<PAGE> 1
GRADISON-MCDONALD
U.S. GOVERNMENT RESERVES
LETTER TO SHAREHOLDERS
May 18, 1995
Dear U.S. Government Reserves Shareholder:
On the following pages you will find the semiannual report of Gradison-McDonald
U.S. Government Reserves (US Reserves or the Fund) for the six months ending
March 31, 1995. The portfolio of investments begins on page 5.
MONEY MARKET DYNAMICS - It has been 15 months since the Federal Reserve
initiated a series of short-term interest rate hikes intended to slow an
unsustainable rate of economic expansion. In that time, the average 7 day yield
of the Fund has more than doubled from 2.46% to 5.29% (as of March 31). Over the
six month period covered by this report, the Fund's yield increased by 139 basis
points. (One basis point is equal to 0.01%.) Following the Fed's last rate hike
in February, rates have retreated from their highs. Although there is some
evidence that the economy is on course for a soft landing, the appearance of
accelerating economic growth may result in additional rate hikes later this
year.
INHERENT MONEY MARKET FUND ADVANTAGE - Money market funds have the inherent
ability to respond quickly to interest rate changes which then flow directly
through to their shareholders. In contrast, it is our observation that many
traditional financial institutions choose not to pass the entire benefit of
higher rates through to their clients. Of course, we are required to note that
traditional financial institution accounts are generally federally insured while
money market fund accounts are not.
US RESERVES TAX ADVANTAGE - We would like to remind shareholders that US
Reserves operates under a policy that sets it apart from many of its peers: To
the extent possible, US Reserves limits its investments to those U.S. Government
securities that qualify as nontaxable at the state and local level. Since this
policy has been in effect, 100% of the Fund's income has been generated from
such securities, and the Fund's shareholders have not been required to pay state
or local taxes on the income received from the Fund. At current interest rate
levels, an investment alternative that does not offer any of this same tax
advantage would have to deliver a pretax yield more than 28 basis points higher
than the Fund's in order to achieve the same after-tax result. (This example
assumes state and local taxes of 5%. Your state and local taxes may be higher or
lower resulting in greater or lesser benefit.)
1-800-869-5999 [LOGO]
<PAGE> 2
LETTER TO SHAREHOLDERS (CONTINUED)
As always, we welcome our shareholders' comments and suggestions.
Respectfully,
GRADISON-McDONALD U.S. GOVERNMENT RESERVES
Paul J. Weston C. Stephen Wesselkamper
Executive Vice President Vice President and Portfolio Manager
U.S. GOVERNMENT RESERVES YIELDS
<TABLE>
<CAPTION>
AVERAGE DAILY EFFECTIVE*
<S> <C> <C>
7 days ending March 31, 1995 5.29% 5.43%
6 months ending March 31, 1995 4.76% 4.82%
6 months ending March 31, 1994 2.48% 2.51%
</TABLE>
*"Effective" yields reflect reinvestment and compounding of actual daily
dividends for the 12-month period; for the 7-day period, it assumes reinvestment
and compounding of the actual 7-day return for an entire year. The foregoing
yields represent past performance. Future yields will fluctuate. The yield for
the most recent 7-day period ending the date of this letter, May 18, 1995 was
5.29% and the effective yield was 5.43%.
An investment in the Fund is neither insured nor guaranteed by the U.S.
Government and there can be no assurance that the Fund will be able to maintain
a stable net asset value of $1.00 per share.
See accompanying notes to financial statements.
2
<PAGE> 3
FINANCIAL HIGHLIGHTS (For a share outstanding throughout each period)
(Note 3) (Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED SEPTEMBER 30,
ENDED --------------------------------------------------
MARCH 31, 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------
Net investment income .024 .029 .025 .037 .059 .076
Dividends from net investment income (.024) (.029) (.025) (.037) (.059) (.076)
------ ------ ------ ------ ------ ------
Net asset value at end of period $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ====== ======
Total return 4.89%(1) 2.97% 2.55% 3.83% 6.12% 7.87%
====== ====== ====== ====== ====== ======
Ratios/Supplemental data:
Net assets at end of period (in millions) $1,076.4 $1,001.2 $979.8 $575.9 $638.7 $659.8
Ratios net of expenses waived by the adviser (3):
Ratio of expenses to average net assets .80%(2) .80% .81% .75% .75% .76%
Ratio of net investment income
to average net assets 4.77%(2) 2.90% 2.53% 3.77% 5.95% 7.57%
Ratios assuming no adviser waiver of expenses (3):
Ratio of expenses to average net assets .80%(2) .81% .81% .75% .75% .76%
Ratio of net investment income
to average net assets 4.77%(2) 2.89% 2.53% 3.77% 5.95% 7.57%
</TABLE>
On October 4, 1991, McDonald & Company Securities, Inc. became investment
adviser of the Fund as a result of a merger with Gradison & Company
Incorporated.
(1) The total return for the six months ended March 31, 1995 represents the
actual return over the period and has been annualized.
(2) Annualized
(3) During the year ended September 30, 1994, the adviser absorbed expenses of
the Fund through waiver of a portion of the investment advisory fee
(Note 2).
See accompanying notes to financial statements.
3
<PAGE> 4
PORTFOLIO OF INVESTMENTS MARCH 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
INTEREST PRINCIPAL
MATURITY (1) RATE (2) AMOUNT VALUE
U.S. GOVERNMENT AGENCIES - 100%
FEDERAL FARM CREDIT BANKS, DISCOUNT NOTES - 21.40%
<S> <C> <C> <C>
4/04/95 5.88% $15,000,000 $ 14,997,550
4/06/95 5.62 30,000,000 29,985,134
4/10/95 5.97 10,000,000 9,988,392
4/12/95 5.89 1,600,000 1,597,644
4/17/95 6.07 15,000,000 14,964,592
4/25/95 5.62 10,000,000 9,965,656
4/26/95 5.98 10,000,000 9,961,794
5/01/95 5.64 9,000,000 8,960,520
5/03/95 5.64 10,000,000 9,953,000
5/04/95 5.97 10,000,000 9,948,592
5/05/95 5.92 20,000,000 19,894,756
5/08/95 5.95 10,500,000 10,439,260
5/12/95 5.96 10,000,000 9,935,433
5/15/95 6.00 20,000,000 19,862,100
5/15/95 5.93 10,000,000 9,925,875
5/18/95 5.93 10,000,000 9,924,228
5/19/95 5.91 10,000,000 9,919,558
8/02/95 6.00 10,000,000 9,798,333
9/26/95 6.01 10,000,000 9,706,178
-----------
229,728,595
-----------
FEDERAL FARM CREDIT BANK BONDS, 6.20% - 0.93%
5/01/95 6.04 10,000,000 10,001,151
-----------
FEDERAL FARM CREDIT BANKS, FLOATING RATE NOTES - 1.02%
9/01/95 6.10 11,000,000 10,991,056
-----------
</TABLE>
<TABLE>
<CAPTION>
INTEREST PRINCIPAL
MATURITY (1) RATE (2) AMOUNT VALUE
FEDERAL FARM CREDIT BANKS,
FLOATING RATE MASTER NOTES - 7.02%
<S> <C> <C> <C>
10/16/95 5.95% $ 75,400,000 $ 75,400,000
-----------
FEDERAL HOME LOAN BANKS, DISCOUNT NOTES - 35.40%
4/03/95 6.25 128,500,000 128,500,000
4/06/95 6.11 35,000,000 34,982,455
4/17/95 6.02 20,000,000 19,953,645
4/26/95 6.04 20,000,000 19,922,822
5/01/95 5.59 10,000,000 9,956,522
5/09/95 5.95 10,000,000 9,940,500
5/15/95 5.93 20,000,000 19,861,634
5/22/95 5.93 35,000,000 24,798,215
5/30/95 6.00 20,000,000 19,810,000
5/31/95 5.98 10,000,000 9,903,656
6/07/95 5.98 10,000,000 9,892,028
6/16/95 5.95 10,000,000 9,877,694
7/10/95 6.05 24,000,000 23,604,734
7/18/95 6.32 10,000,000 9,813,911
7/31/95 5.99 10,000,000 9,801,997
9/13/95 6.00 10,000,000 9,728,333
9/27/95 5.99 10,000,000 9,705,492
-----------
380,053,638
-----------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
PORTFOLIO OF INVESTMENTS MARCH 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
INTEREST PRINCIPAL
MATURITY (1) RATE (2) AMOUNT VALUE
<S> <C> <C> <C>
FEDERAL HOME LOAN BANK BONDS, 7.31%-0.93%
1/19/96 7.36 $10,000,000 $ 9,996,038
-------------
FEDERAL HOME LOAN BANKS, FLOATING RATE NOTES - 14.71%
4/19/95 5.45 25,000,000 25,000,000
6/23/95 5.05 9,000,000 8,970,650
5/17/95 6.25 55,000,000 54,992,465
9/20/95 6.40 24,000,000 24,009,362
12/15/95 6.00 45,000,000 44,979,333
-------------
157,951,810
-------------
STUDENT LOAN MARKETING ASSOCIATION, DISCOUNT NOTES - 5.56%
4/05/95 5.60 20,000,000 19,993,783
5/16/95 5.94 20,000,000 19,858,100
5/24/95 5.95 20,000,000 19,831,417
-------------
59,683,300
-------------
</TABLE>
<TABLE>
<CAPTION>
INTEREST PRINCIPAL
MATURITY (1) RATE (2) AMOUNT VALUE
STUDENT LOAN MARKETING ASSOCIATION,
FLOATING RATE NOTES - 10.25%
<S> <C> <C> <C>
4/13/95 5.79 $25,000,000 $ 25,000,000
4/24/95 6.40 20,000,000 20,000,000
6/02/95 6.12 25,000,000 25,006,258
10/30/97 6.17 20,000,000 20,091,825
11/24/97 5.99 20,000,000 20,000,000
-------------
110,098,083
-------------
TENNESSEE VALLEY AUTHORITY, DISCOUNT NOTES - 2.78%
5/10/95 5.95 20,000,000 19,877,694
5/18/95 5.95 10,000,000 9,925,625
-------------
29,803,319
-------------
TOTAL INVESTMENTS, AT VALUE
(COST $1,073,706,990) - 100.00% $1,073,706,990
=============
</TABLE>
(1) For regulatory purposes, the maturity date of floating rate securities with
market prices that approximate par is considered to be the date upon which
the readjustment of the interest rate can occur.
(2) The interest rates disclosed in the portfolio of investments are as follows:
- U.S. Government Agency discount notes - the discount rate at the time of
purchase by the Fund;
- U.S. Government Agency bonds - the yield to
maturity;
- U.S. Government Agency floating rate notes - the current coupon
rate.
See accompanying notes to financial statements.
5
<PAGE> 6
STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 1995 (UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (Note 1) (Cost $1,073,706,990) $1,073,706,990
Cash 145,144
Receivable for securities sold 45,004,297
Interest receivable 3,229,207
Prepaid expenses and other assets 234,743
-------------
TOTAL ASSETS 1,122,320,381
-------------
LIABILITIES
Payable for securities purchased 45,000,000
Accrued investment advisory fees (Note 2) 449,949
Other accrued expenses payable to adviser (Note 2) 262,793
Payable for Fund shares redeemed 68,705
Other accrued expenses and liabilities 79,536
-------------
TOTAL LIABILITIES 45,860,983
-------------
NET ASSETS
Equivalent to $1.00 per share on 1,076,459,398 outstanding shares (Note 1)
($0.01 par value - unlimited number of shares authorized) $1,076,459,398
=============
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 7
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
INTEREST INCOME $29,363,814
EXPENSES:
Investment advisory fees (Note 2) $2,458,282
Transfer agency fees (Note 2) 914,831
Distribution (Note 2) 523,525
Accounting services fees (Note 2) 65,396
Registration fees 44,839
Printing 41,624
Professional fees 27,368
ICI dues 25,799
Trustees' fees (Note 2) 24,370
Insurance 15,660
Other 69,117
----------
TOTAL EXPENSES 4,210,811
-----------
NET INVESTMENT INCOME $25,153,003
===========
</TABLE>
See accompanying notes to financial statements.
7
<PAGE> 8
STATEMENTS OF CHANGES IN NET ASSETS (NOTE 3) (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
MARCH 31, 1995 SEPTEMBER 30, 1994
<S> <C> <C>
Net investment income $ 25,153,003 $ 29,396,262
------------- --------------
Dividends to shareholders 25,153,003 (29,396,262)
------------- --------------
Utilization of capital loss carryforward (Note 3) - 6,487
------------- --------------
From Trust share transactions:
(at a constant net asset value of $1.00 per share)
Proceeds from shares sold 2,275,685,831 4,251,168,366
Net asset value of shares issued
in reinvestment of dividends 25,153,003 29,396,262
Payments for shares redeemed (2,225,612,651) (4,259,130,431)
------------- --------------
Increase in net assets from Trust share transactions 75,226,183 21,434,197
------------- --------------
Total increase in net assets 75,226,183 21,440,684
Net assets:
Beginning of period 1,001,233,215 979,792,531
------------- --------------
End of period $ 1,076,459,398 $ 1,001,233,215
============= ==============
</TABLE>
See accompanying notes to financial statements.
8
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS MARCH 31, 1995 (UNAUDITED)
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
Gradison-McDonald Cash Reserves Trust (the Trust) is a no-load, diversified,
open-end management investment company registered under the Investment Company
Act of 1940, as amended. Effective with the start of business on September 27,
1993 (the Reorganization Date) all of the outstanding shares of the Gradison
Cash Reserves (GCR) series of the Trust, Gradison U.S. Government Trust,
McDonald Money Market Fund, Inc., and McDonald U.S. Government Money Market
Fund, Inc. (collectively, the Acquired Funds) were acquired by a new series of
the Trust, Gradison-McDonald U.S. Government Reserves (GMU or the Fund). See
Note 3 for a more detailed discussion of the merger.
The following is a summary of the Trust's significant accounting policies:
SECURITIES VALUATION -- Investments are valued using the amortized cost method
which approximates market value. This involves initially valuing a security at
its original cost and thereafter assuming a constant amortization to maturity of
any discount or premium. This method of valuation is expected to enable the
Trust to maintain a constant net asset value per share.
SECURITIES TRANSACTIONS AND INTEREST INCOME -- Securities transactions are
accounted for on the trade date (the date the order to buy or sell is executed).
Interest income is accrued as earned and includes any immaterial gains or losses
realized from securities transactions during the year.
TRUST SHARE VALUATION AND DIVIDENDS TO SHAREHOLDERS -- Trust shares are sold and
redeemed on a continuing basis at the net asset value. The net asset value per
share is computed by dividing the net asset value of the Trust (total assets
less total liabilities) by the number of shares outstanding. All of the net
investment income of the Trust is declared as a dividend and paid in additional
shares once daily. Net investment income consists of all interest income accrued
on the portfolio securities of the Trust, plus or minus amortized purchase
discount or premium, less accrued expenses. Share purchases effective before
12:00 noon (Eastern time) earn dividends that day. Redemption requests received
before 12:00 noon will not receive that day's dividend.
TAXES -- It is the Trust's policy to comply with the provisions of the Internal
Revenue Code available to regulated investment companies. As provided therein,
in any fiscal year in which the Trust so qualifies, and distributes at least 90%
of its taxable net income, the Trust will be relieved of federal income tax on
the income distributed. Accordingly, no provision for income taxes has been
made.
In order to avoid imposition of the excise tax applicable to regulated
investment companies, it is also the Trust's intention to declare as dividends
in each calendar year, at least 98% of its net investment income (earned during
the calendar year) and 98% of its net realized capital gains, if any (earned
during the twelve months ended October 31) plus undistributed amounts from prior
years.
The tax basis of investments is equal to the amortized cost as shown on the
Portfolio of Investments.
NOTE 2 -- TRANSACTIONS WITH AFFILIATES
The Trust's investments are managed, subject to the general supervision and
control of the Trust's Board of Trustees, by McDonald & Company Securities, Inc.
(McDonald), a registered investment adviser and securities dealer, pursuant to
the terms of an Investment Advisory Agreement (the Agreement). Under the terms
of the Agreement, the Trust pays McDonald a fee computed and accrued daily and
paid monthly based upon the Trust's average daily net assets at the annual rate
of .50% on the first $400 million, .45% on the next $600 million, .40% on the
next $1 billion and .35% on any amounts in excess of $2 billion.
9
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS MARCH 31, 1995 (UNAUDITED)
Under the terms of the Agreement, McDonald bears the costs of salaries and
related expenses of executive officers of the Trust who are necessary for the
management and operations of the Trust. In addition, McDonald bears the costs of
preparing, printing and mailing sales literature and other advertising
materials, and compensates the Trust's trustees who are affiliated with
McDonald.
During the year ended September 30, 1994, McDonald waived advisory fees of
$106,691 in order to limit the Fund's annualized ratio of expenses to average
net assets to .80%.
Under the terms of a Transfer Agency, Accounting Services and Administrative
Services Agreement, McDonald provides transfer agent, dividend disbursing,
accounting services and administrative services to the Trust. The Trust pays
McDonald a monthly fee for transfer agency and administrative services at an
annual rate of $23.50 per shareholder account, plus out-of-pocket costs for
statement paper, statement and reply envelopes and reply postage. The Trust pays
McDonald a monthly fee for accounting services based on the Trust's average
daily net assets at an annual rate of .015% on the first $400 million, .0125% on
the next $300 million, .01% on the next $300 million and .0075% on any amount in
excess of $1 billion, with a minimum annual fee of $25,000.
Under the terms of a Distribution Service Plan (the Plan) adopted under Rule
12b-1 of the Investment Company Act of 1940, the Trust has entered into an
agreement with McDonald pursuant to which the Trust pays McDonald a service fee
in the annual amount of .10% of the Trust's average daily net assets.
The officers of the Trust are also officers of McDonald.
Each trustee of the Trust who is not affiliated with McDonald receives fees from
the Trust for services as a trustee. The amounts of such fees for each trustee
are as follows: (a) an annual fee of $6,000 payable in quarterly installments
for service during each fiscal quarter, (b) $500 for each Board of Trustees
meeting attended and (c) $300 for each committee meeting attended. Each trustee
not serving on other Gradison-McDonald Mutual Fund Boards of Trustees receives
an additional $500 for each meeting attended.
NOTE 3 -- BUSINESS COMBINATION
On the Reorganization Date, GMU acquired substantially all of the assets and
liabilities of the Acquired Funds through a tax-free exchange of assets in which
each shareholder of the Acquired Funds received a number of full and fractional
shares of GMU having a total net asset value equal to the net asset value of the
shares held in their former fund as of that date. GMU, which was organized for
the sole purpose of acquiring the assets and liabilities of the Acquired Funds,
had no assets, liabilities, or shareholders and did not commence operations
until the Reorganization Date.
As of the close of business on the Reorganization Date, the Acquired Funds,
excluding GCR, collectively had net assets of $499,941,413 and shares
outstanding of $499,947,900 and had no undistributed net investment income or
unrealized appreciation/depreciation on investments. The Acquired Funds
collectively had accumulated net realized losses of $6,487, which were used to
offset gains realized by GMU during the year ended September 30, 1994.
For financial reporting purposes, GMU is considered the successor to GCR;
therefore, financial information for all periods prior to the Reorganization
Date is that of GCR.
10
<PAGE> 11
GRADISON - MCDONALD MUTUAL FUNDS
The following funds are serviced by Gradison-McDonald Mutual Funds:
GRADISON-MCDONALD ESTABLISHED VALUE FUND
A common stock fund that seeks long-term capital growth by investing in
companies that are included in the Standard's & Poor's 500 Index and other large
companies.
GRADISON-MCDONALD OPPORTUNITY VALUE FUND
A common stock fund that seeks long-term capital growth by investing in
companies that are generally smaller in size than those included in the Standard
& Poor's 500 Index.
GRADISON-MCDONALD GROWTH & INCOME FUND
A common stock fund that seeks long-term capital growth, current income, and
growth of income.
GRADISON-MCDONALD INTERNATIONAL FUND
A common stock fund that seeks long-term capital growth by investing in common
stocks of non-United States companies. Available by prospectus only on or around
June 1, 1995.
GRADISON-MCDONALD GOVERNMENT INCOME FUND
An income fund which invests in intermediate to long-term U.S. Government
Securities.
GRADISON-MCDONALD OHIO TAX-FREE INCOME FUND
An income fund which seeks to provide income exempt from Federal income tax and
Ohio State personal income tax.
GRADISON-MCDONALD INTERMEDIATE MUNICIPAL INCOME FUND
An income fund which seeks to provide income exempt from Federal regular income
tax through investment in a municipal bond portfolio with a three to ten year
average maturity.
MONEY MARKET FUNDS
Gradison offers a full range of taxable and tax-free money market funds.
Prospectuses are available upon request and should be read carefully before you
invest or send money. An investment in the money market funds is neither insured
nor guaranteed by the U.S. Government and there can be no assurance that they
will be able to maintain a stable $1.00 share price.
11
