<PAGE> 1
GRADISON-MCDONALD
This material is intended for distribution to shareholders of the
Gradison-McDonald U.S. Government Reserves Fund. It may be distributed to other
persons only if it is preceded or accompanied by a current prospectus of the
Gradison-McDonald U.S. Government Reserves Fund.
McDonald & Company Securities, Inc. - Distributor
U.S. GOVERNMENT
RESERVES
GRADISON-MCDONALD
SEMIANNUAL REPORT
MARCH 31, 1996
A MONEY MARKET FUND INVESTING IN
U.S. GOVERNMENT SECURITIES
<PAGE> 2
GRADISON-MCDONALD
U.S. GOVERNMENT RESERVES
LETTER TO SHAREHOLDERS
April 17, 1996
Dear U.S. Government Reserves Shareholder:
We are pleased to provide you with our semiannual report for the six months
ended March 31, 1996. Average daily yield information for the Fund is shown in
the chart on the next page.
SIGNIFICANT GROWTH: As shown in the financial highlights on page 3, your Fund
continues to enjoy steady growth, increasing by $180 million in assets during
the six-month period and by more than $327 million over the last twelve months.
The higher assets (in excess of $1.4 billion at the end of the period) resulted
in a reduction of the Fund's average expense ratio during the period to .76%.
The Fund's expense ratio currently stands at .74%.
MIXED ECONOMIC SIGNALS: Just a few weeks ago, a further interest rate cut to
stimulate a weak economy seemed the most likely next move by the Fed. Now,
strong employment statistics and rising commodity and oil prices seem to be
directing more concern toward the threat of inflation, leading some analysts to
predict that the next Fed move will be toward higher, rather than lower, rates.
While long-term interest rates have reacted by rising sharply, short-term rates
appear to be awaiting a clearer view of the Fed's next move. We continue to
maintain a relatively neutral portfolio average maturity of between forty and
fifty days.
OUR TAX ADVANTAGE: Since shareholders have just finished filing their 1995 tax
returns, we feel it is timely to point out that it is the policy of the Fund to
invest, to the extent possible, only in those U.S. Government securities that
are not taxable by states or local governments. Since we adopted this policy
several years ago, none of the income or assets of the Fund has been taxable by
state or local governments.
As always, we welcome the comments and suggestions of our shareholders.
Respectfully,
GRADISON-MCDONALD U.S. GOVERNMENT RESERVES
Paul J. Weston C. Stephen Wesselkamper
Executive Vice President Vice President and Portfolio Manager
1-800-869-5999 [PHONE LOGO]
<PAGE> 3
LETTER TO SHAREHOLDERS (CONTINUED)
<TABLE>
<CAPTION>
U.S. GOVERNMENT RESERVES YIELDS AVERAGE DAILY EFFECTIVE*
<S> <C> <C>
7 days ending March 31, 1996 4.55% 4.64%
6 months ending March 31, 1996 4.81% 4.87%
------------------------------------------------------------------------------------
</TABLE>
* "Effective" yields reflect reinvestment and compounding of actual daily
dividends for the 6-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 and total returns represent past performance. Future yields and total
returns will fluctuate. The yield for the most recent 7-day period ending the
date of this letter, April 17, 1996 was 4.56% and the effective yield was 4.65%.
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> 4
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
(NOTE 3) (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED SEPTEMBER 30,
ENDED --------------------------------------------------------------------
MARCH 31, 1996 1995 1994 1993 1992 1991
<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 .023 .050 .029 .025 .037 .059
Dividends from net investment income (.023) (.050) (.029) (.025) (.037) (.059)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value at end of period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
========== ========== ========== ========== ========== ==========
Total return 5.01%(1) 5.10% 2.97% 2.55% 3.83% 6.12%
========== ========== ========== ========== ========== ==========
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (in millions) $ 1,404.1 $ 1,224.1 $ 1,001.2 $ 979.8 $ 575.9 $ 638.7
Ratio of expenses to average net assets (2) .76%(3) .78% .80% .81% .75% .75%
Ratio of net investment income
to average net assets (2) 4.83%(3) 5.00% 2.90% 2.53% 3.77% 5.95%
- ------------------------------------------------------------------------------------------------------------------------------------
</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, 1996 represents the
actual return over the period and has been annualized.
(2) 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). Assuming no waiver of expenses, the ratio of expenses to
average net assets was .81% and the ratio of net investment income to
average net assets was 2.89%.
(3) Annualized
See accompanying notes to financial statements.
3
<PAGE> 5
PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
INTEREST PRINCIPAL
MATURITY (1) RATE (2) AMOUNT VALUE
FEDERAL FARM CREDIT BANKS, DISCOUNT NOTES - 22.62%
<S> <C> <C> <C>
4/01/96 5.25% $60,000,000 $ 60,000,000
4/03/96 5.26 11,370,000 11,366,678
4/11/96 5.08 10,000,000 9,985,889
4/22/96 5.21 29,000,000 28,911,934
4/23/96 5.26 35,200,000 35,087,378
4/24/96 5.26 45,000,000 44,848,781
4/25/96 5.26 25,000,000 24,912,333
4/29/96 5.21 49,750,000 49,548,357
4/30/96 5.25 25,000,000 24,894,271
6/17/96 4.87 15,000,000 14,843,754
7/30/96 4.81 10,000,000 9,839,667
-----------
314,239,042
-----------
<CAPTION>
FEDERAL FARM CREDIT BANKS, BONDS - 2.52%
<S> <C> <C> <C>
4/01/96 5.32 25,000,000 25,000,000
11/01/96 5.49 10,000,000 10,005,659
-----------
35,005,659
-----------
<CAPTION>
FEDERAL FARM CREDIT BANKS, FLOATING RATE NOTES - 7.20%
<S> <C> <C> <C>
6/07/96 5.29 50,000,000 49,995,543
8/12/96 5.36 50,000,000 49,996,408
-----------
99,991,951
-----------
<CAPTION>
FEDERAL FARM CREDIT BANKS,
FLOATING RATE MASTER NOTE - 5.86%
<S> <C> <C> <C>
10/16/96 5.15 81,400,000 81,400,000
-----------
<CAPTION>
INTEREST PRINCIPAL
MATURITY (1) RATE (2) AMOUNT VALUE
FEDERAL HOME LOAN BANKS, DISCOUNT NOTES - 33.13%
<S> <C> <C> <C>
4/01/96 5.25% $ 80,000,000 $ 80,000,000
4/08/96 5.35 10,000,000 9,989,597
4/22/96 5.28 90,000,000 89,722,946
4/24/96 5.20 20,000,000 19,933,556
4/29/96 5.31 128,000,000 127,470,851
5/06/96 4.98 15,000,000 14,927,448
5/08/96 5.01 29,100,000 28,950,299
5/15/96 5.00 35,000,000 34,786,294
5/22/96 4.99 25,000,000 24,823,271
6/12/96 5.18 10,000,000 9,896,400
6/19/96 5.20 10,000,000 9,885,999
6/28/96 4.99 10,000,000 9,878,022
-----------
460,264,683
-----------
<CAPTION>
FEDERAL HOME LOAN BANK BONDS - 7.22%
<S> <C> <C> <C>
5/23/96 5.89 20,000,000 20,005,163
1/02/97 5.42 5,000,000 5,000,000
1/03/97 5.56 5,400,000 5,398,723
1/29/97 5.30 25,000,000 24,987,168
3/05/97 5.30 25,000,000 25,000,000
3/06/97 5.25 20,000,000 19,962,106
-------------
100,353,160
-------------
<CAPTION>
FEDERAL HOME LOAN BANKS, FLOATING RATE NOTES - 6.11%
<S> <C> <C> <C>
5/22/96 5.29 25,000,000 24,998,274
11/13/96 5.31 10,000,000 9,997,530
3/27/97 5.25 50,000,000 49,954,354
-------------
84,950,158
-------------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 6
PORTFOLIO OF INVESTMENTS MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
INTEREST PRINCIPAL
MATURITY (1) RATE (2) AMOUNT VALUE
STUDENT LOAN MARKETING ASSOCIATION,
FLOATING RATE NOTES - 2.88%
<S> <C> <C> <C>
10/30/97 5.47% $20,000,000 $ 20,056,305
11/24/97 5.29 20,000,000 20,000,000
-------------
40,056,305
-------------
<CAPTION>
TENNESSEE VALLEY AUTHORITY, DISCOUNT NOTES - 9.55%
<S> <C> <C> <C>
4/02/96 5.28 17,850,000 17,847,382
4/09/96 5.26 10,000,000 9,988,311
4/16/96 5.25 15,000,000 14,967,187
4/19/96 5.25 10,000,000 9,973,750
4/26/96 5.13 15,000,000 14,946,563
5/09/96 5.18 20,600,000 20,487,351
5/16/96 5.26 25,000,000 24,835,625
7/26/96 5.00 20,000,000 19,677,778
-------------
132,723,947
-------------
<CAPTION>
INTEREST PRINCIPAL
MATURITY (1) RATE (2) AMOUNT VALUE
U.S. TREASURY NOTES - 2.91%
<S> <C> <C> <C>
9/30/96 6.50% $30,000,000 $ 30,180,179
1/31/97 7.50 10,000,000 10,190,625
-------------
40,370,804
-------------
TOTAL INVESTMENTS, at value
(Cost $1,389,355,709) $1,389,355,709
==============
</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 next 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;
- U.S. Government Agency bonds - the yield to maturity at time
of purchase;
- U.S. Government Agency floating rate notes - the current
coupon rate;
- U.S. Treasury Notes - the stated coupon rate.
See accompanying notes to financial statements.
5
<PAGE> 7
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, 1996
ASSETS
<S> <C>
Investments in securities, at value (Note 1) (Cost $1,389,355,709) $1,389,355,709
Receivable for securities sold 14,000,000
Interest receivable 4,490,949
Prepaid expenses and other assets 149,899
--------------
Total Assets 1,407,996,557
--------------
LIABILITIES
Payable for Fund shares redeemed 2,907,433
Accrued investment advisory fees (Note 2) 538,437
Other accrued expenses payable to adviser (Note 2) 298,796
Other accrued expenses and liabilities 189,528
--------------
Total Liabilities 3,934,194
--------------
NET ASSETS
Equivalent to $1.00 per share on 1,404,062,363 outstanding shares (Note 1)
($0.01 par value - unlimited number of shares authorized) $1,404,062,363
==============
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 8
STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31, 1996
<S> <C> <C>
INTEREST INCOME $37,207,144
EXPENSES
Investment advisory fees (Note 2) $3,010,265
Transfer agency fees (Note 2) 987,221
Distribution (Note 2) 660,349
Registration fees 97,990
Accounting services fees (Note 2) 76,141
Printing 64,084
Professional fees 28,025
ICI dues 26,500
Trustees' fees (Note 2) 22,801
Insurance 17,911
Other 63,582
----------
Total expenses 5,054,869
-----------
NET INVESTMENT INCOME $32,152,275
===========
</TABLE>
See accompanying notes to financial statements.
7
<PAGE> 9
STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
MARCH 31, 1996 SEPTEMBER 30, 1995
<S> <C> <C>
Net investment income $ 32,152,275 $ 55,329,396
--------------- ---------------
Dividends to shareholders 32,152,275 55,329,396
--------------- ---------------
FROM TRUST SHARE TRANSACTIONS:
(at a constant net asset value of $1.00 per share)
Proceeds from shares sold 2,781,727,028 5,412,404,275
Net asset value of shares issued
in reinvestment of dividends 32,152,275 55,329,396
Payments for shares redeemed (2,633,946,401) (5,244,837,425)
--------------- ---------------
Increase in net assets from Trust share transactions 179,932,902 222,896,246
--------------- ---------------
Total increase in net assets 179,932,902 222,896,246
NET ASSETS:
Beginning of period 1,224,129,461 1,001,233,215
--------------- ---------------
End of period $ 1,404,062,363 $ 1,224,129,461
=============== ===============
</TABLE>
See accompanying notes to financial statements.
8
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996 (UNAUDITED)
NOTE 1 -- SIGNIFICANT ACCOUNTING POLITIES
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> 11
NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996 (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.
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> 12
GRADISON-MCDONALD FAMILY OF FUNDS
Increasingly, MUTUAL FUNDS are the preferred vehicle for starting and building
an investment program. And today, GRADISON-MCDONALD is a preferred name in
mutual funds for a GROWING number of investors.
GOVERNMENT INCOME FUND
An income fund which invests in intermediate to long-term U.S. Government
securities.
INTERMEDIATE MUNICIPAL INCOME FUND
An income fund which seeks to provide income exempt from regular Federal income
tax through investment in a municipal bond portfolio with a three to ten year
average maturity.*
OHIO TAX-FREE INCOME FUND
An income fund which seeks to provide income exempt from regular Federal income
tax and Ohio state personal income tax.*
GROWTH & INCOME FUND
A common stock fund that seeks long-term capital growth, current income and
growth of income.
ESTABLISHED VALUE FUND
A common stock fund that seeks long-term capital growth by investing in
companies that are included in the Standard & Poor's 500 Index and other large
companies.
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.
INTERNATIONAL FUND
A common stock fund that seeks capital growth by investing in common stocks of
non-United States companies.
MONEY MARKET FUNDS
Gradison-McDonald offers a full range of taxable and tax-free money market
funds.
Prospectuses are available upon request by calling (800) 869-5999 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. The value of an investment in other funds will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than the original
cost. The returns of all funds will fluctuate.
*Investment income may be subject to the federal alternative minimum tax.
Capital gains, if any, are taxable. Investment income of the Intermediate
Municipal Income Fund may be subject to state and local taxes.
11
