<PAGE> 1
Gradison Mutual Funds
580 Walnut Street
Cincinnati, Ohio 45202-3198
<PAGE> 2
U.S. GOVERNMENT RESERVES
Annual Report
September 30, 1997
[GRADISON MUTUAL FUNDS LOGO]
This material is intended for distribution to shareholders of the Gradison 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 U.S. Government
Reserves Fund. McDonald & Company Securities, Inc.--Distributor.
<PAGE> 3
Letter to Shareholders
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October 24, 1997
Dear Shareholders:
AUDITED ANNUAL REPORT Gradison U.S. Government Reserves money market fund
completed its twenty-second fiscal year on September 30, 1997. Audited financial
statements are published on the following pages. The portfolio of investments
appears on pages 3 and 4 with the unqualified opinion of our independent public
accountants, Arthur Andersen, LLP, on page 10. Investment results (including
yield information) for the fiscal year ending September 30 appear on page 3. The
7-day yield of U.S. Government Reserves money market fund as of October 24 was
4.85% which produced an effective yield of 4.97%.
FINANCIAL MARKETS The U.S. economy has exhibited healthy growth without
indications that inflationary forces are gaining momentum. On the contrary,
inflation in 1997, as measured by the Consumer Price Index, appears poised to
show the smallest increase since 1986. The absence of increased inflationary
pressures in the midst of this long economic expansion is remarkable, and
confounds economic theorists. A new hypothesis has attempted to explain the
strong growth of the U.S. economy -- the new paradigm. It suggests that the
limits of non-inflationary growth may have expanded with the technological
advances of the past decade. This is not saying that "things are different this
time," but merely that the limits are different. No less an authority than Alan
Greenspan, chairman of the Federal Reserve, has suggested that effective
production capacity in the U.S. may have increased as a result of substantial
business investment in computing and telecommunications. In testimony before
Congress, he speculated that the interaction of key technologies has created new
opportunities for wealth creation. Such a favorable confluence of factors may
occur but once or twice a century.
However, even if Mr. Greenspan (and others) are correct about the availability
of additional production capacity; there remains a finite limit to
non-inflationary growth. Perhaps the limit to sustainable, non-inflationary
growth is not 3%, as had been widely believed, but something greater. What has
not changed (and can never change) is the truism that higher levels of inflation
will eventually follow if the growth level is breached. At some point,
accelerating economic expansion must approach its upper growth limit.
MONEY MARKET TRENDS The recent volatility of the equity markets has not carried
over to short term fixed income markets. In fact, there has been extraordinary
stability in short term interest rates for more than two years. The Federal Open
Market Committee (FOMC) has made but two adjustments to the federal funds rate
since July 1995: Once to lower the target rate by 25 basis points (0.25%) in
December 1995, and then to take that cut back 15 months later (March 1997). As
the pace of economic expansion in the U.S. oscillated between moderate and
strong, it was generally believed that the next FOMC move would be to raise
short term rates. But the rationale for that move is no longer obvious.
Inflationary indicators are muted, and any small impact of the Southeast Asian
currency crisis on the U.S. economy is likely to be deflationary. The FOMC may
be inclined to allow this period of stable monetary policy to continue.
SHAREHOLDER SERVICE Beginning with your monthly statement for July, you may have
noticed significant changes in the way that information about your Gradison
mutual funds is displayed. These changes are the result of enhanced computer
capabilities. In most cases you will have the same account number for each of
your Gradison mutual funds with a different fund number identifying each fund.
We would appreciate any comments you may have about the new statement format or
any other aspect of your Gradison money market fund account. Our goal with these
changes, and always, is to deliver the services that are of the most value to
you by the most efficient means available. Please contact a Gradison Mutual Fund
Shareholder Service representative at (800) 869-5999 or your Investment
Consultant with your comments, suggestions, or questions.
Respectfully,
/s/ Paul J. Weston /s/ C. Stephen Wesselkamper
- ------------------------ ----------------------------
Paul J. Weston C. Stephen Wesselkamper
Executive Vice President Executive Vice President
Portfolio Manager
1-800-869-5999
<PAGE> 4
<TABLE>
<CAPTION>
Financial Highlights
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For a share outstanding throughout each year
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1997 1996 1995 1994 1993 (1)
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of year $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------- ------- ------- ------- -------
Net investment income .047 .047 .050 .029 .025
Dividends from net investment income (.047) (.047) (.050) (.029) (.025)
------- ------- ------- ------- -------
Net asset value at end of year $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======= ======= ======= ======= =======
Total return 4.85% 4.86% 5.10% 2.97% 2.55%
======= ======= ======= ======= =======
Ratios/Supplemental data:
Net assets at end of year (in millions) $1,610.1 $1,333.1 $1,224.1 $1,001.2 $979.8
Ratio of gross expenses to average net assets (2) .73% .76% .80% -- --
Ratio of net expenses to average net assets .72% .75% .78% .80%(3) .81%
Ratio of net investment income to average net assets 4.75% 4.72% 5.00% 2.90%(3) 2.53%
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<FN>
(1) Prior to September 27, 1993, the financial results are those of Gradison Cash Reserves, the assets and liabilities of which
were acquired by the Fund effective September 27, 1993 (Note 1).
(2) Effective September 30, 1995, this ratio reflects gross expenses before reduction for earnings credits on cash balances;
such reductions are included in the ratio of net expenses.
(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. 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%.
</TABLE>
2
See accompanying notes to financial statements.
<PAGE> 5
<TABLE>
<CAPTION>
U.S. GOVERNMENT RESERVES
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September 30, 1997
PERFORMANCE DATA
U.S. Government
Reserves Average Annual
Total Return Periods Ended
September 30, 1997 Consumer Price Index
------------------ --------------------
<S> <C> <C> <C>
10 Years 5.35% 3.5% * Not annualized.
5 Years 4.05% 2.7%
3 Years 4.93% 2.6% The chart at left is intended to compare
1 Year 4.85% 2.2% the total return results of Gradison
Quarter 1.23% 0.6% U.S. Government Reserves with the
Consumer Price Index which is widely
considered as a measure of inflation.
Total returns reflect the reinvestment
and compounding of actual daily
dividends and distributions for each
period noted above. Total returns are
historical and will fluctuate in the
future.
Gradison U.S. Government Reserves
acquired all of the outstanding shares
of Gradison Cash Reserves (GCR),
Gradison U.S. Government Trust, McDonald
Money Market Fund, Inc., and McDonald
U.S. Government Money Market Fund, Inc.
on September 27, 1993. Returns prior to
that date are those of GCR, which
invested in non-government obligations,
the yields of which generally exceed
yields of government obligations.
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.
PORTFOLIO OF INVESTMENTS
Maturity, Interest Principal Maturity, Interest Principal
Coupon Rate Rate (1) Amount Value Coupon Rate Rate (1) Amount Value
Federal Farm Credit Banks,
Discount Notes - 6.78% Federal Farm Credit Banks,
Floating Rate Master Note (2) - 6.17%
<S> <C> <C> <C> <C> <C> <C> <C>
10/02/97 5.41% $ 26,575,000 $ 26,571,010 10/16/97 5.44 $105,000,000 $105,000,000
10/10/97 5.38 10,000,000 9,986,550 -------------
10/16/97 5.38 10,000,000 9,977,583
10/17/97 5.40 69,010,000 68,844,296 Federal Home Loan Banks,
------------- Discount Notes - 33.73%
115,379,439
------------- 10/01/97 5.43 178,500,000 178,500,000
10/03/97 5.40 35,070,000 35,059,479
Federal Farm Credit Banks, 10/09/97 5.61 25,000,000 24,968,861
Bonds - 2.33% 10/15/97 5.61 10,345,000 10,322,451
10/17/97 5.38 90,300,000 90,084,046
3/03/98, 5.45% 5.62% 14,625,000 14,614,142 10/22/97 5.44 40,000,000 39,873,067
9/02/98,5.70 5.75 25,000,000 24,988,487 10/23/97 5.61 21,790,000 21,715,290
------------- 10/29/97 5.45 50,000,000 49,788,172
39,602,629 10/30/97 5.63 50,000,000 49,773,135
------------- 10/31/97 5.40 25,000,000 24,887,562
12/26/97 5.43 25,000,000 24,675,649
Federal Farm Credit Banks, 3/09/98 5.46 25,000,000 24,397,125
Floating Rate Notes (2) -17.62% -------------
574,044,837
2/03/98 5.53% 50,000,000 49,993,452 -------------
2/20/98 5.55 50,000,000 49,986,689
7/01/98 5.46 50,000,000 49,970,770
7/01/98 5.52 50,000,000 49,970,796 ----------------------------------------------------------------
8/11/98 5.52 50,000,000 49,966,449
10/01/98 5.44 50,000,000 49,963,000
-------------
299,851,156
-------------
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</TABLE>
3
<PAGE> 6
<TABLE>
<CAPTION>
U.S. GOVERNMENT RESERVES
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PORTFOLIO OF INVESTMENTS - Continued
September 30, 1997
Maturity, Interest Principal Maturity, Interest Principal
Coupon Rate Rate (1) Amount Value Coupon Rate Rate (1) Amount Value
Federal Home Loan Banks, Student Loan Marketing Association,
Bonds - 13.91% Bonds - 5.81%
<S> <C> <C> <C> <C> <C> <C> <C>
1/07/98,5.65 % 5.80 $ 20,800,000 $ 20,791,572 12/19/97,5.44 % 5.56 $ 25,000,000 $ 24,993,767
3/18/98,5.875 5.84 14,290,000 14,289,631 12/24/97,5.62 5.62 13,605,000 13,605,000
6/16/98,5.82 5.84 45,000,000 44,990,734 6/10/98,5.85 5.87 18,685,000 18,682,399
7/08/98,5.76 5.75 20,000,000 20,002,000 9/09/98,5.78 5.85 25,000,000 24,984,249
8/28/98,5.82 5.79 100,000,000 100,003,582 9/16/98,5.79 5.86 16,650,000 16,639,005
9/08/98,5.73 5.82 25,000,000 24,979,855 -------------
9/30/98,5.74 5.77 11,725,000 11,721,609 98,904,420
------------- -------------
236,778,983
------------- Student Loan Marketing Association,
Floating Rate Notes (2) - 2.35%
Federal Home Loan Banks,
Floating Rate Notes (2) - 8.81% 10/30/97 5.41 20,000,000 20,002,830
11/24/97 5.23 20,000,000 20,000,000
3/06/98 5.48% 50,000,000 49,985,223 -------------
7/07/98 5.43 50,000,000 49,966,092 40,002,830
9/30/98 5.46 50,000,000 49,956,061 -------------
-------------
149,907,376 Tennessee Valley Authority,
------------- Discount Note - 1.31%
Student Loan Marketing Association, 10/15/97 5.36 22,400,000 22,353,308
Discount Note - 1.18% -------------
10/01/97 6.00 20,000,000 20,000,000
------------- TOTAL INVESTMENTS,
at value (Cost $ 1,701,824,978) - 100% $1,701,824,978
==============
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----------------------------------------------------------------
<FN>
(1)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 the time of purchase;
- U.S. Government Agency floating rate notes - the current coupon rate;
(2)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.
</TABLE>
4
See accompanying notes to financial statements.
<PAGE> 7
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
- ---------------------------------------------------------------------------------------------------------------------------
9/30/97
<S> <C>
Assets
Investments in securities, at value (Note 1) (Cost $1,701,824,978) $1,701,824,978
Interest receivable 8,396,410
Prepaid expenses and other assets 1,352,071
-------------
Total Assets $1,711,573,459
=============
Liabilities
Payable for investments purchased 99,751,172
Payable for Fund shares redeemed 278,782
Accrued investment advisory fee (Note 2) 578,668
Dividend payable 430,507
Other accrued expenses payable to adviser (Note 2) 342,137
Other accrued expenses and liabilities 134,058
-------------
Total Liabilities 101,515,324
-------------
Net Assets
Equivalent to $1.00 per share on 1,610,058,135 outstanding shares (Note 1)
($.01 par value - unlimited number of shares authorized) $1,610,058,135
=============
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</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 8
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended 9/30/97
<S> <C> <C>
Interest income $85,542,547
Expenses:
Investment advisory fees (Note 2) $ 6,956,236
Transfer agency fees (Note 2) 2,238,584
Distribution (Note 2) 1,550,945
Accounting services fees (Note 2) 169,804
Custodian fees (Note 1) 154,803
Printing 152,522
Registration fees 119,303
Professional fees 45,758
ICI fees (Note 2) 44,637
Amortization of organization expense (Note 1) 3,187
Other 12,185
----------
Gross expenses 11,447,964
Less earnings credits on cash balances (Note 1) (154,803)
----------
Net expenses 11,293,161
----------
Net investment income $74,249,386
==========
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</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 9
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------------------------------------------
Year Ended
-----------------------------
9/30/97 9/30/96
<S> <C>
From net investment income $ 74,249,386 $ 63,488,295
------------- -------------
From dividends to shareholders (74,249,386) (63,488,295)
------------- -------------
From Fund share transactions:
(at a constant net asset value of $1.00 per share)
Proceeds from shares sold 7,808,119,094 5,411,348,184
Net asset value of shares issued in reinvestment of dividends 73,390,308 63,488,295
Payments for shares redeemed (7,604,514,450) (5,365,902,757)
------------- -------------
Increase in net assets from Fund share transactions 276,994,952 108,933,722
------------- -------------
Total increase in net assets 276,994,952 108,933,722
Net assets:
Beginning of year 1,333,063,183 1,224,129,461
------------- -------------
End of year $1,610,058,135 $1,333,063,183
============= =============
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</TABLE>
7
See accompanying notes to financial statements.
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS
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September 30, 1997
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 (the Act), 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. were acquired by a new series of the Trust, Gradison U.S.
Government Reserves (the Fund).
The Fund's investment objective is to maximize current income to the extent
consistent with the preservation of capital and the maintenance of liquidity.
The following is a summary of significant accounting policies followed by the
Trust in the preparation of the Fund's financial statements. The policies are in
conformity with generally accepted accounting principles. The preparation of
financial statements 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 amount of income and expenses for that
period. Actual results could differ from those estimates.
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 Fund to maintain a
constant net asset value per share, but there can be no assurance that this will
be the case.
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.
FUND SHARE VALUATION AND
DIVIDENDS TO SHAREHOLDERS
Fund shares are sold and redeemed on a continuing basis at the net asset value
per share. The net asset value per share is computed by dividing the net asset
value of the Fund (total assets less total liabilities) by the number of shares
outstanding. All of the net investment income of the Fund is declared as a
dividend daily and paid monthly. Net investment income consists of all interest
income accrued on the portfolio securities of the Fund, 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.
EXPENSE OFFSET ARRANGEMENT
The Fund has an arrangement with its custodian bank whereby the custodian's fees
are reduced by credits earned on the Fund's cash on deposit with the bank. This
deposit arrangement is an alternative to overnight investments. The credits are
shown as a reduction of expenses on the Statement of Operations.
TAXES
It is the Trust's policy to comply with the provisions of the Internal Revenue
Code applicable 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.
8
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS Continued
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September 30, 1997
NOTE 2 -- TRANSACTIONS WITH AFFILIATES
The Fund'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 Fund'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.
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 non-zero balance account, and, effective
July 1997, $5.00 per closed shareholder account, as defined, plus out-of-pocket
costs for statement paper, statement and reply envelopes and reply postage.
Prior to July 1997, there was no charge for closed shareholder accounts. The
Trust pays McDonald a monthly fee for accounting services based on the Fund'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 adopted under Rule 12b-1 of the
Act, 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 Fund'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.
9
<PAGE> 12
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
[ARTHUR ANDERSEN LOGO]
To the Shareholders and Board of Trustees
of the Gradison U.S. Government Reserves series of
the Gradison McDonald Cash Reserves Trust
We have audited the accompanying statement of assets and liabilities of the
Gradison U.S. Government Reserves, a series of the Gradison McDonald Cash
Reserves Trust (a Massachusetts business trust), including the portfolio of
investments, as of September 30, 1997, the related statement of operations for
the year then ended, and the statements of changes in net assets for the two
years then ended, and the financial highlights for each of the five years in the
year then ended. 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 audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free from 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
September 30, 1997, by correspondence with the custodian and brokers. 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
Gradison U.S. Government Reserves series of the Gradison McDonald Cash
Reserves Trust as of September 30, 1997, the results of its operations for the
year then ended, the changes in its net assets for the two years then ended, and
the financial highlights for each of the five years in the year then ended, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Cincinnati,Ohio,
October 24, 1997
10
<PAGE> 13
GRADISON FAMILY OF FUNDS
- --------------------------------------------------------------------------------
Increasingly, MUTUAL FUNDS are the preferred vehicle for starting and building
an investment program. And today, GRADISON 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.
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.*
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.
GROWTH & INCOME FUND
A common stock fund that seeks long-term capital growth, current
income and growth of income.
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 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. 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
return and principal 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.
