<PAGE> 1
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
April 20, 1998
Dear Shareholders:
SEMI-ANNUAL REPORT Financial statements of Gradison U.S. Government Reserves
money market fund as of March 31, 1998 appear on the following pages. The fund
continues to fulfill its mission of providing shareholders with a competitive
yield and daily liquidity. The 7-day yield of U.S. Government Reserves money
market fund as of April 20, 1998 was 4.85% which produced an effective yield of
4.97%. You may review the portfolio of investments as of the statement date on
pages 3 and 4. As in the past, all the securities held in the U.S. Government
Reserves money market fund are issued by those U.S. Government Agencies that
provide income which is exempt from state and local taxation.
MONEY MARKET TRENDS Short-term interest rates have been remarkably stable since
early 1997. Similarly, the 7-day yield of U.S. Government Reserves money market
fund has held steady for an extended period. The 7-day yield has ranged from
4.78% to 4.97% at the end of each of each of the trailing twelve months. In the
short run, we look for a continuation of this stability. Short term rates will
likely pierce these range limits if it becomes apparent that either of the
currently competing influences may prevail upon the U.S. economy: (1) A move to
lower short-term rates could follow indications that the economic crisis in Asia
is damping U.S. economic growth to a significant degree; or (2) Higher
short-term interest rates could be the result if U.S economic growth is
substantially unaffected by the Asian financial crisis and continues to expand
at an annualized rate of 3% or better.
FOND FAREWELL Long-time shareholders will recognize that a constant to these
semi-annual letters over nearly two decades has been the signature of Paul
Weston. He has been active in the management of this money market fund since
1981, as well as a significant influence in the administration of the Gradison
Family of Funds. Paul joined Gradison in 1969, served on its Board of Directors,
and was a member of its Executive Committee when Gradison merged with McDonald
Securities in 1991. Paul will retire from his career at Gradison at the end of
May. Paul has asked me to emphasize that the full responsibilities for portfolio
management of the Fund were passed to me in 1993 following a long period of
shared responsibilities and transition dating back to 1983.
No one should be surprised if this transition is an opportunity for Paul and his
wife, Linda, to make additional entries to the already long list of their world
travels. Paul's friends and coworkers wish him well.
Respectfully,
/s/ C. STEPHEN WESSELKAMPER
- ---------------------------
C. Stephen Wesselkamper
Executive Vice President
Portfolio Manager
1-800-869-5999
<PAGE> 2
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a share outstanding throughout each period (Unaudited)
<TABLE>
<CAPTION>
6 MONTHS Year Ended
ENDED -------------------------------------------------------------
3/31/98 9/30/97 9/30/96 9/30/95 9/30/94 9/30/93(1)
<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 .047 .047 .050 .029 .025
DIVIDENDS FROM NET INVESTMENT INCOME (.023) (.047) (.047) (.050) (.029) (.025)
-------- -------- -------- -------- -------- ------
NET ASSET VALUE AT END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $1.000
======== ======== ======== ======== ======== ======
TOTAL RETURN 2.46%(2) 4.85% 4.86% 5.10% 2.97% 2.55%
======== ======== ======== ======== ======== ======
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (in millions) $1,812.5 $1,610.1 $1,333.1 $1,224.1 $1,001.2 979.8
Ratio of gross expenses to average net assets(3) .74%(4) .73% .76% .80% -- --
Ratio of net expenses to average net assets .73%(4) .72% .75% .78% .80%(5) .81%
Ratio of net investment income to average net assets 4.88%(4) 4.75% 4.72% 5.00% 2.90%(5) 2.53%
</TABLE>
================================================================================
(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) Total return represents the actual return over the period and has not been
annualized.
(3) 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.
(4) Annualized.
(5) 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 net expenses to average net
assets was .81% and the ratio of net investment income to average net
assets was 2.89%.
2
See accompanying notes to financial statements.
<PAGE> 3
U.S. GOVERNMENT RESERVES
- --------------------------------------------------------------------------------
March 31, 1998 (Unaudited)
PERFORMANCE DATA
<TABLE>
<CAPTION>
10 YEARS 5 YEARS 3 YEARS 1 YEAR QUARTER*
<S> <C> <C> <C> <C> <C>
U.S. GOVERNMENT RESERVES AVERAGE ANNUAL
TOTAL RETURN PERIODS ENDED MARCH 31, 1998 5.27% 4.29% 4.95% 4.98% 1.21%
CONSUMER PRICE INDEX 3.3% 2.5% 2.3% 1.4% 0.2%
</TABLE>
* Not annualized.
The chart at left is intended to compare the total return results of Gradison
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.
Total returns are historical and will fluctuate in the future.
The yield of U.S. Government Reserves money market fund for the 7-day period
ending April 20, 1998 was 4.85% which produced an effective yield of 4.97%. The
yield quotation more closely reflects the current earnings of the Fund than the
total return quotation.
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
COUPON RATE RATE (1) AMOUNT VALUE
FEDERAL FARM CREDIT BANKS,
DISCOUNT NOTES - 13.60%
4/01/98 5.57% $140,900,000 $140,900,000
4/03/98 5.34 12,977,000 12,973,150
4/07/98 5.32 10,000,000 9,991,133
4/15/98 5.33 15,937,000 15,903,966
4/20/98 5.39 23,000,000 22,934,571
5/01/98 5.43 10,000,000 9,954,750
5/08/98 5.38 10,067,000 10,011,335
7/07/98 5.29 39,425,000 38,863,051
------------
261,531,956
------------
======================================================
MATURITY, INTEREST PRINCIPAL
COUPON RATE RATE (1) AMOUNT VALUE
FEDERAL FARM CREDIT BANKS,
BONDS - 3.58%
4/01/98,5.90% 5.71% $ 10,000,000 $ 10,000,000
9/02/98,5.70 5.75 25,000,000 24,994,723
2/02/99,5.30 5.46 20,000,000 19,975,692
4/01/99,5.50 5.66 14,000,000 13,978,860
------------
68,949,275
------------
FEDERAL FARM CREDIT BANKS,
FLOATING RATE NOTES (2) -15.60%
7/01/98 5.36 50,000,000 49,990,257
7/01/98 5.52 50,000,000 49,990,266
8/11/98 5.52 50,000,000 49,985,896
10/01/98 5.45 50,000,000 49,981,449
12/01/98 5.79 50,000,000 50,000,000
2/01/99 5.57 50,000,000 50,000,000
------------
299,947,868
------------
======================================================
3
See accompanying notes to financial statements.
<PAGE> 4
U.S. GOVERNMENT RESERVES
- --------------------------------------------------------------------------------
March 31, 1998 (Unaudited)
PORTFOLIO OF INVESTMENTS Continued
MATURITY, INTEREST PRINCIPAL
COUPON RATE RATE (1) AMOUNT VALUE
FEDERAL FARM CREDIT BANKS,
FLOATING RATE MASTER NOTE (2) - 2.18%
10/16/98 5.44% $ 42,000,000 $ 42,000,000
--------------
FEDERAL HOME LOAN BANKS,
DISCOUNT NOTES - 37.10%
4/01/98 5.44 35,000,000 35,000,000
4/03/98 5.38 72,932,000 72,910,185
4/08/98 5.48 35,000,000 34,962,706
4/13/98 5.46 35,843,000 35,777,782
4/15/98 5.34 50,000,000 49,896,128
4/17/98 5.52 50,738,000 50,613,523
4/22/98 5.46 101,290,000 100,967,500
5/08/98 5.42 25,000,000 24,860,762
5/22/98 5.37 25,000,000 24,809,990
5/27/98 5.39 10,000,000 9,916,156
6/03/98 5.43 150,000,000 148,574,188
6/10/98 5.44 22,630,000 22,390,625
6/12/98 5.41 42,000,000 41,545,560
6/19/98 5.43 16,470,000 16,273,585
8/26/98 5.34 20,997,000 20,539,160
9/18/98 5.36 25,000,000 24,367,222
--------------
713,405,072
--------------
FEDERAL HOME LOAN BANKS,
BONDS - 8.67%
6/16/98,5.82% 5.85 45,000,000 44,997,271
7/08/98,5.76 5.75 20,000,000 20,000,700
9/08/98,5.73 5.82 25,000,000 24,990,575
9/30/98,5.74 5.77 11,725,000 11,723,305
11/12/98,5.83 5.83 25,000,000 24,999,398
3/16/99,5.56 5.62 20,000,000 19,988,432
3/23/99,5.63 5.64 20,000,000 19,996,952
--------------
166,696,633
--------------
======================================================
MATURITY, INTEREST PRINCIPAL
COUPON RATE RATE (1) AMOUNT VALUE
FEDERAL HOME LOAN BANKS,
FLOATING RATE NOTES (2) - 7.80%
7/07/98 5.46% $ 50,000,000 $ 49,988,211
9/30/98 5.43 50,000,000 49,978,030
10/20/98 5.63 50,000,000 49,991,949
--------------
149,958,190
--------------
STUDENT LOAN MARKETING ASSOCIATION,
DISCOUNT NOTE - 6.50%
4/01/98 5.89 125,000,000 125,000,000
--------------
STUDENT LOAN MARKETING ASSOCIATION,
BONDS - 4.19%
6/10/98,5.85% 5.87 18,685,000 18,684,277
9/09/98,5.78 5.85 25,000,000 24,992,606
9/16/98,5.79 5.86 16,650,000 16,644,722
2/10/99,5.40 5.60 20,375,000 20,340,925
--------------
80,662,530
--------------
TENNESSEE VALLEY AUTHORITY,
DISCOUNT NOTE - 0.78%
4/21/98 5.31 15,000,000 14,955,750
--------------
TOTAL INVESTMENTS,
AT VALUE (COST $1,923,107,274) - 100% $1,923,107,274
==============
======================================================
(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.
4
See accompanying notes to financial statements.
<PAGE> 5
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
3/31/98
<S> <C>
ASSETS
Investments in securities, at value (Note 1) (Cost $1,923,107,274) $1,923,107,274
Interest receivable 6,622,739
Prepaid expenses and other assets 690,397
--------------
TOTAL ASSETS 1,930,420,410
--------------
LIABILITIES
Payable for investments purchased 113,026,423
Payable for Fund shares redeemed 3,279,983
Accrued investment advisory fee (Note 2) 647,662
Dividend payable 485,677
Other accrued expenses payable to adviser (Note 2) 375,471
Other accrued expenses and liabilities 108,171
--------------
TOTAL LIABILITIES 117,923,387
--------------
NET ASSETS
Equivalent to $1.00 per share on 1,812,497,023 outstanding shares (Note 1)
($.01 par value - unlimited number of shares authorized) $1,812,497,023
==============
</TABLE>
================================================================================
See accompanying notes to financial statements.
5
<PAGE> 6
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
(Unaudited)
6 MONTHS ENDED 3/31/98
INTEREST INCOME $47,506,207
EXPENSES:
Investment advisory fees (Note 2) $3,734,597
Transfer agency fees (Note 2) 1,257,565
Distribution (Note 2) 839,330
Printing 100,715
Accounting services fees (Note 2) 89,657
Custodian fees (Note 1) 79,868
Registration fees 56,920
Postage and mailing 31,192
Professional fees 23,079
ICI dues 22,774
Trustees' fees (Note 2) 15,027
Amortization of organization expense (Note 1) 1,773
Other 7,850
----------
GROSS EXPENSES 6,260,347
LESS EARNINGS CREDITS ON CASH BALANCES
(NOTE 1) (79,868)
----------
NET EXPENSES 6,180,479
-----------
NET INVESTMENT INCOME $41,325,728
===========
===============================================================================
See accompanying notes to financial statements.
6
<PAGE> 7
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
6 MONTHS YEAR
ENDED ENDED
3/31/98 9/30/97
<S> <C> <C>
FROM NET INVESTMENT INCOME $ 41,325,728 $ 74,249,386
-------------- --------------
FROM DIVIDENDS TO SHAREHOLDERS (41,325,728) (74,249,386)
-------------- --------------
FROM FUND SHARE TRANSACTIONS:
(at a constant net asset value of $1.00 per share)
Proceeds from shares sold 4,483,164,367 7,808,119,094
Net asset value of shares issued in reinvestment
of dividends 40,375,175 73,390,308
Payments for shares redeemed (4,321,100,654) (7,604,514,450)
-------------- --------------
Increase in net assets from Fund share
transactions 202,438,888 276,994,952
-------------- --------------
TOTAL INCREASE IN NET ASSETS 202,438,888 276,994,952
NET ASSETS:
Beginning of period 1,610,058,135 1,333,063,183
-------------- --------------
End of period $1,812,497,023 $1,610,058,135
============== ==============
</TABLE>
================================================================================
See accompanying notes to financial statements.
7
<PAGE> 8
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
March 31, 1998 (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 (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
8
<PAGE> 9
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 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> 10
This page intentionally left blank.
10
<PAGE> 11
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.
<PAGE> 12
U.S. GOVERNMENT
RESERVES
Semiannual Report
MARCH 31, 1998
GRADISON MUTUAL FUNDS [LOGO]
580 WALNUT STREET GRADISON
CINCINNATI, OHIO 45202-3198 MUTUAL FUNDS(sm)
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
