<PAGE> 1
GRADISON MUTUAL FUNDS
580 WALNUT STREET
CINCINNATI, OHIO 45202-3198
U.S. GOVERNMENT
RESERVES
Annual Report
SEPTEMBER 30, 1998
See Page 11 for Supplement to Prospectus dated 2/1/98 of Gradison U.S.
Government Reserves Fund.
[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. BISYS Fund Services Limited Partnership--Distributor
<PAGE> 2
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
November 6, 1998
Dear Shareholders:
ANNUAL REPORT The twenty-third fiscal year of Gradison U.S. Government Reserves
money market fund was completed on September 30, 1998. The Fund commenced
operations in 1976. We count shareholders who have been with us for years as old
friends, and we welcome our new shareholders. We offer a special welcome to the
many shareholders from Essex Capital Management who joined us in
early-September. We believe that new shareholders of U.S. Government Reserves
money market fund will find that the Fund's longevity provides an important
basis for assessing current developments in financial markets.
Audited financial results for the Fund's fiscal year (with accompanying notes)
follow. The investment portfolio appears on pages 4-5; financial statements, on
pages 6-7; and the unqualified opinion of our independent public accountants,
Arthur Andersen, LLP, on page 10. At September 30, 1998, the 7-day yield of U.S.
Government Reserves money market fund was 4.80% which produced an effective
yield of 4.92% as a result of compounding.
In recent months, the stability of the fixed income markets that has prevailed
for approximately two years has ended as the "Asian contagion" has become
pandemic. Russia and several countries in Latin America are now in financial
crisis. Domestic financial markets are now affected by concerns that growth of
the U.S. economy will be impeded by the crises ravaging other parts of the
globe. The earlier consideration that the domestic economy was growing at an
unsustainable pace has evaporated. Responding in this new environment, the FOMC
reduced short term interest rates by one-quarter of one percent (0.25%) on
September 29 and again on October 15. The FOMC cited concerns that: (1) Growth
in the U.S. economy would slow as a result of weakness prevalent in foreign
economies; (2) Domestic conditions have become less accommodative to economic
growth; and (3) Reduced availability of credit and unsettled market conditions
would restrain demand. Professional investment managers expect more rate cuts.
For the time being, our financial markets remain susceptible to volatility as a
result of the factors cited by the FOMC.
SHAREHOLDER SERVICE U.S. Government Reserves money market fund intends to
deliver the services that shareholders most value, and your comments and
suggestions are welcomed. Contact your Investment Consultant or the Gradison
Mutual Funds Shareholder Service Department during normal business hours if you
have questions about your account or any element about the Fund's operations.
The telephone number for Shareholder Service is (800) 869-5999 (nationwide).
Respectfully,
/s/ C. Stephen Wesselkamper
- ---------------------------
C. Stephen Wesselkamper
Vice President
Portfolio Manager
- --------------------------------------------------------------------------------
SECURITIES, MUTUAL FUNDS AND OTHER INVESTMENT PRODUCTS ARE NOT INSURED BY THE
FDIC AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY MCDONALD
INVESTMENTS INC., KEY BANK OR ANY OF THEIR AFFILIATES, AND ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
- --------------------------------------------------------------------------------
The Gradison Division of McDonald Investments Inc., a subsidiary of KeyCorp, is
the investment adviser to the Gradison U.S. Government Reserves. The Gradison
Funds are sponsored and distributed by BISYS Fund Services Limited Partnership,
which is not affiliated with KeyCorp or its subsidiaries. Gradison receives a
fee for its services from the Gradison Funds.
1-800-869-5999 [LOGO]
<PAGE> 3
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------------------------------------------
For a share outstanding throughout each year
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------
1998 1997 1996 1995 1994
<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 .049 .047 .047 .050 .029
DIVIDENDS FROM NET INVESTMENT INCOME (.049) (.047) (.047) (.050) (.029)
--------- -------- -------- -------- --------
NET ASSET VALUE AT END OF YEAR $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
========= ======== ========= ========= ========
TOTAL RETURN 4.98% 4.85% 4.86% 5.10% 2.97%
========= ======== ========= ========= ========
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year (in millions) $1,933.8 $1,610.1 $1,333.1 $1,224.1 $1,001.2
Ratio of gross expenses to average net assets (1) .73% .73% .76% .80% --
Ratio of net expenses to average net assets .72% .72% .75% .78% .80%(2)
Ratio of net investment income to average net assets 4.86% 4.75% 4.72% 5.00% 2.90%(2)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 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.
(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.
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> 4
U.S. GOVERNMENT RESERVES
- --------------------------------------------------------------------------------
September 30, 1998
PERFORMANCE DATA
<TABLE>
<CAPTION>
U.S. GOVERNMENT RESERVES AVERAGE ANNUAL
TOTAL RETURN PERIODS ENDED SEPTEMBER 30, 1998
CONSUMER PRICE INDEX
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 SEPTEMBER 30, 1998 5.17% 4.54% 4.89% 4.98% 1.23%
CONSUMER PRICE INDEX 3.20% 2.50% 2.30% 1.50% 0.50%
</TABLE>
* Not annualized.
The chart above 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
ended November 6, 1998 was 4.51% which produced an effective yield of 4.61%. 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.
See accompanying notes to financial statements. 3
<PAGE> 5
U.S. GOVERNMENT RESERVES
- --------------------------------------------------------------------------------
September 30, 1998
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
MATURITY, INTEREST PRINCIPAL
COUPON RATE RATE (1) AMOUNT VALUE
FEDERAL FARM CREDIT BANKS,
DISCOUNT NOTES - 6.52%
<S> <C> <C> <C>
10/06/98 5.41% $ 26,928,000 $ 26,907,753
10/07/98 5.41 22,000,000 21,980,163
10/15/98 5.42 20,000,000 19,957,844
10/19/98 5.15 25,000,000 24,935,625
11/09/98 5.35 9,500,000 9,444,940
12/22/98 5.05 5,000,000 4,942,486
1/27/99 5.37 19,000,000 18,665,568
------------
126,834,379
------------
FEDERAL FARM CREDIT BANKS,
BONDS - 5.04%
11/02/98, 5.51% 5.56 23,000,000 22,997,869
12/01/98, 5.48 5.53 16,075,000 16,074,579
2/02/99, 5.30 5.45 20,000,000 19,990,182
4/01/99, 5.50 5.66 14,000,000 13,989,459
9/29/99, 5.24 5.24 25,000,000 25,000,000
-------------
98,052,089
-------------
FEDERAL FARM CREDIT BANKS,
FLOATING RATE NOTES (2) - 8.99%
10/01/98 5.44 50,000,000 50,000,000
12/01/98 5.56 50,000,000 50,000,000
2/01/99 5.46 50,000,000 50,000,000
8/17/99 5.48 25,000,000 24,987,090
-------------
174,987,090
-------------
FEDERAL FARM CREDIT BANKS,
FLOATING RATE MASTER NOTE (2) - 3.21%
10/16/98 5.43 62,500,000 62,500,000
-------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MATURITY, INTEREST PRINCIPAL
COUPON RATE RATE (1) AMOUNT VALUE
FEDERAL HOME LOAN BANKS,
DISCOUNT NOTES - 40.20%
<S> <C> <C> <C>
10/07/98 5.41% $ 96,400,000 $ 96,313,076
10/09/98 5.43 228,790,000 228,514,225
10/14/98 5.42 100,000,000 99,804,224
10/16/98 5.43 27,000,000 26,938,913
10/21/98 5.44 50,000,000 49,849,000
10/26/98 5.11 14,500,000 14,448,545
11/04/98 5.39 56,498,000 56,210,450
11/12/98 5.40 50,000,000 49,685,146
12/02/98 5.07 10,900,000 10,804,919
12/04/98 5.29 38,423,000 38,061,995
12/23/98 5.28 25,000,000 24,695,782
1/06/99 5.37 25,000,000 24,638,608
1/08/99 5.37 15,000,000 14,778,694
1/13/99 5.37 11,000,000 10,829,512
2/03/99 5.35 12,568,000 12,334,532
2/12/99 5.35 25,000,000 24,502,153
------------
782,409,774
------------
FEDERAL HOME LOAN BANKS,
BONDS - 9.55%
11/18/98, 5.30% 5.70 14,000,000 13,992,917
12/08/98, 5.42 5.66 14,000,000 13,993,744
2/26/99, 5.53 5.65 10,000,000 9,989,120
3/16/99, 5.56 5.62 20,000,000 19,994,498
4/07/99, 5.54 5.70 10,150,000 10,141,672
6/10/99, 5.53 5.69 10,000,000 9,989,230
6/11/99, 5.61 5.65 13,700,000 13,695,655
7/01/99, 5.55 5.58 15,000,000 14,996,400
7/23/99, 5.66 5.58 40,000,000 40,008,350
8/04/99, 5.68 5.70 19,175,000 19,171,210
8/17/99, 5.51 5.57 20,000,000 19,990,005
-------------
185,962,801
-------------
- --------------------------------------------------------------------------------
</TABLE>
4 See accompanying notes to financial statements.
<PAGE> 6
U.S. GOVERNMENT RESERVES
- --------------------------------------------------------------------------------
September 30, 1998
PORTFOLIO OF INVESTMENTS Continued
<TABLE>
<CAPTION>
MATURITY, INTEREST PRINCIPAL
COUPON RATE RATE (1) AMOUNT VALUE
FEDERAL HOME LOAN BANKS,
FLOATING RATE NOTES (2) - 5.14%
<S> <C> <C> <C>
10/20/98 5.01% $ 50,000,000 $ 49,999,242
8/12/99 4.98 50,000,000 49,974,541
--------------
99,973,783
--------------
STUDENT LOAN MARKETING ASSOCIATION,
DISCOUNT NOTE - 10.28%
10/01/98 5.39 200,000,000 200,000,000
--------------
STUDENT LOAN MARKETING ASSOCIATION,
BONDS - 4.65%
12/17/98, 5.74% 5.61 11,500,000 11,502,813
1/22/99, 5.66 5.69 10,000,000 9,998,831
1/27/99, 5.56 5.71 13,700,000 13,689,049
2/10/99, 5.40 5.59 20,375,000 20,360,721
6/10/99, 5.52 5.66 10,000,000 9,990,561
9/30/99, 5.20 5.20 25,000,000 25,000,000
--------------
90,541,975
--------------
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MATURITY, INTEREST PRINCIPAL
COUPON RATE RATE (1) AMOUNT VALUE
STUDENT LOAN MARKETING ASSOCIATION,
FLOATING RATE NOTES (2) - 6.42%
<S> <C> <C> <C>
3/18/99 5.14% $ 75,000,000 $ 75,000,000
9/15/99 5.28 50,000,000 49,968,272
--------------
124,968,272
--------------
TOTAL INVESTMENTS,
AT VALUE (COST $1,946,230,163) - 100% $1,946,230,163
==============
- --------------------------------------------------------------------------------
</TABLE>
(1) The interest rates disclosed in the portfolio of investments are as
follows:
o U.S. Government Agency discount notes - the discount rate at the time of
purchase;
o U.S. Government Agency bonds - the yield to maturity at the time of
purchase;
o 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.
See accompanying notes to financial statements. 5
<PAGE> 7
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
- ---------------------------------------------------------------------------------
9/30/98
<S> <C>
ASSETS
Investments in securities, at value (Note 1)
(Cost $1,946,230,163) $1,946,230,163
Interest receivable 7,293,972
Prepaid expenses and other assets 6,743,161
--------------
TOTAL ASSETS 1,960,267,296
--------------
LIABILITIES
Payable for securities purchased 25,000,000
Accrued investment advisory fee (Note 2) 686,155
Other accrued expenses payable to adviser (Note 2) 414,402
Dividend payable 206,780
Other accrued expenses and liabilities 134,263
Payable for Fund shares redeemed 2,000
--------------
TOTAL LIABILITIES 26,443,600
--------------
NET ASSETS
Equivalent to $1.00 per share on 1,933,823,696
outstanding shares (Note 1)
($.01 par value - unlimited number of shares authorized) $1,933,823,696
==============
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------------------------
YEAR ENDED 9/30/98
<S> <C> <C>
INTEREST INCOME $100,139,720
EXPENSES:
Investment advisory fees (Note 2) $ 7,875,357
Transfer agency fees (Note 2) 2,612,210
Distribution (Note 2) 1,778,775
Registration fees 190,291
Accounting services fees (Note 2) 187,038
Custodian fees (Note 1) 166,962
Printing 161,496
Professional fees 57,389
ICI dues 56,101
Trustees' fees (Note 2) 38,326
Amortization of organization expense (Note 1) 4,369
Other 12,868
-----------
GROSS EXPENSES 13,141,182
LESS EARNINGS CREDITS ON CASH BALANCES (NOTE 1) (166,962)
-----------
NET EXPENSES 12,974,220
------------
NET INVESTMENT INCOME $ 87,165,500
============
- ------------------------------------------------------------------------------------------------
</TABLE>
6 See accompanying notes to financial statements.
<PAGE> 8
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------------
YEAR ENDED
-------------------------------------
9/30/98 9/30/97
<S> <C> <C>
FROM NET INVESTMENT INCOME $ 87,165,500 $ 74,249,386
--------------- --------------
FROM DIVIDENDS TO SHAREHOLDERS (87,165,500) (74,249,386)
--------------- --------------
FROM FUND SHARE TRANSACTIONS:
(at a constant net asset value of $1.00
per share)
Proceeds from shares sold 9,220,288,201 7,808,119,094
Net asset value of shares issued in
reinvestment of dividends 85,372,300 73,390,308
Payments for shares redeemed (8,981,894,940) (7,604,514,450)
--------------- --------------
Increase in net assets from Fund share
transactions 323,765,561 276,994,952
--------------- --------------
TOTAL INCREASE IN NET ASSETS 323,765,561 276,994,952
NET ASSETS:
Beginning of year 1,610,058,135 1,333,063,183
--------------- --------------
End of year $ 1,933,823,696 $1,610,058,135
=============== ==============
</TABLE>
See accompanying notes to financial statements. 7
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
September 30, 1998
NOTE 1 -- SIGNIFICANT ACCOUNTING
POLICIES
Gradison o 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.
FUND SHARE VALUATION
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.
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
Securities transactions are accounted for on the trade date (the date the order
to buy or sell is executed).
INTEREST INCOME
Interest income is accrued as earned and includes immaterial gains or losses
realized from securities transactions during the year.
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.
DIVIDENDS TO SHAREHOLDERS
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.
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.
8
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS Continued
- --------------------------------------------------------------------------------
September 30, 1998
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 $5.00 per
closed shareholder account, as defined, 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 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.
NOTE 3 -- SUBSEQUENT EVENT
Effective October 23, 1998, the parent of McDonald was acquired by KeyCorp.
McDonald, which became a subsidiary of KeyCorp as a result of the merger, has
changed its name to McDonald Investments Inc. As of that date, a new Investment
Advisory Agreement between McDonald Investments Inc. and the Fund became
effective. That Agreement is in substantially the same form as the previous
agreement except that it provides that the fees payable by the Fund under the
Agreement will be held in escrow until shareholders of the Fund approve the
Agreement. If the Agreement is not approved by March 22, 1999, the fees will be
returned to the Fund. The current Transfer Agency, Account Services, and
Administrative Services Agreement between the Fund and McDonald Investments Inc.
continues in effect. BISYS Fund Services Limited Partnership has been retained
by the Fund to act as Distributor, succeeding McDonald Investments Inc.
9
<PAGE> 11
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
ARTHUR
ANDERSEN
To the Shareholders and Board of Trustees
of the Gradison U.S. Government Reserves series of
the Gradison o 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 o McDonald Cash
Reserves Trust (a Massachusetts business trust), including the portfolio of
investments, as of September 30, 1998, 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, 1998, 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 o McDonald Cash
Reserves Trust as of September 30, 1998, 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
- -------------------------
Arthur Andersen LLP
Cincinnati, Ohio,
October 23, 1998
10
<PAGE> 12
The following letter and prospectus supplement are not part of the Gradison U.S.
Government Reserves Annual Report to Shareholders.
Dear Shareholder,
The following information is being sent to you in connection with your
investment in the Gradison U.S. Government Reserves Fund. As you may already
know, the parent of McDonald & Company Securities Inc. recently merged with
KeyCorp, a bank holding company with headquarters in Cleveland, Ohio. As
indicated below, certain changes have been made and additional shareholder
approval is also required. Advisory and other services previously provided have
not been changed as a result of the corporate merger.
A recommendation to reorganize the Fund was also presented and approved by your
Fund's Board of Trustees and is briefly outlined below. It is expected that your
approval of the proposed reorganization of the Fund will also be requested early
next year. At this time, no action is required on your part.
Please keep this information with your Fund's prospectus and for further
information or clarification please call 579-5700 from Cincinnati, Ohio,
1-800-869-5999 toll free, or your Investment Consultant.
Sincerely,
Gradison Mutual Funds
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Supplement DATED NOVEMBER 16, l998, To Prospectus Dated February 1, 1998 of:
GRADISON U.S. GOVERNMENT RESERVES (THE "FUND")
The purpose of this supplement is to notify shareholders of several developments
with respect to the Fund:
1. The merger of the parent of McDonald & Company Securities Inc. ("McDonald")
with KeyCorp was finalized on October 23, l998. McDonald, which has changed
its name to McDonald Investments Inc., remains Investment Adviser for the
Fund pursuant to an Investment Advisory Agreement dated October 23, l998.
This Advisory Agreement will be submitted to shareholders for approval at a
special meeting to be held early next year.
2. The Distributor of the Fund has been changed to BISYS Fund Services Limited
Partnership to comply with certain banking regulations.
3. The Board of Trustees of the Trust has approved an Agreement and Plan of
Reorganization for the Fund. The Reorganization is subject to the approval
of the shareholders and the Board of Trustees of the Victory Portfolios.
The Reorganization will be submitted to shareholders at a special meeting
to be held early next year.
If the Reorganization of the Fund is approved shareholders will exchange
their Fund shares for shares of the Victory Gradison Government Reserves
Fund. The shares of received by Gradison shareholders will have the same
value as the total value of their Gradison Fund shares on the effective
date of the Reorganization. (In other words, if you own $1,000 worth of
Gradison U.S. Government Reserves shares, you will receive $1,000 worth of
Victory Gradison Government Reserves shares.) The exchange of shares will
not be taxable. Victory Gradison Government Reserves will be a new fund
formed to continue the operations of the Gradison U.S. Government Reserves
Fund and will have substantially the same investment objective and policies
as the current Gradison U.S. Government Reserves Fund. The Victory Gradison
Government Reserves Fund is a "Series" or "Portfolio" of the Victory
Portfolios, an open-end management investment company organized as a
Delaware trust.
The foregoing letter and prospectus supplement is not part of the Gradison U.S.
Government Reserves Fund Annual Report to Shareholders.
11
