<PAGE> 1
GRADISON U.S. GOVERNMENT RESERVES
PROSPECTUS DATED FEBRUARY 1, 1999
Gradison U.S. Government Reserves (the "Fund") is a diversified series of the
Gradison-McDonald Cash Reserves Trust, an open-end management investment
company. The Gradison-McDonald Asset Management Division of McDonald
Investments, Inc. is the investment adviser for the Fund (the "Adviser"). The
Fund is a money market fund investing in U.S. government securities.
This Prospectus is designed to provide you with information that you should know
before investing and should be retained for future reference. A Statement of
Additional Information for the Fund, dated February 1, 1999, has been filed with
the Securities and Exchange Commission and is incorporated herein by reference.
This Statement is available upon request without charge from the Fund at 580
Walnut Street, Cincinnati, Ohio 45202 or by calling the phone numbers provided
below.
For information and transactions (including purchases, redemptions, and most
recent yield), call 579-5700 from Cincinnati, Ohio or 1-800-869-5999 toll free.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
An investment in the Fund is not insured or guaranteed by the FDIC or any other
government agency. Although the Fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in the
Fund.
EXPENSE SUMMARY
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees .44%
12b-1 Fees .10%
Other Expenses .19%
---
TOTAL FUND OPERATING EXPENSES .73%
===
Example: You would pay the following expenses on a $1,000 investment assuming a
5% annual return* and redemption at the end of each period:
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
$7 $23 $41 $91
- --------------------------------------------------------------------------------
* The 5% annual return is a standardized rate prescribed for use by all
mutual funds for the purpose of this example and does not represent the
past or future return of the Fund.
SHARES OF THE FUND ARE:
- - NOT INSURED BY THE FDIC;
- - NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY KEY BANK,
ANY OF ITS AFFILIATES, OR ANY OTHER BANK;
- - SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED
<PAGE> 2
The purpose of the preceding table is to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear directly and
indirectly. (For more information about Fund expenses, see "Purchases and
Redemptions" and "Management of the Fund.")
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
The table below presents the financial highlights of the most recent ten years
of the Fund's operations. (Prior to September 27, 1993, the financial results
are the results of Gradison Cash Reserves, the assets and liabilities of which
were acquired by the Fund effective September 27, 1993.) The information is
expressed in terms of a single share outstanding throughout each year. The
financial highlights for the years ended on September 30, 1993 and thereafter
have been audited by Arthur Andersen LLP, independent public accountants, whose
unqualified report appears in the Statement of Additional Information. The
financial highlights for periods ended prior to September 30, 1993 were audited
by other accountants. Further information about the Fund's performance is
contained in the Fund's annual report to shareholders, which may be obtained
without charge.
<TABLE>
<CAPTION>
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(2) .72% .72% .75% .78% .80%
Ratio of net investment income to
average net assets(2) 4.86% 4.75% 4.72% 5.00% 2.90%
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------
1993 1992 1991 1990 1989
<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 .025 .037 .059 .076 .084
Dividends from net investment income (.025) (.037) (.059) (.076) (.084)
------ ------ ------ ------ ------
Net asset value at end of year $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ======
Total return 2.55% 3.83% 6.12% 7.87% 8.74%
====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year (in millions) $979.8 $575.9 $638.7 $659.8 $613.4
Ratio of gross expenses to average
net assets(1) -- -- -- -- --
Ratio of net expenses to average
net assets(2) .81% .75% .75% .76% .79%
Ratio of net investment income to
average net assets(2) 2.53% 3.77% 5.96% 7.57% 8.41%
=============================================================================================================
</TABLE>
On October 4, 1991, Gradison became investment adviser of the Fund as a result
of a merger with Gradison & Company Incorporated.
(1) Effective for the fiscal year ended 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 expenses to average net assets
was .81% and the ratio of net investment income to average net assets was
2.89%.
HOW THE FUND INVESTS
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 Fund's investment objective cannot be changed without approval by the
holders of a majority of the Fund's outstanding voting shares (as defined in the
Investment Company Act of 1940 (the "Act")). All other policies set forth in
this Prospectus, unless otherwise noted, are subject to change without
shareholder approval. There can be no assurance that the Fund's investment
objective will be achieved. To achieve its investment objective, the Fund
invests in securities issued or guaranteed as to principal and interest by the
U.S. Government or its agencies or instrumentalities, and repurchase agreements
in respect of these securities. Securities in which the Fund invests may not
2
<PAGE> 3
earn as high a level of current income as long-term or lower quality securities
which generally have less liquidity, greater market risk and more fluctuation in
market value. THE FUND INTENDS TO MAXIMIZE, TO THE EXTENT POSSIBLE, THE PORTION
OF ITS DIVIDENDS THAT ARE NOT SUBJECT TO STATE AND LOCAL TAXATION.
The Fund seeks to maintain a net asset value of $1.00 per share for purchases
and redemptions. To do so, the Fund uses the amortized cost method of valuing
its securities pursuant to Rule 2a-7 under the Act, certain requirements of
which are summarized as follows. In accordance with Rule 2a-7, the Fund will
maintain a dollar-weighted average portfolio maturity of 90 days or less and
purchase only U.S. dollar denominated instruments having remaining maturities of
397 days or less as defined in that Rule. There can be no assurance that the
Fund will be able to maintain a stable net asset value of $1.00 per share.
Securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities include U.S. Treasury securities, which differ only in their
interest rates, maturities and times of issuance. Treasury bills have initial
maturities of one year or less; Treasury notes have initial maturities of one to
ten years; and Treasury Bonds generally have initial maturities of greater than
ten years. Some obligations issued or guaranteed by U.S. Government agencies and
instrumentalities in which the Fund may invest, for example, Government National
Mortgage Association pass-through certificates, are supported by the full faith
and credit of the U.S. Treasury; others, such as those of the Federal Home Loan
Banks, by the right of the issuer to borrow from the Treasury; others, such as
those issued by the Federal National Mortgage Association, by discretionary
authority of the U.S. Government to purchase certain obligations of the agency
or instrumentality; and others, such as those issued by the Federal Farm Credit
Bank System, only by the credit of the agency or instrumentality. While the U.S.
Government may provide financial support to such U.S. Government-sponsored
agencies or instrumentalities, no assurance can be given that it will always do
so, since it is not so obligated by law. The Fund will invest in such securities
only when it is satisfied that the credit risk with respect to the issuer is
minimal.
The Fund invests in securities which bear fixed, floating or variable rates of
interest. Interest derived from floating rate or variable rate securities may
fluctuate based on generally recognized reference rates or the relationship of
rates. The Fund may purchase floating and variable rate securities, including
securities the maturity of which exceeds one year if, under conditions that can
reasonably be foreseen, the Adviser believes that interest rate adjustments will
result in the market value of such securities returning to at least
approximately par. However, there can be no assurance that the market value of
such securities will always be at least approximately par.
The Fund also may invest in repurchase agreements secured by government
securities. For additional information about repurchase agreements and the
Fund's investment policies and restrictions, see "Further Information About How
the Fund Invests."
PURCHASES AND REDEMPTIONS
HOW TO PURCHASE SHARES
You may purchase shares of the Fund, without sales charge, by personally
delivering, mailing, or wiring funds to the Gradison-McDonald Investment
Division of McDonald Investments Inc. ("Gradison") or to McDonald Investments
Inc. ("McDonald"). A completed Account Information Form must accompany or
precede the initial purchase. The minimum investment required to open an account
is $1,000 and additional investments must be at least $50. These minimums may,
however, be waived for certain group purchases. The minimum investment required
to open an Education IRA is $500.
Purchases by check will be credited to your account (and begin earning
dividends) when the Fund receives Federal funds for your check which normally
will be on the next business day after receipt of the check. Purchase checks
should be made payable (or properly endorsed) to the order of "Gradison U.S.
Government Reserves" and should be accompanied by your account name and account
number (if the number has been assigned).
3
<PAGE> 4
Purchases by bank wire will be credited to your account (and begin earning
dividends) on the same business day that the wire is received by the Fund's
custodian bank or Gradison. However, Gradison must be advised by you of the
exact amount of your wire prior to 12:00 noon, Eastern time.
HOW TO REDEEM SHARES
You may redeem shares of the Fund without charge or penalty on any day that the
Fund is open for business. A redemption request (identifying the account name,
account number and the amount of your redemption) may be made in writing or by
telephone call to the Fund. If your request is received by the Fund by 12:00
noon, Eastern time, a check for the amount of your redemption will normally be
mailed the same business day, or if you prefer, you may arrange to pick up your
redemption check at the Fund's offices after 3:00 p.m. the same business day.
The checkwriting feature permits you to write your own redemption checks in
amounts of $100 or more without any fees. Checks also may be written in amounts
of less than $100, in which case you will be charged a fee of $.30 per check,
which reimburses the Fund for expenses associated with clearing such checks.
Shares continue to earn daily dividends until these checks are presented for
payment. Shareholders choosing the checkwriting feature must return a signature
card to the Fund signed by all owners of the account. The names of payees of
checks and the date checks are cashed appear on monthly transaction statements.
The checkwriting feature should not be used to effect a complete redemption of
an account. Shareholders who desire a complete redemption should contact the
Fund.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Purchase and redemption information and authorizations should be mailed or
delivered to Gradison, McDonald, or to Gradison Mutual Funds, 580 Walnut Street,
Cincinnati, Ohio 45202.
Purchases and redemptions are made at the next net asset value per share
calculated after receipt of Federal funds or a valid redemption request. The
Fund may, upon 30 days' written notice, impose reasonable service charges for
what it deems to be excessive use of the checkwriting feature. Share
certificates are not issued. Account transactions are reported on periodic
statements. There is a $10 fee per wire redemption of less than $50,000.
In the case of shares purchased through McDonald and Gradison brokerage
accounts, credit balances arising on the settlement date of a securities sale
will generally be transferred to the Fund by McDonald in the form of Federal
funds on the day after settlement.
Normally, the Fund makes payment for redeemed shares within one business day
(but in no event more than seven days) after receipt of a properly executed
redemption request. However, the Fund may delay payment for the redemption of
shares in those cases where the shares were purchased by check (or any method of
payment subject to collection) until the purchase payment has cleared, currently
considered to be no more than 15 days from the date of receipt by the Fund. If
you need more immediate access to your investment, you should consider
purchasing shares by wire or with other immediately available funds. The Fund
may, at its discretion, redeem all shares in any account if the value of that
account falls below $500. However, shareholders will be given notice and 60 days
to increase the value of the account to the required $500. The Fund reserves the
right to limit or reject any purchase order and to close any account deemed, in
its discretion, to be detrimental to the Fund. The Fund may modify these and
other purchase or redemption procedures to facilitate purchase and redemption of
shares through Gradison and McDonald brokerage accounts.
Under extraordinary circumstances, such as periods of drastic economic or market
changes, it is possible that you might not be able to reach the Fund by
telephone to effect a redemption. If such an occasion were ever to occur, you
can redeem your shares by using the checkwriting feature or you can make a
redemption request in writing (by mail or personally delivered) to the Fund's
offices. Shareholders who have brokerage accounts with Gradison or McDonald can
request that their Investment Consultants arrange the redemption. The telephone
redemption feature may be terminated or modified upon 30 days' notice to
shareholders.
4
<PAGE> 5
The Fund, its Adviser, BISYS Fund Services Limited Partnership (the
"Distributor"), and their officers and employees will not be liable for
following instructions communicated by telephone that are reasonably believed to
be genuine. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine, and if it does not, it may
be liable for any losses resulting from unauthorized instructions. Telephone
transactions are available to all shareholders as a standard service. Redemption
checks which are uncashed for any reason, including non-receipt, will not earn
interest.
Certain optional services are available to shareholders. See "Optional
Shareholder Services" in the Statement of Additional Information.
EXCHANGES
Shares may be exchanged, without administrative fees, for shares of any Gradison
Mutual Fund and for shares of certain other Federal and Federal/Ohio tax-free or
municipal income money market funds.
You may request exchanges of your shares by telephoning or writing the Fund.
Before making an exchange, you should read the prospectus of the fund in which
you desire to invest, each of which is available upon request. The terms of the
exchange feature are subject to change and the exchange feature is subject to
termination, both upon 60 days' notice.
DIVIDENDS AND TAXES
The Fund's net income is accrued daily as dividends and distributed monthly.
Share purchases effective before 12:00 noon, Eastern time, earn the dividend
that day. Shares do not receive a dividend for the day on which they are
redeemed. (See "Purchases and Redemptions.") Dividends may be received in cash
or reinvested in additional shares of the Fund. Dividend checks which are
uncashed for any reason, including non-receipt, will not earn interest.
If your account is not a tax-deferred retirement account or exempt from
taxation, the dividends you receive will be subject to Federal taxation as
ordinary income. The Fund's dividends will not qualify for the dividends
received deduction for corporations. Each shareholder will receive, on an annual
basis, a statement of the Federal income tax consequences of all distributions.
The Fund distributes substantially all of its net investment income and capital
gains, if any, to shareholders each year.
The Fund is required to withhold 31% of all dividends payable to any individual
and certain other noncorporate shareholders who do not provide the Fund with a
correct taxpayer identification number or certification that they are not
subject to backup withholding and that they have provided the Fund with a
correct taxpayer identification number.
Under the laws of most state and local jurisdictions, the portion of the Fund's
dividends derived from direct investments in certain U.S. government securities
will not be subject to state or local income taxation. Each year, shareholders
will be provided with information as to the percentage of income dividends
derived from U.S. government securities which is generally not taxable by state
and local jurisdictions. For the fiscal year ending September 30, 1998, 100% of
the Fund's dividends were derived from qualifying federal obligations and,
therefore, were not taxable by state and local jurisdictions.
NET ASSET VALUE
The net asset value of the Fund's shares is generally calculated as of 12:00
noon and 4:00 p.m. Eastern time on each day when the New York Stock Exchange is
open for business. The net asset value per share, which is the price at which
shares are purchased and redeemed, is computed by dividing the value of the
Fund's net assets (assets minus liabilities) by the number of shares
outstanding. The Fund intends to maintain a constant net asset value of $1.00
per share, although there is no assurance that it will be able to do so.
5
<PAGE> 6
GENERAL INFORMATION
The Fund is a series of the Gradison-McDonald Cash Reserves Trust (the "Trust"),
which is a business trust organized under the laws of the State of Massachusetts
by a Declaration of Trust dated October 20, 1981. The Trust succeeded to the
business of Gradison Cash Reserves, Inc. which began its operations on April 26,
1976. Each share of the Fund has one vote and represents an equal pro rata
interest in the Fund. Shareholder inquiries should be directed to the phone
or address of the Fund listed on the first page of this Prospectus.
MANAGEMENT OF THE FUND
The Trust's Board of Trustees is responsible for the direction and supervision
of the Fund's operations. Subject to the authority of the Board of Trustees, the
Adviser manages the investment and reinvestment of the assets of the Fund, and
provides its employees to act as the officers of the Fund who are responsible
for the overall management of the Fund.
Gradison is a Division of McDonald Investments Inc., 800 Superior Avenue,
Cleveland, Ohio 44114. The parent corporation of McDonald Investments is
KeyCorp, a bank holding company with assets of approximately $75 billion.
Through four principal lines of business, Corporate Capital, Consumer Finance,
Community Banking, and Capital Partners, KeyCorp provides retail and wholesale
banking, investment, financing, and money management services to individuals and
companies across the United States.
Prior to October 23, 1998, the investment adviser of the Fund was the Gradison
Division of McDonald & Company Securities, Inc. ("McDonald Securities"). On that
date, the parent corporation of McDonald Securities, McDonald & Company
Investments Inc., merged with KeyCorp. This may have caused a change in control
of McDonald Securities. Thus, the Board of Trustees of the Trust approved a new
investment advisory agreement with McDonald & Securities Inc., which
subsequently changed its name to McDonald Investments Inc. This new investment
advisory agreement was implemented prior to shareholder approval of the
agreement pursuant to an order issued by the Securities and Exchange Commission.
The new agreement contains substantially the same provisions as the prior
investment advisory agreement, except that all investment advisory fees will be
held in escrow until the new agreement has been approved by Fund shareholders.
If such approval is not obtained by March 22, 1999, the escrowed fees will be
returned to the Fund and the Trustees will attempt to obtain other investment
advisory services for the Fund. It is anticipated that early in 1999, certain of
the investment advisory activities of McDonald Investments Inc., including the
advisory agreement with the Fund, will be assigned to KAM. This assignment,
which did not constitute an assignment under the Investment Company Act of 1940,
had been previously approved by the Board of Trustees of the Trust.
On November 6, 1998, the Board of Trustees of the Trust approved an Agreement
and Plan of Reorganization for the Fund. The Reorganization is subject to
approval of the shareholders of the Fund. The Reorganization is being submitted
to shareholders of the Fund at a special meeting to be held in early 1999. There
can be no assurance that the shareholders of the Fund will approve the
Reorganization.
If the Reorganization of the Fund is approved, shareholders will exchange their
Fund shares for shares of the Victory Gradison Government Reserves Fund Class
"G". The shares received by Gradison Fund 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, a shareholder owning $1,000 worth of Gradison
U.S. Government Reserves, will receive $1,000 worth of Victory Gradison
Government Reserves Fund Class "G" shares.) The exchange of shares will not be
taxable. The Victory Gradison Government Reserves Fund 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 business trust.
6
<PAGE> 7
For acting as investment adviser, the Fund pays the Adviser an annual fee of
.50% of the first $400 million of average daily net assets, .45% of the next
$600 million of average daily net assets, .40% of the next $1 billion of average
daily net assets and .35% of amounts in excess of $2 billion of average daily
net assets. McDonald acts as the Fund's transfer agent, dividend disbursing
agent, and administrative services provider. For providing transfer agent and
administrative services, Gradison receives an annual fee of $23.50 per
shareholder non-zero balance account, $5.00 per closed or zero balance account
per year, plus out of pocket costs. McDonald also provides accounting services
to the Fund for which it receives a fee of .0150% of the first $400 million of
average daily net assets, .0125% of the next $300 million of average daily net
assets, .0100% of the next $300 million of average daily net assets, and .0075%
of average daily net assets in excess of $1 billion, with a minimum fee of
$25,000 per year. Gradison's address is 580 Walnut Street, Cincinnati, Ohio
45202.
Under the terms of a distribution service plan (the "Plan"), adopted pursuant to
Rule 12b-1 under the Act, the Fund pays to the Distributor a service fee at the
annual rate of .10% of the average daily net assets of the Fund. (The maximum
annual fee permitted by the Plan is .20% of the average daily net assets of the
Fund.) Such fee is calculated on a daily basis and paid to the Distributor
monthly. The service fee is paid as compensation to brokers for providing
personal services to shareholders of the Fund, including responding to
shareholder inquiries and providing information to shareholders about their Fund
accounts. The Distributor uses the fee to make payments to authorized dealers
for providing these services to Fund shareholders. In addition to the service
fee, the Distributor may also expend funds provided by the Plan for advertising
and printing prospectuses, annual reports, and other promotional material for
prospective investors, and for other distribution activities.
Registered broker-dealers, third party administrators of tax-qualified
retirement plans, and other entities which establish omnibus accounts with the
Fund may provide sub-transfer agency, recordkeeping, or similar services to
participants in the omnibus accounts which reduce or eliminate the need for
identical services to be provided on behalf of participants by the Fund's
transfer agent. In such cases, the Fund may pay the entity a sub-transfer agency
or recordkeeping fee. Certain entities receiving such fees may also receive
service fees.
INDIVIDUAL RETIREMENT ACCOUNTS
Shares of the Fund may be purchased in conjunction with an Individual Retirement
Account ("IRA") which permits exchange privileges with other Gradison Funds (see
"Exchanges") and which may also be used with a self-directed brokerage account.
Contact Gradison or McDonald for details.
FURTHER INFORMATION ABOUT HOW THE FUND INVESTS
The Fund may engage in repurchase agreement transactions in which it buys a
security at one price and simultaneously agrees to sell the same security back
to the original owner ("seller") at a higher price, usually within seven days of
the initial purchase. The Fund engages in repurchase agreement transactions only
with selected domestic banks and securities dealers which the Adviser believes
present minimal credit risk. In all cases, the security subject to resale is
held by the Fund's custodian and the Fund ensures on a daily basis that the
value of the security, including accrued interest, is maintained at no less than
the price at which the seller is required to repurchase the security. Should a
seller fail to repurchase the security, the Fund could incur costs to sell the
security to another party and possibly a loss if the sale price is less than the
repurchase price. Under certain limited circumstances, the Fund could also be
delayed or otherwise limited in disposing of the security, which could result in
a decline in its value and loss of interest.
The Fund may not borrow money, except from banks as a temporary measure or for
extraordinary or emergency purposes, and then only in amounts not exceeding 15%
of the Fund's total assets at the time of borrowing. While any borrowing of
greater than 5% of the assets occurs, the Fund will not purchase additional
portfolio securities. The foregoing policy may not be changed without
shareholder approval. The Fund may not, in an aggregate amount exceeding 10% of
the value of the Fund's total assets, (a) enter into repurchase agreements
maturing in more than seven days, (b) purchase illiquid securities, and (c)
purchase securities for which there are no readily available market quotations.
7
<PAGE> 8
The Fund may invest in "stripped" securities (both interest-only and
principal-only) issued by the U.S. Treasury and recorded in the Federal Reserve
book-entry record-keeping system. "Stripped" U.S. Treasury securities include
zero coupon obligations that are normally issued at a discount to their "face
value", and may exhibit greater price volatility than ordinary debt securities.
The Fund may purchase securities on a when-issued or forward delivery basis, for
payment and delivery at a later date. The price and yield are generally fixed on
the date of commitment to purchase. During the period between purchase and
settlement, no interest accrues to the Fund. At the time of settlement, the
market value of the security may be more or less than the purchase price.
The Statement of Additional Information contains additional information
regarding Fund investment restrictions and policies.
PERFORMANCE CALCULATIONS
From time to time the Fund may advertise its "yield," "effective yield," and/or
"total return". All performance figures are based on historical earnings and are
not intended to indicate future performance. The yield of the Fund refers to the
investment income generated by an investment in the Fund over a 7-day period.
This income is then annualized. That is, the amount of income generated by the
investment during that week is assumed to be generated each week over a 52-week
period and is shown as a percentage of the investment. The effective yield of
the Fund is calculated similarly but, when annualized, the income earned by an
investment in the Fund is assumed to be reinvested. The effective yield will be
slightly higher than the yield because of the compounding effect of this assumed
reinvestment. The total return refers to the average annual compounded rate of
return over specified time periods that would equate an initial amount of money
invested in the Fund at the beginning of a stated period to the ending
redeemable value of the investment assuming the reinvestment of dividends in
additional Fund shares.
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Expense Summary 1 Net Asset Value 5
Financial Highlights 2 General Information 6
How the Fund Invests 2 Management of the Fund 6
Purchases and Redemptions 3 Individual Retirement Accounts 7
Additional Purchase and
Redemption Information 4 Further Information About
How the Fund Invests 7
Exchanges 5 Performance Calculations 8
Dividends and Taxes 5
- --------------------------------------------------------------------------------
[LOGO]
GRADISON
MUTUAL FUNDS
580 Walnut Street, Cincinnati, Ohio 45202
(513) 579-5700 (800) 869-5999
8
<PAGE> 9
GRADISON U.S. GOVERNMENT RESERVES
Gradison-McDonald Cash Reserves Trust
The Gradison Division of McDonald Investments Inc. ("Gradison"), is the
investment adviser of the Fund ("Adviser").
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL
INFORMATION
- --------------------------------------------------------------------------------
For information (including most recent yield), call:
579-5700 from Cincinnati, Ohio
Toll free (800) 869-5999 outside Cincinnati
Information may also be obtained from the Fund at:
580 Walnut Street
Cincinnati, Ohio 45202
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectus of the Fund, dated February 1, 1999, which
has been filed with the Securities and Exchange Commission. The Prospectus is
available upon request without charge from the Fund at the above address or by
calling the phone numbers provided above.
The date of this Statement of Additional Information is February 1, 1999.
<PAGE> 10
- --------------------------------------------------------------------------------
CONTENTS
- --------------------------------------------------------------------------------
Page Location in Prospectus
INVESTMENT RESTRICTIONS AND POLICIES. . . . . 4 How the Fund Invests; Further
Information About How the
Fund Invests
PURCHASE OF SHARES . . . . . . . . . . . . . 6 Purchases and Redemptions;
Additional Purchase and
Redemption Information
REDEMPTION OF SHARES . . . . . . . . . . . . .6 Purchases and Redemptions;
Additional Purchase and
Redemption Information
EXCHANGE PRIVILEGE . . . . . . . . . . . . . 7 Exchanges
Telephone Exchanges . . . . . . . . . . 7
Written Exchanges . . . . . . . . . . . 7
General Exchange Information . . . . . . 7
SIGNATURE GUARANTEES . . . . . . . . . . . . 8
INCOME AND DIVIDENDS . . . . . . . . . . . . 8 Dividends and Taxes
TAXES . . . . . . . . . . . . . . . . . . . . 8 Dividends and Taxes
YIELD INFORMATION . . . . . . . . . . . . . . 9 Performance
Calculations
NET ASSET VALUE . . . . . . . . . . . . . . . 10 Net Asset Value
PORTFOLIO TRANSACTIONS . . . . . . . . . . 11
INVESTMENT ADVISER . . . . . . . . . . . . . 12 Management of the Fund
Advisory Agreement . . . . . . . . . . . 12
Distribution Service Plan . . . . . . . 13
Transfer Agency, Accounting Services,
and Administrative Services
Agreement . . . . . . . . . . . . 14
OTHER COMPENSATION PAID/REIMBURSEMENT MADE
TO THE ADVISER . . . . . . . . . . . . . 15
TRUSTEES AND OFFICERS OF THE TRUST . . . . . 15
DESCRIPTION OF THE TRUST . . . . . . . . . . 17 General Information
2
<PAGE> 11
CUSTODIAN . . . . . . . . . . . . . . . . . . 19
ACCOUNTANTS . . . . . . . . . . . . . . . . . 19
LEGAL COUNSEL . . . . . . . . . . . . . . . . 19
OPTIONAL SHAREHOLDER SERVICES . . . . . . . . 19
TOTAL RETURN INFORMATION . . . . . . . . . . .20
SALES BROCHURE INFORMATION. . . . . . . . . . 22
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT PUBLIC ACCOUNTANT .Following page 32 Financial Highlights
3
<PAGE> 12
INVESTMENT RESTRICTIONS AND POLICIES
In addition to the investment restrictions described in the Prospectus,
the Fund has adopted the following investment restrictions and limitations,
which may not be changed without the approval of the holders of a majority of
the outstanding voting securities of the Fund as defined in the Investment
Company Act of 1940 (the "Act"). (See "Description of the Trust".) The Fund will
not:
(1) Borrow money, except from banks as a temporary measure or for
extraordinary or emergency purposes such as to enable the Fund to
satisfy redemption requests where liquidation of portfolio securities is
considered disadvantageous, and not for leverage purposes, and then only
in amounts not exceeding 15% of the total assets of the Fund at the time
of the borrowing. While any borrowing of greater than 5% of the assets
is outstanding, the Fund will not purchase additional portfolio
securities;
(2) Make loans, except that the purchase of debt securities as allowed by
the Fund's investment objective and other Investment Restrictions,
entering into repurchase agreements, and the lending of portfolio
securities in an amount not to exceed 30% of the value of its total
assets with the collateral value of loaned securities marked-to-market
daily and in accordance with applicable regulations or guidelines
established by the Securities and Exchange Commission shall not be
prohibited by this restriction;
(3) Purchase or sell real estate. The purchase of securities secured by real
estate which are otherwise allowed by the Fund's investment objective
and other Investment Restrictions shall not be prohibited by this
restriction;
(4) Underwrite the securities of other issuers, except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of
1933 in connection with the disposition of portfolio securities;
(5) Purchase or sell commodities or commodity contracts or interests in oil,
gas or other mineral exploration or development programs or leases
except the purchase or sale of financial futures contracts or options on
financial futures contracts;
(6) Issue senior securities as defined in the Act, except to the extent that
such issuance might be involved with respect to borrowings subject to
item (1) above or with respect to transactions involving futures
contracts or the writing of options and provided that the Trust may
issue shares of additional series or classes that the Trustees may
establish.
(7) Invest more than 25% of its total assets in the securities of issuers in
any single industry, provided that there shall be no limitation on
investments in obligations issued or guaranteed by the U.S. Government,
its agencies or instrumentalities.
4
<PAGE> 13
The limitations and policies set forth in the remainder of this section are
not fundamental and may be changed without shareholder approval: (1) The Fund
will not purchase securities of other investment companies except in connection
with a reorganization, merger, or consolidation with another open-end investment
company; (2) The Fund will not make short sales of securities, or purchase
securities on margin, except for short-term credit as is necessary for the
clearance of transactions; 3) The Fund will not purchase or retain in its
portfolio any securities issued by an issuer, if to the Fund's knowledge, those
Trustees and officers of the Trust or of the Fund's investment adviser, who
individually own beneficially more than 1/2 of 1% of the outstanding securities
of such issuer, together own beneficially more than 5% of such outstanding
securities. This limitation shall not apply to U.S. Government securities; (4)
The Fund will not mortgage, pledge or hypothecate securities except in
connection with permitted borrowings. The Fund has no current intention of
engaging in the lending of portfolio securities.
Government Securities are frequently offered on a "when-issued" or "forward
delivery" basis. When so offered, the price, which is generally expressed in
yield terms, is fixed at the time the commitment to purchase is made, but
delivery and payment for the when-issued or forward delivery securities take
place at a later date. During the period between purchase and settlement, no
payment is made by the Fund to the issuer and no interest accrues to the Fund.
To the extent that assets of the Fund are not invested prior to the settlement
of a purchase of securities, the Fund will earn no income; however, it is
intended that the Fund will be fully invested to the extent practicable and
subject to the policies stated herein. When-issued or forward delivery purchases
are negotiated directly with the other party and are not traded on an exchange.
While when-issued or forward delivery securities may be sold prior to the
settlement date, it is intended that the Fund will purchase such securities with
the purpose of actually acquiring them unless a sale appears desirable for
investment reasons. At the time the Fund makes the commitment to purchase
securities on a when-issued or forward delivery basis, it will record the
transaction and reflect the value of the security in determining its net asset
value. The Fund does not believe that its net asset value or income will be
adversely affected by its purchase of securities on a when-issued or forward
delivery basis. The Fund will establish a segregated account in which it will
maintain cash, U.S. Government securities, or other high-grade debt obligations
equal in value to commitments for when-issued or forward delivery securities.
Such segregated securities either will mature or, if necessary, be sold on or
before the settlement date. The Fund will not enter into such transactions for
leverage purposes.
5
<PAGE> 14
If a percentage restriction set forth above is met at the time of
investment, a later movement above the restriction level resulting from a change
in the value of securities held by the Fund will not be considered a violation
of the investment restriction.
PURCHASE OF SHARES
Purchase orders become effective when the Fund receives the necessary
information regarding an investor's account and Federal funds are available to
the Fund for investment. (See "Net Asset Value".) Federal funds are normally
available to the Fund on the next bank business day following receipt by the
Fund of an investor's check or other payment including credit balances arising
on the settlement date of a sale of securities or receipt of a dividend or
interest payment transferred from a brokerage account maintained by
Gradison-McDonald Investments Division of McDonald Investments Inc. ("Gradison")
or McDonald Investments Inc. ("McDonald"). The Fund reserves the right to impose
a charge of $15 for any purchase check returned to the Fund as uncollectible and
to collect such fee by redeeming shares of the Fund from such shareholder's
account.
On Fund share purchases through Gradison or McDonald brokerage accounts,
prior to the time that an investor's funds become Federal Funds and become
invested in the Fund, McDonald may receive the "float" benefit from those funds.
REDEMPTION OF SHARES
The Fund may suspend the right of redemption or may delay payment (a)
during any period when the New York Stock Exchange is closed other than for
customary weekend and holiday closings, (b) when trading in markets normally
utilized by the Fund is restricted, or an emergency exists (determined in
accordance with the rules and regulations of the Securities and Exchange
Commission) so that disposal of the Fund's portfolio securities or determination
of the Fund's net asset value is not reasonably practicable, or (c) for such
other periods as the Securities and Exchange Commission by order may permit for
the protection of the Fund's shareholders.
The checkwriting privilege is subject to the Fund custodian's (Star Bank,
N.A.) rules and regulations concerning checking accounts, including those
relating to the right of Star Bank to refuse to honor checks in amounts
exceeding the value of the account at the time the check is presented for
payment. The Fund reserves the right to impose a charge of $l5 for any
redemption check written against an insufficient Fund balance and to collect
such fee by redeeming shares of the Fund from such shareholder's account.
On Fund redemptions effected by the drawing of a McDonald check, McDonald
will receive the "float" benefit from the funds redeemed until the check is
presented for payment. Domestic wire redemptions (in a minimum amount of $l,000)
are available to shareholders. There is a $10 fee for each wire redemption in an
amount less than $50,000.
6
<PAGE> 15
The Fund transmits redemption proceeds only to shareholder names and
addresses on its records or which it has otherwise verified, provides written
confirmation of all transactions initiated by telephone either immediately or by
monthly statement, depending on the circumstances, requires identification from
individuals picking up checks at its offices, and may take other additional
steps to verify the identity of persons giving telephone instructions.
EXCHANGE PRIVILEGE
If a new account is established by an exchange, the dollar amount of the
exchange from the Fund must at least be equal to the minimum initial investment
of the Fund into which the exchange is being made; if an exchange is made into
an existing account, the minimum additional investment requirement must be met.
TELEPHONE EXCHANGES
Telephone exchanges may be made only when the registration of the two
accounts are identical.
WRITTEN EXCHANGES
You may also exchange your shares of the Fund by written request directed
to:
Gradison Mutual Funds
580 Walnut Street
Cincinnati, Ohio 45202
Such written request should include your name and account number and the
number of shares or dollar amount to be exchanged.
GENERAL EXCHANGE INFORMATION
An exchange involves a redemption of the Fund shares being exchanged and
the investment of the redemption proceeds into shares of the fund being
purchased. Both the redemption and investment will occur at the respective net
asset value per share next determined after receipt by the Fund of a proper
exchange request. For Federal income tax purposes, an exchange of shares is
considered to be a sale. Unless otherwise indicated, a new account established
by written exchange will have the same registration and selected options as your
present account.
The funds into which exchanges are made, and the Fund's Distributor (with
respect to any other fund) each reserve the right to reject any exchange
request. In the case of excessive use of the exchange privilege,
7
<PAGE> 16
the Fund or the Distributor, upon 60 days' written notice, may make reasonable
service charges (as specified in the notice) by redeeming shares from such
shareholder's account. The terms of the exchange feature are subject to change
and the exchange feature is subject to termination, both upon at least 60 days
notice, except that no notice shall be required under circumstances provided for
by the rules of the Securities and Exchange Commission.
SIGNATURE GUARANTEES
Signatures guaranteed by a domestic commercial bank or trust company,
credit union, savings and loan association, or a member firm of a national
securities exchange or other eligible guarantee institution may be required for
certain transactions. Shareholders may contact the Fund's transfer agent for
additional information about signature guarantee requirements.
INCOME AND DIVIDENDS
Net income of the Fund, for the purpose of declaring dividends, consists
of accrued interest income, plus or minus amortized purchase discount or
premium, plus or minus realized gains or losses, less accrued expenses. To the
extent the Fund's portfolio securities are valued at amortized cost (see "Net
Asset Value"), there will be no unrealized gains or losses on portfolio
securities. However, should net asset value, calculated by using available
market quotations, deviate significantly from $1.00 per share, the Trustees
could decide to value portfolio securities by using available market quotations,
which could result in unrealized gains or losses being considered in the
determination of net investment income of the Fund.
Income dividends accrue daily and are paid monthly. In the event that the
Fund incurs or anticipates any unusual expense, loss or depreciation which would
adversely affect its net income for a particular period, the Board of Trustees
may at that time consider whether to adhere to this dividend policy or to revise
it in light of then prevailing circumstances. Such expenses, losses or
depreciation could result in a shareholder receiving no dividends during such
period or in a shareholder receiving, upon redemption, a price per share lower
than the cost per share.
TAXES
The Fund has qualified and intends to qualify in the future for treatment
as a "regulated investment company" under the Internal Revenue Code of l986, as
amended. As such it will not be taxed on net income distributed to shareholders.
In order to continue to qualify for treatment as a regulated investment company,
the Fund must distribute to its shareholders for each taxable year at least 90%
of its investment company
8
<PAGE> 17
taxable income (consisting generally of taxable net investment income plus net
short-term capital gain, if any), and must meet several additional requirements.
These requirements include the following: (1) the Fund must derive at least 90%
of its gross income each taxable year from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of
securities and certain other income; (2) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. government securities and other
securities, with these other securities limited, in respect of any one issuer,
to an amount that does not exceed 5% of the value of the Fund's total assets;
and (3) at the close of each quarter of the Fund's taxable year, not more than
25% of the value of its total assets may be invested in securities (other than
U.S. government securities) of any one issuer.
The Fund will be subject to a nondeductible 4% excise tax to the extent it
fails to distribute by the end of any calendar year substantially all of its
ordinary income for that year and any capital gain net income for the one-year
period ending on October 31 of that year, plus certain other amounts.
The Federal income tax matters summarized above and in the Prospectus are
subject to change by legislation, administrative action and judicial decision.
YIELD INFORMATION
The current yield of the Fund for any seven-day period is calculated by
determining the net change exclusive of capital changes in the value of a
hypothetical pre-existing account having a balance of one share at the beginning
of the period, dividing the net change by the value of the account at the
beginning of the base period to obtain the base period return, and multiplying
the base period return by (365/7). For purposes of this calculation, the net
change reflects dividends declared on the original share and dividends declared
on any shares purchased with dividends on that share. Capital changes that are
excluded from the net change are realized gains and losses as well as unrealized
appreciation and depreciation with respect to the Fund's portfolio and
non-investment income. The yield of the Fund for the seven day period ended
September 30, 1998 was 4.80%.
The effective or compounded yield of the Fund is calculated by compounding
the unannualized base period return by adding one (1) to the base period return,
raising the sum to a power equal to 365 divided by 7, and subtracting one (1)
from the result. The effective yield of the Fund for the seven day period ended
September 30, l998 was 4.92%.
9
<PAGE> 18
Yield information may be useful to investors in reviewing the Fund's
performance. However, yield normally fluctuates on a daily basis and the yield
for any given past period is not an indication or representation by the Fund of
future yields or rates of return on its shares. The Fund's yield is affected by
prevailing market interest rates, investment portfolio quality and maturity,
type of instruments held and operating expenses. When comparing the Fund's yield
with that of other alternatives, investors should understand that certain other
investments, such as money market instruments or bank accounts, may provide
fixed yields, that other investments and other investment companies may use a
different method of calculating yield, and that bank accounts may be insured.
Investors should also consider that bank accounts may sometimes offer
temporarily high "promotional" rates and may, under certain circumstances,
subject accounts to service charges which reduce their effective yield.
NET ASSET VALUE
The net asset value of the Fund's shares is calculated daily, as of 12:00 noon
and 4:00 p.m., Eastern time, on each day when the New York Stock Exchange is
open for business. The Fund does not calculate its net asset value on the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, Christmas Day, Columbus Day,
Martin Luther King, Jr. Day, and Veterans' Day.
The Fund values its portfolio instruments on the basis of the amortized
cost valuation method, which involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Fund would receive if it sold the instrument.
During such periods, the yield to shareholders of the Fund may differ somewhat
from that obtained in a similar fund with identical investments which uses
market values for all its portfolio securities. For example, if the use of
amortized cost resulted in a lower aggregate portfolio value on a particular
day, a prospective investor in the Fund would be able to obtain a somewhat
higher yield than would result from investment in such a similar fund and
existing shareholders of the Fund would receive less investment income. The
converse would apply in a period of rising interest rates.
The valuation of the Fund's portfolio instruments based upon their
amortized cost and the maintenance of the Fund's per share net asset value of
$1.00 is permitted based on the Fund's adherence to certain conditions. The Fund
will maintain a dollar-weighted average portfolio maturity of 90 days or less,
purchase only instruments having remaining maturities of 397 days or less (as
calculated in accordance with Rule 2a-7 under the Act) and invest only in
securities determined by the Board of Trustees or, pursuant
10
<PAGE> 19
to delegated authority, the Adviser, to be of high quality with minimal credit
risks. The Board also has established procedures designed to stabilize, to the
extent reasonably possible, the Fund's price per share, as computed for the
purpose of sales and redemptions, at $1.00. Such procedures include review of
the Fund's portfolio holdings by the Board, at such intervals as it may deem
appropriate, to determine whether the Fund's net asset value, calculated by
using available market quotations, and estimates of market values obtained from
yield data relating to instruments or securities with similar characteristics
pursuant to procedures approved by the Board of Trustees deviates from $1.00 per
share and, if so, whether such deviation may result in material dilution or is
otherwise unfair to existing shareholders. In the event the Board determines
that such a deviation exists, it has agreed to take such corrective action as it
deems necessary or appropriate, including, for example, the sale of portfolio
instruments prior to maturity to realize capital gains or losses or to shorten
average portfolio maturity, withholding dividends, redemptions of shares in
kind, establishing a net asset value per share by using available market
quotations, and effecting a reverse split of shares.
Assets other than portfolio securities are valued at their fair value as
determined in good faith pursuant to procedures approved by the Board and
subject to the oversight of the Board. The Board reviews these valuation methods
at least annually and from time to time may, in its absolute discretion,
establish other methods which it considers appropriate for determining net asset
value.
PORTFOLIO TRANSACTIONS
Most of the Fund's purchases and sales of portfolio securities will be
direct transactions with issuers, underwriters or major dealers in U.S.
Government securities. Accordingly, the Fund will incur little or no brokerage
cost. Purchases of portfolio securities from underwriters, however, include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers include a spread between the bid and ask prices.
The Fund's policy of investing in short-term debt securities, coupled with
its active portfolio management, may result in high portfolio turnover. However,
high turnover is not expected to adversely affect net asset value or yields,
since there are usually no brokerage commissions paid by the Fund in connection
with the purchase or sale of U.S. Government securities.
The Adviser will make investment decisions for the Fund, arrange for
placement of buy and sell orders and initiate portfolio transactions, subject to
general supervision by the Trust's Board of Trustees. No portfolio transactions
are currently executed with the Adviser or any securities dealer affiliated with
the Adviser. When initiating a portfolio transaction, the Adviser seeks the
prompt execution of its order in an effective manner at the most favorable
price.
11
<PAGE> 20
The Adviser also serves as the investment adviser for other investment
companies. Although investment decisions for the Fund will be made independently
from those for such investment companies, purchases and sales of particular
securities may be effected simultaneously by such entities and the Fund. In such
instances, the transactions will be allocated among the entities and the Fund in
a manner the Adviser considers equitable to each. In some cases, this procedure
could have a detrimental effect upon the price or amount of the securities
purchased or sold by the Fund. On the other hand, in some cases the ability of
the Fund to participate in volume transactions may produce better executions for
the Fund. It is the opinion of the Board of Trustees that the benefits available
to the Fund from retaining the Adviser outweigh any disadvantages which may
arise from exposure to simultaneous transactions.
INVESTMENT ADVISER
ADVISORY AGREEMENT
The Agreement provides that the Adviser will manage the investments of the
Fund, subject to review by the Board of Trustees. The Adviser also bears the
cost of salaries and related expenses of executive officers of the Trust who are
necessary for the management and operation of the Fund and compensates the
Trustees who are affiliated with the Adviser. The Fund reimburses the Adviser
its cost, including salary and fringe benefits, of personnel who perform legal
services for the Fund.
As compensation for its services under the Agreement, the Adviser receives
from the Fund a monthly fee at an annual rate of .50% of the first $400 million
of average daily net assets, .45% of the next $600 million of average daily net
assets, .40% of the next $1 billion of average daily net assets, and .35% of
average daily net assets in excess of $2 billion.
The Agreement further provides that in the absence of willful misfeasance,
bad faith or gross negligence in the performance of its duties thereunder, or
reckless disregard of its obligations thereunder, the Adviser is not liable to
the Fund or any of its shareholders for any act or omission by the Adviser. The
Agreement does not restrict the Adviser from acting as an investment manager or
adviser for others.
The Agreement grants to the Trust the right to use the names "Gradison" and
"McDonald" as a part of its name and the name(s) of its Fund(s), without charge,
subject to withdrawal of such right by the Adviser upon not less than 30 days'
written notice to the Trust and subject to the automatic termination of such
right within 30 days after the termination of the Agreement for any reason. The
Agreement does not impair the right of the Adviser to use the name Gradison or
McDonald in the name and the name(s) of its Fund(s) without charge in connection
with any other business enterprise with which it is or may become associated.
12
<PAGE> 21
The Agreement continues in effect from year to year if such continuance is
specifically approved at least annually by the vote of the holders of a majority
of the outstanding voting securities of the Fund or by the vote of a majority of
the Trust's Board of Trustees, and in either event by the vote cast in person of
a majority of the Trustees who are not "interested persons" of any party to the
Agreement.
The Agreement may be terminated at any time without penalty upon 60 days'
written notice by (i) the Board of Trustees, (ii) the vote of the holders of a
majority of the outstanding voting securities of the Fund, or (iii) the Adviser.
The Agreement will terminate automatically in the event of its assignment by the
Adviser. The Agreement may be amended at any time by the mutual consent of the
parties thereto, provided that such consent on the part of the Fund shall have
been approved by the vote of the holders of a majority of its outstanding voting
securities and by the vote of a majority of the Board of Trustees, including the
vote cast in person by a majority of the Trustees who are not "interested
persons" of any party to the Agreement.
For the years ended September 30, 1998, September 30, l997, and September
30, 1996, the Fund paid Gradison advisory fees totaling respectively,
$7,875,357, $6,956,236 and $6,078,331.
DISTRIBUTION SERVICE PLAN
The Fund has in effect a Distribution Service Plan (the "Plan") under Rule
12b-1 of the Act. Rule 12b-1 permits an investment company to finance, directly
or indirectly, activities primarily intended to result in the sale of its shares
only if it does so in accordance with the provisions of such Rule. The purpose
of the Plan is to increase sales of shares of the Fund to enable it to acquire
and retain a sufficient level of assets to enable it to operate more efficiently
and to provide service to Fund shareholders. Higher levels of assets tend to
result in operating efficiencies with respect to the Fund's fixed costs and
portfolio management.
The Plan permits the Fund to incur expenses related to the distribution of
its shares, but only as specifically contemplated by the Plan. Under the Plan,
the Fund may incur expenses in an amount that does not exceed an annual rate of
.20% of its average daily net assets. Expenses that may be incurred by the Fund
under the Plan within the limitation described above are limited to service fee
payments to broker-dealers or other persons, expenditures to broker-dealers or
other persons for their assistance with respect to distribution of shares of the
Fund
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<PAGE> 22
with respect to any activity primarily intended to result in sale or maintenance
of Fund shares, and expenditures by BISYS Fund Services Limited Partnership (the
"Distributor") for distribution of advertising, prospectuses, annual and
semi-annual reports, and other promotional material for prospective investors.
In approving the Plan, the Board of Trustees concluded that there was a
reasonable likelihood that the Plan would benefit the Fund and its shareholders.
The Plan (together with any agreements relating to implementation of the Plan)
continues in effect for a period of more than one year only so long as such
continuance is specifically approved at least annually by the vote of a majority
of the Board of Trustees, including the vote of a majority of the Independent
Trustees, cast in person at a meeting called for such purpose. The Plan may not
be amended to materially increase the amount of distribution expenses incurred
by the Fund without the approval of a majority of the Independent Trustees by
vote cast in person at a meeting called for the purpose of voting on such
amendment and without the approval of a majority of the outstanding voting
securities of the Fund. The Plan may be terminated at any time by a vote of a
majority of the Independent Trustees or by a vote of the majority of the
outstanding voting securities of the Fund. Any agreement implementing the Plan
may be terminated at any time, without the payment of any penalty, by a vote of
a majority of the Independent Trustees or by a vote of a majority of the
outstanding voting securities of the Fund, on not more than sixty days' written
notice to the other party to the agreement, and any related agreement will
terminate automatically in the event of its assignment. The Plan requires that
the Board of Trustees receive at least quarterly written reports as to the
amounts expended during each quarter pursuant to the Plan and the purposes for
which such amounts were expended. While the Plan is in effect, the selection and
nomination of those Trustees who are not "interested persons" (as defined in the
Act) of the Trust shall be committed to the discretion of the Independent
Trustees then in office.
Pursuant to the Plan the Fund has entered into an agreement with the
Distributor pursuant to which the Fund pays the Distributor an annual service
fee in the amount of .10% of the average assets annually which the Distributor
pays to securities dealers as payment for the provision of personal services to
Fund shareholders. For the fiscal years ended September 30, 1998, September 30,
1997, and September 30, 1996, the Fund paid the former Distributor (McDonald
Investments Inc.) respectively, $1,778,775, $1,550,945 and $1,334,962 as
distribution fees.
TRANSFER AGENCY, ACCOUNTING SERVICES, AND ADMINISTRATIVE SERVICES AGREEMENT
Pursuant to the Transfer Agency, Accounting Services, and Administrative
Services Agreement, McDonald provides transfer agent, dividend disbursing,
accounting services, and administrative services to the Fund. McDonald responds
to inquiries from shareholders, processes purchase and redemption requests,
maintains shareholder account records,
14
<PAGE> 23
provides statements and confirmations to shareholders, maintains the Fund's
books and accounting records, and prepares and files registration statements and
other reports, with the Securities and Exchange Commission and other regulatory
authorities. Pursuant to this Agreement, McDonald receives a fee of $23.50 per
year per shareholder non-zero balance account and $5.00 per closed or zero
balance account per year for transfer agency and administrative services. In
addition to this fee, the Fund pays out of pocket costs including the cost of
statement paper, statement envelopes, reply envelopes, and reply postage. For
accounting services, the Fund pays McDonald an annual fee in the amount of .015%
of the first $400 million of average daily net assets, .0125% of the next $300
million, .01% of the next $300 million, and .0075% of assets in excess of $1
billion, with a minimum fee of $25,000 per year. For the fiscal years ending
September 30, 1998, September 30, 1997, and September 30, 1996, the Fund paid
McDonald respectively $2,612,210, $2,408,388 and $2,179,364 pursuant to this
Agreement.
OTHER COMPENSATION PAID/REIMBURSEMENT MADE TO THE ADVISER
In addition to the advisory fee, transfer agent fee, and distribution fees
paid by the Fund to the Adviser, for the fiscal year ended September 30, 1998,
1997 and 1996, the Fund reimbursed the Adviser, on a cost basis, for costs
allocable to services performed by the Adviser's employees, including salaries
and office space, respectively $4,957, $7,741 and $4,424.
TRUSTEES AND OFFICERS OF THE TRUST
The Trustees and officers of the Trust, together with information as to
their principal occupations during the past five years and positions currently
held with the Gradison Growth Trust ("GGT"), the Gradison-McDonald Custodian
Trust ("GCT"), and the Gradison-McDonald Municipal Custodian Trust ("GMMT"), and
the Adviser, are listed below. All principal occupations have been held for at
least five years unless otherwise specified. Positions held with Gradison were
previously held with Gradison & Company Incorporated. The mailing address for
all officers of the Trust is c/o Gradison Funds, 580 Walnut Street, Cincinnati,
Ohio 45202.
*DONALD E. WESTON, 580 Walnut Street, Cincinnati, Ohio. Trustee and
Chairman of the Board; Chairman of Gradison; Trustee and Chairman of the
Board of GGT, GCT, and GMMT.; Director of Cincinnati Milacron Commercial
Corporation (financing subsidiary of Cincinnati Milacron Corporation
(manufacturer of machine tools).
THEODORE H. EMMERICH, 1201 Edgecliff Place, Cincinnati, Ohio 45206.
Trustee. Retired; until 1986, managing partner (Cincinnati office) Ernst &
Young LLP (independent public accountants); Director of Carillon Fund, Inc.
(investment company), American Financial Group, Inc.(insurance), and
Cincinnati Milacron Commercial Corp.; Trustee of
15
<PAGE> 24
Summit Investment Trust and Carillon Investment Trust (investment
companies); Trustee of GGT, GCT, and GMMT.
RICHARD A. RANKIN, 1717 Dixie Highway, Suite 600, Ft. Wright, Kentucky
41011. Trustee. Partner, Rankin and Rankin (independent public
accountants); Trustee of GGT, GCT, and GMMT.
JEROME E. SCHNEE, 14 Walt Whitman, Morristown, N. J. 07960. Trustee. Senior
Director, Health Economics Johnson & Johnson (Pharmaceuticals) since August
1996; Prior to that Professor of Management, College of Business
Administration, University of Cincinnati); Trustee of GGT, GCT, and GMMT.
DANIEL J. CASTELLINI, 312 Walnut Street, Cincinnati, Ohio 45202. Trustee;
Senior Vice President/Finance and Administration of the E. W. Scripps
Company (communications); Trustee of GGT, GCT, and GMMT.
C. STEPHEN WESSELKAMPER. Vice President and Portfolio Manager; First Vice
President of McDonald.
BRADLEY E. TURNER. President. Senior Managing Director of McDonald;
President of GGT, GCT, and GMMT.
PATRICIA J. JAMIESON. Treasurer. Managing Director and Chief Financial
Officer of McDonald; Treasurer of GGT, GCT, and GMMT.
MARK A. FRIETCH. Assistant Treasurer. Assistant Treasurer of GGT, GCT, and
GMMT (since May 1995.); Senior Vice President of McDonald.
RICHARD M. WACHTERMAN. Secretary. Senior Vice President and General Counsel
of Gradison; Secretary of GGT, GCT, and GMMT.
* Trustee who is an interested and affiliated person as defined by the
Investment Company Act of 1940, of the Trust and the Adviser by virtue of
stock ownership of the parent of the Adviser and employment by the Adviser.
Trustees and officers of the Trust who are affiliated with the Adviser
receive no remuneration from the Trust. Trustees who are not affiliated with the
Adviser receive fees as determined by the Board of Trustees. For the year ended
September 30, 1998, the fees paid to the Trustees by the Trust aggregated
$32,000.
16
<PAGE> 25
Compensation Table
------------------
Aggregate Total Compensation
Compensation From Fund and fund
From Fund complex (3 additional
for fiscal Trusts) paid to
year ended trustee for calendar
Name of Trustee 9/30/98 year ended 12/31/98
- --------------- ------- ---------------------
Theodore H. Emmerich 8,000 $26,500
Richard A. Rankin 8,000 $26,500
Jerome E. Schnee 8,000 $26,500
Daniel J. Castellini 8,000 $26,500
The Trust maintains a deferred compensation plan which allows trustees to defer
receipt of trustee fees otherwise payable to them until a future date. Deferred
amounts are credited with interest at a rate equal to the yield of the Gradison
U.S. Government Reserves Fund. The Trust does not maintain any other pension or
retirement plans. There are currently no amounts owing to any current trustee
pursuant to the deferred compensation plan. As of September 30, 1998, the amount
of $11,624 was payable by the Trust to the beneficiary of a former trustee who
is deceased and as of December 31, 1998, the amount of $36,333.56 was payable to
that beneficiary by the fund complex (including the Fund).
DESCRIPTION OF THE TRUST
The Trust is a diversified, open-end investment company organized under the
laws of the Commonwealth of Massachusetts by an Amended and Restated Declaration
of Trust dated October 25, 1993. The Trust was formed for the specific purpose
of succeeding to the business and acquiring all of the assets of Gradison Cash
Reserves, Inc. in a reorganization effected on December 28, 1981. The Gradison
U.S. Government Reserves series of the Trust was formed for the purpose of
consolidating the following mutual funds: the Gradison Cash Reserves series of
the Trust, Gradison U.S. Government Trust, McDonald Money Market Fund, Inc., and
McDonald U.S. Government Money Market Fund, Inc. The shareholders of each of the
funds approved the consolidation. The Declaration of Trust provides for an
unlimited number of full and fractional shares of beneficial interest, $.01 par
value, of any series authorized by the Board of Trustees. The Board of Trustees
has authorized the issuance of shares of one series, representing the Fund. Any
additional series of shares must be issued in compliance with the Act and must
not constitute a security that is senior to the shares offered pursuant to the
Prospectus. All shares are of the same class and are freely transferable. Upon
issuance and sale in accordance with the terms of the offering, each share will
be fully paid and nonassessable. Shares have no preemptive, subscription or
conversion rights and are redeemable as set forth under "Redemption of Shares."
Holders of shares of the Fund are entitled to one vote per share.
Voting rights are not cumulative, which means that the holders of more than 50%
of the shares voting in any election of Trustees can elect all of the Trustees
of the Trust if they choose to do so, in which event the holders
17
<PAGE> 26
of the remaining shares will be unable to elect a Trustee. Under the Declaration
of Trust, meetings of shareholders are not required to elect Trustees, unless
less than a majority of Trustees holding office have been elected by the
shareholders and a Trustee may be removed for cause by the vote of at least two
thirds of the remaining Trustees. Shareholders' meetings will be held only when
required pursuant to the Declaration of Trust or the Act, and when called by the
Fund or shareholders pursuant to the Declaration of Trust. The Trustees are
required to call a meeting of shareholders when requested in writing to do so by
shareholders of record of not less than 10 percent of the Trust's outstanding
shares. Pursuant to Section 16(c) of the Act, shareholders have the right to
remove trustees upon the vote of two-thirds of the outstanding shares of the
Trust, access shareholder lists under certain circumstances, and, as noted
above, instruct the trustees to call a shareholders' meeting.
Whenever the approval of a majority of the outstanding shares of a series
of the Trust is required in connection with shareholder approval of the
Investment Advisory Agreement or the Distribution Service Plan, or changes in
the investment objective or the investment restrictions, a "majority" shall mean
the vote of (i) 67% or more of the outstanding shares of the Fund present at a
meeting, if the holders of more than 50% of the outstanding shares of the Fund
are present in person or by proxy, or (ii) more than 50% of the outstanding
shares of the Fund, whichever is the lesser.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the trust. The Declaration of Trust contains an express
disclaimer of shareholder liability for acts, obligations or affairs of the
Trust and requires that notice of such disclaimer be given in every written
obligation, contract, instrument, certificate, share of beneficial interest,
other security of the Trust or undertaking made or issued by the Trustees or by
any officers, employees or agents of the Trust. The Declaration of Trust
provides for indemnification out of Trust property of any shareholder held
personally liable for the obligations of the Trust. The Declaration of Trust
also provides that the Trust shall, upon request, assume the defense of any
claim made against any shareholder for any act or obligation of the Trust and
satisfy any judgment thereon. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Trust itself would be unable to meet its obligations. Management
believes that, in view of the above, there is no realistic risk of personal
liability.
The Declaration of Trust provides that no Trustee, officer or agent of the
Trust shall be personally liable to any person for any action or failure to act
except (1) for his own bad faith, willful misfeasance, gross negligence, or
reckless disregard of his duties, (2) with respect to any matter as to which he
did not act in good faith and in a manner he reasonably believed to be in, and
not opposed to, the best interests of the Trust, or (3) in the case of any
criminal proceeding, with respect to any conduct which he had reasonable cause
to believe was unlawful.
18
<PAGE> 27
CUSTODIAN
Star Bank, N.A., Star Bank Center, Cincinnati, Ohio 45202, acts as the
custodian of the portfolio securities and other assets of the Fund. Star Bank
has no part in determining the investment policies of the Fund or the securities
which are to be purchased, held or sold by the Fund. The Fund may enter into
repurchase agreements with Star Bank and may purchase or sell securities from or
to Star Bank.
ACCOUNTANTS
Arthur Andersen LLP, 425 Walnut Street, Cincinnati, Ohio, is the independent
public accountant for the Fund.
LEGAL COUNSEL
Kirkpatrick & Lockhart LLP acts as counsel to the Trust.
OPTIONAL SHAREHOLDER SERVICES
Shareholders may receive cash payment of the dividends that their account
has earned during the month or have such dividends reinvested in additional
shares of the Fund. If such election is made, dividends will be mailed to the
shareholder or any other person designated by the shareholder. This option may
be changed or terminated by written notice to the Fund.
Shareholders may arrange for a fixed amount of money to be transferred on a
regular automatic basis from a bank or other depository account to their Fund
account. For additional information shareholders should contact the Fund or
their sales representative.
If an account has a value of at least $5,000 shareholders may elect to have
monthly or quarterly payments of a specified amount (but not less than $50)
mailed to themselves or another specified person. This option may be changed or
terminated at any time by written notice to the Fund. Because the Fund cannot
guarantee that payments will be made on the date specified, such payments should
not be used when receipt of the payment is time-sensitive.
These services may not be available as to Fund shares not held directly
with the Fund.
19
<PAGE> 28
Gradison U. S. Government Reserves
TOTAL RETURN FOR PERIODS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Average Annual Total Return
---------------------------
10 Years 5 Years 3 Years 1 Year Quarter*
-------- ------- ------- ------ --------
<S> <C> <C> <C> <C> <C>
U. S. Government Reserves +5.35% +4.05% +4.93% +4.85% +1.23%
Consumer Price Index +3.5% +2.7% +2.7% +2.3% +0.5%
</TABLE>
<TABLE>
<CAPTION>
U. S. Government Consumer Price
Year Cash Reserves Index
- ---- ------------- -----
<S> <C> <C>
1998 4.98% + 1.4%
1997 4.92% + 1.7%
1996 4.78% + 3.3%
1995 5.26% + 2.6%
1994 + 3.46% + 2.7%
1993 + 2.49% + 2.7%
1992 + 3.33% + 2.9%
1991 + 5.48% + 3.1%
1990 + 7.64% + 6.1%
1989 + 8.78% + 4.6%
1988 + 7.07% + 4.4%
</TABLE>
The table above is intended to compare the total return results of the
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. The performance quoted above represents past performance. Future returns
will fluctuate. Past performance does not insure future results.
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. In 1993 and
1994 certain fees were waived by the Adviser which increased returns.
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.
All income earned in 1998 was received from U. S. Government obligations that
are exempt from state and local taxes. In some of the periods noted above, GCR
invested in commercial paper and other securities that generally have a higher
yield than U. S. Government Obligations.
20
<PAGE> 29
For a copy of the prospectus please call your Investment Consultant at (513)
579-5000 or (800) 869-5666. The prospectus contains more complete information.
Read it carefully before you invest.
*Not annualized
BISYS Fund Services Limited Partnership - Distributor
GRADISON
Mutual Funds
21
<PAGE> 30
Sales Brochure
COVER PAGE
- ----------
MONEY MARKET
FUNDS
GRADISON MCDONALD
[GRAPHIC: COLLAGE OF CAMERA, PASSPORT, STAMPS, MAP, COMPASS, POSTCARDS AND
"YOUR FUTURE STARTS TODAY."]
U.S. GOVERNMENT RESERVES
MUNICIPAL CASH SERIES
OHIO MUNICIPAL CASH TRUST
22
<PAGE> 31
FAMILY OF MUTUAL FUNDS
MONEY MARKET
INTERMEDIATE OHIO TAX FREE
MUNICIPAL INCOME
INTERNATIONAL ESTABLISHED
VALUE
GOVERNMENT OPPORTUNITY
INCOME VALUE
GROWTH
& INCOME
23
<PAGE> 32
PAGE 1
- ------
[Graphic; collage of passport, stamps, map, and camera]
Whatever your goals or ASPIRATIONS.
Whatever your objective. One thing is certain.
An INVESTMENT made today brings
you that much closer to meeting that OBJECTIVE
and reaching that GOAL ...
whether it's buying a house, starting a family,
SAVING for a college education,
or planning for retirement. Hesitate and
time will pass you by.
Today, opening a MONEY MARKET account
is a FUNDAMENTAL step in starting a
savings and investment program.
And for a growing number of TODAY'S INVESTORS,
GRADISON-McDONALD is a preferred name among money market funds.
1-800-869-5999[Graphic of call for information logo.]
24
<PAGE> 33
PAGE 2
- ------
MONEY MARKET
FUND
GRADISON-McDONALD, RECOGNIZING THE BENEFITS
THAT MONEY MARKET FUNDS OFFERED THEIR
CLIENTS, BEGAN MANAGING ITS MONEY MARKET
FUND IN 1976. MONEY MARKET MUTUAL FUNDS
WERE ORIGINALLY VIEWED AS A CONVENIENT,
TEMPORARY LOCATION FOR CASH WHILE LONG-TERM
INVESTMENTS WERE CONSIDERED. THEY QUICKLY
BECAME A POPULAR VEHICLE FOR SAVINGS AND
CHECKING ASSETS AS PASSBOOK SAVING RATES
DECLINED AND THE COST OF MAINTAINING A
CHECKING ACCOUNT ROSE. TODAY, MONEY
MARKET FUNDS--WITH THEIR COMPETITIVE CURRENT
YIELDS AND HIGH LEVEL OF SERVICE--ARE A
FUNDAMENTAL ASPECT OF PERSONAL FINANCE AND
BUSINESS MANAGEMENT.
CHOOSE FROM THREE FUNDS
- -----------------------
U.S. GOVERNMENT RESERVES invests solely in U.S. Government and agency
securities. The Fund is managed by experienced Gradison-McDonald portfolio
managers.
MUNICIPAL CASH SERIES provides current income exempt from Federal regular income
tax.FN1 and is managed by Federated Advisers and available through Gradison-
McDonald.
OHIO MUNICIPAL CASH TRUST (CASH II SHARES) is a double tax-free money market
mutual fund for Ohio investors. The Fund seeks to provide money market income
exempt from both Federal regular FN1 and Ohio taxation and is also managed by
Federated Advisers and available through Gradison-McDonald.
25
<PAGE> 34
PAGE 3
- ------
[Graphic: Collage: Compass, postcards.]
Unlike checking and passbook accounts, an investment in the Funds is neither
insured nor guaranteed by the U.S. Government. There can be no assurance that
the Funds will maintain a stable net asset value of $1.00 per share.
LIQUIDITY
---------
Money market fund assets are as easily accessible as making a phone call or
writing a check. ATM access is also available for an additional fee through the
McDonald Relationship Account.
LOW MINIMUM INVESTMENT
----------------------
There is no minimum size account or minimum additional investment for money
market fund accounts maintained together with a Gradison-McDonald active
brokerage account.
Money market fund accounts maintained separately from an active brokerage
account must have an initial investment of $1,000 and minimum additional
investments of at least $50.
FN 1 A portion of the income will be subject to Alternative Minimum Taxation for
Taxpayers subject to such tax.
1-800-869-5999 [Graphic of call for information logo.]
26
<PAGE> 35
PAGE 4
- ------
FREE CHECK WRITING
- ------------------
Money market fund accounts offer free check writing for any check of $100 or
more. Checks of less than $100 are processed for a minimal fee of 30 cents per
check.
DAILY DIVIDENDS
- ---------------
Dividends are declared daily. You may also choose to have each month's dividends
paid to you.
EXCHANGES
- ---------
You can move money from the money market funds to any of the following
Gradison-McDonald funds at any time. The Gradison-McDonald funds currently
include
Opportunity Value Fund
Established Value Fund
Government Income Fund
Ohio Tax-Free Income Fund
Intermediate Municipal Income Fund
Gradison-McDonald funds planned for 1995 and sold by prospectus only include:
Growth & Income Fund
International Fund
ACCESS
- ------
You can redeem money market fund shares on any business day.
[Graphic: Passport and stamps.]
27
<PAGE> 36
INSIDE BACK COVER
- -----------------
A TRUSTED NAME
Gradison-McDonald
is headquartered in Cincinnati and has
managed mutual funds since 1976.
The parent company, McDonald & Company
Investments, was founded in 1924
and has been listed on the
New York Stock Exchange since 1983.
It operates a leading regional
investment advisory, investment banking,
and investment brokerage firm
with offices throughout
Ohio, Michigan and Indiana,
and in Atlanta, Boston, Dallas, Chicago,
Los Angeles, the New York City area
and Naples, Florida
1-800-869-5999 [Graphic of call for information logo.]
28
<PAGE> 37
Back Cover
- ----------
[Graphic: Portable phone and envelopes]
To find out more about the
GRADISON-McDONALD
MONEY MARKET FUNDS
OR OTHER FUNDS IN THE FAMILY
CALL
----
1-800-869-5999
OR WRITE
Gradison-McDonald Mutual Funds
580 Walnut Street
Cincinnati, Ohio 45202
GRADISON-McDONALD
You may obtain a prospectus containing complete information about the money
market funds from a Gradison-McDonald Mutual Funds representative or your
Investment Consultant. Read it carefully before investing.
Federated Securities Corp. is the principal distributor for the shares of
Municipal Cash Series and Ohio Municipal Cash Trust (Cash II Shares). McDonald &
Company Securities, Inc. is the principal distributor for the shares of the
Gradison-McDonald U.S. Government Reserves.
McDonald & Company Securities Inc., acts as agent for clients investing in
Municipal Cash Series and Ohio Municipal Cash Trust (Cash II Shares) and does
not act as investment adviser for the those funds. Checking redemptions for
these funds is provided by Gradison-McDonald through Star Bank, N.A.
29
<PAGE> 38
[Fact Sheet]
GRAPHIC: Logo
GRADISON
MUTUAL Funds
U. S.
Government
Reserves
U. S. Government Reserves is a money market mutual fund designed to provide
investors with current money market yields by investing exclusively in
securities issued by the U. S. Government or its agencies or instrumentalities,
and in repurchase agreements for such securities.
The Fund is used by individuals, institutions and corporations as a short-term
investment with convenient daily liquidity. Investors and retirement plan
participants make use of the Fund as a temporary depository for assets between
longer-term investment decisions.
U. S. Government Reserves offers high levels of service including checkwriting,
wire transfers, daily sweeps with brokerage accounts, monthly statements that
include check payee names, and telephone redemption privileges. Additional
services, including a debit card with ATM access, are available for an
additional fee through the optional "Relationship Account".
Symbol: GMUXX
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN Periods Ended 9/30/98
Quarter* One Year Three Years Five Years Ten Years 7-Day Yield
<S> <C> <C> <C> <C> <C>
+1.23% +4.98% +4.89% +4.54% +5.17% _____%
</TABLE>
* Not annualized
** 7-Day Yield as of October ___, 1998. The yield quotation more closely
reflects the current earnings of the Fund than does the total return quotation.
Bar Chart stating "Annual Return of U. S. Government Reserves" with these plot
points 1976 - 5.26%*; 1977 - 5.00%; 1978 - 6.88%; 1979 - 10.18%; 1980 - 11.60%;
1981 - 16.95%; 1982 - 12.32%; 1983 - 8.54%; 1984 - 10.09%; 1985 - 7.78%; 1986 -
6.28%; 1987 - 6.03%; 1988 - 7.07%; 1989 - 8.78%; 1990 - 7.64%; 1991 - 5.48%;
1992 - 3.33%; 1993 - 2.49%; 1994 - 3.46%; 1995 - 5.26%; 1996 - 4.78%; 1997 -
4.92%; 9/30/98 - 4/98%.
30
<PAGE> 39
Line Chart stating "Annual Percent of Change in the Consumer Price Index" with
these plot points 1976 - 4.8%; 1977 - 6.8%; 1978 - 9.0%; 1979 - 13.3%; 1980 -
12.4%; 1981 - 8.9%; 1982 - 3.9%; 1983 - 3.8%; 1984 - 4.0%; 1985 - 3.8%; 1986 -
1.1%; 1987 - 4.4%; 1988 - 4.4%; 1989 - 4.6%; 1989 - 4.6%; 1990 - 6.1%; 1991 -
3.1%; 1992 - 2.9%; 1993 - 2.7%; 1994 - 2.7%; 1995 - 2.6%; 1996 - 3.3%; 1997 -
1.7%; 9/98 - 1.4%.
The performance quoted on this document and any attachment represents past
performance. Future returns will fluctuate. Total return includes reinvestment
of all distributions. Past performance does not ensure future results. Returns
prior to September 27, 1993, are those of Gradison Cash Reserves, a predecessor
money market fund which invested in non-government obligations, the yields of
which generally exceed the yields of government obligations.
An investment in the Fund is not insured or guaranteed by the FDIC. Or any other
Government agency. Although the fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in the
fund.
WHERE THE FUND IS INVESTED
The information below is as of September 30, 1998, and is subject to change in
the future.
$1.93 Billion [Graphic: Pie Chart
Net Assets as of 9/30/98 Federal Home Loan Banks 55%
Federal Farm Credit Bank 24%
Student Loan
Marketing Association 21%]
September 30, 1998
GRAPHIC: Photo of Woman
PORTFOLIO MANAGER PROFILES
[Graphic: Photo C. Stephen Wesselkamper]
C. Stephen Wesselkamper
First Vice President/Portfolio Manager
Gradison McDonald Asset Management
With more than 20 years financial analysis and portfolio management experience,
the last 15 with Gradison, Stephen Wesselkamper carries primary responsibility
for short-term fixed income management on the Gradison McDonald Asset Management
team. In addition to his responsibilities as portfolio manager of U. S.
Government Reserves, Steve is also involved with the Government Income Fund. A
magna cum laude graduate of the University of Cincinnati, Steve holds an MBA
from Xavier University.
31
<PAGE> 40
PROFILE OF GRADISON MUTUAL FUNDS
Gradison mutual Funds is a division of McDonald & Company, a leading regional
investment firm which acquired Gradison in 1991. As a registered investment
advisor since 1974 and mutual fund advisors since 1976, Gradison currently
manages in excess of $4 billion in Gradison Mutual Funds and individually
managed accounts.
A prospectus for U. S. Government Reserves or any other Gradison Mutual Fund may
be obtained by calling 513/579-5700 or 800/869-5999. The prospectus contains
more complete information. Read it carefully before you invest.
Securities, mutual funds and other investment products are:
o Not Insured by the FDIC.
o Not deposits or other obligations of, or guaranteed by McDonald Investments
Inc. Key Bank or any of their affiliates.
o Subject to investment risks, including possible loss of the principal
amount invested.
BISYS Fund Services Limited Partnership - Distributor GMFS 1059 - GMU 9/98
GRAPHIC: Photo of a Man and two Women
International Fund
Opportunity Value Fund
Growth & Income Fund
Established Value Fund
Ohio Tax-Free Income Fund
Government Income Fund
Money Market Funds
McDonald Investments Inc., a subsidiary of KeyCorp, is the investment adviser to
the Gradison Funds. The Gradison Funds are sponsored and distributed by BISYS
Fund Services, which is not affiliated with KeyCorp or its subsidiaries.
McDonald Investments Inc. receives a fee for its services from the Gradison
Funds.
GRAPHIC: Logo
Gradison
Mutual Funds
32
<PAGE> 41
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
--------------
<CAPTION>
Federal Farm Credit Banks,
Bonds - 5.04%
<S> <C> <C> <C>
11/02/98, 5.51% 5.51 23,000,000 22,997,869
12/01/98, 5.48 5.48 16,075,000 16,074,579
2/02/99, 5.30 5.30 20,000,000 19,990,182
4/01/99, 5.50 5.50 14,000,000 13,989,459
9/29/99, 5.24 5.24 25,000,000 25,000,000
--------------
98,052,089
--------------
<CAPTION>
Federal Farm Credit Banks,
Floating Rate Notes (2) - 8.99%
<S> <C> <C> <C>
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
--------------
<CAPTION>
Federal Farm Credit Banks,
Floating Rate Master Note (2) - 3.21%
<S> <C> <C> <C>
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
--------------
<CAPTION>
Federal Home Loan Banks,
Bonds - 9.55%
<S> <C> <C> <C>
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>
See accompanying notes to financial statements.
33
<PAGE> 42
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%
<S> <C> <C> <C>
10/01/98 5.39 200,000,000 200,000,000
--------------
Student Loan Marketing Association,
Bonds - 4.65%
<S> <C> <C> <C>
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:
- 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.
See accompanying notes to financial statements.
34
<PAGE> 43
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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>
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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>
See accompanying notes to financial statements.
35
<PAGE> 44
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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.
36
<PAGE> 45
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
September 30, 1998
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.
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.
37
<PAGE> 46
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.
38
<PAGE> 47
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 - 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, 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 - 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
Cincinnati, Ohio,
October 23, 1998
39
