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[GRAPHICS]
To find out more about the
GRADISON-MCDONALD
INTERNATIONAL FUND
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
The investment return and value of an investment in the Fund will fluctuate so
that an investor's shares, when redeemed, may be worth more or less than the
original cost.
McDonald & Company Securities, Inc.--Distributor
INTERNATIONAL
FUND
GRADISON-MCDONALD
[GRAPHICS]
PROSPECTUS
JUNE 1, 1995
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SIGNIFICANT FEATURES
Professional Management
Portfolio Diversification
Dividends Paid in Additional Shares or Cash
Daily Liquidity at Net Asset Value
$1,000 Minimum Initial Investment
$50 Minimum Additional Investment
Individual Retirement Account Plan
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.
THE DATE OF THIS PROSPECTUS IS JUNE 1, 1995
INTERNATIONAL
FUND
A COMMON STOCK FUND INVESTING
IN NON-UNITED STATES COMPANIES
The Gradison-McDonald International Fund ("Fund") is a diversified series of the
Gradison Growth Trust, an open-end management investment company. The Fund seeks
long-term growth of capital. The Fund invests primarily in a diversified
portfolio of common stocks of non-United States companies. McDonald & Company
Securities, Inc., ("McDonald" or the "Adviser") is the investment adviser for
the Fund. Blairlogie Capital Management ("Blairlogie"), is the investment
sub-adviser of the Fund ("Portfolio Manager"). The Gradison Division of McDonald
("Gradison") acts as transfer agent of the Fund. Investing in foreign securities
presents special risks and investing in emerging market countries presents
additional risks. See "Investment Objective, Policies, and Risk Factors" and
"Foreign Securities" in this Prospectus.
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 June 1, 1995, 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 by calling the
phone numbers provided below.
For all information (including purchases, redemptions, and most recent share
price), call 579-5700 from Cincinnati, Ohio or 1-800-869-5999 toll free.
1-800-869-5999
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TABLE OF CONTENTS
Expense Summary 2
Investment Objective, Policies
and Risk Factors 3
Foreign Securities 6
Futures Transactions 7
Forward Foreign Currency Contracts 8
Risks of Futures and Forward Foreign
Currency Contracts 8
Low Capitalization Stocks 8
Investment Restrictions and
Fundamental Policies 9
Purchases and Redemptions 9
Dividends and Distributions 11
Taxes 11
Net Asset Value 11
Optional Shareholder Services 12
Management of the Fund 13
Performance Calculations 15
Individual Retirement Accounts 15
General Information 15
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES
(as a percentage of offering price)
Maximum sales load imposed on purchases None
=====
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)*
Management Fees (after waiver) .57%
12b-1 Fees .50%
Other Expenses (after reimbursement) .93%
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TOTAL FUND OPERATING EXPENSES 2.00%
=====
The Fund is sold without a front-end or back-end sales charge. The Fund pays an
annual asset based distribution expense fee of .25% and service fee of .25% of
net assets. As a result of the distribution fee, long-term shareholders may pay
more than the economic equivalent of the maximum front-end sales charge
permitted under the rules of the National Association of Securities Dealers.
However, in order for a Fund investor to exceed the maximum permitted front-end
sales charge, a continuous investment in the Fund for 25 years would be
required.
*Since the Fund has not yet been in operation for a full year, the "other
expenses" category is an estimate. The "management fee" category would be 1.00%
and it is estimated that the "other expenses" category would be 1.43% absent fee
waiver and expense reimbursement by the Adviser. It is estimated that the total
expenses of the Fund absent waiver and reimbursement by the Adviser would be
2.93%. The fee waiver and expense reimbursement will be in effect through August
1, 1996 and may be continued thereafter. For further information about fee
waiver and expense reimbursement see "Management of the Fund."
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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.")
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:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
------ -------
<S> <C>
$20 $63
</TABLE>
*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.
The example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown.
INVESTMENT OBJECTIVE, POLICIES AND RISK FACTORS
Upon commencement of the Fund's investment operations, notwithstanding the
Fund's investment objective and policies, it will initially invest all of its
assets in money market obligations of the U.S. Government or its agencies or
instrumentalities. Such investment limitation shall continue until the assets of
the Fund reach a level at which the assets may be invested on a cost-effective
basis, at which time the Fund will commence investing in accordance with its
investment objective and policies. It is anticipated that this period will be
between one and three months. During the period in which the Fund invests
exclusively in U.S. Government money market obligations, the investment adviser
will waive fees which it is entitled to receive and reimburse other expenses of
the Fund in amounts which will limit the Fund's expenses, except for
extraordinary expenses, to an annual rate of .50% of its net assets. During this
period, McDonald will manage the Fund's portfolio without any participation by
the Portfolio Manager.
The investment objective of the Fund is growth of capital. In pursuing this
objective, the Fund invests primarily in a diversified portfolio of common
stocks of non-United States companies. The Fund will invest in both "emerging
market" countries and more developed countries. The Fund generally will invest
approximately 30% of its assets in the securities of issuers in emerging market
countries and such investments will normally be in securities of more than three
different countries. However, between monthly rebalancing of the Fund between
securities of emerging and developed countries, the percentage of the Fund's
assets invested in emerging countries could temporarily exceed 30% of the Fund's
assets as a result of market appreciation or purchase of such securities. At any
time, the Fund's investment in securities of emerging market countries may
constitute less than 30% of the Fund's assets. Some of the countries considered
to be emerging market countries and in which investments may be made are:
Argentina Mexico
Brazil Pakistan
Chile Peru
China (Hong Kong) Philippines
Colombia Portugal
Greece South Korea
India Sri Lanka
Indonesia Taiwan
Jordan Thailand
Malaysia Turkey
Venezuela
For purposes of allocating the Fund's investments, a company will be considered
to be located in a country based on the following criteria: the country in which
the company is domiciled, the country in which it is primarily traded, the
country from which it derives a significant portion of its goods or services are
produced.
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The Portfolio Manager applies two levels of screening in selecting investments
for the Fund. First, an active country selection model analyzes world markets
and assigns a relative value ranking, or "favorability weighting," to various
countries to determine markets which are relatively undervalued. Second, at the
stock selection level, quality analysis and value analysis are applied to each
security, assessing variables such as balance sheet strength and earnings growth
(quality factors) and performance relative to the industry, price-to-earnings
ratios and price-to-book ratios (value factors). This two-level screening method
identifies what the Portfolio Manager believes are undervalued securities for
purchasing as well as provides a sell discipline for securities the Portfolio
Manager believes are fully valued. In selecting securities, the Portfolio
Manager considers to the extent practicable, and on the basis of information
available to it for research, a company's environmental business practices.
Most of the foreign securities in which the Fund invests will be denominated in
foreign currencies. The Fund may engage in foreign currency transactions to
attempt to protect itself against fluctuations in currency exchange rates in
relation to the U.S. dollar or to increase yield. Such foreign currency
transactions may include forward foreign currency contracts, and currency
exchange transactions on a spot (i.e., cash) basis. See "Forward Foreign
Currency Transactions" in this Prospectus.
The Fund may purchase and sell stock index futures contracts. See "Futures
Transactions" in this Prospectus and "Risk Factors and Investment Techniques -
Futures and Currency Strategies" in the Statement of Additional Information for
more information.
Investing in the securities of foreign issuers involves special risks and
considerations not typically associated with investing in U.S. companies. For a
description of these risks, see "Foreign Securities" in this Prospectus.
The Fund will invest primarily (normally at least 65% of its assets) in common
stock of non-United States companies. The Fund may maintain a portion of its
assets, which will usually not exceed 10%, in U.S. Government securities,
high-quality debt securities (whose maturity or remaining maturity will not
exceed five years) and money market obligations (issued by U.S. and foreign
issuers and that are denominated in U.S. dollars or foreign currency), and in
cash to provide for payment of the Fund's expenses and to permit the Fund to
meet redemption requests. The Fund may temporarily not be invested primarily in
equity securities after receipt of significant new monies. The Fund may
temporarily not contain the number of stocks in which the Fund normally invests
if the Fund does not have sufficient assets to be fully invested, or pending the
Portfolio Manager's ability to prudently invest new monies.
It is the policy of the Fund to normally be as fully invested in common stock as
practicable at all times and to invest in securities of more than three
different countries other than the United States. The Fund does not intend to
attempt to "time" the market. Accordingly, investors in the Fund bear the risk
of general declines in stock prices, and bear any risk that the Fund's exposure
to such declines will not be lessened by investment in debt securities. However,
for temporary defensive purposes, such as when the Portfolio Manager believes
that the market for non-United States equity securities is extremely
unfavorable, the Fund may invest an unlimited portion of its assets in U.S.
government debt securities and money market obligations issued by U.S. issuers.
For more detailed information on the investment techniques which the Fund may
utilize, as well as information on the types of securities in which the Fund may
invest, including information on U.S. Government securities, corporate debt
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securities, variable and floating rate securities, preferred stocks, convertible
bonds, repurchase agreements, securities purchased on a when-issued or
firm-commitment basis, warrants, and lending of portfolio securities, see the
Statement of Additional Information.
There can be no assurance that the Fund will achieve its investment objective.
The Fund is subject to the risk of changing economic, business, and other
financial conditions. As with any security, the risk of loss is inherent in
investment in shares of the Fund. Because the market value of the Fund's
investments will change, the net asset value per share of the Fund will also
vary.
The securities in which the Fund invests and the investment techniques that may
be used by the Fund all have attendant risks of varying degrees. With respect to
common stock, there can be no assurance of capital appreciation and there is a
risk of market decline. With respect to debt securities, including money market
instruments, there is the risk that the issuer of a security may not be able to
meet its obligation to make scheduled interest or principal payments. In
addition, the value of debt securities generally rises and falls inversely with
interest rates, and the longer the maturity of the debt security, the more
volatile it may be in terms of changes in value.
The Fund's portfolio will be managed without restriction as to portfolio
turnover, except those imposed on its ability to engage in short-term trading by
provisions of the federal tax laws. It is anticipated that the annual rate of
portfolio turnover will not exceed 150%. A high rate of turnover will increase
the transaction costs for the Fund (securities commissions and indirect
transaction costs for fixed income securities) and may result in greater taxable
distributions. See "Taxes" in the Prospectus and "Portfolio Transactions and
Brokerage" in the Statement of Additional Information.
Information about the types of securities in which the Fund may invest:
COMMON STOCKS
Stocks represent shares of ownership in a company. After other claims are
satisfied, common stockholders participate in company profits on a pro rata
basis; profits may be paid out in dividends or reinvested in the company to help
it grow. Increases and decreases in earnings are usually reflected in a
company's stock price, so common stocks generally have the greatest appreciation
and depreciation potential of all corporate securities.
CONVERTIBLE SECURITIES AND WARRANTS
The Fund may invest in debt or preferred equity securities convertible into or
exchangeable for equity securities. Traditionally, convertible securities have
paid dividends or interest at rates higher than common stocks but lower than
non-convertible securities. They generally participate in the appreciation or
depreciation of the underlying stock into which they are convertible, but to a
lesser degree. In recent years, convertibles have been developed which combine
higher or lower current income with options. Warrants are options to buy a
stated number of shares of common stock at a specified price any time during the
life of the warrants (generally, two or more years).
FIXED INCOME SECURITIES
Fixed income securities represent debt of the issuer on which a fixed amount of
interest is paid. The price of a bond fluctuates with changes in interest rates,
rising when interest rates fall and falling when interest rates rise.
ILLIQUID SECURITIES
The Fund may invest in illiquid securities. However, the Fund may not invest in
securities that are illiquid because they are subject to legal or contractual
restrictions on resale, in repurchase agreements maturing in more than seven
5 1-800-869-5999
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days, or other securities which are illiquid if, as a result of such investment,
more than 15% of the net assets of the Fund (taken at market value at the time
of such investment) would be invested in such securities.
These percentage restrictions set forth above do not limit purchases of
restricted securities that are eligible for sale to qualified institutional
purchasers pursuant to Rule 144A under the Securities Act of 1933, provided that
those securities have been determined to be liquid by the Board of Trustees of
the Fund or by the Portfolio Manager under Board-approved guidelines. Those
guidelines take into account the trading activity for such securities and the
availability of reliable pricing information, among other factors. If there is a
lack of trading interest in a particular Rule 144A security, the Fund's holding
that security may be deemed to be illiquid.
FOREIGN SECURITIES
The Fund may invest directly in foreign equity securities; U.S. dollar or
foreign currency denominated foreign corporate debt securities; foreign
preferred securities; certificates of deposit, fixed time deposits and banker's
acceptances issued by foreign banks, obligations of foreign governments or their
subdivisions, agencies and instrumentalities, international agencies and
supranational entities; and securities represented by American Depository
Receipts ("ADRs"), European Depository Receipts ("EDRs"), or Global Depository
Receipts ("GDRs"). ADRs are dollar denominated receipts issued generally by
domestic banks and representing the deposit with the bank of a security of a
foreign issuer, and are publicly traded on exchanges or over-the-counter in the
United States. EDRs and GDRs are receipts similar to ADRs. EDRs are issued and
traded in Europe, and GDRs are issued and traded in several international
financial markets.
Investing in the securities of issuers in any foreign country involves special
risks and considerations not typically associated with investing in U.S.
companies. These include changes in foreign exchange rates affecting the value
of securities denominated or quoted in currencies other than the U.S. dollar;
differences in accounting, auditing and financial reporting standards; generally
higher commission rates on foreign portfolio transactions; the possibility of
nationalization, expropriation or confiscatory taxation; adverse changes in
investment or exchange control regulations (which may include suspension of the
ability to transfer currency from a country); government interference, including
government ownership of companies in certain sectors, wage and price controls,
or imposition of trade barriers and other protectionist measures; political
instability which could affect U.S. investments in foreign countries; and
potential restrictions on the flow of international capital; reduced levels of
publicly available information concerning issuers; and reduced levels of
governmental regulation of foreign securities markets. Additionally, foreign
securities and dividends and interest payable on those securities may be subject
to foreign taxes, including foreign withholding taxes, and other foreign taxes
may apply with respect to securities transactions. Transactions in foreign
securities may involve greater time from the trade date until the settlement
date than for domestic securities transactions, and may involve the risk of
possible losses through the holding of securities in custodians and securities
depositories in foreign countries. Foreign securities often trade with less
frequency and volume than domestic securities and therefore may exhibit greater
price volatility. Additional costs associated with an investment in foreign
securities may include higher transaction costs and the cost of foreign currency
conversions. The Fund and its shareholders may encounter substantial
difficulties in obtaining and enforcing judgments against non-U.S. resident
individuals and companies.
Investment in emerging market countries presents risks in greater degree than,
and in addition to, those presented by investment in foreign issuers in general.
A number of emerging market countries restrict, to varying degrees,
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foreign investment in stocks. Repatriation of investment income, capital, and
the proceeds of sales by foreign investors may require governmental registration
and/or approval in some emerging market countries. A number of the currencies of
developing countries have experienced significant declines against the U.S.
dollar in recent years, and devaluation may occur subsequent to investments in
these currencies by the Fund. Inflation and rapid fluctuations in inflation
rates have had and may continue to have negative effects on the economies and
securities markets of certain emerging market countries.
Many of the emerging securities markets are relatively small, have low trading
volumes, suffer periods of relative illiquidity, and are characterized by
significant price volatility. There is a risk in emerging market countries that
a future economic or political crisis could lead to price controls, forced
mergers of companies, expropriation or confiscatory taxation, seizure,
nationalization, or creation of government monopolies, any of which may have a
detrimental effect on the Fund's investment.
FUTURES TRANSACTIONS
The Fund may purchase and sell stock index futures contracts (1) in order to
attempt to reduce the overall investment risk in its portfolio ("hedging") or
(2) to enhance yield. The use of stock index futures contracts for non-hedging
purposes may be considered speculative. For example, the Fund may purchase stock
index futures contracts, in lieu of investing in individual stocks, in order to
maintain liquidity, because the Portfolio Manager has not yet selected the
individual securities in which to invest or because the stock index future
presents a more favorable investment than investment in individual securities.
There can be no assurance that these hedging or yield enhancement efforts will
succeed. For more information regarding stock index futures contracts, see "Risk
Factors and Investment Techniques - Futures and Currency Strategies" in the
Statement of Additional Information.
To the extent that the Fund enters into futures contracts other than for bona
fide hedging purposes (as defined by the Commodity Futures Trading Commission
("CFTC")), the aggregate initial margin required to establish those positions
will not exceed 5% of the liquidation value of the Fund's portfolio, after
taking into account unrealized profits and unrealized losses on any contracts
the Fund has entered into. This limitation does not limit the percentage of the
Fund's assets at risk to 5%. The Fund may enter into futures contracts only to
the extent that obligations under such contracts represent not more than 20% of
the Fund's assets. These guidelines may be modified by the Trust's Board of
Trustees without a shareholder vote.
The Fund will only enter into stock index futures contracts which are
standardized and traded on a U.S. or foreign exchange or board of trade, or
similar entity, or quoted on an automated quotation system. The Fund may trade
futures contracts not only on U.S. domestic markets, but also on exchanges
located outside of the United States. Foreign markets may offer advantages such
as trading in indices that are not currently traded in the United States.
Foreign markets, however, may have greater risk potential than domestic markets.
Unlike trading on domestic commodity exchanges, trading on foreign commodity
exchanges is not regulated by the CFTC and may be subject to greater risk than
trading on domestic exchanges. For example, some foreign exchanges are principal
markets so that no common clearing facility exists and a trader may look only to
the broker for performance of the contract. Trading in foreign futures contracts
may not be afforded certain of the protective measures provided by the Commodity
Exchange Act, the CFTC's regulations, and the rules of the National Futures
Association and of any domestic futures exchange, including the right to use
reparations proceedings before the CFTC and arbitration proceedings provided by
the National Futures Association
7 1-800-869-5999
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or any domestic futures exchange. Margin deposits for foreign futures
transactions may not be provided the same protections as deposits provided in
respect of transactions on U.S. futures exchanges. In addition, any profits that
the Fund might realize in trading could be eliminated by adverse changes in the
exchange rate of the currency in which the transaction is denominated, or the
Fund could incur losses as a result of changes in the exchange rate.
Futures contracts constitute "derivative" instruments. Derivative instruments
are instruments the value of which is determined by the movement in value of
other securities.
FORWARD FOREIGN CURRENCY CONTRACTS
The Fund may purchase and sell forward currency contracts to attempt to manage
its foreign currency exchange rate exposure.
For example, the Fund may use forward contracts to shift the Fund's exposure to
foreign currency exchange rate changes from one foreign currency to another. If
the Fund owns securities denominated in a foreign currency and the Portfolio
Manager believes that this currency will decline relative to another currency,
the Fund might enter into a forward contract to sell the appropriate amount of
the first foreign currency with payment to be made in the second foreign
currency. The Fund might also use two forward contracts (one exchanging the
first foreign currency into U.S. dollars and the second exchanging U.S. dollars
into the second foreign currency) to accomplish the same purpose. Transactions
that use two foreign currencies are sometimes referred to as "cross hedging."
Use of a different foreign currency magnifies the Fund's exposure to foreign
currency exchange rate fluctuations.
RISKS OF FUTURES AND FORWARD
FOREIGN CURRENCY CONTRACTS
Although the Fund might not employ any of these instruments, its use of futures
and forward contracts would involve certain investment risks and transaction
costs to which it might otherwise not be subject. These risks include: (1)
dependence on the Portfolio Manager's ability to predict fluctuations in the
general securities markets or appropriate market sector and movements in
currency markets; (2) imperfect correlation, or even no correlation, between
movements in the price of forward contracts or futures contracts and the
movements in the price of the currency or security hedged or used for cover; (3)
the fact that skills and techniques used to trade futures contracts or to use
forward currency contracts are different from those needed to select the
securities in which the Fund invests; (4) lack of assurance that a liquid
secondary market will exist for any particular futures contract at any
particular time; (5) the possible inability of the Fund to purchase or sell a
portfolio security at a time when it would otherwise be favorable for it to do
so, or the possible need for the Fund to sell a security at a disadvantageous
time, due to the need for the Fund to maintain "cover" or to segregate
securities in connection with its use of these instruments; and (6) the possible
need to defer closing out of certain futures contracts and forward currency
contracts in order to qualify or continue to qualify for the beneficial tax
treatment afforded regulated investment companies under the Code. See "Taxes" in
the Fund's Statement of Additional Information. If the Portfolio Manager
incorrectly forecasts securities market movements or currency exchange rates in
utilizing a strategy for the Fund, the Fund would be in a better position if it
had not hedged at all. If the Fund attempts to hedge securities it owns by sale
of a futures contract which is not composed of the same securities as those
owned, there is a greater risk that the hedge will not be successful. There can
be no assurance that the Fund's hedging or yield enhancement strategies will
succeed.
LOW CAPITALIZATION STOCKS
The Fund may invest in the common stock of companies with market capitalization
of less than $500 million. Investments in larger companies present certain
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advantages in that such companies generally have greater financial resources,
more extensive research and development, manufacturing, marketing and service
capabilities, and more stability and greater depth of management and technical
personnel. Investments in smaller, less seasoned companies may present greater
opportunities for growth but also may involve greater risks than are customarily
associated with more established companies. The securities of smaller companies
may be subject to more abrupt or erratic market movements than larger, more
established companies. These companies may have limited product lines, markets
or financial resources, or they may be dependent upon a limited management
group. Their securities may be traded only in the over-the-counter market or on
a foreign securities exchange. As a result, the disposition by the Fund of
securities to meet redemptions may require the Fund to sell these securities at
a disadvantageous time, or at disadvantageous prices, or to make many small
sales over a lengthy period of time.
INVESTMENT RESTRICTIONS AND
FUNDAMENTAL POLICIES
The Fund is subject to investment restrictions that are described more fully in
the Statement of Additional Information. Those investment restrictions so
designated and the investment objective of the Fund are "fundamental policies"
of the Fund, which means that they may not be changed without a majority vote of
the shareholders of the Fund. Except for those restrictions specifically
identified as fundamental and the Fund's investment objective, all other
investment policies and practices described in this Prospectus and in the
Statement of Additional Information are not fundamental, meaning that the Board
of Trustees may change them without shareholder approval. Shareholders will be
notified of material changes. The vote of a majority of the outstanding voting
securities of the Fund means the vote, at an annual or special meeting, of (a)
67% or more of the voting securities present at such meeting, if the holders of
more than 50% of the outstanding voting securities of the Fund are present or
represented by proxy; or (b) more than 50% of the outstanding voting securities
of the Fund, whichever is less.
A brief description of some of the fundamental investment restrictions follows.
The Fund will not, with respect to 75% of its assets, invest more than 5% of its
assets (taken at market value at the time of such investment) in securities of
any one issuer, except that this restriction does not apply to U.S. Government
securities. The Fund will not, with respect to 75% of its assets, invest in more
than 10% (taken at market value at the time of such investment) of any one
issuer's outstanding voting securities, except that this restriction does not
apply to U.S. Government securities. The Portfolio will not concentrate more
than 25% of its assets in any particular industry, except that this restriction
does not apply to U.S. Government securities. The Fund may borrow from banks as
a temporary measure or for extraordinary or emergency purposes, such as to
facilitate redemptions, up to 33 1/3% of the value of its total assets
(including the amount borrowed) less liabilities (other than borrowings). This
borrowing may be unsecured or secured. The Fund may, in connection with
permissible borrowings, transfer as collateral, securities owned by the Fund.
PURCHASES AND REDEMPTIONS
HOW TO PURCHASE SHARES
You may purchase shares of the Fund by bringing or mailing funds to Gradison,
McDonald, or the Fund. Checks should be made payable to the order of
"Gradison-McDonald International Fund" and should be accompanied by your account
name, and account number if one has been assigned. A completed Account
Information Form must accompany or precede the initial purchase. The minimum
investment required to open an account in the Fund, including Individual
Retirement Accounts, is $1,000 and additional investments must be
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<PAGE> 11
at least $50. These minimums may be waived for certain group purchases. Purchase
orders become effective when the Fund receives the necessary information about
your account and provision for payment has been made.
HOW TO REDEEM SHARES
You may redeem Fund shares without charge by sending a signed redemption request
to the Fund identifying the account name and number and the number of shares or
dollar amount to be redeemed. You may redeem shares by telephone and have the
proceeds of your redemption mailed to the address on the Fund's records. The
Fund normally makes payment for redeemed shares within one business day and,
except in extraordinary circumstances, within seven days after receipt of a
properly executed redemption request. The Fund may delay payment for the
redemption of shares where the shares were purchased with a personal check (or
any other method of payment subject to collection), but only until the purchase
payment has cleared, which may be up to 15 days from the day the purchase
payment is received by the Fund. If you need more immediate access to your
investment, you should consider purchasing shares by wire, cash or other
immediately available funds. Shareholders may make special arrangements for wire
transfer of redemption proceeds by contacting the Fund in advance of a share
redemption.
TRANSACTIONS THROUGH GRADISON
AND MCDONALD
Investors who maintain brokerage accounts with Gradison or McDonald may purchase
or redeem Fund shares without incurring any fees. The Fund may agree to modify
or waive its purchase and redemption procedures or requirements in order to
facilitate these transactions. No such modification or waiver will result in an
investor being assessed a fee by the Fund in connection with any purchase or
redemption of shares.
ADDITIONAL PURCHASE AND
REDEMPTION INFORMATION
All purchase and redemption information and authorizations (except those
effected by Gradison or McDonald) should be mailed or delivered to
Gradison-McDonald Mutual Funds, 580 Walnut Street, Cincinnati, Ohio 45202.
All purchases and redemptions are made at the net asset value per share next
calculated after receipt of a purchase order (and provision for payment has been
made) or a valid redemption request. Share certificates are not issued. Account
transactions are reported on periodic statements. The Fund reserves the right to
redeem 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 to
at least the minimum amount.
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 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 Consultant arrange the redemption.
The telephone redemption feature may be terminated or modified upon 30 days'
notice to shareholders.
The Fund, and McDonald, 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, in the
view of the Securities and Exchange Commission, the Fund may be liable for any
losses resulting from unauthorized instructions. Telephone transactions are
available to all shareholders as a standard service.
10
<PAGE> 12
DIVIDENDS AND DISTRIBUTIONS
Substantially all of the net investment income of the Fund, any net capital
gains (net profits on the sale of portfolio securities and from certain futures
transactions, less any available capital loss carryovers), and any net gains
from foreign currency transactions realized by the Fund will be distributed to
shareholders at least annually. Additional distributions are sometimes necessary
to meet tax requirements. The record and distribution dates for income dividends
and capital gain distributions will be as determined by the Board of Trustees.
Unless you direct otherwise, all income dividends and capital gain distributions
from the Fund are automatically paid in additional shares of the Fund at the net
asset value for such shares on the payment date.
TAXES
The Fund intends to distribute to shareholders substantially all of its net
investment income and net capital and foreign currency gains. All dividends and
capital gains are taxable to shareholders whether they are paid in shares or
received in cash, except as to shareholders who are exempt from taxation or
entitled to tax deferral. Dividends derived from net investment income and
distributions of any net realized short-term capital gains and any net realized
gains from certain foreign currency transactions are taxable to shareholders as
ordinary income. Long-term capital gains distributions are taxable as such
regardless of how long shares of the Fund have been held.
Special rules may apply if the Fund invests in certain foreign companies, the
bulk of the gross income of which is derived from investment activity, or at
least half of the assets of which are investment assets (such companies are
classified under the Code as passive foreign investment companies ("PFICs")).
Pursuant to these rules, among other things, (i) the Fund may be subject to
federal income tax (and an interest charge) on distributions from, or on the
gain from the sale of the stock of, such foreign companies, even though the Fund
distributes the corresponding income to shareholders and (ii) gain from the sale
of the stock of such foreign companies may be treated as ordinary income. For a
further discussion of these special rules, including certain tax elections that
may be available, see the Statement of Additional Information under "Taxes."
Shareholders of the Fund who are U.S. citizens or residents may be able to claim
a foreign tax credit or deduction on their U.S. income tax returns with respect
to foreign taxes paid by the Fund. If, at the end of the fiscal year of the
Fund, more than 50% of the value of the Fund's total assets is represented by
stock or securities of foreign corporations, the Fund intends to make an
election permitted by the Code to treat certain foreign taxes it paid as having
been paid by its shareholders. In this case, shareholders who are U.S. citizens
or residents, or U.S. corporations may claim a foreign tax credit or deduction
(but not both) on their U.S. income tax returns, subject to certain rules and
limitations.
The foregoing is only a summary of some important generally applicable Federal
income tax provisions in effect as of the date of this Prospectus; see the
Statement of Additional Information for further information. There may be other
Federal, state, or local tax considerations applicable to a particular investor.
Each year, shareholders will be notified of the amount and Federal tax status of
all distributions paid during the prior year.
NET ASSET VALUE
The net asset value of the shares of the Fund is generally calculated once
daily, as of the close of regular trading on the New York Stock Exchange
(generally 4:00 P.M. Eastern time) on each day that the Exchange is open. The
net asset value per share of the Fund, which is the
11 1-800-869-5999
<PAGE> 13
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 of the Fund. Securities owned by the Fund are generally
valued on the basis of market quotations.
The value of the portfolio securities that are traded on exchanges outside the
United States is based upon the price on the exchange as of the close of
business of the exchange immediately preceding the time of valuation (or as of
4:00 P.M. Eastern time, if that is earlier). Quotations of foreign securities in
foreign currency are converted to U.S. dollar equivalents using the foreign
exchange quotation in effect at the time net asset value is computed. When
market quotations for futures positions held by the Fund are readily available,
those positions will be valued based upon such quotations. Securities and other
assets for which market quotations are not readily available are valued at fair
value determined by or under the direction of the Trust's Board of Trustees. The
calculation of the net asset value of the Fund may not take place
contemporaneously with the determination of the prices of portfolio securities
used in such calculation. Events affecting the values of portfolio securities
that occur between the time their prices are determined and 4:00 P.M. Eastern
time, and at other times, may not be reflected in the calculation of net asset
value. If events materially affecting the value of such securities occur during
such period, then these securities will be valued at fair value as determined by
the management and approved in good faith by the Board of Trustees.
OPTIONAL SHAREHOLDER SERVICES
AUTOMATIC INVESTMENT PLAN
You may arrange for a fixed amount of money to be transferred on a regular
automatic basis from your bank or other depository account to your Fund account.
For additional information, obtain the Gradison-McDonald Automatic Investment
Plan form from the Fund. The required $1,000 minimum investment in the Fund will
be waived while automatic investment of at least $50 per month is in effect.
DISTRIBUTION OPTIONS
You may elect (on the Account Information Form) to automatically receive cash
payments of dividends and/or capital gain distributions. (For this purpose,
short-term capital gain distributions are considered dividends.) You may change
or terminate this election at any time by written notice to the Fund.
AUTOMATIC PAYMENT PLAN
If your account has a value of at least $10,000, you may elect (on the Account
Information Form) to have monthly or quarterly payments of a specified amount
(but not less than $50) mailed to you or anyone specified on the form. You may
change or terminate this election at any time by written notice to the Fund.
Because the Fund cannot guarantee that payments will be made on the exact date
specified, the Plan should not be utilized for time-sensitive payments.
Investors utilizing the Automatic Payment Plan should be aware that each payment
constitutes a redemption for tax purposes.
EXCHANGES
Shares of the Fund may be exchanged, without administrative fees, for shares of
any Gradison-McDonald funds and for shares of certain Federal and Federal/Ohio
tax-free or municipal income money market funds. You may request exchanges by
telephoning or writing the Fund. Before making an exchange, you should read the
prospectus of the fund in which you desire to invest which is available upon
request. An exchange may not be made from the Fund to the fund in which you
desire to invest unless the shares of such fund are registered for sale in the
state in which you reside. Exchanges of Fund shares for shares of funds sold
subject to a sales charge will be subject to such sales charge, except to the
extent that a
12
<PAGE> 14
sales charge has previously been paid in connection with the shares or the
shareholder is exempt from the sales charge. The terms of the exchange feature
are subject to change and the exchange feature is subject to termination, both
upon 60 days' written notice, except that no notice shall be required under
certain circumstances provided for by rules of the Securities and Exchange
Commission.
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,
McDonald is responsible for providing advice and guidance with respect to the
Fund and for managing, either directly or through others, the Fund's
investments, and provides its employees to act as the officers of the Fund who
are responsible for the overall management of the Fund. McDonald, a wholly owned
subsidiary of McDonald & Company Investments, Inc., 800 Superior Avenue,
Cleveland, Ohio 44114, is an investment adviser and a securities broker-dealer.
McDonald, including Gradison, has served as an investment adviser to investment
companies since 1976.
The Fund pays the Adviser a fee of 1.00% of the first $100 million of the Fund's
average daily net assets, .90% of the next $150 million, .80% of the next $250
million and .75% of net assets in excess of $500 million for acting as its
investment adviser. McDonald has engaged Blairlogie as Portfolio Manager for the
Fund pursuant to a Portfolio Management Agreement, and McDonald compensates
Blairlogie from its advisory fee at the rate of .80% of the first $25 million of
average daily net assets, .70% of the next $25 million, .60% of the next $50
million, .50% of the next $150 million, and .40% of assets in excess of $250
million. Under the Portfolio Management Agreement, the Portfolio Manager has
full investment discretion and makes all determinations respecting the purchase
and sale of the Fund's securities and other investments.
James Smith is primarily responsible for the day-to-day portfolio management of
the Fund. Mr. Smith is the Chief Investment Officer of Blairlogie and is
responsible for managing an investment team of seven professionals who, in turn,
specialize in selection of stocks within Europe, Asia, the Americas and in
currency and derivatives. Mr. Smith has been Director and Chief Investment
Officer of Blairlogie since its inception in November 1992. He previously served
as a senior portfolio manager at Murray Johnstone in Glasgow, Scotland (from
October 1989 to November 1992), where he was responsible for international
investment management for North American clients and at Schroder Investment
Management in London. Mr. Smith received his bachelor's degree in Economics from
London University and his M.B.A. from Edinburgh University. He is an Associate
of the Institute of Investment Management and Research.
Blairlogie manages the Blairlogie Emerging Markets Fund and the Blairlogie
International Active Fund. Blairlogie is a Scottish investment management firm,
organized as a limited partnership. Blairlogie is the successor investment
adviser to Blairlogie Capital Management Ltd., an indirect subsidiary of Pacific
Mutual Life Insurance Company ("PFAMCo."). Blairlogie is organized as a U.K.
limited partnership with two general partners and one limited partner. The
general partners are PIMCO Advisors which serves as the supervisory partner, and
Blairlogie Holdings Limited, a wholly owned corporate subsidiary of PIMCO
Advisors which serves as the managing partner. The limited partner is Blairlogie
Partners L.P., a limited partnership, the general partner of which is PFAMCo,
and the limited partners of which are the principal executive officers of
Blairlogie Capital Management. Blairlogie Partners L.P. has agreed with PIMCO
Advisors that PIMCO Advisors will acquire one-fifth of its 25% interest
annually, beginning December 31, 1997. Blairlogie Capital Management Ltd.,
13 1-800-869-5999
<PAGE> 15
the predecessor investment adviser to Blairlogie, commenced operations in 1992.
Accounts managed by Blairlogie had combined assets as of November 30, 1994, of
approximately $504.2 million. Blairlogie's address is 4th Floor, 125 Princes
Street, Edinburgh EH2 4AD, Scotland. Blairlogie is registered as an investment
adviser with the SEC of the United States and the Investment Management
Regulatory Organization of the United Kingdom. PFAMCo and its affiliates own a
substantial interest in PIMCO Advisers and indirectly hold a major interest in
PIMCO Partners, G.P., the general partner of PIMCO Advisers.
Gradison acts as the Fund's transfer agent, dividend disbursing agent, and
accounting services provider. For providing such services, Gradison receives an
annual fee of $19.25 per non-zero balance shareholder account plus out-of-pocket
costs for acting as transfer agent and dividend disbursing agent and an
accounting services fee of .045% of the first $100 million of average daily net
assets, .030% of the next $100 million of average daily net assets and .015% of
average daily net assets in excess of $200 million, with a minimum fee of
$60,000 per year. Gradison's address is 580 Walnut Street, Cincinnati, Ohio
45202.
All expenses not specifically assumed by the Adviser, the Portfolio Manager,
Distributor, or transfer agent and incurred in the operation of the Fund are
borne by the Fund. These expenses include expenses for the cost of preparing and
printing prospectuses, periodic reports and other documents furnished to
shareholders and regulatory authorities; registration, filing and similar fees;
legal expenses, auditing expenses; taxes and other fees; brokers' commissions
chargeable to the Fund in connection with securities transactions; expenses of
Trustees who are not affiliated with the Adviser; charges and expenses of any
transfer and dividend disbursing agent, registrar, custodian or depository
appointed by the Fund; expenses of shareholders' and Trustees' meetings; and
fees and other expenses incurred by the Fund in connection with its membership
in any organization. The Fund reimburses the Adviser for all costs, direct and
indirect, which are fairly allocable to services performed by the Adviser's
employees for which the Fund is responsible.
McDonald may, from time to time, agree to waive the receipt of management fees
from the Fund and/or reimburse the Fund for other expenses in order to limit the
Fund's expenses to a specified percentage of average net assets. Waiver and
reimbursement arrangements, which may be terminated at any time after August 1,
1996, without notice, will increase the Fund's return. If McDonald discontinues
a waiver or reimbursement arrangement, the Fund's expenses will increase and its
return will be reduced. McDonald retains the ability to be repaid by the Fund
for fees waived and expenses reimbursed if expense ratios fall below the
specified limit prior to the end of the fiscal year. McDonald may waive or
reimburse fees in a greater amount than is required by an applicable fee waiver
arrangement. Until August 1, 1996, McDonald has agreed to limit Fund expenses to
2.0% of its net assets, excluding extraordinary items.
Under the terms of a distribution plan and agreement adopted pursuant to Rule
12b-1 under the 1940 Act, the Fund pays to McDonald as Distributor a service fee
at the annual rate of .25 of 1% of the average daily net assets of the Fund and
a distribution fee in the same additional amount for a total payment of .50 of
1% annually. Such fees are calculated on a daily basis and paid to the
Distributor monthly. The service fee is paid as compensation to the Distributor
for providing personal services to shareholders of the Fund, including
responding to shareholder inquiries and providing information to shareholders
about their Fund accounts. The distribution fee is paid to the Distributor for
general distribution services and as compensation for selling shares of the
Fund. The Distributor may use the fees to make payments to authorized dealers,
including Gradison and McDonald, for providing these services to Fund
shareholders.
14
<PAGE> 16
PERFORMANCE CALCULATIONS
From time to time the Fund's "total return" may be presented in advertisements.
THE TOTAL RETURN FIGURE IS AN HISTORICAL FIGURE AND IS NOT INTENDED TO INDICATE
FUTURE PERFORMANCE. The total return of the Fund refers to the average annual
compounded rate of return over specified time periods (which periods will be
stated in the advertisement) 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. The calculations of total return assume the
payment of all dividends and other distributions in additional Fund shares.
The total return of the Fund may be presented in different ways. One calculation
will show the average annual compounded rate of return over an indicated period
that would equate an initial amount of money invested in the Fund at the
beginning of a stated period to the ending value of the investment. Another
calculation will show the aggregate total return over an indicated period by
dividing the change in value during the period by the initial amount of the
investment. Advertisements may also include figures (sometimes depicted in
graphs) reflecting the value of a specified amount of money invested in the Fund
over various time periods and comparison of the Fund's performance to the
performance of stock indices such as the S&P 500. The Fund may also advertise
performance rankings assigned to it by organizations which evaluate mutual fund
performance such as Lipper Analytical Securities Corp. It may also advertise
"ratings" assigned to it by organizations such as Morningstar, Inc.
INDIVIDUAL RETIREMENT ACCOUNTS
Shares of the Fund may be purchased in conjunction with an Individual Retirement
Account ("IRA"), which permits exchange privileges with Gradison-McDonald mutual
funds (see "Exchanges") and which may also be used with a Gradison or McDonald
self-directed brokerage account. Detailed information concerning IRA accounts is
available from the Fund by calling the phone numbers listed on the first page of
this Prospectus.
GENERAL INFORMATION
The Fund is a series of the Gradison Growth Trust, which is an Ohio business
trust organized under the laws of the State of Ohio by a Declaration of Trust
dated May 31, 1983. 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 numbers or address of the Fund listed on the first page of this
Prospectus.
15 1-800-869-5999
<PAGE> 17
GRADISON GROWTH TRUST
Gradison-McDonald International Fund
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL
INFORMATION
- --------------------------------------------------------------------------------
For information, call:
579-5700 from Cincinnati, Ohio
Toll free (800) 869-5999 from outside Cincinnati
Information may also be obtained from the Trust 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 June 1, 1995, which has
been filed with the Securities and Exchange Commission. The Prospectus is
available upon request without charge from the Trust at the above address or by
calling the phone numbers provided above.
The date of this Statement of Additional Information is June 1, 1995.
1
<PAGE> 18
- --------------------------------------------------------------------------------
CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page Location in Prospectus
<S> <C> <C>
RISK FACTORS AND
INVESTMENT TECHNIQUES . . . . . . . . . . . . . . . . . . . . . . . . 3 Investment Objective, Policies and
Risk Factors; Foreign Securities;
Futures Transactions; Forward
Foreign Transactions;
Risks of and Forward
Currency Transactions; Low
Capitalizations Stocks
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . 14 Investment Restrictions
and Fundamental Policies
PURCHASE OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . 16 Purchases and Redemptions
REDEMPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . 17 Purchases and Redemptions
EXCHANGES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Optional Shareholder Services
TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Taxes
NET ASSET VALUE. . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Net Asset Value
PORTFOLIO TRANSACTIONS AND BROKERAGE . . . . . . . . . . . . . . . . 23
INVESTMENT ADVISER . . . . . . . . . . . . . . . . . . . . . . . . 25 Management of the Fund
TRUSTEES AND OFFICERS OF THE TRUST . . . . . . . . . . . . . . . . . 28
DESCRIPTION OF THE TRUST . . . . . . . . . . . . . . . . . . . . . . 28 General Information
CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
LEGAL COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
</TABLE>
2
<PAGE> 19
INTRODUCTION
This Statement of Additional Information is designed to elaborate
upon the discussion in the Prospectus. The investment objective and policies of
the Fund are described in the Prospectus. The more detailed information
contained herein is intended for investors who have read the Prospectus and are
interested in a more detailed explanation of certain aspects of the Fund.
RISK FACTORS AND INVESTMENT TECHNIQUES
U. S. GOVERNMENT SECURITIES
The Fund may invest in U.S. Government securities. U.S. Government
securities are obligations of, or guaranteed by, the U.S. Government, its
agencies, or instrumentalities. Treasury bills, notes, and bonds are direct
obligations of the U.S. Treasury, and they differ with respect to certain items
such as coupons, maturities, and dates of issue. Treasury bills have a maturity
of one year or less. Treasury notes have maturities of one to ten years and
Treasury bonds generally have a maturity of greater than ten years. Securities
guaranteed by the U.S. Government include federal agency obligations guaranteed
as to principal and interest by the U.S. Treasury (such as GNMA certificates
(described below) and Federal Housing Administration ("FHA") debentures). In
these securities, the payment of principal and interest is unconditionally
guaranteed by the U.S. Government, and thus they are of the highest possible
credit quality. Such direct obligations or guaranteed securities are subject to
variations in market value due to fluctuations in interest rates, but, if held
to maturity, the U.S. Government is obligated to or guarantees to pay them in
full.
Securities issued by U.S. Government instrumentalities and certain
federal agencies are neither direct obligations of, nor guaranteed by, the U.S.
Treasury. However, they involve federal sponsorship in one way or another: some
are backed by specific types of collateral; some are supported by the issuer's
right to borrow from the U.S. Treasury; some are supported by the discretionary
authority of the U.S. Treasury to purchase certain obligations of the issuer;
and others are supported only by the credit of the issuing government agency or
instrumentality. These agencies and instrumentalities include, but are not
limited to Federal National Mortgage Association, Federal Home Loan Bank,
Federal Land Banks, Farmers Home Administration, Central Bank for Cooperatives,
Federal Intermediate Credit Banks, Federal Financing Bank, Farm Credit Banks,
and the Tennessee Valley Authority.
CORPORATE DEBT SECURITIES
The Fund may invest in short-term corporate debt securities. The
investment return of corporate debt securities reflects interest earnings and
changes in the market value of the security. The market value of a corporate
debt obligation may also be expected to rise and fall inversely with interest
rates generally. There also exists the risk that the issuers of the securities
may not be able to meet their obligations on interest or principal payments at
the time called for by an instrument.
PREFERRED STOCKS
The Fund may invest in preferred stocks. Preferred stock is a form of
equity ownership in a publicly held corporation. The dividend on a preferred
stock is a fixed payment. In these securities, the firm is not legally bound to
pay the dividend. Certain
3
<PAGE> 20
classes of preferred stock are convertible, meaning the preferred stock is
convertible into shares of common stock of the issuing company. By holding
convertible preferred stock, the Fund can receive a steady stream of dividends
and still have the option to convert it to common stock.
CONVERTIBLE BONDS
The Fund may invest in convertible bonds. A convertible bond can be
exchanged for a specified amount of common stock in the issuing firm. The amount
of common stock that can be acquired is determined by the conversion ratio of
the convertible bond. Convertible bonds offer the relatively safe income of a
bond as well as the opportunity for capital gains should the price of the stock
increase. The risk associated with convertible bonds is that they tend to be
subordinated debentures, which have a somewhat residual claim on the firm's
income and assets in the case of liquidation.
VARIABLE AND FLOATING RATE SECURITIES
The Fund may invest in variable and floating rate securities.
Variable and floating rate securities provide for a periodic adjustment in the
interest paid on the obligations. The terms of such obligations must provide
that interest rates are adjusted periodically based upon some appropriate
interest rate adjustment index as provided in the respective obligations. The
adjustment intervals may be regular, and range from daily up to annually, or may
be event based, such as based on a change in the prime rate.
COMMERCIAL PAPER
The Fund may invest in commercial paper. Commercial paper represents
short-term unsecured promissory notes issued in bearer form by banks or bank
holding companies, corporations and finance companies. The commercial paper
purchased by the Fund consists of U.S. dollar-denominated obligations of
domestic issuers, or, foreign currency-denominated obligations of domestic or
foreign issuers which, at the time of investment, are (i) rated "P-1" or "P-2"
by Moody's Investor's Services, Inc. ("Moody's") or "A-1" or "A-2" or better by
Standard & Poor's Corporation ("S&P"), (ii) issued or guaranteed as to principal
and interest by issuers or guarantors having an existing debt security rating of
"A" or better by Moody's or "A" or better by S&P, or (iii) securities which, if
not rated, are, in the opinion of the Portfolio Manager, of an investment
quality comparable to rated commercial paper in which the Fund may invest. The
rate of return on commercial paper may be linked or indexed to the level of
exchange rates between the U.S. dollar and a foreign currency or currencies.
REPURCHASE AGREEMENTS
If the Fund acquires securities from a bank or broker-dealer, it may
simultaneously enter into a repurchase agreement with the seller wherein the
seller agrees at the time of sale to repurchase the security at a mutually
agreed-upon time and price. The term of such an agreement is generally quite
short, possibly overnight or for a few days, although it may extend over a
number of months (up to one year) from the date of delivery. The resale price is
in excess of the purchase price by an amount which reflects an agreed-upon
market rate of return, effective for the period of time the Fund is invested in
the security. This results in a fixed rate of return protected from market
fluctuations during the period of the agreement. This rate is not tied to the
coupon rate on the security subject to the repurchase agreement.
Under the Investment Company Act of 1940, as amended ("1940 Act"),
4
<PAGE> 21
repurchase agreements are considered to be loans by the purchaser collateralized
by the underlying securities. The Portfolio Manager to the Fund monitors the
value of the underlying securities at the time the repurchase agreement is
entered into and at all times during the term of the agreement to ensure that
its value always equals or exceeds the agreed-upon repurchase price to be paid
to the Fund. The Portfolio Manager, in accordance with procedures established by
the Board of Trustees, also evaluates the creditworthiness and financial
responsibility of the banks and brokers or dealers with which the Fund enters
into repurchase agreements.
The Fund may not enter into a repurchase agreement having more than
seven days remaining to maturity if, as a result, such agreements, together with
any other securities which are not readily marketable, would exceed 15% of the
net assets of the Fund. If the seller should become bankrupt or default on its
obligations to repurchase the securities, the Fund may experience delay or
difficulties in exercising its rights to the securities held as collateral and
might incur a loss if the value of the securities should decline. The Fund also
might incur disposition costs in connection with liquidating the securities.
BORROWING
The Fund may borrow for temporary administrative or emergency
purposes subject to the limits described in the Prospectus. This borrowing may
be unsecured. The 1940 Act requires the Fund to maintain continuous asset
coverage of 300% of the amount borrowed. If the 300% asset coverage should
decline as a result of market fluctuations or other reasons, the Fund may be
required to sell some of its portfolio holdings within three days to reduce the
debt and restore the 300% asset coverage, even though it may be disadvantageous
from an investment standpoint to sell securities at that time. Borrowing may
exaggerate the effect on net asset value of any increase or decrease in the
market value of the Fund. The Fund may also be required to maintain minimum
average balances in connection with such borrowing or to pay a commitment or
other fee to maintain a line of credit; either of these requirements would
increase the cost of borrowing over the stated interest rate. The Fund may, in
connection with permissible borrowings, transfer as collateral securities owned
by the Fund.
FIRM COMMITMENT AGREEMENTS AND WHEN-ISSUED SECURITIES
The Fund may enter firm commitment agreements for the purchase of
securities at an agreed-upon price on a specified future date. The Fund may
purchase new issues of securities on a "when-issued" basis. Such transactions
may be entered into, for example, when the Portfolio Manager anticipates a
decline in the yield of securities of a given issuer and is able to obtain a
more advantageous yield by committing currently to purchase securities to be
issued or delivered later.
The Fund will not enter into such a transaction for the purpose of
investment leverage. Liability for the purchase price and all the rights and
risks of ownership of the securities accrue to the Fund at the time it becomes
obligated to purchase such securities, although delivery and payment occur at a
later date. Accordingly, if the market price of the security should decline, the
effect of the agreement would be to obligate the Fund to purchase the security
at a price above the current market price on the date of delivery and payment.
During the time the Fund is obligated to purchase such securities it will
maintain in a segregated account U.S. Government securities, high-grade debt
obligations, or cash or cash equivalents of an aggregate current value
sufficient to make payment for the securities.
5
<PAGE> 22
ILLIQUID SECURITIES
The Fund may invest in illiquid securities. However, the Fund may not
invest in securities that are illiquid because they are subject to legal or
contractual restrictions on resale, in repurchase agreements maturing in more
than seven days, or other securities which are illiquid if, as a result of such
investment, more than 15% of the net assets of the Fund (taken at market value
at the time of such investment) would be invested in such securities.
With respect to private placements, which are generally subject to
legal or contractual restrictions on resale, if an exemption from registration
under the Securities Act of 1933 is not available, registration may be required
to dispose of the security. Where registration is required, the Fund may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the Fund
may be permitted to sell a security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, the Fund
might obtain a less favorable price than prevailed when it decided to sell.
Restricted securities will be priced at fair value as determined in good faith
by the Adviser under the supervision of the Board of Trustees.
These percentage restrictions set forth above do not limit purchases
of restricted securities that are eligible for sale to qualified institutional
purchasers pursuant to Rule 144A under the Securities Act of 1933, provided that
those securities have been determined to be liquid by the Board of Trustees of
the Fund or by the Portfolio Manager under Board-approved guidelines. Those
guidelines take into account the trading activity for such securities and the
availability of reliable pricing information, among other factors. If there is a
lack of trading interest in a particular Rule 144A security, the Fund's holding
that security may be deemed to be illiquid.
BANK OBLIGATIONS
The Fund may invest in bank obligations. Bank obligations in which
the Fund may invest include certificates of deposit, bankers' acceptances, and
fixed time deposits. The Fund may also hold funds on deposit with its custodian
or sub-custodian bank in an interest-bearing account for temporary purposes.
Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Fixed time deposits are bank obligations payable at a stated maturity date and
bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand
by the investor, but may be subject to early withdrawal penalties which vary
depending upon market conditions and the remaining maturity of the obligation.
There are no contractual restrictions on the right to transfer a beneficial
interest in a fixed time deposit to a third party, although there is no market
for such deposits. The Fund will not invest in fixed time deposits which are (i)
not subject to prepayment or (ii) which provide for withdrawal penalties upon
prepayment (other than overnight deposits) if, in the aggregate, more than 15%
of its assets would be invested in such deposits, repurchase agreements maturing
in more than seven days and other illiquid assets.
The Fund limits its investments in United States bank obligations to
obligations of United States banks (including foreign branches) which have more
than $1 billion in total
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assets at the time of investment and are members of the Federal Reserve System
or are examined by the Comptroller of the Currency or whose deposits are insured
by the Federal Deposit Insurance Corporation. The Fund may also invest in
certificates of deposit and other obligations of savings and loan associations
(federally or state chartered and federally insured) having total assets in
excess of $1 billion.
The Fund limits its investments in foreign bank obligations to United
States dollar- or additionally, foreign currency-denominated obligations of
foreign banks (including United States branches of foreign banks) which at the
time of investment (i) have more than $10 billion, or the equivalent in other
currencies, in total assets; (ii) in terms of assets are among the 75 largest
foreign banks in the world; (iii) have branches, or agencies (limited purpose
offices which do not offer all banking services) in the United States; and (iv)
in the opinion of the Portfolio Manager, are of an investment quality comparable
to obligations of U.S. banks in which the Fund may invest. Subject to the Fund's
limitation on concentration of no more than 25% of its assets in the securities
of issuers in a particular industry, there is no limitation on the amount of the
Fund's assets which may be invested in obligations of foreign banks which meet
the conditions set forth herein.
Obligations of foreign banks involve somewhat different investment
risks than those affecting obligations of U.S. banks, including the
possibilities that their liquidity could be impaired because of future political
and economic developments; that their obligations may be less marketable than
comparable obligations of U.S. banks; that a foreign jurisdiction might impose
withholding taxes on interest income payable on those obligations; that foreign
deposits may be seized or nationalized; that foreign governmental restrictions,
such as exchange controls, may be adopted which might adversely affect the
payment of principal and interest on those obligations; and that the selection
of those obligations may be more difficult because there may be less publicly
available information concerning foreign banks or the accounting, auditing and
financial reporting standards, practices and requirements applicable to foreign
banks may differ from those applicable to U.S. banks. Foreign banks are not
generally subject to examination by any U.S. Government agency or
instrumentality.
FUTURES AND CURRENCY STRATEGIES
GENERAL
The Fund is permitted by its investment restrictions to purchase and
sell interest rate futures contracts, stock index futures contracts, other
financial futures contracts, and options thereon, and forward currency
contracts. The Fund is also permitted by its investment restrictions to purchase
and sell options on securities, indices and currencies. However, the Fund has no
present intention of purchasing or selling any of these instruments other than
stock index futures contracts and forward currency contracts. The Fund will
supplement its Prospectus or this Statement of Additional Information if the
Fund intends to purchase or sell any of these other instruments.
SPECIAL RISKS OF FUTURES AND CURRENCY STRATEGIES
The use of futures contracts and forward currency contracts involves
special considerations and risks, as described below. Risks pertaining to
particular instruments are described in the sections that follow.
(1) Successful use of most of these instruments depends upon the
Portfolio Manager's ability to predict movements of the overall securities and
currency markets, which
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requires different skills than predicting changes in the prices of individual
securities. While the Portfolio Manager is experienced in the use of these
instruments, there can be no assurance that any particular strategy adopted will
succeed.
(2) There might be imperfect correlation, or even no correlation,
between price movements of an instrument and price movements of the investments
being hedged. For example, if the value of an instrument used in a short hedge
increased by less than the decline in value of the hedged investment, the hedge
would not be fully successful. Such a lack of correlation might occur due to
factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which the hedging instrument is
traded. The effectiveness of hedges using hedging instruments on indices will
depend on the degree of correlation between price movements in the index and
price movements in the investments being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by
wholly or partially offsetting the negative effect of unfavorable price
movements in the investments being hedged. However, hedging strategies can also
reduce opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if the Fund entered into a
short hedge because the Portfolio Manager projected a decline in the price of a
security in the Fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the hedging instrument. Moreover, if the price of the
hedging instrument declined by more than the increase in the price of the
security, the Fund could suffer a loss. In either such case, the Fund would have
been in a better position had it not hedged at all.
(4) As described below, the Fund might be required to maintain assets
as "cover," maintain segregated accounts or make margin payments when it takes
positions in futures and forward contracts. If the Fund were unable to close out
its positions in such instruments, it might be required to continue to maintain
such assets or accounts or make such payments until the position expired or
matured. The requirements might impair the Fund's ability to sell a portfolio
security or make an investment at a time when it would otherwise be favorable to
do so, or require that the Fund sell a portfolio security at a disadvantageous
time. The Fund's ability to close out a position in an instrument prior to
expiration or maturity depends on the existence of a liquid secondary market or,
in the absence of such a market, the ability and willingness of the other party
to the transaction ("contra party") to enter into a transaction closing out the
position. Therefore, there is no assurance that any position can be closed out
at a time and price that is favorable to the Fund.
(5) Stock index futures contracts may be traded on foreign exchanges.
Such transactions may not be regulated as effectively as similar transactions in
the United States; may not involve a clearing mechanism and related guarantees;
and are subject to the risk of governmental actions affecting trading in, or the
prices of, foreign securities. The value of such positions also could be
adversely affected by (a) other complex foreign political, legal and economic
factors, (b) lesser availability than in the United States of data on which to
make trading decisions, (c) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (d) the imposition of different exercise and settlement terms and
procedures on margin requirements than in the United States and (e) lesser
trading volume.
STOCK INDEX FUTURES CONTRACTS
The Fund may purchase and sell stock index futures contracts (1) in
order to attempt to reduce the overall investment risk in its portfolio or (2)
to enhance yield. For
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<PAGE> 25
example, the Fund may purchase stock index futures contracts, in lieu of
investing in individual stocks, in order to maintain liquidity, because the
Portfolio Manager has not yet selected the individual securities in which to
invest, or because the stock index futures contract presents a more favorable
investment than investment in individual securities. The Fund only will enter
into futures contracts that are standardized and traded on a U.S. or foreign
exchange, board of trade or similar entity.
An index futures contract provides for the delivery, at a designated
date, time and place, of an amount of cash equal to a specified dollar amount
times the difference between the index value at the close of trading on the
contract and the price at which the futures contract is originally struck; no
physical delivery of the securities comprising the index is made. Brokerage fees
are incurred when a futures contract is bought or sold, and margin deposits must
be maintained at all times the futures contract is outstanding.
Futures contracts usually are closed out before the delivery date.
Closing out an open futures contract sale or purchase is effected by entering
into an offsetting futures contract purchase or sale, respectively, for the same
aggregate amount of the identical financial instrument or currency and the same
delivery date. If the offsetting purchase price is less than the original sale
price, the Fund realizes a gain; if it more, the Fund realizes a loss.
Conversely, if the offsetting sale price is more than the original purchase
price, the Fund realizes a gain; if it is less the Fund realizes a loss. The
transaction costs also must be included in these calculations. There can be no
assurance, however, that the Fund will be able to enter into an offsetting
transaction with respect to a particular futures contract at a particular time.
If the Fund is not able to enter into an offsetting transaction, the Fund will
continue to be required to maintain the margin deposits on the futures contract.
"Margin" is the amount of funds that must be deposited by the Fund in
order to initiate futures trading and to maintain the Fund's open positions in
futures contracts. A margin deposit made when the futures contract is entered
into ("initial margin") is intended to assure the Fund's performance under the
futures contract. The margin required for a particular futures contract is set
by the exchange on which the futures contract is traded, and may be modified
significantly from time to time by the exchange during the term of the futures
contract.
Subsequent payments, called "variation margin," to and from the futures
commission merchant through which the Fund entered into the futures contract
will be made on a daily basis as the price of the underlying index fluctuates
making the futures contract more or less valuable, a process known as
marking-to-market.
The prices of futures contracts are volatile and are influenced, among
other things, by actual, and anticipated changes in individual security prices,
which in turn are affected by fiscal and monetary policies and national and
international political and economic events.
Because of the low margin deposits required, futures trading involves
an extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss, as
well as gain, to the investor. Thus, a purchase or sale of a futures contract
may result in losses in excess of the amount invested in the futures contract.
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<PAGE> 26
Most U.S. futures exchanges limit the amount of fluctuation permitted
in futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and, therefore, does not limit potential losses because the limit may
prevent the liquidation of unfavorable positions. Futures contract prices
occasionally have moved to the daily limit for several consecutive trading days
with little or no trading, thereby preventing prompt liquidation of positions
and subjecting some traders to substantial losses.
If the Fund were unable to liquidate a futures position due to the
absence of a liquid secondary market or the imposition of price limits, it could
incur substantial losses. The Fund would continue to be subject to market risk
with respect to the position. In addition, the Fund would continue to be
required to make daily variation margin payments and might be required to
maintain the position being hedged by the futures contract or to maintain cash
or securities in a segregated account.
Certain characteristics of the futures market might increase the risk
that movements in the prices of futures contracts might not correlate perfectly
with movements in the prices of the investments being hedged. For example, all
participants in the futures markets are subject to daily variation margin calls
and might be compelled to liquidate futures positions whose prices are moving
unfavorably to avoid being subject to further calls. These liquidations could
increase price volatility of the instruments and distort the normal price
relationship between the futures and the investments being hedged. Also, because
initial margin deposit requirements in the futures market are less onerous than
margin requirements in the securities markets, there might be increased
participation by speculators in the futures markets. This participation also
might cause temporary price distortions. In addition, activities of large
traders in both the futures and securities markets involving arbitrage, "program
trading" and other investment strategies might result in temporary price
distortions.
FORWARD CURRENCY CONTRACTS
A forward contract is an obligation, generally arranged with a
commercial bank or other currency dealer, to purchase or sell a currency against
another currency at a future date and price as agreed upon by the parties. The
Fund either may accept or make delivery of the currency at the maturity of the
forward contract. The Fund may also, if its contra party agrees, prior to
maturity, enter into a closing transaction involving the purchase or sale of an
offsetting contract.
The Fund may engage in forward currency transactions in anticipation of
or to protect itself against fluctuations in exchange rates. The Fund might sell
a particular foreign currency forward, for example, when it holds securities
denominated in a foreign currency but anticipates, and seeks to be protected
against, a decline in the currency against the U.S. dollar. Similarly, the Fund
might sell the U.S. dollar forward when it holds securities denominated in U.S.
dollars but anticipates, and seeks to be protected against, a decline in the
U.S. dollar relative to other currencies. Further, the Fund might purchase a
currency forward to "lock in" the price of securities denominated in that
currency that it anticipates purchasing.
Forward contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement, and no commissions are
charged at any stage for
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<PAGE> 27
trades.
The Fund will enter into such forward contracts with major U.S. or foreign banks
and securities or currency dealers in accordance with guidelines approved by the
Trust's Board of Trustees.
The Fund may enter into forward contracts either with respect to
specific transactions or with respect to the Fund's portfolio positions. The
precise matching of the forward contract amounts and the value of specific
securities generally will not be possible because the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. Accordingly, it may be necessary for
the Fund to purchase additional foreign currency on the spot (i.e., cash) market
(and bear the expense of such purchase) if the market value of the security is
less than the amount of foreign currency the Fund is obligated to deliver and if
a decision is made to sell the security and make delivery of the foreign
currency. Conversely, it may be necessary to sell on the spot market some of the
foreign currency the Fund is obligated to deliver. The projection of short-term
currency market movements is extremely difficult, and the successful execution
of a short-term hedging strategy is highly uncertain. Forward contracts involve
the risk that anticipated currency movements will not be predicted accurately,
causing the Fund to sustain losses on these contracts and transaction costs.
At or before the maturity of a forward contract requiring the Fund to
sell a currency, the Fund either may sell a portfolio security and use the sale
proceeds to make delivery of the currency or retain the security and offset its
contractual obligation to deliver the currency by purchasing a second contract
pursuant to which the Fund will obtain, on the maturity date, the same amount of
the currency that it is obligated to deliver. Similarly, the Fund may close out
a forward contract requiring it to purchase a specified currency by, if its
contra party agrees, entering into a second contract entitling it to sell the
same amount of the same currency on the maturity date of the first contract. The
Fund would realize a gain or loss as a result of entering into such an
offsetting forward contract under either circumstance to the extent the exchange
rate or rates between the currencies involved moved between the execution dates
of the first contract and the offsetting contract.
The cost to the Fund of engaging in forward contracts varies with
factors such as the currencies involved, the length of the contract period and
the market conditions then prevailing. Because forward contracts usually are
entered into on a principal basis, no fees or commissions are involved. The use
of forward contracts does not eliminate fluctuations in the prices of the
underlying securities the Fund owns or intends to acquire, but it does establish
a rate of exchange in advance. In addition, while forward contracts limit the
risk of loss due to a decline in the value of the hedged currencies, they also
limit any potential gain that might result should the value of the currencies
increase.
The Fund may use forward contracts to hedge against movements in the
values of the foreign currencies in which the Fund's securities are denominated.
Such currency hedges can protect against price movements in a security that the
Fund owns or intends to acquire that are attributable to changes in the value of
the currency in which it is denominated. Such hedges do not, however, protect
against price movements in the securities that are attributable to other causes.
The Fund might seek to hedge against changes in the value of a
particular currency when no forward contract involving that currency is
available or one of such contracts is more expensive than certain other
contracts. In such cases, the Fund may hedge against
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<PAGE> 28
price movements in that currency by entering into a contract on another currency
or basket of currencies, the values of which the Portfolio Manager believes will
have a positive correlation to the value of the currency being hedged. The risk
that movements in the price of the contract will not correlate perfectly with
movements in the price of the currency being hedged is magnified when this
strategy is used.
The value of forward contracts depends on the value of the underlying
currency relative to the U.S. dollar. Because foreign currency transactions
occurring in the interbank market might involve substantially larger amounts
than those involved in the use of forward contracts, the Fund could be
disadvantaged by dealing in the odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies or any regulatory requirements that quotations available through
dealers or other market sources be firm or revised on a timely basis. Quotation
information generally is representative of very large transactions in the
interbank market and thus might not reflect odd-lot transactions where rates
might be less favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. markets are closed while the
markets for the underlying currencies remain open, significant price and rate
movements might take place in the underlying markets that cannot be reflected in
the U.S. markets until they reopen.
Settlement of forward contracts might be required to take place within
the country issuing the underlying currency. Thus, the Fund might be required to
accept or make delivery of the underlying foreign currency in accordance with
any U.S. or foreign regulations regarding the maintenance of foreign banking
arrangements by U.S. residents and might be required to pay any fees, taxes and
charges associated with such delivery assessed in the issuing country.
COVER
Transactions using forward contracts and futures contracts expose the
Fund to an obligation to another party. The Fund will not enter into any such
transactions unless it owns either (1) an offsetting ("covered") position in
securities, currencies, or other forward contracts or futures contracts, or (2)
cash, receivables and short-term debt securities with a value sufficient at all
times to cover its potential obligations not covered as provided in (1) above.
The Fund will comply with Securities and Exchange Commission guidelines
regarding cover for these instruments and, if the guidelines so require, set
aside cash, U.S. government securities or other liquid, high-grade debt
securities in a segregated account with its custodian in the prescribed amount.
Assets used as cover or held in a segregated account cannot be sold
while the position in the corresponding forward contract or futures contract is
open, unless they are replaced with other appropriate assets. If a large portion
of the Fund's assets are used for cover or segregated accounts, it could affect
portfolio management or the Fund's ability to meet redemption requests or other
current obligations.
ADDITIONAL INFORMATION ABOUT FOREIGN SECURITIES
There is generally less publicly available information about foreign
companies comparable to reports and ratings that are published about companies
in the United States.
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Foreign companies are also generally not subject to uniform accounting and
auditing and financial reporting standards, practices, and requirements
comparable to those applicable to U.S. companies.
It is contemplated that most foreign securities will be purchased in
over-the-counter markets or on stock exchanges located in the countries in which
the respective principal offices of the issuers of the various securities are
located, if that is the best available market. The Fund will not invest in
securities sold in foreign over-the-counter markets unless the dealers effecting
such transactions have a minimum net worth of $20 million or more. Stock markets
in many foreign countries are not as developed or efficient as those in the
United States. While growing in volume, they usually have substantially less
volume than the New York Stock Exchange, and securities of some foreign
companies are less liquid and more volatile than securities of comparable U.S.
companies. Similarly, volume and liquidity in most foreign bond markets is less
than in the United States and at times, volatility of price can be greater than
in the United States. Fixed commissions on foreign stock exchanges are generally
higher than negotiated commissions on U.S. exchanges, although the Fund will
endeavor to achieve the most favorable net results on its portfolio
transactions. There is generally less government supervision and regulation of
stock exchanges, brokers, and listed companies than in the United States.
With respect to certain foreign countries, there is the possibility
of adverse changes in investment or exchange control regulations,
nationalization, expropriation, or confiscatory taxation, limitations on the
removal of funds or other assets of the Fund, political or social instability,
or diplomatic developments which could affect United States investments in those
countries. Moreover, individual foreign economies may differ favorably or
unfavorably from the United States economy in such respects as growth of gross
national product, rate of inflation, capital reinvestment, resource
self-sufficiency, and balance of payments position.
The investment by the Fund in emerging market countries presents
risks in addition to those presented by investment in foreign issuers in
general. A number of emerging market countries restrict, to varying degrees,
foreign investment in stocks. Repatriation of investment income, capital, and
the proceeds of sales by foreign investors may require governmental registration
and/or approval in some emerging market countries. A number of the currencies of
developing countries have experienced significant declines against the U.S.
dollar in recent years and devaluation may occur subsequent to investments in
these currencies by the Fund. Many emerging market countries have experienced
substantial, and in some periods, extremely high rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain emerging market countries.
Many of the emerging securities markets are relatively small, have
low trading volumes, suffer periods of relative illiquidity, and are
characterized by significant price volatility. There is a risk in emerging
market countries that a future economic or political crisis could lead to price
controls, forced mergers of companies, expropriation or confiscatory taxation,
seizure, nationalization, or creation of government monopolies, any of which may
have a detrimental effect on the Fund's investment.
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<PAGE> 30
The income and gains from certain foreign portfolio securities may be
subject to foreign withholding taxes, thus reducing the net amount available for
distribution.
The U.S. Government has, from time to time in the past, imposed
restrictions, through taxation and otherwise, on foreign investments by U.S.
investors such as the Fund. If such restrictions should be reinstituted, it
might become necessary for the Fund to invest all, or substantially all, of its
assets in U.S. short-term securities. In such event, the Fund would review its
investment objective and investment policies to determine whether changes are
appropriate.
WARRANTS
The Fund may invest in warrants; however, the Fund's investment in
warrants (other than warrants acquired by the Fund as part of a unit or attached
to securities at the time of purchase), valued to the lower of cost or market,
may not exceed 5% of the value of the Fund's net assets, of which not more than
2% of the Fund's net assets may be invested in warrants not listed on a
recognized U.S. or foreign stock exchange. Warrants may be considered
speculative in that they have no voting rights, pay no dividends, and have no
rights with respect to the assets of the corporation issuing them. Warrants
basically are options to purchase equity securities at a specific price valid
for a specific period of time. They do not represent ownership of the
securities, but only the right to buy them. Warrants differ from call options in
that warrants are issued by the issuer of the security and may be purchased on
their exercise, whereas, call options may be written or issued by anyone. The
prices of warrants do not necessarily move parallel to the prices of the
underlying securities.
INVESTMENT RESTRICTIONS
The Fund's investment objective as set forth under "Investment
Objectives, Policies and Risk Factors" in the Prospectus together with the
investment restrictions set forth below, unless otherwise indicated, are
fundamental policies of the Fund and may not be changed with respect to the Fund
without the approval of a majority of the outstanding voting shares of the Fund.
Under these restrictions, the Fund may not:
(i) invest in a security if, as a result of such investment, more than 25% of
its total assets (taken at market value at the time of such investment) would be
invested in the securities of issuers in any particular industry, except that
this restriction does not apply to securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities (or repurchase agreements with
respect thereto);
(ii) invest in a security if, with respect to 75% of its total assets, more than
5% of its total assets (taken at market value at the time of such investment)
would be invested in the securities of any one issuer, except that this
restriction does not apply to securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities;
(iii) invest in a security if, with respect to 75% of its total assets, the Fund
would own more than 10% (taken at the time of such investment) of the
outstanding voting securities of any one issuer, except that this restriction
does not apply to securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities;
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<PAGE> 31
(iv) purchase or sell real estate, except that the Fund may purchase securities
secured by real estate or interests therein, or securities issued by companies
in the real estate industry or which invest in real estate or interests therein;
(v) purchase or sell commodities or commodities contracts, (which, for the
purpose of this restriction, shall not include foreign currency or forward
foreign currency contracts), except that the Fund may purchase and sell interest
rate futures contracts, stock index futures contracts, futures contracts based
on other financial instruments or one or more groups of instruments, and on
options on such futures contracts, and options on securities indices and
currencies;
(vi) borrow money, or pledge, mortgage or hypothecate its assets, except that
the Fund may (a) as a temporary measure for extraordinary or emergency purposes
borrow from banks or enter into reverse repurchase agreements, but only if
immediately after each borrowing and continuing thereafter there is asset
coverage of 300% (while any borrowing of greater than 5% of its assets occurs,
the Fund will not purchase additional securities); (b) make deposits of initial
and variation margin and pledge its assets in connection with its purchases and
sales of options, futures, options on futures contracts and forward foreign
currency contracts and (c) purchase securities on a when-issued or delayed
delivery basis and pledge its assets in connection therewith;
(vii) issue senior securities, except as permitted under the Investment Company
Act of 1940;
(viii) lend funds or other assets, except that the Fund may, consistent with its
investment objective and policies: (a) invest in debt obligations, including
bonds, debentures, or other debt securities, bankers' acceptances and commercial
paper, (b) enter into repurchase agreements and reverse repurchase agreements;
and (c) lend its portfolio securities in an amount not to exceed 1/3 of the
value of its total assets; and
(ix) act as an underwriter of securities of other issuers, except to the extent
that in connection with the disposition of portfolio securities, it may be
deemed to be an underwriter under the federal securities laws;
(x) invest in oil, gas or other mineral exploration or development programs
(including oil, gas, or other mineral leases), except that the Fund may invest
in the securities of companies that invest in or sponsor those programs.
The Fund is also subject to the following restrictions and policies
that are not fundamental and may, therefore, be changed by the Board of Trustees
(without shareholder approval) relating to the investment of its assets and
activities. Unless otherwise indicated, the Fund may not:
(i) invest for the purpose of exercising control or management;
(ii) sell securities or property short, except short sales against the box;
(iii) purchase securities on margin, except for use of short-term credit
necessary for clearance or purchases and sales of Fund securities, and except
that the Fund may make certain deposits in connection with transactions in
options, futures and options on futures,
15
<PAGE> 32
and except that effecting short sales will be deemed not to constitute a margin
purchase for purposes of this restriction;
(iv) invest in securities that are illiquid including repurchase agreements
maturing in more than seven days, if, as a result of such investment, more than
15% of the net assets of the Fund would be invested in such securities;
(v) purchase any security if, as a result, the Fund will then have more than 5%
of its total assets invested in securities of companies (including predecessor
companies) that have been in continuous operation for less than three years but
this limitation shall not include special purpose trusts organized by issuers
that have been in business for more than five years;
(vi) purchase or retain securities of any issuer if any of the Fund's officers
or trustees, or any officer or director of the investment adviser or
sub-investment adviser of the Fund, individually owns more than 1/2 of 1% of the
outstanding securities of the issuer and together own beneficially more than 5%
of such issuer's securities;
(vii) invest in warrants (other than warrants acquired by the Fund as part of a
unit or attached to securities at the time of purchase) if, as a result, the
investment in warrants (valued to the lower of cost or market) would exceed 5%
of the value of the Fund's net assets, of which not more than 2% of the Fund's
net assets may be invested in warrants not listed on a recognized U.S. or
foreign stock exchange;
(viii) invest an aggregate of more than 15% of the Fund's total assets in
securities subject to the restriction set forth in paragraph (vi) above and
securities which are restricted as to disposition;
(ix) invest in securities of another open-end investment company.
(x) invest in puts, calls, straddles, spreads, and any combination thereof, if
by reason thereof the value of its aggregate investment in such classes of
securities will exceed 5% of its total assets.
Unless otherwise indicated, as in the restriction for borrowing or
hypothecating assets of the Fund, for example, all percentage limitations listed
above apply to the Fund only at the time into which a transaction is entered.
Accordingly, if a percentage restriction is adhered to at the time of
investment, a later increase or decrease in the percentage which results from a
relative change in values or from a change in the Fund's net assets will not be
considered a violation.
The Fund does not presently intend to engage in options transactions,
options on futures transactions, securities lending activities, or reverse
repurchase agreements.
PURCHASE OF SHARES
The Fund reserves the right to impose a charge of $15 for any purchase
check returned to the Trust as uncollectible and to collect such fee by
redeeming shares of the Fund from such shareholder's account.
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The Fund reserves the right to limit the amount of any purchase and to
reject any purchase order. Shares of the Fund are offered continuously; however,
the offering of shares of the Fund may be suspended at any time and resumed at
any time thereafter. The Trust intends to waive the initial and subsequent
purchase minimums for employees of McDonald & Company Securities, Inc.
("McDonald") which, through its Gradison Division ("Gradison"), acts as the
investment adviser and distributor ("Adviser" and "Distributor").
REDEMPTION OF SHARES
The Trust 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 Trust 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 securities held in the Fund or determination
of the net asset value of the Fund 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 Trust's shareholders.
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), and requires
identification from individuals picking up checks at its offices.
EXCHANGES
TELEPHONE EXCHANGES
You may request exchanges by telephoning the Fund at 579-5700 from
Cincinnati, or toll free (800) 869-5999 from outside Cincinnati. Such request
should include your name and account number and the number of shares or dollar
amount of the Fund to be exchanged. Telephone exchanges may be made only when
the registration of the two accounts will be identical and may not be made by
shareholders who have had share certificates issued for their shares.
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.
WRITTEN EXCHANGES
You may also exchange your shares of either Fund by written request
directed to:
Gradison-McDonald 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 of the Fund to be exchanged. Unless otherwise
indicated, a new account established by written exchange will have the same
registration and selected
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options as your present account.
GENERAL EXCHANGE INFORMATION
An exchange involves a redemption of the shares of the Fund 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 (except in the case of purchases of mutual funds sold
subject to a sales load) 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 and, depending upon the circumstances, a short or
long-term gain or loss may be realized.
The Fund reserves the right to reject any exchange request. The
exchange feature may be terminated at any time upon 60 days' written notice. In
the case of excessive use of the exchange feature, the Fund, upon 30 days'
written notice, may make reasonable service charges (as specified in the notice)
by redeeming shares from such shareholder's account.
TAXES
The Fund intends to qualify as a regulated investment company ("RIC")
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). By so qualifying, the Fund will not be taxed on that part of its
investment company taxable income (consisting generally of net investment
income, net short-term capital gain and net gains from certain foreign currency
transactions) and net capital gain (the excess of net long-term capital gain
over net short-term capital loss) that is distributed to its shareholders. In
order to qualify for treatment as a RIC under the Code, the Fund must distribute
to its shareholders for each taxable year at least 90% of its investment company
taxable income ("Distribution Requirement"), 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 stock, securities or foreign currencies, other income (including
gains from options, futures or forward contracts) derived with respect to its
business of investing in stock, securities or those currencies ("Income
Requirement"); (2) the Fund must derive less than 30% of its gross income each
taxable year from the sale or other disposition of certain assets held for less
than three months, namely (i) securities, (ii) options, futures, or forward
contracts (other than those on foreign currencies), and (iii) foreign currencies
(or options, futures and forward contracts on foreign currencies) that are not
directly related to the Fund's principal business of investing in securities (or
options and futures with respect to stocks or securities) ("Short-Short
Limitation"); (3) 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 that does not represent
more than 10% of the issuer's outstanding voting securities; and (4) 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.
Distributions of any net capital gain are taxable to shareholders as
long-term capital gains, whether paid in cash or in additional shares of the
Fund and regardless of the length of time a shareholder has owned shares of the
Fund. These capital gain distributions are not eligible for the
dividends-received deduction for corporations.
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Investors should be aware of the tax implications of purchasing shares
shortly before a record date for a dividend or capital gain distribution. To the
extent that the net asset value of the Fund at the time of purchase reflects
undistributed income or capital gains, or net unrealized appreciation of
securities held by the Fund, a subsequent distribution to the shareholder of
such amounts, although in effect constituting a return of his or her investment,
would be taxable as described above. Correspondingly, for Federal income tax
purposes, a shareholder's tax basis in his or her shares continues to be his or
her original cost, so that upon redemption of shares, capital gain or loss will
be realized in the amount of the difference between the redemption price and the
shareholder's original cost.
The Treasury Department is authorized to issue regulations to provide
that foreign currency gains that are not directly related to a RIC's principal
business of investing in stock or securities (or options and futures with
respect to stock or securities) may be excluded from the income which qualifies
for purposes of the Income Requirement. To date, however, no regulations have
been issued.
The Fund will be subject to a nondeductible 4% excise tax ("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 net realized
capital gains for the one-year period ending on October 31 of that year, plus
certain other amounts.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such a month and paid in January of the following
year, will be treated as having been received by shareholders on December 31 of
the year in which the dividend was declared.
Redemption of shares of the Fund will be a taxable transaction for
federal income tax purposes. Redeeming shareholders will recognize a gain or
loss in an amount equal to the difference between their basis in such redeemed
shares and the amount received. If such shares are held as a capital asset, the
gain or loss will be a capital gain or loss and will generally be long-term if
such shareholders have held their shares for more than one year. Any loss
realized upon a taxable disposition of shares held for six months or less will
be treated as a long-term capital loss to the extent of any capital gain
distributions received with respect to such shares. An exchange of Fund shares
for shares of any Gradison-McDonald fund or certain other funds (see "Optional
Shareholder Services - Exchanges") generally will have similar tax consequences.
In addition, if a shareholder purchases Fund shares within 30 days after
redeeming other Fund shares at a loss, all or part of that loss will not be
deductible and instead will increase the basis of the newly purchased shares.
The Fund is required to withhold 31% of dividends, capital gain
distributions and redemption proceeds, with respect to dividends and
distributions, paid to individuals and certain other non-corporate shareholders
who do not furnish to the Fund their correct taxpayer identification number or
who are otherwise subject to backup withholding.
HEDGING TRANSACTIONS
Income from foreign currencies, and income from transactions in
options, futures and forward contracts derived by the Fund with respect to its
business of investing in stock, securities or foreign currencies, will qualify
as permissible income under the Income Requirement. However, income from the
disposition of options and futures contracts (other than those on foreign
currencies) will be subject to the Short-Short Limitation if they are held
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<PAGE> 36
for less than three months. Income from the disposition of foreign currencies,
and options, futures and forward contracts thereon, that are not directly
related to the Fund's principal business of investing in stock or securities (or
options and futures with respect thereto) also will be subject to the
Short-Short Limitation if they are held for less than three months. Many of the
futures contracts and forward contracts used by the Fund are "section 1256
contracts." Gains or losses on section 1256 contracts (other than section 1256
contracts that are part of a "mixed straddle" with respect to which the Fund has
made an election not to have the following rules apply) are generally considered
60% long-term and 40% short-term capital gains or losses ("60/40"). Also,
section 1256 contracts held by the Fund at the end of each taxable year (and,
for purposes of the Excise Tax, on certain other dates prescribed by the Code)
are "marked to market", with the result that unrealized gains or losses are
treated as though they were realized, and the resulting gain or loss is treated
as 60/40.
Generally, the hedging transactions undertaken by the Fund may result
in "straddles" for federal income tax purposes. Because only a few regulations
implementing the straddle rules have been promulgated, the tax consequences to
the Fund of transactions in options, futures and forward contracts are not
entirely clear. The straddle rules may affect the character of gains (or losses)
realized by the Fund. In addition, losses realized by the Fund on positions that
are part of a straddle may be deferred under the straddle rules, rather than
being taken into account in calculating the taxable income for the taxable year
in which such losses are realized. The transactions may increase the amount of
short-term capital gain realized by the Fund, which is taxed as ordinary income
when distributed to shareholders.
The Fund may make one or more of the elections available under the
Code which are applicable to straddles. If the Fund makes any of the elections,
the amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the elections made. The rules applicable under certain of the elections
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to the Fund that did not engage in such hedging transactions.
OTHER TAXATION
Gains or losses attributable to fluctuations in exchange rates which
occur between the time the Fund accrues income or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
Fund actually collects such receivables or pays such liabilities generally are
treated as ordinary gain or loss. Similarly, on disposition of foreign
currencies and debt securities denominated in a foreign currency, and on
disposition of certain futures contracts, forward contracts and options, gains
or losses attributable to fluctuations in the value of the foreign currency
between the date of acquisition of the security or contract and the date of
disposition also are treated as ordinary gain or loss. These gains and losses,
referred to under the Code as "Section 988" gains
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<PAGE> 37
or losses, may increase, decrease, or eliminate the Fund's investment company
taxable income to be distributed to its shareholders. If "Section 988" losses
exceed other investment company taxable income during a taxable year, the Fund
would not be able to make any ordinary dividend distributions for that year or
distributions during that year made before the losses were realized would be
characterized in whole or in part as a return of capital or as a capital gain to
shareholders, rather than as an ordinary dividend.
The Fund may invest in the stock of foreign corporations which may be
classified as passive foreign investment companies ("PFICs"). In general, a
foreign corporation is classified as a PFIC for a taxable year if at least
one-half of its assets constitute investment-type assets or 75% or more of its
gross income is investment-type income. If the Fund receives a so-called "excess
distribution" with respect to PFIC stock, the Fund itself may be subject to tax
on a portion of the excess distribution, whether or not the corresponding income
is distributed by the Fund to shareholders. In general, under the PFIC rules, an
excess distribution is treated as having been realized ratably over the period
during which the Fund held the PFIC stock. The Fund itself will be subject to
tax on the portion, if any, of an excess distribution that is so allocated to
prior Fund taxable years and an interest factor will be added to the tax, as if
the tax had been payable in such prior taxable years. Certain distributions from
a PFIC as well as gain from the sale of PFIC stock are treated as excess
distributions. Excess distributions are characterized as ordinary income even
though, absent application of the PFIC rules, certain excess distributions might
have been classified as capital gain.
The Fund may be eligible to elect alternative tax treatment with
respect to PFIC stock. Under an election that currently is available in some
circumstances, the Fund generally would be required to include in its gross
income its share of the earnings and net capital gains of a PFIC on a current
basis, regardless of whether distributions are received from the PFIC in a given
year. If this election were made, the special rules, discussed above, relating
to the taxation of excess distributions would not apply.
In addition, under proposed regulations another election would be
available that would involve marking-to-market the Fund's PFIC stock at the end
of each taxable year (and as otherwise prescribed in the Code), with the result
that unrealized gains in the PFIC stock would be treated as though they were
realized. If this election were made, tax at the Fund level under the PFIC rules
would generally be eliminated, but the Fund could, in limited circumstances,
incur nondeductible interest charges. The Fund's intention to qualify annually
as a RIC may limit its elections with respect to PFIC stock. Because the
application of the PFIC rules may affect, among other things, the character of
gains, the amount of gain or loss and the timing of the recognition of income
with respect to PFIC stock, as well as subject the Fund itself to tax on certain
income from PFIC stock, the amount that must be distributed to shareholders, and
which will be taxed to shareholders as ordinary income or long-term capital
gain, may be increased or decreased substantially as compared to a mutual fund
that did not invest in PFIC stock.
Income received by the Fund from sources within foreign countries may
be subject to withholding and other taxes imposed by such countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. In addition, the Adviser may manage the Fund with the
intention of minimizing foreign taxation in cases where it is deemed prudent to
do so. If more than 50% of the value of the Fund's
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<PAGE> 38
total assets at the close of its taxable year consists of securities of foreign
corporations, the Fund will be eligible to, and may, elect to "pass-through" to
its shareholders the amount of foreign income and similar taxes paid by the
Fund. If this election is made, a shareholder will be required to include in
gross income (in addition to taxable dividends actually received) his or her pro
rata share of the foreign taxes paid by the Fund and will be entitled either to
deduct (as an itemized deduction) his or her pro rata share of the foreign taxes
in computing his or her taxable income or to use it (subject to limitations) as
a foreign tax credit against his or her Federal income tax liability. No
deduction for foreign taxes may be claimed by a shareholder who does not itemize
deductions, and foreign taxes generally are not deductible in computing
alternative minimum taxable income. Each shareholder will be notified within 60
days after the close of the Fund's taxable year whether the foreign taxes paid
by the Fund will "pass-through" for that year.
Generally, a credit for foreign taxes is subject to the limitation
that it may not exceed the shareholder's U.S. tax attributable to his or her
total foreign source taxable income. For this purpose, if the pass-through
election is made, the source of the Fund's income will flow through to its
shareholders. With respect to the Fund, gains from the sale of securities will
be treated as derived from U.S. sources and certain currency fluctuation gains,
including fluctuation gains from foreign-currency-denominated debt securities,
receivables and payables will be treated as ordinary income derived from U.S.
sources. The limitation on the foreign tax credit is applied separately to
foreign source passive income (as defined for purposes of the foreign tax
credit) and to certain other types of income. Shareholders may be unable to
claim a credit for the full amount of their proportionate share of the foreign
taxes paid by the Fund. The foreign tax credit can be used to offset only 90% of
the revised alternative minimum tax imposed on corporations and individuals. The
foregoing is only a general description of the foreign tax credit. Because
application of the credit depends on the particular circumstances of each
shareholder, shareholders are advised to consult their own tax advisers.
The Federal income tax matters summarized above are subject to change by
legislation, administrative action and judicial decision. In addition,
shareholders may be subject to state and local taxes with respect to their
ownership of shares or distributions from the Trust. Foreign shareholders may be
subject to U.S. tax rules that differ significantly from those described above.
Shareholders should consult their tax adviser as to their personal tax
situation.
NET ASSET VALUE
The net asset value of the Fund is calculated once daily Monday
through Friday except on the following holidays: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
The assets and liabilities of the Fund are determined in accordance
with generally accepted accounting principles and the applicable rules and
regulations of the Securities and Exchange Commission. Assets and liabilities
attributable to the Fund are allocated to the Fund. Assets and liabilities not
readily attributable to the Fund are allocated to the Fund in the Trust in a
manner and on a basis determined in good faith by the Trustees to be fair and
equitable.
When calculating the net asset value of the Fund, a security listed or
traded on an exchange is valued at its last sale price on that exchange, or if
there were no sales that
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<PAGE> 39
day, the security is valued at the closing bid price. All other portfolio
securities for which over-the-counter market quotations are readily available
are valued at the latest bid price. When price quotations of futures held by the
Fund are readily available, those positions will be valued based upon such
quotations. Portfolio securities and other assets for which market quotations
are not readily available are valued at their fair value as determined by
management of the Fund and approved in good faith by the Board of Trustees.
Short-term securities with remaining maturities of less than 60 days are valued
at amortized cost which approximates market value.
PORTFOLIO TRANSACTIONS AND BROKERAGE
INVESTMENT DECISIONS
Investment decisions for the Fund and for the other investment
advisory clients of the Adviser and Portfolio Manager are made with a view to
achieving their respective investment objectives. Investment decisions are the
product of many factors in addition to basic suitability for the particular
client involved (including the Fund). Thus, a particular security may be bought
or sold for certain clients even though it could have been bought or sold for
other clients at the same time. Likewise, a particular security may be bought
for one or more clients when one or more clients are selling the security. In
some instances, one client may sell a particular security to another client. It
also sometimes happens that two or more clients simultaneously purchase or sell
the same security, in which event transactions that are close in time in such
security are, insofar as possible, averaged as to price and allocated between
such clients in a manner which in the Adviser's or Portfolio Manager's opinion
is equitable to each and in accordance with the amount being purchased or sold
by each. The various allocation methods used by the Adviser and Portfolio
Manager, and the results of such allocations, are subject to periodic review by
the Fund's Adviser and Board of Trustees. There may be circumstances when
purchases or sales of portfolio securities for one or more clients will have an
adverse effect on other clients.
BROKERAGE AND RESEARCH SERVICES
There is generally no stated commission in the case of fixed-income
markets, but the price paid by the Fund usually includes an undisclosed dealer
commission or markup. In underwritten offerings, the price paid by the Fund
includes a disclosed, fixed commission or discount retained by the underwriter
or dealer. Transactions on U.S. stock exchanges and other agency transactions
involve the payment by the Fund of negotiated brokerage commissions. Such
commissions vary among different brokers. Also, a particular brokerage may
charge different commissions according to such factors as the difficulty and
size of the transaction. Transactions in foreign securities generally involve
the payment of fixed brokerage commissions, which are generally higher than
those in the United States.
The Adviser or Portfolio Manager for the Fund places all orders for
the purchase and sale of portfolio securities, options and futures contracts for
the Fund and buys and sells such securities, options and futures for the Fund
through a number of brokers and dealers and futures commission merchants
("FCMs"). In so doing, the Adviser or Portfolio Manager uses its best efforts to
obtain for the Fund the best execution available, except to the extent it may be
permitted to pay higher brokerage commissions as described below.
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<PAGE> 40
In seeking the best execution, the Adviser or Portfolio Manager, having in mind
the Fund's best interests, considers all factors it deems relevant, including,
by way of illustration, price (including the applicable brokerage commission or
dollar spread), the size of the transaction, the nature of the market for the
security, the amount of the commission, the timing of the transaction taking
into account market prices and trends, the reputation, experience and financial
stability of the broker, dealer, or FCM involved and the quality of service
rendered by the broker, dealer, or FCM in other transactions.
It has for many years been a common practice in the investment
advisory business for advisers of investment companies and other institutional
investors to receive research services from brokers or dealers which execute
portfolio transactions for the clients of such advisers. Consistent with this
practice, the Adviser or the Portfolio Manager may receive research services
from many brokers or dealers with which the Adviser or Portfolio Manager places
the Fund's transactions. These services, which in some cases may also be
purchased for cash, include such matters as general economic and security market
reviews, industry and company reviews, evaluations of securities and
recommendations as to the purchase and sale of securities. Some of these
services are of value to the Adviser or Portfolio Manager in advising various of
its clients (including the Fund), although not all of these services are
necessarily useful and of value in managing the Fund. The management fee paid by
the Fund is not reduced because the Adviser or Portfolio Manager and its
affiliates receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934
(the "1934 Act"), the Adviser or the Portfolio Manager may cause the Fund to pay
a broker or dealer which provides "brokerage and research services" (as defined
in the 1934 Act) to the Adviser or Portfolio Manager an amount of disclosed
commission for effecting a securities transaction for the Fund in excess of the
commission which another broker or dealer would have charged for effecting that
transaction.
PORTFOLIO TURNOVER
The Adviser or the Portfolio Manager may manage the Fund without regard
generally to restrictions on portfolio turnover, except those imposed on its
ability to engage in short-term trading by provisions of the Federal tax laws
(see "Taxation"). Trading in fixed-income securities does not generally involve
the payment of brokerage commissions, but does involve indirect transaction
costs. The higher the rate of portfolio turnover of the Fund, the higher these
transaction costs borne by the Fund generally will be.
The portfolio turnover rate of the Fund is calculated by dividing the
value of the lesser of purchases or sales of portfolio securities for the fiscal
year by the monthly average of the value of portfolio securities owned by the
Fund during the fiscal year. In determining such portfolio turnover, long-term
U.S. Government securities are included. Short-term U.S. Government securities
and all other securities whose maturities at the time of acquisition were one
year or less are excluded. A 100% portfolio turnover rate would occur, for
example, if all of the securities in the portfolio (other than short-term
securities) were replaced once during the fiscal year. The portfolio turnover
rate for the Fund will vary from year to year, depending on market conditions.
It is anticipated that the annual rate of portfolio turnover will not exceed
150%.
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<PAGE> 41
INVESTMENT ADVISER
The Adviser will manage the investment and reinvestment of the assets
of the Fund in accordance with the Fund's investment objective, policies and
restrictions, subject to the general supervision and control of the Fund's Board
of Trustees and pursuant to the terms of the Investment Advisory Agreement
between the Trust and Adviser. The Adviser may, and has, delegated this function
to the Portfolio Manager. In addition, the Adviser provides to the Fund at its
own expense the executive officers who are necessary for the management and
operations of the Fund.
ADVISORY AGREEMENT
The Investment Advisory Agreement dated February 28,1995, effective as
to the Fund on June 1, l995, provides that the Adviser will manage the
investments of the Fund, subject to review by the Board of Trustees of the
Trust. 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 Trust and compensates the Trustees who are affiliated with the
Adviser. In addition, except as borne by the Trust pursuant to an effective plan
under Rule 12b-1 under the Act, the Adviser bears the expenses related to
distribution of shares of the Fund, such as costs of preparing, printing and
mailing sales literature and other advertising materials, costs of furnishing
prospectuses, annual and semiannual reports of the Fund and other materials
regarding distributing shares of the Trust to potential investors.
All expenses not specifically assumed by the Adviser and incurred in
the operation of the Fund are borne by the Fund pursuant to the Investment
Advisory Agreement. Some of these expenses may be paid by the Adviser subject to
reimbursement by the Trust. These expenses include expenses for cost of
preparing and printing registration statements, prospectuses, periodic reports
and other documents furnished to shareholders and regulatory authorities; such
distribution/service expenses as may be incurred pursuant to an effective plan
under Rule 12b-1 under the Investment Company Act of 1940; registration, filing
and similar fees; legal expenses ; auditing and accounting expenses; taxes and
other fees; brokers' commissions and issue or transfer taxes chargeable to the
Trust in connection with securities transactions; expenses of issue, sale,
redemption and repurchase of shares; cost of share certificates, if any,; fees
of Trustees who are not affiliated with the Adviser; charges and expenses of any
transfer and dividend disbursing agent, registrar, custodian or depository
appointed by the Fund; other expenses of the Fund, including expenses of
shareholders' and Trustees' meetings; and fees and other expenses incurred by
the Fund in connection with its membership in any organization. Expenses borne
by the Trust and attributable to a specific fund are allocated to that fund;
expenses that are not specifically attributable to the Fund are allocated to the
Fund in a manner and on a basis determined in good faith by the Adviser to be
fair and equitable (generally, on the basis of the respective net assets of the
Fund), subject to review by the Trustees.
As compensation for its services under the Investment Advisory
Agreement, the Adviser receives from the Fund a monthly fee based upon the
average value of the daily net assets for the month of the Fund at an annual
rate of 1.00% on the first $100 million of assets, of .90% on the next $150
million of assets and .80% on the next $250 million and .75% on any amounts in
excess of $500 million of assets.
The Adviser will reimburse the Trust for aggregate expenses of the Fund
during any fiscal year which exceed the limits prescribed by any state in which
the shares of the Fund are registered for sale. Currently, the most stringent
limit is 2 1/2% of average net assets up to $30 million, 2% on the next $70
million and 1 1/2% on additional net assets.
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<PAGE> 42
However, certain expenses such as brokerage commissions, taxes, interest and
items of an extraordinary nature are excluded from such limitation.
The Investment Advisory Agreement also provides that the Adviser, as a
registered broker-dealer, will distribute the shares of the Fund in states in
which it may be qualified to do so, upon request of the Trust. The Adviser
accepts orders for the purchase of such shares at net asset value only, and no
sales commission, fee or other charge is incurred by the investor other than
charges specified in the Fund's 12b-1 plan. The Adviser receives no compensation
for acting as the Trust's distributor except as may be provided pursuant to the
Distribution Plan of the Trust.
The Investment Advisory 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 in no way restricts the Adviser from
acting as an investment manager or adviser for others.
The Investment Advisory Agreement grants to the Trust the right to use
the name "Gradison" and "McDonald" as a part of its name, 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 Investment Advisory Agreement
for any reason. The Investment Advisory Agreement does not impair the right of
the Adviser to use the name Gradison or McDonald in the name of or in connection
with any other business enterprise with which it is or may become associated.
The Investment Advisory Agreement was approved by the vote of a
majority of the Board of Trustees, including the vote cast in person of a
majority of the Trustees who are not "interested persons" (as defined in the
Investment Company Act of 1940) of the Trust or the Adviser, at a meeting on May
1, l995 and was approved by the initial shareholder of the Fund, the Adviser, on
June 1, l995. The Investment Advisory Agreement continues in effect as to the
Fund until February 27, l997, and, thereafter, 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 Investment Advisory Agreement.
The Investment Advisory 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 Investment Advisory Agreement will terminate
automatically in the event of its assignment by the Adviser. The Investment
Advisory 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 the outstanding voting
securities of the Fund 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 Investment Advisory Agreement.
INVESTMENT SUB-ADVISORY AGREEMENT
Pursuant to an agreement dated June 1, l995,between the Adviser and
Blairlogie, Blairlogie will make investment decisions on behalf of the Fund and
place all orders for the
26
<PAGE> 43
purchase and sale of portfolio securities and all other investments related to
those investment decisions. Blairlogie will furnish all necessary investment and
management facilities required for it to execute its duties as well as
administrative facilities, including bookkeeping, clerical personnel and
equipment necessary for performance of its duties including verification and
oversight of he pricing of the Fund's portfolio. The agreement provides that it:
automatically terminates in the event of its assignment or in the event that the
Advisory Agreement between the Fund and the Adviser terminates; continues in
effect for a period more than two years from the date of its execution only so
long as such continuance is approved at least annually by the Board of Trustees
or by vote of a majority of the outstanding voting securities of the Fund, and
may be terminated without penalty by the Board of Trustees, the Investment
Adviser, or by a vote of a majority of the outstanding voting securities of the
Fund on sixty days written notice to Blairlogie.
DISTRIBUTION
The Fund has adopted a Distribution Plan (the "Plan") under Rule 12b-1
of the Investment Company Act of 1940. 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 the Fund to acquire and retain a sufficient level of assets to enable it
to operate at an efficient level. 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 distribution and service expenses up to an amount that
does not exceed an annual rate of .50 of 1% of its average daily net assets.
Distribution expenses may be incurred by the Fund under the Plan within the
limitation described above for any activity primarily intended to result in sale
of Fund shares.
The Plan also specifically authorizes the payment of those operational
expenses enumerated as being incurred by the Trust pursuant to the Investment
Advisory Agreement, as described under the caption "Advisory Agreement" above,
to the extent that such payments might be considered to be primarily intended to
result in the sale of shares of the Fund. It further specifically authorizes the
payment of advisory fees pursuant to the Investment Advisory Agreement to the
extent that the Trust might be deemed to be indirectly financing the Adviser's
distribution activities through payment of advisory fees. The Board of Trustees
does not believe that the payment of such operational expenses by the Trust or
payment of the advisory fee constitute the direct or indirect financing of
activities primarily intended to result in the sale of shares of the Fund. Thus,
although such payments are authorized by the Plan as a protective measure, they
are not restricted by the .50 of 1% limitation included in the Plan.
The Plan was approved as to the Fund by the vote of a majority of the
Board of Trustees, including the vote of a majority of the Trustees who are not
"interested persons" (as defined in the Investment Company Act of 1940) of the
Trust and have no direct or indirect financial interest in the operation of the
Plan or any agreements related to the Plan (the "Independent Trustees"), cast in
person at a meeting held for such purpose on May 1, l995. The Plan was approved
by the initial shareholder of the Fund, the Adviser, prior to the commencement
of the Fund's operations. The Plan (together with any agreements relating to
implementation of the Plan) shall continue 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
27
<PAGE> 44
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
outstanding voting securities of the Fund, and all material amendments to the
Plan must be approved by a majority of the Board of Trustees and a majority of
the Independent Trustees by votes cast in person at a meeting called for the
purpose of voting on such amendment. The Plan may be terminated as to the Fund
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 60
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 Investment Company Act of 1940) of the Trust shall be committed
to the discretion of the Independent Trustees then in office.
Pursuant to the Plan, the Trust has entered into a distribution
agreement ("Agreement") with McDonald. This agreement provides that the
Distributor will receive compensation for rendering personal services to
shareholders of the Fund including providing shareholder liaison services such
as responding to shareholder inquiries and providing information to shareholders
about their Fund accounts at an annual rate of .25 of 1% of the average daily
net assets of the Fund and .25 of 1% of the value of the average daily net
assets of the Fund for rendering other distribution services to the Fund. The
Agreement may be terminated at any time, without penalty, by a vote of a
majority of the Independent Trustees of the Trust or by a vote of a majority of
the outstanding voting securities of the Fund. The Agreement is contingent on
the continued effectiveness of the Fund's Distribution Plan and automatically
terminates in the event of its assignment.
TRANSFER AGENT AND ACCOUNTING SERVICES AGREEMENT
Pursuant to the Transfer Agent and Accounting Services Agreement,
Gradison provides transfer agent, dividend disbursing, and accounting services
for the Fund. Gradison responds to inquiries from shareholders, processes
purchase and redemption requests, maintains shareholder account records and
provides statements and confirmations to shareholders and maintains the Fund's
books and accounting records.
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 Gradison-McDonald Cash Reserves Trust ("GMCR"), Gradison Custodian
Trust ("GCT"), and Gradison-McDonald Municipal Custodian Trust ("GMMCT"),
Gradison, and McDonald, are listed below. All principal occupations have been
held for at least five years unless otherwise indicated. Positions held with
Gradison were formerly held with Gradison & Company Incorporated.
*DONALD E. WESTON, 580 Walnut Street, Cincinnati, Ohio. Trustee and Chairman of
the Board; Chairman of Gradison; Director of McDonald & Company Investments,
Inc. and Cincinnati Milacron Commercial Corp. (financing arm of capital goods
manufacturer);
28
<PAGE> 45
Trustee and Chairman of the Board of GMCR, GCT, and GMMCT.
THEODORE H. EMMERICH, 1201 Edgecliff Place, Cincinnati, Ohio. Trustee. Retired;
Former managing partner (Cincinnati office) Ernst & Young (Public Accountants);
Director of Carillon Fund, Inc., American Premier Underwriters, Inc.,
Citicasters, Inc., and Cincinnati Milacron Commercial Corp.; Trustee of Summit
Investment Trust and Carillon Investment Trust; Trustee of GMCR, GCT, and GMMCT.
DANIEL J. CASTELLINI, 312 Walnut Street, Cincinnati, Ohio. Trustee; Senior Vice
President/Finance and Administration of the E. W. Scripps Company
(communications); Director and Treasurer of Scripps Howard Broadcasting Company;
Trustee of GMCR, GCT, and GMMCT.
JACOB O. KAMM, 4211 Wooster, Cleveland, Ohio. Trustee; Economic and financial
consultant; Director of Nordson Corporation (industrial products manufacturer);
former Chairman of the Business School of Baldwin Wallace College; Trustee of
GMCR, GCT, and GMMCT
JEROME E. SCHNEE, 11558 Stable Watch Court, Cincinnati, Ohio 45249. Trustee.
Professor of Management, College of Business Administration, University of
Cincinnati, Director of National Sanitary Supply Co. and Rotor Rooter, Inc.;
Trustee of GMCR, GCT, and GMMCT.
RICHARD A. RANKIN, 434 Scott Street, Covington, Kentucky 41011. Trustee.
Partner, Rankin and Rankin (Public Accountants); Trustee GMCR, GCT, and GMMCT.
BRADLEY E. TURNER, 580 Walnut Street, Cincinnati, Ohio. President. Senior Vice
President of McDonald; President of GMCR, GCT, and GMMCT.
WILLIAM J. LEUGERS, JR., 580 Walnut Street, Cincinnati, Ohio 45202. Executive
Vice President and Portfolio Manager of the Gradison-McDonald Established and
Opportunity Value Funds; Executive Vice President of Gradison
JULIAN BALL, 800 Superior Avenue, Cleveland, Ohio. Executive Vice President and
Portfolio Manager of the Gradison-McDonald Growth and Income Fund; Vice
President of McDonald since July l994; prior to that, Vice President of Duff &
Phelps Investment Management Company.
PAUL J. WESTON, 580 Walnut Street, Cincinnati, Ohio 45202. Senior Vice
President; Executive Vice President of GMCR; Senior Vice President of GCT, and
GMMCT; Executive Vice President of Gradison. Mr. Weston is the brother of Donald
E. Weston.
DANIEL R. SHICK , 580 Walnut Street, Cincinnati, Ohio 45202. Vice President
(Established and Opportunity Value Funds); Senior Vice President of Gradison.
ALFRED M. BRUNNER, 580 Walnut Street, Cincinnati, Ohio 45202. Vice President
(Established and Opportunity Value Funds); Vice President of Gradison.
PATRICIA J. JAMIESON, 800 Superior Avenue, Cleveland, Ohio 44114. Senior Vice
President of McDonald; Treasurer of GMCR, GCT, and GMMCT.
RICHARD M. WACHTERMAN, 580 Walnut Street, Cincinnati, Ohio 45202. Secretary;
Senior Vice President and General Counsel of Gradison; Secretary of GMCR, GCT,
and GMMCT.
29
<PAGE> 46
MARK A. FRIETCH, 580 Walnut Street, Cincinnati, Ohio. Assistant Treasurer.
Assistant Treasurer of GMCR, GCT, and GMMCT since May l995; prior to that
Controller of Gradison-McDonald Mutual Funds (since August l992); prior to that
Financial Consultant and Assistant Controller Union Central Life Insurance
Company.
*Trustees who are interested or affiliated persons, as defined by the Investment
Company Act of 1940, of the Trust and 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 compensation as determined by the Board of Trustees. For the
fiscal year ended April 30, 1994, the aggregate of fees paid to the Trustees by
the Trust was $ 26,326.
<TABLE>
<CAPTION>
Trustee Compensation Table
--------------------------
Name of Trustee Aggregate Compensation Total Compensation
From Trust for fiscal period From Trust and fund
ending 3/31/95 complex (3 Trusts) paid
---------------------------- to trustee for
calendar year ending
12/31/94
-----------------------
<S> <C> <C>
Theodore H. Emmerich $ 875 $ 18,604
Richard A. Rankin $ 625 $ 18,604
Jerome E. Schnee $ 875 $ 18,604
Jacob O. Kamm $ 6,367 $ 25,314
Daniel J. Castellini $ 6,083 $ 9,167
Walter G. Alpaugh $ 4,333 $ 9,167
George Rieveschl $ 4,333 $ 9,167
</TABLE>
* Amounts shown include amounts deferred pursuant to a deferred compensation
plan. As of December 31, 1994, Dr. Kamm has a deferred compensation balance of
$8,148 with the Trust and $30,413 with the Trust and the other funds in the
complex. The Trust's deferred compensation plans allow trustees to defer receipt
of trustees fees otherwise payable to them until a future date. Deferred amounts
are credited with interest at a rate of equal to the yield of the
Gradison-McDonald U. S. Government Reserves Fund. The Trust does not maintain
any other pension or retirement plans.
DESCRIPTION OF THE TRUST
The Trust is a diversified, open-end investment company organized under
the laws of the State of Ohio by a Declaration of Trust dated May 31, 1983. The
Declaration of Trust provides for an unlimited number of full and fractional
shares of beneficial interest, without par value, of any series authorized by
the Board of Trustees. The Board of Trustees has authorized the issuance of
shares of four series, representing the Fund, the Gradison-McDonald Established
Value Fund, the Gradison-McDonald Opportunity Value Fund, and the
Gradison-McDonald Growth and Income Fund. Any additional series of shares must
be issued in compliance with the Investment Company Act of 1940 and must not
constitute
30
<PAGE> 47
a security that is senior to the shares offered pursuant to the Prospectuses.
Each share of each series represents an equal, proportionate interest in the
related Fund with each other share of that series. 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 each series are entitled to one vote per share;
however, separate votes are taken by each series on matters specifically
affecting the related fund. 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 of the remaining shares will be unable to elect a Trustee.
Trustees were initially elected by the shareholders at the first annual meeting
of shareholders and at a subsequent meeting of shareholders. Under the
Declaration of Trust, no further meetings of shareholders are required to be
held for the purpose of electing Trustees, unless less than a majority of
Trustees holding office have been elected by the shareholders. Shareholders'
meetings will be held only when required pursuant to the Declaration of Trust or
the Investment Company Act of 1940, and when called by the Trust or shareholders
pursuant to the Declaration of Trust. Pursuant to the Declaration of Trust,
shareholders of record of not less than two-thirds of the outstanding shares of
the Trust may remove a Trustee through a declaration in writing or by vote cast
in person or by proxy at a meeting called for that purpose. The Trustees are
required to call a meeting of shareholders for the purpose of voting upon the
question of removal of any Trustee when requested in writing to do so by
shareholders of record of not less than 10 percent of the Trust's outstanding
shares. Whenever the approval of a majority of the outstanding shares of the
Fund is required in connection with shareholder approval of the Investment
Advisory Agreement or the Distribution 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 assets of the Trust received upon the issuance of the shares of the
fund and all income, earnings, profits and proceeds thereof, subject only to the
rights of creditors, are especially allocated to each such fund and constitute
the underlying assets of each such fund. The underlying assets of the fund are
segregated on the books of account and are to be charged with the liabilities in
respect to each such fund and with a share of the general liabilities of the
Trust. In the event of the termination and liquidation of the Trust, the holders
of the shares of any series are entitled to receive, as a class, the underlying
assets of the related Fund available for distribution to shareholders.
The Trust is currently operating, and intends to continue to operate,
in compliance with the Ohio law relating to business trusts. Under Ohio law, the
shareholders of a complying business trust have no liability to third persons
for obligations of the Trust, which are to be satisfied solely from the Trust's
property. 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 or her own bad faith, willful misfeasance, gross
negligence, or reckless disregard of his duties, (2) with respect to any matters
as to which he or she did not act in good faith and in a manner he reasonably
believed to be in, or 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 or she
had reasonable cause to believe was unlawful.
31
<PAGE> 48
CUSTODIAN
Chase Manhattan Bank N.A. ("Chase") serves as Custodian for assets of
the Fund. Pursuant to rules or other exemptions under the 1940 Act, the Trust
may maintain foreign securities and cash in the custody of certain eligible
foreign banks and securities depositories. There is a risk of possible losses
through holding securities in custodians and securities depositories in foreign
countries. Chase, together with certain of its foreign branches and agencies and
foreign banks and securities depositories acting as subcustodian to Chase will
maintain custody of the securities and other assets of foreign issuers. Under
these agreements, Chase has agreed to use reasonable care in the safekeeping of
these securities and to indemnify and hold harmless the Trust from and against
any loss which shall occur as a result of the failure of a foreign bank or
securities depository holding such securities to exercise reasonable care in the
safekeeping of such securities to the same extent as if the securities were held
in New York. Pursuant to requirements of the Securities and Exchange Commission,
Chase is required to use reasonable care in the selection of foreign
subcustodians, and to consider the financial strength of the foreign
subcustodian, its general reputation and standing in the country in which it is
located, its ability to provide efficiently the custodial services required, and
the relative costs for the services to be rendered by it. Each of the contracts
with foreign subcustodians to be used for the Fund has been approved by the
Board of Trustees, and the Board of Trustees will review annually the
continuance of foreign custodial arrangements. No assurance can be given that
expropriation, nationalization, freezes, or confiscation of assets that would
impact assets of the Trust will not occur, and shareholders bear the risk of
losses arising from these or other events.
ACCOUNTANTS
Arthur Andersen LLP, 425 Walnut Street, Cincinnati, Ohio 45202, is the
independent public accountant for the Trust.
LEGAL COUNSEL
Kirkpatrick & Lockhart acts as legal counsel to the Trust.
Blairlogie currently manages in excess of $ 500 million of international
assets.
32
<PAGE> 49
INTERNATIONAL
FUND
GRADISON-McDONALD
[Picture of desk with foreign money]
A COMMON STOCK FUND INVESTING
IN NON-UNITED STATES COMPANIES
1
<PAGE> 50
FAMILY OF MUTUAL FUNDS
INTERNATIONAL
Growth and Established
Income Value
Opportunity Ohio Tax-Free
Value Income
Government Intermediate
Income Municipal
Money
Market
2
<PAGE> 51
[Picture of
desk with
foreign money]
Whatever your goal 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 a retirement. Hesitate and
time will pass you by.
Increasingly, MUTUAL FUNDS are the
PREFERRED VEHICLE for starting and building
an investment program.
And today, GRADISON-McDONALD is a
preferred name in mutual funds
for a growing number of investors.
1-800-869-5999
3
<PAGE> 52
INTERNATIONAL
FUND
GRADISON-McDONALD INTERNATIONAL FUND SEEKS
TO PROVIDE GROWTH OF CAPITAL PRIMARILY
THROUGH INVESTMENTS IN THE STOCK OF
COMPANIES BASED OUTSIDE OF UNITED STATES.
A WORLD OF OPPORTUNITY
In 1970, the United States accounted for approximately
two-thirds of the world stock market capitalization.
Today, the U.S. accounts for only one-third. While
investing solely in the United States made sense in 1970,
following that same investment strategy today means
excluding a world of opportunities.
WORLD STOCK CAPITALIZATION
1970 1994
U.S. 66% U.S. 37%
Non-U.S. 34% Non-U.S. 63%
Source: Morgan Stanley Capital International
THE POTENTIAL FOR GREATER REWARD
Many international markets have historically delivered
significantly higher returns than the domestic market.
In fact, over the past twenty years, ten markets had
higher returns than the United States.
Source: Morgan Stanley Capital International. Perfomance is
in U.S. Dollars. Investors cannot invest in these unmanaged
indices. The returns shown above represent past performance
and do not reflect the performance of the Gradison-McDonald
International Fund. The returns shown above represent average
returns over a long period of time. Returns for shorter periods
of time differ and include negative returns. There is no
assurance that further returns will be similar to these past
returns.
<TABLE>
<CAPTION> Average
Annual Total
Returns
(20 years ending
12/31/94)
<S> <C>
HONG KONG 23.6%
NETHERLANDS 20.0%
UNITED KINGDOM 19.8%
SINGAPORE 17.7%
JAPAN 17.4%
SWEDEN 16.9%
BELGIUM 16.2%
SWITZERLAND 15.4%
FRANCE 15.2%
AUSTRALIA 14.4%
UNITED STATES 14.1%
</TABLE>
4
<PAGE> 53
LOWER VELOCITY THROUGH DIVERSIFICATION
A portfolio concentrated in just one market is obviously at risk if that market
declines. Investing a portion of a portfolio in a variety of different markets
with varying market cycles may tend to reduce the volatility of a portfolio.
The chart below illustrates the advantage of balancing a portfolio between
U.S. and foreign equities. Over a fifteen year period ending on December 31,
1994, a hypothetical equity portfolio holding 30% international stocks had a
lower level of volatility and greater return potential than a portfolio of 100%
U.S. stocks.
Description of Balancing Risk and Return Graph
The three horizonal axes are 14%, 15%, and 16%. The vertical axes are measures
of standard deviation of 3 to 6 with the higher numbers representing higher
volatility. The data points represent levels of total return and volitality of
varying percentages of U.S. stocks and foreign stocks. The following are the
approximate plot points:
% U.S. stocks Return Volatility standard
------------- ------ -------------------
Std. Deviation
--------------
1- 100% U.S. 14.50% 4.50
2- Less than above 14.75% 4.25
3- " 15.00% 4.125
4- 70% 15.125% 4.00
5- Less than above 15.25% 4.125
6- " 15.50% 4.25
7- " 15.50% 4.40
8- " 15.50% 4.60
9- " 15.40% 4.75
10- " 15.30% 5.10
11- 0% 15.10% 5.40
Source: Lipper Analytical Services, Inc. The chart shows the risk/return
profiles for equity portfolios with varying percentages of U.S. stocks,
represented by the S&P 500, and international stocks represented by the Morgan
Stanley Europe, Australia, and Far East Index ("EAFE") for the fifteen year
period ending December 31, 1994. Both indices are unmanaged, assume
reinvestment of dividends, and are not available as investments. The chart
reflects past performance of the indices, does not predict future results, is
for illustrative purposes only, and does not reflect the past or future
performance of the Gradison-McDonald International Fund. The returns of indices
do not reflect costs involved in investing in foreign securities. The fund's
investment of up to 30% of its assets in emerging market securities may result
in it being more volatile than the EAFE index.
STOCKS OF EMERGING ECONOMIES
Many of these emerging nations are marked by higher economic growth rates than
those of more developed countries. The Gradison-McDonald International Fund
works to take advantage of this growth potential by investing up to one-third
of its assets in emerging markets.
RISKS OF INTERNATIONAL INVESTING
Of course, international investing, particularly investing in emerging markets,
involves greater risks when compared to U.S. investing, such as political
instability, economic uncertainties, high volatility, illiquidity, and currency
fluctuation. The indices returns shown here represent past performance, do not
reflect the Gradison-McDonald International Fund, and are no guarantee of
future returns.
<PAGE> 54
A MANAGEMENT TEAM SELECTED FOR EXPERIENCE
The Gradison-McDonald International Fund is managed by Scotland-based
Blairlogie Capital Management. The firm's three founding partners have over 50
years of combined experience investing internationally. Blairlogie has made a
substantial commitment to technology and uses research and information systems
to actively monitor 44 international markets.
LOW MINIMUM INVESTMENT
The Gradison-McDonald International Fund has a low minimum initial investment
of $1,000. Additional investments can be made for as little as $50.
DIVIDEND REINVESTMENT
You may choose to receive dividends in cash or elect to have them automatically
reinvested in the Fund.
EXCHANGES
You can move money from one Gradison-McDonald fund to another at any time. The
Gradison-McDonald funds currently include:
Growth & Income Fund
Established Value Fund
Opportunity Value Fund
Ohio Tax-Free Income Fund
Intermediate Municipal Income Fund
Government Income Fund
U.S. Government Reserves
ACCESS
[Picture of foreign money]
You can redeem shares on any business day at the closing net asset value.
<PAGE> 55
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
<PAGE> 56
[Picture of phone and envelopes]
To find out more about the
GRADISION-McDONALD
INTERNATIONAL FUND
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 Fund from a Gradison-McDonald Mutual Funds
representative or your Investment Consultant. Read it care-
fully before investing. Upon redemption, the value of an
investment in the Fund may be worth more or less than its cost.
McDonald & Company Securities, Inc. --Distributor
8
