<PAGE> 1
As filed with the Securities and Exchange Commission on July 25, 1996
1933 Act Registration No. 2-84169
1940 Act File No. 811-3760
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 ( )
Pre-Effective Amendment No. ( )
Post-Effective Amendment No. 18 (X)
and/or
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 ( )
Amendment No. 19 (X)
----------
G R A D I S O N G R O W T H T R U S T
(Exact Name of Registrant as Specified in Declaration of Trust)
580 Walnut Street, Cincinnati, Ohio 45202
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (513) 579-
5700
Copy to:
Bradley E. Turner, Jr. Richard M. Wachterman
Gradison Growth Trust Gradison Growth Trust
580 Walnut Street 580 Walnut Street
Cincinnati, Ohio 45202 Cincinnati, Ohio 45202
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check
appropriate box)
immediately upon filing pursuant to paragraph (b) of
-- Rule 485.
X on July 29, 1996 pursuant to paragraph (b) of Rule 485.
days after filing pursuant to paragraph (a) of
-- Rule 485.
on ______________ pursuant to paragraph (a) of Rule
485.
--
----------
Registrant has heretofore registered an indefinite number of shares of
beneficial interest, without par value, pursuant to Rule 24f-2 under the
Investment Company Act of 1940, as amended. Registrant's Rule 24f-2 Notice was
filed on May 28, l996.
==============================================================================
<PAGE> 2
GRADISON GROWTH TRUST
CONTENTS OF POST-EFFECTIVE AMENDMENT
The post-effective amendment to the registration statement of Gradison Growth
Trust contains the following documents:
Facing Sheet
Contents of Post-Effective Amendment
Cross-Reference Sheet
Part A - Prospectus
Gradison-McDonald Established Value Fund ("GM-E/O")
Gradison-McDonald Opportunity Value Fund ("GM-E/O")
Gradison-McDonald International Fund ("GM-INT")
Gradison-McDonald Growth and Income Fund ("GM-GI")
The above referenced funds are hereinafter colletively referred to
as the "Funds".
Part B - Statement of Additional Information
The Funds
Part C - Other Information
Signature Page
Exhibits
- --------------------------
<PAGE> 3
GRADISON GROWTH TRUST
Cross-Reference Sheet
Pursuant to Item 501(b) of Regulation S-K
Under the Securities Act of 1933
Form N-1A
Item Number Location in Prospectus
- ----------- ----------------------
1. Cover Page . . . . . . . . . . . . Cover Page of Prospectus
2. Synopsis . . . . . . . . . . . . . Expense Summary
3. Condensed Financial Information . Performance Calculations
Financial Highlights
4. General Description of Registrant Cover Page; Investment
Objectives, Policies and Risks;
Foreign Securities; Futures
Transactions; General Risks,
Risk of Futures and Forward
Foreign Currency Contracts; Low
Capitalization Stocks;
Repurchase Agreements; Additional
Information about Investment
Restrictions of the Funds;
General Information
5. Management of Fund . . . . . . . . .Management of the Fund;
Dividends and Distributions
6. Capital Stock and Other Securities .Cover Page; Dividends and
Distributions; Taxes;
General Information
7. Purchase of Securities Being Purchases and Redemptions;
Offered Net Asset Value; Optional
Shareholder Services;
Distribution Plan;
Management of the Fund
8. Redemption or Repurchase . . . . Purchases and Redemptions
9. Pending Legal Proceedings . . . . Not applicable
Location in Statement
of Additional Information
-------------------------
10. Cover Page . . . . . . . . . . . Cover Page
11. Table of Contents . . . . . . . . Table of Contents
12. General Information and History . Not applicable
13. Investment Objectives and Policies. Risk Factors and Investment
Techniques; Investment
Restrictions; Portfolio
Transactions and Brokerage;
14. Management of the Fund . . . Trustees and Officers of the
Trust
15. Control Persons and Principal
Holders of Securities . . . . . . .Not applicable
<PAGE> 4
16. Investment Advisory and Other
Services . . . . . Investment Adviser
17. Brokerage Allocation and Other
Practices . . . . . . . . . . . . . Portfolio Transactions and
Brokerage
18. Capital Stock and Other Securities Description of the Trust
19. Purchase, Redemption and Pricing of
Securities Being Offered . . . . . Purchase of Shares; Redemption
of Shares; Net Asset Value
20. Tax Status . . . . . . . . . . Taxes
21. Underwriters . . . . . . . . . . . Investment Adviser
22. Calculation of Yield Quotations
of Money Market Funds . . . . . . .Not applicable
23. Financial Statements . . . . . . Financial Statements
<PAGE> 5
GRADISON-MCDONALD
ESTABLISHED VALUE FUND
GROWTH & INCOME FUND
OPPORTUNITY VALUE FUND
INTERNATIONAL FUND
PROSPECTUS DATED JULY 29, 1996
This Prospectus contains information about the four stock mutual funds listed
above (the "Funds") which are separate series portfolios of the Gradison Growth
Trust (the "Trust"), an open-end management investment company. McDonald &
Company Securities, Inc. ("McDonald"), through its Gradison Division
("Gradison"), is the investment adviser and distributor ("Distributor") for the
Funds. Blairlogie Capital Management ("Blairlogie") is the investment
sub-adviser ("Portfolio Manager") to the International Fund.
This Prospectus is designed to provide you with information that you should know
before investing and should be retained for future reference. Statements of
Additional Information for the Funds, dated July 29, 1996 have been filed with
the Securities and Exchange Commission and are incorporated herein by reference.
The Statements are available upon request without charge from the Funds at 580
Walnut Street, Cincinnati, Ohio 45202 or by calling the phone numbers provided
below.
For all information (including purchases, redemptions, and most recent share
prices), call 579-5700 from Cincinnati, Ohio or 1-800-869-5999 toll free.
The Gradison-McDonald International Fund ("International Fund") invests in
foreign securities which presents special risks and in emerging market countries
which presents additional risks. See "Foreign Securities" in this Prospectus.
Shares of the Funds are not deposits or obligations of any bank or other
depository institution and are not guaranteed or insured by the Federal Deposit
Insurance Corporation or any other government agency.
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.
<PAGE> 6
EXPENSE SUMMARY
<TABLE>
<CAPTION>
ESTABLISHED GROWTH & OPPORTUNITY
VALUE INCOME VALUE INTERNATIONAL
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load on purchases None None None None
- -----------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees(1) .58% .00% .69% .80%
12b-1 Fees(1) .45% .50% .46% .00%
Other Expenses(1) .12% 1.00% .26% 1.20%
---- ---- ---- ----
TOTAL FUND OPERATING EXPENSES(1) 1.15% 1.50% 1.41% 2.00%
==== ==== ==== ====
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The Funds are sold without a front-end or back-end sales charge. The Funds pay
an annual asset-based distribution expense of up to .25% and a service fee of up
to .25% of net assets. As a result of the distribution expense fee, long-term
shareholders may pay more than the economic equivalent of the maximum sales
charge permitted under the rules of the National Association of Securities
Dealers. However, in order for a Fund investor to exceed the amount of the
maximum permitted front-end sales charge, a continuous investment in the Fund
for 25 years would be required.
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 expenses of the Funds, see "Management
of the Funds.")
Example: You would pay the following expenses on a $1,000 investment assuming a
5% annual return(2) and redemption at the end of each period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
ESTABLISHED VALUE FUND $ 12 $ 37 $ 63 $140
GROWTH & INCOME FUND $ 15 $ 47 $ 82 $179
OPPORTUNITY VALUE FUND $ 14 $ 45 $ 77 $169
INTERNATIONAL FUND $ 20 $ 63 $108 $233
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
(1) The expenses of the International Fund and the Management Fees, Other
Expenses, and Total Fund Operating Expenses categories of the Growth & Income
Fund are after fee waivers and expense reimbursement by the investment adviser.
Otherwise, the Management Fees, 12b-1 Fees, Other Expenses and Total Fund
Operating Expenses categories of the International Fund would be 1.00%, 0.50%,
2.23%, and 3.73% respectively, and the Management Fees, Other Expenses, and
Total Fund Operating Expenses categories of the Growth & Income Fund would be
.65%, 1.72%, and 2.87%, respectively. See "Management of the Funds."
(2) 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 any Fund.
2
<PAGE> 7
FINANCIAL HIGHLIGHTS
The tables below present the financial highlights of the Funds' operations for
the periods presented. The information is expressed in terms of a single share
outstanding throughout each year. The financial highlights for periods ended on
April 30, 1993 and thereafter have been audited by Arthur Andersen LLP,
independent public accountants, whose unqualified report appears in the
Statement of Additional Information for each respective fund. The financial
highlights for periods ended prior to April 30, 1993 were audited by other
accountants.
<TABLE>
<CAPTION>
GRADISON-MCDONALD ESTABLISHED VALUE FUND
11
YEAR MONTHS YEAR ENDED APRIL 30,
ENDED ENDED ----------------------------------------------------------------------
3/31/96 3/31/95(1) 1994 1993 1992 1991 1990 1989 1988 1987
------- ---------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning
of period $23.381 $22.515 $21.375 $18.366 $17.754 $17.189 $18.165 $16.270 $17.685 $15.044
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .436 .376 .256 .286 .386 .511 .723 .548 .433 .370
Net realized and
unrealized gains or losses
on investments 5.190 1.520 2.104 3.278 .916 .804 (.474) 2.157 .092 3.791
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total income from
investment operations 5.626 1.896 2.360 3.564 1.302 1.315 .249 2.705 .525 4.161
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from
net investment income (.430) (.370) (.220) (.285) (.420) (.548) (.720) (.495) (.500) (.340)
Distributions from realized
capital gains (1.010) (.660) (1.000) (.270) (.270) (.202) (.505) (.315) (1.440) (1.180)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions
to shareholders (1.440) (1.030) (1.220) (.555) (.690) (.750) (1.225) (.810) (1.940) (1.520)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value at end
of period $27.567 $23.381 $22.515 $21.375 $18.366 $17.754 $17.189 $18.165 $16.270 $17.685
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total return 24.84% 8.85%(2) 11.30% 19.86% 7.59% 8.04% 1.11% 17.24% 3.62% 29.86%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period
(in millions) $ 366.4 $ 277.4 $ 253.3 $ 203.6 $ 175.5 $ 150.5 $ 134.6 $ 102.2 $ 69.2 $ 53.8
Ratio of expenses to
average net assets 1.15% 1.20%(3) 1.22% 1.28% 1.31% 1.39% 1.40% 1.45% 1.57% 1.61%
Ratio of net investment income
to average net assets 1.70% 1.87%(3) 1.15% 1.48% 2.12% 3.10% 4.14% 3.34% 2.67% 2.50%
Portfolio turnover rate 18.48% 24.23% 38.39% 28.08% 67.96% 73.88% 63.63% 49.87% 25.99% 75.94%
</TABLE>
On October 4, 1991, McDonald & Company Securities, Inc. became investment
adviser of the Fund as a result of a merger with Gradison & Company
Incorporated.
(1) The Fund changed its fiscal year to March 31.
(2) Total return represents the actual return over the period and has not
been annualized.
(3) Annualized.
3
<PAGE> 8
<TABLE>
<CAPTION>
GRADISON-McDONALD GROWTH & INCOME FUND
YEAR ENDED FOR THE PERIOD
3/31/96 2/28/95* TO
3/31/95
<S> <C> <C>
Net asset value at beginning of period $ 15.189 $ 15.000
======== ========
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .173 .030
Net realized and unrealized gains on investments 3.317 .159
-------- --------
Total income from investment operations 3.490 .189
-------- --------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income (.185) --
Distributions from realized capital gains (.035) --
-------- --------
Total distributions to shareholders (.220) --
-------- --------
Net asset value at end of period $ 18.459 $ 15.189
======== ========
Total return 23.09% 1.27%(1)
======== ========
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (in millions) $ 12.0 $ 1.2
RATIOS NET OF EXPENSES WAIVED AND REIMBURSED BY THE ADVISER(2):
Ratio of expenses to average net assets 1.50% 0.00%(3)
Ratio of net investment income to average net assets 1.39% 4.09%(3)
RATIOS ASSUMING NO ADVISER WAIVER OR REIMBURSEMENT OF EXPENSES(2):
Ratio of expenses to average net assets 2.87% 13.88%(3)
Ratio of net investment income (loss) to average net assets .01% (9.79%)(3)
Portfolio turnover rate 3.07% 3.62%
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return represents the actual return over the period and has not
been annualized.
(2) The adviser absorbed expenses of the Fund through waiver of fees and
reimbursement of certain expenses.
(3) Annualized.
*Date of public offering
4
<PAGE> 9
<TABLE>
<CAPTION>
GRADISON--MCDONALD OPPORTUNITY VALUE FUND
11
MONTHS YEAR ENDED APRIL 10,
ENDED ENDED --------------------------------------------------
3/31/96 3/31/95(1) 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning
of period $18.100 $18.348 $17.547 $16.462 $14.767 $13.644 $13.499
------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 193 .136 .086 .081 .173 .245 .334
Net realized and unrealized
gains or losses on
investments 4.731 .176 1.585 1.744 2.467 1.198 .401
------- ------ ------- ------- ------- ------- -------
Total income (loss) from
investment operations 4.924 .312 1.671 1.825 2.640 1.443 .735
------- ------ ------- ------- ------- ------- -------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net
investment income (.185) (.120) (.070) (.100) (.270) (.252) (.330)
Distributions from realized
capital gains (.575) (.440) (.800) (.640) (.675) (.068) (.260)
Return of capital -- -- -- -- -- -- --
------- ------ ------- ------- ------- ------- -------
Total distributions to
shareholders (.760) (.560) (.870) (.740) (.945) (.320) (.590)
------- ------ ------- ------- ------- ------- -------
Net asset value at end
of period $22.264 $18.100 $18.348 $17.547 $16.462 $14.767 $13.644
======= ======= ======= ======= ======= ======= =======
Total return 28.00% 1.75%(2) 9.75% 11.57% 18.60% 10.94% 5.16%
======= ======= ======= ======= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of
period (in millions) $ 103.0 $ 84.7 $ 83.3 $ 68.2 $ 47.4 $ 28.7 $ 23.0
Ratio of expenses to
average net assets 1.41% 1.37%(3) 1.38% 1.44% 1.49% 1.61% 1.52%
Ratio of net investment
income to average net
assets .95% .84%(3) .47% .61% 1.32% 2.03% 2.47%
Portfolio turnover rate 23.98% 31.90% 40.41% 39.00% 64.25% 63.88% 36.57%
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
GRADISON--MCDONALD OPPORTUNITY VALUE FUND
YEAR ENDED APRIL 10,
-----------------------------
1989 1988 1987
------- ------- -------
<S> <C> <C> <C>
Net asset value at beginning
of period $12.967 $13.233 $13.161
------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .232 .162 .105
Net realized and unrealized
gains or losses on
investments 1.200 (.178) .807
------- ------- -------
Total income (loss) from
investment operations 1.432 (.016) .912
------- ------- -------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net
investment income (.180) (.120) (.040)
Distributions from realized
capital gains (.720) (.130) (.380)
Return of capital -- -- (.420)
------- ------- -------
Total distributions to
shareholders (.900) (.250) (.840)
------- ------- -------
Net asset value at end
of period $13.499 $12.967 $13.233
======= ======= =======
Total return 11.71% 0.25% 7.34%
======= ======= =======
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of
period (in millions) $ 20.1 $ 17.7 $ 20.3
Ratio of expenses to
average net assets 1.84% 1.83% 1.73%
Ratio of net investment
income to average net
assets 1.84% 1.22% .90%
Portfolio turnover rate 35.79% 73.93% 64.64%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
On October 4, 1991, McDonald & Co. Securities, Inc. became investment adviser of
the Fund as a result of a merger with Gradison & Company Incorporated.
(1) The Fund changed its fiscal year to March 31.
(2) Total return represents the actual return over the period and has not
been annualized.
(3) Annualized.
5
<PAGE> 10
<TABLE>
<CAPTION>
GRADISON-McDONALD
INTERNATIONAL FUND
FOR THE PERIOD
5/31/95* TO
3/31/96
<S> <C>
Net asset value at beginning of period $ 15.000
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .065
Net realized and unrealized gain on investments .799
--------
Total income from investment operations .864
--------
Dividends to shareholders from net investment income (.042)
--------
Net asset value at end of period $ 15.822
========
Total return(1) 5.76%
========
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (in millions) $ 15.3
RATIOS NET OF EXPENSES WAIVED AND REIMBURSED BY THE ADVISER(2)(3);
Ratio of expenses to average net assets 1.75%
Ratio of net investment income to average net assets .70%
RATIOS ASSUMING NO ADVISER WAIVER OR REIMBURSEMENT OF EXPENSES(2)(3):
Ratio of expenses to average net assets 3.73%
Ratio of net investment loss to average net assets (1.28%)
Portfolio turnover rate 71.78%
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return represents the actual return over the period and has not
been annualized.
(2) The adviser absorbed expenses of the Fund through waiver of fees and
reimbursement of certain expenses.
(3) Annualized.
*Date of public offering
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The investment objective of the Gradison-McDonald Established Value Fund
("Established Fund") and the Gradison-McDonald Opportunity Fund ("Opportunity
Fund") is long-term capital growth by investing primarily in common stocks. The
investment objective of the Gradison-McDonald Growth & Income Fund ("Growth &
Income Fund") is long-term growth of capital, current income, and growth of
income consistent with reasonable investment risk. The investment objective of
the International Fund is growth of capital. The Funds' investment objectives
cannot be changed without shareholder approval.
There can be no assurance that the Funds will achieve their investment
objectives. The value of the Funds' investments and the income they generate
varies from day to day, generally reflecting changes in market conditions,
interest rates, and other company, political, and economic news. Stocks are
subject to greater price volatility than
6
<PAGE> 11
fixed income securities and money market investments. While stocks have
historically shown greater growth potential than fixed income securities and
money market securities, they may decline over short or even extended periods.
The fixed income securities in which the Funds may invest have market values
which tend to vary inversely with the level of interest rates - when interest
rates rise, their value will tend to decline and vice versa. When you redeem
your Fund shares, they may be worth more or less than what you paid for them.
INVESTMENT POLICIES - ESTABLISHED AND OPPORTUNITY FUNDS
The Established Fund invests primarily in common stocks of companies that are
considered by Gradison to be undervalued, selected from those in the Standard &
Poor's 500 Composite Stock Price Index ("S&P 500") and from among other
companies with market capitalizations of $500 million or more. The Opportunity
Fund invests primarily in common stocks of smaller companies that are exhibiting
high earnings growth in relation to their price-earnings ratio. These companies
are limited to approximately 2,000 stocks (most of which are listed on the New
York or American Stock Exchanges) and do not include companies in the S&P 500.
These companies generally will have market capitalizations of less than $500
million. Investment in smaller company stocks presents additional risks. See
"Low Capitalization Stocks."
In the Established and Opportunity Funds, investments are made in companies that
meet certain objective requirements with respect to earnings, price-earnings
ratios, price-book ratios, rate of return on shareholders' equity, and other
similar factors. A disciplined approach, using computer modeling methodology is
used as the primary factor in making investment decisions with respect to these
Funds. The methodology generates recommendations on a monthly basis. Gradison
continuously monitors the recommendations and acts at any time during the month,
if necessary, to better achieve the objective of the Funds. Additionally,
Gradison continuously monitors the disciplined approach and will effect
modifications to the methodology if such modifications could better achieve the
objective of the Funds. (See "Advisory Agreement" in the Statement of Additional
Information.)
William J. Leugers, Jr., Executive Vice President of the Trust, has been
primarily responsible for the day-to-day management of these Funds' portfolios
since the inception of the Established and Opportunity Funds. During the past
five years, Mr. Leugers has been Executive Vice President of Gradison. Although
investments in these Funds are made for the purpose of long-term capital growth
rather than short-term profits, the Funds are not restricted with regard to
portfolio turnover.
Under normal circumstances, at least 70% of each Fund's assets will be invested
in common stocks. Each Fund may invest its remaining assets in U.S. Government
obligations, certificates of deposit, commercial paper, other money market
obligations, and repurchase agreements (collectively "Reserves"). The Funds'
maintenance of Reserves is primarily to maintain liquidity for redemptions and
to lower the volatility of net asset value. For temporary defensive purposes,
the portion of the Funds' assets invested in Reserves may be increased without
limitation.
The Established and Opportunity Funds will not purchase the securities of any
issuer if, as a result either Fund: (i) would own more than 10% of the
outstanding voting securities of such issuer; (ii) such holdings would amount to
more than 5% of a Fund's total assets; or (iii) more than 25% of its assets
would be concentrated in any one industry. The investment restrictions in the
previous sentence may not be changed without shareholder approval.
7
<PAGE> 12
INVESTMENT POLICIES - GROWTH & INCOME FUND
The Growth & Income Fund invests primarily in common stocks of companies that it
considers undervalued and which offer earnings growth potential while paying
current dividends. Particular emphasis will be placed on the identification of
dividend paying securities issued by companies which have, on average, records
of historic growth in earnings that are higher than the growth in earnings of
the S&P 500. The companies which will be sought will also have had higher
returns on shareholder equity than the S&P 500. Gradison believes that above
average dividend returns and below average price/earnings ratios are factors
that generally tend to moderate risk and afford opportunity for appreciation of
securities, while also providing current income. The selection process also
utilizes research oriented to quality, predictability of operating growth, and
financial strength. The equity securities invested in by the Growth & Income
Fund will usually be dividend paying securities although securities that are not
paying dividends but offer prospects for growth of capital or future income may
be purchased. In selecting equity securities for investment, no specific
criteria regarding the length of time the company has paid dividends or the rate
of growth of a company's dividend are utilized. The Growth & Income Fund will
generally invest in securities of companies with capitalizations in excess of
$500 million, the securities of which are traded on recognized securities
exchanges or in the over-the-counter market.
The Growth & Income Fund ordinarily invests principally in common stocks and
avoids market-timing or speculating on broad market conditions. It may also
invest in securities convertible into common stocks, warrants, straight debt
securities (rated in the top three quality categories by Standard & Poor's
Corporation or Moody's Investors Service, Inc. or determined to be of equivalent
quality by Gradison), cash equivalents, U.S. Government securities, or
non-convertible preferred stocks. The cash equivalents in which it may invest
are short term U.S. Government obligations, certificates of deposit of domestic
depository institutions, high grade commercial paper, and fully collateralized
repurchase agreements with banks or securities dealers.
It is the policy of the Growth & Income Fund not to engage in trading for
short-term profits. Nevertheless, changes in the portfolio will be made promptly
when determined to be advisable by reason of developments not foreseen at the
time of the initial investment decision, and usually without reference to the
length of time a security has been held. Accordingly, portfolio turnover rate
will not be considered a limiting factor in the execution of investment
decisions.
Julian C. Ball, Executive Vice President and Portfolio Manager of the Growth &
Income Fund, has been primarily responsible for the day-to-day management of its
portfolio since its inception. Mr. Ball has been a Vice President of McDonald
since July of 1994. Prior to that, he was Vice President and Portfolio Manager
at Duff & Phelps Investment Management Company. Mr. Ball is a Chartered
Financial Analyst.
With respect to 75% of its total assets, the Growth & Income Fund will not
purchase securities of any issuer (other than securities issued or guaranteed by
the U.S. Government or its agencies or instrumentalities) if, as a result, more
than 5% of its assets would be invested in securities of that issuer or it would
hold more than 10% of the voting secu-
8
<PAGE> 13
rities of that issuer. The Growth & Income Fund may not purchase the securities
of any issuer (other than securities issued or guaranteed by the U.S. Government
or its agencies or instrumentalities) if, as a result, more than 25% of its
total assets would be invested in the securities of companies whose principal
business activities are in the same industry, and it may not borrow money,
except from banks as a temporary measure or for extraordinary or emergency
purposes, and then only in amounts not exceeding 10% of its total assets. While
any borrowing of greater than 5% of its assets occurs, it will not purchase
additional portfolio securities. The foregoing restrictions may not be changed
without shareholder approval.
INVESTMENT POLICIES - INTERNATIONAL FUND
The International Fund invests primarily in a diversified portfolio of common
stocks of non-United States companies in both "emerging market" countries and
more developed countries. It generally will invest a maximum of 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 its portfolio between
securities of emerging and developed countries, the percentage of the Fund's
assets invested in emerging countries could temporarily exceed 30% of its assets
as a result of market appreciation or purchase of such securities. Some of the
countries considered to be emerging market countries and in which investments
may be made are:
Argentina Indonesia Portugal
Brazil Jordan South Korea
Chile Malaysia Sri Lanka
China (Hong Kong) Mexico Taiwan
Colombia Pakistan Thailand
Greece Peru Turkey
India Philippines Venezuela
For purposes of allocating 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 its securities are primarily traded,
the country from which it derives a significant portion of its goods or the
country where its services are produced.
The Portfolio Manager applies two levels of screening in selecting investments.
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 International Fund invests will be
denominated in foreign currencies and the Fund may engage in foreign currency
transactions to attempt to protect itself against fluctuations in currency
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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 International 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 International Fund will invest primarily (normally at least 65% of its
assets) in common stock of non-United States companies. It may maintain a
portion of its assets, which will usually not exceed 10%, in U.S. Government
securities, high-quality debt securities (the maturity or remaining maturity of
which will not exceed five years), 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 its expenses and to permit it to meet
redemption requests. The International Fund may temporarily not be invested
primarily in equity securities after receipt of significant new monies and may
temporarily not contain the number of stocks in which it normally invests if it
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 International Fund to normally be as fully invested in
common stock as practicable at all times and not to attempt to "time" the
market. Accordingly, investors bear the risk of general declines in stock
prices, and that exposure to such declines will not be lessened by investment in
fixed income 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, an unlimited portion of its assets may be
invested 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
International Fund may utilize, as well as information on the types of
securities in which it may invest, including information on U.S. Government
securities, corporate debt 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.
The International Fund will be managed without restriction as to portfolio
turnover, except as is 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
transaction costs (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.
The International 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. It 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 International Fund will not
concentrate more than 25% of its assets
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in any particular industry, except that this restriction does not apply to U.S.
Government securities. It may borrow from banks as a temporary measure 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.
In connection with permissible borrowings, securities owned may be transferred
as collateral. The foregoing restrictions may not be changed without shareholder
approval.
The International Fund may invest in illiquid securities, but 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 its net assets (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 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 holding of that security may be deemed to be
illiquid.
James Smith of Blairlogie is primarily responsible for day-to-day portfolio
management of the International 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.
FOREIGN SECURITIES
The International 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 U.S. 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.
The International Fund may invest in other investment companies which invest in
foreign securities, including investment companies which invest in indices of
foreign securities of a particular country, subject to the require-
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ments of applicable law. Such investment will result in shareholders, in effect,
paying multiple fees since such investment companies incur expenses similar to
the Fund's.
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; 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 by custodians and in
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 International Fund 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, 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. 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 International Fund's investment.
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<PAGE> 17
FUTURES TRANSACTIONS
The International 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, stock index
futures contracts may be purchased, 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 futures contracts are entered into 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 International Fund's
portfolio, after taking into account unrealized profits and unrealized losses on
any contracts entered into. This limitation does not limit the percentage of the
International Fund's assets at risk to 5%. The International Fund may enter into
futures contracts only to the extent that obligations under such contracts
represent not more than 20% of its assets. These guidelines may be modified by
the Trust's Board of Trustees without a shareholder vote.
The International 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. It 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 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 might be realized in trading could be eliminated by
adverse changes in the exchange rate of the currency in which the transaction is
denominated, or losses could be incurred 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.
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FORWARD FOREIGN CURRENCY CONTRACTS
The International Fund may purchase and sell forward currency contracts to
attempt to manage its foreign currency exchange rate exposure. For example, it
may use forward contracts to shift its exposure to foreign currency exchange
rate changes from one foreign currency to another. If securities denominated in
a foreign currency are owned and the Portfolio Manager believes that this
currency will decline relative to another currency, the International 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. It
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 exposure to foreign currency exchange rate
fluctuations.
RISKS OF FUTURES AND FORWARD FOREIGN CURRENCY CONTRACTS
Although the International Fund might not employ any of these investment
techniques, 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 the skills and techniques used to trade
futures contracts or to use forward currency contracts are different from those
needed to select portfolio securities; (4) lack of assurance that a liquid
secondary market will exist for any particular futures contract at any
particular time; (5) the possible inability 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 to sell a security at a disadvantageous time, due to the need 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 Internal Revenue Code. See "Taxes" in the International Fund's
Statement of Additional Information. If the Portfolio Manager incorrectly
forecasts securities market movements or currency exchange rates in utilizing a
strategy, the International Fund would be in a better position if it had not
hedged at all. If it 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 these hedging or yield enhancement strategies will succeed.
ADDITIONAL INFORMATION ABOUT INVESTMENT RESTRICTIONS OF ALL FUNDS
The Funds are subject to investment restrictions that are described more fully
in the Statements of Additional Information. Those investment restrictions so
designated and the investment objective of each Fund are "fundamental policies",
which means that they may not be changed without a vote of a majority of the
outstanding voting securities of that Fund. All other investment policies and
practices described in this Prospectus and in the Statement
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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 a 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.
LOW CAPITALIZATION STOCKS
The International Fund may invest in, and the Opportunity Fund's equity
investments consist almost exclusively of the common stock of companies with
market capitalization of less than $500 million. Investments in larger companies
present certain 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, and 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 Funds of securities to meet redemptions may require the
Funds to sell these securities at a disadvantageous time, or at disadvantageous
prices, or to make many small sales over a lengthy period of time.
REPURCHASE AGREEMENTS
All of the Funds may enter into repurchase agreement transactions. Repurchase
agreements are transactions by which a Fund purchases obligations of the U.S.
Government with the seller concurrently agreeing to repurchase the securities at
the Fund's cost plus interest within a specified time (usually one business day)
or upon demand by the Fund. In these transactions, the security subject to
repurchase is held by the Fund's custodian, and the Fund ensures on a daily
basis that the market value of the security, including accrued interest, is no
less than the price at which the seller is required to repurchase it. If a
seller fails to repurchase the security, the Fund could incur costs to sell the
security to another party and possibly a loss if the sale is at less than the
repurchase price. Under certain circumstances, a Fund could also be delayed or
limited in disposing of a security, which could result in a decline in its value
or loss of interest. The Funds may engage in repurchase agreement transactions
only with domestic banks and securities dealers which Gradison believes present
minimal credit risk. These investment policies and procedures are not
fundamental policies and may be changed by the Trustees without shareholder
approval.
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PURCHASES AND REDEMPTIONS
HOW TO PURCHASE SHARES
You may purchase shares of any Fund, without initial sales charge, by bringing
or mailing funds to Gradison, McDonald, or the Fund. Checks should be made
payable to the order of the Fund(s) in which you desire to invest and should be
accompanied by your account name, and account number if you have one. A
completed Account Information Form must accompany or precede the initial
purchase. The minimum investment required to open an account in a Fund is $1,000
and additional investments must be 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
Funds normally make 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 Funds 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 a 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 a Fund in advance of a share
redemption.
TRANSACTIONS THROUGH GRADISON, MCDONALD, AND OTHER AGENTS
Investors who maintain brokerage accounts with Gradison or McDonald may purchase
or redeem Fund shares without incurring any fees. Shares may also be purchased
or redeemed through a broker-dealer (other than Gradison or McDonald),
investment counselor or other agent or fiduciary, which may charge a fee for its
services. The Funds may agree to modify or waive their purchase and redemption
procedures or requirements in order to facilitate these transactions. For
example, investors may purchase shares through broker-dealers who are members of
the National Association of Securities Dealers, Inc. under terms that require
payment within three business days of purchase. No such modification or waiver
will result in an investor being assessed a fee by a 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. If payment for a purchase of shares is not
received from a broker-dealer within the time required as set forth above or if
a purchaser's check is returned
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to a Fund as uncollectible, the purchase is subject to cancellation and the
broker-dealer or purchaser, as the case may be, will be responsible for any loss
incurred by a Fund. To redeem share certificates, the certificates must be
presented to the Fund with proper endorsements and signature guarantees, a
procedure that may result in delay. The Funds do not currently issue share
certificates. Shareholders receive periodic statements of share ownership and
transactions.
Under extraordinary circumstances, such as periods of drastic economic or market
changes, it is possible that you might not be able to reach the Funds 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 Funds' 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 Funds, Gradison, McDonald, and their officers and employees will not be
liable for following instructions communicated by telephone that are reasonably
believed to be genuine. The Funds will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine, and if they do not, in
the view of the Securities and Exchange Commission, they may be liable for any
losses resulting from unauthorized instructions. Telephone transactions are
available to all shareholders as a standard service.
DIVIDENDS AND DISTRIBUTIONS
Substantially all of the net investment income of the Established and Growth &
Income Funds is distributed to shareholders as quarterly dividends. Net
investment income is distributed to shareholders of the Opportunity Fund
semi-annually and to shareholders of the International Fund annually. Any net
capital gains (net profits on the sale of portfolio securities, less any
available capital loss carryovers) realized by the Funds are 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 select the Distribution Plan, all income dividends and net realized
capital gain distributions from a Fund are automatically paid in additional
shares of the Fund at the net asset value for such shares on the date the
distributions are payable. Shareholders will receive a statement confirming each
dividend or distribution.
TAXES
The Funds intend to operate as "regulated investment companies" under the
Internal Revenue Code. In any fiscal year in which the Funds so qualify and
distribute to shareholders all of their net investment income and net capital
gains, the Funds themselves are relieved of federal income tax. 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 any
distributions of net realized short-term capital gains are taxable to
shareholders as ordinary income. Long-term capital gains distributions are
taxable as such regardless of how long shares of a Fund have been held. Each
year, shareholders will be notified of the amount and federal tax status of all
dividends and capital gains paid during the prior year.
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Special rules may apply if the International 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 International
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 International 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 of the International Fund under "Taxes."
Shareholders of the International 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 that Fund. If, at the end of the fiscal
year of the International Fund, more than 50% of the value of its total assets
is represented by stock or securities of foreign corporations, it may 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. If the International Fund does not make the election, shareholders
may not claim the foreign tax credit or deduction, but the dividends they
receive and report as income will be net of such foreign tax paid by the Fund.
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
Statements 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 Funds are 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 Exchange is open. The net asset value per share
of the Funds, which is the price at which shares are purchased and redeemed, is
computed by dividing the value of each Fund's net assets (assets minus
liabilities) by the number of shares outstanding. Securities owned by the Funds
are generally valued on the basis of market quotations, including prices
provided by pricing services.
The value of portfolio securities in the International Fund 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 the closing of trading on the New York Stock Exchange, 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 International 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. It is
possible that the calculation of the net asset value of the International Fund
may not take place contemporaneously with the determination of the prices of
portfolio securities used in such
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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
International Fund's management and approved in good faith by or under the
direction of 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 Funds.
DISTRIBUTION PLAN
You may elect (on the Account Information Form) to automatically receive cash
payments of dividends and/or capital gains distributions. (For this purpose,
short-term capital gains distributions are considered dividends.) You may change
or terminate this election at any time by written notice to a 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 a Fund.
Because the Funds 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 Funds may be exchanged, without administrative fees, for shares of
any other Gradison-McDonald fund and for shares of certain federal/Ohio tax-free
money market funds. You may request exchanges by telephoning or writing the
Funds. Before making an exchange, you should read the prospectus of the fund in
which you are investing which is available upon request. An exchange may not be
made from a Fund to the fund in which you are investing 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 an initial sales charge will be
subject to such sales charge except to the extent that a sales charge has
previously been paid in connection with the shares. 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.
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<PAGE> 24
MANAGEMENT OF THE FUNDS
The Trust's Board of Trustees is responsible for the direction and supervision
of the Funds' operations. Subject to the authority of the Board of Trustees,
McDonald, through Gradison, manages the investment and reinvestment of the
assets of the Funds (except for the International Fund), and provides its
employees to act as the officers of the Trust who are responsible for the
overall management of the Funds. McDonald, a wholly owned subsidiary of McDonald
& Company Investments, Inc., McDonald Investment Center, 800 Superior Avenue,
Cleveland, Ohio 44114, is an investment adviser and a securities broker-dealer.
McDonald, including Gradison's predecessor, has served as an investment adviser
to investment companies since 1976.
Blairlogie, the Portfolio Manager of the International Fund, 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 ("PIMCO") 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 that PIMCO will acquire one-fifth of its 25% interest
annually, beginning December 31, 1997. Blairlogie Capital Management Ltd., the
predecessor investment adviser to Blairlogie, commenced operations in 1992.
Accounts managed by Blairlogie had combined assets as of December 31, 1995, in
excess of $600 million. Blairlogie's address is 4th Floor, 125 Princes Street,
Edinburgh EH2 4AD, Scotland. Blairlogie is registered as an investment adviser
with the Securities and Exchange Commission of the United States and the
Investment Management Regulatory Organization of the United Kingdom. PFAMCo and
its affiliates own a substantial interest in PIMCO and indirectly hold a major
interest in PIMCO Partners, G.P., the general partner of PIMCO.
For the year or period ended March 31, 1996, the Established Fund, the
Opportunity Fund, and the Growth & Income Fund paid McDonald investment advisory
fees, respectively of .58%, .69% and 0% (.65% without consideration of fee
waiver by McDonald) of each Fund's average assets. The International Fund pays
an investment advisory fee to McDonald at the rate of 1.00% of the first $100
million, .90% of the next $150 million, .80% of the next $250 million, and .75%
of net assets in excess of $500 million. McDonald compensates Blairlogie as
Portfolio Manager 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
International Fund's investments.
McDonald provides services to the Funds pursuant to a Transfer Agency and
Accounting Services Agreement. That Agreement provides for the payment by the
Established, Opportunity, and Growth & Income Funds to McDonald of $18.25 per
non-zero balance shareholder account per year plus out-of-pocket costs for
acting as transfer agent and an accounting services fee based on the Fund's
average daily net assets at an annual rate of .03% on the first $100 million,
.02% of the next $100 million, and .01% on any amount in excess of $200 million,
with a min-
20
<PAGE> 25
imum annual fee of $40,000 per year and for payment by the International Fund of
$19.25 per non-zero balance shareholder account per year plus out-of-pocket
costs for acting as transfer agent and an accounting services fee based on the
Fund's average daily net assets at an annual rate of .045% on the first $100
million, .030% of the next $100 million, and .015% on any amount in excess of
$200 million, with a minimum annual fee of $60,000 per year.
Registered broker-dealers, third party administrators of tax-qualified
retirement plans, and other entities which establish omnibus accounts with the
Funds may provide sub-transfer agency, recordkeeping, or similar services to
participants in the omnibus accounts which reduce or eliminate the need for
identical services to be provided on behalf of the participants by the Funds'
transfer agent. In such cases, the Funds may, subject to approval by the Board
of Trustees of the Trust, pay the entity a sub-transfer agency or recordkeeping
fee in the annualized amount up to each Fund's per account transfer agency fee
per participant in the entity's omnibus account. Entities receiving such fees
may also receive 12b-1 fees described in the next paragraph.
Under the terms of a distribution expense/service plan adopted pursuant to Rule
12b-1 under the Investment Company Act of 1940, the Funds make service fee
payments to the Distributor for providing personal services to shareholders of
the Funds, including responding to shareholder inquiries and providing
information to shareholders about their accounts, at an annual rate of up to
.25% of the assets of the Funds. The Funds also annually pay the Distributor a
distribution fee in an additional amount of up to .25% of the Funds' assets. The
distribution fee is paid to the Distributor for general distribution services
and as compensation for selling shares of the Funds. These fees are calculated
on a daily basis and paid to the Distributor monthly. The Distribution may make
payments to financial intermediaries and securities dealers of those amounts.
McDonald may, from time to time, agree to waive the receipt of management fees
from a Fund and/or reimburse a Fund for other expenses in order to limit a
Fund's expenses to a specified percentage of average net assets. Until August 1,
1997, McDonald has agreed to limit the expenses of the Growth & Income and
International Funds to no more than 1.50% and 2.00%, respectively of their net
assets, excluding extraordinary items. 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 a 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.
PERFORMANCE CALCULATIONS
From time to time the Funds' "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 a Fund may be presented in different
ways. One way will show the average annual compounded rate of return over an
indicated period that would equate an initial amount of money invested in a 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
21
<PAGE> 26
include figures (sometimes depicted in graphs) reflecting the value of a
specified amount of money invested in a Fund over various time periods and
comparison of a Fund's performance to the performance of stock indices such as
the S& P 500. All calculations assume the reinvestment of all dividends and
distributions. The Funds may also advertise performance rankings assigned to
them by organizations which evaluate mutual fund performance such as Lipper
Analytical Securities Corp. They may also advertise "ratings" assigned to them
by organizations such as Morningstar, Inc. The Funds' Annual Reports to
Shareholders contain additional performance information and will be made
available without charge upon request by telephone to the phone number listed on
the cover of this Prospectus.
INDIVIDUAL RETIREMENT ACCOUNTS
Shares of the Funds 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 by calling the phone numbers listed on the
cover of this Prospectus.
GENERAL INFORMATION
Each Fund is a diversified 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 each 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 listed on the cover of this Prospectus.
22
<PAGE> 27
23
<PAGE> 28
TABLE OF CONTENTS
Expense Summary 2
Financial Highlights 3
Investment Objectives, Policies and Risks 6
Purchases and Redemptions 16
Dividends and Distributions 17
Taxes 17
Net Asset Value 18
Optional Shareholder Services 19
Management of the Funds 20
Performance Calculations 21
Individual Retirement Accounts 22
General Information 22
GRADISON-MCDONALD
MUTUAL FUNDS
------------
580 Walnut Street, Cincinnati, Ohio 45202
(513) 579-5000 (800) 869-5999
<PAGE> 29
GRADISON GROWTH TRUST
AN OPEN-END INVESTMENT COMPANY
GRADISON-McDONALD ESTABLISHED VALUE FUND
GRADISON-McDONALD OPPORTUNITY VALUE 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 each Fund of the Trust, dated
7/29/96, which have been filed with the Securities and Exchange Commission. The
Prospectuses are 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 7/29/96.
<PAGE> 30
<TABLE>
<CAPTION>
CONTENTS Page LOCATION IN PROSPECTUSES
<S> <C>
INVESTMENT RESTRICTIONS . . . . . . . . . . . 3 Investment Objectives, Policies and Risks
PURCHASE OF SHARES . . . . . . . . . . . . . 4 Purchases and Redemptions
REDEMPTION OF SHARES . . . . . . . . . . . . 5 Purchases and Redemptions
EXCHANGE PRIVILEGE . . . . . . . . . . . . . 5 Optional Shareholder Services
Telephone Exchanges . . . . . . . . . . 5
Written Exchanges . . . . . . . . . . . 5
General Exchange Information . . . . . . 6
TAXES . . . . . . . . . . . . . . . . . . . . 6 Taxes
NET ASSET VALUE . . . . . . . . . . . . . . . 8 Net Asset Value
PORTFOLIO TRANSACTIONS . . . . . . . . . . . 8
INVESTMENT PERFORMANCE . . . . . . . . . . . 10 Performance Calculations
INVESTMENT ADVISER . . . . . . . . . . . . . 12 Management of the Funds
Advisory Agreement . . . . . . . . . . . 12
Distribution Expense/Service Plan. . . . 14
Transfer Agency and Accounting
Services Agreement . . . . . . . . . . . 16
TRUSTEES AND OFFICERS OF THE TRUST . . . . . 16
DESCRIPTION OF THE TRUST . . . . . . . . . . 18 General Information
CUSTODIAN . . . . . . . . . . . . . . . . . . 19
ACCOUNTANTS . . . . . . . . . . . . . . . . . 20
LEGAL COUNSEL . . . . . . . . . . . . . . . . 20
DOLLAR COST AVERAGING . . . . . . . . . . . .20
SALES BROCHURE INFORMATION . . . . . . . . . .21
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT PUBLIC ACCOUNTANT . . . .Following Page 42 Financial Highlights
</TABLE>
2
<PAGE> 31
INVESTMENT RESTRICTIONS
In addition to the investment restrictions described in the Prospectus
of each Fund, the Trust has adopted the following investment restrictions and
limitations, which may not be changed with respect to either Fund without the
approval of the holders of a majority of the outstanding shares of that Fund.
(See "Description of the Trust".) The Trust will not:
(1) Borrow money, except as a temporary measure for extraordinary or
emergency purposes, and then only in amounts not exceeding 5% of the
total assets of a Fund, taken at the lower of acquisition cost or
market value;
(2) Make loans, except (a) through the purchase of publicly distributed
corporate securities, U.S. Government obligations, certificates of
deposit, high-grade commercial paper and other money market
instruments, and (b) loans of portfolio securities to persons
unaffiliated with the Trust not in excess of 20% of the value of a
Fund's total assets (taken at market value) made in accordance with the
guidelines of the Securities and Exchange Commission and with any
standards established from time to time by the Trust's Board of
Trustees, including the maintenance of collateral from the borrower at
all times in an amount at least equal to the current market value of
the securities loaned;
(3) Mortgage, pledge or hypothecate securities, except in connection with a
permissible borrowing as set forth in investment restriction (1) above,
and then only in amounts not exceeding 10% of the value of the assets
of a Fund (taken at the lower of acquisition cost or market value);
(4) Make short sales of securities or purchase securities on margin, except
short-term credit necessary for the clearance of transactions;
(5) Purchase or sell real estate, except it is permissible to purchase
securities secured by real estate or real estate interests or issued by
companies that invest in real estate or real estate interests;
(6) Purchase the securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition
of assets, and except by purchase in the open market of securities of
closed-end investment companies involving only customary broker's
commissions, and then only if immediately after such purchase, no more
than 10% of the value of the total assets of a Fund would be invested
in such securities;
(7) Invest in companies for the purpose of exercising control or
management;
(8) Purchase securities subject to restrictions on disposition under the
Securities Act of 1933;
(9) Purchase securities for which no readily available market quotation
exists, if at the time of acquisition more than 5% of the total assets
of a Fund would be invested in such securities (repurchase agreements
maturing in more than seven days are included within this restriction);
3
<PAGE> 32
(10) Underwrite the securities of other issuers, except insofar as the Trust
may technically be deemed an underwriter under the Securities Act of
1933 in connection with the disposition of portfolio securities;
(11) Purchase or sell commodities, commodity contracts, or interests in oil,
gas or other mineral exploration or development programs, except it is
permissible to purchase securities issued by companies that hold
interests in oil, gas or other mineral exploration or development
programs;
(12) Participate on a joint, or a joint and several, basis in any securities
trading account;
(13) Write, purchase or sell puts, calls or combinations thereof;
(14) Purchase or retain the securities of any issuer if any Trustee or
officer of the Trust is or becomes a director or officer of such issuer
and owns beneficially more than 1/2 of 1% of the securities of such
issuer, or if those directors, trustees and officers of the Trust and
its investment adviser who are directors or officers of such issuer
together own or acquire more than 5% of the securities of such issuer;
(15) Purchase any securities of companies which have (with their
predecessors) a record of less than three years of continuous
operation, if at the time of acquisition more than 5% of a Fund's total
assets would be invested in such securities; or
(16) Purchase any securities (other than obligations issued or guaranteed by
the U.S. Government or its agencies or instrumentalities) if
immediately after such purchase, more than 5% of a Fund's total assets
would be invested in securities of any one issuer or more than 10% of
the outstanding securities of any one issuer would be owned by the
Trust and held in that Fund.
If a percentage restriction set forth above is met at the time of
investment, a later movement above the restriction level resulting from a change
in the value of securities held by the Fund will not be considered a violation
of the investment restriction. Pursuant to an undertaking to a state regulatory
authority, the Funds will not invest more than 5% of their assets in warrants.
For purposes of restriction number two above, repurchase agreements are not
considered loans.
PURCHASE OF SHARES
The Trust 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 Trust from such shareholder's account.
Unless specifically requested in writing, share certificates will not
be issued. Under no circumstances will certificates be issued for fractional
shares or to investors who elect Automatic Payments. The Trust reserves the
right to limit the amount of any purchase and to reject any purchase order.
Shares of both Funds are offered continuously; however, the offering of shares
of one or both Funds 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,
4
<PAGE> 33
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 a 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.
EXCHANGE PRIVILEGE
If a new account is established by an exchange, the dollar amount of
the exchange must at least be equal to the minimum initial investment of the
fund into which the exchange is made; if an exchange is made into an existing
account, the minimum additional investment amount must be met.
TELEPHONE EXCHANGES
You may request exchanges by telephoning the Trust 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.
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. If you have share
certificates for the shares being exchanged, they must accompany or precede the
exchange request and must be properly endorsed with signatures guaranteed by a
domestic commercial bank or trust company or a member firm of a national
securities exchange. Unless otherwise indicated, a new account established by
written exchange will have the same registration and selected options as your
present account.
5
<PAGE> 34
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 Trust 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 Gradison-McDonald mutual funds and Gradison (with respect to any
tax-free money market funds) each reserve the right to reject any exchange
request. The exchange feature may be terminated at any time by the shareholder,
the Gradison-McDonald Mutual Funds or Gradison. In the case of excessive use of
the exchange feature, the Trust, upon 30 days' written notice, may make
reasonable service charges (as specified in the notice) by redeeming shares from
such shareholder's account.
TAXES
Each Fund has qualified, and intends to qualify in the future, as a
regulated investment company under Subchapter M of the Internal Revenue Code
(the "Code"). By so qualifying, the Funds will not be taxed on net investment
income and net realized capital gains distributed to shareholders.
Dividends from net investment income and distributions from net
realized short-term capital gains are taxable to shareholders as ordinary
income, whether paid in cash or in additional shares of a Fund. All or a part of
the dividends distributed to shareholders will qualify for the deduction for
dividends received by corporations. The specific amounts eligible for this
deduction depend upon certain factors set forth in the Code, and the Trust will
furnish shareholders annually with written advice as to the amounts of dividend
distributions eligible for such deduction.
Distributions of any net realized long-term capital gains are taxable
to shareholders as long-term capital gains, whether paid in cash or in
additional shares of a Fund and regardless of the length of time a shareholder
has owned shares of a Fund. These capital gains distributions are not eligible
for the dividends received deduction for corporations. The Trust will furnish
shareholders with written notification as to the amount of any long-term capital
gains concurrently with any distribution that includes long-term capital gains.
Investors should be aware of the tax implications of purchasing shares
shortly before a record date for a dividend or capital gains distribution. To
the extent that the net asset value of a 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.
6
<PAGE> 35
In order to continue to qualify for treatment as a regulated investment
company under the Internal Revenue Code of 1986, as amended, the Fund must
distribute to its shareholders for each taxable year at least 90% of its
investment company taxable income (consisting generally of taxable net
investment income plus net short-term capital gain, if any), and must meet
several additional requirements. These requirements include the following: (1)
the Fund must derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of securities and certain other income; (2) the Fund
must derive less than 30% of its gross income each taxable year from the sale or
other disposition of securities held for less than three months; (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 (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.
A Fund will be subject to a nondeductible 4% excise tax to the extent
it fails to distribute by the end of any calendar year substantially all of its
net investment 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 or resale of shares of a 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 of the Fund 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 dividends received with respect to such shares.
A Fund is required, in certain circumstances, to withhold 31% of
dividends and certain other payments, including redemptions, paid to
shareholders who do not furnish to the Fund their correct taxpayer
identification number or who are otherwise subject to backup withholding.
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. Shareholders should consult
their tax adviser as to their personal tax situation.
7
<PAGE> 36
NET ASSET VALUE
The net asset value of each 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 each 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 a specific Fund are allocated to that Fund. Assets and
liabilities not readily attributable to a Fund are allocated to each Fund 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 a 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 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. 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
The Adviser is responsible for making the Trust's portfolio decisions,
including allocation of the Trust's brokerage business and negotiation of
brokerage commissions, subject to policies established by the Trust's Board of
Trustees. The Trust places orders for transactions with a number of brokers and
dealers. For the fiscal year ended March 31, 1996, the aggregate amount of
brokerage commissions paid by the Trust was $131,415 for the Established Value
Fund and $72,891 for the Opportunity Value Fund For the fiscal year ended March
31 1995, the aggregate brokerage commissions paid by the Established Value Fund
were $135,330 and for the Opportunity Value Fund were $51,129. For the fiscal
year ended April 30, 1994, the aggregate brokerage commissions paid by the
Established Value Fund were $224,982 and for the Opportunity Value Fund were
$76,520.
The portfolio turnover rate for the Trust for the respective fiscal
periods ended March 31, l996 and, l995, for the Established Value Fund was
18.48% and 24.23% and for the Opportunity Value Fund was 23.98% and 31.90%.
In purchasing and selling portfolio securities, brokers and dealers are
selected to obtain the most favorable net results, taking into account various
factors, including the price of the security, the commission rate, the size of
the transaction, the difficulty of execution and other services offered by
brokers or dealers which are of benefit to the Trust. The Adviser selects
brokers and dealers to execute transactions on the basis of its judgment of
their professional capability to provide the service at reasonably competitive
rates. The Adviser's determination of what constitutes reasonably competitive
rates is based upon its professional judgment and knowledge as to rates paid and
charged for similar transactions throughout the securities industry. The Adviser
may consider sales by brokers or dealers of shares of the Funds of the Trust
when selecting brokers or
8
<PAGE> 37
dealers to execute portfolio transactions as long as the most favorable net
results are obtained.
The Adviser may receive commissions from the Funds for effecting
transactions only in accordance with procedures adopted by the Board of
Trustees. Any procedures adopted by the Trustees will incorporate the standard
contained in Rule 17e-1 under the Investment Company Act of 1940 that the
commissions paid must be "reasonable and fair compared to the commission, fee or
other remuneration received or to be received by other brokers in connection
with comparable transactions involving similar securities during a comparable
period of time". Pursuant to Rule 17e-1, the Board of Trustees will review at
least annually the appropriateness of any procedures in effect and will conduct
compliance reviews at least quarterly and maintain records in connection with
such reviews. The Adviser has assured the Trust that in all transactions placed
with the Adviser, the Funds will be charged a commission that is at least as
favorable as the rate the Adviser charges to its other customers in similar
transactions. No commission charged to the Funds by the Adviser or any broker
affiliated with the Adviser will include compensation for research services
provided by the Adviser or any such affiliated broker. Since inception of the
Funds neither the Adviser nor any broker affiliated with the Adviser received
any commissions from the Funds.
During the period ended March 31, l996, the Funds purchased commercial
paper of Goldman Sachs Group, L.P., which is an affiliate of one of the Funds'
regular dealers. As of March 31, l995, none of this commercial paper was held by
the Established Value or Opportunity Value Funds. (Item 17).
Brokers who provide supplemental investment research to the Adviser may
receive orders for transactions in portfolio securities of the Trust. Such
supplemental research services ordinarily consist of assessments and analyses of
the business or prospects of a company, industry, or economic sector.
Information so received is in addition to and not in lieu of the services
required to be performed by the Adviser under the Investment Advisory Agreement
with the Trust. If in the judgment of the Adviser the commission is reasonable
in relation to the brokerage and research services provided, the Adviser is
authorized to pay brokerage commissions in excess of commissions another broker
would have received for effecting the same transaction, subject to the review of
the Trust's Board of Trustees. Not all such research services may be used by the
Adviser in connection with managing the Funds. The expenses of the Adviser will
not necessarily be reduced as a result of the receipt of such supplemental
information, and the Adviser may use such information in servicing its other
accounts.
Because of the affiliation of the Adviser with the Trust, the Trust is
prohibited from engaging in certain transactions involving the Adviser except in
compliance with the provisions of the Investment Company Act of 1940, as
amended, and the rules and regulations thereunder. Accordingly, the Trust will
not purchase or sell portfolio securities from or to the Adviser in any
transaction in which the Adviser acts as principal, including transactions in
the over-the-counter market. The Trust may purchase securities from other
members of an underwriting syndicate of which the Adviser is a participant, but
only under the conditions set forth in applicable rules of the Securities and
Exchange Commission.
The Board of Trustees of the Trust has considered the possibility of
recapturing, for the benefit of the Trust, underwriting commissions or similar
fees incurred when purchasing portfolio securities and has determined not do so.
9
<PAGE> 38
The Adviser also serves as the investment adviser to other investment
companies and furnishes investment advice to other clients. Investment decisions
for each Fund of the Trust are made independently from those for the other Fund
and for other Gradison-McDonald mutual funds although other clients advised by
the Adviser may have similar objectives and investment programs as the Funds.
Purchases and sales of particular securities may be effected simultaneously for
such entities and clients. In such instances, the transactions will be allocated
as to price and amount in a manner the Adviser considers equitable to each of
the affected entities or clients, which could have a detrimental effect upon the
price or amount of the securities purchased or sold for a Fund. On the other
hand, in some cases the ability of the Trust to participate in volume
transactions may produce better executions for the Trust. It is the opinion of
the Board of Trustees that the benefits available to the Trust from retaining
the Adviser outweigh any disadvantages that may arise from exposure to
simultaneous transactions.
INVESTMENT PERFORMANCE
Total Return
Percentage Change:
<TABLE>
<CAPTION>
Since Inception Quarter
(8/16/83-3/31/96) Year Ending December 31 ended 3/30/96
------------------------------------------------------------------------------------------
(Not annualized) 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 (Not annualized)
-------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Established 435.4% 22.3% 12.4% 15.1% 16.0% (8.1%) 22.2% 10.2% 20.7% .3% 26.4% 6.3%
Value Fund
Standard 483.0% 18.6% 5.2% 16.4% 31.7% (3.1%) 30.5% 7.6% 10.0% 1.3% 37.6% 5.4%
and Poor's 500
Stock Index
- ----------------------------------------------------------------------------------------------------------------------------
Opportunity 250.3% 13.1% (5.4%) 23.6% 23.1% (13.1%) 35.9% 14.3% 11.1% (2.2%) 26.8% 4.9%
Value Fund
Russell 2000 258.1% 5.7% (8.8%) 24.9% 16.2% (19.5%) 46.0% 18.4% 18.9% (1.8%) 28.4% 5.1%
Index
</TABLE>
The Average Annual Total Return of the Funds has been as follows:
<TABLE>
<CAPTION>
Established Standard Opportunity Russell
Value & Poor's Value 2000
Fund 500 Fund Index
----------- -------- ----------- -----
<S> <C> <C> <C> <C>
For 10 years ending 3/31/96 12.23% 13.95% 10.15% 10.34%
For 5 years ending 3/31/96 14.15% 14.66% 13.29% 15.87%
For 12 months ending 3/31/96 24.84% 32.11% 28.00% 28.82%
</TABLE>
The results of all of the Funds and Indices assume reinvestment of
dividends and other distributions. Dividend income for the Standard & Poor's 500
Stock Index for the period from August 16, 1983 to August 31, 1983 is an
estimate.
During the quarter ended March 31,l996, the approximate cash position
of the Established Value Fund ranged between 25.9% and 30.2% and stood at 26.0%
on March 31, l996. For the Opportunity Value Fund, the range of the approximate
cash position was between 26.8% and 30.4%. On March 31, l996, it stood at 28.7%.
10
<PAGE> 39
The performance of the Standard & Poor's 500 Composite Stock Price
Index is included to compare the Established Value Fund's results with those of
a group of unmanaged securities widely regarded by investors as representative
of the stock market in general and because it generally represents the universe
from which securities are selected for the Established Value Fund. The
performance of the Russell 2000 Index has been included to compare the results
of the Opportunity Value Fund with those of a universe of securities which is
representative of small company stock performance.
The performance quoted above represents past performance. The
investment return and value of an investment in the Funds will fluctuate so that
an investor's shares may be worth more or less than their cost, when redeemed.
[Remainder of page left blank intentionally.]
11
<PAGE> 40
INVESTMENT ADVISER
The Adviser manages the investment and reinvestment of the assets of
the Funds of the Trust in accordance with the Trust's investment objective,
policies and restrictions, subject to the general supervision and control of the
Trust's Board of Trustees and pursuant to the terms of the Investment Advisory
Agreement between the Trust and Adviser.
The Adviser provides to the Trust at its own expense the executive
officers who are necessary for the management and operations of the Trust and
also furnishes to the Trust, at cost, personnel to perform shareholder services,
such as responding to inquiries from shareholders and receiving purchase orders
and redemption requests delivered to the Trust.
ADVISORY AGREEMENT
The Investment Advisory Agreement provides that the Adviser will manage
the investments of each Fund of the Trust, 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. The Adviser pays a fee (at an annual rate of $20,000) to William
Breen, a professor at Northwestern University, for the right to use the computer
modeling methodology and the related data base employed for the Funds (see "How
the Fund Invests" in the Prospectus). In addition, except as borne by the Trust
pursuant to an effective plan under Rule 12b-1 under the Investment Company Act
of 1940, the Adviser bears the expenses related to distribution of shares of the
Funds, such as costs of preparing, printing and mailing sales literature and
other advertising materials, costs of furnishing prospectuses, annual and
semiannual reports of the Trust and other materials regarding distributing
shares of the Trust to potential investors, and service fee payments to brokers
and dealers.
All expenses not specifically assumed by the Adviser and incurred in
the operation of the Trust are borne by the Trust 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 office space,
facilities and equipment and utilities; cost of preparing, printing and mailing
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 (including reimbursement to the Adviser for legal services provided to
the Trust, subject to review by the Trust's outside counsel); 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; expenses incurred by the Trust relating to shareholder
services (such as responding to inquiries from shareholders and receiving
purchase orders and redemption requests) provided by the Adviser or others; 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 Trust; other expenses of the Trust, including expenses of
shareholders' and Trustees' meetings; and fees and other expenses incurred by
the Trust 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
12
<PAGE> 41
attributable to a Fund are allocated to each 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 Funds), subject to review by the
Trustees.
As compensation for its services under the Investment Advisory
Agreement, the Adviser receives from the Trust a monthly fee based upon the
average value of the daily net assets for the month of each Fund at an annual
rate of .65% on the first $100 million of each Fund, .55% on the next $100
million of each Fund and .45% on any amounts in excess of $200 million of each
Fund. For fiscal periods ended March 31, l996, March 31, l995, and April 30,
1994, the advisory fees paid by the Trust to the Adviser, respectively, amounted
to $1,890,225, $1,951,674, and 1,944,969, for the Established Value Fund and
$631,571, $683,260, and $694,530, for the Opportunity Value Fund.
The Adviser will reimburse the Trust for aggregate expenses of a Fund
during any fiscal year which exceed the limits prescribed by any state in which
the shares of that 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. However, certain expenses such as
brokerage commissions, taxes, interest and items of an extraordinary nature are
excluded from such limitation.
Prior to June 1, l995, the Adviser furnished directly to the Trust, at
cost, personnel to perform shareholder services, such as responding to inquiries
from shareholders and receiving purchase orders and redemption requests
delivered to the Trust. For the periods ended March 31, 1995 and April 30, 1994,
the cost to the Trust for such personnel was, respectively, $97,764 and
$117,403, as relates to the Established Value Fund, and $32,231, and $38,810, as
relates to the Opportunity Value Fund.
The Investment Advisory Agreement also provides that the Adviser, as a
registered broker-dealer, will distribute the shares of the Funds 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. The Adviser
receives no compensation for acting as the Trust's distributor except as may be
provided pursuant to the Distribution Expense 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 Trust 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 continues in effect as to each Fund
from year to year if such continuance is specifically approved at least annually
by the vote of the
13
<PAGE> 42
holders of a majority of the outstanding voting securities of that 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 with
respect to either Fund 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 that 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 Trust shall have been approved by the vote of the holders of a majority of
the outstanding voting securities of the affected 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.
DISTRIBUTION EXPENSE SERVICE PLAN
The Trust has in effect a Distribution Expense Service 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 in accordance with the
provisions of such Rule. The purpose of the Plan is to increase sales of shares
of the Funds to enable the Trust 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 Trust's fixed costs
and portfolio management.
The Plan permits the Trust to incur expenses related to the
distribution of the shares of its Funds, but only as specifically contemplated
by the Plan. Under the Plan, the Trust may incur distribution expenses relative
to a Fund up to an amount that does not exceed an annual rate of .50% of the
average daily net assets of that Fund. Distribution expenses that may be
incurred by the Trust under the Plan within the limitation described above are
limited to (a) payments to broker-dealers (including the Adviser) or other
persons as compensation for personal services rendered to shareholders of the
Funds including providing shareholder liaison services such as responding to
shareholder inquiries and providing information to shareholders about their
accounts, and (b) expenses otherwise promoting the sale of the shares of a Fund,
such as expenses of preparation, printing and mailing prospectuses, annual and
semiannual reports, sales literature and other promotional material to potential
investors and of purchasing radio, television, newspaper and other advertising.
In the absence of exemptive relief from certain provisions of the Investment
Company Act of 1940, as amended, the Trust may incur expenses relative to a Fund
under the Plan only when such expenses are directly attributable to that Fund
and may not incur expenses under the Plan on a joint basis with other Fund(s).
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 Funds. 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
14
<PAGE> 43
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 Funds. Thus, although such payments are authorized by the
Plan as a protective measure, they are not restricted by the .50% limitation
included in the Plan.
In approving the Plan, the Board of Trustees concluded that there was a
reasonable likelihood that the Plan will benefit the Trust and its shareholders.
The Plan was approved by the holders of a majority of the outstanding shares of
each Fund on August 24, 1984. The Plan (together with any agreements relating to
implementation of the Plan) continues in effect as to each Fund for a period of
more than one year only so long as such continuance is specifically approved at
least annually by the vote of a majority of the Board of Trustees, including the
vote of a majority of the Independent Trustees, cast in person at a meeting
called for such purpose. The Plan may not be amended to materially increase the
amount of distribution expenses incurred by the Trust as to a Fund without the
approval of a majority of the outstanding voting securities of that 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 a 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
that 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
affected 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 disinterested Trustees
then in office.
Pursuant to the Plan, the Trust has entered into a distribution
agreement ("Agreement") with the Adviser. This agreement provides that the
Adviser will receive compensation for rendering personal services to
shareholders of the Funds 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 the value of the assets
of each Fund of the Trust and, additionally, a fee for other distribution
services at an annual rate of .25% of the value of the assets of each 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 either Fund. The Agreement is contingent on
the continued effectiveness of the Trust's Distribution Expense Plan and
automatically terminates in the event of its assignment.
During the periods ended March 31, 1996, March 31, 1995, and April 30,
1994, $1,460,779, $558,790 and $549,288, respectively, were paid by the
Established Value Fund, and $421,414, $178,864, and $172,893 were paid by the
Opportunity Value Fund to McDonald for its assistance in distributing shares of
the Funds.
15
<PAGE> 44
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 Funds. 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. This Agreement became effective June 1, 1995. For
the period from June 1, 1995 through March 31, 1996, the fees paid by the
Established Value Fund and the Opportunity Value Fund pursuant to this Agreement
were $294,992 and $140,112, respectively. Prior to that, the services provided
pursuant to the Agreement were provided pursuant to a Data Processing Services
Agreement and cost-reimbursement of the Adviser. For the periods ending March
31, 1995 and April 30, 1994, the fees paid pursuant to the Data Processing
Services Agreement were respectively $93,708 and $89,142, with respect to the
Established Value Fund and $45,784 and $29,168, with respect to the Opportunity
Value Fund.
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. Each Trustee
is a Trustee of each of the four Gradison-McDonald investment companies.
* 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 of capital goods);
Chairman of all of the Gradison-McDonald investment companies.
DANIEL J. CASTELLINI, 312 Walnut Street, Cincinnati, Ohio. Trustee; Senior Vice
President/Finance and Administration and Chief Financial Officer of the E. W.
Scripps Company (communications).
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 Financial Group Inc., Citicasters,
Inc., and Cincinnati Milacron Commercial Corp.; Trustee of Summit Investment
Trust and Carillon Investment Trust.
JEROME E. SCHNEE, 11558 Stable Watch Court, Cincinnati, Ohio 45249. Trustee.
Professor of Management, College of Business Administration, University of
Cincinnati.
RICHARD A. RANKIN, 434 Scott Street, Covington, Kentucky 41011. Trustee.
Partner, Rankin and Rankin (Public Accountants).
- --------
*Interested and affiliated trustee, as defined by the Investment Company Act of
the Trust and the Investment Adviser as a result of being an officer of the
Adviser and owning securities of the Adviser's parent
16
<PAGE> 45
BRADLEY E. TURNER, 580 Walnut Street, Cincinnati, Ohio. President. Senior
Managing Director and Director of McDonald; President of all of the
Gradison-McDonald investment companies.
WILLIAM J. LEUGERS, JR., 580 Walnut Street, Cincinnati, Ohio. 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 1994; prior to that, Vice President of Duff &
Phelps Investment Management Company.
PAUL J. WESTON, 580 Walnut Street, Cincinnati, Ohio. Senior Vice President;
Executive Vice President of GMCR; Senior Vice President of GCT, and GMMCT;
Executive Vice President of Gradison; Director of McDonald. Mr. Weston is the
brother of Donald E. Weston.
DANIEL R. SHICK, 580 Walnut Street, Cincinnati, Ohio. Vice President; Senior
Vice President of Gradison.
ALFRED M. BRUNNER, 580 Walnut Street, Cincinnati, Ohio. Vice President; Vice
President of Gradison.
PATRICIA JAMIESON, 800 Superior Avenue, Cleveland, Ohio 44114. Treasurer;
Managing Director and Chief Financial Officer McDonald; Treasurer of all of the
Gradison-McDonald investment companies.
RICHARD M. WACHTERMAN, 580 Walnut Street, Cincinnati, Ohio 45202. Secretary;
Senior Vice President and General Counsel of Gradison. Secretary of all of the
Gradison-McDonald investment companies.
MARK A. FRIETCH, 580 Walnut Street, Cincinnati, Ohio. Assistant Treasurer.
Assistant Treasurer of all of the Gradison-McDonald investment companies (since
May 1995); prior to that Financial Consultant and Assistant Controller of Union
Central Life Insurance Company.
- ---------------------------------------------
*Interested and affiliated person as defined by the Investment Company Act of
1940, because of employment with and stock ownership of the investment adviser.
Trustees and officers of the Trust who are affiliated with the Adviser receive
no remuneration from the Trust. Trustees who are not affiliated with the Adviser
receive fees as determined by the Board of Trustees. As of July 15, 1996, the
Trustees and officers of the Trust owned an aggregate of less than 1% of the
outstanding shares of the Established Value Fund and the Opportunity Value Fund
and no person was known to own 5% or more of the shares of either Fund.
17
<PAGE> 46
Trustee Compensation Table
<TABLE>
<CAPTION>
Name of Trustee Aggregate Total Compensation
- --------------- Compensation From Trust and fund
From Trust* complex (3 additional
for fiscal Trusts) paid to
period ended trustee for calendar
3/31/96 year ended 12/31/95
<S> <C> <C>
Theodore H. Emmerich** $7,000 $23,250
Richard A. Rankin** $7,000 $22,000
Jerome E. Schnee** $7,000 $23,250
Daniel J. Castellini $7,000 $25,000
</TABLE>
The Trust maintains a deferred compensation plan which allows trustees to defer
receipt of trustee fees otherwise payable to them until a future date. Deferred
amounts are credited with interest at a rate equal to the yield of the
Gradison-McDonald U.S. Government Reserves Fund. The Trust does not maintain any
other pension or retirement plans. As of March 31, 1996, $11,136 was payable by
the Trust to the beneficiary of a former trustee who is deceased and as of
December 31, 1995, $45,076 was payable to that beneficiary by the Trust and the
Fund Complex.
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,
which was amended on July 27, 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. Any additional
series of shares must be issued in compliance with the Investment Company Act of
1940 and must not constitute 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 "How to Redeem 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, at special meetings of shareholders, and may be appointed by
the remaining trustees under certain circumstances. 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
18
<PAGE> 47
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 share holders 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 a Fund of the Trust is required in connection with
shareholder approval of the Investment Advisory Agreement or the Distribution
Expense 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 that Fund are present in person or by proxy, or
(ii) more than 50% of the outstanding shares of that Fund, whichever is the
lesser.
The assets of the Trust received upon the issuance of the shares of
each 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
each 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 own bad faith, willful misfeasance, gross negligence, or
reckless disregard of his duties, (2) with respect to any matters as to which he
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 had reasonable cause
to believe was unlawful.
CUSTODIAN
Star Bank, N.A.. ("Star Bank"), Star Bank Center, Cincinnati, Ohio
45201 acts as the custodian of the portfolio securities and other assets of the
Trust. Star Bank has no part in determining the investment policies of the Trust
or the securities which are to be purchased, held or sold by the Trust. The
Trust may purchase or sell securities from or to Star Bank.
19
<PAGE> 48
ACCOUNTANTS
Arthur Andersen LLP, 425 Walnut Street, Cincinnati, Ohio 45202, is the
independent public accountant for the Trust.
LEGAL COUNSEL
Kirkpatrick & Lockhart LLP acts as legal counsel to the Trust.
DOLLAR COST AVERAGING
Dollar Cost Averaging is a strategy for purchasing equal dollar value
amounts of a security, including a mutual fund, periodically for a long period
of time. During periods when share prices are increasing, fewer shares are
purchased and vice versa. Dollar cost averaging will not prevent a loss when
shares are sold at a time when the price is lower than the average cost.
20
<PAGE> 49
[OPP Fact Sheet]
Gradison-McDonald [Graphic of children's blocks]
Opportunity Value Fund
March 31, 1996
Gradison-McDonald Opportunity Value Fund seeks long-term capital appreciation by
investing in the common stocks of smaller companies that it considers to be
relatively undervalued. While smaller companies are frequently considered by
investment professionals to be more volatile, they are also viewed as more
responsive to profit opportunities than their larger brethren. The Fund
generally invests in companies with capitalizations of less than $500 million at
the time of purchase.
Gradison-McDonald uses a disciplined stock selection process that requires that
the companies selected for investment meet a number of objectively measured
criteria including rising earnings, earnings growth rates, price-to-earnings
ratios, and other similar factors.
Under normal circumstances, at least 70% of the Fund's assets will be invested
in common stocks while up to 30% may, at the discretion of the adviser, be
invested in short-term liquid reserves to minimize potential fluctuations in the
Fund's net asset value.
Ten Largest Stock Positions On March 31, 1996
1. HealthSouth Rehab. Rehabilitation.
2. Input/Output Inc. Data Acquisition
3. Comair Holdings PASSENGER AIR TRANSP
4. Adaptec Inc;. Computers
5. Kent Electronics Electronic Conn.
6. Community Health Serv. HOSPITAL
7. Oakwood Homes Manufactured Housing
8. Mueller Industries Inc. METAL FABRICAT.
9. Universal Health Serv. Acute Care Hospl
10. Advanta Corp. Financial Services
These are the top ten positions of 30 issues representing 20.3% of the portfolio
and are subject to change.
Where the Fund is Invested
The chart below indicates distribution of the Fund's stock investments on March
31, 1996. On that date, the Fund Maintained 30% liquid reserves.
[Graphic of Pie Chart showing 19% interest sensitive, 13% services, 12%
cyclicals, 11% technical, 6% consumer durables, 6% consumer non-durables, 2%
transportation.]
21
<PAGE> 50
Value of $1,000 Since Inception
Line chart stating "The value of a $1,000 investment made in the fund at
inception with all dividends and capital gain distributions reinvested" with
these plot points 8/83 - $1,000, 12/83 - $889, 12/84 - $861, 12/85 -$ 1,102,
12/86 - $1,247, 12/87 - $1,180, 12/88 - $1,458, 12/89 - $1,796, 12/90 - $1,561,
12/91 - $2,122, 12/92 - $2,426, 12/93 - $2,694, 12/94 - $2,635, 12/95 - $3,341,
3/96 - $3,503.
The performance quoted above and on the next page represents past performance.
The investment return and principal 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. Total return includes changes in share value and
reinvestment of all distributions. Past performance does not ensure future
results.
Average Annual Total Return
Chart stating periods ended #/31/96, 1 year - +28.00%, 3 years - + 11.84%, 5
years - +13.29%, 10 years - +10.15%, Since inception (8/16/83) - +10.43%
Portfolio Manager Profiles
William J. Leugers, Jr.[Graphic - photo of W.J. Leugers]
Executive Vice President/Portfolio Manager
Gradison-McDonald Asset Management
With more than 27 years of investment experience, the last 13 as portfolio
manager of the Gradison-McDonald Established Value and Opportunity Value Funds,
Bill Leugers has worked closely with academicians at a leading university in the
development of the quantitative models which are used extensively in the
management of these funds. Bill's B.S. degree in Business and his M.B.A. in
Finance are from Xavier University.
Daniel R. Shick [Graphic - photo of D.R. Shick]
Senior Vice President/Portfolio Manager
Gradison-McDonald Asset Management
Dan Shick's entire 20+ year investment career has been with the Asset Management
Division. For most for those years, he has been responsible for managing the
firm's largest individual and institutional accounts. In recent years, Dan has
shared portfolio management responsibilities for the Established Value and
Opportunity Value funds with Bill Leugers. Both his B.B.A. degree in Economics
and his M.B.A. in Finance are from the University of Cincinnati.
Profile of Gradison-McDonald Family of Funds
Grid from less potential risk, less potential reward to more potential risk,
more potential reward from left to right; Money market Funds, Government Income
Fund, Intermediate Munciipal Income Fund, Ohio Tax-Free Income Fund, Established
Value Fund, Growth & Income Fund, Opportunity Value Fund, International Fund.
Gradison-McDonald Asset Management combines the extensive investment experience
of Gradison & Company, founded in 1925, with McDonald & Company which was
founded in 1924. The two firms merged in 1991. As
22
<PAGE> 51
Registered Investment Advisers since 1974 and mutual fund advisers since 1976,
Gradison-McDonald currently manages in excess of $3 billion in mutual funds and
individually managed accounts.
A prospectus for the Opportunity Value Fund or any other Gradison-McDonald Fund
may be obtained by calling (513) 579-5700 or (800) 869-5999. The prospectus
contains more complete information. Read it carefully before you invest.
23
<PAGE> 52
[EST Fact Sheet]
McDonald & Company Securities, Inc. - Distributor
Gradison-McDonald [graphic of medal]
Established Value Fund
March 31, 1996
Gradison-McDonald Established Value Fund seeks long-term capital growth by
investing primarily in the common stocks of large, established U.S. companies
selected from among the 500 stocks that make up the Standard & Poor's 500
Composite Stock Price Index. The Fund may also invest in other large companies
with market capitalizations of $500 million or more.
Gradison-McDonald uses a disciplined stock selection process that requires that
the companies selected for investment meet several objectively measured criteria
including the companies' relative book values, their price-to-earnings ratios,
and other similar factors.
Under normal circumstances, at least 70% of the Fund's assets will be invested
in common stocks while up to 30% may, at the discretion of the adviser, be
invested in short-term liquid reserves to reduce fluctuations in the Fund's net
asset value.
Ten Largest Stock Positions On March 31, 1996
1. Sun Microsystems COMPUTERS
2. Loral Corporation DEFENSE ELECTRONICS
3. Compaq Computer Corp. COMPUTERS
4. Travelers, Inc. FINANCIAL SERVICES
5. Lockheed Martin AEROSPACE DEFENSE
6. Hercules, Inc. CHEMICALS
7. Intel Corp. MICROPROCESSORS
8. Household Inter. FINANCIAL SERVICES
9. B.F. Goodrich AEROSPACE & COM. PRODUCTS
10. Raytheon Co. AEROSPACE DEFENSE
These are the top ten positions of 46 issues representing 23.8% of the portfolio
and are subject to change.
Where the Fund is Invested
The chart below indicates distribution of the Fund's stock investments on March
31, 1996. On that date, the Fund Maintained 24% liquid reserves.
24
<PAGE> 53
[Graphic of Pie Chart showing --% Technology, 33% Cyclicals, 16% Interest Rate
Sensitive, 8% Transportation, 8% Consumer Durables, 8% Services, 5% Other]
Value of $1,000 Since Inception
Line chart stating "The value of a $1,000 investment made in the fund at
inception with all dividends and capital gain distributions reinvested" with
these plot points 8/83 - $1,000, 12/83 - $1,074, 12/84 - $1,123, 12/85 - $1,446,
12/86 - $1,769, 12/87 - $1,989, 12/88 - $2,289, 12/89 - $2,657, 12/90 - $2,441,
12/91 - $2,984, 12/92 - $3,289, 12/93 - $3,972, 12/94 - $3,985, 12/95 - $5,038,
3/96 - $5,354.
The performance quoted above and on the next page represents past performance.
The investment return and principal 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. Total return includes changes in share value and
reinvestment of all distributions. Past performance does not ensure future
results.
Average Annual Total Return
Chart stating periods ended 3/31/96, 1 year - +24.84%, 3 years - + 14.23%, 5
years - +14.15%, 10 years - +12.23%, Since inception (8/16/83) - +14.20%
Portfolio Manager Profiles
William J. Leugers, Jr. [graphic - photo of W.J. Leugers]
Executive Vice President/Portfolio Manager
Gradison-McDonald Asset Management
With more than 27 years of investment experience, the last 13 as portfolio
manager of the Gradison-McDonald Established Value and Opportunity Value Funds,
Bill Leugers has worked closely with academicians at a leading university in the
development of the quantitative models which are used extensively in the
management of these funds. Bill's B.S. degree in Business and his M.B.A. in
Finance are from Xavier University.
Daniel R. Shick [graphic - photo of D.R. Shick]
Senior Vice President/Portfolio Manager
Gradison-McDonald Asset Management
Dan Shick's entire 20+ year investment career has been with the Asset Management
Division. For most for those years, he has been responsible for managing the
firm's largest individual and institutional accounts. In recent years, Dan has
shared portfolio management responsibilities for the Established Value and
Opportunity Value funds with Bill Leugers. Both his B.B.A. degree in Economics
and his M.B.A. in Finance are from the University of Cincinnati.
Profile of Gradison-McDonald Family of Funds
Grid from less potential risk, less potential reward to more potential risk,
more potential reward from left to right; Money market Funds, Government Income
Fund, Intermediate Municipal Income Fund, Ohio Tax-Free Income Fund, Established
Value Fund, Growth & Income Fund, Opportunity Value Fund, International Fund.
25
<PAGE> 54
Gradison-McDonald Asset Management combines the extensive investment experience
of Gradison & Company, founded in 1925, with McDonald & Company which was
founded in 1924. The two firms merged in 1991. As Registered Investment Advisers
since 1974 and mutual fund advisers since 1976, Gradison-McDonald currently
manages in excess of $3 billion in mutual funds and individually managed
accounts.
A prospectus for the Established Value Fund or any other Gradison-McDonald Fund
may be obtained by calling (513) 579-5700 or (800) 869-5999. The prospectus
contains more complete information. Read it carefully before you invest.
26
<PAGE> 55
[Est Sales Brochure]
COVER PAGE
ESTABLISHED VALUE
FUND
GRADISON- MCDONALD
[GRAPHIC: COLLAGE OF SCHOOL PICTURE WITH TITLE "YOUR FUTURE STARTS TODAY",
COLLEGE MEMORABILIA AND BOOKS.]
A COMMON STOCK FUND INVESTING IN LARGE COMPANIES JUDGED TO BE UNDERVALUED
27
<PAGE> 56
INSIDE COVER
FAMILY OF MUTUAL FUNDS
ESTABLISHED
VALUE
INTERMEDIATE OHIO TAX-FREE
MUNICIPAL INCOME
INTERNATIONAL GOVERNMENT
INCOME
MONEY MARKET OPPORTUNITY
VALUE
GROWTH
& INCOME
28
<PAGE> 57
PAGE 1
[Graphic: One portion of graphic described above.]
Whatever your goals or ASPIRATIONS.
Whatever your objective. One thing is certain.
An INVESTMENT made today brings
you that much closer to meeting that OBJECTIVE
and reaching that GOAL...
whether it's buying a house, starting a family,
SAVING for a college education,
or planning for retirement. Hesitate and
time will pass you by.
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 [Graphic: Call for information telephone logo.]
29
<PAGE> 58
PAGE 2
ESTABLISHED VALUE
FUND
GRADISON-MCDONALD ESTABLISHED VALUE FUND
SEEKS TO PROVIDE LONG-TERM CAPITAL
APPRECIATION THROUGH INVESTMENTS IN THE
STOCK OF COMPANIES WHICH OUR DISCIPLINED
ANALYSIS JUDGES AS UNDERVALUED BY THE MARKET.
THE FUND IS PROFESSIONALLY MANAGED BY
EXPERIENCED GRADISON-MCDONALD
PORTFOLIO MANAGERS.
THE CASE FOR COMMON STOCKS
Historically, common stocks have offered the greatest potential for long-term
growth. Over the long-term they have outperformed fixed income investments and
provided a rate of return well above the rate of inflation. It is important to
understand that common stocks pose greater risks and market volatility than
fixed income investments.
CHART
[IBBOTSON CHART COMPARING GROWTH OF A DOLLAR INVESTED FROM 1925-1993 IN 30 DAY
US T-BILLS 20-YEAR VS T. BONDS, COMMON STOCKS WITH INFLATION. INFLATION VALUE IS
ALMOST $10; 30 DAY BILLS VALUE IS JUST OVER $10; 20 YEAR BONDS' VALUE IS
APPROXIMATELY $40; COMMON STOCKS' VALUE IS APPROXIMATELY $900.]
Common Stocks are represented by the Standard & Poor's 500 Composite Stock
Index. The indices and securities in the chart above do not reflect the Fund's
actual portfolio composition, performance, or the fees and expenses associated
with investing in the Fund. T-bills and T-bonds are backed by the full faith and
credit of the U.S. Government, and are less volatile and risky than equity
investments such as the Fund and stocks. The S&P 500 is an unmanaged index of
500 of the largest U.S. stocks. The chart is not intended to imply future
performance of any of these investments or of the Fund. Performance figures of
the Fund, which began operations on 8/16/83 are available upon request from
Gradison- McDonald. The returns for common stocks, Treasury Bonds, and Treasury
Bills include the reinvestment of dividends and interest.
Source: "Ibbotson Associates: Stocks, Bills, and Inflation," 1994 Yearbook.
30
<PAGE> 59
PAGE 3
[Graphic of portion of same picture described above.]
VALUE INVESTING
Gradison-McDonald Established Value Fund employs an investment strategy known
as value investing. This analytic technique identifies stocks which have a low
price-to-book ration and/or price-earnings ratio. The stocks are from companies
in the Standard & Poor's 500 Index and also other companies of similar size.
That is, the stock's selling price is relatively low compared to its estimated
book value and/or the company's earnings. The technique has been fundamental to
the success of many well-known mutual fund managers.
Historical Returns From a
Diversified Portfolio of Stocks(1)
<TABLE>
<CAPTION>
Holding Period Percentage of Times the S&P 500
Achieved a Positive Return
<S> <C>
1 year 70%
5 years 82%
10 years 90%
15 years 100%
</TABLE>
(1) Based on total returns from the Standard & Poor's 500 Composite Index during
the 60 calendar years ending 12/31/93.
Common stock investments have outperformed those of CDs and other conservative
instruments over the years. However, they present more risk and volatility
especially for short-term investors. Investors who spend longer periods of time
in the market have tended to enjoy more consistently positive returns. Those who
try to time the market for short-term gains tend to be less successful.
1-800-869-5999 [Graphic: Call for information telephone logo.]
31
<PAGE> 60
PAGE 4
LOW MINIMUM INVESTMENT
The Gradison- McDonald Established Value Fund has a low minimum initial
investment of $1,000. Additional investments can be made for as little as $50.
EXCHANGES
You can move money from one Gradison-McDonald fund to another at any time. The
Gradison- McDonald funds currently include:
Opportunity Value Fund
Government Income Fund
U.S. Government Reserves
Ohio Tax-Free Income Fund
Intermediate Municipal Income Fund
Gradison- McDonald funds planned for 1995 and sold by prospectus only include:
Growth & Income
International Fund
ACCESS
You can redeem shares on any business day at their current net asset value.
[Graphic; medal and ribbon]
32
<PAGE> 61
INSIDE BACK COVER
A TRUSTED NAME
Gradison-McDonald
is headquartered in Cincinnati and has
managed mutual funds since 1976.
The parent company, McDonald & Company
Investments, was founded in 1924
and has been listed on the
New York Stock Exchange since 1983.
It operates a leading regional
investment advisory, investment banking,
and investment brokerage firm
with offices throughout
Ohio, Michigan and Indiana,
and in Atlanta, Boston, Dallas, Chicago,
Los Angeles, the New York City area
and Naples, Florida.
1-800-869-5999 [ Graphic: Call for information telephone logo.]
33
<PAGE> 62
BACK COVER
[GRAPHIC: TELEPHONE AND TWO ENVELOPES.]
To find out more about the
GRADISON-MCDONALD
ESTABLISHED VALUE 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 funds from
a Gradison- McDonald Mutual Funds representative or your Investment Consultant.
Read it carefully before investing. Upon redemption, the value of an investment
in the Fund may be worth more or less than its costs.
McDonald & Company Securities, Inc.---Distributor
34
<PAGE> 63
[OPP Sales Brochure]
COVER PAGE
OPPORTUNITY VALUE
FUND
GRADISON - MCDONALD
[Graphic: Collage of children's things such as blocks, and baby picture with
title "Your future starts here"]
A COMMON STOCK FUND INVESTING IN SMALLER COMPANIES JUDGED TO BE UNDERVALUED
35
<PAGE> 64
INSIDE COVER
FAMILY OF MUTUAL FUNDS
OPPORTUNITY
VALUE
O V
INTERMEDIATE OHIO TAX-FREE
MUNICIPAL INCOME
INTERNATIONAL GOVERNMENT
INCOME
MONEY MARKET ESTABLISHED
VALUE
GROWTH
& INCOME
36
<PAGE> 65
PAGE 1
[Graphic: Portion of graphic described above.]
Whatever your goals or ASPIRATIONS.
Whatever your objective. One thing is certain.
An INVESTMENT made today brings
you that much closer to meeting that OBJECTIVE
AND REACHING THAT GOAL ...
whether it's buying a house, starting a family,
SAVING for a college education,
or planning for retirement. Hesitate and
time will pass you by.
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 [Phone information graphic]
37
<PAGE> 66
PAGE 2
OPPORTUNITY VALUE
FUND
GRADISON - MCDONALD OPPORTUNITY VALUE
FUND SEEKS TO PROVIDE LONG-TERM CAPITAL
APPRECIATION THROUGH INVESTMENTS IN THE
STOCK OF SMALLER COMPANIES THAT OUR DISCI-
PLINED ANALYSIS JUDGES AS UNDERVALUED. THESE
SMALL CAP COMPANIES GENERALLY HAVE CAPITAL-
IZATIONS OF $500 MILLION OR LESS. THE FUND IS
PROFESSIONALLY MANAGED BY EXPERIENCED
GRADISON - MCDONALD PORTFOLIO MANAGERS.
THE CASE FOR SMALL CAP STOCKS
TRADITIONALLY, SMALLER COMPANIES HAVE BEEN THE BIRTH-
PLACE OF MANY IMPORTANT NEW PRODUCTS, SERVICES AND
TECHNOLOGIES. WHILE THE STOCKS OF SMALLER COMPANIES ARE FREQUENTLY CONSIDERED BY
INVESTMENT PROFESSIONALS TO BE MORE VOLATILE, THEY ARE ALSO OFTEN VIEWED AS MORE
CHART- WEALTH INDICES OF INVESTMENTS IN THE U. S. 1925-1995
[LINE GRAPH COMPARING THE VALUE OF $1 INVESTED IN SMALL COMPANY STOCKS, LARGE
COMPANY STOCKS, AND INFLATION IN 1925 THROUGH 1995. ENDING VALUE OF SMALL
COMPANY STOCKS $3,822, LARGE COMPANY STOCKS $1,119, AND INFLATION $9.]
Small company stocks are represented by the fifth capitalization quintile of
stocks on the New York Stock Exchange from 1926-1981 and the performance of the
Dimensional Fund Advisors (DFA) Small Company 9/10 Fund thereafter. Large
company stocks are represented by the Standard & Poor's 500 Stock Composite
Index. The indices and securities in the chart above do not reflect the Fund's
actual portfolio composition, performance, or the fees and expenses associated
with investing in the Fund. The chart is not intended to imply future
performance of any of these investments or of the Fund. Performance figures of
the Fund, which began operations on 8/16/83 are available upon request from
Gradison - McDonald. The returns for small company common stocks and large
company stocks include the reinvestment of dividends and interest. Source: "SBBI
1996 Yearbook" by Ibbotson Associates.
38
<PAGE> 67
PAGE 3
[Graphic: Portion of first graphic described.]
responsive to profit opportunities than their larger brethren.
VALUE INVESTING
Gradison - McDonald employs a value strategy in the management of the Fund. As
applied to the Gradison - McDonald Opportunity Value Fund, this strategy
involves a disciplined stock selection process that requires that the companies
selected for investment meet a number of objectively measured criteria including
rising earnings, earnings growth rates, price-to-earnings ratios, and other
similar measures. Companies that meet these criteria are then analyzed and
ranked for the relative book value of their shares. The final selection of
investments is made from the list of companies generated from this highly
disciplined process.
Under normal circumstances, at least 70% of the Fund's assets will be invested
in common stocks while up to 30% may, at the discretion of the adviser, be
invested in short-term liquid reserves to reduce fluctuations in the Fund's net
asset value.
1-800-869-5999 [Phone information graphic]
39
<PAGE> 68
PAGE 4
DISCIPLINED APPROACH
Gradison - McDonald Opportunity Value Fund portfolio managers follow a strict
set of objective criteria in selecting small cap stocks. Consequently, stocks
are purchased because of sound fundamentals, not merely someone's intuition
about the market or rumors from Wall Street.
LOW MINIMUM INVESTMENT
The Gradison - McDonald Opportunity Value Fund has a low minimum initial
investment of $1,000. Additional investments can be made for as little as $50.
EXCHANGES
You can move money from one Gradison - McDonald fund to another at any time. The
Gradison - McDonald funds currently include:
Established Value Fund
Growth & Income Fund
International Fund
Government Income Fund
U.S. Government Reserves
Ohio Tax-Free Income Fund
Intermediate Municipal Income Fund
ACCESS
You can redeem shares on any business day at their current net asset value.
[Graphic: Children's blocks]
INSIDE BACK COVER
A TRUSTED NAME
40
<PAGE> 69
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,
Northern Kentucky and Naples, Florida
1-800-869-5999 [Phone information graphic]
41
<PAGE> 70
BACK COVER
[Graphic: Telephone and two envelopes]
To find out more about the
GRADISON - MCDONALD
OPPORTUNITY VALUE 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 many obtain a prospectus containing complete information about the funds
from a Gradison - McDonald Mutual Funds representative or your Investment
Consultant. Read it carefully before investing. Upon redemption, the value of an
investment in the Fund may be worth more or less than its cost.
Gradison - McDonald, a division of McDonald & Company securities, Inc. -
Distributor.
42
<PAGE> 71
The following Financial Statements are for the Gradison-McDonald Established
Value Fund.
<PAGE> 72
BACK COVER
[Graphic: Telephone and two envelopes]
To find out more about the
GRADISON-MCDONALD
OPPORTUNITY VALUE 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 funds
from a Gradison-McDonald Mutual Funds representative or your Investment
Consultant. Read it carefully before investing. Upon redemption, the value of
an investment in the Fund may be worth more or less than its cost.
Gradison-McDonald, a division of McDonald & Company securities, Inc. -
Distributor
42
<PAGE> 73
The following Financial Statements are for the Gradison-McDonald
Established Value Fund.
<PAGE> 74
PORTFOLIO OF INVESTMENTS MARCH 31, 1996
<TABLE>
<CAPTION>
NUMBER COMMON STOCKS - 74.03% VALUE
OF SHARES
<S> <C> <C>
AEROSPACE/DEFENSE COMPANIES - 10.56%
99,756 Lockheed Martin Corporation $ 7,568,987
280,000 Loral Corporation 13,720,000
80,000 Northrop Grumman Corporation 5,090,000
126,400 Raytheon Company 6,478,000
70,000 Textron, Inc. 5,600,000
----------
38,456,987
----------
AUTOMOTIVE - 2.73%
86,000 Cummins Engine Company, Inc. 3,472,250
149,000 Echlin, Inc. 5,401,250
42,000 ITTIndustries, Inc. 1,071,000
----------
9,944,500
----------
CHEMICALS - 3.92%
255,000 Engelhard Corporation 5,960,625
134,000 Hercules, Inc. 8,308,000
----------
14,268,625
----------
COMPUTING PRODUCTS - 10.02%
186,000 (1) Compaq Computer Corporation 7,184,250
126,000 Intel Corporation 7,150,500
62,000 International Business
Machines Corporation 6,889,750
240,000 (1) Sun Microsystems, Inc. 10,500,000
103,000 Tandy Corporation 4,763,750
----------
36,488,250
----------
CONSUMER DURABLES - 2.78%
97,000 Goodyear Tire & Rubber
(The) Company 4,947,000
111,000 Snap-on, Inc. 5,189,250
----------
10,136,250
----------
NUMBER COMMON STOCKS (CONTINUED) VALUE
OF SHARES
CONSUMER NON-DURABLES - 2.25%
138,400 American Greetings Corporation $ 3,823,300
238,000 Archer-Daniels-Midland Company 4,373,250
----------
8,196,550
----------
FINANCIAL SERVICES - 6.16%
119,000 Household International, Inc. 8,002,750
70,000 Transamerica Corporation 5,241,250
139,000 Travelers, Inc. 9,174,000
----------
22,418,000
----------
INDUSTRIAL PRODUCTS - 7.81%
120,000 Foster Wheeler Corporation 5,325,000
90,000 Goodrich (B.F.) Company 7,155,000
90,000 Harris Corporation 5,568,750
74,000 Johnson Controls, Inc. 5,522,250
105,000 Timken Company 4,843,125
----------
28,414,125
----------
INSURANCE - 4.65%
42,000 ITTHartford Group, Inc. 2,058,000
110,000 Providian Corporation 4,908,750
143,000 SAFECO Corporation 4,790,500
93,000 St. Paul Companies, Inc. 5,161,500
----------
16,918,750
----------
NATURAL RESOURCES /FOREST PRODUCTS - 7.66%
152,000 Asarco, Inc. 5,320,000
145,000 Coastal Corporation 5,727,500
150,000 Cyprus Amax Minerals Company 4,237,500
110,000 International Paper Company 4,331,250
100,000 Potlatch Corp. 4,275,000
85,000 Temple-Inland, Inc. 3,984,375
----------
27,875,625
----------
</TABLE>
See accompanying notes to financial statements.
Financial Statement Page 1
<PAGE> 75
PORTFOLIO OF INVESTMENTS MARCH 31, 1996
<TABLE>
<CAPTION>
NUMBER COMMON STOCKS (CONTINUED) VALUE
OF SHARES
<S> <C> <C>
RETAIL TRADE & SERVICES - 5.79%
160,000 American Stores Company $ 5,280,000
75,000 Dillard Department Stores, Inc. 2,596,875
42,000(1) ITT Corporation 2,520,000
99,000 Mercantile Stores, Inc. 6,076,125
254,000 Wendy's International, Inc. 4,603,750
-----------
21,076,750
-----------
TELEPHONE COMMUNICATIONS - 4.03%
210,000 (1) Andrew Corporation 8,032,500
220,000 MCICommunications
Corporation 6,655,000
-----------
14,687,500
-----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER COMMON STOCKS (CONTINUED) VALUE
OF SHARES
TRANSPORTATION - 5.67%
<S> <C> <C>
190,000 Consolidated Freightways, Inc.$ 4,868,750
75,000 Consolidated Rail Corporation 5,371,875
67,000(1) Federal Express Corporation 4,681,625
156,000 Pittston Brink's Group 4,173,000
78,000 Pittston Burlington Group 1,530,750
-----------
20,626,000
-----------
TOTAL COMMON STOCKS
(COST = $155,568,960) $269,507,912
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL COMMERCIAL PAPER - 18.42% MATURITY INTEREST VALUE
AMOUNT RATE (2)
<S> <C> <C> <C> <C>
$ 5,000,000 Air Products & Chemicals, Inc. 4/12/96 5.12% $ 4,992,178
6,000,000 Ameritech Corporation 4/29/96 5.14 5,976,013
5,000,000 AT&T Capital Corporation 4/30/96 5.13 4,979,338
6,000,000 Dun & Bradstreet Corporation 5/07/96 5.30 5,968,200
6,000,000 Dupont (E.I.) de Nemours & Company 5/06/96 5.19 5,969,725
6,000,000 Heinz (H.J.) Company 5/03/96 5.15 5,972,533
6,300,000 Motorola Credit Corporation 4/23/96 5.30 6,279,595
5,000,000 Pitney Bowes Credit Corporation 4/04/96 5.11 4,997,871
6,000,000 PPG Industries, Inc. 5/13/96 5.23 5,963,390
5,000,000 Toys "R" Us, Inc. 4/08/96 5.20 4,994,944
6,000,000 United Parcel Service of America, Inc. 5/01/96 5.17 5,974,150
5,000,000 Weyerhaeuser Company 5/14/96 5.27 4,968,526
-----------
TOTAL COMMERCIAL PAPER (COST = $67,036,463) $ 67,036,463
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL REPURCHASE AGREEMENT - 7.55% MATURITY INTEREST VALUE
AMOUNT RATE (2)
<S> <C> <C> <C> <C>
$27,500,000 First Chicago Capital Markets
dated 3/29/96, collateral; U.S. Treasury Bills, due 9/19/96
with a market value of $28,060,796; repurchase
proceeds: $27,512,031
(COST = $27,500,000) 4/01/96 5.32% $ 27,500,000
------------
TOTAL INVESTMENTS, AT VALUE (NOTE 1) (COST = $250,105,423) - 100% $364,044,375
============
</TABLE>
(1) Non-income producing.
(2) For commercial paper, the rate is the discount rate at the time of purchase
by the Fund. For repurchase agreements, the rate shown reflects the actual
rate of return to the Fund.
See accompanying notes to financial statements.
Financial Statement Page 2
<PAGE> 76
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1996
ASSETS
<S> <C>
Investments in securities, at value (Note 1) (Cost $250,105,423) $364,044,375
Receivable for Fund shares sold 2,303,021
Dividends and interest receivable 307,231
Cash 205,598
Prepaid expenses and other assets 23,237
------------
TOTAL ASSETS 366,883,462
------------
LIABILITIES
Accrued investment advisory fee (Note 2) 163,768
Other liabilities payable to adviser (Note 2) 175,279
Payable for Fund shares redeemed 108,038
Other accrued expenses and liabilities 19,549
------------
TOTAL LIABILITIES 466,634
------------
NET ASSETS $366,416,828
============
Net assets consist of:
Aggregate paid-in capital 244,189,659
Accumulated undistributed net investment income 745,359
Accumulated undistributed net realized gains 7,542,858
Net unrealized appreciation of investments 113,938,952
------------
Net Assets $366,416,828
============
Shares of capital stock outstanding
(no par value - unlimited number of shares authorized) 13,291,936
============
Net asset value and redemption price per share (Note 1) $27.57
======
</TABLE>
See accompanying notes to financial statements.
Financial Statement Page 3
<PAGE> 77
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31, 1996
<S> <C> <C>
INVESTMENT INCOME:
Dividends $4,013,844
Interest 5,311,252
----------
Total investment income $ 9,325,096
EXPENSES:
Investment advisory fees (Note 2) 1,890,225
Distribution (Note 2) 1,460,779
Transfer agency fees (Note 2) 242,289
Accounting services fees (Note 2) 52,703
Registration fees 29,649
Printing 20,578
Professional fees 19,081
Custodian fees 15,617
Trustees' fees (Note 2) 9,114
Postage and mailing 2,414
Other 29,185
----------
TOTAL EXPENSES 3,771,634
----------
NET INVESTMENT INCOME 5,553,462
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 13,508,988
Net increase in unrealized appreciation of investments 51,890,255
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 65,399,243
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $70,952,705
===========
</TABLE>
See accompanying notes to financial statements.
Financial Statement Page 4
<PAGE> 78
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
ELEVEN MONTHS
YEAR ENDED
ENDED MARCH 31, 1995
MARCH 31, 1996 (NOTE 1)
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 5,553,462 $ 4,489,701
Net realized gain on investments 13,508,988 7,099,956
Net increase in unrealized
appreciation of investments 51,890,255 11,638,554
------------ -------------
Net increase in net assets resulting from operations 70,952,705 23,228,211
------------ -------------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income (5,404,325) (4,392,688)
Net realized capital gains (12,516,066) (7,525,690)
------------ -------------
Decrease in net assets from distributions to shareholders (17,920,391) (11,918,378)
------------ -------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 204,134,880 163,689,905
Net asset value of shares issued in reinvestment of distributions 17,748,840 11,790,560
Payments for shares redeemed (185,868,913) (162,712,174)
------------ -------------
Net increase in net assets from Fund share transactions 36,014,807 12,768,291
------------ -------------
TOTAL INCREASE IN NET ASSETS 89,047,121 24,078,124
NET ASSETS:
Beginning of period 277,369,707 253,291,583
------------ -------------
End of period (including undistributed net investment
income of $745,359 and $596,222, respectively) (Note 1) $366,416,828 $ 277,369,707
============ =============
NUMBER OF FUND SHARES:
Sold 7,979,631 7,449,070
Issued in reinvestment of distributions to shareholders 709,780 541,606
Redeemed (7,260,289) (7,377,921)
------------ -------------
Net increase in shares outstanding 1,429,122 612,755
Outstanding at beginning of period 11,862,814 11,250,059
------------ -------------
Outstanding at end of period 13,291,936 11,862,814
============ =============
</TABLE>
Financial Statement Page 5
<PAGE> 79
NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
Gradison Growth Trust (the "Trust") is registered under the Investment Company
Act of 1940, as amended, as a diversified, open-end management investment
company. The Trust was created under Ohio law on May 31, 1983; it commenced
investment operations and the public offering of its shares on August 16, 1983.
The Trust consists of four series, the Gradison-McDonald Established Value Fund,
the Gradison-McDonald Opportunity Value Fund, the Gradison-McDonald Growth
& Income Fund and the Gradison-McDonald International Fund (collectively, the
"Funds"); each of which in effect represents a separate fund with its own
investment policies. This Annual Report to Shareholders pertains only to the
Gradison-McDonald Established Value Fund (the "Fund"). The Fund's investment
objective is to seek long-term capital growth by investing primarily in common
stocks.
The Fund changed its fiscal year end to March 31, effective with the September
30, 1994 Semiannual Report.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles. The preparation of
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amount of income and expenses for the
period. Actual results could differ from those estimates.
SECURITIES VALUATION -- Portfolio securities listed or traded on the New York or
American Stock Exchanges are valued at the last sale price on that exchange, or
if there were no sales that day, the securities are 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. Commercial
paper and discount notes are valued using the amortized cost method which
approximates market value. This involves initially valuing a security at its
original cost and thereafter assuming a constant amortization to maturity of any
discount or premium. Portfolio securities for which market quotations are not
readily available are valued at their fair value as determined in good faith
under procedures adopted by the Board of Trustees.
Repurchase agreements, which are collateralized by U.S. Government obligations,
are valued at cost which, together with accrued interest, approximates market.
Collateral for repurchase agreements is held in safekeeping in the customer-only
account of the Fund's custodian. At the time the Fund enters into a repurchase
agreement, the seller agrees that the value of the underlying security,
including accrued interest, will be equal to or exceed the face amount of the
repurchase agreement. In the event of a bankruptcy or other default of the
seller of a repurchase agreement, the Fund could experience both delays in
liquidating the underlying security and losses. These losses would not exceed an
amount equal to the difference between the liquidating value of the underlying
security and the face amount of the repurchase agreement and accrued interest.
To minimize the possibility of loss, the Fund enters into repurchase agreements
only with selected domestic banks and securities dealers which the Fund's
investment adviser believes present minimal credit risk. Refer to the Fund's
Portfolio of Investments for the face amount of repurchase agreements and
repurchase proceeds as of March 31, 1996.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME -- Securities transactions are
accounted for on the trade date (the date the order to buy or sell is executed),
and dividend income is recorded on the ex-dividend date. Interest income is
accrued as earned. Gains and losses on sales of investments are calculated on
the identified cost basis for financial reporting and tax purposes.
Financial Statement Page 6
<PAGE> 80
NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996
TAXES -- It is the Fund's policy to comply with the provisions of the Internal
Revenue Code available to regulated investment companies. As provided therein,
in any fiscal year in which the Fund so qualifies, and distributes at least 90%
of its taxable net income, the Fund will be relieved of federal income tax on
the income distributed. Accordingly, no provision for income taxes has been
made.
In order to avoid imposition of the excise tax applicable to regulated
investment companies, it is also the Fund's intention to declare as dividends in
each calendar year, at least 98% of its net investment income (earned during the
calendar year) and 98% of its net realized capital gains, if any (earned during
the twelve months ended October 31), plus undistributed amounts from prior
years.
The tax basis of investments is equal to the cost as shown on the Statement of
Assets and Liabilities. For both financial reporting and tax purposes, gross
unrealized appreciation and gross unrealized depreciation of securities at March
31, 1996 was $114,472,602 and $533,650, respectively.
FUND SHARE VALUATION AND DISTRIBUTIONS TO SHAREHOLDERS -- The net asset value
per share is computed by dividing the net asset value of the Fund (total assets
less total liabilities) by the number of shares outstanding. The redemption
price per share is equal to the net asset value per share.
Distributions to shareholders are recorded on the ex-dividend date. During the
year ended March 31, 1996, the Fund made total distributions of $1.44 per share,
of which $.43 was treated as dividend income, $.06 was treated as short-term
capital gain, and $.95 was treated as long-term capital gain.
EXPENSES -- Common expenses incurred by the Trust are allocated to the Fund
based on the ratio of the net assets of the Fund to the combined net assets of
the Trust. In all other respects, expenses are charged to the Fund as incurred
on a specific identification basis.
NOTE 2 -- TRANSACTIONS WITH AFFILIATES
The Trust's investments are managed, subject to the general supervision and
control of the Trust's Board of Trustees, by McDonald & Company Securities, Inc.
("McDonald"), a registered investment adviser and securities dealer, pursuant to
the terms of an Investment Advisory Agreement ("Agreement"). Under the terms of
the Agreement, effective June 1, 1995, the Fund pays McDonald a fee computed and
accrued daily and paid monthly based upon the Fund's daily net assets at the
annual rate of .65% on the first $100 million, .55% on the next $100 million and
.45% on any amounts in excess of $200 million. McDonald is to reimburse the Fund
for the amount by which the Fund's aggregate expenses for a fiscal year,
including the advisory fee but excluding interest, taxes and extraordinary
expenses, exceed limits set by state securities regulations. No such
reimbursement was required for the year ended March 31, 1996. Prior to June 1,
1995, the Fund paid McDonald an investment advisory fee at an annual rate of
.90% on the first $100 million, .80% on the next $100 million and .70% on any
amounts in excess of $200 million.
The Agreement provides that McDonald bears the costs of salaries and related
expenses of executive officers of the Fund who are necessary for the management
and operations of the Fund. In addition, McDonald bears the costs of preparing,
printing and mailing sales literature and other advertising materials and
compensates the Trust's trustees who are affiliated with McDonald. All expenses
not specifically assumed by McDonald are borne by the Fund.
Financial Statement Page 7
<PAGE> 81
NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996
Under the terms of a Transfer Agency, Accounting Services and Administrative
Services Agreement, effective June 1, 1995, McDonald provides transfer agent,
dividend disbursing, accounting services and administrative services to the
Fund. The Fund pays McDonald a monthly fee for transfer agency and
administrative services at an annual rate of $18.25 per shareholder non-zero
balance account, plus out-of-pocket costs for statement paper, statement and
reply envelopes and reply postage. The Fund pays McDonald a monthly fee for
accounting services based on the Fund's average daily net assets at an annual
rate of .03% on the first $100 million, .02% on the next $100 million, and .01%
on any amount in excess of $200 million, with a minimum annual fee of $40,000.
Prior to June 1, 1995, the Fund paid McDonald a monthly fee at an annual rate of
$7.36 per shareholder non-zero balance account for data processing services
provided to the Fund plus the cost of shareholder statement printing. Prior to
June 1, 1995, the Fund also reimbursed McDonald for the cost of furnishing
personnel to perform shareholder and certain other services.
In accordance with the terms of a Distribution Plan adopted under Rule 12b-1 of
the Investment Company Act of 1940, the Fund pays McDonald a fee for its
assistance in distribution of shares of the Fund. Effective June 1, 1995, in
connection with a reduction of the investment advisory fee by .25%, the
Distribution Service Plan was amended to increase the total fee by .25% to .50%,
the components of which are set forth in the remainder of this paragraph. The
Fund pays McDonald a service fee for personal services to shareholders,
including shareholder liaison services such as responding to shareholder
inquiries and providing information to shareholders about their Fund accounts.
This fee is computed and paid at an annual rate of .25% of the Fund's average
daily net assets. The Fund also pays McDonald a fee for its assistance in
selling shares of the Fund, including advising shareholders regarding purchase,
sale and retention of Fund shares. This fee is computed and paid at an annual
rate of .25% of the Fund's average daily net assets.
The officers of the Trust are also officers of McDonald.
Each trustee of the Trust who is not affiliated with McDonald receives fees from
the Trust for services as a trustee. The amounts of such fees for each trustee
are as follows: (a) an annual fee of $5,000 payable in quarterly installments
for service during each fiscal quarter and (b) $500 for each Board of Trustees
or committee meeting attended.
NOTE 3 -- SUMMARY OF PURCHASES AND SALES OF INVESTMENTS
For the year ended March 31, 1996, the cost of purchases and proceeds from the
sale of securities, excluding short-term securities, amounted to $43,503,220 and
$47,342,065, respectively.
Financial Statement Page 8
<PAGE> 82
ARTHUR
ANDERSEN
ARTHUR ANDERSEN & CO, SC
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Trustees of the
Gradison-McDonald Established Value Fund
of the Gradison Growth Trust:
We have audited the accompanying statement of assets and liabilities of the
Gradison-McDonald Established Value Fund of the Gradison Growth Trust (an Ohio
business trust), including the portfolio of investments, as of March 31, 1996,
and the related statement of operations for the year then ended, the statements
of changes in net assets for the periods indicated thereon, and the financial
highlights for each of the four periods in the period then ended. These
financial statements and financial highlights are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits. The financial
highlights for the year ended April 30, 1992, of the Gradison-McDonald
Established Value Fund of the Gradison Growth Trust, was audited by other
auditors whose report dated May 22, 1992, expressed an unqualified opinion on
those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
31, 1996, by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Gradison-McDonald Established Value Fund of the Gradison Growth Trust as of
March 31, 1996, the results of its operations for the year then ended, the
changes in its net assets for the periods indicated thereon, and the financial
highlights for each of the four periods in the period then ended, in conformity
with generally accepted accounting principles.
Cincinnati, Ohio,
May 30, 1996
See accompanying notes to financial statements.
Financial Statement Page 9
<PAGE> 83
The following Financial Statements are for the Gradison-McDonald Opportunity
Value Fund.
<PAGE> 84
PORTFOLIO OF INVESTMENTS MARCH 31, 1996
<TABLE>
<CAPTION>
NUMBER COMMON STOCKS - 71.32% VALUE
OF SHARES
BANKS - 7.73%
<S> <C> <C>
29,600 Boatmen's Bankshares $1,161,800
5,000 First Empire State Corporation 1,230,000
31,100 Firstar Corporation 1,391,725
45,000 HUBCO, Inc. 877,500
30,750 Mercantile Bankshares
Corporation 807,188
25,252 Old Kent Financial Corporation 1,003,767
24,800 Union Planters Corporation 750,200
10,000 Zions Bancorporation 707,500
---------
7,929,680
---------
</TABLE>
<TABLE>
<CAPTION>
BUSINESS SERVICES - 5.65%
<S> <C> <C>
45,000 ABM Industries, Inc. 1,490,625
40,500 Banta Corporation 1,083,375
25,000 Interpool, Inc. 437,500
50,000 Norstan, Inc. 1,337,500
26,000 PHH Corporation 1,446,250
---------
5,795,250
---------
</TABLE>
<TABLE>
<CAPTION>
COMPUTER HARDWARE - 8.06%
<S> <C> <C>
45,000(1) Adaptec, Inc. 2,171,250
115,000(1) Alliance Semiconductor
Corporation 1,092,500
56,250(1) D.H. Technologies, Inc. 1,350,000
55,000 Dallas Semiconductor
Corporation 1,010,625
60,000(1) EXAR Corporation 855,000
79,000(1) Integrated Circuit Systems, Inc. 770,250
89,000(1) Integrated Device Technology,
Inc. 1,012,375
---------
8,262,000
---------
</TABLE>
<TABLE>
<CAPTION>
COMPUTER SOFTWARE - .89%
<S> <C> <C>
37,000 Computer Data Systems, Inc. 578,125
11,250(1) Keane, Inc. 336,094
---------
914,219
---------
</TABLE>
<TABLE>
<CAPTION>
CONSUMER DURABLES - 4.87%
<S> <C> <C>
46,000 Agco Corporation 1,109,750
56,000 Breed Technologies, Inc. 1,043,000
42,000 Culp, Inc. 441,000
45,000 Titan Wheel International
Corporation 742,500
70,500 Wynn's International, Inc. 1,656,750
---------
4,993,000
---------
</TABLE>
<TABLE>
<CAPTION>
NUMBER COMMON STOCKS (CONTINUED) VALUE
OF SHARES
CONSUMER NON-DURABLES - 3.35%
<S> <C> <C>
67,500 Comair Holdings, Inc. $ 2,320,312
50,000(1) CSS Industries, Inc. 1,112,500
---------
3,432,812
---------
</TABLE>
<TABLE>
<CAPTION>
ELECTRONICS - 7.25%
<S> <C> <C>
80,000 Innovex, Inc. 1,060,000
75,000(1) Input/Output, Inc. 2,325,000
60,000(1) Kent Electronics Corporation 2,122,500
45,000 Pioneer Standard Electronics,
Inc. 680,625
74,450 (1)Sterling Electronics Corporation 1,240,706
---------
7,428,831
---------
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL SERVICES - 6.69%
<S> <C> <C>
47,000 Aames Financial Corporation 1,692,000
33,000 Advanta Corporation 1,707,750
20,000 Orion Capital Corporation 905,000
46,000 Raymond James Financial,Inc. 1,035,000
42,000 TCF Financial Corporation 1,522,500
---------
6,862,250
---------
</TABLE>
<TABLE>
<CAPTION>
HEALTH CARE - 6.63%
<S> <C> <C>
49,000(1) Community Health Systems, Inc. 2,009,000
70,000(1) HealthSouth Corporation 2,380,000
40,800(1) United American Healthcare
Corporation 550,800
35,000(1) Universal Health Services, Inc. 1,859,375
---------
6,799,175
---------
</TABLE>
<TABLE>
<CAPTION>
HOUSING / BUILDING MATERIALS - 5.21%
<S> <C>
39,000 Butler Manufacturing Company 1,287,000
43,000 Lennar Corporation 1,069,625
40,000 Oakwood Homes Corporation 1,985,000
76,500 Republic Gypsum Company 1,004,063
---------
5,345,688
---------
</TABLE>
<TABLE>
<CAPTION>
INDUSTRIAL PRODUCTS - 2.18%
<S> <C> <C>
30,000 Amcast Industries Corporation 532,500
15,000 Gleason Corporation 609,375
21,000(1) Raymond Corporation 367,500
31,900 Varlen Corporation 725,725
---------
2,235,100
---------
</TABLE>
See accompanying notes to financial statements.
Financial Statement Page 1
<PAGE> 85
PORTFOLIO OF INVESTMENTS MARCH 31, 1996
<TABLE>
<CAPTION>
NUMBER COMMON STOCKS (CONTINUED) VALUE
OF SHARES
INSURANCE COMPANIES - 5.81%
<S> <C> <C>
35,000 American Bankers
Insurance Group, Inc. $1,225,000
26,000 Equitable of Iowa Corporation 929,500
56,100 Fremont General Corporation 1,325,362
66,811 GAINSCO, Inc. 743,272
29,000 Protective Life Corporation 978,750
30,000 PXRE Corporation 750,000
---------
5,951,884
---------
</TABLE>
<TABLE>
<CAPTION>
NATURAL RESOURCES - 3.87%
<S> <C> <C>
37,000 First Mississippi Corporation 883,375
54,000(1) Mueller Industries, Inc. 1,910,250
95,000 Patrick Industries, Inc. 1,175,625
----------
3,969,250
----------
</TABLE>
<TABLE>
<CAPTION>
NUMBER COMMON STOCKS (CONTINUED) VALUE
OF SHARES
RETAIL TRADE & SERVICES - 3.13%
<S> <C> <C>
55,000(1) DAKA International, Inc. $ 1,375,000
51,000(1) Rex Stores Corporation 707,625
43,000(1) Waban, Inc. 1,128,750
----------
3,211,375
----------
TOTAL COMMON STOCKS
(COST = $42,727,110) $73,130,514
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL COMMERCIAL PAPER - 21.37% MATURITY INTEREST VALUE
AMOUNT RATE (2)
<S> <C> <C> <C>
$ 1,500,000 Air Products & Chemicals, Inc. 4/12/96 5.12% $ 1,497,653
2,000,000 Ameritech Corporation 4/29/96 5.14 1,992,005
1,500,000 AT&T Capital Corporation 4/30/96 5.13 1,493,801
2,000,000 Dunn & Bradstreet Corporation 5/07/96 5.30 1,989,400
2,000,000 Dupont (E.I.) de Nemours & Company 5/06/96 5.19 1,989,908
2,000,000 Heinz (H.J.) Company 5/03/96 5.15 1,990,845
2,000,000 Motorola Credit Corporation 4/23/96 5.30 1,993,522
1,500,000 Pitney Bowes Credit Corporation 4/04/96 5.11 1,499,361
2,000,000 PPG Industries, Inc. 5/13/96 5.23 1,987,797
1,500,000 Toy's "R" Us, Inc. 4/08/96 5.20 1,498,483
2,000,000 United Parcel Service of America, Inc. 5/01/96 5.17 1,991,383
2,000,000 Weyerhaeuser Company 5/14/96 5.27 1,987,411
-----------
TOTAL COMMERCIAL PAPER (COST = $21,911,569) $21,911,569
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL REPURCHASE AGREEMENT - 7.31% MATURITY INTEREST VALUE
AMOUNT RATE (2)
<S> <C> <C> <C> <C>
$ 7,500,000 First Chicago Capital Markets
dated 3/29/96, collateral; U.S. Treasury Bills, due 9/19/96
with a market value of $7,654,275; repurchase
proceeds: $7,503,281
(COST = $7,500,000) 4/01/96 5.32% $ 7,500,000
-----------
TOTAL INVESTMENTS, AT VALUE (NOTE 1) (COST = $72,138,679) - 100% $102,542,083
===========
</TABLE>
(1) Non-income producing.
(2) For commercial paper, the rate is the discount rate at the time of purchase
by the Fund. For repurchase agreements, the rate shown reflects the actual
rate of return to the Fund.
See accompanying notes to financial statements.
Financial Statement Page 2
<PAGE> 86
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
MARCH 31, 1996
ASSETS
<S> <C>
Investments in securities, at value (Note 1) (Cost $72,138,679) $102,542,083
Receivable for Fund shares sold 469,736
Cash 143,434
Dividends and interest receivable 50,683
Prepaid expenses and other assets 10,835
------------
TOTAL ASSETS 103,216,771
------------
LIABILITIES
Payable for Fund shares redeemed 118,971
Accrued investment advisory fee (Note 2) 54,854
Other liabilities payable to adviser (Note 2) 54,897
Other accrued expenses and liabilities 9,519
------------
TOTAL LIABILITIES 238,241
------------
NET ASSETS $102,978,530
============
Net assets consist of:
Aggregate paid-in capital 68,093,037
Accumulated undistributed net investment income 176,382
Accumulated undistributed net realized gains 4,305,707
Net unrealized appreciation of investments 30,403,404
------------
Net Assets $102,978,530
============
Shares of capital stock outstanding
(no par value - unlimited number of shares authorized) 4,625,391
============
Net asset value and redemption price per share (Note 1) $22.26
======
</TABLE>
See accompanying notes to financial statements.
Financial Statement Page 3
<PAGE> 87
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31, 1996
--------------
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 1,457,206
Dividends 705,090
-----------
Total investment income $ 2,162,296
EXPENSES:
Investment advisory fees (Note 2) 631,571
Distribution (Note 2) 421,414
Transfer agency fees (Note 2) 106,779
Accounting services fees (Note 2) 33,333
Registration fees 19,286
Professional fees 18,983
Custodian fees 14,465
Printing 14,121
Trustees' fees (Note 2) 9,054
Postage and mailing 1,196
Other 18,839
-----------
TOTAL EXPENSES 1,289,041
-----------
NET INVESTMENT INCOME 873,255
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 4,563,431
Net increase in unrealized appreciation of investments 17,064,801
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 21,628,232
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $22,501,487
===========
</TABLE>
See accompanying notes to financial statements.
Financial Statement Page 4
<PAGE> 88
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
ELEVEN MONTHS
YEAR ENDED
ENDED MARCH 31, 1995
MARCH 31, 1996 (NOTE 1)
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 873,255 $ 639,271
Net realized gain on investments 4,563,431 2,529,940
Net increase (decrease) in unrealized
appreciation of investments 17,064,801 (1,671,004)
----------- ----------
Net increase in net assets resulting from operations 22,501,487 1,498,207
----------- ----------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income (836,073) (573,964)
Net realized capital gains (2,617,212) (2,002,612)
----------- ----------
Decrease in net assets from distributions to shareholders (3,453,285) (2,576,576)
----------- ----------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 57,418,476 45,495,191
Net asset value of shares issued in reinvestment of distributions 3,398,854 2,526,554
Payments for shares redeemed (61,625,425) (45,501,572)
----------- ----------
Net increase (decrease) in net assets from Fund share transactions (808,095) 2,520,173
----------- ----------
TOTAL INCREASE IN NET ASSETS 18,240,107 1,441,804
NET ASSETS:
Beginning of period 84,738,423 83,296,619
----------- ----------
End of period (including undistributed net investment
income of $176,382 and $139,200, respectively) (Note 1) $102,978,530 $84,738,423
=========== ==========
NUMBER OF FUND SHARES:
Sold 2,817,109 2,552,279
Issued in reinvestment of distributions to shareholders 180,968 141,556
Redeemed (3,054,423) (2,551,892)
----------- ----------
Net increase (decrease) in shares outstanding (56,346) 141,943
Outstanding at beginning of period 4,681,737 4,539,794
----------- ----------
Outstanding at end of period 4,625,391 4,681,737
=========== ==========
</TABLE>
See accompanying notes to financial statements.
Financial Statement Page 5
<PAGE> 89
NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
Gradison Growth Trust (the "Trust") is registered under the Investment Company
Act of 1940, as amended, as a diversified, open-end management investment
company. The Trust was created under Ohio law on May 31, 1983; it commenced
investment operations and the public offering of its shares on August 16, 1983.
The Trust consists of four series, the Gradison-McDonald Opportunity Value Fund,
the Gradison-McDonald Established Value Fund, the Gradison-McDonald Growth &
Income Fund, and the Gradison-McDonald International Fund (collectively, the
"Funds"); each of which in effect represents a separate fund with its own
investment policies. This Annual Report to Shareholders pertains only to the
Gradison-McDonald Opportunity Value Fund (the "Fund"). The Fund's investment
objective is to seek long-term capital growth by investing primarily in common
stocks.
The Fund changed its fiscal year end to March 31, effective with the September
30, 1994 Semiannual Report.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles. The preparation of
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses for the
period. Actual results could differ from those estimates.
SECURITIES VALUATION -- Portfolio securities listed or traded on the New York or
American Stock Exchanges are valued at the last sale price on that exchange, or
if there were no sales that day, the securities are 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. Commercial
paper and discount notes are valued using the amortized cost method which
approximates market value. This involves initially valuing a security at its
original cost and thereafter assuming a constant amortization to maturity of any
discount or premium. Portfolio securities for which market quotations are not
readily available are valued at their fair value as determined in good faith
under procedures adopted by the Board of Trustees.
Repurchase agreements, which are collateralized by U.S. Government obligations,
are valued at cost which, together with accrued interest, approximates market.
Collateral for repurchase agreements is held in safekeeping in the customer-only
account of the Fund's custodian. At the time the Fund enters into a repurchase
agreement, the seller agrees that the value of the underlying security,
including accrued interest, will be equal to or exceed the face amount of the
repurchase agreement. In the event of a bankruptcy or other default of the
seller of a repurchase agreement, the Fund could experience both delays in
liquidating the underlying security and losses. These losses would not exceed an
amount equal to the difference between the liquidating value of the underlying
security and the face amount of the repurchase agreement and accrued interest.
To minimize the possibility of loss, the Fund enters into repurchase agreements
only with selected domestic banks and securities dealers which the Fund's
investment adviser believes present minimal credit risk. Refer to the Fund's
Portfolio of Investments for the face amount of repurchase agreements and
repurchase proceeds as of March 31, 1996.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME -- Securities transactions are
accounted for on the trade date (the date the order to buy or sell is executed),
and dividend income is recorded on the ex-dividend date. Interest income is
accrued as earned. Gains and losses on sales of investments are calculated on
the identified cost basis for financial reporting and tax purposes.
Financial Statement Page 6
<PAGE> 90
NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996
TAXES -- It is the Fund's policy to comply with the provisions of the Internal
Revenue Code available to regulated investment companies. As provided therein,
in any fiscal year in which the Fund so qualifies, and distributes at least 90%
of its taxable net income, the Fund will be relieved of federal income tax on
the income distributed. Accordingly, no provision for income taxes has been
made.
In order to avoid imposition of the excise tax applicable to regulated
investment companies, it is also the Fund's intention to declare as dividends in
each calendar year, at least 98% of its net investment income (earned during the
calendar year) and 98% of its net realized capital gains, if any (earned during
the twelve months ended October 31), plus undistributed amounts from prior
years.
The tax basis of investments is equal to the cost as shown on the Statement of
Assets and Liabilities.
For both financial reporting and tax purposes, gross unrealized appreciation and
gross unrealized depreciation of securities at March 31, 1996 was $31,087,055
and $683,651, respectively.
FUND SHARE VALUATION AND DISTRIBUTIONS TO SHAREHOLDERS -- The net asset value
per share is computed by dividing the net asset value of the Fund (total assets
less total liabilities) by the number of shares outstanding. The redemption
price per share is equal to the net asset value per share.
Distributions to shareholders are recorded on the ex-dividend date. During the
year ended March 31, 1996, the Fund made total distributions of $.76 per share,
of which $.185 was treated as dividend income and $.575 was treated as long-term
capital gain.
EXPENSES -- Common expenses incurred by the Trust are allocated to the Fund
based on the ratio of the net assets of the Fund to the combined net assets of
the Trust. In all other respects, expenses are charged to the Fund as incurred
on a specific identification basis.
NOTE 2 -- TRANSACTIONS WITH AFFILIATES
The Trust's investments are managed, subject to the general supervision and
control of the Trust's Board of Trustees, by McDonald & Company Securities, Inc.
("McDonald"), a registered investment adviser and securities dealer, pursuant to
the terms of an Investment Advisory Agreement ("Agreement"). Under the terms of
the Agreement, effective June 1, 1995, the Fund pays McDonald a fee computed and
accrued daily and paid monthly based upon the Fund's daily net assets at the
annual rate of .65% on the first $100 million, .55% on the next $100 million and
.45% on any amounts in excess of $200 million. McDonald is to reimburse the Fund
for the amount by which the Fund's aggregate expenses for a fiscal year,
including the advisory fee but excluding interest, taxes and extraordinary
expenses, exceed limits set by state securities regulations. No such
reimbursement was required for the year ended March 31, 1996. Prior to June 1,
1995, the Fund paid McDonald an investment advisory fee at an annual rate of
.90% on the first $100 million, .80% on the next $100 million and .70% on any
amounts in excess of $200 million.
The Agreement provides that McDonald bears the costs of salaries and related
expenses of executive officers of the Fund who are necessary for the management
and operations of the Fund. In addition, McDonald bears the costs of preparing,
printing and mailing sales literature and other advertising materials and
compensates the Trust's trustees who are affiliated with McDonald. All expenses
not specifically assumed by McDonald are borne by the Fund.
Financial Statement Page 7
<PAGE> 91
NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996
Under the terms of a Transfer Agency, Accounting Services and Administrative
Services Agreement, effective June 1, 1995, McDonald provides transfer agent,
dividend disbursing, accounting services and administrative services to the
Fund. The Fund pays McDonald a monthly fee for transfer agency and
administrative services at an annual rate of $18.25 per shareholder non-zero
balance account, plus out-of-pocket costs for statement paper, statement and
reply envelopes and reply postage. The Fund pays McDonald a monthly fee for
accounting services based on the Fund's average daily net assets at an annual
rate of .03% on the first $100 million, .02% on the next $100 million, and .01%
on any amount in excess of $200 million, with a minimum annual fee of $40,000.
Prior to June 1, 1995, the Fund paid McDonald a monthly fee at an annual rate
of $7.36 per shareholder non-zero balance account for data processing services
provided to the Fund plus the cost of shareholder statement printing. Prior to
June 1, 1995, the Fund also reimbursed McDonald for the cost of furnishing
personnel to perform shareholder and certain other services.
In accordance with the terms of a Distribution Plan adopted under Rule 12b-1 of
the Investment Company Act of 1940, the Fund pays McDonald a fee for its
assistance in distribution of shares of the Fund. Effective June 1, 1995, in
connection with a reduction of the investment advisory fee by .25%, the
Distribution Service Plan was amended to increase the total fee by .25% to
.50%, the components of which are set forth in the remainder of this paragraph.
The Fund pays McDonald a service fee for personal services to shareholders,
including shareholder liaison services such as responding to shareholder
inquiries and providing information to shareholders about their Fund accounts.
This fee is computed and paid at an annual rate of .25% of the Fund's average
daily net assets. The Fund also pays McDonald a fee for its assistance in
selling shares of the Fund including advising shareholders regarding purchase,
sale and retention of Fund shares. This fee is computed and paid at an annual
rate of .25% of the Fund's average daily net assets.
The officers of the Trust are also officers of McDonald.
Each trustee of the Trust who is not affiliated with Gradison receives fees
from the Trust for services as a trustee. The amounts of such fees for each
trustee are as follows: (a) an annual fee of $5,000 payable in quarterly
installments for service during each fiscal quarter and (b) $500 for each Board
of Trustees or committee meeting attended.
NOTE 3 -- SUMMARY OF PURCHASES AND SALES OF INVESTMENTS
For the year ended March 31, 1996, the cost of purchases and proceeds from the
sale of securities, excluding short-term securities, amounted to $15,965,932
and $25,677,259, respectively.
Financial Statement Page 8
<PAGE> 92
ARTHUR
ANDERSEN
ARTHUR ANDERSEN & CO, SC
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Trustees of the
Gradison-McDonald Opportunity Value Fund
of the Gradison Growth Trust:
We have audited the accompanying statement of assets and liabilities of the
Gradison-McDonald Opportunity Value Fund of the Gradison Growth Trust (an Ohio
business trust), including the portfolio of investments, as of March 31, 1996,
and the related statement of operations for the year then ended, the statements
of changes in net assets for the periods indicated thereon, and the financial
highlights for each of the four periods in the period then ended. These
financial statements and financial highlights are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits. The financial
highlights for the year ended April 30, 1992, of the Gradison-McDonald
Opportunity Value Fund of the Gradison Growth Trust, was audited by other
auditors whose report dated May 22, 1992, expressed an unqualified opinion on
those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
31, 1996, by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Gradison-McDonald Opportunity Value Fund of the Gradison Growth Trust as of
March 31, 1996, the results of its operations for the year then ended, the
changes in its net assets for the periods indicated thereon, and the financial
highlights for each of the four periods in the period then ended, in conformity
with generally accepted accounting principles.
Cincinnati, Ohio,
May 30, 1996
Financial Statement Page 9
<PAGE> 93
ARTHUR
ANDERSEN
ARTHUR ANDERSEN & CO, SC
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Trustees of the
Gradison-McDonald Opportunity Value Fund
of the Gradison Growth Trust:
We have audited the accompanying statement of assets and liabilities of the
Gradison-McDonald Opportunity Value Fund of the Gradison Growth Trust (an Ohio
business trust), including the portfolio of investments, as of March 31, 1996,
and the related statement of operations for the year then ended, the statements
of changes in net assets for the periods indicated thereon, and the financial
highlights for each of the four periods in the period then ended. These
financial statements and financial highlights are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits. The
financial highlights for the year ended April 30, 1992, of the
Gradison-McDonald Opportunity Value Fund of the Gradison Growth Trust, was
audited by other auditors whose report dated May 22, 1992, expressed an
unqualified opinion on those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
March 31, 1996, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Gradison-McDonald Opportunity Value Fund of the Gradison Growth Trust as of
March 31, 1996, the results of its operations for the year then ended, the
changes in its net assets for the periods indicated thereon, and the financial
highlights for each of the four periods in the period then ended, in conformity
with generally accepted accounting principles.
Cincinnati, Ohio,
May 30, 1996
Financial Statement Page 9
<PAGE> 94
GRADISON GROWTH TRUST
Gradison-McDonald Growth & Income 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 July 29, 1996,
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 July 29, 1996
<PAGE> 95
CONTENTS LOCATION IN PROSPECTUS
__________________________________________ Page
INVESTMENT POLICIES AND RESTRICTIONS 3 Investment objectives,
policies and, risks.
PURCHASE OF SHARES 4 Purchases and Redemptions
REDEMPTION OF SHARES 5 Purchases and Redemptions
EXCHANGE PRIVILEGE 5 Optional Shareholder
Services
Telephone Exchanges 5
Written Exchanges 5
General Exchange Information 6
TAXES 6 Taxes
NET ASSET VALUE 8 Net Asset Value
PORTFOLIO TRANSACTIONS 8
INVESTMENT ADVISER 10 Management of the Fund
Advisory Agreement 10
Distribution 12
Transfer Agent and Accounting
Services Agreement 14
TRUSTEES AND OFFICERS OF THE TRUST 14
DESCRIPTION OF THE TRUST 16 General Information
INVESTMENT PERFORMANCE 18 Performance Calculations
CUSTODIAN 18
ACCOUNTANTS 18
LEGAL COUNSEL 18
DOLLAR COST AVERAGING 18
SALES BROCHURE INFORMATION 20
FINANCIAL STATEMENTS Following Page 31 Financial Highlights
2
<PAGE> 96
INVESTMENT POLICIES AND RESTRICTIONS
In addition to the investment restrictions described in the Prospectus,
Gradison-McDonald Growth & Income Fund (the "Fund") has adopted the following
investment restrictions and limitations, which may not be changed without the
approval of the holders of a majority of the outstanding voting securities of
the Fund (as defined in the Investment Company Act of 1940, as amended, (the
"Act"). See "Description of the Trust." The Fund will not:
(1) Make loans, except that the purchase of debt securities as allowed by
the Fund's investment objective and other investment restrictions, the
loaning of portfolio securities pursuant to guidelines of the Securities
and Exchange Commission, and the entering into of repurchase agreements
shall not be prohibited by this restriction;
(2) Purchase or sell real estate, including real estate partnerships or
trusts owning an equity interest in real estate, unless acquired as a
result of ownership of securities or other instruments. The purchase of
securities secured by real estate or securities of companies engaged in
the real estate business which are otherwise allowed by the Fund's
investment objective and other investment restrictions shall not be
prohibited by this restriction;
(3) Underwrite the securities of other issuers, except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of
1933 in connection with the acquisition or disposition of portfolio
securities;
(4) Purchase or sell commodities or commodity contracts or interests in oil,
gas or other mineral exploration or development programs or leases. The
purchase or sale of financial futures contracts or options on financial
futures contracts for the purposes and within the limits set forth in
the Prospectus and this Statement of Additional Information shall not be
prohibited by this restriction;
(5) Issue senior securities except as permitted under the Investment Company
Act of 1940.
The following limitations are not fundamental and may be changed without
shareholder approval: (1) With respect to the purchase of securities of other
investment companies, the Fund will not (a) purchase more than 3% of the
outstanding voting shares of an investment company; (b) invest more than 5% of
its assets in securities of any one investment company; or (c) invest more than
10% of its assets in securities of all investment companies. (2) The Fund will
not make short sales of securities, or purchase securities on margin, except for
short-term credit as is necessary for the clearance of transactions. The deposit
or payment by the Fund of initial or maintenance margin in connection with
futures contracts or related options transactions is not considered the purchase
of a security on margin. (3) The Fund will not purchase or retain in its
3
<PAGE> 97
portfolio any securities issued by an issuer, if those Trustees and officers of
the Trust or of the Fund's investment adviser, who individually own beneficially
more than 1/2 of 1% of the outstanding securities of such issuer, together own
beneficially more than 5% of such outstanding securities. (4) The Fund will not
mortgage, pledge or hypothecate securities in amounts exceeding 15% of the value
of the assets of the Fund (taken at market value). The deposit of underlying
securities and other assets in escrow or other collateral arrangements in
connection with the writing of options or margin for futures contracts or
options on futures contracts are not deemed to be pledges or hypothecations
subject to this restriction. (5) The Fund may not invest more than 5% of its
assets in securities of unseasoned issuers which with their predecessors have
had less than three years of continuous operations. (6) The Fund will not
purchase any security if, as a result, more than 10% of its total assets would
be invested in securities subject to legal restrictions upon resale. (7) The
Fund may not invest more than 15% of its assets in securities that are not
readily marketable.
The cash equivalents which the Fund may invest in are short-term U.S
Government obligations, certificates of deposit of domestic depository
institutions, high grade commercial paper, and bankers acceptances.
At the present time, the Fund does not intend to engage in the loaning
of portfolio securities, the purchase or sale of financial futures contracts or
options on financial futures contracts, the purchase or sale of options, or the
purchase of foreign securities (other than American Deposit Receipts). The Fund
does not intend to purchase warrants, if as a result more than 5% of the Fund's
net assets, valued at lower or cost or market value would be invested in
warrants or more than 2% of its net assets would be invested in warrants, valued
aforesaid, which are not traded on the New York or American Stock Exchanges.
If a percentage restriction set forth above is met at the time of
investment, a later movement above the restriction level resulting from a change
in the value of securities held by the Fund will not be considered a violation
of the investment restriction.
PURCHASE OF SHARES
The Trust 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 Trust from such shareholder's account.
The Trust 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").
4
<PAGE> 98
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.
EXCHANGE PRIVILEGE
If a new account is established by an exchange, the dollar amount of
the exchange must at least be equal to the minimum initial investment ($1,000 in
the case of Gradison-McDonald U.S. Government Reserves ("GMU"),
Gradison-McDonald Government Income Fund ("GIF"), Gradison-McDonald Ohio
Tax-Free Income Fund ("GMO"), Gradison-McDonald Intermediate Municipal Income
Fund ("IMI"), Gradison-McDonald Established Value Fund ("EST"),
Gradison-McDonald Opportunity Value Fund ("OPP") and the Gradison-McDonald
International Fund); and $2,500 in the case of any tax free money market funds
for which the Distributor will effect exchanges; if an exchange is made into an
existing account, the $50 minimum additional investment must be met.
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.
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
5
<PAGE> 99
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 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 Trust 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 Gradison-McDonald mutual funds, and Gradison (with respect to any
tax-free money market funds) each reserve the right to reject any exchange
request. The exchange feature may be terminated at any time by the shareholder,
the Trust, the Gradison-McDonald Mutual Funds, or Gradison. In the case of
excessive use of the exchange feature, the Trust, 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 has qualified and intends to qualify in the future as a
regulated investment company under Subchapter M of the Internal Revenue Code
(the "Code"). By so qualifying, the Fund will not be taxed on net investment
income and net realized capital gains distributed to shareholders.
Dividends from net investment income and distributions from net
realized short-term capital gains are taxable to shareholders as ordinary
income, whether paid in cash or in additional shares of the Fund. All or a part
of the dividends distributed to shareholders will qualify for the deduction for
dividends received by corporations. The specific amounts eligible for this
deduction depend upon certain factors set forth in the Code, and the Trust will
furnish shareholders annually with written advice as to the amounts of dividend
distributions eligible for such deduction.
Distributions of any net realized long-term capital gains 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 gains distributions are not eligible
for the dividends received deduction for corporations. The Trust will furnish
shareholders with written notification as to the
6
<PAGE> 100
amount of any long-term capital gains concurrently with any distribution that
includes long-term capital gains.
Investors should be aware of the tax implications of purchasing shares
shortly before a record date for a dividend or capital gains 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.
In order to qualify for treatment as a regulated investment company
under the Internal Revenue Code of 1986, as amended, the Fund must distribute to
its shareholders for each taxable year at least 90% of its investment company
taxable income (consisting generally of taxable net investment income plus net
short-term capital gain, if any), and must meet several additional requirements.
These requirements include the following: (1) the Fund must derive at least 90%
of its gross income each taxable year from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of
securities and certain other income; (2) the Fund must derive less than 30% of
its gross income each taxable year from the sale or other disposition of
securities held for less than three months; (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 (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.
The Fund will be subject to a nondeductible 4% excise tax to the extent
it fails to distribute by the end of any calendar year substantially all of its
net investment 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 or resale 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 of the Fund 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
7
<PAGE> 101
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 dividends received with respect to such
shares.
The Fund is required, in certain circumstances, to withhold 31% of
dividends and certain other payments, including redemptions, paid to
shareholders who do not furnish to the Fund their correct taxpayer
identification number or who are otherwise subject to backup withholding.
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. 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 a fund are allocated to each 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 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. 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
The Adviser is responsible for making the Fund's portfolio decisions,
including allocation of the Fund's brokerage business and negotiation of
brokerage commissions, subject to policies established by the Trust's Board of
Trustees. In purchasing and selling portfolio securities, brokers and dealers
will be selected to obtain the most favorable net results, taking into account
various factors, including the price of the security, the commission rate, the
size of the transaction, the difficulty of execution
8
<PAGE> 102
and other services offered by brokers or dealers which are of benefit to the
Fund. The Adviser will select brokers and dealers to execute transactions on the
basis of its judgment of their professional capability to provide the service at
reasonably competitive rates. The Adviser's determination of what constitutes
reasonably competitive rates is based upon its professional judgment and
knowledge as to rates paid and charged for similar transactions throughout the
securities industry. The Adviser may consider sales by brokers or dealers of
shares of the Fund when selecting brokers or dealers to execute portfolio
transactions as long as the most favorable net results are obtained.
The Adviser may receive commissions from the Trust for effecting
transactions only in accordance with procedures adopted by the Board of
Trustees. Any procedures adopted by the Trustees will incorporate the standard
contained in Rule 17e-1 under the Act that the commissions paid must be
"reasonable and fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities during a comparable period of time".
Pursuant to Rule 17e-1, the Board of Trustees will review at least annually the
appropriateness of any procedures in effect and will conduct compliance reviews
at least quarterly and maintain records in connection with such reviews. The
Adviser has assured the Trust that in all transactions placed with the Adviser,
the Fund will be charged a commission that is at least as favorable as the rate
the Adviser charges to its other customers in similar transactions. No
commission charged to the Trust by the Adviser or any broker affiliated with the
Adviser will include compensation for research services provided by the Adviser
or any such affiliated broker.
Brokers who provide supplemental investment research to the Adviser may
receive orders for transactions in portfolio securities of the Fund. Such
supplemental research services ordinarily consist of assessments and analyses of
the business or prospects of a company, industry, or economic sector.
Information so received is in addition to and not in lieu of the services
required to be performed by the Adviser under the Investment Advisory Agreement
with the Trust. If in the judgment of the Adviser the commission is reasonable
in relation to the brokerage and research services provided, the Adviser is
authorized to pay brokerage commissions in excess of commissions another broker
would have received for effecting the same transaction, subject to the review of
the Trust's Board of Trustees. Not all such research services may be used by the
Adviser in connection with managing the Fund. The expenses of the Adviser will
not necessarily be reduced as a result of the receipt of such supplemental
information, and the Adviser may use such information in servicing its other
accounts.
Because of the affiliation of the Adviser with the Fund, the Fund is
prohibited from engaging in certain transactions involving the Adviser except in
compliance with the provisions of the Investment Company Act of 1940, as
amended, and the rules and regulations thereunder. Accordingly, the Fund will
not purchase or sell portfolio securities from or to the Adviser in any
transaction in which the Adviser acts as principal, including transactions in
the over-the-counter market. The Fund may purchase securities from other members
of an underwriting syndicate of which the Adviser is a participant, but only
under the conditions set forth in applicable rules of the Securities and
Exchange Commission.
9
<PAGE> 103
The Board of Trustees of the Trust has considered the possibility of
recapturing, for the benefit of the Fund, underwriting commissions or similar
fees incurred when purchasing portfolio securities and has determined not do so.
The Adviser also serves as the investment adviser to GMU, GMO, IMI, GIF
and the Gradison-McDonald International Fund ("INT", for which Blairlogie
Capital Management acts as sub-investment adviser (see "Exchange Privilege"))
and furnishes investment advice to other clients. Investment decisions for the
Fund are made independently from those for EST, OPP, GMU, GMO, IMI, GIF, and INT
although other clients advised by the Adviser may have similar objectives and
investment programs as the Fund. Purchases and sales of particular securities
may be effected simultaneously for such entities and clients. In such instances,
the transactions will be allocated as to price and amount in a manner the
Adviser considers equitable to each of the affected entities or clients, which
could have a detrimental effect upon the price or amount of the securities
purchased or sold for the Fund. On the other hand, in some cases the ability of
the Fund to participate in volume transactions may produce better executions for
the Fund. It is the opinion of the Board of Trustees that the benefits available
to the Fund from retaining the Adviser outweigh any disadvantages that may arise
from exposure to simultaneous transactions.
For the fiscal year ended March 31, 1996, the Fund's portfolio turnover
rate (see page 4 of the prospectus) was 3.1% and the aggregate brokerage
commissions paid by the Fund were $11,195.
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 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 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 Trust and other materials
regarding distributing shares of the Trust to potential investors.
10
<PAGE> 104
All expenses not specifically assumed by the Adviser, the Transfer
Agent, or Distributor and incurred in the operation of the Trust are borne by
the Trust 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 the cost of preparing, printing and mailing 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; 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 Trust; other expenses of the Trust, including
expenses of shareholders' and Trustees' meetings; and fees and other expenses
incurred by the Trust 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 a fund are
allocated to each 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. The Fund reimburses
the Adviser for all costs, direct and indirect, which are fairly allocable to
services provided by the Adviser's employees for which the Fund is responsible.
As compensation for its services under the Investment Advisory
Agreement, the Adviser receives from the Trust a monthly fee based upon the
average value of the daily net assets for the month of the Fund at an annual
rate of .65% on the first $100 million of the Fund, .55% on the next $100
million of the Fund and .45% on any amounts in excess of $200 million of the
Fund. For the fiscal year ended March 31, l996, the Adviser received $0 as
investment advisory fees. If not for the waiver of fees the Adviser would have
received $42,321 as investment advisory fees.
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. 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.
11
<PAGE> 105
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 held
on October 31, 1994, and was approved by the initial shareholder of the Fund,
the Adviser, prior to commencement of operations of the Fund. The Investment
Advisory Agreement continues in effect as to the Fund until February 28, 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.
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
12
<PAGE> 106
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
its shares, but only as specifically contemplated by the Plan. Under the Plan,
the Trust may incur distribution 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% limitation included in the Plan.
The Plan (together with any agreements relating to implementation of
the Plan) continues in effect for a period of more than one year only so long as
such continuance is specifically approved at least annually by the vote of a
majority of the Board of Trustees, including the vote of a majority of the
Independent Trustees, cast in person at a meeting called for such purpose. The
Plan may not be amended to materially increase the amount of distribution
expenses incurred by the Fund without the approval of a majority of the
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 disinterested Trustees then in office.
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<PAGE> 107
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 the average daily net
assets of the Fund and .25% 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 Trust's Distribution Expense Plan and automatically
terminates in the event of its assignment. For the fiscal year ended March 31,
1996, the Fund paid $32,555 to McDonald pursuant to the Plan.
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. For the fiscal year ended March 31, 1996, the Fund
paid $3,887 to McDonald pursuant to this Agreement. If not for the waiver of
fees, the Adviser would have received $50,901 pursuant to the Agreement.
TRUSTEES AND OFFICERS OF THE TRUST
The Trustees and officers of the Trust, together with information as to
their principal occupations during the past five years and positions currently
held with the Gradison-McDonald investment companies, 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. Each trustee is a trustee of each of
the four Gradison-McDonald investment companies.
* 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 of capital goods);
Chairman of all of the Gradison-McDonald investment companies.
DANIEL J. CASTELLINI, 312 Walnut Street, Cincinnati, Ohio. Trustee; Senior Vice
President/Finance and Administration and Chief Financial Officer of the E. W.
Scripps Company (communications).
- --------
*Interested and affiliated trustee, as defined by the Investment Company Act of
the Trust and the Investment Adviser as a result of being an officer of the
Adviser and owning securities of the Adviser's parent
14
<PAGE> 108
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 Financial Group Inc., Citicasters,
Inc., and Cincinnati Milacron Commercial Corp.; Trustee of Summit Investment
Trust and Carillon Investment Trust.
JEROME E. SCHNEE, 11558 Stable Watch Court, Cincinnati, Ohio 45249. Trustee.
Professor of Management, College of Business Administration, University of
Cincinnati.
RICHARD A. RANKIN, 434 Scott Street, Covington, Kentucky 41011. Trustee.
Partner, Rankin and Rankin (Public Accountants).
BRADLEY E. TURNER, 580 Walnut Street, Cincinnati, Ohio. President. Senior
Managing Director and Director of McDonald; President of all of the
Gradison-McDonald investment companies.
WILLIAM J. LEUGERS, JR., 580 Walnut Street, Cincinnati, Ohio. Executive Vice
President and Portfolio Manager of the Gradison-McDonald Established and
Opportunity Value Funds.
JULIAN BALL, 800 Superior Avenue, Cleveland, Ohio. Executive Vice President and
Portfolio Manager of the Fund; Vice President of McDonald since July 1994; prior
to that, Vice President of Duff & Phelps Investment Management Company.
PAUL J. WESTON, 580 Walnut Street, Cincinnati, Ohio. 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. Vice President; Senior
Vice President of Gradison since January 1989.
ALFRED M. BRUNNER, 580 Walnut Street, Cincinnati, Ohio. Vice President; First
Vice President of Gradison.
PATRICIA JAMIESON, 800 Superior Avenue, Cleveland, Ohio 44114. Treasurer;
Managing Director and Chief Financial Officer of McDonald; Treasurer of all of
the Gradison-McDonald investment companies.
RICHARD M. WACHTERMAN, 580 Walnut Street, Cincinnati, Ohio 45202. Secretary;
Senior Vice President and General Counsel of Gradison. Secretary of all of the
Gradison-McDonald investment companies.
MARK A. FRIETCH, 580 Walnut Street, Cincinnati, Ohio. Assistant Treasurer.
Assistant Treasurer of all of the Gradison-McDonald investment companies (since
May 1995); prior to that Financial Consultant and Assistant Controller of Union
Central Life Insurance Company.
15
<PAGE> 109
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.
As of July 5, 1996, the trustees and officers of the Fund owned, of record and
beneficially, an aggregate of less than 1% of the outstanding shares of the Fund
and no person owned 5% or more of the outstanding shares of the Fund.
<TABLE>
<CAPTION>
Trustee Compensation Table
--------------------------
Name of Trustee Aggregate Total Compensation
- --------------- Compensation From Trust and fund
From Trust* complex (3 additional
for fiscal Trusts) paid to
period ended trustee for calendar
3/31/96 year ended 12/31/95
<S> <C> <C>
Theodore H. Emmerich** $7,000 $23,250
Richard A. Rankin** $7,000 $22,000
Jerome E. Schnee** $7,000 $23,250
Daniel J. Castellini $7,000 $25,000
</TABLE>
The Trust maintains a deferred compensation plan which allows trustees to defer
receipt of trustee fees otherwise payable to them until a future date. Deferred
amounts are credited with interest at a rate equal to the yield of the
Gradison-McDonald U.S. Government Reserves Fund. The Trust does not maintain any
other pension or retirement plans. As of March 31, l996, $11,136 was payable by
the Trust to the beneficiary of a former trustee who is deceased and as of
December 31, 1995, $45,076 was payable to that beneficiary by the Trust and the
Fund Complex.
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 International Fund. Any additional series of shares must be
issued in compliance with the Investment Company Act of 1940 and must not
constitute 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.
16
<PAGE> 110
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. 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 of the Trust is required in connection with
shareholder approval of the Investment Advisory Agreement or the Distribution
Expense 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 own bad faith, willful misfeasance, gross negligence, or
reckless disregard of his duties, (2) with respect to any matters as to which he
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
17
<PAGE> 111
of any criminal proceeding, with respect to any conduct which he had reasonable
cause to believe was unlawful.
INVESTMENT PERFORMANCE
<TABLE>
<CAPTION>
Total Return
------------
Percentage Change:
------------------
<S> <C>
Since Inception (annualized) Year ended March 31, l996
(2/28/95-3/31/96)
Fund +22.46% 23.09%
Standard & Poors +32.68% 32.11%
Composite Stock
Index
</TABLE>
The results of the Fund and Index assume reinvestment of dividends and other
distributions. The performance results reflect historical performance and do not
ensure future results.
CUSTODIAN
Star Bank, N.A.. ("Star Bank"), Star Bank Center, Cincinnati, Ohio
45201 acts as the custodian of the portfolio securities and other assets of the
Fund. Star Bank has no part in determining the investment policies of the Fund
or the securities which are to be purchased, held or sold by the Trust. The Fund
may purchase or sell securities from or to Star Bank. The Gradison Division of
McDonald & Company Securities, Inc., 580 Walnut Street, Cincinnati, Ohio 45202,
acts as the transfer agent and dividend disbursing agent.
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.
DOLLAR COST AVERAGING
Dollar Cost Averaging is a strategy for purchasing equal dollar value
amounts of a security, including a mutual fund, periodically for a long period
of time. During periods when share prices are increasing, fewer shares are
purchased and vice versa. Dollar cost
18
<PAGE> 112
averaging will not prevent a loss when shares are sold at a time when the price
is lower than the average cost.
19
<PAGE> 113
[Sales Brochure]
GROWTH & INCOME
FUND
GRADISON-MCDONALD
[Picture of wood table with fishing reel, eyeglasses, thimble, two rolls of
heavy thread or yarn, ivy, and tape measure with "Your Future Starts Today" on
reverse]
A COMMON STOCK FUND SEEKING LONG-TERM GROWTH OF CAPITAL, CURRENT INCOME, AND
GROWTH OF INCOME
20
<PAGE> 114
FAMILY OF MUTUAL FUNDS
GROWTH & INCOME
INTERNATIONAL ESTABLISHED
VALUE
OPPORTUNITY OHIO TAX-FREE
VALUE INCOME
GOVERNMENT INTERMEDIATE
INCOME MUNICIPAL
MONEY
MARKET
21
<PAGE> 115
[Picture of wood table with eyeglasses, thimble, two rolls of heavy thread or
yarn, and tape measure with "Your Future Starts Today" on reverse]
Whatever your goals or ASPIRATIONS.
Whatever your objective. One thing
is certain. An INVESTMENT made today
brings you that much closer to
meeting that OBJECTIVE and reaching
that GOAL... Whether it's buying a
house, starting a family, SAVING for
a college education, or planning for
retirement. Hesitate and time will
pass you by.
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
22
<PAGE> 116
GROWTH & INCOME
FUND
GRADISON-McDONALD GROWTH & INCOME FUND SEEKS TO PROVIDE LONG-TERM CAPITAL
APPRECIATION, CURRENT INCOME AND GROWTH OF INCOME PRIMARILY THROUGH INVESTMENTS
IN THE STOCK OF COMPANIES WHICH GRADISON-McDONALD CONSIDERS TO BE UNDERVALUED
BY THE MARKET. THE FUND IS PROFESSIONALLY MANAGED BY EXPERIENCED GRADISON-
McDONALD PORTFOLIO MANAGERS.
INFLATION
The importance of maximizing the return on your investments becomes clear when
you consider the erosive effect that inflation has on your assets. An annual
inflation rate of just 4% cuts purchasing power in half in just 15 years.
THE CASE FOR COMMON STOCKS
[Chart showing a comparison of $10,000 investment in S&P 500 stocks, Long Term
Government Bonds, Treasury Bills and inflation from 1925 through 1993; S&P 500
stock valuation is approximately $8 million; other indices are approximately
$100,000]
This chart is for illustrative purposes only and is not indicative of past or
future performance of the Gradison-McDonald Growth & Income Fund. The S&P 500
is an unmanaged index of common stocks in various industries. Its past
performance does not predict future performance. While stocks have a greater
potential for growth than bonds or Treasury bills, they involve a high degree of
risk: Treasury bills and government bonds, unlike corporate bonds or stocks are
guaranteed by the U.S. government.
23
<PAGE> 117
[Picture of fishing reel, eyeglasses, handwritten letter, on wooden table]
Historically, common stocks have offered the greatest potential for long-term
growth. Over the long-term they have outperformed fixed income investments and
provided a rate of return well above the rate of inflation. It is important to
understand that common stock investments generally involve greater risk than
fixed income investments. But as a long-term investment, stocks have
historically been an effective way to help maintain your standard of living.
HIGH QUALITY PORTFOLIO
The Gradison-McDonald Growth & Income Fund invests primarily in the common
stock of high quality, well-known companies with histories of growing profits
and rising dividends.
VALUE INVESTING
The Gradison-McDonald Growth & Income Fund portfolio managers employ an
investment strategy known as value investing. Value investing identifies a stock
as undervalued when its earnings record is judged to justify a higher stock
price than the market has settled on. The technique has been fundamental to the
success of many well-known mutual fund managers.
DIVIDEND INCOME
From the universe of stocks judged to be undervalued, the Gradison- McDonald
Growth & Income Fund managers select stocks that have demonstrated the ability
1-800-869-5999
24
<PAGE> 118
to pay above-average dividends on a
consistent basis. Gradison-McDonald believes that
STANDARD & POOR'S 500 dividends are a good indicator of the overall health
And future prospects of a company. Therefore
these stocks offer opportunities for both capital
ANNUAL appreciation and for income growth.
<TABLE>
<CAPTION>
ANNUALIZED RETURN FROM
RETURN FROM CAPITAL
DECADE INCOME APPRECIATION
<S> <C> <C> <C>
Source: Ibbotson Associates. Performance from the Standard
& Poor's 500 is not intended to represent past or future perfor-
mance of the Gradison-McDonald Growth & Income Fund.
There is no assurance that the historical pattern depicted in the
chart will be repeated.
1926-1929 4.7% 13.9%
1930's 5.5% - 5.3
1940's 6.0% 3.0%
1950's 5.1% 13.6%
1960's 3.3% 4.4%
1970's 4.2% 1.6%
1980's 4.4% 12.6%
1990-1994 3.4% 5.4%
-------------------------------------------------
1926-1994 4.9% 5.3%
</TABLE>
LOW MINIMUM INVESTMENT
The Gradison-McDonald Growth & Income Fund has a low minimum initial investment
of $1,000. Additional investments can be made for as little as $50.
QUARTERLY PAYMENT & REINVESTMENT
Dividends are paid quarterly. You may choose to receive dividends 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:
Opportunity Value Fund
Government Income Fund
U.S. Government Reserves [Picture of Eyeglasses]
Ohio Tax-Free Income Fund
Established Value Fund
Intermediate Municipal Income Fund
25
<PAGE> 119
Gradison-McDonald fund planned for 1995 by prospectus only:
International Fund
ACCESS
You can redeem shares on any business day at the closing net asset value.
26
<PAGE> 120
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
27
<PAGE> 121
[Picture of Cellular Telephone and two envelopes]
To find out more about the
GRADISON-McDONALD GROWTH & INCOME
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 many obtain a prospectus containing complete information about the Fund from
a Gradison-McDonald Mutual Funds representative or your Investment Consultant.
Read it carefully 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
28
<PAGE> 122
[Fact Sheet]
Gradison-McDonald [graphic: photo of eyeglasses]
Growth & Income Fund
March 31, 1996
Gradison-McDonald Growth and Income Fund seeks long-term growth, current income
and growth of income by investing in high quality common stocks of large U.S.
corporations that are determined to be relatively undervalued and which
generally have above average dividend returns.
Particular emphasis is placed on the identification of dividend paying common
stocks of companies with higher historic growth rates and returns on shareholder
equity than the average of companies that make up the Standard and Poor's 500
Composite Stock Price Index. Gradison-McDonald believes that a portfolio of
quality common stocks with above average dividend yield and below average
price-to-earnings ratio are factors that provide the opportunity for price
appreciation and current income while generally tending to moderate risk.
Under normal circumstances, it is the policy of the Gradison-McDonald Growth &
Income Fund to maintain a fully invested position at all times.
Ten Largest Stock Positions
1. H.J Heinz Food Producer
2. Mobil Corp. INTERNATIONAL GAS OIL
3. Minn. Mining & Mfg. INDUS./CONS. PROD.
4. Norwest Corp. Financial Services
5. Pitney-Bowes, Inc. BUSINESS EQUIPMENT
6. Bristol-Myers Squibb PHARMACEUTICALS
7. Motorola, Inc. COMMUNICATIONS EQUIPMENT
8. J.P. Morgan Financial Services
9. Exxon Corporation International Oil
10.General Electric Co. ELECTRONICS
29
<PAGE> 123
These are the top ten positions of 24 issues representing 36.2% of the portfolio
and are subject to change.
Where the Fund is Invested
The chart below indicates distribution of the Fund's stock investments on March
31, 1996. On that date, the Fund maintained 3% liquid reserves.
[Graphic of Pie Chart showing 22% technology, 20% consumer non-durables, 17%
services, 14% cyclicals, 13% interest sensitive, 10% natural resource, 3%
chemicals, 1% consumer durables]
Value of $1,000 Since Inception
Line chart stating "The value of a $1,000 investment made in the fund at
inception with all dividends and capital gain distributions reinvested" with
these plot points 2/95 - $1,000, 3/95 - $1,013, 6/95 - $1,061, 9/95 - $1,116,
12/95 - $1,200, 3/96 - $1,247
The performance quoted above and on the next page represents past performance.
The investment return and principal 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. Total return includes changes in share value and
reinvestment of all distributions. Past performance does not ensure future
results.
Average Annual Total Return
Chart stating periods ended 3/31/96, Most recent quarter (not annualized) -
3.84%, 1 year - 23.09%, Since inception (2/28/95) - 22.46%
Portfolio Manager Profile
Julian C. Ball, CFA, CPA [Graphic: photo of Julian Ball]
Vice President/Portfolio Manager
Gradison-McDonald Asset Management
Julian Ball joined Gradison-McDonald Asset Management in 1994 to assume
responsibility for its new Growth & Income Fund following fifteen years of
30
<PAGE> 124
portfolio management experience with Duff & Phelps Investment Management
Company.
Julian holds both a Bachelor of Business Administration degree in Accounting
from Kent State University and a Juris Doctorate degree from Cleveland Marshall
College of Law. He is both a Chartered Financial Analyst and a Certified Public
Accountant, and maintains membership in the Cleveland Society of Security
Analysts where he is a past president, the Association of Investment Management
and Research, the Ohio Society of CPAs, and the Cleveland Bar Association.
Profile of GRADISON-McDONALD Family of Funds
Grid from less potential risk, less potential reward to more potential risk,
more potential reward from left to right; Money market Funds, Government Income
Fund, Intermediate Municipal Income Fund, Ohio Tax-Free Income Fund, Established
Value Fund, Growth & Income Fund, Opportunity Value Fund, International Fund.
Gradison-McDonald Asset Management combines the extensive investment experience
of Gradison & Company, founded in 1925, with McDonald & Company which was
founded in 1924. The two firms merged in 1991. As Registered Investment Advisers
since 1974 and mutual fund advisers since 1976, Gradison-McDonald currently
manages in excess of $3 billion in mutual funds and individually managed
accounts.
A prospectus for the Growth and Income Fund or any other Gradison-McDonald Fund
may be obtained by calling (513) 579-5700 or (800) 869-5999. The prospectus
contains more complete information. Read it carefully before you invest.
McDonald & Company Securities, Inc. - Distributor
31
<PAGE> 125
PORTFOLIO OF INVESTMENTS MARCH 31, 1996
COMMON STOCKS - 100.00%
<TABLE>
<CAPTION>
NUMBER VALUE
OF SHARES
<S> <C> <C>
BANK SERVICES - 8.40%
5,000 Huntington Bankshares, Incorporated $ 119,375
5,000 Morgan, (J.P.) &Company,
Incorporated 415,000
12,000 Norwest Corporation 441,000
---------
975,375
---------
CONSUMER DURABLES - 4.27%
2,000 Cooper Tire & Rubber Company 51,500
8,000 Shaw Industries Corp. 88,000
4,000 TRW Inc. 356,500
---------
496,000
---------
CONSUMER NON-DURABLES - 14.16%
4,000 CPC International, Inc. 277,500
14,000 Heinz, (H.J.) Company 463,750
14,000 Newell Company 374,500
3,000 Pepsico, Inc. 189,750
4,000 Procter & Gamble Company 339,000
---------
1,644,500
---------
ENERGY - 9.92%
5,000 Chevron Corporation 280,625
5,000 Exxon Corporation 408,125
4,000 Mobil Corporation 463,500
---------
1,152,250
---------
FINANCIAL SERVICES - 6.61%
6,000 American Express Company 296,250
8,000 American General Corporation 276,000
3,100 Cincinnati Financial Corporation 196,075
---------
768,325
---------
HEALTHCARE & PHARMACEUTICALS - 11.50%
3,000 American Home Products Corporation 325,125
5,000 Bristol-Myers Squibb Company 428,125
4,000 Merck & Co., Inc. 249,000
5,000 U.S. Healthcare, Inc. 230,000
1,000 Warner-Lambert Company 103,250
---------
1,335,500
---------
</TABLE>
<TABLE>
<CAPTION>
NUMBER VALUE
OF SHARES
<S> <C> <C>
INDUSTRIAL PRODUCTS - 5.65%
5,000 General Electric Company $ 389,375
3,000 Pall Corporation 76,875
6,000 WMX Technologies, Inc. 190,500
----------
656,750
----------
NATURAL RESOURCES - 4.81%
3,000 Avery-Dennison Corporation 162,000
3,000 Du Pont (E.I.) de Nemours
& Company 249,000
7,000 Schulman, (A.) Inc. 147,875
----------
558,875
----------
RETAIL TRADE &SERVICES - 8.27%
6,000 Dun & Bradstreet Corporation 363,750
6,000 May Department Stores Co. 289,500
3,000 McDonald's Corporation 144,000
5,000 Walgreen Co. 163,125
----------
960,375
----------
TECHNOLOGY - 16.50%
4,000 Automated Data Processing, Inc. 157,500
2,000 Intel Corporation 113,500
7,000 Minnesota Mining &
Manufacturing Company 454,125
8,000 Motorola Inc. 424,000
9,000 Pitney-Bowes, Inc. 441,000
10,000 Premier Industrial Corporation 326,250
----------
1,916,375
----------
UTILITIES - 9.91%
6,000 Ameritech Corporation 327,000
9,000 Central & South West Corporation 256,500
5,000 Duke Power Company 252,500
6,000 SBC Communications, Inc. 315,750
----------
1,151,750
----------
TOTAL COMMON STOCKS
(COST = $10,428,866) $11,616,075
==========
</TABLE>
See accompanying notes to financial statements.
Financial Statement Page 1
<PAGE> 126
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
MARCH 31, 1996
<S> <C>
ASSETS
Investments in securities, at value (Note 1) (Cost $10,428,866) $11,616,075
Cash 352,122
Receivable for Fund shares sold 19,253
Dividends receivable 18,898
Prepaid expenses and other assets 7,090
Organization expenses, net (Note 1) 4,939
-----------
TOTAL ASSETS 12,018,377
-----------
LIABILITIES
Liabilities payable to adviser (Note 2) 25,994
Other accrued expenses and liabilities 15,025
-----------
TOTAL LIABILITIES 41,019
-----------
NET ASSETS $11,977,358
===========
Net assets consist of:
Aggregate paid-in capital 10,774,149
Accumulated undistributed net investment income 11,621
Accumulated undistributed net realized gains 4,379
Net unrealized appreciation of investments 1,187,209
-----------
Net Assets $11,977,358
===========
Shares of capital stock outstanding
(no par value - unlimited number of shares authorized) 648,877
===========
Net asset value and redemption price per share (Note 1) $18.46
======
</TABLE>
See accompanying notes to financial statements.
Financial Statement Page 2
<PAGE> 127
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31, 1996
<S> <C> <C>
INVESTMENT INCOME:
Dividends $ 167,716
Interest 20,190
---------
Total investment income $187,906
EXPENSES:
Investment advisory fees (Note 2) 42,321
Accounting services fees (Note 2) 40,000
Distribution (Note 2) 32,555
Registration fees 30,512
Professional fees 11,004
Transfer agency fees (Note 2) 10,901
Custodian fees 7,323
Trustees' fees (Note 2) 6,507
Printing 4,126
Amortization of organization expenses (Note 1) 1,367
Other 398
---------
Total expenses 187,014
Less fees waived by the adviser (Note 2) (89,335)
---------
Net expenses 97,679
----------
NET INVESTMENT INCOME 90,227
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 19,093
Net increase in unrealized appreciation of investments 1,179,997
---------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 1,199,090
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,289,317
==========
</TABLE>
Financial Statement Page 3
<PAGE> 128
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR FOR THE PERIOD
ENDED FEBRUARY 28, 1995*
MARCH 31, 1996 TO MARCH 31, 1995
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 90,227 $ 2,404
Net realized gain on investments 19,093 410
Net increase in unrealized appreciation of investments 1,179,997 7,212
---------- ---------
Net increase in net assets resulting from operations 1,289,317 10,026
---------- ---------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income (81,010) -
Net realized capital gains (15,124) -
---------- ---------
Decrease in net assets from distributions to shareholders (96,134) -
---------- ---------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 10,777,990 1,198,480
Net asset value of shares issued in reinvestment of distributions 93,588 -
Payments for shares redeemed (1,295,409) (500)
---------- ---------
Net increase in net assets from Fund share transactions 9,576,169 1,197,980
---------- ---------
TOTAL INCREASE IN NET ASSETS 10,769,352 1,208,006
NET ASSETS:
Beginning of period 1,208,006 -
---------- ---------
End of period (including undistributed net investment
income of $11,621 and $2,404, respectively) (Note 1) $11,977,358 $1,208,006
========== =========
NUMBER OF FUND SHARES:
Sold 640,085 79,564
Issued in reinvestment of distributions to shareholders 5,402 _
Redeemed (76,141) (33)
---------- ---------
Net increase in shares outstanding 569,346 79,531
Outstanding at beginning of period 79,531 -
---------- ---------
Outstanding at end of period 648,877 79,531
========== =========
</TABLE>
*Date of public offering.
See accompanying notes to financial statements.
Financial Statement Page 3
<PAGE> 129
NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
Gradison Growth Trust (the "Trust") is registered under the Investment Company
Act of 1940, as amended, as an open-end management investment company. The Trust
was created under Ohio law on May 31, 1983; it commenced investment operations
and the public offering of its shares on August 16, 1983. The Trust consists of
four diversified series, the Gradison-McDonald Growth & Income Fund, the
Gradison-McDonald Established Value Fund, the Gradison-McDonald Opportunity
Value Fund and the Gradison-McDonald International Fund (collectively, the
"Funds"); each of which in effect represents a separate fund with its own
investment policies. This Annual Report to Shareholders pertains only to the
Gradison-McDonald Growth & Income Fund (the "Fund"), the public offering of
shares of which commenced on February 28, 1995. The Fund's investment objective
is to seek long-term growth of capital, current income, and growth of income
consistent with reasonable investment risk.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles. The preparation of
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses for the
period. Actual results could differ from those estimates.
SECURITIES VALUATION -- Portfolio securities listed or traded on the New York or
American Stock Exchanges are valued at the last sale price on that exchange, or
if there were no sales that day, the securities are 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. Commercial
paper and discount notes are valued using the amortized cost method which
approximates market value. This involves initially valuing a security at its
original cost and thereafter assuming a constant amortization to maturity of any
discount or premium. Portfolio securities for which market quotations are not
readily available are valued at their fair value as determined in good faith
under procedures adopted by the Board of Trustees.
Repurchase agreements, which are collateralized by U.S. Government obligations,
are valued at cost which, together with accrued interest, approximates market.
Collateral for repurchase agreements is held in safekeeping in the customer-only
account of the Fund's custodian. At the time the Fund enters into a repurchase
agreement, the seller agrees that the value of the underlying security,
including accrued interest, will be equal to or exceed the face amount of the
repurchase agreement. In the event of a bankruptcy or other default of the
seller of a repurchase agreement, the Fund could experience both delays in
liquidating the underlying security and losses. These losses would not exceed an
amount equal to the difference between the liquidating value of the underlying
security and the face amount of the repurchase agreement and accrued interest.
To minimize the possibility of loss, the Fund enters into repurchase agreements
only with selected domestic banks and securities dealers which the Fund's
investment adviser believes present minimal credit risk. There were no
repurchase agreements held in the portfolio at March 31, 1996.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME -- Securities transactions are
accounted for on the trade date (the date the order to buy or sell is executed),
and dividend income is recorded on the ex-dividend date. Interest income is
accrued as earned. Gains and losses on sales of investments are calculated on
the identified cost basis for financial reporting and tax purposes.
TAXES -- It is the Fund's policy to comply with the provisions of the Internal
Revenue Code available to regulated investment companies. As provided therein,
in any fiscal year in which the Fund so qualifies, and distributes at least 90%
of its taxable net income, the Fund will be relieved of federal income tax on
the income distributed. Accordingly, no provision for income taxes has been
made.
Financial Statement Page 5
<PAGE> 130
NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996
In order to avoid imposition of the excise tax applicable to regulated
investment companies, it is also the Fund's intention to declare as dividends in
each calendar year, at least 98% of its net investment income (earned during the
calendar year) and 98% of its net realized capital gains, if any (earned during
the twelve months ended October 31), plus undistributed amounts from prior
years.
The tax basis of investments is equal to the cost as shown on the Statement of
Assets and Liabilities.
For both financial reporting and tax purposes, gross unrealized appreciation and
gross unrealized depreciation of securities at March 31, 1996 was $1,309,077 and
$121,868, respectively.
FUND SHARE VALUATION AND DISTRIBUTIONS TO SHAREHOLDERS -- The net asset value
per share is computed by dividing the net asset value of the Fund (total assets
less total liabilities) by the number of shares outstanding. The redemption
price per share is equal to the net asset value per share.
Distributions to shareholders are recorded on the ex-dividend date. During the
year ended March 31, 1996, the Fund made total distributions of $.22 per share,
$.185 of which was treated as dividend income and $.035 was treated as
short-term capital gain.
EXPENSES -- Common expenses incurred by the Trust are allocated to the Fund
based on the ratio of the net assets of the Fund to the combined net assets of
the Trust. In all other respects, expenses are charged to the Fund as incurred
on a specific identification basis.
ORGANIZATION EXPENSES -- Expenses of organization have been capitalized and are
being amortized on a straight-line basis over 60 months commencing upon the
public offering of the Fund's shares.
NOTE 2 -- TRANSACTIONS WITH AFFILIATES
The Trust's investments are managed, subject to the general supervision and
control of the Trust's Board of Trustees, by McDonald & Company Securities, Inc.
("McDonald"), a registered investment adviser and securities dealer, pursuant to
the terms of an Investment Advisory Agreement ("Agreement"). Under the terms of
the Agreement, the Fund pays McDonald a fee computed and accrued daily and paid
monthly based upon the Fund's daily net assets at the annual rate of .65% on the
first $100 million, .55% on the next $100 million and .45% on any amounts in
excess of $200 million. McDonald is to reimburse the Fund for the amount by
which the Fund's aggregate expenses for a fiscal year, including the advisory
fee but excluding interest, taxes and extraordinary expenses, exceed limits set
by state securities regulations.
The Agreement provides that McDonald bears the costs of salaries and related
expenses of executive officers of the Fund who are necessary for the management
and operations of the Fund. In addition, McDonald bears the costs of preparing,
printing and mailing sales literature and other advertising materials and
compensates the Trust's trustees who are affiliated with McDonald. All expenses
not specifically assumed by McDonald are borne by the Fund.
Under the terms of a Transfer Agency, Accounting Services and Administrative
Services Agreement, McDonald provides transfer agent, dividend disbursing,
accounting services and administrative services to the Fund. The Fund pays
McDonald a monthly fee for transfer agency and administrative services at an
annual rate of $18.25 per shareholder non-zero balance account, plus
out-of-pocket costs for statement paper, statement and reply envelopes and reply
postage. The Fund pays McDonald a monthly fee for accounting services based on
the Fund's average daily net assets at an annual rate of .03% on the first $100
million, .02% on the next $100 million and .01% on any amount in excess of $200
million, with a minimum annual fee of $40,000.
Financial Statement Page 6
<PAGE> 131
NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996
Under the terms of an Expense Reimbursement Agreement, McDonald has agreed to
forego fees owed to it under the Advisory Agreement or any other agreement with
the Trust and to reimburse the Fund if, and to the extent that, expenses
(excluding brokerage commissions, taxes, interest and extraordinary items)
borne by the Fund in any fiscal year exceed 2.00% of the average net assets of
the Fund. This agreement is in effect until August 1, 1996 and is subject to
termination by either party upon written notice subsequent to that date. In
addition, McDonald may, at its discretion, agree to waive fees and/or reimburse
the Fund for other expenses in order to limit the Fund's expenses to a
specified percentage of average net assets lower than 2.00%. For the year ended
March 31, 1996, McDonald waived advisory fees of $42,321, transfer agency fees
of $10,901, and accounting services fees of $36,113.
In accordance with the terms of a Distribution Plan adopted under Rule 12b-1 of
the Investment Company Act of 1940, the Fund pays McDonald a service fee for
personal services to shareholders including shareholder liaison services such
as responding to shareholder inquiries and providing information to
shareholders about their Fund accounts. This fee is computed and paid at an
annual rate of .25% of the Fund's average daily net assets. The Fund also pays
McDonald a fee for its assistance in selling shares of the Fund including
advising shareholders regarding purchase, sale and retention of Fund shares.
This fee is computed and paid at an annual rate of .25% of the Fund's average
daily net assets.
The officers of the Trust are also officers of McDonald.
Each trustee of the Trust who is not affiliated with McDonald receives fees
from the Trust for services as a trustee. The amounts of such fees for each
trustee are as follows: (a) an annual fee of $5,000 payable in quarterly
installments and (b) $500 for each Board of Trustees or committee meeting
attended.
NOTE 3 -- SUMMARY OF PURCHASES AND SALES OF INVESTMENTS
For the period ended March 31, 1996, the cost of purchases and proceeds from
the sale of securities, excluding short-term securities, amounted to $9,848,164
and $180,804, respectively.
Financial Statement Page 7
<PAGE> 132
ARTHUR
ANDERSEN
ARTHUR ANDERSEN & CO,
To the Shareholders and Board of Trustees of the
Gradison-McDonald Growth & Income Fund
of the Gradison Growth Trust:
We have audited the accompanying statement of assets and liabilities of the
Gradison-McDonald Growth & Income Fund of the Gradison Growth Trust (an Ohio
business trust), including the portfolio of investments, as of March 31, 1996,
and the related statement of operations for the year then ended, and the
statements of changes in net assets and the financial highlights for the periods
indicated thereon. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of March
31, 1996, by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Gradison-McDonald Growth & Income Fund of the Gradison Growth Trust as of March
31, 1996, the results of its operations for the year then ended, and the changes
in its net assets and the financial highlights for the periods indicated
thereon, in conformity with generally accepted accounting principles.
Cincinnati, Ohio,
May 30, 1996
See accompanying notes to financial statements.
Financial Statement Page 8
<PAGE> 133
GRADISON GROWTH TRUST
Gradison-McDonald International Fund (the "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 July 29, 1996, 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 July 29, 1996.
<PAGE> 134
CONTENTS
==============================
RISK FACTORS AND INVESTMENT
TECHNIQUES................. 4 Investment Objective, Policies and
Risks; Foreign Securities; Forward
Foreign Currency Transactions; Risks
of Futures and Forward Currency
Transactions; Low Capitalization
Stocks
INVESTMENT RESTRICTIONS.... 21 Investment Restrictions and
Fundamental Policies
PURCHASE OF SHARES......... 23 Purchase and Redemptions
REDEMPTIONS OF SHARES...... 24 Purchase and Redemptions
EXCHANGES.................. 24 Optional Shareholder Services
TAXES...................... 26 Taxes
NET ASSET VALUE............ 31 Net Asset Value
PORTFOLIO TRANSACTIONS AND
BROKERAGE.................. 32
INVESTMENT ADVISER......... 34 Management of the Fund
TRUSTEES AND OFFICERS
OF THE TRUST............... 40
DESCRIPTION OF THE TRUST... 43 General Information
DOLLAR COST AVERAGING...... 45
INVESTMENT PERFORMANCE..... 46 Performance Calculation
CUSTODIAN.................. 47
ACCOUNTANTS................ 47
LEGAL COUNSEL.............. 47
MISCELLANEOUS 47
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SALES BROCHURE MATERIAL 48
FINANCIAL STATEMENTS... After Page 59
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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). With
respect to 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.
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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 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.
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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 Blairlogie Capital Management (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"), 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
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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 extraordinary 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
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<PAGE> 140
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.
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
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of trading interest in a particular Rule 144A security, the Fund's holding of
that security may be deemed to be illiquid.
BANK OBLIGATIONS
The Fund may invest in bank obligations including 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 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)
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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.
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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 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
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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 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
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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 periodic 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 by, among other
things, 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> 146
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
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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 or
sell a currency forward to "lock in" the price of the currency to be used or
received in connection with securities denominated in that currency that it
anticipates purchasing or selling.
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 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
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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 price
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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.
[Remainder of page left blank intentionally.]
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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.
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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. Foreign companies are also generally not subject to uniform
accounting, 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
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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.
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.
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INVESTMENT RESTRICTIONS
The Fund's investment objective as set forth under "Investment Objectives,
Policies and Risks" 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;
(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
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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;
(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, 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
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(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 (iv) above and
securities which are restricted as to disposition. Except as may be required by
State regulations, Rule 144 A securities will not be considered subject to
restrictions on 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.
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
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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 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.
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TAXES
The Fund has qualified and intends to qualify in the future, 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
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owned shares of the Fund. These capital gain distributions are not eligible for
the dividends-received deduction for corporations.
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
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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 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
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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 TAX INFORMATION
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 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.
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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 total assets at the close of its
taxable year consists of securities of foreign corporations, the Fund will be
eligible to, and
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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'
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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 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
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<PAGE> 165
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. 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
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<PAGE> 166
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. For the period
from May 31, 1995 through March 31, 1996, the Fund's unannualized portfolio
turnover rate was 71.8%. It is anticipated that the annual rate of portfolio
turnover will not exceed 150%.
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
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<PAGE> 167
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, 1995, 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 1940 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, the Transfer Agent, or the
Distributor 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 the 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; the
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
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<PAGE> 168
of the respective net assets of the Fund), subject to review by the Trustees.
The Fund reimburses the Adviser for all costs, direct and indirect, which are
fairly allocable to services provided by the Adviser's employees for which the
Fund is responsible.
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. From the inception of the Fund, May 31, 1995, through March 31, 1996,
the Fund paid the Adviser $49,838 as investment advisory fees and would have
paid $74,223 if not for the Adviser's waiver of advisory fees. During that time
period, McDonald paid Blairlogie $49,838 as investment subadviser fees.
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. 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.
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<PAGE> 169
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 continues in effect as to the Fund until
February 28, 1997, 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, 1995, between the Adviser and Blairlogie,
Blairlogie will make investment decisions on behalf of the Fund and place all
orders for the 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
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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; and 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
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authorized by the Plan as a protective measure, they are not restricted by the
.50 of 1% limitation included in the Plan.
The Plan (together with any agreements relating to implementation of the Plan)
continues in effect for a period of more than one year only so long as such
continuance is specifically approved at least annually by the vote of a majority
of the Board of Trustees, including the vote of a majority of the Independent
Trustees, cast in person at a meeting called for such purpose. The Plan may not
be amended to materially increase the amount of distribution expenses incurred
by the Fund without the approval of a majority of the 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. From the
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inception of the Fund through March 31, 1996, the Fund paid McDonald $0 as
distribution fees and would have paid $37,112 if not for McDonald's waiver of
fees.
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. From the inception of the Fund through March 31, 1996 the
Fund paid McDonald $0 as transfer agent and accounting service fees and would
have paid $61,601 if not for McDonald's waiver of fees.
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. Each trustee is a trustee of
each of the four Gradison-McDonald investment companies.
*DONALD E. WESTON, 580 Walnut Street, Cincinnati, Ohio. Trustee and Chairman of
the Board; Chairman of Gradison and Director of McDonald & Company Investments,
Inc. (since October 1991). Director of Cincinnati Milacron Commercial Corp.
(financing arm of capital goods manufacturer) (since January 1993); Chairman of
the Board of GMCR, GCT, and GMMCT.
DANIEL J. CASTELLINI, 312 Walnut Street, Cincinnati, Ohio. Trustee; Senior Vice
President/Finance and Administration and Chief Financial Officer of the E.W.
Scripps Company (communications).
THEODORE H. EMMERICH, 1201 Edgecliff Place, Cincinnati, Ohio 45206. Trustee.
Retired; Until 1986, managing partner (Cincinnati office) Ernst & Young (Public
Accountants); Director of Carillon Fund, Inc.(investment company), American
Financial Group, Inc.(insurance), Citicasters, Inc. (broadcasting), Cincinnati
Milacron Commercial Corp.;
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Trustee of Carillon Investment Trust and Summit Investment Trust (investment
companies).
RICHARD A. RANKIN, 1717 Dixie Highway, Suite 600, Fort Wright, Kentucky 41011.
Trustee. Partner, Rankin and Rankin (Public Accountants).
JEROME E. SCHNEE, 11558 Stablewatch Court, Cincinnati, Ohio 45249. Trustee.
Professor of Management, College of Business Administration, University of
Cincinnati.
BRADLEY E. TURNER, 580 Walnut Street, Cincinnati, Ohio 45202. President. Senior
Managing Director and Director of McDonald; President of GMCR, GCT, and GMMCT.
WILLIAM J. LEUGERS, JR., 580 Walnut Street, Cincinnati, Ohio. Executive Vice
President. Portfolio Manager of the Gradison-McDonald Established and
Opportunity Value Funds.
JULIAN BALL, 800 Superior Avenue, Cleveland, Ohio. Executive Vice President.
Portfolio Manager of the Gradison-McDonald Growth and Income Fund; Vice
President of McDonald since July 1994; prior to that, Vice President of Duff &
Phelps Investment Management Company.
PAUL J. WESTON, 580 Walnut Street, Cincinnati, Ohio. 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. Vice President
(Gradison-McDonald Established Value and Opportunity Value Funds); Senior Vice
President of Gradison.
ALFRED M. BRUNNER, 580 Walnut Street, Cincinnati, Ohio. Vice President
(Gradison-McDonald Established Value and Opportunity Value Funds); First Vice
President of Gradison.
PATRICIA J. JAMIESON, 800 Superior Avenue, Cleveland, Ohio 44114. Treasurer.
Managing Director and Chief Financial Officer of McDonald; Treasurer of GMCR,
GCT, and GMMCT.
MARK A. FRIETCH, 580 Walnut Street, Cincinnati, Ohio. Assistant Treasurer.
Assistant Treasurer of GMCR, GCT, and GMMCT (since May l995); Controller of
Gradison-McDonald mutual funds (since August 1992); prior to that Financial
Consultant and Assistant Controller of Union Central Life Insurance Company.
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RICHARD M. WACHTERMAN, 580 Walnut Street, Cincinnati, Ohio 45202. Secretary.
Senior Vice President and General Counsel of Gradison.; Secretary of GMCR, GCT,
and GMMCT.
*Trustee who is interested and affiliated person, as defined by the Investment
Company Act of 1940, of the Trust and the Adviser by virtue of stock ownership
of the parent of the Adviser and employment by the Adviser.
Trustees and officers of the Trust who are affiliated with the Adviser receive
no remuneration from the Trust. Trustees who are not affiliated with the Adviser
receive compensation as determined by the Board of Trustees
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Trustee Compensation Table
<TABLE>
<CAPTION>
Name of Trustee Aggregate Compensation Total Compensation
- --------------- From Trust for fiscal period From Trust and fund
ending 3/31/96 complex (3 Trusts)
-------------- paid to trustee for
calendar year
ending 12/31/95
---------------
<S> <C> <C>
Theodore H. Emmerich $7,000 $ 23,250
Richard A. Rankin $7,000 $ 22,000
Jerome E. Schnee $7,000 $ 23,250
Daniel J. Castellini $7,000 $ 25,000
</TABLE>
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.
There are currently no amounts owing to any current trustee pursuant to the
deferred compensation plan. As of March 31, 1996, the amount of $11,136 was
payable by the Trust to the beneficiary of a former trustee who is deceased and,
as of March 31, 1996, the amount of $45,076 was payable to that beneficiary by
the Trust and the fund complex.
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 a security that is senior to the shares offered pursuant to
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<PAGE> 176
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 a 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
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<PAGE> 177
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.
DOLLAR COST AVERAGING
Dollar Cost Averaging is a strategy for purchasing equal dollar value
amounts of a security, including a mutual fund, periodically for a long period
of time. During periods when share prices are increasing, fewer shares are
purchased and vice versa. Dollar cost averaging will not prevent a loss when
shares are sold at a time when the price is lower than the average cost.
45
<PAGE> 178
INVESTMENT PERFORMANCE
Total Return
Percentage Change:
Since Inception (non-annualized)
(5/31/95 - 3/31/96)
Fund 5.76%
Morgan Stanley
EAFE Index 9.84%
Hybrid Index * 8.22%
The results of the Fund assume reinvestment of dividends and other
distributions. The performance results reflect historical performance and do not
ensure future results. The annualized return of the Fund for the period of time
set forth above was 6.92%. This figure represents annualization of performance
for a short period of time and does not reflect the actual performance for the
entire year. During the time period, the Fund's investment adviser waived the
receipt of certain fees from the Fund and paid certain other expenses otherwise
payable by the Fund. If not for the investment adviser's waiver of these fees
and payment of these Fund expenses, the Fund's unannualized total return for the
period ending March 31, 1996, would have been 4.60%, and the annualized
return for that period would have been 5.6%.
* The Hybrid Index is composed of a 70% hypothetical investment in the developed
markets represented in the Morgan Stanley Capital International EAFE Index and
30% in the emerging markets of the MSCI Emerging Markets Free Index.
46
<PAGE> 179
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 LLP acts as legal counsel to the Trust.
MISCELLANEOUS
Blairlogie currently manages in excess of $600 million of international assets.
47
<PAGE> 180
[Fact Sheet]
Gradison-McDonald [graphic: photo of foreign currency]
International Fund
March 31, 1996
Gradison-McDonald International Fund seeks growth by investing in common stocks
of companies based outside of the United States. The Fund invests approximately
70% of its assets in developed markets and approximately 30% in emerging
markets. Gradison-McDonald believes that this "hybrid" strategy offers
risk/reward trade-offs favorable to investors. Of course, international
investing, particularly in emerging markets, involves greater risks as compared
to U.S. investing, such as political instability and currency fluctuation.
Gradison-McDonald has chosen Blairlogie Capital Management located in Edinburgh,
Scotland, as sub-adviser to the Fund. Based on their research, they have
determined that the most important factor in international investing is the
"country decision." They, therefore, follow a highly disciplined methodology
that first identifies the countries that they believe offer the most favorable
investment potential and then selects the individual investments in those
countries.
It is generally the policy of Gradison-McDonald International Fund to maintain
as fully invested a position as practicable at all times.
Symbol: INTFX
[Graphic of world map with the countries invested by the Fund highlighted.
The following text reads over the map: 69% DEVELOPED MARKETS, Japan
33.0%, Great Britain 10.1%, France 6.2%, Germany 5.8%, Italy 2.9%, Spain 2.2%,
Hong Kong 2.1%, Singapore 2.0%, Netherlands 1.9%, Australia 1.4%, Norway 0.7%,
Finland 0.7%.31% EMERGING MARKETS Brazil 4.6%, Mexico 4.0%, Malaysia, 3.5%,
India 3.0%, Chile 2.5%, Thailand 1.8%, Turkey 1.7%, South Korea 1.4%,
Philippines 1.4%, Israel 1.3%, Columbia 1.1%, Portugal 1.0%, Poland 1.0%,
Argentina 0.9%, South Africa 0.9%, Peru 0.8%, Venezuela 0.1%
The table above showing the percentage of assets of the Fund invested in
securities of each country indicated as of March 31, 1996 is subject to change.
On that date, the Fund maintained 11% liquid reserves.
Value of $1,000 Since Inception
48
<PAGE> 181
Line chart stating "The value of a $1,000 investment made in the fund at
inception with all dividends and capital gain distributions reinvested" with
these plot points 5/95 - $1,000, 6/95 - $1,003, 9/95 - $999, 12/95 - $1,015,
3/96 - $1,057
The performance quoted above and on the next page represents past performance.
The investment return and principal 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. Total return includes changes in share value and
reinvestment of all distributions and has not been annualized. Past performance
does not ensure future results. Expense reimbursement increased return. See next
page.
Average Annual Total Return
Chart stating periods ended 3/31/96, Most recent quarter (not annualized) -
4.15%, Since inception (5/31/95) - 5.69%
From the inception of the Fund (5/31/95) the investment adviser has paid certain
Fund expenses which has had the effect of increasing the Fund's return. Without
consideration of such payments by the adviser, the cumulative return on initial
investments from inception and most recent quarter would have been approximately
+4.82% and +3.82%, respectively. Expense reimbursement arrangements may be
terminated at any time which would result in lower returns.
*Not annualized
Portfolio Manager Profile
Blairlogie Capital Management
Blairlogie Capital Management was founded in 1992 to specialize in managing
international investments primarily for U.S. investors. Blairlogie's eighteen
full-time employees located in Edinburgh, Scotland, currently manage more than
$640 million in international assets.
Gavin Dobson
Chief Executive Officer
Blairlogie Capital Management
A Scottish lawyer by training, Gavin Dobson has twenty years of international
investment experience that includes international corporate finance with
Klinewert Benson in London and President and Chief Operating Officer of Murray
Johnstone International in Chicago. In 1992, Mr. Dobson was approached by
Pacific Financial Asset Management to form an advisory firm dedicated
exclusively to international investments. An author of numerous articles and
three books on international investing, Gavin has degrees in Economics from
Dundee University and Law from Edinburgh University.
49
<PAGE> 182
James Smith
Chief Investment Officer
Blairlogie Capital Management
James Smith became a founding officer of Blairlogie Capital Management in 1992
following five years with Murray Johnstone International in Glasgow, Scotland,
where he was Senior Portfolio Manager with responsibility for international
asset allocation for North American clients and Vice Chairman of the company's
Emerging Markets Group. Prior to that, Mr. Smith was an equity portfolio manager
with Schroders in London. James has an Economics BSc. degree from London
University and an MBA degree from Edinburgh University, and is an Associate of
the Institute of Investment Research.
Profile of GRADISON-McDONALD Family of Funds
Grid from less potential risk, less potential reward to more potential risk,
more potential reward from left to right; Money market Funds, Government Income
Fund, Intermediate Municipal Income Fund, Ohio Tax-Free Income Fund, Established
Value Fund, Growth & Income Fund, Opportunity Value Fund, International Fund.
A prospectus for the International Fund or any other Gradison-McDonald Fund may
be obtained by calling (513) 579-5700 or (800) 869-5999. The prospectus contains
more complete information. Read it carefully before you invest.
McDonald & Company Securities, Inc. - Distributor
50
<PAGE> 183
[Sales Brochure]
INTERNATIONAL
FUND
GRADISON-McDONALD
[Picture of desk with foreign money]
A COMMON STOCK FUND INVESTING
IN NON-UNITED STATES COMPANIES
1
FAMILY OF MUTUAL FUNDS
INTERNATIONAL
Growth and Established
Income Value
51
<PAGE> 184
Opportunity Ohio Tax-Free
Value Income
Government Intermediate
Income Municipal
Money
Market
2
[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.
52
<PAGE> 185
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
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
53
<PAGE> 186
<TABLE>
<CAPTION>
1970 1994
<S> <C> <C> <C>
U.S. 66% U.S. 37%
Non-U.S. 34% Non-U.S. 63%
</TABLE>
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. Performance 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%
</TABLE>
54
<PAGE> 187
<TABLE>
<S> <C>
BELGIUM 16.2%
SWITZERLAND 15.4%
FRANCE 15.2%
AUSTRALIA 14.4%
UNITED STATES 14.1%
</TABLE>
4
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 horizontal 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 volatility of
varying percentages of U.S. stocks and foreign stocks. The following are the
approximate plot points:
<TABLE>
<CAPTION>
% U.S. stocks Return Volatility standard
------------- ------ -------------------
Std. Deviation
--------------
<S> <C> <C> <C>
1- 100% U.S. 14.50% 4.50
2- Less than above 14.75% 4.25
</TABLE>
55
<PAGE> 188
<TABLE>
<S> <C> <C> <C>
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
</TABLE>
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.
A MANAGEMENT TEAM SELECTED FOR EXPERIENCE
The Gradison-McDonald International Fund is managed by Scotland-based
56
<PAGE> 189
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.
A TRUSTED NAME
Gradison-McDonald
is headquartered in Cincinnati and has
57
<PAGE> 190
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
[Picture of phone and envelopes]
To find out more about the
58
<PAGE> 191
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
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
59
<PAGE> 192
PORTFOLIO OF INVESTMENTS MARCH 31, 1996
PREFERRED STOCKS - 3.20%
<TABLE>
<CAPTION>
NUMBER VALUE
OF SHARES
<S> <C> <C>
BRAZIL - 3.20%
25,500 Aracruz Celulose $ 40,792
6,130,000 Banco Bradesco SA 64,237
51,000 Brasmotor SA 13,167
1,310,000 Cia Energetica Minas Gerais 36,739
426,870 Companhia Vale Do Rio Doce 66,990
238,000 Elerobras Centrais Eletricas 65,061
1,100,000(1) Paranapanema 14,256
364,000 Petroleo Brasileiro SA (Petrobras) 43,488
5,800 Souza Cruz SA 43,631
31,300,000 Usiminas Siderugicas Minas Gerais 34,542
--------
TOTAL PREFERRED STOCKS
(COST = $432,244) $422,903
========
<CAPTION>
COMMON STOCKS - 96.80%
NUMBER VALUE
OF SHARES
<S> <C> <C>
ARGENTINA - 0.97%
1,482 Banco Frances del Rio de la Plata SA $ 13,416
200 Buenos Aires
Embotelladora SAADR 3,325
2,260 Compania Naviera Perez
Compac SAADR 25,727
6,500 Dalmine Siderca SA 6,502
246(1) IRSA(Inversiones y
Representaciones SA) 144A ADR 6,920
720 Molinos Rio de la Plata SA 6,770
750 Telefonica de Argentina ADR 19,219
2,300 YPF Sociedad Anonima ADR 46,288
--------
128,167
--------
AUSTRALIA - 1.52%
2,600 Amcor Ltd. 16,921
7,400 Boral Ltd. 19,391
3,100 Broken Hill Proprietary Co. Ltd. 44,181
4,000 Comalco Ltd. 22,872
6,800 David Jones Ltd. 10,532
3,800 News Corp Ltd. 22,264
3,500 Southcorp Holdings 9,144
3,800 Western Mining Corp. Holding 25,147
6,400 Westpac Banking Corp. 30,137
--------
200,589
--------
BRAZIL - 1.62%
1,430,000 Lojas Americanas SA $ 34,458
578,000(1) Paulista de Forca e Luz 35,113
2,900 Telebras SA ADR 144,275
--------
213,846
--------
CHILE - 2.59%
2,500 Banco Osorno La Union ADR 39,062
800 Cia Cervercerias Unidas ADR 17,000
1,030 Compania de Telefonos de
Chile ADR 87,293
2,600 Empresa Nacional de
Electridad SAADS 50,050
3,200 Enersis SAADR 90,400
900 Madeco SAADR 22,500
1,000 Maderas y Sinteticos ADR 17,750
340 Quimica y Minera Chile SAADR 17,765
--------
341,820
--------
COLUMBIA - 1.12%
5,600 Banco Ind Columbiano ADS 103,600
2,850 Cementos Diamante 144A ADR 44,175
--------
147,775
--------
FINLAND - 0.70%
1,779 Finnair Oy 14,473
420 Nokia (AB) Oy 14,502
500(1) Rauma Oy 8,848
650 Repola Oy 12,905
550 Valmet Oy 12,640
1,600(1) Werner Soderstrom 29,176
--------
92,544
--------
</TABLE>
See accompanying notes to financial statements.
Financial Statement Page 1
<PAGE> 193
PORTFOLIO OF INVESTMENTS MARCH 31, 1996
COMMON STOCKS (CONTINUED)
<TABLE>
<CAPTION>
NUMBER VALUE
OF SHARES
<S> <C> <C>
FRANCE - 6.49%
648 Alcatel Alst $ 60,089
1,266 AXA 77,820
99 Carrefour 72,514
1,620 Cie de Suez 62,901
707(1) Club Mediterranee 68,804
490 Credit Local De France 38,382
628 Eaux (Compagnie Generale) 64,234
380(1) Peugeot SA 57,962
312 Roussel-Uclaf 68,162
102 Salomon SA 65,636
1,750 Schneider SA 77,507
1,129 Total SA 76,238
4,050 Usinor Sacilor 66,239
--------
856,488
--------
GERMANY - 6.16%
550 Adidas AG 40,233
29 Allianz AG Holding 53,880
271 Bayer AG 92,311
80 Daimler Benz AG 43,511
1,270 Deutsche Bank 63,939
88 Karstadt AG 33,230
160 M.A.N. AG 44,107
287 Mannesmann AG 104,584
1,150 Merck AG 49,813
8 Muenchener Rueckversicherungs-
Gesellschaft 16,662
162 Siemens AG 89,154
2,377 Veba AG 115,519
188 Volkswagen AG 65,898
--------
812,841
--------
HONG KONG - 2.24%
6,000 Cheung Kong (Holdings) Ltd. 42,286
4,000 Citic Pacific 15,518
4,200 Hang Seng Bank 42,907
16,400 Hong Kong
Telecommunications Ltd. 32,766
7,000 Hutchison Whampoa Ltd. 44,174
8,000 Sun Hung Kai Properties Ltd. 71,640
4,000 Swire Pacific Ltd. 35,174
3,000 Television Bra 11,037
--------
295,502
--------
INDIA - 3.21%
1,250 Bajaj Auto Ltd. GDR $ 38,906
100 Century Textile & Industries GDR 18,000
1,800 East India Hotels GDR 39,150
2,300 Grasim Industries GDS 40,020
1,450 Hindalco Industries GDR 53,650
4,300 Indian Aluminum GDR 31,476
2,800 Indian Rayon & Industries GDR 42,700
2,000 Larsen & Toubro Ltd. GDS 31,500
900 Raymond Ltd. GDR 18,113
2,750 Reliance Industries Ltd. GDS 39,875
4,500 Tata Engineering & Locomotive
Co. Ltd. GDR 70,875
--------
424,265
--------
INDONESIA - 0.00%
475 Indah Kiat Paper & Pulp Corp. 371
--------
ISRAEL - 1.39%
14 Africa Israel Investments Ltd. 14,174
10,500 Bk Hapoalim Ltd. 15,140
3,600 Blue Square Chain Stores 25,965
350 Koor Industries Ltd. 33,273
4,000 Osem Investments Ltd. 24,108
6,800 Tadiran Ltd. 24,947
1,500 Tadiran Ltd., New GDR 22,500
60 Teva Pharmaceutical Industries Ltd. 23,003
--------
183,110
--------
ITALY - 3.03%
2,000 Benetton Group SpA 22,868
66,325 Credito Italiano SpA 70,978
6,000 Edison SpA 30,156
11,100 Eni SpA 40,268
42,000 Parmalat Finanziaria SpA 38,579
4,400 Riunione Adratica di Sicurta SpA 42,883
10,390 Sasib SpA 20,649
21,000 STET-SocietaFinanziaria Telefonica 58,257
25,000 Telecom Italia SpA 39,574
5,710 Unicem (Union Cem March Emil) 36,009
--------
400,221
--------
</TABLE>
See accompanying notes to financial statements.
Financial Statement Page 2
<PAGE> 194
PORTFOLIO OF INVESTMENTS MARCH 31, 1996
COMMON STOCKS (CONTINUED)
<TABLE>
<CAPTION>
NUMBER VALUE
OF SHARES
<S> <C> <C>
JAPAN - 30.58%
15,000 Daiwa Securities Co. Ltd. $ 228,925
19,000 Fujisawa Pharmaceutical Co. 183,234
13,000 Hitachi Ltd. 126,588
34,000 Marubeni Corp. 190,687
16,000 Matsushita Electric Works 172,279
43,000 Mitsubishi Chemical Corp. 227,474
85,000(1) Mitsui Engineering & Shipbuilding 252,286
19,000 Mitsui Fudosan Co. Ltd. 247,277
53,000(1) Mitsui O.S.K. Lines Ltd. 179,638
39,000 Nippon Oil Co. 249,402
32 Nippon Telephone & Telegraph Corp. 234,300
65,000(1) NKK Corp. 188,056
18,000 Obayashi Corp. 154,714
1,500 Sony Corp. 89,744
12,000 Sumitomo Bank 242,689
20,000 Sumitomo Metal Mining 192,878
14,000 Sumitomo Trust & Banking 192,691
6,900 Tokyo Electric 177,017
8,000 Tokyo Steel Manufacturing 145,314
29,000 Tokyu Corp. 221,295
36,000 UBEIndustries 139,546
----------
4,036,034
----------
MALAYSIA - 3.71%
8,000 Edaran Otomobil Nasional 71,820
7,000 Land & General Berhad 18,548
14,000 Malayan Banking Berhad 130,669
22,000 Metacorp Berhad 67,431
12,000 R J Reynolds Berhad 33,221
31,000 Road Builder Holdings Berhad 118,923
8,000 Sungei Way Holdings Berhad 34,803
2,000 United Engineers Berhad 13,842
----------
489,257
----------
MEXICO - 4.24%
8,300 Apasco SAde CV $ 42,378
34,000(1) Cifra SAde CV 45,270
37,000(1) Controladora Comercial
Mexicana SA de CV 30,815
4,200(1) Desc SA de CV 19,049
2,920 Empresas ICASociedad
Controladora SA 38,259
10,000(1) Fomento Economico Mexicano
SA de CV 28,778
13,800(1) Grupo Financiero Banamex
Accival SA de CV 26,354
7,600(1) Grupo Mexico SA 27,213
10,700 Grupo Modelo SA de CV 49,665
1,100(1) Grupo Televisa ADR 27,363
5,500 Industrias Penoles SA 23,486
1,800 Kimberly-Clark de Mexico SA 34,303
4,720 Telefonos de Mexico ADR 155,170
1,400(1) Tubos de Acero de Mexico SA 11,047
----------
559,150
----------
NETHERLANDS - 1.98%
726 ABN-AMRO Holdings NV 36,113
613 Ahold (Koninklijke) NV 29,564
1,320 Elsevier NV 20,209
255 Fortis Amev NV 17,977
790 K.L.M. Royal Dutch Air Lines NV 27,488
518 Koninklijke PTT Nederlands NV 20,375
685 Philips Electronics NV 24,912
312 Polygram NV 18,880
320 Royal Dutch Petroleum Co. 45,312
1,220 VNU (Verenigde Nederlandse
Uitgevbedri Verigd Bezit) 20,302
----------
261,132
----------
NORWAY - 0.76%
550 Aker AS 10,163
3,950 Christiana Bank Og Kreditkasse 9,177
3,272 Den Norske Bank AS 10,153
380 Hafslund Nycomed Class B 10,370
475 Leif Hoegh & Co. AS 6,814
470 Norsk Hydro AS 20,484
350 Norske Skogindustrier AS 10,642
326 Orkla AS 14,259
310 Sparebanken NOR 8,484
----------
100,546
----------
</TABLE>
See accompanying notes to financial statements.
Financial Statement Page 3
<PAGE> 195
PORTFOLIO OF INVESTMENTS MARCH 31, 1996
COMMON STOCKS (CONTINUED)
<TABLE>
<CAPTION>
NUMBER VALUE
OF SHARES
<S> <C> <C>
PERU - 0.83%
7,000 Cerveceria Backus & Johnston SA $ 8,774
32,400 Compania Peruana Telefonica
B Shares 64,704
1,414 Co de Minas Buenaventura SA 10,382
943 Credicorp Ltd. ADR 16,974
600 Minsur SA 4,716
1,000 Southern Peru Copper Corp. 3,824
--------
109,374
--------
PHILLIPPINES - 1.44%
18,600 Ayala Corp. 26,997
1,800 Metropolitan Bank & Trust Co. 44,690
45,600 Petron Corp. 19,595
800 Phillipine Long Distance
Telephone Co. ADR 42,600
9,700 San Miguel Corp. Class B 32,605
80,000 SM Prime Holdings 23,835
--------
190,322
--------
POLAND - 1.00%
1,570 Bank Gdanski GDR 16,799
1,560 Bank Rozwoju Eksportu SA 33,217
1,055 Debica S.A. 25,731
6,310 Elektrim Spolka Akcyjna S.A. 37,376
3,740 Polifarb-Cieszyn S.A. 19,547
--------
132,670
--------
PORTUGAL - 1.02%
1,330 Banco Comercial Portugues 18,262
960 Cimentos de Portugal SA 18,083
1,000(1) Investec Consultadoria Internacional 23,595
310 Jeronimo Martins & Filho 23,001
1,430 Portugal Telecom SA 32,287
790 Sonae Investimentos Sociedade
Gestora de Participacoes Sociais SA 18,893
--------
134,121
--------
SINGAPORE - 2.09%
28,000 Comfort Group Ltd. $ 25,861
2,000 Cycle & Carriage Ltd. 23,019
8,000 DBS Land Ltd. 30,692
6,000 Hong Leong Finance Ltd. 26,003
3,000 Keppel Corp. Ltd. 27,282
4,000 Oversea-Chinese Banking
Corp. Ltd. 55,842
8,000 Overseas Union Bank Ltd. 56,837
9,000 Straits Steamship Land Ltd. 30,308
--------
275,844
--------
SOUTH AFRICA - 0.97%
3,370 Amalgamated Banks of South Africa 17,789
145 Anglo American Gold
Investment Co. Ltd. 14,944
1,470 Barlow Ltd. 18,845
640 De Beers Centenary AG 20,592
440 Liberty Life Assoc. of Africa Ltd. 13,825
6,100 Norwich Holdings Ltd. 11,040
3,050 Smith (C.G.) Ltd. 19,550
355 South African Breweries Ltd. 11,244
--------
127,829
--------
SOUTH KOREA - 1.47%
8,800 Korea Fund, Inc.
(closed-end mutual fund) 185,900
320 Pohang Iron & Steel Co. Ltd. ADR 7,760
--------
193,660
--------
SPAIN - 2.32%
2,250 Aumar (Autopistas del Mare
Nostrum SA) 27,011
885 Banco Santander SA 42,141
262 Banco Popular Espanol SA 45,259
5,555 Iberdrola SA 51,246
756 Empresa Nacional de Electridad SA 43,308
1,445 Repsol SA 54,486
2,670 Telefonica De Espana 42,379
--------
305,830
--------
</TABLE>
See accompanying notes to financial statements.
Financial Statement Page 4
<PAGE> 196
PORTFOLIO OF INVESTMENTS MARCH 31, 1996
COMMON STOCKS (CONTINUED)
<TABLE>
<CAPTION>
NUMBER VALUE
OF SHARES
<S> <C> <C>
THAILAND - 1.92%
1,900 Advanced Info Service $ 35,695
5,500 Bangkok Bank Public Co. Ltd. 74,117
1,000 Industrial Finance Corp. of Thailand 3,646
8,100 Industrial Finance Corp.
of Thailand (Alien Mkt.) 29,215
5,200 Krung Thai Bank Public Co. Ltd. 24,526
600 Land & House Co. Ltd. 9,893
3,000 Phatra Thanakit Co. Ltd. 27,586
2,300 Property Perfect Public Co. Ltd. 10,757
3,300 Thai Farmers Bank Public Co. Ltd. 38,716
-----------
254,151
-----------
TURKEY - 1.79%
112,800 Adana Cimento Sanayii 20,529
185,900 Akal Tekstil Sanayii 23,944
228,000 Arcelik AS 30,005
50,000 Bagfas Bandirma Gubre AS 17,150
60,000 Brisa Bridgestone Sabanci Lastik 21,420
532,000 Demirbank 20,482
220,000 Eregli Demir Co 25,564
31,200 Migros Turk TAS 33,197
62,000 Netas Telekomunik AS 19,096
126,000 Turk Sise AS 25,137
-----------
236,524
-----------
UNITED KINGDOM - 9.55%
8,940 Abbey National PLC $ 76,832
9,975 BAAPLC 81,768
6,500 Barclays PLC 72,333
7,700 Boots Co. PLC 70,524
19,900 British Telecommunications PLC 112,305
6,900 Commercial Union PLC 60,037
6,900 Granada Group PLC 79,207
14,859 Lloyds TSBGroup PLC 71,222
23,450 Pilkington PLC 75,172
6,000 Scottish & Newcastle PLC 58,526
4,300 Shell Transportation &
Trading PLC 56,910
18,140 Tesco PLC 73,934
18,300 Tomkins PLC 70,955
10,630 Wolseley PLC 71,398
11,040 Zeneca Group PLC 228,858
-----------
1,259,981
-----------
VENEZUELA - 0.09%
3,000 Mavesa SA 144A ADR 11,430
-----------
TOTAL COMMON STOCKS
(COST = $12,205,028) $12,775,394
===========
TOTAL INVESTMENTS,
AT VALUE (NOTE 1)
(COST = $12,637,272) - 100.00% $13,198,297
===========
</TABLE>
(1) Non-income producing.
The following abbreviations are used in this portfolio.
ADR - American Depository Receipts
ADS - American Depository Shares
GDR - Global Depository Receipts
GDS - Global Depository Shares.
144A - These securities are exempt from registration under rule 144A of the
Securities Act of 1933. Such securities may be resold, normally to qualified
institutional buyers, in transactions exempt from registration. See Note 1 of
the Notes to Financial Statements for valuation policy. Rule 144A securities
amounted to $62,525 as of March 31, 1996.
See accompanying notes to financial statements.
Financial Statement Page 5
<PAGE> 197
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
MARCH 31, 1996
<S> <C>
ASSETS
Investments in securities, at value (Note 1) (Cost $12,637,272) $ 13,198,297
Cash 1,697,685
Foreign currency , at value (Note 1) (Cost $514,535) 510,866
Receivable for Fund shares sold 74,906
Dividends and interest receivable 43,793
Receivable from adviser (Note 2) 24,245
Receivable for securities sold 23,815
Organization expenses, net (Note 1) 19,918
Forward foreign currency contracts (Note 1) 13,037
Futures variation margin receivable (Note 1) 11,616
Other assets 6,184
------------
TOTAL ASSETS 15,624,362
------------
LIABILITIES
Payable for securities purchased 253,086
Accrued custodian fees 51,572
Accrued investment advisory fee (Note 2) 9,532
Other accrued expenses and liabilities 5,076
------------
TOTAL LIABILITIES 319,266
------------
NET ASSETS $ 15,305,096
============
Net assets consist of:
Aggregate paid-in capital $ 14,719,979
Accumulated undistributed net investment income 21,788
Accumulated net realized loss from investments and foreign currency transactions (27,769)
Net unrealized appreciation of investments 561,025
Net unrealized appreciation on translation of assets and liabilities in foreign currencies 30,073
------------
Net Assets $ 15,305,096
============
Shares of capital stock outstanding
(no par value - unlimited number of shares authorized) 967,360
============
Net asset value and redemption price per share (Note 1) $ 15.82
============
</TABLE>
See accompanying notes to financial statements.
Financial Statement Page 6
<PAGE> 198
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD MAY 31, 1995*
TO MARCH 31, 1996
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 99,385
Dividends, net of foreign withholding taxes of $9,804 83,254
---------
Total investment income $182,639
EXPENSES:
Investment advisory fees (Note 2) 74,223
Custodian fees 55,070
Accounting services fees (Note 2) 50,000
Distribution (Note 2) 37,112
Registration fees 22,695
Professional fees 13,780
Transfer agency fees (Note 2) 11,601
Trustees' fees (Note 2) 5,250
Amortization of organization expenses (Note 1) 3,984
Other 4,192
---------
TOTAL EXPENSES 277,907
LESS FEES WAIVED AND EXPENSES REIMBURSED BY THE ADVISER (NOTE 2) (147,343)
---------
NET EXPENSES 130,564
--------
NET INVESTMENT INCOME 52,075
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY:
Net realized gain on investments 60,985
Net realized loss on foreign currency transactions (88,754)
Net increase in unrealized appreciation of investments 561,025
Net increase in unrealized appreciation on translation of
assets and liabilities in foreign currencies 30,073
---------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY 563,329
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $615,404
========
</TABLE>
*Date of public offering.
See accompanying notes to financial statements.
Financial Statement Page 7
<PAGE> 199
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE PERIOD
MAY 31,1995* TO
MARCH 31, 1996
<S> <C>
FROM OPERATIONS:
Net investment income $ 52,075
Net realized gain on investments 60,985
Net realized loss on foreign currency transactions (88,754)
Net increase in unrealized appreciation of investments 561,025
Net increase in unrealized appreciation on translation of assets
and liabilities in foreign currencies 30,073
------------
Net increase in net assets resulting from operations 615,404
------------
FROM DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME (30,287)
------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 17,657,397
Net asset value of shares issued in reinvestment of distributions 30,169
Payments for shares redeemed (2,967,587)
------------
Net increase in net assets from Fund share transactions 14,719,979
------------
TOTAL INCREASE IN NET ASSETS 15,305,096
NET ASSETS:
Beginning of period --
------------
End of period (including undistributed net investment income of $21,788) (Note 1) $ 15,305,096
============
NUMBER OF FUND SHARES:
Sold 1,162,052
Issued in reinvestment of distributions to shareholders 1,987
Redeemed (196,679)
------------
Net increase in shares outstanding 967,360
Outstanding at beginning of period --
------------
Outstanding at end of period 967,360
============
</TABLE>
*Date of public offering.
See accompanying notes to financial statements.
Financial Statement Page 8
<PAGE> 200
NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
Gradison Growth Trust (the "Trust") is registered under the Investment Company
Act of 1940, as amended, as an open-end management investment company. The Trust
was created under Ohio law on May 31, 1983; it commenced investment operations
and the public offering of its shares on August 16, 1983. The Trust consists of
four diversified series, the Gradison-McDonald International Fund, the
Gradison-McDonald Established Value Fund, the Gradison-McDonald Opportunity
Value Fund and the Gradison-McDonald Growth &Income Fund (collectively, the
"Funds"); each of which in effect represents a separate fund with its own
investment policies. This Annual Report to Shareholders pertains only to the
Gradison-McDonald International Fund (the "Fund"), the public offering of shares
of which commenced on May 31, 1995. The Fund's investment objective is to seek
long-term growth of capital.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles. The preparation of
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses for the
period. Actual results could differ from those estimates.
SECURITIES VALUATION -- Listed equity securities are valued at the last sale
price reported on national securities exchanges, or if there were no sales that
day, the security is valued at the closing bid price. Unlisted securities, 144A
securities and short-term obligations (and private placement securities) are
generally valued at the prices provided by an independent pricing service.
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 sixty days or less are valued at
amortized cost, which approximates value.
FOREIGN CURRENCY TRANSLATION -- The accounting records of the Fund are
maintained in U.S. dollars. All assets and liabilities denominated in foreign
currencies ("FC") are translated into U.S. dollars based on the rate of exchange
of such currencies against U.S. dollars on the date of valuation. Purchases and
sales of securities, income and expenses are translated at the rate of exchange
quoted on the respective date that such transactions are recorded. Differences
between income and expense amounts recorded and collected or paid are adjusted
when reported by the custodian bank. The Fund does not isolate that portion of
the results of operations resulting from changes in foreign exchange rates on
investments from the fluctuations arising from changes in market prices of
securities held. Such fluctuations are included with the net realized and
unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales and
maturities of short-term securities, sales of FCs, currency gains or losses
realized between the trade and settlement dates on securities transactions, the
difference between the amounts of dividends, interest, and foreign withholding
taxes recorded on the Fund's books, and the U.S. dollar equivalent of the
amounts actually received or paid. Net unrealized foreign exchange gains and
losses arise from changes in the value of assets and liabilities, other than
investments in securities, resulting from changes in the exchange rate.
FUND SHARE VALUATION AND DISTRIBUTIONS TO SHAREHOLDERS -- The net asset value
per share is computed by dividing the net asset value of the Fund (total assets
less total liabilities) by the number of shares outstanding. The redemption
price per share is equal to the net asset value per share.
Distributions to shareholders are recorded on the ex-dividend date. During the
period ended March 31, 1996, the Fund made distributions of $0.042 per share
which is treated as dividend income.
Financial Statement Page 9
<PAGE> 201
NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996
FORWARD FOREIGN CURRENCY CONTRACTS -- At March 31, 1996, the Fund had entered
into forward foreign currency contracts under which it is obligated to exchange
currencies at specified future dates. The Fund's currency transactions are
currently transaction hedges and portfolio hedges involving either specific
transactions or portfolio positions.
The contractual amounts of forward foreign exchange contracts do not necessarily
represent the amounts potentially subject to risk. The measurement of the risks
associated with these instruments is meaningful only when all related and
offsetting transactions are considered. Risks arise from the possible inability
of counterparties to meet the terms of their contracts and from movements in
currency values. The Fund had the following outstanding contracts at March 31,
1996:
PORTFOLIO HEDGES:
<TABLE>
<CAPTION>
UNREALIZED
U.S. DOLLAR SETTLEMENT APPRECIATION (DEPRECIATION)
BUY/SELL AMOUNT FOREIGN CURRENCY PROCEEDS DATE AT MARCH 31, 1996
<S> <C> <C> <C> <C> <C>
Sell 4,000,000 French Franc $ 788,000 4/11/96 $(6,084)
Buy 1,167,696 German Deutschmark 789,000 4/11/96 2,166
Buy 236,855 German Deutschmark 160,000 4/11/96 480
Sell 804,455 German Deutschmark 542,000 4/11/96 (3,054)
Sell 25,000,000 Japanese Yen 237,304 4/11/96 2,835
Sell 160,000,000 Japanese Yen 1,511,145 5/15/96 14,067
Sell 20,000,000 Spanish Peseta 160,760 4/11/96 (200)
Buy 650,000 Swiss Franc 542,000 4/11/96 4,360
-------
$14,570
=======
</TABLE>
TRANSACTION HEDGES:
<TABLE>
<CAPTION>
UNREALIZED
U.S. DOLLAR SETTLEMENT APPRECIATION (DEPRECIATION)
BUY/SELL AMOUNT FOREIGN CURRENCY PROCEEDS DATE AT MARCH 31, 1996
<S> <C> <C> <C> <C> <C>
Buy 26,177,982 Japanese Yen $246,683 4/2/96 $(1,579)
Buy 46,313 Malaysian Ringgit 18,298 4/8/96 18
Buy 101,780 Singapore Dollar 72,276 4/2/96 34
Buy 379,357 Thai Baht 15,042 4/2/96 (6)
-------
$(1,533)
=======
</TABLE>
At March 31, 1996, the Fund had sufficient cash and/or securities to cover any
commitments under these contracts.
See accompanying notes to financial statements.
Financial Statement Page 10
<PAGE> 202
NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996
FUTURES CONTRACTS -- Initial margin deposits made upon entering into futures
contracts are recognized as assets due from the broker (the Fund's agent in
acquiring the futures position). During the period the futures contract is open,
changes in the value of the contract are recognized as unrealized gains or
losses by "marking to market" on a daily basis to reflect the market value of
the contract at the end of each day's trading.
Variation margin payments are received or made, depending upon whether
unrealized gains or losses are incurred. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the opening and
closing value of the contract.
Currencies with an aggregate market value of $504,864 have been segregated with
the custodian (an additional $171,067 in currency was segregated on settlement
date of April 2, 1996) for the following open stock index futures contracts at
March 31, 1996:
<TABLE>
<CAPTION>
OPENING MARKET
MARKET VALUE UNREALIZED
TYPE EXPIRATION VALUE 3/31/96 APPRECIATION
<S> <C> <C> <C> <C> <C>
Long Nikkei 300 (Yen) 6/96 $533,209 $552,104 $18,895
Long FT-SE 100 (Pound) 6/96 139,730 141,333 1,603
</TABLE>
SECURITIES TRANSACTIONS AND INVESTMENT INCOME -- Securities transactions are
accounted for on the trade date (the date the order to buy or sell is executed),
and dividend income is recorded on the ex-dividend date. Interest income is
accrued as earned. Gains and losses on sales of investments are calculated on
the identified cost basis for financial reporting and tax purposes.
TAXES -- It is the Fund's policy to comply with the provisions of the Internal
Revenue Code available to regulated investment companies. As provided therein,
in any fiscal year in which the Fund so qualifies, and distributes at least 90%
of its taxable net income, the Fund will be relieved of federal income tax on
the income distributed. Accordingly, no provision for income taxes has been
made.
In order to avoid imposition of the excise tax applicable to regulated
investment companies, it is also the Fund's intention to declare as dividends in
each calendar year, at least 98% of its net investment income (earned during the
calendar year) and 98% of its net realized capital gains, if any (earned during
the twelve months ended October 31), plus undistributed amounts from prior
years.
The tax basis of investments is equal to the cost as shown on the Statement of
Assets and Liabilities.
For both financial reporting and tax purposes, gross unrealized appreciation and
gross unrealized depreciation of securities at March 31, 1996 was $890,942 and
$329,917, respectively.
EXPENSES -- Common expenses incurred by the Trust are allocated to the Fund
based on the ratio of the net assets of the Fund to the combined net assets of
the Trust. In all other respects, expenses are charged to the Fund as incurred
on a specific identification basis.
ORGANIZATION EXPENSES -- Expenses of organization have been capitalized and are
being amortized on a straight-line basis over 60 months commencing upon the
public offering of the Fund's shares.
Financial Statement Page 11
<PAGE> 203
NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996
NOTE 2 -- TRANSACTIONS WITH AFFILIATES
The Trust's investments are managed, subject to the general supervision and
control of the Trust's Board of Trustees, by McDonald & Company Securities, Inc.
("McDonald"), a registered investment adviser and securities dealer, pursuant to
the terms of an Investment Advisory Agreement ("Agreement"). Under the terms of
the Agreement, the Fund pays McDonald a fee computed and accrued daily and paid
monthly based upon the Fund's daily net assets at the annual rate 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 Capital Management ("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. McDonald is to reimburse the Fund for the amount by which the Fund's
aggregate expenses for a fiscal year, including the advisory fee but excluding
interest, taxes and extraordinary expenses, exceed limits set by state
securities regulations.
The Agreement provides that McDonald bear the costs of salaries and related
expenses of executive officers of the Fund who are necessary for the management
and operations of the Fund. In addition, McDonald bears the costs of preparing,
printing and mailing sales literature and other advertising materials and
compensates the Trust's trustees who are affiliated with McDonald. All expenses
not specifically assumed by McDonald are borne by the Fund.
Under the terms of a Transfer Agency, Accounting Services and Administrative
Services Agreement, McDonald provides transfer agent, dividend disbursing,
accounting services and administrative services to the Fund. The Fund pays
McDonald a monthly fee for transfer agency and administrative services at an
annual rate of $19.25 per shareholder non-zero balance account, plus
out-of-pocket costs for statement paper, statement and reply envelopes and reply
postage. The Fund pays McDonald a monthly fee for accounting services based on
the Fund's average daily net assets at an annual rate of .045% on the first $100
million, .03% on the next $100 million and .015% on any amount in excess of $200
million, with a minimum annual fee of $60,000.
Under the terms of an Expense Reimbursement Agreement, McDonald has agreed to
forego fees owed to it under the Advisory Agreement or any other agreement with
the Trust and to reimburse the Fund if, and to the extent that, expenses
(excluding brokerage commissions, taxes, interest and extraordinary items) borne
by the Fund in any fiscal year exceed 2.00% of the average net assets of the
Fund. This agreement is in effect until August 1, 1996 and is subject to
termination by either party upon written notice subsequent to that date. In
addition, McDonald may, at its discretion, agree to waive fees and/or reimburse
the Fund for other expenses in order to limit the Fund's expenses to a specified
percentage of average net assets lower than 2.00%. For the period ended March
31, 1996, McDonald waived advisory fees of $24,385, transfer agency fees of
$11,601, accounting services fees of $50,000, and distribution expenses of
$37,112 and reimbursed the Fund $24,245 for other operating expenses.
Financial Statement Page 12
<PAGE> 204
NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996
In accordance with the terms of a Distribution Plan adopted under Rule 12b-1 of
the Investment Company Act of 1940, the Fund pays McDonald a service fee for
personal services to shareholders including shareholder liaison services such as
responding to shareholder inquiries and providing information to shareholders
about their Fund accounts. This fee is computed and paid at an annual rate of
.25% of the Fund's average daily net assets. The Fund also pays McDonald a fee
for its assistance in selling shares of the Fund including advising shareholders
regarding purchase, sale and retention of Fund shares. This fee is computed and
paid at an annual rate of .25% of the Fund's average daily net assets.
The officers of the Trust are also officers of McDonald.
Each trustee of the Trust who is not affiliated with McDonald receives fees from
the Trust for services as a trustee. The amounts of such fees for each trustee
are as follows: (a) an annual fee of $5,000 payable in quarterly installments
and (b) $500 for each Board of Trustees or committee meeting attended.
NOTE 3 -- SUMMARY OF PURCHASES AND SALES OF INVESTMENTS
For the period ended March 31, 1996, cost of purchases, and proceeds from the
sale of securities, excluding short-term securities, amounted to $17,433,338 and
$4,857,052, respectively.
NOTE 4 -- PORTFOLIO COMPOSITION
The Fund invests in equity securities of non-U.S. issuers. Although the Fund
maintains a diversified investment portfolio, the political or economic
developments within a particular country or region may have an adverse effect on
the ability of domiciled issuers to meet their obligations. Additionally,
political or economic developments may have an effect on the liquidity and
volatility of portfolio securities and currency holdings.
At March 31, 1996 the Portfolio was diversified within the following industries:
<TABLE>
<S> <C>
Automotive 3.15%
Banking 11.98
Beverages and Tobacco 2.09
Building Materials 2.18
Broadcasting and Publishing 0.99
Chemicals 5.19
Consumer Goods 0.64
Construction and Housing 3.39
Diversified Companies 4.26
Electronics 4.21
Energy 5.62
Financial Services 5.08
Food and Household Products 0.99
Forest Products and Paper 1.15
Health and Personal Care 2.54
Household Appliances and Durables 0.97
Industrial Components 0.73
Insurance 2.23
Investment Companies 1.41
Machinery and Engineering 3.27
Materials and Commodities 0.73
Merchandising 3.43
Metals and Mining 3.37
Public Services 0.69
Real Estate 3.47
Steel 3.99
Telecommunications 8.59
Textiles and Apparel 0.93
Tourism 1.42
Transportation 4.22
Utilities 5.36
Wholesale Trade 1.73
------
100.00%
======
</TABLE>
Financial Statement Page 13
<PAGE> 205
ARTHUR
ANDERSEN
ARTHUR ANDERSEN & CO, SC
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Trustees of the
Gradison-McDonald International Fund
of the Gradison Growth Trust:
We have audited the accompanying statement of assets and liabilities of the
Gradison-McDonald International Fund of the Gradison Growth Trust (an Ohio
business trust), including the portfolio of investments, as of March 31, 1996,
and the related statement of operations, the statement of changes in net assets
and the financial highlights for the period indicated thereon. These financial
statements and financial highlights are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of March 31, 1996, by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Gradison-McDonald International Fund of the Gradison Growth Trust as of March
31, 1996, the results of its operations, the changes in its net assets and the
financial highlights for the period indicated thereon, in conformity with
generally accepted accounting principles.
Cincinnati, Ohio,
May 30, 1996
Financial Statement Page 14
<PAGE> 206
PART C
OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
(a)(1) Financial Highlights of the Funds for the year ending March 31, 1996
are included in the prospectus.
(a)(2) Financial Statements of the Funds included in the respective Statements
of Additional Information for the Funds:
Portfolio of Investments at March 31, 1996
Statement of Assets and Liabilities at March 31, 1996
Statement of Operations for the fiscal period ended March 31, 1996
Statements of Changes in Net Assets for the fiscal period ended March
31, 1995 and March 31, 1996 (for the fiscal period ending
March 31, 1996 only for the Gradison-McDonald International
Fund).
Notes to Financial Statements
<PAGE> 207
(b)Exhibits
(1)(a) First Amended Declaration of Trust.*
(1)(b) Amendment dated October 4, 1991 to Registrant's Declaration
of Trust (Amending Paragraph 2.6).+
(1)(c) Amendments dated May 25, 1995, to First Amended Declaration
of Trust.++
(2)(a) Registrant's By-Laws.**
(2)(b) Amendment to Registrant's By-Laws dated July 16, 1991
(Amending Section 3.1).+
(3) None.
(4)(a) Form of certificate of share of beneficial interest of
GM-E/O.*
(5)(a) Investment Advisory Agreement (GM-E/O) dated October 4,
1991. +
(5)(b) Amendments to Investment Advisory Agreements of GM-E/O dated
June 1, 1995.++
(5)(c) Investment Advisory Agreement of GM-E/O dated May 25, 1995.++
(5)(d) Investment Advisory Agreement of GM-INT dated June 1, 1995.++
(5)(e) Sub-Advisory Agreement of GM-INT dated May 25, 1995.++
(6) None.
(7) None.
(8) Custodian Agreement (GM-E/O).*
(8)(a) Custodian Agreement of GM-GI.++
(8)(b) Custodian Agreement of GM-INT with Chase Manhattan Bank.++
(8)(c) Account Agreement with Star Bank (GM-INT).++
(9)(a) Transfer Agency Accounting Services Agreement (GM-E/O) dated
June 1, 1995.++
(9)(b) Transfer Agency Accounting Services Agreement (GM-GI) dated
February 28, 1995.++
(9)(c) Transfer Agency Accounting Services Agreement (GM-INT) dated
June 1, 1995.++
(10) Opinion of Counsel is filed yearly with Registrant's Rule 24f-2
Notice and was most recently filed on May 25, 1995.
(11) Consent of Independent Accountants. (Included herein)
(12) None.
(14) Documents used in establishment of individual retirement
accounts in conjunction with shares of Registrant.****
(15)(a) Distribution Plan of GM-E/O, as amended October 31, 1994.***
(15)(b) Distribution Agreements dated June 1, 1995 of GM-E/O.++
(15)(c) Distribution Agreement of GM-GI dated February 28, 1995.++
(15)(d) Distribution Agreement of GM-INT dated June 1, 1995.++
(16)(a) Schedule of Total Return Computations.+
(18) Powers of Attorney of Bradley E. Turner, Daniel Castellini, and
Donald E. Weston.***
(18)(a) Powers of Attorney of Patricia Jamieson, Theodore Emmerich,
Jerome Schnee, Richard Rankin, and Julian Ball.++
C-2
<PAGE> 208
- ------------------------------------------------------------
* Incorporated by reference to Exhibits 1,4, and 8 to Registrant's Form N-1
Registration Statement No. 2-84169 previously filed with the Securities and
Exchange Commission on August 9, 1983.
+ Incorporated by reference to Exhibits 1(b),2(b) 5, 15(b) and 16(a)to
Registrant's Form N-1A Registration Statement No. 2-84169 previously filed with
the Securities and Exchange Commission on June 1, 1992.
** Incorporated by reference to Exhibit 2(b) to Registrant's Form N-1
Registration Statement No. 2-84169 previously filed with the Securities and
Exchange Commission on June 2, 1983
**** Incorporated by reference to Exhibit 14 to Registrant's Form N-1A
Registration Statement No. 2-84169 previously filed with the Securities and
Exchange Commission on June 20, 1986.
*** Incorporated by reference to Exhibits 15(a) and 18 to Registrant's Form
N-1A Registration Statement No. 2-84169 previously filed with the Securities and
Exchange Commission on November 23, 1994.
++ Incorporated by reference to Exhibits 1(c), 5(b), 5(c), 5(d), 5(e),
8(a), 8(b), 8(c), 9(a), 9(b), 9(c), 15(b), 15(c), 15(d), and 18(a) to
Registrant's Form N-1A Registration Statement No. 2-84169 previously filed with
the Securities and Exchange Commission on July 27, 1995.
C-3
<PAGE> 209
Item 26. NUMBER OF HOLDERS OF SECURITIES
Number of
Record Holders
as of
Title of Class July 10, 1996
Shares of beneficial interest, without par value of:
Gradison-McDonald Established Value Fund 14,178
Gradison-McDonald Opportunity Value Fund 6,210
Gradison-McDonald Growth and Income Fund 1,075
Gradison-McDonald International Fund 1,484
Item 28. I- BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Reference is made to the captions "Management of the Fund in the
Prospectus that is part of Part A of this Registration Statement, "Trustees and
Officers of the Trust" of each of the Statements of Additional Information of
the Funds that are part of Part B of this Registration Statement and to Item
29(b) of this Part C of the Registration Statement.
II- BUSINESS AND OTHER CONNECTIONS OF INVESTMENT SUB-ADVISER OF
GRADISON-MCDONALD INTERNATIONAL FUND
The address of Blairlogie Capital Management, Limited is 4th Floor, 125 Princes
Street, Edinburgh EH2 4AD, Scotland.
Name Position with Other Affiliations
Investment Sub-Adviser
Gavin R. Dobson Chief Executive Officer Director, Blairlogie
Holdings Limited
(U.K.)
James G.S. Smith Chief Investment Director, Blairlogie
Officer Holdings Limited
(U.K.)
John R.W. Stephens Chief Financial Director, Blairlogie
Officer Holdings Limited
(U.K.)
Item 29. PRINCIPAL UNDERWRITERS
(a) The principal underwriter of the Registrant is McDonald & Company
Securities, Inc., which also serves as the principal underwriter and
C-4
<PAGE> 210
investment adviser for Gradison-McDonald Cash Reserves Trust, Gradison-McDonald
Municipal Trust and Gradison Custodian Trust.
(b) Information pertaining to its directors and officers is contained in
the following table.
Positions Business Positions
Name With Underwriter Address With
Registrant
Daniel F. Austin Director, Vice 800 Superior Avenue None
Chairman Cleveland Ohio 44114
Jack N. Aydin Director, Managing One Evertrust Plaza None
Director Jersey City, NJ 07302
Eugene H. Bosart, Director, Senior 260 East Brown Street None
III Managing Director Birmingham, MI 48009
Thomas G. Clevidence Director, Senior 800 Superior Avenue None
Managing Director Cleveland, OH 44114
Robert Clutterbuck Director, President, 800 Superior Avenue None
Chief Operating Cleveland, OH 44114
Officer
Ralph Della Ratta Director, Senior 800 Superior Avenue None
Managing Director Cleveland, OH 44114
Dennis J. Donnelly Director, Senior 800 Superior Avenue None
Managing Director Cleveland, OH 44114
David W. Ellis, III Director, Managing 580 Walnut Street None
Director Cincinnati, OH 45202
(Gradison Division)
Patricia A. Jamieson Director, Managing 800 Superior Avenue Treasurer
Director, Chief Cleveland, OH 44ll4
Financial Officer
David W. Knall Director, Senior One American Square None
Managing Director Indianapolis, IN 46282
Thomas M. McDonald Director, Managing 800 Superior Avenue None
Director Cleveland, OH 44114
John F. O'Brien Director, Senior 800 Superior Avenue None
Managing Director Cleveland, OH 44114
C-5
<PAGE> 211
Lawrence T. Oakar Director and 800 Superior Avenue None
Managing Director Cleveland, OH 44114
James C. Redinger Director, Senior 800 Superior Avenue None
Managing Director Cleveland, OH 44114
William Summers, Jr. Director, Chairman 800 Superior Avenue None
Chief Executive Cleveland, OH 44114
Officer
David D. Sutcliffe Director, Managing 800 Superior Avenue None
Director Cleveland, OH 44114
Francis S. Tobias Director, Senior 800 Superior Avenue None
Managing Director Cleveland, OH 44114
Bradley E. Turner Director, Senior 580 Walnut Street President
Managing Director Cincinnati, OH 45202
Gary Zdolshek Director, Senior 800 Superior Avenue None
Managing Director Cleveland, OH 44ll4
Item 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and documents required to be maintained by the
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and
Rules 31a-1 through 31(a) thereunder are maintained at the offices of the
Registrant, 580 Walnut Street, Cincinnati, Ohio 45202, except as indicated below
opposite the applicable reference to the aforesaid Rules.
Rule In Possession of:
---- -----------------
31a-1(b)(1), 31a-1(b)(2)(i)(a)-(f), Star Bank, N.A., Star Bank Center
31a-1(b)(2)(ii), 31a-1(b)(5) and Cincinnati, Ohio 45202 for GM-E/O
31a-1(b)(8) and the Fund and Chase Manhattan
Bank, N.A. Chase Metro Tech
Center, Brooklyn New York, 11245,
for the Gradison-McDonald
International Fund.
Item 31. MANAGEMENT SERVICES
Not applicable.
Item 32. UNDERTAKINGS
C-6
<PAGE> 212
The Registrant hereby undertakes to provide, without cost, a copy of
its most recent annual report upon request.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons of
the Registrant pursuant to the foregoing provisions or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction, the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
C-7
<PAGE> 213
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Cincinnati and State of Ohio on the 25th day of
July 1996.
GRADISON GROWTH TRUST
(Registrant)
By /S/ BRADLEY E. TURNER.*
-------------------------------------
Bradley E. Turner President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.
Registrant hereby certifies that this Amendment to Registration
Statement meets all of the requirements for effectiveness pursuant to paragraph
(b) of Rule 485.
Signature Title Date
--------- ----- ----
*/S/ DONALD E. WESTON Chairman of the Board July 25, l996
(Principal Executive Officer)
*/S/ BRADLEY E. TURNER President "
*/S/ PATRICIA JAMIESON Treasurer "
(Principal Financial and
Accounting Officer)
*/S/ THEODORE EMMERICH Trustee "
*/S/ JEROME SCHNEE Trustee "
*/S/ DANIEL J. CASTELLINI Trustee "
*/S/ RICHARD RANKIN Trustee "
*By: |S| Richard M. Wachterman
---------------------------------------
Richard M. Wachterman, Attorney-in-fact
S-1
<PAGE> 1
Exhibit 11
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to references to the use of
our reports dated May 30, 1996, and to all references to our Firm included in or
made a part of this registration statement, post-effective amendment no. 18.
/s/ Arthur Andersen LLP
Cincinnati, Ohio
July 24, 1996
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<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ANNUAL
REPORT MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
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<ACCUMULATED-NET-GAINS> 7,542,858
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<ACCUM-APPREC-OR-DEPREC> 113,938,952
<NET-ASSETS> 366,416,828
<DIVIDEND-INCOME> 4,013,844
<INTEREST-INCOME> 5,311,252
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<EXPENSES-NET> 3,771,634
<NET-INVESTMENT-INCOME> 5,553,462
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ANNUAL
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</LEGEND>
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<SERIES>
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<NAME> OPPORTUNITY VALUE FUND
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
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<INVESTMENTS-AT-VALUE> 102,542,083
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<OTHER-ITEMS-LIABILITIES> 238,241
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<PAID-IN-CAPITAL-COMMON> 68,093,037
<SHARES-COMMON-STOCK> 4,625,391
<SHARES-COMMON-PRIOR> 4,681,737
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<ACCUM-APPREC-OR-DEPREC> 30,403,404
<NET-ASSETS> 102,978,530
<DIVIDEND-INCOME> 705,090
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<EXPENSES-NET> 1,289,041
<NET-INVESTMENT-INCOME> 873,255
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<NET-CHANGE-FROM-OPS> 22,501,487
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<SHARES-REINVESTED> 180,968
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