<PAGE> 1
1933 Act Registration No. 2-84169
1940 Act File No. 811-3760
=============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 ( )
Pre-Effective Amendment No. ( )
Post-Effective Amendment No. 20 (X)
and/or
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 ( )
Amendment No. 21 (X)
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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 31, l998 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.
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=============================================================================
<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
One Prospectus for all of the following fund s:
Gradison Growth and Income Fund (GI)
Gradison Established Value Fund (GE-O)
Gradison Opportunity Value Fund.(GE-O)
Gradison International Fund (GINT)(hereinafter collectively the "Funds")
Part B - Statement of Additional Information
Separate Statements of Additional Information for each of the following funds:
Gradison Growth and Income Fund
Gradison Established Value Fund
Gradison Opportunity Value Fund.
Gradison International Fund.
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 Objective,
Policies, and Risk Factors;
Foreign Securities; Futures
Transactions; Risk of Futures
and Forward Foreign Currency
Contracts; Low Capitalization
Stocks; Investment Restrictions
and Fundamental Policies;
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; Net
Offered 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
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
<PAGE> 4
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 ESTABLISHED VALUE FUND
GRADISON GROWTH & INCOME FUND
GRADISON OPPORTUNITY VALUE FUND
GRADISON INTERNATIONAL FUND
Prospectus dated August 1, 1998
This Prospectus contains information about the four equity mutual funds listed
above (the "Funds") which are separate diversified 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") of 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 August 1, 1998 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 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 International
Value Fund Income Fund Value Fund Fund
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load on purchases None None None None
Contingent deferred sales charge on redemptions during the first
nine months after purchase -- none thereafter -- (as a percentage
of the lower of the original purchase price or redemption price).
Shareholders who purchase Fund shares through Gradison or
McDonald are not subject to the contingent deferred sales charge. .50% .50% .50% .50%
- ------------------------------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees1 .51% .65% .62% .79%
12b-1 Fees1 .48% .50% .50% .31%
Other Expenses1 .11% .34% .19% .90%
------ ------ ------ ------
TOTAL FUND OPERATING EXPENSES(1) 1.10% 1.49% 1.31% 2.00%
====== ====== ====== ======
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
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 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 $ 11 $ 35 $ 61 $134
GROWTH AND INCOME FUND $ 15 $ 47 $ 81 $178
OPPORTUNITY VALUE FUND $ 13 $ 42 $ 72 $158
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 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%, 0.90%, and 2.40% respectively. See
"Management of the Funds."
(2) The 5% annual return is a standardized rate prescribed for use by all mutual
funds for the 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 period. The financial highlights for periods ended
on April 30, 1993 and thereafter have been audited by Arthur Andersen LLP,
independent public accountants, whose unqualified reports appear 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. The Statement of Additional Information can be obtained without
charge by calling the telephone numbers on the front page of this Prospectus.
<TABLE>
<CAPTION>
GRADISON ESTABLISHED VALUE FUND
YEAR ENDED MARCH 31, 11 MONTHS YEAR ENDED APRIL 30,
----------------------------------------- ENDED ------------------------------
1998 1997 1996 3/31/95(1) 1994 1993
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING
OF PERIOD $28.827 $27.567 $23.381 $22.515 $21.375 $18.366
---------- ---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .465 .445 .436 .376 .256 .286
Net realized and unrealized
gains or losses on
investments 7.699 3.615 5.190 1.520 2.104 3.278
---------- ---------- ---------- ---------- ---------- ----------
TOTAL INCOME FROM
INVESTMENT OPERATIONS 8.164 4.060 5.626 1.896 2.360 3.564
---------- ---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from
net investment income (.480) (.450) (.430) (.370) (.220) (.285)
Distributions from realized
capital gains (2.570) (2.350) (.660) (1.000) (.270) (.270)
---------- ---------- ---------- ---------- ---------- ----------
Total distributions to
shareholders (3.050) (2.800) (1.030) (1.220) (.555) (.690)
---------- ---------- ---------- ---------- ---------- ----------
Net asset value at end of
period $33.941 $28.827 $27.567 $23.381 $22.515 $21.375
========== ========== ========== ========== ========== ==========
Total return 29.67% 15.14% 24.84% 8.85%(2) 11.30% 19.86%
========== ========== ========== ========== ========== ==========
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period
(in millions) $567.3 $429.7 $366.4 $277.4 $253.3 $203.6
Ratio of gross expenses to
average net assets (3) 1.10% 1.12% 1.16% -- -- --
Ratio of net expenses to
average net assets 1.10% 1.12% 1.15% 1.20%(4) 1.22% 1.28%
Ratio of net investment
income to average
net assets 1.44% 1.57% 1.70% 1.87%(4) 1.15% 1.48%
Portfolio turnover rate 20% 31% 18% 24% 38% 28%
Average commission paid
per share traded $.0679 $.0600 -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED APRIL 30,
-------------------------------------------------------
1992 1991 1990 1989
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING
OF PERIOD $17.754 $17.189 $18.165 $16.270
---------- ---------- ---------- ----------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .386 .511 .723 .548
Net realized and unrealized
gains or losses on
investments .916 .804 (.474) 2.157
---------- ---------- ---------- ----------
TOTAL INCOME FROM
INVESTMENT OPERATIONS 1.302 1.315 .249 2.705
---------- ---------- ---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from
net investment income (.420) (.548) (.720) (.495)
Distributions from realized
capital gains (.202) (.505) (.315)
---------- ---------- ---------- ----------
TOTAL DISTRIBUTIONS TO
SHAREHOLDERS (.750) (1.225) (.810)
---------- ---------- ---------- ----------
NET ASSET VALUE AT END OF
PERIOD $18.366 $17.754 $17.189 $18.165
========== ========== ========== ==========
TOTAL RETURN 7.59% 8.04% 1.11% 17.24%
========== ========== ========== ==========
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period
(in millions) $175.5 $150.5 $134.6 $102.2
Ratio of gross expenses to
average net assets (3) -- -- -- --
Ratio of net expenses to
average net assets 1.31% 1.39% 1.40% 1.45%
Ratio of net investment
income to average
net assets 2.12% 3.10% 4.14% 3.34%
Portfolio turnover rate 68% 74% 64% 50%
Average commission paid
per share traded -- -- -- --
- --------------------------------------------------------------------------------------------
</TABLE>
On October 4, 1991, McDonald & Company Securities, Inc. became investment
adviser of the Fund as a result of a merger with Gradison & Company Inc.
(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) Effective March 31, 1996, this ratio reflects gross expenses before
reduction for earnings credits; such reductions are included in the ratio of net
expenses.
(4) Annualized.
3
<PAGE> 8
<TABLE>
<CAPTION>
GRADISON GROWTH & INCOME FUND
YEAR ENDED MARCH 31, FOR THE PERIOD
---------------------------------- 2/28/95* TO
1998 1997 1996 3/31/95
<S> <C> <C> <C> <C>
Net asset value at beginning of period $21.477 $18.459 $15.189 $15.000
-------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .236 .246 .173 .030
Net realized and unrealized gains on investments 7.825 3.112 3.317 .159
-------- -------- -------- --------
Total income from investment operations 8.061 3.358 3.490 .189
-------- -------- -------- --------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income (.290) (.210) (.185) --
Distributions from realized capital gains (.260) (.130) (.035) --
-------- -------- -------- --------
Total distributions to shareholders (.550) (.340) (.220) --
-------- -------- -------- --------
Net asset value at end of period $28.988 $21.477 $18.439 $15.189
======== ======== ======== ========
Total return 38.00% 18.33% 23.09% 1.27%
======== ======== ======== ========
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (in millions) $60.1 $25.7 $12.0 $1.2
Ratio of gross expenses to average net assets (2) (4) 1.52% 1.84% 3.09% 13.88%
Ratio of net expenses to average net assets 1.49% 1.50% 1.50% 0.00%
Ratio of net investment income to average net assets 1.02% 1.34% 1.39% 4.09%
Portfolio turnover rate 4% 16% 3% 4%
Average commission paid per share traded $.0595 $.0466 -- --
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return represents the actual return over the period and has not been
annualized.
(2) Effective March 31, 1996, this ratio reflects gross expenses before
reduction for earnings credits; such reductions are included in the ratio of net
expenses.
(3) Annualized.
(4) During each of the periods ending March 31, 1997, 1996, and 1995, the
adviser absorbed expenses of the Growth & Income Fund through waiver of certain
expenses. Assuming no waiver of expenses, the ratio of net investment income to
average net assets would have been 1.09%, .01% and -9.79% (annualized),
respectively.
*Date of public offering
4
<PAGE> 9
<TABLE>
<CAPTION>
GRADISON OPPORTUNITY VALUE FUND
YEAR ENDED MARCH 31, 11 MONTHS YEAR ENDED APRIL 30,
------------------------------------- ENDED ------------------------
1998 1997 1996 3/31/95(1) 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning
of period $22.771 $22.264 $18.100 $18.348 $17.547 $16.462
--------- --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .227 .203 .193 .136 .086 .081
Net realized and unrealized
gains or losses on
investments 8.725 2.509 4.731 .176 1.585 1.744
--------- --------- --------- --------- --------- ---------
Total income (loss) from
investment operations 8.952 2.712 4.924 .312 1.671 1.825
--------- --------- --------- --------- --------- ---------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from
net investment income (.270) (.165) (.185) (.120) (.070) (.100)
Distributions from realized
capital gains (3.560) (2.040) (.575) (.440) (.800) (.640)
--------- --------- --------- --------- --------- ---------
Total distributions to
shareholders (3.830) (2.205) (.760) (.560) (.870) (.740)
--------- --------- --------- --------- --------- ---------
Net asset value at end of
period $27.893 $22.771 $22.264 $18.100 $18.348 $17.547
========= ========= ========= ========= ========= =========
Total return 42.02% 12.46% 28.00% 1.75%(4) 9.75% 11.57%
========= ========= ========= ========= ========= =========
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period
(in millions) $175.7 $114.5 $103.0 $84.7 $83.3 $68.2
Ratio of gross expenses to
average net assets (3) 1.31% 1.36% 1.41% -- -- --
Ratio of net expenses to
average net assets 1.31% 1.36% 1.41% 1.37%(4) 1.3 1.44%
Ratio of net investment
income to average
net assets .86% .90% .95% .84%(4) .47% .61%
Portfolio turnover rate 42% 35% 24% 32% 40% 39%
Average commission paid
per share traded $.0572 $.0600 -- -- -- --
- --------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED APRIL 30,
---------------------------------------------
1992 1991 1990 1989
<S> <C> <C> <C> <C>
Net asset value at beginning
of period $14.767 $13.644 $13.499 $12.967
--------- --------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .173 .245 .334 .232
Net realized and unrealized
gains or losses on
investments 2.467 1.198 .401 1.200
--------- --------- --------- ---------
Total income (loss) from
investment operations 2.640 1.443 .735 1.432
--------- --------- --------- ---------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from
net investment income (.270) (.252) (.330) (.180)
Distributions from realized
capital gains (.675) (.068) (.260) (.720)
--------- --------- --------- ---------
Total distributions to
shareholders (.945) (.320) (.590) (.900)
--------- --------- --------- ---------
Net asset value at end of
period $16.462 $14.767 $13.644 $13.499
========= ========= ========= =========
Total return 18.60% 10.94% 5.16% 11.71%
========= ========= ========= =========
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period
(in millions) $47.4 $28.7 $23.0 $20.1
Ratio of gross expenses to
average net assets (3) -- -- -- --
Ratio of net expenses to
average net assets 1.49% 1.61% 1.52% 1.84%
Ratio of net investment
income to average
net assets 1.32% 2.03% 2.47% 1.84%
Portfolio turnover rate 64% 64% 37% 36%
Average commission paid
per share traded -- -- -- --
- ----------------------------------------------------------------------------------
</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) Effective March 31, 1996, this ratio reflects gross expenses before
reduction for earnings credits; such reductions are included in the ratio of net
expenses.
(4) Annualized.
5
<PAGE> 10
<TABLE>
<CAPTION>
GRADISON INTERNATIONAL FUND
YEAR ENDED MARCH 31, FOR THE PERIOD
--------------------------- 5/31/95* TO
1998 1997 3/31/96
<S> <C> <C> <C>
Net asset value at beginning of period $16.226 $15.822 $15.000
---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .011 (.023) .065
Net realized and unrealized (loss) gain on investments 3.069 .457 .799
---------- ---------- ----------
Total income from investment operations 3.080 .434 .864
---------- ---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income -- -- (.042)
Distributions from realized capital gains (.172) (.030) --
---------- ---------- ----------
Total distributions to shareholders (.172) (.030) (.042)
---------- ---------- ----------
Net asset value at end of period $19.134 $16.226 $15.822
========== ========== ==========
Total return 19.11% 2.78% 5.76%(1)
========== ========== ==========
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (in millions) $33.3 $24.8 $15.3
Ratio of net expenses to average net assets (2) 2.00% 2.00% 1.75%(3)
Ratio of net investment income (loss) to average net assets (2) .04% (.13%) .70%(3)
Portfolio turnover rate 83% 92.36% 71.78%
Average commission paid per share traded $.0036 $.0010 --
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total return represents the actual return over the period and has not been
annualized.
(2) During each of the periods ended March 31, 1998, 1997, and 1996, the adviser
absorbed expenses of the International Fund through waiver of certain expenses.
Assuming no waiver of expenses, the ratio of net expenses to average net assets
would have been 2.40%, 2.78% and 3.73% (annualized) and the ratio of net
investment income (loss) to average net assets would have been -.35%, -.91% and
- -1.28% (annualized), respectively.
(3) Annualized.
*Date of public offering
6
<PAGE> 11
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The investment objective of the Gradison Established Value Fund ("Established
Fund") and the Gradison Opportunity Value Fund ("Opportunity Fund") is long-term
capital growth by investing primarily in common stocks. The investment objective
of the Gradison 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 Gradison
International Fund ("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
vary 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 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 generally with market capitalizations of $1 billion 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 $1 billion. 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. 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. (See "Portfolio
Transactions" in the Funds' Statements of Additional Information.)
Mr. William J. Leugers, Jr. and Mr. Daniel R. Shick are primarily responsible
for the day-to-day portfolio management of the Established and Opportunity
Funds. Mr. Leugers has had such responsibility since the inception of the Funds
and is Executive Vice President of the Trust and Managing Director of Gradison.
Mr. Shick has had such responsibility during the past four years and is Vice
President of the Trust and Senior Vice President of Gradison.
7
<PAGE> 12
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.
INVESTMENT POLICIES - GROWTH & INCOME FUND
The Growth & Income Fund invests primarily in common stocks of companies
considered by Gradison to be 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 of the Trust 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.
8
<PAGE> 13
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 securities 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:
<TABLE>
<S><C> <C> <C> <C> <C> <C>
Argentina Colombia Indonesia Morocco Portugal Taiwan
Brazil Egypt Israel Pakistan Russia Thailand
Czech Republic Greece Jordan Peru South Africa Turkey
Chile Hungary Malaysia Philippines South Korea Venezuela
China India Mexico Poland Sri Lanka
</TABLE>
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 considered to be 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.
In determining which developed countries' stock to invest in, the Portfolio
Manager takes into consideration the country weightings of the Morgan Stanley
Capital International and the Europe Australia Far East Index ("EAFE"). This may
result in weightings of securities in the International Fund similar to the EAFE
Index and a significant percentage of the Fund's portfolio being invested in
Japanese securities. As of June 30, 1998, approximately 7% of the International
Fund's assets were invested in securities of Japanese companies.
9
<PAGE> 14
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
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 Fund's 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 of U.S.
issuers. 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.
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 Fund's 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 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.
10
<PAGE> 15
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. 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 requirements 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
11
<PAGE> 16
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.
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. Stock index futures contracts may also 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 techniques will succeed. For more information regarding
stock index futures contracts, see "Risk Factors and Investment Techniques -
Futures and Currency Strategies" in the Fund's 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 com-
12
<PAGE> 17
modity 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, the rules of the National Futures Association, or 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.
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.
OPTIONS ON FOREIGN CURRENCY
The International Fund may buy call and put options on foreign currencies.
Buying a call gives the Fund the ability to buy the currency on which the call
was written at the call price during the period in which the call may be
exercised. Buying a put gives the Fund the ability to sell the currency on which
the put was written at the put price during the period in which the put may be
exercised. The International Fund may buy put or call options on a currency
irrespective of the size of the position it may hold in securities of that
currency, if any. The International Fund may not purchase options on currency to
the extent that the total premium cost exceeds 5% of the Fund's total assets.
The Fund may execute options transactions on recognized exchanges or in the
over-the-counter markets. The Fund's ability to terminate options in the
over-the-counter markets may be more limited than for exchange-traded options
because of the possible lack of a secondary trading market and may also involve
the risk that securities dealers participating in such transactions would be
unable to meet their obligations to the Fund. The use of options involves
certain special risks. Options transactions involve costs and may result in
losses. See, generally, "Risks of Futures and Forward Foreign Currency
Contracts" in this Prospectus.
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
13
<PAGE> 18
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 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 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 a shareholders' 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 $1 billion. 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 seven days or
less) or upon demand by the Fund.
14
<PAGE> 19
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.
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.
Contingent Deferred Sales Charge
A Contingent Deferred Sales Charge ("CDSC") will be imposed on shares redeemed
within nine months of purchase. Shareholders who purchase through Gradison or
McDonald will not be subject to this charge. The CDSC is in the following
amount:
<TABLE>
<S> <C> <C>
--------------------------------------------------------------------------------------
SHARES REDEEMED WITHIN NINE MONTHS OF PURCHASE:
.5% (1/2 of 1%) of the lower of the purchase price or redemption proceeds
SHARES REDEEMED AFTER NINE MONTHS OF PURCHASE:
None
--------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 20
In determining whether a CDSC is payable on any redemption, shares not subject
to any charge will be redeemed first, followed by shares subject to the charge
held the longest period of time. Shares acquired by reinvestment of
distributions may be redeemed without a CDSC at any time. The CDSC is paid to
McDonald.
The CDSC will be waived on redemptions of shares arising out of the death or
post-purchase disability of a shareholder or settlor of a living trust account
and on redemptions in connection with certain withdrawals from IRA or other
retirement plans. Shares will be sold without a CDSC to "wrap accounts" for the
benefit of clients of broker-dealers, financial institutions, or financial
planners adhering to certain standards established by Gradison Mutual Funds.
The CDSC will not be charged on the following transactions in IRA or other
retirement plans:
(i) required minimum distributions to plan participants or beneficiaries who
are age 701/2 or older, and only with respect to that portion of such
distributions which does not exceed 12% annually of the participant's or
beneficiary's account value;
(ii) in kind transfers of assets where the participant or beneficiary notifies
Gradison of such transfer no later than the time such transfer occurs;
(iii) tax-free rollovers or transfers of assets to another Retirement Plan
invested in other Gradison mutual funds; and
(iv) tax-free returns of excess contributions or returns of excess deferral
amounts.
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
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. Certain redemptions are subject to a
contingent deferred sales charge. (See "Purchases and Redemptions" in this
Prospectus.) 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 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.
16
<PAGE> 21
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, if any, 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 capital gain
distributions from a Fund will be 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
Each Fund intends to operate as a "regulated investment company" under the
Internal Revenue Code ("Code"). In any fiscal year in which a Fund so qualifies
and distributes to shareholders all of its net investment income and net capital
gains, the Fund itself will be 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, if any,
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.
Special rules may apply if the International Fund invests in certain foreign
companies, the bulk of the gross income of which is derived from passive
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."
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<PAGE> 22
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 that 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 International Fund has not made this election for previous fiscal years.
Unless a shareholder has provided the Funds with a certified taxpayer
identification number and has certified that the shareholder is not subject to
back-up withholding, the Funds are required to withhold 31% of distributions and
other reportable payments. Amounts withheld are remitted to the U.S. Treasury.
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 pursuant to procedures approved by the 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 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.
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<PAGE> 23
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 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 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. The terms of the
exchange feature are subject to change and the exchange feature is subject to
termination, both upon 60 days' written notice, except that no notice shall be
required under certain circumstances provided for by rules of the Securities and
Exchange Commission.
MANAGEMENT OF THE 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.
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<PAGE> 24
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, 1997, 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 ending March 31, 1998, the Established Fund, the Opportunity Fund,
the Growth & Income Fund and the International Fund, paid McDonald investment
advisory fees, respectively of .51%, .62%, .65%, and .79% (1.0% without
consideration of fee waiver by McDonald).
McDonald compensates Blairlogie as Portfolio Manager of the International Fund
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
Funds to McDonald of $18.50 per non-zero balance shareholder account per year
($5.00 per closed account per year) plus out-of-pocket costs for acting as
transfer agent and an accounting services fee for the Funds, except the
International Fund, based on each 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 minimum annual fee of $40,000
per year for each Fund, and for payment by the International Fund of an
accounting services fee based on that 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 pay the entity a sub-transfer
agency or recordkeeping fee. Entities receiving such fees may also receive 12b-1
and other 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
20
<PAGE> 25
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
Distributor may make payments to financial intermediaries and securities dealers
of those amounts. The Distributor, from its own resources, also pays a fee in
the amount of .50% of the amount invested to securities dealers who sell Fund
shares.
Gradison 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 at least
August 1, 1999, Gradison 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 Gradison discontinues a waiver or
reimbursement arrangement, the Fund's expenses will increase and its return will
be reduced. Gradison 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. Gradison may waive or reimburse fees in a greater
amount than is required by an applicable fee waiver arrangement.
Like other mutual funds, financial and business organizations, and individuals
around the world, each Fund could be adversely affected if the computer systems
used by its investment adviser, sub-advisers, and other service providers do not
properly process and calculate date-related information and data from and after
January 1, 2000. This is commonly known as the "Year 2000 Problem." Gradison is
taking steps that it believes are reasonably designed to address the Year 2000
Problem with respect to the computer systems that it uses and to obtain
assurances that comparable steps are being taken by the Fund's other major
service providers. At this time, however, there can be no assurance that these
steps will be sufficient to avoid any adverse impact on the Funds.
On June 15, 1998, McDonald & Company Investments, Inc. announced that, subject
to certain conditions that have not yet been satisfied, it will merge with
KeyCorp. KeyCorp is a bank holding company and one of the nation's largest
financial services companies, with assets of approximately $75 billion. Through
four principal lines of business--Corporate Capital, Consumer Finance, Community
Banking and Capital Partners, KeyCorp provides retail and wholesale banking,
investment, financing and money management services to individuals and companies
across the United States. The Funds currently anticipate that, subsequent to the
merger, McDonald & Company Securities, Inc. ("McDonald") will become a
subsidiary of KeyCorp and will continue to act as investment adviser, transfer
agent, and accounting service provider for the Funds and that the sub-investment
adviser of the International Fund will continue to act in that role. However,
shareholder approval may be required in order for McDonald to continue serving
as investment adviser (and for the International Fund's sub-investment adviser
to continue in that role) after the merger. In additional, certain officers of
the Trust who are employees of McDonald may be replaced by individuals who are
not employees of McDonald or any other KeyCorp subsidiary in order to comply
with certain banking laws and regulations. Because those laws and regulations
also would prohibit McDonald from acting as the Fund's distributor subsequent to
the merger, the Funds intend to obtain the services of a new distributor that is
not affiliated with McDonald or KeyCorp.
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<PAGE> 26
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 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
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.
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
================================================================================
<S> <C>
Expense Summary 2
Financial Highlights 3
Investment Objectives, Policies and Risks 7
Purchases and Redemptions 15
Dividends and Distributions 17
Taxes 17
Net Asset Value 18
Optional Shareholder Services 19
Management of the Funds 19
Performance Calculations 22
Individual Retirement Accounts 22
General Information 22
- --------------------------------------------------------------------------------
</TABLE>
[GRADISON MUTUAL FUNDS LOGO]
580 Walnut Street, Cincinnati, Ohio 45202
(513) 579-5000 (800) 869-5999
<PAGE> 29
GRADISON GROWTH TRUST
GRADISON ESTABLISHED VALUE FUND
GRADISON 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 the Funds of the Trust, dated
August 1, l998, 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 August 1, l998.
<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 . . . . . . 5
TAXES . . . . . . . . . . . . . . . . . . . . 6 Taxes
NET ASSET VALUE . . . . . . . . . . . . . . . 7 Net Asset Value
PORTFOLIO TRANSACTIONS . . . . . . . . . . . 7
INVESTMENT PERFORMANCE . . . . . . . . . . . 9 Performance Calculations
INVESTMENT ADVISER . . . . . . . . . . . . . 10 Management of the Funds
Advisory Agreement . . . . . . . . . . . 10
Distribution Plan. . . . . . . . . . . . 11
Transfer Agency and Accounting
Services Agreement . . . . . . . . . . 13
TRUSTEES AND OFFICERS OF THE TRUST . . . . . 13
DESCRIPTION OF THE TRUST . . . . . . . . . . 15 General Information
CUSTODIAN . . . . . . . . . . . . . . . . . . 16
ACCOUNTANTS . . . . . . . . . . . . . . . . . 16
LEGAL COUNSEL . . . . . . . . . . . . . . . . 16
SALES BROCHURE INFORMATION . . . . . . . . . 17
FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT PUBLIC ACCOUNTANT . . . .Following Page 40 Financial Highlights
</TABLE>
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<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".) Each Fund 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);
(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;
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<PAGE> 32
(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. For purposes of restriction number two above,
repurchase agreements are not considered loans. For purposes of the restriction
prohibiting the Fund from investing more than 25% of its assets in companies in
the same industry ( see "Investment Policies - Established and Opportunity
Funds" in the Prospectus), the Directory of Companies Filing Annual Reports with
the Securities and Exchange Commission (which utilizes the Standard Industrial
Classification Codes promulgated by the Office of Management and Budget of the
Executive Office of the President) is used to determine industry
classifications.
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, 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.
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<PAGE> 33
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.
The Contingent Deferred Sales Charge is waived on purchases through
McDonald and Gradison and on purchases in connection with "wrap accounts"
because the Distributor is not paying a sales commission to dealers on such
purchases; therefore, the CDSC is not needed to reimburse the Distributor for
such commissions in the event of a redemption made during the CDSC period. (The
Distributor compensates its own employees for Fund share sales, some of which
compensation may be recouped in the event of redemption of shares on which
compensation has been paid within certain time periods.) The CDSC is waived on
the death or disability of shareholders because of the hardships involved in
such situations. The CDSC is waived on certain redemptions in IRA and retirement
accounts because the redemptions may not be voluntary and for competitive
reasons.
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 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.
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
5
<PAGE> 34
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 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
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, for
treatment 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 capital gains (the excess of net long-term
capital gains over net short-term capital loss) is 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 gain 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.
In order to continue to qualify for treatment as a regulated investment
company under the Code, a Fund must distribute to its shareholders for each
taxable year at least 90% of its investment company taxable income (consisting
generally of net investment income plus net short-term capital gain, if any),
and must meet several additional requirements. For each Fund, these requirements
include the following: (1) the Fund must derive at least 90% of its gross income
each taxable year from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of securities and certain other
income; (2) at the close of each quarter of the Fund's taxable year, at least
50% of the value of its total assets must be represented by cash and cash items,
U.S. government securities and other securities, with these other securities
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of the Fund's total assets and that does not represent more than 10%
of the issuer's outstanding voting securities; and (3) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its total
assets may be invested in securities (other than U.S.
government securities) of any one issuer.
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
6
<PAGE> 35
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 distributions received with respect to such shares.
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 each Fund is calculated once daily Monday through
Friday except on the following holidays: New Year's Day, Presidents' Day, Martin
Luther King, Jr. 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 pursuant to procedures
approved by the Board of Trustees and subject to oversight 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, 1998, the aggregate brokerage
commissions paid by the Established Value Fund were $200,205 and for the
Opportunity Value Fund were $136,378. For the fiscal year ended March 31, 1997,
the aggregate brokerage commissions paid by the Established Value Fund were
$261,702 and for the Opportunity Value Fund were $92,853.
7
<PAGE> 36
The portfolio turnover rate for the Trust for the respective fiscal
periods ended March 31, 1998 and l997 for the Established Value Fund was 20% and
31% and 18.48%, and for the Opportunity Value Fund was 42% and 35%.
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 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". 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 year ended March 31, l998, the Funds did not purchase any
securities of any of the Funds' regular dealers. (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.
8
<PAGE> 37
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 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.
INVESTMENT PERFORMANCE
<TABLE>
<CAPTION>
Total Return
- ------------
Percentage Change:
- ------------------
Since Inception Year Ending December 31
(8/16/83-3/31/98)------------------------------------------------------------------------------
(Not annualized) 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 l997
-------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Established 699.4% 12.4% 15.1% 16.0% (8.1%) 22.2% 10.2% 20.7% .3% 26.4% 19.3% 22.65%
Value Fund
Standard 933.8% 5.2% 16.4% 31.7% (3.1%) 30.5% 7.6% 10.0% 1.3% 37.6% 23.0% 33.36%
and Poor's 500
Stock Index
--------------------------------------------------------------------------------------------------
Opportunity 459.4% (5.4%) 23.6% 23.1% (13.1%) 35.9% 14.3% 11.1% (2.2%) 26.8% 19.5% 31.18%
Russell 2000 434.8% (8.8%) 24.9% 16.2% (19.5%) 46.0% 18.4% 18.9% (1.8%) 28.4% 16.5% 22.36%
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> <C> <C> <C>
For 10 years ending 3/31/98 14.21% 18.93% 14.88% 14.85%
For 5 years ending 3/31/98 17.35% 22.39% 17.44% 17.67%
For 12 months ending 3/31/98 29.67% 47.99% 42.02% 42.01%
</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, l998, the approximate cash position
of the Established Value Fund ranged between 24.2% and 27.1% and stood at 26.3%
on March 31, l998. For the Opportunity Value Fund, the range of the approximate
cash position was between 24.7% and 28.4%. On March 31, l998, it stood at 27.5%.
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.
9
<PAGE> 38
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.
ADVISORY AGREEMENT
The Investment Advisory Agreement provides that the Adviser will manage
the investments of the Funds, 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. 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 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, l998, March 31, 1997, March 31, l996,
and, the advisory fees paid by the Trust to the Adviser, respectively, amounted
10
<PAGE> 39
to $2,580,124,$2,093,562, and $1,890,225, for the Established Value Fund, and
$881,658, $699,336, and $631,571, for the Opportunity Value Fund.
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 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 PLAN
The Trust has in effect 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 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 up to an amount that
does not exceed an annual rate of .50% of its average daily net assets of that
Fund. Distribution expenses may be incurred by the Fund under the Plan within
the limitation described above for any activity primarily intended to result in
the sale of Fund shares. including but not 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
11
<PAGE> 40
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 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.
12
<PAGE> 41
During the periods ended March 31, l998, March 31, 1997, and March 31,
l996, $2,454,412, $1,928,903, and $1,460,779, respectively, were paid by the
Established Value Fund, and $710,599. $544,851, and $421,414, were paid by the
Opportunity Value Fund to McDonald for its assistance in distributing shares of
the Funds and for providing personnel services to shareholders. Of these
amounts, one half were paid for assistance in distributing shares of the Funds,
and one half were paid for providing personnel services to shareholders.
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, l995. For
the year ending March 31, l998, the fees paid pursuant to the Transfer Agency
and Accounting Services Agreement were $384,111, with respect to the Established
Value Fund and $170,769, with respect to the Opportunity Value Fund. For the
year ending March 31, l997, the fees paid pursuant to this Agreement were
$336,673, with respect to the Established Value Fund and $154,756, with respect
to the Opportunity Value Fund. For the period from June 1, l995 through March
31, l996, the fees paid by the Established Value Fund and the Opportunity Value
Fund pursuant to this Agreement were $294,992 and $140,112, respectively.
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 investment companies.
* DONALD E. WESTON (63), 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 investment companies.
DANIEL J. CASTELLINI (58), 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 (71), 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.,
and Cincinnati Milacron Commercial Corp.; Trustee of Summit Investment Trust and
Carillon Investment Trust.
JEROME E. SCHNEE (57), 14 Walt Whitman, Morristown, NJ 07960, Trustee. Senior
Director, Health Economics, Johnson & Johnson (Pharmaceuticals) since August
1996; Professor of Management, College of Business Administration, University of
Cincinnati.
- --------
*Interested and affiliated trustee as defined by the Investment Company Act of
l940, because of employment with and stock ownership of the investment adviser.
13
<PAGE> 42
RICHARD A. RANKIN (56), 434 Scott Street, Covington, Kentucky 41011. Trustee.
Partner, Rankin and Rankin (Public Accountants).
BRADLEY E. TURNER (39), 580 Walnut Street, Cincinnati, Ohio. President. Senior
Managing Director and Director of McDonald; President of all of the Gradison
investment companies.
WILLIAM J. LEUGERS, JR.(55), 580 Walnut Street, Cincinnati, Ohio. Executive Vice
President and Portfolio Manager of the Gradison Established and Opportunity
Value Funds. Managing Director of Gradison.
JULIAN BALL (46), 800 Superior Avenue, Cleveland, Ohio. Executive Vice
President. Portfolio Manager of the Gradison Growth and Income Fund; First Vice
President of McDonald since July l994; prior to that, Vice President of Duff &
Phelps Investment Management Company.
DANIEL R. SHICK (49), 580 Walnut Street, Cincinnati, Ohio. Vice President and
Portfolio Manager of Gradison Established and Opportunity Value Funds; Managing
Director of Gradison.
PATRICIA JAMIESON (44), 800 Superior Avenue, Cleveland, Ohio 44114. Treasurer;
Senior Managing Director and Chief Financial Officer McDonald; Treasurer of all
of the Gradison investment companies.
RICHARD M. WACHTERMAN (51), 580 Walnut Street, Cincinnati, Ohio 45202.
Secretary; Senior Vice President and General Counsel of Gradison. Secretary of
all of the Gradison investment companies.
MARK A. FRIETCH (39), 580 Walnut Street, Cincinnati, Ohio. Assistant Treasurer.
Assistant Treasurer of all of the Gradison investment companies.
GARY H. MILLER (35), 580 Walnut Street, Cincinnati, Ohio. Vice President
(Gradison Established Value and Opportunity Value Funds); Associate Vice
President of Gradison.
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 June 30, l998, 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.
14
<PAGE> 43
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 trustees for calendar
3/31/98 year ended 12/31/97
<S> <C> <C>
Donald E. Weston 0 0
Theodore H. Emmerich $7,000 $25,000
Richard A. Rankin $7,000 $25,000
Jerome E. Schnee $7,000 $25,000
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
U.S. Government Reserves Fund. The Trust does not maintain any other pension or
retirement plans. As of March 31, l998, $9,523 was payable by the Trust to the
beneficiary of a former trustee who is deceased and as of December 31, 1997,
$35,085 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 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
15
<PAGE> 44
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 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 Funds.
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.
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.
16
<PAGE> 45
[Family of Funds Brochure]
COVER PAGE
YOUR FUTURE STARTS TODAY
[Graphic Photo of men, women, children and a dog]
Logo
Gradison
Mutual Funds
INSIDE COVER PAGE
YOUR FUTURE STARTS TODAY
Page 1
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 the goal. Whether it's starting a family, buying a house,
saving for education, or planning for retirement. Time is critical. Hesitate and
time will pass you by. Start today and the future is yours.
Page 2
THE MUTUAL FUND STORY
The first mutual fund company was established in 1924 as a private
investment firm for its founders and is still in business today. By 1980, there
were fewer than 600 mutual funds open to investors. Today, there are some 400
fund groups offering more than 6,000 mutual funds with investments totaling more
than $3 trillion. Increasingly, mutual funds are the preferred vehicle for
individual investors who are starting and building an investment program. And
today, Gradison is a preferred name in mutual funds for a growing number of
investors.
WHY MUTUAL FUNDS?
PROFESSIONAL MANAGEMENT
17
<PAGE> 46
Mutual funds use investment professionals to manage the assets on a full-time
basis. In addition to their dedicated time and experience, these investment
advisers typically have access to extensive research and other analytical
resources not available to most individual investors.
DIVERSIFICATION
Because a mutual fund has significantly more assets to invest than any
individual participant, it can purchase and effectively manage a more
diversified portfolio than can most individual investors.
FLEXIBILITY
A mutual fund is usually part of a family of funds. Fund families offer an
exchange privilege that allow shareholders to reallocate assets quickly and
easily among the various funds within that family of funds. Shares in any fund
may be purchased or liquidated, often by a phone call, generally on any day that
the New York Stock Exchange is open for business.
Page 3
WHY GRADISON MUTUAL FUNDS?
A RESPECTED NAME FOR SEVEN DECADES
A respected name for seven decades Gradison has been a recognized name in
investment brokerage since 1925. The firm became a registered investment adviser
in 1974 and established its first mutual fund in 1976.
Today, Gradison offers seven mutual funds in a growing family of funds and
manages more than $4 billion in assets in both mutual funds and individually
managed accounts.
EXPERIENCED PORTFOLIO MANAGERS
Gradison portfolio managers average nearly 15 years of experience as
professional portfolio managers and more than 20 years of experience in the
investment field. We believe that this depth of first-hand experience, in both
favorable and unfavorable market
18
<PAGE> 47
environments, sets us apart from those other fund managers who have yet to
manage assets through a full market cycle.
SERVICE
Low Minimum Investment of $1,000
Convenient Automatic Dividend Reinvestment
Automatic Investment Plan
Automatic Withdrawals and Payment Plans
Access To Funds
Free Exchange Privileges
Check Writing
Wire Transfers
Toll-Free Customer Service
24-Hour Account Information
Account Statements
Year-End summary
Quarterly Newsletter
Shareholder Reports
Internet Access
Page 4
REACHING YOUR INVESTMENT GOALS
FIGHTING INFLATION
Inflation, the increase in the cost of living, has averaged 4% since 1926. While
it has been lower in recent years, it has also been substantially
higher--reaching 14% in the early 1980s. The surest way of beating inflation is
to earn a rate of return on your investments that exceeds the rate of inflation.
Chart: WHAT INFLATION REALLY MEANS
19
<PAGE> 48
1995 $139,000 Single Family Home
2000 $177,403 [Graphic: Picture of a
2010 $288,971 partially built home]
2025 $600,750
Automobile 1995 $18,359
[Graphic Picture of an 2000 $23,431
automobile] 2010 $38,167
2025 $79,347
Four Year Public University Education
1995 $26,972 [Graphic Picture of a
graduation cap and
2000 $34,424 a diploma.]
2010 $58,073
2025 $116,571
Sources: National Association of Realtors; Department of Commerce; College
Board. Future prices are based on a hypothetical average annual inflation
rate of 5%.
EDUCATION
The cost of four years at a private college, including tuition, fees, books and
other miscellaneous expenses, now averages nearly $95,000. It is projected to
reach $170,000 in a decade. The cost of a public college is expected to nearly
double from an average of $45,000 to more than $80,000 over the next ten years.
Most families realize that no matter when they start saving and investing for
this purpose, it usually is not soon enough.
BUILDING WEALTH
Many investors overlook the potential of investing in their most productive
years when their incomes are high enough to put aside investment assets and the
demands on their
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<PAGE> 49
income are less than they inevitably will be later. Such assets can be
invaluable not only for retirement but as emergency assets for unforeseen
occurrences in life.
RETIREMENT
Given the national debate on Social Security and Medicare, the need for
investors to assure adequate retirement assets for both their active retirement
years, and the possibility of their inactive care years, should be apparent.
Many people look solely to their company retirement plans for such assurance and
only realize the need for supplemental assets much later.
YOUR FAMILY'S FUTURE
Providing for the education of a child or grandchild may only be a part of an
investor's concern for future generations. They may have achieved a sufficient
level of personal success to be able to consider investing in order to pass
along significant assets to provide these future generations with greater
assurance for their financial well-being in an uncertain world.
[GRAPHIC Photo of two women embracing.]
Page 5
INTELLIGENT INVESTING
Time is the essential ingredient
Experience has shown that there is no substitute for time in investing.
Historically, the sooner money has been put to work, and the longer it has been
invested, the more likely positive returns have resulted. Conversely, aggressive
investors are more likely to have volatile results for shorter periods. Clearly,
investing for the long-term is considered one of the keys to successfully
creating investment wealth.
THE RULE OF 72:
HELPING YOU IN TAXING TIMES
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<PAGE> 50
Certain measurements are well known rules in everyone's daily life. Most people
learn early in life, for example, that twelve inches equals a foot and that
three feet make a year. With investments, similar, but not as well known,
measurement rules apply. The Rule of 72 allows potential investors to find out
how long it will take to double their money. All you have to do is divide 72 by
the estimated interest rate of an investment, and the answer is roughly the
number of years needed to double an investment.
Here's the formal equation:
Number of years to double the original investment = 72+ Interest Rate
Using the Rule
Check the table below to see some examples of how the Rule of 72 works.
<TABLE>
<CAPTION>
Rate of Rule of 72 Years to Years to
Return (72 + Interest Rate) Double Quadruple
<S> <C> <C> <C>
3% 72/3 24 48
6% 72/6 12 24
9% 72/9 8 16
12% 72 + 12 6 12
</TABLE>
The rates of return shown are for illustrative purposes only and are not
historical results or projections of the returns of any Gradison Mutual Fund.
(Pie Charts)
THE LONGER YOUR TIME FRAME, THE GREATER THE CHANCE OF REWARD
Percent of time stocks had positive results for rolling periods beginning
December 31, 1925, and ended December 31, 1995.
71% 89% 97% 100%
1 year 5 year 10 year 15 Year
holding holding holding holding
periods periods periods periods
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<PAGE> 51
Stocks will often rise and fall in value over the short term. When investing for
growth, the longer your investment time frame, the greater the chance equity
investments will produce positive results.
Source: Ibbotson Associates, Chicago. Based on the performance of the S & P 500,
an unmanaged index of stocks. This information is historical and is not a
guarantee of future performance of the S & P 500 or any Gradison Mutual Funds.
THE POWER OF COMPOUNDING
The term "compounding" is usually applied to investment income that is
constantly reinvested to generate additional income. However, the concept of
compounding applies equally well to investment profits that are constantly
reinvested. The compounding of income and profits over long periods of time can
have a meaningful impact on overall investment results.
Again, time invested is invaluable.
(CHART) THE POWER OF COMPOUNDING IN A HYPOTHETICAL $10,000 INVESTMENT IN
THE S&P 500
<TABLE>
<S> <C>
$170,000 $168,820...................
$150,000 In the time frame illustrated here,
$130,000 reinvestment of all income and
$110,000 dividends resulted in $168,820,
$ 90,000 while not reinvesting income
$ 70,000 and dividends results in $59,304.
$ 50,000 $ 59,304...................
$ 30,000
$ 10,000
1/1/69 12/31/95
</TABLE>
This chart is for illustrative purposes only. There is, of course, no
correlation between the total return for the S&P 500 and past or future
performance of any Gradison Mutual Fund. The S&P 500 is an unmanaged index
compiled by Standard & Poor's Corporation.
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<PAGE> 52
Investors cannot invest in the S&P 500. Past performance cannot guarantee future
results. Source: The American Funds Group
Page 6
DISCIPLINED PERIODIC INVESTMENTS
It is our experience that the most difficult decision for most investors is not
whether to invest, but when to invest. It is this dilemma that causes many
investors to stay on the investment sidelines.
Dollar cost averaging is a widely used investment concept in the purchase of
mutual funds that allows investors to overcome this difficult decision by
periodically investing(such as weekly, monthly, or quarterly) the same dollar
amount over a long period of time. Gradison Mutual Funds offer a periodic
investment plan to make the process easier and more systematic.
CHART DOLLAR COST AVERAGING CAN REDUCE YOUR AVERAGE COST PER SHARE
<TABLE>
<CAPTION>
Investment Share Shares
Amount Price Purchased
<S> <C> <C> <C>
March $ 500 $10.00 50
June $ 500 $12.50 40
September $ 500 $ 5.00 100
December $ 500 $10.00 50
$2,000 $37.50 240
Average Price Per Share
($37.50 divided by 4) $9.38
Average Cost Per Share
($2,000 divided by 240) $8.33
</TABLE>
Dollar cost averaging will never result in better performance than picking the
best times to invest, if you were able to do so. But dollar cost averaging
allows you invest the same amount periodically as the Fund's share price
fluctuates. You therefore will purchase more
24
<PAGE> 53
shares of the Fund in those months when the price per share is low and less
shares when the price is high. Most importantly, dollar cost averaging can help
investors make the commitment to invest.
Of course, dollar cost averaging does not assure a profit and does not protect
against loss in declining markets. And since dollar cost averaging involves
continuous, periodic investing, you should consider your ability to
continue purchases over an extended period of time.
[Graphic Photo of two men, two women, a boy, girl and a dog walking.]
CONSIDER GRADISON MUTUAL FUNDS
<TABLE>
<S> <C> <C>
Equity Funds Fixed Income Fund Money Market Funds
Established Value Fund Government Income Fund U. S. Government Reserves
Growth & Income Ohio Tax Free Income Fund Municipal Cash Series 2
Fund High Yield Fund 1 Ohio Municipal Cash Trust 2
Opportunity Value Fund Michigan Municipal Cash Trust 2
International Fund
</TABLE>
1. Planned for 1997-1998 and sold by prospectus only.
2. Federated Advisers acts as investment adviser for
these funds and Federated Securities Corp. acts as
distributor.
PAGE 7
GRADISON EQUITY FUNDS
GRADISON ESTABLISHED VALUE FUND
25
<PAGE> 54
The Established Value Fund invests for long-term capital growth using a
disciplined stock selection process to identify investments from the large
established companies that make up the Standard & Poor's 500 Composite Stock
Price Index, and other similar sized companies, which the investment adviser
considers to be undervalued. The stock selection process requires that companies
meet a number of objectively measured criteria of value including the companies'
relative book values, their price to earnings ratios, and other similar factors.
GRADISON GROWTH AND INCOME FUND
The Growth & Income Fund invests for long-term capital growth, as well as
current income and growth of income. The Fund puts particular emphasis on
identifying companies with higher than average growth rates, above average
dividend returns, a history of paying increasing dividends, and which the
investment adviser considers to be undervalued. We believe that stocks meeting
this criteria provide the opportunity for price appreciation and current income
while tending to moderate risk.
GRADISON OPPORTUNITY VALUE FUND
The Opportunity Value Fund uses a disciplined stock selection process to
identify smaller companies, generally with market capitalization of less than
$500 million that meet a number of objectively measured criteria of value
including the companies' growth rates, relative book value, their price to
earnings ratios, and other similar factors and which the investment adviser
considers to be undervalued. The securities of smaller companies generally are
more volatile than those of larger companies.
GRADISON INTERNATIONAL FUND
Blairlogie Capital Management of Edinburgh, Scotland, the subadviser to the
International
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<PAGE> 55
Fund, employs a "hybrid strategy" that invests in both developed international
markets and in emerging international markets.
Using a disciplined methodology, Blairlogie first identifies the countries that
offer the most favorable investment environment, and then selects the individual
investments in those countries. Generally the amount invested in emerging
markets will not exceed 30% of the Fund's assets.
International investing, particularly in emerging markets, involves greater
risks than U.S. investing, such as political instability and currency
fluctuation.
THE CASE FOR COMMON STOCKS
Stocks, more than most other types of investments, have historically shown the
ability to grow faster than inflation and to create wealth over long investment
periods. An investor who has long-term goals of ten years or more should
strongly consider equities as a significant part of his or her investment
portfolio. Historically, the longer an investor has held a well diversified
portfolio of stocks the better that investor has fared, as evidenced in the pie
chart on page 5.
THE ADVANTAGES OF BONDS
Although bond portfolios have not provided returns as high as stocks over long
periods of time (as illustrated in the graph on page 9), they have provided less
volatility and more reliable income than stocks. Investors with a relatively
short investment horizon, may need to avoid the volatility of stocks. For
example when an investor because near retirement, at a time when assets are
needed; or to add greater stability to a portfolio by combining both stocks and
bonds. Importantly, bond mutual funds provide the ability to reinvest these cash
flows immediately and completely to take full advantage of compounding.
Page 8
GRADISON FIXED INCOME FUNDS
GRADISON GOVERNMENT INCOME FUND
27
<PAGE> 56
Designed to provide current monthly income from a portfolio of intermediate to
long-term U.S. Government securities, the Fund's policy is to invest only in
those Government securities that are guaranteed as to principal and interest by
the full faith and credit of the United States Government and in repurchase
agreements collateralized by such obligations.
The Fund is managed with an emphasis on total return, that is the combined
effect of both income and changes in share value. Although the securities in
the portfolio are guaranteed as to principal and interest by the U.S.
Government, the market value of the Fund's shares will fluctuate with changes
in interest rates and other market conditions. Mortgage backed securities
may be subject to prepayment risk.
[Graphic: Photo of two young girls each sitting on an adult's shoulder.]
GRADISON OHIO TAX-FREE INCOME FUND
Designed for Ohio investors who can benefit from a portfolio of long-term
municipal bonds that are exempt from both federal and Ohio income taxes, the
Fund provides monthly income by investing in Ohio municipal securities issued to
finance public institutions and public works, and in private activity municipal
bonds.
In order to gain favorable yields, the Fund invests up to 20% of its assets in
securities that may be subject to the alternative minimum tax for some
investors.
Page 9
INDICES OF INVESTMENTS
IN U. S. CAPITAL MARKETS
(Chart) Comparison of Investments in Small Company Stocks, Large Company Stocks,
Long-Term Government Bonds, U. S. Treasury Bills to Inflation for the period
beginning 1925 through 1995, $0 to $10,000. Ending values: Small Company Stocks
$3,822; Large Company Stocks $1,113; Long-Term Government Bonds $34; U. S.
Treasury Bills $13; Inflation $9. 1926-1995
(YEAR-END 1925 = $1.00)
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<PAGE> 57
This chart is intended to show the growth of one dollar invested in different
types of investments and the Consumer Price Index. It assumes reinvestment of
all dividend and interest payments.
Past performance does not ensure further results.
SMALL COMPANY STOCKS are represented by the fifth capitalization quintile of
stocks on the NYSE for 1926-1981 and thereafter, the performance of the
Dimensional Fund Advisors (DFA) Small Company Fund;
LARGE COMPANY STOCKS are represented by the Standard & Poor's 500 Stock
Composite Index (S&P 500);
LONG-TERM GOVERNMENT BONDS are represented by a one-bond portfolio with a
maturity near twenty years;
U. S. TREASURY BILLS are represented by rolling over each month a one-bill
portfolio containing, at the beginning of each month, the bill having the
shortest maturity not less than one month.
INFLATION is represented by the Consumer Price Index for All Urban Consumers
(CPI-U), not seasonably adjusted.
Source: Ibbotson, Roger G., and Rex A. Sinquefield, Stocks, Bonds, Bills, and
Inflation (SBBI), 1995, updated in Stocks, Bonds, Bills, and Inflation 1996(TM),
Ibbotson Associates, Chicago. All rights reserved.
The indices and securities in the chart above do not reflect the actual
portfolio composition, performance, or fees and expenses associated with
investing in any Gradison Mutual Fund. The chart is not intended to imply future
performance of any of these investments or any Gradison Mutual Fund. Performance
figures of Gradison Mutual Funds are available by request from Gradison. The
returns for stocks include reinvestment of dividends and interest. Government
bonds and Treasury Bills are guaranteed by the U.S. Government and, if held to
maturity, offer a fixed rate of return and fixed principal value.
In existing disclaimer replace "Past performance does not ensure future results"
with: "The performance shown in the above chart is historical and is not
intended to imply
29
<PAGE> 58
future performance of any of these investments or of any Gradison fund.
Page 10
GRADISON MONEY MARKET FUNDS
The money market funds offered by the Gradison Mutual Funds provide a full
complement of services including checkwriting, high quality personalized checks,
and the convenience of automatic sweeping of dividends from the Gradison Funds.
The money market funds provide clear, monthly statements that include the name
of the payees of any checks written against the account, as well as a highly
useful year-end summary of all transactions.
[Graphic Photo of a man and woman seated next to one another going through
documents.]
GRADISON U. S. GOVERNMENT RESERVES
A full service money market fund designed to provide current money market yields
by investing exclusively in securities issued by the U.S. Government, its
agencies or instrumentalities. The fund has tax benefits in that it invests, to
the greatest extent reasonable, only in selected U. S. Government securities
that are not taxable by the states or by local governments.
MUNICIPAL MONEY MARKET FUNDS
Gradison also makes available a general municipal money market fund that
provides income exempt from federal taxation and separate Ohio and Michigan
money market funds that provide income that is not taxable at the federal state
or local levels in those states. A portion of the income of both funds could be
subject to the Alternative Minimum Tax (AMT) for investors who are subject to
AMT.
For more complete information about the Gradison Funds, including sales
charges and expense, please obtain the appropriate prospectuses from your
investment consultant or call 800-869-5999. Please read the prospectuses
carefully before you invest or send money. Investment returns and principal of
the funds will fluctuate so that you may have a gain or a loss when you sell
your shares. Money market funds are neither insured nor guaranteed by the U.S.
Government or any other entity. There can be no assurance that these funds will
maintain a constant net asset value of $1.00 per share.
30
<PAGE> 59
[Graphic Man and woman sitting at a desk opposite each other.]
Page 11
WORKING WITH YOUR PROFESSIONAL INVESTMENT CONSULTANT
We believe that your professional investment consultant is in the best position
to provide you with investment advice.
Your consultant has the training and experience to provide you with guidance in
making your investment decisions. We encourage you to share as much information
as possible about your investment goals and your current personal and financial
situation. Above all, we suggest you ask your investment consultant whatever
you feel you need to know to help you fully understand the investments you are
making.
SERVICE YOU CAN COUNT ON
LOW MINIMUM INVESTMENT OF $1,000 Low subsequent investment minimums of $50.
CONVENIENT AUTOMATIC DIVIDEND REINVESTMENT of income dividends and/or capital
gain dividends into any Gradison fund.
AUTOMATIC INVESTMENT PLAN allows authorization of regular, systematic
investments from bank accounts, money market funds and automated payroll into
any Gradison fund.
AUTOMATIC WITHDRAWALS AND PAYMENT PLANS Can be set up to pay you or designated
payees a specified amount monthly or quarterly.
ACCESS Shares can be redeemed at the then-current market value on any business
day.
Page 12
EXCHANGE PRIVILEGES Including convenient telephone exchanges allows investors to
move money from one Gradison Mutual Fund to another at any time.
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<PAGE> 60
CHECK WRITING For all money market funds includes high quality personalized
checks, check payee names on account statements, and return of canceled checks.
4
WIRE TRANSFERS Specified amounts can be transferred to pre-authorized accounts
at other financial institutions. 5
4. A fee applies to checks under $100.00
5. A fee applies to wires.
TOLL-FREE CUSTOMER SERVICE Knowledgeable shareholder service representatives are
available during business hours at 800-869-5999.
24-HOUR ACCOUNT INFORMATION During non-business hours TeleFund 24 provides
touch-tone access to the most recent prices of Gradison Mutual Funds, current
money market yield, and balances on all Gradison Mutual Funds accounts.
ACCOUNT STATEMENTS Clear, concise and informative. YEAR-END SUMMARY A highly
useful summary of all activity.
QUARTERLY NEWSLETTER Your Future provides Gradison shareholders with timely
information about investing, mutual funds and the Gradison family of funds.
SHAREHOLDER REPORTS Semiannual updates on fund strategy, performance and
portfolio holdings.
INTERNET World Wide Web site www.gradisonfunds.com provides quarterly updates on
Gradison Mutual Funds, as well as other information of interest to mutual fund
investors.
GETTING STARTED
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.
32
<PAGE> 61
The most important thing is to get started. Call your Investment Consultant or
contact
Gradison Mutual Funds at 800-869-5999.
START TODAY AND THE FUTURE IS YOURS.
[Graphic: Photo of a baby smiling.]
Back Cover
Logo
Gradison
Mutual Funds
1997 Gradison Mutual Funds 580 Walnut Street Cincinnati, Ohio 45202
800/869-5999 513/579-5000 htt;:/WWW.gradisonfunds.com
33
<PAGE> 62
[Graphic: Logo] Symbol GETGX
Gradison
Mutual Funds
Established Value Fund
Gradison 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 Stock Index. The
Fund may also invest in other large companies with market capitalizations of $1
billion or more.
Gradison 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 such common stocks and up to 30% may be maintained as liquid reserves to
reduce fluctuations in the Fund's net asset value.
Ten Largest Stock Positions On March 31, l998
1. Household International FINANCIAL SERVICES
2. Travelers FINANCIAL SERVICES
3. Dayton-Hudson DEPARTMENT STORES
4. Intel MICROPROCESSORS
5. Textron AEROSPACE & DEFENSE
6. Beneficial FINANCIAL SERVICES
7. Sun Microsystems COMPUTERS
8. Compaq COMPUTERS
9. Lockheed Martin AEROSPACE DEFENSE
10. Coastal Corp. OIL REFINING
These are the top ten positions of 57 issues representing 20.2% of the portfolio
and are subject to change.
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 -
34
<PAGE> 63
$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, 12/96 - $6,012, 12/97
$7,374, 3/31/98 - $7,994
The performance quoted on this document and any attachment 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.
Where the Fund is Invested
The chart below indicates distribution of the Fund's stock investments on March
31, l998. On that date, the Fund maintained 26% liquid cash reserves.
[Graphic of Pie Chart showing] Insurance 19%, Industrial Products Services 18%,
Retail Services 16%, Computer Products 13%, Technology 10%, Energy 8%, Consumer
Non-Durables 4%, Natural Resources 3%, Consumer Durables 3%, Financial Services
3%, Transportation 3%.
March 31, 1998
[Graphic: Photo of
Man and Woman]
Portfolio Manager Profiles
William J. Leugers, Jr. [graphic - photo of W.J. Leugers]
Managing Director/Portfolio Manager
Gradison-McDonald Asset Management
With more than 28 years of investment experience, the last 14 as portfolio
manager of the Gradison 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]
Managing Director/Portfolio Manager
Gradison-McDonald Asset Management
Dan Shick's entire 25 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 Mutual Funds
Gradison Mutual Funds is a division of McDonald & Company, a leading regional
investment firm which acquired Gradison in 1991. As a registered investment
advisor since 1974 and
35
<PAGE> 64
mutual fund advisors since 1976, Gradison currently manages in excess of $5
billion in Gradison Mutual Funds and individually managed accounts.
A prospectus for the Established Value Fund or any other Gradison Mutual Fund
may be obtained by calling 513/579-5700 or 800/869-5999. The prospectus contains
more complete information. Read it carefully before you invest.
McDonald & Company Securities, Inc. - Distributor
GMFS 1059-EST 3/98
[Graphic: Photo of a man and two women]
Average Annual Total Return
Chart stating periods ended 3/31/98, Most Recent Quarter (not annualized) 8.42%,
1 year 29.67%, 3 years 23.07%, 5 years 17.35%, 10 years 14.21%, Since inception
(8/16/83) 15.26%.
International Fund
Opportunity Value Fund
Growth & Income Fund
Established Value Fund
Ohio Tax-Free Income Fund
Government Income Fund
Money Market Funds
[Graphic: Logo
Gradison
Mutual Funds]
[Graphic: Logo] Symbol GOGFX
Gradison
Mutual Funds
Opportunity Value Fund
Gradison 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 Gradison believes that smaller companies generally
have greater earnings and growth potential than larger companies, investment in
smaller companies may involve greater risks such as limited product lines and
greater price volatility. The Fund generally invests in companies with
capitalizations of less than $1 billion at the time of purchase.
Gradison 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.
36
<PAGE> 65
Under normal circumstances, at least 70% of the Fund's assets will be invested
in such common stocks while up to 30% may be invested in short-term liquid
reserves to reduce fluctuations in the Fund's net asset value.
Ten Largest Stock Positions On March 31, l998
1. American Bankers Insurance INSURANCE
2. Raymond James BROKERAGE FIRM
3. Universal Health Services ACUTE CARE HOSPITALS
4. Fremont General INSURANCE
5. Keane COMPUTERS
6. Mueller Industries METAL FABRICATION
7. Norstan COMMUNICATIONS
8. ABM Industries BUSINESS SERVICES
9. TR Financial FINANCIAL SERVICES
10. Wynn's International AUTOMOTIVE PARTS & ACCESSORIES
These are the top ten positions of 101 issues representing 15.4% of the
portfolio and are subject to change.
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 gains distributions reinvested" with
these plot points 8/83 - $1,000, 12/83 - $889, 12/84 - $861, 12/85 -$ 1,103,
12/86 - $1,247, 12/87 - $1,180, 12/88 - $1,458, 12/89 - $1,795, 12/90 - $1,561,
12/91 - $2,122, 12/92 - $2,425, 12/93 - $2,694, 12/94 - $2,635, 12/95 - $3,341,
12/96 - $3,991, 12/97 - $5,235, 3/98 - $5,594.
The performance quoted on this document and any attachment 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.
Where the Fund is Invested
The chart at the right indicates distribution of the Fund's stock investments on
March 31, l998. On that date, the Fund maintained 27% liquid cash reserves.
37
<PAGE> 66
[Graphic of Pie Chart showing Financial 19%, Industrial Products/Services 18%,
Computer Products 12%, Natural Resources 11%, Insurance 10%, Retail/Services
10%, Consumer Durables 9%, Technology 4%, Transportation 3%, Consumer
Non-Durables 3%, Energy Services 1%
March 31, 1997
[Graphic: Photo of Baby]
Portfolio Manager Profiles
William J. Leugers, Jr.[Graphic: Photo of W.J. Leugers]
Managing Director/Portfolio Manager
Gradison-McDonald Asset Management
With more than 28 years of investment experience, the last 14 as portfolio
manager of the Gradison 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]
Managing Director/Portfolio Manager
Gradison-McDonald Asset Management
Dan Shick's entire 25 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 the B.B.A. degree in Economics
and his M.B.A. in Finance are from the University of Cincinnati.
Profile of Gradison Mutual Funds
Gradison Mutual Funds is a division of McDonald & Company, a leading regional
investment firm which acquired Gradison in 1991. As a registered investment
advisor since 1974 and mutual fund advisors since 1976, Gradison currently
manages in excess of $5 billion in Gradison Mutual Funds and individually
managed accounts.
38
<PAGE> 67
A prospectus for the Opportunity Value Fund or any other Gradison Mutual Fund
may be obtained by calling 513/579-5700 or 800/869-5999. The prospectus contains
more complete information. Read it carefully before you invest.
McDonald & Company Securities, Inc. - Distributor
GMFS 1059 - OPP 3/98
[Graphic: Photo of a Man and two Women]
Average Annual
Total Return
<TABLE>
<CAPTION>
Periods Ended 3/31/98
<S> <C>
Quarter* +6.86%
1 Year +42.02%
3 Years +26.92%
5 Years +17.44%
10 Years +14.88%
Since Inception +12.49%
(8/16/83)
<FN>
*Not annualized
</TABLE>
International Fund
Opportunity Value Fund
Growth & Income Fund
Established Value Fund
Ohio Tax-Free Income Fund
Government Income Fund
39
<PAGE> 68
Money Markets Funds
[Graphic: Logo]
Gradison
Mutual Funds
<PAGE> 69
ESTABLISHED VALUE FUND
- --------------------------------------------------------------------------------
March 31, 1998
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
May 1, 1988 to March 31, 1998
5/1/88 3/31/98
------ -------
GRADISON ESTABLISHED VALUE FUND $10,000 $37,296
S & P 500 $10,000 $57,221
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED MARCH 31, 1998
10 YEARS 5 YEARS 3 YEARS 1 YEAR
-------- ------- ------- ------
Established Value Fund 14.21% 17.35% 23.07% 29.67%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. Performance figures
are historical. The investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than the original cost. The Standard & Poor's (S&P) 500 Composite Stock Price
Index is an unmanaged group of common stocks widely recognized as an index of
market performance the investment returns of which do not include any securities
transaction expenses. Total returns shown include changes in share value and
reinvestment of distributions.
PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS - 73.88% VALUE
------ ------------------------- -----
AEROSPACE/DEFENSE COMPANIES - 6.44%
84,616 Lockheed Martin Corporation $ 9,519,300
80,000 Northrop Grumman Corporation 8,595,000
126,400 Raytheon Company Cl. B 7,378,600
140,000 Textron, Inc. 10,780,000
-----------
36,272,900
-----------
CHEMICALS - 2.03%
255,000 Engelhard Corporation 4,845,000
134,000 Hercules, Inc. 6,616,250
-----------
11,461,250
-----------
COMPUTING PRODUCTS - 9.69%
400,000 Compaq Computer Corporation 10,350,000
300,000 Data General Corporation(1) 5,306,250
180,000 Harris Corporation 9,382,500
160,000 Intel Corporation 12,480,000
250,000 Sun Microsystems, Inc.(1) 10,421,875
150,000 Tektronix, Inc. 6,693,750
-----------
54,634,375
-----------
CONSUMER NON-DURABLES - 1.96%
190,000 Coors (Adolph) Company Cl. B 6,602,500
142,000 RJR Nabisco Holdings Corporation 4,446,375
-----------
11,048,875
-----------
CONSUMER DURABLES - 6.69%
150,000 Agco Corporation 4,453,125
133,000 Black & Decker Corporation 7,057,312
190,000 Brunswick Corporation 6,626,250
97,000 Goodyear Tire & Rubber
(The) Company 7,347,750
100,000 Pulte Corporation 4,650,000
166,500 Snap-on, Inc. 7,596,563
-----------
37,731,000
-----------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
8
<PAGE> 70
ESTABLISHED VALUE FUND
- --------------------------------------------------------------------------------
March 31, 1998
PORTFOLIO OF INVESTMENTS Continued
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS (CONTINUED) VALUE
------ ------------------------- -----
ENERGY - 6.21%
109,000 Ashland, Inc. $ 6,172,125
145,000 Coastal Corporation 9,443,125
100,000 Nicor, Inc. 4,225,000
250,000 Pride International, Inc.(1) 5,968,750
50,000 Royal Dutch Petroleum Company 2,840,625
82,000 Western Atlas, Inc.(1) 6,344,750
-----------
34,994,375
-----------
FINANCIAL SERVICES - 9.07%
85,000 Beneficial Corporation 10,566,562
100,000 Household International, Inc. 13,775,000
150,000 Provident Companies 5,146,875
70,000 Transamerica Corporation 8,155,000
225,000 Travelers, Inc. 13,500,000
-----------
51,143,437
-----------
INDUSTRIAL PRODUCTS - 9.82%
118,000 Cooper Industries, Inc. 7,013,625
180,000 Goodrich (B.F.) Company 9,191,250
165,000 Ingersoll-Rand Company 7,909,688
148,000 Johnson Controls, Inc. 8,981,750
175,950 Parker Hannifin Corporation 9,017,438
185,000 Premark International 6,128,125
210,000 Timken Company 7,100,625
-----------
55,342,501
-----------
INSURANCE - 7.11%
142,500 Berkley (W.R.) Corporation 6,750,937
42,000 Hartford Financial Services Group 4,557,000
82,000 MBIA, Inc. 6,355,000
110,000 Providian Corporation 6,318,125
143,000 SAFECO Corporation 7,811,375
93,000 St. Paul Companies, Inc. 8,288,625
-----------
40,081,062
-----------
RETAIL TRADE - 8.90%
320,000 American Stores Company 8,320,000
150,000 Dayton-Hudson Corporation 13,200,000
135,000 Dillard's, Inc. 4,986,562
110,000 Federated Department Stores,
Inc.(1) 5,699,375
400,000 K Mart Corporation(1) 6,675,000
99,000 Mercantile Stores, Inc. 6,651,563
100,000 Supervalu, Inc. 4,662,500
-----------
50,195,000
-----------
SERVICES - 2.75%
150,000 Fingerhut Companies, Inc. 3,890,625
156,000 Pittston Brink's Group 5,947,500
254,000 Wendy's International, Inc. 5,667,375
-----------
15,505,500
-----------
TELECOMMUNICATIONS - 1.05%
300,000 Andrew Corporation(1) 5,925,000
-----------
TRANSPORTATION - 2.16%
213,000 America West Holdings Co.(1) 5,458,125
180,000 Norfolk Southern Corporation 6,727,500
-----------
12,185,625
-----------
TOTAL COMMON STOCKS
(COST $211,226,984) 416,520,900
-----------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
9
<PAGE> 71
ESTABLISHED VALUE FUND
- --------------------------------------------------------------------------------
March 31, 1998
PORTFOLIO OF INVESTMENTS Continued
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL INTEREST
AMOUNT COMMERCIAL PAPER - 15.90% MATURITY RATE(2) VALUE
------ ------------------------- -------- -------- -----
<S> <C> <C> <C> <C>
$10,000,000 Ameritech Corporation 4/08/98 5.44% $ 9,989,422
10,000,000 Eastman Kodak Co. 4/09/98 5.51 9,987,756
10,000,000 Tribune Co. 4/17/98 5.48 9,975,644
10,000,000 Goldman Sachs Group (The), L.P. 4/21/98 5.50 9,969,444
10,000,000 American Express Company 4/29/98 5.48 9,957,378
10,000,000 International Business Machines Credit Corporation 5/05/98 5.48 9,948,245
10,000,000 Avco Financial Services, Inc. 5/11/98 5.50 9,938,889
10,000,000 Chevron Corporation 5/13/98 5.47 9,936,183
10,000,000 Equitable Resources, Inc. 5/20/98 5.51 9,925,071
-----------
TOTAL COMMERCIAL PAPER (COST $89,628,032) 89,628,032
-----------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT - 10.22%
-----------------------------
<S> <C> <C> <C> <C>
57,610,000 First National Bank of Chicago, dated 3/31/98, collateral:
U.S. Treasury Note 6.25%; due 5/31/00, market value $35,555,031
and U.S. Treasury 6.125%; due 12/31/01, market value $26,340,086
(repurchase proceeds $57,619,362) (COST $57,610,000) 4/01/98 5.85 57,610,000
------------
TOTAL INVESTMENTS, AT VALUE (NOTE 1) (COST $358,465,016) - 100% $563,758,932
============
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Non-income producing
(2) For commercial paper, the interest rate is the discount rate at the time
of purchase by the Fund. For the repurchase agreement, the rate shown
reflects the actual rate of return to the Fund.
See accompanying notes to financial statements.
10
<PAGE> 72
GROWTH & INCOME FUND
- --------------------------------------------------------------------------------
March 31, 1998
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
February 28, 1995 to March 31, 1998
2/28/95 3/31/98
------- -------
GRADISON GROWTH & INCOME FUND $10,000 $20,355
S & P 500 $10,000 $24,118
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED MARCH 31, 1998
INCEPTION 3 YEARS 1 YEAR
--------- ------- ------
Growth & Income Fund 25.88% 26.20% 38.00%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. Performance figures
are historical. The investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than the original cost. The Standard & Poor's (S&P) 500 Composite Stock Price
Index is an unmanaged group of common stocks widely recognized as an index of
market performance the investment returns of which do not include any securities
transaction expenses. Expense reimbursement by the Fund's investment adviser
increased return during the period shown. Total returns shown include changes in
share value and reinvestment of distributions.
PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS - 97.47% VALUE
------ ---------------------- -----
BANK SERVICES - 7.70%
25,000 Huntington Bancshares, Inc. $ 909,375
12,000 Morgan (J.P.) & Company, Inc. 1,611,750
50,000 Norwest Corporation 2,078,125
----------
4,599,250
----------
CHEMICALS - 4.91%
20,000 Avery-Dennison Corporation 1,067,500
20,000 Du Pont (E.I.) de Nemours
& Company 1,360,000
20,000 Schulman, (A.), Inc. 502,500
----------
2,930,000
----------
CONSUMER DURABLES - 3.24%
35,000 Cooper Tire & Rubber Company 831,250
20,000 TRW, Inc. 1,102,500
----------
1,933,750
----------
CONSUMER NON-DURABLES - 14.66%
30,000 Archer Daniels Midland Corporation 658,125
10,000 Bestfoods 1,168,750
15,000 Heinz (H.J.) Company 875,625
40,000 International Flavors &
Fragrances, Inc. 1,885,000
20,000 Kellogg Company 862,500
20,000 Lancaster Colony Corporation 846,250
20,000 Newell Company 968,750
15,000 Pepsico, Inc. 640,312
10,000 Procter & Gamble Company 843,750
----------
8,749,062
----------
ENERGY - 9.27%
15,000 Chevron Corporation 1,204,687
30,000 Exxon Corporation 2,028,750
30,000 Mobil Corporation 2,298,750
----------
5,532,187
----------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
11
<PAGE> 73
GROWTH & INCOME FUND
- --------------------------------------------------------------------------------
March 31, 1998
PORTFOLIO OF INVESTMENTS Continued
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS (CONTINUED) VALUE
------ ------------------------- -----
FINANCIAL SERVICES - 8.32%
25,000 American General Corporation $1,617,187
10,000 Cincinnati Financial Corporation 1,240,000
10,000 Excel Limited 775,000
15,000 St. Paul Companies 1,336,875
----------
4,969,062
----------
HEALTHCARE & PHARMACEUTICALS - 8.52%
20,000 American Home Products Corporation 1,907,500
12,000 Bristol-Myers Squibb Company 1,251,750
15,000 Merck & Co., Inc. 1,925,625
----------
5,084,875
----------
INDUSTRIAL PRODUCTS - 8.01%
10,000 AMP Inc. 438,125
15,000 General Electric Company 1,292,812
20,000 Hubbell, Inc. 1,007,500
30,000 Pall Corporation 645,000
25,000 Waste Management, Inc. 770,313
35,000 Worthington Industries, Inc. 627,813
----------
4,781,563
----------
RETAIL TRADE & SERVICES - 6.12%
10,000 J.C. Penney Company, Inc. 756,875
10,000 May Department Stores Co. 635,000
7,000 McDonald's Corporation 420,000
60,000 Reynolds & Reynolds Company Cl. A 1,312,500
15,000 Walgreen Co. 527,813
----------
3,652,188
----------
TECHNOLOGY - 16.44%
10,000 Automatic Data Processing, Inc. 680,625
25,000 Diebold, Inc. 1,100,000
40,000 Hewlett Packard Company 2,535,000
15,000 Intel Corporation 1,170,000
10,000 Minnesota Mining & Manufacturing
Company 911,875
15,000 Motorola, Inc. 909,375
50,000 Pitney-Bowes, Inc. 2,509,375
----------
9,816,250
----------
TELECOMMUNICATIONS - 7.68%
50,000 Ameritech Corporation 2,471,875
10,000 Bell Atlantic Corporation 1,025,000
25,000 SBC Communications, Inc. 1,090,625
----------
4,587,500
----------
TRANSPORTATION - 0.44%
10,000 Comair Holdings 265,000
----------
UTILITIES - 2.16%
10,000 Duke Energy Company 595,625
25,000 Southern Corporation 692,188
----------
1,287,813
----------
TOTAL COMMON STOCKS
(COST $42,477,806) 58,188,500
----------
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
PRINCIPAL INTEREST
AMOUNT REPURCHASE AGREEMENT - 2.53% MATURITY RATE(1) VALUE
------ ---------------------------- -------- -------- -----
$1,510,000 First National Bank of Chicago, dated 3/31/98, collateral:
U.S. Treasury Note 6.75%; due 6/30/99, market value $1,545,798
(repurchase proceeds $1,510,245) (COST $1,510,000) 4/01/98 5.85% 1,510,000
-----------
TOTAL INVESTMENTS, AT VALUE (NOTE 1) (COST $43,987,806) - 100.00% $59,698,500
===========
</TABLE>
- --------------------------------------------------------------------------------
(1) For the repurchase agreement, the interest rate shown reflects the actual
rate of return to the Fund.
See accompanying notes to financial statements.
12
<PAGE> 74
OPPORTUNITY VALUE FUND
- --------------------------------------------------------------------------------
March 31, 1998
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
May 1, 1988 to March 31, 1998
5/1/88 3/31/98
------ -------
GRADISON OPPORTUNITY VALUE FUND $10,000 $39,369
S & P 500 $10,000 $57,221
RUSSELL 2000 $10,000 $34,111
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED MARCH 31, 1998
10 YEARS 5 YEARS 3 YEARS 1 YEAR
-------- ------- ------- ------
Opportunity Value Fund 14.88% 17.44% 26.92% 42.02%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. Performance figures
are historical. The investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than the original cost. The Russell 2000 Small Stock Index is an unmanaged group
of stocks representative of small company stock performance; the Standard &
Poor's (S&P) 500 Composite Stock Price Index is an unmanaged group of common
stocks widely recognized as an index of market performance. The investment
returns of these indices do not include any securities transaction expenses.
Total returns shown include changes in share value and reinvestment of
distributions.
PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS - 72.85% VALUE
------ ---------------------- -----
AUTOMOTIVES - 4.60%
25,000 Borg-Warner Auto, Inc. $1,603,125
30,000 Gleason Corporation 1,051,875
70,000 Intermet Corporation 1,557,500
30,000 Motocar Parts & Acc.(1) 534,375
30,000 Superior Industries International 995,625
100,000 Wynn's International, Inc. 2,275,000
-----------
8,017,500
-----------
BANKS - 10.12%
4,000 First Empire State Corporation 1,999,500
30,000 Firstar Corporation 1,185,000
39,000 Granite State Bankshares 1,057,875
47,740 HUBCO, Inc. 1,826,055
46,125 Mercantile Bankshares Corporation 1,669,148
12,000 National City Bankcorp(1) 406,500
40,000 Old Kent Financial Corporation 1,535,000
50,000 TCF Financial Corporation 1,696,875
66,000 TR Financial Corporation 2,293,500
20,000 Union Planters Corporation 1,243,750
39,000 Westcorp, Inc. 653,250
40,000 Zions Bancorporation 2,090,000
-----------
17,656,453
-----------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
13
<PAGE> 75
OPPORTUNITY VALUE FUND
- --------------------------------------------------------------------------------
March 31, 1998
PORTFOLIO OF INVESTMENTS Continued
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS (CONTINUED) VALUE
------ ------------------------- -----
BUILDING MATERIALS - 4.48%
39,000 Butler Manufacturing Company $ 1,404,000
32,000 Cascade Corporation 518,000
25,000 Fibermark, Inc.(1) 582,812
45,000 Hughes Supply Company 1,628,438
84,150 Republic Group, Inc. 1,714,556
34,000 Texas Industries, Inc. 1,965,625
-----------
7,813,431
-----------
BUSINESS SERVICES - 4.22%
75,000 ABM Industries, Inc. 2,329,687
38,000 Inacom Corporation(1) 1,049,750
70,000 Merrill Corporation 1,531,250
100,000 Norstan, Inc.(1) 2,450,000
-----------
7,360,687
-----------
CHEMICALS - 1.94%
30,000 Cambrex Corporation 1,511,250
45,000 Ferro Corporation 1,321,875
44,000 Stephan Company 555,500
-----------
3,388,625
-----------
COMPUTER PRODUCTS - 3.43%
35,000 Adaptec, Inc.(1) 686,875
40,000 DRS Technologies, Inc.(1) 555,000
70,000 Innovex, Inc. 1,693,125
45,000 Keane, Inc.(1) 2,542,500
30,000 Printronix, Inc.(1) 498,750
-----------
5,976,250
-----------
COMPUTER SERVICES - 1.77%
60,000 Affiliated Computer
Services, Inc.(1) 1,991,250
19,000 Devon Group, Inc.(1) 1,099,625
-----------
3,090,875
-----------
CONSUMER DURABLES - 1.47%
46,000 Cannondale Corporation(1) 759,000
42,000 Culp, Inc. 861,000
23,000 Thor Industries, Inc. 941,563
-----------
2,561,563
-----------
ELECTRONICS - 3.77%
52,000 Coherent, Inc.(1) 1,248,000
40,500 CTS Corporation 1,374,469
54,000 EDO Corporation(1) 486,000
25,000 Electro Scientific Industries,
Inc.(1) 962,500
25,000 Esterline Technologies
Corporation(1) 1,054,687
34,000 Park Electrochemical Corporation 877,625
20,000 Zero Corporation 565,000
-----------
6,568,281
-----------
ENERGY SERVICES - 1.70%
20,000 Lone Star Technology, Inc.(1) 475,000
20,000 SEACOR SMIT, Inc.(1) 1,163,750
60,000 World Fuel Services Corporation 1,320,000
-----------
2,958,750
-----------
FINANCIAL SERVICES - 2.88%
18,000 AmeriCredit Corporation(1) 495,000
20,000 D & N Financial Corporation(1) 555,000
69,000 Raymond James Financial, Inc. 3,005,813
35,000 Vermont Financial Services
Corporation 966,875
-----------
5,022,688
-----------
HEALTH CARE - 4.42%
42,000 Genesis Health Ventures, Inc.(1) 1,181,250
40,000 HealthSouth Corporation(1) 1,122,500
35,000 Integrated Health Services, Inc. 1,375,937
68,000 Mariner Health Group, Inc.(1) 1,147,500
50,000 Universal Health Services, Inc.(1) 2,887,500
-----------
7,714,687
-----------
HOTELS/CASINOS - 0.39%
24,000 Harveys Casinos Resorts 681,000
-----------
HOUSING - 4.68%
50,000 D.R. Horton, Inc. 1,062,500
43,000 Lennar Corporation 1,480,812
43,000 LNR Property Corporation 1,150,250
49,000 MDC Holdings, Inc. 869,750
60,000 Oakwood Homes Corporation 2,197,500
50,000 Toll Brothers, Inc.(1) 1,406,250
-----------
8,167,062
-----------
INDUSTRIAL PRODUCTS - 4.96%
21,000 Carpenter Technology 1,134,000
25,000 Chase Industries, Inc.(1) 773,437
30,000 DT Industries, Inc. 1,140,000
35,000 Farr Company(1) 665,000
44,000 Gehl Company(1) 935,000
31,800 Met-Pro Corporation 494,888
55,000 MTS Systems Corporation 876,562
10,000 Robbins & Meyers, Inc. 381,250
22,000 Thomas Industries, Inc. 489,500
32,000 Transtechnology Corporation 964,000
25,000 United Dominion Industries, Inc. 810,938
-----------
8,664,575
-----------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
14
<PAGE> 76
OPPORTUNITY VALUE FUND
- --------------------------------------------------------------------------------
March 31, 1998
PORTFOLIO OF INVESTMENTS Continued
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS (CONTINUED) VALUE
------ ------------------------- -----
INSURANCE COMPANIES - 7.22%
60,000 American Bankers Insurance
Group, Inc. $ 3,870,000
45,000 Fremont General Corporation 2,646,562
52,000 HCC Insurance Holdings, Inc. 1,196,000
40,000 Orion Capital Corporation 2,187,500
29,000 Protective Life Corporation 2,117,000
22,000 Selective Insurance Group, Inc. 585,750
-----------
12,602,812
-----------
MEDICAL EQUIPMENT - 1.16%
35,000 EMPI, Inc.(1) 564,375
31,000 Thermedics, Inc.(1) 552,188
30,000 West Company, Inc. 903,750
-----------
2,020,313
-----------
NATURAL RESOURCES - 4.20%
29,000 Atchison Casting Corporation 453,125
24,000 Florida Rock Industries 685,500
40,000 Mueller Industries, Inc.(1) 2,532,500
37,000 Quanex Corporation 1,112,313
5,000 Scope Industries 315,313
32,000 Southdown, Inc. 2,230,000
-----------
7,328,751
-----------
RETAIL TRADE & SERVICES - 1.93%
43,000 BJ's Wholesale Club, Inc.(1) 1,677,000
40,000 O'Charleys, Inc.(1) 847,500
45,000 Play By Play Toys &
Novelties, Inc.(1) 838,125
-----------
3,362,625
-----------
SEMICONDUCTORS - 1.46%
50,000 Dallas Semiconductor Corporation 1,681,250
40,000 Kulicke and Soffa Industries,
Inc.(1) 870,000
-----------
2,551,250
-----------
TELECOMMUNICATIONS - 0.29%
30,000 Communication Systems, Inc. 511,875
-----------
TRANSPORTATION - 1.76%
75,000 Comair Holdings, Inc. 1,987,500
30,000 U.S. Freightways Corporation 1,080,000
-----------
3,067,500
-----------
TOTAL COMMON STOCKS
(COST $68,035,162) 127,087,553
-----------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL INTEREST
AMOUNT COMMERCIAL PAPER - 12.84% MATURITY RATE (2) VALUE
------ ------------------------- -------- -------- -----
<S> <C> <C> <C> <C>
$2,500,000 Ameritech Corporation 4/08/98 5.44% 2,497,356
2,500,000 Eastman Kodak Co. 4/09/98 5.51 2,496,939
2,500,000 Tribune Co. 4/17/98 5.48 2,493,911
2,500,000 Goldman Sachs Group (The), L.P. 4/21/98 5.50 2,492,361
2,500,000 American Express Company 4/29/98 5.48 2,489,344
2,500,000 International Business Machines Credit Corporation 5/05/98 5.48 2,487,061
2,500,000 Avco Financial Services, Inc. 5/11/98 5.50 2,484,722
2,500,000 Chevron Corporation 5/13/98 5.47 2,484,046
2,500,000 Equitable Resources, Inc. 5/20/98 5.51 2,481,268
-----------
TOTAL COMMERCIAL PAPER (COST $22,407,008) 22,407,008
-----------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
REPURCHASE AGREEMENT - 14.31%
-----------------------------
<S> <C> <C> <C> <C>
24,960,000 First National Bank of Chicago, dated 3/31/98,
collateral:
U.S. Treasury Note 6.75%; due 6/30/99, market value
$25,474,745 (repurchase proceeds $24,964,057)
(COST $24,960,000) 4/01/98 5.85 24,960,000
------------
TOTAL INVESTMENTS, AT VALUE (NOTE 1)
(COST $115,402,170) - 100% $174,454,561
============
</TABLE>
- --------------------------------------------------------------------------------
(1) Non-income producing
(2) For commercial paper, the interest rate is the discount rate at the time
of purchase by the Fund. For the repurchase agreement, the rate shown
reflects the actual rate of return to the Fund.
See accompanying notes to financial statements.
15
<PAGE> 77
INTERNATIONAL FUND
- --------------------------------------------------------------------------------
March 31, 1998
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
May 31, 1995 to March 31, 1998
5/31/95 3/31/98
------- -------
GRADISON INTERNATIONAL FUND $10,000 $12,948
EAFE/EMS $10,000 $12,843
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED MARCH 31, 1998
INCEPTION 1 YEAR
--------- ------
International Fund 9.54% 19.11%
Since the Fund's inception, its investment adviser has been waiving receipt of
certain fees otherwise due to be paid by the Fund and paying certain Fund
expenses which increased the Fund's return. Waiver and reimbursement
arrangements may be terminated which would lower future performance. Performance
figures are historical. 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. PAST PERFORMANCE IS
NOT PREDICTIVE OF FUTURE PERFORMANCE. The EAFE/EMS Index is the Morgan Stanley
Capital International Europe Australasia Far East plus Emerging Markets Index.
Total returns shown include changes in share value and reinvestment of
distributions.
PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
SHARES PREFERRED STOCKS - 0.76% VALUE
------ ------------------------ -----
GERMANY - 0.76%
450 Man Ag-vorzugsaktien $113,027
270 Sap Preferred 114,827
--------
TOTAL PREFERRED STOCKS
(COST $203,457) 227,854
--------
- --------------------------------------------------------------------------------
Common Stocks - 99.24%
----------------------
ARGENTINA - 2.84%
39,350 Astra Cia Argentina De Petroleum 74,385
9,497 Banco De Galicia Bue 'B' 58,512
7,196 Banco Frances Rio Plata 72,333
38,364 Dalmine Siderca Sa 102,450
541 IRSA (Inversiones y Representaciones
SA) 144A ADR 20,727
9,040 Molinos Rio Plata 'B' 22,152
9,750 Perez Companc SA ADR 132,038
5,512 Telefonica de Argentina ADR 209,801
4,800 YPF SA ADR 163,200
----------
855,598
----------
CHILE - 2.76%
6,500 Banco Santander Chile ADR 91,406
3,524 Chilgener SA ADR 84,796
1,750 Cia Cerveceria Unidas ADR 52,937
7,000 Cia Telecommunications Chile ADR 192,938
6,600 Empresa Nacional de Electridad
SA ADS 127,050
5,150 Enersis SA ADR 162,547
1,600 Madeco SA ADR 27,700
3,400 Maderas Y Sinteticos ADR 35,063
1,300 Quimica y Minera SA ADR 57,200
----------
831,637
----------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
16
<PAGE> 78
INTERNATIONAL FUND
- --------------------------------------------------------------------------------
March 31, 1998
PORTFOLIO OF INVESTMENTS Continued
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS (CONTINUED) VALUE
------ ------------------------- -----
FINLAND - 5.61%
5,000 Enso Oy $ 46,147
1,200 Hartwall Oy 141,113
9,740 Metsa Serla Oy B Ord 86,770
2,070 Neste Oy 61,224
8,165 Nokia AB Oy 876,506
5,200 Okobank Osuspankk 100,062
55 Rauma Oy 1,019
7,100 Rautaruuki Oy 59,077
4,880 Upm-Kymmene Oy 124,336
550 Viking Line AB 21,069
3,000 Werner Soderstrom 133,630
3,200 Yit Yhtyma 39,056
----------
1,690,009
----------
FRANCE - 11.64%
1,308 Alcatel Alst 245,525
1,616 AXA 166,407
5,050 Banque Nationale de Paris 392,461
1,290 Cie De St Gobain 212,373
1,230 Credit Commercial de France 101,049
880 Danone 212,482
1,720 Eaux (Cie Generale) 279,277
550 Eaux (Cie Generale) Warrant 617
1,482 Elf Aquitaine 194,229
1,840 France Telecom SA 97,053
2,100 Groupe GTM 163,371
490 L'Oreal 227,770
2,050 Lafarge 174,371
2,050 Lafarge Rights 2,680
1,550 Peugeot SA 267,185
290 Pinault-Printemps -- Redoute SA 224,203
752 Schneider SA 57,896
1,240 Societe Generale 248,172
1,120 Total SA 134,493
1,160 Valeo 102,038
----------
3,503,652
----------
GERMANY - 7.41%
25 Allianz AG DEM (REGD) 7,496
860 Allianz AG Holdings 259,720
2,700 Basf AG 120,083
6,315 Bayer AG 288,887
2,400 Commerzbank AG 86,690
1,450 Daimler-Benz AG 133,291
1,010 Degussa AG 57,509
1,200 Deutsche Telekom Bank AG 90,292
1,400 Dresdner Bank AG 63,742
462 Mannesmann AG 338,255
160 Munchener Ruckversicheru 69,214
3,000 Rwe Ag 161,409
2,120 Siemens AG 141,919
4,232 Veba AG 300,236
138 Volkswagen AG 108,052
138 Volkswagen AG Rights 2,507
----------
2,229,302
----------
HUNGARY - 2.71%
1,500 Danibius Hotels(1) 39,379
650 Graboplast Textiles Rt. 26,450
6,900 Magyar Olaj Es Gazipari Rt. 211,550
42,000 Matav 258,918
2,900 OTP Bank Rt. 147,508
1,250 Richter Gedeon Rt. 131,528
----------
815,333
----------
IRELAND - 2.63%
22,500 Allied Irish Banks Ord 276,077
14,100 CRH Ord 211,901
8,800 Irish Life Ord 80,355
6,000 Kerry Group A Ord 79,898
49,900 Smurfit Jefferson Ord 143,068
----------
791,299
----------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
17
<PAGE> 79
INTERNATIONAL FUND
- --------------------------------------------------------------------------------
March 31, 1998
PORTFOLIO OF INVESTMENTS Continued
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS (CONTINUED) VALUE
------ ------------------------- -----
ISRAEL - 3.09%
3,800 Agis Industries $ 27,216
33,000 Bank Leumi Le-Israel BM 62,385
21,600 Bezeq Israel Telecommunications 58,283
40,000 Bk Hapoalim BM 109,485
3,800 Blue Square Chain Stores(1) 41,879
2,800 Eci Telecommunications ADR 86,100
1,740 Elite Industries 55,306
2,000 Formula Systems(1) 81,836
63,000 ICl-Israel Chemical 75,552
37,000 Industrial Building 63,065
880 Koor Industries Ltd. 109,441
15,800 Supersol Ltd. 51,098
2,530 Teva Pharmaceutical Industries Ltd. 108,931
----------
930,577
----------
ITALY - 10.52%
13,500 Alleanza Assicuraz 214,542
8,120 Assicurazioni Generali SpA 250,076
58,400 BCA Communicatios Italiana 291,069
6,240 Benetton Group SpA 130,968
12,500 Danieli & Company 121,587
24,000 Edison SpA 201,817
61,500 Eni SpA 418,579
43,600 Fiat SpA 181,705
61,000 Istituto Nazionale delle
Assicurazioni 197,559
18,300 Instituto Mobiliare Italiano 296,841
15,000 Italcementi SpA 175,908
52,110 Telecom Italia SpA 410,211
51,000 TIM SpA 273,751
----------
3,164,613
----------
JAPAN - 8.82%
6,600 Aoyama Trading Company 158,379
3,000 Bridgestone Corporation 67,941
4,000 Canon 90,288
6,200 Fanuc 213,871
6,000 Fuji Photo Film Company 223,170
19,000 Fujisawa Pharmaceutical Company 169,552
28,000 Hitachi Ltd. 203,673
1,000 Ito-yokado Co Ltd. 54,143
17,000 Kirin Brewery Company 151,705
6,000 Matsushita Electric Works 96,287
19,000 Mitsubishi Chemical Corporation 72,238
65,000 Mitsui O.S.K. Lines Ltd.(1) 108,698
6,000 Murata Manufacturing Company 165,578
8,000 Nec Corporation 80,389
42 Nippon Telgraph & Telephone Company 174,802
18,000 Sumitomo Bank 183,576
22,000 Sumitomo Trust & Banking 142,046
10,000 Tokio Marine & Fire Insurance 111,735
4,200 Tokyo Electric 79,369
4,000 Toyota Motor Corporation 106,486
----------
2,653,926
----------
MEXICO - 1.81%
5,250 Alfa SA de CV Ser A 29,708
6,450 Cemex SA 29,229
21,802 Cifra SA de Cv Servnpv 39,776
8,500 Controlodora Comercial
Mexicana SA de CV 10,398
1,850 Desc SA de CV Ser B 13,531
106 Desc SA de CV Ser C 809
4,700 Empresas La Modern A(1) 23,313
2,800 Fomento Economico Mexico SA de CV 20,216
5,050 Grupo Carso SA de CV Ser A1 31,304
11,554 Grupo Financiero Banamex
Accival SA de CV(1) 27,102
7,172 Grupo Industrial Bimbo SA 18,945
8,150 Grupo Mexico SA 26,313
4,850 Grupo Modelo Sa de Cv 40,939
780 Grupo Televisa GDS(1) 28,567
3,900 Industrias Penoles SA 16,483
5,950 Kimberly Clark de Mexico SA 30,736
2,620 Telefonos de Mexico ADR 147,703
500 Tv Azteca ADS(1) 9,813
----------
544,885
----------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
18
<PAGE> 80
INTERNATIONAL FUND
- --------------------------------------------------------------------------------
March 31, 1998
PORTFOLIO OF INVESTMENTS Continued
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS (CONTINUED) VALUE
------ ------------------------- -----
NETHERLANDS - 4.77%
3,064 ABN-AMRO Holdings NV $ 70,696
350 Akzo Nobel NV 71,102
4,000 Elsevier NV 65,813
1,500 Fortis Amev NV 88,503
2,200 Ing Groep NV 124,844
1,800 Koninklijke PTT Nederland NV 93,252
1,300 Philips Electronic 95,410
7,280 Royal Dutch Petroleum 412,073
2,440 Unilever NV 164,564
1,500 Vendex International NV 94,979
4,480 Ver Ned Uitgevers 153,225
----------
1,434,461
----------
POLAND - 1.38%
900 Agros Holding SA(1) 20,982
1,900 Amica Wronki(1) 35,491
300 Bank Przemyslowo Handlowy SA 23,893
1,900 Bank Rozwoju Eksportu SA 52,824
800 Bank Slaski SA 57,922
35,100 BIG Bank Gdanski SA 49,301
700 Debica SA 18,245
9,300 Elektrim Spolka Akcyjna SA 115,814
4,600 Polifarb Cieszyn-Wroclaw SA(1) 19,184
2,800 Stomil Olsztyn SA 21,894
----------
415,550
----------
PORTUGAL - 4.86%
3,400 Banco Comercial Portugues SA 109,776
3,400 Banco Comercial Portugues SA Rights 11,005
5,450 Banco Espirito Santo 251,790
1,200 Brisa-Auto Estradas de
Portugal SA(1) 54,806
3,460 Cimpor (Cimentos de Portugal) 121,926
9,800 Electricidade de Portugal 227,415
1,650 Investec Consultadoria
Internacional(1) 66,647
1,895 Jeronimo Martins 77,944
4,000 Mundial Confianca(1) 129,360
6,630 Portugal Telecom SA 344,848
1,440 Sonae Investimentos Socieda de Gestora
de Participacoes Sociais SA 67,782
----------
1,463,299
----------
SPAIN - 5.53%
2,000 Argentaria Corp Bc 165,594
6,800 Autopistas, Concesionari 112,604
5,300 Banco Bilbao Vizcaya SA 248,780
700 Banco Central Hispanoame 22,425
700 Banco Central Hsp Rights 553
1,450 Banco Popular Espanol 140,742
2,200 Banco Santander SA 109,572
5,400 Empresa Nacional de Electricid SA 129,832
1,600 Gas Natural 99,866
800 Gas Y Electricidad Sa 64,709
10,600 Iberdrola SA 161,015
1,700 Repsol SA 86,727
7,300 Telefonica de Espana 321,736
----------
1,664,155
----------
SWITZERLAND - 6.85%
72 ABB AG 107,588
238 Ciba Specialty Chemical Nw 30,443
125 Clariant AG 134,881
944 Credit Suisse Group 188,864
99 Holderbank Finance Glaris AG 103,904
30 Kuoni Reisen Holdings 150,543
138 Nestle SA 263,691
253 Novartis AG 447,754
29 Roche Holdings AG 313,876
150 Schweiz Bankgesellschaft 245,001
650 Tag Heuer 73,976
----------
2,060,521
----------
TURKEY - 4.03%
632,700 Adana Cimento Sanayii 41,606
624,237 Akal Tekstil Sanayii 15,650
953,203 Akbank 69,539
1,770,000 Arcelik AS 152,769
323,000 Aygaz AS 45,800
57,000 Bagfas Bandirma Gubre AS 56,810
1,562,000 Brisa AS 78,643
687,000 Ege Biracilik Ve Malt SA 98,825
851,000 Eregli Demir Celik 106,677
73,000 Ford Otomotiv Sanayi AS 45,005
73,650 Migros Turk TAS 65,081
119,000 Netas Telekomunik AS(1) 37,660
906,000 Sabanci Holding 53,062
794,240 T Sise Cam 28,073
3,557,000 Turkiye Garanti Bankasi 140,345
69,7000 Turkiye Is Bankasi 74,481
294,5000 Yapi Ve Kredi Bankasi 101,673
----------
1,211,699
----------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
19
<PAGE> 81
INTERNATIONAL FUND
- --------------------------------------------------------------------------------
March 31, 1998
PORTFOLIO OF INVESTMENTS Continued
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS (CONTINUED) VALUE
------ ------------------------- -----
UNITED KINGDOM - 7.87%
6,640 Abbey National PLC $ 128,651
7,600 Boots Co. PLC 121,797
4,600 British Petroleum 66,401
8,500 British Telecom PLC 92,522
5,900 Commercial Union PLC 115,202
3,550 Glaxo Wellcome 95,533
3,930 HSBC Holdings 128,201
9,500 IMI PLC 72,385
16,000 Lasmo PLC 73,950
17,059 Lloyds TSB Group PLC 265,388
6,200 National Power PLC 63,541
9,400 Prudential PLC 138,208
11,429 Scot Power 107,561
9,100 Scottish & Newcastle PLC 144,007
10,050 Shell Transport & Trading PLC 73,883
13,600 Smith Kline Beecham 171,948
8,300 Tesco 83,256
15,200 Unilever PLC 143,815
11,580 Wolseley PLC 89,009
4,490 Zeneca Group PLC 193,538
-----------
2,368,796
-----------
VENEZUELA - 4.11%
106,356 Banco Provincial 192,478
12,550 Compania Anonima Nacional
Telefonos De Venezuela 524,747
259,750 Electricid Caracas 244,938
9,450 Mavesa SA 144A ADR 49,613
363,850 Sider Venezuela ADR 100,504
82,231 Venezolana De Cemento 125,320
-----------
1,237,600
-----------
TOTAL COMMON STOCKS
(COST $23,545,447) 29,866,912
-----------
TOTAL INVESTMENTS,
AT VALUE (NOTE 1)
(COST $23,748,904) - 100% $30,094,766
===========
- --------------------------------------------------------------------------------
(1) Non-income producing
The following abbreviations are used in this portfolio:
ADR - American Depository Receipts; ADS - American Depository Shares;
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 $70,339 as of March 31, 1998.
- --------------------------------------------------------------------------------
SUMMARY OF INVESTMENTS BY INDUSTRY
% OF
TOTAL
INDUSTRY INVESTMENTS
- -------- -----------
Automotive 3.73%
Banking 17.46
Beverages and Tobacco 2.24
Broadcasting and Publishing 1.52
Building Materials 4.00
Business Services 0.93
Chemicals 4.50
Construction and Housing 1.21
Diversified Companies 4.08
Electronics 6.77
Energy 7.65
Financial Services 1.96
Food and Household Products 3.78
Forest Products and Paper 1.40
Health and Personal Care 4.30
Household Appliances and Durables 1.14
Insurance 6.08
Machinery and Engineering 1.53
Materials and Commodities 0.60
Merchandising 3.10
Metals and Mining 0.39
Real Estate 0.07
Steel 0.89
Telecommunications 13.86
Textiles and Apparel 0.58
Tourism 0.50
Transportation 0.76
Utilities 4.97
------
100.00%
======
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
20
<PAGE> 82
STATEMENTS OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
March 31, 1998
<TABLE>
<CAPTION>
ESTABLISHED GROWTH & OPPORTUNITY INTERNATIONAL
VALUE FUND INCOME FUND VALUE FUND FUND
----------- ----------- ----------- -------------
ASSETS
<S> <C> <C> <C> <C>
Investments in securities, at cost $358,465,016 $43,987,806 $115,402,170 $23,748,904
============ =========== ============ ===========
Investments in securities, at value (Note 1) $563,758,932 $59,698,500 $174,454,561 $30,094,766
Cash 187,719 10,468 30,931 2,043,534
Foreign currency, at value (Note 1) (Cost $619,985) -- -- -- 584,859
Receivable for securities sold -- -- 328,189 596,412
Receivable for Fund shares sold 3,687,669 339,549 1,127,047 21,075
Dividends and interest receivable 492,337 112,195 63,521 58,331
Forward foreign exchange currency contracts,
at value (Note 1) -- -- -- 66,315
Prepaid expenses and other assets 23,056 7,488 11,031 4,104
Organization expenses, net (Note 1) -- 2,526 -- 10,356
------------ ----------- ------------ -----------
TOTAL ASSETS 568,149,713 60,170,726 176,015,280 33,479,752
------------ ----------- ------------ -----------
LIABILITIES
Payable for Fund shares redeemed 388,782 16,537 153,105 27,625
Payable for securities purchased -- -- -- 91,553
Accrued investment advisory fee (Note 2) 231,912 29,639 85,196 20,568
Other accrued expenses payable to adviser (Note 2) 257,653 31,373 85,878 37,518
Other accrued expenses and liabilities 16,814 2,025 6,852 20,850
Futures variation margin payable -- -- -- 3,462
------------ ----------- ------------ -----------
TOTAL LIABILITIES 895,161 79,574 331,031 201,576
------------ ----------- ------------ -----------
NET ASSETS $567,254,552 $60,091,152 $175,684,249 $33,278,176
============ =========== ============ ===========
NET ASSETS CONSIST OF:
Aggregate paid-in capital $346,809,964 $44,250,538 $109,964,485 $27,448,501
Accumulated undistributed net investment
income (loss) 305,847 3,901 206,426 12,679
Accumulated undistributed net realized
gains (losses) 14,844,825 126,019 6,460,947 (540,694)
Net unrealized appreciation of investments 205,293,916 15,710,694 59,052,391 6,345,862
Net unrealized appreciation on translation
of assets and liabilities in foreign currency -- -- -- 11,828
------------ ----------- ------------ -----------
NET ASSETS $567,254,552 $60,091,152 $175,684,249 $33,278,176
============ =========== ============ ===========
SHARES OF CAPITAL STOCK OUTSTANDING
(no par value - unlimited number of shares
authorized) 16,713,114 2,072,968 6,298,471 1,739,146
============ =========== ============ ===========
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE (Note 1) $33.94 $28.99 $27.89 $19.13
============ =========== ============ ===========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
21
<PAGE> 83
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
For the year ended March 31, 1998
<TABLE>
<CAPTION>
ESTABLISHED GROWTH & OPPORTUNITY INTERNATIONAL
VALUE FUND INCOME FUND VALUE FUND FUND
----------- ----------- ----------- -------------
INVESTMENT INCOME:
<S> <C> <C> <C> <C>
Dividends, net of foreign withholding taxes $ 5,183,890 $ 890,955 $ 940,214 $ 432,272
Interest 7,688,489 143,096 2,143,373 145,489
------------ ----------- ----------- ----------
TOTAL INVESTMENT INCOME 12,872,379 1,034,051 3,083,587 577,761
------------ ----------- ----------- ----------
EXPENSES:
Investment advisory fee (Note 2) 2,580,124 267,848 881,658 282,889
Distribution (Note 2) 2,454,412 206,037 710,599 141,445
Transfer agency fees (Note 2) 303,442 47,227 130,769 41,353
Accounting services fees (Note 2) 80,669 40,000 40,000 60,000
Custodian fees (Note 1) 23,598 12,002 19,263 79,583
Registration fees 43,019 23,113 32,427 18,955
Professional fees 14,022 12,937 12,758 32,716
Printing 40,438 7,236 15,904 5,889
Trustees' fees (Note 2) 7,067 6,394 6,618 7,050
Amortization of organization expense (Note 1) -- 1,153 -- 4,746
Other 27,303 3,321 8,356 3,285
------------ ----------- ----------- ----------
GROSS EXPENSES 5,574,094 627,268 1,858,352 677,911
LESS FEES WAIVED BY THE ADVISER (Note 2) -- -- -- (112,829)
LESS EARNINGS CREDITS ON CASH BALANCES
(Note 1) (4,374) (12,002) (2,140) --
------------ ----------- ----------- ----------
NET EXPENSES 5,569,720 615,266 1,856,212 565,082
------------ ----------- ----------- ----------
NET INVESTMENT INCOME 7,302,659 418,785 1,227,375 12,679
------------ ----------- ----------- ----------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
ON INVESTMENTS:
Net realized gain (loss) on investments 41,231,389 278,290 20,508,362 (254,868)
Net realized loss on foreign currency
transactions -- -- -- (208,788)
Net change in unrealized appreciation
of investments 79,580,611 12,198,030 26,917,903 5,495,316
Net change in unrealized depreciation
of foreign currency transactions -- -- -- 13,438
------------ ----------- ----------- ----------
NET REALIZED AND UNREALIZED GAINS ON
INVESTMENTS 120,812,000 12,476,320 47,426,265 5,045,098
------------ ----------- ----------- ----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $128,114,659 $12,895,105 $48,653,640 $5,057,777
============ =========== =========== ==========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
22
<PAGE> 84
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ESTABLISHED VALUE FUND GROWTH & INCOME FUND OPPORTUNITY VALUE FUND
YEAR ENDED YEAR ENDED YEAR ENDED
---------------------- ----------------------- ------------------------
3/31/98 3/31/97 3/31/98 3/31/97 3/31/98 3/31/97
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment income (loss) $ 7,302,659 $ 6,257,379 $ 418,785 $ 242,652 $ 1,227,375 $ 984,370
Net realized gain (loss) on
investments 41,231,389 37,844,738 278,290 337,124 20,508,362 9,839,496
Net realized loss on foreign
currency transactions -- -- -- -- -- --
Net change in unrealized
appreciation of investments 79,580,611 11,774,353 12,198,030 2,325,455 26,917,903 1,731,084
Net change in unrealized
depreciation on translation
of assets and liabilities in
foreign currencies -- -- -- -- -- --
------------- ------------ ------------ ------------ ------------ ------------
Net increase in net assets
resulting from operations 128,114,659 55,876,470 12,895,105 2,905,231 48,653,640 12,554,950
------------- ------------ ------------ ------------ ------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income (7,488,999) (6,248,864) (483,144) (190,392) (1,400,935) (780,766)
Net realized capital gains (39,693,896) (32,341,951) (376,650) (112,745) (18,567,761) (9,624,857)
------------- ------------ ------------ ------------ ------------ ------------
Decrease in net assets from
distributions to shareholders (47,182,895) (38,590,815) (859,794) (303,137) (19,968,696) (10,405,623)
------------- ------------ ------------ ------------ ------------ ------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 177,661,831 150,040,288 28,457,239 13,724,115 97,738,720 74,520,949
Net asset value of shares
issued in reinvestment
of distributions 46,070,717 37,843,938 837,101 297,051 19,731,335 10,317,863
Payments for shares redeemed (167,135,296) (141,861,173) (6,940,220) (2,898,897) (84,921,607) (75,515,812)
------------- ------------ ------------ ------------ ------------ ------------
Net increase in net assets from
Fund share transactions 56,597,252 46,023,053 22,354,120 11,122,269 32,548,448 9,323,000
------------- ------------ ------------ ------------ ------------ ------------
TOTAL INCREASE IN NET ASSETS 137,529,016 63,308,708 34,389,431 13,724,363 61,233,392 11,472,327
NET ASSETS:
Beginning of year 429,725,536 366,416,828 25,701,721 11,977,358 114,450,857 102,978,530
------------- ------------ ------------ ------------ ------------ ------------
End of year $ 567,254,552 $429,725,536 $ 60,091,152 $ 25,701,721 $175,684,249 $114,450,857
============= ============ ============ ============ ============ ============
Undistributed net investment
income (Note 1) $ 305,847 $ 753,874 $ 3,901 $ 63,881 $ 206,426 $ 379,986
============= ============ ============ ============ ============ ============
NUMBER OF FUND SHARES:
Sold 5,536,829 5,266,990 1,118,081 674,493 3,748,080 3,262,371
Issued in reinvestment of
distributions to shareholders 1,493,854 1,334,128 33,607 14,650 796,600 454,117
Redeemed (5,224,469) (4,986,154) (275,439) (141,301) (3,272,472) (3,315,616)
------------- ------------ ------------ ------------ ------------ ------------
Net increase in shares
outstanding 1,806,214 1,614,964 876,249 547,842 1,272,208 400,872
Outstanding at beginning of year 14,906,900 13,291,936 1,196,719 648,877 5,026,263 4,625,391
------------- ------------ ------------ ------------ ------------ ------------
Outstanding at end of year 16,713,114 14,906,900 2,072,968 1,196,719 6,298,471 5,026,263
============= ============ ============ ============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL FUND
YEAR ENDED
------------------------
3/31/98 3/31/97
------- -------
<S> <C> <C>
FROM OPERATIONS:
Net investment income (loss) $ 12,679 $ (27,104)
Net realized gain (loss) on
investments (254,868) 690,706
Net realized loss on foreign
currency transactions (208,788) (403,339)
Net change in unrealized
appreciation of investments 5,495,316 289,521
Net change in unrealized
depreciation on translation
of assets and liabilities in
foreign currencies 13,438 (31,683)
------------ ------------
Net increase in net assets
resulting from operations 5,057,777 518,101
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income -- --
Net realized capital gains (289,530) (41,790)
------------ ------------
Decrease in net assets from
distributions to shareholders (289,530) (41,790)
------------ ------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 9,514,677 12,548,017
Net asset value of shares issued
in reinvestment of distribution 266,710 38,087
Payments for shares redeemed (6,087,530) (3,551,439)
------------ ------------
Net increase in net assets from
Fund share transactions 3,693,857 9,034,665
------------ ------------
TOTAL INCREASE IN NET ASSETS 8,462,104 9,510,976
NET ASSETS:
Beginning of year 24,816,072 15,305,096
------------ ------------
End of year $33,278,176 $ 24,816,072
============ ============
Undistributed net investment
income (Note 1) $ 12,679 --
============ ============
NUMBER OF FUND SHARES:
Sold 547,071 780,856
Issued in reinvestment of
distributions to shareholders 16,413 2,370
Redeemed (353,559) (221,365)
------------ ------------
Net increase in shares
outstanding 209,925 561,861
Outstanding at beginning of year 1,529,221 967,360
------------ ------------
Outstanding at end of year 1,739,146 1,529,221
============ ============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
23
<PAGE> 85
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
March 31, 1998
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. The Trust consists of four series,
the Gradison Established Value Fund ("Established Fund"), the Gradison Growth
&Income Fund ("Growth & Income Fund"), the Gradison Opportunity Value Fund
("Opportunity Fund") and the Gradison International Fund ("International Fund"),
(collectively, the "Funds"), each of which represents a separate diversified
fund with its own investment policies.
The public offering of shares of the Funds commenced as follows:
DATE OF
PUBLIC OFFERING
---------------
Established Value Fund 8/16/83
Growth & Income Fund 2/28/95
Opportunity Value Fund 8/16/83
International Fund 5/31/95
The investment objective of the Established Fund and the Opportunity Fund is
long-term capital growth by investing primarily in common stocks. The investment
objective of the 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 following is a summary of significant accounting policies followed by the
Funds in the preparation of their 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 or which are
believed to not be valid are valued at their fair value as determined by
management using procedures approved by the Board of Trustees. Short-term
securities with remaining maturities of sixty days or less are valued at
amortized cost, which approximates market value.
Repurchase agreements, which are collateralized by U.S. Government obligations,
are valued at cost which, together with accrued interest, approximates market
value. Collateral for repurchase agreements is held in safekeeping in the
customer-only account of the Funds' custodian. At the time the Funds enter 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 Funds 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
securities and the face amount of the repurchase agreement and accrued interest.
To minimize the possibility of loss, the Funds enter into repurchase agreements
only with selected domestic banks and securities dealers which the Funds'
investment adviser believes present minimal credit risk. Refer to the Funds'
Portfolio of Investments for the face amount of repurchase agreements and
repurchase proceeds as of March 31, 1998.
FUNDS SHARE VALUATION AND DISTRIBUTIONS TO SHAREHOLDERS
The net asset value per share of each Fund is computed by dividing the net asset
value of each Fund (total
24
<PAGE> 86
NOTES TO FINANCIAL STATEMENTS Continued
- --------------------------------------------------------------------------------
March 31, 1998
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.
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 Funds' policy to comply with the provisions of the Internal Revenue
Code applicable to regulated investment companies. As provided therein, in any
fiscal year in which a 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 Funds' intention to declare as dividends in
each calendar year, at least 98% of each Fund's net investment income (earned
during the calendar year) and 98% of each Fund's 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 for each Fund is approximately equal to the cost as
shown on the Statements of Assets and Liabilities. For both financial reporting
and tax purposes, gross unrealized appreciation and gross unrealized
depreciation of securities of the Funds at March 31, 1998 was:
GROSS UNREALIZED GROSS UNREALIZED
APPRECIATION DEPRECIATION
OF SECURITIES OF SECURITIES
------------- -------------
Established Value Fund $205,878,885 $ 584,969
Growth & Income Fund 15,819,545 108,851
Opportunity Value Fund 60,339,374 1,286,983
International Fund 7,538,110 1,192,248
As of March 31, 1998 the International Fund had a capital loss carryforward for
Federal income tax purposes of approximately $360,000 which may be utilized to
offset future net realized capital gains through March 31, 2006 prior to
distributing such gains to shareholders.
EXPENSES
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of the net assets or number of accounts, as appropriate. In all other
respects, expenses are charged to the respective Fund as incurred on a specific
identification basis.
EXPENSE OFFSET ARRANGEMENT
Each Fund, other than the International Fund, has an arrangement with its
custodian bank whereby the custodian's fees are reduced by credits earned on
each Fund's cash on deposit with the bank. This deposit arrangement is an
alternative to overnight investments. The credits are shown as a reduction of
expenses on the Statements of Operations.
ORGANIZATION EXPENSES
Expenses of organization of the Growth & Income Fund and the International Fund
have been capitalized
25
<PAGE> 87
NOTES TO FINANCIAL STATEMENTS Continued
- --------------------------------------------------------------------------------
March 31, 1998
and are being amortized on a straight-line basis over 60 months commencing upon
the public offering of the respective Fund's shares.
INTERNATIONAL FUND FOREIGN CURRENCY TRANSLATION
The accounting records of the International 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 International 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 International 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.
INTERNATIONAL FUND FORWARD FOREIGN CURRENCY CONTRACTS
During the year ended March 31, 1998, the International Fund entered into
forward foreign currency contracts under which it was obligated to exchange
currencies at specified future dates. The International Fund's currency
transactions were 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,
1998:
PORTFOLIO HEDGES:
U.S.
BUY/ FOREIGN DOLLAR SETTLEMENT UNREALIZED
SELL AMOUNT CURRENCY PROCEEDS DATE APPRECIATION
---- ------ -------- -------- ---------- ------------
German
Sell 4,900,000 Deutschemark $2,680,525 4/15/98 $27,165
Buy 1,200,000 British Pound 1,976,400 4/15/98 39,150
------
$66,315
======
At March 31, 1998, the Fund had sufficient cash and/or securities to cover any
commitments under these contracts.
INTERNATIONAL FUND 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
International
26
<PAGE> 88
NOTES TO FINANCIAL STATEMENTS Continued
- --------------------------------------------------------------------------------
March 31, 1998
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 $567,262 have been segregated with
the custodian for the following open stock index futures contracts at March 31,
1998.
OPEN
MARKET MARKET UNREALIZED
TYPE EXPIRATION VALUE VALUE (DEPRECIATION)
---- ---------- ------ ------ --------------
Long Nikkei 300(Yen) 6/98 $593,821 $582,326 $(11,495)
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 Funds pay McDonald a fee computed and accrued daily and paid
monthly based upon each Fund's daily net assets, other than the International
Fund, 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. The
International Fund pays McDonald a fee computed and accrued daily and paid
monthly based upon its daily net assets at the annual rate of 1.00% of the first
$100 million of its 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 Sub-Advisor for the International Fund pursuant to
a Sub-Advisor 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.
The Agreement provides that McDonald bears the costs of salaries and related
expenses of executive officers of the Trust who are necessary for the management
and operations of the Funds. 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 Funds.
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 Funds. Effective July 1,
1997, the Funds pay McDonald a monthly fee for transfer agency and
administrative services at an annual rate of $18.50 per shareholder non-zero
balance account and $5.00 per closed shareholder account, as defined, plus
out-of-pocket costs for statement paper, statement and reply envelopes and reply
postage. Prior to July 1, 1997 the Funds, other than the International Fund,
paid 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. Prior to July 1, 1997 the International Fund paid 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 Funds, other than
the International Fund, pay 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. The International 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.
27
<PAGE> 89
NOTES TO FINANCIAL STATEMENTS Continued
- --------------------------------------------------------------------------------
March 31, 1998
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 Growth & Income Fund and the International Fund
if, and to the extent that, expenses (excluding brokerage commissions, taxes,
interest and extraordinary items) borne by the respective Fund in any fiscal
year exceed 1.50% with respect to the Growth & Income Fund, and 2.00% with
respect to the International Fund, of the average net assets of the respective
Fund. This agreement is in effect until July 31, 1998 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
a Fund for other expenses in order to limit the Fund's expenses to a specified
percentage of average net assets lower than the amount subject to the agreement.
For the year ended March 31, 1998, McDonald waived $59,867 of advisory fees and
distribution expenses of $52,962 with respect to the International Fund.
In accordance with the terms of a Distribution Plan adopted under Rule 12b-1 of
the Investment Company Act of 1940, the Funds pay 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 Funds' average daily net assets. The Funds also pay McDonald a fee
for its assistance in selling shares of the Fund including advising shareholders
regarding purchase, sale and retention of Funds 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 year ended March 31, 1998, cost of purchases, and proceeds from the sale
of securities, excluding short-term securities, amounted to:
COST OF PROCEEDS
PURCHASES FROM SALES
--------- ----------
Established Value Fund $71,681,680 $82,965,939
Growth & Income Fund 22,952,595 1,428,477
Opportunity Value Fund 44,047,629 45,068,610
International Fund 24,162,712 21,214,411
28
<PAGE> 90
ARTHUR ANDERSEN
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees
of the Gradison Growth Trust:
We have audited the accompanying statements of assets and liabilities, including
the portfolio of investments, of the Gradison Growth Trust (comprising,
respectively, the Gradison Established Value Fund, Gradison Opportunity Value
Fund, Gradison Growth & Income Fund and the Gradison International Fund) as of
March 31, 1998, and the related statements of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, 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 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, 1998, by correspondence with custodians and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all the material respects, the financial position of
each of the respective portfolios constituting the Gradison Growth Trust as of
March 31, 1998, the results of their operations for the year then ended, the
changes in their net assets for each of the two years in the period then ended,
and their financial highlights for the periods indicated thereon, in conformity
with generally accepted accounting principles.
[SIGNATURE, ARTHUR ANDERSEN LLP]
Cincinnati, Ohio,
May 6, 1998
29
<PAGE> 91
GRADISON GROWTH TRUST
Gradison 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:
58O 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 August 1, 1998 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 August 1, 1998.
<PAGE> 92
<TABLE>
<CAPTION>
<S> <C> <C>
CONTENTS LOCATION IN PROSPECTUS
___________________________PAGE
INVESTMENT POLICIES Investment objectives,
AND RESTRICTIONS 4 policies and risks.
PURCHASE OF SHARES 5 Purchase and Redemptions
REDEMPTION OF SHARES 6 Purchase and Redemptions
EXCHANGE PRIVILEGE 7 Optional Shareholder Service
Telephone Exchanges 7
Written Exchanges 7
General Exchange
Information 7
TAXES 8 Taxes
NET ASSET VALUE 10 Net Asset Value
PORTFOLIO TRANSACTIONS 10
INVESTMENT ADVISER 12 Management of the Fund
Advisory Agreement 13
Distribution 15
Transfer Agent and
Accounting Services
Agreement 17
TRUSTEES AND OFFICERS
OF THE TRUST 18
DESCRIPTION OF THE TRUST 20 General Information
INVESTMENT PERFORMANCE 22 Performance Calculations
CUSTODIAN 22
ACCOUNTANTS 23
</TABLE>
2
<PAGE> 93
<TABLE>
<CAPTION>
<S> <C> <C>
LEGAL COUNSEL 23
SALES BROCHURE INFORMATION 24
FINANCIAL STATEMENTS
Following Sales Brochure Information Financial Highlights
</TABLE>
3
<PAGE> 94
INVESTMENT POLICIES AND RESTRICTIONS
In addition to the investment restrictions described in the Prospectus, Gradison
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)
4
<PAGE> 95
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
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. (4) 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. For purposes of the restriction prohibiting the Fund
from investing more than 25% of its assets in companies in the same industry
(see "Investment Policies - Growth and Income Fund" in the Prospectus), the
Directory of Companies Filing Annual Reports with the Securities and Exchange
Commission (which utilizes the Standard Industrial Classification Codes
promulgated by the Office of Management and Budget of the Executive Office of
the President) is used to determine industry classifications.
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
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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").
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.
The Contingent Deferred Sales Charge is waived on purchases through McDonald and
Gradison and on purchases in connection with "wrap accounts" because the
Distributor is not paying a sales commission to dealers on such purchases;
therefore, the CDSC is not needed to reimburse the Distributor for such
commissions in the event of a redemption made during the CDSC period. (The
Distributor compensates its own employees for Fund share sales, some of which
compensation may be recouped in the event of redemption of shares on which
compensation has been paid within certain time periods.) The CDSC is waived on
the death or disability of shareholders because of the hardships involved in
such situations. The CDSC is waived on certain redemptions in IRA and retirement
accounts because the redemptions may not be voluntary and for competitive
reasons.
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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 U.S. Government Reserves ("GMU"), Gradison Government Income
Fund ("GIF"), Gradison Ohio Tax-Free Income Fund ("GMO"), Gradison Established
Value Fund ("EST"), Gradison Opportunity Value Fund ("OPP") and the Gradison
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 EXCHANGE
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 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
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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 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 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, for treatment 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 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 capital gains (the excess of net long-term capital
gains over net short-term capital loss) is 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 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 gain distribution. To the extent
that the net asset value of the
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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.
In order to continue to qualify for treatment as a regulated investment company
under the Code, the Fund must distribute to its shareholders for each taxable
year at least 90% of its investment company taxable income (consisting generally
of net investment income plus net short-term capital gain, if any), and must
meet several additional requirements. For the Fund, these requirements include
the following: (1) the Fund must derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of securities and certain other
income; (2) at the close of each quarter of the Fund's taxable year, at least
50% of the value of its total assets must be represented by cash and cash items,
U.S. government securities and other securities, with these other securities
limited, in respect of any one issuer, to an amount that does not exceed 5% of
the value of the Fund's total assets and that does not represent more than 10%
of the issuer's outstanding voting securities; and (3) at the close of each
quarter of the Fund's taxable year, not more than 25% of the value of its total
assets may be invested in securities (other than U.S. government securities) of
any one issuer.
The Fund will be subject to a nondeductible 4% excise tax to the extent it fails
to distribute by the end of any calendar year substantially all of its 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 shares for more than one year.
Any loss realized upon a taxable disposition of shares held for six months or
less will be
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treated as a long-term capital loss to the extent of any capital gain
distributions received with respect to such shares.
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, Martin Luther King Jr. 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 pursuant to procedures
approved by the Board of Trustees and subject to oversight 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
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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 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-l 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. 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
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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.
The Adviser also serves as the investment adviser to GMU, GMO, GIF and the
Gradison 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, 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 years ended March 31, 1996, March 31, 1997 and March 31,1998, the
Fund's portfolio turnover rate (see page 4 of the prospectus) was respectively
3%, 16.0%, and 4%, the aggregate brokerage commissions paid by the Fund were
$11,195, $17,405, and $30,261.
INVESTMENT ADVISER
The Adviser manages 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
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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-l 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.
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
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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 years
ended March 31, 1996, March 31, 1997, and March 31, 1998, the Adviser received
respectively $0, $72,378, and $267,948 as investment advisory fees and would
have received $42,321, $ 117,370, and $267,948 as investment advisory fees if
not for the waiver of fees.
The Investment Advisory Agreement also provides that the Adviser, as a
registered broker-dealer, will distribute the shares of the Fund in states in
which it may be qualified to do so, upon request of the Trust. The Adviser
accepts orders for the purchase of such shares at net asset value only, and no
sales commission, fee or other Charge is incurred by the investor other than
charges specified in the Fund's 12b-1 plan. The Adviser receives no compensation
for acting as the Trust's distributor except as may be provided pursuant to the
Distribution Plan of the Trust.
The Investment Advisory Agreement further provides that in the absence of
willful misfeasance, bad faith or gross negligence in the performance of its
duties thereunder, or reckless disregard of its obligations thereunder, the
Adviser is not liable to the Fund or any of its shareholders for any act or
omission by the Adviser. The Agreement in no way restricts the Adviser from
acting as an investment manager or adviser for others.
The Investment Advisory Agreement grants to the Trust the right to use the name
"Gradison" and "McDonald" as a part of its name, without charge, subject to
withdrawal of such right by the Adviser upon not less than 30 days' written
notice to the Trust and subject to the automatic termination of such right
within 30 days after the termination of the Investment Advisory Agreement for
any reason. The Investment Advisory Agreement does not impair the right of the
Adviser to use the name Gradison or McDonald in the name of or in connection
with any other business enterprise with which it is or may become associated.
The Investment Advisory Agreement continues in effect as to the
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<PAGE> 105
Fund 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 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
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 Trust under the Plan within the limitation described
above for any activity primarily intended to result in the sale of Fund shares
including but not 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
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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 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.
In approving the Plan, the Board of Trustees concluded that there was a
reasonable likelihood that the Plan would benefit the Trust and its
shareholders. The Plan (together with any agreements relating to implementation
of the Plan) continues in effect for a period of more than one year only so long
as such continuance is specifically approved at least annually by the vote of a
majority of the Board of Trustees, including the vote of a majority of the
Independent Trustees, cast in person at a meeting called for such purpose. The
Plan may not be amended to materially increase the amount of distribution
expenses incurred by the Fund without the approval of a majority of the
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
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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 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 years ended March 31, 1996, March 31, 1997, and March
31, 1998, the Fund paid $32,555, $90,284, and $206,037 respectively to McDonald
pursuant to the Plan. Of these amounts, one half was paid for rendering
distribution service, and one half for providing personnel services to
shareholders of the Fund.
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 years ended March 31, 1996, March 31, 1997,
and March 31, 1998, the Fund paid $3,887, $63,835, and $87,227 respectively to
McDonald pursuant to this Agreement and if not for the waiver of fees, McDonald
would have received $50,901 pursuant to the Agreement for the fiscal year ended
March 31, 1996.
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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 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 investment companies.
*DONALD E. WESTON (63), 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 investment companies.
DANIEL J. CASTELLINI (58), 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 (71), 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.,
and Cincinnati Milacron Commercial Corp.; Trustee of Summit Investment Trust and
Carillon Investment Trust.
JEROME E. SCHNEE (57), 14 Walt Whitman, Morristown, N. J. 07960 Trustee. Senior
Director, Health, Economics, Johnson and Johnson (Pharmaceuticals), since August
1996. Prior to that, Professor of Management, College of Business
Administration, University of Cincinnati.
RICHARD A. RANKIN, (56) 1717 Dixie Highway, Suite 600, Fort Wright, Kentucky
41011. Trustee. Partner Rankin and Rankin (Public Accountants).
BRADLEY E. TURNER (39), 580 Walnut Street, Cincinnati, Ohio. President. Senior
Managing Director and Director of McDonald; President of all of the Gradison
investment companies.
- --------
*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.
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WILLIAM J. LEUGERS, JR.(56), 580 Walnut Street, Cincinnati, Ohio. Managing
Director and Portfolio Manager of the Gradison Established and Opportunity Value
Funds.
JULIAN BALL (46), 800 Superior Avenue, Cleveland, Ohio. Executive Vice
President. Portfolio Manager of the Gradison Growth & Income Fund; First Vice
President of McDonald since July 1994; prior to that, Vice President of Duff &
Phelps Investment Management Company.
DANIEL R. SHICK (49), 580 Walnut Street, Cincinnati, Ohio. Vice President;
Managing Director of Gradison.
GARY H. MILLER (35), 580 Walnut Street, Cincinnati, Ohio. Vice President
(Gradison Established Value and Opportunity Value Funds); Associate Vice
President of Gradison.
PATRICIA JAMIESON (44), 1800 Superior Avenue, Cleveland, Ohio 44114. Treasurer;
Senior Managing Director and Chief Financial Officer of McDonald; Treasurer of
all of the Gradison investment companies.
RICHARD M. WACHTERMAN (51), 580 Walnut Street, Cincinnati, Ohio 45202.
Secretary. Senior Vice President and General Counsel of Gradison. Secretary of
all of the Gradison investment companies.
MARK A. FRIETCH (39), 580 Walnut Street, Cincinnati, Ohio Assistant Treasurer.
Assistant Treasurer of all of the Gradison investment companies.
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 June 30, 1998, 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.
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<PAGE> 110
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
3/31/98 year ended 12/31/97
<S> <C> <C>
Donald E. Weston $ 0 $ 0
Theodore H. Emmerich $7,000 $25,000
Richard A. Rankin $7,000 $25,000
Jerome E. Schnee $7,000 $25,000
Daniel J. Castellini $7,000 $25,500
</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
U.S. Government Reserves Fund. The Trust does not maintain any other pension or
retirement plans. As of March 31, 1998, $9,523 was payable by the Trust to the
beneficiary of a former trustee who is deceased, and as of December 31, 1997,
$35,085 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, representing the Fund, the
Gradison Established Value Fund, the Gradison Opportunity Value Fund, and the
Gradison 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.
Upon issuance and sale in accordance with the terms of the offering, each share
will be fully paid and non-assessable. Shares have no preemptive, subscription
or conversion rights and
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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 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
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<PAGE> 112
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.
INVESTMENT PERFORMANCE
TOTAL RETURN PERCENTAGE CHANGE:
<TABLE>
<CAPTION>
Since Inception Year Ended
(annualized) March 31, 1998
2/28/95-3/31/98)
<S> <C> <C>
Fund 25.88% 38.00%
Standard & Poor's
Composite Stock 32.99% 47.99%
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, NA. ("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.
22
<PAGE> 113
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.
23
<PAGE> 114
Fact Sheet GRI
(Graphic: Logo)
Growth
& Income
Fund
Gradison Growth and Income Fund seeks long-term capital 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
Stock Index. Gradison believes that a portfolio of quality common stocks with
above average dividend yield and below average price-to-earnings ratio provides
the opportunity for price appreciation and current income while generally
tending to moderate risk.
It is generally the policy of the Gradison Growth & Income Fund to maintain as
fully invested a position as practical at all times.
Symbol GRINX
Ten Largest Stock Positions on March 31, 1998
1. Hewlett Packard COMPUTER PRODUCTS
2. Pitney-Bowes BUSINESS EQUIPMENT
3. Ameritech TELECOMMUNICATIONS
4. Mobil INTERNATIONAL OIL
5. Norwest REGIONAL BANKS
6. Exxon INTERNATIONAL OIL
7. Merck & Company PHARMACEUTICALS
8. American Home Products HEALTHCARE PRODUCTS
9. International Flavors & Fragrances COSMETICS
10. American General FINANCIAL SERVICES
These are the top ten positions of 51 issues representing 35.6% of the portfolio
and are subject to change.
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<PAGE> 115
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 - $1,124,
12/95 - $1,200, 3/96 - $1,247, 9/96 $1,333, 12/96 $1,426, 3/97 $1,475, 12/97 -
$1,855, 3/98 - $2,036.
The performance quoted above on this document 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. Expense reimbursement by the Adviser increased performance during the
period shown. Expense reimbursement may be terminated which would result in
lower performance.
Where the Fund is Invested
The chart at right indicates distribution of the Fund's stock investments on
March 31, 1998. On that date, the Fund maintained 3% liquid cash reserves.
[Graphic of Pie Chart showing Consumer Non-Durables 15%, Technology 11%, Energy
Services 10%, Utilities 10%, Insurance 9%, Computer Products 9%, Financial
Services 8%, Pharmaceuticals 8%, Natural Resources 8%, Industrial Products
Services 6%, Retail Services 4%, Consumer Durables 3%, Transportation 1%.
March 31, 1998
(Graphic: Photo of two
young girls)
Portfolio Manager Profile
Julian C. Ball, CFA, [Graphic: photo of Julian Ball]
First Vice President/Portfolio Manager
Gradison-McDonald Asset Management
Julian Ball is an Executive Vice President and Portfolio Manager of the Gradison
Growth & Income Fund and has been portfolio manager since its inception over
three years ago. Mr. Ball, a Chartered Financial Analyst, has over 10 years of
mutual fund portfolio management experience and has managed portfolios for
25
<PAGE> 116
individuals and institutions for more than eighteen years. He joined Gradison
McDonald Asset Management in 1994.
Julian holds both a Bachelor's of Business Administration degree in Accounting
from Kent State University and a Juris Doctorate degree from Cleveland Marshall
College of Law. He is 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, and the Cleveland Bar
Association.
Profile of Gradison Mutual Funds
Gradison Mutual Funds is a division of McDonald & Company, a leading regional
investment firm which acquired Gradison in 1991. As a registered investment
advisor since 1974 and mutual fund advisors since 1976, Gradison currently
manages in excess of $5 billion in Gradison Mutual Funds and individually
managed accounts.
A prospectus for the Growth & Income Fund or any other Gradison Mutual Fund may
be obtained by calling 513/579-5700 or 800/869-5999. The prospectus contains
more complete information. Read it carefully before you invest.
McDonald & Company Securities, Inc. - Distributor
GMFS 1059 - GRI 3/98
Average Annual Total Return
Chart stating periods ended 3/31/98, Most recent quarter* - +9.71%, 1 year -
+38.00%, 3 year - +26.20%, Since inception (2/28/95) - 25.88%.
*Not Annualized
International Fund
Opportunity Value Fund
Growth & Income Fund
Established Value Fund
Ohio Tax-Free Income Fund
Government Income Fund
Money Market Funds
(Graphic: Logo
Gradison/Mutual Funds
26
<PAGE> 117
[Family of Funds Brochure]
COVER PAGE
YOUR FUTURE STARTS TODAY
Graphic Photo of men, women, children and a dog
Logo
Gradison
Mutual Funds
INSIDE COVER PAGE
YOUR FUTURE STARTS TODAY
Page 1
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 the goal. Whether it's starting a family, buying a house,
saving for education, or planning for retirement. Time is critical. Hesitate and
time will pass you by. Start today and the future is yours.
Page 2
THE MUTUAL FUND STORY
The first mutual fund company was established in 1924 as a private investment
firm for its founders and is still in business today. By 1980, there were fewer
than 600 mutual funds open to investors. Today, there are some 400 fund groups
offering more than 6,000 mutual funds with investments totaling more than $3
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<PAGE> 118
trillion.
Increasingly, mutual funds are the preferred vehicle for individual investors
who are starting and building an investment program. And today, Gradison is a
preferred name in mutual funds for a growing number of investors.
WHY MUTUAL FUNDS?
PROFESSIONAL MANAGEMENT
Mutual funds use investment professionals to manage the assets on a full-time
basis. In addition to their dedicated time and experience, these investment
advisers typically have access to extensive research and other analytical
resources not available to most individual investors.
DIVERSIFICATION
Because a mutual fund has significantly more assets to invest than any
individual participant, it can purchase and effectively manage a more
diversified portfolio than can most individual investors.
FLEXIBILITY
A mutual fund is usually part of a family of funds. Fund families offer an
exchange privilege that allow shareholders to reallocate assets quickly and
easily among the various funds within that family of funds. Shares in any fund
may be
28
<PAGE> 119
purchased or liquidated, often by a phone call, generally on any day that the
New York Stock Exchange is open for business.
Page 3
WHY GRADISON MUTUAL FUNDS?
A RESPECTED NAME FOR SEVEN DECADES
A respected name for seven decades Gradison has been a recognized name in
investment brokerage since 1925. The firm became a registered investment adviser
in 1974 and established its first mutual fund in 1976.
Today, Gradison offers seven mutual funds in a growing family of funds and
manages more than $4 billion in assets in both mutual funds and individually
managed accounts.
EXPERIENCED PORTFOLIO MANAGERS
Gradison portfolio managers average nearly 15 years of experience as
professional portfolio managers and more than 20 years of experience in the
investment field. We believe that this depth of first-hand experience, in both
favorable and unfavorable market environments, sets us apart from those other
fund managers who have yet to manage assets through a full market cycle.
SERVICE
Low Minimum Investment of $1,000
Convenient Automatic Dividend Reinvestment
Automatic Investment Plan
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<PAGE> 120
Automatic Withdrawals and Payment Plans
Access To Funds
Free Exchange Privileges
Check Writing
Wire Transfers
Toll-Free Customer Service
24-Hour Account Information
Account Statements
Year-End summary
Quarterly Newsletter
Shareholder Reports
Internet Access
Page 4
REACHING YOUR INVESTMENT GOALS
FIGHTING INFLATION
Inflation, the increase in the cost of living, has averaged 4% since 1926. While
it has been lower in recent years, it has also been substantially
higher--reaching 14% in the early 1980s. The surest way of beating inflation is
to earn a rate of return on your investments that exceeds the rate of inflation.
Chart: WHAT INFLATION REALLY MEANS
1995 $139,000 Single Family Home
30
<PAGE> 121
2000 $177,403 Graphic: Picture of a
2010 $288,971 partially built home
2025 $600,750
Automobile 1995 $18,359
Graphic Picture of an 2000 $23,431
automobile 2010 $38,167
2025 $79,347
Four Year Public University Education
1995 $26,972 Graphic Picture of a
graduation cap and
2000 $34,424 a diploma.
2010 $58,073
2025 $116,571
Sources: National Association of Realtors; Department of Commerce; College
Board. Future prices are based on a hypothetical average annual inflation rate
of 5%.
EDUCATION
The cost of four years at a private college, including tuition, fees, books and
other miscellaneous expenses, now averages nearly $95,000. It is projected to
reach $170,000 in a decade. The cost of a public college is expected to nearly
double from an average of $45,000 to more than $80,000 over the next ten years.
31
<PAGE> 122
Most families realize that no matter when they start saving and investing for
this purpose, it usually is not soon enough.
BUILDING WEALTH
Many investors overlook the potential of investing in their most productive
years when their incomes are high enough to put aside investment assets and the
demands on their income are less than they inevitably will be later. Such assets
can be invaluable not only for retirement but as emergency assets for unforeseen
occurrences in life.
RETIREMENT
Given the national debate on Social Security and Medicare, the need for
investors to assure adequate retirement assets for both their active retirement
years, and the possibility of their inactive care years, should be
apparent. Many people look solely to their company retirement plans for such
assurance and only realize the need for supplemental assets much later.
YOUR FAMILY'S FUTURE
Providing for the education of a child or grandchild may only be a part of an
investor's concern for future generations. They may have achieved a sufficient
level of personal success to be able to consider investing in order to pass
along significant assets to provide these future generations with greater
assurance for their financial well-being in an uncertain world.
32
<PAGE> 123
GRAPHIC Photo of two women embracing.
Page 5
INTELLIGENT INVESTING
Time is the essential ingredient
Experience has shown that there is no substitute for time in investing.
Historically, the sooner money has been put to work, and the longer it has been
invested, the more likely positive returns have resulted. Conversely, aggressive
investors are more likely to have volatile results for shorter periods. Clearly,
investing for the long-term is considered one of the keys to successfully
creating investment wealth.
THE RULE OF 72:
HELPING YOU IN TAXING TIMES
Certain measurements are well known rules in everyone's daily life. Most people
learn early in life, for example, that twelve inches equals a foot and that
three feet make a year. With investments, similar, but not as well known,
measurement rules apply.
The Rule of 72 allows potential investors to find out how long it will take to
double their money. All you have to do is divide 72 by the estimated interest
rate of an investment, and the answer
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<PAGE> 124
is roughly the number of years needed to double an investment.
Here's the formal equation: Number of years to double the original investment
= 72/ Interest Rate
Using the Rule
Check the table below to see some examples of how the Rule of 72 works.
Rate of Rule of 72 Years to Years to
Return (72/Interest Rate) Double Quadruple
3% 72/3 24 48
6% 72/6 12 24
9% 72/9 8 16
12% 72/12 6 12
The rates of return shown are for illustrative purposes only and are not
historical results or projections of the returns of any Gradison Mutual Fund.
(Pie Charts)
THE LONGER YOUR TIME FRAME, THE GREATER THE CHANCE OF REWARD
Percent of time stocks had positive results for rolling periods beginning
December 31, 1925, and ended December 31, 1995.
71% 89% 97% 100%
34
<PAGE> 125
1 year 5 year 10 year 15 Year
holding holding holding holding
periods periods periods periods
Stocks will often rise and fall in value over the short term. When investing for
growth, the longer your investment time frame, the greater the chance equity
investments will produce positive results.
Source: Ibbotson Associates, Chicago. Based on the performance of the S & P 500,
an unmanaged index of stocks. This information is historical and is not a
guarantee of future performance of the S & P 500 or any Gradison Mutual Funds.
THE POWER OF COMPOUNDING
The term "compounding" is usually applied to investment income that is
constantly reinvested to generate additional income. However, the concept of
compounding applies equally well to investment profits that are constantly
reinvested. The compounding of income and profits over long periods of time can
have a meaningful impact on overall investment results. Again, time invested is
invaluable.
(CHART) THE POWER OF COMPOUNDING IN A HYPOTHETICAL $10,000
INVESTMENT IN THE S&P 500
35
<PAGE> 126
$170,000 $168,820...................
$150,000 In the time frame illustrated here,
$130,000 reinvestment of all income and
$110,000 dividends resulted in $168,820,
$ 90,000 while not reinvesting income
$ 70,000 and dividends results in $59,304.
$ 50,000 $ 59,304...................
$ 30,000
$ 10,000
1/1/69 12/31/95
This chart is for illustrative purposes only. There is, of course, no
correlation between the total return for the S&P 500 and past or future
performance of any Gradison Mutual Fund. The S&P 500 is an unmanaged index
compiled by Standard & Poor's Corporation. Investors cannot invest in the S&P
500. Past performance cannot guarantee future results.
Source: The American Funds Group
Page 6
DISCIPLINED PERIODIC INVESTMENTS
It is our experience that the most difficult decision for most investors is not
whether to invest, but when to invest. It is this dilemma that causes many
investors to stay on the investment sidelines.
36
<PAGE> 127
Dollar cost averaging is a widely used investment concept in the purchase of
mutual funds that allows investors to overcome this difficult decision by
periodically investing(such as weekly, monthly, or quarterly) the same dollar
amount over a long period of time. Gradison Mutual Funds offer a periodic
investment plan to make the process easier and more systematic.
CHART DOLLAR COST AVERAGING CAN REDUCE YOUR AVERAGE COST PER SHARE
Investment Share Shares
Amount Price Purchased
March $ 500 $10.00 50
June $ 500 $12.50 40
September $ 500 $ 5.00 100
December $ 500 $10.00 50
$2,000 $37.50 240
Average Price Per Share
($37.50 divided by 4) $9.38
Average Cost Per Share
($2,000 divided by 240) $8.33
Dollar cost averaging will never result in better performance than picking the
best times to invest, if you were able to do so. But dollar cost averaging
allows you invest the same amount periodically as the Fund's share price
fluctuates. You therefore will purchase more shares of the Fund in those months
when the
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<PAGE> 128
price per share is low and less shares when the price is high. Most importantly,
dollar cost averaging can help investors make the commitment to invest.
Of course, dollar cost averaging does not assure a profit and does not protect
against loss in declining markets. And since dollar cost averaging involves
continuous, periodic investing, you should consider your ability to continue
purchases over an extended period of time.
(Graphic) Photo of two men, two women, a boy, girl and a dog walking.
CONSIDER GRADISON MUTUAL FUNDS
<TABLE>
<CAPTION>
<S> <C> <C>
Equity Funds Fixed Income Fund Money Market Funds
Established Value Fund Government Income Fund U. S. Government Reserves
Growth & Income Ohio Tax Free Income Fund Municipal Cash Series 2
Fund High Yield Fund 1 Ohio Municipal Cash Trust 2
Opportunity Value Fund Michigan Municipal Cash Trust 2
International Fund
</TABLE>
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<PAGE> 129
1. Planned for 1997-1998 and sold by prospectus only.
2. Federated Advisers acts as investment adviser for
these funds and Federated Securities Corp. acts as
distributor.
PAGE 7
GRADISON EQUITY FUNDS
GRADISON ESTABLISHED VALUE FUND
The Established Value Fund invests for long-term capital growth using a
disciplined stock selection process to identify investments from the large
established companies that make up the Standard & Poor's 500 Composite Stock
Price Index, and other similar sized companies, which the investment adviser
considers to be undervalued. The stock selection process requires that companies
meet a number of objectively measured criteria of value including the companies'
relative book values, their price to earnings ratios, and other similar factors.
GRADISON GROWTH AND INCOME FUND
The Growth & Income Fund invests for long-term capital growth, as well as
current income and growth of income. The Fund puts particular emphasis on
identifying companies with higher than
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<PAGE> 130
average growth rates, above average dividend returns, a history of paying
increasing dividends, and which the investment adviser considers to be
undervalued. We believe that stocks meeting this criteria provide the
opportunity for price appreciation and current income while tending to moderate
risk.
GRADISON OPPORTUNITY VALUE FUND
The Opportunity Value Fund uses a disciplined stock selection process to
identify smaller companies, generally with market capitalization of less than
$500 million that meet a number of objectively measured criteria of value
including the companies' growth rates, relative book value, their price to
earnings ratios, and other similar factors and which the investment adviser
considers to be undervalued. The securities of smaller companies generally are
more volatile than those of larger companies.
GRADISON INTERNATIONAL FUND
Blairlogie Capital Management of Edinburgh, Scotland, the subadviser to the
International Fund, employs a "hybrid strategy" that invests in both developed
international markets and in emerging international markets.
Using a disciplined methodology, Blairlogie first identifies the countries that
offer the most favorable investment environment,
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<PAGE> 131
and then selects the individual investments in those countries. Generally the
amount invested in emerging markets will not exceed 30% of the Fund's assets.
International investing, particularly in emerging markets, involves greater
risks than U.S. investing, such as political instability and currency
fluctuation.
THE CASE FOR COMMON STOCKS
Stocks, more than most other types of investments, have historically shown the
ability to grow faster than inflation and to create wealth over long investment
periods. An investor who has long-term goals of ten years or more should
strongly consider equities as a significant part of his or her investment
portfolio. Historically, the longer an investor has held a well diversified
portfolio of stocks the better that investor has fared, as evidenced in the pie
chart on page 5.
THE ADVANTAGES OF BONDS
Although bond portfolios have not provided returns as high as stocks over long
periods of time (as illustrated in the graph on page 9), they have provided less
volatility and more reliable income than stocks. Investors with a relatively
short investment horizon, may need to avoid the volatility of stocks. For
example when an investor nears retirement, at a time when assets are needed; or
to add greater stability to a portfolio by combining
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<PAGE> 132
both stocks and bonds. Importantly, bond mutual funds provide the ability to
reinvest these cash flows immediately and completely to take full advantage of
compounding.
Page 8
GRADISON FIXED INCOME FUNDS
GRADISON GOVERNMENT INCOME FUND
Designed to provide current monthly income from a portfolio of intermediate to
long-term U.S. Government securities, the Fund's policy is to invest only in
those Government securities that are guaranteed as to principal and interest by
the full faith and credit of the United States Government and in repurchase
agreements collateralized by such obligations. The Fund is managed with an
emphasis on total return, that is the combined effect of both income and changes
in share value. Although the securities in the portfolio are guaranteed as to
principal and interest by the U.S. Government, the market value of the Fund's
shares will fluctuate with changes in interest rates and other market
conditions. Mortgage backed securities may be subject to prepayment risk.
Graphic: Photo of two young girls each sitting on an adult's shoulder.
GRADISON OHIO TAX-FREE INCOME FUND
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<PAGE> 133
Designed for Ohio investors who can benefit from a portfolio of long-term
municipal bonds that are exempt from both federal and Ohio income taxes, the
Fund provides monthly income by investing in Ohio municipal securities issued to
finance public institutions and public works, and in private activity municipal
bonds. In order to gain favorable yields, the Fund invests up to 20% of its
assets in securities that may be subject to the alternative minimum tax for some
investors.
Page 9
INDICES OF INVESTMENTS
IN U. S. CAPITAL MARKETS
(Chart) Comparison of Investments in Small Company Stocks, Large Company Stocks,
Long-Term Government Bonds, U. S. Treasury Bills to Inflation for the period
beginning 1925 through 1995, $0 to $10,000. Ending values: Small Company Stocks
$3,822; Large Company Stocks $1,113; Long-Term Government Bonds $34; U. S.
Treasury Bills $13; Inflation $9. 1926-1995
(YEAR-END 1925 = $1.00)
This chart is intended to show the growth of one dollar invested in different
types of investments and the Consumer Price Index. It assumes reinvestment of
all dividend and interest payments. Past performance does not ensure further
results.
43
<PAGE> 134
SMALL COMPANY STOCKS are represented by the fifth capitalization quintile of
stocks on the NYSE for 1926-1981 and thereafter, the performance of the
Dimensional Fund Advisors (DFA) Small Company Fund;
LARGE COMPANY STOCKS are represented by the Standard & Poor's 500 Stock
Composite Index (S&P 500);
LONG-TERM GOVERNMENT BONDS are represented by a one-bond portfolio with a
maturity near twenty years;
U. S. TREASURY BILLS are represented by rolling over each month a one-bill
portfolio containing, at the beginning of each month, the bill having the
shortest maturity not less than one month. INFLATION is represented by the
Consumer Price Index for All Urban Consumers (CPI-U), not seasonably adjusted.
Source: Ibbotson, Roger G., and Rex A. Sinquefield, Stocks, Bonds, Bills, and
Inflation (SBBI), 1995, updated in Stocks, Bonds, Bills, and Inflation 1996(TM),
Ibbotson Associates, Chicago. All rights reserved.
The indices and securities in the chart above do not reflect the actual
portfolio composition, performance, or fees and expenses associated with
investing in any Gradison Mutual Fund. The chart is not intended to imply future
performance of any of these investments or any Gradison Mutual Fund. Performance
figures of Gradison Mutual Funds are available by request from Gradison. The
returns for stocks include reinvestment of dividends and interest. Government
bonds and Treasury Bills are guaranteed by
44
<PAGE> 135
the U.S. Government and, if held to maturity, offer a fixed rate of return and
fixed principal value.
In existing disclaimer replace "Past performance does not ensure future
results" with: "The performance shown in the above chart is historical and is
not intended to imply future performance of any of these investments or
of any Gradison fund.
Page 10
GRADISON MONEY MARKET FUNDS
The money market funds offered by the Gradison Mutual Funds provide a full
complement of services including checkwriting, high quality personalized checks,
and the convenience of automatic sweeping of dividends from the Gradison Funds.
The money market funds provide clear, monthly statements that include the name
of the payees of any checks written against the account, as well as a highly
useful year-end summary of all transactions. Graphic Photo of a man and woman
seated next to one another going through documents.
GRADISON U. S. GOVERNMENT RESERVES
A full service money market fund designed to provide current money market yields
by investing exclusively in securities issued by the U.S. Government, its
agencies or instrumentalities. The fund has tax benefits in that it invests, to
the greatest extent reasonable, only in selected U. S. Government securities
that are
45
<PAGE> 136
not taxable by the states or by local governments.
MUNICIPAL MONEY MARKET FUNDS
Gradison also makes available a general municipal money market fund that
provides income exempt from federal taxation and separate Ohio and Michigan
money market funds that provide income that is not taxable at the federal state
or local levels in those states. A portion of the income of both funds could be
subject to the Alternative Minimum Tax (AMT) for investors who are subject to
AMT.
For more complete information about the Gradison Funds, including sales charges
and expense, please obtain the appropriate prospectuses from your investment
consultant or call 800-869-5999. Please read the prospectuses carefully before
you invest or send money. Investment returns and principal of the funds will
fluctuate so that you may have a gain or a loss when you sell your shares. Money
market funds are neither insured nor guaranteed by the U.S. Government or any
other entity. There can be no assurance that these funds will maintain a
constant net asset value of $1.00 per share.
(Graphic) Man and woman sitting at a desk opposite each other.
Page 11
WORKING WITH YOUR PROFESSIONAL INVESTMENT CONSULTANT
We believe that your professional investment consultant is in the best position
to provide you with investment advice. Your consultant has the training and
experience to provide you with guidance in making your investment decisions. We
encourage you to share as much information as possible about your investment
goals and your current personal and financial situation.
46
<PAGE> 137
Above all, we suggest you ask your investment consultant whatever you feel you
need to know to help you fully understand the investments you are making.
SERVICE YOU CAN COUNT ON
LOW MINIMUM INVESTMENT OF $1,000 Low subsequent investment minimums of $50.
CONVENIENT AUTOMATIC DIVIDEND REINVESTMENT of income dividends and/or capital
gain dividends into any Gradison fund.
AUTOMATIC INVESTMENT PLAN allows authorization of regular, systematic
investments from bank accounts, money market funds and automated payroll into
any Gradison fund.
AUTOMATIC WITHDRAWALS AND PAYMENT PLANS Can be set up to pay you or designated
payees a specified amount monthly or quarterly.
ACCESS Shares can be redeemed at the then-current market value on any business
day.
Page 12
EXCHANGE PRIVILEGES Including convenient telephone exchanges allows investors to
move money from one Gradison Mutual Fund to another at any time.
47
<PAGE> 138
CHECK WRITING
For all money market funds includes high quality personalized checks, check
payee names on account statements, and return of canceled checks. 4
WIRE TRANSFERS Specified amounts can be transferred to pre-authorized accounts
at other financial institutions. 5
4. A fee applies to checks under $100.00
5. A fee applies to wires.
TOLL-FREE CUSTOMER SERVICE Knowledgeable shareholder service representatives are
available during business hours at 800-869-5999.
24-HOUR ACCOUNT INFORMATION During non-business hours TeleFund 24 provides
touch-tone access to the most recent prices of Gradison Mutual Funds, current
money market yield, and balances on all Gradison Mutual Funds accounts.
ACCOUNT STATEMENTS Clear, concise and informative.
YEAR-END SUMMARY A highly useful summary of all activity.
QUARTERLY NEWSLETTER Your Future provides Gradison shareholders with timely
information about investing, mutual funds and the Gradison family of funds.
SHAREHOLDER REPORTS Semiannual updates on fund strategy,
48
<PAGE> 139
performance and portfolio holdings.
INTERNET World Wide Web site www.gradisonfunds.com provides quarterly updates on
Gradison Mutual Funds, as well as other information of interest to mutual fund
investors.
GETTING STARTED
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. The most important thing is to get started.
Call your Investment Consultant or contact Gradison Mutual Funds at
800-869-5999.
START TODAY AND THE FUTURE IS YOURS.
Graphic: Photo of a baby smiling.
Back Cover
Logo
Gradison
Mutual Funds
1997 Gradison Mutual Funds 580 Walnut Street Cincinnati, Ohio 45202 800/869-5999
513/579-5000 htt;:/WWW.gradisonfunds.com
49
<PAGE> 140
ESTABLISHED VALUE FUND
- --------------------------------------------------------------------------------
March 31, 1998
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
May 1, 1988 to March 31, 1998
5/1/88 3/31/98
------ -------
GRADISON ESTABLISHED VALUE FUND $10,000 $37,296
S & P 500 $10,000 $57,221
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED MARCH 31, 1998
10 YEARS 5 YEARS 3 YEARS 1 YEAR
-------- ------- ------- ------
Established Value Fund 14.21% 17.35% 23.07% 29.67%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. Performance figures
are historical. The investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than the original cost. The Standard & Poor's (S&P) 500 Composite Stock Price
Index is an unmanaged group of common stocks widely recognized as an index of
market performance the investment returns of which do not include any securities
transaction expenses. Total returns shown include changes in share value and
reinvestment of distributions.
PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS - 73.88% VALUE
------ ------------------------- -----
AEROSPACE/DEFENSE COMPANIES - 6.44%
84,616 Lockheed Martin Corporation $ 9,519,300
80,000 Northrop Grumman Corporation 8,595,000
126,400 Raytheon Company Cl. B 7,378,600
140,000 Textron, Inc. 10,780,000
-----------
36,272,900
-----------
CHEMICALS - 2.03%
255,000 Engelhard Corporation 4,845,000
134,000 Hercules, Inc. 6,616,250
-----------
11,461,250
-----------
COMPUTING PRODUCTS - 9.69%
400,000 Compaq Computer Corporation 10,350,000
300,000 Data General Corporation(1) 5,306,250
180,000 Harris Corporation 9,382,500
160,000 Intel Corporation 12,480,000
250,000 Sun Microsystems, Inc.(1) 10,421,875
150,000 Tektronix, Inc. 6,693,750
-----------
54,634,375
-----------
CONSUMER NON-DURABLES - 1.96%
190,000 Coors (Adolph) Company Cl. B 6,602,500
142,000 RJR Nabisco Holdings Corporation 4,446,375
-----------
11,048,875
-----------
CONSUMER DURABLES - 6.69%
150,000 Agco Corporation 4,453,125
133,000 Black & Decker Corporation 7,057,312
190,000 Brunswick Corporation 6,626,250
97,000 Goodyear Tire & Rubber
(The) Company 7,347,750
100,000 Pulte Corporation 4,650,000
166,500 Snap-on, Inc. 7,596,563
-----------
37,731,000
-----------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
8
<PAGE> 141
ESTABLISHED VALUE FUND
- --------------------------------------------------------------------------------
March 31, 1998
PORTFOLIO OF INVESTMENTS Continued
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS (CONTINUED) VALUE
------ ------------------------- -----
ENERGY - 6.21%
109,000 Ashland, Inc. $ 6,172,125
145,000 Coastal Corporation 9,443,125
100,000 Nicor, Inc. 4,225,000
250,000 Pride International, Inc.(1) 5,968,750
50,000 Royal Dutch Petroleum Company 2,840,625
82,000 Western Atlas, Inc.(1) 6,344,750
-----------
34,994,375
-----------
FINANCIAL SERVICES - 9.07%
85,000 Beneficial Corporation 10,566,562
100,000 Household International, Inc. 13,775,000
150,000 Provident Companies 5,146,875
70,000 Transamerica Corporation 8,155,000
225,000 Travelers, Inc. 13,500,000
-----------
51,143,437
-----------
INDUSTRIAL PRODUCTS - 9.82%
118,000 Cooper Industries, Inc. 7,013,625
180,000 Goodrich (B.F.) Company 9,191,250
165,000 Ingersoll-Rand Company 7,909,688
148,000 Johnson Controls, Inc. 8,981,750
175,950 Parker Hannifin Corporation 9,017,438
185,000 Premark International 6,128,125
210,000 Timken Company 7,100,625
-----------
55,342,501
-----------
INSURANCE - 7.11%
142,500 Berkley (W.R.) Corporation 6,750,937
42,000 Hartford Financial Services Group 4,557,000
82,000 MBIA, Inc. 6,355,000
110,000 Providian Corporation 6,318,125
143,000 SAFECO Corporation 7,811,375
93,000 St. Paul Companies, Inc. 8,288,625
-----------
40,081,062
-----------
RETAIL TRADE - 8.90%
320,000 American Stores Company 8,320,000
150,000 Dayton-Hudson Corporation 13,200,000
135,000 Dillard's, Inc. 4,986,562
110,000 Federated Department Stores,
Inc.(1) 5,699,375
400,000 K Mart Corporation(1) 6,675,000
99,000 Mercantile Stores, Inc. 6,651,563
100,000 Supervalu, Inc. 4,662,500
-----------
50,195,000
-----------
SERVICES - 2.75%
150,000 Fingerhut Companies, Inc. 3,890,625
156,000 Pittston Brink's Group 5,947,500
254,000 Wendy's International, Inc. 5,667,375
-----------
15,505,500
-----------
TELECOMMUNICATIONS - 1.05%
300,000 Andrew Corporation(1) 5,925,000
-----------
TRANSPORTATION - 2.16%
213,000 America West Holdings Co.(1) 5,458,125
180,000 Norfolk Southern Corporation 6,727,500
-----------
12,185,625
-----------
TOTAL COMMON STOCKS
(COST $211,226,984) 416,520,900
-----------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
9
<PAGE> 142
ESTABLISHED VALUE FUND
- --------------------------------------------------------------------------------
March 31, 1998
PORTFOLIO OF INVESTMENTS Continued
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL INTEREST
AMOUNT COMMERCIAL PAPER - 15.90% MATURITY RATE(2) VALUE
------ ------------------------- -------- -------- -----
<S> <C> <C> <C> <C>
$10,000,000 Ameritech Corporation 4/08/98 5.44% $ 9,989,422
10,000,000 Eastman Kodak Co. 4/09/98 5.51 9,987,756
10,000,000 Tribune Co. 4/17/98 5.48 9,975,644
10,000,000 Goldman Sachs Group (The), L.P. 4/21/98 5.50 9,969,444
10,000,000 American Express Company 4/29/98 5.48 9,957,378
10,000,000 International Business Machines Credit Corporation 5/05/98 5.48 9,948,245
10,000,000 Avco Financial Services, Inc. 5/11/98 5.50 9,938,889
10,000,000 Chevron Corporation 5/13/98 5.47 9,936,183
10,000,000 Equitable Resources, Inc. 5/20/98 5.51 9,925,071
-----------
TOTAL COMMERCIAL PAPER (COST $89,628,032) 89,628,032
-----------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT - 10.22%
-----------------------------
<S> <C> <C> <C> <C>
57,610,000 First National Bank of Chicago, dated 3/31/98, collateral:
U.S. Treasury Note 6.25%; due 5/31/00, market value $35,555,031
and U.S. Treasury 6.125%; due 12/31/01, market value $26,340,086
(repurchase proceeds $57,619,362) (COST $57,610,000) 4/01/98 5.85 57,610,000
------------
TOTAL INVESTMENTS, AT VALUE (NOTE 1) (COST $358,465,016) - 100% $563,758,932
============
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Non-income producing
(2) For commercial paper, the interest rate is the discount rate at the time
of purchase by the Fund. For the repurchase agreement, the rate shown
reflects the actual rate of return to the Fund.
See accompanying notes to financial statements.
10
<PAGE> 143
GROWTH & INCOME FUND
- --------------------------------------------------------------------------------
March 31, 1998
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
February 28, 1995 to March 31, 1998
2/28/95 3/31/98
------- -------
GRADISON GROWTH & INCOME FUND $10,000 $20,355
S & P 500 $10,000 $24,118
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED MARCH 31, 1998
INCEPTION 3 YEARS 1 YEAR
--------- ------- ------
Growth & Income Fund 25.88% 26.20% 38.00%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. Performance figures
are historical. The investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than the original cost. The Standard & Poor's (S&P) 500 Composite Stock Price
Index is an unmanaged group of common stocks widely recognized as an index of
market performance the investment returns of which do not include any securities
transaction expenses. Expense reimbursement by the Fund's investment adviser
increased return during the period shown. Total returns shown include changes in
share value and reinvestment of distributions.
PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS - 97.47% VALUE
------ ---------------------- -----
BANK SERVICES - 7.70%
25,000 Huntington Bancshares, Inc. $ 909,375
12,000 Morgan (J.P.) & Company, Inc. 1,611,750
50,000 Norwest Corporation 2,078,125
----------
4,599,250
----------
CHEMICALS - 4.91%
20,000 Avery-Dennison Corporation 1,067,500
20,000 Du Pont (E.I.) de Nemours
& Company 1,360,000
20,000 Schulman, (A.), Inc. 502,500
----------
2,930,000
----------
CONSUMER DURABLES - 3.24%
35,000 Cooper Tire & Rubber Company 831,250
20,000 TRW, Inc. 1,102,500
----------
1,933,750
----------
CONSUMER NON-DURABLES - 14.66%
30,000 Archer Daniels Midland Corporation 658,125
10,000 Bestfoods 1,168,750
15,000 Heinz (H.J.) Company 875,625
40,000 International Flavors &
Fragrances, Inc. 1,885,000
20,000 Kellogg Company 862,500
20,000 Lancaster Colony Corporation 846,250
20,000 Newell Company 968,750
15,000 Pepsico, Inc. 640,312
10,000 Procter & Gamble Company 843,750
----------
8,749,062
----------
ENERGY - 9.27%
15,000 Chevron Corporation 1,204,687
30,000 Exxon Corporation 2,028,750
30,000 Mobil Corporation 2,298,750
----------
5,532,187
----------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
11
<PAGE> 144
GROWTH & INCOME FUND
- --------------------------------------------------------------------------------
March 31, 1998
PORTFOLIO OF INVESTMENTS Continued
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS (CONTINUED) VALUE
------ ------------------------- -----
FINANCIAL SERVICES - 8.32%
25,000 American General Corporation $1,617,187
10,000 Cincinnati Financial Corporation 1,240,000
10,000 Excel Limited 775,000
15,000 St. Paul Companies 1,336,875
----------
4,969,062
----------
HEALTHCARE & PHARMACEUTICALS - 8.52%
20,000 American Home Products Corporation 1,907,500
12,000 Bristol-Myers Squibb Company 1,251,750
15,000 Merck & Co., Inc. 1,925,625
----------
5,084,875
----------
INDUSTRIAL PRODUCTS - 8.01%
10,000 AMP Inc. 438,125
15,000 General Electric Company 1,292,812
20,000 Hubbell, Inc. 1,007,500
30,000 Pall Corporation 645,000
25,000 Waste Management, Inc. 770,313
35,000 Worthington Industries, Inc. 627,813
----------
4,781,563
----------
RETAIL TRADE & SERVICES - 6.12%
10,000 J.C. Penney Company, Inc. 756,875
10,000 May Department Stores Co. 635,000
7,000 McDonald's Corporation 420,000
60,000 Reynolds & Reynolds Company Cl. A 1,312,500
15,000 Walgreen Co. 527,813
----------
3,652,188
----------
TECHNOLOGY - 16.44%
10,000 Automatic Data Processing, Inc. 680,625
25,000 Diebold, Inc. 1,100,000
40,000 Hewlett Packard Company 2,535,000
15,000 Intel Corporation 1,170,000
10,000 Minnesota Mining & Manufacturing
Company 911,875
15,000 Motorola, Inc. 909,375
50,000 Pitney-Bowes, Inc. 2,509,375
----------
9,816,250
----------
TELECOMMUNICATIONS - 7.68%
50,000 Ameritech Corporation 2,471,875
10,000 Bell Atlantic Corporation 1,025,000
25,000 SBC Communications, Inc. 1,090,625
----------
4,587,500
----------
TRANSPORTATION - 0.44%
10,000 Comair Holdings 265,000
----------
UTILITIES - 2.16%
10,000 Duke Energy Company 595,625
25,000 Southern Corporation 692,188
----------
1,287,813
----------
TOTAL COMMON STOCKS
(COST $42,477,806) 58,188,500
----------
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
PRINCIPAL INTEREST
AMOUNT REPURCHASE AGREEMENT - 2.53% MATURITY RATE(1) VALUE
------ ---------------------------- -------- -------- -----
$1,510,000 First National Bank of Chicago, dated 3/31/98, collateral:
U.S. Treasury Note 6.75%; due 6/30/99, market value $1,545,798
(repurchase proceeds $1,510,245) (COST $1,510,000) 4/01/98 5.85% 1,510,000
-----------
TOTAL INVESTMENTS, AT VALUE (NOTE 1) (COST $43,987,806) - 100.00% $59,698,500
===========
</TABLE>
- --------------------------------------------------------------------------------
(1) For the repurchase agreement, the interest rate shown reflects the actual
rate of return to the Fund.
See accompanying notes to financial statements.
12
<PAGE> 145
OPPORTUNITY VALUE FUND
- --------------------------------------------------------------------------------
March 31, 1998
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
May 1, 1988 to March 31, 1998
5/1/88 3/31/98
------ -------
GRADISON OPPORTUNITY VALUE FUND $10,000 $39,369
S & P 500 $10,000 $57,221
RUSSELL 2000 $10,000 $34,111
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED MARCH 31, 1998
10 YEARS 5 YEARS 3 YEARS 1 YEAR
-------- ------- ------- ------
Opportunity Value Fund 14.88% 17.44% 26.92% 42.02%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. Performance figures
are historical. The investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than the original cost. The Russell 2000 Small Stock Index is an unmanaged group
of stocks representative of small company stock performance; the Standard &
Poor's (S&P) 500 Composite Stock Price Index is an unmanaged group of common
stocks widely recognized as an index of market performance. The investment
returns of these indices do not include any securities transaction expenses.
Total returns shown include changes in share value and reinvestment of
distributions.
PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS - 72.85% VALUE
------ ---------------------- -----
AUTOMOTIVES - 4.60%
25,000 Borg-Warner Auto, Inc. $1,603,125
30,000 Gleason Corporation 1,051,875
70,000 Intermet Corporation 1,557,500
30,000 Motocar Parts & Acc.(1) 534,375
30,000 Superior Industries International 995,625
100,000 Wynn's International, Inc. 2,275,000
-----------
8,017,500
-----------
BANKS - 10.12%
4,000 First Empire State Corporation 1,999,500
30,000 Firstar Corporation 1,185,000
39,000 Granite State Bankshares 1,057,875
47,740 HUBCO, Inc. 1,826,055
46,125 Mercantile Bankshares Corporation 1,669,148
12,000 National City Bankcorp(1) 406,500
40,000 Old Kent Financial Corporation 1,535,000
50,000 TCF Financial Corporation 1,696,875
66,000 TR Financial Corporation 2,293,500
20,000 Union Planters Corporation 1,243,750
39,000 Westcorp, Inc. 653,250
40,000 Zions Bancorporation 2,090,000
-----------
17,656,453
-----------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
13
<PAGE> 146
OPPORTUNITY VALUE FUND
- --------------------------------------------------------------------------------
March 31, 1998
PORTFOLIO OF INVESTMENTS Continued
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS (CONTINUED) VALUE
------ ------------------------- -----
BUILDING MATERIALS - 4.48%
39,000 Butler Manufacturing Company $ 1,404,000
32,000 Cascade Corporation 518,000
25,000 Fibermark, Inc.(1) 582,812
45,000 Hughes Supply Company 1,628,438
84,150 Republic Group, Inc. 1,714,556
34,000 Texas Industries, Inc. 1,965,625
-----------
7,813,431
-----------
BUSINESS SERVICES - 4.22%
75,000 ABM Industries, Inc. 2,329,687
38,000 Inacom Corporation(1) 1,049,750
70,000 Merrill Corporation 1,531,250
100,000 Norstan, Inc.(1) 2,450,000
-----------
7,360,687
-----------
CHEMICALS - 1.94%
30,000 Cambrex Corporation 1,511,250
45,000 Ferro Corporation 1,321,875
44,000 Stephan Company 555,500
-----------
3,388,625
-----------
COMPUTER PRODUCTS - 3.43%
35,000 Adaptec, Inc.(1) 686,875
40,000 DRS Technologies, Inc.(1) 555,000
70,000 Innovex, Inc. 1,693,125
45,000 Keane, Inc.(1) 2,542,500
30,000 Printronix, Inc.(1) 498,750
-----------
5,976,250
-----------
COMPUTER SERVICES - 1.77%
60,000 Affiliated Computer
Services, Inc.(1) 1,991,250
19,000 Devon Group, Inc.(1) 1,099,625
-----------
3,090,875
-----------
CONSUMER DURABLES - 1.47%
46,000 Cannondale Corporation(1) 759,000
42,000 Culp, Inc. 861,000
23,000 Thor Industries, Inc. 941,563
-----------
2,561,563
-----------
ELECTRONICS - 3.77%
52,000 Coherent, Inc.(1) 1,248,000
40,500 CTS Corporation 1,374,469
54,000 EDO Corporation(1) 486,000
25,000 Electro Scientific Industries,
Inc.(1) 962,500
25,000 Esterline Technologies
Corporation(1) 1,054,687
34,000 Park Electrochemical Corporation 877,625
20,000 Zero Corporation 565,000
-----------
6,568,281
-----------
ENERGY SERVICES - 1.70%
20,000 Lone Star Technology, Inc.(1) 475,000
20,000 SEACOR SMIT, Inc.(1) 1,163,750
60,000 World Fuel Services Corporation 1,320,000
-----------
2,958,750
-----------
FINANCIAL SERVICES - 2.88%
18,000 AmeriCredit Corporation(1) 495,000
20,000 D & N Financial Corporation(1) 555,000
69,000 Raymond James Financial, Inc. 3,005,813
35,000 Vermont Financial Services
Corporation 966,875
-----------
5,022,688
-----------
HEALTH CARE - 4.42%
42,000 Genesis Health Ventures, Inc.(1) 1,181,250
40,000 HealthSouth Corporation(1) 1,122,500
35,000 Integrated Health Services, Inc. 1,375,937
68,000 Mariner Health Group, Inc.(1) 1,147,500
50,000 Universal Health Services, Inc.(1) 2,887,500
-----------
7,714,687
-----------
HOTELS/CASINOS - 0.39%
24,000 Harveys Casinos Resorts 681,000
-----------
HOUSING - 4.68%
50,000 D.R. Horton, Inc. 1,062,500
43,000 Lennar Corporation 1,480,812
43,000 LNR Property Corporation 1,150,250
49,000 MDC Holdings, Inc. 869,750
60,000 Oakwood Homes Corporation 2,197,500
50,000 Toll Brothers, Inc.(1) 1,406,250
-----------
8,167,062
-----------
INDUSTRIAL PRODUCTS - 4.96%
21,000 Carpenter Technology 1,134,000
25,000 Chase Industries, Inc.(1) 773,437
30,000 DT Industries, Inc. 1,140,000
35,000 Farr Company(1) 665,000
44,000 Gehl Company(1) 935,000
31,800 Met-Pro Corporation 494,888
55,000 MTS Systems Corporation 876,562
10,000 Robbins & Meyers, Inc. 381,250
22,000 Thomas Industries, Inc. 489,500
32,000 Transtechnology Corporation 964,000
25,000 United Dominion Industries, Inc. 810,938
-----------
8,664,575
-----------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
14
<PAGE> 147
OPPORTUNITY VALUE FUND
- --------------------------------------------------------------------------------
March 31, 1998
PORTFOLIO OF INVESTMENTS Continued
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS (CONTINUED) VALUE
------ ------------------------- -----
INSURANCE COMPANIES - 7.22%
60,000 American Bankers Insurance
Group, Inc. $ 3,870,000
45,000 Fremont General Corporation 2,646,562
52,000 HCC Insurance Holdings, Inc. 1,196,000
40,000 Orion Capital Corporation 2,187,500
29,000 Protective Life Corporation 2,117,000
22,000 Selective Insurance Group, Inc. 585,750
-----------
12,602,812
-----------
MEDICAL EQUIPMENT - 1.16%
35,000 EMPI, Inc.(1) 564,375
31,000 Thermedics, Inc.(1) 552,188
30,000 West Company, Inc. 903,750
-----------
2,020,313
-----------
NATURAL RESOURCES - 4.20%
29,000 Atchison Casting Corporation 453,125
24,000 Florida Rock Industries 685,500
40,000 Mueller Industries, Inc.(1) 2,532,500
37,000 Quanex Corporation 1,112,313
5,000 Scope Industries 315,313
32,000 Southdown, Inc. 2,230,000
-----------
7,328,751
-----------
RETAIL TRADE & SERVICES - 1.93%
43,000 BJ's Wholesale Club, Inc.(1) 1,677,000
40,000 O'Charleys, Inc.(1) 847,500
45,000 Play By Play Toys &
Novelties, Inc.(1) 838,125
-----------
3,362,625
-----------
SEMICONDUCTORS - 1.46%
50,000 Dallas Semiconductor Corporation 1,681,250
40,000 Kulicke and Soffa Industries,
Inc.(1) 870,000
-----------
2,551,250
-----------
TELECOMMUNICATIONS - 0.29%
30,000 Communication Systems, Inc. 511,875
-----------
TRANSPORTATION - 1.76%
75,000 Comair Holdings, Inc. 1,987,500
30,000 U.S. Freightways Corporation 1,080,000
-----------
3,067,500
-----------
TOTAL COMMON STOCKS
(COST $68,035,162) 127,087,553
-----------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL INTEREST
AMOUNT COMMERCIAL PAPER - 12.84% MATURITY RATE (2) VALUE
------ ------------------------- -------- -------- -----
<S> <C> <C> <C> <C>
$2,500,000 Ameritech Corporation 4/08/98 5.44% 2,497,356
2,500,000 Eastman Kodak Co. 4/09/98 5.51 2,496,939
2,500,000 Tribune Co. 4/17/98 5.48 2,493,911
2,500,000 Goldman Sachs Group (The), L.P. 4/21/98 5.50 2,492,361
2,500,000 American Express Company 4/29/98 5.48 2,489,344
2,500,000 International Business Machines Credit Corporation 5/05/98 5.48 2,487,061
2,500,000 Avco Financial Services, Inc. 5/11/98 5.50 2,484,722
2,500,000 Chevron Corporation 5/13/98 5.47 2,484,046
2,500,000 Equitable Resources, Inc. 5/20/98 5.51 2,481,268
-----------
TOTAL COMMERCIAL PAPER (COST $22,407,008) 22,407,008
-----------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
REPURCHASE AGREEMENT - 14.31%
-----------------------------
<S> <C> <C> <C> <C>
24,960,000 First National Bank of Chicago, dated 3/31/98,
collateral:
U.S. Treasury Note 6.75%; due 6/30/99, market value
$25,474,745 (repurchase proceeds $24,964,057)
(COST $24,960,000) 4/01/98 5.85 24,960,000
------------
TOTAL INVESTMENTS, AT VALUE (NOTE 1)
(COST $115,402,170) - 100% $174,454,561
============
</TABLE>
- --------------------------------------------------------------------------------
(1) Non-income producing
(2) For commercial paper, the interest rate is the discount rate at the time
of purchase by the Fund. For the repurchase agreement, the rate shown
reflects the actual rate of return to the Fund.
See accompanying notes to financial statements.
15
<PAGE> 148
INTERNATIONAL FUND
- --------------------------------------------------------------------------------
March 31, 1998
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
May 31, 1995 to March 31, 1998
5/31/95 3/31/98
------- -------
GRADISON INTERNATIONAL FUND $10,000 $12,948
EAFE/EMS $10,000 $12,843
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED MARCH 31, 1998
INCEPTION 1 YEAR
--------- ------
International Fund 9.54% 19.11%
Since the Fund's inception, its investment adviser has been waiving receipt of
certain fees otherwise due to be paid by the Fund and paying certain Fund
expenses which increased the Fund's return. Waiver and reimbursement
arrangements may be terminated which would lower future performance. Performance
figures are historical. 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. PAST PERFORMANCE IS
NOT PREDICTIVE OF FUTURE PERFORMANCE. The EAFE/EMS Index is the Morgan Stanley
Capital International Europe Australasia Far East plus Emerging Markets Index.
Total returns shown include changes in share value and reinvestment of
distributions.
PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
SHARES PREFERRED STOCKS - 0.76% VALUE
------ ------------------------ -----
GERMANY - 0.76%
450 Man Ag-vorzugsaktien $113,027
270 Sap Preferred 114,827
--------
TOTAL PREFERRED STOCKS
(COST $203,457) 227,854
--------
- --------------------------------------------------------------------------------
Common Stocks - 99.24%
----------------------
ARGENTINA - 2.84%
39,350 Astra Cia Argentina De Petroleum 74,385
9,497 Banco De Galicia Bue 'B' 58,512
7,196 Banco Frances Rio Plata 72,333
38,364 Dalmine Siderca Sa 102,450
541 IRSA (Inversiones y Representaciones
SA) 144A ADR 20,727
9,040 Molinos Rio Plata 'B' 22,152
9,750 Perez Companc SA ADR 132,038
5,512 Telefonica de Argentina ADR 209,801
4,800 YPF SA ADR 163,200
----------
855,598
----------
CHILE - 2.76%
6,500 Banco Santander Chile ADR 91,406
3,524 Chilgener SA ADR 84,796
1,750 Cia Cerveceria Unidas ADR 52,937
7,000 Cia Telecommunications Chile ADR 192,938
6,600 Empresa Nacional de Electridad
SA ADS 127,050
5,150 Enersis SA ADR 162,547
1,600 Madeco SA ADR 27,700
3,400 Maderas Y Sinteticos ADR 35,063
1,300 Quimica y Minera SA ADR 57,200
----------
831,637
----------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
16
<PAGE> 149
INTERNATIONAL FUND
- --------------------------------------------------------------------------------
March 31, 1998
PORTFOLIO OF INVESTMENTS Continued
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS (CONTINUED) VALUE
------ ------------------------- -----
FINLAND - 5.61%
5,000 Enso Oy $ 46,147
1,200 Hartwall Oy 141,113
9,740 Metsa Serla Oy B Ord 86,770
2,070 Neste Oy 61,224
8,165 Nokia AB Oy 876,506
5,200 Okobank Osuspankk 100,062
55 Rauma Oy 1,019
7,100 Rautaruuki Oy 59,077
4,880 Upm-Kymmene Oy 124,336
550 Viking Line AB 21,069
3,000 Werner Soderstrom 133,630
3,200 Yit Yhtyma 39,056
----------
1,690,009
----------
FRANCE - 11.64%
1,308 Alcatel Alst 245,525
1,616 AXA 166,407
5,050 Banque Nationale de Paris 392,461
1,290 Cie De St Gobain 212,373
1,230 Credit Commercial de France 101,049
880 Danone 212,482
1,720 Eaux (Cie Generale) 279,277
550 Eaux (Cie Generale) Warrant 617
1,482 Elf Aquitaine 194,229
1,840 France Telecom SA 97,053
2,100 Groupe GTM 163,371
490 L'Oreal 227,770
2,050 Lafarge 174,371
2,050 Lafarge Rights 2,680
1,550 Peugeot SA 267,185
290 Pinault-Printemps -- Redoute SA 224,203
752 Schneider SA 57,896
1,240 Societe Generale 248,172
1,120 Total SA 134,493
1,160 Valeo 102,038
----------
3,503,652
----------
GERMANY - 7.41%
25 Allianz AG DEM (REGD) 7,496
860 Allianz AG Holdings 259,720
2,700 Basf AG 120,083
6,315 Bayer AG 288,887
2,400 Commerzbank AG 86,690
1,450 Daimler-Benz AG 133,291
1,010 Degussa AG 57,509
1,200 Deutsche Telekom Bank AG 90,292
1,400 Dresdner Bank AG 63,742
462 Mannesmann AG 338,255
160 Munchener Ruckversicheru 69,214
3,000 Rwe Ag 161,409
2,120 Siemens AG 141,919
4,232 Veba AG 300,236
138 Volkswagen AG 108,052
138 Volkswagen AG Rights 2,507
----------
2,229,302
----------
HUNGARY - 2.71%
1,500 Danibius Hotels(1) 39,379
650 Graboplast Textiles Rt. 26,450
6,900 Magyar Olaj Es Gazipari Rt. 211,550
42,000 Matav 258,918
2,900 OTP Bank Rt. 147,508
1,250 Richter Gedeon Rt. 131,528
----------
815,333
----------
IRELAND - 2.63%
22,500 Allied Irish Banks Ord 276,077
14,100 CRH Ord 211,901
8,800 Irish Life Ord 80,355
6,000 Kerry Group A Ord 79,898
49,900 Smurfit Jefferson Ord 143,068
----------
791,299
----------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
17
<PAGE> 150
INTERNATIONAL FUND
- --------------------------------------------------------------------------------
March 31, 1998
PORTFOLIO OF INVESTMENTS Continued
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS (CONTINUED) VALUE
------ ------------------------- -----
ISRAEL - 3.09%
3,800 Agis Industries $ 27,216
33,000 Bank Leumi Le-Israel BM 62,385
21,600 Bezeq Israel Telecommunications 58,283
40,000 Bk Hapoalim BM 109,485
3,800 Blue Square Chain Stores(1) 41,879
2,800 Eci Telecommunications ADR 86,100
1,740 Elite Industries 55,306
2,000 Formula Systems(1) 81,836
63,000 ICl-Israel Chemical 75,552
37,000 Industrial Building 63,065
880 Koor Industries Ltd. 109,441
15,800 Supersol Ltd. 51,098
2,530 Teva Pharmaceutical Industries Ltd. 108,931
----------
930,577
----------
ITALY - 10.52%
13,500 Alleanza Assicuraz 214,542
8,120 Assicurazioni Generali SpA 250,076
58,400 BCA Communicatios Italiana 291,069
6,240 Benetton Group SpA 130,968
12,500 Danieli & Company 121,587
24,000 Edison SpA 201,817
61,500 Eni SpA 418,579
43,600 Fiat SpA 181,705
61,000 Istituto Nazionale delle
Assicurazioni 197,559
18,300 Instituto Mobiliare Italiano 296,841
15,000 Italcementi SpA 175,908
52,110 Telecom Italia SpA 410,211
51,000 TIM SpA 273,751
----------
3,164,613
----------
JAPAN - 8.82%
6,600 Aoyama Trading Company 158,379
3,000 Bridgestone Corporation 67,941
4,000 Canon 90,288
6,200 Fanuc 213,871
6,000 Fuji Photo Film Company 223,170
19,000 Fujisawa Pharmaceutical Company 169,552
28,000 Hitachi Ltd. 203,673
1,000 Ito-yokado Co Ltd. 54,143
17,000 Kirin Brewery Company 151,705
6,000 Matsushita Electric Works 96,287
19,000 Mitsubishi Chemical Corporation 72,238
65,000 Mitsui O.S.K. Lines Ltd.(1) 108,698
6,000 Murata Manufacturing Company 165,578
8,000 Nec Corporation 80,389
42 Nippon Telgraph & Telephone Company 174,802
18,000 Sumitomo Bank 183,576
22,000 Sumitomo Trust & Banking 142,046
10,000 Tokio Marine & Fire Insurance 111,735
4,200 Tokyo Electric 79,369
4,000 Toyota Motor Corporation 106,486
----------
2,653,926
----------
MEXICO - 1.81%
5,250 Alfa SA de CV Ser A 29,708
6,450 Cemex SA 29,229
21,802 Cifra SA de Cv Servnpv 39,776
8,500 Controlodora Comercial
Mexicana SA de CV 10,398
1,850 Desc SA de CV Ser B 13,531
106 Desc SA de CV Ser C 809
4,700 Empresas La Modern A(1) 23,313
2,800 Fomento Economico Mexico SA de CV 20,216
5,050 Grupo Carso SA de CV Ser A1 31,304
11,554 Grupo Financiero Banamex
Accival SA de CV(1) 27,102
7,172 Grupo Industrial Bimbo SA 18,945
8,150 Grupo Mexico SA 26,313
4,850 Grupo Modelo Sa de Cv 40,939
780 Grupo Televisa GDS(1) 28,567
3,900 Industrias Penoles SA 16,483
5,950 Kimberly Clark de Mexico SA 30,736
2,620 Telefonos de Mexico ADR 147,703
500 Tv Azteca ADS(1) 9,813
----------
544,885
----------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
18
<PAGE> 151
INTERNATIONAL FUND
- --------------------------------------------------------------------------------
March 31, 1998
PORTFOLIO OF INVESTMENTS Continued
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS (CONTINUED) VALUE
------ ------------------------- -----
NETHERLANDS - 4.77%
3,064 ABN-AMRO Holdings NV $ 70,696
350 Akzo Nobel NV 71,102
4,000 Elsevier NV 65,813
1,500 Fortis Amev NV 88,503
2,200 Ing Groep NV 124,844
1,800 Koninklijke PTT Nederland NV 93,252
1,300 Philips Electronic 95,410
7,280 Royal Dutch Petroleum 412,073
2,440 Unilever NV 164,564
1,500 Vendex International NV 94,979
4,480 Ver Ned Uitgevers 153,225
----------
1,434,461
----------
POLAND - 1.38%
900 Agros Holding SA(1) 20,982
1,900 Amica Wronki(1) 35,491
300 Bank Przemyslowo Handlowy SA 23,893
1,900 Bank Rozwoju Eksportu SA 52,824
800 Bank Slaski SA 57,922
35,100 BIG Bank Gdanski SA 49,301
700 Debica SA 18,245
9,300 Elektrim Spolka Akcyjna SA 115,814
4,600 Polifarb Cieszyn-Wroclaw SA(1) 19,184
2,800 Stomil Olsztyn SA 21,894
----------
415,550
----------
PORTUGAL - 4.86%
3,400 Banco Comercial Portugues SA 109,776
3,400 Banco Comercial Portugues SA Rights 11,005
5,450 Banco Espirito Santo 251,790
1,200 Brisa-Auto Estradas de
Portugal SA(1) 54,806
3,460 Cimpor (Cimentos de Portugal) 121,926
9,800 Electricidade de Portugal 227,415
1,650 Investec Consultadoria
Internacional(1) 66,647
1,895 Jeronimo Martins 77,944
4,000 Mundial Confianca(1) 129,360
6,630 Portugal Telecom SA 344,848
1,440 Sonae Investimentos Socieda de Gestora
de Participacoes Sociais SA 67,782
----------
1,463,299
----------
SPAIN - 5.53%
2,000 Argentaria Corp Bc 165,594
6,800 Autopistas, Concesionari 112,604
5,300 Banco Bilbao Vizcaya SA 248,780
700 Banco Central Hispanoame 22,425
700 Banco Central Hsp Rights 553
1,450 Banco Popular Espanol 140,742
2,200 Banco Santander SA 109,572
5,400 Empresa Nacional de Electricid SA 129,832
1,600 Gas Natural 99,866
800 Gas Y Electricidad Sa 64,709
10,600 Iberdrola SA 161,015
1,700 Repsol SA 86,727
7,300 Telefonica de Espana 321,736
----------
1,664,155
----------
SWITZERLAND - 6.85%
72 ABB AG 107,588
238 Ciba Specialty Chemical Nw 30,443
125 Clariant AG 134,881
944 Credit Suisse Group 188,864
99 Holderbank Finance Glaris AG 103,904
30 Kuoni Reisen Holdings 150,543
138 Nestle SA 263,691
253 Novartis AG 447,754
29 Roche Holdings AG 313,876
150 Schweiz Bankgesellschaft 245,001
650 Tag Heuer 73,976
----------
2,060,521
----------
TURKEY - 4.03%
632,700 Adana Cimento Sanayii 41,606
624,237 Akal Tekstil Sanayii 15,650
953,203 Akbank 69,539
1,770,000 Arcelik AS 152,769
323,000 Aygaz AS 45,800
57,000 Bagfas Bandirma Gubre AS 56,810
1,562,000 Brisa AS 78,643
687,000 Ege Biracilik Ve Malt SA 98,825
851,000 Eregli Demir Celik 106,677
73,000 Ford Otomotiv Sanayi AS 45,005
73,650 Migros Turk TAS 65,081
119,000 Netas Telekomunik AS(1) 37,660
906,000 Sabanci Holding 53,062
794,240 T Sise Cam 28,073
3,557,000 Turkiye Garanti Bankasi 140,345
69,7000 Turkiye Is Bankasi 74,481
294,5000 Yapi Ve Kredi Bankasi 101,673
----------
1,211,699
----------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
19
<PAGE> 152
INTERNATIONAL FUND
- --------------------------------------------------------------------------------
March 31, 1998
PORTFOLIO OF INVESTMENTS Continued
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS (CONTINUED) VALUE
------ ------------------------- -----
UNITED KINGDOM - 7.87%
6,640 Abbey National PLC $ 128,651
7,600 Boots Co. PLC 121,797
4,600 British Petroleum 66,401
8,500 British Telecom PLC 92,522
5,900 Commercial Union PLC 115,202
3,550 Glaxo Wellcome 95,533
3,930 HSBC Holdings 128,201
9,500 IMI PLC 72,385
16,000 Lasmo PLC 73,950
17,059 Lloyds TSB Group PLC 265,388
6,200 National Power PLC 63,541
9,400 Prudential PLC 138,208
11,429 Scot Power 107,561
9,100 Scottish & Newcastle PLC 144,007
10,050 Shell Transport & Trading PLC 73,883
13,600 Smith Kline Beecham 171,948
8,300 Tesco 83,256
15,200 Unilever PLC 143,815
11,580 Wolseley PLC 89,009
4,490 Zeneca Group PLC 193,538
-----------
2,368,796
-----------
VENEZUELA - 4.11%
106,356 Banco Provincial 192,478
12,550 Compania Anonima Nacional
Telefonos De Venezuela 524,747
259,750 Electricid Caracas 244,938
9,450 Mavesa SA 144A ADR 49,613
363,850 Sider Venezuela ADR 100,504
82,231 Venezolana De Cemento 125,320
-----------
1,237,600
-----------
TOTAL COMMON STOCKS
(COST $23,545,447) 29,866,912
-----------
TOTAL INVESTMENTS,
AT VALUE (NOTE 1)
(COST $23,748,904) - 100% $30,094,766
===========
- --------------------------------------------------------------------------------
(1) Non-income producing
The following abbreviations are used in this portfolio:
ADR - American Depository Receipts; ADS - American Depository Shares;
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 $70,339 as of March 31, 1998.
- --------------------------------------------------------------------------------
SUMMARY OF INVESTMENTS BY INDUSTRY
% OF
TOTAL
INDUSTRY INVESTMENTS
- -------- -----------
Automotive 3.73%
Banking 17.46
Beverages and Tobacco 2.24
Broadcasting and Publishing 1.52
Building Materials 4.00
Business Services 0.93
Chemicals 4.50
Construction and Housing 1.21
Diversified Companies 4.08
Electronics 6.77
Energy 7.65
Financial Services 1.96
Food and Household Products 3.78
Forest Products and Paper 1.40
Health and Personal Care 4.30
Household Appliances and Durables 1.14
Insurance 6.08
Machinery and Engineering 1.53
Materials and Commodities 0.60
Merchandising 3.10
Metals and Mining 0.39
Real Estate 0.07
Steel 0.89
Telecommunications 13.86
Textiles and Apparel 0.58
Tourism 0.50
Transportation 0.76
Utilities 4.97
------
100.00%
======
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
20
<PAGE> 153
STATEMENTS OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
March 31, 1998
<TABLE>
<CAPTION>
ESTABLISHED GROWTH & OPPORTUNITY INTERNATIONAL
VALUE FUND INCOME FUND VALUE FUND FUND
----------- ----------- ----------- -------------
ASSETS
<S> <C> <C> <C> <C>
Investments in securities, at cost $358,465,016 $43,987,806 $115,402,170 $23,748,904
============ =========== ============ ===========
Investments in securities, at value (Note 1) $563,758,932 $59,698,500 $174,454,561 $30,094,766
Cash 187,719 10,468 30,931 2,043,534
Foreign currency, at value (Note 1) (Cost $619,985) -- -- -- 584,859
Receivable for securities sold -- -- 328,189 596,412
Receivable for Fund shares sold 3,687,669 339,549 1,127,047 21,075
Dividends and interest receivable 492,337 112,195 63,521 58,331
Forward foreign exchange currency contracts,
at value (Note 1) -- -- -- 66,315
Prepaid expenses and other assets 23,056 7,488 11,031 4,104
Organization expenses, net (Note 1) -- 2,526 -- 10,356
------------ ----------- ------------ -----------
TOTAL ASSETS 568,149,713 60,170,726 176,015,280 33,479,752
------------ ----------- ------------ -----------
LIABILITIES
Payable for Fund shares redeemed 388,782 16,537 153,105 27,625
Payable for securities purchased -- -- -- 91,553
Accrued investment advisory fee (Note 2) 231,912 29,639 85,196 20,568
Other accrued expenses payable to adviser (Note 2) 257,653 31,373 85,878 37,518
Other accrued expenses and liabilities 16,814 2,025 6,852 20,850
Futures variation margin payable -- -- -- 3,462
------------ ----------- ------------ -----------
TOTAL LIABILITIES 895,161 79,574 331,031 201,576
------------ ----------- ------------ -----------
NET ASSETS $567,254,552 $60,091,152 $175,684,249 $33,278,176
============ =========== ============ ===========
NET ASSETS CONSIST OF:
Aggregate paid-in capital $346,809,964 $44,250,538 $109,964,485 $27,448,501
Accumulated undistributed net investment
income (loss) 305,847 3,901 206,426 12,679
Accumulated undistributed net realized
gains (losses) 14,844,825 126,019 6,460,947 (540,694)
Net unrealized appreciation of investments 205,293,916 15,710,694 59,052,391 6,345,862
Net unrealized appreciation on translation
of assets and liabilities in foreign currency -- -- -- 11,828
------------ ----------- ------------ -----------
NET ASSETS $567,254,552 $60,091,152 $175,684,249 $33,278,176
============ =========== ============ ===========
SHARES OF CAPITAL STOCK OUTSTANDING
(no par value - unlimited number of shares
authorized) 16,713,114 2,072,968 6,298,471 1,739,146
============ =========== ============ ===========
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE (Note 1) $33.94 $28.99 $27.89 $19.13
============ =========== ============ ===========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
21
<PAGE> 154
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
For the year ended March 31, 1998
<TABLE>
<CAPTION>
ESTABLISHED GROWTH & OPPORTUNITY INTERNATIONAL
VALUE FUND INCOME FUND VALUE FUND FUND
----------- ----------- ----------- -------------
INVESTMENT INCOME:
<S> <C> <C> <C> <C>
Dividends, net of foreign withholding taxes $ 5,183,890 $ 890,955 $ 940,214 $ 432,272
Interest 7,688,489 143,096 2,143,373 145,489
------------ ----------- ----------- ----------
TOTAL INVESTMENT INCOME 12,872,379 1,034,051 3,083,587 577,761
------------ ----------- ----------- ----------
EXPENSES:
Investment advisory fee (Note 2) 2,580,124 267,848 881,658 282,889
Distribution (Note 2) 2,454,412 206,037 710,599 141,445
Transfer agency fees (Note 2) 303,442 47,227 130,769 41,353
Accounting services fees (Note 2) 80,669 40,000 40,000 60,000
Custodian fees (Note 1) 23,598 12,002 19,263 79,583
Registration fees 43,019 23,113 32,427 18,955
Professional fees 14,022 12,937 12,758 32,716
Printing 40,438 7,236 15,904 5,889
Trustees' fees (Note 2) 7,067 6,394 6,618 7,050
Amortization of organization expense (Note 1) -- 1,153 -- 4,746
Other 27,303 3,321 8,356 3,285
------------ ----------- ----------- ----------
GROSS EXPENSES 5,574,094 627,268 1,858,352 677,911
LESS FEES WAIVED BY THE ADVISER (Note 2) -- -- -- (112,829)
LESS EARNINGS CREDITS ON CASH BALANCES
(Note 1) (4,374) (12,002) (2,140) --
------------ ----------- ----------- ----------
NET EXPENSES 5,569,720 615,266 1,856,212 565,082
------------ ----------- ----------- ----------
NET INVESTMENT INCOME 7,302,659 418,785 1,227,375 12,679
------------ ----------- ----------- ----------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
ON INVESTMENTS:
Net realized gain (loss) on investments 41,231,389 278,290 20,508,362 (254,868)
Net realized loss on foreign currency
transactions -- -- -- (208,788)
Net change in unrealized appreciation
of investments 79,580,611 12,198,030 26,917,903 5,495,316
Net change in unrealized depreciation
of foreign currency transactions -- -- -- 13,438
------------ ----------- ----------- ----------
NET REALIZED AND UNREALIZED GAINS ON
INVESTMENTS 120,812,000 12,476,320 47,426,265 5,045,098
------------ ----------- ----------- ----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $128,114,659 $12,895,105 $48,653,640 $5,057,777
============ =========== =========== ==========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
22
<PAGE> 155
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ESTABLISHED VALUE FUND GROWTH & INCOME FUND OPPORTUNITY VALUE FUND
YEAR ENDED YEAR ENDED YEAR ENDED
---------------------- ----------------------- ------------------------
3/31/98 3/31/97 3/31/98 3/31/97 3/31/98 3/31/97
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment income (loss) $ 7,302,659 $ 6,257,379 $ 418,785 $ 242,652 $ 1,227,375 $ 984,370
Net realized gain (loss) on
investments 41,231,389 37,844,738 278,290 337,124 20,508,362 9,839,496
Net realized loss on foreign
currency transactions -- -- -- -- -- --
Net change in unrealized
appreciation of investments 79,580,611 11,774,353 12,198,030 2,325,455 26,917,903 1,731,084
Net change in unrealized
depreciation on translation
of assets and liabilities in
foreign currencies -- -- -- -- -- --
------------- ------------ ------------ ------------ ------------ ------------
Net increase in net assets
resulting from operations 128,114,659 55,876,470 12,895,105 2,905,231 48,653,640 12,554,950
------------- ------------ ------------ ------------ ------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income (7,488,999) (6,248,864) (483,144) (190,392) (1,400,935) (780,766)
Net realized capital gains (39,693,896) (32,341,951) (376,650) (112,745) (18,567,761) (9,624,857)
------------- ------------ ------------ ------------ ------------ ------------
Decrease in net assets from
distributions to shareholders (47,182,895) (38,590,815) (859,794) (303,137) (19,968,696) (10,405,623)
------------- ------------ ------------ ------------ ------------ ------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 177,661,831 150,040,288 28,457,239 13,724,115 97,738,720 74,520,949
Net asset value of shares
issued in reinvestment
of distributions 46,070,717 37,843,938 837,101 297,051 19,731,335 10,317,863
Payments for shares redeemed (167,135,296) (141,861,173) (6,940,220) (2,898,897) (84,921,607) (75,515,812)
------------- ------------ ------------ ------------ ------------ ------------
Net increase in net assets from
Fund share transactions 56,597,252 46,023,053 22,354,120 11,122,269 32,548,448 9,323,000
------------- ------------ ------------ ------------ ------------ ------------
TOTAL INCREASE IN NET ASSETS 137,529,016 63,308,708 34,389,431 13,724,363 61,233,392 11,472,327
NET ASSETS:
Beginning of year 429,725,536 366,416,828 25,701,721 11,977,358 114,450,857 102,978,530
------------- ------------ ------------ ------------ ------------ ------------
End of year $ 567,254,552 $429,725,536 $ 60,091,152 $ 25,701,721 $175,684,249 $114,450,857
============= ============ ============ ============ ============ ============
Undistributed net investment
income (Note 1) $ 305,847 $ 753,874 $ 3,901 $ 63,881 $ 206,426 $ 379,986
============= ============ ============ ============ ============ ============
NUMBER OF FUND SHARES:
Sold 5,536,829 5,266,990 1,118,081 674,493 3,748,080 3,262,371
Issued in reinvestment of
distributions to shareholders 1,493,854 1,334,128 33,607 14,650 796,600 454,117
Redeemed (5,224,469) (4,986,154) (275,439) (141,301) (3,272,472) (3,315,616)
------------- ------------ ------------ ------------ ------------ ------------
Net increase in shares
outstanding 1,806,214 1,614,964 876,249 547,842 1,272,208 400,872
Outstanding at beginning of year 14,906,900 13,291,936 1,196,719 648,877 5,026,263 4,625,391
------------- ------------ ------------ ------------ ------------ ------------
Outstanding at end of year 16,713,114 14,906,900 2,072,968 1,196,719 6,298,471 5,026,263
============= ============ ============ ============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL FUND
YEAR ENDED
------------------------
3/31/98 3/31/97
------- -------
<S> <C> <C>
FROM OPERATIONS:
Net investment income (loss) $ 12,679 $ (27,104)
Net realized gain (loss) on
investments (254,868) 690,706
Net realized loss on foreign
currency transactions (208,788) (403,339)
Net change in unrealized
appreciation of investments 5,495,316 289,521
Net change in unrealized
depreciation on translation
of assets and liabilities in
foreign currencies 13,438 (31,683)
------------ ------------
Net increase in net assets
resulting from operations 5,057,777 518,101
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income -- --
Net realized capital gains (289,530) (41,790)
------------ ------------
Decrease in net assets from
distributions to shareholders (289,530) (41,790)
------------ ------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 9,514,677 12,548,017
Net asset value of shares issued
in reinvestment of distribution 266,710 38,087
Payments for shares redeemed (6,087,530) (3,551,439)
------------ ------------
Net increase in net assets from
Fund share transactions 3,693,857 9,034,665
------------ ------------
TOTAL INCREASE IN NET ASSETS 8,462,104 9,510,976
NET ASSETS:
Beginning of year 24,816,072 15,305,096
------------ ------------
End of year $33,278,176 $ 24,816,072
============ ============
Undistributed net investment
income (Note 1) $ 12,679 --
============ ============
NUMBER OF FUND SHARES:
Sold 547,071 780,856
Issued in reinvestment of
distributions to shareholders 16,413 2,370
Redeemed (353,559) (221,365)
------------ ------------
Net increase in shares
outstanding 209,925 561,861
Outstanding at beginning of year 1,529,221 967,360
------------ ------------
Outstanding at end of year 1,739,146 1,529,221
============ ============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
23
<PAGE> 156
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
March 31, 1998
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. The Trust consists of four series,
the Gradison Established Value Fund ("Established Fund"), the Gradison Growth
&Income Fund ("Growth & Income Fund"), the Gradison Opportunity Value Fund
("Opportunity Fund") and the Gradison International Fund ("International Fund"),
(collectively, the "Funds"), each of which represents a separate diversified
fund with its own investment policies.
The public offering of shares of the Funds commenced as follows:
DATE OF
PUBLIC OFFERING
---------------
Established Value Fund 8/16/83
Growth & Income Fund 2/28/95
Opportunity Value Fund 8/16/83
International Fund 5/31/95
The investment objective of the Established Fund and the Opportunity Fund is
long-term capital growth by investing primarily in common stocks. The investment
objective of the 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 following is a summary of significant accounting policies followed by the
Funds in the preparation of their 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 or which are
believed to not be valid are valued at their fair value as determined by
management using procedures approved by the Board of Trustees. Short-term
securities with remaining maturities of sixty days or less are valued at
amortized cost, which approximates market value.
Repurchase agreements, which are collateralized by U.S. Government obligations,
are valued at cost which, together with accrued interest, approximates market
value. Collateral for repurchase agreements is held in safekeeping in the
customer-only account of the Funds' custodian. At the time the Funds enter 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 Funds 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
securities and the face amount of the repurchase agreement and accrued interest.
To minimize the possibility of loss, the Funds enter into repurchase agreements
only with selected domestic banks and securities dealers which the Funds'
investment adviser believes present minimal credit risk. Refer to the Funds'
Portfolio of Investments for the face amount of repurchase agreements and
repurchase proceeds as of March 31, 1998.
FUNDS SHARE VALUATION AND DISTRIBUTIONS TO SHAREHOLDERS
The net asset value per share of each Fund is computed by dividing the net asset
value of each Fund (total
24
<PAGE> 157
NOTES TO FINANCIAL STATEMENTS Continued
- --------------------------------------------------------------------------------
March 31, 1998
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.
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 Funds' policy to comply with the provisions of the Internal Revenue
Code applicable to regulated investment companies. As provided therein, in any
fiscal year in which a 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 Funds' intention to declare as dividends in
each calendar year, at least 98% of each Fund's net investment income (earned
during the calendar year) and 98% of each Fund's 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 for each Fund is approximately equal to the cost as
shown on the Statements of Assets and Liabilities. For both financial reporting
and tax purposes, gross unrealized appreciation and gross unrealized
depreciation of securities of the Funds at March 31, 1998 was:
GROSS UNREALIZED GROSS UNREALIZED
APPRECIATION DEPRECIATION
OF SECURITIES OF SECURITIES
------------- -------------
Established Value Fund $205,878,885 $ 584,969
Growth & Income Fund 15,819,545 108,851
Opportunity Value Fund 60,339,374 1,286,983
International Fund 7,538,110 1,192,248
As of March 31, 1998 the International Fund had a capital loss carryforward for
Federal income tax purposes of approximately $360,000 which may be utilized to
offset future net realized capital gains through March 31, 2006 prior to
distributing such gains to shareholders.
EXPENSES
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of the net assets or number of accounts, as appropriate. In all other
respects, expenses are charged to the respective Fund as incurred on a specific
identification basis.
EXPENSE OFFSET ARRANGEMENT
Each Fund, other than the International Fund, has an arrangement with its
custodian bank whereby the custodian's fees are reduced by credits earned on
each Fund's cash on deposit with the bank. This deposit arrangement is an
alternative to overnight investments. The credits are shown as a reduction of
expenses on the Statements of Operations.
ORGANIZATION EXPENSES
Expenses of organization of the Growth & Income Fund and the International Fund
have been capitalized
25
<PAGE> 158
NOTES TO FINANCIAL STATEMENTS Continued
- --------------------------------------------------------------------------------
March 31, 1998
and are being amortized on a straight-line basis over 60 months commencing upon
the public offering of the respective Fund's shares.
INTERNATIONAL FUND FOREIGN CURRENCY TRANSLATION
The accounting records of the International 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 International 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 International 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.
INTERNATIONAL FUND FORWARD FOREIGN CURRENCY CONTRACTS
During the year ended March 31, 1998, the International Fund entered into
forward foreign currency contracts under which it was obligated to exchange
currencies at specified future dates. The International Fund's currency
transactions were 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,
1998:
PORTFOLIO HEDGES:
U.S.
BUY/ FOREIGN DOLLAR SETTLEMENT UNREALIZED
SELL AMOUNT CURRENCY PROCEEDS DATE APPRECIATION
---- ------ -------- -------- ---------- ------------
German
Sell 4,900,000 Deutschemark $2,680,525 4/15/98 $27,165
Buy 1,200,000 British Pound 1,976,400 4/15/98 39,150
------
$66,315
======
At March 31, 1998, the Fund had sufficient cash and/or securities to cover any
commitments under these contracts.
INTERNATIONAL FUND 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
International
26
<PAGE> 159
NOTES TO FINANCIAL STATEMENTS Continued
- --------------------------------------------------------------------------------
March 31, 1998
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 $567,262 have been segregated with
the custodian for the following open stock index futures contracts at March 31,
1998.
OPEN
MARKET MARKET UNREALIZED
TYPE EXPIRATION VALUE VALUE (DEPRECIATION)
---- ---------- ------ ------ --------------
Long Nikkei 300(Yen) 6/98 $593,821 $582,326 $(11,495)
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 Funds pay McDonald a fee computed and accrued daily and paid
monthly based upon each Fund's daily net assets, other than the International
Fund, 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. The
International Fund pays McDonald a fee computed and accrued daily and paid
monthly based upon its daily net assets at the annual rate of 1.00% of the first
$100 million of its 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 Sub-Advisor for the International Fund pursuant to
a Sub-Advisor 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.
The Agreement provides that McDonald bears the costs of salaries and related
expenses of executive officers of the Trust who are necessary for the management
and operations of the Funds. 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 Funds.
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 Funds. Effective July 1,
1997, the Funds pay McDonald a monthly fee for transfer agency and
administrative services at an annual rate of $18.50 per shareholder non-zero
balance account and $5.00 per closed shareholder account, as defined, plus
out-of-pocket costs for statement paper, statement and reply envelopes and reply
postage. Prior to July 1, 1997 the Funds, other than the International Fund,
paid 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. Prior to July 1, 1997 the International Fund paid 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 Funds, other than
the International Fund, pay 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. The International 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.
27
<PAGE> 160
NOTES TO FINANCIAL STATEMENTS Continued
- --------------------------------------------------------------------------------
March 31, 1998
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 Growth & Income Fund and the International Fund
if, and to the extent that, expenses (excluding brokerage commissions, taxes,
interest and extraordinary items) borne by the respective Fund in any fiscal
year exceed 1.50% with respect to the Growth & Income Fund, and 2.00% with
respect to the International Fund, of the average net assets of the respective
Fund. This agreement is in effect until July 31, 1998 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
a Fund for other expenses in order to limit the Fund's expenses to a specified
percentage of average net assets lower than the amount subject to the agreement.
For the year ended March 31, 1998, McDonald waived $59,867 of advisory fees and
distribution expenses of $52,962 with respect to the International Fund.
In accordance with the terms of a Distribution Plan adopted under Rule 12b-1 of
the Investment Company Act of 1940, the Funds pay 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 Funds' average daily net assets. The Funds also pay McDonald a fee
for its assistance in selling shares of the Fund including advising shareholders
regarding purchase, sale and retention of Funds 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 year ended March 31, 1998, cost of purchases, and proceeds from the sale
of securities, excluding short-term securities, amounted to:
COST OF PROCEEDS
PURCHASES FROM SALES
--------- ----------
Established Value Fund $71,681,680 $82,965,939
Growth & Income Fund 22,952,595 1,428,477
Opportunity Value Fund 44,047,629 45,068,610
International Fund 24,162,712 21,214,411
28
<PAGE> 161
ARTHUR ANDERSEN
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees
of the Gradison Growth Trust:
We have audited the accompanying statements of assets and liabilities, including
the portfolio of investments, of the Gradison Growth Trust (comprising,
respectively, the Gradison Established Value Fund, Gradison Opportunity Value
Fund, Gradison Growth & Income Fund and the Gradison International Fund) as of
March 31, 1998, and the related statements of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, 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 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, 1998, by correspondence with custodians and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all the material respects, the financial position of
each of the respective portfolios constituting the Gradison Growth Trust as of
March 31, 1998, the results of their operations for the year then ended, the
changes in their net assets for each of the two years in the period then ended,
and their financial highlights for the periods indicated thereon, in conformity
with generally accepted accounting principles.
[SIGNATURE, ARTHUR ANDERSEN LLP]
Cincinnati, Ohio,
May 6, 1998
29
<PAGE> 162
GRADISON GROWTH TRUST
Gradison 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 August 1, 1998 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 August 1, 1998.
<PAGE> 163
CONTENTS
==============================
INTRODUCTION ...............3
RISK FACTORS AND INVESTMENT
TECHNIQUES..................3
INVESTMENT RESTRICTIONS....18
PURCHASE OF SHARES.........20
REDEMPTIONS OF SHARES......21
EXCHANGES..................21
TAXES......................22
NET ASSET VALUE............28
PORTFOLIO TRANSACTIONS AND
BROKERAGE..................28
INVESTMENT ADVISER.........31
TRUSTEES AND OFFICERS
OF THE TRUST...............36
DESCRIPTION OF THE TRUST...38
INVESTMENT PERFORMANCE.....40
CUSTODIAN..................41
ACCOUNTANTS................41
LEGAL COUNSEL..............41
MISCELLANEOUS .............41
SALES BROCHURE MATERIAL ...42
FINANCIAL STATEMENTS......After Page 66
Location in Prospectus
Investment Objectives, Policies and Risks; Foreign Securities; Forward Foreign
Currency Contracts; Risks of Futures and Forward Currency Transactions; Low
Capitalization Stocks
Purchases and Redemptions
Purchases and Redemptions
Optional Shareholder Services
Taxes
Net Asset Value
Management of the Fund
General Information
Performance Calculation
2
<PAGE> 164
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.
CORPORATE DEBT SECURITIES
The Fund may invest in short-term corporate debt securities. The investment
return of corporate debt securities reflects interest
3
<PAGE> 165
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.
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
4
<PAGE> 166
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
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
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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 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.
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ILLIQUID SECURITIES
The Fund may invest in illiquid securities. However, the Fund may not invest in
securities that are illiquid because they are subject to legal or contractual
restrictions on resale, in repurchase agreements maturing in more than seven
days, or other securities which are illiquid if, as a result of such investment,
more than 15% of the net assets of the Fund (taken at market value at the time
of such investment) would be invested in such securities.
With respect to private placements, which are generally subject to legal or
contractual restrictions on resale, if an exemption from registration under the
Securities Act of 1933 is not available, registration may be required to dispose
of the security. Where registration is required, the Fund may be obligated to
pay all or part of the registration expenses and a considerable period may
elapse between the time of the decision to sell and the time the Fund may be
permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, the Fund might
obtain a less favorable price than prevailed when it decided to sell. Restricted
securities will be priced at fair value as determined in good faith by the
Adviser under the supervision of the Board of Trustees.
These percentage restrictions set forth above do not limit purchases of
restricted securities that are eligible for sale to qualified institutional
purchasers pursuant to Rule 144A under the Securities Act of 1933, provided that
those securities have been determined to be liquid by the Board of Trustees of
the Fund or by the Portfolio Manager under Board-approved guidelines. Those
guidelines take into account the trading activity for such securities and the
availability of reliable pricing information, among other factors. If there is a
lack of trading interest in a particular Rule 144A security, the Fund's holding
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.
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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) 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
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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, forward currency contracts, and options on foreign currency. The Fund
will supplement its Prospectus or this Statement of Additional Information if
the Fund intends to purchase or sell any of these other instruments.
SPECIAL RISKS OF FUTURES AND CURRENCY STRATEGIES
The use of futures contracts and forward currency contracts involves special
considerations and risks, as described below. Risks pertaining to particular
instruments are described in the sections that follow.
(1) Successful use of most of these instruments depends upon the Portfolio
Manager's ability to predict movements of the overall securities and currency
markets, which 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
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movements in the investments being hedged. However, hedging strategies can also
reduce opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if the Fund entered into a
short hedge because the Portfolio Manager projected a decline in the price of a
security in the Fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the hedging instrument. Moreover, if the price of the
hedging instrument declined by more than the increase in the price of the
security, the Fund could suffer a loss. In either such case, the Fund would have
been in a better position had it not hedged at all.
(4) As described below, the Fund might be required to maintain assets as
"cover," maintain segregated accounts or make margin payments when it takes
positions in futures and forward contracts. If the Fund were unable to close out
its positions in such instruments, it might be required to continue to maintain
such assets or accounts or make such payments until the position expired or
matured. The requirements might impair the Fund's ability to sell a portfolio
security or make an investment at a time when it would otherwise be favorable to
do so, or require that the Fund sell a portfolio security at a disadvantageous
time. The Fund's ability to close out a position in an instrument prior to
expiration or maturity depends on the existence of a liquid secondary market or,
in the absence of such a market, the ability and willingness of the other party
to the transaction ("contra party") to enter into a transaction closing out the
position. Therefore, there is no assurance that any position can be closed out
at a time and price that is favorable to the Fund.
(5) Stock index futures contracts may be traded on foreign exchanges. Such
transactions may not be regulated as effectively as similar transactions in the
United States; may not involve a clearing mechanism and related guarantees; and
are subject to the risk of governmental actions affecting trading in, or the
prices of, foreign securities. The value of such positions also could be
adversely affected by (a) other complex foreign political, legal and economic
factors, (b) lesser availability than in the United States of data on which to
make trading decisions, (c) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (d) the imposition of different exercise and settlement terms and
procedures on margin requirements than in the United States and (e) lesser
trading volume.
STOCK INDEX FUTURES CONTRACTS
The Fund may purchase and sell stock index futures contracts (1) in order to
attempt to reduce the overall investment risk in its portfolio or (2) to enhance
yield. For 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
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selected the individual securities in which to invest, or because the stock
index futures contract presents a more favorable investment than investment in
individual securities. The Fund only will enter into futures contracts that are
standardized and traded on a U.S. or foreign exchange, board of trade or similar
entity.
An index futures contract provides for the delivery, at a designated date, time
and place, of an amount of cash equal to a specified dollar amount times the
difference between the index value at the close of trading on the contract and
the price at which the futures contract is originally struck; no physical
delivery of the securities comprising the index is made. Brokerage fees are
incurred when a futures contract is bought or sold, and margin deposits must be
maintained at all times the futures contract is outstanding.
Futures contracts usually are closed out before the delivery date. Closing out
an open futures contract sale or purchase is effected by entering into an
offsetting futures contract purchase or sale, respectively, for the same
aggregate amount of the identical financial instrument or currency and the same
delivery date. If the offsetting purchase price is less than the original sale
price, the Fund realizes a gain; if it is 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.
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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.
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.
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FORWARD CURRENCY CONTRACTS
A forward contract is an obligation, generally arranged with a commercial bank
or other currency dealer, to purchase or sell a currency against another
currency at a future date and price as agreed upon by the parties. The Fund
either may accept or make delivery of the currency at the maturity of the
forward contract. The Fund may also, if its contra party agrees, prior to
maturity, enter into a closing transaction involving the purchase or sale of an
offsetting contract.
The Fund may engage in forward currency transactions in anticipation of or to
protect itself against fluctuations in exchange rates. The Fund might sell a
particular foreign currency forward, for example, when it holds securities
denominated in a foreign currency but anticipates, and seeks to be protected
against, a decline in the currency against the U.S. dollar. Similarly, the Fund
might sell the U.S. dollar forward when it holds securities denominated in U.S.
dollars but anticipates, and seeks to be protected against, a decline in the
U.S. dollar relative to other currencies. Further, the Fund might purchase 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 short-term
hedging strategy is highly uncertain. Forward contracts involve the risk that
anticipated currency movements will not be
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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 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.
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The value of forward contracts depends on the value of the underlying currency
relative to the U.S. dollar. Because foreign currency transactions occurring in
the interbank market might involve substantially larger amounts than those
involved in the use of forward contracts, the Fund could be disadvantaged by
dealing in the odd lot market (generally consisting of transactions of less than
$1 million) for the underlying foreign currencies at prices that are less
favorable than for round lots.
There is no systematic reporting of last sale information for foreign currencies
or any regulatory requirements that quotations available through dealers or
other market sources be firm or revised on a timely basis. Quotation information
generally is representative of very large transactions in the interbank market
and thus might not reflect odd-lot transactions where rates might be less
favorable. The interbank market in foreign currencies is a global,
round-the-clock market. To the extent the U.S. markets are closed while the
markets for the underlying currencies remain open, significant price and rate
movements might take place in the underlying markets that cannot be reflected in
the U.S. markets until they reopen.
Settlement of forward contracts might be required to take place within the
country issuing the underlying currency. Thus, the Fund might be required to
accept or make delivery of the underlying foreign currency in accordance with
any U.S. or foreign regulations regarding the maintenance of foreign banking
arrangements by U.S. residents and might be required to pay any fees, taxes and
charges associated with such delivery assessed in the issuing country.
COVER
Transactions using forward contracts and futures contracts expose the Fund to an
obligation to another party. The Fund will not enter into any such transactions
unless it owns either (1) an offsetting ("covered") position in securities,
currencies, or other forward contracts or futures contracts, or (2) cash, or
other liquid assets with a value sufficient at all times to cover its potential
obligations to the extent 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 or other
liquid assets, 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
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and sales of options, futures, options on futures contracts and forward foreign
currency contracts and (c) purchase securities on a when-issued or delayed
delivery basis and pledge its assets in connection therewith;
(vii) issue senior securities, except as permitted under the Investment Company
Act of 1940;
(viii) lend funds or other assets, except that the Fund may, consistent with its
investment objective and policies: (a) invest in debt obligations, including
bonds, debentures, or other debt securities, bankers' acceptances and commercial
paper, (b) enter into repurchase agreements and reverse repurchase agreements;
and (c) lend its portfolio securities in an amount not to exceed 1/3 of the
value of its total assets;
(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;
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(v) 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;
(vi) invest in puts, calls, straddles, spreads, and any combination thereof, if
by reason thereof the premium cost of its aggregate investment in such options
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. For purposes of the restriction prohibiting the Fund from investing
more than 25% of its assets in companies in the same industry, the Directory of
Companies Filing Annual Reports with the Securities and Exchange Commission
(which utilizes the Standard Industrial Classification Codes promulgated by the
Office of Management and Budget of the Executive Office of the President) is
used to determine industry classifications.
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.
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").
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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 and may take
other steps to verify the identity of persons giving telephone instructions.
CDSC DISCLOSURE
The Contingent Deferred Sales Charge ("CDSC") is waived on purchases through
McDonald and Gradison and on purchases in connection with "wrap accounts"
because the Distributor is not paying a sales commission to dealers on such
purchases; therefore, the CDSC is not needed to reimburse the Distributor for
such commissions in the event of a redemption made during the CDSC period. (The
Distributor compensates its own employees for Fund share sales, some of which
compensation may be recouped in the event of redemption of shares on which
compensation has been paid within certain time periods.) The CDSC is waived on
the death or disability of shareholders because of the hardships involved in
such situations. The CDSC is waived on certain sales in IRA and retirement
account plans because such sales may not be voluntary.
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.
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WRITTEN EXCHANGES
You may also exchange your shares of either Fund by written request directed to:
Gradison Mutual Funds
580 Walnut Street
Cincinnati, Ohio 45202
Such written request should include your name and account number and the number
of shares or dollar amount 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.
TAXES
The Fund has qualified and intends to qualify in the future for treatment, 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
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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 or 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) 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 (3) at the close of each quarter of the Fund's taxable
year, not more than 25% of the value of its total assets may be invested in
securities (other than U.S. government securities) of any one issuer.
Distributions of any net long term capital gain are taxable to shareholders as
long-term capital gains, whether paid in cash or in additional shares of the
Fund and regardless of the length of time a shareholder has owned shares of the
Fund. These capital gain distributions are not eligible for the
dividends-received deduction for corporations.
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.
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
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loss and will generally be long-term if such shareholders have held their shares
for more than one year. Any loss realized upon a taxable disposition of shares
held for six months or less will be treated as a long-term capital loss to the
extent of any capital gain distributions received with respect to such shares.
An exchange of Fund shares for shares of any Gradison 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 may not be deductible and instead will increase the basis of the newly
purchased shares.
HEDGING TRANSACTIONS
Gains from disposition of foreign currencies, and gains 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. Many of the futures
contracts and forward contracts used by the Fund are "section 1256 contracts."
Gains or losses on section 1256 contracts (other than section 1256 contracts
that are part of a "mixed straddle" with respect to which the Fund has made an
election not to have the following rules apply) are generally considered 60%
long-term and 40% short-term capital gains or losses ("60/40"). Also, section
1256 contracts held by the Fund at the end of each taxable year (and, for
purposes of the Excise Tax, on certain other dates prescribed by the Code) are
"marked to market", with the result that unrealized gains or losses are treated
as though they were realized, and the resulting gain or loss is treated as
60/40.
Generally, the hedging transactions undertaken by the Fund may result in
"straddles" for federal income tax purposes. Because only a few regulations
implementing the straddle rules have been promulgated, the tax consequences to
the Fund of transactions in options, futures and forward contracts are not
entirely clear. The straddle rules may affect the character of gains (or losses)
realized by the Fund. In addition, losses realized by the Fund on positions that
are part of a straddle may be deferred under the straddle rules, rather than
being taken into account in calculating the taxable income for the taxable year
in which such losses are realized. The transactions may increase the amount of
short-term capital gain realized by the Fund, which is taxed as ordinary income
when distributed to shareholders.
The Fund may make one or more of the elections available under the Code which
are applicable to straddles. If the Fund makes any of the elections, the amount,
character and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
elections made. The rules applicable under certain of the elections operate to
accelerate the recognition of gains or losses from the affected straddle
positions.
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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 --other than a "controlled foreign corporation" (i.e., a foreign
corporation in which, on any day during its taxable year, more than 50% of the
total voting power of all voting stock therein or the total value of all stock
therein is owned, directly, indirectly, or constructively, by "U.S.
shareholders," defined as U. S. persons that individually owned directly,
indirectly, or constructively, a least 10% of that voting power) as to which the
Fund is a U. S. Shareholder -- 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 passive income. If the Fund receives a so-called "excess
distribution" with respect to PFIC stock, the Fund itself may be subject to tax
on a portion of the excess distribution, whether or not the corresponding income
is distributed by the Fund to shareholders. In general, under the PFIC rules, an
excess distribution is treated as having been received ratably over the period
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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 gain 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.
The Fund may elect to "mark to market" its stock in any PFIC.
"Marking-to-market", in this context, means including in ordinary income each
taxable year the excess, if any, of the fair market value of the stock over the
Fund's adjusted basis therein as of the end of that year. Pursuant to the
election, the Fund also may deduct (as an ordinary, not capital, loss) the
excess, if any, of its adjusted basis in PFIC stock over the fair market value
thereof as of the taxable year-end, but only to the extent of any net
mark-to-market gains with respect to that stock included in income by the Fund
for prior taxable years. The Fund's adjusted basis in each PFIC's stock subject
to the election would be adjusted to reflect the amounts of income included and
deductions taken thereunder. 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. Individuals who have no
more than $300 ($600 for married persons filing jointly) of creditable foreign
taxes included on Forms 1099 and all of whose foreign source income is
"qualified passive income" may elect each year top be exempt from the foreign
tax credit limitations and will be able to claim a foreign tax credit without
having to file the detailed Form 1116 that otherwise is required. Because
application of the credit depends on the particular circumstances of each
shareholder, shareholders are advised to consult their own tax advisers.
If the Fund has an "appreciated financial position" --generally, an interest
(including an interest through an option, futures or forward contract or short
sale) with respect to any stock, debt instrument (other than "straight debt") or
partnership interest the fair market value of which exceeds its adjusted basis
- -- and enters into a "constructive sale" of the same or substantially similar
property, the Fund will be treated as having made an actual sale thereof, with
the result that gain will be recognized at that time. A constructive sale
generally consists of a short sale, an offsetting notional principal contract or
futures or forward contract entered into by the Fund or a
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related person with respect to the same or substantially similar property. In
addition, if the appreciated financial position is itself a short sale or such a
contract, acquisition of the underlying property or substantially similar
property will be deemed a constructive sale.
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, Martin Luther King Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The assets and liabilities of the Fund are determined in accordance with
generally accepted accounting principles and the applicable rules and
regulations of the Securities and Exchange Commission. Assets and liabilities
attributable to the Fund are allocated to the Fund. Assets and liabilities not
readily attributable to the Fund are allocated to the Fund in the Trust in a
manner and on a basis determined in good faith by the Trustees to be fair and
equitable.
When calculating the net asset value of the Fund, a security listed or traded on
an exchange is valued at its last sale price on that exchange, or if there were
no sales that 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 pursuant to procedures approved by by the
Board of Trustees and subject to oversight 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
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are the product of many factors in addition to basic suitability for the
particular client involved (including the Fund). Thus, a particular security may
be bought or sold for certain clients even though it could have been bought or
sold for other clients at the same time. Likewise, a particular security may be
bought for one or more clients when one or more clients are selling the
security. In some instances, one client may sell a particular security to
another client. It also sometimes happens that two or more clients
simultaneously purchase or sell the same security, in which event transactions
that are close in time in such security are, insofar as possible, averaged as to
price and allocated between such clients in a manner which in the Adviser's or
Portfolio Manager's opinion is equitable to each and in accordance with the
amount being purchased or sold by each. The various allocation methods used by
the Adviser and Portfolio Manager, and the results of such allocations, are
subject to periodic review by the Fund's Adviser and Board of Trustees. There
may be circumstances when purchases or sales of portfolio securities for one or
more clients will have an adverse effect on other clients.
BROKERAGE AND RESEARCH SERVICES
There is generally no stated commission in the case of fixed-income markets, but
the price paid by the Fund usually includes an undisclosed dealer commission or
markup. In underwritten offerings, the price paid by the Fund includes a
disclosed, fixed commission or discount retained by the underwriter or dealer.
Transactions on U.S. stock exchanges and other agency transactions involve the
payment by the Fund of negotiated brokerage commissions. Such commissions vary
among different brokers. Also, a particular brokerage firm 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.
For the fiscal years ended March 31, 1996, March 31, 1997, and March 31, 1998,
the total commissions paid by the Fund were, respectively, $$84,498, $166,179
and $158,655.
The 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
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
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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 Portfolio Manager may receive research services from 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 Portfolio Manager
in advising various of its clients (including the Fund), although not all of
these services are necessarily useful and of value in managing the Fund. The
management fee paid by the Fund is not reduced because the Adviser or Portfolio
Manager and its affiliates receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934 (the "1934
Act"), the Adviser or the Portfolio Manager may cause the Fund to pay a broker
or dealer which provides "brokerage and research services" (as defined in the
1934 Act) to the Adviser or Portfolio Manager an amount of disclosed commission
for effecting a securities transaction for the Fund in excess of the commission
which another broker or dealer would have charged for effecting that
transaction.
PORTFOLIO TURNOVER
The Adviser or the Portfolio Manager may manage the Fund without regard
generally to restrictions on portfolio turnover, except those imposed on its
ability to engage in short-term trading by provisions of the Federal tax laws
(see "Taxation"). Trading in fixed-income securities does not generally involve
the payment of brokerage commissions, but does involve indirect transaction
costs. The higher the rate of portfolio turnover of the Fund, the higher these
transaction costs borne by the Fund generally will be.
The portfolio turnover rate of the Fund is calculated by dividing the value of
the lesser of purchases or sales of portfolio securities for the fiscal year by
the monthly average of the value of portfolio securities owned by the Fund
during the fiscal year. In determining such portfolio turnover, long-term U.S.
Government securities are included. Short-term U.S. Government securities and
all other
30
<PAGE> 192
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 fiscal years ended
March 31, 1997 and March 31, 1998, the Fund's portfolio turnover rates were
respectively 92% and 83%. 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 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
31
<PAGE> 193
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 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. For the
fiscal year ending March 31, 1997 the Fund paid the Adviser $166,508 as
investment advisory fees and would have paid it $208,135 if not for the
Adviser's waiver of expenses. The Adviser paid Blairlogie $166,508 as investment
adviser fees during the fiscal year ended March 31, 1997. For the fiscal year
ended March 31, 1998, the Fund paid the Adviser $223,032 as investment advisory
fees and would have paid it $282,889 if not for the Adviser's waiver of
expenses, and during that period the Adviser paid Blairlogie $223,022 as
investment adviser fees.
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
32
<PAGE> 194
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 continues in effect as to the Fund, 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
33
<PAGE> 195
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
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 Trust under the Plan within the limitation described
above for any activity primarily intended to result in the sale of Fund shares
including but not 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 Fund. It further specifically authorizes the
payment of advisory fees pursuant to
34
<PAGE> 196
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.
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. From the inception of the Fund through March 31, 1996,
35
<PAGE> 197
the Fund paid McDonald $0 as distribution fees and would have paid $37,112 if
not for McDonald's waiver of fees. For the fiscal year ended March 31, 1997 the
Fund paid McDonald $0 as distribution fees and would have paid $104,067 if not
for McDonald's waiver of fees. For the fiscal year ended March 31, 1998, the
Fund paid McDonald $88,483 as distribution fees and would have paid $141,445 if
not for McDonald's waiver of fees. Of these amounts, one half was paid for
rendering distribution services and one half for providing personnel services to
shareholders of the Fund.
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. For the fiscal year
ending March 31, 1997, the Fund paid McDonald $73,963 as transfer agent and
accounting services fees and would have paid $91,507 if not for McDonald's
waiver of fees. For the fiscal year ended March 31, 1998, the Fund paid McDonald
$101,353 as transfer agent and accounting services fees. McDonald did not waive
any of these fees for the fiscal year.
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, (63) 580 Walnut Street, Cincinnati, Ohio. Trustee and
Chairman of the Board; Chairman of Gradison and Director of McDonald & Company
Investments, Inc. Director of Cincinnati Milacron Commercial Corp.
- ----------------
* 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.
36
<PAGE> 198
(financing arm of capital goods manufacturer) (since January 1993); Chairman of
the Board of GMCR, GCT, and GMMCT.
DANIEL J. CASTELLINI, (58) 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, (71) 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), Cincinnati Milacron Commercial Corp.;
Trustee of Carillon Investment Trust and Summit Investment Trust (investment
companies).
RICHARD A. RANKIN, (56) 1717 Dixie Highway, Suite 600, Fort Wright, Kentucky
41011. Trustee. Partner, Rankin and Rankin (Public Accountants).
JEROME E. SCHNEE, (57) 14 Walt Whitman, Morristown, NJ 07960, Trustee; Senior
Director, Health Economics, Johnson & Johnson (Pharmaceuticals) since August
1996; Prior to that, Professor of Management, College of Business
Administration, University of Cincinnati (currently on leave of absence).
BRADLEY E. TURNER, (39) 580 Walnut Street, Cincinnati, Ohio 45202. President.
Senior Managing Director and Director of McDonald; President of GMCR, GCT, and
GMMCT.
WILLIAM J. LEUGERS, JR., (55) 580 Walnut Street, Cincinnati, Ohio. Managing
Director. Portfolio Manager of the Gradison Established and Opportunity Value
Funds.
JULIAN BALL, (46) 800 Superior Avenue, Cleveland, Ohio. Executive Vice
President. Portfolio Manager of the Gradison Growth and Income Fund; First Vice
President of McDonald since July 1994; prior to that, Vice President of Duff &
Phelps Investment Management Company.
DANIEL R. SHICK, (49) 580 Walnut Street, Cincinnati, Ohio. Vice President
(Gradison Established Value and Opportunity Value Funds); Managing Director of
Gradison.
GARY H. MILLER, (35) 580 Walnut Street, Cincinnati, Ohio. Vice President
(Gradison Established Value and Opportunity Value Funds); Associate Vice
President of Gradison.
PATRICIA J. JAMIESON, (44) 800 Superior Avenue, Cleveland, Ohio 44114.
Treasurer. Senior Managing Director and Chief Financial Officer of McDonald;
Treasurer of GMCR, GCT, and GMMCT.
MARK A. FRIETCH, (39) 580 Walnut Street, Cincinnati, Ohio. Assistant Treasurer.
Assistant Treasurer of GMCR, GCT, and GMMCT.
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<PAGE> 199
RICHARD M. WACHTERMAN, (51) 580 Walnut Street, Cincinnati, Ohio 45202.
Secretary. Senior Vice President and General Counsel of Gradison; Secretary of
GMCR, GCT, and GMMCT.
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 June 30, 8,
the Trustees and Officers of the Trust owned an aggregate of less than 1% of the
outstanding shares of the Fund. As of that date, no person was known to own 5%
or more of the outstanding shares of the Fund.
Trustee Compensation Table
<TABLE>
<CAPTION>
Name of Trustee Aggregate Compensation Total Compensation
From Trust for fiscal period From Trust and fund
ending 3/31/98 complex (3 Trusts)
paid to trustee for
calendar year
ending 12/31/97
---------------
<S> <C> <C>
Donald E. Weston 0 0
Theodore H. Emmerich $7,000 $ 25,000
Richard A. Rankin $7,000 $ 25,000
Jerome E. Schnee $7,000 $ 25,000
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 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, 8, the amount of $9,523 was payable
by the Trust to the beneficiary of a former trustee who is deceased and, as of
March 31, 8, the amount of $35,085 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,
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<PAGE> 200
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, representing
the Fund, the Gradison Established Value Fund, the Gradison Opportunity Value
Fund, and the Gradison 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 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.
39
<PAGE> 201
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 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.
INVESTMENT PERFORMANCE
Total Return
Percentage Change
<TABLE>
<CAPTION>
Since Inception Year Ending 3/31/98
(annualized)
(5/31/95 - 3/31/98)
<S> <C> <C>
Fund 9.54% 19.11%
Morgan Stanley 15.11%
EAFE/EMS Index* 9.98%
</TABLE>
The results of the Fund assume reinvestment of dividends and other
distributions. The performance results reflect historical performance and do not
ensure future results. 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 which increased the return of the Fund. The
termination of such expense waiver would reduce the future return of the Fund.
40
<PAGE> 202
*The EAFE/EMS Index is the Morgan Stanley Capital International Europe Australia
Far East plus Emerging Markets Index.
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.
41
<PAGE> 203
MISCELLANEOUS
Blairlogie currently manages in excess of $600 million of international assets.
42
<PAGE> 204
[Fact Sheet]
(GRAPHIC: Gradison Logo)
GRADISON
MUTUAL FUNDS
International Fund
Gradison International Fund seeks growth by investing in common stocks of
companies based outside of the United States. The Fund generally invests at
least 70% of its assets in developed markets and a maximum of 30% in emerging
markets. Gradison 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 has chosen Blairlogie Capital Management located in Edinburgh,
Scotland, as subadviser to the Fund. Based on its research, Blairlogie has
determined that the most important factor in international investing is the
country decision. Blairlogie, therefore, follows a highly disciplined
methodology that first identifies the countries that it believes offer the most
favorable investment potential and then selects the individual investments in
those countries.
It is generally the policy of Gradison 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:
DEVELOPED MARKETS 77.26%, France 11.64%, Italy 10.52%, Japan 8.81%, Germany
8.16%, Great Britain 7.87%, Switzerland 6.85%, Finland 5.62%, Spain 5.53%,
Portugal 4.86%, Netherlands 4.77%, Ireland 2.63%, EMERGING MARKETS 22.74%,
Venezuela 4.12%, Turkey 4.02%, Israel 3.09%, Argentina 2.84%, Chile 2.77%,
Hungary 2.71%, Mexico 1.81%, Poland 1.38%
The table above, showing the percentage of assets of the Fund invested in
securities of each country indicated as of March 31, 1998, is subject to change.
Value of $1,000 Since Inception
43
<PAGE> 205
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 6/95 - $1,003, 9/95 - $999, 12/95 - $1,015, 3/96 - $1,057,
6/96 - $1,090.00, 9/96 - $1,064.00, 12/96 - $1,074.00, 12/97 - $1,129.00, 3/98 -
1,295.
The performance quoted on this document and any attachment 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. Expense reimbursement increased return. See next page.
March 31, 1998
Graphic: Photo of Two People Embracing
PORTFOLIO MANAGER PROFILES
(graphic: Photo Gavin Dobson)
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
Kleinwort 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 a
book on international investing, Gavin has degrees in Economics from Dundee
University and Law from Edinburgh University.
(graphic: Photo James Smith)
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 as 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 Mutual Funds
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Gradison Mutual Funds is a division of McDonald & Company, a leading regional
investment firm which acquired Gradison in 1991. As a registered investment
advisor since 1974 and mutual fund advisors since 1976, Gradison currently
manages in excess of $5 billion in Gradison Mutual Funds and individually
managed accounts.
A prospectus for the International Fund or any other Gradison 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
GMFS 1059 INT 3/98
Average Annual Total Return
Chart stating periods ended 3/31/98, Quarter* +14.61%, 1 Year +19.11%, Since
Inception (5/31/95) +9.54%
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. Expense
reimbursement arrangements may be terminated at any time which would result in
lower returns.
*Not annualized
International Fund
Opportunity Value Fund
Growth & Income Fund
Established Value Fund
Ohio Tax-Free Income Fund
Government Income Fund
Money Market Funds
(graphic: Logo
Gradison Mutual Funds)
<PAGE> 207
COVER PAGE
YOUR FUTURE STARTS TODAY
[Graphic Photo of men, women, children and a dog]
Logo
Gradison
Mutual Funds
[Family of Funds brochure]
INSIDE COVER PAGE
YOUR FUTURE STARTS TODAY
Page 1
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 the goal. Whether it's starting a family, buying a house,
saving for education, or planning for retirement. Time is critical. Hesitate and
time will pass you by. Start today and the future is yours.
Page 2
THE MUTUAL FUND STORY
The first mutual fund company was established in 1924 as a private investment
firm for its founders and is still in business today. By 1980, there were fewer
than 600 mutual funds open to investors. Today, there are some 400 fund groups
offering more than 6,000 mutual funds with investments totaling more than $3
trillion.
Increasingly, mutual funds are the preferred vehicle for individual investors
who are starting and building an investment program. And today,
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Gradison is a preferred name in mutual funds for a growing number of investors.
WHY MUTUAL FUNDS?
PROFESSIONAL MANAGEMENT
Mutual funds use investment professionals to manage the assets on a full-time
basis. In addition to their dedicated time and experience, these investment
advisers typically have access to extensive research and other analytical
resources not available to most individual investors.
DIVERSIFICATION
Because a mutual fund has significantly more assets to invest than any
individual participant, it can purchase and effectively manage a more
diversified portfolio than can most individual investors.
FLEXIBILITY
A mutual fund is usually part of a family of funds. Fund families offer an
exchange privilege that allow shareholders to reallocate assets quickly and
easily among the various funds within that family of funds. Shares in any fund
may be purchased or liquidated, often by a phone call, generally on any day that
the New York Stock Exchange is open for business.
Page 3 WHY GRADISON MUTUAL FUNDS?
A RESPECTED NAME FOR SEVEN DECADES
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A respected name for seven decades Gradison has been a recognized name in
investment brokerage since 1925. The firm became a registered investment adviser
in 1974 and established its first mutual fund in 1976. Today, Gradison offers
seven mutual funds in a growing family of funds and manages more than $4 billion
in assets in both mutual funds and individually managed accounts.
EXPERIENCED PORTFOLIO MANAGERS
Gradison portfolio managers average nearly 15 years of experience as
professional portfolio managers and more than 20 years of experience in the
investment field. We believe that this depth of first-hand experience, in both
favorable and unfavorable market environments, sets us apart from those other
fund managers who have yet to manage assets through a full market cycle.
SERVICE
Low Minimum Investment of $1,000
Convenient Automatic Dividend Reinvestment
Automatic Investment Plan
Automatic Withdrawals and Payment Plans
Access To Funds
Free Exchange Privileges
Check Writing
Wire Transfers
Toll-Free Customer Service
24-Hour Account Information
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Account Statements
Year-End summary
Quarterly Newsletter Shareholder
Reports
Internet Access
Page 4
REACHING YOUR INVESTMENT GOALS
FIGHTING INFLATION
Inflation, the increase in the cost of living, has averaged 4% since 1926. While
it has been lower in recent years, it has also been substantially
higher--reaching 14% in the early 1980s. The surest way of beating inflation is
to earn a rate of return on your investments that exceeds the rate of inflation.
Chart: WHAT INFLATION REALLY MEANS
1995 $139,000 Single Family Home
2000 $177,403 [Graphic: Picture of a
2010 $288,971 partially built home]
2025 $600,750
Automobile 1995 $18,359
Graphic Picture of an 2000 $23,431
automobile 2010 $38,167
2025 $79,347
49
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Four Year Public University Education
1995 $26,972 [Graphic Picture of a
graduation cap and
2000 $34,424 a diploma.]
2010 $58,073
2025 $116,571
Sources: National Association of Realtors; Department of Commerce;
College Board. Future prices are based on a hypothetical average annual
inflation rate of 5%.
EDUCATION
The cost of four years at a private college, including tuition, fees, books and
other miscellaneous expenses, now averages nearly $95,000. It is projected to
reach $170,000 in a decade. The cost of a public college is expected to nearly
double from an average of $45,000 to more than $80,000 over the next ten years.
Most families realize that no matter when they start saving and investing for
this purpose, it usually is not soon enough.
BUILDING WEALTH
Many investors overlook the potential of investing in their most productive
years when their incomes are high enough to put aside investment assets and the
demands on their income are less than they inevitably will be later. Such assets
can be invaluable not only for retirement but as emergency
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<PAGE> 212
assets for unforeseen occurrences in life.
RETIREMENT
Given the national debate on Social Security and Medicare, the need for
investors to assure adequate retirement assets for both their active retirement
years, and the possibility of their inactive care years, should be apparent.
Many people look solely to their company retirement plans for such assurance and
only realize the need for supplemental assets much later.
YOUR FAMILY'S FUTURE
Providing for the education of a child or grandchild may only be a part of an
investor's concern for future generations. They may have achieved a sufficient
level of personal success to be able to consider investing in order to pass
along significant assets to provide these future generations with greater
assurance for their financial well-being in an uncertain world.
[GRAPHIC Photo of two women embracing.]
Page 5
INTELLIGENT INVESTING
Time is the essential ingredient
Experience has shown that there is no substitute for time in investing.
Historically, the sooner money has been put to work, and the longer it has been
invested, the more likely positive returns have resulted. Conversely,
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<PAGE> 213
aggressive investors are more likely to have volatile results for shorter
periods. Clearly, investing for the long-term is considered one of the keys to
successfully creating investment wealth.
THE RULE OF 72:
HELPING YOU IN TAXING TIMES
Certain measurements are well known rules in everyone's daily life. Most people
learn early in life, for example, that twelve inches equals a foot and that
three feet make a year. With investments, similar, but not as well known,
measurement rules apply. The Rule of 72 allows potential investors to find out
how long it will take to double their money. All you have to do is divide 72 by
the estimated interest rate of an investment, and the answer is roughly the
number of years needed to double an investment. Here's the formal equation:
Number of years to double the original investment = 72/ Interest Rate
Using the Rule
Check the table below to see some examples of how the Rule of 72 works.
<TABLE>
<CAPTION>
Rule of 72
Rate of (72 (divided by) Years to Years to
Return Interest Rate) Double Quadruple
<S> <C> <C> <C>
3% 72/3 24 48
6% 72/6 12 24
9% 72/9 8 16
</TABLE>
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<TABLE>
<S> <C> <C> <C>
12% 72+12 6 12
</TABLE>
The rates of return shown are for illustrative purposes only and are not
historical results or projections of the returns of any Gradison Mutual Fund.
(Pie Charts)
THE LONGER YOUR TIME FRAME, THE GREATER THE CHANCE OF REWARD
Percent of time stocks had positive results for rolling periods beginning
December 31, 1925, and ended December 31, 1995.
71% 89% 97% 100%
1 year 5 year 10 year 15 Year
holding holding holding holding
periods periods periods periods
Stocks will often rise and fall in value over the short term. When investing for
growth, the longer your investment time frame, the greater the chance equity
investments will produce positive results.
Source: Ibbotson Associates, Chicago. Based on the performance of the S & P 500,
an unmanaged index of stocks. This information is historical and is not a
guarantee of future performance of the S & P 500 or any Gradison Mutual Funds.
THE POWER OF COMPOUNDING
The term "compounding" is usually applied to investment income that is
constantly reinvested to generate additional income. However, the concept of
compounding applies equally well to investment profits that are
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constantly reinvested. The compounding of income and profits over long periods
of time can have a meaningful impact on overall investment results.
Again, time invested is invaluable.
(CHART) THE POWER OF COMPOUNDING IN A HYPOTHETICAL $10,000 INVESTMENT IN THE
S&P 500
<TABLE>
<S> <C>
$170,000 $168,820...................
$150,000 In the time frame illustrated here,
$130,000 reinvestment of all income and
$110,000 dividends resulted in $168,820,
$ 90,000 while not reinvesting income
$ 70,000 and dividends results in $59,304.
$ 50,000 $ 59,304...................
$ 30,000
$ 10,000
1/1/69 12/31/95
</TABLE>
This chart is for illustrative purposes only. There is, of course, no
correlation between the total return for the S&P 500 and past or future
performance of any Gradison Mutual Fund. The S&P 500 is an unmanaged index
compiled by Standard & Poor's Corporation. Investors cannot invest in the S&P
500. Past performance cannot guarantee future results. Source: The American
Funds Group
54
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Page 6
DISCIPLINED PERIODIC INVESTMENTS
It is our experience that the most difficult decision for most investors is not
whether to invest, but when to invest. It is this dilemma that causes many
investors to stay on the investment sidelines. Dollar cost averaging is a widely
used investment concept in the purchase of mutual funds that allows investors to
overcome this difficult decision by periodically investing(such as weekly,
monthly, or quarterly) the same dollar amount over a long period of time.
Gradison Mutual Funds offer a periodic investment plan to make the process
easier and more systematic.
[CHART DOLLAR COST AVERAGING CAN REDUCE YOUR AVERAGE COST PER SHARE]
<TABLE>
<CAPTION>
Investment Share Shares
Amount Price Purchased
<S> <C> <C> <C>
March $ 500 $10.00 50
June $ 500 $12.50 40
September $ 500 $ 5.00 100
December $ 500 $10.00 50
$2,000 $37.50 240
Average Price Per Share
($37.50 divided by 4) $9.38
Average Cost Per Share
($2,000 divided by 240) $8.33
</TABLE>
Dollar cost averaging will never result in better performance than picking the
best times to invest, if you were able to do so. But dollar cost averaging
allows you invest the same amount periodically as the Fund's
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share price fluctuates. You therefore will purchase more shares of the Fund in
those months when the price per share is low and less shares when the price is
high. Most importantly, dollar cost averaging can help investors make the
commitment to invest.
Of course, dollar cost averaging does not assure a profit and does not protect
against loss in declining markets. And since dollar cost averaging involves
continuous, periodic investing, you should consider your ability to continue
purchases over an extended period of time.
[(Graphic) Photo of two men, two women, a boy, girl and a dog walking.]
CONSIDER GRADISON MUTUAL FUNDS
<TABLE>
<CAPTION>
Equity Funds Fixed Income Fund Money Market Funds
<S> <C> <C>
Established Value Fund Government Income Fund U. S. Government Reserves
Growth & Income Ohio Tax Free Income Fund Municipal Cash Series 2
Fund High Yield Fund 1 Ohio Municipal Cash Trust 2
Opportunity Value Fund Michigan Municipal Cash Trust 2
International Fund
</TABLE>
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1. Planned for 1997-1998 and sold by prospectus only.
2. Federated Advisers acts as investment adviser for
these funds and Federated Securities Corp. acts as distributor.
PAGE 7
GRADISON EQUITY FUNDS
GRADISON ESTABLISHED VALUE FUND
The Established Value Fund invests for long-term capital growth using a
disciplined stock selection process to identify investments from the large
established companies that make up the Standard & Poor's 500 Composite Stock
Price Index, and other similar sized companies, which the investment adviser
considers to be undervalued. The stock selection process requires that companies
meet a number of objectively measured criteria of value including the companies'
relative book values, their price to earnings ratios, and other similar factors.
GRADISON GROWTH AND INCOME FUND
The Growth & Income Fund invests for long-term capital growth, as well as
current income and growth of income. The Fund puts particular emphasis on
identifying companies with higher than average growth rates, above average
dividend returns, a history of paying increasing dividends, and which the
investment adviser considers to be undervalued.
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We believe that stocks meeting this criteria provide the opportunity for price
appreciation and current income while tending to moderate risk.
GRADISON OPPORTUNITY VALUE FUND
The Opportunity Value Fund uses a disciplined stock selection process to
identify smaller companies, generally with market capitalization of less than
$500 million that meet a number of objectively measured criteria of value
including the companies' growth rates, relative book value, their price to
earnings ratios, and other similar factors and which the investment adviser
considers to be undervalued. The securities of smaller companies generally are
more volatile than those of larger companies.
GRADISON INTERNATIONAL FUND
Blairlogie Capital Management of Edinburgh, Scotland, the subadviser to the
International Fund, employs a "hybrid strategy" that invests in both developed
international markets and in emerging international markets. Using a disciplined
methodology, Blairlogie first identifies the countries that offer the most
favorable investment environment, and then selects the individual investments in
those countries. Generally the amount invested in emerging markets will not
exceed 30% of the Fund's assets. International investing, particularly in
emerging markets, involves greater risks than U.S. investing, such as political
instability and currency fluctuation.
THE CASE FOR COMMON STOCKS
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Stocks, more than most other types of investments, have historically shown the
ability to grow faster than inflation and to create wealth over long investment
periods. An investor who has long-term goals of ten years or more should
strongly consider equities as a significant part of his or her investment
portfolio. Historically, the longer an investor has held a well diversified
portfolio of stocks the better that investor has fared, as evidenced in the pie
chart on page 5.
THE ADVANTAGES OF BONDS
Although bond portfolios have not provided returns as high as stocks over long
periods of time (as illustrated in the graph on page 9), they have provided less
volatility and more reliable income than stocks. Investors with a relatively
short investment horizon, may need to avoid the volatility of stocks. For
example when an investor because near retirement, at a time when assets are
needed; or to add greater stability to a portfolio by combining both stocks and
bonds. Importantly, bond mutual funds provide the ability to reinvest these cash
flows immediately and completely to take full advantage of compounding.
Page 8
GRADISON FIXED INCOME FUNDS
GRADISON GOVERNMENT INCOME FUND
Designed to provide current monthly income from a portfolio of intermediate to
long-term U.S. Government securities, the Fund's policy is to invest only in
those Government securities that are guaranteed as to principal and interest by
the full faith and credit of the United States Government and
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in repurchase agreements collateralized by such obligations. The Fund is managed
with an emphasis on total return, that is the combined effect of both income and
changes in share value. Although the securities in the portfolio are guaranteed
as to principal and interest by the U.S. Government, the market value of the
Fund's shares will fluctuate with changes in interest rates and other market
conditions. Mortgage backed securities may be subject to prepayment risk.
[Graphic: Photo of two young girls each sitting on an adult's shoulder.]
GRADISON OHIO TAX-FREE INCOME FUND
Designed for Ohio investors who can benefit from a portfolio of long-term
municipal bonds that are exempt from both federal and Ohio income taxes, the
Fund provides monthly income by investing in Ohio municipal securities issued to
finance public institutions and public works, and in private activity municipal
bonds. In order to gain favorable yields, the Fund invests up to 20% of its
assets in securities that may be subject to the alternative minimum tax for some
investors.
Page 9
INDICES OF INVESTMENTS
IN U. S. CAPITAL MARKETS
(Chart) Comparison of Investments in Small Company Stocks, Large Company Stocks,
Long-Term Government Bonds, U. S. Treasury Bills to Inflation for the period
beginning 1925 through 1995, $0 to $10,000. Ending values: Small
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<PAGE> 222
Company Stocks $3,822; Large Company Stocks $1,113; Long-Term Government Bonds
$34; U. S. Treasury Bills $13; Inflation $9.
1926-1995
(YEAR-END 1925 = $1.00)
This chart is intended to show the growth of one dollar invested in different
types of investments and the Consumer Price Index. It assumes reinvestment of
all dividend and interest payments.
Past performance does not ensure further results.
SMALL COMPANY STOCKS are represented by the fifth capitalization quintile of
stocks on the NYSE for 1926-1981 and thereafter, the performance of the
Dimensional Fund Advisors (DFA) Small Company Fund;
LARGE COMPANY STOCKS are represented by the Standard & Poor's 500 Stock
Composite Index (S&P 500);
LONG-TERM GOVERNMENT BONDS are represented by a one-bond portfolio with a
maturity near twenty years;
U. S. TREASURY BILLS are represented by rolling over each month a one-bill
portfolio containing, at the beginning of each month, the bill having the
shortest maturity not less than one month.
INFLATION is represented by the Consumer Price Index for All Urban Consumers
(CPI-U), not seasonably adjusted.
Source: Ibbotson, Roger G., and Rex A. Sinquefield, Stocks, Bonds, Bills, and
Inflation (SBBI), 1995, updated in Stocks, Bonds, Bills, and Inflation 1996(TM),
Ibbotson Associates, Chicago. All rights reserved. The indices and securities
in the chart above do not reflect the actual portfolio composition,
performance, or fees and expenses associated with
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<PAGE> 223
investing in any Gradison Mutual Fund. The chart is not intended to imply future
performance of any of these investments or any Gradison Mutual Fund. Performance
figures of Gradison Mutual Funds are available by request from Gradison. The
returns for stocks include reinvestment of dividends and interest. Government
bonds and Treasury Bills are guaranteed by the U.S. Government and, if held to
maturity, offer a fixed rate of return and fixed principal value.
In existing disclaimer replace "Past performance does not ensure future results"
with: "The performance shown in the above chart is historical and is not
intended to imply future performance of any of these investments or of any
Gradison fund.
Page 10
GRADISON MONEY MARKET FUNDS
The money market funds offered by the Gradison Mutual Funds provide a full
complement of services including checkwriting, high quality personalized checks,
and the convenience of automatic sweeping of dividends from the Gradison Funds.
The money market funds provide clear, monthly statements that include the name
of the payees of any checks written against the account, as well as a highly
useful year-end summary of all transactions. Graphic Photo of a man and woman
seated next to one another going through documents.
GRADISON U. S. GOVERNMENT RESERVES
A full service money market fund designed to provide current money market
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yields by investing exclusively in securities issued by the U.S. Government, its
agencies or instrumentalities. The fund has tax benefits in that it invests, to
the greatest extent reasonable, only in selected U. S. Government securities
that are not taxable by the states or by local governments.
MUNICIPAL MONEY MARKET FUNDS
Gradison also makes available a general municipal money market fund that
provides income exempt from federal taxation and separate Ohio and Michigan
money market funds that provide income that is not taxable at the federal state
or local levels in those states. A portion of the income of both funds could be
subject to the Alternative Minimum Tax (AMT) for investors who are subject to
AMT.
For more complete information about the Gradison Funds, including sales charges
and expense, please obtain the appropriate prospectuses from your investment
consultant or call 800-869-5999. Please read the prospectuses carefully before
you invest or send money. Investment returns and principal of the funds will
fluctuate so that you may have a gain or a loss when you sell your shares. Money
market funds are neither insured nor guaranteed by the U.S. Government or any
other entity. There can be no assurance that these funds will maintain a
constant net asset value of $1.00 per share.
(Graphic) Man and woman sitting at a desk opposite each other.
Page 11
WORKING WITH YOUR PROFESSIONAL INVESTMENT CONSULTANT
We believe that your professional investment consultant is in the best position
to provide you with investment advice. Your consultant has the training and
experience to provide you with guidance in making your investment decisions. We
encourage you to share as
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much information as possible about your investment goals and your current
personal and financial situation.
Above all, we suggest you ask your investment consultant whatever you feel you
need to know to help you fully understand the investments you are making.
SERVICE YOU CAN COUNT ON
LOW MINIMUN INVESTMENT OF $1,000 Low subsequent investment minimums of $50.
CONVENIENT AUTOMATIC DIVIDEND REINVESTMENT of income dividends and/or capital
gain dividends into any Gradison fund.
AUTOMATIC INVESTMENT PLAN allows authorization of regular, systematic
investments from bank accounts, money market funds and automated payroll into
any Gradison fund.
AUTOMATIC WITHDRAWALS AND PAYMENT PLANS Can be set up to pay you or designated
payees a specified amount monthly or quarterly.
ACCESS Shares can be redeemed at the then-current market value on any business
day.
Page 12
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EXCHANGE PRIVILEGES Including convenient telephone exchanges allows investors to
move money from one Gradison Mutual Fund to another at any time.
CHECK WRITING For all money market funds includes high quality personalized
checks, check payee names on account statements, and return of canceled checks.
4
WIRE TRANSFERS Specified amounts can be transferred to pre-authorized accounts
at other financial institutions. 5
4. A fee applies to checks under $100.00
5. A fee applies to wires.
TOLL-FREE CUSTOMER SERVICE Knowledgeable shareholder service representatives are
available during business hours at 800-869-5999.
24-HOUR ACCOUNT INFORMATION During non-business hours TeleFund 24 provides
touch-tone access to the most recent prices of Gradison Mutual Funds, current
money market yield, and balances on all Gradison Mutual Funds accounts.
ACCOUNT STATEMENTS Clear, concise and informative.
YEAR-END SUMMARY A highly useful summary of all activity.
QUARTERLY NEWSLETTER Your Future provides Gradison shareholders with timely
information about investing, mutual funds and the Gradison family of funds.
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SHAREHOLDER REPORTS Semiannual updates on fund strategy, performance and
portfolio holdings.
INTERNET World Wide Web site www.gradisonfunds.com provides quarterly updates on
Gradison Mutual Funds, as well as other information of interest to mutual fund
investors.
GETTING STARTED
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. The most important thing is to get started.
Call your Investment Consultant or contact Gradison Mutual Funds at
800-869-5999.
START TODAY AND THE FUTURE IS YOURS.
[Graphic: Photo of a baby smiling.]
Back Cover
Logo
Gradison
Mutual Funds
1997 Gradison Mutual Funds 580 Walnut Street Cincinnati, Ohio 45202
800/869-5999 513/579-5000 http:/WWW.gradisonfunds.com
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ESTABLISHED VALUE FUND
- --------------------------------------------------------------------------------
March 31, 1998
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
May 1, 1988 to March 31, 1998
5/1/88 3/31/98
------ -------
GRADISON ESTABLISHED VALUE FUND $10,000 $37,296
S & P 500 $10,000 $57,221
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED MARCH 31, 1998
10 YEARS 5 YEARS 3 YEARS 1 YEAR
-------- ------- ------- ------
Established Value Fund 14.21% 17.35% 23.07% 29.67%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. Performance figures
are historical. The investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than the original cost. The Standard & Poor's (S&P) 500 Composite Stock Price
Index is an unmanaged group of common stocks widely recognized as an index of
market performance the investment returns of which do not include any securities
transaction expenses. Total returns shown include changes in share value and
reinvestment of distributions.
PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS - 73.88% VALUE
------ ------------------------- -----
AEROSPACE/DEFENSE COMPANIES - 6.44%
84,616 Lockheed Martin Corporation $ 9,519,300
80,000 Northrop Grumman Corporation 8,595,000
126,400 Raytheon Company Cl. B 7,378,600
140,000 Textron, Inc. 10,780,000
-----------
36,272,900
-----------
CHEMICALS - 2.03%
255,000 Engelhard Corporation 4,845,000
134,000 Hercules, Inc. 6,616,250
-----------
11,461,250
-----------
COMPUTING PRODUCTS - 9.69%
400,000 Compaq Computer Corporation 10,350,000
300,000 Data General Corporation(1) 5,306,250
180,000 Harris Corporation 9,382,500
160,000 Intel Corporation 12,480,000
250,000 Sun Microsystems, Inc.(1) 10,421,875
150,000 Tektronix, Inc. 6,693,750
-----------
54,634,375
-----------
CONSUMER NON-DURABLES - 1.96%
190,000 Coors (Adolph) Company Cl. B 6,602,500
142,000 RJR Nabisco Holdings Corporation 4,446,375
-----------
11,048,875
-----------
CONSUMER DURABLES - 6.69%
150,000 Agco Corporation 4,453,125
133,000 Black & Decker Corporation 7,057,312
190,000 Brunswick Corporation 6,626,250
97,000 Goodyear Tire & Rubber
(The) Company 7,347,750
100,000 Pulte Corporation 4,650,000
166,500 Snap-on, Inc. 7,596,563
-----------
37,731,000
-----------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
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ESTABLISHED VALUE FUND
- --------------------------------------------------------------------------------
March 31, 1998
PORTFOLIO OF INVESTMENTS Continued
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS (CONTINUED) VALUE
------ ------------------------- -----
ENERGY - 6.21%
109,000 Ashland, Inc. $ 6,172,125
145,000 Coastal Corporation 9,443,125
100,000 Nicor, Inc. 4,225,000
250,000 Pride International, Inc.(1) 5,968,750
50,000 Royal Dutch Petroleum Company 2,840,625
82,000 Western Atlas, Inc.(1) 6,344,750
-----------
34,994,375
-----------
FINANCIAL SERVICES - 9.07%
85,000 Beneficial Corporation 10,566,562
100,000 Household International, Inc. 13,775,000
150,000 Provident Companies 5,146,875
70,000 Transamerica Corporation 8,155,000
225,000 Travelers, Inc. 13,500,000
-----------
51,143,437
-----------
INDUSTRIAL PRODUCTS - 9.82%
118,000 Cooper Industries, Inc. 7,013,625
180,000 Goodrich (B.F.) Company 9,191,250
165,000 Ingersoll-Rand Company 7,909,688
148,000 Johnson Controls, Inc. 8,981,750
175,950 Parker Hannifin Corporation 9,017,438
185,000 Premark International 6,128,125
210,000 Timken Company 7,100,625
-----------
55,342,501
-----------
INSURANCE - 7.11%
142,500 Berkley (W.R.) Corporation 6,750,937
42,000 Hartford Financial Services Group 4,557,000
82,000 MBIA, Inc. 6,355,000
110,000 Providian Corporation 6,318,125
143,000 SAFECO Corporation 7,811,375
93,000 St. Paul Companies, Inc. 8,288,625
-----------
40,081,062
-----------
RETAIL TRADE - 8.90%
320,000 American Stores Company 8,320,000
150,000 Dayton-Hudson Corporation 13,200,000
135,000 Dillard's, Inc. 4,986,562
110,000 Federated Department Stores,
Inc.(1) 5,699,375
400,000 K Mart Corporation(1) 6,675,000
99,000 Mercantile Stores, Inc. 6,651,563
100,000 Supervalu, Inc. 4,662,500
-----------
50,195,000
-----------
SERVICES - 2.75%
150,000 Fingerhut Companies, Inc. 3,890,625
156,000 Pittston Brink's Group 5,947,500
254,000 Wendy's International, Inc. 5,667,375
-----------
15,505,500
-----------
TELECOMMUNICATIONS - 1.05%
300,000 Andrew Corporation(1) 5,925,000
-----------
TRANSPORTATION - 2.16%
213,000 America West Holdings Co.(1) 5,458,125
180,000 Norfolk Southern Corporation 6,727,500
-----------
12,185,625
-----------
TOTAL COMMON STOCKS
(COST $211,226,984) 416,520,900
-----------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
9
<PAGE> 230
ESTABLISHED VALUE FUND
- --------------------------------------------------------------------------------
March 31, 1998
PORTFOLIO OF INVESTMENTS Continued
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
PRINCIPAL INTEREST
AMOUNT COMMERCIAL PAPER - 15.90% MATURITY RATE(2) VALUE
------ ------------------------- -------- -------- -----
<S> <C> <C> <C> <C>
$10,000,000 Ameritech Corporation 4/08/98 5.44% $ 9,989,422
10,000,000 Eastman Kodak Co. 4/09/98 5.51 9,987,756
10,000,000 Tribune Co. 4/17/98 5.48 9,975,644
10,000,000 Goldman Sachs Group (The), L.P. 4/21/98 5.50 9,969,444
10,000,000 American Express Company 4/29/98 5.48 9,957,378
10,000,000 International Business Machines Credit Corporation 5/05/98 5.48 9,948,245
10,000,000 Avco Financial Services, Inc. 5/11/98 5.50 9,938,889
10,000,000 Chevron Corporation 5/13/98 5.47 9,936,183
10,000,000 Equitable Resources, Inc. 5/20/98 5.51 9,925,071
-----------
TOTAL COMMERCIAL PAPER (COST $89,628,032) 89,628,032
-----------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT - 10.22%
-----------------------------
<S> <C> <C> <C> <C>
57,610,000 First National Bank of Chicago, dated 3/31/98, collateral:
U.S. Treasury Note 6.25%; due 5/31/00, market value $35,555,031
and U.S. Treasury 6.125%; due 12/31/01, market value $26,340,086
(repurchase proceeds $57,619,362) (COST $57,610,000) 4/01/98 5.85 57,610,000
------------
TOTAL INVESTMENTS, AT VALUE (NOTE 1) (COST $358,465,016) - 100% $563,758,932
============
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Non-income producing
(2) For commercial paper, the interest rate is the discount rate at the time
of purchase by the Fund. For the repurchase agreement, the rate shown
reflects the actual rate of return to the Fund.
See accompanying notes to financial statements.
10
<PAGE> 231
GROWTH & INCOME FUND
- --------------------------------------------------------------------------------
March 31, 1998
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
February 28, 1995 to March 31, 1998
2/28/95 3/31/98
------- -------
GRADISON GROWTH & INCOME FUND $10,000 $20,355
S & P 500 $10,000 $24,118
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED MARCH 31, 1998
INCEPTION 3 YEARS 1 YEAR
--------- ------- ------
Growth & Income Fund 25.88% 26.20% 38.00%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. Performance figures
are historical. The investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than the original cost. The Standard & Poor's (S&P) 500 Composite Stock Price
Index is an unmanaged group of common stocks widely recognized as an index of
market performance the investment returns of which do not include any securities
transaction expenses. Expense reimbursement by the Fund's investment adviser
increased return during the period shown. Total returns shown include changes in
share value and reinvestment of distributions.
PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS - 97.47% VALUE
------ ---------------------- -----
BANK SERVICES - 7.70%
25,000 Huntington Bancshares, Inc. $ 909,375
12,000 Morgan (J.P.) & Company, Inc. 1,611,750
50,000 Norwest Corporation 2,078,125
----------
4,599,250
----------
CHEMICALS - 4.91%
20,000 Avery-Dennison Corporation 1,067,500
20,000 Du Pont (E.I.) de Nemours
& Company 1,360,000
20,000 Schulman, (A.), Inc. 502,500
----------
2,930,000
----------
CONSUMER DURABLES - 3.24%
35,000 Cooper Tire & Rubber Company 831,250
20,000 TRW, Inc. 1,102,500
----------
1,933,750
----------
CONSUMER NON-DURABLES - 14.66%
30,000 Archer Daniels Midland Corporation 658,125
10,000 Bestfoods 1,168,750
15,000 Heinz (H.J.) Company 875,625
40,000 International Flavors &
Fragrances, Inc. 1,885,000
20,000 Kellogg Company 862,500
20,000 Lancaster Colony Corporation 846,250
20,000 Newell Company 968,750
15,000 Pepsico, Inc. 640,312
10,000 Procter & Gamble Company 843,750
----------
8,749,062
----------
ENERGY - 9.27%
15,000 Chevron Corporation 1,204,687
30,000 Exxon Corporation 2,028,750
30,000 Mobil Corporation 2,298,750
----------
5,532,187
----------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
11
<PAGE> 232
GROWTH & INCOME FUND
- --------------------------------------------------------------------------------
March 31, 1998
PORTFOLIO OF INVESTMENTS Continued
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS (CONTINUED) VALUE
------ ------------------------- -----
FINANCIAL SERVICES - 8.32%
25,000 American General Corporation $1,617,187
10,000 Cincinnati Financial Corporation 1,240,000
10,000 Excel Limited 775,000
15,000 St. Paul Companies 1,336,875
----------
4,969,062
----------
HEALTHCARE & PHARMACEUTICALS - 8.52%
20,000 American Home Products Corporation 1,907,500
12,000 Bristol-Myers Squibb Company 1,251,750
15,000 Merck & Co., Inc. 1,925,625
----------
5,084,875
----------
INDUSTRIAL PRODUCTS - 8.01%
10,000 AMP Inc. 438,125
15,000 General Electric Company 1,292,812
20,000 Hubbell, Inc. 1,007,500
30,000 Pall Corporation 645,000
25,000 Waste Management, Inc. 770,313
35,000 Worthington Industries, Inc. 627,813
----------
4,781,563
----------
RETAIL TRADE & SERVICES - 6.12%
10,000 J.C. Penney Company, Inc. 756,875
10,000 May Department Stores Co. 635,000
7,000 McDonald's Corporation 420,000
60,000 Reynolds & Reynolds Company Cl. A 1,312,500
15,000 Walgreen Co. 527,813
----------
3,652,188
----------
TECHNOLOGY - 16.44%
10,000 Automatic Data Processing, Inc. 680,625
25,000 Diebold, Inc. 1,100,000
40,000 Hewlett Packard Company 2,535,000
15,000 Intel Corporation 1,170,000
10,000 Minnesota Mining & Manufacturing
Company 911,875
15,000 Motorola, Inc. 909,375
50,000 Pitney-Bowes, Inc. 2,509,375
----------
9,816,250
----------
TELECOMMUNICATIONS - 7.68%
50,000 Ameritech Corporation 2,471,875
10,000 Bell Atlantic Corporation 1,025,000
25,000 SBC Communications, Inc. 1,090,625
----------
4,587,500
----------
TRANSPORTATION - 0.44%
10,000 Comair Holdings 265,000
----------
UTILITIES - 2.16%
10,000 Duke Energy Company 595,625
25,000 Southern Corporation 692,188
----------
1,287,813
----------
TOTAL COMMON STOCKS
(COST $42,477,806) 58,188,500
----------
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
PRINCIPAL INTEREST
AMOUNT REPURCHASE AGREEMENT - 2.53% MATURITY RATE(1) VALUE
------ ---------------------------- -------- -------- -----
$1,510,000 First National Bank of Chicago, dated 3/31/98, collateral:
U.S. Treasury Note 6.75%; due 6/30/99, market value $1,545,798
(repurchase proceeds $1,510,245) (COST $1,510,000) 4/01/98 5.85% 1,510,000
-----------
TOTAL INVESTMENTS, AT VALUE (NOTE 1) (COST $43,987,806) - 100.00% $59,698,500
===========
</TABLE>
- --------------------------------------------------------------------------------
(1) For the repurchase agreement, the interest rate shown reflects the actual
rate of return to the Fund.
See accompanying notes to financial statements.
12
<PAGE> 233
OPPORTUNITY VALUE FUND
- --------------------------------------------------------------------------------
March 31, 1998
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
May 1, 1988 to March 31, 1998
5/1/88 3/31/98
------ -------
GRADISON OPPORTUNITY VALUE FUND $10,000 $39,369
S & P 500 $10,000 $57,221
RUSSELL 2000 $10,000 $34,111
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED MARCH 31, 1998
10 YEARS 5 YEARS 3 YEARS 1 YEAR
-------- ------- ------- ------
Opportunity Value Fund 14.88% 17.44% 26.92% 42.02%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. Performance figures
are historical. The investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than the original cost. The Russell 2000 Small Stock Index is an unmanaged group
of stocks representative of small company stock performance; the Standard &
Poor's (S&P) 500 Composite Stock Price Index is an unmanaged group of common
stocks widely recognized as an index of market performance. The investment
returns of these indices do not include any securities transaction expenses.
Total returns shown include changes in share value and reinvestment of
distributions.
PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS - 72.85% VALUE
------ ---------------------- -----
AUTOMOTIVES - 4.60%
25,000 Borg-Warner Auto, Inc. $1,603,125
30,000 Gleason Corporation 1,051,875
70,000 Intermet Corporation 1,557,500
30,000 Motocar Parts & Acc.(1) 534,375
30,000 Superior Industries International 995,625
100,000 Wynn's International, Inc. 2,275,000
-----------
8,017,500
-----------
BANKS - 10.12%
4,000 First Empire State Corporation 1,999,500
30,000 Firstar Corporation 1,185,000
39,000 Granite State Bankshares 1,057,875
47,740 HUBCO, Inc. 1,826,055
46,125 Mercantile Bankshares Corporation 1,669,148
12,000 National City Bankcorp(1) 406,500
40,000 Old Kent Financial Corporation 1,535,000
50,000 TCF Financial Corporation 1,696,875
66,000 TR Financial Corporation 2,293,500
20,000 Union Planters Corporation 1,243,750
39,000 Westcorp, Inc. 653,250
40,000 Zions Bancorporation 2,090,000
-----------
17,656,453
-----------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
13
<PAGE> 234
OPPORTUNITY VALUE FUND
- --------------------------------------------------------------------------------
March 31, 1998
PORTFOLIO OF INVESTMENTS Continued
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS (CONTINUED) VALUE
------ ------------------------- -----
BUILDING MATERIALS - 4.48%
39,000 Butler Manufacturing Company $ 1,404,000
32,000 Cascade Corporation 518,000
25,000 Fibermark, Inc.(1) 582,812
45,000 Hughes Supply Company 1,628,438
84,150 Republic Group, Inc. 1,714,556
34,000 Texas Industries, Inc. 1,965,625
-----------
7,813,431
-----------
BUSINESS SERVICES - 4.22%
75,000 ABM Industries, Inc. 2,329,687
38,000 Inacom Corporation(1) 1,049,750
70,000 Merrill Corporation 1,531,250
100,000 Norstan, Inc.(1) 2,450,000
-----------
7,360,687
-----------
CHEMICALS - 1.94%
30,000 Cambrex Corporation 1,511,250
45,000 Ferro Corporation 1,321,875
44,000 Stephan Company 555,500
-----------
3,388,625
-----------
COMPUTER PRODUCTS - 3.43%
35,000 Adaptec, Inc.(1) 686,875
40,000 DRS Technologies, Inc.(1) 555,000
70,000 Innovex, Inc. 1,693,125
45,000 Keane, Inc.(1) 2,542,500
30,000 Printronix, Inc.(1) 498,750
-----------
5,976,250
-----------
COMPUTER SERVICES - 1.77%
60,000 Affiliated Computer
Services, Inc.(1) 1,991,250
19,000 Devon Group, Inc.(1) 1,099,625
-----------
3,090,875
-----------
CONSUMER DURABLES - 1.47%
46,000 Cannondale Corporation(1) 759,000
42,000 Culp, Inc. 861,000
23,000 Thor Industries, Inc. 941,563
-----------
2,561,563
-----------
ELECTRONICS - 3.77%
52,000 Coherent, Inc.(1) 1,248,000
40,500 CTS Corporation 1,374,469
54,000 EDO Corporation(1) 486,000
25,000 Electro Scientific Industries,
Inc.(1) 962,500
25,000 Esterline Technologies
Corporation(1) 1,054,687
34,000 Park Electrochemical Corporation 877,625
20,000 Zero Corporation 565,000
-----------
6,568,281
-----------
ENERGY SERVICES - 1.70%
20,000 Lone Star Technology, Inc.(1) 475,000
20,000 SEACOR SMIT, Inc.(1) 1,163,750
60,000 World Fuel Services Corporation 1,320,000
-----------
2,958,750
-----------
FINANCIAL SERVICES - 2.88%
18,000 AmeriCredit Corporation(1) 495,000
20,000 D & N Financial Corporation(1) 555,000
69,000 Raymond James Financial, Inc. 3,005,813
35,000 Vermont Financial Services
Corporation 966,875
-----------
5,022,688
-----------
HEALTH CARE - 4.42%
42,000 Genesis Health Ventures, Inc.(1) 1,181,250
40,000 HealthSouth Corporation(1) 1,122,500
35,000 Integrated Health Services, Inc. 1,375,937
68,000 Mariner Health Group, Inc.(1) 1,147,500
50,000 Universal Health Services, Inc.(1) 2,887,500
-----------
7,714,687
-----------
HOTELS/CASINOS - 0.39%
24,000 Harveys Casinos Resorts 681,000
-----------
HOUSING - 4.68%
50,000 D.R. Horton, Inc. 1,062,500
43,000 Lennar Corporation 1,480,812
43,000 LNR Property Corporation 1,150,250
49,000 MDC Holdings, Inc. 869,750
60,000 Oakwood Homes Corporation 2,197,500
50,000 Toll Brothers, Inc.(1) 1,406,250
-----------
8,167,062
-----------
INDUSTRIAL PRODUCTS - 4.96%
21,000 Carpenter Technology 1,134,000
25,000 Chase Industries, Inc.(1) 773,437
30,000 DT Industries, Inc. 1,140,000
35,000 Farr Company(1) 665,000
44,000 Gehl Company(1) 935,000
31,800 Met-Pro Corporation 494,888
55,000 MTS Systems Corporation 876,562
10,000 Robbins & Meyers, Inc. 381,250
22,000 Thomas Industries, Inc. 489,500
32,000 Transtechnology Corporation 964,000
25,000 United Dominion Industries, Inc. 810,938
-----------
8,664,575
-----------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
14
<PAGE> 235
OPPORTUNITY VALUE FUND
- --------------------------------------------------------------------------------
March 31, 1998
PORTFOLIO OF INVESTMENTS Continued
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS (CONTINUED) VALUE
------ ------------------------- -----
INSURANCE COMPANIES - 7.22%
60,000 American Bankers Insurance
Group, Inc. $ 3,870,000
45,000 Fremont General Corporation 2,646,562
52,000 HCC Insurance Holdings, Inc. 1,196,000
40,000 Orion Capital Corporation 2,187,500
29,000 Protective Life Corporation 2,117,000
22,000 Selective Insurance Group, Inc. 585,750
-----------
12,602,812
-----------
MEDICAL EQUIPMENT - 1.16%
35,000 EMPI, Inc.(1) 564,375
31,000 Thermedics, Inc.(1) 552,188
30,000 West Company, Inc. 903,750
-----------
2,020,313
-----------
NATURAL RESOURCES - 4.20%
29,000 Atchison Casting Corporation 453,125
24,000 Florida Rock Industries 685,500
40,000 Mueller Industries, Inc.(1) 2,532,500
37,000 Quanex Corporation 1,112,313
5,000 Scope Industries 315,313
32,000 Southdown, Inc. 2,230,000
-----------
7,328,751
-----------
RETAIL TRADE & SERVICES - 1.93%
43,000 BJ's Wholesale Club, Inc.(1) 1,677,000
40,000 O'Charleys, Inc.(1) 847,500
45,000 Play By Play Toys &
Novelties, Inc.(1) 838,125
-----------
3,362,625
-----------
SEMICONDUCTORS - 1.46%
50,000 Dallas Semiconductor Corporation 1,681,250
40,000 Kulicke and Soffa Industries,
Inc.(1) 870,000
-----------
2,551,250
-----------
TELECOMMUNICATIONS - 0.29%
30,000 Communication Systems, Inc. 511,875
-----------
TRANSPORTATION - 1.76%
75,000 Comair Holdings, Inc. 1,987,500
30,000 U.S. Freightways Corporation 1,080,000
-----------
3,067,500
-----------
TOTAL COMMON STOCKS
(COST $68,035,162) 127,087,553
-----------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL INTEREST
AMOUNT COMMERCIAL PAPER - 12.84% MATURITY RATE (2) VALUE
------ ------------------------- -------- -------- -----
<S> <C> <C> <C> <C>
$2,500,000 Ameritech Corporation 4/08/98 5.44% 2,497,356
2,500,000 Eastman Kodak Co. 4/09/98 5.51 2,496,939
2,500,000 Tribune Co. 4/17/98 5.48 2,493,911
2,500,000 Goldman Sachs Group (The), L.P. 4/21/98 5.50 2,492,361
2,500,000 American Express Company 4/29/98 5.48 2,489,344
2,500,000 International Business Machines Credit Corporation 5/05/98 5.48 2,487,061
2,500,000 Avco Financial Services, Inc. 5/11/98 5.50 2,484,722
2,500,000 Chevron Corporation 5/13/98 5.47 2,484,046
2,500,000 Equitable Resources, Inc. 5/20/98 5.51 2,481,268
-----------
TOTAL COMMERCIAL PAPER (COST $22,407,008) 22,407,008
-----------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
REPURCHASE AGREEMENT - 14.31%
-----------------------------
<S> <C> <C> <C> <C>
24,960,000 First National Bank of Chicago, dated 3/31/98,
collateral:
U.S. Treasury Note 6.75%; due 6/30/99, market value
$25,474,745 (repurchase proceeds $24,964,057)
(COST $24,960,000) 4/01/98 5.85 24,960,000
------------
TOTAL INVESTMENTS, AT VALUE (NOTE 1)
(COST $115,402,170) - 100% $174,454,561
============
</TABLE>
- --------------------------------------------------------------------------------
(1) Non-income producing
(2) For commercial paper, the interest rate is the discount rate at the time
of purchase by the Fund. For the repurchase agreement, the rate shown
reflects the actual rate of return to the Fund.
See accompanying notes to financial statements.
15
<PAGE> 236
INTERNATIONAL FUND
- --------------------------------------------------------------------------------
March 31, 1998
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
May 31, 1995 to March 31, 1998
5/31/95 3/31/98
------- -------
GRADISON INTERNATIONAL FUND $10,000 $12,948
EAFE/EMS $10,000 $12,843
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED MARCH 31, 1998
INCEPTION 1 YEAR
--------- ------
International Fund 9.54% 19.11%
Since the Fund's inception, its investment adviser has been waiving receipt of
certain fees otherwise due to be paid by the Fund and paying certain Fund
expenses which increased the Fund's return. Waiver and reimbursement
arrangements may be terminated which would lower future performance. Performance
figures are historical. 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. PAST PERFORMANCE IS
NOT PREDICTIVE OF FUTURE PERFORMANCE. The EAFE/EMS Index is the Morgan Stanley
Capital International Europe Australasia Far East plus Emerging Markets Index.
Total returns shown include changes in share value and reinvestment of
distributions.
PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
SHARES PREFERRED STOCKS - 0.76% VALUE
------ ------------------------ -----
GERMANY - 0.76%
450 Man Ag-vorzugsaktien $113,027
270 Sap Preferred 114,827
--------
TOTAL PREFERRED STOCKS
(COST $203,457) 227,854
--------
- --------------------------------------------------------------------------------
Common Stocks - 99.24%
----------------------
ARGENTINA - 2.84%
39,350 Astra Cia Argentina De Petroleum 74,385
9,497 Banco De Galicia Bue 'B' 58,512
7,196 Banco Frances Rio Plata 72,333
38,364 Dalmine Siderca Sa 102,450
541 IRSA (Inversiones y Representaciones
SA) 144A ADR 20,727
9,040 Molinos Rio Plata 'B' 22,152
9,750 Perez Companc SA ADR 132,038
5,512 Telefonica de Argentina ADR 209,801
4,800 YPF SA ADR 163,200
----------
855,598
----------
CHILE - 2.76%
6,500 Banco Santander Chile ADR 91,406
3,524 Chilgener SA ADR 84,796
1,750 Cia Cerveceria Unidas ADR 52,937
7,000 Cia Telecommunications Chile ADR 192,938
6,600 Empresa Nacional de Electridad
SA ADS 127,050
5,150 Enersis SA ADR 162,547
1,600 Madeco SA ADR 27,700
3,400 Maderas Y Sinteticos ADR 35,063
1,300 Quimica y Minera SA ADR 57,200
----------
831,637
----------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
16
<PAGE> 237
INTERNATIONAL FUND
- --------------------------------------------------------------------------------
March 31, 1998
PORTFOLIO OF INVESTMENTS Continued
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS (CONTINUED) VALUE
------ ------------------------- -----
FINLAND - 5.61%
5,000 Enso Oy $ 46,147
1,200 Hartwall Oy 141,113
9,740 Metsa Serla Oy B Ord 86,770
2,070 Neste Oy 61,224
8,165 Nokia AB Oy 876,506
5,200 Okobank Osuspankk 100,062
55 Rauma Oy 1,019
7,100 Rautaruuki Oy 59,077
4,880 Upm-Kymmene Oy 124,336
550 Viking Line AB 21,069
3,000 Werner Soderstrom 133,630
3,200 Yit Yhtyma 39,056
----------
1,690,009
----------
FRANCE - 11.64%
1,308 Alcatel Alst 245,525
1,616 AXA 166,407
5,050 Banque Nationale de Paris 392,461
1,290 Cie De St Gobain 212,373
1,230 Credit Commercial de France 101,049
880 Danone 212,482
1,720 Eaux (Cie Generale) 279,277
550 Eaux (Cie Generale) Warrant 617
1,482 Elf Aquitaine 194,229
1,840 France Telecom SA 97,053
2,100 Groupe GTM 163,371
490 L'Oreal 227,770
2,050 Lafarge 174,371
2,050 Lafarge Rights 2,680
1,550 Peugeot SA 267,185
290 Pinault-Printemps -- Redoute SA 224,203
752 Schneider SA 57,896
1,240 Societe Generale 248,172
1,120 Total SA 134,493
1,160 Valeo 102,038
----------
3,503,652
----------
GERMANY - 7.41%
25 Allianz AG DEM (REGD) 7,496
860 Allianz AG Holdings 259,720
2,700 Basf AG 120,083
6,315 Bayer AG 288,887
2,400 Commerzbank AG 86,690
1,450 Daimler-Benz AG 133,291
1,010 Degussa AG 57,509
1,200 Deutsche Telekom Bank AG 90,292
1,400 Dresdner Bank AG 63,742
462 Mannesmann AG 338,255
160 Munchener Ruckversicheru 69,214
3,000 Rwe Ag 161,409
2,120 Siemens AG 141,919
4,232 Veba AG 300,236
138 Volkswagen AG 108,052
138 Volkswagen AG Rights 2,507
----------
2,229,302
----------
HUNGARY - 2.71%
1,500 Danibius Hotels(1) 39,379
650 Graboplast Textiles Rt. 26,450
6,900 Magyar Olaj Es Gazipari Rt. 211,550
42,000 Matav 258,918
2,900 OTP Bank Rt. 147,508
1,250 Richter Gedeon Rt. 131,528
----------
815,333
----------
IRELAND - 2.63%
22,500 Allied Irish Banks Ord 276,077
14,100 CRH Ord 211,901
8,800 Irish Life Ord 80,355
6,000 Kerry Group A Ord 79,898
49,900 Smurfit Jefferson Ord 143,068
----------
791,299
----------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
17
<PAGE> 238
INTERNATIONAL FUND
- --------------------------------------------------------------------------------
March 31, 1998
PORTFOLIO OF INVESTMENTS Continued
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS (CONTINUED) VALUE
------ ------------------------- -----
ISRAEL - 3.09%
3,800 Agis Industries $ 27,216
33,000 Bank Leumi Le-Israel BM 62,385
21,600 Bezeq Israel Telecommunications 58,283
40,000 Bk Hapoalim BM 109,485
3,800 Blue Square Chain Stores(1) 41,879
2,800 Eci Telecommunications ADR 86,100
1,740 Elite Industries 55,306
2,000 Formula Systems(1) 81,836
63,000 ICl-Israel Chemical 75,552
37,000 Industrial Building 63,065
880 Koor Industries Ltd. 109,441
15,800 Supersol Ltd. 51,098
2,530 Teva Pharmaceutical Industries Ltd. 108,931
----------
930,577
----------
ITALY - 10.52%
13,500 Alleanza Assicuraz 214,542
8,120 Assicurazioni Generali SpA 250,076
58,400 BCA Communicatios Italiana 291,069
6,240 Benetton Group SpA 130,968
12,500 Danieli & Company 121,587
24,000 Edison SpA 201,817
61,500 Eni SpA 418,579
43,600 Fiat SpA 181,705
61,000 Istituto Nazionale delle
Assicurazioni 197,559
18,300 Instituto Mobiliare Italiano 296,841
15,000 Italcementi SpA 175,908
52,110 Telecom Italia SpA 410,211
51,000 TIM SpA 273,751
----------
3,164,613
----------
JAPAN - 8.82%
6,600 Aoyama Trading Company 158,379
3,000 Bridgestone Corporation 67,941
4,000 Canon 90,288
6,200 Fanuc 213,871
6,000 Fuji Photo Film Company 223,170
19,000 Fujisawa Pharmaceutical Company 169,552
28,000 Hitachi Ltd. 203,673
1,000 Ito-yokado Co Ltd. 54,143
17,000 Kirin Brewery Company 151,705
6,000 Matsushita Electric Works 96,287
19,000 Mitsubishi Chemical Corporation 72,238
65,000 Mitsui O.S.K. Lines Ltd.(1) 108,698
6,000 Murata Manufacturing Company 165,578
8,000 Nec Corporation 80,389
42 Nippon Telgraph & Telephone Company 174,802
18,000 Sumitomo Bank 183,576
22,000 Sumitomo Trust & Banking 142,046
10,000 Tokio Marine & Fire Insurance 111,735
4,200 Tokyo Electric 79,369
4,000 Toyota Motor Corporation 106,486
----------
2,653,926
----------
MEXICO - 1.81%
5,250 Alfa SA de CV Ser A 29,708
6,450 Cemex SA 29,229
21,802 Cifra SA de Cv Servnpv 39,776
8,500 Controlodora Comercial
Mexicana SA de CV 10,398
1,850 Desc SA de CV Ser B 13,531
106 Desc SA de CV Ser C 809
4,700 Empresas La Modern A(1) 23,313
2,800 Fomento Economico Mexico SA de CV 20,216
5,050 Grupo Carso SA de CV Ser A1 31,304
11,554 Grupo Financiero Banamex
Accival SA de CV(1) 27,102
7,172 Grupo Industrial Bimbo SA 18,945
8,150 Grupo Mexico SA 26,313
4,850 Grupo Modelo Sa de Cv 40,939
780 Grupo Televisa GDS(1) 28,567
3,900 Industrias Penoles SA 16,483
5,950 Kimberly Clark de Mexico SA 30,736
2,620 Telefonos de Mexico ADR 147,703
500 Tv Azteca ADS(1) 9,813
----------
544,885
----------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
18
<PAGE> 239
INTERNATIONAL FUND
- --------------------------------------------------------------------------------
March 31, 1998
PORTFOLIO OF INVESTMENTS Continued
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS (CONTINUED) VALUE
------ ------------------------- -----
NETHERLANDS - 4.77%
3,064 ABN-AMRO Holdings NV $ 70,696
350 Akzo Nobel NV 71,102
4,000 Elsevier NV 65,813
1,500 Fortis Amev NV 88,503
2,200 Ing Groep NV 124,844
1,800 Koninklijke PTT Nederland NV 93,252
1,300 Philips Electronic 95,410
7,280 Royal Dutch Petroleum 412,073
2,440 Unilever NV 164,564
1,500 Vendex International NV 94,979
4,480 Ver Ned Uitgevers 153,225
----------
1,434,461
----------
POLAND - 1.38%
900 Agros Holding SA(1) 20,982
1,900 Amica Wronki(1) 35,491
300 Bank Przemyslowo Handlowy SA 23,893
1,900 Bank Rozwoju Eksportu SA 52,824
800 Bank Slaski SA 57,922
35,100 BIG Bank Gdanski SA 49,301
700 Debica SA 18,245
9,300 Elektrim Spolka Akcyjna SA 115,814
4,600 Polifarb Cieszyn-Wroclaw SA(1) 19,184
2,800 Stomil Olsztyn SA 21,894
----------
415,550
----------
PORTUGAL - 4.86%
3,400 Banco Comercial Portugues SA 109,776
3,400 Banco Comercial Portugues SA Rights 11,005
5,450 Banco Espirito Santo 251,790
1,200 Brisa-Auto Estradas de
Portugal SA(1) 54,806
3,460 Cimpor (Cimentos de Portugal) 121,926
9,800 Electricidade de Portugal 227,415
1,650 Investec Consultadoria
Internacional(1) 66,647
1,895 Jeronimo Martins 77,944
4,000 Mundial Confianca(1) 129,360
6,630 Portugal Telecom SA 344,848
1,440 Sonae Investimentos Socieda de Gestora
de Participacoes Sociais SA 67,782
----------
1,463,299
----------
SPAIN - 5.53%
2,000 Argentaria Corp Bc 165,594
6,800 Autopistas, Concesionari 112,604
5,300 Banco Bilbao Vizcaya SA 248,780
700 Banco Central Hispanoame 22,425
700 Banco Central Hsp Rights 553
1,450 Banco Popular Espanol 140,742
2,200 Banco Santander SA 109,572
5,400 Empresa Nacional de Electricid SA 129,832
1,600 Gas Natural 99,866
800 Gas Y Electricidad Sa 64,709
10,600 Iberdrola SA 161,015
1,700 Repsol SA 86,727
7,300 Telefonica de Espana 321,736
----------
1,664,155
----------
SWITZERLAND - 6.85%
72 ABB AG 107,588
238 Ciba Specialty Chemical Nw 30,443
125 Clariant AG 134,881
944 Credit Suisse Group 188,864
99 Holderbank Finance Glaris AG 103,904
30 Kuoni Reisen Holdings 150,543
138 Nestle SA 263,691
253 Novartis AG 447,754
29 Roche Holdings AG 313,876
150 Schweiz Bankgesellschaft 245,001
650 Tag Heuer 73,976
----------
2,060,521
----------
TURKEY - 4.03%
632,700 Adana Cimento Sanayii 41,606
624,237 Akal Tekstil Sanayii 15,650
953,203 Akbank 69,539
1,770,000 Arcelik AS 152,769
323,000 Aygaz AS 45,800
57,000 Bagfas Bandirma Gubre AS 56,810
1,562,000 Brisa AS 78,643
687,000 Ege Biracilik Ve Malt SA 98,825
851,000 Eregli Demir Celik 106,677
73,000 Ford Otomotiv Sanayi AS 45,005
73,650 Migros Turk TAS 65,081
119,000 Netas Telekomunik AS(1) 37,660
906,000 Sabanci Holding 53,062
794,240 T Sise Cam 28,073
3,557,000 Turkiye Garanti Bankasi 140,345
69,7000 Turkiye Is Bankasi 74,481
294,5000 Yapi Ve Kredi Bankasi 101,673
----------
1,211,699
----------
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
19
<PAGE> 240
INTERNATIONAL FUND
- --------------------------------------------------------------------------------
March 31, 1998
PORTFOLIO OF INVESTMENTS Continued
- --------------------------------------------------------------------------------
SHARES COMMON STOCKS (CONTINUED) VALUE
------ ------------------------- -----
UNITED KINGDOM - 7.87%
6,640 Abbey National PLC $ 128,651
7,600 Boots Co. PLC 121,797
4,600 British Petroleum 66,401
8,500 British Telecom PLC 92,522
5,900 Commercial Union PLC 115,202
3,550 Glaxo Wellcome 95,533
3,930 HSBC Holdings 128,201
9,500 IMI PLC 72,385
16,000 Lasmo PLC 73,950
17,059 Lloyds TSB Group PLC 265,388
6,200 National Power PLC 63,541
9,400 Prudential PLC 138,208
11,429 Scot Power 107,561
9,100 Scottish & Newcastle PLC 144,007
10,050 Shell Transport & Trading PLC 73,883
13,600 Smith Kline Beecham 171,948
8,300 Tesco 83,256
15,200 Unilever PLC 143,815
11,580 Wolseley PLC 89,009
4,490 Zeneca Group PLC 193,538
-----------
2,368,796
-----------
VENEZUELA - 4.11%
106,356 Banco Provincial 192,478
12,550 Compania Anonima Nacional
Telefonos De Venezuela 524,747
259,750 Electricid Caracas 244,938
9,450 Mavesa SA 144A ADR 49,613
363,850 Sider Venezuela ADR 100,504
82,231 Venezolana De Cemento 125,320
-----------
1,237,600
-----------
TOTAL COMMON STOCKS
(COST $23,545,447) 29,866,912
-----------
TOTAL INVESTMENTS,
AT VALUE (NOTE 1)
(COST $23,748,904) - 100% $30,094,766
===========
- --------------------------------------------------------------------------------
(1) Non-income producing
The following abbreviations are used in this portfolio:
ADR - American Depository Receipts; ADS - American Depository Shares;
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 $70,339 as of March 31, 1998.
- --------------------------------------------------------------------------------
SUMMARY OF INVESTMENTS BY INDUSTRY
% OF
TOTAL
INDUSTRY INVESTMENTS
- -------- -----------
Automotive 3.73%
Banking 17.46
Beverages and Tobacco 2.24
Broadcasting and Publishing 1.52
Building Materials 4.00
Business Services 0.93
Chemicals 4.50
Construction and Housing 1.21
Diversified Companies 4.08
Electronics 6.77
Energy 7.65
Financial Services 1.96
Food and Household Products 3.78
Forest Products and Paper 1.40
Health and Personal Care 4.30
Household Appliances and Durables 1.14
Insurance 6.08
Machinery and Engineering 1.53
Materials and Commodities 0.60
Merchandising 3.10
Metals and Mining 0.39
Real Estate 0.07
Steel 0.89
Telecommunications 13.86
Textiles and Apparel 0.58
Tourism 0.50
Transportation 0.76
Utilities 4.97
------
100.00%
======
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
20
<PAGE> 241
STATEMENTS OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
March 31, 1998
<TABLE>
<CAPTION>
ESTABLISHED GROWTH & OPPORTUNITY INTERNATIONAL
VALUE FUND INCOME FUND VALUE FUND FUND
----------- ----------- ----------- -------------
ASSETS
<S> <C> <C> <C> <C>
Investments in securities, at cost $358,465,016 $43,987,806 $115,402,170 $23,748,904
============ =========== ============ ===========
Investments in securities, at value (Note 1) $563,758,932 $59,698,500 $174,454,561 $30,094,766
Cash 187,719 10,468 30,931 2,043,534
Foreign currency, at value (Note 1) (Cost $619,985) -- -- -- 584,859
Receivable for securities sold -- -- 328,189 596,412
Receivable for Fund shares sold 3,687,669 339,549 1,127,047 21,075
Dividends and interest receivable 492,337 112,195 63,521 58,331
Forward foreign exchange currency contracts,
at value (Note 1) -- -- -- 66,315
Prepaid expenses and other assets 23,056 7,488 11,031 4,104
Organization expenses, net (Note 1) -- 2,526 -- 10,356
------------ ----------- ------------ -----------
TOTAL ASSETS 568,149,713 60,170,726 176,015,280 33,479,752
------------ ----------- ------------ -----------
LIABILITIES
Payable for Fund shares redeemed 388,782 16,537 153,105 27,625
Payable for securities purchased -- -- -- 91,553
Accrued investment advisory fee (Note 2) 231,912 29,639 85,196 20,568
Other accrued expenses payable to adviser (Note 2) 257,653 31,373 85,878 37,518
Other accrued expenses and liabilities 16,814 2,025 6,852 20,850
Futures variation margin payable -- -- -- 3,462
------------ ----------- ------------ -----------
TOTAL LIABILITIES 895,161 79,574 331,031 201,576
------------ ----------- ------------ -----------
NET ASSETS $567,254,552 $60,091,152 $175,684,249 $33,278,176
============ =========== ============ ===========
NET ASSETS CONSIST OF:
Aggregate paid-in capital $346,809,964 $44,250,538 $109,964,485 $27,448,501
Accumulated undistributed net investment
income (loss) 305,847 3,901 206,426 12,679
Accumulated undistributed net realized
gains (losses) 14,844,825 126,019 6,460,947 (540,694)
Net unrealized appreciation of investments 205,293,916 15,710,694 59,052,391 6,345,862
Net unrealized appreciation on translation
of assets and liabilities in foreign currency -- -- -- 11,828
------------ ----------- ------------ -----------
NET ASSETS $567,254,552 $60,091,152 $175,684,249 $33,278,176
============ =========== ============ ===========
SHARES OF CAPITAL STOCK OUTSTANDING
(no par value - unlimited number of shares
authorized) 16,713,114 2,072,968 6,298,471 1,739,146
============ =========== ============ ===========
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE (Note 1) $33.94 $28.99 $27.89 $19.13
============ =========== ============ ===========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
21
<PAGE> 242
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
For the year ended March 31, 1998
<TABLE>
<CAPTION>
ESTABLISHED GROWTH & OPPORTUNITY INTERNATIONAL
VALUE FUND INCOME FUND VALUE FUND FUND
----------- ----------- ----------- -------------
INVESTMENT INCOME:
<S> <C> <C> <C> <C>
Dividends, net of foreign withholding taxes $ 5,183,890 $ 890,955 $ 940,214 $ 432,272
Interest 7,688,489 143,096 2,143,373 145,489
------------ ----------- ----------- ----------
TOTAL INVESTMENT INCOME 12,872,379 1,034,051 3,083,587 577,761
------------ ----------- ----------- ----------
EXPENSES:
Investment advisory fee (Note 2) 2,580,124 267,848 881,658 282,889
Distribution (Note 2) 2,454,412 206,037 710,599 141,445
Transfer agency fees (Note 2) 303,442 47,227 130,769 41,353
Accounting services fees (Note 2) 80,669 40,000 40,000 60,000
Custodian fees (Note 1) 23,598 12,002 19,263 79,583
Registration fees 43,019 23,113 32,427 18,955
Professional fees 14,022 12,937 12,758 32,716
Printing 40,438 7,236 15,904 5,889
Trustees' fees (Note 2) 7,067 6,394 6,618 7,050
Amortization of organization expense (Note 1) -- 1,153 -- 4,746
Other 27,303 3,321 8,356 3,285
------------ ----------- ----------- ----------
GROSS EXPENSES 5,574,094 627,268 1,858,352 677,911
LESS FEES WAIVED BY THE ADVISER (Note 2) -- -- -- (112,829)
LESS EARNINGS CREDITS ON CASH BALANCES
(Note 1) (4,374) (12,002) (2,140) --
------------ ----------- ----------- ----------
NET EXPENSES 5,569,720 615,266 1,856,212 565,082
------------ ----------- ----------- ----------
NET INVESTMENT INCOME 7,302,659 418,785 1,227,375 12,679
------------ ----------- ----------- ----------
NET REALIZED AND UNREALIZED GAINS (LOSSES)
ON INVESTMENTS:
Net realized gain (loss) on investments 41,231,389 278,290 20,508,362 (254,868)
Net realized loss on foreign currency
transactions -- -- -- (208,788)
Net change in unrealized appreciation
of investments 79,580,611 12,198,030 26,917,903 5,495,316
Net change in unrealized depreciation
of foreign currency transactions -- -- -- 13,438
------------ ----------- ----------- ----------
NET REALIZED AND UNREALIZED GAINS ON
INVESTMENTS 120,812,000 12,476,320 47,426,265 5,045,098
------------ ----------- ----------- ----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $128,114,659 $12,895,105 $48,653,640 $5,057,777
============ =========== =========== ==========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
22
<PAGE> 243
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ESTABLISHED VALUE FUND GROWTH & INCOME FUND OPPORTUNITY VALUE FUND
YEAR ENDED YEAR ENDED YEAR ENDED
---------------------- ----------------------- ------------------------
3/31/98 3/31/97 3/31/98 3/31/97 3/31/98 3/31/97
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment income (loss) $ 7,302,659 $ 6,257,379 $ 418,785 $ 242,652 $ 1,227,375 $ 984,370
Net realized gain (loss) on
investments 41,231,389 37,844,738 278,290 337,124 20,508,362 9,839,496
Net realized loss on foreign
currency transactions -- -- -- -- -- --
Net change in unrealized
appreciation of investments 79,580,611 11,774,353 12,198,030 2,325,455 26,917,903 1,731,084
Net change in unrealized
depreciation on translation
of assets and liabilities in
foreign currencies -- -- -- -- -- --
------------- ------------ ------------ ------------ ------------ ------------
Net increase in net assets
resulting from operations 128,114,659 55,876,470 12,895,105 2,905,231 48,653,640 12,554,950
------------- ------------ ------------ ------------ ------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income (7,488,999) (6,248,864) (483,144) (190,392) (1,400,935) (780,766)
Net realized capital gains (39,693,896) (32,341,951) (376,650) (112,745) (18,567,761) (9,624,857)
------------- ------------ ------------ ------------ ------------ ------------
Decrease in net assets from
distributions to shareholders (47,182,895) (38,590,815) (859,794) (303,137) (19,968,696) (10,405,623)
------------- ------------ ------------ ------------ ------------ ------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 177,661,831 150,040,288 28,457,239 13,724,115 97,738,720 74,520,949
Net asset value of shares
issued in reinvestment
of distributions 46,070,717 37,843,938 837,101 297,051 19,731,335 10,317,863
Payments for shares redeemed (167,135,296) (141,861,173) (6,940,220) (2,898,897) (84,921,607) (75,515,812)
------------- ------------ ------------ ------------ ------------ ------------
Net increase in net assets from
Fund share transactions 56,597,252 46,023,053 22,354,120 11,122,269 32,548,448 9,323,000
------------- ------------ ------------ ------------ ------------ ------------
TOTAL INCREASE IN NET ASSETS 137,529,016 63,308,708 34,389,431 13,724,363 61,233,392 11,472,327
NET ASSETS:
Beginning of year 429,725,536 366,416,828 25,701,721 11,977,358 114,450,857 102,978,530
------------- ------------ ------------ ------------ ------------ ------------
End of year $ 567,254,552 $429,725,536 $ 60,091,152 $ 25,701,721 $175,684,249 $114,450,857
============= ============ ============ ============ ============ ============
Undistributed net investment
income (Note 1) $ 305,847 $ 753,874 $ 3,901 $ 63,881 $ 206,426 $ 379,986
============= ============ ============ ============ ============ ============
NUMBER OF FUND SHARES:
Sold 5,536,829 5,266,990 1,118,081 674,493 3,748,080 3,262,371
Issued in reinvestment of
distributions to shareholders 1,493,854 1,334,128 33,607 14,650 796,600 454,117
Redeemed (5,224,469) (4,986,154) (275,439) (141,301) (3,272,472) (3,315,616)
------------- ------------ ------------ ------------ ------------ ------------
Net increase in shares
outstanding 1,806,214 1,614,964 876,249 547,842 1,272,208 400,872
Outstanding at beginning of year 14,906,900 13,291,936 1,196,719 648,877 5,026,263 4,625,391
------------- ------------ ------------ ------------ ------------ ------------
Outstanding at end of year 16,713,114 14,906,900 2,072,968 1,196,719 6,298,471 5,026,263
============= ============ ============ ============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL FUND
YEAR ENDED
------------------------
3/31/98 3/31/97
------- -------
<S> <C> <C>
FROM OPERATIONS:
Net investment income (loss) $ 12,679 $ (27,104)
Net realized gain (loss) on
investments (254,868) 690,706
Net realized loss on foreign
currency transactions (208,788) (403,339)
Net change in unrealized
appreciation of investments 5,495,316 289,521
Net change in unrealized
depreciation on translation
of assets and liabilities in
foreign currencies 13,438 (31,683)
------------ ------------
Net increase in net assets
resulting from operations 5,057,777 518,101
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income -- --
Net realized capital gains (289,530) (41,790)
------------ ------------
Decrease in net assets from
distributions to shareholders (289,530) (41,790)
------------ ------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 9,514,677 12,548,017
Net asset value of shares issued
in reinvestment of distribution 266,710 38,087
Payments for shares redeemed (6,087,530) (3,551,439)
------------ ------------
Net increase in net assets from
Fund share transactions 3,693,857 9,034,665
------------ ------------
TOTAL INCREASE IN NET ASSETS 8,462,104 9,510,976
NET ASSETS:
Beginning of year 24,816,072 15,305,096
------------ ------------
End of year $33,278,176 $ 24,816,072
============ ============
Undistributed net investment
income (Note 1) $ 12,679 --
============ ============
NUMBER OF FUND SHARES:
Sold 547,071 780,856
Issued in reinvestment of
distributions to shareholders 16,413 2,370
Redeemed (353,559) (221,365)
------------ ------------
Net increase in shares
outstanding 209,925 561,861
Outstanding at beginning of year 1,529,221 967,360
------------ ------------
Outstanding at end of year 1,739,146 1,529,221
============ ============
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
23
<PAGE> 244
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
March 31, 1998
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. The Trust consists of four series,
the Gradison Established Value Fund ("Established Fund"), the Gradison Growth
&Income Fund ("Growth & Income Fund"), the Gradison Opportunity Value Fund
("Opportunity Fund") and the Gradison International Fund ("International Fund"),
(collectively, the "Funds"), each of which represents a separate diversified
fund with its own investment policies.
The public offering of shares of the Funds commenced as follows:
DATE OF
PUBLIC OFFERING
---------------
Established Value Fund 8/16/83
Growth & Income Fund 2/28/95
Opportunity Value Fund 8/16/83
International Fund 5/31/95
The investment objective of the Established Fund and the Opportunity Fund is
long-term capital growth by investing primarily in common stocks. The investment
objective of the 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 following is a summary of significant accounting policies followed by the
Funds in the preparation of their 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 or which are
believed to not be valid are valued at their fair value as determined by
management using procedures approved by the Board of Trustees. Short-term
securities with remaining maturities of sixty days or less are valued at
amortized cost, which approximates market value.
Repurchase agreements, which are collateralized by U.S. Government obligations,
are valued at cost which, together with accrued interest, approximates market
value. Collateral for repurchase agreements is held in safekeeping in the
customer-only account of the Funds' custodian. At the time the Funds enter 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 Funds 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
securities and the face amount of the repurchase agreement and accrued interest.
To minimize the possibility of loss, the Funds enter into repurchase agreements
only with selected domestic banks and securities dealers which the Funds'
investment adviser believes present minimal credit risk. Refer to the Funds'
Portfolio of Investments for the face amount of repurchase agreements and
repurchase proceeds as of March 31, 1998.
FUNDS SHARE VALUATION AND DISTRIBUTIONS TO SHAREHOLDERS
The net asset value per share of each Fund is computed by dividing the net asset
value of each Fund (total
24
<PAGE> 245
NOTES TO FINANCIAL STATEMENTS Continued
- --------------------------------------------------------------------------------
March 31, 1998
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.
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 Funds' policy to comply with the provisions of the Internal Revenue
Code applicable to regulated investment companies. As provided therein, in any
fiscal year in which a 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 Funds' intention to declare as dividends in
each calendar year, at least 98% of each Fund's net investment income (earned
during the calendar year) and 98% of each Fund's 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 for each Fund is approximately equal to the cost as
shown on the Statements of Assets and Liabilities. For both financial reporting
and tax purposes, gross unrealized appreciation and gross unrealized
depreciation of securities of the Funds at March 31, 1998 was:
GROSS UNREALIZED GROSS UNREALIZED
APPRECIATION DEPRECIATION
OF SECURITIES OF SECURITIES
------------- -------------
Established Value Fund $205,878,885 $ 584,969
Growth & Income Fund 15,819,545 108,851
Opportunity Value Fund 60,339,374 1,286,983
International Fund 7,538,110 1,192,248
As of March 31, 1998 the International Fund had a capital loss carryforward for
Federal income tax purposes of approximately $360,000 which may be utilized to
offset future net realized capital gains through March 31, 2006 prior to
distributing such gains to shareholders.
EXPENSES
Common expenses incurred by the Trust are allocated among the Funds based on the
ratio of the net assets or number of accounts, as appropriate. In all other
respects, expenses are charged to the respective Fund as incurred on a specific
identification basis.
EXPENSE OFFSET ARRANGEMENT
Each Fund, other than the International Fund, has an arrangement with its
custodian bank whereby the custodian's fees are reduced by credits earned on
each Fund's cash on deposit with the bank. This deposit arrangement is an
alternative to overnight investments. The credits are shown as a reduction of
expenses on the Statements of Operations.
ORGANIZATION EXPENSES
Expenses of organization of the Growth & Income Fund and the International Fund
have been capitalized
25
<PAGE> 246
NOTES TO FINANCIAL STATEMENTS Continued
- --------------------------------------------------------------------------------
March 31, 1998
and are being amortized on a straight-line basis over 60 months commencing upon
the public offering of the respective Fund's shares.
INTERNATIONAL FUND FOREIGN CURRENCY TRANSLATION
The accounting records of the International 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 International 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 International 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.
INTERNATIONAL FUND FORWARD FOREIGN CURRENCY CONTRACTS
During the year ended March 31, 1998, the International Fund entered into
forward foreign currency contracts under which it was obligated to exchange
currencies at specified future dates. The International Fund's currency
transactions were 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,
1998:
PORTFOLIO HEDGES:
U.S.
BUY/ FOREIGN DOLLAR SETTLEMENT UNREALIZED
SELL AMOUNT CURRENCY PROCEEDS DATE APPRECIATION
---- ------ -------- -------- ---------- ------------
German
Sell 4,900,000 Deutschemark $2,680,525 4/15/98 $27,165
Buy 1,200,000 British Pound 1,976,400 4/15/98 39,150
------
$66,315
======
At March 31, 1998, the Fund had sufficient cash and/or securities to cover any
commitments under these contracts.
INTERNATIONAL FUND 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
International
26
<PAGE> 247
NOTES TO FINANCIAL STATEMENTS Continued
- --------------------------------------------------------------------------------
March 31, 1998
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 $567,262 have been segregated with
the custodian for the following open stock index futures contracts at March 31,
1998.
OPEN
MARKET MARKET UNREALIZED
TYPE EXPIRATION VALUE VALUE (DEPRECIATION)
---- ---------- ------ ------ --------------
Long Nikkei 300(Yen) 6/98 $593,821 $582,326 $(11,495)
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 Funds pay McDonald a fee computed and accrued daily and paid
monthly based upon each Fund's daily net assets, other than the International
Fund, 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. The
International Fund pays McDonald a fee computed and accrued daily and paid
monthly based upon its daily net assets at the annual rate of 1.00% of the first
$100 million of its 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 Sub-Advisor for the International Fund pursuant to
a Sub-Advisor 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.
The Agreement provides that McDonald bears the costs of salaries and related
expenses of executive officers of the Trust who are necessary for the management
and operations of the Funds. 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 Funds.
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 Funds. Effective July 1,
1997, the Funds pay McDonald a monthly fee for transfer agency and
administrative services at an annual rate of $18.50 per shareholder non-zero
balance account and $5.00 per closed shareholder account, as defined, plus
out-of-pocket costs for statement paper, statement and reply envelopes and reply
postage. Prior to July 1, 1997 the Funds, other than the International Fund,
paid 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. Prior to July 1, 1997 the International Fund paid 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 Funds, other than
the International Fund, pay 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. The International 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.
27
<PAGE> 248
NOTES TO FINANCIAL STATEMENTS Continued
- --------------------------------------------------------------------------------
March 31, 1998
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 Growth & Income Fund and the International Fund
if, and to the extent that, expenses (excluding brokerage commissions, taxes,
interest and extraordinary items) borne by the respective Fund in any fiscal
year exceed 1.50% with respect to the Growth & Income Fund, and 2.00% with
respect to the International Fund, of the average net assets of the respective
Fund. This agreement is in effect until July 31, 1998 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
a Fund for other expenses in order to limit the Fund's expenses to a specified
percentage of average net assets lower than the amount subject to the agreement.
For the year ended March 31, 1998, McDonald waived $59,867 of advisory fees and
distribution expenses of $52,962 with respect to the International Fund.
In accordance with the terms of a Distribution Plan adopted under Rule 12b-1 of
the Investment Company Act of 1940, the Funds pay 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 Funds' average daily net assets. The Funds also pay McDonald a fee
for its assistance in selling shares of the Fund including advising shareholders
regarding purchase, sale and retention of Funds 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 year ended March 31, 1998, cost of purchases, and proceeds from the sale
of securities, excluding short-term securities, amounted to:
COST OF PROCEEDS
PURCHASES FROM SALES
--------- ----------
Established Value Fund $71,681,680 $82,965,939
Growth & Income Fund 22,952,595 1,428,477
Opportunity Value Fund 44,047,629 45,068,610
International Fund 24,162,712 21,214,411
28
<PAGE> 249
ARTHUR ANDERSEN
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees
of the Gradison Growth Trust:
We have audited the accompanying statements of assets and liabilities, including
the portfolio of investments, of the Gradison Growth Trust (comprising,
respectively, the Gradison Established Value Fund, Gradison Opportunity Value
Fund, Gradison Growth & Income Fund and the Gradison International Fund) as of
March 31, 1998, and the related statements of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, 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 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, 1998, by correspondence with custodians and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all the material respects, the financial position of
each of the respective portfolios constituting the Gradison Growth Trust as of
March 31, 1998, the results of their operations for the year then ended, the
changes in their net assets for each of the two years in the period then ended,
and their financial highlights for the periods indicated thereon, in conformity
with generally accepted accounting principles.
[SIGNATURE, ARTHUR ANDERSEN LLP]
Cincinnati, Ohio,
May 6, 1998
29
<PAGE> 250
PART C
OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
(a)(1) Financial Highlights of the Funds for the year ending March 31, l998
are included in the prospectus.
(a)(2) Financial Statements of the Funds included in the respective Statements
of Additional Information:
Portfolios of Investments at March 31, l998 for the Funds.
Statements of Assets and Liabilities at March 31, l998 for the Funds.
Statements of Operations for the fiscal year ended March 31, l998 for
the Funds.
Statements of Changes in Net Assets for the fiscal years ended March
31, l997 and March 31, l998 for the Funds.
Notes to Financial Statements
C-1
<PAGE> 251
(b)Exhibits
(1) First Amended Declaration of Trust.*
(2) Registrant's By-Laws.*
(3) None.
(4) None
(5)(a) Investment Advisory Agreement (GE-O) dated October 4,
1991. *
(5)(b) Amendments to Investment Advisory Agreements of GI dated
June 1, l995.++
(5)(c) Investment Advisory Agreement of GI dated May 25, l995.++
(5)(d) Investment Advisory Agreement of GE-O dated June 1, l995.++
(5)(e) Sub-Advisory Agreement of GINT dated May 25, l995.++
(6) None.
(7) None.
(8) Custodian Agreement (GE-O).*
(8)(a) Amendment dated February 28, l995 to Custodian Agreement of
Gradison Growth Trust. ++
(8)(b) Custodian Agreement of GINT with Chase Manhattan Bank. ++
(8)(c) Account Agreement with Star Bank (GINT).++
(9)(a) Transfer Agency Accounting Services Agreement (GM-E/O) dated
June 1, l995.++
(9)(b) Transfer Agency Accounting Services Agreement (GM-GI) dated
February 28, l995.++
(9)(c) Transfer Agency Accounting Services Agreement (GM-INT) dated
June 1, l995.++
(10) None.
(11) Consent of Independent Accountants *
(12) None
(14) Documents used in establishment of individual retirement
accounts in conjunction with shares of Registrant.**
(15)(a) Distribution Plan, as amended October 31, l994. *
(15)(b) Distribution Agreements dated June 1, l995 of GE-O.++
(15)(c) Distribution Agreement of GI dated February 28, l995.++
(15)(d) Distribution Agreement of GINT dated June 1, l995.++
(15)(e) Principal Underwriting Agreement dated May 7, l998.*
(16) None
(18) Powers of Attorney of Bradley E. Turner, Daniel Castellini, and
Donald E. Weston, Patricia Jamieson, Theodore Emmerich,
Jerome Schnee, Richard Rankin, and Julian Ball. **
C-2
<PAGE> 252
- ------------------------------------------------------------
* Included herein.
** Incorporated by reference to N-1A filing of Gradison-McDonald Cash Reserves
Trust, File # 002-55297, January 29, l998.
++ Incorporated by reference to Registrant's Form N-1A Registration Statement
No. 2-84169 previously filed electronically with the Securities and Exchange
Commission on July 27, l995.
C-3
<PAGE> 253
Item 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
Number of
Record Holders
as of
Title of Class June 30, l997
<S> <C>
Shares of beneficial interest, without par
value of:
Gradison Established Value Fund 16,891
Gradison Opportunity Value Fund 7,931
Gradison Growth and Income Fund 3,633
Gradison International Fund 2,361
</TABLE>
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" in the Statements of Additional Information 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.)
Item 29. PRINCIPAL UNDERWRITERS
(a) The principal underwriter of the Registrant is McDonald & Company
Securities, Inc., which also serves as the principal underwriter and 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
C-4
<PAGE> 254
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
Jr. Managing Director Cleveland, OH 44114
Leonard J. De Roma Director Senior 800 Superior Avenue None
Managing Cleveland OH 44114
Dennis J. Donnelly Director, Senior 800 Superior Avenue None
Managing Director Cleveland, OH 44114
David W. Ellis, III Director, 580 Walnut Street None
Managing Director Cincinnati, OH 45202
(Gradison Division)
Patricia A. Jamieson Director, Senior 800 Superior Avenue Treasurer
Managing Director Cleveland, OH 44114
Chief Financial
Officer, Secretary,
Treasurer
David W. Knall Director, Senior One American Square None
Managing Director Indianapolis, IN 46282
Thomas M. McDonald Director, Senior 800 Superior Avenue None
Managing Director Cleveland, OH 44114
John F. O'Brien Director, Senior 800 Superior Avenue None
Managing Director Cleveland, OH 44114
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
C-5
<PAGE> 255
David D. Sutcliffe Director, Managing 800 Superior Avenue None
Director Cleveland, OH 44114
Bradley E. Turner Director, Senior 580 Walnut Street President
Managing Director. Cincinnati, OH 45202
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
The Registrant hereby undertakes to file a post-effective amendment
with respect to the Gradison-McDonald International Fund series, using
reasonable current financial statements, which need not be audited, within four
to six months from the effective dated of this Amendment.
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
C-6
<PAGE> 256
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> 257
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 28th day of
July 1998.
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 28, l998
(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> 258
Exhibit List
( 1)) First Amended Declaration of Trust.*
( 2) Registrant's By-Laws.*
( 5)(a) Investment Advisory Agreement (GE-O) dated October 4,
1991. *
( 8) Custodian Agreement (GE-O).*
(11) Consent of Independent Accountants *
(15)(a) Distribution Plan, as amended October 31, l994. *
(15)(e) Principal Underwriting Agreement dated May 7, l998.*
<PAGE> 1
Exhibit 1
AMENDMENT DATED OCTOBER 4, 1991
TO FIRST AMENDED DECLARATION OF TRUST
OF GRADISON GROWTH TRUST
Paragraph 2.6 is restated as follows:
2.6 Officers. The Trustees shall annually elect a Chairman, a
President, a Secretary and a Treasurer and may elect a Vice Chairman and Vice
Presidents and such other officers as they deem necessary or appropriate. The
Trustees may authorize the Chairman or President to appoint such other officers
or agents with such powers as the Trustees may deem to be advisable. The
Chairman and Vice Chairman, if any, shall be, and the President, Secretary and
Treasurer may, but need not be, a Trustee.
The undersigned hereby certifies that the foregoing amendment to the
First Amended Declaration of Trust, of Gradison Growth Trust, was duly effected
by the Trustees of the Gradison Growth Trust at a meeting held on July 17, 1991.
/s/Kevin M. Sheehan
Secretary Gradison Growth Trust
<PAGE> 2
FIRST AMENDED DECLARATION OF TRUST
OF
GRADISON GROWTH TRUST
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Introduction 1
Article I - The Trust
1.1 Name and Principal Office 2
1.2 Purpose 2
1.3 Definitions 2
Article II - Trustees
2.1 Number and Qualification 4
2.2 Term and Election 4
2.3 Resignation and Removal 5
2.4 Vacancies 6
2.5 Meetings 6
2.6 Officers 8
2.7 By-Laws 8
Article III - Powers of Trustees
3.1 General 9
3.2 Investments 9
3.3 Legal Title 10
3.4 Issuance and Repurchase of Securities 11
3.5 Borrow Money 11
3.6 Delegation; Committees 12
3.7 Collection and Payment 12
3.8 Expenses 12
3.9 Miscellaneous Powers 12
3.10 Further Powers 13
Article IV - Investment Adviser and Distributor
4.1 Investment Adviser 15
4.2 Distributor 15
4.3 Parties to Contract 16
4.4 Provisions and Amendments 16
Article V - Limitation of Liability and Indemnification
5.1 No Personal Liability of Shareholders, Trustees, etc. 17
5.2 Indemnification of Trustees, Officers, Employees
or Agents of the Trust 18
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
5.3 Exceptions and Limitations to Indemnification 19
5.4 Conditions of Indemnification 19
5.5 Payment of Expenses 20
5.6 Non-Exclusivity of Indemnification 21
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C>
5.7 No Bond Required of Trustees 21
5.8 No Duty of Investigation; Notice in Trust
Instruments, etc. 21
5.9 Reliance on Experts, etc. 22
Article VI - Shares of Beneficial Interest
6.1 Beneficial Interest 23
6.2 Rights of Shareholders 24
6.3 Trust Only 25
6.4 Issuance of Shares 25
6.5 Register of Shares 26
6.6 Transfer Agent and Registrar 26
6.7 Transfer of Shares 26
6.8 Notices 27
Article VII - Custodian
7.1 Appointment and Duties 28
7.2 Central Certificate System 29
Article VIII - Redemption
8.1 Redemptions 30
8.2 Redemption of Shares; Disclosure of Holding 30
8.3 Redemptions of Small Accounts 31
Article IX - Determination of Net Asset Value, Net Income and
Distribution
9.1 Net Asset Value 33
9.2 Distributions to Shareholders 33
9.3 Power to Modify Foregoing Procedures 34
Article X - Shareholders
10.1 Meetings of Shareholders 35
10.2 Notice of Meetings 36
10.3 Record Date for Meetings 36
10.4 Proxies, etc. 36
10.5 Reports 37
10.6 Inspection of Records 38
10.7 Shareholder Action By Written Consent 38
Article XI - Duration; Termination of Trust; Amendment;
Mergers; Etc.
11.1 Duration 39
11.2 Termination of Trust 39
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
<S> <C>
11.3 Amendment Procedure 40
11.4 Merger, Consolidation and Sale of Assets 42
11.5 Incorporation 42
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
Article XII - Miscellaneous
<S> <C>
12.1 Filing 44
12.2 Governing Law 44
12.3 Counterparts 44
12.4 Gender 44
12.5 Name 44
12.6 Reliance by Third Parties 45
12.7 Provisions in Conflict With Law or Regulations 45
</TABLE>
<PAGE> 7
FIRST AMENDED
DECLARATION OF TRUST
OF
GRADISON GROWTH TRUST
THIS FIRST AMENDED DECLARATION OF TRUST of Gradison Growth Trust is
made the 27th day of July, 1983 by the parties signatory hereto, as trustees
(such persons, so long as they shall continue in office in accordance with the
terms of this Declaration of Trust, and all other persons who at the time in
question have been duly elected or appointed as trustees in accordance with the
provisions of this Declaration of Trust and are then in office, being
hereinafter called the "Trustees").
W I T N E S S E T H:
WHEREAS, the Trustees desire to continue a business trust under the law
of the State of Ohio for the investment and reinvestment of funds contributed
thereto and to amend and restate the Declaration of Trust of Gradison Growth
Trust dated May 31. 1983; and
WHEREAS, it is proposed that the beneficial interest in the trust
assets be divided into transferable shares of beneficial interest as hereinafter
provided;
NOW, THEREFORE, the Trustees hereby declare that they will hold in
trust all money and property contributed to the business trust to manage and
dispose of the same for the benefit of the holders from time to time of the
shares of beneficial interest issued hereunder and subject to the provisions
hereof, to wit:
<PAGE> 8
ARTICLE I
The Trust
1.1 Name and Principal Office. The name of the trust created hereby
(the "Trust") shall be "Gradison Growth Trust", and so far as may be practicable
the Trustees shall conduct the Trust's activities, execute all documents and sue
or be sued under that name or a name or names that reflect one or more of the
Series of the Trust, which name(s) (and the word "Trust" wherever hereinafter
used) shall refer to the Trustees as Trustees, and not individually, and shall
not refer to the officers, agents, employees or shareholders of the Trust. The
principal office of the Trust is located in Cincinnati, Ohio.
1.2 Purpose. The purpose for which the Trust is formed is to operate as
an investment company and to engage in any lawful act or activity for which a
business trust may be formed under Sections 1746.01 to 1746.20, inclusive, of
the Revised Code of Ohio, as now in effect or hereinafter amended.
1.3 Definitions. As used in this Declaration, the following terms shall
have the following meanings:
The terms "Affiliated Person", "Assignment", "Commission", "Interested
Person" and "Majority Shareholder Vote" (the 67% or 50% requirement of the third
sentence of Section 2(a)(42) of the Investment Company Act of 1940, whichever
may be applicable) shall have the meanings given them in said Act, as amended
from time to time.
"Declaration" shall mean this Declaration of Trust as amended from time
to time. References in this Declaration to "Declaration", "hereof", "herein" and
"hereunder" shall be deemed to refer to the Declaration rather than the article
or section in which such words appear.
<PAGE> 9
"Investment Restrictions" shall mean the restrictions and policies set
forth in the Prospectus and designated as those which may not be changed without
Majority Shareholder Vote.
"Person" shall mean and include individuals, corporations,
partnerships, trusts, associations, joint ventures and other entities, whether
or not legal entities, and governments and agencies and political subdivisions
thereof.
"Prospectus" shall mean the currently effective Prospectus of the Trust
under the Securities Act of 1933, as amended.
"Shareholders" shall mean as of any particular time all holders of
record of outstanding Shares at such time.
"Shares" shall mean one class of transferable units of interest into
which the beneficial interest in the Trust shall be divided from time to time
and shall include fractions of Shares as well as whole Shares and Shares issued
in series ("Series") as authorized by the Trustees.
"Trustees" shall mean the signatories to this Declaration, so long as
they shall continue in office in accordance with the terms hereof, and all other
persons who at the time in question have been duly elected or appointed and have
qualified as trustees in accordance with the provisions hereof and are then in
office, and reference in this Declaration to a Trustee or Trustees shall refer
to such person or persons in their capacity as Trustees hereunder.
"Trust Property" shall mean as of any particular time any and all
property, real or personal, tangible or intangible, which at such time is owned
or held by or for the account of the Trust or the Trustees, and allocated as
appropriate to any Series authorized by the Trustees. The "1940 Act" refers to
the Investment Company Act of 1940, as amended from time to time, and the rules
and regulations issued thereunder.
<PAGE> 10
ARTICLE II
Trustees
Trustees 2.1 Number and Qualification. The number of Trustees shall be
fixed from time to time by written instrument signed by a majority of the
Trustees then in office, provided, however, that the number of Trustees shall in
no event be less than three nor more than fifteen. Any vacancy created by an
increase in Trustees may be filled by the appointment of an individual having
the qualifications described in this Article made by a written instrument signed
by a majority of the Trustees then in office. Any such appointment shall not
become effective, however, until the individual named in the written instrument
of appointment shall have accepted in writing such appointment and agreed in
writing to be bound by the terms of this Declaration. No reduction in the number
of Trustees shall have the effect of removing any Trustee from office prior to
the expiration of his term. Whenever a vacancy in the number of Trustees shall
occur, until such vacancy is filled as provided in Section 2.4 hereof, the
Trustees in office, regardless of their number, shall have all the powers
granted to the Trustees and shall discharge all the duties imposed upon the
Trustees by this Declaration. A Trustee shall be an individual at least 21 years
of age who is not under legal disability.
2.2 Term and Election. Each Trustee signatory hereto, or
elected or appointed prior to the first meeting of Shareholders, shall (except
in the event of resignations, removals or other events creating a vacancy
pursuant to Section 2.3 or 2.4 hereof) hold office until the first meeting of
Shareholders and until his successor has been elected at such meeting and has
qualified to serve as Trustee. Beginning with the Trustees elected at the first
meeting of
<PAGE> 11
Shareholders, each Trustee shall serve as a Trustee of the Trust for an
indefinite period, subject to resignations, removals or other events creating a
vacancy pursuant to Section 2.3 or 2.4 hereof, provided that if, at any time,
less than a majority of the Trustees have been elected by the Shareholders, a
meeting of the Shareholders shall be called and held within sixty days of the
occurrence of such condition for the purpose of electing Trustees. Election of
Trustees at any meeting of Shareholders shall be by the affirmative vote of the
holders of a majority of the Shares entitled to vote present in person or by
proxy. Trustees may succeed themselves in office. The election of any Trustee
(other than an individual who was serving as a Trustee immediately prior
thereto) shall not become effective unless and until such person shall have in
writing accepted his election and agreed to be bound by the terms of this
Declaration. Trustees may, but are not required to, own Shares.
2.3 Resignation and Removal. Any Trustee may resign his trust (without
need for prior or subsequent accounting) by an instrument in writing signed by
him and delivered or mailed to the Chairman, the President or the Secretary and
such resignation shall be effective upon such delivery, or at a later date
according to the terms of the instrument. Any Trustee may be removed (provided
the aggregate number of Trustees after such removal shall not be less than the
number required by Section 2.1 hereof) with cause, by the vote of two-thirds of
the remaining Trustees. In addition, any Trustee may he removed by the holders
of record of not less than two-thirds of the outstanding Shares of the Trust,
either by a declaration in writing filed with the custodian of the securities of
the Trust or by votes cast in person or by proxy at a meeting called for such
purpose, which meeting shall be called promptly by the Trustees when requested
in writing to do so by record holders
<PAGE> 12
of not less than ten percent of the outstanding Shares of the Trust. Upon the
resignation or removal of a Trustee, or his otherwise ceasing to be a Trustee,
he shall execute and deliver such documents as the remaining Trustees shall
require for the purpose of conveying to the Trust or the remaining Trustees any
Trust Property held in the name of the resigning or removed Trustee. Upon the
incapacity or death of any Trustee, his legal representative shall execute and
deliver on his behalf such documents as the remaining Trustees shall require as
provided in the preceding sentence.
2.4 Vacancies. The term of office of a Trustee shall terminate and a
vacancy shall occur in the event of the death, resignation, bankruptcy,
adjudicated incompetence or other incapacity to perform the duties of the
office, or removal, of a Trustee. No such vacancy shall operate to annul this
Declaration or to revoke any existing agency created pursuant to the terms of
this Declaration. In the case of an existing vacancy (other than by reason of an
increase in the number of Trustees) a majority of the Trustees continuing in
office may fill such vacancy, provided that immediately after filling any such
vacancy at least two-thirds of the Trustees then in office shall have been
elected by the Shareholders. Any Trustee so elected by the Trustees shall hold
office for the period described in Section 2.2 hereof.
2.5 Meetings. Meetings of the Trustees shall be held from time to time
upon the call of the Chairman, the President, the Secretary or a majority of the
Board of Trustees. Regular meetings of the Trustees may be held without call or
notice at a time and place fixed by the By-Laws or by resolution of the
Trustees. Notice of any other meeting shall be mailed or otherwise given not
less than 72 hours before the meeting but may be waived in writing by any
Trustee either before or after such meeting. The attendance of a
<PAGE> 13
Trustee at a meeting shall constitute a waiver of notice of such meeting except
where a Trustee attends a meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting has not been lawfully
called or convened. The Trustees may act with or without a meeting. A quorum for
all meetings of the Trustees shall be a majority of the Trustees. If less than a
majority of the Trustees are present at any meeting, a majority of those present
may adjourn the meeting from time to time without further notice; and at such
adjourned meeting at which a quorum is present, any business may be transacted
which might have been transacted at the meeting as originally notified. Unless
provided otherwise in this Declaration, any action of the Trustees may be taken
at a meeting by vote of a majority of the Trustees present (a quorum being
present) or without a meeting by written consent of a majority of the Trustees.
Such consents shall be filed with the records of the meetings of the Trustees
and shall be treated for all purposes as votes at the meeting.
Any committee of the Trustees, including an executive or audit
committee, if any, may act with or without a meeting. A quorum for all meetings
of any such committee shall be a majority of the members thereof. Unless
provided otherwise in this Declaration, any action of any such committee may be
taken at a meeting by vote of a majority of the members present (a quorum being
present) or without a meeting by written consent of a majority of the members.
Such consents shall be filed with the records of the meetings of such committee
and shall be treated for all purposes as votes at the meeting.
With respect to actions of the Trustees and any committee of the
Trustees, Trustees who are Interested Persons of the Trust within the meaning of
Section 1.3 hereof or otherwise interested in any action to be taken may be
<PAGE> 14
counted for quorum purposes under this Section and shall be entitled to vote to
the extent permitted by the 1940 Act.
All or any one or more Trustees may participate in a meeting of the
Trustees or any committee thereof by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other and participation in a meeting pursuant to such
communications systems shall constitute presence in person at such meeting.
2.6 Officers. The Trustees shall annually elect a Chairman, a
President, a Secretary, and a Treasurer and may elect a Vice Chairman, Vice
Presidents and such other officers as they deem necessary or appropriate. The
Trustees may authorize the Chairman or President to appoint such other officers
or agents with such powers as the Trustees may deem to be advisable. The
Chairman, Vice Chairman, if any, and President shall be, and the Secretary and
Treasurer may, but need not be, a Trustee.
2.7 By-Laws. The Trustees may adopt and from time to time amend or
repeal By-Laws for the conduct of the business of the Trust.
<PAGE> 15
Article III
Powers of Trustees
3.1 General. The Trustees in all instances shall act as principals, and
are and shall be free from the control of the Shareholders. The Trustees shall
have exclusive and absolute control over the Trust Property and thereof the
Trust to the same extent as if the Trustees were the of the Trust Property and
business in their own right, but with such powers of delegation as may be
permitted by this Declaration. The Trustees may perform such acts as in their
sole discretion are proper for conducting the business of the Trust. The
enumeration of any specific power herein shall not be construed as limiting
aforesaid power. Such powers of the Trustees may be exercised without order of
or resort to any court.
3.2 Investments. The Trustees shall have power, subject to the
Investment Restrictions, to:
(a) conduct, operate and carry on the business of an
investment company; and
(b) with respect to each Series of Shares authorized by the
Trustees, subscribe for, invest in, reinvest in, purchase or otherwise
acquire, hold, pledge, sell, assign, transfer, exchange, distribute or
otherwise deal in or dispose of common stocks, securities convertible
into common stocks, marketable obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities, deposit
obligations, bankers acceptances and documented discount notes of
domestic commercial banks and savings and loans which are members of
the Federal Deposit Insurance
<PAGE> 16
Corporation or the Federal Savings and Loan Insurance Corporation,
short term high-grade corporate debt, including but not limited to
commercial paper, and instruments (including repurchase agreements)
secured by such obligations. The Trustees may exercise any and all
rights, powers and privileges of ownership or interest in respect to
any and all such investments of every kind and description, including,
without limitation, the right to consent and otherwise act with respect
thereto, with power to designate one or more persons, firms,
associations or corporations to exercise any of said rights, powers and
privileges in respect of any of said instruments; and the Trustees
shall be deemed to have the foregoing powers with respect to any
additional securities in which the Trust may invest as set forth in the
Prospectus.
The Trustees shall not be limited to investing in obligations maturing
before the possible termination of the Trust, nor shall the Trustees be limited
by any law limiting the investments which may be made by fiduciaries.
3.3 Legal Title. Legal title to all the Trust Property shall be vested
in the Trustees as joint tenants except that the Trustees shall have power to
cause legal title to any Trust Property to be held by or in the name of one or
more of the Trustees, or in the name of the Trust or any Series of the Trust, or
in the name of any other Person as nominee, on such terms as the Trustees may
determine, provided that the interest of the Trust therein is appropriately
protected.
<PAGE> 17
The right, title and interest of the Trustees in the Trust
Property shall vest automatically in each person who may hereafter become a
Trustee upon his due election and qualification. Upon the death, resignation,
bankruptcy, adjudicated incompetence, or other incapacity to perform the duties
of the office or removal of a Trustee he shall automatically cease to have any
right, title or interest in any of the Trust Property, and the right, title and
interest of such Trustee in the Trust Property shall vest automatically in the
remaining Trustees. Such vesting and cessation of title shall be effective
whether or not conveyancing documents have been executed and delivered.
3.4 Issuance and Repurchase of Securities. The Trustees shall
have the power to issue, sell, repurchase, redeem, retire, cancel, acquire,
hold, resell, reissue, dispose of, transfer, and otherwise deal in, Shares,
including Shares in fractional denominations, and, subject to the more detailed
provisions set forth in Articles VIII and IX, to apply to any such repurchase,
redemption, retirement, cancellation or acquisition of Shares any funds or
property of the Trust whether capital or surplus or otherwise, to the full
extent now or hereafter permitted by the laws of the State of Ohio governing
business corporations.
3.5 Borrow Money. Subject to the Investment Restrictions, the
Trustees shall have the power to borrow money or otherwise obtain credit and to
secure the same by hypothecating, mortgaging, pledging or otherwise subjecting
as security the assets of the Trust, including the lending of portfolio
securities, and to endorse guarantee, or undertake the performance of any
obligation, contract or engagement of any other person, firm, association or
corporation.
<PAGE> 18
3.6 Delegation; Committees. The Trustees shall have power,
consistent with their continuing exclusive authority over the management of the
Trust and the Trust Property, to delegate from time to time to such of their
number or to officers, employees or agents of the Trust the doing of such things
and the execution of such instruments either in the name of the Trust or the
names of the Trustees or otherwise as the Trustees may deem expedient, to the
same extent as such delegation is permitted to directors of an Ohio business
corporation and not prohibited by the 1940 Act.
3.7 Collection and Payment. The Trustees shall have power to
collect all property due to the Trust; to pay all claims, including taxes,
against the Trust Property; to prosecute, defend, compromise or abandon any
claims relating to the Trust Property; to foreclose any security interest
securing any obligations, by virtue of which any property is owed to the Trust;
and to enter into releases, agreements and other instruments.
3.8 Expenses. The Trustees shall have power to incur and pay
any expenses which in the opinion of the Trustees are necessary or incidental to
carry out any of the purposes of this Declaration, and to pay reasonable
compensation from the funds of the Trust to themselves as Trustees. The Trustees
shall fix the compensation of all officers, employees and Trustees. The Trustees
may pay themselves or any firm of which any of them may be a member or officer
such compensation for special services, including legal, underwriting,
syndicating and brokerage services, as they in good faith may deem reasonable
and may reimburse themselves for expenses reasonably incurred by them on behalf
of the Trust.
3.9 Miscellaneous Powers. The Trustees shall have the power
to: (a) employ or contract with such Persons as the Trustees may deem desirable
<PAGE> 19
for the transaction of the business of the Trust; (b) enter into joint ventures,
partnerships and any other combinations or associations; (c) purchase, and pay
for out of Trust Property, insurance policies insuring the Shareholders,
Trustees, officers, employees, agents, investment advisers, distributors,
selected dealers or independent contractors of the Trust against all claims
arising by reason of holding any such position or by reason of any action taken
or omitted by any such Person in such capacity, whether or not constituting
negligence, or whether or not the Trust would have the power to indemnify such
Person against such liability; (d) establish pension, profit sharing, share
purchase, and other retirement, incentive and benefit plans for any Trustees,
officers, employees and agents of the Trust; (e) make donations, irrespective of
benefit to the Trust, for charitable, religious, educational, scientific, civic
or similar purposes; (f) to the extent permitted by law, indemnify any Person
with whom the Trust has dealings, including without limitation its investment
adviser, any distributor and selected dealers, to such extent as the Trustees
shall determine; (g) guarantee indebtedness or contractual obligations of
others; (h) determine and change the fiscal year of the Trust and the method by
which its accounts shall be kept; and (i) adopt a seal for the Trust, but the
absence of such seal, shall not impair the validity of any instrument executed
on behalf of the Trust.
3.10 Further Powers. The Trustees shall have power to conduct the of
the Trust and carry on its operations in any and all of its-and maintain offices
both within and without the State of Ohio in any and all states of the United
States of America, in the District of Columbia, in any and all commonwealths,
territories, dependencies, colonies, possessions, agencies or instrumentalities
of the United States of and
<PAGE> 20
of foreign governments, and to do all such other things and execute all such
instruments as they deem necessary, proper or desirable in order to promote the
interests of the Trust although such things are not herein specifically
mentioned. Any determination as to what is in the interests of the Trust made by
the Trustees in good faith shall be conclusive. In construing the provisions of
this Declaration, the presumption shall be in favor of a grant of power to the
Trustees. The Trustees will not be required to obtain any court order to deal
with the Trust Property.
<PAGE> 21
ARTICLE IV
Investment Adviser and Distributor
4.1 Investment Adviser. Subject to a Majority Shareholder Vote, the
Trustees may in their discretion from time to time enter into an investment
advisory or management contract whereby the other party to such contract shall
undertake to furnish the Trustees such management, investment advisory,
statistical and research facilities and services, promotional activities, and
such other facilities and services, if any, as the Trustees shall from time to
time consider desirable and all upon such terms and conditions as the Trustees
may in their discretion determine. Notwithstanding any provisions of this
Declaration, the Trustees may authorize such investment adviser (subject to such
general or specific instructions as the Trustees may from time to time adopt) to
effect purchases, sales, loans or exchanges of portfolio securities of the Trust
on behalf of the Trustees or may authorize any officer, employee or Trustee to
effect such purchases, sales, loans or exchanges pursuant to recommendations of
such investment adviser (and all without further action by the Trustees). Any
such purchases, sales, loans and exchanges shall be deemed to have been
authorized by all of the Trustees.
4.2 Distributor. The Trustees may in their discretion from
time to time enter into a contract providing for the sale of the Shares whereby
the Trust may either agree to sell the Shares to the other party to the contract
or appoint such other party its sales agent for such Shares. In either case, the
contract shall be on such terms and conditions as the Trustees may in their
discretion determine and as are not inconsistent with the provisions of this
Article IV or the By-Laws. Any such contract may also provide for the repurchase
or sale of Shares by such other party as principal or as agent of
<PAGE> 22
the Trust and may provide that such other party may enter into selected dealer
agreements with registered securities dealers to further the purpose of the
distribution or repurchase of the Shares.
4.3 Parties to Contract. Any contract of the character described in
Section 4.1 and 4.2 of this Article IV or in Article VII hereof may be entered
into with any corporation, firm, trust or association, although one or more of
the Trustees or officers of the Trust may be an officer, director, Trustee,
shareholder, or member of such other party to the contract, and no such contract
shall be invalidated or rendered voidable by reason of the existence of any such
relationship, nor shall any person holding such relationship be liable merely by
reason of such relationship for any loss or expense to the Trust under or by
reason of said contract or accountable for any profit realized directly or
indirectly therefrom, provided that the contract when entered into was
reasonable and fair and not inconsistent with the provisions of this Article IV
or the By-Laws. The same person (including a firm, corporation, trust, or
association) may be the other party to contracts entered into pursuant to
Sections 4.1 and 4.2 above or Article VII, and any individual may be financially
interested or otherwise affiliated with persons who are parties to any or all of
the contracts mentioned in this Section 4.3.
4.4 Provisions and Amendments. Any contract entered into pursuant to
Section 4.1 and 4.2 of this Article IV shall be consistent with and subject to
the requirements of Section 15 of the 1940 Act with respect to its continuance
in effect, its termination, and the method of authorization and approval of such
contract, and amendment thereto or renewal thereof.
<PAGE> 23
ARTICLE V
Liability and Indemnification
5.1 No Personal Liability of Shareholders, Trustees, etc. No
Shareholder shall be subject to any personal liability whatsoever to any Person
in connection with Trust Property or the acts, obligations or affairs of the
Trust. The Trustees shall have no power to bind any Shareholder personally or to
call upon any Shareholder for the payment of any sum of money or assessment
whatsoever other than such as the Shareholder may at any time personally agree
to pay by way of subscription for any Shares or otherwise. Provided he has acted
in good faith and in a manner he reasonably believed to be in, or not opposed
to, the best interests of the Trust, no Trustee, officer, employee or agent of
the Trust shall be subject to any personal liability whatsoever to the Trust,
its Shareholders or to any Trustee, officer, employee or agent thereof for any
action or failure to act (including without limitation the failure to compel in
any way any former or acting Trustee to redress any breach of Trust) or to any
other Person in connection with Trust Property or the affairs of the Trust, but
nothing contained herein shall protect any Trustee, officer, employee or agent
of the Trust against any liability to which he would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of his duty to the Trust or to any Shareholder, Trustee, officer, employee or
agent thereof or to any other such Person, and any Shareholder, Trustee,
officer, employee or agent of the Trust or any such Person shall look solely to
the Trust Property for satisfaction of claims of any nature arising in
connection with the affairs of the Trust. If any Shareholder, Trustee, officer,
employee, or agent, as such, of the Trust, is made a party to any suit or
proceeding to enforce any such
<PAGE> 24
liability he shall not on account thereof, be held to any personal liability.
The Trust shall indemnify and hold each Shareholder harmless from and against
all claims and liabilities, to which such Shareholder may become subject by
reason of his being or having been a Shareholder, and shall reimburse such
Shareholder for all legal and other expenses reasonably incurred by him in
connection with any such claim or liability and shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation of
the Trust and satisfy any judgment thereon. The rights accruing to a Shareholder
under this Section 5.1 shall not exclude any other right to which such
Shareholder may be lawfully entitled, nor shall anything herein contained
restrict the right of the Trust to indemnify or reimburse a Shareholder in any
appropriate situation even though not specifically provided herein.
5.2 Indemnification of Trustees, Officers, Employees or Agents of the
Trust. Subject to the exceptions and limitations contained in Section 5.3 and
the 1940 Act:
(a) every person who is, or has been, a Trustee, officer, employee or
agent of the Trust shall be indemnified by the Trust to the fullest extent now
or hereafter permitted by law against all liabilities and expenses reasonably
incurred or paid by him in connection with any claim, action, suit or proceeding
in which he becomes involved as a party or otherwise by virtue of his being or
having been a Trustee, officer, employee or agent of the Trust or serving or
having served, at the request of the Trust, as a director, officer, trustee,
employee or agent of any corporation, partnership, joint venture, trust or other
enterprise and against amounts paid or incurred by him in the settlement
thereof;
<PAGE> 25
(b) the words "claim," "action," "suit" or "proceeding" shall apply to
all claims, actions, suits or proceedings (civil, criminal or other, including
appeals), actual or threatened, including claims, actions, suits or proceedings
by or in the right of the Trust to procure a judgment in its favor; and the
words "liability" and "expenses" shall include attorneys' fees, costs,
judgments, amounts paid in settlement, fines, penalties and reasonable expenses
actually incurred in connection with the proceeding.
5.3 Exceptions and Limitations to Indemnification. No indemnification
shall be provided hereunder to a Trustee, officer, employee or agent of the
Trust:
(a) against any liability to the Trust or its Shareholders, whether or
not there is an adjudication of liability, arising by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of his duties
involved in the conduct of his office; or
(b) with respect to any matter as to which he has not acted in good
faith and in a manner he reasonably believed to be in, or not opposed to, the
best interests of the Trust; or
(c) in the case of any criminal proceeding, with respect to any conduct
which he had reasonable cause to believe was unlawful.
5.4 Conditions of Indemnification. Any indemnification under Section
5.2 shall be made by the Trust only after:
(a) a final decision on the merits by a court or other body before whom
the claim, action, suit or proceeding referred to in Section 5.2 was brought
that the person to be indemnified was not liable by reason of conduct described
in Section 5.3; or
<PAGE> 26
(b) in the absence of such a decision, a reasonable determination,
based upon a review of the facts, that the person to be indemnified was not
liable by reason of conduct described in Section 5.3, such determination to be
made by either (i) the vote of a majority of a quorum of Trustees who are
neither Interested Persons of the Trust nor parties to the claim, action, suit
or proceeding, or (ii) an independent legal counsel in a written opinion, unless
there has been a dismissal of the claim, action, suit or proceeding against the
person to be indemnified for insufficiency of evidence of any conduct with which
he has been charged described in Section 5.3, in which case indemnification
shall be mandatory.
5.5 Payment of Expenses. Expenses (including attorneys' fees) incurred
in defending any claim, action, suit or proceeding may be paid by the Trustees
in advance of the final disposition thereof after (a) a determination by a
majority of a quorum of the Trustees who are neither Interested Persons of the
Trust nor parties to the claim, action, suit or proceeding, or independent
counsel, in a written opinion, that, based upon a review of readily available
facts, that there is reason to believe that the person will ultimately be found
entitled to indemnification; and (b) upon receipt of a written affirmation by
the Trustee, officer, employee or agent of the Trust of his good faith belief
that the standard of conduct necessary for indemnification has been met; and (c)
upon receipt of an undertaking by the person to be indemnified to repay such
payment if he shall be found not to be entitled to indemnification under Section
5.2 through Section 5.4, and (d) the person provides security for his
undertaking, or the Trust is insured against losses arising by reason of
unlawful advances.
<PAGE> 27
5.6 Non-Exclusivity of Indemnification. The rights of indemnification
herein provided shall not be deemed exclusive of any other rights to which a
person may be entitled under any By-Law, agreement, vote of Shareholders or
disinterested Trustees or otherwise, both as to action in his official capacity
and as to action in another capacity while holding the office, and shall
continue as to a person who has ceased to be a Trustee, officer, employee or
agent and to inure to the benefit of the heirs, executors and administrators of
the person. The rights of indemnification herein provided may be insured against
by policies maintained by the Trust.
5.7 No Bond Required of Trustees. No Trustee shall, as such, be
obligated to give any bond or security or other security for the performance of
any of his duties hereunder.
5.8 No Duty of Investigation; Notice in Trust Instruments, etc. No
purchaser, lender, transfer agent or other person dealing with the Trustees or
any officer, employee or agent of the Trust shall be bound to make any inquiry
concerning the validity of any transaction purporting to be made by the Trustees
or by said officer, employee or agent or be liable for the application of money
or property paid, loaned, or delivered to or on the order of the Trustees or of
said officer, employee or agent. Every obligation, contract, instrument,
certificate, Share, other security of the Trust or undertaking, and every other
act or thing whatsoever executed in connection with the Trust shall be
conclusively taken to have been executed or done by the executors thereof only
in their capacity as Trustees under this Declaration or in their capacity as
officers, employees or agents of the Trust. Every written obligation, contract,
instrument, certificate, Share, other security of the Trust or undertaking made
or issued by the Trustees or by any officers, employees or
<PAGE> 28
agents of the Trust, in their capacity as such, shall contain an appropriate
recital to the effect that the Shareholders, Trustees, officers, employees and
agents of the Trust shall not personally be bound by or liable thereunder, nor
shall resort be had to their private property for the satisfaction of any
obligation or claim thereunder, and appropriate references shall be made therein
to the Declaration, and may contain any further recital which they may deem
appropriate, but the omission of such recital shall not operate to impose
personal liability on any of the Trustees, Shareholders, officers, employees or
agents of the Trust. The Trustees shall at all times maintain insurance for the
protection of the Trust Property, its Shareholders, Trustees, officers,
employees and agents in such amount as the Trustees shall deem adequate to cover
possible tort liability, and such other insurance as the Trustees in their sole
judgment shall deem advisable.
5.9 Reliance on Experts, etc. Each Trustee and officer or employee of
the Trust shall, in the performance of his duties, be fully and completely
justified and protected with regard to any act or any failure to act resulting
from reliance in good faith upon the books of account or other records of the
Trust, upon an opinion of counsel, or upon reports made to the Trust by any of
its Trustees, officers or employees or by its investment adviser, a distributor,
selected dealers, accountants, appraisers or other experts or consultants
selected with reasonable care by the Trustees, officers or employees of the
Trust, regardless of whether such counsel or expert may also be a Trustee.
<PAGE> 29
Article VI
Shares of Beneficial Interest
6.1 Beneficial Interest. The interest of the beneficiaries hereunder
shall be divided into transferable shares of beneficial interest without par
value. The Shares may be issued from time to time, in one or more Series, each
such Series to differ from every other Series then outstanding as may be
determined from time to time by the Trustees prior to the issuance of any Shares
thereof, in any or all of the following, but in no other respects; provided that
the Trustees shall not issue any Series that would constitute a senior security
prohibited under the 1940 Act or would otherwise violate any provision of the
1940 Act:
(a) The designation of such Series, by a distinguishing number, letter
or title as the Trustees may deem;
(b) The assets and liabilities, if any, to be specifically allocated to
such Series;
(c) The method of calculating net investment income and expenses
attributable to such Series;
(d) The right, if any, of the Shareholders of any Series to convert the
same into Shares of any other Series and the terms and conditions of such
conversion;
(e) The rights of Shareholders of a Series to receive dividends and
other distributions; and
(f) The separate voting rights, if any, of Shareholders of such Series
with respect to matters that affect
<PAGE> 30
such Series only and do not affect the rights of Shareholders of any
other Series then outstanding.
All Shares shall be of equal rank, shall together constitute a single class of
shares of beneficial interest in the Trust and shall be identical in all
respects except as may be fixed by the Trustees as herein above provided. The
number of such shares of beneficial interest of any Series authorized hereunder
is unlimited. All Shares issued hereunder including, without limitation, Shares
issued in connection with a dividend in Shares or a split of Shares, shall be
fully paid and nonassessable.
6.2 Rights of Shareholders. The ownership of the Trust Property of
every description and the right to conduct any business hereinbefore described
are vested exclusively in the Trustees, and the Shareholders shall have no
interest therein other than the proportionate beneficial interest conferred by
their Shares, and they shall have no right to call for any partition or division
of any property, profits, rights or interests of the Trust nor can they be
called upon to share or assume any losses of the Trust or suffer an assessment
of any kind by virtue of their ownership of Shares. The Shares shall be personal
property giving only the rights in this Declaration specifically set forth.
Voting rights shall be exercised by the holders of Shares of all Series, as a
single class, or by the holders of Shares of one or more specific Series, voting
separately, as required by the 1940 Act or otherwise contemplated by this
Declaration, so that Shareholders shall exercise their voting rights only as to
matters that affect the Trust generally or their Series specifically. The term
"entitled to vote" as used in this Declaration shall be construed to apply to
all Shareholders or to holders of Shares of one or more particular Series, as is
appropriate in each particular
<PAGE> 31
instance. The Shareholders shall have no preemptive or other right to subscribe
to any additional shares or other securities issued by the Trust or the Trustees
and shall have no preference, appraisal, conversion or exchange rights, except
for rights of conversion or exchange specified in Section 6.1.
6.3 Trust Only. It is the intention of the Trustees to create only the
relationship of Trustee and beneficiary between the Trustees and each
Shareholder from time to time. It is not the intention of the Trustees to create
a general partnership, limited partnership, joint stock association,
corporation, bailment or any form of legal relationship other than a trust.
Nothing in this Declaration shall be construed to make the Shareholders, either
by themselves or with the Trustees, partners or members of a joint stock
association.
6.4 Issuance of Shares. The Trustees, in their discretion, may from
time to time without vote of the Shareholders issue Shares, in addition to the
then issued and outstanding Shares and Shares held in the treasury, to such
party or parties and for such amount and type of consideration, including cash
or property, at such time or times and on such terms as the Trustees may deem
best, and may in such manner acquire other assets (including the acquisition of
assets subject to, and in connection with the assumption of, liabilities) and
businesses. In connection with any issuance of Shares, the Trustees may issue
fractional Shares. The Trustees may from time to time divide or combine the
Shares into a greater or lesser number without thereby changing the
proportionate beneficial interests in the Trust. Contributions to the Trust may
be accepted for, and Shares shall be redeemed as, whole Shares and/or 1/100ths
of a Share or multiples thereof.
<PAGE> 32
6.5 Register of Shares. A register shall be kept at the Trust or a
transfer agent duly appointed by the Trustees under the direction of the
Trustees which shall contain the names and addresses of the Shareholders and the
number of Shares held by them respectively and a record of all transfers
thereof. Such register shall be conclusive as to the holders of the Shares and
as to who shall be entitled to receive dividends or distributions or otherwise
exercise or enjoy the rights of Shareholders. No Shareholder shall be entitled
to receive payment of any dividend or distribution, nor to have notice given to
him as herein provided, until he has given his address to a transfer agent or
such other officer or agent of the Trustees as shall keep the said register for
entry thereon. Certificates will not be issued for the Shares unless
specifically requested by a Shareholder and the Trustees, in their discretion,
may promulgate appropriate rules and regulations as to their use.
6.6 Transfer Agent and Registrar. The Trustees shall have power to
employ a transfer agent or transfer agents, and a registrar or registrars. The
transfer agent or transfer agents may keep the said register and record therein
the original issues and transfers, if any, of the said Shares. Any such transfer
agent and registrars shall perform the duties usually performed by transfer
agents and registrars of certificates of stock in a corporation, except as
modified by the Trustees.
6.7 Transfer of Shares. Shares shall be transferable on the records of
the Trust only by the record holder thereof or by his agent thereto duly
authorized in writing, upon delivery to the Trust or a transfer agent of the
Trust of a duly executed instrument of transfer, together with such evidence of
the genuineness of each such execution and authorization and of other
<PAGE> 33
matters as may reasonably be required. Upon such delivery the transfer shall be
recorded on the register of the Trust. Until such record is made, the
Shareholder of record shall be deemed to be the holder of such Shares for all
purposes hereof and neither the Trust nor any transfer agent or registrar nor
any officer, employee or agent of the Trust shall be affected by any notice of
the proposed transfer.
Any person becoming entitled to any Shares in consequence of the death,
bankruptcy, or incompetence of any Shareholder, or otherwise by operation of
law, shall be recorded on the register of Shares as the holder of such Shares
upon production of the proper evidence thereof to the Trust or a transfer agent
of the Trust, but until such record is made, the of record shall be deemed to be
the holder of such Shares for all purposes hereof and neither the Trust nor any
transfer agent or registrar nor any transfer agent of the Trust shall be
affected by any notice of such death, incompetence, or other operation of law.
6.8 Notices. Any and all notices to which any Shareholder hereunder may
be entitled and any and all communications shall be deemed duly served or given
if mailed, postage prepaid, addressed to any Shareholder of record at his last
known address as recorded on the register of the Trust.
<PAGE> 34
ARTICLE VII
CUSTODIAN
7.1 Appointment and Duties. The Trustees shall at all times employ a
bank or trust company organized under the laws of the United States or the
states thereof and having capital, surplus and undivided profits of at least two
million dollars ($2,000,000) as custodian with authority as, its agent, but
subject to such restrictions, limitations and other requirements if any, as may
be contained in the By-Laws of the Trust and the 1940:
(a) to hold the securities owned by the Trust and deliver the same upon
written order;
(b) to receive and receipt for any moneys due to the
Trust and deposit the same in its own banking department or elsewhere as the
Trustees may direct;
(c) to disburse such funds upon orders or vouchers and to employ such
custodian as its agent for such purpose;
(d) if authorized by the Trustees, to keep the books and accounts of
the Trust and to furnish clerical and accounting services; and
(e) if authorized by the Trustees, to compute the net income of the
Trust and the net income attributable to each Series, if any, of Shares of the
Trust; all upon such basis of compensation as may be agreed upon between the
Trustees and the custodian. If so directed by a Majority Shareholder Vote, the
custodian shall deliver and pay over all property of the Trust held by it as
specified in such vote.
<PAGE> 35
The Trustees may also authorize the custodian to employ one or more
sub-custodians from time to time to perform such of the acts and services of the
custodian and upon such terms and conditions, as may be agreed upon between the
custodian and such sub-custodian and approved by the Trustees, provided that in
every case such sub-custodian shall be a bank or trust company organized under
the laws of the United States or one of the states thereof and having capital,
surplus and undivided profits of at least two million dollars ($2,000,000).
7.2 Central Certificate System. Subject to such rules, regulations and
orders as the Commission may adopt, the Trustees may direct the custodian to
deposit all or any part of the securities owned by the Trust in a system for the
central handling of securities established by a national securities exchange or
a national securities association registered with the Commission under the
Securities Exchange Act of 1934, or such other Person as may be permitted by the
Commission, or otherwise in accordance with the 1940 Act, pursuant to which
system all securities of any particular class or series of any issuer deposited
within the system are treated as fungible and may be transferred or pledged by
bookkeeping entry without physical delivery of such securities, provided that
all such deposits shall be subject to withdrawal only upon the order of the
Trust.
<PAGE> 36
VIII
Redemption
8.1 Redemptions. All outstanding Shares may be redeemed at the option
of the holders thereof, upon and subject to the terms and conditions provided in
this Article VIII. The Trust shall, upon application of any Shareholder or
pursuant to authorization from any Shareholder, redeem or repurchase from such
Shareholder outstanding Shares for an amount per Share determined by the
application of a formula adopted for such purpose by resolution of the Trustees
(which formula shall be consistent with the 1940 Act, and the rules and
regulations promulgated thereunder); provided that (a) such amount per Share
shall not exceed the cash equivalent of the proportionate interest of each Share
in the assets of the Trust at the time of the repurchase or redemption; (b) if
the Shares to be redeemed or repurchased are Shares of a Series with interests
in assets specifically allocated to such Series, such amount per Share shall not
exceed the cash equivalent of the proportionate interest of each Share in the
assets of the Trust so allocated at the time of the redemption or repurchase;
(c) if so authorized by the Trustees, the Trust may, at any time and from time
to time, charge fees for effecting such redemption, at such rates as the
Trustees may establish, as and to the extent permitted under the 1940 Act, and
the rules and regulations promulgated thereunder, and may, at any time and from
time to time, pursuant to such Act and such rules and regulations, suspend such
right of redemption. The procedures for effecting redemption shall be as set
forth in the Prospectus from time to time.
8.2 Redemption of Shares; Disclosure of Holding. If the Trustees at any
time and in good faith be of the opinion that direct or indirect
<PAGE> 37
ownership of Shares or other securities of the Trust has or may become
concentrated in any person to an extent which would disqualify the Trust as a
regulated investment company under the Internal Revenue Code, then the Trustees
shall have the power by lot or other means deemed equitable by them (i) to call
for redemption a number, or principal amount, of Shares or other securities of
the Trust sufficient, in the opinion of the Trustees, to maintain or bring the
direct or indirect ownership of Shares or other securities of the Trust into
conformity with the requirements for such qualification and (ii) to refuse to
transfer or issue Shares or other securities of the Trust to any Person whose
acquisition of the Shares or other securities of the Trust in question would in
the opinion of the Trustees result in such disqualification. The redemption
shall be effected at a redemption price determined in accordance with Section
8.1.
The holders of Shares or other securities of the Trust shall upon
demand disclose to the Trustees in writing such information with respect to
direct and indirect ownership of Shares or other securities of the Trust as the
Trustees deem necessary to comply with the provisions of the Internal Revenue
Code, or to comply with the requirements of any other taxing authority.
8.3 Redemptions of Small Accounts. Due to the relatively high cost of
maintaining investment accounts, the Trustees shall have the power to redeem
Shares at a redemption price determined in accordance with Section 8.1 if at any
time the total investment in such account does not have a value of at least $500
or such other amount as the Trustees may in their discretion from time to time
determine and as shall be set forth in the Prospectus. In such event
Shareholders will be notified that the value of their account is
<PAGE> 38
less than the designated minimum and allowed 60 days to make an additional
investment before redemption is processed.
<PAGE> 39
IX
Determination of Net Asset
Value, Net Income and Distribution
9.1 Net Asset Value. The net asset value of each outstanding Share of
the Trust shall be determined at least once on each business day on which it
shall be reasonably practicable to determine the value of the assets of the
Trust in accordance with the rules and regulations of the Commission, and at
such other times as the Trustees by resolution may determine. The method of
determination of net asset value shall be determined by the Trustees and shall
be as set forth in the Prospectus. Separate determinations of net asset value
shall be made for Shares of each Series, if any, with respect to which specific
assets of the Trust have been allocated. The power and duty to make the daily
calculations may be delegated by the Trustees to the Investment Adviser, the
custodian, the transfer agent or such other person as the Trustees by resolution
may determine. The Trustees may suspend the daily determination of net asset
value to the extent permitted by the 1940 Act.
9.2 Distributions to Shareholders. The Trustees shall from time to time
distribute ratably among the holders of Shares such proportion of the net
profits, surplus (including paid-in surplus), capital, or assets held by the
Trustees and allocable to such Shares as they may deem proper. Such distribution
may be made in cash or in property, subject to compliance with the 1940 Act
(including without limitation any type of obligations of the Trust or any assets
thereof), and the Trustees may distribute ratably among the Shareholders
additional Shares issuable hereunder in such manner, at such times, and on such
terms as the Trustees may deem proper. Such distributions may be among the
Shareholders of record at the time of declaring a distribution or
<PAGE> 40
among the Shareholders of record at such later date as the Trustees shall
determine. The Trustees may always retain from the net profits attributable to
the Shares such amount as they may deem necessary to pay the debts or expenses
of the Trust or to meet obligations of the Trust, or as they may deem desirable
to use in the conduct of its affairs or to retain for future requirements or
extensions of the Trust's business. The Trustees may adopt and offer to
Shareholders such dividend reinvestment plan, cash dividend payout plans or
related plans as the Trustees shall deem appropriate.
Inasmuch as the computation of net income and gains for Federal income
tax purposes may vary from the computation thereof on the books, the above
provisions shall be interpreted to give the Trustees the power in their
discretion to distribute for any fiscal year as ordinary dividends and as
capital gains distributions, respectively, additional amounts sufficient to
enable the Trust to avoid or reduce liability for taxes.
9.3 Power to Modify Foregoing Procedures. Notwithstanding any of the
foregoing provisions of this Article IX, the Trustees may prescribe, in their
absolute discretion, such other bases and times for determining the per Share
net asset value of the Trust's Shares or net income, or the declaration and
payment of dividends and distributions as they may deem necessary or desirable
to enable the Trust to comply with any provision of the 1940 Act, or any rule or
regulation thereunder, including any rule or regulation adopted pursuant to
Section 22 of the 1940 Act by the Commission or any securities association
registered under the Securities Exchange Act of 1934, or any order of exception
issued by said Commission, all as in effect now or hereafter amended or
modified.
<PAGE> 41
ARTICLE X
Shareholders
10.1 Meetings of Shareholders. (a) Annual Meetings. The first meeting
of the Shareholders shall be held at such place within or without the State of
Ohio on such day and at such time as the Trustees shall designate. The presence
in person or by proxy of the holders of one-third of the outstanding Shares
entitled to vote shall constitute a quorum at any meeting of Shareholders.
Except as otherwise specified in this Declaration or by a specific superseding
statutory provision, any action may be taken or authorized by the Shareholders
(a quorum being present) upon the affirmative vote of the holders of a majority
of the Shares entitled to vote present in person or by proxy. A majority of such
Shares represented at any meeting (whether or not a quorum is present) may
adjourn the meeting from time to time without further notice; and at such
adjourned meeting at which a quorum is represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. Except as required by the 1940 Act or as provided herein, there shall
be no Annual Meetings of Shareholders.
(b) Special Meetings. Special meetings of the Shareholders may be
called at any time by a majority of the Trustees and shall be called by any
Trustee, upon written request of Shareholders holding in the aggregate not less
than 25% of the outstanding Shares having voting rights with respect to the
matters to be brought before the meeting, such request specifying the purpose or
purposes for which such meeting is to be called. Any such meeting shall be held
within or without the State of Ohio on such day and at such time as the Trustees
shall designate.
<PAGE> 42
10.2 Notice of Meetings. Written notice of all meetings of the
Shareholders, stating the time, place and purposes of the meeting, shall be
given by the Trustees by mail to each Shareholder entitled to vote on the
matters to be brought before such meeting at registered address, mailed at least
7 days and not more than 60 days before the meeting. Only the business stated in
the notice of the meeting shall be considered at such meeting. Any adjourned
meeting may be held as adjourned without further notice.
10.3 Record Date for Meetings. For the purpose of determining the
Shareholders who are entitled to notice of and to vote at any meeting, or to
participate in any distribution, or for the purpose of any other action, the
Trustees may from time to time close the transfer books for such period, not
exceeding 30 days, as the Trustees may determine; or without closing the
transfer books the Trustees may fix a date not more than 60 days prior to the
date of any meeting of Shareholders, any distribution or any other action as a
record date for the determination of the Persons to be treated as Shareholders
record for such purposes, except for dividend payments which shall be governed
by Section 9.2 hereof.
10.4 Proxies, etc. At any meeting of Shareholders, any holder of Shares
entitled to vote thereat may vote by proxy, provided that no proxy shall be
voted at any meeting unless it shall have been placed on file with the
Secretary, or with such other officer or agent of the Trust as the Secretary may
direct, for verification prior to the time at which such vote shall be taken.
Pursuant to a resolution of a majority of the Trustees, proxies may be solicited
in the name of one or more Trustees or one or more of the officers of the Trust.
Only Shareholders of record shall be entitled to vote. Each full Share shall be
entitled to one vote and fractional Shares shall be
<PAGE> 43
entitled to a vote of such fraction. When any Share is held jointly by several
persons, any one of them may vote at any meeting in person or by proxy in
respect of such Share, but if more than one of them shall be present at such
meeting in person or by proxy, and such joint owners or their proxies so present
disagree as to any vote to be cast, such vote shall not be received in respect
of such Share. A proxy purporting to be executed by or on behalf of a
Shareholder shall be deemed valid unless challenged at or prior to its exercise,
and the burden of proving invalidity shall rest on the challenger. No
appointment of a proxy shall be valid after the expiration of eleven months
after it is made unless the writing specifies the date on which it is to expire
or the length of time it is to continue in force. If the holder of any Share is
a minor or a person of unsound mind, and subject to guardianship or to the legal
control of any other person as regards the charge or management of such Share,
he may vote by his guardian or such other person appointed or having such
control, and such vote may be given in person or by proxy.
10.5 Reports. The Trustees shall cause to be prepared at least annually
a report of operations containing a balance sheet and statement of income and
undistributed income of the Trust (or of each Series) prepared in conformity
with generally accepted accounting principles and an opinion of an independent
public accountant on such financial statements. Copies of such reports shall be
mailed to all Shareholders of record within the time required by the 1940 Act.
The Trustees shall, in addition, furnish to the Shareholders at least
semi-annually, an interim report containing an unaudited balance sheet of the
Trust as at the end of such period and an unaudited statement of income and
surplus for the period from the beginning of the current fiscal
<PAGE> 44
year to the end of such period, which report may be furnished as to each Series
separately rather than the entire Trust if deemed desirable.
10.6 Inspection of Records. The records of the Trust shall be open to
inspection by Shareholders to the same extent as is permitted shareholders of an
Ohio business corporation.
10.7 Shareholder Action By Written Consent. Any action which may be
authorized or taken at a meeting of the Shareholders may be authorized or taken
without a meeting with the affirmative vote or approval of, and in a writing or
writings signed by, all the Shareholders who would be entitled to notice of a
meeting of the Shareholders held for such purpose, which writing or writings
shall be filed with or entered upon the records of the Trust.
<PAGE> 45
Article XI
Duration; Termination of Trust; Amendment; Mergers, Etc.
11.1 Duration. Subject to possible termination in accordance provisions
of Section 11.2 hereof, the Trust created hereby shall limitation of time.
11.2 Termination of Trust. (a) The Trust may be terminated by vote of
the holders of not less than two-thirds of the Shares outstanding and entitled
to vote at any meeting of Shareholders or by an instrument in writing, without a
meeting, signed by a majority of the Trustees and consented to by the holders of
not less than two-thirds of such Shares. Upon the termination of the Trust,
(i) The Trust shall carry on no business except for the purpose of
winding up its affairs.
(ii) The Trustees shall proceed to wind up the affairs of the Trust and
all of the powers of the Trustees under this Declaration shall continue until
the affairs of the Trust shall have been wound up, including the power to
fulfill or discharge the contracts of the Trust, collect its assets, sell,
convey, assign, exchange, transfer or otherwise dispose of all or any part of
the remaining Trust Property to one or more Persons at public or private sale
for consideration which may consist in whole or in part of cash, securities or
other property of any kind, discharge or pay its liabilities, and do all other
acts appropriate to liquidate its business; provided that any sale, conveyance,
assignment, exchange, transfer or other disposition
<PAGE> 46
of all or substantially all of the Trust Property shall require
approval of the principal terms of the transaction and the nature and
amount of the consideration by the Shareholders in accordance with
Section 11.4 hereof.
(iii) After paying or adequately providing for the
payment of all liabilities, and upon receipt of such releases,
indemnities and refunding agreements, as they deem necessary for their
protection, the Trustees may distribute the remaining Trust Property,
in cash or in kind or partly of each, among the Shareholders according
to their respective rights.
(b) After termination of the Trust and distribution to the Shareholders
as herein provided, a majority of the Trustees shall execute and lodge among the
records of the Trust an instrument in writing setting forth the fact of such
termination, and the Trustees shall thereupon be discharged from liabilities and
duties hereunder, and the rights and interests shall thereupon cease.
(c) The provisions of Sections 11.2(a) and (b) shall further be
applicable to the termination of any one or more but less than all Series in
which case the language of such Sections shall be applied and interpreted so as
to relate only to the Series being terminated rather than the entire Trust.
11.3 Amendment Procedure. (a) This Declaration may be amended by
affirmative vote of the holders of a majority of the Shares entitled to vote at
any meeting of Shareholders or by an instrument in writing, without a meeting,
signed by a majority of the Trustees and by the holders of a majority of such
Shares. The Trustees may also amend
<PAGE> 47
this Declaration without the vote or consent of Shareholders if they deem it
necessary to conform this Declaration to the requirements of applicable federal
laws or regulations or the requirements of the regulated investment company
provisions of the Internal Revenue Code, but the Trustees shall not be liable
for failing so to do.
(b) No amendment may be made, under Section 11.3(a) above, which would
change any rights with respect to any Shares of the Trust by reducing the amount
payable thereon upon liquidation of the Trust or by impairing or diminishing the
preferences, voting powers, restrictions, qualifications, special or relative
rights or privileges pertaining thereto, except with the vote or consent of the
holders of two-thirds of the Shares; if Shares have been issued in Series and
such amendment would not affect Shares of all Series equally, no such amendment
may be made except with the vote or consent of the holders of two-thirds of the
Shares of each Series affected by such amendment. Nothing contained in this
Declaration shall permit the amendment of this Declaration to impair the
exemption from personal liability of the Shareholders, Trustees, officers,
employees and agents of the Trust or to permit assessments upon Shareholders.
(c) A certification in recordable form signed by a majority of the
Trustees setting forth an amendment and reciting that it was duly adopted by the
Shareholders as aforesaid shall be conclusive evidence of such amendment when
lodged among the records of the Trust. Notwithstanding any other provision
hereof, until such time as a Registration Statement under the Securities Act of
1933, as amended, covering the initial public offering of Shares shall have
become effective, this Declaration may be terminated or amended in any respect
by the affirmative
<PAGE> 48
vote of a majority of the Trustees or by an instrument signed by a majority of
the Trustees.
11.4 Merger, Consolidation and Sale of Assets. To the extent permitted
by law as now or hereafter in effect, the Trust or any Series may merge or
consolidate with any other corporation, association, trust, Series or other
organization or may sell, lease or exchange all or substantially all of the
Trust Property (or of the portion of the Trust Property allocated to such
Series), including its good will, upon such terms and conditions and for such
consideration when and as authorized at any meeting of Shareholders called for
that purpose by the affirmative vote of the holders of two-thirds of the Shares
outstanding and entitled to vote, or by an instrument or instruments in writing
without a meeting, consented to by the holders of two-thirds of such Shares;
provided, however, that, if such merger, consolidation, sale, lease or exchange
is recommended by the Trustees, the vote or written consent of the holders of a
majority of the Shares outstanding and entitled to vote shall be sufficient
authorization.
11.5 Incorporation. With the approval of the holders of a majority of
the Shares outstanding and entitled to vote, the Trustees may cause to be
organized or assist in organizing a corporation or corporations under the laws
of any jurisdiction or any other trust, partnership, association or other
organization to take over all of the Trust Property or to carry on any business
in which the Trust shall directly or indirectly have any interest, and to sell,
convey and transfer the Trust Property to any such corporation, trust,
association or organization in exchange for the shares or securities thereof or
otherwise, and to lend money to, subscribe for the shares or securities of, and
enter into any contracts with any such corporation, trust, partnership,
<PAGE> 49
association or organization, or any corporation, partnership, trust, association
or organization in which the Trust holds or is about to acquire shares or any
other interest. The Trustees may also cause a merger or consolidation between
the Trust or any successor thereto and any such corporation, trust, partnership,
association or other organization if and to the extent permitted by law, as
provided under the law then in effect.
<PAGE> 50
ARTICLE XII
Miscellaneous
12.1 Filing. This Declaration and any amendment hereto shall be filed
with the Office of the Secretary of State of Ohio.
12.2 Governing Law. The Trust created by this instrument is created
under and is to be construed and administered according to the laws of the State
of Ohio.
12.3 Counterparts. This Declaration may be simultaneously executed in
several counterparts, each of which shall be deemed to be an original, and such
counterparts, together, shall constitute one and the same instrument, which
shall be sufficiently evidenced by any such original counterpart.
12.4 Gender. Words denoting the male gender in this Declaration shall
be construed to denote either the male or female gender, or any Person, as
appropriate in any particular case.
12.5 Name. Gradison & Company Incorporated ("Gradison") has consented
to the use by the Trust of the identifying word "Gradison" in the name of the
Trust. Such consent is conditioned upon the employment of Gradison as investment
adviser of the Trust. As between the Trust and itself, Gradison controls the use
of the name of the Trust insofar as such name contains the identifying word
"Gradison." Gradison may from time to time use the identifying word "Gradison"
in other connections and for other purposes, including, without limitation, in
the names of other investment companies, corporations or businesses which it may
manage, advise, sponsor or own or in which it may have a financial interest.
Gradison may require the Trust to cease using the identifying word "Gradison" in
the name of the Trust if the Trust ceases to employ Gradison or a subsidiary
thereof as investment adviser of the Trust.
<PAGE> 51
12.6 Reliance by Third Parties. Any certificate executed by an
individual who, according to the records of the Trust, appears to be a Trustee
hereunder, certifying to: (a) the number or identity of Trustees or
Shareholders, (b) the due authorization of the execution of any instrument or
writing, (c) the form of any vote passed at a meeting of Trustees or
Shareholders, (d) the fact that the number of Trustees or Shareholders present
at any meeting or executing any written instrument satisfies the requirements of
this Declaration, (e) the form of any ByLaws adopted by or the identity of any
officers elected by the Trustees, or (f) the existence of any fact or facts
which in any manner relate to the affairs of the Trust, shall be conclusive
evidence as to the matters so certified in favor of any person dealing with the
Trustees and their successors.
12.7 Provisions in Conflict With Law or Regulations. (a) The provisions
of this Declaration are severable, and if the Trustees shall determine, with the
advice of counsel, that any of such provisions is in conflict with the 1940 Act,
the regulated investment company provisions of the Internal Revenue Code or with
other applicable laws and regulations, the conflicting provision shall be deemed
never to have constituted a part of this Declaration; provided, however, that
such determination shall not affect any of the remaining provisions of this
Declaration or render invalid or improper any action taken or omitted prior to
such determination.
(b) If any provision of this Declaration shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to such provision in such jurisdiction and shall not in any manner
affect such provision in any other jurisdiction or any other provision of this
Declaration in any jurisdiction.
<PAGE> 52
IN WITNESS WHEREOF, the undersigned have caused these presents to be
executed as of the day and year first above written.
Walter G. Alpaugh
Lawrence A. Leser
William J. Leugers, Jr.
George Rieveschl, Jr.
Donald E. Weston
<PAGE> 1
Exhibit 2
BY-LAWS OF GRADISON GROWTH TRUST
GRADISON GROWTH TRUST
BY-LAWS
These By-Laws are made and adopted pursuant to Section 2.7 of the
Declaration of Trust establishing GRADISON GROWTH TRUST dated July 27, 1983, as
from time to time amended (hereinafter called the "Declaration"). All words and
terms capitalized in these By-Laws shall have the meaning or meanings set forth
for such words or terms in the Declaration.
ARTICLE I
Shareholder meetings
Section 1.1. Chairman. The Chairman shall act as chairman at all
meetings of the Shareholders; in his absence, the President shall act as
chairman; and in the absence of the Chairman and the President, the Trustee or
Trustees present at each meeting may elect a temporary chairman for the meeting,
who may be one of themselves.
Section 1.2. Proxies; Voting. Shareholders may vote either in person or
by duly executed proxy and each full and fractional share represented at the
meeting shall have one vote or a fractional vote, as the case may be, all as
provided in Section 10.4 of the Declaration. Cumulative voting shall be
prohibited. No appointment of proxy shall be valid after the expiration of
eleven months after it is made unless the writing specifies the date on which it
is to expire or the length of time it is to continue in force. Each proxy shall
be revocable unless expressly provided therein to be irrevocable or unless
otherwise made irrevocable by law.
<PAGE> 2
Section 1.3. Closing of Transfer Books and Fixing of Record Dates. For
the purpose of determining the Shareholders who are entitled to notice of or to
vote or act at any meeting, including any adjournment thereof, or for the
purpose of any other action, the Trustees may from time to time close the
transfer books or fix a record date in the manner provided in Section 10.3 of
the Declaration. If the Trustees do not, prior to any meeting of Shareholders,
so fix a record date or close the transfer books, then the date of mailing
notice of the meeting shall be the record date. For the purpose of determining
the Shareholders who are entitled to participate in any distribution, the
Trustees may from time to time close the transfer books or fix a record date in
the manner provided in Section 10.3 of the Declaration. If the Trustees do not,
in connection with any distribution, so fix a record date or close the transfer
books, then the date upon which the distribution is declared shall be the record
date.
Section 1.4. Inspectors of Election. In advance of any meeting of
Shareholders, the Trustees may appoint Inspectors of Election to act at the
meeting or any adjournment thereof. If Inspectors of Election are not so
appointed, the chairman of any meeting of Shareholders may, and on the request
of any Shareholder or his proxy shall, appoint Inspectors of Election of the
meeting. The number of Inspectors shall be either one or three. If appointed at
the meeting on the request of one or more Shareholders or proxies, a majority of
Shares present and entitled to vote (as such phrase is defined in Section 6.2 of
the Declaration) shall determine whether one or three Inspectors are to be
appointed, but failure to allow such determination by the Shareholders shall not
affect the validity of the appointment of Inspectors of Election. In case any
person appointed as Inspector fails to appear or fails
<PAGE> 3
or refuses to act, the vacancy may be filled by appointment made by the Trustees
in advance of the convening of the meeting or at the meeting by the person
acting as chairman. The Inspectors of Election shall determine the number of
Shares outstanding, the voting rights with respect to each, the Shares
represented at the meeting, the existence of a quorum, the authenticity,
validity and effect of proxies; shall receive votes, ballots or consents; shall
hear and determine all challenges and questions in any way arising in connection
with the right to vote; shall count and tabulate all votes or consents,
determine the results; and shall do such other acts as may be proper to conduct
the election or vote with fairness to all Shareholders. If there are three
Inspectors of Election, the decision, act or certificate of a majority is
effective in all respects as the decision, act or certificate of all. On request
of the chairman of the meeting, or of any Shareholder or his proxy, the
Inspectors of Election shall make a report in writing of any challenge or
question or matter determined by them and shall execute a certificate of any
facts found by them. If no Inspectors of Election are appointed, the duties set
forth in this Section 1.4 shall be discharged by the Secretary of the meeting.
Section 1.5. Records at Shareholder Meetings. At each meeting of the
Shareholders there shall be open for inspection the minutes of the last previous
Annual or Special Meeting of Shareholders of the Trust and a list of the
Shareholders of the Trust, certified to be true and correct by the Secretary or
other proper agent of the Trust, as of the record date of the meeting or the
date of closing of transfer books, as the case may be. Such list of Shareholders
shall contain the name of each Shareholder in alphabetical
<PAGE> 4
order and the address and number of Shares owned by such Shareholder.
Shareholders shall have such other rights and procedures of inspection of the
books and records of the Trust as are granted to shareholders of an Ohio
business corporation.
Article II
Trustees
Section 2.1. Organizational, Annual and Regular Meetings. The Trustees
shall hold an organizational meeting for the election of officers and the
transaction of other business which may come before such meeting as soon as
practicable after the formation of the Trust. Thereafter, the Trustees shall
hold an annual meeting for the election of officers and the transaction of other
business which may come before such meeting and may hold such regular meetings
as they deem desirable. The organizational, annual and regular meetings of the
Trustees may be held without call or notice at such time and place as the
Trustees may provide from time to time.
Section 2.2. Special Meetings. Special Meetings of the Trustees shall
be held upon the call of the Chairman, the President, the Secretary or a
majority of the Board of Trustees, at such time, on such day and at such place,
as shall be designated in the notice of the meeting.
Section 2.3. Notice. Notice of a regular meeting may, and notice of a
special meeting shall, be given by mail or by telegram (which term shall include
a cablegram) or delivered personally. Notice of a special meeting shall be
mailed or otherwise given not less than 72 hours before the meeting. Notice by
telephone shall constitute personal delivery for these purposes. Notice of a
meeting of Trustees may be waived before or after any meeting by
<PAGE> 5
signed written waiver. Neither the business to be transacted at, nor the purpose
of, any meeting of the Board of Trustees need be stated in the notice or waiver
of notice of such meeting, and no notice need be given of action proposed to be
taken by unanimous written consent. The attendance of a Trustee at a meeting
shall constitute a waiver of notice of such meeting except where a Trustee
attends a meeting for the express purpose of objecting to the transaction of any
business on the ground that the meeting has not been lawfully called or
convened.
Section 2.4. Chairman; Records. The Chairman shall act as chairman at
all meetings of the Trustees; in the absence of the Chairman, the Trustees
present shall elect one of their number to act as temporary chairman. The
results of all actions taken at a meeting of the Trustees, or by unanimous
written consent of the Trustees, shall be recorded by the Secretary or other
person designated by the chairman of the meeting.
Article III
Officers
Section 3.1. Officers of the Trust. The Officers of the Trust shall
consist of a Chairman, a President, a Secretary, a Treasurer and such other
officers or assistant officers, including a Vice Chairman and Vice Presidents,
as may be elected by the Trustees. Any two or more of the offices may be held by
the same person, except that the same person may not be both President and
Secretary. The Trustees may designate any Vice President as an Executive Vice
President and may designate the order in which the other Vice Presidents may
act. The Chairman and the Vice Chairman, if any, and the President shall be
Trustees, but no other officer of the Trust need be a Trustee.
<PAGE> 6
Section 3.2. Election and Tenure. At the organizational meeting and
thereafter at each annual meeting of the Trustees, the Trustees may elect a Vice
Chairman, and shall elect a Chairman, a President, a Secretary, a Treasurer and
such other officers as the Trustees shall deem necessary or appropriate in order
to carry out the business of the Trust. Such officers shall hold office until
the next annual meeting of the Trustees and until their successors have been
duly elected and qualify. The Trustees may fill any vacancy in office or add any
additional officers at any time.
Section 3.3. Removal of Officers. Any officer may be removed at any
time, with cause, by action of two-thirds of the Trustees. If the officer in
such a case is a Trustee, he shall not participate in such vote or be counted in
the determination of whether a two-thirds majority is obtained. This Section 3.3
shall not prevent the making of a contract of employment for a definite term
with any officer and shall have no effect upon any cause of action which any
officer may have as a result of removal in breach of a contract of employment.
Any officer may resign at any time by notice in writing signed by such officer
and delivered or mailed to the Chairman, President or Secretary, and such
resignation shall take effect immediately upon receipt by the Chairman,
President or Secretary, or at such later date agreed to in writing by the
recipient of the notice of resignation.
Section 3.4. Bonds and Surety. Any officer may be required by the
Trustees to be bonded for the faithful performance of his duties in such amount
and with such sureties as the Trustee may determine.
Section 3.5. Chairman, Vice Chairman, President and Vice Presidents.
The Chairman shall if present preside at all meetings of the Shareholders and of
the Trustees and shall exercise and perform such other powers and duties as
<PAGE> 7
may be from time to time assigned to him by the Trustees. The Vice Chairman, if
any, shall exercise and perform such powers and duties as may be from time to
time assigned to him by the Trustees or the Chairman. The Trustees shall
designate the Chairman, Vice Chairman, if any, or the President to be the chief
executive officer of the Trust and, subject to the control of the Trustees, such
chief executive officer shall have general supervision, direction and control of
the business of the Trust and of its employees and shall exercise such general
powers of management as are usually vested in the office of president of a
corporation. Subject to direction of the Trustees, the Chairman and the
President shall each have power in the name and on behalf of the Trust to
execute any and all documents, contracts, agreements and other instruments in
writing, and to employ and discharge employees and agents of the Trust. Unless
otherwise directed by the Trustees, the Chairman and the President shall each
have full authority and power, on behalf of all of the Trustees, to attend and
to act and to vote on behalf of the Trust at any meetings of business
organizations in which the Trust holds an interest, or to confer such powers
upon any other persons by executing any proxies duly authorizing such persons.
The President shall have such further authorities and duties as the Trustees
shall from time to time determine. In the absence or disability of the
President, the Vice Presidents in order of their rank as fixed by the Trustees
or, if more than one and not ranked, the Vice President designated by the
Trustees, shall perform all of the duties of the President, and when so acting
shall have all the powers of and be subject to all of the restrictions upon the
President. Subject to the direction of the Trustees and of the President, each
Vice President shall have the power in the name and on behalf of the Trust to
execute any and all documents, contracts, agreements
<PAGE> 8
and other instruments in writing, and in addition, shall have such other duties
and powers as shall be designated from time to time by the Trustees or by the
President.
Section 3.6. Secretary. The Secretary, or any other person designated
by the chairman of any meeting, shall keep the minutes of all meetings of, and
record all votes of, Shareholders, Trustees and the Executive Committee, if any.
The Secretary shall be custodian of the seal of the Trust, if any, and he
(together with any other person so authorized by the Trustees) may affix the
seal or, if permitted, a facsimile thereof, to any instrument executed by the
Trust which would be sealed by an Ohio corporation executing the same or a
similar instrument, and may attest the seal and the signature or signatures of
the officer or officers executing such instrument on behalf of the Trust. The
Secretary shall also perform any other duties commonly incident to such office
in an Ohio corporation, and shall have such other authorities and duties as the
Trustees shall from time to time determine.
Section 3.7. Treasurer. Except as otherwise directed by the Trustees,
the Treasurer shall have the general supervision of the monies, funds,
securities, notes receivable and other valuable papers and documents of the
Trust, and shall have and exercise under the supervision of the Trustees and of
the President all powers and duties normally incident to his office. The
Treasurer may endorse for deposit or collection all notes, checks and other
instruments payable to or to the order of the Trust or any Series of the Trust.
He shall deposit all funds of the Trust in such depositories as the Trustees
shall designate. He shall be responsible for such disbursement of the funds of
the Trust as may be ordered by the Trustees or the President.
<PAGE> 9
The Treasurer shall keep accurate account of the books of the Trust's
transactions which shall be the property of the Trust, and which, together with
all other property of the Trust in his possession, shall be subject at all times
to the inspection and control of the Trustees. Unless the Trustees shall
otherwise determine, the Treasurer shall be the principal accounting officer of
the Trust and shall also be the principal financial officer of the Trust. The
Treasurer shall have such other duties and authorities as the Trustees shall
from time to time determine. Notwithstanding anything to the contrary herein
contained, the Trustees may authorize the Trust's investment adviser or the
Trust's transfer agent to maintain bank accounts and deposit and disburse funds
of the Trust on behalf of the Trust.
Section 3.8. Other Officers and Duties; Delegation. The Trustees may
elect such other officers and assistant officers as they shall from time to time
determine to be necessary or desirable in order to conduct the business of the
Trust. Assistant officers shall act generally in the absence of the officer whom
they assist and shall assist that officer in the duties of his office. Each
officer, employee and agent of the Trust shall have such other duties and
authority as may be conferred upon him by the Trustees or delegated to him by
the chief executive officer. Each officer may delegate to employees and agents
such duties and authority as he may deem appropriate.
ARTICLE IV
Investment Restrictions
Section 4.1. Investment Restrictions of the Trust. The Trust is subject
to the restrictions relating to the investment of its assets and its activities
which are set forth in the Prospectus, and which may not be changed unless
assented to by a Majority Shareholder Vote.
<PAGE> 10
ARTICLE V
Miscellaneous
Section 5.1. Depositories. In accordance with Section 7.1 of the
Declaration, the funds of the Trust shall be deposited in such depositories as
the Trustee shall designate and shall be drawn out on checks, drafts or other
orders signed by such officer, officers, agent or agents (including the Trust's
investment adviser) as the Trustees may from time to time authorize.
Section 5.2. Signatures. All contracts and other instruments shall be
executed on behalf of the Trust by such officer, officers, agent or agents as
provided in these By-Laws or as the Trustees may from time to time by resolution
provide.
Section 5.3. Seal. The seal of the Trust, if any, may be affixed to any
document and the seal and its attestation may be lithographed, engraved or
otherwise printed on any document with the same force and effect as if it had
been imprinted and attested manually in the same manner and with the same effect
as if done by an Ohio corporation under Ohio law.
Section 5.4. Gender. Words denoting the male gender in these ByLaws
shall be construed to denote either the male or female gender as appropriate in
any particular case.
ARTICLE VI
Transfers
Section 6.1. Certificates. Certificates representing Shares shall not
be issued except upon specific request by a Shareholder.
<PAGE> 11
Section 6.2. Transfer Agents, Registrars and the Like. As provided in
Section 6.6 of the Declaration, the Trustees shall have authority to employ and
compensate such transfer agents and registrars as the Trustees shall deem
necessary or desirable. In addition, the Trustees shall have power to employ and
compensate such dividend disbursing agents, warrant agents and agents for the
reinvestment of dividends as they shall deem necessary or desirable. Any of such
agents shall have such power and authority as is delegated to any of them by the
Trustees.
Section 6.3. Transfer of Shares. The Shares shall be transferable on
the books of the Trust only upon delivery to the Trust or a transfer agent of
the Trust of proper documentation as provided in Section 6.7 of the Declaration.
The Trust, or its transfer agent, shall be authorized to refuse any transfer
unless and until presentation of such evidence as may be reasonably required to
show that the requested transfer is proper.
Section 6.4. Registered Shareholders. The Trust may deem and treat the
holder of record of any Share as the absolute owner thereof for all purposes and
shall not be required to take any notice of any right or claim of right of any
other person.
ARTICLE VII
Amendment of By-Laws
Section 7.1. Amendment and Repeal of By-Laws. In accordance with
Section 2.7 of the Declaration, the Trustees shall have the power to alter,
amend or repeal the By-Laws or adopt new By-Laws at any time. Action by the
Trustees with respect to the By-Laws shall be taken by an affirmative vote of a
majority of the Trustees. The Trustees shall in no event adopt By-Laws
<PAGE> 12
which are in conflict with the Declaration, and any apparent inconsistency shall
be construed in favor of the related provisions in the Declaration.
The Declaration establishing Gradison Growth Trust dated May 31, 1983,
a copy of which, together with all amendments thereto, is on file in the
business office of the Trust, provides that the name "Gradison Growth Trust"
refers to the Trustees under the Declaration collectively as trustees, but not
as individuals or personally; and no Trustee, shareholder, officer, employee or
agent of Gradison Growth Trust shall be held to any personal liability, nor
shall resort be had to their private property for the satisfaction of any
obligation or claim or otherwise in connection with the affairs of said Gradison
Growth Trust but the Trust Property only shall be liable.
Amendment to By-Laws of
Gradison Growth Trust
The last sentence of Section 3.1 of the By-Laws is restated as follows:
The Chairman and the Vice Chairman, if any, shall be a Trustee, but no other
officer of the Trust need be a Trustee.
The undersigned hereby certifies that the foregoing amendment to the By-Laws was
duly effected by the Trustees of the Gradison Custodian Trust at a meeting held
on July 17, 1991.
Kevin M. Sheehan
Secretary
Gradison Growth Trust
<PAGE> 1
Exhibit 5(a)
INVESTMENT ADVISORY AGREEMENT
Between
McDONALD & COMPANY SECURITIES, INC. and GRADISON GROWTH TRUST
THIS AGREEMENT is made as of the 4th day of October 1991, between McDonald
&Company Securities, Inc., an Ohio corporation (the "Adviser", and Gradison
Growth Trust, an Ohio business trust (the "Fund.
In consideration of the mutual covenants hereinafter contained, the parties
agree as follows:
1. a. The Trust hereby employs the Adviser to manage the investment and
reinvestment of the assets of the Established Growth Fund and the Opportunity
Growth Fund (individually, a "Fund" or, collectively, the "Funds" of the Trust
in accordance with the Trust's investment objective and policies, and to perform
certain other services herein set forth and administer the Trust's affairs to
the extent requested, subject to the supervision of the board of trustees of the
Trust, for the period and on the terms herein set forth.
b. The Trust also hereby employs the Adviser, which is a broker-dealer
registered under the Securities Exchange Act of 1934 and under the laws of
certain other jurisdictions, to distribute shares of the Funds of the Trust in
certain states in which it may be qualified to do so, upon request of the Trust.
In that connection, the Adviser will accept orders for the purchase of shares of
the Trust's Funds at net asset value only, and no sales commission, fee or other
charge will be made to the investor. No portion of the investment advisory fee
specified in Paragraph 11 hereof will be deemed to constitute a distributor's
fee or brokerage commission.
c. The Adviser hereby accepts such employment, and agrees to render such
services and to assume the obligations herein set forth.
2. The Adviser shall:
a. Obtain, evaluate and provide to the Trust pertinent statistical and economic
data, investment research reports and other information relevant to the
investment policies of
<PAGE> 2
the Trust, to securities held by the Trust and to securities which the Trust
might purchase or sell. The Adviser reserves the right in its discretion, to
purchase or otherwise acquire such data, reports, other information and
additional services from other sources, including, in connection with the
management of the Funds, the right to contract (for a fee) for the use of a
computer modeling methodology;
b. Periodically furnish to the board of trustees of the Trust advice,
information and recommendations with respect to an overall investment program
for approval, modification or rejection by the Trust;
c. Take such steps as are necessary to implement such investment program as may
be approved by the Trust through the purchase and sale of securities, including
the placing of orders for such purchases and sales;
d. Report periodically to the Trust with respect to implementation of such
approved investment programs and with respect to the Adviser's activities in
connection with the administration of the Trust;
e. Provide shareholder services for the Trust (other than services to be
performed by any transfer agent, dividend disbursing agent, registrar,
distributor, custodian or depository appointed by the Trust). Such shareholder
services shall include, without limitation, responses to inquiries from
investors and receipt of purchase orders and redemption requests; and
f. Provide persons satisfactory to the board of trustees of the Trust to act as
officers of the Trust.
3. Any investment program undertaken by the Adviser pursuant to this Agreement,
and any other activities undertaken by the Adviser on behalf of the Trust, shall
at all times be subject to any directives of the board of trustees of the Trust,
or of any duly constituted committee of the board, or of any officer of the
Trust acting pursuant to authority granted by the board or by any such
committee.
4. In addition to performing the obligations set forth in Paragraph 2 hereof,
the Adviser shall assume and bear expenses incurred with respect to the
following:
a. Trustees who are affiliated with the Adviser;
b. Officers who are necessary for the management, operations, administration and
investments of the Trust; and
<PAGE> 3
c. Distribution of the shares of the Trust's Funds (other than the portion of
any such expenses to be borne by the Trust in accordance with an effective plan
pursuant to Rule 12b-1 under the Investment Company Act of 1940), including but
not limited to the preparation, printing and mailing of any sales literature and
other advertising materials for the Trust the furnishing to potential investors
of prospectuses, annual and semi-annual reports of the Trust and other materials
regarding the Trust and payments to brokers and dealers for their assistance
with respect to the distribution of shares of the Trust's Funds.
5. All expenses not specifically assumed by the Adviser under this Agreement
which may be incurred in the operation of the Trust will be borne by the Trust.
These include:
a. Expenses incurred by the Trust for office space, office facilities, business
equipment and utilities (including communications expenses);
b. Costs of preparing, printing and mailing, and expenses incurred in connection
with the furnishing of information and administrative assistance with respect to
the preparation of registration statements and prospectuses, including
amendments and revisions thereto, and annual, semi-annual and other periodic
reports furnished to shareholders of the Trust or to regulatory authorities; and
other documents required by regulatory authorities; and notices and proxy
solicitation materials furnished to shareholders of the Trust;
c. Such distribution expenses as may be contemplated by an effective plan
pursuant to Rule 12b-1 under the Investment Company Act of 1940, provided,
however, that any such payment by the Trust of distribution expenses shall be in
the amounts, and in accordance with the procedures, set forth in such plan;
d. Registration, filing and other fees in connection with requirements of
regulatory authorities;
e. Expenses of issue, sale, redemption and repurchase of shares of the Trust's
Funds;
f. Expenses incurred by the Trust in connection with the provision of
shareholder services by the Adviser or others;
g. Compensation of trustees of the Trust who are not affiliated with the
Adviser;
<PAGE> 4
h. Compensation and expenses of any transfer agent, dividend disbursing agent,
registrar, custodian or depository appointed by the Trust;
i. Charges and expenses of independent accountants retained by the Trust;
j. Brokers' commissions and issue or transfer taxes chargeable to the Trust in
connection with securities transactions to which the Trust or a Fund of the
Trust is a party;
k. Taxes and other fees payable by the Trust to federal, state, or other
governmental agencies;
1. Costs of share certificates representing shares of the Trust's Funds;
m. Legal fees and expenses (including reimbursement to the Adviser for legal
services provided to the Trust, subject to review by the Trust's outside
counsel) in connection with the operations of the Trust, including the
registration or qualification of its shares with federal or state regulatory
authorities;
n. Expenses of the Trust, including expenses incurred in connection with
shareholders' or trustees' meetings; and
o. Fees and other expenses incurred by the Trust in connection with its
membership in any organization.
6. Expenses borne by the Trust pursuant to Paragraph 5 hereof and attributable
to a specific Fund of the Trust shall be allocated to that Fund. Expenses borne
by the Trust pursuant to Paragraph 5 hereof that are not specifically
attributable to a Fund shall be allocated to each Fund in a manner and on a
basis determined in good faith by the Adviser to be fair and equitable, subject
to review by the board of trustees of the Trust.
7. The Fund shall cause its books and accounts to be audited at least once each
year by a firm of independent public accountants who shall render a written
report to the Trust.
8. The Fund shall reimburse the Adviser for all costs (direct and indirect)
which are fairly allocable to the shareholder services performed by the
Adviser's employees under this Agreement on behalf of the Trust including,
without limitation, appropriate portions of employee salaries, benefits and
expenses in the event of disagreement between
<PAGE> 5
the Trust and the Adviser as to a fair basis for allocating such costs, such
basis shall be fixed by the independent public accountants for the Trust, and
the parties shall be bound thereby.
9. The services of the Adviser to the Trust are not to be deemed exclusive, and
the Adviser shall be free to render similar services to other persons so long as
the services to be rendered hereunder are not impaired thereby. Nothing in this
Agreement shall limit or restrict the right of any director, office or employee
of the Adviser to engage in any other business or to devote his time and
attention in part to any other business.
10. The Adviser assumes no responsibility or obligation under this Agreement
other than to render in good faith the services provided for herein; provided
that nothing herein shall be deemed to protect or purport to protect the Adviser
against any liability to the Trust or its shareholders to which the Adviser
would otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties hereunder, or by reason of reckless
disregard of its obligations and duties hereunder. The Adviser shall not be
responsible or liable for any action or inaction of the board of trustees of the
Trust or any committee thereof.
11. In addition to all other charges and expenses to be paid hereunder, the
Trust shall pay to the Adviser compensation for its services and facilities
furnished hereunder, at the following annual rate with respect to each of the
Established Growth Fund and the Opportunity Growth Fund: 0.9% of that Fund's
average daily net assets up to $100 million, 0.8% of that Fund's average daily
net assets exceeding $100 million up to $200 million, and 0.7% that Fund's
average daily net assets exceeding $200 million. The fee shall be computed and
accrued daily. The fee so computed and accrued during each calendar month shall
be paid to the Adviser on the first day of the next month.
12. The Adviser shall reimburse the Trust if and to the extent that expenses
(excluding brokerage commissions, taxes, interest and extraordinary items) borne
by the Trust in any fiscal year exceed any expense limitation applicable to the
Trust imposed by any federal or state regulatory authority (as such limitations
may be established from time to time). During any fiscal year, the Adviser shall
be bound, in calculating the amount of any such excess, by the most stringent
applicable requirements of any state in which the shares of the Trust's Funds
are qualified for sale. Such
<PAGE> 6
excess expenses, if any, shall be determined and paid on a monthly basis,
subject to annual adjustment so that the aggregate of reimbursements, if any, by
the Adviser to the Trust for the fiscal year are in the amount necessary to
limit such expenses to the applicable expense limitation.
13. It is mutually understood that trustees, officers, shareholders, employees
and agents of the Trust are or may be interested in the Adviser as directors,
officers, stockholders, employees, agents or in other capacities; that
directors, officers, stockholders, employees and agents of the Adviser are or
may be interested in the Trust as trustees, officers, shareholders, employees,
agents of in other capacities; that the Adviser may be interested in the Trust
as a shareholder or otherwise; and that the existence of any such dual interest
shall not affect the validity of this Agreement or of any transactions made
hereunder, except as may otherwise be provided in the Declaration of Trust of
the Trust or the Articles of Incorporation of the Adviser, or by any specific
provision of any applicable statute, rule or regulation.
14. This Agreement shall become effective as to both Funds of the Trust as of
the date first set forth above and shall continue in effect until June 30, 1992.
Thereafter, it shall continue in effect from year to year, provided such
continuance is specifically approved at least annually, at meetings called for
the purpose of voting upon such approvals, by the vote of a majority of the
outstanding voting securities of that Fund or by the vote of a majority of the
board of trustees of the Trust, and in either event by the vote cast in person
of a majority of the trustees of the Trust who are not interested persons (a
defined in the Investment Company Act of 1940, as amended) of either party to
this Agreement.
15. The Trust may at any time and without the payment of any penalty terminate
this Agreement as to either Fund upon 60 days' written notice to the Adviser,
either by action of the board of trustees of the Trust or by the vote of a
majority of the outstanding voting securities of that Fund, and the Adviser may
at any time and without the payment of any penalty terminate this Agreement upon
60 days' written notice to the Trust. This Agreement shall automatically
terminate in the event of its assignment (within the meaning of the Investment
Company Act of 1940, as amended) by the Adviser, unless such automatic
termination shall be prevented by an order of exemption from the Securities and
Exchange Commission.
<PAGE> 7
16. This Agreement may be amended at any time by the mutual consent of the
parties, provided that such consent on the part of the Trust shall have been
approved, at meetings called for the purpose of voting upon such consent, by the
vote of a majority of the outstanding voting securities of the affected Fund,
and by the vote of a majority of the board of trustees of the Trust, including
the vote cast in person by a majority of the trustees of the Trust who are not
interested persons (as defined in the Investment Company Act of 1940, as
amended) of either party to this Agreement.
17. The parties to this Agreement acknowledge that the Adviser has an exclusive
proprietary interest in the use of the names "Gradison" and "McDonald" and
further acknowledge that the Adviser has consented to the use of such names by
the Trust subject to withdrawal of such consent upon 30 days' written notice to
the Trust. The Trust agrees that the names 'Gradison' and "McDonald" will be
used by it only in connection with the business of an open-end diversified
management investment company; that such names will be used only in such forms,
styles and contexts as may be approved by the Adviser; and that the Trust will
not do or cause to be done any act or undertaking which has the effect of
contesting, challenging or in any way impairing the Adviser's right, title or
interest in or to such names. The Trust agrees that it will not represent that
it has any right, title or interest in such names, and that the Trust's use of
such names shall not create any right, title or interest in its favor therein.
Within 30 days after the termination of this Agreement for any reason, or after
the written withdrawal of such consent of the Adviser (with or without cause and
within the Adviser's sole discretion) the Trust (a) will cease and desist from
every use of the names 'Gradison' and "McDonald" and will deliver to the Adviser
all prospectuses, sales literature and other advertising materials bearing such
names; (b) will cause its name to be changed so as to eliminate the word
'Gradison" or 'McDonald' therefrom; and (c) will not at any time thereafter
adopt or use any name, mark or other trade designation which is confusingly
similar to the names 'Gradison" or 'McDonald" or likely to mislead the public.
18. Any notice required by or permitted to be given in connection with this
Agreement shall be in writing, addressed and delivered in person, or mailed
postage prepaid, to the addresses designated by the respective parties for the
receipt of such notice. Until further written notice, it is agreed that the
addresses of the Adviser and of the Trust, respectively, shall be:
<PAGE> 8
McDonald & Company Securities, Inc.
Attention: Gordon Price
2100 Society Building
Cleveland, Ohio 44114
Gradison Growth Trust
Attention: William J. Leugers, Jr.
The 580 Building
Cincinnati, Ohio 45202
Gradison Growth Trust
Attention: Daniel J. Castellini
Central Trust Tower
Cincinnati, Ohio 45202
19. The shareholders, trustees, officers, employees and agents of the Trust
shall not personally be bound by or liable under this Agreement, nor shall
resort be had to their private property for the satisfaction of any obligation
or claim hereunder, as more fully provided under the terms of the Declaration of
Trust.
IN WITNESS WHEREOF, the parties have executed this Investment Advisory Agreement
as of the date first written above.
McDONALD & COMPANY SECURITIES, INC. GRADISON GROWTH TRUST
By: [Illegible] By Donald E. Weston
Chairman Chairman
<PAGE> 1
Exhibit 8
CUSTODY AGREEMENT
Agreement made this 5th day of August, 1983, between Gradison Growth
Trust, a business trust organized and existing under the laws of the State of
Ohio, having its office at The 580 Building, Cincinnati, Ohio (hereinafter
called the "Trust"), and The First National Bank of Cincinnati, a national
banking association, having its principal office and place or business at First
National bank Center, 425 Walnut Street, Cincinnati, Ohio (hereinafter called
the "Custodian").
WITNESSETH
that for and in consideration of the mutual promises hereinafter set forth the
Trust and the Custodian agree as follows:
Article I
DEFINITIONS
Whenever used in this Agreement, the following words and phrases, unless the
context otherwise requires, shall have the following meanings:
1. "Authorized Person" shall be deemed to include the Senior Vice
President, the Treasurer, or any other person, whether or not any such person is
an Officer or employee of the Trust, duly authorized by the Board of Trustees of
the Trust to give Oral Instructions and Written Instructions on behalf of the
Trust and listed in the Certificate annexed hereto as Appendix A or such other
Certificate as may be received by the Custodian from time to time.
2. "Book-Entry System" shall mean the Federal Reserve/Treasury
book-entry system for United States and federal agency securities, its successor
or successors and its nominee or nominees, provided the Custodian has received a
certified copy of a resolution of the Board of Trustees of the Trust
specifically approving deposits in the Book-Entry System.
3. "Certificate" shall mean any notice, instruction, or other
instrument in writing, authorized or required by this Agreement to be given to
the Custodian which is actually
<PAGE> 2
received by the Custodian and signed on behalf of the Trust by an Officer of the
Trust.
4. "Depository" shall mean The Depository Trust Company ("DTC"), a
clearing agency registered with the Securities and Exchange Commission, its
successor or successors and its nominee or nominees, provided the Custodian has
received a certified copy of a resolution of the Trust's Board of Trustees
specifically approving deposits in OTC. The term "Depository" shall further mean
and include any other person authorized to act as a depository under the
Investment Company Act of 1940, its successor or successors and its nominee or
nominees, specifically identified in a certified copy of a resolution of the
<PAGE> 3
Trust's Board or Trustees specifically approving deposits therein by the
Custodian.
5. "Dividend and Transfer Agent" shall mean the Trust or such other
Dividend and Transfer Agent active, from time to time, in such capacity pursuant
to a written Agreement with the Trust. The Trust shall immediately report to the
Custodian in writing any change in the Dividend and Transfer Agent.
6. "Fund" or "Funds" shall mean the Established Growth Fund of the
Trust or the Emerging Growth Fund of the Trust, or both or them as appropriate.
7. "Money Market Security" shall be deemed to include, without
limitation, obligations issued, or guaranteed or insured as to principal and/or
interest, by the government of the United States or agencies or
instrumentalities thereof; commercial paper; obligations (including certificates
of deposit, bankers' acceptances and bank time deposits) of domestic banks that
are members of Federal Deposit Insurance Corporation; obligations (including
certificates or deposit and demand and time deposits) of savings and loan
associations that are members of the Federal Savings and Loan Insurance
Corporation; short term corporate obligations where the purchase and sale of
such securities normally require settlement in federal funds or their equivalent
on the same day as such purchase or sale; and repurchase agreements relating to
the above.
8. "Officers" shall be deemed to include the Chairman, the President,
any Senior Vice President, any Vice President, any Assistant Vice President, the
Secretary, the Treasurer, any Assistant Treasurer, or any other person or
persons duly authorized by the Board of Trustees of the Trust to execute any
Certificate, instruction, notice or other instrument on behalf of the Trust and
listed in the Certificate annexed hereto as Appendix B or such other
Certificates as may be received by the Custodian from time to time.
9. "Oral Instructions" shall mean oral instructions actually received
by the Custodian from an Authorized Person or from a person believed in good
faith by the Custodian to be an Authorized Person.
10. "Security or Securities" shall mean Money Market Securities, common
stocks, bonds, debentures, notes, and other corporate securities convertible
into common stock, and any certificates, receipts, warrants or other instruments
representing rights to receive, purchase or subscribe for the same, or
evidencing or representing any other rights or interest therein, or any property
or assets.
11. Written Instructions" shall mean communications actually received
by the Custodian from an Authorized Person
<PAGE> 4
or from a person believed in good faith by the Custodian to be an Authorized
Person in writing or by telex or any other such system whereby the receiver of
such communications is able to verify by codes or otherwise with reasonable
degree of certainty the authenticity of the sender or such communication.
<PAGE> 5
ARTICLE II
APPOINTMENT OF CUSTODIAN
1. The Trust hereby constitutes and appoints the Custodian as custodian
of all of the Securities and moneys at any time owned by the Trust during the
period of this Agreement.
2. The Custodian hereby accepts appointment as such custodian and
agrees to perform the duties thereof as hereinafter set forth.
ARTICLE III
CUSTODY OF CASH AND SECURITIES
1. The Trust will deliver or cause to be delivered to the Custodian all
Securities and all moneys owned by it, including cash received for the issuance
of its shares, at any time during the period of this Agreement. As part of this
obligation, the Trust will designate or cause to be designated to the Custodian
whether such Securities and moneys are to be credited to the account or accounts
for the Trust's Established Growth Fund or the Trust's Emerging Growth Fund. The
Custodian will not be responsible for such Securities and such moneys until
actually received by it. The Custodian will be entitled to reverse any credits
made on the Trust's behalf where such credits have been previously made and
moneys are not finally collected. Prior to the deposit of any Securities of the
Trust in the Book-Entry System, including any deposit in connection with the
settlement of a purchase or sale, there shall be delivered to the Custodian by
the Trust a certified resolution of the Board of Trustees of the Trust
specifically approving such deposits by the Custodian on behalf of the Trust in
the Book-Entry System. The Custodian shall be entitled to rely on such
Certificate until a Certificate to the contrary is delivered to the Custodian.
Prior to a deposit of any Securities of the Trust in the Depository, there shall
be delivered to the Custodian by the Trust a certified resolution of the Board
of Trustees of the Trust specifically approving such deposits by the Custodian
on behalf of the Trust. The Custodian shall be entitled to rely on such
Certificate until a Certificate to the contrary is delivered to the Custodian
and to deposit in the Depository all Securities eligible for deposit therein and
to utilize the Depository to the extent possible in connection with its
performance hereunder, including, without limitation, in connection with
settlements of purchases and
<PAGE> 6
sales of Securities, and deliveries and returns of Securities collateral.
Securities and moneys of the Trust deposited in the Book-Entry System or the
Depository will be represented in accounts which include only assets held by the
Custodian for customers, including but not limited to accounts in which the
Custodian acts in a fiduciary or representative capacity.
2. The Custodian shall credit to separate accounts in the name of
either the Trust's Established Growth Fund or the Trust's Emerging Growth Fund
all moneys received by it for the account of the respective Funds of the Trust,
and shall disburse the same only:
<PAGE> 7
(a) In payment for Securities purchased, as provided in Article IV
hereof;
(b) In payment of dividends or distributions, as provided in Article V
hereof;
(c) In payment of original issue or other taxes, as provided in Article
VI hereof;
(d) In payment for shares or beneficial interest of the Trust's Funds
redeemed by it, as provided in Article VI hereof;
(e) Pursuant to Certificates directing payment and setting forth (i)
the name and address of the person to whom the payment is to be made, the amount
or such payment and the purpose for which payment is to be made (the Custodian
not being required to question such direction) or (ii) if reserve requirements
are established for the Trust by law or by valid regulation, directing the
Custodian to deposit a specified amount of collected funds in the form of U.S.
dollars at a specified Federal Reserve Bank and stating the purpose of such
deposit; and
(f) In payment of the fees and in reimbursement of the expenses and
liabilities of the Custodian, as provided in Article VIII hereof.
3. Promptly after the close of business on each day the Custodian shall
furnish the Trust with confirmations and a summary of all transfers to or from
the account of the Trust's Funds during said day. Where Securities are
transferred to the account of the Trust's Funds, the Custodian shall also by
book-entry or otherwise identify as belonging to the Trust (and allocable to a
particular Fund of the Trust) a quantity of Securities in a fungible bulk of
Securities registered in the name of the Custodian (or its nominee) or shown on
the Custodian's account on the books of the Book-Entry System or the Depository.
At least monthly and from time to time, the Custodian shall furnish the Trust
with a detailed statement of the Securities and moneys held for the Trust's
Funds under this Agreement.
4. All Securities held for the Trust's Funds, which are issued or
issuable only in bearer form, except such Securities as are held in the Book
Entry System, shall be held by the Custodian in that form; all other Securities
held for the Trust's Funds may be registered in the name of the Trust, in the
name of the appropriate Fund of the Trust, in
<PAGE> 8
the name of any duly appointed registered nominee of the Custodian as the
Custodian may from time to time determine, or in the name of the Book-Entry
System or the Depository or their successor or successors, or their nominee or
nominees. The Trust agrees to furnish to the Custodian appropriate instruments
to enable the Custodian to hold or deliver in proper form for transfer, or to
register in the name of its registered nominee or in the name of the Book-Entry
System or the Depository any Securities which it may hold for the account of the
Trust's Funds and which may from time to time be registered in the name of the
Trust or a particular Fund of the Trust. The Custodian shall hold all such
Securities which are not held in the Book-Entry System or the Depository in
<PAGE> 9
separate accounts in the name of the Trust's Funds physically segregated at all
times from those of any other person or persons.
5. Unless otherwise instructed to the contrary by a Certificate, the
Custodian by itself, or through the use or the Book Entry System or the
Depository with respect to Securities therein deposited, shall with respect to
all Securities held for the Trust's Funds in accordance with this Agreement:
(a) Collect all dividends, income and other amounts due or payable;
(b) Present for payment and collect the amount payable upon all
Securities which may mature or be called, redeemed, or retired, or otherwise
become payable;
(c) Surrender Securities in temporary form for definitive Securities;
(d) Execute, as Custodian, any necessary declarations or certificates
of ownership under the federal income tax laws or the laws or regulations of any
other taxing authority, including any foreign taxing authority, now or hereafter
in effect; and
(e) Hold directly, or through the Book-Entry System or the Depository
with respect to Securities therein deposited, for the accounts of the respective
Funds of the Trust all rights and similar securities issued with respect to any
Securities held by the Custodian hereunder.
6. Upon receipt of a Certificate and not otherwise, the Custodian
directly or through the use of the Book-Entry System or the Depository shall:
(a) Execute and deliver to such persons as may be designated in such
Certificate proxies, consents, authorizations, and any other instruments whereby
the authority of the Trust as owner of any Securities may be exercised;
(b) Deliver any Securities held for the Trust's Funds in exchange for
other Securities or cash issued or paid in connection with the liquidation,
reorganization, refinancing, merger, consolidation or recapitalization of any
corporation, or the exercise of any conversion privilege;
(c) Deliver any Securities held for the Trust's Funds to any protective
committee, reorganization committee or other
<PAGE> 10
person in connection with the reorganization, refinancing, merger,
consolidation, recapitalization or sale of assets of any corporation, and
receive and hold under the terms of this Agreement such certificates of deposit,
interim receipts or other instruments or documents as may be issued to it to
evidence such delivery; and
(d) Make such transfers or exchanges of the assets of the Trust and
take such other steps as shall be stated in said order to be for the purpose or
effectuating any duly authorized plan of liquidation, reorganization, merger,
consolidation or recapitalization of the Trust.
<PAGE> 11
ARTICLE IV
PURCHASE AND SALE OF INVESTMENTS OF THE TRUST
1. Promptly after each purchase of Securities by the Trust,
the Trust shall deliver to the Custodian (i) with respect to each purchase of
Securities which are not Money Market Securities, a Certificate, and (ii) with
respect to each purchase or Money Market Securities, Written Instructions, a
Certificate or Oral Instructions, specifying with respect to each such purchase:
(a) the name or the issuer and the title of the Securities, (b) the number of
shares or principal amount purchased, together with accrued dividends or
interest, if any, (c) the date of purchase and settlement, (d) the purchase
price per unit, (e) the total amount payable upon such purchase, (f) the name or
the person from whom or the broker through whom the purchase was made, and (g)
the Fund of the Trust for which the Securities were purchased. The Custodian
shall upon receipt of Securities purchased by or for the Trust pay out of the
moneys held for the account of the appropriate Fund of the Trust the total
amount payable to the person from whom or the broker through whom the purchase
was made, provided that the same conforms to the total amount payable as set
forth in such Certificate, Written Instructions or Oral Instructions.
2. Promptly after each sale of Securities by the Trust, the
Trust shall deliver to the Custodian (i) with respect to each sale of Securities
which are not Money Market Securities, a Certificate, and (ii) with respect to
each sale of Money Market Securities, Written Instructions, a Certificate, or
Oral Instructions, specifying with respect to each such sale: (a) the name of
the issuer and the title of the Security, (b) the number of shares or principal
amount sold, together with accrued dividends or interest, if any, (c) the date
of sale, (d) the sale price per unit, (e) the total amount payable to the Trust
upon such sale, (f) the name of the broker through whom or the person to whom
the sale was made, and (g) the Fund of the Trust from which the Securities were
sold. The Custodian shall deliver the Securities upon receipt of the total
amount payable to the Trust upon such sale, provided that the same conforms to
the total amount payable as set forth in such Certificate, Written Instructions
or Oral Instructions. Subject to the foregoing, the Custodian may accept payment
in such form as shall be satisfactory to it, and may deliver Securities and
arrange for payment in accordance with the customs prevailing among dealers in
Securities.
<PAGE> 12
Article V
PAYMENT OF DIVIDEND OR DISTRIBUTIONS
1. The Trust shall furnish to the Custodian a copy of the
resolution of the Board of Trustees, certified by the Secretary or any Assistant
Secretary, either (i) setting forth the date of the declaration or a dividend or
distribution relating to one or both of the Trust's Funds, the date of payment
thereof, the record date as of which shareholders entitled to payment shall be
determined, the amount payable per share to the shareholders of record as of
that date and the total amount to be paid by the Dividend and Transfer Agent
<PAGE> 13
of the Trust on the payment date, or (ii) authorizing the declaration of
dividends and distributions on a specified periodic basis and authorizing the
Custodian to rely on Oral Instructions, Written Instructions or a Certificate
setting forth the date of the declaration or such dividend or distribution, the
date of payment thereof, the record date as of which shareholders entitled to
payment shall be determined, the amount payable per share to the shareholders of
record as of that date and the total amount to be paid by the Dividend and
Transfer Agent on the payment date.
2. Upon the payment date specified in any such resolution, Oral
Instructions, Written Instructions or Certificates, as the case may be, the
Custodian shall arrange for such payments to be made by the Dividend and
Transfer Agent out of moneys held for the account of the appropriate Fund of the
Trust, or for such payments to be reinvested for the accounts of the
shareholders in additional shares of the Trust's Funds in accordance with the
then current reinvestment procedures of the Trust.
ARTICLE VI
SALE AND REDEMPTION OF SHARES OF BENEFICIAL INTEREST OF THE
TRUST
1. Whenever a sale of shares of beneficial interest of a Fund of the
Trust shall occur, the Trust shall promptly advise the Custodian by a Written
Instruction of the affected Fund, the number of shares sold, trade date, and
price, and the amount of money received or to be received by the Custodian for
the sale of such shares. The Custodian understands and agrees that the Written
Instruction may be furnished subsequent to the sale of shares of beneficial
interest of the Trust's Funds.
2. Upon receipt of such money from the Dividend and Transfer Agent, the
Trust, or any of the Trust's agents, the Custodian shall credit such money to
the account of the appropriate Fund of the Trust.
3. Upon issuance of any shares of beneficial interest of the Trust's
Funds in accordance with the foregoing provisions of this Article, the Custodian
shall pay, out of the money held for the account of the appropriate Fund of the
Trust, all original issue or other taxes required to be paid by the Trust in
connection with such issuance upon the receipt of a Written Instruction
specifying the amount to be paid.
<PAGE> 14
4. Whenever any shares of beneficial interest of the Trust's Funds are
redeemed, the Trust or its Dividend and Transfer Agent shall promptly advise the
Custodian by Written Instructions of (a) the affected Fund; (b) the number of
shares of beneficial interest redeemed; and (c) the amount to be paid for the
shares of beneficial interest redeemed. The Custodian further understands that,
if the Trust is not acting as the Dividend and Transfer Agent, the information
contained in such Written Instructions will be derived from redemptions of
shares of beneficial interest of the Trust's Funds as reported by the Trust to
the Dividend and Transfer Agent.
<PAGE> 15
5. Upon receipt from the Dividend and Transfer Agent of any Written
Instructions setting forth the number of shares of beneficial interest to be
redeemed and advice that such shares are valid and in good form for redemption,
the Custodian shall arrange for payment of redemption proceeds to be made by the
Dividend and Transfer Agent out of the moneys held for the account of the
appropriate Fund of the Trust in the total amount specified as sec forth in the
Written Instructions furnished pursuant to paragraph 4 of this Article.
ARTICLE VII
INDEBTEDNESS
The Trust will cause to be delivered to the Custodian by any bank
(including the Custodian, if the borrowing is from the Custodian) from which it
borrows money for temporary or emergency purposes using Securities as collateral
for such borrowings, a notice or undertaking in the form currently employed by
any such bank setting forth the amount which such bank will loan to the Trust
against delivery of a stated amount of collateral. The Trust shall promptly
deliver to the Custodian a Certificate specifying with respect to each such
borrowing: (a) the name of the bank, (b) the amount and terms of the borrowing,
which may be set forth by incorporating by reference an attached promissory
note, duly endorsed by the Trust, or other loan agreement, (c) the date and
time, if known, on which the loan is to be entered into, (d) the date on which
the loan becomes due and payable, (e) the total amount payable to the Trust on
the borrowing date, (f) the market value of Securities collateralizing the loan,
including the name of the issuer, the title and the number of shares or the
principal amount of any particular Securities, and (g) a statement that such
loan for temporary or emergency purposes is in conformance with the Investment
Company Act of 1940 and the Trust's then current Prospectus. The Custodian shall
deliver on the borrowing date specified in a Certificate the specified
collateral and the executed promissory note, if any, against delivery by the
lending bank of the total amount of the loan payable, provided that the same
conforms to the total amount payable as set forth in the Certificate. The
Custodian may, at the option of the lending bank, keep such collateral in its
possession, but such collateral shall be subject to all rights therein given the
lending bank by virtue of any promissory note or loan agreement. The Custodian
shall deliver in the manner directed by the Trust from time to time such
Securities as additional
<PAGE> 16
collateral as may be specified in a Certificate to collateralize further any
transaction described in this paragraph. The Trust shall cause all Securities
released from collateral status to be returned directly to the Custodian, and
the Custodian shall receive from time to time such return of collateral as may
be tendered to it. In the event that the Trust fails to specify in a Certificate
the name of the issuer, the title and number of shares or the principal amount
of any particular Securities to be delivered as collateral by the Custodian, the
Custodian shall not be under any obligation to deliver any Securities. the
Custodian may require such reasonable conditions with respect to such collateral
and its dealings with third-party lenders as it may deem appropriate.
<PAGE> 17
ARTICLE VIII
THE CUSTODIAN
1. Except as otherwise provided herein, neither the Custodian
nor its nominee shall be liable for any loss or damage, including counsel fees,
resulting from its action or omission to act or otherwise, except for any such
loss or damage arising out of its own negligence or willful misconduct. The
Trust shall defend, indemnify and hold harmless the Custodian and its directors,
officers, employees and agents with respect to any loss, claim, liability or
cost (including reasonable attorneys' fees) arising or alleged to arise from or
relating to the Trust's duties' hereunder or any other action or inaction of the
Trust or its trustees, officers, employees or agents, except such as may arise
from the negligent action, omission or willful misconduct of the Custodian, its
directors, officers, employees or agents. The Custodian shall defend, indemnify
and hold harmless the Trust and its trustees, officers, employees or agents with
respect to any loss, claim, liability or cost (including reasonable attorneys'
fees) arising or alleged to arise from or relating to the Custodian's duties
hereunder or any other action or inaction of the Custodian or its directors,
officers, employees or agents, except such as may arise from the negligent
action, omission or willful misconduct of the Trust, its trustees, officers,
employees or agents. The Custodian may, with respect to questions of law, apply
for and obtain the advice and opinion of counsel to the Trust at the expense of
the Trust, or of its own counsel at its own expense and shall be fully protected
with respect to anything done or omitted by it in good faith in conformity with
the advice or opinion of counsel to the Trust, and shall be similarly protected
with respect to anything done or omitted by it in good faith in conformity with
advice or opinion of its own counsel unless counsel to the Trust shall have a
differing or contrary interpretation of such question of law, or unless counsel
to the Trust shall fail to respond within a reasonable period of time to the
request of the Custodian for legal advice. The Custodian shall be liable to the
Trust for any proximate loss or damage resulting from the use of the Book-Entry
System or any Depository arising by reason of any negligence, misfeasance or
misconduct on the part of the Custodian or any of its employees or agents but
not for any special, incidental, consequential or punitive damages; provided,
however, that nothing contained herein shall preclude recovery by the Trust of
principal or shares constituting Securities, and dividends and interest to the
<PAGE> 18
date of recovery on Securities, incorrectly omitted from any account for the
Trust's Funds or penalties imposed on the Trust for any failure to deliver
Securities.
2. Without limiting the generality of the foregoing, the
Custodian, acting in the capacity of Custodian hereunder, shall be under no
obligation to inquire into, and shall not be liable for:
(a) The validity of the issue of any Securities purchased by
or for the Trust, the legality of the purchase thereof, or the propriety of the
amount paid therefor;
(b) The legality of the sale of any Securities by or for the
Trust, or the propriety of the amount for which the same are sold;
<PAGE> 19
(c) The legality of the issue or sale of any shares of
beneficial interest of the Trust's Funds, or the sufficiency of the amount to be
received therefor;
(d) The legality of the redemption of any shares or beneficial
interest of the Trust's Funds or the propriety or the amount to be paid
therefor;
(e) The legality of the declaration or payment or any dividend
by the Trust;
(f) The legality of any borrowing by the Trust using
Securities as collateral;
(g) The sufficiency of any deposit made pursuant to a
Certificate described in paragraph 2(e) of Article III herein; or
(h) The genuineness of any Certificate, Written Instructions
or other writing herein described.
3. The Custodian shall not be liable for any money or
collected funds in U.S. dollars deposited in a Federal Reserve Bank in
accordance with a Certificate described in paragraph 2(e) of Article III herein,
nor be liable for or considered to be the Custodian of any money, whether or not
represented by any check, draft, or other instrument for the payment of money,
received by it on behalf of the Trust until the Custodian actually receives and
collects such money directly or by the final crediting of the appropriate
account representing the Trust's interest at the Book-Entry System or the
Depository.
4. The Custodian shall not be under any duty or obligation to
take action to effect collection of any amount due to the Trust from the
Dividend and Transfer Agent of the Trust nor to take any action to effect
payment or distribution by the Dividend and Transfer Agent of the Trust of any
amount arranged by the Custodian to be paid by the Dividend and Transfer Agent
or the Trust-in accordance with this Agreement.
5. The Custodian shall not be under any duty or obligation to
take action to effect collection of any amount, if the Securities upon which
such amount is payable are in default, or if payment is refused after due demand
or presentation, unless and until (i) it shall be directed to take such action
by a Certificate and (ii) it shall be assured to its satisfaction of
reimbursement of its costs and
<PAGE> 20
expenses in connection with any such action or, at the Custodian's option,
prepayment.
6. The Custodian may appoint one or more banking institutions,
including, but not limited to, banking institutions located in foreign
countries, as Sub-Custodian or Sub-Custodians of Securities and moneys at any
time owned by the Trust, upon terms and conditions approved in a Certificate.
The Custodian shall not be relieved of any obligation or liability under this
Agreement in connection with the appointment or activities of such
Sub-custodians.
<PAGE> 21
7. The Custodian shall not be under any duty or obligation to ascertain
whether any Securities at any time delivered to or held by it for the account of
the Trust's Funds are such as properly may be held by the Trust under the
provisions of its Declaration of Trust.
8. The Custodian shall be entitled to receive and the Trust agrees to
pay to the Custodian, as relates to each Fund of the Trust, such compensation as
shall be set forth in Appendix C attached hereto, or as shall be set forth in
amendments to such Appendix approved by the Custodian and the Trust. With
respect to each Fund, the Custodian may charge such compensation and any
expenses incurred by the Custodian in the performance of its duties pursuant to
such Appendix C against any money held by it for the respective account or that
Fund of the Trust. The Custodian shall also be entitled to charge against any
money held by it for the respective accounts of the Trust's Funds the amount of
any loss, damage, liability or expense, including counsel fees, which relates to
that Fund and for which it shall be entitled to reimbursement under the
provisions of this Agreement. The expenses which the Custodian may charge
against the respective accounts of the Trust's Funds include, but are not
limited to, the expenses of Sub-Custodians incurred in settling transactions
involving the purchase and sale of Securities of the Trust.
9. The Custodian shall be entitled to rely upon any
Certificate, notice or other instrument in writing received by the Custodian and
believed in good faith by the Custodian to be a Certificate. The Custodian shall
be entitled to rely upon any Oral Instructions and any Written Instructions
actually received by the Custodian pursuant to Article IV or V hereof. The Trust
agrees to forward to the Custodian Written Instructions from an Authorized
Person confirming Oral Instructions in such manner so that such Written
Instructions are received by the Custodian, whether by hand delivery, telex or
otherwise, on the day on which such Oral Instructions are given to the
Custodian. The Trust agrees that the fact that such confirming instructions are
not received by the Custodian shall in no way affect the validity of the
transactions or enforceability of the transactions hereby authorized by the
Trust. The Trust agrees that the Custodian shall incur no liability to the Trust
in acting upon Oral Instructions given to the Custodian hereunder concerning
such transactions provided such instructions are believed in good faith to have
been received from an Authorized Person.
<PAGE> 22
10. The books and records of the Custodian shall be open to inspection
and audit at reasonable times and with prior notice by Officers and auditors
employed by the Trust.
11. The Custodian shall provide the Trust with any report obtained by
the Custodian on the system of internal accounting control of the Book-Entry
System or the Depository and with such reports on its own systems of internal
accounting control as the Trust may reasonably request from time to time.
12. The Custodian performs only the services of a custodian and shall
have no responsibility for the management, investment or reinvestment of the
Securities from time to time owned by the Trust. The Custodian is not a selling
agent for shares of beneficial interest of the Trust's Funds and performance of
its duties as a custodial agent shall not be deemed to be a
<PAGE> 23
recommendation to the Custodian's depositors or others of shares of beneficial
interest of the Trust's Funds as an investment.
ARTICLE IX
TERMINATION
1. Either of the parties hereto may terminate this Agreement, with
respect to both Funds or either Fund, for any reason by giving to the other
party a notice in writing specifying the date of such termination, which shall
be not less than ninety (90) days after the date or giving of such notice. In
the event such notice is given by the Trust, it shall be accompanied by a copy
of a resolution of the Board of Trustees of the Trust, certified by the
Secretary or any Assistant Secretary, electing to terminate this Agreement in
whole or in part and designating a successor custodian or custodians, each of
which shall be a bank or trust company having not less than $2,000,000 aggregate
capital, surplus and undivided profits. In the event such notice is given by the
Custodian, the Trust shall, on or before the termination date, deliver to the
Custodian a copy of a resolution of its Board of Trustees, certified by the
Secretary or any Assistant Secretary, designating a successor custodian or
custodians. In the absence of such designation by the Trust, the Custodian may
designate a successor custodian which shall be a bank or trust company having
not less than $2,000,000 aggregate capital, surplus, and undivided profits. Upon
the date set forth in such notice, this Agreement shall terminate as to the Fund
or Funds designated, and the Custodian shall upon receipt of a notice of
acceptance by the successor custodian on that date deliver directly to the
successor custodian all Securities and moneys then owned by the Trust and held
by it as Custodian for the account of the affected Trust Fund or Funds, after
deducting all fees, expenses and other amounts for the payment or reimbursement
of which it shall then be entitled.
2. If a successor custodian is not designated by the Trust or the
Custodian in accordance with the preceding paragraph, or the designated
successor cannot or will not serve, the Trust shall upon the date specified in
the notice of termination of this Agreement and upon the delivery by the
Custodian to the Trust of all Securities (other than Securities held in the
Book-Entry System which cannot be delivered to the Trust) and moneys then owned
by the Trust
<PAGE> 24
and held for the account of the affected Trust Fund or Funds, other than moneys
deposited with a Federal Reserve Bank pursuant to a Certificate described in
paragraph 2(e) of Article III, be deemed to be its own custodian and the
Custodian shall thereby be relieved of all duties and responsibilities pursuant
to this Agreement as relates to the affected Trust Fund or Funds, other than the
duty with respect to Securities held in the Book-Entry System which cannot be
delivered to the Trust, to hold such Securities hereunder in accordance with
this Agreement.
<PAGE> 25
ARTICLE X
MISCELLANEOUS
1. Annexed hereto as Appendix A is a Certificate signed by present
Officers or the Trust, setting forth the names and the signatures of the present
Authorized Persons. The Trust agrees to furnish to the Custodian a new
Certificate in similar form in the event that any such present Authorized Person
ceases to be an Authorized Person or in the event that other or additional
Authorized Persons are elected or appointed. Until such new Certificate shall be
received, the Custodian shall be fully protected in acting under the provisions
of this Agreement upon Oral Instructions or signatures of the present Authorized
Persons as set forth in the last delivered Certificate.
2. Annexed hereto as Appendix B is a Certificate signed by present
Officers of the Trust, setting forth the names and the signatures of the present
Officers of the Trust. The Trust agrees to furnish to the Custodian a new
Certificate in similar form in the event any such present Officer ceases to be
an Officer of the Trust, or in the event that other or additional Officers are
elected or appointed. Until such new Certificate shall be received, the
Custodian shall be fully protected in acting under the provisions of this
Agreement upon the signatures of the Officers as set forth in the last delivered
Certificate.
3. No recourse under any obligation of this Agreement or for any claim
based thereon shall be had against any organizer, shareholder, Officer, Trustee,
past, present or future as such, of the Trust or of any predecessor or
successor, either directly or through the Trust or any such predecessor or
successor, whether by virtue of any constitution, statute or rule of law or
equity, or by the enforcement of any assessment or penalty or otherwise; it
being expressly agreed and understood that this Agreement and the obligations
thereunder are enforceable solely against the Trust property, and that no such
personal liability whatever shall attach to, or is or shall be incurred by, the
organizers, shareholders, Officers, Trustees of the Trust or of any predecessor
or successor, or any of them, as such, because of the obligations contained in
this Agreement or implied therefrom and that any and all such liability is
hereby expressly waived and released by the Custodian as a condition of, and as
a consideration for, the execution of this Agreement.
<PAGE> 26
4. The obligations set forth in this Agreement as having been made by
the Trust have been made by the Trustees of the Trust acting as such Trustees
pursuant to the authority vested in them under the laws of the State of Ohio and
the First Amended Declaration of Trust dated July 27, 1983 of the Trust. This
Agreement has been executed by Officers of the Trust as officers under the First
Amended Declaration of Trust, and not individually, and the obligations
contained herein are not binding upon any of the Trustees, Officers, agents or
holders of shares, personally, but bind only the trust estate of the Trust, as
provided in the First Amended Declaration of Trust.
5. Such provisions of the Prospectus of the Trust and any other
documents (including advertising material) specifically mentioning the Custodian
shall be reviewed with the Custodian by the Trust.
<PAGE> 27
6. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Custodian, shall be sufficiently given if
addressed to the Custodian and mailed or delivered to it at its offices at First
National Bank Center, 425 Walnut Street, Cincinnati, Ohio 45202, attention
Corporate Trust Services Department, or at such other place as the Custodian may
from time to time designate in writing.
7. Any notice or other instrument in writing, authorized or
required by this Agreement to be given to the Trust shall be sufficiently given
or addressed to the Trust and mailed or delivered to it at its office at The 580
Building, Cincinnati, Ohio 45202 or at such other place as the Trust may from
time to time designate in writing.
8. This Agreement may not be amended or modified in any manner
except by a written agreement executed by both parties with the same formality
as this Agreement, and authorized and approved by a resolution of the Board of
Trustees of the Trust.
9. This Agreement shall extend to and shall be binding upon
the parties hereto, and their respective successors and assigns; provided,
however, that this Agreement shall not be assignable by the Trust and no
attempted assignment by the Trust shall be effective without the written consent
of the Custodian, or by the Custodian without the written consent of the Trust,
authorized or approved by a resolution of its Board of Trustees.
10. This Agreement shall be construed in accordance with the
laws of the State of Ohio.
11. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but such
counterparts shall, together, constitute only one instrument.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers, "hereunto duly
authorized, as of the day and year first above written.
ATTEST GRADISON GROWTH TRUST
/s/ Thomas Bowers By:
THE FIRST NATIONAL BANK OF CINCINNATI
By:
<PAGE> 28
CERTIFICATION OF RESOLUTIONS
This is to certify that the Board of Trustees of Gradison
Growth Trust, on July 27, 1983, upon motion duly made, seconded, and unanimously
carried:
RESOLVED, that the following officers of the Trust and other persons be
and are hereby authorized to (i) sign on behalf of the Trust,
authorizations, instructions, certifications, approvals or other
written Instruction, (ii) to give instructions by telex or any other
such system whereby the receiver of such communications is able to
verify by codes or otherwise with a reasonable degree of certainty the
authenticity of the sender of such communication and (iii) and to give
Oral Instructions to The First National Bank of Cincinnati (the
"Bank"), Custodian of the Trust under a certain Custody Agreement
between the Trust and the Bank:
1. Donald E. Weston 4. Thomas W. Bowers
2. William J. Leugers 5. Gregory Huning
3. Paul J. Weston 6. Alfred Brunner
7. Daniel Shick
RESOLVED, that pursuant to the provisions of
subsection (d) of 17f4 under the Investment Company Act of 1940, The
First National Bank of Cincinnati, as Custodian of the portfolio
securities of the Trust, be and is hereby authorized to use the Federal
Reserve Book-Entry Deposit System for deposit of Trust securities
representing obligations of the United States, and to use the
Depository Trust Corporation, such use to be in complete accordance
with the provisions of said subsection of said Rule; and
RESOLVED, that pursuant to the terms of the Custody
Agreement to be entered into between the Trust and The First National
Bank of Cincinnati, Manufacturers Hanover Trust of New York be and is
hereby selected to serve as Sub-custodian of the Trust.
In Witness Whereof, I have set my official hand, in
behalf of the Trust, this 5th day of August, 1983.
s/s Thomas Bowers, Secretary
Growth Trust
<PAGE> 29
Appendix A to Custody Agreement Between First National Bank of
Cincinnati and Gradison Growth Trust.
Certificate Naming "Authorized Persons" as defined under
Article I, Paragraph 1
The following persons shall be considered "authorized
persons":
1. Donald E. Weston
2. William J. Leugers, Jr.
3. Paul J. Weston
4. Gregory S. Huning
5. Daniel R. Shick
6. Alfred M. Brunner
7. Thomas W. Bowers
Dated: 8/5/83 William J. Leugers, Jr.
President
<PAGE> 30
Appendix B to Custody Agreement Between First National Bank of Cincinnati and
Gradison Growth Trust.
Certificate Naming Present "Officers" of the Trust as defined under Article I,
Paragraph 8:
1. Donald E. Weston, Chairman of the Board
2. William J. Leugers, President.
3. Paul J. Weston, Senior Vice President
4 Gregory S. Huning, Vice President
5. Daniel R. Shick, Vice President
6. Alfred M. Brunner, Assistant Vice President
7. Thomas W. Bowers, Secretary/Treasurer
Dated: 8/5/83 William J. Leugers, Jr.
President
<PAGE> 31
APPENDIX C
The Custodian shall receive from the Trust compensation for its
services rendered under the Custody Agreement computed at the following annual
rates and in the following manner:
$400 per $1,000,000 on first $l00,000,000
$300 per $1,000,000 on next $100,000,000
$250 per $1,000,000 on next $l00,000,000
$200 per $l,000,000 on next $100,000,000
$150 per $1,000,000 on next $100,000,000
$50 per $1,000,000 on the balance over $500,000,000
Such compensation is to be computed on the average daily balance net
asset value of the Trust each month from the daily net asset values supplied to
the Custodian by the Trust, and is payable monthly out of the respective
accounts of the Funds of the Trust based upon their respective net asset values.
Further, the Custodian is to be reimbursed by the Trust for all out-of-pocket
expenses, including, but not limited to, postage, insurance, long distance
telephone charges, and the fees and expenses of the New York Subcustodian Bank.
Such reimbursement shall be made on a monthly basis.
<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 6, 1998, and to all references to our Firm included in or
made a part of this registration statement, post-effective amendment no. 20.
/s/ Arthur Andersen LLP
Cincinnati, Ohio
July 28, 1998
<PAGE> 1
Exhibit (15)(a)
GRADISON GROWTH TRUST
DISTRIBUTION PLAN
Section 1. Gradison Growth Trust and each series thereof (the
"Fund"), pursuant to Section 12(b) of the Investment company Act of 1940, as
amended (the "1940 Act"), and the rules and regulations promulgated thereunder
as the same may be from time to time issued or amended, and specifically
pursuant to Rule 12b-1 (the "Rule") promulgated under the 1940 Act, may finance
the distribution of securities of which it is the issuer, in accordance with the
terms of this Distribution Plan (the "Plan").
Section 2. While this Plan is in effect, the Fund may, in
respect of the distribution of securities of which it is the issuer, expend
funds at an annual rate of up to .50 of 1% of the average daily net assets of
the Fund. A majority of the Trustees who are not "interested persons" of the
Trust and have no direct or indirect financial interest in the operation of the
Plan or any agreements related to the Plan ("Independent Trustees") may from
time to time reduce the amount of such expenditures or may suspend the operation
of this Section 2 for such period or periods of time as they may determine.
Expenditures pursuant to this Section 2 may be made for any activity primarily
intended to result in sale of Fund shares including, but not limited to, service
fees to broker-dealers or other persons (including the Fund's Distributor) for
providing personal services to shareholders of the Fund, including shareholder
liaison services such as responding to shareholder inquiries and providing
information to customers about their Fund accounts, expenditures to the
Distributor and broker-dealers or other persons for their assistance with
respect to distribution of shares of the Fund, expenditures for the printing of
Fund prospectuses, statements of additional information, and reports for other
than existing shareholders, and the preparation, printing and distribution of
sales literature and advertising materials. All expenditures pursuant to the
Plan shall be separately made and accounted for by each series.
Section 3. While this Plan is in effect, the selection and
nomination of those Trustees who are not
<PAGE> 2
"interested persons" of the Trust shall be committed to the discretion of the
disinterested Trustees then in office.
Section 4. While this Plan is in effect, any person authorized
to direct the disposition of monies paid or payable by the Fund pursuant to this
Plan or any related agreement shall furnish at least quarterly to the Board of
Trustees of the Trust, and the Trustees shall review, a written report as to the
amounts expended during each quarter and the purposes for which such amounts
were expended.
Section 5. This Plan shall continue in effect for so long as
such continuance is specifically approved at least annually 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 continuance. This
Plan may be terminated at any time 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. This Plan may not be amended to materially increase the amount of fees
incurred as to 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.
Section 6. Any agreement with any person relating to
implementation of this Plan shall be in writing, and any agreement related to
this Plan shall provide (a) that such agreement may be terminated at any time,
without payment of any penalty, by a vote of a majority of the Independent
Trustees or by a vote of a majority of the outstanding voting securities of the
Fund, on not more than sixty days' notice to any other party to the agreement,
and (b) that such agreement shall terminate automatically in the event of its
assignment.
Section 7. As used in this Plan, the terms "assignment",
"interested person" and "vote of a majority of the outstanding voting
securities" shall have the respective meanings specified in the 1940 Act and the
rules and regulations thereunder, subject to such exemptions as may be granted
by the Securities and Exchange Commission.
Section 8. The Trust shall preserve copies of this Plan and
any related agreements and all reports made pursuant to Section 4 hereof for a
period of not less than six years from the date of execution of this Plan, or of
the
<PAGE> 3
agreements or of any such reports, as the case may be, the first two years
in an easily accessible place.
Section 9. The Trust's investment adviser (the "Adviser")
incurs or may incur certain expenses in connection with the Trust. To the extent
that any advisory fees paid by the Trust pursuant to the Investment Advisory
Agreement might be considered to be indirectly financing any activity which is
"primarily intended to result in the sale of shares" issued by the Trust within
the meaning of the Rule, the payment of such advisory fees is authorized under
this Plan. Pursuant to the Investment Advisory Agreement between the Trust and
its Adviser, the Trust bears all expenses incurred in the operation of the Trust
and not specifically assumed by the Adviser under the Investment Advisory
Agreement or any other agreement, including the costs of preparing, printing and
mailing registration statements, prospectuses, annual, semiannual and other
periodic reports furnished to shareholders of the Trust's series and to
regulatory authorities; registration, filing and other fees in connection with
the requirements of regulatory authorities; expenses of issue, sale, redemption
and repurchase of shares of the Fund; expenses incurred in connection with the
provision of shareholder services; and legal and accounting expenses incurred in
connection with the foregoing. To the extent that any payments made by the Trust
pursuant to the Investment Advisory Agreement are considered to be "primarily
intended to result in the sale of shares" issued by the Trust within the meaning
of the Rule, such payments when made by the Trust pursuant to the Investment
Advisory Agreement are authorized under this Plan.
Dated August 12, 1983
As amended October 31, 1994
<PAGE> 1
Exhibit 15 (e)
GRADISON GROWTH TRUST
PRINCIPAL UNDERWRITING AGREEMENT
--------------------------------
AGREEMENT made this 7th day of May, 1998 by and between
Gradison-Growth Trust (the "Trust"), an Ohio business trust, and McDonald &
Company Securities, Inc. (the "Distributor"), an Ohio corporation.
W I T N E S S E T H:
In consideration of the mutual convenants hereinafter contained,
the parties hereto agree as follows:
Section 1. APPOINTMENT OF THE DISTRIBUTOR.
(a) The Trust hereby appoints the Distributor as its agent to
arrange for the sale of shares of beneficial interest (the "Shares") of the
various series of the Trust (the "Series") on the terms and for the period set
forth in this Agreement, and the Distributor hereby accepts such appointment and
agrees to act hereunder.
(b) Should the Trust establish any additional series subsequent to
the date hereof for which the Trust wishes to appoint the Distributor as its
agent to arrange for the sale of the shares thereof under the terms of this
Agreement, the Trust shall provide the Distributor with a written notice to such
effect. If the Distributor is willing to serve in such capacity, it shall
provide the Trust with a written notice to such effect, whereupon the shares of
such series, together with the shares of the Series named in Section 1(a)
hereunder, shall be included in the term "Shares" hereunder, and such series,
together with the Series named in Section 1(a) hereunder, shall be included in
the term "Series" hereunder.
(c) It is understood that purchases of Shares of the Series may be
made through other broker-dealers entering into agreements with either the Trust
or the Distributor and directly through the Trust in the manner set forth in the
Prospectus. As used in this Agreement, the term "Prospectus" shall mean the
prospectus(es) and statement(s) of additional information included in the
Trust's Registration Statement and relating to the Series for which the
Distributor serves in
<PAGE> 2
such capacity hereunder, and the term "Registration Statement" shall mean the
Registration Statement(s) most recently filed by the Trust with the Securities
and Exchange Commission and effective under the Securities Act of 1933, as
amended (the "1933 Act") and the Investment Company Act of 1940, as amended (the
"1940 Act"), as such Registration Statement is amended by any amendments thereto
at the time in effect.
Section 2. SERVICES AND DUTIES OF THE DISTRIBUTOR.
(a) The Distributor agrees to arrange to sell, as agent for the
Trust and from time to time during the term of this Agreement, the Shares of the
Series upon the terms described in the Prospectus.
(b) During the continuous public offering of the Shares of the
Series, the Distributor will hold itself available to receive orders,
satisfactory to the Distributor, for the purchase of such Shares and will accept
such orders on behalf of the Trust as of the time of receipt of such orders and
will transmit such orders as are so accepted to the Trust as promptly as
practicable. Purchase orders shall be deemed effective at the time and in the
manner set forth in the Prospectus.
(c) The Distributor, as agent for the Trust and in its discretion,
may enter into agreements with such registered and qualified retail
broker-dealers as it may select pursuant to which such broker-dealers may also
arrange for the sale or sell Shares of the Series.
(d) The offering price of the Shares of each Series shall be the
net asset value per share of each such Series next determined following receipt
of an order plus the sales charge, if any, as stated in the Prospectus. The
Trust shall furnish the Distributor, with all possible promptness, advice of
each computation of each Series' net asset value. The Distributor shall receive
the entire amount of any sales charge (initial or deferred) as compensation for
its services under this Agreement; however, the Distributor may reallow all or
any portion of such charge to broker-dealers entering into agreements with the
Distributor to sell Shares of the Series.
(e) In addition to the above, the Distributor shall also receive
compensation pursuant to any separate Distribution Plan or Agreement entered
into with the Trust.
<PAGE> 3
(f) The Distributor hereby agrees to use its best efforts to find
purchasers who shall purchase the Shares of the Series; it shall not be
obligated to sell any certain number of such Shares and nothing herein contained
shall prevent the Distributor from entering into like distribution arrangements
with other investment companies so long as the performance of its obligations
hereunder is not impaired thereby.
(g) The Distributor is authorized on behalf of the Trust to
purchase Shares of the Series presented to it by dealers at the price determined
in accordance with, and in the manner set forth in the Prospectus.
Section 3. SERVICES NOT EXCLUSIVE. The services
<PAGE> 4
furnished by the Distributor hereunder are not to be deemed exclusive and the
Distributor shall be free to furnish similar services to others so long as its
services under this Agreement are not impaired thereby. Nothing in this
Agreement shall limit or restrict the right of any director, officer or employee
of the Distributor, who may also be a Trustee, officer or employee of the Trust,
to engage in any other business or to devote his or her time and attention in
part to the management or other aspects of any other business, whether of a
similar or dissimilar nature.
Section 4. DUTIES OF THE TRUST.
(a) The Trust agrees to sell the Shares of the Series so long as it
has such Shares available for sale and to issue, if requested by the purchaser
and if provided for by the Trust, certificates for the Shares of the Series,
registered in such names and amounts as the Distributor has requested in
writing, as promptly as practicable after receipt by the Trust of the net asset
value thereof and written request of the Distributor therefor. The Trust may at
any time withdraw offerings of the Shares of one or more Series by notice to the
Distributor.
(b) The Trust shall keep the Distributor fully informed with regard
to its affairs and the affairs of the Series and shall furnish to the
Distributor copies of all information, financial statements and other papers
which the Distributor may reasonably request for use in connection with the
distribution of the Shares. This shall include, without limitation, one
certified copy of all financial statements of the Trust and the Series prepared
by independent accountants and such reasonable number of copies of its most
current Prospectus, and annual and interim reports as the Distributor may
request. The Trust shall cooperate fully in the efforts of the Distributor to
arrange for the sale of the Shares and in the performance of the Distributor's
duties under this Agreement.
(c) The Trust shall take, from time to time, all necessary action
to fix the number of authorized Shares of the Series and such steps, including
payment of the related filing fees, as may be necessary to register the same
under the 1933 Act so that there will be available for sale such number of
Shares of the Series as the Distributor may be expected to sell. The Trust
agrees to file from time to time such amendments, reports and other documents as
may be necessary in order that there may be no untrue statement of a material
fact in a Registration Statement or Prospectus, or necessary in order that there
may be no omission to state a material fact
<PAGE> 5
in the Registration Statement or Prospectus which omission would make the
statements therein, in light of the circumstances under which they were made,
misleading.
(d) The Trust shall use its best efforts to qualify and maintain
the qualification of an appropriate number of the Shares of the Series for sale
under the securities laws of such states as the Distributor and the Trust may
approve, and, if necessary or appropriate in connection therewith, to qualify
and maintain the qualification of the Trust as a broker, dealer or agent in such
states; provided that the Trust shall not be required to amend the Declaration
of Trust or its By-Laws to comply with the laws of any state, to maintain an
office in any state, to change the terms of the offering of the Shares of the
Series in any state from the terms set forth in its Registration Statement or
Prospectus, to qualify as a foreign corporation, business trust or similar
entity in any state or to consent to service of process in any state other than
with respect to claims arising out of the offering of the Shares of the Series.
The Distributor shall furnish such information and other material relating to
its affairs and activities as may be required by the Trust in connection with
such qualifications.
Section 5. EXPENSES.
(a) The Trust shall bear all costs and expenses of the continuous
offering of the Shares of the Series in connection with: (i) fees and
disbursements of counsel and auditors, (ii) the preparation, filing and printing
of any registration statements and/or prospectuses required by and under the
federal securities laws, (iii) the preparation and mailing of annual and interim
reports and proxy materials to shareholders and (iv) the qualification of the
Shares for sale and of the Trust as a broker-dealer under the securities laws of
such states or other jurisdictions as shall be selected by the Trust and the
Distributor pursuant to Section 4(d) hereof and the cost and expenses payable to
each such state for continuing qualification therein. Any such costs and
expenses borne by the Trust which are attributable only to one Series will be
allocated to that Series; expenses which are not specifically allocable will be
allocated to each Series in a manner and on a basis determined in good faith by
the Trustees (including a majority of the Trustees who are not "interested
persons" (as defined in the 1940 Act) of the Trust, the Adviser or the
Distributor) to be fair and equitable.
(b) The Distributor shall bear the following expenses (on a Series
by Series basis, where applicable): (i) the costs and expenses of preparing,
printing and distributing any
<PAGE> 6
materials not prepared by the Trust and other materials used by the Distributor
in connection with the offering of the Shares of the Series for sale to the
public, including the additional cost of printing copies of the Prospectus and
of annual and interim reports to shareholders other than the copies thereof
required for distribution to existing shareholders or for filing with any
federal and state securities authorities, (ii) the expenses of registration or
qualification of the Distributor as a dealer or broker under federal or state
laws and the expenses of continuing such registration or qualification; and
(iii) any other distribution or promotional expenses incurred by the Distributor
in connection with such offering, except for any such distribution or
promotional expenses as are paid by one or more Series pursuant to a Rule 12b-1
distribution plan.
Section 6. INDEMNIFICATION. The Trust agrees to indemnify, defend
and hold the Distributor, its officers and directors and any person who controls
the Distributor within the meaning of Section 15 of the 1933 Act or Section 20
of the Securities Exchange Act of 1934, as amended (the "1934 Act"), free and
harmless from and against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending such claims, demands or
liabilities and any counsel fees incurred in connection therewith) which the
Distributor, its officers, directors or any such controlling person may incur
under the 1933 Act, the 1934 Act, or under common law or otherwise, arising out
of or based upon any untrue statement of a material fact contained in the
Registration Statement or Prospectus or arising out of or based upon any alleged
omission to state a material fact required to be stated in either thereof or
necessary to make the statements in either thereof not misleading, except
insofar as such claims, demands, liabilities or expenses arise out of or are
based upon any such untrue statement or omission or alleged untrue statement or
omission made in reliance upon and in conformity with information furnished in
writing by the Distributor to the Trust for use in the Registration Statement or
Prospectus; provided, however, that this indemnity agreement, to the extent that
it might require indemnity of any person who is also an officer or director of
the Trust or who controls the Trust within the meaning of Section 15 of the 1933
Act or Section 20 of the 1934 Act, shall not inure to the benefit of such
officer, director or controlling person unless a court of competent jurisdiction
shall determine, or it shall have been determined by controlling precedent, that
such result would not be against public policy as expressed in the 1933 Act; and
further provided, that in no event shall anything contained herein be so
construed as to protect the Distributor against any liability to the Trust or to
its
<PAGE> 7
security holders to which the Distributor would otherwise be subject by reason
of willful misfeasance, bad faith, or gross negligence in the performance of its
duties, or by reason of its reckless disregard of its obligations under this
Agreement. The Trust's agreement to indemnify the Distributor, its officers and
directors and any such controlling person as aforesaid is expressly conditioned
upon the Trust being promptly notified of any action brought against the
Distributor, its officers or directors, or any such controlling person, such
notification to be given by letter or telegram addressed to the Trust at its
principal business office. The Trust agrees promptly to notify the Distributor
of the commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issue and sale of any of its
Shares.
The Trust shall be entitled to participate at its own expense in
the defense or, if it so elects, to assume the defense of any suit brought to
enforce any claims subject to this indemnity agreement. If the Trust elects to
assume the defense of any such claim, the defense shall be conducted by counsel
chosen by the Trust and satisfactory to indemnified defendants in the suit whose
approval shall not be unreasonably withheld. In the event that the Trust elects
to assume the defense of a suit, it will reimburse the indemnified defendants
for the reasonable fees and expenses of any counsel retained by the indemnified
defendants.
The Distributor agrees to indemnify, defend and hold the Trust, its
trustees and officers and any person who controls the Trust, if any, within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, free and
harmless from and against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending such claims, demands or
liabilities and any counsel fees incurred in connection therewith) which the
Trust, its trustees or officers or any such controlling person may incur under
the 1933 Act, and the 1934 Act, or under common law or otherwise, but only to
the extent that such liability or expense incurred by the Trust, its trustees or
officers or such controlling person resulting from such claims or demands shall
arise out of or be based upon (i) any alleged untrue statement of a material
fact contained in information furnished in writing by the Distributor to the
Trust for use in the Registration Statement or Prospectus; (ii) any failure of
the Distributor or any investor purchasing Shares of a Series through the
Distributor to timely transmit good payment for the purchase of such Shares;
(iii) any breach of the obligations of the Distributor under Section 7 of this
Agreement; or (iv) arising out of any agreement between the
<PAGE> 8
Distributor and any retail dealer or arising out of any supplemental sales
literature or advertising used by the Distributor in connection with its duties
under this Agreement. The Distributor's agreement to indemnify the Trust, its
trustees and officers and any such controlling person as aforesaid, is expressly
conditioned upon the Distributor being promptly notified of any event giving
rise to rights of indemnification hereunder, including any action brought
against the Trust, its trustees or officers or any such controlling person, such
notification being given to the Distributor at its principal business office.
The Distributor shall be entitled to participate, at its own expense, in the
defense or, if it so elects, to assume the defense of any suit brought to
enforce the claim, but if the Distributor elects to assume the defense, the
defense shall be conducted by counsel chosen by the Distributor and satisfactory
to the indemnified defendants whose approval shall not be unreasonably withheld.
In the event the Distributor elects to assume the defense of any suit and retain
counsel, the defendants in the suit shall bear the fees and expenses of any
additional counsel retained by them. If the Distributor does not elect to assume
the defense of any suit, it will reimburse the indemnified defendants in the
suit for the reasonable fees and expenses of any counsel retained by them.
Section 7. COMPLIANCE WITH SECURITIES LAWS. The Trust represents
that it is registered as an open-end management investment company under the
1940 Act, and agrees that it will comply with all of the provisions of the 1940
Act and of the rules and regulations thereunder. The Trust and the Distributor
each agree to comply with all of the applicable terms and provisions of the 1940
Act, the 1933 Act and, subject to the provisions of Section 4(d), all applicable
state securities notification laws. The Distributor agrees to comply with all of
the applicable terms and provisions of the 1934 Act.
Section 8. TERM OF AGREEMENT. This Agreement shall commence on the
date first set forth above. This Agreement shall continue in effect for a period
more than one year from the date hereof only so long as such continuance is
specifically approved at least annually in conformity with the requirements of
the 1940 Act.
Section 9. TERMINATION. This Agreement may be terminated with
respect to any Series at any time, without the payment of any penalty, by vote
of a majority of the outstanding voting securities of the respective Series on
not more than sixty days' written notice to the Distributor. This Agreement may
also be terminated by the Distributor upon not
<PAGE> 9
less than thirty days' written notice to the Trust. Any such notices shall be by
delivery in person or by registered or certified mail to the addresses of the
parties as specified below.
In the event of termination, any sums due the Distributor for
itself for accounts serviced prior to termination will be paid within ten days
after the end of the month of such termination.
This Agreement shall terminate automatically in the event of its
assignment (within the meaning of the 1940 Act) unless such automatic
termination shall be prevented by an order of exemption from the Securities and
Exchange Commission.
Section 10. NOTICES. Any notice required to be given pursuant to
this Agreement shall be deemed duly given if delivered or mailed by registered
mail, postage prepaid, (1) to the Distributor at Gradison Division McDonald &
Company Securities Inc., 580 Walnut Street, Cincinnati, Ohio 45202 or (2) to the
Trust at Gradison Growth Trust, 580 Walnut Street, Cincinnati, Ohio 45202.
Section 11. GOVERNING LAW. This Agreement shall be governed and
construed in accordance with the laws of the State of Ohio.
Section 12. AMENDMENT OF THIS AGREEMENT. No provision of this
Agreement may be changed, waived, discharged or terminated orally, but only by
an instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought.
<PAGE> 10
Section 13. NON-LIABILITY OF SHAREHOLDERS, TRUSTEES, OFFICERS,
EMPLOYEES, REPRESENTATIVES AND AGENTS. A copy of the Declaration of Trust, as
amended, establishing the Trust is on file with the Secretary of the State of
Ohio, and notice is hereby given that this Agreement is executed on behalf of
the Trust by the Officers of the Trust as officers, and not individually, and
that the shareholders, trustees, officers, employees, representatives or agents
of the Trust shall not personally be bound by or liable under this Agreement,
nor shall resort be had to their private property for the satisfaction of any
obligation or claim thereunder, as more fully provided under the terms of the
Declaration of Trust.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
on the day and year first above written.
GRADISON GROWTH TRUST
By _______________________________
Donald E. Weston
Chairman
McDONALD & COMPANY SECURITIES, INC.
By ______________________________
Bradley E. Turner
Senior Managing Director
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