<PAGE> 1
GOVERNMENT
INCOME FUND
GRADISON-MCDONALD
SEMIANNUAL REPORT
JUNE 30, 1995
GRADISON-MCDONALD
This material is intended for distribution to shareholders of the
Gradison-McDonald Government Income Fund. It may be distributed to other
persons only if it is preceded or accompanied by a current prospectus of the
Gradison-McDonald Government Income Fund. McDonald & Company Securities,
Inc.-Distributor
A FUND INVESTING IN
U.S. GOVERNMENT SECURITIES
<PAGE> 2
GRADISON-MCDONALD
GOVERNMENT INCOME FUND
LETTER TO SHAREHOLDERS
August 22, 1995
Dear Shareholder:
As you may recall, we closed our February 1, 1995 letter with the observation
that, "Traditionally, extraordinary events (good or bad) are reversed very
quickly." We are very pleased to state that the first six months of 1995 have
not let us down.
With some economic releases suggesting a slowing economy, the Federal Reserve
Board lowered the "Fed Funds" rate by 1/4 of 1% on July 5th, 1995, thus
validating the bond market rally that began in mid-November of 1994. By
believing in our strategy of being fully invested in intermediate-term
securities, your Fund has had an excellent first half. Please see the
performance numbers below. The performance of your Fund was such that it
received favorable mention in several recent editions of the Wall Street
Journal.
As we go forward, a very important consideration will be consumer confidence.
Specifically, will softer economic numbers cause consumers to pull back,
setting into motion a spiraling down that causes a recession rather than a soft
landing? The job market (new jobs, hours worked, unemployment claims, etc.)
will significantly affect the economy's direction and the resultant impact on
interest rates.
As always, we appreciate your trust and confidence and ask that you not
hesitate to contact us if we can be of any assistance to you.
Gradison-McDonald Government Income Fund
/s/ Michael J. Link
Michael J. Link
Executive Vice President and Portfolio Manager
1-800-869-5999
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<TABLE>
AVERAGE ANNUAL TOTAL RETURN PERIODS ENDED 6/30/95
SINCE INCEPTION 5 YEARS 1 YEAR
9/16/87
<S> <C> <C> <C>
@ Maximum Offer Price (2% Sales Charge) 8.48% 7.72% 9.27%
@ Net Asset Value (No Sales Charge)* 8.77% 8.16% 11.48%
<FN>
*Certain qualifying group retirement Fund purchases are made without a sales
charge, as are all purchases representing reinvestment of dividends. See pages
7 and 11 of the Prospectus. This performance data does not reflect the
deduction of the sales charge which would reduce the performance illustrated to
the figure of the line above it.
The performance quoted above represents past performance. The investment return
and value of an investment in the Fund will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than the original cost. Total
return includes changes in share value and reinvestment of all distributions.
During the periods ended 12/31/87 and 12/31/88, the investment adviser paid
certain Fund expenses which had the effect of increasing the Fund's return.
See accompanying notes to financial statements.
</TABLE>
2
<PAGE> 4
<TABLE>
FINANCIAL HIGHLIGHTS (For a share outstanding throughout each period) (Unaudited)
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, -------------------------------------
1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
------- ------- ------- ------- ------- -------
Net asset value at beginning of period $12.018 $13.373 $13.327 $13.553 $12.933 $13.027
------- ------- ------- ------- ------- -------
Income from investment operations:
Net investment income .397 .755 .749 .856 .947 1.015
Net realized and unrealized
gain (loss) on investments .915 (1.244) .239 (.050) .785 .061
------- ------- ------- ------- ------- -------
Total income (loss) from
investment operations 1.312 (.489) .988 .806 1.732 1.076
------- ------- ------- ------- ------- -------
Distributions to shareholders:
Dividends from net investment income (.397) (.779) (.738) (.859) (.946) (1.026)
Distributions in excess of net
investment income - (.013) - - - -
Distributions from realized capital gains - (.053) (.204) (.173) (.166) (.144)
Distributions from paid-in capital (.023) (.021) - - - -
------- ------- ------- ------- ------- -------
Total distributions to shareholders (.420) (.866) (.942) (1.032) (1.112) (1.170)
------- ------- ------- ------- ------- -------
Net asset value at end of period $12.910 $12.018 $13.373 $13.327 $13.553 $12.933
======= ======= ======= ======= ======= =======
Total return (1) 11.05%(2) (3.69%) 7.52% 6.29% 14.08% 8.79%
======= ======= ======= ======= ======= =======
Ratios/Supplemental data:
Net assets at end of period (in millions) $184.4 $184.0 $266.0 $210.9 $151.8 $78.0
Ratio of expenses to average net assets .94%(3) .90% .90% .94% .99% 1.08%
Ratio of net investment income
to average net assets 6.36%(3) 6.03% 5.48% 6.39% 7.33% 8.13%
Portfolio turnover rate 8.37% 20.91% 133.88% 83.36% 108.08% 70.98%
<FN>
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) Total return is based upon an initial investment purchased without a sales charge.
(2) Total return for the six months ended June 30, 1995 represents the actual return over that period and has not been annualized.
(3) Annualized.
See accompanying notes to financial statements.
</TABLE>
3
<PAGE> 5
<TABLE>
PORTFOLIO OF INVESTMENTS JUNE 30, 1995 (UNAUDITED)
<CAPTION>
PAR MORTGAGE-BACKED SECURITIES - 65.43% COUPON MATURITY VALUE
AMOUNT RATE
<S> <C> <C> <C> <C>
$10,602,330 Government National Mortgage Association 6.50% 11/15/08 - 12/15/08 $ 10,479,741
24,901,205 Government National Mortgage Association 7.00% 4/15/23 - 9/15/23 24,504,342
24,935,260 Government National Mortgage Association 7.50% 4/15/23 - 3/15/24 25,067,729
26,330,347 Government National Mortgage Association 8.00% 7/15/02 - 4/15/23 27,034,065
4,730,494 Government National Mortgage Association 8.25% 3/15/22 - 6/15/35 4,806,626
11,591,434 Government National Mortgage Association 8.50% 4/15/21 - 11/15/22 12,033,358
2,658,591 Government National Mortgage Association 8.75% 4/15/22 2,736,272
3,036,617 Government National Mortgage Association 9.00% 1/15/20 - 5/15/21 3,189,397
4,560,877 Government National Mortgage Association 9.50% 10/15/02 - 6/15/21 4,824,824
4,416,159 Government National Mortgage Association 10.00% 5/15/12 - 6/15/21 4,806,713
------------
Total Mortgage-Backed Securities
(Cost $120,722,014) 119,483,067
------------
U.S. TREASURY OBLIGATIONS - 33.64%
10,000,000 U.S. Treasury Notes 6.38% 1/15/00 10,153,125
10,000,000 U.S. Treasury Bonds 8.38% 8/15/00 10,025,000
20,000,000 U.S. Treasury Notes 6.25% 2/15/03 20,056,250
10,000,000 U.S. Treasury Notes 5.75% 8/15/03 9,700,000
10,000,000 U.S. Treasury Bonds 8.75% 11/15/08 11,503,125
------------
Total U.S. Treasury Obligations
(Cost $62,703,125) 61,437,500
------------
FACE
AMOUNT REPURCHASE AGREEMENT - 0.93%
<S> <C> <C> <C> <C>
1,700,000 First Chicago Capital Markets, dated 6/30/95, 6.12% 7/03/95 1,700,000
collateral: U.S. Treasury Notes, 8.50% due 5/15/97 ------------
with a market value of $1,738,559 (repurchase
proceeds: $1,700,867)
(Cost $1,700,000)
TOTAL INVESTMENTS, at value (Note 1)
(Cost $185,125,139) - 100% $182,620,567
============
<FN>
See accompanying notes to financial statements.
</TABLE>
4
<PAGE> 6
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 1995 (UNAUDITED)
<S> <C>
ASSETS
Investments in securities, at value (Note 1) (Cost $185,125,139) $182,620,567
Cash 34,495
Interest receivable 2,240,781
Receivable for Fund shares purchased 12,737
Prepaid expenses and other assets 27,698
-----------
Total Assets 184,936,278
-----------
LIABILITIES
Payable for Fund shares redeemed 406,006
Accrued investment advisory fee (Note 2) 81,536
Other accrued expenses payable to adviser (Note 2) 52,428
Other accrued expenses and liabilities 18,940
-----------
Total Liabilities 558,910
-----------
NET ASSETS $184,377,368
===========
Net assets consist of:
Aggregate paid-in capital $192,345,761
Distributions in excess of net investment income (Note 1) (208,567)
Accumulated net realized loss (5,255,254)
Net unrealized depreciation of investments (2,504,572)
-----------
Net Assets $184,377,368
===========
Shares of capital stock outstanding
(no par value - unlimited number of shares authorized) 14,281,219
===========
Net asset value and redemption price per share (Note 1) $12.91
===========
Maximum offering price per share (Note 1) $13.17
===========
<FN>
See accompanying notes to financial statements.
</TABLE>
5
<PAGE> 7
<TABLE>
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED)
<S> <C> <C>
INTEREST INCOME $ 6,741,493
EXPENSES
Investment advisory fees (Note 2) $ 461,534
Distribution (Note 2) 227,355
Personnel costs (Note 2) 51,236
Data processing fees (Note 2) 25,698
Professional fees 18,050
Trustees' fees (Note 2) 13,611
Postage and mailing 12,657
Registration fees 11,652
Custodian fees 9,793
Insurance 9,743
ICI dues 6,547
Printing 2,812
Other 16,996
-----------
Total expenses 867,684
------------
NET INVESTMENT INCOME 5,873,809
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investments (3,078,162)
Net decrease in unrealized depreciation of investments $16,571,570
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 13,493,408
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 19,367,217
============
<FN>
See accompanying notes to financial statements.
</TABLE>
6
<PAGE> 8
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
JUNE 30, 1995 DECEMBER 31, 1994
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 5,873,809 $ 14,175,683
Net realized loss on investments (3,078,162) (1,433,534)
Net (increase) decrease in unrealized
depreciation of investments 16,571,570 (22,746,207)
------------ -------------
Net increase (decrease) in net assets resulting from operations 19,367,217 (10,004,058)
------------ -------------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income (5,873,809) (14,639,911)
In excess of net investment income - (208,567)
Net realized capital gains - (985,474)
Paid-in capital (Note 1) (309,467) (329,703)
------------ -------------
Decrease in net assets from distributions to shareholders (6,183,276) (16,163,655)
------------ -------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 15,002,991 51,282,890
Net asset value of shares issued as distributions 5,135,758 13,705,725
Payments for shares redeemed (32,974,018) (120,783,811)
------------ -------------
Net decrease in net assets from Fund share transactions (12,835,269) (55,795,196)
------------ -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 348,672 (81,962,909)
NET ASSETS:
Beginning of period 184,028,696 265,991,605
------------ -------------
End of period (including distributions in excess of
net investment income of ($208,567) for both periods) (Note 1) $184,377,368 $184,028,696
============ =============
NUMBER OF FUND SHARES:
Sold 1,201,011 4,021,604
Issued as distributions to shareholders 409,675 1,090,718
Redeemed (2,642,753) (9,688,819)
------------ -------------
Net decrease in shares outstanding (1,032,067) (4,576,497)
Outstanding at beginning of period 15,313,286 19,889,783
------------ -------------
Outstanding at end of period 14,281,219 15,313,286
============ =============
<FN>
See accompanying notes to financial statements.
</TABLE>
7
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1995 (UNAUDITED)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Gradison Custodian Trust (the "Trust") is registered under the Investment
Company Act of 1940, as amended, as a diversified, open-end management
investment company. The Trust was created under Ohio law by a Declaration of
Trust dated June 3, 1987; it commenced investment operations and the public
offering of its shares on September 16, 1987. There is currently one series,
the Gradison-McDonald Government Income Fund (the "Fund"). The following is a
summary of the Trust's significant accounting policies:
SECURITIES VALUATION - Portfolio securities for which over-the-counter market
quotations are readily available are valued at the latest bid price. Debt
securities maturing within 60 days are valued at amortized cost, which
approximates market value. Portfolio securities for which market quotations are
not readily available are valued at their fair value as determined in good
faith by the Board of Trustees.
Repurchase agreements, which are collateralized by U.S. Government obligations,
are valued at cost which, together with accrued interest, approximates market.
Collateral for repurchase agreements is held in safekeeping in the
customer-only account of the Fund's custodian. At the time the Fund enters into
a repurchase agreement, the seller agrees that the value of the underlying
security, including accrued interest, will be equal to or exceed the face
amount of the repurchase agreement. In the event of a bankruptcy or other
default of the seller of a repurchase agreement, the Fund could experience both
delays in liquidating the underlying security and losses. These losses would
not exceed an amount equal to the difference between the liquidating value of
the underlying security and the face amount of the repurchase agreement and
accrued interest. To minimize the possibility of loss, the Fund enters into
repurchase agreements only with selected domestic banks and securities dealers
which the Fund's investment adviser believes present minimal credit risk. Refer
to the Fund's Portfolio of Investments for the face amount of repurchase
agreements and repurchase proceeds as of June 30, 1995.
OPTION ACCOUNTING PRINCIPLES - When the Fund writes a call option, an amount
equal to the premium received by the Fund is recorded as an asset and as an
equivalent liability. The amount of the liability is subsequently marked-to-
market to reflect the current market value of the written option. The current
market value of a traded option is the last ask price on the principal exchange
on which such option is traded. If the option expires on its stipulated
expiration date or if the Fund enters into a closing purchase transaction, the
Fund will realize a gain or loss without regard to any unrealized gain or loss
on the underlying security and the liability related to such option will be
extinguished.
The risk in writing a call option on a security which the Fund owns is that the
Fund limits the profit potential from an increase in the market price of the
security. The Fund may also be subject to the additional risk of not being able
to enter into a closing transaction if a liquid secondary market does not
exist. The Fund also writes over-the-counter options where the Fund's ability
to successfully extinguish its obligation is dependent upon the credit standing
of the other party.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME - Securities transactions are
accounted for on the trade date (the date the order to buy or sell is
executed). 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.
SECURITIES PURCHASED ON A WHEN-ISSUED OR DELAYED DELIVERY BASIS - When the Fund
purchases securities on a when-issued or delayed delivery basis, the
transaction may be entered into a month or more before delivery and payment are
made. Such securities are subject to market fluctuation during this period. In
the event that the seller fails to deliver the securities, the Fund could
experience a loss to the extent of any appreciation, or a gain to the extent of
any depreciation, in the price of the securities.
The Fund will maintain, in a segregated account with its custodian, cash or
U.S. Government securities having an aggregate value at least equal to the
amount of such purchase commitments. At June 30, 1995, the Fund had not
committed to the purchase of any when-issued or delayed delivery securities.
8
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1995 (UNAUDITED)
TAXES - It is the Fund's policy to comply with the provisions of the Internal
Revenue Code available to regulated investment companies. As provided therein,
in any fiscal year in which the Fund so qualifies, and distributes at least 90%
of its taxable net income, the Fund will be relieved of federal income tax on
the income distributed. Accordingly, no provision for income taxes has been
made.
In order to avoid imposition of the excise tax applicable to regulated
investment companies, it is also the Fund's intention to declare as dividends
in each calendar year, at least 98% of its net investment income (earned during
the calendar year) and 98% of its net realized capital gains, if any (earned
during the twelve months ended October 31), plus undistributed amounts from
prior years.
The tax basis of investments is substantially equal to the cost as shown on the
Statement of Assets and Liabilities.
For both financial reporting and tax purposes, gross unrealized appreciation
and gross unrealized depreciation of securities at June 30, 1995 was $1,839,256
and $4,343,828, respectively.
Net short-term capital losses of $1,207,813 and net long-term capital losses of
$928,227 which were realized during the period November 1, 1994 through
December 31, 1994 were treated, for tax purposes, as arising on January 1, 1995
and can be used to offset future capital gains.
FUND SHARE VALUATION - The net asset value per share is computed by dividing
the net asset value of the Fund (total assets less total liabilities) by the
number of shares outstanding. The maximum offering price per share is equal to
the net asset value per share plus 2.04% of net asset value (or 2% of the
offering price). The offering price per share is reduced on sales of $100,000
or more. The redemption price per share is equal to the net asset value per
share.
DISTRIBUTIONS TO SHAREHOLDERS - Dividends arising from net investment income
are declared daily and paid monthly. Distributions of net realized short-term
capital gains, if any, are declared and paid monthly on all shares of record on
established record dates. Net realized long-term capital gains, if any, are
distributed at least annually. During the period ended June 30, 1995, the Fund
made distributions to shareholders in excess of net investment income resulting
in a distribution of $309,467 from paid-in capital.
RECLASSIFICATION OF CAPITAL ACCOUNTS - The Fund has adopted Statement of
Position 93-2 "Determination, Disclosure, and Financial Statement Presentation
of Income, Capital Gain, and Return of Capital Distributions by Investment
Companies" ("SOP"). The purpose of this SOP is to report the undistributed
net investment income (loss) and accumulated net realized capital gain (loss)
accounts in such a manner as to approximate amounts available for future
distributions (or to offset future realized capital gains) and to achieve
uniformity between generally accepted accounting principles and tax
distributions by investment companies. The SOP also requires that differences
in the recognition or classification of income between the presentation of
generally accepted accounting principles and tax rules which result in
temporary overdistributions for financial statement purposes are classified as
distributions in excess of net investment income or accumulated net realized
gains.
During the prior fiscal year, the Fund reclassified $7,410 to distributions in
excess of net investment income from aggregate paid-in capital in compliance
with this SOP. This reclassification, which has no impact on the net asset
value of the Fund, is primarily attributable to certain differences in the
computation of net investment income and capital gains under federal tax rules
and generally accepted accounting principles. Additional adjustments may be
necessary in subsequent reporting periods.
NOTE 2 - TRANSACTIONS WITH AFFILIATES
The Fund's investments are managed, subject to the general supervision and
control of the Fund's Board of Trustees, by the Gradison Division of McDonald &
Company Securities, Inc. (Gradison), a registered investment adviser and
securities dealer, pursuant to the terms of an Investment Advisory Agreement
(the Agreement). Under the terms of the Agreement, the Fund pays Gradison a fee
computed and accrued daily and paid monthly based upon the Fund's daily net
assets at the annual rate of .50%.
9
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1995 (UNAUDITED)
Under the terms of the Agreement, the Fund reimburses Gradison for the cost of
furnishing personnel to perform shareholder and certain other services for the
Fund. The Agreement also provides that Gradison bear the costs of salaries and
related expenses of executive officers of the Fund who are necessary for the
management and operations of the Fund. In addition, Gradison bears the costs of
preparing, printing and mailing sales literature and other advertising
materials, and compensates the Fund's trustees who are affiliated with
Gradison. All expenses not specifically assumed by Gradison are borne by the
Fund.
Under the terms of a Data Processing Agreement between the Trust and Gradison,
the Fund pays Gradison a monthly fee at an annual rate of $8.25 per shareholder
non-zero balance account for data processing services provided to the Fund.
In accordance with the terms of a Distribution Service Plan adopted under Rule
12b-1 of the Investment Company Act of 1940, the Fund pays Gradison a service
fee at an annual rate of .25% of average daily net assets.
During the period ended June 30, 1995, Gradison received sales charges
aggregating $75,703 on sales of shares of the Fund.
The officers of the Trust are also officers of McDonald & Company Securities,
Inc.
Each trustee of the Trust who is not affiliated with Gradison receives fees
from the Trust for services as a trustee. The amounts of such fees for each
trustee are as follows: (a) an annual fee of $3,500 payable in quarterly
installments for service during each fiscal quarter and (b) $500 for each Board
of Trustees or committee meeting attended.
NOTE 3 - SUMMARY OF SECURITIES TRANSACTIONS
For the period ended June 30, 1995, purchases and proceeds from the sale of
securities, excluding short-term securities, amounted to $15,126,906 and
$31,482,754, respectively. There were no transactions in written options on
U.S. Treasury Notes and Bonds for the period ended June 30, 1995.
NOTE 4 - SHORT-TERM BORROWINGS
The Fund has available a Line of Credit Promissory Note (the "Note") from Star
Bank (the "Bank"), the Fund's custodian, whereby borrowings may not exceed
either $15,000,000 (in accordance with the Note), or 10% of total assets (in
accordance with the Fund's investment restrictions).
Information regarding borrowings on the Note by the Fund during the period
ended June 30, 1995 is as follows:
<TABLE>
<S> <C>
Balance outstanding at June 30, 1995 $ 0
==========
Maximum amount outstanding during the period $9,174,000
==========
Average amount outstanding during the period $1,339,841
==========
Weighted average interest rate during the period 6.24%
==========
Interest expense on borrowings during the period $ 41,927
==========
</TABLE>
The average amount outstanding during the period was calculated by aggregating
borrowings at the end of each day and dividing by the total number of days in
the period. The weighted average interest rate during the period was calculated
by dividing the interest on borrowings during the period by the average amount
of borrowings outstanding during the period.
10
<PAGE> 12
GRADISON-MCDONALD MUTUAL FUNDS
The following funds are serviced by Gradison-McDonald Mutual Funds:
GRADISON-MCDONALD ESTABLISHED VALUE FUND
A common stock fund that seeks long-term capital growth by investing in
companies that are included in the Standard's & Poor's 500 Index and other
large companies.
GRADISON-MCDONALD OPPORTUNITY VALUE FUND
A common stock fund that seeks long-term capital growth by investing in
companies that are generally smaller in size than those included in the
Standard & Poor's 500 Index.
GRADISON-MCDONALD GROWTH & INCOME FUND
A common stock fund that seeks long-term capital growth, current income, and
growth of income.
GRADISON-MCDONALD INTERNATIONAL FUND
A common stock fund that seeks long-term capital growth by investing in common
stocks of non-United States companies.
GRADISON-MCDONALD GOVERNMENT INCOME FUND
An income fund which invests in intermediate to long-term U.S. Government
Securities.
GRADISON-MCDONALD OHIO TAX-FREE INCOME FUND
An income fund which seeks to provide income exempt from Federal income tax and
Ohio State personal income tax.
GRADISON-MCDONALD INTERMEDIATE MUNICIPAL INCOME FUND
An income fund which seeks to provide income exempt from Federal regular income
tax through investment in a municipal bond portfolio with a three to ten year
average maturity.
MONEY MARKET FUNDS
Gradison offers a full range of taxable and tax-free money market funds.
Prospectuses are available upon request and should be read carefully before you
invest or send money. An investment in the money market funds is neither
insured nor guaranteed by the U.S. Government and there can be no assurance
that they will be able to maintain a stable $1.00 share price.
11
