<PAGE> 1
GRADISON - MCDONALD
GOVERNMENT INCOME FUND
LETTER TO SHAREHOLDERS
February 1, 1996
Dear Shareholder:
In closing our 1994 letter we said, "Traditionally, extraordinary events (good
or bad) are reversed very quickly. We are therefore looking forward to better
times ahead." If you will recall, 1994 was the worst bond market since 1929.
Happily, 1995 was a very good year: THE FUND HAD A TOTAL RETURN OF +17.20% (See
Performance Table). This performance gained us favorable mention in the Wall
Street Journal on several occasions.
The excellent performance of your Fund was in no small part due to the decision
in 1994 and 1995 to emphasize low interest bearing mortgage-backed securities
(61/2%, 7% GNMA's) while underweighing high interest bearing securities (9%,
91/2%, 10% GNMA's) due to the former's superior price appreciation in a rally.
This decision, which produced excellent price appreciation and total return
results, did have its downside; namely, a reduced dividend (7.0 to 6.7 and now
6.4 cents/share per month) and a 3.53 cents/share return of capital, since the
Fund did not earn a small portion of the distributions paid. We believe that the
decision to preserve/maximize per-share value (from $12.02 to $13.21/share,
+$1.19/share) offsets the reduced dividend (total distribution $0.866 ('94) to
$0.822 ('95), -$0.044/share).
As we go forward, I believe that the uncertainty of the outcome of the "budget
debate" is a major factor which will affect the bond market in the near term.
Due to the profoundness of this issue, this is not a time to be making
significant commitments in the near term. Until it is resolved, we intend to
maintain a neutral attitude as to the direction of interest rates (intermediate
average maturity, in other words) so that CAPITAL PRESERVATION REMAINS OUR
PRIMARY GOAL AT THIS JUNCTURE. Regardless of the budget balance conflict, I
believe that the long term outlook for the nation's prosperity is excellent.
Apropos of this, let me share with you what I consider to be an extremely
encouraging story. In the December 1995 issue of Reader's Digest, in an article
entitled "How Honest are We?", it was reported that 67% of U.S. Citizens passed
a very tough "morality" test - they returned a wallet that was left on a
sidewalk with $50 in it. Most importantly, teenagers were as likely to return
the wallet as adults! There is hope, real hope for our country despite what goes
on in Washington, D.C.
On behalf of all our people, I want to thank you for your continued support and
patronage.
Very truly yours,
/s/ Michael J. Link
Michael J. Link
Executive Vice President and Portfolio Manager
Gradison-McDonald Government Income Fund
1-800-869-5999 [TELEPHONE GRAPHIC]
<PAGE> 2
AVERAGE ANNUAL TOTAL RETURN PERIODS ENDED 12/31/95
<TABLE>
<CAPTION>
SINCE INCEPTION 5 YEARS 1 YEAR
9/16/87
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
@ Maximum Offer Price (2% Sales Charge) 8.65% 7.62% 14.81%
@ Net Asset Value (No Sales Charge)* 8.92% 8.05% 17.20%
</TABLE>
* 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.
GROWTH OF A $10,000 INVESTMENT
Effective July 1993, the Securities and Exchange Commission (SEC) requires that
performance information be graphed and compared with the performance of a broad
based index. It should be noted that an actively managed fund has a variety of
expenses that reduces its total return while an index includes no expenses.
<TABLE>
<CAPTION>
Lehman Brothers Lehman Brothers Lehman Brothers Gradison-McDonald
Measurement Aggregate Bond Treasury GNMA Government Income
Period Index Index Index Fund
<S> <C> <C> <C> <C>
9/16/87 $10,000 $10,000 $10,000 $ 9,800
12/31/87 10,467 10,465 10,474 10,302
3/31/88 10,861 10,913 10,913 10,600
6/30/88 10,989 10,908 11,112 10,706
9/30/88 11,208 11,090 11,362 10,921
12/31/88 11,293 11,197 11,395 11,036
3/31/89 11,422 11,317 11,525 11,191
6/30/89 12,331 12,241 12,473 11,814
9/30/89 12,471 12,338 12,655 10,036
12/31/89 12,934 12,807 13,183 12,442
3/31/90 13,831 12,634 13,179 12,350
6/30/90 13,300 13,074 13,679 12,760
9/30/90 13,414 13,174 13,850 12,863
12/31/90 14,093 13,901 14,578 13,536
3/31/91 14,488 14,204 15,026 13,843
6/30/91 14,723 14,405 15,291 14,036
9/30/91 15,559 15,203 16,151 14,745
12/31/91 16,348 16,027 16,917 15,441
3/31/92 16,139 15,736 16,786 15,218
6/30/92 16,790 16,359 17,449 15,766
9/30/92 17,512 17,182 17,996 16,370
12/31/92 17,558 17,183 18,170 16,414
3/31/93 18,284 17,963 18,590 16,904
6/30/93 18,769 18,486 19,038 17,323
9/30/93 19,259 19,084 19,182 17,577
12/31/93 19,270 19,018 19,365 17,650
3/31/94 18,717 18,442 18,896 17,112
6/30/94 18,524 18,235 18,792 16,935
9/30/94 18,638 18,312 18,946 16,970
12/31/94 18,707 18,376 19,071 16,981
3/31/95 19,652 19,235 20,083 17,874
6/30/95 20,847 20,436 21,138 18,857
9/30/95 21,256 20,793 21,610 19,204
12/31/95 22,161 21,750 22,321 19,902
</TABLE>
DISTRIBUTIONS PER SHARE
<TABLE>
<CAPTION>
IN EXCESS OF
INVESTMENT INVESTMENT SHORT-TERM LONG-TERM PAID-IN TOTAL
INCOME INCOME CAPITAL GAIN CAPITAL GAIN CAPITAL
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 $0.787 - - - $0.035 $0.822
1994 $0.779 $0.013 $0.038 $0.015 $0.021 $0.866
</TABLE>
2
<PAGE> 3
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1995 1994 1993 1992 1991
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of year $12.018 $13.373 $13.327 $13.553 $12.933
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.786 .755 .749 .856 .947
Net realized and unrealized
gain (loss) on investments 1.232 (1.244) .239 (.050) .785
------- ------- ------- ------- -------
Total income (loss) from
investment operations 2.018 (.489) .988 .806 1.732
------- ------- ------- ------- -------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income (.787) (.779) (.738) (.859) (.946)
Distributions in excess of net
investment income -- (.013) -- -- --
Distributions from realized capital gains -- (.053) (.204) (.173) (.166)
Distributions from paid-in capital (.035) (.021) -- -- --
------- ------- ------- ------- -------
Total distributions to shareholders (.822) (.866) (.942) (1.032) (1.112)
------- ------- ------- ------- -------
Net asset value at end of year $13.214 $12.018 $13.373 $13.327 $13.553
======= ======= ======= ======= =======
Total return (1) 17.20% (3.69%) 7.52% 6.29% 14.08%
======= ======= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year (in millions) $ 185.4 $ 184.0 $ 266.0 $ 210.9 $ 151.8
Ratio of expenses to average net assets .92% .90% .90% .94% .99%
Ratio of net investment income
to average net assets 6.19% 6.03% 5.48% 6.39% 7.33%
Portfolio turnover rate 15.84% 20.91% 133.88% 83.36% 108.08%
</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) Total return is based upon an initial investment purchased without a sales
charge.
See accompanying notes to financial statements.
3
<PAGE> 4
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1995
<TABLE>
<CAPTION>
PAR MORTGAGE-BACKED SECURITIES - 61.28% COUPON MATURITY VALUE
AMOUNT RATE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 9,755,973 Government National Mortgage Association 6.50% 11/15/08- 12/15/23 $ 9,844,387
21,608,551 Government National Mortgage Association 7.00% 4/15/23- 9/15/23 21,858,400
23,784,708 Government National Mortgage Association 7.50% 4/15/23- 3/15/24 24,461,085
24,620,797 Government National Mortgage Association 8.00% 7/15/02- 4/15/23 25,659,829
3,780,179 Government National Mortgage Association 8.25% 6/15/35 3,953,831
11,908,910 Government National Mortgage Association 8.50% 4/15/21- 12/15/24 12,504,355
2,646,509 Government National Mortgage Association 8.75% 4/15/22 2,791,240
2,530,566 Government National Mortgage Association 9.00% 1/15/20- 8/15/21 2,680,818
4,126,855 Government National Mortgage Association 9.50% 10/15/02- 6/15/21 4,413,719
3,922,562 Government National Mortgage Association 10.00% 5/15/12- 6/15/21 4,317,270
-------------
TOTAL MORTGAGE-BACKED SECURITIES
(COST $111,590,878) 112,484,934
-------------
<CAPTION>
U.S. TREASURY OBLIGATIONS - 35.02%
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10,000,000 U.S. Treasury Notes 5.75% 8/15/03 10,128,125
20,000,000 U.S. Treasury Notes 6.25% 2/15/03 20,881,250
10,000,000 U.S. Treasury Notes 6.38% 1/15/00 10,368,750
10,000,000 U.S. Treasury Bonds 7.63% 2/15/07 10,990,625
10,000,000 U.S. Treasury Bonds 8.75% 11/15/08 11,903,125
-------------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $63,062,500) 64,271,875
-------------
<CAPTION>
FACE
AMOUNT REPURCHASE AGREEMENT - 3.70%
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
6,800,000 1st National Bank of Chicago, dated 12/29/95, 5.70% 1/02/96 6,800,000
collateral: U.S. Treasury Notes, 6.125% due 9/30/00 -------------
with a market value of $6,947,433 (repurchase
proceeds: $6,804,307)
(COST $6,800,000)
TOTAL INVESTMENTS, AT VALUE (NOTE 1)
(COST $181,453,378) - 100% $ 183,556,809
-------------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C>
ASSETS
Investments in securities, at value (Note 1) (Cost $181,453,378) $183,556,809
Cash 58,768
Receivable for Fund shares sold 270,357
Interest receivable 2,093,719
Prepaid expenses 15,609
------------
TOTAL ASSETS 185,995,262
------------
LIABILITIES
Payable for Fund shares redeemed 409,342
Accrued investment advisory fee (Note 2) 78,378
Other accrued expenses payable to adviser (Note 2) 54,461
Other accrued expenses and liabilities 19,558
------------
TOTAL LIABILITIES 561,739
------------
NET ASSETS $185,433,523
============
Net assets consist of:
Aggregate paid-in capital $188,936,113
Distributions in excess of net investment income (Note 1) (208,516)
Accumulated net realized loss (5,397,505)
Net unrealized appreciation of investments 2,103,431
------------
Net Assets $185,433,523
============
Shares of capital stock outstanding
(no par value - unlimited number of shares authorized) 14,032,850
============
Net asset value and redemption price per share (Note 1) $ 13.21
============
Maximum offering price per share (Note 1) $ 13.48
============
- ---------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------
<S> <C> <C>
INTEREST INCOME $13,059,273
EXPENSES
Investment advisory fees (Note 2) $ 918,897
Distribution (Note 2) 453,931
Personnel costs (Note 2) 84,384
Data processing fees (Note 2) 49,804
Professional fees 31,884
Trustees' fees (Note 2) 24,856
Registration fees 21,679
Postage and mailing 21,298
Custodian fees 19,093
ICI dues 12,288
Printing 10,089
Other 36,624
-----------
Total expenses 1,684,827
-----------
NET INVESTMENT INCOME 11,374,446
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investments (3,220,413)
Net increase in unrealized appreciation of investments 21,179,573
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 17,959,160
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $29,333,606
===========
- ----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 7
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994
------------------------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 11,374,446 $ 14,175,683
Net realized loss on investments (3,220,413) (1,433,534)
Net increase in unrealized
appreciation (depreciation) of investments 21,179,573 (22,746,207)
------------ ------------
Net increase (decrease) in net assets resulting from operations 29,333,606 (10,004,058)
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income (11,374,395) (14,639,911)
In excess of net investment income -- (208,567)
Net realized capital gains -- (985,474)
Paid-in capital (Note 1) (495,716) (329,703)
------------ ------------
Decrease in net assets from distributions to shareholders (11,870,111) (16,163,655)
------------ ------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 32,626,195 51,282,890
Net asset value of shares issued as distributions 9,872,425 13,705,725
Payments for Fund shares redeemed (58,557,288) (120,783,811)
------------ ------------
Net decrease in net assets from Fund share transactions (16,058,668) (55,795,196)
------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 1,404,827 (81,962,909)
NET ASSETS:
Beginning of year 184,028,696 265,991,605
------------ ------------
End of year (including distributions in excess of net investment
income of $208,516 and $208,567, respectively) (Note 1) $185,433,523 $184,028,696
============ ============
NUMBER OF FUND SHARES:
Sold 2,562,741 4,021,604
Issued as distributions to shareholders 774,962 1,090,718
Redeemed (4,618,139) (9,688,819)
------------ ------------
Net decrease in shares outstanding (1,280,436) (4,576,497)
Outstanding at beginning of year 15,313,286 19,889,783
------------ ------------
Outstanding at end of year 14,032,850 15,313,286
============ ============
</TABLE>
See accompanying notes to financial statements.
7
<PAGE> 8
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995
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 December 31, 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 December 31, 1995, the Fund had not committed to
the purchase of any when-issued or delayed delivery securities.
8
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995
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 December 31, 1995 was $3,535,251
and $1,431,820, respectively.
As of December 31, 1995, the Fund had capital loss carryforwards for Federal
income tax purposes of approximately $5,350,000 which may be utilized to offset
net realized capital gains through December 31, 2003 prior to distributing such
gains to shareholders.
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 year ended December 31, 1995, the Fund
made distributions to shareholders of $495,716 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.
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> 10
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995
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
distirbution service fee at an annual rate of .25% of average daily net assets.
During the year ended December 31, 1995, Gradison received sales charges
aggregating $175,972 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 year ended December 31, 1995, purchases and proceeds from the sale of
securities, excluding short-term securities, amounted to $28,313,101 and
$46,176,735, respectively. There were no transactions in written options on U.S.
Treasury Notes and Bonds for the year ended December 31, 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 year ended
December 31, 1995 is as follows:
<TABLE>
<S> <C>
Balance outstanding at December 31, 1995 $ 0
==========
Maximum amount outstanding during the year $9,174,000
==========
Average amount outstanding during the year $ 671,756
==========
Weighted average interest rate during the year 6.24%
==========
Interest expense on borrowings during the year $ 41,927
==========
</TABLE>
The average amount outstanding during the year was calculated by aggregating
borrowings at the end of each day and dividing by the total number of days in
the year. The weighted average interest rate during the year was calculated by
dividing the interest on borrowings during the year by the average amount of
borrowings outstanding during the year.
10
<PAGE> 11
ARTHUR
ANDERSEN
ARTHUR ANDERSEN & CO, SC
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Trustees of the
Gradison Custodian Trust:
We have audited the accompanying statement of assets and liabilities of the
Gradison-McDonald Government Income Fund of the Gradison Custodian Trust (an
Ohio business trust), including the portfolio of investments, as of December 31,
1995, and the related statement of operations for the year then ended, the
statements of changes in net assets for the two years then ended and the
financial highlights for the four years then ended. These financial statements
and financial highlights are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based upon our audits. The financial highlights for the
year ended December 31, 1991, of the Gradison-McDonald Government Income Fund of
the Gradison Custodian Trust, was audited by other auditors whose report dated
January 16, 1992, expressed an unqualified opinion on those financial
highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995, by correspondence with the custodian and broker. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Gradison-McDonald Government Income Fund of the Gradison Custodian Trust as of
December 31, 1995, the results of its operations for the year then ended, the
changes in its net assets for the two years then ended and the financial
highlights for the four years then ended, in conformity with generally accepted
accounting principles.
/s/ Arthur Anderson LLP
Cincinnati, Ohio,
February 2, 1996
11
<PAGE> 12
GOVERNMENT
INCOME FUND
GRADISON - MCDONALD
ANNUAL REPORT
DECEMBER 31, 1995
A FUND INVESTING IN
U.S. GOVERNMENT SECURITIES
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 Gradison MacDonald
Government Income Fund.
McDonald & Company Securities, Inc. - Distributor
