<PAGE> 1
1933 Act Registration No. 33-14949
1940 Act File No. 811-5198
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 ( )
Pre-Effective Amendment No. ( )
Post-Effective Amendment No. 15 FN1 (X)
and/or
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 (X)
Amendment No. 14
--------
G R A D I S O N C U S T O D I A N 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 RICHARD M. WACHTERMAN
Gradison Division of McDonald & Gradison Division of McDonald &
Company Securities, Inc. Company Securities, Inc.
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)
/X/ on April 28, l997, pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)
/ / on ___________ pursuant to paragraph (a) of rule 485
Registrant has heretofore registered an indefinite number of shares of
beneficial interest, without par value, pursuant to Rule 24f-2 under the
Investment Company Act of 1940, as amended. Registrant's Rule 24f-2 Notice was
filed on February 26, l997.
===============================================================================
FN1 Amendment #1, which was filed on March 11, 1988, was erroneously identified
as Post-Effective Amendment #4. All subsequent Post-Effective Amendments were
consecutively numbered beginning with #5. No Post-Effective Amendments numbered
1 through 3 were filed.
<PAGE> 2
GRADISON CUSTODIAN TRUST
Cross-Reference Sheet
Pursuant to Item 501(b) of Regulation S-K
Under the Securities Act of 1933
<TABLE>
<CAPTION>
Form N-1A
Item Number Location in Prospectus
<S> <C>
1. Cover Page . . . . . . . . . . . . . . . . Cover Page
2. Synopsis . . . . . . . . . . . . . . . . . Expense Summary
3. Condensed Financial Information . . . . . Financial History Summary;
Performance Calculations
4. General Description of Registrant . . . . .How the Fund Invests;
General Information
5. Management of Fund . . . . . . . . . . . . Management of the Fund,
Cover
6. Capital Stock and Other Securities . . . . Distributions; Taxes
7. Purchase of Securities Being Offered . . . How to Purchase Shares
8. Redemption or Repurchase . . . . . . . . . How to Redeem Shares;
Redemptions Through
Gradison and Other Dealers
9. Pending Legal Proceedings . . . . . . . . *
Location in Statement
of Additional Information
10. Cover Page . . . . . . . . . . . . . . . . Cover Page
11. Table of Contents. . . . . . . . . . . . . Table of Contents
12. General Information and History . . . . . *
13. Investment Objectives and Policies. . . . Investment Policies and
Restrictions; Portfolio
Transactions
14. Management of the Fund . . . . . .. . . . Trustees and Officers of
the Trust
15. Control Persons and Principal Holders
of Securities . . . . . . . . . . . . . . *
16. Investment Advisory and Other Services. . . Investment Adviser
17. Brokerage Allocation and Other Practices Portfolio Transactions
18. Capital Stock and Other Securities. . . . . *
19. Purchase, Redemption and Pricing of
Securities Being Offered . . . . . . . . . Purchase of Shares;
Redemption of Shares; Net
Asset Value
20. Tax Status. . . . . . . . . . . . . . . . . Taxes
21. Underwriters. . . . . . . . . . . . . . . . Master Distribution
Agreement
22. Calculation of Yield Quotations of Money
Market Funds . . . . . . . . . . . . . . . *
23. Financial Statements. . . . . . . . . . . . Financial Statements and
Accountants
</TABLE>
<PAGE> 3
GRADISON
GOVERNMENT INCOME FUND
PROSPECTUS DATED APRIL 28, 1997
Gradison Government Income Fund (the "Fund") seeks high current income through
investment in U.S. Government obligations and obligations of agencies or
instrumentalities of the U.S. Government. The Fund currently invests only
in securities which are guaranteed by the full faith and credit of the U.S.
Government, and repurchase agreements collateralized by such securities.
The Fund will notify shareholders of any change in this policy at least 30
days prior to such a change. McDonald & Company Securities, Inc.
("McDonald"), through its Gradison Division ("Gradison"), is the investment
adviser and principal underwriter for the Fund. The net asset value and
yield of the Fund will fluctuate depending on market conditions and other
factors.
This Prospectus is designed to provide you with information that you should
know before investing and should be retained for future reference. A
Statement of Additional Information for the Fund, dated April 28, 1997, has
been filed with the Securities and Exchange Commission ("SEC") and is
incorporated herein by reference. This Statement is available upon request
without charge from the Fund at 580 Walnut Street, Cincinnati, Ohio 45202
or by calling the phone numbers provided below, and may be accessed
along with other related materials at the internet web site of the
SEC (http://www.sec.gov).
For all information (including purchases, redemptions, and most recent
yield), call 579-5700 from Cincinnati, Ohio or 1-800-869-5999 toll free.
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.
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES
(as a percentage of offering price)
Maximum sales load imposed on purchases 2.00%
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees .50%
12b-1 Fees .25%
Other Expenses .15%
TOTAL FUND OPERATING EXPENSES .90%
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:
- ------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------
$ 29 $ 48 $ 69 $ 129
- ------------------------------------------------------
*The 5% annual return is a standardized rate prescribed for use by all mutual
funds for the purpose of this example and does not represent the past or future
return of the Fund.
The purpose of the preceding table is to assist investors in understanding
the various costs and expenses that an investor in the Fund will bear
directly and indirectly. (For more information about Fund expenses, see
"Purchases and Redemptions" and "Management of the Fund.")
The example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown.
<PAGE> 4
FINANCIAL HIGHLIGHTS
The table below presents the financial highlights of the Fund's operations.
It expresses the information in terms of a share outstanding throughout each
period. The financial highlights for the years ended December 31, 1992 and
thereafter have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their unqualified report which appears in the
Statement of Additional Information. The financial highlights for periods
ended prior to December 31, 1992 were audited by other accountants.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987(1)
---- ---- ---- ---- ---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $13.214 $12.018 $13.373 $13.327 $13.553 $12.933 $13.027 $12.654 $12.946 $12.500
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from investment
operations:
Net investment income .778 .786 .755 .749 .856 .947 1.015 1.057 .991 .184
Net realized and
unrealized gain
(loss) on investments (.340) 1.232 (1.244) .239 (.050) .785 .061 .481 (.094) .457
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total income (loss) from
investment operations .438 2.018 (.489) .988 .806 1.732 1.076 1.538 .897 .641
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Distributions to shareholders:
From net investment income (.768) (.787) (.779) (.738) (.859) (.946) (1.026) (1.050) (.990) (.181)
In excess of net investment
income -- -- (.013) -- -- -- -- -- -- --
From realized capital gains -- -- (.053) (.204) (.173) (.166) (.144) (.115) (.199) (.014)
From paid-in capital -- (.035) (.021) -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions
to shareholders (.768) (.822) (.866) (.942) (1.032) (1.112) (1.170) (1.165) (1.189) (.195)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value at end
of period $12.884 $13.214 $12.018 $13.373 $13.327 $13.553 $12.933 $13.027 $12.654 $12.946
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Total return (2) 3.51% 17.20% (3.69%) 7.52% 6.29% 14.08% 8.79% 12.75% 7.12% 4.99%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Ratios/Supplemental data:
Net assets at end of period
(in millions) $162.9 $185.4 $184.0 $266.0 $210.9 $151.8 $ 78.0 $ 40.3 $ 25.3 $ 6.7
Ratio of expenses to average
net assets (3) .90% .92% .90% .90% .94% .99% 1.08% 1.22% 1.25% 1.25%
Ratio of net investment in-
come to average net assets (3) 6.06% 6.19% 6.03% 5.48% 6.39% 7.33% 8.13% 8.27% 8.12% 7.74%
Portfolio turnover rate 13.33% 15.84% 20.91% 133.88% 83.36% 108.08% 70.98% 173.86% 89.63% 25.09%
</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 commenced operations on September 16, 1987.
(2) Total return is based upon an initial investment purchased without a
sales charge. Total return for the year ended December 31, 1987
represents the actual return from September 16, 1987, the date of the
Fund's initial public offering, through December 31, 1987 and has not
been annualized.
(3) For each of the periods prior to January 1, 1989, the Fund's
investment adviser reimbursed the Fund for the amount by which aggregate
expenses for the period exceeded 1.25% of the Fund's average daily net
assets. Without such reimbursement, the ratios of expenses to average
net assets and net investment income to average net assets would have
been 1.58% and 7.78%, respectively, for the year ended December 31,
1988, and 2.98% and 6.01%, respectively, for the period ended December
31, 1987.
(4) Annualized.
2
<PAGE> 5
INVESTMENT OBJECTIVE
The investment objective of the Fund is high current income through investment
in U.S. Government obligations and obligations of agencies or instrumentalities
of the U.S. Government. This objective cannot be changed without the approval
of a majority of the Fund's outstanding shares. The Fund is not intended to be
a complete investment program and there is no assurance that the Fund will
achieve its objective.
RISK FACTORS AND FOR WHOM THE FUND MAY BE APPROPRIATE
Gradison Government Income Fund is designed for investors seeking high current
income from a portfolio of U.S. Government securities. Although the
securities in the Fund's portfolio are guaranteed as to principal and
interest by the U.S. Government or its agencies or instrumentalities, the
market value of these securities upon which the daily net asset value of the
Fund is based may fluctuate because of such factors as changing interest
rates. In general, prices of fixed income debt obligations fall when
interest rates rise and vice versa. Additionally, mortgage backed
securities are subject to prepayment risk. As a result, the price per
share you receive upon redemption may be more or less than the price you paid
for the shares. The dividends per share paid by the Fund will also vary.
The Fund may be appropriate for investors seeking income from U.S. Government
securities who can accept the fluctuations in the value of Fund shares
inherent in investment in the intermediate and long-term debt securities in
which the Fund invests, as described below. The Fund has a higher risk
level and yield/return potential than fixed income funds of shorter
maturity, including money market funds. The Fund has a lower risk level and
yield/return potential than fixed income investments with lower grade
securities and/or longer maturities, and as compared to equity investments.
HOW THE FUND PURSUES ITS OBJECTIVE
BASIC INVESTMENT STRATEGY
The Fund invests in securities issued by the U.S. Government or its
agencies or instrumentalities. The Fund may also hold a portion of its assets
in cash and repurchase agreements collateralized by securities eligible for
purchase by the Fund. The Fund invests in U.S. Treasury bonds, notes and
bills, and securities issued by various agencies or instrumentalities of
the U.S. Government. Depending on Gradison's assessment of market conditions,
the Fund may invest a substantial portion of its assets in obligations of
the Government National Mortgage Association, called "GNMAs" or "Ginnie
Maes." On December 31, 1996, the average weighted maturity of the Fund's
portfolio was 5.33 years.
GNMAs are mortgage-backed securities representing part ownership of a pool
of mortgage loans. GNMA Certificates differ from bonds in that principal
is scheduled to be paid back by the borrower over the length of the loan
rather than returned in a lump sum at maturity. The Fund will primarily
purchase "modified pass-through" type GNMA Certificates, but may also
purchase "variable rate" GNMA Certificates, project note GNMA's, or any
other type of GNMA security. GNMA provides its commitment to guarantee timely
scheduled payment of principal and interest on the GNMA Certificates secured
by the mortgages included in the pool. This commitment is backed by the full
faith and credit of the U.S. Government.
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<PAGE> 6
When mortgages in the pool underlying a GNMA Certificate are prepaid by
mortgagors or as a result of foreclosure, such principal payments are passed
through to the Certificate holders (such as the Fund). Accordingly, the
life of a GNMA Certificate is likely to be substantially shorter than the
stated maturity of the mortgages in the underlying pool. Because of such
variation in prepayments, it is not possible to predict with certainty the
life of a particular GNMA Certificate, but Federal Housing Administration
statistics indicate that 25 to 30 year single-family dwelling mortgages have a
considerably shorter average life of approximately 8 to 12 years.
GNMA securities may offer yields higher than those available from other
kinds of government securities, but because of the risk of prepayment of the
underlying mortgages, they may be less effective than other types of
securities as a means of "locking in" attractive long-term interest rates.
This is generally caused by the need to reinvest prepayments of principal and
the possibility of unscheduled payments resulting from a decline in
mortgage rates. As a result, GNMA securities may have less potential for
capital appreciation during periods of declining interest rates as compared
with other U.S. Government securities with comparable stated maturities,
while having a comparable risk of decline during periods of rising interest
rates. Since GNMAs purchased or trading at a premium pay a fixed rate of
interest which exceeds the prevailing level of yields in the marketplace,
the premium is not guaranteed and a decline in the value to par may result in
a loss of the premium.
The Fund also invests in other obligations issued or guaranteed by
the U.S. Government or by its agencies or instrumentalities with
maturities generally in the range of 2 to 30 years. These instruments may
be either direct obligations of the Treasury (such as U.S. Treasury notes or
bonds) or securities issued or guaranteed by U.S. Government agencies or
instrumentalities. Of the obligations issued or guaranteed by agencies or
instrumentalities of the U.S. Government, some are backed by the full faith
and credit of the U.S. Government (such as obligations of the Farmers' Home
Administration and Maritime Administration Title XI Ship Financing bonds),
others are backed only by the limited right of the issuer to borrow from the
U.S. Treasury (such as Federal Home Loan Bank bonds), others (such as those
of the Federal National Mortgage Association) by discretionary authority of
the U.S. Government to purchase certain obligations of the agency or
instrumentality, and others (such as those issued by the Federal Farm Credit
Bank System) only by the credit of the agency or instrumentality. No
assurance can be given that the U.S. Government will provide financial support
to such agencies or instrumentalities in the future, to the extent it is not
obligated to do so by law. The Fund will invest in such obligations only when
it is satisfied that the credit risk is minimal. The Fund currently invests
only in securities which are guaranteed by the full faith and credit of the
U.S. Government and repurchase agreements collateralized by such securities.
The Fund will notify shareholders of any change in this policy at least 30 days
prior to such a change.
Gradison seeks to maintain a portfolio that will be responsive to changes in
economic trends and developments. Gradison actively makes portfolio
adjustments that reflect this investment strategy, but does not trade
securities for the Fund for the purpose of seeking short-term profits. It
will, however, trade the Fund's securities, regardless of how long they
have been held, when it believes doing so will further the Fund's investment
objective.
OTHER INVESTMENT PRACTICES
The Fund may engage to a limited extent in the following investment
practices, each of which may involve certain special risks. Except as
specifically noted, these practices are not fundamental policies and may
be changed without a shareholder vote.
WRITING OPTIONS: The Fund may write covered call options, that is sell
options on securities the Fund owns, as a means of increasing the yield on its
portfolio. A person buying a call option from the Fund has the right to buy
the security on which the option is written for a specified period of time
at a price agreed to when the Fund sells the
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<PAGE> 7
option, even though that price may be less than the value of the
security at the time the option is exercised. When the Fund writes a
call option on one of its portfolio securities, if the underlying
securities do not reach a price level that would make the exercise of
the option profitable to the holder of the option, the option will
generally expire without being exercised. Whenever an option is
exercised, the Fund will not participate in any increase in the price of
the underlying securities beyond the exercise price of that option. When
the Fund sells covered call options, it receives a cash premium which
can be applied in whatever way is deemed to be most advantageous to the
Fund. The Fund does not engage in options transactions for speculative
purposes.
CLOSING OPTIONS TRANSACTIONS: In order to avoid the exercise of an option
written by it, the Fund may purchase an option having the same terms as the
option written by it. The Fund will not purchase options in an amount in
excess of 5% of the Fund's total assets. In the case of an option
purchased on an exchange, this is called a "closing purchase transaction"
and has the effect of extinguishing the option writer's obligation under the
option. Depending on the price which the Fund pays to purchase the option and
the premium it received to write the option, it may realize a profit or
loss on the transaction. In the case of an option purchased
over-the-counter, such a transaction does not actually extinguish the
Fund's obligation under the option unless the transaction is with the same
broker-dealer as the original option. The economic effect is the same,
except that the Fund bears the risk that the broker-dealer which wrote the
option the Fund purchased will fail to meet its obligations. There can be no
assurance that the Fund will always be able to close out option positions at
acceptable prices. In such a case, the Fund will deliver the underlying
securities from its portfolio.
WHEN ISSUED AND DELAYED DELIVERY TRANSACTIONS: The Fund may purchase and
sell securities on a "when issued" and "delayed delivery" basis, that is,
obligate itself to purchase or sell securities with delivery and payment to
occur at a later date. When the Fund engages in when issued and delayed
delivery transactions, the Fund relies on the buyer or seller, as the case
may be, to consummate the sale. Failure to do so may result in the Fund
missing the opportunity of obtaining a price or yield considered to be
advantageous. No interest accrues to the Fund with respect to securities
purchased on a when issued or delayed delivery basis until delivery and
payment take place. Such securities are subject to market fluctuation and
the yields on securities so purchased may be lower than those available
in the market at the time of delivery. No payment or delivery is made by the
Fund until it receives delivery or payment from the other party to the
transaction. The Fund will maintain, in a segregated account with its
custodian, cash, Treasury bills, or other U.S. Government securities
having an aggregate value equal to the amount of such purchase commitments
until payment is made. To the extent the Fund engages in when issued and
delayed delivery transactions, it will do so for the purpose of acquiring
securities for the Fund's portfolio consistent with the Fund's investment
objective and policies and not for the purpose of investment leverage.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements with
domestic banks and investment securities dealers which Gradison believes
present minimal credit risks. The difference between the amount the Fund
pays for the securities and the amount it receives upon resale is accrued as
interest and reflected in the Fund's net income. When the Fund enters into
repurchase agreements, it relies on the seller to repurchase the securities.
Failure to do so may result in a loss for the Fund if the market value of the
securities is less than the repurchase price. At the time the Fund enters
into a repurchase agreement, the value of the underlying security including
accrued interest will be equal to or exceed the value of the repurchase
agreements and, for repurchase agreements that mature in more than one day,
the seller will have agreed that the value of the underlying security
including accrued interest will continue to be at least equal to the value of
the repurchase agreement. The Fund will monitor this value on a daily
basis, and the securities subject to repurchase will be held by the Fund's
custodian (or subcustodian) in a segregated account. In determining
whether to enter into a repurchase agreement, the Fund will take into
account the
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<PAGE> 8
credit-worthiness of the other party to the transaction. In the event of
default by such party, the Fund may not have a right to the underlying
security and there may be possible delays and expenses in liquidating the
security purchased, resulting in a decline in its value and loss of interest.
The Fund will use repurchase agreements as a means of making short-term
investments, and will invest in repurchase agreements of duration of seven
days or less in an amount not exceeding 25% of the net assets of the Fund. The
Fund's ability to invest in repurchase agreements that mature in more than
seven days is subject to an investment restriction that limits the Fund's
investment in "illiquid" securities, including such repurchase agreements,
to 10% of the Fund's assets.
BORROWING: The Fund may not borrow money except from banks as a temporary
measure for extraordinary purposes or emergency purposes, and then only in
amounts not exceeding 10% of the total assets of the Fund. While any
borrowing of greater than 5% of the assets occurs, the Fund will not purchase
additional portfolio securities. This restriction may not be changed
without the approval of the holders of a majority of the outstanding shares of
the Fund.
PORTFOLIO MANAGER
Michael J. Link, Executive Vice President of the Fund, has been primarily
responsible for the day-to-day management of the Fund's portfolio since the
Fund's inception. He is also Senior Vice President of Gradison with
responsibility for fixed income trading and investment management.
PURCHASES AND REDEMPTIONS
HOW TO PURCHASE SHARES
You may purchase shares of the Fund by bringing or mailing funds to Gradison
or McDonald. Checks should be made payable to the order of "Gradison
Government Income Fund" and should be accompanied by your account name and
account number (if the number has been assigned). A completed Account
Information Form must accompany or precede the initial purchase. The minimum
investment required to open an account is $1,000 and additional investments
must be at least $50. These minimums may, however, 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. Provision for payment is made either when payment to the Fund has
been made or when Gradison or McDonald has placed a purchase order for an
investor. Shares begin earning dividends on the business day after the Fund
receives payment for shares purchased. No share certificates will be issued.
Share purchases are confirmed by issuance of account statements. Shares are
sold at the public offering price based on the net asset value next determined
after the Fund receives your order. The Fund receives the net asset value
from purchases. The sales charge is retained by McDonald.
The Fund sells shares without a sales charge to: the trustees (and their
families) of any investment company as to which Gradison or McDonald acts as
investment adviser, current and retired employees of Gradison or McDonald
and affiliates (and their families). The Fund's shares are available
without a sales charge to individual employee accounts of 401(k) retirement
plans, Simplified Employee Pension ("SEP") Individual Retirement Accounts
("IRA") or other employer sponsored individual employee account plans with 10
or more employees investing in the Fund, and SEP IRA "Salary Reduction"
plans. The Fund also sells shares without a sales charge to investment
advisory accounts managed by Gradison or McDonald, to IRA rollover accounts
directly and simultaneously transferred from qualified retirement plans in
connection with a company sponsored group presentation to 10 or more qualified
employees, to bank or trust company trust accounts, and to accounts of
financial institutions or broker-dealers that charge account management
fees, provided the distributor has entered into an agreement with respect to
such accounts.
6
<PAGE> 9
Investors may purchase shares of the Fund without payment of a sales charge
to the extent that the investment represents the proceeds of a redemption of
any other mutual fund's shares, the purchase of which involved an initial
sales charge. Additionally, investors may purchase shares of the Fund
without payment of a sales charge to the extent that the investment
represents the proceeds of a redemption of any other mutual fund, except a
Gradison fund or a money market fund, so long as the investor has been
invested in such fund for at least one year prior to the purchase of Fund
shares. Investors must inform Gradison or McDonald of their eligibility
for these no sales charge purchases and provide appropriate documentation
to demonstrate their eligibility. Call Gradison or McDonald for details.
The public offering price is the net asset value plus a sales charge. The
sales charge varies depending on the size of the purchase. The current sales
charges are:
<TABLE>
<CAPTION>
TOTAL SALES CHARGE AMOUNT OF SALES CHARGE
---------------------------------------- REALLOWED TO DEALERS
SIZE OF TRANSACTION AS PERCENTAGE OF AS PERCENTAGE OF AS A PERCENTAGE OF
AT OFFERING PRICE OFFERING PRICE NET ASSET VALUE OFFERING PRICE
<S> <C> <C> <C>
Less than $100,000 2.00% 2.04% 2.00%
$100,000 or more but less than $250,000 1.50% 1.52% 1.50%
$250,000 or more but less than $500,000 1.00% 1.01% 1.00%
$500,000 or more 0.00% 0.00% 0.00%
</TABLE>
Within six months of a redemption of shares of the Fund, shareholders may
reinvest all or part of the redemption proceeds in shares of the Fund without
the payment of a sales charge. The amount which may be reinvested is
limited to an amount up to the redemption proceeds. In order to exercise this
privilege, you must make a written request for reinstatement which must
accompany the reinvestment. Gradison, McDonald and the Fund do not assume any
responsibility for your receipt of the reinvestment privilege in the absence
of such written notice from you, or for ensuring that you provide such
written notice. This reinstatement privilege can be exercised only once
for all or a portion of the shares redeemed. The tax treatment of a gain
realized on a redemption will not be affected by exercise of the reinstatement
privilege, but a loss may be nullified by a reinvestment in the Fund within
30 days before or after the redemption. Under the Internal Revenue Code, if
the redemption proceeds of Fund shares on which a sales charge was paid are
reinvested in shares of the Fund within 90 days of the payment of the sales
charge, the shareholder's basis in the Fund shares redeemed may not
include the amount of the sales charge paid, thereby reducing the loss or
increasing the gain recognized from the redemption. The Fund may amend or
cease offering this privilege at any time as to shares redeemed after the
date of such amendment or change.
QUANTITY DISCOUNTS
You may be entitled to reduced sales charges through a combination of
investments, rights of accumulation, or a Letter of Intent, even if you do
not make an investment of a size that would normally qualify you for a
quantity discount. YOU MUST NOTIFY GRADISON OR MCDONALD IN WRITING
WHENEVER A QUANTITY DISCOUNT IS APPLICABLE TO YOUR PURCHASE AND, IF
NECESSARY, PROVIDE SUFFICIENT INFORMATION TO VERIFY THAT YOUR PURCHASE
QUALIFIES FOR A DISCOUNT. UPON SUCH NOTIFICATION, YOU WILL RECEIVE THE
LOWEST APPLICABLE SALES CHARGE. GRADISON, MCDONALD, AND THE FUND WILL NOT
BE RESPONSIBLE FOR FAILURE TO OBTAIN SUCH A QUANTITY DISCOUNT IN THE
ABSENCE OF SUCH NOTIFICATION. Quantity discounts may be modified or
terminated at any time. The purchases and share balances of all accounts
managed by a particular investment adviser may be aggregated for purposes of
determining the quantity discounts described below. For more information
about quantity discounts, contact Gradison or McDonald.
1. COMBINATION OF INVESTMENTS. You may combine your purchase of shares of
the Fund on any day with purchases of shares of the Fund or any other
Gradison fund sold with a sales charge made by you, your spouse and your
children
7
<PAGE> 10
under the age of 21 to qualify for a quantity discount. The aggregate
investments of a trustee or custodian of any qualified pension or profit
sharing plan or IRA, or the aggregate investment of a trustee or other
fiduciary, established for the benefit of you or any of the individuals
described above may also be considered in determining whether a reduced
sales charge is available.
2. RIGHTS OF ACCUMULATION. In determining the sales charge to be paid for
your current purchase, you may combine your current purchase with the
current public offering price of shares of the Fund or any other Gradison
fund sold with a sales charge (or the original amount invested, whichever is
greater) that are owned by you, your spouse, your children under the age of
21, or a trustee or custodian of any qualified pension or profit sharing
plan or IRA, or the aggregate investment of a trustee or other fiduciary,
established for the benefit of you or any of the individuals described above.
3. LETTER OF INTENT. You may qualify for a reduced sales charge immediately
by stating your intention to invest, during a 13-month period, an amount
that would qualify for a reduced sales charge. You may do this by signing a
nonbinding Letter of Intent, which may be signed at any time within 90 days
after the first investment you want included under your Letter of Intent.
Each investment you make after signing the Letter of Intent will be
entitled to the sales charge applicable to the total investment indicated
in the Letter of Intent. A Letter of Intent will apply to all Gradison
funds sold with a sales charge.
When you sign a Letter of Intent, Fund shares purchased by you with a value
of 3% of the amount you specify in the Letter of Intent will be restricted,
that is, these shares cannot be sold or redeemed until the Letter of Intent is
satisfied or the additional sales charges have been paid. If the total
purchases you make under the Letter of Intent, less redemptions, equal
or exceed the amount you specify in the Letter of Intent, the shares will no
longer be restricted. If the total purchases, less redemptions, exceed the
amount you specify, and qualify you for further quantity discount, Gradison
will, at your request, make a retroactive sales charge adjustment and
will apply the adjustment amount to purchase additional shares of the Fund
for your account at the next computed price. (See "Letters of Intent" in
the Statement of Additional Information for an example of the operation
of this feature.) If you do not complete your purchases under the Letter
of Intent, your sales charge will be adjusted upward, and if after written
notice you do not pay the increased sales charge, restricted shares will be
redeemed to pay such charge.
HOW TO REDEEM SHARES
You may redeem shares of the Fund without charge or penalty by sending
a written 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. All redemptions are effected at the
next net asset value calculated after the Fund receives the redemption
request in good order. The Fund normally makes payment for redeemed shares
within one business day, and, except in extraordinary circumstances, within
seven days after receipt of a properly executed redemption request.
Shareholders may make special arrangements for wire transfer of redemption
proceeds by contacting the Fund in advance of a contemplated share
redemption. The Fund reserves the right to delay payment for the redemption
of shares where the shares were purchased with a personal check, but only
until the purchase payment has cleared, which may take up to 15 days from
the day the check is received by the Fund. If you need more immediate access
to your investment, you should consider purchasing shares by wire,
cash, or other immediately available funds.
The Fund, Gradison, McDonald, and their trustees, directors, officers and
employees will not be liable for following instructions communicated by
telephone that are reasonably believed to be genuine. The Fund will employ
8
<PAGE> 11
reasonable procedures to confirm that instructions communicated by telephone
are genuine, and if it does not, it may be liable for any losses resulting
from unauthorized instructions. Investors who maintain brokerage accounts
with Gradison or McDonald may redeem shares of the Fund through their
Gradison or McDonald Investment Consultants. Telephone transactions are
available to all shareholders automatically.
All 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.
Under extraordinary circumstances, such as periods of drastic economic or
market changes, it is possible that you might not be able to reach the Fund by
telephone to effect a redemption. (This situation has never occurred in
the Fund's history.) In the event of such a situation, you can mail or
personally deliver a written redemption request to the Fund's offices. The
telephone redemption feature may be terminated or modified upon 30 days' notice
to shareholders.
EXCHANGES
As a shareholder, you have the privilege of exchanging shares of a Gradison
fund for shares of any other Gradison fund and for shares of certain other
Federal and Federal/Ohio tax-free or municipal income money market funds.
There is presently no fee for exchanges. If you exchange into a fund with
a sales charge, you pay the percentage difference between the fund's
sales charge and any sales charge you have previously paid in connection
with the shares you are exchanging.
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 to a fund 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' notice.
NET ASSET VALUE
The net asset value per share of the Fund is determined by calculating the
total value of the Fund's assets, deducting its total liabilities, and
dividing the result by the number of shares outstanding. The net asset value
is computed once daily as of the close of regular trading on the New York
Stock Exchange, currently 4:00 p.m. Eastern time, on each day when the New
York Stock Exchange is open for business.
Fixed-income securities are valued by using market quotations, prices
provided by market makers or pricing services, or estimates of market values
obtained from yield data relating to instruments or securities with similar
characteristics in accordance with procedures established by the Board of
Trustees. Short-term securities with remaining maturities of less than 60
days are valued at amortized cost. Other assets are valued at fair value as
determined pursuant to procedures approved by the Board of Trustees.
OPTIONAL SHAREHOLDER SERVICES
AUTOMATIC INVESTMENT PLAN
You may arrange for a fixed amount of money to be transferred automatically
on a regular basis from your bank or other depository account to your Fund
account. For additional information, obtain the Gradison Automatic
Investment Plan form from the Fund.
9
<PAGE> 12
MONTHLY 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 option at any time by written notice to the
Fund.
AUTOMATIC PAYMENT PLAN
If your account has a value of at least $10,000, you may elect (on the
Account Information Form) to have monthly or quarterly payments of a
specified amount (but not less than $50) mailed to you or anyone specified on
the form. You may change or terminate this option at any time by written
notice to the Fund. Because the Fund cannot guarantee that payments will
be made on the date specified, the Plan should not be used for
time-sensitive payments. Investors utilizing the Automatic Payment Plan
should be aware that each payment constitutes a redemption for tax purposes.
DISTRIBUTIONS
The Fund declares dividends from net investment income daily,
immediately prior to the close of business. These dividends are credited
to fully paid shares of record at the time of declaration. (Fund shares begin
earning dividends on the business day after the Fund receives payment for the
purchase of such shares.) Dividends representing the amounts credited to Fund
shares are paid monthly.
Distributions of all or a portion of net realized short-term capital
gains, if any, will be declared and paid on a monthly basis on all shares
of record on established record dates. Net realized long-term capital gains,
if any, will be distributed at least annually. The Fund distributes
substantially all of its net investment income and capital gains, if any, to
shareholders each year.
Unless you select the Monthly Distribution Plan, all income dividends and
net realized capital gain distributions are automatically reinvested in
additional shares at the net asset value of such shares on the date the
distributions are payable. THERE IS NO SALES CHARGE FOR SHARES ISSUED IN
THIS MANNER. The Fund acts as its own transfer and dividend disbursing
agent.
TAXES
If your account is not a tax-deferred retirement account or exempt from
taxation, the dividends you receive from the Fund, including any net
realized short-term capital gains, will be taxable to you as ordinary income.
Long-term capital gain distributions are taxable to you as long-term
capital gains, regardless of how long you have held shares of the Fund. The
taxability of distributions is not affected by whether you receive the
distributions in additional shares or have them sent to you in cash. Each
shareholder will receive, on an annual basis, a statement of the
federal tax consequences of all distributions.
Fund distributions that represent interest income from certain U.S.
Government securities are tax-exempt at most state and local levels. Since
the taxability of the Fund's distributions at state and local levels will
vary, prospective shareholders are urged to consult their own tax advisers
regarding state and local tax consequences.
The foregoing is only a summary of some important generally applicable
federal and state income tax provisions in effect as of the date of this
Prospectus; see the Statement of Additional Information for a further
discussion. There may be other federal, state, or local tax considerations
applicable to a particular investor.
10
<PAGE> 13
GENERAL INFORMATION
Gradison Government Income Fund is a diversified series of the Gradison
Custodian Trust (the "Trust"), which is an Ohio business trust organized
under the laws of the State of Ohio by a Declaration of Trust dated June 3,
1987, as amended, and is registered with the Securities and Exchange
Commission as an open-end management investment company. Each share of the
Fund has one vote and represents an equal pro rata interest in the Fund. As
an Ohio business trust, the Trust is not required to hold annual shareholder
meetings, although special shareholder meetings may be called for purposes
such as electing or removing trustees. Special meetings shall be called upon
the written request of shareholders owning at least 10% of the outstanding
shares of the Trust. At the present time, the Gradison Government Income
Fund is the only series of the Trust authorized. Shareholder inquiries
should be directed to the phone numbers or address of the Fund listed on the
first page of this Prospectus.
MANAGEMENT OF THE FUND
The Trust's Board of Trustees is responsible for the direction and
supervision of the Fund's operations. McDonald is a wholly owned subsidiary
of McDonald & Company Investments, Inc., McDonald Investment Center, 800
Superior Avenue, Cleveland, Ohio 44114. Subject to the authority of the
Board of Trustees, Gradison manages the investment and reinvestment of
the assets of the Fund, and provides its employees to act as the officers of
the Fund who are responsible for the overall management of the Fund.
McDonald is an investment adviser and a securities broker-dealer.
McDonald, through Gradison, has been an investment adviser since 1976.
For the year ended December 31, 1996, McDonald received: a fee of .50% of
average net assets of the Fund as compensation for investment advisory
services provided to the Fund; $59,036 as cost reimbursement for shareholder
and other services provided to the Fund; and a fee of $.6875 per month per
shareholder account for providing data processing services to the Fund, plus
charges for shareholder statement printing.
Under the terms of a distribution service plan adopted pursuant to Rule 12b-1
under the Investment Company Act of 1940, the Fund pays McDonald a service
fee at the annual rate of .25% of the average daily net assets of the Fund.
Such fee is calculated on a daily basis and paid monthly. The service fee is
paid as compensation to McDonald for providing personal services to
shareholders of the Fund, including responding to shareholder inquiries
and providing information to shareholders about their Fund accounts.
McDonald may use the fee to make payments to authorized dealers or other
financial intermediaries, including itself, for providing these services to
Fund shareholders. McDonald may also make other payments to dealers or other
financial intermediaries in connection with their clients' investments in the
Fund.
INDIVIDUAL RETIREMENT ACCOUNTS
Shares of the Fund may be purchased in conjunction with an IRA which may
also be used with a Gradison or McDonald self-directed brokerage account.
Detailed information concerning IRA accounts is available from the Fund by
calling the phone number listed on the first page of this Prospectus.
PERFORMANCE CALCULATIONS
From time to time the Fund may advertise its "yield" and "total return."
Both yield and total return figures are based on historical figures and are
not intended to indicate future performance. The yield of the Fund is
computed by dividing
11
<PAGE> 14
the net investment income per share during the period stated in the
advertisement by the maximum offering price per share on the last day of
the period (using the average number of shares entitled to receive
dividends). The yield formula provides for semi-annual compounding which
assumes that net investment income is earned and reinvested at a
constant rate and annualized at the end of the six-month period.
The total return of the Fund (including the effect of deduction of the
maximum 2% sales charge) refers to the average annual compounded rate of
return over specified time periods (which periods will be stated in the
advertisement) that would equate an initial amount of money invested in the
Fund (prior to deduction of the sales charge) at the beginning of a stated
period to the ending redeemable value of the investment. The Fund may also
calculate total returns which assume that no sales charge was paid on the
initial investment, total returns for single-year time periods, aggregate
total returns over various time periods, and the aggregate value of an
investment made in the Fund over various time periods. The Fund may also
compare its performance with the performance of various securities indices
or combinations of indices. Any of the calculations may be presented in
tabular or graph formats. The calculations of total return and aggregate
values assume the reinvestment of all dividends and distributions in additional
Fund shares.
The Fund may also advertise performance rankings assigned to it by
organizations which evaluate mutual fund performance such as Lipper
Analytical Securities Corp. It may also advertise "ratings" assigned to
it by organizations such as Morningstar, Inc.
The Fund's Annual Report to Shareholders contains 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.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C> <C>
Expense Summary 1 Net Asset Value 9
Financial Highlights 2 Optional Shareholder Services 9
Investment Objective 3 Distributions 10
Risk Factors and for Whom the Taxes 10
Fund May be Appropriate 3
General Information 11
How the Fund Pursues
its Objective 3 Management of the Fund 11
Purchases and Redemptions 6 Individual Retirement Accounts 11
Performance Calculations 11
</TABLE>
[LOGO]
GRADISON * McDONALD
M u t u a l F u n d s
------------------------
580 Walnut Street, Cincinnati, Ohio 45202
(513) 579-5000 (800) 869-5999
<PAGE> 15
GRADISON GOVERNMENT INCOME FUND
GRADISON CUSTODIAN TRUST
___________________________________________________________________________
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 Fund 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 April 28, 1997, which has
been filed with the Securities and Exchange Commission. The Prospectus is
available upon request without charge from the Fund at the above address or by
calling the phone numbers provided above.
The date of this Statement of Additional Information is April 28, 1997.
1
<PAGE> 16
- ------------------------------------------------------------------------------
CONTENTS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page Location in Prospectus
<S> <C>
INVESTMENT POLICIES AND RESTRICTIONS . . . . 3 How the Fund Pursues Its
Objective
PURCHASE OF SHARES . . . . . . . . . . . . . 5 Purchases and Redemptions
LETTERS OF INTENT . . . . . . . . . . . . . 5 How to Purchase Shares
REDEMPTION OF SHARES . . . . . . . . . . . . 6 How to Redeem Shares
DAILY DISTRIBUTIONS - ACCOUNTING PRINCIPLES . 6 Distributions
TAXES . . . . . . . . . . . . . . . . . . . . 7 Taxes
NET ASSET VALUE . . . . . . . . . . . . . . . 8 Net Asset Value
SALES CHARGE REDUCTIONS . . . . . . . . . . . 8 How to Purchase Shares
PORTFOLIO TRANSACTIONS . . . . . . . . . . . 9
INVESTMENT ADVISER . . . . . . . . . . . . . 11 Management of the Fund
Advisory Agreement . . . . . . . . . . . 11
Master Distribution Agreement . . . . . 12
Payment and Reimbursement of
Expenses by the Fund . . . . . . . . 13
Distribution Service Plan . . . . . . . 14
Data Processing Service Agreement . . . 15
PERFORMANCE CALCULATIONS . . . . . . . . . . 15 Performance Calculations
TRUSTEES AND OFFICERS OF THE TRUST . . . . . . 17
DESCRIPTION OF THE TRUST . . . . . . . . . . . 19 General Information
CUSTODIAN . . . . . . . . . . . . . . . . . . 21
ACCOUNTANT. . . . . . . . . . . . . . . . . . 21
</TABLE>
2
<PAGE> 17
<TABLE>
<S> <C>
LEGAL COUNSEL . . . . . . . . . . . . . . . . 20
SALES BROCHURE INFORMATION . . . . . . . . . . 22
FUND FACT SHEET . . . . . . . . . . . . . . . 38
REPORT OF INDEPENDENT PUBLIC ACCOUNTANT AND
FINANCIAL STATEMENTS Following Page 40 Financial Highlights
</TABLE>
- ------------------------------------------------------------------------------
INVESTMENT POLICIES AND RESTRICTIONS
Gradison Government Income Fund (the "Fund") invests in securities issued
or guaranteed by the U.S. Government or its agencies or instrumentalities. In
addition to the investment restrictions described in the Prospectus, 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 shares of the Fund. (See "Description of the Trust.") The Fund
will not:
(1) Borrow money, except from banks or through reverse repurchase
agreements as a temporary measure for extraordinary or emergency
purposes such as to enable the Fund to satisfy redemption requests
where liquidation of portfolio securities is considered disadvantageous
and not for leverage purposes, and then only in amounts not exceeding
10% of the total assets of the Fund, taken at the lower of acquisition
cost or market value. While any borrowing of greater than 5% of the
assets occurs, the Fund will not purchase additional portfolio
securities;
(2) Make loans, except loans of portfolio securities not in excess of 25%
of the value of the 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
Board of Trustees, including the maintenance of collateral in the form
of cash or securities which would be eligible for purchase by the Fund
from the borrower at all times in an amount at least equal to the
current market value of the securities loaned. The purchase of
securities as allowed by the Fund's investment objective and other
Investment Restrictions shall not be prohibited by this restriction;
(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 15% of the value of the assets
of the Fund (taken at market value). Notwithstanding this restriction
the Fund may enter into "when issued" and "delayed delivery"
transactions. The deposit of underlying securities and other assets in
escrow or other collateral arrangements in connection with
3
<PAGE> 18
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) Make short sales of securities or purchase securities on margin;
(5) Purchase or sell real estate. The purchase of securities secured by
real estate which are otherwise allowed by the Fund's investment
objective and other Investment Restrictions shall not be prohibited by
this restriction;
(6) Purchase the securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition
of assets;
(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 10% of the total assets
of the Fund would be invested in such securities (included within this
restriction are repurchase agreements maturing in more than seven days,
as well as options purchased and underlying securities for call options
written by the Fund, but in either case only if such options are not
tradable on an exchange);
(10) 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 disposition of portfolio securities;
(11) Purchase or sell commodities or commodity contracts or interests in
oil, gas or other mineral exploration or development programs. The
purchase or sale of financial futures contracts or options on financial
futures contracts shall not be prohibited by this restriction;
(12) Participate on a joint, or a joint and several, basis in any securities
trading account; or
(13) 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 the value 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 the Fund. There is no limit on the amount of
the Fund's assets which may be invested in the securities of
4
<PAGE> 19
any one issuer of obligations issued or guaranteed by the United States
Government or by its agencies or instrumentalities.
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.
At the present time the Fund does not engage in futures or options on
futures transactions but may do so in the future upon appropriate disclosure in
the Prospectus.
PURCHASE OF SHARES
The Fund reserves the right to impose a charge of $15 for any purchase
check returned to the Fund 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 Fund 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
Fund's investment adviser and distributor (the "Adviser" and "Distributor").
LETTERS OF INTENT
If the total purchases, less redemptions, exceed the amount you
specify, and qualify you for a further quantity discount, Gradison will, at
your request, make a retroactive sales charge adjustment and will apply the
adjustment amount to purchase additional shares of the Fund for your account at
the next computed price. For example:
1. You executed a letter of intent for $100,000 of Fund shares and
were, therefore, charged a $1,500 sales charge on purchases in
that amount;
2. During the existence of the Letter of Intent you subsequently
purchased an additional $400,000 of shares, thereby qualifying
for purchases at $0 sales charge;
3. You will receive an adjustment of $1,500, the sales charge you
paid on the $100,000 purchase, since you reached the $500,000
purchase level during the existence of the Letter of Intent.
The $1,500 will be applied to purchase additional shares for
your account at the next computed price.
5
<PAGE> 20
REDEMPTION OF SHARES
The Fund may suspend the right of redemption or may delay payment
(a) during any period when the New York Stock Exchange("NYSE")is closed other
than for customary weekend and holiday closings, (b) when trading in markets
normally utilized by the Fund 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 by 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 Fund's shareholders.
By Telephone - 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 office.
DAILY DISTRIBUTIONS - ACCOUNTING PRINCIPLES
The distribution declared by the Fund each day will normally be in an
amount equal to the estimated net investment income for the applicable monthly
period, plus for certain periods undistributed amounts of such income from
prior periods, minus for certain periods amounts to provide a reserve of
undistributed income which could be paid in subsequent months, divided by the
number of days in that period. The amount of the daily distribution will
generally differ from the Fund's daily book net investment income computed in
accordance with generally accepted accounting principles. Estimated net
investment income for any period will be based on the Adviser's projections of
accrued interest income during such period less projected expenses of the Fund
to be accrued for such period. This procedure may enable the Fund to avoid
fluctuations in the total daily distributions from period to period and to
minimize the possibility of making distributions from paid-in capital or other
capital sources. The reserve may increase the net asset value of the Fund's
shares, thereby causing shareholders to realize higher capital gains or lower
capital losses upon redemption. The Fund may also make distributions which are
in excess of net investment income and distributions from paid-in capital.
For example, if the Adviser estimates that net investment income for a
31-day month will be $.085 per share, and if the Fund has a reserve of $.01 per
share of undistributed income, the daily distribution might be initially
established at $.09/31 per share for each day during such month, leaving a
reserve of $.005 per share available for distributions in subsequent months if
such estimates are accurate. The Adviser may revise
6
<PAGE> 21
its estimates of the monthly amounts of such income, in which case the
subsequent daily distributions during such month may be revised accordingly.
Each month a shareholder will receive a notice setting forth the source
of all distributions paid that month (i.e., net investment income, accumulated
undistributed net profits from the sale of securities or paid in capital).
TAXES
The Fund has qualified and intends to qualify in the future as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (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 reinvested in additional shares of the Fund.
Distributions of any net realized long-term capital gains are taxable
to shareholders as long-term capital gains, whether paid in cash or reinvested
in additional shares of the Fund and regardless of the length of time a
shareholder has owned shares of the Fund. The Fund will furnish shareholders
with written notification as to the amount of any long-term capital gains or
return of capital concurrently with any distribution that includes long-term
capital gains or return of capital.
Investors should be aware of the tax implications of purchasing shares
shortly before a record date for a capital gains distribution. To the extent
that the net asset value of the Fund at the time of purchase reflects
undistributed capital gains, or net unrealized appreciation of securities held
by the Fund, a subsequent distribution to the shareholder of such amounts,
although in effect constituting a return of his or her investment, would be
taxable as described above. Correspondingly, for federal income tax purposes,
a shareholder's tax basis in his or her shares continues to be his or her
original cost, so that upon redemption of shares, capital gain or loss will be
realized in the amount of the difference between the redemption price and the
shareholder's original cost.
Federal law may require the Fund or your broker to withhold and remit
to the U.S. Treasury 31% of (i) dividend and capital gain distributions and
(ii) the proceeds of any redemptions if you fail to furnish the Fund or your
broker with your correct taxpayer identification number, under-report dividend
or interest income, or fail to certify to the Fund or your broker that you are
not subject to such withholding.
7
<PAGE> 22
The Fund will generally realize capital gain or loss for federal income
tax purposes upon the closing of an option, the expiration of an option without
exercise and the exercise of an option. Generally, any gains or losses
realized with respect to over-the-counter options will be treated as short-term
for federal income tax purposes.
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 Fund. Shareholders should
consult their tax adviser as to their personal tax situation.
NET ASSET VALUE
The net asset value of the Fund is calculated once daily Monday through
Friday except on the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day Observed, Independence Day, Labor Day, Thanksgiving Day,
Christmas Day, Columbus Day, Martin Luther King, Jr. Day, and Veterans' 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.
Occasionally, trading in U. S. Government securities is substantially
completed each day prior to the close of the NYSE. The values of securities
used in computing the net asset value is computed as of that time, prior to the
close of the NYSE. It is possible that events affecting the value of the
Fund's securities may occur between the time at which the values of the
securities are determined and the close of the NYSE which will not be reflected
in the computation of the Fund's net asset value. If events materially
affecting the value of such securities occur during such period, then these
securities will be valued at their fair value as determined in good faith
pursuant to procedures approved by the Board of Trustees.
SALES CHARGE REDUCTIONS
The difference in the price at which the Fund's shares are offered due
to scheduled variations in sales charges as a percentage of both offering price
and amount invested, as described in the Prospectus under the caption "How To
Purchase Shares", result from cost savings inherent in economy of size.
Management of the Fund believes that the costs and expenses of sales efforts of
the Fund's principal underwriter and broker-dealers tend to decrease as the
size of the purchase order increases. It is for this reason that the sales
charges as a percentage of the offering price and of the amount invested are
reduced with respect to "breakpoint" purchases, Combination of Investments, and
Letter of Intent and Rights of Accumulation
8
<PAGE> 23
privileges, all as stated in the Prospectus. In addition, because the exchange
privilege is available to all investors whose objectives may have changed and
because it is such investors who initiate the exchange, no additional sales
expenses are incurred, and accordingly, these savings are passed on to the
investor in the form of a net asset value purchase. Likewise, no significant
sales effort is necessary for sales of shares at net asset value to trustees of
mutual funds as to which Gradison acts as an investment adviser (and their
families), current and retired employees of the Fund's investment adviser, and
investment advisory accounts managed by Gradison or McDonald. With respect to
IRA rollover accounts directly and simultaneously transferred from retirement
plans in connection with a company sponsored group presentation to 10 or more
qualified employees, individual employee accounts of 401(k) retirement plans,
Simplified Employee Pension ("SEP") Individual Retirement Accounts ("IRA") and
other employer individual employee account plans with 10 or more employees
investing in the Fund, and SEP IRA Salary Reduction plans, sales efforts
required are significantly reduced to the extent that the continuing
distribution expense fee compensation to the principal underwriter and broker
dealers is sufficient compensation to motivate them to be willing to effect such
sales without payment of sales charges. With respect to sales at net asset
value to investors who purchase Fund shares with the proceeds of redemptions
from other mutual funds as to which they have previously paid a sales charge,
such waiver of the Fund's charge is necessary to compensate such investors for
the fact that they have previously paid a sales load on their investment. With
respect to sales at net asset value to bank or trust company trust accounts,
such sales are necessary because potential clients are paying fees to banks or
trust companies.
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 Board of
Trustees. The Fund places orders for transactions with a number of brokers and
dealers. Most of the Fund's purchases and sales of portfolio securities are
principal transactions with securities dealers and underwriters. During the
three years ended December 31, 1996, the Fund incurred no brokerage
commissions. Purchases of securities from underwriters, however, include a
concession paid by the issuer to the underwriter and purchases or sales of
securities from/to a dealer include a spread between the bid and ask prices.
In purchasing and selling portfolio securities, it is the policy of the
Fund to select brokers and dealers so as 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 and dealers which are of
benefit to the Fund. The Adviser selects brokers and dealers to execute
transactions on the basis of its judgment of their professional
9
<PAGE> 24
capability to provide the service at reasonably competitive rates or prices. The
Adviser's determination of what constitutes reasonably competitive rates or
prices 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 Fund for effecting transactions
only in accordance with procedures adopted by the Board of Trustees. Any
procedures adopted by the Trustees will incorporate the standard contained in
Rule 17e-1 under the Investment Company Act of 1940 that the commissions paid
must be "reasonable and fair compared to the commission, fee or other
remuneration received or to be received by other brokers in connection with
comparable transactions involving similar securities during a comparable period
of time." Pursuant to Rule 17e-1, the Board of Trustees must determine no less
frequently than quarterly that all transactions effected pursuant to this Rule
were effected in compliance with such procedures and the Fund must maintain
records in connection with such reviews. The Adviser has assured the Fund 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 Fund 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 Fund, the Adviser has not received any commissions for
effecting portfolio transactions for the Fund.
During the periods ending 12/31/95 and 12/31/96 the portfolio turnover rates for
the Fund were respectively 15.84% and 13.33%.
Brokers who provide supplemental investment research to the Adviser may receive
orders for agency 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 Fund. 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 Board of Trustees. Not all such research services may be used by the
Adviser in connection with managing the Fund. The expenses of the Adviser will
not necessarily be reduced as a result of the receipt of such supplemental
information, and the Adviser may use such information in servicing its other
accounts.
10
<PAGE> 25
Because of its affiliation with the Adviser, 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.
The Adviser also serves as the investment adviser to other investment
companies and individual accounts. 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.
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 Board of
Trustees and pursuant to the terms of the Investment Advisory Agreement
("Agreement") between the Trust and Adviser.
ADVISORY AGREEMENT
The Agreement provides that the Adviser will provide to the Trust at
its own expense the executive officers who are necessary for the management and
operations of the Fund and manage the investments of the Fund, subject to
review by the Board of Trustees. The Adviser also compensates the Trustees who
are affiliated with the Adviser.
As compensation for its services under the Agreement, the Adviser
receives from the Fund a monthly fee based upon the average value of the daily
net assets for the month at an annual rate of .5 of 1% of the Fund's net
assets. For the years ending December 31, 1994, and l995, and 1996, the
Adviser received $1,176,225, $918,897 and $866,440 respectively, as advisory
fees.
The Adviser furnishes directly to the Fund, at cost, personnel to
perform shareholder services, such as responding to inquiries from shareholders
and processing purchase orders and redemption requests delivered to the Fund.
Certain of the costs attributable to services provided to the Fund, such as
occupancy expenses, telephone service, computer service and equipment costs,
depreciation and interest, may require allocation among the Fund, the other
investment companies for which the Adviser acts as investment adviser, and
other activities of the
11
<PAGE> 26
Adviser. Such allocations are made on the basis of reasonable approximations
calculated by the Adviser and periodically reviewed by the Trustees. For the
years ending December 31, 1994, and l995, and 1996, the Adviser received
$109,573, $84,384 and $59,036 respectively, as cost reimbursement from the Fund
for personnel performing shareholder services.
The 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 does not restrict the Adviser from acting as an
investment manager or adviser for others.
The Agreement grants to the Trust the right to use the names "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 Agreement for any reason. The 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 Agreement continues in effect 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 Agreement.
The 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 Agreement will terminate automatically in the event of its
assignment by the Adviser. The 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 its outstanding voting securities 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 Agreement.
MASTER DISTRIBUTION AGREEMENT
Shares of the Fund are continuously offered and distributed through the
principal underwriter of the Fund, McDonald & Company Securities, Inc.,
operating through its Gradison Division (the "Distributor"). Under the terms
of the Master Distribution Agreement, the Distributor, as agent of the Fund,
accepts orders for the purchase of shares of the Fund and, as compensation
therefore, receives the amount of the sales charge described
12
<PAGE> 27
in the Prospectus. For the years ended December 31, 1994, 1995, and l996, the
Distributor received underwriting sales charges of $319,287, $175,972, and
$110,078 respectively, and retained all such amounts except for payments made to
its own sales representatives. The Distributor is not obligated to sell any
certain number of shares of the Fund. The Distributor may enter into dealer
agreements with other dealers, pursuant to which such dealers will also sell
shares of the Fund. The Master Distribution Agreement between the Fund and the
Distributor permits the Distributor to reallow up to the full sales charge to
the other dealers entering into dealer agreements with the Distributor;
accordingly, such dealers may be deemed to be underwriters of the Fund, as that
term is defined in the Securities Act of 1933, as amended (the "1933 Act"). The
Fund has agreed to indemnify the Distributor to the extent permitted by
applicable law against certain liabilities under the 1933 Act. The Agreement
also provides for the payment of distribution service fees to McDonald in the
annual amount of .25% of the Fund's average daily net assets.
PAYMENT AND REIMBURSEMENT OF EXPENSES BY THE FUND
All expenses not specifically assumed by the Adviser under the
Investment Advisory Agreement or the Distributor under the Master Distribution
Agreement and incurred in the operation of the Fund are borne by the Fund
pursuant to these agreements. Some of these expenses may be paid by the
Adviser or the Distributor subject to reimbursement by the Fund. 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 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 (including reimbursement
to the Adviser for legal services provided to the Fund, subject to review by
the Fund's outside counsel), auditing and accounting expenses; taxes and other
fees; brokers' commissions and issue or transfer taxes chargeable to the Fund
in connection with securities transactions; expenses of issue, sale,
redemptions and repurchase of shares; expenses incurred by the Fund relating to
shareholder services (such as responding to inquiries from shareholders and
processing 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 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.
13
<PAGE> 28
DISTRIBUTION SERVICE PLAN
The Fund has adopted a Distribution Service Plan (the "Plan") under
Rule 12b-1 of the Investment Company Act of 1940. Rule 12b-1 permits an
investment company to finance, directly or indirectly, activities primarily
intended to result in the sale of its shares 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 it 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 or servicing of its shareholders, but only as specifically
contemplated by the Plan. Under the Plan, the Fund may incur distribution
expenses up to an amount that does not exceed an annual rate of .25 of 1% of
its average daily net assets. Distribution expenses that may be incurred by
the Fund under the Plan within the limitation described above are limited to
payments to broker-dealers (including the Distributor) as compensation for
personal services rendered to shareholders of the Fund including providing
shareholder liaison services such as responding to shareholder inquiries and
providing information to shareholders about their accounts. For the years
ending December 31, 1994, 1995, and l996, the Fund paid $582,335, $453,931 and
$427,632 respectively, to McDonald and Gradison.
The Plan also specifically authorizes the payment of those operational
expenses enumerated as being incurred by the Fund pursuant to the Agreement, as
described under the caption "Payment and Reimbursement of Expenses by the Fund"
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 Advisory Agreement to
the extent that the Fund might be deemed to be indirectly financing the
distribution activities through payment of advisory fees. The Board of Trustees
does not believe that the payment of such operational expenses by the Fund 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 .25 of 1% 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 Fund and its shareholders.
The Plan was last approved by the Fund's shareholders on September 22, 1988. The
Plan (together with any agreements relating to implementation of the Plan) shall
continue in effect for a period of more than one year only so long as such
continuance is specifically approved at least annually by the vote 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
14
<PAGE> 29
to materially increase the amount of distribution expenses incurred by the Fund
without the approval of a majority of the Independent Trustees by votes cast in
person at a meeting called for the purpose of voting on such amendment and
without the approval of a majority of the outstanding voting securities of the
Fund. The Plan may be terminated 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 sixty 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.
DATA PROCESSING SERVICE AGREEMENT
Pursuant to a data processing service agreement, Gradison provides data
processing services to the Trust with respect to shareholder servicing
activities. The fee for these services is $.6875 per shareholder account per
month. For the years ending December 31, 1994, 1995, and l996, the total fees
paid by the Trust pursuant to the agreement were $57,575, $49,804, and $45,119
respectively, plus shareholder statement printing costs.
PERFORMANCE CALCULATIONS
The Fund's yield for the 30 days ending December 31, 1996 was 5.87%.
15
<PAGE> 30
GRADISON GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
Total Return Statistics
-----------------------
Five Years Since Inception* Cumulative
Ending 9/16/87 - Return
12/31/96 12/31/96 Since
(Average Annual (Average Annual Inception
Compounded Compounded 9/16/87 -
Rate of Return) Rate of Return) 12/31/96
- --------------- ---------------- ----------
<S> <C> <C>
5.97% 8.32% 110.27%(1)
5.53% 8.08% 106.00%(2)
6.86% 9.35% 129.50%(3)
</TABLE>
<TABLE>
<CAPTION>
12 Mos. 12 Mos. 12 Mos. 12 Mos. 12 Mos. 12 Mos.
Ended Ended Ended Ended Ended Ended
12/31/91 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Gradison Gov.
Income Fund(1) 14.08% 6.29% 7.52% -3.69% 17.20% 3.51%
Gradison Gov.
Income Fund(2) 11.83% 4.14% 5.40% -5.59% 14.81% 1.44%
Index of
Performance(3) 15.68% 7.32% 8.56% -2.44% 17.70% 4.12%
</TABLE>
* During the period 9/16/87 through 12/31/88 the investment adviser paid
certain Fund expenses which had the effect of increasing return.
(1) When purchased at net asset value. The Fund is sold subject to a sales
charge; namely, 2.00% decreasing to zero for purchases of at least
$500,000. Additionally, certain qualifying group retirement fund
purchases are made without a sales charge, as are all purchases
representing reinvestment of dividends. Please see the following
performance data which reflects the effect of a maximum sales charge.
(2) When purchased at maximum offering price (i.e., 2% sales charge).
(3) Average of performance of the Lehman Brothers U.S. Treasury and the
Lehman Brothers GNMA Index. No cost/expense computation of
16
<PAGE> 31
performance of a diversified unmanaged portfolio comprised of 50% U.S.
Treasury and 50% GNMA bonds.
The performance quoted above represents past performance and assumes
reinvestment of all distributions. 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 is comprised of changes in net asset value and the reinvestment of
all distributions.
TRUSTEES AND OFFICERS OF THE TRUST
The trustees and officers of the Fund, together with information as to
their principal occupations during the past five years and positions currently
held with Gradison Cash Reserves Trust ("GCR"), Gradison Municipal Custodian
Trust ("GMCT"), Gradison Growth Trust ("GGT"), 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. The mailing address for the affiliated
trustee and for all officers of the Trust is c/o Gradison Funds, 580 Walnut
Street, Cincinnati, Ohio 45202. Each trustee is a trustee of each of the four
Gradison Investment Companies.
*DONALD E. WESTON, Trustee and Chairman of the Board of each of the four
Gradison Investment Companies; Chairman of Gradison and Director of McDonald &
Company Investments, Inc. (since October 1991). Director of Cincinnati
Milacron Commercial Corp. (financing arm of capital goods manufacturer).
DANIEL J. CASTELLINI, 312 Walnut Street, Cincinnati, Ohio 45202, Trustee;
Senior Vice President/Finance and Administration of the E. W. Scripps Company
(communications).
THEODORE H. EMMERICH, 1201 Edgecliff Place, Cincinnati, Ohio 45206, Trustee;
Retired; Until 1986, managing partner (Cincinnati office) Ernst & Young
(independent public accountants); Director of Carillon Fund, Inc.(investment
company), American Financial Group Inc.(insurance), and Cincinnati Milacron
Commercial Corp.; Trustee of Summit Investment Trust and Carillon Investment
Trust (investment companies).
RICHARD A. RANKIN, 1717 Dixie Highway, Suite 600, Fort Wright, Kentucky 41011,
Trustee; Partner, Rankin and Rankin (independent public accountants).
JEROME E. SCHNEE, 14 Walt Whitman, Morristown, N.J. 07960, Trustee; Senior
Director, Health Economics, Johnson & Johnson (Pharmaceuticals) since
17
<PAGE> 32
August 1996; Professor of Management, College of Business Administration,
University of Cincinnati (currently on leave of absence).
BRADLEY E. TURNER, President of each of the four Gradison Investment Companies;
Senior Managing Director and Director of McDonald.
MICHAEL J. LINK, Executive Vice President and Portfolio Manager; Senior Vice
President of Gradison.
PAUL J. WESTON, Senior Vice President; Executive Vice President of GCR;
Senior Vice President of GMCT and GGT; Executive Vice President of Gradison.
Mr. Weston is the brother of Donald E. Weston.
C. STEPHEN WESSELKAMPER, Senior Vice President; Executive Vice President and
Portfolio Manager of GCR; First Vice President of Gradison.
RICHARD M. WACHTERMAN, Secretary of each of the four Gradison Investment
Companies; Senior Vice President and General Counsel of Gradison.
PATRICIA J. JAMIESON, Treasurer of each of the four Gradison Investment
Companies; Treasurer and Chief Accounting Officer of McDonald.
MARK A. FRIETCH, Assistant Treasurer of each of the Gradison Investment
Companies (since May 1995); prior to that Controller of Gradison Mutual funds
(since August l992); prior to that Financial Consultant of Union Central Life
Insurance Company.
* Trustee who is an interested and affiliated person, as defined by the
Investment Company Act of l940, of the Trust and the Adviser by virtue of stock
ownership of the parent of the Adviser and employment by the Adviser.
Trustees and officers of the Fund who are affiliated with the Adviser
receive no remuneration from the Fund. As of March 31, 1997, 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 was known to own
more than 5% of the outstanding shares of the Fund.
18
<PAGE> 33
Trustee Compensation Table
--------------------------
<TABLE>
<CAPTION>
Name of Trustee Aggregate Total Compensation
- --------------- Compensation From Fund and fund
From Fund complex (3 additional
for fiscal Trusts) paid to
year ended trustee for calendar
12/31/96 year 12/31/96
------------ ---------------------
<S> <C> <C>
Theodore H. Emmerich $ 5,563 $25,500
Richard A. Rankin $ 5,563 $25,500
Jerome E. Schnee $ 5,500 $25,000
Daniel J. Castellini $ 5,363 $25,500
-------
$22,189
</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. There are currently no amounts owing to any
current trustee pursuant to the deferred compensation plan. As of December 31,
l996, the amount of $9,487 was payable by the Trust to the beneficiary of a
former trustee who is deceased and as of December 31, l996, the amount of
$42,470 was payable to that beneficiary by the fund complex.
DESCRIPTION OF THE TRUST
The Trust is a diversified, open-end management investment company
organized under the laws of the State of Ohio by a Declaration of Trust dated
June 3, 1987, which was amended on August 20, 1987. 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 one series,
representing the Gradison Government Income Fund. Prior to February 1, 1997,
the series was named the Gradison-McDonald Government Income Fund. Upon
issuance and sale in accordance with the terms set forth in the Prospectus,
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 are entitled to one vote per share. 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 if
19
<PAGE> 34
they choose to do so, in which event the holders of the remaining shares will be
unable to elect a Trustee. Under the Declaration of Trust, meetings of
shareholders are not required to elect 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 Fund or shareholders
pursuant to the Declaration of Trust. Pursuant to the Declaration of Trust,
shareholders of record of not less than a majority of the outstanding shares of
the Fund 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
questions of removal of any Trustee when requested in writing to do so by
shareholders of record of not less than 10 percent of the Fund's outstanding
shares. The Fund or any Series may be terminated by a vote of a majority of the
Trustees. Whenever the approval of a majority of the outstanding shares of a
Fund is required in connection with shareholder approval of the Investment
Advisory Agreement, the Master Distribution Agreement, or the Distribution
Service 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 Fund 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 the Fund and constitute
the underlying assets of the 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 the Fund and with a share of the general liabilities of the
Trust. If more than one series was authorized by the Trust and one series were
unable to meet its obligations, the assets of the other series(s) would be
available to creditors for that purpose, in which case the assets of the other
series(s) could be used to meet liabilities which are not otherwise chargeable
to it. In the event of the termination and liquidation of the Fund, the
holders of the shares of any series are entitled to receive, as a class, the
underlying assets of the related series 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 Fund, which are to be satisfied solely from the
Fund's property. The Declaration of Trust provides that no Trustee, officer or
agent of the Fund 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
20
<PAGE> 35
and in a manner he reasonably believed to be in, or not opposed to, the best
interests of the Fund, 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 Center, Cincinnati, Ohio 45202, 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 Fund. The Fund may
purchase or sell securities from or to Star Bank. The Fund acts as its own
transfer agent and dividend disbursing agent.
ACCOUNTANT
Arthur Andersen LLP, 425 Walnut Street, Cincinnati, Ohio 45202 is the
independent public accountant of the Trust.
LEGAL COUNSEL
Kirkpatrick & Lockhart LLP acts as legal counsel to the Trust.
21
<PAGE> 36
[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
Mutual funds use investment professionals to manage the assets on a full-time
basis. In
22
<PAGE> 37
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 environments, sets us apart from those other
fund managers who have yet to manage assets through a full market cycle.
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<PAGE> 38
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
1995 $139,000 Single Family Home
2000 $177,403 Graphic: Picture of a
24
<PAGE> 39
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 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.
25
<PAGE> 40
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
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.
26
<PAGE> 41
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.
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%
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.
27
<PAGE> 42
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.
<TABLE>
<CAPTION>
(CHART) THE POWER OF COMPOUNDING IN A HYPOTHETICAL $10,000 INVESTMENT IN THE S&P 500
<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
28
<PAGE> 43
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.
<TABLE>
<CAPTION>
CHART DOLLAR COST AVERAGING CAN REDUCE YOUR AVERAGE COST PER SHARE
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 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.
29
<PAGE> 44
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.
<TABLE>
<CAPTION>
(Graphic) Photo of two men, two women, a boy, girl and a dog walking.
CONSIDER GRADISON MUTUAL FUNDS
<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
The Established Value Fund invests for long-term
capital growth using a disciplined stock selection
process to identify investments from the large
30
<PAGE> 45
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 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
31
<PAGE> 46
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
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.
32
<PAGE> 47
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)
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
33
<PAGE> 48
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',
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 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
34
<PAGE> 49
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.
(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.
35
<PAGE> 50
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.
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.
36
<PAGE> 51
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.
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
37
<PAGE> 52
[Fact sheet]
Graphic: Gradison Logo Symbol GGIFX
GRADISON MUTUAL FUNDS
Average Annual Total Return Periods Ended 12/31/96
Since
One Three Five Inception
Year Years Years (9/16/87)
For 401(k) Retirement Plans
And Reinvested Dividends +3.51% +5.33% +5.97% +8.32%
Purchased at Net Asset
Value
For Shares Purchased at
Full 2% Sales Charge +1.44% +4.62% +5.53% +8.08%
Gradison Government Income Fund is designed for investors seeking high current
income from a portfolio of U. S. Government Securities. It is the Fund's
current policy 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 repurchase agreements collateralized by full faith
and credit obligations.
While one of the Fund's objectives is to produce monthly income, the Fund is
managed with an emphasis on total return, that is, the combined effect of both
income and principal value.
Although the securities in the Fund's portfolio are guaranteed as to principal
and interest by the U. S. Government, the market value of its shares will
fluctuate with changes in interest rates and market conditions. Mortgage
backed securities in which the Fund invests are subject to prepayment risk.
[Graphic: Value of $1,000 Since Inception]
The Value of a $1,000 Investment made
in the Fund at Inception
9/16/87
Inception
Date
38
<PAGE> 53
Graph: X axis shows years as indicated below with plot points as indicated
below:
$1,500 With All Dividend and Capital Gain
Distributions Reinvested
1987 1,049.96
1988 1,124.84
1989 1,268.34
1990 1,379.90
1991 1,574.29
1992 1,673.43
1993 1,800.48
1994 1,734.16
1995 2,032.48
1996 2,060.62
$1,000 With All Dividend and Capital Gain Distributions
Paid Out
1987 1,034.34
1988 1,010.38
1989 1,040.73
1990 1,032.74
1991 1,082.27
1992 1,064.69
1993 1,067.89
1994 960.06
1995 1,055.11
1996 1,028.75
The performance quoted above does not include the effect of the maximum 2%
sales charge which would reduce the performance shown. The performance quoted
above 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.
COMPOSITION AND WEIGHTED AVERAGE MATURITY
The portfolio composition and maturity Pie Chart: Cash 2%
of the Fund is as of December 31, 1996 U. S. Treasuries 38%
and is subject to change. GNMA's 60%
39
<PAGE> 54
December 31, 1996
[Graphic: Photo of a Woman]
[Graphic: Photo of a Man,
Woman and Young Girl
PORTFOLIO MANAGER PROFILES
[Graphic: Photo of Michael J. Link]
Michael J. Link
Senior Vice President/Portfolio Manager
Gradison McDonald Asset Management
With more than 25 years of experience in investments with Gradison McDonald,
Michael Link has carried the portfolio management responsibilities for the
Government Income Fund since its inception in 1987. Mike also manages the
fixed income portion of various individual client portfolios managed by
Gradison McDonald Asset Management. A frequent seminar speaker and natural
teacher, Mike earned his B.S. degree in Civil Engineering from Manhattan
College and an M.S. degree in Applied Mechanics from Lehigh University.
C. Stephen Wesselkamper [Graphic: Photo of Stephen Wesselkamper]
First Vice President
Gradison McDonald Asset Management
With more than 18 years financial analysis and portfolio management experience,
the last 13 with Gradison, Stephen Wesselkamper carries primary responsibility
for short term fixed income management on the Gradison McDonald Asset
Management team. In addition to his responsibilities for the Government Income
Fund, Steve is portfolio manager of Gradison McDonald U. S. Government Reserves
money market fund. A magna cum laude graduate of the University of Cincinnati,
Steve holds an MBA from Xavier University.
PROFILE OF GRADISON MUTUAL FUNDS
A prospectus for the Government Income fund or International Fund
any other Gradison Mutual Fund may be obtained Opportunity Value Fund
by calling 513/579-5700 or 800/869-5999. Growth & Income Fund
The prospectus contains more complete Established Value Fund
information. Read it carefully before Ohio Tax-Free Income Fund
you invest. Government Income Fund
Money Market Funds
McDonald & Company Securities, Inc. - Distributor
GMFS 1029 - GIF 12/96
Graphic: Gradison Logo
GRADISON MUTUAL FUNDS
40
<PAGE> 55
PORTFOLIO OF INVESTEMENTS DECEMBER 31,1996
<TABLE>
<CAPTION>
PAR COUPON
AMOUNT MORTGAGE-BACKED SECURITIES - 60.75% RATE MATURITY VALUE
<S> <C> <C> <C> <C>
$10,581,043 Government National Mortgage Association 6.50% 11/15/08-5/15/09 $ 10,438,860
724,688 Government National Mortgage Association 6.55 11/15/13 700,456
20,000,871 Government National Mortgage Association 7.00 4/15/23-9/15/23 19,563,352
21,178,452 Government National Mortgage Association 7.50 4/15/23-3/15/24 21,185,071
20,989,906 Government National Mortgage Association 8.00 7/15/02-7/15/26 21,504,328
3,768,815 Government National Mortgage Association 8.25 6/15/35 3,874,813
8,491,255 Government National Mortgage Association 8.50 4/15/21-11/15/22 8,799,063
2,620,657 Government National Mortgage Association 8.75 4/15/22 2,738,177
2,072,460 Government National Mortgage Association 9.00 1/15/20-8/15/21 2,183,207
3,286,489 Government National Mortgage Association 9.50 10/15/02-6/15/21 3,536,946
2,983,780 Government National Mortgage Association 10.00 5/15/12-6/15/21 3,282,158
------------
Total Mortgage-Backed Securities
(Cost $99,040,668) 97,806,431
------------
</TABLE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. TREASURY OBLIGATIONS - 38.16%
<S> <C> <C> <C> <C>
10,000,000 U.S. Treasury Bond 5.88 11/15/05 9,643,750
20,000,000 U.S. Treasury Note 6.25 2/15/03 19,981,250
10,000,000 U.S. Treasury Note 6.38 1/15/00 10,096,875
10,000,000 U.S. Treasury Bond 7.63 2/15/07 10,487,500
10,000,000 U.S. Treasury Bond 8.75 11/15/08 11,225,000
------------
Total U.S. Treasury Obligations
(Cost $62,545,313) 61,434,375
------------
</TABLE>
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE INTEREST
AMOUNT REPURCHASE AGREEMENT - 1.09% RATE (1)
<S> <C> <C> <C> <C>
1,755,000 Fuji Securities, dated 12/31/96, collateral:
U.S. Treasury Note, 8%; due 8/15/99
with a market value of $1,787,573
(repurchase proceeds: $1,755,629)
(Cost $1,755,000) 6.54 1/2/97 1,755,000
------------
TOTAL INVESTMENTS, at value (Note 1)
(Cost $163,340,981) - 100% $160,995,806
============
</TABLE>
- -------------------------------------------------------------------------------
(1) For repurchase agreements, the rate shown reflects the actual rate of
return to the Fund.
See accompanying notes to financial statements.
1
<PAGE> 56
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<S> <C>
ASSETS
Investments in securities, at value (Note 1) (Cost $163,340,981) $160,995,806
Receivable for Fund shares sold 393,094
Interest receivable 1,866,683
Prepaid expenses and other assets 12,858
------------
TOTAL ASSETS 163,268,441
------------
LIABILITIES
Payable for Fund shares redeemed 260,985
Accrued investment advisory fee (Note 2) 67,259
Other accrued expenses payable to adviser (Note 2) 41,690
Other accrued expenses and liabilities 24,664
------------
TOTAL LIABILITIES 394,598
------------
NET ASSETS $162,873,843
============
Net assets consist of:
Aggregate paid-in capital $171,212,390
Distributions in excess of net investment income (Note 1) (59,323)
Accumulated net realized loss (5,934,049)
Net unrealized depreciation of investments (2,345,175)
------------
Net Assets $162,873,843
============
Shares of capital stock outstanding
(no par value - unlimited number of shares authorized) 12,640,897
============
Net asset value and redemption price per share (Note 1) $12.88
============
Maximum offering price per share (Note 1) $13.14
============
</TABLE>
See accompanying notes to financial statements.
2
<PAGE> 57
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
YEAR ENDED
DECEMBER 31, 1996
<S> <C> <C>
INTEREST INCOME $11,993,991
EXPENSES:
Investment advisory fee (Note 2) $ 866,440
Distribution (Note 2) 427,632
Personnel costs (Note 2) 59,036
Data Processing fee (Note 2) 45,119
Professional fees 34,774
Trustees' fees (Note 2) 22,612
Registration fees 21,072
Custodian fees 19,416
Postage and mailing 16,221
Printing 14,640
ICI dues 9,077
Other 15,522
---------
Total expenses 1,551,561
----------
NET INVESTMENT INCOME 10,442,430
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized loss on investments (768,575)
Net realized gain on written call options 232,031
Net change in unrealized depreciation of investments (4,448,606)
----------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS (4,985,150)
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 5,457,280
===========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 58
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C> <C>
1996 1995
FROM OPERATIONS:
Net investment income $ 10,442,430 $ 11,374,446
Net realized loss on investments (536,544) (3,220,413)
Net change in unrealized appreciation/depreciation of investments (4,448,606) 21,179,573
------------ ------------
Net increase in net assets resulting from operations 5,457,280 29,333,606
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income (10,293,237) (11,374,395)
Paid-in capital (Note 1) - (495,716)
------------ ------------
Decrease in net assets from distributions to shareholders (10,293,237) (11,870,111)
------------ ------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 28,763,172 32,626,195
Net asset value of shares issued as distributions 8,597,718 9,872,425
Payments for Fund shares redeemed (55,084,613) (58,557,288)
------------ ------------
Net decrease in net assets from Fund share transactions (17,723,723) (16,058,668)
------------ ------------
TOTAL (DECREASE) INCREASE IN NET ASSETS (22,559,680) 1,404,827
NET ASSETS:
Beginning of year 185,433,523 184,028,696
------------ ------------
End of year (including distributions in excess of net investment
income of $59,323 and $208,516, respectively) (Note 1) $162,873,843 $185,433,523
============ ============
NUMBER OF FUND SHARES:
Sold 2,230,737 2,562,741
Issued as distributions to shareholders 670,451 774,962
Redeemed (4,293,141) (4,618,139)
------------ ------------
Net decrease in shares outstanding (1,391,953) (1,280,436)
Outstanding at beginning of year 14,032,850 15,313,286
------------ ------------
Outstanding at end of year 12,640,897 14,032,850
============ ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 59
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996
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 Government Income Fund (The "Fund"). The Fund's investment
objective is to seek high current income through investment in U.S. Government
obligations and obligations of agencies or instrumentalities of the U.S.
Government.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles. The preparation of
financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amount of income and expenses for the
period. Actual results could differ from those estimates.
SECURITIES VALUATION - Portfolio securities 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 by
management using procedures approved 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, 1996.
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 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.
5
<PAGE> 60
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996
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, 1996, the Fund had not
committed to the purchase of any when-issued of delayed delivery securities.
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, 1996 was
$1,380,038 and $3,725,213, respectively.
As of December 31, 1996, the Fund had a capital loss carryforward for Federal
income tax purposes of approximately $5,890,000 which may be utilized to
offset future net realized capital gains through December 31, 2004 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.
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%.
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
6
<PAGE> 61
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996
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
distribution service fee at an annual rate of .25% of average daily net
assets.
During the year ended December 31, 1996, Gradison received sales charges
aggregating $110,078 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, 1996, purchases and proceeds from the sale of
securities, excluding short-term securities, amounted to $23,844,705 and
$22,415,852, respectively. Transactions in written options on U.S. Treasury
Notes and Bonds were as follows:
NO. OF CONTRACTS PREMIUM
Outstanding at December 31, 1995 0 $ 0
Written 4,500 302,344
Closed (1,500) (113,281)
Exercised (1,000) (65,625)
Expired (2,000) (123,438)
------- --------
Outstanding at December 31, 1996 0 $ 0
======= ========
7
<PAGE> 62
[LOGO - LETTERHEAD - ARTHUR ANDERSEN]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Trustees of the
Gradison Government Income Fund
of the Gradison Custodian Trust:
We have audited the accompanying statement of assets and liabilities of the
Gradison Government Income Fund of the Gradison Custodian Trust (an Ohio
business trust), including the portfolio of investments, as of December 31,
1996, 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 five 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.
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, 1996, 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 Government Income Fund of the Gradison Custodian Trust as of
December 31, 1996, 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 five years then ended, in conformity with generally
accepted accounting principles.
Cincinnati, Ohio,
January 31, 1997
/s/ Arthur Andersen LLP
8
<PAGE> 63
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a)(1) Financial Statements (included in Prospectus)
Selected Per Share Data and Ratios
(a)(2) Financial Statements (included in Statement of Additional
Information)
Portfolio of Investments at December 31, 1996
Statement of Assets and Liabilities at December 31, l996
Statement of Operations for the year ended December 31, 1996
Statement of Changes in Net Assets for the two years ended
December 31, 1995 and December 31, l996
Notes to Financial Statements
Report of Independent Public Accountants
(b) Exhibits
( 1)(a) Registrant's Declaration of Trust, as amended.**
(b) Amendment dated October 4, 1991 to Registrant's
Declaration of Trust (Amending Paragraph 2.6).****
( 2)(a) Registrant's By-Laws.*
(b) Amendment to Registrant's By-Laws dated July 16, 1991
(Amending Section 3.1).****
( 3) None.
( 4) None.
( 5) Investment Advisory Agreement dated October 4, 1991.****
( 6)(a) Master Distribution Agreement dated October 4, 1991.****
(b) Form of Dealer's Agreement.*
( 7) None.
( 8) Custodian Agreement.**
( 9)(a) Data Processing Services Agreement.**
(b) Amendment to Data Processing Agreement.***
(10) Opinion of Counsel is filed yearly with Registrant's
Rule 24f-2 Notice.
(11) Consent of Arthur Andersen LLP (included herein).
(12) None.
(13) None
(14) Documents used in establishment of individual retirement
C-1
<PAGE> 64
accounts in conjunction with shares of Registrant.**
(15) Distribution Expense Plan.*
(15)(a) Amendments to Distribution Expense Plan and Master
Distribution Agreement. +
(16)(a) Schedule of Yield and Total Return Computations.****
(16)(b) Powers of Attorney of Bradley E. Turner, Daniel J.
Castellini, Richard Rankin, Theodore Emmerich, Jerome
Schnee, Donald Weston, Michael Link, Patricia
Jamieson. ++
* Incorporated by reference to Exhibits 2, 6b, and 15 to Registrant's
Form N-1A Registration Statement No. 33-14949 previously filed with the
Securities and Exchange Commission on June 10, 1987.
** Incorporated by reference to Exhibits 1, 8, 9(a), 13, and 14 to
Registrant's Form N-1A Registration Statement No. 33-14949 previously
filed with the Securities and Exchange Commission on September 9, 1987.
*** Incorporated by reference to Exhibit 9 to Registrant's Form N-1A
Registration Statement No. 33-14949 previously filed with the Securities
and Exchange Commission on April 26, 1990
**** Incorporated by reference to Exhibits 2(b), 5, and 6 to Registrant's
Form N-1A Registration Statement No. 33-14949 previously filed with the
Securities and Exchange Commission on February 28, 1992
+ Incorporated by reference to Exhibit 15(a) to Registrant's Form
N-1A Registration Statement No. 33-14949 previously filed with the
Securities and Exchange Commission on April 29, l994.
++ Incorporated by reference to Exhibit 16(b) to Registrant's Form
N-1A Registration Statement No. 33-14949 previously filed with the
Securities and Exchange Commission on April 29, l996.
Item 26. Number of Holders of Securities
Number of Record Holders
Title of Class as of March 31, l997
Shares of beneficial interest, without
par value, of the Registrant 4,744
C-2
<PAGE> 65
Item 28. Business and Other Connections of Investment Adviser
Reference is made to the captions "Management of the Trust" on page 10 of the
Prospectus that is Part A of this Registration Statement and "Trustees and
Officers of the Trust" on page 17 of the Statement of Additional Information
that is Part B of this Registration Statement and to Item 29(b) of this Part C
of the Registration Statement.
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
Growth Trust, and Gradison-McDonald Municipal Custodian Trust.
(b) Information pertaining to its directors and officers is contained in
the following table.
<TABLE>
<CAPTION>
Positions
Positions Business with
Name With Underwriter Address Registrant
- ---- ---------------- -------- ----------
<S> <C> <C> <C>
Daniel F. Austin Vice Chairman 800 Superior Avenue None
Director Cleveland, OH 44114
Jack N. Aydin Managing Director One Evertrust Plaza None
Director Jersey City, NJ 07302
Eugene H. Bosart, Senior Managing 260 East Brown Street None
III Director, Director Birmingham, MI 48009
Thomas G. Clevidence Senior Managing 800 Superior Avenue None
Director, Director Cleveland, OH 44114
Robert T. Clutterbuck Director, President, 800 Superior Avenue None
Chief Operating Cleveland, OH 44114
Officer
Dennis J. Donnelly Senior Managing 800 Superior Avenue None
Director, Director Cleveland, OH 44114
</TABLE>
C-3
<PAGE> 66
<TABLE>
<S> <C> <C> <C>
David W. Ellis, III Director, Managing 580 Walnut Street None
Director Cincinnati, OH 45202
(Gradison Division)
Patricia J. Jamieson Treasurer, Secretary 800 Superior Avenue Treasurer
Managing Director Cleveland, OH 44114
Chief Financial
Officer
David W. Knall Senior Managing One American Square None
Director, Director Indianapolis, IN 46282
Thomas McDonald Managing Director 800 Superior Avenue None
Director Cleveland, OH 44114
John F. O'Brien Senior Managing 800 Superior Avenue None
Director, Director Cleveland, OH 44114
Lawrence T. Oakar Director and 800 Superior Avenue None
Managing Director Cleveland, OH 44114
James C. Redinger Senior Managing 800 Superior Avenue None
Director, Director Cleveland, OH 44114
William B. Summers,
Jr. Director, Chairman 800 Superior Avenue None
and Chief Executive Cleveland, OH 44114
Officer
David D. Sutcliffe Managing Director 800 Superior Avenue None
Director Cleveland, OH 44114
Bradley E. Turner Senior Managing 580 Walnut Street
Director, Director Cincinnati, Ohio 45202 President
</TABLE>
C-4
<PAGE> 67
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.
31a-1(b)(8)
Item 31. MANAGEMENT SERVICES
Not applicable.
Item 32. UNDERTAKINGS
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
l933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction, the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
C-5
<PAGE> 68
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
24th day of April, l997.
Registrant hereby certifies that this Amendment to Registration Statement
meets all of the requirements for effectiveness pursuant to paragraph (b) of
Rule 485.
GRADISON CUSTODIAN TRUST
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.
Signature Title
*DONALD E. WESTON Chairman of the Board April 24, l997
(Principal Executive Officer)
*BRADLEY E. TURNER President "
*PATRICIA JAMIESON Secretary and Treasurer "
(Principal Financial
and Accounting Officer)
*DANIEL J. CASTELLINI Trustee "
*RICHARD A. RANKIN Trustee "
*JEROME E. SCHNEE Trustee "
*THEODORE H. EMMERICH Trustee "
*By /s/ RICHARD M. WACHTERMAN
--------------------------------------------
Richard M. Wachterman, Attorney-in-fact
S-1
<PAGE> 69
Exhibit List
Exhibit Number Description
11 Consent of Arthur Andersen LLP
<PAGE> 1
Exhibit 11
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use in this Post
Effective Amendment No. 15 of our report dated January 31, l997 and to all
references to our Firm included in or made a part of Post-Effective Amendment.
/s/ Arthur Andersen LLP
-----------------------
ARTHUR ANDERSEN LLP
Cincinnati, Ohio,
April 23, l997
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000815913
<NAME> GRADISON CUSTODIAN TRUST
<SERIES>
<NUMBER> 1
<NAME> GRADISON GOVERNMENT INCOME FUND
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 163,340,981
<INVESTMENTS-AT-VALUE> 160,995,806
<RECEIVABLES> 2,259,777
<ASSETS-OTHER> 12,858
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 163,268,441
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 394,598
<TOTAL-LIABILITIES> 394,598
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 171,212,390
<SHARES-COMMON-STOCK> 12,640,897
<SHARES-COMMON-PRIOR> 14,032,850
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 59,323
<ACCUMULATED-NET-GAINS> (5,934,049)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (2,345,175)
<NET-ASSETS> 162,873,843
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,993,991
<OTHER-INCOME> 0
<EXPENSES-NET> 1,551,561
<NET-INVESTMENT-INCOME> 10,442,430
<REALIZED-GAINS-CURRENT> (536,544)
<APPREC-INCREASE-CURRENT> (4,448,606)
<NET-CHANGE-FROM-OPS> 5,457,280
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 10,293,237
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,230,737
<NUMBER-OF-SHARES-REDEEMED> 4,293,141
<SHARES-REINVESTED> 670,451
<NET-CHANGE-IN-ASSETS> (17,723,723)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (5,397,505)
<OVERDISTRIB-NII-PRIOR> 208,516
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 866,440
<INTEREST-EXPENSE> 334
<GROSS-EXPENSE> 1,551,561
<AVERAGE-NET-ASSETS> 172,275,003
<PER-SHARE-NAV-BEGIN> 13,214
<PER-SHARE-NII> .778
<PER-SHARE-GAIN-APPREC> (.340)
<PER-SHARE-DIVIDEND> .768
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.884
<EXPENSE-RATIO> .90
<AVG-DEBT-OUTSTANDING> 5,451
<AVG-DEBT-PER-SHARE> .001
</TABLE>
