<PAGE> 1
Gradison Mutual Funds
580 Walnut Street
Cincinnati, Ohio 45202-3198
GOVERNMENT
INCOME FUND
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SECURITIES, MUTUAL FUNDS AND OTHER INVESTMENT PRODUCTS ARE NOT INSURED BY THE
FDIC AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY MCDONALD
INVESTMENTS INC., KEY BANK OR ANY OF THEIR AFFILIATES, AND ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
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The Gradison Division of McDonald Investments Inc., a subsidiary of KeyCorp, is
the investment adviser to the Gradison Custodian Trust. The Gradison Funds are
sponsored and distributed by BISYS Fund Services Limited Partnership, which is
not affiliated with KeyCorp or its subsidiaries. Gradison receives a fee for its
services from the Gradison Funds.
Annual Report
DECEMBER 31, 1998
[Gradison Mutual Funds Logo]
This material is intended for distribution to shareholders of the Gradison
Government Income Fund. It may be distributed to other persons only if it is
preceded or accompanied by a current prospectus of the Gradison Government
Income Fund. BISYS Fund Services Limited Partnership--Distributor
<PAGE> 2
LETTER TO SHAREHOLDERS
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January 28, 1999
Dear Shareholders:
A review of history, from an economics perspective, traditionally reveals that
during periods of low unemployment, rising wages, and unbridled consumer
confidence, the economy grows at too rapid a pace. This excessive growth leads
to rising inflation, requiring a more restrictive monetary policy, and the end
result is higher interest rates. During 1998, the United States witnessed the
lowest unemployment rate in 28 years. Employees' wages continued to grow at a
rate faster than inflation. These positive employment characteristics, combined
with an unprecedented four consecutive years of 20%-plus stock market returns,
allowed American consumers to open their wallets and buy new homes, new
automobiles and whatever else they desired. The end result was that the U.S.
economy again grew faster than expected or desired by the Federal Reserve.
This is where the history lesson ends and an apparent new economic paradigm
begins. The rate of inflation, which traditionally has risen during such an
economic environment, instead, went down and grew at the lowest yearly rate
since 1986. The Federal Reserve, instead of forcing interest rates higher to
slow the rate of growth, lowered rates. When 1998 came to an end, long-term
interest rates were at historically low levels and the entire yield curve was
approximately 100 basis points lower than at year-end 1997.
<TABLE>
<CAPTION>
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U.S. TREASURY INTEREST RATES
-----------------------------------
MATURITY 12/31/97 12/31/98 CHANGE
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<S> <C> <C> <C>
2 year 5.64% 4.53% -1.11%
5 year 5.71 4.54 -1.17
10 year 5.74 4.65 -1.09
30 year 5.92 5.09 -0.83
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</TABLE>
Throughout the year, the Fund increased its holding in GNMA securities from 50%
at year-end 1997 to 72% of the Fund's assets at year-end 1998. The objective is
to increase the interest income earning power of the Fund. Due to the change in
asset weightings, a more appropriate comparative index was adopted for the Fund,
the Lehman Brothers Government National Mortgage Association (GNMA) Index.
The Government Income Fund's performance compared to other funds with similar
investment parameters was well above the average return for the year. The
average return for funds within the Lipper Government National Mortgage
Association (GNMA) category was 6.47% versus 7.37% for the Fund. The Fund's
above average return reflects the fact that the portion of its portfolio not
invested in GNMA securities was invested in U.S. Treasury bonds. Within the
entire fixed income asset category, the star performer for 1998 was U.S.
Treasury securities. The continuing economic problems in Asia and Russia versus
U.S. economic stability and the implosion of high-risk hedge funds had investors
seeking the safety of U.S. Treasury securities. Due to this flight to quality,
the returns of non-Treasury securities significantly impaired the performance of
funds that invested in lower quality/higher risk bonds. The Fund's investment in
100% full faith and credit U.S. government securities, its intermediate maturity
characteristic, and mortgage-backed security positions continued to provide
shareholders a stable, moderate-risk, income generating investment.
As we look forward to 1999, the Gradison Government Income Fund will witness a
year of change, but the character of the Fund will maintain the Fund's
investment tradition. If a majority of Fund shareholders approve, the Gradison
Government Income Fund will become the Victory Fund for Income. Notwithstanding
this change, the Fund's investment objective, guidelines and manager will remain
the same. It is my intent to provide our new shareholders the same consistent,
long-term, investment strategy that has made the fund successful since its
inception in 1987.
As always, we thank you for your support and patronage of the Gradison
Government Income Fund.
Sincerely,
/s/ Thomas M. Seay
Thomas M. Seay
Vice President & Portfolio Manager
[Picture]
1-800-869-5999
<PAGE> 3
FINANCIAL HIGHLIGHTS
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For a share outstanding throughout each year
<TABLE>
<CAPTION>
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YEAR ENDED
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12/31/98 12/31/97 12/31/96 12/31/95 12/31/94
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<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF YEAR $13.139 $12.884 $13.214 $12.018 $13.373
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .766 .775 .778 .786 .755
Net realized and unrealized gain (loss) on investments .168 .256 (.340) 1.232 (1.244)
-------- -------- -------- -------- --------
TOTAL INCOME (LOSS) FROM INVESTMENT OPERATIONS .934 1.031 .438 2.018 (.489)
-------- -------- -------- -------- --------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income (.757) (.776) (.768) (.787) (.779)
Dividends in excess of net investment income -- -- -- -- (.013)
Distributions from realized capital gains -- -- -- -- (.053)
Distributions from paid-in capital -- -- -- (.035) (.021)
-------- -------- -------- -------- --------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS (.757) (.776) (.768) (.822) (.866)
-------- -------- -------- -------- --------
NET ASSET VALUE AT END OF YEAR $13.316 $13.139 $12.884 $13.214 $12.018
======== ======== ======== ======== ========
TOTAL RETURN(1) 7.37% 8.36% 3.51% 17.20% (3.69%)
======== ======== ======== ======== ========
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year (in millions) $159.7 $155.1 $162.9 $185.4 $184.0
Ratio of gross expenses to average net assets(2) .90% .90% .90% .92% --
Ratio of net expenses to average net assets .89% .90% .90% .92% .90%
Ratio of net investment income to average net assets 5.79% 6.04% 6.06% 6.19% 6.03%
Portfolio turnover rate 36% 12% 13% 16% 21%
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</TABLE>
(1) Total return is based upon an initial investment purchased without a sales
charge.
(2) Effective December 31, 1995, this ratio reflects gross expenses before
reduction for earnings credits on cash balances; such reductions are
included in the ratio of net expenses.
See accompanying notes to financial statements.
2
<PAGE> 4
GOVERNMENT INCOME FUND
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December 31, 1998
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
December 31, 1988 to December 31, 1998
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 1998
10 YEARS 5 YEARS 1 YEAR
<S> <C> <C> <C>
Government Income Fund 8.08% 6.33% 7.37%
</TABLE>
[Graph]
<TABLE>
<CAPTION>
GRADISON GOVERNMENT LEHMAN BROTHERS LEHMAN BROTHERS AGGREGATE LEHMAN BROTHERS
INCOME FUND GNMA INDEX BOND INDEX TREASURY INDEX
<S> <C> <C> <C> <C>
12/31/88
12/31/89
12/31/90
12/31/91
12/31/92
12/31/93
12/31/94
12/31/95
12/31/96
12/31/97
12/31/98 $21,736 $24,205 $22,549 $24,066
</TABLE>
Effective July 7, 1997, the sales charge on purchases of Fund shares was
eliminated. This performance data does not reflect the deduction of the sales
charge which would reduce the performance illustrated.
Past performance is not predictive of future performance.
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
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PAR COUPON
AMOUNT MORTGAGE-BACKED SECURITIES - 50.68% RATE MATURITY VALUE
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<S> <C> <C> <C>
$16,443,535 Government National Mortgage Association 6.50% 1/15/13-11/15/28 $16,675,861
561,882 Government National Mortgage Association 6.55 11/15/13 573,468
2,994,231 Government National Mortgage Association 6.63 10/15/26 3,054,115
15,736,661 Government National Mortgage Association 7.00 9/15/16-4/20/26 16,103,678
17,535,379 Government National Mortgage Association 7.50 9/15/10-3/15/24 18,091,995
11,004,235 Government National Mortgage Association 8.00 7/15/02-7/15/26 11,416,975
6,986,212 Government National Mortgage Association 8.50 4/15/21-3/15/28 7,409,716
2,561,451 Government National Mortgage Association 8.75 4/15/22 2,817,596
1,285,425 Government National Mortgage Association 9.00 1/15/20-8/15/21 1,371,780
1,843,424 Government National Mortgage Association 9.50 10/15/02-6/15/21 1,982,216
713,796 Government National Mortgage Association 10.00 5/15/12-3/15/20 779,822
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TOTAL MORTGAGE-BACKED SECURITIES (COST $79,502,460) 80,277,222
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</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 5
GOVERNMENT INCOME FUND
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December 31, 1998
PORTFOLIO OF INVESTMENTS Continued
<TABLE>
<CAPTION>
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PAR COUPON
AMOUNT U.S. TREASURY OBLIGATIONS - 27.75% RATE MATURITY VALUE
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<S> <C> <C> <C>
$ 2,500,000 U.S. Treasury Note 6.38% 1/15/00 $ 2,543,575
10,000,000 U.S. Treasury Bond 7.50 2/15/05 11,448,800
11,000,000 U.S. Treasury Bond 7.63 2/15/07 11,931,150
5,500,000 U.S. Treasury Bond 7.88 11/15/04 6,369,550
10,000,000 U.S. Treasury Bond 8.75 11/15/08 11,668,600
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TOTAL U.S. TREASURY OBLIGATIONS (COST $42,401,797) 43,961,675
-----------
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</TABLE>
<TABLE>
<CAPTION>
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COLLATERALIZED MORTGAGE OBLIGATIONS - 21.24%
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<S> <C> <C> <C>
3,000,000 Government National Mortgage Association 1998-11 VB 6.50 2/20/11 3,091,590
3,000,000 Government National Mortgage Association 1998-18 VN 6.50 2/20/12 3,111,960
3,000,000 Government National Mortgage Association 1998-16 VB 6.75 10/20/07 3,082,860
2,147,000 Government National Mortgage Association 1996-21 J 7.00 7/16/13 2,245,247
3,500,000 Government National Mortgage Association 1996-11 PC 7.00 5/20/23 3,614,205
5,000,000 Government National Mortgage Association 1997-8 PL 7.00 1/16/25 5,184,500
719,000 Government National Mortgage Association 1995-8 B 7.50 8/20/20 728,275
2,000,000 Government National Mortgage Association 1996-20 C 7.50 5/16/23 2,053,320
3,000,000 Government National Mortgage Association 1995-7 CQ 7.50 9/16/25 3,102,780
346,656 Government National Mortgage Association 1994-6 L 7.99 8/16/99 347,686
2,372,635 Government National Mortgage Association 1998-19 DB 8.50 6/20/16 2,446,020
1,544,205 Government National Mortgage Association 1998-13 DB 9.00 4/20/22 1,675,122
2,808,526 Government National Mortgage Association 1998-12 GA 9.00 12/20/23 2,965,382
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TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (COST $33,497,003) 33,648,947
-----------
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</TABLE>
<TABLE>
<CAPTION>
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FACE INTEREST
AMOUNT REPURCHASE AGREEMENT - 0.33% RATE(1)
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<S> <C> <C> <C>
525,000 First Union Capital, dated 12/31/98, collateral: U.S.
Treasury Note 6 3/8% due 9/30/01, market value $541,749
(repurchase proceeds: $525,269) (COST $525,000) 4.95 1/04/99 525,000
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TOTAL INVESTMENTS, at value (Note 1) (Cost $155,926,260) - 100% $158,412,844
===========
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</TABLE>
(1) For the Repurchase Agreement, the rate shown reflects the actual rate of
return to the Fund.
See accompanying notes to financial statements.
4
<PAGE> 6
STATEMENT OF ASSETS AND LIABILITIES
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<TABLE>
<CAPTION>
-------------
12/31/98
-------------
<S> <C>
ASSETS
Investments in securities, at value (Note 1) (Cost $155,926,260) $158,412,844
Interest and principal receivable 1,552,246
Receivable for Fund shares sold 489,555
Cash 4,835
Prepaid expenses and other assets 12,024
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TOTAL ASSETS 160,471,504
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LIABILITIES
Payable for Fund shares redeemed 573,887
Accrued investment advisory fee (Note 2) 68,173
Dividend payable 50,460
Other accrued expenses payable to adviser (Note 2) 40,020
Other accrued expenses and liabilities 27,225
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TOTAL LIABILITIES 759,765
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NET ASSETS $159,711,739
=============
NET ASSETS CONSIST OF:
Aggregate paid-in capital $162,950,183
Accumulated undistributed net investment income 44,320
Accumulated net realized loss (5,769,348)
Net unrealized appreciation of investments 2,486,584
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NET ASSETS $159,711,739
=============
SHARES OF CAPITAL STOCK OUTSTANDING
(no par value - unlimited number of shares authorized) 11,993,852
=============
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE (NOTE 1) $13.32
=============
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</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 7
STATEMENT OF OPERATIONS
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<TABLE>
<CAPTION>
-------------------------------------
YEAR ENDED 12/31/98
-------------------------------------
<S> <C> <C>
INTEREST INCOME $10,647,531
EXPENSES:
Investment advisory fees (Note 2) $ 796,226
Distribution (Note 2) 390,404
Personnel costs (Note 2) 59,992
Data processing fees (Note 2) 39,970
Professional fees 36,668
Custodian fees (Note 1) 28,906
Trustees' fees (Note 2) 25,490
Registration fees 22,887
Printing 12,799
ICI dues 1,932
Insurance 1,494
Other 8,845
----------
GROSS EXPENSES 1,425,613
LESS EARNINGS CREDITS ON CASH BALANCES (NOTE 1) (2,897)
----------
NET EXPENSES 1,422,716
----------
NET INVESTMENT INCOME 9,224,815
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 226,566
Net change in unrealized appreciation of investments 1,815,747
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 2,042,313
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $11,267,128
==========
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</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 8
STATEMENTS OF CHANGES IN NET ASSETS
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<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------
12/31/98 12/31/97
--------------------------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income $9,224,815 $9,332,826
Net realized gain (loss) on investments 226,566 (61,865)
Net change in unrealized appreciation of investments 1,815,747 3,016,012
------------- -------------
Net increase in net assets resulting from operations 11,267,128 12,286,973
------------- -------------
FROM DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME (9,112,745) (9,341,253)
------------- -------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 52,318,737 31,526,924
Net asset value of shares issued in reinvestment of distributions 7,551,819 7,757,697
Payments for shares redeemed (57,384,808) (50,032,576)
------------- -------------
Net increase (decrease) in net assets from Fund share transactions 2,485,748 (10,747,955)
------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 4,640,131 (7,802,235)
NET ASSETS:
Beginning of year 155,071,608 162,873,843
------------- -------------
End of year (including accumulated undistributed net investment income of
$44,320 and distributions in excess of net investment income of
$67,750, respectively) (Note 1) $159,711,739 $155,071,608
============= =============
NUMBER OF FUND SHARES:
Sold 3,957,991 2,432,514
Issued in reinvestment of distributions to shareholders 571,592 600,948
Redeemed (4,337,959) (3,872,131)
------------- -------------
Net increase (decrease) in shares outstanding 191,624 (838,669)
Outstanding at beginning of year 11,802,228 12,640,897
------------- -------------
Outstanding at end of year 11,993,852 11,802,228
============= =============
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</TABLE>
See accompanying notes to financial statements.
7
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS
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December 31, 1998
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
Gradison Custodian Trust (the "Trust") is registered under the Investment
Company Act of 1940 (the Act), 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, 1998.
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 offering and redemption price per share are equal to the net asset value per
share.
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
8
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS continued
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December 31, 1998
over-the-counter options where the Fund's ability to successfully extinguish its
obligation is dependent upon the credit standing of the other party.
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.
SECURITIES TRANSACTIONS
Securities transactions are accounted for on the trade date (the date the order
to buy or sell is executed).
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, 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, 1998, the Fund had not committed to
the purchase of any when-issued or delayed delivery securities.
INVESTMENT INCOME
Interest income is accrued as earned. Gains and losses on sales of investments
are calculated on the identified cost basis for financial reporting and tax
purposes.
TAXES
It is the Fund's policy to comply with the provisions of the Internal Revenue
Code applicable 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 $155,993,851.
For financial reporting purposes, gross unrealized appreciation and gross
unrealized depreciation of securities at December 31, 1998 was $3,116,949 and
$630,365, respectively. For tax purposes, gross unrealized appreciation and
gross unrealized depreciation of securities at December 31, 1998 was $3,049,358
and $630,365, respectively.
As of December 31, 1998, the Fund had a capital loss carryforward for Federal
income tax purposes of approximately $5,948,000 which may be utilized to offset
future net realized capital gains through December 31, 2004 prior to
distributing such gains to shareholders.
EXPENSE OFFSET ARRANGEMENT
The Fund has an arrangement with its custodian bank whereby the custodian's fees
are reduced by credits earned on the Fund's cash on deposit with the bank. This
deposit arrangement is an alternative to overnight investments. The credits are
shown as a reduction of expenses on the Statement of Operations.
9
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS continued
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December 31, 1998
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
Investments 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 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 the Distributor,
BISYS Funds Services Limited Partnership, a distribution service fee. BISYS pays
this fee to financial intermediaries for providing personal services to
shareholders of the Fund, including responding to shareholder inquiries and
providing information to shareholders about their Fund accounts. This fee is
computed and paid at an annual rate of .25% of the Fund's average daily net
assets.
The 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, 1998, purchases and proceeds from the sale of
securities, excluding short-term securities, amounted to $89,659,914 and
$54,953,641, respectively. There were no transactions in written options on U.S.
Treasury Notes and Bonds for the year ended December 31, 1998.
10
<PAGE> 12
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
ARTHUR
ANDERSEN
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,
1998, and the related statement of operations for the year then ended, the
statement 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 on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1998, 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, 1998, the results of its operations for the year then ended, the changes in
its net assets for each of the two years then ended, and the financial
highlights for the five years then ended, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Cincinnati, Ohio,
January 28, 1999
11
