<PAGE> 1
OHIO TAX-FREE
INCOME FUND
GRADISON-MCDONALD
ANNUAL REPORT
JUNE 30, 1995
GRADISON-MCDONALD
This material is intended for distribution to shareholders of the
Gradison-McDonald Ohio Tax-Free Income Fund. It may be distributed to other
persons only if it is preceded or accompanied by a current prospectus of the
Gradison-McDonald Ohio Tax-Free Income Fund. McDonald & Company Securities,
Inc.-Distributor
A MUNICIPAL BOND FUND WITH DOUBLE
TAX-FREE BENEFITS TO OHIO INVESTORS
<PAGE> 2
GRADISON-MCDONALD
OHIO TAX-FREE INCOME FUND
LETTER TO SHAREHOLDERS
August 22, 1995
Dear Shareholder:
Throughout the past year, the bond market experienced increased volatility as
huge swings in interest rates caused the value of fixed income investments to
fall and then rise dramatically. Adding to the confusion were events unique to
the municipal bond market such as the Orange County California bankruptcy and
concern over the potentially adverse effects of tax reform. Despite this
volatility and uncertainty, the municipal market finished the year generally
higher as reflected in the +8.0% 1 yr. total return for the Gradison-McDonald
Ohio Tax-Free Income Fund (not including the effect of the sales charge). This
strong performance can be attributed to our being fully invested as falling
interest rates in the first six months of 1995 completely overwhelmed the
negative impact of rising rates in the second half of 1994.
Going forward, the outlook for municipal bonds remains generally positive with
the understanding that a number of uncertainties could adversely affect that
outlook. The economy "appears" to have settled into a slow growth, low
inflation cycle which is the optimal scenario for bonds. Additional price
support is provided by the fact that the supply of municipal bonds is down
approximately 30% from last year and tax exempt bonds are currently trading at
a significant discount to taxable bonds because of the potential risk of tax
reform. The prospects for State of Ohio municipal bonds are bolstered by the
fact that the state has enjoyed higher than average economic growth.
Consequently, tax revenues and fund balances are at recent highs and tax cuts
are being considered. The uncertainties are the possibility of tax reform
affecting municipal bonds and the ultimate validation of the slow growth low
inflation scenario.
The Fund has pursued a strategy over the past 12 months of shortening the
average maturity of its portfolio in order to reduce price volatility. Because
the interest rates on intermediate maturity bonds nearly equal those of longer
bonds, we have achieved this shortening without lowering the distribution yield
or the quality of our portfolio.
We appreciate the confidence shown by our shareholders and welcome any
comments or suggestions.
Very truly yours,
/s/ Stephen C. Dilbone
- ----------------------
Stephen C. Dilbone
Executive Vice President and Portfolio Manager
1-800-869-5999
<PAGE> 3
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENTS SEPT. 18, 1992
TO JUNE 30, 1995
GRADISON-MCDONALD OHIO TAX-FREE INCOME FUND
Lehman Brothers 20 Year Municipal Index
<TABLE>
Gradison - McDonald Lehman Brothers
Measurement Ohio Tax-Free 20 YEAR
Period Income Fund Municipal Index
<S> <C> <C>
09/18/92 $ 9,800 $10,000
12/31/92 10,082 10,250
03/31/93 10,366 10,705
06/30/93 10,070 11,130
09/30/93 10,607 11,554
12/31/93 10,905 11,723
03/31/94 10,713 10,911
06/30/94 10,776 11,019
09/30/94 10,856 11,077
12/31/94 10,669 10.863
03/31/95 11,545 11,831
06/30/95 11,648 12,085
</TABLE>
<TABLE>
OHIO TAX-FREE FUND
TOTAL RETURN PERIODS ENDED JUNE 30, 1995
<CAPTION>
Average Annual
Initial Investment 1 Year From Inception (9/18/92)
<S> <C> <C>
Purchased at 2% Sales Charge 5.88% 5.63%
Purchased at Net Asset Value 8.00% 6.41%
- -------------------------------------------------------------------------------
9/18/92 3/31/93 9/30/93 3/31/94 9/30/94 3/31/95 6/30/95
</TABLE>
Past performance is not predictive of future performance. The performance
quoted above represents past performance. The investment return and value of
an investment in the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than the original cost. Total return
includes changes in share value and reinvestment of all distributions. From the
inception of the Fund (September 18, 1992) through June 30, 1995 the investment
adviser paid certain Fund expenses which had the effect of increasing the
Fund's return.
FEDERAL INCOME TAX INFORMATION
During the year ended June 30, 1995, the Fund made total distributions of
$0.662 per share all of which was from net investment income. All such
distributions from net investment income were entirely exempt from federal
regular income tax and income taxation in Ohio.
See accompanying notes to financial statements.
2
<PAGE> 4
FINANCIAL HIGHLIGHTS (For a share outstanding throughout each period)
<TABLE>
<CAPTION>
ELEVEN MONTHS
YEAR ENDED FOR THE PERIOD
ENDED JUNE 30, 1994 SEPTEMBER 18, 1992
JUNE 30, 1995 (NOTE 1) TO JULY 31, 1993 (1)
<S> <C> <C> <C>
Net asset value at beginning of period $12.466 $13.316 $12.500
------- ------- -------
Income from investment operations:
Net investment income .661 .593 .599
Net realized and unrealized gain (loss) on investments .308 (.743) .813
------- ------- -------
Total income (loss) from investment operations .969 (.150) 1.412
------- ------- -------
Distributions to shareholders:
Dividends from net investment income (.662) (.594) (.596)
Distributions from realized capital gains -- (.106) --
------- ------- -------
Total distributions to shareholders (.662) (.700) (.596)
------- ------- -------
Net asset value at end of period $12.773 $12.466 $13.316
======= ======= =======
Total return (2) 8.00% (1.27%) 11.56%
======= ======= =======
Ratios/Supplemental data:
Net assets at end of period (millions) $ 70.0 $ 77.6 $69.6
Ratios net of expenses waived by the adviser:
Ratio of expenses to average net assets .97% .90% (3)(4) .75% (3)(4)
Ratio of net investment income to average net assets 5.26% 4.94% (3)(4) 5.25% (3)(4)
Ratios assuming no adviser waiver of expenses:
Ratio of expenses to average net assets .97% .99% (3)(4) 1.14% (3)(4)
Ratio of net investment income to average net assets 5.26% 4.85% (3)(4) 4.86% (3)(4)
Portfolio turnover rate 80.19% 55.84% 45.04%
<FN>
(1) No income was earned or expenses incurred from the date the initial shares
were purchased by the adviser (August 21, 1992) through the date of public
offering (September 18, 1992).
(2) Total returns are based upon an initial investment purchased without the
applicable sales charge, represent the actual returns over those periods, and
have not been annualized.
(3) The adviser absorbed expenses of the Fund through waiver of a portion of the
investment advisory fee (Note 2).
(4) Annualized.
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 5
PORTFOLIO OF INVESTMENTS JUNE 30, 1995
<TABLE>
<CAPTION>
FACE MUNICIPAL BONDS - 95.39% COUPON MATURITY VALUE
AMOUNT RATE
<S> <C> <C> <C> <C>
$1,000,000 Akron, OH Waterworks System Mortgage Revenue 5.90% 3/01/09 $ 1,016,250
Improvement Series 1994
545,000 Athens Co., OH Community Mental Health Series 1993 I 5.90 3/01/09 539,550
270,000 Athens Co., OH Community Mental Health Series 1993 I 5.95 3/01/11 265,613
1,000,000 Aurora, OH City School District General Obligation ("G.O.") 5.80 12/01/16 975,000
335,000 Avon, OH G.O. 6.50 12/01/15 351,750
1,375,000 Bedford, OH City School District 6.25 12/01/13 1,419,687
Unlimited Tax G.O.
1,075,000 Broadview Heights, OH Industrial Development 6.25 7/01/13 1,089,781
500,000 Buckeye Local School District OH 5.62 12/01/11 493,750
Unlimited Tax G.O.
1,250,000 Cincinnati, OH Urban Redevelopment Improvement G.O. 6.30 12/01/15 1,292,188
2,950,000 Cleveland, OH Certificates of Participation 7.10 7/01/02 3,093,812
500,000 Cleveland, OH Limited Tax G.O. 6.37 7/01/12 515,625
2,055,000 Cleveland, OH Parking Facilities Revenue 8.00 9/15/12 2,168,025
750,000 Cleveland, OH Public Power System First Mortgage Revenue 7.00 11/15/16 837,187
1,300,000 Cleveland, OH Urban Renewal Increment Bonds Series 1993 6.75 3/15/18 1,291,875
100,000 Cleveland, OH Urban Renewal Increment Bonds Series 1993 6.62 3/15/11 99,250
1,400,000 Copley-Fairlawn, OH City School District 6.25 12/01/15 1,422,750
Unlimited Tax G.O.
1,500,000 Cuyahoga Co., OH Hospital Facilities Revenue 6.25 8/15/10 1,554,375
(Cleveland Fairview General and Lutheran Medical Center)
500,000 Cuyahoga Co., OH Hospital Revenue 6.90 2/15/07 528,125
(Metro Health System Project)
2,185,000 Cuyahoga Co., OH Industrial Development Revenue 6.50 6/01/16 2,245,088
1,500,000 Cuyahoga Co., OH Utility Systems Revenue* 5.85 8/15/10 1,471,875
(The Medical Center Company Project)
500,000 Delaware Co., OH G.O. 5.60 12/01/10 486,250
1,160,000 Eastern Local School District, Brown Co., OH G.O. 6.25 12/01/17 1,212,200
900,000 Erie Co., OH Hospital Facilities Revenue (Firelands Hospital) 6.75 1/01/15 920,250
1,000,000 Fairfield, OH City School District G.O. 7.45 12/01/14 1,172,500
3,330,000 Franklin Co., OH Convention Facilities Authority 5.80 12/01/13 3,317,512
Tax and Lease Revenue Anticipation Refunding
680,000 Franklin Co., OH Hospital Facilities FHA Insured Revenue 7.00 8/01/16 698,700
(Worthington Christian Village)
1,310,000 Franklin Co., OH Industrial Development Refunding Revenue 5.60 8/01/21 1,197,013
(First Community Village Project)
1,310,000 Franklin Co., OH Industrial Development Revenue 6.00 9/01/13 1,296,900
(Columbus College of Art & Design)
2,500,000 Gateway Economic Development Corporation of 6.50 9/15/14 2,446,875
Greater Cleveland Stadium Revenue
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 6
PORTFOLIO OF INVESTMENTS JUNE 30, 1995
<TABLE>
<CAPTION>
FACE MUNICIPAL BONDS (CONTINUED) COUPON MATURITY VALUE
AMOUNT RATE
<S> <C> <C> <C>
$2,020,000 Greater Cincinnati, OH Mortgage Revenue Refunding 6.90% 8/01/25 $ 2,083,125
(Walnut Towers Project)
500,000 Hamilton Co., OH Hospital Facilities Revenue 6.75 5/15/09 532,500
(Children's Hospital)
750,000 Hamilton Co., OH Hospital Facilities Revenue 7.00 1/01/12 788,438
(Deaconess Hospital)
1,000,000 Indian Valley Local School District, OH G.O. 5.75 12/01/19 970,000
500,000 Lake Co., OH Limited Tax G.O. 6.60 12/01/10 535,625
1,075,000 Lakota Local School District, OH G.O. 6.12 12/01/17 1,084,406
1,405,000 Lucas-Airport Housing Development Corp. 5.62 12/01/09 1,347,044
Mortgage Revenue Refunding
395,000 Lucas Northgate Housing Development Corp., OH 8.12 1/12/05 415,737
500,000 Mount Vernon, OH City School District 7.50 12/01/14 569,375
Unlimited Tax G.O.
1,130,000 Ohio HFA FHA Insured Mortgage Loan (Oakleaf Village) 5.55 9/01/14 1,048,075
985,000 Ohio Capital Corp. Housing Mortgage Revenue Refunding 7.70 1/01/25 1,040,406
(FHA Section 8 Housing)
920,000 Ohio Capital Corp. Housing Mortgage Revenue Refunding 6.50 7/01/24 922,300
(FHA Section 8 Housing)
Ohio State Air Quality Development Authority Revenue:
2,750,000 Cleveland Electric 8.00 12/01/13 3,203,750
1,150,000 Ohio Power Company 7.40 8/01/09 1,257,813
1,600,000 Ohio State Building Authority Revenue 6.12 10/01/09 1,648,000
(Adult Correctional Building)
1,000,000 Ohio State Building Authority Revenue 6.12 10/01/12 1,017,500
(Adult Correctional Building)
500,000 Ohio State Economic Development Authority Revenue 6.00 6/01/04 508,750
(ABS Industries)
815,000 Ohio State Economic Development Revenue 6.50 12/01/09 815,000
(Ohio Enterprise Bond Fund)
65,000 Ohio State Water Development Authority Revenue 9.25 12/01/12 68,169
1,000,000 Ohio State Water Development Authority Revenue 6.40 8/15/27 1,021,250
(Dayton Power & Light)
450,000 Puerto Rico Commonwealth Highway & 6.62 7/01/12 467,438
Transportation Authority
1,500,000 Puerto Rico Commonwealth Highway & 5.50 7/01/15 1,400,625
Transportation Authority
500,000 Ross Co., OH Hospital Facilities Revenue 5.60 12/01/14 480,000
2,000,000 Springdale, OH Hospital Facilities Revenue 5.87 11/01/12 1,820,000
(Southwestern Ohio Seniors' Services Inc.)
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 7
PORTFOLIO OF INVESTMENTS JUNE 30, 1995
<TABLE>
<CAPTION>
FACE MUNICIPAL BONDS (CONTINUED) COUPON MATURITY VALUE
AMOUNT RATE
<S> <C> <C> <C> <C>
$1,000,000 Student Loan Funding Corporation, Cincinnati, OH 6.15% 8/01/10 $ 968,750
Senior Subordinated Revenue Series 1993A
500,000 Summit Co., OH Limited Tax G.O. 6.90 8/01/12 535,625
500,000 Toledo, OH Sewage System Revenue 6.35 11/15/17 518,750
1,055,000 Wapakoneta, OH Limited Tax G.O. 5.45 12/01/13 994,337
725,000 Warren, OH Limited Tax G.O. 6.55 12/01/14 785,719
1,760,000 Westlake, OH Industrial Development Revenue 6.40 8/01/09 1,788,600
1,000,000 Willoughby Hills, OH Limited Tax G.O. 6.37 12/01/12 1,048,750
-----------
Total Municipal Bonds
(Amortized Cost $66,866,764) 67,105,613
-----------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS - 4.61%
3,245,000 Ohio Municipal Cash Trust** (Amortized Cost $3,245,000) 3.77 -- 3,245,000
-----------
TOTAL INVESTMENTS, at value
(Amortized Cost $70,111,764) - 100% $70,350,613
===========
<FN>
* Security purchased on a delayed delivery basis. See Note 1.
** Ohio Municipal Cash Trust is a money market mutual fund the investment
objective of which is to provide current income exempt from federal regular
and Ohio state income taxes consistent with stability of principal.
Interest is accrued daily and paid to the Fund monthly. The coupon rate
disclosed is the daily rate on June 30, 1995.
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 8
STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 1995
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (Note 1) (amortized cost $70,111,764) $70,350,613
Cash 116,719
Interest receivable 1,085,643
Organization expenses, net (Note 1) 25,524
Prepaid expenses and other assets 5,072
-----------
TOTAL ASSETS 71,583,571
-----------
LIABILITIES
Payable for securities purchased 1,480,695
Payable for Fund shares redeemed 63,373
Accrued investment advisory fee (Note 2) 29,179
Other accrued expenses payable to adviser (Note 2) 22,327
Other accrued expenses and liabilities 5,380
-----------
TOTAL LIABILITIES 1,600,954
-----------
NET ASSETS $69,982,617
===========
Net assets consist of:
Aggregate paid-in capital $71,241,819
Accumulated undistributed net investment income 1,229
Accumulated net realized loss (1,499,280)
Net unrealized appreciation of investments 238,849
-----------
Net Assets $69,982,617
===========
Shares of capital stock outstanding
(no par value - unlimited number of shares authorized) 5,478,886
===========
Net asset value and redemption price per share (Note 1) $12.77
===========
Maximum offering price per share (Note 1) $13.03
===========
</TABLE>
See accompanying notes to financial statements.
7
<PAGE> 9
STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1995
<TABLE>
<S> <C> <C>
INTEREST INCOME $4,520,751
EXPENSES:
Investment advisory fee (Note 2) $ 362,864
Distribution (Note 2) 181,432
Transfer agency and accounting services fees (Note 2) 95,692
Professional fees 29,940
Amortization of organization expense (Note 1) 11,515
Trustees' fees (Note 2) 10,568
Insurance 4,367
ICI dues 3,434
Custodian fees 1,664
Registration fees 1,647
Other 2,103
----------
TOTAL EXPENSES 705,226
----------
NET INVESTMENT INCOME 3,815,525
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments (1,353,239)
Net increase in unrealized appreciation of investments 2,903,704
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 1,550,465
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $5,365,990
==========
</TABLE>
See accompanying notes to financial statements.
8
<PAGE> 10
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
ELEVEN MONTHS
YEAR ENDED
ENDED JUNE 30, 1994
JUNE 30, 1995 (NOTE 1)
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 3,815,525 $ 3,542,727
Net realized gain (loss) on investments (1,353,239) 413,640
Net increase (decrease) in unrealized
appreciation/depreciation of investments 2,903,704 (5,300,214)
----------- -----------
Net increase (decrease) in net assets resulting from operations 5,365,990 (1,343,847)
----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income (3,825,971) (3,547,479)
Net realized capital gains -- (624,994)
----------- -----------
Decrease in net assets from distributions to shareholders (3,825,971) (4,172,473)
----------- -----------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 9,722,003 29,858,508
Net asset value of shares issued as distributions 3,154,243 3,478,053
Payments for shares redeemed (22,071,088) (19,800,740)
----------- -----------
Net increase (decrease) in net assets from Fund share transactions (9,194,842) 13,535,821
----------- -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS (7,654,823) 8,019,501
NET ASSETS:
Beginning of period 77,637,440 69,617,939
----------- -----------
End of period (including undistributed net investment
income of $1,229 and $11,675, respectively) (Note 1) $69,982,617 $77,637,440
=========== ===========
NUMBER OF FUND SHARES:
Sold 781,164 2,237,725
Issued as distributions to shareholders 254,251 262,658
Redeemed (1,784,364) (1,500,873)
----------- -----------
Net increase (decrease) in shares outstanding (748,949) 999,510
Outstanding at beginning of period 6,227,835 5,228,325
----------- -----------
Outstanding at end of period 5,478,886 6,227,835
=========== ===========
</TABLE>
See accompanying notes to financial statements.
9
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1995
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Gradison-McDonald Municipal Custodian Trust (the "Trust") is registered under
the Investment Company Act of 1940, as amended, as a management investment
company. The Trust was created under Ohio law by a Declaration of Trust dated
June 11, 1992. The Trust consists of two series, the Gradison-McDonald Ohio
Tax-Free Income Fund and the Gradison-McDonald Intermediate Municipal Income
Fund; each of which is a diversified, open-end series representing a separate
fund with its own investment policies. This Annual Report to Shareholders
pertains only to Gradison-McDonald Ohio Tax-Free Income Fund (the "Fund"), the
public offering of shares of which commenced on September 18, 1992.
The Fund changed its fiscal year end to June 30, effective with the June 30,
1994 Annual Report.
The following is a summary of the Trust's significant accounting policies:
SECURITIES VALUATION - Securities are valued in accordance with procedures
established by the Board of Trustees by using market quotations provided by an
independent pricing service, prices provided by market makers, or estimates of
market values obtained from yield data relating to instruments or securities
with similar characteristics. Short-term securities with remaining maturities
of less than 60 days are valued at amortized cost which approximates market
value.
FUTURES CONTRACTS - At the time the Fund enters into a futures contract, it may
be required to make a margin deposit with its custodian of a specified amount
of cash or eligible securities. During the period that the futures contract is
open, changes in the value of the contract are recognized as unrealized gains
or losses by "marking to market" on a daily basis to reflect the market value
of the contract at the end of each day's trading. Variation margin payments are
made or received on a weekly basis, depending upon whether unrealized gains or
losses are incurred. When the contract is closed, the Fund records a realized
gain or loss equal to the difference between the proceeds from (or cost of) the
closing transaction and the Fund's basis in the contract.
The Fund's investments in futures contracts involve, to varying degrees,
elements of market risks in excess of the amount recognized in the Statement of
Assets and Liabilities. Risks may be caused by an imperfect correlation between
movements in the price of the futures contracts and the price of the securities
being hedged. Risks may also arise if there is an illiquid secondary market for
the contracts.
At June 30, 1995, the Fund had no outstanding futures contracts.
SECURITIES TRANSACTIONS - Securities transactions are accounted for on the
trade date (the date the order to buy or sell is executed). Gains and losses on
sales of securities are calculated on the identified cost basis for financial
reporting and tax purposes.
SECURITIES PURCHASED ON A WHEN-ISSUED OR DELAYED DELIVERY BASIS - When the Fund
purchases securities on a when-issued or delayed delivery basis, the
transaction may be entered into a month or more before delivery and payment are
made. Such securities are marked to market daily and begin earning interest on
the settlement date. 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
high-grade portfolio securities having an aggregate value at least equal to the
amount of such purchase commitments. At June 30, 1995, the Fund had committed
$1,477,770 to the purchase of a delayed delivery security; the market value of
the security segregated as collateral for this purchase is $2,083,125.
INVESTMENT INCOME AND DISTRIBUTIONS TO SHAREHOLDERS - Interest income is
accrued as earned. Interest income includes interest earned, net of premium
and original issue discount, as required by the Internal Revenue Code.
Dividends arising from net investment income are declared daily and paid
monthly. Net realized capital gains, if any, are distributed at least annually.
10
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1995
TAXES - It is the Fund's policy to comply with the provisions of the Internal
Revenue Code available to regulated investment companies. As provided therein,
in any fiscal year in which the Fund so qualifies, and distributes at least 90%
of 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 taxable 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 equal to the amortized 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 investments at June 30, 1995 were
$1,023,507 and $784,658, respectively.
As of June 30, 1995, the Fund had a capital loss carryforward for federal
income tax purposes of $1,499,280 which can be used to offset future capital
gains.
FUND SHARE VALUATION - The net asset value per share is computed by dividing
the net asset value of the Fund (total assets less total liabilities) by the
number of shares outstanding. The maximum offering price per share is equal to
the net asset value per share plus 2.04% of net asset value (or 2% of the
offering price). The offering price is reduced on sales of $250,000 or more.
The redemption price per share is equal to the net asset value per share.
EXPENSES - Common expenses incurred by the Trust are allocated to the Fund
based on the ratio of the net assets of the Fund to the combined net assets of
the Trust. In all other respects, expenses are charged to the Fund as incurred
on a specific identification basis.
ORGANIZATION EXPENSES - Expenses of organization have been capitalized and are
being amortized on a straight-line basis over 60 months commencing upon the
public offering of the Fund's shares.
NOTE 2 - TRANSACTIONS WITH AFFILIATES
The Fund's investments are managed, subject to the general supervision and
control of the Trust's Board of Trustees, by McDonald & Company Securities,
Inc. ("McDonald"), a registered investment adviser and securities dealer,
pursuant to the terms of an Investment Advisory Agreement (the Agreement).
Under the terms of the Agreement, the Fund pays McDonald a fee computed and
accrued daily and paid monthly based upon the Fund's average daily net assets
at the annual rate of .50%.
The Agreement provides that McDonald 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, McDonald bears the costs of preparing,
printing and mailing sales literature and other advertising materials, the cost
of space and equipment rental, and compensates the Trust's trustees who are
affiliated with McDonald. All expenses not specifically assumed by McDonald are
borne by the Fund.
Under the terms of a Transfer Agency, Accounting Services and Administrative
Services Agreement, McDonald provides transfer agent, dividend disbursing,
accounting services and administrative services to the Trust. The Fund pays
McDonald a monthly fee for transfer agency and administrative services at an
annual rate of $26.50 per shareholder non-zero balance account, plus
out-of-pocket costs for statement paper, statement and reply envelopes and
reply postage. The Fund pays McDonald a monthly fee for accounting services
based on the Fund's average daily net assets at an annual rate of .035% on the
first $100 million, .025% on the next $100 million and .015% on any amount in
excess of $200 million, with a minimum annual fee of $48,000.
11
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1995
Under the terms of an Expense Reimbursement Agreement, McDonald has agreed to
forego fees owed to it under the Advisory Agreement or any other agreement with
the Trust and to reimburse the Fund if, and to the extent that, expenses
(excluding brokerage commissions, taxes, interest and extraordinary items)
borne by the Fund in any fiscal year exceed 1.25% of the average net assets of
the Fund. This agreement is subject to termination at any time without notice.
In addition, McDonald may, at its discretion, agree to waive fees and/or
reimburse the Fund for other expenses in order to limit the Fund's expenses to
a specified percentage of average net assets lower than 1.25%. For the year
ended June 30, 1995, no fees were waived or expenses reimbursed.
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 McDonald a service
fee 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.
During the year ended June 30, 1995, McDonald received sales charges
aggregating $89,864 on sales of shares of the Fund.
The officers of the Trust are also officers of McDonald.
Each trustee of the Trust who is not affiliated with McDonald receives fees
from the Trust for services as a trustee. The amounts of such fees for each
trustee are as follows: (a) an annual fee of $3,500 payable in quarterly
installments and (b) $250 for each Board of Trustees or committee meeting
attended.
NOTE 3 - SUMMARY OF INVESTMENT TRANSACTIONS
For the year ended June 30, 1995, purchases and proceeds from the sale of
securities, excluding short-term securities, amounted to $55,436,867 and
$67,019,037, respectively.
NOTE 4 - PORTFOLIO COMPOSITION
The concentration of investments as of June 30, 1995, classified by revenue
source and credit rating, was as follows:
<TABLE>
<S> <C> <C> <C>
General Obligations 22.5% &P/Moody's:
Revenue Bonds: -----------
Health Care 16.3 AAA/Aaa 47.0%
Housing 14.0 AA/Aa 10.4
Utilities 13.4 A/A 18.8
State Agency 3.8 BBB/Baa 9.7
Higher Education 3.2 Unrated (2) 9.5
Other (1) 17.8 oney Market (3) 4.6
Money Market 4.6 -----
Municipal Lease 4.4 otal 100.0%
----- =====
Total 100.0%
=====
<FN>
(1) Individually less than 3%.
(2) Unrated obligations have been determined by the adviser to be of equivalent
quality to the rated securities in which the Fund is permitted to invest.
(3) Money market funds in the Fund's portfolio invest in obligations rated in
one of the two highest short-term rating categories or unrated obligations
of comparable quality.
See the Fund's Portfolio of Investments for additional information on portfolio
composition.
</TABLE>
12
<PAGE> 14
ARTHUR
ANDERSEN
ARTHUR ANDERSEN & CO, SC
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Trustees of the
Gradison-McDonald Ohio Tax-Free Income Fund
of the Gradison-McDonald Municipal Custodian Trust:
We have audited the accompanying statement of assets and liabilities of the
Gradison-McDonald Ohio Tax-Free Income Fund of the Gradison-McDonald Municipal
Custodian Trust (an Ohio business trust), including the portfolio of
investments, as of June 30, 1995, and the related statement of operations for
the year then ended, and the statements of changes in net assets and the
financial highlights for the periods indicated thereon. These financial
statements and financial highlights are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of June
30, 1995, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Gradison-McDonald Ohio Tax-Free Income Fund of the Gradison-McDonald Municipal
Custodian Trust as of June 30, 1995, the results of its operations for the year
then ended, and the changes in its net assets and the financial highlights for
the periods indicated thereon, in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
Cincinnati, Ohio,
August 4, 1995
13
<PAGE> 15
GRADISON-MCDONALD MUTUAL FUNDS
The following funds are serviced by Gradison-McDonald Mutual Funds:
GRADISON-MCDONALD ESTABLISHED VALUE FUND
A common stock fund that seeks long-term capital growth by investing in
companies that are included in the Standard's & Poor's 500 Index and other
large companies.
GRADISON-MCDONALD OPPORTUNITY VALUE FUND
A common stock fund that seeks long-term capital growth by investing in
companies that are generally smaller in size than those included in the
Standard & Poor's 500 Index.
GRADISON-MCDONALD GROWTH & INCOME FUND
A common stock fund that seeks long-term capital growth, current income, and
growth of income.
GRADISON-MCDONALD INTERNATIONAL FUND
A common stock fund that seeks long-term capital growth by investing in common
stocks of non-United States companies.
GRADISON-MCDONALD GOVERNMENT INCOME FUND
An income fund which invests in intermediate to long-term U.S. Government
Securities.
GRADISON-MCDONALD OHIO TAX-FREE INCOME FUND
An income fund which seeks to provide income exempt from Federal income tax and
Ohio State personal income tax.
GRADISON-MCDONALD INTERMEDIATE MUNICIPAL INCOME FUND
An income fund which seeks to provide income exempt from Federal regular income
tax through investment in a municipal bond portfolio with a three to ten year
average maturity.
MONEY MARKET FUNDS
Gradison offers a full range of taxable and tax-free money market funds.
Prospectuses are available upon request and should be read carefully before you
invest or send money. An investment in the money market funds is neither
insured nor guaranteed by the U.S. Government and there can be no assurance
that they will be able to maintain a stable $1.00 share price.
14
<PAGE> 16
This page intentionally left blank.
15
<PAGE> 17
INTERMEDIATE MUNICIPAL
INCOME FUND
GRADISON-MCDONALD
ANNUAL REPORT
JUNE 30, 1995
GRADISON-MCDONALD
This material is intended for distribution to shareholders of the
Gradison-McDonald Intermediate Municipal Income Fund. It may be distributed to
other persons only if it is preceded or accompanied by a current prospectus of
the Gradison-McDonald Intermediate Municipal Income Fund. McDonald & Company
Securities, Inc.-Distributor
AN INTERMEDIATE MUNICIPAL BOND FUND
SEEKING A HIGH LEVEL OF AFTER-TAX INCOME
<PAGE> 18
GRADISON-MCDONALD
INTERMEDIATE MUNICIPAL INCOME FUND
LETTER TO SHAREHOLDERS
August 22, 1995
Dear Shareholder:
Throughout the past year, the bond market experienced increased volatility as
huge swings in interest rates caused the value of fixed income investments to
fall and then rise dramatically. Adding to the confusion were events unique to
the municipal bond market such as the Orange County California bankruptcy and
concern over the potentially adverse effects of tax reform. Despite this
volatility and uncertainty, the municipal market finished the year generally
higher as reflected in the +7.88% 1 yr. total return for the Gradison-McDonald
Intermediate Municipal Income Fund (not including the effect of the sales
charge). This strong performance can be attributed to falling interest rates in
the first six months of 1995 completely overwhelming the negative impact of
rising rates in the second half of 1994.
Going forward, the outlook for municipal bonds remains generally positive with
the understanding that a number of uncertainties could adversely affect that
outlook. The economy "appears" to have settled into a slow growth, low
inflation cycle which is the optimal scenario for bonds. Additional price
support is provided by the fact that the supply of municipal bonds is down
approximately 30% from last year and tax exempt bonds are currently trading at
a significant discount to taxable bonds. The uncertainties are the possibility
of tax reform affecting municipal bonds and the ultimate validation of the slow
growth low inflation scenario.
The Fund has pursued a strategy over the past 12 months of shortening the
average maturity of its portfolio in order to reduce price volatility. The
result has been a slight decrease in the monthly distribution income to reflect
the lower risk and lower yields offered by the shorter maturity bonds. Looking
ahead, we will continue to adjust the average maturity of the Fund in order to
maintain the optimal balance between yield and volatility without sacrificing
quality.
We appreciate the confidence shown by our shareholders and welcome any comments
or suggestions.
Very truly yours,
/s/ Stephen C. Dilbone
Stephen C. Dilbone
Executive Vice President and Portfolio Manager
1-800-869-5999 [Figure 1]
<PAGE> 19
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENTS APRIL 15, 1994
TO JUNE 30, 1995
<TABLE>
<CAPTION>
VALUE
INTERMEDIATE MUNICIPAL INCOME FUND
TOTAL RETURN PERIODS ENDED JUNE 30, 1995
Average Annual
Initial Investment 1 Year From Inception (4/15/94)
<S> <C> <C>
Purchased at 2% Sales Charge 6.06% 4.59%
Purchased at Net Asset Value 7.88% 6.72%
</TABLE>
<TABLE>
<CAPTION>
GRADISON-MCDONALD LEHMAN BROTHERS
INTERMEDIATE MUNICIPAL 7 YEAR
Measurement Period INCOME FUND MUNICIPAL INDEX
<S> <C> <C>
04/15/94 $ 9,800 $10,000
04/30/94 10,020 10,059
05/31/94 10,027 10,108
06/30/94 10,065 10,090
07/31/94 10,202 10,232
08/31/94 10,252 10,284
09/30/94 10,143 10,186
10/31/94 10,075 10,083
11/30/94 9,957 9,936
12/31/94 10,066 10,087
01/31/95 10,256 10,276
02/28/95 10,446 10,507
03/31/95 10,528 10,616
04/30/95 10,580 10,644
05/31/95 10,783 10,927
06/30/95 10,737 10,917
</TABLE>
Past performance is not predictive of future performance. The performance
quoted above represents past performance. The investment return and value of
an investment in the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than the original cost. Total return
includes changes in share value and reinvestment of all distributions.
From the inception of the Fund (April 15, 1994) through June 30, 1995 the
investment adviser paid certain Fund expenses which had the effect of
increasing the Fund's return. Without consideration of such payments by the
adviser, the average annual return of investments purchased at the 2% sales
charge from inception would have been 3.74% and the 1 year return would have
been 2.43%. Without consideration of such payments by the adviser, the average
annual return on initial investments purchased at net asset value from
inception would have been 5.42% and the 1 year return would have been 4.53%.
FEDERAL INCOME TAX INFORMATION
During the year ended June 30, 1995, the Fund made total distributions of
$0.629 per share, all of which was from net investment income. All
distributions were entirely exempt from federal regular income tax.
2
<PAGE> 20
FINANCIAL HIGHLIGHTS (For a share outstanding throughout each period)
<TABLE>
<CAPTION>
YEAR FOR THE PERIOD
ENDED APRIL 15, 1994*
JUNE 30, 1995 TO JUNE 30, 1994
<S> <C> <C>
Net asset value at beginning of period $12.718 $12.500
------- -------
Income from investment operations:
Net investment income .633 .119
Net realized and unrealized gain on investments .196 .217
------- -------
Total income from investment operations .829 .336
------- -------
Distributions to shareholders:
Dividends from net investment income (.629) (.118)
------- -------
Total distributions to shareholders (.629) (.118)
------- -------
Net asset value at end of period $12.918 $12.718
======= =======
Total return (1) 6.72% 2.76%
======= =======
Ratios/Supplemental data:
Net assets at end of period (millions) $ 14.0 $ 7.3
Ratios net of expenses waived by the adviser (2):
Ratio of expenses to average net assets 0.50% 0.13% (3)
Ratio of net investment income to average net assets 4.95% 4.40% (3)
Ratios assuming no adviser waiver of expenses (2):
Ratio of expenses to average net assets 1.68% 2.94% (3)
Ratio of net investment income to average net assets 3.77% 1.58% (3)
Portfolio turnover rate 137.98% 10.38%
<FN>
(1) Total returns are based upon an initial investment purchased without the
applicable sales charge and represent actual returns over those periods and
have not been annualized.
(2) The adviser absorbed expenses of the Fund through waiver of fees and
reimbursement of certain expenses (Note 2).
(3) Annualized.
*Date of public offering.
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 21
STATEMENT OF NET ASSETS JUNE 30, 1995
<TABLE>
<CAPTION>
FACE MUNICIPAL BONDS - 98.50% COUPON MATURITY VALUE
AMOUNT RATE
<S> <C> <C> <C> <C>
$500,000 Baton Rouge, LA Public Improvement Sales Tax Revenue 9.00% 8/01/98 $ 560,625
200,000 Butler Co., PA Industrial Development Authority Revenue 5.87 6/15/98 201,500
(K-Mart Corporation)
500,000 Colorado River Municipal Water District Texas 5.30 1/01/08 485,625
500,000 Columbus, OH General Obligation ("G.O.") 5.05 6/15/05 495,000
500,000 Cook & Du Page Co., IL School District #113A 6.20 12/01/96 502,500
480,000 Cuyahoga Co., OH Industrial Development 5.90 6/01/04 491,400
Refunding Revenue (Southwest Associates Project)
480,000 Eaton Rapids, MI Public Schools 5.45 5/01/08 473,400
500,000 Fairfield, OHCity School District 7.75 12/01/09 548,750
500,000 Franklin Co., OH Industrial Development Revenue Refunding 5.85 6/01/02 510,000
(Hoover Universal Inc. Project)
500,000 Hamilton Co., OH Hospital Facilities Revenue 6.75 5/15/09 532,500
(Children's Hospital)
500,000 Harris Co., TX Housing Finance Corporation Multifamily 5.60 9/01/99 499,375
Housing (Colonial House Apartment Project)
500,000 Hawaii State Airports System Revenue 6.30 7/01/01 530,000
490,000 Huntington, NY G.O. 5.25 6/15/08 477,750
500,000 Indiana Health Facility Financing Authority 7.10 9/01/03 561,875
(Sisters of St. Francis Health Services, Inc.)
500,000 Louisville, KY Housing Assistance Corporation 7.00 1/01/10 525,625
(FHA Insured Mortgage Loan-Carrousel Properties)
500,000 Maine Educational Loan Marketing Corporation 6.05 11/01/04 510,625
Senior Student Loan Revenue
575,000 Metropolitan Council Minnesota Minneapolis/St. Paul G.O. 5.50 6/01/09 569,969
500,000 Michigan State Housing Development Authority 6.00 4/01/01 508,125
Rental Housing Revenue
300,000 Ohio State Economic Development Revenue 6.50 12/01/09 300,000
(Ohio Enterprise Bond Fund)
400,000 Ohio State Public Facilities Commission 7.00 11/01/98 428,000
Higher Education Facilities
450,000 Ohio State Public Facilities Commission 7.00 11/01/02 476,437
Higher Education Facilities
500,000 Port Authur, TX G.O. 5.50 2/15/09 490,000
400,000 Puerto Rico Highway & Transportation Authority 6.37 7/01/08 417,500
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 22
STATEMENT OF NET ASSETS JUNE 30, 1995
<TABLE>
<CAPTION>
FACE MUNICIPAL BONDS (CONTINUED) COUPON MATURITY VALUE
AMOUNT RATE
<S> <C> <C> <C> <C>
$500,000 Shelby Co., TN Health Facilities Revenue 7.37% 6/01/01 $ 543,125
(Methodist Health Systems, Inc.)
400,000 South Dakota Student Loan Finance 5.50 8/01/98 404,500
400,000 Student Loan Funding Corporation, Cincinnati, OH 5.95 8/01/05 399,000
Senior Subordinated Revenue
400,000 Westlake, OH Industrial Development Revenue Refunding 6.00 8/01/04 414,000
(Westbay Manor I and II Projects) FHA
400,000 West Clermont, OHLocal School District 6.00 12/01/00 418,000
500,000 Youngstown, OH City School District Revenue 5.50 6/15/96 506,380
Anticipation Notes
-----------
TOTAL INVESTMENTS, at value (Note 1)
(Amortized Cost = $13,563,988) - 98.50% 13,781,586
Interest Receivable - 1.52% 212,439
Payable for Fund Shares Redeemed - (0.08%) (11,072)
Accrued Expenses Payable to Adviser (Note 2) - (0.13%) (17,795)
Other Assets & Liabilities, Net - 0.19% 25,713
-----------
Net Assets - Applicable to 1,083,058 outstanding shares
(no par value - unlimited number of shares authorized)
(Note 4) - 100% $13,990,871
===========
Net Asset Value and Redemption Price per Share (Note 1) $12.92
======
Maximum Offering Price per Share (Note 1) $13.18
======
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 23
STATEMENT OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1995
<TABLE>
<S> <C>
Interest income $ 685,495
Expenses
Investment advisory fee (Note 2) $ 62,925
Transfer agency and accounting services fees (Note 2) 55,793
Distribution (Note 2) 31,463
Registration fees 27,607
Professional fees 18,161
Trustees' fees (Note 2) 11,467
Amortization of organization expense (Note 1) 2,042
Other 1,549
---------
TOTAL EXPENSES 211,007
LESS FEES WAIVED BY THE ADVISER (NOTE 2) (148,122)
---------
NET EXPENSES 62,885
---------
Net investment income 622,610
Net realized and unrealized gain on investments
Net realized gain on investments 11,539
Net increase in unrealized appreciation of investments 220,153
---------
Net realized and unrealized gain on investments 231,692
---------
Net increase in net assets resulting from operations $854,302
=========
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 24
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE
YEAR PERIOD
ENDED APRIL 15, 1994*
JUNE 30, 1995 TO JUNE 30, 1994
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 622,610 $ 42,688
Net realized gain on investments 11,539 742
Net increase (decrease) in unrealized appreciation/depreciation
of investments 220,153 (2,555)
----------- ----------
Net increase in net assets resulting from operations 854,302 40,875
----------- ----------
FROM DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME (617,514) (42,012)
----------- ----------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 10,710,665 11,430,908
Net asset value of shares issued as distributions 532,240 25,285
Payments for shares redeemed (4,752,618) (4,191,260)
----------- ----------
Net increase in net assets from Fund share transactions 6,490,287 7,264,933
----------- ----------
TOTAL INCREASE IN NET ASSETS 6,727,075 7,263,796
NET ASSETS:
Beginning of period 7,263,796 -
----------- ----------
End of period (including undistributed net investment
income of $5,772 and $676, respectively) (Note 1) $13,990,871 $7,263,796
=========== ==========
NUMBER OF FUND SHARES:
Sold 844,755 896,461
Issued as distributions to shareholders 41,982 1,977
Redeemed (374,835) (327,282)
----------- ----------
Net increase in shares outstanding 511,902 571,156
Outstanding at beginning of period 571,156 -
----------- ----------
Outstanding at end of period 1,083,058 571,156
=========== ==========
<FN>
*Date of public offering.
</TABLE>
See accompanying notes to financial statements.
7
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1995
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Gradison-McDonald Municipal Custodian Trust (the "Trust") is registered under
the Investment Company Act of 1940, as amended, as a management investment
company. The Trust was created under Ohio law by a Declaration of Trust dated
June 11, 1992. The Trust consists of two series, the Gradison-McDonald
Intermediate Municipal Income Fund and the Gradison-McDonald Ohio Tax-Free
Income Fund; each of which is a diversified, open-end series representing a
separate fund with its own investment policies. This Annual Report to
Shareholders pertains only to Gradison-McDonald Intermediate Municipal Income
Fund (the "Fund"), the public offering of shares of which commenced on April
15, 1994.
The following is a summary of the Trust's significant accounting policies:
SECURITIES VALUATION - Securities are valued in accordance with procedures
established by the Board of Trustees by using market quotations provided by an
independent pricing service, prices provided by market makers, or estimates of
market values obtained from yield data relating to instruments or securities
with similar characteristics. Short-term securities with remaining maturities
of less than 60 days are valued at amortized cost which approximates market
value.
SECURITIES TRANSACTIONS - Securities transactions are accounted for on the
trade date (the date the order to buy or sell is executed). Gains and losses on
sales of securities are calculated on the identified cost basis for financial
reporting and tax purposes.
SECURITIES PURCHASED ON A WHEN-ISSUED OR DELAYED DELIVERY BASIS - When the Fund
purchases securities on a when-issued or delayed delivery basis, the
transaction may be entered into a month or more before delivery and payment are
made. Such securities are marked to market daily and begin earning interest on
the settlement date. 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
high-grade portfolio securities having an aggregate value at least equal to the
amount of such purchase commitments. At June 30, 1995, the Fund was not
committed to the purchase of any when-issued or delayed delivery securities.
INVESTMENT INCOME AND DISTRIBUTIONS TO SHAREHOLDERS - Interest income is
accrued as earned. Interest income includes interest earned, net of premium
and original issue discount, as required by the Internal Revenue Code.
Dividends arising from net investment income are declared daily and paid
monthly. Net realized capital gains, if any, are distributed at least annually.
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 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 taxable 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 equal to the amortized cost as shown on the
Statement of Net Assets.
For both financial reporting and tax purposes, gross unrealized appreciation
and gross unrealized depreciation of investments at June 30, 1995 were $242,435
and $24,837, respectively.
8
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1995
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 is reduced on sales of $250,000 or more.
The redemption price per share is equal to the net asset value per share.
EXPENSES - Common expenses incurred by the Trust are allocated to the Fund
based on the ratio of the net assets of the Fund to the combined net assets of
the Trust. In all other respects, expenses are charged to the Fund as incurred
on a specific identification basis.
ORGANIZATION EXPENSES - Expenses of organization have been capitalized and are
being amortized on a straight-line basis over 60 months commencing upon the
public offering of the Fund's shares.
NOTE 2 - TRANSACTIONS WITH AFFILIATES
The Fund's investments are managed, subject to the general supervision and
control of the Trust's Board of Trustees, by McDonald & Company Securities,
Inc. ("McDonald"), a registered investment adviser and securities dealer,
pursuant to the terms of an Investment Advisory Agreement (the Agreement).
Under the terms of the Agreement, the Fund pays McDonald a fee computed and
accrued daily and paid monthly based upon the Fund's average daily net assets
at the annual rate of .50%.
The Agreement provides that McDonald 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, McDonald bears the costs of
preparing, printing and mailing sales literature and other advertising
materials, the cost of space and equipment rental, and compensates the Trust's
trustees who are affiliated with McDonald. All expenses not specifically
assumed by McDonald are borne by the Fund.
Under the terms of a Transfer Agency, Accounting Services and Administrative
Services Agreement, McDonald provides transfer agent, dividend disbursing,
accounting services and administrative services to the Trust. The Fund pays
McDonald a monthly fee for transfer agency and administrative services at an
annual rate of $26.50 per shareholder non-zero balance account, plus
out-of-pocket costs for statement paper, statement and reply envelopes and
reply postage. The Fund pays McDonald a monthly fee for accounting services
based on the Fund's average daily net assets at an annual rate of .035% on the
first $100 million, .025% on the next $100 million and .015% on any amount in
excess of $200 million, with a minimum annual fee of $48,000.
Under the terms of an Expense Reimbursement Agreement, McDonald has agreed to
forego fees owed to it under the Advisory Agreement or any other agreement with
the Trust and to reimburse the Fund if, and to the extent that, expenses
(excluding brokerage commissions, taxes, interest and extraordinary items)
borne by the Fund in any fiscal year exceed 1.25% of the average net assets of
the Fund. This agreement is subject to termination at any time without notice.
In addition, McDonald may, at its discretion, agree to waive fees and/or
reimburse the Fund for other expenses in order to limit the Fund's expenses to
a specified percentage of average net assets lower than 1.25%. For the year
ended June 30, 1995, McDonald waived advisory fees of $62,925, transfer agency
and accounting services fees of $55,793, and distribution expenses of $29,404.
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 McDonald a service
fee 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.
During the year ended June 30, 1995, McDonald received sales charges
aggregating $124,492 on sales of shares of the Fund.
The officers of the Trust are also officers of McDonald.
9
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1995
Each trustee of the Trust who is not affiliated with McDonald receives fees
from the Trust for services as a trustee. The amounts of such fees for each
trustee are as follows: (a) an annual fee of $3,500 payable in quarterly
installments and (b) $250 for each Board of Trustees or committee meeting
attended.
NOTE 3 - SUMMARY OF INVESTMENT TRANSACTIONS
For the period ended June 30, 1995, purchases and proceeds from the sale of
securities, excluding short-term securities, amounted to $22,623,385 and
$16,380,809, respectively.
NOTE 4 - NET ASSETS
At June 30, 1995, net assets of the Fund consisted of:
<TABLE>
<S> <C>
Aggregate paid-in capital $13,755,220
Accumulated undistributed net investment income 5,772
Accumulated undistributed net realized gains 12,281
Net unrealized appreciation of investments 217,598
-----------
Net assets $13,990,871
===========
</TABLE>
NOTE 5 - PORTFOLIO COMPOSITION
The concentration of investments as of June 30, 1995, classified by state,
credit rating and revenue source, was as follows:
<TABLE>
<CAPTION>
Investments by State Investments by Rating Investments by Revenue Source
- -------------------- --------------------- -----------------------------
<S> <C> <C> <C> <C> <C>
Ohio 40.1% S&P/Moody's General Obligations 28.9%
Texas 10.7 AAA/Aaa 55.8% Revenue Bonds:
Michigan 7.1 AA/Aa 7.4 Health Care 15.5
Indiana 4.1 A/A 25.0 Housing 14.1
Louisiana 4.1 BBB/Baa 4.5 Higher Education 9.5
Minnesota 4.1 Unrated (2) 7.3 Industrial Development 7.3
Hawaii 3.9 ---- Transportation 6.9
Tennessee 3.9 Total 100.0% State Agency 6.6
Kentucky 3.8 ===== Water Works 3.5
Illinois 3.7 Other 7.7
Maine 3.7 -----
New York 3.5 Total 100.0%
Other (1) 7.3 =====
-----
Total 100.0%
=====
<FN>
(1) Individually less than 3%.
(2) Unrated obligations have been determined by the adviser to be of equivalent quality to the rated securities in which the Fund
is permitted to invest.
See the Fund's Statement of Net Assets for additional information on portfolio composition.
</TABLE>
See accompanying notes to financial statements.
10
<PAGE> 28
ARTHUR
ANDERSEN
ARTHUR ANDERSEN & CO, SC
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Trustees of the
Gradison-McDonald Intermediate Municipal Income Fund
of the Gradison-McDonald Municipal Custodian Trust:
We have audited the accompanying statement of net assets of the
Gradison-McDonald Intermediate Municipal Income Fund of the Gradison-McDonald
Municipal Custodian Trust (an Ohio business trust), as of June 30, 1995, and
the related statement of operations for the year then ended, and the statements
of changes in net assets and the financial highlights for the periods indicated
thereon. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of June
30, 1995, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Gradison-McDonald Intermediate Municipal Income Fund of the Gradison-McDonald
Municipal Custodian Trust as of June 30, 1995, the results of its operations
for the year then ended, and the changes in its net assets and the financial
highlights for the periods indicated thereon, in conformity with generally
accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Cincinnati, Ohio,
August 4, 1995
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