<PAGE> 1
GRADISON-MCDONALD
OHIO TAX-FREE INCOME FUND
LETTER TO SHAREHOLDERS February 14, 1996
Dear Shareholder:
The year ended December 31, 1995 was a very good year for the municipal bond
market generally and the Gradison-McDonald Ohio Tax Free Income Fund in
particular. A weak U.S. economy and low inflation rate combined to drive
interest rates on long-term bonds significantly lower and prices substantially
higher. Consequently, the Fund earned a total return for the 12 months ended
December 31, 1995 of 16.84% (not including the effect of the sales charge).
While this is a very strong performance, municipal bonds could have done even
better had it not been for the looming threat of tax reform, which we feel has
little chance of passing in its current form.
Looking ahead to 1996, we believe bonds have the potential to move higher in a
continuation of the favorable economic environment of last year. With retail
sales depressed, industrial production down, consumer confidence low, and
layoffs unabated, we see little threat of rising interest rates this year. On
the contrary, the Federal Reserve has embarked on a program to stimulate the
economy by lowering short-term rates, which could lead to lower rates across the
entire maturity spectrum. Of course, the downside is that at some point in the
future, the stimulus takes hold, the economy picks up and inflation fears are
rekindled. We don't see that as an imminent problem.
As noted above, municipal bond price appreciation has been restrained by the
current tax reform discussion, specifically the "flat tax" proposal. Although
interesting on the surface, many aspects of a flat tax, such as the loss of the
mortgage interest and charitable contribution deductions, the increased
borrowing costs of cities and states, the increased tax burden on the middle
class, and the negative impact on the budget deficit may make these proposals
difficult to enact into law. If the flat tax idea fades or is modified, as we
believe it may, municipal bonds could rise as money flows back into the tax free
market.
For all of these reasons, we are optimistic about the prospects for bonds and
the Gradison-McDonald Ohio Tax Free Income Fund in 1996.
Very truly yours,
/s/ Stephen C. Dilbone
Stephen C. Dilbone
Executive Vice President and Portfolio Manager
[TELEPHONE GRAPHIC]
1-800-869-5999
<PAGE> 2
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) (UNAUDITED)
<TABLE>
<CAPTION>
ELEVEN MONTHS
SIX MONTHS YEAR ENDED FOR THE PERIOD
ENDED ENDED JUNE 30, 1994 SEPT. 18, 1992 TO
DEC. 31, 1995 JUNE 30, 1995 (NOTE 1) JULY 31, 1993 (1)
------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C>
Net asset value at beginning of period $12.773 $12.466 $13.316 $12.500
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .326 .661 .593 .599
Net realized and unrealized
gain (loss) on investments .558 .308 (.743) .813
------- ------- ------- -------
Total income (loss) from investment
operations .884 .969 (.150) 1.412
------- ------- ------- -------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income (.324) (.662) (.594) (.596)
Distributions from realized capital gains - - (.106) -
------- ------- ------- -------
Total distributions to shareholders (.324) (.662) (.700) (.596)
------- ------- ------- -------
Net asset value at end of period $13.333 $12.773 $12.466 $13.316
======= ======= ======= =======
Total return (2) 7.02% 8.00% (1.27%) 11.56%
======= ======= ======= =======
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (millions) $ 73.0 $ 70.0 $ 77.6 $ 69.6
RATIOS NET OF EXPENSES WAIVED BY THE ADVISER:
Ratio of expenses to average net assets .97%(4) .97% .90%(3)(4) .75%(3)(4)
Ratio of net investment income to
average net assets 5.00%(4) 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%(4) .97% .99%(3)(4) 1.14%(3)(4)
Ratio of net investment income to
average net assets 5.00%(4) 5.26% 4.85%(3)(4) 4.86%(3)(4)
Portfolio turnover rate 46.33% 80.19% 55.84% 45.04%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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.
See accompanying notes to financial statements.
2
<PAGE> 3
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
FACE MUNICIPAL BONDS - 97.77% COUPON MATURITY VALUE
AMOUNT RATE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1,000,000 Akron, OH Waterworks System Mortgage Revenue 5.90% 3/01/09 $1,051,250
Improvement Series 1994
1,000,000 Anthony Wayne Local School District OH G.O. 5.75 12/01/18 1,021,250
545,000 Athens Co., OH Community Mental Health Series 1993 I 5.90 3/01/09 564,756
335,000 Avon, OH G.O. 6.50 12/01/15 376,037
1,375,000 Bedford, OH City School District 6.25 12/01/13 1,476,406
Unlimited Tax G.O.
1,075,000 Broadview Heights, OH Industrial Development 6.25 7/01/13 1,126,063
1,250,000 Cincinnati, OH Urban Redevelopment Improvement G.O. 6.30 12/01/15 1,348,437
2,950,000 Cleveland, OH Certificates of Participation 7.10 7/01/02 3,182,313
2,055,000 Cleveland, OH Parking Facilities Revenue 8.00 9/15/12 2,203,988
750,000 Cleveland, OH Public Power System First Mortgage Revenue 7.00 11/15/16 868,125
1,300,000 Cleveland, OH Urban Renewal Increment Bonds Series 1993 6.75 3/15/18 1,321,125
100,000 Cleveland, OH Urban Renewal Increment Bonds Series 1993 6.62 3/15/11 101,375
500,000 Cuyahoga Co., OH Health Care 5.30 12/01/25 517,500
(Benjamin Rose Institute)
1,500,000 Cuyahoga Co., OH Hospital Facilities Revenue 6.25 8/15/10 1,601,250
(Cleveland Fairview General and Lutheran Medical Center)
2,185,000 Cuyahoga Co., OH Industrial Development Revenue 6.50 6/01/16 2,354,337
1,500,000 Cuyahoga Co., OH Utility Systems Revenue 5.85 8/15/10 1,539,375
(The Medical Center Company Project)
1,160,000 Eastern Local School District, Brown Co., OH G.O. 6.25 12/01/17 1,300,650
900,000 Erie Co., OH Hospital Facilities Revenue 6.75 1/01/15 955,125
(Firelands Hospital)
1,000,000 Fairfield, OH City School District G.O. 7.45 12/01/14 1,253,750
1,200,000 Franklin Co., OH Riverside Hospital 5.75 5/15/12 1,230,000
670,000 Franklin Co., OH Hospital Facilities FHA Insured Revenue 7.00 8/01/16 706,850
(Worthington Christian Village)
1,000,000 Franklin Co., OH Doctors' Hospital 5.80 12/01/05 1,031,250
1,310,000 Franklin Co., OH Industrial Development Refunding Revenue 5.60 8/01/21 1,314,913
(First Community Village Project)
1,310,000 Franklin Co., OH Industrial Development Revenue 6.00 9/01/13 1,347,663
(Columbus College of Art & Design)
2,500,000 Gateway Economic Development Corporation of 6.50 9/15/14 2,487,500
Greater Cleveland Stadium Revenue
2,020,000 Greater Cincinnati, OH Mortgage Revenue Refunding 6.90 8/01/25 2,161,400
(Walnut Towers Project)
500,000 Hamilton Co., OH Hospital Facilities Revenue 6.75 5/15/09 528,750
(Children's Hospital)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
FACE MUNICIPAL BONDS (CONTINUED) COUPON MATURITY VALUE
AMOUNT RATE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 750,000 Hamilton Co., OH Hospital Facilities Revenue 7.00% 1/01/12 $ 814,687
(Deaconess Hospital)
500,000 Lake Co., OH Limited Tax G.O. 6.60 12/01/10 552,500
750,000 Lorain, OH Water System 5.20 4/01/16 740,625
1,405,000 Lucas-Airport Housing Development Corp. 5.62 12/01/09 1,412,025
Mortgage Revenue Refunding
390,000 Lucas Northgate Housing Development Corp., OH 8.12 1/12/05 413,888
1,500,000 Mahoning Co., OH Hospital 5.37 10/15/15 1,490,625
(Western Reserve Care System)
865,000 Marysville, OH Exempted Village School District G.O. 0.00 12/01/13 324,375
1,000,000 Middleburg Hts., OH Hospital Improvement Revenue 5.62 8/15/15 1,012,500
(Southwest General Health Center)
500,000 Mount Vernon, OH City School District 7.50 12/01/14 595,000
Unlimited Tax G.O.
1,835,000 Muskingham Co., OH Hospital Facilities Franciscan Sisters 5.25 2/15/07 1,816,650
1,000,000 Muskingham Co., OH Hospital Facilities Franciscan Sisters 5.37 2/15/12 981,250
980,000 Ohio Capital Corp. Housing Mortgage Revenue Refunding 7.70 1/01/25 1,043,700
(FHA Section 8 Housing)
920,000 Ohio Capital Corp. Housing Mortgage Revenue Refunding 6.50 7/01/24 956,800
(FHA Section 8 Housing)
1,000,000 Ohio Capital Corp. Housing Mortgage Revenue Refunding 6.35 7/01/15 1,042,500
Ohio State Air Quality Development Authority Revenue:
2,750,000 Cleveland Electric 8.00 12/01/13 3,341,250
1,150,000 Ohio Power Company 7.40 8/01/09 1,275,063
1,600,000 Ohio State Building Authority Revenue 6.12 10/01/09 1,736,000
(Adult Correctional Building)
1,000,000 Ohio State Building Authority Revenue 6.12 10/01/12 1,070,000
(Adult Correctional Building)
500,000 Ohio State Economic Development Authority Revenue 6.00 6/01/04 523,750
(ABS Industries)
815,000 Ohio State Economic Development Revenue 6.50 12/01/09 871,031
(Ohio Enterprise Bond Fund)
25,000 Ohio State Water Development Authority Revenue 9.25 12/01/12 26,299
1,000,000 Ohio State Water Development Authority Revenue 5.90 2/01/15 1,047,500
1,000,000 Ohio State Water Development Authority Revenue 6.40 8/15/27 1,068,750
(Dayton Power & Light)
1,000,000 Ohio State Water Development Authority Revenue 6.30 9/01/20 1,060,000
500,000 Ottoville Local School District, OH G.O. 5.90 12/01/21 515,625
1,000,000 Puerto Rico Electric Power 6.00 7/01/15 1,030,000
--------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
FACE MUNICIPAL BONDS (CONTINUED) COUPON MATURITY VALUE
AMOUNT RATE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$2,000,000 Springdale, OH Hospital Facilities Revenue 5.87% 11/01/12 $ 1,940,000
(Southwestern Ohio Seniors' Services Inc.)
1,675,000 Stark Co., OH G.O. 5.70 11/15/17 1,710,594
1,000,000 Student Loan Funding Corporation, Cincinnati, OH 6.15 8/01/10 1,017,500
Senior Subordinated Revenue Series 1993A
500,000 Summit Co., OH Limited Tax G.O. 6.90 8/01/12 552,500
500,000 Toledo, OH Sewage System Revenue 6.35 11/15/17 543,125
725,000 Warren, OH Limited Tax G.O. 6.55 12/01/14 839,187
1,760,000 Westlake, OH Industrial Development Revenue 6.40 8/01/09 1,865,600
-----------
TOTAL MUNICIPAL BONDS
(AMORTIZED COST $67,292,459) 70,202,337
-----------
----------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS - 2.23%
----------------------------------------------------------------------------------------------------------------
1,600,000 Dreyfus Ohio Municipal Money Market Fund*
(AMORTIZED COST $1,600,000) 3.18 - 1,600,000
-----------
TOTAL INVESTMENTS, at value
(AMORTIZED COST $68,892,459) - 100% $71,802,337
===========
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* Dreyfus Ohio Municipal Money Market Fund 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 December 31, 1995.
See accompanying notes to financial statements.
5
<PAGE> 6
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C>
ASSETS
Investments in securities, at value (Note 1) (amortized cost $68,892,459) $71,802,337
Cash 174,509
Receivable for Fund shares sold 23,296
Interest receivable 1,132,355
Organization expenses, net (Note 1) 19,767
Prepaid expenses and other assets 14,317
-----------
TOTAL ASSETS 73,166,581
-----------
LIABILITIES
Payable for Fund shares redeemed 62,361
Accrued investment advisory fee (Note 2) 30,692
Other accrued expenses payable to adviser (Note 2) 22,913
Other accrued expenses and liabilities 6,680
-----------
TOTAL LIABILITIES 122,646
-----------
NET ASSETS $73,043,935
===========
Net assets consist of:
Aggregate paid-in capital $71,244,527
Accumulated undistributed net investment income 12,879
Accumulated net realized loss (1,123,349)
Net unrealized appreciation of investments 2,909,878
-----------
Net Assets $73,043,935
===========
Shares of capital stock outstanding
(no par value - unlimited number of shares authorized) 5,478,261
===========
Net asset value and redemption price per share (Note 1) $13.33
======
Maximum offering price per share (Note 1) $13.60
======
- --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 7
STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
DECEMBER 31, 1995
------------------------
<S> <C> <C>
INTEREST INCOME $2,126,973
EXPENSES:
Investment advisory fee (Note 2) $ 178,062
Distribution (Note 2) 89,031
Transfer agency and accounting services fees (Note 2) 45,865
Professional fees 13,950
Amortization of organization expense (Note 1) 5,757
Printing 4,643
Trustees' fees (Note 2) 4,614
ICI dues 1,952
Insurance 1,084
Registration fees 755
Other 974
----------
TOTAL EXPENSES 346,687
----------
NET INVESTMENT INCOME 1,780,286
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 375,931
Net increase in unrealized appreciation of investments 2,671,029
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 3,046,960
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $4,827,246
==========
- -----------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
7
<PAGE> 8
STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
DECEMBER 31, 1995 JUNE 30, 1995
-------------------------------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 1,780,286 $ 3,815,525
Net realized gain (loss) on investments 375,931 (1,353,239)
Net increase in unrealized
appreciation of investments 2,671,029 2,903,704
----------- ------------
Net increase in net assets resulting from operations 4,827,246 5,365,990
----------- ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME: (1,768,636) (3,825,971)
----------- ------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 7,451,615 9,722,003
Net asset value of shares issued as distributions 1,422,793 3,154,243
Payments for shares redeemed (8,871,700) (22,071,088)
----------- ------------
Net increase (decrease) in net assets from Fund share transactions 2,708 (9,194,842)
----------- ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 3,061,318 (7,654,823)
NET ASSETS:
Beginning of period 69,982,617 77,637,440
----------- ------------
End of period (including undistributed net investment
income of $12,879 and $1,229, respectively) (Note 1) $73,043,935 $ 69,982,617
=========== ============
NUMBER OF FUND SHARES:
Sold 573,588 781,164
Issued as distributions to shareholders 109,532 254,251
Redeemed (683,745) (1,784,364)
----------- ------------
Net decrease in shares outstanding (625) (748,949)
Outstanding at beginning of period 5,478,886 6,227,835
----------- ------------
Outstanding at end of period 5,478,261 5,478,886
=========== ============
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
8
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 (UNAUDITED)
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 Semiannual Report to Shareholders
pertains only to the 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 December 31, 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 December 31, 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.
9
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 (UNAUDITED)
TAXES - It is the Fund's policy to comply with the provisions of the Internal
Revenue Code available to regulated investment companies. As provided therein,
in any fiscal year in which the Fund so qualifies, and distributes at least 90%
of 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 December 31, 1995 were
$2,967,264 and $57,386, 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.
10
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 (UNAUDITED)
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 period ended December
31, 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 period ended December 31, 1995, McDonald received sales charges
aggregating $64,535 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 period ended December 31, 1995, purchases and proceeds from the sale of
securities, excluding short-term securities, amounted to $31,759,646 and
$31,694,933, respectively.
NOTE 4 - PORTFOLIO COMPOSITION
The concentration of investments as of December 31, 1995, classified by revenue
source and credit rating, was as follows:
INVESTMENTS BY REVENUE SOURCE
------------------------------------
<TABLE>
<S> <C>
General Obligations 16.5%
Revenue Bonds:
Health Care 27.8
Utilities 14.6
Housing 14.3
Public Facilities 8.5
State Agency 5.4
Industrial Development 3.4
Other 2.9
Municipal Lease 4.4
Money Market 2.2
-----
Total 100.0%
=====
-------------------------------------
</TABLE>
INVESTMENTS BY RATING
-------------------------------------
<TABLE>
<S> <C>
S&P/Moody's:
AAA/Aaa 53.1%
AA/Aa 11.9
A/A 25.7
BBB/Baa 7.1
Money Market (1) 2.2
-----
Total 100.0%
=====
-------------------------------------
</TABLE>
(1) 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.
11
<PAGE> 12
OHIO TAX-FREE
INCOME FUND
GRADISON-MCDONALD
SEMIANNUAL REPORT
DECEMBER 31, 1995
A MUNICIPAL BOND FUND WITH DOUBLE
TAX-FREE BENEFITS TO OHIO INVESTORS
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
<PAGE> 13
GRADISON-MCDONALD
INTERMEDIATE MUNICIPAL INCOME FUND
LETTER TO SHAREHOLDERS February 14, 1996
Dear Shareholder:
The year ended December 31, 1995 was a very good year for the municipal bond
market generally and the Gradison-McDonald Intermediate Municipal Income Fund in
particular. A weak U.S. economy and low inflation rate combined to drive
interest rates on long-term bonds significantly lower and prices substantially
higher. Consequently, the Fund earned a total return for the 12 months ended
December 31, 1995 of 12.23% (not including the effect of the sales charge).
While this is a very strong performance, municipal bonds could have done even
better had it not been for the looming threat of tax reform, which we feel has
little chance of passing in its current form.
Looking ahead to 1996, we believe bonds have the potential to move higher in a
continuation of the favorable economic environment of last year. With retail
sales depressed, industrial production down, consumer confidence low, and
layoffs unabated, we see little threat of rising interest rates this year. On
the contrary, the Federal Reserve has embarked on a program to stimulate the
economy by lowering short-term rates, which could lead to lower rates across the
entire maturity spectrum. Of course, the downside is that at some point in the
future, the stimulus takes hold, the economy picks up and inflation fears are
rekindled. We don't see that as an imminent problem.
As noted above, municipal bond price appreciation has been restrained by the
current tax reform discussion, specifically the "flat tax" proposal. Although
interesting on the surface, many aspects of a flat tax, such as the loss of the
mortgage interest and charitable contribution deductions, the increased
borrowing costs of cities and states, the increased tax burden on the middle
class, and the negative impact on the budget deficit may make these proposals
difficult to enact into law. If the flat tax idea fades or is modified, as we
believe it may, municipal bonds could rise as money flows back into the tax free
market.
For all of these reasons, we are optimistic about the prospects for bonds and
the Gradison-McDonald Intermediate Municipal Income Fund in 1996.
Very truly yours,
/s/ Stephen C. Dilbone
Stephen C. Dilbone
Executive Vice President and Portfolio Manager
[TELEPHONE GRAPHIC]
1-800-869-5999
<PAGE> 14
FINANCIAL HIGHLIGHTS(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS YEAR FOR THE PERIOD
ENDED ENDED APRIL 15, 1994*
DECEMBER 31, 1995 JUNE 30, 1995 TO JUNE 30, 1994
---------------------------------------------------------
<S> <C> <C> <C>
Net asset value at beginning of period $12.918 $12.718 $12.500
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .295 .633 .119
Net realized and unrealized gain on investments .366 .196 .217
------- ------- -------
Total income from investment operations .661 .829 .336
------- ------- -------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income (.300) (.629) (.118)
Distributions from realized capital gains (.100) - -
------- ------- -------
Total distributions to shareholders (.400) (.629) (.118)
------- ------- -------
Net asset value at end of period $13.179 $12.918 $12.718
======= ======= =======
Total return (1) 5.16% 6.72% 2.76%
======= ======= =======
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (millions) $ 13.7 $ 14.0 $ 7.3
RATIOS NET OF EXPENSES WAIVED BY THE ADVISER (2):
Ratio of expenses to average net assets .99% (3) 0.50% 0.13% (3)
Ratio of net investment income to average net assets 4.48% (3) 4.95% 4.40% (3)
RATIOS ASSUMING NO ADVISER WAIVER OF EXPENSES (2):
Ratio of expenses to average net assets 1.58% (3) 1.68% 2.94% (3)
Ratio of net investment income to average net assets 3.89% (3) 3.77% 1.58% (3)
Portfolio turnover rate 57.72% 137.98% 10.38%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(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.
See accompanying notes to financial statements.
2
<PAGE> 15
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
FACE MUNICIPAL BONDS - 100% COUPON MATURITY VALUE
AMOUNT RATE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$325,000 Auburn Hills, MI Building Authority 5.50% 11/01/02 $340,031
500,000 Baton Rouge, LA Public Improvement Sales Tax Revenue 9.00 8/01/98 558,125
500,000 Corpus Christi, TX, G.O. 6.65 3/01/07 546,875
460,000 Cuyahoga Co., OH Industrial Development 5.90 6/01/04 490,475
Refunding Revenue (Southwest Associates Project)
500,000 Daytona Beach, FL Water & Sewer 6.75 11/15/07 582,500
500,000 Fairfield, OH City School District 7.75 12/01/09 553,125
500,000 Franklin Co., OH Industrial Development Revenue Refunding 5.85 6/01/02 531,875
(Hoover Universal Inc. Project)
500,000 Gateway Economic Development Corporation 6.87 9/01/05 555,000
of Greater Cleveland
500,000 Hamilton Co., OH Hospital Facilities Revenue 6.75 5/15/09 528,750
(Children's Hospital)
490,000 Harris Co., TX Housing Finance Corporation Multifamily 5.60 9/01/19 507,763
Housing (Colonial House Apartment Project)
500,000 Hawaii State Airports System Revenue 6.30 7/01/01 542,500
500,000 Islip, NY Resource Recovery Agency 6.05 7/01/04 546,250
500,000 Louisville, KY Housing Assistance Corporation 7.00 1/01/10 536,250
(FHA Insured Mortgage Loan-Carrousel Properties)
740,000 Mahoning Co., OH Hospital Western Reserve 5.15 10/15/06 758,500
500,000 Maine Educational Loan Marketing Corporation 6.05 11/01/04 530,625
Senior Student Loan Revenue
400,000 McAlister, OK Public Works Authority 8.25 12/01/00 465,000
500,000 Michigan State Housing Development Authority 6.00 4/01/01 533,750
Rental Housing Revenue
300,000 Ohio State Economic Development Revenue 6.50 12/01/09 320,625
(Ohio Enterprise Bond Fund)
750,000 Ohio State Economic Development Revenue 5.60 12/01/03 765,000
(Smith Steelite Co.)
400,000 Puerto Rico Highway & Transportation Authority 6.37 7/01/08 432,000
-----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 16
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1995 (UNAUDITED)
<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 $ 542,500
(Methodist Health Systems, Inc.)
400,000 South Dakota Student Loan Finance 5.50 8/01/98 409,500
400,000 Student Loan Funding Corporation, Cincinnati, OH 5.95 8/01/05 412,000
Senior Subordinated Revenue
400,000 Westlake, OH Industrial Development Revenue Refunding 6.00 8/01/04 426,000
(Westbay Manor I and II Projects) FHA
400,000 West Clermont, OH Local School District 6.00 12/01/00 435,500
500,000 Youngstown, OH City School District Revenue 5.50 6/15/96 503,675
Anticipation Notes
-----------
TOTAL MUNICIPAL BONDS, AT VALUE
(AMORTIZED COST = $12,853,965) - 100% $13,354,194
===========
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 17
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
<S> <C>
ASSETS
Investments in securities, at value (Note 1) (amortized cost $12,853,965) $13,354,194
Cash 213,806
Interest receivable 201,120
Organization expenses, net (Note 1) 6,733
Prepaid expenses and other assets 56,522
-----------
TOTAL ASSETS 13,832,375
-----------
LIABILITIES
Payable for Fund shares redeemed 25,399
Accrued investment advisory fee (Note 2) 28,844
Other accrued expenses payable to adviser (Note 2) 44,872
Other accrued expenses and liabilities 19,432
-----------
TOTAL LIABILITIES 118,547
-----------
NET ASSETS $13,713,828
===========
Net assets consist of:
Aggregate paid-in capital $13,200,984
Accumulated undistributed net investment income 34
Accumulated net realized gain 12,581
Net unrealized appreciation of investments 500,229
-----------
Net Assets $13,713,828
===========
Shares of capital stock outstanding
(no par value - unlimited number of shares authorized) 1,040,594
===========
Net asset value and redemption price per share (Note 1) $13.18
======
Maximum offering price per share (Note 1) $13.45
======
- -----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 18
STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
DECEMBER 31, 1995
------------------------
<S> <C> <C>
INTEREST INCOME $375,809
EXPENSES
Investment advisory fee (Note 2) $ 34,345
Transfer agency and accounting services fees (Note 2) 27,699
Distribution (Note 2) 17,173
Professional fees 12,833
Registration fees 8,428
Trustees' fees (Note 2) 4,599
Amortization of organization expense (Note 1) 1,021
Other 2,351
---------
TOTAL EXPENSES 108,449
LESS FEES WAIVED BY THE ADVISER (NOTE 2) (40,131)
---------
NET EXPENSES 68,318
--------
NET INVESTMENT INCOME 307,491
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 103,382
Net increase in unrealized appreciation of investments 282,631
---------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 386,013
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $693,504
========
- -----------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 19
STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
DECEMBER 31, 1995 JUNE 30, 1995
-------------------------------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 307,491 $ 622,610
Net realized gain on investments 103,382 11,539
Net increase in unrealized appreciation
of investments 282,631 220,153
----------- -----------
Net increase in net assets resulting from operations 693,504 854,302
----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income (313,229) (617,514)
Net realized capital gains (103,082) -
----------- -----------
Decrease in net assets from distributions to shareholders (416,311) (617,514)
----------- -----------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 1,283,113 10,710,665
Net asset value of shares issued as distributions 351,773 532,240
Payments for shares redeemed (2,189,122) (4,752,618)
----------- -----------
Net increase (decrease) in net assets from Fund share transactions (554,236) 6,490,287
----------- -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS (277,043) 6,727,075
NET ASSETS:
Beginning of period 13,990,871 7,263,796
----------- -----------
End of period (including undistributed net investment
income of $34 and $5,772, respectively) (Note 1) $13,713,828 $13,990,871
=========== ===========
NUMBER OF FUND SHARES:
Sold 97,839 844,755
Issued as distributions to shareholders 26,849 41,982
Redeemed (167,152) (374,835)
----------- -----------
Net increase (decrease) in shares outstanding (42,464) 511,902
Outstanding at beginning of period 1,083,058 571,156
----------- -----------
Outstanding at end of period 1,040,594 1,083,058
=========== ===========
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
7
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 (UNAUDITED)
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 Semiannual Report to
Shareholders pertains only to the 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 December 31, 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 Assets and Liabilities.
For both financial reporting and tax purposes, gross unrealized appreciation and
gross unrealized depreciation of investments at December 31, 1995 were $500,229
and none, respectively.
8
<PAGE> 21
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 (UNAUDITED)
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 period ended December
31, 1995, McDonald waived advisory fees of $34,345 and transfer agency and
accounting services fees of $5,786.
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 period ended December 31, 1995, McDonald received sales charges
aggregating $16,335 on sales of shares of the Fund.
The officers of the Trust are also officers of McDonald.
9
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 (UNAUDITED)
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 December 31, 1995, purchases and proceeds from the sale of
securities, excluding short-term securities, amounted to $7,821,514 and
$8,612,839, respectively.
NOTE 4 - PORTFOLIO COMPOSITION
The concentration of investments as of December 31, 1995, classified by state,
credit rating and revenue source, was as follows:
INVESTMENTS BY STATE
--------------------------------
<TABLE>
<S> <C>
Ohio 54.6%
Michigan 6.5
Florida 4.4
Hawaii 4.1
Louisiana 4.1
New Mexico 4.1
Tennessee 4.1
Kentucky 4.0
Maine 4.0
Texas 3.8
S. Dakota 3.1
Other 3.2
-----
Total 100.0%
=====
--------------------------------
</TABLE>
INVESTMENTS BY RATING
--------------------------------
<TABLE>
<S> <C>
S&P/Moody's
AAA/Aaa 57.1%
AA/Aa 14.7
A/A 28.2
-----
Total 100.0%
=====
--------------------------------
</TABLE>
INVESTMENTS BY REVENUE SOURCE
--------------------------------
<TABLE>
<S> <C>
General Obligations 14.1%
Revenue Bonds:
Health Care 17.4
Housing 15.0
Industrial Development 12.1
Higher Education 10.1
Transportation 8.4
Public Facilities 7.6
Other (1) 15.3
-----
Total 100.0%
=====
--------------------------------
</TABLE>
(1) Individually less than 5%.
See the Fund's Portfolio of Investments for additional information on portfolio
composition.
10
<PAGE> 23
GRADISON-MCDONALD FAMILY OF FUNDS
Increasingly, MUTUAL FUNDS are the preferred vehicle for starting and building
an investment program. And today, GRADISON-MCDONALD is a preferred name in
mutual funds for a GROWING number of investors.
GOVERNMENT INCOME FUND
An income fund which invests in intermediate to long-term U.S. Government
securities.
OHIO TAX-FREE INCOME FUND
An income fund which seeks to provide income exempt from Federal income tax and
Ohio state personal income tax.*
GROWTH & INCOME FUND
A common stock fund that seeks long-term capital growth, current income and
growth of income.
ESTABLISHED VALUE FUND
A common stock fund that seeks long-term capital growth by investing in
companies that are included in the Standard & Poor's 500 Index and other large
companies.
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.
INTERNATIONAL FUND
A common stock fund that seeks capital growth by investing in common stocks of
non United States companies.
MONEY MARKET FUNDS
Gradison-McDonald offers a full range of taxable and tax-free money market
funds.
Prospectuses are available upon request by calling (800) 869-5999 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. The value of an investment in other funds will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than the original
cost. The returns of all funds will fluctuate.
*Investment income may be subject to the federal alternative minimum tax.
Capital gains, if any, are taxable.
11
<PAGE> 24
INTERMEDIATE MUNICIPAL
INCOME FUND
GRADISON-MCDONALD
SEMIANNUAL REPORT
DECEMBER 31, 1995
AN INTERMEDIATE MUNICIPAL BOND FUND
SEEKING A HIGH LEVEL OF AFTER-TAX INCOME
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
