<PAGE> 1
1933 Act Registration No. 33-48613 1940 Act File No. 811-6705
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 ( )
Pre-Effective Amendment No. ( )
Post-Effective Amendment No. 9 (X)
and/or
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 ( )
Amendment No. 10 (X)
----------
G R A D I S O N - M C D O N A L D M U N I C I P A L
C U S T O D I A N T R U S T
(Exact Name of Registrant as Specified in Declaration of Trust)
580 Walnut Street, Cincinnati, Ohio 45202
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (513) 579-5700
Copy to:
Richard M. Wachterman Bradley J. Turner
Gradison-McDonald Municipal Gradison-McDonald Municipal
Custodian Trust Custodian Trust
580 Walnut Street 580 Walnut Street
Cincinnati, Ohio 45202 Cincinnati, Ohio 45202
Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
__X__ immediately upon filing pursuant to paragraph (b)
of Rule 485.
_____ on ____________ pursuant to paragraph (b) of
Rule 485.
_____ 60 days after filing pursuant to paragraph (a)
of Rule 485.
_____ on ____________ 1995 pursuant to paragraph (a) of Rule
485
____________
Registrant has heretofore registered an indefinite number of shares of
beneficial interest, without par value, pursuant to Rule 24f-2 under the
Investment Company Act of 1940, as amended. Registrant's Rule 24f-2 Notice was
filed on August 21, 1996.
================================================================================
<PAGE> 2
GRADISON-McDONALD MUNICIPAL CUSTODIAN TRUST
CONTENTS OF POST-EFFECTIVE AMENDMENT
The post-effective amendment to the registration statement of Gradison-McDonald
Municipal Custodian Trust contains the following documents all with respect to
the Gradison Ohio Tax-Free Income Fund:
Facing Sheet
Contents of Post-Effective Amendment
Cross-Reference Sheet
Part A - Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
<PAGE> 3
GRADISON-MCDONALD MUNICIPAL CUSTODIAN TRUST
Cross-Reference Sheet
Pursuant to Item 501(b) of Regulation S-K
Under the Securities Act of 1933
<TABLE>
<CAPTION>
Form N-1A Location in
Item Number Prospectus
- ----------- -----------
<S> <C>
1. Cover Page . . . . . . . . . . . . . .Cover Page of Prospectus
2. Synopsis . . . . . . . . . . . . . . .Expense Summary
3. Condensed Financial Information . . .Performance Calculations
4. General Description of Registrant . .Investment Objective and
Policies; Hedging; Quality
(Ratings); Maturity;
Concentration; Other Investment
Restrictions; Ohio Economic
Considerations; General
Information
5. Management of Fund . . . . . . . . . .Management of the Trust,
Distributions; Cover Page of the
Prospectus
6. Capital Stock and Other Securities .Cover Page of Prospectus;
Distributions; Taxes; General
Information
7. Purchase of Securities Being Offered .Purchases and Redemptions; Net
Asset Value; Optional Shareholder
Services;
Management of the Fund
8. Redemption or Repurchase . . . . . . .Purchases and Redemptions
9. Pending Legal Proceedings . . . . . .Not Applicable
Location in Statement
of Additional Information
-------------------------
10. Cover Page . . . . . . . . . . . .. Cover Page
11. Table of Contents . . . . . . . . . .Table of Contents
12. General Information and History . . Description of the Trust
13. Investment Objectives and Policies . .Investment Restrictions; Factors
Relating to Ohio; Portfolio
Transactions
14. Management of the Fund . . . . . . . .Trustees and Officers of the
Trust
15. Control Persons and Principal
Holders of Securities . . . . . . . . . *
16. Investment Advisory and Other
Services . . . . .. . . . . . . . Investment Adviser; Custodian
17. Brokerage Allocation and Other
Practices . . . . . . . . . . . . Portfolio Transactions
18. Capital Stock and Other Securities Description of the Trust
19. Purchase, Redemption and Pricing of
Securities Being Offered . . . . . .Purchase of Shares; Letters of
Intent; Redemption of Shares; Net
Asset Value
20. Tax Status . . . . . . . . . . . . Taxes
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
21. Underwriters . . . . . . . . . . . Investment Adviser
22. Calculation of Performance Data
. . . . . . . . . . . Performance Calculations
(Prospectus)
23. Financial Statements . . . . . . . . Financial Statements and
Accountants
</TABLE>
<PAGE> 5
GRADISON MCDONALD
OHIO TAX-FREE INCOME FUND
PROSPECTUS DATED OCTOBER 28, 1996
The Gradison McDonald Ohio Tax-Free Income Fund ("Fund") is a diversified
open-end management investment company which seeks to provide as high a level of
after-tax current income exempt from Federal income tax and Ohio state personal
income tax as is consistent with preservation of capital by investing primarily
in municipal securities. The Gradison Division of McDonald & Company Securities,
Inc. ("Gradison" or the "Adviser") is the investment adviser and principal
underwriter for the Fund and acts as transfer agent of the Fund. The Fund is a
series of the GradisonoMcDonald Municipal Custodian Trust.
This Prospectus is designed to provide you with information that you should know
before investing and should be retained for future reference. A Statement of
Additional Information for the Fund, dated October 28, 1996 has been filed with
the Securities and Exchange Commission and is incorporated herein by reference.
This Statement is available upon request without charge from the Fund at 580
Walnut Street, Cincinnati, Ohio 45202 or by calling the phone numbers provided
below.
For all information (including purchases, redemptions, and most recent yield),
call 579-5700 from Cincinnati, Ohio or 1-800-869-5999 toll free.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
EXPENSE SUMMARY
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
(as a percentage of offering price)
Maximum sales charge imposed on purchases 2.00%
====
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees .50%
12b-1 Fees .25%
Other Expenses .22%
----
TOTAL FUND OPERATING EXPENSES .97%
====
</TABLE>
The purpose of the preceding table is to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear directly and
indirectly. (For more information about Fund expenses, see "Purchases and
Redemptions" and "Management of the Fund.")
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
Example: You would pay the following expenses on a $1,000 investment
assuming a 5% annual return* and redemption at the end of each period:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C>
$30 $50 $73 $137
</TABLE>
*The 5% annual return is a standardized rate prescribed for use by all mutual
funds for the purpose of this example and does not represent the past or future
return of the Fund.
<PAGE> 6
FINANCIAL HIGHLIGHTS
The table below presents the financial highlights of the Fund's operations. The
information is expressed in terms of a single share outstanding throughout the
period and has been audited by Arthur Andersen LLP, independent public
accountants, whose unqualified report appears in the Statement of Additional
Information.
<TABLE>
FOR THE PERIOD
YEAR ENDED JUNE 30 11 MONTHS SEPTEMBER 18,
--------------------- ENDED 1992 TO JULY 31,
1996 1995 JUNE 30, 1994(1) 1993 (2)
<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 .648 .661 .593 .599
Net realized and unrealized gain (loss) on investments .126 .308 (.743) .813
--------- -------- --------- ---------
Total income (loss) from investment operations .774 .969 (.150) 1.412
--------- -------- --------- ---------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income (.648) (.662) (.594) (.596)
Distributions from realized capital gains -- -- (.106) --
--------- -------- --------- ---------
Total distributions to shareholders (.648) (.662) (.700) (.596)
--------- -------- --------- ---------
Net asset value at end of period $ 12.899 $ 12.773 $ 12.466 $ 13.316
========= ======== ========= =========
Total return (3) 6.17% 8.00% (1.27%) 11.56%
--------- -------- --------- ---------
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (in millions) $ 70.6 $ 70.0 $ 77.6 $ 69.6
Ratios net of expenses waived by the adviser:
Ratio of expenses to average net assets .97% .97% .90%(4)(5) .75%(4)(5)
Ratio of net investment income to average net assets 4.99% 5.26% 4.94%(4)(5) 5.25%(4)(5)
Ratios assuming no adviser waiver of expenses:
Ratio of expenses to average net assets .97% .97% .99%(4)(5) 1.14%(4)(5)
Ratio of net investment income to average net assets 4.99% 5.26% 4.85%(4)(5) 4.86%(4)(5)
Portfolio turnover rate 99.68% 80.19% 55.84% 45.04%
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) The Fund changed its fiscal year end to June 30, effective with the June 30,
1994 Annual Report.
(2) 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).
(3) 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.
(4) The investment adviser absorbed expenses of the Fund through waiver of a
portion of the investment advisory fee.
(5) Annualized.
</TABLE>
2
<PAGE> 7
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide as high a level of after-tax
current income as is consistent with preservation of capital through investment
primarily in obligations the interest from which is exempt from Federal income
taxation and from Ohio state personal income taxation. There can be no assurance
that the objective of the Fund will be achieved.
RISK FACTORS AND FOR WHOM THE FUND MAY BE APPROPRIATE
The net asset value and yield of the Fund's shares will fluctuate depending on
market conditions and other factors, with the value of shares normally
fluctuating inversely with changes in interest rates. There are risks associated
with investment in municipal securities, options, and financial futures
transactions, including changes by rating services of the rating of portfolio
securities and in the ability of issuers to make payment of principal and
interest. See "Investment Policies" at pages 3-8 of this Prospectus. There can
be no assurance that the investment objective of the Fund will be achieved.
The Fund may be appropriate for investors seeking income free of regular Federal
income tax and Ohio income tax who can accept the fluctuations in the value of
Fund shares inherent in investment in long-term debt securities. The Fund
focuses on longer term investment grade Ohio municipal securities. The Fund has
a higher risk level and yield/return potential than fixed income investments of
shorter maturity and/or higher grade securities and may have a higher risk level
than investments in more diversified municipal securities. The Fund has a lower
risk level and yield/return potential than fixed income investments with lower
grade securities and as compared to equity investments.
INVESTMENT POLICIES
The Fund normally invests substantially all (at least 80%) of the value of its
net assets in securities, the interest from which is exempt from Federal income
tax and Ohio state personal income tax and which is not subject to Federal
alternative minimum taxation ("AMT"). Although the Fund does not anticipate that
it will ordinarily invest in securities subject to Federal income tax or the
Ohio personal income tax, it may do so on a temporary basis when it is
considered necessary because of the unavailability of Federal or Ohio tax-free
securities. From the commencement of its operations (September 18, 1992) through
June 30, 1996, 100% of the Fund's income dividends were free of Federal income
and Ohio personal income taxes. Investment in securities, interest from which is
subject to AMT, normally will not exceed 20% of the value of the net assets of
the Fund. During the fiscal year ending June 30, 1996, 12.5% of the Fund's
income dividends were subject to AMT. At times, the Fund's Trustees or the
Adviser may determine that conditions in the markets for tax-exempt securities
make pursuing the Fund's basic investment strategy inconsistent with the best
interests of its shareholders. At such times, the Fund may invest more than 20%
of its assets in investments subject to Federal income tax, Ohio personal income
tax, or AMT for temporary defensive purposes to reduce fluctuations in the value
of the Fund's assets. The investment objective of the Fund and the policy set
forth in the first sentence of this paragraph cannot be changed without the
approval of a "majority of the outstanding voting securities" of the Fund as
defined in the Investment Company Act of 1940 (the "1940 Act"). See "Description
of the Trust" in the Statement of Additional Information.
The Fund invests in municipal bonds issued by or on behalf of states,
territories or possessions of the U.S. and their political subdivisions,
agencies and instrumentalities. Municipal bonds are generally issued to finance
public works such as airports, bridges, highways, schools and housing. Municipal
bonds are also used to repay outstanding oblig-
3
<PAGE> 8
ations, to raise funds for general operating expenses and to make loans to other
public institutions and facilities. Certain types of "private activity"
municipal bonds are issued to obtain funding for privately operated facilities.
There are two general categories of municipal bonds: general obligation and
revenue. General obligation bonds are backed by the taxing power of the issuing
municipality. Revenue bonds are backed by the revenue of a project or facility.
Payment of principal and interest on such bonds is dependent solely on the
revenue generated by the facility financed by the bond or other specified
sources of revenue or collateral. Private activity bonds are typically one type
of revenue bond.
Interest from obligations of the governments of the U.S. Virgin Islands, Puerto
Rico, and Guam ("Territorial Obligations") is exempt from Ohio personal income
taxation as well as Federal income taxation. The Fund will not invest more than
5% of its net assets in the obligations of each of the Virgin Islands, Puerto
Rico and Guam.
The Fund may also invest in short-term tax-exempt securities, usually for
temporary purposes. Short-term tax-exempt securities are generally issued as
interim financing in anticipation of tax collections, revenue receipts or bond
sales to finance public purposes. From time to time, the Fund may also invest up
to 10% of its assets in tax-exempt mutual funds, including tax-exempt money
market funds, which have investment criteria equal to or higher than those of
the Fund, subject to the requirements of applicable law. Such investments will
result in shareholders, in effect, paying duplicate or multiple fees, since such
mutual funds incur expenses similar to those of the Fund. The 1940 Act limits
the Fund's investment in any other mutual fund to a maximum of 3% of the
outstanding voting stock of that mutual fund and an amount which may not
represent more than 5% of the total assets of the Fund. The Adviser will only
invest in such funds when it believes that the yields on such funds are
advantageous.
The Fund may invest in participations in lease obligations or installment
purchase contract obligations of municipal authorities or entities ("Municipal
Leases"). Certain Municipal Leases contain "nonappropriation" clauses which
provide that the municipality has no obligation to make lease or installment
purchase payments in future years unless money is appropriated for such purpose
on a yearly basis. Although nonappropriation Municipal Leases are secured by the
leased property, disposition of the property in the event of foreclosure might
prove difficult. Nonappropriation Municipal Leases may present special risks
because the municipality's obligation to make future lease or installment
payments depends on money being appropriated in the future. The Fund will limit
its investment in nonappropriation leases to a maximum of 10% of its total
assets. The Fund invests in such leases according to guidelines of the Fund as
set forth in the "Municipal Leases" section of the Statement of Additional
Information.
With respect to unrated Municipal Leases, credit quality will be determined by
the Adviser (pursuant to procedures established by the Board of Trustees
("Board"), and subject to review by the Board) on an ongoing basis, including an
assessment of the likelihood that a lease will be cancelled. For further
information, see "Municipal Leases" in the Statement of Additional Information.
The Fund may invest in floating or variable rate instruments, which provide for
interest rate adjustments at specified intervals. Rate adjustments on such
securities are usually set at the issuer's discretion, in which case the Fund
would normally have the right to resell the security to the issuer or its agent.
Alternatively, rate revisions may be determined in accordance with a prescribed
formula or other contractual procedure. Generally, these interest rate
adjustments cause the market value of floating rate and variable rate municipal
securities to fluctuate less than the market value of fixed rate obligations.
Accordingly, as interest rates decrease or increase the potential for capital
appreciation or depreciation is less than for fixed rate obligations.
The Fund may also acquire put options in combination with the purchase of
underlying securities or may separately acquire put options that relate to
securities held in the Fund's portfolio. Such put options would give the Fund
the right to require the issuer or some other person to purchase the underlying
security at an agreed upon price. There
4
<PAGE> 9
is no assurance that the issuer of a put bond acquired by the Fund will be able
to repurchase the bond upon the exercise date if the Fund chooses to exercise
its right to put the bond back to the issuer.
The Fund may invest in zero coupon municipal bonds. Such bonds are debt
obligations which do not require the periodic payment of interest and are issued
at a significant discount from face value. The discount approximates the total
amount of interest the bonds will accrue and compound over the period until
maturity at a rate of interest reflecting the market rate of the security at the
time of issuance. Zero coupon bonds benefit the issuer by reducing its need to
use cash for debt service, but also require a higher rate of return to attract
investors who are willing to defer receipt of such cash. Such bonds experience
greater volatility in market value due to changes in interest rates than debt
obligations which provide for regular payments of interest. The Fund will accrue
income on such bonds for tax and accounting purposes, in accordance with
applicable law, which income is distributable to shareholders. Because no cash
is received at the time such income is accrued, the Fund may be required to
liquidate other portfolio securities to satisfy its distribution obligations.
The Fund does not intend to invest more than 25% of its total assets in zero
coupon bonds.
The Fund may purchase and sell securities on a "when-issued" and "delayed
delivery" basis, that is, obligate itself to purchase or sell securities with
delivery and payment to occur at a later date. Such securities are subject to
market fluctuation and the yields on securities so purchased may be lower than
those available in the market at the time of delivery. When issued and delayed
delivery transactions may be expected to occur a month or more before delivery
is due. The Fund will maintain, in a segregated account with its custodian, cash
or liquid high-grade debt securities having an aggregate value equal to the
amount of such purchase commitments until payment is made. To the extent the
Fund acquires securities in when-issued and delayed delivery transactions, it
will do so for the purpose of acquiring securities for the Fund's portfolio and
not for the purpose of investment leverage. The Fund does not accrue income on
securities purchased on a when-issued or delayed delivery basis until delivery
occurs. The Fund may enter into delayed delivery sales of securities in order to
accommodate purchasers of portfolio securities from the Fund in transactions
effected at an advantageous price to the Fund. The Fund will limit its
outstanding purchases of securities on a when-issued or delayed delivery basis
to no more than 33 1/3% of its total assets.
The Fund may also hold cash that is not earning interest and may invest in
short-term obligations issued or guaranteed by the U.S. Government and its
agencies or its instrumentalities. The Fund may engage in short-term trading,
that is, the sale of securities held for a short time, ranging from several
months to less than a day. The object of such short-term trading is to take
advantage of what the Adviser believes are temporary disparities in prices
between securities, or to take advantage of what the Adviser believes are
changes in market, industry, or individual issuer's conditions or outlook. Such
trading may be expected to increase the Fund's turnover rate. High turnover will
generally result in higher transaction costs and may result in net capital gains
which, when distributed to shareholders, will be subject to tax. See "Taxes" in
this Prospectus and "Portfolio Transactions" in the Statement of Additional
Information. For the fiscal year ending June 30, 1996, the Fund's portfolio
turnover was 100%.
HEDGING
The Fund may engage in certain hedging transactions involving the use of
financial futures contracts, options on financial futures or options based on
either an index of tax-exempt securities or on debt securities the prices of
which, in the opinion of the Adviser, correlate with the prices of the Fund's
investments. These hedging transactions are designed to limit the risk of price
fluctuations of the Fund's investments. In the past, the Fund has made extremely
limited use of these techniques and may or may not utilize them in the future.
If utilized, there can be no assurance that they will be successful.
5
<PAGE> 10
The Fund may purchase and sell financial futures contracts and related options.
Futures contracts on a Municipal Bond Index are traded on the Chicago Board of
Trade. This Index is designed to represent a numerical measure of market
performance for long-term tax-exempt bonds. The Fund may purchase and sell
futures contracts on this Index or any other tax-exempt bond index approved for
trading by the Commodity Futures Trading Commission to hedge against general
changes in market values of portfolio securities which the Fund owns or expects
to purchase. The Fund may also purchase and sell put and call options on index
futures for hedging purposes. The Adviser believes that, under certain market
conditions, price movements in U.S. Treasury security futures and related
options may correlate closely with price movements in tax-exempt securities and
may as a result provide significant hedging opportunities for the Fund. The Fund
may also purchase and sell futures contracts and related options with respect to
such U.S. Treasury securities when the Adviser believes that the price movements
of Treasury securities will correlate with price movements in tax-exempt
securities.
The Fund will enter into hedging transactions only when it either owns an
offsetting position in the underlying securities, options or futures contracts
or maintains cash or liquid high-grade debt securities with a value sufficient
at all times to cover its obligations. The use of these strategies involves
certain special risks, including (1) the fact that the skills needed to use
hedging instruments are different from those needed to select the Fund's
securities, (2) possible imperfect correlation, or even no correlation, between
price movements of the investments being hedged, (3) the fact that, while
hedging strategies can reduce the risk of loss, they can also reduce the
opportunity for gain, or even result in losses, by offsetting favorable price
movements in hedged investments and (4) the possible inability of the Fund to
purchase or sell a portfolio security at a time that otherwise would be
favorable to do so, or the possible need for the Fund to sell a portfolio
security at a disadvantageous time, due to the need for the Fund to segregate
securities in connection with hedging transactions and the possible inability of
the Fund to close out or liquidate its hedged position. New financial products
and risk management instruments and techniques continue to be developed. The
Fund may use these instruments and techniques to the extent consistent with its
investment objective and regulatory and tax considerations.
The Fund may purchase options on debt securities only if the value of the
premiums does not exceed 5% of the Fund's total assets and will not purchase or
sell futures contracts or related options if the sum of the amount of initial
margin deposits on the Fund's existing futures positions and initial margin
deposits and premiums paid for related options would exceed 5% of the market
value of the Fund's total assets. These respective guidelines cannot be
guaranteed to limit the percentage of the Fund's assets at risk to 5% as to each
type of transaction.
See the Statement of Additional Information for further information about
futures and options and associated risks.
QUALITY (RATINGS)
The Fund invests in municipal bonds judged by the Adviser to be of investment
grade quality. Investment grade bonds are those rated Baa or better by Moody's
Investors Service, Inc. ("Moody's"), or BBB or better by Standard & Poor's
("S&P") or Fitch Investor Services, Inc. ("Fitch"). Investment grade bonds have
adequate to strong protection of principal and interest payments. Bonds rated
Baa are considered by Moody's to be medium grade obligations which lack
outstanding investment characteristics and, in fact, have speculative
characteristics as well, while municipal obligations rated BBB are regarded by
S&P and Fitch as having an adequate capacity to pay principal and interest.
Bonds rated BBB or Baa are at the lower end of the investment grade category and
may be more sensitive to economic changes and changes in the financial condition
of issuers.
The Fund may also invest in unrated obligations determined by the Adviser to be
of equivalent quality to the rated securities in which it is permitted to
invest. See the Statement of Additional Information for more detailed
infor-
6
<PAGE> 11
mation concerning securities ratings. If the rating of a bond held by the
Fund drops below investment grade or if an unrated bond deemed by the Adviser to
be of equivalent quality to investment grade ceases to be considered investment
grade, the Fund will normally sell such bond in a reasonable period of time.
In the case of short-term notes, the Fund will invest in notes rated SP-1
through SP-2 by S&P or MIG 1 through MIG 3 by Moody's. In the case of tax-exempt
commercial paper, the Fund will invest in such obligations when rated A-1+
through A-2 by S&P or Prime-1 or Prime-2 by Moody's.
MATURITY
The Fund intends to emphasize investments in obligations with long-term
maturities in order to maintain an average weighted maturity of 20 to 30 years
but will also invest in shorter term obligations. The average weighted maturity
may be shortened from time to time depending on market conditions in order to
limit market risks. On June 30, 1996, the average weighted maturity of the
Fund's portfolio was 19 years.
DIVERSIFICATION
The Fund will not, as a fundamental policy, with respect to 75% of its assets,
invest more than 5% of its assets in securities of any one issuer or acquire
more than 10% of the voting securities of any issuer, except securities issued
by the U.S. Government or its agencies or instrumentalities. The Fund does not
intend to invest in securities backed by letters of credit of any one bank to
the extent that such securities constitute more than 10% of the assets of the
Fund. For this purpose, the "issuer" of a security is deemed to be the entity
whose assets and revenues are committed to the payment of principal and interest
on that security, provided that the guarantee of an instrument will be
considered a separate security except when the value of all securities issued or
guaranteed by the guarantor, and owned by the Fund, does not exceed 10% of the
value of the total assets of the Fund.
CONCENTRATION
It is possible that the Fund will invest more than 25% of its assets in a
particular segment of the municipal bond market such as Hospital Revenue Bonds,
Housing Agency Revenue Obligations or Airport Revenue Obligations. This would
only be the case if the Adviser determined that the yields available from such
obligations justified the additional risks associated with such concentration.
Economic, business, political and other developments generally affecting the
revenue of such users (for example, proposed legislation or pending court
decisions affecting the financing of such projects and market factors affecting
the demand for their services or products) may have a general adverse effect on
all obligations in such a market segment.
OTHER INVESTMENT RESTRICTIONS
The Fund may not borrow money, except from banks as a temporary measure or for
extraordinary or emergency purposes, and then only in amounts not exceeding 10%
of its total assets or one third of the value of the Fund's total assets
including the amount borrowed. While any borrowing of greater than 5% of assets
occurs, the Fund will not purchase additional portfolio securities. This
restriction may not be changed without shareholder approval. The Fund may not
invest more than 15% of its assets in securities that are not readily marketable
nor may it pledge more than 15% of its assets.
7
<PAGE> 12
The public offering price is the net asset value plus a sales charge. The sales
charge varies depending on the size of the purchase. The current sales charges
are:
<TABLE>
<CAPTION>
AMOUNT OF SALES
TOTAL SALES CHARGE CHARGE REALLOWED TO
--------------------------------------- DEALERS
SITE TRANSACTION AS PERCENTAGE OF AS PERCENTAGE OF AS A PERCENTAGE OF
AT OFFERING PRICE OFFERING PRICE NET ASSET VALUE OFFERING PRICE
<S> <C> <C> <C> <C>
Less than $250,000 2.00% 2.04% 2.00%
$250,000 or more but less than $500,000 1.00% 1.01% 1.00%
$500,000 or more 0.00% 0.00% 0.00%
</TABLE>
PORTFOLIO MANAGER
Stephen C. Dilbone, Executive Vice President of the Trust, has been primarily
responsible for the day-to-day management of the Fund's portfolio since the
Fund's inception. Mr. Dilbone is a First Vice President of Gradison with
responsibility for tax-exempt securities trading.
OHIO ECONOMIC CONSIDERATIONS
Because the Fund invests primarily in securities of Ohio issuers, political and
economic factors affecting Ohio could affect the creditworthiness and the value
of the securities in its portfolio. The Ohio economy, while diversifying more
into the service and other non-manufacturing areas in recent years, continues to
rely in part on durable goods manufacturing largely concentrated in motor
vehicles and equipment, steel, rubber products and household appliances. As a
result, general economic activity in Ohio, as in many other industrially
developed states, tends to be more cyclical than in some other states and in the
nation as a whole. Agriculture is an important segment of the economy, with over
half the State's area devoted to farming and approximately 16% of total
employment involved in agribusiness. The State's overall unemployment rate is
commonly somewhat higher than the national figure although in recent years the
reverse has been true. The unemployment rate and its effects vary among
particular geographic areas of the State. Future statewide or regional economic
difficulties, and the resulting impact on State or local government finances
generally, could adversely affect the market value of Ohio obligations held in
the portfolio of the Fund or the ability of particular obligors to make timely
payments of debt service on those obligations. See the Statement of Additional
Information for additional information about Ohio economic considerations.
PURCHASES AND REDEMPTIONS
HOW TO PURCHASE SHARES
You may purchase shares of the Fund by bringing or mailing funds to Gradison,
the principal underwriter of the Fund or your investment dealer. The minimum
investment required to open an account is $1,000 and additional investments must
be at least $50. These minimums may, however, be waived for certain group
purchases. Purchase orders become effective when the Fund receives the necessary
information about your account and provision for payment has been made. No share
certificates will be issued. Share purchases are confirmed by issuance of
account statements.
Shares are sold at the public offering price based on the net asset value next
determined after the Fund receives your order. See the table at the top of this
page for additional information about sales charges. The Fund receives the net
8
<PAGE> 13
asset value from purchases. The sales charge is retained by Gradison or
reallowed by Gradison to your investment dealer. In accordance with a
distribution service plan adopted pursuant to Rule 12b-1, Gradison also receives
an annual service fee as Distributor in the amount of .25% of the average net
assets of the Fund (see "Distribution Service Plan"). The Fund sells shares
without a sales charge to: the trustees of any investment company as to which
Gradison is investment adviser (and their families), current and retired
employees of Gradison, McDonald and affiliates (and their families), advisory
accounts managed by McDonald & Company Securities, Inc. ("McDonald") or
Gradison, bank or trust company trust accounts, and accounts participating in
McDonald's Fund Select mutual fund consulting program.
Investors may purchase shares of the Fund without payment of a sales charge to
the extent that the investment represents the proceeds of a redemption of any
other mutual fund's shares, the purchase of which involved an initial sales
charge. Additionally, investors may purchase shares of the Fund without payment
of a sales load to the extent that the investment represents the proceeds of a
redemption of any other mutual fund, except a Gradison fund or a money market
fund, so long as the investor has been invested in such fund for at least one
year prior to the purchase of Fund shares. Investors must inform Gradison of
their eligibility for these no sales charge purchases and provide appropriate
documentation to demonstrate their eligibility. Call Gradison for details.
Within six months of a redemption of shares of the Fund, shareholders may
reinvest all or part of the redemption proceeds in shares of the Fund without
the payment of a sales charge. The amount which may be so reinvested is limited
to an amount up to the redemption proceeds. In order to exercise this privilege,
you must make a written request for reinstatement which must accompany the
reinvestment. Gradison, McDonald, and the Fund do not assume any responsibility
for your receipt of the reinvestment credit in the absence of such written
notice from you, or for ensuring that you provide such written notice. This
reinstatement privilege can be exercised only once for all or a portion of the
shares redeemed. The tax treatment of a gain realized on a redemption will not
be affected by exercise of the reinstatement privilege, but a loss may be
nullified by a reinvestment in the Fund within 30 days before or after the
redemption. See "Taxes." The Fund may amend or cease offering this privilege at
any time as to shares redeemed after the date of such amendment or change.
QUANTITY DISCOUNTS
You may be entitled to reduced sales charges through a Combination of
Investments, Rights of Accumulation, or a Letter of Intent, even if you do not
wish to make an investment of a size that would normally qualify you for a
quantity discount. You must notify Gradison whenever a quantity discount is
applicable to your purchase and, if necessary, provide sufficient information to
verify that your purchase qualifies for a discount. Upon such notification, you
will receive the lowest applicable sales charge. Gradison, McDonald, and the
Fund shall not be responsible for failure to obtain such a quantity discount in
the absence of such notification. Quantity discounts may be modified or
terminated at any time. For more information about quantity discounts, contact
Gradison.
1. Combination of Investments. You may combine your purchase of shares of the
Fund on any day with purchases of shares of the Fund or any other Gradison funds
sold with a sales charge made by you, your spouse and your children under the
age of 21 to qualify for a quantity discount. The aggregate investments of a
trustee or custodian for the benefit of you or any of the individuals described
above may also be considered in determining whether a reduced sales charge is
available.
2. Rights of Accumulation. In determining the sales charge to be paid for your
current purchase you may combine your current purchase with the current public
offering price of shares of the Fund or any other Gradison funds sold with a
sales charge (or the original amount invested, whichever is greater) that are
currently owned by you, your
9
<PAGE> 14
spouse, your children under the age of 21, or the aggregate investment of a
trustee or other fiduciary, for the benefit of you or any of the individuals
described above.
3. Letter of Intent. You may qualify for a reduced sales charge immediately by
stating your intention to invest, during a 13-month period, an amount that would
qualify you for a reduced sales charge. You may do this by signing a NONBINDING
Letter of Intent, which may be signed at any time within 90 days after the first
investment you want included under your Letter of Intent. Each investment you
make after signing the Letter of Intent will be entitled to the sales charge
applicable to the total investment indicated in the Letter of Intent. A Letter
of Intent will apply to all Gradison funds sold with a sales charge.
When you sign a Letter of Intent, shares purchased by you with a value of 3% of
the amount you specify in the Letter of Intent will be restricted, that is,
these shares cannot be sold or redeemed until the Letter of Intent is satisfied
or the additional sales charges have been paid. If the total purchases you make
under the Letter of Intent, less redemptions, equal or exceed the amount you
specify in the Letter of Intent, the shares will no longer be restricted. If the
total purchases, less redemptions, exceed the amount you specify, and qualify
you for further quantity discount, Gradison will, at your request, make a
retroactive share adjustment and will apply the adjustment to purchase
additional shares of the Fund for your account at the next computed price. If
you do not complete your purchases under the Letter of Intent, your sales charge
will be adjusted upward, and if, after written notice, you do not pay the
increased sales charge, restricted shares will be redeemed to pay such charge.
The purchases and share balances of all accounts managed by a particular
investment adviser may be aggregated for purposes of determining the quantity
discounts discussed above.
HOW TO REDEEM SHARES
You may redeem shares of the Fund without charge or penalty by sending a written
redemption request to the Fund identifying the name of the Fund, the account
name and number and the number of shares or dollar amount to be redeemed. You
may redeem shares by telephone and have the proceeds of your redemption mailed
to the address on the Fund's records. All redemptions are effected at the next
net asset value calculated after the Fund receives the redemption request in
good order. The Fund normally makes payment for redeemed shares within one
business day, and, except in extraordinary circumstances, within seven days
after receipt of a properly executed redemption request. Shareholders may make
special arrangements for wire transfer of redemption proceeds by contacting the
Fund in advance of a contemplated share redemption. The Fund reserves the right
to delay payment for the redemption of shares where the shares were purchased
with a personal check, but only until the purchase payment has cleared, which
may take up to 15 days from the day the check is received by the Fund. If you
need more immediate access to your investment, you should consider purchasing
shares by wire, cash, or other immediately available funds.
All redemption information and authorizations (except those effected by your
investment dealer) should be mailed or delivered to GradisonoMcDonald Mutual
Funds, 580 Walnut Street, Cincinnati, Ohio 45202.
Under extraordinary circumstances, such as periods of drastic economic or market
changes, it is possible that you might not be able to reach the Fund by
telephone to effect a redemption. In the event of such a situation, you can mail
or personally deliver a written redemption request to the Fund's offices.
Shareholders who have brokerage accounts with McDonald or Gradison can also
request that their Investment Consultant arrange the redemption.
The telephone redemption feature may be terminated or modified upon 30 days'
notice to shareholders.
The Fund, Gradison, McDonald, and their officers and employees will not be
liable for following instructions communicated by telephone that are reasonably
believed to be genuine. The Fund will employ reasonable procedures to
10
<PAGE> 15
confirm that instructions communicated by telephone are genuine, and if it does
not, in the view of the Securities and Exchange Commission, it may be liable for
any losses resulting from unauthorized instructions. Telephone transactions are
available to all shareholders automatically.
REDEMPTIONS THROUGH MCDONALD AND GRADISON
Investors who maintain brokerage accounts with McDonald or Gradison may redeem
shares of the Fund through their Investment Consultant.
EXCHANGES
Shares of the Fund may be exchanged, without administrative fees, for shares of
any other Gradison fund and for shares of certain Federal and/or Ohio tax-free
or municipal income money market funds.
You may request exchanges by telephoning or writing the Fund. Before making an
exchange, you should read the prospectus of the fund in which you are investing
which is available upon request. An exchange may not be made from the Fund to
the fund in which you are investing unless the shares of such fund are
registered for sale in the state in which you reside. Exchanges of Fund shares
for shares of funds sold subject to an initial sales charge will be subject to
such sales charge except to the extent that a sales charge has previously been
paid in connection with the shares. The terms of the exchange feature are
subject to change and the exchange feature is subject to termination, both upon
60 days' written notice, except that no notice shall be required under certain
circumstances provided for by rules of the Securities and Exchange Commission.
NET ASSET VALUE
The net asset value per share of the Fund is determined by calculating the total
value of the Fund's assets, deducting its total liabilities, and dividing the
result by the number of shares outstanding. The net asset value is generally
computed once daily as of the close of regular trading on the New York Stock
Exchange, normally 4:00 p.m. Eastern time, on each day when the New York Stock
Exchange is open for business.
Securities are valued by using market quotations, prices provided by market
makers or pricing services, or estimates of market values obtained from yield
data relating to instruments or securities with similar characteristics in
accordance with procedures established by the Board of Trustees. Short-term
securities with remaining maturities of less than 60 days are valued at
amortized cost which approximates market value. Other assets are valued at fair
value as determined pursuant to procedures approved by the Board.
OPTIONAL SHAREHOLDER SERVICES
AUTOMATIC INVESTMENT PLAN
You may arrange for a fixed amount of money to be transferred automatically on a
regular basis from your bank or other depository account to your Fund account.
For additional information, obtain the GradisonoMcDonald Automatic Investment
Plan form from the Fund.
11
<PAGE> 16
MONTHLY DISTRIBUTION PLAN
You may elect (on the Account Information Form) to automatically receive cash
payments of dividends and/or capital gains distributions. (For this purpose,
short-term capital gains distributions are considered dividends.) You may change
or terminate this option at any time by written notice to the Fund.
AUTOMATIC PAYMENT PLAN
If your account has a value of at least $10,000, you may elect (on the Account
Information Form) to have monthly or quarterly payments of a specified amount
(but not less than $50) mailed to you or anyone specified on the form. You may
change or terminate this option at any time by written notice to the Fund.
Because the Fund cannot guarantee that payments will be made on the date
specified, the Plan should not be used for time-sensitive payments. Shareholders
utilizing the Automatic Payment Plan should be aware that each payment
constitutes a redemption for tax purposes.
DISTRIBUTIONS
The Fund declares dividends from net investment income daily, immediately prior
to the close of business. These dividends are credited to fully paid shares of
record at the time of declaration. (Fund shares begin earning dividends on the
business day after the Fund receives payment for the purchase of such shares.)
Dividends representing the amounts credited to Fund shares are paid monthly. Net
realized capital gains, if any, will be distributed at least annually. The Fund
distributes substantially all of its net investment income and capital gains (if
any) to shareholders each year.
Unless you select the Monthly Distribution Plan, all income dividends and net
realized capital gain distributions are automatically reinvested in additional
shares at the net asset value of such shares on the date the dividends or other
distributions are payable. There is no sales charge for shares issued in this
manner.
TAXES
Federally tax-free interest earned by the Fund is federally tax-free when
distributed to you as income dividends. Any taxable income earned on the Fund's
investments will be distributed to you as a taxable dividend. If the Fund
invests in "private activity" obligations, individuals who are subject to the
AMT must report a portion of the Fund's dividends as a tax preference item in
determining their Federal income tax liability. Distributions of short-term
capital gains are taxable for Federal income tax purposes as dividends, and
distributions of net capital gains, when designated as such, are taxable for
those purposes as long-term capital gains, regardless of the length of time you
have owned your shares. Distributions of any taxable dividends or realized
capital gains are taxable when they are paid, whether you take them in cash or
additional Fund shares, except that any distributions declared in December and
paid in January are treated as if paid on December 31.
The Fund's income dividends will be exempt from the Ohio personal income tax and
excluded from the net income base of the Ohio corporation franchise tax except
to the extent that such dividends consist of interest from obligations that are
neither debt obligations issued by or on behalf of the State of Ohio and its
political subdivisions, agencies, and instrumentalities ("Ohio Obligations") or
Territorial Obligations. Distributions of short-term and long-term capital gains
will also be exempt from the Ohio personal income tax and the net income base of
the Ohio
12
<PAGE> 17
corporation franchise tax to the extent that they represent gain from
the sale of Ohio Obligations.
Each year, the Fund will provide a statement informing you of the Federal and
state income tax status of dividends and other distributions paid during the
previous year.
If you purchase Fund shares just before the record date of a distribution of
capital gains, you will pay the full price for shares and then receive a portion
of the price back as a taxable distribution. Congress may propose to restrict or
eliminate the Federal income tax exemption for interest on municipal securities.
If such a proposal were enacted, the availability of municipal securities for
investment by the Fund and the value of its portfolio would be adversely
affected. In such event, the Fund would reevaluate its investment objective and
policies. The Fund is required to withhold 31% of all taxable dividends, capital
gain distributions, and redemption proceeds if you do not furnish the Fund with
a correct taxpayer identification number and in certain other circumstances.
Your redemption of Fund shares will result in taxable gain or loss to you,
depending on whether the redemption proceeds are more or less than your adjusted
basis for the redeemed shares (which normally includes any sales charge paid).
An exchange of Fund shares for shares of any other fund generally will have
similar tax consequences. However, special rules apply (1) when you dispose of
Fund shares through an exchange within 90 days after your purchase and acquire
shares of another fund without paying a sales charge, or (2) if you redeem
shares of another fund within 90 days after purchase and then acquire Fund
shares without paying a sales charge. In these cases, any gain on disposition of
shares would be increased, or loss decreased, by the amount of the sales charge
you paid when those shares were acquired, and that amount will increase the
adjusted basis of the shares subsequently acquired. In addition, if you purchase
Fund shares within 30 days after redeeming other Fund shares at a loss, that
loss will not be deductible and will increase the basis of the newly purchased
shares.
The foregoing is only a summary of some important generally applicable Federal
and state income tax provisions in effect as of the date of this Prospectus; see
the Statement of Additional Information for a further discussion. There may be
other Federal, state or local tax considerations applicable to a particular
investor.
GENERAL INFORMATION
The Fund is a series of the GradisonoMcDonald Municipal Custodian Trust (the
"Trust"), which is an Ohio business trust organized under the laws of the State
of Ohio by a Declaration of Trust dated June 11, 1992. The Fund is a diversified
portfolio of the Trust which is registered with the Securities and Exchange
Commission as an open-end management investment company. Each share of the Fund
has one vote and represents an equal pro rata interest in the Fund. As an Ohio
business trust, the Trust is not required to hold annual shareholder meetings,
although special shareholder meetings may be called for purposes such as
electing or removing trustees. Special meetings shall be called upon the written
request of shareholders owning at least 10% of the outstanding shares of the
Fund. Shareholder inquiries should be directed to the telephone number or
address of the Fund listed on the first page of this Prospectus.
MANAGEMENT OF THE FUND
The Board is responsible for the direction and supervision of the Fund's
operations. Gradison acts as the Fund's investment adviser and principal
underwriter. McDonald is a wholly owned subsidiary of McDonald & Company
Investments, Inc., McDonald Investment Center, 800 Superior Avenue, Cleveland,
Ohio 44114. Subject to the
13
<PAGE> 18
authority of the Board, Gradison manages the investment and reinvestment of the
assets of the Fund, and provides its employees to act as the officers of the
Fund who are responsible for the overall management of the Fund. Gradison is an
investment adviser and a securities broker-dealer. Gradison including its
predecessor, has served as investment adviser to investment companies since
1976.
The Fund pays the Adviser a fee of one half of 1% of its average daily net
assets for acting as its investment adviser. Gradison acts as the Fund's
transfer agent, dividend disbursing agent, and accounting services provider. For
providing such services, Gradison receives an annual fee of $26.50 per
shareholder non-zero balance account plus out of pocket costs for acting as
transfer agent and dividend disbursing agent and an accounting services fee of
.035% of the first $100 million of average daily net assets, .025% of the next
$100 million of average daily net assets, and .015% of average daily net assets
in excess of $200 million, with a minimum fee of $48,000 per year. Gradison's
address is 580 Walnut Street, Cincinnati, Ohio 45202.
All expenses not specifically assumed by the Adviser, Transfer Agent, or
Distributor and incurred in the operation of the Fund are borne by the Fund.
These include expenses for: printing and mailing registration statements,
prospectuses, periodic reports and other documents furnished to shareholders and
regulatory authorities; registration, filing and similar fees; legal expenses;
auditing and accounting expenses; taxes and other fees; brokers' commissions
chargeable to the Fund in connection with securities transactions; expenses of
Trustees who are not affiliated with the Adviser; expenses of Shareholders' and
Trustees' meetings; and fees and other expenses incurred by the Fund in
connection with its membership in any organization. The Fund reimburses the
Adviser for all costs, direct and indirect, which are fairly allocable to
services performed by the Adviser's employees for which the Fund is responsible.
Gradison may, from time to time, agree to waive the receipt of management or
transfer agent fees from the Fund and/or reimburse the Fund for other expenses
in order to limit the Fund's expenses to a specified percentage of average net
assets. Waiver and reimbursement arrangements, which may be terminated at any
time without notice, will increase the Fund's return. If Gradison discontinues a
waiver or reimbursement arrangement, the Fund's expenses will increase and its
yield will be reduced. Gradison retains the ability to be repaid by the Fund for
fees waived and expenses reimbursed if expense ratios fall below the specified
limit prior to the end of the fiscal year. Gradison may waive or reimburse fees
in a greater amount than is required by an applicable fee waiver arrangement.
Under the terms of a distribution service plan adopted pursuant to Rule 12b-1
under the 1940 Act, the Fund pays to Gradison as Distributor a service fee at
the annual rate of one quarter of 1% of the average daily net assets of the
Fund. Such fee is calculated on a daily basis and paid to the Distributor
monthly. The service fee is paid as compensation to the Distributor for
providing personal services to shareholders of the Fund, including responding to
shareholder inquiries and providing information to shareholders about their Fund
accounts. The service fee is a fixed fee which may be more or less than the
Distributor's expenses for rendering these services. The Distributor may use the
fee to make payments to authorized dealers for providing these services to Fund
shareholders.
PERFORMANCE CALCULATIONS
From time to time the Fund may advertise its "yield," "taxable equivalent
yield," and "total return." Both yield and total return figures are based on
historical figures and are not intended to indicate future performance. The
yield of the Fund is computed by dividing the net investment income per share
during the period stated in the advertisement by the maximum offering price per
share on the last day of the period (using the average number of shares entitled
to receive dividends). The yield formula provides for semiannual compounding
which assumes that net investment income is earned and reinvested at a constant
rate and annualized at the end of the six-month period. The Fund's
14
<PAGE> 19
taxable equivalent yield is the yield that a taxable investment would have to
generate in order to equal the Fund's yield for an investor in a stated tax
bracket.
The total return of the Fund refers to the average annual compounded rate of
return over specified time periods (which periods will be stated in the
advertisement) that would equate an initial amount of money invested in the Fund
(prior to deduction of the sales charge) at the beginning of a stated period to
the ending redeemable value of the investment. The Fund may also calculate
aggregate total returns over various periods of time and total returns which
exclude the effect of the sales charge. The calculations of total return assume
the reinvestment of all dividends and other distributions in additional Fund
shares.
The Fund may also advertise performance rankings assigned to it by organizations
which evaluate mutual fund performance such as Lipper Analytical Securities
Corp. It may also advertise "ratings" assigned to it by organizations such as
Morningstar, Inc.
The Fund's Annual Report to Shareholders contains additional performance
information and will be made available upon request without charge.
15
<PAGE> 20
Table of Contents
<TABLE>
<S> <C> <C> <C>
Expense Summary 1 Net Asset Value 11
Financial Highlights 2 Optional Shareholder Services 11
Investment Objective 3 Distributions 12
Risk Factors and for Whom the Taxes 12
Fund May be Appropriate 3
General Information 13
Investment Policies 3
Management of the Fund 13
Ohio Economic Considerations 8
Performance Calculations 14
Purchases and Redemptions 8
</TABLE>
GRADISON-MCDONALD
Mutual Funds
-----------------
580 Walnut Street, Cincinnati, Ohio 45202
(513) 579-5000 (800) 869-5999
<PAGE> 21
GRADISON-MCDONALD OHIO TAX-FREE INCOME FUND
GRADISON-MCDONALD MUNICIPAL CUSTODIAN TRUST
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL
INFORMATION
- --------------------------------------------------------------------------------
For information, call: 579-5700 from Cincinnati, Ohio
Toll free (800) 869-5999 from outside Cincinnati
Information may also be obtained from the Fund at:
580 Walnut Street
Cincinnati, Ohio 45202
- ---------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Prospectus of the Fund, dated October 28, l996,
which has been filed with the Securities and Exchange Commission. The Prospectus
is available upon request without charge from the Fund at the above address or
by calling the phone numbers provided above.
The date of this Statement of Additional Information is October 28, l996.
<PAGE> 22
CONTENTS
- ---
Page Location in Prospectus
<TABLE>
<S> <C>
INVESTMENT POLICIES AND RESTRICTIONS . . . . . . 4 Investment Objective
Diversification . . . . . . . . . . . . . 5
Tax-Exempt Securities Ratings . . . . . . 6
FACTORS RELATING TO OHIO . . . . . . . . . . .. .7 Ohio Economic Considerations
HEDGING STRATEGIES . . . . . . . . . . . . . . 12 Investment Objective
Special Risks of Hedging Strategies . . 14
Additional Information
About Hedging Transactions . . . . . . 15
Options . . . . . . . . . . . . . . . . 15
Guidelines for Options . . . . . . . . . 17
Futures . . . . . . . . . . . . . . . . 18
Guidelines for Futures and
Related Options . . . . . . . . . . . 20
MUNICIPAL LEASES . . . . . . . . . . . . . . . 20 Investment Objective
PURCHASE OF SHARES . . . . . . . . . . . . . . 22 Quantity Discounts
LETTERS OF INTENT . . . . . . . . . . . . . . 22 How to Purchase Shares
REDEMPTION OF SHARES . . . . . . . . . . . . . 22 How to Redeem Shares;
Redemptions through
Gradison and McDonald
DAILY DISTRIBUTIONS - ACCOUNTING PRINCIPLES. . . 23 Distributions
TAXES . . . . . . . . . . . . . . . . . . . . . 24 Taxes
Federal . . . . . . . . . . . . . . . 24
Ohio State and Local Tax Matters . . . 26
</TABLE>
2
<PAGE> 23
<TABLE>
<S> <C>
NET ASSET VALUE . . . . . . . . . . . . . . . . 27 Net Asset Value
SALES CHARGE DIFFERENTIALS. . . . . . . . . . . 27 How to Purchase Shares
PORTFOLIO TRANSACTIONS . . . . . . . . . . . 28
INVESTMENT ADVISER . . . . . . . . . . . . . 30 Management of the Fund
Advisory Agreement . . . . . . . . . . 31
Master Distribution Agreement . . . . . 32
Distribution Service Plan . . . . . . . 32
Transfer Agent and
Accounting Services Agreement . . . 34
Other Compensation Paid/
Reimbursement Made to the Adviser . . 34
TRUSTEES AND OFFICERS OF THE TRUST . . . . . . . 34
DESCRIPTION OF THE TRUST . . . . . . . . . . . 36 General Information
CUSTODIAN . . . . . . . . . . . . . . . . . . . 38
INDEPENDENT PUBLIC ACCOUNTANTS . . . . . . . . . 38
LEGAL COUNSEL . . . . . . . . . . . . . . . . . 39
EXCHANGES . . . . . . . . . . . . . . . . . . . 39 Exchanges
TELEPHONE ACCESS TO ACCOUNT
INFORMATION . . . . . . . . . . . . . . . . . . 39
PERFORMANCE CALCULATIONS . .. . . . . . . . . . 39
APPENDIX A . . . . . . . . . . . . . . . . . . 41
SALES BROCHURE INFORMATION . . . . . . . . . . . 43
REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS AND FINANCIAL STATEMENTS Following Page 54
</TABLE>
3
<PAGE> 24
INVESTMENT POLICIES AND RESTRICTIONS
Gradison-McDonald Ohio Tax-Free Income Fund (the "Fund") invests
primarily in securities issued by state and local municipalities the interest
from which is free from Federal income tax and Ohio state personal income tax.
In addition to the investment restrictions described in the Prospectus, the Fund
has adopted the following investment restrictions and limitations, which may not
be changed without the approval of the holders of a majority of the outstanding
voting securities of the Fund. (See "Description of the Trust.") The Fund will
not:
(1) Borrow money, except from banks or as a temporary measure or for
extraordinary or emergency purposes such as to enable the Fund to
satisfy redemption requests where liquidation of portfolio securities is
considered disadvantageous and not for leverage purposes, and then only
in amounts not exceeding 10% of the total assets of the Fund at the time
of the borrowing or one third of the value of the Fund's total assets
including the amount borrowed. Any borrowing that comes to exceed
33 1/3% of the Fund's total assets by reason of a decline of net assets
will be reduced to the extent necessary to comply with the 33 1/3%
limitation. While any borrowing of greater than 5% of the assets occurs,
the Fund will not purchase additional portfolio securities;
(2) Make loans, except that the purchase of securities as allowed by the
Fund's investment objective and other investment restrictions and the
entering into of repurchase agreements shall not be prohibited by this
restriction;
(3) Purchase or sell real estate. The purchase of securities secured by real
estate which are otherwise allowed by the Fund's investment objective
and other investment restrictions shall not be prohibited by this
restriction;
(4) Underwrite the securities of other issuers, except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of
1933 in connection with the acquisition of portfolio securities;
(5) Purchase or sell commodities or commodity contracts or interests in oil,
gas or other mineral exploration or development programs. The purchase
or sale of financial futures contracts or options on financial futures
contracts for the purposes and within the limits set forth in the
Prospectus and this Statement of Additional Information shall not be
prohibited by this restriction;
(6) Issue senior securities as defined in the Investment Company Act of
1940, except to the extent that such issuance might be involved with
respect to borrowings subject to item (1) above or with respect to
transactions involving futures contracts or the writing of options
4
<PAGE> 25
within the limits described in the Prospectus and this Statement and
provided that the Fund may issue shares of additional series or classes
that the Trustees may establish.
The following limitations are not fundamental and may be changed without
shareholder approval: (1) With respect to the purchase of securities of other
investment companies, the Fund will not (a) purchase more than 3% of the
outstanding voting shares of an investment company; (b) invest more than 5% of
its assets in securities of any one investment company; or (c) invest more than
10% of its assets in securities of all investment companies. (2) The Fund will
not make short sales of securities, or purchase securities on margin, except for
short-term credit as is necessary for the clearance of transactions. The deposit
or payment by the Fund of initial or maintenance margin in connection with
futures contracts or related options transactions is not considered the purchase
of a security on margin. (3) The Fund will not purchase or retain in its
portfolio any securities issued by an issuer, if to the Fund's knowledge, those
Trustees and officers of the Trust or of the Fund's investment adviser, who
individually own beneficially more than 1/2 of 1% of the outstanding securities
of such issuer, together own beneficially more than 5% of such outstanding
securities. (4) The Fund will not mortgage, pledge or hypothecate securities in
amounts exceeding 15% of the value of the assets of the Fund (taken at market
value). Notwithstanding this restriction the Fund may enter into "when issued"
and "delayed delivery" transactions. The deposit of underlying securities and
other assets in escrow or other collateral arrangements in connection with the
writing of options or margin for futures contracts or options on futures
contracts are not deemed to be pledges or hypothecations subject to this
restriction. (5) The Fund may not invest more than 15% of its assets in the
aggregate in securities of unseasoned issuers which with their predecessors have
had less than three years of continuous operations and in securities subject to
legal restrictions upon resale.
If a percentage restriction set forth above is met at the time of
investment, a later movement above the restriction level resulting from a change
in the value of securities held by the Fund will not be considered a violation
of the investment restriction.
DIVERSIFICATION
A bond for which the payments of principal and interest are secured by
an escrow account of securities backed by the full faith and credit of the U.S.
Government (defeased) will not be treated as an obligation of the original
municipality for purposes of determining concentration. When a security is
insured by bond insurance, it is not considered a security guaranteed by the
insurer and there is no limit on the percentage of the Fund's assets that may be
invested in securities insured by a single insurer.
5
<PAGE> 26
TAX-EXEMPT SECURITIES RATINGS
Moody's Investors Services, Inc. ("Moodys"), Standard & Poor's ("S&P"),
and Fitch Investors Services, Inc. ("Fitch") are private services that provide
ratings of the credit quality of debt obligations, including issues of municipal
securities. A description of the investment grade ratings assigned to municipal
securities and tax-free commercial paper is set forth below. The Fund may use
these ratings in determining whether to purchase, sell or hold a security. It
should be emphasized, however, that ratings are general and are not absolute
standards of quality. Consequently, municipal securities with the same maturity,
interest rate and rating may have different market prices.
MUNICIPAL BONDS - Tax-exempt bonds rated Aaa and Aa by Moody's comprise what are
generally known as "high grade bonds". Tax-exempt bonds which are rated A by
Moody's possess many favorable investment attributes and are considered "upper
medium grade obligations". Factors giving security to principal and interest of
A-rated tax-exempt bonds are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future. The Baa
rating is assigned to "medium grade" obligations by Moody's. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Tax-exempt bonds rated AAA bear the highest rating assigned by
S&P to a debt obligation and indicates an extremely strong capacity to pay
principal and interest. Tax-exempt bonds rated AA also qualify as high-quality
debt obligations. Capacity to pay principal and interest is very strong, and in
the majority of instances they differ from AAA issues only in small degree.
Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions. The BBB rating, which is the lowest
"investment grade" security rating by S&P, indicates an adequate capacity to pay
principal and interest. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay principal
and interest for Municipal Obligations in this category than for Municipal
Obligations in the A category.
Bonds rated AAA by Fitch are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events. Bonds rated AA by Fitch are considered to be investment
grade and of very high credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong as bonds rated AAA.
Bonds rated A by Fitch are considered to investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings. Bonds rated BBB by
Fitch are considered to be investment grade and of satisfactory
6
<PAGE> 27
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on these bonds,
and therefore, impair timely payment.
SHORT-TERM NOTES - Moody's MIG1/VMIG1 rating denotes best quality characterized
by strong protection by established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing. Moody's
MIG2/VMIG2 denotes high quality with ample margins of protection. MIG3/VMIG3
denotes favorable quality. While all security elements are accounted for there
is lacking the undeniable strengths of MIG1/VMIG1 and MIG2/VMIG2. Moody's
ratings MIG1/VMIG1-MIG3/VMIG3 are all investment grade ratings. S&P's rating of
SP-1 reflects very strong or strong capacity to pay principal and interest.
S&P's SP-2 rating reflects satisfactory capacity to pay principal and interest.
TAX-FREE COMMERCIAL PAPER - Issuers rated Prime-1 by Moody's (or related
supporting institutions) have a superior capacity for repayment of short-term
promissory obligations. Prime-1 repayment capacity will normally be evidenced by
the following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earnings coverage of fixed financial charges and high internal cash
generation; well established access to a range of financial markets; and assured
sources of alternate liquidity.
Issuers rated Prime-2 by Moody's (or related supporting institutions)
have a strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample liquidity is maintained.
A-1 - (S&P) This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2 - Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
"A-1".
FACTORS RELATING TO OHIO
As described above, and except to the extent investments are in
temporary investments, or invested in the limited amounts described in the
7
<PAGE> 28
Prospectus in obligations of the governments of Puerto Rico, Guam, and the U.S.
Virgin Islands, the Fund will invest substantially all of its net assets in
obligations issued by or on behalf of the State of Ohio, political subdivisions
thereof, or agencies or instrumentalities of the State or its political
subdivisions (Ohio Obligations). The Fund is therefore susceptible to political,
economic or regulatory factors that may affect issuers of Ohio Obligations. In
addition, the specific Ohio Obligations invested in are expected to change from
time to time. The following information constitutes only a brief summary of some
of the many complex factors that may affect the financial situation of issuers
in Ohio, and is not applicable to "conduit" obligations on which the public
issuer itself has no financial responsibility. This information is derived from
official statements published in connection with the issuance of securities of
certain Ohio issuers and from other publicly available documents, and is
believed to be accurate. No independent verification has been made of any of the
following information.
The creditworthiness of Ohio Obligations of local Ohio issuers is
generally unrelated to that of obligations issued by the State itself, and
generally there is no responsibility on the part of the State to make payments
on those local obligations. There may be specific factors that are from time to
time applicable in connection with investment in particular Ohio Obligations or
in those obligations of particular Ohio issuers, and it is possible the
investment will be in particular Ohio Obligations or in those Obligations of
particular issuers as to which those factors apply. However, the information set
forth below is intended only as a general summary and not as a discussion of any
specific factors that may affect any particular issue or issuer of Ohio
Obligations.
Ohio is the seventh most populous state, with a 1990 Census count of
10,847,000 indicating a 0.5% population increase from 1980.
The Ohio economy while diversifying more into the service and other
nonmanufacturing areas, continues to rely in part on durable goods manufacturing
largely concentrated in motor vehicles and equipment, steel, rubber products and
household appliances. In l991, 26.3% of Ohio's gross product was manufacturing
and 17.1% from services. As a result, general economic activity in Ohio, as in
many other industrially-developed states, tends to be more cyclical than in some
other states and in the nation as a whole. Agriculture is an important segment
of the economy, with over half the State's area devoted to farming and
approximately 16% of total employment in agribusiness.
The State's overall unemployment rate has commonly been somewhat higher
than the national figure. However, Ohio reported 1995 average monthly rate of
4.8%, compared to the national figure of 5.6% and l994 average monthly
unemployment rate of 5.5% compared to the national figure of 6.1% The
unemployment rate and its effects vary among particular geographic areas of the
State.
8
<PAGE> 29
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on State or local government finances
generally, will not adversely affect the market value of Ohio Obligations held
in the portfolio of the Fund or the ability of particular obligors to make
timely payments of debt service on (or lease payments relating to) those
obligations.
The State operates on the basis of a fiscal biennium for its
appropriations and expenditures, and is effectively precluded by law from ending
a fiscal year ending June 30 (FY) or biennium in a deficit position. Most State
operations are financed through the General Revenue Fund (GRF), for which
personal income and sales-use taxes are the major revenue sources. Growth and
depletion of GRF ending fund balances show a consistent pattern related to
economic conditions, with the FY-ending balance reduced during less favorable
economic periods and increased during more favorable economic periods. The State
has established procedures for, and has timely taken, necessary actions to
ensure a resource/expenditure balance during less favorable economic periods.
These include general and selected reductions in appropriations spending; none
have been applied to appropriations needed for debt service or lease rentals on
any State obligations.
As a first step of addressing a $520,000,000 GRF shortfall for Fiscal
Year 1993 then estimated by the Office of Budget and Management (OBM), the
Governor ordered selected GRF appropriations reductions totaling $300,000,000
effective July 1, 1992, expressly excluding appropriations for primary and
secondary education and for debt service (including lease rental
appropriations.) Subsequent executive and legislative actions provided for
positive biennium-ending GRF balances.
The GRF appropriations act for the l994-l995 biennium provided for total GRF
biennial expenditures of approximately $30.7 billion. Authorized expenditures in
Fiscal Year 1994 were 9.2% higher than in Fiscal Year l993 (taking into account
F fiscal Year 1993 expenditures reductions), and for Fiscal Year 1995 are 6.6%
higher than in Fiscal Year 1994.
The first year of the biennium, Fiscal Year 1994, ended with a GRF fund
balance of over $560,000,000, permitting an additional $260,300,000 to be
deposited in the BSF. Actual Fiscal Year 1994 expenditures were 3.3% below those
authorized, primarily as the result of lower than expected Medicaid spending, In
addition, tax receipts (primarily auto sales and use tax) were significantly
above estimates.
The biennium ending GRF fund balance was $928,000,000. Of that, $70,000,000
has been retained as an unreserved and undesignated balance, and $858,000,000
transferred into various funds, including $535,200,000 into the Budget
Stabilization Fund (which has a current balance of $828,300,000).
9
<PAGE> 30
The GRF appropriations act for the current biennium was passed on June 28,
1995 and promptly signed (with, however, selective vetoes) by the Governor. That
act provides for total GRF biennial expenditures of approximately $33,5 billion,
with the following examples of GRF biennial expenditure increases over those
expenditures for the prior biennium for certain major programs: higher
education, 13.1%; mental health and mental retardation, 4.8%; primary and
secondary education, l5.4%; human services, 9.5%; justice and corrections, 28%.
Necessary GRF debt service and lease-rental appropriations for the entire
biennium were requested in the Governor's proposed budget and incorporated in
the related appropriations bill as introduced, and in the bill's versions as
passed by the House and the Senate and in the act as passed and signed. the same
is true for the separate Department of Transportation/Department of Public
Safety and Bureau of Workers' Compensation appropriations acts, contained
lease-rental appropriations for certain OBA-financed ODOT/DPS and BWC projects.
In accordance with the appropriations act, the significant June 30, 1995 GRF
fund balance, after leaving in the GRF an unreserved and undesignated balance of
$70,000,000, has been transferred to a variety of funds, including $535,200,000
to the BSF. $322,800,000 was transferred to other funds, including school
assistance funds and, in anticipation of possible federal program changes, a
human services stabilization fund.
The June 30, l996, GRF ending fund balance was over $781 million which was
higher than forecast; $100 million was transferred from GRF to the fund
providing for the elementary and secondary school computer network and
$30,000,000 to a new fund for transportation infrastructure. Approximately $401
million is serving as a basis for a temporary 1996 personal income tax
reduction.
The incurrence or assumption of debt by the State without a popular vote is,
with limited exceptions, prohibited by current provisions of the State
Constitution. The State may incur debt to cover casual deficits or failures in
revenues or to meet expenses not otherwise provided for, but limited in amount
to $750,000. The Constitution expressly precludes the State from assuming the
debts of any local government or corporation. (An exception in both cases is for
any debt incurred to repel invasion, suppress insurrection or defend the State
in war.)
By thirteen constitutional amendments, the last adopted in 1993, Ohio voters
have authorized the incurrence of State debt to which taxes or excises were
pledged for payment. At July 1, l995, $892 million (excluding certain highway
bonds ($1.8 billion) payable primarily from highway use charges) of this debt
was outstanding, with the only such State debt then still authorized to be
incurred being portions of the highway bonds, and the following: (a) up to $100
million of obligations for coal research and
10
<PAGE> 31
development may be outstanding at any one time ($30.3 million outstanding); and
(b) of $1.2 billion of obligations for local infrastructure improvements, no
more than $120 million may be issued in any calendar year ($775 million
outstanding).
The Constitution also authorizes the issuance of State obligations for
certain purposes, the owners of which are not given the right to have excises or
taxes levied to pay debt services. Those special obligations include bonds and
notes issued by, among others, the Ohio Public Facilities Commission and the
Ohio Building Authority; approximately $5.0 billion of those obligations were
outstanding at July 1, l995.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation in the provision of individual and family housing,
including borrowing for the purpose. The General Assembly may for the purpose
authorize the issuance of State obligations secured by a pledge of all or such
portion as it authorizes of State revenues or receipts, although the obligations
may not be supported by the State's full faith and credit.
The General Assembly has placed on the November 1995 ballot a proposed
constitutional amendment that would extend the local infrastructure bond program
(authorizing an additional $1.2 billion of State full faith and credit
obligations to be issued over 10 years for the purpose) and authorize additional
highway bonds. The latter would supersede the current $500,000,000 highway bonds
authorization, and would authorize not more than $ l.2 billion to be outstanding
at any time and not more than $220,000,000 to be issued in a Fiscal Year. This
amendment was approved by the electors.
Common resolutions are pending in both houses of the General Assembly that
would submit a constitutional amendment relating to certain other aspects of
State debt. The proposal would authorize, among other things, the issuance of
general obligation State debt for a variety of purposes, with debt service on
all State general obligation debt and GRF-supported obligations not to exceed 5%
of the preceding Fiscal Year's GRF expenditures. It cannot be predicted whether
any such amendment will be submitted, or, if submitted, approved by the
electors.
State and local agencies issue revenue obligations that are payable from
revenues from or relating to certain facilities, which obligations are not
"debt" within constitutional provisions or payable from taxes. In general,
payment obligations under lease-purchase agreements of Ohio public agencies (in
which certificates of participation may be issued) are limited in duration to
the agency's fiscal period, and are renewable only upon appropriations being
made available for the subsequent fiscal period.
Local school districts in Ohio receive a major portion (on a statewide
basis, recently approximately 44%) of their operating moneys from State
11
<PAGE> 32
subsidies, but are dependent on local property taxes, and in 120 districts
income taxes, for significant portions of their budgets. Litigation is pending,
similar to that in other states, questioning the constitutionality of Ohio's
system of school funding. A small number of the State's 612 local school
districts have in any year required special assistance to avoid year-end
deficits. A current program provides for school district cash needs borrowing
directly from commercial lenders, with diversion of State subsidy distributions
to repayment if needed; in FY 1996 under this program 20 districts borrowed a
total of $87 million (including over $42 million by one district), and in FY
1995 borrowings totaling $71.1 million were approved.
Ohio's 943 incorporated cities and villages rely primarily on property and
municipal income taxes for their operations, and, with other local governments,
receive local government support and property tax relief moneys distributed by
the State. For those few municipalities that on occasion have faced significant
financial problems, established procedures provide for a joint State/local
commission to monitor the municipality's fiscal affairs, and for development of
a financial plan to eliminate deficits and cure any defaults. Since inception in
1979, these procedures have been applied to 23 cities and villages, in 19 of
which the fiscal situation has been resolved and the procedures terminated.
At present the State itself does not levy ad valorem taxes on real or
tangible personal property. Those taxes are levied by political subdivisions and
other local taxing districts. The Constitution has since 1934 limited the amount
of the aggregate levy (including a levy for unvoted general obligations) of
property taxes by all overlapping subdivisions, without a vote of the electors
or a municipal charter provision, to 1% of true value in money, and statutes
limit the amount of that aggregate levy to 10 mills per $1 of assessed valuation
(commonly referred to as the "ten-mill limitation"). Voted general obligations
of subdivisions are payable from property taxes unlimited as to amount or rate.
HEDGING STRATEGIES
As discussed in the Prospectus, the Adviser may use a variety of
financial instruments ("Hedging Instruments"), including certain options,
futures contracts (sometimes referred to as "futures") and options on futures
contracts to attempt to hedge the Fund's portfolio. The particular Hedging
Instruments are described in Appendix A to this Statement of Additional
Information. Any income realized from the use of options and futures would be
taxable to shareholders.
Hedging strategies can be broadly categorized as "short hedges" and "long
hedges". A short hedge is a purchase or sale of a Hedging Instrument intended to
partially or fully offset potential declines in the value of one or more
investments held in the Fund's portfolio. Thus, in a short
12
<PAGE> 33
hedge the Fund takes a position in a Hedging Instrument whose price is expected
to move in the opposite direction of the price of the investment being hedged.
For example, the Fund might purchase a put option on a security to hedge against
a potential decline in the value of that security. If the price of the security
declined below the exercise price of the put, the Fund could exercise the put
and thus limit its loss below the exercise price to the premium paid plus
transaction costs. In the alternative, because the value of the put option can
be expected to increase as the value of the underlying security declines, the
Fund might be able to close out the put option and realize a gain to offset the
decline in the value of the security.
Conversely, a long hedge is a purchase or sale of a Hedging Instrument
intended to partially or fully offset potential increases in the acquisition
cost of one or more investments that the Fund intends to acquire. Thus, in a
long hedge the Fund takes a position in a Hedging Instrument whose price is
expected to move in the same direction as the price of the prospective
investment being hedged. For example, the Fund might purchase a call option on a
security it intends to purchase to hedge against an increase in the cost of the
security. If the price of the security increased above the exercise price of the
call, the Fund could exercise the call and thus limit its acquisition cost to
the exercise price plus the premium paid and transaction costs. Alternatively,
the Fund might be able to offset the price increase by closing out an
appreciated call option and realizing a gain.
Hedging Instruments on securities generally are used to hedge against price
movements in one or more particular securities positions that the Fund owns or
intends to acquire. Hedging Instruments on debt securities may be used to hedge
either individual securities or broad market sectors.
The use of Hedging Instruments is subject to applicable regulations of the
SEC, the several options and futures exchanges upon which they are traded, the
Commodity Futures Trading Commission ("CFTC") and various state regulatory
authorities. In addition, the Fund's ability to use Hedging Instruments will be
limited by tax considerations. See "Taxes".
In addition to the products, strategies and risks described below, the
Adviser may discover additional opportunities in connection with options,
futures contracts and other hedging techniques. These new opportunities may
become available as the Adviser develops new techniques, as regulatory
authorities broaden the range of permitted transactions and as new options,
futures contracts or other techniques are developed. The Adviser may utilize
these opportunities to the extent that they are consistent with the Fund's
investment objectives and permitted by the Fund's investment limitations and
applicable regulatory authorities. The Fund's Statement of Additional
Information will be supplemented to the extent that new products or techniques
involve materially different risks than those described below or in the
Prospectus.
13
<PAGE> 34
SPECIAL RISKS OF HEDGING STRATEGIES
The use of Hedging Instruments involves special consideration and risks,
as described below. Risks pertaining to particular Hedging Instruments are
described in the sections that follow.
(1) Successful use of most Hedging Instruments depends upon the
Adviser's ability to predict movements of the overall securities
and interest rate markets, which requires different skills than
predicting changes in the prices of individual securities. While
the Adviser is experienced in the use of Hedging Instruments,
there can be no assurance that any particular hedging strategy
adopted will succeed.
(2) There might be imperfect correlation, or even no correlation,
between price movements of a Hedging Instrument and price
movements of the investments being hedged. For example, if the
value of a Hedging Instrument used in a short hedge increased by
less than the decline in value of the hedged investment, the
hedge would not be fully successful. Such a lack of correlation
might occur due to factors unrelated to the value of the
investments being hedged, such as speculative or other pressures
on the markets in which Hedging Instruments are traded. The
effectiveness of hedges using Hedging Instruments on indices will
depend on the degree of correlation between price movements in
the index and price movements in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by
wholly or partially offsetting the negative effect of unfavorable
price movements in the investments being hedged. However, hedging
strategies can also reduce opportunity for gain by offsetting the
positive effect of favorable price movements in the hedged
investments. For example, if the Fund entered into a short hedge
because the Adviser projected a decline in the price of a
security in the Fund's portfolio, and the price of that security
increased instead, the gain from that increase might be wholly or
partially offset by a decline in the price of the Hedging
Instrument. Moreover, if the price of the Hedging Instrument
declined by more than the increase in the price of the security,
the Fund could suffer a loss. In either such case, the Fund would
have been in a better position had it not hedged at all.
(4) As described below, the Fund might be required to maintain assets
as "cover", maintain segregated accounts or make margin payments
when it takes positions in Hedging Instruments involving
obligations to third parties (i.e., Hedging Instruments other
than purchased options). If the Fund were unable to close out its
positions in such Hedging Instruments, it might be required to
14
<PAGE> 35
continue to maintain such assets or accounts or make such
payments until the position expired or matured. These
requirements might impair the Fund's ability to sell a portfolio
security or make an investment at a time when it would otherwise
be favorable to do so, or require that the Fund sell a portfolio
security at a disadvantageous time. The Fund's ability to close
out a position in a Hedging Instrument prior to expiration or
maturity depends on the existence of a liquid secondary market
or, in the absence of such a market, the ability and willingness
of the opposite party to the transaction to enter into a
transaction closing out the position. Therefore, there is no
assurance that any hedging position can be closed out at a time
and price that is favorable to the Fund.
ADDITIONAL INFORMATION ABOUT HEDGING TRANSACTIONS
The Fund will not use Hedging Instruments for speculative purposes or for
purposes of leverage. Transactions using Hedging Instruments, other than
purchased options, expose the Fund to an obligation to another party. The Fund
will comply with SEC guidelines regarding cover for hedging transactions and
will, if the guidelines so require, set aside cash or liquid, high-grade debt
securities in a segregated account with its custodian in the prescribed amount.
Assets held in a segregated account cannot be sold while the position in the
corresponding Hedging Instrument is open, unless they are replaced with similar
assets. As a result, the commitment of a large portion of the Fund's assets to
cover or segregated accounts could impede portfolio management or the Fund's
ability to meet redemption requests or other current obligations.
OPTIONS
The Fund may purchase put and call options, and write (sell) covered call
options and covered put options, on debt securities. The purchase of a call
option serves as a long hedge, and the purchase of a put option serves as a
short hedge.
Writing a covered call option serves as a limited short hedge, because
declines in the value of the hedged investment would be offset to the extent of
the premium received for writing the option. However, if the security
appreciates to a price higher than the exercise price of the call option, it can
be expected that the option will be exercised and the Fund will be obligated to
sell the security at less than its market value. If the covered call option is
an OTC option, the securities or other assets used as cover would be considered
illiquid unless the OTC options are sold to qualified dealers who agree that the
Fund may repurchase any OTC option it writes at a maximum price to be calculated
by a formula set forth in the option agreement. The cover for an OTC option
written subject to this
15
<PAGE> 36
procedure would be considered illiquid only to the extent that the maximum
repurchase price under the formula exceeds the intrinsic value of the option.
Writing a put option serves as a limited long hedge because increases in the
value of a security the Fund intends to purchase would be offset to the extent
of the premium received for writing the option. However, if the security
depreciates to a price lower than the exercise price of the put option, it can
be expected that the option will be exercised and the Fund will be obligated to
purchase the security at more than its market value.
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration dates
of up to nine months. Options purchased by the Fund that expire unexercised have
no value.
The Fund may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, the Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, the Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit the Fund to realize profits or
limit losses on an option position prior to its exercise or expiration.
The Fund may purchase or write both exchange-traded and OTC options.
Exchange markets for options on debt securities exist but are relatively new,
and these instruments are primarily traded on the OTC market. Exchange-traded
options in the United States are issued by a clearing organization affiliated
with the exchange on which the option is listed which, in effect, guarantees
completion of every exchange-traded option transaction. In contrast, OTC options
are contracts between the Fund and its contra-party (usually a securities dealer
or a bank) with no clearing organization guarantee. Thus, when the Fund
purchases an OTC option, it relies on the party from whom it purchased the
option or to whom it has written the option (the contra-party) to make or take
delivery of the underlying investment upon exercise of the option. Failure by
the contra-party to do so would result in the loss of any premium paid by the
Fund as well as the loss of any expected benefit of the transaction.
The Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. The Fund
intends to purchase or write only those exchange-traded options for which there
appears to be a liquid secondary market. However, there can be no assurance that
such a market will exist at any particular time. Closing
16
<PAGE> 37
transactions can be made for OTC options only by negotiating directly with the
contra-party, or by a transaction in the secondary market if any such market
exists. Although the Fund will enter into OTC options only with contra-parties
that are expected to be capable of entering into closing transactions with the
Fund, there is no assurance that the Fund will in fact be able to close out an
OTC option position at a favorable price prior to expiration. In the event of
insolvency of the contra-party, the Fund might be unable to close out an OTC
option position at any time prior to its expiration.
If the Fund were unable to effect a closing transaction for an option it had
purchased, it would have to exercise the option to realize any profit and would
be unable to limit its losses prior to expiration. The inability to enter into a
closing purchase transaction for a covered call option written by the Fund could
cause material losses because the Fund would be unable to sell the investment
used as cover for the written option until the option expires or is exercised.
The inability to enter into a closing purchase transaction for a put option
written by the Fund could also cause material losses because the price of the
security underlying the option could continue to decline.
As options on indexes of municipal and nonmunicipal debt securities become
available, the Fund may purchase and write put and call options on such indexes
in much the same manner as the more traditional options discussed above, except
that index options may serve as a hedge against overall fluctuations in the debt
securities markets (or market sectors) rather than anticipated increases or
decreases in the value of a particular security.
Because of the limited availability of options on municipal securities, the
Adviser may deem it in the best interest of the Fund to engage in transactions
using exchange-traded options on U.S. government securities. Options on U.S.
Treasury bonds, bills and notes are currently so traded; additional contracts
are likely to be developed. In the opinion of the Adviser, there is a high
degree of correlation between the prices and interest rates of U.S. government
securities and those of municipal securities. Therefore, the Adviser believes
that options on U.S. government securities could serve as an effective proxy for
options on municipal securities. Therefore, the Fund's options activities may
also include options on U.S. government securities traded on national securities
exchanges.
GUIDELINES FOR OPTIONS
In view of the risks involved in using the options strategies described
above, the Trust's Board of Trustees has determined that the Fund may purchase a
put or call option, including any straddles or spreads, only if the value of its
premium, when aggregated with the premiums on all other
17
<PAGE> 38
options held by the Fund, does not exceed 5% of the Fund's total assets. This
guideline may be modified by the board without shareholder vote. Adoption of
this guideline cannot be guaranteed to limit the percentage of the Fund's assets
at risk to 5%.
FUTURES
The Fund may purchase and sell municipal bond index futures, municipal debt
futures and other interest rate futures contracts. The Fund may also purchase
put and call options and write put and covered call options on futures in which
it is allowed to invest. The purchase of futures or call options thereon can
serve as a long hedge, and the sale of futures or the purchase of put options
thereon can serve as a short hedge. Writing covered call options on futures
contracts can serve as a limited short hedge, using a strategy similar to that
used for writing covered call options on securities or indices. Similarly,
writing put options on futures contracts can serve as a limited long hedge.
Interest rate futures contracts also can be used to manage the average
duration of the Fund's portfolio. If the Adviser wishes to shorten the average
duration of the Fund, the Fund may sell a futures contract or a call option
thereon, or purchase a put option on that futures contract. If the Adviser
wishes to lengthen the average duration of the Fund, the Fund may buy a futures
contract or a call option thereon, or sell a put option thereon.
The Fund may enter into interest rate futures contracts as a hedge against
or to minimize adverse principal fluctuations or as an efficient means of
regulating the Fund's exposure to the municipal bond market. The Fund could sell
interest rate futures as an offset against the effect of expected increases in
interest rates and purchase such futures as an offset against the effect of
expected declines in interest rates.
It is possible that the Fund's hedging activities will occur primarily
through the use of municipal bond index futures contracts because the uniqueness
of that index contract should better correlate with the Fund's portfolio and
thereby be more effective. However, it is also possible that it may be deemed in
the best interest of shareholders to use futures contracts on U.S. Treasury
bonds, bills or notes, and the Fund reserves the right to use such futures
contracts at any time. Use of these futures could occur, as an example, when
both the U.S. Treasury bond futures contract and municipal bond index futures
contract are correlating well with municipal bond prices, but the U.S. Treasury
bond futures contract is trading at a more advantageous price making the hedge
less expensive with the U.S. Treasury bond futures contract than would be
obtained with the municipal bond index futures contract.
18
<PAGE> 39
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the Fund is required to deposit in a segregated
account with its custodian, in the name of the futures broker through whom the
transaction was effected, "initial margin" consisting of cash, U.S. government
securities or other liquid, high-grade debt securities, in an amount generally
equal to 10% or less of the contract value. Margin must also be deposited when
writing a call or put option on a futures contract, in accordance with
applicable exchange rules. Unlike margin in securities transactions, initial
margin on futures contracts does not represent a borrowing, but rather is in the
nature of a performance bond or good-faith deposit that is returned to the Fund
at the termination of the transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as periods of high volatility, the
Fund may be required by an exchange to increase the level of its initial margin
payment, and initial margin requirements might be increased generally in the
future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
broker daily as the value of the futures position varies, a process known as
"marking to market". Variation margin does not involve borrowing, but rather
represents a daily settlement of the Fund's obligations to or from a futures
broker. When the Fund purchases an option on a future, the premium paid plus
transaction costs is all that is at risk. In contrast, when the Fund purchases
or sells a futures contract or writes a call or put option thereon, it is
subject to daily variation margin calls that could be substantial in the event
of adverse price movements. If the Fund had insufficient cash to meet daily
variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.
Holders and writers of futures positions and options on futures can enter
into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument held or written. Positions in futures and options on futures may be
closed only on an exchange or board of trade that provides a secondary market.
The Fund intends to enter into futures transactions and options thereon only on
exchanges or boards of trade where there appears to be a liquid secondary
market. However, there can be no assurance that such a market will exist for a
particular contract at a particular time.
Under the circumstances, futures exchanges may establish daily limits on the
amount that the price of a futures or related option can vary from the previous
day's settlement price; once that limit is reached, no trades may be made that
day at a price beyond the limit. Daily price limits do not limit potential
losses because prices could move to the daily limit for several consecutive days
with little or no trading, thereby preventing liquidation of unfavorable
positions.
If the Fund were unable to liquidate a futures or related options position
due to the absence of a liquid secondary market or the imposition
19
<PAGE> 40
of price limits, it could incur substantial losses. The Fund would continue to
be subject to market risk with respect to the position. In addition, except in
the case of purchased options, the Fund would continue to be required to make
daily variation margin payments and might be required to maintain the position
being hedged by the future or option or to maintain cash or securities in a
segregated account.
Certain characteristics of the futures market might increase the risk that
movements in the prices of futures contracts or related options might not
correlate perfectly with movements in the prices of the investments being
hedged. For example, all participants in the futures and related options markets
are subject to daily variation margin calls and might be compelled to liquidate
futures or related options positions whose prices are moving unfavorably to
avoid being subject to further calls. These liquidations could increase price
volatility of the instruments and distort the normal price relationship between
the futures or options and the investments being hedged. Also, because initial
margin deposit requirements in the futures market are less onerous than margin
requirements in the securities markets, there might be increased participation
by speculators in the futures markets. This participation also might cause
temporary price distortions. In addition, activities of large traders in both
the futures and securities markets involving arbitrage, "program trading" and
other investment strategies might result in temporary price distortions.
GUIDELINES FOR FUTURES AND RELATED OPTIONS
In view of the risks involved in using the futures and options strategies that
are described above, the Trust's Board of Trustees has determined that the Fund
will not purchase or sell futures contracts or related options if, immediately
thereafter, the sum of the amount of initial margin deposits on the Fund's
existing futures positions and initial margin deposits and premiums paid for
related options would exceed 5% of the market value of the Fund's total assets.
This guideline may be modified by the board without shareholder vote. Adoption
of this guideline cannot be guaranteed to limit the percentage of the Fund's
assets at risk to 5%.
In addition, the Fund has represented to the CFTC that it will use futures
contracts and options thereon solely in bona fide hedging transactions or under
other circumstances permitted by the CFTC.
MUNICIPAL LEASES
As described in the Prospectus, the Fund may invest in Municipal Obligations
that constitute participations in a lease obligation or installment purchase
contract obligation (hereafter collectively called "municipal leases) of a
municipal authority or entity. Although municipal
20
<PAGE> 41
leases do not constitute general obligations of the municipality for which the
municipality's taxing power is pledged, a lease obligation is ordinarily backed
by the municipality's covenant to budget for, appropriate and make the payments
due under the lease obligation. However, certain municipal leases contain
"nonappropriation" clauses which provide that the municipality has no obligation
to make lease or installment purchase payments in future years unless money is
appropriated for such purpose on a yearly basis. Although nonappropriation
municipal leases are secured by the leased property, disposition of the property
in the event of foreclosure might prove difficult. The Fund will seek to
minimize the special risks associated with such securities by not investing more
than 10% of its assets in municipal leases that contain nonappropriation
clauses. In evaluating investments in municipal leases with nonappropriation
clauses, the Adviser will consider such factors as whether (1) the nature of the
leased equipment or property is such that its ownership or use is essential to a
governmental function of the municipality, (2) the lease payments will commence
amortization of principal at an early date resulting in an average life of seven
years or less for the lease obligation, (3) appropriate covenants will be
obtained from the municipal obligor prohibiting the substitution or purchase of
similar equipment if lease payments are not appropriated, (4) the lease obligor
has maintained good market acceptability in the past,(5) the investment is of a
size that will be attractive to institutional investors, and (6) the underlying
leased equipment has elements of portability and/or use that enhance its
marketability in the event foreclosure on the underlying equipment were ever
required. Municipal leases provide a premium interest rate which along with
regular amortization of the principal may make them attractive for a portion of
the assets of the Fund. With respect to evaluating the credit quality of a
municipal lease the Adviser will consider: whether a lease can be canceled; the
level of assurance that leased assets can be sold; the strength of the lessee's
general credit; the potential for an event of nonappropriation; and the legal
recourse in the event of a failure to appropriate.
The Trust's Board of Trustees has established the following guidelines for
determining the liquidity of municipal leases in the Fund's portfolio, and
subject to review by the Board, has delegated that responsibility to the
Adviser. When evaluating the liquidity of Municipal Leases, the Adviser,
pursuant to procedures established by the Board, considers all relevant factors,
including frequency of trading, availability of quotations, the number of
dealers and their willingness to make markets, the nature of trading activity
and the assurance that liquidity will be maintained.
21
<PAGE> 42
PURCHASE OF SHARES
The Fund reserves the right to impose a charge of $15 for any purchase check
returned to the Fund as uncollectible and to collect such fee by redeeming
shares of the Fund from such shareholder's account.
The Fund reserves the right to limit the amount of any purchase and to
reject any purchase order. Shares of the Fund are offered continuously; however,
the offering of shares of the Fund may be suspended at any time and resumed at
any time thereafter. The Fund intends to waive the initial and subsequent
purchase minimums for employees of McDonald & Company Securities, Inc. which
through its Gradison Division acts as the Fund's Adviser and Distributor.
LETTERS OF INTENT (SEE "QUANTITY DISCOUNTS" IN THE PROSPECTUS)
If the total purchases, less redemptions, exceed the amount you specify, and
qualify you for a further quantity discount, Gradison or McDonald will, at your
request, make a retroactive sales charge adjustment and will apply the
adjustment amount to purchase additional shares of the Fund, and, if applicable,
the shares of other Gradison-McDonald funds sold with a sales charge, for your
account at the next computed price. For example:
1. You executed a Letter of Intent for $100,000 of shares and were,
therefore, charged a $2,000 sales charge on purchases in that amount;
2. During the existence of the Letter of Intent you subsequently
purchased an additional $400,000 of shares thereby qualifying for
purchases at $0 sales charge;
3. You will receive an adjustment of $2,000, the sales charge you paid
on the $100,000 purchase, since you reached the $500,000 purchase
level during the existence of the Letter of Intent. The $2,000 will
be applied to purchase additional shares for your account at the next
computed price.
REDEMPTION OF SHARES
The Fund may suspend the right of redemption or may delay payment (a) during
any period when the New York Stock Exchange is closed other than for customary
weekend and holiday closings, (b) when trading in markets normally utilized by
the Fund is restricted, or an emergency exists (determined in accordance with
the rules and regulations of the Securities and Exchange Commission) so that
disposal of the securities held in the
22
<PAGE> 43
Fund or determination of the net asset value of the Fund is not reasonably
practicable, or (c) for such other periods as the Securities and Exchange
Commission by order may permit for the protection of the Fund's shareholders.
The Fund transmits redemption proceeds only to shareholders names and
addresses on its records (or which it has otherwise verifies), provides written
confirmation of all transactions initiated by telephone (either immediately or
by monthly statement, depending on the circumstances), and requires
identification from individuals picking up checks at its office.
DAILY DISTRIBUTIONS - ACCOUNTING PRINCIPLES
The distribution declared by the Fund each day will normally be in an
amount equal to that day's proportionate share of the estimated net investment
income for the applicable monthly period, plus, for certain periods,
undistributed amounts of such income from prior periods, minus, for certain
periods, amounts to provide a reserve of undistributed income which could be
paid in subsequent months, divided by the number of days in that period. The
amount of the daily distribution will generally differ from the Fund's daily
book net income computed in accordance with generally accepted accounting
principles. Estimated net investment income for any period will be based on the
Adviser's projections of accrued interest income during such period less
projected expenses of the Fund to be accrued during such period. This procedure
may enable the Fund to avoid fluctuations in the total daily distributions from
period to period and to minimize the possibility of making distributions from
paid-in capital or other capital sources. The reserve may increase the net asset
value of the Fund's shares, thereby causing shareholders to realize higher
capital gains or lower capital losses upon redemption. On occasion, the Fund may
make distributions which constitute the return of capital to shareholders.
For example, if the Adviser estimates that net investment income for a
31-day month will be $.085 per share, and if the Fund has a reserve of $.01 per
share of undistributed income, the daily distribution might be initially
established at $.09/31 per share for each day during such month, leaving a
reserve of $.005 per share available for distributions in subsequent months if
such estimates are accurate. The Adviser may revise its estimates of the monthly
amounts of such income, in which case the subsequent daily distributions during
such month may be revised accordingly.
23
<PAGE> 44
TAXES
FEDERAL
The Fund has qualified and intends to qualify in the future for
treatment as a regulated investment company ("RIC") under the Internal Revenue
Code of 1986, as amended ("Code") and to qualify to pay "exempt-interest"
dividends. By so qualifying, the Fund will be relieved of Federal income tax on
that part of its investment company taxable income (consisting generally of any
taxable net investment income and net short-term capital gain) and any net
capital gain (the excess of net long-term capital gain over net short-term
capital loss) distributed to Fund shareholders. In order to continue qualify for
treatment as a RIC under the Internal Revenue Code of 1986, as amended ("Code"),
the Fund must distribute to its shareholders for each taxable year at least 90%
of the sum of its investment company taxable income (consisting generally of
taxable net investment income and net short-term capital gain) plus its net
interest income excludable from gross income under Section 103(a) of the Code,
and must meet several additional requirements. Among these requirements are the
following: (1) the Fund must derive at least 90% of its gross income each
taxable year from dividends, interest, payments with respect to securities loan,
and gains from the sale or other disposition of securities, or other income
(including gains from options or futures) derived with respect to its business
of investing in securities ("Income Requirement"); (2) the Fund must derive less
than 30% of its gross income each taxable year from the sale or other
disposition of securities, options, or futures that were held for less than
three months ("Short-Short Limitation"); and (3) at the close of each quarter of
the Fund's taxable year, (a) at least 50% of the value of its total assets must
be represented by cash and cash items, U.S. government securities, securities of
other RICs, and other securities, with these other securities limited, in
respect of any one issuer, to an amount that does not exceed 5% of the value of
the Fund's total assets, and (b) not more than 25% of the value of its total
assets may be invested in securities (other than U.S. government securities or
the securities of other RICs) of any one issuer.
Dividends paid by the Fund will qualify as exempt-interest dividends,
and thus will be excludable from gross income by its shareholders, if the Fund
satisfies the additional requirement that, at the close of each quarter of its
taxable year, at least 50% of the value of its total assets consists of
securities the interest on which is excludable from gross income under Section
103(a); the Fund intends to satisfy this requirement. The aggregate dividends
excludable from the shareholders' gross income may not exceed the Fund's net
tax-exempt income.
If Fund shares are sold at a loss after being held for six months or
less, the loss will be disallowed to the extent of any exempt-interest dividends
received on those shares and any allowable loss will be treated as long-term
capital loss to the extent of any capital gain distributions
24
<PAGE> 45
received on those shares. Distributions of the portion of the gain on bonds
purchased at a discount after April 30, l993, are taxable for Federal income tax
purposes as dividends.
Interest on indebtedness incurred or continued to purchase or carry Fund
shares will not be deductible for Federal income tax purposes to the extent that
the Fund distributes exempt-interest dividends. Purchases of Fund shares may be
deemed to have been made with borrowed funds even though those funds are not
directly traceable to the purchase of those shares. Exempt-interest dividends
paid by the Fund are includable in your tax base for determining the taxability
of social security and railroad retirement benefits. Shares of the Fund may not
be an appropriate investment for "substantial users" of certain facilities
financed by private activity bonds in which the Fund may invest because interest
on such bonds will not be exempt from Federal income tax for such users and
their related persons.
Tax-exempt interest attributable to certain private activity bonds
(including, in the case of a RIC, such as the Fund, receiving interest on such
bonds, a proportionate part of the exempt-interest dividends paid by that RIC)
is an item of tax preference for purposes of the alternative minimum tax.
Exempt-interest dividends received by a corporate shareholder also may be
indirectly subject to that tax without regard to whether the Fund's tax-exempt
interest was attributable to such bonds.
The Fund may acquire zero coupon municipal securities, which are
securities issued with original issue discount. As the holder of those
securities, the Fund must accrue a portion of the original issue discount during
the taxable year, even if it receives no corresponding payment on the securities
during the year. Because the Fund annually must distribute substantially all of
its tax-exempt income, including any original issue discount, in order to
qualify for treatment as a RIC, the Fund may be required in some years to
distribute as a dividend an amount that is greater than the total cash it
actually receives. Those distributions will be made from the Fund's other cash
assets or from proceeds of sales of portfolio securities. The Fund may realize
capital gains or losses from those sales, which would increase or decrease its
investment company taxable income and/or net capital gain (the excess of net
long-term capital gain over net short-term capital loss). In addition, any such
gains may be realized on the disposition of securities held for less than three
months. Because of the Short-Short Limitation, any such gains would reduce the
Fund's ability to sell other securities, or options or futures, held for less
than three months that it might wish to sell in the ordinary course of its
portfolio management.
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts, involves complex rules that will determine for
income tax purposes the character and timing of recognition of the gains and
losses the Fund realizes in connection therewith by the Fund. Income from
transactions in options and futures derived by the Fund
25
<PAGE> 46
with respect to its business of investing in securities will qualify as
permissible income under the Income Requirement. However, income from the
disposition of options and futures contracts will be subject to the Short-Short
Limitation if they are held for less than three months.
If the Fund satisfies certain requirements, any increase in value on a
position that is part of a "designated hedge" will be offset by any decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be included in gross income for purposes of that limitation. The Fund
may, when it engages in hedging transactions, seek to qualify for this
treatment, but at the present time it is not clear whether this treatment will
be available for all of the Funds' hedging transactions. To the extent this
treatment is not available, the Fund may be forced to defer the closing out of
certain options and futures contracts beyond the time when it otherwise would be
advantageous to do so, in order for the Fund to qualify as a RIC.
OHIO STATE AND LOCAL TAX MATTERS
The following reflects Ohio law as of the date of this Statement of
Additional Information.
Individual shareholders who are subject to the Ohio personal income tax,
Ohio school district income tax or Ohio municipal income tax will not be subject
to such taxes on distributions received from the Fund to the extent such
distributions consist of interest on or gain from the sale of debt obligations
issued by or on behalf of the State of Ohio and its political subdivisions,
agencies, and instrumentalities. ("Ohio Obligations") provided that the Fund
continues to qualify as a regulated investment company for federal income tax
purposes and that at all times at least 50% of the value of the total assets of
the Fund consists of Ohio Obligations, or similar obligations of other states or
their subdivisions. It is assumed for purposes of this discussion of Ohio
taxation that these requirements are satisfied. Gain recognized by such
individual shareholders on the sale of shares of the Fund will be subject to the
Ohio personal income tax and Ohio school district income tax; such gain may be
subjected to municipal income tax only by those three Ohio municipalities
(Indian Hill, Wickliffe and Wyoming) that are authorized by State law to tax
intangible income.
Corporate shareholders that are subject to the Ohio corporation
franchise tax will not be required to include distributions received from the
Fund in their net income base for purposes of calculating their Ohio corporation
franchise tax liability to the extent that such distributions are either
excluded from gross income for federal income tax purposes or consist of
interest on or gain from the sale of Ohio Obligations. However, corporate
shareholders will be required to include gain recognized on the
26
<PAGE> 47
sale of shares of the Fund in their net income base for purposes of calculating
their liability for such tax. In addition, shares of the Fund will be includable
in the computation of net worth for purposes of such tax. Corporate shareholders
that are subject to Ohio municipal income tax will not be subject to such tax on
distributions received from the Fund to the extent such distributions consist of
interest on or gain from the sale of Ohio Obligations but may be subject to such
tax on gain from the sale of shares of the Fund in those three Ohio
municipalities that are authorized by State law to tax intangible income.
Distributions from the Fund that consist of interest on obligations of
the United States or the government of Puerto Rico, the Virgin Islands or Guam
or their authorities or instrumentalities are exempt from Ohio personal income
tax, Ohio school district income taxes and Ohio municipal income taxes and are
excluded from the net income base of the Ohio corporation franchise tax to the
same extent that such interest would be so exempt or excluded if the obligations
were held directly by the shareholders.
The Fund is not subject to the Ohio personal income tax, Ohio school
district income taxes, the Ohio corporation franchise tax, or the Ohio dealers
in intangibles tax, provided that, with respect to the Ohio corporation
franchise tax and the Ohio dealers in intangibles tax, the Fund satisfies an
annual reporting requirement imposed by the Ohio Revised Code.
NET ASSET VALUE
The net asset value of the Fund is calculated once daily Monday through
Friday except on days on which changes in the value of the Fund's portfolio
securities will not materially affect the current net asset value of the Fund's
shares and except on the following holidays: New Year's Day, Presidents Day,
Good Friday, Memorial Day Observed, Independence Day, Labor Day, Thanksgiving
Day, Christmas Day, Columbus Day, Martin Luther King Jr. Day, and Veteran's Day.
The assets and liabilities of the Fund are determined in accordance with
generally accepted accounting principles and the applicable rules and
regulations of the Securities and Exchange Commission.
SALES CHARGE DIFFERENTIALS (SEE "HOW TO PURCHASE SHARES" IN THE PROSPECTUS)
The difference in the price at which the Fund's shares are offered due
to scheduled variations in sales charges as a percentage of both offering price
and amount invested, as described in the Prospectus under the caption "How To
Purchase Shares", results from cost savings inherent in economy of size.
Management of the Fund believes that costs and expenses of sales efforts of the
Fund's principal underwriter and broker-dealers tend to
27
<PAGE> 48
decrease as the size of the purchase order increases. It is for this reason that
the sales charges as a percentage of the offering price and of the amount
invested are reduced with respect to "breakpoint" purchases and Letter of Intent
and Rights of Accumulation privileges, all as stated in the Prospectus. In
addition, because the exchange privilege is available to all investors whose
objectives may have changed and because it is such investors who initiate the
exchange, no additional sales expenses are incurred, and accordingly, these
savings are passed on to the investor in the form of a net asset value purchase
when they have previously paid a sales load to another fund advised by the
Adviser. No significant sales effort is necessary for sales of shares at net
asset value to trustees of mutual funds as to which Gradison or McDonald act as
an investment adviser (and their families), current and retired employees of the
Fund's investment adviser, and investment advisory accounts managed by Gradison
or McDonald. With respect to sales at net asset value to investors who purchase
Fund shares with the proceeds of redemptions from other mutual funds as to which
they have previously paid a sales charge, such waiver of the Fund's charge is
necessary to compensate such investors for the fact that they have previously
paid a sales load on their investment. Sales are made to investors who have
owned mutual fund shares for a year or more (where the proceeds of disposition
of such shares are used to purchase Fund shares) without payment of a sales load
as an additional inducement for purchase of Fund shares.
PORTFOLIO TRANSACTIONS
The Adviser is responsible for making the Fund's portfolio decisions,
including allocation of the Fund's brokerage business and negotiation of
brokerage commissions, subject to policies established by the Board of Trustees.
The Fund places orders for transactions with a number of brokers and dealers.
Most of the Fund's purchases and sales of portfolio securities are principal
transactions with securities dealers and underwriters. Since the Fund's
inception it has incurred no brokerage commissions. Purchases of securities from
underwriters, however, include a concession paid by the issuer to the
underwriter and purchases or sales of securities from/to a dealer include a
spread between the bid and ask prices.
In purchasing and selling portfolio securities, it is the policy of the
Fund to select brokers and dealers so as to obtain the most favorable net
results, taking into account various factors, including the price of the
security, the commission rate, the size of the transaction, the difficulty of
execution and other services offered by brokers and dealers which are of benefit
to the Fund. The Adviser selects brokers and dealers to execute transactions on
the basis of its judgment of their professional capability to provide the
service at reasonably competitive rates. The Adviser's determination of what
constitutes reasonably competitive rates is based upon its professional judgment
and knowledge as to rates paid and
28
<PAGE> 49
charged for similar transactions throughout the securities industry. The Adviser
may consider sales by brokers or dealers of shares of the Fund when selecting
brokers or dealers to execute portfolio transactions as long as the most
favorable net results are obtained.
The Adviser may receive commissions from the Fund for effecting
transactions on an agency basis only in accordance with procedures adopted by
the Board of Trustees. Any procedures adopted by the Trustees will incorporate
the standard contained in Rule 17e-1 under the Investment Company Act of 1940
that the commissions paid must be "reasonable and fair compared to the
commission, fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar securities
during a comparable period of time." Pursuant to Rule 17e-1, the Board of
Trustees must conduct compliance reviews at least quarterly and maintain records
in connection with such reviews. The Adviser has assured the Fund that in all
transactions placed with the Adviser, the Fund will be charged a commission that
is at least as favorable as the rate the Adviser charges to its other customers
in similar transactions. No commission charged to the Fund by the Adviser or any
broker affiliated with the Adviser will include compensation for research
services provided by the Adviser or any such affiliated broker. From the
inception of the Fund to the date of this Statement of Additional Information,
the Adviser has not received any commissions from the Fund for executing
transactions in portfolio securities.
Brokers who provide supplemental investment research to the Adviser may
receive orders for agency transactions in portfolio securities of the Fund. Such
supplemental research services ordinarily consist of assessments and analyses of
the business or prospects of a company, industry, or economic sector.
Information so received is in addition to and not in lieu of the services
required to be performed by the Adviser under the Investment Advisory Agreement
with the Fund. If in the judgment of the Adviser the commission is reasonable in
relation to the brokerage and research services provided, the Adviser is
authorized to pay brokerage commissions in excess of commissions another broker
would have received for effecting the same transaction, subject to the review of
the Board of Trustees. Not all such research services may be used by the Adviser
in connection with managing the Fund. The expenses of the Adviser will not
necessarily be reduced as a result of the receipt of such supplemental
information, and the Adviser may use such information in servicing its other
accounts.
Because of its affiliation with the Adviser, the Fund is prohibited from
engaging in certain transactions involving the Adviser except in compliance with
the provisions of the Investment Company Act of 1940, as amended, and the rules
and regulations thereunder and subject to the possible receipt of exemptive
relief from the Securities and Exchange Commission. Accordingly, the Fund does
not purchase or sell portfolio securities from or to the Adviser in any
transaction in which the Adviser
29
<PAGE> 50
acts as principal. Pursuant to regulations of the Securities and Exchange
Commission, the Fund purchases securities in underwritings in which the Adviser
participates as an underwriter.
The Adviser also serves as the investment adviser to Gradison-McDonald
Cash Reserves Trust ("GMCR"), (a U.S. Government "money market" investment
company), Gradison-McDonald Government Custodian Trust ("GCT") (Government
income investment company, and Gradison Growth Trust ("GGT") (equity investment
company) and furnishes investment advice to other clients. The assets of the
mutual funds managed by the Gradison Division totaled approximately $2.3 billion
as of October 7, l996. The Adviser, including its predecessor, Gradison &
Company, Incorporated, has served as investment adviser to investment companies
since l976. Investment decisions for the Fund are made independently from those
of the other investment companies for which it acts as investment adviser and
other clients of the Adviser. Purchases and sales of particular securities may
be effected simultaneously for such entities and clients. In such instances, the
transactions will be allocated as to price and amount in a manner the Adviser
considers equitable to each of the affected entities or clients, which could
have a detrimental effect upon the price or amount of the securities purchased
or sold for the Fund. On the other hand, in some cases the ability of the Fund
to participate in volume transactions may produce better executions for the
Fund. It is the opinion of the Board of Trustees that the benefits available to
the Fund from retaining the Adviser outweigh any disadvantages that may arise
from exposure to simultaneous transactions.
For the fiscal years ended June 30, l995, and l996 the Fund's respective
portfolio turnover rates were 80.19% and 99.68%. The higher portfolio turnover
for the fiscal year ended June 30, l996 resulted from an increase in short-term
trading activities.
INVESTMENT ADVISER
The Adviser manages the investment and reinvestment of the assets of the
Fund in accordance with the Fund's investment objective, policies and
restrictions, subject to the general supervision and control of the Board of
Trustees and pursuant to the terms of the Investment Advisory Agreement
("Agreement") between the Trust and Adviser. The Adviser and its officers and
employees, from time to time, enter into transactions with various banks,
including the Fund's custodian bank. It is the Adviser's opinion that the terms
and conditions of those transactions are not influenced by existing or potential
custodial or other Trust relationships.
The Adviser provides to the Trust at its own expense the executive
officers who are necessary for the management and operations of the Fund.
The Adviser, founded in 1924, is the leading underwriter of Ohio
long-term municipal financings as measured by the value of offerings managed by
30
<PAGE> 51
underwriters according to Securities Data Company for 1994. The Adviser is a
securities broker dealer with 23 retail offices in the state of Ohio and is the
largest investment banking and securities brokerage firm headquartered in Ohio.
The Adviser manages investment advisory accounts, including mutual funds, with
assets in excess of $3 billion as of September 30, l996.
ADVISORY AGREEMENT
The Agreement provides that the Adviser will manage the investments of
the Fund, subject to review by the Board of Trustees. The Adviser also bears the
cost of salaries and related expenses of executive officers of the Trust who are
necessary for the management and operation of the Fund and compensates the
Trustees who are affiliated with the Adviser. As compensation for its services
under the Agreement, the Adviser receives from the Fund a monthly fee based upon
the average value of the daily net assets for the month at an annual rate of .5
of 1% of the Fund's assets. From the inception of the Fund, September 18, 1992
through July 31, 1993, the Adviser received $40,914 as investment advisory fees.
If not for the waiver of fees, the Adviser would have received $178,704. From
August 1, l993 through June 30, l994, the Adviser received $294,050 as
investment advisory fees. If not for the waiver of fees, the Adviser would have
received $358,797. For the fiscal years ended June 30, l995 and June 30, l996,
the Adviser received respectively $362,864 and $356,463 as investment advisory
fees.
The Agreement further provides that in the absence of willful
misfeasance, bad faith or gross negligence in the performance of its duties
thereunder, or reckless disregard of its obligations thereunder, the Adviser is
not liable to the Fund or any of its shareholders for any act or omission by the
Adviser. The Agreement does not restrict the Adviser from acting as an
investment manager or adviser for others.
The Agreement grants to the Trust the right to use the names "Gradison"
and "McDonald" as a part of its name and the name(s) of its Fund(s), without
charge, subject to withdrawal of such right by the Adviser upon not less than 30
days' written notice to the Trust and subject to the automatic termination of
such right within 30 days after the termination of the Agreement for any reason.
The Agreement does not impair the right of the Adviser to use the name Gradison
or McDonald in the name and the name(s) of its Fund(s) without charge in
connection with any other business enterprise with which it is or may become
associated.
The Agreement will be submitted to a vote at the initial meeting of the
Fund's public shareholders, if and when such meeting is held. The Agreement
continues in effect from year to year if such continuance is specifically
approved at least annually by the vote of the holders of a majority of the
outstanding voting securities of the Fund or by the vote of a majority of
31
<PAGE> 52
the Trust's Board of Trustees, and in either event by the vote cast in person of
a majority of the Trustees who are not "interested persons" of any party to the
Agreement (as defined in the Act).
The Agreement may be terminated at any time without penalty upon 60
days' written notice by (i) the Board of Trustees, (ii) the vote of the holders
of a majority of the outstanding voting securities of the Fund, or (iii) the
Adviser. The Agreement will terminate automatically in the event of its
assignment by the Adviser. The Agreement may be amended at any time by the
mutual consent of the parties thereto, provided that such consent on the part of
the Fund shall have been approved by the vote of the holders of a majority of
its outstanding voting securities and by the vote of a majority of the Board of
Trustees, including the vote cast in person by a majority of the Trustees who
are not "interested persons" of any party to the Agreement (as defined in the
Act).
MASTER DISTRIBUTION AGREEMENT
Shares of the Fund are continuously offered and distributed through the
principal underwriter of the Fund, McDonald (the "Distributor"). Under the terms
of the Master Distribution Agreement, the Distributor, as agent of the Fund,
accepts orders for the purchase of shares of the Fund and, as compensation
therefore, receives the amount of the sales charge described in the Prospectus.
For the respective periods from the inception of the Fund to July 31, l993, from
August 1, l993 through June 30, l994, and for the fiscal year ended June 30,
l995 and l996. McDonald received underwriting commissions in the respective
amounts of $1,073,126, $303,484, $89,864, and $122,266 all of which was retained
by McDonald. The Distributor is not obligated to sell any certain number of
shares of the Fund. The Distributor may enter into dealer's agreements with
other dealers, pursuant to which such dealers will also sell shares of the Fund.
The Master Distribution Agreement between the Fund and the Distributor permits
the Distributor to reallow up to the full sales charge to the other dealers
entering into dealer's agreements with the Distributor; accordingly, such
dealers may be deemed to be underwriters of the Fund, as that term is defined in
the Securities Act of 1933, as amended (the "1933 Act"). The Fund has agreed to
indemnify the Distributor to the extent permitted by applicable law against
certain liabilities under the 1933 Act. The Agreement also provides for the
payment of Distribution Service fees in the annual amount of .25% of the Fund's
average daily net assets.
DISTRIBUTION SERVICE PLAN
The Fund has in effect a Distribution Service Plan (the "Plan") under
Rule 12b-1 of the Investment Company Act of 1940. Rule 12b-1 permits an
investment company to finance, directly or indirectly, activities primarily
intended to result in the sale of its shares only if it does so in
32
<PAGE> 53
accordance with the provisions of such Rule. The purpose of the Plan is to
increase sales of shares of the Fund to enable it to acquire and retain a
sufficient level of assets to enable it to operate at an efficient level. Higher
levels of assets tend to result in operating efficiencies with respect to the
Fund's fixed costs and portfolio management.
The Plan permits the Fund to incur expenses related to the distribution
of its shares, but only as specifically contemplated by the Plan. Under the
Plan, the Fund may pay service fees up to an amount that does not exceed an
annual rate of .25% of its average daily net assets. Such service fees that may
be incurred by the Fund under the Plan within the limitation described above are
limited to payments to broker-dealers (including the Distributor) or other
persons for certain services provided to Fund shareholders (See the Prospectus
for further information). For the respective periods from the inception of the
Fund through July 31, l993, from August 1, l993, through June 30, l994, and for
the fiscal year ended June 30, l995 and l996, the Fund paid service fees to the
Distributor in the respective amounts of $87,773, $179,374, $181,432, and
$178,232. The benefits resulting from the Plan include a more stable or
increasing level of assets which, in turn, reduces the expenses of the Fund on a
per share basis and facilitates portfolio management, among other benefits.
The Plan also specifically authorizes the payment of operational
expenses incurred by the Fund to the extent that such payments might be
considered to be primarily intended to result in the sale of shares of the Fund.
It further specifically authorizes the payment of advisory fees pursuant to the
Advisory Agreement to the extent that the Fund might be deemed to be indirectly
financing the distribution activities through payment of advisory fees. The
Board of Trustees does not believe that the payment of such operational expenses
by the Fund or payment of the advisory fee constitute the direct or indirect
financing of activities primarily intended to result in the sale of shares of
the Fund. Thus, although such payments are authorized by the Plan as a
protective measure, they are not restricted by the .25% limitation included in
the Plan.
In approving the Plan, the Board of Trustees concluded that there was a
reasonable likelihood that the Plan would benefit the Fund and its shareholders.
The Plan will be submitted for approval by the Fund's shareholders at the Fund's
initial shareholders' meeting, if and when such meeting is held. The Plan
(together with any agreements relating to implementation of the Plan) continues
in effect for a period of more than one year only so long as such continuance is
specifically approved at least annually by the vote of a majority of the Board
of Trustees, including the vote of a majority of the Independent Trustees, cast
in person at a meeting called for such purpose. The Plan may not be amended to
materially increase the amount of distribution expenses incurred by the Fund
without the approval of a majority of the Independent Trustees by votes cast in
person at a meeting called for the purpose of voting on such amendment and
without the approval of a majority of the outstanding voting securities of
33
<PAGE> 54
the Fund. The Plan may be terminated at any time by a vote of a majority of the
Independent Trustees or by a vote of the majority of the outstanding voting
securities of the Fund. Any agreement implementing the Plan may be terminated at
any time, without the payment of any penalty, by a vote of a majority of the
Independent Trustees or by a vote of a majority of the outstanding voting
securities of the Fund, on not more than sixty days' written notice to the other
party to the agreement, and any related agreement will terminate automatically
in the event of its assignment. The Plan requires that the Board of Trustees
receive at least quarterly written reports as to the amounts expended during
each quarter pursuant to the Plan and the purposes for which such amounts were
expended. While the Plan is in effect, the selection and nomination of those
Trustees who are not "interested persons" (as defined in the Investment Company
Act of 1940) of the Trust shall be committed to the discretion of the
disinterested Trustees then in office.
TRANSFER AGENT AND ACCOUNTING SERVICES AGREEMENT
Pursuant to the Transfer Agent and Accounting Services Agreement,
Gradison provides transfer agent, dividend disbursing, and accounting services
for the Fund. Gradison responds to inquiries from shareholders, processes
purchase and redemption requests, maintains shareholder account records and
provides statements and confirmations to shareholders and maintains the Fund's
books and accounting records. For the periods from the inception of the Fund
through July 31, l993, from August 1, l993 through June 30, l994, and for the
fiscal years ended June 30, l995 and l996 the Fund paid Gradison respectively
$66,736, $92,406, $95,692, and $90,667 for transfer agent, dividend disbursing,
and accounting services.
OTHER COMPENSATION PAID/REIMBURSEMENT MADE TO THE ADVISER
In addition to the advisory fee, transfer agent fee, and distribution
fees paid by the Fund to the Adviser, for the respective periods from the
inception of the Fund through July 31, l993, from August 1, l993 through June
30, l994, and for the fiscal year ended June 30, l995, the Fund reimbursed the
Adviser, on a cost basis, for costs allocable to services performed by the
Adviser's employees, including legal services, including salaries and office
space, the respective amounts of $16,940, $4,038, and $851, and $3,402.
TRUSTEES AND OFFICERS OF THE TRUST
The Trustees and officers of the Trust, together with information as to
their principal occupations during the past five years and positions currently
held with GMCR, GGT, GCT, Gradison and McDonald, are listed below. All principal
occupations have been held for at least five years
34
<PAGE> 55
unless otherwise indicated. Positions held with Gradison were formerly held with
Gradison & Company Incorporated.
*DONALD E. WESTON, 580 Walnut Street, Cincinnati, Ohio. Trustee and
Chairman of the Board; Chairman of Gradison and Director of McDonald &
Company Investments, Inc.). Director of Cincinnati Milacron Commercial
Corp. (financing arm of capital goods manufacturer) (since January 1993);
Trustee and Chairman of the Board of GMCR, GCT, and GGT.
DANIEL J. CASTELLINI, 312 Walnut Street, Cincinnati, Ohio. Trustee; Senior
Vice President/Finance and Administration and Chief Financial Officer of
the E.W. Scripps Company (communications); Trustee of GMCR, GCT, and GGT.
THEODORE H. EMMERICH, 1201 Edgecliff Place, Cincinnati, Ohio 45206.
Trustee. Retired; Until 1986, managing partner (Cincinnati office) Ernst &
Young (Public Accountants); Director of Carillon Fund, Inc.(investment
company), American Financial Group, Inc.(insurance), Cincinnati Milacron
Commercial Corp.; Trustee of Carillon Investment Trust and Summit
Investment Trust(investment companies); Trustee of GMCR, GCT, and GGT.
RICHARD A. RANKIN, 1717 Dixie Highway, Suite 600, Fort Wright, Kentucky
41011. Trustee. Partner, Rankin and Rankin (Public Accountants); Trustee of
GMCR, GCT, and GGT.
JEROME E. SCHNEE, 11558 Stablewatch Court, Cincinnati, Ohio 45249. Trustee.
Professor of Management, College of Business Administration, University of
Cincinnati.
BRADLEY E. TURNER, 580 Walnut Street, Cincinnati, Ohio 45202. President.
Senior Managing Director of McDonald; President of GMCR, GCT, and GGT.
STEPHEN C. DILBONE, 580 Walnut Street, Cincinnati, Ohio 45202. Executive
Vice President. First Vice President of Gradison.
RICHARD S. DEMKO, 800 Superior Avenue, Cleveland, Ohio 44114. Vice
President. Senior Vice President of McDonald.
PATRICIA J. JAMIESON, 800 Superior Avenue, Cleveland, Ohio 44114.
Treasurer. Treasurer, Managing Director, and Chief Financial Officer of
McDonald; Treasurer of GMCR, GCT, and GGT.
MARK A. FRIETCH, 580 Walnut Street, Cincinnati, Ohio. Assistant Treasurer.
Assistant Treasurer of GMCR, GCT, and GGT (since May l995); Controller of
Gradison-McDonald mutual funds (since August l992); prior to that Financial
Consultant at Union Central Life Insurance Company.
35
<PAGE> 56
RICHARD M. WACHTERMAN, 580 Walnut Street, Cincinnati, Ohio 45202.
Secretary. Senior Vice President and General Counsel of Gradison.;
Secretary of GMCR, GCT, and GGT.
PAUL J. WESTON, 580 Walnut Street, Cincinnati, Ohio. Senior Vice President.
Executive Vice President of GMCR; Senior Vice President of GCT and GGT;
Executive Vice President of Gradison. Mr. Weston is the brother of Donald
E. Weston.
- ------------------------------
Trustees and officers of the Trust who are affiliated with the Adviser
receive no remuneration from the Trust. Trustees who are not affiliated with the
Adviser receive fees as determined by the Board of Trustees. As of September 30,
l996, the trustees and officers of the Trust owned an aggregate of less than 1%
of the outstanding securities of the Fund.
<TABLE>
Trustee Compensation Table
- --------------------------
<CAPTION>
Name of Trustee Aggregate Total Compensation
- --------------- Compensation From Trust and fund
From Trust complex (3 additional
as of June Trusts) paid to
30, l996 trustee for calendar year ended
--------- 12/31/96
--------
<S> <C> <C>
Theodore H. Emmerich $4,625 $23,250
Richard A. Rankin $4,625 $22,000
Jerome E. Schnee $4,500 $23,250
Daniel J. Castellini $4,625 $25,000
</TABLE>
The Trust maintains a deferred compensation plan which allows trustees to defer
receipt of trustee fees otherwise payable to them until a future date. Deferred
amounts are credited with interest at a rate equal to the yield of the
Gradison-McDonald U.S. Government Reserves Fund. The Trust does not maintain any
other pension or retirement plans. There are currently no amounts owing to any
current trustee pursuant to the deferred compensation plan. As of June 30, l996,
the amount of $7,455 was payable by the Trust to the beneficiary of a former
trustee who is deceased and as of December 31, l995, the amount of $45,075 was
payable to that trustee by the Trust and the fund complex.
DESCRIPTION OF THE TRUST
The Trust is an open-end management investment company organized under
the laws of the State of Ohio by a Declaration of Trust dated June 11, 1992. The
Declaration of Trust provides for an unlimited number of full and fractional
shares of beneficial interest, without par value, of any series authorized by
the Board of Trustees. The Board of Trustees has
36
<PAGE> 57
authorized the issuance of shares of two series, representing the
Gradison-McDonald Ohio Tax-Free Income Fund and the Gradison-McDonald
Intermediate Municipal Income Fund. Any additional series of shares must be
issued in compliance with the Investment Company Act of 1940. Upon issuance and
sale in accordance with the terms set forth in the Prospectus, each share will
be fully paid and nonassessable. Shares have no preemptive, subscription or
conversion rights and are redeemable as set forth under "How to Redeem Shares."
Holders of shares of the Fund are entitled to vote the full and
fractional shares in the amount of their ownership of Fund shares. Voting rights
are not cumulative, which means that the holders of more than 50% of the shares
voting in any election of Trustees can elect all of the Trustees if they choose
to do so, in which event the holders of the remaining shares will be unable to
elect a Trustee. Under the Declaration of Trust, meetings of shareholders are
not required to elect trustees, unless less than a majority of trustees holding
office have been elected by the shareholders. Shareholders' meetings will be
held only when required pursuant to the Declaration of Trust or the Investment
Company Act of 1940, and when called by the Fund or shareholders pursuant to the
Declaration of Trust. Pursuant to the Declaration of Trust, shareholders of
record of not less than a majority of the outstanding shares of the Fund may
remove a Trustee through a declaration in writing or by vote cast in person or
by proxy at a meeting called for that purpose. The Trustees are required to call
a meeting of shareholders for the purpose of voting upon the questions of
removal of any Trustee when requested in writing to do so by shareholders of
record of not less than 10 percent of the Trust's outstanding shares. The Trust
or any Fund may be terminated by a vote of a majority of the Trustees. Whenever
the approval of a majority of the outstanding shares of the Fund is required in
connection with shareholder approval of the Investment Advisory Agreement, the
Master Distribution Agreement, or the Distribution Service Plan, or changes in
the investment objective or the investment restrictions, a "majority" shall mean
the vote of (i) 67% or more of the outstanding shares of the Fund present at a
meeting, if the holders of more than 50% of the outstanding shares of the Fund
are present in person or by proxy, or (ii) more than 50% of the outstanding
shares of the Fund, whichever is the lesser.
The assets of the Trust received upon the issuance of the shares of each
series, and all income, earnings, profits and proceeds thereof, subject only to
the rights of creditors, are allocated to each such series and constitute the
underlying assets of each series. The underlying assets of each series are
segregated on the books of account and are to be charged with the liabilities in
respect to such series and with each series' proportionate share of the general
liabilities of the Trust. In the event of the termination and liquidation of the
Trust, the holders of the shares of any series are entitled to receive their
pro-rata portion of the underlying assets of the series available for
distribution to shareholders.
37
<PAGE> 58
The Trust is currently operating, and intends to continue to operate, in
compliance with the Ohio law relating to business trusts. Under Ohio law, the
shareholders of a complying business trust have no liability to third persons
for obligations of the Trust, which are to be satisfied solely from the Trust's
property. The Declaration of Trust provides that no Trustee, officer, employee,
or agent of the Fund shall be personally liable to any person for any action or
failure to act in connection with the Trust's property or the affairs of the
Trust except (1) for his own willful misfeasance, bad faith, gross negligence,
or reckless disregard of his duties, (2) with respect to any matters as to which
he did not act in good faith and in a manner he reasonably believed to be in, or
not opposed to, the best interests of the Trust or where he did not act with the
care that an ordinarily prudent person in a like position would use under
similar circumstances.
In the Fund's pre-effective registration statement, pursuant to the
requirements of the staff of the Securities and Exchange Commission ("SEC")
applied to all new funds at the time, the Fund undertook to hold a shareholders'
meeting within 16 months of effectiveness for the purpose of electing trustees,
ratifying the selection of independent accountants, and approving the investment
advisory agreement and distribution expense plan, notwithstanding the fact that
such election, ratification, and approvals had been effected by the sole
shareholder of the Fund (the Adviser) prior to the public offering of its shares
in accordance with the requirements of the Investment Company Act of 1940.
Subsequent to that time, the staff of the SEC has eliminated these requirements
for new funds and has determined that funds which had previously made such
undertakings could decide whether or not to hold such meetings. The Trustees of
the Fund have determined that it is in the best interests of the Fund not to
hold such a meeting, until one is otherwise required, in order to avoid the
costs of such a meeting.
CUSTODIAN
Star Bank, N.A., Star Bank Center, Cincinnati, Ohio 45202 acts as the
custodian of the portfolio securities and other assets of the Trust. Star Bank
has no part in determining the investment policies of the Trust or the
securities which are to be purchased, held or sold by the Trust. The Trust may
purchase or sell securities from or to Star Bank.
INDEPENDENT PUBLIC ACCOUNTANTS
The firm of Arthur Andersen LLP has been selected as independent public
accountants for the Fund for the fiscal year ending June 30, 1997.
38
<PAGE> 59
LEGAL COUNSEL
Kirkpatrick & Lockhart LLP acts as legal counsel for the Fund.
EXCHANGES
Any termination or modification of the exchange privilege will be
preceded by 60 days' notice from the Fund except (1) under extraordinary
circumstances where there is a suspension of the exchanged security under
Section 22(e) of the 1940 Act and the rules and regulations thereunder or the
offering company temporarily ceases or delays sales of the acquired security
because it is unable to invest amounts effectively in accordance with applicable
investment objectives policies and restrictions; or (2) if the only material
effect of an amendment is to reduce or eliminate an administrative fee, sales
load, or redemption fee payable at the time of an exchange.
TELEPHONE ACCESS TO ACCOUNT INFORMATION
Shareholders may access information about their Fund account by
telephone 24 hours a day using a password assigned to them.
PERFORMANCE CALCULATIONS
The Fund's yield for the 30 days ended June 30, 1996 was 4.88%. The Fund's
tax-equivalent yield was 8.73% based on combined Federal and Ohio tax rates of
44.1%, the highest marginal tax rates. The tax equivalent yield is the yield
that a taxable investment would have to yield to be equivalent to the Fund's
tax-free yield.
The Average Annual Total Return of the Fund based on purchase at the maximum
offering price (including the 2% sales charge) has been as follows:
From inception (September 18, l992) through 6/30/96 5.78%
For 12 months ending 6/30/96 4.05%
The Average Annual Total Return of the Fund based on purchase at the net asset
price (not including the 2% sales charge) has been as follows:
From inception (September 18, l992) through 6/30/96 6.35%
For 12 months ending 6/30/96 6.17%
39
<PAGE> 60
The performance results shown above assume reinvestment of dividends and
other distributions. The performance quoted above represents historical
performance. The Fund's yield and return will fluctuate and value of an
investment in the Fund will fluctuate so that an investor's shares may be worth
more or less than their cost, when redeemed. During the period prior to July 1,
l994, the Adviser waived fees and/or reimbursed Fund expenses which had the
effect of increasing the performance shown above.
40
<PAGE> 61
APPENDIX A
THE FUND MAY USE THE FOLLOWING HEDGING INSTRUMENTS:
OPTIONS ON DEBT SECURITIES -- A call option is a short-term contract
pursuant to which the purchaser of the option, in return for a premium, has the
right to buy the security underlying the option at a specified price at any time
during the term of the option. The writer of the call option, who receives the
premium, has the obligation, upon exercise of the option during the option term,
to deliver the underlying securing against payment of the exercise price. A put
option is a similar contract which gives its purchaser, in return for a premium,
the right to sell the underlying security at a specified price during the option
term. The writer of the put option, who receives the premium, has the
obligation, upon exercise during the option term, to buy the underlying security
at the exercise price. Options on debt securities are traded primarily in the
over-the-counter market rather than on any of the several options exchanges.
OPTIONS ON INDEXES OF DEBT SECURITIES -- An index assigns relative
values to the securities included in the index and fluctuates with changes in
the market values of such securities. Index options operate in the same way as
more traditional options except that exercises of index options are effected
with cash payments and do not involve delivery of securities. Thus upon exercise
of an index option, the purchaser will realize and the writer will pay, an
amount based on the difference between the exercise price and the closing price
of the index.
BOND INDEX FUTURES CONTRACTS -- A bond index futures contract is a
bilateral agreement pursuant to which one party agrees to accept and the other
party agrees to make delivery of an amount of cash equal to a specified dollar
amount times the difference between the index value at the close of trading of
the contract and the price at which the futures contract is originally struck.
No physical delivery of the bonds comprising the index is made; generally
contracts are closed out prior to the expiration date of the contract.
INTEREST RATE FUTURES CONTRACTS -- Interest rate futures contracts are
bilateral agreements pursuant to which one party agrees to make, and the other
party agrees to accept, delivery of a specified type of debt security at a
specified future time and at a specified price. Although such futures contracts
by their terms call for actual delivery or acceptance of debt securities, in
most cases the contracts are closed out before the settlement date without the
making or taking of delivery.
OPTIONS ON FUTURES CONTRACTS -- Options on futures contracts are similar
to options on securities except that an option on a futures contract gives the
purchaser the right, in return for the premium, to
41
<PAGE> 62
assume a position in a futures contract (a long position if the option is a call
and a short position if the option is a put), rather than to purchase or sell a
security, at a specified price at any time during the option term. Upon exercise
of the option, the delivery of the futures position to the holder of the option
will be accompanied by delivery of the accumulated balance, which represents the
amount by which the market price of the futures contract exceeds, in the case of
a call, or is less than, in the case of a put, the exercise price of the option
on the future. The writer of an option, upon exercise, will assume a short
position in the case of a call, and a long position in the case of a put.
42
<PAGE> 63
[Sales brochure]
COVER PAGE
- ----------
OHIO TAX-FREE
INCOME FUND
GRADISON-MCDONALD
[Graphic of collage of blueprint , hammer, nails, picture of street with houses,
and logo "Your Future Starts Today."]
A MUNICIPAL BOND FUND WITH DOUBLE TAX-FREE BENEFITS TO OHIO INVESTORS
43
<PAGE> 64
INSIDE COVER
- ------------
FAMILY OF MUTUAL FUNDS
OHIO TAX-FREE
INCOME
INTERMEDIATE ESTABLISHED
MUNICIPAL VALUE
INTERNATIONAL GOVERNMENT
INCOME
MONEY MARKET OPPORTUNITY
VALUE
GROWTH
& INCOME
44
<PAGE> 65
PAGE 1
[Graphic of portion of above described collage with logo "Your Future
Starts here.]
Whatever your goals or ASPIRATIONS Whatever your objective. One thing is
certain. An INVESTMENT made today brings you that much closer to meeting that
OBJECTIVE and reaching that GOAL ... whether it's buying a house, starting a
family, SAVING for a college education, or planning for retirement. Hesitate and
time will pass you by.
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.
1-800-869-5999 [Telephone information logo.]
45
<PAGE> 66
PAGE 2
OHIO TAX-FREE
INCOME FUND
GRADISON-McDONALD OHIO TAX-FREE INCOME FUND SEEKS TO PROVIDE OHIO RESIDENTS
REGULAR MONTHLY INCOME THAT IS FREE FROM BOTH REGULAR FEDERAL(1) AND OHIO STATE
INCOME TAXES. THE FUND IS PROFESSIONALLY MANAGED BY EXPERIENCED GRADISON-
McDONALD PORTFOLIO MANAGERS.
THE TAX-FREE ADVANTAGE
Gradison-McDonald Ohio Tax-Free Income Fund's double tax-free dividends can
help you keep more of what you earn. The table below illustrates how the income
from a tax-free investment compares with that of a taxable investment after
taxes.
THE TAX-FREE ADVANTAGE FOR OHIO INVESTORS
REFLECTS THE NEW 36% AND 39.6% FEDERAL TAX RATES
<TABLE>
<CAPTION>
TAXABLE INCOME COMBINED A TAX-EXEMPT YIELD OR
TAX 4.50% 5.00% 5.50%
JOINT SINGLE BRACKET EQUALS A TAXABLE YIELD OF
<S> <C> <C> <C> <C> <C>
$40,000-80,000 $40,000-53,500 31.74% 6.59% 7.33% 8.06%
80,001-89,150 . 32.28 6.64 7.38 8.12
............. 53,501-80,000 34.59 6.88 7.64 8.41
89,151-100,000 80,001-100,000 35.10** 6.93 7.70 8.47
100,001-140,000 100,001-115,000 35.76** 7.01 7.78 8.56
140,001-200,000 115,001-200,000 40.42** 7.55 8.39 9.23
200,001-250,000 200,001-250,000 40.80** 7.60 8.45 9.29
250,001 and up 250,001 and up 44.13** 8.05 8.95 9.84
</TABLE>
This table is for illustrative purposes only and does not project or guarantee
future yields of the Fund. *The combined brackets include the effect of
deducting state taxes on your federal tax return. **Does not reflect the
phase-out of exemptions for federal tax purposes or the
46
<PAGE> 67
reduction of otherwise allowable deductions that occur when adjusted gross
income exceeds certain levels.
(1)Some income may be subject to Alternative Minimum Taxation for taxpayers
subject to such tax.
47
<PAGE> 68
Page 3
[Graphic of portion of collage described above showing model of house and
blueprint.]
THE MAGIC OF COMPOUNDING
Dividends from the Gradison-McDonald Tax-Free Income Fund can be paid to you
each month or reinvested to purchase additional shares of the Fund Remember that
money that is reinvested will compound tax-free. The following chart illustrates
the effect of tax-free compounding
CHART -The Power of Tax-Free Compounding -
A chart showing a $10,000 investment yielding a tax-free fixed return of 5.5%
with dividends paid out and again with dividends reinvested over a 1,2,3,4 and 5
year period.
The above chart is based on a hypothetical investment of $10,000 receiving
fixed annual returns of 5.5%. Based on the 40.4% federal and Ohio state income
tax bracket. This table is for illustrative purposes only and does not project
or guarantee future fund dividends.
HIGH QUALITY, DIVERSIFIED PORTFOLIO
Gradison-McDonald Ohio Tax-Free Income Fund invests by nationally recognized
service. It focuses on bonds with a maturity of 10 years or longer, which can
return a higher yield but are more sensitive to interest rate fluctuations The
Fund's managers use a range of bond maturities to attempt to reduce those
fluctuations. 1-800-869-5999 [Telephone information logo.]
48
<PAGE> 69
Page 4
LOW MINIMUM INVESTMENT
The Gradison-McDonald Ohio Tax-Free Income Fund has a low minimum initial
investment of $1,000. Additional investments can be made for as little as $50.
MONTHLY PAYMENT & REINVESTMENT
Dividends are paid monthly. You may choose to receive monthly dividends
automatically reinvested in the Fund.
EXCHANGES
You can move money from one Gradison-McDonald fund to another at any time
without a service charge. The Gradison-McDonald funds currently include:
Established Value Fund
Opportunity Value Fund
Government Income Fund
U.S. Government Reserves
Intermediate Municipal Income Fund
Gradison-McDonald funds planned for 1995 and sold by prospectus only include:
Growth & Income Fund
International Fund
ACCESS
[Graphic of postcard of tree lined street.] You can redeem shares on any
business day.
49
<PAGE> 70
Inside back cover
A TRUSTED NAME
Gradison-McDonald is headquartered in Cincinnati and has managed mutual funds
since 1976. The parent company, McDonald & Company Investments, was founded in
1924 and has been listed on the New York Stock Exchange since 1983. It operates
a leading regional investment advisory, investment banking, and investment
brokerage firm with offices throughout Ohio, Michigan and Indiana, and in
Atlanta, Boston, Dallas, Chicago, Los Angeles, the New York City area and
Naples, Florida.
1-800-869-5999 [Telephone information logo.]
50
<PAGE> 71
Back Cover
[Graphic of portable phone and envelopes.]
To find out more about the GRADISON-McDONALD OHIO TAX-FREE INCOME FUND or
other funds in the family
CALL
1-800-869-5999
OR WRITE
Gradison-McDonald Mutual Funds
580 Walnut Street
Cincinnati, Ohio 45202
GRADISON-McDONALD
You may obtain a prospectus containing complete information about the funds from
a Gradison-McDonald Mutual Funds representative or your Investment Consultant.
Read it carefully before investing.
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. Under rare circumstances, a small portion of the Fund's income
may be subject to Federal and State taxes. McDonald & Company Securities,
Inc.--Distributor
51
<PAGE> 72
[GMO Fact Sheet]
GRADISON MCDONALD
OHIO
TAX FREE
INCOME FUND
March 31, 1996
The Ohio Tax Free Income Fund's goal is to provide monthly income, consistent
with preservation of capital, which is exempt from both federal and State of
Ohio income taxes. It is designed for higher tax bracket Ohio investors who can
take advantage of the double tax-free income generated from the Fund. The Fund
offers the added benefit of the reinvestment of dividends, thus providing the
compounding of income on a tax free basis.
The Fund invests in Ohio municipal bonds issued to finance general operating
expenses of public institutions and public work s. It also invests in "private
activity" municipal bonds that are issued to obtain funding for privately
operated facilities. In order to gain favorable yield spreads, the Fund may
invest up to 20% of its assets in securities that are subject to the alternative
minimum tax ("AMT") for certain investors.
Symbol: GMOTX
Chart:
Value of $1,000 Since Inception
Graph:
The value of a $1,000 investment made in the fund at inception with all dividend
and capital gain distributions reinvested.
9/18/92 12/31/92 12/31/93 12/31/94 12/31/95 3/1/96
Inception
Date
(Approximate Plot Points)
$1,000 $1,010 $1,150 $1,100 $1,250 $1,246
The performance quoted above does not include the effect of the maximum 2% sales
charge which would reduce the performance shown. The performance
52
<PAGE> 73
quoted above and below represents past performance. The performance below
includes the effect of the maximum 2% sales charge. The investment return and
principal value of an investment in the Fund will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than the original
cost. Total return includes changes in share value and reinvestment of all
distributions. Past performance does not ensure future results.
NET ASSETS AND QUALITY RATING
The information below is as of March 31, 1996, and is subject to change in the
future.
Pie Chart:
<TABLE>
<S> <C>
$ 72 Million Money Markets 6%
Not Rated 9%
BB 7%
A 15%
AA 10%
AAA 53%
Net Assets as of 3/31/96
</TABLE>
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
Periods Ended 3/31/96
<S> <C> <C> <C>
For Shares Purchased
at Net Asset Value + 10.16% + 5.15% + 8.51%
For Shares Purchased at Full
2% Sales Charge + 7.99% + 4.44% + 8.25%
1 Year 3 Years Since
Inception
(9/18/92)
</TABLE>
WEIGHTED AVERAGE MATURITY
Chart:
18.8 Years Weighted Average Maturity
5 10 15 20 25 30
Years
53
<PAGE> 74
The maturity of the Fund's portfolio is as of March 31, 1996, and is subject to
change. The net asset value of the Fund will fluctuate more than the value of a
fixed income fund with a shorter term maturity.
PORTFOLIO MANAGER PROFILES
[Photo]: Stephen C. Dilbone, CFA
First Vice President
Gradison McDonald Asset Management
With more than thirteen years investment experience, Steve Dilbone not only
carries responsibility for managing the Ohio Tax Free Income Fund portfolio, but
is also portfolio manager of the Gradison McDonald Intermediate Municipal Income
Fund. Steve's additional responsibilities include overseeing all fixed income
investments in the mutual fund group and in individually managed Gradison
McDonald Asset Management accounts.
Prior to joining Gradison McDonald in 1990, Steve spent seven years with Merrill
Lynch, most recently as Vice President of Municipal Markets in Chicago. A
Certified Financial Analyst, Steve holds a B.S. degree in Finance from Miami
University and an M.B.A. in Finance from the University of Chicago.
PROFILE OF GRADISON MCDONALD FAMILY OF FUNDS
Less Potential Risk More Potential Risk
Less Potential Reward [Double sided Arrow] More Potential Reward
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Money Govern Intermed Ohio Establi Growth Opportunity Inter
Market ment iate Tax shed and Value natio
Funds Income Municipal Free Vale Income Fund nal
Fund Income Fund Fund Fund Fund
</TABLE>
GRADISON MCDONALD ASSET MANAGEMENT COMBINES THE EXTENSIVE INVESTMENT EXPERIENCE
OF GRADISON & COMPANY, FOUNDED IN 1925, WITH MCDONALD & COMPANY WHICH WAS
FOUNDED IN 1924. THE TWO FIRMS MERGED IN 1991. AS REGISTERED INVESTMENT ADVISERS
SINCE 1974 AND MUTUAL FUND ADVISERS SINCE 1976, GRADISON MCDONALD CURRENTLY
MANAGES IN EXCESS OF $3 BILLION IN MUTUAL FUND AND INDIVIDUALLY MANAGED ASSETS.
A prospectus for the Ohio Tax Free Income Fund or any other Gradison McDonald
Fund may be obtained by calling (513) 579-5700 or (800) 869-5999. The prospectus
contains more complete information. Read it carefully before you invest. Capital
gains, if any, will be taxable.
McDonald & Company Securities, Inc. - Distributor
54
<PAGE> 75
PORTFOLIO OF INVESTMENTS JUNE 30, 1996
<TABLE>
<CAPTION>
FACE COUPON
AMOUNT MUNICIPAL BONDS - 98.44% RATE MATURITY VALUE
- ---------- ------------------------------------------------------------ ------ -------- ----------
<S> <C> <C> <C> <C>
$1,000,000 Adams Co., OH Valley School District G.O. 5.25% 12/01/21 $ 910,000
1,000,000 Akron, Bath, Copley, OH Hospital (Childrens Hospital) 5.00 11/01/15 903,750
1,300,000 Archibald, OH Area School District G.O.* 5.90 12/01/16 1,304,875
545,000 Athens Co., OH Community Mental Health Series 1993 I 5.90 3/01/09 539,550
335,000 Avon, OH G.O. 6.50 12/01/15 354,263
1,375,000 Bedford, OH City School District G.O. 6.25 12/01/13 1,428,281
500,000 Brecksville-Broadview Heights,OH City School District G.O. 5.25 12/01/21 465,000
1,075,000 Broadview Heights, OH Industrial Development Revenue 6.25 7/01/13 1,093,813
1,000,000 Butler Co., OH Sewer System 5.25 12/01/21 932,500
1,100,000 Butler Co., OH Waterworks System 5.13 12/01/21 1,006,500
1,000,000 Celina, OH City School District G.O. 5.25 12/01/20 920,000
1,250,000 Cincinnati, OH Urban Redevelopment Improvement G.O. 6.30 12/01/15 1,307,813
2,950,000 Cleveland, OH Certificates of Participation 7.10 7/01/02 3,104,875
2,055,000 Cleveland, OH Parking Facilities Revenue 8.00 9/15/12 2,191,144
750,000 Cleveland, OH Public Power System First Mortgage Revenue 7.00 11/15/16 838,125
1,300,000 Cleveland, OH Urban Renewal Increment Bonds Series 1993 6.75 3/15/18 1,274,000
100,000 Cleveland, OH Urban Renewal Increment Bonds Series 1993 6.63 3/15/11 98,125
500,000 Cuyahoga Co., OH Health Care (Benjamin Rose Institute) 5.30 12/01/25 495,000
1,500,000 Cuyahoga Co., OH Hospital Revenue 6.25 8/15/10 1,550,625
(Cleveland Fairview and Lutheran Medical Center)
2,185,000 Cuyahoga Co., OH Industrial Development Revenue 6.50 6/01/16 2,258,744
1,500,000 Cuyahoga Co., OH Utility Systems Revenue 5.85 8/15/10 1,513,125
(The Medical Center Company Project)
1,000,000 Cuyahoga Co.,OH Hospital (University Hospital) 5.40 2/15/10 970,000
900,000 Erie Co., OH Hospital Facilities Revenue 6.75 1/01/15 923,625
(Firelands Hospital)
1,000,000 Fairfield Co., OH City School District G.O. 7.45 12/01/14 1,188,750
665,000 Franklin Co., OH Hospital Revenue 7.00 8/01/16 685,781
(Worthington Christian Village)
1,310,000 Franklin Co., OH Industrial Development Revenue 6.00 9/01/13 1,298,538
(Columbus College of Art & Design)
2,300,000 Gateway Economic Development Corporation 6.50 9/15/14 2,193,625
of Greater Cleveland Stadium Revenue
2,020,000 Greater Cincinnati, OH Mortgage Revenue Refunding 6.90 8/01/25 2,103,325
(Walnut Towers Project)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 76
PORTFOLIO OF INVESTMENTS JUNE 30, 1996
<TABLE>
<CAPTION>
FACE COUPON
AMOUNT MUNICIPAL BONDS (CONTINUED) RATE MATURITY VALUE
- ---------- ------------------------------------------------------------ ------ -------- ----------
<S> <C> <C> <C> <C>
$ 500,000 Hamilton Co., OH Hospital Facilities Revenue 6.75% 5/15/09 $ 522,325
(Childrens Hospital)
2,150,000 Hamilton Co., OH Hospital Facilities Revenue 7.00 1/01/12 2,265,563
(Deaconess Hospital)
365,000 Huron Co., OH G.O. 6.15 12/01/16 363,631
500,000 Lake Co., OH G.O. 6.60 12/01/10 536,875
385,000 Lucas Northgate Housing Development Corp Ohio 8.13 1/12/25 402,325
1,000,000 Mahoning Co., OH Hospital (Western Reserve Care System) 5.38 10/15/15 950,000
865,000 Marysville, OH Exempted Village School District G.O. 0.00 12/01/13 308,156
2,000,000 Montgomery Co., OH Hospital (Kettering Medical Center) 5.50 4/01/26 1,877,500
2,000,000 Montgomery Co., OH Hospital (Kettering Medical Center) 6.25 4/01/20 2,077,500
500,000 Mount Vernon, OH City School District G.O. 7.50 12/01/14 571,875
500,000 Muskingham Co., OH Hospital Facilities (Franciscan Sisters) 5.38 2/15/12 468,125
980,000 Ohio Capital Corp Housing Mortgage Revenue Refunding 7.70 1/01/25 1,027,775
(FHA Section 8 Housing)
920,000 Ohio Capital Corp Housing Mortgage Revenue Refunding 6.50 7/01/24 931,500
(FHA Section 8 Housing)
1,000,000 Ohio Capital Corp Housing (FHA Section 8 Housing) 6.35 7/01/15 1,016,250
1,150,000 Ohio State Air Quality Development Authority Revenue 7.40 8/01/09 1,244,875
(Ohio Power)
2,750,000 Ohio State Air Quality Development Authority Revenue 8.00 12/01/13 3,241,563
(Cleveland Electric)
1,000,000 Ohio State Building Authority (Adult Correctional Building) 6.13 10/01/12 1,018,750
815,000 Ohio State Economic Development Revenue 6.50 12/01/09 839,450
(Ohio Enterprise Bond Fund)
500,000 Ohio State Economic Development Revenue (ABS Industries) 6.00 6/01/04 507,500
630,000 Ohio State Economic Development Revenue 5.60 6/01/02 626,850
2,000,000 Ohio State Turnpike Commission 5.50 2/15/26 1,907,500
1,000,000 Ohio State Water Development Authority Revenue 6.40 8/15/27 1,030,000
(Dayton Power)
1,000,000 Ohio State Water Development Authority Revenue 6.30 9/01/20 1,013,750
1,000,000 South Euclid Lyndhurst, OH City School District G.O. 6.40 12/01/18 1,038,750
1,000,000 Springboro, OH City School District G.O. 5.25 12/01/16 922,500
910,000 Springboro, OH City School District G.O. 0.00 12/01/04 585,813
2,000,000 Springdale, OH Hospital Facilities Revenue 5.88 11/01/12 1,877,500
(Southwestern Ohio Seniors' Services Inc.)
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 77
PORTFOLIO OF INVESTMENTS JUNE 30, 1996
<TABLE>
<CAPTION>
FACE COUPON
AMOUNT MUNICIPAL BONDS (CONTINUED) RATE MATURITY VALUE
- ---------- ------------------------------------------------------------ ------ -------- ------------
<S> <C> <C> <C> <C>
$1,000,000 Student Loan Funding Corporation, Cincinnati, OH 6.15% 8/01/10 $ 1,002,500
Senior Subordinated Revenue Bonds Series 1993A
1,100,000 Summit Co., OH G.O. 5.25 12/01/15 1,027,125
500,000 Summit Co., OH G.O. 6.90 8/01/12 538,125
500,000 Toledo, OH Sewer System Revenue Mortgage Revenue Bonds 6.35 11/15/17 523,125
1,000,000 Upper Arlington, OH City School District G.O. 5.25 12/01/22 910,000
725,000 Warren Co., OH G.O. 6.55 12/01/14 791,153
1,760,000 Westlake, OH Industrial Development Revenue 6.40 8/01/09 1,815,000
-----------
TOTAL MUNICIPAL BONDS
(AMORTIZED COST $68,989,555) 69,634,981
-----------
- -----------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS - 1.56%
1,100,000 Ohio Municipal Cash Trust ** (AMORTIZED COST $1,100,000) 3.11 - 1,100,000
-----------
TOTAL INVESTMENTS, AT VALUE
(AMORTIZED COST $70,089,555) - 100% $70,734,981
===========
- -----------------------------------------------------------------------------------------------------------------
<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, 1996.
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 78
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------
<S> <C>
ASSETS
Investments in securities, at value (Note 1) (amortized cost $70,089,555) $70,734,981
Cash 96,929
Interest receivable 1,136,179
Receivable for Fund shares sold 8,874
Organization expenses, net (Note 1) 14,009
Prepaid expenses and other assets 2,664
-----------
TOTAL ASSETS 71,993,636
-----------
LIABILITIES
Payable for investments purchased 1,303,142
Payable for Fund shares redeemed 73,755
Accrued investment advisory fee (Note 2) 26,748
Other accrued expenses payable to adviser (Note 2) 20,808
Other accrued expenses and liabilities 7,290
-----------
TOTAL LIABILITIES 1,431,743
-----------
NET ASSETS $70,561,893
===========
Net assets consist of:
Aggregate paid-in capital $71,176,826
Accumulated undistributed net investment income 1,560
Accumulated net realized loss (1,261,919)
Net unrealized appreciation of investments 645,426
-----------
Net Assets $70,561,893
===========
Shares of capital stock outstanding
(no par value - unlimited number of shares authorized) 5,470,248
===========
Net asset value and redemption price per share (Note 1) $ 12.90
===========
Maximum offering price per share (Note 1) $ 13.16
===========
- ------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
7
<PAGE> 79
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
JUNE 30, 1996
------------------------------
<S> <C> <C>
INTEREST INCOME $4,247,476
EXPENSES:
Investment advisory fee (Note 2) $ 356,463
Distribution (Note 2) 178,232
Transfer agency and accounting services fees (Note 2) 90,667
Professional fees 26,288
Amortization of organization expense (Note 1) 11,515
Trustees' fees (Note 2) 9,398
Printing 5,936
ICI dues 3,739
Insurance 2,030
Registration fees 1,188
Other 5,904
---------
TOTAL EXPENSES 691,360
----------
NET INVESTMENT INCOME 3,556,116
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 237,361
Net change in unrealized appreciation of investments 406,577
---------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 643,938
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $4,200,054
==========
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
8
<PAGE> 80
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------
1996 1995
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 3,556,116 $ 3,815,525
Net realized gain (loss) on investments 237,361 (1,353,239)
Net change in unrealized appreciation of investments 406,577 2,903,704
------------ ------------
Net increase in net assets resulting from operations 4,200,054 5,365,990
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME (3,555,785) (3,825,971)
------------ ------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 14,042,107 9,722,003
Net asset value of shares issued as distributions 2,869,010 3,154,243
Payments for shares redeemed (16,976,110) (22,071,088)
------------ ------------
Net decrease in net assets from Fund share transactions (64,993) (9,194,842)
------------ ------------
TOTAL INCREASE (DECREASE) IN NET ASSETS 579,276 (7,654,823)
NET ASSETS:
Beginning of year 69,982,617 77,637,440
------------ ------------
End of year (including undistributed net investment
income of $1,560 and $1,229, respectively) (Note 1) $ 70,561,893 $ 69,982,617
============ ============
NUMBER OF FUND SHARES:
Sold 1,078,575 781,164
Issued as distributions to shareholders 220,755 254,251
Redeemed (1,307,968) (1,784,364)
----------- -----------
Net decrease in shares outstanding (8,638) (748,949)
Outstanding at beginning of year 5,478,886 6,227,835
----------- -----------
Outstanding at end of year 5,470,248 5,478,886
=========== ===========
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
9
<PAGE> 81
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1996
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's
investment objective is to provide as high a level of after-tax current income
exempt from Federal income tax and Ohio state personal income tax as is
consistent with preservation of capital by investing primarily in municipal
securities.
The Fund changed its fiscal year end to June 30, effective with the June 30,
1994 Annual Report.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles. The preparation of
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amount of income and expenses for that
period. Actual results could differ from those estimates.
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, 1996, the Fund had committed
$1,303,142 to the purchase of a delayed delivery security; the market value of
the securities segregated as collateral for this purchase is $6,422,562.
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> 82
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1996
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, 1996 were $1,312,037
and $666,611, respectively.
As of June 30, 1996, the Fund had a capital loss carryforward for Federal income
tax purposes of $1,261,919 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> 83
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1996
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, 1996, McDonald received sales charges aggregating
$122,266 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, 1996, purchases and proceeds from the sale of
securities, excluding short-term securities, amounted to $69,984,827 and
$68,087,445, respectively.
NOTE 4 - PORTFOLIO COMPOSITION
The concentration of investments as of June 30, 1996, classified by revenue
source and credit rating, was as follows:
INVESTMENTS BY REVENUE SOURCE
<TABLE>
<S> <C>
General Obligations 23.2%
Revenue Bonds:
Health Care 26.2
Utilities 14.6
Housing 12.2
Public Facilities 10.8
Industrial Development 4.2
Higher Education 1.4
State Agency 1.4
Municipal Lease 4.4
Money Market 1.6
-----
Total 100.0%
======
</TABLE>
INVESTMENTS BY RATING
<TABLE>
<S> <C>
S&P/Moody's:
AAA/Aaa 59.2%
AA/Aa 9.0
A/A 13.5
BBB/Baa 7.0
Unrated (1) 9.8
Money Market (2) 1.5
-----
Total 100.0%
=====
</TABLE>
(1)Unrated obligations have been determined by the advisor to be of equivalent
quality to the rated securities in which the Fund is permitted to invest.
(2)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.
12
<PAGE> 84
ARTHUR ANDERSEN
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, 1996, and the related statement of operations for
the year then ended, the statements of changes in net assets for the two years
then ended, and the financial highlights for the 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, 1996, 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, 1996, 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.
Cincinnati, Ohio,
August 2, 1996
Arthur Andersen LLP
13
<PAGE> 85
This page intentionally left blank.
14
<PAGE> 86
PART C
OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
(a)(1) Financial Statements (included in prospectus
Financial Highlights
(a)(2) Financial Statements (included in statement of additional
information).
Portfolio of Investments as of June 30, 1996.
Statement of Assets and Liabilities as of June 30, 1996.
Statement of Operations for the year ended June 30, 1996.
Statement of Changes in Net Assets for the years ended
June 30, 1995 and June 30, l996.
Notes to financial statements.
Report of Independent Public Accountants
(b)Exhibits
( 1) Declaration of Trust.**
( 2) By-Laws of Trust.**
( 5)(a) Form of Investment Advisory Agreement.***
( 5)(b) Notice dated April 14, l994 adding Gradison-McDonald
Intermediate Municipal Income Fund to Investment Advisory
Agreement).++
( 6) Form of Master Distribution Agreement.***
( 6)(b) Form of Dealer's Agreement.***
( 6)(c) Amendment to Master Distribution Agreement Dated April
14, l994.++
( 6)(d) Notice dated April 14, l994, adding Gradison-McDonald
Intermediate Municipal Income Fund to Transfer Agency
Agreement.++
( 8) Form of Custodian Agreement.*
( 9a) Form of Transfer Agency Agreement.***
( 9b) Form of Expense Reimbursement Agreement.***
( 9c) Amended Appendix B to Transfer Agency Agreement Dated April
14, l994.+*
( 9d) Amended Appendix C to Transfer Agency Agreement Dated February
25, l994.+*
(10) Opinion of Counsel, is filed yearly with Registrant's Rule 24f-2.
Notice was filed most recently on August 21, l996.
(11) Consent of Independent Accountant.(included herein)
(13) Letter of Investment Intent.***
(15) Distribution Service Plan Dated February 25, l994.++
(15a) Addition of Gradison-McDonald Intermediate Municipal Income
Fund to Distribution Service Plan ++.
(16) Schedule of Performance Calculations.+
(18) Powers of Attorney of Bradley E. Turner and Daniel Castellini.++
(18a) Power of Attorney of Patricia J. Jamieson. +++
* Incorporated by reference to respective exhibits to Registrant's Form N-1A
registration statement previously filed with the Securities and Exchange
Commission on August 31, l992.
** Incorporated by reference to respective exhibits to Registrant's Form N-1A
registration statement previously filed with the Securities and Exchange
Commission on June 16, l992.
*** Incorporated by reference to respective exhibits to Registrant's Form N-1A
registration statement previously filed with the Securities and Exchange
Commission on August 3, l992.
C-3
<PAGE> 87
+ Incorporated by reference to respective exhibits to Registrant's Form N-1A
registration statement previously filed with the Securities and Exchange
Commission on November 23, l993.
++ Incorporated by reference to respective exhibits to Registrant's Form N-1A
registration statement previously filed with the Securities and Exchange
Commission on November 25, l994
+ Incorporated by reference to respective exhibits to Registrant's Form N-1A
registration statement previously filed with the Securities and Exchange
Commission on September 29, l994.
+++ Incorporated by reference to respective exhibits to Registrant's Form N-1A
registration statement previously filed with the Securities and Exchange
Commission on September 29, l994.
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
Item 26. NUMBER OF HOLDERS OF SECURITIES
<TABLE>
<CAPTION>
Number of Record Holders
Title of Class as of October 4, l996
-------------- -------------------------
<S> <C>
Shares of beneficial
interest of Registrant
Gradison Ohio Tax-Free Income Fund 1,522
</TABLE>
C-2
<PAGE> 88
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Reference is made to the captions "Management of the Trust" on page 13 of
the Prospectus that is Part A of this Registration Statement, "Trustees and
Officers of the Trust" on page 34 of the Statement of Additional Information of
the Gradison Ohio Tax-Free series of the Trust that is part of Part B of this
Registration Statement and to Item 29(b) of this Part C of the Registration
Statement.
Item 29. PRINCIPAL UNDERWRITERS
(a) The principal underwriter of the Registrant is the Gradison Division of
McDonald & Company Securities, Inc., which also serves as the principal
underwriter and investment adviser for Gradison-McDonald Cash Reserves
Trust, Gradison Custodian Trust, and Gradison Growth Trust.
(b) Information pertaining to the underwriter's directors and officers
is contained in the following table.
<TABLE>
<CAPTION>
Principal Positions and
Positions and Offices Business Offices with
Name With Underwriter Address Registrant
- ---- --------------------- -------------------------------------
<S> <C> <C> <C>
Daniel F. Austin Director, Vice 800 Superior Avenue None
Chairman Cleveland Ohio 44114
Jack N. Aydin Director, Managing One Evertrust Plaza None
Director Jersey City, NJ 07302
Eugene H. Bosart, Director, Senior 260 East Brown Street None
III Managing Director Birmingham, MI 48009
Thomas G. Clevidence Director, Managing 800 Superior Avenue None
Director Cleveland, OH 44114
Robert Clutterbuck Director, President, 800 Superior Avenue None
Chief Operating, Cleveland, OH 44114
Officer, Chief Financial Officer
Ralph M. Della Ratta Director, Senior 800 Superior Avenue None
Jr. Director, Cleveland, Ohio 44114
Managing Director
Dennis J. Donnelly Director, Senior 800 Superior Avenue None
Managing Director Cleveland, OH 44114
David W. Ellis, III Director, and Sr. 580 Walnut Street None
Managing Director Cincinnati, OH 45202
(Gradison Division)
Patricia J. Jamieson Secretary/Treasurer 800 Superior Avenue Treasurer,
Chief Financial Cleveland, OH 44114 Chief Financial
Officer Officer
David W. Knall Director, Senior One American Square None
Managing Director Indianapolis, IN 46282
Thomas M. McDonald Director, Managing 800 Superior Avenue
Director, Cleveland, OH 44114
</TABLE>
C-3
<PAGE> 89
<TABLE>
<S> <C> <C> <C>
John F. O'Brien Director, Senior 800 Superior Avenue None
Managing Director Cleveland, OH 44114
Lawrence T. Oakar Director, Senior 800 Superior Avenue None
Managing Director Cleveland, OH 44114
James C. Redinger Director, Senior 800 Superior Avenue None
Managing Director Cleveland, OH 44114
William Summers, Jr. Director, Chairman 800 Superior Avenue None
Chief Executive Cleveland, OH 44114
Officer
David D. Sutcliffe Director, Senior 800 Superior Avenue None
Managing Director Cleveland, OH 44114
Bradley E. Turner Director, Senior 800 Superior Avenue President
Managing Director Cleveland, OH 44114
Gary A. Zdolshek Director, Senior 800 Superior Avenue None
Managing Director Cleveland, OH 44114
</TABLE>
Item 30 LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and documents required to be maintained by the Registrant
pursuant to Section 31(a) of the Investment Company Act of 1940 and Rules 31a-1
through 31(a) thereunder are maintained at the offices of the Registrant, 580
Walnut Street, Cincinnati, Ohio 45202, except as indicated below opposite the
applicable reference to the aforesaid Rules.
<TABLE>
Rule In Possession of:
- ---- ----------------
<S> <C>
31a-1(b)(1), 31a-1(b)(2)(i)(a)-(f), Star Bank, N.A., Star Bank
Center,
31a-1(b)(2)(ii), 31a-1(b)(5) and Cincinnati, Ohio 45202.
31a-1(b)(8)
</TABLE>
Item 31. MANAGEMENT SERVICES
Not applicable.
Item 32. UNDERTAKINGS
The Registrant hereby undertakes to provide, without cost, a copy of its most
recent annual report upon request.
Insofar as indemnification for liability arising under the Securities Act of
l933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction, the question whether
C-4
<PAGE> 90
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
C-5
<PAGE> 91
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Cincinnati and State of Ohio on the 23rd day of October 1996.
Registrant hereby certifies that this Amendment to Registration Statement meets
all of the requirements for effectiveness pursuant to paragraph (b) of Rule 485.
GRADISON-MCDONALD MUNICIPAL CUSTODIAN TRUST
(Registrant)
By */S/ DONALD E. WESTON
--------------------
Chairman
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
*DONALD E. WESTON Chairman of the Board October 23, l996
(Principal Executive
Officer and Trustee)
*DANIEL J. CASTELLINI Trustee "
*THEODORE EMMERICH Trustee "
*RICHARD RANKIN Trustee "
*JEROME SCHNEE Trustee "
*BRADLEY E. TURNER President "
*PATRICIA J. JAMIESON Treasurer
(Principal Financial and "
Accounting Officer)
</TABLE>
*By /S/ Richard M. Wachterman
Richard M. Wachterman
Attorney-in-Fact
S-1
<PAGE> 92
Exhibit List
Exhibit Number Description
- -------------- -----------
11 Consent of Arthur Andersen LLP
<PAGE> 1
Exhibit 11
Consent of Independent Public Accountants
-----------------------------------------
As independent public accountants, we hereby consent to the use of our report
dated August 2, l996 and to all references to our Firm included in or made a
part of this registration statement, post-effective amendment no. 9.
|S| Arthur Andersen LLP
Cincinnati, Ohio,
October 23, l996
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> GRADISON-MCDONALD OHIO TAX-FREE INCOME FUND
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 70,089,555
<INVESTMENTS-AT-VALUE> 70,734,981
<RECEIVABLES> 1,145,053
<ASSETS-OTHER> 113,600
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 71,993,636
<PAYABLE-FOR-SECURITIES> 1,303,142
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 128,601
<TOTAL-LIABILITIES> 1,431,743
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 71,176,826
<SHARES-COMMON-STOCK> 5,470,248
<SHARES-COMMON-PRIOR> 5,478,886
<ACCUMULATED-NII-CURRENT> 1,560
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,261,919)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 645,426
<NET-ASSETS> 70,561,893
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,247,476
<OTHER-INCOME> 0
<EXPENSES-NET> 691,360
<NET-INVESTMENT-INCOME> 3,556,116
<REALIZED-GAINS-CURRENT> 237,361
<APPREC-INCREASE-CURRENT> 406,577
<NET-CHANGE-FROM-OPS> 4,200,054
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3,555,785
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,078,575
<NUMBER-OF-SHARES-REDEEMED> 1,307,968
<SHARES-REINVESTED> 220,755
<NET-CHANGE-IN-ASSETS> 579,276
<ACCUMULATED-NII-PRIOR> 1,229
<ACCUMULATED-GAINS-PRIOR> (1,499,279)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 356,463
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 691,360
<AVERAGE-NET-ASSETS> 71,292,695
<PER-SHARE-NAV-BEGIN> 12,773
<PER-SHARE-NII> .648
<PER-SHARE-GAIN-APPREC> .126
<PER-SHARE-DIVIDEND> .648
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.899
<EXPENSE-RATIO> .97
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
