<PAGE> 1
GRADISON - MCDONALD
INTERMEDIATE MUNICIPAL INCOME FUND
LETTER TO SHAREHOLDERS
August 12, 1996
Dear Shareholder:
As our fiscal year comes to a close, the bond market is very apprehensive
about the future, having been subject to wide swings in interest rates for the
third year in a row. This year, the good news came early as rates dropped
throughout 1995 on weak economic forecasts and then rose dramatically as
robust GDP growth, large employment gains, and a strong housing market fueled
speculation that wage pressure due to tight labor conditions would reignite
inflation. In this environment, our strategy has been to stay fully invested,
stick with our long term objective of generating high tax-free income, and
ignore short term volatility. For the twelve months ended June 30, 1996, the
Gradison-McDonald Intermediate Municipal Income Fund had a slight increase
in net asset value which, combined with dividend income, generated a total
return to shareholders of 5.47% (not including the effect of the sales
charge).
As previously announced, a decision was made to terminate the Fund on August
15th due to a lack of asset growth. Despite posting positive results, the Fund
was unable to attract sufficient assets to achieve expected operating
efficiencies. We regret having to make this decision, but make it knowing it
is in the best interest of the shareholders.
We appreciate your patronage of the Gradison-McDonald Intermediate Municipal
Income Fund and hope that our other mutual funds will continue to be of
service to you.
Very truly yours,
/s/Stephen C. Dilbone
---------------------
Stephen C. Dilbone
Executive Vice President and Portfolio Manager
1-800-869-5999 [GRAPHIC]
<PAGE> 2
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENTS APRIL 15, 1994
TO JUNE 30, 1996
[GRAPH]
Past performance is not predictive of future performance. The performance
quoted above represents past performance. The investment return and value of
an investment in the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than the original cost. Total return
includes changes in share value and reinvestment of all distributions.
From the inception of the Fund (April 15, 1994) through June 30, 1996 the
investment adviser paid certain Fund expenses which had the effect of
increasing the Fund's return. Without consideration of such payments by the
adviser, the average annual return of investments purchased at the 2% sales
charge from inception would have been 4.69% and the 1 year return would have
been 2.42%. Without consideration of such payments by the adviser, the average
annual return on initial investments purchased at net asset value from
inception would have been 5.61% and the 1 year return would have been 4.49%.
FEDERAL INCOME TAX INFORMATION
During the year ended June 30, 1996, the Fund made total distributions of
$0.677 per share, of which $0.577 was from net investment income (exempt from
federal regular income tax) and $0.100 from short-term capital gains.
See accompanying notes to financial statements.
2
<PAGE> 3
FINANCIAL HIGHLIGHTS (For a share outstanding throughout each period)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, FOR THE PERIOD
--------------------------- APRIL 15, 1994*
1996 1995 TO JUNE 30, 1994
<S> <C> <C> <C>
Net asset value at beginning of period $ 12.918 $ 12.718 $ 12.500
--------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .574 .633 .119
Net realized and unrealized gain on investments .126 .196 .217
--------- --------- ---------
Total income from investment operations .700 .829 .336
--------- --------- ---------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income (.577) (.629) (.118)
Distributions from realized capital gains (.100) -- --
--------- --------- ---------
Total distributions to shareholders (.677) (.629) (.118)
--------- --------- ---------
Net asset value at end of period $ 12.941 $ 12.918 $ 12.718
========= ========= =========
Total return (1) 5.47% 6.72% 2.76%
========= ========= =========
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (in millions) $ 13.2 $ 14.0 $ 7.3
RATIOS NET OF EXPENSES WAIVED AND REIMBURSED
BY THE ADVISER (2):
Ratio of expenses to average net assets 1.10% 0.50% 0.13%(3)
Ratio of net investment income to average net assets 4.40% 4.95% 4.40%(3)
RATIOS ASSUMING NO ADVISER WAIVER OR
REIMBURSEMENT OF EXPENSES (2):
Ratio of expenses to average net assets 1.59% 1.68% 2.94%(3)
Ratio of net investment income to average net assets 3.91% 3.77% 1.58%(3)
Portfolio turnover rate 98.32% 137.98% 10.38%
</TABLE>
(1) 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.
(2) The adviser absorbed expenses of the Fund through waiver of fees and
reimbursement of certain expenses (Note 2).
(3) Annualized.
* Date of public offering.
See accompanying notes to financial statements.
3
<PAGE> 4
PORTFOLIO OF INVESTMENTS JUNE 30, 1996
<TABLE>
<CAPTION>
FACE COUPON
AMOUNT MUNICIPAL BONDS - 91.77% RATE MATURITY VALUE
-------- ------------------------ ------ -------- --------
<S> <C> <C> <C>
$500,000 Chester Co., PA Health and Education Revenue 5.50% 7/01/07 $495,625
(Chester Co. Hospital)
435,000 Cuyahoga Co., OH IDR (Southwest Associates) 5.90 6/01/04 448,594
500,000 Dade Co., FL Special Obligation Water Revenue 0.00 10/01/08 251,205
500,000 Daytona Beach, FL Water and Sewer Revenue 6.75 11/15/07 556,875
100,000 Elmira Co., NY G.O. 5.45 3/01/06 100,000
500,000 Fairfield, OH Local School District G.O. 7.75 12/01/09 541,250
310,000 Florida State Board of Education G.O. 8.40 6/01/07 392,925
500,000 Franklin Co., OH Industrial Development Revenue 5.85 6/01/02 517,500
(Hoover Universal Project)
500,000 Gateway Economic Development Corporation 6.88 9/01/05 540,625
of Greater Cleveland
500,000 Hamilton Co., OH Hospital Facilities (Childrens Hospital) 6.75 5/15/09 522,325
420,000 Hamilton Co., OH Sewer System Revenue 6.30 12/01/01 448,350
490,000 Harris Co., TX Housing Finance Corporation 5.60 9/01/19 497,350
Multifamily Housing (Colonial House Apt.)
500,000 Hawaii State Airports System Revenue Bonds 6.30 7/01/01 528,750
720,000 Kenowa Hills, MI Public Schools G.O. 5.60 5/01/09 723,600
500,000 Louisville, KY Housing Assistance Corporation 7.00 1/01/10 528,125
(FHA Insured Mortgage Loan-Carrousel Properties)
500,000 Maine Educational Loan Marketing 6.05 11/01/04 505,000
Senior Student Loan Revenue
250,000 Michigan Municipal Bond Authority Revenue 7.25 11/01/10 272,500
500,000 Michigan State Housing Development Authority 6.00 4/01/00 523,125
Rental Housing Revenue
285,000 North Providence, RI G.O. 5.90 7/01/11 283,592
300,000 Ohio State Economic Development Revenue 6.50 12/01/09 309,000
(Ohio Enterprise Bond Fund)
500,000 Ohio State Economic Development Revenue 5.60 12/01/03 501,250
(Smith Steelite Co.)
400,000 Puerto Rico Highway and Transportation Authority 6.38 7/01/08 425,000
500,000 Shelby Co., TN Health Facilities Revenue 7.38 6/01/01 532,500
(Methodist Health Systems Inc.)
400,000 South Dakota Student Loan Finance 5.50 8/01/98 402,000
310,000 Stewartville, MN Independent School District G.O. 5.25 2/01/04 314,650
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
PORTFOLIO OF INVESTMENTS JUNE 30, 1996
<TABLE>
<CAPTION>
FACE COUPON
AMOUNT MUNICIPAL BONDS (CONTINUED) RATE MATURITY VALUE
-------- --------------------------- ------ -------- -------------
<S> <C> <C> <C>
$400,000 Student Loan Funding Corporation, Cincinnati, OH 5.95% 8/01/05 $ 408,000
Senior Subordinated Revenue Bonds
400,000 West Clermont, OH Local School District G.O. 6.00 12/01/00 426,500
350,000 West Geauga, OH Local School District G.O. 8.10 11/01/03 416,937
400,000 Westlake, OH Industrial Development Revenue 6.00 8/01/04 415,500
(Westbay Manor I & II Project)
-----------
TOTAL MUNICIPAL BONDS
(AMORTIZED COST $12,569,918) 12,828,653
-----------
SHORT-TERM INVESTMENTS - 8.23%
500,000 Ohio Municipal Cash Trust * 3.11 - 500,000
650,000 Dreyfus Ohio Municipal Money Market Fund* 2.67 - 650,000
-----------
TOTAL SHORT-TERM INVESTMENTS
(AMORTIZED COST $ 1,150,000) 1,150,000
-----------
TOTAL INVESTMENTS, AT VALUE
(AMORTIZED COST $ 13,719,918) - 100% $13,978,653
===========
</TABLE>
* Ohio Municipal Cash Trust and Dreyfus Ohio Municipal Money Market Fund are
money market mutual funds 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.
See accompanying notes to financial statements.
5
<PAGE> 6
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
JUNE 30, 1996
ASSETS
<S> <C>
Investments in securities, at value (Note 1) (Cost $13,719,918) $13,978,653
Cash 320,002
Receivable for securities sold 276,196
Interest receivable 154,504
Organization expenses, net (Note 1) 5,712
Prepaid expenses and other assets 8,228
-----------
TOTAL ASSETS 14,743,295
-----------
LIABILITIES
Payable for Fund shares redeemed 7,432
Payable for investments purchased 1,440,786
Accrued investment advisory fee (Note 2) 1,043
Other accrued expenses payable to adviser (Note 2) 51,333
Other accrued expenses and liabilities 2,819
-----------
TOTAL LIABILITIES 1,503,413
-----------
NET ASSETS $13,239,882
===========
Net assets consist of:
Aggregate paid-in capital $12,978,929
Accumulated undistributed net investment income (Note 1) 2,185
Accumulated undistributed net realized gain 33
Net unrealized appreciation of investments 258,735
-----------
Net Assets $13,239,882
===========
Shares of capital stock outstanding
(no par value - unlimited number of shares authorized) 1,023,134
===========
Net asset value and redemption price per share (Note 1) $12.94
===========
Maximum offering price per share (Note 1) $13.20
===========
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 7
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
JUNE 30, 1996
<S> <C> <C>
INVESTMENT INCOME $746,703
EXPENSES:
Investment advisory fee (Note 2) $ 67,927
Transfer agency and accounting services fees (Note 2) 55,261
Distribution (Note 2) 33,963
Professional fees 26,701
Registration fees 17,204
Trustees' fees (Note 2) 8,879
Printing 2,431
Amortization of organization expense (Note 2) 2,042
Other 1,389
--------
TOTAL EXPENSES 215,797
LESS FEES WAIVED BY THE ADVISER (NOTE 2) (66,884)
--------
NET EXPENSES 148,913
--------
NET INVESTMENT INCOME 597,790
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 90,835
Net change in unrealized appreciation of investments 41,137
--------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 131,972
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $729,762
========
</TABLE>
See accompanying notes to financial statements.
7
<PAGE> 8
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------
1996 1995
FROM OPERATIONS:
<S> <C> <C>
Net investment income $ 597,790 $ 622,610
Net realized gain on investments 90,835 11,539
Net change in unrealized appreciation of investments 41,137 220,153
----------- -----------
Net increase in net assets resulting from operations 729,762 854,302
----------- -----------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income (601,377) (617,514)
Net realized capital gains (103,083) -
----------- -----------
Decrease in net assets from distributions to shareholders (704,460) (617,514)
----------- -----------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 2,136,393 10,710,665
Net asset value of shares issued as distributions 595,456 532,240
Payments for shares redeemed (3,508,140) (4,752,618)
----------- -----------
Net increase (decrease) in net assets from Fund share transactions (776,291) 6,490,287
----------- -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS (750,989) 6,727,075
NET ASSETS:
Beginning of year 13,990,871 7,263,796
----------- -----------
End of year (including undistributed net investment
income of $2,185 and $5,772, respectively) (Note 1) $13,239,882 $13,990,871
=========== ===========
NUMBER OF FUND SHARES:
Sold 163,212 844,755
Issued as distributions to shareholders 45,613 41,982
Redeemed (268,749) (374,835)
----------- -----------
Net increase (decrease) in shares outstanding (59,924) 511,902
Outstanding at beginning of year 1,083,058 571,156
----------- -----------
Outstanding at end of year 1,023,134 1,083,058
=========== ===========
</TABLE>
See accompanying notes to financial statements.
8
<PAGE> 9
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
Intermediate Municipal Income Fund and the Gradison-McDonald Ohio Tax-Free
Income Fund; each of which is a diversified, open-end series representing a
separate fund with its own investment policies. This Annual Report to
Shareholders pertains only to Gradison-McDonald Intermediate Municipal Income
Fund (the "Fund"), the public offering of shares of which commenced on April
15, 1994. The Fund's investment objective is to provide as high a level of
after-tax current income exempt from regular Federal income tax as is
consistent with preservation of capital by investing primarily in intermediate
maturity municipal securities.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles. The preparation of
financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amount of income and expenses for the
period. Actual results could differ from those estimates.
SECURITIES VALUATION - 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 maintains, 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 was not
committed to the purchase of any when-issued or delayed delivery securities.
INVESTMENT INCOME AND DISTRIBUTIONS TO SHAREHOLDERS - Interest income is
accrued as earned. Interest income includes interest earned, net of premium
and original issue discount, as required by the Internal Revenue Code.
Dividends arising from net investment income are declared daily and paid
monthly. Net realized capital gains, if any, are distributed at least
annually.
TAXES - It is the Fund's policy to comply with the provisions of the Internal
Revenue Code available to regulated investment companies. As provided therein,
in any fiscal year in which the Fund so qualifies, and distributes at least
90% of taxable net income, the Fund will be relieved of federal income tax on
the income distributed. Accordingly, no provision for income taxes has been
made.
In order to avoid imposition of the excise tax applicable to regulated
investment companies, it is also the Fund's intention to declare as dividends
in each calendar year, at least 98% of its taxable net investment income
(earned during the calendar year) and 98% of its net realized capital gains,
if any (earned during the twelve months ended October 31), plus undistributed
amounts from prior years.
9
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1996
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 $281,892 and
$23,157, respectively.
FUND SHARE VALUATION - The net asset value per share is computed by dividing the
net asset value of the Fund (total assets less total liabilities) by the number
of shares outstanding. The maximum offering price per share is equal to the net
asset value per share plus 2.04% of net asset value (or 2% of the offering
price). The offering price is reduced on sales of $250,000 or more. The
redemption price per share is equal to the net asset value per share.
EXPENSES - Common expenses incurred by the Trust are allocated to the Fund based
on the ratio of the net assets of the Fund to the combined net assets of the
Trust. In all other respects, expenses are charged to the Fund as incurred on a
specific identification basis.
ORGANIZATION EXPENSES - Expenses of organization have been capitalized and are
being amortized on a straight-line basis over 60 months commencing upon the
public offering of the Fund's shares.
NOTE 2 - TRANSACTIONS WITH AFFILIATES
The Fund's investments are managed, subject to the general supervision and
control of the Trust's Board of Trustees, by McDonald & Company Securities, Inc.
("McDonald"), a registered investment adviser and securities dealer, pursuant to
the terms of an Investment Advisory Agreement (the Agreement). Under the terms
of the Agreement, the Fund pays McDonald a fee computed and accrued daily and
paid monthly based upon the Fund's average daily net assets at the annual rate
of .50%.
The Agreement provides that McDonald bear the costs of salaries and related
expenses of executive officers of the Fund who are necessary for the management
and operations of the Fund. In addition, McDonald bears the costs of preparing,
printing and mailing sales literature and other advertising materials, the cost
of space and equipment rental, and compensates the Trust's trustees who are
affiliated with McDonald. All expenses not specifically assumed by McDonald are
borne by the Fund.
Under the terms of a Transfer Agency, Accounting Services and Administrative
Services Agreement, McDonald provides transfer agent, dividend disbursing,
accounting services and administrative services to the Trust. The Fund pays
McDonald a monthly fee for transfer agency and administrative services at an
annual rate of $26.50 per shareholder non-zero balance account, plus
out-of-pocket costs for statement paper, statement and reply envelopes and reply
postage. The Fund pays McDonald a monthly fee for accounting services based on
the Fund's average daily net assets at an annual rate of .035% on the first $100
million, .025% on the next $100 million and .015% on any amount in excess of
$200 million, with a minimum annual fee of $48,000.
Under the terms of an Expense Reimbursement Agreement, McDonald has agreed to
forego fees owed to it under the Advisory Agreement or any other agreement with
the Trust and to reimburse the Fund if, and to the extent that, expenses
(excluding brokerage commissions, taxes, interest and extraordinary items) borne
by the Fund in any fiscal year exceed 1.25% of the average net assets of the
Fund. This agreement is subject to termination at any time without notice. In
addition, McDonald may, at its discretion, agree to waive fees and/or reimburse
the Fund for other expenses in order to limit the Fund's expenses to a specified
percentage of average net assets lower than 1.25%. For the year ended June 30,
1996, McDonald waived advisory fees of $66,884.
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
10
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1996
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
$27,695 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 $13,119,284 and
$14,160,421, respectively.
NOTE 4 - PORTFOLIO COMPOSITION
The concentration of investments as of June 30, 1996, classified by state,
credit rating and revenue source was as follows:
INVESTMENTS BY STATE
<TABLE>
<CAPTION>
<S> <C>
Ohio 48.8%
Michigan 13.1
Florida 7.0
Tennessee 3.9
Hawaii 3.9
Kentucky 3.9
Maine 3.7
Texas 3.7
Pennsylvania 3.6
Puerto Rico 3.1
Other (1) 5.3
------
Total 100.0%
======
</TABLE>
INVESTMENTS BY RATING
<TABLE>
<CAPTION>
<S> <C>
S&P/Moody's:
AAA/Aaa 49.1%
AA/Aa 18.5
A/A 24.2
Money Market 8.2
------
Total 100.0%
======
</TABLE>
INVESTMENTS BY REVENUE SOURCE
<TABLE>
<CAPTION>
<S> <C>
General Obligations 22.9%
Revenue Bonds:
Health Care 14.3
Housing 14.1
Industrial Development 9.5
Higher Education 9.4
Transportation 7.8
Public Facilities 7.6
Utilities 3.2
Other (1) 3.0
Money Market (2) 8.2
------
Total 100.0%
======
</TABLE>
(1) Individually less than 3%.
(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.
NOTE 5 - SUBSEQUENT EVENT
On August 2, 1996, the Board of Trustees approved the liquidation of the
Gradison-McDonald Intermediate Municipal Income series, effective August 15,
1996.
11
<PAGE> 12
[ARTHUR ANDERSEN LETTERHEAD]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Trustees of the
Gradison-McDonald Intermediate Municipal Income Fund
of the Gradison-McDonald Municipal Custodian Trust:
We have audited the accompanying statement of assets and liabilities of the
Gradison-McDonald Intermediate Municipal Income Fund of the Gradison-McDonald
Municipal Custodian Trust (an Ohio business trust), 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 Intermediate Municipal 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.
As stated in Note 5 to the financial statements, the Board of Trustees adopted a
resolution on August 2, 1996 providing a Plan of Liquidation of the Gradison-
McDonald Intermediate Municipal Income Fund to be finalized August 15, 1996.
Arthur Andersen LLP
Cincinnati, Ohio,
August 2, 1996
12
<PAGE> 13
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13
<PAGE> 14
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14
<PAGE> 15
GRADISON -- MCDONALD FAMILY OF FUNDS
Increasingly, MUTUAL FUNDS are the preferred vehicle for starting and building
an investment program. And today, GRADISON-MCDONALD is a preferred name in
mutual funds for a GROWING number of investors.
GOVERNMENT INCOME FUND
An income fund which invests in intermediate to long-term U.S. Government
securities.
OHIO TAX-FREE INCOME FUND
An income fund which seeks to provide income exempt from regular Federal
income tax and Ohio state personal income tax.*
ESTABLISHED VALUE FUND
A common stock fund that seeks long-term capital growth by investing in
companies that are included in the Standard & Poor's 500 Index and other large
companies.
GROWTH & INCOME FUND
A common stock fund that seeks long-term capital growth, current income and
growth of income.
OPPORTUNITY VALUE FUND
A common stock fund that seeks long-term capital growth by investing in
companies that are generally smaller in size than those included in the
Standard & Poor's 500 Index.
INTERNATIONAL FUND
A common stock fund that seeks capital growth by investing in common stocks of
non-United States companies.
MONEY MARKET FUNDS
Gradison-McDonald offers a full range of taxable and tax-free money market
funds.
Prospectuses are available upon request by calling (800) 869-5999 and should
be read carefully before you invest. An investment in the money market funds
is neither insured nor guaranteed by the U.S. Government and there can be no
assurance that they will be able to maintain a stable $1.00 share price. The
return and principal value of an investment in other funds will fluctuate so
that an investor's shares, when redeemed, may be worth more or less than the
original cost. The returns of all funds will fluctuate.
* Investment income may be subject to the federal alternative minimum tax.
Capital gains, if any, are taxable.
15
<PAGE> 16
INTERMEDIATE MUNICIPAL
INCOME FUND
GRADISON -- MCDONALD
ANNUAL REPORT
June 30, 1996
AN INTERMEDIATE MUNICIPAL INCOME FUND
SEEKING A HIGH LEVEL OF AFTER-TAX INCOME
GRADISON -- MCDONALD
This material is intended for distribution to shareholders of the Gradison-
McDonald Intermediate Municipal Income Fund. It may be distributed to other
persons only if it is preceded or accompanied by a current prospectus of the
Gradison-McDonald Intermediate Municipal Income Fund. McDonald & Company
Securities, Inc. -- Distributor
<PAGE> 17
GRADISON-MCDONALD
OHIO TAX FREE INCOME FUND
LETTER TO SHAREHOLDERS
August 12, 1996
Dear Shareholder:
As our fiscal year comes to a close, the bond market is very apprehensive about
the future, having been subject to wide swings in interest rates for the third
year in a row. This year, the good news came early as rates dropped throughout
1995 on weak economic forecasts and then rose dramatically as robust economic
growth, large employment gains, and a strong housing market fueled speculation
that wage pressure due to tight labor conditions would reignite inflation. In
this environment, our strategy has been to stay fully invested, stick with our
long-term objective of generating high tax-free income, and ignore short-term
volatility. For the twelve months ended June 30, 1996, the Gradison-McDonald
Ohio Tax-Free Income Fund had a slight increase in net asset value which,
combined with dividend income, generated a total return to shareholders of 6.17%
(not including the effect of the sales charge).
Going forward, it is our feeling that the economic growth experienced in the
first half of 1996 is not sustainable and will revert to a slower pace in the
second half. If this scenario is confirmed, we may look to extend portfolio
maturity to take advantage of the capital appreciation offered by falling rates.
The municipal market seems to have put many of its problems behind it as tax
reform initiatives have been shelved and municipal bankruptcy problems are out
of the headlines. The credit prospects for Ohio municipal bonds, specifically,
remain quite good as tax collections have come in so strong that the legislature
has just approved a state tax cut.
We appreciate the confidence shown by our shareholders and welcome any comments
or suggestions.
Very truly yours,
/s/ Stephen C. Dilbone
Stephen C. Dilbone
Executive Vice President and Portfolio Manager
[GRAPHIC]
<PAGE> 18
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENTS SEPT. 18, 1992
TO JUNE 30, 1996
GRADISON-MCDONALD OHIO TAX-FREE INCOME FUND
Lehman Brothers 20 Year Municipal Index
OHIO TAX-FREE INCOME FUND
TOTAL RETURN PERIODS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
-------Average Annual----------------
Initial Investment From Inception (9/18/92) 3 Years 1 Year
- ------------------ ------------------------ ------- ------
<S> <C> <C> <C>
Purchased at 2% Sales Charge 5.78% 3.48% 4.05%
Purchased at Net Asset Value 6.35% 4.17% 6.17%
</TABLE>
[LINE GRAPH]
Past performance is not predictive of future performance. The performance quoted
above represents past performance. The investment return and value of an
investment in the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than the original cost. Total return
includes changes in share value and reinvestment of all distributions. From the
inception of the Fund (September 18, 1992) through June 30, 1994 the investment
adviser paid certain Fund expenses which had the effect of increasing the Fund's
return.
FEDERAL INCOME TAX INFORMATION
During the year ended June 30, 1996, the Fund made total distributions of $0.648
per share all of which was from net investment income. All such distributions
from net investment income were entirely exempt from federal regular income tax
and income taxation in Ohio.
2
See accompanying notes to financial statements.
<PAGE> 19
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
ELEVEN MONTHS
YEAR ENDED JUNE 30, ENDED FOR THE PERIOD
--------------------- JUNE 30, 1994 SEPTEMBER 18, 1992
1996 1995 (NOTE 1) TO JULY 31, 1993 (1)
------- ------- ------------- --------------------
<S> <C> <C> <C> <C>
Net asset value at beginning of period $12.773 $12.466 $13.316 $12.500
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .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 (2) 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% (3)(4) .75% (3)(4)
Ratio of net investment income to
average net assets 4.99% 5.26% 4.94% (3)(4) 5.25% (3)(4)
RATIOS ASSUMING NO ADVISER WAIVER OF EXPENSES:
Ratio of expenses to average net assets .97% .97% .99% (3)(4) 1.14% (3)(4)
Ratio of net investment income to
average net assets 4.99% 5.26% 4.85% (3)(4) 4.86% (3)(4)
Portfolio turnover rate 99.68% 80.19% 55.84% 45.04%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) No income was earned or expenses incurred from the date the initial shares
were purchased by the adviser (August 21, 1992) through the date of public
offering (September 18, 1992).
(2) Total returns are based upon an initial investment purchased without the
applicable sales charge, represent the actual returns over those periods,
and have not been annualized.
(3) The adviser absorbed expenses of the Fund through waiver of a portion of
the investment advisory fee (Note 2).
(4) Annualized.
See accompanying notes to financial statements.
3
<PAGE> 20
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> 21
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> 22
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
===========
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* 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.
See accompanying notes to financial statements.
6
<PAGE> 23
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> 24
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> 25
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> 26
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> 27
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> 28
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> 29
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
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GRADISON-MCDONALD FAMILY OF FUNDS
Increasingly, MUTUAL FUNDS are the preferred vehicle for starting and building
an investment program. And today, GRADISON-MCDONALD is a preferred name in
mutual funds for a GROWING number of investors.
GOVERNMENT INCOME FUND
An income fund which invests in intermediate to long-term U.S. Government
securities.
ESTABLISHED VALUE FUND
A common stock fund that seeks long-term capital growth by investing in
companies that are included in the Standard & Poor's 500 Index and other large
companies.
GROWTH & INCOME FUND
A common stock fund that seeks long-term capital growth, current income and
growth of income.
OPPORTUNITY VALUE FUND
A common stock fund that seeks long-term capital growth by investing in
companies that are generally smaller in size than those included in the Standard
& Poor's 500 Index.
INTERNATIONAL FUND
A common stock fund that seeks capital growth by investing in common stocks of
non-United States companies.
MONEY MARKET FUNDS
Gradison-McDonald offers a full range of taxable and tax-free money market
funds.
Prospectuses are available upon request by calling (800) 869-5999 and should be
read carefully before you invest. An investment in the money market funds is
neither insured nor guaranteed by the U.S. Government and there can be no
assurance that they will be able to maintain a stable $1.00 share price. The
return and principal value of an investment in other funds will fluctuate so
that an investor's shares, when redeemed, may be worth more or less than the
original cost. The returns of all funds will fluctuate.
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OHIO TAX-FREE
INCOME FUND
GRADISON-MCDONALD
ANNUAL REPORT
JUNE 30, 1996
A MUNICIPAL BOND FUND WITH DOUBLE
TAX-FREE BENEFITS TO OHIO INVESTORS
GRADISON-MCDONALD
This material is intended for distribution to shareholders of the
Gradison-McDonald Ohio Tax-Free Income fund. It may be distributed to other
persons only if it is preceded or accompanied by a current prospectus of
McDonald & Company Securities, Inc.-- Distributor
