Supplement Dated February 19, l997 to Statements of Additional
Information as set forth below:
Gradison U.S. Government Reserves Dated January 31, l997
Gradison Government Income Fund Dated May 1, l996
Gradison Ohio Tax-Free Income Fund Dated October 28, l996
Gradison Established Value Fund and Gradison Opportunity Value Fund
July 29, l996
Gradison Growth and Income Fund dated July 29, l996
Gradison International Fund dated July 29, l996
COVER PAGE
YOUR FUTURE STARTS TODAY
Graphic Photo of men, women, children and a dog
Logo
Gradison
Mutual Funds
INSIDE COVER PAGE
YOUR FUTURE STARTS TODAY
Page 1
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 the goal. Whether it's starting
a family, buying a house, saving for education, or
planning for retirement. Time is critical. Hesitate and
time will pass you by. Start today and the future is
yours.
Page 2
THE MUTUAL FUND STORY
The first mutual fund company was established in 1924
as a private investment firm for its founders and is
still in business today. By 1980, there were fewer than
600 mutual funds open to investors. Today, there are
some 400 fund groups offering more than 6,000 mutual
funds with investments totaling more than $3 trillion.
Increasingly, mutual funds are the preferred vehicle
for individual investors who are starting and building
an investment program. And today, Gradison is a
preferred name in mutual funds for a growing number of
investors.
WHY MUTUAL FUNDS?
PROFESSIONAL MANAGEMENT
Mutual funds use investment professionals to manage the
assets on a full-time basis. In addition to their
dedicated time and experience, these investment
advisers typically have access to extensive research
and other analytical resources not available to most
individual investors.
DIVERSIFICATION
Because a mutual fund has significantly more assets to
invest than any individual participant, it can purchase
and effectively manage a more diversified portfolio
than can most individual investors.
FLEXIBILITY
A mutual fund is usually part of a family of funds.
Fund families offer an exchange privilege that allow
shareholders to reallocate assets quickly and easily
among the various funds within that family of funds.
Shares in any fund may be purchased or liquidated,
often by a phone call, generally on any day that the
New York Stock Exchange is open for business.
Page 3
WHY GRADISON MUTUAL FUNDS?
A RESPECTED NAME FOR SEVEN DECADES
A respected name for seven decades Gradison has been a
recognized name in investment brokerage since 1925. The
firm became a registered investment adviser in 1974 and
established its first mutual fund in 1976.
Today, Gradison offers seven mutual funds in a growing
family of funds and manages more than $4 billion in
assets in both mutual funds and individually managed
accounts.
EXPERIENCED PORTFOLIO MANAGERS
Gradison portfolio managers average nearly 15 years of
experience as professional portfolio managers and more
than 20 years of experience in the investment field. We
believe that this depth of first-hand experience, in
both favorable and unfavorable market environments,
sets us apart from those other fund managers who have
yet to manage assets through a full market cycle.
SERVICE
Low Minimum Investment of $1,000
Convenient Automatic Dividend Reinvestment
Automatic Investment Plan
Automatic Withdrawals and Payment Plans
Access To Funds
Free Exchange Privileges
Check Writing
Wire Transfers
Toll-Free Customer Service
24-Hour Account Information
Account Statements
Year-End summary
Quarterly Newsletter
Shareholder Reports
Internet Access
Page 4
REACHING YOUR INVESTMENT GOALS
FIGHTING INFLATION
Inflation, the increase in the cost of living,
has averaged 4% since 1926. While it has been lower in
recent years, it has also been substantially
higher-reaching 14% in the early 1980s. The surest way
of beating inflation is to earn a rate of return on
your investments that exceeds the rate of inflation.
Chart: WHAT INFLATION REALLY MEANS
1995 $139,000 Single Family Home
2000 $177,403 Graphic: Picture of a
2010 $288,971 partially built home
2025 $600,750
Automobile 1995 $18,359
Graphic Picture of an 2000 $23,431
automobile 2010 $38,167
2025 $79,347
Four Year Public University Education
1995 $26,972 Graphic Picture of a
graduation cap and
2000 $34,424 a diploma.
2010 $58,073
2025 $116,571
Sources: National Association of Realtors;
Department of Commerce; College Board. Future prices
are based on a hypothetical average annual inflation
rate of 5%.
EDUCATION
The cost of four years at a private college, including
tuition, fees, books and other miscellaneous expenses,
now averages nearly $95,000. It is projected to reach
$170,000 in a decade. The cost of a public college is
expected to nearly double from an average of $45,000 to
more than $80,000 over the next ten years.
Most families realize that no matter when they start
saving and investing for this purpose, it usually is
not soon enough.
BUILDING WEALTH
Many investors overlook the potential of investing in
their most productive years when their incomes are high
enough to put aside investment assets and the demands
on their income are less than they inevitably will be
later. Such assets can be invaluable not only for
retirement but as emergency assets for unforeseen
occurrences in life.
RETIREMENT
Given the national debate on Social Security and
Medicare, the need for investors to assure adequate
retirement assets for both their active retirement
years, and the possibility of their inactive care
years, should be apparent. Many people look solely to
their company retirement plans for such assurance and
only realize the need for supplemental assets much
later.
YOUR FAMILY'S FUTURE
Providing for the education of a child or grandchild
may only be a part of an investor's concern for future
generations. They may have achieved a sufficient level
of personal success to be able to consider investing in
order to pass along significant assets to provide these
future generations with greater assurance for their
financial well-being in an uncertain world.
GRAPHIC Photo of two women embracing.
Page 5
INTELLIGENT INVESTING
Time is the essential ingredient
Experience has shown that there is no substitute for
time in investing. Historically, the sooner money has
been put to work, and the longer it has been invested,
the more likely positive returns have resulted.
Conversely, aggressive investors are more likely to
have volatile results for shorter periods. Clearly,
investing for the long-term is considered one of the
keys to successfully creating investment wealth.
THE RULE OF 72:
HELPING YOU IN TAXING TIMES
Certain measurements are well known rules in everyone's
daily life. Most people learn early in life, for
example, that twelve inches equals a foot and that
three feet make a year. With investments, similar, but
not as well known, measurement rules apply.
The Rule of 72 allows potential investors to find out
how long it will take to double their money. All you
have to do is divide 72 by the estimated interest rate
of an investment, and the answer is roughly the number
of years needed to double an investment. Here's the
formal equation:
Number of years to double the original investment = 72
Interest Rate
Using the Rule
Check the table below to see some examples of how the
Rule of 72 works.
Rate of Rule of 72 Years to Years to
Return (72Interest Rate) Double Quadruple
3% 723 24 48
6% 726 12 24
9% 729 8 16
12% 7212 6 12
The rates of return shown are for illustrative purposes
only and are not historical results or projections of
the returns of any Gradison Mutual Fund.
(Pie Charts)
THE LONGER YOUR TIME FRAME, THE GREATER THE CHANCE OF
REWARD
Percent of time stocks had positive results for rolling
periods beginning December 31, 1925, and ended December
31, 1995.
71% 89% 97% 100%
1 year 5 year 10 year 15 Year
holding holding holding holding
periods periods periods periods
Stocks will often rise and fall in value over the short
term. When investing for growth, the longer your
investment time frame, the greater the chance equity
investments will produce positive results.
Source: Ibbotson Associates, Chicago. Based on the
performance of the S & P 500, an unmanaged index of
stocks. This information is historical and is not a
guarantee of future performance of the S & P 500 or any
Gradison Mutual Funds.
THE POWER OF COMPOUNDING
The term "compounding" is usually applied to investment
income that is constantly reinvested to generate
additional income. However, the concept of compounding
applies equally well to investment profits that are
constantly reinvested. The compounding of income and
profits over long periods of time can have a meaningful
impact on overall investment results. Again, time
invested is invaluable.
(CHART) THE POWER OF COMPOUNDING IN A HYPOTHETICAL
$10,000 INVESTMENT IN THE S&P 500
$170,000 $168,820...................
$150,000 In the time frame illustrated here,
$130,000 reinvestment of all income and
$110,000 dividends resulted in $168,820,
$ 90,000 while not reinvesting income
$ 70,000 and dividends results in $59,304.
$ 50,000 $ 59,304...................
$ 30,000
$ 10,000
1/1/69 12/31/95
This chart is for illustrative purposes only. There
is, of course, no correlation between the total return
for the S&P 500 and past or future performance of any
Gradison Mutual Fund. The S&P 500 is an unmanaged
index compiled by Standard & Poor's Corporation.
Investors cannot invest in the S&P 500. Past
performance cannot guarantee future results.
Source: The American Funds Group
Page 6
DISCIPLINED PERIODIC INVESTMENTS
It is our experience that the most difficult decision
for most investors is not whether to invest, but when
to invest. It is this dilemma that causes many
investors to stay on the investment sidelines.
Dollar cost averaging is a widely used investment
concept in the purchase of mutual funds that allows
investors to overcome this difficult decision by
periodically investing(such as weekly, monthly, or
quarterly) the same dollar amount over a long period of
time. Gradison Mutual Funds offer a periodic
investment plan to make the process easier and more
systematic.
CHART DOLLAR COST AVERAGING CAN REDUCE YOUR AVERAGE
COST PER SHARE
Investment Share Shares
Amount Price Purchased
March $ 500 $10.00 50
June $ 500 $12.50 40
September $ 500 $ 5.00 100
December $ 500 $10.00 50
$2,000 $37.50 240
Average Price Per Share
($37.50 divided by 4) $9.38
Average Cost Per Share
($2,000 divided by 240) $8.33
Dollar cost averaging will never result in better
performance than picking the best times to invest, if
you were able to do so. But dollar cost averaging
allows you invest the same amount periodically as the
Fund's share price fluctuates. You therefore will
purchase more shares of the Fund in those months when
the price per share is low and less shares when the
price is high. Most importantly, dollar cost averaging
can help investors make the commitment to invest.
Of course, dollar cost averaging does not assure a
profit and does not protect against loss in declining
markets. And since dollar cost averaging involves
continuous, periodic investing, you should consider
your ability to continue purchases over an extended
period of time.
(Graphic) Photo of two men, two women, a boy, girl and
a dog walking.
CONSIDER GRADISON MUTUAL FUNDS
Equity Funds Fixed Income Fund Money Market
Funds
Established Value Government Income U. S. Government
Fund Fund Reserves
Growth & Income Ohio Tax Free Municipal Cash
Fund Income Fund Series 2
Opportunity Value High Yield Fund 1 Ohio Municipal
Fund Cash Trust 2
International Michigan
Fund Municipal Cash
Trust 2
1. Planned for 1997-1998 and sold by prospectus only.
2. Federated Advisers acts as investment adviser for
these funds and Federated Securities Corp. acts as
distributor.
PAGE 7
GRADISON EQUITY FUNDS
GRADISON ESTABLISHED VALUE FUND
The Established Value Fund invests for long-term
capital growth using a disciplined stock selection
process to identify investments from the large
established companies that make up the
Standard & Poor's 500 Composite Stock Price Index, and
other similar sized companies, which the investment
adviser considers to be undervalued. The stock
selection process requires that companies meet a number
of objectively measured criteria of value including the
companies' relative book values, their price to
earnings ratios, and other similar factors.
GRADISON GROWTH AND INCOME FUND
The Growth & Income Fund invests for long-term capital
growth, as well as current income and growth of income.
The Fund puts particular emphasis on identifying
companies with higher than average growth rates, above
average dividend returns, a history of paying
increasing dividends, and which the investment adviser
considers to be undervalued.
We believe that stocks meeting this criteria provide
the opportunity for price appreciation and current
income while tending to moderate risk.
GRADISON OPPORTUNITY VALUE FUND
The Opportunity Value Fund uses a disciplined stock
selection process to identify smaller companies,
generally with market capitalization of less than $500
million that meet a number of objectively measured
criteria of value including the companies' growth
rates, relative book value, their price to earnings
ratios, and other similar factors and which the
investment adviser considers to be undervalued. The
securities of smaller companies generally are more
volatile than those of larger companies.
GRADISON INTERNATIONAL FUND
Blairlogie Capital Management of Edinburgh, Scotland,
the subadviser to the International Fund, employs a
"hybrid strategy" that invests in both developed
international markets and in emerging international
markets.
Using a disciplined methodology, Blairlogie first
identifies the countries that offer the most favorable
investment environment, and then selects the individual
investments in those countries. Generally the amount
invested in emerging markets will not exceed 30% of the
Fund's assets.
International investing, particularly in emerging
markets, involves greater risks than U.S. investing,
such as political instability and currency fluctuation.
THE CASE FOR COMMON STOCKS
Stocks, more than most other types of investments, have
historically shown the ability to grow faster than
inflation and to create wealth over long investment
periods. An investor who has long-term goals of ten
years or more should strongly consider equities as a
significant part of his or her investment portfolio.
Historically, the longer an investor has held a well
diversified portfolio of stocks the better that
investor has fared, as evidenced in the pie chart on
page 5.
THE ADVANTAGES OF BONDS
Although bond portfolios have not provided returns as
high as stocks over long periods of time (as
illustrated in the graph on page 9), they have provided
less volatility and more reliable income than stocks.
Investors with a relatively short investment horizon,
may need to avoid the volatility of stocks. For
example when an investor because near retirement, at a
time when assets are needed; or to add greater
stability to a portfolio by combining both stocks and
bonds. Importantly, bond mutual funds provide the
ability to reinvest these cash flows immediately and
completely to take full advantage of compounding.
Page 8
GRADISON FIXED INCOME FUNDS
GRADISON GOVERNMENT INCOME FUND
Designed to provide current monthly income from a
portfolio of intermediate to long-term U.S. Government
securities, the Fund's policy is to invest only in
those Government securities that are guaranteed as to
principal and interest by the full faith and credit of
the United States Government and in repurchase
agreements collateralized by such obligations.
The Fund is managed with an emphasis on total return,
that is the combined effect of both income and changes
in share value. Although the securities in the
portfolio are guaranteed as to principal and interest
by the U.S. Government, the market value of the Fund's
shares will fluctuate with changes in interest rates
and other market conditions. Mortgage backed
securities may be subject to prepayment risk.
Graphic: Photo of two young girls each sitting on an
adult's shoulder.
GRADISON OHIO TAX-FREE INCOME FUND
Designed for Ohio investors who can benefit from a
portfolio of long-term municipal bonds that are exempt
from both federal and Ohio income taxes, the Fund
provides monthly income by investing in Ohio municipal
securities issued to finance public institutions and
public works, and in private activity municipal bonds.
In order to gain favorable yields, the Fund invests up
to 20% of its assets in securities that may be subject
to the alternative minimum tax for some investors.
Page 9
INDICES OF INVESTMENTS
IN U. S. CAPITAL MARKETS
(Chart) Comparison of Investments in Small Company
Stocks, Large Company Stocks, Long-Term Government
Bonds, U. S. Treasury Bills to Inflation for the period
beginning 1925 through 1995, $0 to $10,000.
Small Company Stocks $3,822; Large Company Stocks
$1,113; Long-Term Government Bonds $34; U. S. Treasury
Bills $13; Inflation $9.
1926-1995
(YEAR-END 1925 = $1.00)
This chart is intended to show the growth of one dollar
invested in different types of investments and the
Consumer Price Index. It assumes reinvestment of all
dividend and interest payments.
Past performance does not ensure further results.
SMALL COMPANY STOCKS are represented by the fifth
capitalization quintile of stocks on the NYSE for 1926-
1981 and thereafter, the performance of the Dimensional
Fund Advisors (DFA) Small Company Fund;
LARGE COMPANY STOCKS are represented by the Standard &
Poor's 500 Stock Composite Index (S&P 500);
LONG-TERM GOVERNMENT BONDS are represented by a one-
bond portfolio with a maturity near twenty years;
U. S. TREASURY BILLS are represented by rolling over
each month a one-bill portfolio containing, at the
beginning of each month, the bill having the shortest
maturity not less than one month.
INFLATION is represented by the Consumer Price Index
for All Urban Consumers (CPI-U), not seasonably
adjusted.
Source: Ibbotson, Roger G., and Rex A. Sinquefield,
Stocks, Bonds, Bills, and Inflation (SBBI), 1995,
updated in Stocks, Bonds, Bills, and Inflation 1996T,
Ibbotson Associates, Chicago. All rights reserved.
The indices and securities in the chart above do not
reflect the actual portfolio composition, performance,
or fees and expenses associated with investing in any
Gradison Mutual Fund. The chart is not intended to
imply future performance of any of these investments or
any Gradison Mutual Fund. Performance figures of
Gradison Mutual Funds are available by request from
Gradison. The returns for stocks include reinvestment
of dividends and interest. Government bonds and
Treasury Bills are guaranteed by the U.S. Government
and, if held to maturity, offer a fixed rate of return
and fixed principal value.
In existing disclaimer replace "Past performance does
not ensure future results" with: "The performance shown
in the above chart is historical and is not intended to
imply future performance of any of these investments or
of any Gradison fund.
Page 10
GRADISON MONEY MARKET FUNDS
The money market funds offered by the Gradison Mutual
Funds provide a full complement of services including
checkwriting, high quality personalized checks, and the
convenience of automatic sweeping of dividends from the
Gradison Funds. The money market funds provide clear,
monthly statements that include the name of the payees
of any checks written against the account, as well as a
highly useful year-end summary of all transactions.
Graphic Photo of a man and woman seated next to one
another going through documents.
GRADISON U. S. GOVERNMENT RESERVES
A full service money market fund designed to provide
current money market yields by investing exclusively in
securities issued by the U.S. Government, its agencies
or instrumentalities. The fund has tax benefits in
that it invests, to the greatest extent reasonable,
only in selected U. S. Government securities that are
not taxable by the states or by local governments.
MUNICIPAL MONEY MARKET FUNDS
Gradison also makes available a general municipal money
market fund that provides income exempt from federal
taxation and separate Ohio and Michigan money market
funds that provide income that is not taxable at the
federal state or local levels in those states. A
portion of the income of both funds could be subject to
the Alternative Minimum Tax (AMT) for investors who are
subject to AMT.
For more complete information about the Gradison Funds,
including sales charges and expense, please obtain the
appropriate prospectuses from your investment
consultant or call 800-869-5999. Please read the
prospectuses carefully before you invest or send money.
Investment returns and principal of the funds will
fluctuate so that you may have a gain or a loss when
you sell your shares. Money market funds are neither
insured nor guaranteed by the U.S. Government or any
other entity. There can be no assurance that these
funds will maintain a constant net asset value of $1.00
per share.
(Graphic) Man and woman sitting at a desk opposite
each other.
Page 11
WORKING WITH YOUR PROFESSIONAL INVESTMENT CONSULTANT
We believe that your professional investment consultant
is in the best position to provide you with investment
advice.
Your consultant has the training and experience to
provide you with guidance in making your investment
decisions. We encourage you to share as much
information as possible about your investment goals and
your current personal and financial situation.
Above all, we suggest you ask your investment
consultant whatever you feel you need to know to help
you fully understand the investments you are making.
SERVICE YOU CAN COUNT ON
LOW MINIMUN INVESTMENT OF $1,000 Low subsequent
investment minimums of $50.
CONVENIENT AUTOMATIC DIVIDEND REINVESTMENT of income
dividends and/or capital gain dividends into any
Gradison fund.
AUTOMATIC INVESTMENT PLAN allows authorization of
regular, systematic investments from bank accounts,
money market funds and automated payroll into any
Gradison fund.
AUTOMATIC WITHDRAWALS AND PAYMENT PLANS can be set up
to pay you or designated payees a specified amount
monthly or quarterly.
ACCESS Shares can be redeemed at the then-current
market value on any business day.
Page 12
EXCHANGE PRIVILEGES Including convenient telephone
exchanges allows investors to move money from one
Gradison Mutual Fund to another at any time.
CHECK WRITING For all money market funds includes high
quality personalized checks, check payee names on
account statements, and return of canceled checks. 4
WIRE TRANSFERS Specified amounts can be transferred to
pre-authorized accounts at other financial
institutions. 5
4. A fee applies to checks under $100.00
5. A fee applies to wires.
TOLL-FREE CUSTOMER SERVICE Knowledgeable shareholder
service representatives are available during business
hours at 800-869-5999.
24-HOUR ACCOUNT INFORMATION During non-business hours
TeleFund 24 provides touch-tone access to the most
recent prices of Gradison Mutual Funds, current money
market yield, and balances on all Gradison Mutual Funds
accounts.
ACCOUNT STATEMENTS Clear, concise and informative.
YEAR-END SUMMARY A highly useful summary of all
activity.
QUARTERLY NEWSLETTER Your Future provides Gradison
shareholders with timely information about investing,
mutual funds and the Gradison family of funds.
SHAREHOLDER REPORTS Semiannual updates on fund
strategy, performance and portfolio holdings.
INTERNET World Wide Web site www.gradisonfunds.com
provides quarterly updates on Gradison Mutual Funds, as
well as other information of interest to mutual fund
investors.
GETTING STARTED
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.
The most important thing is to get started. Call your
Investment Consultant or contact Gradison Mutual Funds
at 800-869-5999.
START TODAY AND THE FUTURE IS YOURS.
Graphic: Photo of a baby smiling.
Back Cover
Logo
Gradison
Mutual Funds
1997 Gradison Mutual Funds 580 Walnut Street
Cincinnati, Ohio 45202 800/869-5999 513/579-5000
htt;:/WWW.gradisonfunds.com
