<PAGE> 1
OHIO TAX-FREE
INCOME FUND
ANNUAL REPORT
JUNE 30, 1997
[GRADISON MUTUAL FUNDS LOGO]
This material is intended for distribution to shareholders of the Gradison Ohio
Tax-Free Income Fund. It may be distributed to other persons only if it is
preceded or accompanied by a current prospectus of the Gradison Ohio Tax-Free
Income Fund. McDonald & Company Securities, Inc.--Distributor
Gradison Mutual Funds
580 Walnut Street
Cincinnati, Ohio 45202-3198
<PAGE> 2
GRADISON OHIO TAX-FREE INCOME FUND
LETTER TO SHAREHOLDERS
August 5, 1997
Dear Shareholder:
As our fiscal year comes to a close, interest rates continue to fall as
investors have come to accept the notion that the economy has entered a phase of
slow sustainable non-inflationary growth. In fact, fears of inflation spawned by
a strong economy and tight labor markets have given way to thoughts of deflation
and possible recession. The resulting drop in general interest rates, which was
magnified in the municipal bond market due to strong investor demand and light
supply by issuers, has driven up bond prices and enhanced the value of your Fund
shares. In addition, the Gradison Ohio Tax-Free Income Fund has pursued a
strategy of investing in long maturity, high quality discount bonds, which tend
to appreciate faster as interest rates fall. For the twelve months ended June
30, 1997, the Fund had an increase in net asset value which, combined with
dividend income, generated a total return to shareholders of 8.80% (not
including the effect of the sales charge).
Going forward, the issue facing the bond market is the sustainability of this
ideal economic environment of slow growth and benign inflation. At this time,
there is little on the horizon that threatens to dispel investor optimism;
therefore, we believe interest rates have room to move even lower. Combine this
with the fact that municipal balance sheets are stronger than they have been in
years and the prospects for Ohio municipal bonds remain quite good. In any case,
your Fund's management will continue to pursue strategies to maximize
shareholder value while generating high tax-free income.
As always, we thank you for your support and investment in the Gradison Ohio
Tax-Free Fund.
Very truly yours,
/s/ Stephen C. Dilbone
Stephen C. Dilbone
Executive Vice President and Portfolio Manager
<PAGE> 3
COMPARSION OF CHANGE IN VALUE OF $10,000 INVESTMENT SEPT. 18, 1992
TO JUNE 30, 1997
OHIO TAX-FREE INCOME FUND
TOTAL RETURN PERIODS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
----Average Inception (9/18/92)---
Initial Investment From Inception (9/18/92) 3 Years 1 Year
<S> <C> <C> <C>
Purchased at 2% Sales Charge* 6.40% 6.94% 6.65%
Purchased at Net Asset Value 6.86% 7.65% 8.80%
</TABLE>
<TABLE>
<CAPTION>
GRADISON OHIO Lehman Brothers
TAX-FREE INCOME FUND 20 Year Municipal Index
<S> <C> <C>
9/92 9,800 10,000
12/92 10,082 10,250
6/93 10,911 11,130
12/93 11,323 11,723
6/94 10,858 11,019
12/94 10,672 10,863
6/95 11,652 12,085
12/95 12,469 13,139
6/96 12,371 12,992
12/96 13,033 13,725
6/97 13,458 14,217
</TABLE>
Past performance is not predictive of future performance. The performance quoted
above represents past performance. The investment return and value of an
investment in the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than the original cost. Total return
includes changes in share value and reinvestment of all distributions. From the
inception of the Fund (September 18, 1992) through June 30, 1994 the investment
adviser paid certain Fund expenses which had the effect of increasing the Fund's
return.
*The Fund's sales charge was eliminated effective July 7, 1997.
FEDERAL INCOME TAX INFORMATION
During the year ended June 30, 1997, the Fund made total distributions of $0.639
per share, all of which was from net investment income. All such distributions
from net investment income were entirely exempt from federal regular income tax
and income taxation in Ohio.
See accompanying notes to financial statements.
2
<PAGE> 4
FINANCIAL HIGHLIGHTS (For a share outstanding throughout each period)
<TABLE>
<CAPTION>
ELEVEN MONTHS FOR THE PERIOD
YEAR ENDED JUNE 30, ENDED SEPT. 18, 1992
--------------------------------------- JUNE 30, 1994 TO
1997 1996 1995 (NOTE 1) JULY 31, 1993(1)
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 12.899 $ 12.773 $ 12.466 $ 13.316 $ 12.500
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .640 .648 .661 .593 .599
Net realized and unrealized gain
(loss) on investments .467 .126 .308 (.743) .813
-------- -------- -------- -------- --------
Total income (loss) from investment
operations 1.107 .774 .969 (.150) 1.412
-------- -------- -------- -------- --------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income (.639) (.648) (.662) (.594) (.596)
Distributions from realized capital gains -- -- (.106) --
-------- -------- -------- -------- --------
Total distributions to shareholders (.639) (.648) (.662) (.700) (.596)
-------- -------- -------- -------- --------
Net asset value at end of period $ 13.367 $ 12.899 $ 12.773 $ 12.466 $ 13.316
======== ======== ======== ======== ========
Total return (2) 8.80% 6.17% 8.00% (1.27%) 11.56%
======== ======== ======== ======== ========
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (in millions) $ 76.2 $ 70.6 $ 70.0 $ 77.6 $ 69.6
Ratio of expenses to average net assets .96% .97% .97% .90%(3)(4) .75%(3)(4)
Ratio of net investment income to
average net assets 4.87% 4.99% 5.26% 4.94%(3)(4) 5.25%(3)(4)
Portfolio turnover rate 134.33% 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) Annualized.
(4) During each of the periods ending June 30, 1994 and July 31, 1993, the
adviser absorbed expenses of the Fund through waiver of a portion of the
investment advisory fee. Assuming no waiver of expenses, the ratio of
expenses to average net assets was .99% and 1.14% and the ratio of net
investment income to average net assets was 4.85% and 4.86%, respectively.
See accompanying notes to financial statements.
3
<PAGE> 5
PORTFOLIO OF INVESTMENTS JUNE 30, 1997
<TABLE>
<CAPTION>
FACE COUPON
AMOUNT MUNICIPAL BONDS - 94.97% RATE MATURITY VALUE
<S> <C> <C> <C> <C>
$ 500,000 Akron, Bath, Coplay, OH Hospital (Akron General Hospital)* 5.38% 2/01/27 $ 483,750
545,000 Athens Co., OH Community Mental Health Series 1993 I 5.90 3/01/09 554,537
335,000 Avon, OH G.O. 6.50 12/01/15 366,825
1,045,000 Avon, OH G.O.* 5.50 12/01/17 1,024,100
1,075,000 Broadview Heights, OH Industrial Development Revenue 6.25 7/01/13 1,112,625
1,250,000 Cincinnati, OH Urban Redevelopment Improvement G.O. 6.30 12/01/15 1,342,188
2,950,000 Cleveland, OH Certificates of Participation 7.10 7/01/02 3,112,250
750,000 Cleveland, OH Public Power System First Mortgage Revenue 7.00 11/15/16 861,563
1,300,000 Cleveland, OH Urban Renewal Increment Bonds Series 1993 6.75 3/15/18 1,347,125
100,000 Cleveland, OH Urban Renewal Increment Bonds Series 1993 6.63 3/15/11 103,500
500,000 Cuyahoga Co., OH Health Care (Benjamin Rose Institute) 5.30 12/01/25 507,500
1,500,000 Cuyahoga Co., OH Hospital Revenue
(Fairview General and Lutheran Medical Center) 5.50 8/01/14 1,498,125
1,500,000 Cuyahoga Co., OH Utility Systems Revenue
(The Medical Center Company Project) 5.85 8/15/10 1,550,625
2,185,000 Cuyahoga Co., OH Industrial Development Revenue 6.50 6/01/16 2,321,563
1,250,000 Dublin, OH City School District G.O. 0.00 12/01/09 653,125
1,000,000 Fairfield Co., OH City School District G.O. 7.45 12/01/14 1,235,000
650,000 Franklin Co., OH Hospital Revenue
(Worthington Christian Village) 7.00 8/01/16 676,813
1,310,000 Franklin Co., OH Industrial Development Revenue
(Columbus College of Art & Design) 6.00 9/01/13 1,326,375
2,300,000 Gateway Economic Development Corporation
of Greater Cleveland Stadium Revenue 6.50 9/15/14 2,357,500
2,020,000 Greater Cincinnati, OH Mortgage Revenue Refunding
(Walnut Towers Project) 6.90 8/01/25 2,141,200
1,000,000 Greater Cleveland, OH Regional Transit 5.60 12/01/11 1,021,250
1,995,000 Hamilton Co., OH G.O. 5.50 12/01/17 2,014,950
2,150,000 Hamilton Co., OH Hospital Facilities Revenue
(Deaconess Hospital) 7.00 1/01/12 2,297,813
160,000 Hamilton Co., OH Hospital Facilities Revenue
(Childrens Hospital) 6.75 5/15/09 163,200
1,050,000 Hilliard, OH City School District 5.00 12/01/20 973,875
1,000,000 Kent, OH City School District 5.75 12/01/21 1,013,750
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 6
PORTFOLIO OF INVESTMENTS JUNE 30, 1997
<TABLE>
<CAPTION>
FACE COUPON
AMOUNT MUNICIPAL BONDS - (CONTINUED) RATE MATURITY VALUE
<S> <C> <C> <C> <C>
$1,000,000 Kettering, OH City School District 5.25% 1/01/22 $ 957,500
1,000,000 Lorain, OH G.O. 7.88 12/01/09 1,090,000
1,500,000 Lucas Co., OH Hospital Revenue (Toledo Hospital) 5.00 11/15/10 1,460,625
2,000,000 Lucas Co., OH Hospital Revenue (Toledo Hospital) 5.00 11/01/22 1,820,000
385,000 Lucas Northgate Housing Development Corp Ohio 8.13 1/01/25 402,806
500,000 Mount Vernon, OH City School District G.O. 7.50 12/01/14 583,750
1,000,000 Ohio Capital Corp Housing Mortgage Revenue Funding
(FHA Section 8 Housing) 6.35 7/01/15 1,032,500
920,000 Ohio Capital Corp Housing Mortgage Revenue Refunding
(FHA Section 8 Housing) 6.50 7/01/24 949,900
975,000 Ohio Capital Corp Housing Mortgage Revenue Refunding
(FHA Section 8 Housing) 7.70 1/01/25 1,022,531
1,000,000 Ohio G.O. 5.35 8/01/12 1,013,750
1,150,000 Ohio State Air Quality Development Authority Revenue
(Ohio Power) 7.40 8/01/09 1,236,250
2,750,000 Ohio State Air Quality Development Authority Revenue
(Cleveland Electric) 8.00 12/01/13 3,190,000
1,000,000 Ohio State Building Authority (Adult Correctional Building) 6.13 10/01/12 1,035,000
500,000 Ohio State Economic Development Revenue (ABS Industries) 6.00 6/01/04 519,375
815,000 Ohio State Economic Development Revenue
(Ohio Enterprise Bond Fund) 6.50 12/01/09 859,825
540,000 Ohio State Economic Development Revenue 5.60 6/01/02 543,375
3,500,000 Ohio Higher Education Facilities Revenue (Xavier University) 5.38 5/01/22 3,412,500
1,000,000 Ohio Higher Education Facilities Revenue (University of Dayton)* 5.20 12/01/10 1,000,000
1,000,000 Ohio State Water Development Authority Revenue
(Dayton Power) 6.40 8/15/27 1,061,250
1,000,000 Ohio State Water Development Authority Revenue 6.30 9/01/20 1,046,250
2,700,000 Puerto Rico G.O. 5.38 7/01/21 2,646,000
1,000,000 Puerto Rico Electric Power Authority Revenue 5.38 7/01/14 998,750
1,500,000 Springdale, OH Hospital Facilities Revenue
(Southwestern Ohio Seniors' Services Inc.) 5.88 11/01/12 1,492,500
1,715,000 Springfield, OH City School District G.O. 0.00 12/01/11 799,618
1,000,000 Student Loan Funding Corporation, Cincinnati, OH
Senior Subordinated Revenue Bonds Series 1993A 6.15 8/01/10 1,016,250
500,000 Summit Co., OH G.O. 6.90 8/01/12 541,875
</TABLE>
See accompanying notes to financial statements.
<PAGE> 7
PORTFOLIO OF INVESTMENTS JUNE 30, 1997
<TABLE>
<CAPTION>
FACE COUPON
AMOUNT MUNICIPAL BONDS - (CONTINUED) RATE MATURITY VALUE
<S> <C> <C> <C> <C>
$1,500,000 Toledo-Lucas Co., OH Convention Center
Special Lodging Tax Revenue 5.70% 10/01/15 $ 1,516,875
1,000,000 University of Akron, OH 5.25 1/01/22 952,500
1,000,000 University of Cincinnati, OH Certificates of Participation 5.00 6/01/09 990,000
1,250,000 Upper Arlington, OH G.O. 5.13 12/01/19 1,200,000
725,000 Warren Co., OH G.O. 6.55 12/01/14 829,218
1,500,000 Westlake, OH G.O. 5.55 12/01/17 1,511,250
1,000,000 Westlake, OH G.O. 5.50 12/01/20 997,500
1,760,000 Westlake, OH Industrial Development Revenue 6.40 8/01/09 1,839,200
--------------
TOTAL MUNICIPAL BONDS
(AMORTIZED COST $71,535,324) 73,629,850
--------------
SHORT-TERM INVESTMENTS - 5.03%
3,000,000 Ohio Municipal Cash Trust** 3.64 - 3,000,000
900,000 Ohio Tax-Free Money Fund** 3.47 - 900,000
--------------
TOTAL SHORT TERM INVESTMENTS
(AMORTIZED COST $3,900,000) 3,900,000
--------------
TOTAL INVESTMENTS, AT VALUE
(AMORTIZED COST $75,435,324) - 100% $ 77,529,850
==============
</TABLE>
*Security purchased on a delayed delivery basis. See Note 1.
**Ohio Municipal Cash Trust and Ohio Tax-Free Money 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 7-day rate on June 30, 1997.
See accompanying notes to financial statements.
6
<PAGE> 8
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
JUNE 30, 1997
<S> <C>
ASSETS
Investments in securities, at value (Note 1) (Cost $75,435,324) $ 77,529,850
Interest receivable 1,106,401
Receivable for investments sold 484,569
Cash 145,469
Prepaid expenses 4,444
Receivable for Fund shares sold 642
------------
TOTAL ASSETS 79,271,375
------------
LIABILITIES
Payable for investments purchased 3,009,358
Accrued investment advisory fee (Note 2) 30,618
Other accrued expenses payable to adviser (Note 2) 22,423
Payable for Fund shares redeemed 20,475
Dividends payable 9,576
Other accrued expenses and liabilities 6,449
------------
TOTAL LIABILITIES 3,098,899
------------
NET ASSETS $ 76,172,476
============
Net assets consist of:
Aggregate paid-in capital $ 74,151,016
Accumulated undistributed net investment income 5,681
Accumulated net realized loss (78,747)
Net unrealized appreciation of investments 2,094,526
------------
Net assets $ 76,172,476
============
Shares of capital stock outstanding
(no par value - unlimited number of shares authorized) 5,698,746
============
Net asset value and redemption price per share (Note 1) $ 13.37
============
Maximum offering price per share (Note 1) $ 13.64
============
</TABLE>
See accompanying notes to financial statements.
7
<PAGE> 9
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997
<S> <C> <C>
INVESTMENT INCOME $4,406,662
EXPENSES:
Investment advisory fee (Note 2) $ 377,638
Distribution (Note 2) 188,819
Accounting service fees (Note 2) 48,000
Transfer agency fees (Note 2) 39,323
Professional fees 30,824
Trustees' fees (Note 2) 17,939
Amortization of organization expense (Note 2) 11,397
Printing 6,735
Registration fees 3,853
ICI dues 3,041
Other 246
----------
TOTAL EXPENSES 727,815
----------
NET INVESTMENT INCOME 3,678,847
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 1,183,172
Net change in unrealized appreciation of investments 1,449,100
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 2,632,272
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $6,311,119
==========
</TABLE>
See accompanying notes to financial statements.
8
<PAGE> 10
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1997 1996
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 3,678,847 $ 3,556,116
Net realized gain on investments 1,183,172 237,361
Net change in unrealized appreciation of investments 1,449,100 406,577
------------ ------------
Net increase in net assets resulting from operations 6,311,119 4,200,054
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME (3,674,726) (3,555,785)
------------ ------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 18,817,895 14,042,107
Net asset value of shares issued as distributions 2,938,885 2,869,010
Payments for shares redeemed (18,782,590) (16,976,110)
------------ ------------
Net increase (decrease) in net assets from Fund share transactions 2,974,190 (64,993)
------------ ------------
TOTAL INCREASE IN NET ASSETS 5,610,583 579,276
NET ASSETS:
Beginning of year 70,561,893 69,982,617
------------ ------------
End of year (including undistributed net investment income
of $5,681 and $1,560, respectively) (Note 1) $ 76,172,476 $ 70,561,893
============ ============
NUMBER OF FUND SHARES:
Sold 1,433,203 1,078,575
Issued as distributions to shareholders 223,226 220,755
Redeemed (1,427,931) (1,307,968)
------------ ------------
Net increase (decrease) in shares outstanding 228,498 (8,638)
Outstanding at beginning of year 5,470,248 5,478,886
------------ ------------
Outstanding at end of year 5,698,746 5,470,248
============ ============
</TABLE>
See accompanying notes to financial statements.
9
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997
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 diversified, open-end
management investment company. The Trust was created under Ohio law by a
Declaration of Trust dated June 11, 1992; it commenced investment operations and
the public offering of its shares on September 18, 1992. There is currently one
series, the Gradison Ohio Tax-Free Income Fund (the "Fund"). The Fund's
investment objective is to provide as high a level of current income exempt from
Federal regular 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 management and approved 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, 1997, the Fund had committed
$3,009,358 to the purchase of delayed delivery securities; the market value of
the securities segregated as collateral for this purchase is $3,470,125.
INVESTMENT INCOME AND DISTRIBUTIONS TO SHAREHOLDERS - Interest income is accrued
as earned. Interest income includes interest earned, net of premium and original
issue discount, as required by the Internal Revenue Code.
Dividends arising from net investment income are declared daily and paid
monthly. Net realized capital gains, if any, are distributed at least annually.
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.
10
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997
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, 1997 were $2,182,717
and $88,191, respectively.
As of June 30, 1997, the Fund had a capital loss carryforward for Federal income
tax purposes of $78,747 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. Effective
July 7, 1997 the sales charge on purchases of Fund shares is eliminated.
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. For the year ended
June 30, 1997, the Fund paid 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. Effective July, 1997, the Fund pays McDonald
a monthly fee for transfer agency and administrative services at an annual rate
of $23.00 per shareholder non-zero balance account and $5.00 per closed
shareholder account, as defined, plus out-of-pocket costs for statement paper,
statement and reply envelopes and reply postage. The Fund pays McDonald a
monthly fee for accounting services based on the Fund's average daily net assets
at an annual rate of .035% on the first $100 million, .025% on the next $100
million and .015% on any amount in excess of $200 million, with a minimum annual
fee of $48,000.
11
<PAGE> 13
NOTES TO FINANCIAL STATEMENTS JUNE 30, 1997
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, 1997, McDonald received sales charges aggregating
$85,767 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, 1997, purchases and proceeds from the sale of
securities, excluding short-term securities, amounted to $97,531,503 and
$96,197,089, respectively.
NOTE 4 - PORTFOLIO COMPOSITION
The concentration of investments as of June 30, 1997, classified by revenue
source and credit rating, was as follows:
<TABLE>
<CAPTION>
INVESTMENTS BY REVENUE SOURCE
<S> <C>
General Obligations 28.2%
Revenue Bonds:
Health Care 18.6
Utilities 11.5
Housing 11.2
Higher Education 8.2
Public Facilities 6.9
Industrial Development 3.8
State Agency 1.3
Municipal Lease 5.3
Money Market 5.0
-----
Total 100.0%
=====
</TABLE>
<TABLE>
<CAPTION>
INVESTMENTS BY CREDIT RATING
<S> <C>
S&P/Moody's:
AAA/Aaa 58.7%
AA/Aa 14.3
A/A 11.2
BBB/Baa 7.3
Unrated (1) 5.8
Money Market (2) 2.7
-----
Total 100.0%
=====
</TABLE>
(1) Unrated obligations have been determined by the adviser to be of equivalent
quality to the rated securities in which the Fund is permitted to invest.
(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> 14
[ARTHUR ANDERSEN LOGO]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Trustees of the
Gradison 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 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, 1997, 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, 1997, 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 Ohio Tax-Free Income Fund of the GradisonoMcDonald Municipal Custodian
Trust as of June 30, 1997, the results of its operations for the year then
ended, and the changes in its net assets for each of the two years in the period
then ended, and the financial highlights for the periods indicated thereon, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Cincinnati, Ohio,
July 25, 1997
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GRADISON FAMILY OF FUNDS
Increasingly, MUTUAL FUNDS are the preferred vehicle for starting and building
an investment program. And today, Gradison 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 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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