<PAGE> 1
1933 Act Registration No. 33-48613 1940 Act File No. 811-6705
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 ( )
Pre-Effective Amendment No. ( )
Post-Effective Amendment No. 11 (X)
and/or
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 ( )
Amendment No. 12 (X)
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GRADISON - MCDONALD MUNICIPAL
CUSTODIAN TRUST
(Exact Name of Registrant as Specified in Declaration of Trust)
580 Walnut Street, Cincinnati, Ohio 45202
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (513) 579-5700
Copy to:
Richard M. Wachterman Bradley J. Turner
Gradison-McDonald Gradison-McDonald
Municipal Municipal
Custodian Trust Custodian Trust
580 Walnut Street 580 Walnut Street
Cincinnati, Ohio 45202 Cincinnati, Ohio 45202
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
immediately upon filing pursuant to paragraph (b) of Rule
----- 485.
on ______________ pursuant to paragraph (b) of Rule 485.
-----
60 days after filing pursuant to paragraph (a) of Rule
----- 485.
X on December 6, 1998 pursuant to paragraph (a)(1) of Rule
----- 485
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<PAGE> 2
GRADISON-McDONALD MUNICIPAL CUSTODIAN TRUST
CONTENTS OF POST-EFFECTIVE AMENDMENT
The post-effective amendment to the registration statement of Gradison-McDonald
Municipal Custodian Trust contains the following documents all with respect to
the Gradison Ohio Tax-Free Income Fund:
Facing Sheet
Contents of Post-Effective Amendment
Cross-Reference Sheet
Part A - Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
<PAGE> 3
GRADISON-MCDONALD MUNICIPAL CUSTODIAN TRUST
Cross-Reference Sheet
Pursuant to Item 501(b) of Regulation S-K
Under the Securities Act of 1933
Form N-1A
Item Number Location in
- ----------- Prospectus
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1. Cover Page . . . . . . . . . . . . . . .Cover Page of Prospectus
2. Synopsis . . . . . . . . . . . . . . . .Expense Summary
3. Condensed Financial Information . . . .Performance Calculations
4. General Description of Registrant . . .Investment Objective and
Policies; Hedging; Quality
(Ratings); Maturity;
Concentration; Other
Investment Restrictions;
Ohio Economic Considerations;
General Information
5. Management of Fund . . . . . . . . . . .Management of the Trust,
Distributions; Cover Page of
the Prospectus
6. Capital Stock and Other Securities . . .Cover Page of Prospectus;
Distributions; Taxes; General
Information
7. Purchase of Securities Being Offered . .Purchases and Redemptions; Net
Asset Value; Optional
Shareholder Services;
Management of the Fund
8. Redemption or Repurchase . . . . . . . .Purchases and Redemptions
9. Pending Legal Proceedings . . . . . . .Not Applicable
Location in Statement
of Additional Information
-------------------------
10. Cover Page . . . . . . . . . . . . . .Cover Page
11. Table of Contents . . . . . . . . . . .Table of Contents
12. General Information and History . . . .Description of the Trust
13. Investment Objectives and Policies . . .Investment Restrictions;
Factors
Relating to Ohio; Portfolio
Transactions
14. Management of the Fund . . . . . . . . .Trustees and Officers of the
Trust
15. Control Persons and Principal Principal holders of Securities
Holders of Securities . . . . . . . . . .
<PAGE> 4
16. Investment Advisory and Other
Services . . . . .. . . . . . . . Investment Adviser; Custodian
17. Brokerage Allocation and Other
Practices . . . . . . . . . . . . Portfolio Transactions
18. Capital Stock and Other Securities Description of the Trust
19. Purchase, Redemption and Pricing of
Securities Being Offered . . . . . .Purchase of Shares;
Redemption of Shares; Net
Asset Value
20. Tax Status . . . . . . . . . . . . Taxes
21. Underwriters . . . . . . . . . . . Master Distribution Agreement
22. Calculation of Performance Data
. . . . . . . . . . . Performance Calculations
(Prospectus)
23. Financial Statements . . . . . . . . Financial Statements and
Accountants
<PAGE> 5
GRADISON OHIOTAX-FREE FUND
Prospectus dated November 1, 1998
The Gradison Ohio Tax-Free Income Fund ("Fund") is a diversified open-end
management investment company which seeks to provide as high a level of
after-tax current income exempt from Federal income tax and Ohio state personal
income tax as is consistent with preservation of capital by investing primarily
in municipal securities. The Gradison Division of McDonald-Key Investments, Inc.
("Gradison" or the "Adviser") is the investment adviser for the Fund and acts as
transfer agent of the Fund.
This Prospectus is designed to provide you with information that you should know
before investing and should be retained for future reference. A Statement of
Additional Information for the Fund, dated November 1, 1998 has been filed with
the Securities and Exchange Commission and is incorporated herein by reference.
This Statement is available upon request without charge from the Fund at 580
Walnut Street, Cincinnati, Ohio 45202 or by calling the phone numbers provided
below.
For all information (including purchases, redemptions, and most recent yield),
call 579-5700 from Cincinnati, Ohio or 1-800-869-5999 toll free.
LIKE ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
Shares of the Fund are:
- - Not insured by the FDIC;
- - Not deposits or other obligations of, or guaranteed by, any KeyBank, any of
its affiliates, or any other bank;
- - Subject to investment risks, including possible loss of the principal amount
invested.
<PAGE> 6
EXPENSE SUMMARY
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales load on purchases None
- ----------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees .50%
12b-1 Fees .25%
Other Expenses .18%
------
TOTAL FUND OPERATING EXPENSES .93%
======
- --------------------------------------------------------------------------------
Example: You would pay the following expenses on a $1,000 investment assuming a
5% annual return* and redemption at the end of each period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$9 $30 $51 $114
</TABLE>
*The 5% annual return is a standardized rate prescribed for use by all mutual
funds for the purpose of this example and does not represent the past or future
return of the Fund.
The purpose of the preceding table is to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear directly and
indirectly. (For more information about Fund expenses, see "Purchases and
Redemptions" and "Management of the Fund.")
The example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown.
2
<PAGE> 7
FINANCIAL HIGHLIGHTS
The table below presents the financial highlights of the Fund's operations. The
information is expressed in terms of a single share outstanding throughout the
period and has been audited by Arthur Andersen LLP, independent public
accountants, whose unqualified report appears in the Statement of Additional
Information. The Statement of Additional Information can be obtained without
charge by calling the telephone numbers on the front page of this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 11 MONTHS FOR THE PERIOD
---------------------------------------------- ENDED 9/18/92 TO
1998 1997 1996 1995 6/30/94 (1) 7/31/93 (2)
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 13.367 $ 12.899 $ 12.773 $ 12.466 $ 13.316 $ 12.500
-------- -------- -------- -------- -------- --------
Income from investment operations:
Net investment income .627 .640 .648 .661 .593 .599
Net realized and unrealized gain (loss)
on investments .445 .467 .126 .308 (.743) .813
-------- -------- -------- -------- -------- --------
Total income (loss) from investment operations 1.072 1.107 .774 .969 (.150) 1.412
-------- -------- -------- -------- -------- --------
Distributions to shareholders:
Dividends from net investment income (.628) (.639) (.648) (.662) (.594) (.596)
Distributions from realized capital gains -- -- -- -- (.106) --
-------- -------- -------- -------- -------- --------
Total distributions to shareholders (.628) (.639) (.648) (.662) (.700) (.596)
-------- -------- -------- -------- -------- --------
Net asset value at end of period $ 13.811 $ 13.367 $ 12.899 $ 12.773 $ 12.466 $ 13.316
======== ======== ======== ======== ======== ========
Total return (3) 8.19% 8.80% 6.17% 8.00% (1.27%) 11.56%
======== ======== ======== ======== ======== ========
Ratios/Supplemental data:
Net assets at end of period (in millions) $ 99.2 $ 76.2 $ 70.6 $ 70.0 $ 77.6 $ 69.6
Ratio of gross expenses to average
net assets (4) .95% .97% .98% -- -- --
Ratio of net expenses to average net assets .93% .96% .97% .97% .90%(5)(6) .75%(5)(6)
Ratio of net investment income to
average net assets 4.62% 4.87% 4.99% 5.26% 4.94%(5)(6) 5.25%(5)(6)
Portfolio turnover rate 45% 134% 100% 80% 56% 45%
</TABLE>
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(1) The Fund changed its fiscal year end to June 30, effective with the June 30,
1994 Annual Report.
(2) No income was earned or expenses incurred from the date the initial shares
were purchased by the Adviser (August 21, 1992) through the date of public
offering (September 18, 1992).
(3) Total returns are based upon an initial investment purchased without the
applicable sales charge which was in effect prior to July 7, 1997, represent
the actual returns over those periods, and have not been annualized.
(4) Effective June 30, 1996, this ratio reflects gross expenses before reduction
for earnings credit; such reductions are included in the ratio of net
expenses.
(5) 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.
(6) Annualized.
3
<PAGE> 8
INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide as high a level of after-tax
current income as is consistent with preservation of capital through investment
primarily in obligations the interest from which is exempt from Federal income
tax and from Ohio state personal income tax. There can be no assurance that the
objective of the Fund will be achieved.
RISK FACTORS AND FOR WHOM THE FUND MAY BE APPROPRIATE
The net asset value and yield of the Fund's shares will fluctuate depending on
market conditions and other factors, with the value of shares normally
fluctuating inversely with changes in interest rates. There are risks associated
with investment in municipal securities, options, and financial futures
transactions, including changes by rating services of the rating of portfolio
securities and in the ability of issuers to make payment of principal and
interest. See "Investment Policies" at pages 3-8 of this Prospectus. There can
be no assurance that the investment objective of the Fund will be achieved.
The Fund may be appropriate for investors seeking income free of regular Federal
income tax and Ohio income tax who can accept the fluctuations in the value of
Fund shares inherent in investment in long-term debt securities. The Fund
focuses on longer term investment grade Ohio municipal securities. The Fund has
a higher risk level and yield/return potential than fixed income investments of
shorter maturity and/or higher grade securities and may have a higher risk level
than investments in more diversified municipal securities. The Fund has a lower
risk level and yield/return potential than fixed income investments with lower
grade securities and as compared to equity investments.
INVESTMENT POLICIES
The Fund normally invests substantially all (at least 80%) of the value of its
net assets in securities, the interest from which is exempt from Federal income
tax and Ohio state personal income tax and is not a tax preference item for
purposes of the Federal alternative minimum tax ("AMT"). Although the Fund does
not anticipate that it will ordinarily invest in securities subject to Federal
income tax or the Ohio personal income tax, it may do so on a temporary basis
when it is considered necessary because of the unavailability of Federal or Ohio
tax-free securities. From the commencement of its operations (September 18,
1992) through June 30, 1998, 100% of the Fund's income dividends were free of
Federal income and Ohio personal income taxes. Investment in securities,
interest from which is an AMT tax preference item, normally will not exceed 20%
of the value of the net assets of the Fund. During the fiscal year ending June
30, 1998, 12.1% of the Fund's income dividends were AMT tax preference items. At
times, the Fund's Trustees or the Adviser may determine that conditions in the
markets for tax-exempt securities make pursuing the Fund's basic investment
strategy inconsistent with the best interests of its shareholders. At such
times, the Fund may invest more than 20% of its assets in investments the
interest from which is subject to Federal income tax or Ohio personal income
tax, or an AMT tax preference item, for temporary defensive purposes to reduce
fluctuations in the value of the Fund's assets. The investment objective of the
Fund and the policy set forth in the first sentence of this paragraph cannot be
changed without the approval of a "majority of the outstanding voting
securities" of the Fund as defined in the Investment Company Act of 1940 (the
"1940 Act"). See "Description of the Trust" in the Statement of Additional
Information.
4
<PAGE> 9
The Fund invests in municipal bonds issued by or on behalf of states,
territories or possessions of the U.S. and their political subdivisions,
agencies and instrumentalities. Municipal bonds are generally issued to finance
public works such as airports, bridges, highways, schools and housing. Municipal
bonds are also used to repay outstanding obligations, to raise funds for general
operating expenses and to make loans to other public institutions and
facilities. Certain types of "private activity" municipal bonds are issued to
obtain funding for privately operated facilities. There are two general
categories of municipal bonds: general obligation and revenue. General
obligation bonds are backed by the taxing power of the issuing municipality.
Revenue bonds are backed by the revenue of a project or facility. Payment of
principal and interest on such bonds is dependent solely on the revenue
generated by the facility financed by the bond or other specified sources of
revenue or collateral. Private activity bonds are typically one type of revenue
bond.
Interest from obligations of the governments of the U.S. Virgin Islands, Puerto
Rico, and Guam ("Territorial Obligations") is exempt from Ohio personal income
taxation as well as Federal income taxation. The Fund will not invest more than
5% of its net assets in the obligations of each of the Virgin Islands, Puerto
Rico and Guam.
The Fund may also invest in short-term tax-exempt securities, usually for
temporary purposes. Short-term tax-exempt securities are generally issued as
interim financing in anticipation of tax collections, revenue receipts or bond
sales to finance public purposes. From time to time, the Fund may also invest up
to 10% of its assets in tax-exempt mutual funds, including tax-exempt money
market funds, which have investment criteria equal to or higher than those of
the Fund, subject to the requirements of applicable law. Such investments will
result in shareholders, in effect, paying duplicate or multiple fees, since such
mutual funds incur expenses similar to those of the Fund. The 1940 Act limits
the Fund's investment in any other mutual fund to a maximum of 3% of the
outstanding voting stock of that mutual fund and an amount which may not
represent more than 5% of the total assets of the Fund. The Adviser will only
invest in such funds when it believes that the yields on such funds are
advantageous.
The Fund may invest in participations in lease obligations or installment
purchase contract obligations of municipal authorities or entities ("Municipal
Leases"). Certain Municipal Leases contain "nonappropriation" clauses which
provide that the municipality has no obligation to make lease or installment
purchase payments in future years unless money is appropriated for such purpose
on a yearly basis. Although Nonappropriation Municipal Leases are secured by the
leased property, disposition of the property in the event of foreclosure might
prove difficult. Nonappropriation Municipal Leases may present special risks
because the municipality's obligation to make future lease or installment
payments depends on money being appropriated in the future. The Fund will limit
its investment in Nonappropriation Municipal Leases to a maximum of 10% of its
total assets. The Fund invests in such leases according to guidelines of the
Fund as set forth in the "Municipal Leases" section of the Statement of
Additional Information.
With respect to unrated Municipal Leases, credit quality will be determined by
the Adviser (pursuant to procedures established by the Board of Trustees
("Board"), and subject to review by the Board) on an ongoing basis, including an
assessment of the likelihood that a lease will be cancelled. For further
information, see "Municipal Leases" in the Statement of Additional Information.
The Fund may invest in floating or variable rate instruments, which provide for
interest rate adjustments at specified intervals. Rate adjustments on such
securities are usually set at the issuer's discretion, in which case the Fund
would normally have the right to resell the security to the issuer or its agent.
Alternatively, rate revisions may be determined in accordance with a prescribed
formula or other contractual procedure. Generally, these interest rate
adjustments cause the market value of floating rate and variable rate municipal
securities to fluctuate less than the market value of fixed rate obligations.
Accordingly, as interest rates decrease or increase the potential for capital
appreciation or depreciation is less than for fixed rate obligations.
5
<PAGE> 10
The Fund may also acquire put options in combination with the purchase of
underlying securities or may separately acquire put options that relate to
securities held in the Fund's portfolio. Such put options would give the Fund
the right to require the issuer or some other person to purchase the underlying
security at an agreed upon price. There is no assurance that the issuer of a put
bond acquired by the Fund will be able to repurchase the bond upon the exercise
date if the Fund chooses to exercise its right to put the bond back to the
issuer.
The Fund may invest in zero coupon municipal bonds. Such bonds are debt
obligations which do not require the periodic payment of interest and are issued
at a significant discount from face value. The discount approximates the total
amount of interest the bonds will accrue and compound over the period until
maturity at a rate of interest reflecting the market rate of the security at the
time of issuance. Zero coupon bonds benefit the issuer by reducing its need to
use cash for debt service, but also require a higher rate of return to attract
investors who are willing to defer receipt of such cash. Such bonds experience
greater volatility in market value due to changes in interest rates than debt
obligations which provide for regular payments of interest. The Fund will take
into account income on such bonds for tax and accounting purposes, in accordance
with applicable law, which income is distributable to shareholders. Because no
cash is received at the time such income is accrued, the Fund may be required to
liquidate other portfolio securities to satisfy its distribution obligations.
The Fund does not intend to invest more than 25% of its total assets in zero
coupon bonds.
The Fund may purchase and sell securities on a "when-issued" and "delayed
delivery" basis, that is, obligate itself to purchase or sell securities with
delivery and payment to occur at a later date. Such securities are subject to
market fluctuation and the yields on securities so purchased may be lower than
those available in the market at the time of delivery. When issued and delayed
delivery transactions may be expected to occur a month or more before delivery
is due. The Fund will maintain, in a segregated account with its custodian, cash
or liquid high-grade debt securities having an aggregate value equal to the
amount of such purchase commitments until payment is made. To the extent the
Fund acquires securities in when-issued and delayed delivery transactions, it
will do so for the purpose of acquiring securities for the Fund's portfolio and
not for the purpose of investment leverage. The Fund does not accrue income on
securities purchased on a when-issued or delayed delivery basis until delivery
occurs. The Fund may enter into delayed delivery sales of securities in order to
accommodate purchasers of portfolio securities from the Fund in transactions
effected at an advantageous price to the Fund. The Fund will limit its
outstanding purchases of securities on a when-issued or delayed delivery basis
to no more than 33 1/3% of its total assets.
The Fund may also hold cash that is not earning interest and may invest in
short-term obligations issued or guaranteed by the U.S. Government and its
agencies or its instrumentalities. The Fund may engage in short-term trading,
that is, the sale of securities held for a short time, ranging from several
months to less than a day. The object of such short-term trading is to take
advantage of what the Adviser believes are temporary disparities in prices
between securities, or to take advantage of what the Adviser believes are
changes in market, industry, or individual issuer's conditions or outlook. Such
trading may be expected to increase the Fund's turnover rate. High turnover will
generally result in higher transaction costs and may result in net capital gains
which, when distributed to shareholders, will be subject to tax. See "Taxes" in
this Prospectus and "Portfolio Transactions" in the Statement of Additional
Information. For the fiscal year ending June 30, 1998, the Fund's portfolio
turnover was 45%.
6
<PAGE> 11
HEDGING
The Fund may engage in certain hedging transactions involving the use of
financial futures contracts, options on financial futures, or options based on
either an index of tax-exempt securities or on debt securities the prices of
which, in the opinion of the Adviser, correlate with the prices of the Fund's
investments. These hedging transactions are designed to limit the risk of price
fluctuations of the Fund's investments. In the past, the Fund has made extremely
limited use of these techniques and may or may not utilize them in the future.
If utilized, there can be no assurance that they will be successful.
The Fund may purchase and sell financial futures contracts and related options.
Futures contracts on a Municipal Bond Index are traded on the Chicago Board of
Trade. This Index is designed to represent a numerical measure of market
performance for long-term tax-exempt bonds. The Fund may purchase and sell
futures contracts on this Index or any other tax-exempt bond index approved for
trading by the Commodity Futures Trading Commission to hedge against general
changes in market values of portfolio securities which the Fund owns or expects
to purchase. The Fund may also purchase and sell put and call options on index
futures for hedging purposes. The Adviser believes that, under certain market
conditions, price movements in U.S. Treasury security futures and related
options may correlate closely with price movements in tax-exempt securities and
may as a result provide significant hedging opportunities for the Fund. The Fund
may also purchase and sell futures contracts and related options with respect to
such U.S. Treasury securities when the Adviser believes that the price movements
of Treasury securities will correlate with price movements in tax-exempt
securities.
The Fund will enter into hedging transactions only when it either owns an
offsetting position in the underlying securities, options or futures contracts
or maintains cash or liquid high-grade debt securities with a value sufficient
at all times to cover its obligations. The use of these strategies involves
certain special risks, including (1) the fact that the skills needed to use
hedging instruments are different from those needed to select the Fund's
securities, (2) possible imperfect correlation, or even no correlation, between
price movements of the investments being hedged, (3) the fact that, while
hedging strategies can reduce the risk of loss, they can also reduce the
opportunity for gain, or even result in losses, by offsetting favorable price
movements in hedged investments and (4) the possible inability of the Fund to
purchase or sell a portfolio security at a time that otherwise would be
favorable to do so, or the possible need for the Fund to sell a portfolio
security at a disadvantageous time, due to the need for the Fund to segregate
securities in connection with hedging transactions and the possible inability of
the Fund to close out or liquidate its hedged position. New financial products
and risk management instruments and techniques continue to be developed. The
Fund may use these instruments and techniques to the extent consistent with its
investment objective and regulatory and tax considerations.
The Fund may purchase options on debt securities only if the value of the
premiums does not exceed 5% of the Fund's total assets and will not purchase or
sell futures contracts or related options if the sum of the amount of initial
margin deposits on the Fund's existing futures positions and initial margin
deposits and premiums paid for related options would exceed 5% of the market
value of the Fund's total assets. These respective guidelines cannot be
guaranteed to limit the percentage of the Fund's assets at risk to 5% as to each
type of transaction.
See the Statement of Additional Information for further information about
futures and options and associated risks.
7
<PAGE> 12
QUALITY (RATINGS)
The Fund invests in municipal bonds judged by the Adviser to be of investment
grade quality. Investment grade bonds are those rated Baa or better by Moody's
Investors Service, Inc. ("Moody's"), or BBB or better by Standard & Poor's
("S&P") or Fitch Investor Services, Inc. ("Fitch"). Investment grade bonds have
adequate to strong protection of principal and interest payments. Bonds rated
Baa are considered by Moody's to be medium grade obligations which lack
outstanding investment characteristics and, in fact, have speculative
characteristics as well, while municipal obligations rated BBB are regarded by
S&P and Fitch as having an adequate capacity to pay principal and interest.
Bonds rated BBB or Baa are at the lower end of the investment grade category and
may be more sensitive to economic changes and changes in the financial condition
of issuers.
The Fund may also invest in unrated obligations determined by the Adviser to be
of equivalent quality to the rated securities in which it is permitted to
invest. See the Statement of Additional Information for more detailed
information concerning securities ratings. If the rating of a bond held by the
Fund drops below investment grade or if an unrated bond deemed by the Adviser to
be of equivalent quality to investment grade ceases to be considered investment
grade, the Fund will normally sell such bond in a reasonable period of time.
In the case of short-term notes, the Fund will invest in notes rated SP-1
through SP-2 by S&P or MIG 1 through MIG 3 by Moody's. In the case of tax-exempt
commercial paper, the Fund will invest in such obligations when rated A-1+
through A-2 by S&P or Prime-1 or Prime-2 by Moody's.
MATURITY
The Fund intends to emphasize investments in obligations with long-term
maturities in order to maintain an average weighted maturity of 20 to 30 years
but will also invest in shorter term obligations. The average weighted maturity
may be shortened from time to time depending on market conditions in order to
limit market risks. On June 30, 1998, the average weighted maturity of the
Fund's portfolio was 19 years.
DIVERSIFICATION
The Fund will not, as a fundamental policy, with respect to 75% of its assets,
invest more than 5% of its assets in securities of any one issuer or acquire
more than 10% of the voting securities of any issuer, except securities issued
by the U.S. Government or its agencies or instrumentalities. The Fund does not
intend to invest in securities backed by letters of credit of any one bank to
the extent that such securities constitute more than 10% of the assets of the
Fund. For this purpose, the "issuer" of a security is deemed to be the entity
whose assets and revenues are committed to the payment of principal and interest
on that security, provided that the guarantee of an instrument will be
considered a separate security except when the value of all securities issued or
guaranteed by the guarantor, and owned by the Fund, does not exceed 10% of the
value of the total assets of the Fund.
CONCENTRATION
It is possible that the Fund will invest more than 25% of its assets in a
particular segment of the municipal bond market such as Hospital Revenue Bonds,
Housing Agency Revenue Obligations or Airport Revenue Obligations. This would
only be the case if the Adviser determined that the yields available from such
obligations justified the additional risks associated with such concentration.
Economic, business, political and other developments generally affecting the
revenue of such users (for example, proposed legislation or pending court
decisions affecting the financing of such projects and market factors affecting
the demand for their services or products) may have a general adverse effect on
all obligations in such a market segment.
8
<PAGE> 13
OTHER INVESTMENT RESTRICTIONS
The Fund may not borrow money, except from banks as a temporary measure or for
extraordinary or emergency purposes, and then only in amounts not exceeding 10%
of its total assets or one third of the value of the Fund's total assets
including the amount borrowed. While any borrowing of greater than 5% of assets
occurs, the Fund will not purchase additional portfolio securities. This
restriction may not be changed without shareholder approval. The Fund may not
invest more than 15% of its assets in securities that are not readily marketable
nor may it pledge more than 15% of its assets.
PORTFOLIO MANAGER
Stephen C. Dilbone, Vice President of the Trust, has been primarily responsible
for the day-to-day management of the Fund's portfolio since the Fund's
inception. Mr. Dilbone is a Senior Vice President of Gradison with
responsibility for tax-exempt securities trading.
OHIO ECONOMIC CONSIDERATIONS
Because the Fund invests primarily in securities of Ohio issuers, political and
economic factors affecting Ohio could affect the creditworthiness and the value
of the securities in its portfolio. The Ohio economy, while diversifying more
into the service and other non-manufacturing areas in recent years, continues to
rely in part on durable goods manufacturing largely concentrated in motor
vehicles and equipment, steel, rubber products and household appliances. As a
result, general economic activity in Ohio, as in many other industrially
developed states, tends to be more cyclical than in some other states and in the
nation as a whole. Agriculture is an important segment of the economy, with over
half the State's area devoted to farming and approximately 15% of total
employment involved in agriculture and agribusiness. The State's overall
unemployment rate is commonly somewhat higher than the national figure although
in recent years the reverse has been true. The unemployment rate and its effects
vary among particular geographic areas of the State. Future statewide or
regional economic difficulties, and the resulting impact on State or local
government finances generally, could adversely affect the market value of Ohio
obligations held in the portfolio of the Fund or the ability of particular
obligors to make timely payments of debt service on those obligations. See the
Statement of Additional Information for additional information about Ohio
economic considerations.
PURCHASES AND REDEMPTIONS
HOW TO PURCHASE SHARES
You may purchase shares of the Fund by bringing or mailing funds to the Fund or
your investment dealer including Gradison and McDonald-Key Investments, Inc.
("McDonald"). The minimum investment required to open an account is $1,000 and
additional investments must be at least $50. These minimums may, however, be
waived for certain group purchases. Purchase orders become effective when the
Fund receives the necessary information about your account and provision for
payment has been made. No share certificates will be issued. Share purchases are
confirmed by issuance of account statements. Shares are sold at the net asset
value next determined after the Fund or its agent receives your order. Shares of
the Fund may be purchased through brokers other than Gradison and McDonald and
other financial intermediaries. Such brokers (other than Gradison and McDonald)
may charge you a fee for this service. When purchased through certain brokers or
intermediaries, certain features of the Fund, such as minimum investments, may
be modified and administrative charges may be imposed for the services rendered.
9
<PAGE> 14
HOW TO REDEEM SHARES
You may redeem shares of the Fund without charge or penalty by sending a written
redemption request to the Fund identifying the name of the Fund, the account
name and number and the number of shares or dollar amount to be redeemed. You
may redeem shares by telephone and have the proceeds of your redemption mailed
to the address on the Fund's records. All redemptions are effected at the next
net asset value calculated after the Fund or its agent receives the redemption
request in good order. The Fund normally makes payment for redeemed shares
within one business day, and, except in extraordinary circumstances, within
seven days after receipt of a properly executed redemption request. Shareholders
may make special arrangements for wire transfer of redemption proceeds by
contacting the Fund in advance of a contemplated share redemption. The Fund
reserves the right to delay payment for the redemption of shares where the
shares were purchased with a personal check, but only until the purchase payment
has cleared, which may take up to 15 days from the day the check is received by
the Fund. If you need more immediate access to your investment, you should
consider purchasing shares by wire, cash, or other immediately available funds.
Redemption proceeds checks which are not cashed for any reason, including
non-receipt, will not earn interest.
All redemption information and authorizations (except those effected by your
investment dealer) should be mailed or delivered to Gradison Mutual Funds, 580
Walnut Street, Cincinnati, Ohio 45202.
Under extraordinary circumstances, such as periods of drastic economic or market
changes, it is possible that you might not be able to reach the Fund by
telephone to effect a redemption. In the event of such a situation, you can mail
or personally deliver a written redemption request to the Fund's offices.
Shareholders who have brokerage accounts with McDonald or Gradison can also
request that their Investment Consultant arrange the redemption. The telephone
redemption feature may be terminated or modified upon 30 days' notice to
shareholders.
The Fund, Gradison, McDonald, and their officers and employees will not be
liable for following instructions communicated by telephone that are reasonably
believed to be genuine. The Fund will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine, and if it does not, in
the view of the Securities and Exchange Commission, it may be liable for any
losses resulting from unauthorized instructions. Telephone transactions are
available to all shareholders automatically.
REDEMPTIONS THROUGH MCDONALD AND GRADISON
Investors who maintain brokerage accounts with McDonald or Gradison may redeem
shares of the Fund through their Investment Consultant.
EXCHANGES
Shares of the Fund may be exchanged, without administrative fees, for shares of
any other Gradison fund and for shares of certain Federal and/or Ohio tax-free
or municipal income money market funds.
You may request exchanges by telephoning or writing the Fund. Before making an
exchange, you should read the prospectus of the fund in which you are investing
which is available upon request. An exchange may not be made from the Fund to
the fund in which you are investing unless the shares of such fund are
registered for sale in the state in which you reside. The terms of the exchange
feature are subject to change and the exchange feature is subject to
termination, both upon 60 days' written notice, except that no notice shall be
required under certain circumstances provided for by rules of the Securities and
Exchange Commission.
10
<PAGE> 15
PURCHASES AND SALES THROUGH INTERMEDIARIES
The Fund has authorized one or more intermediaries (who, in turn, have been
authorized by the Fund to designate intermediaries ("sub-intermediaries")) to
accept on its behalf purchase and redemption orders. The Fund will be deemed to
have received a purchase or redemption when an authorized intermediary or
sub-intermediary accepts the order and customer orders will be priced at the
Fund's net asset value next computed after they are accepted by such an
intermediary or sub-intermediary.
NET ASSET VALUE
The net asset value per share of the Fund is determined by calculating the total
value of the Fund's assets, deducting its total liabilities, and dividing the
result by the number of shares outstanding. The net asset value is generally
computed once daily as of the close of regular trading on the New York Stock
Exchange, normally 4:00 p.m. Eastern time, on each day when the New York Stock
Exchange is open for business.
Securities are valued by using market quotations, prices provided by market
makers or pricing services, or estimates of market values obtained from yield
data relating to instruments or securities with similar characteristics in
accordance with procedures established by the Board of Trustees. Short-term
securities with remaining maturities of less than 60 days are valued at
amortized cost which approximates market value. Other assets are valued at fair
value as determined pursuant to procedures approved by the Board.
OPTIONAL SHAREHOLDER SERVICES
AUTOMATIC INVESTMENT PLAN
You may arrange for a fixed amount of money to be transferred automatically on a
regular basis from your bank or other depository account to your Fund account.
For additional information, obtain the Gradison Automatic Investment Plan form
from the Fund.
MONTHLY DISTRIBUTION PLAN
You may elect (on the Account Information Form) to automatically receive cash
payments of dividends and/or capital gain distributions. (For this purpose,
short-term capital gain distributions are considered dividends.) You may change
or terminate this option at any time by written notice to the Fund. Dividend
checks which are not cashed for any reason, including non-receipt, will not earn
interest.
AUTOMATIC PAYMENT PLAN
If your account has a value of at least $10,000, you may elect (on the Account
Information Form) to have monthly or quarterly payments of a specified amount
(but not less than $50) mailed to you or anyone specified on the form. You may
change or terminate this option at any time by written notice to the Fund.
Because the Fund cannot guarantee that payments will be made on the date
specified, the Plan should not be used for time-sensitive payments. Shareholders
utilizing the Automatic Payment Plan should be aware that each payment
constitutes a redemption for tax purposes.
11
<PAGE> 16
DISTRIBUTIONS
The Fund declares dividends from net investment income daily, immediately prior
to the close of business. These dividends are credited to fully paid shares of
record at the time of declaration. (Fund shares begin earning dividends on the
business day after the Fund receives payment for the purchase of such shares.)
Dividends representing the amounts credited to Fund shares are paid monthly. Net
realized capital gains, if any, will be distributed at least annually. The Fund
distributes substantially all of its net investment income and capital gains (if
any) to shareholders each year. Unless you select the Monthly Distribution Plan,
all income dividends and net realized capital gain distributions are
automatically reinvested in additional shares at the net asset value of such
shares on the date the dividends or other distributions are payable.
TAXES
Federally tax-free interest earned by the Fund is federally tax-free when
distributed to you as income dividends. Any taxable income earned on the Fund's
investments will be distributed to you as a taxable dividend. If the Fund
invests in "private activity" obligations, the portion of the Fund's dividends
attributable to interest thereon is a tax preference item for Alternative
Minimum Taxation Purposes. Distributions of net short-term capital gains are
taxable for Federal income tax purposes as dividends, and distributions of net
capital gain (the excess of net long-term capital gain over net short-term
capital loss), when designated as such, are taxable for those purposes as
long-term capital gains, regardless of the length of time you have owned your
shares. Distributions of any taxable dividends or realized capital gains are
taxable when they are paid, whether you take them in cash or additional Fund
shares, except that any distributions declared in December and paid in January
are treated as if paid on December 31.
The Fund's income dividends will be exempt from the Ohio personal income tax and
excluded from the net income base of the Ohio corporation franchise tax except
to the extent that such dividends consist of interest from obligations that are
neither debt obligations issued by or on behalf of the State of Ohio and its
political subdivisions, agencies, and instrumentalities ("Ohio Obligations") or
Territorial Obligations. Distributions of net short-term and long-term capital
gains will also be exempt from the Ohio personal income tax and the net income
base of the Ohio corporation franchise tax to the extent that they represent
gain from the sale of Ohio Obligations.
Each year, the Fund will provide a statement informing you of the Federal and
state income tax status of dividends and other distributions paid during the
previous year.
If you purchase Fund shares just before the record date of a distribution of
capital gains, you will pay the full price for shares and then receive a portion
of the price back as a taxable distribution. Congress may propose to restrict or
eliminate the Federal income tax exemption for interest on municipal securities.
If such a proposal were enacted, the availability of municipal securities for
investment by the Fund and the value of its portfolio would be adversely
affected. In such event, the Fund would reevaluate its investment objective and
policies. The Fund is required to withhold 31% of all taxable dividends, capital
gain distributions, and redemption proceeds if you do not furnish the Fund with
a correct taxpayer identification number and in certain other circumstances.
Your redemption of Fund shares will result in taxable gain or loss to you,
depending on whether the redemption proceeds are more or less than your adjusted
basis for the redeemed shares (which normally includes any sales charge paid).
An exchange of Fund shares for shares of any other fund generally will have
similar tax consequences. If you purchase Fund shares within 30 days before or
after redeeming other Fund shares at a loss, that loss will not be deductible
and will increase the basis of the newly purchased shares.
12
<PAGE> 17
The foregoing is only a summary of some important generally applicable Federal
and state income tax provisions in effect as of the date of this Prospectus; see
the Statement of Additional Information for a further discussion. There may be
other Federal, state or local tax considerations applicable to a particular
investor.
GENERAL INFORMATION
The Fund is a series of the Gradison-McDonald Municipal Custodian Trust (the
"Trust"), which is an Ohio business trust organized under the laws of the State
of Ohio by a Declaration of Trust dated June 11, 1992. The Fund is a diversified
portfolio of the Trust which is registered with the Securities and Exchange
Commission as an open-end management investment company. Each share of the Fund
has one vote and represents an equal pro rata interest in the Fund. As an Ohio
business trust, the Trust is not required to hold annual shareholder meetings,
although special shareholder meetings may be called for purposes such as
electing or removing trustees. Special meetings shall be called upon the written
request of shareholders owning at least 10% of the outstanding shares of the
Fund. Shareholder inquiries should be directed to the telephone number or
address of the Fund listed on the first page of this Prospectus.
MANAGEMENT OF THE FUND
The Board is responsible for the direction and supervision of the Fund's
operations. Gradison acts as the Fund's investment adviser. Subject to the
authority of the Board, Gradison manages the investment and reinvestment of the
assets of the Fund, and provides its employees to act as the officers of the
Fund who are responsible for the overall management of the Fund. Gradison is an
investment adviser and a securities broker-dealer. Gradison including its
predecessor, has served as investment adviser to investment companies since
1976.
Gradison is a Division of McDonald-Key Investments, Inc. ("MKII"), 800 Superior
Avenue, Cleveland, Ohio 44114. The parent corporation of MKII is KeyCorp, a bank
holding company with assets of approximately $75 billion. Through four principal
lines of business -- Corporate Capital, Consumer Finance, Community Banking and
Capital Partners -- KeyCorp provides retail and wholesale banking, investment,
financing and money management services to individuals and companies across the
United States.
On October _____, 1998, the parent corporation of MKII merged with KeyCorp.
(Prior to the merger, MKII's name was McDonald & Company Securities, Inc.) This
merger may have caused a change in control of MKII. Thus, the Board of Trustees
of the Trust approved a new investment advisory agreement with MKII. This new
agreement was implemented prior to shareholder approval of the agreement
pursuant to an order issued by the Securities and Exchange Commission. The new
agreement contains substantially the same provisions as the prior investment
advisory agreement, except that all investment advisory fees will be held in
escrow until the new agreement has been approved by Fund shareholders. If such
approval is not obtained by _____, 1999, the escrowed fees will be returned to
the Fund and the Trustees will attempt to obtain other investment advisory
services for the Fund. MKII intends to propose that the Fund be consolidated
with another investment company with many similar objectives and policies and
for which another subsidiary of KeyCorp currently acts as investment advisor.
Any such proposal would require the approval of the Board of Trustees and Fund
shareholders
13
<PAGE> 18
Banking laws, including the Glass-Steagall Act, prevent a bank holding company
or its affiliates from sponsoring, organizing, or controlling a registered,
open-end investment company. However, bank holding company subsidiaries may act
as investment advisor or transfer agent. They also may purchase shares of such a
company for their customers and pay third parties for performing these
functions. Should laws change in the future, the Trustees would consider
selecting another qualified firm so that all services would continue.
BISYS Fund Services Limited Partnership ("BISYS"), 3435 Stelzer Road, Columbus,
Ohio 43219, acts as Distributor of the Fund's shares.
The Fund pays the Adviser a fee of .50% of its average daily net assets for
acting as its investment adviser. Gradison acts as the Fund's transfer agent,
dividend disbursing agent, and accounting services provider. For providing such
services, Gradison receives an annual fee of $23.00 per shareholder non-zero
balance account ($5.00 for closed or zero balance accounts) plus out of pocket
costs for acting as transfer agent and dividend disbursing agent and an
accounting services fee of .035% of the first $100 million of average daily net
assets, .025% of the next $100 million of average daily net assets, and .015% of
average daily net assets in excess of $200 million, with a minimum fee of
$48,000 per year. Gradison's address is 580 Walnut Street, Cincinnati, Ohio
45202.
All expenses not specifically assumed by the Adviser, Transfer Agent, or
Distributor and incurred in the operation of the Fund are borne by the Fund.
These include expenses for: printing and mailing registration statements,
prospectuses, periodic reports and other documents furnished to shareholders and
regulatory authorities; registration, filing and similar fees; legal expenses;
auditing and accounting expenses; taxes and other fees; brokers' commissions
chargeable to the Fund in connection with securities transactions; expenses of
Trustees who are not affiliated with the Adviser; expenses of Shareholders' and
Trustees' meetings; and fees and other expenses incurred by the Fund in
connection with its membership in any organization. The Fund reimburses the
Adviser for all costs, direct and indirect, which are fairly allocable to
services performed by the Adviser's employees for which the Fund is responsible.
Gradison may, from time to time, agree to waive the receipt of management or
transfer agent fees from the Fund and/or reimburse the Fund for other expenses
in order to limit the Fund's expenses to a specified percentage of average net
assets. Waiver and reimbursement arrangements, which may be terminated at any
time without notice, will increase the Fund's return. If Gradison discontinues a
waiver or reimbursement arrangement, the Fund's expenses will increase and its
yield will be reduced. Gradison retains the ability to be repaid by the Fund for
fees waived and expenses reimbursed if expense ratios fall below the specified
limit prior to the end of the fiscal year. Gradison may waive or reimburse fees
in a greater amount than is required by an applicable fee waiver arrangement.
Under the terms of a distribution service plan adopted pursuant to Rule 12b-1
under the 1940 Act, the Fund pays to the Distributor a service fee at the annual
rate of .25% of the average daily net assets of the Fund. Such fee is calculated
on a daily basis and paid to the Distributor monthly. The service fee is paid by
the Distributor to dealers as compensation for providing personal services to
shareholders of the Fund, including responding to shareholder inquiries and
providing information to shareholders about their Fund accounts.
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<PAGE> 19
PERFORMANCE CALCULATIONS
From time to time the Fund may advertise its "yield," "taxable equivalent
yield," and "total return." Both yield and total return figures are based on
historical figures and are not intended to indicate future performance. The
yield of the Fund is computed by dividing the net investment income per share
during the period stated in the advertisement by the net asset value on the last
day of the period (using the average number of shares entitled to receive
dividends). The yield formula provides for semiannual compounding which assumes
that net investment income is earned and reinvested at a constant rate and
annualized at the end of the six-month period. The Fund's taxable equivalent
yield is the yield that a taxable investment would have to generate in order to
equal the Fund's yield for an investor in a stated tax bracket.
The total return of the Fund refers to the average annual compounded rate of
return over specified time periods (which periods will be stated in the
advertisement) that would equate an initial amount of money invested in the Fund
at the beginning of a stated period to the ending redeemable value of the
investment. The Fund may also calculate aggregate total returns over various
periods of time. The calculations of total return assume the reinvestment of all
dividends and other distributions in additional Fund shares.
The Fund may also advertise performance rankings assigned to it by organizations
which evaluate mutual fund performance such as Lipper Analytical Securities
Corp. It may also advertise "ratings" assigned to it by organizations such as
Morningstar, Inc.
The Fund's Annual Report to Shareholders contains additional performance
information and will be made available upon request without charge.
15
<PAGE> 20
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Expense Summary 2
Financial Highlights 3
Investment Objective 4
Risk Factors and for Whom the Fund May be Appropriate 4
Investment Policies 4
Ohio Economic Considerations 9
Purchases and Redemptions 9
Net Asset Value 11
Optional Shareholder Services 11
Distributions 12
Taxes 12
General Information 13
Management of the Fund 13
Performance Calculations 15
- --------------------------------------------------------------------------------
[GRADISON MUTUAL FUNDS LOGO]
580 Walnut Street, Cincinnati, Ohio 45202
(513) 579-5000 (800) 869-5999
<PAGE> 21
GRADISON OHIO TAX-FREE INCOME FUND
GRADISON-MCDONALD MUNICIPAL CUSTODIAN TRUST
---------------------------------------------------------------------------
STATEMENT OF ADDITIONAL
INFORMATION
---------------------------------------------------------------------------
For information, call: 579-5700 from Cincinnati, Ohio
Toll free (800) 869-5999 from outside Cincinnati
Information may also be obtained from the Fund at:
580 Walnut Street
Cincinnati, Ohio 45202
Investment Adviser ("Adviser") - Gradison Division of McDonald Key Investments
Inc.
------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Prospectus of the Fund, dated November 1, 1998,
which has been filed with the Securities and Exchange Commission. The Prospectus
is available upon request without charge from the Fund at the above address or
by calling the phone numbers provided above.
The date of this Statement of Additional Information is November 1, 1998.
<PAGE> 22
CONTENTS
- ---
<TABLE>
<CAPTION>
Page Location in Prospectus
<S> <C> <C>
INVESTMENT POLICIES AND RESTRICTIONS . . . . . . 4 Investment Objective
Diversification . . . . . . . . . . . . 5
Tax-Exempt Securities Ratings. . . . . . 5
FACTORS RELATING TO OHIO . . . . . . . . . . . 7 Ohio Economic Considerations
HEDGING STRATEGIES . . . . . . . . . . . . . . . 16 Investment Objective
Special Risks of Hedging Strategies. . . 17
Additional Information
About Hedging Transactions . . . . . . 18
Options . . . . . . . . . . . . . . . . 19
Guidelines for Options . . . . . . . . . 21
Futures . . . . . . . . . . . . . . . . 21
Guidelines for Futures and
Related Options . . . . . . . . . . . 23
MUNICIPAL LEASES . . . . . . . . . . . . . . . 23 Investment Objective
PURCHASE OF SHARES . . . . . . . . . . . . . . . 24 How to Purchase Shares
REDEMPTION OF SHARES . . . . . . . . . . . . . . 25 How to Redeem Shares;
Redemptions through
Gradison and McDonald
DAILY DISTRIBUTIONS - ACCOUNTING PRINCIPLES. . . 25 Distributions
TAXES. . . . . . . . . . . . . . . . . . . . . . 26 Taxes
Federal . . . . . . . . . . . . . . . . 26
Ohio State and Local Tax Matters . . . . 27
NET ASSET VALUE. . . . . . . . . . . . . . . . . 28
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . 29
INVESTMENT ADVISER . . . . . . . . . . . . . . 31 Management of the Fund
Advisory Agreement . . . . . . . . . . . 31
Master Distribution Agreement . . . . . 32
</TABLE>
2
<PAGE> 23
<TABLE>
<S> <C>
Distribution Service Plan . . . . . . . 32
Transfer Agent and
Accounting Services Agreement . . . . 34
Other Compensation Paid/
Reimbursement Made to the Adviser . . 34
TRUSTEES AND OFFICERS OF THE TRUST . . . . . . . 34
DESCRIPTION OF THE TRUST . . . . . . . . . . . . 36 General Information
CUSTODIAN . . . . . . . . . . . . . . . . . . . 37
INDEPENDENT PUBLIC ACCOUNTANTS . . . . . . . . . 37
LEGAL COUNSEL . . . . . . . . . . . . . . . . . 38
EXCHANGES . . . . . . . . . . . . . . . . . . . 38 Exchanges
TELEPHONE ACCESS TO ACCOUNT
INFORMATION . . . . . . . . . . . . . . . . . 38
PERFORMANCE CALCULATIONS . . . . . . . . . . . 38
PRINCIPAL HOLDERS OF SECURITIES . . . . . . . . 39
APPENDIX A . . . . . . . . . . . . . . . . . . 40
SALES BROCHURE INFORMATION . . . . . . . . . . . 42
REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS AND FINANCIAL STATEMENTS Following Page 59
</TABLE>
3
<PAGE> 24
INVESTMENT POLICIES AND RESTRICTIONS
Gradison Ohio Tax-Free Income Fund (the "Fund") invests primarily in
securities issued by state and local municipalities the interest from which is
free from Federal income tax and Ohio state personal income tax. In addition to
the investment restrictions described in the Prospectus, the Fund has adopted
the following investment restrictions and limitations, which may not be changed
without the approval of the holders of a majority of the outstanding voting
securities of the Fund. (See "Description of the Trust.") The Fund will not:
(1) Borrow money, except from banks or as a temporary measure or for
extraordinary or emergency purposes such as to enable the Fund to
satisfy redemption requests where liquidation of portfolio securities is
considered disadvantageous and not for leverage purposes, and then only
in amounts not exceeding 10% of the total assets of the Fund at the time
of the borrowing or one third of the value of the Fund's total assets
including the amount borrowed. Any borrowing that comes to exceed 33
1/3% of the Fund's total assets by reason of a decline of net assets
will be reduced to the extent necessary to comply with the 33 1/3%
limitation. While any borrowing of greater than 5% of the assets occurs,
the Fund will not purchase additional portfolio securities;
(2) Make loans, except that the purchase of securities as allowed by the
Fund's investment objective and other investment restrictions and the
entering into of repurchase agreements shall not be prohibited by this
restriction;
(3) Purchase or sell real estate. The purchase of securities secured by real
estate which are otherwise allowed by the Fund's investment objective
and other investment restrictions shall not be prohibited by this
restriction;
(4) Underwrite the securities of other issuers, except insofar as the Fund
may technically be deemed an underwriter under the Securities Act of
1933 in connection with the acquisition of portfolio securities;
(5) Purchase or sell commodities or commodity contracts or interests in oil,
gas or other mineral exploration or development programs. The purchase
or sale of financial futures contracts or options on financial futures
contracts for the purposes and within the limits set forth in the
Prospectus and this Statement of Additional Information shall not be
prohibited by this restriction;
(6) Issue senior securities as defined in the Investment Company Act of
1940, except to the extent that such issuance might be involved with
respect to borrowings subject to item (1) above or with respect to
transactions involving futures contracts or the writing of options
within the limits described in the Prospectus and this Statement and
provided that the Fund may issue shares of additional series or classes
that the Trustees may establish.
The following limitations are not fundamental and may be changed without
shareholder approval: (1) With respect to the purchase of
4
<PAGE> 25
securities of other investment companies, the Fund will not (a) purchase more
than 3% of the outstanding voting shares of an investment company; (b) invest
more than 5% of its assets in securities of any one investment company; or (c)
invest more than 10% of its assets in securities of all investment companies.
(2) The Fund will not make short sales of securities, or purchase securities on
margin, except for short-term credit as is necessary for the clearance of
transactions. The deposit or payment by the Fund of initial or maintenance
margin in connection with futures contracts or related options transactions is
not considered the purchase of a security on margin. (3) The Fund will not
mortgage, pledge or hypothecate securities in amounts exceeding 15% of the value
of the assets of the Fund (taken at market value). Notwithstanding this
restriction the Fund may enter into "when issued" and "delayed delivery"
transactions. The deposit of underlying securities and other assets in escrow or
other collateral arrangements in connection with the writing of options or
margin for futures contracts or options on futures contracts are not deemed to
be pledges or hypothecations subject to this restriction.
If a percentage restriction set forth above is met at the time of
investment, a later movement above the restriction level resulting from a change
in the value of securities held by the Fund will not be considered a violation
of the investment restriction.
DIVERSIFICATION
A bond for which the payments of principal and interest are secured by
an escrow account of securities backed by the full faith and credit of the U.S.
Government (defeased) will not be treated as an obligation of the original
municipality for purposes of determining concentration. When a security is
insured by bond insurance, it is not considered a security guaranteed by the
insurer and there is no limit on the percentage of the Fund's assets that may be
invested in securities insured by a single insurer.
TAX-EXEMPT SECURITIES RATINGS
Moody's Investors Services, Inc. ("Moody's"), Standard & Poor's ("S&P"),
and Fitch Investors Services, Inc. ("Fitch") are private services that provide
ratings of the credit quality of debt obligations, including issues of municipal
securities. A description of the investment grade ratings assigned to municipal
securities and tax-free commercial paper is set forth below. The Fund may use
these ratings in determining whether to purchase, sell or hold a security. It
should be emphasized, however, that ratings are general and are not absolute
standards of quality. Consequently, municipal securities with the same maturity,
interest rate and rating may have different market prices.
MUNICIPAL BONDS - Tax-exempt bonds rated Aaa and Aa by Moody's comprise what are
generally known as "high grade bonds". Tax-exempt bonds which are rated A by
Moody's possess many favorable investment attributes and are considered "upper
medium grade obligations". Factors giving security to principal and interest of
A-rated tax-exempt bonds are considered adequate,
5
<PAGE> 26
but elements may be present which suggest a susceptibility to impairment
sometime in the future. The Baa rating is assigned to "medium grade" obligations
by Moody's. Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Tax-exempt bonds
rated AAA bear the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest. Tax-exempt
bonds rated AA also qualify as high-quality debt obligations. Capacity to pay
principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree. Bonds rated A have a strong
capacity to pay principal and interest, although they are somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions. The BBB rating, which is the lowest "investment grade" security
rating by S&P, indicates an adequate capacity to pay principal and interest.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity to pay principal and interest for Municipal
Obligations in this category than for Municipal Obligations in the A category.
Bonds rated AAA by Fitch are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events. Bonds rated AA by Fitch are considered to be investment
grade and of very high credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong as bonds rated AAA.
Bonds rated A by Fitch are considered to investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings. Bonds rated BBB by
Fitch are considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore, impair timely
payment.
SHORT-TERM NOTES - Moody's MIG1/VMIG1 rating denotes best quality characterized
by strong protection by established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing. Moody's
MIG2/VMIG2 denotes high quality with ample margins of protection. MIG3/VMIG3
denotes favorable quality. While all security elements are accounted for there
is lacking the undeniable strengths of MIG1/VMIG1 and MIG2/VMIG2. Moody's
ratings MIG1/VMIG1-MIG3/VMIG3 are all investment grade ratings. S&P's rating of
SP-1 reflects very strong or strong capacity to pay principal and interest.
S&P's SP-2 rating reflects satisfactory capacity to pay principal and interest.
TAX-FREE COMMERCIAL PAPER - Issuers rated Prime-1 by Moody's (or related
supporting institutions) have a superior capacity for repayment of short-term
promissory obligations. Prime-1 repayment capacity will normally be evidenced by
the following characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad
margins in earnings coverage of fixed financial charges and high internal cash
generation; well established
6
<PAGE> 27
access to a range of financial markets; and assured sources of alternate
liquidity.
Issuers rated Prime-2 by Moody's (or related supporting institutions)
have a strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample liquidity is maintained.
A-1 - (S&P) This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2 - Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
"A-1".
FACTORS RELATING TO OHIO
As described above, and except to the extent investments are in
temporary investments, or invested in the limited amounts described in the
Prospectus in obligations of the governments of Puerto Rico, Guam, and the U.S.
Virgin Islands, the Fund will invest substantially all of its net assets in
obligations issued by or on behalf of the State of Ohio, political subdivisions
thereof, or agencies or instrumentalities of the State or its political
subdivisions (Ohio Obligations). The Fund is therefore susceptible to political,
economic or regulatory factors that may affect issuers of Ohio Obligations. In
addition, the specific Ohio Obligations invested in are expected to change from
time to time. The following information constitutes only a brief summary of some
of the many complex factors that may affect the financial situation of issuers
in Ohio, and is not applicable to "conduit" obligations on which the public
issuer itself has no financial responsibility. This information is derived from
official statements published in connection with the issuance of securities of
certain Ohio issuers and from other publicly available documents, and is
believed to be accurate. No independent verification has been made of any of the
following information.
The creditworthiness of Ohio Obligations of local Ohio issuers is
generally unrelated to that of obligations issued by the State itself, and
generally there is no responsibility on the part of the State to make payments
on those local obligations. There may be specific factors that are from time to
time applicable in connection with investment in particular Ohio Obligations or
in those obligations of particular Ohio issuers, and it is possible the
investment will be in particular Ohio Obligations or in those Obligations of
particular issuers as to which those factors apply. However, the information set
forth below is intended only as a general summary and not as a discussion of any
specific factors that may affect any particular issue or issuer of Ohio
Obligations.
Ohio is the seventh most populous state, with a 1990 Census count of
10,847,000 indicating a 0.5% population increase from 1980.
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<PAGE> 28
The Ohio economy while diversifying more into the service and other
nonmanufacturing areas, continues to rely in part on durable goods manufacturing
largely concentrated in motor vehicles and equipment, steel, rubber products and
household appliances. In 1996, 27.2% of Ohio's gross product was manufacturing
and 17.7% from services. As a result, general economic activity in Ohio, as in
many other industrially-developed states, tends to be more cyclical than in some
other states and in the nation as a whole. Agriculture is an important segment
of the economy, with over half the State's area devoted to farming and
approximately 15% of total employment in agribusiness.
The State's overall unemployment rate has commonly been somewhat higher
than the national figure. However, Ohio reported a 1997 average monthly rate of
4.6%, compared to the national figure of 4.9% and 1996 average monthly
unemployment rate of 4.9% compared to the national figure of 5.4% The
unemployment rate and its effects vary among particular geographic areas of the
State.
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on State or local government finances
generally, will not adversely affect the market value of Ohio Obligations held
in the portfolio of the Fund or the ability of particular obligors to make
timely payments of debt service on (or lease payments relating to) those
obligations.
The State operates on the basis of a fiscal biennium for its
appropriations and expenditures, and is effectively precluded by law from ending
a fiscal year ending June 30 (FY) or biennium in a deficit position. Most State
operations are financed through the General Revenue Fund (GRF), for which
personal income and sales-use taxes are the major revenue sources. Growth and
depletion of GRF ending fund balances show a consistent pattern related to
economic conditions, with the FY-ending balance reduced during less favorable
economic periods and increased during more favorable economic periods. The State
has established procedures for, and has timely taken, necessary actions to
ensure a resource/expenditure balance during less favorable economic periods.
These include general and selected reductions in appropriations spending; none
have been applied to appropriations needed for debt service or lease rentals on
any State obligations.
The GRF appropriations act for the 1996-97 biennium was passed on June 28,
1995 and promptly signed (with, however, selective vetoes) by the Governor. That
act provides for total GRF biennial expenditures of approximately $33.5 billion,
with the following examples of GRF biennial expenditure increases over those
expenditures for the prior biennium for certain major programs: higher
education, 13.1%; mental health and mental retardation, 4.8%; primary and
secondary education, 15.4%; human services, 9.5%; justice and corrections, 28%.
Necessary GRF debt service and lease-rental appropriations for the entire
biennium were requested in the Governor's proposed budget and incorporated in
the related appropriations bill as introduced, and in the bill's versions as
passed by the House and the Senate and in the act as passed and signed. the same
is true for the separate Department of Transportation/Department of Public
Safety and Bureau of Workers' Compensation appropriations acts,
8
<PAGE> 29
contained lease-rental appropriations for certain OBA-financed ODOT/DPS and BWC
projects.
In accordance with the appropriations act, the significant June 30, 1995 GRF
fund balance, after leaving in the GRF an unreserved and undesignated balance of
$70,000,000, has been transferred to a variety of funds, including $535,200,000
to the BSF. $322,800,000 was transferred to other funds, including school
assistance funds and, in anticipation of possible federal program changes, a
human services stabilization fund.
The June 30, 1996, GRF ending fund balance was over $781 million which was
higher than forecast; $100 million was transferred from GRF to the fund
providing for the elementary and secondary school computer network and
$30,000,000 to a new fund for transportation infrastructure. Approximately $401
million is serving as a basis for a temporary 1996 personal income tax
reduction.
CURRENT BIENNIUM
The GRF appropriations act for the current biennium was passed on June
25, 1997 and promptly signed (after selective vetoes) by the Governor. That act
provided for total GRF biennial expenditures of over $36 billion, with the
following examples of GRF major program biennial expenditure increases over
those for the prior biennium: higher education, 10.8%; mental health and mental
retardation, 4.2%; primary and secondary education, 15.4%; human services, 7.3%;
and adult and juvenile corrections, 18.4%.
Necessary GRF debt service and lease-rental appropriations for the
entire biennium were requested in the Governor's proposed budget and
incorporated in the related appropriations bill as introduced, and in the bill's
versions as passed by the House and the Senate and in the act as passed and
signed. The same is true for the separate appropriations acts for the Department
of Transportation, Department of Public Safety and Bureau of Workers'
Compensation, which included lease-rental appropriations for certain
OBA-financed ODOT, DPS and BWC projects.
Litigation pending in federal district court and in the Ohio Court of
Claims contests the Ohio Department of Human Services' (ODHS) prior Medicaid
financial eligibility rules for married couples where one spouse is living in a
nursing facility and the other spouse resides in the community. ODHS promulgated
new eligibility rules effective January 1, 1996. It is appealing an order of the
federal court directing it to provide notice to persons potentially affected by
the former rules from 1990 through 1995. It is not possible at this time to
state whether this appeal will be successful or, should plaintiffs prevail, the
period (beyond the current fiscal year) during which necessary additional
Medicaid expenditures would have to be made. Plaintiffs have estimated total
additional Medicaid expenditures at $600,000,000 for the retroactive period and,
based on current law, it is estimated that the State's share of those additional
expenditures is approximately $240,000,000. The Court of Claims has certified
the action there as a class action.
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<PAGE> 30
CASH FLOW
Because GRF cash receipts and disbursements do not precisely coincide,
temporary GRF cash flow deficiencies often occur in some months, and
particularly the middle months, of a Fiscal Year. Statutory provisions provide
for effective management by permitting the adjustment of payment schedules (as
was done during some prior Fiscal Years) and the use of the Total Operating Fund
(TOF).
The State has not done and does not do external revenue anticipation
borrowing.
The TOF includes the total consolidated cash balances, revenues,
disbursements and transfers of the GRF and several other specified funds
(including the BSF). The TOF cash balances are consolidated only for the purpose
of meeting cash flow requirements, and, except for the GRF, a positive cash
balance must be maintained for each discrete fund included in the TOF. The GRF
is permitted to incur a temporary cash deficiency by drawing upon the available
consolidated cash balance in the TOF. The amount of that permitted GRF cash
deficiency at any time is limited to 10% of GRF revenues for the then preceding
Fiscal Year.
The State has encountered (and planned for) some monthly GRF cash flow
deficiencies in all recent Fiscal Years. For example, GRF cash flow deficiencies
have ranged from occurring 10 months in Fiscal Years 1992 ($743,140,000 the
highest) to four months in Fiscal Year 1995 (the highest being $337,964,000).
The GRF had cash flow deficiencies in four months in Fiscal Year 1997 (the
highest being $565,741,000). The GRF had cash flow deficiencies in five months
in fiscal 1998 (the highest being $742 million.
Cash flow deficiencies have been and are expected by OBM to be within
the TOF limitations discussed above. Often, the GRF balancing steps described
above ameliorated cash flow deficiencies in later months of a Fiscal Year,
significantly assisting in producing the positive year-end GRF balances.
STATE DEBT
The incurrence or assumption of debt by the State without a popular vote
is, with limited exceptions, prohibited by current provisions of the State
Constitution. The State may incur debt to cover casual deficits or failures in
revenues or to meet expenses not otherwise provided for, but limited in amount
to $750,000. The Constitution expressly precludes the State from assuming the
debts of any county, city, town, or township, or of any corporation. (An
exception in both cases if for debts incurred to repel invasion, suppress
insurrection, or defend the State in war.) The Constitution provides that
"Except the debts above specified . . . no debt whatever shall hereafter be
created by, or on behalf of the state."
From 1921 to date Ohio voters approved 15 constitutional amendments
authorizing the incurrence of State debt to which taxes or excises were pledged
for payment. All related to capital facilities financing, except for three
funding veterans' bonuses. The only such tax-supported debt still
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<PAGE> 31
authorized to be incurred are highway, local infrastructure, coal development
and natural resources general obligation bonds as discussed below.
The State and State agencies have issued revenue bonds that are payable
from net revenues or relating to revenue-producing facilities or categories of
facilities, such as those issued by the Ohio Turnpike Commission. Under
interpretations by Ohio courts, those revenue bonds are not "debt" within the
constitutional provisions described above. The Constitution authorizes State
bonds (issued by the Ohio Housing Finance Agency) for certain housing purposes;
tax moneys may not be obligated or pledged to those bonds. See the discussion of
expanded housing finance authority below under Additional Authorizations.
In addition, Section 2i of Article VIII of the Constitution authorizes
the issuance, for certain purposes, the State obligations the owners or holders
of which are not given the right to have excises or taxes levied by the General
Assembly to pay principal and interest. Those special obligations include the
bonds and notes issued by, among others, the Ohio Public Facilities Commission
and the Ohio Building Authority and certain obligations issued by the Treasurer
of State. OPFC issues obligations for facilities for higher education, mental
health, and parks and recreation purposes. OBA issues obligations for facilities
to house branches and agencies of State Government and their functions,
including: State office buildings and facilities for the Department of
Administrative Services (DAS) and others; juvenile detention facilities,
including single-county or joint-county facilities, for the Department of Youth
Services (DYS) and their governmental entities; Ohio Department of
Transportation (ODOT) buildings; Department of Rehabilitation and Correction
(DRC) prisons and correctional facilities including certain local and
community-based facilities; office facilities for the Bureau of Workers'
Compensation (BWC) and Department of Natural Resources (DNR); Ohio Arts and
Sports Facilities Commission (ASFC) and Department of Public Safety (DPS)
facilities; and school district computer and security facilities. The Treasurer
issues obligations for certain elementary and secondary school facilities under
leases with the State Department of Education.
A current summary of State tax-supported obligations (general obligation
bonds), and special obligations issued by the OPFC and OBA, and certain special
obligations issued by the Treasurer, that have been authorized, and scheduled to
be issued and outstanding, excluding the 1998B Bonds, is as follows:
<TABLE>
<CAPTION>
AUTHORIZED BY
GENERAL ASSEMBLY ISSUED(a) OUTSTANDING(b)
GENERAL OBLIGATION BONDS
<S> <C> <C> <C>
Highway(c) $ 772,500,000 $ 375,000,000 $ 352,000,000
Highway(d) 1,854,695,000 1,745,000,000 275,700,000
Coal Development(e) 150,000,000 95,000,000 30,950,000
Infrastructure(f) 1,560,000,000 1,400,000,000 1,015,888,487
Natural Resources(g) 180,000,000 100,000,000 94,200,000
OHIO PUBLIC FACILITIES COMMISSION
Higher Education Facilities $ 4,929,300,000 $ 4,621,230,000 $ 2,369,965,000
Mental Health Facilities 1,141,000,000 1,237,535,000 396,765,000
Parks and Recreation Facilities 218,800,000 194,750,000 92,310,000
</TABLE>
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<PAGE> 32
<TABLE>
<CAPTION>
OHIO BUILDING AUTHORITY
<S> <C> <C> <C>
Prison Facilities $ 1,499,000,000 $ 1,302,100,000 $ 981,959,827
DYS Facilities 194,000,000 113,000,000 101,830,000
DAS Facilities(h) 1,018,000,000 898,300,000 714,225,231
ASFC Facilities 197,600,000 137,000,000 122,345,000
ODOT Facilities(i) 210,000,000 143,800,000 103,220,000
DNR Facilities 12,160,000 12,160,000 9,830,000
DPS Facilities(i) 129,000,000 103,200,000 101,830,000
BWC Facilities(j) 214,255,000 214,255,000 205,255,000
</TABLE>
<TABLE>
<CAPTION>
TREASURER OF STATE
<S> <C> <C> <C>
Education Facilities $ 538,640,000 $ 138,640,000 $ 116,810,000
</TABLE>
(a) Excludes refunding bonds; includes bonds refunded.
(b) Excludes bonds refunded; includes refunding bonds.
(c) Not more than $220,000,000 may be issued in any year and not more than $1.2
billion may be outstanding at any time.
(d) The authority to issue expired December 31, 1996. (e) Not more than
$100,000,000 may be outstanding at any time.
(f) Not more than $120,000,000 may be issued in any year, and the total issued
may not exceed $2.4 billion.
(g) Not more than $50,000,000 may be issued in any year and not more than
$200,000,000 may be outstanding at any time.
(h) Primarily for State office buildings in Columbus (two), Cleveland, Akron and
Toledo, and a State computer center in Columbus. Debt service for the Akron
and Toledo office buildings is supported in part by payments from local
government agencies using portions of those facilities. Includes
$100,000,000 for school district computer technology and security systems.
(i) Debt service paid from appropriations from highway use receipts.
(j) Debt service paid from appropriations from BWC Administrative Cost Fund.
The General Assembly has appropriated sufficient moneys to meet debt
service requirements for the current biennium (ending June 30, 1999) on all
OPFC, OBA and Treasurer special obligations listed in the accompanying tables.
Except for $58,441,000 of highway user receipts appropriated for obligations
issued for ODOT and DPS facilities, and $30,130,000 for the BWC facility
obligations, all those moneys have been appropriated from the GRF.
The following table shows the principal amount of those obligations
which were or are scheduled to be outstanding as of July 1 of the indicated
years:
<TABLE>
<CAPTION>
GENERAL OBLIGATIONS
-------------------
HIGHWAY NON-HIGHWAY OPFC OBA TREASURER
------- ----------- ---- --- ---------
<S> <C> <C> <C> <C> <C>
1997 $675,700,000 $1,065,566,568 $2,559,040,000 $ 2,200,910,058 $189,810,000
2000 452,500,000 1,040,149,349 1,703,335,000 1,946,290,020 147,040,000
2005 90,000,000 671,656,341 983,200,000 1,115,076,194 47,000,000
2010 -0- 350,937,892 206,600,000 418,245,000 -0-
2015 -0- 78,123,600 -0- 75,770,000 -0-
</TABLE>
The following tables show certain historical debt information and
comparisons. These tables include only outstanding bonds of the State secured by
pledges of taxes and excises, and those issued by the OPFC, OBA and the
Treasurer as reflected in the tables above. Highway obligations and obligations
issued by the OBA for ODOT, DPS and BWC purposes are not included since they are
paid from receipts that do not go into the GRF.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
FISCAL PRINCIPAL AMOUNT PRINCIPAL AMOUNT AS % OF ANNUAL
YEAR OUTSTANDING (AS OF JULY 1) PER CAPITA (a) PERSONAL INCOME
- ------ -------------------------- -------------- ----------------
<S> <C> <C> <C>
1980 $1,991,915,000 $184.48 1.90%
1985 2,664,060,000 246.73 1.88
1990 3,690,154,994 340.20 1.94
1993 4,286,631,904 395.19 2.00
</TABLE>
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<PAGE> 33
<TABLE>
<S> <C> <C> <C>
1994 4,669,967,748 430.53 2.01
1995 5,049,962,637 465.56 2.06
1996 5,203,715,312 479.74 1.98
1997 5,461,641,626 489.52 2.08(b)
1998 5,682,827,565 508.62 2.16(b)
</TABLE>
<TABLE>
<CAPTION>
DEBT
DEBT SERVICE AS SERVICE DEBT SERVICE
FISCAL DEBT SERVICE TOTAL GRF % OF GRF PER AS % OF ANNUAL
YEAR PAYABLE(c) DISBURSEMENTS DISBURSEMENTS CAPITA PERSONAL INCOME
- ---- ---------- ------------- ------------- ------ ---------------
<S> <C> <C> <C> <C> <C>
1980 $ 187,478,382 $ 5,183,999,871 3.61% $ 17.43 0.18%
1985 316,122,379 8,480,380,477 3.73 29.30 0.22
1990 488,676,826 11,585,673,568 4.22 45.05 0.26
1993 556,512,741 13,600,175,302 4.09 50.18 0.25
1994 601,201,857 14,433,186,000 4.17 54.15 0.26
1995 648,878,779 14,978,608,718 4.33 58.15 0.26
1996 691,007,871 15,858,131,400 4.36 61.94 0.26
1997 716,501,188 16,404,050,000 4.37 64.22(a) 0.27(b)
1998 741,300,000 17,087,000,000 4.34 66.33(a) 0.28(b)
</TABLE>
(a) Population based on 1995 census figures (estimated).
(b) Based on 1996 personal income data.
A statewide economic development program assists, with loans and,loan
guarantees, the financing of facilities for industry, commerce, research and
distribution. The law authorizes the issuance of State bonds and loan guarantees
secured by a pledge of portions of the State profits from liquor sales. The
General Assembly has authorized the issuance of these bonds by the State
Treasurer, with a general maximum of $300,000,000 currently authorized to be
outstanding at any one time (excluding bonds issued to meet guarantees, but less
any amount by which 4% of the unpaid principal amount of guaranteed loan
payments exceeds the funded amount applicable to the guarantees). The aggregate
amount from the liquor profits to be used in any Fiscal Year in connection with
these bonds (except for bonds issued to meet guarantees) may not under present
law exceed $25,000,000. The total of unpaid guaranteed loan amounts and unpaid
principal of direct loans may not exceed $500,000,000. A 1996 issue of
$168,740,000 of taxable bonds refunded outstanding bonds and provided additional
funds for the program. The highest future Fiscal Year debt service on those
bonds, which are payable through 2022, is $16,166,827.
The State from time to time enters into capital lease and lease purchase
agreements relating to facilities for general State governmental purposes. OBM
estimates total Fiscal Year 1998 rental payments under those agreements are
approximately $3,150,869 and $6,000,000 respectively. Payments under those
leases are subject to biennial appropriations. The number of and obligations
under such leases will vary from time to time.
ADDITIONAL AUTHORIZATION
Only a portion of State capital needs can be met by direct GRF
appropriations, and so additional State borrowing for capital purposes has been
and will be required. Under present constitutional limitations most of that
borrowing has been and will probably primarily be by lease-rental supported
obligations such as those issued by the OPFC and the OBA and, in some cases, by
the Treasurer.
The general capital appropriations act for the current (1997-98) capital
appropriations biennium authorized additional borrowing. It authorized OPFC
issuance of additional obligations in the amounts of $559,000,000 for higher
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<PAGE> 34
education capital facilities projects (a substantial number of which are
renovations and equipment of and improvements to existing facilities),
$68,400,000 for mental health facilities projects (including local projects),
and $22,700,000 for parks and recreation facilities projects. It also authorizes
additional OBA obligations in the amounts of $197,400,000 for prisons and local
jails, $37,800,000 for DYS facilities, $125,650,000 for DAS facilities including
computer technology and security systems for school districts, $80,700,000 for
ASFC facilities (including $38,000,000 for the newly authorized category of
sports facilities), $75,800,000 for DPS facilities, and $27,750,000 for ODOT
facilities. These additional authorizations and issuances under them are
reflected in the above tables.
The Treasurer of State has been authorized to issue bonds to finance
approximately $538,640,000 of capital improvements for elementary and secondary
public school facilities ($223,640,000 issued). Debt service on these
lease-rental obligations is payable from State resources.
A 1995 constitutional amendment extended the local infrastructure bond
program (authorizing an additional $1.2 billion of State full faith and credit
obligations to be issued over 10 years for the purpose) and authorized
additional highway bonds. The latter supersedes the prior highway bonds
authorization of not more than $500,000,000 to be outstanding at any time and
not more than $100,000,000 to be issued annually, and authorizes not more than
$1.2 billion to be outstanding at any time and not more than $220,000,000 to be
issued in a Fiscal Year.
The General Assembly has authorized the following additional general
obligation bonds to be issued by the Commissioners of the Sinking Fund:
$55,000,000 coal development, $398,000,000 highway capital improvements, and
$80,000,000 natural resources, and by the Treasurer $240,013,864 of
infrastructure bonds.
The most recent capital appropriations legislation provides for two new
categories of revenue-type financing. OBA is authorized to issue lease revenue
obligations to assist in the financing of up to 15% of the estimated cost of
certain Ohio sports facilities. In addition, a revolving fund is created to
assist in financing local multimodal and intermodal transportation facilities,
initially funded with a deposit of $30,000,000 of GRF moneys.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation in the provision of individual and family housing.
This supplements the previously constitutionally authorized loans-for-lenders
and other housing assistance programs, financed in part with State revenue
bonds. The amendment authorizes the General Assembly to provide for State
assistance for housing in a variety of manners. The General Assembly could
authorize State borrowing for the purpose by the issuance of State obligations
secured by a pledge of all or such portion as it authorizes of State revenues or
receipts, although the obligations may not be supported by the State's full
faith and credit.
A 1994 constitutional amendment pledges the State's full faith and
credit and taxing power to meeting certain guarantees under the state's tuition
credit program. That program provides for purchase of tuition credits, for the
benefit of State residents, guaranteed to cover a specified amount when applied
to the cost of higher education tuition. Under the
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<PAGE> 35
amendment, to secure the tuition guarantees the General Assembly shall
appropriate moneys sufficient to offset any deficiency that may occur from time
to time in the trust fund that provides for the guarantees and at any time
necessary to make payment of the full amount of any tuition payment or refund
required by a tuition payment contract. (A 1965 constitutional provision that
authorized, but did not require, State student loan guarantees payable from
available State moneys has never been implemented, apart from a "guarantee fund"
approach funded essentially from program revenues.)
The voters did not approve at the May 1998 election a General Assembly proposed
constitutional amendment authorizing State general obligation debt to pay costs
of facilities for schools. Under one of its provisions, that and other debt
represented by direct obligations of the state would not have been issuable if
future Fiscal Year total debt service on those obligations to be paid from the
GRF or net lottery proceeds exceeded 5% of total preceding Fiscal Year State
expenditures from the GRF and net lottery proceeds.
SCHOOLS
Litigation similar to that in other states, has been pending questioning
the constitutionality of Ohio's system of school funding. The Ohio Supreme Court
concluded in a decision released March 24, 1997 that major aspects of the system
(including basic operating assistance and the loan program described below) are
unconstitutional. It ordered the State to provide for and fund sufficiently a
system complying with the Ohio Constitution, staying its order for a year to
permit time for responsive corrective actions by the General Assembly. In
response to a State motion for reconsideration and clarification, the Court on
April 25 indicated that property taxes may still play a role in, but "can no
longer be the primary means" of, school funding. The Court also confirmed that
contractual repayment provisions of certain debt obligations issued for school
funding will remain valid after the stay terminates.
Local school districts in Ohio receive a major portion (on a statewide
basis, recently approximately 44%) of their operating moneys from State
subsidies, but are dependent on local property taxes, and in 120 districts
income taxes, for significant portions of their budgets. Litigation is pending,
similar to that in other states, questioning the constitutionality of Ohio's
system of school funding. A small number of the State's 612 local school
districts have in any year required special assistance to avoid year-end
deficits. A current program provides for school district cash needs borrowing
directly from commercial lenders, with diversion of State subsidy distributions
to repayment if needed; in FY 1997 under this program 12 districts borrowed a
total of $113 million (including over $90 million by one district), and in FY
1996 borrowings totaling $87.2 million were approved.
As part of its response the General Assembly has increased State funding for
public schools. Its proposal to increase the sales tax from 5% to 6% in May 1998
was defeated.
State appropriations for the current 2998-99 biennium are $11.6 billion or 18.3%
over the previous biennium.
15
<PAGE> 36
Ohio's 943 incorporated cities and villages rely primarily on property and
municipal income taxes for their operations, and, with other local governments,
receive local government support and property tax relief moneys distributed by
the State. For those few municipalities that on occasion have faced significant
financial problems, established procedures provide for a joint State/local
commission to monitor the municipality's fiscal affairs, and for development of
a financial plan to eliminate deficits and cure any defaults. Since inception in
1979, these procedures have been applied to 25 cities and villages, in 18 of
which the fiscal situation has been resolved and the procedures terminated.
The fiscal emergency legislation was recently amended to extend its
potential application to counties (88 in the State) and townships. This
extension is on an "if and as needed" basis, and not aimed at particular
existing fiscal problems of those subdivisions.
At present the State itself does not levy ad valorem taxes on real or
tangible personal property. Those taxes are levied by political subdivisions and
other local taxing districts. The Constitution has since 1934 limited the amount
of the aggregate levy (including a levy for unvoted general obligations) of
property taxes by all overlapping subdivisions, without a vote of the electors
or a municipal charter provision, to 1% of true value in money, and statutes
limit the amount of that aggregate levy to 10 mills per $1 of assessed valuation
(commonly referred to as the "ten-mill limitation"). Voted general obligations
of subdivisions are payable from property taxes unlimited as to amount or rate.
HEDGING STRATEGIES
As discussed in the Prospectus, the Adviser may use a variety of
financial instruments ("Hedging Instruments"), including certain options,
futures contracts (sometimes referred to as "futures") and options on futures
contracts to attempt to hedge the Fund's portfolio. The particular Hedging
Instruments are described in Appendix A to this Statement of Additional
Information. Any income realized from the use of options and futures would be
taxable to shareholders.
Hedging strategies can be broadly categorized as "short hedges" and "long
hedges". A short hedge is a purchase or sale of a Hedging Instrument intended to
partially or fully offset potential declines in the value of one or more
investments held in the Fund's portfolio. Thus, in a short hedge the Fund takes
a position in a Hedging Instrument whose price is expected to move in the
opposite direction of the price of the investment being hedged. For example, the
Fund might purchase a put option on a security to hedge against a potential
decline in the value of that security. If the price of the security declined
below the exercise price of the put, the Fund could exercise the put and thus
limit its loss below the exercise price to the premium paid plus transaction
costs. In the alternative, because the value of the put option can be expected
to increase as the value of the underlying security declines, the Fund might be
able to close out the put option and realize a gain to offset the decline in the
value of the security.
Conversely, a long hedge is a purchase or sale of a Hedging Instrument
intended to partially or fully offset potential increases in the acquisition
cost of one or more investments that the Fund intends to
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acquire. Thus, in a long hedge the Fund takes a position in a Hedging Instrument
whose price is expected to move in the same direction as the price of the
prospective investment being hedged. For example, the Fund might purchase a call
option on a security it intends to purchase to hedge against an increase in the
cost of the security. If the price of the security increased above the exercise
price of the call, the Fund could exercise the call and thus limit its
acquisition cost to the exercise price plus the premium paid and transaction
costs. Alternatively, the Fund might be able to offset the price increase by
closing out an appreciated call option and realizing a gain.
Hedging Instruments on securities generally are used to hedge against price
movements in one or more particular securities positions that the Fund owns or
intends to acquire. Hedging Instruments on debt securities may be used to hedge
either individual securities or broad market sectors.
The use of Hedging Instruments is subject to applicable regulations of the
SEC, the several options and futures exchanges upon which they are traded, and
the Commodity Futures Trading Commission ("CFTC"). In addition, the Fund's
ability to use Hedging Instruments will be limited by tax considerations. See
"Taxes".
In addition to the products, strategies and risks described below, the
Adviser may discover additional opportunities in connection with options,
futures contracts and other hedging techniques. These new opportunities may
become available as the Adviser develops new techniques, as regulatory
authorities broaden the range of permitted transactions and as new options,
futures contracts or other techniques are developed. The Adviser may utilize
these opportunities to the extent that they are consistent with the Fund's
investment objectives and permitted by the Fund's investment limitations and
applicable regulatory authorities. The Fund's Statement of Additional
Information will be supplemented to the extent that new products or techniques
involve materially different risks than those described below or in the
Prospectus.
SPECIAL RISKS OF HEDGING STRATEGIES
The use of Hedging Instruments involves special consideration and risks,
as described below. Risks pertaining to particular Hedging Instruments are
described in the sections that follow.
(1) Successful use of most Hedging Instruments depends upon the
Adviser's ability to predict movements of the overall securities
and interest rate markets, which requires different skills than
predicting changes in the prices of individual securities. While
the Adviser is experienced in the use of Hedging Instruments,
there can be no assurance that any particular hedging strategy
adopted will succeed.
(2) There might be imperfect correlation, or even no correlation,
between price movements of a Hedging Instrument and price
movements of the investments being hedged. For example, if the
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value of a Hedging Instrument used in a short hedge increased by
less than the decline in value of the hedged investment, the
hedge would not be fully successful. Such a lack of correlation
might occur due to factors unrelated to the value of the
investments being hedged, such as speculative or other pressures
on the markets in which Hedging Instruments are traded. The
effectiveness of hedges using Hedging Instruments on indices will
depend on the degree of correlation between price movements in
the index and price movements in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by
wholly or partially offsetting the negative effect of unfavorable
price movements in the investments being hedged. However, hedging
strategies can also reduce opportunity for gain by offsetting the
positive effect of favorable price movements in the hedged
investments. For example, if the Fund entered into a short hedge
because the Adviser projected a decline in the price of a
security in the Fund's portfolio, and the price of that security
increased instead, the gain from that increase might be wholly or
partially offset by a decline in the price of the Hedging
Instrument. Moreover, if the price of the Hedging Instrument
declined by more than the increase in the price of the security,
the Fund could suffer a loss. In either such case, the Fund would
have been in a better position had it not hedged at all.
(4) As described below, the Fund might be required to maintain assets
as "cover", maintain segregated accounts or make margin payments
when it takes positions in Hedging Instruments involving
obligations to third parties (i.e., Hedging Instruments other
than purchased options). If the Fund were unable to close out its
positions in such Hedging Instruments, it might be required to
continue to maintain such assets or accounts or make such
payments until the position expired or matured. These
requirements might impair the Fund's ability to sell a portfolio
security or make an investment at a time when it would otherwise
be favorable to do so, or require that the Fund sell a portfolio
security at a disadvantageous time. The Fund's ability to close
out a position in a Hedging Instrument prior to expiration or
maturity depends on the existence of a liquid secondary market
or, in the absence of such a market, the ability and willingness
of the opposite party to the transaction to enter into a
transaction closing out the position. Therefore, there is no
assurance that any hedging position can be closed out at a time
and price that is favorable to the Fund.
ADDITIONAL INFORMATION ABOUT HEDGING TRANSACTIONS
The Fund will not use Hedging Instruments for speculative purposes or
for purposes of leverage. Transactions using Hedging Instruments, other than
purchased options, expose the Fund to an obligation to another party. The Fund
will comply with SEC guidelines regarding cover for hedging transactions and
will, if the guidelines so require, set aside cash or liquid securities in a
segregated account with its custodian in the prescribed amount.
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Assets held in a segregated account cannot be sold while the position in the
corresponding Hedging Instrument is open, unless they are replaced with similar
assets. As a result, the commitment of a large portion of the Fund's assets to
cover or segregated accounts could impede portfolio management or the Fund's
ability to meet redemption requests or other current obligations.
OPTIONS
The Fund may purchase put and call options, and write (sell) covered call
options and covered put options, on debt securities. The purchase of a call
option serves as a long hedge, and the purchase of a put option serves as a
short hedge.
Writing a covered call option serves as a limited short hedge, because
declines in the value of the hedged investment would be offset to the extent of
the premium received for writing the option. However, if the security
appreciates to a price higher than the exercise price of the call option, it can
be expected that the option will be exercised and the Fund will be obligated to
sell the security at less than its market value. If the covered call option is
an OTC option, the securities or other assets used as cover would be considered
illiquid unless the OTC options are sold to qualified dealers who agree that the
Fund may repurchase any OTC option it writes at a maximum price to be calculated
by a formula set forth in the option agreement. The cover for an OTC option
written subject to this procedure would be considered illiquid only to the
extent that the maximum repurchase price under the formula exceeds the intrinsic
value of the option.
Writing a put option serves as a limited long hedge because increases in the
value of a security the Fund intends to purchase would be offset to the extent
of the premium received for writing the option. However, if the security
depreciates to a price lower than the exercise price of the put option, it can
be expected that the option will be exercised and the Fund will be obligated to
purchase the security at more than its market value.
The value of an option position will reflect, among other things, the
current market value of the underlying investment, the time remaining until
expiration, the relationship of the exercise price to the market price of the
underlying investment, the historical price volatility of the underlying
investment and general market conditions. Options normally have expiration dates
of up to nine months. Options purchased by the Fund that expire unexercised have
no value.
The Fund may effectively terminate its right or obligation under an option
by entering into a closing transaction. For example, the Fund may terminate its
obligation under a call or put option that it had written by purchasing an
identical call or put option; this is known as a closing purchase transaction.
Conversely, the Fund may terminate a position in a put or call option it had
purchased by writing an identical put or call option; this is known as a closing
sale transaction. Closing transactions permit the Fund to realize profits or
limit losses on an option position prior to its exercise or expiration.
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The Fund may purchase or write both exchange-traded and OTC options.
Exchange markets for options on debt securities exist but are relatively new,
and these instruments are primarily traded on the OTC market. Exchange-traded
options in the United States are issued by a clearing organization affiliated
with the exchange on which the option is listed which, in effect, guarantees
completion of every exchange-traded option transaction. In contrast, OTC options
are contracts between the Fund and its contra-party (usually a securities dealer
or a bank) with no clearing organization guarantee. Thus, when the Fund
purchases an OTC option, it relies on the party from whom it purchased the
option or to whom it has written the option (the contra-party) to make or take
delivery of the underlying investment upon exercise of the option. Failure by
the contra-party to do so would result in the loss of any premium paid by the
Fund as well as the loss of any expected benefit of the transaction.
The Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. The Fund
intends to purchase or write only those exchange-traded options for which there
appears to be a liquid secondary market. However, there can be no assurance that
such a market will exist at any particular time. Closing transactions can be
made for OTC options only by negotiating directly with the contra-party, or by a
transaction in the secondary market if any such market exists. Although the Fund
will enter into OTC options only with contra-parties that are expected to be
capable of entering into closing transactions with the Fund, there is no
assurance that the Fund will in fact be able to close out an OTC option position
at a favorable price prior to expiration. In the event of insolvency of the
contra-party, the Fund might be unable to close out an OTC option position at
any time prior to its expiration.
If the Fund were unable to effect a closing transaction for an option it had
purchased, it would have to exercise the option to realize any profit and would
be unable to limit its losses prior to expiration. The inability to enter into a
closing purchase transaction for a covered call option written by the Fund could
cause material losses because the Fund would be unable to sell the investment
used as cover for the written option until the option expires or is exercised.
The inability to enter into a closing purchase transaction for a put option
written by the Fund could also cause material losses because the price of the
security underlying the option could continue to decline.
As options on indexes of municipal and nonmunicipal debt securities
become available, the Fund may purchase and write put and call options on such
indexes in much the same manner as the more traditional options discussed above,
except that index options may serve as a hedge against overall fluctuations in
the debt securities markets (or market sectors) rather than anticipated
increases or decreases in the value of a particular security.
Because of the limited availability of options on municipal securities,
the Adviser may deem it in the best interest of the Fund to engage in
transactions using exchange-traded options on U.S. government securities.
Options on U.S. Treasury bonds, bills and notes are currently so traded;
additional contracts are likely to be developed. In the opinion
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of the Adviser, there is a high degree of correlation between the prices and
interest rates of U.S. government securities and those of municipal securities.
Therefore, the Adviser believes that options on U.S. government securities could
serve as an effective proxy for options on municipal securities. Therefore, the
Fund's options activities may also include options on U.S. government securities
traded on national securities exchanges.
GUIDELINES FOR OPTIONS
In view of the risks involved in using the options strategies described
above, the Trust's Board of Trustees has determined that the Fund may purchase a
put or call option, including any straddles or spreads, only if the value of its
premium, when aggregated with the premiums on all other options held by the
Fund, does not exceed 5% of the Fund's total assets. This guideline may be
modified by the board without shareholder vote. Adoption of this guideline
cannot be guaranteed to limit the percentage of the Fund's assets at risk to 5%.
FUTURES
The Fund may purchase and sell municipal bond index futures, municipal debt
futures and other interest rate futures contracts. The Fund may also purchase
put and call options and write put and covered call options on futures in which
it is allowed to invest. The purchase of futures or call options thereon can
serve as a long hedge, and the sale of futures or the purchase of put options
thereon can serve as a short hedge. Writing covered call options on futures
contracts can serve as a limited short hedge, using a strategy similar to that
used for writing covered call options on securities or indices. Similarly,
writing put options on futures contracts can serve as a limited long hedge.
Interest rate futures contracts also can be used to manage the average
duration of the Fund's portfolio. If the Adviser wishes to shorten the average
duration of the Fund, the Fund may sell a futures contract or a call option
thereon, or purchase a put option on that futures contract. If the Adviser
wishes to lengthen the average duration of the Fund, the Fund may buy a futures
contract or a call option thereon, or sell a put option thereon.
The Fund may enter into interest rate futures contracts as a hedge against
or to minimize adverse principal fluctuations or as an efficient means of
regulating the Fund's exposure to the municipal bond market. The Fund could sell
interest rate futures as an offset against the effect of expected increases in
interest rates and purchase such futures as an offset against the effect of
expected declines in interest rates.
It is possible that the Fund's hedging activities will occur primarily
through the use of municipal bond index futures contracts because the uniqueness
of that index contract should better correlate with the Fund's portfolio and
thereby be more effective. However, it is also possible that it may be deemed in
the best interest of shareholders to use futures
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contracts on U.S. Treasury bonds, bills or notes, and the Fund reserves the
right to use such futures contracts at any time. Use of these futures could
occur, as an example, when both the U.S. Treasury bond futures contract and
municipal bond index futures contract are correlating well with municipal bond
prices, but the U.S. Treasury bond futures contract is trading at a more
advantageous price making the hedge less expensive with the U.S. Treasury bond
futures contract than would be obtained with the municipal bond index futures
contract.
No price is paid upon entering into a futures contract. Instead, at the
inception of a futures contract the Fund is required to deposit an amount
generally equal to 10% or less of the contract value. Margin must also be
deposited when writing a call or put option on a futures contract, in accordance
with applicable exchange rules. Unlike margin in securities transactions,
initial margin on futures contracts does not represent a borrowing, but rather
is in the nature of a performance bond or good-faith deposit that is returned to
the Fund at the termination of the transaction if all contractual obligations
have been satisfied. Under certain circumstances, such as periods of high
volatility, the Fund may be required by an exchange to increase the level of its
initial margin payment, and initial margin requirements might be increased
generally in the future by regulatory action.
Subsequent "variation margin" payments are made to and from the futures
commission merchant daily as the value of the futures position varies, a process
known as "marking to market". Variation margin does not involve borrowing, but
rather represents a daily settlement of the Fund's obligations to or from a
futures commission merchant. When the Fund purchases an option on a future, the
premium paid plus transaction costs is all that is at risk. In contrast, when
the Fund purchases or sells a futures contract or writes a call or put option
thereon, it is subject to daily variation margin calls that could be substantial
in the event of adverse price movements. If the Fund had insufficient cash to
meet daily variation margin requirements, it might need to sell securities at a
time when such sales are disadvantageous.
Purchasers and sellers of futures contracts and options on futures can
enter into offsetting closing transactions, similar to closing transactions on
options, by selling or purchasing, respectively, an instrument identical to the
instrument purchased or sold. Positions in futures and options on futures
contracts may be closed only on an exchange or board of trade that provides a
secondary market. The Fund intends to enter into futures transactions and
options thereon only on exchanges or boards of trade where there appears to be a
liquid secondary market. However, there can be no assurance that such a market
will exist for a particular contract at a particular time.
Under the circumstances, futures exchanges may establish daily limits on the
amount that the price of a futures contract or an option on a futures contract
can vary from the previous day's settlement price; once that limit is reached,
no trades may be made that day at a price beyond the limit. Daily price limits
do not limit potential losses because prices could move to the daily limit for
several consecutive days with little or no trading, thereby preventing
liquidation of unfavorable positions.
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If the Fund were unable to liquidate a futures contract or an option on
a futures contract position due to the absence of a liquid secondary market or
the imposition of price limits, it could incur substantial losses. The Fund
would continue to be subject to market risk with respect to the position. In
addition, except in the case of purchased options, the Fund would continue to be
required to make daily variation margin payments and might be required to make
daily variation margin payments and might be required to maintain cash or liquid
assets in an account.
Certain characteristics of the futures market might increase the risk
that movements in the prices of futures contracts or an option on a futures
contract might not correlate perfectly with movements in the prices of the
investments being hedged. For example, all participants in the futures markets
are subject to margin deposit and maintenance requirements and might be
compelled to liquidate futures or related options positions whose prices are
moving unfavorably to avoid being subject to further calls. These liquidations
could increase price volatility of the instruments and distort the normal price
relationship between the futures or options and the investments being hedged.
Also, because initial margin deposit requirements in the futures market are less
onerous than margin requirements in the securities markets, there might be
increased participation by speculators in the futures markets. This
participation also might cause temporary price distortions. In addition,
activities of large traders in both the futures and securities markets involving
arbitrage, "program trading" and other investment strategies might result in
temporary price distortions.
GUIDELINES FOR FUTURES AND RELATED OPTIONS
In view of the risks involved in using the futures and options
strategies that are described above, the Trust's Board of Trustees has
determined that the Fund will not purchase or sell futures contracts or related
options if, immediately thereafter, the sum of the amount of initial margin
deposits on the Fund's existing futures positions and initial margin deposits
and premiums paid for related options would exceed 5% of the market value of the
Fund's total assets. This guideline may be modified by the board without
shareholder vote. Adoption of this guideline cannot be guaranteed to limit the
percentage of the Fund's assets at risk to 5%.
In addition, the Fund has represented to the CFTC that it will use
futures contracts and options thereon solely in bona fide hedging transactions
or under other circumstances permitted by the CFTC.
MUNICIPAL LEASES
As described in the Prospectus, the Fund may invest in Municipal
Obligations that constitute participations in a lease obligation or installment
purchase contract obligation (hereafter collectively called "municipal leases")
of a municipal authority or entity. Although municipal leases do not constitute
general obligations of the municipality for which the municipality's taxing
power is pledged, a lease obligation is
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ordinarily backed by the municipality's covenant to budget for, appropriate and
make the payments due under the lease obligation. However, certain municipal
leases contain "nonappropriation" clauses which provide that the municipality
has no obligation to make lease or installment purchase payments in future years
unless money is appropriated for such purpose on a yearly basis. Although
nonappropriation municipal leases are secured by the leased property,
disposition of the property in the event of foreclosure might prove difficult.
The Fund will seek to minimize the special risks associated with such securities
by not investing more than 10% of its assets in municipal leases that contain
nonappropriation clauses. In evaluating investments in municipal leases with
nonappropriation clauses, the Adviser will consider such factors as whether (1)
the nature of the leased equipment or property is such that its ownership or use
is essential to a governmental function of the municipality, (2) the lease
payments will commence amortization of principal at an early date resulting in
an average life of seven years or less for the lease obligation, (3) appropriate
covenants will be obtained from the municipal obligor prohibiting the
substitution or purchase of similar equipment if lease payments are not
appropriated, (4) the lease obligor has maintained good market acceptability in
the past,(5) the investment is of a size that will be attractive to
institutional investors, and (6) the underlying leased equipment has elements of
portability and/or use that enhance its marketability in the event foreclosure
on the underlying equipment were ever required. Municipal leases provide a
premium interest rate which along with regular amortization of the principal may
make them attractive for a portion of the assets of the Fund. With respect to
evaluating the credit quality of a municipal lease the Adviser will consider:
whether a lease can be canceled; the level of assurance that leased assets can
be sold; the strength of the lessee's general credit; the potential for an event
of nonappropriation; and the legal recourse in the event of a failure to
appropriate.
The Trust's Board of Trustees has established the following guidelines for
determining the liquidity of municipal leases in the Fund's portfolio, and
subject to review by the Board, has delegated that responsibility to the
Adviser. When evaluating the liquidity of Municipal Leases, the Adviser,
pursuant to procedures established by the Board, considers all relevant factors,
including frequency of trading, availability of quotations, the number of
dealers and their willingness to make markets, the nature of trading activity
and the assurance that liquidity will be maintained.
PURCHASE OF SHARES
The Fund reserves the right to impose a charge of $15 for any purchase check
returned to the Fund as uncollectible and to collect such fee by redeeming
shares of the Fund from such shareholder's account.
The Fund reserves the right to limit the amount of any purchase and to
reject any purchase order. Shares of the Fund are offered continuously; however,
the offering of shares of the Fund may be suspended at any time and resumed at
any time thereafter. The Fund intends to waive the initial and subsequent
purchase minimums for employees of McDonald & Company
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Securities, Inc. which through its Gradison Division acts as the Fund's Adviser
and Distributor.
REDEMPTION OF SHARES
The Fund may suspend the right of redemption or may delay payment (a)
during any period when the New York Stock Exchange is closed other than for
customary weekend and holiday closings, (b) when trading in markets normally
utilized by the Fund is restricted, or an emergency exists (determined in
accordance with the rules and regulations of the Securities and Exchange
Commission) so that disposal of the securities held in the Fund or determination
of the net asset value of the Fund is not reasonably practicable, or (c) for
such other periods as the Securities and Exchange Commission by order may permit
for the protection of the Fund's shareholders.
The Fund transmits redemption proceeds only to shareholders names and
addresses on its records (or which it has otherwise verifies), provides written
confirmation of all transactions initiated by telephone (either immediately or
by monthly statement, depending on the circumstances), and requires
identification from individuals picking up checks at its office.
DAILY DISTRIBUTIONS - ACCOUNTING PRINCIPLES
The distribution declared by the Fund each day will normally be in an
amount equal to that day's proportionate share of the estimated net investment
income for the applicable monthly period, plus, for certain periods,
undistributed amounts of such income from prior periods, minus, for certain
periods, amounts to provide a reserve of undistributed income which could be
paid in subsequent months, divided by the number of days in that period. The
amount of the daily distribution will generally differ from the Fund's daily
book net income computed in accordance with generally accepted accounting
principles. Estimated net investment income for any period will be based on the
Adviser's projections of accrued interest income during such period less
projected expenses of the Fund to be accrued during such period. This procedure
may enable the Fund to avoid fluctuations in the total daily distributions from
period to period and to minimize the possibility of making distributions from
paid-in capital or other capital sources. The reserve may increase the net asset
value of the Fund's shares, thereby causing shareholders to realize higher
capital gains or lower capital losses upon redemption. On occasion, the Fund may
make distributions which constitute the return of capital to shareholders.
For example, if the Adviser estimates that net investment income for a
31-day month will be $.085 per share, and if the Fund has a reserve of $.01 per
share of undistributed income, the daily distribution might be initially
established at $.09/31 per share for each day during such month, leaving a
reserve of $.005 per share available for distributions in subsequent months if
such estimates are accurate. The Adviser may revise its estimates of the monthly
amounts of such income, in which case the subsequent daily distributions during
such month may be revised accordingly.
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TAXES
FEDERAL
The Fund has qualified and intends to qualify in the future for
treatment as a regulated investment company ("RIC") under the Internal Revenue
Code of 1986, as amended ("Code") and to qualify to pay "exempt-interest"
dividends. By so qualifying, the Fund will be relieved of Federal income tax on
that part of its investment company taxable income (consisting generally of any
taxable net investment income and net short-term capital gain) and any net
capital gain (the excess of net long-term capital gain over net short-term
capital loss) distributed to Fund shareholders. In order to continue to qualify
for treatment as a RIC, the Fund must distribute to its shareholders for each
taxable year at least 90% of the sum of its investment company taxable income
plus its net interest income excludable from gross income under Section 103(a)
of the Code, and must meet several additional requirements. Among these
requirements are the following: (1) the Fund must derive at least 90% of its
gross income each taxable year from dividends, interest, payments with respect
to securities loans, and gains from the sale or other disposition of securities,
or other income (including gains from options or futures) derived with respect
to its business of investing in securities ("Income Requirement"); (2) at the
close of each quarter of the Fund's taxable year, (a) at least 50% of the value
of its total assets must be represented by cash and cash items, U.S. government
securities, securities of other RICs, and other securities, with these other
securities limited, in respect of any one issuer, to an amount that does not
exceed 5% of the value of the Fund's total assets, and (b) not more than 25% of
the value of its total assets may be invested in securities (other than U.S.
government securities or the securities of other RICs) of any one issuer.
Dividends paid by the Fund will qualify as exempt-interest dividends,
and thus will be excludable from gross income by its shareholders, if the Fund
satisfies the additional requirement that, at the close of each quarter of its
taxable year, at least 50% of the value of its total assets consists of
securities the interest on which is excludable from gross income under Section
103(a); the Fund intends to continue to satisfy this requirement. The aggregate
dividends excludable from the shareholders' gross income may not exceed the
Fund's net tax-exempt income.
If Fund shares are sold at a loss after being held for six months or
less, the loss will be disallowed to the extent of any exempt-interest dividends
received on those shares and any allowable loss will be treated as long-term
capital loss to the extent of any capital gain distributions received on those
shares. Distributions of the portion of the gain on bonds purchased at a
discount after April 30, 1993, are taxable for Federal income tax purposes as
dividends.
Interest on indebtedness incurred or continued to purchase or carry Fund
shares will not be deductible for Federal income tax purposes to the extent that
the Fund distributes exempt-interest dividends; purchases of Fund shares may be
deemed to have been made with borrowed funds even though
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those funds are not directly traceable to the purchase of those shares.
Exempt-interest dividends paid by the Fund are includable in your tax base for
determining the taxability of social security and railroad retirement benefits.
Shares of the Fund may not be an appropriate investment for "substantial users"
of certain facilities financed by private activity bonds in which the Fund may
invest because interest on such bonds will not be exempt from Federal income tax
for such users and their related persons.
Tax-exempt interest attributable to certain private activity bonds
(including, in the case of a RIC, such as the Fund, receiving interest on such
bonds, a proportionate part of the exempt-interest dividends paid by that RIC)
is an item of tax preference for purposes of the alternative minimum tax.
Exempt-interest dividends received by a corporate shareholder also may be
indirectly subject to that tax without regard to whether the Fund's tax-exempt
interest was attributable to such bonds.
The Fund may acquire zero coupon municipal securities, which are
securities issued with original issue discount. As a holder of those securities,
the Fund must take into account a portion of the original issue discount during
the taxable year, even if it receives no corresponding payment on the securities
during the year. Because the Fund annually must distribute substantially all of
its tax-exempt income, including any original issue discount, in order to
qualify for treatment as a RIC, the Fund may be required in some years to
distribute as a dividend an amount that is greater than the total cash it
actually receives. Those distributions will be made from the Fund's other cash
assets or from proceeds of sales of portfolio securities. The Fund may realize
capital gains or losses from those sales, which would increase or decrease its
investment company taxable income and/or net capital gain.
The use of hedging strategies, such as writing (selling) and purchasing
options and futures contracts, involves complex rules that will determine for
income tax purposes the amount, character, and timing of recognition of the
gains and losses the Fund realizes in connection therewith. Gains from options
and futures derived by the Fund with respect to its business of investing in
securities will qualify as permissible income under the Income Requirement.
OHIO STATE AND LOCAL TAX MATTERS
The following reflects Ohio law as of the date of this Statement of
Additional Information.
Individual shareholders who are subject to the Ohio personal income tax,
Ohio school district income tax or Ohio municipal income tax will not be subject
to such taxes on distributions received from the Fund to the extent such
distributions consist of interest on or gain from the sale of debt obligations
issued by or on behalf of the State of Ohio and its political subdivisions,
agencies, and instrumentalities. ("Ohio Obligations") provided that the Fund
continues to qualify as a regulated investment company for federal income tax
purposes and that at all times at least 50% of the value of the total assets of
the Fund consists of Ohio Obligations, or similar obligations of other states or
their subdivisions.
27
<PAGE> 48
It is assumed for purposes of this discussion of Ohio taxation that these
requirements are satisfied. Gain recognized by such individual shareholders on
the sale of shares of the Fund will be subject to the Ohio personal income tax
and Ohio school district income tax; such gain may be subjected to municipal
income tax only by those Ohio municipalities that are authorized by State law to
tax intangible income.
Corporate shareholders that are subject to the Ohio corporation
franchise tax will not be required to include distributions received from the
Fund in their net income base for purposes of calculating their Ohio corporation
franchise tax liability to the extent that such distributions are either
excluded from gross income for federal income tax purposes or consist of
interest on or gain from the sale of Ohio Obligations. However, corporate
shareholders will be required to include gain recognized on the sale of shares
of the Fund in their net income base for purposes of calculating their liability
for such tax. In addition, shares of the Fund will be includable in the
computation of net worth for purposes of such tax. Corporate shareholders that
are subject to Ohio municipal income tax will not be subject to such tax on
distributions received from the Fund to the extent such distributions consist of
interest on or gain from the sale of Ohio Obligations but may be subject to such
tax on gain from the sale of shares of the Fund in those three Ohio
municipalities that are authorized by State law to tax intangible income.
Distributions from the Fund that consist of interest on obligations of
the United States or the government of Puerto Rico, the Virgin Islands or Guam
or their authorities or instrumentalities are exempt from Ohio personal income
tax, Ohio school district income taxes and Ohio municipal income taxes and are
excluded from the net income base of the Ohio corporation franchise tax to the
same extent that such interest would be so exempt or excluded if the obligations
were held directly by the shareholders.
The Fund is not subject to the Ohio personal income tax, Ohio school
district income taxes, the Ohio corporation franchise tax, or the Ohio dealers
in intangibles tax, provided that, with respect to the Ohio corporation
franchise tax and the Ohio dealers in intangibles tax, the Fund satisfies an
annual reporting requirement imposed by the Ohio Revised Code.
NET ASSET VALUE
The net asset value of the Fund is calculated once daily Monday through
Friday except on days on which changes in the value of the Fund's portfolio
securities will not materially affect the current net asset value of the Fund's
shares and except on the following holidays: New Year's Day, Presidents Day,
Good Friday, Memorial Day Observed, Independence Day, Labor Day, Thanksgiving
Day, Christmas Day, Columbus Day, Martin Luther King Jr. Day, and Veteran's Day.
The assets and liabilities of the Fund are determined in accordance with
generally accepted accounting principles and the applicable rules and
regulations of the Securities and Exchange Commission.
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<PAGE> 49
PORTFOLIO TRANSACTIONS
The Adviser is responsible for making the Fund's portfolio decisions,
including allocation of the Fund's brokerage business and negotiation of
brokerage commissions, subject to policies established by the Board of Trustees.
The Fund places orders for transactions with a number of brokers and dealers.
Most of the Fund's purchases and sales of portfolio securities are principal
transactions with securities dealers and underwriters. Since the Fund's
inception it has incurred no brokerage commissions. Purchases of securities from
underwriters, however, include a concession paid by the issuer to the
underwriter and purchases or sales of securities from/to a dealer include a
spread between the bid and ask prices.
In purchasing and selling portfolio securities, it is the policy of the
Fund to select brokers and dealers so as to obtain the most favorable net
results, taking into account various factors, including the price of the
security, the commission rate, the size of the transaction, the difficulty of
execution and other services offered by brokers and dealers which are of benefit
to the Fund. The Adviser selects brokers and dealers to execute transactions on
the basis of its judgment of their professional capability to provide the
service at reasonably competitive rates. The Adviser's determination of what
constitutes reasonably competitive rates is based upon its professional judgment
and knowledge as to rates paid and charged for similar transactions throughout
the securities industry. The Adviser may consider sales by brokers or dealers of
shares of the Fund when selecting brokers or dealers to execute portfolio
transactions as long as the most favorable net results are obtained.
The Adviser may receive commissions from the Fund for effecting
transactions on an agency basis only in accordance with procedures adopted by
the Board of Trustees. Any procedures adopted by the Trustees will incorporate
the standard contained in Rule 17e-1 under the Investment Company Act of 1940
that the commissions paid must be "reasonable and fair compared to the
commission, fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar securities
during a comparable period of time." Pursuant to Rule 17e-1, the Board of
Trustees must conduct compliance reviews at least quarterly and maintain records
in connection with such reviews. The Adviser has assured the Fund that in all
transactions placed with the Adviser, the Fund will be charged a commission that
is at least as favorable as the rate the Adviser charges to its other customers
in similar transactions. No commission charged to the Fund by the Adviser or any
broker affiliated with the Adviser will include compensation for research
services provided by the Adviser or any such affiliated broker. From the
inception of the Fund to the date of this Statement of Additional Information,
the Adviser has not received any commissions from the Fund for executing
transactions in portfolio securities.
Brokers who provide supplemental investment research to the Adviser may
receive orders for agency transactions in portfolio securities of the Fund. Such
supplemental research services ordinarily consist of assessments and analyses of
the business or prospects of a company, industry, or economic sector.
Information so received is in addition to and not in lieu of the services
required to be performed by the Adviser
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<PAGE> 50
under the Investment Advisory Agreement with the Fund. If in the judgment of the
Adviser the commission is reasonable in relation to the brokerage and research
services provided, the Adviser is authorized to pay brokerage commissions in
excess of commissions another broker would have received for effecting the same
transaction, subject to the review of the Board of Trustees. Not all such
research services may be used by the Adviser in connection with managing the
Fund. The expenses of the Adviser will not necessarily be reduced as a result of
the receipt of such supplemental information, and the Adviser may use such
information in servicing its other accounts.
Because of its affiliation with the Adviser, the Fund is prohibited from
engaging in certain transactions involving the Adviser except in compliance with
the provisions of the Investment Company Act of 1940, as amended, and the rules
and regulations thereunder and subject to the possible receipt of exemptive
relief from the Securities and Exchange Commission. Accordingly, the Fund does
not purchase or sell portfolio securities from or to the Adviser in any
transaction in which the Adviser acts as principal. Pursuant to regulations of
the Securities and Exchange Commission, the Fund purchases securities in
underwritings in which the Adviser participates as an underwriter.
The Adviser also serves as the investment adviser to Gradison-McDonald
Cash Reserves Trust ("GMCR"), (a U.S. Government "money market" investment
company), Gradison Custodian Trust ("GCT") (U. S. Government income investment
company, and Gradison Growth Trust ("GGT") (equity investment company) and
furnishes investment advice to other clients. The assets of the mutual funds
managed by the Gradison Division totaled approximately $2.5 billion as of
September 30, 1997. The Adviser, including its predecessor, Gradison & Company,
Incorporated, has served as investment adviser to investment companies since
1976 Investment decisions for the Fund are made independently from those of the
other investment companies for which it acts as investment adviser and other
clients of the Adviser. Purchases and sales of particular securities may be
effected simultaneously for such entities and clients. In such instances, the
transactions will be allocated as to price and amount in a manner the Adviser
considers equitable to each of the affected entities or clients, which could
have a detrimental effect upon the price or amount of the securities purchased
or sold for the Fund. On the other hand, in some cases the ability of the Fund
to participate in volume transactions may produce better executions for the
Fund. It is the opinion of the Board of Trustees that the benefits available to
the Fund from retaining the Adviser outweigh any disadvantages that may arise
from exposure to simultaneous transactions.
For the fiscal years ended June 30, 1998, and 1997 the Fund's respective
portfolio turnover rates were 45% and 134%. The lower portfolio turnover rate
for the year ending June 30, 1998 was due to the portfolio manager refraining
from selling securities which would have resulted in the distribution of taxable
gains to shareholders and the asset growth of the Fund which reduced the need to
sell securities to purchase other securities or meet redemptions.
30
<PAGE> 51
INVESTMENT ADVISER
The Adviser manages the investment and reinvestment of the assets of the
Fund in accordance with the Fund's investment objective, policies and
restrictions, subject to the general supervision and control of the Board of
Trustees and pursuant to the terms of the Investment Advisory Agreement
("Agreement") between the Trust and Adviser. The Adviser and its officers and
employees, from time to time, enter into transactions with various banks,
including the Fund's custodian bank. It is the Adviser's opinion that the terms
and conditions of those transactions are not influenced by existing or potential
custodial or other Trust relationships.
The Adviser provides to the Trust at its own expense the executive
officers who are necessary for the management and operations of the Fund.
The Adviser is a securities broker and is the largest investment banking
and securities brokerage firm headquartered in Ohio. The Adviser manages
investment advisory accounts, including mutual funds, with assets in excess of
$4 billion as of September 30, 1998.
ADVISORY AGREEMENT
The Agreement provides that the Adviser will manage the investments of
the Fund, subject to review by the Board of Trustees. The Adviser also bears the
cost of salaries and related expenses of executive officers of the Trust who are
necessary for the management and operation of the Fund and compensates the
Trustees who are affiliated with the Adviser. As compensation for its services
under the Agreement, the Adviser receives from the Fund a monthly fee based upon
the average value of the daily net assets for the month at an annual rate of .5
of 1% of the Fund's assets. For the fiscal years ended June 30, 1996, June 30,
1997, and June 30, 1998, the Adviser received respectively $356,463, $377,638,
and $432,146 as investment advisory fees.
The Agreement further provides that in the absence of willful
misfeasance, bad faith or gross negligence in the performance of its duties
thereunder, or reckless disregard of its obligations thereunder, the Adviser is
not liable to the Fund or any of its shareholders for any act or omission by the
Adviser. The Agreement does not restrict the Adviser from acting as an
investment manager or adviser for others.
The Agreement grants to the Trust the right to use the names "Gradison"
and "McDonald" as a part of its name and the name(s) of its Fund(s), without
charge, subject to withdrawal of such right by the Adviser upon not less than 30
days' written notice to the Trust and subject to the automatic termination of
such right within 30 days after the termination of the Agreement for any reason.
The Agreement does not impair the right of the Adviser to use the name Gradison
or McDonald in the name and the name(s) of its Fund(s) without charge in
connection with any other business enterprise with which it is or may become
associated.
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<PAGE> 52
The Agreement continues in effect from year to year if such continuance
is specifically approved at least annually by the vote of the holders of a
majority of the outstanding voting securities of the Fund or by the vote of a
majority of the Trust's Board of Trustees, and in either event by the vote cast
in person of a majority of the Trustees who are not "interested persons" of any
party to the Agreement (as defined in the Act).
The Agreement may be terminated at any time without penalty upon 60
days' written notice by (i) the Board of Trustees, (ii) the vote of the holders
of a majority of the outstanding voting securities of the Fund, or (iii) the
Adviser. The Agreement will terminate automatically in the event of its
assignment by the Adviser. The Agreement may be amended at any time by the
mutual consent of the parties thereto, provided that such consent on the part of
the Fund shall have been approved by the vote of the holders of a majority of
its outstanding voting securities and by the vote of a majority of the Board of
Trustees, including the vote cast in person by a majority of the Trustees who
are not "interested persons" of any party to the Agreement (as defined in the
Act).
MASTER DISTRIBUTION AGREEMENT
Under the terms of the Master Distribution Agreement, BISYS Fund
Services. Ltd. (the "Distributor"), as agent of the Fund, arranges for the sale
of shares of the Fund. For the fiscal years ended June 30, 1996, 1997 and 1998,
the former distributor, McDonald & Company Securities, Inc., received
underwriting commissions in the respective amounts of $122,266, $85,767, and $0,
all of which was retained by McDonald. On July 7, 1997, the sales charge was
eliminated. The Distributor is not obligated to sell any certain number of
shares of the Fund. The Distributor may enter into dealer's agreements with
other dealers, pursuant to which such dealers will also sell shares of the Fund.
The Fund has agreed to indemnify the Distributor to the extent permitted by
applicable law against certain liabilities under the 1933 Act. The Agreement
also provides for the payment of Distribution Service fees in the annual amount
of .25% of the Fund's average daily net assets.
DISTRIBUTION SERVICE PLAN
The Fund has in effect a Distribution Service Plan (the "Plan") under
Rule 12b-1 of the Investment Company Act of 1940. Rule 12b-1 permits an
investment company to finance, directly or indirectly, activities primarily
intended to result in the sale of its shares only if it does so in accordance
with the provisions of such Rule. The purpose of the Plan is to increase sales
of shares of the Fund to enable it to acquire and retain a sufficient level of
assets to enable it to operate at an efficient level. Higher levels of assets
tend to result in operating efficiencies with respect to the Fund's fixed costs
and portfolio management.
The Plan permits the Fund to incur expenses related to the distribution
of its shares, but only as specifically contemplated by the Plan. Under the
Plan, the Fund may pay service fees up to an amount that does not exceed an
annual rate of .25% of its average daily net assets.
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<PAGE> 53
Such service fees that may be incurred by the Fund under the Plan within the
limitation described above are limited to payments to broker-dealers (including
the Distributor) or other persons for certain services provided to Fund
shareholders (See the Prospectus for further information). For the fiscal years
ended June 30, 1996, 1997, and 1998, the Fund paid service fees to the prior
Distributor in the respective amounts of $178,232, $188,819. and $ $216,073. The
benefits resulting from the Plan include a more stable or increasing level of
assets which, in turn, can limit or reduce the expenses of the Fund on a per
share basis and facilitates portfolio management, among other benefits.
The Plan also specifically authorizes the payment of operational
expenses incurred by the Fund to the extent that such payments might be
considered to be primarily intended to result in the sale of shares of the Fund.
It further specifically authorizes the payment of advisory fees pursuant to the
Advisory Agreement to the extent that the Fund might be deemed to be indirectly
financing the distribution activities through payment of advisory fees. The
Board of Trustees does not believe that the payment of such operational expenses
by the Fund or payment of the advisory fee constitute the direct or indirect
financing of activities primarily intended to result in the sale of shares of
the Fund. Thus, although such payments are authorized by the Plan as a
protective measure, they are not restricted by the .25% limitation included in
the Plan.
In approving the Plan, the Board of Trustees concluded that there was a
reasonable likelihood that the Plan would benefit the Fund and its shareholders.
The Plan will be submitted for approval by the Fund's shareholders at the Fund's
initial shareholders' meeting, if and when such meeting is held. The Plan
(together with any agreements relating to implementation of the Plan) continues
in effect for a period of more than one year only so long as such continuance is
specifically approved at least annually by the vote of a majority of the Board
of Trustees, including the vote of a majority of the Independent Trustees, cast
in person at a meeting called for such purpose. The Plan may not be amended to
materially increase the amount of distribution expenses incurred by the Fund
without the approval of a majority of the Independent Trustees by votes cast in
person at a meeting called for the purpose of voting on such amendment and
without the approval of a majority of the outstanding voting securities of the
Fund. The Plan may be terminated at any time by a vote of a majority of the
Independent Trustees or by a vote of the majority of the outstanding voting
securities of the Fund. Any agreement implementing the Plan may be terminated at
any time, without the payment of any penalty, by a vote of a majority of the
Independent Trustees or by a vote of a majority of the outstanding voting
securities of the Fund, on not more than sixty days' written notice to the other
party to the agreement, and any related agreement will terminate automatically
in the event of its assignment. The Plan requires that the Board of Trustees
receive at least quarterly written reports as to the amounts expended during
each quarter pursuant to the Plan and the purposes for which such amounts were
expended. While the Plan is in effect, the selection and nomination of those
Trustees who are not "interested persons" (as defined in the Investment Company
Act of 1940) of the Trust shall be committed to the discretion of the
disinterested Trustees then in office.
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<PAGE> 54
TRANSFER AGENT AND ACCOUNTING SERVICES AGREEMENT
Pursuant to the Transfer Agent and Accounting Services Agreement,
Gradison provides transfer agent, dividend disbursing, and accounting services
for the Fund. Gradison responds to inquiries from shareholders, processes
purchase and redemption requests, maintains shareholder account records and
provides statements and confirmations to shareholders and maintains the Fund's
books and accounting records. For the fiscal years ended June 30, 1996, 1997 and
1998, the Fund paid Gradison respectively, , $90,667, $87,323, and $85,821 for
transfer agent, dividend disbursing, and accounting services.
OTHER COMPENSATION PAID/REIMBURSEMENT MADE TO THE ADVISER
In addition to the advisory fee, transfer agent fee, and distribution
fees paid by the Fund to the Adviser, For the fiscal years ended June 30, 1996,
1997 and 1998, the Fund reimbursed the Adviser, on a cost basis, for costs
allocable to services performed by the Adviser's employees, including legal
services, including salaries and office space, the amounts of $3,402, $3,512,
and $ $4,163.
TRUSTEES AND OFFICERS OF THE TRUST
The Trustees and officers of the Trust, together with information as to
their principal occupations during the past five years and positions currently
held with GMCR, GGT, GCT, Gradison and McDonald, are listed below. All principal
occupations have been held for at least five years unless otherwise indicated..
*DONALD E. WESTON, 580 Walnut Street, Cincinnati, Ohio. Trustee and
Chairman of the Board; Chairman of Gradison and Director of McDonald &
Company Investments, Inc.; Director of Cincinnati Milacron Commercial Corp.
(financing arm of capital goods manufacturer); Trustee and Chairman of the
Board of GMCR, GCT, and GGT.
DANIEL J. CASTELLINI, 312 Walnut Street, Cincinnati, Ohio. Trustee; Senior
Vice President/Finance and Administration and Chief Financial Officer of
the E.W. Scripps Company (communications); Trustee of GMCR, GCT, and GGT.
THEODORE H. EMMERICH, 1201 Edgecliff Place, Cincinnati, Ohio 45206.
Trustee. Retired; Until 1986, managing partner (Cincinnati office) Ernst &
Young (Public Accountants); Director of Carillon Fund, Inc.(investment
company), American Financial Group, Inc.(insurance), Cincinnati Milacron
Commercial Corp.; Trustee of Carillon Investment Trust and Summit
Investment Trust(investment companies); Trustee of GMCR, GCT, and GGT.
RICHARD A. RANKIN, 1717 Dixie Highway, Suite 600, Fort Wright, Kentucky
41011. Trustee. Partner, Rankin and Rankin (Public Accountants); Trustee of
GMCR, GCT, and GGT.
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<PAGE> 55
JEROME E. SCHNEE, 14 Walt Whitman, Morristown, NJ 07960, Trustee. Senior
Director, Health Economics, Johnson & Johnson (Pharmaceuticals) since
August 1996; Prior to that, Professor of Management, College of Business
Administration, University of Cincinnati.
BRADLEY E. TURNER, 580 Walnut Street, Cincinnati, Ohio 45202. President.
Senior Managing Director of McDonald; President of GMCR, GCT, and GGT.
STEPHEN C. DILBONE, 580 Walnut Street, Cincinnati, Ohio 45202. Vice
President. Senior Vice President of Gradison.
RICHARD S. DEMKO, 800 Superior Avenue, Cleveland, Ohio 44114. Vice
President. Senior Vice President of McDonald.
PATRICIA J. JAMIESON, 800 Superior Avenue, Cleveland, Ohio 44114.
Treasurer. Secretary, Treasurer, Senior Managing Director, and Chief
Financial Officer of McDonald; Treasurer of GMCR, GCT, and GGT.
MARK A. FRIETCH, 580 Walnut Street, Cincinnati, Ohio. Assistant Treasurer.
Assistant Treasurer of GMCR, GCT, and GGT (since May 1995); prior to that,
Gradison Mutual Funds Controller.
RICHARD M. WACHTERMAN, 580 Walnut Street, Cincinnati, Ohio 45202.
Secretary. Senior Vice President and General Counsel of Gradison; Secretary
of GMCR, GCT, and GGT.
- ------------------------------
Trustees and officers of the Trust who are affiliated with the Adviser
receive no remuneration from the Trust. Trustees who are not affiliated with the
Adviser receive fees as determined by the Board of Trustees. As of September 30,
1998, the Trustees and officers of the Trust owned an aggregate of less than 1%
of the outstanding securities of the Fund.
Trustee Compensation Table
<TABLE>
<CAPTION>
Name of Trustee Aggregate Total Compensation
- --------------- Compensation From Trust and fund
From Trust complex (3 additional
as of June Trusts) paid to
30, 1998 trustee for calendar year ended
-------- 12/31/97
--------
<S> <C> <C>
Theodore H. Emmerich $4,500 $25,000
Richard A. Rankin $4,500 $25,000
Jerome E. Schnee $4,500 $25,000
Daniel J. Castellini $4,500 $25,000
</TABLE>
The Trust maintains a deferred compensation plan which allows trustees to defer
receipt of trustee fees otherwise payable to them until a future date. Deferred
amounts are credited with interest at a rate equal to the yield of the
Gradison-McDonald U.S. Government Reserves Fund. The Trust does not maintain any
other pension or retirement plans. There are currently no amounts owing to any
current trustee pursuant to the deferred
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<PAGE> 56
compensation plan. As of June 30, 1998, the amount of $6,452 was payable by the
Trust to the beneficiary of a former trustee who is deceased and as of December
31, 1997, the amount of $39,615 was payable to the beneficiary of that trustee
by the Trust and the fund complex.
DESCRIPTION OF THE TRUST
The Trust is an open-end management investment company organized under
the laws of the State of Ohio by a Declaration of Trust dated June 11, 1992. The
Declaration of Trust provides for an unlimited number of full and fractional
shares of beneficial interest, without par value, of any series authorized by
the Board of Trustees. The Board of Trustees has authorized the issuance of
shares of one series, representing the Gradison-McDonald Ohio Tax-Free Income
Fund. Any additional series of shares must be issued in compliance with the
Investment Company Act of 1940. Upon issuance and sale in accordance with the
terms set forth in the Prospectus, each share will be fully paid and
nonassessable. Shares have no preemptive, subscription or conversion rights and
are redeemable as set forth under "How to Redeem Shares."
Holders of shares of the Fund are entitled to vote the full and
fractional shares in the amount of their ownership of Fund shares. Voting rights
are not cumulative, which means that the holders of more than 50% of the shares
voting in any election of Trustees can elect all of the Trustees if they choose
to do so, in which event the holders of the remaining shares will be unable to
elect a Trustee. Under the Declaration of Trust, meetings of shareholders are
not required to elect trustees, unless less than a majority of trustees holding
office have been elected by the shareholders. Shareholders' meetings will be
held only when required pursuant to the Declaration of Trust or the Investment
Company Act of 1940, and when called by the Fund or shareholders pursuant to the
Declaration of Trust. Pursuant to the Declaration of Trust, shareholders of
record of not less than a majority of the outstanding shares of the Fund may
remove a Trustee through a declaration in writing or by vote cast in person or
by proxy at a meeting called for that purpose. The Trustees are required to call
a meeting of shareholders for the purpose of voting upon the questions of
removal of any Trustee when requested in writing to do so by shareholders of
record of not less than 10 percent of the Trust's outstanding shares. The Trust
or any Fund may be terminated by a vote of a majority of the Trustees. Whenever
the approval of a majority of the outstanding shares of the Fund is required in
connection with shareholder approval of the Investment Advisory Agreement, the
Master Distribution Agreement, or the Distribution Service Plan, or changes in
the investment objective or the investment restrictions, a "majority" shall mean
the vote of (i) 67% or more of the outstanding shares of the Fund present at a
meeting, if the holders of more than 50% of the outstanding shares of the Fund
are present in person or by proxy, or (ii) more than 50% of the outstanding
shares of the Fund, whichever is the lesser.
The Trust is currently operating, and intends to continue to operate, in
compliance with the Ohio law relating to business trusts. Under Ohio law, the
shareholders of a complying business trust have no liability to third persons
for obligations of the Trust, which are to be satisfied solely from the Trust's
property. The Declaration of Trust provides that
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<PAGE> 57
no Trustee, officer, employee, or agent of the Fund shall be personally liable
to any person for any action or failure to act in connection with the Trust's
property or the affairs of the Trust except (1) for his own willful misfeasance,
bad faith, gross negligence, or reckless disregard of his duties, (2) with
respect to any matters as to which he did not act in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
Trust or where he did not act with the care that an ordinarily prudent person in
a like position would use under similar circumstances.
CUSTODIAN
Star Bank, N.A., Star Bank Center, Cincinnati, Ohio 45202 acts as the
custodian of the portfolio securities and other assets of the Trust. Star Bank
has no part in determining the investment policies of the Trust or the
securities which are to be purchased, held or sold by the Trust. The Trust may
purchase or sell securities from or to Star Bank.
INDEPENDENT PUBLIC ACCOUNTANTS
The firm of Arthur Andersen LLP, 425 Walnut Street, Cincinnati, Ohio
45202, has been selected as independent public accountants for the Fund for the
fiscal year ending June 30, 1999.
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<PAGE> 58
LEGAL COUNSEL
Kirkpatrick & Lockhart LLP acts as legal counsel for the Fund.
EXCHANGES
Any termination or modification of the exchange privilege will be
preceded by 60 days' notice from the Fund except (1) under extraordinary
circumstances where there is a suspension of the exchanged security under
Section 22(e) of the 1940 Act and the rules and regulations thereunder or the
offering company temporarily ceases or delays sales of the acquired security
because it is unable to invest amounts effectively in accordance with applicable
investment objectives policies and restrictions; or (2) if the only material
effect of an amendment is to reduce or eliminate an administrative fee, sales
load, or redemption fee payable at the time of an exchange.
TELEPHONE ACCESS TO ACCOUNT INFORMATION
Shareholders may access information about their Fund account by
telephone 24 hours a day using a password assigned to them.
PERFORMANCE CALCULATIONS
The Fund's yield for the 30 days ended June 30, 1998 was 4.12%. The Fund's
tax-equivalent yield was 7.37% based on combined Federal and Ohio tax rates of
44.1%, the highest marginal tax rates. The tax equivalent yield is the yield
that a taxable investment would have to yield to be equivalent to the Fund's
tax-free yield.
The Average Annual Total Return of the Fund based on purchase at the net asset
price(1) has been as follows:
From inception (September 18, 1992) through 6/30/98 7.09%
For 5 years ending 6/30/98 5.88%
For 12 months ending 6/30/98 8.19%
The performance results shown above assume reinvestment of dividends and
other distributions. The performance quoted above represents historical
performance. The Fund's yield and return will fluctuate and value of an
investment in the Fund will fluctuate so that an investor's shares may be worth
more or less than their cost, when redeemed. During the period prior to July 1,
1994, the Adviser waived fees and/or reimbursed Fund expenses which had the
effect of increasing the performance shown above.
- ------------
1 A sales load of up to 2% was charged until July 7, 1997, which is not
reflected in the total return figures.
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<PAGE> 59
PRINCIPAL HOLDERS OF SECURITIES
As of October 2, 1998, Mr. David M. Schneider, 2767 Belgrave Road,
Pepper Pike, Ohio, 44124, owned 9.85% of the Fund's shares.
39
<PAGE> 60
APPENDIX A
THE FUND MAY USE THE FOLLOWING HEDGING INSTRUMENTS:
OPTIONS ON DEBT SECURITIES -- A call option is a short-term contract
pursuant to which the purchaser of the option, in return for a premium, has the
right to buy the security underlying the option at a specified price at any time
during the term of the option. The writer of the call option, who receives the
premium, has the obligation, upon exercise of the option during the option term,
to deliver the underlying securing against payment of the exercise price. A put
option is a similar contract which gives its purchaser, in return for a premium,
the right to sell the underlying security at a specified price during the option
term. The writer of the put option, who receives the premium, has the
obligation, upon exercise during the option term, to buy the underlying security
at the exercise price. Options on debt securities are traded primarily in the
over-the-counter market rather than on any of the several options exchanges.
OPTIONS ON INDEXES OF DEBT SECURITIES -- An index assigns relative
values to the securities included in the index and fluctuates with changes in
the market values of such securities. Index options operate in the same way as
more traditional options except that exercises of index options are effected
with cash payments and do not involve delivery of securities. Thus upon exercise
of an index option, the purchaser will realize and the writer will pay, an
amount based on the difference between the exercise price and the closing price
of the index.
BOND INDEX FUTURES CONTRACTS -- A bond index futures contract is a
bilateral agreement pursuant to which one party agrees to accept and the other
party agrees to make delivery of an amount of cash equal to a specified dollar
amount times the difference between the index value at the close of trading of
the contract and the price at which the futures contract is originally struck.
No physical delivery of the bonds comprising the index is made; generally
contracts are closed out prior to the expiration date of the contract.
INTEREST RATE FUTURES CONTRACTS -- Interest rate futures contracts are
bilateral agreements pursuant to which one party agrees to make, and the other
party agrees to accept, delivery of a specified type of debt security at a
specified future time and at a specified price. Although such futures contracts
by their terms call for actual delivery or acceptance of debt securities, in
most cases the contracts are closed out before the settlement date without the
making or taking of delivery.
OPTIONS ON FUTURES CONTRACTS -- Options on futures contracts are similar
to options on securities except that an option on a futures contract gives the
purchaser the right, in return for the premium, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put), rather than to purchase or sell a security, at a
specified price at any time during the option term. Upon exercise of the option,
the delivery of the futures position to the holder of the option will be
accompanied by delivery of the accumulated
40
<PAGE> 61
balance, which represents the amount by which the market price of the futures
contract exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the future. The writer of an option, upon
exercise, will assume a short position in the case of a call, and a long
position in the case of a put.
41
<PAGE> 62
[Family of Funds Brochure]
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
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<PAGE> 63
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
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<PAGE> 64
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
44
<PAGE> 65
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
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<PAGE> 66
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.
<TABLE>
<CAPTION>
Rate of Rule of 72 Years to Years to
Return (72/Interest Rate) Double Quadruple
<S> <C> <C> <C>
3% 72/3 24 48
6% 72/6 12 24
</TABLE>
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<PAGE> 67
<TABLE>
<S> <C> <C> <C>
9% 72/9 8 16
12% 72/12 6 12
</TABLE>
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.
<TABLE>
<CAPTION>
71% 89% 97% 100%
<S> <C> <C> <C>
1 year 5 year 10 year 15 Year
holding holding holding holding
periods periods periods periods
</TABLE>
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.
<TABLE>
<CAPTION>
(CHART) THE POWER OF COMPOUNDING IN A HYPOTHETICAL $10,000 INVESTMENT IN THE S&P 500
<S> <C>
$170,000 $168,820...................
$150,000 In the time frame illustrated here,
$130,000 reinvestment of all income and
</TABLE>
47
<PAGE> 68
<TABLE>
<S> <C>
$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
</TABLE>
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.
<TABLE>
<CAPTION>
CHART DOLLAR COST AVERAGING CAN REDUCE YOUR AVERAGE COST PER SHARE
Investment Share Shares
Amount Price Purchased
<S> <C> <C> <C>
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
</TABLE>
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<PAGE> 69
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.
<TABLE>
<CAPTION>
CONSIDER GRADISON MUTUAL FUNDS
<S> <C> <C>
Equity Funds Fixed Income Fund Money Market Funds
Established Value Fund Government Income Fund U. S. Government Reserves
Growth & Income Ohio Tax Free Income Fund Municipal Cash Series (2)
Fund High Yield Fund (1) Ohio Municipal Cash Trust (2)
Opportunity Value Fund Michigan Municipal Cash Trust (2)
International Fund
</TABLE>
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
49
<PAGE> 70
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
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<PAGE> 71
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
51
<PAGE> 72
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. Ending values: 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
52
<PAGE> 73
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 1996(TM),
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
53
<PAGE> 74
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.
54
<PAGE> 75
SERVICE YOU CAN COUNT ON
LOW MINIMUM 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.
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<PAGE> 76
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 http://www.gradisonfunds.com
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<PAGE> 77
OHIO
TAX FREE
INCOME FUND
The Ohio Tax Free Income Fund's goal is to provide monthly income, consistent
with preservation of capital, which is exempt from both federal and State of
Ohio income taxes. It is designed for higher tax bracket Ohio investors who can
take advantage of the double tax-free income generated from the Fund. The Fund
offers the added benefit of the reinvestment of dividends, thus providing the
compounding of income on a tax free basis.
The Fund invests in Ohio municipal bonds issued to finance general operating
expenses of public institutions and public works. It also invests in "private
activity" municipal bonds that are issued to obtain funding for privately
operated facilities. In order to gain favorable yield spreads, the Fund may
invest up to 20% of its assets in securities that are subject to the Alternative
Minimum Tax ("AMT") for certain investors.
Symbol: GMOTX
AVERAGE ANNUAL TOTAL RETURN Periods Ended 6/30/98
<TABLE>
<CAPTION>
Since Inception
One Year Three Years Five Years (9/18/92)
<S> <C> <C> <C> <C>
+ 8.19% + 7.71% + 5.88% + 7.09%
</TABLE>
Chart:
Value of $1,000 Since Inception
Graph:
9/18/92 Inception Date $1485 as of 6/30/98
The value of a $1,000 investment made in the fund at inception with all dividend
and capital gain distributions reinvested.
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997 6/30/98
<S> <C> <C> <C> <C> <C> <C>
$1,028.78 $1,164.50 $1,088.98 $1,272.38 $1,330.42 $1,450 $1,485
</TABLE>
The value of a $1,000 Investment made in the Fund at Inception with all dividend
and capital gain distributions paid out.
$1,013.60 $1,081.60 $ 960.00 $1,066.40 $1,060.80 $1,1103 $1,105
The performance quoted above represents past performance. The investment return
and principal value of an investment in the Fund will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than the original
cost. Total return includes changes in share value and reinvestment of all
distributions. A sales load of 2% was charged until July 7, 1997, which is not
reflected in any performance or value figures. Past performance does not ensure
future results.
Effective July 7, 1997, all sales loads have been eliminated.
NET ASSETS AND QUALITY RATING
The information below is as Pie Chart:
of June 30, 1998, and is
subject to change in the future. A 10%
AA 17%
AAA 63%
Not Rated 5%
BBB 5%
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<PAGE> 78
$99 million
Net Assets as of 6/30/98
June 30, 1998
Graphic: Photo of a man and woman
WEIGHTED AVERAGE MATURITY
Chart:
18.5 Years Weighted Average Maturity
5 10 15 20 25
The maturity of the Fund's portfolio is as of June 30, 1998, and is subject to
change. The net asset value of the Fund will fluctuate more than the value of a
fixed income fund with a shorter term maturity.
PORTFOLIO MANAGER PROFILE
[Photo]: Stephen C. Dilbone, CFA
Senior Vice President/Portfolio Manager
Gradison McDonald Asset Management
With more than fourteen years investment experience, Steve Dilbone is
responsible for managing the Ohio Tax Free Income Fund portfolio. Steve's
additional responsibilities include overseeing all fixed income investments in
the mutual fund group and in individually managed Gradison McDonald Asset
Management accounts.
Prior to joining Gradison McDonald in 1990, Steve spent seven years with Merrill
Lynch, most recently as Vice President of Municipal Markets in Chicago. A
Chartered Financial Analyst, Steve holds a B.S. degree in Finance from Miami
University and an M.B.A. in Finance from the University of Chicago.
PROFILE OF GRADISON MUTUAL OF FUNDS
Gradison Mutual Funds is a division of McDonald & Company, a leading regional
investment firm which acquired Gradison in 1991. As a registered investment
advisor since 1974 and mutual fund advisors since 1976, Gradison currently
manages in excess of $4 billion in Gradison Mutual Funds and individually
managed accounts.
A prospectus for the Ohio Tax Free Income Fund or any other Gradison Mutual Fund
may be obtained by calling 513/579-5700 or 800/869-5999. The prospectus contains
more complete information. Read it carefully before you invest.
McDonald & Company Securities, Inc. - Distributor
GMIFS 1059 - GMO 6/98
Graphic: Photo of a man and two women
International Fund
58
<PAGE> 79
Opportunity Value Fund
Growth & Income Fund
Ohio Tax Free Income Fund
Government Income Fund
Money Market Funds
Logo
GRADISON
Mutual Funds
59
<PAGE> 80
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
Face Coupon
Amount Municipal Bonds - 98.91% Rate Maturity Value
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1,500,000 Alliance, OH Water Works Revenue 5.00% 11/15/20 $ 1,470,000
545,000 Athens Co., OH Community Mental Health Series 1993 I 5.90 3/01/09 571,569
335,000 Avon, OH G.O. 6.50 12/01/15 389,019
390,000 Batavia Local School District, OH G.O. 0.00 12/01/12 190,612
1,075,000 Broadview Heights, OH Industrial Development Revenue 6.25 7/01/13 1,120,515
1,400,000 Butler Co., OH Transportation Improvement District Revenue 5.13 4/01/17 1,410,500
1,250,000 Cincinnati, OH Urban Redevelopment Improvement G.O. 6.30 12/01/15 1,376,563
1,500,000 Cleveland, OH Airport System Revenue 5.13 1/01/22 1,492,500
2,950,000 Cleveland, OH Certificates of Participation 7.10 7/01/02 3,149,125
750,000 Cleveland, OH Public Power System First Mortgage Revenue 7.00 11/15/16 869,062
100,000 Cleveland, OH Urban Renewal Increment Bonds Series 1993 6.63 3/15/11 106,750
1,300,000 Cleveland, OH Urban Renewal Increment Bonds Series 1993 6.75 3/15/18 1,389,375
1,000,000 Columbus, OH Airport Authority Revenue 5.00 1/01/14 1,002,500
750,000 Columbus, OH Airport Authority Revenue 5.25 1/01/11 784,687
500,000 Cuyahoga Co., OH Health Care (Benjamin Rose Institute) 5.30 12/01/25 520,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements. 3
<PAGE> 81
OHIO TAX-FREE INCOME FUND
- -------------------------------------------------------------------------------
June 30, 1998
PORTFOLIO OF INVESTMENTS CONTINUED
<TABLE>
<CAPTION>
FACE COUPON
AMOUNT MUNICIPAL BONDS - (CONTINUED) RATE MATURITY VALUE
<S> <C> <C> <C> <C>
$1,500,000 Cuyahoga Co., OH Hospital Revenue
(Fairview General and Lutheran Medical Center) 5.50% 8/15/14 $ 1,561,875
1,000,000 Cuyahoga Co., OH Hospital Revenue
(Fairview General and Lutheran Medical Center) 6.25 8/15/10 1,072,500
2,250,000 Cuyahoga Co., OH Hospital Revenue (Walker Center)* 5.00 1/01/23 2,188,125
2,185,000 Cuyahoga Co., OH Industrial Development Revenue 6.50 6/01/16 2,398,038
1,300,000 Cuyahoga Co., OH Utility Systems Revenue (The Medical Center Company Project) 5.13 2/15/28 1,290,250
1,500,000 Cuyahoga Co., OH Utility Systems Revenue (The Medical Center Company Project) 5.85 8/15/10 1,618,125
1,250,000 Dublin, OH City School District G.O. 0.00 12/01/09 732,812
1,000,000 Fairfield Co., OH City School District G.O. 7.45 12/01/14 1,286,250
1,000,000 Franklin Co., OH Hospital Revenue (Holy Cross Health) 5.00 6/01/28 963,750
635,000 Franklin Co., OH Hospital Revenue (Worthington Christian Village) 7.00 8/01/16 665,956
1,310,000 Franklin Co., OH Industrial Development Revenue
(Columbus College of Art & Design) 6.00 9/01/13 1,352,575
1,000,000 Franklin Co., OH Mortgage Revenue 5.35 11/20/12 1,020,000
500,000 Franklin Co., OH Mortgage Revenue 5.55 11/20/17 510,000
2,300,000 Gateway Economic Development Corporation of
Greater Cleveland Stadium Revenue 6.50 9/15/14 2,423,625
2,020,000 Greater Cincinnati, OH Mortgage Revenue Refunding (Walnut Towers Project) 6.90 8/01/25 2,194,225
1,000,000 Greater Cleveland, OH Regional Transit Authority 5.60 12/01/11 1,061,250
750,000 Green Co., OH Sewer System Revenue 5.13 12/01/20 746,250
1,000,000 Green Co., OH Sewer System Revenue 5.25 12/01/25 1,003,750
1,935,000 Hamilton Co., OH G.O. 4.90 12/01/18 1,905,975
1,995,000 Hamilton Co., OH G.O. 5.50 12/01/17 2,084,775
1,000,000 Hamilton Co., OH G.O. Sales Tax Revenue 4.75 12/01/27 941,250
160,000 Hamilton Co., OH Hospital Facilities Revenue (Childrens Hospital) 6.75 5/15/09 163,904
2,150,000 Hamilton Co., OH Hospital Facilities Revenue (Deaconess Hospital) 7.00 1/01/12 2,340,813
1,000,000 Hamilton Co., OH Sales Tax Revenue 4.75 12/01/17 963,750
445,000 Hamilton Co., OH Sales Tax Revenue 5.00 12/01/27 433,875
1,050,000 Hilliard, OH City School District G.O. 5.00 12/01/20 1,027,688
500,000 Indian Lake Local School District, OH G.O. 5.13 12/01/25 495,625
1,000,000 Kent, OH City School District G.O. 5.75 12/01/21 1,065,000
1,000,000 Kent State University 5.00 5/01/18 978,280
1,000,000 Kent State University 5.00 5/01/23 980,000
1,000,000 Kettering, OH City School District G.O. 5.25 12/01/22 1,002,500
700,000 Liberty Local School District, OH G.O. 5.25 12/01/15 712,250
1,500,000 Lucas Co., OH Hospital Revenue (Toledo Hospital) 5.00 11/15/10 1,516,875
500,000 Lucas Co., OH Hospital Revenue (Toledo Hospital) 5.00 11/15/22 490,625
385,000 Lucas Northgate Housing Development Corp. 8.13 1/01/25 401,362
855,000 Mahoning Co., OH Hospital Revenue (Forum Health Group) 7.00 10/15/14 952,256
500,000 Maple Heights, OH G.O. 0.00 12/01/07 326,875
505,000 Maple Heights, OH G.O. 0.00 12/01/08 313,731
500,000 Maple Heights, OH G.O. 0.00 12/01/09 293,125
490,000 Maple Heights, OH G.O. 0.00 12/01/11 255,412
400,000 Mason, OH City School District G.O. 5.20 12/01/13 408,500
500,000 Mount Vernon, OH City School District G.O. 7.50 12/01/14 586,250
600,000 Oak Hills Local School District, OH G.O. 5.70 12/01/25 637,500
1,000,000 Ohio Capital Corp Housing Mortgage Revenue Refunding (FHA Section 8 Housing) 6.35 7/01/15 1,051,250
920,000 Ohio Capital Corp Housing Mortgage Revenue Refunding (FHA Section 8 Housing) 6.50 7/01/24 978,650
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
4 See accompanying notes to financial statements.
<PAGE> 82
OHIO TAX-FREE INCOME FUND
- ------------------------------------------------------------------------------
June 30, 1998
PORTFOLIO OF INVESTMENTS CONTINUED
<TABLE>
<CAPTION>
FACE COUPON
AMOUNT MUNICIPAL BONDS - (CONTINUED) RATE MATURITY VALUE
<S> <C> <C> <C> <C> <C>
$ 965,000 Ohio Capital Corp Housing Mortgage Revenue Refunding (FHA Section 8 Housing) 7.70% 1/01/25 $ 1,007,219
620,000 Ohio G.O. 4.90 8/01/17 609,150
1,000,000 Ohio G.O. 5.35 8/01/12 1,042,500
2,500,000 Ohio Higher Education Facilities Revenue (University of Dayton) 5.38 5/01/22 2,568,750
1,000,000 Ohio Higher Education Facilities Revenue (Xavier University) 5.20 12/01/10 1,043,750
1,000,000 Ohio State Building Authority (Adult Correctional Building) 6.13 10/01/12 1,081,250
445,000 Ohio State Economic Development Revenue (Ohio Enterprise Bond Fund) 5.60 6/01/02 456,681
500,000 Ohio State Economic Development Revenue (Ohio Enterprice Bond Fund) 6.00 6/01/04 532,500
815,000 Ohio State Economic Development Revenue (Ohio Enterprise Bond Fund) 6.50 12/01/09 886,312
1,000,000 Ohio State University 5.05 12/01/17 986,250
1,000,000 Ohio State Water Development Authority Revenue 5.00 12/01/15 997,500
1,415,000 Ohio State Water Development Authority Revenue (Broken Hill) 6.45 9/01/20 1,538,813
1,000,000 Ohio State Water Development Authority Revenue (Cargill) 6.30 9/01/20 1,088,750
2,250,000 Ohio State Water Development Authority Revenue (Dayton Power) 6.40 8/15/27 2,432,813
1,000,000 Parma, OH G.O. 5.00 12/01/24 968,750
1,850,000 Puerto Rico G.O. 5.38 7/01/21 1,891,625
1,000,000 Puerto Rico Electric Power Authority Revenue 5.38 7/01/14 1,040,000
1,500,000 Springdale, OH Hospital Facilities Revenue
(Southwestern Ohio Seniors' Services Inc.) 5.88 11/01/12 1,554,375
1,715,000 Springfield, OH City School District G.O. 0.00 12/01/11 893,944
1,000,000 Stark Co., OH Health Care Facilities Revenue* 5.45 7/20/33 998,750
1,000,000 Student Loan Funding Corporation, Cincinnati, OH
Senior Subordinated Revenue Bonds Series 1993A 6.15 8/01/10 1,053,750
15,000 Summit Co., OH G.O. 6.90 8/01/12 16,575
255,000 Summit Co., OH G.O. 6.90 8/01/12 277,950
230,000 Summit Co., OH G.O. 6.90 8/01/12 258,750
1,500,000 Toledo-Lucas Co., OH Convention Center Special Lodging Tax Revenue 5.70 10/01/15 1,588,125
1,000,000 University of Akron, OH 5.25 1/01/22 1,006,250
1,000,000 University of Cincinnati, OH Certificates of Participation 5.00 6/01/09 1,031,250
1,250,000 Upper Arlington, OH G.O. 5.13 12/01/19 1,243,750
500,000 Wadsworth, OH City School District G.O. 5.00 12/01/22 488,125
725,000 Warren Co., OH G.O. 6.55 12/01/14 850,969
1,000,000 Warren, OH Water Revenue 5.00 11/01/22 990,000
1,000,000 Westlake, OH G.O. 5.50 12/01/20 1,045,000
1,500,000 Westlake, OH G.O. 5.55 12/01/17 1,575,000
1,755,000 Westlake, OH Industrial Development Revenue 6.40 8/01/09 1,835,590
-----------
TOTAL MUNICIPAL BONDS (AMORTIZED COST $95,450,974) 100,120,995
-----------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM INVESTMENTS - 1.09%
<S> <C> <C> <C>
1,100,000 Ohio Municipal Cash Trust** (AMORTIZED COST $1,100,000) 3.19 1,100,000
------------
TOTAL INVESTMENTS, AT VALUE (AMORTIZED COST $96,550,974) - 100% $101,220,995
============
- -------------------------------------------------------------------------------------------------------------------------------
</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, 1998.
See accompanying notes to financial statements. 5
<PAGE> 83
OHIO TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
June 30, 1998
PORTFOLIO OF INVESTMENTS CONTINUED
NOTES TO PORTFOLIO OF INVESTMENTS -- PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
INVESTMENTS BY REVENUE SOURCE
<S> <C>
GENERAL OBLIGATIONS 28.0%
REVENUE BONDS:
Health Care 18.8
Utilities 11.3
Housing 10.2
Higher Education 8.5
Public Facilities 7.8
Transportation 4.6
Industrial Development 4.5
State Agency 1.1
MUNICIPAL LEASE 4.1
MONEY MARKET 1.1
----
TOTAL 100.0%
=====
</TABLE>
- -----------------------------------------------
<TABLE>
<CAPTION>
INVESTMENTS BY CREDIT RATING
S&P/MOODY'S:
<S> <C>
AAA/Aaa 62.2%
AA/Aa 17.2
A/A 10.3
BBB/Baa 4.7
Unrated (1) 4.5
MONEY MARKET (2) 1.1
-----
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.
6 See accompanying notes to financial statements.
<PAGE> 84
STATEMENT OF ASSETS AND LIABILITIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6/30/98
<S> <C>
ASSETS
Investments in securities, at value (Note 1) (Cost $96,550,974) $ 101,220,995
Interest receivable 1,357,759
Receivable for Fund shares sold 307,865
Cash 15,348
Prepaid expenses and other assets 5,152
-------------
TOTAL ASSETS 102,907,119
-------------
LIABILITIES
Payable for securities purchased 3,195,977
Payable for Fund shares redeemed 410,657
Dividend payable 62,990
Accrued investment advisory fee (Note 2) 40,774
Other accrued expenses payable to adviser (Note 2) 27,832
Other accrued expenses and liabilities 14,068
-------------
TOTAL LIABILITIES 3,752,298
-------------
NET ASSETS $ 99,154,821
=============
NET ASSETS CONSIST OF:
Aggregate paid-in capital $ 94,485,326
Accumulated net realized loss (526)
Net unrealized appreciation of investments 4,670,021
-------------
NET ASSETS $ 99,154,821
=============
SHARES OF CAPITAL STOCK OUTSTANDING
(no par value - unlimited number of shares authorized) 7,179,641
=============
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
(Note 1) $13.81
=============
- --------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements. 7
<PAGE> 85
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED 6/30/98
<S> <C> <C>
INTEREST INCOME $4,800,434
EXPENSES:
Investment advisory fee (Note 2) $ 432,146
Distribution (Note 2) 216,073
Accounting service fees (Note 2) 48,000
Transfer agency fees (Note 2) 37,821
Professional fees 34,822
Trustees' fees (Note 2) 18,668
Custodian fees (Note 1) 9,703
Registration fees 7,474
Printing 5,082
ICI dues 2,654
Amortization of organization expense (Note 2) 2,608
Insurance 962
Other 1,535
---------
GROSS EXPENSES 817,548
LESS EARNINGS CREDITS ON CASH BALANCES (Note 1) (9,703)
---------
NET EXPENSES 807,845
----------
NET INVESTMENT INCOME 3,992,589
----------
NET REALIZED AND UNREALIZED GAINS ON INVESTMENTS:
Net realized gain on investments 78,221
Net change in unrealized appreciation of
investments 2,575,495
---------
NET REALIZED AND UNREALIZED GAINS ON INVESTMENTS 2,653,716
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $6,646,305
==========
- -------------------------------------------------------------------------------
</TABLE>
8 See accompanying notes to financial statements.
<PAGE> 86
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
-----------------------------
6/30/98 6/30/97
<S> <C> <C>
FROM OPERATIONS:
Net investment income $ 3,992,589 $ 3,678,847
Net realized gain on investments 78,221 1,183,172
Net change in unrealized appreciation of investments 2,575,495 1,449,100
---------- ----------
Net increase in net assets resulting from operations 6,646,305 6,311,119
---------- ----------
FROM DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT
INCOME (3,998,270) (3,674,726)
---------- ----------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 42,849,900 18,817,895
Net asset value of shares issued in reinvestment of
distributions 3,066,244 2,938,885
Payments for shares redeemed (25,581,834) (18,782,590)
---------- ----------
Net increase in net assets from Fund share
transactions 20,334,310 2,974,190
---------- ----------
TOTAL INCREASE IN NET ASSETS 22,982,345 5,610,583
NET ASSETS:
Beginning of year 76,172,476 70,561,893
---------- ----------
End of year (including undistributed net investment
income of $0 and $5,681, respectively) (Note 1) $99,154,821 $76,172,476
========== ==========
NUMBER OF FUND SHARES:
Sold 3,128,080 1,433,203
Issued in reinvestment of distributions to shareholders 223,735 223,226
Redeemed (1,870,920) (1,427,931)
---------- ----------
Net increase in shares outstanding 1,480,895 228,498
Outstanding at beginning of year 5,698,746 5,470,248
---------- ----------
Outstanding at end of year 7,179,641 5,698,746
========== ==========
- ----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements. 9
<PAGE> 87
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1998
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 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.
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 offering and redemption price per share are equal to the net asset value per
share. Effective July 7, 1997 the sales charge on purchases of Fund shares was
eliminated.
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 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, 1998, the Fund had committed
$3,195,977 to the purchase of delayed delivery securities; the market value of
the securities segregated for this purchase is $4,265,744.
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.
10
<PAGE> 88
NOTES TO FINANCIAL STATEMENTS CONTINUED
- -------------------------------------------------------------------------------
June 30, 1998
DISTRIBUTIONS TO SHAREHOLDERS
Dividends arising from net investment income are declared daily and paid
monthly. Net realized capital gains, if any, are distributed at least annually.
INVESTMENT INCOME
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.
EXPENSE OFFSET ARRANGEMENT
The Fund has an arrangement with its custodian bank whereby the custodian's fees
are reduced by credits earned on the Fund's cash on deposit with the bank. This
deposit arrangement is an alternative to overnight investments. The credits are
shown as a reduction of expenses on the Statement of Operations.
ORGANIZATION EXPENSES
Expenses of organization were capitalized and amortized on a straight-line basis
over 60 months commencing upon the public offering of the Fund's shares.
TAXES
It is the Fund's policy to comply with the provisions of the Internal Revenue
Code applicable 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, 1998 were $4,708,970
and $38,949, respectively.
As of June 30, 1998, the Fund had a capital loss carryforward for Federal income
tax purposes of $526 which can be used to offset future capital gains.
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 $23.00 per shareholder non-zero balance account and $5.00 per
closed shareholder account, as defined, plus
11
<PAGE> 89
NOTES TO FINANCIAL STATEMENTS CONTINUED
- ------------------------------------------------------------------------------
June 30, 1998
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.
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.
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, 1998, purchases and proceeds from the sale of
securities, excluding short-term securities, amounted to $61,340,344 and
$37,532,366, respectively.
===============================================================================
FEDERAL INCOME TAX INFORMATION
During the year ended June 30, 1998, the Fund made total distributions of
$0.6275 per share, all of which were from net investment income. All such
distributions were entirely exempt from federal regular income tax and income
taxation in Ohio.
12
<PAGE> 90
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- -------------------------------------------------------------------------------
[ARTHUR ANDERSEN LOGO]
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, 1998, 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, 1998, 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 Gradison-McDonald Municipal Custodian
Trust as of June 30, 1998, 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 28, 1998
13
<PAGE> 91
PART C
OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
(a)(l) Financial Statements (included in prospectus
Financial Highlights
(a)(2) Financial Statements (included in statement of additional
information).
Portfolio of Investments as of June 30, 1998.
Statement of Assets and liabilities as of June 30, 1998.
Statement of Operations for the year ended June 30, 1998.
Statement of Changes in Net Assets for the years ended
June 30, 1997 and June 30, 1998
Notes to financial statements.
Report of Independent Public Accountants
(b)Exhibits
( 1) Declaration of Trust.*
( 2) By-laws of Trust.*
( 5) Investment Advisory Agreement dated August 24, 1992.*
( 5)(a) Form of Investment Advisory Agreement. (Included herein)
( 6)(a) Master Distribution Agreement as amended through April 14,
1994.*
( 6)(b) Form of Dealer's Agreement.*
( 6)(c) Form of Master Distribution Agreement. (Included herein)
( 8) Custodian Agreement dated August 24, 1992.*
( 9) Transfer Agency Agreement as amended through May 8, 1997.*
(10) Opinion of Counsel.*
(11) Consent of Independent Accountant. (Included herein)
(15) Distribution Service Plan dated August 25, 1992.*
(16) Schedule of Performance Calculations.*
(17) Financial Data Schedule
Other Exhibits Powers of Attorney of Bradley E. Turner, Daniel
Castellini, Patricia Jamieson, Donald E. Weston,
Rankin, Theodore Emmerich, and Jerome Schnee.*
*Incorporated by reference to the N-1A filing of Registrant filed electronically
on October 30, 1997, accession number 0000950152-97-007473.
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
C-1
<PAGE> 92
Item 26. NUMBER OF HOLDERS OF SECURITIES
Number of Record Holders
Title of Class as of October 1, 1998
-------------- ---------------------
Shares of beneficial
interest of Registrant
Gradison Ohio Tax-Free Income Fund 1,653
Item 27. INDEMNIFICATION
Reference is made to Article V of the Declaration of Trust of the
Registrant, filed as Exhibit 1 to this Registration Statement. Officers and
Trustees of Registrant are insured against liability by reason of acts, errors,
or omissions in such capacities.
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Reference is made to the captions "Management of the Fund" on page 13 of
the Prospectus that is Part A of this Registration Statement, "Trustees and
Officers of the Trust" on page 34 of the Statement of Additional Information of
the Gradison Ohio Tax-Free series of the Trust that is part of Part B of this
Registration Statement and to Item 29(b) of this Part C of the Registration
Statement (with respect to McDonald & Company Securities Inc.).
Item 29. PRINCIPAL UNDERWRITERS
(a) The principal underwriter of the Registrant is the Gradison Division of
McDonald & Company Securities, Inc. which also serves as the principal
underwriter and investment adviser for Gradison-McDonald Cash Reserves
Trust, Gradison Custodian Trust, Gradison Municipal Custodian Trust,
and Gradison Growth Trust.
(b) Information pertaining to the underwriter's (McDonald & Company
Securities, Inc.) directors and officers is contained in the following
table.
<TABLE>
<CAPTION>
Principal Positions and
Positions and Offices Business Offices with
Name With Underwriter Address Registrant
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Daniel F. Austin Director, Vice 800 Superior Avenue None
Chairman Cleveland Ohio 44114
Jack N. Aydin Director, Managing One Evertrust Plaza None
Director Jersey City, NJ 07302
</TABLE>
C-2
<PAGE> 93
<TABLE>
<S> <C> <C> <C>
Eugene H. Bosart, Director, Senior 260 East Brown Street None
III Managing Director Birmingham, MI 48009
Thomas G. Clevidence Director, Senior 800 Superior Avenue None
Managing Director Cleveland, OH 44114
Robert Clutterbuck Director, President, 800 Superior Avenue None
Chief Operating, Cleveland, OH 44114
Officer, Chief
Financial Officer
Ralph M. Della Ratta Director, Senior 800 Superior Avenue None
Jr. Managing Director, Cleveland, Ohio 44114
Dennis J. Donnelly Director, Senior 800 Superior Avenue None
Managing Director Cleveland, OH 44114
David W. Ellis, III Director, and Sr. 580 Walnut Street None
Managing Director Cincinnati, OH 45202
(Gradison Division)
Patricia J. Jamieson Secretary/Treasurer 800 Superior Avenue Treasurer,
Chief Financial Cleveland, OH 44114 Chief
Officer Financial
Officer
David W. Knall Director, Senior One American Square None
Managing Director Indianapolis, IN 46282
Thomas M. McDonald Director, Managing 800 Superior Avenue
Director, Cleveland, OH 44114
John F. O'Brien Director, Senior 800 Superior Avenue None
Managing Director Cleveland, OH 44114
Lawrence T. Oakar Director, 800 Superior Avenue None
Managing Director Cleveland, OH 44114
James C. Redinger Director, Senior 800 Superior Avenue None
Managing Director Cleveland, OH 44114
William Summers, Jr. Director, Chairman, 800 Superior Avenue None
Chief Executive Cleveland, OH 44114
Officer
David D. Sutcliffe Director, 800 Superior Avenue None
Managing Director Cleveland, OH 44114
</TABLE>
C-3
<PAGE> 94
<TABLE>
<S> <C> <C> <C>
Bradley E. Turner Director, Senior 800 Superior Avenue President
Managing Director Cleveland, OH 44114
</TABLE>
It is anticipated that on or around about October 23, 1998, the principal
underwriter will become BISYS Fund Services Limited Partnership, which, also
acts as the distributor for the following investment companies as of October 1,
1998:
Alpine Equity Trust
The ARCH Fund, Inc.
American Performance Funds
AmSouth Mutual Funds
The BB&T Mutual Funds Group
The Coventry Group
ESC Strategic Funds, Inc.
The Eureka Funds
Fountain Square Funds,
Hirtle Callaghan Trust
HSBC Family of Funds
INTRUST Funds Trust
The Infinity Mutual Funds, Inc.
The Kent Funds
Magna Funds
Meyers Investment Trust
MMA Praxis Mutual Funds
M.S.D.&T. Funds
Pacific Capital Funds
The Parkstone Advantage Funds
Pegasus Funds
The Republic Advisors Funds Trust
Puget Sound Asset Management
The Republic Funds Trust
The Riverfront Funds, Inc.
Sefton Funds
The Sessions Group
Summit Investment Trust
BISYS Variable Insurance Funds
The Victory Portfolios
The Victory Variable Funds
Vintage Funds, Inc.
(b) Directors, officers and partners of BISYS Fund Services, Inc., the
General Partner of BISYS Fund Services Limited Partnership, as of October 1,
1998 were as follows:
Lynn J. Mangum, Chairman and CEO.
C-4
<PAGE> 95
Dennis Sheehan, Director, Executive Vice President and
Treasurer
J. David Huber, President.
Kevin J. Dell, Vice President and Secretary.
Mark Rybarczyk, Senior Vice President.
William Tomko, Senior Vice President.
Michael D. Burns, Vice President.
David Blackmore, Vice President.
Steve Ludwig, Compliance Officer.
Mark Telfer, Compliance Officer.
Robert Tuch, Assistant Secretary.
The business address of each of the foregoing individuals is BISYS
Fund Services, Inc., 3435 Stelzer Road, Columbus, Ohio 43215.
Item 30 LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and documents required to be maintained by the Registrant
pursuant to Section 31(a) of the Investment Company Act of 1940 and Rules 31a-1
through 31(a) thereunder are maintained at the offices of the Registrant, 580
Walnut Street, Cincinnati, Ohio 45202, except as indicated below opposite the
applicable reference to the aforesaid Rules.
Rule In Possession of:
- ---- -----------------
31a-1(b)(1), 31a-1(b)(2)(i)(a)-(f), Star Bank, N.A., Star Bank
Center,
31a-1(b)(2)(ii), 31a-1(b)(5) and Cincinnati, Ohio 45202.
31a-1(b)(8)
Item 31. MANAGEMENT SERVICES
Not applicable.
C-5
<PAGE> 96
Item 32. UNDERTAKINGS
The Registrant hereby undertakes to provide, without cost, a copy of its most
recent annual report upon request.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction, the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
C-6
<PAGE> 97
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Cincinnati and State of Ohio on the 6th day of October 1998.
GRADISON-MCDONALD MUNICIPAL CUSTODIAN TRUST
(Registrant)
By */S/ DONALD E. WESTON
----------------------------
Chairman
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the date indicated.
Signature Title Date
--------- ----- ----
*DONALD E. WESTON Chairman of the Board October 6, 1998
(Principal Executive
Officer and Trustee)
*DANIEL J. CASTELLINI Trustee "
*THEODORE EMMERICH Trustee "
*RICHARD RANKIN Trustee "
*JEROME SCHNEE Trustee "
*BRADLEY E. TURNER President "
*PATRICIA J. JAMIESON Treasurer
(Principal Financial and "
Accounting Officer)
*By /S/ Richard M. Wachterman
Richard M. Wachterman
Attorney-in-Fact
S-1
<PAGE> 98
Exhibit List
Exhibit Number Description
- -------------- -----------
(5)(a) Form of Investment Advisory Agreement.
(6)(c) Form of Dealer's Agreement.
(11) Consent of Independent Accountant.
S-1
<PAGE> 1
Exhibit 5(a)
INVESTMENT ADVISORY AGREEMENT
BETWEEN
MCDONALD-KEY INVESTMENTS INC.
AND
GRADISON-MCDONALD MUNICIPAL CUSTODIAN TRUST
THIS AGREEMENT is made as of the ____ day of _____, 199_, between McDonald Key
Investments Inc., Inc., an Ohio corporation (the "Adviser"), and
Gradison-McDonald Municipal Custodian Trust, an Ohio business trust (the
"Trust").
In consideration of the mutual covenants hereinafter contained, the parties
hereto agree as follows:
1. a. The Trust hereby employs the Adviser to manage the investment and
reinvestment of the assets of the Gradison-McDonald Ohio Tax-Free Income Fund
(the "Fund") of the Trust in accordance with the Fund's investment objective and
policies, and to perform certain other services herein set forth and administer
the Trust's affairs to the extent requested subject to the supervision of the
board of trustees of the Trust, for the period and on the terms herein set
forth.
b. The Adviser hereby accepts such employment, and agrees to render such
services and to assume the obligations herein set forth.
2. Should the Trust establish any additional series subsequent to the date
hereof and wish to retain the Adviser to serve as such series' investment
adviser under the terms of this Agreement, the Trust shall provide the Adviser
with a written notice to such effect which shall include the advisory fee
payable with respect to each such series. If the Adviser is willing to render
such services, it shall provide the Trust with a written notice to such effect,
whereupon each such series shall be included with Gradison-McDonald Ohio
Tax-Free Income Fund in the term "Fund" hereunder.
3. The Adviser shall:
a. Manage the investment of the Fund's assets including the placing of orders
for purchases and sales and other investment transactions;
b. Report periodically to the Trust with respect to the Trust's investment
programs and with respect to the Adviser's activities in connection with the
administration of the Trust;
<PAGE> 2
c. In all matters relating to the performance of this Agreement, act in
conformity with the Declaration of Trust, By-Laws, and Registration Statement of
the Trust and with the instructions and directions of the Board of Trustees and
will comply with the requirements of the 1940 Act, the rules thereunder, and all
other applicable federal and state laws and regulations; and
d. Provide persons satisfactory to the Board of Trustees of the Trust to act
as officers of the Trust to the extent permissible under applicable federal
law.
4. Any investment program undertaken by the Adviser pursuant to this Agreement,
and any other activities undertaken by the Adviser on behalf of the Trust,
shall at all times be subject to any directives of the Board of Trustees of the
Trust, or of any duly constituted committee of the Board, or of any officer of
the Trust acting pursuant to authority granted by the Board or by any such
committee.
5. In addition to performing the obligations set forth in Paragraph 3 hereof,
the Adviser shall assume and bear expenses incurred with respect to the
following:
a. Trustees who are affiliated with the Adviser;
b. Officers affiliated with the Adviser who are necessary for the management,
operations, administration and investments of the Trust; and
c. The payment or assumption by the Adviser of any expense of the Trust or the
Fund that the Adviser is not required by this Agreement to pay or assume shall
not obligate the Adviser to pay or assume the same or any similar expense of the
Trust or Fund on any subsequent occasion.
6. All expenses not specifically assumed by the Adviser under this Agreement or
by another party pursuant to any other agreement which may be incurred in the
operation of the Trust will be borne by the Trust. These include:
a. Expenses incurred by the Trust for office space, office facilities, business
equipment and utilities (including communications expenses);
b. Costs of preparing, printing and mailing, and expenses incurred in
connection with furnishing of information and administrative assistance with
respect to the preparation of; registration statements and prospectuses,
including amendments and revisions thereto, and annual, semiannual and other
periodic reports furnished to shareholders of the Trust's Fund or to regulatory
authorities; and other documents required by regulatory authorities; and
notices and proxy solicitation materials furnished to shareholders of the
Trust's Fund;
c. Such distribution expenses or service fees as may be contemplated by an
effective plan pursuant to Rule 12b-1 under the 1940 Act, provided, however,
that any such
<PAGE> 3
payment by the Trust of distribution expenses shall be in the amounts, and in
accordance with the procedures, set forth in such plan;
d. Registration, filing and other fees in connection with requirements of
regulatory authorities;
e. Expenses of issue, sale, redemption and repurchase of shares of the Trust's
Fund;
f. Compensation of trustees of the Trust who are not affiliated with the
Adviser;
g. Compensation and expenses of any transfer agent, dividend disbursing agent,
registrar, custodian or depository appointed by the Trust;
h. Any costs, expenses or other relief asserted against the Trust or Fund for
violation of any law;
i. Charges and expenses of independent accountants retained by the Trust;
j. Brokers' commissions and issue or transfer taxes chargeable to the Trust in
connection with securities transactions to which the Trust or a Fund of the
Trust is a party;
k. Any extraordinary expenses (including fees and disbursements of counsel,
costs of actions, suits or proceedings to which the Trust is a party and the
expenses the Trust may incur as a result of its legal obligation to provide
indemnification to its officers, trustees, agents and shareholders) incurred by
the Trust or Fund;
l. Taxes and other fees payable by the Trust to federal, state, or other
governmental agencies;
m. Costs of share certificates representing shares of the Trust's Fund, if
provided for;
n. Legal and accounting fees and expenses in connection with the operations of
the Trust, including its organization and the registration or qualification of
its shares with federal or state regulatory authorities;
o. Expenses incurred in connection with shareholders' or trustees' meetings;
p. Fees and other expenses incurred by the Trust in connection with its
membership in any organization, and;
q. Costs of liability, errors and omissions and other insurance and fidelity
bond.
7. Expenses borne by the Trust pursuant to Paragraph 6 hereof and attributable
to a specific Fund of the Trust shall be allocated to that Fund. Expenses borne
by the Trust
<PAGE> 4
pursuant to Paragraph 6 hereof that are not specifically attributable to a Fund
shall be allocated to each Fund in a manner and on a basis determined in good
faith by the Adviser to be fair and equitable, subject to review by the Board
of Trustees of the Trust.
8. The Trust shall reimburse the Adviser for all costs (direct and indirect)
which are fairly allocable to services performed by the Adviser's employees
under this Agreement on behalf of the Trust, for which the Trust is responsible
including, without limitation, appropriate portions of employee salaries, office
space, benefits, and expenses. In the event of disagreement between the Trust
and the Adviser as to a fair basis for allocating such costs, such basis shall
be fixed by the independent public accountants for the Trust, and the parties
shall be bound thereby.
9. The services of the Adviser to the Trust are not to be deemed exclusive, and
the Adviser shall be free to render similar services to other persons so long
as the services to be rendered hereunder are not impaired thereby. Nothing in
this Agreement shall limit or restrict the right of any director, officer or
employee of the Adviser to engage in any other business or to devote his time
and attention in part to any other business.
10. The Adviser assumes no responsibility or obligation under this Agreement
other than to render in good faith the services provided for herein; provided
that nothing herein shall be deemed to protect or purport to protect the Adviser
against any liability to the Trust or its shareholders to which the Adviser
would otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties hereunder, or by reason of reckless
disregard of its obligations and duties hereunder. The Adviser shall not be
responsible or liable for any action or inaction of the Board of Trustees of the
Trust or any committee thereof.
11. In addition to all other charges and expenses to be paid hereunder, the
Trust shall pay to the Adviser compensation for its services and facilities
furnished hereunder, at an annual rate computed in accordance with the
appropriate portion of Schedule A attached hereto. The fee shall be computed and
accrued daily. The fee so computed and accrued during each calendar month shall
be paid to the Adviser on the first day of the next month. If this Agreement
becomes effective or terminates before the end of any month, the fee for the
period from the effective date to the end of the month or from the beginning of
such month to the date of termination, as the case may be, shall be prorated
according to the proportion which such period bears to the full month in which
such effectiveness or termination occurs.
12. The Adviser shall reimburse the Trust if and to the extent that expenses
borne by the Trust in any fiscal year exceed any expense limitation applicable
to a Fund of the Trust imposed by any regulatory authority (as such limitations
may be established from time to time). During any fiscal year, the Adviser shall
be bound, in calculating the amount of any such excess, by the most stringent
applicable requirements of any state in which the shares of the Trust's Funds
are qualified for sale. Such excess expenses, if any, shall be determined and
paid on a monthly basis, subject to annual adjustment so that the
<PAGE> 5
aggregate of reimbursements, if any, by the Adviser to the Trust for the fiscal
year are in the amount necessary to limit such expenses to the applicable
expense limitation.
13. Subject to compliance with the provisions of the 1940 Act and the duties
and conditions to which the Adviser is bound by Paragraph 3 of this Agreement,
the Trust hereby agrees that the Adviser may subcontract for the performance of
any of the services contemplated to be rendered by the Adviser hereunder.
14. It is mutually understood that trustees, officers, shareholders, employees
and agents of the Trust are or may be interested in the Adviser as directors,
officers, stockholders, employees, agents or in other capacities; that
directors, officers, stockholders, employees and agents of the Adviser are or
may be interested in the Trust as trustees, officers, shareholders, employees,
agents or in other capacities; that the Adviser may be interested in the Trust
as a shareholder or otherwise; and that the existence of any such dual interest
shall not affect the validity of this Agreement or of any transactions made
hereunder, except as may otherwise be provided in the Declaration of Trust of
the Trust or the Articles of Incorporation of the Adviser, or by any specific
provision of any applicable statute, rule or regulation.
15. This Agreement shall become effective as of the date first set forth above
and shall continue in for a two year period so long as it is approved by the
vote of a majority of the outstanding voting securities of the Fund as defined
in the 1940 Act, and in accordance with the exemption granted by the Securities
and Exchange Commission on providing for this Agreement to become effective
prior to the required vote of the shareholders of the Fund. Thereafter, it shall
continue in effect from year to year, provided such continuance is specifically
approved at least annually, at meetings called for the purpose of voting upon
such approvals, by the vote of a majority of the outstanding voting securities
of that Fund or by the vote of a majority of the Board of Trustees of the Trust,
and in either event by the vote cast in person of a majority of the trustees of
the Trust who are not interested persons (as defined in the 1940 Act) of either
party to this Agreement.
16. The Trust may at any time and without the payment of any penalty terminate
this Agreement as to a Fund upon 60 days' written notice to the Adviser, either
by action of the Board of Trustees of the Trust or by the vote of a majority of
the outstanding voting securities of that Fund, and the Adviser may at any time
and without the payment of any penalty terminate this Agreement upon 60 days'
written notice to the Trust. This Agreement shall automatically terminate in the
event of its assignment (within the meaning of the 1940 Act) by the Adviser,
unless such automatic termination shall be prevented by an order of exemption
from the Securities and Exchange Commission. Termination of this Agreement with
respect to any given Fund shall in no way affect the continued validity of this
Agreement or the performance thereunder with respect to any other Fund. This
Agreement may be assigned by the Adviser to Key Asset Management Inc. so long as
such assignment shall not constitute an assignment within the meaning of the
1940 Act.
<PAGE> 6
17. This Agreement may be amended at any time by the mutual consent of the
parties, provided that such consent on the part of Trust shall have been
approved, at meetings called for the purpose of voting upon such consent, by the
vote of a majority of the outstanding voting securities of the affected Fund,
and by the vote of a majority of the Board of Trustees of the Trust, including
the vote cast in person by a majority of the trustees of the Trust who are not
interested persons (as defined in the 1940 Act) of either party to this
Agreement.
18. The parties to this Agreement acknowledge that the Adviser has an exclusive
proprietary interest in the use of the names "Gradison" and "McDonald" and
further acknowledge that the Adviser has consented to the use of such names by
the Trust subject to withdrawal of such consent upon 30 days' written notice to
the Trust. The Trust agrees that the names "Gradison" and "McDonald" will be
used by it only in connection with the business of any open-end management
investment company; that such names will be used only in such forms, styles and
contexts as may be approved by the Adviser; and that the Trust will not do or
cause to be done any act or undertaking which has the effect of contesting,
challenging or in any way impairing the Adviser's right, title or interest in
or to such names. The Trust agrees that it will not represent that it has any
right, title or interest in such names, and that the Trust's use of such names
shall not create any right, title or interest in its favor therein. Within 30
days after the termination of this Agreement for any reason, or after the
written withdrawal of such consent of the Adviser (with or without cause and
within the Adviser' sole discretion) the Trust
a. will cease and desist from every use of the names "Gradison" and "McDonald"
and will deliver to the Adviser all prospectuses, sales literature and other
advertising materials bearing such names;
b. will cause its name to be changed so as to eliminate the word "Gradison" or
"McDonald" therefrom; and
c. will not at any time thereafter adopt or use any name, mark or other trade
designation which is confusingly similar to the names "Gradison" or "McDonald"
or likely to mislead the public.
19. Any notice required by or permitted to be given in connection with this
Agreement shall be in writing, addressed and delivered in person, or mailed
postage prepaid, to the addresses designated by the respective parties for the
receipt of such notice. Until further written notice, it is agreed that the
addresses of the Adviser and of the Trust, respectively, shall be:
McDonald-Key Investments Inc..
Attention: _____________
800 Superior Avenue
<PAGE> 7
Cleveland, Ohio 44114
Gradison-McDonald Municipal Custodian Trust
Attention: Stephen C. Dilbone
580 Walnut Street
Cincinnati, Ohio 45202
Gradison-McDonald Municipal Custodian Trust
Attention: Richard M. Wachterman
580 Walnut Street
Cincinnati, Ohio 45202
20. The shareholders, trustees, officers, employees and agents of the Trust
shall not personally be bound by or liable under this Agreement, nor shall
resort be had to their private property for the satisfaction of any obligation
or claim hereunder, as more fully provided under the terms of the Declaration of
Trust.
21. This Agreement shall be construed in accordance with the laws of the State
of Ohio. To the extent that the applicable laws of the State of Ohio conflict
with the applicable provisions of the 1940 Act, the latter shall control.
IN WITNESS WHEREOF, the parties have executed this Investment Advisory Agreement
as of the date first written above.
MCDONALD-Key Investments Inc.
By: _____________________
GRADISON-McDONALD MUNICIPAL CUSTODIAN TRUST
By: Donald E. Weston
Schedule A
----------
Investment Advisory Fee
-----------------------
<PAGE> 8
Series Fee
- ------ ---
Gradison-McDonald Ohio .5 of 1% of the average daily
Tax-Free Income Fund net assets of the series
<PAGE> 1
Exhibit 6(c)
GRADISON-McDONALD MUNICIPAL CUSTODIAN TRUST
MASTER DISTRIBUTION AGREEMENT
AGREEMENT made this __ day of ______, 199_ by and between
Gradison-McDonald Municipal Custodian Trust (the "Trust"), an Ohio business
trust, and BISYS Fund Services Limited Partnership (the "Distributor"), an Ohio
limited partnership.
W I T N E S S E T H:
In consideration of the mutual covenants hereinafter contained,
the parties hereto agree as follows:
Section 1. APPOINTMENT OF THE DISTRIBUTOR.
(a) The Trust hereby appoints the Distributor as its agent to
arrange for the sale of shares of beneficial interest (the "Shares") of the
Gradison-McDonald Ohio Tax-Free Income Fund (the "Series") on the terms and for
the period set forth in this Agreement, and the Distributor hereby accepts such
appointment and agrees to act hereunder.
(b) Should the Trust establish any additional series subsequent to
the date hereof for which the Trust wishes to appoint the Distributor as its
agent to arrange for the sale of the shares thereof under the terms of this
Agreement, the Trust shall provide the Distributor with a written notice to such
effect. If the Distributor is willing to serve in such capacity, it shall
provide the Trust with a written notice to such effect, whereupon the shares of
such series, together with the shares of the Series named in Section 1(a)
hereunder, shall be included in the term "Shares" hereunder, and such series,
together with the Series named in Section 1(a) hereunder, shall be included in
the term "Series" hereunder.
(c) It is understood that purchases of Shares of the Series may be
made through other broker-dealers entering into agreements with either the Trust
or the Distributor and directly through the Trust in the manner set forth in the
Prospectus. As used in this Agreement, the term "Prospectus" shall mean the
prospectus(es) and statement(s) of additional information included in the
Trust's Registration Statement and relating to the Series for which the
Distributor serves in such capacity hereunder, and the term "Registration
Statement" shall mean the Registration Statement(s) most recently filed by the
Trust with the Securities and Exchange Commission and effective under the
Securities Act of 1933, as amended (the "1933 Act") and the Investment Company
Act of 1940, as amended (the "1940 Act"), as such Registration Statement is
amended by any amendments thereto at the time in effect.
Section 2. SERVICES AND DUTIES OF THE DISTRIBUTOR.
(a) The Distributor agrees to arrange to sell, as agent for the
Trust and from time to time during the term of this Agreement, the Shares of the
Series upon the terms described in the Prospectus.
(b) During the continuous public offering of the Shares of the
Series, the Distributor will hold itself available to receive orders,
satisfactory to the Distributor, for the
<PAGE> 2
purchase of such Shares and will accept such orders on behalf of the Trust as
of the time of receipt of such orders and will transmit such orders as are so
accepted to the Trust as promptly as practicable. Purchase orders shall be
deemed effective at the time and in the manner set forth in the Prospectus.
(c) The Distributor, as agent for the Trust and in its discretion,
may enter into agreements with such registered and qualified retail
broker-dealers as it may select pursuant to which such broker-dealers may also
arrange for the sale or sell Shares of the Series. The Distributor, as a retail
broker-dealer may also sell shares of the Series. When it does so, it shall do
so pursuant to a standard form of "Dealer's Agreement" as may be modified in the
future.
(d) The offering price of the Shares of each Series shall be the
net asset value per share of each such Series next determined following receipt
of an order plus the sales charge, if any, as stated in the Prospectus. The
Trust shall furnish the Distributor, with all possible promptness, advice of
each computation of each Series' net asset value. The Distributor shall receive
the entire amount of any sales charge as compensation for its services under
this Agreement; however, the Distributor shall reallow the portion of such
charge as set forth in the Prospectus to broker-dealers entering into agreements
with the Distributor to sell Shares of the Series.
(e) In addition to the above, the Distributor shall collect fees in an
amount equal to a percentage (annual rate) of the assets of a Series' accounts
during the preceding month, as provided in Schedule A to this Agreement and
shall pay such fees to broker-dealers with which it has executed dealer
agreements as compensation for personal services rendered to shareholders of the
Trust including providing shareholder liaison services such as responding to
shareholder inquiries and providing information to shareholders about their
Trust accounts. Such amounts shall be paid by the Trust at the end of each
calendar month. The Trust's obligation to make payments described in this
paragraph (e) is contingent upon the continuance of the Trust's Distribution
Service Plan, and in that connection it is understood that:
(i) such Plan shall remain in effect for one year from its adoption
date and may be continued from year to year thereafter
only if the Plan and any related agreements are approved
at least annually by a majority vote of the Trustees of
the Trust, including a majority of the Trustees who are
not "interested persons" of the Trust and who have no
direct or indirect financial interest in the operation of
the Plan or in any related agreement ("Independent
Trustee"), cast in person at a meeting called for the
purpose of voting on such Plan and agreements; and
(ii) the Plan may be terminated with respect to any Series at any
time by a majority vote of the Independent Trustees or by
vote of a majority of the outstanding voting securities
of the Series. In the event the Plan is not continued or
is terminated with respect to a Series, the provisions of
this Agreement pursuant to which fees are paid to the
Distributor shall automatically terminate with respect to
that Series.
(f) The Distributor hereby agrees to use its best efforts to find
purchasers who shall purchase the Shares of the Series; it shall not be
obligated to sell any certain number of such Shares and nothing herein contained
shall prevent the Distributor from entering into like distribution arrangements
with other investment companies so long as the performance of its obligations
hereunder is not impaired thereby.
<PAGE> 3
(g) The Distributor is authorized on behalf of the Trust to
purchase Shares of the Series presented to it by dealers at the price determined
in accordance with, and in the manner set forth in, the Prospectus.
Section 3. SERVICES NOT EXCLUSIVE.
The services furnished by the Distributor hereunder are not to be
deemed exclusive and the Distributor shall be free to furnish similar services
to others so long as its services under this Agreement are not impaired thereby.
Nothing in this Agreement shall limit or restrict the right of any director,
officer or employee of the Distributor, who may also be a Trustee, officer or
employee of the Trust, to engage in any other business or to devote his or her
time and attention in part to the management or other aspects of any other
business, whether of a similar or dissimilar nature.
Section 4. DUTIES OF THE TRUST.
(a) The Trust agrees to sell the Shares of the Series so long as it
has such Shares available for sale and to issue, if requested by the purchaser
and if provided for by the Trust, certificates for the Shares of the Series,
registered in such names and amounts as the Distributor has requested in
writing, as promptly as practicable after receipt by the Trust of the net asset
value thereof and written request of the Distributor therefor. The Trust may at
any time withdraw offerings of the Shares of one or more Series by notice to the
Distributor.
(b) The Trust shall keep the Distributor fully informed with regard
to its affairs and the affairs of the Series and shall furnish to the
Distributor copies of all information, financial statements and other papers
which the Distributor may reasonably request for use in connection with the
distribution of the Shares. This shall include, without limitation, one copy of
all financial statements of the Trust and the Series prepared by independent
accountants and such reasonable number of copies of its most current Prospectus,
and annual and interim reports as the Distributor may request. The Trust shall
cooperate fully in the efforts of the Distributor to arrange for the sale of the
Shares and in the performance of the Distributor's duties under this Agreement.
(c) The Trust shall take, from time to time, all necessary action
to fix the number of authorized Shares of the Series and such steps, including
payment of the related filing fees, as may be necessary to register the same
under the 1933 Act so that there will be available for sale such number of
Shares of the Series as the Distributor may be expected to sell. The Trust
agrees to file from time to time such amendments, reports and other documents as
may be necessary in order that there may be no untrue statement of a material
fact in a Registration Statement or Prospectus, or necessary in order that there
may be no omission to state a material fact in the Registration Statement or
Prospectus which omission would make the statements therein, in light of the
circumstances under which they were made, misleading.
(d) The Trust shall use its best efforts to qualify and maintain
the qualification of an appropriate number of the Shares of the Series for sale
under the securities laws of such states as the Distributor and the Trust may
approve, and, if necessary or appropriate in connection therewith, to qualify
and maintain the qualification of the Trust as a broker, dealer or agent in such
states; provided that the Trust shall not be required to amend the Declaration
of Trust or its By-Laws to comply with the laws of any state, to maintain an
office in any state, to change the terms of the offering of the Shares of the
Series in any state from the terms set forth in its Registration Statement or
Prospectus, to qualify as a foreign corporation, business trust or similar
entity in any state or to consent to service of process in any state other than
with respect to claims arising out of the offering of the Shares of the Series.
The Distributor shall furnish such information and other material
<PAGE> 4
relating to its affairs and activities as may be required by the Trust in
connection with such qualifications.
Section 5. EXPENSES.
(a) The Trust shall bear all costs and expenses of the continuous
offering of the Shares of the Series in connection with: (i) fees and
disbursements of counsel and auditors, (ii) the preparation, filing and printing
of any registration statements and/or prospectuses required by and under the
federal securities laws, (iii) the preparation and mailing of annual and interim
reports and proxy materials to shareholders and (iv) the qualification of the
Shares for sale and of the Trust as a broker-dealer under the securities laws of
such states or other jurisdictions as shall be selected by the Trust and the
Distributor pursuant to Section 4(d) hereof and the cost and expenses payable to
each such state for continuing qualification therein. Any such costs and
expenses borne by the Trust which are attributable only to one Series will be
allocated to that Series; expenses which are not specifically allocable will be
allocated to each Series in a manner and on a basis determined in good faith by
the Trustees (including a majority of the Trustees who are not "interested
persons" (as defined in the 1940 Act) of the Trust, the Adviser or the
Distributor) to be fair and equitable.
(b) The Distributor shall bear the following expenses (on a Series
by Series basis, where applicable): (i) the costs and expenses of preparing,
printing and distributing any materials not prepared by the Trust and other
materials used by the Distributor in connection with the offering of the Shares
of the Series for sale to the public, including the additional cost of printing
copies of the Prospectus and of annual and interim reports to shareholders other
than the copies thereof required for distribution to existing shareholders or
for filing with any federal and state securities authorities, (ii) the expenses
of registration or qualification of the Distributor as a dealer or broker under
federal or state laws and the expenses of continuing such registration or
qualification; and (iii) any other distribution or promotional expenses incurred
by the Distributor in connection with such offering, except for any such
distribution or promotional expenses as are paid by one or more Series pursuant
to a Rule 12b-1 distribution plan.
Section 6. INDEMNIFICATION. The Trust agrees to indemnify, defend
and hold the Distributor, its officers, partners, and employees, and any person
who controls the Distributor within the meaning of Section 15 of the 1933 Act or
Section 20 of the Securities Exchange Act of 1934, as amended (the "1934 Act"),
free and harmless from and against any and all claims, demands, liabilities and
expenses (including the cost of investigating or defending such claims, demands
or liabilities and any counsel fees incurred in connection therewith) which the
Distributor, its officers, partners, employees, or any such controlling person
may incur under the 1933 Act, the 1934 Act, or under common law or otherwise,
arising out of or based upon any untrue statement of a material fact contained
in the Registration Statement or Prospectus or arising out of or based upon any
alleged omission to state a material fact required to be stated in either
thereof or necessary to make the statements in either thereof not misleading,
except insofar as such claims, demands, liabilities or expenses arise out of or
are based upon any such untrue statement or omission or alleged untrue statement
or omission made in reliance upon and in conformity with information furnished
in writing by the Distributor to the Trust for use in the Registration Statement
or Prospectus; provided, however, that this indemnity agreement, to the extent
that it might require indemnity of any person who is also an officer or director
of the Trust or who controls the Trust within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act, shall not inure to the benefit of such
officer, director or controlling person unless a court of competent jurisdiction
shall determine, or it shall have been determined by controlling precedent, that
such result would not be against public policy as expressed in the 1933 Act; and
further provided, that in no event shall anything contained herein be so
<PAGE> 5
construed as to protect the Distributor against any liability to the Trust or to
its security holders to which the Distributor would otherwise be subject by
reason of willful misfeasance, bad faith, or gross negligence in the performance
of its duties, or by reason of its reckless disregard of its obligations under
this Agreement. The Trust's agreement to indemnify the Distributor, its officers
and directors and any such controlling person as aforesaid is expressly
conditioned upon the Trust being promptly notified of any action brought against
the Distributor, its officers or directors, or any such controlling person, such
notification to be given by letter or telegram addressed to the Trust at its
principal business office. The Trust agrees promptly to notify the Distributor
of the commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issue and sale of any of its
Shares. The Trust shall be entitled to participate at its own expense in the
defense or, if it so elects, to assume the defense of any suit brought to
enforce any claims subject to this indemnity agreement. If the Trust elects to
assume the defense of any such claim, the defense shall be conducted by counsel
chosen by the Trust and satisfactory to indemnified defendants in the suit whose
approval shall not be unreasonably withheld. In the event that the Trust elects
to assume the defense of a suit, it will reimburse the indemnified defendants
for the reasonable fees and expenses of any counsel retained by the indemnified
defendants.
The Distributor agrees to indemnify, defend and hold the Trust, its
trustees and officers and any person who controls the Trust, if any, within the
meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, free and
harmless from and against any and all claims, demands, liabilities and expenses
(including the cost of investigating or defending such claims, demands or
liabilities and any counsel fees incurred in connection therewith) which the
Trust, its trustees or officers or any such controlling person may incur under
the 1933 Act, and the 1934 Act, or under common law or otherwise, but only to
the extent that such liability or expense incurred by the Trust, its trustees or
officers or such controlling person resulting from such claims or demands shall
arise out of or be based upon (i) any alleged untrue statement of a material
fact contained in information furnished in writing by the Distributor to the
Trust for use in the Registration Statement or Prospectus; (ii) any failure of
the Distributor or any investor purchasing Shares of a Series through the
Distributor to timely transmit good payment for the purchase of such Shares;
(iii) any material breach of the obligations of the Distributor under Section 7
of this Agreement; or (iv) any agreement between the Distributor and any retail
dealer or any supplemental sales literature or advertising used by the
Distributor in connection with its duties under this Agreement except insofar as
such claims, demands, liabilities or expenses arise out of or are based upon any
such untrue statement or omission or alleged untrue statement or omission made
in reliance upon and in conformity with information furnished in writing by the
Trust to the Distributor for use in the Registration Statement or Prospectus.
The Distributor's agreement to indemnify the Trust, its trustees and officers
and any such controlling person as aforesaid, is expressly conditioned upon the
Distributor being promptly notified of any event giving rise to rights of
indemnification hereunder, including any action brought against the Trust, its
trustees or officers or any such controlling person, such notification being
given to the Distributor at its principal business office. The Distributor shall
be entitled to participate, at its own expense, in the defense or, if it so
elects, to assume the defense of any suit brought to enforce the claim, but if
the Distributor elects to assume the defense, the defense shall be conducted by
counsel chosen by the Distributor and satisfactory to the indemnified defendants
whose approval shall not be unreasonably withheld. In the event the Distributor
elects to assume the defense of any suit and retain counsel, the defendants in
the suit shall bear the fees and expenses of any additional counsel retained by
them. If the Distributor does not elect to assume the defense of any suit, it
will reimburse the indemnified defendants in the suit for the reasonable fees
and expenses of any counsel retained by them.
Section 7. COMPLIANCE WITH SECURITIES LAWS. The Trust represents
that it is registered as an open-end management investment company under the
1940 Act, and agrees
<PAGE> 6
that it will comply with all of the provisions of the 1940 Act and of the rules
and regulations thereunder. The Trust and the Distributor each agree to comply
with all of the applicable terms and provisions of the 1940 Act, the 1933 Act
and, subject to the provisions of Section 4(d), all applicable state "Blue Sky"
laws. The Distributor agrees to comply with all of the applicable terms and
provisions of the 1934 Act.
Section 8. TERM OF AGREEMENT. This Agreement shall commence on the
date first set forth above. This Agreement shall continue in effect for a period
more than one year from the date hereof only so long as such continuance is
specifically approved at least annually in conformity with the requirements of
the 1940 Act.
Section 9. TERMINATION. This Agreement may be terminated with
respect to any Series at any time, without the payment of any penalty, by vote
of a majority of the outstanding voting securities of the respective Series or
by a vote of a majority of the members of the board of trustees of the Trust who
are not interested persons of the Trust and have no direct or indirect financial
interest in the operation of the plan or in any agreements related to the plan
on not less than sixty days' written notice to the Distributor. This Agreement
may also be terminated by the Distributor upon not less than sixty days' written
notice to the Trust. Any such notices shall be by delivery in person or by
registered or certified mail to the addresses of the parties as specified below.
In the event of termination, any sums due the Distributor for
itself for accounts serviced prior to termination will be paid within ten days
after the end of the month of such termination.
This Agreement shall terminate automatically in the event of its
assignment (within the meaning of the 1940 Act) unless such automatic
termination shall be prevented by an order of exemption from the Securities and
Exchange Commission.
Section 10. NOTICES. Any notice required to be given pursuant to
this Agreement shall be deemed duly given if delivered or mailed by registered
mail, postage prepaid, (1) to the Distributor at 3435 Stelzer Road, Columbus
Ohio (2) to the Trust 580 Walnut Street, Cincinnati, Ohio 45202.
Section 11. GOVERNING LAW. This Agreement shall be governed and
construed in accordance with the laws of the State of Ohio.
Section 12. AMENDMENT OF THIS AGREEMENT. No provision of this
Agreement may be changed, waived, discharged or terminated orally, but only by
an instrument in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought.
<PAGE> 7
Section 13. NON-LIABILITY OF SHAREHOLDERS, TRUSTEES, OFFICERS,
EMPLOYEES, REPRESENTATIVES AND AGENTS. A copy of the Declaration of Trust, as
amended, establishing the Trust is on file with the Secretary of the State of
Ohio, and notice is hereby given that this Agreement is executed on behalf of
the Trust by the Officers of the Trust as officers, and not individually, and
that the shareholders, trustees, officers, employees, representatives or agents
of the Trust shall not personally be bound by or liable under this Agreement,
nor shall resort be had to their private property for the satisfaction of any
obligation or claim thereunder, as more fully provided under the terms of the
Declaration of Trust.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
on the day and year first above written.
GRADISON-McDONALD MUNICIPAL CUSTODIAN TRUST
By: ______________________
______________________
BISYS FUND SERVICES LIMITED PARTNERSHIP
DBA BISYS FUND SERVICES
BY: BISYS FUND SERVICES INC., GENERAL PARTNER
By:______________________
______________________
<PAGE> 8
Master Distribution Agreement
between
Gradison-McDonald Municipal Custodian Trust
and
BISYS Fund Services Limited Partnership
Schedule A
----------
Service Fee
-----------
Series Fee
------ ---
Gradison-McDonald Ohio Tax-Free .25% of 1% of the
Income Fund average daily net
assets of the Series
<PAGE> 1
Exhibit 11
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to references to the use of
our reports dated July 28, 1998 and to all references to our Firm included in or
made a part of this registration statement, post-effective amendment no. 11.
/s/ Arthur Andersen LLP
Cincinnati, Ohio
October 6, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000888850
<NAME> GRADISON-MCDONALD MUNICIPAL CUSTODIAN TRUST
<SERIES>
<NUMBER> 1
<NAME> GRADISON OHIO TAX FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 96550974
<INVESTMENTS-AT-VALUE> 101220995
<RECEIVABLES> 1665624
<ASSETS-OTHER> 20500
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 102907119
<PAYABLE-FOR-SECURITIES> 3195977
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 556381
<TOTAL-LIABILITIES> 3752298
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 94485326
<SHARES-COMMON-STOCK> 7179641
<SHARES-COMMON-PRIOR> 5698746
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (526)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4670021
<NET-ASSETS> 99154821
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4800434
<OTHER-INCOME> 0
<EXPENSES-NET> 807845
<NET-INVESTMENT-INCOME> 3992589
<REALIZED-GAINS-CURRENT> 78221
<APPREC-INCREASE-CURRENT> 2575495
<NET-CHANGE-FROM-OPS> 6646305
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3998270
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3128080
<NUMBER-OF-SHARES-REDEEMED> 1870920
<SHARES-REINVESTED> 223735
<NET-CHANGE-IN-ASSETS> 22982345
<ACCUMULATED-NII-PRIOR> 5681
<ACCUMULATED-GAINS-PRIOR> (78747)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 432146
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 817548
<AVERAGE-NET-ASSETS> 86429225
<PER-SHARE-NAV-BEGIN> 13.367
<PER-SHARE-NII> .627
<PER-SHARE-GAIN-APPREC> .445
<PER-SHARE-DIVIDEND> .628
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.811
<EXPENSE-RATIO> .93
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
