<PAGE> 1
OHIO TAX-FREE
INCOME FUND
Semiannual Report
DECEMBER 31, 1997
[logo] GRADISON MUTUAL FUNDS(TM)
GRADISON MUTUAL FUNDS
580 WALNUT STREET
CINCINNATI, OHIO 45202-3198
This material is intended for distribution to shareholders of the Gradison Ohio
Tax-Free Income Fund. It may be distributed to other persons only if it is
preceded or accompanied by a current prospectus of the Gradison Ohio Tax-Free
Income Fund. McDonald & Company Securities, Inc.--Distributor
<PAGE> 2
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
January 30, 1998
Dear Shareholders:
During the second half of 1997, the bond market staged a powerful rally based on
the expectation of slower domestic economic growth and low inflation in the
United States. The near collapse of the Asian equity and currency markets in
October added fuel to those expectations, driving the yield on the 30 year
Treasury bond below 6% for the first time since the start of 1996. Prices of
municipal bonds rose in concert with treasuries making for a very positive
investment environment for the Gradison Ohio Tax-Free Income Fund. The Fund had
an increase in net asset value which, combined with dividend income, generated a
total return to shareholders of 5.60% for the six months and 9.04% for the
twelve months ended December 31, 1997 (not including the effect of any sales
charge).* This strong performance can be attributed to management's strategy of
investing in high quality discount bonds which tend to appreciate faster as
interest rates fall.
The question going forward is how long the current optimal scenario for bonds
can persist. While trying to forecast the direction of interest rates is very
difficult, we feel there is a high likelihood that rates will remain low. The
greatest impediment to interest rates moving lower has been the Federal Reserve.
Worried about inflation, the Fed indicated that it was poised to raise rates
during 1997. With the Asian crisis as a catalyst for global economic slowdown,
the Fed is more likely to take a neutral or easing posture in the coming months.
The combination of reduced demand for U.S. exports and an influx of cheap
foreign goods should lead to a slower domestic economy and low inflation.
Although the foregoing scenario is highly likely, the Fund has begun to reduce
its interest rate risk by shortening the average maturity of the portfolio. This
strategy has been undertaken with the goal of reducing the volatility of the
Fund in recognition of the progress already made in bringing rates down and the
potential for interest rates to rise unexpectedly in response to unforeseen
events. In any case, your Fund's management will continue to pursue strategies
to maximize shareholder value while generating high tax-free income.
As always, we thank you for your support and investment in the Gradison Ohio
Tax-Free Fund.
Very truly yours,
/s/ Stephen C. Dilbone
Stephen C. Dilbone
Executive Vice President and Portfolio Manager
*The sales charge was eliminated on July 7, 1997.
<PAGE> 3
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a share outstanding throughout each period (Unaudited)
<TABLE>
<CAPTION>
FOR
6 11 PERIOD
MONTHS YEAR ENDED MONTHS 9/18/92
ENDED --------------------------- ENDED TO
12/31/97 6/30/97 6/30/96 6/30/95 6/30/94 7/31/93(1)
-------- ------- ------- ------- ------- ----------
<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 .321 .640 .648 .661 .593 .599
Net realized and unrealized gain (loss) on investments .421 .467 .126 .308 (.743) .813
------ ------ ------ ------ ------ ------
TOTAL INCOME (LOSS) FROM INVESTMENT OPERATIONS .742 1.107 .774 .969 (.150) 1.412
------ ------ ------ ------ ------ ------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income (.318) (.639) (.648) (.662) (.594) (.596)
Distributions from realized capital gains -- -- -- -- (.106) --
------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS (.318) (.639) (.648) (.662) (.700) (.596)
------ ------ ------ ------ ------ ------
NET ASSET VALUE AT END OF PERIOD $13.791 $13.367 $12.899 $12.773 $12.466 $13.316
======= ======= ======= ======= ======= =======
TOTAL RETURN 5.60%(2) 8.80% 6.17% 8.00% (1.27%)(2) 11.56%(2)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (in millions) $85.2 $76.2 $70.6 $70.0 $77.6 $69.6
Ratio of gross expenses to average net assets(3) .96%(4) .97% .98% -- -- --
Ratio of net expenses to average net assets .95%(4) .96% .97% .97% .90%(4)(5) .75%(4)(5)
Ratio of net investment income to average net assets 4.73%(4) 4.87% 4.99% 5.26% 4.94%(4)(5) 5.25%(4)(5)
Portfolio turnover rate 10% 134% 100% 80% 56% 45%
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) No income was earned or expenses incurred from the date the initial
shares were purchased by the adviser (August 21, 1992) through the date
of public offering (September 18, 1992).
(2) Total return represents the actual returns over those periods and has not
been annualized.
(3) Effective June 30, 1996, this ratio reflects gross expenses before
reduction for earnings credits; such reductions are included in the ratio
of net expenses.
(4) Annualized.
(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 net
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.
</TABLE>
See accompanying notes to financial statements.
2
<PAGE> 4
OHIO TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
December 31, 1997 (Unaudited)
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
FACE COUPON
AMOUNT MUNICIPAL BONDS - 97.77% RATE MATURITY VALUE
------ ------------------------ ---- -------- ------
<S> <C> <C> <C> <C>
$ 750,000 Ashland Co., OH G.O. 7.00% 12/01/11 $ 830,625
545,000 Athens Co., OH Community Mental Health Series 1993 I 5.90 3/01/09 570,888
335,000 Avon, OH G.O. 6.50 12/01/15 388,181
1,075,000 Broadview Heights, OH Industrial Development Revenue 6.25 7/01/13 1,126,062
1,250,000 Cincinnati, OH Urban Redevelopment Improvement G.O. 6.30 12/01/15 1,382,812
1,500,000 Cleveland, OH Airport System Revenue 5.13 1/01/22 1,503,750
2,950,000 Cleveland, OH Certificates of Participation 7.10 7/01/02 3,160,187
750,000 Cleveland, OH Public Power System First Mortgage Revenue 7.00 11/15/16 872,813
100,000 Cleveland, OH Urban Renewal Increment Bonds Series 1993 6.63 3/15/11 106,875
1,300,000 Cleveland, OH Urban Renewal Increment Bonds Series 1993 6.75 3/15/18 1,391,000
500,000 Cuyahoga Co., OH Health Care (Benjamin Rose Institute) 5.30 12/01/25 520,625
1,000,000 Cuyahoga Co., OH Hospital Revenue (Fairview General and Lutheran Medical Center)* 6.25 8/15/10 1,078,750
1,500,000 Cuyahoga Co., OH Hospital Revenue (Fairview General and Lutheran Medical Center) 5.50 8/01/14 1,552,500
1,500,000 Cuyahoga Co., OH Utility Systems Revenue (The Medical Center Company Project) 5.85 8/15/10 1,605,000
2,185,000 Cuyahoga Co., OH Industrial Development Revenue 6.50 6/01/16 2,403,500
1,250,000 Dublin, OH City School District G.O. 0.00 12/01/09 720,313
1,000,000 Fairfield Co., OH City School District G.O. 7.45 12/01/14 1,305,000
640,000 Franklin Co., OH Hospital Revenue (Worthington Christian Village) 7.00 8/01/16 674,400
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 1,013,750
500,000 Franklin Co., OH Mortgage Revenue 5.55 11/20/17 506,875
2,300,000 Gateway Economic Development Corporation of Greater Cleveland Stadium Revenue 6.50 9/15/14 2,420,750
2,020,000 Greater Cincinnati, OH Mortgage Revenue Refunding (Walnut Towers Project) 6.90 8/01/25 2,196,750
1,000,000 Greater Cleveland, OH Regional Transit Authority 5.60 12/01/11 1,067,500
1,995,000 Hamilton Co., OH G.O. 5.50 12/01/17 2,084,775
160,000 Hamilton Co., OH Hospital Facilities Revenue (Childrens Hospital) 6.75 5/15/09 164,038
2,150,000 Hamilton Co., OH Hospital Facilities Revenue (Deaconess Hospital) 7.00 1/01/12 2,356,937
1,050,000 Hilliard, OH City School District G.O. 5.00 12/01/20 1,036,875
1,000,000 Kent, OH City School District G.O. 5.75 12/01/21 1,065,000
1,000,000 Kettering, OH City School District G.O. 5.25 12/01/22 1,008,750
700,000 Liberty Local School District, OH G.O. 5.25 12/01/15 706,125
1,000,000 Lorain, OH G.O. 7.88 12/01/09 1,083,750
1,500,000 Lucas Co., OH Hospital Revenue (Toledo Hospital) 5.00 11/15/10 1,520,625
500,000 Lucas Co., OH Hospital Revenue (Toledo Hospital) 5.00 11/15/22 488,125
385,000 Lucas Northgate Housing Development Corp., OH 8.13 1/01/25 403,769
1,000,000 Mahoning Co., OH Hospital Revenue (Forum Health Group) 4.90 11/15/10 988,750
855,000 Mahoning Co., OH Hospital Revenue (Forum Health Group) 7.00 10/15/14 928,744
500,000 Mount Vernon, OH City School District G.O. 7.50 12/01/14 594,375
600,000 Oak Hills Local School District, OH G.O. 5.70 12/01/25 621,000
1,000,000 Ohio Capital Corp. Housing Mortgage Revenue Refunding (FHA Section 8 Housing) 6.35 7/01/15 1,052,500
920,000 Ohio Capital Corp. Housing Mortgage Revenue Refunding (FHA Section 8 Housing) 6.50 7/01/24 977,500
970,000 Ohio Capital Corp. Housing Mortgage Revenue Refunding (FHA Section 8 Housing) 7.70 1/01/25 1,019,713
1,000,000 Ohio G.O. 5.35 8/01/12 1,043,750
2,750,000 Ohio State Air Quality Development Authority Revenue (Cleveland Electric) 8.00 12/01/13 3,207,188
1,150,000 Ohio State Air Quality Development Authority Revenue (OH Power) 7.40 8/01/09 1,227,625
1,000,000 Ohio State Building Authority (Adult Correctional Building) 6.13 10/01/12 1,072,500
500,000 Ohio State Economic Development Revenue (OH Enterprise Bond Fund) 6.00 6/01/04 532,500
815,000 Ohio State Economic Development Revenue (OH Enterprise Bond Fund) 6.50 12/01/09 887,331
490,000 Ohio State Economic Development Revenue (OH Enterprise Bond Fund) 5.60 6/01/02 502,250
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 5
OHIO TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
December 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS CONTINUED
FACE COUPON
AMOUNT MUNICIPAL BONDS - CONTINUED) RATE MATURITY VALUE
------ --------------------------- ---- -------- ------
<S> <C> <C> <C> <C>
$2,500,000 Ohio Higher Education Facilities Revenue (University of Dayton) 5.38% 5/01/22 $ 2,559,375
1,000,000 Ohio Higher Education Facilities Revenue (Xavier University) 5.20 12/01/10 1,040,000
1,000,000 Ohio State Water Development Authority Revenue (Cargill) 6.30 9/01/20 1,091,250
2,250,000 Ohio State Water Development Authority Revenue (Dayton Power) 6.40 8/15/27 2,444,062
1,850,000 Puerto Rico G.O. 5.38 7/01/21 1,882,375
1,000,000 Puerto Rico Electric Power Authority Revenue 5.38 7/01/14 1,038,750
500,000 Puerto Rico Infrastructure Finance Authority Revenue 5.00 7/01/16 499,375
500,000 South Euclid, OH G.O. 7.00 12/01/11 553,125
1,500,000 Springdale, OH Hospital Facilities Revenue (Southwestern OH Seniors' Services Inc.) 5.88 11/01/12 1,554,375
1,715,000 Springfield, OH City School District G.O. 0.00 12/01/11 874,650
1,000,000 Student Loan Funding Corporation, Cincinnati, OH Senior
Subordinated Revenue Bonds Series 1993A 6.15 8/01/10 1,038,750
15,000 Summit Co., OH G.O. 6.90 8/01/12 16,669
255,000 Summit Co., OH G.O. 6.90 8/01/12 278,269
230,000 Summit Co., OH G.O. 6.90 8/01/12 259,900
1,500,000 Toledo-Lucas Co., OH Convention Center Special Lodging Tax Revenue 5.70 10/01/15 1,582,500
1,000,000 University of Akron, OH 5.25 1/01/22 1,007,500
500,000 University of Cincinnati, OH 7.00 6/01/11 551,875
1,000,000 University of Cincinnati, OH Certificates of Participation 5.00 6/01/09 1,036,250
1,250,000 Upper Arlington, OH G.O. 5.13 12/01/19 1,250,000
725,000 Warren Co., OH G.O. 6.55 12/01/14 879,969
1,000,000 Warren, OH Water Revenue 5.00 11/01/22 986,250
1,500,000 Westlake, OH G.O. 5.55 12/01/17 1,575,000
1,000,000 Westlake, OH G.O. 5.50 12/01/20 1,042,500
1,760,000 Westlake, OH Industrial Development Revenue 6.40 8/01/09 1,854,600
-----------
TOTAL MUNICIPAL BONDS (AMORTIZED COST $78,801,694) 83,223,345
-----------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FACE COUPON
AMOUNT SHORT-TERM INVESTMENTS - 2.23% RATE MATURITY VALUE
------ ------------------------------ ---- -------- -----
<S> <C> <C> <C> <C>
1,600,000 Ohio Municipal Cash Trust** 3.63 -- 1,600,000
300,000 Countrywide Ohio Tax-Free Money Fund** 3.29 -- 300,000
-----------
TOTAL SHORT TERM INVESTMENTS (AMORTIZED COST $1,900,000) 1,900,000
-----------
TOTAL INVESTMENTS, AT VALUE (AMORTIZED COST $80,701,694) - 100% $85,123,345
===========
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
* Security purchased on a delayed delivery basis. See Note 1.
**Ohio Municipal Cash Trust and Countrywide Ohio Tax-Free Money Fund are money
market mutual funds the investment objective of which is to provide current
income exempt from federal regular and Ohio state income taxes consistent with
stability of principal. Interest is accrued daily and paid to the Fund monthly.
The coupon rate disclosed is the 7-day rate on December 31, 1997.
</TABLE>
4
See accompanying notes to financial statements.
<PAGE> 6
OHIO TAX-FREE INCOME FUND
- --------------------------------------------------------------------------------
December 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
PORTFOLIO COMPOSITION
INVESTMENTS BY REVENUE SOURCE
<S> <C>
GENERAL OBLIGATIONS 27.7%
REVENUE BONDS:
Health Care 18.7
Utilities 14.0
Housing 12.2
Higher Education 7.3
Public Facilities 6.5
Industrial Development 3.5
Transportation 1.8
State Agency 1.2
MUNICIPAL LEASE 4.9
MONEY MARKET 2.2
----
TOTAL 100.0%
=====
- --------------------------------------------------------------------------------
<CAPTION>
INVESTMENTS BY CREDIT RATING
S&P/MOODY'S:
<S> <C>
AAA/Aaa 56.9%
AA/Aa 15.2
A/A 12.8
BBB/Baa 6.8
Unrated (1) 6.1
MONEY MARKET (2) 2.2
-----
TOTAL 100.0%
=====
- --------------------------------------------------------------------------------
<FN>
(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.
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 7
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
12/31/97
--------
ASSETS
<S> <C>
Investments in securities, at value (Note 1) (Cost $80,701,694) $85,123,345
Interest receivable 1,241,775
Cash 41,362
Receivable for Fund shares sold 35,106
Prepaid expenses and other assets 17,586
-----------
TOTAL ASSETS 86,459,174
-----------
LIABILITIES
Payable for investments purchased 1,107,855
Payable for Fund shares redeemed 79,512
Accrued investment advisory fee (Note 2) 35,725
Dividend payable 32,640
Other accrued expenses payable to adviser (Note 2) 25,158
Other accrued expenses and liabilities 8,516
-----------
TOTAL LIABILITIES 1,289,406
-----------
NET ASSETS $85,169,768
===========
NET ASSETS CONSIST OF:
Aggregate paid-in capital $80,656,309
Accumulated undistributed net investment income 21,760
Accumulated net realized gain 70,048
Net unrealized appreciation of investments 4,421,651
-----------
NET ASSETS $85,169,768
===========
SHARES OF CAPITAL STOCK OUTSTANDING
(no par value - unlimited number of shares authorized) 6,175,730
===========
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE (NOTE 1) $13.79
===========
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 8
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
6 MONTHS ENDED 12/31/97
-----------------------
<S> <C> <C>
INTEREST INCOME $2,297,543
EXPENSES:
Investment advisory fee (Note 2) $ 202,280
Distribution (Note 2) 101,140
Accounting service fees (Note 2) 24,000
Professional fees 18,490
Transfer agency fees (Note 2) 18,236
Trustees' fees (Note 2) 9,629
Custodian fees (Note 1) 4,356
Printing 2,733
Registration fees 2,148
Postage and mailing 1,421
ICI dues 1,378
Amortization of organization expense (Note 2) 1,355
Other 1,568
----------
GROSS EXPENSES 388,734
LESS EARNINGS CREDITS ON CASH BALANCES (NOTE 1) (4,356)
----------
NET EXPENSES 384,378
----------
NET INVESTMENT INCOME 1,913,165
NET REALIZED AND UNREALIZED GAINS ON INVESTMENTS:
Net realized gain on investments 148,795
Net change in unrealized appreciation of investments 2,327,125
----------
NET REALIZED AND UNREALIZED GAINS ON INVESTMENTS 2,475,920
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $4,389,085
==========
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
7
<PAGE> 9
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
6 MONTHS ENDED YEAR ENDED
12/31/97 6/30/97
FROM OPERATIONS:
<S> <C> <C>
Net investment income $ 1,913,165 $ 3,678,847
Net realized gain on investments 148,795 1,183,172
Net change in unrealized appreciation of investments 2,327,125 1,449,100
------------ ------------
Net increase in net assets resulting from operations 4,389,085 6,311,119
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME (1,897,086) (3,674,726)
------------ ------------
FROM FUND SHARE TRANSACTIONS:
Proceeds from shares sold 18,702,290 18,817,895
Net asset value of shares issued in reinvestment of distributions 1,491,727 2,938,885
Payments for Fund shares redeemed (13,688,724) (18,782,590)
------------ ------------
Net increase in net assets from Fund share transactions 6,505,293 2,974,190
------------ ------------
TOTAL INCREASE IN NET ASSETS 8,997,292 5,610,583
NET ASSETS:
Beginning of period 76,172,476 70,561,893
------------ ------------
End of period (including undistributed net investment income
of $21,760 and $5,681, respectively) (Note 1) $85,169,768 $76,172,476
============ =============
NUMBER OF FUND SHARES:
Sold 1,374,505 1,433,203
Issued in reinvestment of distributions to shareholders 109,455 223,226
Redeemed (1,006,976) (1,427,931)
------------ -------------
Net increase in shares outstanding 476,984 228,498
Outstanding at beginning of period 5,698,746 5,470,248
------------ -------------
Outstanding at end of period 6,175,730 5,698,746
============ =============
- ------------------------------------------------------------------------------------------------------------
</TABLE>
8
See accompanying notes to financial statements.
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1997 (Unaudited)
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.
SECURITIES VALUATION
Securities are valued in accordance with procedures established by management
and approved by the Board of Trustees by using market quotations provided by an
independent pricing service, prices provided by market makers, or estimates of
market values obtained from yield data relating to instruments or securities
with similar characteristics. Short-term securities with remaining maturities of
less than 60 days are valued at amortized cost which approximates market value.
SECURITIES TRANSACTIONS
Securities transactions are accounted for on the trade date (the date the order
to buy or sell is executed). Gains and losses on sales of securities are
calculated on the identified cost basis for financial reporting and tax
purposes.
SECURITIES PURCHASED ON A WHEN-ISSUED OR DELAYED DELIVERY BASIS
When the Fund purchases securities on a when-issued or delayed delivery basis,
the transaction may be entered into a month or more before delivery and payment
are made. Such securities are marked to market daily and begin earning interest
on the settlement date. In the event that the seller fails to deliver the
securities, the Fund could experience a loss to the extent of any appreciation,
or a gain to the extent of any depreciation, in the price of the securities.
The Fund will maintain, in a segregated account with its custodian, cash or
high-grade portfolio securities having an aggregate value at least equal to the
amount of such purchase commitments. At December 31, 1997, the Fund had
committed $1,084,070 to the purchase of delayed delivery securities; the market
value of the securities segregated as collateral for this purchase is
$1,126,062.
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 redemption price per share is equal to the net asset value per share.
Effective July 7, 1997 the sales charge on purchases of Fund shares was
eliminated.
INVESTMENT INCOME AND DISTRIBUTIONS
TO SHAREHOLDERS
Interest income is accrued as earned. Interest income includes interest earned,
net of premium and original issue discount, as required by the Internal Revenue
Code.
Dividends arising from net investment income are declared daily and paid
monthly. Net realized capital gains, if any, are distributed at least annually.
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 have been capitalized and were fully amortized on a
straight-line basis over 60 months commencing upon the public offering of the
Fund's shares.
8
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS CONTINUED
- --------------------------------------------------------------------------------
December 31, 1997 (Unaudited)
TAXES
It is the Fund's policy to comply with the provisions of the Internal Revenue
Code available to regulated investment companies. As provided therein, in any
fiscal year in which the Fund so qualifies, and distributes at least 90% of
taxable net income, the Fund will be relieved of federal income tax on the
income distributed. Accordingly, no provision for income taxes has been made.
In order to avoid imposition of the excise tax applicable to regulated
investment companies, it is also the Fund's intention to declare as dividends in
each calendar year, at least 98% of its taxable net investment income (earned
during the calendar year) and 98% of its net realized capital gains, if any
(earned during the twelve months ended October 31), plus undistributed amounts
from prior years.
The tax basis of investments is equal to the amortized cost as shown on the
Statement of Assets and Liabilities.
For both financial reporting and tax purposes, gross unrealized appreciation and
gross unrealized depreciation of investments at December 31, 1997 were
$4,484,528 and $62,877, respectively.
As of June 30, 1997, the Fund had a capital loss carryforward for Federal income
tax purposes of $78,747 which can be used to offset future capital gains.
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 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 December 31, 1997, purchases and proceeds from the sale of
securities, excluding short-term securities, amounted to $14,923,491 and
$7,823,269, respectively.
10
<PAGE> 12
GRADISON FAMILY OF FUNDS
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Increasingly, MUTUAL FUNDS are the preferred vehicle for starting and building
an investment program. And today, GRADISON is a preferred name in mutual funds
for a GROWING number of investors.
GOVERNMENT INCOME FUND
An income fund which invests in intermediate to long-term U.S. Government
securities.
OHIO TAX-FREE INCOME FUND
An income fund which seeks to provide income exempt from regular Federal
income tax and Ohio state personal income tax.*
ESTABLISHED VALUE FUND
A common stock fund that seeks long-term capital growth by investing in
companies that are included in the Standard & Poor's 500 Index and other
large companies.
GROWTH & INCOME FUND
A common stock fund that seeks long-term capital growth, current income
and growth of income.
OPPORTUNITY VALUE FUND
A common stock fund that seeks long-term capital growth by investing in
companies that are generally smaller in size than those included in the
Standard & Poor's 500 Index.
INTERNATIONAL FUND
A common stock fund that seeks capital growth by investing in common
stocks of non-United States companies.
MONEY MARKET FUNDS
Gradison offers a full range of taxable and tax-free money market funds.
Prospectuses are available upon request by calling (800) 869-5999 and should be
read carefully before you invest. AN INVESTMENT IN THE MONEY MARKET FUNDS IS
NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT AND THERE CAN BE NO
ASSURANCE THAT THEY WILL BE ABLE TO MAINTAIN A STABLE $1.00 SHARE PRICE. The
return and principal value of an investment in other funds will fluctuate so
that an investor's shares, when redeemed, may be worth more or less than the
original cost. The returns of all funds will fluctuate.
* Investment income may be subject to the federal alternative minimum tax.
Capital gains, if any, are taxable.
