<PAGE> 1
LETTER TO SHAREHOLDERS
- -------------------------------------------------------------------------------
August 3, 1998
Dear Shareholders:
As our fiscal year comes to a close, interest rates have fallen to historically
low levels as a result of global economic weakness and low domestic inflation.
Although the United States is experiencing one of its most robust and enduring
business expansions on record, investors believe that weakness in Asia and
Russia will sufficiently reduce demand for U.S. goods to prevent our economy
from overheating. With this low inflation environment as a backdrop, interest
rates have fallen and bond prices have risen, driving up the value of your Fund
shares. The Gradison Ohio Tax-Free Fund has pursued a strategy of investing in
long maturity, high quality bonds which tend to perform well as interest rates
fall. For the twelve months ended June 30, 1998, the Fund had an increase in net
asset value which, combined with dividend income, generated a total return to
shareholders of 8.19%.
Going forward, the issue facing the bond market is the ability of interest rates
to move lower after having fallen so much already. At this time, there is little
on the horizon that threatens to dispel investor optimism; therefore, we are
constructive on the market and intend to stick with our strategy of owning long
maturity, high quality bonds. Another source of optimism comes from the credit
quality improvement of issuers in the state of Ohio. The strong economy has
particularly benefited the balance sheets of municipal issuers as tax
collections have increased and welfare expenditures have declined. In any case,
as events unfold, 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
1-800-869-5999 [LOGO]
<PAGE> 2
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
For a share outstanding throughout each period
<TABLE>
<CAPTION>
11
Year Ended Months
----------------------------------------------- Ended
6/30/98 6/30/97 6/30/96 6/30/95 6/30/94
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 13.367 $ 12.899 $ 12.773 $ 12.466 $ 13.316
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .627 .640 .648 .661 .593
Net realized and unrealized gain (loss) on investments.445 .467 .126 .308 (.743)
-------- -------- -------- -------- --------
TOTAL INCOME (LOSS) FROM INVESTMENT OPERATIONS 1.072 1.107 .774 .969 (.150)
-------- -------- -------- -------- --------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income (.628) (.639) (.648) (.662) (.594)
Distributions from realized capital gains -- -- -- -- (.106)
-------- -------- -------- -------- --------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS (.628) (.639) (.648) (.662) (.700)
-------- -------- -------- -------- --------
NET ASSET VALUE AT END OF PERIOD $ 13.811 $ 13.367 $ 12.899 $ 12.773 $ 12.466
======== ======== ======== ======== ========
TOTAL RETURN(1) 8.19% 8.80% 6.17% 8.00% (1.27%)(2)
==== ==== ==== ==== =====
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of period (in millions) $ 99.2 $ 76.2 $ 70.6 $ 70.0 $ 77.6
Ratio of gross expenses to average net assets (3) .95% .97% .98% -- --
Ratio of net expenses to average net assets .93% .96% .97% .97% .90% (4)(5)
Ratio of net investment income to average net assets 4.62% 4.87% 4.99% 5.26% 4.94% (4)(5)
Portfolio turnover rate 45% 134% 100% 80% 56%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Total returns are based upon an initial investment purchased without the
applicable sales charge. The sales charge was eliminated on July 7,
1997.
(2) Total return represents the actual return over those periods and has not
been annualized.
(3) Effective June 30, 1996 this ratio reflects gross expenses before
reduction for earnings credit; such reductions are included in the ratio
of net expenses.
(4) Annualized.
(5) During the period ended June 30, 1994, 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 the ratio of net investment income to average net
assets was 4.85%.
2 See accompanying notes to financial statements.
<PAGE> 3
OHIO TAX-FREE INCOME FUND
- -------------------------------------------------------------------------------
June 30, 1998
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
September 18, 1992 to June 30, 1998
<TABLE>
<CAPTION>
VALUE AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED JUNE 30, 1998
16,000 Inception 8/18/92 5 Years 3 Years 1 Year
<S> <C> <C> <C> <C> <C>
Ohio Tax-Free Income fund 7.09% 5.88% 7.71% 8.19%
15,000
-- GRADISON OHIO TAX-FREE INCOME FUND 15,663
-- LEHMAN BROTHERS 20 YEAR MUNICIPAL INDEX 14,551
14,000
13,000
12,000
11,000
10,000
-----------------------------------------------------------------------------------------------
9/92 12/92 6/93 6/94 6/95 12/95 6/96 12/96 12/96 6/97 12/97 6/98
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. The performance quoted
represents past performance. The investment return and value of an investment in
the Fund will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than the original cost. Total return includes changes in
share value and reinvestment of all distributions. The Fund's sales charge was
eliminated effective July 7, 1997. This performance data does not reflect the
deduction of the sales charge which would reduce the performance.
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> 4
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> 5
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> 6
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> 7
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> 8
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> 9
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> 10
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> 11
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> 12
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> 13
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
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<PAGE> 15
GRADISON FAMILY OF FUNDS
- -------------------------------------------------------------------------------
Increasingly, MUTUAL FUNDS are the preferred vehicle for starting and building
an investment program. And today, GRADISON is a preferred name in mutual funds
for a GROWING number of investors.
GOVERNMENT INCOME FUND
An income fund which invests in intermediate to long-term U.S. Government
securities.
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.
<PAGE> 16
OHIO TAX-FREE
INCOME FUND
ANNUAL REPORT
JUNE 30, 1998
[GRADISON
MUTUAL FUNDS LOGO]
This material is intended for distribution to shareholders of the Gradison Ohio
Tax-Free Income Fund. It may be distributed to other persons only if it is
preceded or accompanied by a current prospectus of the Gradison Ohio Tax-Free
Income Fund. McDonald & Company Securities, Inc.--Distributor
