<PAGE> 1
Gradison Mutual Funds
580 Walnut Street
Cincinnati, Ohio 45202-3198
OHIO TAX-FREE
INCOME FUND
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SECURITIES, MUTUAL FUNDS AND OTHER INVESTMENT PRODUCTS ARE NOT INSURED BY THE
FDIC AND ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY MCDONALD
INVESTMENTS INC., KEY BANK OR ANY OF THEIR AFFILIATES, AND ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.
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The Gradison Division of McDonald Investments Inc., a subsidiary of KeyCorp, is
the investment adviser to the Gradison-McDonald Municipal Trust. The Gradison
Funds are sponsored and distributed by BISYS Fund Services Limited Partnership,
which is not affiliated with KeyCorp or its subsidiaries. Gradison receives a
fee for its services from the Gradison Funds.
Semiannual Report
DECEMBER 31, 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. BISYS Fund Services Limited Partnership--Distributor
<PAGE> 2
LETTER TO SHAREHOLDERS
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January 28, 1999
Dear Shareholders:
During the second half of 1998, municipal bond interest rates continued to
decline although the journey was a bumpy one as conflicting economic indicators
created a fair amount of uncertainty in the markets. The United States economy,
which was widely expected to slow this year, remained surprisingly strong,
driving the unemployment rate to its lowest level in almost 30 years. Much of
this strength is attributable to a high level of consumer spending fueled by
rising wages and increased job security as a result of the strong labor market.
Historically these conditions are a precursor to higher inflation, but weak
demand for U.S. exports and an influx of cheap foreign goods, helped to keep the
inflation rate at a low 1.6% for the year. As the year wore on, fears increased
that falling prices and depressed worldwide economies would hurt corporate
profitability and push the U.S. into a recession. In response, Federal Reserve
Chairman Alan Greenspan orchestrated three short-term interest rates cuts in the
span of seven weeks in order to keep the economy rolling. While these actions
are good for the economy and the stock market, it disturbed many bond investors
who perceived that Mr. Greenspan's role had changed from that of being a staunch
inflation fighter to an economic savior. To date, he has achieved an almost
perfect balance between low unemployment, low inflation and strong growth.
The Gradison Ohio Tax-Free Income Fund has been the beneficiary of higher
municipal bond prices due to the subdued inflation environment. The Fund had an
increase in net asset value, which combined with dividend income, generated a
total return to shareholders of 3.15% for the six months and 5.64% for the
twelve months ended December 31, 1998. The investment strategy continues to
focus on high quality discount bonds which we believe will perform well in the
future.
Going forward we believe there is a high likelihood that interest rates may
decline further as a result of slow economic growth. Although the economy
continues to show surprising strength, many economists believe that corporate
profits will fall substantially this year, leading to reduced capital spending
and hiring. Under that scenario, interest rates will likely fall which would be
a catalyst for higher bond prices. In any case, your Fund's management will
continue to pursue strategies to maximize shareholders value while generating
high tax-free income.
As always, we thank you for your investment in the Gradison Ohio-Tax Free Income
Fund.
Very truly yours,
/s/ Stephen C. Dilbone
Vice President and Portfolio Manager
[Picture}
1-800-869-5999
<PAGE> 3
FINANCIAL HIGHLIGHTS
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<TABLE>
<CAPTION>
For a share outstanding throughout each period (Unaudited)
---------------------------------------------------------------
6 11
MONTHS YEAR ENDED MONTHS
ENDED -------------------------------- ENDED
12/31/98 6/30/98 6/30/97 6/30/96 6/30/95 6/30/94
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $13.811 $13.367 $12.899 $12.773 $12.466 $13.316
------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .310 .627 .640 .648 .661 .593
Net realized and unrealized gain (loss) on investments .120 .445 .467 .126 .308 (.743)
------- ------- ------- ------- ------- -------
TOTAL INCOME (LOSS) FROM INVESTMENT OPERATIONS .430 1.072 1.107 .774 .969 (.150)
------- ------- ------- ------- ------- -------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income (.306) (.628) (.639) (.648) (.662) (.594)
Distributions from realized capital gains (.012) -- -- -- -- (.106)
------- ------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS (.318) (.628) (.639) (.648) (.662) (.700)
------- ------- ------- ------- ------- -------
NET ASSET VALUE AT END OF PERIOD $13.923 $13.811 $13.367 $12.899 $12.773 $12.466
======= ======= ======= ======= ======= =======
TOTAL RETURN(1) 3.15%(2) 8.19% 8.80% 6.17% 8.00% (1.27%)(2)
======= ======= ======= ======= ======= =======
Ratios/Supplemental data:
Net assets at end of period (in millions) $119.1 $99.2 $76.2 $70.6 $70.0 $77.6
Ratio of gross expenses to average net assets(3) .90% .95% .97% .98% -- --
Ratio of net expenses to average net assets .89%(4) .93% .96% .97% .97% .90%(4)(5)
Ratio of net investment income to average net assets 4.35%(4) 4.62% 4.87% 4.99% 5.26% 4.94%(4)(5)
Portfolio turnover rate 12% 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%.
See accompanying notes to financial statements.
2
<PAGE> 4
OHIO TAX-FREE INCOME FUND
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December 31, 1998 (Unaudited)
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
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FACE COUPON
AMOUNT MUNICIPAL BONDS - 99.83% RATE MATURITY VALUE
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<S> <C> <C> <C>
$ 1,500,000 Alliance, OH Water Works Revenue 5.00% 11/15/20 $1,490,625
545,000 Athens Co., OH Community Mental Health Series 1993 I 5.90 3/01/09 572,250
335,000 Avon, OH G.O. 6.50 12/01/15 400,744
1,075,000 Broadview Heights, OH Industrial Development Revenue 6.25 7/01/13 1,114,334
1,250,000 Cincinnati, OH Urban Redevelopment Improvement G.O. 6.30 12/01/15 1,396,875
1,250,000 Cleveland, OH Airport System Revenue 5.13 1/01/22 1,260,938
2,600,000 Cleveland, OH Certificates of Participation 7.10 7/01/02 2,769,000
750,000 Cleveland, OH Public Power System First Mortgage Revenue 7.00 11/15/16 882,188
100,000 Cleveland, OH Urban Renewal Increment Bonds Series 1993 6.63 3/15/11 106,250
1,300,000 Cleveland, OH Urban Renewal Increment Bonds Series 1993 6.75 3/15/18 1,381,250
500,000 Cuyahoga Co., OH Health Care (Benjamin Rose Institute) 5.30 12/01/25 532,500
1,500,000 Cuyahoga Co., OH Hospital Revenue
(Fairview General and Lutheran Medical Center) 5.50 8/15/14 1,578,750
500,000 Cuyahoga Co., OH Hospital Revenue
(Fairview General and Lutheran Medical Center) 6.25 8/15/10 538,125
2,250,000 Cuyahoga Co., OH Hospital Revenue (Walker Center) 5.00 1/01/23 2,219,063
2,185,000 Cuyahoga Co., OH Industrial Development Revenue 6.50 6/01/16 2,398,038
1,050,000 Cuyahoga Co., OH Utility Systems Revenue
(The Medical Center Company Project) 5.13 2/15/28 1,052,625
1,500,000 Cuyahoga Co., OH Utility Systems Revenue
(The Medical Center Company Project) 5.85 8/15/10 1,636,875
2,425,000 Deerfield Township, OH Tax Increment Revenue 5.13 12/01/23 2,452,281
1,250,000 Dublin, OH City School District G.O. 0.00 12/01/09 771,875
1,000,000 Fairfield, OH City School District G.O. 7.45 12/01/14 1,301,250
1,000,000 Fort Loramie Local School District, OH G.O. 5.00 12/01/26 988,750
1,000,000 Franklin Co., OH Hospital Revenue (Holy Cross Health) 5.00 6/01/28 978,750
625,000 Franklin Co., OH Hospital Revenue (Worthington Christian Village) 7.00 8/01/16 651,563
1,310,000 Franklin Co., OH Industrial Development Revenue
(Columbus College of Art & Design) 6.00 9/01/13 1,349,300
1,000,000 Franklin Co., OH Mortgage Revenue 5.35 11/20/12 1,030,000
500,000 Franklin Co., OH Mortgage Revenue 5.55 11/20/17 514,375
2,300,000 Gateway Economic Development Corporation
of Greater Cleveland Stadium Revenue 6.50 9/15/14 2,415,000
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 1,062,500
750,000 Green Co., OH Sewer System Revenue 5.13 12/01/20 757,500
1,000,000 Green Co., OH Sewer System Revenue 5.25 12/01/25 1,021,250
1,935,000 Hamilton Co., OH G.O. 4.90 12/01/18 1,918,069
1,995,000 Hamilton Co., OH G.O. 5.50 12/01/17 2,109,713
755,000 Hamilton Co., OH Health Care Revenue (Twin Towers) 5.75 10/01/08 822,950
535,000 Hamilton Co., OH Health Care Revenue (Twin Towers) 5.13 10/01/18 520,287
1,000,000 Hamilton Co., OH Hospital Revenue (Children's Hospital) 5.00 5/15/23 988,750
2,000,000 Hamilton Co., OH Hospital Revenue (Children's Hospital) 4.75 5/15/28 1,887,500
2,150,000 Hamilton Co., OH Hospital Facilities Revenue (Deaconess Hospital) 7.00 1/01/12 2,330,062
1,000,000 Hamilton Co., OH Sales Tax Revenue 4.75 12/01/17 966,250
1,000,000 Hamilton Co., OH Sales Tax Revenue 4.75 12/01/27 945,000
445,000 Hamilton Co., OH Sales Tax Revenue 5.00 12/01/27 441,106
1,050,000 Hilliard, OH City School District G.O. 5.00 12/01/20 1,042,125
1,000,000 Kent, OH City School District G.O. 5.75 12/01/21 1,075,000
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</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 5
OHIO TAX-FREE INCOME FUND
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December 31, 1998 (Unaudited)
PORTFOLIO OF INVESTMENTS Continued
<TABLE>
<CAPTION>
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FACE COUPON
AMOUNT MUNICIPAL BONDS - (Continued) RATE MATURITY VALUE
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<S> <C> <C> <C>
$ 1,000,000 Kent State University Revenue 5.00% 5/01/23 995,000
1,000,000 Kettering, OH City School District G.O. 5.25 12/01/22 1,008,750
2,000,000 Knox Co., OH Hospital Revenue Asset Guaranty 4.40 6/01/05 1,997,500
1,500,000 Lucas Co., OH Hospital Revenue (Toledo Hospital) 5.00 11/15/10 1,537,500
500,000 Lucas Co., OH Hospital Revenue (Toledo Hospital) 5.00 11/15/22 497,500
380,000 Lucas Northgate Housing Development Corp., OH 8.13 1/01/25 393,156
855,000 Mahoning Co., OH Hospital Revenue (Forum Health Group) 7.00 10/15/14 953,325
500,000 Maple Heights, OH G.O. 0.00 12/01/07 343,125
505,000 Maple Heights, OH G.O. 0.00 12/01/08 330,775
500,000 Mount Vernon, OH City School District G.O. 7.50 12/01/14 586,875
1,490,000 Newark, OH Water System G.O. 0.00 12/01/16 610,900
1,000,000 North Olmstead, OH G.O. 6.20 12/01/11 1,163,750
600,000 Oak Hills Local School District, OH G.O. 5.70 12/01/25 642,750
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
960,000 Ohio Capital Corp Housing Mortgage Revenue Refunding
(FHA Section 8 Housing) 7.70 1/01/25 994,061
2,205,000 Ohio Higher Education Facilities Revenue (Mount Union College) 5.00 10/01/23 2,171,925
2,500,000 Ohio Higher Education Facilities Revenue (University of Dayton) 5.38 5/01/22 2,606,250
1,000,000 Ohio Higher Education Facilities Revenue (Xavier University) 5.20 12/01/10 1,055,000
1,000,000 Ohio G.O. 5.35 8/01/12 1,060,000
1,000,000 Ohio State Building Authority 4.75 10/01/17 975,000
1,000,000 Ohio State Building Authority (Adult Correctional Building) 6.13 10/01/12 1,093,750
1,000,000 Ohio State Department of Administrative Services Certificates of
Participation 5.00 7/15/23 986,250
1,055,000 Ohio State Department of Administrative Services Certificates of
Participation 5.00 7/15/28 1,033,900
395,000 Ohio State Economic Development Revenue (Ohio Enterprise Bond Fund) 5.60 6/01/02 405,862
500,000 Ohio State Economic Development Revenue (Ohio Enterprise Bond Fund) 6.00 6/01/04 533,125
815,000 Ohio State Economic Development Revenue (Ohio Enterprise Bond Fund) 6.50 12/01/09 890,387
1,000,000 Ohio State University, Certificates of Participation 5.05 12/01/17 1,002,500
3,415,000 Ohio State Water Development Authority Revenue (Broken Hill) 6.45 9/01/20 3,722,350
1,000,000 Ohio State Water Development Authority Revenue (Cargill) 6.30 9/01/20 1,093,750
2,250,000 Ohio State Water Development Authority Revenue (Dayton Power) 6.40 8/15/27 2,424,375
1,000,000 Ohio State Water Development Authority Revenue (Fresh Water) 5.00 12/01/15 1,005,000
1,000,000 Parma, OH G.O. 5.00 12/01/24 988,750
1,000,000 Parma, OH Hospital Improvement Revenue (Parma General Hospital) 5.25 11/01/13 1,008,750
1,000,000 Puerto Rico Electric Power Authority Revenue 5.38 7/01/14 1,055,000
1,850,000 Puerto Rico G.O. 5.38 7/01/21 1,919,375
1,280,000 Springboro, OH Water Works Revenue 4.75 12/01/23 1,228,800
1,500,000 Springdale, OH Hospital Facilities Revenue
(Southwestern Ohio Seniors' Services Inc.) 5.88 11/01/12 1,558,125
1,715,000 Springfield, OH City School District G.O. 0.00 12/01/11 947,537
1,000,000 Stark Co., OH Health Care Facilities Revenue 5.45 7/20/33 1,006,250
15,000 Summit Co., OH G.O. 6.90 8/01/12 16,594
255,000 Summit Co., OH G.O. 6.90 8/01/12 277,631
230,000 Summit Co., OH G.O. 6.90 8/01/12 259,612
1,000,000 Sycamore Community School District, OH Certificate of Participation 4.75 12/01/19 956,250
1,500,000 Toledo-Lucas Co., OH Convention Center Special Lodging Tax Revenue 5.70 10/01/15 1,616,250
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</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 6
OHIO TAX-FREE INCOME FUND
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December 31, 1998 (Unaudited)
PORTFOLIO OF INVESTMENTS Continued
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
FACE COUPON
AMOUNT MUNICIPAL BONDS - (Continued) RATE MATURITY VALUE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 1,000,000 University of Akron, OH General Receipts 5.25% 1/01/22 1,013,750
1,000,000 University of Cincinnati, OH Certificates of Participation 5.00 6/01/09 1,043,750
500,000 University of Cincinnati, OH General Receipts 4.75 6/01/18 485,000
1,250,000 Upper Arlington, OH G.O. 5.13 12/01/19 1,260,937
500,000 Wadsworth, OH City School District G.O. 5.00 12/01/22 495,000
725,000 Warren Co., OH G.O. 6.55 12/01/14 880,875
1,000,000 Warren, OH Water Revenue 5.00 11/01/22 1,002,500
1,045,000 Washington Co., OH G.O. 5.00 12/01/18 1,039,775
1,000,000 Westerville, OH G.O. 4.50 12/01/18 950,000
1,000,000 Westlake, OH G.O. 5.50 12/01/20 1,053,750
1,500,000 Westlake, OH G.O. 5.55 12/01/17 1,591,875
1,755,000 Westlake, OH Industrial Development Revenue 6.40 8/01/09 1,825,007
500,000 Wyoming, OH City School District G.O. 5.00 12/01/23 494,375
1,300,000 Youngstown, Ohio G.O. 5.10 12/01/11 1,374,750
-----------
TOTAL MUNICIPAL BONDS (AMORTIZED COST $111,885,076) 117,360,420
-----------
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</TABLE>
<TABLE>
<CAPTION>
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SHORT-TERM INVESTMENTS - 0.17%
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<S> <C> <C>
200,000 Ohio Municipal Cash Trust* (AMORTIZED COST $200,000) 3.25 200,000
------------
TOTAL INVESTMENTS, AT VALUE (AMORTIZED COST $112,085,076) - 100% $117,560,420
============
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</TABLE>
* 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
7-day rate on December 31, 1998.
See accompanying notes to financial statements.
5
<PAGE> 7
OHIO TAX-FREE INCOME FUND
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December 31, 1998 (Unaudited)
PORTFOLIO OF INVESTMENTS Continued
NOTES TO PORTFOLIO OF INVESTMENTS -- PORTFOLIO COMPOSITION
- ------------------------------------
INVESTMENTS BY REVENUE SOURCE
- ------------------------------------
GENERAL OBLIGATIONS 27.5%
REVENUE BONDS:
Health Care 21.9
Utilities 10.7
Housing 8.8
Higher Education 7.9
Industrial Development 7.7
Public Facilities 6.7
State Agency 1.7
Transportation 1.1
MUNICIPAL LEASE 5.8
MONEY MARKET 0.2
----
TOTAL 100.0%
=====
- ------------------------------------
- ------------------------------------
INVESTMENTS BY CREDIT RATING
- ------------------------------------
S&P/MOODY'S:
AAA/Aaa 62.2%
AA/Aa 17.8
A/A 12.2
BBB/Baa 3.7
Unrated (1) 3.9
MONEY MARKET (2) 0.2
-----
TOTAL 100.0%
=====
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(1) Unrated obligations have been determined by the adviser to be of equivalent
quality to the rated securities in which the Fund is permitted to invest.
(2) Money market funds in the Fund's portfolio invest in obligations rated in
one of the two highest short-term rating categories or unrated obligations
of comparable quality.
See accompanying notes to financial statements.
6
<PAGE> 8
STATEMENT OF ASSETS AND LIABILITIES
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(Unaudited)
<TABLE>
<CAPTION>
------------
12/31/98
------------
<S> <C>
ASSETS
Investments in securities, at value (Note 1) (Cost $112,085,076) $117,560,420
Interest receivable 1,637,200
Receivable for Fund shares sold 37,958
Cash 6,991
Prepaid expenses and other assets 11,662
------------
TOTAL ASSETS 119,254,231
------------
LIABILITIES
Dividend payable 75,279
Accrued investment advisory fee (Note 2) 56,223
Other accrued expenses payable to adviser (Note 2) 36,304
Other accrued expenses and liabilities 19,301
------------
TOTAL LIABILITIES 187,107
------------
NET ASSETS $119,067,124
============
NET ASSETS CONSIST OF:
Aggregate paid-in capital $113,491,902
Accumulated undistributed net investment income 32,719
Accumulated net realized gain 67,159
Net unrealized appreciation of investments 5,475,344
------------
NET ASSETS $119,067,124
============
SHARES OF CAPITAL STOCK OUTSTANDING
(no par value - unlimited number of shares authorized) 8,551,826
============
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE (NOTE 1) $13.92
============
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</TABLE>
See accompanying notes to financial statements.
7
<PAGE> 9
STATEMENT OF OPERATIONS
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(Unaudited)
<TABLE>
<CAPTION>
-----------------------------
6 MONTHS ENDED 12/31/98
-----------------------------
<S> <C> <C>
INTEREST INCOME:
Interest $3,010,507
---------
EXPENSES:
Investment advisory fee (Note 2) 287,199
Distribution (Note 2) 143,599
Accounting service fees (Note 2) 24,000
Transfer agency fees (Note 2) 20,566
Professional fees 19,266
Trustees' fees (Note 2) 10,641
Custodian fees (Note 1) 4,493
Printing 3,282
ICI dues 1,977
Registration fees 676
Insurance 628
Other 61
---------
GROSS EXPENSES 516,388
LESS EARNINGS CREDITS ON CASH BALANCES (NOTE 1) (4,493)
---------
NET EXPENSES 511,895
---------
NET INVESTMENT INCOME 2,498,612
---------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 165,413
Net change in unrealized appreciation of investments 805,323
---------
NET REALIZED AND UNREALIZED GAINS ON INVESTMENTS 970,736
---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,469,348
=========
- --------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
8
<PAGE> 10
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
--------------------------------
6 MONTHS YEAR
ENDED ENDED
12/31/98 6/30/98
--------------------------------
<S> <C> <C>
From operations:
Net investment income $ 2,498,612 $ 3,992,589
Net realized gain on investments 165,413 78,221
Net change in unrealized appreciation of investments 805,323 2,575,495
------------- -------------
Net increase in net assets resulting from operations 3,469,348 6,646,305
------------- -------------
From distributions to shareholders:
Net investment income (2,465,893) (3,998,270)
Net realized capital gains (97,728) --
------------- -------------
Decrease in net assets from distributions to shareholders (2,563,621) (3,998,270)
------------- -------------
From Fund share transactions:
Proceeds from shares sold 28,505,113 42,849,900
Net asset value of shares issued in reinvestment of distributions 2,013,361 3,066,244
Payments for Fund shares redeemed (11,511,898) (25,581,834)
------------- -------------
Net increase in net assets from Fund share transactions 19,006,576 20,334,310
------------- -------------
Total increase in net assets 19,912,303 22,982,345
Net assets:
Beginning of period 99,154,821 76,172,476
------------- -------------
End of period (including undistributed net investment income
of $32,179 and $0, respectively) (Note 1) $ 119,067,124 $ 99,154,821
============= =============
Number of Fund shares:
Sold 2,054,622 3,128,080
Issued in reinvestment of distributions to shareholders 144,693 223,735
Redeemed (827,130) (1,870,920)
------------- -------------
Net increase in shares outstanding 1,372,185 1,480,895
Outstanding at beginning of period 7,179,641 5,698,746
------------- -------------
Outstanding at end of period 8,551,826 7,179,641
============= =============
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
9
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS
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December 31, 1998 (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.
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.
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.
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, 1998, the Fund had not
committed to the purchase of any delayed delivery securities.
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.
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
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NOTES TO FINANCIAL STATEMENTS continued
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December 31, 1998 (Unaudited)
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, 1998 were
$5,539,334 and $63,990, 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.
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.
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 Investments 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 the Distributor,
BISYS Funds Services Limited Partnership, a distribution service fee. BISYS pays
this fee to financial intermediaries 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 period ended December 31, 1998, purchases and proceeds from the sale of
securities, excluding short-term securities, amounted to $29,018,967 and
$12,773,982, respectively.
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