As filed via EDGAR with the Securities and Exchange Commission on July 1, 1999
File No. 333-62051
ICA No. 811-8979
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 1 [X]
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 3
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THE VICTORY VARIABLE INSURANCE FUNDS
------------------------------------
(Exact Name of Registrant as Specified in Charter)
3435 Stelzer Road, Columbus, Ohio 43219
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(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code: (800) 362-5365
Copy to:
George Stevens, Esq. Carl Frischling, Esq.
BISYS Fund Services Kramer Levin Naftalis & Frankel LLP
3435 Stelzer Road 919 Third Avenue
Columbus, Ohio 43219 New York, New York 10022
(Name and Address of Agent for Service)
Approximate date of proposed public offering: As soon as practicable
after this registration statement becomes effective.
It is proposed that this filing will become effective:
|X| Immediately upon filing |_| on __________, pursuant to
pursuant to paragraph (b) paragraph (b)
|_| 60 days after filing pursuant |_| on (date) pursuant to paragraph (a)
to paragraph (a)(1) (1)
|_| 75 days after filing pursuant to |_| on (date) pursuant to paragraph (a)
paragraph (a)(2) (2) of rule 485.
If appropriate, check the following box:
|_| this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
CROSS-REFERENCE SHEET
(Pursuant to Rule 404 showing location in the Prospectus of
the responses to the Items in Part A and location in the Statement of Additional
Information of the responses to the Items in Part B of Form N-1A.)
THE VICTORY VARIABLE INSURANCE FUNDS
Form N-1A,
Part A
Item Number Prospectus Caption
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1(a) Front Cover Page
(b) Back Cover Page
2(a) Risk/Return Summary - Investment Objective
(b) Risk/Return Summary - Principal Investment Strategies
(c) Risk/Return Summary - Principal Risks; Q&A -- Important
Considerations
3 Not applicable
4(a) Risk/Return Summary - Investment Objective
(b) Risk/Return Summary - Principal Investment Strategies;
Definitions
(c) Risk Factors
5 Not applicable
6(a) Organization and Management of the Funds - Investment
Adviser; Portfolio Management
(b) Not Applicable
7(a) Share Price
(b) Investing in the Victory Variable Insurance Funds -
Purchases
(c) Investing in the Victory Variable Insurance Funds -
Redemptions
(d) Dividends, Distributions and Taxes
(e) Important Information about Taxes
(f) Not applicable
8(a) Not applicable
(b) Not applicable
(c) Investing in the Victory Variable Insurance Funds
9 Not applicable
<PAGE>
THE VICTORY VARIABLE INSURANCE FUNDS
Form N-1A,
Part B
Item Number Statement of Additional Information Caption
----------- -------------------------------------------
10(a) Front Cover Page
(b) Table of Contents
11(a) Additional Information - Description of Shares
(b) Not applicable
12(a) Statement of Additional Information
(b) Instruments in which the Funds can Invest
(c) Investment Policies and Limitations
(d) Temporary Defensive Measures - Short-Term Obligations
(e) Not applicable
13(a) Trustees and Officers - Board of Trustees
(b) Trustees and Officers - Board of Trustees; Officers
(c) Trustees and Officers - Board of Trustees
(d) Trustees and Officers - Board of Trustees
(e) Not applicable
14(a) Miscellaneous
(b) Miscellaneous
(c) Trustees and Officers - Officers
15(a) Advisory and Other Contracts - Investment Adviser
(b) Advisory and Other Contracts - Distributor
(c) Advisory and Other Contracts - Investment Adviser
(d) Transfer Agent; Contract Owner Administrative Services
Agreement; Fund Accountant; Legal
Counsel
(e) Not applicable
(f) Not applicable
(g) Not applicable
(h) Administrator; Transfer Agent; Custodian; Independent
Accountant; Legal Counsel
16(a) Portfolio Transactions
(b) Not applicable
(c) Portfolio Transactions
(d) Not applicable
<PAGE>
(e) Not applicable
17(a) Additional Information - Description of Shares
(b) Not applicable
18(a) Additional Purchase and Redemption Information; Purchasing
and Redeeming Shares
(b) Not applicable
(c) Valuation of Portfolio Securities for the Investment
Quality Bond Fund; Valuation of Portfolio Securities for
the Equity Funds
(d) Additional Purchase and Redemption Information
19(a) Taxes
(b) Taxes
20(a) Advisory and Other Contracts - Distributor
(b) Not applicable
(c) Not applicable
21(a) Not applicable
(b) Performance
22(a) Appendix B -- Financial Statements
(b) Not applicable
(c) Not applicable
Part C
- ------
Information required to be included in Part C is set forth
under the appropriate Item, so numbered, in Part C to this Registration
Statement.
<PAGE>
The prospectus for Class A Shares of the Investment Quality Bond Fund,
Diversified Stock Fund and Small Company Opportunity Fund, dated July 1, 1999,
is incorporated by reference to pre-effective amendment no. 2 to Registrant's
registration statement on Form N-1A filed electronically with the Securities and
Exchange Commission on June 3, 1999.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
THE VICTORY VARIABLE INSURANCE FUNDS
Investment Quality Bond Fund
Diversified Stock Fund
Small Company Opportunity Fund
July 1, 1999
This Statement of Additional Information ("SAI") is not a prospectus, but should
be read in conjunction with the Class A Share prospectus of The Victory Variable
Insurance Funds (the "Prospectus"), which is dated July 1, 1999 as amended or
supplemented from time to time. This SAI is incorporated by reference in its
entirety into the Prospectus. Copies of the Prospectus may be obtained by
writing The Victory Variable Insurance Funds at P.O Box 8527, Boston, MA
02266-8527, or by calling your participating insurance company at the toll free
number indicated on the separate account prospectus.
INVESTMENT ADVISER and SUB-ADMINISTRATOR Key Asset Management Inc.
ADMINISTRATOR
BISYS Fund Services Ohio, Inc.
DISTRIBUTOR
BISYS Fund Services Limited Partnership
TRANSFER AGENT
State Street Bank and Trust Company
DIVIDEND DISBURSING AGENT
AND SERVICING AGENT
Boston Financial Data Services, Inc.
CUSTODIAN
Key Trust Company of Ohio, N.A.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
COUNSEL
Kramer Levin Naftalis & Frankel LLP
1
<PAGE>
Table of Contents
INVESTMENT OBJECTIVES AND INVESTMENT POLICIES AND LIMITATIONS................ 1
FUNDAMENTAL RESTRICTIONS OF THE FUNDS........................................ 2
NON-FUNDAMENTAL RESTRICTIONS OF THE FUNDS.................................... 3
INSTRUMENTS IN WHICH THE FUNDS CAN INVEST......................................4
U.S. Corporate Debt Obligations.......................................5
Temporary Defensive Measures -- Short-Term Obligations................6
Short-Term Corporate Obligations......................................6
Demand Features.......................................................6
Bankers' Acceptances..................................................6
Certificates of Deposit...............................................6
Eurodollar Certificates of Deposit....................................6
Yankee Certificates of Deposit........................................6
Eurodollar Time Deposits..............................................6
Canadian Time Deposits................................................7
Commercial Paper......................................................7
International Bonds...................................................7
Foreign Debt Securities...............................................7
Repurchase Agreements.................................................7
Reverse Repurchase Agreements.........................................7
Short-Term Funding Agreements.........................................8
Variable Amount Master Demand Notes...................................8
Variable Rate Demand Notes............................................8
Variable and Floating Rate Notes......................................8
Extendible Debt Securities............................................9
Receipts..............................................................9
Zero-Coupon Bonds.....................................................9
Loans and Other Direct Debt Instruments...............................9
Securities of Other Investment Companies.............................10
U.S. Government Obligations..........................................10
When-Issued Securities...............................................10
Delayed-Delivery Transactions........................................10
Mortgage-Backed Securities...........................................10
In General..................................................10
U.S. Government Mortgage-Backed Securities..................11
GNMA Certificates...........................................11
FHLMC Securities............................................12
FNMA Securities.............................................12
Collateralized Mortgage Obligations.........................12
Non-Government Mortgage-Backed Securities...................12
Asset-Backed Securities..............................................13
Real Estate Investment Trusts........................................13
Preferred Stock......................................................13
Convertible Securities...............................................13
Futures and Options..................................................14
Futures Contracts...........................................14
Restrictions on the Use of Futures Contracts................15
Risk Factors in Futures Transactions........................15
Options.....................................................16
Puts........................................................16
Illiquid Investments.................................................17
Restricted Securities................................................18
2
<PAGE>
Securities Lending Transactions......................................18
Short Sales Against-the-Box..........................................18
Investment-Grade and High Quality Securities.........................18
Participation Interests..............................................18
Warrants.............................................................19
Foreign Investments..................................................19
VALUATION OF PORTFOLIO SECURITIES FOR THE INVESTMENT QUALITY BOND FUND .......20
VALUATION OF PORTFOLIO SECURITIES FOR THE EQUITY FUNDS........................20
PERFORMANCE ..................................................................20
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION................................24
DIVIDENDS AND DISTRIBUTIONS...................................................24
TAXES.........................................................................24
TRUSTEES AND OFFICERS.........................................................25
ADVISORY AND OTHER CONTRACTS..................................................28
ADDITIONAL INFORMATION........................................................33
APPENDIX A -- Description of Security Ratings................................A-1
APPENDIX B -- FINANCIAL STATEMENTS...........................................B-1
3
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
The Victory Variable Insurance Funds (the "Trust") is an open-end management
investment company consisting of three series (each a "Fund") of units of
beneficial interest ("shares"). The outstanding shares represent interests in
the Investment Quality Bond Fund (sometimes referred to as the "Bond Fund"), the
Diversified Stock Fund and the Small Company Opportunity Fund. Each Fund is a
diversified mutual fund. This SAI relates to the Class A shares of the Funds.
Much of the information contained in this SAI expands on subjects discussed in
the Prospectus. Capitalized terms not defined herein are used as defined in the
Prospectus. No investment in shares of a Fund should be made without first
reading the Prospectus.
INVESTMENT OBJECTIVES AND INVESTMENT POLICIES AND LIMITATIONS
Each Fund's investment objective is fundamental and may not be changed without a
vote of the holders of a majority of the Fund's outstanding voting securities.
There can be no assurance that a Fund will achieve its investment objective.
Additional Information Regarding Fund Investments.
The following policies and limitations supplement the Funds' investment policies
set forth in the Prospectus. The Funds' investments in the following securities
and other financial instruments are subject to the other investment policies and
limitations described in the Prospectus and this SAI.
Unless otherwise noted in the Prospectus or this SAI, a Fund may invest no more
than 5% of its total assets in any of the securities or financial instruments
described below (unless the context of the Prospectus or this SAI requires
otherwise).
Unless otherwise noted, whenever an investment policy or limitation states a
maximum percentage of a Fund's assets that may be invested in any security or
other asset, or sets forth a policy regarding quality standards, such standard
or percentage limitation will be determined immediately after and as a result of
the Fund's acquisition of such security or other asset except in the case of
borrowing (or other activities that may be deemed to result in the issuance of a
"senior security" under the Investment Company Act of 1940, as amended (the
"1940 Act")). Accordingly, any subsequent change in values, net assets, or other
circumstances will not be considered when determining whether the investment
complies with a Fund's investment policies and limitations. If the value of a
Fund's holdings of illiquid securities at any time exceeds the percentage
limitation applicable at the time of acquisition due to subsequent fluctuations
in value or other reasons, the Trustees will consider what actions, if any, are
appropriate to maintain adequate liquidity.
The investment policies of a Fund may be changed without an affirmative vote of
the holders of a majority of that Fund's outstanding voting securities unless
(1) a policy expressly is deemed to be a fundamental policy of the Fund or (2) a
policy expressly is deemed to be changeable only by such majority vote. A Fund
may, following notice to its shareholders, take advantage of other investment
practices which presently are not contemplated for use by the Fund or which
currently are not available but which may be developed to the extent such
investment practices are both consistent with the Fund's investment objective
and legally permissible for the Fund. Such investment practices, if they arise,
may involve risks which exceed those involved in the activities described in a
Fund's Prospectus.
The following sections list each Fund's investment objective and its investment
policies, limitations, and restrictions. The securities in which the Funds can
invest and the risks associated with these securities are discussed in the
section "Instruments in Which the Funds Can Invest." When this SAI refers to
only the Diversified Stock Fund and the Small Company Opportunity Fund, they
will be called the "Equity Funds."
<PAGE>
FUNDAMENTAL RESTRICTIONS OF THE FUNDS
The following Fundamental Restrictions may not be changed with respect to a Fund
without the affirmative vote of the holders of a majority of the Fund's
outstanding shares. Such majority is defined as the lesser of (a) 67% or more of
the shares of the Fund present at a meeting at which the holders of more than
50% of the outstanding shares of the Fund are represented in person or by proxy,
or (b) more than 50% of the outstanding shares of the Fund.
1. Senior Securities
No Fund may:
Issue any senior security (as defined in the 1940 Act), except that (a) each
Fund may engage in transactions that may result in the issuance of senior
securities to the extent permitted under applicable regulations and
interpretations of the 1940 Act or an exemptive order; (b) each Fund may acquire
other securities, the acquisition of which may result in the issuance of a
senior security, to the extent permitted under applicable regulations or
interpretations of the 1940 Act; (c) subject to the restrictions set forth
below, the Fund may borrow money as authorized by the 1940 Act.
2. Underwriting
The Funds may not:
Underwrite securities issued by others, except to the extent that the Fund may
be considered an underwriter within the meaning of the Securities Act of 1933,
as amended (the "Securities Act"), in the disposition of restricted securities.
3. Borrowing
Each Fund may not:
Borrow money, except that (a) each Fund may enter into commitments to purchase
securities in accordance with its investment program, including delayed-delivery
and when-issued securities and reverse repurchase agreements, provided that the
total amount of any such borrowing does not exceed 33 1/3 % of the Fund's total
assets; and (b) each Fund may borrow money for temporary or emergency purposes
in an amount not exceeding 5% of the value of its total assets at the time when
the loan is made. Any borrowings representing more than 5% of a Fund's total
assets must be repaid before the Fund may make additional investments.
4. Lending
Each Fund may not:
Lend any security or make any other loan if, as a result, more than 33 1/3% of
its total assets would be lent to other parties, but this limitation does not
apply to purchases of publicly issued debt securities or to repurchase
agreements.
2
<PAGE>
NON-FUNDAMENTAL RESTRICTIONS OF THE FUNDS
1. Illiquid Securities
Each Fund:
Will not invest more than 15% of its net assets in illiquid securities. Illiquid
securities are securities that are not readily marketable or cannot be disposed
of promptly within seven days and in the usual course of business at
approximately the price at which the Fund has valued them. Such securities
include, but are not limited to, time deposits and repurchase agreements with
maturities longer than seven days. Securities that may be resold under Rule
144A, securities offered pursuant to Section 4(2) of, or securities otherwise
subject to restrictions or limitations on resale under the Securities Act
("Restricted Securities") shall not be deemed illiquid solely by reason of being
unregistered. Key Asset Management Inc., the Funds' investment adviser ("KAM" or
the "Adviser"), determines whether a particular security is deemed to be liquid
based on the trading markets for the specific security and other factors.
2. Short Sales and Purchases on Margin
Each Fund:
Will not make short sales of securities, other than short sales "against the
box," or purchase securities on margin except for short-term credits necessary
for clearance of portfolio transactions, provided that this restriction will not
be applied to limit the use of options, futures contracts and related options,
in the manner otherwise permitted by the investment restrictions, policies, and
investment program of the Fund.
3. Other Investment Companies
Each Fund:
May invest up to 5% of their total assets in the securities of any one
investment company, but may not own more than 3% of the securities of any one
investment company or invest more than 10% of its total assets in the securities
of other investment companies.
The Funds may not:
Purchase the securities of any registered open-end investment company or
registered unit investment trust in reliance on Section 12(d)(1)(G) or Section
12(d)(1)(F) of the 1940 Act, which permits operation as a "fund of funds."
4. Real Estate
Each Fund may not:
Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent each Fund from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business). Investments by the Funds in
securities backed by mortgages on real estate or in marketable securities of
companies engaged in such activities are not excluded.
3
<PAGE>
5. Commodities
Each Fund may not:
Purchase or sell physical commodities unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the Funds from
purchasing or selling options and futures contracts or from investing in
securities or other instruments backed by physical commodities).
6. Concentration
Each Fund may not:
Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities,
or repurchase agreements secured thereby) if, as a result, more than 25% of the
Fund's total assets would be invested in the securities of companies whose
principal business activities are in the same industry. In the utilities
category, the industry shall be determined according to the service provided.
For example, gas, electric, water and telephone will be considered as separate
industries.
INSTRUMENTS IN WHICH THE FUNDS CAN INVEST
The following table lists some of the types of securities each of the Funds may
choose to purchase under normal market conditions. Unless otherwise stated, the
indicated percentage relates to a Fund's total assets.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Investments common to each Fund
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Preferred Stock o 20% When-Issued and o 33 1/3%
Delayed-Delivery
Securities
- -------------------------------------------------------------------------------------------------------------
Receipts o 20% Illiquid Securities o 15% of net assets
- -------------------------------------------------------------------------------------------------------------
Futures Contracts and o 5% in margins and Securities Lending o 33 1/3%
Options on Futures premiums; 33-1/3%
Contracts subject to futures or
options on futures
- -------------------------------------------------------------------------------------------------------------
U.S. Corporate Debt o Bond Fund: no limit; U.S. Government o Bond Fund: no
Obligations Securities limit;
Equity Funds: 20% Equity Funds: 20%
- -------------------------------------------------------------------------------------------------------------
Short-Term Debt o Bond Fund: 35%; Repurchase o Bond Fund: 35%;
Obligations Agreements
Equity Funds: 20% Equity Funds: 20%
- -------------------------------------------------------------------------------------------------------------
Restricted Securities o Bond Fund: no limit; Convertible or o Bond Fund: no
Exchangeable limit;
Corporate Debt
Equity Funds: 20% Obligations Equity Funds: 80%
to 100% (included
in limit for U.S.
equity securities)
- -------------------------------------------------------------------------------------------------------------
4
<PAGE>
- -------------------------------------------------------------------------------------------------------------
Investments of the Investment Quality Bond Fund only
- -------------------------------------------------------------------------------------------------------------
Foreign Debt Securities o 20% Asset Backed o No limit
Securities
- -------------------------------------------------------------------------------------------------------------
Mortgage-Backed o No limit Collateralized o No limit
Securities Mortgage Obligations
- -------------------------------------------------------------------------------------------------------------
Zero Coupon Bonds o 20% Variable & Floating o No limit
Rate Securities
- -------------------------------------------------------------------------------------------------------------
Yankee Securities o 20% Tax, Revenue and o No limit
Bond Anticipation
Notes
- -------------------------------------------------------------------------------------------------------------
Dollar Weighted o 5 - 15 years
Effective Average
Maturity
- -------------------------------------------------------------------------------------------------------------
Investments of the Equity Funds only
- -------------------------------------------------------------------------------------------------------------
Equity Securities of Foreign Companies Traded o Diversified Stock Fund: 10%
on U.S. Exchanges
o Small Company Opportunity Fund: 5%
- -------------------------------------------------------------------------------------------------------------
Warrants o 10%
- -------------------------------------------------------------------------------------------------------------
Real Estate Investment Trusts o 25%
- -------------------------------------------------------------------------------------------------------------
Options o 25% in covered
calls
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The instruments in which the Funds can invest, according to their investment
policies and limitations, are described below.
The following paragraphs provide a brief description of the types of securities
in which the Funds may invest in accordance with their investment objective,
policies, and limitations, including transactions the Funds may make and
strategies they may adopt. The following also contains a brief description of
the risk factors related to those strategies. The Funds may, following notice to
their shareholders, take advantage of other investment practices which presently
are not contemplated for use by the Funds or which currently are not available
but which may be developed, to the extent such investment practices are both
consistent with a Fund's investment objective and are legally permissible for
the Fund. Such investment practices, if they arise, may involve risks which
exceed those involved in the activities described in the Prospectus and this
SAI.
U.S. Corporate Debt Obligations. U.S. Corporate Debt Obligations include bonds,
debentures, and notes. Debentures represent unsecured promises to pay, while
notes and bonds may be secured by mortgages on real property or security
interests in personal property. Bonds include, but are not limited to, debt
instruments with maturities of approximately one year or more, debentures,
mortgage-related securities, stripped government securities, and zero coupon
obligations. Bonds, notes, and debentures in which the Funds may invest may
differ in interest rates, maturities, and times of issuance. The market value of
a Fund's fixed income investments will change in response to interest rate
changes and other factors. During periods of falling interest rates, the values
of outstanding fixed income securities generally rise. Conversely, during
periods of rising interest rates, the values of such securities generally
decline. Moreover, while securities with longer maturities tend to produce
higher yields, the price of longer maturity securities are also subject to
greater market fluctuations as a result of changes in interest rates.
5
<PAGE>
Changes by recognized agencies in the rating of any fixed income security and in
the ability of an issuer to make payments of interest and principal also affect
the value of these investments. Except under conditions of default, changes in
the value of a Fund's securities will not affect cash income derived from these
securities but will affect the Fund's net asset value.
Temporary Defensive Measures -- Short-Term Obligations. These include high
quality, short-term obligations such as domestic and foreign commercial paper
(including variable-amount master demand notes), bankers' acceptances,
certificates of deposit and demand and time deposits of domestic and foreign
branches of U.S. banks and foreign banks, and repurchase agreements. (See
"Foreign Securities" for a description of risks associated with investments in
foreign securities.) Each Fund may hold up to 100% of its assets in these
instruments for temporary defensive purposes, which may result in performance
that is inconsistent with its investment objective.
Short-Term Corporate Obligations. Corporate obligations are bonds issued by
corporations and other business organizations in order to finance their
long-term credit needs. Corporate bonds in which a Fund may invest generally
consist of those rated in the two highest rating categories of a nationally
recognized statistical rating organization ("NRSRO") that possess many favorable
investment attributes. In the lower end of this category, credit quality may be
more susceptible to potential future changes in circumstances.
Demand Features. The Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period (usually
seven days) following a demand by the Fund. The demand feature may be issued by
the issuer of the underlying securities, a dealer in the securities or by
another third party, and may not be transferred separately from the underlying
security. The Fund uses these arrangements to provide the Fund with liquidity
and not to protect against changes in the market value of the underlying
securities. The bankruptcy, receivership or default by the issuer of the demand
feature, or a default on the underlying security or other event that terminates
the demand feature before its exercise, will adversely affect the liquidity of
the underlying security. Demand features that are exercisable even after a
payment default on the underlying security may be treated as a form of credit
enhancement.
Bankers' Acceptances. Bankers' Acceptances are negotiable drafts or bills of
exchange typically drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Bankers' Acceptances will be those guaranteed by domestic and foreign banks, if
at the time of purchase such banks have capital, surplus, and undivided profits
in excess of $100,000,000 (as of the date of their most recently published
financial statements).
Certificates of Deposit. Certificates of Deposit are negotiable certificates
issued against funds deposited in a commercial bank or a savings and loan
association for a definite period of time and earning a specified return.
Certificates of Deposit and demand and time deposits invested in by a Fund will
be those of domestic and foreign banks and savings and loan associations, if (a)
at the time of purchase such financial institutions have capital, surplus, and
undivided profits in excess of $100 million (as of the date of their most
recently published financial statements) or (b) the principal amount of the
instrument is insured in full by the Federal Deposit Insurance Corporation (the
"FDIC") or the Savings Association Insurance Fund.
Eurodollar Certificates of Deposit are U.S. dollar-denominated certificates of
deposit issued by branches of foreign and domestic banks located outside the
United States.
Yankee Certificates of Deposit are certificates of deposit issued by a U.S.
branch of a foreign bank denominated in U.S. dollars and held in the United
States.
Eurodollar Time Deposits are U.S. dollar-denominated deposits in a foreign
branch of a U.S. bank or a foreign bank.
6
<PAGE>
Canadian Time Deposits are U.S. dollar-denominated certificates of deposit
issued by Canadian offices of major Canadian Banks.
Commercial Paper. Commercial paper is unsecured promissory notes issued by
corporations. Except as noted below with respect to variable amount master
demand notes, issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.
The Funds will purchase only commercial paper rated in one of the two highest
categories at the time of purchase by an NRSRO or, if not rated, found by the
Trustees to present minimal credit risks and to be of comparable quality to
instruments that are rated high quality (i.e., in one of the two top ratings
categories) by an NRSRO that is neither controlling, controlled by, or under
common control with the issuer of, or any issuer, guarantor, or provider of
credit support for, the instruments. For a description of the rating symbols of
each NRSRO see the Appendix to this SAI.
International Bonds. International Bonds include Euro and Yankee obligations,
which are U.S. dollar-denominated international bonds for which the primary
trading market is in the United States ("Yankee Bonds"), or for which the
primary trading market is abroad ("Eurodollar Bonds"). International Bonds also
include Canadian and Supranational Agency Bonds (e.g., International Monetary
Fund). (See "Foreign Debt Securities" for a description of risks associated with
investments in foreign securities.)
Foreign Debt Securities. Investments in securities of foreign companies
generally involve greater risks than are present in U.S. investments. Compared
to U.S. and Canadian companies, there generally is less publicly available
information about foreign companies, and there may be less governmental
regulation and supervision of foreign stock exchanges, brokers and listed
companies. Foreign companies generally are not subject to uniform accounting,
auditing, and financial reporting standards, practices, and requirements
comparable to those applicable to U.S. companies. Securities of some foreign
companies are less liquid, and their prices more volatile, than securities of
comparable U.S. companies. Settlement of transactions in some foreign markets
may be delayed or may be less frequent than in the U.S., which could affect the
liquidity of a Fund's investment. In addition, with respect to some foreign
countries, there is the possibility of nationalization, expropriation, or
confiscatory taxation; limitations on the removal of securities, property, or
other assets of a Fund; there may be political or social instability; there may
be increased difficulty in obtaining legal judgments; or diplomatic developments
which could affect U.S. investments in those countries. The Adviser will take
such factors into consideration in managing a Fund's investments.
Repurchase Agreements. Securities held by a Fund may be subject to Repurchase
Agreements. Under the terms of a Repurchase Agreement, a Fund would acquire
securities from financial institutions or registered broker-dealers deemed
creditworthy by the Adviser pursuant to guidelines adopted by the Trustees,
subject to the seller's agreement to repurchase such securities at a mutually
agreed upon date and price. The seller is required to maintain the value of
collateral held pursuant to the agreement at not less than the repurchase price
(including accrued interest).
If the seller were to default on its repurchase obligation or become insolvent,
a Fund would suffer a loss to the extent that the proceeds from a sale of the
underlying portfolio securities were less than the repurchase price, or to the
extent that the disposition of such securities by the Fund is delayed pending
court action.
Reverse Repurchase Agreements. A Fund may borrow funds for temporary purposes by
entering into Reverse Repurchase Agreements. These Agreements are considered to
be borrowings under the 1940 Act. Pursuant to such agreement, a Fund would sell
a portfolio security to a financial institution such as a bank and a
broker-dealer, and agree to repurchase such security at a mutually agreed-upon
date and price. At the time a Fund enters into a Reverse Repurchase Agreement,
it will place in a segregated custodial account liquid assets consistent with
the Fund's investment restrictions having a value equal to the repurchase price
(including accrued interest). The collateral will be marked-to-market on a daily
basis, and will be monitored continuously to ensure that such equivalent value
is maintained. Reverse Repurchase
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Agreements involve the risk that the market value of the securities sold by a
Fund may decline below the price at which the Fund is obligated to repurchase
the securities.
Short-Term Funding Agreements. A Fund may invest in Short-Term Funding
Agreements (sometimes referred to as "GICs") issued by insurance companies.
Pursuant to such agreements, a Fund makes cash contributions to a deposit fund
of the insurance company's general account. The insurance company then credits
the Fund, on a monthly basis, guaranteed interest which is based on an index.
The Short-Term Funding Agreement provides that this guaranteed interest will not
be less than a certain minimum rate. Because the principal amount of a
Short-Term Funding Agreement may not be received from the insurance company on
seven days notice or less, the agreement is considered to be an illiquid
investment and, together with other instruments in a Fund which are not readily
marketable, will not exceed 15% of a Fund's net assets. In determining
dollar-weighted average portfolio maturity, a Short-Term Funding Agreement will
be deemed to have a maturity equal to the period of time remaining until the
next readjustment of the guaranteed interest rate.
Variable Amount Master Demand Notes. Variable Amount Master Demand Notes are
unsecured demand notes that permit the indebtedness thereunder to vary and
provide for periodic adjustments in the interest rate according to the terms of
the instrument. Although there is no secondary market for these notes, a Fund
may demand payment of principal and accrued interest at any time and may resell
the notes at any time to a third party. The absence of an active secondary
market, however, could make it difficult for a Fund to dispose of a Variable
Amount Master Demand Note if the issuer defaulted on its payment obligations,
and the Fund could, for this or other reasons, suffer a loss to the extent of
the default. While the notes typically are not rated by credit rating agencies,
issuers of Variable Amount Master Demand Notes must satisfy the same criteria as
set forth above for unrated commercial paper, and the Adviser will monitor
continuously the issuer's financial status and ability to make payments due
under the instrument. Where necessary to ensure that a note is of "high
quality," a Fund will require that the issuer's obligation to pay the principal
of the note be backed by an unconditional bank letter or line of credit,
guarantee or commitment to lend. For purposes of a Fund's investment policies, a
Variable Amount Master Demand Note will be deemed to have a maturity equal to
the longer of the period of time remaining until the next readjustment of its
interest rate or the period of time remaining until the principal amount can be
recovered from the issuer through demand.
Variable Rate Demand Notes. Variable Rate Demand Notes are tax-exempt
obligations containing a floating or variable interest rate adjustment formula,
together with an unconditional right to demand payment of the unpaid principal
balance plus accrued interest upon a short notice period, generally not to
exceed seven days. The Funds also may invest in participation Variable Rate
Demand Notes, which provide a Fund with an undivided interest in underlying
Variable Rate Demand Notes held by major investment banking institutions. Any
purchase of Variable Rate Demand Notes will meet applicable diversification and
concentration requirements.
Variable and Floating Rate Notes. A Variable Rate Note is one whose terms
provide for the readjustment of its interest rate on set dates and which, upon
such readjustment, reasonably can be expected to have a market value that
approximates its par value. A Floating Rate Note is one whose terms provide for
the readjustment of its interest rate whenever a specified interest rate changes
and which, at any time, reasonably can be expected to have a market value that
approximates its par value. Such notes frequently are not rated by credit rating
agencies; however, unrated Variable and Floating Rate Notes purchased by the
Fund will only be those determined by the Adviser, under guidelines established
by the Trustees, to pose minimal credit risks and to be of comparable quality,
at the time of purchase, to rated instruments eligible for purchase under the
Fund's investment policies. In making such determinations, the Adviser will
consider the earning power, cash flow and other liquidity ratios of the issuers
of such notes (such issuers include financial, merchandising, bank holding and
other companies) and will continuously monitor their financial condition.
Although there may be no active secondary market with respect to a particular
Variable or Floating Rate Note purchased by a Fund, the Fund may resell the note
at any time to a third party. The absence of an active secondary market,
however, could make it difficult for a Fund to
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dispose of a Variable or Floating Rate Note in the event that the issuer of the
note defaulted on its payment obligations and a Fund could, for this or other
reasons, suffer a loss to the extent of the default. Variable or Floating Rate
Notes may be secured by bank letters of credit.
Variable or Floating Rate Notes may have maturities of more than one year, as
follows:
1. A Variable or Floating Rate Note that is issued or guaranteed by the United
States government or any agency thereof and which has a variable rate of
interest readjusted no less frequently than annually will be deemed to have a
maturity equal to the period remaining until the next readjustment of the
interest rate.
2. A Variable or Floating Rate Note, the principal amount of which is scheduled
on the face of the instrument to be paid in one year or less, will be deemed by
the Fund to have a maturity equal to the period remaining until the next
readjustment of the interest rate.
3. A Variable or Floating Rate Note that is subject to a demand feature
scheduled to be paid in one year or more will be deemed to have a maturity equal
to the longer of the period remaining until the next readjustment of the
interest rate or the period remaining until the principal amount can be
recovered through demand.
4. A Variable or Floating Rate Note that is subject to a demand feature will be
deemed to have a maturity equal to the period remaining until the principal
amount can be recovered through demand.
As used above, a note is "subject to a demand feature" where a Fund is entitled
to receive the principal amount of the note either at any time on no more than
30 days' notice or at specified intervals not exceeding one year and upon no
more than 30 days' notice.
Extendible Debt Securities. Extendible Debt Securities are securities that can
be retired at the option of a Fund at various dates prior to maturity. In
calculating average portfolio maturity, a Fund may treat Extendible Debt
Securities as maturing on the next optional retirement date.
Receipts. Receipts are separately traded interest and principal component parts
of bills, notes, and bonds issued by the U.S. Treasury that are transferable
through the Federal book entry system, known as Separately Traded Registered
Interest and Principal Securities ("STRIPS") and Coupon Under Book Entry
Safekeeping ("CUBES"). These instruments are issued by banks and brokerage firms
and are created by depositing Treasury notes and Treasury bonds into a special
account at a custodian bank; the custodian holds the interest and principal
payments for the benefit of the registered owners of the certificates or
receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
Treasury Receipts ("TRs"), Treasury Investment Growth Receipts ("TIGRs"), and
Certificates of Accrual on Treasury Securities ("CATS").
Zero-Coupon Bonds. Zero-Coupon Bonds are purchased at a discount from the face
amount because the buyer receives only the right to a fixed payment on a certain
date in the future and does not receive any periodic interest payments. The
effect of owning instruments which do not make current interest payments is that
a fixed yield is earned not only on the original investment but also, in effect,
on accretion during the life of the obligations. This implicit reinvestment of
earnings at the same rate eliminates the risk of being unable to reinvest
distributions at a rate as high as the implicit yields on the Zero-Coupon Bond,
but at the same time eliminates the holder's ability to reinvest at higher
rates. For this reason, Zero-Coupon Bonds are subject to substantially greater
price fluctuations during periods of changing market interest rates than are
comparable securities which pay interest currently, which fluctuation increases
in accordance with the length of the period to maturity.
Loans and Other Direct Debt Instruments. Loans and Other Direct Debt Instruments
are interests in amounts owed by a corporate, governmental, or other borrower to
another party. They may represent amounts owed to lenders or lending syndicates
(loans and loan participations), to suppliers of goods or
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services (trade claims or other receivables), or to other parties. Direct Debt
Instruments involve a risk of loss in case of default or insolvency of the
borrower and may offer less legal protection to a Fund in the event of fraud or
misrepresentation. In addition, loan participations involve a risk of insolvency
of the lending bank or other financial intermediary. Direct Debt Instruments may
also include standby financing commitments that obligate a Fund to supply
additional cash to the borrower on demand.
Securities of Other Investment Companies. A Fund may invest up to 5% of its
total assets in the securities of any one investment company, but may not own
more than 3% of the securities of any one investment company or invest more than
10% of its total assets in the securities of other investment companies.
U.S. Government Obligations. U.S. Government Obligations are obligations issued
or guaranteed by the U.S. Government, its agencies, and instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. Government are
supported by the full faith and credit of the U.S. Treasury; others are
supported by the right of the issuer to borrow from the U.S. Treasury; others
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; and still others are supported only by the credit of
the agency or instrumentality. No assurance can be given that the U.S.
Government will provide financial support to U.S. Government-sponsored agencies
or instrumentalities if it is not obligated to do so by law.
When-Issued Securities. A Fund may purchase securities on a when-issued basis
(i.e., for delivery beyond the normal settlement date at a stated price and
yield). When a Fund agrees to purchase securities on a when-issued basis, the
custodian will set aside cash or liquid portfolio securities equal to the amount
of the commitment in a separate account. Normally, the custodian will set aside
portfolio securities to satisfy the purchase commitment, and in such a case, the
Fund may be required subsequently to place additional assets in the separate
account in order to assure that the value of the account remains equal to the
amount of the Fund's commitment. It may be expected that a Fund's net assets
will fluctuate to a greater degree when it sets aside portfolio securities to
cover such purchase commitments than when it sets aside cash. When a Fund
engages in when-issued transactions, it relies on the seller to consummate the
trade. Failure of the seller to do so may result in the Fund incurring a loss or
missing the opportunity to obtain a price considered to be advantageous. The
Funds do not intend to purchase when issued securities for speculative purposes,
but only in furtherance of its investment objective.
Delayed-Delivery Transactions. A Fund may buy and sell securities on a
delayed-delivery basis. These transactions involve a commitment by the Fund to
purchase or sell specific securities at a predetermined price or yield, with
payment and delivery taking place after the customary settlement period for that
type of security (and more than seven days in the future). Typically, no
interest accrues to the purchaser until the security is delivered. The Fund may
receive fees for entering into delayed delivery transactions.
When purchasing securities on a delayed-delivery basis, a Fund assumes the
rights and risks of ownership, including the risks of price and yield
fluctuations in addition to the risks associated with the Fund's other
investments. Because a Fund is not required to pay for securities until the
delivery date, these delayed-delivery purchases may result in a form of
leverage. When delayed-delivery purchases are outstanding, the Fund will set
aside cash and appropriate liquid assets in a segregated custodial account to
cover its purchase obligations. When the Fund has sold a security on a
delayed-delivery basis, it does not participate in further gains or losses with
respect to the security. If the other party to a delayed-delivery transaction
fails to deliver or pay for the securities, the Fund could miss a favorable
price or yield opportunity or suffer a loss.
The Fund may renegotiate delayed-delivery transactions after they are entered
into or may sell underlying securities before they are delivered, either of
which may result in capital gains or losses.
Mortgage-Backed Securities--In General. Mortgage-Backed Securities are backed by
mortgage obligations including, among others, conventional 30-year fixed rate
mortgage obligations, graduated
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payment mortgage obligations, 15-year mortgage obligations, and adjustable-rate
mortgage obligations. All of these mortgage obligations can be used to create
pass-through securities. A pass-through security is created when mortgage
obligations are pooled together and undivided interests in the pool or pools are
sold. The cash flow from the mortgage obligations is passed through to the
holders of the securities in the form of periodic payments of interest,
principal, and prepayments (net of a service fee).
Prepayments occur when the holder of an individual mortgage obligation prepays
the remaining principal before the mortgage obligation's scheduled maturity
date. As a result of the pass-through of prepayments of principal on the
underlying securities, Mortgage-Backed Securities are often subject to more
rapid prepayment of principal than their stated maturity indicates. In addition,
during periods of falling interest rates, the rate of prepayment tends to
increase, thereby shortening the actual average life of the pool. Conversely, in
periods of rising interest rates, prepayment rates tend to decrease, lengthening
a pool's average life. Because the prepayment characteristics of the underlying
mortgage obligations vary, it is not possible to predict accurately the realized
yield or average life of a particular issue of pass-through certificates.
Prepayment rates are important because of their effect on the yield and price of
the securities.
A Fund may purchase Mortgage-Backed Securities at a premium or at a discount.
Accelerated prepayments have an adverse impact on yields for pass-throughs
purchased at a premium (i.e., a price in excess of principal amount) and may
involve additional risk of loss of principal because the premium may not have
been fully amortized at the time the obligation is repaid. The opposite is true
for pass-throughs purchased at a discount. Among the U.S. Government securities
in which a Fund may invest are Government Mortgage-Backed Securities (or
government guaranteed mortgage-related securities). Such guarantees do not
extend to the value of yield of the Mortgage-Backed Securities themselves or of
the Fund's shares.
U.S. Government Mortgage-Backed Securities. Certain obligations of certain
agencies and instrumentalities of the U.S. Government are Mortgage-Backed
Securities. Some such obligations, such as those issued by GNMA are supported by
the full faith and credit of the U.S. Treasury; others, such as those of FNMA,
are supported by the right of the issuer to borrow from the Treasury; others are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations; still others, such as those of the Federal Farm Credit
Banks or FHLMC, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored agencies and instrumentalities if it is not
obligated to do so by law.
The principal governmental (i.e., backed by the full faith and credit of the
U.S. Government) guarantor of Mortgage-Backed Securities is GNMA. GNMA is a
wholly owned U.S. Government corporation within the Department of Housing and
Urban Development. GNMA is authorized to guarantee, with the full faith and
credit of the U.S. Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks, and mortgage bankers) and pools of FHA-insured
or VA-guaranteed mortgages. Government-related (i.e., not backed by the full
faith and credit of the U.S. Government) guarantors include FNMA and FHLMC. FNMA
and FHLMC are government-sponsored corporations owned entirely by private
stockholders. Pass-through securities issued by FNMA and FHLMC are guaranteed as
to timely payment of principal and interest by FNMA and FHLMC, respectively, but
are not backed by the full faith and credit of the U.S. Government.
GNMA Certificates. Certificates of the GNMA are mortgage-backed securities which
evidence an undivided interest in a pool or pools of mortgages. GNMA
Certificates that a Fund may purchase are the "modified pass-through" type,
which entitle the holder to receive timely payment of all interest and principal
payments due on the mortgage pool, net of fees paid to the "issuer" and GNMA,
regardless of whether or not the mortgagor actually makes the payment.
The National Housing Act authorizes GNMA to guarantee the timely payment of
principal and interest on securities backed by a pool of mortgages insured by
the Federal Housing Administration ("FHA") or guaranteed by the Veterans
Administration ("VA"). The GNMA guarantee is backed by the full faith and
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credit of the U.S. Government. GNMA is also empowered to borrow without
limitation from the U.S. Treasury if necessary to make any payments required
under its guarantee.
The estimated average life of a GNMA Certificate is likely to be substantially
shorter than the original maturity of the mortgages underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures usually will
result in the return of the greater part of principal investment long before the
maturity of the mortgages in the pool. Foreclosures impose no risk to principal
investment because of the GNMA guarantee, except to the extent that a Fund has
purchased the certificates above par in the secondary market.
FHLMC Securities. The FHLMC was created in 1970 to promote development of a
nationwide secondary market in conventional residential mortgages. The FHLMC
issues two types of mortgage pass-through securities ("FHLMC Certificates"),
mortgage participation certificates, and collateralized mortgage obligations
("CMOs"). Participation Certificates resemble GNMA Certificates in that each
Participation Certificate represents a pro rata share of all interest and
principal payments made and owed on the underlying pool. The FHLMC guarantees
timely monthly payment of interest on PCs and the ultimate payment of principal.
Recently introduced FHLMC Gold Participation Certificates guarantee the timely
payment of both principal and interest.
FHLMC CMOs are backed by pools of agency mortgage-backed securities and the
timely payment of principal and interest of each tranche is guaranteed by the
FHLMC. The FHLMC guarantee is not backed by the full faith and credit of the
U.S. Government.
FNMA Securities. The FNMA was established in 1938 to create a secondary market
in mortgages insured by the FHA, but has expanded its activity to the secondary
market for conventional residential mortgages. FNMA primarily issues two types
of mortgage-backed securities, guaranteed mortgage pass-through certificates
("FNMA Certificates") and CMOs. FNMA Certificates resemble GNMA Certificates in
that each FNMA Certificate represents a pro rata share of all interest and
principal payments made and owed on the underlying pool. FNMA guarantees timely
payment of interest and principal on FNMA Certificates and CMOs. The FNMA
guarantee is not backed by the full faith and credit of the U.S. Government.
Collateralized Mortgage Obligations. Mortgage-Backed Securities in which a Fund
may invest may also include CMOs. CMOs are securities backed by a pool of
mortgages in which the principal and interest cash flows of the pool are
channeled on a prioritized basis into two or more classes, or tranches, of
bonds.
Non-Governmental Mortgage-Backed Securities. A Fund may invest in
mortgage-related securities issued by non-governmental entities. Commercial
banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers, and other secondary market issuers also create pass-through
pools of conventional residential mortgage loans. Such issuers also may be the
originators of the underlying mortgage loans as well as the guarantors of the
mortgage-related securities. Pools created by such non-governmental issuers
generally offer a higher rate of interest than government and government-related
pools because there are not direct or indirect government guarantees of payments
in the former pools. However, timely payment of interest and principal of these
pools is supported by various forms of insurance or guarantees, including
individual loan, title, pool, and hazard insurance. The insurance and guarantees
are issued by government entities, private insurers and the mortgage poolers.
Such insurance and guarantees and the creditworthiness of the issuers, thereof
will be considered in determining whether a Non-Governmental Mortgage-Backed
Security meets a Fund's investment quality standards. There can be no assurance
that the private insurers can meet their obligations under the policies. A Fund
may buy Non-Governmental Mortgage-Backed Related Securities without insurance or
guarantees if, through an examination of the loan experience and practices of
the poolers, the Adviser determines that the securities meet the Fund's quality
standards. Although the market for such securities is becoming increasingly
liquid, securities issued by certain private organizations may not be readily
marketable. A Fund will not purchase mortgage-related securities or any other
assets which in the opinion of the Adviser are illiquid if, as a result, more
than 15% of the value of the Fund's net assets will be invested in illiquid
securities.
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A Fund may purchase mortgage-related securities with stated maturities in excess
of 10 years. Mortgage-related securities include CMOs and participation
certificates in pools of mortgages. The average life of mortgage-related
securities varies with the maturities of the underlying mortgage instruments,
which have maximum maturities of 40 years. The average life is likely to be
substantially less than the original maturity of the mortgage pools underlying
the securities as the result of mortgage prepayments. The rate of such
prepayments, and hence the average life of the certificates, will be a function
of current market interest rates and current conditions in the relevant housing
markets. The impact of prepayment of mortgages is described under "Government
Mortgage-Backed Securities." Estimated average life will be determined by the
Adviser. Various independent mortgage-related securities dealers publish
estimated average life data using proprietary models, and in making such
determinations, the Adviser will rely on such data except to the extent such
data are deemed unreliable by the Adviser. The Adviser might deem data
unreliable which appeared to present a significantly different estimated average
life for a security than data relating to the estimated average life of
comparable securities as provided by other independent mortgage-related
securities dealers.
Asset-Backed Securities. Asset-backed securities are debt securities backed by
pools of automobile or other commercial or consumer finance loans. The
collateral backing asset-backed securities cannot be foreclosed upon. These
issues are normally traded over-the-counter and typically have a short to
intermediate maturity structure, depending on the paydown characteristics of the
underlying financial assets which are passed through to the security holder.
Real Estate Investment Trusts. Each Fund may invest in real estate investment
trusts ("REITs"), which are pooled investment vehicles that invest primarily in
income-producing real estate or real estate-related loans or interests. Like
regulated investment companies such as the Trust, a REIT is not taxed on income
distributed to its shareholders if the REIT complies with the applicable
provisions of the Internal Revenue Code of 1986, as amended (the "Code"). By
investing in a REIT, a Fund will indirectly bear its proportionate share of any
expenses paid by the REIT in addition to Fund expenses.
There are three general categories of REITs: equity, mortgage and hybrid REITs.
Equity REITs, which invest the majority of their assets directly in real
property, derive their income primarily from rents and may also realize capital
gains by selling properties that have appreciated in value. Mortgage REITs,
which invest primarily in real estate mortgages, derive their income primarily
from interest payments on those mortgages. Hybrid REITs combine the
characteristics of both equity and mortgage REITs.
A REIT's market price may be affected by changes in the value of the underlying
property that it owns or by the credit quality of borrowers to whom the REIT
lends money. REITs are dependent on property management skills, are not
diversified (except as the Code requires), are heavily dependent on cash flow,
and are subject to borrower default, self-liquidation, failing to qualify for
tax exemption under the Code and/or registration exemption under the 1940 Act.
Preferred Stock. Each Fund may invest in preferred stock issued by domestic and
foreign corporations. Preferred stocks are instruments that combine qualities
both of equity and debt securities. Individual issues of preferred stock will
have those rights and liabilities that are spelled out in the governing
document. Preferred stocks usually pay a fixed dividend per quarter (or annum)
and are senior to common stock in terms of liquidation and dividends rights.
Preferred stocks typically do not have voting rights.
Convertible Securities. Each Fund may invest in convertible debt and convertible
preferred stock. These securities may be converted at either a stated price or
rate into underlying shares of common stock. As a result, an investor in
convertible securities may benefit from increases in the underlying common
stock's market price. Convertible securities provide higher yields than the
underlying common stock, but typically offer lower yields than comparable
non-convertible securities. The value of convertible securities fluctuates in
relation to changes in interest rates like bonds and also fluctuates in relation
to the underlying stock's price.
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Futures and Options
Futures Contracts. The Funds may enter into futures contracts, options on
futures contracts, and stock index futures contracts and options thereon for the
purposes of remaining fully invested and reducing transaction costs. Futures
contracts provide for the future sale by one party and purchase by another party
of a specified amount of a specific security, class of securities, or an index
at a specified future time and at a specified price. A stock index futures
contract is a bilateral agreement pursuant to which two parties agree to take or
make delivery of an amount of cash equal to a specified dollar amount times the
difference between the stock index value at the close of trading of the
contracts and the price at which the futures contract is originally struck.
Futures contracts which are standardized as to maturity date and underlying
financial instrument are traded on national futures exchanges. Futures exchanges
and trading are regulated under the Commodity Exchange Act by the Commodity
Futures Trading Commission (the "CFTC"), a U.S. Government agency.
The Funds may enter into contracts for the future delivery of securities and
futures contracts based on a specific security, class of securities or an index,
purchase or sell options on any such futures contracts and engage in related
closing transactions. A futures contract on a securities index is an agreement
obligating either party to pay, and entitling the other party to receive, while
the contract is outstanding, cash payments based on the level of a specified
securities index.
Although futures contracts (other than those relating to indexes) by their terms
call for actual delivery and acceptance of the underlying securities, in most
cases the contracts are closed out before the settlement date without the making
or taking of delivery. Closing out an open futures position is done by taking an
opposite position (buying a contract which has previously been "sold," or
"selling" a contract previously purchased) in an identical contract to terminate
the position. The acquisition of put and call options on futures contracts will,
respectively, give a Fund the right (but not the obligation), for a specified
price, to sell or to purchase the underlying futures contract, upon exercise of
the option, at any time during the option period. Brokerage commissions are
incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a futures commission merchant or custodian to
initiate and maintain open positions in futures contracts. A margin deposit is
intended to assure completion of the contract (delivery or acceptance of the
underlying security) if it is not terminated prior to the specified delivery
date. Minimal initial margin requirements are established by the futures
exchange and may be changed. Futures commission merchants may establish deposit
requirements which are higher than the exchange minimums. Initial margin
deposits on futures contracts are customarily set at levels much lower than the
prices at which the underlying securities are purchased and sold, typically
ranging upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked-to-market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Funds
expect to earn interest income on its margin deposits.
When interest rates are expected to rise or market values of portfolio
securities are expected to fall, a Fund can seek through the sale of futures
contracts to offset a decline in the value of its portfolio securities. When
interest rates are expected to fall or market values are expected to rise, a
Fund, through the purchase of such contracts, can attempt to secure better rates
or prices for a Fund than might later be available in the market when it effects
anticipated purchases.
The Funds may sell futures contracts to protect securities it owns against price
declines or purchase contracts to protect against an increase in the price of
securities it intends to purchase. A Fund may also enter into such transactions
in order to terminate existing positions.
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The Funds' ability to use futures trading effectively depends on several
factors. First, it is possible that there will not be a perfect price
correlation between a futures contract and its underlying stock index. Second,
it is possible that a lack of liquidity for futures contracts could exist in the
secondary market, resulting in an inability to close a futures position prior to
its maturity date. Third, the purchase of a futures contract involves the risk
that a Fund could lose more than the original margin deposit required to
initiate a futures transaction.
Futures transactions involve brokerage costs and require a Fund to segregate
assets to cover contracts that would require it to purchase securities. A Fund
may lose the expected benefit of futures transactions if interest rates,
exchange rates or securities prices move in an unanticipated manner. Such
unanticipated changes may also result in poorer overall performance than if a
Fund had not entered into any futures transactions. In addition, the value of a
Fund's futures positions may not prove to be perfectly or even highly correlated
with the value of its portfolio securities, limiting a Fund's ability to hedge
effectively against interest rate and/or market risk and giving rise to
additional risks. There is no assurance of liquidity in the secondary market for
purposes of closing out futures positions.
Restrictions on the Use of Futures Contracts. The Funds will not enter into
futures contract transactions for purposes other than bona fide hedging purposes
or as a substitute for the underlying securities to gain market exposure to the
extent that, immediately thereafter, the sum of its initial margin deposits on
open contracts exceeds 5% of the market value of a Fund's total assets. In
addition, a Fund will not enter into futures contracts to the extent that the
value of the futures contracts held would exceed 1/3 of the Fund's total assets.
The Trust need not register with the CFTC as a Commodities Pool Operator.
In addition to the margin restrictions discussed above, transactions in futures
contracts may involve the segregation of funds pursuant to requirements imposed
by the SEC. Under those requirements, where a Fund has a long position in a
futures contract, it may be required to establish a segregated account (not with
a futures commission merchant or broker) containing cash or certain liquid
assets equal to the purchase price of the contract (less any margin on deposit).
For a short position in futures or forward contracts held by the Fund, those
requirements may mandate the establishment of a segregated account (not with a
futures commission merchant or broker) with cash or certain liquid assets that,
when added to the amounts deposited as margin, equal the market value of the
instruments underlying the futures contracts (but are not less than the price at
which the short positions were established). However, segregation of assets is
not required if a Fund "covers" a long position. For example, instead of
segregating assets, a Fund, when holding a long position in a futures contract,
could purchase a put option on the same futures contract with a strike price as
high or higher than the price of the contract held by a Fund. In addition, where
a Fund takes short positions, or engages in sales of call options, it need not
segregate assets if it "covers" these positions. For example, where a Fund holds
a short position in a futures contract, it may cover by owning the instruments
underlying the contract. A Fund may also cover such a position by holding a call
option permitting it to purchase the same futures contract at a price no higher
than the price at which the short position was established. Where a Fund sells a
call option on a futures contract, it may cover either by entering into a long
position in the same contract at a price no higher than the strike price of the
call option or by owning the instruments underlying the futures contract. A Fund
could also cover this position by holding a separate call option permitting it
to purchase the same futures contract at a price no higher than the strike price
of the call option sold by a Fund.
In addition, the extent to which a Fund may enter into transactions involving
futures contracts may be limited by the Code's requirements for qualification as
a registered investment company and a Fund's intention to qualify as such.
Risk Factors in Futures Transactions. Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a Fund would continue to be required to make daily cash payments to
maintain the required margin. In such situations, if a Fund has
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insufficient cash, it may have to sell portfolio securities to meet daily margin
requirements at a time when it may be disadvantageous to do so. In addition, a
Fund may be required to make delivery of the instruments underlying futures
contracts it holds. The inability to close options and futures positions also
could have an adverse impact on the ability to effectively hedge them. A Fund
will minimize the risk that they will be unable to close out a futures contract
by only entering into futures contracts which are traded on national futures
exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. Because the deposit
requirements in the futures markets are less onerous than margin requirements in
the securities market, there may be increased participation by speculators in
the futures market which may also cause temporary price distortions. A
relatively small price movement in a futures contract may result in immediate
and substantial loss (as well as gain) to the investor. For example, if at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit if the contract
were closed out. Thus, a purchaser or sale of a futures contract may result in
losses in excess of the amount invested in the contract. However, because the
futures strategies engaged in by the Funds are only for hedging purposes, the
Adviser does not believe that the Funds are subject to the risks of loss
frequently associated with futures transactions. The Funds would presumably have
sustained comparable losses if, instead of the futures contract, it had invested
in the underlying financial instrument and sold it after the decline.
Use of futures transactions by the Funds involve the risk of imperfect or no
correlation where the securities underlying futures contract have different
maturities than the portfolio securities being hedged. It is also possible that
the Funds could both lose money on futures contracts and also experience a
decline in the value of its portfolio securities. There is also the risk of loss
by the Funds of margin deposits in the event of bankruptcy of a broker with whom
the Funds have open positions in a futures contract or related option.
Options. The Funds may sell (write) call options which are traded on national
securities exchanges with respect to common stock in its portfolio. A Fund must
at all times have in its portfolio the securities which it may be obligated to
deliver if the option is exercised. The risk of writing uncovered call options
is that the writer of the option may be forced to acquire the underlying
security at a price in excess of the exercise price of the option, that is, the
price at which the writer has agreed to sell the underlying security to the
purchaser of the option. A Fund may write call options in an attempt to realize
a greater level of current income than would be realized on the securities
alone. A Fund may also write call options as a partial hedge against a possible
stock market decline. In view of their investment objective, a Fund generally
would write call options only in circumstances where the Adviser does not
anticipate significant appreciation of the underlying security in the near
future or has otherwise determined to dispose of the security. As the writer of
a call option, a Fund receives a premium for undertaking the obligation to sell
the underlying security at a fixed price during the option period, if the option
is exercised. So long as a Fund remains obligated as a writer of a call option,
it forgoes the opportunity to profit from increases in the market price of the
underlying security above the exercise price of the option, except insofar as
the premium represents such a profit. A Fund retains the risk of loss should the
value of the underlying security decline. A Fund may also enter into "closing
purchase transactions" in order to terminate its obligation as a writer of a
call option prior to the expiration of the option. Although the writing of call
options only on national securities exchanges increases the likelihood of a
Fund's ability to make closing purchase transactions, there is no assurance that
a Fund will be able to effect such transactions at any particular time or at any
acceptable price. The writing of call options could result in increases in a
Fund's portfolio turnover rate, especially during periods when market prices of
the underlying securities appreciate.
Puts. A put is a right to sell a specified security (or securities) within a
specified period of time at a specified exercise price. A Fund may sell,
transfer, or assign a put only in conjunction with the sale,
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transfer, or assignment of the underlying security or securities. The amount
payable to a Fund upon its exercise of a "put" is normally (i) a Fund's
acquisition cost of the securities (excluding any accrued interest which a Fund
paid on the acquisition), less any amortized market premium or plus any
amortized market or original issue discount during the period a Fund owned the
securities, plus (ii) all interest accrued on the securities since the last
interest payment date during that period.
Puts may be acquired by a Fund to facilitate the liquidity of its portfolio
assets. Puts may also be used to facilitate the reinvestment of a Fund's assets
at a rate of return more favorable than that of the underlying security. Puts
may, under certain circumstances, also be used to shorten the maturity of
underlying variable rate or floating rate securities for purposes of calculating
the remaining maturity of those securities and the dollar-weighted average
portfolio maturity of a Fund's assets. See "Variable and Floating Rate Notes"
and "Valuation" in this SAI.
A Fund generally will acquire puts only where the puts are available without the
payment of any direct or indirect consideration. However, if necessary or
advisable, a Fund may pay for puts either separately in cash or by paying a
higher price for portfolio securities which are acquired subject to the puts
(thus reducing the yield to maturity otherwise available for the same
securities). The Funds intends to enter into puts only with dealers, banks, and
broker-dealers which, in the Adviser's opinion, present minimal credit risks.
Each Fund may write put options from time to time. Such options may be listed on
a national securities exchange and issued by the Options Clearing Corporation or
traded over-the-counter. A Fund may seek to terminate its position in a put
option it writes before exercise by closing out the option in the secondary
market at its current price. If the secondary market is not liquid for a put
option a Fund has written, however, the Fund must continue to be prepared to pay
the strike price while the option is outstanding, regardless of price changes,
and must continue to set aside assets to cover its position. Upon the exercise
of an option, the Fund is not entitled to the gains, if any, on securities
underlying the options. Each Fund also may purchase index put and call options
and write index options. Through the writing or purchase of index options, the
Fund can achieve many of the same objectives as through the use of options on
individual securities. Utilizing options is a specialized investment technique
that entails a substantial risk of a complete loss of the amounts paid as
premiums to writers of options.
Illiquid Investments. Illiquid investments are investments that cannot be sold
or disposed of, within seven business days, in the ordinary course of business
at approximately the prices at which they are valued.
Under the supervision of the Trust's Board of Trustees (the "Board"), the
Adviser determines the liquidity of the Funds' investments and, through reports
from the Adviser, the Trustees monitor investments in illiquid instruments. In
determining the liquidity of a Fund's investments, the Adviser may consider
various factors, including (1) the frequency of trades and quotations, (2) the
number of dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, (4) the nature of the security (including any
demand or tender features), and (5) the nature of the marketplace for trades
(including the ability to assign or offset the Funds' rights and obligations
relating to the investment).
Investments currently considered by a Fund to be illiquid include repurchase
agreements not entitling the holder to payment of principal and interest within
seven days, over the counter options, non-government stripped fixed-rate
mortgage-backed securities, and Restricted Securities.
Also, the Adviser may determine some securities to be illiquid.
However, with respect to over-the-counter options a Fund writes, all or a
portion of the value of the underlying instrument may be illiquid depending on
the assets held to cover the option and the nature and terms of any agreement a
Fund may have to close out the option before expiration.
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In the absence of market quotations, illiquid investments are priced at fair
value as determined in good faith by a committee appointed by the Trustees.
If through a change in values, net assets, or other circumstances, more than 15%
of a Fund's net assets were invested in illiquid securities, the Fund would seek
to take appropriate steps to protect liquidity.
Restricted Securities. Restricted securities generally can be sold in privately
negotiated transactions, pursuant to an exemption from registration under the
Securities Act, or in a registered public offering.
Where registration is required, a Fund may be obligated to pay all or part of
the registration expense and a considerable period may elapse between the time
it decides to seek registration and the time the Fund may be permitted to sell a
security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, a Fund
might obtain a less favorable price than prevailed when it decided to seek
registration of the shares.
Securities Lending Transactions. The Funds may from time to time lend securities
from their portfolio to broker-dealers, banks, financial institutions and
institutional borrowers of securities and receive collateral in the form of cash
or U.S. Government Obligations. Generally, a Fund must receive initial
collateral equal to 102% of the market value of the loaned securities, plus any
interest due in the form of cash or U.S. Government Obligations. The Funds will
not lend portfolio securities to: (a) any "affiliated person" (as that term is
defined in the 1940 Act)) of any Fund; (b) any affiliated person of the
Investment Adviser; or (c) any affiliated person of such an affiliated person.
This collateral must be valued daily and should the market value of the loaned
securities increase, the borrower must furnish additional collateral to a Fund
sufficient to maintain the value of the collateral equal to at least 100% of the
value of the loaned securities. During the time portfolio securities are on
loan, the borrower will pay the Fund any dividends or interest paid on such
securities plus any interest negotiated between the parties to the lending
agreement. Loans will be subject to termination by the Funds or the borrower at
any time. While a Fund will not have the right to vote securities on loan, they
intend to terminate loans and regain the right to vote if that is considered
important with respect to the investment. A Fund will only enter into loan
arrangements with broker-dealers, banks or other institutions which the Adviser
has determined are creditworthy under guidelines established by the Trustees.
The Funds will limit their securities lending to 33 1/3% of total assets.
Short Sales Against-the-Box. The Funds will not make short sales of securities,
other than short sales "against-the-box." In a short sale against-the-box, a
Fund sells a security that it owns, or a security equivalent in kind and amount
to the security sold short that the Fund has the right to obtain, for delivery
at a specified date in the future. A Fund will enter into short sales
against-the-box to hedge against unanticipated declines in the market price of
portfolio securities. If the value of the securities sold short increases prior
to the scheduled delivery date, a Fund loses the opportunity to participate in
the gain.
Investment Grade and High Quality Securities. The Funds may invest in
"investment grade" obligations, which are those rated at the time of purchase
within the four highest rating categories assigned by an NRSRO or, if unrated,
are obligations that the Adviser determines to be of comparable quality. The
applicable securities ratings are described in the Appendix. "High-quality"
short-term obligations are those obligations which, at the time of purchase, (1)
possess a rating in one of the two highest ratings categories from at least one
NRSRO (for example, commercial paper rated "A-1" or "A-2" by Standard & Poor's
("S&P") or "P-1" or "P-2" by Moody's Investors Service, Inc. ("Moody's")) or (2)
are unrated by an NRSRO but are determined by the Adviser to present minimal
credit risks and to be of comparable quality to rated instruments eligible for
purchase by the Funds under guidelines adopted by the Board.
Participation Interests. The Funds may purchase interests in securities from
financial institutions such as commercial and investment banks, savings and loan
associations and insurance companies. These interests may take the form of
participation, beneficial interests in a trust, partnership interests or any
other form of
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indirect ownership. The Funds invest in these participation interests, in order
to obtain credit enhancement or demand features that would not be available
through direct ownership of the underlying securities.
Warrants. Warrants are securities that give a Fund the right to purchase equity
securities from the issuer at a specified price (the strike price) for a limited
period of time, which strike price is usually higher than the current market
price at the time of issuance. Because the market price of warrants typically is
much lower than the current market price of the underlying securities, they are
subject to greater price fluctuations. As a result, warrants may be more
volatile investments than the underlying securities and may offer greater
potential for capital appreciation as well as capital loss.
Foreign Investments. A Fund may invest in securities issued by foreign branches
of U.S. banks, foreign banks, or other foreign issuers, including securities
purchased on foreign securities exchanges. Such investment may subject the Fund
to significant investment risks that are different from, and additional to,
those related to investments in obligations of U.S. domestic issuers or in U.S.
securities markets.
Foreign securities markets generally have less trading volume and less liquidity
than U.S. markets, and prices on some foreign markets can be highly volatile.
Many foreign countries lack uniform accounting and disclosure standards
comparable to those applicable to U.S. companies, and it may be more difficult
to obtain reliable information regarding an issuer's financial condition and
operations. In addition, the costs of foreign investing, including withholding
taxes, brokerage commissions, and custodial costs, are generally higher than for
U.S. investments.
Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers, and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It may also be difficult to enforce legal rights
in foreign countries.
Investing abroad also involves different political and economic risks. Foreign
investments may be affected by actions of foreign governments adverse to the
interests of U.S. investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets, or other government
intervention. There may be a greater possibility of default by foreign
governments or foreign government-sponsored enterprises. Investments in foreign
countries also involve a risk of local political, economic, or social
instability, military action or unrest, or adverse diplomatic developments.
There is no assurance that the Adviser will be able to anticipate these
potential events or counter their effects.
The considerations noted above generally are intensified for investments in
developing countries. Developing countries may have relatively unstable
governments, economies based on only a few industries, and securities markets
that trade a small number of securities.
A Fund may invest in foreign securities that impose restrictions on transfer
within the U.S. or to U.S. persons. Although securities subject to transfer
restrictions may be marketable abroad, they may be less liquid than foreign
securities of the same class that are not subject to such restrictions.
Preferred stocks are instruments that combine qualities both of equity and debt
securities. Individual issues of preferred stock will have those rights and
liabilities that are spelled out in the governing document. Preferred stocks
usually pay a fixed dividend per quarter (or annum) and are senior to common
stock in terms of liquidation and dividends rights, and preferred stocks
typically do not have voting rights.
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Valuation of Portfolio Securities for the Investment Quality Bond Fund
Investment securities held by the Investment Quality Bond Fund are valued on the
basis of security valuations provided by an independent pricing service,
approved by the Trustees, which determines value by using information with
respect to transactions of a security, quotations from dealers, market
transactions in comparable securities, and various relationships between
securities. Specific investment securities which are not priced by the approved
pricing service will be valued according to quotations obtained from dealers who
are market makers in those securities. Investment securities with less than 60
days to maturity when purchased are valued at amortized cost which approximates
market value. Investment securities not having readily available market
quotations will be priced at fair value using a methodology approved in good
faith by the Board.
Generally, trading in foreign securities, corporate bonds, U.S. Government
securities and money market instruments is substantially completed each day at
various times prior to the close of the New York Stock Exchange, Inc. (the
"NYSE"). The values of such securities used in computing the net asset value of
the Investment Quality Bond Fund's shares are determined at such times.
Occasionally, events affecting the values of such securities may occur between
the times at which such values are determined and the close of the NYSE which
will not be reflected in the computation of the Investment Quality Bond Fund's
net asset value. If events materially affecting the value of such securities
occur during such period, then these securities will be valued at their fair
value as determined in good faith by or under the supervision of the Board.
Valuation of Portfolio Securities For The Equity Funds.
Each equity security held by an Equity Fund is valued at its last sales price on
the exchange where the security is principally traded or, lacking any sales on a
particular day, the security is valued at the last available bid quotation on
that day. Exchange listed convertible debt securities are valued at the bid
obtained from broker-dealers or a comparable alternative, such as Bloomberg or
Reuters, based upon pricing procedures approved by the Board. Each security
traded in the over-the-counter market (but not including securities reported on
the Nasdaq National Market System) is valued at the bid based upon quotes
furnished by market makers for such securities. Each security reported on the
Nasdaq National Market System is valued at the sales price on the valuation date
or absent a last sales price, at the fair market value on that day, as
established by an independent pricing service. Non-convertible debt securities
are valued on the basis of prices provided by an independent pricing service.
Prices provided by the pricing service may be determined without exclusive
reliance on quoted prices, and may reflect appropriate factors such as
institution-size trading in similar groups of securities, developments related
to special securities, yield, quality, coupon rate, maturity, type of issue,
individual trading characteristics and other market data. Securities for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the supervision of the Trust's officers in
a manner specifically authorized by the Boards. Short-term obligations having 60
days or less to maturity are valued on the basis of amortized cost. For purposes
of determining net asset value per share, futures and options contracts
generally will be valued 15 minutes after the close of trading of the NYSE.
Generally, trading in corporate bonds, U.S. Government securities and money
market instruments is substantially completed each day at various times prior to
the close of the NYSE. The values of such securities used in computing the net
asset value of each Equity Fund's shares are determined at such times.
PERFORMANCE
From time to time, the "standardized yield," "distribution return," "dividend
yield," "average annual total return" and "total return," of an investment in
Fund shares may be advertised. An explanation of how yields and total returns
are calculated and the components of those calculations are set forth below.
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Yield and total return information may be useful to contract owners in reviewing
a Fund's performance. A Fund's advertisement of its performance must, under
applicable SEC rules, include the average annual total returns for a Fund for
the 1, 5, and 10-year period as of the most recently ended calendar quarter.
This enables a contract owner to compare the Fund's performance to the
performance of other funds for the same periods. However, a number of factors
should be considered before using such information as a basis for comparison
with other investments. A Fund's shares are not insured; their yield and total
return are not guaranteed and normally will fluctuate on a daily basis. When
redeemed, shares of a Fund may be worth more or less than their original cost.
Yield and total return for any given past period are not a prediction or
representation by the Trust of future yields or rates of return on its shares.
The yield and total returns of shares of the Funds are affected by portfolio
quality, portfolio maturity, the type of investments the Funds hold, and
operating expenses. Class A Shares are subject to an annual contract owner
administrative services fee of up to 0.20% of average daily net assets.
Standardized Yield. The "yield" (referred to as "standardized yield") of the
Funds for a given 30-day period is calculated using the following formula set
forth in rules adopted by the SEC that apply to all funds that quote yields:
Standardized Yield = 2 [(a-b + 1)6 - 1]
cd
The symbols above represent the following factors:
a = dividends and interest earned during the 30-day period.
b = expenses accrued for the period (net of any expense
reimbursements).
c = the average daily number of shares of outstanding during the
30-day period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period, adjusted for undistributed net investment income.
A Fund's standardized yield for a 30-day period may differ from its yield for
any other period. The SEC formula assumes that the standardized yield for a
30-day period occurs at a constant rate for a six-month period and is annualized
at the end of the six-month period. This standardized yield is not based on
actual distributions paid by a Fund in the 30-day period, but is a hypothetical
yield based upon the net investment income from a Fund's portfolio investments
calculated for that period. The standardized yield may differ from the "dividend
yield," described below.
Dividend Yield and Distribution Returns. From time to time a Fund may quote a
"dividend yield" or a "distribution return." Dividend yield is based on a Fund's
dividends derived from net investment income during a one-year period.
Distribution return includes dividends derived from net investment income and
from net realized capital gains declared during a one-year period. The "dividend
yield" is calculated as follows:
Dividend Yield = Dividends for a Period of One-Year
Maximum. Offering Price (last day of period)
Total Return Calculations. Total returns quoted in advertising reflect all
aspects of a Fund's return, including the effect of reinvesting dividends and
net capital gain distributions (if any), and any change in the net asset value
per share of a Fund over the period. Average annual total returns are calculated
by determining the growth or decline in value of a hypothetical historical
investment in a Fund over a stated period, and then calculating the annually
compounded percentage rate that would have produced the same result if the rate
of growth or decline in value had been constant over the period. For example, a
cumulative total return of 100% over ten years would produce an average annual
total return of 7.18%, which is the steady annual rate of return that would
equal 100% growth on an annually compounded basis in ten years. While average
annual total returns (or "annualized total return") are a convenient means of
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comparing alternative choices to fund a variable contract, contract owners
should realize that performance for a Fund is not constant over time, but
changes from year to year, and that average annual total returns represent
averaged figures as opposed to the actual year-to-year performance of a Fund.
When using total return and yield to compare a Fund with other variable contract
investment vehicles, contract owners should take into consideration permitted
portfolio composition methods used to value portfolio securities and computing
offering price.
Total Returns. The "average annual total return" of a Fund is an average annual
compounded rate of return for each year in a specified number of years. The
average annual rate of return ("T" in the formula below) is based on the change
in value of a hypothetical initial investment of $1,000 ("P") held for a number
of years ("n") to achieve an Ending Redeemable Value ("ERV"), according to the
following formula:
P (1+T)n = ERV
The cumulative "total return" calculation measures the change in value of a
hypothetical investment of $1,000 over an entire period of years. Its
calculation uses some of the same factors as average annual total return, but it
does not average the rate of return on an annual basis. Total return is
determined as follows:
ERV - P = Total Return
P
Total returns also assume that all dividends and net capital gains distributions
during the period are reinvested to buy additional shares at net asset value per
share, and that the investment is redeemed at the end of the period.
A Fund's total return should be distinguished from the rate of return of the
corresponding separate account. The separate account's return reflects the
deduction of additional insurance charges, including mortality and expense risk
charges, resulting in a lower rate of return. Because a Fund's yield or total
return do not reflect these additional charges, this performance information
should not be compared with that of mutual funds that are sold directly to the
public. A Fund's performance information will only be included in sales
literature if comparable performance figures for the corresponding separate
account are also included. Contract owners should consult the separate account
prospectus for further information.
Other Performance Comparisons.
From time to time a Fund may publish the ranking of its performance or the
performance of its shares by Lipper, Inc., a widely-recognized independent
mutual fund monitoring service. Lipper monitors the performance of regulated
investment companies, including the Funds, and ranks the performance of the
Funds against all other funds in similar categories, for both equity and fixed
income funds. The Lipper performance rankings are based on total return that
includes the reinvestment of capital gains distributions and income dividends
but does not take sales charges or taxes into consideration.
From time to time a Fund may publish the ranking of its performance or
performance of its shares by Morningstar, Inc., an independent mutual fund
monitoring service that ranks mutual funds, including the Funds, in broad
investment categories (domestic equity, international equity taxable bond,
municipal bond or other) monthly, based upon each fund's three, five, and
ten-year average annual total returns (when available) and a risk adjustment
factor that reflects fund performance relative to three-month U.S. Treasury bill
monthly returns. Such returns are adjusted for fees and sales loads. There are
five ranking categories with a corresponding number of stars: highest (5), above
average (4), neutral (3), below average (2), and lowest (1). Ten percent of the
funds, series or classes in an investment category receive five stars, 22.5%
receive four stars, 35% receive three stars, 22.5% receive two stars, and the
bottom 10% receive one star.
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The total return on an investment made in a Fund may be compared with the
performance for the same period of one or more of the following indices: the
Consumer Price Index, the Standard & Poor's 500 Index (the "S&P 500"), the
Standard & Poor's SmallCap Index, and the Lehman Aggregate Bond Index. Other
indices may be used from time to time. The Consumer Price Index generally is
considered to be a measure of inflation. The S&P 500 is a composite index of 500
common stocks generally regarded as an index of U.S. stock market performance.
The Lehman Aggregate Bond Index measures the performance of U.S. corporate bond
issues, U.S. government securities and mortgage-backed securities. The foregoing
indices are unmanaged indices of securities that do not reflect reinvestment of
capital gains or take investment costs into consideration, as these items are
not applicable to indices.
From time to time, in advertisements and other sales literature, the yields and
the total returns of the Funds may be quoted in and compared to those of other
mutual funds with similar investment objectives that serve as funding vehicles
for separate accounts offering variable contracts. A Fund also may include
calculations that describe hypothetical performance results. (Such performance
examples are based on an express set of assumptions and are not indicative of
the performance of any Fund.) Such calculations may from time to time include
discussions or illustrations of the effects of compounding. "Compounding" refers
to the fact that the receipt of additional contract units attributable to a
Fund's dividends or other distributions (which distributions are reinvested in
additional Fund shares) results in an increase in the value, not only of the
units representing the original Fund shares acquired by the separate account,
but also of additional units previously received.
A Fund may also include discussions or illustrations of the potential investment
goals of a prospective contract owner (including but not limited to tax and/or
retirement planning), investment management techniques, policies or investment
suitability of a Fund, economic conditions, legislative developments (including
pending legislation), the effects of inflation and historical performance of
various asset classes, including but not limited to stocks, bonds and Treasury
bills. From time to time advertisements or other sales literature may summarize
the substance of information contained in the Funds' financial reports
(including the investment composition of a Fund, as well as the views of the
investment adviser as to current market, economic, trade and interest rate
trends, legislative, regulatory and monetary developments, investment strategies
and related matters believed to be of relevance to a Fund). Sales literature
relating to a Fund may also include charts, graphs or drawings which illustrate
the potential risks and rewards of various investment vehicles, including but
not limited to stock, bonds, and Treasury bills, as compared owning a contract
with a separate account investing in a Fund, as well as charts or graphs which
illustrate strategies such as dollar cost averaging, and comparisons of
hypothetical yields of investment in tax-exempt versus taxable investments. In
addition, sales literature may include a discussion of certain attributes or
benefits resulting from participation in a separate account that invests in a
Fund. Such sales literature may include symbols, headlines or other material
which highlight or summarize the information discussed in more detail therein.
With proper authorization, a Fund may reprint articles (or excerpts) written
regarding a Fund and provide them to prospective contact owners. Performance
information with respect to the Funds is generally available by contacting your
participating insurance company.
Advertisements and sales literature may include discussions of specifics of a
portfolio manager's investment strategy and process, including, but not limited
to, descriptions of security selection and analysis. Advertisements may also
include descriptive information about the investment adviser, including, but not
limited to, its status within the industry, other services and products it makes
available, total assets under management, and its investment philosophy.
When comparing yield, total return, and investment risk of a Fund with other
variable contract funding vehicles, contract owners should understand that
certain other vehicles have different risk characteristics than a Fund's shares.
For example, certificates of deposit may have fixed rates of return and may be
insured as to principal and interest by the FDIC, while a Fund's returns will
fluctuate and its share values and returns are not guaranteed. Money market
accounts offered by banks also may be insured by the FDIC and may offer
stability of principal. U.S. Treasury securities are guaranteed as to principal
and interest by the full faith and credit of the U.S. Government.
23
<PAGE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The NYSE is scheduled to be closed for the following holidays: New Year's Day,
Dr. Martin Luther King, Jr., Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas. This holiday closing
schedule is subject to change.
The Trust has elected, pursuant to Rule 18f-1 under the 1940 Act, to redeem
shares of each Fund solely in cash up to the lesser of $250,000 or 1% of the net
asset value of the Fund during any 90-day period for any one separate account.
The remaining portion of the redemption may be made in securities or other
property, valued for this purpose as they are valued in computing the net asset
value of the Fund. Separate accounts receiving securities or other property on
redemption may realize a gain or loss for tax purposes and may incur additional
costs as well as the associated inconveniences of holding and/or disposing of
such securities or other property.
Purchasing and Redeeming Shares.
As described in the Prospectus, shares of the Funds may be purchased and
redeemed solely through variable annuity contracts and variable life insurance
policies (collectively, "contracts") offered by separate accounts of
participating insurance companies. The separate accounts purchase and redeem
shares of a Fund based on, among other things, the amount of premium payments
received on that day pursuant to variable contracts and variable life insurance
policies but only on days when the NYSE is open for trading. Such purchases and
redemptions of Fund shares are effected at its net asset value per share
determined as of the close of regular trading on the NYSE (normally 4:00 p.m.
Eastern time) on that same day. No fee is charged the separate accounts of the
participating insurance companies when they redeem Fund shares.
DIVIDENDS AND DISTRIBUTIONS
The Funds distribute substantially all of their net investment income and net
capital gains, if any, to shareholders within each calendar year as well as on a
fiscal year basis to the extent required for the Funds to qualify for favorable
federal tax treatment. Each Fund ordinarily declares and pays dividends
quarterly. If a Fund makes a capital gains distribution, it is declared and paid
annually.
For this purpose, the net income of a Fund, from the time of the immediately
preceding determination thereof, shall consist of all interest income accrued on
the portfolio assets of the Fund, dividend income, if any, income from
securities loans, if any, and realized capital gains and losses on the Fund's
assets, less all expenses and liabilities of the Fund chargeable against income.
Interest income shall include discount earned, including both original issue and
market discount, on discount paper accrued ratably to the date of maturity.
Expenses, including the compensation payable to the Adviser, are accrued each
day. The expenses and liabilities of a Fund shall include those appropriately
allocable to the Fund as well as a share of the general expenses and liabilities
of the Trust in proportion to the Fund's share of the total net assets of the
Trust.
TAXES
The following is only a summary of certain additional federal income tax
considerations that are not described in the Prospectus and generally affect
each Fund and its shareholders. No attempt is made to present a detailed
explanation of the tax treatment of each Fund or its shareholders, and the
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.
Each Fund intends to qualify as a regulated investment company ("RIC") under
Subchapter M of the Code. If so qualified, a Fund will not be subject to federal
income tax on its investment company taxable income and net capital gains to the
extent that such investment company taxable income and net capital gains are
distributed in each taxable year to the variable annuity or variable life
insurance contracts ("Contracts") of participating insurance companies that hold
its shares. In addition, if a Fund distributes annually to the
24
<PAGE>
Contracts its ordinary income and capital gain net income, in the manner
prescribed in the Code, it will also not be subject to the 4% federal excise tax
otherwise applicable to a RIC on any of its undistributed income or gains.
Distributions of net investment income and net short-term capital gains will be
treated as ordinary income and distributions of net long-term capital gains will
be treated as long-term capital gain in the hands of the insurance companies.
Under current tax law, capital gains or dividends from any Fund are not
currently taxable to a holder of a Contract when left to accumulate within such
Contract.
Section 817(h) of the Code requires that investments of a segregated asset
account of an insurance company be "adequately diversified," in accordance with
Treasury Regulations promulgated thereunder, in order for the holders of the
variable annuity contracts or variable life insurance policies based on such
account to receive the tax-deferred or tax-free treatment generally afforded
holders of annuities or life insurance policies under the Code. The Department
of the Treasury has issued Regulations under section 817(h) which, among other
things, provide the manner in which a segregated asset account will treat
investments in a RIC for purposes of the applicable diversification
requirements. Under the Regulations, if a RIC satisfies certain conditions, the
RIC will not be treated as a single investment of the account for these
purposes, but rather the segregated asset account will be treated as owning its
proportionate share of each of the assets of the RIC. Each Fund plans to satisfy
these conditions at all times so that each Contract of a participating insurance
company investing in the Funds will be treated as adequately diversified under
the Code and Regulations.
For information concerning the federal income tax consequences to the holders of
Contracts, such holders should consult the prospectuses for their particular
Contract.
TRUSTEES AND OFFICERS
Board of Trustees.
Overall responsibility for management of the Trust rests with the Trustees, who
are elected by the shareholders of the Trust. The Trust is managed by the
Trustees in accordance with the laws of the State of Delaware. There are
currently nine Trustees, seven of whom are not "interested persons" of the Trust
within the meaning of that term under the 1940 Act ("Independent Trustees"). The
Trustees, in turn, elect the officers of the Trust to supervise actively its
day-to-day operations.
The Trustees of the Trust, their ages, addresses and their principal occupations
during the past five years are as follows. Each of the following individuals,
except Theodore H. Emmerich and Donald E. Weston, holds the same position with
The Victory Portfolios, a registered investment company in the same fund complex
as the Trust. Whereas Messrs. Emmerich and Weston serve as Trustees of the
Trust, each of them serves as an Advisory Trustee of The Victory Portfolios.
<TABLE>
<CAPTION>
Position(s)
Held with Principal Occupation
Name, Age and Address the Trust During Past 5 Years
- --------------------- --------- --------------------
<S> <C> <C>
Roger Noall,* 63 Chairman Since 1996, Executive of KeyCorp; from 1995
c/o Brighton Apt. 1603 and Trustee to 1996, General Counsel and Secretary of
from 1994 to 8231 Bay Colony Drive KeyCorp; 1996, Senior Executive Vice
Chief Naples, FL 34108 President and Administrative Officer of KeyCorp;
from 1985 to 1994, Vice Chairman of the Board
and Chief Administrative Officer of Society
Corporation (now known as KeyCorp).
- ----------------
* Mr. Noall is an "interested person" and an "affiliated person" of the Trust.
25
<PAGE>
Leigh A. Wilson,** 54 President Since 1989, Chairman and Chief Executive
New Century Care, Inc. and Trustee Officer, New Century Care, Inc. (merchant bank);
53 Sylvan Road North since 1995, Principal of New Century Living, Inc.;
Westport, CT 06880 since 1989, Director of Chimney Rock Vineyard and
Chimney Rock Winery.
Theodore H. Emmerich, 72 Trustee Retired; until 1986, managing partner (Cincinnati office)
1201 Edgecliff Place Ernst & Young LLP; Director of Carillon Fund, Inc.
Cincinnati, Ohio 45206 (investment company), American Financial Group
(insurance), and Cincinnati Milacron Commercial Corporation (financing
arm of Cincinnati Milacron Corporation, a machine tool manufacturer);
Trustee of Summit Investment Trust and Carillon Investment Trust.
Dr. Harry Gazelle, 71 Trustee Retired radiologist, Drs. Hill and Thomas Corporation.
17822 Lake Road
Lakewood, OH 44107
Eugene J. McDonald, 66 Trustee Since 1990, Executive Vice President and Chief Investment
Duke Management Company Officer for Asset Management of Duke University and
2200 West Main Street President and CEO of Duke Management Company; Director of
Suite 1000 CCB Financial Corporation, Flag Group of Mutual Funds, DP
Durham, NC 27705 Mann Holdings, Greater Triangle Community Foundation, and
NC Bar Association Investment Committee.
Dr. Thomas F. Morrissey, 65 Trustee Since 1970, Professor, Weatherhead School of Management,
Weatherhead School of Management Case Western Reserve University; from 1989 to 1995,
Case Western Reserve University Associate Dean of Weatherhead School of Management; from
10900 Euclid Avenue 1987 to December 1994, Member of the Supervisory
Cleveland, OH 44106-7235 Committee of Society's Collective Investment Retirement
Fund; from May 1991 to August 1994, Trustee, Financial
Reserves Fund and from May 1993 to August 1994, Trustee, Ohio
Municipal Money Market Fund.
H. Patrick Swygert, 55 Trustee Since 1995, President, Howard University; since May 1996,
Howard University Director, Hartford Financial Services Group; since May
2400 6th Street, N.W. 1996, Director, Hartford Life Insurance Company; from
Suite 402 1990 to 1995, President, State University of New York at
Washington, DC 20059 Albany.
Donald E. Weston, 63* Trustee Since October 1998, Chairman of Gradison McDonald
McDonald Investments Inc. Investments, a division of McDonald Investments Inc.;
580 Walnut Street until October 1998, Chairman of the Gradison Division of
Cincinnati, Ohio 45202 McDonald & Company Securities, Inc. and a Director of
McDonald & Company Investments Inc.; Director of
Cincinnati Milacron Commercial Corporation.
- ------------------
** Mr. Wilson is deemed to be an "interested person" of the Trust under the 19940 Act solely by reason of his
position as President.
26
<PAGE>
Frank A. Weil, 67 Trustee Since 1984, Chairman and Chief Executive Officer of
Abacus & Associates Abacus & Associates, Inc. (private investment firm);
147 E. 47th Street Director and President of the Norman and Hickrill
New York, NY 10017 Foundations; Director, Trojan Industries; from 1977 to
1979, United States Assistant Secretary of Commerce for
Industry and Trade.
</TABLE>
The Board currently has an Investment Committee, a Business, Legal, and Audit
Committee, and a Board Process and Nominating Committee. The members of the
Investment Committee are Messrs. Wilson, Morrissey, Swygert, Weston and Weil,
who will serve until August 1999. The function of the Investment Committee is to
review the existing investment policies of the Trust, including the levels of
risk and types of funds available to shareholders, and make recommendations to
the Trustees regarding the revision of such policies or, if necessary, the
submission of such revisions to the Trust's shareholders for their
consideration. The members of the Business, Legal and Audit Committee are
Messrs. McDonald (Chairman), Emmerich, and Gazelle who will serve until August
1999. The function of the Business, Legal, and Audit Committee is to recommend
independent auditors and monitor accounting and financial matters and to review
compliance and contract matters. Mr. Swygert is the Chairman of the Board
Process and Nominating Committee (consisting of all the Trustees), which
nominates persons to serve as Independent Trustees and Trustees to serve on
committees of the Board.
Remuneration of Trustees and Certain Executive Officers.
Each Trustee receives an annual fee of $2,500 for serving as Trustee of all the
Funds of the Trust, and an additional fee of $500 per in-person meeting. The
Trustees do not receive compensation for participating in telephonic meetings.
The Adviser pays the expenses of Messrs. Noall and Weston.
The following table indicates the compensation that each Trustee is expected to
receive from the Victory "Fund Complex"(1) for the 12 month period ending
December 31, 1999.
<TABLE>
<CAPTION>
Pension or Estimated Annual
Retirement Benefits Upon Aggregate Total Compensation
Benefits Accrued Retirement Compensation from Victory
as Fund Expenses from Trust "Fund Complex"(1)
<S> <C> <C> <C> <C>
Leigh A. Wilson -0- -0- $5,000 $50,000
Theodore H. Emmerich -0- -0- $5,000 $41,600
Harry Gazelle -0- -0- $5,000 $41,600
Eugene J. McDonald -0- -0- $5,000 $41,600
Thomas F. Morrissey -0- -0- $5,000 $41,600
H. Patrick Swygert -0- -0- $5,000 $41,600
(1) There are currently 39 mutual funds from which the above-named Trustees are compensated in the Victory
"Fund Complex," but not all of the above-named Trustees serve on the board of each fund in the "Fund
Complex."
</TABLE>
27
<PAGE>
Officers.
The officers of the Trust, their ages, and principal occupations during the past
five years, are as follows:
<TABLE>
<CAPTION>
Position(s)
Name and Age with the Trust Principal Occupation During Past 5 Years
- ------------ -------------- ----------------------------------------
<S> <C> <C>
Leigh A. Wilson, 54 President and See biographical information under "Board of Trustees."
Trustee
William B. Blundin, 60 Vice President Senior Vice President of BISYS Fund Services, Inc. ("BISYS
Inc."); officer of other investment companies administered
by BISYS Inc.
J. David Huber, 52 Vice President President of BISYS Inc.; officer of BISYS Inc. since June
1987.
Robert D. Hingston, 46 Secretary Since November 1998, Vice President of BISYS; from January
1995 to October 1998, founder and principal of RDH
Associates (mutual fund management consulting firm); from
June 1980 to January 1995, Vice President of Investors
Bank & Trust Company.
Joel B. Engle, 33 Treasurer Since September 1998, Vice President of BISYS; from March
1995 to September 1998, Vice President, Northern Trust
Company; from July 1994 to February 1995, General
Accountant, Wanger Asset Management; from September 1988
to June 1994, Audit Manager with Ernst & Young LLP.
</TABLE>
The mailing address of each of the officers of the Trust is 3435 Stelzer Road,
Columbus, Ohio 43219-3035.
The officers of the Trust (other than Mr. Wilson) receive no compensation
directly from the Trust for performing the duties of their offices. BISYS Inc.
receives fees from the Trust as Administrator.
ADVISORY AND OTHER CONTRACTS
Investment Adviser.
One of the Trust's most important contracts is with its investment adviser, KAM,
a New York corporation registered as an investment adviser with the SEC. KAM is
a wholly owned subsidiary of KeyCorp. Affiliates of the Adviser manage
approximately $75 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals, and mutual funds.
KeyCorp, a financial services holding company, is headquartered at 127 Public
Square, Cleveland, Ohio 44114. As of December 31, 1998, KeyCorp had an asset
base of $80 billion, with banking offices in 13 states from Maine to Alaska, and
trust and investment offices in 14 states. KeyCorp's major business activities
include providing traditional banking and associated financial services to
consumer, business and commercial markets. Its non-bank subsidiaries include
investment advisory, securities brokerage, insurance, bank credit card
processing, and leasing companies.
The following schedule lists the advisory fees for each mutual fund of the Trust
that is advised by the Adviser.
28
<PAGE>
.20 of 1% of average daily net assets
Investment Quality Bond Fund
.30 of 1% of average daily net assets
Diversified Stock Fund
Small Company Opportunity Fund
The Investment Advisory Agreement.
Unless sooner terminated, the Investment Advisory Agreement between KAM and the
Trust, on behalf of the Funds (the "Investment Advisory Agreement"), provides
that it will continue in effect as to the Funds for an initial two-year term and
for consecutive one-year terms thereafter, provided that such renewal is
approved at least annually by the Trustees or by vote of a majority of the
outstanding shares of each Fund (as defined under "Additional Information -
Miscellaneous"), and, in either case, by a majority of the Trustees who are not
parties to the Investment Advisory Agreement or interested persons (as defined
in the 1940 Act) of any party to the Investment Advisory Agreement, by votes
cast in person at a meeting called for such purpose.
The Investment Advisory Agreement is terminable as to any particular Fund at any
time on 60 days' written notice without penalty by the Trustees, by vote of a
majority of the outstanding shares of the Fund, by vote of the Board, or by the
Adviser. The Investment Advisory Agreement also terminates automatically in the
event of any assignment, as defined in the 1940 Act.
The Investment Advisory Agreement provides that the Adviser shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Funds in connection with the performance of services pursuant to the Investment
Advisory Agreement, except a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services or a loss resulting from
willful misfeasance, bad faith, or gross negligence on the part of the Adviser
in the performance of its duties, or from reckless disregard by it of its duties
and obligations thereunder. The Adviser pays a fee to Disciplined Investment
Advisers, P.O. Box 112, Evanston, Illinois 60204, in connection with the
computer modeling methodology and the related database used to manage the
investments of the Small Company Opportunity Fund.
Under the Investment Advisory Agreement, the Adviser may delegate a portion of
its responsibilities to a sub-adviser. In addition, the Investment Advisory
Agreement provides that the Adviser may render services through its own
employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser of the Funds and are under the common
control of KeyCorp as long as all such persons are functioning as part of an
organized group of persons, managed by authorized officers of the Adviser.
Glass-Steagall Act.
In 1971 the United States Supreme Court held in Investment Company Institute v.
Camp that the federal statute commonly referred to as the Glass-Steagall Act
prohibits a national bank from operating a fund for the collective investment of
managing agency accounts. Subsequently, the Board of Governors of the Federal
Reserve System (the "Board of Governors") issued a regulation and interpretation
to the effect that the Glass-Steagall Act and such decision: (a) forbid a bank
holding company registered under the Federal Bank Holding Company Act of 1956
(the "Holding Company Act") or any non-bank affiliate thereof from sponsoring,
organizing, or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but (b) do not prohibit such
a holding company or affiliate from acting as investment adviser, transfer
agent, and custodian to such an investment company. In 1981 the United States
Supreme Court held in Board of Governors of the Federal Reserve System v.
Investment Company Institute that the Board of Governors did not exceed its
authority under the Holding Company Act when it adopted its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to registered closed-end investment companies. In
the Board of Governors
29
<PAGE>
case, the Supreme Court also stated that if a national bank complied with the
restrictions imposed by the Board of Governors in its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to investment companies, a national bank
performing investment advisory services for an investment company would not
violate the Glass-Steagall Act.
From time to time, advertisements, supplemental sales literature and information
furnished to present or prospective owners of contracts offered by separate
accounts that may invest in the Funds may include descriptions of Key Trust
Company of Ohio, N.A. ("Key Trust") and the Adviser including, but not limited
to, (1) descriptions of the operations of Key Trust and the Adviser; (2)
descriptions of certain personnel and their functions; and (3) statistics and
rankings related to the operations of Key Trust and the Adviser.
Portfolio Transactions.
Pursuant to the Investment Advisory Agreement, the Adviser determines, subject
to the general supervision of the Board, and in accordance with each Fund's
investment objective and restrictions, which securities are to be purchased and
sold by the Funds, and which brokers are to be eligible to execute its portfolio
transactions. Purchases from underwriters and/or broker-dealers of portfolio
securities include a commission or concession paid by the issuer to the
underwriter and/or broker-dealer and purchases from dealers serving as market
makers may include the spread between the bid and asked price. While the Adviser
generally seeks competitive spreads or commissions, each Fund may not
necessarily pay the lowest spread or commission available on each transaction,
for reasons discussed below.
Allocation of transactions to dealers is determined by the Adviser in their best
judgment and in a manner deemed fair and reasonable to shareholders. The primary
consideration is prompt execution of orders in an effective manner at the most
favorable price. Subject to this consideration, dealers who provide supplemental
investment research to the Adviser may receive orders for transactions by the
Trust. Information so received is in addition to and not in lieu of services
required to be performed by the Adviser and does not reduce the investment
advisory fees payable to the Adviser by the Funds. Such information may be
useful to the Adviser in serving both the Trust and other clients and,
conversely, such supplemental research information obtained by the placement of
orders on behalf of other clients may be useful to the Adviser in carrying out
its obligations to the Trust. The Trustees have authorized the allocation of
brokerage to affiliated broker-dealers on an agency basis to effect portfolio
transactions. The Trustees have adopted procedures incorporating the standards
of Rule 17e-1 of the 1940 Act, which require that the commission paid to
affiliated broker-dealers must be "reasonable and fair compared to the
commission, fee or other remuneration received, or to be received, by other
brokers in connection with comparable transactions involving similar securities
during a comparable period of time." At times, the Funds may also purchase
portfolio securities directly from dealers acting as principals, underwriters or
market makers. As these transactions are usually conducted on a net basis, no
brokerage commissions are paid by the Funds.
Investment decisions for each Fund are made independently from those made for
the other Funds of the Trust or any other investment company or account managed
by the Adviser. Such other investment companies or accounts may also invest in
the securities in which the Funds invest, and the Funds may invest in similar
securities. When a purchase or sale of the same security is made at
substantially the same time on behalf of a Fund and any other Fund, investment
company or account, the transaction will be averaged as to price, and available
investments allocated as to amount, in a manner which the Adviser believes to be
equitable to such Funds, investment company or account. In some instances, this
investment procedure may affect the price paid or received by a Fund or the size
of the position obtained by the Fund in an adverse manner relative to the result
that would have been obtained if only that particular Fund had participated in
or been allocated such trades. To the extent permitted by law, the Adviser may
aggregate the securities to be sold or purchased for a Fund with those to be
sold or purchased for the other funds of the Trust or for other investment
companies or accounts in order to obtain best execution. In making investment
recommendations for the Trust, the Adviser will not inquire or take into
consideration whether an issuer of securities proposed for purchase or sale by a
Fund is a customer of the Adviser, their parents or
30
<PAGE>
subsidiaries or affiliates and, in dealing with their commercial customers, the
Adviser, its parent, subsidiaries, and affiliates will not inquire or take into
consideration whether securities of such customers are held by the Trust.
Administrator.
BISYS Fund Services Ohio, Inc. (the "Administrator") serves as administrator to
the Funds pursuant to an administration agreement dated October 16, 1998 (the
"Administration Agreement"). The Administrator assists in supervising all
operations of the Funds (other than those performed by the Adviser under the
Investment Advisory Agreement), subject to the supervision of the Board.
For the services rendered to the Funds and related expenses borne by the
Administrator, each Fund pays the Administrator an annual fee of 0.05% of each
Fund's average daily net assets, computed daily and paid monthly.
The Administrator may periodically waive all or a portion of its fee with
respect to any Fund in order to increase the net income of one or more of the
Funds available for distribution to shareholders.
Unless sooner terminated, the Administration Agreement will continue in effect
as to each Fund until September 30, 1999, and for consecutive two-year terms
thereafter, provided that such renewal is ratified by the Trustees or by vote of
a majority of the outstanding shares of each Fund, and in either case by a
majority of the Trustees who are not parties to the Administration Agreement or
interested persons (as defined in the 1940 Act) of any party to the
Administration Agreement, by votes cast in person at a meeting called for such
purpose.
The Administration Agreement provides that the Administrator shall not be liable
for any error of judgment or mistake of law or any loss suffered by the Trust in
connection with the matters to which the Administration Agreement relates,
except a loss resulting from willful misfeasance, bad faith, or negligence in
the performance of its duties, or from the reckless disregard by it of its
obligations and duties thereunder.
Under the Administration Agreement, the Administrator assists in each Fund's
administration and operation, including providing statistical and research data,
clerical services, internal compliance and various other administrative
services, including among other responsibilities, participation in the updating
of the prospectus, coordinating the preparation, filing, printing and
dissemination of reports to shareholders, coordinating the preparation of income
tax returns, arranging for the maintenance of books and records and providing
the office facilities necessary to carry out the duties thereunder. Under the
Administration Agreement, the Administrator may delegate all or any part of its
responsibilities thereunder.
Sub-Administrator.
KAM serves as sub-administrator to the Funds pursuant to a sub-administration
agreement dated October 16, 1998 (the "Sub-Administration Agreement"). As
sub-administrator, KAM assists the Administrator in all aspects of the
operations of the Funds, except those performed by KAM under its Investment
Advisory Agreement.
For services provided under the Sub-Administration Agreement, the Administrator
pays KAM a fee, with respect to each Fund, calculated at the annual rate of up
to five one-hundredths of one percent (0.05%) of such Fund's average daily net
assets. Except as otherwise provided in the Administration Agreement, KAM shall
pay all expenses incurred by it in performing its services and duties as
sub-administrator. Unless sooner terminated, the Sub-Administration Agreement
will continue in effect as to each Fund for a period of two years, and for
consecutive one-year terms thereafter, unless written notice not to renew is
given by the non-renewing party.
31
<PAGE>
Under the Sub-Administration Agreement, KAM's duties include maintaining office
facilities, furnishing statistical and research data, compiling data for various
state and federal filings by the Funds, assist in mailing and filing the Funds'
annual and semi-annual reports to shareholders, providing support for board
meetings, and arranging for the maintenance of books and records and providing
the office facilities necessary to carry out the duties thereunder.
Distributor.
BISYS Fund Services Limited Partnership serves as distributor (the
"Distributor") for the continuous offering of the shares of the Funds pursuant
to a Distribution Agreement between the Distributor and the Trust. Unless
otherwise terminated, the Distribution Agreement will remain in effect with
respect to each Fund until September 30, 1999, and thereafter for consecutive
one-year terms, provided that it is approved at least annually (1) by the
Trustees or by the vote of a majority of the outstanding shares of each Fund,
and (2) by the vote of a majority of the Trustees of the Trust who are not
parties to the Distribution Agreement or interested persons of any such party,
cast in person at a meeting called for the purpose of voting on such approval.
The Distribution Agreement will terminate in the event of its assignment, as
defined under the 1940 Act.
Transfer Agent.
State Street Bank and Trust Company ("State Street") serves as transfer agent
for the Funds. Boston Financial Data Services, Inc. ("BFDS") serves as the
dividend disbursing agent and shareholder servicing agent for the Funds,
pursuant to a Transfer Agency and Service Agreement. Under its agreement with
the Trust, State Street has agreed (1) to issue and redeem shares of the Trust;
(2) to address and mail all communications by the Trust to its shareholders,
including reports to shareholders, dividend and distribution notices, and proxy
material for its meetings of shareholders; (3) to respond to correspondence or
inquiries by shareholders and others relating to its duties; (4) to maintain
shareholder accounts and certain sub-accounts; and (5) to make periodic reports
to the Trustees concerning the Trust's operations. BFDS is located at Two
Heritage Drive, Quincy, Massachusetts 02171.
Contract Owner Administrative Services Agreement.
Payments made under the Contract Owner Administrative Services Agreement to
contract owner servicing agents (which may include affiliates of the Adviser),
or to insurance companies or their affiliates, are for administrative support
services to individuals who may from time to time own contracts offered by the
separate accounts that invest in the Funds, which services may include: (1)
dissemination of Fund prospectuses to existing contract owners; (2) solicitation
of Trust proxies (including facilitating distribution of proxy material to
contract owners, tabulation and reporting); (3) telephonic support for contract
owners with respect to inquiries about the Trust (not including information
related to sales); (4) communications to contract owners regarding performance
of the separate account and the Funds; (5) aggregating purchase and redemption
orders of the separate account for sales of shares of the Funds; (6) recording
issuance and transfers of shares of the Funds held by the separate account; (7)
processing and reinvesting dividends and distributions of the Funds held by the
separate account; and (8) providing other administrative support to the Trust as
mutually agreed between the Trust, a life insurance company and the Distributor.
Fund Accountant.
BISYS Fund Services Ohio, Inc. ("BISYS Ohio") serves as fund accountant for the
all of the Funds pursuant to a fund accounting agreement with the Trust dated
October 16, 1998 (the "Fund Accounting Agreement"). As fund accountant for the
Trust, BISYS Ohio calculates each Fund's net asset value, the dividend and
capital gain distribution, if any, and the yield. BISYS Ohio also provides a
current security position report, a summary report of transactions and pending
maturities, a current cash position report, and maintains the general ledger
accounting records for the Funds. Under the Fund Accounting Agreement, BISYS
Ohio is entitled to receive annual fees of 0.03% of the first $100 million of
the Fund's daily
32
<PAGE>
average net assets, 0.02% of the next $100 million, and .01% of the Fund's
remaining daily average net assets. These annual fees are subject to a minimum
monthly assets charge of $2,500 per Fund and does not include out-of-pocket
expenses or multiple class charges of $833 per month assessed for each class of
shares after the first class.
Custodian.
Cash and securities owned by each of the Funds are held by Key Trust as
custodian pursuant to a Custodian Agreement dated October 16, 1998. Under this
Agreement, Key Trust (1) maintains a separate account or accounts in the name of
each respective fund; (2) makes receipts and disbursements of money on behalf of
each Fund; (3) collects and receives all income and other payments and
distributions on account of portfolio securities; (4) responds to correspondence
from security brokers and others relating to its duties; and (5) makes periodic
reports to the Trustees concerning the Trust's operations. Key Trust may, with
the approval of a Fund and at the custodian's own expense, open and maintain a
sub-custody account or accounts on behalf of a fund, provided that Key Trust
shall remain liable for the performance of all of its duties under the Custodian
Agreement.
Independent Accountants.
PricewaterhouseCoopers LLP, located at 100 East Broad Street, Columbus, Ohio
43215, serves as the Trust's independent accountants.
Legal Counsel.
Kramer Levin Naftalis & Frankel LLP, 919 Third Avenue, New York, New York 10022
is the counsel to the Trust.
Expenses.
The Funds bear the following expenses relating to its operations: taxes,
interest, brokerage fees and commissions, fees of the Trustees, SEC fees, state
securities qualification fees, costs of preparing and printing prospectuses for
regulatory purposes and for distribution to current shareholders, outside
auditing and legal expenses, advisory and administration fees, fees and
out-of-pocket expenses of the custodian and transfer agent, certain insurance
premiums, costs of maintenance of the fund's existence, costs of shareholders'
reports and meetings, and any extraordinary expenses incurred in the Funds'
operation.
ADDITIONAL INFORMATION
Description of Shares.
The Trust is a Delaware business trust and was formed on February 11, 1998 under
the name "The Victory Variable Funds." The Trust's Certificate of Trust was
amended on October 15, 1998 to reflect its current name, "The Victory Variable
Insurance Funds." The Delaware Trust Instrument authorizes the Trustees to issue
an unlimited number of shares, which are units of beneficial interest, with a
par value of $.001 per share. The Trust currently offers three series of Class A
Shares.
The Trust Instrument authorizes the Trustees to divide or redivide any unissued
shares of the Trust into one or more additional series by setting or changing in
any one or more aspects their respective preferences, conversion or other
rights, voting power, restrictions, limitations as to dividends, qualifications,
and terms and conditions of redemption.
Shares have no subscription or preemptive rights and only such conversion or
exchange rights as the Trustees may grant in their discretion. When issued for
payment as described in the Prospectus and this SAI, the Trust's shares will be
fully paid and non-assessable. In the event of a liquidation or dissolution of
33
<PAGE>
the Trust, shares of a Fund are entitled to receive the assets available for
distribution belonging to the fund, and a proportionate distribution, based upon
the relative asset values of the respective funds, of any general assets not
belonging to any particular fund which are available for distribution.
Shares of the Trust are entitled to one vote per share (with proportional voting
for fractional shares) on such matters as shareholders are entitled to vote.
Shareholders vote as a single class on all matters except (1) when required by
the 1940 Act, shares shall be voted by individual series or class, and (2) when
the Trustees have determined that the matter affects only the interests of one
or more series, then only shareholders of such series shall be entitled to vote
thereon. The shareholders of the Trust are the insurance company separate
accounts using the Funds to fund contracts. The insurance company separate
accounts pass voting rights attributable to shares held for the contracts to the
contract owners, as described in the separate account prospectus.
There will normally be no meetings of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority of the Trustees have
been elected by the shareholders, at which time the Trustees then in office will
call a shareholders' meeting for the election of Trustees. A meeting shall be
held for such purpose upon the written request of the holders of not less than
10% of the outstanding shares. Upon written request by ten or more shareholders
meeting the qualifications of Section 16(c) of the 1940 Act, (i.e., persons who
have been shareholders for at least six months, and who hold shares having a net
asset value of at least $25,000 or constituting 1% of the outstanding shares)
stating that such shareholders wish to communicate with the other shareholders
for the purpose of obtaining the signatures necessary to demand a meeting to
consider removal of a Trustee, the Trust will provide a list of shareholders or
disseminate appropriate materials (at the expense of the requesting
shareholders). Except as set forth above, the Trustees shall continue to hold
office and may appoint their successors.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
to the holders of the outstanding voting securities of an investment company
such as the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each fund of
the Trust affected by the matter. For purposes of determining whether the
approval of a majority of the outstanding shares of a fund will be required in
connection with a matter, a fund will be deemed to be affected by a matter
unless it is clear that the interests of each fund in the matter are identical,
or that the matter does not affect any interest of the fund. Under Rule 18f-2,
the approval of an investment advisory agreement or any change in investment
policy would be effectively acted upon with respect to a fund only if approved
by a majority of the outstanding shares of such fund. However, Rule 18f-2 also
provides that the ratification of independent accountants, the approval of
principal underwriting contracts, and the election of Trustees may be
effectively acted upon by shareholders of the Trust voting without regard to
series.
Shareholder and Trustee Liability.
The Delaware Business Trust Act provides that a shareholder of a Delaware
business trust shall be entitled to the same limitation of personal liability
extended to shareholders of Delaware corporations, and the Trust Instrument
provides that shareholders of the Trust shall not be liable for the obligations
of the Trust. The Trust Instrument also provides for indemnification out of the
trust property of any shareholder held personally liable solely by reason of his
or her being or having been a shareholder. The Trust Instrument also provides
that the Trust shall, upon request, assume the defense of any claim made against
any shareholder for any act or obligation of the Trust, and shall satisfy any
judgment thereon. Thus, the risk of a shareholder incurring financial loss on
account of shareholder liability is considered to be extremely remote.
The Trust Instrument states further that no Trustee, officer, or agent of the
Trust shall be personally liable in connection with the administration or
preservation of the assets of the funds or the conduct of the Trust's business;
nor shall any Trustee, officer, or agent be personally liable to any person for
any action or failure to act except for his own bad faith, willful misfeasance,
gross negligence, or reckless disregard of his
34
<PAGE>
duties. The Trust Instrument also provides that all persons having any claim
against the Trustees or the Trust shall look solely to the assets of the Trust
for payment.
As of July 1, 1999, the following entities owned 5% or more of outstanding
shares of the listed Fund. These entities are the insurance company sponsored
separate accounts that invest in the Funds as investment vehicles for variable
annuity and variable life insurance contracts. Nationwide Life Insurance Company
may be deemed to control the Trust because it owns more than 25% of each Fund's
shares.
<TABLE>
<CAPTION>
Insurance company Percentage
separate account name & address owned
<S> <C> <C>
Investment Quality Bond Fund, Class A Nationwide Life Insurance Company 100%
One Nationwide Plaza 1-09-V3
Columbus, Ohio 43215
Diversified Stock Fund, Class A Nationwide Life Insurance Company 100%
One Nationwide Plaza 1-09-V3
Columbus, Ohio 43215
Small Company Opportunity Fund, Class A Nationwide Life Insurance Company 100%
One Nationwide Plaza 1-09-V3
Columbus, Ohio 43215
</TABLE>
Financial Statements
Each Fund's audited statement of assets and liabilities of as of July 1, 1999
is included herein as Appendix B to this SAI. The statements of assets and
liabilities as of July 1, 1999 for Class A shares of each Fund have been
audited by PricewaterhouseCoopers LLP, as set forth in their report included in
Appendix B to this SAI, and are included in reliance upon such report and on the
authority of such firm as experts in auditing and accounting.
Miscellaneous.
As used in the Prospectus and in this SAI, "assets belonging to a fund" (or
"assets belonging to the Fund") means the consideration received by the Trust
upon the issuance or sale of shares of a Fund, together with all income,
earnings, profits, and proceeds derived from the investment thereof, including
any proceeds from the sale, exchange, or liquidation of such investments, and
any funds or payments derived from any reinvestment of such proceeds and any
general assets of the Trust, which general liabilities and expenses are not
readily identified as belonging to a particular Fund that are allocated to that
Fund by the Trustees. The Trustees may allocate such general assets in any
manner they deem fair and equitable. It is anticipated that the factor that will
be used by the Trustees in making allocations of general assets to a particular
fund of the Trust will be the relative net asset value of each respective fund
at the time of allocation. Assets belonging to a particular Fund are charged
with the direct liabilities and expenses in respect of that Fund, and with a
share of the general liabilities and expenses of each of the Funds not readily
identified as belonging to a particular Fund, which are allocated to each Fund
in accordance with its proportionate share of the net asset values of the Trust
at the time of allocation. The timing of allocations of general assets and
general liabilities and expenses of the Trust to a particular fund will be
determined by the Trustees and will be in accordance with generally accepted
accounting principles. Determinations by the Trustees as to the timing of the
allocation of general liabilities and expenses and as to the timing and
allocable portion of any general assets with respect to a particular fund are
conclusive.
As used in the Prospectus and in this SAI, a "vote of a majority of the
outstanding shares" of the Fund means the affirmative vote of the lesser of (a)
67% or more of the shares of the Fund present at a meeting
35
<PAGE>
at which the holders of more than 50% of the outstanding shares of the Fund are
represented in person or by proxy, or (b) more than 50% of the outstanding
shares of the Fund.
The Trust is registered with the SEC as an open-end management investment
company. Such registration does not involve supervision by the SEC of the
management or policies of the Trust.
The Prospectus and this SAI omit certain of the information contained in the
Registration Statement filed with the SEC. Copies of such information may be
obtained from the SEC upon payment of the prescribed fee.
The Prospectus and this SAI are not an offering of the securities described in
these documents in any state in which such offering may not lawfully be made. No
salesman, dealer, or other person is authorized to give any information or make
any representation other than those contained in the Prospectus and this SAI.
36
<PAGE>
APPENDIX A
Description of Security Ratings.
The NRSROs that may be utilized by the Adviser with regard to portfolio
investments for the Funds include Moody's and S&P. Set forth below is a
description of the relevant ratings of each such NRSRO. The NRSROs that may be
utilized by the Adviser and the description of each NRSRO's ratings is as of the
date of this SAI, and may subsequently change.
Long-Term Debt Ratings (may be assigned, for example, to corporate and municipal
bonds).
Description of the five highest long-term debt ratings by Moody's (Moody's
applies numerical modifiers (e.g., 1, 2, and 3) in each rating category to
indicate the security's ranking within the category):
Aaa. Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa. Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements - their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times in the future. Uncertainty of position
characterizes bonds in this class.
Description of the five highest long-term debt ratings by S&P (S&P may apply a
plus (+) or minus (-) to a particular rating classification to show relative
standing within that classification):
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
<PAGE>
BBB. Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB. Debt rated BB is regarded, on balance, as predominately speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposure to adverse conditions.
Short-Term Debt Ratings (may be assigned, for example, to commercial paper,
master demand notes, bank instruments, and letters of credit).
Moody's description of its three highest short-term debt ratings:
Prime-1. Issuers rated Prime-1 (or supporting institutions) have a superior
capacity for repayment of senior short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by many of the following
characteristics:
- - Leading market positions in well-established industries.
- - High rates of return on funds employed.
- - Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
- - Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- - Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a strong
capacity for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
S&P's description of its three highest short-term debt ratings:
A-1. This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to have extremely strong safety
characteristics are denoted with a plus sign (+).
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
A-3. Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
<PAGE>
Short-Term Loan/Municipal Note Ratings
Moody's description of its two highest short-term loan/municipal note ratings:
MIG-1/VMIG-1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG-2/VMIG-2. This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
S&P's description of its two highest municipal note ratings:
SP-1. Very strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will be given a plus
(+) designation.
SP-2. Satisfactory capacity to pay principal and interest.
<PAGE>
APPENDIX B
The Victory Variable Insurance Funds
Investment Quality Bond Fund
Statement of Assets and Liabilities
July 1, 1999
ASSETS:
Cash $ 1,000,000
--------------
Total Assets 1,000,000
LIABILITIES: -
--------------
NET ASSETS: $ 1,000,000
==============
NET ASSETS CONSIST OF:
Capital $ 1,000,000
==============
NET ASSETS:
Class A Shares $ 1,000,000
==============
SHARES OUTSTANDING:
Class A Shares 100,000
==============
NET ASSET VALUE:
Class A Shares - Offering and redemption
price per share $ 10.00
==============
B-1
<PAGE>
The Victory Variable Insurance Funds
Diversified Stock Fund
Statement of Assets and Liabilities
July 1, 1999
ASSETS:
Cash $ 1,000,000
------------
Total Assets 1,000,000
LIABILITIES: -
------------
NET ASSETS: $ 1,000,000
============
NET ASSETS CONSIST OF:
Capital $ 1,000,000
============
NET ASSETS:
Class A Shares $ 1,000,000
============
SHARES OUTSTANDING:
Class A Shares 100,000
============
NET ASSET VALUE:
Class A Shares - Offering and redemption
price per share $ 10.00
============
B-2
<PAGE>
The Victory Variable Insurance Funds
Small Company Opportunity Fund
Statement of Assets and Liabilities
July 1, 1999
ASSETS:
Cash $ 1,000,000
------------
Total Assets 1,000,000
LIABILITIES: -
------------
NET ASSETS: $ 1,000,000
============
NET ASSETS CONSIST OF:
Capital $ 1,000,000
============
NET ASSETS:
Class A Shares $ 1,000,000
============
SHARES OUTSTANDING:
Class A Shares 100,000
============
NET ASSET VALUE:
Class A Shares - Offering and redemption
price per share $ 10.00
============
B-3
<PAGE>
The Victory Variable Insurance Funds
NOTES TO STATEMENTS OF ASSETS AND LIABILITIES
July 1, 1999
1. ORGANIZATION
The Victory Variable Insurance Funds (the "Trust") was organized as a
Delaware business trust on February 11, 1998. The Trust is a
diversified open-end management investment company registered under the
Investment Company Act of 1940, as amended. The Trust is authorized to
issue an unlimited number of shares, which are units of beneficial
interest with a par value of $0.001. The Trust currently offers shares
of three funds: the Investment Quality Bond Fund, the Diversified Stock
Fund and the Small Company Opportunity Fund (collectively, the
"Funds"). Each of the Funds offers a single class of shares: Class A
Shares. As of July 1, 1999, all outstanding shares of the Funds are
owned by Nationwide Life Insurance Company.
The objective of the Investment Quality Bond Fund is to provide a high
level of income. The Diversified Stock Fund seeks to provide long term
growth of capital. The Small Company Opportunity Fund seeks to provide
capital appreciation.
2. SIGNIFICANT ACCOUNTING POLICIES
Organization Expense: All costs incurred by the Trust in connection
with the organization of the Funds and the initial public offering of
shares of the Funds, principally professional fees and printing, were
paid on behalf of the Trust by an affiliate of The BISYS Group, Inc.
("BISYS"), and will not be borne by the Funds.
Federal Income Taxes: The Trust intends to comply with the requirements
of the Internal Revenue Code necessary to qualify as a regulated
investment company and to make the requisite distributions of taxable
income to its shareholders which will be sufficient to relieve it from
all or substantially all federal income taxes.
Use of Estimates: Estimates and assumptions are required to be made
regarding assets and liabilities when financial statements are
prepared. Changes in the economic environment, financial markets and
any other parameters used in determining these estimates could cause
actual results to differ from these amounts.
3. RELATED PARTY TRANSACTIONS
Key Asset Management Inc. ("KAM"), a wholly-owned subsidiary of
KeyCorp, serves as the investment adviser to the Trust. Under the terms
of the investment advisory agreement, KAM is entitled to receive fees
computed daily and paid monthly at the annual rate of 0.20%, 0.30% and
0.30% of average net assets of the Investment Quality Bond Fund, the
Diversified Stock Fund and the Small Company Opportunity Fund,
respectively. KeyTrust Company of Ohio, serving as custodian, receives
custodian fees in addition to reimbursement of actual out-of-pocket
expenses incurred.
Affiliates of KAM and other financial institutions serve as Contract
Owner Servicing Agents for the Trust. The Funds are subject to a
contract owner servicing fee, pursuant to a contract owner
administrative services agreement, payable at an annual rate of up to
0.20% of average daily net assets of Class A Shares.
BISYS Fund Services Ohio, Inc. (the "Administrator") and BISYS Fund
Services, Limited Partnership (the "Distributor"), each an indirect,
wholly-owned subsidiary of BISYS serves as the administrator and
distributor, respectively, for the Trust. The Administrator also serves
the Trust
B-4
<PAGE>
as Fund Accountant. Certain officers of the Trust are affiliated with
BISYS. Such officers receive no direct payments or fees from the Funds
for serving as officers of the Trust.
Under the terms of the administration agreement, the Administrator's
fee is computed at the annual rate of 0.05% of each Fund's average
daily net assets. Pursuant to a sub-administration agreement, the
Administrator, and not the Trust, pays KAM a fee of up to 0.05% of each
Fund's average daily net assets to perform certain of the
administrative functions for the Funds.
Fees may be voluntarily reduced or reimbursed to assist the Trust in
maintaining competitive expense ratios.
B-5
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of
The Victory Variable Insurance Funds
In our opinion, the accompanying statements of assets and liabilities
present fairly, in all material respects, the financial position of the
Investment Quality Bond Fund, the Diversified Stock Fund and the Small
Company Opportunity Fund (separate portfolios constituting The Victory
Variable Insurance Funds, hereafter referred to as the "Funds") at July
1, 1999 in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Funds'
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of
these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which include
correspondence with the custodian, provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Columbus, Ohio
July 1, 1999
<PAGE>
PART C. OTHER INFORMATION
-------------------------
ITEM 23. Exhibits
--------
(a)(1) Amended and Restated Certificate of Trust, filed as of
October 15, 1998. /1/
(a)(2) Amended and Restated Trust Instrument as of October 15,
1998. /1/
(b) Amended and Restated Bylaws as of October 15, 1998. /1/
(c) The rights of holders of the securities being registered are
set out in Articles II, VII, IX and X of the Trust
Instrument referenced in Exhibit (a)(2) above and in Article
IV of the Bylaws referenced in Exhibit (b) above.
(d) Form of Investment Advisory Agreement between Registrant and
Key Asset Management Inc. ("KAM"). /1/
(e) Form of Distribution Agreement between Registrant and BISYS
Fund Services Limited Partnership (collectively with all
affiliates, "BISYS"). /1/
(f) Not applicable.
(g) Form of Mutual Fund Custody Agreement between Registrant and
Key Trust Company of Ohio. /1/
(h)(1) Form of Fund Accounting Agreement between Registrant and
BISYS. /1/
(2) Form of Administration Agreement between Registrant and
BISYS. /1/
(3) Form of Sub-Administration Agreement between BISYS and KAM.
/1/
(4) Form of Transfer Agency and Service Agreement between
Registrant and State Street Bank and Trust Company. /1/
(5) Form of Participation Agreement among Registrant, BISYS and
Nationwide Life Insurance Company. /1/
(i)(i) Opinion of Morris, Nichols, Arsht & Tunnell, Delaware
counsel to the Trust, relating to the legality of the
Trust's shares. /2/
(i)(2) Opinion of Kramer Levin Naftalis & Frankel LLP, relating to
the legality of the Trust's shares. /2/
(i)(3) Consent of Kramer Levin Naftalis & Frankel LLP.
(j) Consent of PricewaterhouseCoopers LLP.
(k) Not applicable.
(l) Form of Initial Investment and Redemption Agreement. /1/
(m)(1) Class A Shares Form of Distribution and Service Plan. /1/
(2) Form of Contract Owner Administrative Services Agreement.
/1/
- ---------------------------
/1/ Incorporated by reference to Pre-Effective Amendment No. 1 to the
Trust's Registration Statement on Form N-1A, filed electronically with
the Securities and Exchange Commission on May 10, 1999.
/2/ Incorporated by reference to Pre-Effective Amendment No. 2 to the
Trust's Registration Statement on Form N-1A, filed electronically with
the Securities and Exchange Commission on June 3, 1999.
C-1
<PAGE>
(o) Not applicable.
Powers of Attorney of Theodore H. Emmerich and Donald E.
Weston. /1/
Powers of Attorney of Leigh A. Wilson, Roger Noall, Dr.
Harry Gazelle, Eugene J. McDonald, Dr. Thomas F. Morissey,
H. Patrick Swygert and Frank A. Weil. /3/
ITEM 24. Persons Controlled By or Under Common Control with Registrant
-------------------------------------------------------------
None.
ITEM 25. Indemnification
---------------
Article X, Section 10.02 of Registrant's Delaware Trust
Instrument, attached hereto as Exhibit (a)(2), provides for
the indemnification of Registrant's Trustees and officers, as
follows:
"Section 10.02 Indemnification.
(a) Subject to the exceptions and limitations contained in
Subsection 10.02(b):
(i) every person who is, or has been, a Trustee or officer of the
Trust (hereinafter referred to as a "Covered Person") shall be
indemnified by the Trust to the fullest extent permitted by
law against liability and against all expenses reasonably
incurred or paid by him in connection with any claim, action,
suit or proceeding in which he becomes involved as a party or
otherwise by virtue of his being or having been a Trustee or
officer and against amounts paid or incurred by him in the
settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding" shall
apply to all claims, actions, suits or proceedings (civil,
criminal or other, including appeals), actual or threatened
while in office or thereafter, and the words "liability" and
"expenses" shall include, without limitation, attorneys' fees,
costs, judgments, amounts paid in settlement, fines, penalties
and other liabilities.
(b) No indemnification shall be provided hereunder to a Covered
Person:
(i) who shall have been adjudicated by a court or body before
which the proceeding was brought (A) to be liable to the Trust
or its Shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office or (B) not to have acted
in good faith in the reasonable belief that his action was in
the best interest of the Trust; or
(ii) in the event of a settlement, unless there has been a
determination that such Trustee or officer did not engage in
willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office,
(A) by the court or other body approving the settlement; (B)
by at least a majority of those Trustees who are neither
Interested Persons of the Trust nor are parties to the matter
based upon a review of readily available facts (as opposed to
a full trial-type inquiry); or (C) by written
- --------------------------
/3/ Incorporated by reference to the Trust's Registration Statement on Form
N-1A, filed electronically with the Securities and Exchange Commission
on August 21, 1998.
C-2
<PAGE>
opinion of independent legal counsel based upon a review of
readily available facts (as opposed to a full trial-type
inquiry).
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be
severable, shall not be exclusive of or affect any other
rights to which any Covered Person may now or hereafter be
entitled, shall continue as to a person who has ceased to be a
Covered Person and shall inure to the benefit of the heirs,
executors and administrators of such a person. Nothing
contained herein shall affect any rights to indemnification to
which Trust personnel, other than Covered Persons, and other
persons may be entitled by contract or otherwise under law.
(d) Expenses in connection with the preparation and presentation
of a defense to any claim, action, suit or proceeding of the
character described in Subsection (a) of this Section 10.02
may be paid by the Trust or Series from time to time prior to
final disposition thereof upon receipt of an undertaking by or
on behalf of such Covered Person that such amount will be paid
over by him to the Trust or Series if it is ultimately
determined that he is not entitled to indemnification under
this Section 10.02; provided, however, that either (i) such
Covered Person shall have provided appropriate security for
such undertaking, (ii) the Trust is insured against losses
arising out of any such advance payments or (iii) either a
majority of the Trustees who are neither Interested Persons of
the Trust nor parties to the matter, or independent legal
counsel in a written opinion, shall have determined, based
upon a review of readily available facts (as opposed to a
trial-type inquiry or full investigation), that there is
reason to believe that such Covered Person will be found
entitled to indemnification under this Section 10.02."
Insofar as indemnification for liability arising under the Securities
Act of 1933, as amended (the "Securities Act"), may be permitted to
trustees, officers, and controlling persons or Registrant pursuant to
the foregoing provisions, or otherwise, Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Investment
Company Act of 1940, as amended (the "1940 Act"), and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses
incurred or paid by a trustee, officer, or controlling person of
Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such trustee, officer, or controlling person
in connection with the securities being registered, Registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 26. Business and Other Connections of Investment Adviser
----------------------------------------------------
KAM is the investment adviser to each series of Registrant.
KAM is a wholly-owned indirect subsidiary of KeyCorp, a bank
holding company which had total assets of approximately $80
billion as of March 31, 1999. KeyCorp is a leading financial
institution doing business in 13 states from Maine to Alaska,
providing a full array of trust, commercial, and retail
banking services. Its non-bank subsidiaries include investment
advisory, securities brokerage, insurance, bank credit card
processing, mortgage and leasing companies. KAM and its
affiliates have over $76 billion in assets
C-3
<PAGE>
under management, and provides a full range of investment
management services to personal and corporate clients.
To the knowledge of Registrant, none of the directors or
officers of KAM, except those set forth below, is or has been
at any time during the past two calendar years engaged in any
other business, profession, vocation or employment of a
substantial nature, except that certain directors and officers
of KAM also hold positions with KeyCorp or its subsidiaries.
The principal executive officers and directors of KAM are as follows:
- ---------------------------------------------------------------------
<TABLE>
<CAPTION>
Directors:
- ----------
<S> <C> <C>
William G. Spears o Senior Managing Director, Chairman and Chief Executive Officer.
Richard J. Buoncore o Senior Managing Director, President and Chief Operating Officer.
Anthony Aveni o Senior Managing Director and Chief Investment Officer of Society Asset
Management Division.
Vincent DeP. Farrell o Senior Managing Director and Chief Investment Officer, Spears, Benzak, Salomon
& Farrell Division.
Richard E. Salomon o Senior Managing Director.
Gary R. Martzolf o Senior Managing Director.
Other Officers:
Charles G. Crane o Senior Managing Director and Chief Market Strategist.
James D. Kacic o Chief Financial Officer, Chief Administrative Officer, and Senior Managing
Director.
William R. Allen o Managing Director.
Michael Foisel o Assistant Treasurer.
Michael Stearns o Chief Compliance Officer.
William J. Blake o Secretary.
Steven N. Bulloch o Assistant Secretary. Also, Senior Vice President and Senior Counsel of
KeyCorp Management Company.
Kathleen A. Dennis o Senior Managing Director.
</TABLE>
The business address of each of the foregoing individuals is 127 Public Square,
Cleveland, Ohio 44114.
C-4
<PAGE>
ITEM 27. Principal Underwriter
---------------------
(a) BISYS Fund Services, Registrant's administrator, also acts as the
distributor for the following investment companies as of June 17, 1999.
<TABLE>
<CAPTION>
<S> <C>
Alpine Equity Trust MMA Praxis Mutual Funds
American Performance Funds M.S.D. & T. Funds
AmSouth Mutual Funds Pacific Capital Funds
The BB&T Mutual Funds Group The Parkstone Advantage Fund
The Coventry Group Pegasus Funds
ESC Strategic Funds, Inc. Puget Sound Alternative Investment Series Trust
The Eureka Funds Republic Advisor Funds Trust
Fifth Third Funds Republic Funds Trust
Hirtle Callaghan Trust The Riverfront Funds, Inc.
HSBC Funds Trust Sefton Funds
HSBC Mutual Funds Trust SSgA Liquidity Fund
The Infinity Mutual Funds, Inc. The Sessions Group
INTRUST Funds Trust Summit Investment Trust
The Kent Funds Variable Insurance Funds
Magna Funds The Victory Variable Insurance Funds
Mercantile Mutual Funds, Inc. Vintage Mutual Funds, Inc.
Meyers Investment Trust
</TABLE>
(b) Directors, officers and partners of BISYS Fund Services, Inc., the General
Partner of BISYS Fund Services, as of June 15, 1998 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Lynn J. Mangum o Chairman and CEO. William Tomko o Senior Vice
President.
Dennis Sheehan o Director, Executive Michael D. Burns o Vice President.
Vice President and
Treasurer.
J. David Huber* o President. David Blackmore o Vice President.
Kevin J. Dell o Vice President and Steve Ludwig o Compliance Officer.
Secretary.
Mark Rybarczyk o Senior Vice President. Robert Tuch o Assistant
Secretary.
</TABLE>
The business address of each of the foregoing individuals is BISYS Fund
Services, Inc., 3435 Stelzer Road, Columbus, Ohio 43215.
(c) Not applicable.
ITEM 28. Location of Accounts and Records
--------------------------------
(1) Key Asset Management Inc., 127 Public Square, Cleveland, Ohio 44114-1306
(records relating to its functions as investment adviser and
sub-administrator).
(2) KeyBank National Association, 127 Public Square, Cleveland, Ohio 44114-1306
(records relating to its functions as shareholder servicing agent).
- -----------------------
* Mr. Huber is also the Vice President of the Trust.
C-5
<PAGE>
(3) BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, Ohio 43219
(records relating to its functions as administrator and fund accountant).
(4) BISYS Fund Services Limited Partnership, 3435 Stelzer Road, Columbus, Ohio
43219 (records relating to its function as distributor).
(5) State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110-3875 (records relating to its function as transfer
agent).
(6) Boston Financial Data Services, Inc. Two Heritage Drive, Quincy,
Massachusetts 02171 (records relating to its functions as dividend
disbursing agent and shareholder servicing agent).
(7) Key Trust Company of Ohio, N.A., 127 Public Square, Cleveland, Ohio
44114-1306 (records relating to its functions as custodian and securities
lending agent).
ITEM 29. Management Services
-------------------
None.
ITEM 30. Undertakings
------------
None
NOTICE
A copy of Registrant's Certificate of Trust is on file with the Secretary of
State of Delaware and notice is hereby given that this Pre-Effective Amendment
to Registrant's Registration Statement has been executed on behalf of Registrant
by officers of, and Trustees of, Registrant as officers and as Trustees,
respectively, and not individually, and that the obligations of or arising out
of this instrument are not binding upon any of the Trustees, officers or
shareholders of Registrant individually but are binding only upon the assets and
property of Registrant.
C-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the
Investment Company Act, Registrant certifies that it meets all of the
requirements for effectiveness of this registration statement under rule 485(b)
under the Securities Act and has duly caused this registration statement to be
signed on its behalf by the undersigned, duly authorized, in the City of New
York, and the State of New York on this 1st day of July, 1999.
THE VICTORY VARIABLE INSURANCE FUNDS
By: /s/ Leigh A. Wilson
-------------------
Leigh A. Wilson, President and Trustee
Pursuant to the requirements of the Securities Act, this
registration statement has been signed below by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Roger Noall Chairman of the Board and Trustee July 1, 1999
- ---------------
Roger Noall
/s/ Leigh A. Wilson Trustee July 1, 1999
- -------------------
Leigh A. Wilson
/s/ Joel B. Engle Treasurer July 1, 1999
- -----------------
Joel B. Engle
/s/ Theodore H. Emmerich* Trustee July 1, 1999
- -------------------------
Theodore H. Emmerich
/s/ Harry Gazelle* Trustee July 1, 1999
- ------------------
Harry Gazelle
/s/ Eugene J. McDonald* Trustee July 1, 1999
- -----------------------
Eugene J. McDonald
/s/ Thomas F. Morrissey* Trustee July 1, 1999
- ------------------------
Thomas F. Morrissey
/s/ H. Patrick Swygert* Trustee July 1, 1999
- -----------------------
H. Patrick Swygert
/s/ Frank A. Weil* Trustee July 1, 1999
- ------------------
Frank A. Weil
/s/ Donald E. Weston* Trustee July 1, 1999
- ---------------------
Donald E. Weston
</TABLE>
- --------------------------------
*
By: /s/ Carl Frischling
-------------------
Carl Frischling
Attorney-in-fact
C-7
<PAGE>
EXHIBIT INDEX
-------------
N-1A Item 23
- ------------
EX-99.B10 Consent of Kramer Levin Naftalis & Frankel LLP.
EX-99.B11 Consent of PricewaterhouseCoopers LLP.
KRAMER LEVIN NAFTALIS & FRANKEL LLP
-----
WRITER'S DIRECT
NUMBER
(212) 715-7510
June 30, 1999
The Victory Variable Insurance Funds
3435 Stelzer Road
Columbus, Ohio 43219
Re: The Victory Variable Insurance Funds
Post-Effective Amendment No. 1
File Nos. 333-62051; 811-8979
------------------------------------
Dear Ladies and Gentlemen:
We hereby consent to the reference of our firm as Counsel in
this Post-Effective Amendment No. 1 to Registration Statement No. 333-62051 on
Form N-1A.
Very truly yours,
/s/ KRAMER LEVIN NAFTALIS & FRANKEL LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation in this Post-Effective Amendment No. 1
to the Registration Statement of The Victory Variable Insurance Funds
on Form N-1A (File No. 333-62051) of our report dated July 1, 1999 on
our audit of the financial statements of The Victory Variable Insurance
Funds (comprising, respectively, the Investment Quality Bond Fund, the
Diversified Stock Fund and the Small Company Opportunity Fund) which
are included in the Registration Statement. We also consent to the
reference to our Firm under the caption "Independent Accountants" in
the Statement of Additional Information relating to The Victory
Variable Insurance Funds in this Post-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 333-62051).
/s/ PricewaterhouseCoopers LLP
Columbus, Ohio
July 1, 1999
