As filed via EDGAR with the Securities and Exchange Commission on April 27, 2000
File No. 333-62051
ICA No. 811-8979
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 2 [X]
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 4
THE VICTORY VARIABLE INSURANCE FUNDS
(Exact Name of Registrant as Specified in Charter)
3435 Stelzer Road, Columbus, Ohio 43219
(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:
| | Immediately upon filing pursuant |X| on February 28, 2000, pursuant to
to paragraph (b) paragraph (b)
|_| 60 days after filing pursuant to |_| on (date) pursuant to paragraph(a)(1)
paragraph (a)(1)
|_| 75 days after filing pursuant to |_| on (date) pursuant to paragraph
paragraph (a)(2) (a)(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.
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Prospectus
April 28, 2000
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved any Fund's securities or determined whether this
Prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
Victory Variable Insurance Funds
Diversified Stock Fund
Class A Shares
Small Company Opportunity Fund
Class A Shares
For information, call your participating insurance company.
(LOGO)
Victory Variable Insurance Funds
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The Victory Variable Insurance Funds
Key to Financial Information
Objective and Strategy
The goals and the strategies that a Fund plans to use in pursuing its
investment objective.
Risk Factors
The risks associated with a Fund's investment strategies.
Shares of the Fund are:
*Not insured by the FDIC;
*Not deposits or other obligations of, or guaranteed by KeyBank, any of its
affiliates, or any other bank;
*Subject to investment risks, including possible loss of the amount invested.
Table of Contents
Risk/Return Summary for each of the Funds
An analysis which includes investment objective, principal strategies, and
principal risks.
Diversified Stock Fund
Class A Shares 2
Small Company Opportunity Fund
Class A Shares 3
Q&A -- Important Considerations 4
Investments 5
Risk Factors 5
Share Price 6
Dividends, Distributions, and Taxes 6
Investing in the Victory Variable Insurance Funds 7
*Contract Owner Administrative
Services Agreement 8
*Distribution and Service Plan 8
*Purchases 9
*Redemptions 9
Organization and Management of the Funds 10
Financial Highlights 11
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Risk/Return Summary DIVERSIFIED STOCK FUND
CLASS A SHARES
Cusip#: 92646Q307
Investment Objective
The Fund seeks to provide long-term growth of capital.
Principal Investment Strategies
The Fund pursues its investment objective by investing primarily in equity
securities and securities convertible into common stocks traded on U.S.
exchanges and issued by large, established companies.
Key Asset Management Inc. (KAM or the Adviser) seeks to invest in both growth
and value securities. In making investment decisions, the Adviser may
consider cash flow, book value, dividend yield, growth potential, quality of
management, adequacy of revenues, earnings, capitalization, relation to
historical earnings, the value of the issuer's underlying assets, and
expected future relative earnings growth. The Adviser will pursue investments
that provide above average dividend yield or potential for appreciation.
Under normal market conditions, the Fund will invest at least 80% of its
total assets in equity securities of large established companies and
securities convertible or exchangeable into common stock, including:
*Growth stocks, which are stocks of companies that the Adviser believes will
experience earnings growth; and
*Value stocks, which are stocks that the Adviser believes are intrinsically
worth more than their market value.
There is no guarantee that the Fund will achieve its objective.
Principal Risks
An investment in the Fund may lose money. The Fund is subject to the
following principal risks, more fully described in "Risk Factors." The Fund's
net asset value, yield and/or total return may be adversely affected if any
of the following occurs:
*The market value of securities acquired by the Fund declines.
*Growth stocks fall out of favor because the companies' earnings growth
does not meet expectations.
*Value stocks fall out of favor relative to growth stocks.
*The portfolio manager does not execute the Fund's principal investment
strategies effectively.
*A company's earnings do not increase as expected.
An investment in the Fund is not a deposit of KeyBank or any of its
affiliates and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
By itself, the Fund does not constitute a complete investment plan and should
be considered a long-term investment for investors who can afford to weather
changes in the value of their investment.
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Risk/Return Summary SMALL COMPANY OPPORTUNITY FUND
CLASS A SHARES
Cusip#: 92646Q505
Investment Objective
The Fund seeks to provide capital appreciation.
Principal Investment Strategies
The Fund invests primarily in common stocks of smaller companies that show
the potential for high earnings growth in relation to their price-earnings
ratio. The Adviser considers small companies to be companies with
capitalizations of $2 billion or less. The Fund may continue to hold an
investment made in a small company after its market capitalization exceeds
this level. The Adviser uses a computer model to assist in selecting
securities that appear favorably priced.
Under normal market conditions, the Fund:
*Will invest at least 80% of its total assets in equity securities of small
companies. These equity investments include:
*Common stock;
*Convertible preferred stock; and
*Debt convertible or exchangeable into equity securities.
There is no guarantee that the Fund will achieve its objective.
Principal Risks
An investment in the Fund may lose money. The Fund is subject to the
following principal risks, more fully described in "Risk Factors." The Fund's
net asset value, yield and/or total return may be adversely affected if any
of the following occurs:
*The market value of securities acquired by the Fund declines.
*Value stocks fall out of favor relative to growth stocks.
*Smaller, less seasoned companies lose market share or profits to a greater
extent than larger, established companies as a result of deteriorating
economic conditions.
*The portfolio manager does not execute the Fund's principal investment
strategies effectively.
*A company's earnings do not increase as expected.
An investment in the Fund is not a deposit of KeyBank or any of its
affiliates and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
By itself, the Fund does not constitute a complete investment plan and should
be considered a long-term investment for investors who can afford to weather
changes in the value of their investment.
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Q&A -- Important Considerations
Keep in mind that:
*No Fund is a complete investment program.
*A Fund could lose money, but it also has the potential to make money.
You cannot buy shares of the Victory Variable Insurance Funds directly, but
only through variable annuity or variable life insurance contracts
(contracts) that are offered by the segregated asset accounts (separate
accounts) of certain life insurance companies (participating insurance
companies).
The Victory Variable Insurance Funds offer Class A Shares. You are encouraged
to read this Prospectus in conjunction with the accompanying separate account
prospectus.
In choosing a Fund as an investment for your contract, please keep in mind
the following considerations.
What are the general investment characteristics of each Fund?
*Diversified investment portfolio;
*Appropriate for achieving long-term goals, like saving for retirement;
*Seeks potential growth over time; and
*Fluctuating net asset value (NAV) per share.
What are the particular investment characteristics of the Funds?
Diversified Stock Fund:
*Assumes more short-term risk for potentially higher long-term gains.
Small Company Opportunity Fund:
*Assumes the added risks associated with small company stocks in return for
the possibility of long-term rewards.
The Funds may not be an appropriate selection for contract owners who:
*are not willing to take any risk that they may lose money on their
investment;
*want absolute stability of their investment principal; or
*want to invest in a particular sector or in particular industries,
countries, or regions.
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Investments
Under normal market conditions each Fund purchases equity securities,
including common stock and securities that are convertible or exchangeable
into common stock of U.S. corporations.
For cash management or for temporary defensive purposes in response to market
conditions, each Fund may hold all or a portion of its assets in cash or
short-term money market instruments. This may reduce the benefit from any
upswing in the market and may cause a Fund to fail to meet its investment
objective.
For a more complete description of the types of securities in which each Fund
can invest, see the Statement of Additional Information (SAI).
Risk Factors
By matching your investment objective with an acceptable level of risk, you
can create your own customized investment plan.
It is important to keep in mind one basic principle of investing: the greater
the risk, the greater the potential reward. The reverse is also generally
true: the lower the risk, the lower the potential reward.
This Prospectus describes the principal risks that are associated with the
Funds' investment strategies.
Each Fund is subject to market risk, manager risk, and equity risk, as
described below.
General Risks:
*Market risk is the risk that the market value of a security may
fluctuate, depending on the supply and demand for that type of security. As
a result of this fluctuation, a security may be worth more or less than the
price a Fund originally paid for the security, or more or less than the
security was worth at an earlier time. Market risk may affect a single
issuer, an industry, a sector of the economy, or the entire market and is
common to all investments.
*Manager risk is the risk that a Fund's portfolio manager may implement its
investment strategy in a way that does not produce the intended result.
Risk associated with investing in equity securities:
*Equity risk is the risk that the value of the security will fluctuate in
response to changes in earnings or other conditions affecting the issuer's
profitability. Unlike debt securities, which have preference to a
company's assets in case of liquidation, equity securities are entitled to
the residual value after the company meets its other obligations. For
example, in the event of bankruptcy, holders of debt securities have
priority over holders of equity securities to a company's assets.
An investment in a Fund is not a complete investment program.
5
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Share Price
Each Fund calculates its share price, called its "net asset value" (NAV),
each business day at 4:00 p.m. Eastern Time or at the close of trading on the
New York Stock Exchange, Inc. (the NYSE), whichever time is earlier. A
separate account buys and redeems shares at the next share price calculated
after your instructions are received and accepted by an authorized
representative of your participating insurance company. A business day is a
day on which the NYSE is open.
A Fund's NAV may change on days when separate accounts will not be able to
buy or redeem the Fund's shares if a Fund has portfolio securities primarily
listed on foreign exchanges that trade on weekends or other days when a Fund
does not price its shares.
The Funds value their investments based on market value. When market
quotations are not readily available, the Funds value their investments based
on fair value methods approved by the Funds' Board of Trustees. Each Fund
calculates its NAV by adding up the total value of its investments and other
assets, subtracting its liabilities, and then dividing that figure by the
number of its outstanding shares.
Total Assets-Liabilities
NAV = ----------------------------
Number of Shares Outstanding
Dividends, Distributions, and Taxes
The tax status of your separate account's investment in a Fund depends upon
the features of your contract. For further information, please refer to the
separate account prospectus.
Each Fund expects to distribute substantially all of its ordinary income and
capital gains each year. Ordinarily, each Fund declares and pays dividends
from its net investment income quarterly. Capital gains distributions, if
any, from the Funds will be made annually. In addition, a Fund may
occasionally be required to make supplemental dividend or capital gains
distributions at some other time during the year.
All dividend and capital gains distributions made by each Fund will be
automatically reinvested in additional shares of the Fund.
6
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Dividends, Distributions, and Taxes (continued)
You should consult with your own tax adviser regarding the tax consequences
of your investment in the separate account, including the application of
state and local taxes which may differ from the federal income tax
consequences described.
Important Information about Taxes
Each Fund intends to qualify as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the Code), so that it will not be
subject to federal income tax on its earnings and capital gains that are
distributed to its shareholders. In addition, each Fund intends to comply
with the diversification requirements of the Code and Treasury Regulations in
order to maintain the tax-deferred status of the contracts.
*Shares of a Fund must be purchased through the contracts. As a result, it
is anticipated that any dividend or capital gains distribution from a Fund
will be exempt from current taxation if left to accumulate within a contract.
*The Code requires that a separate account underlying a contract must be
"adequately diversified" in order for the contract to be treated as an
annuity or life insurance contract for tax purposes. A separate account
invested in a Fund will be treated as owning its proportionate share of the
Fund's assets for purposes of determining whether the account is adequately
diversified. If a separate account underlying a contract were not in
compliance with these diversification requirements, the contract owner would
be subject to tax on the contract's earnings.
*This discussion of federal income tax consequences is based on tax laws
and regulations in effect as of the date of this Prospectus, and may change
as a result of legislative, administrative or judicial action. As this
discussion is for general information only, you also should review the more
detailed discussion of federal income tax considerations that is contained
in the separate account prospectus and the SAI.
INVESTING IN THE VICTORY VARIABLE INSURANCE FUNDS
The Funds are designed as an investment exclusively for contracts that are
offered by the separate accounts of participating insurance companies. The
participating insurance company will buy and redeem shares according to your
instructions, as provided in the contract, and will redeem shares as needed
to provide benefits under the contract.
Shares of the Funds may be offered in the future to other separate accounts
established by other insurance companies. Although the Funds currently do not
foresee any conflicts of interest between owners of variable annuity
contracts and variable life insurance contracts, it is possible, due to
differences in tax treatment or other considerations, that the interests of
these two groups for which the Funds serve as investment vehicles may
conflict. The Funds' Board of Trustees and each insurance company whose
separate accounts invest in the Funds are required to monitor the Funds'
operations to identify any material conflict between the interests of holders
of annuities and life insurance contracts and to determine what action, if
any, should be taken to resolve the conflict. In the event of a conflict, an
insurance company might redeem its investment of one or more separate
accounts in a Fund's shares. If this happens, the Fund may have to sell
securities at unfavorable prices.
7
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Contract Owner Administrative Services Agreement
The Funds have adopted a Contract Owner Administrative Services Agreement. A
contract owner servicing agent performs a number of services for its
customers who hold contracts offered by separate accounts that invest in the
Funds, such as establishing and maintaining accounts and records, processing
additional contract units attributable to Fund dividend payments, arranging
for bank wires, assisting in transactions, and changing account information.
For these services, Class A Shares of each Fund pay a fee at an annual rate
of up to 0.20% of its average daily net assets serviced by the agent. The
Funds may enter into these agreements with KeyCorp and its affiliates, and
with other financial institutions that provide such services. Contract owner
servicing agents may waive all or a portion of their fee.
Distribution and Service Plan
The Funds have adopted a plan consistent with Rule 12b-1 under the Investment
Company Act of 1940, as amended, on behalf of their Shares (the Plan) to
allow a Fund or the Adviser, Administrator or the Distributor, directly or
through an affiliate, using its own resources, to make payments for
promotional and administrative expenses that might be considered direct or
indirect payment by the Fund of distribution expenses otherwise prohibited by
Rule 12b-1. Shares of the Funds do not pay expenses under the Plan.
8
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Purchases
Shares of the Funds may be purchased only through contracts offered through
participating insurance companies. Please refer to the separate account
prospectus for information on how the participating insurance company buys
and redeems shares.
Insurance company separate accounts invest in a Fund based upon its current
NAV. The Funds' Transfer Agent processes orders to buy or redeem shares of a
Fund at its NAV. The value of your contract's investment in a Fund also will
be based upon premium payments, surrender and transfer requests, and any
other transaction requests from contract and policy owners, annuitants, and
beneficiaries. In order to calculate the value of your investment, you would
have to determine the number of contract units you own along with the
"accrued unit value" of your contract. Any orders to buy or redeem Fund
shares that are based on actions by participating insurance companies or
persons other than contract owners, annuitants, and beneficiaries will be
executed at the Fund's NAV next computed after the Distributor receives the
order.
Redemptions
Shares of a Fund may be redeemed by instructing your participating insurance
company to terminate your contract's investment in the Fund. Please refer to
the instructions provided in the prospectus for the separate account. The
separate account may redeem shares on any business day at the NAV that is
next calculated after the order is placed.
A Fund may suspend the right of redemption in the following circumstances:
*During non-routine closings of the NYSE;
*When the Securities and Exchange Commission (the SEC) determines that (a)
trading on the NYSE is restricted or (b) an emergency prevents the sale or
valuation of the Fund's securities; or
*When the SEC orders a suspension to protect the Fund's shareholders.
Each Fund will pay redemptions by any one separate account during any 90-day
period in cash up to the lesser of $250,000 or 1% of the Fund's net assets at
the beginning of the period. Each Fund reserves the right to pay the
remaining portion "in kind," that is, in portfolio securities rather than
cash.
9
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Organization and Management of the Funds
The Funds are supervised by the Board of Trustees who monitor the services
provided to contract owners.
About The Victory Variable Insurance Funds
Each Fund is a series of The Victory Variable Insurance Funds, which is
organized as a Delaware business trust.
The Board of Trustees of The Victory Variable Insurance Funds has the overall
responsibility for the management of the Funds.
Fees and Expenses
The Funds incur annual operating expenses which include investment advisory,
administrative, and distribution expenses. You also should review the fee
tables in the separate account prospectus for your contract.
The Investment Adviser and Sub-Administrator
Each Fund has an Advisory Agreement, which is one of its most important
contracts. Key Asset Management Inc. (KAM), a New York corporation registered
as an investment adviser with the SEC, is the Adviser to each Fund. KAM, a
subsidiary of KeyCorp, oversees the operations of the Funds according to
investment policies and procedures adopted by the Board of Trustees.
Affiliates of the Adviser manage approximately $73 billion for individual and
institutional clients. KAM also serves as the investment adviser of The
Victory Portfolios, a registered investment company currently offering more
than 30 money market, bond and equity mutual funds, with approximately $20
billion in total assets. KAM's address is 127 Public Square, Cleveland, Ohio
44114.
KAM's advisory fee is calculated at an annual rate of 0.20% of each Fund's
average daily net assets.
Under a sub-administrative agreement, BISYS Fund Services Ohio, Inc. pays KAM
a fee at the annual rate of up to 0.05% of each Fund's average daily net
assets to perform some of the administrative duties for the Funds.
Portfolio Management
Lawrence G. Babin and Paul D. Danes are the portfolio managers of the
Diversified Stock Fund and together are primarily responsible for the
day-to-day management of the Fund's portfolio. Mr. Babin has been the
portfolio manager of the Diversified Stock Fund since its inception. Mr.
Babin is a Chartered Financial Analyst and Portfolio Manager and Managing
Director of KAM, has managed the Diversified Stock Fund, a series of The
Victory Portfolios, since October 1989, and manages other investment accounts
advised by KAM. Mr. Danes has been a portfolio manager of the Diversified
Stock Fund since March 2000. He is a Portfolio Manager and Director with KAM,
and has been associated with KAM or an affiliate since 1987. He also manages
the Special Value Fund, a series of the Victory Portfolios, and other
investment accounts managed by KAM.
William J. Leugers, Jr., Daniel R. Shick and Gary H. Miller have been the
co-portfolio managers of the Small Company Opportunity Fund since its
inception, and together are primarily responsible for the day-to-day
management of its portfolio. Messrs. Leugers and Shick are Portfolio Managers
and Managing Directors of the Gradison Division of McDonald Investments Inc.
(Gradison McDonald), an affiliate of KAM. Mr. Miller has been a Vice
President and Portfolio Manager of Gradison McDonald since 1998, prior to
which he was a Portfolio Trader with Gradison McDonald since 1993. Messrs.
Leugers, Shick and Miller also have managed the Established Value Fund and
Small Company Opportunity Fund, two series of The Victory Portfolios, and
their predecessor funds, Mr. Leugers since 1984, Mr. Shick since 1993 and Mr.
Miller since 1998.
10
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Financial Highlights
The Financial Highlights table is intended to help you understand each Fund's
financial performance for the period from July 1, 1999 (commencement of
operations) to December 31, 1999. Certain information shows the results of an
investment in one share of each Fund. The total returns in the table
represent the rate that an investor would have earned on an investment in
each Fund (assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about Class A
Shares of each Fund. The financial highlights for the fiscal period from July
1, 1999 to December 31, 1999 were audited by PricewaterhouseCoopers LLP,
whose report, along with the financial statements of each Fund, are included
in the Funds' annual report, which is available by calling your participating
insurance company.
DIVERSIFIED STOCK FUND
Period
Ended
Dec. 31,
1999(a)
Net Asset Value, Beginning of Period $10.00
Investment Activities
Net investment income 0.05
Net realized and unrealized gains (losses) from investments 0.07
Total from Investment Activities 0.12
Distributions:
Net investment income (0.05)
Net realized gains --
Total Distributions (0.05)
Net Asset Value, End of Period $10.07
Total Return 1.21%(b)
Ratios/Supplemental Data:
Net Assets, End of Period (000) $4,001
Ratio of expenses to average net assets 0.78%(c)
Ratio of net investment income to average net assets 1.30%(c)
Ratio of expenses to average net assets* 6.98%(c)
Ratio of net investment income to average net assets* (4.90)%(c)
Portfolio turnover rate 10%
SMALL COMPANY OPPORTUNITY FUND
Period
Ended
Dec. 31,
1999(a)
Net Asset Value, Beginning of Period $10.00
Investment Activities
Net investment income 0.03
Net realized and unrealized gains (losses) from investments (0.08)
Total from Investment Activities (0.05)
Distributions:
Net investment income (0.03)
Return of capital (0.02)
Net realized gains --
Total Distributions (0.05)
Net Asset Value, End of Period $ 9.90
Total Return (0.43)%(b)
Ratios/Supplemental Data:
Net Assets, End of Period (000) $1,369
Ratio of expenses to average net assets 0.75%(c)
Ratio of net investment income to average net assets 0.72%(c)
Ratio of expenses to average net assets* 9.63%(c)
Ratio of net investment income to average net assets* (8.16)%(c)
Portfolio turnover rate 9%
* During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been as
indicated.
(a) For the period from July 1, 1999 (commencement of operations) through
December 31, 1999.
(b) Not annualized.
(c) Annualized.
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12
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If you would like a free copy of any of the following documents or would like
to request other information regarding the Funds, you can call or write your
participating insurance company.
Statement of Additional Information (SAI)
Contains more details describing the Funds and their policies. The SAI has
been filed with the Securities and Exchange Commission (SEC), and is
incorporated by reference in this Prospectus.
Annual and Semi-annual Reports
Describes each Fund's performance, lists portfolio holdings, and discusses
market conditions and investment strategies that significantly affected each
Fund's performance during its last fiscal year.
If you would like to receive copies of the annual and semi-annual reports
and/or the SAI at no charge, please call your participating insurance
company.
How to Obtain Information
By telephone: Call your participating insurance company at the toll free
number listed in the separate account prospectus.
By mail: You may write to your participating insurance company at the address
listed in the separate account prospectus.
You also may obtain copies of materials from the SEC's Public Reference Room
in Washington, D.C. (Call 1-202-942-8090 for information on the operation of
the SEC's Public Reference Room.) Copies of this information may be obtained,
after paying a duplicating fee, by electronic request at the following e-mail
address: [email protected], or by writing the SEC's Public Reference
Section, Washington, D.C. 20459-0102.
On the Internet: Text only versions of Fund documents can be viewed on-line
or downloaded from the SEC at http://www.sec.gov.
The securities described in this Prospectus and the SAI are not offered in
any state in which they may not lawfully be sold. No sales representative,
dealer, or other person is authorized to give any information or make any
representation other than those contained in this Prospectus and the SAI.
(LOGO)
Victory Variable Insurance Funds
Investment Company Act File Number 811-8979 VF-VVIF-PRO (4/00)
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(LOGO)
Victory Variable Insurance Funds
PROSPECTUS
Investment Quality Bond Fund
Class A Shares
As with all mutual funds, the Securities and Exchange Commission has
not approved or disapproved the Fund's securities or determined
whether this Prospectus is accurate or complete. Any representation to
the contrary is a criminal offense.
For information, call your participating insurance company.
April 28, 2000
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TABLE OF CONTENTS
RISK/RETURN SUMMARY FOR THE FUND 1
An analysis which includes the investment objective, principal
strategies and principal risks of the Fund.
Q&A -- IMPORTANT CONSIDERATIONS 2
INVESTMENTS 3
RISK FACTORS 4
SHARE PRICE 5
DIVIDENDS, DISTRIBUTIONS, AND TAXES 6
INVESTING IN THE FUND 7
o Contract Owner Administrative Services Agreement 7
o Distribution and Services Plan 7
o Purchases 8
o Redemptions 8
ORGANIZATION AND MANAGEMENT OF THE FUND 9
FINANCIAL HIGHLIGHTS 10
Shares of the Fund are:
o Not insured by the FDIC;
o Not deposits or other obligations of, or guaranteed by KeyBank, any of
its affiliates, or any other bank;
o Subject to investment risks, including possible loss of the amount
invested.
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INVESTMENT QUALITY BOND FUND Risk/Return Summary
Cusip # 92646Q109
Investment Objective
The Fund seeks to provide a high level of income.
Principal Investment Strategies
The Fund pursues its investment objective by investing primarily in
investment-grade bonds issued by corporations and the U.S. government and its
agencies or instrumentalities.
"Investment grade" obligations in which the Fund may invest are those rated
within the top four rating categories by a nationally recognized statistical
rating organization (NRSRO). NRSROs assign credit ratings to securities based on
the issuer's ability to make principal and interest payments.
Under normal conditions, the Fund will invest at least 80% of its total assets
in the following securities:
o Investment grade corporate securities, asset-backed securities, convertible
securities and exchangeable debt securities;
o Mortgage-related securities issued by governmental agencies and
non-governmental entities;
o Obligations issued or guaranteed by the U.S. government or its agencies or
instrumentalities; and
o Commercial paper.
Important characteristics of the Fund's investments:
o Quality: All instruments will be rated, at the time of purchase, within the
four highest rating categories by Standard & Poor's (S&P), Fitch IBCA,
Moody's Investors Service (Moody's), or another NRSRO, or, if unrated, be
of comparable quality. For more information on ratings, see the Appendix to
the Statement of Additional Information (SAI).
o Maturity: The dollar-weighted effective average maturity of the Fund will
range from 5 to 15 years. The maturity of individual assets held by the
Fund may vary from the average maturity of the Fund. Under certain market
conditions, the Fund's portfolio manager may go outside these boundaries.
There is no guarantee that the Fund will achieve its objectives.
Principal Risks
An investment in the Fund may lose money. The Fund is subject to the following
principal risks, more fully described in "Risk Factors." The Fund's net asset
value, yield and/or total return may be adversely affected if any of the
following occurs:
o The market value of securities acquired by the Fund declines.
o The portfolio manager does not execute the Fund's principal investment
strategies effectively.
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INVESTMENT QUALITY BOND FUND Risk/Return Summary
o Interest rates rise.
o An issuer's credit quality is downgraded.
o The Fund must reinvest interest or sale proceeds at lower rates.
o The rate of inflation increases.
o The average life of a mortgage-related security is shortened or lengthened.
An investment in the Fund is not a deposit of KeyBank or any of its affiliates
and is not insured or guaranteed by the Federal Deposit Insurance Corporation or
any other government agency.
Q&A -- Important Considerations
Keep in mind that:
o The Fund is not a complete investment program.
o The Fund could lose money, but it also has the potential to make money.
You cannot buy shares of the Fund directly, but only through variable annuity or
variable life insurance contracts (contracts) that are offered by the segregated
asset accounts (separate accounts) of certain life insurance companies
(participating insurance companies).
The Fund offers Class A Shares. You are encouraged to read this Prospectus in
conjunction with the accompanying separate account prospectus.
In choosing the Fund as an investment for your contract, please keep in mind the
following considerations.
What are the general investment characteristics of the Fund?
o Diversified investment portfolio;
o Appropriate for achieving long-term goals, like saving for retirement; and
o Fluctuating net asset value (NAV) per share.
What are the particular investment characteristics of the Fund?
o Seeks to generate a high level of income by investing in investment grade
debt securities.
The Fund may not be an appropriate selection for contract owners who:
o are not willing to take any risk that they may lose money on their
investment;
o want absolute stability of their investment principal; or
o want to invest in a particular sector or in particular industries,
countries, or regions.
2
<PAGE>
Investments
The following describes some of the types of securities the Fund may purchase
under normal market conditions.
For cash management or for temporary defensive purposes in response to market
conditions, the Fund may hold all or a portion of its assets in cash or
short-term money market instruments. This may reduce the benefit from any
upswing in the market and may cause the Fund to fail to meet its investment
objective.
For more information on ratings and a more complete description of the types of
securities in which the Fund can invest, see the SAI.
o U.S. Government Securities. Notes and bonds issued or guaranteed by the
U.S. government, its agencies or instrumentalities. Some are direct
obligations of the U.S. Treasury; others are obligations only of the U.S.
agency.
o Mortgage-Backed Securities. Instruments secured by a mortgage or pools of
mortgages.
o When-Issued and Delayed-Delivery Securities. A security that is purchased
for delivery at a later time. The market value may change before the
delivery date, and the value is included in the NAV of the Fund.
o Dollar-Weighted Effective Average Maturity. Based on the value of the
Fund's investments in securities with different maturity dates. This
measures the sensitivity of a debt security's value to changes in interest
rates. The value of a long term debt security is more sensitive to interest
rate changes than the value of a short-term security.
3
<PAGE>
Risk Factors
This Prospectus describes the principal risks that are associated with the
Fund's investment strategies.
By matching your investment objective with an acceptable level of risk, you
can create your own customized investment plan.
The Fund is subject to the following principal risks.
General risks:
o Market risk is the risk that the market value of a security may fluctuate,
depending on the supply and demand for that type of security. As a result
of this fluctuation, a security may be worth more or less than the price
the Fund originally paid for the security, or more or less than the
security was worth at an earlier time. Market risk may affect a single
issuer, an industry, a sector of the economy, or the entire market and is
common to all investments.
o Manager risk is the risk that the Fund's portfolio manager may implement
its principal investment strategy in a way that does not produce the
intended result.
Risks associated with investing in debt securities:
o Interest rate risk. The value of a debt security typically changes in the
opposite direction from a change in interest rates. When interest rates go
up, the value of a debt security typically goes down. When interest rates
go down, the value of a debt security typically goes up. Generally, the
market values of securities with longer maturities are more sensitive to
changes in interest rates.
o Inflation risk is the risk that inflation will erode the purchasing power
of the cash flows generated by debt securities held by the Fund. Fixed-rate
debt securities are more susceptible to this risk than floating-rate debt
securities or equity securities that have a record of dividend growth.
o Reinvestment risk is the risk that when interest rates are declining, the
Fund will have to reinvest any interest income or prepayments on a security
at lower interest rates. Generally, interest rate risk and reinvestment
risk tend to have offsetting effects, though not necessarily of the same
magnitude.
o Credit (or default) risk is the risk that the issuer of a debt security
will be unable to make timely payments of interest or principal. Although
the Fund generally invests in only high-quality securities, the interest or
principal payments may not be insured or guaranteed on all securities.
Credit risk is measured by NRSROs such as S&P, Fitch IBCA or Moody's.
It is important to keep in mind one basic principle of investing: the greater
the risk, the greater the potential reward. The reverse is also generally true:
the lower the risk, the lower the potential reward.
An investment in the Fund is not a complete investment program.
4
<PAGE>
Risk Factors (continued)
Risks associated with investing in mortgage-related securities:
o Prepayment risk. Prepayments of principal on mortgage-related
securities affect the average life of a pool of mortgage-related
securities. The level of interest rates and other factors may
affect the frequency of mortgage prepayments. In periods of rising
interest rates, the prepayment rate tends to decrease, lengthening
the average life of a pool of mortgage-related securities. In
periods of falling interest rates, the prepayment rate tends to
increase, shortening the average life of a pool of
mortgage-related securities. Prepayment risk is the risk that,
because prepayments generally occur when interest rates are
falling, the Fund may have to reinvest the proceeds from
prepayments at lower interest rates.
o Extension risk is the risk that the rate of anticipated
prepayments on principal may not occur, typically because of a
rise in interest rates, and the expected maturity of the security
will increase. During periods of rapidly rising interest rates,
the effective average maturity of a security may be extended past
what the Fund's portfolio manager anticipated that it would be.
The market value of securities with longer maturities tend to be
more volatile.
Share Price
The Fund calculates its share price, called its "net asset value" (NAV), each
business day at 4:00 p.m. Eastern Time or at the close of trading on the New
York Stock Exchange Inc. (NYSE), whichever time is earlier. A separate account
buys and redeems shares at the next share price calculated after your
instructions are received and accepted by an authorized representative of your
participating insurance company. A business day is a day on which the NYSE is
open.
The Fund's NAV may change on days when separate accounts will not be able to buy
or redeem its shares if the Fund holds portfolio securities primarily listed on
foreign exchanges that trade on weekends or other days when it does not price
its shares.
The Fund values its investments based on market value. When market quotations
are not readily available, the Fund values its investments based on fair value
methods approved by the Fund's Board of Trustees. The Fund calculates its NAV by
adding up the total value of its investments and other assets, subtracting its
liabilities, and then dividing that figure by the number of outstanding shares.
Total Assets-Liabilities
NAV = ----------------------------
Number of Shares Outstanding
5
<PAGE>
Dividends, Distributions and Taxes
The Fund expects to distribute substantially all of its ordinary income and
capital gains each year. Ordinarily, the Fund declares and pays dividends from
its net investment income quarterly. Capital gains distributions, if any, from
the Fund will be made annually. In addition, the Fund may occasionally be
required to make supplemental dividend or capital gains distributions at some
other time during the year.
All dividend and capital gains distributions made by the Fund will be
automatically reinvested in additional shares of the Fund.
Important Information about Taxes
The tax status of your separate account's investment in the Fund depends upon
the features of your contract. For further information, please refer to the
separate account prospectus.
The Fund intends to qualify as a regulated investment company under the Internal
Revenue Code of 1986, as amended (the Code), so that it will not be subject to
federal income tax on its earnings and capital gains that are distributed to its
shareholders. In addition, the Fund intends to comply with the diversification
requirements of the Code and Treasury Regulations in order to maintain the
tax-deferred status of the contracts.
o Shares of the Fund must be purchased through the contracts. As a result, it
is anticipated that any dividend or capital gains distribution from the
Fund will be exempt from current taxation if left to accumulate within a
contract.
o The Code requires that a separate account underlying a contract must be
"adequately diversified" in order for the contract to be treated as an
annuity or life insurance contract for tax purposes. A separate account
invested in the Fund will be treated as owning its proportionate share of
the Fund's assets for purposes of determining whether the account is
adequately diversified. If a separate account underlying a contract were
not in compliance with these diversification requirements, the contract
owner would be subject to tax on the contract's earnings.
o This discussion of federal income tax consequences is based on tax laws and
regulations in effect as of the date of this Prospectus, and may change as
a result of legislative, administrative or judicial action. As this
discussion is for general information only, you also should review the more
detailed discussion of federal income tax considerations that is contained
in the separate account prospectus and the SAI.
You should consult with your own tax adviser regarding the tax consequences of
your investment in the separate account, including the application of state and
local taxes which may differ from the federal income tax consequences described.
6
<PAGE>
Investing in the Fund
The Fund is designed as an investment exclusively for contracts that are offered
by the separate accounts of participating insurance companies. The participating
insurance company will buy and redeem shares according to your instructions, as
provided in the contract, and will redeem shares as needed to provide benefits
under the contract.
Shares of the Fund may be offered in the future to other separate accounts
established by other insurance companies. Although the Fund currently does not
foresee any conflicts of interest between owners of variable annuity contracts
and variable life insurance contracts, it is possible, due to differences in tax
treatment or other considerations, that the interests of these two groups for
which the Fund serves as investment vehicles may conflict. The Fund's Board of
Trustees and each insurance company whose separate accounts invest in the Fund
are required to monitor the Fund's operations to identify any material conflict
between the interests of holders of annuities and life insurance contracts and
to determine what action, if any, should be taken to resolve the conflict. In
the event of a conflict, an insurance company might redeem its investment of one
or more separate accounts in the Fund's shares. If this happens, the Fund may
have to sell securities at unfavorable prices.
Contract Owner Administrative Services Agreement
The Fund has adopted a Contract Owner Administrative Services Agreement. A
contract owner servicing agent performs a number of services for its customers
who hold contracts offered by separate accounts that invest in the Fund, such as
establishing and maintaining accounts and records, processing additional
contract units attributable to Fund dividend payments, arranging for bank wires,
assisting in transactions, and changing account information. For these services,
Class A Shares of the Fund pay a fee at an annual rate of up to 0.20% of its
average daily net assets serviced by the agent. The Fund may enter into these
agreements with KeyCorp and its affiliates, and with other financial
institutions that provide such services. Contract owner servicing agents may
waive all or a portion of their fee.
Distribution and Service Plan
The Fund has adopted a plan consistent with Rule 12b-1 under the Investment
Company Act of 1940, as amended (the Plan), to allow the Fund or the Adviser,
Administrator or the Distributor, directly or through an affiliate, using its
own resources, to make payments for promotional and administrative expenses that
might be considered direct or indirect payment by the Fund of distribution
expenses otherwise prohibited by Rule 12b-1. Shares of the Fund do not pay
expenses under the Plan.
7
<PAGE>
Purchases
Shares of the Fund may be purchased only through contracts offered through
participating insurance companies. Please refer to the separate account
prospectus for information on how the participating insurance company buys and
redeems shares.
Insurance company separate accounts invest in the Fund based upon its current
NAV. The Fund's Transfer Agent processes orders to buy or redeem shares of the
Fund at its NAV. The value of your contract's investment in the Fund also will
be based upon premium payments, surrender and transfer requests, and any other
transaction requests from contract and policy owners, annuitants, and
beneficiaries. In order to calculate the value of your investment, you would
have to determine the number of contract units you own along with the "accrued
unit value" of your contract. Any orders to buy or redeem Fund shares that are
based on actions by participating insurance companies or persons other than
contract owners, annuitants, and beneficiaries will be executed at the Fund's
NAV next computed after the Distributor receives the order.
Redemptions
Shares of the Fund may be redeemed by instructing your participating insurance
company to terminate your contract's investment in the Fund. Please refer to the
instructions provided in the prospectus for the separate account. The separate
account may redeem shares on any business day at the NAV that is next calculated
after the order is placed.
The Fund may suspend the right of redemption in the following circumstances:
o During non-routine closings of the NYSE;
o When the Securities and Exchange Commission (SEC) determines either
that trading on the NYSE is restricted or that an emergency prevents
the sale or valuation of the Fund's securities; or
o When the SEC orders a suspension to protect the Fund's shareholders.
The Fund will pay redemptions by any one separate account during any 90-day
period in cash up to the lesser of $250,000 or 1% of the Fund's net assets. The
Fund reserves the right to pay the remaining portion "in kind," that is, in
portfolio securities rather than cash.
8
<PAGE>
Organization and Management of the Fund
About the Fund
The Fund is a series of The Victory Variable Insurance Funds, which is organized
as a Delaware business trust.
The Board of Trustees of The Victory Variable Insurance Funds has the overall
responsibility for the management of the Fund.
Fees and Expenses
The Fund incurs annual operating expenses which include investment advisory,
administrative, and distribution expenses. You also should review the fee tables
in the separate account prospectus for your contract.
The Investment Adviser and Sub-Administrator
The Fund has an Advisory Agreement, which is one of its most important
contracts. Key Asset Management Inc. (KAM), a New York corporation registered as
an investment adviser with the SEC, is the Adviser to the Fund. KAM, a
subsidiary of KeyCorp, oversees the operations of the Fund according to
investment policies and procedures adopted by the Board of Trustees. Affiliates
of the Adviser manage approximately $73 billion for individual and institutional
clients. KAM also serves as the investment adviser of The Victory Portfolios, a
registered investment company currently offering more than 30 money market, bond
and equity mutual funds, with approximately $20 billion in total assets. KAM's
address is 127 Public Square, Cleveland, Ohio 44114.
KAM's advisory fee is calculated at an annual rate of 0.20% of the Fund's
average daily net assets.
Under a Sub-Administation Agreement, BISYS Fund Services Ohio, Inc. pays KAM a
fee at the annual rate of up to 0.05% of the Fund's average daily net assets to
perform some of the administrative duties of the Fund.
Portfolio Management
Richard T. Heine has been the portfolio manager of the Fund since its inception.
Mr. Heine is a Portfolio Manager and Director with KAM, has managed the Balanced
Fund and the Investment Quality Bond Fund, two series of The Victory Portfolios,
since 1993, and manages other investment accounts advised by KAM.
The Fund is supervised by the Board of Trustees, which monitors the services
provided to contract owners.
9
<PAGE>
Financial Highlights Investment Quality Bond Fund
The Financial Highlights table is intended to help you understand the Fund's
financial performance for the fiscal period from July 1, 1999 (commencement of
operations) to December 31, 1999. Certain information shows the results of an
investment in one share of the Fund. The total returns in the table represent
the rate that a separate account would have earned on an investment in the Fund
(assuming reinvestment of all dividends and distributions).
These financial highlights reflect historical information about Class A Shares
of the Fund. The financial highlights for the fiscal period from July 1, 1999
(commencement of operations) to December 31, 1999 were audited by
PricewaterhouseCoopers LLP, whose report, along with the financial statements of
the Fund, are included in the Fund's annual report, which is available by
calling your participating insurance company.
Period Ended December 31,
1999 (a)
--------------------------
Net Asset Value, Beginning of Period $ 10.00
- -------------------------------------------------------------------------------
Investment Activities
Net investment income 0.24
Net realized and unrealized gains (losses)
from investments (0.22)
- -------------------------------------------------------------------------------
Total from Investment Activities 0.02
- -------------------------------------------------------------------------------
Distributions
Net investment income (0.22)
Net realized gains --
- -------------------------------------------------------------------------------
Total Distributions (0.22)
- -------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.80
- -------------------------------------------------------------------------------
Total Return 0.21%(b)
Ratios/Supplemental Data:
Net Assets, End of Period (000) $1,729
Ratio of expenses to average net assets 0.60%(c)
Ratio of net investment income to average net assets 5.41%(c)
Ratio of expenses to average net assets* 8.90%(c)
Ratio of net investment income to average net assets* (2.89)%(c)
Portfolio turnover 191%
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) For the period from July 1, 1999 (commencement of operations) through
December 31, 1999.
(b) Not annualized.
(c) Annualized.
10
<PAGE>
This page is intentionally left blank.
11
<PAGE>
If you would like a free copy of any of the following documents or would like to
request other information regarding the Fund, you can call or write your
participating insurance company.
Statement of Additional Information (SAI)
Contains more details describing the Fund and its policies. The SAI has been
filed with the Securities and Exchange Commission (SEC), and is incorporated by
reference in this Prospectus.
Annual and Semi-annual Reports
Describes the Fund's performance, lists portfolio holdings, and discusses market
conditions and investment strategies that significantly affected the Fund's
performance during its last fiscal year.
If you would like to receive copies of the annual and semi-annual reports and/or
the SAI at no charge, please call your participating insurance company.
How to Obtain Information
By telephone: Call your participating insurance company at the toll free number
listed in the separate account prospectus.
By mail: You may write to your participating insurance company at the address
listed in the separate account prospectus.
You also may obtain copies of materials from the SEC's Public Reference Room in
Washington, D.C. (Call 1-202-942-8090 for information on the operation of the
SEC's Public Reference Room.) Copies of this information may be obtained, after
paying a duplicating fee, by electronic request at the following e-mail address:
[email protected], or by writing the SEC's Public Reference Section,
Washington, D.C. 20459-0102.
On the Internet: Text only versions of Fund documents can be viewed on-line or
downloaded from the SEC at http://www.sec.gov.
The securities described in this Prospectus and the SAI are not offered in any
state in which they may not lawfully be sold. No sales representative, dealer,
or other person is authorized to give any information or make any representation
other than those contained in this Prospectus and the SAI.
Investment Company Act File Number 811-8979
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
THE VICTORY VARIABLE INSURANCE FUNDS
Investment Quality Bond Fund
Diversified Stock Fund
Small Company Opportunity Fund
April 28, 2000
This Statement of Additional Information ("SAI") is not a prospectus, but should
be read in conjunction with the relevant Class A Share prospectus of The Victory
Variable Insurance Funds (the "Trust"), which is dated April 28, 2000 as amended
or supplemented from time to time (the "Prospectus"). This SAI is incorporated
by reference in its entirety into the Prospectus. Copies of the Prospectus may
be obtained by writing the Trust 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 DIVIDEND DISBURSING AGENT
SUB-ADMINISTRATOR and SERVICING AGENT
Key Asset Management Inc. Boston Financial Data Services, Inc.
ADMINISTRATOR and DISTRIBUTOR CUSTODIAN
BISYS Fund Services Key Trust Company of Ohio, N.A.
TRANSFER AGENT INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company PricewaterhouseCoopers LLP
COUNSEL
Kramer Levin Naftalis & Frankel LLP
Table of Contents
Investment Policies and Limitations.......................................1
Valuation of Portfolio Securities for the Investment Quality Bond Fund...20
Valuation of Portfolio Securities For The Equity Funds...................21
Performance..............................................................21
Additional Purchase and Redemption Information...........................25
Dividends and Distributions..............................................25
Taxes....................................................................25
Trustees and Officers....................................................26
Advisory and Other Contracts.............................................29
Additional Information...................................................35
Appendix................................................................A-1
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
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, 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 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.
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
2
<PAGE>
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 under, 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 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.
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.
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
3
<PAGE>
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.
Investment Policies
The following tables describe the Funds' investment policies and list some of
the types of transactions that a Fund may engage in under normal market
conditions. Unless otherwise stated, the indicated percentage relates to a
Fund's total assets that may be committed to the stated investment. A checkmark
["X"] indicates that a Fund may engage in the stated transaction without limit.
"None" or "N/A" indicates that the Fund may not engage in the stated transaction
or that no policy has been stated with respect to the investment category.
Where applicable, a Fund that may engage in futures contracts and options on
futures contracts may invest up to 5% of its total assets in margins and
premiums and may hold up to 33 1/3% of its total assets subject to futures
contracts or options thereon. To the extent that a Fund invests in investment
company securities, the Fund may (i) invest up to 5% in any one investment
company, (ii) acquire up to 3% of the total assets of any one investment
company, and (iii) hold up to 10% of its total assets in securities issued by
investment companies.
- --------------------------------------------------------------------------------
Investment Small
Quality Diversified Company
Investment Bond Stock Opportunity
- --------------------------------------------------------------------------------
Asset-backed securities 35% None None
- --------------------------------------------------------------------------------
Borrowing from banks 5% 5% 5%
- --------------------------------------------------------------------------------
Collateralized mortgage obligations |X| None None
- --------------------------------------------------------------------------------
Convertible or exchangeable corporate |X| |X| None
debt obligations
- --------------------------------------------------------------------------------
Corporate debt obligations |X| 20% 20%
- --------------------------------------------------------------------------------
Dollar-weighted average maturity 5 to 15 years N/A N/A
- --------------------------------------------------------------------------------
Foreign debt securities 20% None None
- --------------------------------------------------------------------------------
Foreign equity securities traded on None 10% 10%
U.S. exchanges
- --------------------------------------------------------------------------------
Futures contracts and options on 5%/33 1/3% 5%/33 1/3% 5%/33 1/3%
futures contracts
- --------------------------------------------------------------------------------
Illiquid securities 15% net 15% net 15% net
- --------------------------------------------------------------------------------
Investment company securities 5% 5% 5%
- --------------------------------------------------------------------------------
Mortgage-backed securities |X| None None
- --------------------------------------------------------------------------------
Options None 25% (covered 25%/5% (1)
calls)
- --------------------------------------------------------------------------------
Preferred securities 20% 20% 20%
- --------------------------------------------------------------------------------
Real estate investment trusts None 25% 25%
- --------------------------------------------------------------------------------
Receipts 20% 20% 20%
- --------------------------------------------------------------------------------
Repurchase agreements 35% 20% 20%
- --------------------------------------------------------------------------------
Restricted securities |X| 20% 35%
- --------------------------------------------------------------------------------
- -------------------
(1) 25% of covered calls and 5% in call or put options.
4
<PAGE>
- --------------------------------------------------------------------------------
Reverse repurchase agreements 33 1/3% 33 1/3% 33 1/3%
- --------------------------------------------------------------------------------
Securities lending 33 1/3% 33 1/3% 33 1/3%
- --------------------------------------------------------------------------------
Short-term debt obligations 35% 20% 20%
- --------------------------------------------------------------------------------
Tax, revenue and bond anticipation |X| None None
notes
- --------------------------------------------------------------------------------
U.S. equity securities None 80% - 100% 80% - 100%
- --------------------------------------------------------------------------------
U.S. government securities |X| 20% 20%
- --------------------------------------------------------------------------------
Variable and floating rate notes |X| None None
- --------------------------------------------------------------------------------
Warrants None 10% 10%
- --------------------------------------------------------------------------------
When-issued and delayed-delivery 33 1/3% 33 1/3% 33 1/3%
- --------------------------------------------------------------------------------
Yankee securities 20% None None
- --------------------------------------------------------------------------------
Zero coupon bonds 20% None None
- --------------------------------------------------------------------------------
Secondary Investment Strategies. In addition to the principal strategies
described in the Prospectus, the Funds may engage in the secondary
investment strategies outlined below.
- --------------------------------------------------------------------------------
Investment o May invest up to 20% of its total assets in preferred and
Bond convertible Quality preferred securities, and separately traded interest
and principal component parts of U.S. Treasury
obligations.
o May invest up to 35% of its total assets in high quality,
short-term debt.
o May, but is not required to, use derivative instruments.
- --------------------------------------------------------------------------------
Diversified o May invest up to 20% of its total assets in preferred stocks,
Stock investment grade corporate debt securities, short-term debt obligations
and U.S. government obligations.
o May, but is not required to, use derivative instruments.
- --------------------------------------------------------------------------------
Small o May invest up to 20% of its total assets in: equity
Company securities of larger companies (those with market
Opportunity capitalizations over $2 billion); investment-grade
securities; preferred stocks; short-term debt obligations;
and repurchase agreements.
- --------------------------------------------------------------------------------
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 some of the types
of securities in which the Funds may invest in accordance with their
investment objective, policies, and limitations, including certain
transactions the Funds may make and strategies they may adopt. The
following also contains a brief description of the risk factors related to
these securities. 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
5
<PAGE>
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 also is subject to greater market fluctuations as a result of changes
in interest rates.
Changes by nationally recognized statistical rating organizations ("NRSROs") 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 per share ("NAV").
Temporary Defensive Measures. For temporary defensive purposes in response to
market conditions, each Fund may hold up to 100% of its assets in cash or 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.) These temporary defensive measures may result in
performance that is inconsistent with a Fund's 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 an 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. A 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. A Fund uses these arrangements to obtain 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).
Bank Deposit Instruments. Certificates of deposit ("CDs") 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. CDs 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.
6
<PAGE>
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.
Canadian Time Deposits are U.S. dollar-denominated certificates of deposit
issued by Canadian offices of major Canadian Banks.
Commercial Paper. Commercial paper is comprised of unsecured promissory notes,
usually 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., those issued by the
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. 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 prevalent
in the U.S. 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.
7
<PAGE>
Reverse Repurchase Agreements. Pursuant to such an agreement, a Fund would sell
a portfolio security to a financial institution such as a bank or 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 assets (such as cash or liquid
securities) 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 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 guaranteed income contracts or "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
8
<PAGE>
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 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.
The maturities of variable or floating rate notes are determined as follows:
1. A variable or floating rate note that is issued or guaranteed by the U.S.
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
9
<PAGE>
are comparable securities which pay interest currently. This 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 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 also may 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.
Pursuant to an SEC exemptive order, a Fund may invest in the money market funds
of the Trust. The Adviser will waive its investment advisory fee with respect to
assets of a Fund invested in any of the money market funds of the Trust, and, to
the extent required by the laws of any state in which a Fund's shares are sold,
the Adviser will waive its investment advisory fee as to all assets invested in
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 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 their investment objectives.
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 a 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
10
<PAGE>
to deliver or pay for the securities, the Fund could miss a favorable price or
yield opportunity or suffer a loss.
A 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 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. 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.
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. A Fund may purchase mortgage-backed
securities at a premium or 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 the Government
Natinal Mortgage Association ("GNMA") are supported by the full faith and credit
of the U.S. Treasury; others, such as those of the Federal natinal Mortgage
Association ("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 , but are not backed by the full
faith and credit of the U.S. government.
GNMA Certificates. GNMA certificates 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
11
<PAGE>
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 credit
of the U.S. government. GNMA also is 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 underlying mortgages. 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. FHLMC was created in 1970 to promote development of a
nationwide secondary market in conventional residential mortgages. FHLMC issues
two types of mortgage pass-through securities: 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. FHLMC guarantees timely monthly payment of interest on
participation certificates and the ultimate payment of principal. 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. 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. A Fund also may invest in CMOs, which 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-Government Mortgage-Backed Securities. A Fund may invest in mortgage-related
securities issued by non- government 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- government 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-government 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-government mortgage-backed 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
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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.
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. A 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. A 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
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fluctuates in relation to changes in interest rates like bonds and also
fluctuates in relation to the underlying stock's price.
Futures and Options
Futures Contracts. A Fund 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.
A Fund 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 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 making or taking 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 broker 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.
Brokers 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 their 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.
A Fund will only 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 also may
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enter into futures contracts as a temporary substitute to maintain exposure to a
particular market or security pending the purchase or sale of that security.
A Fund's 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 or
currencies. 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 also may 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. A Fund will not enter into futures
contract transactions for purposes other than bona fide hedging purposes 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.
Futures transactions will be limited to the extent necessary to maintain a
Fund's qualification as a regulated investment company.
The Trust has undertaken to restrict their futures contract trading as follows:
first, the Trust will not engage in transactions in futures contracts for
speculative purposes; second, the Trust will not market its Funds to the public
as commodity pools or otherwise as vehicles for trading in the commodities
futures or commodity options markets; third, the Trust will disclose to all
prospective shareholders the purpose of and limitations on its Funds' commodity
futures trading; fourth, the Trust will submit to the CFTC special calls for
information. Accordingly, registration as a Commodities Pool Operator with the
CFTC is not required.
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 liquid securities
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 liquid securities 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 also may cover such a position by
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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 also could 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 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 the futures contracts
that 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 it 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 markets, there may be increased participation by speculators in
the futures market which also may 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 purchase 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 involves the risk of imperfect or no
correlation where the securities underlying futures contract have different
maturities than the portfolio securities being hedged. It also is possible that
the Funds could both lose money on futures contracts and also experience a
decline in value of its portfolio securities. There also is 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. Each Equity Fund may sell (write) call options that 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 also may write call options as a partial hedge
against a possible stock market decline. In view of its 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
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premium represents such a profit. A Fund retains the risk of loss should the
value of the underlying security decline. A Fund also may 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, 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 also may 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 intend 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).
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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 and non-government stripped fixed-rate
mortgage-backed 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.
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, a Fund were
in a position where more than 15% of its 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 that which 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. Key Trust Company of Ohio, N.A., an affiliate of
the Adviser, serves as lending agent for the Funds pursuant to a Securities
Lending Agency Agreement that was adopted by the Trustees of the Funds. Under
the Funds' current practices (which are subject to change), 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 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 (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 that the Adviser
has determined are creditworthy under guidelines established by the Trustees.
Each Fund will limit its 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.
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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 ("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 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 specific price (the strike price) for a limited
period of time. The strike price of warrants typically is much lower than the
current market price of the underlying securities, yet warrants 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.
Convertible Securities. A convertible security is typically a bond or preferred
stock that may be converted at a stated price within a specified period of time
into a specified number of shares of common stock of the same or a different
issuer. Convertible securities are usually senior to common stock in a
corporation's capital structure, but usually are subordinate to similar
non-convertible securities. While providing a fixed income stream (generally
higher in yield than the income derivable from a common stock but lower than
that afforded by a similar non-convertible security), a convertible security
also affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation of the common stock into which it is
convertible.
In general, the market value of a convertible security is at least the higher of
its "investment value" (i.e., its value as a fixed income security) or its
"conversion value" (i.e., the value of the underlying share of common stock if
the security is converted). As a fixed-income security, a convertible security
tends to increase in market value when interest rates decline and tends to
decrease in value when interest rates rise. However, the price of a convertible
security also is influenced by the market value of the security's underlying
common stock. Thus, the price of a convertible security tends to increase as the
market value of the underlying stock increases, and tends to decrease as the
market value of the underlying stock declines. While no securities investment is
without some risk, investments in convertible securities generally entail less
risk than investments in the common stock of the same issuer.
Securities received upon conversion of convertible securities or upon exercise
of call options or warrants forming elements of synthetic convertibles
(described below) may be retained temporarily to permit orderly disposition or
to defer realization of gain or loss for federal tax purposes, and will be
included in calculating the amount of the Fund's total assets invested in true
and synthetic convertibles.
Foreign Investments. A Fund may invest in securities issued by foreign branches
of U.S. banks, foreign banks, or other foreign issuers, including sponsored and
unsponsored American Depositary Receipts ("ADRs") and securities purchased on
foreign securities exchanges. Such investment may subject a 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. Unsponsored ADRs may involve additional risks.
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The value of securities denominated in or indexed to foreign currencies, and of
dividends and interest from such securities, can change significantly when
foreign currencies strengthen or weaken relative to the U.S. dollar.
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, which
may result in substantial delays. It also may 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 convert currency into U.S.
dollars, 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.
Miscellaneous Securities. The Funds can invest in various securities issued by
domestic and foreign corporations, including preferred stocks and investment
grade corporate bonds, notes, and warrants. Bonds are long-term corporate debt
instruments secured by some or all of the issuer's assets, debentures are
general corporate debt obligations backed only by the integrity of the borrower,
and warrants are instruments that entitle the holder to purchase a certain
amount of common stock at a specified price, which price is usually higher than
the current market price at the time of issuance. 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.
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.
20
<PAGE>
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 NAV 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
NAV. 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 the 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 mean between the closing bid and asked
prices on that day. Non-convertible debt securities are valued on the basis of
prices provided by independent pricing services. Prices provided by the pricing
service may be determined without exclusive reliance on quoted prices, and may
reflect appropriate factors such as institution- sized 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 specially authorized by the
Board. Short-term obligations having 60 days or less to maturity are valued on
the basis of amortized cost. For purposes of determining NAV, futures and
options contracts generally will be valued 15 minutes after the close of trading
of the NYSE.
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 NYSE. The values of such securities used
in computing the NAV of each Equity Fund's shares are determined at such times.
Foreign currency exchange rates are also generally determined prior the close of
the NYSE. Occasionally, events affecting the values of such securities and such
exchange rates 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 a
Fund's NAV. 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.
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.
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
21
<PAGE>
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:
6
Standardized Yield = 2 [(a-b + 1) - 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. The yields on Class A shares of the Funds for the
30-day period ended December 31, 1999 were as follows: Investment Quality Bond
Fund -- 5.88%, Diversified Stock Fund -- 0.91% and Small Company Opportunity
Fund -- 0.36%.
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)
The dividend yields and distribution returns on Class A shares of the Funds for
the period from July 1, 1999 (commencement of operations) to December 31, 1999
were as follows:
- ---------------------------------------------------------------------------
Dividend Yield Distribution Return
- ---------------------------------------------------------------------------
Investment Quality Bond 2.26% 2.26%
Fund
- ---------------------------------------------------------------------------
Diversified Stock Fund 0.48% 0.48%
- ---------------------------------------------------------------------------
Small Company Opportunity 0.53% 0.53%
Fund
- ---------------------------------------------------------------------------
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 NAV 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
22
<PAGE>
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 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:
n
P (1+T) = ERV
The cumulative "total return" calculation measures the change in value of a
hypothetical investment of $1,000 over an entire period greater than one year.
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 NAV, and that the
investment is redeemed at the end of the period. For the period from July 1,
1999 (commencement of operations) to December 31, 1999, the total returns of
Class A shares of the Funds were as follows: Investment Quality Bond Fund --
0.21%, Diversified Stock Fund -- 1.21% and Small Company Opportunity Fund --
0.43%.
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. ("Lipper"), 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,
23
<PAGE>
22.5% receive four stars, 35% receive three stars, 22.5% receive two stars, and
the bottom 10% receive one star.
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, the yields and the total returns of the Funds may be quoted
in and compared to other mutual funds with similar investment objectives that
serve as funding vehicles for separate accounts offering variable contracts in
advertisements, shareholder reports or other communications to shareholders. A
Fund also may include calculations in such communications that describe
hypothetical investment 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 in advertisements. "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 also may 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 to 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
24
<PAGE>
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.
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 NAV
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 NAV of the Fund. Separate
accounts receiving securities or other property on redemption 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 NAV 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 separate accounts underlying the
contracts of participating
25
<PAGE>
insurance companies that hold its shares. In addition, if a Fund distributes
annually 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. If a
Fund fails to qualify as a RIC, it would be subject to tax on its net investment
income and net capital gains without being able to deduct dividends paid to
shareholders, thereby reducing the amounts available for distribution of the
separate accounts invested in the Fund. 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 underlying a contract be "adequately diversified," in accordance with
Treasury Regulations promulgated thereunder, in order for the holder of the
contract 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. Regulations under section 817(h) provide, among other things, 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 account of
a participating insurance company investing in the Funds will be treated as
owning its proportionate share of each Fund's assets for purposes of determining
whether it is 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. The
Trust is managed by the Trustees in accordance with the laws of the State of
Delaware. There are currently ten 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
holds the same position with The Victory Portfolios, a registered investment
company in the same fund complex as the Trust.
<TABLE>
<CAPTION>
<S> <C> <C>
Position(s)
Held with
Name, Age and Address the Trust Principal Occupation During Past 5 Years
- --------------------- --------- ----------------------------------------
Roger Noall,* 65 Chairman Since 1996, Executive of KeyCorp; from 1995 to 1996, General Counsel
c/o Brighton Apt. 1603 and Trustee and Secretary of KeyCorp; from 1994 to 1996, Senior Executive Vice
8231 Bay Colony Drive President and Chief Administrative Officer of KeyCorp; Director of
Naples, FL 34108 Alleghany Corporation (insurance, financial services and industrial
minerals) and Elite Information Systems, Inc. (financial, legal and
professional software).
</TABLE>
- --------
* Mr. Noall is an "interested person" and an "affiliated person" of the
Trust.
26
<PAGE>
<TABLE>
<CAPTION>
Position(s)
Held with
Name, Age and Address the Trust Principal Occupation During Past 5 Years
- --------------------- --------- ----------------------------------------
<S> <C> <C>
Leigh A. Wilson,** 55 President Since 1989, Chairman and Chief Executive Officer, New Century
New Century Care, Inc. and Trustee Care, Inc. (merchant bank); since 1995, Principal of New Century
53 Sylvan Road North Living, Inc. (assisted living facilities); since 1989, Director of
Westport , CT 06880 Chimney Rock Vineyard and Chimney Rock Winery.
Theodore H. Emmerich, 74 Trustee Retired; until 1986, managing partner (Cincinnati office) Ernst &
1201 Edgecliff Place, Whinney (now Ernst & Young LLP); Director of Carillon Fund, Inc.
Apt. 102 (investment company), American Financial Group (insurance), and
Cincinnati, Ohio 45206 Cincinnati Milacron Commercial Corporation (financing ); Trustee
of Summit Investment Trust (investment company).
Dr. Harry Gazelle, 72 Trustee Retired radiologist, Drs. Hill and Thomas Corporation.
17822 Lake Road
Lakewood , OH 44107
Frankie D. Hughes, 47 Trustee Since 1993, Principal and Chief Investment Officer of Hughes
Hughes Capital Management, Inc. Capital Management, Inc. (fixed income asset management).
315 Cameron Street, 2nd Fl.
Alexandria, Virginia 22314
Eugene J. McDonald, 67 Trustee Since 1990, Executive Vice President and Chief Investment Officer
Duke Management Company for Asset Management of Duke University and President and CEO of
2200 West Main Street Duke Management Company; Director of CCB Financial Corporation,
Suite 1000 Flag Group of Mutual Funds, Greater Triangle Community
Durham , NC 27705 Foundation, and North Carolina Bar Association Investment
Committee.
Dr. Thomas F. Morrissey, 66 Trustee Since 1970, Professor, Weatherhead School of Management, Case
Weatherhead School of Western Reserve University; from 1989 to 1995, Associate Dean of
Management Weatherhead School of Management.
Case Western Reserve Univ.
10900 Euclid Avenue
Cleveland , OH 44106-7235
H. Patrick Swygert, 57 Trustee Since 1995, President, Howard University; from 1990 to 1995,
Howard University President, State University of New York at Albany; Director of
2400 6th St. N.W., Ste. 402 Hartford Financial Services Group, Hartford Life Insurance and
Washington , DC 20059 Federal National Mortgage Association; Chairman, Community
Business Partnership, Greater Washington Board of Trade.
Frank A. Weil, 69 Trustee Since 1984, Chairman and Chief Executive Officer of Abacus &
Abacus & Associates Associates, Inc. (private investment firm); Director and President
147 E. 47th Street of the Hickrill Foundation.
New York, NY 10017
</TABLE>
- --------
* Mr. Wilson is deemed to be an "interested person" of the
Trust under the 1940 Act solely by reason of his position as President.
27
<PAGE>
<TABLE>
<CAPTION>
Position(s)
Held with
Name, Age and Address the Trust Principal Occupation During Past 5 Years
- --------------------- --------- ----------------------------------------
<S> <C> <C>
Donald E. Weston, 65* Trustee Since October 1998, Chairman of Gradison McDonald Investments, a
McDonald Investments Inc. division of McDonald Investments Inc.; until October 1998,
580 Walnut Street Chairman of the Gradison Division of McDonald & Company
Cincinnati, Ohio 45202 Securities, Inc. and a Director of McDonald & Company Investments
Inc.; Director of Cincinnati Milacron Commercial Corporation
(financing) and Katchall Industries Int'l, Inc. (food industry
disease prevention and safety).
</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. Weil (Chairman), Morrissey, Weston and Wilson.
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. Gazelle (Chairman), Emmerich, McDonald and
Swygert. 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. This Committee also reviews Trustee performance and
compensation issues. The Board Process and Nominating Committee has a Nominating
Subcommittee, composed of Messrs. Swygert, Emmerich, McDonald and Weil and Drs.
Gazelle and Morrissey. This Subcommittee makes recommendations to the Board
Process and Nominating Committee concerning candidates to serve as trustees.
Remuneration of Trustees and Certain Executive Officers.
Each Trustee (other than Messrs. Noall and Weston) 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 estimated compensation received by each
Trustee from the Victory "Fund Complex" (1) for the fiscal year ended December
31, 1999.
Pension or Estimated
Retirement Annual Total
Benefits Benefits Aggregate Compensation
Accrued as Upon Compensation from Victory
Fund Expenses Retirement from Trust "Fund Complex"
Leigh A. Wilson -0- -0- $5,000 $56,600
Theodore H. Emmerich -0- -0- $4,500 $42,500
Harry Gazelle -0- -0- $5,000 $44,000
Frankie D. Hughes(2) -0- -0- None None
Eugene J. McDonald -0- -0- $5,000 $47,000
Thomas F. Morrissey -0- -0- $5,000 $47,000
Roger Noall -0- -0- None None
- ------------------------
* Mr. Weston is an "interested person" and an "affiliated person" of the
Trust.
28
<PAGE>
Pension or Estimated
Retirement Annual Total
Benefits Benefits Aggregate Compensation
Accrued as Upon Compensation from Victory
Fund Expenses Retirement from Trust "Fund Complex"
Frank A. Weil -0- -0- $4,750 $47,000
Donald E. Weston -0- -0- None None
H. Patrick Swygert -0- -0- $5,000 $42,500
(1) There are currently 41 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."
(2) Ms. Hughes commenced service on the Board as of January 1, 2000.
Officers.
The officers of the Trust, their ages, and principal occupations during the past
five years, are as follows:
Position(s)
with the
Name and Age Trust Principal Occupation During Past 5 Years
- ------------ ----- ----------------------------------------
Leigh A. Wilson, 54 President See biographical information under "Board of
and Trustees" above.
Trustee
J. David Huber, 53 Vice President of BISYS Fund Services Inc.
President ("BISYS"); officer of BISYS since June 1987.
Robert D. Hingston, Secretary Since November 1998, Vice President of BISYS;
47 from January 1995 to October 1998, founder and
principal of RDH Associates (mutual fund
management consulting firm).
Joel B.Engle, 34 Treasurer Since September 1998, Vice President of BISYS;
from March 1995 to September 1998, Vice
President, Northern Trust Company.
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 $73 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 March 31, 2000, KeyCorp had an asset base
of approximately $84 billion, with banking offices in 13 states from Maine to
Alaska, and trust and investment offices in 14 states. KeyCorp's McDonald
Investments Inc., a registered broker dealer, is located primarily in the
midwestern United States. KeyCorp's major business activities include providing
traditional banking and associated financial services to consumer, business and
commercial markets. Its non-bank subsidiaries
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<PAGE>
include investment advisory, securities brokerage, insurance, bank credit card
processing, and leasing companies.
The Investment Quality Bond Fund pays the Adviser a fee equal to 0.20% of its
average daily net assets and the Diversified Stock Fund and Small Company
Opportunity Fund each pay the Adviser a fee equal to 0.30% of its average daily
net assets.
The Investment Advisory Agreement.
Unless sooner terminated, the Investment Advisory Agreement between the Adviser
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 Agreement or interested persons (as defined in the 1940 Act) of
any party to the 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 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 thereto, 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 the Adviser of its duties and obligations
thereunder.
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.
For the period from July 1, 1999 (commencement of operations) to December 31,
1999, KAM earned the following advisory fees with respect to each Fund. The
amount of fees paid to the Adviser is shown net of the amount of fee reduction.
- ---------------------------------------------------------------------------
Fees Paid Fee Reduction
- ---------------------------------------------------------------------------
Investment Quality Bond $356 $889
Fund
- ---------------------------------------------------------------------------
Diversified Stock Fund $625 $2,640
- ---------------------------------------------------------------------------
Small Company Opportunity $515 $1,118
Fund
- ---------------------------------------------------------------------------
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
30
<PAGE>
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 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.
On November 12, 1999, President Clinton signed a bill repealing the
Glass-Steagall Act. As a result, the Adviser may in the future perform certain
functions for the Funds that previously were not permitted under federal law.
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.
Code of Ethics.
The Funds, the Adviser and the Distributor have each adopted a Code of Ethics to
which all investment personnel and all other "access persons" of the Funds (as
defined in Rule 17j-1 under the 1940 Act) must conform. These Codes of Ethics
permit personnel subject to the Codes to invest in securities, including
securities that may be purchased or held by the Funds. These individuals must
refrain from certain trading practices and are required to report certain
personal investment transactions and holdings. Violations of a Code of Ethics
can result in penalties, suspension, or termination of employment.
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 its 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
31
<PAGE>
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.
The Trust will not execute portfolio transactions through, acquire portfolio
securities issued by, make savings deposits in, or enter into repurchase or
reverse repurchase agreements with the Adviser, Key Trust or their affiliates,
or BISYS or its affiliates, and will not give preference to Key Trust's
correspondent banks or affiliates, or BISYS with respect to such transactions,
securities, savings deposits, repurchase agreements, and reverse repurchase
agreements.
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 and may follow similar investment strategies as the Funds. 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 subsidiaries or affiliates and, in dealing with their
commercial customers, the Adviser, its parents, subsidiaries, and affiliates
will not inquire or take into consideration whether securities of such customers
are held by the Trust.
Portfolio Turnover.
The portfolio turnover rates stated in the Prospectus are calculated by dividing
the lesser of each Fund's purchases or sales of portfolio securities for the
year by the monthly average value of the portfolio securities. The calculation
excludes all securities whose maturities, at the time of acquisition, were one
year or less. Portfolio turnover is calculated on the basis of the Fund as a
whole without distinguishing between the classes of shares issued. The portfolio
turnover rates for Class A shares of each Fund for the period from July 1, 1999
(commencement of operations) to December 31, 1999 were as follows: Investment
Quality Bond Fund: 191%; Diversified Stock Fund: 10% and Small Company
Opportunity Fund: 9%.
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.
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<PAGE>
Unless sooner terminated, the Administration Agreement will continue in effect
as to each Fund for a period of two years, and for consecutive two-year terms
thereafter, provided that such continuance 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
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 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. The
Administrator may delegate all or any part of its responsibilities under the
Administration Agreement.
The following table reflects the aggregate administration fees earned after fee
reductions by the Administrator with respect to Class A shares of each Fund for
the period from July 1, 1999 (commencement of operations) to December 31, 1999.
- ---------------------------------------------------------------------------
Fees Paid Fee Reduction
- ---------------------------------------------------------------------------
Investment Quality Bond $348 $0
Fund
- ---------------------------------------------------------------------------
Diversified Stock Fund $544 $0
- ---------------------------------------------------------------------------
Small Company Opportunity $394 $0
Fund
- ---------------------------------------------------------------------------
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 Trust, 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.
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 Trust, assisting in mailing and filing the
Trust's 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.
33
<PAGE>
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 for one year, and will continue thereafter for consecutive
one-year terms, provided that the renewal 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. 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.
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 Accountant calculates each Fund's NAV, dividend and
capital gain distributions, if any, and yield. The Fund Accountant 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. The Fund Accountant is entitled to receive
annual fees of 0.03% of the first $100 million of each Fund's daily 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 do not include out-of-pocket expenses or multiple
class charges of $833 per month assessed for each class of shares after the
first class.
For the period from July 1, 1999 (commencement of operations) to December 31,
1999, BISYS Ohio received the following fund accounting fees with respect to
Class A shares of the Funds: Investment Quality Bond Fund -- $15,123;
Diversified Stock Fund -- $15,123 and Small Company Opportunity Fund -- $15,123.
34
<PAGE>
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 auditors.
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, including:
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 Funds' 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
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 that are available for distribution.
Shareholders of the Funds are entitled to one vote per share (with proportional
voting for fractional shares) on such matters as shareholders are entitled to
vote ("share-based voting"). Alternatively (except
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<PAGE>
where the 1940 Act requires share-based voting), the Board in its discretion may
determine that shareholders are entitled to one vote per dollar of NAV (with
proportional voting for fractional dollar amounts). Shareholders vote as a
single class on all matters except that (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 an
NAV 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.
The Trust instrument permits the Board to take certain actions without obtaining
shareholder approval, if the Board determines that doing so would be in the best
interests of shareholders. These actions include: (a) reorganizing a Fund with
another investment company or another Fund of the Trust; (b) liquidating a Fund;
(c) restructuring one or more Funds into a "master/feeder" structure, in which
one Fund (the "feeder") would invest all of its assets in a separate "master"
Fund; and (d) amending the Trust Instrument, unless shareholder consent is
required by law.
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
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<PAGE>
to act except for his own bad faith, willful misfeasance, gross negligence, or
reckless disregard of his 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 March 31, 2000, 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 Investment Quality Bond Fund and the Small Company
Opportunity Fund because it beneficially owns more than 25% of each such Fund's
shares.
- -------------------------------------------------------------------------------
Insurance company Percent Percent Owned
separate account name & Owned of Beneficially
address Record
- -------------------------------------------------------------------------------
Investment Quality Nationwide Ins Company 58.56% 58.56%
Bond Fund - Class A NWVA9 Seed Account
C/O IPO Portfolio Accounting
PO Box 182029
Columbus, OH 43218-2029
- -------------------------------------------------------------------------------
Nationwide Ins Company 41.44%
C/O IPO Portfolio Accounting
PO Box 182029
Columbus, OH 43218-2029
- -------------------------------------------------------------------------------
Diversified Stock Nationwide Ins Company 19.36% 19.36%
Fund - Class A NWVA9 Seed Account
C/O IPO Portfolio Accounting
PO Box 182029
Columbus, OH 43218-2029
- -------------------------------------------------------------------------------
Nationwide Ins Company 80.64%
C/O IPO Portfolio Accounting
PO Box 182029
Columbus, OH 43218-2029
- -------------------------------------------------------------------------------
Small Company Nationwide Ins Company 66.98% 66.98%
Opportunity Fund - NWVA9 Seed Account
Class A C/O IPO Portfolio Accounting
PO Box 182029
Columbus, OH 43218-2029
- -------------------------------------------------------------------------------
Nationwide Ins Company 33.02%
C/O IPO Portfolio Accounting
PO Box 182029
Columbus, OH 43218-2029
- -------------------------------------------------------------------------------
Financial Statements
The audited financial statements of the Trust, with respect to all the Funds,
for the period from July 1, 1999 (commencement of operations) to December 31,
1999 are incorporated by reference herein. These financial statements have been
audited by PricewaterhouseCoopers LLP as set forth in their report incorporated
by reference herein, 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
37
<PAGE>
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 NAV 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 NAVs 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 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.
38
<PAGE>
APPENDIX
Description of Security Ratings.
The NRSROs that may be utilized by the Adviser with regard to portfolio
investments for the Funds include Moody's , S&P and Fitch IBCA. 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).
Moody's. Description of the four 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.
S&P. Description of the four 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.
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.
A-1
<PAGE>
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.
Fitch IBCA International Credit Ratings
International credit ratings assess the capacity to meet foreign currency or
local currency commitments. Both "foreign currency" and "local currency" ratings
are internationally comparable assessments. The local currency rating measures
the probability of payment within the relevant sovereign state's currency and
jurisdiction and therefore, unlike the foreign currency rating, does not take
account of the possibility of foreign exchange controls limiting transfer into
foreign currency.
A-2
<PAGE>
Fitch IBCA International Long-Term Credit Ratings
Investment Grade
AAA Highest credit quality. `AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity for
timely payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA Very high credit quality. `AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A High credit quality. `A' ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
BBB Good credit quality. `BBB' ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
"+" or "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the `AAA' long-term rating
category.
Fitch IBCA International Short-Term Credit Ratings
A short term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.
F1 Highest credit quality. Indicates the strongest capacity for timely payment
of financial commitments; they may have an added "+" to denote any exceptionally
strong credit feature.
F2 Good credit quality. A satisfactory capacity for timely payment of financial
commitments, but the margin of safety is not as great as in the case of the
higher ratings.
Note:
RatingAlert: Fitch IBCA Ratings are placed on RatingAlert to notify investors
that there is a reasonable probability of a rating change and the likely
direction of such change. These are designated as "Positive", indicating a
potential upgrade, "Negative", for a potential downgrade, or "Evolving", if
ratings may be raised, lowered or maintained. RatingAlert is typically resolved
over a relatively short period.
<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)
(h)(2) Form of Administration Agreement between Registrant and BISYS.(1)
(h)(3) Form of Sub-Administration Agreement between BISYS and KAM.(1)
(h)(4) Form of Transfer Agency and Service Agreement between Registrant and
State Street Bank and Trust Company.(1)
(h)(5) Form of Participation Agreement among Registrant, BISYS and Nationwide
Life Insurance Company.(1)
(i)(1) Opinion of Morris, Nichols, Arsht & Tunnell, Delaware counsel to the
Trust, relating to the legality of the Trust's shares.
(i)(2) Opinion and Consent of Kramer Levin Naftalis & Frankel LLP, relating
to the legality of the Trust's shares.
(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)
(m)(2) Form of Contract Owner Administrative Services Agreement.(1)
(n) Not applicable.
(p)(1) Code of Ethics of Registrant.
(p)(2) Code of Ethics of KAM.
- -------------------
(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.
C-1
<PAGE>
(p)(3) Code of Ethics of BISYS.
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.(2)
Power of Attorney of Frankie D. Hughes.
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
opinion of independent legal counsel based upon a review of
readily available facts (as opposed to a full trial-type
inquiry).
- ----------------
(2) 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>
(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 $84 billion as of March 31, 2000. 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 $73 billion in assets under management, and provide 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.
C-3
<PAGE>
The principal executive officers and directors of KAM are as follows:
Directors:
- ---------
William G. Spears o Senior Managing Director and Chairman.
Richard J. Buoncore o Senior Managing Director, President and Chief
Executive Officer.
Bradley E. Turner o Senior Managing Director and Chief Operating Officer.
Anthony Aveni o Senior Managing Director and Chief Investment Officer.
Vincent DeP. Farrell o Senior Managing Director. Also, Chief Investment
Officer of Spears, Benzak, Salomon & Farrell Division.
Richard E. Salomon o Senior Managing Director.
Robert B. Heisler, Jr. o Senior Managing Director. Also, President, Key
Capital Partners.
Robert T. Clutterbuck o Senior Managing Director. Also, President, Chief
Financial Officer and Chief Operating Officer of
McDonald Investments Inc.
Other Officers:
- --------------
James D. Kacic o Treasurer. Also, Chief Financial Officer, Chief
Administrative Officer, and Senior Managing Director.
Jeff D. Suhanic o Chief Compliance Officer.
Michael Foisel o Assistant Treasurer.
William J. Blake o Secretary.
Steven N. Bulloch o Assistant Secretary. Also, Senior Vice President and
Senior Counsel of KeyCorp Management Company.
The business address of each of the foregoing individuals is 127 Public Square,
Cleveland, Ohio 44114.
ITEM 27. Principal Underwriter
(a) BISYS Fund Services Limited Partnership (the "Distributor"), an
affiliate of Registrant's administrator, also acts as the distributor
for the following investment companies as of April 14, 2000.
- ----------------------- ----------------------------- --------------------------
Alpine Equity Trust HSBC Funds Trust and HSBC Republic Advisor Funds
American Independence Mutual Funds Trust Trust
Funds Trust The Infinity Mutual Funds, Republic Funds Trust
American Performance Inc. Sefton Funds Trust
Funds Magna Funds Summit Investment Trust
AmSouth Funds Mercantile Mutual Funds, Inc. USAllianz Funds
The BB&T Mutual Funds Metamarkets.com USAllianz Funds Variable
Group Meyers Investment Trust Insurance Products Trust
The Coventry Group MMA Praxis Mutual Funds Variable Insurance Funds
The Eureka Funds M.S.D.&T. Funds The Victory Portfolios
Fifth Third Funds Pacific Capital Funds Vintage Mutual Funds, Inc.
Governor Funds
Hirtle Callaghan Trust
- ----------------------- ------------------------------- ------------------------
C-4
<PAGE>
(b) Directors and officers of BISYS Fund Services, Inc., the general
partner of the Distributor, as of April 14, 2000 were as follows:
Lynn Mangum o Director.
Dennis Sheehan o Director.
Kevin Dell o Vice President and Secretary.
William Tomko o Senior Vice President.
Robert Tuch o Assistant Secretary.
None of the foregoing individuals holds any position with Registrant.
The business address of each of these 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).
(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-5
<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 27th day of April, 2000.
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:
Signature Title Date
--------- ----- ----
/s/ Roger Noall Chairman of the April 27, 2000
- --------------------- Board and Trustee
Roger Noall
/s/ Leigh A. Wilson Trustee April 27, 2000
- ---------------------
Leigh A. Wilson
/s/ Joel B. Engle Treasurer April 27, 2000
- ---------------------
Joel B. Engle
/s/ Theodore H. Emmerich* Trustee April 27, 2000
- -------------------------
Theodore H. Emmerich
/s/ Frankie D. Hughes* Trustee April 27, 2000
- ----------------------
Frankie D. Hughes
/s/ Harry Gazelle* Trustee April 27, 2000
- ------------------
Harry Gazelle
/s/ Eugene J. McDonald* Trustee April 27, 2000
- -----------------------
Eugene J. McDonald
/s/ Thomas F. Morrissey* Trustee April 27, 2000
- ------------------------
Thomas F. Morrissey
/s/ H. Patrick Swygert* Trustee April 27, 2000
- -----------------------
H. Patrick Swygert
/s/ Frank A. Weil* Trustee April 27, 2000
- ------------------
Frank A. Weil
/s/ Donald E. Weston* Trustee April 27, 2000
- ---------------------
Donald E. Weston
- --------------------------------
* By: /s/ Carl Frischling
---------------------------
Carl Frischling
Attorney-in-fact
C-6
<PAGE>
EXHIBIT INDEX
N-1A Item 23
EX-99.i(a) Opinion of Morris, Nichols, Arsht & Tunnell.
EX-99.i(b) Opinion and Consent of Kramer Levin Naftalis & Frankel LLP.
EX-99.j Consent of PricewaterhouseCoopers LLP.
EX-99.p(a) Code of Ethics of Registrant.
EX-99.p(b) Code of Ethics of KAM.
EX-99.p(c) Code of Ethics of BISYS.
[Letterhead of Morris, Nichols, Arsht & Tunnell]
April 27, 2000
Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, New York 10022
Re: The Victory Variable Insurance Funds
Ladies and Gentlemen:
We have acted as special Delaware counsel to The Victory Variable
Insurance Funds, a Delaware business trust (the "Trust"), in connection with
certain matters relating to the formation of the Trust and the issuance of
Shares therein. Capitalized terms used herein and not otherwise herein defined
are used as defined in the Amended and Restated Trust Instrument of the Trust
dated as of October 15, 1998 (the "Governing Instrument").
In rendering this opinion, we have examined and relied upon copies of
the following documents, each in the form provided to us: the Certificate of
Trust of the Trust as filed in the Office of the Secretary of State of the State
of Delaware (the "State Office") on February 11, 1998 (the "Certificate"); the
Amended and Restated Certificate of Trust of the Trust as filed in the State
Office on October 15, 1998; the Governing Instrument; the Trust Instrument of
the Trust dated February 11, 1998 (the "Original Governing Instrument"); the
original Bylaws of the Trust dated February 20, 1998; the Amended and Restated
Bylaws of the Trust dated October 15, 1998 (the "Bylaws"); Post-Effective
Amendment No. 2 to the Registration Statement on Form N-1A of the Trust to be
filed with the Securities and Exchange Commission on or about the date hereof
(the "Post-Effective Amendment"); certain resolutions of the Trustees of the
Trust prepared for adoption at the meetings of the Board of Trustees held on
February 20, 1998, August 28, 1998 and May 11, 1999 (such resolutions, together
with the Governing Instrument, the Bylaws and the Post-Effective Amendment, the
"Governing Documents"); the Trust's Notification of Registration filed pursuant
to Section 8(a) of the Investment Company Act of 1940 on Form N-8A filed with
the Securities and Exchange
<PAGE>
Kramer Levin Naftalis & Frankel LLP
April 27, 2000
Page 2
Commission on August 21, 1998; a Certificate of Assistant Secretary of the Trust
dated April 19, 2000 certifying as to the Governing Instrument and the due
adoption of the resolutions referenced above; and a certification of good
standing of the Trust obtained as of a recent date from the State Office. In
such examinations, we have assumed the genuineness of all signatures, the
conformity to original documents of all documents submitted to us as copies or
drafts of documents to be executed, and the legal capacity of natural persons to
complete the execution of documents. We have further assumed for the purpose of
this opinion: (i) the due authorization, execution and delivery by, or on behalf
of, each of the parties thereto of the above-referenced instruments,
certificates and other documents, and of all documents contemplated by the
Governing Documents to be executed by investors desiring to become Shareholders;
(ii) the payment of consideration for the Shares, and the application of such
consideration, as provided in the Governing Documents and compliance with the
other terms, conditions and restrictions set forth in the Governing Documents in
connection with the issuance of the Shares (including, without limitation, the
taking of all appropriate action by the Trustees to designate Series and Classes
of the Shares and the rights and preferences attributable thereto as
contemplated by the Governing Instrument); (iii) that appropriate notation of
the names and addresses of, the number of the Shares held by, and the
consideration paid by, Shareholders will be maintained in the appropriate
registers and other books and records of the Trust in connection with the
issuance or transfer of the Shares; (iv) that no event has occurred subsequent
to the filing of the Certificate that would cause a termination or
reorganization of the Trust under Sections 11.04 or 11.05 of the Original
Governing Instrument or the Governing Instrument; (v) that the activities of the
Trust have been and will be conducted in accordance with the terms of the
Original Governing Instrument or the Governing Instrument, as applicable, and
the Delaware Business Trust Act, 12 Del. C. ss.ss. 3801 et seq.; (vi) that the
Trust was upon formation, or became within 180 days following the first issuance
of beneficial interest therein, a registered investment company under the
Investment Company Act of 1940, as amended; and (vii) that each of the documents
examined by us is in full force and effect and has not been amended,
supplemented or otherwise modified, except as herein referenced. No opinion is
expressed herein with respect to the requirements of, or compliance with,
federal or state securities or blue sky laws. Further, we express no opinion on
the sufficiency or accuracy of any registration or offering materials relating
to the Trust or the Shares. As to any facts material to our opinion, other than
those assumed, we have relied without independent investigation on the
above-referenced documents and on the accuracy, as of the date hereof, of the
matters therein contained.
Based on and subject to the foregoing, and limited in all respects to
matters of Delaware law, it is our opinion that:
1. The Trust is a duly formed and validly existing business trust in
good standing under the laws of the State of Delaware.
2. The Shares, when issued to Shareholders in accordance with the
terms, conditions, requirements and procedures set forth in the Governing
Documents, will constitute legally issued, fully paid and non-assessable shares
of beneficial interest in the Trust.
<PAGE>
Kramer Levin Naftalis & Frankel LLP
April 27, 2000
Page 3
We understand that you wish to rely on this opinion in connection
with the delivery of your opinion to the Trust dated on or about the date hereof
and we hereby consent to such reliance. Except as provided in the immediately
preceding sentence, this opinion may not be relied on by any person on or for
any purpose without our prior written consent. We hereby consent to the filing
of a copy of this opinion with the Securities and Exchange Commission as part of
the Post-Effective Amendment. In giving this consent, we do not thereby admit
that we come within the category of persons whose consent is required under
Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder. This opinion
speaks only as of the date hereof and is based on our understandings and
assumptions as to present facts and our review of the above-referenced documents
and certificates and the application of Delaware law as the same exists on the
date hereof, and we undertake no obligation to update or supplement this opinion
after the date hereof for the benefit of any person or entity with respect to
any facts or circumstances that may hereafter come to our attention or any
changes in facts or law that may hereafter occur or take effect.
Sincerely,
/s/ MORRIS, NICHOLS, ARSHT & TUNNELL
KRAMER LEVIN NAFTALIS & FRANKEL LLP
919 THIRD AVENUE
NEW YORK, N.Y. 10022 - 3852
TEL (212) 715-9100 47, Avenue Hoche
FAX (212) 715-8000 75008 Paris
France
April 27, 2000
The Victory Variable Insurance Funds
127 Public Square
Cleveland, OH 44114
Re: The Victory Variable Insurance Funds - Post-Effective Amendment
No. 2 to Registration Statement on Form N-1A
Ladies and Gentlemen:
We have acted as counsel for The Victory Variable Insurance Funds, a
Delaware business trust (the "Trust"), in connection with certain matters
relating to the creation of the Trust and the issuance and offering of its
Shares. Capitalized terms used herein and not otherwise herein defined are used
as defined in the Amended and Restated Trust Instrument of the Trust dated as of
October 15, 1998 (the "Governing Instrument").
In rendering this opinion, we have examined and relied upon copies of
the following documents, each in the form provided to us: the Certificate of
Trust of the Trust as filed in the Office of the Secretary of State of the State
of Delaware (the "State Office") on February 11, 1998 (the "Certificate"); the
Amended and Restated Certificate of Trust of the Trust as filed in the State
Office on October 15, 1998; the Governing Instrument; the Trust Instrument of
the Trust dated February 11, 1998 (the "Original Governing Instrument"); the
original Bylaws of the Trust dated February 20, 1998; the Amended and Restated
Bylaws of the Trust dated October 15, 1998 (the "Bylaws"); Post-Effective
Amendment No. 2 to the Registration Statement on Form N-1A of the Trust to be
filed with the Securities and Exchange Commission on or about the date hereof
(the "Post-Effective Amendment"); certain resolutions of the Trustees of the
Trust prepared for adoption at the meetings of the Board of Trustees held on
February 20, 1998, August 28, 1998 and May 11, 1999 (such resolutions, together
with the Governing Instrument, the Bylaws and the Post-Effective Amendment, the
"Governing Documents"); the Trust's Notification of Registration filed pursuant
to Section 8(a) of the Investment Company Act of 1940 on Form N-8A filed with
the Securities and Exchange Commission on August 21, 1998; a Certificate of
Assistant Secretary of the Trust dated April 19, 2000 certifying as to the
Governing Instrument and the due adoption of the resolutions referenced above;
and a certification of good standing of the Trust obtained as of a recent date
from the State Office. In such examinations, we have assumed the genuineness of
all signatures, the conformity to original documents of all documents submitted
to us as copies or drafts of documents to be executed, and the legal capacity of
natural persons to complete the execution of documents.
<PAGE>
The Victory Variable Insurance Funds
April 27, 2000
Page 2
We are members of the Bar of the State of New York and do not hold
ourselves out as experts on, or express any opinion as to, the law of any other
state or jurisdiction other than the laws of the State of New York and
applicable federal laws of the United States. As to matters involving Delaware
law, with your permission, we have relied solely upon an opinion of Morris,
Nichols, Arsht & Tunnell, special Delaware counsel to the Trust, a copy of which
is attached hereto, concerning the organization of the Trust and the
authorization and issuance of the Shares, and our opinion is subject to the
qualifications and limitations set forth therein, which are incorporated herein
by reference as though fully set forth herein.
Based on and subject to the foregoing, it is our opinion that:
1. The Trust is a duly formed and validly existing business trust in
good standing under the laws of the State of Delaware.
2. The Shares, when issued to Shareholders in accordance with the
terms, conditions, requirements and procedures set forth in the Governing
Documents, will constitute legally issued, fully paid and non-assessable shares
of beneficial interest in the Trust.
This opinion is solely for your benefit and is not to be quoted in
whole or in part, summarized or otherwise referred to, nor is it to be filed
with or supplied to any governmental agency or other person without the written
consent of this firm. This opinion letter is rendered as of the date hereof, and
we specifically disclaim any responsibility to update or supplement this letter
to reflect any events or statements of fact which may hereafter come to our
attention or any changes in statutes or regulations or any court decisions which
may hereafter occur.
Notwithstanding the previous paragraph, we consent to the filing of
this opinion as an exhibit to Post-Effective Amendment No. 2 to the Trust's
Registration Statement.
Very truly yours,
/S/ Kramer Levin Naftalis & Frankel LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in Post-Effective Amendment
No. 2 to the Registration Statement on Form N-1A (File No. 333-62051) of our
report dated February 15, 2000, relating to the financial statements and
financial highlights appearing in the December 31, 1999 Annual Report to the
Shareholders of Investment Quality Bond Fund, Diversified Stock Fund, and Small
Company Opportunity Fund (three portfolios constituting Victory Variable
Insurance Funds), which are also incorporated by reference into the Registration
Statement. We also consent to the references to our Firm under the captions
"Financial Highlights" in the Prospectuses and "Financial Statements" and
"Independent Accountants" in the Statement of Additional Information.
/s/ PricewaterhouseCoopers LLP
Columbus, Ohio
April 27, 2000
THE VICTORY PORTFOLIOS
THE VICTORY VARIABLE INSURANCE FUNDS
CODE OF ETHICS
A. Legal Requirements.
------------------
Rule 17j-1(a) under the Investment Company Act of 1940, as amended
(the "1940 Act") makes it unlawful for any officer or Trustee(1)(as well as
other persons) of The Victory Portfolios and The Victory Variable Insurance
Funds (collectively, the "Funds"), in connection with the purchase or sale by
such person of a security "held or to be acquired" by any investment portfolio
of the Funds (each, a "Portfolio" and collectively, the "Portfolios"):
(1) To employ any device, scheme or artifice to defraud a Fund or
Portfolio;
(2) To make to a Fund or Portfolio any untrue statement of a material
fact or to omit to state to the Fund or Portfolio a material fact
necessary in order to make the statements made, in light of the
circumstances under which they are made, not misleading;
(3) To engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon a Fund or
Portfolio; or
(4) To engage in any manipulative practice with respect to a Fund or
Portfolio.
B. Certain Definitions.
-------------------
(1) "Access Person" means
(a) all directors, officers and employees of the Funds and
Portfolios; and
(b) any other person designated by the Compliance Officer
to be an Access Person.
(2) "Beneficial Ownership" means
(a) the receipt of benefits substantially equivalent to
those of ownership through relationship, understanding,
agreement, contract or other arrangements; or
- --------
(1) In this Code of Ethics, "trustees" also refers to "directors" and "Board of
Trustees" also refers to "Board of Directors."
<PAGE>
(b) the power to vest benefits substantially equivalent to
those of ownership in oneself at once or at some future
time.
Generally, a person will be regarded as having a direct or indirect
Beneficial Ownership in securities held in his/her name, as well as in the name
of a spouse, minor children who live with such person, any other relative
(parents, adult children, brothers, sisters, in-laws, etc.) whose investments
the person directs or controls, whether they live together or not. The
definition of "Beneficial Ownership" will be interpreted with reference to the
definition contained in the provisions of Section 16 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and the rules and regulations
thereunder, as such provisions may be interpreted by the Securities and Exchange
Commission, except that the determination of direct or indirect Beneficial
Ownership will apply to all securities which an Access Person has or acquires.
(3) "Compliance Officer" means the Compliance Officer of the Funds.
(4) "Covered Service Provider" means the investment adviser,
administrator and principal underwriter for each Fund.
(5) "Ethics Committee" means the Ethics Committee established by KAM.
(6) "Exempt Security" means: Government securities (as defined by
Section 2(a)(16) of the 1940 Act); shares of registered open-end
investment companies; securities that are not eligible for purchase
or sale by any Fund; and any other security that KAM's Ethics
Committee from time to time may designate as an Exempt Security.
(7) "KAM" means Key Asset Management Inc.
(8) "Reportable Securities" means all securities other than Exempt
Securities.
(9) "Security" shall have the meaning set forth in Section 2(a)(36)
of the 1940 Act, and shall include a related security.
(a) A security is "being considered for purchase or sale"
when a recommendation to purchase or sell such security
has been made and communicated and, with respect to the
person making the recommendation, when such person
seriously considers making such a recommendation.
(b) A security is "held or to be acquired" if within the
most recent 15 days it is or has been held by a Portfolio,
or is being or has been considered by a Portfolio or KAM
for purchase by the Portfolio.
(c) A purchase or sale includes the writing of an option
to purchase or sell.
2
<PAGE>
C. Fund Policies.
-------------
(1) No Access Person shall engage in any act, practice or course of
conduct that would violate the provisions of Rule 17j-1(a) set forth above.
(2) In keeping with the recommendations of the Board of Governors of
the Investment Company Institute, the following general policies shall govern
personal investment activities of Access Persons of a Fund or a Portfolio:
(a) it is the duty of all Access Persons to place the interest of
Fund shareholders first;
(b) all Access Persons shall conduct personal securities transactions
in a manner that is consistent with this Code of Ethics and that
avoids any actual or potential conflict of interest or any abuse of a
position of trust and responsibility; and
(c) no Access Person of a Fund or of a Portfolio shall take
inappropriate advantage of his or her position with the Fund or with
a Portfolio.
D. Procedures.
----------
(1) In order to enable the Funds to determine with reasonable
assurance whether the foregoing policies are being observed by its Access
Persons:
(a) Each Access Person, other than a Trustee who is not an
"interested person" of KAM (as defined in the 1940 Act), shall submit
reports in the form attached hereto as Exhibit A ("Securities
Transaction Reports") to the Fund's Compliance Officer showing all
transactions in Reportable Securities in which the person has, or by
reason of such transaction acquires Beneficial Ownership. Such
reports shall be filed no later than 10 days after the end of each
calendar quarter, but need not show transactions over which such
person had no direct or indirect influence or control.
(b) Each Trustee who is not an "interested person" of KAM shall
submit the same quarterly report as required under paragraph (a), for
each transaction in a Reportable Security when the Trustee knew at
the time of the transaction or, in the ordinary course of fulfilling
official duties as a Trustee, should have known that during the
15-day period immediately preceding or after the date of the
transaction, such security is or was purchased or sold, or was
considered for purchase or sale, by the Fund or Portfolio or the
investment adviser for the Fund or Portfolio. No report is required
if the Trustee has no direct or indirect influence or control over
the transaction.
(c) For purposes of this paragraph D.(1), a trustee who is an
employee of an affiliate of KAM, but who has no day-to-day
responsibilities to KAM or an
3
<PAGE>
affiliate, shall be deemed to be not an interested person of KAM.
Similarly, for purposes of this Paragraph D.(1), an assistant officer
of the Trust who is not an employee of KAM or its affiliates shall
not be considered an Access Person.
(2) The Compliance Officer shall notify each Access Person required
to submit reports pursuant to this Code of Ethics that such person is subject to
this reporting requirement and shall deliver a copy of this Code of Ethics to
such person.
(3) The Compliance Officer shall report to the Board of Trustees:
(a) at the next meeting following the receipt of any Securities
Transaction Report with respect to each reported transaction in a
security which was held or acquired by the Fund or a Portfolio within
15 days before or after the date of the reported transaction or at a
time when, to the knowledge of the Compliance Officer, the Fund, a
Portfolio or the investment adviser for the Fund or a Portfolio was
considering the purchase or sale of such security;
(b) any transaction not required to be reported to the Board by
operation of subparagraph (a) that the Compliance Officer believes
may nonetheless constitute a violation of this Code of Ethics; and
(c) any apparent violation of any reporting requirement hereunder.
(4) The Board of Trustees shall consider reports made to it hereunder
and shall determine whether the policies established in section B above have
been violated, and what sanctions, if any, should be imposed.
(5) The Board of Trustees, including a majority of the Trustees who
are not "interested persons" of the Fund, with advice of counsel to the Funds
and to the disinterested Trustees, shall determine, that each Access Person who
is an employee of a Covered Service Provider shall be subject to this Code of
Ethics or a Code of Ethics adopted by such Covered Service Provider, provided
that:
(a) the Covered Service Provider has adopted a Code of Ethics that
meets the requirements of Rule 17j-1 and substantially conforms to
generally accepted industry and regulatory standards; and
(b) the Covered Service Provider has implemented adequate procedures
for monitoring compliance with its Code of Ethics.
(6) The Board of Trustees shall review the operation of this Code of
Ethics at least once a year. To that end, an appropriate officer of each Fund
shall prepare an annual report to the Board of Trustees that:
4
<PAGE>
(a) summarizes existing procedures of the Fund and its Covered
Service Providers concerning personal investing and any changes in
the procedures made during the past year;
(b) identifies any violations requiring significant remedial action
during the past year; and
(c) identifies any recommended changes in existing restrictions or
procedures of the Fund or its Covered Service Providers based upon
the experience of the Fund or its investment advisers, evolving
industry practices or developments in applicable laws or regulations.
(7) This Code of Ethics, a copy of each Securities Transaction Report
by an Access Person, any written report submitted hereunder required by the
Ethics Committee, and lists of all persons required to make reports shall be
preserved with the Fund records for the period required by Rule 17j-1.
Adopted: February 23, 1999
- -------
The Board of Trustees of The Victory Portfolios
The Board of Trustees of The Victory Variable Insurance Funds
5
<PAGE>
EXHIBIT A
THE VICTORY PORTFOLIOS
THE VICTORY VARIABLE INSURANCE FUNDS
SECURITY TRANSACTION REPORT
For The Calendar Quarter Ended __________
Instructions:
1. List all transactions in Reportable Securities in any account in
which you have a Beneficial Ownership. Please write "none" if you have no
transactions in Reportable Securities during the quarter. If you submit copies
of monthly brokerage statements covering all transactions in Reportable
Securities, please write "see monthly statements."
2. If you are Trustee who is not an "interested person" of KAM, then
you need only report transactions in Reportable Securities when you knew at the
time of the transaction or, in the ordinary course of fulfilling your duties as
a Trustee, or you should have known, that during the 15-day period immediately
preceding or after the date of the transaction, such security is or was
purchased or sold, or was considered for purchase or sale, by the Funds. Please
write "none" if you have no transactions in Reportable Securities during the
quarter that meet the above conditions.
3. Use additional sheets if necessary.
<TABLE>
<CAPTION>
No. of Shares Broker, Dealer or
Name of Security Date of or Principal Other Party Through
Transaction Purchase/Sale Amount Price Whom Transaction Was Made
<S> <C> <C> <C> <C> <C>
- ---------------- ----------- ------------ ------------ ----- -------------------------
- ---------------- ----------- ------------ ------------ ----- -------------------------
- ---------------- ----------- ------------ ------------ ----- -------------------------
- ---------------- ----------- ------------ ------------ ----- -------------------------
- ---------------- ----------- ------------ ------------ ----- -------------------------
- ---------------- ----------- ------------ ------------ ----- -------------------------
</TABLE>
I certify that the information provided above is correct.
Date:______________ Signature:_____________________
KEY ASSET MANAGEMENT INC.
INVESTMENT ADVISER CODE OF ETHICS
CONCERNING PERSONAL CONDUCT & SECURITIES TRANSACTIONS
1. Purposes
Rule 17j-1 under the Investment Company Act of 1940, as amended (the "1940
Act") generally proscribes fraudulent or manipulative practices with respect to
purchases or sales of securities held or to be acquired by investment companies,
if effected by associated persons of such companies. Section 204A of the
Investment Advisers Act of 1940, as amended ("Advisers Act"), requires every
registered investment adviser to establish, maintain and enforce written
policies and procedures reasonably designed to prevent the misuse of material,
nonpublic information by such investment adviser or any person associated with
such investment adviser.
The purpose of this Code of Ethics is to provide regulations and
procedures consistent with the 1940 Act, Rule 17j-1 thereunder and Section 204A
of the Advisers Act. It is designed to give effect to the general prohibitions
set forth in Rule 17j-1(a), as follows:
(a) It shall be unlawful for any affiliated person of or principal
underwriter for a registered investment company, or any affiliated
person of an investment adviser of or principal underwriter for a
registered investment company, in connection with the purchase or
sale, directly or indirectly, by such person of a security held or
to be acquired, as defined in this section, by such registered
investment company --
(1) To employ any device, scheme or artifice to defraud such
registered investment company,
(2) To make to such registered investment company any untrue
statement of a material fact or omit to state to such
registered investment company a material fact necessary
in order to make the statements made, in light of the
circumstances under which they are made, not misleading,
(3) To engage in any act, practice, or course of business
which operates or would operate as a fraud or deceit
upon any such registered investment company, or
(4) To engage in any manipulative practice with respect to
such registered investment company.
In addition, this Code of Ethics sets forth procedures to deter the misuse of
material, nonpublic information, in Appendix I hereto.
The provisions of this Investment Adviser Code of Ethics Concerning
Personal Securities Transactions and the attached Policy Statement on Insider
Trading are in addition to, and not a substitute for, the KeyCorp Code of Ethics
and the KeyCorp Policy on Public Disclosure and
<PAGE>
Securities Trading, or any successors thereto, which Code of Ethics and Policy
shall apply to all officers, directors and employees of Key Asset Management
Inc.
2. Definitions
(a) "Account" means any Fund or other investment advisory client.
(b) "Adviser" means Key Asset Management Inc.
(c) "Access person" means any director, officer or advisory person of
the Adviser, and those persons employed by affiliates of the Adviser
whose employment duties necessitate access to the business and
affairs of the Adviser.
(d) "Advisory person" means (i) all Investment Personnel, (ii) any
employee of the Adviser or of any company in a control relationship
to the Adviser who, in connection with his or her regular functions
or duties, makes, participates in, or obtains information regarding
the purchase or sale of a security by an Account, or whose functions
relate to the making of any recommendations with respect to such
purchases or sales; and (iii) any natural person in a control or
affiliate relationship to the Adviser who obtains information
concerning recommendations made to an Account with regard to the
purchase or sale of a security.
(e) A security is "being considered for purchase or sale" when a
recommendation to purchase or sell a security has been made and
communicated to other investment persons within the Adviser and,
with respect to the person making the recommendation, when such
person seriously considers making such a recommendation.
(f) "Beneficial ownership" shall be interpreted with reference to the
definition contained in the provisions of Section 16 of the
Securities Exchange Act of 1934, as amended ("Exchange Act") and the
rules and regulations thereunder, as such provisions may be
interpreted by the Securities and Exchange Commission ("SEC"),
except that the determination of direct or indirect beneficial
ownership shall apply to all securities which an access person has
or acquires. In general, an access person would have a beneficial
ownership interest in any account in which the access person either
directly, or indirectly derives some form of financial benefit. This
extends to the access person's immediate family. Generally speaking,
any accounts in which the access person, or a member of the
immediate family of the access person derives some form of financial
benefit and has the ability to direct trades, would be considered an
account where a beneficial ownership interest exists. Examples of
such accounts would include a brokerage account or a self-directed
IRA. Although a charitable trust or charitable foundation would not
result in a direct beneficial ownership interest, thus not requiring
trade preclearance by investment personnel, the investment person
continues to be obligated to comply with Sections 9 and 12 of this
Code.
(g) "Control" shall have the meaning set forth in Section 2(a)(9) of the
1940 Act.
2
<PAGE>
(h) "Fund" means any registered investment company for which the Adviser
serves as investment adviser.
(i) "Investment Personnel" or "Investment Person" means any Portfolio
Manager, and any person whose regular function or duty is to
support, or participate in, the portfolio management function and
the investment decision-making process, including, but not limited
to, analysts and traders who provide information and advice to a
Portfolio Manager or who help execute a Portfolio Manager's
decisions. For purposes of this Code of Ethics, all Senior Managing
Directors, Managing Directors, and Directors of the Adviser and
other persons serving in a portfolio management, research or trading
capacity shall be deemed to be "investment personnel". If an access
person becomes aware of information or activities that are normally
within the function and responsibilities of an investment person,
then such access person shall be treated as an investment person for
the purpose of complying with this Code.
(j) "Portfolio Manager" means any employee entrusted with the direct
responsibility and authority to make investment decisions affecting
an Account.
(k) "Purchase or sale of a security" includes the writing of an option
to purchase or sell a security and short sales, in addition to an
actual purchase or sale.
(1) "Security" shall have the meaning set forth in Section 2(a)(36) of
the 1940 Act, except that it shall not include shares of
unaffiliated registered open-end investment companies, securities
issued or guaranteed as to principal and interest by the Government
of the United States, short term debt securities which are
"government securities" within the meaning of Section 2(a)(16) of
the 1940 Act, bankers' acceptances, bank certificates of deposit,
commercial paper and such other money market instruments as
designated by the Board of Directors of the Adviser.
3. Statement of General Principles
In addition to the specific prohibitions set forth below, all access
persons shall conduct their personal investment activities in a manner
consistent with the following general fiduciary principles:
(a) the duty at all times to place the interests of the Accounts first,
including the interests of shareholders of a Fund;
(b) the requirement that all personal securities transactions be
conducted in such a manner as to avoid any actual or potential
conflict of interest, the appearance of a conflict of interest, any
abuse of an individual's position of trust and responsibility or any
appearance of a conflict of interest; and
(c) the fundamental standard that access persons should not take
inappropriate advantage of their positions.
3
<PAGE>
4. Prohibited Activities for Investment Personnel
In addition to the prohibited activities set forth in Section 5 of this
Code of Ethics:
(a) No investment person shall reveal to any other person (except in the
normal course of his or her duties on behalf of the Adviser) any
information regarding securities transactions by the Accounts or
consideration by the Accounts or the Adviser of any such securities
transaction.
(b) No investment person shall recommend any securities transaction by
the Accounts, including the purchase or sale of such security, or
the addition to, deletion from or change in weighing of any such
security in any of the Adviser's model portfolios, without having
disclosed his or her interest, if any, in such securities or the
issuer thereof, including without limitation (i) his or her direct
or indirect beneficial ownership of any securities of such issuer,
(ii) any contemplated transaction by such person in such securities,
(iii) any position with such issuer or its affiliates, and (iv) any
present or proposed business relationship between such issuer or its
affiliates, on the one hand, and such person or any party in which
such person has a significant interest, on the other.
(c) No investment person shall purchase or sell any security for any
account in which he or she has any direct or indirect beneficial
ownership interest without placing such transaction through one of
the Adviser's regional trading desks. All such transactions placed
with the equity trading desk shall be submitted using the personal
trade order form attached hereto as Appendix III, and shall be
executed by the regional trading desk in accordance with Section 6
of this Code of Ethics. In cases where the Investment Person's
account is traded on-line via the Internet (e.g., E-Trade,
Waterhouse On-Line, Schwab, etc.), such Investment Person shall be
authorized to place the order only after obtaining written
pre-clearance from the regional trading desk evidenced by the
approval of the personal trade order form.
5. Prohibited Activities for Advisory Personnel
(a) No advisory person shall acquire any securities in an initial public
offering.
(b) No advisory person shall acquire any securities in a private
placement without the prior approval of the Chief Compliance Officer
and the Chief Executive Officer of the Adviser. The prior approval
should take into account, among other factors, whether the
investment opportunity should be reserved for one or more Accounts,
and whether the opportunity is being offered to an individual by
virtue of his or her position with the Adviser. Any authorized
investment in a private placement must be disclosed by such advisory
person to the Adviser's Chief Investment Officer when he or she
plays any part in an Account's subsequent consideration of an
investment in securities of the issuer, and any decision by the
Account to purchase securities of the issuer will be subject to an
independent review by personnel of the Adviser with no personal
interest in the issuer.
4
<PAGE>
(c) No advisory person shall serve on the board of directors of any
for-profit company without the prior approval of the Chief
Compliance Officer and the Chief Executive Officer of the Adviser of
such intended service. Advisory persons serving as directors shall
be isolated from those persons making investment decisions with
respect to the securities of the issuer through "Chinese Wall" or
other procedures specified by the Chief Compliance Officer absent a
determination by the Chief Compliance Officer to the contrary for
good cause shown. The requirements of this Section 5 (c) are in
addition to, and not in lieu of, the requirements of KeyCorp's Code
of Ethics, which requires similar approval from a KeyCorp code of
ethics officer.
6. Trading Preclearance Procedures
All transactions in equities or securities having equity-like
characteristics (e.g., convertible bonds, convertible preferreds, options, etc),
entered into by an investment person shall be precleared by the equity trading
desk through which such investment person's personal trade was placed. All such
trades shall be subject to the following trading preclearance procedures:
(a) Personal trades placed by an investment person in an equity
(including closed-end mutual funds) having a market capitalization
of less than $ 2.5 billion, or where the proposed personal trade
represents more than 1% of the average daily shares traded, shall be
reviewed by the trade desk through which the trade was placed to
determine the following: (1) If such security is currently being
traded by either the New York or Cleveland equity trading desks.
Such information shall be determined by contacting the other
regional trade desk; and, (2) If such security has been recently
proposed for purchase or sale by either the New York or Cleveland
offices of the Adviser. Such information shall be determined through
correspondence with the Chief Investment Officers of the New York
and Cleveland offices, or in their absence, an appropriate designee.
In each case of preclearance, the foregoing information shall be
determined prior to execution. If it is so determined that either
office is active in trading the security or if such security has
been recently proposed for purchase or sale, the personal security
trade shall be denied execution. Otherwise, the trade shall be
immediately executed. In cases where the personal trade has been
denied execution, such security trade may be executed on the first
trade day following the most recent trading day in which all trading
activity (regardless of materiality) in such security on behalf of
the Accounts or Funds ceases to exists. On all trades denied
execution, it shall be the responsibility of the investment person
to resubmit the personal trade on the following trade day if the
trade is still desired.
(b) Personal trades placed by an investment person in an equity
(including closed-end mutual funds) having a market capitalization
of more than $2.5 billion, and where the proposed personal trade
represents less than 1% of the average daily shares traded shall be
reviewed by the equity trading desk through which the trade was
placed, to determine only if such security is currently being traded
by that desk. If the equity trading desk is currently trading such
security on behalf of Accounts
5
<PAGE>
pursuant to a material model portfolio change or security
recommendation, or on behalf of a Fund, the personal trade shall be
denied execution. Such security trade may be executed on the first
trade day following the most recent trading day in which material
trading activity in such security on behalf of the Accounts or Funds
ceases to occur. Otherwise, if the equity trade desk is inactive in
the security, or not working material orders in the security, the
trade shall be immediately executed. The determination of whether
trade activity in a given security is material or not, will be at
the sole discretion of the equity trading desk. On all trades denied
execution, it shall be the responsibility of the investment person
to resubmit the personal trade on the following trade day if the
trade is still desired.
(c) All personal trades placed by an investment person in a convertible
security, regardless of the size of the order or the market cap of
the underlying equity, shall be reviewed by the equity trading desk
through which the trade was placed to determine the following: (1)
If such security is currently being traded by the convertible desk
in Cleveland. Such information shall be determined by contacting the
convertible desk in Cleveland; and, (2) If such security has been
recently proposed for purchase or sale by the convertible desk in
Cleveland. Such information shall be determined through
correspondence with the Senior Managing Director of the convertible
desk in Cleveland, or in his absence, an appropriate designee. In
each case of preclearance, the foregoing information shall be
determined prior to execution. If it is so determined that the
convertible desk in Cleveland is active in trading the security or
if such security has been recently proposed for purchase or sale,
the personal security trade shall be denied execution. Otherwise,
the trade shall be immediately executed. In cases where the personal
trade has been denied execution, such security trade may be executed
on the first trade day following the most recent trading day in
which all trading activity (regardless of materiality) in such
security on behalf of the Accounts or Funds ceases to exists. On all
trades denied execution, it shall be the responsibility of the
investment person to resubmit the personal trade on the following
trade day if the trade is still desired.
(d) All personal trades placed by an investment person in a security
which derives its value from an equity (e.g., put and call options),
shall be reviewed in accordance with paragraphs (a) and (b) as if
the underlying equity were being traded.
7. Exempted Transactions
The prohibitions of Sections 4, 5 and 6 of this Code of Ethics shall not
apply to:
(a) Purchases or sales effected in any account over which the access
person has no direct or indirect influence or control.
(b) Purchases or sales which are non-volitional on the part of either
the access person or the Accounts.
6
<PAGE>
(c) Purchases which are part of an automatic dividend reinvestment plan
or employer sponsored discounted stock purchase program.
(d) Purchases effected upon the exercise of rights issued by an issuer
pro rata to all holders of a class of its securities, to the extent
such rights were acquired from such issuer, and sales of such rights
so acquired.
(e) Sales which are effected pursuant to a tender offer or similar
transaction involving an offer to acquire all or a significant
portion of a class of securities.
(f) Purchases or sales in shares of mutual funds (both affiliated and
non-affiliated), government securities and money market investments.
8. Reporting
(a) In addition to the reports provided in this Section 8, every access
person must direct his or her broker to provide to the Compliance
Officer, on a timely basis, duplicate copies of confirmations of all
personal securities transactions.
(b) No later than ten calendar days following the end of each calendar
quarter, every access person shall report to the Compliance Officer
the information described in subsection (c) of this Section 8 with
respect to each transaction, effected during such preceding calendar
quarter, in any security in which such access person has, or by
reason of such transaction acquires, any direct or indirect
beneficial ownership in the security; notwithstanding the foregoing,
the following transactions will be exempt from the requirements of
this subsection (b): (i) transactions in securities of the U.S.
government, its agencies or instrumentalities; (ii) transactions in
shares of open-end mutual funds that are not advised by the Adviser
or any direct or indirect affiliate of the Adviser or KeyCorp; (iii)
transactions in any account over which such access person has no
direct influence or control; (iv) transactions in shares of any
money market mutual fund, whether affiliated or unaffiliated; (v)
transactions in mutual fund shares purchased by a 401(k) account
(individual equities purchased in any 401(k) or IRA account are ---
reportable securities); and, (vi) transactions in securities
pursuant to a dividend reinvestment plan or employer-sponsored
discounted stock purchase program.
(c) Every report described in subsection (b) of this Section 8 shall
contain the following information:
(i) The date of the transaction, the title and the number of
shares or the par value of each security involved;
(ii) The nature of the transaction (i.e., purchase, sale or
any other type of acquisition or disposition); ---
(iii) The price at which the transaction was effected; and
7
<PAGE>
(iv) The name of the broker, dealer or bank with or through
whom the transaction was effected.
9. AIMR Code of Ethics and Standards of Professional Conduct
The Board of Directors of the Adviser has adopted the AIMR (Association
for Investment Management and Research) Code of Ethics and Standards of
Professional Conduct ("AIMR Code"), a copy of which is attached hereto as
Appendix II. Although the Adviser acknowledges that not all investment persons
are members of AIMR, the Adviser has chosen to adopt the AIMR Code as it
embodies an industry standard of high moral and professional conduct and
integrity. The AIMR Code shall apply to all investment persons.
10. Violations; Exceptions
Failure to comply with any provision of this Code of Ethics, including but
not limited to the requirement to preclear transactions and to provide complete
and accurate quarterly reports shall be a violation of this Code of Ethics, and
shall be reported by the Chief Compliance Officer to the President and Chief
Executive Officer of the Adviser. The President and the Chief Compliance Officer
may, in their discretion, report material violations to the Board of Directors
of the Adviser. Exceptions to the provisions of this Code of Ethics shall be
considered by the Chief Compliance Officer and the Chief Executive Officer on a
case-by-case basis and shall be granted, in the sole discretion of the Chief
Compliance Officer and the Chief Executive Officer, only if the facts and
circumstances permit.
11. Sanctions
Upon discovering a violation of this Code, the Board of Directors of the
Adviser may impose such sanctions as it deems appropriate, including, but not
limited to, a letter of censure or suspension or termination of the employment
of the violator. All material violations of this Code and any sanctions imposed
with respect thereto may, in the discretion of the President and the Chief
Executive Officer of the Adviser, be reported periodically to the Board of
Directors of the Funds.
12. Insider Trading
The Board of Directors of the Adviser has adopted a policy statement on
insider trading and conflicts of interest (the "Policy Statement"), a copy of
which is attached hereto as Appendix I. All access persons are required by this
Code to read and familiarize themselves with their responsibilities under this
Code and the Policy Statement. All access persons shall certify annually that
they have read and understand this Code and the Policy Statement, and that they
have complied with the requirements thereof, and the Compliance Officer shall
maintain a copy of each executed Acknowledgment.
8
<PAGE>
Appendix I
POLICY STATEMENT ON INSIDER TRADING
A. Introduction
Key Asset Management Inc. (the "Adviser") seeks to foster a reputation for
integrity and professionalism. That reputation is a vital business asset. The
confidence and trust placed in us by our clients is something we should value
and endeavor to protect. To further that goal, this Policy Statement implements
procedures to determine the misuse of material, nonpublic information in
securities transactions.
Trading securities while in possession of material, nonpublic information
or improperly communicating that information to others may expose you to
stringent penalties. Criminal sanctions may include a fine of up to $1,000,000
and/or ten years imprisonment. The Securities and Exchange Commission ("SEC")
can recover the profits gained or losses avoided through the violative trading,
a penalty of up to three times the illicit windfall and an order permanently
barring you from the securities industry. Finally, you may be sued by investors
seeking to recover damages for insider trading violations.
Regardless of whether a government inquiry occurs, the Adviser views
seriously any violation of this Policy Statement. Such violations constitute
grounds for disciplinary sanctions, including dismissal.
B. Scope of the Policy Statement
This Policy Statement is drafted broadly; it will be applied and
interpreted in a similar manner. This Policy Statement applies to securities
trading and information handling by directors, officers, and employees of the
Adviser (including spouses, minor children, and adult members of their
households).
The law of insider trading is unsettled; an individual legitimately may be
uncertain about the application of the Policy Statement in a particular
circumstance. Often, a single question can forestall disciplinary action or
complex legal problems. You should direct any questions relating to the Policy
Statement to the Chief Compliance Officer. You also must notify the Chief
Compliance Officer immediately if you have any reason to believe that a
violation of the Policy Statement has occurred or is about to occur.
C. Policy Statement
No person to whom this Policy Statement applies, including you, may trade,
either personally or on behalf of others, while in possession of material,
nonpublic information; no personnel of the Adviser may communicate material,
nonpublic information to others in violation of the law. This section reviews
principles important to the Policy Statement.
<PAGE>
1. What is Material Information?
Information is "material" when there is a substantial likelihood that a
reasonable investor would consider it important in making his or her investment
decisions. Generally, this is information whose disclosure will have a
substantial effect on the price of a company's securities. No simple "bright
line" test exists to determine when information is material; assessments of
materiality involve a highly fact-specific inquiry. For this reason, you
should direct any questions about whether information is material to the Chief
Compliance Officer.
Material information often relates to a company's results and operations
including, for example, dividend changes, earning results, changes in previously
released earnings estimates, significant merger or acquisition proposals or
agreements, major litigation, liquidation problems, and extraordinary management
developments.
Material information also may relate to the market for a company's
securities. Information about a significant order to purchase or sell securities
may, in some contexts, be deemed material. Similarly, prepublication information
regarding reports in the financial press also may be deemed material. For
example, the U.S. Supreme Court upheld the criminal convictions of insider
trading defendants who capitalized on prepublication information about the Wall
Street Journal's "Heard on the Street" column.
2. What is Nonpublic Information?
Information is "public" when it has been disseminated broadly to investors
in the marketplace. Tangible evidence of such dissemination is the best
indication that the information is public. For example, information is public
after it has become available to the general public through a public filing with
the SEC or some other government agency, the Dow Jones "tape" or the Wall Street
Journal or some other publication of general circulation, and after sufficient
time has passed so that the information has been disseminated widely.
3. Identifying Inside Information
Before executing any trade for yourself or others, including Accounts, you
must determine whether you have access to material, nonpublic information. If
you think that you might have access to material, nonpublic information, you
should take the following steps:
(i) Report the information and proposed trade immediately to the
Compliance Officer.
(ii) Do not purchase or sell the securities on behalf of yourself or
others, including the Accounts.
(iii) Do not communicate the information inside or outside the Advisers,
other than to the Compliance Officer, and your supervisor if
necessary.
(iv) After the Compliance Officer has reviewed the issue, the firm will
determine whether the information is material and nonpublic and, if
so, what action the firm should take.
<PAGE>
You should consult with the Compliance Officer before taking any action.
This degree of caution will protect you, your clients and the firm.
4. Contact with Public Companies
The Adviser's contacts with public companies represent an important part
of our research efforts. The Adviser may make investment decisions on the basis
of the firm's conclusions formed through such contacts and analysis of publicly
available information. Difficult legal issues arise, however, when, in the
course of these contacts, an employee or other person subject to this Policy
Statement becomes aware of material, nonpublic information. This could happen,
for example, if a company's Chief Financial Officer were to prematurely disclose
quarterly results to an analyst, or an investor relations representative makes a
selective disclosure of adverse news to a handful of investors. In such
situations, the Adviser must make a judgment as to their further conduct. To
protect yourself, your clients and the firm, you should contact the Chief
Compliance Officer immediately if you believe that you may have received
material, nonpublic information.
5. Tender Offers
Tender offers represent a particular concern in the law of insider trading
for two reasons. First, tender offer activity often produces extraordinary
gyrations in the price of the target company's securities. Trading during this
time period is more likely to attract regulatory attention (and produces a
disproportionate percentage of insider trading cases). Second, the SEC has
adopted a rule which expressly forbids trading and "tipping" while in possession
of material, nonpublic information regarding a tender offer received from the
tender offeror, the target company or anyone acting on behalf of either.
Employees and others subject to this Policy Statement should exercise particular
caution any time they become aware of nonpublic information relating to a tender
offer.
<PAGE>
AIMR
Association for Investment Management and Research
Code of Ethics and Standards of Professional Conduct
As amended and restated May 5, 1996
The Code of Ethics
Members of the Association for Investment Management and Research shall:
o Act with integrity, competence, dignity, and in an ethical manner when
dealing with the public, clients, prospects, employers, employees, and
fellow members.
o Practice and encourage others to practice in a professional and ethical
manner that will reflect credit on members and their profession.
o Strive to maintain and improve their competence and the competence of
others in the profession.
o Use reasonable care and exercise independent professional judgment.
The Standards of Professional Conduct
Standard I: Fundamental Responsibilities
Members shall:
A. Maintain knowledge of and comply with all applicable laws, rules, and
regulations (including AIMR's Code of Ethics and Standards of Professional
Conduct) of any government, regulatory organization, licensing agency, or
professional association governing the members' professional activities.
B. Not knowingly participate or assist in any violation of such laws, rules, or
regulations.
Standard II: Relationships with and Responsibilities to the Profession
A. Use of Professional Designation.
1. Membership in AIMR, the Financial Analysts Federation (FAF), or the
Institute of Chartered Financial Analysts (ICFA) may be referenced
by members of these organizations only in a dignified and judicious
manner. The use of the reference may be accompanied by an accurate
explanation of the requirements that have been met to obtain
membership in these organizations.
2. Holders of the Chartered Financial Analyst designation may use the
professional designation "Chartered Financial Analyst," or the mark
"CFA," and are encouraged to do so, but only in a dignified and
judicious manner. The use of the
<PAGE>
designation may be accompanied by an accurate explanation of the
requirements that have been met to obtain the designation.
3. Candidates may reference their participation in the CFA Program, but
the reference must clearly state that an Individual is a candidate
for the CFA designation and may not imply that the candidate has
achieved any type of partial designation.
B. Professional Misconduct. Members shall not engage in any professional conduct
involving dishonesty, fraud, deceit, or misrepresentation or commit any act that
reflects adversely on their honesty, trustworthiness, or professional
competence.
C. Prohibition against Plagiarism. Members shall not copy or use, in
substantially the same form as the original, material prepared by another
without acknowledging and identifying the name of the author, publisher or
source of such material. Members may use, without acknowledgment, factual
information published by recognized financial and statistical reporting services
or similar sources.
Standard III: Relationships with and Responsibilities to the Employer
A. Obligation to Inform Employer of Code and Standards.
Members shall:
1. Inform their employer, through their direct supervisor, that they
are obligated to comply with the Code and Standards and are subject
to disciplinary sanctions for violations thereof.
2. Deliver a copy of the Code and Standards to their employer if the
employer does not have a copy.
B. Duty to Employer. Members shall not undertake any independent practice that
could result in compensation or other benefit in competition with their employer
unless they obtain written consent from both their employer and the persons or
entities for whom they undertake independent practice.
C. Disclosure of Conflicts to Employer. Members shall:
1. Disclose to their employer all matters, including beneficial
ownership of securities or other investments, that reasonably could
be expected to interfere with their duty to their employer or
ability to make unbiased and objective recommendations.
2. Comply with any prohibitions on activities imposed by their employer
if a conflict of interest exists.
<PAGE>
D. Disclosure of Additional Compensation Arrangements. Members shall disclose to
their employer in writing all monetary compensation or other benefits that they
receive for their services that are in addition to compensation or benefits
conferred by a member's employer.
E. Responsibilities of Supervisors. Members with supervisory responsibility,
authority, or the ability to influence the conduct of others shall exercise
reasonable supervision over those subject to their supervision or authority to
prevent any violation of applicable statutes, regulations, or provisions of the
Code and Standards. In so doing, members are entitled to rely on reasonable
procedures designed to detect and prevent such violations.
Standard IV: Relationships with and Responsibilities to Clients and Prospects
A. Investment Process.
A.1 Reasonable Basis and Representations. Members shall:
a. Exercise diligence and thoroughness in making investment
recommendations or in taking investment actions.
b. Have a reasonable and adequate basis, supported by appropriate
research and investigation, for such recommendations or actions.
c. Make reasonable and diligent efforts to avoid any material
misrepresentation in any research report or investment
recommendation.
d. Maintain appropriate records to support the reasonableness of such
recommendations or actions.
A.2 Research Reports. Members shall:
a. Use reasonable judgment regarding the inclusion or exclusion of
relevant factors in research reports.
b. Distinguish between facts and opinions in research reports.
c. Indicate the basic characteristics of the investment involved when
preparing for public distribution a research report that is not
directly related to a specific portfolio or client.
A.3 Independence and Objectivity. Members shall use reasonable care and judgment
to achieve and maintain independence and objectivity in making investment
recommendations or taking investment action.
B. Interactions with Clients and Prospects.
B.1 Fiduciary Duties. In relationships with clients, members shall use
particular care in determining applicable fiduciary duty and shall comply with
such duty as to those persons and
<PAGE>
interests to whom the duty is owed. Members must act for the benefit of their
clients and place their clients' interests before their own.
B.2 Portfolio Investment Recommendations and Actions.
Members shall:
a. Make a reasonable inquiry into a client's financial situation,
investment experience, and investment objectives prior to making any
investment recommendations and shall update this information as
necessary, but no less frequently than annually, to allow the
members to adjust their investment recommendations to reflect
changed circumstances.
b. Consider the appropriateness and suitability of investment
recommendations or actions for each portfolio or client. In
determining appropriateness and suitability, members shall consider
applicable relevant factors, including the needs and circumstances
of the portfolio or client, the basic characteristics of the
investment involved, and the basic characteristics of the total
portfolio. Members shall not make a recommendation unless they
reasonably determine that the recommendation is suitable to the
client's financial situation, investment experience, and investment
objectives.
c. Distinguish between facts and opinions in the presentation of
investment recommendations.
d. Disclose to clients and prospects the basic format and general
principles of the investment processes by which securities are
selected and portfolios are constructed and shall promptly disclose
to clients and prospects any changes that might significantly affect
those processes.
B.3 Fair Dealing. Members shall deal fairly and objectively with all clients and
prospects when disseminating investment recommendations, disseminating material
changes in prior investment recommendations, and taking investment action.
B.4 Priority of Transactions. Transactions for clients and employers shall have
priority over transactions in securities or other investments of which a member
is the beneficial owner so that such personal transactions do not operate
adversely to their clients' or employer's interests. If members make a
recommendation regarding the purchase or sale of a security or other investment,
they shall give their clients and employer adequate opportunity to act on the
recommendation before acting on their own behalf. For purposes of the Code and
Standards, a member is a "beneficial owner" if the member has:
a. a direct or indirect pecuniary interest in the securities;
b. the power to vote or direct the voting of the shares of the
securities or investments;
c. the power to dispose or direct the disposition of the security or
investment.
<PAGE>
B.5 Preservation of Confidentiality. Members shall preserve the confidentiality
of information communicated by clients, prospects, or employers concerning
matters within the scope of the client-member, prospect-member, or
employer-member relationship unless the member receives information concerning
illegal activities on the part of the client, prospect, or employer.
B.6 Prohibition against Misrepresentation. Members shall not make any
statements, orally or in writing, that misrepresent:
a. the services that they or their firms are capable of performing;
b. their qualifications or the qualifications of their firm;
c. the member's academic or professional credentials. Members shall not
make or imply, orally or in writing, any assurances or guarantees
regarding any investment except to communicate accurate information
regarding the terms of the investment instrument and the issuer's
obligations under the instrument.
B.7 Disclosure of Conflicts to Clients and Prospects. Members shall disclose to
their clients and prospects all matters, including beneficial ownership of
securities or other investments, that reasonably could be expected to impair the
member's ability to make unbiased and objective recommendations.
B.8 Disclosure of Referral Fees. Members shall disclose to clients and prospects
any consideration or benefit received by the member or delivered to others for
the recommendation of any services to the client or prospect.
Standard V: Relationships with and Responsibilities to the Investing Public
A. Prohibition against Use of Material Nonpublic Information. Members who
possess material nonpublic information related to the value of a security shall
not trade or cause others to trade in that security if such trading would breach
a duty or if the information was misappropriated or relates to a tender offer.
If members receive material nonpublic information in confidence, they shall not
breach that confidence by trading or causing others to trade in securities to
which such information relates. Members shall make reasonable efforts to achieve
public dissemination of material nonpublic information disclosed in breach of a
duty.
B. Performance Presentation.
1. Members shall not make any statements, orally or in writing, that
misrepresent the investment performance that they or their firm have
accomplished or can reasonably be expected to achieve.
2. If members communicate individual or firm performance information
directly or indirectly to clients or prospective clients, or in a
manner intended to be received by clients or prospective clients,
members shall make every reasonable effort to assure that such
performance information is a fair, accurate, and complete
presentation of such performance.
<PAGE>
Personal Trade Request
Key Asset Management Inc.
To Be Completed By Employee
Employee Name:_____________________________ DATE:_____________________
(please circle)
- -------------------------------------------------------------------------------
BUY SELL LIMIT GTC OTHER
- -------------------------------------------------------------------------------
Full Security Name
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Ticker Symbol Number of Shares (state for each account)
- --------------------- -------------------------------------------------------
- --------------------- -------------------------------------------------------
Special Instructions
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Name of Brokerage Film
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Phone Number of Broker
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Account Number(s)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Name of Broker Rep
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
To Be Completed By Trade
Preclearance Name of individual(s)
confirmed with
CLE NYC
Trade desk Currently Active in YES NO ____________________________
Issue:
Being Considered For Purchase YES NO ____________________________
or Sale
Trader: DENIED APPROVED ____________________________
Date:
____________________________
<PAGE>
Acknowledgment
I have read and understand the Investment Adviser Code of Ethics
Concerning Personal Securities Transactions (the "Code") and the accompanying
Policy Statement on Insider Trading (the "Policy"). I certify that I have
complied with the Code and Policy and will continue to comply with the Code and
Policy. I understand that any violation of the Code or Policy may lead to
sanctions, including dismissal.
- --------------------- ------------------
Signature Date
- ---------------------
Name
BISYS FUND SERVICES
CODE OF ETHICS
I. INTRODUCTION
This Code of Ethics (the "Code") sets forth the basic policies of
ethical conduct for all directors, officers and associates (hereinafter referred
to as "Covered Persons") of the BISYS Fund Services companies listed on Exhibit
A hereto (hereinafter collectively referred to as "BISYS").
Rule 17j-1(b) under the Investment Company Act of 1940, as amended,
(the "1940 Act") makes it unlawful for BISYS companies operating as a principal
underwriter of a registered investment company (hereinafter referred to
individually as a "Fund" or collectively as the "Funds"), or any affiliated
person of such principal underwriter, in connection with the purchase or sale by
such person of a security "held or to be acquired"(1) by any Fund:
(1) to employ any device, scheme or artifice to defraud the Fund;
(2) to make to the Fund any untrue statement of a material fact or
omit to state to the Fund a material fact necessary in order to
make the statements made, in light of the circumstances under
which they are made, not misleading;
(3) to engage in any act, practice or course of business that
operates or would operate as a fraud or deceit upon the Fund; or
(4) to engage in any manipulative practice with respect to the Fund.
Any violation of this provision by a Covered Person shall be deemed
to be a violation of this Code.
II. RISKS OF NON-COMPLIANCE
Any violation of this Code may result in the imposition by BISYS of
sanctions against the Covered Person, or may be grounds for the immediate
termination of the Covered Person's position with BISYS. In addition, in some
cases (e.g., the misuse of inside information), a violation of federal and state
civil and criminal statutes may subject the Covered Person to fines,
imprisonment and/or monetary damages.
- -------------
(1) A security "held or to be acquired" is defined under Rule 17j-l(a)(10) as
any Covered Security which, within the most recent fifteen (15) days: (A) is or
has been held by a Fund, or (B) is being or has been considered by a Fund or the
investment adviser for a Fund for purchase by the Fund. A purchase or sale
includes the writing of an option to purchase or sell and any security that is
convertible into or exchangeable for, any security that is held or to be
acquired by a Fund. "Covered Securities", as defined under Rule 17j-1(a)(4), do
not include: (i) securities issued by the United States Government; (ii)
bankers' acceptances, bank certificates of deposit, commercial paper and high
quality short-term debt instruments, including repurchase agreements; (iii)
shares of open-end investment companies; (iv) transactions which you had no
direct or indirect influence or control; (v) transactions that are not
initiated, or directed, by you; and (vi) securities acquired upon the exercise
of rights issued by the issuer to all shareholders pro rata.
<PAGE>
III. ETHICAL STANDARDS
The foundation of this Code consists of basic standards of conduct
including, but not limited to, the avoidance of conflicts between personal
interests and interests of BISYS or its Fund clients. To this end, Covered
Persons should understand and adhere to the following ethical standards:
(a) The duty at all times to place the interests of Fund shareholders
first;
This duty requires that all Covered Persons avoid serving
their own personal interests ahead of the interests of the
shareholders of any Fund for which BISYS serves as the
administrator, distributor, transfer agent or fund
accountant.
(b) The duty to ensure that all personal securities transactions be
conducted in a manner that is consistent with this Code to avoid
any actual or potential conflict of interest or any abuse of such
Covered Person's position of trust and responsibility; and
Covered Persons should study this Code and ensure that they
understand its requirements. Covered Persons should conduct
their activities in a manner that not only achieves
technical compliance with this Code but also abides by its
spirit and principles.
(c) The duty to ensure that Covered Persons do not take inappropriate
advantage of their position with BISYS.
Covered Persons engaged in personal securities transactions
should not take inappropriate advantage of their position
or of information obtained during the course of their
association with BISYS. Covered Persons should avoid
situations that might compromise their judgment (e.g., the
receipt of perquisites, gifts of more than de minimis value
or unusual investment opportunities from persons doing or
seeking to do business with BISYS or the Funds).
A "personal securities transaction" is considered to be a
transaction in a Covered Security of which the Covered
Person is deemed to have "beneficial ownership."(2) This
includes, but is not limited to, transactions in accounts
of the Covered Person's spouse, minor children, or other
relations residing in the Covered Person's household, or
accounts in which the Covered Person has discretionary
investment control.
- -------------
(2) "Beneficial ownership" of a security is defined under Rule 16a-1(a)(2) of
the Securities Exchange Act of 1934, which provides that a Covered Person should
consider himself/herself the beneficial owner of securities held by his/her
spouse, his/her minor children, a relative who shares his/her home, or other
persons, directly or indirectly, if by reason of any contract, understanding,
relationship, agreement or other arrangement, he/she obtains from such
securities benefits substantially equivalent to those of ownership. He/she
should also consider himself/herself the beneficial owner of securities if
he/she can vest or revest title in himself/herself now or in the future.
2
<PAGE>
IV. RESTRICTIONS AND PROCEDURES
This section is divided into two (2) parts. Part A relates to
restrictions and procedures applicable to all Covered Persons in addition to the
aforementioned Rule 17j-1(b) provisions. Part B imposes additional restrictions
and reporting requirements for those Covered Persons who are listed on Exhibit B
hereto (hereinafter referred to as "Access Persons"(3).
A. Restrictions and Procedures for all Covered Persons:
1. Prohibition Against Use of Material Inside Information
Covered Persons may have access to information about Funds
that is confidential and not available to the general
public, such as (but not limited to) information concerning
securities held in, or traded by, Fund portfolios,
information concerning certain underwritings of
broker/dealers affiliated with a Fund that may be deemed to
be "material inside information", and information which
involves a merger or acquisition that has not been
disclosed to the public.
"Material inside information" is defined as any information
about a company which has not been disclosed to the general
public and which either a reasonable person would deem to
be important in making an investment decision or the
dissemination of which is likely to impact the market price
of the company's securities.
Covered Persons in possession of material inside
information must not trade in or recommend the purchase or
sale of the securities concerned until the information has
been properly disclosed and disseminated to the public.
2. Initial and Annual Certifications
Within ten (10) days following the commencement of their
employment or otherwise becoming subject to this Code and
at least annually following the end of the calendar year,
all Covered Persons shall be required to sign and submit to
the Code Compliance Officer a written certification, in the
form of Exhibit C hereto, affirming that he/she has read
and understands this Code to which he/she is subject. In
addition, the Covered Person must certify annually that
he/she has complied with the
- -------------
(3) An "Access Person" is defined under Rule 17j-1(a)(1)(ii) to include any
director, officer or general partner of a principal underwriter for a Fund who,
in the ordinary course of business, makes, participates in or obtains
information regarding the purchase or sale of securities for such Fund or whose
functions or duties in the ordinary course of business relate to the making of
any recommendation to such Fund regarding the purchase or sale of securities.
This Code has included BISYS associates that are not directors, officers or
general partners of any BISYS Fund Services company but would otherwise be
deemed Access Persons for purposes of this Code.
3
<PAGE>
requirements of this Code and has disclosed and reported all
personal securities transactions that are required to be
disclosed and reported by this Code. The Code Compliance
Officer will circulate the Annual Certifications and
Holdings Reports for completion following the end of each
calendar year.
B. Restrictions and Reporting Requirements for all Access Persons:
Each Access Person must refrain from engaging in a personal
securities transaction when the Access Person knows, or in
the ordinary course of fulfilling his/her duties would have
reason to know, that at the time of the personal securities
transaction a Fund has a pending buy or sell order in the
same Covered Security.
1. Initial and Annual Holdings Reports
All Access Persons must file a completed Initial and Annual
Holdings Report, in the form of Exhibit D hereto, with the
Code Compliance Officer within ten (10) days of
commencement of their employment or otherwise becoming
subject to this Code and thereafter on an annual basis
following the end of the calendar year in accordance with
Procedures established by the Code Compliance Officer.
2. Transaction/New Account Reports
All Access Persons must file a completed Transaction/New
Account Report, in the form of Exhibit E hereto, with the
Code Compliance Officer within ten (10) days after (i)
opening an account with a broker, dealer or bank in which
Covered Securities are held; or (ii) entering into any
personal securities transaction in which an Access Person
has any direct or indirect beneficial ownership. Personal
securities transactions are those involving any Covered
Security1 in which the person has, or by reason of such
personal securities transaction acquires, any direct or
indirect, "beneficial ownership."2
3. Confirmations and Statements
In order to provide BISYS with information to determine
whether the provisions of this Code are being observed,
each Access Person shall direct his/her broker, dealer or
bank to supply to the Code Compliance Officer, on a timely
basis, duplicate copies of confirmations of all personal
securities transactions and copies of monthly statements
for all Covered Securities accounts. The confirmations
should match the Transaction/New Account Reports. These
confirmations and statements should be mailed, on a
confidential basis, to the Code Compliance Officer at the
following address:
4
<PAGE>
ATTN: Code Compliance Officer
Regulatory Services
BISYS Fund Services
3435 Stelzer Road, Suite 1000
Columbus, Ohio 43219-8001
C. Review of Reports and Assessment of Code Adequacy:
The Code Compliance Officer shall review and maintain the
Initial and Annual Certifications, Initial and Annual
Holdings Reports and Transaction/New Account Reports (the
"Reports") with the records of BISYS. Following receipt of
the Reports, the Code Compliance Officer shall consider in
accordance with Procedures designed to prevent Access
Persons from violating this Code:
(a) whether any personal securities transaction evidences
an apparent violation of this Code; and
(b) whether any apparent violation of the reporting
requirement has occurred pursuant to Section B above.
Upon making a determination that a violation of this Code,
including its reporting requirements, has occurred, the
Code Compliance Officer shall report such violations to the
General Counsel of BISYS Fund Services who shall determine
what sanctions, if any, should be recommended to be taken
by BISYS. The Code Compliance Officer shall prepare
quarterly reports to be presented to the Fund Boards of
Directors/Trustees with respect to any material trading
violations under this Code.
This Code, a copy of all Reports referenced herein, any
reports of violations, and lists of all Covered and Access
Persons required to make Reports, shall be preserved for
the period(s) required by Rule 17j-1. BISYS shall review
the adequacy of the Code and the operation of its related
Procedures at least once a year.
V. REPORTS TO FUND BOARDS OF DIRECTORS/TRUSTEES
BISYS shall submit the following reports to the Board of
Directors/Trustees for each Fund for which it serves as principal underwriter:
A. BISYS Fund Services Code of Ethics
A copy of this Code shall be submitted to the Board of each
Fund no later than September 1, 2000 or for new Fund
clients, prior to BISYS commencing operations as principal
underwriter, for review and approval. Thereafter, all
material changes to this Code shall be submitted to each
Board for review and approval not later than six (6) months
following the date of implementation of such material
changes.
5
<PAGE>
B. Annual Certification of Adequacy
The Code Compliance Officer shall annually prepare a
written report to be presented to the Board of each Fund
detailing the following:
1. Any issues arising under this Code or its related
Procedures since the preceding report, including
information about material violations of this
Code or its related Procedures and sanctions
imposed in response to such material violations;
and
2. A Certification to Fund Boards, in the form of
Exhibit F hereto, that BISYS has adopted
Procedures designed to be reasonably necessary to
prevent Access Persons from violating this Code.
6
<PAGE>
BISYS FUND SERVICES
CODE OF ETHICS
EXHIBIT A
The following companies are subject to the BISYS Fund Services Code of
Ethics (1):
Barr Rosenberg Funds Distributor, Inc.
BISYS Fund Services, Inc.
BISYS Fund Services Limited Partnership
BISYS Fund Services Ohio, Inc.
BNY Hamilton Distributors, Inc.
CFD Fund Distributors, Inc.
Centura Funds Distributor, Inc.
Concord Financial Group, Inc.
Kent Funds Distributors, Inc.
Evergreen Distributor, Inc.
IBJ Funds Distributor, Inc.
Mentor Distributors, LLC
The One Group Services Company
Performance Funds Distributor, Inc.
VISTA Fund Distributors, Inc.
- -------------------------
(1) The companies listed on this Exhibit A may be amended from time to time, as
required.
As of January 11, 2000
A-1
<PAGE>
BISYS FUND SERVICES
CODE OF ETHICS
EXHIBIT B
The following Covered Persons are considered Access Persons under the BISYS Fund
Services Code of Ethics(1):
Client Services - all associates
CFD Fund Distributors, Inc. - all directors, officers and employees
Directors/Officers of each BISYS entity listed on Exhibit A that met the
statutory definition of Access Person under Rule 17j-1
Financial Services (Fund Accounting and Financial Administration) - all
associates
Fund Administration - all associates
Information Systems - all associates
Legal Services - all paralegals and attorneys
The One Group Services Company - all directors, officers and employees
Tax Services - all associates
VISTA Fund Distributors, Inc.- all officers, directors and employees
All wholesalers and telewholesalers employed by the BISYS companies listed on
Exhibit A
- -------------------------
(1) The Access Persons listed on this Exhibit B may be amended from time to
time, as required.
As of January 11, 2000
B-1
<PAGE>
BISYS FUND SERVICES
CODE OF ETHICS
EXHIBIT C
INITIAL AND ANNUAL CERTIFICATIONS
I hereby certify that I have read and thoroughly understand and agree
to abide by the conditions set forth in the BISYS Fund Services Code of Ethics.
I further certify that, during the time of my affiliation with BISYS, I will
comply or have complied with the requirements of this Code and will
disclose/report or have disclosed/reported all personal securities transactions
required to be disclosed/reported by the Code.
If I am deemed to be an Access Person under this Code, I certify that
I will comply or have complied with the Transaction/New Account Report
requirements as detailed in the Code and submit herewith my Initial and Annual
Holdings Report. I further certify that I will direct or have directed each
broker, dealer or bank with whom I have an account or accounts to send to the
BISYS Code Compliance Officer duplicate copies of all confirmations and
statements relating to my account(s).
- --------------------------------
Print or Type Name
- ---------------------------------
Signature
- ---------------------------------
Date
C-1
<PAGE>
BISYS FUND SERVICES
CODE OF ETHICS
EXHIBIT D
INITIAL AND ANNUAL HOLDINGS REPORT
Name and Address of Account Number(s) If New Account,
Broker, Dealer or Bank(s) Date Established
- ------------------------------ ------------------ ------------------
- ------------------------------ ------------------ ------------------
- ------------------------------ ------------------ ------------------
- ------------------------------ ------------------ ------------------
- ------------------------------ ------------------ ------------------
- ------------------------------ ------------------ ------------------
- ------------------------------ ------------------ ------------------
- ------------------------------ ------------------ ------------------
- ------------------------------ ------------------ ------------------
- ------------------------------ ------------------ ------------------
Attached are the Covered Securities beneficially owned by me as of the date of
this Initial and Annual Holdings Report.
- --------------------------------
Print or Type Name
- ---------------------------------
Signature
- ---------------------------------
Date
D-1
<PAGE>
Security Number of Principal Amount
Description Covered
(Symbol/CUSIP) Securities/
Shares Held
- ------------------ ---------------- ----------------
- ------------------ ---------------- ----------------
- ------------------ ---------------- ----------------
- ------------------ ---------------- ----------------
- ------------------ ---------------- ----------------
- ------------------ ---------------- ----------------
- ------------------ ---------------- ----------------
- ------------------ ---------------- ----------------
- ------------------ ---------------- ----------------
- ------------------ ---------------- ----------------
- ------------------ ---------------- ----------------
- ------------------ ---------------- ----------------
- ------------------ ---------------- ----------------
- ------------------ ---------------- ----------------
- ---------------- ---------------- ----------------
D-2
<PAGE>
BISYS FUND SERVICES CODE OF ETHICS -TRANSACTION/NEW ACCOUNT REPORT EXHIBIT E
I hereby certify that the Covered Securities described below (or
attached hereto in the annual statement from my broker, dealer or bank) were
purchased or sold on the date(s) indicated. Such Covered Securities were
purchased or sold in reliance upon public information lawfully obtained by me
through independent research. I have also listed below the account number(s) for
any new account(s) opened in which Covered Securities are held. My decision to
enter into any personal securities transaction(s) was not based upon information
obtained as a result of my affiliation with BISYS.
COVERED SECURITIES PURCHASED/ACQUIRED OR SOLD/DISPOSED
<TABLE>
<CAPTION>
Security Trade Number of Per Share Principal Interest Maturity Name of Broker, Dealer Bought (B)
Description Date Shares Price Amount Rate Rate or Bank (and or Sold (S)
(Symbol/CUSIP) (If (If Account Number
Applicable) Applicable) and Date Established,
if New)
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------- ----- --------- --------- --------- ----------- ----------- ---------------------- ------------
- -------------- ----- --------- --------- --------- ----------- ----------- ---------------------- ------------
- -------------- ----- --------- --------- --------- ----------- ----------- ---------------------- ------------
- -------------- ----- --------- --------- --------- ----------- ----------- ---------------------- ------------
- -------------- ----- --------- --------- --------- ----------- ----------- ---------------------- ------------
- -------------- ----- --------- --------- --------- ----------- ----------- ---------------------- ------------
- -------------- ----- --------- --------- --------- ----------- ----------- ---------------------- ------------
- -------------- ----- --------- --------- --------- ----------- ----------- ---------------------- ------------
</TABLE>
This Transaction/New Account Report is not an admission that you have
or had any direct or indirect beneficial ownership in the Covered Securities
listed above.
- --------------------------------
Print or Type Name
- -------------------------------- -----------------------------------
Signature Date
E-1
<PAGE>
BISYS FUND SERVICES
CODE OF ETHICS
EXHIBIT F
CERTIFICATION TO FUND BOARDS
BISYS Fund Services ("BISYS") requires that all directors, officers and
associates of BISYS ("Covered Persons") certify that they have read and
thoroughly understand and agree to abide by the conditions set forth in the
BISYS Code of Ethics (the "Code"). If such Covered Persons are deemed to be
Access Persons under the Code, they are required to submit Initial and Annual
Holdings Reports, as well as Transaction/New Account Reports, to the Code
Compliance Officer, listing all personal securities transactions in Covered
Securities for all such accounts in which the Access Person has any direct or
indirect beneficial interest within ten (10) days of entering into any such
transactions. Access Persons must direct their broker, dealer or bank(s) to send
duplicate trade confirmations and statements of all such personal securities
transactions directly to the Code Compliance Officer who compares them to the
required Transaction/New Account Reports. Additionally, the Code Compliance
Officer undertakes a quarterly review of all Access Person's personal securities
transactions against the Fund's Investment Adviser for all such Funds that BISYS
serves as principal underwriter.
The undersigned hereby certifies that BISYS has adopted Procedures designed to
be reasonably necessary to prevent Access Persons from violating BISYS' Code and
the required provisions of Rule 17j-1 under the Investment Company Act of 1940,
as amended.
- -------------------------------- ------------------
Kathleen McGinnis Date
Code Compliance Officer
BISYS Fund Services
F-1
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Trustee of THE
VICTORY VARIABLE INSURANCE FUNDS, a Delaware business trust, (the "Trust"),
constitutes and appoints Carl Frischling and Jay G. Baris my true and lawful
attorneys-in-fact, with full power of substitution and resubstitution, for me
and in my name, place and stead, in any and all capacities as a trustee of the
Trust, to sign for me and in my name in the appropriate capacity, any and all
Registration Statements on Form N-1A of the Trust under the Securities Act of
1933, as amended (the "Securities Act"), and the Investment Company Act of 1940,
as amended (the "1940 Act"), any and all Pre-Effective Amendments to any
Registration Statement of the Trust, any and all Post-Effective Amendments to
said Registration Statements, any and all Registration Statements on Form N-14,
and any supplements or other instruments in connection therewith, and generally
to do all such things in my name and behalf in connection therewith as said
attorneys-in-fact deem necessary or appropriate, and that have been approved by
the Board of Trustees of the Trust or by the appropriate officers of the Trust,
acting in good faith and in a manner they reasonably believe to be in the best
interests of the Trust, upon the advice of counsel, such approval to be
conclusively evidenced by their execution thereof, to comply with the provisions
of the Securities Act and the 1940 Act, and all related requirements of the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorneys-in-fact or their substitutes may do or cause to be done by virtue
hereof.
Witness my hand on this 3rd day of April, 2000.
/s/ Frankie D. Hughes
----------------------------------------
Frankie D. Hughes
