THE INSTITUTIONAL MONEY MARKET FUND
ANNUAL REPORT OCTOBER 31,1997
LOGO
Victory Funds(R)
TABLE OF CONTENTS
Fund Review and Commentary
Shareholder Letter 2
Glossary of Investment Terms 3
Schedule of Investments 4
Statement of Assets and Liabilities 8
Statement of Operations 9
Statement of Changes in Net Assets 10
Notes to Financial Statements 11
Financial Highlights 14
Report of Independent Accountants 15
Shares of the Victory Funds are not insured by the FDIC and are not
deposits or other obligations of, or guaranteed by, any KeyCorp bank,
Key Asset Management Inc., or their affiliates, and are subject to
investment risks, including possible loss of the principal amount
invested.
Key Asset Management Inc., (KAM) a subsidiary of KeyCorp, is the investment
adviser to The Victory Funds. The Victory Funds are sponsored and
distributed by BISYS Fund Services, which is not affiliated with KeyCorp
or its subsidiaries. KAM receives a fee for its services from The
Victory Funds.
This report is not authorized for distribution to prospective investors
unless preceded or accompanied by a current prospectus for The Victory
Funds.
Letter to our Shareholders
Welcome to the Victory Institutional Money Market Fund's annual report
for the fiscal year ended October 31, 1997. The fiscal year 1997 was
dominated by speculation about when the Federal Reserve Board will
tighten monetary policy by increasing the Federal Funds Rate. One
tightening did occur in the first quarter of 1997 but the subsequent
period was one of temporary calm before continued US economic performance
re-ignited concerns that the Fed would have to tighten again. However,
this has not been the case as each additional piece of economic news
or data which shows that the economy is not overheating pushes a potential
tightening further into the future. Most recently, the equity sell-off
in October has most likely delayed a Fed tightening until late in
the first quarter of 1998 at the earliest.
The strong corporate performance we have seen in the last year has
reduced the demand for money overall and has focused the remaining
demand on high quality Tier 1 paper. We have seen a significant reduction
in quality spreads associated with these short-term investments, which
has commoditized the market. The result is a market that focuses on
differences in the yield to a much greater extent than in the past
when a security's credit quality played a larger role in issue selection.
This has reduced the dispersion of investment performance between
managers for the time being.
Going forward, given the recent round of interest rate increases by
European banks, the Institutional Money Market Fund has taken a more
defensive posture. In addition, Fed Chairman Greenspan continues to
issue warnings indicating that a tightening of monetary policy may
be forthcoming. Currently, the strong bond market rally that has occurred
this year has made it more difficult to find issues with relative
value. We will continue to manage the Fund with the following investment
philosophy: the preservation of capital, high level of liquidity to
the client and the striving for a competitive market yield designed
to make the Fund a viable alternative to other short-term investments.
Changes in the level of interest rates is the primary risk in managing
this Fund and we attempt to reduce this risk by investing in high
quality Tier 1 securities which have gone through a credit pre-approval
process.
/s/ Leigh A. Wilson
Leigh A. Wilson, President
The Victory Funds
<TABLE>
As of October 31, 1997
<CAPTION>
INSTITUTIONAL MONEY MARKET
INVESTOR CLASS SELECT CLASS
<S> <C> <C>
Seven-Day Yield 5.40% 5.12%
Seven-Day Effective Yield 5.55% 5.25%
One Year Total Return 5.46% 5.17%
</TABLE>
<TABLE>
Maturity Schedule <F1>
As of 10/31/97
<CAPTION>
Days to Maturity INSTITUTIONAL MONEY MARKET
<S> <C>
Less than 30 Days 69.7%
31 to 60 Days 10.0%
61 to 90 Days 6.1%
Greater than 90 Days 14.2%
<FN>
<F1> The Fund's Maturity Schedule presented may not be representative
of current or future investment strategies. Fund strategies may change
at any time.
</TABLE>
The performance data quoted is past performance and are not indicative
of future results. Yields will fluctuate with market conditions. The
Institutional Money Market Fund and Select and Investor Class yields
reflect the waiver of a portion of certain fees for various periods.
In such instances and without such waivers of fees, the current 7-day
yields would have been 5.19% and 4.91% and the 7-day effective yield
would have been 5.35% and 5.05%, for the Investor and Select Classes,
respectively. There can be no assurance that the Funds will be able
to maintain a stable net asset value of $1.00 per share. An investment
in the Victory Institutional Money Market Fund is neither insured
nor guaranteed by the U.S. Government.
Glossary of
Often-Used
Investment
Terms
BOND RATING
An indication of the risk of a bond issue, as determined by a bond
rating service (such as Moody's or Standard & Poor's). Bonds with
the highest ratings generally (AAA) have the lowest credit risk.
PAR VALUE
The face value of a security. A bond selling at par is worth the same
dollar amount it was issued for or at which it will be redeemed at
maturity--typically, $1000 per bond.
PORTFOLIO
Any combination of more than one security. A mutual fund typically
has a large, diversified portfolio of securities or investments in
order to help reduce investment risks.
SETTLEMENT DATE
Date by which an executed order must be settled, either by a buyer
paying for the securities with cash or by a seller delivering the
securities and receiving the proceeds of the sale for them. In a "regular
way" delivery of stocks and bonds, the settlement date is three business
days after the trade was executed. For listed options and government
securities, settlement is required by the next business day.
SHORT-TERM
CAPITAL GAIN (LOSS)
A capital gain (loss) arises from an asset which was held six months
or less. Short-term capital gains are taxed at the taxpayer's ordinary
tax rate.
CALL OPTIONS
A contract for the right to buy a specified number of shares at a
predetermined price on or before a stated date. The purchaser of a
call option believes the underlying stock price will rise, and he
purchases the call option from an investor equally convinced the underlying
stock price will either stay the same or fall.
PUT OPTION
A specified contract for the right to sell a specified number of shares
at a predetermined price on or before a stated date. The purchaser
of a put option believes the underlying stock price will fall, and
he purchases the put option from an investor equally convinced the
price will stay the same or rise.
PROSPECTUS
A document providing investors information about the fund's investment
objective, policies, and risks. It also provides the basic information
and details of the funds operations and services; information on sales
charges; redemption rights; tax status of the dividends and income;
expenses; the fund custodian and other service providers; and how
to buy and sell shares.
DOLLAR COST AVERAGING
OR CONSTANT DOLLAR PLAN*
A method of accumulating assets by investing a fixed amount of dollars
in securities at set intervals. The result is that more shares are
purchased when the price is low and fewer shares are purchased when
the price is high. The overall cost is lower than it would be if a
constant number of shares were bought at set intervals.
CONVERTIBLE SECURITIES
Corporate bonds and preferred stocks that carry an option to be exchanged
for, or "converted" into, a set number of shares of common stock.
*This strategy does not assure a profit and does not protect against
loss in declining markets. An investor should be prepared to continue
the program of investing at regular intervals, even during economic
downturns, in order to fully utilize a dollar cost averaging program.
<TABLE>
Schedule of Investments
The Victory Portfolios October 31, 1997
Institutional Money Market Fund (Amounts in Thousands, Except Shares)
<CAPTION>
Shares or
Principal Amortized
Security Description Amount Cost
<S> <C> <C>
Bankers Acceptances (1.1%)
Bank of America,
5.51%, 4/15/98 12,000 $ 11,697
Total Bankers Acceptances
(Amortized Cost $11,697) 11,697
Certificates of Deposit (9.4%)
Bankers Trust New York,
5.64%<FN2>, 11/3/97<FN3> 10,000 10,000
Bankers Trust New York,
6.24%, 4/2/98 5,000 5,002
Bankers Trust New York,
5.91%, 8/7/98 5,000 4,995
Canadian Imperial,
5.58%, 12/30/97 25,000 25,000
Deutschbank,
5.96%, 8/17/98 4,000 4,000
Harris Bank and Trust,
5.55%, 11/14/97 15,000 15,000
Morgan Guaranty Trust,
5.58%, 12/22/97 10,000 10,000
Morgan Guaranty Trust,
5.87%, 8/6/98 5,000 5,000
Societe Generale,
5.63%<FN2>, 11/3/97<FN3> 9,000 8,996
Societe Generale,
5.64%<FN2>, 11/3/97<FN3> 7,000 6,998
Societe Generale,
5.60%, 11/14/97 6,000 6,000
Total Certificates of Deposit
(Amortized Cost $100,991) 100,991
Commercial Paper (46.4%)
Asset Securitization Corp.,
5.51%, 11/17/97 15,000 14,963
Associates Corp.,
5.75%, 11/3/97 50,000 49,985
AVCO Financial Services,
5.51%, 11/12/97 6,000 5,990
AVCO Financial Services,
5.50%, 12/4/97 28,172 28,030
AVCO Financial Services,
5.50%, 12/15/97 9,500 9,436
Brown-Foreman,
5.51%, 11/3/97 12,789 12,785
California,
5.55%, 11/13/97 20,279 20,241
California Higher Education Loan
Authority, 5.56%, 11/6/97,
LOC State Street 23,484 23,466
Cemex,
5.53%, 11/12/97,
LOC Credit Suisse Bank 12,000 11,980
COFCO Capital Corp.,
5.53%, 11/17/97 10,000 9,975
Eiger Capital Corp.,
5.55%, 11/21/97 10,000 9,969
Fleet Funding,
5.52%, 11/18/97 10,000 9,974
Ford Motor Credit,
5.52%, 12/04/97 5,000 4,975
General Electric Capital Corp.,
5.79%, 11/3/97 30,000 29,991
General Electric Capital Corp.,
5.64%, 2/2/98 4,000 3,942
General Electric Capital Corp.,
5.59%, 3/30/98 10,000 9,769
General Motors Acceptance Corp.,
5.62%, 4/23/98 20,000 19,459
Nebraska Higher Education Loan
Program, 5.59%, 11/25/97, SLMA 10,000 9,963
Nebraska Higher Education Loan
Program, 5.00%, 11/26/97, SLMA 25,000 24,911
Pitney Bowes Credit Corp.,
5.57%, 12/11/97 10,000 9,938
Pitney Bowes Credit Corp.,
5.51%, 1/14/98 20,000 19,773
Prudential Funding,
5.50%, 11/10/97 5,000 4,993
Retailer Funding,
5.54%, 11/13/97 5,000 4,991
Retailer Funding,
5.52%, 11/18/97 15,588 15,547
Retailer Funding,
5.55%, 12/5/97 10,000 9,948
Sanwa Business Credit Corp.,
5.62%, 11/6/97 10,000 9,992
Smith Barney,
5.50%, 12/1/97 6,000 5,973
Smith Barney, Inc.,
5.52%, 11/14/97 30,000 29,940
Sony Capital Corp.,
5.50%, 11/5/97 13,000 12,992
Sony Capital Corp.,
5.52%, 11/7/97 15,000 14,986
Sony Capital Corp.,
5.50%, 11/10/97 10,000 9,986
Toshiba America, Inc.,
5.57%, 12/12/97 10,000 9,937
Toshiba America, Inc.,
5.52%, 12/23/97 5,000 4,960
Vehicle Services,
5.63%, 1/14/98,
LOC NationsBank, Texas 10,000 9,884
Weyerhauser Real Estate,
5.49%, 11/14/97 15,600 15,569
Total Commercial Paper
(Amortized Cost $499,213) 499,213
Corporate Bonds (16.3%)
Anne Aurndel Medical Center,
5.70%<FN2>, 11/12/97<FN3>,
LOC Mellon Bank N.A. 9,850 9,850
Automated Packaging System,
5.70%<FN2>, 11/6/97<FN3>,
LOC National City Bank 2,020 2,020
AVCO Financial Services,
5.50%, 5/1/98 3,200 3,194
Bankers Trust New York,
5.70%<FN2>, 11/3/97<FN3> 20,000 20,000
Beta Finance,
5.87%, 1/30/98 5,000 5,002
Beta Finance,
6.13%, 5/15/98 5,000 5,003
Buckeye Corrugated, Inc.
Project, 5.70%<FN2>, 11/6/97<FN3>,
LOC National City Bank 1,100 1,100
Burton I Saltzman,
5.70%<FN2>, 11/6/97<FN3>,
LOC National City Bank 2,845 2,845
Chevron Finance,
5.60%, 4/1/98 12,000 11,991
CIT Group Holdings,
6.75%, 4/30/98 4,000 4,013
Danis Construction Co.,
5.63%<FN2>, 11/6/97<FN3> 6,000 6,000
Fairborn Christel Mann,
5.71%<FN2>, 11/6/97<FN3>,
LOC Fifth Third Bank 1,180 1,180
Ford Motor Credit Corp.,
7.13%, 12/1/97 2,450 2,452
Ford Motor Credit Corp.,
7.13%, 12/1/97 2,000 2,002
Ford Motor Credit Corp.,
9.25%, 6/15/98 5,000 5,100
General American Life Insurance,
5.85%<FN2>, 11/3/97<FN3> 25,000 25,000
Hannah Boulevard Limited Partnership,
5.67%<FN2>, 11/6/97<FN3>, LOC 4,875 4,875
Commerica Bank Industrial
Dimensions, Inc.,
5.70%<FN2>, 11/6/97<FN3>,
LOC National City Bank 1,205 1,205
Lexington Financial Services,
5.70%<FN2>, 11/12/97<FN3>,
LOC LaSalle National Bank 5,900 5,899
Maximum Principal Mubea Project,
5.70%<FN2>, 11/6/97<FN3>,
LOC Fifth Third Bank 1,850 1,850
Miami Valley Steel,
5.60%<FN2>, 11/6/97<FN3> 2,050 2,050
Miami Valley Steel,
5.60%<FN2> 11/6/97<FN3> 2,950 2,950
Miami Valley Steel,
5.70%<FN2>, 11/6/97<FN3>,
LOC National City Bank 425 425
Monticello Investments,
5.70%<FN2>, 11/6/97<FN3>,
LOC National City Bank 2,280 2,280
Perfection Corp.,
5.70%<FN2>, 11/6/97<FN3>,
LOC National City Bank 460 460
Pomeroy Investments,
5.63%<FN2>, 11/6/97<FN3>,
LOC Fifth Third Bank 3,550 3,550
Professional Center Associates Ltd.,
5.70%<FN2>, 11/6/97<FN3>,
LOC National City Bank 1,475 1,475
Republic New York Corp.,
5.79%<FN2>, 11/4/97<FN3> 25,000 25,000
Sea River Maritime, Inc.,
5.62%<FN2>, 11/3/97<FN3>,
Guaranteed by Exxon Corp. 13,900 13,900
Sedlak Interiors, Inc.,
5.71%<FN2>, 11/6/97<FN3>,
LOC Fifth Third Bank 1,850 1,850
Tube Products, 5.70%<FN2>,
11/6/97, LOC Bank One 400 400
Total Corporate Bonds
(Amortized Cost $174,921) 174,921
Medium Term Notes (8.5%)
Bank Of America,
5.58%<FN2>, 11/3/97<FN3> 5,000 4,997
CIT Group Holdings,
6.35%, 7/31/98 7,000 7,028
General Electric Capital Corp.,
7.84%, 2/5/98 1,700 1,707
General Electric Capital Corp.,
7.50%, 2/27/98 2,940 2,951
General Motors Acceptance Corp.,
7.85%, 11/17/97 10,000 10,008
General Motors Acceptance Corp.,
7.50%, 1/29/98 5,000 5,020
General Motors Acceptance Corp.,
8.38%, 1/30/98 5,000 5,026
General Motors Acceptance Corp.,
7.00%, 4/15/98 2,975 2,990
General Motors Acceptance Corp.,
7.13%, 5/11/98 2,000 2,008
John Deere Capital Corp.,
5.85%, 10/28/98 10,000 9,994
Morgan Guaranty Trust Co.,
5.63%<FN2>, 11/14/97<FN3> 9,000 9,000
Morgan Stanley Group,
5.82%<FN2>, 12/15/97<FN3> 13,000 13,000
PepsiCo, Inc.,
5.80%, 8/31/98 8,000 7,985
Philip Morris Cos. Inc,
8.75%, 6/1/98 4,500 4,572
Sara Lee Corp.,
4.75%, 10/22/98 5,000 4,944
Total Medium Term Notes
(Amortized Cost $91,230) 91,230
Municipal Bonds (2.3%)
Michigan (0.1%):
Ottawa County, EDR,
Sunset Manor, Inc.,
Series C, 5.85%<FN2>, 11/6/97<FN3>,
LOC Old Kent Bank 1,030 1,030
Pennsylvania (0.9%):
Armstrong County Hospital
Authority, Hospital Revenue
Refunding, St. Francis Corp.,
Series B, 5.70%<FN2>, 11/12/97<FN3>,
LOC First National Bank of Chicago 10,000 10,000
Virginia (1.3%):
Industrial Development
Authority of Bedford,
5.73%<FN2>, 12/23/97<FN3>,
LOC Societe Generale 7,000 7,000
State Housing
Authority Commonwealth
Mortgage, 5.80%, 12/30/97 7,000 6,999
13,999
Total Municipal Bonds
(Amortized Cost $25,029) 25,029
U.S. Government Agencies (10.7%)
Federal Home Loan Bank (0.5%):
5.81%, 1/30/98 5,000 5,000
Federal National Mortgage
Assoc. (5.4%):
5.29<FN2>, 11/4/97<FN3> 33,000 33,000
5.28%<FN2>, 11/4/97<FN3> 25,000 24,999
57,999
Student Loan Marketing
Assoc. (4.8%):
5.54%, 2/25/98 9,000 8,998
5.29%<FN2>, 11/4/97<FN3> 4,000 4,000
5.31%<FN2>, 11/4/97<FN3> 6,000 6,000
5.32%<FN2>, 11/4/97<FN3> 32,500 32,500
51,498
Total U.S. Government Agencies
(Amortized Cost $114,497) 114,497
U.S. Treasury Notes (1.5%)
5.25%, 12/31/97 6,000 5,997
7.88%, 1/15/98 10,000 10,044
Total U.S. Treasury Notes
(Amortized Cost $16,041) 16,041
Total Investments
(Amortized Cost $1,033,619) 1,033,619
Repurchase Agreements (6.1%)
Goldman Sachs Group L.P.,
5.70%, 11/3/97,
(Collateralized by $33,051
U.S. Treasury Notes,
5.88%, 7/31/99,
market value--$33,661) 33,000 33,000
Paine Webber Securities Corp.,
5.70%, 11/3/97
(Collateralized by $150,855
various U.S. Treasury
Securities, 7.13%,7.38%,
11/15/97 2/15/23,
market value--$33,433) 32,777 32,777
Total Repurchase Agreements
(Cost $65,777) 65,777
Total Investments and
Repurchase Agrements
(Amortized Cost $1,099,396) <FN1>--102.3% 1,099,396
Liabilities in excess of other assets (2.3)% (25,094)
TOTAL NET ASSETS--100.0% $1,074,302
<FN>
<FN1>Cost and value for federal income tax and financial reporting
purposes are the same.
<FN2>Variable rate securities having liquidity agreements. The
interest rate, which will change periodically, is based upon an index
of market rates. The rate reflected on the Schedule of Portfolio Investments
is the rate in effect at October 31, 1997.
<FN3>Put and demand features exist allowing the Fund to require
the repurchase of the instrument within variable time periods including
daily, weekly, monthly, or semi-annually.
</TABLE>
EDR--Economic Development Revenue
LOC--Letter of Credit
SLMA--Student Loan Marketing Assoc.
See notes to financial statements.
<TABLE>
Statement of Assets and Liabilities
October 31, 1997
The Victory Portfolios (Amounts in Thousands, except per share amounts)
<CAPTION>
Institutional
Money Market
Fund
<S> <C>
ASSETS:
Investments, at amortized cost $1,033,619
Repurchase agreements, at cost 65,777
Total 1,099,396
Interest receivable 5,124
Prepaid expenses and other assets 8
Total Assets 1,104,528
LIABILITIES:
Cash Overdraft 150
Dividends payable 4,814
Payable to brokers for investments purchased 24,911
Accrued expenses and other payables:
Investment advisory fees 120
Administration fees 5
Custodian fees 19
Transfer agent fees 28
Shareholder service fees--Select Shares 94
Other 85
Total Liabilities 30,226
NET ASSETS:
Capital 1,074,147
Undistributed net investment income 140
Accumulated undistributed net realized gains from
investment transactions 15
Net Assets $1,074,302
Net Assets
Investor Shares $ 585,663
Select Shares 488,639
Total $1,074,302
Outstanding units of beneficial interest (shares)
Investor Shares 585,646
Select Shares 488,637
Total 1,074,283
Net asset value
Offering and redemption price per share--Investor Shares $ 1.00
Offering and redemption price per share--Select Shares $ 1.00
</TABLE>
See notes to financial statements.
<TABLE>
Statement of Operations
For the Year Ended October 31, 1997
The Victory Portfolios (Amounts in Thousands)
<CAPTION>
Institutional
Money Market
Fund
<S> <C>
Investment Income:
Interest income $55,882
Expenses:
Investment advisory fees 2,494
Administration fees 1,497
Shareholder service fees--Select Shares 991
Accounting fees 102
Custodian fees 194
Legal and audit fees 122
Trustees' fees and expenses 31
Transfer agent fees 157
Registration and filing fees 171
Printing fees 81
Other 13
Total Expenses 5,853
Expenses voluntarily reduced (2,012)
Net Expenses 3,841
Net Investment Income 52,041
Realized Gains from Investments:
Net realized gains from investment transactions 15
Change in net assets resulting from operations $52,056
</TABLE>
See notes to financial statements.
<TABLE>
Statement of Changes in Net Assets
The Victory Portfolios (Amounts in Thousands)
<CAPTION>
Institutional Money
Market Fund
Year Ended Year Ended
October 31, October 31,
1997 1996
<S> <C> <C>
From Investment Activities:
Operations:
Net investment income $ 52,041 $ 40,393
Net realized gains from investment transactions 15 2
Change in net assets resulting from operations 52,056 40,395
Distributions to Shareholders:
From net investment income:
Investor Shares (31,873) (33,269)
Select Shares (20,168) (7,124)
From net realized gains from investment transactions -- (2)
In excess of net realized gains from investment transactions -- (24)
Change in net assets from distributions to shareholders (52,041) (4,419)
Capital Transactions:
Proceeds from shares issued 4,221,092 2,708,661
Dividends reinvested 21,609 6,114
Cost of shares redeemed (4,213,079) (2,186,101)
Change in net assets from capital transactions 29,622 528,674
Change in net assets 29,637 528,650
Net Assets:
Beginning of period 1,044,665 516,015
End of period $ 1,074,302 $ 1,044,665
Share Transactions:
Issued 4,221,092 2,708,661
Reinvested 21,609 6,114
Redeemed (4,213,079) (2,186,101)
Change in shares 29,622 528,674
</TABLE>
See notes to financial statements.
The Victory Portfolios Notes to Financial Statements
Institutional Money Market Fund October 31, 1997
1. Organization:
The Victory Portfolios (collectively, the "Trust" and individually,
a "Fund") was organized on December 6, 1995 as a successor to a company
of the same name organized as a Massachusetts business trust on February
5, 1986. The Trust is registered under the Investment Company Act
of 1940, as amended, (the "1940 Act") as an open-end investment company
established as a Delaware business trust. The Trust is authorized
to issue an unlimited number of shares which are units of beneficial
interest with a par value of $0.001. The Trust presently offers shares
of 25 active funds. The accompanying financial statements and financial
highlights are those of the Institutional Money Market (the "Fund")
only.
The Fund is authorized to issues two classes of shares: Investor Shares
and Select Shares. Each class of shares has identical rights and privileges
except with respect to fees paid under shareholders service plans,
expenses allocable exclusively to each class of shares, voting rights
on matters affecting a single class of shares, and the exchange privilege
of each class of shares.
The Fund seeks to obtain a high level of current income as is consistent
with preserving capital and providing liquidity.
2. Significant Accounting Policies:
The following is a summary of significant accounting policies followed
by the Fund in the preparation of its financial statements. The policies
are in conformity with generally accepted accounting principles. The
preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of
income and expenses for the period. Actual results could differ from
those estimates.
Securities Valuation:
Investments of the Fund are valued at either amortized cost which
approximates market value, or at original cost which, combined with
accrued interest, approximates market value. Under the amortized cost
valuation method, discount or premium is amortized on a constant basis
to the maturity of the security. In addition, the Fund may not (a)
purchase any instrument with a remaining maturity greater than 397
days unless such instrument is subject to a demand feature, or (b)
maintain a dollar-weighted-average portfolio maturity which exceeds
90 days.
Securities Transactions and Related Income:
Securities transactions are accounted for on the date the security
is purchased or sold (trade date). Interest income is recognized on
the accrual basis and includes, where applicable, the pro rata amortization
of premium or accretion of discount. Dividend income is recorded on
the ex-dividend date. Gains or losses realized on sales of securities
are determined by comparing the identified cost of the security lot
sold with the net sales proceeds.
Repurchase Agreements:
The Fund may acquire repurchase agreements from financial institutions
such as banks and broker-dealers which the Fund's investment adviser
deems creditworthy under guidelines approved by the Board of Trustees,
subject to the seller's agreement to repurchase such securities at
a mutually agreed-upon date and price. The repurchase price generally
equals the price paid by a Fund plus interest negotiated on the basis
of current short-term rates, which may be more or less than the rate
on the underlying securities. The seller, under a repurchase agreement,
is required to maintain the value of collateral held pursuant to the
agreement at not less than the repurchase price (including accrued
interest). Securities subject to repurchase agreements are held by
the Fund's custodian or another qualified custodian or in the Federal
Reserve/Treasury book-entry system. Repurchase agreements are considered
to be loans by the Fund under the 1940 Act.
Securities Purchased on a When-Issued Basis:
The Fund may purchase securities on a "when-issued" basis. When-issued
securities are securities purchased for delivery beyond the normal
settlement date at a stated price and/or yield, thereby, involving
the risk that the price and/or yield obtained may be more or less
than those available in the market when delivery takes place. At the
time the Fund makes the commitment to purchase a security on a when-issued
basis, the Fund records the transaction and reflects the value of
the security in determining net asset value. Normally, the settlement
date occurs within one month of the purchase. A segregated account
is established and the Fund maintain cash and marketable securities
at least equal in value to commitments for when-issued securities.
Securities purchased on a when-issued basis do not earn income until
settlement date.
Securities Lending:
The Fund may, from time to time, lend securities from their portfolio
to broker-dealers, banks, financial institutions and institutional
borrowers of securities approved by the Board. The Fund will limit
its securities lending to 331 3% of total assets. Key Trust Company
of Ohio, N.A. ("Key Trust"), an affiliate of the Adviser, serves as
the lending agent for the Fund pursuant to a Securities Lending Agency
Agreement (the "Lending Agreement"). Under guidelines established
by the Board of Trustees, Key Trust must maintain the loan collateral
at all times in an amount equal to at least 102% of the current market
value of the loaned securities in the form of cash or U.S. Government
obligations, to secure the return of the loaned securities. Key Trust,
at the direction of the Adviser, may invest the collateral in short-term
debt instruments that the Adviser has determined present minimal credit
risks. There is a risk of delay in receiving collateral or in receiving
the securities loaned or even a loss of rights in the collateral should
the borrower of the securities fail financially. By lending its securities,
the Fund can increase its income by continuing to receive interest
or dividends on the loaned securities as well as either investing
the cash collateral in short-term instruments or obtaining yield in
the form of interest paid by the borrower when U.S. Government securities
are used as collateral. Loans are subject to termination by the Fund
or the borrower at any time. During the year ended October 31, 1997,
the Fund did not loan any securities.
Dividends to Shareholders:
Dividends from net investment income are declared daily and paid monthly
by the Fund. Distributable net realized capital gains, if any, are
declared and distributed at least annually.
The amounts of dividends from net investment income and of distributions
from net realized gains are determined in accordance with federal
income tax regulations which may differ from generally accepted accounting
principles. These "book/tax" differences are either considered temporary
or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the components of
net assets based on their federal tax-basis treatment; temporary differences
do not require reclassification. Dividends and distributions to shareholders
which exceed net investment income and realized capital gains for
financial reporting purposes but not for tax purposes are reported
as dividends in excess of net investment income or distributions in
excess of net realized gains. To the extent they exceed net investment
income and net realized gains for tax purposes, they are reported
as distributions of capital.
Federal Income Taxes:
It is the policy of the Fund to continue to qualify as a regulated
investment company by complying with the provisions available to certain
investment companies, as defined in applicable sections of the Internal
Revenue Code, and to make distributions of net investment income and
net realized capital gains sufficient to relieve it from all, or substantially
all, federal income taxes.
Other:
Expenses that are directly related to one of the Funds are charged
directly to that Fund. Other operating expenses of the Fund are prorated
on the basis of relative net assets or other appropriate basis. Fees
paid under the Fund's shareholder servicing or distribution plans
are borne by the specific class of shares to which they apply.
3. Related Party Transactions:
Investment advisory services are provided to the Fund by Key Asset
Management Inc. ("the Adviser"), a wholly owned subsidiary of KeyBank
National Association ("Key"), formerly Society National Bank, a wholly
owned subsidiary of KeyCorp. On February 28, 1997, Key Asset Management
Inc. became the surviving corporation after the reorganization of
four indirect investment adviser subsidiaries of KeyCorp, including
KeyCorp Mutual Fund Advisers. Under the terms of the investment advisory
agreements, the Adviser is entitled to receive fees based on a percentage
of the average daily net assets of the Fund. KeyTrust Company of Ohio,
serving as custodian for the Fund, receives custodian fees in addition
to reimbursement of actual out-of-pocket expenses incurred.
Key and its affiliated brokerage and banking companies also serve
as Shareholder Servicing Agent for the Institutional Money Market
Fund (Investor Shares). As such, Key and its affiliates provide support
services to their clients who are shareholders, which may include
establishing and maintaining accounts and records, processing dividend
and distribution payments, providing account information, assisting
in processing of purchase, exchange and redemption requests, and assisting
shareholders in changing dividend options, account designations and
addresses. For providing such services, Key and its affiliates may
receive a fee of up to 0.25% of the average daily net assets of the
Fund serviced.
BISYS Fund Services (the "Administrator"), an indirect, wholly-owned
subsidiary of The BISYS Group, Inc. ("BISYS") serves as the administrator
and distributor to the Fund. Certain officers of the Fund are affiliated
with BISYS. Such officers receive no direct payments or fees from
the Fund for serving as officers.
Under the terms of the administration agreement, effective October
1, 1997, the Administrator's fee is computed at the annual rate of
0.15% of the fund's average daily net assets of $300 million and less,
0.12% of the fund's average daily net assets between $300 million
and $600 million and 0.10% of the fund's average daily net assets
greater than $600 million. Under a Sub-Administration agreement, BISYS
pays Key Asset Management Inc. a fee of up to 0.05% of the fund's
average daily net assets to perform some of the administrative duties
for the Funds. Prior to October 1, 1997, the Administrator's fee was
computed at the annual rate of 0.15% of the fund's average daily net
assets.
Fees may be voluntarily reduced or reimbursed to assist the Fund in
maintaining competitive expense ratios.
<TABLE>
<CAPTION>
Additional information regarding related party transactions is as
follows for the year ended October 31, 1997:
Investment Administration
Advisory Fees Fees
Percentages of
Average Daily
Net Assets
(before voluntary Voluntary Voluntary
fee reductions) Fee Reductions Fee Reductions
(000) (000)
<S> <C> <C> <C>
Institutional Money Market Fund 0.25% $855 $1,157
</TABLE>
4. Capital Share Transactions:
Transactions in capital shares were as follows (amounts in thousands):
<TABLE>
<CAPTION>
Institutional Money Market Fund
Year Ended Year Ended
October 31, October 31,
1997 1996 <F1>
<S> <C> <C>
Capital Share Transactions:
Investor Shares:
Issued 1,422,308 1,367,293
Reinvested 1,983 493
Redeemed (1,510,212) (1,200,727)
Total (85,921) 167,059
Select Shares:
Issued 2,798,784 1,341,368
Reinvested 19,626 5,621
Redeemed (2,702,867) (985,374)
Total 115,543 361,615
<FN>
<F1>Effective March 1, 1996, the Fund designated Institutional
Shares as Investor Shares and Service Shares as Select Shares.
</TABLE>
See notes to financial statements.
<TABLE>
The Victory Portfolios Financial Highlights
<CAPTION>
Institutional Money Market Fund
Investor Shares Select Shares
Year Year Six Months Year Year June 5, 1995
Ended Ended Ended Ended Ended to
October 31, October 31, October 31, October 31, October 31, October 31,
1997 1996<F6> 1995<F5> 1997 1996<F6> 1995<F2><F5>
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Investment Activities
Net investment income 0.053 0.053 0.290 0.051 0.050 0.012
Distributions
Net investment income (0.053) (0.053) (0.290) (0.051) (0.050) (0.012)
Net Asset Value,
End of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Total Return 5.46% 5.41% 2.90%<F3> 5.17% 5.16% 1.23%<F3>
Ratios/Supplemental Data:
Net Assets, End of
Period (000) $585,663 $671,575 $504,536 $488,639 $373,090 $11,479
Ratio of expenses to
average net assets 0.28% 0.27% 0.26%<F4> 0.55% 0.52% 0.51%<F4>
Ratio of net investment
income to average
net assets 5.32% 5.27% 5.69%<F4> 5.05% 4.97% 5.33%<F4>
Ratio of expenses to
average net assets<F1> 0.48% 0.48% 0.49%<F4> 0.75% 0.73% 1.00%<F4>
Ratio of net investment
income to average
net assets<F1> 5.12% 5.06% 5.46%<F4> 4.85% 4.77% 4.84%<F4>
<FN>
<F1> During the period, certain fees were voluntarily reduced. If
such voluntary fee reductions had not occurred, the ratios would have
been as indicated.
<F2> Period from commencement of operations.
<F3> Not annualized.
<F4> Annualized.
<F5> Effective June 5, 1995, the Victory Institutional Money Market
Portfolio became the Institutional Money Market Fund, and the Fund
designated the existing shares as Institutional Shares and commenced
offering Service Shares.
<F6> Effective March 1, 1996, the Fund redesignated Institutional
Shares as Investor Shares and Service Shares as Select Shares.
</TABLE>
See notes to financial statements.
<TABLE>
<CAPTION>
Institutional Money Market Fund
Year Ended April 30,
1995 1994 1993
<S> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 1.000 $ 1.000 $ 1.000
Investment Activities
Net investment income 0.500 0.028 0.032
Distributions
Net investment income (0.500) (0.028) (0.032)
Net Asset Value,
End of Period $ 1.000 $ 1.000 $ 1.000
Total Return 4.91% 2.80% 3.26%
Ratios/Supplemental Data:
Net Assets, End of
Period (000) $449,814 $541,229 $155,097
Ratio of expenses to
average net assets 0.27% 0.55% 0.43%
Ratio of net investment
income to average
net assets 4.91% 2.78% 3.19%
Ratio of expenses to
average net assets<F1> 0.51% 0.55% 0.48%
Ratio of net investment
income to average
net assets<F1> 4.67% 2.78% 3.14%
<FN>
<F1> During the period, certain fees were voluntarily reduced. If
such voluntary fee reductions had not occurred, the ratios would have
been as indicated.
<F2> Period from commencement of operations.
<F3> Not annualized.
<F4> Annualized.
<F5> Effective June 5, 1995, the Victory Institutional Money Market
Portfolio became the Institutional Money Market Fund, and the Fund
designated the existing shares as Institutional Shares and commenced
offering Service Shares.
<F6> Effective March 1, 1996, the Fund redesignated Institutional
Shares as Investor Shares and Service Shares as Select Shares.
</TABLE>
See notes to financial statements.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Trustees of
The Victory Portfolios
We have audited the accompanying statement of assets and liabilities
of the Victory Institutional Money Market Fund, including the schedule
of investments, as of October 31, 1997, and the related statements
of operations and changes in net assets, and the financial highlights
for each period presented except as noted in the next paragraph. These
financial statements and financial highlights are the responsibility
of The Victory Portfolios' management. Our responsibility is to express
an opinion on these financial statements and financial highlights
based on our audits.
The Victory Institutional Money Market Fund's financial highlights
for each of the three years in the period ended April 30, 1995 were
audited by other auditors, whose report dated June 20, 1995 expressed
an unqualified opinion on those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. Our procedures included
confirmation and verification by examination of securities owned as
of October 31, 1997, by correspondence with the custodian and brokers
or other auditing procedures where confirmations from brokers were
not received. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above, except as noted in the second paragraph, present
fairly, in all material respects, the financial position of the Victory
Institutional Money Market Fund as of October 31, 1997, and the results
of its operations, the changes in its net assets and the financial
highlights for the periods presented are in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
December 15, 1997
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