SEMI-ANNUAL REPORT
May 31, 1997
KeyChoice
Funds
Income & Growth Fund
Moderate Growth Fund
Growth Fund
(logo)
KeyFunds
Key Asset Management Inc. (KAM), a subsidiary of KeyCorp, is the investment
adviser to Key Mutual Funds, which consists of several different portfolios,
three of which are included in this semi-annual report. Key Mutual
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 Key Mutual Funds.
Shares of the Funds are not deposits or other obligations of, or guaranteed
or endorsed by Key Asset Management Inc., any KeyCorp bank, or their
affiliates. Shares of the Funds are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board or any other
agency. An investment in mutual fund shares is subject to investment
risks, including the possible loss of the principal amount invested.
This report is submitted for the general information of the shareholders
of the Funds. It is not authorized for distribution to prospective
investors in the Funds unless preceded or accompanied by an effective
prospectus, which includes information regarding the Funds' objectives
and policies, experience of its management, marketability of shares
and other information.
(logo)
KeyFunds
KEYCHOICE FUNDS
Letter to Our Shareholders
Dear Shareholders,
We are pleased to present the first semiannual report of the KeyChoice
Funds for the period ended May 31, 1997.
As an investor in the KeyChoice funds you have demonstrated your commitment
to a disciplined investment process and long-term planning to help
meet your investment goals. It is well worth reiterating some of the
benefits of lifestyle investing to reinforce this commitment. Thus
the KeyChoice Funds:
Provide investors with three simple, yet powerful customized asset
allocation portfolios designed to support a specified investment objective
and maintain consistency between the level of investment risk and
return expectations.
Extend the benefits of mutual fund investing further by simplifying
the asset allocation process, a key determinant of investment returns,
for investors.
Provide investment exposure to a select mix of funds managed by both
Key Asset Management Inc. and other well recognized advisers.
Provide multiple levels of diversification to reduce risk--across
asset classes, within asset classes and across investment styles.
Rebalance periodically to ensures that each KeyChoice portfolio adheres
to its strategy, regardless of changes in the market.
Help retirement plan sponsors improve employee plan participation
levels and promote proper asset allocation of employee retirement
assets.
We welcome your suggestions, thoughts and comments.
Sincerely,
/s/ Leigh A. Wilson
Leigh A. Wilson, President
June 15, 1997
For more information regarding the KeyChoice Funds, including charges
and expenses, request a prospectus by calling 1-800-KEY-FUND. Read
the prospectus carefully before investing or sending money.
Investment
Review and
Economic
Outlook
The stock market has enjoyed a spectacular rise since early April
of this year, thanks to near-perfect conditions for financial assets.
Economic growth has been satisfactory, fueling healthy job creation
and driving unemployment to its lowest level since the early 1970s.
Household incomes have risen and consumer confidence has soared. Most
encouraging to investors, inflation has remained well-behaved, exhibiting
none of the signs of acceleration typical of such robust economic
conditions.
This idealized version of capitalism just didn't happen overnight.
It represents the confluence of hundreds (if not thousands) of minor
variables that have been tweaked by various shifts in policy, management
techniques and consumer attitudes over the years. This fine tuning
has been helped enormously by the great strides made in technology
and computing, which has allowed the various key players to gather
and analyze mountains of data about their respective fiefdoms, whether
they be executives of small companies struggling to break into the
big leagues, or the Chairman of the Federal Reserve steering the monetary
policy of the entire country.
Technology has also had a big role in keeping inflation at bay, even
as the economy has expanded beyond the point where historically pricing
pressures have become noticeable. Most obviously, it has helped improve
productivity, but the impact of technology goes beyond machines that
can make three widgets in the time it used to take to make one. Combined
with profit-driven managements who are willing to do anything and
lay off anyone to enhance their companies' bottom lines, technology
has influenced the attitude of workers, many of whom fear that their
job could be sacrificed at the altar of technology-driven margin-enhancing
change. Fed Chairman Alan Greenspan has referred to this as one of
the primary factors explaining the history-defying low level of inflation
in the face of declining unemployment.
Though unemployment is now just 5%, and some companies are having
to pay up for talent to fill specific positions, there seems to be
little in the way of systematic wage pressure, and most companies
are not experiencing much trouble filling positions as they open up.
Capacity utilization is stuck at around 83%-84%, a little below the
85% level at which point things have historically gotten sticky. Part
of the reason is that companies have been using some of their excess
cash flow to build new plants, as well as to modernize old ones by
installing new technology.
With so many people working, income growth has been OK and confidence
has been improving, which has helped keep consumption rising, even
though it would be hard to argue that there is any "pent-up" demand
left anywhere for anything. Production has also been up in order to
meet consumer demand, and while there was an abundance of inventory-building
in the first quarter (which added considerably to the almost unbelievable
5.9% real growth posted in that period), inventories are far from
out of hand (thank technology again for giving managers the tools
to perfect just-in-time techniques that have squeezed inventory-to-sales
ratios down to record low levels). Stir in a strong dollar and favorably
priced oil, and the low inflation story is just about complete. In
econo-speak, this has been a virtuous cycle, one that has managed
to avoid the problems and excesses of past periods of prosperity.
Examining corporate performance, one finds margins having risen to
mid-1960s levels, thanks once again to the cost-cutting efforts of
management across nearly the entire business spectrum. This has helped
fuel spectacular growth in earnings over the past five years, the
likes of which we've never seen before. Moreover, thanks to low inflation,
the "quality" of those earnings is better than it was a few years
ago. The shifting emphasis in our economy away from heavy industry
towards service and high technology may have permanently raised the
overall profitability of corporate America, since the latter have
traditionally enjoyed higher margins than the former.
This is especially true in the S&P 500; reviewing the substitutions
that have been made over the past several years reveals that the newcomers
have tended to be higher margin, higher growth companies than the
firms they've replaced, which introduces an upward bias in the composite's
valuation statistics. All of the merger activity that has taken place
over the years has also helped on the margin front, since such deals
tend to lead to reductions in redundant overhead and thus greater
profits to the combined entity when compared with the sum of the two
independent parts. History tells us that investors are willing to
pay a higher multiple for companies whose earnings are of higher quality
and derive from higher margins, so the expansion of margins is seen
as a doubly good thing.
The market's condition has been enhanced by a number of additional
macro/political/economic factors. Perhaps the most important of these
is the noteworthy reduction in the Federal budget deficit, which is
now estimated to be in the range of $60 to $75 billion and sinking
fast. Smaller deficits mean the government is issuing fewer bonds
to finance those deficits, and a smaller supply is a good thing in
the eyes of the bond market. One more thing worth noting: excluding
interest payments on debt already outstanding, the Federal government
is operating at a record surplus already. Many bond investors simply
reinvest their interest payments in the purchase of more bonds, so
that source of demand for bonds is unlikely to go away anytime soon.
Speaking of demand, foreign demand for US Treasury securities is also
on the rise. The apparent disarray in the European Community as per
its attempts to create a unified currency has likely led some offshore
investors to seek the relative safety and stability of the US, where
the political scene is calm and the economy is doing well. Once again,
greater demand, even if it proves temporary, meeting headlong with
decelerating growth in supply is the ideal setting for lower long-term
rates, and the bond market has indeed been very strong over the past
couple of months.
The bond market has not been the sole arena to host a surge in demand.
Following a brief lull, cash flows heading into equity mutual funds
have jumped once again in recent weeks, as investors have feared that
they may be missing one of the last great bull markets of their lives.
Corporations have also been active buyers of their own shares, utilizing
some of their abundant free cash (courtesy of those wide margins referred
to above). The recent pick-up in merger and acquisition activity completes
the demand trifecta, as both strategic and financial buyers have apparently
had money burning holes in their pockets.
Another plus for the stock market in recent weeks was the news of
a proposed cut in the capital gains tax rate, first announced in early
May. Although it raised the specter of a wave of selling by investors
eager to cash in some of their massive unrealized capital gains, such
selling has yet to materialize. Perhaps investors have read their
history books and have realized that stocks have tended to do well
in the couple of years after such tax cuts in the past, or perhaps
investors are reluctant to pay any taxes, even at the lower rate.
In any case, news of the cut has reinforced the increasingly compelling
case for smaller stocks, which have tended to be the best performers
of all following past reductions in the capital gains tax rate.*
With so much in its favor, we probably should not be surprised by
the market's surge. However, we are concerned that in their euphoria,
investors have overlooked valuation as they have poured ever more
money into stocks. By every measure we employ, equities are trading
at or near record high levels. While valuation by itself rarely causes
stocks to decline, and the longer term prospects for stocks remain
bright, such high prices leave little room for negative surprises,
and foster heightened volatility in the short run (witness the nervous
reaction of the stock market to comments by the Japanese prime Minister).
In such times, investors are wise to exercise extra care when constructing
their portfolios, and to remember that though past performance is
no indication of future results, diversification has historically
proven to be one of the best ways to preserve capital and to reduce
risk.
/s/ Charlie Crane
Charlie Crane
Chief Market Strategist
Key Asset Management Inc.
June 25, 1997
*Past performance is no guarantee of future results.
Note: The views expressed in the Investment Review and Economic Outlook
are through June 25, 1997 and are subject to change at any time based
on market, economic and other conditions.
<TABLE>
May 31, 1997 (Unaudited)
KEYCHOICE GROWTH FUND
Statement of Investments
<CAPTION>
SECURITY SHARES OR VALUE
DESCRIPTION PRINCIPAL AMOUNT
<S> <C> <C>
MUTUAL FUNDS (99.7%):
Equity Funds (79.3%):
Victory Value Fund 3,787 $ 60,057
Victory Diversified Stock Fund 3,641 60,081
Victory Growth Fund 254 4,298
Victory Special Value Fund 2,552 38,941
PBHG Growth Fund 1,269 30,152
Neuberger & Berman Genesis Fund 2,937 39,244
Victory Special Growth Fund 1,638 22,078
Victory International Growth Fund 6,497 88,159
343,010
Fixed Income/Bond Funds (14.9%):
SBSF Convertible Securities Fund 1,603 21,492
Victory Investment Quality Bond Fund 4,515 42,807
64,299
Money Market Funds (5.5%):
Victory Financial Reserves Fund 23,670 23,670
Total Investments
(cost $406,761)<F1> 99.7% 430,979
Other assets less liabilities 0.3% 1,363
TOTAL 100.0% $432,342
<FN>
<F1> Represents cost for federal income tax purposes and differs from
value by net unrealized appreciation of securities as follows:
Unrealized appreciation $24,508
Unrealized depreciation (290)
Net unrealized appreciation $24,218
</TABLE>
See accompanying Notes to Financial Statements
<TABLE>
May 31, 1997 (Unaudited)
KEYCHOICE MODERATE GROWTH FUND
Statement of Investments
<CAPTION>
SECURITY SHARES OR
DESCRIPTION PRINCIPAL AMOUNT VALUE
<S> <C> <C>
MUTUAL FUNDS (100.0%):
Equity Funds (59.4%):
Victory Value Fund 22,395 $ 355,181
Victory Diversified Stock Fund 17,621 290,752
Victory Growth Fund 3,819 64,540
Victory Special Value Fund 12,907 196,960
PBHG Growth Fund 6,855 162,866
Neuberger & Berman Genesis Fund 17,269 230,716
Victory Special Growth Fund 9,901 133,471
Victory International Growth Fund 34,692 470,768
1,905,254
Fixed Income/Bond Funds (35.7%):
SBSF Convertible Securities Fund 11,969 160,503
Loomis Sayles Bond Fund 10,129 127,118
Victory Investment Quality Bond Fund 56,995 540,313
Victory Intermediate Income Fund 20,200 190,287
Victory Fund for Income 13,126 126,933
1,145,154
Money Market Funds (4.9%):
Victory Financial Reserves Fund 157,002 157,002
Total Investments
(cost $3,082,205)<F1> 100.0% 3,207,410
Other assets less liabilities 0.0% 873
TOTAL 100.0% $3,208,283
<FN>
<F1> Represents cost for federal income tax purposes and differs from
value by net unrealized appreciation of securities as follows:
Unrealized appreciation $128,692
Unrealized depreciation (3,487)
Net unrealized appreciation $125,205
</TABLE>
See accompanying Notes to Financial Statements
<TABLE>
May 31, 1997 (Unaudited)
KEYCHOICE INCOME & GROWTH FUND
Statement of Investments
<CAPTION>
SECURITY SHARES OR VALUE
DESCRIPTION PRINCIPAL AMOUNT
<S> <C> <C>
MUTUAL FUNDS (99.6%):
Equity Funds (34.0%):
Victory Value Fund 1,480 $ 23,472
Victory Diversified Stock Fund 1,656 27,330
Victory Growth Fund 231 3,902
Victory Special Value Fund 781 11,922
PBHG Growth Fund 497 11,817
Neuberger & Berman Genesis Fund 1,194 15,945
Victory Special Growth Fund 600 8,087
Victory International Growth Fund 2,243 30,434
132,909
Fixed Income/Bond Funds (60.6%):
SBSF Convertible Securities Fund 2,893 38,795
Loomis Sayles Bond Fund 2,791 35,032
Victory Investment Quality Bond Fund 9,444 89,533
Victory Intermediate Income Fund 4,537 42,740
Victory Fund for Income 3,216 31,096
237,196
Money Market Funds (5.0%):
Victory Financial Reserves Fund 19,553 19,553
Total Investments
(cost $379,935)<F1> 99.6% 389,658
Other assets less liabilities 0.4% 1,371
TOTAL 100.0% $391,029
<FN>
<F1> Represents cost for federal income tax purposes and differs from
value by net unrealized appreciation of securities as follows:
Unrealized appreciation $10,320
Unrealized depreciation (597)
Net unrealized appreciation $ 9,723
</TABLE>
See accompanying Notes to Financial Statements
<TABLE>
May 31, 1997 (Unaudited)
KEYCHOICE FUNDS
Statements of Assets and Liabilities
<CAPTION>
Key Choice Key Choice
Key Choice Moderate Income &
Growth Fund Growth Fund Growth Fund
<S> <C> <C> <C>
ASSETS:
Investments, at value (cost $406,761, $3,082,205, & $379,935) $430,979 $3,207,410 $389,658
Dividend and interest receivable 93 640 87
Deferred organization costs 47,035 47,035 47,035
Prepaid expenses and other assets 3,402 2,365 3,416
Total Assets 481,509 3,257,450 440,196
LIABILITIES:
Payable for organization costs 49,167 49,167 49,167
Accrued expenses and other liabilities:
Investment advisory fees -- -- --
Administration fees -- -- --
Custodian, accounting and transfer agent fees -- -- --
Total Liabilities 49,167 49,167 49,167
NET ASSETS--Applicable for 40,405, 304,759 and 37,809 shares,
respectively, of common stock outstanding (1 billion
shares per fund authorized)) $432,342 $3,208,283 $391,029
NET ASSETS:
Paid in Capital 401,844 3,061,570 377,313
Undistributed net investment income 532 13,600 1,791
Net unrealized appreciation on investments 24,218 125,205 9,723
Accumulated undistributed net realized gains
from investment transactions 5,748 7,908 2,202
NET ASSETS $432,342 $3,208,283 $391,029
NET ASSET VALUE--OFFERING AND REDEMPTION PRICE PER SHARE $10.70 $10.53 $10.34
</TABLE>
See accompanying Notes to Financial Statements
<TABLE>
For the Period Ended May 31, 1997<F1> (Unaudited)
KEYCHOICE FUNDS
Statements of Operations
<CAPTION>
Key Choice Key Choice
Key Choice Moderate Income &
Growth Fund Growth Fund Growth Fund
<S> <C> <C> <C>
Investment Income:
Dividend income $ 851 $ 20,771 $ 3,651
Interest income 267 2,256 335
Total Income 1,118 23,027 3,986
Expenses:
Investment advisory fees 177 1,513 209
Administration fees 2,271 2,288 2,273
Accounting fees 13,511 13,511 13,755
Custodian fees 2,340 2,340 2,400
Legal and audit fees 1,926 2,686 1,980
Organization costs 2,965 2,965 2,965
Trustees' fees and expenses 0 91 1
Transfer agent fees 2,483 2,483 2,483
Registration and filing fees 6,625 7,281 6,783
Other expenses 49 921 82
Total expenses before expense reimbursements 32,347 36,079 32,931
Less: Expense waivers and reimbursements (32,171) (34,565) (32,723)
Net Expenses 176 1,514 208
NET INVESTMENT INCOME 942 21,513 3,778
REALIZED GAINS FROM INVESTMENTS:
Net realized gains from investment transactions 5,748 7,908 2,202
Net change in unrealized appreciation on investments 24,218 125,205 9,723
Net realized/unrealized gains on investments 29,966 133,113 11,925
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS $30,908 $154,626 $15,703
<FN>
<F1> For the period December 31, 1996 (commencement of operations) through
May 31, 1997.
</TABLE>
See accompanying Notes to Financial Statements
<TABLE>
For the Period Ended May 31, 1997<F1> (Unaudited)
KEYCHOICE FUNDS
Statements of Changes in Net Assets
<CAPTION>
Key Choice Key Choice
Key Choice Moderate Income &
Growth Fund Growth Fund Growth Fund
<S> <C> <C> <C>
From Investment Activities:
Operations:
Net investment income $ 942 $ 21,513 $ 3,778
Net realized gains from investment transactions 5,748 7,908 2,202
Net change in unrealized appreciation from investments 24,218 125,205 9,723
Change in net assets resulting from operations 30,908 154,626 15,703
Dividends to Shareholders:
From net investment income (410) (7,913) (1,987)
Capital Stock Transactions:
Proceeds from shares issued 414,762 3,572,865 377,339
Dividends reinvested 410 7,079 1,986
Cost of shares redeemed (13,328) (518,374) (2,012)
Change in net assets from capital stock transactions 401,844 3,061,570 377,313
Change in net assets 432,342 3,208,283 391,029
Net Assets:
Beginning of period -- -- --
End of period $432,342 $3,208,283 $391,029
Share Transactions:
Issued 41,631 354,415 37,808
Reinvested 41 702 199
Redeemed (1,268) (50,359) (199)
Change in shares 40,404 304,758 37,808
<FN>
<F1> For the period December 31, 1996 (commencement of operations) through
May 31, 1997.
</TABLE>
See accompanying Notes to Financial Statements
<TABLE>
(Unaudited)
KEYCHOICE FUNDS
Financial Highlights
<CAPTION>
Key Choice Key Choice
Key Choice Moderate Income &
Growth Fund<F2> Growth Fund<F2> Growth Fund<F2>
Period Ended Period Ended Period Ended
May 31, 1997 May 31, 1997 May 31, 1997
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.00 $ 10.00 $ 10.00
Investment Activities
Net investment income 0.05 0.09 0.14
Net realized and unrealized gains from investment transactions 0.69 0.48 0.29
Total from Investment Activities 0.74 0.57 0.43
Distributions
Net investment income (0.04) (0.04) (0.09)
Net Asset Value, End of Period $ 10.70 $ 10.53 $ 10.34
Total Return 7.40%<F3> 5.75%<F3> 4.33%<F3>
Ratios/Supplemental Data:
Net Assets, End of Period (000) $ 432 $ 3,208 $ 391
Ratio of expenses to average net assets 0.20%<F4> 0.20%<F4> 0.20%<F4>
Ratio of net investment income to average net assets 1.05%<F4> 2.81%<F4> 3.58%<F4>
Ratio of expenses to average net assets<F1> 36.04%<F4> 4.71%<F4> 31.17%<F4>
Ratio of net investment income to average net assets<F1> (-34.79%)<F4> (-1.71%)<F4> (-27.40%)<F4>
Portfolio Turnover 63.27% 64.13% 44.96%
Average Commission Rate per share -- -- --
<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> For the period December 31, 1996 (commencement of operations) through
May 31, 1997.
<F3> Not annualized.
<F4> Annualized.
</TABLE>
See accompanying Notes to Financial Statements
(Unaudited)
KEYCHOICE FUNDS
Notes to Financial Statements
Note 1
Organization:
The KeyFunds (collectively, the "Company") were organized on May 26,
1983, and are registered under the Investment Company Act of 1940,
as amended, (the "1940 Act") as an open-end investment company established
as a Maryland Corporation. The Company, incorporated under the name
SBSF Funds, Inc., is currently doing business under the name "Key
Mutual Funds." The Company has 25 billion authorized shares of $.01
par value capital stock. The Company presently offers shares of the
Key Stock Index Fund, SBSF Fund, SBSF Convertible Securities Fund,
SBSF Capital Growth Fund, Key Money Market Mutual Fund, KeyChoice
Growth Fund, KeyChoice Moderate Growth Fund, and KeyChoice Income
& Growth Fund. The accompanying financial statements refer only to
the KeyChoice Growth Fund, KeyChoice Moderate Growth Fund and KeyChoice
Income and Growth Fund (collectively, the "KeyChoice Funds"). The
KeyChoice Funds commenced operations on December 31, 1996.
The investment objective of the KeyChoice Growth Fund is to seek to
provide growth of capital by allocating its assets primarily among
registered investment companies that invest in equity securities.
The investment objective of the KeyChoice Moderate Growth Fund is
to seek to provide growth of capital combined with a moderate level
of current income by allocating its assets primarily among registered
investment companies that invest in equity securities and, to a lesser
extent, fixed income securities. The investment objective of the KeyChoice
Income and Growth Fund is to seek to provide current income combined
with moderate growth of capital by allocating its assets primarily
among registered investment companies that invest in fixed income
securities and, to a lesser extent, equity securities.
Note 2
Significant Accounting Policies:
The following is a summary of significant accounting policies followed
by the KeyChoice Funds 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 in registered investment companies are valued at the closing
net asset value per share on the day of valuation. Short-term investments
with maturities of sixty days or less are valued at amortized cost,
which approximates market value.
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 using the specific identification method.
Repurchase Agreements:
The Funds may acquire repurchase agreements from financial institutions
such as banks and broker-dealers which the KeyChoice Fund's investment
adviser deems creditworthy under guidelines approved by the Board
of Directors, 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 the KeyChoice Funds plus
interest negotiated on the basis of current short-term rates, which
may be more or less than the rate on the underlying Fund 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 KeyChoice Fund's
custodian or another qualified custodian or in the Federal Reserve/Treasury
book-entry system. Repurchase agreements are considered to be loans
by a Fund under the 1940 Act.
Dividends to Shareholders:
Dividends from net investment income are declared and paid quarterly.
Distributable net realized capital gains, if any, are declared and
distributed at least annually.
Dividends from net investment income and from net realized capital
gains are determined in accordance with federal income tax regulations
which may differ from generally accepted accounting principles. These
differences are primarily due to differing treatments for deferrals
of certain losses. Permanent book and tax basis differences are reflected
in the components of net assets.
Federal Income Taxes:
It is the policy of the KeyChoice Funds to continue to qualify as
regulated investment companies 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.
Organizational Expense:
Costs incurred in connection with the organization of the KeyChoice
Funds are being amortized on a straight-line basis over a period not
to exceed sixty months from the date the Funds commenced operations.
Other:
Expenses that are directly related to the KeyChoice Funds are charged
directly to those Funds. Other operating expenses of the KeyChoice
Funds are prorated to each KeyChoice Fund on the basis of relative
net assets or other appropriate basis.
Note 3
Purchases and Sales of Securities:
Purchases and sales of securities (excluding short-term securities)
for the period ended May 31, 1997 were as follows (amounts in thousands):
<TABLE>
<CAPTION>
Purchases Sales
<S> <C> <C>
KeyChoice Growth Fund $ 609 $ 135
KeyChoice Moderate Growth Fund 4,504 1,285
KeyChoice Income and Growth Fund 675 114
</TABLE>
Note 4
Investment Advisory and Administration Fees and Transactions with
Affiliates
(a) Investment Advisory, Custodian and Administration Fees
The investment adviser to the KeyChoice Funds is Key Asset Management
Inc. ("KAM" or the "Adviser"), a New York corporation that is registered
as an investment adviser with the SEC. The Adviser is a wholly owned
subsidiary of KeyBank National Association, which is a wholly owned
subsidiary of KeyCorp. On February 28, 1997, KAM became the surviving
corporation after the reorganization of the following four indirect
investment adviser subsidiaries of KeyCorp: Spears, Benzak, Salomon
& Farrell, Inc. ("SBSF"), KeyCorp Mutual Fund Advisers, Inc., Society
Asset Management, Inc., and Applied Technology Investments, Inc. Pursuant
to the terms of the reorganization, the subsidiaries identified above
were merged into SBSF and SBSF then changed its name to Key Asset
Management Inc. Under the terms of the investment advisory agreements,
the Adviser is entitled to receive fees equal to 0.20% of each of
the KeyChoice Funds average daily net assets. KeyTrust Company of
Ohio, N.A., an affiliate of the adviser, serves as custodian for all
of the KeyChoice Funds, and receives reimbursement of actual out-of-pocket
expenses incurred.
BISYS Fund Services (the "Administrator"), an indirect, wholly-owned
subsidiary of The BISYS Group, Inc. ("BISYS") serves as the administrator
and distributor of the KeyChoice Funds. Certain officers of the KeyChoice
Funds are affiliated with BISYS. Such officers receive no direct payments
or fees from the KeyChoice Funds for serving as officers of the KeyChoice
Funds.
Under the terms of the administration agreement, the Administrator's
fee is computed at the annual rate of 0.01% of the average daily net
assets of each of the KeyChoice Funds with a minimum of $12,000 per
fund per year. BISYS Fund Services, Ohio Inc., an affiliate of BISYS,
serves the KeyChoice Funds as Mutual Fund Accountant. Under the terms
of the Fund Accounting Agreement, the fee is based on a percentage
of average daily net assets with a minimum monthly fee of $1,666.66
per fund.
Fees may be voluntarily reduced to assist the KeyChoice Funds in maintaining
competitive expense ratios.
Additional information regarding related party transactions is as
follows for the period ended May 31, 1997:
<TABLE>
<CAPTION>
Investment
Advisory Fees Expenses
Voluntarily Reimbursed
Reduced by Distributor
<S> <C> <C>
KeyChoice Growth $ 90 $32,081
KeyChoice Moderate Growth $765 $33,800
KeyChoice Income and Growth $106 $32,617
(b) Directors' Fees
Fees of $7,500 per annum, and $750 per meeting, are paid to each director
of the Company.
(c) Distribution Plan and Shareholder Servicing Plan
Pursuant to a plan adopted under 12b-1 under the Act, the Fund is
permitted to make distribution payments to the extent that any portion
of fees paid under a Shareholder Servicing Plan (described below)
are subsequently deemed to be for services primarily intended to result
in the sale of Fund shares.
The Company currently has a Shareholder Servicing Plan under which
the Fund may pay fees of up to an annual rate of 0.25% of their average
daily net assets for fees incurred in connection with personal service
and the maintenance of accounts holding shares of the Fund. Such agreements
may be entered into between the Company, on behalf of the Fund, and
various shareholder servicing agents including the Distributor and
affiliates of KeyCorp and the Adviser.
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(logo)
KeyFunds
1-800-KEYFUND
2 KF/KCHS-SEM (5/97)
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