ANNUAL REPORT
November 30, 1997
KeyChoice
Funds
KeyChoice Income & Growth Fund
KeyChoice Moderate Growth Fund
KeyChoice Growth Fund
LOGO(R)
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 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 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(R)
KeyFunds
KEYCHOICE FUNDS
Letter to Our Shareholders
Dear Shareholders,
We are happy to present our first Annual Report for the period ended
November 30, 1997. The KeyChoice Funds give many different investors
with particular needs the ability to choose one portfolio that will
meet their individual investment objectives, personal time horizons
and specific degrees of risk tolerance.
Early in the year the KeyChoice Funds became the first portfolios
within the "fund of funds" category to receive permission from the
Securities and Exchange Commission (SEC) to invest in outside, unaffiliated
mutual funds, that is underlying funds outside of and unaffiliated
with the Victory Portfolio and Key Mutual Fund families. This expanded
diversification allowed us to add additional funds that are expected
to be complementary to, and managed with the same degree of consistency
as our own.
While maintaining good, consistent returns is an important criterion,
consistent management style is the single most important factor that
we look for when choosing an underlying fund. With so many mutual
funds available, we are able to be very selective in choosing additional
outside funds to enhance the overall portfolios. We are very excited
about having this added flexibility in implementing our asset allocation
strategies.
We welcome your comments on this Annual Report.
/s/ Leigh A. Wilson
Leigh A. Wilson
President, The Key Funds
January 15, 1998
NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE
KEYCHOICE FUNDS
Investment
Review and
Outlook
Dances with Bears
At a time of the year when the air usually gets cool and bears prepare
to hibernate, temperatures have instead been rising from the heat
of furious trading on capital markets around the world. Rather than
trying to find a cozy cave in which to sleep away the winter, bears
of the Wall Street variety have been seen lurking around trading desks
on six continents, sending analysts and investors scurrying for shelter.
If one is looking retrospectively, there is some latitude in what
constitutes a bear market, as compared to a correction in a bull market.
Corrections are generally considered to be short-term in nature (lasting
only a few months at worst), and are usually contained to less than
20% (the retreat of August-October 1987 stands out as a significant
exception). Bear markets, on the other hand, are typically defined
as retreats of 20% or more that stretch out for at least a year. In
the ever-rosy ways of Wall Street, everything that's neither a bear
market nor a correction must therefore be a bull market. But when
returns are positive but below average, or negative but not excessively
so, they typify markets that are neither bull nor bear, but some sort
of investment purgatory.
The primary reason I have been hesitant to proclaim a bear market
is the lack of an obvious domestic policy mistake, either fiscal or
monetary. Nearly every bear market of the past can be traced to policy
blunders of one sort or another, the most famous being the Smoot-Hawley
trade restrictions that helped turn the stock market crash of 1929
into the Great Depression of the 1930s. If one looks at this country's
policy stance today, there is little to be worried about. Monetary
policy under Fed Chairman Alan Greenspan has not been overly restrictive
(though the word "easy" does not come to mind, either), and his most
recent comments suggest that he is not going to tighten soon. And
while the balanced budget amendment could prove to be a modest fiscal
drag at times, the recent tax law changes should be somewhat stimulative,
and I think the net impact will be positive.
However, we live in a global market, as we have been reminded time
and again in recent months. For as clean as the policy slate may be
in the U.S., those of many of our nation's most important trading
partners are covered with glaring mistakes, and the impact cannot
escape the domestic markets. But let's say that our nation's various
policy-makers keep steering the boat in the right direction, and make
all of the right decisions. Investors may still have to dance with
the bears as the perfect balance of low unemployment, good earnings
growth and low inflation begins to unravel in 1998. We've already
experienced fairly sharp deceleration in trend-line earnings growth,
but I think that we're about to down-shift another notch.
We've already heard warnings from great companies like Coca-Cola,
Gillette and Procter & Gamble, whose non-U.S. profits have been damaged
by the strength of the dollar and the weakness of various local economies
overseas. More important, I think that domestic profit margins have
peaked, which may reduce bottom line growth to the mid-single digits
(roughly equal to top line growth). Operating margins are likely to
be squeezed a little by higher labor costs, the product of the nation's
lowest rate of unemployment in 24 years.
As evidenced by the latest statistics from the Labor Department, wages
are accelerating as employers are having to pay up to attract and
to retain qualified help. While productivity gains can be expected
to offset some of this wage increase, look for overall unit labor
costs to rise at a rate well in excess of inflation next year (don't
forget, labor accounts for nearly three-quarters of the cost of producing
the nation's goods and services). Speaking of offsets, lower interest
rates will likely have a neutralizing effect on the decline in operating
margins, bringing 1998 net margins in flat with 1997 levels. The costs
associated with retooling (computer hardware and software) for the
year 2000 will also be substantial.
Synthesizing these forecasts, it looks to me like the S&P 500 will
earn about $48.00 or so from operations in 1998, followed by $50.50-$51.00
in 1999. Short-term interest rates are likely to remain unchanged
for the next several months, and perhaps decline a bit by the end
of 1998. Long rates are likely to trade between 6.0% and 6.5%, though
they could move below 6.0% if it appears that a domestic economic
slowdown will unfold sooner rather than later. At 955, the S&P is
now trading at a little over 19 times next year's estimated earnings,
nearly three times the anticipated three-year earnings growth rate.
Even with interest rates as low as they are, this strikes me as being
at least 10% too rich, especially when one can buy the stocks of smaller
and mid-sized companies, whose earnings are expected to grow at a
substantially faster pace, for roughly the same multiple.
So why am I not 100% sure that we're in a bear market, given the prospects
detailed above? For one thing, U.S. investors continue to pour huge
sums of new cash into the market, despite the scary headlines of the
past few months. Much of this is coming from 401(k) plans, which put
money into the markets regardless of the environment. In addition,
corporations stand ready to buy their stock on dips, putting some
of their cash to work in support of their stock price. I'm not a big
fan of supply and demand arguments for stocks (to me, the supply is
ultimately infinite, since companies can always issue more shares),
but I can't ignore them, either. In addition, I think that the margin
pressure described above will catalyze a significant new wave of merger
and acquisition activity in a wide variety of industries, as competitors
seek ways to increase efficiency.
By itself, such deal-making can't stop a bear market, but it can foster
a "Who's next?" mentality among investors, who in turn bid up the
shares of the stock they believe to be the next acquisition target.
Third, I've heard from a few bullishly-inclined friends that things
can't get much worse overseas. Therefore, whenever one of the afflicted
nations in Asia or elsewhere decides to undo some of its policy mistakes,
overseas markets have the potential to explode to the upside, and
carry the U.S. stock market with them. Finally, I'm keenly aware of
the "safe harbor" argument espoused by many market observers. According
to this view, the U.S. markets may not be cheap and the economy may
not be completely wart-free, but they look a lot better than anything
else out there, and will therefore attract the marginal investment
dollar.
Frankly, these are all bull market beliefs. One of the qualitative
traits of a true bear market is the erosion and eventual absence of
such hopeful views. Though there is considerably greater worry on
Wall Street today compared to this past summer, the prevailing attitude
there and on Main Street is still one of optimism. Should investor
confidence deteriorate, I think the market averages will follow suit
(or is it the other way around?).
Regardless of which animal is roaming the streets, market volatility
promises to remain high. Although a savvy investor who takes advantage
of peaks and valleys to sell and buy stocks could benefit from this
scenario, fundamental company-specific research is still critical,
especially since I think it will be harder to post good performance
by merely making sector bets. Above all, be alert. As big as bears
are, they're also pretty sneaky, and you can't always count on seeing
them before they see you (and your portfolio).
/s/ Charles G. Crane
Charlie Crane
Chief Market Strategist, Key Asset Management Inc.
November 30, 1997
KEYCHOICE FUNDS
Fund Managers'
Comments
Each portfolio of the KeyChoice Funds currently consists of 11-14
underlying mutual funds. Each underlying fund was specifically chosen
based on its type or style. A percentage of the overall mix is allocated
to each of the underlying funds based on how these types and styles
interact, as well as how they contribute to the overall objective
of the Fund.
The KeyChoice Funds are managed through a committee process. This
team approach towards portfolio management, incorporating individuals
with different investment specialties, from various areas within the
organization, is used to determine the tactical and strategic allocation
of each fund. The Committee reviews both past performance as well
as expected future performance of the underlying funds and uses target
allocation ranges to determine the current portfolio allocation mix
of each fund. This constant review process keeps the three portfolios
in line with their overall objectives.
As of November 30, 1997, the portfolio for the KeyChoice Income &
Growth Fund consisted of 14 underlying funds. In light of the overall
market ups and downs, the performance of the Fund has been pretty
much in line with our expectations for its first 11 months. With a
return for this period of 11.62%, we compare the Fund's performance
to both the Lehman Aggregate Bond Index with an 8.59% return and the
S&P 500 with a return of 31.11%. Based on its objective of providing
a current level of income with some growth, the Fund holds an investment
mix of approximately 60% fixed income and 40% equity. The performance
over time should fall between the established fixed income (Lehman
Aggregate Bond Index) and equity (S&P 500) benchmarks.
The same 14 underlying funds were used in the portfolio mix of the
KeyChoice Moderate Growth Fund. While the more conservative Income
& Growth Fund's primary concern is maintaining income with some growth,
the Moderate Growth Fund has as its primary objective growth of principal,
with current income as a secondary concern. With a return of 13.64%,
this Fund also falls between the two standard benchmarks, the S&P
500 and the Lehman Aggregate Bond Index. Holding an investment mix
of approximately 40% fixed income and 60% equity, the higher return
is the result of the heavier weighting in equities, which have performed
better than fixed income investments this year.
The KeyChoice Growth Fund held 11 underlying funds. For this period
the Fund's performance of 15.46% falls between that of the two benchmarks.
With an even heavier weighting in equities, which, again, have performed
better than fixed income investments this year, we see an even higher
return from this portfolio. The investment mix of approximately 20%
fixed income and 80% equity shows the portfolio's emphasis on long
term growth by holding a concentration in equity investments.
All three KeyChoice Funds share a common investment process and philosophy.
Each Fund is continuously managed and monitored, and as market conditions
change, they are rebalanced to their respective target allocations.
This helps keep investors on track towards reaching their personal
goals. Changes in weightings will be few and minor in nature, as we
believe this will best serve investors in the long run. To achieve
each fund's overall objective and to preserve the commitment to asset
allocation, the individual holdings within the portfolios may change
as the underlying funds selected to represent styles change.
Looking ahead, the addition of the Victory Real Estate Investment
Fund is one option that is currently being reviewed.* A movement into
real estate investment trusts would bring to the portfolios an asset
class that is not only unique, but historically less volatile than
the broader equity market.
As they stand now and as they will continue to be, the KeyChoice Funds
are broadly diversified into many different types and styles of underlying
mutual funds. And although this recent period has been marked by dramatic
upward and downward swings in overall market performance, the portfolios
themselves have not moved up or down to as great a degree as the general
market. Currently inflation is well contained, interest rates are
stable and corporate profits are still robust. Long term, the basic
fundamentals for the stock market appear to be very strong. However,
there is still some concern that the US economy could slow. Fortunately,
the KeyChoice Funds are expected to help investors ride through these
periods of market volatility and indecision by the fact that they
are so diversified. Each portfolio's diversification across funds
and asset classes should better position them for meeting their objective
in the long term.
* For more information about the Victory Funds, including charges and
expenses, request a prospectus by calling 1-800-KEY-FUND(R) (1-800-539-3863).
Please read the prospectus carefully before investing or sending money.
<TABLE>
KEYCHOICE INCOME & GROWTH FUND vs.
S&P 500 AND LEHMAN AGGREG. BOND INDEX
<CAPTION>
Lehman Aggreg. KeyChoice Income
Bond Index <F2> & Growth Fund S&P 500 <F1>
<S> <C> <C> <C>
12/96 10,000 10,000 10,000
1/97 10,031 10,110 10,625
2/97 10,056 10,110 10,708
3/97 9,944 9,938 10,268
4/97 10,094 10,090 10,881
5/97 10,190 10,433 11,544
6/97 10,311 10,675 12,061
7/97 10,589 11,091 13,020
8/97 10,499 10,919 12,291
9/97 10,655 11,285 12,964
10/97 10,809 11,121 12,531
11/97 10,859 11,162 13,111
<FN>
<F1> The S&P 500 Index (S&P 500) is an index of widely held common stocks
which is unmanaged and therefore not subject to any fees or expenses.
<F2> The Lehman Brothers Aggregate Bond Index (Lehman Aggregate) is
a broad-based unmanaged index that represents the general performance
of longer-term (greater than 1 year), investment-grade fixed-income
securities.
</TABLE>
<TABLE>
KEYCHOICE INCOME
& GROWTH FUND
<CAPTION>
TOTAL RETURN
SINCE INCEPTION
<S> <C>
12/31/96 11.62%
</TABLE>
<TABLE>
KEYCHOICE MODERATE
GROWTH FUND
<CAPTION>
TOTAL RETURN
SINCE INCEPTION
<S> <C>
12/31/96 13.64%
</TABLE>
<TABLE>
KEYCHOICE MODERATE GROWTH FUND vs.
S&P 500 AND LEHMAN AGGREG. BOND INDEX
<CAPTION>
Lehman Aggreg. KeyChoice Moderate
Bond Index <F2> Growth Fund S&P 500 <F1>
<S> <C> <C> <C>
12/96 10,000 10,000 10,000
1/97 10,031 10,140 10,625
2/97 10,056 10,250 10,708
3/97 9,944 9,952 10,268
4/97 10,094 10,093 10,881
5/97 10,190 10,575 11,544
6/97 10,311 10,876 12,061
7/97 10,589 11,352 13,020
8/97 10,499 11,129 12,291
9/97 10,655 11,618 12,964
10/97 10,809 11,324 12,531
11/97 10,859 11,364 13,111
<FN>
<F1> The S&P 500 Index (S&P 500) is an index of widely held common stocks
which is unmanaged and therefore not subject to any fees or expenses.
<F2> The Lehman Brothers Aggregate Bond Index (Lehman Aggregate) is
a broad-based unmanaged index that represents the general performance
of longer-term (greater than 1 year), investment-grade fixed-income
securities.
</TABLE>
The accompanying presentations are hypothetical illustrations of the
results of a $10,000 investment on the respective inception dates
of each Fund and the subsequent reinvestment of all dividends and
capital gain distributions through November 30, 1997. Investment returns
and principal values will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost. The total
return figures set forth herein may reflect the waiver of a portion of certain
fees for various periods since the Funds' inception date. In such instances and
without such waiver of fees, the total returns would have been lower. Fee
waivers are voluntary and may be modified or terminated at any time.
The performance data quoted represent past performance and are not
predictive of future results.
<TABLE>
KEYCHOICE GROWTH FUND vs.
S&P 500 AND LEHMAN AGGREG. BOND INDEX
<CAPTION>
Lehman Aggreg. KeyChoice
Bond Index <F2> Growth S&P 500 <F1>
<S> <C> <C> <C>
12/96 10,000 10,000 10,000
1/97 10,031 10,190 10,625
2/97 10,056 10,170 10,708
3/97 9,944 9,917 10,268
4/97 10,094 10,108 10,881
5/97 10,190 10,741 11,544
6/97 10,311 11,105 12,061
7/97 10,589 11,608 13,020
8/97 10,499 11,346 12,291
9/97 10,655 11,950 12,964
10/97 10,809 11,496 12,531
11/97 10,859 11,546 13,111
The above presentation is a hypothetical illustration of the results
of a $10,000 investment on the Fund's inception date and the subsequent
reinvestment of all capital gain distributions through November 30, 1997.
Investment returns and principal values will fluctuate so that
an investor's shares, when redeemed, may be worth more or less than
their original cost. The total return figures set forth herein may reflect
the waiver of a portion of certain fees for various periods since the Fund's
inception date. In such instances and without such waiver of fees, the total
returns would have been lower. The performance data quoted
represent past performance and are not indicative of future results.
<FN>
<F1> The S&P 500 Index (S&P 500) is an index of widely held common stocks
which is unmanaged and therefore not subject to any fees or expenses.
<F2> The Lehman Brothers Aggregate Bond Index (Lehman Aggregate) is
a broad-based unmanaged index that represents the general performance of
longer-term (greater than 1 year), investment-grade fixed-income securities.
</TABLE>
<TABLE>
KEYCHOICE
GROWTH FUND
<CAPTION>
TOTAL RETURN
SINCE INCEPTION
<S> <C>
12/31/96 15.46%
</TABLE>
<TABLE>
November 30, 1997
KEYCHOICE GROWTH FUND
Statement of Portfolio Investments
<CAPTION>
SECURITY
DESCRIPTION SHARES VALUE
<S> <C> <C>
MUTUAL FUNDS (100.0%)
Equity Funds (80.3%)
Victory Value Fund 59,679 $1,063,470
Victory Diversified Stock Fund,
Class A 64,373 1,060,867
Victory Growth Fund 4,034 76,413
Victory Special Value Fund,
Class A 39,898 672,678
PBHG Growth Fund <F2> 19,958 506,924
Neuberger & Berman
Genesis Fund <F2> 44,463 715,860
Victory Special Growth Fund <F2> 24,795 380,362
Victory International Growth
Fund, Class A 117,638 1,556,347
6,032,921
Fixed Income/Bond Funds (14.9%)
SBSF Convertible Securities Fund 25,860 370,579
Victory Investment Quality Bond
Fund 76,732 749,669
1,120,248
Money Market Funds (4.8%)
Victory Financial Reserves Fund 360,961 360,961
Total Mutual Funds
(cost $7,515,010) 7,514,130
Total Investments
(cost $7,515,010) <F1> 100.0% 7,514,130
Other assets in excess of liabilities 0.0% 885
TOTAL NET ASSETS 100.0% $7,515,015
<FN>
<F1> Represents cost for financial reporting purposes and differs
from cost basis for federal income tax purposes by the amount of losses
recognized for financial reporting purposes in excess
of federal income tax reporting of approximately $6,419. Cost for
federal income tax purposes differs from value by
net unrealized depreciation of securities as follows:
Unrealized appreciation $ 170,237
Unrealized depreciation (177,536)
Net unrealized depreciation $ (7,299)
<F2> Non-income producing securities.
See accompanying Notes to Financial Statements
</TABLE>
<TABLE>
November 30, 1997
KEYCHOICE MODERATE GROWTH FUND
Statement of Portfolio Investments
<CAPTION>
SECURITY
DESCRIPTION SHARES VALUE
<S> <C> <C>
MUTUAL FUNDS (100.0%)
Equity Funds (59.0%)
Victory Value Fund 48,253 $ 859,871
Victory Diversified Stock Fund,
Class A 42,534 700,965
Victory Growth Fund 8,268 156,599
Victory Special Value Fund,
Class A 27,483 463,360
PBHG Growth Fund <F2> 14,691 373,162
Neuberger & Berman
Genesis Fund <F2> 34,510 555,616
Victory Special Growth Fund <F2> 19,634 301,182
Victory International Growth
Fund, Class A 86,787 1,148,194
4,558,949
Fixed Income/Bond Funds (36.0%)
SBSF Convertible Securities Fund 26,750 383,323
Loomis Sayles Bond Fund 23,383 308,660
Victory Investment Quality Bond
Fund 134,557 1,314,625
Victory Intermediate
Income Fund 48,337 463,549
Victory Fund For Income 31,566 308,714
2,778,871
Money Market Funds (5.0%)
Victory Financial Reserves Fund 389,059 389,059
Total Mutual Funds
(cost $7,477,019) 7,726,879
Total Investments
(cost $7,477,019) <F1> 100.0% 7,726,879
Other assets in excess of liabilities 0.0% 1,034
TOTAL NET ASSETS 100.0% $7,727,913
<FN>
<F1> Represents cost for financial reporting purposes and differs
from cost basis for federal income tax purposes by the amount of losses
recognized for financial reporting purposes in excess
of federal income tax reporting of approximately $4,728. Cost for
federal income tax purposes differs from value by
net unrealized appreciation of securities as follows:
Unrealized appreciation $339,508
Unrealized depreciation (94,376)
Net unrealized appreciation $245,132
<F2> Non-income producing securities.
See accompanying Notes to Financial Statements
</TABLE>
<TABLE>
November 30, 1997
KEYCHOICE INCOME & GROWTH FUND
Statement of Portfolio Investments
<CAPTION>
SECURITY
DESCRIPTION SHARES VALUE
<S> <C> <C>
MUTUAL FUNDS (100.0%)
Equity Funds (33.8%)
Victory Value Fund 31,095 $ 554,115
Victory Diversified Stock Fund,
Class A 39,084 644,108
Victory Growth Fund 4,884 92,501
Victory Special Value Fund,
Class A 16,229 273,624
PBHG Growth Fund <F2> 10,419 264,647
Neuberger & Berman
Genesis Fund <F2> 22,086 355,590
Victory Special Growth Fund <F2> 11,598 177,919
Victory International Growth
Fund, Class A 54,697 723,643
3,086,147
Fixed Income/Bond Funds (60.9%)
SBSF Convertible Securities Fund 63,211 905,810
Loomis Sayles Bond Fund 62,167 820,607
Victory Investment Quality Bond
Fund 215,303 2,103,514
Victory Intermediate Income Fund 104,753 1,004,585
Victory Fund For Income 74,635 729,931
5,564,447
Money Market Funds (5.3%)
Victory Financial Reserves Fund 485,731 485,731
Total Mutual Funds
(cost $9,237,636) 9,136,325
Total Investments
(cost $9,237,636) <F1> 100.0% 9,136,325
Other assets in excess of liabilities 0.0% 1,162
TOTAL NET ASSETS 100.0% $9,137,487
<FN>
<F1> Cost for federal income tax purposes differs from value by
net unrealized depreciation of securities as follows:
Unrealized appreciation $ 88,323
Unrealized depreciation (189,634)
Net unrealized depreciation $(101,311)
<F2> Non-income producing securities.
See accompanying Notes to Financial Statements
</TABLE>
<TABLE>
November 30, 1997
KEYCHOICE FUNDS
Statements of Assets and Liabilities
<CAPTION>
KeyChoice KeyChoice
KeyChoice Moderate Income &
Growth Growth Growth
Fund Fund Fund
<S> <C> <C> <C>
ASSETS
Investments, at value (Cost $7,515,010; $7,477,019;
and $9,237,636 respectively) $7,514,130 $7,726,879 $9,136,325
Interest and dividends receivable 1,603 1,671 2,191
Receivable from brokers for investments sold 12,045 266 1,882
Receivable from affiliates 27,314 31,178 29,349
Unamortized organization costs 41,728 41,728 41,728
Prepaid expenses and other assets 7,402 7,407 7,399
Total Assets 7,604,222 7,809,129 9,218,874
LIABILITIES
Payable to brokers for investments purchased 12,045 266 1,882
Payable for organization costs 50,000 50,000 50,000
Accrued expenses and other payables:
Investment advisory fees 1,174 1,251 1,457
Administration fees 988 988 988
Accounting fees 4,458 5,150 5,904
Transfer agent fees 598 570 568
Custodian fees 13,310 18,408 16,474
Other 6,634 4,583 4,114
Total Liabilities 89,207 81,216 81,387
NET ASSETS--Applicable to 657,189, 690,892 and 839,132 shares
of capital stock outstanding, respectively $7,515,015 $7,727,913 $9,137,487
NET ASSETS
Shares of Capital Stock, $0.01 par share value 6,572 6,909 8,391
Paid in Capital 7,208,168 7,305,869 9,085,570
Accumulated undistributed net investment income 10,310 28,064 49,638
Net unrealized appreciation/depreciation from investments (880) 249,860 (101,311)
Accumulated undistributed net realized gains (losses)
from investment transactions 290,845 137,211 95,199
NET ASSETS $7,515,015 $7,727,913 $9,137,487
NET ASSET VALUE--OFFERING AND REDEMPTION PRICE PER SHARE $ 11.44 $ 11.19 $ 10.89
See accompanying Notes to Financial Statements
</TABLE>
<TABLE>
For the Period Ended November 30, 1997 <F1>
KEYCHOICE FUNDS
Statements of Operations
<CAPTION>
KeyChoice KeyChoice
KeyChoice Moderate Income &
Growth Growth Growth
Fund Fund Fund
<S> <C> <C> <C>
INVESTMENT INCOME
Interest income $ 8,901 $ 11,021 $ 8,312
Dividend income 25,787 85,141 73,935
Total Income 34,688 96,162 82,247
EXPENSES
Investment advisory fees 6,257 7,589 4,450
Administration fees 11,000 11,000 11,000
Shareholder servicing fees 2,387 3,119 1,410
Custodian fees 21,966 29,125 26,166
Accounting fees 32,422 34,531 35,070
Legal fees 7,241 6,197 3,908
Audit fees 4,583 4,586 4,583
Directors' fees and expenses 282 255 145
Transfer agent fees 5,768 5,740 5,679
Registration and filing fees 14,054 14,883 14,167
Printing costs 338 336 305
Amortization of organization costs 8,272 8,272 8,272
Other expenses 202 362 125
Total expenses before expense waivers and reimbursements 114,772 125,995 115,280
Less: Fee waivers (3,402) (4,402) (3,250)
Less: Expense reimbursements (102,115) (111,233) (105,641)
Net Expenses 9,255 10,360 6,389
NET INVESTMENT INCOME 25,433 85,802 75,858
REALIZED/UNREALIZED GAINS (LOSSES) FROM INVESTMENTS
Net realized gains from investment transactions 290,845 137,211 95,199
Net change in unrealized appreciation/depreciation from investments (880) 249,860 (101,311)
Net realized/unrealized gains (losses) from investments 289,965 387,071 (6,112)
CHANGES IN NET ASSETS RESULTING FROM OPERATIONS $ 315,398 $ 472,873 $ 69,746
<FN>
<F1> For the period December 31, 1996 (commencement of operations) through November 30, 1997.
See accompanying Notes to Financial Statements
</TABLE>
<TABLE>
For the Period Ended November 30, 1997 <F1>
KEYCHOICE FUNDS
Statements of Changes in Net Assets
<CAPTION>
KeyChoice KeyChoice
KeyChoice Moderate Income &
Growth Growth Growth
Fund Fund Fund
<S> <C> <C> <C>
FROM INVESTMENT ACTIVITIES
Operations:
Net investment income $ 25,433 $ 85,802 $ 75,858
Net realized gains from investment transactions 290,845 137,211 95,199
Net change in unrealized appreciation/depreciation from investments (880) 249,860 (101,311)
Change in net assets resulting from operations 315,398 472,873 69,746
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income (19,531) (62,442) (30,786)
CAPITAL TRANSACTIONS
Proceeds from shares issued 9,563,595 8,443,486 9,405,344
Dividends reinvested 19,350 60,021 30,117
Cost of shares redeemed (2,363,797) (1,186,025) (336,934)
Change in net assets from capital transactions 7,219,148 7,317,482 9,098,527
Change in net assets 7,515,015 7,727,913 9,137,487
NET ASSETS
Beginning of period -- -- --
End of period $ 7,515,015 $ 7,727,913 $9,137,487
SHARE TRANSACTIONS
Issued 862,949 795,551 867,280
Reinvested 1,663 5,476 2,781
Redeemed (207,423) (110,135) (30,929)
Change in shares 657,189 690,892 839,132
<FN>
<F1> For the period December 31, 1996 (commencement of operations) through November 30, 1997.
See accompanying Notes to Financial Statements
</TABLE>
<TABLE>
For the Period Ended November 30, 1997 <F2>
KEYCHOICE FUNDS
Financial Highlights
<CAPTION>
KeyChoice KeyChoice
KeyChoice Moderate Income &
Growth Growth Growth
Fund<F2> Fund<F2> Fund<F2>
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.00 $10.00 $10.00
Investment Activities:
Net investment income 0.11 0.20 0.31
Net realized and unrealized gains from investments 1.43 1.16 0.84 <F5>
Total from Investment Activities 1.54 1.36 1.15
Distributions:
Net investment income (0.10) (0.17) (0.26)
NET ASSET VALUE, END OF PERIOD $ 11.44 $11.19 $10.89
Total Return 15.46% <F3> 13.64 <F3> 11.62% <F3>
RATIOS/SUPPLEMENTAL DATA
Net Assets at end of period (000) $ 7,515 $7,728 $9,137
Ratio of expenses to average net assets 0.30% <F4> 0.27% <F4> 0.29% <F4>
Ratio of net investment income to average net assets 0.81% <F4> 2.26% <F4> 3.41% <F4>
Ratio of expenses to average net assets <F1> 3.67% <F4> 3.32% <F4> 5.18% <F4>
Ratio of net investment income to average net assets <F1> (2.56)% <F4> (0.79)% <F4> (1.48)% <F4>
Portfolio Turnover 105.55% 50.15% 19.00%
<FN>
<F1> During the period, certain fees were voluntarily reduced and/or
reimbursed. If such voluntary fee reductions and/or expense reimbursements
had not occurred, the ratios would have been as indicated.
<F2> For the period December 31, 1996 (commencement of operations) through November 30, 1997.
<F3> Not annualized.
<F4> Annualized.
<F5> The amount shown for a share outstanding throughout the period does not accord with the change in the aggregate
gains and losses in the portfolio of securities during the period because of the timing of sales and purchases of
fund shares in relation to fluctuating market values during the period.
See accompanying Notes to Financial Statements
</TABLE>
November 30, 1997
KEYCHOICE FUNDS
Notes to Financial Statements
NOTE 1
Organization
Key Mutual Funds (collectively, the "Funds" and individually, a "Fund")
were organized on May 26, 1983 under the name SBSF Funds, Inc., and
are currently doing business under the name "Key Mutual Funds" (the
"Company"). The Funds 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 Funds are authorized
to issue 25 billion shares of $.01 par value capital stock. The Funds
presently offer shares of 8 active funds. Included in this report
are the financial statements and financial highlights of the KeyChoice
Growth Fund, KeyChoice Moderate Growth Fund and the 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.
Reorganization
On December 2, 1997, the Board of Directors approved an agreement
and plan of reorganization and liquidation ("the Plan") for the Key
Mutual Funds. Under the Plan, the assets and liabilities of the Key
Funds will be transferred to a Victory Portfolio as follows:
<TABLE>
<CAPTION>
Key Mutual Funds The Victory Portfolios
<S> <C>
KeyChoice Growth Fund LifeChoice Growth
Investor Fund (new)
KeyChoice Moderate LifeChoice Moderate
Growth Fund Investor Fund (new)
KeyChoice Income and LifeChoice Conservative
Growth Fund Investor Fund (new)
SBSF Fund Victory Diversified Stock
Fund--Class A Shares
SBSF Capital Growth Fund Victory Special Growth Fund
SBSF Convertible Victory Convertible Securities
Securities Fund Fund (new)
Key Money Market Victory Federal Money Market
Mutual Fund Fund--Investor Class (new)
Key Stock Index Fund Victory Stock Index Fund
</TABLE>
Shares of the Victory Portfolios will be distributed to the Key Funds'
shareholders in complete liquidation of each Key Fund. It is expected
that the reorganization will be treated as a tax-free transaction
to the shareholders of the Funds. A special Shareholder Meeting to
approve the plan is currently expected to be held in March 1998. If
the shareholders approve the merger and necessary regulatory approval
is obtained, it is expected that the merger will take place in March
1998.
NOTE 2
Significant Accounting Policies
The following is a summary of significant accounting policies followed
by the KeyChoice Funds in the preparation of their 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.
(a) 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.
(b) 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.
(c) Repurchase Agreements
The Funds may acquire repurchase agreements from financial institutions
such as banks and broker-dealers which the Funds' 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 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 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 Funds' 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.
(d) Dividends to Shareholders
Dividends payable to shareholders are declared and distributed quarterly.
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.
(e) Federal Income Taxes
It is the policy of each Fund 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 of 1986, as amended, 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.
(f) Other
Expenses that are directly related to one of the Funds are charged
directly to that Fund. Other operating expenses of the Funds are prorated
to each Fund on the basis of relative net assets or other appropriate
basis.
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.
NOTE 3
Purchases and Sales of Securities
Purchases and sales of securities (excluding short-term securities)
for the year ended November 30, 1997 were as follows:
<TABLE>
<CAPTION>
Purchases Sales
<S> <C> <C>
KeyChoice Growth Fund $10,245,036 $3,170,637
KeyChoice Moderate
Growth Fund 9,241,259 1,912,334
KeyChoice Income
and Growth Fund 9,342,767 413,834
</TABLE>
NOTE 4
Related Party Transactions
Investment advisory services are provided to the KeyChoice Funds 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 Inc.,
Spears, Benzak, Salomon & Farrell, Inc. ("SBSF"), Society Asset Management,
Inc. and Applied Technology Investment, 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 of 0.20% of the average daily net assets
of the KeyChoice Funds. KeyTrust Company of Ohio, N.A., a subsidiary
of KeyCorp and an affiliate of the Adviser, serving as custodian for
all of the KeyChoice Funds, is entitled to receive custodian fees
in addition to reimbursement of actual out-of-pocket expenses incurred.
Key and its affiliated brokerage and banking companies also serve
as a Shareholder Servicing Agent for the Funds. 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 KeyChoice Funds.
BISYS Fund Services (the "Administrator"), an indirect, wholly-owned subsidiary
of The BISYS Group, Inc. ("BISYS") serves as the administrator
and distributor to the Funds. Certain officers of the Funds are affiliated
with BISYS. Such officers receive no direct payments or fees from
the Funds for serving as officers.
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
asset 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 the
average daily net assets of the Funds with a minimum monthly fee of
$1,667 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 year ended November 30, 1997:
<TABLE>
<CAPTION>
Investment Administration Custodian
Advisory Fees Fees Fees Reimbursements
Voluntarily Voluntarily Voluntarily by the
Reduced Reduced Reduced Distributor
<S> <C> <C> <C> <C>
KeyChoice Growth Fund $ 128 $2,712 $562 $102,115
KeyChoice Moderate Growth Fund 1,024 2,695 683 111,233
KeyChoice Income and Growth Fund 139 2,710 401 105,641
</TABLE>
NOTE 5
Federal Income Tax Information (Unaudited)
For the taxable year ended November 30, 1997, the following percentages
of income dividends paid by the following Funds qualify for the dividends
received deduction available to corporations:
<TABLE>
<CAPTION>
Qualified
Dividend
Income
<S> <C>
KeyChoice Growth Fund 7.59%
KeyChoice Moderate Growth Fund 27.73%
KeyChoice Income and Growth Fund 27.39%
KEYCHOICE FUNDS
Report of Independent Accountants
To the Board of Directors and Shareholders
of Key Mutual Funds (SBSF Funds, Inc.):
We have audited the accompanying statements of assets and liabilities
of the KeyChoice Growth Fund, the KeyChoice Moderate
Growth Fund and the KeyChoice Income & Growth Fund, three portfolios
of the Key Mutual Funds (SBSF Funds, Inc.), including the schedules
of portfolio investments, as of November 30, 1997, and the related
statements of operations, statements of changes in net assets, and
the financial highlights for the period then ended. These financial
statements and financial highlights are the responsibility of the
Key Mutual Funds' (SBSF Funds, Inc.'s) management. Our responsibility
is to express an opinion on these financial statements and financial
highlights based on our audits.
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 November 30, 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 present fairly, in all material respects, the financial
position of the KeyChoice Growth Fund, the KeyChoice Moderate Growth
Fund and the KeyChoice Income & Growth Fund as of November 30, 1997,
and the results of their operations, the changes in their net assets
and their financial highlights for the period
then ended in conformity with generally accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
Columbus, Ohio
January 16, 1998
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LOGO(R)
KeyFunds
2KF-KCHO-AR (1/98)
</TABLE>
