ANNUAL REPORT
November 30, 1997
Key Stock
Index 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, one of which, the Key Stock Index Fund (the"Fund"),
is 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 Fund 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 Fund 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 Fund. It is not authorized for distribution to
prospective investors in the Fund unless preceded or accompanied by
an effective prospectus, which includes information regarding the
Fund's objectives and policies, experience of its management, marketability
of shares, and other information.
LOGO(R)
KeyFunds
KEY STOCK INDEX FUND
Letter to Our Shareholders
Dear Shareholders:
We are happy to present this Annual Report for the fiscal year ended
November 30, 1997. This fiscal year the assets of the Key Funds complex
increased by nearly 85%, a testimony not only to the stellar performance
of the US financial markets but also to your confidence in our investment
style and management.
Towards the end of the fiscal year ended November 1997, US financial
markets experienced turbulence stemming from the Asian currency crisis.
However, despite the temporary setbacks to stock market returns as
a result of this event, the Standard & Poor's Composite of 500 stocks
posted a total return for the fiscal year of 28.52%. Although past
performance is no guarantee of future results, such returns of the
S&P 500 do endorse the benefits of an Index Fund as a vehicle for
long term investing.
In the following pages, your Fund manager discusses the Fund's performance
and the strategies employed during the fiscal year 1997. This commentary,
along with the related financial data, provides comprehensive information
about your investment in the Key Fund. As always, we welcome your
comments on this Annual Report.
/s/ Leigh A. Wilson
Leigh A. Wilson
President, The Key Funds
January 15, 1998
KEY STOCK INDEX FUND
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/ Charlie Crane
Charlie Crane
Chief Market Strategist, Key Asset Management Inc.
November 30, 1997
KEY STOCK INDEX FUND
Fund Manager's Comments
The objective of the Key Stock Index Fund is to replicate the performance
of the S&P 500 Index. The Fund invests in all stocks in the S&P 500
Index, in proportion to their weighting in the Index. This method
of management is referred to as passive investing.
Since we strive to replicate the performance of the S&P 500 Index,
we invest in every one of the stocks that comprise the Index; our
sector weights are also closely aligned to that of the Index. We follow
a full-replication strategy, not one of sampling. In addition, we
invest in S&P futures contracts to hedge cash flows, provide liquidity
and reduce tracking error. We do not use futures for speculative or
leveraging purposes.
The S&P 500 Index posted a total return of 28.52% for the twelve months
ended November 30, 1997*. The Key Stock Index Fund returned 27.92%
for the same period. Year to date, the Fund's performance has been
30.10%, compared to the S&P 500's return of 31.11% for the same period.
Consistent with its investment objective, the Fund strives to continue
matching the performance of the S&P 500.
* The S&P 500 Composite Index (S&P 500) is an unmanaged, capitalization
weighted index of 500 publicly held stocks; its value varies with
the aggregate value of the common equity of each of the 500 companies.
<TABLE>
KEY STOCK INDEX FUND vs. S&P INDEX
<CAPTION>
Key Index S&P Index
<S> <C> <C>
6/96 10000 10000
8/96 9690 9682
11/96 11229 11303
2/97 11787 11864
5/97 12688 12790
8/97 13514 13618
11/97 14364 14527
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL RETURN
<S> <C>
ONE YEAR 27.92%
SINCE INCEPTION 29.07%
7/1/96
</TABLE>
The performance data quoted represent past performance and are not
indicative of future results. Total returns are historical and include
the change in share price and reinvestment of dividend distributions
and is not annualized. 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 figure
set forth above reflects the waiver of all fees and reimbursement of
expenses since the Fund's inception date. Without such waivers and
reimbursements, the total return would have been lower.
The accompanying presentations are hypothetical illustrations of the
results of a $10,000 investment on the respective inception date of
the Fund and the subsequent reinvestment of all dividends and capital
gain distributions through November 30, 1997.
Fee waivers are voluntary and may be modified or terminated at any time.
<TABLE>
November 30, 1997
KEY STOCK INDEX FUND
Statement of Portfolio Investments
<CAPTION>
SECURITY SHARES OR
DESCRIPTION PRINCIPAL AMOUNT VALUE
<S> <C> <C>
COMMERCIAL PAPER (22.0%)
Financial Services (22.0%)
General Electric Capital Corp.,
5.80%, 12/1/97 <F3> $ 8,676,657 $ 8,676,657
Total Commercial Paper
(Cost $8,676,657) 8,676,657
COMMON STOCKS (76.8%)
Advertising (0.1%)
Interpublic Group of Cos., Inc. 505 24,208
Aerospace--Defense (1.4%)
AlliedSignal, Inc. 2,317 86,019
B.F. Goodrich Co. 220 9,790
Boeing Co. 4,098 217,716
General Dynamics Corp. 255 22,089
Lockheed Martin Corp. 790 77,074
Northrop Grumman Corp. 273 30,781
Raytheon Co. 964 53,924
United Technologies Corp. 965 72,315
569,708
Agriculture (0.1%)
Pioneer Hi-Bred International, Inc. 275 28,084
Airlines (0.3%)
AMR Corp. Delaware <F2> 373 45,203
Delta Air Lines, Inc. 301 33,543
Southwest Airlines Co. 891 21,774
U.S. Airways Group, Inc. <F2> 353 19,459
119,979
Aluminum (0.2%)
Alcan Aluminum Ltd. 927 24,971
Aluminum Co. of America 709 47,681
Reynolds Metal Co. 299 17,024
89,676
Apparel (0.0%)
Reebok International Ltd. <F2> 231 9,081
Apparel--Footwear (0.3%)
Fruit of the Loom, Inc., Class A <F2> 301 7,017
Liz Claiborne, Inc. 288 14,472
Nike, Inc., Class B 1,179 57,402
VF Corp. 520 24,018
102,909
Automobiles (1.3%)
Chrysler Corp. 2,762 94,771
Ford Motor Co. 4,889 210,227
General Motors Corp. 2,984 182,024
Navistar International Corp. <F2> 300 6,600
PACCAR, Inc. 317 17,435
511,057
Automotive Parts (0.3%)
Cummins Engine Co., Inc. 156 10,043
Dana Corp. 422 19,729
Echlin, Inc. 255 8,080
Genuine Parts Co. 735 23,520
ITT Industries, Inc. 485 15,399
TRW, Inc. 508 28,828
105,599
Banks (4.8%)
Banc One Corp. 2,386 122,581
Bank of New York Co. 1,554 83,528
BankAmerica Corp. 2,859 208,706
Bankers Trust New York Corp. 407 48,255
Barnett Banks, Inc. 811 57,074
Chase Manhattan Corp. 1,734 188,356
Comerica, Inc. 431 36,716
First Chicago NBD Corp. 1,211 94,761
First Union Corp. 2,299 112,076
Huntington Bancshares, Inc. 778 26,452
J.P. Morgan & Co., Inc. 733 83,699
KeyCorp 889 59,952
MBNA Corp. 2,046 54,347
Mellon Bank Corp. 1,030 58,388
National City Corp. 882 58,874
NationsBank Corp. 2,915 175,082
Norwest Corp. 3,066 114,783
PNC Bank Corp. 1,257 67,642
Republic New York Corp. 222 24,143
SunTrust Banks, Inc. 876 62,196
Synovus Financial Corp. 349 11,146
Wachovia Corp. 687 52,899
Wells Fargo & Co. 364 111,839
1,913,495
Banks--Money Centers Regional (1.4%)
BankBoston Corp. 599 53,386
Citicorp 1,876 225,003
CoreStates Financial Corp. 829 64,092
Fleet Financial Group, Inc. 1,024 67,648
State Street Corp. 656 39,032
U.S. Bancorp 999 107,455
556,616
Banks--Outside Money Center (0.2%)
Fifth Third Bancorp 631 44,485
Providian Financial Corp. 383 16,876
61,361
Beverages (2.6%)
Anheuser-Busch Cos., Inc. 2,014 86,980
Brown-Forman Corp., Class B 281 14,436
Coca-Cola Co. 10,153 634,562
Coors (Adolph) Co. 153 5,508
PepsiCo, Inc. 6,265 231,022
Seagram Co. Ltd. 1,513 48,889
1,021,397
Broadcasting/Cable (0.1%)
Tele-Communications, Inc.,
Class A <F2> 1,789 40,979
Brokerage Services (0.7%)
Merrill Lynch & Co., Inc. 1,352 94,894
Morgan Stanley, Dean, Witter,
Discover & Co. 2,403 130,512
Schwab (Charles) Corp. 1,082 41,725
267,131
Building Materials (0.2%)
Armstrong World Industries, Inc. 167 11,513
Centex Corp. 118 7,478
Fleetwood Enterprises, Inc. 146 5,210
Kaufman & Broad Home Corp. 158 3,427
Masco Corp. 675 31,809
Pulte Corp. 85 3,448
62,885
Chemicals--General (1.9%)
Air Products & Chemicals, Inc. 448 34,356
Dow Chemical Co. 934 92,233
E.I. Du Pont de Nemours Co. 4,629 280,343
Eastman Chemical Co. 320 19,320
Englehard Corp. 589 10,492
FMC Corp. <F2> 152 11,106
Great Lakes Chemical Corp. 244 10,950
Hercules, Inc. 409 19,862
Mallinckrodt, Inc. 300 11,100
Monsanto Co. 2,413 105,417
Nalco Chemical Co. 273 10,596
PPG Industries, Inc. 735 42,584
Praxair, Inc. 644 28,296
Rohm & Haas Co. 253 23,260
Sigma-Aldrich Corp. 409 14,775
Union Carbide Corp. 511 22,548
W.R. Grace & Co. 296 21,534
758,772
Chemicals--Specialty (0.1%)
Millipore Corp. 179 6,936
Morton International, Inc. 572 19,484
26,420
Commercial Services (0.4%)
Automatic Data Processing, Inc. 1,195 67,219
CUC International, Inc. <F2> 1,676 48,185
Ecolab, Inc. 265 13,515
Federal Express Corp. <F2> 467 31,318
160,237
Computers & Peripherals (4.0%)
3Com Corp. <F2> 1,410 51,113
Apple Computer, Inc. <F2> 517 9,177
Bay Networks, Inc. <F2> 874 26,275
Cabletron Systems, Inc. <F2> 645 14,835
Cisco Systems, Inc. <F2> 2,739 236,239
Compaq Computer Corp. <F2> 3,094 193,182
Computer Sciences Corp. <F2> 313 24,786
Data General Corp. <F2> 195 3,498
Dell Computer, Inc. <F2> 1,354 113,990
Digital Equipment Corp. <F2> 623 30,683
EMC Corp. <F2> 2,010 60,928
Hewlett-Packard Co. 4,258 260,003
International Business
Machines Corp. 4,021 440,550
Seagate Technology, Inc. <F2> 1,001 22,710
Silicon Graphics, Inc. <F2> 722 9,476
Sun Microsystems, Inc. <F2> 1,506 54,216
Unisys Corp. <F2> 713 10,205
1,561,866
Conglomerates (1.0%)
Corning, Inc. 944 40,061
Crane Co. 188 7,920
Minnesota Mining &
Manufacturing Co. 1,699 165,545
National Service Industries, Inc. 184 8,614
Tenneco, Inc. 698 30,232
Textron, Inc. 673 39,791
Westinghouse Electric Corp. <F2> 2,901 87,030
Whitman Corp. 415 10,920
390,113
Construction (0.0%)
Fluor Corp. 343 12,327
Foster Wheeler Corp. 165 5,084
17,411
Consumer Products (1.5%)
American Greetings Corp., Class A 306 11,246
Clorox Co. 422 2,758
Colgate-Palmolive Co. 1,211 80,910
Jostens, Inc. 158 3,792
Newell Co. 649 26,487
Procter & Gamble Co. 5,526 421,702
576,895
Containers (0.2%)
Ball Corp. 123 4,736
Bemis, Inc. 216 9,099
Crown Cork & Seal, Inc. 524 25,577
Owens Corning 217 7,975
Owens-Illinois, Inc. <F2> 574 19,444
Rubbermaid, Inc. 613 14,865
Stone Container Corp. 405 5,063
Tupperware Corp. 251 5,993
92,752
Cosmetics & Related (0.7%)
Alberto Culver Co. 228 7,111
Avon Products, Inc. 540 31,219
Gillette Co. 2,291 211,487
International Flavor &
Fragance, Inc. 446 21,492
271,309
Diversified (0.2%)
Tyco International Ltd. 2,180 85,565
Electrical Equipment (2.9%)
Emerson Electric Co. 1,817 99,935
General Electric Co. 13,403 988,472
Johnson Controls, Inc. 342 15,668
Thomas & Betts Corp. 222 10,073
W.W. Grainger, Inc. 210 19,661
1,133,809
Electronic & Electrical--General (1.2%)
Advanced Micro Devices, Inc. <F2> 573 12,499
AMP, Inc. 896 38,920
Andrew Corp. <F2> 371 9,832
EG&G, Inc. 187 3,670
General Signal Corp. 205 8,367
Harris Corp. 326 15,465
Honeywell, Inc. 519 33,995
KLA-Tencor Corp. <F2> 342 13,253
Motorola, Inc. 2,436 153,163
National Semiconductor Corp. <F2> 683 22,624
Rockwell International Corp. 856 41,729
Tandy Corp. 442 19,006
Tektronix, Inc. 204 8,555
Texas Instruments, Inc. 1,562 76,928
458,006
Entertainment (1.0%)
Brunswick Corp. 405 13,542
Harrah's Entertainment, Inc. <F2> 418 8,386
Hasbro, Inc. 520 15,113
King World Productions, Inc. <F2> 152 8,265
Loews Corp. 469 49,773
Viacom, Inc., Class B <F2> 1,439 50,365
Walt Disney Co. 2,763 262,312
407,756
Financial & Insurance (0.1%)
MBIA, Inc. 358 22,509
Financial Services (2.8%)
American Express Co. 1,919 151,361
American General Corp. 1,016 54,737
Beneficial Corp. 219 17,000
Countrywide Credit Industries, Inc. 438 17,931
Equifax, Inc. 617 21,055
Federal Home Loan
Mortgage Corp. 2,845 117,356
Federal National Mortgage Assoc. 4,343 229,365
First Data Corp. 1,817 51,444
Golden West Financial Corp.,
Delaware 234 20,972
Green Tree Financial Corp. 554 16,966
H.F. Ahmanson & Co. 399 23,741
Household International, Inc. 435 54,810
TransAmerica Corp. 260 28,226
Travelers Group, Inc. 4,685 236,592
Washington Mutual, Inc. 1,025 70,853
1,112,409
Food Distributors (0.5%)
Albertsons, Inc. 1,006 44,640
American Stores Co. 1,115 22,091
Fleming Cos., Inc. 154 2,560
Giant Food, Inc., Class A 245 8,269
Great Atlantic & Pacific Tea, Inc. 156 4,817
Kroger Co. <F2> 1,037 35,711
SUPERVALU, Inc. 245 9,632
Sysco Corp. 712 31,729
Winn-Dixie Stores, Inc. 608 24,586
184,035
Food Processing & Packaging (1.9%)
Archer-Daniels-Midland Co. 2,292 48,992
Campbell Soup Co. 1,883 105,449
ConAgra, Inc. 1,946 69,934
CPC International, Inc. 585 60,474
General Mills, Inc. 657 48,618
H.J. Heinz Co. 1,511 75,644
Hershey Foods Corp. 586 35,966
Kellogg Co. 1,694 78,559
Quaker Oats Co. 557 29,521
Ralston-Ralston Purina Group 435 40,455
Sara Lee Corp. 1,966 103,952
Wm. Wrigley Jr. Co. 474 37,505
735,069
Forest Products--Lumber & Paper (1.0%)
Boise Cascade Corp. 227 7,647
Champion International Corp. 390 20,889
Fort James Corp. 773 30,244
Georgia Pacific Corp. 374 31,930
International Paper Co. 1,237 58,680
Kimberly-Clark Corp. 2,282 118,806
Louisiana Pacific Corp. 446 9,004
Mead Corp. 214 13,816
Potlatch Corp. 118 5,738
Temple-Inland, Inc. 233 13,310
Union Camp Corp. 283 16,998
Westvaco Corp. 416 13,572
Weyerhauser Co. 811 42,831
Willamette Industries, Inc. 452 15,877
399,342
Funeral Services (0.1%)
Service Corp. International 1,029 37,623
Health Care (0.2%)
Columbia/HCA Healthcare Corp. 2,678 79,001
Humana, Inc. <F2> 668 14,821
93,822
Heavy Machinery (0.5%)
Case Corp. 304 18,848
Caterpillar Tractor, Inc. 1,542 73,919
Deere & Co. 1,032 56,567
Harnischfeger Industries, Inc. 201 7,676
Ingersoll Rand Co. 678 27,713
McDermott International, Inc. 225 7,088
191,811
Hotels & Motels (0.4%)
HFS, Inc. <F2> 646 44,331
Hilton Hotels Corp. 1,019 31,716
ITT Corp. <F2> 475 36,041
Marriott International, Inc. 518 37,523
Mirage Resorts, Inc. <F2> 732 17,385
166,996
Household Goods--Appliances,
Furnishings & Electronics (0.1%)
Maytag Corp. 399 12,893
Whirlpool Corp. 304 16,663
29,556
Industrial Goods & Services (0.1%)
Aeroquip-Vickers Inc. 114 5,821
Dover Corp. 457 30,647
UNOVA, Inc. <F2> 220 3,713
40,181
Insurance--Life (0.1%)
Jefferson Pilot Corp. 289 22,054
Insurance--Multi-Line (2.3%)
Aetna, Inc. 616 46,431
Allstate Corp. 1,781 152,942
American International
Group, Inc. 2,872 289,533
Aon Corp. 680 35,998
CIGNA Corp. 302 50,510
Conseco Inc. 769 35,807
General Re Corp. 330 65,504
Hartford Financial Services
Group, Inc. 482 40,368
Lincoln National Corp. 420 29,978
Marsh & McLennan Cos., Inc. 690 51,362
MGIC Investment Corp. 467 27,290
Safeco Corp. 578 28,250
SunAmerica, Inc. 798 32,319
Torchmark Corp. 569 23,222
USF&G Corp. 451 9,105
918,619
Insurance--Property, Casualty, Health (0.3%)
Chubb Corp. 712 50,508
Progressive Corp. 295 30,090
St. Paul Cos., Inc. 342 27,360
UNUM Corp. 570 27,039
134,997
Investment Company (0.0%)
Telecommunications-
TCI Ventures Group, Class A (b) 799 18,077
Machine Tools (0.0%)
Cincinnati Milacron, Inc. 163 4,819
Manufacturing--Capital Goods (0.2%)
Cooper Industries, Inc. 500 25,813
Illinois Tool Works, Inc. 1,017 55,744
81,557
Manufacturing--Consumer Goods (0.2%)
Eaton Corp. 315 29,748
Mattel, Inc. 1,189 47,634
77,382
Manufacturing--Miscellaneous (0.5%)
Briggs & Stratton Corp. 104 5,317
NACCO Industries, Inc. 33 3,593
Pall Corp. 517 10,922
Thermo Electron Corp. <F2> 613 22,566
Unilever N.V. 2,612 151,659
Western Atlas, Inc. <F2> 220 15,304
209,361
Medical Services (0.4%)
Beverly Enterprises, Inc. <F2> 450 7,650
HEALTHSOUTH Corp. <F2> 1,813 47,590
Manor Care, Inc. 259 9,130
Tenet Healthcare Corp. <F2> 1,240 39,293
United Healthcare Corp. 767 39,932
143,595
Medical Supplies (0.8%)
Alza Corp., Class A <F2> 347 9,261
Bausch & Lomb, Inc. 227 8,995
Baxter International, Inc. 1,144 57,915
Becton Dickinson & Co. 499 25,730
Biomet, Inc. 454 10,839
Boston Scientific Corp. <F2> 794 35,879
C.R. Bard, Inc. 233 6,975
Guidant Corp. 607 39,000
Medtronic, Inc. 1,914 91,393
St. Jude Medical, Inc. <F2> 373 11,050
United States Surgical Corp. 299 7,886
304,923
Medical--Wholesale Drug Distribution (0.1%)
Cardinal Health, Inc. 443 33,557
Metals--Fabrication (0.1%)
Phelps Dodge Corp. 252 16,695
Timken Co. 256 9,072
25,767
Mining (0.1%)
Asarco, Inc. 176 4,378
Cyprus Amax Minerals Co. 381 6,977
Inco Ltd. 680 12,963
24,318
Newspapers (0.5%)
Dow Jones & Co., Inc. 390 19,719
Gannett Co., Inc. 1,156 67,121
Knight-Ridder, Inc. 359 17,995
New York Times Co., Class A 390 23,156
Times Mirror Co., Class A 390 23,156
Tribune Co. 501 28,244
179,391
Office Equipment & Supplies
(Non-Computer Related) (0.5%)
Avery Dennison Corp. 422 17,671
Deluxe Corp. 336 11,865
IKON Office Solutions, Inc. 541 16,467
Moore Corp. Ltd. 360 5,603
Pitney Bowes, Inc. 594 49,933
Xerox Corp. 1,331 103,402
204,941
Oil & Gas Exploration,
Production & Services (1.0%)
Amerada Hess Corp. 378 21,168
Anadarko Petroleum Corp. 244 15,860
Apache Corp. 369 13,561
Ashland, Inc. 304 14,193
Burlington Resource, Inc. 722 32,107
Coastal Corp. 432 25,299
Columbia Gas System, Inc. 226 16,442
Helmerich & Payne, Inc. 101 7,682
Kerr-McGee Corp. 195 12,931
Occidental Petroleum Corp. 1,356 40,255
Oneok Inc. 114 4,261
Oryx Energy Co. <F2> 430 11,610
Pennzoil Co. 192 12,792
Rowan Cos., Inc. <F2> 351 11,934
Sonat, Inc. 351 15,290
Sun Co., Inc. 297 12,010
Union Pacific Resources
Group, Inc. 1,036 25,771
Unocal Corp. 1,011 40,250
USX--Marathon Group 1,175 40,244
Williams Cos., Inc. 647 34,574
408,234
Oil-Integrated Companies (5.0%)
Amoco Corp. 2,014 181,260
Atlantic Richfield Co. 1,314 107,091
Chevron Corp. 2,679 214,822
Exxon Corp. 10,129 617,870
Mobil Corp. 3,215 231,279
Phillips Petroleum Co. 1,076 52,119
Royal Dutch Petroleum Co.,
New York Shares 8,778 462,491
Texaco, Inc. 2,154 121,701
1,988,633
Oilfield Services & Equipment (0.8%)
Baker Hughes, Inc. 690 28,894
Dresser Industries, Inc. 719 26,873
Halliburton Co. 1,032 55,664
Parker-Hannifin Corp. 457 20,337
Schlumberger, Ltd. 2,026 166,764
298,532
Paint, Varnishes, Enamels (0.1%)
Sherwin-Williams Co. 704 20,108
Pharmaceuticals (7.0%)
Abbott Laboratories 3,154 205,010
Allergan, Inc. 267 9,045
American Home Products Corp. 2,655 185,518
Amgen, Inc. <F2> 1,081 55,266
Bristol-Myers Squibb Co. 4,079 381,896
Cognizant Corp. 672 28,812
Crescendo
Pharmaceuticals Corp. <F2> 17 194
Eli Lilly & Co. 4,554 287,187
Johnson & Johnson 5,447 342,821
Merck & Co., Inc. 4,944 467,517
Pfizer, Inc. 5,291 384,920
Pharmacia & Upjohn, Inc. 2,077 70,099
Schering-Plough Corp. 2,999 188,000
Warner-Lambert Co. 1,108 154,982
2,761,267
Photography (0.2%)
Eastman Kodak Co. 1,334 80,874
Polaroid Corp. 184 7,820
88,694
Pollution Control Services & Equipment (0.2%)
Browning-Ferris Industries, Inc. 803 28,657
Safety-Kleen Corp. 238 6,605
Waste Management, Inc. 1,855 45,679
80,941
Precision Instruments & Related (0.0%)
Perkin-Elmer Corp. 180 12,521
Primary Metal & Mineral Production (0.2%)
Barrick Gold Corp. 1,522 25,207
Battle Mountain Gold Co. 938 4,749
Echo Bay Mines Ltd. 569 1,316
Freeport-McMoRan Copper
& Gold, Inc., Class B 817 17,106
Homestake Mining Co. 602 6,321
Inland Steel Industries, Inc. 200 3,825
Newmont Mining Corp. 637 19,150
Placer Dome, Inc. 980 12,005
89,679
Publishing (0.5%)
Dun & Bradstreet Corp. 698 19,544
John H. Harland Co. 126 2,607
McGraw-Hill Cos., Inc. 408 27,923
Meredith Corp. 218 7,603
R.R. Donnelley & Sons Co. 597 21,044
Time Warner, Inc. 2,291 133,450
212,171
Radio & Television (0.3%)
Clear Channel
Communications, Inc. <F2> 401 27,168
Comcast Corp., Class A
Special Shares 1,427 39,956
U.S. West Media Group <F2> 2,482 65,928
133,052
Railroads (0.5%)
Burlington Northern Santa Fe 637 58,286
CSX Corp. 889 46,506
Norfolk Southern Corp. 1,536 48,864
Union Pacific Corp. 1,008 60,479
214,135
Restaurants (0.4%)
Darden Restaurants, Inc. 625 7,422
McDonald's Corp. 2,814 136,479
Tricon Global Restaurants, Inc. <F2> 626 21,167
Wendy's International, Inc. 536 11,256
176,324
Retail (1.3%)
Costco Cos., Inc. <F2> 870 38,552
Dayton Hudson Corp. 886 58,863
K-Mart Corp. <F2> 1,992 25,025
Wal-Mart Stores, Inc. 9,270 370,220
Woolworth Corp. <F2> 550 11,894
504,554
Retail--Department Stores (0.7%)
Dillard's, Inc., Class A 463 16,928
Federated Department
Stores, Inc. <F2> 856 39,002
Harcourt General, Inc. 289 15,823
J.C. Penney Co., Inc. 1,019 65,471
May Department Stores Co. 952 51,170
Mercantile Stores Co., Inc. 150 9,694
Nordstrom, Inc. 322 18,998
Sears, Roebuck & Co. 1,600 73,299
290,385
Retail--Drug Stores (0.4%)
CVS Corp. 703 46,662
Longs Drug Stores Corp. 159 4,651
Rite Aid Corp. 501 32,941
Walgreen Co. 2,009 64,664
148,918
Retail--Specialty Stores (1.0%)
AutoZone, Inc. <F2> 616 18,480
Charming Shoppes, Inc. <F2> 431 2,115
Circuit City Stores, Inc. 400 13,125
Gap, Inc. 1,098 58,949
Home Depot, Inc. 2,988 167,141
Limited, Inc. 1,108 26,661
Lowe's Cos., Inc. 707 32,478
Pep Boys--Manny, Moe & Jack 258 6,482
TJX Cos., Inc. 668 23,046
Toys "R" Us, Inc. <F2> 1,166 39,790
388,267
Rubber & Rubber Products (0.1%)
Cooper Tire & Rubber Co. 321 7,182
Goodyear Tire & Rubber Co. 637 38,658
45,840
Semiconductors (1.5%)
Applied Materials, Inc.<F2> 1,480 48,840
Intel Corp. 6,683 518,767
LSI Logic Corp. <F2> 578 13,439
Micron Technology, Inc. <F2> 858 21,343
602,389
Software & Computer Services (2.7%)
Adobe Systems, Inc. 293 12,306
Autodesk, Inc. 195 7,495
Ceridian Corp. <F2> 329 14,435
Computer Associates
International, Inc. 2,226 115,891
HBO & Co 810 36,349
Microsoft Corp. <F2> 4,905 694,058
Novell, Inc. <F2> 1,429 13,218
Oracle Corp. <F2> 4,010 133,583
Parametric Technology Corp. <F2> 521 26,343
Shared Medical Systems Corp. 101 6,464
Siebel Systems Inc. <F2> 1 41
1,060,183
Steel (0.2%)
Allegheny Teledyne, Inc. 718 18,488
Armco, Inc. <F2> 437 2,322
Bethlehem Steel Corp. <F2> 458 4,695
Nucor Corp. 360 18,000
USX-U.S. Steel Group, Inc. 350 10,959
Worthington Industries, Inc. 395 7,159
61,623
Tax Return Preparation (0.0%)
H&R Block, Inc. 426 17,466
Telecommunications (1.0%)
Alltel Corp. 761 30,250
DSC Communications Corp. <F2> 479 10,807
Frontier Corp. 670 16,415
Lucent Technologies, Inc. 2,626 210,408
Northern Telecom Ltd. 1,073 96,369
Scientific-Atlanta, Inc. 316 6,320
Tellabs, Inc. <F2> 737 38,324
408,893
Telecommunications--Equipment (0.0%)
NextLevel Systems, Inc. <F2> 602 7,977
Textile Manufacturing (0.0%)
Russell Corp. 149 4,554
Springs Industries, Inc., Class A 83 4,186
8,740
Tobacco & Tobacco Products (1.2%)
Fortune Brands, Inc. 702 25,404
Philip Morris Cos., Inc. 9,919 431,477
UST, Inc. 749 23,125
480,006
Tools & Hardware Manufacturing (0.1%)
Black & Decker Corp. 385 14,149
Snap-On Tools, Inc. 248 10,897
Stanley Works 364 16,038
41,084
Transportation Leasing & Trucking (0.0%)
Caliber System, Inc. 159 8,497
Ryder Systems, Inc. 313 11,365
19,862
Transportation Services (0.0%)
Laidlaw, Inc. 1,345 17,485
Utilities--Electric (1.9%)
American Electric Power Co. 771 38,213
Carolina Power & Light Co. 617 23,060
Central & South West Corp. 866 21,650
CINergy Corp. 643 22,907
Consolidated Edison Co. of
New York, Inc. 959 36,202
Detroit Edison Co. 592 19,425
Dominion Resources, Inc. 760 29,545
Duke Power Co. 1,473 76,595
Edison International 1,626 43,597
Entergy Corp 987 25,662
FirstEnergy Corp. <F2> 957 25,839
FPL Group, Inc. 744 41,618
Houston Industries, Inc. 1,168 27,667
Niagara Mohawk Power Corp. <F2> 590 5,642
Northern States Power Co.
Minnesota 301 16,517
PacifiCorp 1,208 28,162
Peco Energy Co. 908 22,076
PG&E Corp. 1,795 50,709
PP&L Resources, Inc. 671 15,769
Public Service Enterprise Group 947 27,641
Raychem Corp. 178 16,832
Southern Co. 2,803 67,271
Texas Utilities Co. 983 39,320
Unicom Corp. 883 25,717
Union Electric Co. 417 16,602
764,238
Utilities--Electric & Gas (0.1%)
Baltimore Gas & Electric Co. 602 18,474
GPU, Inc. 493 19,473
37,947
Utilities--Natural Gas (0.3%)
Consolidated Natural Gas Co. 388 23,426
Eastern Enterprises 83 3,341
Enron Corp. 1,252 48,515
NICOR, Inc. 200 8,050
Pacific Enterprises 341 12,063
Peoples Energy Corp. 143 5,237
100,632
Utilities--Telecommunications (5.2%)
AirTouch Communications, Inc. <F2> 2,061 80,894
Ameritech Corp. 2,250 173,391
AT&T Corp. 6,650 371,568
Bell Atlantic Corp. 3,178 283,636
BellSouth Corp. 4,058 222,176
GTE Corp. 3,914 197,902
MCI Telecommunications Corp. 2,832 124,431
SBC Communications, Inc. 3,741 272,392
Sprint Corp. 1,758 102,953
U.S. West Communications Group 1,956 88,387
WorldCom, Inc. <F2> 3,692 118,144
2,035,874
Total Common Stocks
(Cost $25,229,435) 30,348,441
U.S. TREASURY BILLS (1.1%)
12/18/97 $450,000 448,911
Total U.S. Treasury Bills
(Cost $448,945) 448,911
Total Investments
(Cost $34,355,037) <F1> 99.9% 39,474,009
Other assets in excess of liabilities 0.1% 23,539
TOTAL NET ASSETS 100.0% $39,497,548
SECURITY DESCRIPTION NUMBER OF CONTRACTS VALUE
FUTURES CONTRACTS (21.8%)
S&P 500 Index, face amount
$8,430,393, expiring
December 1997 36 $ 8,594,100
Total Futures Contracts
(Cost $8,430,393) $ 8,594,100
<FN>
<F1> Cost for federal income tax purposes differs from value by net
unrealized appreciation of securities as follows:
Unrealized appreciation $5,783,042
Unrealized depreciation (664,070)
Net unrealized appreciation $5,118,972
<F2> Non-income producing securities.
<F3> Collateral for futures contracts.
</TABLE>
See accompanying Notes to Financial Statements
<TABLE>
November 30, 1997
KEY STOCK INDEX FUND
Statement of Assets and Liabilities
<CAPTION>
<S> <C>
ASSETS
Investments, at value (Cost $34,355,037) $39,474,009
Cash 5,485
Interest and dividends receivable 58,205
Receivable from affiliates 22,419
Unamortized organization costs 23,099
Prepaid expenses and other assets 4,367
Total Assets 39,587,584
LIABILITIES
Payable to brokers for investments purchased 11,164
Payable for organization costs 30,000
Net payable for variation margin on futures contracts 900
Accrued expenses and other payables
Transfer agent fees 5,485
Custodian fees 18,037
Legal fees 6,251
Audit fees 18,199
Total Liabilities 90,036
NET ASSETS--Applicable to 2,861,069 shares of
capital stock outstanding $39,497,548
NET ASSETS
Shares of Capital Stock, $0.01 par value 28,611
Paid in Capital 32,207,989
Accumulated undistributed net investment income 421,973
Net unrealized appreciation/depreciation from investments and futures 5,282,679
Accumulated undistributed net realized gains from investment transactions 1,556,296
NET ASSETS $39,497,548
NET ASSET VALUE--OFFERING AND REDEMPTION PRICE PER SHARE $ 13.81
</TABLE>
See accompanying Notes to Financial Statements
<TABLE>
For the Year Ended November 30, 1997
KEY STOCK INDEX FUND
Statement of Operations
<CAPTION>
<S> <C>
INVESTMENT INCOME
Interest income $ 398,070
Dividend income 362,470
Foreign taxes withheld (2,192)
Total Income 758,348
EXPENSES
Investment advisory fees 27,585
Administration fees 41,378
Custodian fees 66,574
Accounting fees 76,279
Legal fees 36,557
Audit fees 21,805
Directors fees and expenses 3,886
Transfer agent fees 15,638
Registration and filing fees 26,657
Printing costs 10,279
Amorization of organization costs 6,787
Other expenses 3,581
Total expenses before expense waivers and reimbursements 337,006
Less: Fee waivers (73,928)
Less: Expense reimbursements (263,078)
Net Expenses --
NET INVESTMENT INCOME 758,348
REALIZED/UNREALIZED GAINS(LOSSES) FROM INVESTMENTS
Net realized gains from investment transactions 1,939,791
Net change in unrealized appreciation/depreciation from investments 3,942,262
Net realized/unrealized gains from investments 5,882,053
CHANGE IN NET ASSETS RESULTING FROM OPERATIONS $6,640,401
</TABLE>
See accompanying Notes to Financial Statements
<TABLE>
For the Years Ended November 30, 1997 and 1996<F1>
KEY STOCK INDEX FUND
Statement of Changes in Net Assets
<CAPTION>
<S> <C> <C>
1997 1996
FROM INVESTMENT ACTIVITIES
Operations:
Net investment income $ 758,348 $ 122,759
Net realized gains from investment transactions 1,939,791 15,857
Net change in unrealized appreciation/depreciation from investments 3,942,262 1,340,417
Change in net assets resulting from operations 6,640,401 1,479,033
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income (652,893) (52,979)
From net realized gains (152,614) --
Change in net assets from distributions to shareholders (805,507) (52,979)
CAPITAL TRANSACTIONS
Proceeds from shares issued 24,113,857 18,614,362
Dividends reinvested 381,649 52,979
Cost of shares redeemed (6,756,847) (4,169,400)
Change in net assets from capital transactions 17,738,659 14,497,941
Change in net assets 23,573,553 15,923,995
NET ASSETS
Beginning of period 15,923,995 --
End of period $39,497,548 $15,923,995
SHARE TRANSACTIONS
Issued 1,960,464 1,822,175
Reinvested 29,447 5,225
Redeemed (555,918) (400,324)
Change in shares 1,433,993 1,427,076
<FN>
<F1> For the period July 1, 1996 (commencement of operations) through November 30, 1996.
</TABLE>
See accompanying Notes to Financial Statements
<TABLE>
KEY STOCK INDEX FUND
Financial Highlights
<CAPTION>
Fiscal Year Ended November 30,
1997 1996<F2>
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.16 $ 10.00
Investment Activities:
Net investment income 0.32 0.11
Net realized and unrealized gains from investments 2.74 1.11
Total from Investment Activities 3.06 1.22
Distributions:
Net investment income (0.31) (0.06)
Net realized gains (0.10) --
Total Distributions (0.41) (0.06)
NET ASSET VALUE, END OF PERIOD $ 13.81 $ 11.16
Total Return 27.92% 12.29%<F3>
RATIO/SUPPLEMENTARY DATA
Net Assets at end of period (000) $39,498 $15,924
Ratio of expenses to average net assets 0.00% 0.00%<F4>
Ratio of net investment income to average net assets 2.75% 3.33%<F4>
Ratio of expenses to average net assets<F1> 1.22% 3.27%<F4>
Ratio of net investment income to average net assets<F1> 1.53% 0.06%<F4>
Portfolio Turnover 8.41% 0.60%
Average Commission Rate $0.0238 $0.0166
<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 July 1, 1996 (commencement of operations) through November 30, 1996.
<F3> Not annualized.
<F4> Annualized.
</TABLE>
See accompanying Notes to Financial Statements
November 30, 1997
KEY STOCK INDEX FUND
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 Key Stock
Index Fund.
The investment objective of the Fund is to seek to provide long term
capital appreciation by attempting to match the investment performance
of the Standard & Poors' 500 Composite Stock Index (the "S&P 500 Index"
or the "Index").* Under normal market conditions the Stock Index Fund
will attempt to duplicate the capital performance and dividend income
of the S&P 500 Index by investing primarily in stocks which compose
the S&P 500 Index and secondarily in stock index futures, while minimizing
transaction costs.
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 newly established or currently operating
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 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.
(a) Securities Valuation
Securities traded on securities exchanges or the Nasdaq National Market
are valued as of the close of regular trading of the New York Stock
Exchange which is generally 4:00 p.m. (Eastern Time) on each business
day of the Funds. Listed and unlisted securities for which such information
is regularly reported are valued at the last sales price or, in the
absence of sales, at the mean between the most recent bid and offer
price. Listed debt securities and over-the-counter securities are
valued at the mean between the most recent bid and offer price. Securities
for which quotations are not readily available and any other assets
are valued at fair value as determined in good faith under the general
supervision of the Board of Directors. Money market instruments with
maturities over sixty days are valued at market value, and those with
maturities of sixty days or less are valued at amortized cost, which
approximates market value. Investments in investment companies are
valued at their respective net asset values as reported by such companies.
(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 Fund 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 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.
(d) Futures Contracts
The Fund may enter into contracts for the future delivery of securities
or foreign currencies and futures contracts based on a specific security,
class of securities, foreign currency or an index, purchase or sell
options on any such futures contracts and engage in related closing
transactions. A futures contract on a securities index is an agreement
obligating either party to pay, and entitling the other party to receive,
while the contract is outstanding, cash payments based on the level
of a specified securities index. The Fund may enter into futures contracts
in an effort to hedge against market risks. The acquisition of put
and call options on futures contracts will give the Fund the right
(but not the obligation), for a specified price, to sell or to purchase
the underlying futures contract, upon exercise of the option, at any
time during the option period. Futures transactions involve brokerage
costs and require the Fund to segregate assets to cover contracts
that would require it to purchase securities or currencies. The Fund
may lose the expected benefit of futures transactions if interest
rates, exchange rates or securities prices change in an unanticipated
manner. Such unanticipated changes may also result in lower overall
performance than if the Fund had not entered into any futures transactions.
In addition, the value of the Fund's futures positions may not prove
to be perfectly or even highly correlated with the value of its portfolio
securities or foreign currencies, limiting the Fund's ability to hedge
effectively against interest rate, exchange rate and /or market risk
and giving rise to additional risks. There is no assurance of liquidity
in the secondary market for purposes of closing out futures positions.
(e) 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.
(f) 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 33 1/3% of its total asset. Key Trust Company
of Ohio, N.A. ("Key Trust"), an affiliate of the Adviser, serves as
the lending agent for the Company 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,
a 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 November 30, 1997,
the Fund did not loan any securities.
(g) 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.
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.
(h) 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 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.
(i) 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 Fund are
being amortized on a straight-line basis over a period not to exceed
sixty months from the date the Fund commenced operations.
NOTE 3
Purchases and Sales of Securities
Purchases and sales of securities (excluding short-term securities)
for the period ended November 30, 1997 were as follows:
<TABLE>
<CAPTION>
Purchases Sales
<S> <C> <C>
Key Stock Index Fund $17,602,219 $1,701,630
</TABLE>
NOTE 4
Related Party Transactions
Investment advisory services are provided to the 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 0.10% of the average daily net assets of the Fund. KeyTrust
Company of Ohio, N.A., a subsidiary of KeyCorp and an affiliate of
the Adviser, serving as custodian for the Fund, received custodian
fees in addition to 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 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, the Administrator's
fee is computed at the annual rate of 0.25% of the first $50 million
of average daily net assets and 0.15% of such average daily net assets
in excess of $50 million.
BISYS Fund Services, Ohio Inc., an affiliate of BISYS, serves the
Fund 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 $2,500.
Fees may be voluntarily reduced to assist the Fund in maintaining
a competitive expense ratio.
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>
$27,585 $41,378 $4,965 $263,078
</TABLE>
NOTE 5
Federal Income Tax Information (Unaudited)
For the taxable year ended November 30, 1997, the percentage of income
dividends paid by the Fund qualifying for the dividends received deduction
available to corporations was 11.11%.
KEY STOCK INDEX FUND
Report of Independent Accountants
To the Board of Directors and Shareholders
of Key Mutual Funds (SBSF Funds, Inc.):
We have audited the accompanying statement of assets and liabilities
of the Key Stock Index Fund, including the schedule of portfolio investments,
as of November 30, 1997, and the related statement of operations,
statement of changes in net assets, and the financial highlights for
the year then ended. These financial statements and financial highlights
are the responsibility of the Key Stock Index Fund's management. Our
responsibility is to express an opinion on these financial statements
and financial highlights based on our audit. The financial statements
and financial highlights of the Key Stock Index Fund for the period
ended November 30, 1996, were audited by other auditors, whose report
dated January 15, 1997 expressed an unqualified opinion on those statements.
We conducted our audit 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
audit provides 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 Key Stock Index Fund as of November 30, 1997, and
the results of its operations, the changes in its net assets and the
financial highlights for the year then ended in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
Columbus, Ohio
January 16, 1998
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