<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 28, 1995.
File No. 33-8982
ICA No. 811-4852
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. _____ / /
Post-Effective Amendment No. 26 /X/
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 27 /X/
THE VICTORY PORTFOLIOS
(Exact name of Registrant as Specified in Trust Instrument)
3435 Stelzer Road
Columbus, Ohio 43219
(Address of Principal Executive Office)
(800) 362-5365
(Area Code and Telephone Number)
George O. Martinez, Esq.
Concord Holding Corporation
3435 Stelzer Road
Columbus, Ohio 43219
(Name and Address of Agent for Service)
Copy to:
Carl Frischling, Esq.
Kramer, Levin, Naftalis,
Nessen, Kamin & Frankel
919 Third Avenue
New York, New York 10022
It is proposed that this filing will become effective:
/ / Immediately upon filing pursuant to / / on (__________) pursuant to
paragraph (b) paragraph (b)
/ / 60 days after filing pursuant to /X/ on March 1, 1996 pursuant to
paragraph (a)(1) paragraph (a)(1)
/ / 75 days after filing pursuant to / / on ( ) pursuant to
paragraph (a)(2) paragraph (a)(2), of rule 485.
<PAGE> 2
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
/ / THIS POST-EFFECTIVE AMENDMENT DESIGNATES A NEW EFFECTIVE DATE FOR A
PREVIOUSLY FILED POST-EFFECTIVE AMENDMENT.
REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF SHARES PURSUANT TO RULE 24f-2
AND ITS RULE 24f-2 NOTICE FOR ITS APRIL 30, 1995 FISCAL YEAR WAS FILED ON JUNE
30, 1995, FOR ITS AUGUST 31, 1995 FISCAL YEAR WAS FILED ON OCTOBER 25, 1995,
AND REGISTRANT WILL FILE ON OR ABOUT DECEMBER 29, 1995 ITS RULE 24f-2 NOTICE
FOR ITS OCTOBER 31, 1995 FISCAL YEAR, IN ACCORDANCE WITH RULE 24f-2.
BY THIS AMENDMENT TO THE REGISTRATION STATEMENT (No. 33-8982) ON FORM N-1A
OF THE VICTORY PORTFOLIOS, THE BOARD OF TRUSTEES OF THE VICTORY PORTFOLIOS, A
DELAWARE BUSINESS TRUST, ADOPTS THE REGISTRATION STATEMENT OF THE VICTORY
PORTFOLIOS, A MASSACHUSETTS BUSINESS TRUST, UNDER THE SECURITIES ACT OF 1933
AND THE NOTIFICATION OF REGISTRATION AND REGISTRATION STATEMENT OF THE VICTORY
PORTFOLIOS UNDER THE INVESTMENT COMPANY ACT OF 1940.
<PAGE> 3
The Victory Portfolios
THE VICTORY PORTFOLIOS
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
Form N-1A Part A Item Prospectus Caption
- --------------------- ------------------
<S> <C> <C>
i. Cover Page Cover Page
ii. Synopsis Summary of Fund Expenses
iii. Condensed Financial Information
Financial Highlights
iv. General Description of Registrant
Investment Objective and Policies;
Limiting Investment Risks; Additional
Information; Additional Information Regarding
Securities in which the Fund May Invest
v. Management of the Fund Fund
Organization and Fees
v.A. Management's Discussion of Fund Portfolio Management
Performance
vi. Capital Stock and Other Securities
How to Invest, Exchange and Redeem;
Dividends, Distributions and Taxes; Additional
Information
vii. Purchase of Securities Being Offered
How to Invest, Exchange and Redeem
viii. Redemption or Repurchase How to
Invest, Exchange and Redeem
ix. Pending Legal Proceedings
Inapplicable
</TABLE>
<PAGE> 4
The Victory Portfolios
CROSS REFERENCE SHEET
THE VICTORY PORTFOLIOS - STATEMENT OF
ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
Form N-1A Part B Item
---------------------
<S> <C> <C>
x. Cover Page Cover Page
xi. Table of Contents Table of
Contents
xii. General Information and History
The Victory Portfolios; Additional
Information-Description of Shares
xiii. Investment Objectives and Policies
Investment Objective and Policies
xiv. Management of the Fund
Management of the Victory Portfolios
xv. Control Persons and Principal
Additional Information - Miscellaneous
Holders of Securities
xvi. Investment Advisory and Other
Management of The Victory Portfolios
Services
xvii. Brokerage Allocation and Other
Practices Management of The Victory
Portfolios- Portfolio Transactions
xviii. Capital Stock and Other Securities
Valuation; Additional Purchase and
Redemption Information; Matters Affecting
Redemption; Additional Information
xix. Purchase, Redemption and Pricing
Valuation; Additional Purchase and
of Securities Being Offered Redemption Information; Management of the
Victory Portfolios
</TABLE>
<PAGE> 5
The Victory Portfolios
<TABLE>
<CAPTION>
Form N-1A Part B Item
---------------------
<S> <C> <C>
xx. Tax Status Additional Purchase and
Redemption Information; Additional Tax
Information
xxi. Underwriters Management of the
Funds-Distributor
xxii. Calculation of Performance Data
Additional Information - Calculation of
Performance Data
xxiii. Financial Statements
</TABLE>
<PAGE> 6
The Victory Portfolios
PART A
<PAGE> 7
THE
VICTORY
PORTFOLIOS
FINANCIAL RESERVES FUND
PROSPECTUS For current yield, purchase and redemption information,
March 1, 1996 call 800-539-FUND or 800-539-3863
THE VICTORY PORTFOLIOS (the "Victory Portfolios") is a registered open-end
management investment company that offers investors a selection of money
market, fixed-income, municipal bond, domestic and international equity
portfolios. This Prospectus relates to the Victory Financial Reserves Fund
(the "Fund"). KeyCorp Mutual Fund Advisers, Inc., Cleveland, Ohio, an indirect
subsidiary of KeyCorp, is the investment adviser to the Fund ("Key Advisers" or
the "Adviser"). Society Asset Management, Inc., Cleveland, Ohio, an indirect
subsidiary of KeyCorp, is the investment sub-adviser to the Fund (the
"Sub-Adviser" or "Society"). Concord Holding Corporation is the Fund's
administrator (the "Administrator"). Victory Broker-Dealer Services, Inc. is
the Fund's distributor (the "Distributor").
The Fund seeks to obtain as high a level of current income as is consistent
with preserving capital and providing liquidity. The Fund pursues this
investment objective by investing primarily in a portfolio of high-quality U.S.
dollar-denominated money market instruments. Shares of the Fund are offered at
net asset value.
Please read this Prospectus before investing. It is designed to provide you
with information and to help you decide if the Fund's goals match your own.
Retain this document for future reference. A Statement of Additional
Information (dated March 1, 1996) for the Fund and an annual report for the
Fund's fiscal year ended October 31, 1995, and for Financial Reserves
Portfolio, the immediate predecessor to the Fund (the "First Predecessor Fund")
and for The Victory Fund, the predecessor to the First Predecessor Fund (the
"Second Predecessor Fund," together with the First Predecessor Fund, the
"Predecessor Funds") and have been filed with the Securities and Exchange
Commission and are incorporated herein by reference. This Statement of
Additional Information is available without charge upon request from
800-539-3863.
SHARES OF THE FUND ARE NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT.
THERE CAN BE NO ASSURANCE THAT THE FUND WILL MAINTAIN A STABLE $1.00 SHARE
PRICE.
SHARES OF THE FUND ARE:
- - NOT INSURED BY THE FDIC;
- - NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY KEYCORP
BANK, ANY OF ITS AFFILIATES, OR ANY OTHER BANK;
- - SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("COMMISSION"), OR SECURITIES REGULATORY AUTHORITY OF ANY
STATE, NOR HAS THE COMMISSION OR ANY SUCH STATE AUTHORITY PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
2
<PAGE> 8
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
----
<S> <C>
Summary of Fund Expenses 4
Financial Highlights 5
Investment Objective 7
Investment Risks 7
How to Invest and Redeem 10
Dividends, Distributions and Taxes 13
Performance 15
Fund Organization and Fees 15
Additional Information 18
Additional Information Regarding Securities in Which the Fund May Invest 19
</TABLE>
3
<PAGE> 9
SUMMARY OF FUND EXPENSES
The table below summarizes the expenses associated with the Fund. This
standard format was developed for use by all mutual funds to help you make your
investment decisions. Of course, you should consider this expense information
along with other important information in this Prospectus, including the Fund's
investment objective investment policies and risk factors, and financial
highlights.
A. SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum Sales Charge None
Sales Charge Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
</TABLE>
B. ESTIMATED ANNUAL FUND OPERATING EXPENSES AFTER EXPENSE WAIVERS
AND REIMBURSEMENTS (AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<S> <C>
Advisory Fee(1) .35%
Administration Fee .15%
Total Other Expenses .15%
---
Total Fund Operating Expenses(2) .65%
===
</TABLE>
(1) Key Advisers has agreed to reduce its fees to the extent necessary
necessary so that the total operating expenses of the Fund do not
exceed .77% until at least [February 28, 1996]. Key Advisers may
terminate this voluntary waiver at any time at its sole discretion.
The maximum Advisory Fee absent waiver is .50%.
(2) Without the voluntary waiver referred in footnote (1) above, the total
operating expense ratio of the Fund would be .74%.
C. EXAMPLE: You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return and (2) redemption at the end of each time
period. As noted in the table above, the Fund charges no redemption fees:
<TABLE>
<S> <C>
One Year $ 7
Three Years $21
Five Years $37
Ten Years $82
</TABLE>
Explanation of Table: The purpose of the table is to assist an investor in
understanding the various costs and expenses that an investor in the Fund would
bear either directly or indirectly. For more complete descriptions of the
various costs and expenses, see "Fund Information." The foregoing example is
based upon expenses for the fiscal year ended October 31, 1995 and expenses
that the Fund is expected to incur during the current fiscal year. THE ABOVE
EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE FUND
PERFORMANCE OR EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
A. SHAREHOLDER TRANSACTION EXPENSES represent charges paid when an investor
purchases or redeems shares of the Fund.
B. ESTIMATED ANNUAL FUND OPERATING EXPENSES are based on the Fund's estimated
expenses for a fiscal year.
4
<PAGE> 10
FINANCIAL HIGHLIGHTS
The information in the table below sets forth certain financial
information with respect to the per-share data and ratios for the Fund and its
Predecessor Funds, and (except as indicated) has been audited by Coopers &
Lybrand LLP (for the fiscal year ended October 31, 1995), by KPMG Peat Marwick
LLP (for the fiscal year ended October 31, 1994), and by Price Waterhouse LLP
(for all earlier periods), respectively, whose reports thereon, together with
the financial statements of the Fund and the Predecessor Funds are incorporated
by reference into or contained in the Statement of Additional Information.
5
<PAGE> 11
<TABLE>
<CAPTION>
Year Six Months
Ended Ended Years Ended October 31,
October 31, April 30, -----------------------
1995+++ 1995 1994 1993+ 1992+ 1991+ 1990 1989
---- ---- ---- ----- ----- ----- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of year [to be [to be $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
INCOME FROM INVESTMENT inserted] inserted]
OPERATIONS:
Net interest income(1) 0.035 0.030 0.040 0.060 0.080 0.090
DISTRIBUTIONS:
Net interest income (0.035) (0.030) (0.040) (0.060) (0.080) (0.090)
Net asset value, end of year $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
TOTAL RETURN++ 3.57% 2.81% 3.76% 6.28% 8.12% 9.14%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of
Year (000) $433,266 $457,872 $523,889 $412,542 $432,905 $369,582
Ratio of expenses to
average net assets(1) 0.57% 0.55% 0.55% 0.55% 0.55% 0.56%
Ratio of net interest
income to average net
assets 3.48% 2.78% 3.67% 6.12% 7.84% 8.77%
</TABLE>
<TABLE>
<CAPTION>
Years Ended October 31,
-----------------------
1988 1987 1986 1985
---- ---- ---- ----
<S> <C>
Net asset value, beginning
of year $ 1.000 $ 1.000 $ 1.000 $ 1.000
INCOME FROM INVESTMENT
OPERATIONS:
Net interest income(1) 0.070 0.060 0.070 0.080
DISTRIBUTIONS:
Net interest income (0.070) (0.060) (0.070) (0.080)
Net asset value, end of year $ 1.000 $ 1.000 $ 1.000 $ 1.000
TOTAL RETURN++ 7.13% 6.19% 6.87% 8.25%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of
Year (000) $409,440 $388,938 $231,823 $147,407
Ratio of expenses to
average net assets(1) 0.54% 0.56% 0.57% 0.59%
Ratio of net interest
income to average net
assets 6.92% 6.06% 6.55% 7.92%
</TABLE>
(1) During the years ended October 31, 1993, 1992, and 1991 various fees
and expenses were voluntarily waived and reimbursed by Society Asset
Management, Inc. During the year ended October 31, 1994 various fees
and expenses were voluntarily waived and reimbursed by Key Trust
Company. The ratio of expenses to average net assets had such waivers
and reimbursements not occurred were as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Ratio of expenses to
average net assets 0.73% 0.70% 0.70% 0.62% -- --
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Ratio of expenses to
average net assets -- -- -- --
</TABLE>
+ Effective May 16, 1991, Ameritrust Company National Association became
investment adviser to the Predecessor Fund. Ameritrust was acquired
by Society Corporation on March 16, 1992, and merged into Society
National Bank, a wholly-owned subsidiary of Society Corporation on
July 13, 1992. On January 7, 1993, investment responsibility was
transferred to Society Asset Management, Inc., another wholly-owned
subsidiary of Society Corporation.
++ Total return would have been lower had certain expenses not been
reduced during the period.
+++ The Fund's fiscal year end was changed to the period ending October 31
of each year.
6
<PAGE> 12
INVESTMENT OBJECTIVE
The investment objective of the Fund is to obtain as high a level of current
income as is consistent with preserving capital and providing liquidity through
investment in high-quality, money market instruments. The investment objective
of the Fund is fundamental and may not be changed without a vote of a majority
of the Fund's outstanding voting securities (as defined in the Statement of
Additional Information). There can be no assurance that the Fund will achieve
its investment objective.
ACCEPTABLE INVESTMENTS. The Fund will invest primarily in high-quality, U.S.
dollar-denominated money market instruments with remaining maturities of 397
days or less at the time of purchase by the Fund and average maturity, computed
on a dollar weighted basis, of 90 days or less:
- - obligations of domestic and foreign financial institutions consisting
of certificates of deposit, bankers' acceptances and time deposits.
- - obligations of foreign branches of U.S. banks (Eurodollars) consisting
of certificates of deposit, bankers' acceptances and time deposits.
- - obligations of the U.S. government or any of its agencies or
instrumentalities which may be backed by the credit-worthiness of the
issuing agency.
- - short-term corporate obligations, consisting of commercial paper,
notes, and bonds, with remaining maturities of one year or less of
domestic and foreign issuers.
- - repurchase agreements with member banks of the Federal Reserve System
and primary dealers in U.S. government securities with respect to any
security in which the Fund is authorized to invest.
- - other short-term debt obligations of domestic and foreign issuers
discussed in this prospectus.
The Fund may engage in reverse repurchase agreements.
The investment policies of the Fund may be changed without an affirmative vote
of the holders of a majority of the Fund's outstanding voting securities unless
(1) a policy is expressly deemed to be a fundamental policy of the Fund or (2)
a policy is expressly deemed to be changeable only by such a majority vote.
INVESTMENT RISKS
The Fund may invest up to 25% of its total assets in U.S. dollar-denominated
instruments issued by foreign branches of U.S. banks (Eurodollars), foreign
banks and other foreign issuers (including American Depository Receipts).
Investments in foreign securities, certificates of deposit and demand and time
deposits of foreign banks and foreign branches of U.S. banks (including
Eurodollar Certificates of Deposit, Eurodollar Time Deposits, Canadian Time
Deposits, Yankee Certificates of Deposit, Canadian Commercial Paper and
Europaper) may subject the Fund to investment risks that differ in some
respects from those related to investments in obligations of U.S. domestic
issuers. Such risks include future adverse economic and political
developments, the possible imposition of withholding taxes on interest income,
possible seizure, nationalization or expropriation, or the imposition of other
restrictions which could adversely affect the payment of principal and interest
on such obligations. Certain provisions of federal law which govern the
establishment and operation of U.S. banks do not apply to foreign banks or to
foreign branches of U.S. banks. In addition, there is no limit on the amount
of the Fund's investments in any one type of instrument or in the securities of
issuers located in any one particular foreign country. The Fund will acquire
such securities or financial instruments only when Key Advisers or the
Sub-Adviser believes that the risks associated with them are minimal.
7
<PAGE> 13
Available cash invested in the Fund earns income at current money market rates
while remaining conveniently liquid. In order to provide full liquidity, the
Fund will seek to maintain a stable $1.00 share price; limit portfolio average
maturity to 120 days or less (however, as a matter of nonfundamental policy and
in order to conform with applicable regulation, average weighted portfolio
maturity will be limited to 90 days or less); buy U.S. dollar-denominated
securities which mature in one year or less; and buy only high quality
securities with minimal credit risks. As required by Rule 2a-7 under the
Investment Company Act of 1940, as amended ("Rule 2a-7"), the Fund's Board of
Trustees (the "Trustees") will monitor the quality of the Fund's investments.
Of course, a $1.00 share price cannot be guaranteed, but these practices help
to minimize any price fluctuations that might result from rising or declining
interest rates. Accordingly, while the Fund invests in high quality
securities, investors should be aware that an investment is not without risk
even if all securities are paid in full at maturity. All money market
instruments, including U.S. government securities, can change in value when
interest rates or an issuer's creditworthiness changes.
ADDITIONAL INFORMATION REGARDING SECURITIES IN WHICH THE FUND MAY INVEST
The following paragraphs provide a brief description of some of the types of
securities in which the Fund may invest, the transactions it may make and
strategies it may adopt. The Fund may, following notice to its shareholders,
take advantage of other investment practices which are not at present
contemplated for use by the Fund or which currently are not available but which
may be developed, to the extent such investment practices are both consistent
with the Fund's investment objective and legally permissible for the Fund.
Such investment practices, if they arise, may involve risks which exceed those
involved in the activities described in this Prospectus.
BANK OBLIGATIONS:
COMMERCIAL PAPER consists of short-term obligations issued by banks,
broker-dealers, corporations and other entities for purposes such as financing
their current operations.
CERTIFICATES OF DEPOSIT are negotiable certificates representing a commercial
bank's obligations to repay funds deposited with it, earning specified rates of
interest over given periods.
BANKERS' ACCEPTANCES are negotiable obligations of a bank to pay a draft which
has been drawn on it by a customer. These obligations are backed by large
banks and usually backed by goods in international trade.
TIME DEPOSITS are non-negotiable deposits in a banking institution earning a
specified interest rate over a given period of time.
CORPORATE OBLIGATIONS. Corporate obligations are bonds issued by corporations
and other business organizations in order to finance their long-term credit
needs. Corporate bonds in which a Fund may invest generally consist of those
rated A or higher by S&P or Moody's that possess many favorable investment
attributes. In the lower end of this category, credit quality may be more
susceptible to potential future changes in circumstances.
WHEN ISSUED AND DELAYED DELIVERY SECURITIES. The Fund does not intend to
invest in forward commitments for speculative purposes; however, the Fund may
purchase and sell securities on a "when-issued" and "delayed delivery" basis.
These are arrangements in which the Fund purchases securities with payment and
delivery scheduled for a future date. If completed, the transaction will
generally settle within 60 days. Purchases of securities on a "when-issued" or
"delayed delivery" basis are subject to market fluctuation and are subject to
the risk that the market value may change before the delivery date, which could
affect the market value of the Fund's assets. Although the Fund will generally
purchase securities on a "when-issued" basis with the intention of acquiring
such securities, it may sell such securities before the settlement date if it
is deemed advisable. When the
8
<PAGE> 14
Fund is the buyer in such a transaction, it will segregate and maintain cash or
high-grade readily marketable debt securities sufficient to pay for such
purchase commitments. To the extent the Fund engages in "when-issued" and
"delayed delivery" transactions, it will do so only for the purpose of
acquiring portfolio securities consistent with the Fund's investment objectives
and policies, and not for the purpose of leverage. In "when-issued" and
"delayed delivery" transactions, the Fund relies on the seller to complete the
transaction. The other party's failure may cause the Fund to miss a price or
yield considered advantageous. Ordinarily, the Fund will not earn interest on
securities purchased until they are delivered.
VARIABLE AND FLOATING RATE SECURITIES. The Fund may purchase variable and
floating rate obligations, including certain participation interests in
municipal obligations, which are tax-exempt obligations containing interest
rate adjustment formulas that help stabilize their market values. Many
variable and floating rate instruments also carry demand features that permit
the funds to sell them at par value plus accrued interest on short notice,
generally not to exceed seven days. When determining the maturity of a
variable or floating rate instrument, the fund may look to the date the demand
feature can be exercised, or to the date the interest rate is readjusted,
rather than to the final maturity of the instrument.
REPURCHASE AGREEMENTS AND SECURITIES LOANS. In a repurchase agreement, the
Fund purchases a security at one price and simultaneously agrees to sell it
back at a higher price. The Fund may also make securities loans to
broker-dealers and institutional investors. In the event of the bankruptcy of
the other party to either a repurchase agreement or a securities loan, the Fund
could experience delays in recovering its cash or the securities it lent. To
the extent that, in the meantime, the value of the securities purchased had
decreased or the value of the securities lent had increased, the Fund could
experience a loss. In all cases, Key Advisers or the Sub-Adviser must find the
creditworthiness of the other party to the transaction satisfactory. The Fund
may invest only in repurchase agreements that are secured by those securities
in which it is permitted to invest directly. Repurchase agreements are
considered by the staff of the Securities and Exchange Commission to be loans
by the Fund.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, the Fund
temporarily transfers possession of a portfolio security to another party, such
as a bank or a broker-dealer, in return for cash, and agrees to buy the
security back at a future date and price. The Fund can invest the cash it
receives or use it to meet redemption requests. If the Fund reinvests the cash
at a rate higher than the rate reflected by the terms of the agreement, it may
earn additional income. At the same time, the Fund is exposed to greater
potential fluctuations in the value of its assets when engaging in reverse
repurchase agreements.
At all times that a reverse repurchase agreement is outstanding, the Fund will
maintain cash and liquid securities in a segregated account at its custodian
bank with a value at least equal to its obligation under the agreement.
Securities and other assets held in the segregated account may not be sold
while the reverse repurchase agreement is outstanding, unless other suitable
assets are substituted. While Key Advisers or the Sub-Adviser does not
consider reverse repurchase agreements to involve borrowing money, reverse
repurchase agreements will be included within the aggregate limitation on
"borrowings" contained in the Fund's fundamental limitation. (See the
Statement of Additional Information).
PARTICIPATION INTERESTS. The Fund may purchase interests in securities from
financial institutions such as commercial and investment banks, savings and
loan associations and insurance companies. These interests may take the form
of participation, beneficial interests in a trust, partnership interests or any
other form of indirect ownership. The Fund invests in these participation
interests in order to obtain credit enhancement or demand features that would
not be available through direct ownership of the underlying securities.
EXTENDIBLE DEBT SECURITIES. The Fund may purchase extendible debt securities.
Extendible debt securities purchased by the Fund are securities that can be
retired at the option of a Fund at various dates prior to maturity. In
calculating average portfolio maturity, the Fund may treat extendible debt
securities as maturing on the next optional retirement date.
9
<PAGE> 15
ILLIQUID INVESTMENTS AND RESTRICTED SECURITIES. The Fund may invest up to 10%
of its assets in illiquid investments (investments that cannot be readily sold
within seven days in the usual course of business at approximately the price at
which the Fund has valued them), including restricted securities deemed to be
illiquid. Under the supervision of the Trustees, Key Advisers or the
Sub-Adviser determines the liquidity of the Fund's investments. The absence of
a trading market can make it difficult to ascertain a market value for illiquid
investments. Disposing of illiquid investments may involve time-consuming
negotiation and legal expenses, and it may be difficult or impossible for the
Fund to sell them promptly at an acceptable price. "Restricted Securities" are
securities which are acquired without registration under the Securities Act of
1933, as amended (the "1933 Act"). Unless registered for sale, these
securities can only be sold in privately negotiated transactions or pursuant to
an exemption from registration. Unless registered for sale, these securities
can only be sold in privately negotiated transactions or pursuant to and
exemption from registration.
MASTER DEMAND NOTES. Master demand notes are unsecured obligations that permit
the investment of fluctuating amounts by the Fund at varying rates of interest
pursuant to direct arrangements between the Fund, as lender, and the issuer as
borrower.
MONEY MARKET INSTRUMENTS. Money market instruments refer to short-term,
high-quality debt securities, including U.S. government obligations, commercial
paper, certificates of deposit, bankers' acceptances, time deposits and
short-term corporate obligations. Money market instruments may carry fixed
rates of return or have variable or floating interest rates.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities purchased by the Fund
are securities issued or guaranteed by agencies or instrumentalities of the
U.S. government and non-government entities such as banks, mortgage lenders, or
other financial institutions. A mortgage-backed security may be an obligation
of the issuer backed by a mortgage or pool of mortgages or a direct interest in
an underlying pool of mortgages. Some mortgage-backed securities make payments
of both principal and interest at a variety of intervals; others make
semiannual interest payments at a predetermined rate and repay principal at
maturity (like a typical bond). Mortgage-backed securities are based on
different types of mortgages including those on commercial real estate or
residential properties. Other types of mortgage-backed securities will likely
be developed in the future, and the Fund may invest in them if the Key Advisers
or the Sub-Adviser determines they are consistent with the Fund's investment
objective and policies. The Fund will not acquire "residual" interests in real
estate mortgage investment conduits ("REMICs") under current tax law in order
to avoid certain potential adverse tax consequences.
The value of mortgage-backed securities may change due to shifts in the
market's perception of issuers. In addition, regulatory or tax changes may
adversely affect the mortgage securities market as a whole. Non-government,
mortgage-backed securities may offer higher yields than those issued by
government entities, but also may be subject to greater price changes than
government issues. Mortgage-backed securities are subject to prepayment risk.
Prepayment, which occurs when unscheduled or early payments are made on the
underlying mortgages, may shorten the effective maturities of these securities
and may lower their total returns. The rate of prepayments is generally
expected to increase in periods of declining interest rates. Consequently, in
such periods, some of the Fund's higher-yielding securities may be converted to
cash, and the Fund will be forced to accept lower interest rates when that cash
is used to purchase additional securities.
ZERO COUPON BONDS. The Fund may purchase zero coupon bonds. Zero coupon bonds
purchased by the Fund do not make interest payments; instead, they are sold at
a deep discount from their face value and are redeemed at face value when they
mature. Because zero coupon bonds do not pay current income, their prices can
be very volatile when interest rates change. In calculating its daily dividend
and in complying with federal tax distribution requirements, the Fund takes
into account as income a portion of the difference between a zero coupon bond's
purchase price and its face value. Although zero coupon securities pay no
interest to holders prior to maturity, interest on these securities is reported
as income to the Fund and distributed to its shareholders. These distributions
must be made from the Fund's cash assets or, if necessary, from the proceeds of
sales of portfolio securities. The
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<PAGE> 16
Fund will not be able to purchase additional income producing securities with
cash used to make such distributions and its current income ultimately may be
reduced as a result.
A broker-dealer creates a derivative zero by separating the interest and
principal components of a U.S. treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury Securities),
TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury Receipts) are
examples of derivative zeros. The Fund does not consider these instruments to
be U.S. Government securities for certain purposes under the 1940 Act.
STRIPS. The Fund may invest in STRIPS (Separate Trading of Registered Interest
and Principal of Securities). The Federal Reserve Bank creates STRIPS by
separating the interest and principal components of an outstanding U.S.
Treasury bond and selling them as individual securities. Bonds issued by the
Resolution Funding Corporation and the Financing Corporation can also be
separated in this fashion. Original issue zeros are zero coupon securities
originally issued by the U.S. government, a government agency or a corporation
in zero coupon form.
U.S. GOVERNMENT OBLIGATIONS. U.S. Government Obligations are debt securities
issued or guaranteed by the U.S. Treasury or by an agency or instrumentality of
the U.S. government. Not all U.S. government obligations are backed by the
full faith and credit of the United States. For example, securities issued by
the Federal Farm Credit Bank or by the Federal National Mortgage Association
are supported by the agency's right to borrow money from the U.S. Treasury
under certain circumstances. Securities issued by the Federal Home Loan Banks
are supported only by the credit of the agency. There is no guarantee that the
government will support these types of securities, and therefore they involve
more risk than government obligations which are backed by the full faith and
credit of the United States.
INVESTMENT COMPANY SECURITIES. The Fund may invest up to 5% of its total
assets in the securities of any one investment company, but may not own more
than 3% of the securities of any one investment company or invest more than 10%
of its total assets in the securities of other investment companies. To the
extent required by the laws of any state in which shares of a fund of the
Victory Portfolios are sold, Key Adviser and/or the Sub-Adviser will waive its
investment advisory fee as to all assets invested in other investment
companies. Because such other investment companies employ an investment
adviser, such investment by the Fund will cause shareholders to bear
duplicative fees, such as management fees, to the extent such fees are not
waived by Key Adviser and/or the Sub-Adviser. The Fund will invest only in the
securities of other money market funds which have similar investment policies
and objectives and which invest only in securities of equal or higher
short-term ratings.
SHORT-TERM FUNDING AGREEMENTS. The Fund may invest in short-term funding
agreements (sometimes referred to as "GICs") issued by insurance companies.
Pursuant to a short-term funding agreement, the Fund invests an amount of cash
with an insurance company and the insurance company credits such investment on
a monthly basis with guaranteed interest which is based on an index.
Short-term funding agreements provide that this guaranteed interest will not be
less than a certain minimum rate. The Fund will purchase a short-term funding
agreement only when Key Advisers and the Sub-Adviser have determined, under
guidelines established by the Victory Portfolios' Board of Trustees, that the
agreement presents minimal credit risks to the Fund and is of comparable
quality to instruments that possess the highest short-term rating from an NRSRO
not affiliated with the issuer or guarantor of the instrument. The Fund may
receive all principal and accrued interest on a short-term funding agreement at
any time upon thirty days' written notice. Because the Fund may not receive
the principal amount of a short-term funding agreement from the insurance
company on seven days' notice or less, a short-term funding agreement is
considered an illiquid investment and, together with other instruments in the
Fund which are not readily marketable, will not exceed 10% of the Fund's total
assets.
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<PAGE> 17
LIMITING INVESTMENT RISKS
The Fund follows specific guidelines in buying portfolio securities:
The Fund will only purchase obligations that (i) are rated high quality by two
of the following four nationally recognized rating services: Duff & Phelps Inc.
("Duff"), Fitch Investors Service, Inc. ("Fitch"), Moody's Investors Service,
Inc. ("Moody's"), and Standard & Poor's Corporation ("S&P"), if rated by two or
more services; (ii) are rated high quality if rated by only one rating service;
or (iii) if unrated, are determined to be of equivalent quality pursuant to
procedures reviewed by the Trustees. Obligations that are not rated are not
necessarily of lower quality than those which are rated, but may be less
marketable and therefore may provide higher yields.
Currently, only obligations in the top two categories are considered to be
rated high quality for commercial paper. The two highest rating categories of
Duff, Fitch, Moody's and S&P are Duff 1 and Duff 2, Fitch-1 and Fitch-2,
Prime-1 and Prime-2, and A-1 and A-2, respectively. Under Rule 2a-7, the Fund
is not permitted to invest more than 5% of its total assets in securities that
would be considered to be in the second highest rating category, and, subject
to this limitation, the Fund may not invest more than the greater of 1% of its
total assets or $1 million in such securities of any one issuer. However, the
Fund currently has a nonfundamental policy to purchase only commercial paper
which is rated in the single highest category by the rating services as
outlined above, or which, if unrated, is deemed to be of equivalent quality
pursuant to procedures reviewed by the Trustees. The Fund may purchase an
instrument rated below highest quality by a rating service if two other
services have given that instrument a highest quality rating ("split rated"
obligation), and if Key Advisers or the Sub-Adviser considers that the
instrument is of highest quality and presents minimal credit risks.
For other corporate obligations, the two highest rating categories are Duff 1
and Duff 2, AAA and AA by Fitch, Aaa and Aa by Moody's, and AAA and AA by S&P.
For a more complete description of these ratings see the Appendix to the
Statement of Additional Information.
The Fund will commit no more than 10% of its net assets to illiquid securities,
including repurchase agreements maturing in more than seven days, subject to
the Fund's fundamental limitation on investments in illiquid securities.
In addition, the Fund has certain other limitations. The Fund will not
purchase a security other than U.S. government securities if, as a result: (a)
with respect to 75% of total assets, more than 5% of total assets would be
invested in the securities of any one issuer (with respect to the remaining 25%
of total assets, the Fund may invest an amount equal to 10% of total assets in
bankers' acceptances, certificates of deposit and time deposits of a single
bank); however, as a matter of nonfundamental policy, the Fund will limit the
percentage allocation of its investments so as to comply with Rule 2a-7, which
generally limits to 5% of total assets the amount which may be invested in the
securities of any one issuer; or (b) more than 25% of total assets would be
invested in a particular industry, except that the Fund may invest more than
25% of total assets in the securities of banks.
Currently, the Commission defines the term "bank" to include U.S. banks and
their foreign branches if, in the case of foreign branches, the parent U.S.
bank is unconditionally liable for such obligations. These limitations do not
apply to obligations of the U.S. government or any of its agencies or
instrumentalities. The Fund does not consider utilities or companies engaged
in finance generally to be one industry. Finance companies will be considered
a part of the industry they finance (e.g., GMAC--auto; VISA-- credit cards).
Utilities will be divided according to the types of services they provide; for
example, gas, gas transmission, electric and gas, electric and telephone will
each be considered a separate industry.
The Fund may borrow money from banks or by engaging in reverse repurchase
agreements, but not in an amount equal to or exceeding 33 1/3% of the current
value of its total assets.
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<PAGE> 18
As a matter of operating policy, the Fund does not intend to purchase
securities for investment during periods when the sum of temporary bank
borrowings and reverse repurchase agreements entered into to facilitate
redemptions exceeds 5% of its total assets. This operating policy is not
fundamental and may be changed without shareholder notification.
The limitations and policies discussed in "Investment Objective and Policies"
are considered at the time of purchase; the sale of securities is not required
in the event of a subsequent change in circumstances. Except where noted, the
investment objective, policies, and limitations of the Fund are fundamental and
can only be changed by vote of a majority of the outstanding shares of the
Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Sub-Adviser is responsible for decisions to buy and sell securities for the
Fund, broker-dealer selection and negotiation of commission rates. Since
purchases and sales of portfolio securities by the Fund are usually principal
transactions, the Fund incurs little or no brokerage commissions. Portfolio
securities are normally purchased directly from the issuer or from a market
maker for the securities. The purchase price paid to dealers serving as market
makers may include a spread between the bid and asked prices. The Fund may
also purchase securities from underwriters at prices which include a concession
paid by the issuer to the underwriter.
The Sub-Adviser's primary consideration in effecting a security transaction is
to obtain the best net price and the most favorable execution of the order. To
the extent that the executions and prices offered by more than one dealer are
comparable, the Sub- Adviser may, in its discretion, effect transactions with
dealers that furnish statistical, research or other information or services
which are deemed by the Sub-Adviser to be beneficial to the Fund's investment
program. Certain research services furnished by dealers may be useful to the
Sub-Adviser with respect to clients other than the Fund. Similarly, any
research services received by the Sub-Adviser through placement of portfolio
transactions of other clients may be of value to the Sub-Adviser in fulfilling
its obligations to the Fund.
HOW TO INVEST, EXCHANGE AND REDEEM\
ELIGIBLE INVESTORS
Shares may be purchased directly or through an Investment Professional.
Investment Professionals are securities brokers or other financial institutions
that have entered into selling or servicing agreements with the Fund or the
Distributor. Shares are also available to clients of bank trust departments
who have qualified trust accounts. The minimum initial investment in the Fund
is $500. The minimum subsequent investment is $25. Accounts set up through
your Investment Professional or your bank trust department may be subject to
different investment minimums.
- - Investing Through Your Investment Professional. Shares are offered
continuously to investors who engage an Investment Professional for investment
advice and may be purchased at the public offering price equal to the net asset
value ("NAV" as defined below under "Share Price") next determined after the
Transfer Agent receives an investor's purchase order. If you are investing
through your Investment Professional, you may be required to set up a brokerage
or agency account. Call your Investment Professional for information in
establishing an account. Your Investment Professional will notify you whether
subsequent trades should be directed to the Investment Professional or directly
to the Fund's Transfer Agent. If you are purchasing shares of the Fund through
a program of services offered or administered by your Investment Professional,
you should read the program materials in conjunction with this Prospectus.
Certain features of the Fund may be modified by the Investment Professional in
these programs and charges may be imposed for the services rendered. Your
Investment Professional may offer any or all of the services mentioned in this
section. Contact your Investment Professional for information on these
services.
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<PAGE> 19
- - Investing Through Your Bank Trust Department. Your bank trust department
may require a minimum investment and may charge additional fees. Fee schedules
for such accounts are available upon request and are detailed in the agreements
by which a client opens the desired account. Your bank trust department may
require a completed and signed application before an investment is made.
Additional documents may be required from corporations, associations, and
certain fiduciaries. Contact your bank trust department to obtain account
information and for instructions on making additional purchases or redemptions.
The services rendered by your bank trust department, including affiliates of
Key Advisers or the Sub-Adviser, in the management of their accounts are not
duplicative of any of the services for which Key Advisers or the Sub-Adviser as
the investment adviser and sub-adviser, respectively, is compensated for
advising the Fund. The charges paid by clients of bank trust departments, or
their affiliates, should be considered in calculating the net yield on
investments in the Fund, although such charges do not affect the Fund's
dividends and distributions.
- - INVESTING DIRECTLY:
BY MAIL: You may purchase shares by completing and signing an account
application (initial purchase only) and mailing it, together with a check (or
other negotiable bank draft or money order) in the amount of at least the
minimum investment requirement to The Victory Portfolios: Financial Reserves
Fund, and mail it to the following address: Primary Funds Service Corporation,
P.O. Box 9741, Providence, RI 02940-9741. Your account will be credited on
the business day after the Transfer Agent processes your transaction.
Subsequent purchases may be made in the same manner.
BY WIRE: Call the Transfer Agent at 800-539-3863 to set up your account to
accommodate wire transactions. YOU MUST CALL THE TRANSFER AGENT BEFORE WIRING
FUNDS. If you call the Transfer Agent before 2:00 p.m. and your wire is
received that day, you will earn that day's dividend. If you call the Transfer
Agent after 2:00 p.m. but before 4:00 p.m. your purchase will be processed at
the closing NAV (usually 4:00 p.m. eastern time) and you will begin to earn
dividends on the first business day following receipt of your wire. Federal
funds (monies transferred from one bank to another through the Federal Reserve
System with same-day availability) should be wired to: Boston Safe Deposit &
Trust Co., ABA #011001234, Credit PFSC DDA #16-918-8, The Victory Portfolios:
Victory Financial Reserves Fund.
You must include your account number, your name(s), and the control number
assigned by the Transfer Agent. The Fund does not impose a fee for wire
transactions, although your bank may charge you a fee for this service.
INVESTMENT REQUIREMENTS
All purchases must be made in U.S. dollars. Checks must be drawn on U.S.
banks. No cash will be accepted. If you make a purchase with more than one
check, each check must have a value of at least $25, and the minimum investment
requirement still applies. The Fund reserves the right to limit the number of
checks processed at one time. If your check does not clear, your purchase may
be canceled and you could be liable for any losses or fees incurred. Payment
for the purchase is expected at the time of the order. If payment is not
received within three business days of the order, the order will be canceled,
and you could be held liable for resulting fees and/or losses.
You may initiate any transaction by telephone either through your bank trust
department or through your Investment Professional. Subsequent investments by
telephone may be made directly. See "Redeeming Shares--By Telephone" for more
information about telephone transactions.
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<PAGE> 20
HOW TO EXCHANGE SHARES
An exchange is the redemption of shares of one portfolio and the purchase of
shares of another. The exchange privilege is a convenient way to sell and buy
shares of other portfolios registered in your state. Shares of the Fund may be
exchanged for shares of another portfolio of the Victory Group. Exchanges into
a portfolio with a sales charge from the Fund will be processed at the offering
price, unless the shares of the Fund that you wish to exchange were acquired by
exchanging shares of a portfolio of the Victory Group that were originally
purchased subject to a sales charge; in that event, the shares will be
exchanged on the basis of current net asset values plus any difference in the
sales charge originally paid and the sales charge applicable to the shares you
wish to acquire through the exchange.
You may execute exchange transactions by calling either your Investment
Professional, your bank trust department or the Transfer Agent at 800-539-3863
prior to valuation time on any Business Day, as defined below. When making an
exchange or opening an account in another portfolio by exchange, the
registration and tax identification numbers of the two accounts must be
identical. In order to open an account through exchange, the applicable
minimum initial investment must be met. It is the Fund's policy to mail to you
at your address of record, within five business days after any telephone call
transaction, a written confirmation of the transaction. All calls will be
recorded for your protection. See "Redeeming Shares--By Telephone" for more
information about telephone transactions.
Each exchange may produce a gain or loss for tax purposes. The exchange
privilege is an important benefit. However, in order to protect the Fund's
performance and its shareholders, the Victory Portfolios discourages frequent
exchange activity in response to short-term market fluctuations. The Fund
reserves the right to refuse any specific purchase order, including certain
purchases by exchange if, in the Victory Portfolios' opinion, the Fund would be
unable to invest effectively in accordance with its investment objective and
policies, or would otherwise be affected adversely. Exchanges or purchase
orders may be restricted or refused if the Fund receives or anticipates
individual or simultaneous orders affecting significant portions of the Fund's
assets. Although the Fund will attempt to give prior notice whenever it is
reasonably able to do so, it may impose these restrictions at any time. The
Fund reserves the right to modify or withdraw the exchange privilege, and to
suspend the offering of shares in any class upon 60 days written notice to
shareholders. The exchange privilege is only available in states where the
exchange can legally be made.
REDEEMING SHARES
You may redeem all or a portion of your shares on any day that the Fund is open
for business (see "Business Day" below). Shares will be redeemed at the NAV
next calculated after the Transfer Agent has received the redemption request.
You may redeem shares in several ways:
BY MAIL: Send a written request to: The Victory Portfolios, P.O. Box 9741,
Providence, RI 02940-9741.
Write a "letter of instruction" with your name, the Fund's name, your Fund
account number, the dollar amount or number of shares to be redeemed, and any
additional requirements that apply to each particular account. You will need
the letter of instruction signed by all persons required to sign for
transactions, exactly as their names appear on the account application. A
signature guarantee is required if: you wish to redeem more than $10,000 worth
of shares; your Fund account registration has changed within the last 60 days;
the check is not being mailed to the address on your account; the check is not
being made out to the account owner; or, if the redemption proceeds are being
transferred to another Victory Group account with a different registration.
The following institutions should be able to provide you with a signature
guarantee: banks, brokers, dealers, credit unions (if authorized under state
law), securities exchanges and associations, clearing agencies, and savings
associations. A signature guarantee may
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<PAGE> 21
not be provided by a notary public. A signature guarantee is designed to
protect you, the Fund, and its agents from fraud. The Transfer Agent reserves
the right to reject any signature guarantee if (1) it has reason to believe
that the signature is not genuine, (2) it has reason to believe that the
transaction would otherwise be improper, or (3) the guarantor is a broker or
dealer that is neither a member of a clearing corporation nor maintains net
capital of at least $100,000.
BY WIRE: You may make redemptions by wire provided you have established a Fund
account to accommodate wire transactions. If telephone instructions are
received before Valuation Time (generally 2:00 p.m. Eastern time), proceeds of
the redemption for the Fund will be wired as federal funds on the same Business
Day (as defined in "Share Price") to the bank account designated with the
Transfer Agent. You may change the bank account designated to receive an
amount redeemed at any time by sending a letter of instruction with a signature
guarantee to the Transfer Agent, Primary Funds Service Corporation, P.O. Box
9741, Providence, RI 02940-9741.
BY TELEPHONE: To redeem by telephone, you may call the Transfer Agent toll
free at 800-539-3863 or call your Investment Professional or bank trust
department. It is the Fund's policy to mail to you at your address of record,
within five business days after any telephone call transaction, a written
confirmation of the transaction. Generally, neither the Fund, the bank trust
department nor the Transfer Agent will be responsible for any claims, losses or
expenses for acting on telephone instructions that they reasonably believe to
be genuine. The Transfer Agent and the Fund will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine and if they
do not employ reasonable procedures they may be liable for any losses due to
unauthorized or fraudulent instructions. The identification procedures may
include, but are not limited to, the following: account number, registration
and address, personalized security codes, taxpayer identification number and
other information particular to the account. Since you may bear the risk of
loss in the event of any unauthorized telephone transaction, you should verify
the accuracy of telephone transactions immediately upon receipt of your
confirmation statement. Your Investment Professional, bank trust department,
or the Transfer Agent may also record calls, and you should verify the accuracy
of your confirmation statements immediately after you receive them. See "How
to Invest, Exchange and Redeem--Exchanging Shares," for additional information
with respect to losses resulting from unauthorized telephone transactions.
ADDITIONAL REDEMPTION REQUIREMENTS: The Fund may withhold payment on
redemptions until it is reasonably satisfied that investments made by check
have been collected, which can take up to 15 days. Also, when the NYSE is
closed (or when trading is restricted) for any reason other than its customary
weekend or holiday closings, or under any emergency circumstances as determined
by the Commission to merit such action, the right of redemption may be
suspended or the date of payment postponed for a period of time that may exceed
7 days. In addition, the Fund reserves the right to advance the time on that
day by which purchase and redemption orders must be received. To the extent
that portfolio securities are traded in other markets on days when the NYSE is
closed, the Fund's NAV may be affected on days when investors do not have
access to the Fund to purchase or redeem shares.
If you are unable to reach the Transfer Agent by telephone (for example, during
times of unusual market activity), consider placing your order by mail directly
to the Transfer Agent. In case of suspension of the right of redemption, you
may either withdraw your request for redemption or receive payment based on the
NAV next determined after the termination of the suspension. If your balance
in the Fund falls below $500, you may be given 60 days' notice to reestablish
the minimum balance (except with respect to officers, trustees, directors and
employees, including retired directors and employees, of the Victory
Portfolios, KeyCorp and its affiliates, and the Administrator and its
affiliates (and family members of each of the foregoing, i.e., parents,
children and household members) participating in the Systematic Investment
Plan, to whom no minimum balance requirement applies). If you do not increase
your balance, your account may be closed and the proceeds mailed to you at the
address on record. Shares will be redeemed at the last calculated NAV on the
day the account is closed.
SHARE PRICE. The term "net asset value per share," or "NAV," means the value
of one share. The NAV is calculated by adding the value of all the Fund's
investments, plus cash and other assets, deducting liabilities, and
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<PAGE> 22
then dividing the result by the number of shares outstanding. A "Business Day"
is a day on which the NYSE is open for trading, the Federal Reserve Bank of
Cleveland is open, and any other day (other than a day on which no shares of
the Fund are tendered for redemption and no order to purchase any shares is
received) during which there is sufficient trading in its portfolio instruments
that the Fund's net asset value per share might be materially affected. The
NYSE or the Federal Reserve Bank of Cleveland will not be open in observance of
the following holidays: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Columbus Day, Veterans Day, Thanksgiving, and Christmas. The NAV of the Fund
is calculated twice daily, at 2:00 p.m. Eastern time, and at the close of the
Fund's Business Day, which coincides with the close of normal trading of the
NYSE (normally 4:00 p.m. Eastern time).
The Fund's securities are valued on the basis of amortized cost. This means
valuation assumes a steady rate of payment from the date of purchase until
maturity instead of looking at actual changes in market value. Although the
Fund seeks to maintain an NAV of $1.00, there can be no assurance that it will
be able to do so.
TAX-SHELTERED RETIREMENT PLANS. Retirement plans offer among the best tax
breaks available to individuals. Call your Investment Professional for more
information on the plans and their benefits, provisions and fees. Your
Investment Professional can set up your new account in the Fund under one of
several tax-sheltered plans. These plans let you invest for retirement and
shelter your investment income from current taxes. Plans include individual
Retirement Accounts ("IRAs") and Rollover IRAs. Other fees may be charged by
the IRA custodian or trustee.
[/R]
DIVIDENDS, DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
The Fund distributes substantially all of its net investment income and net
capital gains, if any, to shareholders within each calendar year as well as on
a fiscal year basis to the extent necessary to qualify for favorable federal
tax treatment. The Fund accrues and declares dividends from its net investment
daily and pays such dividends on or around the second Business Day of the
succeeding month.
DISTRIBUTION OPTIONS
When you fill out your account application, you can specify how you want to
receive your dividend distributions. Currently, there are five available
options:
1. REINVESTMENT OPTION. Your income and capital gain dividends, if any,
will be automatically reinvested in additional shares of the Fund.
Income and capital gain dividends will be reinvested at the net asset
value of the Fund as of the day after the dividend payment date. If
you do not indicate a choice on your application, you will be assigned
this option.
2. CASH OPTION. You will receive a check for each income or capital gain
dividend, if any. Distribution checks will be mailed no later than 7
days after the last day of the preceding month.
3. INCOME EARNED OPTION. You will have your capital gain dividend
distributions, if any, reinvested automatically in the Fund and have
your income dividends paid in cash.
4. DIRECTED DIVIDENDS OPTION. You will have income and capital gain
dividends, or only capital gain dividends, automatically reinvested in
shares of another fund of the Victory Group. Shares will be purchased
as of the dividend payment date. If you are reinvesting dividends of
a fund sold without a sales charge in shares of a fund sold with a
sales charge, the shares will be purchased at the offering price. If
you are reinvesting dividends of a fund sold with a sales charge in
shares of a fund sold with or without
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<PAGE> 23
a sales charge, the shares will be purchased at net asset value.
Dividend distributions can be directed only to an existing account
with a registration that is identical to that of your Fund account.
5. DIRECTED BANK ACCOUNT OPTION. You will have your income and capital
gain dividends, or only your income dividends, automatically
transferred to your bank checking or savings account. The amount will
be determined on the dividend record date and will normally be
transferred to your account within 7 days of the dividend payment
date. Dividend distributions can be directed only to an existing
account with a registration that is identical to that of your Fund
account. Please call or write the Transfer Agent to learn more about
this dividend distribution option.
Any election or revocation of any of the above dividend distribution options
may be made in writing to the Fund and sent to Primary Funds Service
Corporation, P.O. Box 9741, Providence, R.I. 02940-9741, or by calling the
Transfer Agent at 800-539-3863, and will become effective with respect to
dividends having record dates after receipt of the application or request by
the Transfer Agent.
Reinvested dividend distributions receive the same tax treatment as dividend
distributions paid in cash.
COMPLETE REDEMPTIONS: If you request a complete redemption of all your Fund
shares, any dividend accrued to your account will be included in the redemption
check.
STATEMENT AND REPORTS: You will receive a monthly statement reflecting all
transactions that affect the share balance or the registration of your Fund
account. You will receive a confirmation after every transaction that affected
the share balance of your Fund account, except for dividend reinvestment,
systematic investment and systematic withdrawal transactions. These
transactions will be detailed in your Fund account statement. Transactions
that affect the share balance of your Fund investment in an account established
with an Investment Professional or financial institution will be detailed in
regular statements or through confirmation procedures of the financial
institution. Certificates representing shares of the Fund will not be issued.
An IRS Form 1099-DIV with federal tax information will be mailed to you by
January 31 of each tax year and also will be filed with the IRS. At least
twice a year, you will receive the Fund's financial reports.
FEDERAL TAXES
The Fund will be treated as a separate entity for federal income tax purposes.
The Fund intends to qualify as a "regulated investment company" under the
Internal Revenue Code of 1986, as amended (the "IRS Code"), for so long as such
qualification is in the best interest of its shareholders. The Fund
contemplates declaring as dividends at least 100% of its net investment income
and capital gains, if any, for each year. Since all of the Fund's net
investment income is expected to be derived from earned interest, it is
anticipated that no part of any distribution will be eligible for the dividends
received deduction for corporations. The Fund does not expect to realize any
long-term capital gains.
To the extent that dividends paid to shareholders are derived from taxable
income (for example, interest on certificates of deposit or repurchase
agreements) or from capital gains, such dividends will be subject to federal
income tax whether received in cash or additional shares and may also be
subject to state and local taxes.
Interest income received by direct holders of obligations of the U.S.
Government and certain of its agencies and instrumentalities is exempt from
state and local income taxation. The Fund's dividend distributions from
investment income may, to the extent that such dividend distributions consist
of interest from obligations of the U.S. Government and certain of its agencies
and instrumentalities, also be exempt from state and local income taxes. The
Fund intends to advise shareholders of the proportion of their dividend
distributions which consist of such interest. Shareholders are urged to
consult their own tax advisers regarding the possible exclusion of a portion of
their dividend distributions for state and local income tax purposes in their
respective jurisdictions.
18
<PAGE> 24
Dividends received by shareholders of the Fund in January of a given year will
be treated as received on December 31 of the preceding year provided that such
dividends were declared to shareholders of record on a date in October,
November or December of such preceding year.
The foregoing discussion is limited to federal income tax consequences and is
based on tax laws and regulations which are in effect as of the date of this
Prospectus; such laws and regulations may be changed by legislative or
administrative actions. Additional information regarding federal taxes is
contained in the Statement of Additional Information under the headings
"ADDITIONAL PURCHASE AND REDEMPTION INFORMATION--Additional Tax Information."
The foregoing and the additional material in the Statement of Additional
Information are only brief summaries of some of the important tax
considerations generally affecting the Fund and its shareholders. Accordingly,
potential investors are urged to consult their tax advisers with specific
reference to their own federal, state and other local tax situation.
The Victory Portfolios will provide shareholders at least annually with
information as to the federal income tax consequences of distributions made to
them during the year.
PERFORMANCE
From time to time, the Fund's "yield" and "effective yield" for each class of
shares may be presented in advertisements, sales literature and in reports to
shareholders. The "yield" is based upon the income earned by the Fund over a
seven-day period, which is then annualized, i.e., the income earned in the
period is assumed to be earned every seven days over a 52-week period and is
stated as a percentage of the investment. The "effective yield" is calculated
similarly, but when annualized, the income earned by the investment is assumed
to be reinvested in shares of the Fund and thus compounded in the course of a
52-week period. The effective yield will be higher than the yield because of
the compounding effect of this assumed reinvestment.
In addition, performance information showing the total return may be presented
in advertisements, sales literature and in reports to shareholders. Such
performance figures are based on historical earnings and are not intended to
indicate future performance. Average annual total return and aggregate total
return will be calculated over a stated period of more than one year. Average
annual total return is measured by comparing the value of an investment in the
Fund at the beginning of the relevant period to the redemption value of the
investment at the end of the period (assuming immediate reinvestment of any
dividends or capital gains distributions) and annualizing that figure.
Aggregate total return is calculated similarly to average annual total return,
the resulting difference is not annualized.
Investors may also judge, and the Victory Portfolios may at times advertise,
the performance of the Fund by comparing it to the performance of other mutual
funds with comparable investment objectives and policies, which performance may
be contained in various unmanaged mutual fund or market indices or rankings
such as those prepared by Dow Jones & Co., Inc. and Standard & Poor's
Corporation, in publications issued by Lipper Analytical Services, Inc., and in
the following publications: IBC/Donoghue's Money Fund Reports, Ibbotson
Associates of Chicago, MorningStar, CDA/Wiesenberger, Money Magazine, Forbes,
Barron's, The Wall Street Journal, The New York Times, Business Week, American
Banker, Fortune, Institutional Investor, U.S.A. Today and local newspapers.
In addition, general information about the Fund that appears in publications
such as those mentioned above may also be quoted or reproduced in
advertisements or in reports to shareholders.
Performance is a function of the type and quality of instruments held in the
portfolio, operating expenses, and market conditions. Consequently, current
performance will fluctuate and is not necessarily representative of future
results. Any fees charged by service providers with respect to customer
accounts for investing in shares of the Victory Portfolios will not be
reflected in performance calculations.
19
<PAGE> 25
Additional performance information for each fund of the Victory Portfolios is
included in the Victory Portfolios' Annual Report, which is available free of
charge by calling 800-539-3863.
FUND ORGANIZATION AND FEES
The Victory Portfolios is an open-end management investment company, commonly
known as a mutual fund, and currently consisting of twenty-eight series
portfolios, four of which are inactive. The Victory Portfolios has been
operating continuously since 1986, when it was created under Massachusetts law
as a Massachusetts business trust, although certain of its funds have a prior
operating history from their predecessor funds. On February 29, 1996 the
Victory Portfolios converted from a Massachusetts business trust to a Delaware
business trust. The Victory Portfolios' offices are located at 3435 Stelzer
Road, Columbus, OH 43219-3035.
Overall responsibility for management of the Victory Portfolios rests with its
Board of Trustees, who are elected by the shareholders of the Victory
Portfolios.
REORGANIZATION WITH PREDECESSOR FUND
The Predecessor Fund was a portfolio of The Victory Funds. On April 28, 1995,
the shareholders of the Predecessor Fund approved an Agreement and Plan of
Reorganization (the "Reorganization Plan"). Under the Reorganization Plan, the
Predecessor Fund transferred all its assets and liabilities to the Fund in
exchange for shares of the Fund, which were distributed pro rata to
shareholders of the Predecessor Fund, who then became shareholders of the Fund
(the "Reorganization"). The Predecessor Fund has ceased operations. The Fund
had no assets and did not begin operations until the Reorganization occurred.
INVESTMENT ADVISER AND SUB-ADVISER
Key Advisers is the investment adviser to the Fund. Key Advisers directs the
investment of the Victory Portfolios' assets, subject at all times to the
supervision of the Victory Portfolio's Board of Trustees. Key Advisers
continually conducts investment research and supervision for the Victory
Portfolios and is responsible for the purchase or sale of the portfolio
instruments.
Key Advisers was organized as an Ohio corporation on July 27, 1995 and is
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended. It is a wholly-owned subsidiary of KeyCorp Asset Management
Holdings, Inc., which is a wholly- owned subsidiary of Society National Bank, a
wholly-owned subsidiary of KeyCorp. Affiliates of Key Advisers manage
approximately $37 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals and mutual funds.
For the services provided and expenses incurred pursuant to its investment
advisory agreement with the Victory Portfolios, Key Advisers receives a fee
from the Fund, computed daily and paid monthly, at the annual rate of
twenty-five one-hundredths of one percent (.25%) of the Fund's average daily
net assets. Key Advisers may periodically waive all or a portion of its
advisory fee with respect to the Fund to increase the net income of the Fund
available for distribution as dividends. Prior to January 1, 1996, the
Sub-Adviser (Society Asset Management, Inc.) served as investment adviser to
the Fund. During the Fund's fiscal period ended October 31, 1995, the
Sub-Adviser received investment advisory fees aggregating .__% of the Fund's
average daily net assets.
Under the investment advisory agreement between the Victory Portfolios, on
behalf of the Fund, and Key Advisers, Key Advisers may delegate a portion of
its responsibilities to a subadviser. In addition, the investment advisory
agreement provides that Key Advisers may render services through its own
employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser of the Fund and are under the common
20
<PAGE> 26
control of KeyCorp as long as all such persons are functioning as part of an
organized group of persons, managed by authorized officers of Key Advisers.
Key Advisers has entered into an investment sub-advisory agreement with its
affiliate, Society Asset Management, Inc. a registered investment adviser, on
behalf of the Fund. The Sub-Adviser is a wholly-owned subsidiary of KeyCorp
Asset Management Holdings, Inc. For its services under the investment
sub-advisory agreement, Key Advisers pays the Sub-Adviser sub-advisory fees at
an annual rate as a percentage of the Fund's average daily net assets as
follows: .25% of the first $10 million of average daily net assets; .20% of the
next $15 million of average daily net assets; .15% of the next $25 million of
average daily net assets; and .125% of average daily net assets in excess of
$50 million.
ADVISORY FEES. Key Advisers receives an annual investment advisory fee equal
to .50 of 1% of the Fund's average daily net assets. Such fee is accrued daily
at the rate of 1/365th of .50 of 1% of the daily net assets of the Fund. Key
Advisers agreed to waive a portion of its Advisory fee, to the extent
necessary, to maintain the operating expense ratio of the Fund at .77% until at
least February 28, 1996. For the fiscal year ended October 31, 1994, Key
Advisers earned an investment advisory fee of $2,137,744 of which $584,417 was
voluntarily waived.
Society is a wholly-owned subsidiary of KeyCorp Asset Management Holdings,
Inc., which is a wholly-owned subsidiary of Society National Bank, which, in
turn, is a wholly-owned subsidiary of KeyCorp.
EFFECT OF BANKING LAWS
The Glass-Steagall Act and other banking laws and regulations presently
prohibit a bank holding company registered under the Bank Holding Company Act
of 1956 or any affiliate thereof from sponsoring, organizing or controlling a
registered, open-end investment company continuously engaged in the issuance of
its shares, and from issuing, underwriting, selling or distributing securities
in general. Such laws and regulations do not prohibit such a holding company
or affiliate from acting as investment adviser, transfer agent, or custodian to
such an investment company or from purchasing shares of such a company as agent
for and upon the order of their customers, nor should they prevent the Adviser
or the Fund from compensating third parties for performing such functions. The
Adviser is subject to such banking laws and regulations.
The Adviser believes that it may perform the investment advisory services for
the Fund contemplated by its advisory agreement with the Fund without violating
the Glass-Steagall Act or other applicable banking laws or regulations.
Changes in either federal or state statutes and regulations relating to the
permissible activities of banks and their subsidiaries or affiliates, as well
as further judicial or administrative decisions or interpretations of present
or future statutes and regulations could prevent the Adviser from continuing to
perform all or a part of the above services for its customers and/or the Fund.
In such event, changes in the operation of the Fund may occur, including the
possible alteration or termination of any automatic or other Fund share
investment and redemption service then being provided by the Adviser, and the
Trustees would consider alternate investment advisers and other means of
continuing available investment services. It is not expected that the Fund's
shareholders would suffer any adverse financial consequences (if another
adviser with equivalent abilities to the Adviser is found) as a result of any
of these occurrences.
ADMINISTRATOR AND DISTRIBUTOR
Concord Holding Corporation is the Administrator for the Financial Reserves
Fund. Victory Broker-Dealer Services, Inc. is the Fund's principal underwriter
and Distributor.
The Administrator generally assists in all aspects of the Fund's administration
and operation. For expenses incurred and services provided pursuant to its
management and administration agreement with the Victory Portfolios, the
Administrator receives a fee from the Fund, computed daily and paid monthly, at
an annual rate of fifteen
21
<PAGE> 27
one-hundredths of one percent (.15%) of the Fund's average daily net assets.
The Administrator may periodically waive all or a portion of its administrative
fee with respect to the Fund to increase the net income of the Fund available
for distribution as dividends. For the period from May 16, 1994 to October 31,
1994, the Administrator earned an administration fee of $278,025, none of which
was voluntarily waived. Prior to May 16, 1994, Federated Administrative
Services ("FAS") provided administrative personnel and services at an annual
rate of .15% on the first $250 million of average aggregate daily net assets of
all the mutual funds advised by the Adviser for which FAS served as
administrator, .125% on the next $250 million, .10% on the next $250 million
and .75% on the average aggregate daily net assets in excess of $750 million.
The minimum administrative fee received during any fiscal year by FAS was
$50,000. FAS had the right to voluntarily waive a portion of its fee. For the
period from October 31, 1993 to May 15, 1994, FAS earned $299,620, none of
which was waived.
Victory Broker-Dealer Services, Inc. sells shares of the Fund as agent on
behalf of the Victory Portfolios at no cost to the Fund. Society neither
participates in nor is it responsible for the underwriting of Victory
Portfolios shares.
PLAN OF DISTRIBUTION
The Victory Portfolios has adopted a Distribution and Service Plan (the "Plan")
for the Fund under Rule 12b-1 under the 1940 Act. No separate payments are
authorized to be made by the Fund under the Plan. Rather, the Plan recognizes
that Society or the Distributor may use fee revenues, or other resources to pay
expenses associated with activities primarily intended to result in the sale of
the shares of the Fund. The Plan also provides that Society or the Distributor
may make payments from these sources to third parties, including affiliates,
such as banks or broker-dealers, that provide shareholder support services or
engage in the sale of the shares of the Fund. See "Effect of Banking Laws"
with respect to certain prohibitions under the Glass-Steagall Act.
TRANSFER AGENT AND FUND ACCOUNTANT
Primary Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741,
serves as the Fund's Transfer Agent pursuant to a Transfer Agency and
Shareholder Service Agreement with the Victory Portfolios and receives a fee
for such services based on various criteria, including assets, transactions and
the number of accounts. BISYS Fund Services Ohio, Inc., 3435 Stelzer Road,
Columbus, Ohio 43219 provides certain accounting services for the Fund pursuant
to a Fund Accounting Agreement and receives a fee for such services.
BUSINESS MANAGEMENT AGREEMENT
In connection with its obligations under its investment sub-advisory agreement
with Key Advisers, the Sub-Adviser has entered into a Business Management
Agreement with Key Advisers pursuant to which Key Advisers provides certain
administrative and support services to the Sub-Adviser. Such services include
preparing reports to the Company's Board of Trustees, recordkeeping services,
and services rendered in connection with the preparation of regulatory filings
and other reports, and regulatory and compliance systems and other
administrative and support services.
For such services, the Sub-Adviser pays fees to Key Advisers at an annual rate
as follows: .20% on the first $10 million of average daily net assets; .15% of
the next $15 million of average daily net assets; .10% of the next $25 million
of average daily net assets; and .075% of average daily net assets in excess of
$50 million.
EXPENSES
For the fiscal year ended October 31, 1995, the Fund's total operating expenses
were .__% of average daily net assets.
22
<PAGE> 28
CUSTODIAN
Key Trust Company of Ohio, N.A. serves as custodian of the Fund and may receive
fees for the services it performs as custodian.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. serves as the Fund's independent accountants.
ADDITIONAL INFORMATION
The Victory Portfolios may issue an unlimited number of shares. All shares of
the Fund participate equally in dividends and distributions and have equal
voting, liquidation and other rights. When issued and paid for, shares will be
fully paid and nonassessable by the Victory Portfolios and will have no
preference, conversion, exchange or preemptive rights. Shareholders are
entitled to one vote for each full share owned and fractional votes for
fractional shares owned.
For those investors with qualified trust accounts established with affiliates
of the Adviser, the trustee will vote the shares at meetings of the Fund's
shareholders in accordance with the shareholder's instructions or will vote in
the same percentage as shares that are not held in trust. The trustee will
forward to these shareholders all communications received by the trustee
including proxy statements and financial reports. The Victory Portfolios are
not required to hold annual meetings of shareholders and in ordinary
circumstances do not intend to hold such meetings. The Trustees may call
special meetings of shareholders for action by shareholder vote as may be
required by the 1940 Act or the Declaration of Trust. Under certain
circumstances, the Trustees may be removed by action of the Trustees or by the
shareholders. Shareholders holding 10% or more of the Victory Portfolios'
outstanding shares may call a special meeting of shareholders for the purpose
of voting upon the question of removal of Trustees.
The Victory Portfolios' Board of Trustees may authorize the Victory Portfolios
to offer other Funds which may differ in the types of securities in which their
assets may be invested.
Key Advisers, the Sub-Adviser and the Victory Portfolios have adopted Codes of
Ethics ( the "Codes") which require investment personnel (a) to pre-clear all
personal securities transactions, (b) to file reports regarding such
transactions, and (c) to refrain from personally engaging in (i) short-term
trading of a security, (ii) transactions involving a security within seven days
of a Victory fund transaction involving the same security, and (iii)
transactions involving securities being considered for investment by a Victory
fund. The Codes also prohibit investment personnel from purchasing securities
in an initial public offering. Personal trading reports are reviewed
periodically by Key Advisers or the Sub-Adviser, and the Board of Trustees
reviews annually such reports (including information on any substantial
violations of the Codes). Violations of the Codes may result in censure,
monetary penalties, suspension or termination of employment.
DELAWARE LAW
The Delaware Business Trust Act provides that a shareholder of a Delaware
business trust shall be entitled to the same limitation of personal liability
extended to stockholders of Delaware corporations. In light of Delaware law,
the nature of the Victory Portfolios' business, and the nature of its assets,
management of the Victory Portfolios believes that the risk of personal
liability to a Fund shareholder would be extremely remote.
In the unlikely event a shareholder is held personally liable for the Victory
Portfolios' obligations, the Victory Portfolios is required to use its property
to protect or compensate the shareholder. On request, the Victory
23
<PAGE> 29
Portfolios will defend any claim made and pay any judgment against a
shareholder for any act or obligation of the Victory Portfolios. Therefore,
financial loss resulting from liability as a shareholder will occur only if the
Victory Portfolios itself cannot meet its obligations to indemnify shareholders
and pay judgments against them.
Delaware law authorizes electronic or telephonic communications between
shareholders and the Victory Portfolios. Under Delaware law, the Successor
Company has the flexibility to respond to future business contingencies. For
example, the Trustees will have the power to incorporate the Victory
Portfolios, to merge or consolidate it with another entity, to cause each fund
to become a separate trust, and to change the Victory Portfolios' domicile
without a shareholder vote. This flexibility could help reduce the expense and
frequency of future shareholder meetings for non-investment related issues.
MISCELLANEOUS
Shareholders will receive Semi-Annual Reports, which are unaudited, and Annual
Reports, which are audited by independent public accountants, describing the
investment operations of the Fund. Each of these reports, when available for a
particular fiscal year end or the end of a semi-annual fiscal period, is
incorporated herein by reference. The Victory Portfolios may include
information in their Annual Reports and Semi-Annual Reports to shareholders
that (i) describes general economic trends, (ii) describes general trends
within the financial services industry or the mutual fund industry, (iii)
describes past or anticipated portfolio holdings for the Fund or (iv) describes
investment management strategies for the Victory Portfolios. Such information
is provided to inform shareholders of the activities of the Victory Portfolios
for the most recent fiscal year or semi-annual fiscal period and to provide the
views of Key Advisers, the Sub-Adviser and/or the Victory Portfolios' officers
regarding expected trends and strategies.
Inquiries regarding the Victory Portfolios or the Fund may be directed in
writing to the Victory Portfolios at Primary Funds Service Corporation, P.O.
Box 9741, Providence, RI 02940-9741, or by telephone, toll-free, at
800-539-3863.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
VICTORY PORTFOLIOS OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFERING BY THE VICTORY PORTFOLIOS OR BY THE DISTRIBUTOR IN ANY JURISDICTION
IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
24
<PAGE> 30
THE
VICTORY
PORTFOLIOS
FUND FOR INCOME
PROSPECTUS For current yield, purchase and redemption information,
March 1, 1996 call 800-539-FUND or 800-539-3863
THE VICTORY PORTFOLIOS (the "Victory Portfolios") is a registered open-end
management investment company that offers investors a selection of money market,
fixed-income, municipal bond, domestic and international equity portfolios. This
Prospectus relates to the Victory Fund for Income (the "Fund"), a diversified
portfolio. KeyCorp Mutual Fund Advisers, Inc., Cleveland, Ohio, an indirect
subsidiary of KeyCorp, is the investment adviser to the Fund ("Key Advisers" or
the "Adviser"). First Albany Asset Management Corporation is the investment
sub-adviser to the Fund (the "Sub-Adviser" or "First Albany"). Concord Holding
Corporation is the Fund's administrator (the "Administrator"). Victory
Broker-Dealer Services, Inc. is the Fund's distributor (the "Distributor").
The Fund seeks to provide a high level of current income consistent with
preservation of shareholders' capital. The Fund pursues this objective by
investing primarily in selected mortgage-related securities
Please read this Prospectus before investing. It is designed to provide you with
information and to help you decide if the Fund's goals match your own. Retain
this document for future reference. A Statement of Additional Information (dated
March 1, 1996) for the Fund and an audited report for the Fund's fiscal period
ended October 31, 1995 have been filed with the Securities and Exchange
Commission and are incorporated herein by reference. The Statement of Additional
Information is available without charge upon request by calling 800-539-3863.
SHARES OF THE FUND ARE:
- - NOT INSURED BY THE FDIC;
- - NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY KEYCORP
BANK, ANY OF ITS AFFILIATES, OR ANY OTHER BANK;
- - SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("COMMISSION"), OR ANY SECURITIES REGULATORY AUTHORITY OF
ANY STATE, NOR HAS THE COMMISSION OR ANY SUCH STATE AUTHORITY PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
2
<PAGE> 31
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
- ----------------- ----
<S> <C>
Summary of Fund Expenses 2
Financial Highlights 3
Investment Objective and Policies 3
Limiting Investment Risks 4
Portfolio Management 5
How to Invest, Exchange and Redeem 5
Dividends, Distributions and Taxes 11
Performance 13
Fund Organization and Fees 13
Additional Information 16
Additional Information Regarding Securities in
Which the Fund May Invest 16
</TABLE>
3
<PAGE> 32
SUMMARY OF FUND EXPENSES
The table below summarizes the expenses associated with the Fund. This standard
format was developed for use by all mutual funds to help you make your
investment decisions. Of course, you should consider this expense information
along with other important information in this Prospectus, including the Fund's
investment objective, past performance, and financial highlights.
A. SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases (as a percentage of the
offering price) 2.00%
Sales Charge Imposed on Reinvested Dividends 0%
Deferred Sales Charge Imposed on Redemptions 0%
Redemption Fee 0%
Exchange Fee 0%
B. ANNUAL FUND OPERATING EXPENSES AFTER EXPENSE WAIVERS AND REIMBURSEMENTS (AS A
PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fee(1) .30%
Administration Fee .15%
Other Expenses(2) .75%
----
Total Fund Operating Expenses(3) 1.20%
====
(1) The advisory fee has been reduced to reflect the voluntary waiver of a
portion of such fees by the Investment Adviser. The Adviser has agreed
to waive its advisory fees to the extent necessary to maintain the
operating expense ratio of the Fund at 1.20% until at least May 2,
1996. The Fund's maximum advisory fee absent waiver is .50%.
(2) Includes a maximum .25% shareholder servicing fee payable to certain
financial institutions.
(3) Without voluntary waivers, the total operating expense ratio of the
Fund would be 1.40%.
C. EXAMPLE: You would pay the following expenses, including the maximum 2.00%
sales charge on a $1,000 investment in the Fund, assuming (1) a 5% annual return
and (2) full redemption at the end of each time period:
One Year $ 32
Three Years $ 57
Five Years $ 85
Ten Years $162
EXPLANATION OF TABLE: The purpose of the table is to assist you in understanding
the various costs and expenses that an investor in the Fund would bear directly
or indirectly. THE RETURN OF 5% AND EXPENSES SHOULD NOT BE CONSIDERED
INDICATIONS OF ACTUAL OR EXPECTED FUND PERFORMANCE OR EXPENSES, BOTH OF WHICH
MAY VARY.
A. SHAREHOLDER TRANSACTIONS EXPENSES represent charges paid when you purchase,
redeem or exchange shares of the Fund. See "How to Invest, Exchange and Redeem".
4
<PAGE> 33
B. ANNUAL FUND OPERATING EXPENSES are based on the Fund's estimated expenses for
the current fiscal year ended October 31, 1995.
C. EXAMPLE OF EXPENSES. The hypothetical example illustrates the expenses,
including the maximum 2.00% sales charge associated with a $1,000 investment in
the Fund over periods of one, three, five and ten years, based on the estimated
expenses in the table detailed above and an assumed annual rate of return of 5%.
The purpose of the table above is to assist you in understanding the various
costs and expenses that an investor in the Fund will bear directly and
indirectly. See "Fund Organization and Fees" for a more complete discussion of
annual operating expenses of the Fund. The foregoing example is based upon
expenses for the fiscal period ended October 31, 1995 and expenses that the Fund
is expected to incur during the current fiscal year. THE FOREGOING EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES, SINCE
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
The Fund's Financial History
The information in the table below relates to the Fund and to its predecessor, a
Portfolio of The Victory Funds (the "Predecessor Fund"), and (except as
indicated) has been audited by Coopers & Lybrand LLP (for fiscal year ended
October 31, 1995), by KPMG Peat Marwick LLP (for the period February 1, 1994
through October 31, 1994), and by LaMaster and Daniels (for earlier periods),
respectively, as auditors, whose reports thereon, together with the financial
statements of the Fund and the Predecessor Fund, are incorporated by reference
into or contained in the Statement of Additional Information. First Albany Asset
Management Corporation (the Sub-Adviser) served as the investment adviser of
Investors Preference Fund for Income, Inc. prior to May 3, 1994.
5
<PAGE> 34
<TABLE>
<CAPTION>
SIX PERIOD FROM
FISCAL PERIOD MONTHS FEBRUARY 1,
ENDED ENDED 1994 TO
OCTOBER 31, APRIL 30, 1995 OCTOBER 31,
1995(4) -------------- 1994 1994 1993 1992
------------- (UNAUDITED) ----------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year [to $ 9.43 $ 10.14 $ 10.57 $ 10.55 $ 10.19
be inserted] ------- ------- ------- ------- -------
Income from investment operations:
Net interest income (0.05) 0.52 0.80 0.80 0.85
Net gains or losses on securities
(both realized and unrealized) 0.58 (0.71) (0.41) 0.06 0.36
------- ------- ------- ------- -------
Total from investment operations 0.53 (0.19) (0.39) 0.86 1.21
------- ------- ------- ------- -------
Less Distributions:
Dividends
(from net investment income) (0.35) (0.52) (0.80) (0.80) (0.85)
Distributions (from net realized
gains on investments) -- -- (0.02) (0.04) --
------- ------- ------- ------- -------
Total distributions (0.35) (0.52) (0.82) (0.84) (0.85)
------- ------- ------- ------- -------
Net asset value, end of year $ 9.61 $ 9.43 $ 10.14 $ 10.57 $ 10.55
======= ======= ======= ======= =======
Total return(1) 5.7 %(b) (1.99)% (3.75)% 8.45 % 12.34%
Ratios and supplemental data:
Net assets, end of year (thousands) $24,713 $29,358 $46,632 $55,075 $58,055
Ratio of expenses to average
net assets(2) 0.57 %(b) 1.12 %(b) 1.13 % 1.12 % 0.92 %
Ratio of net income to average
net assets 3.51 %(b) 7.21 %(b) 7.65 % 7.56 % 8.18 %
Portfolio turnover rate 27.00 % 18 % 47.11 % 22.50 % 23.76 %
<CAPTION>
PERIOD FROM
MAY 8, 1987
TO
YEAR ENDED JANUARY 31, JANUARY 31,
1991 1990 1989 1988(3)
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 9.90 $ 9.73 $ 9.95 $10.00
------ ------- -------- ------
Income from investment operations:
Net interest income 0.91 0.93 0.94 0.66
Net gains or losses on securities
(both realized and unrealized) 0.29 0.17 (0.22) (0.05)
------ ------- -------- ------
Total from investment operations 1.20 1.10 0.72 0.61
------ ------- -------- ------
Less Distributions:
Dividends
(from net investment income) (0.91) (0.93) (0.94) (0.66)
Distributions (from net realized
gains on investments) -- -- -- --
------ ------- -------- ------
Total distributions (0.91) (0.93) (0.94) (0.66)
------ ------- -------- ------
Net asset value, end of year $10.19 $ 9.90 $ 9.73 $ 9.95
====== ======= ======== ======
Total return(1) 12.75 % 11.77 % 7.58 % --
Ratios and supplemental data:
Net assets, end of year (thousands) $44,097 $35,788 $22,664 $6,221
Ratio of expenses to average
net assets(2) 0.50 % 0.29 % 0.22 % 0.12%
Ratio of net income to average
net assets 9.15 % 9.34 % 9.53 % 6.72%
Portfolio turnover rate 4.97 % 5.40 % 14.62 % 19.88%
</TABLE>
(1) Total return does not reflect sales charges and for a period of less
than one year is not annualized.
(2) The administrator absorbed all expenses through the effective date of
the initial registration statement. The investment advisor voluntarily
reimbursed a portion of the Investors Preference Fund for Income,
Inc.'s expenses during the period from May 8, 1987 to April 30, 1991.
For the period ended October 31, 1994, a portion of operating expenses
equal to 0.14% of average daily net assets was voluntarily waived and
reimbursed by Key Trust Company and Concord Holding Corporation. [For
the period ended October 31, 1995, a portion of operating expenses
equal to ___% of average daily net assets was voluntarily waived and
reimbursed by Society Asset Management, Inc. and the Administrator.]
(3) Period from commencement of operations.
(4) The Fund's fiscal year end was changed to the period ending October 31
of each year.
(a) Aggregate.
(b) Annualized.
6
<PAGE> 35
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to provide a high level of current income,
consistent with preservation of shareholders' capital. The investment objective
of the Fund is fundamental and may not be changed without a vote of the holders
of a majority of its outstanding voting securities (as defined in the Statement
of Additional Information). There can be no assurance that the Fund will
achieve its investment objective.
THE FUND'S INVESTMENT STRATEGIES AND RISK FACTORS
The Fund pursues its objective by investing primarily in a portfolio of selected
mortgage-related securities. The Sub-Adviser intends to achieve the Fund's
objective by primarily investing in a diversified portfolio of mortgage-related
debt securities. This means that the Sub-Adviser generally will invest at least
65% of the Fund's total assets in mortgage-related securities--which are rated
AA or higher by a recognized rating agency--and in unrated mortgages and
mortgage-related securities--which, in the opinion of the Sub-Adviser, are of
equivalent investment quality. This is a fundamental policy which may not be
changed without shareholder approval. This policy will limit the Fund's ability
to invest in lower-rated securities from which a higher yield, but at a higher
risk, may be derived. The mortgage-related securities in which the Fund may
invest consist of traditional pass-throughs (GNMAs, FNMAs and FHLMCs, CMOs, and
REMICs). It is the Sub-Adviser's opinion that mortgage-related securities
historically have provided the highest yield available on high-quality
investments; nevertheless, for defensive purposes, the Sub-Adviser may, at
certain times, decrease the percentage of the Fund's assets invested in these
instruments. In addition, the Fund bears the risk that prepayment of underlying
mortgages may occur at a higher or lower rate than the assumed prepayment rate,
which may adversely affect the Fund's yield. For a more detailed discussion of
mortgage-related securities and risks associated with them, see "Additional
Information Regarding Securities in Which the Fund May Invest".
Even though the Fund will invest in high-quality assets which are expected to
return 100% of their principal if held to maturity, there is risk to an
investor's principal because of price changes which result from changes in
interest rates. A rise in interest rates will result in a decline in the value
of fixed-rate securities held by the Fund. A similar decline in interest rates
would result in an increase in the value of the same assets. In general, the
longer the maturity of a fixed-rate asset, the more sensitive to interest rate
changes the price of the asset will be. An asset which has a fixed coupon rate
and which has a longer maturity has greater price risk than a similar asset
which either has a variable coupon rate or a shorter maturity.
The Sub-Adviser will consider interest rate risk as well as yield and safety of
principal in managing the Fund's assets. As part of the Fund's interest rate
strategy, except in unusual circumstances, the assets of the Fund as a whole
will have an expected average maturity not to exceed 10 years. Individual assets
may have expected average maturities which are shorter or longer than 10 years.
The contractual maturity of an asset may also be substantially longer than its
expected average maturity.
7
<PAGE> 36
OTHER SECURITIES
The Fund may invest up to 35% of the value of its total assets in (1) securities
issued or guaranteed by the United States government, its agencies, and
instrumentalities; (2) certificates of deposit, bankers' acceptances, and
interest-bearing savings deposits of banks having total assets of more than $1
billion and that are members of the Federal Deposit Insurance Corporation; (3)
commercial paper of prime quality rated A-1 or higher by Standard & Poor's
Ratings Group ("S&P") or Prime-1 or higher by Moody's Investors Service, Inc.
("Moody's") or, if not rated, issued by companies which have an outstanding debt
issue rated AA or higher by S&P or Aa or higher by Moody's; (4) privately issued
debt securities which, although not mortgage-related securities of the type
described above, are secured by mortgages on residential properties, provided
such securities are rated A or better by Moody's and S&P or, if not rated, are
of equivalent investment quality as determined by the Sub-Adviser (such
securities may entitle the holder to participate in income derived from the
mortgaged properties or from sales thereof); and (5) corporate debt obligations
rated A or higher by Moody's and S&P. When business or financial conditions
warrant, the Fund may take a temporary defensive position and invest without
limit in the foregoing securities.
Key Advisers provides the overall management and administrative services
necessary for the Fund's operations. Key Advisers selected, and continually
monitors and evaluates the Fund's Sub-Adviser, who is responsible for the
selection of the Fund's investments. Key Advisers and not the Fund, pays the
fees of the Sub-Adviser pursuant to a sub-advisory agreement between Key
Advisers and the Sub-Adviser. See "Fund Organization and Fees."
The investment policies of the Fund may be changed without an affirmative vote
of the holders of a majority of the Fund's outstanding voting securities unless
(1) a policy is expressly deemed to be a fundamental policy of the Fund or (2) a
policy is expressly deemed to be changeable only by such majority vote.
ADDITIONAL INFORMATION REGARDING SECURITIES IN WHICH THE FUND MAY INVEST
The following paragraphs provide a brief description of some of the types of
securities in which the Fund may invest, the transactions it may make and the
strategies it may adopt. The Fund may, following notice to its shareholders,
take advantage of other investment practices which are not at present
contemplated for use by the Fund or which currently are not available but which
may be developed, to the extent such investment practices are both consistent
with the Fund's investment objective and legally permissible for the Fund. Such
investment practices, if they arise, may involve risks which exceed those
involved in the activities described in this Prospectus.
MORTGAGE-RELATED SECURITIES
Mortgage-Related Securities include securities which represent or are secured by
interests in pools of residential or commercial mortgage loans made by lenders
such as thrift institutions, mortgage bankers, commercial banks, and others.
Pools of mortgage loans are assembled for sale to investors (such as the Fund)
by various governmental, government-related, and private organizations.
Mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly, quarterly, or semiannual payment which generally
consists of both interest and principal payments. In effect, these payments are
a "pass-through" of the payments made by the individual borrowers on their
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by repayments of principal generally
resulting from the sale of the underlying property, refinancing, or foreclosure,
net of fees or costs which may be incurred. Some mortgage-related securities
(such as securities issued by the Government National Mortgage Association) are
described as "modified pass-through." These securities entitle the holder to
receive all interest and principal payments owed on the mortgage pool, net of
certain fees, regardless of whether or not the mortgagor actually
8
<PAGE> 37
makes the payment. The average life of pass-through pools varies with the
maturities of the underlying mortgage instruments. In addition, a pool's term
may be shortened by early payments of principal and interest on the underlying
mortgages. The occurrence of mortgage prepayments is affected by factors
including the level of interest rates, general economic conditions, the location
and age of the mortgage, and other social and demographic conditions. As
prepayment rates of individual pools vary widely, it is difficult to predict
accurately the average life of a particular pool. For pools of fixed-rate
mortgages, common industry practice is to estimate the average life based on
assumptions regarding prepayments. An average life based on the prepayment
characteristics of the underlying mortgages will be assumed. Such assumptions
will vary as a result of the particular characteristics of each pool such as
interest rates and demographics.
Yields on traditional pass-through securities are typically quoted by investment
dealers based on the maturity of the underlying instruments and the associated
average life assumption. In periods of falling interest rates, the rate of
prepayment tends to increase, thereby shortening the actual average life of a
pool of mortgage-related securities. Conversely, in periods of rising rates, the
rate of prepayment tends to decrease, thereby lengthening the actual average
life of the pool of the mortgage-related securities. Actual prepayment
experience may cause the yield to differ from the assumed average life yield if
the security is priced either above or below the par amount. Reinvestment of
prepayments may occur at higher or lower interest rates than the original
investment, thus reducing or increasing the yield of the Fund.
COLLATERALIZED MORTGAGE OBLIGATIONS, KNOWN AS "CMOS" AND REAL ESTATE MORTGAGE
INVESTMENT CONDUITS, known as "REMICs," are mortgage-related securities which
generally distribute principal and interest from an underlying pool of mortgages
monthly, quarterly, or semiannually. The distribution is made sequentially
rather than on a pro rata basis. Generally, with both the CMOs and REMICs, there
are multiple classes of ownership providing for successively longer expected
average maturities.
The Fund may invest in any class. The average maturity of a CMO or REMIC
interest will vary based on the maturity of the underlying mortgage instruments
and the rate of prepayment of such mortgages, the nature of the interest, and
the payment priority of the class. Because of the multi-class structure,
prepayments are more likely to shorten the average maturity of the shorter
maturity classes of CMOs and REMICs than would be the case for traditional
pass-through securities. As a consequence, investment in CMOs and REMICs may
involve greater investment risk than investment in traditional pass-through
securities.
The principal governmental guarantor of mortgage-related securities is the
Government National Mortgage Association ("GNMA"). GNMA is a wholly-owned United
States government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the United States government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA and backed by pools of
FHA-insured or VA-guaranteed mortgages.
Government-related guarantors include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA and
FHLMC are government-sponsored corporations owned entirely by private
stockholders. Pass-through securities issued by FNMA and FHLMC are guaranteed as
to timely payment of principal and interest by FNMA and FHLMC but are not backed
by the full faith and credit of the United States government. FHLMC issues
Participation Certificates ("PCs") which represent interests in mortgages from
FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and
ultimate collection of principal but PCs are not backed by the full faith and
credit of the United States government.
Commercial banks, thrift institutions, private mortgage insurance companies,
mortgage bankers, real estate developers, and other secondary market issuers
also create pass-through pools of mortgage loans. Such issuers, in addition, may
be the originators of the underlying mortgage loans as well as the guarantors of
the mortgage-related securities. Pools created by such non-governmental issuers
generally offer a higher rate of interest than government and
9
<PAGE> 38
government-related pools because there are no direct or indirect government
guarantees of payments in the former pools; however, timely payment of interest
and principal of these mortgage pools often is supported by various forms of
insurance or guarantees. Such insurance and guarantees and the creditworthiness
of the issuers thereof will be considered by the Sub-Adviser in determining
whether a mortgage-related security meets the Fund's investment quality
standards. The Fund may buy mortgage-related securities without insurance or
guarantees if, through an examination of loan characteristics, payment history,
and loan experience and practices of the poolers, the Sub-Adviser determines
that the securities meet the Fund's quality standards.
The size of the primary issuance market, active participation in the secondary
market of securities dealers, and a diversity of investors make government and
government-related pass-through pools highly liquid. Private conventional pools
of mortgagees have also achieved broad market acceptance and consequently an
active secondary market has emerged; however, the market for conventional pools
is smaller and less liquid than the market for the government and
government-related mortgage pools. The Fund may purchase some mortgage-related
securities through private placement, in which case the secondary market is less
liquid; those securities are considered illiquid. The Fund will not purchase
mortgage-related securities, other interests in mortgages, or any other assets
which, in the Sub-Adviser's opinion, are illiquid if, as a result, more than 10%
of the value of the Fund's total assets will be illiquid.
The Fund expects that governmental, government-related, or private entities may
create mortgage loan pools offering pass-through investments in addition to
those described above. The mortgages underlying these securities may be
alternative mortgage instruments; that is, mortgage instruments whose principal
or interest payments may vary or whose terms to maturity may differ from
customary long-term fixed-rate mortgages. As new types of mortgage-related
securities are developed and offered to investors, the Sub-Adviser, consistent
with the Fund's investment objective, policies, and quality standards, will
consider making investments in such new types of securities.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements usually having a maturity of less
than seven days pertaining to the types of securities in which it invests. A
repurchase agreement arises when a buyer purchases a security and simultaneously
agrees to resell it to the seller at an agreed-upon future date. The resale
price is greater than the purchase price, reflecting an agreed-upon market rate
which is effective for the period of time the buyer's money is invested in the
security and which is not related to the coupon rate on the purchase security.
The Fund requires continual maintenance of collateral held by the Fund's
custodian in an amount in excess of the purchase price of the securities which
are the subject of the agreement. Repurchase agreements involve certain risks in
the event of default or insolvency of the other party, including possible delays
or restrictions on the Fund's ability to dispose of the underlying securities.
The Fund might also suffer a loss to the extent that the proceeds from the sale
of the collateral were less than the repurchase price. The Sub-Adviser intends
to monitor the creditworthiness of parties with whom repurchase agreements are
executed in order to evaluate these risks. Repurchase agreements are considered
by the staff of the Securities and Exchange Commission to be loans by the Fund.
Not more than 10% of the Fund's total assets will be invested in repurchase
agreements having a maturity of more than seven days.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
The Fund may purchase securities offered on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis. When such
transactions are negotiated, the price, which is often expressed in yield terms,
is fixed at the time the commitment is made, but delivery and payment for the
securities take place at a later date. Normally, the settlement date occurs
within two months after the transaction, but delayed settlements beyond two
months may be negotiated. During the period between a commitment and settlement,
no payment is made for the securities purchased by the purchaser and, thus, no
interest accrues to the purchaser from the transaction. The use of when-issued
10
<PAGE> 39
transactions and forward-commitments enables the Fund to hedge against
anticipated changes in interest rates and prices. For instance, in periods of
rising interest rates and falling bond prices, the Fund might sell securities in
its portfolio on a forward-commitment basis to limit its exposure to falling
prices. In periods of falling interest rates and rising bond prices, the Fund
might sell a security in its portfolio and purchase the same or a similar
security on a when-issued or forward commitment basis, thereby obtaining the
benefit of currently higher cash yields.
However, if the Sub-Adviser were to forecast incorrectly the direction of
interest rate movements, the Fund might be required to complete such when-issued
or forward transactions at prices inferior to then-current market values. No
when-issued or forward transactions will be made by the Fund if, as a result,
more than 20% of the value of the Fund's total assets would be committed to such
transactions.
LENDING OF FUND SECURITIES
The Fund may from time to time lend securities from its portfolio to brokers,
dealers, and financial institutions and receive collateral in the form of cash
or United States government obligations. Under the Fund's current practices
(which are subject to change), the loan collateral must be maintained at all
times in an amount equal to at least 102% of the current market value of the
loaned securities. The Fund will not lend portfolio securities in excess of 20%
of the value of its total assets, nor will the Fund lend its portfolio
securities to any officer, director, employee, or affiliate of the Fund, the
Victory Portfolios, Key Advisers, the Sub-Adviser, or the Distributor.
INVESTMENT COMPANY SECURITIES
The Fund may invest up to 5% of its total assets in the securities of any one
investment company, but may not own more than 3% of the securities of any one
investment company or invest more than 10% of its total assets in the securities
of other investment companies. Pursuant to an exemptive order received by the
Victory Portfolios from the Commission, the Fund may invest in the money market
funds of the Victory Portfolios. Key Advisers and/or the Sub-Adviser will waive
its investment advisory fee attributable to the Fund's assets invested in a fund
of the Victory Portfolios, and to the extent required by the laws of any state
in which shares of a fund of the Victory Portfolios are sold, Key Advisers
and/or the Sub-Adviser will waive its investment advisory fee as to all assets
invested in other investment companies. Because such other investment companies
employ an investment adviser, such investment by the Fund will cause
shareholders to bear duplicative fees, such as management fees, to the extent
such fees are not waived by Key Advisers and/or the Sub-Adviser. The Fund will
invest only in the securities of other money market funds which have similar
investment policies and objectives and which invest only in securities of equal
ratings as the securities in which the Fund may invest.
LIMITING INVESTMENT RISKS
The following summarizes the Fund's principal investment limitations. A complete
listing is contained in the Statement of Additional Information.
1. To meet federal income tax requirements for qualification as a
"regulated investment company," the Fund limits its investments so that
at the close of every quarter of its taxable year: (a) no more than 25%
of total assets are invested in securities of a single issuer, and (b)
with regard to at least 50% of total assets, no more than 5% of total
assets are invested in the securities of a single issuer.
2. The Fund may not borrow money, except that (a) the Fund may enter into
commitments to purchase securities in accordance with the Fund's
investment program, including delayed-delivery and when-issued
securities and reverse repurchase agreements, provided that the total
amount of any such borrowing may not exceed 33 1/3%
11
<PAGE> 40
of the Fund's total assets; and (b) the Fund may borrow money for
temporary or emergency purposes in an amount not exceeding 5% of the
value of the Fund's total assets at the time of borrowing.
3. The Fund will not purchase a security if, as a result, more than 15% of
its net assets would be invested in illiquid securities. The Fund may
invest up to 15% of its net assets in illiquid investments (investments
that cannot be readily sold within seven days in the usual course of
business at approximately the price at which the Fund has valued them),
including restricted securities deemed to be illiquid. Under the
supervision of the Trustees, Key Advisers or the Sub-Adviser determines
the liquidity of the Fund's investments. The absence of a trading
market can make it difficult to ascertain a market value for illiquid
investments. Disposing of illiquid investments may involve
time-consuming negotiation and legal expenses, and it may be difficult
or impossible for the Fund to sell them promptly at an acceptable
price.
Except for the Fund's investment objective, the diversification limitation in
limitation 1 and the percentage limitation on borrowing in limitation 2(a) and
(b), the investment policies described in this Prospectus are not fundamental.
Non-fundamental limitations may be changed without shareholder approval.
Whenever an investment policy or limitation states a maximum percentage of the
Fund's assets that may be invested, such percentage limitation will be
determined immediately after and as a result of the investment, except in the
case of borrowing (or other activities that may be deemed to result in the
issuance of a "senior security" under the 1940 Act). Any subsequent change in
values, assets, or other circumstances will not be considered when determining
whether the investment complies with the Fund's investment policies and
limitations. If the value of a Fund's holdings of illiquid securities at any
time exceeds the percentage limitation applicable at the time of acquisition due
to subsequent fluctuations in value or other reasons, the Board of Trustees will
consider what actions, if any, are appropriate to maintain adequate liquidity.
PORTFOLIO TRANSACTIONS
Brokerage firms are utilized to conduct securities transactions for the Fund.
Broker-dealers are chosen by judging professional ability and quality of
service. The Fund generally pays lower commissions on listed securities than
would individual investors when placing trades with brokers.
Higher commissions for the Fund may be paid to firms that provide research
services to the extent permitted by law. The frequency of portfolio
transactions--the Fund's turnover rate--will vary from year to year depending on
market conditions. The turnover rate for the Fund may be somewhat higher than
might be expected from investment companies which invest substantially all of
their funds on a long-term basis. The portfolio turnover rates for the Fund's
fiscal years ended October 31, 1994 and October 31, 1995 were 18% and _____%,
respectively.
HOW TO INVEST, EXCHANGE AND REDEEM
HOW TO INVEST
Shares may be purchased directly or through an Investment Professional.
Investment Professionals are securities brokers or other financial institutions
that have entered into selling or servicing agreements with the Fund or the
Distributor. Shares are also available to clients of bank trust departments who
have qualified trust accounts. The minimum investment is $500 for the initial
purchase and $25 thereafter. Accounts set up through a bank trust department or
an Investment Professional may be subject to different minimums.
- - Investing Through Your Investment Professional. Your Investment Professional
will place your order with the Transfer Agent on your behalf. You may be
required to establish a brokerage or agency account. Your Investment
Professional will notify you whether subsequent trades should be directed to the
Investment Professional or directly to
12
<PAGE> 41
the Fund's Transfer Agent. Accounts established with Investment Professionals
may have different features, requirements and fees. In addition, Investment
Professionals may charge for their services. Information regarding these
features, requirements and fees will be provided by the Investment Professional.
If you are purchasing shares of any Fund through a program of services offered
or administered by your Investment Professional, you should read the program
materials in conjunction with this Prospectus.
- - Investing Through The Systematic Investment Plan. You can use the Systematic
Investment Plan to purchase shares directly from your bank account. Please refer
to "Systematic Investment Plan" below for more details.
- - Investing Through Your Bank Trust Department. Your bank trust department may
require a minimum investment and may charge additional fees. Fee schedules for
such accounts are available upon request and are detailed in the agreements by
which a client opens the desired account. Your bank trust department may require
a completed and signed application for the Fund in which an investment is made.
Additional documents may be required from corporations, associations, and
certain fiduciaries. Any account information, such as balances, should be
obtained through your bank trust department. Additional purchases, exchanges or
redemptions should also be coordinated through your bank trust department.
Contact your bank trust department for instructions.
The services rendered by a bank trust department, including affiliates of Key
Advisers or the Sub-Adviser, in the management of its accounts are not
duplicative of any of the services for which Key Advisers or the Sub-Adviser as
the investment adviser or sub-adviser, respectively, is compensated for advising
the Fund. The charges paid by clients of bank trust departments, or their
affiliates, should be considered in calculating the net yield and return on the
client's investments in the Fund, although such charges do not affect the Fund's
dividends and distributions.
INVESTING DIRECTLY
BY MAIL: You may purchase shares by completing and signing an account
application (initial purchase only) and mailing it, together with a check (or
other negotiable bank draft or money order) in the amount of at least the
minimum investment requirement to, The Victory Fund for Income, Primary Funds
Service Corporation, P.O. Box 9741, Providence, RI 02940-9741. Subsequent
purchases may be made in the same manner.
BY WIRE: Call 800-539-3863 to set up your Fund account to accommodate wire
transactions. YOU MUST CALL THE TRANSFER AGENT BEFORE WIRING FUNDS. You will
begin to earn dividends on the first business day following receipt of your
wire. Federal funds (monies transferred from one bank to another through the
Federal Reserve System with same-day availability) should be wired to:
Boston Safe Deposit & Trust Co.
ABA #011001234
Credit PFSC DDA #16-918-8
The Victory Portfolios: The Fund for Income
You must include your account number, your name(s), tax identification number(s)
and the control number assigned by the Transfer Agent. The Fund does not impose
a fee for wire transactions, although your bank may charge you a fee for this
service.
Shares are sold at the public offering price based on the net asset value that
is next determined after the Transfer Agent receives the purchase order. In most
cases, to receive that day's offering price, the Transfer Agent must receive
your order before the close of regular trading of the New York Stock Exchange
("NYSE") (generally 4:00 pm Eastern time) (the "Valuation Time") on each
Business Day (as defined in "Net Asset Value Per Share") of the Fund. If you buy
shares through an Investment Professional, the Investment Professional must
receive your order in a timely fashion on a
13
<PAGE> 42
regular Business Day and transmit it to the Transfer Agent so that it is
received before the close of business that day. The Transfer Agent may reject
any purchase order for the Fund's shares, in its sole discretion.
It is the responsibility of your Investment Professional to transmit your order
to purchase shares to the Transfer Agent in a timely fashion in order for you to
receive that day's share price. The Fund must receive payment within three
business days after an order is placed. Otherwise, the purchase order will be
canceled and you could be held liable for resulting fees and/or losses.
INVESTMENT REQUIREMENTS
All purchases must be made in U.S. dollars. Checks must be drawn on U.S. banks.
No cash will be accepted. If you make a purchase with more than one check, each
check must have a value of at least $25, and the minimum investment requirement
still applies. The Fund reserves the right to limit the number of checks
processed at one time. If your check does not clear, your purchase will be
canceled and you could be liable for any losses or fees incurred. Payment for
the purchase is expected at the time of the order. If payment is not received
within three business days of the date of the order, the order may be canceled,
and you could be held liable for resulting fees and/or losses.
Shares are sold at their offering price, which is normally net asset value plus
an initial sales charge. However, in some cases, described below, where
purchases are not subject to an initial sales charge, the offering price may be
net asset value. In some cases, reduced sales charges may be available, as
described below. When you invest, the Fund receives the net asset value for your
account. The sales charge varies depending on the amount of your purchase and a
portion may be retained by the Distributor and allocated to your Investment
Professional. The Victory Portfolios has a reinstatement policy which allows an
investor who redeems his/her shares originally purchased with a sales charge to
reinvest within 90 days without incurring an additional sales charge. The
current sales charge rates and commissions paid to Investment Professionals are
as follows:
<TABLE>
<CAPTION>
SALES
CHARGES
AS A % OF
OFFERING NET AMOUNT DEALER
INVESTMENT PRICE INVESTED REALLOWANCE*
- ---------- -------- ----------- ------------
<S> <C> <C> <C>
$0-$49,999 2.00% 2.04% 1.50%
$50,000-$99,999 1.75 1.78 1.25
$100,000-$249,999 1.50 1.52 1.00
$250,000-$499,999 1.25 1.27 0.75
$500,000-$999,999 1.00 1.01 0.50
$1,000,000 and above 0.00 none **
</TABLE>
- --------------------
* The Distributor reserves the right to reallow the entire sales
commission to dealers. If that occurs, the dealer may be considered an
"underwriter" under Federal securities laws.
** There is no initial sales charge on purchases of $1 million or more.
However, Investment Professionals will be compensated at the rate of up
to .25% of such purchases.
The Distributor may pay all or a portion of any applicable sales charges and
service fees to Investment Professionals who sell shares of the Fund and provide
ongoing sales support services or shareholder support services. For the
three-year period commencing April 30, 1994, for activities in maintaining and
servicing accounts of customers invested in the Fund, First Albany Corporation
("First Albany") and PFIC Securities Corporation ("PFIC") may receive
14
<PAGE> 43
payments from the Distributor equal to two-thirds of the Dealer Retention (as
defined below) on any shares of the Fund (and other funds of the Victory
Portfolios) sold by First Albany or PFIC and their broker-dealer affiliates.
"Dealer Retention" is an amount equal to the difference between the applicable
sales charge and such part of the sales charge which is reallowed to
broker-dealers.
The Distributor, at its expense, may also provide additional cash compensation
to dealers in connection with sales of shares of the Fund. The maximum cash
compensation payable by the Distributor is currently 4.00% of the offering
price. In addition, the Distributor will, from time to time and at its own
expense, provide compensation, including financial assistance, to dealers in
connection with conferences, sales or training programs for their employees,
seminars for the public, advertising campaigns regarding one or more Victory
Portfolios and/or other dealer-sponsored special events including payment for
travel expenses, including lodging, incurred in connection with trips taken by
invited registered representatives and members of their families to locations
within or outside of the United States for meetings or seminars of a business
nature. Compensation will include the following types of non-cash compensation
offered through sales contests: (1) vacation trips including the provision of
travel arrangements and lodging; (2) tickets for entertainment events (such as
concerts, cruises and sporting events) and (3) merchandise (such as clothing,
trophies, clocks and pens). Dealers may not use sales of the Fund's shares to
qualify for this compensation if prohibited by the laws of any state or any
self-regulatory organization, such as the National Association of Securities
Dealers, Inc. None of the aforementioned compensation is paid for by the Fund or
its shareholders.
REDUCED SALES CHARGES. You may be eligible to buy shares at reduced sales charge
rates in one or more of the following ways:
LETTER OF INTENT. An investor may obtain a reduced sales charge by means of a
written Letter of Intent which expresses the investor's intention to purchase
shares of the Fund at a specified total public offering price within a 13-month
period.
A Letter of Intent is not a binding obligation upon the investor to purchase the
full amount indicated. The minimum initial investment under a Letter of Intent
is 5% of the total amount. Shares purchased with the first 5% of such amount
will be held in escrow (while remaining registered in the name of the investor)
to secure payment of the higher sales charge applicable to the shares actually
purchased if the full amount indicated is not purchased, and such escrowed
shares will be involuntarily redeemed to pay the additional sales charge, if
necessary. Dividends (if any) on escrowed shares, whether paid in cash or
reinvested in additional shares, are not subject to escrow. The escrowed shares
will not be available for disposal by the investor until all purchases pursuant
to the Letter of Intent have been made or the higher sales charge has been paid.
When the full amount indicated has been purchased, the escrow will be released.
A Letter of Intent may include purchases of shares made not more than 90 days
prior to the date the investor signs a Letter of Intent; however, the 13-month
period during which the Letter of Intent is in effect will begin on the date of
the earliest purchase to be included. An investor may combine purchases that are
made in an individual capacity with (1) purchases that are made by members of
the investor's immediate family and (2) purchases made by businesses that the
investor owns as sole proprietorships, for purposes of obtaining reduced sales
charges by means of a written Letter of Intent. In order to accomplish this,
however, investors must designate on the account application the accounts that
are to be combined for this purpose. Investors can only designate accounts that
are open at the time the Letter of Intent is executed.
If an investor qualifies for a further reduced sales charge because the investor
has either purchased more than the dollar amount indicated on the Letter of
Intent or has entered into a Letter of Intent which includes shares purchased
prior to the date of the Letter of Intent, the difference in the sales charge
will be used to purchase additional shares of the Fund on behalf of the
investor; thus the total purchases (included in the Letter of Intent) will
reflect the applicable reduced sales charge of the Letter of Intent.
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<PAGE> 44
For investors who purchase more than the dollar amount indicated on the Letter
of Intent or enter into a Letter of Intent that includes shares purchased prior
to the date of the Letter of Intent and qualify for a reduced sales charge, all
such additional shares will be immediately purchased in the form of additional
shares and credited to the investor's account at the then current public
offering price applicable to a single purchase of the total amount of the
purchases.
For further information about Letters of Intent, interested investors should
contact the Transfer Agent at 800-539-3863. This program, however, may be
modified or eliminated at any time without notice.
RIGHT OF ACCUMULATION AND CONCURRENT PURCHASES
A shareholder may qualify for a reduced sales charge on purchases of shares of
the Fund and other funds of the Victory Portfolios by combining a current
purchase with purchases of another fund(s) or with certain prior purchases of
shares of the Victory Portfolios. The applicable sales charge is based on the
sum of (i) the purchaser's current purchase plus (ii) the current public
offering price of the purchaser's previous purchases of (a) all shares held by
the purchaser in the Fund and (b) all shares held by the purchaser in any other
fund of the Victory Portfolios (except money market funds).
To receive the applicable public offering price pursuant to the right of
accumulation, shareholders must provide the Transfer Agent with sufficient
information at the time of purchase to permit confirmation of qualification.
Accumulation privileges may be amended or terminated without notice at any time
by the Distributor.
- - WAIVERS OF SALES CHARGES. No sales charge is imposed on sales of shares to the
following categories of persons (which categories may be changed or eliminated
at any time):
(1) Current or retired trustees of the Victory Portfolios; employees,
directors, trustees, and their family members of KeyCorp or an
Affiliated Provider (Affiliated Providers refer to affiliates and
subsidiaries of KeyCorp and service providers to the Victory Portfolios
and the Victory Shares (collectively, the "Victory Group")), dealers
having an agreement with the Distributor and any trade organization to
which Key Advisers, the Sub-Adviser or the Administrator belongs;
(2) Investors who purchase shares for trust, investment management or
certain other advisory accounts established with KeyCorp or any of its
affiliates;
(3) Investors who purchase shares through a 401(k) plan sponsored by an
Affiliated Provider;
(4) Investors who reinvest assets received in a distribution from a
qualified, non-qualified or deferred compensation plan, agency, trust
or custody account that was either (a) maintained by KeyCorp or an
Affiliated Provider, or (b) invested in a fund of the Victory Group;
(5) Investors who, within 90 days of redemption, use the proceeds from the
redemption of shares of another mutual fund complex for which they
previously paid a front end sales charge or sales charge upon
redemption of shares; and
(6) Shareholders of the former Investors Preference Fund For Income, Inc.
and the Investors Preference New York Tax-Free Fund, Inc. who have
continuously maintained accounts with a fund or funds of the Victory
Group with a balance of $250,000 or more (investors with less than
$250,000 will pay any applicable sales loads).
SPECIAL INVESTOR SERVICES
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<PAGE> 45
- - THE SYSTEMATIC INVESTMENT PLAN. You can make regular investments in the Fund
and all other funds of the Victory Group with the Systematic Investment Plan by
completing the appropriate section of the account application and attaching a
voided personal check with your bank's magnetic ink coding number across the
front. If your bank account is jointly owned, be sure that all owners sign. You
must first meet the Fund's initial investment requirement of $500, then
investments may be made monthly by automatically deducting $25 or more from your
bank checking account. For officers, trustees, directors and employees,
including retired directors and employees, of the Victory Group, KeyCorp and its
affiliates, and the Administrator and its affiliates (and family members of each
of the foregoing, i.e., parents and children) who participate in the Systematic
Investment Plan, there is no minimum initial investment required. You may change
the amount of your monthly purchase at any time. A bank draft form must be
completed for this option. Your bank checking account will be debited on the
date indicated on your Account Application. Shares will be purchased at the
offering price next determined following receipt of the order by the Transfer
Agent. You may cancel the Systematic Investment Plan at any time without payment
of a cancellation fee. Your monthly account statement will reflect systematic
investment transactions, and a debit entry will appear on your bank statement.
- - TELEPHONE TRANSACTIONS. You can initiate any transaction by telephone. You may
call the Transfer Agent toll-free at 800-539-3863 or call your Investment
Professional or bank trust department. See "Shareholder Account Rules and
Policies" for more information about telephone transactions.
- - THE SYSTEMATIC WITHDRAWAL PLAN. You can make regular withdrawals from your
account in any fund of the Victory Group with the Systematic Withdrawal Plan by
completing the appropriate section of the account application. If you own shares
in a fund worth $5,000 or more, you can have monthly, quarterly, semi-annual or
annual checks sent from your account directly to you, to a person named by you,
or to your bank checking account. The required minimum withdrawal is $25. If you
are having checks sent to your bank checking account, attach a voided personal
check with your bank's magnetic coding number across the front of the account
application. If your account is jointly owned, be sure that all owners sign the
application. You may obtain information about the Systematic Withdrawal Plan by
contacting your Investment Professional. Your Systematic Withdrawal Plan
payments are drawn from share redemptions. If Systematic Withdrawal Plan
redemptions exceed dividend distributions paid on your Fund shares, your account
eventually may be exhausted. If any applicable sales charges are applied to new
purchases of shares of the Fund, it is to your disadvantage to buy shares of the
Fund while also making systematic redemptions.
Your account will be debited on the date you indicate on your Account
Application. Shares will be redeemed at the NAV as determined on the debit date
indicated on your Account Application. You may cancel the Systematic Withdrawal
Plan at any time without payment of a cancellation fee. Each Systematic
Withdrawal Plan transaction will appear as a debit entry on your monthly account
statement.
- - RETIREMENT PLANS. Retirement plans can be among the best tax-planning vehicles
available to individuals. Call your Investment Professional for more information
on the plans and their benefits, provisions and fees. Your Investment
Professional can set up your new account in the Fund under one of several
tax-sheltered plans. These plans let you invest for retirement and shelter your
investment income from current taxes. Plans include Individual Retirement
Accounts (IRAs) and Rollover IRAs. Other fees may be charged by the IRA
custodian or trustee.
HOW TO REDEEM SHARES
You may redeem all or a portion of your shares on any day that the Fund is open
for business (see "Shareholder Account Rules and Policies" below). Shares will
be redeemed at the NAV next calculated after the Transfer Agent has received the
redemption request. If the Fund account is closed, any accrued dividends will be
paid at the beginning of the following month.
You may redeem shares in several ways:
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<PAGE> 46
BY MAIL: Send a written request to:
The Victory Portfolios: The Fund for Income
P.O. Box 9741
Providence, RI 02940-9741
Write a "letter of instruction" with your name, the Fund's name, your Fund
account number, the dollar amount or number of shares to be redeemed, and any
additional requirements that apply to each particular account. You will need the
letter of instruction signed by all persons required to sign for transactions,
exactly as their names appear on the account application. A signature guarantee
is required if: you wish to redeem more than $10,000 worth of shares; your Fund
account registration has changed within the last 60 days; the check is not being
mailed to the address on your account; the check is not being made out to the
account owner; or the redemption proceeds are being transferred to another
Victory Group account with a different registration. The following institutions
should be able to provide you with a signature guarantee: banks, brokers,
dealers, credit unions (if authorized under state law), securities exchanges and
associations, clearing agencies, and savings associations. A signature guarantee
may not be provided by a notary public. A signature guarantee is designed to
protect you, the Fund, and its agents from fraud. The Transfer Agent reserves
the right to reject any signature guarantee if (1) it has reason to believe that
the signature is not genuine, (2) it has reason to believe that the transaction
would otherwise be improper, or (3) the guarantor institution is a broker or
dealer that is neither a member of a clearing corporation nor maintains net
capital of at least $100,000.
BY WIRE: You may make redemptions by wire provided you have established a Fund
account to accommodate wire transactions. If telephone instructions are received
before Valuation Time (generally 4:00 p.m. Eastern time), proceeds of the
redemption will be wired as federal funds on the next Business Day to the bank
account designated with the Transfer Agent. You may change the bank account
designated to receive an amount redeemed at any time by sending a letter of
instruction with a signature guarantee to the Transfer Agent, Primary Funds
Service Corporation, P.O. Box 9741, Providence, RI 02940-9741.
BY TELEPHONE: To redeem by telephone, you may call the Transfer Agent toll free
at 800-539-3863 or call your Investment Professional or bank trust department.
See "Shareholder Account Rules and Policies" for more information about
telephone transactions.
ADDITIONAL REDEMPTION REQUIREMENTS: The Fund may withhold payment on redemptions
until it is reasonably satisfied that investments made by check have been
collected, which can take up to 15 days. Also, when the NYSE is closed (or when
trading is restricted) for any reason other than its customary weekend or
holiday closings, or under any emergency circumstances as determined by the
Commission to merit such action, the right of redemption may be suspended or the
date of payment postponed for a period of time that may exceed 7 days. In
addition, the Fund reserves the right to advance the time on that day by which
purchase and redemption orders must be received. To the extent that portfolio
securities are traded in other markets on days when the NYSE is closed, the
Fund's NAV may be affected on days when investors do not have access to the Fund
to purchase or redeem shares.
If you are unable to reach the Transfer Agent by telephone (for example, during
times of unusual market activity), consider placing your order by mail directly
to the Transfer Agent. In case of suspension of the right of redemption, you may
either withdraw your request for redemption or receive payment based on the NAV
next determined after the termination of the suspension. If your balance in the
Fund falls below $500, you may be given 60 days' notice to reestablish the
minimum balance (except with respect to officers, trustees, directors and
employees, including retired directors and employees, of the Victory Portfolios,
KeyCorp and its affiliates, and the Administrator and its affiliates (and family
members of each of the foregoing, i.e., parents, children and household members)
participating in the Systematic Investment Plan, to whom no minimum balance
requirement applies). If you do not increase your balance, your account may be
closed and the proceeds mailed to you at the address on record. Shares will be
redeemed at the last calculated NAV on the day the account is closed.
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<PAGE> 47
HOW TO EXCHANGE SHARES
Shares of the Fund may be exchanged for shares of certain funds of the Victory
Group at net asset value per share at the time of exchange, without a sales
charge. To exchange shares, you must meet several conditions:
- - Shares of the fund selected for exchange must be available for sale in
your state of residence.
- - The prospectuses of this Fund and the fund whose shares you want to buy
must offer the exchange privilege.
- - You must hold the shares you buy when you establish your account for at
least 7 days before you can exchange them; after the account is open 7
days, you can exchange shares every regular Business Day.
- - You must meet the minimum purchase requirements for the fund you
purchase by exchange.
- - The registration and tax identification numbers of the two accounts
must be identical.
- - Before exchanging into a fund, obtain and read its prospectus.
Shares of a particular class may be exchanged only for shares of the same class
in the other funds of the Victory Group. For example, you can exchange shares of
this Fund only for Class A shares of another fund. At present, not all of the
funds offer the same two classes of shares. If a fund has only one class of
shares that does not have a class designation, they are "Class A" shares for
exchange purposes. In some cases, sales charges may be imposed on exchange
transactions. Certain funds offer Class A or Class B shares and a list can be
obtained by calling the Transfer Agent at 800-539-3863. Please refer to the
Statement of Additional Information for more details about this policy.
Telephone exchange requests may be made either by calling your Investment
Professional or the Transfer Agent at 800-539-3863 prior to valuation time
(generally 4:00 p.m. Eastern time) on any Business Day.
You can obtain a list of eligible funds of the Victory Group by calling the
Transfer Agent at 800-539-3863. Exchanges of shares involve a redemption of the
shares of the Fund and a purchase of shares of the other fund.
There are certain exchange policies you should be aware of:
- - Shares are normally redeemed from one fund and purchased from the other fund
in the exchange transaction on the same Business Day on which the Transfer Agent
receives an exchange request by Valuation Time (generally 4:00 p.m. Eastern
time) that is in proper form, but either fund may delay the purchase of shares
of the fund into which you are exchanging if it determines it would be
disadvantaged by a same-day transfer of the proceeds to buy shares. For example,
the receipt of multiple exchange requests from a dealer in a "market-timing"
strategy might require the disposition of securities at a time or price
disadvantageous to the Fund.
- - Because excessive trading can hurt fund performance and harm shareholders, the
Victory Portfolios reserves the right to refuse any exchange request that will
disadvantage it, or to refuse multiple exchange requests submitted by a
shareholder or dealer.
- - The Fund may amend, suspend or terminate the exchange privilege at any time
upon 60 days' written notice to shareholders.
- - If the Transfer Agent cannot exchange all the shares you request because of a
restriction cited above, only the shares eligible for exchange will be
exchanged.
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<PAGE> 48
- - Each exchange may produce a gain or loss for tax purposes.
Shareholders of the former Investors Preference Fund for Income, Inc. and
Investors Preference New York Tax-Free Fund, Inc. will not be subject to any
additional sales load upon an exchange of shares attributable to an Investors
Preference Funds account for shares of other funds of the Victory Portfolios.
SHAREHOLDER ACCOUNT RULES AND POLICIES
- - NET ASSET VALUE PER SHARE. The term "net asset value per share," or "NAV",
means the value of one share. The NAV is calculated by adding the value of all
of the Fund's investments, plus cash and other assets, deducting expenses and
liabilities of the Fund, and then dividing the result by the number of shares
outstanding. The NAV is determined as of the close of regular trading of the New
York Stock Exchange (NYSE), (generally 4:00 p.m. Eastern time) (the "Valuation
Time") on each Business Day of the Fund. A "Business Day" is a day on which the
NYSE is open for trading, the Federal Reserve Bank of Cleveland is open, and any
other day (other than a day on which no shares of the Fund are tendered for
redemption and no order to purchase any shares is received) during which there
is sufficient trading in its portfolio instruments that the Fund's net asset
value per share might be materially affected. The NYSE or the Federal Reserve
Bank of Cleveland will not be open in observance of the following holidays: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving Day,
and Christmas Day.
The Fund's securities are valued primarily on the basis of market quotations or,
if quotations are not readily available, by a method that the Board of Trustees
believes accurately reflects fair value. Fair value of these portfolio
securities is determined by an independent pricing service approved by the
Trustees based primarily upon information concerning market transactions and
dealers quotations for similar securities.
- - THE OFFERING OF SHARES may be suspended during any period in which the
determination of net asset value is suspended, and the offering may be suspended
by the Trustees at any time the Trustees believe it is in the Fund's best
interest to do so.
- - TELEPHONE TRANSACTION PRIVILEGES for purchases, redemptions or exchanges may
be modified, suspended or terminated by the Fund at any time. If an account has
more than one owner, the Fund and the Transfer Agent may rely on the
instructions of any one owner. Telephone privileges apply to each owner of the
account and the dealer representative of record for the account unless and until
the Transfer Agent receives cancellation instructions from an owner of the
account.
- - TELEPHONE INSTRUCTIONS. Generally, neither the Fund, the bank trust department
nor the Transfer Agent will be responsible for any claims, losses or expenses
for acting on telephone instructions that are reasonably believed to be genuine.
The Transfer Agent and the Fund will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine and if they do not
employ reasonable procedures they may be liable for any losses due to
unauthorized or fraudulent instructions. The identification procedures may
include, but are not limited to, the following: account number, registration and
address, personalized security codes, taxpayer identification number and other
information particular to the account. Your Investment Professional, bank trust
department or the Transfer Agent may also record calls, and you should verify
the accuracy of your confirmation statements immediately after you receive them.
- - REDEMPTION OR TRANSFER REQUESTS WILL NOT BE HONORED UNTIL THE TRANSFER AGENT
RECEIVES ALL REQUIRED DOCUMENTS IN PROPER FORM. From time to time, the Transfer
Agent in its discretion may waive certain of the requirements for redemptions
stated in this Prospectus.
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<PAGE> 49
- - DEALERS THAT CAN PERFORM ACCOUNT TRANSACTIONS FOR THEIR CLIENTS BY
PARTICIPATING IN NETWORKING through the National Securities Clearing Corporation
are responsible for obtaining their clients' permission to perform those
transactions and are responsible to their clients who are shareholders of the
Victory Portfolios if the dealer performs any transaction erroneously.
- - THE REDEMPTION PRICE FOR SHARES WILL VARY from day to day because the value of
the securities in the Fund fluctuates, and the value of your shares may be more
or less than their original cost.
- - PAYMENT FOR REDEEMED SHARES is made ordinarily in cash and forwarded by check
within three business days after the Transfer Agent receives redemption
instructions in proper form, except under unusual circumstances determined by
the Commission delaying or suspending such payments. The Transfer Agent may
delay forwarding a check for recently purchased shares, but only until the
purchase payment has cleared. That delay may be as much as 15 days from the date
the shares were purchased. That delay may be avoided if you arrange with your
bank to provide telephone or written assurance to the Transfer Agent that your
purchase payment has cleared.
- - INVOLUNTARY REDEMPTIONS OF SMALL ACCOUNTS. If your account value has fallen
below $500, you will be given 60 days' notice to reestablish the minimum
balance. If you do not increase your minimum balance, your account may be closed
and the proceeds mailed to you at the record address. In some cases involuntary
redemptions may be made to repay the Distributor for losses from the
cancellation of share purchase orders. Under unusual circumstances, shares of
the Fund may be redeemed "in kind," which means that the redemption proceeds
will be paid with securities from the Fund. Please refer to the Statement of
Additional Information for more details.
- - "BACKUP WITHHOLDING" of Federal income tax may be applied at the rate of 31%
from dividends, distributions and redemption proceeds (including exchanges) if
you fail to furnish the Victory Portfolios with a certified Social Security or
taxpayer identification number when you sign your application, or if you violate
Internal Revenue Service regulations on tax reporting of dividends.
- - THE VICTORY PORTFOLIOS DOES NOT CHARGE A REDEMPTION FEE, but if your
Investment Professional handles your redemption, they may charge a separate
service fee.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS. The Fund ordinarily declares and pays dividends from its net
investment income monthly. The Fund distributes substantially all net capital
gains, if any, to shareholders each year, to the extent necessary to qualify for
favorable federal tax treatment.
CAPITAL GAINS. The Fund may make distributions annually out of any net
short-term or long-term capital gains, and the Fund may make supplemental
distributions of dividends and capital gains following the end of its fiscal
year.
DISTRIBUTION OPTIONS
When you fill out your account application, you can specify how you want to
receive your dividend distributions. Currently, there are five available
options:
1. REINVESTMENT OPTION. Your income and capital gain dividends, if any,
will be automatically reinvested in additional shares of the Fund.
Income and capital gain dividends will be reinvested at the net asset
value of
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<PAGE> 50
the Fund as of the day after the record date. If you do not
indicate a choice on your application, you will be assigned this
option.
2. CASH OPTION. You will receive a check for each income or capital gain
dividend, if any. Distribution checks will be mailed no later than 7
days after the dividend payment date which may be more than 7 days
after the dividend record date.
3. INCOME EARNED OPTION. You will have your capital gain dividend
distributions, if any, reinvested automatically in the Fund and have
your income dividends paid in cash.
4. DIRECTED DIVIDENDS OPTION. You will have income and capital gain
dividends, or only capital gain dividends, automatically reinvested in
shares of another fund of the Victory Group. Shares will be purchased
at the NAV as of the dividend record date. If you are reinvesting
dividends of a fund sold without a sales charge in shares of a fund
sold with a sales charge, the shares will be purchased at the public
offering price. If you are reinvesting dividends of a fund sold with a
sales charge in shares of a fund sold with or without a sales charge,
the shares will be purchased at the net asset value of the fund.
Dividend distributions can be directed only to an existing account with
a registration that is identical to that of your Fund account.
5. DIRECTED BANK ACCOUNT OPTION. You will have your income and capital
gain dividends, or only your income dividends, automatically
transferred to your bank checking or savings account. The amount will
be determined on the dividend record date and will normally be
transferred to your account within 7 days of the dividend record date.
Dividend distributions can be directed only to an existing account with
a registration that is identical to that of your Fund account. Please
call or write the Transfer Agent to learn more about this dividend
distribution option.
Any election or revocation of any of the above dividend distribution options may
be made in writing to the Fund and sent to Primary Funds Service Corporation,
P.O. Box 9741, Providence, RI 02940-9741, or by calling the Transfer Agent at
800-539-3863, and will become effective with respect to dividends having record
dates after receipt of the application or request by the Transfer Agent.
Reinvested dividend distributions receive the same tax treatment as dividend
distributions paid in cash.
COMPLETE REDEMPTIONS: If you request a complete redemption of all your Fund
shares, any dividend accrued to your account will be included in the redemption
check.
STATEMENTS AND REPORTS: You will receive a monthly statement reflecting all
transactions that affect the share balance or the registration of your Fund
account. You will receive a confirmation after every transaction that affected
the share balance of your Fund account, except for dividend reinvestment,
systematic investment and systematic withdrawal transactions. These transactions
will be detailed in your Fund account statement. Transactions that affect the
share balance of your Fund investment in an account established with an
Investment Professional or financial institution will be detailed in regular
statements or through confirmation procedures of the financial institution.
Certificates representing shares of the Fund will not be issued. An IRS Form
1099-DIV with federal tax information will be mailed to you by January 31 of
each tax year and also will be filed with the IRS. At least twice a year, you
will receive the Fund's financial reports.
FEDERAL TAXES
The Fund intends to qualify each year and elect to be treated as a separate
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "IRS Code"). If the Fund is treated as a "regulated
investment company" and all its taxable income is distributed to its
shareholders in accordance with the
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<PAGE> 51
timing requirements imposed by the IRS Code, it will not be subject to federal
income tax on its income. The Fund's distributions that are attributable to its
net investment income and short-term capital gains are taxable as ordinary
income, and its distributions from long-term capital gains are taxed as
long-term capital gains. Such distributions are taxable when they are paid,
whether taken in cash or reinvested in additional shares, except that
distributions declared in October, November or December and paid during the
following January are taxable as if paid and received on December 31. Dividends
received from the Fund by corporate shareholders are not entitled to the
dividends-received deduction. The Fund sends tax statements to its shareholders
(with copies to the Internal Revenue Service (the "IRS")) by January 31 showing
the amounts and tax status of distributions made (or deemed made) during the
preceding calendar year.
REDEMPTION OR EXCHANGES
Investors may realize a gain or loss when redeeming (selling) or exchanging
shares. For most types of accounts, the Fund reports the proceeds to the IRS
annually. Because the shareholders' tax treatment also depends on their purchase
price and personal tax positions, shareholders should keep their regular account
statements to use in determining their tax. See "Buying a Dividend".
"BUYING A DIVIDEND"
On the record date for a distribution of ordinary income or capital gains
dividend, the net asset value of the Fund is reduced by the amount of the
distribution. An investor who buys shares just before the record date ("buying a
dividend") will pay the full price for the shares and then receive a portion of
the purchase price back as a taxable distribution.
OTHER TAX INFORMATION
The information above is only a summary of some of the federal income tax
consequences generally affecting the Fund and its shareholders, and no attempt
has been made to discuss individual tax consequences. A prospective investor
should also review the more detailed discussion of federal income tax
considerations in the Statement of Additional Information. In addition to
federal income tax, a shareholder may be subject to state or local taxes on the
shareholder's investment, depending on the laws in the shareholder's area.
Investors considering an investment in the Fund should consult their tax adviser
to determine whether the Fund is suitable to their particular tax situation.
When investors sign their account application, they are asked to provide their
correct social security or taxpayer identification number and other required
certifications. If investors do not comply with IRS regulations, the IRS can
require the Fund to withhold 31% of taxable distributions and redemptions from
their account.
PERFORMANCE
From time to time, performance information for the Fund showing total return may
be presented in advertisements, sales literature and in reports to shareholders.
Such performance figures are based on historical earnings and are not intended
to indicate future performance. Average annual total return will be calculated
over a stated period of more than one year. Average annual total return is
measured by comparing the value of an investment at the beginning of the
relevant period (as adjusted for sales charges, if any) to the redemption value
of the investment at the end of the period (assuming immediate reinvestment of
any dividends or capital gains distributions) and annualizing that figure.
Aggregate total return is calculated similarly to average annual total return,
except that the resulting difference is not annualized.
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<PAGE> 52
From time to time performance information for the Fund showing the yield and/or
effective yield for each class of shares may also be presented in
advertisements, sales literature and in reports to shareholders. Yields reflect
the deduction of the maximum sales charge. Such performance figures are based on
historical earnings and are not intended to indicate future performance. Yield
will be computed by dividing the Fund's net investment income per share earned
during a recent thirty-day period by the Fund's maximum offering price per share
(reduced by any undeclared earned income expected to be paid shortly as a
dividend) on the last day of the period and annualizing the result. Effective
yield is computed in a similar manner, but, when annualized, the income earned
by an investment in the Fund is assumed to be reinvested. The effective yield
will be slightly higher than the yield because of the compounding effect of this
assumed reinvestment.
Investors may also judge, and the Victory Portfolios may at times advertise, the
performance of the Fund by comparing it to the performance of other mutual funds
with comparable investment objectives and policies, which performance may be
contained in various unmanaged mutual fund or market indices or rankings such as
those prepared by Dow Jones & Co., Inc. and Standard & Poor's Corporation, in
publications issued by Lipper Analytical Services, Inc., and in the following
publications: IBC/Donoghue's Money Fund Reports, Ibbotson Associates, Inc.,
Morningstar, CDA/Wiesenberger, Money Magazine, Forbes, Barron's, The Wall Street
Journal, The New York Times, Business Week, American Banker, Fortune,
Institutional Investor, U.S.A. Today and local newspapers. In addition, general
information about the Fund that appears in publications such as those mentioned
above may also be quoted or reproduced in advertisements, sales literature or in
reports to shareholders.
Performance is a function of the type and quality of instruments held in the
Fund's portfolio, operating expenses, and market conditions. Consequently,
current performance will fluctuate and is not necessarily representative of
future results. Any fees charged by service providers with respect to customer
accounts for investing in shares of the Fund will not be reflected in
performance calculations.
Additional information regarding the performance of each of the Victory
Portfolios is included in the Victory Portfolios' annual report, which is
available free of charge by calling 800-539-3863.
The Fund is the successor to Investors Preference Fund for Income, Inc. The Fund
may also quote historical performance of Investors Preference Fund for Income,
Inc.
FUND ORGANIZATION AND FEES
The Victory Portfolios is an open-end management investment company, commonly
known as a mutual fund, and currently consisting of twenty-eight series
portfolios, four of which are inactive. The Victory Portfolios has been
operating continuously since 1986, when it was created under Massachusetts law
as a Massachusetts business trust, although certain of the funds have a prior
operating history from their predecessor funds. On February 29, 1996 the Victory
Portfolios converted from a Massachusetts business trust to a Delaware business
trust. The Victory Portfolios' offices are located at 3435 Stelzer Road,
Columbus, OH 43219-3035.
Overall responsibility for management of the Victory Portfolios rests with its
Board of Trustees, who are elected by the shareholders of the Victory
Portfolios.
After the close of business on April 30, 1994, the Fund for Income Portfolio and
Investors Preference Fund for Income Fund, Inc. consummated an Agreement and
Plan of Reorganization (the "Agreement") pursuant to which the Investors
Preference Fund for Income Inc. transferred substantially all its assets and
certain liabilities to the Fund for Income Portfolio in exchange for shares of
the Fund for Income Portfolio which were distributed pro rata to shareholders of
the Investors Preference Fund for Income Fund, Inc. The Fund for Income
Portfolio succeeded to the operations of the
24
<PAGE> 53
Investors Preference Fund for Income Fund, Inc. Prior to this date, the Fund for
Income Portfolio had no assets or operations.
REORGANIZATION WITH PREDECESSOR FUND
The Predecessor Fund was a portfolio of The Victory Funds. On May 26, 1995, the
Shareholders of the Predecessor Fund approved an Agreement and Plan of
Reorganization (the "Reorganization Plan"). Under the Reorganization Plan, the
Predecessor Fund transferred all its assets and liabilities to the Fund in
exchange for shares of the Fund, which were distributed pro rata to shareholders
of the Predecessor Fund, who then became shareholders of the Fund (the
"Reorganization"). The Predecessor Fund has then ceased operations. The Fund had
no assets and did not begin operations until the Reorganization occurred.
INVESTMENT ADVISERS AND SUB-ADVISER
Key Advisers is the investment adviser to the Fund. Key Advisers directs the
investment of the Victory Portfolios' assets, subject at all times to the
supervision of the Victory Portfolios' Board of Trustees. Key Advisers
continually supervises the investment and reinvestment of cash, securities and
other property comprising the assets of the Victory Portfolios.
Key Advisers was organized as an Ohio corporation on July 27, 1995 and is
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended. It is a wholly-owned subsidiary of KeyCorp Asset Management
Holdings, Inc., which is a wholly-owned subsidiary of Key Advisers National
Bank, a wholly-owned subsidiary of KeyCorp. Affiliates of Key Advisers manage
approximately $37 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals and mutual funds.
For the services provided and expenses incurred pursuant to its investment
advisory agreement with the Victory Portfolios respecting the Fund, Key Advisers
receives a fee, computed daily and paid monthly, at the annual rate of fifty
one-hundredths of one percent (.50%) of the average daily net assets of the
Fund. The advisory fees for the Fund have been determined to be fair and
reasonable in light of the services provided to the Fund. Key Advisers may
periodically waive all or a portion of its advisory fee with respect to the Fund
to increase the net income of the Fund available for distribution as dividends.
Prior to January 1, 1996, the Sub-Adviser (Society Asset Management, Inc.)
served as investment adviser to the Fund. During the Fund's fiscal year ended
October 31, 1995, Society Asset Management, Inc. received investment advisory
fees aggregating .__% of the average daily net assets of the Fund of which .___%
was paid to the Sub-Adviser.
Under the investment advisory agreement between the Victory Portfolios, on
behalf of the Fund, and Key Advisers, Key Advisers may delegate a portion of its
responsibilities to a subadviser. In addition, the investment advisory agreement
provides that Key Advisers may render services through its own employees or the
employees of one or more affiliated companies that are qualified to act as an
investment adviser of the Fund and are under the common control of KeyCorp as
long as all such persons are functioning as part of an organized group of
persons, managed by authorized officers of Key Advisers.
Key Advisers has entered into an investment sub-advisory agreement with First
Albany Asset Management Corporation. The Sub-Adviser, 41 State Street, Albany,
New York 12207, was incorporated on July 3, 1991, as a newly formed subsidiary
of First Albany Companies, Inc. It utilizes the expertise of an experienced
staff of research personnel employed by its affiliate, First Albany Corporation.
The person primarily responsible for the investment management of the Fund as
well as his previous experience is as follows:
25
<PAGE> 54
<TABLE>
<CAPTION>
PORTFOLIO MANAGING PREVIOUS
MANAGER PORTFOLIO SINCE EXPERIENCE
---------- --------------- ----------
<S> <C> <C>
Robert T. Hennes, Jr. Portfolio Manager of the Fund and the Executive Vice President
Predecessor Fund since inception in of First Albany Asset
1987. Management Corporation
since 1991; Executive
Vice President and
Director of Dollar Dry
Dock Bank.
</TABLE>
For its services under the investment sub-advisory agreement, Key Advisers pays
the Sub-Adviser sub-advisory fees of .20% of the Fund's average daily net
assets.
ADMINISTRATOR AND DISTRIBUTOR
Concord Holding Corporation is the Administrator for the Fund. Victory
Broker-Dealer Services, Inc. is the Fund's principal underwriter and
Distributor.
The Administrator generally assists in all aspects of the Fund's administration
and operation. For expenses incurred and services provided as Administrator
pursuant to its management and administration agreement with the Victory
Portfolios, the Administrator receives a fee from the Fund, computed daily and
paid monthly, at an annual rate of fifteen one-hundredths of one percent (.15%)
of the Fund's average daily net assets. The Administrator may periodically waive
all or a portion of its administrative fee with respect to the Fund to increase
the net income of the Fund available for distribution as dividends. During the
fiscal period ended October 31, 1995, the Fund paid administration fees of .15%
of its average daily net assets.
PLAN OF DISTRIBUTION
The Victory Portfolios has adopted a Distribution and Service Plan (the "Plan")
for the Fund under Rule 12b-1 under the Investment Company Act of 1940 (the
"1940 Act"). No separate payments are authorized to be made by the Fund under
the Plan. Rather, the Plan recognizes that the Adviser or the Distributor may
use their fee revenues, or other resources to pay expenses associated with
activities primarily intended to result in the sale of the shares of the Fund.
The Plan also provides that the Adviser or the Distributor may make payments
from these sources to third parties, including affiliates, such as banks or
broker-dealers, that provide distribution-related services or engage in the sale
of the shares of a Fund. See "Investment Adviser" with respect to certain
prohibitions under the Glass-Steagall Act.
TRANSFER AGENT AND FUND ACCOUNTANT
Primary Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741,
serves as the Fund's Transfer Agent pursuant to a Transfer Agency and
Shareholder Service Agreement with the Victory Portfolios and receives a fee for
such services based on a percentage of the average daily net assets of the Fund.
BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, OH 43219, provides
certain accounting services for the Fund pursuant to a Fund Accounting Agreement
and receives a fee for such services.
SHAREHOLDER SERVICING
26
<PAGE> 55
Shareholder services are provided to the Fund pursuant to agreements between the
Victory Portfolios and various shareholder servicing agents, including Key Trust
Company of Ohio, N.A. and its affiliates and other financial institutions and
securities brokers (each a "Shareholder Servicing Agent"). Each Shareholder
Servicing Agent generally will provide support services to shareholders by
establishing and maintaining accounts and records, processing dividend and
distribution payments, providing account information, arranging for bank wires,
responding to routine inquires, forwarding shareholder communication, assisting
in the processing of purchase, exchange and redemption requests, and assisting
shareholders in changing dividend options, account designations and addresses.
For expenses incurred and services provided as Shareholder Servicing Agent
pursuant to its respective Shareholder Servicing Agreement, the Fund pays each
Shareholder Servicing Agent a fee computed daily and paid monthly, in amounts
aggregating not more than twenty-five one-hundredths of one percent (.25%) of
the average daily net assets of the Fund per year. A Shareholder Servicing Agent
may periodically waive all or a portion of its respective shareholder servicing
fees with respect to the Fund to increase the net income of the Fund available
for distribution as dividends. During the fiscal year ended October 31, 1995,
the Fund paid shareholder servicing fees of % of the Fund's average daily net
assets.
EFFECT OF BANKING LAWS
Key Advisers and the Sub-Adviser believe that they may perform the investment
advisory services for the Fund contemplated by the investment advisory (and
sub-advisory) agreements (the "Advisory Agreements") for the Fund. In the
Advisory Agreements, Key Advisers and the Sub-Adviser have represented that they
possess the legal authority to perform the investment advisory services
contemplated therein and described in this Prospectus. Key Trust Company of
Ohio, N.A. and its affiliates also believe that they also may perform the
services for the Victory Portfolios contemplated by the Shareholder Servicing
Agreement with the Victory Portfolios without violating applicable banking laws
and regulations. Future changes in federal or state statutes and regulations
relating to permissible activities of banks or bank holding companies and their
subsidiaries and affiliates, as well as further judicial or administrative
decisions or interpretations of present and future statutes and regulations,
could change the manner in which Key Advisers, the Sub-Adviser, Key Trust
Company of Ohio, N.A. and its affiliates could continue to perform such services
for the Victory Portfolios. See the Statement of Additional Information
("Glass-Steagall Act") for further discussion.
EXPENSES
For the fiscal period ended October 31, 1995, the Fund's total operating
expenses were .___% of the Fund's average net assets.
CUSTODIAN
Key Trust Company of Ohio, N.A. serves as custodian for the Fund and receives
fees for its services.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. serves as the Fund's independent accountants.
ADDITIONAL INFORMATION
The Victory Portfolios may issue an unlimited number of shares and classes of
the Fund. Shares of each class of the Fund participate equally in dividends and
distributions and have equal voting, liquidation and other rights. When issued
and paid for, shares will be fully paid and nonassessable by the Victory
Portfolios and will have no preference, conversion, exchange or preemptive
rights. Shareholders are entitled to one vote for each full share owned and
fractional votes for fractional shares owned. For those investors with qualified
trust accounts established with affiliates of the Adviser, the trustee will vote
the shares at meetings of the Fund's shareholders in accordance with the
27
<PAGE> 56
shareholder's instructions or will vote in the same percentage as shares that
are not held in Trust. The trustee will forward to these shareholders all
communications received by the trustee, including proxy statements and financial
reports. The Victory Portfolios and the Fund are not required to hold annual
meetings of shareholders and in ordinary circumstances do not intend to hold
such meetings. The Trustees may call special meetings of shareholders for action
by shareholder vote as may be required by the 1940 Act or the Victory
Portfolios' Delaware Trust Instrument. Under certain circumstances, the Trustees
may be removed by action of the Trustees or by the shareholders. Shareholders
holding 10% or more of the Victory Portfolios' outstanding shares may call a
special meeting of shareholders for the purpose of voting upon the question of
removal of Trustees.
The Victory Portfolio's Board of Trustees may authorize the Victory Portfolios
to offer other funds which may differ in the types of securities in which their
assets may be invested.
Key Advisers, the Sub-Adviser and the Victory Portfolios have adopted Codes of
Ethics ( the "Codes") which require investment personnel (a) to pre-clear all
personal securities transactions, (b) to file reports regarding such
transactions, and (c) to refrain from personally engaging in (i) short-term
trading of a security, (ii) transactions involving a security within seven days
of a Victory fund transaction involving the same security, and (iii)
transactions involving securities being considered for investment by a Victory
fund. The Codes also prohibit investment personnel from purchasing securities in
an initial public offering. Personal trading reports are reviewed periodically
by Key Advisers or the Sub-Adviser, and the Board of Trustees reviews annually
such reports (including information on any substantial violations of the Codes).
Violations of the Codes may result in censure, monetary penalties, suspension or
termination of employment.
DELAWARE LAW
The Delaware Business Trust Act provides that a shareholder of a Delaware
business trust shall be entitled to the same limitation of personal liability
extended to stockholders of Delaware corporations. In light of Delaware law, the
nature of the Victory Portfolios' business, and the nature of its assets,
management of the Victory Portfolios believes that the risk of personal
liability to a Fund shareholder would be extremely remote.
In the unlikely event a shareholder is held personally liable for the Victory
Portfolios' obligations, the Victory Portfolios is required to use its property
to protect or compensate the shareholder. On request, the Victory Portfolios
will defend any claim made and pay any judgment against a shareholder for any
act or obligation of the Victory Portfolios. Therefore, financial loss resulting
from liability as a shareholder will occur only if the Victory Portfolios itself
cannot meet its obligations to indemnify shareholders and pay judgments against
them.
Delaware law authorizes electronic or telephonic communications between
shareholders and the Victory Portfolios. Under Delaware law, the Successor
Company has the flexibility to respond to future business contingencies. For
example, the Trustees will have the power to incorporate the Victory Portfolios,
to merge or consolidate it with another entity, to cause each fund to become a
separate trust, and to change the Victory Portfolios' domicile without a
shareholder vote. This flexibility could help reduce the expense and frequency
of future shareholder meetings for non-investment related issues.
MISCELLANEOUS
Shareholders will receive Semi-Annual Reports, which are unaudited, and Annual
Reports, which are audited by independent public accountants, describing the
investment operations of the Fund. Each of these reports, when available for a
particular fiscal year end or the end of a semi-annual fiscal period, is
incorporated herein by reference. The Victory Portfolios may include information
in their Annual Reports and Semi-Annual Reports to shareholders that (i)
describes general economic trends, (ii) describes general trends within the
financial services industry or the mutual fund industry, (iii) describes past or
anticipated portfolio holdings for the Fund or (iv) describes investment
28
<PAGE> 57
management strategies for the Victory Portfolios. Such information is provided
to inform shareholders of the activities of the Victory Portfolios for the most
recent fiscal year or semi-annual fiscal period, and to provide the views of Key
Advisers, the Sub-Adviser and/or the Victory Portfolios' officers regarding
expected trends and strategies.
Inquiries regarding the Victory Portfolios or the Fund may be directed in
writing to the Victory Portfolios at Primary Funds Service Corporation, P.O. Box
9741, Providence, RI 02940-9741, or by telephone, toll-free, at 800-539-3863.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE VICTORY
PORTFOLIOS OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING
BY THE VICTORY PORTFOLIOS OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE.
29
<PAGE> 58
DRAFT
The
VICTORY
Portfolios
GOVERNMENT BOND FUND
PROSPECTUS For current yield, purchase and redemption information,
March 1, 1996 call 800-539-FUND or 800-539-3863
THE VICTORY PORTFOLIOS (the "Victory Portfolios") is a registered open-end
management investment company that offers investors a selection of money
market, fixed-income, municipal bond, domestic and international equity
portfolios. This Prospectus relates to the Victory Government Bond Fund (the
"Fund"), a diversified portfolio. KeyCorp Mutual Fund Advisers, Inc.,
Cleveland, Ohio, an indirect subsidiary of KeyCorp, is the investment adviser
to the Fund ("Key Advisers" or the "Adviser"). Society Asset Management, Inc.,
Cleveland, Ohio, an indirect subsidiary of KeyCorp, is the investment
sub-adviser to the Fund ("Society" or the "Sub-Adviser"). Concord Holding
Corporation is the Fund's administrator (the "Administrator"). Victory
Broker-Dealer Services, Inc. is the Fund's distributor (the "Distributor").
The Fund seeks to provide as high a level of current income as is consistent
with preservation of capital by investing in U.S. Government securities. The
Fund's dollar-weighted average maturity will not exceed ten years.
The Fund offers two classes of shares: (i) Class A shares, which are offered
at net asset value plus the applicable sales charge (maximum of 4.75% of public
offering price) and (ii) Class B shares, which are offered at net asset value
with a maximum contingent deferred sales charge ("CDSC") of 5.0% imposed on
certain redemptions. At the end of the sixth year after a purchase of Class B
shares the CDSC will no longer apply to redemptions. Class B shares have
higher ongoing expenses than Class A shares, but automatically convert to Class
A shares eight years after purchase.
Please read this Prospectus before investing. It is designed to provide you
with information and to help you decide if the Fund's goals match your own.
Retain this document for future reference. A Statement of Additional
Information (dated March 1, 1996) for the Fund and an annual report for the
Fund's fiscal period ended October 31, 1995 have been filed with the Securities
and Exchange Commission and are incorporated herein by reference. The
Statement of Additional Information is available without charge upon request by
calling 800-539-3863.
SHARES OF THE FUND ARE:
- - NOT INSURED BY THE FDIC;
- - NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY KEYCORP
BANK, ANY OF ITS AFFILIATES, OR ANY OTHER BANK;
- - SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("COMMISSION"), OR ANY SECURITIES REGULATORY AUTHORITY OF
ANY STATE, NOR HAS THE COMMISSION OR ANY SUCH STATE AUTHORITY PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE> 59
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
----
<S> <C>
Summary of Fund Expenses 2
Financial Highlights 3
Investment Objective and Policies 3
Additional Information Regarding Securities in Which the Fund May Invest 4
Limiting Investment Risks 6
Portfolio Management 6
How to Invest, Exchange and Redeem 7
Dividends, Distributions and Taxes 16
Performance 17
Fund Organization and Fees 18
Additional Information 20
</TABLE>
2
<PAGE> 60
SUMMARY OF FUND EXPENSES
The table below summarizes the expenses associated with the Fund. This
standard format was developed for use by all mutual funds to help you make your
investment decisions. Of course, you should consider this expense information
along with other important information in the Prospectus, including the Fund's
investment objective, investment policies and risk factors, and financial
highlights.
SHAREHOLDER TRANSACTION EXPENSES(1). These represent charges paid when you
purchase, redeem or exchange shares of the Fund. See "How to Invest, Exchange
and Redeem."
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of the offering price) 4.75% none
Sales Charge Imposed on Reinvested Dividends none none
Deferred Sales Charge Imposed on Redemptions none 5% in the first year,
declining to 1% in
the sixth year and
eliminated there-
after to 0%.
Exchange Fee none none
</TABLE>
ANNUAL FUND OPERATING EXPENSES AFTER EXPENSE WAIVERS AND REIMBURSEMENTS (AS A
PERCENTAGE OF AVERAGE NET ASSETS).
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
Management Fees(2) 0.41% 0.41%
Administration Fees 0.15% 0.15%
Rule 12b-1 Distribution Fee none 0.75%
Other Expenses(3) 0.39% 0.54%
----- -----
Total Fund Operating Expenses(3) 0.95% 1.85%
===== =====
</TABLE>
(1) Subsidiaries, correspondents, affiliated banks and nonaffiliated banks
of KeyCorp may charge a customer's account fee for services provided
in connection with investment in the Fund. (See "How to Invest,
Exchange and Redeem" in the Prospectus.)
(2) Key Advisers has agreed to reduce its investment advisory fees to the
extent necessary so that the total operating expenses of the Fund do
not exceed 1.26% for Class A shares and 2.01% for Class B shares until
at lease [February 28, 1996]. Absent the voluntary reduction of
investment advisory fees, "Management Fees" as a percentage of average
daily net assets would be .55%.
(3) These amounts include an estimate of the shareholder servicing fees
the Fund expects to pay and voluntary expense reimbursements by the
Administrator. (See "Fund Organization and Fees--Shareholder
Servicing" in the Prospectus.) If the voluntary fee reductions and
reimbursements referred to in footnote (2) above were not in effect,
"Total Fund Operating Expenses" as a percentage of average daily net
assets would be 1.09% for Class A shares and 1.99% for Class B shares.
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return and (2) full redemption at the end of each time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Government Bond Fund Class A $57 $76 $ 98 $159
Government Bond Fund Class B $69 $88 $120 $193*
</TABLE>
* Includes expenses for Class A shares for years 9 & 10 since Class B shares
convert to Class A after 8 years.
The purpose of the table above is to assist you in understanding the various
costs and expenses that an investor in the Fund will bear directly and
indirectly. See "Fund
3
<PAGE> 61
Organization and Fees" for a more complete discussion of annual operating
expenses of the Fund. The foregoing example is based upon expenses for the
fiscal period ended October 31, 1995 and expenses that the Fund is expected to
incur during the current fiscal year. THE FOREGOING EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES, SINCE ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN.
4
<PAGE> 62
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA.
The information in the table below relates to the Fund and to its predecessor,
the Government Bond Portfolio, a portfolio of The Victory Funds (the
"Predecessor Fund"), and has been audited by Coopers & Lybrand L.L.P. (for the
fiscal period ended October 31, 1995) and by KPMG Peat Marwick L.L.P. (for
earlier periods), respectively, as auditors, whose reports thereon, together
with the financial statements of the Fund and the Predecessor Fund are
incorporated by reference into or contained in the Statement of Additional
Information. No Class B shares were publicly issued prior to September 26,
1994, and therefore no information on Class B shares is reflected in the table
below or in the Predecessor Fund's other financial statements for periods prior
to September 26, 1994.
<TABLE>
<CAPTION>
CLASS A
-------
FISCAL PERIOD FROM MAY
PERIOD ENDED YEAR ENDED 3,1993**
OCTOBER APRIL 30, TO APRIL 30,
31,1995*** 1995 1994
------- -------- --------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period [To be inserted] $ 9.45 $ 10.00
------ -------
Income from investment operations: 0.55 0.45
Net investment income(1)
Net realized and unrealized loss
on investments (0.02) (0.54)
------ ------
Total from investment activities 0.53 (0.09)
------ ------
Distributions:
Net investment income (0.54) (0.45)
In excess of net investment income -- (0.01)
------ ------
Total distributions (0.54) (0.46)
------ ------
NET ASSET VALUE, END OF PERIOD $ 9.44 $ 9.45
======
Total Return+ 5.87% (1.06)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (thousands) $84,567 $120,636
Ratio of expenses to average net assets(1) .63% 0.38%*
Ratio of net investment income to average net 5.97% 4.61%*
assets
Portfolio turnover rate 127% 121%*
</TABLE>
5
<PAGE> 63
<TABLE>
<CAPTION>
CLASS B
-------
PERIOD FROM
FISCAL PERIOD SEPTEMBER 26,
ENDED 1994** TO
OCTOBER 31, 1995*** APRIL 30,1995
------------------- -------------
<S> <C> <C>
Net Asset Value, Beginning of Period $ 9.25
------
Income from investment operations: 0.31
Net investment income(1)
Net realized and unrealized loss
on investments 0.17
------
Total from investment activities 0.48
------
Distributions:
Net investment income (0.30)
In excess of net investment income --
Total distributions (0.30)
------
NET ASSET VALUE, END OF PERIOD $ 9.43
======
Total Return+ 5.26%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (thousands) $ 155
Ratio of expenses to average net assets(1) 1.43%*
Ratio of net investment income to 5.03%*
average net assets
Portfolio turnover rate 127%*
</TABLE>
(1) During the period from May 3, 1993 to April 30, 1994, various fees and
expenses were voluntarily waived by Key Trust Company and Fidelity
Distributors Corporation, in the amount of $0.06 per share. During the
year ended April 30, 1995, expenses were voluntarily waived by Key Trust
Company, Society Asset Management, Inc. and Concord Holding Corporation,
in the amount of $0.04 and $0.00 per share for Class A shares and Class B
shares, respectively. During the fiscal period ended October 31, 1995
[to be inserted]. The ratio of expenses to average net assets had such
waiver not occurred is as follows:
Ratio of expenses to average net assets ____% 1.60%* 0.98% ____% 0.96%*
* Annualized.
** Commencement of operations.
*** The Fund's fiscal year end was changed to the period ending October 31
of each year.
+ Total return does not include the one time sales charge and for a
period of less than one year is not annualized. Total returns would
have been lower had certain expenses not been reduced during the
period.
THE FUND'S INVESTMENT OBJECTIVE
The Fund's investment objective is to seek to provide as high a level of
current income as is consistent with preservation of shareholders' capital.
The investment objective of the Fund is fundamental and may not be changed
without a vote of the holders of a majority of its outstanding voting
securities (as defined in the Statement of Additional Information). There can
be no assurance that the Fund will achieve its investment objective.
INVESTMENT POLICIES OF THE FUND
The Fund pursues its objective by investing primarily in a portfolio of U.S.
government securities. When Key Advisers or the Sub-Adviser believes market
conditions warrant a temporary defensive position, the Fund may invest up to
100% of its assets in short-term
6
<PAGE> 64
securities such as bankers' acceptances, certificates of deposit and other bank
obligations, repurchase agreements, short-term government or government agency
obligations, and commercial paper and other short-term corporate obligations,
having remaining maturities of one year or less.
The investment policies of the Fund may be changed without an affirmative vote
of the holders of a majority of the Fund's outstanding voting securities unless
(1) a policy is expressly deemed to be a fundamental policy of the Fund or (2)
a policy is expressly deemed to be changeable only by such majority vote.
The Fund is advised by KeyCorp Mutual Fund Advisers, Inc., an indirect
subsidiary of KeyCorp, which purchases securities for the Fund consistent with
its investment objective and policies and which meet the quality and maturity
characteristics established for the Fund. The Predecessor Fund was advised by
Key Trust Company, an affiliate of Key Advisers.
FROM TIME TO TIME, THE FUND, TO THE EXTENT CONSISTENT WITH ITS INVESTMENT
OBJECTIVE, POLICIES AND RESTRICTIONS, MAY INVEST IN SECURITIES OF COMPANIES
WITH WHICH KEY ADVISERS OR THE SUB-ADVISER OR ITS AFFILIATES HAVE A LENDING
RELATIONSHIP.
RISK FACTORS
The value of the Fund's securities will fluctuate in response to market
conditions and the value of a share in the Fund may vary. Investors should
review the investment objective and policies of the Fund and carefully consider
the ability to assume any risk involved in purchasing shares of the Fund,
including the risk of possible loss of principal.
Generally, bond funds offer higher yields than money market funds although
unlike money market funds, the share price of bond funds fluctuates in response
to changes in prevailing interest rates and may be affected by other market and
credit factors. Fixed-income securities (except securities with floating or
variable interest rates) are generally considered to be interest rate
sensitive, which means that their value (and a Fund's share price) will tend to
decrease when interest rates rise and increase when interest rates fall.
Securities with shorter maturities, while offering lower yields, generally
provide greater price stability than longer-term securities and are less
affected by changes in interest rates. The share prices and yields of the Fund
are not insured or guaranteed by the U.S. Government.
ADDITIONAL INFORMATION REGARDING SECURITIES IN WHICH THE FUND MAY INVEST
The following paragraphs provide a brief description of some of the types of
securities in which the Fund may invest, the transactions it may make, and the
strategies it may adopt. The Fund may, following notice to its shareholders,
take advantage of other investment practices which are not at present
contemplated for use by the Fund, or which currently are not available but
which may be developed, to the extent such investment practices are both
consistent with the Fund's investment objective and legally permissible for the
Fund. Such investment practices, if they arise, may involve risks which exceed
those involved in the activities described in this Prospectus.
MONEY MARKET INSTRUMENTS refer to short-term, high-quality debt securities,
including U.S. Government obligations, commercial paper, certificates of
deposit, bankers' acceptances, time deposits and short-term corporate
obligations. Money market instruments may carry fixed rates of return or have
variable or floating interest rates. The Fund may only invest in U.S.
Government securities and money market instruments.
COMMERCIAL PAPER consists of short-term obligations issued by banks,
broker-dealers, corporations and other entities for purposes such as financing
their current operations.
CERTIFICATES OF DEPOSIT are negotiable certificates representing a commercial
bank's obligations to repay funds deposited with it, earning specified rates of
interest over given periods.
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<PAGE> 65
BANKERS' ACCEPTANCES are negotiable obligations of a bank to pay a draft which
has been drawn on it by a customer. These obligations are backed by large
banks and usually backed by goods in international trade.
TIME DEPOSITS are non-negotiable deposits in a banking institution earning a
specified interest rate over a given period of time.
DELAYED-DELIVERY TRANSACTIONS for the Fund are purchases and sales of
securities on a when-issued or delayed-delivery basis, with payment and
delivery taking place at a future date. The market value for securities
purchased in this fashion may change before the delivery date, and could
increase fluctuations in the Fund's yield. Ordinarily, the Fund will not earn
interest on securities purchased until they are delivered.
REPURCHASE AGREEMENTS AND SECURITIES LOANS. In a repurchase agreement, the
Fund purchases a security at one price and simultaneously agrees to sell it
back at a higher price. The Fund may also make securities loans to
broker-dealers and institutional investors. In the event of the bankruptcy of
the other party to either a repurchase agreement or a securities loan, the Fund
could experience delays in recovering its cash or the securities it lent. To
the extent that, in the meantime, the value of the securities purchased had
decreased or the value of the securities lent had increased, the Fund could
experience a loss. In all cases, Key Advisers or the Sub-Adviser must find the
creditworthiness of the other party to the transaction satisfactory. The Fund
may invest only in repurchase agreements that are secured by those securities
in which it is permitted to invest directly. Repurchase agreements are
considered by the staff of the Securities and Exchange Commission to be loans
by the Fund.
ZERO COUPON BONDS do not make interest payments; instead, they are sold at a
deep discount from their face value and are redeemed at face value when they
mature. Because zero coupon bonds do not pay current income, their prices can
be very volatile when interest rates change. In calculating its daily dividend
and in complying with federal tax distribution requirements, the Fund takes
into account as income a portion of the difference between a zero coupon bond's
purchase price and its face value.
A broker-dealer creates a derivative zero by separating the interest and
principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury Securities),
TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury Receipts) are
examples of derivative zeros. The Fund has been advised that the staff of the
SEC does not consider these instruments to be U.S. Government securities for
certain purposes under the 1940 Act. Therefore, the Fund does not treat these
obligations as U.S. Government Securities for purposes of its 100% investment
policy.
The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and principal
components of an outstanding U.S. Treasury bond and selling them as individual
securities. Bonds issued by the Resolution Funding Corporation and the
Financing Corporation can also be separated in this fashion. Original issue
zeros are zero coupon securities originally issued by the U.S. Government, a
government agency or a corporation in zero coupon form.
MORTGAGE-BACKED SECURITIES are securities issued or guaranteed by agencies or
instrumentalities of the U.S. Government and non-government entities such as
banks, mortgage lenders, or other financial institutions. A mortgage-backed
security may be an obligation of the issuer backed by a mortgage or pool of
mortgages or a direct interest in an underlying pool of mortgages. Some
mortgage-backed securities make payments of both principal and interest at a
variety of intervals; others make semiannual interest payments at a
predetermined rate and repay principal at maturity (like a typical bond).
Mortgage-backed securities are based on different types of mortgages including
those on commercial real estate or residential properties. Other types of
mortgage-backed securities will likely be developed in the future, and the Fund
may invest in them if Key Advisers or the Sub-Adviser determines they are
consistent with the Fund's investment objective and policies. The Fund will
not acquire "residual" interests in real estate mortgage investment conduits
(REMICs) under current tax law in order to avoid certain potential adverse tax
consequences.
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<PAGE> 66
The value of mortgage-backed securities may change due to shifts in the
market's perception of issuers. In addition, regulatory or tax changes may
adversely affect the mortgage securities market as a whole. Non-government,
mortgage-backed securities may offer higher yields than those issued by
government entities, but also may be subject to greater price changes than
government issues. Mortgage-backed securities are subject to prepayment risk.
Prepayment, which occurs when unscheduled or early payments are made on the
underlying mortgages, may shorten the effective maturities of these securities
and may lower their total returns.
EXTENDIBLE DEBT SECURITIES are securities that can be retired at the option of
the Fund at various dates prior to maturity.
INVESTMENT COMPANY SECURITIES. The Fund may invest up to 5% of its total
assets in the securities of any one investment company, but may not own more
than 3% of the securities of any one investment company or invest more than 10%
of its total assets in the securities of other investment companies. Pursuant
to an exemptive order received by the Victory Portfolios from the Commission,
the Fund may invest in the money market funds of the Victory Portfolios. Key
Advisers and/or the Sub-Adviser will waive its investment advisory fee
attributable to the Fund's assets invested in a fund of the Victory Portfolios
to the extent such fees are duplicated. To the extent required by the laws of
any state in which shares of a fund of the Victory Portfolios are sold, Key
Advisers and/or the Sub-Adviser will waive its investment advisory fee as to
all assets invested in other investment companies. Because such other
investment companies employ an investment adviser, such investment by the Fund
will cause shareholders to bear duplicative fees, such as management fees, to
the extent such fees are not waived by Key Advisers and/or the Sub-Adviser. The
Fund will invest only in the securities of money market funds which invest only
in securities of equal or higher short-term ratings as the securities in which
the Fund may invest.
LIMITING INVESTMENT RISKS
The Fund is subject to certain investment restrictions, described below and in
more detail in the Statement of Additional Information, which have been adopted
by the Fund as fundamental policies. These fundamental policies cannot be
changed without the approval of a majority of the outstanding shares of the
Fund.
Among other restrictions, the Fund may not (a) invest more than 5% of its total
assets in the securities of any issuer (except U.S. government securities,
except that up to 25% of the Fund's total assets may be invested without regard
to this limitation); (b) invest more than 25% of the Fund's assets in
securities of companies having their principal business activities in the same
industry (except U.S. government securities); and (c) borrow money, except that
the Fund may borrow money from banks for temporary or emergency purposes and
engage in reverse repurchase agreements in an amount not exceeding 33 1/3% of
its total assets, provided that any such borrowings representing more than 5%
of the Fund's total assets must be repaid before the Fund may make additional
investments. These limitations and the policies discussed in this Prospectus
are considered and applied by Key Advisers or the Sub- Adviser at the time of
purchase of an investment; the sale of securities by a Fund is not required in
the event of a subsequent change in circumstances.
The Fund will not purchase a security if, as a result, more than 15% of its net
assets would be invested in illiquid securities. The Fund may invest up to 15%
of its net assets in illiquid investments (investments that cannot be readily
sold within seven days in the usual course of business at approximately the
price at which the Fund has valued them), including restricted securities
deemed to be illiquid. Under the supervision of the Trustees, Key Advisers or
the Sub-Adviser determines the liquidity of the Fund's investments. The
absence of a trading market can make it difficult to ascertain a market value
for illiquid investments. Disposing of illiquid investments may involve
time-consuming negotiation and legal expenses, and it may be difficult or
impossible for the Fund to sell them promptly at an acceptable price.
Whenever an investment policy or limitation states a maximum percentage of the
Fund's assets that may be invested, such percentage limitation will be
determined immediately after and
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<PAGE> 67
as a result of the investment, except in the case of borrowing (or other
activities that may be deemed to result in the issuance of a "senior security"
under the Investment Company Act of 1940). Any subsequent change in values,
assets, or other circumstances will not be considered when determining whether
the investment complies with the Funds's investment policies and limitations.
If the value of a Fund's holdings of illiquid securities at any time exceeds
the percentage limitation applicable at the time of acquisition due to
subsequent fluctuations in value or other reasons, the Board of Trustees will
consider what actions, if any, are appropriate to maintain adequate liquidity.
PORTFOLIO TRANSACTIONS
Brokerage firms are utilized to conduct securities transactions for the Fund.
Broker-dealers are chosen by judging professional ability and quality of
service. The Fund's securities are generally traded in the over-the-counter
market through broker-dealers. In the over-the-counter market, a broker-dealer
makes a market for securities by offering to buy at one price and sell at a
slightly higher price. The difference between the prices is known as a spread.
[Since Key Advisers and the Sub-Adviser trade a large number of securities,
broker-dealers are willing to work with the portfolio on a more favorable
spread than would be possible for most individual investors.]
Higher commissions for each Fund may be paid to firms that provide research
services to the extent permitted by law. The frequency of portfolio
transactions -- the Fund's turnover rate -- will vary from year to year
depending on market conditions. The portfolio turnover rates for the Fund's
fiscal year ended April 30, 1994, April 30, 1995 and fiscal period ended
October 31, 1995, were 121% and ___% (annualized), respectively.
HOW TO INVEST, EXCHANGE AND REDEEM
HOW TO INVEST
The Fund offers investors two different classes of shares. The different
classes of shares represent investments in the same portfolio of securities but
are subject to different expenses and will likely have different share prices.
- - CLASS A SHARES. If you buy Class A shares, you pay an initial sales
charge (on investments up to $1 million).
- - CLASS B SHARES. If you buy Class B shares, you pay no sales charge at
the time of purchase, but if you sell your shares within six years, you will
normally pay a contingent deferred sales charge ("CDSC") that varies depending
on how long you own your shares.
- - WHICH CLASS OF SHARES SHOULD YOU CHOOSE? Once you decide that the
Fund is an appropriate investment for you, the decision as to which class of
shares is better suited to your needs depends on a number of factors which you
should discuss with your financial advisors:
- - Amount of investment. If you plan to invest a substantial amount, the
reduced sales charges available for larger purchases of Class A shares may be
more beneficial to you. Any order for $1 million or more on behalf of a single
investor will only be accepted for Class A Shares for that reason.
- - Investment horizon. While future financial needs cannot be predicted
with certainty, investors who prefer not to pay an initial sales charge and who
plan to hold their shares for more than six years might consider Class B shares.
Investors who plan to redeem shares within eight years might prefer Class A
shares.
- - Differences in account features. The dividends payable to Class B
shareholders will be reduced by the additional expenses borne solely by that
class, such as the asset-based sales charge to which Class B shares are subject,
as described below and in the Statement of Additional Information.
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<PAGE> 68
- - Investment Professionals. A salesperson or any other person who is
entitled to receive compensation for selling Victory Portfolios shares may
receive different compensation for selling one class than for selling another
class. The purpose of both the CDSC (and asset-based sales charge) for Class B
shares, and the purpose of the front-end sales charge on sales of Class A shares
is primarily to compensate such sales persons.
- - HOW ARE SHARES PURCHASED? Shares may be purchased directly or through
an Investment Professional. Investment Professionals are securities brokers or
other financial institutions that have entered into selling or servicing
agreements with the Fund or the Distributor. Shares are also available to
clients of bank trust departments who have qualified trust accounts. The minimum
investment is $500 for the initial purchase and $25 thereafter. Accounts set up
through a bank trust department or an Investment Professional may be subject to
different minimums. When you buy shares, be sure to specify Class A or Class B
shares. If you do not make a selection, your investment will be made in Class A
shares.
- - Investing Through Your Investment Professional. Your Investment
Professional will place your order with the Transfer Agent on your behalf. You
may be required to establish a brokerage or agency account. Your Investment
Professional will notify you whether subsequent trades should be directed to the
Investment Professional or directly to the Fund's Transfer Agent. Accounts
established with Investment Professionals may have different features,
requirements and fees. In addition, Investment Professionals may charge for
their services. Information regarding these features, requirements and fees will
be provided by the Investment Professional. If you are purchasing shares of any
Fund through a program of services offered or administered by your Investment
Professional, you should read the program materials in conjunction with this
Prospectus.
- - Investing Through The Systematic Investment Plan. You can use the
Systematic Investment Plan to purchase shares directly from your bank account.
Please refer to "Systematic Investment Plan" below for more details.
- - Investing Through Your Bank Trust Department. Your bank trust
department may require a minimum investment and may charge additional fees. Fee
schedules for such accounts are available upon request and are detailed in the
agreements by which a client opens the desired account. Your bank trust
department may require a completed and signed application for the Fund in which
an investment is made. Additional documents may be required from corporations,
associations, and certain fiduciaries. Any account information, such as
balances, should be obtained through your bank trust department. Additional
purchases, exchanges or redemptions should also be coordinated through your bank
trust department. Contact your bank trust department for instructions.
The services rendered by a bank trust department, including affiliates of Key
Advisers or the Sub-Adviser, in the management of its accounts are not
duplicative of any of the services for which Key Advisers or the Sub-Adviser as
the investment adviser or sub-adviser, respectively, is compensated for
advising the Fund. The charges paid by clients of bank trust departments, or
their affiliates, should be considered in calculating the net yield and return
on the Client's investments in the Fund, although such charges do not affect
the Fund's dividends and distributions.
INVESTING DIRECTLY
BY MAIL: You may purchase shares by completing and signing an account
application (initial purchase only) and mailing it, together with a check (or
other negotiable bank draft or money order) in the amount of at least the
minimum investment requirement to, The Victory Government Bond Fund, Primary
Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741.
Subsequent purchases may be made in the same manner.
BY WIRE: Call 800-539-3863 to set up your Fund account to accommodate wire
transactions. YOU MUST CALL THE TRANSFER AGENT BEFORE WIRING FUNDS. You will
begin to earn dividends on the first business day following receipt of your
wire. Federal funds (monies transferred from one bank to another through the
Federal Reserve System with same-day availability) should be wired to:
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<PAGE> 69
Boston Safe Deposit & Trust Co.
ABA #011001234
Credit PFSC DDA#16-918-8
The Victory Portfolios: Government Bond Fund
You must include your account number, your name(s), tax identification
number(s) and the control number assigned by the Transfer Agent. The Fund does
not impose a fee for wire transactions, although your bank may charge you a fee
for this service.
Shares are sold at the public offering price based on the net asset value that
is next determined after the Transfer Agent receives the purchase order. In
most cases, to receive that day's offering price, the Transfer Agent must
receive your order before the close of regular trading of the New York Stock
Exchange ("NYSE") (generally 4:00 p.m. Eastern time) (the "Valuation Time") on
each Business Day (as defined in "Net Asset Value Per Share")of the Fund. If
you buy shares through an Investment Professional, the Investment Professional
must receive your order in a timely fashion on a regular Business Day and
transmit it to the Transfer Agent so that it is received before the close of
business that day. The Transfer Agent may reject any purchase order for the
Fund's shares, in its sole discretion.
It is the responsibility of your Investment Professional to transmit your order
to purchase shares to the Transfer Agent in a timely fashion in order for you
to receive that day's share price.
INVESTMENT REQUIREMENTS
All purchases must be made in U.S. dollars. Checks must be drawn on U.S.
banks. No cash will be accepted. If you make a purchase with more than one
check, each check must have a value of at least $25, and the minimum investment
requirement still applies. The Fund reserves the right to limit the number of
checks processed at one time. If your check does not clear, your purchase will
be canceled and you could be liable for any losses or fees incurred. Payment
for the purchase is expected at the time of the order. If payment is not
received within three business days of the date of the order, the order may be
canceled, and you could be held liable for resulting fees and/or losses.
CLASS A SHARES. Class A shares are sold at their offering price, which is
normally net asset value plus an initial sales charge. However, in some cases,
described below, where purchases are not subject to an initial sales charge,
the offering price may be net asset value. In some cases, reduced sales
charges may be available, as described below. When you invest, the Fund
receives the net asset value for your account. The sales charge varies
depending on the amount of your purchase and a portion may be retained by the
Distributor and allocated to your Investment Professional. The Victory
Portfolios has a reinstatement policy which allows an investor who redeems
his/her shares originally purchased with a sales charge to reinvest within 90
days without incurring an additional sales charge. The current sales charge
rates and commissions paid to Investment Professionals are as follows:
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<PAGE> 70
<TABLE>
<CAPTION>
Front-End Sales Charge Dealer
As a Percentage of: Reallocation
------------------- as a Percentage
Offering Net Amount of the
Amount of Purchase Price Invested Offering Price*
- ------------------ ----- -------- --------------
<S> <C> <C> <C>
Less than $49,999 4.75% 4.99% 4.00%
$50,000 to $99,999 4.50% 4.71% 4.00%
$100,000 to $249,999 3.50% 3.63% 3.00%
$250,000 to $499,999 2.25% 2.30% 2.00%
$500,000 to $999,999 1.75% 1.78% 1.50%
$1,000,000 and above 0.00% 0.00% **
</TABLE>
* The Distributor reserves the right to reallow the entire sales charge
to dealers. If that occurs, the dealer may be considered an
"underwriter" under Federal securities laws.
** There is no initial sales charge on purchases of $1 million or more.
Investment Professionals will be compensated at the rate of up to
0.25% of such purchases.
The Distributor may pay all or a portion of any applicable sales charges and
service fees to Investment Professionals who sell shares of the Fund and
provide ongoing sales support services or shareholder support services. For
the three-year period commencing April 30, 1994, for activities in maintaining
and servicing accounts of customers invested in the Fund, First Albany
Corporation ("First Albany") and PFIC Securities Corporation ("PFIC") may
receive payments from the Distributor equal to two-thirds of the Dealer
Retention (as defined below) on any shares of the Fund (and other funds of the
Victory Portfolios) sold by First Albany or PFIC and their broker-dealer
affiliates. "Dealer Retention" is an amount equal to the difference between
the applicable sales charge and such part of the sales charge which is
reallowed to broker-dealers.
The Distributor, at its expense, may also provide additional cash compensation
to dealers in connection with sales of shares of the Fund. The maximum cash
compensation payable by the Distributor is currently 4.00% of the offering
price. In addition, the Distributor will, from time to time and at its own
expense, provide compensation, including financial assistance, to dealers in
connection with conferences, sales or training programs for their employees,
seminars for the public, advertising campaigns regarding one or more Victory
Portfolios and/or other dealer-sponsored special events including payment for
travel expenses, including lodging, incurred in connection with trips taken by
invited registered representatives and members of their families to locations
within or outside of the United States for meetings or seminars of a business
nature. Compensation will include the following types of non-cash compensation
offered through sales contests: (1) vacation trips including the provision of
travel arrangements and lodging; (2) tickets for entertainment events (such as
concerts, cruises and sporting events) and (3) merchandise (such as clothing,
trophies, clocks and pens). Dealers may not use sales of the Fund's shares to
qualify for this compensation if prohibited by the laws of any state or any
self-regulatory organization, such as the National Association of Securities
Dealers, Inc. None of the aforementioned compensation is paid for by the Fund
or its shareholders.
REDUCED SALES CHARGES FOR CLASS A SHARES. You may be eligible to buy Class A
shares at reduced sales charge rates in one or more of the following ways:
LETTER OF INTENT. An investor may obtain a reduced sales charge by means of a
written Letter of Intent which expresses the investor's intention to purchase
shares of the Fund at a specified total public offering price within a 13-month
period.
A Letter of Intent is not a binding obligation upon the investor to purchase
the full amount indicated. The minimum initial investment under a Letter of
Intent is 5% of the total amount. Shares purchased with the first 5% of such
amount will be held in escrow (while remaining registered in the name of the
investor) to secure payment of the higher sales
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<PAGE> 71
charge applicable to the shares actually purchased if the full amount indicated
is not purchased, and such escrowed shares will be involuntarily redeemed to
pay the additional sales charge, if necessary. Dividends (if any) on escrowed
shares, whether paid in cash or reinvested in additional shares, are not
subject to escrow. The escrowed shares will not be available for disposal by
the investor until all purchases pursuant to the Letter of Intent have been
made or the higher sales charge has been paid. When the full amount indicated
has been purchased, the escrow will be released. A Letter of Intent may
include purchases of shares made not more than 90 days prior to the date the
investor signs a Letter of Intent; however, the 13-month period during which
the Letter of Intent is in effect will begin on the date of the earliest
purchase to be included. An investor may combine purchases that are made in an
individual capacity with (1) purchases that are made by members of the
investor's immediate family and (2) purchases made by businesses that the
investor owns as sole proprietorships, for purposes of obtaining reduced sales
charges by means of a written Letter of Intent. In order to accomplish this,
however, investors must designate on the account application the accounts that
are to be combined for this purpose. Investors can only designate accounts
that are open at the time the Letter of Intent is executed.
If an investor qualifies for a further reduced sales charge because the
investor has either purchased more than the dollar amount indicated on the
Letter of Intent or has entered into a Letter of Intent which includes shares
purchased prior to the date of the Letter of Intent, the difference in the
sales charge will be used to purchase additional shares of the Fund on behalf
of the investor; thus the total purchases (included in the Letter of Intent)
will reflect the applicable reduced sales charge of the Letter of Intent.
For investors who purchase more than the dollar amount indicated on the Letter
of Intent or enter into a Letter of Intent that includes shares purchased prior
to the date of the Letter of Intent and qualify for a reduced sales charge, all
such additional shares will be immediately purchased in the form of additional
shares and credited to the investor's account at the then current public
offering price applicable to a single purchase of the total amount of the
purchases.
For further information about Letters of Intent, interested investors should
contact the Transfer Agent at 800-539-3863. This program, however, may be
modified or eliminated at any time without notice.
RIGHT OF ACCUMULATION AND CONCURRENT PURCHASES
A shareholder may qualify for a reduced sales charge on purchases of Class A
Shares of the Fund and other funds of the Victory Portfolios by combining a
current purchase with purchases of another fund(s) or with certain prior
purchases of shares of the Victory Portfolios. The applicable sales charge is
based on the sum of (i) the purchaser's current purchase plus (ii) the current
public offering price of the purchaser's previous purchases of (a) all shares
held by the purchaser in the Fund and (b) all shares held by the purchaser in
any other fund of the Victory Portfolios (except money market funds).
To receive the applicable public offering price pursuant to the right of
accumulation, shareholders must provide the Transfer Agent with sufficient
information at the time of purchase to permit confirmation of qualification.
Accumulation privileges may be amended or terminated without notice at any time
by the Distributor.
- - WAIVERS OF CLASS A SALES CHARGES. No sales charge is imposed on sales of
Class A shares to the following categories of persons (which categories may be
changed or eliminated at any time):
(1) Current or retired trustees of the Victory Portfolios; employees,
directors, trustees, and their family members of KeyCorp or an
Affiliated Provider (Affiliated Providers refer to affiliates and
subsidiaries of KeyCorp and service providers to the Victory
Portfolios and the Victory Shares (collectively, the "Victory
Group")), dealers having an agreement with the Distributor and any
trade organization to which Key Advisers, the Sub-Adviser or the
Administrator belongs;
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<PAGE> 72
(2) Investors who purchase shares for trust, investment management or
certain other advisory accounts established with KeyCorp or any of its
affiliates;
(3) Investors who purchase shares through a 401(k) plan sponsored by an
Affiliated Provider;
(4) Investors who reinvest assets received in a distribution from a
qualified, non-qualified or deferred compensation plan, agency, trust
or custody account that was either (a) maintained by KeyCorp or an
Affiliated Provider, or (b) invested in a fund of the Victory Group;
(5) Investors who, within 90 days of redemption, use the proceeds from the
redemption of shares of another mutual fund complex for which they
previously paid a front end sales charge or sales charge upon
redemption of shares; and
(6) Shareholders of the former Investors Preference Fund For Income, Inc.
and the Investors Preference New York Tax-Free Fund, Inc. who have
continuously maintained accounts with a fund or funds of the Victory
Group with a balance of $250,000 or more (investors with less than
$250,000 will pay any applicable sales loads).
CLASS B SHARES. Class B shares are sold at net asset value per share without
an initial sales charge. However, if Class B shares are redeemed within six
years of their purchase, a CDSC will be deducted from the redemption proceeds.
That sales charge will not apply to shares purchased by the reinvestment of
dividends or capital gains distributions. The charge will be assessed on the
lesser of the net asset value of the shares at the time of redemption or the
original purchase price. The CDSC is not imposed on the amount of your account
value represented by the increase in net asset value over the initial purchase
price (including increases due to the reinvestment of dividends and capital
gains distributions). The Class B CDSC is paid to the Distributor to reimburse
its expenses of providing distribution-related services to the Fund in
connection with the sale of Class B shares.
To determine whether the CDSC applies to a redemption, the Victory Portfolios
deems shares to be redeemed in the following order: (1) shares acquired by
reinvestment of dividends and capital gains distributions, (2) shares held for
over six years, and (3) shares held the longest during the 6-year period. The
amount of the CDSC will depend on the number of years since you invested and
the dollar amount being redeemed, according to the following schedule:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
YEARS SINCE PURCHASE ON REDEMPTIONS IN THAT YEAR
PAYMENT WAS MADE (AS % OF AMOUNT SUBJECT TO CHARGE)
- ---------------- ---------------------------------
<S> <C>
0-1 5.0%
1-2 4.0%
2-3 3.0%
3-4 3.0%
4-5 2.0%
5-6 1.0%
6 and following None
</TABLE>
In the table, a "year" is a 12-month period. All purchases are considered to
have been made on the first regular business day of the month in which the
purchase was made.
- - WAIVERS OF CLASS B SALES CHARGE. The Class B CDSC will be waived if the
shareholder requests it for any of the following redemptions: (1) distributions
to participants or beneficiaries from Retirement Plans, if the distributions
are made (a) under an Automatic Withdrawal Plan after the participant reaches
age 59, as long as the payments are no more than 10% of the account value
annually (measured from the date the Transfer Agent receives the request), or
(b) following the death or disability (as defined in the Internal Revenue Code)
of the participant or beneficiary; (2) redemptions from accounts other than
Retirement Plans following the death or disability of the shareholder (as
evidenced by a determination
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of disability by the Social Security Administration), and (3) returns of excess
contributions to Retirement Plans.
The CDSC is also waived on Class B shares in the following cases: (i) shares
sold to Key Advisers, the Sub-Adviser or their affiliates; (ii) shares issued
in plans of reorganization to which the Victory Portfolios is a party; and
(iii) shares redeemed in involuntary redemptions as described above. Further
details about this policy are contained in "Reduced Sales Charges" in the
Statement of Additional Information.
- - AUTOMATIC CONVERSION OF CLASS B SHARES. Eight years after you purchase
Class B shares, those shares will automatically convert to Class A shares.
This conversion feature relieves Class B shareholders of the asset-based sales
charge that applies to Class B shares under the Class B Distribution Plan,
described below. The conversion is based on the relative net asset value of
the two classes, and no sales load or other charge is imposed. When Class B
shares convert, any other Class B shares that were acquired by the reinvestment
of dividends and distributions on the converted shares will also convert to
Class A shares. The conversion feature is subject to the continued
availability of a tax ruling described in "Alternative Sales Arrangements-Class
A and Class B Shares" in the Statement of Additional Information.
- - DISTRIBUTION PLAN FOR CLASS B SHARES. The Victory Portfolios has adopted a
Distribution Plan (the "Plan") under Rule 12b-1 of the 1940 Act for Class B
shares to compensate the Distributor for its services and costs in distributing
Class B shares and servicing accounts. Under the Plan, the Victory Portfolios
pays the Distributor an annual "asset-based sales charge" of 0.75% per year on
Class B shares that are outstanding for 6 years or less. This fee is computed
on the average daily net assets of Class B shares and paid monthly. The
asset-based sales charge enables investors to buy Class B shares without a
front-end sales charge while enabling the Distributor to compensate dealers
that sell Class B shares. The asset-based sales charge increases Class B
expenses by up to 0.75% of average net assets per year.
The Distributor pays sales commissions of 4.00% of the purchase price to
dealers from its own resources at the time of sale. For activities in
maintaining and servicing accounts of customers invested in the Fund, First
Albany and PFIC Securities Corporation may receive payments from the
Distributor equal to two-thirds of the excess of the scheduled CDSC for a
redemption of a share during the first year after purchase over any scheduled
payment to the selling broker on such share. The Distributor retains the
asset-based sales charge to recoup the sales commissions it pays, the advances
of service fee payments it makes, and its financing costs. If the Plan is
terminated by the Victory Portfolios, it provides that the Trustees may elect
to continue payments for certain expenses already incurred. The payments under
the Plan increase the annual expenses of Class B shares. For more details,
please refer to "Advisory and Other Contracts - Class B Shares Distribution
Plan" in the Statement of Additional Information.
SPECIAL INVESTOR SERVICES
- - THE SYSTEMATIC INVESTMENT PLAN. You can make regular investments in the
Fund and all other funds of the Victory Group with the Systematic Investment
Plan by completing the appropriate section of the account application and
attaching a voided personal check with your bank's magnetic ink coding number
across the front. If your bank account is jointly owned, be sure that all
owners sign. You must first meet the Fund's initial investment requirement of
$500, then investments may be made monthly by automatically deducting $25 or
more from your bank checking account. For officers, trustees, directors and
employees, including retired directors and employees, of the Victory Group,
KeyCorp and its affiliates, and the Administrator and its affiliates (and
family members of each of the foregoing, i.e., parents and children) who
participate in the Systematic Investment Plan, there is no minimum initial
investment required, You may change the amount of your monthly purchase at any
time. A bank draft form must be completed for this option. Your bank checking
account will be debited on the date indicated on your Account Application.
Shares will be purchased at the offering price next determined following
receipt of the order by the Transfer Agent. You may cancel the Systematic
Investment Plan at any time without payment of a cancellation fee.
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Your monthly account statement will reflect systematic investment transactions,
and a debit entry will appear on your bank statement.
- - TELEPHONE TRANSACTIONS. You can initiate any transaction by telephone. You
may call the Transfer Agent toll-free at 800-539-3863 or call your Investment
Professional or bank trust department. See "Shareholder Account Rules and
Policies" for more information about telephone transactions.
- - THE SYSTEMATIC WITHDRAWAL PLAN. You can make regular withdrawals from your
account in any fund of the Victory Group with the Systematic Withdrawal Plan by
completing the appropriate section of the account application. If you own
shares in a fund worth $5,000 or more, you can have monthly, quarterly,
semi-annual or annual checks sent from your account directly to you, to a
person named by you, or to your bank checking account. The required minimum
withdrawal is $25. If you are having checks sent to your bank checking
account, attach a voided personal check with your bank's magnetic coding number
across the front of the account application. If your account is jointly owned,
be sure that all owners sign the application. You may obtain information about
the Systematic Withdrawal Plan by contacting your Investment Professional.
Your Systematic Withdrawal Plan payments are drawn from share redemptions. If
Systematic Withdrawal Plan redemptions exceed dividend distributions paid on
your Fund shares, your account eventually may be exhausted. If any applicable
sales charges are applied to new purchases of shares of the Fund, it is to your
disadvantage to buy shares of the Fund while also making systematic
redemptions.
Your account will be debited on the date you indicate on your Account
Application. Shares will be redeemed at the NAV as determined on the debit
date indicated on your Account Application. You may cancel the Systematic
Withdrawal Plan at any time without payment of a cancellation fee. Each
Systematic Withdrawal Plan transaction will appear as a debit entry on your
monthly account statement.
- - RETIREMENT PLANS. Retirement plans can be among the best tax-planning
vehicles available to individuals. Call your Investment Professional for more
information on the plans and their benefits, provisions and fees. Your
Investment Professional can set up your new account in the Fund under one of
several tax-sheltered plans. These plans let you invest for retirement and
shelter your investment income from current taxes. Plans include Individual
Retirement Accounts (IRAs) and Rollover IRAs. Other fees may be charged by the
IRA custodian or trustee.
HOW TO REDEEM SHARES
You may redeem all or a portion of your shares on any day that the Fund is open
for business (see "Net Asset Value per Share" below). Shares will be redeemed
at the NAV next calculated after the Transfer Agent has received the redemption
request. If the Fund account is closed, any accrued dividends will be paid at
the beginning of the following month.
You may redeem shares in several ways:
BY MAIL: Send a written request to: The Victory Portfolios: Government Bond Fund
P.O. Box 9741
Providence, RI 02940-9741
Write a "letter of instruction" with your name, the Fund's name, your Fund
account number, the dollar amount or number of shares to be redeemed, and any
additional requirements that apply to each particular account. You will need
the letter of instruction signed by all persons required to sign for
transactions, exactly as their names appear on the account application. A
signature guarantee is required if: you wish to redeem more than $10,000 worth
of shares; your Fund account registration has changed within the last 60 days;
the check is not being mailed to the address on your account; the check is not
being made out to the account owner; or the redemption proceeds are being
transferred to another Victory Group account with a different registration.
The following institutions should be able to provide you with a signature
guarantee: banks, brokers, dealers, credit unions (if authorized under state
law), securities exchanges and associations, clearing agencies, and savings
associations. A signature guarantee may not be provided by a notary public. A
signature
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guarantee is designed to protect you, the Fund, and its agents from fraud. The
Transfer Agent reserves the right to reject any signature guarantee if (1) it
has reason to believe that the signature is not genuine, (2) it has reason to
believe that the transaction would otherwise be improper, or (3) the guarantor
institution is a broker or dealer that is neither a member of a clearing
corporation nor maintains net capital of at least $100,000.
BY WIRE: You may make redemptions by wire provided you have established a Fund
account to accommodate wire transactions. If telephone instructions are
received before Valuation Time (generally 4:00 p.m. Eastern time), proceeds of
the redemption will be wired as federal funds on the next Business Day to the
bank account designated with the Transfer Agent. You may change the bank
account designated to receive an amount redeemed at any time by sending a
letter of instruction with a signature guarantee to the Transfer Agent, Primary
Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741.
BY TELEPHONE: To redeem by telephone, you may call the Transfer Agent toll
free at 800-539-3863 or call your Investment Professional or bank trust
department. See "Shareholder Account Rules and Policies" for more information
about telephone transactions.
ADDITIONAL REDEMPTION REQUIREMENTS: The Fund may withhold payment on
redemptions until it is reasonably satisfied that investments made by check
have been collected, which can take up to 15 days. Also, when the NYSE is
closed (or when trading is restricted) for any reason other than its customary
weekend or holiday closings, or under any emergency circumstances as determined
by the Commission to merit such action, the right of redemption may be
suspended or the date of payment postponed for a period of time that may exceed
7 days. In addition, the Fund reserves the right to advance the time on that
day by which purchase and redemption orders must be received. To the extent
that portfolio securities are traded in other markets on days when the NYSE is
closed, the Fund's NAV may be affected on days when investors do not have
access to the Fund to purchase or redeem shares.
If you are unable to reach the Transfer Agent by telephone (for example, during
times of unusual market activity), consider placing your order by mail directly
to the Transfer Agent. In case of suspension of the right of redemption, you
may either withdraw your request for redemption or receive payment based on the
NAV next determined after the termination of the suspension. If your balance
in the Fund falls below $500, you may be given 60 days' notice to reestablish
the minimum balance (except with respect to officers, trustees, directors and
employees, including retired directors and employees, of the Victory
Portfolios, KeyCorp and its affiliates, and the Administrator and its
affiliates (and family members of each of the foregoing, i.e., parents,
children and household members) participating in the Systematic Investment
Plan, to whom no minimum balance requirement applies). If you do not increase
your balance, your account may be closed and the proceeds mailed to you at the
address on record. Shares will be redeemed at the last calculated NAV on the
day the account is closed.
HOW TO EXCHANGE SHARES
Shares of the Fund may be exchanged for shares of certain funds of the Victory
Group at net asset value per share at the time of exchange, without a sales
charge. To exchange shares, you must meet several conditions:
- - Shares of the fund selected for exchange must be available for sale in
your state of residence.
- - The prospectuses of this Fund and the fund whose shares you want to
buy must offer the exchange privilege.
- - You must hold the shares you buy when you establish your account for
at least 7 days before you can exchange them; after the account is
open 7 days, you can exchange shares every regular Business Day.
- - You must meet the minimum purchase requirements for the fund you
purchase by exchange.
- - The registration and tax identification numbers of the two accounts
must be identical.
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- - Before exchanging into a fund, obtain and read its prospectus.
Shares of a particular class may be exchanged only for shares of the same class
in the other funds of the Victory Group. For example, you can exchange Class A
shares of this Fund only for Class A shares of another fund. At present, not
all of the funds offer the same two classes of shares. If a fund has only one
class of shares that does not have a class designation, they are "Class A"
shares for exchange purposes. In some cases, sales charges may be imposed on
exchange transactions. Certain funds offer Class A or Class B shares and a
list can be obtained by calling the Transfer Agent at 800-539-3863. Please
refer to the Statement of Additional Information for more details about this
policy.
Telephone exchange requests may be made either by calling your Investment
Professional or the Transfer Agent at 800-539-3863 prior to valuation time
(generally 4:00 p.m. Eastern time) on any Business Day.
You can obtain a list of eligible funds of the Victory Group by calling the
Transfer Agent at 800-539-3863. Exchanges of shares involve a redemption of
the shares of the Fund and a purchase of shares of the other fund.
There are certain exchange policies you should be aware of:
- - Shares are normally redeemed from one fund and purchased from the other fund
in the exchange transaction on the same Business Day on which the Transfer
Agent receives an exchange request by Valuation Time (generally 4:00 p.m.
Eastern time) that is in proper form, but either fund may delay the purchase of
shares of the fund into which you are exchanging if it determines it would be
disadvantaged by a same-day transfer of the proceeds to buy shares. For
example, the receipt of multiple exchange requests from a dealer in a
"market-timing" strategy might require the disposition of securities at a time
or price disadvantageous to the Fund.
- - Because excessive trading can hurt fund performance and harm shareholders,
the Victory Portfolios reserves the right to refuse any exchange request that
will disadvantage it, or to refuse multiple exchange requests submitted by a
shareholder or dealer.
- - The Fund may amend, suspend or terminate the exchange privilege at any time
upon 60 days' written notice to shareholders.
- - If the Transfer Agent cannot exchange all the shares you request because of
a restriction cited above, only the shares eligible for exchange will be
exchanged.
- - Each exchange may produce a gain or loss for tax purposes.
Shareholders of the former Investors Preference Fund for Income, Inc. and
Investors Preference New York Tax-Free Fund, Inc. will not be subject to any
additional sales load upon an exchange of shares attributable to an Investors
Preference Funds account for shares of other funds of the Victory Portfolios.
SHAREHOLDER ACCOUNT RULES AND POLICIES
- - NET ASSET VALUE PER SHARE. The term "net asset value per share," or "NAV",
means the value of one share. The NAV of each class of shares is calculated by
adding the value of all of the Fund's investments, plus cash and other assets,
deducting expenses and liabilities, of the Fund and of the class, and then
dividing the result by the number of shares of the Class outstanding. The NAV
of the Fund is determined as of the close of regular trading of the New York
Stock Exchange (NYSE) (generally 4:00 p.m. Eastern Time) (the "Valuation
Time") on each Business Day of the Fund. A "Business Day" is a day on which the
NYSE is open for trading, the Federal Reserve Bank of Cleveland is open, and
any other day (other than a day on which no shares of the Fund are tendered for
redemption and no order to purchase any shares is received) during which there
is sufficient trading in its portfolio instruments that the Fund's net asset
value per share might be materially affected. The NYSE or the Federal Reserve
Bank of Cleveland will not be open in observance of the following holidays: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
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Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans' Day,
Thanksgiving Day, and Christmas Day.
The Fund's securities are valued primarily on the basis of market quotations
or, if quotations are not readily available, by a method that the Board of
Trustees believes accurately reflects fair value. Fair value of these
portfolio securities is determined by an independent pricing service approved
by the Trustees based primarily upon information concerning market transactions
and dealers quotations for similar securities.
- - THE OFFERING OF SHARES may be suspended during any period in which the
determination of net asset value is suspended, and the offering may be
suspended by the Trustees at any time the Trustees believe it is in the Fund's
best interest to do so.
- - TELEPHONE TRANSACTION PRIVILEGES for purchases, redemptions or exchanges may
be modified, suspended or terminated by the Fund at any time. If an account
has more than one owner, the Fund and the Transfer Agent may rely on the
instructions of any one owner. Telephone privileges apply to each owner of the
account and the dealer representative of record for the account unless and
until the Transfer Agent receives cancellation instructions from an owner of
the account.
- - TELEPHONE INSTRUCTIONS. Generally, neither the Fund, the bank trust
department nor the Transfer Agent will be responsible for any claims, losses or
expenses for acting on telephone instructions that are reasonably believed to
be genuine. The Transfer Agent and the Fund will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine and if they
do not employ reasonable procedures they may be liable for any losses due to
unauthorized or fraudulent instructions. The identification procedures may
include, but are not limited to, the following: account number, registration
and address, personalized security codes, taxpayer identification number and
other information particular to the account. Your Investment Professional,
bank trust department or the Transfer Agent may also record calls, and you
should verify the accuracy of your confirmation statements immediately after
you receive them.
- - REDEMPTION OR TRANSFER REQUESTS WILL NOT BE HONORED UNTIL THE TRANSFER AGENT
RECEIVES ALL REQUIRED DOCUMENTS IN PROPER FORM. From time to time, the
Transfer Agent in its discretion may waive certain of the requirements for
redemptions stated in this Prospectus.
- - DEALERS THAT CAN PERFORM ACCOUNT TRANSACTIONS FOR THEIR CLIENTS BY
PARTICIPATING IN NETWORKING through the National Securities Clearing
Corporation are responsible for obtaining their clients' permission to perform
those transactions and are responsible to their clients who are shareholders of
the Victory Portfolios if the dealer performs any transaction erroneously.
- - THE REDEMPTION PRICE FOR SHARES WILL VARY from day to day because the value
of the securities in the Fund fluctuates, and the value of your shares may be
more or less than their original cost.
- - PAYMENT FOR REDEEMED SHARES is made ordinarily in cash and forwarded by
check within three business days after the Transfer Agent receives redemption
instructions in proper form, except under unusual circumstances determined by
the Commission delaying or suspending such payments. The Transfer Agent may
delay forwarding a check for recently purchased shares, but only until the
purchase payment has cleared. That delay may be as much as 15 days from the
date the shares were purchased. That delay may be avoided if you arrange with
your bank to provide telephone or written assurance to the Transfer Agent that
your purchase payment has cleared.
- - INVOLUNTARY REDEMPTIONS OF SMALL ACCOUNTS. If your account value has fallen
below $500, you will be given 60 days' notice to reestablish the minimum
balance. If you do not increase your minimum balance, your account may be
closed and the proceeds mailed to you at the record address. In some cases
involuntary redemptions may be made to repay the Distributor for losses from
the cancellation of share purchase orders. Under unusual circumstances, shares
of the Fund may be redeemed "in kind," which means that the redemption proceeds
will be paid
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with securities from the Fund. Please refer to the Statement of Additional
Information for more details.
- - "BACKUP WITHHOLDING" of Federal income tax may be applied at the rate of 31%
from dividends, distributions and redemption proceeds (including exchanges) if
you fail to furnish the Victory Portfolios with a certified Social Security or
taxpayer identification number when you sign your application, or if you
violate Internal Revenue Service regulations on tax reporting of dividends.
- - THE VICTORY PORTFOLIOS DOES NOT CHARGE A REDEMPTION FEE, but if your
Investment Professional handles your redemption, they may charge a separate
service fee. Under the circumstances described in "How to Invest," you may be
subject to CDSC when redeeming Class B shares.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS. The Fund ordinarily declares and pays dividends separately for
Class A and Class B shares from its net investment income monthly. The Fund
distributes substantially all net capital gains, if any, to shareholders each
year, to the extent necessary to qualify for favorable federal tax treatment.
CAPITAL GAINS. The Fund may make distributions annually out of any net
short-term or long-term capital gains, and the Fund may make supplemental
distributions of dividends and capital gains following the end of its fiscal
year.
DISTRIBUTION OPTIONS
When you fill out your account application, you can specify how you want to
receive your dividend distributions. Currently, there are five available
options:
1. REINVESTMENT OPTION. Your income and capital gain dividends, if any,
will be automatically reinvested in additional shares of the Fund.
Income and capital gain dividends will be reinvested at the net asset
value of your class of shares of the Fund as of the day after the
record date. If you do not indicate a choice on your application, you
will be assigned this option.
2. CASH OPTION. You will receive a check for each income or capital gain
dividend, if any. Distribution checks will be mailed no later than 7
days after the dividend payment date which may be more than 7 days
after the dividend record date.
3. INCOME EARNED OPTION. You will have your capital gain dividend
distributions, if any, reinvested automatically in the Fund and have
your income dividends paid in cash.
4. DIRECTED DIVIDENDS OPTION. You will have income and capital gain
dividends, or only capital gain dividends, automatically reinvested in
shares of another fund of the Victory Group. Shares will be purchased
at the NAV as of the dividend record date. If you are reinvesting
dividends of a fund sold without a sales charge in shares of a fund
sold with a sales charge, the shares will be purchased at the public
offering price. If you are reinvesting dividends of a fund sold with
a sales charge in shares of a fund sold with or without a sales
charge, the shares will be purchased at the net asset value of the
fund. Dividend distributions can be directed only to an existing
account with a registration that is identical to that of your Fund
account.
5. DIRECTED BANK ACCOUNT OPTION. You will have your income and capital
gain dividends, or only your income dividends, automatically
transferred to your bank checking or savings account. The amount will
be determined on the dividend record date and will normally be
transferred to your account within 7 days of the dividend record date.
Dividend distributions can be directed only to an existing account
with a registration that is identical to that of your Fund account.
Please call or write the Transfer Agent to learn more about this
dividend distribution option.
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Any election or revocation of any of the above dividend distribution options
may be made in writing to the Fund and sent to Primary Funds Service
Corporation, P.O. Box 9741, Providence, RI 02940-9741, or by calling the
Transfer Agent at 800-539-3863, and will become effective with respect to
dividends having record dates after receipt of the application or request by
the Transfer Agent.
Reinvested dividend distributions receive the same tax treatment as dividend
distributions paid in cash.
COMPLETE REDEMPTIONS: If you request a complete redemption of all your Fund
shares, any dividend accrued to your account will be included in the redemption
check.
STATEMENTS AND REPORTS: You will receive a monthly statement reflecting all
transactions that affect the share balance or the registration of your Fund
account. You will receive a confirmation after every transaction that affected
the share balance of your Fund account, except for dividend reinvestment,
systematic investment and systematic withdrawal transactions. These
transactions will be detailed in your Fund account statement. Transactions
that affect the share balance of your Fund investment in an account established
with an Investment Professional or financial institution will be detailed in
regular statements or through confirmation procedures of the financial
institution. Certificates representing shares of the Fund will not be issued.
An IRS Form 1099-DIV with federal tax information will be mailed to you by
January 31 of each tax year and also will be filed with the IRS. At least
twice a year, you will receive the Fund's financial reports.
FEDERAL TAXES
The Fund intends to qualify each year and elect to be treated as a separate
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "IRS Code"). If the Fund is treated as a "regulated
investment company" and all its taxable income is distributed to its
shareholders in accordance with the timing requirements imposed by the IRS
Code, it will not be subject to federal income tax on its income. The Fund's
distributions that are attributable to its net investment income and short-term
capital gains are taxable as ordinary income, and its distributions from
long-term capital gains are taxed as long-term capital gains. Such
distributions are taxable when they are paid, whether taken in cash or
reinvested in additional shares, except that distributions declared in October,
November or December and paid during the following January are taxable as if
paid and received on December 31. Dividends received from the Fund by
corporate shareholders are not entitled to the dividends-received deduction.
The Fund sends tax statements to its shareholders (with copies to the Internal
Revenue Service (the "IRS")) by January 31 showing the amounts and tax status
of distributions made (or deemed made) during the preceding calendar year.
REDEMPTION OR EXCHANGES
Investors may realize a gain or loss when redeeming (selling) or exchanging
shares. For most types of accounts, the Fund reports the proceeds to the IRS
annually. Because the shareholders' tax treatment also depends on their
purchase price and personal tax positions, shareholders should keep their
regular account statements to use in determining their tax. See "Buying a
Dividend."
"BUYING A DIVIDEND"
On the record date for a distribution of ordinary income or capital gains
dividend, the net asset value of the Fund is reduced by the amount of the
distribution. An investor who buys shares just before the record date ("buying
a dividend") will pay the full price for the shares and then receive a portion
of the purchase price back as a taxable distribution.
OTHER TAX INFORMATION
The information above is only a summary of some of the federal income tax
consequences generally affecting the Fund and its shareholders, and no attempt
has been made to discuss individual tax consequences. A prospective investor
should also review the more detailed discussion of federal income tax
considerations in the Statement of Additional Information. In addition to
federal income tax, a shareholder may be subject to state or local taxes on
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the shareholder's investment, depending on the laws in the shareholder's area.
Investors considering an investment in the Fund should consult their tax
adviser to determine whether the Fund is suitable to their particular tax
situation.
When investors sign their account application, they are asked to provide their
correct social security or taxpayer identification number and other required
certifications. If investors do not comply with IRS regulations, the IRS can
require the Fund to withhold 31% of taxable distributions and redemptions from
their account.
PERFORMANCE
From time to time, performance information for each class of shares of the Fund
showing total return of each class of shares may be presented in
advertisements, sales literature and in reports to shareholders. Such
performance figures are based on historical earnings and are not intended to
indicate future performance. Average annual total return will be calculated
over a stated period of more than one year. Average annual total return is
measured by comparing the value of an investment in a class at the beginning of
the relevant period (as adjusted for sales charges, if any) to the redemption
value of the investment at the end of the period (assuming immediate
reinvestment of any dividends or capital gains distributions) and annualizing
that figure. Aggregate total return is calculated similarly to average annual
total return, except that the resulting difference is not annualized.
From time to time performance information for each class of shares of the Fund
showing the yield and/or effective yield for each class of shares may also be
presented in advertisements, sales literature and in reports to shareholders.
Yields for Class A shares reflect the deduction of the maximum sales charge.
Yields for Class B shares do not reflect the deduction of the CDSC. Such
performance figures are based on historical earnings and are not intended to
indicate future performance. Yield will be computed by dividing the Fund's net
investment income per share earned during a recent thirty-day period by the
Fund's maximum offering price per share (reduced by any undeclared earned
income expected to be paid shortly as a dividend) on the last day of the period
and annualizing the result. Effective yield is computed in a similar manner,
but, when annualized, the income earned by an investment in the Fund is assumed
to be reinvested. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
Investors may also judge, and the Victory Portfolios may at times advertise,
the performance of the Fund by comparing it to the performance of other mutual
funds with comparable investment objectives and policies, which performance may
be contained in various unmanaged mutual fund or market indices or rankings
such as those prepared by Dow Jones & Co., Inc. and Standard & Poor's
Corporation, in publications issued by Lipper Analytical Services, Inc., and in
the following publications: IBC/Donoghue's Money Fund Reports, Ibbotson
Associates, Inc., Morningstar, CDA/Wiesenberger, Money Magazine, Forbes,
Barron's, The Wall Street Journal, The New York Times, Business Week, American
Banker, Fortune, Institutional Investor, U.S.A. Today and local newspapers.
In addition, general information about the Fund that appears in publications
such as those mentioned above may also be quoted or reproduced in
advertisements, sales literature or in reports to shareholders.
Performance is a function of the type and quality of instruments held in the
Fund's portfolio, operating expenses, and market conditions. Consequently,
current performance will fluctuate and is not necessarily representative of
future results. Any fees charged by service providers with respect to customer
accounts for investing in shares of the Fund will not be reflected in
performance calculations.
Additional information regarding the performance of each of the Victory
Portfolios is included in the Victory Portfolios' annual report, which is
available free of charge by calling 800-539-3863.
The Predecessor Fund's Annual Report to shareholders dated April 30, 1995,
includes additional information about the performance of the Predecessor Fund.
The annual report is available without charge upon request by calling
800-539-3863.
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FUND ORGANIZATION AND FEES
The Victory Portfolios is an open-end management investment company, commonly
known as a mutual fund, and currently consisting of twenty-eight series
portfolios, four of which are inactive. The Victory Portfolios has been
operating continuously since 1986, when it was created under Massachusetts law
as a Massachusetts business trust, although certain of its funds have a prior
operating history from their predecessor funds. On February 29, 1996, the
Victory Portfolios converted from a Massachusetts business trust to a Delaware
business trust. The Victory Portfolios' offices are located at 3435 Stelzer
Road, Columbus, OH 43219-3035.
REORGANIZATION WITH PREDECESSOR FUND
The Predecessor Fund was a portfolio of The Victory Funds. On April 28, 1995,
the Shareholders of the Predecessor Fund approved an Agreement and Plan of
Reorganization (the "Reorganization Plan"). Under the Reorganization Plan, the
Predecessor Fund transferred all its assets and liabilities to the Fund in
exchange for shares of the Fund, which were distributed pro rata to
shareholders of the Predecessor Fund, who then became shareholders of the Fund
(the "Reorganization"). The Predecessor Fund has ceased operations. The Fund
had no assets and did not begin operations until the Reorganization occurred.
Overall responsibility for management of the Victory Portfolios rests with its
Board of Trustees, who are elected by the shareholders of the Victory
Portfolios.
INVESTMENT ADVISER AND SUB-ADVISER
Key Advisers is the investment adviser to the Fund. Key Advisers directs the
investment of the Victory Portfolios' assets, subject at all times to the
supervision of the Victory Portfolios' Board of Trustees. Key Advisers
continually supervises the investment and reinvestment of cash, securities and
other property comprising the assets of the Victory Portfolios.
Key Advisers was organized as an Ohio corporation on July 27, 1995 and is
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended. It is a wholly-owned subsidiary of KeyCorp Asset Management
Holdings, Inc., which is a wholly-owned subsidiary of Society National Bank, a
wholly-owned subsidiary of KeyCorp. Affiliates of Key Advisers manage
approximately $37 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals and mutual funds.
For the services provided and expenses incurred pursuant to its investment
advisory agreement with the Victory Portfolios respecting the Fund, Key
Advisers receives a fee, computed daily and paid monthly, at the annual rate of
fifty-five one-hundredths of one percent (.55%) of the average daily net assets
of the Fund. The advisory fees for the Fund have been determined to be fair
and reasonable in light of the services provided to the Fund. Key Advisers may
periodically waive all or a portion of its advisory fee with respect to the
Fund to increase the net income of the Fund available for distribution as
dividends. Prior to January 1, 1996, the Sub-Adviser (Society Asset
Management, Inc.) served as investment adviser to the Fund. During the Fund's
fiscal period ended October 31, 1995, the Sub-Adviser received investment
advisory fees aggregating .20% and .38% of the average daily net assets for
Class A shares and Class B shares, respectively.
Under the investment advisory agreement between the Victory Portfolios, on
behalf of the Fund, and Key Advisers, Key Advisers may delegate a portion of
its responsibilities to a subadviser. In addition, the investment advisory
agreement provides that Key Advisers may render services through its own
employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser of the Fund and are under the common
control of KeyCorp as long as all such persons are functioning as part of an
organized group of persons, managed by authorized officers of Key Advisers.
Key Advisers has entered into an investment sub-advisory agreement with its
affiliate, Society Asset Management, Inc., a registered investment adviser, on
behalf of each Fund.
24
<PAGE> 82
The Sub-Adviser is a wholly-owned subsidiary of KeyCorp Asset Management
Holdings, Inc. For its services under the investment sub-advisory agreement,
Key Advisers pays the Sub-Adviser sub-advisory fees as a percentage of average
daily net assets as follows: .40% of the first $10 million of average daily net
assets; .30% of the next $15 million of average daily net assets; .25% of the
next $25 million of average daily net assets; and .20% of average daily net
assets in excess of $50 million.
The person primarily responsible for the investment management of the Fund as
well as his previous experience is as follows:
<TABLE>
<CAPTION>
Managing Previous
Portfolio Manager Portfolio Since Experience
----------------- --------------- ----------
<S> <C> <C>
Robert H. Fernald March, 1994 Vice President, Society Asset Management, Inc.;
Portfolio manager with Society Asset Management,
Inc. since 1993 and with Society National Bank
since 1992; Portfolio manager, Ameritrust
Company National Association 1991-1992;
formerly, Vice President, Fairfield Research
Corporation.
</TABLE>
ADMINISTRATOR AND DISTRIBUTOR
Concord Holding Corporation is the Administrator for the Fund. Victory
Broker-Dealer Services, Inc. is the Fund's principal underwriter and
Distributor.
The Administrator generally assists in all aspects of the Fund's administration
and operation. For expenses incurred and services provided as Administrator
pursuant to its management and administration agreement with the Victory
Portfolios, the Administrator receives a fee from the Fund, computed daily and
paid monthly, at an annual rate of fifteen one-hundredths of one percent (.15%)
of the Fund's average daily net assets. The Administrator may periodically
waive all or a portion of its administrative fee with respect to the Fund to
increase the net income of the Fund available for distribution as dividends.
During the fiscal year ended October 31, 1995, the Fund paid administration
fees of .__% of its average daily net assets.
TRANSFER AGENT AND FUND ACCOUNTANT
Primary Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741,
serves as the Fund's Transfer Agent pursuant to a Transfer Agency and
Shareholder Service Agreement with the Victory Portfolios and receives a fee
for such services based on a percentage of the average daily net assets of the
Fund. BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, OH 43219,
provides certain accounting services for the Fund pursuant to a Fund Accounting
Agreement and receives a fee for such services.
SHAREHOLDER SERVICING
Shareholder services are provided to the Fund pursuant to agreements between
the Victory Portfolios and various shareholder servicing agents, including Key
Trust Company of Ohio, N.A. and its affiliates and other financial institutions
and securities brokers (each a "Shareholder Servicing Agent"). Each
Shareholder Servicing Agent generally will provide support services to
shareholders by establishing and maintaining accounts and records, processing
dividend and distribution payments, providing account information, arranging
for bank wires, responding to routine inquiries, forwarding shareholder
communication, assisting in the processing of purchase, exchange and redemption
requests, and assisting shareholders in changing dividend options, account
designations and addresses. For expenses incurred and services provided as
Shareholder Servicing Agent pursuant to its respective Shareholder Servicing
Agreement, the Fund pays each Shareholder Servicing Agent a fee computed daily
and
25
<PAGE> 83
paid monthly, in amounts aggregating not more than twenty-five one-hundredths
of one percent (.25%) of the average daily net assets of the Fund per year. A
Shareholder Servicing Agent may periodically waive all or a portion of its
respective shareholder servicing fees with respect to the Fund to increase the
net income of the Fund available for distribution as dividends. For the fiscal
period ended October 31, 1995, the Fund paid Shareholder Servicing fees of __%
for Class A shares and ___% for Class B shares.
EFFECT OF BANKING LAWS
Key Advisers and the Sub-Adviser believe that they may perform the investment
advisory services for the Fund contemplated by the investment advisory (and
sub-advisory) agreements (the "Advisory Agreements") for the Fund. In the
Advisory Agreements, Key Advisers and the Sub-Adviser have represented that
they possess the legal authority to perform the investment advisory services
contemplated therein and described in this Prospectus. Key Trust Company of
Ohio, N.A. and its affiliates also believe that they also may perform the
services for the Victory Portfolios contemplated by the Shareholder Servicing
Agreement with the Victory Portfolios without violating applicable banking laws
and regulations. Future changes in federal or state statutes and regulations
relating to permissible activities of banks or bank holding companies and their
subsidiaries and affiliates, as well as further judicial or administrative
decisions or interpretations of present and future statutes and regulations,
could change the manner in which Key Advisers, the Sub-Adviser, Key Trust
Company of Ohio, N.A. and its affiliates could continue to perform such
services for the Victory Portfolios. See the Statement of Additional
Information ("Glass-Steagall Act") for further discussion.
BUSINESS MANAGEMENT AGREEMENT
In connection with its obligations under its investment sub-advisory agreement
with Key Advisers, the Sub-Adviser has entered into a Business Management
Agreement with Key Advisers pursuant to which Key Advisers provides certain
administrative and support services to the Sub-Adviser. Such services include
preparing reports to the Company's Board of Trustees, recordkeeping services,
and services rendered in connection with the preparation of regulatory filings
and other reports, and regulatory and compliance systems and other
administrative and support services.
For such services, the Sub-Adviser pays fees to Key Advisers at an annual rate
as follows: .25% on the first $10 million of average daily net assets; .15% of
the next $15 million of average daily net assets; .10% of the next $25 million
of average daily net assets; and .05% of average daily net assets in excess of
$50 million.
EXPENSES
For the fiscal period ended October 31, 1995, the Fund's total operating
expenses were .__% and ____% for Class A shares and Class B shares,
respectively.
CUSTODIAN
Key Trust Company of Ohio, N.A. serves as custodian for the Fund and receives
fees for its services.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. serves as the Fund's independent accountants.
26
<PAGE> 84
ADDITIONAL INFORMATION
The Victory Portfolios may issue an unlimited number of shares and classes of
the Fund. Shares of each class of the Fund participate equally in dividends
and distributions and have equal voting, liquidation and other rights. When
issued and paid for, shares will be fully paid and nonassessable by the Victory
Portfolios and will have no preference, conversion, exchange or preemptive
rights. Shareholders are entitled to one vote for each full share owned and
fractional votes for fractional shares owned. For those investors with
qualified trust accounts established with affiliates of the Adviser, the
trustee will vote the shares at meetings of the Fund's shareholders in
accordance with the shareholder's instructions or will vote in the same
percentage as shares that are not held in trust. The trustee will forward to
these shareholders all communications received by the trustee, including proxy
statements and financial reports. The Victory Portfolios and the Fund are not
required to hold annual meetings of shareholders and in ordinary circumstances
do not intend to hold such meetings. The Trustees may call special meetings of
shareholders for action by shareholder vote as may be required by the 1940 Act
or the Victory Portfolios' Delaware Trust Instrument. Under certain
circumstances, the Trustees may be removed by action of the Trustees or by the
shareholders. Shareholders holding 10% or more of the Victory Portfolios'
outstanding shares may call a special meeting of shareholders for the purpose
of voting upon the question of removal of Trustees.
The Victory Portfolio's Board of Trustees may authorize the Victory Portfolios
to offer other funds which may differ in the types of securities in which their
assets may be invested.
Key Advisers, the Sub-Adviser and the Victory Portfolios have adopted Codes of
Ethics ( the "Codes") which require investment personnel (a) to pre-clear all
personal securities transactions, (b) to file reports regarding such
transactions, and (c) to refrain from personally engaging in (i) short-term
trading of a security, (ii) transactions involving a security within seven days
of a Victory fund transaction involving the same security, and (iii)
transactions involving securities being considered for investment by a Victory
fund. The Codes also prohibit investment personnel from purchasing securities
in an initial public offering. Personal trading reports are reviewed
periodically by Key Advisers or the Sub-Adviser, and the Board of Trustees
reviews annually such reports (including information on any substantial
violations of the Codes). Violations of the Codes may result in censure,
monetary penalties, suspension or termination of employment.
DELAWARE LAW
The Delaware Business Trust Act provides that a shareholder of a Delaware
business trust shall be entitled to the same limitation of personal liability
extended to stockholders of Delaware corporations. In light of Delaware law,
the nature of the Victory Portfolios' business, and the nature of its assets,
management of the Victory Portfolios believes that the risk of personal
liability to a Fund shareholder would be extremely remote.
In the unlikely event a shareholder is held personally liable for the Victory
Portfolios' obligations, the Victory Portfolios is required to use its property
to protect or compensate the shareholder. On request, the Victory Portfolios
will defend any claim made and pay any judgment against a shareholder for any
act or obligation of the Victory Portfolios. Therefore, financial loss
resulting from liability as a shareholder will occur only if the Victory
Portfolios itself cannot meet its obligations to indemnify shareholders and pay
judgments against them.
Delaware law authorizes electronic or telephonic communications between
shareholders and the Victory Portfolios. Under Delaware law, the Successor
Company has the flexibility to respond to future business contingencies. For
example, the Trustees will have the power to incorporate the Victory
Portfolios, to merge or consolidate it with another entity, to cause each fund
to become a separate trust, and to change the Victory Portfolios' domicile
without a shareholder vote. This flexibility could help reduce the expense and
frequency of future shareholder meetings for non-investment related issues.
27
<PAGE> 85
MISCELLANEOUS
Shareholders will receive Semi-Annual Reports, which are unaudited, and Annual
Reports, which are audited by independent public accountants, describing the
investment operations of the Fund. Each of these reports, when available for a
particular fiscal year end or the end of a semi-annual fiscal period, is
incorporated herein by reference. The Victory Portfolios may include
information in their Annual Reports and Semi-Annual Reports to shareholders
that (i) describes general economic trends, (ii) describes general trends
within the financial services industry or the mutual fund industry, (iii)
describes past or anticipated portfolio holdings for the Fund or (iv) describes
investment management strategies for the Victory Portfolios. Such information
is provided to inform shareholders of the activities of the Victory Portfolios
for the most recent fiscal year or semi-annual fiscal period and to provide the
views of Key Advisers, the Sub-Adviser and/or the Victory Portfolios' officers
regarding expected trends and strategies.
Inquiries regarding the Victory Portfolios or the Fund may be directed in
writing to the Victory Portfolios at Primary Funds Service Corporation, P.O.
Box 9741, Providence, RI 02940-9741, or by telephone, toll-free, at
800-539-3863.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
VICTORY PORTFOLIOS OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFERING BY THE VICTORY PORTFOLIOS OR BY THE DISTRIBUTOR IN ANY JURISDICTION
IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
28
<PAGE> 86
The
VICTORY
Portfolios
THE VICTORY GOVERNMENT MORTGAGE FUND
PROSPECTUS For current yield, purchase, and redemption information,
March 1, 1996 call 800-539-FUND or 800-539-3863
THE VICTORY PORTFOLIOS (the "Victory Portfolios") is a registered open-end
management investment company that offers investors a selection of money market,
fixed-income, municipal bond, domestic and international equity portfolios. This
Prospectus relates to the Victory Government Mortgage Fund (the "Fund") a
diversified portfolio. KeyCorp Mutual Fund Advisers, Inc., Cleveland, Ohio, an
indirect subsidiary of KeyCorp, is the investment adviser to the Fund ("Key
Advisers" or the "Adviser"). Society Asset Management, Inc., Cleveland, Ohio, an
indirect subsidiary of KeyCorp, is the investment sub-adviser to the Fund (the
"Sub-Adviser" or "Society"). Concord Holding Corporation is the Fund's
administrator (the "Administrator"). Victory Broker-Dealer Services, Inc. is the
Fund's distributor (the "Distributor").
The Victory Government Mortgage Fund seeks to provide a high level of current
income consistent with safety of principal. The Fund pursues this objective by
investing exclusively in obligations issued or guaranteed by the U.S. Government
or its agencies or instrumentalities.
Please read this Prospectus before investing. It is designed to provide you with
information and to help you decide if the Fund's goals match your own. Retain
this document for future reference. A Statement of Additional Information (dated
March 1, 1996) for the Fund and an annual report for the Fund's fiscal year
ended October 31, 1995 has been filed with the Securities and Exchange
Commission and is incorporated herein by reference. The Statement of Additional
Information is available without charge upon request by calling 800-539-3863.
SHARES OF THE FUND ARE:
- - NOT INSURED BY THE FDIC;
- - NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY KEYCORP
BANK, ANY OF ITS AFFILIATES, OR ANY OTHER BANK;
- - SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("COMMISSION") OR ANY SECURITIES REGULATORY AUTHORITY OF ANY
STATE, NOR HAS THE COMMISSION OR ANY SUCH STATE AUTHORITY PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE> 87
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
- ----------------- ----
<S> <C>
Summary of Fund Expenses 3
Financial Highlights 4
The Fund's Investment Objective 5
The Fund's Investment Policies and Risk Factors 5
How to Invest, Exchange and Redeem 9
Dividends, Distributions and Taxes 19
Performance 21
Fund Organization and Fees 22
Additional Information 25
</TABLE>
2
<PAGE> 88
SUMMARY OF FUND EXPENSES
The table below summarizes the expenses associated with the Fund. This standard
format was developed for use by all mutual funds to help you make your
investment decisions. Of course, you should consider this expense information
along with other important information in this Prospectus, including the Fund's
investment objective, investment policies and risk factors, and financial
highlights.
SHAREHOLDER TRANSACTION EXPENSES(1)
<TABLE>
<S> <C>
Maximum Sales Load Imposed on Purchases (as a
percentage of offering price) 4.75%
Maximum Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES AFTER EXPENSE WAIVERS AND REIMBURSEMENTS (as a
percentage of average net assets)
<TABLE>
<S> <C>
Management Fees .50%
Administration Fee .15%
Other Expenses(2) .21%
----
Total Fund Operating Expenses(2) .86%
====
</TABLE>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return and (2) full redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Government Mortgage Fund $56 $74 $93 $149
</TABLE>
(1) Subsidiaries, correspondents, affiliate banks, and non-bank affiliates
of KeyCorp may charge a customer's account fees for services provided
in connection with investment in the Fund. (See "How To Invest,
Exchange and Redeem.")
(2) These amounts include an estimate of the shareholder servicing fees the
Fund expects to pay. (See "Fund Organization and Fees - Shareholder
Servicing".)
The purpose of the table above is to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. The foregoing example is based upon expenses for the fiscal year
ended October 31, 1995 and expenses that the Fund is expected to incur during
the current fiscal year. THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN.
3
<PAGE> 89
FINANCIAL HIGHLIGHTS
THE FUND'S FINANCIAL HISTORY
The table below sets forth certain financial information with respect to the
financial highlights for the Fund for the periods indicated. The information
below (except for the six months ended April 30, 1995) has been derived from
financial statements audited by Coopers & Lybrand L.L.P., independent public
accountants for the Victory Portfolios, whose report thereon is included in the
Statement of Additional Information.
THE VICTORY GOVERNMENT MORTGAGE FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
May 18, 1990 to
October 31,
1994 1993 1992 1991 1990(a)
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period $ 11.36 $ 11.07 $ 10.73 $ 10.18 $ 10.00
-------- -------- ------- ------- -------
INVESTMENT ACTIVITIES:
Net investment income 0.68 0.66 0.74 0.80 0.35
Net realized and unrealized
gains (losses) on investments (1.02) 0.32 0.34 0.55 0.18
-------- -------- ------- ------- -------
Total from Investment Activities (0.34) 0.98 1.08 1.35 0.53
-------- -------- ------- ------- -------
Distributions
Net investment income (0.67) (0.66) (0.74) (0.80) (0.35)
Net realized gains (0.02) (0.03)
-------- --------
Total Distributions (0.69) (0.69) (0.74) (0.80) (0.35)
-------- -------- ------- ------- -------
Net Asset Value, End
of Period $ 10.33 $ 11.36 $ 11.07 $ 10.73 $ 10.18
======== ======== ======= ======= =======
TOTAL RETURN (3.01)% 9.05% 10.34% 13.77% 5.37%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $148,168 $132,738 $73,660 $42,616 $31,972
Ratio of expenses to
average net assets 0.76% 0.75% 0.77% 0.78% 0.82%(b)
Ratio of net investment
income to average net assets 6.38% 5.92% 6.82% 7.68% 7.98%(b)
Ratio of expenses to
average net assets* 0.96% 0.76%
Ratio of net investment
income to average net assets* 6.18% 5.92%
Portfolio turnover 131.63% 50.18% 11.19% 20.70%
</TABLE>
- ---------
4
<PAGE> 90
<TABLE>
<CAPTION>
Year Ended Six Months
October 31, Ended
1995 April 30, 1995
---- --------------
(Unaudited)
<S> <C> <C>
Net Asset Value, Beginning
of Period [To be inserted] $10.33
INVESTMENT ACTIVITIES:
Net investment income 0.36
Net realized and unrealized
gains (losses) on investments 0.32
--------
Total from Investment Activities 0.68
--------
Distributions
Net investment income (0.37)
Net realized gains (0.08)
---------
Total Distributions (0.45
--------
Net Asset Value, End
of Period $ 10.56
=======
TOTAL RETURN 6.64%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $143,435
Ratio of expenses to
average net assets 0.77%(c)
Ratio of net investment
income to average net assets 6.99%(c)
Ratio of expenses to
average net assets* 0.79%(c)
Ratio of net investment
income to average net assets* 6.97%(c)
Portfolio turnover 24.12%
</TABLE>
* During the period the investment advisory, administration and/or
shareholder service fees were voluntarily reduced. If such voluntary fee
reductions had not occurred, the ratios would be as indicated.
(a) Period from commencement of operations.
(b) Annualized.
(c) Aggregate.
5
<PAGE> 91
THE FUND'S INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide a high level of current
income consistent with safety of principal. The investment objective of the Fund
is fundamental and may not be changed without a vote of the holders of a
majority of the Fund's outstanding voting securities (as defined in the
Statement of Additional Information). There can be no assurance the investment
objective of the Fund will be achieved.
THE FUND'S INVESTMENT POLICIES
The Fund pursues its objective by investing exclusively in obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities.
Mortgage-related securities in which the Fund may invest must be issued or
guaranteed by the U.S. Government or its agencies or instrumentalities, such as
the Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA"), the Federal Home Loan Bank ("FHLB") and the
Federal Home Loan Mortgage Corporation ("FHLMC").
ACCEPTABLE INVESTMENTS AND ASSOCIATED RISKS. The Fund may invest in the
following instruments:
- - U.S. GOVERNMENT SECURITIES. The Fund may invest in obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. Government,
such as the Government National Mortgage Association ("GNMA") and the
Export-Import Bank of the United States, are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Federal National
Mortgage Association ("FNMA") are supported by the right of the issuer to borrow
from the Treasury; others, such as those of the Student Loan Marketing
Association ("SLMA"), are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; still others, such as those of
the Federal Farm Credit Banks or the Federal Home Loan Mortgage Corporation
("FHLMC"), are supported only by the credit of the instrumentality. No assurance
can be given that the U.S. Government will provide financial support to U.S.
Government-sponsored agencies or instrumentalities if it is not obligated to do
so by law. The Fund will invest in the obligations of such agencies or
instrumentalities only when Key Advisers or the Sub-Adviser believes that the
credit risk with respect thereto is minimal.
- - RECEIPTS. In addition to bills, notes and bonds issued by the U.S. Treasury,
the Fund may also purchase separately traded interest and principal component
parts of such obligations that are transferable through the Federal book entry
system, known as Separately Traded Registered Interest and Principal Securities
("STRIPS") and Coupon Under Book Entry Safekeeping ("CUBES"). These instruments
are issued by banks and brokerage firms and are created by depositing Treasury
notes and Treasury bonds into a special account at a custodian bank; the
custodian holds the interest and principal payments for the benefit of the
registered owners of the certificates or receipts. The custodian arranges for
the issuance of the certificates or receipts evidencing ownership and maintains
the register. Receipts include Treasury Receipts ("TRs"), Treasury Investment
Growth Receipts ("TIGRs") and Certificates of Accrual on Treasury Securities
("CATS").
STRIPS, CUBES, TRs, TIGRs and CATS are sold as zero coupon securities, which
means that they are sold at a substantial discount and redeemed at face value at
their maturity dates without interim cash payments of interest or principal.
This discount is amortized over the life of the security, and such amortization
will constitute the income earned on the security for both accounting and tax
purposes. Because of these features, these securities may be subject to greater
interest rate volatility than interest-paying U.S. Treasury obligations. The
Fund will limit its investments in such instruments to 20% of its total assets.
6
<PAGE> 92
- - GOVERNMENT MORTGAGE-BACKED SECURITIES. The principal governmental (i.e.,
backed by the full faith and credit of the United States Government) guarantor
of mortgage-related securities is GNMA. GNMA is a wholly owned United States
Government corporation within the Department of Housing and Urban Development.
GNMA is authorized to guarantee with the full faith and credit of the United
States Government, the timely payment of principal and interest on securities
issued by institutions approved by GNMA (such as savings and loan institutions,
commercial banks and mortgage bankers) and backed by pools of FHA-insured or
VA-guaranteed mortgages.
Government-related (i.e., not backed by the full faith and credit of the United
States Government) guarantors include FNMA and FHLMC. FNMA and FHLMC are
government-sponsored corporations owned entirely by private stockholders.
Pass-through securities issued by FNMA and FHLMC are guaranteed as to timely
payment of principal and interest by FNMA and FHLMC but are not backed by the
full faith and credit of the United States Government.
The investment characteristics of mortgage-related securities differ from
traditional debt securities. These differences can result in significantly
greater price and yield volatility than is the case with traditional fixed
income securities. The major differences typically include more frequent
interest and principal payments, usually monthly, the adjustability of interest
rates, and the possibility that prepayments of principal may be made at any
time. Prepayment rates are influenced by changes in current interest rates and a
variety of economic, geographic, social and other factors. During periods of
declining interest rates, prepayment rates can be expected to accelerate. Under
certain interest rate and prepayment rate scenarios, the Fund may fail to recoup
fully its investment in mortgage-backed securities (and incur capital losses)
notwithstanding a direct or indirect governmental or agency guarantee. In
general, changes in the rate of prepayments on a mortgage-related security will
change that security's market value and its yield to maturity. When interest
rates fall, high prepayments could force the Fund to reinvest principal at a
time when investment opportunities are not attractive. Thus, mortgage-backed
securities may not be an effective means for the Fund to lock in long-term
interest rates. Conversely, during periods when interest rates rise, slow
prepayments could cause the average life of the security to lengthen and the
value to decline more than anticipated. However, during periods of rising
interest rates, principal repayments by mortgage-backed securities allows the
Fund to reinvest at increased interest rates.
- - COLLATERALIZED MORTGAGE OBLIGATIONS. Mortgage-related securities in which the
Fund may invest may also include collateralized mortgage obligations ("CMOs").
CMOs are debt obligations issued generally by finance subsidiaries or trusts
that are secured by mortgage-backed certificates, including, in many cases,
certificates issued by government-related guarantors, including GNMA, FNMA and
FHLMC, together with certain funds and other collateral. Although payment of the
principal of and interest on the mortgage-backed certificates pledged to secure
the CMOs may be guaranteed by GNMA, FNMA or FHLMC, the CMOs represent
obligations solely of the issuer and are not insured or guaranteed by GNMA,
FHLMC, FNMA or any other governmental agency, or by any other person or entity.
The issuers of the CMOs typically have no significant assets other than those
pledged as collateral for the obligations.
- - SECURITIES LENDING. In order to generate additional income, the Fund may, from
time to time, lend portfolio securities to broker-dealers, banks or
institutional borrowers of securities. The Fund must receive collateral equal to
100% of the securities' value plus any interest due in the form of cash or U.S.
Government securities, which collateral must be marked to market daily by Key
Advisers or the Sub-Adviser. Should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund. During
the time portfolio securities are on loan, the borrower pays the Fund an amount
equal to any dividends or interest paid on such securities plus any interest
negotiated between the parties to the lending agreement. Loans are subject to
termination by the Fund or the borrower at any time. While the Fund does not
have the right to vote securities on loan, the Fund intends to terminate the
loan and regain the right to vote if that is considered important with respect
to the investment. The Fund will only enter into loan arrangements with
broker-dealers, banks or other institutions which Key Advisers
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or the Sub-Adviser has determined are creditworthy under guidelines established
by the Victory Portfolios' Board of Trustees. The Fund intends to limit its
securities lending to 33% of total assets.
- - WHEN-ISSUED SECURITIES. The Fund may purchase securities on a when-issued or
delayed delivery basis. These transactions are arrangements in which the Fund
purchases securities with payment and delivery scheduled for a future time,
thereby involving the risk that the yield obtained in the transaction will be
less than that available in the market when delivery takes place. When the Fund
agrees to purchase securities on a when-issued basis, the Fund's custodian will
set aside cash or liquid portfolio securities equal to the amount of that
commitment in a separate account, and may be required to subsequently place
additional assets in the separate account to maintain equivalence with the
Fund's commitment. The Fund generally will not pay for such securities and no
income accrues on the securities until they are received. Securities purchased
on a when-issued basis are recorded as assets and are subject to changes in
value prior to delivery based upon changes in the general level of interest
rates and other market factors. The Fund does not intend to purchase when-issued
or delayed delivery securities for speculative purposes, but only for the
purpose of acquiring portfolio securities consistent with its investment
objective and policies, and not for investment leverage. In when-issued and
delayed delivery transactions, the Fund relies on the seller to complete the
transaction; its failure to do so may cause the Fund to miss a price or yield
considered to be advantageous.
- - REPURCHASE AGREEMENTS. Under the terms of a repurchase agreement, the Fund
acquires securities from financial institutions or registered broker-dealers,
subject to the seller's agreement to repurchase such securities at a mutually
agreed upon date and price. The seller is required to maintain the value of
collateral held pursuant to the agreement at not less than the repurchase price
(including accrued interest). If the seller were to default on its repurchase
obligation or become insolvent, the Fund holding such obligation would suffer a
loss to the extent that the proceeds from a sale of the underlying portfolio
securities were less than the repurchase price, or to the extent that the
disposition of such securities by the Fund is delayed pending court action.
Repurchase agreements are considered by the staff of the Commission to be loans
by the Fund.
- - REVERSE REPURCHASE AGREEMENTS. The Fund may borrow funds for temporary
purposes by entering into reverse repurchase agreements. Pursuant to such
agreements, the Fund sells portfolio securities to financial institutions such
as banks and broker-dealers, and agrees to repurchase them at a mutually
agreed-upon date and price. At the time the Fund enters into a reverse
repurchase agreement, it must place in a segregated custodial account assets
having a value equal to the repurchase price (including accrued interest); the
collateral will be marked to market on a daily basis, and will be continuously
monitored to ensure that such equivalent value is maintained. Reverse repurchase
agreements involve the risk that the market value of the securities sold by the
Fund may decline below the price at which the Fund is obligated to repurchase
the securities. Reverse repurchase agreements are considered to be borrowings
under the Investment Company Act of 1940 (the "1940 Act").
- - INVESTMENT COMPANY SECURITIES. The Fund may also invest up to 5% of its total
assets in the securities of any one investment company, but may not own more
than 3% of the securities of any one investment company or invest more than 10%
of its total assets in the securities of other investment companies. Pursuant to
an exemptive order received by the Victory Portfolios from the Commission, the
Fund may invest in the Money Market Funds of the Victory Portfolios. Key
Advisers or the Sub-Adviser will waive its fee attributable to the Fund's assets
invested in a fund of the Victory Portfolios, and, to the extent required by the
laws of any state in which shares of the Fund are sold, Key Advisers or the
Sub-Adviser will waive its investment advisory fee as to all assets invested in
other investment companies. Because such other investment companies employ an
investment adviser, such investment by the Fund will cause shareholders to bear
duplicative fees such as management fees, to the extent such fees are not waived
by Key Advisers or the Sub-Adviser.
- - PRIVATE PLACEMENT INVESTMENTS. The Fund may invest in commercial paper issued
in reliance on the exemption from registration afforded by Section 4(2) of the
1933 Act. Section 4(2) commercial paper is restricted as to disposition under
federal securities law and is generally sold to institutional investors, such as
the Fund, that agree
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they are purchasing the paper for investment purposes and not with a view to
public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity. The Fund believes that Section 4(2) commercial paper
and possibly certain other restricted securities that meet the criteria for
liquidity established by the Trustees are quite liquid. The Fund intends,
therefore, to treat the restricted securities that meet the criteria for
liquidity established by the Trustees, including Section 4(2) commercial paper,
as determined by Key Advisers or the Sub-Adviser, as liquid and not subject to
the investment limitation applicable to illiquid securities. Therefore, the Fund
will generally purchase Section 4(2) commercial paper without regard to the
Fund's restriction on illiquid securities.
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under a position of the Staff of the Commission set
forth in the adopting release for Rule 144A under the 1933 Act (the "Rule"). The
Rule is a nonexclusive safe-harbor for certain secondary market transactions
involving certain Restricted Securities under federal securities laws. The Rule
provides an exemption from registration for resales of Restricted Securities to
qualified institutional buyers. The Rule was expected to further enhance the
liquidity of the secondary market for the types of securities eligible for
resale under Rule 144A. The Victory Portfolios believes that the Staff of the
Commission has left the question of determining the liquidity of all Restricted
Securities to the Trustees. The Trustees consider the following criteria in
determining the liquidity of certain restricted securities: the frequency of
trades and quotes for the security; the number of dealers willing to purchase or
sell the security and the number of other potential buyers; dealer undertakings
to make a market in the security; and the nature of the security and the nature
of the marketplace trades.
The investment policies of the Funr may be changed without an affirmative vote
of the holders of the Fund's outstanding voting securities unless (1) a policy
is expressly deemed to be a fundamental policy of the Fund or (2) a policy is
expressly deemed to be changeable only by such majority vote.
NOTE: The Statement of Additional Information contains information about certain
investment practices and portfolio securities of the Fund. The Statement of
Additional Information also contains information about investment restrictions
designed to reduce the risk of an investment in the Fund.
PORTFOLIO TURNOVER
Although the primary objective of the Fund is current income or total return,
the Fund may engage in the technique of short-term trading. Such trading
involves the selling of securities held for a short time, ranging from several
months to less than a day. The object of such short-term trading is to take
advantage of what believes are changes in market, industry or individual company
conditions or outlook. Any such trading would increase the Fund's turnover rate
and its transaction costs. In the fiscal year ended October 31, 1995, the Fund's
turnover rate was ______ compared to ______% for the prior year.
HOW TO INVEST, EXCHANGE AND REDEEM
HOW TO INVEST
Shares may be purchased directly or through an Investment Professional.
Investment Professionals are securities brokers or other financial institutions
that have entered into selling or servicing agreements with the Fund or the
Distributor. Shares are also available to clients of bank trust departments who
have qualified trust accounts. The minimum investment is $500 for the initial
purchase and $25 thereafter. Accounts set up through a bank trust department or
an Investment Professional may be subject to different minimums.
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<PAGE> 95
- - Investing Through Your Investment Professional. Your Investment Professional
will place your order with the Transfer Agent on your behalf. You may be
required to establish a brokerage or agency account. Your Investment
Professional will notify you whether subsequent trades should be directed to the
Investment Professional or directly to the Fund's Transfer Agent. Accounts
established with Investment Professionals may have different features,
requirements and fees. In addition, Investment Professionals may charge for
their services. Information regarding these features, requirements and fees will
be provided by the Investment Professional. If you are purchasing shares of any
Fund through a program of services offered or administered by your Investment
Professional, you should read the program materials in conjunction with this
Prospectus.
- - Investing Through The Systematic Investment Plan. You can use the Systematic
Investment Plan to purchase shares directly from your bank account. Please refer
to "Systematic Investment Plan" below for more details.
- - Investing Through Your Bank Trust Department. Your bank trust department may
require a minimum investment and may charge additional fees. Fee schedules for
such accounts are available upon request and are detailed in the agreements by
which a client opens the desired account. Your bank trust department may require
a completed and signed application for the Fund in which an investment is made.
Additional documents may be required from corporations, associations, and
certain fiduciaries. Any account information, such as balances, should be
obtained through your bank trust department. Additional purchases, exchanges or
redemptions should also be coordinated through your bank trust department.
Contact your bank trust department for instructions.
The services rendered by a bank trust department, including affiliates of Key
Advisers or the Sub-Adviser, in the management of its accounts are not
duplicative of any of the services for which Key Advisers or the Sub-Adviser as
the investment adviser or sub-adviser, respectively, is compensated for advising
the Fund. The charges paid by clients of bank trust departments, or their
affiliates, should be considered in calculating the net yield and return on
investments in the Fund, although such charges do not affect the Fund's
dividends and distributions.
INVESTING DIRECTLY
BY MAIL: You may purchase shares by completing and signing an account
application (initial purchase only) and mailing it, together with a check (or
other negotiable bank draft or money order) in the amount of at least the
minimum investment requirement to, The Victory Government Mortgage Fund, Primary
Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741. Subsequent
purchases may be made in the same manner.
BY WIRE: Call 800-539-3863 to set up your Fund account to accommodate wire
transactions. YOU MUST CALL THE TRANSFER AGENT BEFORE WIRING FUNDS. You will
begin to earn dividends on the first business day following receipt of your
wire. Federal funds (monies transferred from one bank to another through the
Federal Reserve System with same-day availability) should be wired to:
Boston Safe Deposit & Trust Co.
ABA #011001234
Credit PFSC DDA#16-918-8
The Victory Portfolios: The Victory Government Mortgage Fund
You must include your account number, your name(s), tax identification number(s)
and the control number assigned by the Transfer Agent. The Fund does not impose
a fee for wire transactions, although your bank may charge you a fee for this
service.
Shares are sold at the public offering price based on the net asset value that
is next determined after the Transfer Agent receives the purchase order. In most
cases, to receive that day's offering price, the Transfer Agent must
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<PAGE> 96
receive your order as of the close of regular trading of the New York Stock
Exchange ("NYSE") (generally 4:00 pm Eastern time) (the "Valuation Time") on
each Business Day (as defined in "Net Asset Value Per Share")of the Fund. If you
buy shares through an Investment Professional, the Investment Professional must
receive your order in a timely fashion on a regular Business Day and transmit it
to the Transfer Agent so that it is received before the close of business that
day. The Transfer Agent may reject any purchase order for the Fund's shares, in
its sole discretion.
It is the responsibility of your Investment Professional to transmit your order
to purchase shares to the Transfer Agent in a timely fashion in order for you to
receive that day's share price. The Fund must receive payment within three
business days after an order is placed. Otherwise, the purchase order will be
canceled and you could be held liable for resulting fees and/or losses.
INVESTMENT REQUIREMENTS
All purchases must be made in U.S. dollars. Checks must be drawn on U.S. banks.
No cash will be accepted. If you make a purchase with more than one check, each
check must have a value of at least $25, and the minimum investment requirement
still applies. The Fund reserves the right to limit the number of checks
processed at one time. If your check does not clear, your purchase will be
canceled and you could be liable for any losses or fees incurred. Payment for
the purchase is expected at the time of the order. If payment is not received
within three business days of the date of the order, the order may be canceled,
and you could be held liable for resulting fees and/or losses.
Shares are sold at their offering price, which is normally net asset value plus
an initial sales charge. However, in some cases, described below, where
purchases are not subject to an initial sales charge, the offering price may be
net asset value. In some cases, reduced sales charges may be available, as
described below. When you invest, the Fund receives the net asset value for your
account. The sales charge varies depending on the amount of your purchase and a
portion may be retained by the Distributor and allocated to your Investment
Professional. The Victory Portfolios has a reinstatement policy which allows an
investor who redeems his/her shares originally purchased with a sales charge to
reinvest within 90 days without incurring an additional sales charge. The
current sales charge rates and commissions paid to Investment Professionals are
as follows:
<TABLE>
<CAPTION>
FRONT-END SALES CHARGE
AS A PERCENTAGE OF:
-------------------
OFFERING NET AMOUNT DEALER
AMOUNT OF PURCHASE PRICE INVESTED REALLOWANCE
- ------------------ ----- -------- -----------
<S> <C> <C> <C>
Less than $49,999 4.75% 4.99% 4.00%
$50,000 to $99,999 4.50% 4.71% 4.00%
$100,000 to $249,999 3.50% 3.63% 3.00%
$250,000 to $499,999 2.25% 2.30% 2.00%
$500,000 to $999,999 1.75% 1.78% 1.50%
$1,000,000 and above 0.00% 0.00% *
</TABLE>
* There is no initial sales charge on purchases of $1 million or more.
Investment Professionals will be compensated at the rate of up to 0.25%
of such purchases.
The Distributor reserves the right to reallow the entire commission to dealers.
If that occurs, the dealer may be considered an "underwriter" under Federal
securities laws.
The Distributor may pay all or a portion of any applicable sales charges and
service fees to Investment Professionals who sell shares of the Fund and provide
ongoing sales support services or shareholder support services. For the
three-year period commencing April 30, 1994, for activities in maintaining and
servicing accounts of customers
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<PAGE> 97
invested in the Fund, First Albany Corporation ("First Albany") and PFIC
Securities Corporation ("PFIC") may receive payments from the Distributor equal
to two-thirds of the Dealer Retention (as defined below) on any shares of the
Fund (and other funds of the Victory Portfolios) sold by First Albany or PFIC
and their broker-dealer affiliates. "Dealer Retention" is an amount equal to the
difference between the applicable sales charge and such part of the sales charge
which is reallowed to broker-dealers.
The Distributor, at its expense, may also provide additional cash compensation
to dealers in connection with sales of shares of the Fund. The maximum cash
compensation payable by the Distributor is 4.00% of the offering price. In
addition, the Distributor will, from time to time and at its own expense,
provide compensation, including financial assistance, to dealers in connection
with conferences, sales or training programs for their employees, seminars for
the public, advertising campaigns regarding one or more Victory Portfolios
and/or other dealer-sponsored special events including payment for travel
expenses, including lodging, incurred in connection with trips taken by invited
registered representatives and members of their families to locations within or
outside of the United States for meetings or seminars of a business nature.
Compensation will include the following types of non-cash compensation offered
through sales contests: (1) vacation trips including the provision of travel
arrangements and lodging; (2) tickets for entertainment events (such as
concerts, cruises and sporting events) and (3) merchandise (such as clothing,
trophies, clocks and pens). Dealers may not use sales of the Fund's shares to
qualify for this compensation to the extent such may be prohibited by the laws
of any state or any self-regulatory agency, such as the National Association of
Securities Dealers, Inc. None of the aforementioned compensation is paid for by
the Fund or its shareholders.
REDUCED SALES CHARGES. You may be eligible to buy shares at reduced sales charge
rates in one or more of the following ways:
LETTER OF INTENT. An investor may obtain a reduced sales charge by means of a
written Letter of Intent which expresses the investor's intention to purchase
shares of the Fund at a specified total public offering price within a 13-month
period.
A Letter of Intent is not a binding obligation upon the investor to purchase the
full amount indicated. The minimum initial investment under a Letter of Intent
is 5% of such amount. Shares purchased with the first 5% of such amount will be
held in escrow (while remaining registered in the name of the investor) to
secure payment of the higher sales charge applicable to the shares actually
purchased if the full amount indicated is not purchased, and such escrowed
shares will be involuntarily redeemed to pay the additional sales charge, if
necessary. Dividends (if any) on escrowed shares, whether paid in cash or
reinvested in additional shares, are not subject to escrow. The escrowed shares
will not be available for disposal by the investor until all purchases pursuant
to the Letter of Intent have been made or the higher sales charge has been paid.
When the full amount indicated has been purchased, the escrow will be released.
A Letter of Intent may include purchases of shares made not more than 90 days
prior to the date the investor signs a Letter of Intent; however, the 13-month
period during which the Letter of Intent is in effect will begin on the date of
the earliest purchase to be included. An investor may combine purchases that are
made in an individual capacity with (1) purchases that are made by members of
the investor's immediate family and (2) purchases made by businesses that the
investor owns as sole proprietorships, for purposes of obtaining reduced sales
charges by means of a written Letter of Intent. In order to accomplish this,
however, investors must designate on the account application the accounts that
are to be combined for this purpose. Investors can only designate accounts that
are open at the time the Letter of Intent is executed.
If an investor qualifies for a further reduced sales charge because the investor
has either purchased more than the dollar amount indicated on the Letter of
Intent or has entered into a Letter of Intent which includes shares purchased
prior to the date of the Letter of Intent, the difference in the sales charge
will be used to purchase additional shares of the Fund on behalf of the
investor; thus the total purchases (included in the Letter of Intent) will
reflect the applicable reduced sales charge of the Letter of Intent.
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<PAGE> 98
For investors who purchase more than the dollar amount indicated on the Letter
of Intent or enter into a Letter of Intent that includes shares purchased prior
to the date of the Letter of Intent and qualify for a reduced sales charge, all
such additional shares will be immediately purchased in the form of additional
shares and credited to the investor's account at the then current public
offering price applicable to a single purchase of the total amount of the
purchases.
For further information about Letters of Intent, interested investors should
contact the Transfer Agent at 800-539-3863. This program, however, may be
modified or eliminated at any time without notice.
RIGHT OF ACCUMULATION AND CONCURRENT PURCHASES
A shareholder may qualify for a reduced sales charge on purchases of shares of
the Fund and other funds of the Victory Portfolios by combining a current
purchase with purchases of another fund(s) or with certain prior purchases of
shares of the Victory Portfolios. The applicable sales charge is based on the
sum of (i) the purchaser's current purchase plus (ii) the current public
offering price of the purchaser's previous purchases of (a) all shares held by
the purchaser in the Fund and (b) all shares held by the purchaser in any other
fund of the Victory Portfolios (except money market funds).
To receive the applicable public offering price pursuant to the right of
accumulation, shareholders must provide the Transfer Agent with sufficient
information at the time of purchase to permit confirmation of qualification.
Accumulation privileges may be amended or terminated without notice at any time
by the Distributor.
- - WAIVERS OF SALES CHARGES. No sales charge is imposed on sales of shares to the
following categories of persons (which categories may be changed or eliminated
at any time):
(1) Current or retired trustees of the Victory Portfolios; employees,
directors, trustees, and their family members of KeyCorp or an
Affiliated Provider (Affiliated Providers refer to affiliates and
subsidiaries of KeyCorp and service providers to the Victory Portfolios
and the Victory Shares (collectively, the "Victory Group")), dealers
having an agreement with the Distributor and any trade organization to
which Key Advisers, the Sub-Adviser or the Administrator belongs;
(2) Investors who purchase shares for trust, investment management or
certain other advisory accounts established with KeyCorp or any of its
affiliates;
(3) Investors who purchase shares through a 401(k) plan sponsored by an
Affiliated Provider;
(4) Investors who reinvest assets received in a distribution from a
qualified, non-qualified or deferred compensation plan, agency, trust
or custody account that was either (a) maintained by KeyCorp or an
Affiliated Provider, or (b) invested in a fund of the Victory Group;
(5) Investors who, within 90 days of redemption, use the proceeds from the
redemption of shares of another mutual fund complex for which they
previously paid a front end sales charge or sales charge upon
redemption of shares; and
(6) Shareholders of the former Investors Preference Fund For Income, Inc.
and the Investors Preference New York Tax-Free Fund, Inc. who have
continuously maintained accounts with a fund or funds of the Victory
Group with a balance of $250,000 or more (investors with less than
$250,000 will pay any applicable sales loads).
SPECIAL INVESTOR SERVICES
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- - THE SYSTEMATIC INVESTMENT PLAN. You can make regular investments in the Fund
and all other funds of the Victory Group with the Systematic Investment Plan by
completing the appropriate section of the account application and attaching a
voided personal check with your bank's magnetic ink coding number across the
front. If your bank account is jointly owned, be sure that all owners sign. You
must first meet the Fund's initial investment requirement of $500, then
investments may be made monthly by automatically deducting $25 or more from your
bank checking account. For officers, trustees, directors and employees,
including retired directors and employees, of the Victory Group, KeyCorp and its
affiliates, and the Administrator and its affiliates (and family members of each
of the foregoing, i.e., parents and children) who participate in the Systematic
Investment Plan, there is no minimum initial investment required. You may change
the amount of your monthly purchase at any time. A bank draft form must be
completed for this option. Your bank checking account will be debited on the
date indicated on your Account Application. Shares will be purchased at the
offering price next determined following receipt of the order by the Transfer
Agent. You may cancel the Systematic Investment Plan at any time without payment
of a cancellation fee. Your monthly account statement will reflect systematic
investment transactions, and a debit entry will appear on your bank statement.
- - TELEPHONE TRANSACTIONS. You can initiate any transaction by telephone. You may
call the Transfer Agent toll-free at 800-539-3863 or call your Investment
Professional or bank trust department. See "Shareholder Account Rules and
Policies" for more information about telephone transactions.
- - THE SYSTEMATIC WITHDRAWAL PLAN. You can make regular withdrawals from your
account in any fund of the Victory Group with the Systematic Withdrawal Plan by
completing the appropriate section of the account application. If you own shares
in a fund worth $5,000 or more, you can have monthly, quarterly, semi-annual or
annual checks sent from your account directly to you, to a person named by you,
or to your bank checking account. The required minimum withdrawal is $25. If you
are having checks sent to your bank checking account, attach a voided personal
check with your bank's magnetic coding number across the front of the account
application. If your account is jointly owned, be sure that all owners sign the
application. You may obtain information about the Systematic Withdrawal Plan by
contacting your Investment Professional. Your Systematic Withdrawal Plan
payments are drawn from share redemptions. If Systematic Withdrawal Plan
redemptions exceed income dividends and capital gain dividend distributions
earned on your Fund shares, your account eventually may be exhausted. If any
applicable sales charges are applied to new purchases of shares of the Fund, it
is to your disadvantage to buy shares of the Fund while also making systematic
redemptions.
Your account will be debited on the date you indicate on your Account
Application. Shares will be redeemed at the NAV as determined on the debit date
indicated on your Account Application. You may cancel the Systematic Withdrawal
Plan at any time without payment of a cancellation fee. Each Systematic
Withdrawal Plan transaction will appear as a debit entry on your monthly account
statement.
- - RETIREMENT PLANS. Retirement plans can be among the best tax-planning vehicles
available to individuals. Call your Investment Professional for more information
on the plans and their benefits, provisions and fees. Your Investment
Professional can set up your new account in the Fund under one of several
tax-sheltered plans. These plans let you invest for retirement and shelter your
investment income from current taxes. Plans include Individual Retirement
Accounts (IRAs) and Rollover IRAs. Other fees may be charged by the IRA
custodian or trustee.
HOW TO REDEEM SHARES
You may redeem all or a portion of your shares on any day that the Fund is open
for business (see "Share Price" below). Shares will be redeemed at the NAV next
calculated after the Transfer Agent has received the redemption request. If the
Fund account is closed, any accrued dividends will be paid at the beginning of
the following month.
You may redeem shares in several ways:
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<PAGE> 100
BY MAIL: Send a written request to: The Victory Portfolios
P.O. Box 9741
Providence, RI 02940-9741
Write a "letter of instruction" with your name, the Fund's name, your Fund
account number, the dollar amount or number of shares to be redeemed, and any
additional requirements that apply to each particular account. You will need the
letter of instruction signed by all persons required to sign for transactions,
exactly as their names appear on the account application. A signature guarantee
is required if: you wish to redeem more than $10,000 worth of shares; your Fund
account registration has changed within the last 60 days; the check is not being
mailed to the address on your account; the check is not being made out to the
account owner; or the redemption proceeds are being transferred to another
Victory Group account with a different registration. The following institutions
should be able to provide you with a signature guarantee: banks, brokers,
dealers, credit unions (if authorized under state law), securities exchanges and
associations, clearing agencies, and savings associations. A signature guarantee
may not be provided by a notary public. A signature guarantee is designed to
protect you, the Fund, and its agents from fraud. The Transfer Agent reserves
the right to reject any signature guarantee if (1) it has reason to believe that
the signature is not genuine, (2) it has reason to believe that the transaction
would otherwise be improper, or (3) the guarantor institution is a broker or
dealer that is neither a member of a clearing corporation nor maintains net
capital of at least $100,000.
BY WIRE: You may make redemptions by wire provided you have established a Fund
account to accommodate wire transactions. If telephone instructions are received
before Valuation Time (generally 4:00 p.m. Eastern time), proceeds of the
redemption will be wired as federal funds on the next Business Day to the bank
account designated with the Transfer Agent. You may change the bank account
designated to receive an amount redeemed at any time by sending a letter of
instruction with a signature guarantee to the Transfer Agent, Primary Funds
Service Corporation, P.O. Box 9741, Providence, RI 02940-9741.
BY TELEPHONE: To redeem by telephone, you may call the Transfer Agent toll free
at 800-539-3863 or call your Investment Professional or bank trust department.
See "Shareholder Account Rules and Policies" for more information about
telephone transactions.
ADDITIONAL REDEMPTION REQUIREMENTS: The Fund may withhold payment on redemptions
until it is reasonably satisfied that investments made by check have been
collected, which can take up to 15 days. Also, when the NYSE is closed (or when
trading is restricted) for any reason other than its customary weekend or
holiday closings, or under any emergency circumstances as determined by the
Commission to merit such action, the right of redemption may be suspended or the
date of payment postponed for a period of time that may exceed 7 days. In
addition, the Fund reserves the right to advance the time on that day by which
purchase and redemption orders must be received. To the extent that portfolio
securities are traded in other markets on days when the NYSE is closed, the
Fund's NAV may be affected on days when investors do not have access to the Fund
to purchase or redeem shares.
If you are unable to reach the Transfer Agent by telephone (for example, during
times of unusual market activity), consider placing your order by mail directly
to the Transfer Agent. In case of suspension of the right of redemption, you may
either withdraw your request for redemption or receive payment based on the NAV
next determined after the termination of the suspension. If your balance in a
Fund falls below $500, you may be given 60 days' notice to reestablish the
minimum balance (except with respect to officers, trustees, directors and
employees, including retired directors and employees, of the Victory Portfolios,
KeyCorp and its affiliates, and the Administrator and its affiliates (and family
members of each of the foregoing, i.e., parents, children and household members)
participating in the Systematic Investment Plan, to whom no minimum balance
requirement applies). If you do not increase your balance, your account may be
closed and the proceeds mailed to you at the address on record. Shares will be
redeemed at the last calculated NAV on the day the account is closed.
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<PAGE> 101
HOW TO EXCHANGE SHARES
Shares of the Fund may be exchanged for shares of certain funds of the Victory
Group at net asset value per share at the time of exchange, without a sales
charge. To exchange shares, you must meet several conditions:
- - Shares of the fund selected for exchange must be available for sale in
your state of residence.
- - The prospectuses of this Fund and the fund whose shares you want to
buy must offer the exchange privilege.
- - You must hold the shares you buy when you establish your account for
at least 7 days before you can exchange them; after the account is
open 7 days, you can exchange shares every regular Business Day.
- - You must meet the minimum purchase requirements for the fund you
purchase by exchange.
- - The registration and tax identification numbers of the two accounts
must be identical.
- - Before exchanging into a fund, obtain and read its prospectus.
Shares of a particular class may be exchanged only for shares of the same class
in the other funds of the Victory Group. For example, you can exchange shares of
this Fund only for Class A shares of another fund. At present, not all of the
funds offer the same two classes of shares. If a fund has only one class of
shares that does not have a class designation, they are "Class A" shares for
exchange purposes. In some cases, sales charges may be imposed on exchange
transactions. Certain funds offer Class A or Class B shares and a list can be
obtained by calling the Transfer Agent at 800-539-3863. Please refer to the
Statement of Additional Information for more details about this policy.
Telephone exchange requests may be made either by calling your Investment
Professional or the Transfer Agent at 800-539-3863 prior to valuation time
(generally 4:00 p.m. Eastern time) on any Business Day.
You can obtain a list of eligible funds of the Victory Group by calling the
Transfer Agent at 800-539-3863. Exchanges of shares involve a redemption of the
shares of the Fund and a purchase of shares of the other portfolio.
There are certain exchange policies you should be aware of:
- - Shares are normally redeemed from one fund and purchased from the other fund
in the exchange transaction on the same Business Day on which the Transfer Agent
receives an exchange request by Valuation Time (generally 4:00 p.m. Eastern
time) that is in proper form, but either fund may delay the purchase of shares
of the fund into which you are exchanging if it determines it would be
disadvantaged by a same-day transfer of the proceeds to buy shares. For example,
the receipt of multiple exchange requests from a dealer in a "market-timing"
strategy might require the disposition of securities at a time or price
disadvantageous to the Fund.
- - Because excessive trading can hurt fund performance and harm shareholders, the
Victory Portfolios reserves the right to refuse any exchange request that will
disadvantage it, or to refuse multiple exchange requests submitted by a
shareholder or dealer.
- - The Fund may amend, suspend or terminate the exchange privilege at any time
upon 60 days' written notice to shareholders.
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<PAGE> 102
- - If the Transfer Agent cannot exchange all the shares you request because of a
restriction cited above, only the shares eligible for exchange will be
exchanged.
- - Each exchange may produce a gain or loss for tax purposes.
Shareholders of the former Investors Preference Fund for Income, Inc. and
Investors Preference New York Tax-Free Fund, Inc. will not be subject to any
additional sales load upon an exchange of shares attributable to an Investors
Preference Funds account for shares of other funds of the Victory Portfolios.
SHAREHOLDER ACCOUNT RULES AND POLICIES
- - NET ASSET VALUE PER SHARE. The term "net asset value per share," or "NAV",
means the value of one share. The NAV is calculated by adding the value of all
its investments, plus cash and other assets, deducting liabilities, and then
dividing the result by the number of shares outstanding. The NAV of the Fund is
determined and its shares are priced as of the close of regular trading of the
New York Stock Exchange (NYSE), (generally 4:00 p.m. Eastern Time) (the
"Valuation Time") on each Business Day of the Fund. A "Business Day" is a day on
which the NYSE is open for trading, the Federal Reserve Bank of Cleveland is
open, and any other day (other than a day on which no shares of the Fund are
tendered for redemption and no order to purchase any shares is received) during
which there is sufficient trading in its portfolio instruments that the Fund's
net asset value per share might be materially affected. The NYSE or the Federal
Reserve Bank of Cleveland will not be open in observance of the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans' Day,
Thanksgiving Day, and Christmas Day.
The Fund's securities are valued primarily on the basis of market quotations or,
if quotations are not readily available, by a method that the Board of Trustees
believes accurately reflects fair value. Fair value of these portfolio
securities is determined by an independent pricing service approved by the
Trustees based primarily upon information concerning market transactions and
dealers quotations for similar securities.
- - THE OFFERING OF SHARES may be suspended during any period in which the
determination of net asset value is suspended, and the offering may be suspended
by the Trustees at any time the Trustees believe it is in the Fund's best
interest to do so.
- - TELEPHONE TRANSACTION PRIVILEGES for purchases, redemptions or exchanges may
be modified, suspended or terminated by the Fund at any time. If an account has
more than one owner, the Fund and the Transfer Agent may rely on the
instructions of any one owner. Telephone privileges apply to each owner of the
account and the dealer representative of record for the account unless and until
the Transfer Agent receives cancellation instructions from an owner of the
account.
- - TELEPHONE INSTRUCTIONS. Generally, neither the Fund, the bank trust department
nor the Transfer Agent will be responsible for any claims, losses or expenses
for acting on telephone instructions that they reasonably believe to be genuine.
The Transfer Agent and the Fund will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine and if they do not
employ reasonable procedures they may be liable for any losses due to
unauthorized or fraudulent instructions. The identification procedures may
include, but are not limited to, the following: account number, registration and
address, personalized security codes, taxpayer identification number and other
information particular to the account. Your Investment Professional, bank trust
department or the Transfer Agent may also record calls, and you should verify
the accuracy of your confirmation statements immediately after you receive them.
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<PAGE> 103
- - REDEMPTION OR TRANSFER REQUESTS WILL NOT BE HONORED UNTIL THE TRANSFER AGENT
RECEIVES ALL REQUIRED DOCUMENTS IN PROPER FORM. From time to time, the Transfer
Agent in its discretion may waive certain of the requirements for redemptions
stated in this Prospectus.
- - DEALERS THAT CAN PERFORM ACCOUNT TRANSACTIONS FOR THEIR CLIENTS BY
PARTICIPATING IN NETWORKING through the National Securities Clearing Corporation
are responsible for obtaining their clients' permission to perform those
transactions and are responsible to their clients who are shareholders of the
Victory Portfolios if the dealer performs any transaction erroneously.
- - THE REDEMPTION PRICE FOR SHARES WILL VARY from day to day because the value of
the securities in the Fund fluctuates, and the value of your shares may be more
or less than their original cost.
- - PAYMENT FOR REDEEMED SHARES is made ordinarily in cash and forwarded by check
within three business days after the Transfer Agent receives redemption
instructions in proper form, except under unusual circumstances determined by
the Commission delaying or suspending such payments. The Transfer Agent may
delay forwarding a check for recently purchased shares, but only until the
purchase payment has cleared. That delay may be as much as 15 days from the date
the shares were purchased. That delay may be avoided if you arrange with your
bank to provide telephone or written assurance to the Transfer Agent that your
purchase payment has cleared.
- - INVOLUNTARY REDEMPTIONS OF SMALL ACCOUNTS. If your account value has fallen
below $500, you will be given 60 days' notice to reestablish the minimum
balance. If you do not increase your minimum balance, your account may be closed
and the proceeds mailed to you at the record address. In some cases involuntary
redemptions may be made to repay the Distributor for losses from the
cancellation of share purchase orders. Under unusual circumstances, shares of
the Fund may be redeemed "in kind," which means that the redemption proceeds
will be paid with securities from the Fund. Please refer to the Statement of
Additional Information for more details.
- - "BACKUP WITHHOLDING" of Federal income tax may be applied at the rate of 31%
from dividends, distributions and redemption proceeds (including exchanges) if
you fail to furnish the Victory Portfolios with a certified Social Security or
taxpayer identification number when you sign your application, or if you violate
Internal Revenue Service regulations on tax reporting of dividends.
- - THE VICTORY PORTFOLIOS DOES NOT CHARGE A REDEMPTION FEE, but if your
Investment Professional handles your redemption, they may charge a separate
service fee.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS. The Fund ordinarily declares and pays dividends from its net
investment income quarterly. The Fund distributes substantially all net capital
gains, if any, to shareholders each year, to the extent necessary to qualify for
favorable federal tax treatment.
CAPITAL GAINS. The Fund may make distributions annually out of any net
short-term or long-term capital gains, and the Fund may make supplemental
distributions of dividends and capital gains following the end of its fiscal
year.
DISTRIBUTION OPTIONS
When you fill out your account application, you can specify how you want to
receive your dividend distributions. Currently, there are five available
options:
1. REINVESTMENT OPTION. Your income and capital gain dividends, if any,
will be automatically reinvested in additional shares of the Fund.
Income and capital gain dividends will be reinvested at the net asset
value of
18
<PAGE> 104
the Fund as of the day after the record date. If you do not indicate a
choice on your application, you will be assigned this option.
2. CASH OPTION. You will receive a check for each income or capital gain
dividend, if any. Distribution checks will be mailed no later than 7
days after the dividend payment date which may be more than 7 days
after the dividend record date.
3. INCOME EARNED OPTION. You will have your capital gain dividend
distributions, if any, reinvested automatically in the Fund and have
your income dividends paid in cash.
4. DIRECTED DIVIDENDS OPTION. You will have income and capital gain
dividends, or only capital gain dividends, automatically reinvested in
shares of another fund of the Victory Group. Shares will be purchased
at the NAV as of the dividend record date. If you are reinvesting
dividends of a fund sold without a sales charge in shares of a fund
sold with a sales charge, the shares will be purchased at the public
offering price. If you are reinvesting dividends of a fund sold with a
sales charge in shares of a fund sold with or without a sales charge,
the shares will be purchased at the net asset value of the fund.
Dividend distributions can be directed only to an existing account
with a registration that is identical to that of your Fund account.
5. DIRECTED BANK ACCOUNT OPTION. You will have your income and capital
gain dividends, or only your income dividends, automatically
transferred to your bank checking or savings account. The amount will
be determined on the dividend record date and will normally be
transferred to your account within 7 days of the dividend record date.
Dividend distributions can be directed only to an existing account
with a registration that is identical to that of your Fund account.
Please call or write the Transfer Agent to learn more about this
dividend distribution option.
Any election or revocation of any of the above dividend distribution options may
be made in writing to the Fund and sent to Primary Funds Service Corporation,
P.O. Box 9741, Providence, RI 02940-9741, or by calling the Transfer Agent at
800-539-3863, and will become effective with respect to dividends having record
dates after receipt of the application or request by the Transfer Agent.
Reinvested dividend distributions receive the same tax treatment as dividend
distributions paid in cash.
COMPLETE REDEMPTIONS: If you request a complete redemption of all your Fund
shares, any dividend accrued to your account will be included in the redemption
check.
STATEMENTS AND REPORTS: You will receive a monthly statement reflecting all
transactions that affect the share balance or the registration of your Fund
account. You will receive a confirmation after every transaction that affected
the share balance of your Fund account, except for dividend reinvestment,
systematic investment and systematic withdrawal transactions. These transactions
will be detailed in your Fund account statement. Transactions that affect the
share balance of your Fund investment in an account established with an
Investment Professional or financial institution will be detailed in regular
statements or through confirmation procedures of the financial institution.
Certificates representing shares of the Fund will not be issued. An IRS Form
1099-DIV with federal tax information will be mailed to you by January 31 of
each tax year and also will be filed with the IRS. At least twice a year, you
will receive the Fund's financial reports.
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<PAGE> 105
FEDERAL TAXES
The Fund intends to qualify each year and elect to be treated as a separate
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "IRS Code"). If the Fund is treated as a "regulated
investment company" and all its taxable income is distributed to its
shareholders in accordance with the timing requirements imposed by the IRS Code,
it will not be subject to federal income tax on its income. The Fund's
distributions that are attributable to its net investment income and short-term
capital gains are taxable as ordinary income, and its distributions from
long-term capital gains are taxed as long-term capital gains. Such distributions
are taxable when they are paid, whether taken in cash or reinvested in
additional shares, except that distributions declared in October, November or
December and paid during the following January are taxable as if paid and
received on December 31. Dividends received from the Fund by corporate
shareholders are not entitled to the dividends-received deduction. The Fund
sends tax statements to its shareholders (with copies to the Internal Revenue
Service (the "IRS")) by January 31 showing the amounts and tax status of
distributions made (or deemed made) during the preceding calendar year.
Income received by direct holders of obligations of the U.S. Government and
certain of its agencies and instrumentalities is exempt from state and local
income taxation. The Fund's dividends from investment income may, to the extent
such dividends consist of interest from obligations of the U.S. government and
certain of its agencies and instrumentalities, also be exempt from state and
local income taxes. The Fund intends to advise shareholders of the proportion of
their dividends which consist of such interest. Shareholders ar urged to consult
their tax advisers regarding the possible exclusion of a portion of their
dividends for state a local income tax purposes in their respective
jurisdictions.
REDEMPTION OR EXCHANGES
Investors may realize a gain or loss when redeeming (selling) or exchanging
shares. For most types of accounts, the Fund reports the proceeds to the IRS
annually. Because the shareholders' tax treatment also depends on their purchase
price and personal tax positions, shareholders should keep their regular account
statements to use in determining their tax. See "Buying a Dividend".
"BUYING A DIVIDEND"
On the record date for a distribution of ordinary income or capital gains
dividend, the net asset value of the Fund is reduced by the amount of the
distribution. An investor who buys shares just before the record date ("buying a
dividend") will pay the full price for the shares and then receive a portion of
the purchase price back as a taxable distribution.
OTHER TAX INFORMATION
The information above is only a summary of some of the federal income tax
consequences generally affecting the Fund and its shareholders, and no attempt
has been made to discuss individual tax consequences. A prospective investor
should also review the more detailed discussion of federal income tax
considerations in the Statement of Additional Information. In addition to
federal income tax, a shareholder may be subject to state or local taxes on the
shareholder's investment, depending on the laws in the shareholder's area.
Investors considering an investment in the Fund should consult their tax adviser
to determine whether the Fund is suitable to their particular tax situation.
When investors sign their account application, they are asked to provide their
correct social security or taxpayer identification number and other required
certifications. If investors do not comply with IRS regulations, the IRS can
require the Fund to withhold 31% of taxable distributions and redemptions from
their account.
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<PAGE> 106
PERFORMANCE
From time to time, performance information for the Fund showing total return may
be presented in advertisements, sales literature and in reports to shareholders.
Such performance figures are based on historical earnings and are not intended
to indicate future performance. Average annual total return will be calculated
over a stated period of more than one year. Average annual total return is
measured by comparing the value of an investment at the beginning of the
relevant period (as adjusted for sales charges, if any) to the redemption value
of the investment at the end of the period (assuming immediate reinvestment of
any dividends or capital gains distributions) and annualizing that figure.
Aggregate total return is calculated similarly to average annual total return,
except that the resulting difference is not annualized.
From time to time performance information for the Fund showing the yield and/or
effective yield for each class of shares may also be presented in
advertisements, sales literature and in reports to shareholders. Yields reflect
the deduction of the maximum sales charge. Such performance figures are based on
historical earnings and are not intended to indicate future performance. Yield
will be computed by dividing the Fund's net investment income per share earned
during a recent thirty-day period by the Fund's maximum offering price per share
(reduced by any undeclared earned income expected to be paid shortly as a
dividend) on the last day of the period and annualizing the result. Effective
yield is computed in a similar manner, but, when annualized, the income earned
by an investment in the Fund is assumed to be reinvested. The effective yield
will be slightly higher than the yield because of the compounding effect of this
assumed reinvestment.
Investors may also judge, and the Victory Portfolios may at times advertise, the
performance of the Fund by comparing it to the performance of other mutual funds
with comparable investment objectives and policies, which performance may be
contained in various unmanaged mutual fund or market indices or rankings such as
those prepared by Dow Jones & Co., Inc. and Standard & Poor's Corporation, in
publications issued by Lipper Analytical Services, Inc., and in the following
publications: IBC/Donoghue's Money Fund Reports, Ibbotson Associates, Inc.,
Morningstar, CDA/Wiesenberger, Money Magazine, Forbes, Barron's, The Wall Street
Journal, The New York Times, Business Week, American Banker, Fortune,
Institutional Investor, U.S.A. Today and local newspapers. In addition, general
information about the Fund that appears in publications such as those mentioned
above may also be quoted or reproduced in advertisements, sales literature or in
reports to shareholders.
Performance is a function of the type and quality of instruments held in the
Fund's portfolio, operating expenses, and market conditions. Consequently,
current performance will fluctuate and is not necessarily representative of
future results. Any fees charged by service providers with respect to customer
accounts for investing in shares of the Fund will not be reflected in
performance calculations.
Additional information regarding the performance of each of the Victory
Portfolios is included in the Victory Portfolios' annual report, which is
available free of charge by calling 800-539-3863.
FUND ORGANIZATION AND FEES
The Victory Portfolios is an open-end management investment company, commonly
known as a mutual fund currently consisting of twenty-eight series portfolios,
four of which are inactive. The Victory Portfolios has been operating
continuously since 1986, when it was created under Massachusetts law as a
Massachusetts business trust. On or about February 29, 1996, contingent upon
shareholder approval, the Victory Portfolios converted from a Massachusetts
business trust to a Delaware business trust. The Victory Portfolios' offices are
located at 3435 Stelzer Road, Columbus, OH 43219-3035.
Overall responsibility for management of the Victory Portfolios rests with its
Board of Trustees, who are elected by the shareholders of the Victory
Portfolios.
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<PAGE> 107
INVESTMENT ADVISER
Key Advisers is the investment adviser to the Fund. Key Advisers directs the
investment of the Victory Portfolios' assets, subject at all times to the
supervision of the Victory Portfolios' Board of Trustees. Key Advisers
continually supervises the investment and reinvestment of cash, securities and
other property comprising the assets of the Victory Portfolios.
Key Advisers was organized as an Ohio corporation on July 27, 1995 and is
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended. It is a wholly-owned subsidiary of KeyCorp Asset Management
Holdings, Inc., which is a wholly-owned subsidiary of Society National Bank, a
wholly-owned subsidiary of KeyCorp. Affiliates of Key Advisers manage
approximately $37 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals and mutual funds.
For the services provided and expenses incurred pursuant to its investment
advisory agreement with the Victory Portfolios respecting the Fund, Key Advisers
receives a fee, computed daily and paid monthly, at the annual rate of fifty one
hundredths of one percent (.50%) of the average daily net assets of the Fund.
The advisory fees for the Fund have been determined to be fair and reasonable in
light of the services provided to the Fund. Key Advisers may periodically waive
all or a portion of its advisory fee with respect to the Fund to increase the
net income of the Fund available for distribution as dividends. Prior to January
1, 1996, Society (the Sub-Adviser) served as the investment adviser to the Fund.
During the Fund's fiscal year ended October 31, 1995, Society received
investment advisory fees aggregating .__% of the average daily net assets of the
Fund.
Under the investment advisory agreement between the Victory Portfolios, on
behalf of the Fund, and Key Advisers, Key Advisers may delegate a portion of its
responsibilities to a subadviser. In addition, the investment advisory agreement
provides that Key Advisers may render services through its own employees or the
employees of one or more affiliated companies that are qualified to act as an
investment adviser of the Fund and are under the common control of KeyCorp as
long as all such persons are functioning as part of an organized group of
persons, managed by authorized officers of Key Advisers.
Key Advisers has entered into an investment sub-advisory agreement with its
affiliate, Key Advisers or the Sub-Adviser, a registered investment adviser, on
behalf of the Fund. The Sub-Adviser is a wholly-owned subsidiary of KeyCorp
Asset Management Holdings, Inc. For its services under the investment
sub-advisory agreement, Key Advisers pays the Sub-Adviser sub-advisory fees at
an annual rate as a percentage of the Fund's average daily net assets as
follows: .40% of the first $10 million of average daily net assets; .30% of the
next $15 million of average daily net assets; .25% of the next $25 million of
average daily net assets; and .20% of average daily net assets in excess of $50
million.
The person primarily responsible for the investment management of the Government
Mortgage Fund, as well as his previous experience, is as follows:
<TABLE>
<CAPTION>
Portfolio Managing Previous
Manager the Fund Since Experience
- ----------------------- ----------
<S> <C>
Robert E. Fernald November, 1994 Portfolio Manager for Society Asset
Management, Inc., beginning in 1993 and for Society
National Bank since 1992; portfolio manager for
Ameritrust Company National Association 1991 to
1992: formerly Vice President of Fairfield Research
Corporation.
</TABLE>
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<PAGE> 108
ADMINISTRATOR AND DISTRIBUTOR
Concord Holding Corporation is the Administrator for the Fund. Victory
Broker-Dealer Services, Inc. is the Fund's principal underwriter and
Distributor.
The Administrator generally assists in all aspects of the Fund's administration
and operation. For expenses incurred and services provided as Administrator
pursuant to its management and administration agreement with the Victory
Portfolios, the Administrator receives a fee from the Fund, computed daily and
paid monthly, at an annual rate of fifteen one-hundredths of one percent (.15%)
of the Fund's average daily net assets. The Administrator may periodically waive
all or a portion of its administrative fee with respect to the Fund to increase
the net income of the Fund available for distribution as dividends. During the
fiscal year ended October 31, 1995, the Fund paid administration fees of .15% of
its average daily net assets.
TRANSFER AGENT AND FUND ACCOUNTANT
Primary Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741,
serves as the Fund's Transfer Agent pursuant to a Transfer Agency and
Shareholder Service Agreement with the Victory Portfolios and receives a fee for
such services based on a percentage of the average daily net assets of the Fund.
BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, OH 43219, provides
certain accounting services for the Fund pursuant to a Fund Accounting Agreement
and receives a fee for such services.
SHAREHOLDER SERVICING
Shareholder services are provided to the Fund pursuant to agreements between the
Victory Portfolios and various shareholder servicing agents, including Key Trust
Company of Ohio, N.A. and its affiliates and other financial institutions and
securities brokers (each a "Shareholder Servicing Agent"). Each Shareholder
Servicing Agent generally will provide support services to shareholders by
establishing and maintaining accounts and records, processing dividend and
distribution payments, providing account information, arranging for bank wires,
responding to routine inquires, forwarding shareholder communication, assisting
in the processing of purchase, exchange and redemption requests, and assisting
shareholders in changing dividend options, account designations and addresses.
For expenses incurred and services provided as Shareholder Servicing Agent
pursuant to its respective Shareholder Servicing Agreement, the Fund pays each
Shareholder Servicing Agent a fee computed daily and paid monthly, in amounts
aggregating not more than twenty-five one-hundredths of one percent (.25%) of
the average daily net assets of the Fund per year. A Shareholder Servicing Agent
may periodically waive all or a portion of its respective shareholder servicing
fees with respect to the Fund to increase the net income of the Fund available
for distribution as dividends. During the fiscal year ended October 31, 1995,
the Fund paid shareholder servicing fees of ____% of the Fund's average daily
net assets.
EFFECT OF BANKING LAWS
Key Advisers and the Sub-Adviser believe that they may perform the investment
advisory services for the Fund contemplated by the investment advisory (and
sub-advisory) agreements for the Fund (the "Advisory Agreements"). In the
Advisory Agreements, Key Advisers and the Sub-Adviser have represented that they
possess the legal authority to perform the investment advisory services
contemplated therein and described in this Prospectus. Key Trust Company of
Ohio, N.A. and its affiliates also believe that they also may perform the
services for the Victory Portfolios contemplated by the Shareholder Servicing
Agreement with the Victory Portfolios without violating applicable banking laws
and regulations. Future changes in federal or state statutes and regulations
relating to permissible activities of banks or bank holding companies and their
subsidiaries and affiliates, as well as further judicial or administrative
decisions or interpretations of present and future statutes and regulations,
could change the manner in which Key Advisers, the Sub-Adviser, Key Trust
Company of Ohio, N.A. and its affiliates could
23
<PAGE> 109
continue to perform such services for the Victory Portfolios. See the Statement
of Additional Information ("Glass-Steagall Act") for further discussion.
BUSINESS MANAGEMENT AGREEMENT
In connection with its obligations under the investment sub-advisory agreement,
the Sub-Adviser has entered into a Business Management Agreement with Key
Advisers pursuant to which Key Advisers provides certain administrative and
support services to the Sub-Adviser. Such services include preparing reports to
the Company's Board of Trustees, recordkeeping services, and services rendered
in connection with the preparation of regulatory filings and other reports, and
regulatory and compliance systems and other administrative and support services.
For such services, the Sub-Adviser pays fees to Key Advisers as follows: .25% on
the first $10 million of average daily net assets; .15% of the next $15 million
of average daily net assets ; .10% of the next $25 million of average daily net
assets; and .05% of average daily net assets in excess of $50 million.
EXPENSES
For the fiscal period ended April 30, 1995, the Fund's total operating expenses
were .__% of the Fund's average net assets.
CUSTODIAN
Key Trust Company of Ohio, N.A. serves as custodian for the Fund and receives
fees for its services.
AUDITORS
Coopers & Lybrand L.L.P. serves as the Fund's independent public accountants.
ADDITIONAL INFORMATION
The Victory Portfolios may issue an unlimited number of shares and classes of
the Fund. Shares of each class of the Fund participate equally in dividends and
distributions and have equal voting, liquidation and other rights. When issued
and paid for, shares will be fully paid and nonassessable by the Victory
Portfolios and will have no preference, conversion, exchange or preemptive
rights. Shareholders are entitled to one vote for each full share owned and
fractional votes for fractional shares owned. For those investors with qualified
trust accounts, the trustee will vote the shares at meetings of the Fund's
shareholders in accordance with the shareholder's instructions. The trustee will
forward to these shareholders all communications received by the trustee,
including proxy statements and financial reports. The Victory Portfolios and the
Fund are not required to hold annual meetings of shareholders and in ordinary
circumstances do not intend to hold such meetings. The Trustees may call special
meetings of shareholders for action by shareholder vote as may be required by
the 1940 Act or the Victory Portfolios' Delaware Trust Instrument. Under certain
circumstances, the Trustees may be removed by action of the Trustees or by the
shareholders. Shareholders holding 10% or more of the Victory Portfolios'
outstanding shares may call a special meeting of shareholders for the purpose of
voting upon the question of removal of Trustees.
The Victory Portfolio's Board of Trustees may authorize the Victory Portfolios
to offer other funds which may differ in the types of securities in which their
assets may be invested.
Key Advisers, the Sub-Adviser and the Victory Portfolios have adopted Codes of
Ethics ( the "Codes") which require investment personnel (a) to pre-clear all
personal securities transactions, (b) to file reports regarding such
transactions, and (c) to refrain from personally engaging in (i) short-term
trading of a security, (ii) transactions
24
<PAGE> 110
involving a security within seven days of a Fund transaction involving the same
security, and (iii) transactions involving securities being considered for
investment by a Fund. The Codes also prohibit investment personnel from
purchasing securities in an initial public offering. Personal trading reports
are reviewed periodically by Key Advisers or the Sub-Adviser, and the Board of
Trustees reviews annually such reports (including information on any substantial
violations of the Codes). Violations of the Codes may result in censure,
monetary penalties, suspension or termination of employment.
DELAWARE LAW
The Delaware Business Trust Act provides that a shareholder of a Delaware
business trust shall be entitled to the same limitations of personal liability
extended to stockholders of Delaware corporations, and the Victory Portfolios'
Delaware Trust Instrument provides that no shareholder will be liable for the
obligations of the Fund. In light of Delaware law, the nature of the Victory
Portfolios' business, and the nature of its assets, management of the Victory
Portfolios believes that the risk of personal liability to a Fund shareholder
would be extremely remote.
In the unlikely event a shareholder is held personally liable for the Victory
Portfolios' obligations, the Victory Portfolios is required to use its property
to protect or compensate the shareholder. On request, the Victory Portfolios
will defend any claim made and pay any judgment against a shareholder for any
act or obligation of the Victory Portfolios. Therefore, financial loss resulting
from liability as a shareholder will occur only if the Victory Portfolios itself
cannot meet its obligations to indemnify shareholders and pay judgments against
them.
Delaware law authorizes electronic or telephonic communications between
shareholders and the Victory Portfolios. Under Delaware law, the Successor
Company has the flexibility to respond to future business contingencies. For
example, the Trustees will have the power to incorporate the Victory Portfolios,
to merge or consolidate it with another entity, to cause each fund to become a
separate trust, and to change the Victory Portfolios' domicile without a
shareholder vote. This flexibility could help reduce the expense and frequency
of future shareholder meetings for non-investment related issues.
MISCELLANEOUS
Shareholders will receive Semi-Annual Reports, which are unaudited, and Annual
Reports, which are audited by independent public accountants, describing the
investment operations of the Fund. Each of these reports, when available for a
particular fiscal year end or the end of a semi-annual fiscal year-end period,
is incorporated herein by reference. The Victory Portfolios may include
information in their Annual Reports and Semi-Annual Reports to shareholders that
(i) describes general economic trends, (ii) describes general trends within the
financial services industry or the mutual fund industry, (iii) describes past or
anticipated portfolio holdings for the Fund or (iv) describes investment
management strategies for the Victory Portfolios. Such information is provided
to inform shareholders of the activities of the Victory Portfolios for the most
recent fiscal year or semi-annual period and to provide the views of Key
Advisers, the Sub-Adviser and/or the Victory Portfolios' officers regarding
expected trends and strategies.
Inquiries regarding the Victory Portfolios or the Fund may be directed in
writing to the Victory Portfolios at Primary Funds Service Corporation, P.O. Box
9741, Providence, RI 02940-9741, or by telephone, toll-free, at 800-539-3863.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
25
<PAGE> 111
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE VICTORY
PORTFOLIOS OR THEIR DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING
BY THE VICTORY PORTFOLIOS OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE.
26
<PAGE> 112
2 DRAFT
The
VICTORY
Portfolios
Growth Fund
PROSPECTUS For current yield, purchase and redemption information,
March 1, 1996 call 800-539-FUND or 800-539-3863
THE VICTORY PORTFOLIOS (the "Victory Portfolios") is a registered open-end
management investment company that offers investors a selection of money market,
fixed-income, municipal bond, domestic and international equity portfolios. This
Prospectus relates to the Growth Fund (the "Fund"), a diversified portfolio.
KeyCorp Mutual Fund Advisers, Inc., Cleveland, Ohio, an indirect subsidiary of
KeyCorp, is the investment adviser to the Fund ("Key Advisers" or the
"Adviser"). Key Advisers or The Sub-Adviser., Cleveland, Ohio, an indirect
subsidiary of KeyCorp, is the investment sub-adviser to the Fund (the
"Sub-Adviser" or "Society"). Concord Holding Corporation is the Fund's
administrator (the "Administrator"). Victory Broker-Dealer Services, Inc. is the
Fund's distributor (the "Distributor").
The Growth Fund seeks to provide long-term growth of capital. The Fund pursues
this objective by investing primarily in a common stocks of issuers listed on a
nationally recognized exchange with an emphasis on companies with superior
prospects for long-term earnings growth and price appreciation.
Please read this Prospectus before investing. It is designed to provide you with
information and to help you decide if the Fund's goals match your own. Retain
this document for future reference. A Statement of Additional Information (dated
March 1, 1996) for the Fund and an annual report for the Fund's fiscal year
ended October 31, 1995 have been filed with the Securities and Exchange
Commission and are incorporated herein by reference. The Statement of Additional
Information is available without charge upon request by calling 800-539-3863.
SHARES OF THE FUND ARE:
- - NOT INSURED BY THE FDIC;
- - NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY KEYCORP
BANK, ANY OF ITS AFFILIATES, OR ANY OTHER BANK;
- - SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("COMMISSION") OR ANY SECURITIES REGULATORY AUTHORITY OF
ANY STATE, NOR HAS THE COMMISSION OR ANY SUCH STATE AUTHORITY PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE> 113
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
- ----------------- ----
<S> <C>
Summary of Fund Expenses 2
Financial Highlights 3
The Fund's Investment Objective 4
The Fund's Investment Policies and Risk Factors 4
How to Invest, Exchange and Redeem 8
Dividends, Distributions and Taxes 14
Performance 16
Fund Organization and Fees 17
Additional Information 19
</TABLE>
-2-
<PAGE> 114
SUMMARY OF FUND EXPENSES
The table below summarizes the expenses associated with the Fund. This standard
format was developed for use by all mutual funds to help an investor make
investment decisions. Of course, you should consider this expense information
along with other important information in this Prospectus, including the Fund's
investment objective, investment policies and risk factors, and financial
highlights.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES(1)
<S> <C>
Maximum Sales Load Imposed on Purchases (as a percentage
of offering price) 4.75%
Sales Load Imposed on Reinvested Dividends 0%
Deferred Sales Load 0%
Redemption Fee 0%
Exchange Fee 0%
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets)
<S> <C>
Management Fees(2) .85%
Administration Fee .15%
Other Expenses(3) .25%
-----
Total Operating Expenses(3) 1.25%
=====
</TABLE>
(1) Subsidiaries, correspondents, affiliated banks, and non-bank
affiliates of KeyCorp may charge a customer's account fees for
services provided in connection with investment in the Fund. (See
"How To Invest, Exchange and Redeem.")
(2) The Adviser has agreed to reduce its fee to the extent necessary so
that the total operating expenses of the Fund do not exceed 1.25% until
at least February 28, 1996. Absent the voluntary reduction of
investment advisory fees, "Management Fees" as a percentage of average
daily net assets would be 1.00%, and the Fund's total operating
expenses would be 1.40%.
(3) The Fund may pay a maximum of 0.25% of its average daily net assets to
financial institutions (including affiliates of KeyCorp) who have
entered into a Shareholder Servicing Agreement with the Fund. Had the
Fund paid a maximum of 0.25% of its average daily net assets, "Other
Expenses," as a percentage of the Fund's average daily net assets,
would be .62% and "Total Fund Operating Expenses" would be 1.62%.
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<C> <C> <C> <C>
$60 $85 $113 $191
</TABLE>
The purpose of the table above is to assist a potential investor in
understanding the various costs and expenses that an investor in the Fund will
bear directly or indirectly. See "Fund Organization and Fees" for a more
complete discussion of annual operating expenses of the Fund. The foregoing
example is based upon expenses for the fiscal year ended October 31, 1995 and
expenses that the Fund is expected to incur during the current fiscal year. THE
FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
- 3 -
<PAGE> 115
FINANCIAL HIGHLIGHTS
THE FUND'S FINANCIAL HISTORY
The table below sets forth certain financial information with respect to the
financial highlights for the Growth Fund for the period indicated. The
information below (except as indicated) has been derived from financial
statements audited by Coopers & Lybrand L.L.P., independent accountants for the
Victory Portfolios, whose report thereon, together with the financial statements
of the Fund, are incorporated by reference into or contained in the Statement of
Additional Information.
THE VICTORY GROWTH FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FISCAL YEAR SIX MONTHS DECEMBER 3,1993
ENDED ENDED TO OCTOBER 31,
OCTOBER 31, 1995 APRIL 30, 1995 1994(A)
---------------- -------------- -------
(UNAUDITED)
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.23 $ 10.00
------- -------
INVESTMENT ACTIVITIES:
Net investment income 0.06 0.10
Net realized and unrealized gains (losses)
on investments 0.64 0.22
------- -------
Total from Investment Activities [To be inserted] 0.70 0.32
------- -------
DISTRIBUTIONS:
Net investment income (0.06) (0.09)
Net realized gains (0.05)
------- -------
Total Distributions (0.11) (0.09)
------- -------
Net Asset Value, End of Period $ 10.82 $ 10.23
======= =======
Total Return (Excludes Sales Charge) 6.91%(b) 3.22%(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $43,861 $66,921
Ratio of expenses to average net assets 1.03%(c) 0.94%(c)
Ratio of net investment income to average net assets 1.11%(c) 1.10%(c)
Ratio of expenses to average net assets* 1.39%(c) 1.51%(c)
Ratio of net investment income to average net assets* 0.75%(c) 0.52%(c)
Portfolio turnover 2.56% 28.09%
</TABLE>
* During the period the investment advisory, administration and/or
shareholder service fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would be as indicated.
(a) Period from commencement of operations.
(b) Aggregate.
(c) Annualized.
- 4 -
<PAGE> 116
THE FUND'S INVESTMENT OBJECTIVE
The Fund seeks to provide long-term growth of capital. The investment objective
of the Fund is fundamental and may not be changed without a vote of the holders
of a majority of the Fund's outstanding voting securities (as defined in the
Statement of Additional Information). There can be no assurance that the Fund
will achieve its investment objective.
INVESTMENT POLICIES OF THE FUND
The Fund pursues its objective by investing primarily in a diversified group of
common stocks of issuers listed on a nationally recognized exchange with an
emphasis on companies with superior prospects for long-term earnings growth and
price appreciation.
Under normal market conditions, Key Advisers or the Sub-Adviser selects
securities issued by companies with above-average growth rates, high return on
equity, high rate of reinvestment in the company, and strong balance sheets.
The investment policies of the Fund may be changed without an affirmative vote
of the holders of a majority of the Fund's outstanding voting securities unless
(1) a policy is expressly deemed to be a fundamental policy of the Fund or (2) a
policy is expressly deemed to be changeable only by such majority vote.
The Fund is advised by Key Advisers, an indirect subsidiary of KeyCorp, which
purchases securities for the Fund consistent with its investment objective and
policies and which meet the quality and maturity characteristics established for
the Fund.
From time to time, the Fund, to the extent consistent with its investment
objective, policies and restrictions, may invest in securities of issuers with
which Key Advisers or the Sub-Adviser or its affiliates have a lending
relationship.
ADDITIONAL INFORMATION REGARDING SECURITIES IN WHICH THE FUND MAY INVEST
The following paragraphs provide a brief description of some of the types of
securities in which the Fund may invest, the transactions it may make and
strategies it may adopt. The Fund may, following notice to its shareholders,
take advantage of other investment practices which are not at present
contemplated for use by the Fund or which currently are not available but which
may be developed, to the extent such investment practices are both consistent
with the Fund's investment objective and legally permissible for the Fund. Such
investment practices, if they arise, may involve risks which exceed those
involved in the activities described in this Prospectus.
The Fund may invest in preferred stocks, investment-grade corporate bonds and
notes, warrants, and high quality short-term debt obligations (including
variable amount master demand notes), bankers' acceptances, certificates of
deposit, repurchase agreements, obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, and demand and time deposits of
domestic and foreign banks and savings and loan associations. The Fund will
limit such investments to 20% of its respective total assets.
Changes in the value of portfolio securities will not affect cash income, if
any, derived from these securities but will affect the Fund's net asset value.
Because the Fund invests primarily in equity securities, which fluctuate in
value, the Fund's shares will fluctuate in value.
- - SHORT-TERM OBLIGATIONS. While the Growth Fund will normally be predominantly
invested in equity securities, there may be times when, in the opinion of Key
Advisers or the Sub-Adviser, market conditions warrant that, for temporary
defensive purposes, the Fund may hold more than 20% of its total assets in
short-term obligations. To the extent that the Fund's assets are so invested,
they will not be invested so as to meet its investment objective. The
instruments may include high grade liquid debt securities such as commercial
paper, certificates of deposit,
- 5 -
<PAGE> 117
bankers' acceptances, repurchase agreements which mature in less than seven
days, and United States Treasury Bills. Bankers' acceptances are instruments of
United States banks which are drafts or bills of exchange "accepted" by a bank
or trust company as an obligation to pay on maturity.
- - INVESTMENT GRADE SECURITIES. The Fund may invest in obligations which are
rated at the time of purchase within the four highest rating categories assigned
by a nationally recognized statistical ratings organization ("NRSRO")
(investment grade) or, if unrated, which Key Advisers or the Sub-Adviser
determines to be of comparable quality. Such obligations are considered by the
rating agencies to be of medium quality and thus may present investment risks
not present in more highly rated obligations. Such obligations lack outstanding
investment characteristics and may in fact have speculative characteristics as
well. Changes in economic conditions or other circumstances are more likely to
lead to a weakened capacity of the issuer of such obligations to make principal
and interest payments than is the case for higher grade obligations. The
applicable securities ratings are described in the Appendix to the Statement of
Additional Information.
- - FOREIGN SECURITIES. The Fund may invest in equity securities of foreign
issuers, including securities traded in the form of American Depository
Receipts. Any investments in foreign securities will be made in accordance with
the Fund's investment objective and policies. Foreign securities are subject to
special risks, which are described under the caption "Risk
Factors--International Investments." The Fund will limit its investments in such
securities to 20% of its total assets. The Fund will not hold foreign currency
as a result of investment in foreign securities.
- - OPTIONS. The Fund may engage in writing call options from time to time. The
Fund will write only covered call options (options on securities owned by the
Fund and index options). Such options must be listed on a national securities
exchange and issued by the Options Clearing Corporation. In order to close out a
call option it has written, the Fund will enter into a "closing purchase
transaction", i.e., the purchase of a call option on the same security with the
same exercise price and expiration date as the call option which the Fund
previously wrote on any particular security. When a portfolio security subject
to a call option is sold, the Fund will effect a closing purchase transaction to
close out any existing call option on that security. If the Fund is unable to
effect a closing purchase transaction, it will not be able to sell the
underlying security until the option expires or such Fund delivers the
underlying security upon exercise. Upon the exercise of an option, the Fund is
not entitled to the gains, if any, on securities underlying the options. The
Fund intends to limit its investment in call and index options to 25% of its
total assets.
The Fund may also purchase put options on securities for the purpose of hedging
against market risks related to its securities. The Fund may also purchase index
put and call options and write index options. Through the writing or purchase of
index options, the Fund can achieve many of the same objectives as through the
use of options on individual securities. Utilizing options is a specialized
investment technique that entails a substantial risk of a complete loss of the
amounts paid as premiums to writers of options.
- - FUTURES CONTRACTS. The Fund may also 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. For example, when interest rates are expected to rise or market values of
portfolio securities are expected to fall, the Fund can seek to offset a decline
in the value of its portfolio securities by entering into futures contract
transactions. When interest rates are expected to fall or market values are
expected to rise, the Fund, through the purchase of such contracts, can attempt
to secure better rates or prices than might later be available in the market
when it effects anticipated purchases.
- 6 -
<PAGE> 118
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.
Aggregate initial margin deposits for futures contracts, and premiums paid for
related options, may not exceed 5% of the Fund's total assets (other than in
connection with bona fide hedging purposes), and the value of securities that
are the subject of such futures and options (both for receipt and delivery) may
not exceed one-third of the market value of the Fund's total assets. Futures
transactions will be limited to the extent necessary to maintain the Fund's
qualification as a regulated investment company.
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 move in an unanticipated
manner. Such unanticipated changes may also result in poorer overall performance
than if the Fund had not entered into any futures transactions. In addition, the
value of a Fund's futures positions may not prove to be perfectly or even highly
correlated with the value of its portfolio securities 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.
- - ZERO COUPON BONDS. The Fund is permitted to purchase both zero coupon U.S.
government securities and zero coupon corporate securities ("zero coupon
bonds"). Zero coupon bonds are purchased at a discount from the face amount
because the buyer receives only the right to receive a fixed payment on a
certain date in the future and does not receive any periodic interest payments.
The effect of owning instruments which do not make current interest payments is
that a fixed yield is earned not only on the original investment but also, in
effect, on all discount accretion during the life of the obligations. This
implicit reinvestment of earnings at the same rate eliminates the risk of being
unable to reinvest distributions at a rate as high as the implicit yields on the
zero coupon bond, but at the same time eliminates the holder's ability to
reinvest at higher rates in the future. For this reason, zero coupon bonds are
subject to substantially greater price fluctuations during periods of changing
market interest rates than are comparable securities which pay interest
currently, which fluctuation increases the longer the period to maturity.
- - RECEIPTS. In addition to bills, notes and bonds issued by the U.S. Treasury,
the Fund may also purchase separately traded interest and principal component
parts of such obligations that are transferable through the Federal book entry
system, known as Separately Traded Registered Interest and Principal Securities
("STRIPS") and Coupon Under Book Entry Safekeeping ("CUBES"). These instruments
are issued by banks and brokerage firms and are created by depositing Treasury
notes and Treasury bonds into a special account at a custodian bank; the
custodian holds the interest and principal payments for the benefit of the
registered owners of the certificates or receipts. The custodian arranges for
the issuance of the certificates or receipts evidencing ownership and maintains
the register. Receipts include Treasury Receipts ("TRs"), Treasury Investment
Growth Receipts ("TIGRs") and Certificates of Accrual on Treasury Securities
("CATS").
STRIPS, CUBES, TRs, TIGRs and CATS are sold as zero coupon securities, which
means that they are sold at a substantial discount and redeemed at face value at
their maturity date without interim cash payments of interest or principal. This
discount is amortized over the life of the security, and such amortization will
constitute the income earned on the security for both accounting and tax
purposes. Because of these features, these securities may be subject to greater
interest rate volatility than interest-paying U.S. Treasury obligations. The
Growth Fund will limit its investment in such instruments to 20% of its total
assets.
- - SECURITIES LENDING. In order to generate additional income, the Fund may, from
time to time, lend its portfolio securities to broker-dealers, banks or
institutional borrowers of securities. The Fund must receive collateral equal to
100% of the securities' value in the form of cash or U.S. Government securities,
plus any interest due, which collateral must be marked to market daily by Key
Advisers or the Sub-Adviser. Should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund. During
the time portfolio securities are on loan, the borrower pays the Fund amounts
equal to any dividends or interest paid on such securities
- 7 -
<PAGE> 119
plus any interest negotiated between the parties to the lending agreement. Loans
are subject to termination by the Fund or the borrower at any time. While the
Fund does not have the right to vote securities on loan, the Fund intends to
terminate the loan and regain the right to vote if that is considered important
with respect to the investment. The Fund will only enter into loan arrangements
with broker-dealers, banks or other institutions which Key Advisers or the
Sub-Adviser. has determined are creditworthy under guidelines established by the
Victory Portfolios' Board of Trustees. The Fund intends to limit its securities
lending to 33 1/3% of total assets.
- - WHEN-ISSUED SECURITIES. The Fund may purchase securities on a when-issued or
delayed delivery basis. These transactions are arrangements in which the Fund
purchases securities with payment and delivery scheduled for a future time. When
the Fund agrees to purchase securities on a when-issued basis, the Fund's
custodian must set aside cash or liquid portfolio securities equal to the amount
of that commitment in a separate account, and may be required to subsequently
place additional assets in the separate account to maintain equivalence with the
Fund's commitment. Prior to delivery of when-issued securities, their value is
subject to fluctuation and no income accrues until their receipt. The Fund
engages in when-issued and delayed delivery transactions only for the purpose of
acquiring portfolio securities consistent with its respective investment
objective and policies, and not for investment leverage. In when-issued and
delayed delivery transactions, the Fund relies on the seller to complete the
transaction; its failure to do so may cause the Fund to miss a price or yield
considered to be advantageous.
- - VARIABLE AND FLOATING RATE SECURITIES. The Fund may purchase variable and
floating rate notes with ratings within the four highest rating groups assigned
by an NRSRO or, if unrated, which Key Advisers or the Sub-Adviser deems to be of
comparable quality. The interest rates on these securities may be reset daily,
weekly, quarterly, or some other reset period, and may be subject to a floor or
ceiling. There is a risk that the current interest rate on such obligations may
not accurately reflect existing market interest rates. There may be no active
secondary market with respect to a particular variable or floating rate note.
Variable and floating rate notes for which no readily available market exists
will be purchased in an amount which, together with other illiquid securities
held by the Fund, does not exceed 15% of the Fund's total assets unless such
notes are subject to a demand feature that will permit the Fund to receive
payment of the principal within seven days after demand therefor.
- - REPURCHASE AGREEMENTS. Under the terms of a repurchase agreement, the Fund
acquires securities from financial institutions or registered broker-dealers,
subject to the seller's agreement to repurchase such securities at a mutually
agreed upon date and price. The seller is required to maintain the value of
collateral held pursuant to the agreement at not less than the repurchase price
(including accrued interest). If the seller were to default on its repurchase
obligation or become insolvent, the Fund holding such obligation would suffer a
loss to the extent that the proceeds from a sale of the underlying portfolio
securities were less than the repurchase price, or to the extent that the
disposition of such securities by the Fund is delayed pending court action.
Repurchase agreements are considered by the staff of the Commission to be loans
by the Fund.
- - REVERSE REPURCHASE AGREEMENTS. The Fund may borrow funds for temporary
purposes by entering into reverse repurchase agreements. Pursuant to such
agreements, the Fund sells portfolio securities to financial institutions such
as banks and broker-dealers, and agrees to repurchase them at a mutually
agreed-upon date and price. At the time the Fund enters into a reverse
repurchase agreement, it must place in a segregated custodial account assets
having a value equal to the repurchase price (including accrued interest); the
collateral will be marked to market on a daily basis, and will be continuously
monitored to ensure that such equivalent value is maintained. Reverse repurchase
agreements involve the risk that the market value of the securities sold by the
Fund may decline below the price at which the Fund is obligated to repurchase
the securities. Reverse repurchase agreements are considered to be borrowings
under the Investment Company Act of 1940 (the "1940 Act").
- - INVESTMENT COMPANY SECURITIES. The Fund may invest up to 5% of its total
assets in the securities of any one investment company, but may not own more
than 3% of the securities of any one investment company or invest more than 10%
of its total assets in the securities of other investment companies. Pursuant to
an exemptive order received by the Victory Portfolios from the Commission, the
Fund may invest in the money market funds of the Victory Portfolios. Key
Advisers and/or the Sub-Adviser will waive its fee attributable to the Fund's
assets invested in a fund of the Victory Portfolios, and, to the extent required
by the laws of any state in which shares of the Fund
- 8 -
<PAGE> 120
are sold, Key Advisers and/or the Sub-Adviser will waive their respective
investment advisory fees as to all assets invested in other investment
companies. Because such other investment companies employ an investment adviser,
such investment by the Fund will cause shareholders to bear duplicative fees,
such as management fees, to the extent such fees are not waived by Key Advisers
and/or the Sub-Adviser.
- - BORROWING. The Fund may enter into commitments to purchase securities in
accordance with its investment program, including delayed-delivery and
when-issued securities and reverse repurchase agreements, provided that the
total amount of any such borrowing does not exceed 33 1/3% of the Fund's total
assets. The Fund may borrow money for temporary or emergency purposes in an
amount not exceeding 5% of the value of its total assets at the time when the
loan is made. Any borrowings representing more than 5% of the Fund's total
assets must be repaid before the Fund may make additional investments. The Fund
does not currently intend to borrow for leveraging purposes.
- - ILLIQUID INVESTMENTS AND RESTRICTED SECURITIES. The Fund may invest up to 15%
of its net assets in illiquid investments (investments that cannot be readily
sold within seven days in the usual course of business at approximately the
price at which the Fund has valued them), including Restricted Securities (as
defined below) deemed to be illiquid. Under the supervision of the Trustees, Key
Advisers or the Sub-Adviser determines the liquidity of the Fund's investments.
The absence of a trading market can make it difficult to ascertain a market
value for illiquid investments. Disposing of illiquid investments may involve
time-consuming negotiation and legal expenses, and it may be difficult or
impossible for the Fund to sell them promptly at an acceptable price.
"Restricted Securities" are securities which are subject to restrictions on
resale due to acquisition without registration under the Securities Act of 1933,
as amended (the "1933 Act"). Unless registered for sale, these securities can
only be sold in privately negotiated transactions or pursuant to an exemption
from registration. See "Private Placement Investments," below.
- - PRIVATE PLACEMENT INVESTMENTS. The Fund may invest in commercial paper issued
in reliance on the exemption from registration afforded by Section 4(2) of the
1933 Act. Section 4(2) commercial paper is restricted as to disposition under
federal securities law and is generally sold to institutional investors, such as
the Fund, that agree that they are purchasing the paper for investment purposes
and not with a view to public distribution. Any resale by the purchaser must be
in an exempt transaction. Section 4(2) commercial paper is normally resold to
other institutional investors like the Fund through or with the assistance of
the issuer or investment dealers who make a market in Section 4(2) commercial
paper, thus providing liquidity. The Fund believes that Section 4(2) commercial
paper and possibly certain other Restricted Securities that meet the criteria
for liquidity established by the Trustees are quite liquid. The Fund intends,
therefore, to treat the Restricted Securities that meet the criteria for
liquidity established by the Trustees, including Section 4(2) commercial paper,
as determined by Key Advisers or the Sub-Adviser, as liquid and not subject to
the investment limitation applicable to illiquid securities. Therefore, the Fund
will generally purchase Section 4(2) commercial paper without regard to the
Fund's restriction on illiquid securities.
The ability of the Trustees to determine the liquidity of certain Restricted
Securities is permitted under a position of the Staff of the Commission set
forth in the adopting release for Rule 144A under the 1933 Act (the "Rule"). The
Rule is a nonexclusive safe-harbor providing an exemption from registration
under the 1933 Act for resales of Restricted Securities to qualified
institutional buyers. The Rule was expected to further enhance the liquidity of
the secondary market for the types of securities eligible for resale under Rule
144A. The Victory Portfolios believes that the staff of the Commission has left
the question of determining the liquidity of all Restricted Securities to the
Trustees. The Trustees consider the following criteria in determining the
liquidity of certain restricted securities: the frequency of trades and quotes
for the security; the number of dealers willing to purchase or sell the security
and the number of other potential buyers; dealer undertakings to make a market
in the security; and the nature of the security and the nature of the
marketplace trades.
INVESTMENT RISKS
INTERNATIONAL INVESTMENTS. Generally, investments in securities of foreign
companies involve greater risks than are present in U.S. investments. Compared
to U.S. and Canadian companies, there is generally less publicly
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available information about foreign companies and there may be less governmental
regulation and supervision of foreign stock exchanges, brokers and listed
companies. Foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to U.S. companies. Securities of some foreign
companies are less liquid, and their prices more volatile, than securities of
comparable U.S. companies. Settlement of transactions in some foreign markets
may be delayed or may be less frequent than in the U.S., which could affect the
liquidity of the Growth Fund's investment. In addition, with respect to some
foreign countries, there is the possibility of nationalization, expropriation or
confiscatory taxation; limitations on the removal of securities, property or
other assets of the Fund; political or social instability; increased difficulty
in obtaining legal judgments; or diplomatic developments which could affect U.S.
investments in those countries. Key Advisers or the Sub-Adviser will take such
factors into consideration in managing the Fund's investments.
CERTAIN INVESTMENT TECHNIQUES. Certain investment management techniques which
the Fund may use, such as the purchase and sale of futures and options,
described above, may expose the Fund to special risks. These products may be
used to adjust the risk and return characteristics of the Fund's portfolio of
investments. These various products may increase or decrease exposure to
security prices, interest rates, or other factors that affect security values,
regardless of the issuer's credit risk. Regardless of whether the intent was to
decrease risk or increase return, if market conditions do not perform
consistently with expectations, these products may result in a loss. In
addition, losses may occur if counterparties involved in transactions do not
perform as promised. These products may expose the Fund to potentially greater
risk of loss than more traditional equity investments.
NOTE: The Statement of Additional Information contains information about certain
investment practices and portfolio securities of the Fund. The Statement of
Additional Information also contains information about investment restrictions
designed to reduce the risk of an investment in the Fund.
LIMITING INVESTMENT RISKS
The following summarizes the Fund's principal investment limitations. A complete
listing is contained in the Statement of Additional Information.
1. (a) The Fund may borrow money solely for temporary or emergency
purposes, but not in an amount exceeding 33 1/3% of its total assets.
(b) The Fund may borrow money from banks or by engaging in reverse
repurchase agreements. (c) The Fund will not purchase securities
when borrowings exceed 5% of its total assets. If the Fund borrows
money, its share price may be subject to greater fluctuation until the
borrowing is paid off. To this extent, purchasing securities when
borrowings are outstanding may involve an element of leverage.
2. The Fund will not purchase a security if, as a result, more than 15%
of its net assets would be invested in illiquid securities. The Fund
may invest up to 15% of its net assets in illiquid investments
(investments that cannot be readily sold within seven days in the
usual course of business at approximately the price at which the Fund
has valued them), including restricted securities deemed to be
illiquid. Under the supervision of the Trustees, Key Advisers or the
Sub- Adviser determines the liquidity of the Fund's investments. The
absence of a trading market can make it difficult to ascertain a
market value for illiquid investments. Disposing of illiquid
investments may involve time-consuming negotiation and legal expenses,
and it may be difficult or impossible for the Fund to sell them
promptly at an acceptable price.
Except for the Fund's investment objective and the percentage limitation on
borrowing in limitation 1(a), the investment policies described in this
Prospectus are not fundamental. Non-fundamental limitations may be changed
without shareholder approval. Whenever an investment policy or limitation states
a maximum percentage of the Fund's assets that may be invested, such percentage
limitation will be determined immediately after and as a result of the
investment, except in the case of borrowing (or other activities that may be
deemed to result in the issuance of a "senior security" under the 1940 Act). Any
subsequent change in values, assets, or other circumstances will not be
considered when determining whether the investment complies with the Fund's
investment policies and
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limitations. If the value of a Fund's holdings of illiquid securities at any
time exceeds the percentage limitation applicable at the time of acquisition due
to subsequent fluctuations in value or other reasons, the Board of Trustees will
consider what actions, if any, are appropriate to maintain adequate liquidity.
PORTFOLIO TRANSACTIONS
Brokerage firms are utilized to conduct securities transactions for the Fund.
Broker-dealers are chosen by judging professional ability and quality of
service.
Key Advisers or the Sub-Adviser may allocate transactions to broker-dealers who
help distribute the Fund's shares or the shares of the other funds of the
Victory Portfolios, to the extent permitted by law. Key Advisers or the
Sub-Adviser will make such allocations only if brokerage fees are comparable to
those charged by non-affiliated, qualified broker-dealers for similar services.
Key Advisers or the Sub-Adviser may engage in short-term trading with respect to
the Fund when it believes it is consistent with the Fund's investment objective
and policies. The frequency of portfolio transactions--the Fund's turnover
rate--will vary from year for to year depending on market conditions.
For the fiscal periods ended October 31, 1994 and October 31, 1995, the annual
portfolio turnover rates for the Fund were 28.09% and ____%, respectively.
HOW TO INVEST, EXCHANGE AND REDEEM
HOW TO INVEST
Shares may be purchased directly or through an Investment Professional.
Investment Professionals are securities brokers or other financial institutions
that have entered into selling or servicing agreements with the Fund or the
Distributor. Shares are also available to clients of bank trust departments who
have qualified trust accounts. The minimum investment is $500 for the initial
purchase and $25 thereafter. Accounts set up through a bank trust department or
an Investment Professional may be subject to different minimums.
- - Investing Through Your Investment Professional. Your Investment Professional
will place your order with the Transfer Agent on your behalf. You may be
required to establish a brokerage or agency account. Your Investment
Professional will notify you whether subsequent trades should be directed to the
Investment Professional or directly to the Fund's Transfer Agent. Accounts
established with Investment Professionals may have different features,
requirements and fees. In addition, Investment Professionals may charge for
their services. Information regarding these features, requirements and fees will
be provided by the Investment Professional. If you are purchasing shares of any
Fund through a program of services offered or administered by your Investment
Professional, you should read the program materials in conjunction with this
Prospectus.
- - Investing Through The Systematic Investment Plan. You can use the
Systematic Investment Plan to purchase shares directly from your bank account.
Please refer to "Systematic Investment Plan" below for more details.
- - Investing Through Your Bank Trust Department. Your bank trust department may
require a minimum investment and may charge additional fees. Fee schedules for
such accounts are available upon request and are detailed in the agreements by
which a client opens the desired account. Your bank trust department may require
a completed and signed application for the Fund in which an investment is made.
Additional documents may be required from corporations, associations, and
certain fiduciaries. Any account information, such as balances, should be
obtained through your bank trust department. Additional purchases, exchanges or
redemptions should also be coordinated through your bank trust department.
Contact your bank trust department for instructions.
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<PAGE> 123
The services rendered by a bank trust department, including affiliates of Key
Advisers or the Sub-Adviser, in the management of its accounts are not
duplicative of any of the services for which Key Advisers or the Sub-Adviser as
the investment adviser or sub-adviser, respectively, is compensated for
advising the Fund. The charges paid by clients of bank trust departments, or
their affiliates, should be considered in calculating the net yield and return
on investments in the Fund, although such charges do not affect the Fund's
dividends and distributions.
INVESTING DIRECTLY
BY MAIL: You may purchase shares by completing and signing an account
application (initial purchase only) and mailing it, together with a check (or
other negotiable bank draft or money order) in the amount of at least the
minimum investment requirement to, The Victory Growth Fund, Primary Funds
Service Corporation, P.O. Box 9741, Providence, RI 02940-9741. Subsequent
purchases may be made in the same manner.
BY WIRE: Call 800-539-3863 to set up your Fund account to accommodate wire
transactions. YOU MUST CALL THE TRANSFER AGENT BEFORE WIRING FUNDS. You will
begin to earn dividends on the first business day following receipt of your
wire. Federal funds (monies transferred from one bank to another through the
Federal Reserve System with same-day availability) should be wired to:
Boston Safe Deposit & Trust Co.
ABA #011001234
Credit PFSC DDA #16-918-8
The Victory Portfolios: Growth Fund
You must include your account number, your name(s), tax identification number(s)
and the control number assigned by the Transfer Agent. The Fund does not impose
a fee for wire transactions, although your bank may charge you a fee for this
service.
Shares are sold at the public offering price based on the net asset value that
is next determined after the Transfer Agent receives the purchase order. In most
cases, to receive that day's offering price, the Transfer Agent must receive
your order as of the close of regular trading of the New York Stock Exchange
("NYSE") (generally 4:00 pm Eastern time) (the "Valuation Time") on each
Business Day (as defined in "Net Asset Value Per Share")of the Fund. If you buy
shares through an Investment Professional, the Investment Professional must
receive your order in a timely fashion on a regular Business Day and transmit it
to the Transfer Agent so that it is received before the close of business that
day. The Transfer Agent may reject any purchase order for the Fund's shares, in
its sole discretion.
It is the responsibility of your Investment Professional to transmit your order
to purchase shares to the Transfer Agent in a timely fashion in order for you to
receive that day's share price. The Fund must receive payment within three
business days after an order is placed. Otherwise, the purchase order will be
canceled and you could be held liable for resulting fees and/or losses.
INVESTMENT REQUIREMENTS
All purchases must be made in U.S. dollars. Checks must be drawn on U.S. banks.
No cash will be accepted. If you make a purchase with more than one check, each
check must have a value of at least $25, and the minimum investment requirement
still applies. The Fund reserves the right to limit the number of checks
processed at one time. If your check does not clear, your purchase will be
canceled and you could be liable for any losses or fees incurred. Payment for
the purchase is expected at the time of the order. If payment is not received
within three business days of the date of the order, the order may be canceled,
and you could be held liable for resulting fees and/or losses.
Shares are sold at their offering price, which is normally net asset value plus
an initial sales charge. However, in some cases, described below, where
purchases are not subject to an initial sales charge, the offering price may be
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<PAGE> 124
net asset value. In some cases, reduced sales charges may be available, as
described below. When you invest, the Fund receives the net asset value for your
account. The sales charge varies depending on the amount of your purchase and a
portion may be retained by the Distributor and allocated to your Investment
Professional. The Victory Portfolios has a reinstatement policy which allows an
investor who redeems his/her shares originally purchased with a sales charge to
reinvest within 90 days without incurring an additional sales charge. The
current sales charge rates and commissions paid to Investment Professionals are
as follows:
<TABLE>
<CAPTION>
FRONT-END SALES CHARGE
AS A PERCENTAGE OF:
-------------------
OFFERING NET AMOUNT DEALER
AMOUNT OF PURCHASE PRICE INVESTED REALLOWANCE
- ------------------ ----- -------- -----------
<S> <C> <C> <C>
Less than $49,999 4.75% 4.99% 4.00%
$50,000 to $99,999 4.50% 4.71% 4.00%
$100,000 to $249,999 3.50% 3.63% 3.00%
$250,000 to $499,999 2.25% 2.30% 2.00%
$500,000 to $999,999 1.75% 1.78% 1.50%
$1,000,000 and above 0.00% 0.00% *
</TABLE>
* There is no initial sales charge on purchases of $1 million or more.
Investment Professionals will be compensated at the rate of up to 0.25%
on such purchases.
The Distributor reserves the right to reallow the entire commission to dealers.
If that occurs, the dealer may be considered an "underwriter" under Federal
securities laws.
The Distributor may pay all or a portion of any applicable sales charges and
service fees to Investment Professionals who sell shares of the Fund and provide
ongoing sales support services or shareholder support services. For the
three-year period commencing April 30, 1994, for activities in maintaining and
servicing accounts of customers invested in the Fund, First Albany Corporation
("First Albany") and PFIC Securities Corporation ("PFIC") may receive payments
from the Distributor equal to two-thirds of the Dealer Retention (as defined
below) on any shares of the Fund (and other funds of the Victory Portfolios)
sold by First Albany or PFIC and their broker-dealer affiliates. "Dealer
Retention" is an amount equal to the difference between the applicable sales
charge and such part of the sales charge which is reallowed to broker-dealers.
The Distributor, at its expense, may also provide additional cash compensation
to dealers in connection with sales of shares of the Fund. The maximum cash
compensation payable by the Distributor is currently 4.00% of the offering
price. In addition, the Distributor will, from time to time and at its own
expense, provide compensation, including financial assistance, to dealers in
connection with conferences, sales or training programs for their employees,
seminars for the public, advertising campaigns regarding one or more Victory
Portfolios and/or other dealer-sponsored special events including payment for
travel expenses, including lodging, incurred in connection with trips taken by
invited registered representatives and members of their families to locations
within or outside of the United States for meetings or seminars of a business
nature. Compensation will include the following types of non-cash compensation
offered through sales contests: (1) vacation trips including the provision of
travel arrangements and lodging; (2) tickets for entertainment events (such as
concerts, cruises and sporting events) and (3) merchandise (such as clothing,
trophies, clocks and pens). Dealers may not use sales of the Fund's shares to
qualify for this compensation to the extent such may be prohibited by the laws
of any state or any self-regulatory organization, such as the National
Association of Securities Dealers, Inc. None of the aforementioned compensation
is paid for by the Fund or its shareholders.
REDUCED SALES CHARGES. You may be eligible to buy shares at reduced sales
charge rates in one or more of the following ways:
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<PAGE> 125
LETTER OF INTENT. An investor may obtain a reduced sales charge by means of a
written Letter of Intent which expresses the investor's intention to purchase
shares of the Fund at a specified total public offering price within a 13-month
period.
A Letter of Intent is not a binding obligation upon the investor to purchase the
full amount indicated. The minimum initial investment under a Letter of Intent
is 5% of the total amount. Shares purchased with the first 5% of such amount
will be held in escrow (while remaining registered in the name of the investor)
to secure payment of the higher sales charge applicable to the shares actually
purchased if the full amount indicated is not purchased, and such escrowed
shares will be involuntarily redeemed to pay the additional sales charge, if
necessary. Dividends (if any) on escrowed shares, whether paid in cash or
reinvested in additional shares, are not subject to escrow. The escrowed shares
will not be available for disposal by the investor until all purchases pursuant
to the Letter of Intent have been made or the higher sales charge has been paid.
When the full amount indicated has been purchased, the escrow will be released.
A Letter of Intent may include purchases of shares made not more than 90 days
prior to the date the investor signs a Letter of Intent; however, the 13-month
period during which the Letter of Intent is in effect will begin on the date of
the earliest purchase to be included. An investor may combine purchases that are
made in an individual capacity with (1) purchases that are made by members of
the investor's immediate family and (2) purchases made by businesses that the
investor owns as sole proprietorships, for purposes of obtaining reduced sales
charges by means of a written Letter of Intent. In order to accomplish this,
however, investors must designate on the account application the accounts that
are to be combined for this purpose. Investors can only designate accounts that
are open at the time the Letter of Intent is executed.
If an investor qualifies for a further reduced sales charge because the investor
has either purchased more than the dollar amount indicated on the Letter of
Intent or has entered into a Letter of Intent which includes shares purchased
prior to the date of the Letter of Intent, the difference in the sales charge
will be used to purchase additional shares of the Fund on behalf of the
investor; thus the total purchases (included in the Letter of Intent) will
reflect the applicable reduced sales charge of the Letter of Intent.
For investors who purchase more than the dollar amount indicated on the Letter
of Intent or enter into a Letter of Intent that includes shares purchased prior
to the date of the Letter of Intent and qualify for a reduced sales charge, all
such additional shares will be immediately purchased in the form of additional
shares and credited to the investor's account at the then current public
offering price applicable to a single purchase of the total amount of the
purchases.
For further information about Letters of Intent, interested investors should
contact the Transfer Agent at 800-539-3863. This program, however, may be
modified or eliminated at any time without notice.
RIGHT OF ACCUMULATION AND CONCURRENT PURCHASES
A shareholder may qualify for a reduced sales charge on purchases of shares of
the Fund and other funds of the Victory Portfolios by combining a current
purchase with purchases of another fund(s) or with certain prior purchases of
shares of the Victory Portfolios. The applicable sales charge is based on the
sum of (i) the purchaser's current purchase plus (ii) the current public
offering price of the purchaser's previous purchases of (a) all shares held by
the purchaser in the Fund and (b) all shares held by the purchaser in any other
fund of the Victory Portfolios (except money market funds).
To receive the applicable public offering price pursuant to the right of
accumulation, shareholders must provide the Transfer Agent with sufficient
information at the time of purchase to permit confirmation of qualification.
Accumulation privileges may be amended or terminated without notice at any time
by the Distributor.
- - WAIVERS OF SALES CHARGES. No sales charge is imposed on sales of shares to
the following categories of persons (which categories may be changed or
eliminated at any time):
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<PAGE> 126
(1) Current or retired trustees of the Victory Portfolios; employees,
directors, trustees, and their family members of KeyCorp or an
Affiliated Provider (Affiliated Providers refer to affiliates and
subsidiaries of KeyCorp and service providers to the Victory
Portfolios and the Victory Shares (collectively, the "Victory
Group")), dealers having an agreement with the Distributor and any
trade organization to which Key Advisers, the Sub-Adviser or the
Administrator belongs;
(2) Investors who purchase shares for trust, investment management or
certain other advisory accounts established with KeyCorp or any of its
affiliates;
(3) Investors who purchase shares through a 401(k) plan sponsored by an
Affiliated Provider;
(4) Investors who reinvest assets received in a distribution from a
qualified, non-qualified or deferred compensation plan, agency, trust
or custody account that was either (a) maintained by KeyCorp or an
Affiliated Provider, or (b) invested in a fund of the Victory Group;
(5) Investors who, within 90 days of redemption, use the proceeds from the
redemption of shares of another mutual fund complex for which they
previously paid a front end sales charge or sales charge upon
redemption of shares; and
(6) Shareholders of the former Investors Preference Fund For Income, Inc.
and the Investors Preference New York Tax-Free Fund, Inc. who have
continuously maintained accounts with a fund or funds of the Victory
Group with a balance of $250,000 or more (investors with less than
$250,000 will pay any applicable sales loads).
SPECIAL INVESTOR SERVICES
- - THE SYSTEMATIC INVESTMENT PLAN. You can make regular investments in the Fund
and all other funds of the Victory Group with the Systematic Investment Plan by
completing the appropriate section of the account application and attaching a
voided personal check with your bank's magnetic ink coding number across the
front. If your bank account is jointly owned, be sure that all owners sign. You
must first meet the Fund's initial investment requirement of $500, then
investments may be made monthly by automatically deducting $25 or more from your
bank checking account. For officers, trustees, directors and employees,
including retired directors and employees, of the Victory Group, KeyCorp and its
affiliates, and the Administrator and its affiliates (and family members of each
of the foregoing, i.e., parents and children) who participate in the Systematic
Investment Plan, there is no minimum initial investment required. You may change
the amount of your monthly purchase at any time. A bank draft form must be
completed for this option. Your bank checking account will be debited on the
date indicated on your Account Application. Shares will be purchased at the
offering price next determined following receipt of the order by the Transfer
Agent. You may cancel the Systematic Investment Plan at any time without payment
of a cancellation fee. Your monthly account statement will reflect systematic
investment transactions, and a debit entry will appear on your bank statement.
- - TELEPHONE TRANSACTIONS. You can initiate any transaction by telephone. You may
call the Transfer Agent toll-free at 800-539-3863 or call your Investment
Professional or bank trust department. See "Shareholder Account Rules and
Policies" for more information about telephone transactions.
- - THE SYSTEMATIC WITHDRAWAL PLAN. You can make regular withdrawals from your
account in any fund of the Victory Group with the Systematic Withdrawal Plan by
completing the appropriate section of the account application. If you own shares
in a fund worth $5,000 or more, you can have monthly, quarterly, semi-annual or
annual checks sent from your account directly to you, to a person named by you,
or to your bank checking account. The required minimum withdrawal is $25. If you
are having checks sent to your bank checking account, attach a voided personal
check with your bank's magnetic coding number across the front of the account
application. If your account is jointly owned, be sure that all owners sign the
application. You may obtain information about the Systematic Withdrawal Plan by
contacting your Investment Professional. Your Systematic Withdrawal Plan
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<PAGE> 127
payments are drawn from share redemptions. If Systematic Withdrawal Plan
redemptions exceed dividend distributions paid on your Fund shares, your account
eventually may be exhausted. If any applicable sales charges are applied to new
purchases of shares of the Fund, it is to your disadvantage to buy shares of the
Fund while also making systematic redemptions.
Your account will be debited on the date you indicate on your Account
Application. Shares will be redeemed at the NAV as determined on the debit date
indicated on your Account Application. You may cancel the Systematic Withdrawal
Plan at any time without payment of a cancellation fee. Each Systematic
Withdrawal Plan transaction will appear as a debit entry on your monthly account
statement.
- - RETIREMENT PLANS. Retirement plans can be among the best tax-planning vehicles
available to individuals. Call your Investment Professional for more information
on the plans and their benefits, provisions and fees. Your Investment
Professional can set up your new account in the Fund under one of several
tax-sheltered plans. These plans let you invest for retirement and shelter your
investment income from current taxes. Plans include Individual Retirement
Accounts (IRAs) and Rollover IRAs. Other fees may be charged by the IRA
custodian or trustee.
HOW TO REDEEM SHARES
You may redeem all or a portion of your shares on any day that the Fund is open
for business (see "Share Price" below). Shares will be redeemed at the NAV next
calculated after the Transfer Agent has received the redemption request. If the
Fund account is closed, any accrued dividends will be paid at the beginning of
the following month.
You may redeem shares in several ways:
BY MAIL: Send a written request to: The Victory Portfolios: The Growth Fund
P.O. Box 9741
Providence, RI 02940-9741
Write a "letter of instruction" with your name, the Fund's name, your Fund
account number, the dollar amount or number of shares to be redeemed, and any
additional requirements that apply to each particular account. You will need the
letter of instruction signed by all persons required to sign for transactions,
exactly as their names appear on the account application. A signature guarantee
is required if: you wish to redeem more than $10,000 worth of shares; your Fund
account registration has changed within the last 60 days; the check is not being
mailed to the address on your account; the check is not being made out to the
account owner; or the redemption proceeds are being transferred to another
Victory Group account with a different registration. The following institutions
should be able to provide you with a signature guarantee: banks, brokers,
dealers, credit unions (if authorized under state law), securities exchanges and
associations, clearing agencies, and savings associations. A signature guarantee
may not be provided by a notary public. A signature guarantee is designed to
protect you, the Fund, and its agents from fraud. The Transfer Agent reserves
the right to reject any signature guarantee if (1) it has reason to believe that
the signature is not genuine, (2) it has reason to believe that the transaction
would otherwise be improper, or (3) the guarantor institution is a broker or
dealer that is neither a member of a clearing corporation nor maintains net
capital of at least $100,000.
BY WIRE: You may make redemptions by wire provided you have established a Fund
account to accommodate wire transactions. If telephone instructions are received
before Valuation Time (generally 4:00 p.m. Eastern time), proceeds of the
redemption will be wired as federal funds on the next Business Day to the bank
account designated with the Transfer Agent. You may change the bank account
designated to receive an amount redeemed at any time by sending a letter of
instruction with a signature guarantee to the Transfer Agent, Primary Funds
Service Corporation, P.O. Box 9741, Providence, RI 02940-9741.
BY TELEPHONE: To redeem by telephone, you may call the Transfer Agent toll free
at 800-539-3863 or call your Investment Professional or bank trust department.
See "Shareholder Account Rules and Policies" for more information about
telephone transactions.
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<PAGE> 128
ADDITIONAL REDEMPTION REQUIREMENTS: The Fund may withhold payment on redemptions
until it is reasonably satisfied that investments made by check have been
collected, which can take up to 15 days. Also, when the NYSE is closed (or when
trading is restricted) for any reason other than its customary weekend or
holiday closings, or under any emergency circumstances as determined by the
Commission to merit such action, the right of redemption may be suspended or the
date of payment postponed for a period of time that may exceed 7 days. In
addition, the Fund reserves the right to advance the time on that day by which
purchase and redemption orders must be received. To the extent that portfolio
securities are traded in other markets on days when the NYSE is closed, the
Fund's NAV may be affected on days when investors do not have access to the Fund
to purchase or redeem shares.
If you are unable to reach the Transfer Agent by telephone (for example, during
times of unusual market activity), consider placing your order by mail directly
to the Transfer Agent. In case of suspension of the right of redemption, you may
either withdraw your request for redemption or receive payment based on the NAV
next determined after the termination of the suspension. If your balance in a
Fund falls below $500, you may be given 60 days' notice to reestablish the
minimum balance (except with respect to officers, trustees, directors and
employees, including retired directors and employees, of the Victory Portfolios,
KeyCorp and its affiliates, and the Administrator and its affiliates (and family
members of each of the foregoing, i.e., parents, children and household members)
participating in the Systematic Investment Plan, to whom no minimum balance
requirement applies). If you do not increase your balance, your account may be
closed and the proceeds mailed to you at the address on record. Shares will be
redeemed at the last calculated NAV on the day the account is closed.
HOW TO EXCHANGE SHARES
Shares of the Fund may be exchanged for shares of certain funds of the Victory
Group at net asset value per share at the time of exchange, without a sales
charge. To exchange shares, you must meet several conditions:
- - Shares of the fund selected for exchange must be available for sale in
your state of residence.
- - The prospectuses of this Fund and the fund whose shares you want to buy
must offer the exchange privilege.
- - You must hold the shares you buy when you establish your account for at
least 7 days before you can exchange them; after the account is open 7
days, you can exchange shares every regular Business Day.
- - You must meet the minimum purchase requirements for the fund you
purchase by exchange.
- - The registration and tax identification numbers of the two accounts
must be identical.
- - Before exchanging into a fund, obtain and read its prospectus.
Shares of a particular class may be exchanged only for shares of the same class
in the other funds of the Victory Group. For example, you can exchange shares of
this Fund only for Class A shares of another fund. At present, not all of the
funds offer the same two classes of shares. If a fund has only one class of
shares that does not have a class designation, they are "Class A" shares for
exchange purposes. In some cases, sales charges may be imposed on exchange
transactions. Certain funds offer Class A or Class B shares and a list can be
obtained by calling the Transfer Agent at 800-539-3863. Please refer to the
Statement of Additional Information for more details about this policy.
Telephone exchange requests may be made either by calling your Investment
Professional or the Transfer Agent at 800-539-3863 prior to valuation time
(generally 4:00 p.m. Eastern time) on any Business Day.
You can obtain a list of eligible funds of the Victory Group by calling the
Transfer Agent at 800-539-3863. Exchanges of shares involve a redemption of the
shares of the Fund and a purchase of shares of the other portfolio.
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<PAGE> 129
There are certain exchange policies you should be aware of:
- - Shares are normally redeemed from one fund and purchased from the other fund
in the exchange transaction on the same Business Day on which the Transfer Agent
receives an exchange request by Valuation Time (generally 4:00 p.m. Eastern
time) that is in proper form, but either fund may delay the purchase of shares
of the fund into which you are exchanging if it determines it would be
disadvantaged by a same-day transfer of the proceeds to buy shares. For example,
the receipt of multiple exchange requests from a dealer in a "market-timing"
strategy might require the disposition of securities at a time or price
disadvantageous to the Fund.
- - Because excessive trading can hurt fund performance and harm shareholders, the
Victory Portfolios reserves the right to refuse any exchange request that will
disadvantage it, or to refuse multiple exchange requests submitted by a
shareholder or dealer.
- - The Fund may amend, suspend or terminate the exchange privilege at any time
upon 60 days' written notice to shareholders.
- - If the Transfer Agent cannot exchange all the shares you request because of a
restriction cited above, only the shares eligible for exchange will be
exchanged.
- - Each exchange may produce a gain or loss for tax purposes.
Shareholders of the former Investors Preference Fund for Income, Inc. and
Investors Preference New York Tax-Free Fund, Inc. will not be subject to any
additional sales load upon an exchange of shares attributable to an Investors
Preference Funds account for shares of other funds of the Victory Portfolios.
SHAREHOLDER ACCOUNT RULES AND POLICIES
- - NET ASSET VALUE PER SHARE. The term "net asset value per share," or "NAV",
means the value of one share. The NAV is calculated by adding the value of all
its investments, plus cash and other assets, deducting liabilities, and then
dividing the result by the number of shares outstanding. The NAV of the Fund is
determined and its shares are priced as of the close of regular trading of the
New York Stock Exchange (NYSE), (generally 4:00 p.m. Eastern Time) (the
"Valuation Time") on each Business Day of the Fund. A "Business Day" is a day on
which the NYSE is open for trading, the Federal Reserve Bank of Cleveland is
open, and any other day (other than a day on which no shares of the Fund are
tendered for redemption and no order to purchase any shares is received) during
which there is sufficient trading in its portfolio instruments that the Fund's
net asset value per share might be materially affected. The NYSE or the Federal
Reserve Bank of Cleveland will not be open in observance of the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans' Day,
Thanksgiving Day, and Christmas Day.
The Fund's securities are valued primarily on the basis of market quotations or,
if quotations are not readily available, by a method that the Board of Trustees
believes accurately reflects fair value. Fair value of these portfolio
securities is determined by an independent pricing service approved by the
Trustees based primarily upon information concerning market transactions and
dealers quotations for similar securities.
- - THE OFFERING OF SHARES may be suspended during any period in which the
determination of net asset value is suspended, and the offering may be suspended
by the Trustees at any time the Trustees believe it is in the Fund's best
interest to do so.
- - TELEPHONE TRANSACTION PRIVILEGES for purchases, redemptions or exchanges may
be modified, suspended or terminated by the Fund at any time. If an account has
more than one owner, the Fund and the Transfer Agent may rely on the
instructions of any one owner. Telephone privileges apply to each owner of the
account and the dealer representative of record for the account unless and until
the Transfer Agent receives cancellation instructions from an owner of the
account.
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<PAGE> 130
- - TELEPHONE INSTRUCTIONS. Generally, neither the Fund, the bank trust department
nor the Transfer Agent will be responsible for any claims, losses or expenses
for acting on telephone instructions that are reasonably believed to be genuine.
The Transfer Agent and the Fund will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine and if they do not
employ reasonable procedures they may be liable for any losses due to
unauthorized or fraudulent instructions. The identification procedures may
include, but are not limited to, the following: account number, registration and
address, personalized security codes, taxpayer identification number and other
information particular to the account. Your Investment Professional, bank trust
department or the Transfer Agent may also record calls, and you should verify
the accuracy of your confirmation statements immediately after you receive them.
- - REDEMPTION OR TRANSFER REQUESTS WILL NOT BE HONORED UNTIL THE TRANSFER AGENT
RECEIVES ALL REQUIRED DOCUMENTS IN PROPER FORM. From time to time, the Transfer
Agent in its discretion may waive certain of the requirements for redemptions
stated in this Prospectus.
- - DEALERS THAT CAN PERFORM ACCOUNT TRANSACTIONS FOR THEIR CLIENTS BY
PARTICIPATING IN NETWORKING through the National Securities Clearing Corporation
are responsible for obtaining their clients' permission to perform those
transactions and are responsible to their clients who are shareholders of the
Victory Portfolios if the dealer performs any transaction erroneously.
- - THE REDEMPTION PRICE FOR SHARES WILL VARY from day to day because the value of
the securities in the Fund fluctuates, and the value of your shares may be more
or less than their original cost.
- - PAYMENT FOR REDEEMED SHARES is made ordinarily in cash and forwarded by check
within three business days after the Transfer Agent receives redemption
instructions in proper form, except under unusual circumstances determined by
the Commission delaying or suspending such payments. The Transfer Agent may
delay forwarding a check for recently purchased shares, but only until the
purchase payment has cleared. That delay may be as much as 15 days from the date
the shares were purchased. That delay may be avoided if you arrange with your
bank to provide telephone or written assurance to the Transfer Agent that your
purchase payment has cleared.
- - INVOLUNTARY REDEMPTIONS OF SMALL ACCOUNTS. If your account value has fallen
below $500, you will be given 60 days' notice to reestablish the minimum
balance. If you do not increase your minimum balance, your account may be closed
and the proceeds mailed to you at the record address. In some cases involuntary
redemptions may be made to repay the Distributor for losses from the
cancellation of share purchase orders. Under unusual circumstances, shares of
the Fund may be redeemed "in kind," which means that the redemption proceeds
will be paid with securities from the Fund. Please refer to the Statement of
Additional Information for more details.
- - "BACKUP WITHHOLDING" of Federal income tax may be applied at the rate of 31%
from dividends, distributions and redemption proceeds (including exchanges) if
you fail to furnish the Victory Portfolios with a certified Social Security or
taxpayer identification number when you sign your application, or if you violate
Internal Revenue Service regulations on tax reporting of dividends.
- - THE VICTORY PORTFOLIOS DOES NOT CHARGE A REDEMPTION FEE, but if your
Investment Professional handles your redemption, they may charge a separate
service fee.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS. The Fund ordinarily declares and pays dividends from its net
investment income quarterly. The Fund distributes substantially all net capital
gains, if any, to shareholders each year, to the extent necessary to qualify for
favorable federal tax treatment.
CAPITAL GAINS. The Fund may make distributions annually out of any net
short-term or long-term capital gains, and the Fund may make supplemental
distributions of dividends and capital gains following the end of its fiscal
year.
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<PAGE> 131
DISTRIBUTION OPTIONS
When you fill out your account application, you can specify how you want to
receive your dividend distributions. Currently, there are five available
options:
1. REINVESTMENT OPTION. Your income and capital gain dividends, if any,
will be automatically reinvested in additional shares of the Fund.
Income and capital gain dividends will be reinvested at the net asset
value of the Fund as of the day after the record date. If you do not
indicate a choice on your application, you will be assigned this
option.
2. CASH OPTION. You will receive a check for each income or capital gain
dividend, if any. Distribution checks will be mailed no later than 7
days after the dividend payment date which may be more than 7 days
after the dividend record date.
3. INCOME EARNED OPTION. You will have your capital gain dividend
distributions, if any, reinvested automatically in the Fund and have
your income dividends paid in cash.
4. DIRECTED DIVIDENDS OPTION. You will have income and capital gain
dividends, or only capital gain dividends, automatically reinvested in
shares of another fund of the Victory Group. Shares will be purchased
at the NAV as of the dividend record date. If you are reinvesting
dividends of a fund sold without a sales charge in shares of a fund
sold with a sales charge, the shares will be purchased at the public
offering price. If you are reinvesting dividends of a fund sold with
a sales charge in shares of a fund sold with or without a sales
charge, the shares will be purchased at the net asset value of the
fund. Dividend distributions can be directed only to an existing
account with a registration that is identical to that of your Fund
account.
5. DIRECTED BANK ACCOUNT OPTION. You will have your income and capital
gain dividends, or only your income dividends, automatically
transferred to your bank checking or savings account. The amount will
be determined on the dividend record date and will normally be
transferred to your account within 7 days of the dividend record date.
Dividend distributions can be directed only to an existing account
with a registration that is identical to that of your Fund account.
Please call or write the Transfer Agent to learn more about this
dividend distribution option.
Any election or revocation of any of the above dividend distribution options may
be made in writing to the Fund and sent to Primary Funds Service Corporation,
P.O. Box 9741, Providence, RI 02940-9741, or by calling the Transfer Agent at
800-539-3863, and will become effective with respect to dividends having record
dates after receipt of the application or request by the Transfer Agent.
Reinvested dividend distributions receive the same tax treatment as dividend
distributions paid in cash.
COMPLETE REDEMPTIONS: If you request a complete redemption of all your Fund
shares, any dividend accrued to your account will be included in the redemption
check.
STATEMENTS AND REPORTS: You will receive a monthly statement reflecting all
transactions that affect the share balance or the registration of your Fund
account. You will receive a confirmation after every transaction that affected
the share balance of your Fund account, except for dividend reinvestment,
systematic investment and systematic withdrawal transactions. These transactions
will be detailed in your Fund account statement. Transactions that affect the
share balance of your Fund investment in an account established with an
Investment Professional or financial institution will be detailed in regular
statements or through confirmation procedures of the financial institution.
Certificates representing shares of the Fund will not be issued. An IRS Form
1099-DIV with federal tax information will be mailed to you by January 31 of
each tax year and also will be filed with the IRS. At least twice a year, you
will receive the Fund's financial reports.
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<PAGE> 132
FEDERAL TAXES
The Fund intends to qualify each year and elect to be treated as a separate
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "IRS Code"). If the Fund is treated as a "regulated
investment company" and all its taxable income is distributed to its
shareholders in accordance with the timing requirements imposed by the IRS Code,
it will not be subject to federal income tax on its income. The Fund's
distributions that are attributable to its net investment income and short-term
capital gains are taxable as ordinary income, and its distributions from
long-term capital gains are taxed as long-term capital gains. Such distributions
are taxable when they are paid, whether taken in cash or reinvested in
additional shares, except that distributions declared in October, November or
December and paid during the following January are taxable as if paid and
received on December 31. Dividends received from the Fund by corporate
shareholders are not entitled to the dividends-received deduction. The Fund
sends tax statements to its shareholders (with copies to the Internal Revenue
Service (the "IRS")) by January 31 showing the amounts and tax status of
distributions made (or deemed made) during the preceding calendar year.
REDEMPTION OR EXCHANGES
Investors may realize a gain or loss when redeeming (selling) or exchanging
shares. For most types of accounts, the Fund reports the proceeds to the IRS
annually. Because the shareholders' tax treatment also depends on their purchase
price and personal tax positions, shareholders should keep their regular account
statements to use in determining their tax. See "Buying a Dividend".
"BUYING A DIVIDEND"
On the record date for a distribution of ordinary income or capital gains
dividend, the net asset value of the Fund is reduced by the amount of the
distribution. An investor who buys shares just before the record date ("buying a
dividend") will pay the full price for the shares and then receive a portion of
the purchase price back as a taxable distribution.
OTHER TAX INFORMATION
The information above is only a summary of some of the federal income tax
consequences generally affecting the Fund and its shareholders, and no attempt
has been made to discuss individual tax consequences. A prospective investor
should also review the more detailed discussion of federal income tax
considerations in the Statement of Additional Information. In addition to
federal income tax, a shareholder may be subject to state or local taxes on the
shareholder's investment, depending on the laws in the shareholder's area.
Investors considering an investment in the Fund should consult their tax adviser
to determine whether the Fund is suitable to their particular tax situation.
When investors sign their account application, they are asked to provide their
correct social security or taxpayer identification number and other required
certifications. If investors do not comply with IRS regulations, the IRS can
require the Fund to withhold 31% of taxable distributions and redemptions from
their account.
PERFORMANCE
From time to time, performance information for the Fund showing total return may
be presented in advertisements, sales literature and in reports to shareholders.
Such performance figures are based on historical earnings and are not intended
to indicate future performance. Average annual total return will be calculated
over a stated period of more than one year. Average annual total return is
measured by comparing the value of an investment at the beginning of the
relevant period (as adjusted for sales charges, if any) to the redemption value
of the investment at the end of the period (assuming immediate reinvestment of
any dividends or capital gains distributions) and annualizing that figure.
Aggregate total return is calculated similarly to average annual total return,
except that the resulting difference is not annualized.
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<PAGE> 133
From time to time performance information for the Fund showing the yield and/or
effective yield for each class of shares may also be presented in
advertisements, sales literature and in reports to shareholders. Yields reflect
the deduction of the maximum sales charge. Such performance figures are based on
historical earnings and are not intended to indicate future performance. Yield
will be computed by dividing the Fund's net investment income per share earned
during a recent thirty-day period by the Fund's maximum offering price per share
(reduced by any undeclared earned income expected to be paid shortly as a
dividend) on the last day of the period and annualizing the result. Effective
yield is computed in a similar manner, but, when annualized, the income earned
by an investment in the Fund is assumed to be reinvested. The effective yield
will be slightly higher than the yield because of the compounding effect of this
assumed reinvestment.
Investors may also judge, and the Victory Portfolios may at times advertise, the
performance of the Fund by comparing it to the performance of other mutual funds
with comparable investment objectives and policies, which performance may be
contained in various unmanaged mutual fund or market indices or rankings such as
those prepared by Dow Jones & Co., Inc. and Standard & Poor's Corporation, in
publications issued by Lipper Analytical Services, Inc., and in the following
publications: IBC/Donoghue's Money Fund Reports, Ibbotson Associates, Inc.,
Morningstar, CDA/Wiesenberger, Money Magazine, Forbes, Barron's, The Wall Street
Journal, The New York Times, Business Week, American Banker, Fortune,
Institutional Investor, U.S.A. Today and local newspapers. In addition, general
information about the Fund that appears in publications such as those mentioned
above may also be quoted or reproduced in advertisements, sales literature or in
reports to shareholders.
Performance is a function of the type and quality of instruments held in the
Fund's portfolio, operating expenses, and market conditions. Consequently,
current performance will fluctuate and is not necessarily representative of
future results. Any fees charged by service providers with respect to customer
accounts for investing in shares of the Fund will not be reflected in
performance calculations.
Additional information regarding the performance of each of the Victory
Portfolios is included in the Victory Portfolios' annual report, which is
available free of charge by calling 800-539-3863.
FUND ORGANIZATION AND FEES
The Victory Portfolios is an open-end management investment company, commonly
known as a mutual fund, and currently consisting of twenty-eight series
portfolios, four of which are inactive. The Victory Portfolios has been
operating continuously since 1986, when it was created under Massachusetts law
as a Massachusetts business trust, although certain of its funds have a prior
operating history from their predecessor funds. On February 29, 1996 the Victory
Portfolios converted from a Massachusetts business trust to a Delaware business
trust. The Victory Portfolios' offices are located at 3435 Stelzer Road,
Columbus, OH 43219-3035.
Overall responsibility for management of the Victory Portfolios rests with its
Board of Trustees, who are elected by the shareholders of the Victory
Portfolios.
INVESTMENT ADVISER AND SUB-ADVISER
Key Advisers, Inc. is the investment adviser to the Fund. Key Advisers directs
the investment of the Victory Portfolios' assets, subject at all times to the
supervision of the Victory Portfolios' Board of Trustees. Key Advisers
continually supervises the investment and reinvestment of cash, securities and
other property comprising the assets of the Victory Portfolios.
Key Advisers was organized as an Ohio corporation on July 27, 1995 and is
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended. It is a wholly-owned subsidiary of KeyCorp Asset Management
Holdings, Inc., which is a wholly- owned subsidiary of Society National Bank, a
wholly-owned subsidiary of KeyCorp. Affiliates of Key Advisers manage
approximately $37 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals and mutual funds.
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<PAGE> 134
For the services provided and expenses incurred pursuant to its investment
advisory agreement with the Victory Portfolios respecting the Fund, Key Advisers
receives a fee, computed daily and paid monthly, at the annual rate of one
percent (1.00%) of the average daily net assets of the Fund. The advisory fees
for the Fund have been determined to be fair and reasonable in light of the
services provided to the Fund. Key Advisers may periodically waive all or a
portion of its advisory fee with respect to the Fund to increase the net income
of the Fund available for distribution as dividends. Prior to January 1, 1996,
the Sub-Adviser (Society Asset Management, Inc.) served as investment adviser to
the Fund. During the Fund's fiscal year ended October 31, 1995, the Sub- Adviser
received investment advisory fees aggregating .__% of the average daily net
assets of the Fund.
Under the investment advisory agreement between the Victory Portfolios, on
behalf of the Fund, and Key Advisers, Key Advisers may delegate a portion of its
responsibilities to a subadviser. In addition, the investment advisory agreement
provides that Key Advisers may render services through its own employees or the
employees of one or more affiliated companies that are qualified to act as an
investment adviser of the Fund and are under the common control of KeyCorp as
long as all such persons are functioning as part of an organized group of
persons, managed by authorized officers of Key Advisers.
Key Advisers has entered into an investment sub-advisory agreement with its
affiliate, Key Advisers or The Sub-Adviser., a registered investment adviser, on
behalf of the Fund. The Sub-Adviser is a wholly-owned subsidiary of KeyCorp
Asset Management Holdings, Inc. For its services under the investment
sub-advisory agreement, Key Advisers pays the Sub-Adviser sub-advisory fees at
an annual rate as a percentage of the Fund's average daily net assets as
follows: .65% of the first $10 million of average daily net assets; .50% of the
next $15 million of average daily net assets; .40% of the next $25 million of
average daily net assets; and .35% of average daily net assets in excess of $50
million.
The person primarily responsible for the investment management of the Fund as
well as her previous experience is as follows:
<TABLE>
<CAPTION>
MANAGING
PORTFOLIO MANAGER PORTFOLIO SINCE PREVIOUS EXPERIENCE
- ----------------- --------------- -------------------
<S> <C> <C>
William F. June, 1995 Portfolio manager with Society Asset
Ruple Management, Inc. since December 1992; portfolio manager with Society
National Bank from 1989 to December 1992.
</TABLE>
ADMINISTRATOR AND DISTRIBUTOR
Concord Holding Corporation is the Administrator for the Fund. Victory
Broker-Dealer Services, Inc. is the Fund's principal underwriter and
istributor.
The Administrator generally assists in all aspects of the Fund's administration
and operation. For expenses incurred and services provided as Administrator
pursuant to its management and administration agreement with the Victory
Portfolios, the Administrator receives a fee from the Fund, computed daily and
paid monthly, at an annual rate of fifteen one-hundredths of one percent (.15%)
of the Fund's average daily net assets. The Administrator may periodically waive
all or a portion of its administrative fee with respect to the Fund to increase
the net income of the Fund available for distribution as dividends. During the
fiscal year ended October 31, 1995, the Fund paid administration fees of .__% of
its average daily net assets.
TRANSFER AGENT AND FUND ACCOUNTANT
Primary Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741,
serves as the Fund's Transfer Agent pursuant to a Transfer Agency and
Shareholder Service Agreement with the Victory Portfolios and receives a fee
for such services based on various criteria, including assets, transactions and
the number of accounts. BISYS
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<PAGE> 135
Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, OH 43219, provides
certain accounting services for the Fund pursuant to a Fund Accounting Agreement
and receives a fee for such services.
SHAREHOLDER SERVICING
Shareholder services are provided to the Fund pursuant to agreements between the
Victory Portfolios and various shareholder servicing agents, including Key Trust
Company of Ohio, N.A. and its affiliates and other financial institutions and
securities brokers (each a "Shareholder Servicing Agent"). Each Shareholder
Servicing Agent generally will provide support services to shareholders by
establishing and maintaining accounts and records, processing dividend and
distribution payments, providing account information, arranging for bank wires,
responding to routine inquires, forwarding shareholder communication, assisting
in the processing of purchase, exchange and redemption requests, and assisting
shareholders in changing dividend options, account designations and addresses.
For expenses incurred and services provided as Shareholder Servicing Agent
pursuant to its respective Shareholder Servicing Agreement, the Fund pays each
Shareholder Servicing Agent a fee computed daily and paid monthly, in amounts
aggregating not more than twenty-five one-hundredths of one percent (.25%) of
the average daily net assets of the Fund per year. A Shareholder Servicing Agent
may periodically waive all or a portion of its respective shareholder servicing
fees with respect to the Fund to increase the net income of the Fund available
for distribution as dividends. During the fiscal year ended October 31, 1995,
the Fund paid Shareholder Servicing fees of __% of the Fund's average daily net
assets.
EFFECT OF BANKING LAWS
Key Advisers and the Sub-Adviser believe that they may perform the investment
advisory services for the Fund contemplated by the investment advisory (and
sub-advisory) agreements (the "Advisory Agreements") with the Fund. In the
Advisory Agreements, Key Advisers and the Sub-Adviser have represented that they
possess the legal authority to perform the investment advisory services
contemplated therein and described in this Prospectus. Key Trust Company of
Ohio, N.A. and its affiliates also believe that they also may perform the
services for the Victory Portfolios contemplated by the Shareholder Servicing
Agreement with the Victory Portfolios without violating applicable banking laws
and regulations. Future changes in federal or state statutes and regulations
relating to permissible activities of banks or bank holding companies and their
subsidiaries and affiliates, as well as further judicial or administrative
decisions or interpretations of present and future statutes and regulations,
could change the manner in which Key Advisers, the Sub-Adviser, Key Trust
Company of Ohio, N.A. and its affiliates could continue to perform such services
for the Victory Portfolios. See the Statement of Additional Information
("Glass-Steagall Act") for further discussion.
BUSINESS MANAGEMENT AGREEMENT
In connection with its obligations under its investment sub-advisory agreement
with Key Advisers, the Sub-Adviser has entered into a Business Management
Agreement with Key Advisers pursuant to which Key Advisers provides certain
administrative and support services to the Sub-Adviser. Such services include
preparing reports to the Company's Board of Trustees, recordkeeping services,
and services rendered in connection with the preparation of regulatory filings
and other reports, and regulatory and compliance systems and other
administrative and support services.
For such services, the Sub-Adviser pays fees to Key Advisers at an annual rate
as follows: .30% on the first $10 million of average daily net assets; .15% of
the next $15 million of average daily net assets; .05% of the next $25 million
of average daily net assets; and .00% of average daily net assets in excess of
$50 million.
EXPENSES
For the fiscal year ended October 31, 1995, the Fund's total operating expenses
were ____% of the Fund's average net assets.
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<PAGE> 136
CUSTODIAN
Key Trust Company of Ohio, N.A. serves as custodian for the Fund and receives
fees for its services.
INDEPENDANT ACCOUNTANTS
Coopers & Lybrand L.L.P. serves as the Fund's independent accountants.
ADDITIONAL INFORMATION
The Victory Portfolios may issue an unlimited number of shares and classes of
the Fund. Shares of each class of the Fund participate equally in dividends and
distributions and have equal voting, liquidation and other rights. When issued
and paid for, shares will be fully paid and nonassessable by the Victory
Portfolios and will have no preference, conversion, exchange or preemptive
rights. Shareholders are entitled to one vote for each full share owned and
fractional votes for fractional shares owned. For those investors with qualified
trust accounts established with the affiliates of the Adviser, the trustee will
vote the shares at meetings of the Fund's shareholders in accordance with the
shareholder's instructions or will vote in the same percentage as shares that
are not held in trust. The trustee will forward to these shareholders all
communications received by the trustee, including proxy statements and financial
reports. The Victory Portfolios and the Fund are not required to hold annual
meetings of shareholders and in ordinary circumstances do not intend to hold
such meetings. The Trustees may call special meetings of shareholders for action
by shareholder vote as may be required by the 1940 Act or the Victory
Portfolio's Delaware Trust Instrument. Under certain circumstances, the Trustees
may be removed by action of the Trustees or by the shareholders. Shareholders
holding 10% or more of the Victory Portfolios' outstanding shares may call a
special meeting of shareholders for the purpose of voting upon the question of
removal of Trustees.
The Victory Portfolio's Board of Trustees may authorize the Victory Portfolios
to offer other funds which may differ in the types of securities in which their
assets may be invested.
Key Advisers, the Sub-Adviser and the Victory Portfolios have adopted Codes of
Ethics (the "Codes") which require investment personnel (a) to pre-clear all
personal securities transactions, (b) to file reports regarding such
transactions, and (c) to refrain from personally engaging in (i) short-term
trading of a security, (ii) transactions involving a security within seven days
of a Victory fund transaction involving the same security, and (iii)
transactions involving securities being considered for investment by a Victory
fund. The Codes also prohibit investment personnel from purchasing securities in
an initial public offering. Personal trading reports are reviewed periodically
by Key Advisers or the Sub-Adviser, and the Board of Trustees reviews annually
such reports (including information on any substantial violations of the Codes).
Violations of the Codes may result in censure, monetary penalties, suspension or
termination of employment.
DELAWARE LAW
The Delaware Business Trust Act provides that a shareholder of a Delaware
business trust shall be entitled to the same limitation of personal liability
extended to stockholders of Delaware corporations. In light of Delaware law, the
nature of the Victory Portfolios' business, and the nature of its assets,
management of Victory Portfolios believe that the risk of personal liability to
a Fund shareholder would be extremely remote.
In the unlikely event a shareholder is held personally liable for the Victory
Portfolios' obligations, the Victory Portfolios is required to use its property
to protect or compensate the shareholder. On request, the Victory Portfolios
will defend any claim made and pay any judgment against a shareholder for any
act or obligation of the Victory Portfolios. Therefore, financial loss resulting
from liability as a shareholder will occur only if the Victory Portfolios itself
cannot meet its obligations to indemnify shareholders and pay judgments against
them.
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<PAGE> 137
Delaware law authorizes electronic or telephonic communications between
shareholders and the Victory Portfolios. Under Delaware law, the Successor
Company has the flexibility to respond to future business contingencies. For
example, the Trustees will have the power to incorporate the Victory Portfolios,
to merge or consolidate it with another entity, to cause each fund to become a
separate trust, and to change the Victory Portfolio's domicile without a
shareholder vote. This flexibility could help reduce the expense and frequency
of future shareholder meetings for non-investment related issues.
MISCELLANEOUS
Shareholders will receive Semi-Annual Reports, which are unaudited, and Annual
Reports, which are audited by independent public accountants, describing the
investment operations of the Fund. Each of these reports, when available for a
particular fiscal year end or the end of a semi-annual fiscal period, is
incorporated herein by reference. The Victory Portfolios may include information
in their Annual Reports and Semi-Annual Reports to shareholders that (i)
describes general economic trends, (ii) describes general trends within the
financial services industry or the mutual fund industry, (iii) describes past or
anticipated portfolio holdings for the Fund or (iv) describes investment
management strategies for the Victory Portfolios. Such information is provided
to inform shareholders of the activities of the Victory Portfolios for the most
recent fiscal year or semi-annual fiscal period and to provide the views of Key
Advisers, the Sub-Adviser and/or the Victory Portfolios' officers regarding
expected trends and strategies.
Inquiries regarding the Victory Portfolios or the Fund may be directed in
writing to the Victory Portfolios at Primary Funds Service Corporation, P.O. Box
9741, Providence, RI 02940-9741, or by telephone, toll-free, at 800-539-3863.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE VICTORY
PORTFOLIOS OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING
BY THE VICTORY PORTFOLIOS OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE.
- 26 -
<PAGE> 138
Overall responsibility for management of the Victory Portfolios rests with its
Board of Trustees, who are elected by the shareholders of the Victory
Portfolios.
INVESTMENT ADVISER AND SUB-ADVISER
KeyCorp Mutual Fund Advisers, Inc. is the investment adviser to the Fund. Key
Advisers directs the investment of the Victory Portfolios' assets, subject at
all times to the supervision of the Victory Portfolios' Board of Trustees. Key
Advisers continually supervises the investment and reinvestment of cash,
securities and other property comprising the assets of the Victory Portfolios.
Key Advisers was organized as an Ohio corporation on July 27, 1995 and is
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended. It is a wholly-owned subsidiary of KeyCorp Asset Management
Holdings, Inc., which is a wholly-owned subsidiary of Society National Bank, a
wholly-owned subsidiary of KeyCorp. Affiliates of Key Advisers manage
approximately $37 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals and mutual funds.
For the services provided and expenses incurred pursuant to its investment
advisory agreement with the Victory Portfolios respecting the Fund, Key Advisers
receives a fee, computed daily and paid monthly, at the annual rate of one
percent (1.00%) of the average daily net assets of the Fund. The advisory fees
for the Fund have been determined to be fair and reasonable in light of the
services provided to the Fund. Key Advisers may periodically waive all or a
portion of its advisory fee with respect to the Fund to increase the net income
of the Fund available for distribution as dividends. Prior to January 1, 1996,
the Sub-Adviser (Society Asset Management, Inc.) served as investment adviser to
the Fund. During the Fund's fiscal period ended October 31, 1995, the
Sub-Adviser received investment advisory fees aggregating .__% of the average
daily net assets of the Fund.
Under the investment advisory agreement between the Victory Portfolios, on
behalf of the Fund, and Key Advisers, Key Advisers may delegate a portion of its
responsibilities to a subadviser.
Key Advisers has entered into an investment sub-advisory agreement with T. Rowe
Price, on behalf of the Fund. For its services under the investment sub-advisory
agreement, Key Advisers pays the Sub-Adviser sub-advisory fees as a percentage
of average daily net assets as follows: 25% of average daily net assets up to
$100 million and .20% of average daily net assets in excess of $100 million.
T. Rowe Price serves as the investment sub-adviser for the Fund pursuant to an
investment sub-advisory agreement dated June 5, 1995 between Key Advisers and
the Sub-Adviser, which was approved by the shareholders of the Fund at the
shareholders' meeting held on May 19, 1995. The Sub-Adviser, which maintains its
principal office at 100 East Pratt Street, Baltimore, Maryland 21202, was
founded in 1937 by the late Thomas Rowe Price, Jr. As of December 31, 1994, the
firm and its affiliates managed over $57 billion for over 3 million individual
and institutional investor accounts.
The Investment Advisory Committee of the Sub-Adviser, which consists of Jonathan
M. Greene, Chairman, Richard T. Whitney, Donald J. Peters and K. D. Farrow, is
primarily responsible for the investment management of the Fund. The Committee
Chairman has day to day responsibility for managing the Fund and works with the
Committee in developing and executing the Fund's investment program. Mr. Greene,
Vice President, has been with the Sub-Adviser since 1974, and has been managing
investments since 1979.
ADMINISTRATOR AND DISTRIBUTOR
Concord Holding Corporation is the Administrator for the Fund. Victory
Broker-Dealer Services, Inc. is the Fund's principal underwriter and
Distributor.
26
<PAGE> 139
The Administrator generally assists in all aspects of the Fund's administration
and operation. For expenses incurred and services provided as Administrator
pursuant to its management and administration agreement with the Victory
Portfolios, the Administrator receives a fee from the Fund, computed daily and
paid monthly, at an annual rate of fifteen one-hundredths of one percent (.15%)
of the Fund's average daily net assets. The Administrator may periodically waive
all or a portion of its administrative fee with respect to the Fund to increase
the net income of the Fund available for distribution as dividends. During the
fiscal period May 1, 1995 to October 31, 1995, and the fiscal year ended April
30, 1995, the Fund paid administration fees of .15% of its average daily net
assets.
TRANSFER AGENT AND FUND ACCOUNTANT
Primary Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741,
serves as the Fund's Transfer Agent pursuant to a Transfer Agency and
Shareholder Service Agreement with the Victory Portfolios and receives a fee for
such services based on various criteria, including assets, transactions and the
number of Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, OH 43219,
provides certain accounting services for the Fund pursuant to a Fund Accounting
Agreement and receives a fee for such services.
SHAREHOLDER SERVICING
Shareholder services are provided to the Fund pursuant to agreements between the
Victory Portfolios and various shareholder servicing agents, including Key Trust
Company of Ohio, N.A. and its affiliates and other financial institutions and
securities brokers (each a "Shareholder Servicing Agent"). Each Shareholder
Servicing Agent generally will provide support services to shareholders by
establishing and maintaining accounts and records, processing dividend and
distribution payments, providing account information, arranging for bank wires,
responding to routine inquires, forwarding shareholder communication, assisting
in the processing of purchase, exchange and redemption requests, and assisting
shareholders in changing dividend options, account designations and addresses.
For expenses incurred and services provided as Shareholder Servicing Agent
pursuant to its respective Shareholder Servicing Agreement, the Fund pays each
Shareholder Servicing Agent a fee computed daily and paid monthly, in amounts
aggregating not more than twenty-five one-hundredths of one percent (.25%) of
the average daily net assets of the Fund per year. A Shareholder Servicing Agent
may periodically waive all or a portion of its respective shareholder servicing
fees with respect to the Fund to increase the net income of the Fund available
for distribution as dividends. During the fiscal year ended April 30, 1995, the
Fund paid Shareholder Servicing fees of % of the Fund's average daily net
assets. During the fiscal period ended October 31, 1995, the Fund paid
Shareholder Servicing fees of _____% of the Fund's average daily net assets.
EFFECT OF BANKING LAWS
Key Advisers and the Sub-Adviser believe that they may perform the investment
advisory services for the Fund contemplated by the investment advisory
(sub-advisory) agreements (the "Advisory Agreements") with the Fund. In the
Advisory Agreement with the Key Advisers and the Sub-Adviser have represented
that they possess the legal authority to perform the investment advisory
services contemplated therein and described in this Prospectus. Key Trust
Company of Ohio, N.A. and its affiliates also believe that they also may perform
the services for the Victory Portfolios contemplated by the Shareholder
Servicing Agreement with the Victory Portfolios without violating applicable
banking laws and regulations. Future changes in federal or state statutes and
regulations relating to permissible activities of banks or bank holding
companies and their subsidiaries and affiliates, as well as further judicial or
administrative decisions or interpretations of present and future statutes and
regulations, could change the manner in which Key Advisers, the Sub-Adviser, Key
Trust Company of Ohio, N.A. and its affiliates could continue to perform such
services for the Victory Portfolios. See the Statement of Additional Information
("Glass-Steagall Act") for further discussion.
27
<PAGE> 140
EXPENSES
For the fiscal year ended October 31, 1995, the Fund's total operating expenses
were [____%] of the Fund's average net assets.
CUSTODIAN
Key Trust Company of Ohio, N.A. serves as custodian for the Fund and receives
fees for its services.
INDEPENDENT ACCOUNTS
Coopers & Lybrand L.L.P. serves as the Fund's independent accountants.
ADDITIONAL INFORMATION
The Victory Portfolios may issue an unlimited number of shares and classes of
the Fund. Shares of each class of the Fund participate equally in dividends and
distributions and have equal voting, liquidation and other rights. When issued
and paid for, shares will be fully paid and nonassessable by the Victory
Portfolios and will have no preference, conversion, exchange or preemptive
rights. Shareholders are entitled to one vote for each full share owned and
fractional votes for fractional shares owned. For those investors with qualified
trust accounts, the trustee will vote the shares at meetings of the Fund's
shareholders in accordance with the shareholder's instructions. The trustee will
forward to these shareholders all communications received by the trustee,
including proxy statements and financial reports. The Victory Portfolios and the
Fund are not required to hold annual meetings of shareholders and in ordinary
circumstances do not intend to hold such meetings. The Trustees may call special
meetings of shareholders for action by shareholder vote as may be required by
the 1940 Act or the Victory Portfolio's Delaware Trust Instrument. Under certain
circumstances, the Trustees may be removed by action of the Trustees or by the
shareholders. Shareholders holding 10% or more of the Victory Portfolios'
outstanding shares may call a special meeting of shareholders for the purpose of
voting upon the question of removal of Trustees.
The Victory Portfolio's Board of Trustees may authorize the Victory Portfolios
to offer other funds which may differ in the types of securities in which their
assets may be invested.
Key Advisers, the Sub-Adviser and the Victory Portfolios have adopted Codes of
Ethics ( the "Codes") which require investment personnel (a) to pre-clear all
personal securities transactions, (b) to file reports regarding such
transactions, and (c) to refrain from personally engaging in (i) short-term
trading of a security, (ii) transactions involving a security within seven days
of a Fund transaction involving the same security, and (iii) transactions
involving securities being considered for investment by a Fund. The Codes also
prohibit investment personnel from purchasing securities in an initial public
offering. Personal trading reports are reviewed periodically by Key Advisers or
the Sub-Adviser, and the Board of Trustees reviews annually such reports
(including information on any substantial violations of the Codes). Violations
of the Codes may result in censure, monetary penalties, suspension or
termination of employment.
DELAWARE LAW
The Delaware Business Trust Act provides that a shareholder of a Delaware
business trust shall be entitled to the same limitation of personal liability
extended to stockholders of Delaware corporations. In light of Delaware law, the
nature of the Victory Portfolios' business, and the nature of its assets,
management of Victory Portfolios believe that the risk of personal liability to
a Fund shareholder would be extremely remote.
28
<PAGE> 141
In the unlikely event a shareholder is held personally liable for the Victory
Portfolios' obligations, the Victory Portfolios is required to use its property
to protect or compensate the shareholder. On request, the Victory Portfolios
will defend any claim made and pay any judgment against a shareholder for any
act or obligation of the Victory Portfolios. Therefore, financial loss resulting
from liability as a shareholder will occur only if the Victory Portfolios itself
cannot meet its obligations to indemnify shareholders and pay judgments against
them.
Delaware law authorizes electronic or telephonic communications between
shareholders and the Victory Portfolios. Under Delaware law, the Successor
Company has the flexibility to respond to future business contingencies. For
example, the Trustees will have the power to incorporate the Victory Portfolios,
to merge or consolidate it with another entity, to cause each fund to become a
separate trust, and to change the Victory Portfolio's domicile without a
shareholder vote. This flexibility could help reduce the expense and frequency
of future shareholder meetings for non-investment related issues.
MISCELLANEOUS
Shareholders will receive Semi-Annual Reports, which are unaudited, and Annual
Reports, which are audited by independent public accountants, describing the
investment operations of the Fund. Each of these reports, when available for a
particular fiscal year end or the end of a semi-annual fiscal period, is
incorporated herein by reference. The Victory Portfolios may include information
in their Annual Reports and Semi-Annual Reports to shareholders that (i)
describes general economic trends, (ii) describes general trends within the
financial services industry or the mutual fund industry, (iii) describes past or
anticipated portfolio holdings for the Fund or (iv) describes investment
management strategies for the Victory Portfolios. Such information is provided
to inform shareholders of the activities of the Victory Portfolios for the most
recent fiscal year or semi-annual fiscal period and to provide the views of Key
Advisers, the Sub-Adviser and/or the Victory Portfolios' officers regarding
expected trends and strategies.
Inquiries regarding the Victory Portfolios or the Fund may be directed in
writing to the Victory Portfolios at Primary Funds Service Corporation, P.O. Box
9741, Providence, RI 02940-9741, or by telephone, toll-free, at 800-539-3863.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE VICTORY
PORTFOLIOS OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING
BY THE VICTORY PORTFOLIOS OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE.
<PAGE> 142
THE
VICTORY
PORTFOLIOS
INSTITUTIONAL MONEY MARKET FUND
PROSPECTUS For current yield, purchase, and redemption information,
March 1, 1996 call 800-539-FUND or 800-539-3863
THE VICTORY PORTFOLIOS (the "Victory Portfolios") is a registered open-end
management investment company that offers investors a selection of money market,
fixed-income, municipal bond, domestic and international equity portfolios. This
Prospectus relates to the Victory Institutional Money Market Fund (the "Fund") a
diversified portfolio. KeyCorp Mutual Fund Advisers, Inc., Cleveland, Ohio, an
indirect subsidiary of KeyCorp, is the investment adviser to the Fund ("Key
Advisers" or the "Adviser"). Society Asset Management, Inc., Cleveland, Ohio, an
indirect subsidiary of KeyCorp, is the investment sub-adviser to the Fund (the
"Sub-Adviser" or "Society"). Concord Holding Corporation is the Fund's
administrator (the "Administrator"). Victory Broker-Dealer Services, Inc. is the
Fund's distributor (the "Distributor").
The Fund seeks to maintain a constant net asset value of $1.00 per unit of
beneficial interest. AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT. THERE CAN BE NO ASSURANCE THAT THE FUND
WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER UNIT.
The Fund seeks to obtain as high a level of current income as is consistent
with preserving capital and providing liquidity.
The Fund offers two classes of shares: Institutional Shares and Service Shares.
The Institutional Shares class is sold without a sales load or a shareholder
servicing fee and is available to certain institutions. The Service Shares
class is sold without a sales load but pays a shareholder servicing fee not to
exceed 0.25% of the aggregate net assets of that class to bank trust
departments and other financial institutions that provide shareholder services.
Please read this Prospectus before investing. It is designed to provide you
with information and to help you decide if the Fund's goals match your own.
Retain this document for future reference. A Statement of Additional
Information (dated March 1, 1996) for the Fund and an audited report for the
Fund's fiscal period ended October 31, 1995 have been filed with the Securities
and Exchange Commission and are incorporated herein by reference. The
Statement of Additional Information is available without charge upon request by
calling 800-539-3863.
SHARES OF THE FUND ARE NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT.
THERE CAN BE NO ASSURANCE THAT THE FUND WILL MAINTAIN A STABLE $1.00 SHARE
PRICE.
SHARES OF THE FUND ARE:
o NOT INSURED BY THE FDIC;
o NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY KEYCORP
BANK, ANY OF ITS AFFILIATES, OR ANY OTHER BANK;
o SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("COMMISSION"), OR ANY SECURITIES REGULATORY AUTHORITY OF
ANY STATE, NOR HAS THE COMMISSION OR ANY SUCH STATE AUTHORITY PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- 2 -
<PAGE> 143
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C>
Summary of Fund Expenses 4
Financial Highlights 5
Investment Objective 7
Investment Policies of the Fund 7
Investment Risks 7
Additional Information Regarding Securities in Which the Fund May Invest 8
Limiting Investment Risks 11
How to Invest, Exchange and Redeem 14
Dividends, Distributions and Taxes 19
Performance 21
Fund Organization and Fees 22
Additional Information 24
</TABLE>
- 3 -
<PAGE> 144
SUMMARY OF FUND EXPENSES
The table below summarizes the expenses associated with the Fund.
This standard format was developed for use by all mutual funds to help you make
your investment decisions. Of course, you should consider this expense
information along with other important information in this Prospectus,
including the Fund's investment objective, investment policies and risk
factors, and financial highlights.
SHAREHOLDER TRANSACTION EXPENSES.(1) These represent charges paid when you
purchase or redeem shares of the Fund. See "How to Invest and Redeem".
<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage
of the offering price) None
Sales Charge Imposed on Reinvested Dividends None
Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable) None
Redemption Fees (as a percentage of amount redeemed,
if applicable) None
Exchange Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES AFTER EXPENSE WAIVERS AND REIMBURSEMENTS
(AS A PERCENTAGE OF AVERAGE NET ASSETS).
<TABLE>
<CAPTION>
INSTITUTIONAL SERVICE
SHARES SHARES
------ ------
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<S> <C> <C>
Management Fees(2) .10% .10%
Shareholder Servicing Fee none .25%
Other Expenses(3) .17% .17%
--- ---
Total Fund Operating Expenses(4) .27% .52%
=== ===
</TABLE>
(1) Subsidiaries, correspondents, affiliated banks and unaffiliated banks
of KeyCorp may charge a customer's account fee for services provided
in connection with investment in the Fund. (See "How to Invest and
Redeem" in the Prospectus.)
(2) [Key Advisers has agreed to reduce its fees to the extent necessary so
that total opreating expenses of the Class A shares do not exceed
0.48% until at least [February 28, 1996]. Absent the voluntary
reduction of investment advisory fees, "Management Fees" as a
percentage of average daily net assets would be .25%.]
(3) [The Administrator has voluntarily agreed to waive a portion of its
Administration Fee. The Administrator may terminate this voluntary
waiver at any time at its sole discretion. Absent the voluntary
reduction of administration fees "Other Expenses" as a percentage of
average daily net assets would be .26%.]
(4) If these voluntary fee reductions referred to in footnotes (2) and (3)
above were not in effect, "Total Fund Operating Expenses" as a
percentage of average daily net assets would be .51% for Institutional
Shares and .76% for Service Shares.
EXAMPLE: An investor would pay the following expenses on a $1,000
investment, assuming (1) a 5% annual return and (2) full redemption at the end
of each time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Institutional Money Market--
Institutional Shares $3 $ 9 $15 $34
Institutional Money Market--
Service Shares $5 $17 $29 $65
</TABLE>
The purpose of the table above is to assist the investor in
understanding the various costs and expenses that an investor in the Fund would
bear directly or indirectly. See "Fund Organization and Fees" for a more
complete discussion of annual operating expenses of the Fund. The foregoing
example is based upon expenses for the fiscal period ended October 31, 1995 and
expenses that the Fund is expected to incur during the current fiscal year.
THE FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES, SINCE ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
- 4 -
<PAGE> 145
The information in the table below sets forth certain financial
information with respect to the per-share data and ratios for the Fund and to
its predecessor, a Portfolio of The Victory Funds (the "Predecessor Fund"), and
(except as indicated) has been audited by Coopers & Lybrand LLP (for the fiscal
period ended October 31, 1995) and by KPMG Peat Marwick LLP (for all earlier
periods), respectively, whose reports thereon, together with the financial
statements of the Fund and the Predecessor Fund are, incorporated by reference
into or contained in the Statement of Additional Information. The Predecessor
Fund only offered Service Shares.
- 5 -
<PAGE> 146
SELECTED PER-SHARE DATA--SERVICE SHARES
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
PERIOD ENDED ---------------------
10/31/95* 1995 1994 1993 1992 1991
--------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD [To be inserted] $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Investment Activities:
Net investment income(1) 0.050 0.028 0.032 0.051 0.076
Distributions:
Net investment income (0.050) (0.028) (0.032) (0.051) (0.076)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== ======== ========
Total Return 4.91% 2.80% 3.26% 5.21% 7.83%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (thousands) $449,814 $541,229 $155,097 $177,640 $248,515
Ratio of expenses to average
net assets(1) 0.27% .55% .43% .30% .30%
Ratio of net investment income to
average net assets 4.91% 2.78% 3.19% 5.06% 7.46%
<CAPTION>
YEARS ENDED APRIL 30,
---------------------
1990 1989 1988 1987 1986
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Investment Activities:
Net investment income(1) 0.087 0.082 0.068 0.061 0.075
Distributions:
Net investment income (0.087) (0.082) (0.068)+ (0.061)+ (0.075)+
-------- -------- -------- -------- -------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== ======== =======
Total Return 8.95% 8.46% 6.98% 6.21% 7.72%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (thousands) $178,208 $133,492 $172,151 $106,961 $56,260
Ratio of expenses to average
net assets(1) .30% .29% .25% .24% .39%
Ratio of net investment income to
average net assets 8.63% 8.21% 6.94%+ 6.02%+ 7.58%+
</TABLE>
SELECTED PER-SHARE DATA--INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
Period from
June 5, 1995
to
10/31/95**
------------
<S> <C>
NET ASSET VALUE, BEGINNING [To be Inserted]
OF PERIOD
Investment Activities:
Net investment income(1)
Distributions:
Net investment income
NET ASSET VALUE, END OF PERIOD
Total Return
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (thousands)
Ratio of expenses to average
net assets(1)
Ratio of net investment income to
average net assets
</TABLE>
(1) During the years ended April 30, 1994, 1993, 1992, 1991, 1990, and 1989
various fees and expenses were voluntarily waived and reimbursed by Key Trust
Company and Fidelity Distributors Corporation (the Predecessor Fund's former
Administrator), in the amount of $0.001 per share for each of the respective
periods. During the year ended April 30, 1995 [various fees and expenses were
voluntarily waived and reimbursed by Key Trust Company, Society Asset
Management, Inc. and Concord Holding Corporation in the amount of $0.002 per
share.] [For the period ended October 31, 1995, a portion of operating
expenses equal to ___% of average daily net assets was voluntarily waived and
reimbursed by Society and the Administrator.] The ratio of expenses to average
net assets had such waivers and reimbursements not occurred is as follows:
Ratios of expenses to average net assets____%.51%.55%.48%.42%
.44%.43%.36%.25%.24%.39%
+Through March 13, 1988, distributions were declared from the total of net
investment income, net realized gain/(loss) on investments and unrealized
appreciation (depreciation) of investments. Subsequently, distributions have
been declared solely from net investment income.
*The Fund's fiscal year end was changed to the period ending October 31 of each
year.
- 6 -
<PAGE> 147
**Commencement of operations.
- 7 -
<PAGE> 148
INVESTMENT OBJECTIVE
The Fund's investment objective is to provide a high level of current income,
consistent with preservation of shareholders' capital. The investment
objective of the Fund is fundamental and may not be changed without a vote of a
majority of the Fund's outstanding voting securities (as defined in the
Statement of Additional Information). There can be no assurance that the Fund
will achieve its investment objective.
INVESTMENT POLICIES AND RISK OF FACTORS
The Fund pursues its objective by investing primarily in a portfolio of
high-quality, U.S. dollar-denominated money market instruments. While there is
no assurance that the Fund will achieve its investment objective, it endeavors
to do so by following the investment policies described in this prospectus.
The Fund will invest in high-quality, U.S. dollar-denominated money market
instruments with remaining maturities of 397 days or less at the time of
purchase by the Fund and average maturity, computed on a dollar weighted basis,
of 90 days or less:
o obligations of domestic financial institutions consisting of
certificates of deposit, bankers' acceptances and time deposits.
o obligations of foreign branches of U.S. banks (Eurodollars) including
certificates of deposit, bankers' acceptances and time deposits.
o obligations of the U.S. government or any of its agencies or
instrumentalities which may be backed by the credit-worthiness of the
issuing agency.
o short-term corporate obligations, consisting of commercial paper,
notes, and bonds, with remaining maturities of 397 days or less.
o repurchase agreements with member banks of the Federal Reserve System
and primary dealers in U.S. government securities with respect to any
security in which the Fund is authorized to invest.
o other short-term debt obligations of domestic issuers discussed in
this prospectus.
The Fund will only purchase obligations that at the time of purchase (i) are
rated high quality by at least two nationally recognized statistical rating
organizations ("NRSRO"); (ii) are rated high quality if rated by only one
rating service; or (iii) if unrated, are determined to be of equivalent quality
pursuant to procedures reviewed by the Trustees. Obligations that are not
rated are not necessarily of lower quality than those which are rated, but may
be less marketable and therefore may provide higher yields.
Currently, only obligations in the top two categories are considered to be
rated high quality for commercial paper. The two highest rating categories of
Duff, Fitch, Moody's and S&P are Duff 1 and Duff 2, Fitch-1 and Fitch-2,
Prime-1 and Prime-2, and A-1 and A-2, respectively. Under Rule 2a-7, the Fund
is not permitted to invest more than 5% of its total assets in securities that
would be considered to be in the second highest rating category, and, subject
to this limitation, the Fund may not invest more than the greater of 1% of its
total assets or $1 million in such securities of any one issuer. However, the
Fund currently has a nonfundamental policy to purchase only commercial paper
which is rated in the single highest category by at least one NRSRO as outlined
above, or which, if unrated, is deemed to be of equivalent quality pursuant to
procedures reviewed by the Trustees. The Fund may purchase an instrument rated
below highest quality by a rating service if two other services have given that
instrument a highest quality rating, and if Key Advisers or the Sub-Adviser
considers that the instrument is of highest quality and presents minimal credit
risks.
For other corporate obligations, the two highest rating categories are Duff 1
and Duff 2, AAA and AA by Fitch, Aaa and Aa by Moody's, and AAA and AA by S&P.
For a more complete description of these ratings see the Appendix to the
Statement of Additional Information.
The Fund will commit no more than 10% of its net assets to illiquid securities,
including repurchase agreements maturing in more than seven days, subject to
the Fund's fundamental limitation on investments in illiquid securities.
The Fund may invest in obligations of foreign branches of U.S. banks
(Eurodollars). Payment of interest and principal upon these obligations may
also be affected by governmental action in the country of domicile of the
branch (generally referred to as sovereign risk). In addition, evidences of
ownership of portfolio securities may be held outside of the U.S. and the Fund
may be subject to the risks associated with the holding of such property
overseas. Various provisions of federal law governing the establishment and
operation of domestic branches do not apply to foreign branches of domestic
banks.
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Key Advisers or the Sub-Adviser carefully considers these factors when making
investments. The Fund does not limit the amount of its assets which can be
invested in any one type of instrument or in any foreign country in which a
branch of a U.S. bank or the parent of a U.S. branch is located. Investments
in obligations of foreign branches of U.S. banks may be subject to an overall
limit of 25% of total assets which may be invested in a single industry.
Available cash invested in the Fund earns income at current money market rates
while remaining conveniently liquid. In order to provide full liquidity, the
Fund will seek to maintain a stable $1.00 share price; limit portfolio average
maturity to 90 days or less; buy U.S. dollar-denominated securities which
mature in 397 days or less; and buy only high quality securities with minimal
credit risks. As required by Rule 2a-7 under the Investment Company Act of
1940, as amended ("Rule 2a-7"), the Fund's Board of Trustees (the "Trustees")
will monitor the quality of the Fund's investments.
Of course, a $1.00 share price cannot be guaranteed, but these practices help
to minimize any price fluctuations that might result from rising or declining
interest rates. Accordingly, while the Fund invests in high quality
securities, investors should be aware that an investment is not without risk
even if all securities are paid in full at maturity. All money market
instruments, including U.S. government securities, can change in value when
interest rates or an issuer's creditworthiness changes.
The investment policies of the Fund may be changed without an affirmative vote
of the holders of a majority of the Fund's outstanding voting securities unless
(1) a policy is expressly deemed to be a fundamental policy of the Fund or (2)
a policy is expressly deemed to be changeable only by such majority vote.
ADDITIONAL INFORMATION REGARDING SECURITIES IN WHICH THE FUND MAY INVEST
The following paragraphs provide a brief description of some of the
types of securities in which the Fund may invest, the transactions it may make
and strategies it may adopt. The Fund may, following notice to its
shareholders, take advantage of other investment practices which are not at
present contemplated for use by the Fund or which currently are not available
but which may be developed, to the extent such investment practices are both
consistent with the Fund's investment objective and legally permissible for the
Fund. Such investment practices, if they arise, may involve risks which exceed
those involved in the activities described in this Prospectus.
MONEY MARKET INSTRUMENTS. Money market instruments refer to short-term,
high-quality debt securities, including U.S. government obligations, commercial
paper, certificates of deposit, bankers' acceptances, time deposits and
short-term corporate obligations. Money market instruments may carry fixed
rates of return or have variable or floating interest rates.
COMMERCIAL PAPER. Short-term obligations issued by banks, broker-dealers,
corporations and other entities for purposes such as financing their current
operations.
CERTIFICATES OF DEPOSIT. Negotiable certificates representing a commercial
bank's obligations to repay funds deposited with it, earning specified rates of
interest over given periods.
BANKERS' ACCEPTANCES. Negotiable obligations of a bank to pay a draft which
has been drawn on it by a customer. These obligations are backed by large
banks and usually backed by goods in international trade.
TIME DEPOSITS. Non-negotiable deposits in a banking institution earning a
specified interest rate over a given period of time.
SHORT-TERM CORPORATE OBLIGATIONS. Corporate obligations are bonds issued by
corporations and other business organizations in order to finance their
long-term credit needs. Corporate bonds in which a Fund may invest generally
consist of those rated in the two highest rating categories of an NRSRO that
possess many favorable investment attributes. In the lower end of this
category, credit quality may be more susceptible to potential future changes in
circumstances.
WHEN ISSUED AND DELAYED DELIVERY SECURITIES. The Fund does not intend to
invest in forward commitments for speculative purposes; however, the Fund may
purchase and sell securities on a "when-issued" and "delayed delivery" basis.
These are arrangements in which the Fund purchases securities with payment and
delivery scheduled for a future date. If completed, the transaction will
generally settle within 60 days. Purchases of securities on a "when-issued" or
"delayed delivery" basis are subject to market fluctuation and are subject to
the risk that the market value may change before the delivery date, which could
affect the market value of the Fund's assets. Although the Fund will generally
purchase securities on a "when-issued" basis with the intention of
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acquiring such securities, it may sell such securities before the settlement
date if it is deemed advisable. When the Fund is the buyer in such a
transaction, it will segregate and maintain cash or high-grade readily
marketable debt securities sufficient to pay for such purchase commitments. To
the extent the Fund engages in "when-issued" and "delayed delivery"
transactions, it will do so only for the purpose of acquiring portfolio
securities consistent with the Fund's investment objectives and policies, and
not for the purpose of leverage. In "when-issued" and "delayed delivery"
transactions, the Fund relies on the seller to complete the transaction. The
other party's failure may cause the Fund to miss a price or yield considered
advantageous. Ordinarily, the Fund will not earn interest on securities
purchased until they are delivered.
VARIABLE AND FLOATING RATE SECURITIES. The Fund may purchase variable and
floating rate obligations, including certain participation interests in
municipal obligations, which are tax-exempt obligations containing interest
rate adjustment formulas that help stabilize their market values. Many
variable and floating rate instruments also carry demand features that permit
the funds to sell them at par value plus accrued interest on short notice,
generally not to exceed seven days. When determining the maturity of a
variable or floating rate instrument, the fund may look to the date the demand
feature can be exercised, or to the date the interest rate is readjusted,
rather than to the final maturity of the instrument.
REPURCHASE AGREEMENTS AND SECURITIES LOANS. In a repurchase agreement, the
Fund purchases a security at one price and simultaneously agrees to sell it
back at a higher price. The Fund may also make securities loans to
broker-dealers and institutional investors. In the event of the bankruptcy of
the other party to either a repurchase agreement or a securities loan, the Fund
could experience delays in recovering its cash or the securities it lent. To
the extent that, in the meantime, the value of the securities purchased had
decreased or the value of the securities lent had increased, the Fund could
experience a loss. In all cases, Key Advisers or the Sub-Adviser must find the
creditworthiness of the other party to the transaction satisfactory. The Fund
may invest only in repurchase agreements that are secured by those securities
in which it is permitted to invest directly. Repurchase agreements are
considered by the staff of the Commission to be loans by the Fund.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, the Fund
temporarily transfers possession of a portfolio security to another party, such
as a bank or a broker-dealer, in return for cash, and agrees to buy the
security back at a future date and price. The Fund can invest the cash it
receives or use it to meet redemption requests. If the Fund reinvests the cash
at a rate higher than the rate reflected by the terms of the agreement, it may
earn additional income. At the same time, the Fund is exposed to greater
potential fluctuations in the value of its assets when engaging in reverse
repurchase agreements.
At all times that a reverse repurchase agreement is outstanding, the Fund will
maintain cash and liquid securities in a segregated account at its custodian
bank with a value at least equal to its obligation under the agreement.
Securities and other assets held in the segregated account may not be sold
while the reverse repurchase agreement is outstanding, unless other suitable
assets are substituted. While Key Advisers or the Sub-Adviser does not
consider reverse repurchase agreements to involve borrowing money, reverse
repurchase agreements will be included within the aggregate limitation on
"borrowings" contained in the Fund's fundamental limitation. (See the
Statement of Additional Information.)
PARTICIPATION INTERESTS. The Fund may purchase interests in securities from
financial institutions such as commercial and investment banks, savings and
loan associations and insurance companies. These interests may take the form
of participation, beneficial interests in a trust, partnership interests or any
other form of indirect ownership. The Fund invests in these participation
interests in order to obtain credit enhancement or demand features that would
not be available through direct ownership of the underlying securities.
EXTENDIBLE DEBT SECURITIES. The Fund may purchase extendible debt securities.
Extendible debt securities purchased by the Fund are securities that can be
retired at the option of a Fund at various dates prior to maturity. In
calculating average portfolio maturity, the Fund may treat extendible debt
securities as maturing on the next optional retirement date.
MASTER DEMAND NOTES. Master demand notes are unsecured obligations that permit
the investment of fluctuating amounts by the Fund at varying rates of interest
pursuant to direct arrangements between the Fund, as lender, and the issuer as
borrower.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities purchased by the Fund
are securities issued or guaranteed by agencies or instrumentalities of the
U.S. government and non-government entities such as banks, mortgage lenders, or
other financial
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institutions. A mortgage-backed security may be an obligation of the issuer
backed by a mortgage or pool of mortgages or a direct interest in an underlying
pool of mortgages. Some mortgage-backed securities make payments of both
principal and interest at a variety of intervals; others make semiannual
interest payments at a predetermined rate and repay principal at maturity (like
a typical bond). Mortgage-backed securities are based on different types of
mortgages including those on commercial real estate or residential properties.
Other types of mortgage-backed securities will likely be developed in the
future, and the Fund may invest in them if Key Advisers or the Sub-Adviser
determines they are consistent with the Fund's investment objective and
policies. The Fund will not acquire "residual" interests in real estate
mortgage investment conduits ("REMICs") under current tax law in order to avoid
certain potential adverse tax consequences.
The value of mortgage-backed securities may change due to shifts in the
market's perception of issuers. In addition, regulatory or tax changes may
adversely affect the mortgage securities market as a whole. Non-government,
mortgage-backed securities may offer higher yields than those issued by
government entities, but also may be subject to greater price changes than
government issues. Mortgage-backed securities are subject to prepayment risk.
Prepayment, which occurs when unscheduled or early payments are made on the
underlying mortgages, may shorten the effective maturities of these securities
and may lower their total returns. The rate of prepayments is generally
expected to increase in periods of declining interest rates. Consequently, in
such periods, some of the Fund's higher-yielding securities may be converted to
cash, and the Fund will be forced to accept lower interest rates when that cash
is used to purchase additional securities.
ZERO COUPON BONDS. The Fund may purchase zero coupon bonds. Zero coupon bonds
purchased by the Fund do not make interest payments; instead, they are sold at
a deep discount from their face value and are redeemed at face value when they
mature. Because zero coupon bonds do not pay current income, their prices can
be very volatile when interest rates change. In calculating its daily dividend
and in complying with federal tax distribution requirements, the Fund takes
into account as income a portion of the difference between a zero coupon bond's
purchase price and its face value.
A broker-dealer creates a derivative zero by separating the interest and
principal components of a U.S. treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury Securities),
TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury Receipts) are
examples of derivative zeros. The Fund does not consider these instruments to
be U.S. Government securities for certain purposes under the 1940 Act.
STRIPS. The Fund may invest in STRIPS (Separate Trading of Registered Interest
and Principal of Securities). The Federal Reserve Bank creates STRIPS by
separating the interest and principal components of an outstanding U.S.
Treasury bond and selling them as individual securities. Bonds issued by the
Resolution Funding Corporation and the Financing Corporation can also be
separated in this fashion. Original issue zeros are zero coupon securities
originally issued by the U.S. government, a government agency or a corporation
in zero coupon form.
U.S. GOVERNMENT OBLIGATIONS. U.S. Government Obligations are debt securities
issued or guaranteed by the U.S. Treasury or by an agency or instrumentality of
the U.S. government. Not all U.S. government obligations are backed by the
full faith and credit of the United States. For example, securities issued by
the Federal Farm Credit Bank or by the Federal National Mortgage Association
are supported by the agency's right to borrow money from the U.S. Treasury
under certain circumstances. Securities issued by the Federal Home Loan Banks
are supported only by the credit of the agency. There is no guarantee that the
government will support these types of securities, and therefore they involve
more risk than government obligations which are backed by the full faith and
credit of the United States.
INVESTMENT COMPANY SECURITIES. The Fund may invest up to 5% of its total
assets in the securities of any one investment company, but may not own more
than 3% of the securities of any one investment company or invest more than 10%
of its total assets in the securities of other investment companies. Key
Advisers and/or the Sub-Adviser will waive its investment advisory fee
attributable to the Fund's assets invested in a fund of the Victory Portfolios
to the extent such fees are duplicated. To the extent required by the laws of
any state in which shares of a fund of the Victory Portfolios are sold, Key
Advisers and/or the Sub-Adviser will waive its investment advisory fee as to
all assets invested in other investment companies. Because such other
investment companies employ an investment adviser, such investment by the Fund
will cause shareholders to bear duplicative fees, such as management fees, to
the extent such fees are not waived by Key Advisers and/or the Sub-Adviser.
The Fund will invest only in the securities of money market funds which invest
only in securities of equal or higher short-term ratings.
Short-Term Funding Agreements. The Fund may invest in short-term
funding agreements (sometimes referred to as "GICs") issued by insurance
companies. Pursuant to
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a short-term funding agreement, the Fund invests an amount of cash with an
insurance company and the insurance company credits such investment on a
monthly basis with guaranteed interest which is based on a index. Short-term
funding agreements provide that this guaranteed interest will not be less than
a certain minimum rate. The Fund will purchase a short-term funding agreement
only when Key Advisers and the Sub-Adviser have determined, under guidelines
established by the Victory Portfolios' Board of Trustees, that the agreement
presents minimal credit risks to the Fund and is of comparable quality to
instruments that possess the highest short-term rating from an NRSRO not
affiliated with the issuer or guarantor of the instrument. The Fund may
receive all principal and accrued interest on a short-term funding agreement at
any time upon thirty days' written notice. Because the Fund may not receive
the principal amount of a short-term funding agreement from the insurance
company on seven days' notice or less, a short-term funding agreement is
considered an illiquid investment and, together with other instruments in the
Fund which are not readily marketable, will not exceed 10% of the Fund's total
assets.
LIMITING INVESTMENT RISKS
The Fund follows specific guidelines in buying portfolio securities:
1. (a) The Fund may borrow money solely for temporary or emergency
purposes, but not in an amount exceeding 33 1/3% of its total assets.
(b) The Fund may borrow money from banks or by engaging in reverse
repurchase agreements. (c) The fund will not purchase securities
when borrowings exceed 5% of its total assets. If the Fund borrows
money, its share price may be subject to greater fluctuation until the
borrowing is paid off. To this extent, purchasing securities when
borrowings are outstanding may involve an element of leverage.
2. The Fund will not purchase a security if, as a result, more than 10%
of its net assets would be invested in illiquid securities. The Fund
may invest up to 10% of its net assets in illiquid investments
(investments that cannot be readily sold within seven days in the
usual course of business at approximately the price at which the Fund
has valued them), including restricted securities deemed to be
illiquid. Under the supervision of the Trustees, Key Advisers or the
Sub-Adviser determines the liquidity of the Fund's investments. The
absence of a trading market can make it difficult to ascertain a
market value for illiquid investments. Disposing of illiquid
investments may involve time-consuming negotiation and legal expenses,
and it may be difficult or impossible for the Fund to sell them
promptly at an acceptable price.
In addition, the Fund has certain other limitations. The Fund will not
purchase a security other than U.S. government securities if, as a result: (a)
with respect to 75% of total assets, more than 5% of total assets would be
invested in the securities of any one issuer (with respect to the remaining 25%
of total assets, the Fund may invest an amount equal to 10% of total assets in
bankers' acceptances, certificates of deposit and time deposits of a single
bank); however, as a matter of nonfundamental policy, the Fund will limit the
percentage allocation of its investments so as to comply with Rule 2a-7, which
generally limits to 5% of total assets the amount which may be invested in the
securities of any one issuer; or (b) more than 25% of total assets would be
invested in a particular industry, except that the Fund may invest more than
25% of total assets in the securities of banks.
Currently, the Commission defines the term "bank" to include U.S. banks and
their foreign branches if, in the case of foreign branches, the parent U.S.
bank is unconditionally liable for such obligations. These limitations do not
apply to obligations of the U.S. government or any of its agencies or
instrumentalities. The Fund does not consider utilities or companies engaged
in finance generally to be one industry. Finance companies will be considered
a part of the industry they finance (e.g., GMAC--auto; VISA--credit cards).
Utilities will be divided according to the types of services they provide; for
example, gas, gas transmission, electric and gas, electric and telephone will
each be considered a separate industry.
The Fund may borrow money from banks or by engaging in reverse repurchase
agreements, but not in an amount equal to or exceeding 33 1/3% of the current
value of its total assets.
As a matter of operating policy, the Fund does not intend to purchase
securities for investment during periods when the sum of temporary bank
borrowings and reverse repurchase agreements entered into to facilitate
redemptions exceeds 5% of its total assets. This operating policy is not
fundamental and may be changed without shareholder notification.
Whenever an investment policy or limitation states a maximum percentage of the
Fund's assets that may be invested, such percentage limitation will be
determined immediately after and as a result of the investment, except in the
case of borrowing (or other activities that may be deemed to result in issuance
of a "senior security" under the 1940 Act). Any subsequent change in values,
assets or other circumstances will not be
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considered when determining whether the investment complies with the Fund's
investment policies and limitations. If the value of Fund's holdings of
illiquid securities at any time exceeds the percentage limitation applicable at
the time of acquisition due to subsequent fluctuations in value or other
reasons, the Board of Trustees will consider what actions, if any, are
appropriate to maintain adequate liquidity.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Sub-Adviser is responsible for decisions to buy and sell securities for the
Fund, broker-dealer selection and negotiation of commission rates. Since
purchases and sales of portfolio securities by the Fund are usually principal
transactions, the Fund incurs little or no brokerage commissions. Fund
securities are normally purchased directly from the issuer or from a market
maker for the securities. The purchase price paid to dealers serving as market
makers may include a spread between the bid and asked prices. The Fund may
also purchase securities from underwriters at prices which include a concession
paid by the issuer to the underwriter.
The Sub-Adviser's primary consideration in effecting a security transaction is
to obtain the best net price and the most favorable execution of the order. To
the extent that the executions and prices offered by more than one dealer are
comparable, the Sub-Adviser may, in its discretion, effect transactions with
dealers that furnish statistical, research or other information or services
which are deemed by the Sub- Adviser to be beneficial to the Fund's investment
program. Certain research services furnished by dealers may be useful to the
Sub-Adviser with respect to clients other than the Fund. Similarly, any
research services received by the Sub-Adviser through placement of portfolio
transactions of other clients may be of value to the Sub-Adviser in fulfilling
its obligations to the Fund.
HOW TO INVEST, EXCHANGE AND REDEEM
The Institutional Shares and the Service Shares may be purchased directly or
through an Investment Professional. Investment Professionals are securities
brokers or other financial institutions that have entered into selling or
servicing agreements with the Fund or the Distributor. The Institutional
Shares and the Service Shares are also available to clients of bank trust
departments who have qualified trust accounts. The minimum initial investment
in the Fund is $1,000,000. The minimum subsequent investment is $25. Accounts
set up through a bank trust department or an Investment Professional may be
subject to different minimums.
INVESTING THROUGH YOUR INVESTMENT PROFESSIONAL
The Institutional Shares and the Service Shares are offered continuously to
investors who engage an Investment Professional for investment advice and may
be purchased at an offering price equal to the net asset value ("NAV" as
defined below under "Share Price") next determined after the Transfer Agent
receives an investor's purchase order. If you are investing through your
Investment Professional, you may be required to set up a brokerage or agency
account. Call your Investment Professional for information in establishing an
account. Your Investment Professional will notify you whether subsequent
trades should be directed to the Investment Professional or directly to the
Fund's Transfer Agent. If you are purchasing shares of the Fund through a
program of services offered or administered by your Investment Professional,
you should read the program materials in conjunction with this Prospectus.
Certain features of the Fund may be modified by the Investment Professional in
these programs and charges may be imposed for the services rendered. Your
Investment Professional may offer any or all of the services mentioned in this
section. Contact your Investment Professional for information on these
services.
INVESTING THROUGH YOUR BANK TRUST DEPARTMENT
Your bank trust department may require a minimum investment and may charge
additional fees. Fee schedules for such accounts are available upon request
and are detailed in the agreements by which a client opens the desired account.
Your bank trust department may require a completed and signed application for
the Fund in which an investment is made. Additional documents may be required
from corporations, associations, and certain fiduciaries. Any account
information, such as balances, should be obtained through your bank trust
department. Additional purchases, exchanges or redemptions should also be
coordinated through your bank trust department. Contact your bank trust
department for instructions.
The services rendered by your bank trust department, including affiliates of
Key Advisers or the Sub-Adviser, in the management of their accounts are not
duplicative of any of the services for which Key Advisers or the Sub-Adviser as
the investment adviser and sub-adviser, respectively, is compensated for
advising the Fund. The charges paid by clients of bank trust departments, or
their affiliates, should be considered in calculating the
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net yield and return on investments in the Fund, although such charges do not
affect the Fund's dividends and distributions.
INVESTING DIRECTLY
BY MAIL: You may purchase shares by completing and signing an account
application (initial purchase only) and mailing it, together with a check (or
other negotiable bank draft or money order) in the amount of at least the
minimum investment requirement to, The Victory Institutional Money Market Fund,
Primary Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741.
Subsequent purchases may be made in the same manner.
BY WIRE: Call the Transfer Agent at 800-539-3863 to set up your Fund account
to accommodate wire transactions. YOU MUST CALL TO NOTIFY THE TRANSFER AGENT
BEFORE WIRING FUNDS. If you call the Transfer Agent before 2:00 p.m., Eastern
time, and your wire is received that day, you will earn that day's dividend.
If you call the Transfer Agent after 2:00 p.m. but before 4:00 p.m. Eastern
Time, your purchase will be processed at the closing NAV (usually 4:00 p.m.)
and you will begin to earn dividends on the first business day following
receipt of your wire.
Federal funds (monies transferred from one bank to another through the Federal
Reserve System with same-day availability) should be wired to:
Boston Safe Deposit & Trust Co.
ABA #011001234
Credit PFSC DDA #16-918-8
The Victory Portfolios: The Institutional Money Market Fund
You must include your account number, your name(s), tax identification
number(s) and the control number assigned by the Transfer Agent. The Fund does
not impose a fee for wire transactions, although your bank may charge you a fee
for this service.
SHAREHOLDER SERVICE AGREEMENTS - SERVICE SHARES
The Fund may enter into Shareholder Service Agreements with bank trust
departments and other financial institutions ("Investment Professionals") to
pay costs incurred in connection with the personal service and maintenance of
accounts that hold Service Class Fund shares. Services to be provided to
Service Class shareholders include, among other things, account maintenance,
including responding to shareholder inquiries, directing shareholder
communications, account balances, maintenance and dividend policy. Payments
are made quarterly at an annual rate not to exceed 0.25% of the average annual
net assets of the Service Class Fund shares held in accounts of the investment
professional of its customers.
INVESTMENT REQUIREMENTS
All purchases must be made in U.S. dollars. Checks must be drawn on U.S.
banks. No cash will be accepted. If you make a purchase with more than one
check, each check must have a value of at least $25, and the minimum investment
requirement still applies. The Fund reserves the right to limit the number of
checks processed at one time. If your check does not clear, your purchase may
be canceled and you could be liable for any losses or fees incurred. Payment
for the purchase is expected at the time of the order. If payment is not
received within three business days of the date of the order, the order will be
canceled, and you could be held liable for resulting fees and/or losses.
You may initiate any transaction by telephone either through your bank trust
department or through your Investment Professional or call the Transfer Agent
at 800-539-3863. Subsequent investments by telephone may be made directly or
through procedures established by your bank trust department or Investment
Professional. See "Redeeming Shares--By Telephone" for more information about
telephone transactions.
SPECIAL INVESTOR SERVICES
THE SYSTEMATIC INVESTMENT PLAN. You may make regular investments in the Fund
and all other funds of the Victory Portfolios and Victory Shares (collectively,
the "Victory Group") with the Systematic Investment Plan by completing the
appropriate section of the account application and attaching a voided personal
check with your bank's magnetic ink coding number across the front. If your
bank account is jointly owned, be sure that all owners sign. You must first
meet the Fund's initial investment requirement of $500, then investments may be
made monthly by automatically deducting $25 or more from your bank checking
account. For officers, trustees, directors and employees, including retired
directors and employees, of the Victory Group, KeyCorp and its affiliates, and
the Administrator and its affiliates (and family members of each of the
foregoing, i.e., parents and children) who participate in the Systematic
Investment Plan, there is no minimum initial investment required. You may
change the amount of your monthly purchase
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at any time. Your bank checking account will be debited on the date indicated
on your Account Application. Shares will be purchased at the offering price
next determined following receipt of the order by the Transfer Agent. You may
cancel the Systematic Investment Plan at any time without payment of a
cancellation fee. Your monthly account statement will reflect systematic
investment transactions and a debit entry will appear on your bank statement.
EXCHANGING SHARES
An exchange is the redemption of shares of one fund and the purchase of shares
of another. The exchange privilege is a convenient way to sell and buy shares
of other funds registered in your state. Shares of the Fund may be exchanged
for shares of another fund of the Victory Group. Exchanges into a fund with a
sales charge from the Fund will be processed at the offering price, unless the
shares of the Fund that you wish to exchange were acquired by exchanging shares
of a fund of the Victory Group that were originally purchased subject to a
sales charge; in that event, the shares will be exchanged on the basis of
current net asset values plus any difference in the sales charge originally
paid and the sales charge applicable to the shares you wish to acquire through
the exchange.
You may execute exchange transactions by calling either your Investment
Professional, your bank trust department or the Transfer Agent at 800-539-3863
prior to Valuation Time (generally 4:00 p.m. Eastern time) on any Business
Day, as defined below. When making an exchange or opening an account in
another fund by exchange, the registration and tax identification numbers of
the two accounts must be identical. In order to open an account through
exchange, the applicable minimum initial investment must be met. It is the
Fund's policy to mail to you at your address of record, within five business
days after any telephone call transaction, a written confirmation of the
transaction. All calls will be recorded for your protection. See "Redeeming
Shares--By Telephone" for more information about telephone transactions.
Each exchange may produce a gain or loss for tax purposes. The exchange
privilege is an important benefit. However, in order to protect the Fund's
performance and its shareholders, the Victory Portfolios discourages frequent
exchange activity in response to short-term market fluctuations. The Fund
reserves the right to refuse any specific purchase order, including certain
purchases by exchange if, in the Victory Portfolios' opinion, the Fund would be
unable to invest effectively in accordance with its investment objective and
policies, or would otherwise be affected adversely. Exchanges or purchase
orders may be restricted or refused if the Fund receives or anticipates
individual or simultaneous orders affecting significant portions of the Fund's
assets. Although the Fund will attempt to give prior notice whenever it is
reasonably able to do so, it may impose these restrictions at any time. The
Fund reserves the right to modify or withdraw the exchange privilege, and to
suspend the offering of shares in any class upon 60 days written notice to
shareholders. The exchange privilege is only available in states where the
exchange can legally be made.
REDEEMING SHARES
You may redeem all or a portion of your shares on any day that the Fund is open
for business (a "Business Day" below). Shares will be redeemed at the NAV next
calculated after the Transfer Agent has received the redemption request.
You may redeem shares in several ways:
BY MAIL: Send a written request to: The Victory Portfolios:
Institutional Money Market Fund
P.O. Box 9741
Providence, RI 02940-9741
Write a "letter of instruction" with your name, the Fund's name, your Fund
account number, the dollar amount or number of shares to be redeemed, and any
additional requirements that apply to each particular account. You will need
the letter of instruction signed by all persons required to sign for
transactions, exactly as their names appear on the account application. A
signature guarantee is required if: you wish to redeem more than $10,000 worth
of shares; your Fund account registration has changed within the last 60 days;
the check is not being mailed to the address on your account; the check is not
being made out to the account owner; or, if the redemption proceeds are being
transferred to another Victory Group account with a different registration.
The following institutions should be able to provide you with a signature
guarantee: banks, brokers, dealers, credit unions (if authorized under state
law), securities exchanges and associations, clearing agencies, and savings
associations. A signature guarantee may not be provided by a notary public. A
signature guarantee is designed to protect you, the Fund, and its agents from
fraud. The Transfer Agent reserves the right to reject any signature guarantee
if (1) it has reason to believe that the signature is not genuine, (2) it has
reason to believe that the transaction would otherwise be improper, or (3) the
guarantor institution is a broker
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or dealer that is neither a member of a clearing corporation nor maintains net
capital of at least $100,000.
BY WIRE: You may make redemptions by wire provided you have established a Fund
account to accommodate wire transactions. If telephone instructions are
received before Valuation Time (generally 2:00 p.m. Eastern time), proceeds of
the redemption for the Fund will be wired as federal funds on the same Business
Day (as defined in "Share Price") to the bank account designated with the
Transfer Agent. You may change the bank account designated to receive an
amount redeemed at any time by sending a letter of instruction with a signature
guarantee to the Transfer Agent, Primary Funds Service Corporation at P. O. Box
9741, Providence, RI 02940-9741.
BY TELEPHONE: To redeem by telephone, you may call the Transfer Agent toll
free at 800-539-3863 or call your Investment Professional or bank trust
department. Generally, neither the Fund, the bank trust department nor the
Transfer Agent will be responsible for any claims, losses or expenses for
acting on telephone instructions that they reasonably believe to be genuine.
The Transfer Agent and the Fund will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine and if they do not
employ reasonable procedures they may be liable for any losses due to
unauthorized or fraudulent instructions. The identification procedures may
include, but are not limited to, the following: account number, registration
and address, personalized security codes, taxpayer identification number and
other information particular to the account. Your Investment Professional,
bank trust department or the Transfer Agent may also record calls, and you
should verify the accuracy of your confirmation or statements immediately after
you receive them. See "How to Invest, Exchange and Redeem--Exchanging Shares,"
for additional information with respect to losses resulting from unauthorized
telephone transactions.
CHECK WRITING: Check writing service is available to shareholders of the Fund,
whereby a shareholder may write checks on his or her Fund account for $100 or
more. Shareholders must comply with minimum balance requirements in order to
maintain check writing privileges. A shareholder will receive a supply of
checks once a signature card is received by the Fund. The check may be made
payable to any person, and the shareholder's account will continue to earn
dividends until the check clears. Because of the difficulty of determining in
advance the exact value of an account, a shareholder may not use a check to
close an account. The shareholder's account will be charged a fee for stopping
payment of a check upon the shareholder's request, if the check cannot be
honored because of insufficient funds (or other valid reasons), or in
accordance with any schedule of fees set forth in the account application.
Shareholders should call the Transfer Agent at 800-539-3863 to inquire as to
the availability of the check writing service and to receive a check writing
signature card.
THE SYSTEMATIC WITHDRAWAL PLAN: You can make regular withdrawals from your
account in any fund of the Victory Group with the Systematic Withdrawal Plan by
completing the appropriate section of the account application. If you own
shares in a fund worth $_________ or more, you can have checks sent from your
account directly to you, to a person named by you, or to your bank checking
account on a monthly, quarterly, semi-annual or annual basis. The required
minimum withdrawal is $25. If you are having checks sent to your bank checking
account, attach a voided personal check with your bank's magnetic coding number
across the front of the account application. If your bank checking account is
jointly owned, be sure that all owners sign the application. If your account
is jointly owned be sure that all owners sign the application. You may obtain
information about the Systematic Withdrawal Plan by contacting your Investment
Professional. Your Systematic Withdrawal Plan payments are drawn from share
redemptions. If Systematic Withdrawal Plan redemptions exceed dividend
distributions paid on your Fund shares, your Fund account eventually may be
exhausted.
Your account will be debited on the date you indicate on your account
application. Shares will be redeemed at the NAV as determined on the debit
date indicated on your account application. You may cancel the Systematic
Withdrawal Plan at any time without payment of a cancellation fee. Each
Systematic Withdrawal Plan transaction will appear as a debit entry on your
monthly account statement.
ADDITIONAL REDEMPTION REQUIREMENTS: The Fund may withhold payment on
redemptions until it is reasonably satisfied that investments made by check
have been collected, which can take up to 15 days. Also, when the NYSE is
closed (or when trading is restricted) for any reason other than its customary
weekend or holiday closings, or under any emergency circumstances as determined
by the Commission to merit such action, the right of redemption may be
suspended or the date of payment postponed for a period of time that may exceed
7 days. In addition, the Fund reserves the right to advance the time on that
day by which purchase and redemption orders must be received. To the extent
that portfolio securities are traded in other markets on days when the NYSE is
closed, the Fund's NAV may be affected on days when investors do not have
access to the Fund to purchase or redeem shares.
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<PAGE> 157
If you are unable to reach the Transfer Agent by telephone (for example, during
times of unusual market activity), consider placing your order by mail directly
to the Transfer Agent. In case of suspension of the right of redemption, you
may either withdraw your request for redemption or receive payment based on the
NAV next determined after the termination of the suspension. If your balance
in the Fund falls below $500, you may be given 60 days' notice to reestablish
the minimum balance (except with respect to officers, trustees, directors and
employees, including retired directors and employees, of the Victory
Portfolios, KeyCorp and its affiliates, and the Administrator and its
affiliates (and family members of each of the foregoing, i.e., parents,
children and household members) participating in the Systematic Investment
Plan, to whom no minimum balance requirement applies). If you do not increase
your balance, your account may be closed and the proceeds mailed to you at the
address on record. Shares will be redeemed at the last calculated NAV on the
day the account is closed.
SHARE PRICE
The term "net asset value per share," or "NAV", means the value of one share.
The NAV is calculated by adding the value of all the Fund's investments, plus
cash and other assets, deducting liabilities, and then dividing the result by
the number of shares outstanding. The Fund is open for business each Business
Day. A "Business Day" is a day on which the NYSE is open for trading, the
Federal Reserve Bank of Cleveland is open, and any other day (other than a day
on which no shares of the Fund are tendered for redemption and no order to
purchase any shares is received) during which there is sufficient trading in
its portfolio instruments that the Fund's net asset value per share might be
materially affected. The NYSE or the Federal Reserve Bank of Cleveland will
not be open in observance of the following holidays: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving Day, and Christmas
Day. The NAV of the Fund is calculated twice daily, at 2:00 p.m. Eastern
time, and at the close of the Fund's Business Day, which coincides with the
close of normal trading of the NYSE (normally 4:00 p.m. Eastern time).
The Fund's securities are valued on the basis of amortized cost. This means
valuation assumes a steady rate of payment from the date of purchase until
maturity instead of looking at actual changes in market value. Although the
Fund seeks to maintain an NAV of $1.00, there can be no assurance that it will
be able to do so.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
The Fund distributes substantially all of its net investment income and net
capital gains, if any, to shareholders within each calendar year as well as on
a fiscal year basis to the extent necessary to qualify for favorable federal
tax treatment. The Fund accrues and declares dividends from its net investment
income daily and pays such dividends on or around the second Business Day of
the succeeding month.
DISTRIBUTION OPTIONS
When you fill out your account application, you can specify how you want to
receive your dividend distributions. Currently, there are five available
options:
1. REINVESTMENT OPTION. Your income and capital gain dividends, if any,
will be automatically reinvested in additional shares of the Fund.
Income and capital gain dividends will be reinvested at the net asset
value of your class of shares of the Fund as of the day after the
dividend payment date. If you do not indicate a choice on your
application, you will be assigned this option.
2. CASH OPTION. You will receive a check for each income or capital gain
dividend, if any. Distribution checks will be mailed no later than 7
days after the last day of the preceding month.
3. INCOME EARNED OPTION. You will have your capital gain dividend
distributions, if any, reinvested automatically in the Fund and have
your income dividends paid in cash.
4. DIRECTED DIVIDENDS OPTION. You will have income and capital gain
dividends, or only capital gain dividends, automatically reinvested in
shares of another fund of the Victory Group. Shares will be purchased
as of the dividend payment date. If you are reinvesting dividends of
a fund sold without a sales charge in shares of a fund sold with a
sales charge, the shares will be purchased at the offering price. If
you are reinvesting dividends of a fund sold with a sales charge in
shares of a fund sold with or without a sales charge, the shares will
be purchased
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<PAGE> 158
at net asset value. Dividend distributions can be directed only to an
existing account with a registration that is identical to that of your
Fund account.
5. DIRECTED BANK ACCOUNT OPTION. You will have your income and capital
gain dividends, or only your income dividends, automatically
transferred to your bank checking or savings account. The amount will
be determined on the dividend record date and will normally be
transferred to your account within 7 days of the dividend payment
date. Dividend distributions can be directed only to an existing
account with a registration that is identical to that of your Fund
account. Please call or write the Transfer Agent to learn more about
this dividend distribution option.
Any election or revocation of any of the above dividend distribution options
may be made in writing to the Fund and sent to Primary Funds Service
Corporation, P.O. Box 9741, Providence, RI 02940-9741, or by calling the
Transfer Agent at 800-539-3863, and will become effective with respect to
dividends having record dates after receipt of the application or request by
the Transfer Agent.
Reinvested dividend distributions receive the same tax treatment as dividend
distributions paid in cash.
COMPLETE REDEMPTIONS: If you request a complete redemption of all your Fund
shares, any dividend accrued to your account will be included in the redemption
check.
STATEMENT AND REPORTS: You will receive a monthly statement reflecting all
transactions that affect the share balance or the registration of your Fund
account. You will receive a confirmation after every transaction that affected
the share balance of your Fund account, except for dividend reinvestment,
systematic investment and systematic withdrawal transactions. These
transactions will be detailed in your Fund account statement. Transactions
that affect the share balance of your Fund investment in an account established
with an Investment Professional or financial institution will be detailed in
regular statements or through confirmation procedures of the financial
institution. Certificates representing shares of the Fund will not be issued.
An IRS Form 1099-DIV with federal tax information will be mailed to you by
January 31 of each tax year and also will be filed with the IRS. At least
twice a year, you will receive the Fund's financial reports.
FEDERAL TAXES
The Fund will be treated as a separate entity for federal income tax purposes.
The Fund intends to qualify as a "regulated investment company" under the
Internal Revenue Code of 1986, as amended (the "IRS Code"), for so long as such
qualification is in the best interest of its shareholders. The Fund
contemplates declaring as dividends at least 100% of its net investment income
and capital gains, if any, for each year. Since all of the Fund's net
investment income is expected to be derived from earned interest, it is
anticipated that no part of any distribution will be eligible for the dividends
received deduction for corporations. The Fund does not expect to realize any
long-term capital gains.
To the extent that dividends paid to shareholders are derived from taxable
income (for example, interest on certificates of deposit or repurchase
agreements) or from capital gains, such dividends will be subject to federal
income tax whether received in cash or additional shares and may also be
subject to state and local taxes.
Interest income received by direct holders of obligations of the U.S.
Government and certain of its agencies and instrumentalities is exempt from
state and local income taxation. The Fund's dividend distributions from
investment income may, to the extent that such dividend distributions consist
of interest from obligations of the U.S. Government and certain of its agencies
and instrumentalities, also be exempt from state and local income taxes. The
Fund intends to advise shareholders of the proportion of their dividend
distributions which consist of such interest. Shareholders are urged to
consult their own tax advisers regarding the possible exclusion of a portion of
their dividend distributions for state and local income tax purposes in their
respective jurisdictions.
Dividends received by shareholders of the Fund in January of a given year will
be treated as received on December 31 of the preceding year provided that such
dividends were declared to shareholders of record on a date in October,
November or December of such preceding year.
The foregoing discussion is limited to federal income tax consequences and is
based on tax laws and regulations which are in effect as of the date of this
Prospectus; such laws and regulations may be changed by legislative or
administrative actions. Additional information regarding federal taxes is
contained in the Statement of Additional Information under the headings
"ADDITIONAL PURCHASE AND REDEMPTION INFORMATION-- Additional
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<PAGE> 159
Tax Information." The foregoing and the additional material in the Statement of
Additional Information are only brief summaries of some of the important tax
considerations generally affecting the Fund and its shareholders. Accordingly,
potential investors are urged to consult their tax advisers with specific
reference to their own federal, state and other local tax situation.
The Victory Portfolios will provide shareholders at least annually with
information as to the federal income tax consequences of distributions made to
them during the year.
PERFORMANCE
From time to time, the Fund's "yield" and "effective yield" for each class of
shares may be presented in advertisements, sales literature and in reports to
shareholders. The "yield" is based upon the income earned by the Fund over a
seven-day period, which is then annualized, i.e., the income earned in the
period is assumed to be earned every seven days over a 52-week period and is
stated as a percentage of the investment. The "effective yield" is calculated
similarly, but when annualized, the income earned by the investment is assumed
to be reinvested in shares of the Fund and thus compounded in the course of a
52-week period. The effective yield will be higher than the yield because of
the compounding effect of this assumed reinvestment.
In addition, performance information showing the total return may be presented
in advertisements, sales literature and in reports to shareholders. Such
performance figures are based on historical earnings and are not intended to
indicate future performance. Average annual total return and aggregate total
return will be calculated over a stated period of more than one year. Average
annual total return is measured by comparing the value of an investment in the
Fund at the beginning of the relevant period to the redemption value of the
investment at the end of the period (assuming immediate reinvestment of any
dividends or capital gains distributions) and annualizing that figure.
Aggregate total return is calculated similarly to average annual total return,
the resulting difference is not annualized.
Investors may also judge, and the Victory Portfolios may at times advertise,
the performance of the Fund by comparing it to the performance of other mutual
funds with comparable investment objectives and policies, which performance may
be contained in various unmanaged mutual fund or market indices or rankings
such as those prepared by Dow Jones & Co., Inc. and Standard & Poor's
Corporation, in publications issued by Lipper Analytical Services, Inc., and in
the following publications: IBC/Donoghue's Money Fund Reports, Ibbotson
Associates of Chicago, MorningStar, CDA/Wiesenberger, Money Magazine, Forbes,
Barron's, The Wall Street Journal, The New York Times, Business Week, American
Banker, Fortune, Institutional Investor, U.S.A. Today and local newspapers.
In addition, general information about the Fund that appears in publications
such as those mentioned above may also be quoted or reproduced in
advertisements or in reports to shareholders.
Performance is a function of the type and quality of instruments held in the
portfolio, operating expenses, and market conditions. Consequently, current
performance will fluctuate and is not necessarily representative of future
results. Any fees charged by service providers with respect to customer
accounts for investing in shares of the Victory Portfolios will not be
reflected in performance calculations.
Additional performance information for each fund of the Victory Portfolios is
included in the Victory Portfolios' Annual Report, which is available free of
charge by calling 800-539-3863.
FUND ORGANIZATION AND FEES
The Victory Portfolios is an open-end management investment company, commonly
known as a mutual fund, and currently consisting of twenty-eight series
portfolios, four of which are inactive. The Victory Portfolios has been
operating continuously since 1986, when it was created under Massachusetts law
as a Massachusetts business trust, although certain of its funds have a prior
operating history from their predecessor funds. On February 29, 1996 the
Victory Portfolios converted from a Massachusetts business trust to a Delaware
business trust. The Victory Portfolios' offices are located at 3435 Stelzer
Road, Columbus, OH 43219-3035.
Overall responsibility for management of the Victory Portfolios rests with its
Board of Trustees, who are elected by the shareholders of the Victory
Portfolios.
REORGANIZATION WITH PREDECESSOR FUND
The Predecessor Fund was a portfolio of The Victory Funds. On April 28, 1995,
the shareholders of the Predecessor Fund approved an Agreement and Plan of
Reorganization (the
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<PAGE> 160
"Reorganization Plan"). Under the Reorganization Plan, the Predecessor Fund
transferred all its assets and liabilities to the Fund in exchange for shares
of the Fund, which were distributed pro rata to shareholders of the Predecessor
Fund, who then became shareholders of the Fund (the "Reorganization"). The
Predecessor Fund has ceased operations. The Fund had no assets and did not
begin operations until the Reorganization occurred.
INVESTMENT ADVISER AND SUB-ADVISER
Key Advisers is the investment adviser to the Fund. Key Advisers directs the
investment of the Victory Portfolios' assets, subject at all times to the
supervision of the Victory Portfolio's Board of Trustees. Key Advisers
continually conducts investment research and supervision for the Victory
Portfolios and is responsible for the purchase or sale of the portfolio
instruments.
Key Advisers was organized as an Ohio corporation on July 27, 1995 and is
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended. It is a wholly-owned subsidiary of KeyCorp Asset Management
Holdings, Inc., which is a wholly-owned subsidiary of Society National Bank, a
wholly-owned subsidiary of KeyCorp. Affiliates of Key Advisers manage
approximately $37 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals and mutual funds.
For the services provided and expenses incurred pursuant to its investment
advisory agreement with the Victory Portfolios, Key Advisers receives a fee
from the Fund, computed daily and paid monthly, at the annual rate of
twenty-five one-hundredths of one percent (.25%) of the Fund's average daily
net assets. Key Advisers may periodically waive all or a portion of its
advisory fee with respect to the Fund to increase the net income of the Fund
available for distribution as dividends. Prior to January 1, 1996, the
Sub-Adviser (Society Asset Management, Inc.) served as investment adviser to
the Fund. During the Fund's fiscal period ended October 31, 1995, the
Sub-Adviser received investment advisory fees aggregating .__% of the Fund's
average daily net assets.
Under the investment advisory agreement between the Victory Portfolios, on
behalf of the Fund, and Key Advisers, Key Advisers may delegate a portion of
its responsibilities to a subadviser. In addition, the investment advisory
agreement provides that Key Advisers may render services through its own
employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser of the Fund and are under the common
control of KeyCorp as long as all such persons are functioning as part of an
organized group of persons, managed by authorized officers of Key Advisers.
Key Advisers has entered into an investment sub-advisory agreement with its
affiliate, Society Asset Management, Inc. a registered investment adviser, on
behalf of the Fund. The Sub-Adviser is a wholly-owned subsidiary of KeyCorp
Asset Management Holdings, Inc. For its services under the investment
sub-advisory agreement, Key Advisers pays the Sub-Adviser sub-advisory fees at
an annual rate as a percentage of the Fund's average daily net assets as
follows: .25% of the first $10 million of average daily net assets; .20% of the
next $15 million of average daily net assets; .15% of the next $25 million of
average daily net assets; and .125% of average daily net assets in excess of
$50 million.
ADMINISTRATOR AND DISTRIBUTOR
Concord Holding Corporation is the Administrator for the Fund, Victory
Broker-Dealer Services, Inc. is the Fund's principal underwriter and
Distributor.
The Administrator generally assists in all aspects of the Fund's administration
and operation. For expenses incurred and services provided as Administrator
pursuant to its management and administration agreements with the Victory
Portfolios, the Administrator receives a fee from the Fund, computed daily and
paid monthly, at an annual rate of fifteen one-hundredths of one percent (.15%)
of the Fund's average daily net assets. The Administrator may periodically
waive all or a portion of its administrative fee with respect to the Fund to
increase the net income of the Fund available for distribution as dividends.
During the fiscal period ended October 31, 1995, the Fund paid administration
fees aggregating .__% of its average daily net assets.
TRANSFER AGENT AND FUND ACCOUNTANT
Primary Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741
serves as the Fund's transfer agent pursuant to a Transfer Agency and
Shareholder Service Agreement with the Victory Portfolios and receives a fee
for such services based on various criteria, including assets, transactions and
the number of accounts. BISYS Fund Services Ohio, Inc., 3435 Stelzer Road,
Columbus, Ohio 43219, provides certain accounting services for the Fund
pursuant to a Fund Accounting Agreement and receives a fee for such services.
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<PAGE> 161
SHAREHOLDER SERVICING -- SERVICE SHARES
Shareholder services are provided to the Fund pursuant to agreements between
the Victory Portfolios and various shareholder servicing agents, including Key
Advisers, the Sub-Adviser and other financial institutions and securities
brokers (each a "Shareholder Servicing Agent"). Each Shareholder Servicing
Agent generally will provide support services to shareholders by establishing
and maintaining accounts and records, processing dividend and distribution
payments, providing account information, arranging for bank wires, responding
to routine inquires, forwarding shareholder communications, assisting in the
processing of purchase, exchange and redemption requests, and assisting
shareholders in changing dividend options, account designations and addresses.
For expenses incurred and services provided as Shareholder Servicing Agent
pursuant to its respective Shareholder Servicing Agreement, the Fund pays each
Shareholder Servicing Agent a fee computed daily and paid monthly, in amounts
that, in the aggregate, will not exceed twenty-five one-hundredths of one
percent (.25%) of the average daily net assets of the Fund per year. A
Shareholder Servicing Agent may periodically waive all or a portion of its
respective shareholder servicing fees with respect to the Fund to increase the
net income of the Fund available for distribution as dividends. During the
fiscal period ended October 31, 1995, the Fund paid Shareholder Servicing fees
of __% of its average daily net assets.
EFFECT OF BANKING LAWS
Key Advisers and the Sub-Adviser believe that they may perform the investment
advisory services for the Fund contemplated by the investment advisory (and
sub-advisory agreements (the "Advisory Agreements") for the Fund. In the
Advisory Agreements, Key Advisers and the Sub-Adviser have represented that
they possess the legal authority to perform the investment advisory services
contemplated therein and described in this Prospectus. Key Trust Company of
Ohio, N.A. and its affiliates also believe that they may perform the services
for the Victory Portfolios contemplated by its Shareholder Servicing Agreement
with the Victory Portfolios without violating applicable banking laws or
regulations. Future changes in federal or state statutes and regulations
relating to permissible activities of banks or bank holding companies and their
subsidiaries and affiliates, as well as further judicial or administrative
decisions or interpretations of present and future statutes and regulations,
could change the manner in which Key Advisers, the Sub-Adviser or Key Trust
Company of Ohio, N.A. and its affiliates could continue to perform such
services for the Victory Portfolios. See the Statement of Additional
Information ("Glass-Steagall Act") for further discussion.
BUSINESS MANAGEMENT AGREEMENT
In connection with its obligations under its investment sub-advisory agreement
with Key Advisers, the Sub-Adviser has entered into a Business Management
Agreement with Key Advisers pursuant to which Key Advisers provides certain
administrative and support services to the Sub-Adviser. Such services include
preparing reports to the Company's Board of Trustees, recordkeeping services,
and services rendered in connection with the preparation of regulatory filings
and other reports, and regulatory and compliance systems and other
administrative and support services.
For such services, the Sub-Adviser pays fees to Key Advisers at an annual rate
as follows: .20% on the first $10 million of average daily net assets; .15% of
the next $15 million of average daily net assets; .10% of the next $25 million
of average daily net assets; and .075% of average daily net assets in excess of
$50 million.
EXPENSES
For the fiscal period ended October 31, 1995, the Fund's total operating
expenses were .__% of the average daily net assets of the Institutional Class
and ____ of the average daily net assets of the Service Class.
CUSTODIAN
Key Trust Company of Ohio, N.A. serves as custodian for the Fund and receives a
fee for its services.
INDEPENDENT ACCOUNTS
Coopers & Lybrand L.L.P. serves as the Fund's independent accountants.
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<PAGE> 162
ADDITIONAL INFORMATION
The Victory Portfolios may issue an unlimited number of shares and classes of
the Fund. Shares of each class of the Fund participate equally in dividends
and distributions and have equal voting, liquidation and other rights. When
issued and paid for, shares will be fully paid and nonassessable by the Victory
Portfolios and will have no preference, conversion, exchange or preemptive
rights. Shareholders are entitled to one vote for each full share owned and
fractional votes for fractional shares owned. For those investors with
qualified trust accounts established with affiliates of the Adviser, the
trustee will vote the shares at meetings of the Fund's shareholders in
accordance with the shareholder's instructions or will vote in the same
percentage as shares that are not held in trust. The trustee will forward to
these shareholders all communications received by the trustee, including proxy
statements and financial reports. The Victory Portfolios and the Fund are not
required to hold annual meetings of shareholders and in ordinary circumstances
do not intend to hold such meetings. The Trustees may call special meetings of
shareholders for action by shareholder vote as may be required by the 1940 Act
or the Victory Portfolios' Delaware Trust Instrument. Under certain
circumstances, the Trustees may be removed by action of the Trustees or by the
shareholders. Shareholders holding 10% or more of the Victory Portfolios'
outstanding shares may call a special meeting of shareholders for the purpose
of voting upon the question of removal of Trustees.
The Victory Portfolio's Board of Trustees may authorize the Victory Portfolios
to offer other funds which may differ in the types of securities in which their
assets may be invested.
Key Advisers, the Sub-Adviser and the Victory Portfolios have adopted Codes of
Ethics (the "Codes") which require investment personnel (a) to pre-clear all
personal securities transactions, (b) to file reports regarding such
transactions, and (c) to refrain from personally engaging in (i) short-term
trading of a security, (ii) transactions involving a security within seven days
of a Victory fund transaction involving the same security, and (iii)
transactions involving securities being considered for investment by a Victory
fund. The Codes also prohibit investment personnel from purchasing securities
in an initial public offering. Personal trading reports are reviewed
periodically by Key Advisers or the Sub-Adviser, and the Board of Trustees
reviews annually such reports (including information on any substantial
violations of the Codes). Violations of the Codes may result in censure,
monetary penalties, suspension or termination of employment.
DELAWARE LAW
The Delaware Business Trust Act provides that a shareholder of a Delaware
business trust shall be entitled to the same limitation of personal liability
extended to stockholders of Delaware corporations. In light of Delaware law,
the nature of the Victory Portfolios' business, and the nature of its assets,
management of the Victory Portfolios believes that the risk of personal
liability to a Fund shareholder would be extremely remote.
In the unlikely event a shareholder is held personally liable for the Victory
Portfolios' obligations, the Victory Portfolios is required to use its property
to protect or compensate the shareholder. On request, the Victory Portfolios
will defend any claim made and pay any judgment against a shareholder for any
act or obligation of the Victory Portfolios. Therefore, financial loss
resulting from liability as a shareholder will occur only if the Victory
Portfolios itself cannot meet its obligations to indemnify shareholders and pay
judgments against them.
Delaware law authorizes electronic or telephonic communications between
shareholders and the Victory Portfolios. Under Delaware law, the Successor
Company has the flexibility to respond to future business contingencies. For
example, the Trustees will have the power to incorporate the Victory
Portfolios, to merge or consolidate it with another entity, to cause each fund
to become a separate trust, and to change the Victory Portfolios' domicile
without a shareholder vote. This flexibility could help reduce the expense and
frequency of future shareholder meetings for non-investment related issues.
MISCELLANEOUS
Shareholders will receive Semi-Annual Reports, which are unaudited, and Annual
Reports, which are audited by independent public accountants, describing the
investment operations of the Fund. Each of these reports, when available for a
particular fiscal year end or the end of a semi- annual fiscal period, is
incorporated herein by reference. The Victory Portfolios may include
information in their Annual Reports and Semi-Annual Reports to shareholders
that (i) describes general economic trends, (ii) describes general trends
within the financial services industry or the mutual fund industry, (iii)
describes past or anticipated portfolio holdings for the Fund or (iv) describes
investment management strategies for the Victory Portfolios. Such information
is provided to inform shareholders of the activities of the Victory Portfolios
for the most recent fiscal year
- 22 -
<PAGE> 163
or end and to provide the views of Key Advisers, the Sub-Adviser and/or the
Victory Portfolios' officers regarding expected trends and strategies.
Inquiries regarding the Victory Portfolios or the Fund may be directed in
writing to the Victory Portfolios at Primary Funds Service Corporation, P.O.
Box 9741, Providence, RI 02940-9741, or by telephone, toll-free, at
800-539-3863.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
VICTORY PORTFOLIOS OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFERING BY THE VICTORY PORTFOLIOS OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN
WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
- 23 -
<PAGE> 164
THE
Victory
Portfolios
Intermediate Income Fund
Prospectus For current yield, purchase, and redemption information,
March 1, 1996 call 800-539-FUND or 800-539-3863
THE VICTORY PORTFOLIOS (the "Victory Portfolios") is a registered open-end
management investment company that offers investors a selection of money market,
fixed-income, municipal bond, domestic and international equity portfolios. This
Prospectus relates to The Victory Intermediate Income Fund (the "Fund"), a
diversified portfolio. KeyCorp Mutual Fund Advisers, Inc., Cleveland, Ohio, an
indirect subsidiary of KeyCorp, is the investment adviser to the Fund ("Key
Advisers" or the "Adviser"). Society Asset Management, Inc., Cleveland, Ohio, an
indirect subsidiary of KeyCorp, is the investment sub-adviser to the Fund (the
"Sub-Adviser" or "Society"). Concord Holding Corporation is the Fund's
administrator (the "Administrator"). Victory Broker-Dealer Services, Inc. is the
Fund's distributor (the "Distributor").
The Victory Intermediate Income Fund seeks to provide a high level of income.
The Fund pursues this objective by investing in debt securities issued by
corporations and the U.S. Government and its agencies or instrumentalities.
Please read this Prospectus before investing. It is designed to provide you with
information and to help you decide if the Fund's goals match your own. Retain
this document for future reference. A Statement of Additional Information (dated
March 1, 1996) for the Fund and an annual report for the Fund's fiscal year
ended October 31, 1995 has been filed with the Securities and Exchange
Commission and is incorporated herein by reference. The Statement of Additional
Information is available without charge upon request by calling 800-539-3863.
SHARES OF THE FUND ARE:
- - NOT INSURED BY THE FDIC;
- - NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY KEYCORP
BANK, ANY OF ITS AFFILIATES, OR ANY OTHER BANK;
- - SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("COMMISSION") OR ANY SECURITIES REGULATORY AUTHORITY OF ANY
STATE, NOR HAS THE COMMISSION OR ANY SUCH STATE AUTHORITY PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE> 165
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
----
<S> <C>
Summary of Fund Expenses 2
Financial Highlights 3
The Fund's Investment Objective 4
The Fund's Investment Policies and Risk Factors 4
How to Invest, Exchange and Redeem 12
Dividends, Distributions and Taxes 21
Performance 24
Fund Organization and Fees 25
Additional Information 28
</TABLE>
2
<PAGE> 166
SUMMARY OF FUND EXPENSES
The table below summarizes the expenses associated with the Fund. This standard
format was developed for use by all mutual funds to help you make your
investment decisions. Of course, you should consider this expense information
along with other important information in this Prospectus including the
Portfolio's investment objective.
SHAREHOLDER TRANSACTION EXPENSES(1)
<TABLE>
<S> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) 4.75%
Maximum Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES, AFTER EXPENSE WAIVERS AND REIMBURSEMENTS (AS A
PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<S> <C>
Management Fees(2) .57%
Administration Fee .15%
Other Expenses(3) .23%
---
Total Fund Operating Expenses(3) .95%
===
</TABLE>
(1) Subsidiaries, correspondents, affiliated banks, and non-bank affiliates
of KeyCorp may charge a Customer's account fees for automatic
investment and other cash management services provided in connection
with an investment in the Fund. (See "How to Invest, Exchange and
Redeem".)
(2) Key Advisers [and the Administrator] have agreed to reduce their fees
and/or reimburse expenses [for the indefinite future].
(3) These amounts include an estimate of the shareholder servicing fees the
Fund expects to pay. (See "Fund Organization and Fees - Shareholder
Servicing".)
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) 95% annual return and (2) full redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
$57 $76 $98 $159
</TABLE>
The purpose of the table above is to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. See "Fund Organization and Fees" for a more complete discussion of
annual operating expenses of the Fund. THE FOREGOING EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN.
3
<PAGE> 167
FINANCIAL HIGHLIGHTS
THE FUND'S FINANCIAL HISTORY
The table below sets forth certain financial information with respect to the
financial highlights for the Victory Intermediate Income Fund for the period
indicated. The information below (except as indicated) has been derived from
financial statements audited by Coopers & Lybrand L.L.P. independent accountants
for the Victory Portfolios, whose report thereon is incorporated by reference
into the Statement of Information.
THE VICTORY INTERMEDIATE INCOME FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS DECEMBER 10,
YEAR ENDED ENDED 1993 TO
OCTOBER 31, APRIL 30, OCTOBER 31,
1995 1995 1994**
----------- ----------- ------------
(Unaudited)
<S> <C> <C> <C>
Net Asset Value, Beginning of
Period [To be inserted] $ 9.25 $ 10.00
-------- --------
INVESTMENT ACTIVITIES:
Net investment income 0.30 0.52
Net realized and unrealized
losses on investments 0.17 (0.76)
-------- --------
Total from Investment Activities 0.47 (0.24)
-------- --------
DISTRIBUTIONS:
Net investment income (0.31) (0.51)
-------- --------
Net Asset Value, End of Period $ 9.41 $ 9.25
======== ========
TOTAL RETURN (EXCLUDES SALES
CHARGE) 5.07 %(b) (2.48)%
(b)
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $133,225 $112,923
Ratio of expenses to average
net assets 0.81 %(c)
0.79%(b)
Ratio of net investment income to
average net assets 6.65 %(c)
5.77%(c)
Ratio of expenses to average
net assets* 1.08 %(c)
1.25%(b)
Ratio of net investment income to
average net assets* 6.38 %(c)
Portfolio turnover 28.74 % 55.06 %
</TABLE>
* During the period the investment advisory, administration and/or
shareholder service fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would be as indicated.
** Period from commencement of operations.
(b) Aggregate.
(c) Annualized.
4
<PAGE> 168
THE FUND'S INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide a high level of income. The
investment objective of the Fund is fundamental and may not be changed without a
vote of the holders of a majority of its outstanding voting securities (as
defined in the Statement of Additional Information). There can be no assurance
the investment objective of the Fund will be achieved.
THE FUND'S INVESTMENT POLICIES
The Fund pursues its objective by investing in debt securities issued by
corporations and the U.S. Government and its agencies or instrumentalities.
Under normal market conditions, the Fund will invest at least 65% of the value
of its total assets in investment-grade bonds, debentures, notes with remaining
maturities at the time of purchase of one year or more, zero-coupon securities,
mortgage-related securities, state, municipal or industrial revenue bonds,
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, debt securities convertible into, or exchangeable for, common
stocks, first mortgage loans and participation certificates in pools of
mortgages issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. The Fund will invest in state and municipal securities when,
in the opinion of Key Advisers or the Sub-Adviser, their yields are competitive
with comparable taxable debt obligations. In addition, up to 20% of the value of
the Fund's total assets may be invested in preferred stocks, notes with
remaining maturities at the time of purchase of less than one year, short-term
debt obligations consisting of commercial paper (including variable amount
master demand notes), bankers' acceptances, certificates of deposit and time
deposits of domestic and foreign branches of U.S. banks and foreign banks,
repurchase agreements, and securities of other investment companies. Some of the
securities in which the Fund invests may have warrants or options attached.
Under normal market conditions, the Fund intends to maintain a dollar-weighted
average portfolio maturity of approximately three to eight years. However, for
temporary defensive purposes, as determined by the Key Advisers or the
Sub-Adviser, the Fund may extend or shorten the dollar-weighted average maturity
of its portfolio depending upon anticipated changes in interest rates or other
relevant market factors.
All instruments purchased by the Fund will be rated, at the time of purchase,
within the four highest rating categories by a nationally recognized statistical
ratings organization ("NRSRO") (investment grade) or, if unrated, will be of
comparable quality, as determined by Key Advisers or the Sub-Adviser.
Changes in the value of portfolio securities will not affect cash income, if
any, derived from these securities but will affect the Fund's net asset value.
Because the Fund invests primarily in debt securities, which fluctuate in value,
the Fund's shares will fluctuate in value.
ACCEPTABLE INVESTMENTS AND ASSOCIATED RISKS. The Fund may invest in the
following instruments:
- - INVESTMENT GRADE SECURITIES. The Fund will invest in obligations which,
at the time of purchase, are rated within the four highest rating
categories by an NRSRO (investment grade) or, if unrated, which Key
Advisers or the Sub-Adviser determines to be of comparable quality. See
the Appendix in the Statement of Additional Information for a
description of the rating categories.
- - BONDS, NOTES AND DEBENTURES OF U.S. CORPORATE ISSUERS. Debentures
represent unsecured promises to pay, while notes and bonds may be
secured by mortgages
5
<PAGE> 169
on real property or security interests in personal property. Bonds
include, but are not limited to, debt instruments with maturities of
approximately one year or more, debentures, mortgage-related
securities, stripped government securities and zero coupon obligations.
Bonds, notes and debentures in which the Fund may invest may differ in
interest rates, maturities and times of issuance. The market value of
the Fund's fixed income investments will change in response to interest
rate changes and other factors. During periods of falling interest
rates, the values of outstanding fixed income securities generally
rise. Conversely, during periods of rising interest rates, the values
of such securities generally decline. Moreover, while securities with
longer maturities tend to produce higher yields, the price of longer
maturity securities are also subject to greater market fluctuations as
a result of changes in interest rates. Changes by recognized agencies
in the rating of any fixed income security and in the ability of an
issuer to make payments of interest and principal also affect the value
of these investments. Except under conditions of default, changes in
the value of fund securities will not affect cash income derived from
these securities but will affect the Fund's net asset value.
- - ZERO COUPON BONDS. The Fund is permitted to purchase zero coupon U.S.
Government securities ("zero coupon bonds"). Zero coupon bonds are
purchased at a discount from the face amount because the buyer receives
only the right to receive a fixed payment on a certain date in the
future and does not receive any periodic interest payments. The effect
of owning instruments which do not make current interest payments is
that a fixed yield is earned not only on the original investment but
also, in effect, on all discount accretion during the life of the
obligations. This implicit reinvestment of earnings at the same rate
eliminates the risk of being unable to reinvest distributions at a rate
as high as the implicit yields on the zero coupon bond, but at the same
time eliminates the holder's ability to reinvest the interest payments
at higher rates in the future. For this reason, zero coupon bonds are
subject to substantially greater price fluctuations during periods of
changing market interest rates than are comparable securities which pay
interest currently, which fluctuation increases the longer the period
to maturity.
- - SHORT-TERM OBLIGATIONS. These include high quality, short-term
obligations such as domestic and foreign commercial paper (including
variable-amount master demand notes), bankers' acceptances,
certificates of deposit and demand and time deposits of domestic and
foreign branches of U.S. banks and foreign banks, and repurchase
agreements.
- - INTERNATIONAL BONDS. The Fund may invest in Euro and Yankee
obligations, which are U.S. dollar-denominated international bonds for
which the primary trading market is in the United States ("Yankee
Bonds"), or for which the primary trading market is abroad ("Eurodollar
Bonds"). The Fund may also invest in Canadian and Supranational Agency
Bonds (e.g., International Monetary Fund). (See "Foreign Securities"
for a description of risks associated with investments in foreign
securities.)
- - FOREIGN SECURITIES. The Fund may invest up to 20% of the value of its
total assets in debt securities of foreign issuers, including foreign
banks. Foreign securities are subject to special risks, such as future
adverse political and economic developments, possible seizure,
nationalization, or expropriation of foreign investments, less
stringent disclosure requirements, increased costs associated with the
conversion of foreign currency into U.S. dollars, the possible
establishment of exchange controls or taxation at the source, or the
adoption of other foreign governmental restrictions. To the extent the
Fund may invest in securities of foreign issuers which are not traded
on any exchange, there is a further risk that these securities will not
be readily marketable. The Fund will not hold
6
<PAGE> 170
foreign currency in amounts exceeding 5% of its assets as a result of
such investments.
- - U.S. GOVERNMENT SECURITIES. The Fund may invest in obligations issued
or guaranteed by the U.S. Government or its agencies or
instrumentalities. Obligations of certain agencies and
instrumentalities of the U.S. Government, such as the Government
National Mortgage Association ("GNMA") and the Export-Import Bank of
the United States, are supported by the full faith and credit of the
U.S. Treasury; others, such as those of the Federal National Mortgage
Association ("FNMA") are supported by the right of the issuer to borrow
from the Treasury; others, such as those of the Student Loan Marketing
Association ("SLMA"), are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others,
such as those of the Federal Farm Credit Banks or the Federal Home Loan
Mortgage Corporation ("FHLMC"), are supported only by the credit of the
instrumentality. No assurance can be given that the U.S. Government
will provide financial support to U.S. Government-sponsored agencies or
instrumentalities if it is not obligated to do so by law. The Fund will
invest in the obligations of such agencies or instrumentalities only
when Key Advisers or the Sub-Adviser believes that the credit risk with
respect thereto is minimal.
- - RECEIPTS. In addition to bills, notes and bonds issued by the U.S.
Treasury, the Fund may also purchase separately traded interest and
principal component parts of such obligations that are transferable
through the Federal book entry system, known as Separately Traded
Registered Interest and Principal Securities ("STRIPS") and Coupon
Under Book Entry Safekeeping ("CUBES"). These instruments are issued by
banks and brokerage firms and are created by depositing Treasury notes
and Treasury bonds into a special account at a custodian bank; the
custodian holds the interest and principal payments for the benefit of
the registered owners of the certificates or receipts. The custodian
arranges for the issuance of the certificates or receipts evidencing
ownership and maintains the register. Receipts include Treasury
Receipts ("TRs"), Treasury Investment Growth Receipts ("TIGRs") and
Certificates of Accrual on Treasury Securities ("CATS"). STRIPS, CUBES,
TRs, TIGRs and CATS are sold as zero coupon securities, which means
that they are sold at a substantial discount and redeemed at face value
at their maturity dates without interim cash payments of interest or
principal. This discount is amortized over the life of the security,
and such amortization will constitute the income earned on the security
for both accounting and tax purposes. Because of these features, these
securities may be subject to greater interest rate volatility than
interest-paying U.S. Treasury obligations. The Fund will limit its
investments in such instruments to 20% of its total assets.
- - GOVERNMENT MORTGAGE-BACKED SECURITIES. The principal governmental
(i.e., backed by the full faith and credit of the United States
Government) guarantor of mortgage-related securities is GNMA. GNMA is a
wholly owned United States Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee with
the full faith and credit of the United States Government, the timely
payment of principal and interest on securities issued by institutions
approved by GNMA (such as savings and loan institutions, commercial
banks and mortgage bankers) and backed by pools of FHA-insured or
VA-guaranteed mortgages.
Government-related (i.e., not backed by the full faith and credit of
the United States Government) guarantors include FNMA and FHLMC. FNMA
and FHLMC are government-sponsored corporations owned entirely by
private stockholders. Pass-through securities issued by FNMA and FHLMC
are guaranteed as to timely payment of principal and interest by FNMA
and FHLMC but are not backed by the full faith and credit of the United
States
7
<PAGE> 171
Government.
The investment characteristics of mortgage-related securities differ
from traditional debt securities. These differences can result in
significantly greater price and yield volatility than is the case with
traditional fixed income securities. The major differences typically
include more frequent interest and principal payments, usually monthly,
the adjustability of interest rates, and the possibility that
prepayments of principal may be made at any time. Prepayment rates are
influenced by changes in current interest rates and a variety of
economic, geographic, social and other factors. During periods of
declining interest rates, prepayment rates can be expected to
accelerate. Under certain interest rate and prepayment rate scenarios,
the Fund may fail to recoup fully its investment in mortgage-backed
securities (and incur capital losses), notwithstanding a direct or
indirect governmental or agency guarantee. In general, changes in the
rate of prepayments on a mortgage-related security will change that
security's market value and its yield to maturity. When interest rates
fall, high prepayments could force the Fund to reinvest principal at a
time when investment opportunities are not attractive. Thus,
mortgage-backed securities may not be an effective means for the Fund
to lock in long-term interest rates. Conversely, during periods when
interest rates rise, slow prepayments could cause the average life of
the security to lengthen and the value to decline more than
anticipated.
- - COLLATERALIZED MORTGAGE OBLIGATIONS. Mortgage-related securities in
which the Fund may invest may also include collateralized mortgage
obligations ("CMOs"). CMOs are debt obligations issued generally by
finance subsidiaries or trusts that are secured by mortgage-backed
certificates, including, in many cases, certificates issued by
government-related guarantors, including GNMA, FNMA and FHLMC, together
with certain funds and other collateral. Although payment of the
principal of and interest on the mortgage-backed certificates pledged
to secure the CMOs may be guaranteed by GNMA, FNMA or FHLMC, the CMOs
represent obligations solely of the issuer and are not insured or
guaranteed by GNMA, FHLMC, FNMA or any other governmental agency, or by
any other person or entity. The issuers of the CMOs typically have no
significant assets other than those pledged as collateral for the
obligations.
- - MORTGAGE-RELATED SECURITIES ISSUED BY NON-GOVERNMENTAL ENTITIES. The
Fund may invest in mortgage-related securities issued by
non-governmental entities. Commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers
and other secondary market issuers also create pass-through pools of
conventional residential mortgage loans. Such issuers may also be the
originators of the underlying mortgage loans as well as the guarantors
of the mortgage-related securities. Pools created by such
non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are not direct or
indirect government guarantees of payments in the former pools.
However, timely payment of interest and principal of these pools is
supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance. The insurance and
guarantees are issued by government entities, private insurers and the
mortgage poolers. Such insurance and guarantees and the
creditworthiness of the issuers thereof will be considered in
determining whether a mortgage-related security meets the Fund's
investment quality standards. There can be no assurance that the
private insurers can meet their obligations under the policies. The
Fund may buy mortgage-related securities without insurance or
guarantees if, through an examination of the loan experience and
practices of the poolers, Key Advisers or the Sub-Adviser determines
that the securities meet the Fund's quality standards. Although the
market for such securities is becoming increasingly liquid, securities
issued by certain private
8
<PAGE> 172
organizations may not be readily marketable. The Fund will not purchase
mortgage-related securities or any other assets which in Key Advisers
or the Sub-Adviser's opinion are illiquid if, as a result, more than
15% of the value of the Fund's total assets will be invested in
illiquid securities.
[/R]
The Fund may purchase mortgage-related securities with stated
maturities in excess of 10 years. Mortgage-related securities include
collateralized mortgage obligations and participation certificates in
pools of mortgages. The average life of mortgage-related securities
varies with the maturities of the underlying mortgage instruments,
which have maximum maturities of 40 years. The average life is likely
to be substantially less than the original maturity of the mortgage
pools underlying the securities as the result of mortgage prepayments.
The rate of such prepayments, and hence the average life of the
certificates, will be a function of current market interest rates and
current conditions in the relevant housing markets. The impact of
prepayment of mortgages is described under "Government Mortgage-Backed
Securities" above. Estimated average life will be determined by Key
Advisers or the Sub-Adviser Various independent mortgage-related
securities dealers publish estimated average life data using
proprietary models, and in making such determinations, Key Advisers or
the Sub-Adviser will rely on such data except to the extent such data
are deemed unreliable by Key Advisers or the Sub-Adviser. Key Advisers
or the Sub-Adviser might deem data unreliable which appeared to present
a significantly different estimated average life for a security than
data relating to the estimated average life of comparable securities as
provided by other independent mortgage-related securities dealers.
[/R]
- - SECURITIES LENDING. In order to generate additional income, the Fund
may, from time to time, lend portfolio securities to broker-dealers,
banks or institutional borrowers of securities. The Fund must receive
collateral equal to 100% of the securities' value plus any interest due
in the form of cash or U.S. Government securities, which collateral
must be marked to market daily by Key Advisers or the Sub-Adviser
Should the market value of the loaned securities increase, the borrower
must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund an amount
equal to any dividends or interest paid on such securities plus any
interest negotiated between the parties to the lending agreement. Loans
are subject to termination by the Fund or the borrower at any time.
While the Fund does not have the right to vote securities on loan, the
Fund intends to terminate the loan and regain the right to vote if that
is considered important with respect to the investment. The Fund will
only enter into loan arrangements with broker-dealers, banks or other
institutions which Key Advisers or the Sub-Adviser has determined are
creditworthy under guidelines established by the Victory Portfolios'
Board of Trustees. The Fund intends to limit its securities lending to
33% of total assets.
- - WHEN-ISSUED SECURITIES. The Fund may purchase securities on a
when-issued or delayed delivery basis. These transactions are
arrangements in which the Fund purchases securities with payment and
delivery scheduled for a future time, thereby involving the risk that
the yield obtained in the transaction will be less than that available
in the market when delivery takes place. When the Fund agrees to
purchase securities on a when-issued basis, the Trust's custodian will
set aside cash or liquid portfolio securities equal to the amount of
that commitment in a separate account, and may be required to
subsequently place additional assets in the separate account to
maintain equivalence with the Fund's commitment. The Fund generally
will not pay for such securities and no income accrues on the
securities until they are received. Securities purchased on a
when-issued basis are recorded as assets and are subject to changes in
value prior to delivery based upon changes in the general level of
interest rates and other market factors.
9
<PAGE> 173
The Fund does not intend to purchase when-issued or delayed delivery
securities for speculative purposes, but only for the purpose of
acquiring portfolio securities consistent with its investment objective
and policies, and not for investment leverage. In when-issued and
delayed delivery transactions, the Fund relies on the seller to
complete the transaction; its failure to do so may cause the Fund to
miss a price or yield considered to be advantageous.
- - REPURCHASE AGREEMENTS. Under the terms of a repurchase agreement, the
Fund acquires securities from financial institutions or registered
broker-dealers, subject to the seller's agreement to repurchase such
securities at a mutually agreed upon date and price. The seller is
required to maintain the value of collateral held pursuant to the
agreement at not less than the repurchase price (including accrued
interest). If the seller were to default on its repurchase obligation
or become insolvent, the Fund holding such obligation would suffer a
loss to the extent that the proceeds from a sale of the underlying
portfolio securities were less than the repurchase price, or to the
extent that the disposition of such securities by the Fund were delayed
pending court action. Repurchase agreements are considered by the staff
of the Commission to be loans by the Fund.
- - REVERSE REPURCHASE AGREEMENTS. The Fund may borrow funds for temporary
purposes by entering into reverse repurchase agreements. Pursuant to
such agreements, the Fund sells portfolio securities to financial
institutions such as banks and broker-dealers, and agrees to repurchase
them at a mutually agreed-upon date and price. At the time the Fund
enters into a reverse repurchase agreement, it must place in a
segregated custodial account assets having a value equal to the
repurchase price (including accrued interest); the collateral will be
marked to market on a daily basis, and will be continuously monitored
to ensure that such equivalent value is maintained. Reverse repurchase
agreements involve the risk that the market value of the securities
sold by the Fund may decline below the price at which the Fund is
obligated to repurchase the securities. Reverse repurchase agreements
are considered to be borrowings under the Investment Company Act of
1940.
- - INVESTMENT COMPANY SECURITIES. The Fund may also invest up to 5% of its
total assets in the securities of any one investment company, but may
not own more than 3% of the securities of any one investment company or
invest more than 10% of its total assets in the securities of other
investment companies. Pursuant to an exemptive order received by the
Victory Portfolios' from the Commission, the Fund may invest in the
Money Market Funds of the Victory Portfolios. Key Advisers or the
Sub-Adviser will waive its fee attributable to the Fund's assets
invested in a fund of the Victory Portfolios and, to the extent
required by the laws of any state in which shares of the Fund are sold,
Key Advisers or the Sub-Adviser will waive its investment advisory fee
as to all assets invested in other investment companies. Because such
other investment companies employ an investment adviser, such
investment by the Fund will cause shareholders to bear duplicative fees
such as management fees, to the extent such fees are not waived by Key
Advisers or the Sub-Adviser.
- - PRIVATE PLACEMENT INVESTMENTS. The Fund may invest in commercial paper
issued in reliance on the exemption from registration afforded by
Section 4(2) of the 1933 Act. Section 4(2) commercial paper is
restricted as to disposition under federal securities law and is
generally sold to institutional investors, such as the Fund, that agree
they are purchasing the paper for investment purposes and not with a
view to public distribution. Any resale by the purchaser must be in an
exempt transaction. Section 4(2) commercial paper is normally resold to
other institutional investors like the Fund through or with the
assistance of the issuer or
10
<PAGE> 174
investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity. The Fund believes that Section 4(2)
commercial paper and possibly certain other restricted securities that
meet the criteria for liquidity established by the Trustees are quite
liquid. The Fund intends, therefore, to treat the restricted securities
that meet the criteria for liquidity established by the Trustees,
including Section 4(2) commercial paper, as determined by Key Advisers
or the Sub-Adviser, as liquid and not subject to the investment
limitation applicable to illiquid securities. Therefore, the Fund will
generally purchase Section 4(2) commercial paper without regard to the
Fund's restriction on illiquid securities.
The ability of the Trustees to determine the liquidity of certain
restricted securities is permitted under a position of the Staff of the
Commission set forth in the adopting release for Rule 144A under the
1933 Act (the "Rule"). The Rule is a nonexclusive safe-harbor for
certain secondary market transactions involving certain Restricted
Securities under federal securities laws. The Rule provides an
exemption from registration for resales of Restricted Securities to
qualified institutional buyers. The Rule was expected to further
enhance the liquidity of the secondary market for the types of
securities eligible for resale under Rule 144A. The Victory Portfolios
believes that the Staff of the Commission has left the question of
determining the liquidity of all Restricted Securities to the Trustees.
The Trustees consider the following criteria in determining the
liquidity of certain restricted securities: the frequency of trades and
quotes for the security; the number of dealers willing to purchase or
sell the security and the number of other potential buyers; dealer
undertakings to make a market in the security; and the nature of the
security and the nature of the marketplace trades.
The investment policies of the Fund may be changed without an affirmative vote
of the holders of a majority of the Fund's outstanding voting securities unless
(1) a policy is expressly deemed to be a fundamental policy of the Fund or (2)
policy is expressly deemed to be changeable only by such majority vote.
CERTAIN INVESTMENT RISKS
INTERNATIONAL INVESTMENTS. Generally, investments in securities of foreign
companies involve greater risks than are present in U.S. investments. Compared
to U.S. and Canadian companies, there is generally less publicly available
information about foreign companies and there may be less governmental
regulation and supervision of foreign stock exchanges, brokers and listed
companies. Foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to U.S. companies. Securities of some foreign
companies are less liquid, and their prices more volatile, than securities of
comparable U.S. companies. Settlement of transactions in some foreign markets
may be delayed or may be less frequent than in the U.S., which could affect the
liquidity of the Fund's investment. In addition, with respect to some foreign
countries, there is the possibility of nationalization, expropriation or
confiscatory taxation; limitations on the removal of securities, property or
other assets of the Fund; political or social instability; increased difficulty
in obtaining legal judgments; or diplomatic developments which could affect U.S.
investments in those countries. The Fund's investment advisers will take such
factors into consideration in managing the Fund's investments.
LIMITING INVESTMENT RISKS
The Fund follows specific guidelines in buying portfolio securities:
1. (a) The Fund may borrow money solely for temporary or emergency
purposes but not in an amount exceeding 33 1/3% of its total assets.
(b) The Fund may borrow money from banks or by engaging in reverse
repurchase agreements.
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(c) The Fund will not purchase securities when borrowings exceed 5% of
its total assets. If the Fund borrows money, its share price may be
subject to greater fluctuation until the borrowing is paid off. To this
extent, purchasing securities when borrowings are outstanding may
involve an element of leverage.
2. The Fund will not purchase a security if, as a result, more than 15% of
its net assets would be invested in illiquid securities. The Fund may
invest up to 15% of its net assets in illiquid investments (investments
that cannot be readily sold within seven days in the usual course of
business at approximately the price at which the Fund has valued them),
including restricted securities deemed to be illiquid. Under the
supervision of the Trustees, Key Advisers or the Sub-Adviser determines
the liquidity of the Fund's investments. The absence of a trading
market can make it difficult to ascertain a market value for illiquid
investments. Disposing of illiquid investments may involve
time-consuming negotiation and legal expenses, and it may be difficult
or impossible for the Fund to sell them promptly at an acceptable
price.
Except for the Fund's investment objective and limitation on borrowing in
limitation 1, the investment policies described in this Prospectus are not
fundamental. Non-Fundamental limitations may be changed without shareholder
approval. Whenever an investment policy or limitation states a maximum
percentage of the Fund's assets that may be invested, such percentage limitation
will be determined immediately after and as a result of the investment, except
in the case of borrowing (or other activities that may be deemed to result in
the issuance of a "senior security" under the 1940 Act). Any subsequent change
in values, assets or other circumstances will not be considered when determining
whether the investment complies with the Fund's investment policies and
limitations. If the value of the Fund's holdings of illiquid securities at any
time exceeds the percentage limitation applicable at the time of acquisition due
to subsequent fluctuations in value or other reasons, the Board of Trustees will
consider what actions, if any, are appropriate to maintain adequate liquidity.
NOTE: The Statement of Additional Information contains information about certain
investment practices and portfolio securities of the Fund. The Statement of
Additional Information also contains information about investment restrictions
designed to reduce the risk of an investment in the Fund.
PORTFOLIO TURNOVER
Although the primary objective of the Fund is current income, the Fund may
engage in the technique of short-term trading. Such trading involves the selling
of securities held for a short time, ranging from several months to less than a
day. The object of such short-term trading is to take advantage of what Key
Advisers or the Sub-Adviser believes are changes in market, industry or
individual company conditions or outlook. Any such trading would increase the
Fund's turnover rate and its transaction costs. For the fiscal year ended
October 31, 1995, the portfolio turnover rate was _____% for the Fund compared
to _____% for the prior year.
HOW TO INVEST, EXCHANGE AND REDEEM
HOW TO INVEST
Shares may be purchased directly or through an Investment Professional.
Investment Professionals are securities brokers or other financial institutions
that have entered into selling or servicing agreements with the Fund or the
Distributor. Shares are also available to clients of bank trust departments who
have qualified trust accounts. The minimum investment is $500 for the initial
purchase and $25 thereafter. Accounts set up through a bank trust department or
an Investment Professional may be subject to different minimums.
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<PAGE> 176
- - Investing Through Your Investment Professional. Your Investment Professional
will place your order with the Transfer Agent on your behalf. You may be
required to establish a brokerage or agency account. Your Investment
Professional will notify you whether subsequent trades should be directed to the
Investment Professional or directly to the Fund's Transfer Agent. Accounts
established with Investment Professionals may have different features,
requirements and fees. In addition, Investment Professionals may charge for
their services. Information regarding these features, requirements and fees will
be provided by the Investment Professional. If you are purchasing shares of any
Fund through a program of services offered or administered by your Investment
Professional, you should read the program materials in conjunction with this
Prospectus.
- - Investing Through The Systematic Investment Plan. You can use the Systematic
Investment Plan to purchase shares directly from your bank account. Please refer
to "Systematic Investment Plan" below for more details.
- - Investing Through Your Bank Trust Department. Your bank trust department may
require a minimum investment and may charge additional fees. Fee schedules for
such accounts are available upon request and are detailed in the agreements by
which a client opens the desired account. Your bank trust department may require
a completed and signed application for the Fund in which an investment is made.
Additional documents may be required from corporations, associations, and
certain fiduciaries. Any account information, such as balances, should be
obtained through your bank trust department. Additional purchases, exchanges or
redemptions should also be coordinated through your bank trust department.
Contact your bank trust department for instructions.
The services rendered by a bank trust department, including affiliates of Key
Advisers or the Sub-Adviser, in the management of its accounts are not
duplicative of any of the services for which Key Advisers or the Sub-Adviser as
the investment adviser or sub-adviser, respectively, is compensated for advising
the Fund. The charges paid by clients of bank trust departments, or their
affiliates, should be considered in calculating the net yield and return on
investments in the Fund, although such charges do not affect the Fund's
dividends and distributions.
INVESTING DIRECTLY
BY MAIL: You may purchase shares by completing and signing an account
application (initial purchase only) and mailing it, together with a check (or
other negotiable bank draft or money order) in the amount of at least the
minimum investment requirement to, The Victory Growth Fund, Primary Funds
Service Corporation, P.O. Box 9741, Providence, RI 02940-9741. Subsequent
purchases may be made in the same manner.
BY WIRE: Call 800-539-3863 to set up your Fund account to accommodate wire
transactions. YOU MUST CALL THE TRANSFER AGENT BEFORE WIRING FUNDS. You will
begin to earn dividends on the first business day following receipt of your
wire. Federal funds (monies transferred from one bank to another through the
Federal Reserve System with same-day availability) should be wired to:
Boston Safe Deposit & Trust Co.
ABA #011001234
Credit PFSC DDA#16-918-8
The Victory Portfolios: Growth Fund
You must include your account number, your name(s), tax identification number(s)
an the control number assigned by the Transfer Agent. The Fund does not impose
a fee for wire transactions, although your bank may charge you a fee for this
service.
Shares are sold at the public offering price based on the net asset value that
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<PAGE> 177
is next determined after the Transfer Agent receives the purchase order. In most
cases, to receive that day's offering price, the Transfer Agent must receive
your order as of the close of regular trading of the New York Stock Exchange
("NYSE") (generally 4:00 pm Eastern time) (the "Valuation Time") on each
Business Day (as defined in "Net Asset Value Per Share")of the Fund. If you buy
shares through an Investment Professional, the Investment Professional must
receive your order in a timely fashion on a regular Business Day and transmit it
to the Transfer Agent so that it is received before the close of business that
day. The Transfer Agent may reject any purchase order for the Fund's shares, in
its sole discretion.
It is the responsibility of your Investment Professional to transmit your order
to purchase shares to the Transfer Agent in a timely fashion in order for you to
receive that day's share price. The Fund must receive payment within three
business days after an order is placed. Otherwise, the purchase order will be
canceled and you could be held liable for resulting fees and/or losses.
INVESTMENT REQUIREMENTS
All purchases must be made in U.S. dollars. Checks must be drawn on U.S. banks.
No cash will be accepted. If you make a purchase with more than one check, each
check must have a value of at least $25, and the minimum investment requirement
still applies. The Fund reserves the right to limit the number of checks
processed at one time. If your check does not clear, your purchase will be
canceled and you could be liable for any losses or fees incurred. Payment for
the purchase is expected at the time of the order. If payment is not received
within three business days of the date of the order, the order may be canceled,
and you could be held liable for resulting fees and/or losses.
You may initiate any transaction by telephone either through your bank trust
department or through your Investment Professional or call the Transfer Agent at
800-539-3863. Subsequent investments by telephone may be made directly or
through procedures established by your bank trust department or Investment
Professional. See "Redeeming Shares -- Buy Telephone" for more information about
telephone transactions.
Shares are sold at their offering price, which is normally net asset value plus
an initial sales charge. However, in some cases, described below, where
purchases are not subject to an initial sales charge, the offering price may be
net asset value. In some cases, reduced sales charges may be available, as
described below. When you invest, the Fund receives the net asset value for your
account. The sales charge varies depending on the amount of your purchase and a
portion may be retained by the Distributor and allocated to your Investment
Professional. The Victory Portfolios has a reinstatement policy which allows an
investor who redeems his/her shares originally purchased with a sales charge to
reinvest within 90 days without incurring an additional sales charge. The
current sales charge rates and commissions paid to Investment Professionals are
as follows:
<TABLE>
<CAPTION>
FRONT-END SALES CHARGE
AS A PERCENTAGE OF:
OFFERING NET AMOUNT DEALER
AMOUNT OF PURCHASE PRICE INVESTED REALLOWANCE
- ------------------ -------- ---------- -----------
<S> <C> <C> <C>
Less than $49,999 4.75% 4.99% 4.00%
$50,000 to $99,999 4.50% 4.71% 4.00%
$100,000 to $249,999 3.50% 3.63% 3.00%
$250,000 to $499,999 2.25% 2.30% 2.00%
$500,000 to $999,999 1.75% 1.78% 1.50%
$1,000,000 and above 0.00% 0.00% *
</TABLE>
* There is no initial sales charge on purchases of $1 million or more.
Investment Professionals will be compensated at the rate of up to 0.25%
on such purchases.
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The Distributor reserves the right to reallow the entire commission to dealers.
If that occurs, the dealer may be considered an "underwriter" under Federal
securities laws.
The Distributor may pay all or a portion of any applicable sales charges and
service fees to Investment Professionals who sell shares of the Fund and provide
ongoing sales support services or shareholder support services. For the
three-year period commencing April 30, 1994, for activities in maintaining and
servicing accounts of customers invested in the Fund, First Albany Corporation
("First Albany") and PFIC Securities Corporation ("PFIC") may receive payments
from the Distributor equal to two-thirds of the Dealer Retention (as defined
below) on any shares of the Fund (and other funds of the Victory Portfolios)
sold by First Albany or PFIC and their broker-dealer affiliates. "Dealer
Retention" is an amount equal to the difference between the applicable sales
charge and such part of the sales charge which is reallowed to broker-dealers.
The Distributor, at its expense, may also provide additional cash compensation
to dealers in connection with sales of shares of the Fund. The maximum cash
compensation payable by the Distributor is 4.00% of the offering price. In
addition, the Distributor will, from time to time and at its own expense,
provide compensation, including financial assistance, to dealers in connection
with conferences, sales or training programs for their employees, seminars for
the public, advertising campaigns regarding one or more Victory Portfolios
and/or other dealer-sponsored special events including payment for travel
expenses, including lodging, incurred in connection with trips taken by invited
registered representatives and members of their families to locations within or
outside of the United States for meetings or seminars of a business nature.
Compensation will include the following types of non-cash compensation offered
through sales contests: (1) vacation trips including the provision of travel
arrangements and lodging; (2) tickets for entertainment events (such as
concerts, cruises and sporting events) and (3) merchandise (such as clothing,
trophies, clocks and pens). Dealers may not use sales of the Fund's shares to
qualify for this compensation to the extent such may be prohibited by the laws
of any state or any self-regulatory agency, such as the National Association of
Securities Dealers, Inc. None of the aforementioned compensation is paid for by
the Fund or its shareholders.
REDUCED SALES CHARGES. You may be eligible to buy shares at reduced sales charge
rates in one or more of the following ways:
LETTER OF INTENT. An investor may obtain a reduced sales charge by means of a
written Letter of Intent which expresses the investor's intention to purchase
shares of the Fund at a specified total public offering price within a 13-month
period.
A Letter of Intent is not a binding obligation upon the investor to purchase the
full amount indicated. The minimum initial investment under a Letter of Intent
is 5% of such amount. Shares purchased with the first 5% of such amount will be
held in escrow (while remaining registered in the name of the investor) to
secure payment of the higher sales charge applicable to the shares actually
purchased if the full amount indicated is not purchased, and such escrowed
shares will be involuntarily redeemed to pay the additional sales charge, if
necessary. Dividends (if any) on escrowed shares, whether paid in cash or
reinvested in additional shares, are not subject to escrow. The escrowed shares
will not be available for disposal by the investor until all purchases pursuant
to the Letter of Intent have been made or the higher sales charge has been paid.
When the full amount indicated has been purchased, the escrow will be released.
A Letter of Intent may include purchases of shares made not more than 90 days
prior to the date the investor signs a Letter of Intent; however, the 13-month
period during which the Letter of Intent is in effect will begin on the date of
the earliest purchase to be included. An investor may combine purchases that are
made in an individual capacity with (1) purchases that are made by members of
the investor's
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<PAGE> 179
immediate family and (2) purchases made by businesses that the investor owns as
sole proprietorships, for purposes of obtaining reduced sales charges by means
of a written Letter of Intent. In order to accomplish this, however, investors
must designate on the account application the accounts that are to be combined
for this purpose. Investors can only designate accounts that are open at the
time the Letter of Intent is executed.
If an investor qualifies for a further reduced sales charge because the investor
has either purchased more than the dollar amount indicated on the Letter of
Intent or has entered into a Letter of Intent which includes shares purchased
prior to the date of the Letter of Intent, the difference in the sales charge
will be used to purchase additional shares of the Fund on behalf of the
investor; thus the total purchases (included in the Letter of Intent) will
reflect the applicable reduced sales charge of the Letter of Intent.
For investors who purchase more than the dollar amount indicated on the Letter
of Intent or enter into a Letter of Intent that includes shares purchased prior
to the date of the Letter of Intent and qualify for a reduced sales charge, all
such additional shares will be immediately purchased in the form of additional
shares and credited to the investor's account at the then current public
offering price applicable to a single purchase of the total amount of the
purchases.
For further information about Letters of Intent, interested investors should
contact the Transfer Agent at 800-539-3863. This program, however, may be
modified or eliminated at any time without notice.
RIGHT OF ACCUMULATION AND CONCURRENT PURCHASES
A shareholder may qualify for a reduced sales charge on purchases of shares of
the Fund and other funds of the Victory Portfolios by combining a current
purchase with purchases of another fund(s) or with certain prior purchases of
shares of the Victory Portfolios. The applicable sales charge is based on the
sum of (i) the purchaser's current purchase plus (ii) the current public
offering price of the purchaser's previous purchases of (a) all shares held by
the purchaser in the Fund and (b) all shares held by the purchaser in any other
fund of the Victory Portfolios (except money market funds).
To receive the applicable public offering price pursuant to the right of
accumulation, shareholders must provide the Transfer Agent with sufficient
information at the time of purchase to permit confirmation of qualification.
Accumulation privileges may be amended or terminated without notice at any time
by the Distributor.
- - WAIVERS OF SALES CHARGES. No sales charge is imposed on sales of shares to the
following categories of persons (which categories may be changed or eliminated
at any time):
(1) Current or retired trustees of the Victory Portfolios; employees,
directors, trustees, and their family members of KeyCorp or an
Affiliated Provider (Affiliated Providers refer to affiliates and
subsidiaries of KeyCorp and service providers to the Victory Portfolios
and the Victory Shares (collectively, the "Victory Group")), dealers
having an agreement with the Distributor and any trade organization to
which Key Advisers, the Sub- Adviser or the Administrator belongs;
(2) Investors who purchase shares for trust, investment management or
certain other advisory accounts established with KeyCorp or any of its
affiliates;
(3) Investors who purchase shares through a 401(k) plan sponsored by an
Affiliated Provider;
(4) Investors who reinvest assets received in a distribution from a
qualified,
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non-qualified or deferred compensation plan, agency, trust or custody
account that was either (a) maintained by KeyCorp or an Affiliated
Provider, or (b) invested in a fund of the Victory Group;
(5) Investors who, within 90 days of redemption, use the proceeds from the
redemption of shares of another mutual fund complex for which they
previously paid a front end sales charge or sales charge upon
redemption of shares; and
(6) Shareholders of the former Investors Preference Fund For Income, Inc.
and the Investors Preference New York Tax-Free Fund, Inc. who have
continuously maintained accounts with a fund or funds of the Victory
Group with a balance of $250,000 or more (investors with less than
$250,000 will pay any applicable sales loads).
SPECIAL INVESTOR SERVICES
- - THE SYSTEMATIC INVESTMENT PLAN. You can make regular investments in the Fund
and all other funds of the Victory Group with the Systematic Investment Plan by
completing the appropriate section of the account application and attaching a
voided personal check with your bank's magnetic ink coding number across the
front. If your bank account is jointly owned, be sure that all owners sign. You
must first meet the Fund's initial investment requirement of $500, then
investments may be made monthly by automatically deducting $25 or more from your
bank checking account. For officers, trustees, directors and employees,
including retired directors and employees, of the Victory Group, KeyCorp and its
affiliates, and the Administrator and its affiliates (and family members of each
of the foregoing, i.e., parents and children) who participate in the Systematic
Investment Plan, there is no minimum initial investment required. You may change
the amount of your monthly purchase at any time. A bank draft form must be
completed for this option. Your bank checking account will be debited on the
date indicated on your Account Application. Shares will be purchased at the
offering price next determined following receipt of the order by the Transfer
Agent. You may cancel the Systematic Investment Plan at any time without payment
of a cancellation fee. Your monthly account statement will reflect systematic
investment transactions, and a debit entry will appear on your bank statement.
- - TELEPHONE TRANSACTIONS. You can initiate any transaction by telephone. You may
call the Transfer Agent toll-free at 800-539-3863 or call your Investment
Professional or bank trust department. See "Shareholder Account Rules and
Policies" for more information about telephone transactions.
- - THE SYSTEMATIC WITHDRAWAL PLAN. You can make regular withdrawals from your
account in any fund of the Victory Group with the Systematic Withdrawal Plan by
completing the appropriate section of the account application. If you own shares
in a fund worth $5,000 or more, you can have monthly, quarterly, semi-annual or
annual checks sent from your account directly to you, to a person named by you,
or to your bank checking account. The required minimum withdrawal is $25. If you
are having checks sent to your bank checking account, attach a voided personal
check with your bank's magnetic coding number across the front of the account
application. If your account is jointly owned, be sure that all owners sign the
application. You may obtain information about the Systematic Withdrawal Plan by
contacting your Investment Professional. Your Systematic Withdrawal Plan
payments are drawn from share redemptions. If Systematic Withdrawal Plan
redemptions exceed dividend distributions on your Fund shares, your account
eventually may be exhausted. If any applicable sales charges are applied to new
purchases of shares of the Fund, it is to your disadvantage to buy shares of the
Fund while also making systematic redemptions.
Your account will be debited on the date you indicate on your Account
Application.
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<PAGE> 181
Shares will be redeemed at the NAV as determined on the debit date indicated on
your Account Application. You may cancel the Systematic Withdrawal Plan at any
time without payment of a cancellation fee. Each Systematic Withdrawal Plan
transaction will appear as a debit entry on your monthly account statement.
- - RETIREMENT PLANS. Retirement plans can be among the best tax-planning vehicles
available to individuals. Call your Investment Professional for more information
on the plans and their benefits, provisions and fees. Your Investment
Professional can set up your new account in the Fund under one of several
tax-sheltered plans. These plans let you invest for retirement and shelter your
investment income from current taxes. Plans include Individual Retirement
Accounts (IRAs) and Rollover IRAs. Other fees may be charged by the IRA
custodian or trustee.
HOW TO REDEEM SHARES
You may redeem all or a portion of your shares on any day that the Fund is open
for business (see "Share Price" below). Shares will be redeemed at the NAV next
calculated after the Transfer Agent has received the redemption request. If the
Fund account is closed, any accrued dividends will be paid at the beginning of
the following month.
You may redeem shares in several ways:
BY MAIL: Send a written request to:
The Victory Portfolios:
Intermediate Income Fund
P.O. Box 9741
Providence, RI 02940-9741
Write a "letter of instruction" with your name, the Fund's name, your Fund
account number, the dollar amount or number of shares to be redeemed, and any
additional requirements that apply to each particular account. You will need the
letter of instruction signed by all persons required to sign for transactions,
exactly as their names appear on the account application. A signature guarantee
is required if: you wish to redeem more than $10,000 worth of shares; your Fund
account registration has changed within the last 60 days; the check is not being
mailed to the address on your account; the check is not being made out to the
account owner; or the redemption proceeds are being transferred to another
Victory Group account with a different registration. The following institutions
should be able to provide you with a signature guarantee: banks, brokers,
dealers, credit unions (if authorized under state law), securities exchanges and
associations, clearing agencies, and savings associations. A signature guarantee
may not be provided by a notary public. A signature guarantee is designed to
protect you, the Fund, and its agents from fraud. The Transfer Agent reserves
the right to reject any signature guarantee if (1) it has reason to believe that
the signature is not genuine, (2) it has reason to believe that the transaction
would otherwise be improper, or (3) the guarantor institution is a broker or
dealer that is neither a member of a clearing corporation nor maintains net
capital of at least $100,000.
BY WIRE: You may make redemptions by wire provided you have established a Fund
account to accommodate wire transactions. If telephone instructions are received
before Valuation Time (generally 4:00 p.m. Eastern time), proceeds of the
redemption will be wired as federal funds on the next Business Day to the bank
account designated with the Transfer Agent. You may change the bank account
designated to receive an amount redeemed at any time by sending a letter of
instruction with a signature guarantee to the Transfer Agent, Primary Funds
Service Corporation, P.O. Box 9741, Providence, RI 02940-9741.
BY TELEPHONE: To redeem by telephone, you may call the Transfer Agent toll free
at 800-539-3863 or call your Investment Professional or bank trust department.
See "Shareholder Account Rules and Policies" for more information about
telephone transactions.
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ADDITIONAL REDEMPTION REQUIREMENTS: The Fund may withhold payment on redemptions
until it is reasonably satisfied that investments made by check have been
collected, which can take up to 15 days. Also, when the NYSE is closed (or when
trading is restricted) for any reason other than its customary weekend or
holiday closings, or under any emergency circumstances as determined by the
Commission to merit such action, the right of redemption may be suspended or the
date of payment postponed for a period of time that may exceed 7 days. In
addition, the Fund reserves the right to advance the time on that day by which
purchase and redemption orders must be received. To the extent that portfolio
securities are traded in other markets on days when the NYSE is closed, the
Fund's NAV may be affected on days when investors do not have access to the Fund
to purchase or redeem shares.
If you are unable to reach the Transfer Agent by telephone (for example, during
times of unusual market activity), consider placing your order by mail directly
to the Transfer Agent. In case of suspension of the right of redemption, you may
either withdraw your request for redemption or receive payment based on the NAV
next determined after the termination of the suspension. If your balance in a
Fund falls below $500, you may be given 60 days' notice to reestablish the
minimum balance (except with respect to officers, trustees, directors and
employees, including retired directors and employees, of the Victory Portfolios,
KeyCorp and its affiliates, and the Administrator and its affiliates (and family
members of each of the foregoing, i.e., parents, children and household members)
participating in the Systematic Investment Plan, to whom no minimum balance
requirement applies). If you do not increase your balance, your account may be
closed and the proceeds mailed to you at the address on record. Shares will be
redeemed at the last calculated NAV on the day the account is closed.
HOW TO EXCHANGE SHARES
Shares of the Fund may be exchanged for shares of certain funds of the Victory
Group at net asset value per share at the time of exchange, without a sales
charge. To exchange shares, you must meet several conditions:
- - Shares of the fund selected for exchange must be available for sale in
your state of residence.
- - The prospectuses of this Fund and the fund whose shares you want to buy
must offer the exchange privilege.
- - You must hold the shares you buy when you establish your account for at
least 7 days before you can exchange them; after the account is open 7
days, you can exchange shares every regular Business Day.
- - You must meet the minimum purchase requirements for the fund you
purchase by exchange.
- - The registration and tax identification numbers of the two accounts
must be identical.
- - Before exchanging into a fund, obtain and read its prospectus.
Shares of a particular class may be exchanged only for shares of the same class
in the other funds of the Victory Group. For example, you can exchange shares of
this Fund only for Class A shares of another fund. At present, not all of the
funds offer the same two classes of shares. If a fund has only one class of
shares that does not have a class designation, they are "Class A" shares for
exchange purposes. In some cases, sales charges may be imposed on exchange
transactions. Certain funds offer Class A or Class B shares and a list can be
obtained by calling the Transfer Agent at 800-539-3863. Please refer to the
Statement of Additional Information for more details about this policy.
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Telephone exchange requests may be made either by calling your Investment
Professional or the Transfer Agent at 800-539-3863 prior to valuation time
(generally 4:00 p.m. Eastern time) on any Business Day.
You can obtain a list of eligible funds of the Victory Group by calling the
Transfer Agent at 800-539-3863. Exchanges of shares involve a redemption of the
shares of the Fund and a purchase of shares of the other portfolio.
There are certain exchange policies you should be aware of:
- - Shares are normally redeemed from one fund and purchased from the other fund
in the exchange transaction on the same Business Day on which the Transfer Agent
receives an exchange request by Valuation Time (generally 4:00 p.m. Eastern
time) that is in proper form, but either fund may delay the purchase of shares
of the fund into which you are exchanging if it determines it would be
disadvantaged by a same-day transfer of the proceeds to buy shares. For example,
the receipt of multiple exchange requests from a dealer in a "market-timing"
strategy might require the disposition of securities at a time or price
disadvantageous to the Fund.
- - Because excessive trading can hurt fund performance and harm shareholders, the
Victory Portfolios reserves the right to refuse any exchange request that will
disadvantage it, or to refuse multiple exchange requests submitted by a
shareholder or dealer.
- - The Fund may amend, suspend or terminate the exchange privilege at any time
upon 60 days' written notice to shareholders.
- - If the Transfer Agent cannot exchange all the shares you request because of a
restriction cited above, only the shares eligible for exchange will be
exchanged.
- - Each exchange may produce a gain or loss for tax purposes.
Shareholders of the former Investors Preference Fund for Income, Inc. and
Investors Preference New York Tax-Free Fund, Inc. will not be subject to any
additional sales load upon an exchange of shares attributable to an Investors
Preference Funds account for shares of other funds of the Victory Portfolios.
SHAREHOLDER ACCOUNT RULES AND POLICIES
- - NET ASSET VALUE PER SHARE. The term "net asset value per share," or "NAV",
means the value of one share. The NAV is calculated by adding the value of all
its investments, plus cash and other assets, deducting liabilities, and then
dividing the result by the number of shares outstanding. The NAV of the Fund is
determined and its shares are priced as of the close of regular trading of the
New York Stock Exchange (NYSE), (generally 4:00 p.m. Eastern Time) (the
"Valuation Time") on each Business Day of the Fund. A "Business Day" is a day on
which the NYSE is open for trading, the Federal Reserve Bank of Cleveland is
open, and any other day (other than a day on which no shares of the Fund are
tendered for redemption and no order to purchase any shares is received) during
which there is sufficient trading in its portfolio instruments that the Fund's
net asset value per share might be materially affected. The NYSE or the Federal
Reserve Bank of Cleveland will not be open in observance of the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans' Day,
Thanksgiving Day, and Christmas Day.
The Fund's securities are valued primarily on the basis of market quotations or,
if quotations are not readily available, by a method that the Board of Trustees
believes accurately reflects fair value. Fair value of these portfolio
securities
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is determined by an independent pricing service approved by the Trustees based
primarily upon information concerning market transactions and dealers quotations
for similar securities.
- - THE OFFERING OF SHARES may be suspended during any period in which the
determination of net asset value is suspended, and the offering may be suspended
by the Trustees at any time the Trustees believe it is in the Fund's best
interest to do so.
- - TELEPHONE TRANSACTION PRIVILEGES for purchases, redemptions or exchanges may
be modified, suspended or terminated by the Fund at any time. If an account has
more than one owner, the Fund and the Transfer Agent may rely on the
instructions of any one owner. Telephone privileges apply to each owner of the
account and the dealer representative of record for the account unless and until
the Transfer Agent receives cancellation instructions from an owner of the
account.
- - TELEPHONE INSTRUCTIONS. Generally, neither the Fund, the bank trust department
nor the Transfer Agent will be responsible for any claims, losses or expenses
for acting on telephone instructions that they reasonably believe to be genuine.
The Transfer Agent and the Fund will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine and if they do not
employ reasonable procedures they may be liable for any losses due to
unauthorized or fraudulent instructions. The identification procedures may
include, but are not limited to, the following: account number, registration and
address, personalized security codes, taxpayer identification number and other
information particular to the account. Your Investment Professional, bank trust
department or the Transfer Agent may also record calls, and you should verify
the accuracy of your confirmation statements immediately after you receive them.
- - REDEMPTION OR TRANSFER REQUESTS WILL NOT BE HONORED UNTIL THE TRANSFER AGENT
RECEIVES ALL REQUIRED DOCUMENTS IN PROPER FORM. From time to time, the Transfer
Agent in its discretion may waive certain of the requirements for redemptions
stated in this Prospectus.
- - DEALERS THAT CAN PERFORM ACCOUNT TRANSACTIONS FOR THEIR CLIENTS BY
PARTICIPATING IN NETWORKING through the National Securities Clearing Corporation
are responsible for obtaining their clients' permission to perform those
transactions and are responsible to their clients who are shareholders of the
Victory Portfolios if the dealer performs any transaction erroneously.
- - THE REDEMPTION PRICE FOR SHARES WILL VARY from day to day because the value of
the securities in the Fund fluctuates, and the value of your shares may be more
or less than their original cost.
- - PAYMENT FOR REDEEMED SHARES is made ordinarily in cash and forwarded by check
within three business days after the Transfer Agent receives redemption
instructions in proper form, except under unusual circumstances determined by
the Commission delaying or suspending such payments. The Transfer Agent may
delay forwarding a check for recently purchased shares, but only until the
purchase payment has cleared. That delay may be as much as 15 days from the date
the shares were purchased. That delay may be avoided if you arrange with your
bank to provide telephone or written assurance to the Transfer Agent that your
purchase payment has cleared.
- - INVOLUNTARY REDEMPTIONS OF SMALL ACCOUNTS. If your account value has fallen
below $500, you will be given 60 days' notice to reestablish the minimum
balance. If you do not increase your minimum balance, your account may be closed
and the proceeds mailed to you at the record address. In some cases involuntary
redemptions may be made to repay the Distributor for losses from the
cancellation of share purchase orders. Under unusual circumstances, shares of
the Fund may be
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redeemed "in kind," which means that the redemption proceeds will be paid with
securities from the Fund. Please refer to the Statement of Additional
Information for more details.
- - "BACKUP WITHHOLDING" of Federal income tax may be applied at the rate of 31%
from dividends, distributions and redemption proceeds (including exchanges) if
you fail to furnish the Victory Portfolios with a certified Social Security or
taxpayer identification number when you sign your application, or if you violate
Internal Revenue Service regulations on tax reporting of dividends.
- - THE VICTORY PORTFOLIOS DOES NOT CHARGE A REDEMPTION FEE, but if your
Investment Professional handles your redemption, they may charge a separate
service fee.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS. The Fund ordinarily declares and pays dividends from its net
investment income quarterly. The Fund distributes substantially all net capital
gains, if any, to shareholders each year, to the extent necessary to qualify for
favorable federal tax treatment.
CAPITAL GAINS. The Fund may make distributions annually out of any net
short-term or long-term capital gains, and the Fund may make supplemental
distributions of dividends and capital gains following the end of its fiscal
year.
DISTRIBUTION OPTIONS
When you fill out your account application, you can specify how you want to
receive your dividend distributions. Currently, there are five available
options:
1. REINVESTMENT OPTION. Your income and capital gain dividends, if any,
will be automatically reinvested in additional shares of the Fund.
Income and capital gain dividends will be reinvested at the net asset
value of the Fund as of the day after the record date. If you do not
indicate a choice on your application, you will be assigned this
option.
2. CASH OPTION. You will receive a check for each income or capital gain
dividend, if any. Distribution checks will be mailed no later than 7
days after the dividend payment date which may be more than 7 days
after the dividend record date.
3. INCOME EARNED OPTION. You will have your capital gain dividend
distributions, if any, reinvested automatically in the Fund and have
your income dividends paid in cash.
4. DIRECTED DIVIDENDS OPTION. You will have income and capital gain
dividends, or only capital gain dividends, automatically reinvested in
shares of another fund of the Victory Group. Shares will be purchased
at the NAV as of the dividend record date. If you are reinvesting
dividends of a fund sold without a sales charge in shares of a fund
sold with a sales charge, the shares will be purchased at the public
offering price. If you are reinvesting dividends of a fund sold with a
sales charge in shares of a fund sold with or without a sales charge,
the shares will be purchased at the net asset value of the fund.
Dividend distributions can be directed only to an existing account with
a registration that is identical to that of your Fund account.
5. DIRECTED BANK ACCOUNT OPTION. You will have your income and capital
gain dividends, or only your income dividends, automatically
transferred to your bank checking or savings account. The amount will
be determined on the dividend record date and will normally be
transferred to your account within 7 days of the dividend record date.
Dividend distributions can be directed
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only to an existing account with a registration that is identical to
that of your Fund account. Please call or write the Transfer Agent to
learn more about this dividend distribution option.
Any election or revocation of any of the above dividend distribution options may
be made in writing to the Fund and sent to Primary Funds Service Corporation,
P.O. Box 9741, Providence, RI 02940-9741, or by calling the Transfer Agent at
800-539-3863, and will become effective with respect to dividends having record
dates after receipt of the application or request by the Transfer Agent.
Reinvested dividend distributions receive the same tax treatment as dividend
distributions paid in cash.
COMPLETE REDEMPTIONS: If you request a complete redemption of all your Fund
shares, any dividend accrued to your account will be included in the redemption
check.
STATEMENTS AND REPORTS: You will receive a monthly statement reflecting all
transactions that affect the share balance or the registration of your Fund
account. You will receive a confirmation after every transaction that affected
the share balance of your Fund account, except for dividend reinvestment,
systematic investment and systematic withdrawal transactions. These transactions
will be detailed in your Fund account statement. Transactions that affect the
share balance of your Fund investment in an account established with an
Investment Professional or financial institution will be detailed in regular
statements or through confirmation procedures of the financial institution.
Certificates representing shares of the Fund will not be issued. An IRS Form
1099-DIV with federal tax information will be mailed to you by January 31 of
each tax year and also will be filed with the IRS. At least twice a year, you
will receive the Fund's financial reports.
FEDERAL TAXES
The Fund intends to qualify each year and elect to be treated as a separate
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "IRS Code"). If the Fund is treated as a "regulated
investment company" and all its taxable income is distributed to its
shareholders in accordance with the timing requirements imposed by the IRS Code,
it will not be subject to federal income tax on its income. The Fund's
distributions that are attributable to its net investment income and short-term
capital gains are taxable as ordinary income, and its distributions from
long-term capital gains are taxed as long-term capital gains. Such distributions
are taxable when they are paid, whether taken in cash or reinvested in
additional shares, except that distributions declared in October, November or
December and paid during the following January are taxable as if paid and
received on December 31. Dividends received from the Fund by corporate
shareholders are not entitled to the dividends-received deduction. The Fund
sends tax statements to its shareholders (with copies to the Internal Revenue
Service (the "IRS")) by January 31 showing the amounts and tax status of
distributions made (or deemed made) during the preceding calendar year.
Income received by direct holders of obligations of the U.S. Government and
certain of its agencies and instrumentalities is exempt from state and local
income taxation. The Fund's dividends from investment income may, to the extent
such dividends consist of interest from obligations of the U.S. Government and
certain of its agencies and instrumentalities, also be exempt from state and
local income taxes. The Fund intends to advise shareholders of the proportion of
their dividends which consist of such interest. Shareholders are urged to
consult their tax advisers regarding the possible exclusion of a portion of
their dividends for state and local income tax purposes in their respective
jurisdictions.
REDEMPTION OR EXCHANGES
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Investors may realize a gain or loss when redeeming (selling) or exchanging
shares. For most types of accounts, the Fund reports the proceeds to the IRS
annually. Because the shareholders' tax treatment also depends on their purchase
price and personal tax positions, shareholders should keep their regular account
statements to use in determining their tax. See "Buying a Dividend".
"BUYING A DIVIDEND"
On the record date for a distribution of ordinary income or capital gains
dividend, the net asset value of the Fund is reduced by the amount of the
distribution. An investor who buys shares just before the record date ("buying a
dividend") will pay the full price for the shares and then receive a portion of
the purchase price back as a taxable distribution.
OTHER TAX INFORMATION
The information above is only a summary of some of the federal income tax
consequences generally affecting the Fund and its shareholders, and no attempt
has been made to discuss individual tax consequences. A prospective investor
should also review the more detailed discussion of federal income tax
considerations in the Statement of Additional Information. In addition to
federal income tax, a shareholder may be subject to state or local taxes on the
shareholder's investment, depending on the laws in the shareholder's area.
Investors considering an investment in the Fund should consult their tax adviser
to determine whether the Fund is suitable to their particular tax situation.
When investors sign their account application, they are asked to provide their
correct social security or taxpayer identification number and other required
certifications. If investors do not comply with IRS regulations, the IRS can
require the Fund to withhold 31% of taxable distributions and redemptions from
their account.
PERFORMANCE
From time to time, performance information for the Fund showing total return may
be presented in advertisements, sales literature and in reports to shareholders.
Such performance figures are based on historical earnings and are not intended
to indicate future performance. Average annual total return will be calculated
over a stated period of more than one year. Average annual total return is
measured by comparing the value of an investment at the beginning of the
relevant period (as adjusted for sales charges, if any) to the redemption value
of the investment at the end of the period (assuming immediate reinvestment of
any dividends or capital gains distributions) and annualizing that figure.
Aggregate total return is calculated similarly to average annual total return,
except that the resulting difference is not annualized.
From time to time performance information for the Fund showing the yield and/or
effective yield for each class of shares may also be presented in
advertisements, sales literature and in reports to shareholders. Yields reflect
the deduction of the maximum sales charge. Such performance figures are based on
historical earnings and are not intended to indicate future performance. Yield
will be computed by dividing the Fund's net investment income per share earned
during a recent thirty-day period by the Fund's maximum offering price per share
(reduced by any undeclared earned income expected to be paid shortly as a
dividend) on the last day of the period and annualizing the result. Effective
yield is computed in a similar manner, but, when annualized, the income earned
by an investment in the Fund is assumed to be reinvested. The effective yield
will be slightly higher than the yield because of the compounding effect of this
assumed reinvestment.
Investors may also judge, and the Victory Portfolios may at times advertise, the
performance of the Fund by comparing it to the performance of other mutual funds
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<PAGE> 188
with comparable investment objectives and policies, which performance may be
contained in various unmanaged mutual fund or market indices or rankings such as
those prepared by Dow Jones & Co., Inc. and Standard & Poor's Corporation, in
publications issued by Lipper Analytical Services, Inc., and in the following
publications: IBC/Donoghue's Money Fund Reports, Ibbotson Associates, Inc.,
Morningstar, CDA/Wiesenberger, Money Magazine, Forbes, Barron's, The Wall Street
Journal, The New York Times, Business Week, American Banker, Fortune,
Institutional Investor, U.S.A. Today and local newspapers. In addition, general
information about the Fund that appears in publications such as those mentioned
above may also be quoted or reproduced in advertisements, sales literature or in
reports to shareholders.
Performance is a function of the type and quality of instruments held in the
Fund's portfolio, operating expenses, and market conditions. Consequently,
current performance will fluctuate and is not necessarily representative of
future results. Any fees charged by service providers with respect to customer
accounts for investing in shares of the Fund will not be reflected in
performance calculations.
Additional information regarding the performance of each of the Victory
Portfolios is included in the Victory Portfolios' annual report, which is
available free of charge by calling 800-539-3863.
FUND ORGANIZATION AND FEES
The Victory Portfolios is an open-end management investment company, commonly
known as a mutual fund, and currently consisting of twenty-eight series
portfolios, four of which are inactive. The Victory Portfolios has been
operating continuously since 1986, when it was created under Massachusetts law
as a Massachusetts business trust, although certain of its funds have a prior
operating history from their predecessor funds. On February 29, 1996, the
Victory Portfolios converted from a Massachusetts business trust to a Delaware
business trust. The Victory Portfolios' offices are located at 3435 Stelzer
Road, Columbus, OH 43219-3035.
Overall responsibility for management of the Victory Portfolios rests with its
Board of Trustees, who are elected by the shareholders of the Victory
Portfolios.
INVESTMENT ADVISER AND SUB-ADVISER
Key Advisers is the investment adviser to the Fund. Key Advisers directs the
investment of the Victory Portfolios' assets, subject at all times to the
supervision of the Victory Portfolios' Board of Trustees. Key Advisers
continually supervises the investment and reinvestment of cash, securities and
other property comprising the assets of the Victory Portfolios.
Key Advisers was organized as an Ohio corporation on July 27, 1995 and is
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended. It is a wholly-owned subsidiary of KeyCorp Asset Management
Holdings, Inc., which is a wholly-owned subsidiary of Society National Bank, a
wholly-owned subsidiary of KeyCorp. Affiliates of Key Advisers manage
approximately $37 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals and mutual funds.
The person primarily responsible for the investment management of the
Intermediate Income Fund, as well as his previous experience, is as follows:
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<TABLE>
<CAPTION>
MANAGING
PORTFOLIO MANAGER THE FUND SINCE PREVIOUS EXPERIENCE
- ----------------- -------------- -------------------
<S> <C> <C>
Robert E. Fernald January, 1995 Portfolio Manager for Key Advisers
or the Sub-Adviser, beginning in
1993 and Society National Bank
since 1992; portfolio manager for
Ameritrust Company National
Association 1991-1992; formerly
Vice President of Fairfield Research
Corporation.
</TABLE>
Subject to the general supervision of the Victory Portfolios' Board of Trustees
and in accordance with the Intermediate Income Fund's investment objective,
policies and restrictions, Key Advisers and the Sub-Adviser manages the Fund,
makes decisions with respect to and places orders for all purchases and sales of
the Fund's portfolio securities, and maintains the Fund's records relating to
such purchases and sales.
For the services provided and expenses incurred pursuant to its investment
advisory agreement with the Victory Portfolios respecting the Fund, Key Advisers
receives a fee, computed daily and paid monthly, at the annual rate of
seventy-five percent (.75%) of the average daily net assets of the Fund. The
advisory fees for the Fund have been determined to be fair and reasonable in
light of the services provided to the Fund. Key Advisers may periodically waive
all or a portion of its advisory fee with respect to the Fund to increase the
net income of the Fund available for distribution as dividends. Prior to January
1, 1996, the Sub-Adviser (Society Asset Management, Inc.) served as investment
adviser to the Fund. During the Fund's fiscal year ended October 31, 1995,
Society Asset Management, Inc. received investment advisory fees aggregating
.__% of the average daily net assets of the Fund.
Under the investment advisory agreement between the Victory Portfolios, on
behalf of the Fund, and Key Advisers, Key Advisers may delegate a portion of its
responsibilities to a subadviser. In addition, the investment advisory agreement
provides that Key Advisers may render services through its own employees or the
employees of one or more affiliated companies that are qualified to act as an
investment adviser of the Fund and are under the common control of KeyCorp as
long as all such persons are functioning as part of an organized group of
persons, managed by authorized officers of Key Advisers.
Key Advisers has entered into an investment sub-advisory agreement with its
affiliate, Society Asset Management, Inc., a registered investment adviser, on
behalf of the Fund. The Sub-Adviser is a wholly-owned subsidiary of KeyCorp
Asset Management Holdings, Inc. For its services under the investment
sub-advisory agreement, Key Advisers pays the Sub-Adviser sub-advisory fees at
an annual rate as a percentage of the Fund's average daily net assets as
follows: .40% of the first $10 million of average daily net assets; .30% of the
next $15 million of average daily net assets; .25% of the next $25 million of
average daily net assets; and .20% of average daily net assets in excess of $50
million.
ADMINISTRATOR AND DISTRIBUTOR
Concord Holding Corporation is the Administrator for the Fund. Victory
Broker-Dealer Services, Inc. is the Fund's principal underwriter and
Distributor.
The Administrator generally assists in all aspects of the Fund's administration
and operation. For expenses incurred and services provided as Administrator
pursuant to its management and administration agreement with the Victory
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<PAGE> 190
Portfolios, the Administrator receives a fee from the Fund, computed daily and
paid monthly, at an annual rate of fifteen one-hundredths of one percent (.15%)
of the Fund's average daily net assets. The Administrator may periodically waive
all or a portion of its administrative fee with respect to the Fund to increase
the net income of the Fund available for distribution as dividends. During the
fiscal year ended October 31, 1995, the Fund paid administration fees of .15% of
its average daily net assets.
TRANSFER AGENT AND FUND ACCOUNTANT
Primary Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741,
serves as the Fund's Transfer Agent pursuant to a Transfer Agency and
Shareholder Service Agreement with the Victory Portfolios and receives a fee for
such services based on various criteria, including assets, transactions and the
number of accounts. BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus,
OH 43219, provides certain accounting services for the Fund pursuant to a Fund
Accounting Agreement and receives a fee for such services.
SHAREHOLDER SERVICING
Shareholder services are provided to the Fund pursuant to agreements between the
Victory Portfolios and various shareholder servicing agents, including Key Trust
Company of Ohio, N.A. and its affiliates and other financial institutions and
securities brokers (each a "Shareholder Servicing Agent"). Each Shareholder
Servicing Agent generally will provide support services to shareholders by
establishing and maintaining accounts and records, processing dividend and
distribution payments, providing account information, arranging for bank wires,
responding to routine inquires, forwarding shareholder communication, assisting
in the processing of purchase, exchange and redemption requests, and assisting
shareholders in changing dividend options, account designations and addresses.
For expenses incurred and services provided as Shareholder Servicing Agent
pursuant to its respective Shareholder Servicing Agreement, the Fund pays each
Shareholder Servicing Agent a fee computed daily and paid monthly, in amounts
aggregating not more than twenty-five one-hundredths of one percent (.25%) of
the average daily net assets of the Fund per year. A Shareholder Servicing Agent
may periodically waive all or a portion of its respective shareholder servicing
fees with respect to the Fund to increase the net income of the Fund available
for distribution as dividends. During the fiscal year ended October 31, 1995,
the Fund paid shareholder servicing fees of % of the Fund's average daily net
assets.
EFFECT OF BANKING LAWS
Key Advisers and the Sub-Adviser believe that they may perform the investment
advisory services for the Fund contemplated by the Investment Advisory (and
Sub-Advisory) Agreements for the Fund (the "Advisory Agreements"). In the
Advisory Agreements, Key Advisers and the Sub-Adviser have represented that they
possess the legal authority to perform the investment advisory services
contemplated therein and described in this Prospectus. Key Trust Company of
Ohio, N.A. and its affiliates also believe that they also may perform the
services for the Victory Portfolios contemplated by the Shareholder Servicing
Agreement with the Victory Portfolios without violating applicable banking laws
and regulations. Future changes in federal or state statutes and regulations
relating to permissible activities of banks or bank holding companies and their
subsidiaries and affiliates, as well as further judicial or administrative
decisions or interpretations of present and future statutes and regulations,
could change the manner in which Key Advisers, the Sub-Adviser, Key Trust
Company of Ohio, N.A. and its affiliates could continue to perform such services
for the Victory Portfolios. See the Statement of Additional Information
("Glass-Steagall Act") for further discussion.
BUSINESS MANAGEMENT AGREEMENT
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<PAGE> 191
In connection with its obligations under its investment sub-advisory agreement,
with Key Advisers, the Sub-Adviser has entered into a Business Management
Agreement with Key Advisers pursuant to which Key Advisers provides certain
administrative and support services to the Sub-Adviser. Such services include
preparing reports to the Company's Board of Trustees, recordkeeping services,
and services rendered in connection with the preparation of regulatory filings
and other reports, and regulatory and compliance systems and other
administrative and support services.
For such services, the Sub-Adviser pays fees to Key Advisers at an annual rate
as follows: .25% on the first $10 million of average daily net assets; .15% of
the next $15 million of average daily net assets; .10% of the next $25 million
of average daily net assets; and .05% of average daily net assets in excess of
$50 million.
EXPENSES
For the fiscal period ended April 30, 1995, the Fund's total operating expenses
were .__% of the Fund's average net assets.
CUSTODIAN
Key Trust Company of Ohio, N.A. serves as custodian for the Fund and receives
fees for its services.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. serves as the Fund's independent accountants.
ADDITIONAL INFORMATION
The Victory Portfolios may issue an unlimited number of shares and classes of
the Fund. Shares of each class of the Fund participate equally in dividends and
distributions and have equal voting, liquidation and other rights. When issued
and paid for, shares will be fully paid and nonassessable by the Victory
Portfolios and will have no preference, conversion, exchange or preemptive
rights. Shareholders are entitled to one vote for each full share owned and
fractional votes for fractional shares owned. For those investors with qualified
trust accounts established with affiliates of the Adviser, the trustee will vote
the shares at meetings of the Fund's shareholders in accordance with the
shareholder's instructions or will vote in the same percentage as shares that
are not held in trust. The trustee will forward to these shareholders all
communications received by the trustee, including proxy statements and financial
reports. The Victory Portfolios and the Fund are not required to hold annual
meetings of shareholders and in ordinary circumstances do not intend to hold
such meetings. The Trustees may call special meetings of shareholders for action
by shareholder vote as may be required by the 1940 Act or the Victory
Portfolios' Delaware Trust Instrument. Under certain circumstances, the Trustees
may be removed by action of the Trustees or by the shareholders. Shareholders
holding 10% or more of the Victory Portfolios' outstanding shares may call a
special meeting of shareholders for the purpose of voting upon the question of
removal of Trustees.
The Victory Portfolio's Board of Trustees may authorize the Victory Portfolios
to offer other funds which may differ in the types of securities in which their
assets may be invested.
Key Advisers, the Sub-Adviser and the Victory Portfolios have adopted Codes of
Ethics ( the "Codes") which require investment personnel (a) to pre-clear all
personal securities transactions, (b) to file reports regarding such
transactions, and (c) to refrain from personally engaging in (i) short-term
trading of a security, (ii) transactions involving a security within seven days
of a Victory
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<PAGE> 192
fund transaction involving the same security, and (iii) transactions involving
securities being considered for investment by a Victory fund. The Codes also
prohibit investment personnel from purchasing securities in an initial public
offering. Personal trading reports are reviewed periodically by Key Advisers or
the Sub-Adviser, and the Board of Trustees reviews annually such reports
(including information on any substantial violations of the Codes). Violations
of the Codes may result in censure, monetary penalties, suspension or
termination of employment.
DELAWARE LAW
The Delaware Business Trust Act provides that a shareholder of a Delaware
business trust shall be entitled to the same limitation of personal liability
extended to stockholders of Delaware corporations, and the Victory Portfolios'
Delaware Trust Instrument provides that shareholders will not be liable for
obligations of the Victory Portfolios. In light of Delaware law, the nature of
the Victory Portfolios' business, and the nature of its assets, management of
the Victory Portfolios believes that the risk of personal liability to a Fund
shareholder would be extremely remote.
In the unlikely event a shareholder is held personally liable for the Victory
Portfolios' obligations, the Victory Portfolios is required to use its property
to protect or compensate the shareholder. On request, the Victory Portfolios
will defend any claim made and pay any judgment against a shareholder for any
act or obligation of the Victory Portfolios. Therefore, financial loss resulting
from liability as a shareholder will occur only if the Victory Portfolios itself
cannot meet its obligations to indemnify shareholders and pay judgments against
them.
Delaware law authorizes electronic or telephonic communications between
shareholders and the Victory Portfolios. Under Delaware law, the Successor
Company has the flexibility to respond to future business contingencies. For
example, the Trustees will have the power to incorporate the Victory Portfolios,
to merge or consolidate it with another entity, to cause each fund to become a
separate trust, and to change the Victory Portfolios' domicile without a
shareholder vote. This flexibility could help reduce the expense and frequency
of future shareholder meetings for non-investment related issues.
MISCELLANEOUS
Shareholders will receive Semi-Annual Reports, which are unaudited, and Annual
Reports, which are audited by independent public accountants, describing the
investment operations of the Fund. Each of these reports, when available for a
particular fiscal year end or the end of a semi-annual fiscal period, is
incorporated herein by reference. The Victory Portfolios may include information
in their Annual Reports and Semi-Annual Reports to shareholders that (i)
describes general economic trends, (ii) describes general trends within the
financial services industry or the mutual fund industry, (iii) describes past or
anticipated portfolio holdings for the Fund or (iv) describes investment
management strategies for the Victory Portfolios. Such information is provided
to inform shareholders of the activities of the Victory Portfolios for the most
recent fiscal year end of a semi-annual fiscal period and to provide the views
of Key Advisers, the SubAdviser and/or the Victory Portfolios' officers
regarding expected trends and strategies.
Inquiries regarding the Victory Portfolios or the Fund may be directed in
writing to the Victory Portfolios at Primary Funds Service Corporation, P.O. Box
9741, Providence, RI 02940-9741, or by telephone, toll-free, at 800-539-3863.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
29
<PAGE> 193
MADE BY THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE VICTORY
PORTFOLIOS OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING
BY THE VICTORY PORTFOLIOS OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE.
30
<PAGE> 194
THE
VICTORY
PORTFOLIOS
INVESTMENT QUALITY BOND FUND
PROSPECTUS For current yield, purchase, and redemption information,
March 1, 1996 call 800-539-FUND or 800-539-3863
THE VICTORY PORTFOLIOS (the "Victory Portfolios") is a registered open-end
management investment company that offers investors a selection of money market,
fixed-income, municipal bond, domestic and international equity portfolios. This
Prospectus relates to the Investment Quality Bond Fund (the "Fund"), a
diversified portfolio. KeyCorp Mutual Fund Advisers, Inc., Cleveland, Ohio, an
indirect subsidiary of KeyCorp, is the investment adviser to the Fund ("Key
Advisers" or the "Adviser"). Society Asset Management, Inc., Cleveland, Ohio, an
indirect subsidiary of KeyCorp, is the investment sub-adviser to the Fund (the
"SubAdviser" or "Society"). Concord Holding Corporation is the Fund's
administrator (the "Administrator"). Victory Broker-Dealer Services, Inc. is the
Fund's distributor (the "Distributor").
The Investment Quality Bond Fund seeks to provide a high level of income. The
Fund pursues this objective by investing primarily in investment-grade bonds
issued by corporations and the U.S. Government and its agencies or
instrumentalities.
Please read this Prospectus before investing. It is designed to provide you with
information and to help you decide if the Fund's goals match your own. Retain
this document for future reference. A Statement of Additional Information (dated
March 1, 1996) for the Fund and an annual report for the Fund's fiscal year
ended October 31, 1995 for the Fund have been filed with the Securities and
Exchange Commission and are incorporated herein by reference. The Statement of
Additional Information is available without charge upon request by calling
800-539-3863.
SHARES OF THE FUND ARE:
- - NOT INSURED BY THE FDIC;
- - NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY KEYCORP
BANK, ANY OF ITS AFFILIATES, OR ANY OTHER BANK;
- - SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("COMMISSION") OR ANY SECURITIES REGULATORY AUTHORITY OF ANY
STATE, NOR HAS THE COMMISSION OR ANY SUCH STATE AUTHORITY PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE> 195
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
----
<S> <C>
Summary of Fund Expenses 2
Financial Highlights 3
The Fund's Investment Objective 4
The Fund's Investment Policies and Risk Factors 4
How to Invest, Exchange and Redeem 9
Dividends, Distributions and Taxes 15
Performance 17
Fund Organization and Fees 17
Additional Information 20
</TABLE>
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<PAGE> 196
SUMMARY OF FUND EXPENSES
The table below summarizes the expenses associated with the Investment Quality
Bond Fund. This standard format was developed for use by all mutual funds to
help you make your investment decisions. Of course, you should consider this
expense information along with other important information in this Prospectus,
including the Fund's investment objective, investment policies and risk factors,
and financial highlights.
SHAREHOLDER TRANSACTION EXPENSES(1)
<TABLE>
<S> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of offering price) 4.75%
Maximum Sales Load Imposed on Reinvested Dividends 0 %
Deferred Sales Load 0 %
Redemption Fees 0 %
Exchange Fee 0 %
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees(2) .62%
Administration Fees .15%
Other Expenses(3) .23%
-----
Total Fund Operating Expenses(3) 1.00%
=====
</TABLE>
(1) Subsidiaries, correspondents, affiliate banks, and non-affiliates of
banks. KeyCorp may charge a customer's account fees for services
provided in connection with investment in the Fund. (See "How To
Invest, Exchange and Redeem.")
(2) Key Advisers has agreed to reduce the amount of its investment advisory
fee for the indefinite future. Key Advisers may terminate this
voluntary waiver at its sole discretion. Absent this voluntary
reduction, "Management Fees" would be .75% of the Fund's average daily
net assets.
(3) The Fund may pay a maximum of 0.25% of its average daily net assets to
financial institutions (including affiliates of KeyCorp) who have
entered into a Shareholder Servicing Agreement with the Fund. Had the
Fund paid a maximum of 0.25% of its average daily net assets, "Other
Expenses" would be ___% of the Fund's average daily net assets and
"Total Fund Operating Expenses" would be ___% of the Fund's average
daily net assets.
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return and (2) full redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Investment Quality Bond Fund $57 $78 $100 $164
</TABLE>
The purpose of the table above is to assist a potential investor in the Fund in
understanding the various costs and expenses that an investor in the Fund will
bear directly or indirectly. See "Fund Organization and Fees" for a more
complete discussion of annual operating expenses of the Fund. The foregoing
example is based upon expenses for the fiscal year ended October 31, 1995 and
expenses that the Fund is expected to incur during the current fiscal year. THE
FOREGOING EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
-3-
<PAGE> 197
FINANCIAL HIGHLIGHTS
THE FUND'S FINANCIAL HISTORY
The table below sets forth certain financial information with respect to the
financial highlights for the Investment Quality Bond Fund for the periods
indicated. The information below (except as indicated) has been derived from
financial statements audited by Coopers & Lybrand L.L.P., independent
accountants for the Victory Portfolios, whose report thereon, together with the
financial statements of the Fund, are incorporated by reference into or
contained in the Statement of Additional Information.
THE VICTORY INVESTMENT QUALITY BOND FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FISCAL YEAR SIX MONTHS DECEMBER 10, 1993
ENDED ENDED TO OCTOBER 31,
OCTOBER 31, 1995 APRIL 30, 1995 1994(a)
---------------- -------------- -----------------
(UNAUDITED)
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 9.10 $ 10.00
------- -------
Investment Activities
Net investment income 0.31 0.53
Net realized and unrealized gains
(losses) on investments 0.29 (0.92)
------- -------
Total from Investment Activities 0.60 (0.39)
Distributions ------- -------
Net investment income [To be (0.32) (0.51)
Net Asset Value, End of Period inserted] $ 9.38 $ 9.10
Total Return (Excludes Sales Charge) 6.74%(b) (3.92)%(b)
Ratios/Supplemental Data:
------- -------
Net Assets, End of Period (000) $92,202 $94,685
======= =======
Ratio of expenses to average net
assets 0.84%(c) 0.79%(c)
Ratio of net investment income
to average net assets 6.89%(c) 6.33%(c)
Ratio of expenses to average net
assets* 1.10%(c) 1.25%(c)
Ratio of net investment income
to average net assets* 6.63%(c) 5.87%(c)
Portfolio turnover 54.92% 89.92%
</TABLE>
* During the period the investment advisory, administration and/or
shareholder service fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would be as indicated.
(a) Period from commencement of operations.
(b) Aggregate.
(c) Annualized.
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<PAGE> 198
THE FUND'S INVESTMENT OBJECTIVE
The Fund seeks to provide a high level of income. The investment objective of
the Fund is fundamental and may not be changed without a vote of the holders of
a majority of its outstanding voting securities (as defined in the Statement of
Additional Information). There can be no assurance the investment objective of
the Fund will be achieved.
INVESTMENT POLICIES OF THE FUND
The Fund pursues its objective by investing primarily in investment-grade bonds
issued by corporations and the U.S. Government and its agencies or
instrumentalities.
Under normal market conditions, the Fund will invest at least 65% of the value
of its total assets in investment-grade bonds. The Fund's investments will
include debentures, notes with remaining maturities at the time of purchase of
one year or more, zero-coupon securities, mortgage-related securities, state,
municipal or industrial revenue bonds, obligations issued or guaranteed by the
U.S. Government or its agencies or instrumentalities, debt securities
convertible into, or exchangeable for, common stocks, first mortgage loans and
participation certificates in pools of mortgages issued or guaranteed by the
U.S. Government or its agencies or instrumentalities. The Fund will invest in
state and municipal securities when, in the opinion of Key Advisers or the
Sub-Adviser, their yields are competitive with those of comparable taxable debt
obligations. In addition, up to 20% of the value of the Fund's total assets may
be invested in preferred stocks, notes with remaining maturities at the time of
purchase of less than one year, short-term debt obligations consisting of
commercial paper (including variable amount master demand notes), bankers'
acceptances, certificates of deposit and time deposits of domestic and foreign
branches of U.S. banks and foreign banks, repurchase agreements, and securities
of other investment companies. Some of the securities in which the Fund invests
may have warrants or options attached.
All instruments purchased by the Fund will be rated, at the time of purchase,
within the four highest rating categories by a nationally recognized statistical
ratings organization ("NRSRO") (investment grade) or, if unrated, will be of
comparable quality, as determined by Key Advisers or the Sub-Adviser.
Changes in the value of portfolio securities will not affect cash income, if
any, derived from these securities but will affect the Fund's net asset value.
The investment policies of the Fund may be changed without an affirmative vote
of the holders of a majority of the fund's outstanding voting securities unless
(1) a policy is expressly deemed to be a fundamental policy of the Fund or (2) a
policy is expressly deemed to be changeable only by such majority vote.
The Fund is advised by Key Advisers, an indirect subsidiary of KeyCorp, which
purchases securities for the Fund consistent with its investment objective and
policies and which meet the quality and maturity characteristics established for
the Fund.
From time to time, the Fund, to the extent consistent with its investment
objective, policies and restrictions, may invest in securities of issuers with
which Key Advisers or the Sub-Adviser or its affiliates have a lending
relationship.
ADDITIONAL INFORMATION REGARDING SECURITIES IN WHICH THE FUND MAY INVEST
The following paragraphs provide a brief description of some of the types of
securities in which the Fund may invest, the transactions it may make and
strategies it may adopt. The Fund may, following notice to its shareholders,
take advantage of other investment practices which are not at present
contemplated for use by the Fund or which currently are not available but which
may be developed, to the extent such investment practices are both consistent
with the Fund's investment objective and legally permissible for the Fund. Such
investment practices, if they arise, may involve risks which exceed those
involved in the activities described in this Prospectus.
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<PAGE> 199
- - INVESTMENT GRADE SECURITIES. The Fund will invest in obligations which, at the
time of purchase, are rated within the four highest rating categories by an
NRSRO (investment grade) or, if unrated, which Key Advisers or the Sub-Adviser
determines to be of comparable quality. The applicable securities ratings are
described in the Appendix to the Statement of Additional Information.
- - BONDS, NOTES AND DEBENTURES OF U.S. CORPORATE ISSUERS. Debentures represent
unsecured promises to pay, while notes and bonds may be secured by mortgages on
real property or security interests in personal property. Bonds include, but are
not limited to, debt instruments with maturities of approximately one year or
more, debentures, mortgage-related securities, stripped government securities
and zero coupon obligations. Bonds, notes and debentures in which the Fund may
invest may differ in interest rates, maturities and times of issuance. The
market value of the Fund's fixed income investments will change in response to
interest rate changes and other factors. During periods of falling interest
rates, the values of outstanding fixed income securities generally rise.
Conversely, during periods of rising interest rates, the values of such
securities generally decline. Moreover, while securities with longer maturities
tend to produce higher yields, the price of longer maturity securities are also
subject to greater market fluctuations as a result of changes in interest rates.
Changes by recognized agencies in the rating of any fixed income security and in
the ability of an issuer to make payments of interest and principal also affect
the value of these investments. Except under conditions of default, changes in
the value of Fund securities will not affect cash income derived from these
securities but will affect the Fund's net asset value.
- - ZERO COUPON BONDS. The Fund is permitted to purchase zero coupon U.S.
Government securities ("zero coupon bonds"). Zero coupon bonds are purchased at
a discount from the face amount because the buyer receives only the right to
receive a fixed payment on a certain date in the future and does not receive any
periodic interest payments. The effect of owning instruments which do not make
current interest payments is that a fixed yield is earned not only on the
original investment but also, in effect, on all discount accretion during the
life of the obligations. This implicit reinvestment of earnings at the same rate
eliminates the risk of being unable to reinvest distributions at a rate as high
as the implicit yields on the zero coupon bond, but at the same time eliminates
the holder's ability to reinvest the interest payments at higher rates in the
future. For this reason, zero coupon bonds are subject to substantially greater
price fluctuations during periods of changing market interest rates than are
comparable securities which pay interest currently, which fluctuation increases
the longer the period to maturity.
- - SHORT-TERM OBLIGATIONS. These include high quality, short-term obligations
such as domestic and foreign commercial paper (including variable-amount master
demand notes), bankers' acceptances, certificates of deposit and demand and time
deposits of domestic and foreign branches of U.S. banks and foreign banks, and
repurchase agreements. (See "Foreign Securities" for a description of risks
associated with investments in foreign securities.)
- - INTERNATIONAL BONDS. The Fund may invest in Euro and Yankee obligations, which
are U.S. dollar-denominated international bonds for which the primary trading
market is in the United States ("Yankee Bonds"), or for which the primary
trading market is abroad ("Eurodollar Bonds"). The Fund may also invest in
Canadian and Supranational Agency Bonds (e.g., International Monetary Fund).
(See "Foreign Securities" for a description of risks associated with investments
in foreign securities.)
- - FOREIGN SECURITIES. The Fund may invest up to 20% of the value of its total
assets in debt securities of foreign issuers, including foreign banks. Foreign
securities are subject to special risks, such as future adverse political and
economic developments, possible seizure, nationalization, or expropriation of
foreign investments, less stringent disclosure requirements, increased costs
associated with the conversion of foreign currency into U.S. dollars, the
possible establishment of exchange controls or taxation at the source, or the
adoption of other foreign governmental restrictions. To the extent the Fund may
invest in securities of foreign issuers which are not traded on any exchange,
there is a further risk that these securities will not be readily marketable.
The Fund will not hold foreign currency in amounts exceeding 5% of its assets as
a result of such investments.
-6-
<PAGE> 200
- - U.S. GOVERNMENT SECURITIES. The Fund may invest in obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. Government,
such as the Government National Mortgage Association ("GNMA") and the
Export-Import Bank of the United States, are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Federal National
Mortgage Association ("FNMA") are supported by the right of the issuer to
borrow from the Treasury; others, such as those of the Student Loan Marketing
Association ("SLMA"), are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; still others, such as those of
the Federal Farm Credit Banks or the Federal Home Loan Mortgage Corporation
("FHLMC"), are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government will provide financial support
to U.S. Government-sponsored agencies or instrumentalities if it is not
obligated to do so by law. The Fund will invest in the obligations of such
agencies or instrumentalities only when Key Advisers or the Sub-Adviser
believes that the credit risk with respect thereto is minimal.
- - RECEIPTS. In addition to bills, notes and bonds issued by the U.S. Treasury,
the Fund may also purchase separately traded interest and principal component
parts of such obligations that are transferable through the Federal book entry
system, known as Separately Traded Registered Interest and Principal Securities
("STRIPS") and Coupon Under Book Entry Safekeeping ("CUBES"). These instruments
are issued by banks and brokerage firms and are created by depositing Treasury
notes and Treasury bonds into a special account at a custodian bank; the
custodian holds the interest and principal payments for the benefit of the
registered owners of the certificates or receipts. The custodian arranges for
the issuance of the certificates or receipts evidencing ownership and maintains
the register. Receipts include Treasury Receipts ("TRs"), Treasury Investment
Growth Receipts ("TIGRs") and Certificates of Accrual on Treasury Securities
("CATS").
STRIPS, CUBES, TRs, TIGRs and CATS are sold as zero coupon securities, which
means that they are sold at a substantial discount and redeemed at face value
at their maturity dates without interim cash payments of interest or principal.
This discount is amortized over the life of the security, and such amortization
will constitute the income earned on the security for both accounting and tax
purposes. Because of these features, these securities may be subject to greater
interest rate volatility than interest-paying U.S. Treasury obligations. The
Fund will limit its investments in such instruments to 20% of its total assets.
- - GOVERNMENT MORTGAGE-BACKED SECURITIES. The principal governmental (i.e.,
backed by the full faith and credit of the United States Government) guarantor
of mortgage-related securities is GNMA. GNMA is a wholly owned United States
Government corporation within the Department of Housing and Urban Development.
GNMA is authorized to guarantee with the full faith and credit of the United
States Government, the timely payment of principal and interest on securities
issued by institutions approved by GNMA (such as savings and loan institutions,
commercial banks and mortgage bankers) and backed by pools of FHA-insured or
VA-guaranteed mortgages.
Government-related (i.e., not backed by the full faith and credit of the United
States Government) guarantors include FNMA and FHLMC. FNMA and FHLMC are
government-sponsored corporations owned entirely by private stockholders.
Pass-through securities issued by FNMA and FHLMC are guaranteed as to timely
payment of principal and interest by FNMA and FHLMC but are not backed by the
full faith and credit of the United States Government. The investment
characteristics of mortgage-related securities differ from traditional debt
securities. These differences can result in greater price and yield volatility
than is the case with traditional fixed income securities. The major differences
typically include more frequent interest and principal payments, usually
monthly, the adjustability of interest rates, and the possibility that
prepayments of principal may be made at any time. Prepayment rates are
influenced by changes in current interest rates and a variety of economic,
geographic, social and other factors. During periods of declining interest
rates, prepayment rates can be expected to accelerate. Under certain interest
rate and prepayment rate scenarios, the Fund may fail to recoup fully its
investment in mortgage-backed securities (and incur capital losses)
notwithstanding a direct or indirect governmental or agency guarantee. In
general, changes in the rate of prepayments on a mortgage-related security will
change that security's market value and its yield to maturity. When interest
rates fall, high prepayments could force the Fund to reinvest
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<PAGE> 201
principal at a time when investment opportunities are not attractive. Thus,
mortgage-backed securities may not be an effective means for the Fund to lock in
long-term interest rates. Conversely, during periods when interest rates rise,
slow prepayments could cause the average life of the security to lengthen and
the value to decline more than anticipated. However, during periods of rising
interest rates, principal repayments by mortgage-backed securities allow the
Fund to reinvest at increased interest rates.
- - COLLATERALIZED MORTGAGE OBLIGATIONS. Mortgage-related securities in which the
Fund may invest may also include collateralized mortgage obligations ("CMOs").
CMOs are debt obligations issued generally by finance subsidiaries or trusts
that are secured by mortgage-backed certificates, including, in many cases,
certificates issued by government-related guarantors, including GNMA, FNMA and
FHLMC, together with certain funds and other collateral. Although payment of the
principal of and interest on the mortgage-backed certificates pledged to secure
the CMOs may be guaranteed by GNMA, FNMA or FHLMC, the CMOs represent
obligations solely of the issuer and are not insured or guaranteed by GNMA,
FHLMC, FNMA or any other governmental agency, or by any other person or entity.
The issuers of the CMOs typically have no significant assets other than those
pledged as collateral for the obligations.
- - MORTGAGE-RELATED SECURITIES ISSUED BY NON-GOVERNMENTAL ENTITIES. The Fund may
invest in mortgage-related securities issued by non-governmental entities.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. Such issuers may
also be the originators of the underlying mortgage loans as well as the
guarantors of the mortgage-related securities. Pools created by such
non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are not direct or indirect
government guarantees of payments in the former pools. However, timely payment
of interest and principal of these pools is supported by various forms of
insurance or guarantees, including individual loan, title, pool and hazard
insurance. The insurance and guarantees are issued by government entities,
private insurers and the mortgage poolers. Such insurance and guarantees and the
creditworthiness of the issuers thereof will be considered in determining
whether a mortgage-related security meets the Fund's investment quality
standards. There can be no assurance that the private insurers can meet their
obligations under the policies. The Fund may buy mortgage-related securities
without insurance or guarantees if, through an examination of the loan
experience and practices of the poolers, Key Advisers or the Sub-Adviser
determines that the securities meet the Fund's quality standards. Although the
market for such securities is becoming increasingly liquid, securities issued by
certain private organizations may not be readily marketable. The Fund will not
purchase mortgage-related securities or any other assets which in the opinion of
Key Advisers or the Sub-Adviser are illiquid if, as a result, more than 15% of
the value of the Fund's total assets will be invested in illiquid securities.
The Fund may purchase mortgage-related securities with stated maturities in
excess of 10 years. Mortgage-related securities include collateralized mortgage
obligations and participation certificates in pools of mortgages. The average
life of mortgage-related securities varies with the maturities of the underlying
mortgage instruments, which have maximum maturities of 40 years. The average
life is likely to be substantially less than the original maturity of the
mortgage pools underlying the securities as the result of mortgage prepayments.
The rate of such prepayments, and hence the average life of the certificates,
will be a function of current market interest rates and current conditions in
the relevant housing markets. The impact of prepayment of mortgages is described
under "Government Mortgage-Backed Securities" above. Estimated average life will
be determined by Key Advisers or the Sub-Adviser. Various independent
mortgage-related securities dealers publish estimated average life data using
proprietary models, and in making such determinations, Key Advisers or the
Sub-Adviser will rely on such data except to the extent such data are deemed
unreliable by Key Advisers or the Sub-Adviser. Key Advisers or the Sub-Adviser
might deem data unreliable which appeared to present a significantly different
estimated average life for a security than data relating to the estimated
average life of comparable securities as provided by other independent
mortgage-related securities dealers.
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<PAGE> 202
- - SECURITIES LENDING. In order to generate additional income, the Fund may, from
time to time, lend portfolio securities to broker-dealers, banks or
institutional borrowers of securities. The Fund must receive collateral equal to
100% of the securities' value in the form of cash or U.S. Government securities,
plus any interest due, which collateral must be marked to market daily by Key
Advisers or the Sub-Adviser. Should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund. During
the time portfolio securities are on loan, the borrower pays the Fund an amount
equal to any dividends or interest paid on such securities plus any interest
negotiated between the parties to the lending agreement. Loans are subject to
termination by the Fund or the borrower at any time. While the fund does not
have the right to vote securities on loan, the Fund intends to terminate the
loan and regain the right to vote if that is considered important with respect
to the investment. The Fund will only enter into loan arrangements with
broker-dealers, banks or other institutions which Key Advisers or the
Sub-Adviser has determined are creditworthy under guidelines established by the
Victory Portfolios' Board of Trustees. The Fund intends to limit its securities
lending to 33% of total assets.
- - WHEN-ISSUED SECURITIES. The Fund may purchase securities on a when-issued or
delayed delivery basis. These transactions are arrangements in which the Fund
purchases securities with payment and delivery scheduled for a future time,
thereby involving the risk that the yield obtained in the transaction will be
less than that available in the market when delivery takes place. When the Fund
agrees to purchase securities on a when-issued basis, the Fund's custodian will
set aside cash or liquid portfolio securities equal to the amount of that
commitment in a separate account, and may be required to subsequently place
additional assets in the separate account to maintain equivalence with the
Fund's commitment. The Fund generally will not pay for such securities and no
income accrues on the securities until they are received. Securities purchased
on a when-issued basis are recorded as assets and are subject to changes in
value prior to delivery based upon changes in the general level of interest
rates and other market factors. The Fund does not intend to purchase when-issued
or delayed delivery securities for speculative purposes, but only for the
purpose of acquiring portfolio securities consistent with its investment
objective and policies, and not for investment leverage. In when-issued and
delayed delivery transactions, the Fund relies on the seller to complete the
transaction; its failure to do so may cause the Fund to miss a price or yield
considered to be advantageous.
- - REPURCHASE AGREEMENTS. Under the terms of a repurchase agreement, the Fund
acquires securities from financial institutions or registered broker-dealers,
subject to the seller's agreement to repurchase such securities at a mutually
agreed upon date and price. The seller is required to maintain the value of
collateral held pursuant to the agreement at not less than the repurchase price
(including accrued interest). If the seller were to default on its repurchase
obligation or become insolvent, the Fund holding such obligation would suffer a
loss to the extent that the proceeds from a sale of the underlying portfolio
securities were less than the repurchase price, or to the extent that the
disposition of such securities by the Fund were delayed pending court action.
Repurchase agreements are considered by the staff of the Commission to be loans
by the Funds.
- - REVERSE REPURCHASE AGREEMENTS. The Fund may borrow funds for temporary
purposes by entering into reverse repurchase agreements. Pursuant to such
agreements, the Fund sells portfolio securities to financial institutions such
as banks and broker-dealers, and agrees to repurchase them at a mutually agreed
upon date and price. At the time the Fund enters into a reverse repurchase
agreement, it must place in a segregated custodial account assets having a value
equal to the repurchase price (including accrued interest); the collateral will
be marked to market on a daily basis, and will be continuously monitored to
ensure that such equivalent value is maintained. Reverse repurchase agreements
involve the risk that the market value of the securities sold by the Fund may
decline below the price at which the Fund is obligated to repurchase the
securities. Reverse repurchase agreements are considered to be borrowings under
the Investment Company Act of 1940 (the "1940 Act").
- - INVESTMENT COMPANY SECURITIES. The Fund may also invest up to 5% of its total
assets in the securities of any one investment company, but may not own more
than 3% of the securities of any one investment company or invest more than 10%
of its total assets in the securities of other investment companies. Pursuant to
an exemptive order received by the Victory Portfolios from the Securities and
Exchange Commission, the Fund may invest in the money market funds of the
Victory Portfolios. Key Advisers and/or the Sub-Adviser will waive its fee
attributable to the
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<PAGE> 203
Fund's assets invested in a fund of the Victory Portfolios and, to the extent
required by the laws of any state in which shares of the Fund are sold, Key
Advisers and/or the Sub-Adviser will waive its investment advisory fee as to all
assets invested in other investment companies. Because such other investment
companies employ an investment adviser, such investment by the Fund will cause
shareholders to bear duplicative fees such as management fees, to the extent
such fees are not waived by Key Advisers and/or the Sub-Adviser.
- - BORROWING. The Fund may enter into commitments to purchase securities in
accordance with its investment program, including delayed-delivery and
when-issued securities and reverse repurchase agreements, provided that the
total amount of any such borrowing does not exceed 33 1/3% of the Fund's total
assets. The Fund may borrow money for temporary or emergency purposes in an
amount not exceeding 5% of the value of its total assets at the time when the
loan is made. Any borrowings representing more than 5% of the Fund's total
assets must be repaid before the Fund may make additional investments. The Fund
does not currently intend to borrow for leveraging purposes.
- - ILLIQUID INVESTMENTS AND RESTRICTED SECURITIES. The Fund may invest up to 15%
of its net assets in illiquid investments (investments that cannot be readily
sold within seven days in the usual course of business at approximately the
price at which the Fund has valued them), including Restricted Securities (as
defined below) deemed to be illiquid. Under the supervision of the Trustees, Key
Advisers or the Sub-Adviser determines the liquidity of the Fund's investments.
The absence of a trading market can make it difficult to ascertain a market
value for illiquid investments. Disposing of illiquid investments may involve
time-consuming negotiation and legal expenses, and it may be difficult or
impossible for the Fund to sell them promptly at an acceptable price.
"Restricted Securities" are securities which are subject to restrictions on
resale due to acquisition without registration under the Securities Act of 1933,
as amended (the "1933 Act"). Unless registered for sale, these securities can
only be sold in privately negotiated transactions or pursuant to an exemption
from registration. See "Private Placement Investments," below.
- - PRIVATE PLACEMENT INVESTMENTS. The Fund may invest in commercial paper issued
in reliance on the exemption from registration afforded by Section 4(2) of the
1933 Act. Section 4(2) commercial paper is restricted as to disposition under
federal securities law and is generally sold to institutional investors, such as
the Fund, that agree that they are purchasing the paper for investment purposes
and not with a view to public distribution. Any resale by the purchaser must be
in an exempt transaction. Section 4(2) commercial paper is normally resold to
other institutional investors like the Fund through or with the assistance of
the issuer or investment dealers who make a market in Section 4(2) commercial
paper, thus providing liquidity. The Fund believes that Section 4(2) commercial
paper and possibly certain other Restricted Securities that meet the criteria
for liquidity established by the Trustees are quite liquid. The Fund intends,
therefore, to treat the Restricted Securities that meet the criteria for
liquidity established by the Trustees, including Section 4(2) commercial paper,
as determined by Key Advisers or the Sub-Adviser, as liquid and not subject to
the investment limitation applicable to illiquid securities. Therefore, the Fund
will generally purchase Section 4(2) commercial paper without regard to the
Fund's restriction on illiquid securities.
The ability of the Trustees to determine the liquidity of certain Restricted
Securities is permitted under a position of the Staff of the Commission set
forth in the adopting release for Rule 144A under the 1933 Act (the "Rule"). The
Rule is a nonexclusive safe-harbor. The Rule provides an exemption from
registration under resales of Restricted Securities to qualified institutional
buyers. The Rule was expected to further enhance the liquidity of the 1933 Act
the secondary market for the types of securities eligible for resale under Rule
144A. The Victory Portfolios believes that the staff of the Commission has left
the question of determining the liquidity of all Restricted Securities to the
Trustees. The Trustees consider the following criteria in determining the
liquidity of certain restricted securities: the frequency of trades and quotes
for the security; the number of dealers willing to purchase or sell the security
and the number of other potential buyers; dealer undertakings to make a market
in the security; and the nature of the security and the nature of the
marketplace trades.
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NOTE: The Statement of Additional Information contains information about certain
investment practices and portfolio securities of the Fund. The Statement of
Additional Information also contains information about investment restrictions
designed to reduce the risk of an investment in the Fund.
LIMITING INVESTMENT RISKS
The following summarizes the Fund's principal investment limitations. A complete
listing is contained in the Statement of Additional Information.
1. (a) The Fund may borrow money solely for temporary or emergency
purposes, but not in an amount exceeding 33_% of its total assets. (b)
The Fund may borrow money from banks or by engaging in reverse
repurchase agreements. (c) The Fund will not purchase securities when
borrowings exceed 5% of its total assets. If the Fund borrows money,
its share price may be subject to greater fluctuation until the
borrowing is paid off. To this extent, purchasing securities when
borrowings are outstanding may involve an element of leverage.
2. The Fund will not purchase a security if, as a result, more than 15% of
its net assets would be invested in illiquid securities. The Fund may
invest up to 15% of its net assets in illiquid investments (investments
that cannot be readily sold within seven days in the usual course of
business at approximately the price at which the Fund has valued them),
including restricted securities deemed to be illiquid. Under the
supervision of the Trustees, Key Advisers or the Sub-Adviser determines
the liquidity of the Fund's investments. The absence of a trading
market can make it difficult to ascertain a market value for illiquid
investments. Disposing of illiquid investments may involve
time-consuming negotiation and legal expenses, and it may be difficult
or impossible for the Fund to sell them promptly at an acceptable
price.
Except for the Fund's investment objective and the percentage limitation on
borrowing in limitation 1(a), the investment policies described in this
Prospectus are not fundamental. Non-fundamental limitations may be changed
without shareholder approval. Whenever an investment policy or limitation states
a maximum percentage of the Fund's assets that may be invested, such percentage
limitation will be determined immediately after and as a result of the
investment, except in the case of borrowing (or other activities that may be
deemed to result in the issuance of a "senior security" under the 1940 Act). Any
subsequent change in values, assets, or other circumstances will not be
considered when determining whether the investment complies with the Fund's
investment policies and limitations. If the value of a Fund's holdings of
illiquid securities at any time exceeds the percentage limitation applicable at
the time of acquisition due to subsequent fluctuations in value or other
reasons, the Board of Trustees will consider what actions, if any, are
appropriate to maintain adequate liquidity.
PORTFOLIO TRANSACTIONS
Brokerage firms are utilized to conduct securities transactions for the Fund.
Broker-dealers are chosen by judging professional ability and quality of
service.
Key Advisers or the Sub-Adviser may allocate transactions to broker-dealers who
help distribute the Fund's shares or the shares of the other funds of the
Victory Portfolios, to the extent permitted by law. Key Advisers or the
Sub-Adviser will make such allocations only if brokerage fees are comparable to
those charged by non-affiliated, qualified broker-dealers for similar services.
Key Advisers or the Sub-Adviser may engage in short-term trading with respect to
the Fund when it believes it is consistent with the Fund's investment objective
and policies. The frequency of portfolio transactions--the Fund's turnover
rate--will vary from year for to year depending on market conditions.
For the fiscal periods ended October 31, 1994 and October 31, 1995, the annual
portfolio turnover rates for the Fund were 89.92% and ___%, respectively.
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HOW TO INVEST, EXCHANGE AND REDEEM
HOW TO INVEST
Shares may be purchased directly or through an Investment Professional.
Investment Professionals are securities brokers or other financial institutions
that have entered into selling or servicing agreements with the Fund or the
Distributor. Shares are also available to clients of bank trust departments who
have qualified trust accounts. The minimum investment is $500 for the initial
purchase and $25 thereafter. Accounts set up through a bank trust department or
an Investment Professional may be subject to different minimums.
- - Investing Through Your Investment Professional. Your Investment Professional
will place your order with the Transfer Agent on your behalf. You may be
required to establish a brokerage or agency account. Your Investment
Professional will notify you whether subsequent trades should be directed to the
Investment Professional or directly to the Fund's Transfer Agent. Accounts
established with Investment Professionals may have different features,
requirements and fees. In addition, Investment Professionals may charge for
their services. Information regarding these features, requirements and fees will
be provided by the Investment Professional. If you are purchasing shares of any
Fund through a program of services offered or administered by your Investment
Professional, you should read the program materials in conjunction with this
Prospectus.
- - Investing Through The Systematic Investment Plan. You can use the Systematic
Investment Plan to purchase shares directly from your bank account. Please refer
to "Systematic Investment Plan" below for more details.
- - Investing Through Your Bank Trust Department. Your bank trust department may
require a minimum investment and may charge additional fees. Fee schedules for
such accounts are available upon request and are detailed in the agreements by
which a client opens the desired account. Your bank trust department may require
a completed and signed application for the Fund in which an investment is made.
Additional documents may be required from corporations, associations, and
certain fiduciaries. Any account information, such as balances, should be
obtained through your bank trust department. Additional purchases, exchanges or
redemptions should also be coordinated through your bank trust department.
Contact your bank trust department for instructions.
The services rendered by a bank trust department, including affiliates of Key
Advisers or the Sub-Adviser, in the management of its accounts are not
duplicative of any of the services for which Key Advisers or the Sub-Adviser as
the investment adviser or sub-adviser, respectively, is compensated for advising
the Fund. The charges paid by clients of bank trust departments, or their
affiliates, should be considered in calculating the net yield and return on
investments in the Fund, although such charges do not affect the Fund's
dividends and distributions.
INVESTING DIRECTLY
BY MAIL: You may purchase shares by completing and signing an account
application (initial purchase only) and mailing it, together with a check (or
other negotiable bank draft or money order) in the amount of at least the
minimum investment requirement to, The Victory Investment Quality Bond Fund,
Primary Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741.
Subsequent purchases may be made in the same manner.
BY WIRE: Call 800-539-3863 to set up your Fund account to accommodate wire
transactions. YOU MUST CALL THE TRANSFER AGENT BEFORE WIRING FUNDS. You will
begin to earn dividends on the first business day following receipt of your
wire. Federal funds (monies transferred from one bank to another through the
Federal Reserve System with same-day availability) should be wired to:
Boston Safe Deposit & Trust Co.
ABA #011001234
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Credit PFSC DDA #16-918-8
The Victory Portfolios: Investment Quality Bond Fund
You must include your account number, your name(s), tax identification number(s)
and the control number assigned by the Transfer Agent. The Fund does not impose
a fee for wire transactions, although your bank may charge you a fee for this
service.
Shares are sold at the public offering price based on the net asset value that
is next determined after the Transfer Agent receives the purchase order. In most
cases, to receive that day's offering price, the Transfer Agent must receive
your order as of the close of regular trading of the New York Stock Exchange
("NYSE") (generally 4:00 pm Eastern time) (the "Valuation Time") on each
Business Day (as defined in "Net Asset Value Per Share") of the Fund. If you buy
shares through an Investment Professional, the Investment Professional must
receive your order in a timely fashion on a regular Business Day and transmit it
to the Transfer Agent so that it is received before the close of business that
day. The Transfer Agent may reject any purchase order for the Fund's shares, in
its sole discretion.
It is the responsibility of your Investment Professional to transmit your order
to purchase shares to the Transfer Agent in a timely fashion in order for you to
receive that day's share price. The Fund must receive payment within three
business days after an order is placed. Otherwise, the purchase order will be
canceled and you could be held liable for resulting fees and/or losses.
INVESTMENT REQUIREMENTS
All purchases must be made in U.S. dollars. Checks must be drawn on U.S. banks.
No cash will be accepted. If you make a purchase with more than one check, each
check must have a value of at least $25, and the minimum investment requirement
still applies. The Fund reserves the right to limit the number of checks
processed at one time. If your check does not clear, your purchase will be
canceled and you could be liable for any losses or fees incurred. Payment for
the purchase is expected at the time of the order. If payment is not received
within three business days of the date of the order, the order may be canceled,
and you could be held liable for resulting fees and/or losses.
Shares are sold at their offering price, which is normally net asset value plus
an initial sales charge. However, in some cases, described below, where
purchases are not subject to an initial sales charge, the offering price may be
net asset value. In some cases, reduced sales charges may be available, as
described below. When you invest, the Fund receives the net asset value for your
account. The sales charge varies depending on the amount of your purchase and a
portion may be retained by the Distributor and allocated to your Investment
Professional. The Victory Portfolios has a reinstatement policy which allows an
investor who redeems his/her shares originally purchased with a sales charge to
reinvest within 90 days without incurring an additional sales charge. The
current sales charge rates and commissions paid to Investment Professionals are
as follows:
<TABLE>
<CAPTION>
FRONT-END SALES CHARGE
AS A PERCENTAGE OF:
----------------------
OFFERING NET AMOUNT DEALER
AMOUNT OF PURCHASE PRICE INVESTED REALLOWANCE
- ------------------ -------- ---------- -----------
<S> <C> <C> <C>
Less than $49,999 4.75% 4.99% 4.00%
$50,000 to $99,999 4.50% 4.71% 4.00%
$100,000 to $249,999 3.50% 3.63% 3.00%
$250,000 to $499,999 2.25% 2.30% 2.00%
$500,000 to $999,999 1.75% 1.78% 1.50%
$1,000,000 and above 0.00% 0.00% *
</TABLE>
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<PAGE> 207
* There is no initial sales charge on purchases of $1 million or more.
Investment Professionals will be compensated at the rate of up to 0.25%
of such purchases.
The Distributor reserves the right to reallow the entire commission to dealers.
If that occurs, the dealer may be considered an "underwriter" under Federal
securities laws.
The Distributor may pay all or a portion of any applicable sales charges and
service fees to Investment Professionals who sell shares of the Fund and provide
ongoing sales support services or shareholder support services. For the
three-year period commencing April 30, 1994, for activities in maintaining and
servicing accounts of customers invested in the Fund, First Albany Corporation
("First Albany") and PFIC Securities Corporation ("PFIC") may receive payments
from the Distributor equal to two-thirds of the Dealer Retention (as defined
below) on any shares of the Fund (and other funds of the Victory Portfolios)
sold by First Albany or PFIC and their broker-dealer affiliates. "Dealer
Retention" is an amount equal to the difference between the applicable sales
charge and such part of the sales charge which is reallowed to broker-dealers.
The Distributor, at its expense, may also provide additional cash compensation
to dealers in connection with sales of shares of the Fund. The maximum cash
compensation payable by the Distributor is currently 4.00% of the offering
price. In addition, the Distributor will, from time to time and at its own
expense, provide compensation, including financial assistance, to dealers in
connection with conferences, sales or training programs for their employees,
seminars for the public, advertising campaigns regarding one or more Victory
Portfolios and/or other dealer-sponsored special events including payment for
travel expenses, including lodging, incurred in connection with trips taken by
invited registered representatives and members of their families to locations
within or outside of the United States for meetings or seminars of a business
nature. Compensation will include the following types of non-cash compensation
offered through sales contests: (1) vacation trips including the provision of
travel arrangements and lodging; (2) tickets for entertainment events (such as
concerts, cruises and sporting events) and (3) merchandise (such as clothing,
trophies, clocks and pens). Dealers may not use sales of the Fund's shares to
qualify for this compensation to the extent such may be prohibited by the laws
of any state or any self-regulatory organization, such as the National
Association of Securities Dealers, Inc. None of the aforementioned compensation
is paid for by the Fund or its shareholders.
REDUCED SALES CHARGES. You may be eligible to buy shares at reduced sales
charge rates in one or more of the following ways:
LETTER OF INTENT. An investor may obtain a reduced sales charge by means of a
written Letter of Intent which expresses the investor's intention to purchase
shares of the Fund at a specified total public offering price within a 13-month
period.
A Letter of Intent is not a binding obligation upon the investor to purchase the
full amount indicated. The minimum initial investment under a Letter of Intent
is 5% of the total amount. Shares purchased with the first 5% of such amount
will be held in escrow (while remaining registered in the name of the investor)
to secure payment of the higher sales charge applicable to the shares actually
purchased if the full amount indicated is not purchased, and such escrowed
shares will be involuntarily redeemed to pay the additional sales charge, if
necessary. Dividends (if any) on escrowed shares, whether paid in cash or
reinvested in additional shares, are not subject to escrow. The escrowed shares
will not be available for disposal by the investor until all purchases pursuant
to the Letter of Intent have been made or the higher sales charge has been paid.
When the full amount indicated has been purchased, the escrow will be released.
A Letter of Intent may include purchases of shares made not more than 90 days
prior to the date the investor signs a Letter of Intent; however, the 13-month
period during which the Letter of Intent is in effect will begin on the date of
the earliest purchase to be included. An investor may combine purchases that are
made in an individual capacity with (1) purchases that are made by members of
the investor's immediate family and (2) purchases made by businesses that the
investor owns as sole proprietorships, for purposes of obtaining reduced sales
charges by means of a written Letter of Intent. In order to accomplish this,
however, investors must designate
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<PAGE> 208
on the account application the accounts that are to be combined for this
purpose. Investors can only designate accounts that are open at the time the
Letter of Intent is executed.
If an investor qualifies for a further reduced sales charge because the investor
has either purchased more than the dollar amount indicated on the Letter of
Intent or has entered into a Letter of Intent which includes shares purchased
prior to the date of the Letter of Intent, the difference in the sales charge
will be used to purchase additional shares of the Fund on behalf of the
investor; thus the total purchases (included in the Letter of Intent) will
reflect the applicable reduced sales charge of the Letter of Intent.
For investors who purchase more than the dollar amount indicated on the Letter
of Intent or enter into a Letter of Intent that includes shares purchased prior
to the date of the Letter of Intent and qualify for a reduced sales charge, all
such additional shares will be immediately purchased in the form of additional
shares and credited to the investor's account at the then current public
offering price applicable to a single purchase of the total amount of the
purchases.
For further information about Letters of Intent, interested investors should
contact the Transfer Agent at 800-539-3863. This program, however, may be
modified or eliminated at any time without notice.
RIGHT OF ACCUMULATION AND CONCURRENT PURCHASES
A shareholder may qualify for a reduced sales charge on purchases of shares of
the Fund and other funds of the Victory Portfolios by combining a current
purchase with purchases of another fund(s) or with certain prior purchases of
shares of the Victory Portfolios. The applicable sales charge is based on the
sum of (i) the purchaser's current purchase plus (ii) the current public
offering price of the purchaser's previous purchases of (a) all shares held by
the purchaser in the Fund and (b) all shares held by the purchaser in any other
fund of the Victory Portfolios (except money market funds).
To receive the applicable public offering price pursuant to the right of
accumulation, shareholders must provide the Transfer Agent with sufficient
information at the time of purchase to permit confirmation of qualification.
Accumulation privileges may be amended or terminated without notice at any time
by the Distributor.
- - WAIVERS OF SALES CHARGES. No sales charge is imposed on sales of shares to
the following categories of persons (which categories may be changed or
eliminated at any time):
(1) Current or retired trustees of the Victory Portfolios; employees,
directors, trustees, and their family members of KeyCorp or an
Affiliated Provider (Affiliated Providers refer to affiliates and
subsidiaries of KeyCorp and service providers to the Victory Portfolios
and the Victory Shares (collectively, the "Victory Group")), dealers
having an agreement with the Distributor and any trade organization to
which Key Advisers, the Sub-Adviser or the Administrator belongs;
(2) Investors who purchase shares for trust, investment management or
certain other advisory accounts established with KeyCorp or any of its
affiliates;
(3) Investors who purchase shares through a 401(k) plan sponsored by an
Affiliated Provider;
(4) Investors who reinvest assets received in a distribution from a
qualified, non-qualified or deferred compensation plan, agency, trust
or custody account that was either (a) maintained by KeyCorp or an
Affiliated Provider, or (b) invested in a fund of the Victory Group;
(5) Investors who, within 90 days of redemption, use the proceeds from the
redemption of shares of another mutual fund complex for which they
previously paid a front end sales charge or sales charge upon
redemption of shares; and
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<PAGE> 209
(6) Shareholders of the former Investors Preference Fund For Income, Inc.
and the Investors Preference New York Tax-Free Fund, Inc. who have
continuously maintained accounts with a fund or funds of the Victory
Group with a balance of $250,000 or more (investors with less than
$250,000 will pay any applicable sales loads).
SPECIAL INVESTOR SERVICES
- - THE SYSTEMATIC INVESTMENT PLAN. You can make regular investments in the Fund
and all other funds of the Victory Group with the Systematic Investment Plan by
completing the appropriate section of the account application and attaching a
voided personal check with your bank's magnetic ink coding number across the
front. If your bank account is jointly owned, be sure that all owners sign. You
must first meet the Fund's initial investment requirement of $500, then
investments may be made monthly by automatically deducting $25 or more from your
bank checking account. For officers, trustees, directors and employees,
including retired directors and employees, of the Victory Group, KeyCorp and its
affiliates, and the Administrator and its affiliates (and family members of each
of the foregoing, i.e., parents and children) who participate in the Systematic
Investment Plan, there is no minimum initial investment required. You may change
the amount of your monthly purchase at any time. A bank draft form must be
completed for this option. Your bank checking account will be debited on the
date indicated on your Account Application. Shares will be purchased at the
offering price next determined following receipt of the order by the Transfer
Agent. You may cancel the Systematic Investment Plan at any time without payment
of a cancellation fee. Your monthly account statement will reflect systematic
investment transactions, and a debit entry will appear on your bank statement.
- - TELEPHONE TRANSACTIONS. You can initiate any transaction by telephone. You may
call the Transfer Agent toll-free at 800-539-3863 or call your Investment
Professional or bank trust department. See "Shareholder Account Rules and
Policies" for more information about telephone transactions.
- - THE SYSTEMATIC WITHDRAWAL PLAN. You can make regular withdrawals from your
account in any fund of the Victory Group with the Systematic Withdrawal Plan by
completing the appropriate section of the account application. If you own shares
in a fund worth $5,000 or more, you can have monthly, quarterly, semi-annual or
annual checks sent from your account directly to you, to a person named by you,
or to your bank checking account. The required minimum withdrawal is $25. If you
are having checks sent to your bank checking account, attach a voided personal
check with your bank's magnetic coding number across the front of the account
application. If your account is jointly owned, be sure that all owners sign the
application. You may obtain information about the Systematic Withdrawal Plan by
contacting your Investment Professional. Your Systematic Withdrawal Plan
payments are drawn from share redemptions. If Systematic Withdrawal Plan
redemptions exceed dividend distributions paid on your Fund shares, your account
eventually may be exhausted. If any applicable sales charges are applied to new
purchases of shares of the Fund, it is to your disadvantage to buy shares of the
Fund while also making systematic redemptions.
Your account will be debited on the date you indicate on your Account
Application. Shares will be redeemed at the NAV as determined on the debit date
indicated on your Account Application. You may cancel the Systematic Withdrawal
Plan at any time without payment of a cancellation fee. Each Systematic
Withdrawal Plan transaction will appear as a debit entry on your monthly account
statement.
- - RETIREMENT PLANS. Retirement plans can be among the best tax-planning vehicles
available to individuals. Call your Investment Professional for more information
on the plans and their benefits, provisions and fees. Your Investment
Professional can set up your new account in the Fund under one of several
tax-sheltered plans. These plans let you invest for retirement and shelter your
investment income from current taxes. Plans include Individual Retirement
Accounts (IRAs) and Rollover IRAs. Other fees may be charged by the IRA
custodian or trustee.
HOW TO REDEEM SHARES
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<PAGE> 210
You may redeem all or a portion of your shares on any day that the Fund is open
for business (see "Share Price" below). Shares will be redeemed at the NAV next
calculated after the Transfer Agent has received the redemption request. If the
Fund account is closed, any accrued dividends will be paid at the beginning of
the following month.
You may redeem shares in several ways:
BY MAIL: Send a written request to:
The Victory Portfolios: Investment Quality Bond Fund
P.O. Box 9741
Providence, RI 02940-9741
Write a "letter of instruction" with your name, the Fund's name, your Fund
account number, the dollar amount or number of shares to be redeemed, and any
additional requirements that apply to each particular account. You will need the
letter of instruction signed by all persons required to sign for transactions,
exactly as their names appear on the account application. A signature guarantee
is required if: you wish to redeem more than $10,000 worth of shares; your Fund
account registration has changed within the last 60 days; the check is not being
mailed to the address on your account; the check is not being made out to the
account owner; or the redemption proceeds are being transferred to another
Victory Group account with a different registration. The following institutions
should be able to provide you with a signature guarantee: banks, brokers,
dealers, credit unions (if authorized under state law), securities exchanges and
associations, clearing agencies, and savings associations. A signature guarantee
may not be provided by a notary public. A signature guarantee is designed to
protect you, the Fund, and its agents from fraud. The Transfer Agent reserves
the right to reject any signature guarantee if (1) it has reason to believe that
the signature is not genuine, (2) it has reason to believe that the transaction
would otherwise be improper, or (3) the guarantor institution is a broker or
dealer that is neither a member of a clearing corporation nor maintains net
capital of at least $100,000.
BY WIRE: You may make redemptions by wire provided you have established a Fund
account to accommodate wire transactions. If telephone instructions are received
before Valuation Time (generally 4:00 p.m. Eastern time), proceeds of the
redemption will be wired as federal funds on the next Business Day to the bank
account designated with the Transfer Agent. You may change the bank account
designated to receive an amount redeemed at any time by sending a letter of
instruction with a signature guarantee to the Transfer Agent, Primary Funds
Service Corporation, P.O. Box 9741, Providence, RI 02940-9741.
BY TELEPHONE: To redeem by telephone, you may call the Transfer Agent toll free
at 800-539-3863 or call your Investment Professional or bank trust department.
See "Shareholder Account Rules and Policies" for more information about
telephone transactions.
ADDITIONAL REDEMPTION REQUIREMENTS: The Fund may withhold payment on redemptions
until it is reasonably satisfied that investments made by check have been
collected, which can take up to 15 days. Also, when the NYSE is closed (or when
trading is restricted) for any reason other than its customary weekend or
holiday closings, or under any emergency circumstances as determined by the
Commission to merit such action, the right of redemption may be suspended or the
date of payment postponed for a period of time that may exceed 7 days. In
addition, the Fund reserves the right to advance the time on that day by which
purchase and redemption orders must be received. To the extent that portfolio
securities are traded in other markets on days when the NYSE is closed, the
Fund's NAV may be affected on days when investors do not have access to the Fund
to purchase or redeem shares.
If you are unable to reach the Transfer Agent by telephone (for example, during
times of unusual market activity), consider placing your order by mail directly
to the Transfer Agent. In case of suspension of the right of redemption, you may
either withdraw your request for redemption or receive payment based on the NAV
next determined after the termination of the suspension. If your balance in a
Fund falls below $500, you may be given 60 days' notice to reestablish the
minimum balance (except with respect to officers, trustees, directors and
employees, including retired
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<PAGE> 211
directors and employees, of the Victory Portfolios, KeyCorp and its affiliates,
and the Administrator and its affiliates (and family members of each of the
foregoing, i.e., parents, children and household members) participating in the
Systematic Investment Plan, to whom no minimum balance requirement applies). If
you do not increase your balance, your account may be closed and the proceeds
mailed to you at the address on record. Shares will be redeemed at the last
calculated NAV on the day the account is closed.
HOW TO EXCHANGE SHARES
Shares of the Fund may be exchanged for shares of certain funds of the Victory
Group at net asset value per share at the time of exchange, without a sales
charge. To exchange shares, you must meet several conditions:
- - Shares of the fund selected for exchange must be available for sale in
your state of residence.
- - The prospectuses of this Fund and the fund whose shares you want to
buy must offer the exchange privilege.
- - You must hold the shares you buy when you establish your account for
at least 7 days before you can exchange them; after the account is
open 7 days, you can exchange shares every regular Business Day.
- - You must meet the minimum purchase requirements for the fund you
purchase by exchange.
- - The registration and tax identification numbers of the two accounts
must be identical.
- - Before exchanging into a fund, obtain and read its prospectus.
Shares of a particular class may be exchanged only for shares of the same class
in the other funds of the Victory Group. For example, you can exchange shares of
this Fund only for Class A shares of another fund. At present, not all of the
funds offer the same two classes of shares. If a fund has only one class of
shares that does not have a class designation, they are "Class A" shares for
exchange purposes. In some cases, sales charges may be imposed on exchange
transactions. Certain funds offer Class A or Class B shares and a list can be
obtained by calling the Transfer Agent at 800-539-3863. Please refer to the
Statement of Additional Information for more details about this policy.
Telephone exchange requests may be made either by calling your Investment
Professional or the Transfer Agent at 800-539-3863 prior to valuation time
(generally 4:00 p.m. Eastern time) on any Business Day.
You can obtain a list of eligible funds of the Victory Group by calling the
Transfer Agent at 800-539-3863. Exchanges of shares involve a redemption of the
shares of the Fund and a purchase of shares of the other portfolio.
There are certain exchange policies you should be aware of:
- - Shares are normally redeemed from one fund and purchased from the other fund
in the exchange transaction on the same Business Day on which the Transfer Agent
receives an exchange request by Valuation Time (generally 4:00 p.m. Eastern
time) that is in proper form, but either fund may delay the purchase of shares
of the fund into which you are exchanging if it determines it would be
disadvantaged by a same-day transfer of the proceeds to buy shares. For example,
the receipt of multiple exchange requests from a dealer in a "market-timing"
strategy might require the disposition of securities at a time or price
disadvantageous to the Fund.
- - Because excessive trading can hurt fund performance and harm shareholders, the
Victory Portfolios reserves the right to refuse any exchange request that will
disadvantage it, or to refuse multiple exchange requests submitted by a
shareholder or dealer.
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- - The Fund may amend, suspend or terminate the exchange privilege at any time
upon 60 days' written notice to shareholders.
- - If the Transfer Agent cannot exchange all the shares you request because of a
restriction cited above, only the shares eligible for exchange will be
exchanged.
- - Each exchange may produce a gain or loss for tax purposes.
Shareholders of the former Investors Preference Fund for Income, Inc. and
Investors Preference New York Tax-Free Fund, Inc. will not be subject to any
additional sales load upon an exchange of shares attributable to an Investors
Preference Funds account for shares of other funds of the Victory Portfolios.
SHAREHOLDER ACCOUNT RULES AND POLICIES
- - NET ASSET VALUE PER SHARE. The term "net asset value per share," or "NAV",
means the value of one share. The NAV is calculated by adding the value of all
its investments, plus cash and other assets, deducting liabilities, and then
dividing the result by the number of shares outstanding. The NAV of the Fund is
determined and its shares are priced as of the close of regular trading of the
New York Stock Exchange (NYSE), (generally 4:00 p.m. Eastern Time) (the
"Valuation Time") on each Business Day of the Fund. A "Business Day" is a day on
which the NYSE is open for trading, the Federal Reserve Bank of Cleveland is
open, and any other day (other than a day on which no shares of the Fund are
tendered for redemption and no order to purchase any shares is received) during
which there is sufficient trading in its portfolio instruments that the Fund's
net asset value per share might be materially affected. The NYSE or the Federal
Reserve Bank of Cleveland will not be open in observance of the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans' Day,
Thanksgiving Day, and Christmas Day.
The Fund's securities are valued primarily on the basis of market quotations or,
if quotations are not readily available, by a method that the Board of Trustees
believes accurately reflects fair value. Fair value of these portfolio
securities is determined by an independent pricing service approved by the
Trustees based primarily upon information concerning market transactions and
dealers quotations for similar securities.
- - THE OFFERING OF SHARES may be suspended during any period in which the
determination of net asset value is suspended, and the offering may be suspended
by the Trustees at any time the Trustees believe it is in the Fund's best
interest to do so.
- - TELEPHONE TRANSACTION PRIVILEGES for purchases, redemptions or exchanges may
be modified, suspended or terminated by the Fund at any time. If an account has
more than one owner, the Fund and the Transfer Agent may rely on the
instructions of any one owner. Telephone privileges apply to each owner of the
account and the dealer representative of record for the account unless and until
the Transfer Agent receives cancellation instructions from an owner of the
account.
- - TELEPHONE INSTRUCTIONS. Generally, neither the Fund, the bank trust department
nor the Transfer Agent will be responsible for any claims, losses or expenses
for acting on telephone instructions that they reasonably believe to be genuine.
The Transfer Agent and the Fund will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine and if they do not
employ reasonable procedures they may be liable for any losses due to
unauthorized or fraudulent instructions. The identification procedures may
include, but are not limited to, the following: account number, registration and
address, personalized security codes, taxpayer identification number and other
information particular to the account. Your Investment Professional, bank trust
department or the Transfer Agent may also record calls, and you should verify
the accuracy of your confirmation statements immediately after you receive them.
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- - REDEMPTION OR TRANSFER REQUESTS WILL NOT BE HONORED UNTIL THE TRANSFER AGENT
RECEIVES ALL REQUIRED DOCUMENTS IN PROPER FORM. From time to time, the Transfer
Agent in its discretion may waive certain of the requirements for redemptions
stated in this Prospectus.
- - DEALERS THAT CAN PERFORM ACCOUNT TRANSACTIONS FOR THEIR CLIENTS BY
PARTICIPATING IN NETWORKING through the National Securities Clearing Corporation
are responsible for obtaining their clients' permission to perform those
transactions and are responsible to their clients who are shareholders of the
Victory Portfolios if the dealer performs any transaction erroneously.
- - THE REDEMPTION PRICE FOR SHARES WILL VARY from day to day because the value of
the securities in the Fund fluctuates, and the value of your shares may be more
or less than their original cost.
- - PAYMENT FOR REDEEMED SHARES is made ordinarily in cash and forwarded by check
within three business days after the Transfer Agent receives redemption
instructions in proper form, except under unusual circumstances determined by
the Commission delaying or suspending such payments. The Transfer Agent may
delay forwarding a check for recently purchased shares, but only until the
purchase payment has cleared. That delay may be as much as 15 days from the date
the shares were purchased. That delay may be avoided if you arrange with your
bank to provide telephone or written assurance to the Transfer Agent that your
purchase payment has cleared.
- - INVOLUNTARY REDEMPTIONS OF SMALL ACCOUNTS. If your account value has fallen
below $500, you will be given 60 days' notice to reestablish the minimum
balance. If you do not increase your minimum balance, your account may be closed
and the proceeds mailed to you at the record address. In some cases involuntary
redemptions may be made to repay the Distributor for losses from the
cancellation of share purchase orders. Under unusual circumstances, shares of
the Fund may be redeemed "in kind," which means that the redemption proceeds
will be paid with securities from the Fund. Please refer to the Statement of
Additional Information for more details.
- - "BACKUP WITHHOLDING" of Federal income tax may be applied at the rate of 31%
from dividends, distributions and redemption proceeds (including exchanges) if
you fail to furnish the Victory Portfolios with a certified Social Security or
taxpayer identification number when you sign your application, or if you violate
Internal Revenue Service regulations on tax reporting of dividends.
- - THE VICTORY PORTFOLIOS DOES NOT CHARGE A REDEMPTION FEE, but if your
Investment Professional handles your redemption, they may charge a separate
service fee.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS. The Fund ordinarily declares and pays dividends from its net
investment income monthly. The Fund distributes substantially all net capital
gains, if any, to shareholders each year, to the extent necessary to qualify for
favorable federal tax treatment.
CAPITAL GAINS. The Fund may make distributions annually out of any net
short-term or long-term capital gains, and the Fund may make supplemental
distributions of dividends and capital gains following the end of its fiscal
year.
DISTRIBUTION OPTIONS
When you fill out your account application, you can specify how you want to
receive your dividend distributions. Currently, there are five available
options:
1. REINVESTMENT OPTION. Your income and capital gain dividends, if any,
will be automatically reinvested in additional shares of the Fund.
Income and capital gain dividends will be reinvested at the net asset
value of
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the Fund as of the day after the record date. If you do not indicate
a choice on your application, you will be assigned this option.
2. CASH OPTION. You will receive a check for each income or capital gain
dividend, if any. Distribution checks will be mailed no later than 7
days after the dividend payment date which may be more than 7 days
after the dividend record date.
3. INCOME EARNED OPTION. You will have your capital gain dividend
distributions, if any, reinvested automatically in the Fund and have
your income dividends paid in cash.
4. DIRECTED DIVIDENDS OPTION. You will have income and capital gain
dividends, or only capital gain dividends, automatically reinvested in
shares of another fund of the Victory Group. Shares will be purchased
at the NAV as of the dividend record date. If you are reinvesting
dividends of a fund sold without a sales charge in shares of a fund
sold with a sales charge, the shares will be purchased at the public
offering price. If you are reinvesting dividends of a fund sold with a
sales charge in shares of a fund sold with or without a sales charge,
the shares will be purchased at the net asset value of the fund.
Dividend distributions can be directed only to an existing account
with a registration that is identical to that of your Fund account.
5. DIRECTED BANK ACCOUNT OPTION. You will have your income and capital
gain dividends, or only your income dividends, automatically
transferred to your bank checking or savings account. The amount will
be determined on the dividend record date and will normally be
transferred to your account within 7 days of the dividend record date.
Dividend distributions can be directed only to an existing account
with a registration that is identical to that of your Fund account.
Please call or write the Transfer Agent to learn more about this
dividend distribution option.
Any election or revocation of any of the above dividend distribution options may
be made in writing to the Fund and sent to Primary Funds Service Corporation,
P.O. Box 9741, Providence, RI 02940-9741, or by calling the Transfer Agent at
800-539-3863, and will become effective with respect to dividends having record
dates after receipt of the application or request by the Transfer Agent.
Reinvested dividend distributions receive the same tax treatment as dividend
distributions paid in cash.
COMPLETE REDEMPTIONS: If you request a complete redemption of all your Fund
shares, any dividend accrued to your account will be included in the redemption
check.
STATEMENTS AND REPORTS: You will receive a monthly statement reflecting all
transactions that affect the share balance or the registration of your Fund
account. You will receive a confirmation after every transaction that affected
the share balance of your Fund account, except for dividend reinvestment,
systematic investment and systematic withdrawal transactions. These transactions
will be detailed in your Fund account statement. Transactions that affect the
share balance of your Fund investment in an account established with an
Investment Professional or financial institution will be detailed in regular
statements or through confirmation procedures of the financial institution.
Certificates representing shares of the Fund will not be issued. An IRS Form
1099- DIV with federal tax information will be mailed to you by January 31 of
each tax year and also will be filed with the IRS. At least twice a year, you
will receive the Fund's financial reports.
FEDERAL TAXES
The Fund intends to qualify each year and elect to be treated as a separate
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "IRS Code"). If the Fund is treated as a "regulated
investment company" and all its taxable income is distributed to its
shareholders in accordance with the
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<PAGE> 215
timing requirements imposed by the IRS Code, it will not be subject to federal
income tax on its income. The Fund's distributions that are attributable to its
net investment income and short-term capital gains are taxable as ordinary
income, and its distributions from long-term capital gains are taxed as
long-term capital gains. Such distributions are taxable when they are paid,
whether taken in cash or reinvested in additional shares, except that
distributions declared in October, November or December and paid during the
following January are taxable as if paid and received on December 31. Dividends
received from the Fund by corporate shareholders are not entitled to the
dividends-received deduction. The Fund sends tax statements to its shareholders
(with copies to the Internal Revenue Service (the "IRS")) by January 31 showing
the amounts and tax status of distributions made (or deemed made) during the
preceding calendar year.
REDEMPTION OR EXCHANGES
Investors may realize a gain or loss when redeeming (selling) or exchanging
shares. For most types of accounts, the Fund reports the proceeds to the IRS
annually. Because the shareholders' tax treatment also depends on their purchase
price and personal tax positions, shareholders should keep their regular account
statements to use in determining their tax. See "Buying a Dividend".
"BUYING A DIVIDEND"
On the record date for a distribution of ordinary income or capital gains
dividend, the net asset value of the Fund is reduced by the amount of the
distribution. An investor who buys shares just before the record date ("buying a
dividend") will pay the full price for the shares and then receive a portion of
the purchase price back as a taxable distribution.
OTHER TAX INFORMATION
The information above is only a summary of some of the federal income tax
consequences generally affecting the Fund and its shareholders, and no attempt
has been made to discuss individual tax consequences. A prospective investor
should also review the more detailed discussion of federal income tax
considerations in the Statement of Additional Information. In addition to
federal income tax, a shareholder may be subject to state or local taxes on the
shareholder's investment, depending on the laws in the shareholder's area.
Investors considering an investment in the Fund should consult their tax adviser
to determine whether the Fund is suitable to their particular tax situation.
When investors sign their account application, they are asked to provide their
correct social security or taxpayer identification number and other required
certifications. If investors do not comply with IRS regulations, the IRS can
require the Fund to withhold 31% of taxable distributions and redemptions from
their account.
PERFORMANCE
From time to time, performance information for the Fund showing total return may
be presented in advertisements, sales literature and in reports to shareholders.
Such performance figures are based on historical earnings and are not intended
to indicate future performance. Average annual total return will be calculated
over a stated period of more than one year. Average annual total return is
measured by comparing the value of an investment at the beginning of the
relevant period (as adjusted for sales charges, if any) to the redemption value
of the investment at the end of the period (assuming immediate reinvestment of
any dividends or capital gains distributions) and annualizing that figure.
Aggregate total return is calculated similarly to average annual total return,
except that the resulting difference is not annualized.
From time to time performance information for the Fund showing the yield and/or
effective yield for each class of shares may also be presented in
advertisements, sales literature and in reports to shareholders. Yields reflect
the deduction of the maximum sales charge. Such performance figures are based on
historical earnings and are not
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<PAGE> 216
intended to indicate future performance. Yield will be computed by dividing the
Fund's net investment income per share earned during a recent thirty-day period
by the Fund's maximum offering price per share (reduced by any undeclared earned
income expected to be paid shortly as a dividend) on the last day of the period
and annualizing the result. Effective yield is computed in a similar manner,
but, when annualized, the income earned by an investment in the Fund is assumed
to be reinvested. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
Investors may also judge, and the Victory Portfolios may at times advertise, the
performance of the Fund by comparing it to the performance of other mutual funds
with comparable investment objectives and policies, which performance may be
contained in various unmanaged mutual fund or market indices or rankings such as
those prepared by Dow Jones & Co., Inc. and Standard & Poor's Corporation, in
publications issued by Lipper Analytical Services, Inc., and in the following
publications: IBC/Donoghue's Money Fund Reports, Ibbotson Associates, Inc.,
Morningstar, CDA/Wiesenberger, Money Magazine, Forbes, Barron's, The Wall Street
Journal, The New York Times, Business Week, American Banker, Fortune,
Institutional Investor, U.S.A. Today and local newspapers. In addition, general
information about the Fund that appears in publications such as those mentioned
above may also be quoted or reproduced in advertisements, sales literature or in
reports to shareholders.
Performance is a function of the type and quality of instruments held in the
Fund's portfolio, operating expenses, and market conditions. Consequently,
current performance will fluctuate and is not necessarily representative of
future results. Any fees charged by service providers with respect to customer
accounts for investing in shares of the Fund will not be reflected in
performance calculations.
Additional information regarding the performance of each of the Victory
Portfolios is included in the Victory Portfolios' annual report, which is
available free of charge by calling 800-539-3863.
FUND ORGANIZATION AND FEES
The Victory Portfolios is an open-end management investment company, commonly
known as a mutual fund, and currently consisting of twenty-eight series
portfolios, four of which are inactive. The Victory Portfolios has been
operating continuously since 1986, when it was created under Massachusetts law
as a Massachusetts business trust, although certain of its funds have a prior
operating history from their predecessor funds. On February 29, 1996 the Victory
Portfolios converted from a Massachusetts business trust to a Delaware business
trust. The Victory Portfolios' offices are located at 3435 Stelzer Road,
Columbus, OH 43219-3035.
Overall responsibility for management of the Victory Portfolios rests with its
Board of Trustees, who are elected by the shareholders of the Victory
Portfolios.
INVESTMENT ADVISER AND SUB-ADVISER
Key Advisers is the investment adviser to the Fund. Key Advisers directs the
investment of the Victory Portfolios' assets, subject at all times to the
supervision of the Victory Portfolios' Board of Trustees. Key Advisers
continually supervises the investment and reinvestment of cash, securities and
other property comprising the assets of the Victory Portfolios.
Key Advisers was organized as an Ohio corporation on July 27, 1995 and is
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended. It is a wholly-owned subsidiary of KeyCorp Asset Management
Holdings, Inc., which is a wholly-owned subsidiary of Society National Bank, a
wholly-owned subsidiary of KeyCorp. Affiliates of Key Advisers manage
approximately $37 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals and mutual funds.
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For the services provided and expenses incurred pursuant to its investment
advisory agreement with the Victory Portfolios respecting the Fund, Key Advisers
receives a fee, computed daily and paid monthly, at the annual rate of
seventy-five one-hundredths of one percent (.75%) of the average daily net
assets of the Fund. The advisory fees for the Fund have been determined to be
fair and reasonable in light of the services provided to the Fund. Key Advisers
may periodically waive all or a portion of its advisory fee with respect to the
Fund to increase the net income of the Fund available for distribution as
dividends. Prior to January 1, 1996, the SubAdviser (Society Asset Management,
Inc.) served as investment adviser to the Fund. During the Fund's fiscal period
ended April 30, 1995, Society Asset Management, Inc. received investment
advisory fees aggregating .__% of the average daily net assets of the Fund.
Under the investment advisory agreement between the Victory Portfolios, on
behalf of the Fund, and Key Advisers, Key Advisers may delegate a portion of its
responsibilities to a subadviser. In addition, the investment advisory agreement
provides that Key Advisers may render services through its own employees or the
employees of one or more affiliated companies that are qualified to act as an
investment adviser of the Fund and are under the common control of KeyCorp as
long as all such persons are functioning as part of an organized group of
persons, managed by authorized officers of Key Advisers.
Key Advisers has entered into an investment sub-advisory agreement with its
affiliate, Society Asset Management, Inc., a registered investment adviser, on
behalf of the Fund. The Sub-Adviser is a wholly-owned subsidiary of KeyCorp
Asset Management Holdings, Inc. For its services under the investment
sub-advisory agreement, Key Advisers pays the Sub-Adviser sub-advisory fees at
an annual rate as a percentage of the Fund's average daily net assets as
follows: .40% of the first $10 million of average daily net assets; .30% of the
next $15 million of average daily net assets; .25% of the next $25 million of
average daily net assets; and .20% of average daily net assets in excess of $50
million.
The person primarily responsible for the investment management of the Fund, as
well as his previous experience, is as follows:
<TABLE>
<CAPTION>
PORTFOLIO MANAGING PREVIOUS
FUND MANAGER PORTFOLIO SINCE EXPERIENCE
- ------------ --------------- ----------
<S> <C> <C>
Richard T. Heine Commencement of Vice President and portfolio
Operations manager for Society Asset
Management, Inc. beginning in
1993; vice president and
portfolio manager for Society
National Bank since 1992; with
Ameritrust Company National
Association from 1973 to 1992.
</TABLE>
ADMINISTRATOR AND DISTRIBUTOR
Concord Holding Corporation is the Administrator for the Fund. Victory
Broker-Dealer Services, Inc. is the Fund's principal underwriter and
Distributor.
The Administrator generally assists in all aspects of the Fund's administration
and operation. For expenses incurred and services provided as Administrator
pursuant to its management and administration agreement with the Victory
Portfolios, the Administrator receives a fee from the Fund, computed daily and
paid monthly, at an annual rate of fifteen one-hundredths of one percent (.15%)
of the Fund's average daily net assets. The Administrator may periodically waive
all or a portion of its administrative fee with respect to the Fund to increase
the net income of the Fund available for distribution as dividends. During the
fiscal year ended October 31, 1995, the Fund paid administration fees of .__% of
its average daily net assets.
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TRANSFER AGENT AND FUND ACCOUNTANT
Primary Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741,
serves as the Fund's Transfer Agent pursuant to a Transfer Agency and
Shareholder Service Agreement with the Victory Portfolios and receives a fee for
such services based on various criteria, including assets, transactions and the
number of accounts. BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus,
OH 43219, provides certain accounting services for the Fund pursuant to a Fund
Accounting Agreement and receives a fee for such services.
SHAREHOLDER SERVICING
Shareholder services are provided to the Fund pursuant to agreements between the
Victory Portfolios and various shareholder servicing agents, including Key Trust
Company of Ohio, N.A. and its affiliates and other financial institutions and
securities brokers (each a "Shareholder Servicing Agent"). Each Shareholder
Servicing Agent generally will provide support services to shareholders by
establishing and maintaining accounts and records, processing dividend and
distribution payments, providing account information, arranging for bank wires,
responding to routine inquires, forwarding shareholder communication, assisting
in the processing of purchase, exchange and redemption requests, and assisting
shareholders in changing dividend options, account designations and addresses.
For expenses incurred and services provided as Shareholder Servicing Agent
pursuant to its respective Shareholder Servicing Agreement, the Fund pays each
Shareholder Servicing Agent a fee computed daily and paid monthly, in amounts
aggregating not more than twenty-five one-hundredths of one percent (.25%) of
the average daily net assets of the Fund per year. A Shareholder Servicing Agent
may periodically waive all or a portion of its respective shareholder servicing
fees with respect to the Fund to increase the net income of the Fund available
for distribution as dividends. During the fiscal year ended October 31, 1995,
the Fund paid Shareholder Servicing fees of __% of the Fund's average daily net
assets.
EFFECT OF BANKING LAWS
Key Advisers and the Sub-Adviser believe that they may perform the investment
advisory services for the Fund contemplated by the Investment Advisory Agreement
and Sub-Advisory Agreement for the Fund. In the Advisory Agreements, Key
Advisers and the Sub-Adviser have represented that they possess the legal
authority to perform the investment advisory services contemplated therein and
described in this Prospectus. Key Trust Company of Ohio, N.A. and its affiliates
also believe that they also may perform the services for the Victory Portfolios
contemplated by the Shareholder Servicing Agreement with the Victory Portfolios
without violating applicable banking laws and regulations. Future changes in
federal or state statutes and regulations relating to permissible activities of
banks or bank holding companies and their subsidiaries and affiliates, as well
as further judicial or administrative decisions or interpretations of present
and future statutes and regulations, could change the manner in which Key
Advisers, the Sub-Adviser, Key Trust Company of Ohio, N.A. and its affiliates
could continue to perform such services for the Victory Portfolios. See the
Statement of Additional Information ("Glass-Steagall Act") for further
discussion.
BUSINESS MANAGEMENT AGREEMENT
In connection with its obligations under its investment sub-advisory agreement
with Key Advisers, the SubAdviser has entered into a Business Management
Agreement with Key Advisers pursuant to which Key Advisers provides certain
administrative and support services to the Sub-Adviser. Such services include
preparing reports to the Company's Board of Trustees, recordkeeping services,
and services rendered in connection with the preparation of regulatory filings
and other reports, and regulatory and compliance systems and other
administrative and support services.
For such services, the Sub-Adviser pays fees to Key Advisers at an annual rate
as follows: .25% on the first $10 million of average daily net assets; .15% of
the next $15 million of average daily net assets; .10% of the next $25 million
of average daily net assets; and .5% of average daily net assets in excess of
$50 million.
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EXPENSES
For the fiscal year ended October 31, 1995, the Fund's total operating expenses
were .__% of the Fund's average net assets.
CUSTODIAN
Key Trust Company of Ohio, N.A. serves as custodian for the Fund and receives
fees for its services.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. serves as the Fund's independent accountants.
ADDITIONAL INFORMATION
The Victory Portfolios may issue an unlimited number of shares and classes of
the Fund. Shares of each class of the Fund participate equally in dividends and
distributions and have equal voting, liquidation and other rights. When issued
and paid for, shares will be fully paid and nonassessable by the Victory
Portfolios and will have no preference, conversion, exchange or preemptive
rights. Shareholders are entitled to one vote for each full share owned and
fractional votes for fractional shares owned. For those investors with qualified
trust accounts established with affiliates of the Adviser, the trustee will vote
the shares at meetings of the Fund's shareholders in accordance with the
shareholder's instructions or will vote in the same percentage as shares that
are not held in trust. The trustee will forward to these shareholders all
communications received by the trustee, including proxy statements and financial
reports. The Victory Portfolios and the Fund are not required to hold annual
meetings of shareholders and in ordinary circumstances do not intend to hold
such meetings. The Trustees may call special meetings of shareholders for action
by shareholder vote as may be required by the 1940 Act or the Victory
Portfolio's Trust Instrument. Under certain circumstances, the Trustees may be
removed by action of the Trustees or by the shareholders. Shareholders holding
10% or more of the Victory Portfolios' outstanding shares may call a special
meeting of shareholders for the purpose of voting upon the question of removal
of Trustees.
The Victory Portfolio's Board of Trustees may authorize the Victory Portfolios
to offer other funds which may differ in the types of securities in which their
assets may be invested.
Key Advisers, the Sub-Adviser and the Victory Portfolios have adopted Codes of
Ethics (the "Codes") which require investment personnel (a) to pre-clear all
personal securities transactions, (b) to file reports regarding such
transactions, and (c) to refrain from personally engaging in (i) short-term
trading of a security, (ii) transactions involving a security within seven days
of a Victory fund transaction involving the same security, and (iii)
transactions involving securities being considered for investment by a Victory
fund. The Codes also prohibit investment personnel from purchasing securities in
an initial public offering. Personal trading reports are reviewed periodically
by Key Advisers or the Sub-Adviser, and the Board of Trustees reviews annually
such reports (including information on any substantial violations of the Codes).
Violations of the Codes may result in censure, monetary penalties, suspension or
termination of employment.
DELAWARE LAW
The Delaware Business Trust Act provides that a shareholder of a Delaware
business trust shall be entitled to the same limitation of personal liability
extended to stockholders of Delaware corporations. In light of Delaware law, the
nature of the Victory Portfolios' business, and the nature of its assets,
management of Victory Portfolios believe that the risk of personal liability to
a Fund shareholder would be extremely remote.
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<PAGE> 220
In the unlikely event a shareholder is held personally liable for the Victory
Portfolios' obligations, the Victory Portfolios is required to use its property
to protect or compensate the shareholder. On request, the Victory Portfolios
will defend any claim made and pay any judgment against a shareholder for any
act or obligation of the Victory Portfolios. Therefore, financial loss resulting
from liability as a shareholder will occur only if the Victory Portfolios itself
cannot meet its obligations to indemnify shareholders and pay judgments against
them.
Delaware law authorizes electronic or telephonic communications between
shareholders and the Victory Portfolios. Under Delaware law, the Successor
Company has the flexibility to respond to future business contingencies. For
example, the Trustees will have the power to incorporate the Victory Portfolios,
to merge or consolidate it with another entity, to cause each fund to become a
separate trust, and to change the Victory Portfolio's domicile without a
shareholder vote. This flexibility could help reduce the expense and frequency
of future shareholder meetings for non-investment related issues.
MISCELLANEOUS
Shareholders will receive Semi-Annual Reports, which are unaudited, and Annual
Reports, which are audited by independent public accountants, describing the
investment operations of the Fund. Each of these reports, when available for a
particular fiscal year end or the end of a semi-annual fiscal period, is
incorporated herein by reference. The Victory Portfolios may include information
in their Annual Reports and Semi-Annual Reports to shareholders that (i)
describes general economic trends, (ii) describes general trends within the
financial services industry or the mutual fund industry, (iii) describes past or
anticipated portfolio holdings for the Fund or (iv) describes investment
management strategies for the Victory Portfolios. Such information is provided
to inform shareholders of the activities of the Victory Portfolios for the most
recent fiscal year or semi-annual fiscal period to provide the views of Key
Advisers, the Sub-Adviser and/or the Victory Portfolios' officers regarding
expected trends and strategies.
Inquiries regarding the Victory Portfolios or the Fund may be directed in
writing to the Victory Portfolios at Primary Funds Service Corporation, P.O. Box
9741, Providence, RI 02940-9741, or by telephone, toll-free, at 800-539-3863.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE VICTORY
PORTFOLIOS OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING
BY THE VICTORY PORTFOLIOS OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-27-
<PAGE> 221
THE
VICTORY
PORTFOLIOS
LIMITED TERM INCOME FUND
PROSPECTUS For current yield, purchase, and redemption information,
March 1, 1996 call 800-539-FUND or 800-539-3863
THE VICTORY PORTFOLIOS (the "Victory Portfolios") is a registered open-end
management investment company that offers investors a selection of money market,
fixed-income, municipal bond, domestic and international equity portfolios. This
Prospectus relates to the Limited Term Income Fund (the "Fund") a diversified
portfolio. KeyCorp Mutual Fund Advisers, Inc., Cleveland, Ohio, an indirect
subsidiary of KeyCorp, is the investment adviser to the Fund ("Key Advisers" or
the "Adviser"). Society Asset Management, Inc., Cleveland, Ohio, an indirect
subsidiary of KeyCorp, is the investment sub-adviser to the Fund (the
"SubAdviser" or "Society"). Concord Holding Corporation is the Fund's
administrator (the "Administrator"). Victory Broker-Dealer Services, Inc. is the
Fund's distributor (the "Distributor").
The Limited Term Income Fund seeks to provide income consistent with limited
fluctuation of principal. The Fund pursues this objective by investing in high
grade, fixed income securities with a dollar-weighted average maturity of
between one and five years, based on remaining maturities.
Please read this Prospectus before investing. It is designed to provide you with
information and to help you decide if the Fund's goals match your own. Retain
this document for future reference. A Statement of Additional Information (dated
March 1, 1996) for the Fund and an annual report for the Fund's fiscal year
ended October 31, 1995 has been filed with the Securities and Exchange
Commission and is incorporated herein by reference. The Statement of Additional
Information is available without charge upon request by calling 800-539-3863.
SHARES OF THE FUND ARE:
- - NOT INSURED BY THE FDIC;
- - NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY KEYCORP
BANK, ANY OF ITS AFFILIATES, OR ANY OTHER BANK;
- - SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("COMMISSION") OR ANY SECURITIES REGULATORY AUTHORITY OF ANY
STATE, NOR HAS THE COMMISSION OR ANY SUCH STATE AUTHORITY PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
- ----------------- ----
<S> <C>
Summary of Fund Expenses 2
Financial Highlights 3
The Fund's Investment Objective 4
The Fund's Investment Policies and Risk Factors 4
How to Invest, Exchange and Redeem 9
Dividends, Distributions and Taxes 15
Performance 17
Fund Organization and Fees 17
Additional Information 20
</TABLE>
<PAGE> 222
SUMMARY OF FUND EXPENSES
The table below summarizes the expenses associated with the Fund. This standard
format was developed for use by all mutual funds to help you make your
investment decisions. Of course, you should consider this expense information
along with other important information in this Prospectus, including the Fund's
investment objective.
SHAREHOLDER TRANSACTION EXPENSES(1)
<TABLE>
<S> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price) 2.00%
Maximum Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES AFTER EXPENSE WAIVERS AND REIMBURSEMENTS (as a
percentage of average net assets)
<TABLE>
<S> <C>
Management Fees .50%
Administration Fees .15%
Other Expenses(2) .21%
---
Total Fund Operating Expenses(2) .86%
===
</TABLE>
(1) Subsidiaries, correspondents, affiliate banks, and non-bank affiliates
of KeyCorp may charge a customer's account fees for automatic
investment and other cash management services provided in connection
with an investment in the Fund. (See "How to Invest, Exchange and
Redeem.")
(2) Key Advisers has agreed to reduce its fees to the extent necessary so
that total operating expenses of the Fund do not exceed 1.34% until at
least February 28, 1996].
(3) These amounts include an estimate of the shareholder servicing fees the
Fund expects to pay. (See "Fund Organization and Fees - Shareholder
Servicing".)
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return and (2) full redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Limited Term Income Fund $29 $47 $67 $124
</TABLE>
The purpose of the table above is to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. See "Fund Organization and Fees" for a more complete discussion of
annual operating expenses of the Fund. THE FOREGOING EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
THE FUND'S FINANCIAL HISTORY
The table below sets forth certain financial information with respect to the
financial highlights for the Fund, for the periods indicated. The information
below (except as indicated) has been derived from financial statements audited
by Coopers & Lybrand L.L.P., independent accountants for The Victory Portfolios,
whose report thereon is included or incorporated by reference in the Statement
of Additional Information.
-2-
<PAGE> 223
THE VICTORY LIMITED TERM INCOME FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
OCTOBER 20,
1989 TO
YEAR ENDED OCTOBER 31, OCTOBER 31,
----------------------
1994 1993 1992 1991 1990 1989(**)
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period $ 10.53 $ 10.45 $ 10.33 $ 10.02 $ 10.04 $ 10.00
----- ----- ----- ----- ----- -----
Investment Activities
Net investment income 0.54 0.57 0.64 0.73 0.76 0.02
Net realized and unrealized
gains (losses) on
investments (0.61) 0.08 0.13 0.31 (0.01) 0.02
------- ------- -------- ------- ------- -------
Total from Investment
Activities (0.07) 0.65 0.77 1.04 0.75 0.04
------- ------- -------- ------- ------- -------
Distributions
Net investment income (0.54) (0.57) (0.64) (0.73) (0.77)
Net realized gains (0.04) (0.01)
------- ------- -------- ------- -------
Total Distributions (0.58) (0.57) (0.65) (0.73) (0.77)
------- ------- -------- ------- -------
Net Asset Value, End
of Period $ 9.88 $ 10.53 $ 10.45 $ 10.33 $ 10.02 $ 10.04
======= ======= ======== ======= ======= =======
Total Return (Excludes
Sales Charge) (0.66)% 6.39% 7.77% 10.82% 7.75% 0.40%
Ratios/Supplemental Data:
Net Assets, End of
Period (000) $79,150 $81,771 $55,565 $43,763 $31,303 $29,834
Ratio of expenses to
average net assets 0.79% 0.77% 0.78% 0.80% 0.82% 0.64%(b)
Ratio of net investment
income to average
net assets 5.29% 5.49% 6.18% 7.20% 7.63% 7.56%(b)
Ratio of expenses to
average net assets* 0.97% 0.78%
Ratio of net investment
income to average
net assets* 5.10% 5.48%
Portfolio turnover 41.26% 50.27% 14.97% 9.79%
</TABLE>
- ----------
-3-
<PAGE> 224
<TABLE>
<CAPTION>
Six Months
Ended
Year Ended April 30,
October 31, 1995 1995
---------------- ----
(Unaudited)
<S> <C> <C>
Net Asset Value, Beginning [To be Inserted]
of Period $ 9.88
------
Investment Activities
Net investment income 0.27
Net realized and unrealized
gains (losses) on
investments 0.11
Total from Investment ------
Activities 0.38
Distributions ------
Net investment income (.28)
------
Total Distributions (.28)
Net Asset Value, End ------
of Period $9.98
Total Return (Excludes ======
Sales Charge) 3.80%(c)
Ratios/Supplemental Data:
Net Assets, End of
Period (000) $168,112
Ratio of expenses to
average net assets 0.77%(b)
Ratio of net investment
income to average
net assets 5.86%(b)
Ratio of expenses to
average net assets* 0.79%(b)
Ratio of net investment
income to average
net assets* 5.84%(b)
Portfolio turnover 24.49%(b)
</TABLE>
* During the period the investment advisory, administration and/or
shareholder service fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would be as indicated.
(a) Period from commencement of operations.
(b) Annualized.
(c) Aggregate.
THE FUND'S INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek to provide income consistent
with limited fluctuations of principal. The investment objective of the Fund is
fundamental and may not be changed without a vote of the holders of a majority
of the Fund's outstanding voting securities (as defined in the Statement of
Additional Information). There can be no assurance the investment objective of
the Fund will be achieved.
THE FUND'S INVESTMENT POLICIES
The Fund will invest in high grade, fixed income securities with a
dollar-weighted average maturity of between one and five years, based upon
remaining maturities.
While the Fund cannot guarantee that it will maintain a stable net asset value,
its investments will be consistent with the preservation of principal. The Fund
will normally invest in debt securities such as corporate bonds, debentures and
notes, equipment lease and trust certificates, collateralized mortgage
obligations, obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, and fixed-income securities convertible into, or
exchangeable for, common stocks, as well as repurchase agreements collateralized
by such instruments. In addition, a portion of the Fund may from time to time be
invested in first mortgage loans, income participation loans, and participation
certificates in pools of mortgages, all of which are issued or guaranteed
-4-
<PAGE> 225
by the U.S. Government or its agencies or instrumentalities, or debt securities
backed by pools of automobile or other commercial or consumer finance loans
("asset-backed" securities, as further described below). Some of the securities
in which the Fund invests may have warrants or options attached.
The Fund will invest only in those debt securities which are rated at the time
of purchase in one of the three highest rating groups assigned by a nationally
recognized statistical ratings organization ("NRSRO") or, if unrated, which Key
Advisers or the Sub-Adviser deems to be of comparable quality. For a description
of such NRSROs, see the Appendix to the Statement of Additional Information.
Changes in the value of portfolio securities will not affect cash income, if
any, derived from these securities but will affect the Fund's net asset value.
Because the Fund invests primarily in debt securities, which fluctuate in value,
the Fund's shares will fluctuate in value.
ACCEPTABLE INVESTMENTS AND ASSOCIATED RISKS. The Fund may invest in the
following instruments:
- - BONDS, NOTES AND DEBENTURES OF U.S. CORPORATE ISSUERS. Debentures
represent unsecured promises to pay, while notes and bonds may be
secured by mortgages on real property or security interests in personal
property. Bonds include, but are not limited to, debt instruments with
maturities of approximately one year or more, debentures,
mortgage-related securities, stripped government securities and zero
coupon obligations. Bonds, notes and debentures in which the Fund may
invest may differ in interest rates, maturities and times of issuance.
The market value of the Fund's fixed income investments will change in
response to interest rate changes and other factors. During periods of
falling interest rates, the values of outstanding fixed income
securities generally rise. Conversely, during periods of rising
interest rates, the values of such securities generally decline.
Moreover, while securities with longer maturities tend to produce
higher yields, the price of longer maturity securities are also subject
to greater market fluctuations as a result of changes in interest
rates. Changes by recognized agencies in the rating of any fixed income
security and in the ability of an issuer to make payments of interest
and principal also affect the value of these investments. Except under
conditions of default, changes in the value of Fund securities will not
affect cash income derived from these securities but will affect the
Fund's net asset value.
- - ZERO COUPON BONDS. The Fund is permitted to purchase zero coupon U.S.
Government securities ("zero coupon bonds"). Zero coupon bonds are
purchased at a discount from the face amount because the buyer receives
only the right to receive a fixed payment on a certain date in the
future and does not receive any periodic interest payments. The effect
of owning instruments which do not make current interest payments is
that a fixed yield is earned not only on the original investment but
also, in effect, on all discount accretion during the life of the
obligations. This implicit reinvestment of earnings at the same rate
eliminates the risk of being unable to reinvest distributions at a rate
as high as the implicit yields on the zero coupon bond, but at the same
time eliminates the holder's ability to reinvest the interest payments
at higher rates in the future. For this reason, zero coupon bonds are
subject to substantially greater price fluctuations during periods of
changing market interest rates than are comparable securities which pay
interest currently, which fluctuation increases the longer the period
to maturity.
- - SHORT-TERM OBLIGATIONS. These include high quality, short-term
obligations such as domestic and foreign commercial paper (including
variable-amount master demand notes), bankers' acceptances,
certificates of deposit and demand and time deposits of domestic and
foreign branches of U.S. banks and foreign banks, and repurchase
agreements. (See "Foreign Securities" for a description of risks
associated with investments in foreign securities.)
- - INTERNATIONAL BONDS. The Fund may invest in Euro and Yankee
obligations, which are U.S. dollar-denominated international bonds for
which the primary trading market is in the United States ("Yankee
Bonds"), or for which the primary trading market is abroad ("Eurodollar
Bonds"). The Fund may also invest in Canadian and Supranational Agency
Bonds (e.g., International Monetary Fund). (See "Foreign Securities"
for a description of risks associated with investments in foreign
securities.)
- - FOREIGN SECURITIES. The Fund may invest up to 20% of the value of its
total assets in debt securities of foreign issuers, including foreign
banks. Foreign securities are subject to special risks, such as future
adverse political and economic developments, possible seizure,
nationalization, or expropriation of foreign
-5-
<PAGE> 226
investments, less stringent disclosure requirements, increased costs
associated with the conversion of foreign currency into U.S. dollars,
the possible establishment of exchange controls or taxation at the
source, or the adoption of other foreign governmental restrictions. To
the extent the Fund may invest in securities of foreign issuers which
are not traded on any exchange, there is a further risk that these
securities will not be readily marketable. The Fund will not hold
foreign currency in amounts exceeding 5% of its assets as a result of
such investments.
- - ASSET-BACKED SECURITIES. These are debt securities backed by pools of
automobile or other commercial or consumer finance loans. The
collateral backing asset-backed securities cannot be foreclosed upon.
These issues are normally traded over-the-counter and typically have a
short to intermediate maturity structure, depending on the paydown
characteristics of the underlying financial assets which are passed
through to the security holder.
- - U.S. GOVERNMENT SECURITIES. The Fund may invest in obligations issued
or guaranteed by the U.S. Government or its agencies or
instrumentalities. Obligations of certain agencies and
instrumentalities of the U.S. Government, such as the Government
National Mortgage Association ("GNMA") and the Export-Import Bank of
the United States, are supported by the full faith and credit of the
U.S. Treasury; others, such as those of the Federal National Mortgage
Association ("FNMA") are supported by the right of the issuer to borrow
from the Treasury; others, such as those of the Student Loan Marketing
Association ("SLMA"), are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others,
such as those of the Federal Farm Credit Banks or the Federal Home Loan
Mortgage Corporation ("FHLMC"), are supported only by the credit of the
instrumentality. No assurance can be given that the U.S. Government
will provide financial support to U.S. Government-sponsored agencies or
instrumentalities if it is not obligated to do so by law. The Fund will
invest in the obligations of such agencies or instrumentalities only
when Key Advisers or the Sub-Adviser believes that the credit risk
with respect thereto is minimal.
- - RECEIPTS. In addition to notes and bonds issued by the U.S. Treasury,
the Fund may also purchase separately traded interest and principal
component parts of such obligations that are transferable through the
Federal book entry system, known as Separately Traded Registered
Interest and Principal Securities ("STRIPS") and Coupon Under Book
Entry Safekeeping ("CUBES"). These instruments are issued by banks and
brokerage firms and are created by depositing Treasury notes and
Treasury bonds into a special account at a custodian bank; the
custodian holds the interest and principal payments for the benefit of
the registered owners of the certificates or receipts. The custodian
arranges for the issuance of the certificates or receipts evidencing
ownership and maintains the register. Receipts include Treasury
Receipts ("TRs"), Treasury Investment Growth Receipts ("TIGRs") and
Certificates of Accrual on Treasury Securities ("CATS").
STRIPS, CUBES, TRs, TIGRs and CATS are sold as zero coupon securities,
which means that they are sold at a substantial discount and redeemed
at face value at their maturity dates without interim cash payments of
interest or principal. This discount is amortized over the life of the
security, and such amortization will constitute the income earned on
the security for both accounting and tax purposes. Because of these
features, these securities may be subject to greater interest rate
volatility than interest-paying U.S. Treasury obligations. The Fund
will limit its investments in such instruments to 20% of its total
assets.
- - GOVERNMENT MORTGAGE-BACKED SECURITIES. The principal governmental
(i.e., backed by the full faith and credit of the United States
Government) guarantor of mortgage-related securities is GNMA. GNMA is a
wholly owned United States Government corporation within the Department
of Housing and Urban Development. GNMA is authorized to guarantee with
the full faith and credit of the United States Government, the timely
payment of principal and interest on securities issued by institutions
approved by GNMA (such as savings and loan institutions, commercial
banks and mortgage bankers) and backed by pools of FHA-insured or
VA-guaranteed mortgages.
Government-related (i.e., not backed by the full faith and credit of
the United States Government) guarantors include FNMA and FHLMC. FNMA
and FHLMC are government-sponsored corporations owned entirely by
private stockholders. Pass-through securities issued by FNMA and FHLMC
are guaranteed as to timely payment of principal and interest by FNMA
and FHLMC but are not backed by the full faith and credit of the United
States Government.
-6-
<PAGE> 227
The investment characteristics of mortgage-related securities differ
from traditional debt securities. These differences can result in
significantly greater price and yield volatility than is the case with
traditional fixed income securities. The major differences typically
include more frequent interest and principal payments, usually monthly,
the adjustability of interest rates, and the possibility that
prepayments of principal may be made at any time. Prepayment rates are
influenced by changes in current interest rates and a variety of
economic, geographic, social and other factors. During periods of
declining interest rates, prepayment rates can be expected to
accelerate. Under certain interest rate and prepayment rate scenarios,
the Fund may fail to recoup fully its investment in mortgage-backed
securities (and incur capital losses) notwithstanding a direct or
indirect governmental or agency guarantee. In general, changes in the
rate of prepayments on a mortgage-related security will change that
security's market value and its yield to maturity. When interest rates
fall, high prepayments could force the Fund to reinvest principal at a
time when investment opportunities are not attractive. Thus,
mortgage-backed securities may not be an effective means for the Fund
to lock in long-term interest rates. Conversely, during periods when
interest rates rise, slow prepayments could cause the average life of
the security to lengthen and the value to decline more than
anticipated. However, during periods of rising interest rates,
principal repayments by mortgage-backed securities allow the Fund to
reinvest at increased interest rates.
- - COLLATERALIZED MORTGAGE OBLIGATIONS. Mortgage-related securities in
which the Fund may invest may also include collateralized mortgage
obligations ("CMOs"). CMOs are debt obligations issued generally by
finance subsidiaries or trusts that are secured by mortgage-backed
certificates, including, in many cases, certificates issued by
government-related guarantors, including GNMA, FNMA and FHLMC, together
with certain funds and other collateral. Although payment of the
principal of and interest on the mortgage-backed certificates pledged
to secure the CMOs may be guaranteed by GNMA, FNMA or FHLMC, the CMOs
represent obligations solely of the issuer and are not insured or
guaranteed by GNMA, FHLMC, FNMA or any other governmental agency, or by
any other person or entity. The issuers of the CMOs typically have no
significant assets other than those pledged as collateral for the
obligations.
- - MORTGAGE-RELATED SECURITIES ISSUED BY NON-GOVERNMENTAL ENTITIES. The
Fund may invest in mortgage-related securities issued by
non-governmental entities. Commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers
and other secondary market issuers also create pass-through pools of
conventional residential mortgage loans. Such issuers may also be the
originators of the underlying mortgage loans as well as the guarantors
of the mortgage-related securities. Pools created by such
non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are not direct or
indirect government guarantees of payments in the former pools.
However, timely payment of interest and principal of these pools is
supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance. The insurance and
guarantees are issued by government entities, private insurers and the
mortgage poolers. Such insurance and guarantees and the
creditworthiness of the issuers thereof will be considered in
determining whether a mortgage-related security meets the Fund's
investment quality standards. There can be no assurance that the
private insurers can meet their obligations under the policies. The
Fund may buy mortgage-related securities without insurance or
guarantees if, through an examination of the loan experience and
practices of the poolers, Key Advisers or the Sub-Adviser determines
that the securities meet the Fund's quality standards. Although the
market for such securities is becoming increasingly liquid, securities
issued by certain private organizations may not be readily marketable.
The Fund will not purchase mortgage-related securities or any other
assets which in the opinion of Key Advisers or the Sub-Adviser are
illiquid if, as a result, more than 15% of the value of the Fund's
total assets will be invested in illiquid securities.
The Fund may purchase mortgage-related securities with stated
maturities in excess of 10 years. Mortgage-related securities include
collateralized mortgage obligations and participation certificates in
pools of mortgages. The average life of mortgage-related securities
varies with the maturities of the underlying mortgage instruments,
which have maximum maturities of 40 years. The average life is likely
to be substantially less than the original maturity of the mortgage
pools underlying the securities as the result of mortgage prepayments.
The rate of such prepayments, and hence the average life of the
certificates, will be a function of current market interest rates and
current conditions in the relevant housing markets. The impact of
prepayment of mortgages is described under "Government Mortgage-Backed
Securities" above. Estimated average life will be determined by
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<PAGE> 228
Key Advisers or the Sub-Adviser. Various independent mortgage-related
securities dealers publish estimated average life data using
proprietary models, and in making such determinations, Key Advisers or
the Sub-Adviser will rely on such data except to the extent such data
are deemed unreliable by Key Advisers or the Sub-Adviser might deem
data unreliable which appeared to present a significantly different
estimated average life for a security than data relating to the
estimated average life of comparable securities as provided by other
independent mortgage-related securities dealers.
- - SECURITIES LENDING. In order to generate additional income, the Fund
may, from time to time, lend portfolio securities to broker-dealers,
banks or institutional borrowers of securities. The Fund must receive
collateral equal to 100% of the securities' value plus any interest due
in the form of cash or U.S. Government securities, which collateral
must be marked to market daily by Key Advisers or the Sub-Adviser.
Should the market value of the loaned securities increase, the borrower
must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund an amount
equal to any dividends or interest paid on such securities plus any
interest negotiated between the parties to the lending agreement. Loans
are subject to termination by the Fund or the borrower at any time.
While the lending fund does not have the right to vote securities on
loan, the Fund intends to terminate the loan and regain the right to
vote if that is considered important with respect to the investment.
The Fund will only enter into loan arrangements with broker-dealers,
banks or other institutions which Key Advisers or the Sub-Adviser has
determined are creditworthy under guidelines established by the Victory
Portfolios' Board of Trustees. The Fund intends to limit its securities
lending to 33 of total assets.
- - WHEN-ISSUED SECURITIES. The Fund may purchase securities on a
when-issued or delayed delivery basis. These transactions are
arrangements in which the Fund purchases securities with payment and
delivery scheduled for a future time, thereby involving the risk that
the yield obtained in the transaction will be less than that available
in the market when delivery takes place. When the Fund agrees to
purchase securities on a when-issued basis, the Fund's custodian will
set aside cash or liquid portfolio securities equal to the amount of
that commitment in a separate account, and may be required to
subsequently place additional assets in the separate account to
maintain equivalence with the Fund's commitment. The Fund generally
will not pay for such securities and no income accrues on the
securities until they are received. Securities purchased on a
when-issued basis are recorded as assets and are subject to changes in
value prior to delivery based upon changes in the general level of
interest rates and other market factors. The Fund does not intend to
purchase when-issued or delayed delivery securities for speculative
purposes, but only for the purpose of acquiring portfolio securities
consistent with its investment objective and policies, and not for
investment leverage. In when-issued and delayed delivery transactions,
the Fund relies on the seller to complete the transaction; its failure
to do so may cause the Fund to miss a price or yield considered to be
advantageous.
- - VARIABLE AND FLOATING RATE SECURITIES. The Fund may purchase variable
and floating rate tax exempt notes with ratings that are within the
three highest rating groups assigned by an NRSRO or, if unrated, which
Key Advisers or the Sub-Adviser deems to be of comparable quality.
There may be no active secondary market with respect to a particular
variable or floating rate note. Nevertheless, the periodic
readjustments of their interest rates tend to assure that their value
to the Fund will approximate their par value. The interest rates on the
variable and floating rate notes purchased by the Fund may be reset
daily, weekly, quarterly, or some other reset period, and may be
subject to a floor or ceiling. There is a risk that the current
interest rate on such obligations may not accurately reflect existing
market interest rates. There may be no active secondary market with
respect to a particular variable or floating rate note. Variable and
floating rate notes for which no readily available market exists will
be purchased in an amount which, together with other illiquid
securities held by the Fund, does not exceed 15% of the Fund's
respective total assets unless such notes are subject to a demand
feature that will permit the Fund to receive payment of the principal
within seven days after demand by the Fund therefor.
- - REPURCHASE AGREEMENTS. Under the terms of a repurchase agreement, the
Fund acquires securities from financial institutions or registered
broker-dealers, subject to the seller's agreement to repurchase such
securities at a mutually agreed upon date and price. The seller is
required to maintain the value of collateral held pursuant to the
agreement at not less than the repurchase price (including accrued
interest). If the seller were to default on its repurchase obligation
or become insolvent, the Fund holding such obligation would suffer a
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<PAGE> 229
loss to the extent that the proceeds from a sale of the underlying
portfolio securities were less than the repurchase price, or to the
extent that the disposition of such securities by the Fund were delayed
pending court action. Repurchase agreements are considered by the staff
of the Commission to be loans by the Fund.
- - REVERSE REPURCHASE AGREEMENTS. The Fund may borrow funds for temporary
purposes by entering into reverse repurchase agreements. Pursuant to
such agreements, the Fund sells portfolio securities to financial
institutions such as banks and broker-dealers, and agrees to repurchase
them at a mutually agreed-upon date and price. At the time the Fund
enters into a reverse repurchase agreement, it must place in a
segregated custodial account assets having a value equal to the
repurchase price (including accrued interest); the collateral will be
marked to market on a daily basis, and will be continuously monitored
to ensure that such equivalent value is maintained. Reverse repurchase
agreements involve the risk that the market value of the securities
sold by the Fund may decline below the price at which the Fund is
obligated to repurchase the securities. Reverse repurchase agreements
are considered to be borrowings under the Investment Company Act of
1940 (the "1940 Act").
- - INVESTMENT COMPANY SECURITIES. The Fund may also invest up to 5% of its
total assets in the securities of any one investment company, but may
not own more than 3% of the securities of any one investment company or
invest more than 10% of its total assets in the securities of other
investment companies. Pursuant to an exemptive order received by the
Victory Portfolios from the Commission, the Fund may invest in the
money market funds of the Victory Portfolios. Key Advisers and/or the
Sub-Adviser will waive its fee attributable to the Fund's assets
invested in a fund of the Victory Portfolios and, to the extent
required by the laws of any state in which shares of the Fund are sold,
Key Advisers and/or the Sub-Adviser will waive its investment advisory
fee as to all assets invested in other investment companies. Because
such other investment companies employ an investment adviser, such
investment by the Fund will cause shareholders to bear duplicative fees
such as management fees, to the extent such fees are not waived by Key
Advisers and/or the Sub-Adviser
- - PRIVATE PLACEMENT INVESTMENTS. The Fund may invest in commercial paper
issued in reliance on the exemption from registration afforded by
Section 4(2) of the 1933 Act. Section 4(2) commercial paper is
restricted as to disposition under federal securities law and is
generally sold to institutional investors, such as the Fund, that agree
they are purchasing the paper for investment purposes and not with a
view to public distribution. Any resale by the purchaser must be in an
exempt transaction. Section 4(2) commercial paper is normally resold to
other institutional investors like the Fund through or with the
assistance of the issuer or investment dealers who make a market in
Section 4(2) commercial paper, thus providing liquidity. The Fund
believes that Section 4(2) commercial paper and possibly certain other
restricted securities that meet the criteria for liquidity established
by the Trustees are quite liquid. The Fund intends, therefore, to treat
the restricted securities that meet the criteria for liquidity
established by the Trustees, including Section 4(2) commercial paper,
as determined by Key Advisers or the Sub-Adviser, as liquid and not
subject to the investment limitation applicable to illiquid securities.
Therefore, the Fund will generally purchase Section 4(2) commercial
paper without regard to the Fund's restriction on illiquid securities.
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under a position of the Staff of the Commission set
forth in the adopting release for Rule 144A under the 1933 Act (the "Rule"). The
Rule is a nonexclusive safe-harbor for certain secondary market transactions
involving certain Restricted Securities under federal securities laws. The Rule
provides an exemption from registration for resales of Restricted Securities to
qualified institutional buyers. The Rule was expected to further enhance the
liquidity of the secondary market for the types of securities eligible for
resale under Rule 144A. The Victory Portfolios believes that the Staff of the
Commission has left the question of determining the liquidity of all Restricted
Securities to the Trustees. The Trustees consider the following criteria in
determining the liquidity of certain restricted securities: the frequency of
trades and quotes for the security; the number of dealers willing to purchase or
sell the security and the number of other potential buyers; dealer undertakings
to make a market in the security; and the nature of the security and the nature
of the marketplace trades.
The Investment policies of the Fund may be changed without an affirmative vote
of the holders of a majority of the Fund's outstanding voting securities unless
(1) a policy is expressly deemed to be a fundamental policy of the Fund or (2)
policy is expressly deemed to be changeable only by such majority vote.
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LIMITING INVESTMENT RISKS
The Fund follows specific guidelines in buying portfolio securities:
1. (a) The Fund may borrow money solely for temporary or emergency
purposes, but not in an amount exceeding 33 1/3% of its total assets.
(b) The Fund may borrow money from banks or by engaging in reverse
repurchase agreements. (c) The Fund will not purchase securities when
borrowings exceed 5% of its total assets. If the Fund borrows money,
its share price may be subject to greater fluctuation until the
borrowing is paid off. To this extent, purchasing securities when
borrowings are outstanding may involve an element of leverage.
2. The Fund will not purchase a security if, as a result, more than 15% of
its net assets would be invested in illiquid securities. The Fund may
invest up to 15% of its net assets in illiquid investments (investments
that cannot be readily sold within seven days in the usual course of
business at approximately the price at which the Fund has valued them),
including restricted securities deemed to be illiquid. Under the
supervision of the Trustees, Key Advisers or the Sub-Adviser determines
the liquidity of the Fund's investments. The absence of a trading
market can make it difficult to ascertain a market value for illiquid
investments. Disposing of illiquid investments may involve
time-consuming negotiation and legal expenses, and it may be difficult
or impossible for the Fund to sell them promptly at an acceptable
price.
Except for the Fund's investment objective and limitation on borrowing in
limitation 1 above, the investment policies described in this Prospectus are
nonfundamental. Non-fundamental limitations may be changed without shareholder
approval. Whenever an investment policy or limitation states a maximum
percentage of the Fund's assets that may be invested, such percentage limitation
will be determined immediately after and as a result of the investment, except
in the case of borrowing (or other activities that may be deemed to result in
the issuance of a "senior security" under the 1940 Act). Any subsequent change
in values, assets or other circumstances will not be considered when determining
whether the investment complies with the Fund's investment policies and
limitations. If the value of the Fund's holdings of illiquid securities at any
time exceeds the percentage limitation applicable at the time of acquisition due
to subsequent fluctuations in value or other reasons, the Board of Trustees will
consider what actions, if any, are appropriate to maintain adequate liquidity.
NOTE: The Statement of Additional Information contains information about certain
investment practices and portfolio securities of the Fund. The Statement of
Additional Information also contains information about investment restrictions
designed to reduce the risk of an investment in the Fund.
Portfolio Turnover
Although the primary objective of the Fund is current income, the Fund may
engage in the technique of short-term trading. Such trading involves the selling
of securities held for a short time, ranging from several months to less than a
day. The object of such short-term trading is to take advantage of what Key
Advisers or the Sub-Adviser believes are changes in market, industry or
individual company conditions or outlook. Any such trading would increase the
Fund's turnover rate and its transaction costs. In the fiscal period ended
October 31, 1995, the annual portfolio turnover rate was _____% for the Fund
compared to _____% for the prior fiscal year.
HOW TO INVEST, EXCHANGE AND REDEEM
HOW TO INVEST
Shares may be purchased directly or through an Investment Professional.
Investment Professionals are securities brokers or other financial institutions
that have entered into selling or servicing agreements with the Fund or the
Distributor. Shares are also available to clients of bank trust departments who
have qualified trust accounts. The minimum investment is $500 for the initial
purchase and $25 thereafter. Accounts set up through a bank trust department or
an Investment Professional may be subject to different minimums.
- - Investing Through Your Investment Professional. Your Investment
Professional will place your order with the Transfer Agent on your
behalf. You may be required to establish a brokerage or agency account.
Your Investment Professional will notify you whether subsequent trades
should be directed to the Investment Professional or directly to the
Fund's Transfer Agent. Accounts established with Investment
Professionals may have different features, requirements and fees. In
addition,
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Investment Professionals may charge for their services. Information
regarding these features, requirements and fees will be provided by the
Investment Professional. If you are purchasing shares of any Fund
through a program of services offered or administered by your
Investment Professional, you should read the program materials in
conjunction with this Prospectus.
- - Investing Through The Systematic Investment Plan. You can use the
Systematic Investment Plan to purchase shares directly from your bank
account. Please refer to "Systematic Investment Plan" below for more
details.
- - Investing Through Your Bank Trust Department. Your bank trust
department may require a minimum investment and may charge additional
fees. Fee schedules for such accounts are available upon request and
are detailed in the agreements by which a client opens the desired
account. Your bank trust department may require a completed and signed
application for the Fund in which an investment is made. Additional
documents may be required from corporations, associations, and certain
fiduciaries. Any account information, such as balances, should be
obtained through your bank trust department. Additional purchases,
exchanges or redemptions should also be coordinated through your bank
trust department. Contact your bank trust department for instructions.
The services rendered by a bank trust department, including affiliates of Key
Advisers or the Sub-Adviser, in the management of its accounts are not
duplicative of any of the services for which Key Advisers or the Sub-Adviser as
the investment adviser or sub-adviser, respectively, is compensated for advising
the Fund. The charges paid by clients of bank trust departments, or their
affiliates, should be considered in calculating the net yield and return on
investments in the Fund, although such charges do not affect the Fund's
dividends and distributions.
INVESTING DIRECTLY
BY MAIL: You may purchase shares by completing and signing an account
application (initial purchase only) and mailing it, together with a check (or
other negotiable bank draft or money order) in the amount of at least the
minimum investment requirement to, The Victory Limited Term Income Fund, Primary
Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741.
Subsequent purchases may be made in the same manner.
BY WIRE: Call 800-539-3863 to set up your Fund account to accommodate wire
transactions. YOU MUST CALL THE TRANSFER AGENT BEFORE WIRING FUNDS. You will
begin to earn dividends on the first business day following receipt of your
wire. Federal funds (monies transferred from one bank to another through the
Federal Reserve System with same-day availability) should be wired to:
Boston Safe Deposit & Trust Co.
ABA #011001234
Credit PFSC DDA#16-918-8
The Victory Portfolios: Limited Term Income Fund
You must include your account number, your name(s), tax identification number(s)
and the control number assigned by the Transfer Agent. The Fund does not impose
a fee for wire transactions, although your bank may charge you a fee for this
service.
Shares are sold at the public offering price based on the net asset value that
is next determined after the Transfer Agent receives the purchase order. In most
cases, to receive that day's offering price, the Transfer Agent must receive
your order as of the close of regular trading of the New York Stock Exchange
("NYSE") (generally 4:00 pm Eastern time) (the "Valuation Time") on each
Business Day (as defined in "Net Asset Value Per Share")of the Fund. If you buy
shares through an Investment Professional, the Investment Professional must
receive your order in a timely fashion on a regular Business Day and transmit it
to the Transfer Agent so that it is received before the close of business that
day. The Transfer Agent may reject any purchase order for the Fund's shares, in
its sole discretion.
It is the responsibility of your Investment Professional to transmit your order
to purchase shares to the Transfer Agent in a timely fashion in order for you to
receive that day's share price. The Fund must receive payment within three
business days after an order is placed. Otherwise, the purchase order will be
canceled and you could be held liable for resulting fees and/or losses.
INVESTMENT REQUIREMENTS
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All purchases must be made in U.S. dollars. Checks must be drawn on U.S. banks.
No cash will be accepted. If you make a purchase with more than one check, each
check must have a value of at least $25, and the minimum investment requirement
still applies. The Fund reserves the right to limit the number of checks
processed at one time. If your check does not clear, your purchase will be
canceled and you could be liable for any losses or fees incurred. Payment for
the purchase is expected at the time of the order. If payment is not received
within three business days of the date of the order, the order may be canceled,
and you could be held liable for resulting fees and/or losses.
You may initiate any transaction by telephone either through your bank trust
department or through your Investment Professional or call the Transfer Agent at
800-539-3863. Subsequent investments by telephone may be made directly or
through procedures established by your bank trust department or Investment
Professional. See "Redeeming Shares -- By Telephone" for more information about
telephone transactions.
Shares are sold at their offering price, which is normally net asset value plus
an initial sales charge. However, in some cases, described below, where
purchases are not subject to an initial sales charge, the offering price may be
net asset value. In some cases, reduced sales charges may be available, as
described below. When you invest, the Fund receives the net asset value for your
account. The sales charge varies depending on the amount of your purchase and a
portion may be retained by the Distributor and allocated to your Investment
Professional. The Victory Portfolios has a reinstatement policy which allows an
investor who redeems his/her shares originally purchased with a sales charge to
reinvest within 90 days without incurring an additional sales charge. The
current sales charge rates and commissions paid to Investment Professionals are
as follows:
<TABLE>
<CAPTION>
SALES CHANGE
AS A % OR SALES CHARGE
OFFERING AS A % OF NET DEALER
AMOUNT OF PURCHASE PRICE AMOUNT INVESTED REALLOWANCE
- ------------------ ----- --------------- -----------
<S> <C> <C> <C>
$0-$49,999 2.00% 2.04% 1.50%
$50,000-$99,999 1.75% 1.78% 1.25%
$100,000-$249,999 1.50% 1.52% 1.00%
$250,000-$499,999 1.25% 1.27% 0.75%
$500,000-$999,999 1.00% 1.01% 0.50%
$1,000,000 and above 0.00% 0.00% 0.00%*
</TABLE>
* There is no initial sales charge on purchases of $1 million or more.
However, Investment Professionals will be compensated at the rate of up
to .25% of the amount of such purchases.
The Distributor reserves the right to reallow the entire commission to dealers.
If that occurs, the dealer may be considered an "underwriter" under Federal
securities laws.
The Distributor may pay all or a portion of any applicable sales charges and
service fees to Investment Professionals who sell shares of the Fund and provide
ongoing sales support services or shareholder support services. For the
three-year period commencing April 30, 1994, for activities in maintaining and
servicing accounts of customers invested in the Fund, First Albany Corporation
("First Albany") and PFIC Securities Corporation ("PFIC") may receive payments
from the Distributor equal to two-thirds of the Dealer Retention (as defined
below) on any shares of the Fund (and other funds of the Victory Portfolios)
sold by First Albany or PFIC and their broker-dealer affiliates. "Dealer
Retention" is an amount equal to the difference between the applicable sales
charge and such part of the sales charge which is reallowed to broker-dealers.
The Distributor, at its expense, may also provide additional cash compensation
to dealers in connection with sales of shares of the Fund. The maximum cash
compensation payable by the Distributor is 4.00% of the offering price. In
addition, the Distributor will, from time to time and at its own expense,
provide compensation, including financial assistance, to dealers in connection
with conferences, sales or training programs for their employees, seminars for
the public, advertising campaigns regarding one or more Victory Portfolios
and/or other dealer-sponsored special events including payment for travel
expenses, including lodging, incurred in connection with trips taken by invited
registered representatives and members of their families to locations within or
outside of the United States for meetings or seminars of a business nature.
Compensation will include the following types of non-cash compensation offered
through sales contests: (1) vacation trips including the provision of travel
arrangements and lodging; (2) tickets for entertainment events (such as
concerts, cruises and sporting events) and (3) merchandise (such as clothing,
trophies, clocks and pens). Dealers may not use sales
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<PAGE> 233
of the Fund's shares to qualify for this compensation to the extent such may be
prohibited by the laws of any state or any self-regulatory agency, such as the
National Association of Securities Dealers, Inc. None of the aforementioned
compensation is paid for by the Fund or its shareholders.
REDUCED SALES CHARGES. You may be eligible to buy shares at reduced sales
charge rates in one or more of the following ways:
LETTER OF INTENT. An investor may obtain a reduced sales charge by means of a
written Letter of Intent which expresses the investor's intention to purchase
shares of the Fund at a specified total public offering price within a 13-month
period.
A Letter of Intent is not a binding obligation upon the investor to purchase the
full amount indicated. The minimum initial investment under a Letter of Intent
is 5% of such amount. Shares purchased with the first 5% of such amount will be
held in escrow (while remaining registered in the name of the investor) to
secure payment of the higher sales charge applicable to the shares actually
purchased if the full amount indicated is not purchased, and such escrowed
shares will be involuntarily redeemed to pay the additional sales charge, if
necessary. Dividends (if any) on escrowed shares, whether paid in cash or
reinvested in additional shares, are not subject to escrow. The escrowed shares
will not be available for disposal by the investor until all purchases pursuant
to the Letter of Intent have been made or the higher sales charge has been paid.
When the full amount indicated has been purchased, the escrow will be released.
A Letter of Intent may include purchases of shares made not more than 90 days
prior to the date the investor signs a Letter of Intent; however, the 13-month
period during which the Letter of Intent is in effect will begin on the date of
the earliest purchase to be included. An investor may combine purchases that are
made in an individual capacity with (1) purchases that are made by members of
the investor's immediate family and (2) purchases made by businesses that the
investor owns as sole proprietorships, for purposes of obtaining reduced sales
charges by means of a written Letter of Intent. In order to accomplish this,
however, investors must designate on the account application the accounts that
are to be combined for this purpose. Investors can only designate accounts that
are open at the time the Letter of Intent is executed.
If an investor qualifies for a further reduced sales charge because the investor
has either purchased more than the dollar amount indicated on the Letter of
Intent or has entered into a Letter of Intent which includes shares purchased
prior to the date of the Letter of Intent, the difference in the sales charge
will be used to purchase additional shares of the Fund on behalf of the
investor; thus the total purchases (included in the Letter of Intent) will
reflect the applicable reduced sales charge of the Letter of Intent.
For investors who purchase more than the dollar amount indicated on the Letter
of Intent or enter into a Letter of Intent that includes shares purchased prior
to the date of the Letter of Intent and qualify for a reduced sales charge, all
such additional shares will be immediately purchased in the form of additional
shares and credited to the investor's account at the then current public
offering price applicable to a single purchase of the total amount of the
purchases.
For further information about Letters of Intent, interested investors should
contact the Transfer Agent at 800-539-3863. This program, however, may be
modified or eliminated at any time without notice.
RIGHT OF ACCUMULATION AND CONCURRENT PURCHASES
A shareholder may qualify for a reduced sales charge on purchases of shares of
the Fund and other funds of the Victory Portfolios by combining a current
purchase with purchases of another fund(s) or with certain prior purchases of
shares of the Victory Portfolios. The applicable sales charge is based on the
sum of (i) the purchaser's current purchase plus (ii) the current public
offering price of the purchaser's previous purchases of (a) all shares held by
the purchaser in the Fund and (b) all shares held by the purchaser in any other
fund of the Victory Portfolios (except money market funds).
To receive the applicable public offering price pursuant to the right of
accumulation, shareholders must provide the Transfer Agent with sufficient
information at the time of purchase to permit confirmation of qualification.
Accumulation privileges may be amended or terminated without notice at any time
by the Distributor.
- - WAIVERS OF SALES CHARGES. No sales charge is imposed on sales of shares
to the following categories of persons (which categories may be changed
or eliminated at any time):
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<PAGE> 234
(1) Current or retired trustees of the Victory Portfolios; employees,
directors, trustees, and their family members of KeyCorp or an
Affiliated Provider (Affiliated Providers refer to affiliates and
subsidiaries of KeyCorp and service providers to the Victory Portfolios
and the Victory Shares (collectively, the "Victory Group")), dealers
having an agreement with the Distributor and any trade organization to
which Key Advisers, the Sub-Adviser or the Administrator belongs;
(2) Investors who purchase shares for trust, investment management or
certain other advisory accounts established with KeyCorp or any of its
affiliates;
(3) Investors who purchase shares through a 401(k) plan sponsored by an
Affiliated Provider;
(4) Investors who reinvest assets received in a distribution from a
qualified, non-qualified or deferred compensation plan, agency, trust
or custody account that was either (a) maintained by KeyCorp or an
Affiliated Provider, or (b) invested in a fund of the Victory Group;
(5) Investors who, within 90 days of redemption, use the proceeds from the
redemption of shares of another mutual fund complex for which they
previously paid a front end sales charge or sales charge upon
redemption of shares; and
(6) Shareholders of the former Investors Preference Fund For Income, Inc.
and the Investors Preference New York Tax-Free Fund, Inc. who have
continuously maintained accounts with a fund or funds of the Victory
Group with a balance of $250,000 or more (investors with less than
$250,000 will pay any applicable sales loads).
SPECIAL INVESTOR SERVICES
- - THE SYSTEMATIC INVESTMENT PLAN. You can make regular investments in the
Fund and all other funds of the Victory Group with the Systematic
Investment Plan by completing the appropriate section of the account
application and attaching a voided personal check with your bank's
magnetic ink coding number across the front. If your bank account is
jointly owned, be sure that all owners sign. You must first meet the
Fund's initial investment requirement of $500, then investments may be
made monthly by automatically deducting $25 or more from your bank
checking account. For officers, trustees, directors and employees,
including retired directors and employees, of the Victory Group,
KeyCorp and its affiliates, and the Administrator and its affiliates
(and family members of each of the foregoing, i.e., parents and
children) who participate in the Systematic Investment Plan, there is
no minimum initial investment required. You may change the amount of
your monthly purchase at any time. A bank draft form must be completed
for this option. Your bank checking account will be debited on the date
indicated on your Account Application. Shares will be purchased at the
offering price next determined following receipt of the order by the
Transfer Agent. You may cancel the Systematic Investment Plan at any
time without payment of a cancellation fee. Your monthly account
statement will reflect systematic investment transactions, and a debit
entry will appear on your bank statement.
- - TELEPHONE TRANSACTIONS. You can initiate any transaction by telephone.
You may call the Transfer Agent toll-free at 800-539-3863 or call your
Investment Professional or bank trust department. See "Shareholder
Account Rules and Policies" for more information about telephone
transactions.
- - THE SYSTEMATIC WITHDRAWAL PLAN. You can make regular withdrawals from
your account in any fund of the Victory Group with the Systematic
Withdrawal Plan by completing the appropriate section of the account
application. If you own shares in a fund worth $5,000 or more, you can
have monthly, quarterly, semi-annual or annual checks sent from your
account directly to you, to a person named by you, or to your bank
checking account. The required minimum withdrawal is $25. If you are
having checks sent to your bank checking account, attach a voided
personal check with your bank's magnetic coding number across the front
of the account application. If your account is jointly owned, be sure
that all owners sign the application. You may obtain information about
the Systematic Withdrawal Plan by contacting your Investment
Professional. Your Systematic Withdrawal Plan payments are drawn from
share redemptions. If Systematic Withdrawal Plan redemptions exceed
dividend distributions paid on your Fund shares, your account
eventually may be exhausted. If any applicable sales charges are
applied to new purchases of shares of the Fund, it is to your
disadvantage to buy shares of the Fund while also making systematic
redemptions.
Your account will be debited on the date you indicate on your Account
Application. Shares will be redeemed at the NAV as determined on the debit date
indicated on your Account
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<PAGE> 235
Application. You may cancel the Systematic Withdrawal Plan at any time without
payment of a cancellation fee. Each Systematic Withdrawal Plan transaction will
appear as a debit entry on your monthly account statement.
- - RETIREMENT PLANS. Retirement plans can be among the best tax-planning vehicles
available to individuals. Call your Investment Professional for more information
on the plans and their benefits, provisions and fees. Your Investment
Professional can set up your new account in the Fund under one of several
tax-sheltered plans. These plans let you invest for retirement and shelter your
investment income from current taxes. Plans include Individual Retirement
Accounts (IRAs) and Rollover IRAs. Other fees may be charged by the IRA
custodian or trustee.
HOW TO REDEEM SHARES
You may redeem all or a portion of your shares on any day that the Fund is open
for business (see "Share Price" below). Shares will be redeemed at the NAV next
calculated after the Transfer Agent has received the redemption request. If the
Fund account is closed, any accrued dividends will be paid at the beginning of
the following month.
You may redeem shares in several ways:
BY MAIL: Send a written request to: The Victory Portfolios: Limited Term
Income Fund
P.O. Box 9741
Providence, RI 02940-9741
Write a "letter of instruction" with your name, the Fund's name, your Fund
account number, the dollar amount or number of shares to be redeemed, and any
additional requirements that apply to each particular account. You will need the
letter of instruction signed by all persons required to sign for transactions,
exactly as their names appear on the account application. A signature guarantee
is required if: you wish to redeem more than $10,000 worth of shares; your Fund
account registration has changed within the last 60 days; the check is not being
mailed to the address on your account; the check is not being made out to the
account owner; or the redemption proceeds are being transferred to another
Victory Group account with a different registration. The following institutions
should be able to provide you with a signature guarantee: banks, brokers,
dealers, credit unions (if authorized under state law), securities exchanges and
associations, clearing agencies, and savings associations. A signature guarantee
may not be provided by a notary public. A signature guarantee is designed to
protect you, the Fund, and its agents from fraud. The Transfer Agent reserves
the right to reject any signature guarantee if (1) it has reason to believe that
the signature is not genuine, (2) it has reason to believe that the transaction
would otherwise be improper, or (3) the guarantor institution is a broker or
dealer that is neither a member of a clearing corporation nor maintains net
capital of at least $100,000.
BY WIRE: You may make redemptions by wire provided you have established a Fund
account to accommodate wire transactions. If telephone instructions are received
before Valuation Time (generally 4:00 p.m. Eastern time), proceeds of the
redemption will be wired as federal funds on the next Business Day to the bank
account designated with the Transfer Agent. You may change the bank account
designated to receive an amount redeemed at any time by sending a letter of
instruction with a signature guarantee to the Transfer Agent, Primary Funds
Service Corporation, P.O. Box 9741, Providence, RI 02940-9741.
BY TELEPHONE: To redeem by telephone, you may call the Transfer Agent toll free
at 800-539-3863 or call your Investment Professional or bank trust department.
See "Shareholder Account Rules and Policies" for more information about
telephone transactions.
ADDITIONAL REDEMPTION REQUIREMENTS: The Fund may withhold payment on redemptions
until it is reasonably satisfied that investments made by check have been
collected, which can take up to 15 days. Also, when the NYSE is closed (or when
trading is restricted) for any reason other than its customary weekend or
holiday closings, or under any emergency circumstances as determined by the
Commission to merit such action, the right of redemption may be suspended or the
date of payment postponed for a period of time that may exceed 7 days. In
addition, the Fund reserves the right to advance the time on that day by which
purchase and redemption orders must be received. To the extent that portfolio
securities are traded in other markets on days when the NYSE is closed, the
Fund's NAV may be affected on days when investors do not have access to the Fund
to purchase or redeem shares.
If you are unable to reach the Transfer Agent by telephone (for example, during
times of unusual market activity), consider placing your order by mail directly
to the Transfer Agent. In case of suspension of the right of redemption, you may
either withdraw your
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request for redemption or receive payment based on the NAV next determined after
the termination of the suspension. If your balance in a Fund falls below $500,
you may be given 60 days' notice to reestablish the minimum balance (except with
respect to officers, trustees, directors and employees, including retired
directors and employees, of the Victory Portfolios, KeyCorp and its affiliates,
and the Administrator and its affiliates (and family members of each of the
foregoing, i.e., parents, children and household members) participating in the
Systematic Investment Plan, to whom no minimum balance requirement applies). If
you do not increase your balance, your account may be closed and the proceeds
mailed to you at the address on record. Shares will be redeemed at the last
calculated NAV on the day the account is closed.
HOW TO EXCHANGE SHARES
Shares of the Fund may be exchanged for shares of certain funds of the Victory
Group at net asset value per share at the time of exchange, without a sales
charge. To exchange shares, you must meet several conditions:
- - Shares of the fund selected for exchange must be available for sale in
your state of residence.
- - The prospectuses of this Fund and the fund whose shares you want to buy
must offer the exchange privilege.
- - You must hold the shares you buy when you establish your account for at
least 7 days before you can exchange them; after the account is open 7
days, you can exchange shares every regular Business Day.
- - You must meet the minimum purchase requirements for the fund you
purchase by exchange.
- - The registration and tax identification numbers of the two accounts
must be identical.
- - Before exchanging into a fund, obtain and read its prospectus.
Shares of a particular class may be exchanged only for shares of the same class
in the other funds of the Victory Group. For example, you can exchange shares of
this Fund only for Class A shares of another fund. At present, not all of the
funds offer the same two classes of shares. If a fund has only one class of
shares that does not have a class designation, they are "Class A" shares for
exchange purposes. In some cases, sales charges may be imposed on exchange
transactions. Certain funds offer Class A or Class B shares and a list can be
obtained by calling the Transfer Agent at 800-539-3863. Please refer to the
Statement of Additional Information for more details about this policy.
Telephone exchange requests may be made either by calling your Investment
Professional or the Transfer Agent at 800-539-3863 prior to valuation time
(generally 4:00 p.m. Eastern time) on any Business Day.
You can obtain a list of eligible funds of the Victory Group by calling the
Transfer Agent at 800-539-3863. Exchanges of shares involve a redemption of the
shares of the Fund and a purchase of shares of the other portfolio.
There are certain exchange policies you should be aware of:
- - Shares are normally redeemed from one fund and purchased from the other
fund in the exchange transaction on the same Business Day on which the
Transfer Agent receives an exchange request by Valuation Time
(generally 4:00 p.m. Eastern time) that is in proper form, but either
fund may delay the purchase of shares of the fund into which you are
exchanging if it determines it would be disadvantaged by a same-day
transfer of the proceeds to buy shares. For example, the receipt of
multiple exchange requests from a dealer in a "market-timing" strategy
might require the disposition of securities at a time or price
disadvantageous to the Fund.
- - Because excessive trading can hurt fund performance and harm
shareholders, the Victory Portfolios reserves the right to refuse any
exchange request that will disadvantage it, or to refuse multiple
exchange requests submitted by a shareholder or dealer.
- - The Fund may amend, suspend or terminate the exchange privilege at any
time upon 60 days' written notice to shareholders.
- - If the Transfer Agent cannot exchange all the shares you request
because of a restriction cited above, only the shares eligible for
exchange will be exchanged.
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<PAGE> 237
- - Each exchange may produce a gain or loss for tax purposes.
Shareholders of the former Investors Preference Fund for Income, Inc. and
Investors Preference New York Tax-Free Fund, Inc. will not be subject to any
additional sales load upon an exchange of shares attributable to an Investors
Preference Funds account for shares of other funds of the Victory Portfolios.
SHAREHOLDER ACCOUNT RULES AND POLICIES
- - NET ASSET VALUE PER SHARE. The term "net asset value per share," or
"NAV", means the value of one share. The NAV is calculated by adding
the value of all its investments, plus cash and other assets, deducting
liabilities, and then dividing the result by the number of shares
outstanding. The NAV of the Fund is determined and its shares are
priced as of the close of regular trading of the New York Stock
Exchange (NYSE), (generally 4:00 p.m. Eastern Time) (the "Valuation
Time") on each Business Day of the Fund. A "Business Day" is a day on
which the NYSE is open for trading, the Federal Reserve Bank of
Cleveland is open, and any other day (other than a day on which no
shares of the Fund are tendered for redemption and no order to purchase
any shares is received) during which there is sufficient trading in its
portfolio instruments that the Fund's net asset value per share might
be materially affected. The NYSE or the Federal Reserve Bank of
Cleveland will not be open in observance of the following holidays: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans' Day,
Thanksgiving Day, and Christmas Day.
The Fund's securities are valued primarily on the basis of market quotations or,
if quotations are not readily available, by a method that the Board of Trustees
believes accurately reflects fair value. Fair value of these portfolio
securities is determined by an independent pricing service approved by the
Trustees based primarily upon information concerning market transactions and
dealers quotations for similar securities.
- - THE OFFERING OF SHARES may be suspended during any period in which the
determination of net asset value is suspended, and the offering may be
suspended by the Trustees at any time the Trustees believe it is in the
Fund's best interest to do so.
- - TELEPHONE TRANSACTION PRIVILEGES for purchases, redemptions or
exchanges may be modified, suspended or terminated by the Fund at any
time. If an account has more than one owner, the Fund and the Transfer
Agent may rely on the instructions of any one owner. Telephone
privileges apply to each owner of the account and the dealer
representative of record for the account unless and until the Transfer
Agent receives cancellation instructions from an owner of the account.
- - TELEPHONE INSTRUCTIONS. Generally, neither the Fund, the bank trust
department nor the Transfer Agent will be responsible for any claims,
losses or expenses for acting on telephone instructions that they
reasonably believe to be genuine. The Transfer Agent and the Fund will
employ reasonable procedures to confirm that instructions communicated
by telephone are genuine and if they do not employ reasonable
procedures they may be liable for any losses due to unauthorized or
fraudulent instructions. The identification procedures may include, but
are not limited to, the following: account number, registration and
address, personalized security codes, taxpayer identification number
and other information particular to the account. Your Investment
Professional, bank trust department or the Transfer Agent may also
record calls, and you should verify the accuracy of your confirmation
statements immediately after you receive them.
- - REDEMPTION OR TRANSFER REQUESTS WILL NOT BE HONORED UNTIL THE TRANSFER
AGENT RECEIVES ALL REQUIRED DOCUMENTS IN PROPER FORM. From time to
time, the Transfer Agent in its discretion may waive certain of the
requirements for redemptions stated in this Prospectus.
- - DEALERS THAT CAN PERFORM ACCOUNT TRANSACTIONS FOR THEIR CLIENTS BY
PARTICIPATING IN NETWORKING through the National Securities Clearing
Corporation are responsible for obtaining their clients' permission to
perform those transactions and are responsible to their clients who are
shareholders of the Victory Portfolios if the dealer performs any
transaction erroneously.
- - THE REDEMPTION PRICE FOR SHARES WILL VARY from day to day because the
value of the securities in the Fund fluctuates, and the value of your
shares may be more or less than their original cost.
- - PAYMENT FOR REDEEMED SHARES is made ordinarily in cash and forwarded by
check within three business days after the Transfer Agent receives
redemption
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<PAGE> 238
instructions in proper form, except under unusual circumstances
determined by the Commission delaying or suspending such payments. The
Transfer Agent may delay forwarding a check for recently purchased
shares, but only until the purchase payment has cleared. That delay may
be as much as 15 days from the date the shares were purchased. That
delay may be avoided if you arrange with your bank to provide telephone
or written assurance to the Transfer Agent that your purchase payment
has cleared.
- - INVOLUNTARY REDEMPTIONS OF SMALL ACCOUNTS. If your account value has
fallen below $500, you will be given 60 days' notice to reestablish the
minimum balance. If you do not increase your minimum balance, your
account may be closed and the proceeds mailed to you at the record
address. In some cases involuntary redemptions may be made to repay the
Distributor for losses from the cancellation of share purchase orders.
Under unusual circumstances, shares of the Fund may be redeemed "in
kind," which means that the redemption proceeds will be paid with
securities from the Fund. Please refer to the Statement of Additional
Information for more details.
- - "BACKUP WITHHOLDING" of Federal income tax may be applied at the rate
of 31% from dividends, distributions and redemption proceeds (including
exchanges) if you fail to furnish the Victory Portfolios with a
certified Social Security or taxpayer identification number when you
sign your application, or if you violate Internal Revenue Service
regulations on tax reporting of dividends.
- - THE VICTORY PORTFOLIOS DOES NOT CHARGE A REDEMPTION FEE, but if your
Investment Professional handles your redemption, they may charge a
separate service fee.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS. The Fund ordinarily declares and pays dividends from its net
investment income monthly. The Fund distributes substantially all net capital
gains, if any, to shareholders each year, to the extent necessary to qualify for
favorable federal tax treatment.
CAPITAL GAINS. The Fund may make distributions annually out of any net
short-term or long-term capital gains, and the Fund may make supplemental
distributions of dividends and capital gains following the end of its fiscal
year.
DISTRIBUTION OPTIONS
When you fill out your account application, you can specify how you want to
receive your dividend distributions. Currently, there are five available
options:
1. REINVESTMENT OPTION. Your income and capital gain dividends, if any,
will be automatically reinvested in additional shares of the Fund.
Income and capital gain dividends will be reinvested at the net asset
value of the Fund as of the day after the record date. If you do not
indicate a choice on your application, you will be assigned this
option.
2. CASH OPTION. You will receive a check for each income or capital gain
dividend, if any. Distribution checks will be mailed no later than 7
days after the dividend payment date which may be more than 7 days
after the dividend record date.
3. INCOME EARNED OPTION. You will have your capital gain dividend
distributions, if any, reinvested automatically in the Fund and have
your income dividends paid in cash.
4. DIRECTED DIVIDENDS OPTION. You will have income and capital gain
dividends, or only capital gain dividends, automatically reinvested in
shares of another fund of the Victory Group. Shares will be purchased
at the NAV as of the dividend record date. If you are reinvesting
dividends of a fund sold without a sales charge in shares of a fund
sold with a sales charge, the shares will be purchased at the public
offering price. If you are reinvesting dividends of a fund sold with a
sales charge in shares of a fund sold with or without a sales charge,
the shares will be purchased at the net asset value of the fund.
Dividend distributions can be directed only to an existing account with
a registration that is identical to that of your Fund account.
5. DIRECTED BANK ACCOUNT OPTION. You will have your income and capital
gain dividends, or only your income dividends, automatically
transferred to your bank checking or savings account. The amount will
be determined on the dividend record date and will normally be
transferred to your account within 7 days of the dividend record date.
Dividend distributions can be directed only to an existing account
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<PAGE> 239
with a registration that is identical to that of your Fund account.
Please call or write the Transfer Agent to learn more about this
dividend distribution option.
Any election or revocation of any of the above dividend distribution options may
be made in writing to the Fund and sent to Primary Funds Service Corporation,
P.O. Box 9741, Providence, RI 02940-9741, or by calling the Transfer Agent at
800-539-3863, and will become effective with respect to dividends having record
dates after receipt of the application or request by the Transfer Agent.
Reinvested dividend distributions receive the same tax treatment as dividend
distributions paid in cash.
COMPLETE REDEMPTIONS: If you request a complete redemption of all your Fund
shares, any dividend accrued to your account will be included in the redemption
check.
STATEMENTS AND REPORTS: You will receive a monthly statement reflecting all
transactions that affect the share balance or the registration of your Fund
account. You will receive a confirmation after every transaction that affected
the share balance of your Fund account, except for dividend reinvestment,
systematic investment and systematic withdrawal transactions. These transactions
will be detailed in your Fund account statement. Transactions that affect the
share balance of your Fund investment in an account established with an
Investment Professional or financial institution will be detailed in regular
statements or through confirmation procedures of the financial institution.
Certificates representing shares of the Fund will not be issued. An IRS Form
1099-DIV with federal tax information will be mailed to you by January 31 of
each tax year and also will be filed with the IRS. At least twice a year, you
will receive the Fund's financial reports.
FEDERAL TAXES
The Fund intends to qualify each year and elect to be treated as a separate
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "IRS Code"). If the Fund is treated as a "regulated
investment company" and all its taxable income is distributed to its
shareholders in accordance with the timing requirements imposed by the IRS Code,
it will not be subject to federal income tax on its income. The Fund's
distributions that are attributable to its net investment income and short-term
capital gains are taxable as ordinary income, and its distributions from
long-term capital gains are taxed as long-term capital gains. Such distributions
are taxable when they are paid, whether taken in cash or reinvested in
additional shares, except that distributions declared in October, November or
December and paid during the following January are taxable as if paid and
received on December 31. Dividends received from the Fund by corporate
shareholders are not entitled to the dividends-received deduction. The Fund
sends tax statements to its shareholders (with copies to the Internal Revenue
Service (the "IRS")) by January 31 showing the amounts and tax status of
distributions made (or deemed made) during the preceding calendar year.
Income received by direct holders of obligations of the U.S. Government and
certain of its agencies and instrumentalities is exempt from state and local
income taxation. The Fund's dividends from investment income may, to the extent
that such dividends consist of interest from obligations of the U.S. Government
and certain of its agencies and instrumentalities, also be exempt from state and
local income taxes. The Fund intends to advise shareholders of the proportion of
their dividends which consist of such interest. Shareholders are urged to
consult their tax advisers regarding the possible exclusion of a portion of
their dividends for state and local income tax purposes in their respective
jurisdictions.
REDEMPTION OR EXCHANGES
Investors may realize a gain or loss when redeeming (selling) or exchanging
shares. For most types of accounts, the Fund reports the proceeds to the IRS
annually. Because the shareholders' tax treatment also depends on their purchase
price and personal tax positions, shareholders should keep their regular account
statements to use in determining their tax. See "Buying a Dividend".
"BUYING A DIVIDEND"
On the record date for a distribution of ordinary income or capital gains
dividend, the net asset value of the Fund is reduced by the amount of the
distribution. An investor who buys shares just before the record date ("buying a
dividend") will pay the full price for the shares and then receive a portion of
the purchase price back as a taxable distribution.
OTHER TAX INFORMATION
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<PAGE> 240
The information above is only a summary of some of the federal income tax
consequences generally affecting the Fund and its shareholders, and no attempt
has been made to discuss individual tax consequences. A prospective investor
should also review the more detailed discussion of federal income tax
considerations in the Statement of Additional Information. In addition to
federal income tax, a shareholder may be subject to state or local taxes on the
shareholder's investment, depending on the laws in the shareholder's area.
Investors considering an investment in the Fund should consult their tax adviser
to determine whether the Fund is suitable to their particular tax situation.
When investors sign their account application, they are asked to provide their
correct social security or taxpayer identification number and other required
certifications. If investors do not comply with IRS regulations, the IRS can
require the Fund to withhold 31% of taxable distributions and redemptions from
their account.
PERFORMANCE
From time to time, performance information for the Fund showing total return may
be presented in advertisements, sales literature and in reports to shareholders.
Such performance figures are based on historical earnings and are not intended
to indicate future performance. Average annual total return will be calculated
over a stated period of more than one year. Average annual total return is
measured by comparing the value of an investment at the beginning of the
relevant period (as adjusted for sales charges, if any) to the redemption value
of the investment at the end of the period (assuming immediate reinvestment of
any dividends or capital gains distributions) and annualizing that figure.
Aggregate total return is calculated similarly to average annual total return,
except that the resulting difference is not annualized.
From time to time performance information for the Fund showing the yield and/or
effective yield for each class of shares may also be presented in
advertisements, sales literature and in reports to shareholders. Yields reflect
the deduction of the maximum sales charge. Such performance figures are based on
historical earnings and are not intended to indicate future performance. Yield
will be computed by dividing the Fund's net investment income per share earned
during a recent thirty-day period by the Fund's maximum offering price per share
(reduced by any undeclared earned income expected to be paid shortly as a
dividend) on the last day of the period and annualizing the result. Effective
yield is computed in a similar manner, but, when annualized, the income earned
by an investment in the Fund is assumed to be reinvested. The effective yield
will be slightly higher than the yield because of the compounding effect of this
assumed reinvestment.
Investors may also judge, and the Victory Portfolios may at times advertise, the
performance of the Fund by comparing it to the performance of other mutual funds
with comparable investment objectives and policies, which performance may be
contained in various unmanaged mutual fund or market indices or rankings such as
those prepared by Dow Jones & Co., Inc. and Standard & Poor's Corporation, in
publications issued by Lipper Analytical Services, Inc., and in the following
publications: IBC/Donoghue's Money Fund Reports, Ibbotson Associates, Inc.,
Morningstar, CDA/Wiesenberger, Money Magazine, Forbes, Barron's, The Wall Street
Journal, The New York Times, Business Week, American Banker, Fortune,
Institutional Investor, U.S.A. Today and local newspapers. In addition, general
information about the Fund that appears in publications such as those mentioned
above may also be quoted or reproduced in advertisements, sales literature or in
reports to shareholders.
Performance is a function of the type and quality of instruments held in the
Fund's portfolio, operating expenses, and market conditions. Consequently,
current performance will fluctuate and is not necessarily representative of
future results. Any fees charged by service providers with respect to customer
accounts for investing in shares of the Fund will not be reflected in
performance calculations.
Additional information regarding the performance of each of the Victory
Portfolios is included in the Victory Portfolios' annual report, which is
available free of charge by calling 800-539-3863.
FUND ORGANIZATION AND FEES
The Victory Portfolios is an open-end management investment company, commonly
known as a mutual fund, and currently consisting of twenty-eight series
portfolios, four of which are inactive. The Victory Portfolios has been
operating continuously since 1986, when it was created under Massachusetts law
as a Massachusetts business trust, although certain of its funds have a prior
operating history from their predecessor funds. On or about February 29, 1996,
contingent upon shareholder approval, the Victory Portfolios will convert from a
Massachusetts business trust to a Delaware business trust. The Victory
Portfolios' offices are located at 3435 Stelzer Road, Columbus, OH 43219-3035.
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<PAGE> 241
Overall responsibility for management of the Victory Portfolios rests with its
Board of Trustees, who are elected by the shareholders of the Victory
Portfolios.
INVESTMENT ADVISER AND SUB-ADVISER
Key Advisers is the investment adviser to the Fund. Key Advisers directs the
investment of the Victory Portfolios' assets, subject at all times to the
supervision of the Victory Portfolios' Board of Trustees. Key Advisers
continually supervises the investment and reinvestment of cash, securities and
other property comprising the assets of the Victory Portfolios.
Key Advisers was organized as an Ohio corporation on July 27, 1995 and is
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended. It is a wholly-owned subsidiary of KeyCorp Asset Management
Holdings, Inc., which is a wholly-owned subsidiary of Society National Bank, a
wholly-owned subsidiary of KeyCorp. Affiliates of Key Advisers manage
approximately $37 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals and mutual funds.
For the services provided and expenses incurred pursuant to its investment
advisory agreement with the Victory Portfolios respecting the Fund, Key Advisers
receives a fee, computed daily and paid monthly, at the annual rate of fifty
one-hundredths of one percent (.50%) of the average daily net assets of the
Fund. The advisory fees for the Fund have been determined to be fair and
reasonable in light of the services provided to the Fund. Key Advisers may
periodically waive all or a portion of its advisory fee with respect to the Fund
to increase the net income of the Fund available for distribution as dividends.
Prior to January 1, 1996, the Sub-Adviser (Society Asset Management, Inc.)
served as investment adviser to the Fund. During the Fund's fiscal year ended
October 31, 1995, Society Asset Management, Inc. received investment advisory
fees aggregating .__% of the average daily net assets of the Fund.
Under the investment advisory agreement between the Victory Portfolios, on
behalf of the Fund, and Key Advisers, Key Advisers may delegate a portion of its
responsibilities to a subadviser. In addition, the investment advisory agreement
provides that Key Advisers may render services through its own employees or the
employees of one or more affiliated companies that are qualified to act as an
investment adviser of the Fund and are under the common control of KeyCorp as
long as all such persons are functioning as part of an organized group of
persons, managed by authorized officers of Key Advisers.
Key Advisers has entered into an investment sub-advisory agreement with its
affiliate, Society Asset Management, Inc. a registered investment adviser, on
behalf of the Fund. The Sub-Adviser is a wholly-owned subsidiary of KeyCorp
Asset Management Holdings, Inc. For its services under the investment
subadvisory agreement, Key Advisers pays the Sub-Adviser sub-advisory fees at an
annual rate as a percentage of the Fund's average daily net assets as follows:
.40% of the first $10 million of average daily net assets; .30% of the next $15
million of average daily net assets; .25% of the next $25 million of average
daily net assets; and .20% of average daily net assets in excess of $50 million.
The person primarily responsible for the investment management of the Fund, as
well as his previous experience, is as follows:
<TABLE>
<CAPTION>
MANAGING
PORTFOLIO MANAGER PORTFOLIO SINCE PREVIOUS EXPERIENCE
----------------- --------------- -------------------
<S> <C> <C>
Robert E. Fernald January, 1995 Portfolio Manager for
Society Asset
Management, Inc.,
beginning in 1993 and
Society National Bank
since 1992; portfolio
manager for Ameritrust
Company National
Association 1991-1992;
formerly Vice
President of Fairfield
Research Corporation.
</TABLE>
ADMINISTRATOR AND DISTRIBUTOR
Concord Holding Corporation is the Administrator for the Fund. Victory
Broker-Dealer Services, Inc. is the Fund's principal underwriter and
Distributor.
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<PAGE> 242
The Administrator generally assists in all aspects of the Fund's administration
and operation. For expenses incurred and services provided as Administrator
pursuant to its management and administration agreement with the Victory
Portfolios, the Administrator receives a fee from the Fund, computed daily and
paid monthly, at an annual rate of fifteen one-hundredths of one percent (.15%)
of the Fund's average daily net assets. The Administrator may periodically waive
all or a portion of its administrative fee with respect to the Fund to increase
the net income of the Fund available for distribution as dividends. During the
fiscal year ended October 31, 1995, the Fund paid administration fees of .15% of
its average daily net assets.
TRANSFER AGENT AND FUND ACCOUNTANT
Primary Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741,
serves as the Fund's Transfer Agent pursuant to a Transfer Agency and
Shareholder Service Agreement with the Victory Portfolios and receives a fee for
such services based on various criteria, including assets, transactions and the
number of accounts. BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus,
OH 43219, provides certain accounting services for the Fund pursuant to a Fund
Accounting Agreement and receives a fee for such services.
SHAREHOLDER SERVICING
Shareholder services are provided to the Fund pursuant to agreements between the
Victory Portfolios and various shareholder servicing agents, including Key Trust
Company of Ohio, N.A. and its affiliates and other financial institutions and
securities brokers (each a "Shareholder Servicing Agent"). Each Shareholder
Servicing Agent generally will provide support services to shareholders by
establishing and maintaining accounts and records, processing dividend and
distribution payments, providing account information, arranging for bank wires,
responding to routine inquires, forwarding shareholder communication, assisting
in the processing of purchase, exchange and redemption requests, and assisting
shareholders in changing dividend options, account designations and addresses.
For expenses incurred and services provided as Shareholder Servicing Agent
pursuant to its respective Shareholder Servicing Agreement, the Fund pays each
Shareholder Servicing Agent a fee computed daily and paid monthly, in amounts
aggregating not more than twenty-five one-hundredths of one percent (.25%) of
the average daily net assets of the Fund per year. A Shareholder Servicing Agent
may periodically waive all or a portion of its respective shareholder servicing
fees with respect to the Fund to increase the net income of the Fund available
for distribution as dividends. During the fiscal year ended October 31, 1995,
the Fund paid shareholder servicing fees of % of the Fund's average daily net
assets.
EFFECT OF BANKING LAWS
Key Advisers and the Sub-Adviser believe that they may perform the investment
advisory services for the Fund contemplated by the Investment Advisory (and
Sub-Advisory) Agreements for the Fund (the "Advisory Agreements"). In the
Advisory Agreement, Key Advisers and the Sub-Adviser have represented that they
possess the legal authority to perform the investment advisory services
contemplated therein and described in this Prospectus. Key Trust Company of
Ohio, N.A. and its affiliates also believe that they also may perform the
services for the Victory Portfolios contemplated by the Shareholder Servicing
Agreement with the Victory Portfolios without violating applicable banking laws
and regulations. Future changes in federal or state statutes and regulations
relating to permissible activities of banks or bank holding companies and their
subsidiaries and affiliates, as well as further judicial or administrative
decisions or interpretations of present and future statutes and regulations,
could change the manner in which Key Advisers, the Sub-Adviser, Key Trust
Company of Ohio, N.A. and its affiliates could continue to perform such services
for the Victory Portfolios. See the Statement of Additional Information
("Glass-Steagall Act") for further discussion.
BUSINESS MANAGEMENT AGREEMENT
In connection with its obligations under its investment sub-advisory agreement
with Key Advisers, the Sub-Adviser has entered into a Business Management
Agreement with Key Advisers pursuant to which Key Advisers provides certain
administrative and support services to the Sub-Adviser. Such services include
preparing reports to the Company's Board of Trustees, recordkeeping services,
and services rendered in connection with the preparation of regulatory filings
and other reports, and regulatory and compliance systems and other
administrative and support services.
For such services, the Sub-Adviser pays fees to Key Advisers at an annual rate
as follows: .25% on the first $10 million of average daily net assets; .15% of
the next $15 million of average daily net assets ; .10% of the next $25 million
of average daily net assets; and .05% of average daily net assets in excess of
$50 million.
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<PAGE> 243
EXPENSES
For the fiscal year ended October 31, 1995, the Fund's total operating expenses
were .__% of the Fund's average net assets.
CUSTODIAN
Key Trust Company of Ohio, N.A. serves as custodian for the Fund and receives
fees for its services.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. serves as the Fund's independent accountants.
ADDITIONAL INFORMATION
The Victory Portfolios may issue an unlimited number of shares and classes of
the Fund. Shares of each class of the Fund participate equally in dividends and
distributions and have equal voting, liquidation and other rights. When issued
and paid for, shares will be fully paid and nonassessable by the Victory
Portfolios and will have no preference, conversion, exchange or preemptive
rights. Shareholders are entitled to one vote for each full share owned and
fractional votes for fractional shares owned. For those investors with qualified
trust accounts established with affiliates of the Adviser, the trustee will vote
the shares at meetings of the Fund's shareholders in accordance with the
shareholder's instructions or will vote in the same percentage as shares that
are not held in trust. The trustee will forward to these shareholders all
communications received by the trustee, including proxy statements and financial
reports. The Victory Portfolios and the Fund are not required to hold annual
meetings of shareholders and in ordinary circumstances do not intend to hold
such meetings. The Trustees may call special meetings of shareholders for action
by shareholder vote as may be required by the 1940 Act or the Victory
Portfolios' Delaware Trust Instrument. Under certain circumstances, the Trustees
may be removed by action of the Trustees or by the shareholders. Shareholders
holding 10% or more of the Victory Portfolios' outstanding shares may call a
special meeting of shareholders for the purpose of voting upon the question of
removal of Trustees.
The Victory Portfolio's Board of Trustees may authorize the Victory Portfolios
to offer other funds which may differ in the types of securities in which their
assets may be invested.
Key Advisers, the Sub-Adviser and the Victory Portfolios have adopted Codes of
Ethics (the "Codes") which require investment personnel (a) to pre-clear all
personal securities transactions, (b) to file reports regarding such
transactions, and (c) to refrain from personally engaging in (i) short-term
trading of a security, (ii) transactions involving a security within seven days
of a Victory fund transaction involving the same security, and (iii)
transactions involving securities being considered for investment by a Victory
fund. The Codes also prohibit investment personnel from purchasing securities in
an initial public offering. Personal trading reports are reviewed periodically
by Key Advisers or the Sub-Adviser, and the Board of Trustees reviews annually
such reports (including information on any substantial violations of the Codes).
Violations of the Codes may result in censure, monetary penalties, suspension or
termination of employment.
DELAWARE LAW
The Delaware Business Trust Act provides that a shareholder of a Delaware
business trust shall be entitled to the same limitation of personal liability
extended to stockholders of Delaware corporations, and the Victory Portfolios'
Delaware Trust Instrument provides that shareholders will not be liable for
obligations of the Victory Portfolios. In light of Delaware law, the nature of
the Victory Portfolios' business, and the nature of its assets, management of
the Victory Portfolios believes that the risk of personal liability to a Fund
shareholder would be extremely remote.
In the unlikely event a shareholder is held personally liable for the Victory
Portfolios' obligations, the Victory Portfolios is required to use its property
to protect or compensate the shareholder. On request, the Victory Portfolios
will defend any claim made and pay any judgment against a shareholder for any
act or obligation of the Victory Portfolios. Therefore, financial loss resulting
from liability as a shareholder will occur only if the Victory Portfolios itself
cannot meet its obligations to indemnify shareholders and pay judgments against
them.
Delaware law authorizes electronic or telephonic communications between
shareholders and the Victory Portfolios. Under Delaware law, the Successor
Company has the flexibility to respond to future business contingencies. For
example, the Trustees will have the
-23-
<PAGE> 244
power to incorporate the Victory Portfolios, to merge or consolidate it with
another entity, to cause each fund to become a separate vote. This flexibility
could help reduce the expense and frequency of future shareholder meetings for
non-investment related issues.
MISCELLANEOUS
Shareholders will receive Semi-Annual Reports, which are unaudited, and Annual
Reports, which are audited by independent public accountants, describing the
investment operations of the Victory Portfolios. Each of these reports, when
available for a particular fiscal year end or half-year end, is incorporated
herein by reference. The Victory Portfolios may include information in their
Annual Reports and Semi-Annual Reports to shareholders that (i) describes
general economic trends, (ii) describes general trends within the financial
services industry or the mutual fund industry, (iii) describes past or
anticipated portfolio holdings for the Fund or (iv) describes investment
management strategies for the Victory Portfolios. Such information is provided
to inform shareholders of the activities of the Victory Portfolios for the most
recent fiscal year or half-year and to provide the views of Key Advisers, the
Sub-Adviser and/or the Victory Portfolios' officers regarding expected trends
and strategies.
Inquiries regarding the Victory Portfolios or the Fund may be directed in
writing to the Victory Portfolios at Primary Funds Service Corporation, P.O.
Box 9741, Providence, RI 02940-9741, or by telephone, toll-free, at
800-539-3863.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE VICTORY
PORTFOLIOS OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING
BY THE VICTORY PORTFOLIOS OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-24-
<PAGE> 245
The
VICTORY
Portfolios
NATIONAL MUNICIPAL BOND FUND
PROSPECTUS For current yield, purchase, and redemption information,
March 1, 1996 call 800-539-FUND or 800-539-3863
THE VICTORY PORTFOLIOS (the "Victory Portfolios") is a registered open-end
management investment company that offers investors a selection of money market,
fixed-income, municipal bond, domestic and international equity portfolios. This
Prospectus relates to the Victory National Municipal Bond Fund (the "Fund"), a
non-diversified portfolio. KeyCorp Mutual Fund Advisers, Inc., Cleveland, Ohio,
an indirect subsidiary of KeyCorp, is the investment adviser to the Fund ("Key
Advisers" or the "Adviser"). Society Asset Management, Inc., Cleveland, Ohio, an
indirect subsidiary of KeyCorp, is the investment sub-adviser to the Fund (the
"Sub-Adviser" or "Society"). Concord Holding Corporation is the Fund's
administrator (the "Administrator"). Victory Broker-Dealer Services, Inc. is the
Fund's distributor (the "Distributor").
The Fund seeks to provide a high level of current interest income exempt from
federal income tax, as is consistent with the preservation of capital. The Fund
invests primarily in municipal bonds of varying maturities issued by or on
behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies, authorities and
instrumentalities, the interest from which, in the opinion of bond counsel for
the issuer, is exempt from federal income tax.
The Fund offers two classes of shares: (i) Class A shares, which are offered at
net asset value plus the applicable sales charge (maximum of 4.75% of public
offering price) and (ii) Class B shares, which are offered at net asset value
with a maximum contingent deferred sales charge ("CDSC") of 5.0% imposed on
certain redemptions. At the end of the sixth year after a purchase of Class B
shares, the CDSC will no longer apply to redemptions. Class B shares have higher
ongoing expenses than Class A shares, but automatically convert to Class A
shares eight years after purchase.
Please read this Prospectus before investing. It is designed to provide you with
information and to help you decide if the Fund's goals match your own. Retain
this document for future reference. A Statement of Additional Information (dated
March 1, 1996) for the Fund and an audited report for the Fund's fiscal period
ended October 31, 1995 have been filed with the Securities and Exchange
Commission and are incorporated herein by reference. The Statement of Additional
Information is available without charge upon request by calling 800-539-3863.
SHARES OF THE FUND ARE:
- - NOT INSURED BY THE FDIC;
- - NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY KEYCORP
BANK, ANY OF ITS AFFILIATES, OR ANY OTHER BANK;
- - SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("COMMISSION"), OR ANY SECURITIES REGULATORY AUTHORITY OF
ANY STATE, NOR HAS THE COMMISSION OR ANY SUCH STATE AUTHORITY PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
- ------------------ ----
<S> <C>
Summary of Fund Expenses 2
Financial Highlights 3
Investment Objective and Policies 3
</TABLE>
2
<PAGE> 246
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
- ------------------ ----
<S> <C>
Suitability 4
Additional Information Regarding Securities in Which the Fund May Invest 5
Limiting Investment Risks 6
Portfolio Management 7
How to Invest, Exchange and Redeem 7
Dividends, Distributions and Taxes 16
Performance 18
Fund Organization and Fees 19
Additional Information 21
</TABLE>
3
<PAGE> 247
SUMMARY OF FUND EXPENSES
The table below summarizes the expenses associated with the Fund. This standard
format was developed for use by all mutual funds to help you make your
investment decisions. Of course, you should consider this expense information
along with other important information in the Prospectus, including the Fund's
investment objective, investment policies and risk factors, and financial
highlights.
SHAREHOLDER TRANSACTION EXPENSES(1). These represent charges paid when you
purchase, redeem or exchange shares of the Fund. See "How to Invest, Exchange
and Redeem".
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of the offering price) 4.75% none
Sales Load Imposed on Reinvested Dividends none none
Deferred Sales Load none 5% in the first year,
declining to 1% in the sixth
year and eliminated
thereafter
Redemption Fee none none
Exchange Fee none none
</TABLE>
ANNUAL FUND OPERATING EXPENSES AFTER EXPENSE WAIVERS AND REIMBURSEMENTS.
<TABLE>
<CAPTION>
(AS A PERCENTAGE OF AVERAGE NET ASSETS) CLASS A CLASS B
--------------------------------------- ------- -------
<S> <C> <C>
Management Fees(2) 0.00% 0.00%
Administration Fees(2) 0.00% 0.00%
Rule 12b-1 Distribution Fee 0.00% 0.75%
Other Expenses(3) 0.00% 0.25%
---- ----
Total Fund Operating Expenses(3) 0.00% 1.00%
==== ====
</TABLE>
(1) Subsidiaries, correspondents, affiliated banks and unaffiliated banks
of KeyCorp may charge a customer's account fee for services provided in
connection with investment in the Fund. (See "How to Invest, Exchange
and Redeem" in the Prospectus.)
(2) Key Advisers has agreed to reduce its fees to the extent necessary so
that total operating expenses do not exceed 2.08% for Class A shares
and 2.83% for Class B shares until at least [February 28, 1996]. Absent
the voluntary reduction of investment advisory and administration fees,
"Management Fees" and "Administration Fees" as a percentage of average
daily net assets would be .55% and .15%, respectively.
(3) These amounts include an estimate of the shareholder servicing fees the
Fund expects to pay. (See "Fund Organization and Fees--Shareholder
Servicing"). If the voluntary fee reductions and reimbursements
referred to in footnote (2) above were not in effect, "Total Fund
Operating Expenses" as a percentage of average daily net assets would
be .70% for Class A shares and 1.70% for Class B shares.
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return and (2) full redemption at the end of each time period:
4
<PAGE> 248
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
National Municipal Bond Fund Class A $48 $48 $48 $48
National Municipal Bond Fund Class B $60 $62 $75 $94
</TABLE>
The purpose of the table above is to assist an investor in understanding the
various costs and expenses that an investor in the Fund will bear directly and
indirectly. See "Fund Organization and Fees" for a more complete discussion of
annual operating expenses of the Fund. The foregoing example is based upon
expenses for the fiscal period ended October 31, 1995 and expenses that the Fund
is expected to incur during the current fiscal year. THE FOREGOING EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES, SINCE
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
- ------------------------
*
Includes expenses for Class A shares during years 9 and 10 due to conversion
to Class A shares after 8 years.
FINANCIAL HIGHLIGHTS
The information in the table below relates to the Fund and to its predecessor, a
portfolio of The Victory Funds (the "Predecessor Fund"), and has been audited by
Coopers & Lybrand LLP (for the fiscal period ended October 31, 1995) and by KPMG
Peat Marwick LLP (for earlier periods), respectively, as auditors, whose reports
thereon, together with the financial statements of the Fund and the Predecessor
Fund together with related notes are incorporated by reference into or contained
in the Statement of Additional Information. No Class B shares were publicly
issued prior to September 26, 1994, and therefore no information on Class B
shares is reflected in the table below for periods prior to September 26, 1994.
SELECTED PER SHARE DATA
<TABLE>
<CAPTION>
CLASS B
-------
PERIOD FROM
SEPTEMBER 26,
FISCAL PERIOD 1994** TO
ENDED OCTOBER 31, APRIL 30,
1995*** 1995
---- ----
<S> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.53
-------
INCOME FROM INVESTMENT OPERATIONS: [To be inserted]
Net investment income(1) 0.28
Net realized and unrealized loss
on investments 0.03
-------
Total from investment
activities 0.31
-------
DISTRIBUTIONS:
Net investment income (0.27)
In excess of net investment
income --
Total distributions (0.27)
-------
NET ASSET VALUE, END OF PERIOD $ 9.59
=======
TOTAL RETURN+ 3.54 %
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period
(thousands) $ 147
Ratio of expenses to average net
assets(1) (.05)%*
Ratio of net investment income to
average net assets 4.35 %*
Portfolio turnover rate 52 %*
</TABLE>
5
<PAGE> 249
<TABLE>
<CAPTION>
CLASS A
-------
PERIOD FROM
FEBRUARY 3,
FISCAL PERIOD YEAR ENDED 1994** TO
ENDED APRIL 30, APRIL 30,
OCTOBER 31, 1995 1995*** 1994
---------------- ---------- -----------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD [To $ 9.64 $10.00
------ ------
Income from investment operations:
Net investment income(1) be 0.44 0.08
Net realized and unrealized loss
on investments inserted] (0.05) (0.36)
------ ------
Total from investment
activities 0.39 (0.28)
------ ------
Distributions:
Net investment income (0.44) (0.08)
In excess of net investment
income -- --
------ ------
Total distributions (0.44) (0.08)
------ ------
NET ASSET VALUE, END OF PERIOD 9.59 $ 9.64
====== ======
Total Return+ 4.21% (2.82)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period
(thousands) $5,118 $ 494
Ratio of expenses to average net
assets(1) .20% 0.65 %*
Ratio of net investment income to
average net assets 5.01% 3.15 %*
Portfolio turnover rate 52% 13 %*
</TABLE>
(1) During the year ended April 30, 1995, expenses were voluntarily waived
by Key Trust Company, Society Asset Management, Inc. and Concord
Holding Corporation, in the amount of $0.33 and $(0.17) per share for
Class A shares and Class B shares, respectively. During the fiscal
period ended October 31, 1995, [To be inserted]. The ratio of expenses
to average net assets had such waiver not occurred is as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Ratio of expenses to average net assets ___% 2.63%* ___% 3.95% 26.10%*
</TABLE>
* Annualized.
** Commencement of operations.
*** The Fund's fiscal year end was changed to the period ending October 31
of each year.
+ Total return does not include the one time sales charge and for a
period of less than one year is not annualized. Total returns would
have been lower had certain expenses not been reduced during the
period.
6
<PAGE> 250
THE FUND'S INVESTMENT OBJECTIVE
The Fund seeks to provide as high a level of current interest income, exempt
from federal income taxes, as is consistent with the preservation of capital.
The investment objective of the Fund is fundamental and may not be changed
without a vote of the holders of a majority of its outstanding voting securities
(as defined in the Statement of Additional Information). There can be no
assurance that the Fund will achieve its investment objective.
INVESTMENT POLICIES OF THE FUND
The Fund pursues its objective by investing primarily in a portfolio of
municipal securities. Key Advisers and the Sub-Adviser anticipate that the Fund
ordinarily will be fully invested in obligations of municipalities whose
interest is exempt from federal income tax; under normal conditions, 80% or more
of its income distributions will be exempt from federal income taxes, including
the alternative minimum tax.
The Fund will invest in municipal securities judged by Key Advisers or the
Sub-Adviser to be the equivalent to those described by Standard & Poor's
Corporation ("S&P") and Moody's Investors Service, Inc. ("Moody's") as
characteristic of their ratings of A and above. The Fund may continue to hold up
to 5% of its total assets in municipal bonds which have been downgraded below an
A rating. For a description of S&P's and Moody's ratings of municipal
securities, see the Appendix to the Statement of Additional Information.
It is anticipated that the Fund normally will be invested in long-term municipal
bonds and that its dollar-weighted effective average maturity generally will
range from five to eleven years, although it may invest in obligations of any
maturity. If Key Advisers or the Sub-Adviser determines that market conditions
warrant a shorter or longer average maturity, the Fund will be adjusted
accordingly.
Municipal securities are issued to raise money for various public purposes,
including general purpose financing for state and local governments as well as
financing for specific projects or public facilities. Municipal securities may
be backed by the full taxing power of a state or municipality (general
obligation bonds), or may be backed only by the revenues from a specific tax,
project or facility (revenue bonds). Some municipal securities are insured by
private insurance companies, while others may be supported by letters of credit
furnished by domestic or foreign banks. Key Advisers or the Sub-Adviser monitors
the financial condition of parties (including insurance companies, banks, and
corporations) whose creditworthiness is relied upon in determining the credit
quality of securities the Fund may purchase.
Generally, the Fund's investments in municipal securities may include fixed,
variable, or floating rate general obligation and revenue bonds (including
municipal lease obligations and resource recovery bonds); zero coupon; tax,
revenue, and bond anticipation notes; and tax-exempt commercial paper. The Fund
may buy or sell municipal securities on a when-issued or delayed-delivery basis
(including refunding contracts). See "Additional Information Regarding
Securities in Which the Fund May Invest" for further discussion of the Fund's
investments.
The Fund may temporarily change its investment focus for defensive purposes.
During periods when, in the opinion of Key Advisers or the Sub-Adviser, a
temporary defensive posture in the market is appropriate, the Fund may hold cash
that is not earning interest or invest in obligations of issuers whose interest
may be taxable at the state and/or federal level. The Fund may also invest in
short-term municipal obligations and money market instruments (including other
investment companies). Under such circumstances, the Fund may temporarily invest
so that less than 80% of its income distributions will be federally or state
tax-free. Federally taxable obligations include, but are not limited to,
obligations issued by the U.S. government or any of its agencies or
instrumentalities and repurchase agreements. The Fund does not intend to invest
in federally taxable obligations under normal conditions.
The investment policies of the Fund may be changed without an affirmative vote
of the holders of a majority of the Fund's outstanding voting securities unless
(1) a policy is expressly deemed to be a fundamental policy of the Fund or (2) a
policy is expressly deemed to be changeable only by such majority vote.
The Fund is advised by Key Advisers, an indirect subsidiary of KeyCorp, which
purchases securities for the Fund consistent with its investment objective and
policies and which meet the quality and maturity characteristics established for
the Fund.
7
<PAGE> 251
From time to time, the Fund, to the extent consistent with its investment
objective, policies and restrictions, may invest in securities of issuers with
which Key Advisers or the Sub-Adviser or its affiliates have a lending
relationship.
SUITABILITY
The Fund is designed for investors in higher tax brackets seeking income free
from federal income taxes. By itself, the Fund does not constitute a balanced
investment plan; the Fund stresses tax-exempt income. The Fund may be
appropriate for investors who seek the higher yields that longer-term bonds
generally provide and who realize that the Fund's share price will fluctuate.
The Fund's share price and its yield change daily based on many factors. Share
price volatility and investment return depend in part on interest rate changes.
The value of the Fund's shares will tend to decrease when interest rates rise
and increase when interest rates fall. Shorter-term obligations generally offer
greater stability and are less sensitive to interest rate changes, but
longer-term obligations generally offer higher yields.
The ability of the Fund to meet its investment objective is affected by the
ability of municipal issuers to meet their payment obligations.
The Fund's share price, yield, and total return will fluctuate, and your
investment may be worth more or less than your original cost when you redeem
your shares.
ADDITIONAL INFORMATION REGARDING SECURITIES IN WHICH THE FUND MAY INVEST
The following paragraphs provide a brief description of some of the types of
securities in which the Fund may invest, the transactions it may make and
strategies it may adopt. The Fund may, following notice to its shareholders,
take advantage of other investment practices which are not at present
contemplated for use by the Fund or which currently are not available but which
may be developed, to the extent such investment practices are both consistent
with the Fund's investment objective and legally permissible for the Fund. Such
investment practices, if they arise, may involve risks which exceed those
involved in the activities described in this Prospectus.
DELAYED-DELIVERY TRANSACTIONS. The Fund may buy and sell securities on a
when-issued or delayed-delivery basis, with payment and delivery taking place at
a future date. The market value of securities purchased in this way may change
before the delivery date, which could increase fluctuations in the Fund's yield.
Ordinarily, the Fund will not earn interest on securities purchased until they
are delivered.
A DEMAND FEATURE is a put that entitles the security holder to repayment of the
principal amount of the underlying security on no more than 30 days' notice at
any time or at specified intervals.
Issuers or financial intermediaries who provide demand features or standby
commitments often support their ability to buy securities on demand by obtaining
letters of credit (LOCs) or other guarantees from domestic or foreign banks.
LOCs also may be used as credit supports for other types of municipal
instruments. Key Advisers or the Sub-Adviser may rely upon its evaluation of a
bank's credit in determining whether to purchase an instrument supported by an
LOC. In evaluating a foreign bank's credit, Key Advisers or the Sub-Adviser will
consider whether adequate public information about the bank is available and
whether the bank may be subject to unfavorable political or economic
developments, currency controls, or other governmental restrictions that might
affect the bank's ability to honor its credit commitment.
MUNICIPAL LEASE OBLIGATIONS are issued by a state or local government or
authority to acquire land and a wide variety of equipment and facilities. These
obligations typically are not fully backed by the municipality's credit, and
their interest may become taxable if the lease is assigned. If funds are not
appropriated for the following year's lease payments, the lease may terminate,
with the possibility of default on the lease obligation and significant loss to
the Fund. Certificates of Participation in municipal lease obligations or
installment sales contracts entitle the holder to a proportionate interest in
the lease-purchase payments made.
INDUSTRIAL DEVELOPMENT BONDS are a type of revenue bond backed by the credit and
security of a private issuer and may involve greater risk.
8
<PAGE> 252
REFUNDING CONTRACTS. The Fund may purchase securities on a when-issued basis in
connection with the refinancing of an issuer's outstanding indebtedness.
Refunding contracts require the issuer to sell and the Fund to buy refunded
municipal obligations at a stated price and yield on a settlement date that may
be several months or several years in the future.
RESOURCE RECOVERY BONDS are a type of revenue bond issued to build facilities
such as solid waste incinerators or waste-to-energy plants. Typically, a private
corporation will be involved, at least during the construction phase, and the
revenue stream will be secured by fees or rents paid by municipalities for use
of the facilities. The viability of a resource recovery project, environmental
protection regulations, and project operator tax incentives may affect the value
and credit quality of resource recovery bonds.
TAX AND REVENUE ANTICIPATION NOTES are issued by municipalities in expectation
of future tax or other revenues, and are payable from those specific taxes or
revenues. BOND ANTICIPATION NOTES normally provide interim financing in advance
of an issue of bonds or notes, the proceeds of which are used to repay the
anticipation notes. TAX-EXEMPT COMMERCIAL PAPER is issued by municipalities to
help finance short-term capital or operating needs.
VARIABLE AND FLOATING RATE INSTRUMENTS, including certain participation
interests in municipal obligations, have interest rate adjustment formulas that
help to stabilize their market values. Many variable and floating rate
instruments also carry demand features that permit the Fund to sell them at par
value plus accrued interest on short notice. When determining the maturity of a
variable or floating rate instrument, the Fund may look to the date the demand
feature can be exercised, or to the date the interest rate is readjusted, rather
than to the final maturity of the instrument.
ZERO COUPON DEBT SECURITIES do not make regular interest payments. Instead they
are sold at a deep discount from their face value. In calculating its daily
dividend, the Fund takes into account as income a portion of the difference
between these securities' purchase prices and their face values. Because this
income must be taken into account prior to the receipt of any cash from such
securities, the Fund may be required to obtain cash from other sources, such as
the sale of obligations in its portfolio, in order to satisfy the distribution
requirements necessary for qualification as a regulated investment company under
the Internal Revenue Code. Because they do not pay current income, the prices of
zero coupon debt securities can be very volatile when interest rates change.
INVESTMENT COMPANY SECURITIES. The Fund may invest up to 5% of its total assets
in the securities of any one investment company, but may not own more than 3% of
the securities of any one investment company or invest more than 10% of its
total assets in the securities of other investment companies. Pursuant to an
exemptive order received by the Victory Portfolios from the Commission, the Fund
may invest in the money market funds of the Victory Portfolios. Key Advisers
and/or the Sub-Adviser will waive its investment advisory fee attributable to
the Fund's assets invested in a fund of the Victory Portfolios to the extent
such fees are duplicated. To the extent required by the laws of any state in
which shares of a fund of the Victory Portfolios are sold, Key Advisers and/or
the Sub-Advisor will waive its investment advisory fee as to all assets invested
in other investment companies. Because such other investment companies employ an
investment adviser, such investment by the Fund will cause shareholders to bear
duplicative fees, such as management fees, to the extent such fees are not
waived by Key Advisers and/or the Sub-Adviser. The Fund will invest only in the
securities of money market funds which invest only in securities of equal
ratings as the securities in which the Fund may invest.
LIMITING INVESTMENT RISKS
The following summarizes the Fund's principal investment limitations. A complete
listing is contained in the Statement of Additional Information.
1. To meet federal tax requirements for qualification as a "regulated
investment company," the Fund limits its investments so that at the
close of each quarter of its taxable year: (a) no more than 25% of
total assets are invested in the securities of a single issuer; and (b)
with regard to at least 50% of total assets, no more than 5% of total
assets are invested in the securities of a single issuer.
2. (a) The Fund may borrow money solely for temporary or emergency
purposes, but not in an amount exceeding 33 1/3% of its total assets.
(b) The Fund may borrow money from banks or by engaging in reverse
repurchase agreements. (c) The Fund will not purchase securities when
borrowings exceed 5% of its total assets. If the Fund borrows money,
its share price may be subject to greater fluctuation until the
borrowing is paid off. To this extent, purchasing securities when
borrowings are outstanding may involve an element of leverage.
9
<PAGE> 253
3. The Fund will not purchase a security if, as a result, more than 15% of
its net assets would be invested in illiquid securities. The Fund may
invest up to 15% of its net assets in illiquid investments (investments
that cannot be readily sold within seven days in the usual course of
business at approximately the price at which the Fund has valued them),
including restricted securities deemed to be illiquid. Under the
supervision of the Trustees, Key Advisers or the Sub-Adviser determines
the liquidity of the Fund's investments. The absence of a trading
market can make it difficult to ascertain a market value for illiquid
investments. Disposing of illiquid investments may involve
time-consuming negotiation and legal expenses, and it may be difficult
or impossible for the Fund to sell them promptly at an acceptable
price.
Except for the Fund's investment objective, the diversification limitation in 1,
and the percentage limitation on borrowing in limitation 2(a), the investment
policies described in this Prospectus are not fundamental. Non-fundamental
limitations may be changed without shareholder approval. Whenever an investment
policy or limitation states a maximum percentage of the Fund's assets that may
be invested, such percentage limitation will be determined immediately after and
as a result of the investment, except in the case of borrowing (or other
activities that may be deemed to result in the issuance of a "senior security"
under the 1940 Act). Any subsequent change in values, assets, or other
circumstances will not be considered when determining whether the investment
complies with the Fund's investment policies and limitations. If the value of
the Fund's holdings of illiquid securities at any time exceeds the percentage
limitation applicable at the time of acquisition due to subsequent fluctuations
in value or other reasons, the Board of Trustees will consider what actions, if
any, are appropriate to maintain adequate liquidity.
PORTFOLIO TRANSACTIONS
Brokerage firms are utilized to conduct securities transactions for the Fund.
Broker-dealers are chosen by judging professional ability and quality of
service. Municipal obligations are generally traded in the over-the-counter
market through broker-dealers. In the over-the-counter market, a securities
broker-dealer makes a market for securities by offering to buy at one price and
sell at a slightly higher price. The difference between the prices is known as a
spread. [Since Key Advisers or the Sub-Adviser trades a large number of
securities, broker-dealers are willing to work with the Fund on a more favorable
spread than would be possible for most individual investors.]
Key Advisers or the Sub-Adviser may allocate transactions to broker-dealers who
help distribute the Fund's shares or the shares of the other funds of the
Victory Portfolios, to the extent permitted by law. Key Advisers or the
Sub-Adviser will make such allocations only if brokerage fees are comparable to
those charged by non-affiliated, qualified broker-dealers for similar services.
Key Advisers or the Sub-Adviser may engage in short-term trading with respect to
the Fund when it believes it is consistent with the Fund's investment objective
and policies. Also, a security may be sold and another of comparable quality
simultaneously purchased to take advantage of what Key Advisers or the
Sub-Adviser believes to be a temporary disparity in the normal yield
relationship between the two securities. The frequency of portfolio
transactions--the Fund's turnover rate--will vary from year for to year
depending on market conditions. The portfolio turnover rates for the fiscal
period February 3, 1994 (commencement of operations) to October 31, 1994 and for
the fiscal year ended October 31, 1995 were 52% and ___% (each annualized),
respectively. The portfolio turnover rate is not expected to exceed 100%.
HOW TO INVEST, EXCHANGE AND REDEEM
HOW TO INVEST
The Fund offers investors two different classes of shares. The different classes
of shares represent investments in the same portfolio of securities but are
subject to different expenses and will likely have different share prices.
- - CLASS A SHARES. If you buy Class A shares, you pay an initial sales charge
(on investments up to $1 million).
- - CLASS B SHARES. If you buy Class B shares, you pay no sales charge at the time
of purchase, but if you sell your shares within six years, you will normally pay
a contingent deferred sales charge ("CDSC") that varies depending on how long
you own your shares.
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<PAGE> 254
- - WHICH CLASS OF SHARES SHOULD YOU CHOOSE? Once you decide that the Fund is an
appropriate investment for you, the decision as to which class of shares is
better suited to your needs depends on a number of factors which you should
discuss with your financial advisors:
- - Amount of investment. If you plan to invest a substantial amount, the reduced
sales charges available for larger purchases of Class A shares may be more
beneficial to you. Any order for $1 million or more on behalf of a single
investor will only be accepted for Class A shares for that reason.
- - Investment horizon. While future financial needs cannot be predicted with
certainty, investors who prefer not to pay an initial sales charge and who plan
to hold their shares for more than six years might consider Class B shares.
Investors who plan to redeem shares within eight years might prefer Class A
shares.
- - Differences in account features. The dividends payable to Class B shareholders
will be reduced by the additional expenses borne by that class, such as the
asset-based sales charge to which Class B shares are subject, as described below
and in the Statement of Additional Information.
- - Investment Professionals. A salesperson or any other person who is entitled to
receive compensation for selling Victory Portfolios shares may receive different
compensation for selling one class than for selling another class. The purpose
of both the CDSC (and asset-based sales charge) for Class B shares, and the
purpose of the front-end sales charge on sales of Class A shares is primarily to
compensate such sales persons.
- - HOW ARE SHARES PURCHASED? Shares may be purchased directly or through an
Investment Professional. Investment Professionals are securities brokers or
other financial institutions that have entered into selling or servicing
agreements with the Fund or the Distributor. Shares are also available to
clients of bank trust departments who have qualified trust accounts. The minimum
investment is $500 for the initial purchase and $25 thereafter. Accounts set up
through a bank trust department or an Investment Professional may be subject to
different minimums. When you buy shares, be sure to specify Class A or Class B
shares. If you do not make a selection, your investment will be made in Class A
shares.
- - Investing Through Your Investment Professional. Your Investment Professional
will place your order with the Transfer Agent on your behalf. You may be
required to establish a brokerage or agency account. Your Investment
Professional will notify you whether subsequent trades should be directed to the
Investment Professional or directly to the Fund's Transfer Agent. Accounts
established with Investment Professionals may have different features,
requirements and fees. In addition, Investment Professionals may charge for
their services. Information regarding these features, requirements and fees will
be provided by the Investment Professional. If you are purchasing shares of any
Fund through a program of services offered or administered by your Investment
Professional, you should read the program materials in conjunction with this
Prospectus.
- - Investing Through The Systematic Investment Plan. You can use the Systematic
Investment Plan to purchase shares directly from your bank account. Please
refer to "Systematic Investment Plan" below for more details.
- - Investing Through Your Bank Trust Department. Your bank trust department may
require a minimum investment and may charge additional fees. Fee schedules for
such accounts are available upon request and are detailed in the agreements by
which a client opens the desired account. Your bank trust department may require
a completed and signed application for the Fund in which an investment is made.
Additional documents may be required from corporations, associations, and
certain fiduciaries. Any account information, such as balances, should be
obtained through your bank trust department. Additional purchases, exchanges or
redemptions should also be coordinated through your bank trust department.
Contact your bank trust department for instructions.
The services rendered by a bank trust department, including affiliates of Key
Advisers or the Sub-Adviser, in the management of its accounts are not
duplicative of any of the services for which Key Advisers or the Sub-Adviser as
the investment adviser or sub-adviser, respectively, is compensated for advising
the Fund. The charges paid by clients of bank trust departments, or their
affiliates, should be considered in calculating the net yield and return on the
client's investments in the Fund, although such charges do not affect the Fund's
dividends and distributions.
INVESTING DIRECTLY
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<PAGE> 255
BY MAIL: You may purchase shares by completing and signing an account
application (initial purchase only) and mailing it, together with a check (or
other negotiable bank draft or money order) in the amount of at least the
minimum investment requirement to, The Victory National Municipal Bond Fund,
Primary Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741.
Subsequent purchases may be made in the same manner.
BY WIRE: Call 800-539-3863 to set up your Fund account to accommodate wire
transactions. YOU MUST CALL THE TRANSFER AGENT BEFORE WIRING FUNDS. You will
begin to earn dividends on the first business day following receipt of your
wire. Federal funds (monies transferred from one bank to another through the
Federal Reserve System with same-day availability) should be wired to:
Boston Safe Deposit & Trust Co.
ABA #011001234
Credit PFSC DDA#16-918-8
The Victory Portfolios: National Municipal Bond Fund
You must include your account number, your name(s), tax identification number(s)
and the control number assigned by the Transfer Agent. The Fund does not impose
a fee for wire transactions, although your bank may charge you a fee for this
service.
Shares are sold at the public offering price based on the net asset value that
is next determined after the Transfer Agent receives the purchase order. In most
cases, to receive that day's offering price, the Transfer Agent must receive
your order before the close of regular trading of the New York Stock Exchange
("NYSE") (generally 4:00 pm Eastern time) (the "Valuation Time") on each
Business Day (as defined in "Net Asset Value Per Share") of the Fund. If you buy
shares through an Investment Professional, the Investment Professional must
receive your order in a timely fashion on a regular Business Day and transmit it
to the Transfer Agent so that it is received before the close of business that
day. The Transfer Agent may reject any purchase order for the Fund's shares, in
its sole discretion.
It is the responsibility of your Investment Professional to transmit your order
to purchase shares to the Transfer Agent in a timely fashion in order for you to
receive that day's share price.
INVESTMENT REQUIREMENTS
All purchases must be made in U.S. dollars. Checks must be drawn on U.S. banks.
No cash will be accepted. If you make a purchase with more than one check, each
check must have a value of at least $25, and the minimum investment requirement
still applies. The Fund reserves the right to limit the number of checks
processed at one time. If your check does not clear, your purchase will be
canceled and you could be liable for any losses or fees incurred. Payment for
the purchase is expected at the time of the order. If payment is not received
within three business days of the date of the order, the order may be canceled,
and you could be held liable for resulting fees and/or losses.
CLASS A SHARES. Class A shares are sold at their offering price, which is
normally net asset value plus an initial sales charge. However, in some cases,
described below, where purchases are not subject to an initial sales charge, the
offering price may be net asset value. In some cases, reduced sales charges may
be available, as described below. When you invest, the Fund receives the net
asset value for your account. The sales charge varies depending on the amount of
your purchase and a portion may be retained by the Distributor and allocated to
your Investment Professional. The Victory Portfolios has a reinstatement policy
which allows an investor who redeems his/her shares originally purchased with a
sales charge to reinvest within 90 days without incurring an additional sales
charge. The current sales charge rates and commissions paid to Investment
Professionals are as follows:
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<PAGE> 256
<TABLE>
<CAPTION>
FRONT-END SALES CHARGE
AS A PERCENTAGE OF: DEALER RE-
------------------- ALLOWANCE AS
OFFERING NET AMOUNT A PERCENTAGE OF
AMOUNT OF PURCHASE PRICE INVESTED OFFERING PRICE*
-------- ---------- ---------------
<S> <C> <C> <C>
Less than $49,999 4.75% 4.99% 4.00%
$50,000 to $99,999 4.50% 4.71% 4.00%
$100,000 to $249,999 3.50% 3.63% 3.00%
$250,000 to $499,999 2.25% 2.30% 2.00%
$500,000 to $999,999 1.75% 1.78% 1.50%
$1,000,000 and above 0.00% 0.00% **
</TABLE>
* The Distributor reserves the right to reallow the entire sales charge
to dealers. If that occurs, the dealer may be considered an
"underwriter" under Federal securities laws.
** There is no initial sales charge on purchases of $1 million or more.
Investment Professionals will be compensated at the rate of up to 0.25%
of such purchases.
The Distributor may pay all or a portion of any applicable sales charges and
service fees to Investment Professionals who sell shares of the Fund and provide
ongoing sales support services or shareholder support services. For the
three-year period commencing April 30, 1994, for activities in maintaining and
servicing accounts of customers invested in the Fund, First Albany Corporation
("First Albany") and PFIC Securities Corporation ("PFIC") may receive payments
from the Distributor equal to two-thirds of the Dealer Retention (as defined
below) on any shares of the Fund (and other funds of the Victory Portfolios)
sold by First Albany or PFIC and their broker-dealer affiliates. "Dealer
Retention" is an amount equal to the difference between the applicable sales
charge and such part of the sales charge which is reallowed to broker-dealers.
The Distributor, at its expense, may also provide additional cash compensation
to dealers in connection with sales of shares of the Fund. The maximum cash
compensation payable by the Distributor is currently 4.00% of the offering
price. In addition, the Distributor will, from time to time and at its own
expense, provide compensation, including financial assistance, to dealers in
connection with conferences, sales or training programs for their employees,
seminars for the public, advertising campaigns regarding one or more Victory
Portfolios and/or other dealer-sponsored special events including payment for
travel expenses, including lodging, incurred in connection with trips taken by
invited registered representatives and members of their families to locations
within or outside of the United States for meetings or seminars of a business
nature. Compensation will include the following types of non-cash compensation
offered through sales contests: (1) vacation trips including the provision of
travel arrangements and lodging; (2) tickets for entertainment events (such as
concerts, cruises and sporting events) and (3) merchandise (such as clothing,
trophies, clocks and pens). Dealers may not use sales of the Fund's shares to
qualify for this compensation if prohibited by the laws of any state or any
self-regulatory organization, such as the National Association of Securities
Dealers, Inc. None of the aforementioned compensation is paid for by the Fund or
its shareholders.
REDUCED SALES CHARGES FOR CLASS A SHARES. You may be eligible to buy Class A
shares at reduced sales charge rates in one or more of the following ways:
LETTER OF INTENT. An investor may obtain a reduced sales charge by means of a
written Letter of Intent which expresses the investor's intention to purchase
shares of the Fund at a specified total public offering price within a 13-month
period.
A Letter of Intent is not a binding obligation upon the investor to purchase the
full amount indicated. The minimum initial investment under a Letter of Intent
is 5% of the total amount. Shares purchased with the first 5% of such amount
will be held in escrow (while remaining registered in the name of the investor)
to secure payment of the higher sales charge applicable to the shares actually
purchased if the full amount indicated is not purchased, and such escrowed
shares will be involuntarily redeemed to pay the additional sales charge, if
necessary. Dividends (if any) on escrowed shares, whether paid in cash or
reinvested in additional shares, are not subject to escrow. The escrowed shares
will not be available for disposal by the investor until all purchases pursuant
to the Letter of Intent have been made or the higher sales charge has been paid.
When the full amount indicated has been purchased, the escrow will be released.
A Letter of Intent may include purchases of shares made not more than 90 days
prior to the date the investor signs a Letter of Intent; however, the 13-month
period during which the Letter of Intent is in effect will begin on the date of
the earliest purchase to be included. An investor may combine purchases that are
made in an individual capacity with (1) purchases that are made by members of
the investor's immediate family and (2) purchases
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<PAGE> 257
made by businesses that the investor owns as sole proprietorships, for purposes
of obtaining reduced sales charges by means of a written Letter of Intent. In
order to accomplish this, however, investors must designate on the account
application the accounts that are to be combined for this purpose. Investors can
only designate accounts that are open at the time the Letter of Intent is
executed.
If an investor qualifies for a further reduced sales charge because the investor
has either purchased more than the dollar amount indicated on the Letter of
Intent or has entered into a Letter of Intent which includes shares purchased
prior to the date of the Letter of Intent, the difference in the sales charge
will be used to purchase additional shares of the Fund on behalf of the
investor; thus the total purchases (included in the Letter of Intent) will
reflect the applicable reduced sales charge of the Letter of Intent.
For investors who purchase more than the dollar amount indicated on the Letter
of Intent or enter into a Letter of Intent that includes shares purchased prior
to the date of the Letter of Intent and qualify for a reduced sales charge, all
such additional shares will be immediately purchased in the form of additional
shares and credited to the investor's account at the then current public
offering price applicable to a single purchase of the total amount of the
purchases.
For further information about Letters of Intent, interested investors should
contact the Transfer Agent at 800-539-3863. This program, however, may be
modified or eliminated at any time without notice.
RIGHT OF ACCUMULATION AND CONCURRENT PURCHASES
A shareholder may qualify for a reduced sales charge on purchases of Class A
Shares of the Fund and other funds of the Victory Portfolios by combining a
current purchase with purchases of another fund(s) or with certain prior
purchases of shares of the Victory Portfolios. The applicable sales charge is
based on the sum of (i) the purchaser's current purchase plus (ii) the current
public offering price of the purchaser's previous purchases of (a) all shares
held by the purchaser in the Fund and (b) all shares held by the purchaser in
any other fund of the Victory Portfolios (except money market funds).
To receive the applicable public offering price pursuant to the right of
accumulation, shareholders must provide the Transfer Agent with sufficient
information at the time of purchase to permit confirmation of qualification.
Accumulation privileges may be amended or terminated without notice at any time
by the Distributor.
- - WAIVERS OF CLASS A SALES CHARGES. No sales charge is imposed on sales of Class
A shares to the following categories of persons (which categories may be changed
or eliminated at any time):
(1) Current or retired trustees of the Victory Portfolios and Victory
Shares; employees, directors, trustees, and their family members of
KeyCorp or an Affiliated Provider (Affiliated Providers refer to
affiliates and subsidiaries of KeyCorp and service providers to the
Victory Portfolios and the Victory Shares (collectively, the "Victory
Group")), dealers having an agreement with the Distributor and any
trade organization to which Key Advisers, the Sub-Adviser or the
Administrator belongs;
(2) Investors who purchase shares for trust, investment management or
certain other advisory accounts established with KeyCorp or any of its
affiliates;
(3) Investors who purchase shares through a 401(k) plan sponsored by an
Affiliated Provider;
(4) Investors who reinvest assets received in a distribution from a
qualified, non-qualified or deferred compensation plan, agency, trust
or custody account that was either (a) maintained by KeyCorp or an
Affiliated Provider, or (b) invested in a fund of the Victory Group;
(5) Investors who, within 90 days of redemption, use the proceeds from the
redemption of shares of another mutual fund complex for which they
previously paid a front end sales charge or sales charge upon
redemption of shares; and
(6) Shareholders of the former Investors Preference Fund For Income, Inc.
and the Investors Preference New York Tax-Free Fund, Inc. who have
continuously maintained accounts with a fund or funds of the Victory
Group with a balance of $250,000 or more (investors with less than
$250,000 will pay any applicable sales loads).
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<PAGE> 258
- - PLAN OF DISTRIBUTION FOR CLASS A SHARES. The Victory Portfolios, on behalf of
the Class A shares of the Fund, has adopted a Distribution and Service Plan
("Plan") for the Fund under Rule 12b-1 under the Investment Company Act of 1940
(the "1940 Act"). No separate payments are authorized to be made by the Fund
under the Plan. Rather, the Plan recognizes that Key Advisers or the Distributor
may use their fee revenues, or other resources to pay expenses associated with
activities primarily intended to result in the sale of the shares of the Fund.
The Plan also provides that Key Advisers or the Distributor may make payments
from these sources to third parties, including affiliates, such as banks or
broker-dealers, that engage in the sale of the shares of a Fund. See "Investment
Adviser" below with respect to certain prohibitions under the Glass-Steagall
Act.
- - SHAREHOLDER SERVICE AGREEMENTS FOR CLASS A SHARES. The Fund may enter into
Shareholder Service Agreements with the Distributor or Investment Professionals
(including affiliates of Key Advisers) to pay costs incurred in connection with
the personal service and maintenance of accounts that hold Class A shares.
Services to be provided include, among others, account maintenance, including
responding to shareholder inquiries, directing shareholder communications,
account balances, maintenance and dividend policy. Payments are made quarterly
at an annual rate not to exceed 0.25% of the average annual net assets of Class
A shares held in accounts of the dealer of its customers.
CLASS B SHARES. Class B shares are sold at net asset value per share without an
initial sales charge. However, if Class B shares are redeemed within six years
of their purchase, a CDSC will be deducted from the redemption proceeds. That
sales charge will not apply to shares purchased by the reinvestment of dividends
or capital gains distributions. The charge will be assessed on the lesser of the
net asset value of the shares at the time of redemption or the original purchase
price. The CDSC is not imposed on the amount of your account value represented
by the increase in net asset value over the initial purchase price (including
increases due to the reinvestment of dividends and capital gains distributions).
The Class B CDSC is paid to the Distributor to reimburse its expenses of
providing distribution-related services to the Fund in connection with the sale
of Class B shares.
To determine whether the CDSC applies to a redemption, the Victory Portfolios
deems shares to be redeemed in the following order: (1) shares acquired by
reinvestment of dividends and capital gains distributions, (2) shares held for
over six years, and (3) shares held the longest during the 6-year period. The
amount of the CDSC will depend on the number of years since you invested and the
dollar amount being redeemed, according to the following schedule:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
YEARS SINCE PURCHASE ON REDEMPTIONS IN THAT YEAR
PAYMENT WAS MADE (AS % OF AMOUNT SUBJECT TO CHARGE)
- -------------------- ----------------------------------
<S> <C>
0-1 5.0%
1-2 4.0%
2-3 3.0%
3-4 3.0%
4-5 2.0%
5-6 1.0%
6 and following None
</TABLE>
In the table, a "year" is a 12-month period. All purchases are considered to
have been made on the first regular business day of the month in which the
purchase was made.
- - WAIVERS OF CLASS B SALES CHARGE. The Class B CDSC will be waived if the
shareholder requests it for any of the following redemptions: (1) distributions
to participants or beneficiaries from Retirement Plans, if the distributions are
made (a) under an Automatic Withdrawal Plan after the participant reaches age
59, as long as the payments are no more than 10% of the account value annually
(measured from the date the Transfer Agent receives the request), or (b)
following the death or disability (as defined in the Internal Revenue Code) of
the participant or beneficiary; (2) redemptions from accounts other than
Retirement Plans following the death or disability of the shareholder (as
evidenced by a determination of disability by the Social Security
Administration), and (3) returns of excess contributions to Retirement Plans.
The CDSC is also waived on Class B shares in the following cases: (i) shares
sold to Key Advisers, the Sub-Adviser or their affiliates; (ii) shares issued in
plans of reorganization to which the Victory Portfolios is a party; and (iii)
shares redeemed in involuntary redemptions as described above. Further details
about this policy are contained in "Reduced Sales Charges" in the Statement of
Additional Information.
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<PAGE> 259
- - AUTOMATIC CONVERSION OF CLASS B SHARES. Eight years after you purchase Class B
shares, those shares will automatically convert to Class A shares. This
conversion feature relieves Class B shareholders of the asset-based sales charge
that applies to Class B shares under the Class B Distribution Plan, described
below. The conversion is based on the relative net asset value of the two
classes, and no sales load or other charge is imposed. When Class B shares
convert, any other Class B shares that were acquired by the reinvestment of
dividends and distributions on the converted shares will also convert to Class A
shares. The conversion feature is subject to the continued availability of a tax
ruling described in "Alternative Sales Arrangements--Class A and Class B Shares"
in the Statement of Additional Information.
- - DISTRIBUTION PLAN FOR CLASS B SHARES. The Victory Portfolios has adopted a
Distribution Plan (the "Plan") under Rule 12b-1 of the 1940 Act for Class B
shares to compensate the Distributor for its services and costs in distributing
Class B shares and servicing accounts. Under the Plan, the Victory Portfolios
pays the Distributor an annual "asset-based sales charge" of 0.75% per year on
Class B shares that are outstanding for 6 years or less. This fee is computed on
the average daily net assets of Class B shares and paid monthly. The asset-based
sales charge enables investors to buy Class B shares without a front-end sales
charge while enabling the Distributor to compensate dealers that sell Class B
shares. The asset-based sales charge increases Class B expenses by up to 0.75%
of average net assets per year.
The Distributor pays sales commissions of 4.00% of the purchase price to dealers
from its own resources at the time of sale. For activities in maintaining and
servicing accounts of customers invested in the Fund, First Albany and PFIC
Securities Corporation may receive payments from the Distributor equal to
two-thirds of the excess of the scheduled CDSC for a redemption of a share
during the first year after purchase over any scheduled payment to the selling
broker on such share. The Distributor retains the asset-based sales charge to
recoup the sales commissions it pays, the advances of service fee payments it
makes, and its financing costs. If the Plan is terminated by the Victory
Portfolios, it provides that the Trustees may elect to continue payments for
certain expenses already incurred. The payments under the Plan increase the
annual expenses of Class B shares. For more details, please refer to "Advisory
and Other Contracts--Class B Shares Distribution Plan" in the Statement of
Additional Information.
SPECIAL INVESTOR SERVICES
- - THE SYSTEMATIC INVESTMENT PLAN. You can make regular investments in the Fund
and all other funds of the Victory Group with the Systematic Investment Plan by
completing the appropriate section of the account application and attaching a
voided personal check with your bank's magnetic ink coding number across the
front. If your bank account is jointly owned, be sure that all owners sign. You
must first meet the Fund's initial investment requirement of $500, then
investments may be made monthly by automatically deducting $25 or more from your
bank checking account. For officers, trustees, directors and employees,
including retired directors and employees, of the Victory Group, KeyCorp and its
affiliates, and the Administrator and its affiliates (and family members of each
of the foregoing, i.e., parents and children) who participate in the Systematic
Investment Plan, there is no minimum initial investment required. You may change
the amount of your monthly purchase at any time. A bank draft form must be
completed for this option. Your bank checking account will be debited on the
date indicated on your Account Application. Shares will be purchased at the
offering price next determined following receipt of the order by the Transfer
Agent. You may cancel the Systematic Investment Plan at any time without payment
of a cancellation fee. Your monthly account statement will reflect systematic
investment transactions, and a debit entry will appear on your bank statement.
- - TELEPHONE TRANSACTIONS. You can initiate any transaction by telephone. You may
call the Transfer Agent toll-free at 800-539-3863 or call your Investment
Professional or bank trust department. See "Shareholder Account Rules and
Policies" for more information about telephone transactions.
- - THE SYSTEMATIC WITHDRAWAL PLAN. You can make regular withdrawals from your
account in any fund of the Victory Group with the Systematic Withdrawal Plan by
completing the appropriate section of the account application. If you own shares
in a fund worth $5,000 or more, you can have monthly, quarterly, semi-annual or
annual checks sent from your account directly to you, to a person named by you,
or to your bank checking account. The required minimum withdrawal is $25. If you
are having checks sent to your bank checking account, attach a voided personal
check with your bank's magnetic coding number across the front of the account
application. If your account is jointly owned, be sure that all owners sign the
application. You may obtain information about the Systematic Withdrawal Plan by
contacting your Investment Professional. Your Systematic Withdrawal Plan
payments are drawn from share redemptions. If Systematic Withdrawal Plan
redemptions exceed dividend distributions paid on your Fund shares, your account
eventually may be exhausted. If any applicable sales charges are applied to new
purchases of shares of the Fund, it is to your disadvantage to buy shares of the
Fund while also making systematic redemptions.
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<PAGE> 260
Your account will be debited on the date you indicate on your Account
Application. Shares will be redeemed at the NAV as determined on the debit date
indicated on your Account Application. You may cancel the Systematic Withdrawal
Plan at any time without payment of a cancellation fee. Each Systematic
Withdrawal Plan transaction will appear as a debit entry on your monthly account
statement.
HOW TO REDEEM SHARES
You may redeem all or a portion of your shares on any day that the Fund is open
for business (see "Share Price" below). Shares will be redeemed at the NAV next
calculated after the Transfer Agent has received the redemption request. If the
Fund account is closed, any accrued dividends will be paid at the beginning of
the following month.
You may redeem shares in several ways:
BY MAIL: Send a written request to:
The Victory Portfolios: National Municipal Bond Fund
P.O. Box 9741
Providence, RI 02940-9741
Write a "letter of instruction" with your name, the Fund's name, your Fund
account number, the dollar amount or number of shares to be redeemed, and any
additional requirements that apply to each particular account. You will need the
letter of instruction signed by all persons required to sign for transactions,
exactly as their names appear on the account application. A signature guarantee
is required if: you wish to redeem more than $10,000 worth of shares; your Fund
account registration has changed within the last 60 days; the check is not being
mailed to the address on your account; the check is not being made out to the
account owner; or the redemption proceeds are being transferred to another
Victory Group account with a different registration. The following institutions
should be able to provide you with a signature guarantee: banks, brokers,
dealers, credit unions (if authorized under state law), securities exchanges and
associations, clearing agencies, and savings associations. A signature guarantee
may not be provided by a notary public. A signature guarantee is designed to
protect you, the Fund, and its agents from fraud. The Transfer Agent reserves
the right to reject any signature guarantee if (1) it has reason to believe that
the signature is not genuine, (2) it has reason to believe that the transaction
would otherwise be improper, or (3) the guarantor institution is a broker or
dealer that is neither a member of a clearing corporation nor maintains net
capital of at least $100,000.
BY WIRE: You may make redemptions by wire provided you have established a Fund
account to accommodate wire transactions. If telephone instructions are
received before Valuation Time (generally 4:00 p.m. Eastern time), proceeds of
the redemption will be wired as federal funds on the next Business Day to the
bank account designated with the Transfer Agent. You may change the bank account
designated to receive an amount redeemed at any time by sending a letter of
instruction with a signature guarantee to the Transfer Agent, Primary Funds
Service Corporation, P.O. Box 9741, Providence, RI 02940-9741.
BY TELEPHONE: To redeem by telephone, you may call the Transfer Agent toll free
at 800-539-3863 or call your Investment Professional or bank trust department.
See "Shareholder Account Rules and Policies" for more information about
telephone transactions.
ADDITIONAL REDEMPTION REQUIREMENTS: The Fund may withhold payment on redemptions
until it is reasonably satisfied that investments made by check have been
collected, which can take up to 15 days. Also, when the NYSE is closed (or when
trading is restricted) for any reason other than its customary weekend or
holiday closings, or under any emergency circumstances as determined by the
Commission to merit such action, the right of redemption may be suspended or the
date of payment postponed for a period of time that may exceed 7 days. In
addition, the Fund reserves the right to advance the time on that day by which
purchase and redemption orders must be received. To the extent that portfolio
securities are traded in other markets on days when the NYSE is closed, the
Fund's NAV may be affected on days when investors do not have access to the Fund
to purchase or redeem shares.
If you are unable to reach the Transfer Agent by telephone (for example, during
times of unusual market activity), consider placing your order by mail directly
to the Transfer Agent. In case of suspension of the right of redemption, you may
either withdraw your request for redemption or receive payment based on the NAV
next determined after the termination of the suspension. If your balance in the
Fund falls below $500, you may be given 60 days' notice to reestablish the
minimum balance (except with respect to officers, trustees, directors and
employees, including retired directors and employees, of the Victory Portfolios,
KeyCorp and its affiliates, and the Administrator and its affiliates (and family
members of each of the foregoing, i.e., parents, children and household members)
participating in the Systematic Investment Plan, to whom no minimum balance
17
<PAGE> 261
requirement applies). If you do not increase your balance, your account may be
closed and the proceeds mailed to you at the address on record. Shares will be
redeemed at the last calculated NAV on the day the account is closed.
HOW TO EXCHANGE SHARES
Shares of the Fund may be exchanged for shares of certain funds of the Victory
Group at net asset value per share at the time of exchange, without a sales
charge. To exchange shares, you must meet several conditions:
- - Shares of the fund selected for exchange must be available for sale in
your state of residence.
- - The prospectuses of this Fund and the fund whose shares you want to buy
must offer the exchange privilege.
- - You must hold the shares you buy when you establish your account for at
least 7 days before you can exchange them; after the account is open 7
days, you can exchange shares every regular Business Day.
- - You must meet the minimum purchase requirements for the fund you
purchase by exchange.
- - The registration and tax identification numbers of the two accounts
must be identical.
- - Before exchanging into a fund, obtain and read its prospectus.
Shares of a particular class may be exchanged only for shares of the same class
in the other funds of the Victory Group. For example, you can exchange Class A
shares of this Fund only for Class A shares of another fund. At present, not all
of the funds offer the same two classes of shares. If a fund has only one class
of shares that does not have a class designation, they are "Class A" shares for
exchange purposes. In some cases, sales charges may be imposed on exchange
transactions. Certain funds offer Class A or Class B shares and a list can be
obtained by calling the Transfer Agent at 800-539-3863. Please refer to the
Statement of Additional Information for more details about this policy.
Telephone exchange requests may be made either by calling your Investment
Professional or the Transfer Agent at 800-539-3863 prior to valuation time
(generally 4:00 p.m. Eastern time) on any Business Day.
You can obtain a list of eligible funds of the Victory Group by calling the
Transfer Agent at 800-539-3863. Exchanges of shares involve a redemption of the
shares of the Fund and a purchase of shares of the other fund.
There are certain exchange policies you should be aware of:
- - Shares are normally redeemed from one fund and purchased from the other fund
in the exchange transaction on the same Business Day on which the Transfer Agent
receives an exchange request by Valuation Time (generally 4:00 p.m. Eastern
time) that is in proper form, but either fund may delay the purchase of shares
of the fund into which you are exchanging if it determines it would be
disadvantaged by a same-day transfer of the proceeds to buy shares. For example,
the receipt of multiple exchange requests from a dealer in a "market-timing"
strategy might require the disposition of securities at a time or price
disadvantageous to the Fund.
- - Because excessive trading can hurt fund performance and harm shareholders,
the Victory Portfolios reserves the right to refuse any exchange request that
will disadvantage it, or to refuse multiple exchange requests submitted by a
shareholder or dealer.
- - The Fund may amend, suspend or terminate the exchange privilege at any time
upon 60 days' written notice to shareholders.
- - If the Transfer Agent cannot exchange all the shares you request because of a
restriction cited above, only the shares eligible for exchange will be
exchanged.
- - Each exchange may produce a gain or loss for tax purposes.
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Shareholders of the former Investors Preference Fund for Income, Inc. and
Investors Preference New York Tax-Free Fund, Inc. will not be subject to any
additional sales load upon an exchange of shares attributable to an Investors
Preference Funds account for shares of other funds of the Victory Portfolios.
SHAREHOLDER ACCOUNT RULES AND POLICIES
- - NET ASSET VALUE PER SHARE. The term "net asset value per share," or "NAV",
means the value of one share. The NAV of each class of shares is calculated by
adding the value of all of the Fund's investments, plus cash and other assets,
deducting expenses and liabilities of the Fund and of the class, and then
dividing the result by the number of shares of the class outstanding. The NAV is
determined and its shares are priced as of the close of regular trading of the
New York Stock Exchange (NYSE), (generally 4:00 p.m. Eastern time) (the
"Valuation Time") on each Business Day of the Fund. A "Business Day" is a day on
which the NYSE is open for trading, the Federal Reserve Bank of Cleveland is
open, and any other day (other than a day on which no shares of the Fund are
tendered for redemption and no order to purchase any shares is received) during
which there is sufficient trading in its portfolio instruments that the Fund's
net asset value per share might be materially affected. The NYSE or the Federal
Reserve Bank of Cleveland will not be open in observance of the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans' Day,
Thanksgiving Day, and Christmas Day.
The Fund's securities are valued primarily on the basis of market quotations or,
if quotations are not readily available, by a method that the Board of Trustees
believes accurately reflects fair value. Fair value of these portfolio
securities is determined by an independent pricing service approved by the
Trustees based primarily upon information concerning market transactions and
dealers quotations for similar securities.
- - THE OFFERING OF SHARES may be suspended during any period in which the
determination of net asset value is suspended, and the offering may be suspended
by the Trustees at any time the Trustees believe it is in the Fund's best
interest to do so.
- - TELEPHONE TRANSACTION PRIVILEGES for purchases, redemptions or exchanges may
be modified, suspended or terminated by the Fund at any time. If an account has
more than one owner, the Fund and the Transfer Agent may rely on the
instructions of any one owner. Telephone privileges apply to each owner of the
account and the dealer representative of record for the account unless and until
the Transfer Agent receives cancellation instructions from an owner of the
account.
- - TELEPHONE INSTRUCTIONS. Generally, neither the Fund, the bank trust department
nor the Transfer Agent will be responsible for any claims, losses or expenses
for acting on telephone instructions that are reasonably believed to be genuine.
The Transfer Agent and the Fund will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine and if they do not
employ reasonable procedures they may be liable for any losses due to
unauthorized or fraudulent instructions. The identification procedures may
include, but are not limited to, the following: account number, registration and
address, personalized security codes, taxpayer identification number and other
information particular to the account. Your Investment Professional, bank trust
department or the Transfer Agent may also record calls, and you should verify
the accuracy of your confirmation statements immediately after you receive them.
- - REDEMPTION OR TRANSFER REQUESTS WILL NOT BE HONORED UNTIL THE TRANSFER AGENT
RECEIVES ALL REQUIRED DOCUMENTS IN PROPER FORM. From time to time, the Transfer
Agent in its discretion may waive certain of the requirements for redemptions
stated in this Prospectus.
- - DEALERS THAT CAN PERFORM ACCOUNT TRANSACTIONS FOR THEIR CLIENTS BY
PARTICIPATING IN NETWORKING through the National Securities Clearing Corporation
are responsible for obtaining their clients' permission to perform those
transactions and are responsible to their clients who are shareholders of the
Fund if the dealer performs any transaction erroneously.
- - THE REDEMPTION PRICE FOR SHARES WILL VARY from day to day because the value of
the securities in the Fund fluctuates, and the value of your shares may be more
or less than their original cost.
- - PAYMENT FOR REDEEMED SHARES is made ordinarily in cash and forwarded by check
within three business days after the Transfer Agent receives redemption
instructions in proper form, except under unusual circumstances determined by
the Commission delaying or suspending such payments. The Transfer Agent may
delay forwarding a check for recently purchased shares, but only until the
purchase payment has cleared. That delay may be as much as 15 days from the date
the shares were purchased.
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That delay may be avoided if you arrange with your bank to provide telephone or
written assurance to the Transfer Agent that your purchase payment has cleared.
- - INVOLUNTARY REDEMPTIONS OF SMALL ACCOUNTS. If your account value has fallen
below $500, you will be given 60 days' notice to reestablish the minimum
balance. If you do not increase your minimum balance, your account may be closed
and the proceeds mailed to you at the record address. In some cases involuntary
redemptions may be made to repay the Distributor for losses from the
cancellation of share purchase orders. Under unusual circumstances, shares of
the Fund may be redeemed "in kind," which means that the redemption proceeds
will be paid with securities from the Fund. Please refer to the Statement of
Additional Information for more details.
- - "BACKUP WITHHOLDING" of Federal income tax may be applied at the rate of 31%
from dividends, distributions and redemption proceeds (including exchanges) if
you fail to furnish the Victory Portfolios with a certified Social Security or
taxpayer identification number when you sign your application, or if you violate
Internal Revenue Service regulations on tax reporting of dividends.
- - THE VICTORY PORTFOLIOS DOES NOT CHARGE A REDEMPTION FEE, but if your
Investment Professional handles your redemption, they may charge a separate
service fee. Under the circumstances described in "How to Invest," you may be
subject to CDSC when redeeming Class B shares.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS. The Fund ordinarily declares and pays dividends separately for Class
A and Class B shares from its net investment income monthly. The Fund
distributes substantially all net capital gains, if any, to shareholders each
year, to the extent necessary to qualify for favorable federal tax treatment.
CAPITAL GAINS. The Fund may make distributions annually out of any net
short-term or long-term capital gains, and the Fund may make supplemental
distributions of dividends and capital gains following the end of its fiscal
year.
DISTRIBUTION OPTIONS
When you fill out your account application, you can specify how you want to
receive your dividend distributions. Currently, there are five available
options:
1. REINVESTMENT OPTION. Your income and capital gain dividends, if any,
will be automatically reinvested in additional shares of the Fund.
Income and capital gain dividends will be reinvested at the net asset
value of your class of shares of the Fund as of the day after the
record date. If you do not indicate a choice on your application, you
will be assigned this option.
2. CASH OPTION. You will receive a check for each income or capital gain
dividend, if any. Distribution checks will be mailed no later than 7
days after the dividend payment date which may be more than 7 days
after the dividend record date.
3. INCOME EARNED OPTION. You will have your capital gain dividend
distributions, if any, reinvested automatically in the Fund and have
your income dividends paid in cash.
4. DIRECTED DIVIDENDS OPTION. You will have income and capital gain
dividends, or only capital gain dividends, automatically reinvested in
shares of another fund of the Victory Group. Shares will be purchased
at the NAV as of the day after the record date. If you are reinvesting
dividends of a fund sold without a sales charge in shares of a fund
sold with a sales charge, the shares will be purchased at the public
offering price. If you are reinvesting dividends of a fund sold with a
sales charge in shares of a fund sold with or without a sales charge,
the shares will be purchased at net asset value. Dividend distributions
can be directed only to an existing account with a registration that is
identical to that of your Fund account.
5. DIRECTED BANK ACCOUNT OPTION. You will have your income and capital
gain dividends, or only your income dividends, automatically
transferred to your bank checking or savings account. The amount will
be determined on the
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dividend record date and will normally be transferred to your account
within 7 days of the dividend record date. Dividend distributions can
be directed only to an existing account with a registration that is
identical to that of your Fund account. Please call or write the
Transfer Agent to learn more about this dividend distribution option.
Any election or revocation of any of the above dividend distribution options may
be made in writing to the Fund and sent to Primary Funds Service Corporation,
P.O. Box 9741, Providence, RI 02940-9741, or by calling the Transfer Agent at
800-539-3863, and will become effective with respect to dividends having record
dates after receipt of the application or request by the Transfer Agent.
Reinvested dividend distributions receive the same tax treatment as dividend
distributions paid in cash.
COMPLETE REDEMPTIONS: If you request a complete redemption of all your Fund
shares, any dividend accrued to your account will be included in the redemption
check.
STATEMENTS AND REPORTS: You will receive a monthly statement reflecting all
transactions that affect the share balance or the registration of your Fund
account. You will receive a confirmation after every transaction that affected
the share balance of your Fund account, except for dividend reinvestment,
systematic investment and systematic withdrawal transactions. These transactions
will be detailed in your Fund account statement. Transactions that affect the
share balance of your Fund investment in an account established with an
Investment Professional or financial institution will be detailed in regular
statements or through confirmation procedures of the financial institution.
Certificates representing shares of the Fund will not be issued. An IRS Form
1099-DIV with federal tax information will be mailed to you by January 31 of
each tax year and also will be filed with the IRS. At least twice a year, you
will receive the Fund's financial reports.
FEDERAL TAXES
The Fund intends to qualify each year and elect to be treated as a separate
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "IRS Code"). If the Fund is treated as a "regulated
investment company" and all its taxable income is distributed to its
shareholders in accordance with the timing requirements imposed by the IRS Code,
it will not be subject to federal income tax on its income. The Fund's
distributions that are attributable to its net investment income and short-term
capital gains are taxable as ordinary income, and its distributions from
long-term capital gains are taxed as long-term capital gains. Such distributions
are taxable when they are paid, whether taken in cash or reinvested in
additional shares, except that distributions declared in October, November or
December and paid during the following January are taxable as if paid and
received on December 31. Dividends received from the Fund by corporate
shareholders are not entitled to the dividends-received deduction. The Fund
sends tax statements to its shareholders (with copies to the Internal Revenue
Service (the "IRS")) by January 31 showing the amounts and tax status of
distributions made (or deemed made) during the preceding calendar year.
The Fund also intends to satisfy certain federal tax requirements so that
tax-exempt interest income (net of expenses) earned by the Fund will be excluded
from gross income for regular federal income tax purposes when distributed to
you as income dividends. Although excluded from gross income for regular federal
income tax purposes, exempt-interest dividends, together with other tax-exempt
interest, are required to be reported on shareholders' federal income tax
returns, and are taken into account in determining the portion, if any, of
Social Security benefits which must be included in gross income. In addition,
all exempt-interest dividends will be included in computing a corporate
shareholder's adjusted current earnings, upon which a separate corporate
preference item is based which may be subject to an alternative minimum tax
("AMT") and to the environmental superfund tax. Interest on indebtedness
incurred, or continued, to purchase or carry shares of the Fund is not
deductible. Further, entities or persons who may be "substantial users" (or
persons related to "substantial users") of facilities financed by certain types
of municipal obligations should consult with their own tax advisers before
purchasing shares of the Fund. Finally, the exclusion from gross income for
federal income tax purposes of exempt-interest dividends does not necessarily
result in an exclusion under the income or other tax laws of any state or local
taxing authority. If the Fund earned taxable income from any of its investments
other than exempt-interest dividends, it would be distributed as a taxable
ordinary income dividend. For example, distributions from the Fund's excess, if
any, of net short-term capital gains over its net long-term capital losses are
taxable as ordinary income dividends. Distributions from the Fund's excess, if
any, of the net long-term capital gain over its net short-term capital losses
are designated as capital gain dividends and are taxable to shareholders as
long-term capital gains, regardless of the length of time the shareholder held
his shares. Dividends received from the Fund by corporate shareholders are not
entitled to the dividends-received deduction.
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The Fund's distributions other than exempt-interest dividends, are taxable when
they are paid, whether taken in cash or reinvested in additional shares, except
that distributions declared in October, November or December and paid in January
are taxable as if paid and received on December 31. The Fund sends a tax
statement by January 31 showing the tax status of distributions paid in the past
year and will file statements with the Internal Revenue Service (IRS) reporting
distributions made (or deemed made) during the calendar year.
REDEMPTION OR EXCHANGES
Investors may realize a gain or loss when redeeming (selling) or exchanging
shares. For most types of accounts, the Fund reports the proceeds to the IRS
annually. Because the shareholders' tax treatment also depends on their purchase
price and personal tax positions, shareholders should keep their regular account
statements to use in determining their tax. See "Buying a Dividend."
"BUYING A DIVIDEND"
On the record date for a distribution of ordinary income or capital gains
dividend, the net asset value of the Fund is reduced by the amount of the
distribution. An investor who buys shares just before the record date ("buying a
dividend") will pay the full price for the shares and then receive a portion of
the purchase price back as a taxable distribution.
OTHER TAX INFORMATION
The information above is only a summary of some of the federal income tax
consequences generally affecting the Fund and its shareholders, and no attempt
has been made to discuss individual tax consequences. A prospective investor
should also review the more detailed discussion of federal income tax
considerations in the Statement of Additional Information. In addition to
federal income tax, a shareholder may be subject to state or local taxes on the
shareholder's investment, depending on the laws in the shareholder's area.
Investors considering an investment in the Fund should consult their tax adviser
to determine whether the Fund is suitable to their particular tax situation.
When investors sign their account application, they are asked to provide their
correct social security or taxpayer identification number and other required
certifications. If investors do not comply with IRS regulations, the IRS can
require the Fund to withhold 31% of taxable distributions and redemptions from
their account.
PERFORMANCE
From time to time, performance information for each class of shares of the Fund
showing total return of each class of shares may be presented in advertisements,
sales literature and in reports to shareholders. Such performance figures are
based on historical earnings and are not intended to indicate future
performance. Average annual total return will be calculated over a stated period
of more than one year. Average annual total return is measured by comparing the
value of an investment in a class at the beginning of the relevant period (as
adjusted for sales charges, if any) to the redemption value of the investment at
the end of the period (assuming immediate reinvestment of any dividends or
capital gains distributions) and annualizing that figure. Aggregate total return
is calculated similarly to average annual total return, except that the
resulting difference is not annualized.
From time to time performance information for each class of shares of the Fund
showing the yield and/or effective yield for each class of shares may also be
presented in advertisements, sales literature and in reports to shareholders.
Yields for Class A shares reflect the deduction of the maximum sales charge.
Yields for Class B shares do not reflect the deduction of the CDSC. Such
performance figures are based on historical earnings and are not intended to
indicate future performance. Yield will be computed by dividing the Fund's net
investment income per share earned during a recent thirty-day period by the
Fund's maximum offering price per share (reduced by any undeclared earned income
expected to be paid shortly as a dividend) on the last day of the period and
annualizing the result. Effective yield is computed in a similar manner, but,
when annualized, the income earned by an investment in the Fund is assumed to be
reinvested. The effective yield will be slightly higher than the yield because
of the compounding effect of this assumed reinvestment.
The Fund may also quote TAXABLE-EQUIVALENT YIELDS, which show the taxable yields
an investor would have to earn, before taxes, to equal the tax-free yields for a
class of shares of the Fund. A tax-equivalent yield is calculated by dividing
the Fund's tax-exempt yield for each class of shares of the Fund by the result
of one minus the sum of the stated federal, state and city tax
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rates, and taking into account the deductibility of state and city taxes from
federal tax. If only a portion of the Fund's income is tax-exempt, only that
portion is adjusted in the calculation.
Investors may also judge, and the Victory Portfolios may at times advertise, the
performance of the Fund by comparing it to the performance of other mutual funds
with comparable investment objectives and policies, which performance may be
contained in various unmanaged mutual fund or market indices or rankings such as
those prepared by Dow Jones & Co., Inc. and Standard & Poor's Corporation, in
publications issued by Lipper Analytical Services, Inc., and in the following
publications: IBC/Donoghue's Money Fund Reports, Ibbotson Associates, Inc.,
Morningstar, CDA/Wiesenberger, Money Magazine, Forbes, Barron's, The Wall Street
Journal, The New York Times, Business Week, American Banker, Fortune,
Institutional Investor, U.S.A. Today and local newspapers. In addition, general
information about the Fund that appears in publications such as those mentioned
above may also be quoted or reproduced in advertisements, sales literature or in
reports to shareholders.
Performance is a function of the type and quality of instruments held in the
Fund's portfolio, operating expenses, and market conditions. Consequently,
current performance will fluctuate and is not necessarily representative of
future results. Any fees charged by service providers with respect to customer
accounts for investing in shares of the Fund will not be reflected in
performance calculations.
Additional information regarding the performance of each of the Victory
Portfolios is included in the Victory Portfolios' annual report, which is
available free of charge by calling 800-539-3863.
FUND ORGANIZATION AND FEES
The Victory Portfolios is an open-end management investment company, commonly
known as a mutual fund, and currently consisting of twenty-eight series
portfolios, four of which are inactive. The Victory Portfolios has been
operating continuously since 1986, when it was created under Massachusetts law
as a Massachusetts business trust, although certain of its funds have a prior
operating history from their predecessor funds. On February 29, 1996 the Victory
Portfolios converted from a Massachusetts business trust to a Delaware business
trust. The Victory Portfolios' offices are located at 3435 Stelzer Road,
Columbus, OH 43219-3035.
Overall responsibility for management of the Victory Portfolios rests with its
Board of Trustees, who are elected by the shareholders of the Victory
Portfolios.
REORGANIZATION WITH PREDECESSOR FUND
The Predecessor Fund was a portfolio of The Victory Funds. On April 28, 1995,
the Shareholders of the Predecessor Fund approved an Agreement and Plan of
Reorganization (the "Reorganization Plan"). Under the Reorganization Plan, the
Predecessor Fund transferred all its assets and liabilities to the Fund in
exchange for shares of the Fund, which were distributed pro rata to shareholders
of the Predecessor Fund, who then became shareholders of the Fund (the
"Reorganization"). The Predecessor Fund has ceased operations. The Fund had no
assets and did not begin operations until the Reorganization occurred.
INVESTMENT ADVISER AND SUB-ADVISER
Key Advisers is the investment adviser to the Fund. Key Advisers directs the
investment of the Victory Portfolios' assets, subject at all times to the
supervision of the Victory Portfolios' Board of Trustees. Key Advisers
continually supervises the investment and reinvestment of cash, securities and
other property comprising the assets of the Victory Portfolios.
Key Advisers was organized as an Ohio corporation on July 27, 1995 and is
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended. It is a wholly-owned subsidiary of KeyCorp Asset Management
Holdings, Inc., which is a wholly-owned subsidiary of Society National Bank, a
wholly-owned subsidiary of KeyCorp. Affiliates of Key Advisers manage
approximately $37 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals and mutual funds.
For the services provided and expenses incurred pursuant to its investment
advisory agreement with the Victory Portfolios respecting the Fund, Key Advisers
receives a fee, computed daily and paid monthly, at the annual rate of
fifty-five one-hundredths of one percent (.55%) of the average daily net assets
of the Fund. The advisory fees for the Fund have been determined to be fair and
reasonable in light of the services provided to the Fund. Key Advisers may
periodically waive all or a
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portion of its advisory fee with respect to the Fund to increase the net income
of the Fund available for distribution as dividends. Prior to January 1, 1996,
the Sub-Adviser (Society Asset Management, Inc.) served as investment adviser to
the Fund. During the Fund's fiscal period ended October 31, 1995, the
Sub-Adviser received investment advisory fees aggregating .00% of the average
daily net assets of Class A shares and .00% of the average daily net assets of
Class B shares of the Fund.
Under the investment advisory agreement between the Victory Portfolios, on
behalf of the Fund, and Key Advisers, Key Advisers may delegate a portion of its
responsibilities to a subadviser. In addition, the investment advisory agreement
provides that Key Advisers may render services through its own employees or the
employees of one or more affiliated companies that are qualified to act as an
investment adviser of the Fund and are under the common control of KeyCorp as
long as all such persons are functioning as part of an organized group of
persons, managed by authorized officers of Key Advisers.
Key Advisers has entered into an investment sub-advisory agreement with its
affiliate, Society Asset Management, Inc., a registered investment adviser, on
behalf of the Fund. The Sub-Adviser is a wholly-owned subsidiary of KeyCorp
Asset Management Holdings, Inc. For its services under the investment
sub-advisory agreement, Key Advisers pays the Sub-Adviser subadvisory fees at an
annual rate as a percentage of the Fund's average daily net assets as follows:
.40% of the first $10 million of average daily net assets; .30% of the next $15
million of average daily net assets; .25% of the next $25 million of average
daily net assets; and .20% of average daily net assets in excess of $50 million.
The person primarily responsible for the investment management of the Fund, as
well as his previous experience is as follows:
<TABLE>
<CAPTION>
PORTFOLIO MANAGING PREVIOUS
MANAGER FUND SINCE EXPERIENCE
<S> <C> <C>
Paul Toft September, 1994 Vice President, Society Asset
Management, Inc; Portfolio
Manager, Society Asset
Management, Inc. since
September, 1994; Vice
President and Manager, Nike
Securities, L.P., 1991-1994;
formerly, Assistant Vice
President, Van Kampen
Merrett, 1990-1991
</TABLE>
ADMINISTRATOR AND DISTRIBUTOR
Concord Holding Corporation is the Administrator for the Fund. Victory
Broker-Dealer Services, Inc. is the Fund's principal underwriter and
Distributor.
The Administrator generally assists in all aspects of the Fund's administration
and operation. For expenses incurred and services provided as Administrator
pursuant to its management and administration agreement with the Victory
Portfolios, the Administrator receives a fee from the Fund, computed daily and
paid monthly, at an annual rate of fifteen one-hundredths of one percent (.15%)
of the Fund's average daily net assets. The Administrator may periodically waive
all or a portion of its administrative fee with respect to the Fund to increase
the net income of the Fund available for distribution as dividends. During the
fiscal period ended October 31, 1995, the Fund paid administration fees of .__%
of its average daily net assets.
TRANSFER AGENT AND FUND ACCOUNTANT
Primary Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741,
serves as the Fund's Transfer Agent pursuant to a Transfer Agency and
Shareholder Service Agreement with the Victory Portfolios and receives a fee for
such services based on various criteria, including assets, transactions and the
number of accounts. BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus,
OH 43219, provides certain accounting services for the Fund pursuant to a Fund
Accounting Agreement and receives a fee for such services.
SHAREHOLDER SERVICING
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Shareholder services are provided to the Fund pursuant to agreements between the
Victory Portfolios and various shareholder servicing agents, including Key Trust
Company of Ohio, N.A. and its affiliates and other financial institutions and
securities brokers (each a "Shareholder Servicing Agent"). Each Shareholder
Servicing Agent generally will provide support services to shareholders by
establishing and maintaining accounts and records, processing dividend and
distribution payments, providing account information, arranging for bank wires,
responding to routine inquires, forwarding shareholder communication, assisting
in the processing of purchase, exchange and redemption requests, and assisting
shareholders in changing dividend options, account designations and addresses.
For expenses incurred and services provided as Shareholder Servicing Agent
pursuant to its respective Shareholder Servicing Agreement, the Fund pays each
Shareholder Servicing Agent a fee computed daily and paid monthly, in amounts
aggregating not more than twenty-five one-hundredths of one percent (.25%) of
the average daily net assets of the Fund per year. A Shareholder Servicing Agent
may periodically waive all or a portion of its respective shareholder servicing
fees with respect to the Fund to increase the net income of the Fund available
for distribution as dividends. During the fiscal period ended October 31, 1995,
the Fund paid Shareholder Servicing fees of ___% the Fund's average daily net
assets.
EFFECT OF BANKING LAWS
Key Advisers and the Sub-Adviser believe that they may perform the investment
advisory services for the Fund contemplated by the investment advisory (and
sub-advisory) agreements (the "Advisory Agreements") for the Fund. In the
Advisory Agreements, Key Advisers and the Sub-Adviser have represented that they
possess the legal authority to perform the investment advisory services
contemplated therein and described in this Prospectus. Key Trust Company of
Ohio, N.A. and its affiliates also believe that they also may perform the
services for the Victory Portfolios contemplated by the Shareholder Servicing
Agreement with the Victory Portfolios without violating applicable banking laws
and regulations. Future changes in federal or state statutes and regulations
relating to permissible activities of banks or bank holding companies and their
subsidiaries and affiliates, as well as further judicial or administrative
decisions or interpretations of present and future statutes and regulations,
could change the manner in which Key Advisers, the Sub-Adviser, Key Trust
Company of Ohio, N.A. and its affiliates could continue to perform such services
for the Victory Portfolios. See the Statement of Additional Information
("Glass-Steagall Act") for further discussion.
BUSINESS MANAGEMENT AGREEMENT
In connection with its obligations under its investment sub-advisory agreement
with Key Advisers, the Sub-Adviser has entered into a Business Management
Agreement with Key Advisers pursuant to which Key Advisers provides certain
administrative and support services to the Sub-Adviser. Such services include
preparing reports to the Company's Board of Trustees, recordkeeping services,
and services rendered in connection with the preparation of regulatory filings
and other reports, and regulatory and compliance systems and other
administrative and support services.
For such services, the Sub-Adviser pays fees to Key Advisers at an annual rate
as follows: .25% on the first $10 million of average daily net assets; .15% of
the next $15 million of average daily net assets; .10% of the next $25 million
of average daily net assets; and .05% of average daily net assets in excess of
$50 million.
EXPENSES
For the fiscal period ended October 31, 1995, the Fund's total operating
expenses were ___% of the Class A shares' average daily net assets and ____% of
Class B shares' average daily net assets.
CUSTODIAN
Key Trust Company of Ohio, N.A. serves as custodian for the Fund and receives
fees for its services.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. serves as the Fund's independent accountants.
ADDITIONAL INFORMATION
25
<PAGE> 269
The Victory Portfolios may issue an unlimited number of shares and classes of
the Fund. Shares of each class of the Fund participate equally in dividends and
distributions and have equal voting, liquidation and other rights. When issued
and paid for, shares will be fully paid and nonassessable by the Victory
Portfolios and will have no preference, conversion, exchange or preemptive
rights. Shareholders are entitled to one vote for each full share owned and
fractional votes for fractional shares owned. For those investors with qualified
trust accounts established with affiliates of the Adviser, the trustee will vote
the shares at meetings of the Fund's shareholders in accordance with the
shareholder's instructions or will vote in the same percentage as shares that
are not held in trust. The trustee will forward to these shareholders all
communications received by the trustee, including proxy statements and financial
reports. The Victory Portfolios and the Fund are not required to hold annual
meetings of shareholders and in ordinary circumstances do not intend to hold
such meetings. The Trustees may call special meetings of shareholders for action
by shareholder vote as may be required by the 1940 Act or the Victory
Portfolios' Delaware Trust Instrument. Under certain circumstances, the Trustees
may be removed by action of the Trustees or by the shareholders. Shareholders
holding 10% or more of the Victory Portfolios' outstanding shares may call a
special meeting of shareholders for the purpose of voting upon the question of
removal of Trustees.
The Victory Portfolio's Board of Trustees may authorize the Victory Portfolios
to offer other funds which may differ in the types of securities in which their
assets may be invested.
Key Advisers, the Sub-Adviser and the Victory Portfolios have adopted Codes of
Ethics (the "Codes") which require investment personnel (a) to pre-clear all
personal securities transactions, (b) to file reports regarding such
transactions, and (c) to refrain from personally engaging in (i) short-term
trading of a security, (ii) transactions involving a security within seven days
of a Victory fund transaction involving the same security, and (iii)
transactions involving securities being considered for investment by a Victory
fund. The Codes also prohibit investment personnel from purchasing securities in
an initial public offering. Personal trading reports are reviewed periodically
by Key Advisers or the Sub-Adviser, and the Board of Trustees reviews annually
such reports (including information on any substantial violations of the Codes).
Violations of the Codes may result in censure, monetary penalties, suspension or
termination of employment.
DELAWARE LAW
The Delaware Business Trust Act provides that a shareholder of a Delaware
business trust shall be entitled to the same limitation of personal liability
extended to stockholders of Delaware corporations. In light of Delaware law, the
nature of the Victory Portfolios' business, and the nature of its assets,
management of the Victory Portfolios believes that the risk of personal
liability to a Fund shareholder would be extremely remote.
In the unlikely event a shareholder is held personally liable for the Victory
Portfolios' obligations, the Victory Portfolios is required to use its property
to protect or compensate the shareholder. On request, the Victory Portfolios
will defend any claim made and pay any judgment against a shareholder for any
act or obligation of the Victory Portfolios. Therefore, financial loss resulting
from liability as a shareholder will occur only if the Victory Portfolios itself
cannot meet its obligations to indemnify shareholders and pay judgments against
them.
Delaware law authorizes electronic or telephonic communications between
shareholders and the Victory Portfolios. Under Delaware law, the Successor
Company has the flexibility to respond to future business contingencies. For
example, the Trustees will have the power to incorporate the Victory Portfolios,
to merge or consolidate it with another entity, to cause each fund to become a
separate trust, and to change the Victory Portfolios' domicile without a
shareholder vote. This flexibility could help reduce the expense and frequency
of future shareholder meetings for non-investment related issues.
MISCELLANEOUS
Shareholders will receive Semi-Annual Reports, which are unaudited, and Annual
Reports, which are audited by independent public accountants, describing the
investment operations of the Fund. Each of these reports, when available for a
particular fiscal year end or the end of a semi-annual fiscal period, is
incorporated herein by reference. The Victory Portfolios may include information
in their Annual Reports and Semi-Annual Reports to shareholders that (i)
describes general economic trends, (ii) describes general trends within the
financial services industry or the mutual fund industry, (iii) describes past or
anticipated portfolio holdings for the Fund or (iv) describes investment
management strategies for the Victory Portfolios. Such information is provided
to inform shareholders of the activities of the Victory Portfolios for the most
recent fiscal year or semi-annual fiscal period and to provide the views of Key
Advisers, the Sub-Adviser and/or the Victory Portfolios' officers regarding
expected trends and strategies.
26
<PAGE> 270
Inquiries regarding the Victory Portfolios or the Fund may be directed in
writing to the Victory Portfolios at Primary Funds Service Corporation, P.O. Box
9741, Providence, RI 02940-9741, or by telephone, toll-free, at 800-539-3863.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE VICTORY
PORTFOLIOS OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING
BY THE VICTORY PORTFOLIOS OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE.
27
<PAGE> 271
PR/DS-130 9/95
THE VICTORY NATIONAL MUNICIPAL BOND FUND
March 1, 1996
28
<PAGE> 272
The
VICTORY
Portfolios
NEW YORK TAX-FREE FUND
PROSPECTUS For current yield, purchase and redemption information,
March 1, 1996 call 800-539-FUND or 800-539-3863
THE VICTORY PORTFOLIOS (the "Victory Portfolios") is a registered open-end
management investment company that offers investors a selection of money
market, fixed-income, municipal bond, domestic and international equity
portfolios. This Prospectus relates to the Victory New York Tax-Free Fund (the
"Fund") a diversified portfolio. KeyCorp Mutual Fund Advisers, Inc.,
Cleveland, Ohio, an indirect subsidiary of KeyCorp, is the investment adviser
to the Fund ("Key Advisers" or the "Advisers"). Society Asset Management, Inc.,
Cleveland, Ohio, an indirect subsidiary of KeyCorp, is the investment
sub-adviser to the Fund ("Society" or the "Sub-Adviser"). Concord Holding
Corporation is the Fund's administrator (the "Administrator"). Victory
Broker-Dealer Services, Inc. is the Fund's distributor (the "Distributor").
The Fund seeks to provide a high level of current income exempt from federal,
New York State, and New York City income taxes, consistent with the
preservation of shareholders' capital. In normal markets, the Fund will invest
at least 80% of its portfolio in federally tax-exempt securities and at least
65% of the portfolio in insured investments of New York State and its public
authorities, instrumentalities, and municipalities. The Fund is designed
expressly for those investors who are subject to income taxes imposed by the
state of New York and/or its municipalities. (See "The Fund's Investment
Strategies," for more detailed investment information.)
The Fund offers two classes of shares: (i) Class A shares, which are offered
at net asset value plus the applicable sales charge (maximum of 4.75% of public
offering price) and (ii) Class B shares, which are offered at net asset value
with a maximum contingent deferred sales charge after a purchase of Class B
shares ("CDSC") of 5.0% imposed on certain redemptions. At the end of the
sixth year the CDSC will no longer apply to redemptions. Class B shares have
higher ongoing expenses than Class A shares, but automatically convert to Class
A shares eight years after purchase.
Please read this Prospectus before investing. It is designed to provide you
with information and to help you decide if the Fund's goals match your own.
Retain this document for future reference. A Statement of Additional
Information (dated March 1, 1996) for the Fund and an audited report for the
Fund's fiscal year ended October 31, 1995 Fund have been filed with the
Securities and Exchange Commission (the "Commission") and are incorporated
herein by reference. The Statement of Additional Information is available
without charge upon request by calling 800-539-3863.
SHARES OF THE FUND ARE:
- - NOT INSURED BY THE FDIC;
- - NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY KEYCORP
BANK, ANY OF ITS AFFILIATES, OR ANY OTHER BANK;
- - SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
2
<PAGE> 273
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("COMMISSION"), OR ANY SECURITIES REGULATORY AUTHORITY OF
ANY STATE, NOR HAS THE COMMISSION OR ANY SUCH STATE AUTHORITY PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
3
<PAGE> 274
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Summary of Fund Expenses 2
Financial Highlights 3
The Fund's Investment Objectives 6
Investment Strategies 8
Additional Information Regarding Securities in Which the Fund May Invest 9
Limiting Investment Risks 11
How to Invest, Exchange and Redeem 12
Dividends, Distributions and Taxes 23
Performance 25
Fund Organization and Fees 26
Additional Information 29
</TABLE>
4
<PAGE> 275
SUMMARY OF FUND EXPENSES
The table below summarizes the expenses associated with the Fund. The purpose
of the tables is to assist you in understanding the various costs and expenses
that an investor in the Fund would bear directly or indirectly. This standard
format was developed for use by all mutual funds to help you make your
investment decisions. Of course, you should consider this expense information
along with other important information in this Prospectus including the Fund's
investment objective.
A. SHAREHOLDER TRANSACTION EXPENSES. These represent charges paid when
you purchase, redeem or exchange shares of the Fund. See "How to Invest,
Exchange and Redeem."
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of the offering price) 4.75% none
Sales Load Imposed on Reinvested Dividends none none
Deferred Sales Load none 5% in the first year, declining to
1% in the sixth year and eliminated
thereafter to 0%
Redemption Fee none none
Exchange Fee none none
</TABLE>
B. ANNUAL FUND OPERATING EXPENSES AFTER EXPENSE WAIVERS AND
REIMBURSEMENTS.
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
CLASS A CLASS B
------- -------
<S> <C> <C>
Advisory Fees(1) .18% .18%
Administration Fee .15% .15%
Rule 12b-1 Distribution Fee none .75%
Other Expenses(2) .87% .87%
---- ----
Total Fund Operating Expenses(3) 1.20% 1.95%
===== =====
</TABLE>
(1) The Investment Advisory Fee has been reduced to reflect the voluntary
waiver of a portion of the fee by the Adviser. The Adviser has agreed
to waive a portion of its Advisory Fee, to the extent necessary, to
maintain the operating expense ratio of Class A shares at 1.20% until
at least May 2, 1996. The maximum advisory fee absent waiver is .55%.
(2) Includes a maximum .25% Shareholder Servicing Fee payable to certain
financial institutions.
(3) Without the voluntary waiver by the Adviser, the total operating
expense ratio of the Fund would be 1.57% for the Class A shares and
2.32% for the Class B shares.
C. EXAMPLE: An investor would pay the following expenses on a $1,000
investment assuming a 5% annual return.
<TABLE>
<CAPTION>
CLASS A(1) CLASS B(2)
---------- ----------
<S> <C> <C>
One Year $ 59 $ 70
Three Years $ 84 $ 91
Five Years $110 $125
Ten Years $186 $207
</TABLE>
5
<PAGE> 276
(1) Assumes a deduction at the time of purchase of the maximum 4.75%
initial sales charge, as applicable.
(2) Assumes deduction at the time of redemption of the maximum applicable
CDSC, and conversion of Class B shares to Class A shares after the
eighth year.
The purpose of the table above is to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. See "Fund Organization and Fees" for a more complete discussion of
annual operating expenses of the Fund. The foregoing example is based upon
expenses for the fiscal year ended October 31, 1995 and expenses that the Fund
is expected to incur during the current fiscal year. THE FOREGOING EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
6
<PAGE> 277
FINANCIAL HIGHLIGHTS
PER SHARE DATA AND RATIOS. The information in the table below for the fiscal
year ended October 31, 1995 relates to the Fund and its predecessor, a
portfolio of The Victory Funds (the "Predecessor Fund"), and (except as
indicated) has been audited by Coopers & Lybrand, L.L.P. only for fiscal period
ended October 31, 1995. The information in the table below relating to the
periods September 25, 1994 to October 31, 1994 (for Class B shares) and January
1, 1994 to October 31, 1994 (for Class A shares) represents selected data for a
single share outstanding for the New York Tax-Free Portfolio, the predecessor
to the Predecessor Fund. The information for the other periods shown
represents selected data for a single share outstanding of the Investors
Preference New York Tax-Free Fund, Inc., the predecessor to the New York Tax-
Free Portfolio. The information for the periods September 25, 1994 to October
31, 1994 and January 1, 1994 to October 31, 1994 has been audited by KPMG Peat
Marwick LLP. Information for prior periods shown has been audited by LeMaster
& Daniels, independent auditors. The financial statements and independent
auditors' reports thereon contained in the Statement of Additional Information
are incorporated herein by reference.
<TABLE>
<CAPTION>
CLASS B CLASS A
------- -------
Period Period Period
Fiscal Six from Fiscal Six from from
Year Months Sept. 25, Year Months Jan. 1, Feb. 11,
Ended Ended 1994** to Ended ended 1994 to 1991**
Oct. 31, Apr. 30, Oct. 31, Oct. 31, Apr. 30, Oct. 31 Years ended Dec. 31, to Dec. 31,
1995 1995 1994 1995*** 1995 1994 1993 1992 1991
---- ---- ---- ------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, [To be [To be
beginning of period Inserted] $12.39 $12.62 Inserted] $12.39 $13.54 $12.76 $12.50 $12.00
Income from
Investment
operations:
Net interest
income(1) 0.31 0.07 0.32 0.57 0.70 0.74 0.64
Net gains or losses
on securities (both
realized and
unrealized) 0.27 (0.23) 0.30 (1.15) 0.84 0.26 0.50
------ ------ ------- ------- ------- ------- -------
Total from investment
operations 0.58 (0.16) 0.62 (0.58) 1.54 1.00 1.14
------ ------ ------- ------- ------- ------- -------
Distributions:
Dividends (from net
investment income) (0.30) (0.07) (0.33) (0.57) (0.70) (0.74) (0.64)
Distributions (from
capital gains) (0.17) -- (0.17) -- (0.06) -- --
------ ------ ------- ------- ------- ------- -------
Total distributions (0.47) (0.07) (0.50) (0.57) (0.76) (0.74) (0.64)
------ ------ ------- ------- ------- ------- -------
Net asset value, end
of period $12.50 $12.39 $12.51 $12.39 $13.54 $12.76 $12.50
------ ------ ------- ------- ------- ------- -------
Total return 4.80 (1.25)%* 5.1690* (4.31)* 12.34% 8.26 11.06%*
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (thousands) $ 834 * __ $15,974 $17,840 $28,530 $26,034 $20,995
Ratio of expenses to
average net assets 2.72%* 0.52%* 1.10%* 0.91%* 0.87% 0.66% 0.45%*
Ratio of net income
to average net assets 9.48%* 5.94%* 5.18%* 5.33%* 5.28% 5.89% 6.28%*
Ratio of expenses to
average assets* 3.07%* 1.45%*
Ratio of net
investment income to
average net assets* 9.13%* 4.83%*
Portfolio turnover rate 17% 18% 17% 18% 12% 14% 61%
</TABLE>
7
<PAGE> 278
(1) During the period from February 11, 1991** to May 10, 1991, all operating
expenses were voluntarily waived by First Albany Asset Management
Corporation. During the period from May 11, 1991 to December 31,
1991, all operating expenses in excess of 0.50% of average daily net
assets were voluntarily waived by First Albany Asset Management
Corporation. For the year ended December 31, 1992, a portion of
operating expenses equal to 0.30% of average daily net assets were
voluntarily waived by First Albany Asset Management Corporation. For
the year ended December 31, 1993, a portion of operating expenses
equal to 0.09% of average daily net assets were voluntarily waived by
First Albany Asset Management Corporation. For the period ended
October 31, 1994, a portion of operating expenses equal to 0.34% of
average daily new assets were voluntarily waived and reimbursed by Key
Trust Company and Concord Holding Corporation. During the fiscal
period ended October 31, 1995, [to be inserted].
* Annualized
** Commencement of operations
*** The Fund's fiscal year end was changed to the period ending October 31 of
each year.
+ Total return does not include the one time sales charge and for a period
of less than one year is not annualized. Total returns would have
been lower had certain expenses not been reduced during the period.
THE FUND'S INVESTMENT OBJECTIVE
The Fund seeks to provide a high level of current income exempt from federal,
New York State and New York City income taxes, consistent with the preservation
of shareholders' capital. The investment objective of the Fund is fundamental
and may not be changed without a vote of the holders of a majority of its
outstanding voting securities (as defined in the Statement of Additional
Information). There can be no assurance that the Fund will achieve its
investment objective.
THE FUND'S INVESTMENT POLICIES AND RISK FACTORS
The Fund pursues its objective by investing primarily in a portfolio of
municipal securities. In normal markets, the Fund will invest at least 80%
(and generally all) of its portfolio in federally tax-exempt securities and
will maintain at least 65% of the portfolio in insured investments of New York
State and its public authorities, instrumentalities, and municipalities. The
Fund generally invests all of its portfolio in federally tax-exempt and insured
municipal securities. The Fund expects that these insured investments will
have the highest rating of Standard & Poor's and/or Moody's; however, it may
invest, without percentage limitation, in securities having at the time of
purchase one of the three highest ratings by these agencies (AAA, AA, A, or
Aaa, Aa, A, respectively). Any securities owned which are downgraded below the
fourth highest rating (BBB or Baa) will be held only temporarily. (See the
Statement of Additional Information for a detailed description of the ratings.)
This policy will limit the Fund's ability to invest in lower-rated securities
from which a higher yield, but at a higher risk, may be derived. As a matter
of investment policy, the Fund does not invest in securities the interest on
which constitutes a preference item, and consequently, may be subject to the
federal alternative minimum tax on individuals.
In adverse markets, the Fund may take temporary defensive positions and invest
up to 50% of its portfolio in short-term investments which may be uninsured.
To the extent that these short-term investments are not tax-exempt securities,
the income received by the Fund may be taxable to investors. These investments
will be limited to:
- -Obligations of the United States government and its agencies and
instrumentalities. These investments, limited to short maturities as temporary
investments, would not be made routinely, nor to any significant extent.
- -Commercial paper rated in the highest grade by either Moody's or Standard &
Poor's. (See the Statement of Additional Information for ratings.)
8
<PAGE> 279
- - High-quality obligations of U.S. banks belonging to the Federal Reserve
System having assets of $10 billion or more.
- - Municipal bonds or any of the previously mentioned investments subject to
short-term repurchase agreements.
Because the Fund generally invests such a significant portion of its portfolio
in New York City and State securities, it has elected to be non-diversified.
As more than 5% of its assets may be invested in the securities of a single
issuer, and as assets may be concentrated in the same economic sector, the
susceptibility of investments to a single economic, political, or regulatory
occurrence will be increased.
In determining the issuer of a tax-exempt security, each state and each
political subdivision, agency, and instrumentality of each state and each
multi-state agency of which such state is a member is a separate issuer. Where
securities are backed only by assets and revenues of a particular
instrumentality, facility, or subdivision, such entity is considered the
issuer. Percentage limitations referred to in this section and elsewhere in
this Prospectus are determined as of the time an investment is made.
Bonds held by the Fund are covered by an insurance policy applicable to the
specific security, either obtained by the issuer of the security or by a third
party from a private insurer. Insurance premiums for the municipal bonds are
paid in advance by the issuer or the third party obtaining such insurance.
Such policies are noncancellable and continue in force as long as the municipal
bonds are outstanding and the respective insurers remain in business.
The insurer unconditionally guarantees the timely payment of the principal of
and interest on the insured municipal bonds when and as such payments become
due but shall not be paid by the issuer, except that in the event of any
acceleration of the due date of the principal by reason of mandatory or
optional redemption (other than acceleration by reason of a mandatory sinking
fund payment), default, or otherwise, the payments guaranteed will be made in
such amounts and at such times as payments of principal would have been due had
there not been such acceleration. The insurer will be responsible for such
payments less any amounts received by the Fund from any trustee for the
municipal bond issuers or from any other source. The insurance does not
guarantee the payment of any redemption premium, the value of the shares of the
Fund, or payments of any tender purchase price upon the tender of the municipal
bonds. With respect to small issue industrial development municipal bonds and
pollution control revenue municipal bonds, the insurer guarantees the full and
complete payments required to be made by or on behalf of an issuer of such
municipal bonds if there occurs any change in the tax-exempt status of interest
on such municipal bonds, including principal, interest, or premium payments, if
any, as and when required to be made by or on behalf of the issuer pursuant to
the terms of such municipal bonds. This insurance is intended to reduce
financial risk, but the cost thereof will reduce the yield available to
shareholders of the Fund.
In general, the longer the maturity of a municipal bond, the higher the rate of
interest it pays. A longer maturity is also generally associated with a higher
level of volatility in the market value of a municipal bond. There is
generally an inverse relationship between interest rates on the value of debt
obligations, i.e., as interest rates rise the value of debt obligations falls,
and falling rates should produce higher values. Since the portfolio's
objective is to provide high current income consistent with capital
preservation, the Fund will invest in municipal obligations with a slightly
greater emphasis on income than on the stability of the portfolio's net asset
value. The average maturity of the portfolio will vary depending on market
conditions. The Fund will generally invest in bonds that have a maturity of
20-30 years.
Municipal bonds generally have a provision permitting the issuer to redeem or
call the bonds prior to their maturity dates at a specified price which
typically reflects a premium over the bond's original issue price. Most
municipal bonds have call protection (e.g., a period of time during which the
bonds may be called) which usually lasts seven to 10 years. An issuer
generally may be expected to call its bonds, or a portion of them, during
periods of declining interest rates, when borrowings may be replaced at lower
rates than those obtained in prior years. Proceeds of a bond called under such
circumstances may be reinvested at lower yields. When pricing the portfolio,
each callable bond's call features are considered so that the call of some or
all of the Fund's callable bonds is not expected to have
9
<PAGE> 280
a material impact on the Fund's net asset value. This pricing procedure and
the amortization procedures required by the Internal Revenue Service should
reduce any material adverse impact in connection with a call of bonds purchased
at a premium. Nevertheless, there is no guarantee that a call may not have a
substantial price impact or that the Fund's objectives will be achieved. As
previously stated, however, the Fund intends to invest only in insured
obligations earning the highest credit rating which substantially reduces the
credit risk of the issuer.
The investment policies of the Fund may be changed without an affirmative vote
of the holders of a majority of the Fund's outstanding voting securities unless
(1) a policy is expressly deemed to be a fundamental policy of the Fund or (2)
a policy is expressly deemed to be changeable only by such majority vote.
The Fund is advised by Key Advisers, an indirect subsidiary of KeyCorp, which
purchases securities for the Fund consistent with its investment objective and
policies and which meet the quality and maturity characteristics established
for the Fund.
From time to time, the Fund, to the extent consistent with its investment
objective, policies and restrictions, may invest in securities of issuers with
which Key Advisers, the Sub-Adviser or their affiliates have a lending
relationship.
RISK FACTORS
Key Advisers or the Sub-Adviser has thoroughly researched the economic
conditions of New York State and New York City. New York State (the "State")
has historically been one of the wealthiest states in the nation. For decades,
however, the State economy has grown more slowly than that of the nation as a
whole, and the result has been a gradual erosion of the State's relative
economic affluence. Statewide, urban centers have experienced significant
changes involving migration of the more affluent to the suburbs and an influx
of generally less affluent residents. Regionally, the older Northeast cities
have suffered because of the relative success that the South and the West have
had in attracting people and business. New York City (the "City") also has had
to face greater competition as other major cities have developed financial and
business capabilities which make them less dependent on the specialized
services traditionally available almost exclusively in New York City.
As of the date of this Prospectus, Moody's Investor Services, Inc. ("Moody's")
rating of the State general obligation bonds stood at A and Standard & Poor's
Corporation ("Standard & Poor's") rating stood at. New York City accounts for
approximately 40% of the State's population and personal income, and the City's
financial health affects the State in numerous ways. Severe financial
difficulties were encountered by the City in 1975 and caused it to lose access
to the public credit market. At that time, the City was incurring substantial
operating deficits and employing financial and accounting practices which were
widely criticized. Since that time, the City benefitted substantially from
financial assistance provided through a combination of federal, State, and
private measures and the City has extensively revised its financial systems and
accounting practices. Since the 1978 fiscal year, the City's annual financial
statements, prepared in accordance with GAAP, have been audited by independent
certified accountants and four-year financial plans have been prepared
annually.
In recent years, forecasting business and individual income taxes has been
complicated by the difficulty of estimating the effects of federal tax reform
and new State and local laws. The City's tax revenues have been below expected
levels. Local employment data confirm that the City's economy is severely
affected by the economic events impacting the securities industry and the
resulting impact of layoffs in the finance, insurance, and real estate sectors.
As of the date of this Prospectus, Moody's rating of the City's general
obligation bonds stood at Baa1 and Standard & Poor's rating stood at ____.
Certain agencies of New York State--including the State Housing Finance Agency
("HFA"), the Battery Park City Authority ("BPCA"), the Metropolitan
Transportation Authority ("MTA"), and the Urban Development Corporation ("UDC")
have faced, and continue to experience, substantial financial difficulties
which could adversely affect the ability of such agencies to make payments of
interest on, and principal amounts of, their respective bonds. The
difficulties have in certain instances caused the State (under its so-called
"moral obligation") to appropriate funds on behalf of the agencies; moreover,
it is expected that the problems faced by these agencies will continue and will
require increasing amounts of State assistance in future years. Failure of the
State to
10
<PAGE> 281
appropriate necessary amounts or to take other action to permit those agencies
having financial difficulties to meet their obligations (including HFA, UDC,
MTA, and BPCA) could result in a default by one or more of the agencies. Such
default, if it were to occur, would likely have a significant adverse effect on
investor confidence in, and therefore the market price of, obligations of the
defaulting agencies. In addition, any default in payment on any general
obligation of any agency whose bonds contain a moral obligation provision could
constitute a failure of certain conditions that must be satisfied in connection
with federal guarantees of New York City and could thus jeopardize the City's
long-term financing plans.
Because of the many factors which influence debt securities, including economic
and interest rate trends and government actions and regulations, market risks
are involved, and there can be no assurance that the Fund will achieve its
objectives.
ADDITIONAL INFORMATION REGARDING SECURITIES IN WHICH THE FUND MAY INVEST
The following paragraphs provide a brief description of some of the types of
securities in which the Fund may invest, the transactions it may make and the
strategies it may adopt. The Fund may, following notice to its shareholders,
take advantage of other investment practices which are not at present
contemplated for use by the Fund or which currently are not available but which
may be developed, to the extent such investment practices are both consistent
with the Fund's investment objective and legally permissible for the Fund.
Such investment practices, if they arise, may involve risks which exceed those
involved in the activities described in this Prospectus.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Fund does not intend to
invest in forward commitments for speculative purposes: however, the Fund may
purchase and sell municipal securities on a "when-issued" and "delayed
delivery" basis. These are arrangements in which the Fund purchases securities
with payment and delivery scheduled for a future date. If completed, the
transaction will generally settle within 60 days. Purchases of municipal
securities on a "when-issued" or "delayed delivery" basis will generally settle
within 60 days. Purchases of municipal securities on a "when-issued" or
"delayed delivery" basis are subject to market fluctuation and are subject to
the risk that the value or yields at delivery may be more or less than the
purchase price or the yields available when the transaction was initiated.
Although the Fund will generally purchase municipal securities on a
"when-issued" basis with the intention of acquiring such securities, it may
sell such securities before the settlement date if it is deemed advisable.
When the Fund is the buyer in such a transaction, it will maintain cash or
high-grade readily marketable debt securities sufficient to pay for such
purchase commitments. To the extent the Fund engages in "when-issued" and
"delayed delivery" transactions, it will do so only for the purpose of
acquiring portfolio securities consistent with the Fund's investment objectives
and policies, and not for the purpose of leverage in "when-issued" and "delayed
delivery" transactions. The Fund relies on the seller to complete the
transaction. The other party's failure may cause the Fund to miss a price or
yield considered advantageous. Securities purchased on a "when-issued" or
"delayed delivery" basis generally do not earn interest until their scheduled
settlement date.
VARIABLE RATE DEMAND NOTES. The Fund may purchase variable rate demand notes
("VRDNs"), which are tax-exempt obligations containing a floating or variable
interest rate adjustment formula, together with an unconditional right of the
Fund to demand payment of the unpaid principal balance plus accrued interest
upon a short notice period, generally not to exceed seven days. The Fund may
also invest in participation VRDNs, which provide the Fund with an undivided
interest in underlying VRDNs held by major investment banking institutions.
Any purchase of VRDNs will meet applicable diversification and concentration
requirements.
REPURCHASE AGREEMENTS. In a repurchase agreement, the Fund purchases a
security at one price and simultaneously agrees to sell it back at a higher
price. In the event of the bankruptcy of the other party to a repurchase
agreement, the Fund could experience delays in recovering its cash. To the
extent that, in the meantime, the value of the underlying security had
decreased, the Fund could experience a loss. In all cases, Key Advisers or the
Sub-Adviser must find the creditworthiness of the other party to the
transaction satisfactory. The Fund may invest only in repurchase agreements
that are secured by those securities in which it is permitted to invest
directly. Repurchase agreements are considered by the staff of the Securities
and Exchange Commission to be loans by the Fund.
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MUNICIPAL SECURITIES include debt obligations issued to obtain funds for
various public purposes, including the construction of a wide range of public
facilities such as bridges, highways, housing, hospitals, mass transportation,
schools, streets, and water and sewer works. Other public purposes for which
municipal securities or bonds may be issued include the refunding of
outstanding obligations, obtaining funds for general operating expenses and the
obtaining of funds to loan to other public institutions and facilities. In
addition, certain types of industrial development bonds are issued by or on
behalf of public authorities to obtain funds to provide privately operated
housing facilities, sports facilities, convention or trade show facilities,
airport, mass transit, port or parking facilities, air or water pollution
control facilities, and certain local facilities for water supply, gas,
electricity or sewage or solid waste disposal. Such obligations are included
within the term municipal bonds if the interest rate paid thereon qualifies as
exempt from federal income tax. Other types of industrial development bonds,
the proceeds of which are used for the constructing, equipment, repair, or
improvement of privately operated industrial or commercial facilities, may
constitute municipal bonds, although the current federal tax laws place
substantial limitations on the size of such issues.
The two principal classifications of municipal securities are "general
obligation bonds" and "revenue bonds." General obligation bonds are secured by
the issuer's pledge of its faith, credit, and taxing power for the payment of
principal and interest. Revenue bonds are payable only from the revenues
derived from a particular facility or class of facility or, in some cases, from
the proceeds of a special excise or specific revenue source. A type of revenue
bond common to New York State is a "moral obligation" bond. Under applicable
State law, the State may be called upon to restore deficits in reserve capital
funds of such agencies or authorities created with respect to the bonds. Any
such restoration requires appropriations by the state legislature and,
accordingly, the bonds do not constitute the pledge of the credit of the issuer
of such bonds. Of course, there are variations in the security of municipal
bonds, both within a particular classification and between classifications,
depending on numerous factors.
The values of outstanding municipal bonds will vary as a result of changing
evaluations of the ability of their issuers to meet the interest and principal
payments. Such values will also change in response to changes in the interest
rates payable on new issues of municipal bonds. Should such interest rates
rise, the values of outstanding bonds, including those held in the Fund's
portfolio will decline and (if purchased at principal amount) would sell at
discount. Conversely, if such interest rates fall, the values of outstanding
bonds will increase and (if purchased at principal amount) would sell at a
premium. Changes in the value of municipal bonds held in the portfolio arising
from these or other factors would sell at a premium. Changes in the value of
municipal bonds held in the portfolio arising from these or other factors will
cause changes in the net asset value per share of the Fund. The Fund will not
invest more than 5% of its assets in securities where the principal amount and
interest are the responsibility of an industrial user with less than three
year's operational history.
DELAYED-DELIVERY TRANSACTIONS. The Fund may buy and sell securities on a
when-issued or delayed-delivery basis, with payment and delivery taking place
at a future date. The market value of securities purchased in this way may
change before the delivery date, which could increase fluctuations in the
Fund's yield. Ordinarily, the Fund will not earn interest on securities
purchased until they are delivered.
A DEMAND FEATURE is a put that entitles the security holder to repayment of the
principal amount of the underlying security on no more than 30 days' notice at
any time or at specified intervals.
Issuers or financial intermediaries who provide demand features or standby
commitments often support their ability to buy securities on demand by
obtaining letters of credit (LOCs) or other guarantees from domestic or foreign
banks. LOCs also may be used as credit supports for other types of municipal
instruments. Key Advisers or the Sub-Adviser may rely upon its evaluation of a
bank's credit in determining whether to purchase an instrument supported by an
LOC. In evaluating a foreign bank's credit, Key Advisers or the Sub-Adviser
will consider whether adequate public information about the bank is available
and whether the bank may be subject to unfavorable political or economic
developments, currency controls, or other governmental restrictions that might
affect the bank's ability to honor its credit commitment.
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MUNICIPAL LEASE OBLIGATIONS are issued by a state or local government or
authority to acquire land and a wide variety of equipment and facilities.
These obligations typically are not fully backed by the municipality's credit,
and their interest may become taxable if the lease is assigned. If funds are
not appropriated for the following year's lease payments, the lease may
terminate, with the possibility of default on the lease obligation and
significant loss to the Fund. Certificates of Participation in municipal lease
obligations or installment sales contracts entitle the holder to a
proportionate interest in the lease-purchase payments made.
INDUSTRIAL DEVELOPMENT BONDS are a type of revenue bond backed by the credit
and security of a private issuer and may involve greater risk.
REFUNDING CONTRACTS. The Fund may purchase securities on a when-issued basis
in connection with the refinancing of an issuer's outstanding indebtedness.
Refunding contracts require the issuer to sell and the Fund to buy refunded
municipal obligations at a stated price and yield on a settlement date that may
be several months or several years in the future.
RESOURCE RECOVERY BONDS are a type of revenue bond issued to build facilities
such as solid waste incinerators or waste-to-energy plants. Typically, a
private corporation will be involved, at least during the construction phase,
and the revenue stream will be secured by fees or rents paid by municipalities
for use of the facilities. The viability of a resource recovery project,
environmental protection regulations, and project operator tax incentives may
affect the value and credit quality of resource recovery bonds.
TAX AND REVENUE ANTICIPATION NOTES are issued by municipalities in expectation
of future tax or other revenues, and are payable from those specific taxes or
revenues. BOND ANTICIPATION NOTES normally provide interim financing in
advance of an issue of bonds or notes, the proceeds of which are used to repay
the anticipation notes. TAX-EXEMPT COMMERCIAL PAPER is issued by
municipalities to help finance short-term capital or operating needs.
VARIABLE AND FLOATING RATE INSTRUMENTS, including certain participation
interests in municipal obligations, have interest rate adjustment formulas that
help to stabilize their market values. Many variable and floating rate
instruments also carry demand features that permit the Fund to sell them at par
value plus accrued interest on short notice. When determining the maturity of
a variable or floating rate instrument, the Fund may look to the date the
demand feature can be exercised, or to the date the interest rate is
readjusted, rather than to the final maturity of the instrument.
ZERO COUPON DEBT SECURITIES do not make regular interest payments. Instead
they are sold at a deep discount from their face value. In calculating its
daily dividend, the Fund takes into account as income a portion of the
difference between these securities' purchase prices and their face values.
Because this income must be taken into account prior to the receipt of any cash
from such securities, the Fund may be required to obtain cash from other
sources, such as the sale of obligations in its portfolio, in order to satisfy
the distribution requirements necessary for qualification as a regulated
investment company under the Internal Revenue Code. Because they do not pay
current income, the prices of zero coupon debt securities can be very volatile
when interest rates change.
INVESTMENT COMPANY SECURITIES. The Fund may invest up to 5% of its total
assets in the securities of any one investment company, but may not own more
than 3% of the securities of any one investment company or invest more than 10%
of its total assets in the securities of other investment companies. Pursuant
to an exemptive order received by the Victory Portfolios from the Commission,
the Fund may invest in the money market funds of the Victory Portfolios. Key
Advisers and/or the Sub-Adviser will waive its investment advisory fee
attributable to the Fund's assets invested in a fund of the Victory Portfolios,
and to the extent required by the laws of any state in which shares of a fund
of the Victory Portfolios are sold, Key Advisers and/or the Sub-Adviser will
waive its investment advisory fee as to all assets invested in other investment
companies. Because such other investment companies employ an investment
adviser, such investment by the Fund will cause shareholders to bear
duplicative fees, such as management fees, to the extent such fees are not
waived by Key Advisers and/or the Sub-Adviser. The Fund will invest only in
the securities of other money market funds which have similar investment
policies and objectives and which invest only in securities of equal or higher
short-term ratings as the securities in which the fund may invest.
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LIMITING INVESTMENT RISKS
The following summarizes the Fund's principal investment limitations. A
complete listing is contained in the Statement of Additional Information.
1. To meet federal income tax requirements for qualification as a "regulated
investment company," the Fund limits its investments so that at the
close of every quarter of its taxable year: (a) no more than 25% of
total assets are invested in securities of a single issuer, and (b)
with regard to at least 50% of total assets, no more than 5% of total
assets are invested in the securities of a single issuer.
2. The Fund may not borrow money, except that (a) the Fund may enter into
commitments to purchase securities in accordance with the Fund's
investment program, including delayed-delivery and when-issued
securities and reverse repurchase agreements, provided that the total
amount of any such borrowing may not exceed 33 1/3% of the Fund's
total assets; and (b) the Fund may borrow money for temporary or
emergency purposes in an amount not exceeding 10% of the value of the
Fund's total assets at the time of borrowing.
3. The Fund will not purchase a security if, as a result, more than 15% of
its net assets would be invested in illiquid securities. The Fund may
invest up to 15% of its net assets in illiquid investments
(investments that cannot be readily sold within seven days in the
usual course of business at approximately the price at which the Fund
has valued them), including restricted securities deemed to be
illiquid. Under the supervision of the Trustees, Key Advisers or the
Sub-Adviser determines the liquidity of the Fund's investments. The
absence of a trading market can make it difficult to ascertain a
market value for illiquid investments. Disposing of illiquid
investments may involve time-consuming negotiation and legal expenses,
and it may be difficult or impossible for the Fund to sell them
promptly at an acceptable price.
Except for the Fund's investment objective, the diversification limitation in
limitation 1 and the percentage limitation on borrowing in limitation 2(b), the
policies described in this Prospectus are not fundamental. Non-fundamental
limitations may be changed without shareholder approval. Whenever an
investment policy or limitation states a maximum percentage of the Fund's
assets that may be invested, such percentage limitation will be determined
immediately after and as a result of the investment, except in the case of
borrowing (or other activities that may be deemed to result in the issuance of
a "senior security" under the 1940 Act). Any subsequent change in values,
assets, or other circumstances will not be considered when determining whether
the investment complies with the Fund's investment policies and limitations.
If the value of a Fund's holdings of illiquid securities at any time exceeds
the percentage limitation applicable at the time of acquisition due to
subsequent fluctuations in value or other reasons, the Board of Trustees will
consider what actions, if any, are appropriate to maintain adequate liquidity.
PORTFOLIO TRANSACTIONS
Brokerage firms are utilized to conduct securities transactions for the Fund.
Broker-dealers are chosen by judging professional ability and quality of
service. The Fund's securities are generally traded in the over-the-counter
market through broker-dealers. In the over-the-counter market, a securities
broker-dealer makes a market for securities by offering to buy at one price and
sell at a slightly higher price. The difference between the prices is known as
a spread. [Since Key Advisers or the Sub-Adviser trades a large number of
securities, broker-dealers are willing to work with the Fund on a more
favorable spread than would be possible for most individual investors.]
Key Advisers or the Sub-Adviser may allocate transactions to broker-dealers who
help distribute the Fund's shares or the shares of the other funds of the
Victory Portfolios, to the extent permitted by law. Key Advisers or the
Sub-Adviser will make such allocations only if brokerage fees are comparable to
those charged by non-affiliated, qualified broker-dealers for similar services.
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Key Advisers or the Sub-Adviser may engage in short-term trading with respect
to the Fund when it believes it is consistent with the Fund's investment
objective and policies. Also, a security may be sold and another of comparable
quality simultaneously purchased to take advantage of what Key Advisers or the
Sub-Adviser believes to be a temporary disparity in the normal yield
relationship between the two securities. The frequency of portfolio
transactions--the Fund's turnover rate--will vary from year to year depending
on market conditions. The portfolio turnover rates for the Fund's fiscal years
ended October 31, 1994 and October 31, 1995 were 12%, and ___% (each
annualized), respectively. The Fund's portfolio turnover rate is not expected
to exceed 100%.
HOW TO INVEST, EXCHANGE AND REDEEM
HOW TO INVEST
The Fund offers investors two different classes of shares. The different
classes of shares represent investments in the same portfolio of securities but
are subject to different expenses and will likely have different share prices.
- - CLASS A SHARES. If you buy Class A shares, you pay an initial sales charge
(on investments up to $1 million).
- - CLASS B SHARES. If you buy Class B shares, you pay no sales charge at the
time of purchase, but if you sell your shares within six years, you will
normally pay a contingent deferred sales charge ("CDSC") that varies depending
on how long you own your shares.
- - WHICH CLASS OF SHARES SHOULD YOU CHOOSE? Once you decide that the Fund is
an appropriate investment for you, the decision as to which class of shares is
better suited to your needs depends on a number of factors which you should
discuss with your financial advisors:
- - Amount of investment. If you plan to invest a substantial amount, the
reduced sales charges available for larger purchases of Class A shares may be
more beneficial to you. Any order for $1 million or more on behalf of a single
investor will only be accepted for Class A shares for that reason.
- - Investment horizon. While future financial needs cannot be predicted with
certainty, investors who prefer not to pay an initial sales charge and who plan
to hold their shares for more than six years might consider Class B shares.
Investors who plan to redeem shares within eight years might prefer Class A
shares.
- - Differences in account features. The dividends payable to Class B
shareholders will be reduced by the additional expenses borne solely by that
class, such as the asset-based sales charge to which Class B shares are
subject, as described below and in the Statement of Additional Information.
- - Investment Professionals. A salesperson or any other person who is entitled
to receive compensation for selling Victory Portfolios shares may receive
different compensation for selling one class than for selling another class.
The purpose of both the CDSC (and asset-based sales charge) for Class B shares,
and the purpose of the front-end sales charge on sales of Class A shares is
primarily to compensate such sales persons.
- - HOW ARE SHARES PURCHASED? Shares may be purchased directly or through an
Investment Professional. Investment Professionals are securities brokers or
other financial institutions that have entered into selling or servicing
agreements with the Fund or the Distributor. Shares are also available to
clients of bank trust departments who have qualified trust accounts. The
minimum investment is $500 for the initial purchase and $25 thereafter.
Accounts set up through a bank trust department or an Investment Professional
may be subject to different minimums. When you buy shares, be sure to specify
Class A or Class B shares. If you do not make a selection, your investment
will be made in Class A shares.
- - Investing Through Your Investment Professional. Your Investment
Professional will place your order with the Transfer Agent on your behalf. You
may be required to establish a brokerage or agency account. Your Investment
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Professional will notify you whether subsequent trades should be directed to
the Investment Professional or directly to the Fund's Transfer Agent. Accounts
established with Investment Professionals may have different features,
requirements and fees. In addition, Investment Professionals may charge for
their services. Information regarding these features, requirements and fees
will be provided by the Investment Professional. If you are purchasing shares
of any Fund through a program of services offered or administered by your
Investment Professional, you should read the program materials in conjunction
with this Prospectus.
- - Investing Through The Systematic Investment Plan. You can use the
Systematic Investment Plan to purchase shares directly from your bank account.
Please refer to "Systematic Investment Plan" below for more details.
- - Investing Through Your Bank Trust Department. Your bank trust department
may require a minimum investment and may charge additional fees. Fee schedules
for such accounts are available upon request and are detailed in the agreements
by which a client opens the desired account. Your bank trust department may
require a completed and signed application for the Fund in which an investment
is made. Additional documents may be required from corporations, associations,
and certain fiduciaries. Any account information, such as balances, should be
obtained through your bank trust department. Additional purchases, exchanges
or redemptions should also be coordinated through your bank trust department.
Contact your bank trust department for instructions.
The services rendered by a bank trust department, including affiliates of Key
Advisers or the Sub-Adviser, in the management of its accounts are not
duplicative of any of the services for which Key Advisers or the Sub-Adviser as
the investment adviser or sub-adviser, respectively, is compensated for
advising the Fund. The charges paid by clients of bank trust departments, or
their affiliates, should be considered in calculating the net yield and return
on the client's investments in the Fund, although such charges do not affect
the Fund's dividends and distributions.
INVESTING DIRECTLY
BY MAIL: You may purchase shares by completing and signing an account
application (initial purchase only) and mailing it, together with a check (or
other negotiable bank draft or money order) in the amount of at least the
minimum investment requirement to, The Victory New York Tax-Free Fund, Primary
Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741.
Subsequent purchases may be made in the same manner.
BY WIRE: Call 800-539-3863 to set up your Fund account to accommodate wire
transactions. YOU MUST CALL THE TRANSFER AGENT BEFORE WIRING FUNDS. You will
begin to earn dividends on the first business day following receipt of your
wire. Federal funds (monies transferred from one bank to another through the
Federal Reserve System with same-day availability) should be wired to:
Boston Safe Deposit & Trust Co.
ABA #011001234
Credit PFSC DDA#16-918-8
The Victory Portfolios: New York Tax-Free Fund
You must include your account number, your name(s), tax identification
number(s) and the control number assigned by the Transfer Agent. The Fund does
not impose a fee for wire transactions, although your bank may charge you a fee
for this service.
Shares are sold at the public offering price based on the net asset value that
is next determined after the Transfer Agent receives the purchase order. In
most cases, to receive that day's offering price, the Transfer Agent must
receive your order before the close of regular trading of the New York Stock
Exchange ("NYSE") (generally 4:00 p.m. Eastern time) (the "Valuation Time") on
each Business Day (as defined in "Net Asset Value Per Share")of the Fund. If
you buy shares through an Investment Professional, the Investment Professional
must receive your order in a timely fashion on a regular Business Day and
transmit it to the Transfer Agent so that it is received before the close of
business that day. The Transfer Agent may reject any purchase order for the
Fund's shares, in its sole discretion.
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It is the responsibility of your Investment Professional to transmit your order
to purchase shares to the Transfer Agent in a timely fashion in order for you
to receive that day's share price.
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INVESTMENT REQUIREMENTS
All purchases must be made in U.S. dollars. Checks must be drawn on U.S.
banks. No cash will be accepted. If you make a purchase with more than one
check, each check must have a value of at least $25, and the minimum investment
requirement still applies. The Fund reserves the right to limit the number of
checks processed at one time. If your check does not clear, your purchase will
be canceled and you could be liable for any losses or fees incurred. Payment
for the purchase is expected at the time of the order. If payment is not
received within three business days of the date of the order, the order may be
canceled, and you could be held liable for resulting fees and/or losses.
CLASS A SHARES. Class A shares are sold at their offering price, which is
normally net asset value plus an initial sales charge. However, in some cases,
described below, where purchases are not subject to an initial sales charge,
the offering price may be net asset value. In some cases, reduced sales
charges may be available, as described below. When you invest, the Fund
receives the net asset value for your account. The sales charge varies
depending on the amount of your purchase and a portion may be retained by the
Distributor and allocated to your Investment Professional. The Victory
Portfolios has a reinstatement policy which allows an investor who redeems
his/her shares originally purchased with a sales charge to reinvest within 90
days without incurring an additional sales charge. The current sales charge
rates and commissions paid to Investment Professionals are as follows:
<TABLE>
<CAPTION>
DEALER
FRONT-END SALES CHARGE REALLOWANCE
AS A PERCENTAGE OF AS A PERCENTAGE
OFFERING NET AMOUNT OF THE
AMOUNT OF PURCHASE PRICE INVESTED OFFERING PRICE (1)
- ------------------ ----- -------- ------------------
<S> <C> <C> <C>
Less than $49,999 4.75% 4.99% 4.00%
$50,000 to $99,999 4.50% 4.71% 4.00%
$100,000 to $249,999 3.50% 3.63% 3.00%
$250,000 to $499,999 2.25% 2.30% 2.00%
$500,000 to $999,999 1.75% 1.78% 1.50%
$1,000,000 and above 0.00% 0.00% (2)
</TABLE>
(1) Distributor reserves the right to reallow the entire sales charge to
dealers. If that occurs, the dealer may be considered an
"underwriter" under Federal securities laws.
(2) There is no initial sales charge on purchases of $1 million or more.
Investment Professionals will be compensated at the rate of up to
0.25% of such purchases.
The Distributor may pay all or a portion of any applicable sales charges and
service fees to Investment Professionals who sell shares of the Fund and
provide ongoing sales support services or shareholder support services. For
the three-year period commencing April 30, 1994, for activities in maintaining
and servicing accounts of customers invested in the Fund, First Albany
Corporation ("First Albany") and PFIC Securities Corporation ("PFIC") may
receive payments from the Distributor equal to two-thirds of the Dealer
Retention (as defined below) on any shares of the Fund (and other funds of the
Victory Portfolios) sold by First Albany or PFIC and their broker-dealer
affiliates. "Dealer Retention" is an amount equal to the difference between
the applicable sales charge and such part of the sales charge which is
reallowed to broker-dealers.
The Distributor, at its expense, may also provide additional cash compensation
to dealers in connection with sales of shares of the Fund. The maximum cash
compensation payable by the Distributor is currently 4.00% of the offering
price. In addition, the Distributor will, from time to time and at its own
expense, provide compensation, including financial assistance, to dealers in
connection with conferences, sales or training programs for their employees,
seminars for the public, advertising campaigns regarding one or more Victory
Portfolios and/or other dealer-sponsored special
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events including payment for travel expenses, including lodging, incurred in
connection with trips taken by invited registered representatives and members
of their families to locations within or outside of the United States for
meetings or seminars of a business nature. Compensation will include the
following types of non-cash compensation offered through sales contests: (1)
vacation trips including the provision of travel arrangements and lodging; (2)
tickets for entertainment events (such as concerts, cruises and sporting
events) and (3) merchandise (such as clothing, trophies, clocks and pens).
Dealers may not use sales of the Fund's shares to qualify for this compensation
if prohibited by the laws of any state or any self-regulatory organization,
such as the National Association of Securities Dealers, Inc. None of the
aforementioned compensation is paid for by the Fund or its shareholders.
REDUCED SALES CHARGES FOR CLASS A SHARES. You may be eligible to buy Class A
shares at reduced sales charge rates in one or more of the following ways:
LETTER OF INTENT. An investor may obtain a reduced sales charge by means of a
written Letter of Intent which expresses the investor's intention to purchase
shares of the Fund at a specified total public offering price within a 13-month
period.
A Letter of Intent is not a binding obligation upon the investor to purchase
the full amount indicated. The minimum initial investment under a Letter of
Intent is 5% of the total amount. Shares purchased with the first 5% of such
amount will be held in escrow (while remaining registered in the name of the
investor) to secure payment of the higher sales charge applicable to the shares
actually purchased if the full amount indicated is not purchased, and such
escrowed shares will be involuntarily redeemed to pay the additional sales
charge, if necessary. Dividends (if any) on escrowed shares, whether paid in
cash or reinvested in additional shares, are not subject to escrow. The
escrowed shares will not be available for disposal by the investor until all
purchases pursuant to the Letter of Intent have been made or the higher sales
charge has been paid. When the full amount indicated has been purchased, the
escrow will be released. A Letter of Intent may include purchases of shares
made not more than 90 days prior to the date the investor signs a Letter of
Intent; however, the 13-month period during which the Letter of Intent is in
effect will begin on the date of the earliest purchase to be included. An
investor may combine purchases that are made in an individual capacity with (1)
purchases that are made by members of the investor's immediate family and (2)
purchases made by businesses that the investor owns as sole proprietorships,
for purposes of obtaining reduced sales charges by means of a written Letter of
Intent. In order to accomplish this, however, investors must designate on the
account application the accounts that are to be combined for this purpose.
Investors can only designate accounts that are open at the time the Letter of
Intent is executed.
If an investor qualifies for a further reduced sales charge because the
investor has either purchased more than the dollar amount indicated on the
Letter of Intent or has entered into a Letter of Intent which includes shares
purchased prior to the date of the Letter of Intent, the difference in the
sales charge will be used to purchase additional shares of the Fund on behalf
of the investor; thus the total purchases (included in the Letter of Intent)
will reflect the applicable reduced sales charge of the Letter of Intent.
For investors who purchase more than the dollar amount indicated on the Letter
of Intent or enter into a Letter of Intent that includes shares purchased prior
to the date of the Letter of Intent and qualify for a reduced sales charge, all
such additional shares will be immediately purchased in the form of additional
shares and credited to the investor's account at the then current public
offering price applicable to a single purchase of the total amount of the
purchases.
For further information about Letters of Intent, interested investors should
contact the Transfer Agent at 800-539-3863. This program, however, may be
modified or eliminated at any time without notice.
RIGHT OF ACCUMULATION AND CONCURRENT PURCHASES
A shareholder may qualify for a reduced sales charge on purchases of Class A
Shares of the Fund and other funds of the Victory Portfolios by combining a
current purchase with purchases of another fund(s) or with certain prior
purchases of shares of the Victory Portfolios. The applicable sales charge is
based on the sum of (i) the purchaser's current purchase plus (ii) the current
public offering price of the purchaser's previous purchases of (a) all shares
held by the purchaser in
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the Fund and (b) all shares held by the purchaser in any other fund of the
Victory Portfolios (except money market funds).
To receive the applicable public offering price pursuant to the right of
accumulation, shareholders must provide the Transfer Agent with sufficient
information at the time of purchase to permit confirmation of qualification.
Accumulation privileges may be amended or terminated without notice at any time
by the Distributor.
- - WAIVERS OF CLASS A SALES CHARGES. No sales charge is imposed on sales of
Class A shares to the following categories of persons (which categories may be
changed or eliminated at any time):
(1) Current or retired trustees of the Victory Portfolios; employees,
directors, trustees, and their family members of KeyCorp or an
Affiliated Provider (Affiliated Providers refer to affiliates and
subsidiaries of KeyCorp and service providers to the Victory
Portfolios and the Victory Shares (collectively, the "Victory
Group")), dealers having an agreement with the Distributor and any
trade organization to which Key Advisers, the Sub-Adviser or the
Administrator belongs;
(2) Investors who purchase shares for trust, investment management or
certain other advisory accounts established with KeyCorp or any of its
affiliates;
(3) Investors who purchase shares through a 401(k) plan sponsored by an
Affiliated Provider;
(4) Investors who reinvest assets received in a distribution from a
qualified, non-qualified or deferred compensation plan, agency, trust
or custody account that was either (a) maintained by KeyCorp or an
Affiliated Provider, or (b) invested in a fund of the Victory Group;
(5) Investors who, within 90 days of redemption, use the proceeds from the
redemption of shares of another mutual fund complex for which they
previously paid a front end sales charge or sales charge upon
redemption of shares; and
(6) Shareholders of the former Investors Preference Fund For Income, Inc.
and the Investors Preference New York Tax-Free Fund, Inc. who have
continuously maintained accounts with a fund or funds of the Victory
Group with a balance of $250,000 or more (investors with less than
$250,000 will pay any applicable sales loads).
CLASS B SHARES. Class B shares are sold at net asset value per share without
an initial sales charge. However, if Class B shares are redeemed within six
years of their purchase, a CDSC will be deducted from the redemption proceeds.
That sales charge will not apply to shares purchased by the reinvestment of
dividends or capital gains distributions. The charge will be assessed on the
lesser of the net asset value of the shares at the time of redemption or the
original purchase price. The CDSC is not imposed on the amount of your account
value represented by the increase in net asset value over the initial purchase
price (including increases due to the reinvestment of dividends and capital
gains distributions). The Class B CDSC is paid to the Distributor to reimburse
its expenses of providing distribution-related services to the Fund in
connection with the sale of Class B shares.
To determine whether the CDSC applies to a redemption, the Victory Portfolios
deems shares to be redeemed in the following order: (1) shares acquired by
reinvestment of dividends and capital gains distributions, (2) shares held for
over six years, and (3) shares held the longest during the 6-year period. The
amount of the CDSC will depend on the number of years since you invested and
the dollar amount being redeemed, according to the following schedule:
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<TABLE>
<CAPTION>
Contingent Deferred Sales Charge
Years Since Purchase On Redemptions in That Year
Payment Was Made (As % of Amount Subject to Charge)
---------------- ---------------------------------
<S> <C>
0-1 5.0%
1-2 4.0%
2-3 3.0%
3-4 3.0%
4-5 2.0%
5-6 1.0%
6 and following None
</TABLE>
In the table, a "year" is a 12-month period. All purchases are considered to
have been made on the first regular business day of the month in which the
purchase was made.
- - WAIVERS OF CLASS B SALES CHARGE. The Class B CDSC will be waived if the
shareholder requests it for any of the following redemptions: (1) distributions
to participants or beneficiaries from Retirement Plans, if the distributions
are made (a) under an Automatic Withdrawal Plan after the participant reaches
age 59, as long as the payments are no more than 10% of the account value
annually (measured from the date the Transfer Agent receives the request), or
(b) following the death or disability (as defined in the Internal Revenue Code)
of the participant or beneficiary; (2) redemptions from accounts other than
Retirement Plans following the death or disability of the shareholder (as
evidenced by a determination of disability by the Social Security
Administration), and (3) returns of excess contributions to Retirement Plans.
The CDSC is also waived on Class B shares in the following cases: (i) shares
sold to Key Advisers, the Sub-Adviser or their affiliates; (ii) shares issued
in plans of reorganization to which the Victory Portfolios is a party; and
(iii) shares redeemed in involuntary redemptions as described above. Further
details about this policy are contained in "Reduced Sales Charges" in the
Statement of Additional Information.
- - AUTOMATIC CONVERSION OF CLASS B SHARES. Eight years after you purchase
Class B shares, those shares will automatically convert to Class A shares.
This conversion feature relieves Class B shareholders of the asset-based sales
charge that applies to Class B shares under the Class B Distribution Plan,
described below. The conversion is based on the relative net asset value of
the two classes, and no sales load or other charge is imposed. When Class B
shares convert, any other Class B shares that were acquired by the reinvestment
of dividends and distributions on the converted shares will also convert to
Class A shares. The conversion feature is subject to the continued
availability of a tax ruling described in "Alternative Sales
Arrangements--Class A and Class B Shares" in the Statement of Additional
Information.
- - DISTRIBUTION PLAN FOR CLASS B SHARES. The Victory Portfolios has adopted a
Distribution Plan (the "Plan") under Rule 12b-1 of the 1940 Act for Class B
shares to compensate the Distributor for its services and costs in distributing
Class B shares and servicing accounts. Under the Plan, the Victory Portfolios
pays the Distributor an annual "asset-based sales charge" of 0.75% per year on
Class B shares that are outstanding for 6 years or less. This fee is computed
on the average daily net assets of Class B shares and paid monthly. The
asset-based sales charge enables investors to buy Class B shares without a
front-end sales charge while enabling the Distributor to compensate dealers
that sell Class B shares. The asset-based sales charge increases Class B
expenses by up to 0.75% of average net assets per year.
The Distributor pays sales commissions of 4.00% of the purchase price to
dealers from its own resources at the time of sale. For activities in
maintaining and servicing accounts of customers invested in the Fund, First
Albany and PFIC Securities Corporation may receive payments from the
Distributor equal to two-thirds of the excess of the scheduled CDSC for a
redemption of a share during the first year after purchase over any scheduled
payment to the selling broker on such share. The Distributor retains the
asset-based sales charge to recoup the sales commissions it pays, the advances
of service fee payments it makes, and its financing costs. If the Plan is
terminated by the Victory Portfolios, it provides that the Trustees may elect
to continue payments for certain expenses already incurred. The payments under
the Plan
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<PAGE> 292
increase the annual expenses of Class B shares. For more details, please refer
to "Advisory and Other Contracts--Class B Shares Distribution Plan" in the
Statement of Additional Information.
SPECIAL INVESTOR SERVICES
- - THE SYSTEMATIC INVESTMENT PLAN. You can make regular investments in the
Fund and all other funds of the Victory Group with the Systematic Investment
Plan by completing the appropriate section of the account application and
attaching a voided personal check with your bank's magnetic ink coding number
across the front. If your bank account is jointly owned, be sure that all
owners sign. You must first meet the Fund's initial investment requirement of
$500, then investments may be made monthly by automatically deducting $25 or
more from your bank checking account. For officers, trustees, directors and
employees, including retired directors and employees, of the Victory Group,
KeyCorp and its affiliates, and the Administrator and its affiliates (and
family members of each of the foregoing, i.e., parents and children) who
participate in the Systematic Investment Plan, there is no minimum initial
investment required. You may change the amount of your monthly purchase at any
time. A bank draft form must be completed for this option. Your bank checking
account will be debited on the date indicated on your Account Application.
Shares will be purchased at the offering price next determined following
receipt of the order by the Transfer Agent. You may cancel the Systematic
Investment Plan at any time without payment of a cancellation fee. Your
monthly account statement will reflect systematic investment transactions, and
a debit entry will appear on your bank statement.
- - TELEPHONE TRANSACTIONS. You can initiate any transaction by telephone. You
may call the Transfer Agent toll-free at 800-539-3863 or call your Investment
Professional or bank trust department. See "Shareholder Account Rules and
Policies" for more information about telephone transactions.
- - THE SYSTEMATIC WITHDRAWAL PLAN. You can make regular withdrawals from your
account in any fund of the Victory Group with the Systematic Withdrawal Plan by
completing the appropriate section of the account application. If you own
shares in a fund worth $5,000 or more, you can have monthly, quarterly,
semi-annual or annual checks sent from your account directly to you, to a
person named by you, or to your bank checking account. The required minimum
withdrawal is $25. If you are having checks sent to your bank checking
account, attach a voided personal check with your bank's magnetic coding number
across the front of the account application. If your account is jointly owned,
be sure that all owners sign the application. You may obtain information about
the Systematic Withdrawal Plan by contacting your Investment Professional.
Your Systematic Withdrawal Plan payments are drawn from share redemptions. If
Systematic Withdrawal Plan redemptions exceed dividend distributions paid on
your Fund shares, your account eventually may be exhausted. If any applicable
sales charges are applied to new purchases of shares of the Fund, it is to your
disadvantage to buy shares of the Fund while also making systematic
redemptions.
Your account will be debited on the date you indicate on your Account
Application. Shares will be redeemed at the NAV as determined on the debit
date indicated on your Account Application. You may cancel the Systematic
Withdrawal Plan at any time without payment of a cancellation fee. Each
Systematic Withdrawal Plan transaction will appear as a debit entry on your
monthly account statement.
- - RETIREMENT PLANS. Retirement plans can be among the best tax-planning
vehicles available to individuals. Call your Investment Professional for more
information on the plans and their benefits, provisions and fees. Your
Investment Professional can set up your new account under one of several
tax-sheltered plans. These plans let you invest for retirement and shelter
your investment income from current taxes. Plans include Individual Retirement
Accounts (IRAs) and Rollover IRAs. Other fees may be charged by the IRA
custodian or trustee.
HOW TO REDEEM SHARES
You may redeem all or a portion of your shares on any day that the Fund is open
for business (see "Share Price" below). Shares will be redeemed at the NAV
next calculated after the Transfer Agent has received the redemption request.
If the Fund account is closed, any accrued dividends will be paid at the
beginning of the following month.
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<PAGE> 293
You may redeem shares in several ways:
<TABLE>
<S> <C> <C>
BY MAIL: Send a written request to: The Victory Portfolios: New York Tax-Free Fund
P.O. Box 9741
Providence, RI 02940-9741
</TABLE>
Write a "letter of instruction" with your name, the Fund's name, your Fund
account number, the dollar amount or number of shares to be redeemed, and any
additional requirements that apply to each particular account. You will need
the letter of instruction signed by all persons required to sign for
transactions, exactly as their names appear on the account application. A
signature guarantee is required if: you wish to redeem more than $10,000 worth
of shares; your Fund account registration has changed within the last 60 days;
the check is not being mailed to the address on your account; the check is not
being made out to the account owner; or the redemption proceeds are being
transferred to another Victory Group account with a different registration.
The following institutions should be able to provide you with a signature
guarantee: banks, brokers, dealers, credit unions (if authorized under state
law), securities exchanges and associations, clearing agencies, and savings
associations. A signature guarantee may not be provided by a notary public. A
signature guarantee is designed to protect you, the Fund, and its agents from
fraud. The Transfer Agent reserves the right to reject any signature guarantee
if (1) it has reason to believe that the signature is not genuine, (2) it has
reason to believe that the transaction would otherwise be improper, or (3) the
guarantor institution is a broker or dealer that is neither a member of a
clearing corporation nor maintains net capital of at least $100,000.
BY WIRE: You may make redemptions by wire provided you have established a Fund
account to accommodate wire transactions. If telephone instructions are
received before Valuation Time (generally 4:00 p.m. Eastern time), proceeds of
the redemption will be wired as federal funds on the next Business Day to the
bank account designated with the Transfer Agent. You may change the bank
account designated to receive an amount redeemed at any time by sending a
letter of instruction with a signature guarantee to the Transfer Agent, Primary
Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741.
BY TELEPHONE: To redeem by telephone, you may call the Transfer Agent toll
free at 800-539-3863 or call your Investment Professional or bank trust
department. See "Shareholder Account Rules and Policies" for more information
about telephone transactions.
ADDITIONAL REDEMPTION REQUIREMENTS: The Fund may withhold payment on
redemptions until it is reasonably satisfied that investments made by check
have been collected, which can take up to 15 days. Also, when the NYSE is
closed (or when trading is restricted) for any reason other than its customary
weekend or holiday closings, or under any emergency circumstances as determined
by the Commission to merit such action, the right of redemption may be
suspended or the date of payment postponed for a period of time that may exceed
7 days. In addition, the Fund reserves the right to advance the time on that
day by which purchase and redemption orders must be received. To the extent
that portfolio securities are traded in other markets on days when the NYSE is
closed, the Fund's NAV may be affected on days when investors do not have
access to the Fund to purchase or redeem shares.
If you are unable to reach the Transfer Agent by telephone (for example, during
times of unusual market activity), consider placing your order by mail directly
to the Transfer Agent. In case of suspension of the right of redemption, you
may either withdraw your request for redemption or receive payment based on the
NAV next determined after the termination of the suspension. If your balance
in the Fund falls below $500, you may be given 60 days' notice to reestablish
the minimum balance (except with respect to officers, trustees, directors and
employees, including retired directors and employees, of the Victory
Portfolios, KeyCorp and its affiliates, and the Administrator and its
affiliates (and family members of each of the foregoing, i.e., parents,
children and household members) participating in the Systematic Investment
Plan, to whom no minimum balance requirement applies). If you do not increase
your balance, your account may be closed and the proceeds mailed to you at the
address on record. Shares will be redeemed at the last calculated NAV on the
day the account is closed.
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<PAGE> 294
HOW TO EXCHANGE SHARES
Shares of the Fund may be exchanged for shares of certain funds of the Victory
Group at net asset value per share at the time of exchange, without a sales
charge. To exchange shares, you must meet several conditions:
- - Shares of the fund selected for exchange must be available for sale in
your state of residence.
- - The prospectuses of this Fund and the fund whose shares you want to
buy must offer the exchange privilege.
- - You must hold the shares you buy when you establish your account for
at least 7 days before you can exchange them; after the account is
open 7 days, you can exchange shares every regular Business Day.
- - You must meet the minimum purchase requirements for the fund you
purchase by exchange.
- - The registration and tax identification numbers of the two accounts
must be identical.
- - Before exchanging into a fund, obtain and read its prospectus.
Shares of a particular class may be exchanged only for shares of the same class
in the other funds of the Victory Group. For example, you can exchange Class A
shares of this Fund only for Class A shares of another fund. At present, not
all of the funds offer the same two classes of shares. If a fund has only one
class of shares that does not have a class designation, they are "Class A"
shares for exchange purposes. In some cases, sales charges may be imposed on
exchange transactions. Certain funds offer Class A or Class B shares and a
list can be obtained by calling the Transfer Agent at 800-539-3863. Please
refer to the Statement of Additional Information for more details about this
policy.
Telephone exchange requests may be made either by calling your Investment
Professional or the Transfer Agent at 800-539-3863 prior to valuation time
(generally 4:00 p.m. Eastern time) on any Business Day.
You can obtain a list of eligible funds of the Victory Group by calling the
Transfer Agent at 800-539-3863. Exchanges of shares involve a redemption of
the shares of the Fund and a purchase of shares of the other fund.
There are certain exchange policies you should be aware of:
- - Shares are normally redeemed from one fund and purchased from the other fund
in the exchange transaction on the same Business Day on which the Transfer
Agent receives an exchange request by Valuation Time (generally 4:00 p.m.
Eastern time) that is in proper form, but either fund may delay the purchase of
shares of the fund into which you are exchanging if it determines it would be
disadvantaged by a same-day transfer of the proceeds to buy shares. For
example, the receipt of multiple exchange requests from a dealer in a
"market-timing" strategy might require the disposition of securities at a time
or price disadvantageous to the Fund.
- - Because excessive trading can hurt fund performance and harm shareholders,
the Victory Portfolios reserves the right to refuse any exchange request that
will disadvantage it, or to refuse multiple exchange requests submitted by a
shareholder or dealer.
- - The Fund may amend, suspend or terminate the exchange privilege at any time
upon 60 days' written notice to shareholders.
- - If the Transfer Agent cannot exchange all the shares you request because of
a restriction cited above, only the shares eligible for exchange will be
exchanged.
- - Each exchange may produce a gain or loss for tax purposes.
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<PAGE> 295
Shareholders of the former Investors Preference Fund for Income, Inc. and
Investors Preference New York Tax-Free Fund, Inc. will not be subject to any
additional sales load upon an exchange of shares attributable to an Investors
Preference Funds account for shares of other funds of the Victory Portfolios.
SHAREHOLDER ACCOUNT RULES AND POLICIES
- - NET ASSET VALUE PER SHARE. The term "net asset value per share," or "NAV",
means the value of one share. The NAV of each class of shares is calculated by
adding the value of all of the Fund's investments, plus cash and other assets,
deducting expenses and liabilities of the Fund and of the class, and then
dividing the result by the number of shares of the class outstanding. The NAV
is determined as of the close of regular trading of the New York Stock Exchange
(NYSE), (generally 4:00 p.m. Eastern time) (the "Valuation Time") on each
Business Day of the Fund. A "Business Day" is a day on which the NYSE is open
for trading, the Federal Reserve Bank of Cleveland is open, and any other day
(other than a day on which no shares of the Fund are tendered for redemption
and no order to purchase any shares is received) during which there is
sufficient trading in its portfolio instruments that the Fund's net asset value
per share might be materially affected. The NYSE or the Federal Reserve Bank
of Cleveland will not be open in observance of the following holidays: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans' Day,
Thanksgiving Day, and Christmas Day.
The Fund's securities are valued primarily on the basis of market quotations
or, if quotations are not readily available, by a method that the Board of
Trustees believes accurately reflects fair value. Fair value of these
portfolio securities is determined by an independent pricing service approved
by the Trustees based primarily upon information concerning market transactions
and dealers quotations for similar securities.
- - THE OFFERING OF SHARES may be suspended during any period in which the
determination of net asset value is suspended, and the offering may be
suspended by the Trustees at any time the Trustees believe it is in the Fund's
best interest to do so.
- - TELEPHONE TRANSACTION PRIVILEGES for purchases, redemptions or exchanges
may be modified, suspended or terminated by the Fund at any time. If an
account has more than one owner, the Fund and the Transfer Agent may rely on
the instructions of any one owner. Telephone privileges apply to each owner of
the account and the dealer representative of record for the account unless and
until the Transfer Agent receives cancellation instructions from an owner of
the account.
- - TELEPHONE INSTRUCTIONS. Generally, neither the Fund, the bank trust
department nor the Transfer Agent will be responsible for any claims, losses or
expenses for acting on telephone instructions that are reasonably believed to
be genuine. The Transfer Agent and the Fund will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine and if they
do not employ reasonable procedures they may be liable for any losses due to
unauthorized or fraudulent instructions. The identification procedures may
include, but are not limited to, the following: account number, registration
and address, personalized security codes, taxpayer identification number and
other information particular to the account. Your Investment Professional,
bank trust department or the Transfer Agent may also record calls, and you
should verify the accuracy of your confirmation statements immediately after
you receive them.
- - REDEMPTION OR TRANSFER REQUESTS WILL NOT BE HONORED UNTIL THE TRANSFER AGENT
RECEIVES ALL REQUIRED DOCUMENTS IN PROPER FORM. From time to time, the
Transfer Agent in its discretion may waive certain of the requirements for
redemptions stated in this Prospectus.
- - DEALERS THAT CAN PERFORM ACCOUNT TRANSACTIONS FOR THEIR CLIENTS BY
PARTICIPATING IN NETWORKING through the National Securities Clearing
Corporation are responsible for obtaining their clients' permission to perform
those transactions and are responsible to their clients who are shareholders of
the Victory Portfolios if the dealer performs any transaction erroneously.
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<PAGE> 296
- - THE REDEMPTION PRICE FOR SHARES WILL VARY from day to day because the value
of the securities in the Fund fluctuates, and the value of your shares may be
more or less than their original cost.
- - PAYMENT FOR REDEEMED SHARES is made ordinarily in cash and forwarded by
check within three business days after the Transfer Agent receives redemption
instructions in proper form, except under unusual circumstances determined by
the Commission delaying or suspending such payments. The Transfer Agent may
delay forwarding a check for recently purchased shares, but only until the
purchase payment has cleared. That delay may be as much as 15 days from the
date the shares were purchased. That delay may be avoided if you arrange with
your bank to provide telephone or written assurance to the Transfer Agent that
your purchase payment has cleared.
- - INVOLUNTARY REDEMPTIONS OF SMALL ACCOUNTS. If your account value has fallen
below $500, you will be given 60 days' notice to reestablish the minimum
balance. If you do not increase your minimum balance, your account may be
closed and the proceeds mailed to you at the record address. In some cases
involuntary redemptions may be made to repay the Distributor for losses from
the cancellation of share purchase orders. Under unusual circumstances, shares
of the Fund may be redeemed "in kind," which means that the redemption proceeds
will be paid with securities from the Fund. Please refer to the Statement of
Additional Information for more details.
- - "BACKUP WITHHOLDING" of Federal income tax may be applied at the rate of 31%
from dividends, distributions and redemption proceeds (including exchanges) if
you fail to furnish the Victory Portfolios with a certified Social Security or
taxpayer identification number when you sign your application, or if you
violate Internal Revenue Service regulations on tax reporting of dividends.
- - THE VICTORY PORTFOLIOS DOES NOT CHARGE A REDEMPTION FEE, but if your
Investment Professional handles your redemption, they may charge a separate
service fee. Under the circumstances described in "How to Invest," you may be
subject to CDSC when redeeming Class B shares.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS. The Fund ordinarily declares and pays dividends separately for
Class A and Class B shares from its net investment income monthly. The Fund
distributes substantially all net capital gains, if any, to shareholders each
year, to the extent necessary to qualify for favorable federal tax treatment.
CAPITAL GAINS. The Fund may make distributions annually out of any net
short-term or long-term capital gains, and the Fund may make supplemental
distributions of dividends and capital gains following the end of its fiscal
year.
DISTRIBUTION OPTIONS
When you fill out your account application, you can specify how you want to
receive your dividend distributions. Currently, there are five available
options:
1. REINVESTMENT OPTION. Your income and capital gain dividends, if any,
will be automatically reinvested in additional shares of the Fund.
Income and capital gain dividends will be reinvested at the net asset
value of your class of shares of the Fund as of the day after the
record date. If you do not indicate a choice on your application, you
will be assigned this option.
2. CASH OPTION. You will receive a check for each income or capital gain
dividend, if any. Distribution checks will be mailed no later than 7
days after the dividend payment date which may be more than 7 days
after the dividend record date.
3. INCOME EARNED OPTION. You will have your capital gain dividend
distributions, if any, reinvested automatically in the Fund and have
your income dividends paid in cash.
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<PAGE> 297
4. DIRECTED DIVIDENDS OPTION. You will have income and capital gain
dividends, or only capital gain dividends, automatically reinvested in
shares of another fund of the Victory Group. Shares will be purchased
at the NAV as of the dividend record date. If you are reinvesting
dividends of a fund sold without a sales charge in shares of a fund
sold with a sales charge, the shares will be purchased at the public
offering price. If you are reinvesting dividends of a fund sold with
a sales charge in shares of a fund sold with or without a sales
charge, the shares will be purchased at net asset value. Dividend
distributions can be directed only to an existing account with a
registration that is identical to that of your Fund account.
5. DIRECTED BANK ACCOUNT OPTION. You will have your income and capital
gain dividends, or only your income dividends, automatically
transferred to your bank checking or savings account. The amount will
be determined on the dividend record date and will normally be
transferred to your account within 7 days of the dividend record date.
Dividend distributions can be directed only to an existing account
with a registration that is identical to that of your Fund account.
Please call or write the Transfer Agent to learn more about this
dividend distribution option.
Any election or revocation of any of the above dividend distribution options
may be made in writing to the Fund and sent to Primary Funds Service
Corporation, P.O. Box 9741, Providence, RI 02940-9741, or by calling the
Transfer Agent at 800-539-3863, and will become effective with respect to
dividends having record dates after receipt of the application or request by
the Transfer Agent.
Reinvested dividend distributions receive the same tax treatment as dividend
distributions paid in cash.
COMPLETE REDEMPTIONS: If you request a complete redemption of all your Fund
shares, any dividend accrued to your account will be included in the redemption
check.
STATEMENTS AND REPORTS: You will receive a monthly statement reflecting all
transactions that affect the share balance or the registration of your Fund
account. You will receive a confirmation after every transaction that affected
the share balance of your Fund account, except for dividend reinvestment,
systematic investment and systematic withdrawal transactions. These
transactions will be detailed in your Fund account statement. Transactions
that affect the share balance of your Fund investment in an account established
with an Investment Professional or financial institution will be detailed in
regular statements or through confirmation procedures of the financial
institution. Certificates representing shares of the Fund will not be issued.
An IRS Form 1099-DIV with federal tax information will be mailed to you by
January 31 of each tax year and also will be filed with the IRS. At least
twice a year, you will receive the Fund's financial reports.
FEDERAL TAXES
The Fund intends to qualify each year and elect to be treated as a separate
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "IRS Code"). If the Fund is treated as a "regulated
investment company" and all its taxable income is distributed to its
shareholders in accordance with the timing requirements imposed by the IRS
Code, it will not be subject to federal income tax on its income. The Fund's
distributions that are attributable to its net investment income and short-term
capital gains are taxable as ordinary income, and its distributions from
long-term capital gains are taxed as long-term capital gains. Such
distributions are taxable when they are paid, whether taken in cash or
reinvested in additional shares, except that distributions declared in October,
November or December and paid during the following January are taxable as if
paid and received on December 31. Dividends received from the Fund by
corporate shareholders are not entitled to the dividends-received deduction.
The Fund sends tax statements to its shareholders (with copies to the Internal
Revenue Service (the "IRS")) by January 31 showing the amounts and tax status
of distributions made (or deemed made) during the preceding calendar year.
Although excluded from gross income for regular federal income tax purposes,
exempt-interest dividends, together with other tax-exempt interest, are
required to be reported on shareholders' federal income tax returns, and are
taken into account in determining the portion, if any, of Social Security
benefits which must be included in gross income for federal
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income tax purposes. In addition, exempt-interest dividends paid out of
interest on certain municipal securities may be treated as a tax preference
item for both individual and corporate shareholders potentially subject to an
alternative minimum tax ("AMT"), and all exempt-interest dividends will be
included in computing a corporate shareholder's adjusted current earnings, upon
which a separate corporate preference item is based which may be subject to AMT
and to the environmental superfund tax. Interest on indebtedness incurred, or
continued, to purchase or carry shares of the Fund is not deductible. Further,
entities or persons who may be "substantial users" (or persons related to
"substantial users") of facilities financed by certain types of municipal
securities should consult with their own tax advisers before purchasing shares
of the Fund.
The exclusion from gross income for federal income tax purposes of
exempt-interest dividends does not necessarily result in exclusion under the
income or any other tax laws of any state or local taxing authority. However,
to the extent that exempt-interest dividends on shares of the Fund are derived
from interest received by the Fund on obligations of New York State, its
political subdivisions or its duly constituted authorities, they will be exempt
from New York State and New York City personal income taxes for a New York
resident individual shareholder. Exempt-interest dividends will not be
excluded in determining New York State or New York City franchise taxes
applicable to corporations or financial institutions. You should consult with
your tax adviser concerning the application of state and local taxes to an
investment in the Fund, which may differ from the Federal income tax
consequences described above.
REDEMPTION OR EXCHANGES
Investors may realize a gain or loss when redeeming (selling) or exchanging
shares. For most types of accounts, the Fund reports the proceeds to the IRS
annually. Because the shareholders' tax treatment also depends on their
purchase price and personal tax positions, shareholders should keep their
regular account statements to use in determining their tax. See "Buying a
Dividend."
"BUYING A DIVIDEND"
On the record date for a distribution of ordinary income or capital gains
dividend, the net asset value of the Fund is reduced by the amount of the
distribution. An investor who buys shares just before the record date ("buying
a dividend") will pay the full price for the shares and then receive a portion
of the purchase price back as a taxable distribution.
OTHER TAX INFORMATION
The information above is only a summary of some of the federal income tax
consequences generally affecting the Fund and its shareholders, and no attempt
has been made to discuss individual tax consequences. A prospective investor
should also review the more detailed discussion of federal income tax
considerations in the Statement of Additional Information. In addition to
federal income tax, a shareholder may be subject to state or local taxes on the
shareholder's investment, depending on the laws in the shareholder's area.
Investors considering an investment in the Fund should consult their tax
adviser to determine whether the Fund is suitable to their particular tax
situation.
When investors sign their account application, they are asked to provide their
correct social security or taxpayer identification number and other required
certifications. If investors do not comply with IRS regulations, the IRS can
require the Fund to withhold 31% of taxable distributions and redemptions from
their account.
PERFORMANCE
From time to time, performance information for each class of shares of the Fund
showing total return of each class of shares may be presented in
advertisements, sales literature and in reports to shareholders. Such
performance figures are based on historical earnings and are not intended to
indicate future performance. Average annual total return will be calculated
over a stated period of more than one year. Average annual total return is
measured by comparing the value of an investment in a class at the beginning of
the relevant period (as adjusted for sales charges, if any) to the redemption
value of the investment at the end of the period (assuming immediate
reinvestment of any dividends or capital gains
28
<PAGE> 299
distributions) and annualizing that figure. Aggregate total return is
calculated similarly to average annual total return, except that the resulting
difference is not annualized.
From time to time performance information for each class of shares of the Fund
showing the yield and/or effective yield for each class of shares may also be
presented in advertisements, sales literature and in reports to shareholders.
Yields for Class A shares reflect the deduction of the maximum sales charge.
Yields for Class B shares do not reflect the deduction of the CDSC. Such
performance figures are based on historical earnings and are not intended to
indicate future performance. Yield will be computed by dividing the Fund's net
investment income per share earned during a recent thirty-day period by the
Fund's maximum offering price per share (reduced by any undeclared earned
income expected to be paid shortly as a dividend) on the last day of the period
and annualizing the result. Effective yield is computed in a similar manner,
but, when annualized, the income earned by an investment in the Fund is assumed
to be reinvested. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
The Fund may also quote TAXABLE-EQUIVALENT YIELDS, which show the taxable
yields an investor would have to earn, before taxes, to equal the tax-free
yields for a class of shares of the Fund. A tax-equivalent yield is calculated
by dividing the Fund's tax-exempt yield for each class of shares of the Fund by
the result of one minus the sum of the stated federal, state and city tax
rates, and taking into account the deductibility of state and city taxes from
federal tax. If only a portion of the Fund's income is tax-exempt, only that
portion is adjusted in the calculation.
Investors may also judge, and the Victory Portfolios may at times advertise,
the performance of the Fund by comparing it to the performance of other mutual
funds with comparable investment objectives and policies, which performance may
be contained in various unmanaged mutual fund or market indices or rankings
such as those prepared by Dow Jones & Co., Inc. and Standard & Poor's
Corporation, in publications issued by Lipper Analytical Services, Inc., and in
the following publications: IBC/Donoghue's Money Fund Reports, Ibbotson
Associates, Inc., Morningstar, CDA/Wiesenberger, Money Magazine, Forbes,
Barron's, The Wall Street Journal, The New York Times, Business Week, American
Banker, Fortune, Institutional Investor, U.S.A. Today and local newspapers. In
addition, general information about the Fund that appears in publications such
as those mentioned above may also be quoted or reproduced in advertisements,
sales literature or in reports to shareholders.
Performance is a function of the type and quality of instruments held in the
Fund's portfolio, operating expenses, and market conditions. Consequently,
current performance will fluctuate and is not necessarily representative of
future results. Any fees charged by service providers with respect to customer
accounts for investing in shares of the Fund will not be reflected in
performance calculations.
Additional information regarding the performance of each of the Victory
Portfolios is included in the Victory Portfolios' annual report, which is
available free of charge by calling 800-539-3863.
FUND ORGANIZATION AND FEES
The Victory Portfolios is an open-end management investment company, commonly
known as a mutual fund, and currently consisting of twenty-eight series
portfolios, four of which are inactive. The Victory Portfolios has been
operating continuously since 1986, when it was created under Massachusetts law
as a Massachusetts business trust, although certain of its funds have a prior
operating history from their predecessor funds. On February 29, 1996, the
Victory Portfolios converted from a Massachusetts business trust to a Delaware
business trust. The Victory Portfolios' offices are located at 3435 Stelzer
Road, Columbus, OH 43219-3035.
REORGANIZATION WITH PREDECESSOR FUND
The Predecessor Fund was a portfolio of The Victory Funds. On May 26, 1995,
the Shareholders of the Predecessor Fund, approved an Agreement and Plan of
Reorganization (the "Reorganization Plan"). Under the Reorganization Plan, the
Predecessor Fund transferred all its assets and liabilities to the Fund in
exchange for shares of the Fund, which were
29
<PAGE> 300
distributed pro rata to shareholders of the Predecessor Fund, who then became
shareholders of the Fund (the "Reorganization"). The Predecessor Fund has
ceased operations. The Fund had no assets and did not begin operations until
the Reorganization occurred.
Overall responsibility for management of the Victory Portfolios rests with its
Board of Trustees, who are elected by the shareholders of the Victory
Portfolios.
INVESTMENT ADVISER AND SUB-ADVISER
Key Advisers is the investment adviser to the Fund. Key Advisers directs the
investment of the Victory Portfolios' assets, subject at all times to the
supervision of the Victory Portfolios' Board of Trustees. Key Advisers
continually supervises the investment and reinvestment of cash, securities and
other property comprising the assets of the Victory Portfolios.
Key Advisers was organized as an Ohio corporation on July 27, 1995 and is
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended. It is a wholly-owned subsidiary of KeyCorp Asset Management
Holdings, Inc., which is a wholly-owned subsidiary of Society National Bank, a
wholly-owned subsidiary of KeyCorp. Affiliates of Key Advisers manage
approximately $37 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals and mutual funds.
For the services provided and expenses incurred pursuant to its investment
advisory agreement with the Victory Portfolios respecting the Fund, Key
Advisers receives a fee, computed daily and paid monthly, at the annual rate of
fifty-five one-hundredths of one percent (.55%) of the average daily net assets
of the Fund. The advisory fees for the Fund have been determined to be fair
and reasonable in light of the services provided to the Fund. Key Advisers may
periodically waive all or a portion of its advisory fee with respect to the
Fund to increase the net income of the Fund available for distribution as
dividends. Prior to January 1, 1996, the Sub-Adviser (Society Asset
Management, Inc.) served as investment adviser to the Fund. During the Fund's
fiscal year ended October 31, 1995, the Sub-Adviser received investment
advisory fees aggregating ___% of the average daily net assets of the Fund.
Under the investment advisory agreement between the Victory Portfolios, on
behalf of the Fund, and Key Advisers, Key Advisers may delegate a portion of
its responsibilities to a subadviser. In addition, the investment advisory
agreement provides that Key Advisers may render services through its own
employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser of the Fund and are under the common
control of KeyCorp as long as all such persons are functioning as part of an
organized group of persons, managed by authorized officers of Key Advisers.
Key Advisers has entered into an investment sub-advisory agreement with its
affiliate, Society Asset Management, Inc., a registered investment adviser, on
behalf of the Fund. The Sub-Adviser is a wholly-owned subsidiary of KeyCorp
Asset Management Holdings, Inc. For its services under the investment
sub-advisory agreement, Key Advisers pays the Sub-Adviser sub-advisory fees at
an annual rate as a percentage of the Fund's average daily net assets as
follows: .40% of the first $10 million of average daily net assets; .30% of the
next $15 million of average daily net assets; .25% of the next $25 million of
average daily net assets; and .20% of average daily net assets in excess of $50
million. The Fund is the successor to the New York Tax-Free Portfolio, which
is the successor to the Investors Preference New York Tax-Free Fund, Inc. The
Fund may also quote historical performance of the Predecessor Fund and the
Investors Preference New York Tax-Free Fund, Inc.
The person primarily responsible for the investment management of the Fund, as
well as his previous experience is as follows:
30
<PAGE> 301
<TABLE>
<CAPTION>
PORTFOLIO MANAGING PREVIOUS
MANAGER FUND SINCE EXPERIENCE
<S> <C> <C>
Paul Toft September, 1994 Vice President, Society
Asset Management, Inc;
Portfolio Manager,
Society Asset Management,
Inc. since September,
1994; Vice President and
Manager, Nike Securities,
L.P., 1991-1994;
formerly, Assistant Vice
President, Van Kampen
Merrett, 1990-1991
</TABLE>
ADMINISTRATOR AND DISTRIBUTOR
Concord Holding Corporation is the Administrator for the Fund. Victory
Broker-Dealer Services, Inc. is the Fund's principal underwriter and
Distributor.
The Administrator generally assists in all aspects of the Fund's administration
and operation. For expenses incurred and services provided as Administrator
pursuant to its management and administration agreement with the Victory
Portfolios, the Administrator receives a fee from the Fund, computed daily and
paid monthly, at an annual rate of fifteen one-hundredths of one percent (.15%)
of the Fund's average daily net assets. The Administrator may periodically
waive all or a portion of its administrative fee with respect to the Fund to
increase the net income of the Fund available for distribution as dividends.
During the fiscal year ended October 31, 1995, the Fund paid administration
fees of .__% of its average daily net assets.
TRANSFER AGENT AND FUND ACCOUNTANT
Primary Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741,
serves as the Fund's Transfer Agent pursuant to a Transfer Agency and
Shareholder Service Agreement with the Victory Portfolios and receives a fee
for such services based on various criteria, including assets, transactions and
the number of accounts. BISYS Fund Services Ohio, Inc., 3435 Stelzer Road,
Columbus, OH 43219, provides certain accounting services for the Fund pursuant
to a Fund Accounting Agreement and receives a fee for such services.
SHAREHOLDER SERVICING
Shareholder services are provided to the Fund pursuant to agreements between
the Victory Portfolios and various shareholder servicing agents, including Key
Trust Company of Ohio, N.A. and its affiliates and other financial institutions
and securities brokers (each a "Shareholder Servicing Agent"). Each
Shareholder Servicing Agent generally will provide support services to
shareholders by establishing and maintaining accounts and records, processing
dividend and distribution payments, providing account information, arranging
for bank wires, responding to routine inquires, forwarding shareholder
communication, assisting in the processing of purchase, exchange and redemption
requests, and assisting shareholders in changing dividend options, account
designations and addresses. For expenses incurred and services provided as
Shareholder Servicing Agent pursuant to its respective Shareholder Servicing
Agreement, the Fund pays each Shareholder Servicing Agent a fee computed daily
and paid monthly, in amounts aggregating not more than twenty-five
one-hundredths of one percent (.25%) of the average daily net assets of the
Fund per year. A Shareholder Servicing Agent may periodically waive all or a
portion of its respective shareholder servicing fees with respect to the Fund
to increase the net income of the Fund available for distribution as dividends.
During the fiscal period ended October 31, 1995, the Fund paid Shareholder
Servicing fees of __% of the Fund's average daily net assets.
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<PAGE> 302
EFFECT OF BANKING LAWS
Key Advisers and the Sub-Adviser believe that they may perform the investment
advisory services for the Fund contemplated by the investment advisory (and
sub-advisory) agreement (the "Advisory Agreement") for the Fund. In the
Investment Advisory Agreement with the Victory Portfolios, Key Advisers and the
Sub-Adviser have represented that they possess the legal authority to perform
the investment advisory services contemplated therein and described in this
Prospectus. Key Trust Company of Ohio, N.A. and its affiliates also believe
that they also may perform the services for the Victory Portfolios contemplated
by the Shareholder Servicing Agreement with the Victory Portfolios without
violating applicable banking laws and regulations. Future changes in federal
or state statutes and regulations relating to permissible activities of banks
or bank holding companies and their subsidiaries and affiliates, as well as
further judicial or administrative decisions or interpretations of present and
future statutes and regulations, could change the manner in which Key Advisers,
the Sub-Adviser, Key Trust Company of Ohio, N.A. and its affiliates could
continue to perform such services for the Victory Portfolios. See the
Statement of Additional Information ("Glass-Steagall Act") for further
discussion.
BUSINESS MANAGEMENT AGREEMENT
In connection with its obligations under its investment sub-advisory agreement
with Key Advisers, the Sub-Adviser has entered into a Business Management
Agreement with Key Advisers pursuant to which Key Advisers provides certain
administrative and support services to the Sub-Adviser. Such services include
preparing reports to the Company's Board of Trustees, recordkeeping services,
and services rendered in connection with the preparation of regulatory filings
and other reports, and regulatory and compliance systems and other
administrative and support services.
For such services, the Sub-Adviser pays fees to Key Advisers at an annual rate
as follows: .25% on the first $10 million of average daily net assets; .15% of
the next $15 million of average daily net assets; .10% of the next $25 million
of average daily net assets; and .05% of average daily net assets in excess of
$50 million.
EXPENSES
For the fiscal year ended October 31, 1995, the Fund's total operating expenses
were ____% of Class A Shares' average daily net assets and ____% of Class B
shares' average daily net assets.
CUSTODIAN
Key Trust Company of Ohio, N.A. serves as custodian for the Fund and receives
fees for its services.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. serves as the Fund's independent accountants.
ADDITIONAL INFORMATION
The Victory Portfolios may issue an unlimited number of shares and classes of
the Fund. Shares of each class of the Fund participate equally in dividends
and distributions and have equal voting, liquidation and other rights. When
issued and paid for, shares will be fully paid and nonassessable by the Victory
Portfolios and will have no preference, conversion, exchange or preemptive
rights. Shareholders are entitled to one vote for each full share owned and
fractional votes for fractional shares owned. For those investors with
qualified trust accounts established with affiliates of the Adviser, the
trustee will vote the shares at meetings of the Fund's shareholders in
accordance with the shareholder's instructions or will vote in the same
percentage as shares that are not held in trust. The trustee will forward to
these shareholders all communications received by the trustee, including proxy
statements and financial reports. The Victory Portfolios and the Fund are not
required to hold annual meetings of shareholders and in ordinary circumstances
do not intend to hold such meetings. The Trustees may call special meetings of
shareholders for action by
32
<PAGE> 303
shareholder vote as may be required by the 1940 Act or the Victory Portfolios
of Trust Instrument. Under certain circumstances, the Trustees may be removed
by action of the Trustees or by the shareholders. Shareholders holding 10% or
more of the Victory Portfolios' outstanding shares may call a special meeting
of shareholders for the purpose of voting upon the question of removal of
Trustees.
The Victory Portfolio's Board of Trustees may authorize the Victory Portfolios
to offer other funds which may differ in the types of securities in which their
assets may be invested.
Key Advisers, the Sub-Adviser and the Victory Portfolios have adopted Codes of
Ethics ( the "Codes") which require investment personnel (a) to pre-clear all
personal securities transactions, (b) to file reports regarding such
transactions, and (c) to refrain from personally engaging in (i) short-term
trading of a security, (ii) transactions involving a security within seven days
of a Victory fund transaction involving the same security, and (iii)
transactions involving securities being considered for investment by a Victory
fund. The Codes also prohibit investment personnel from purchasing securities
in an initial public offering. Personal trading reports are reviewed
periodically by Key Advisers or the Sub-Adviser, and the Board of Trustees
reviews annually such reports (including information on any substantial
violations of the Codes). Violations of the Codes may result in censure,
monetary penalties, suspension or termination of employment.
DELAWARE LAW
The Delaware Business Trust Act (the "Delaware Act") provides that a
shareholder of a Delaware business trust shall be entitled to the same
limitation of personal liability extended to stockholders of Delaware
corporations. In light of Delaware law, the nature of the Victory Portfolios'
business, and the nature of its assets, management of the Victory Portfolios
believes that the risk of personal liability to a Fund shareholder would be
extremely remote.
In the unlikely event a shareholder is held personally liable for the Victory
Portfolios' obligations, the Victory Portfolios is required to use its property
to protect or compensate the shareholder. On request, the Victory Portfolios
will defend any claim made and pay any judgment against a shareholder for any
act or obligation of the Victory Portfolios. Therefore, financial loss
resulting from liability as a shareholder will occur only if the Victory
Portfolios itself cannot meet its obligations to indemnify shareholders and pay
judgments against them.
Delaware law authorizes electronic or telephonic communications between
shareholders and the Victory Portfolios. Under Delaware law, the Successor
Company has the flexibility to respond to future business contingencies. For
example, the Trustees will have the power to incorporate the Victory
Portfolios, to merge or consolidate it with another entity, to cause each fund
to become a separate trust, and to change the Victory Portfolios' domicile
without a shareholder vote. This flexibility could help reduce the expense and
frequency of future shareholder meetings for non-investment related issues.
MISCELLANEOUS
Shareholders will receive Semi-Annual Reports, which are unaudited, and Annual
Reports, which are audited by independent public accountants, describing the
investment operations of the Fund. Each of these reports, when available for a
particular fiscal year end or the end of a semi-annual fiscal period is
incorporated herein by reference. The Victory Portfolios may include
information in their Annual Reports and Semi-Annual Reports to shareholders
that (i) describes general economic trends, (ii) describes general trends
within the financial services industry or the mutual fund industry, (iii)
describes past or anticipated portfolio holdings for the Fund or (iv) describes
investment management strategies for the Victory Portfolios. Such information
is provided to inform shareholders of the activities of the Victory Portfolios
for the most recent fiscal year or semi-annual fiscal period and to provide the
views of Key Advisers, the Sub-Adviser and/or the Victory Portfolios' officers
regarding expected trends and strategies.
Inquiries regarding the Victory Portfolios or the Fund may be directed in
writing to the Victory Portfolios at Primary Funds Service Corporation, P.O.
Box 9741, Providence, RI 02940-9741, or by telephone, toll-free, at
800-539-3863.
33
<PAGE> 304
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
VICTORY PORTFOLIOS OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFERING BY THE VICTORY PORTFOLIOS OR BY THE DISTRIBUTOR IN ANY JURISDICTION
IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
34
<PAGE> 305
The
VICTORY
Portfolios
Ohio Municipal Bond Fund
PROSPECTUS For current yield, purchase, and redemption information,
March 1, 1996 call 800-539-FUND or 800-539-3863
THE VICTORY PORTFOLIOS (the "Victory Portfolios") is a registered open-end
management investment company that offers investors a selection of money
market, fixed-income, municipal bond, domestic and international equity
portfolios. This Prospectus relates to the Victory Ohio Municipal Bond Fund
(the "Fund") a non-diversified portfolio. KeyCorp Mutual Fund Advisers, Inc.,
Cleveland, Ohio, an indirect subsidiary of KeyCorp, is the investment adviser
to the Fund ("Key Advisers" or the "Adviser"). Society Asset Management, Inc.,
Cleveland, Ohio, an indirect subsidiary of KeyCorp, is the investment
sub-adviser to the Fund ("Society" or the "Sub-Adviser"). Concord Holding
Corporation is the Fund's administrator (the "Administrator"). Victory
Broker-Dealer Services, Inc. is the Fund's distributor (the "Distributor").
The Fund seeks to produce a high level of current interest income which is
exempt from both federal income tax and Ohio personal income tax. Under normal
market conditions, the Fund will invest at least 80% of its total assets in
investment grade obligations issued by or on behalf of the State of Ohio and
its political subdivisions, the interest on which is exempt from federal income
tax and Ohio personal income tax and not treated as a preference item for
purposes of the federal alternative minimum tax for individuals and
corporations. The Fund will maintain a dollar-weighted average portfolio
maturity of between five and fifteen years.
Please read this Prospectus before investing. It is designed to provide you
with information and to help you decide if the Fund's goals match your own.
Retain this document for future reference. A Statement of Additional
Information (dated March 1, 1996) for the Fund and an audited report for the
fiscal year ended October 31, 1995 for the Fund has been filed with the
Securities and Exchange Commission and is incorporated herein by reference.
The Statement of Additional Information is available without charge upon
request by calling 800-539-3863.
SHARES OF THE FUND ARE:
- - NOT INSURED BY THE FDIC;
- - NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY KEYCORP
BANK, ANY OF ITS AFFILIATES, OR ANY OTHER BANK;
- - SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("COMMISSION") OR ANY SECURITIES REGULATORY AUTHORITY OF
ANY STATE, NOR HAS THE COMMISSION OR ANY SUCH STATE AUTHORITY PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE> 306
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C>
Summary of Fund Expenses 2
Financial Highlights 3
The Fund's Investment Objective 4
The Fund's Investment Policies and Risk Factors 4
How to Invest, Exchange and Redeem 10
Dividends, Distributions and Taxes 16
Performance 18
Fund Organization and Fees 19
Additional Information 21
</TABLE>
2
<PAGE> 307
SUMMARY OF FUND EXPENSES
The table below summarizes the expenses associated with the Fund. This
standard format was developed for use by all mutual funds to help you make your
investment decisions. Of course, you should consider this expense information
along with other important information in this Prospectus, including the Fund's
investment objective.
SHAREHOLDER TRANSACTION EXPENSES(1)
<TABLE>
<S> <C>
Maximum Sales Load Imposed on Purchases (as a percentage
of offering price) 4.75%
Maximum Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fees None
</TABLE>
ANNUAL FUND OPERATING EXPENSES AFTER EXPENSE WAIVERS AND REIMBURSEMENTS (as a
percentage of average net assets)
<TABLE>
<S> <C>
Management Fees (2) .46%
Administration Fees .15%
Other Expenses .29%
---
Total Fund Operating Expenses(3) .90%
===
</TABLE>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return and (2) full redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$56 $75 $95 $153
</TABLE>
(1) Subsidiaries, correspondents, affiliate banks, and non-bank affiliates
of KeyCorp may charge a customer's account fees for services provided
in connection with investment in the Fund. (See "How To Invest,
Exchange and Redeem.")
(2) Key Advisers has agreed to reduce its investment advisory fee for the
indefinite future. The Adviser may terminate this voluntary waiver at
its sole discretion. Absent the voluntary reduction of investment
advisory fees, "Management Fees" as a percentage of average daily net
assets would be .60%.
(3) These amounts include an estimate of the shareholder servicing fees
the Fund expects to pay. (See "Fund Organization and Fees -
Shareholder Servicing."
The purpose of the table above is to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. See "Fund Organization and Fees" for a more complete discussion of
annual operating expenses of the Fund. THE FOREGOING EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN.
3
<PAGE> 308
FINANCIAL HIGHLIGHTS
THE FUND'S FINANCIAL HISTORY
The table below sets forth certain financial information with respect to the
financial highlights for the Fund for the periods indicated. The information
below (unless otherwise noted) has been derived from financial statements
audited by Coopers & Lybrand L.L.P., independent public accountants for the
Victory Portfolios, whose report thereon is included in the Statement of
Additional Information.
THE VICTORY OHIO MUNICIPAL BOND FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS MAY 18,
YEAR ENDED ENDED YEARS ENDED OCTOBER 31, 1990 TO
OCT. 31, APRIL 30, ----------------------- OCTOBER 31,
1995 1995 1994 1993 1992 1991 1990(A)
---- ---- ---- ---- ---- ---- -------
[to be (Unaudited)
inserted]
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 10.33 $ 11.52 $ 10.52 $ 10.37 $ 10.06 $ 10.00
------- ------- ------- ------- ------- -------
INVESTMENT ACTIVITIES
Net investment income 0.26 0.49 0.52 0.60 0.65 0.28
Net realized and unrealized gains
(losses) on investments 0.52 (0.94) 1.00 0.15 0.31 0.04
------- ------- ------- ------- ------- -------
Total from
Investment Activities 0.78 (0.45) 1.52 0.75 0.96 0.32
------- ------- ------- ------- ------- -------
DISTRIBUTIONS
Net investment income (0.26) (0.49) (0.52) (0.60) (0.65) (0.26)
Net realized gains (0.25)
------- ------- ------- ------- -------- -------
Total Distributions (0.26) (0.74) (0.52) (0.60) (0.65) (0.26)
------- ------- ------- ------- ------ -------
Net Asset Value, End of Period $ 10.85 $ 10.33 $ 11.52 $ 10.52 $ 10.37 $ 10.06
======= ======= ======= ======= ======= =======
TOTAL RETURN
(Excludes Sales Charge) 7.67%(c) (4.08)% 14.75% 7.34% 9.87% 3.27%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (000) $58,137 $57,704 $50,676 $17,676 $ 8,042 $ 6,315
Ratio of expenses to
average net assets 0.64%(b) 0.51% 0.42% 0.09% 0.01% 0.38%(b)
Ratio of net investment
income to average net assets 4.88%(b) 4.58% 4.77% 5.76% 6.39% 6.11%(b)
Ratio of expenses to
average net assets* 0.95%(b) 1.09% 0.86% 0.84% 0% 1.17%(b)
Ratio of net investment income
to average net assets* 4.58%(b) 4.01% 4.33% 5.01% 5.32%(b)
Portfolio turnover 64.80% 52.59% 150.76% 47.28% 15.06% 17.62%
</TABLE>
* During the period the investment advisory, administration, shareholder
service and/or fund accounting fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would be as
indicated.
(a) Period from commencement of operations.
(b) Annualized.
(c) Aggregate.
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THE FUND'S INVESTMENT OBJECTIVE
The investment objective of the Fund is to produce a high level of current
interest income which is exempt from both federal income tax and Ohio personal
income tax. The investment objective of the Fund is fundamental and may not be
changed without a vote of the holders of a majority of the Fund's outstanding
voting securities (as defined in the Statement of Additional Information).
There can be no assurance the investment objective of the Fund will be
achieved.
THE FUND'S INVESTMENT POLICIES
Under normal market conditions, the Fund will invest at least 80% of its total
assets in investment grade obligations issued by or on behalf of the State of
Ohio and its political subdivisions, the interest on which, in the opinion of
the issuer's bond counsel at the time of issuance, is exempt from both federal
income tax and Ohio personal income tax and not treated as a preference item
for purposes of the federal alternative minimum tax ("Ohio Tax-Exempt
Obligations"). Under normal market conditions, the Fund will invest at least
65% of its total assets in Ohio Tax-Exempt Obligations that are bonds. The
Fund will maintain a dollar-weighted average portfolio maturity of between five
and fifteen years.
Investment in the Fund would not be appropriate for tax-deferred plans, such as
IRA and Keogh plans. Investors should consult a tax or other financial adviser
to determine whether investment in the Fund would be suitable for them.
Changes in the value of portfolio securities will not affect cash income, if
any, derived from these securities but will affect the Fund's net asset value.
Because the Fund invests primarily in debt securities, which fluctuate in
value, the Fund's shares will fluctuate in value.
ACCEPTABLE INVESTMENTS AND ASSOCIATED RISKS. The Fund may invest in the
following instruments:
- - U.S. GOVERNMENT SECURITIES. The Fund may invest in obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. Government,
such as the Government National Mortgage Association ("GNMA") and the
Export-Import Bank of the United States, are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Federal National
Mortgage Association ("FNMA") are supported by the right of the issuer to
borrow from the Treasury; others, such as those of the Student Loan Marketing
Association ("SLMA"), are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; still others, such as those of
the Federal Farm Credit Banks or the Federal Home Loan Mortgage Corporation
("FHLMC"), are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government will provide financial support
to U.S. Government-sponsored agencies or instrumentalities if it is not
obligated to do so by law. The Fund will invest in the obligations of such
agencies or instrumentalities only when Key Advisers or the Sub-Adviser
believes that the credit risk with respect thereto is minimal.
- - RECEIPTS. In addition to bills, notes and bonds issued by the U.S.
Treasury, the Fund may also purchase separately traded interest and principal
component parts of such obligations that are transferable through the Federal
book entry system, known as Separately Traded Registered Interest and Principal
Securities ("STRIPS") and Coupon Under Book Entry Safekeeping ("CUBES"). These
instruments are issued by banks and brokerage firms and are created by
depositing Treasury notes and Treasury bonds into a special account at a
custodian bank; the custodian holds the interest and principal payments for the
benefit of the registered owners of the certificates or receipts. The
custodian arranges for
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the issuance of the certificates or receipts evidencing ownership and maintains
the register. Receipts include Treasury Receipts ("TRs"), Treasury Investment
Growth Receipts ("TIGRs") and Certificates of Accrual on Treasury Securities
("CATS").
STRIPS, CUBES, TRs, TIGRs and CATS are sold as zero coupon securities, which
means that they are sold at a substantial discount and redeemed at face value
at their maturity dates without interim cash payments of interest or principal.
This discount is amortized over the life of the security, and such amortization
will constitute the income earned on the security for both accounting and tax
purposes. Because of these features, these securities may be subject to
greater interest rate volatility than interest-paying U.S. Treasury
obligations. The Fund will limit its investments in such instruments to 20% of
its total assets.
- - GOVERNMENT MORTGAGE-BACKED SECURITIES. The principal governmental (i.e.,
backed by the full faith and credit of the United States Government) guarantor
of mortgage-related securities is GNMA. GNMA is a wholly-owned United States
Government corporation within the Department of Housing and Urban Development.
GNMA is authorized to guarantee with the full faith and credit of the United
States Government, the timely payment of principal and interest on securities
issued by institutions approved by GNMA (such as savings and loan institutions,
commercial banks and mortgage bankers) and backed by pools of FHA-insured or
VA-guaranteed mortgages.
Government-related (i.e., not backed by the full faith and credit of the United
States Government) guarantors include FNMA and FHLMC. FNMA and FHLMC are
government-sponsored corporations owned entirely by private stockholders.
Pass-through securities issued by FNMA and FHLMC are guaranteed as to timely
payment of principal and interest by FNMA and FHLMC but are not backed by the
full faith and credit of the United States Government.
The investment characteristics of mortgage-related securities differ from
traditional debt securities. These differences can result in greater price and
yield volatility than is the case with traditional fixed income securities.
The major differences typically include more frequent interest and principal
payments, usually monthly, the adjustability of interest rates, and the
possibility that prepayments of principal may be made at any time. Prepayment
rates are influenced by changes in current interest rates and a variety of
economic, geographic, social and other factors. During periods of declining
interest rates, prepayment rates can be expected to accelerate. Under certain
interest rate and prepayment rate scenarios, the Fund may fail to recoup fully
its investment in mortgage-backed securities (and incur capital losses)
notwithstanding a direct or indirect governmental or agency guarantee. In
general, changes in the rate of prepayments on a mortgage-related security will
change that security's market value and its yield to maturity. When interest
rates fall, high prepayments could force the Fund to reinvest principal at a
time when investment opportunities are not attractive. Thus, mortgage-backed
securities may not be an effective means for the Fund to lock in long-term
interest rates. Conversely, during periods when interest rates rise, slow
prepayments could cause the average life of the security to lengthen and the
value to decline more than anticipated. However during periods of rising
interest rates, principal repayments by mortgage-backed securities allow the
Fund to reinvest at increased interest rates.
- - COLLATERALIZED MORTGAGE OBLIGATIONS. Mortgage-related securities in which
the Fund may invest may also include collateralized mortgage obligations
("CMOs"). CMOs are debt obligations issued generally by finance subsidiaries
or trusts that are secured by mortgage-backed certificates, including, in many
cases, certificates issued by government-related guarantors, including GNMA,
FNMA and FHLMC, together with certain funds and other collateral. Although
payment of the principal of and interest on the mortgage-backed certificates
pledged to secure
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the CMOs may be guaranteed by GNMA, FNMA or FHLMC, the CMOs represent
obligations solely of the issuer and are not insured or guaranteed by GNMA,
FHLMC, FNMA or any other governmental agency, or by any other person or entity.
The issuers of the CMOs typically have no significant assets other than those
pledged as collateral for the obligations.
- - MORTGAGE-RELATED SECURITIES ISSUED BY NON-GOVERNMENTAL ENTITIES. The Fund
may invest in mortgage-related securities issued by non-governmental entities.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. Such issuers
may also be the originators of the underlying mortgage loans as well as the
guarantors of the mortgage-related securities. Pools created by such
non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are not direct or
indirect government guarantees of payments in the former pools. However,
timely payment of interest and principal of these pools is supported by various
forms of insurance or guarantees, including individual loan, title, pool and
hazard insurance. The insurance and guarantees are issued by government
entities, private insurers and the mortgage poolers. Such insurance and
guarantees and the creditworthiness of the issuers thereof will be considered
in determining whether a mortgage-related security meets the Fund's investment
quality standards. There can be no assurance that the private insurers can
meet their obligations under the policies. The Fund may buy mortgage-related
securities without insurance or guarantees if, through an examination of the
loan experience and practices of the poolers, Key Advisers or the Sub-Adviser
determines that the securities meet the Fund's quality standards. Although the
market for such securities is becoming increasingly liquid, securities issued
by certain private organizations may not be readily marketable. The Fund will
not purchase mortgage-related securities or any other assets which in Key
Advisers or the Sub-Adviser's opinion are illiquid if, as a result, more than
15% of the value of the Fund's total assets will be invested in illiquid
securities.
The Fund may purchase mortgage-related securities with stated maturities in
excess of 10 years. Mortgage-related securities include collateralized
mortgage obligations and participation certificates in pools of mortgages. The
average life of mortgage-related securities varies with the maturities of the
underlying mortgage instruments, which have maximum maturities of 40 years.
The average life is likely to be substantially less than the original maturity
of the mortgage pools underlying the securities as the result of mortgage
prepayments. The rate of such prepayments, and hence the average life of the
certificates, will be a function of current market interest rates and current
conditions in the relevant housing markets. The impact of prepayment of
mortgages is described under "Government Mortgage-Backed Securities" above.
Estimated average life will be determined by Key Advisers or the Sub-Adviser.
Various independent mortgage-related securities dealers publish estimated
average life data using proprietary models, and in making such determinations,
Key Advisers or the Sub-Adviser will rely on such data except to the extent
such data are deemed unreliable by Key Advisers or the Sub-Adviser. Key
Advisers or the Sub-Adviser might deem data unreliable which appeared to
present a significantly different estimated average life for a security than
data relating to the estimated average life of comparable securities as
provided by other independent mortgage-related securities dealers.
- - OHIO TAX-EXEMPT OBLIGATIONS. The two principal classifications of Ohio
Tax-Exempt Obligations which may be held by the Fund are "general obligation"
securities and "revenue" securities. General obligation securities are secured
by the issuer's pledge of its full faith, and credit and taxing power for the
payment of principal and interest. Revenue securities are payable only from
the revenues derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a specific revenue source such as the user of
the
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facility being financed. Private activity bonds held by the Fund are in most
cases revenue securities and are not payable from the revenues of the issuer.
Consequently, the credit quality of private activity bonds is usually directly
related to the credit standing of the corporate user of the facility involved.
Among other types of Ohio Tax-Exempt Obligations, the Fund may purchase Tax
Anticipation Notes, Bond Anticipation Notes, Revenue Anticipation Notes,
Tax-Exempt Commercial Paper and other forms of short-term tax-exempt loans.
Such instruments are issued with a short-term maturity in anticipation of the
receipt of tax funds, the proceeds of bonds to be sold or other revenues.
Investments by the Fund in refunded municipal bonds that are secured by
escrowed obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities are considered to be investments in U.S.
Government securities for purposes of the diversification requirements to which
the Fund is subject under the Investment Company Act of 1940. As a result,
more than 5% of the Fund's assets may be invested in such refunded bonds issued
by a particular municipal issuer.
The Fund invests in Ohio Tax-Exempt Obligations which are rated at the time of
purchase within the three highest rating categories by a nationally recognized
statistical ratings organization ("NRSRO"), in the case of bonds (for example,
"A" or higher by Moody's Investors Service ("Moody's") or Standard & Poor's
("S&P")); rated "A-2" or higher by S&P or "P-2" or higher by Moody's in the
case of notes; rated "SP-1" or higher by S&P or "MIG-2" by Moody's in the case
of tax-exempt commercial paper; or rated "VMIG-2" by Moody's in the case of
variable rate demand obligations. Such ratings requirements do not constitute
a fundamental investment objective or restriction. The Fund may also purchase
Ohio Tax-Exempt Obligations which are unrated at the time of purchase but are
determined to be of comparable quality by Key Advisers or the Sub-Adviser
pursuant to guidelines approved by the Victory Portfolios' Board of Trustees.
Opinions relating to the validity of Ohio Tax-Exempt Obligations and to the
exemption of interest thereon from federal and Ohio state income tax are
rendered by bond counsel to the respective issuers at the time of issuance.
Neither the Fund nor Key Advisers or the Sub-Adviser will review the
proceedings relating to the issuance of Ohio Tax-Exempt Obligations or the
basis for such opinions.
- - TAXABLE OBLIGATIONS. The Fund may invest up to 20% of its net assets in
taxable obligations or debt securities the interest income from which may be
treated as an item of tax preference for purposes of the federal alternative
minimum tax if, for example, suitable tax-exempt obligations are unavailable or
if the acquisition of such securities is deemed appropriate for temporary
defensive purposes. Taxable obligations may include obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities (some of
which may be subject to repurchase agreements), certificates of deposit and
bankers' acceptances of domestic banks and domestic branches of foreign banks,
commercial paper meeting the Fund's quality standards (as described above) for
tax-exempt commercial paper, and shares issued by other open-end registered
investment companies issuing taxable dividends where the Fund's investment
adviser waives a pro rata portion of its advisory fee; notwithstanding this
waiver, such investments involve a layering of certain costs and expenses. To
the extent required by the laws of any state in which shares of the Fund are
sold, Key Advisers or the Sub-Adviser will waive its investment advisory fee as
to all assets invested in other investment companies. These obligations are
described further in the Statement of Additional Information.
The Fund may hold uninvested cash reserves pending investment, during temporary
defensive periods or if, in the opinion of Key Advisers or the Sub-Adviser,
suitable Ohio Tax-Exempt Obligations are unavailable. There is no percentage
limitation on the amount of assets which may be held uninvested. Uninvested
cash
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reserves will not earn income, and thus are not being utilized so as to meet
the Fund's investment objective.
- - PUTS. The Fund may acquire "puts" with respect to Ohio Tax-Exempt
Obligations held in its portfolio. Under a put, the Fund has the right to sell
a specified Ohio Tax-Exempt Obligation within a specified period of time at a
specified price. A put will be sold, transferred, or assigned only with the
underlying Ohio Tax-Exempt Obligation. The Fund will acquire puts solely to
facilitate portfolio liquidity, shorten the maturity of underlying Ohio
Tax-Exempt Obligations, or permit the investment of its assets at a more
favorable rate of return. The Fund expects that it will generally acquire puts
only where the puts are available without the payment of any direct or indirect
consideration. However, if necessary or advisable, the Fund may pay for a put
either separately in cash or by paying a higher price for portfolio securities
which are acquired subject to the put (thus reducing the yield to maturity
otherwise available for the same securities).
- - STAND-BY COMMITMENTS. The Fund may acquire "stand-by commitments" with
respect to Ohio Tax-Exempt Obligations held in its portfolio. Under a stand-by
commitment, a dealer would agree to purchase at the Fund's option specified
Ohio Tax-Exempt Obligations at a specified price. The Fund will acquire
stand-by commitments solely to facilitate portfolio liquidity and does not
intend to exercise its rights thereunder for trading purposes. Stand-by
commitments acquired by the Fund may also be referred to as "put" options.
- - WHEN-ISSUED SECURITIES. The Fund may purchase securities on a when-issued
or delayed delivery basis. These transactions are arrangements in which the
Fund purchases securities with payment and delivery scheduled for a future
time, thereby involving the risk that the yield obtained in the transaction
will be less than that available in the market when delivery takes place. When
the Fund agrees to purchase securities on a when-issued basis, the Fund's
custodian will set aside cash or liquid portfolio securities equal to the
amount of that commitment in a separate account, and may be required to
subsequently place additional assets in the separate account to maintain
equivalence with the Fund's commitment. The Fund generally will not pay for
such securities and no income accrues on the securities until they are
received. Securities purchased on a when-issued basis are recorded as assets
and are subject to changes in value prior to delivery based upon changes in the
general level of interest rates and other market factors. The Fund does not
intend to purchase when-issued or delayed delivery securities for speculative
purposes, but only for the purpose of acquiring portfolio securities consistent
with its investment objective and policies, and not for investment leverage.
In when-issued and delayed delivery transactions, the Fund relies on the seller
to complete the transaction; its failure to do so may cause the Fund to miss a
price or yield considered to be advantageous.
- - VARIABLE AND FLOATING RATE SECURITIES. The Fund may purchase variable and
floating rate tax-exempt notes with ratings that are within the three highest
rating groups assigned by an NRSRO or, if unrated, which Key Advisers or the
Sub-Adviser deems to be of comparable quality. There may be no active
secondary market with respect to a particular variable or floating rate note.
Nevertheless, the periodic readjustments of their interest rates tend to assure
that their value to the Fund will approximate their par value. The interest
rates on the variable and floating rate notes purchased by the Fund may be
reset daily, weekly, quarterly, or some other rest period, and may be subject
to a floor or ceiling. There is a risk that the current interest rate on such
obligations may not accurately reflect existing market interest rates. There
may be no active secondary market with respect to a particular variable or
floating rate note. Variable and floating rate notes for which no readily
available market exists will be purchased in an amount which, together with
other illiquid securities held by the Fund, does not exceed 15% of the Fund's
respective total
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assets unless such notes are subject to a demand feature that will permit the
Fund to receive payment of the principal within seven days after demand by the
Fund therefor.
- - REPURCHASE AGREEMENTS. Under the terms of a repurchase agreement, the Fund
acquires securities from financial institutions or registered broker-dealers,
subject to the seller's agreement to repurchase such securities at a mutually
agreed upon date and price. The seller is required to maintain the value of
collateral held pursuant to the agreement at not less than the repurchase price
(including accrued interest). If the seller were to default on its repurchase
obligation or become insolvent, the Fund holding such obligation would suffer a
loss to the extent that the proceeds from a sale of the underlying portfolio
securities were less than the repurchase price, or to the extent that the
disposition of such securities by the Fund were delayed pending court action.
Repurchase agreements are considered by the staff of the Commission to be loans
by the Fund.
- - REVERSE REPURCHASE AGREEMENTS. The Fund may borrow funds for temporary
purposes by entering into reverse repurchase agreements. Pursuant to such
agreements, the Fund sells portfolio securities to financial institutions such
as banks and broker-dealers, and agrees to repurchase them at a mutually
agreed-upon date and price. At the time the Fund enters into a reverse
repurchase agreement, it must place in a segregated custodial account assets
having a value equal to the repurchase price (including accrued interest); the
collateral will be marked to market on a daily basis, and will be continuously
monitored to ensure that such equivalent value is maintained. Reverse
repurchase agreements involve the risk that the market value of the securities
sold by the Fund may decline below the price at which the Fund is obligated to
repurchase the securities. Reverse repurchase agreements are considered to be
borrowings under the Investment Company Act of 1940 (the "1940 Act").
- - INVESTMENT COMPANY SECURITIES. The Fund may also invest up to 5% of its
total assets in the securities of any one investment company, but may not own
more than 3% of the securities of any one investment company or invest more
than 10% of its total assets in the securities of other investment companies.
Pursuant to an exemptive order received by the Victory Portfolios from the
Securities and Exchange Commission, the Fund may invest in the money market
funds of the Victory Portfolios. Key Advisers or the Sub-Adviser will waive
its fee attributable to the Fund's assets invested in a fund of the Victory
Portfolios, and, to the extent required by the laws of any state in which
shares of the Fund are sold, Key Advisers or the Sub-Adviser will waive its
investment advisory fee as to all assets invested in other investment
companies. Because such other investment companies employ an investment
adviser, such investment by the Fund will cause shareholders to bear
duplicative fees such as management fees, to the extent such fees are not
waived by Key Advisers or the Sub-Adviser.
- - PRIVATE PLACEMENT INVESTMENTS. The Fund may invest in commercial paper
issued in reliance on the exemption from registration afforded by Section 4(2)
of the 1933 Act. Section 4(2) commercial paper is restricted as to
disposition under federal securities law and is generally sold to institutional
investors, such as the Fund, that agree they are purchasing the paper for
investment purposes and not with a view to public distribution. Any resale by
the purchaser must be in an exempt transaction. Section 4(2) commercial paper
is normally resold to other institutional investors like the Fund through or
with the assistance of the issuer or investment dealers who make a market in
Section 4(2) commercial paper, thus providing liquidity. The Fund believes
that Section 4(2) commercial paper and possibly certain other restricted
securities that meet the criteria for liquidity established by the Trustees are
quite liquid. The Fund intends, therefore, to treat the restricted securities
that meet the criteria for liquidity established by the Trustees, including
Section 4(2) commercial paper, as determined by Key Advisers or the
Sub-Adviser, as liquid and not subject to
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the investment limitation applicable to illiquid securities. Therefore, the
Fund will generally purchase Section 4(2) commercial paper without regard to
the Fund's restriction on illiquid securities.
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under a position of the Staff of the Commission set
forth in the adopting release for Rule 144A under the 1933 Act (the "Rule").
The Rule is a nonexclusive safe-harbor for certain secondary market
transactions involving certain Restricted Securities under federal securities
laws. The Rule provides an exemption from registration for resales of
Restricted Securities to qualified institutional buyers. The Rule was expected
to further enhance the liquidity of the secondary market for the types of
securities eligible for resale under Rule 144A. The Victory Portfolios
believes that the Staff of the Commission has left the question of determining
the liquidity of all Restricted Securities to the Trustees. The Trustees
consider the following criteria in determining the liquidity of certain
restricted securities: the frequency of trades and quotes for the security; the
number of dealers willing to purchase or sell the security and the number of
other potential buyers; dealer undertakings to make a market in the security;
and the nature of the security and the nature of the marketplace trades.
The investment policies of the Fund may be changed without an affirmative vote
of the holders of a majority of the Fund's outstanding voting securities unless
(1) a policy is expressly deemed to be a fundamental policy of the Fund or (2)
a policy is expressly deemed to be changeable only by such majority vote.
INVESTMENT RISKS
- - DIVERSIFICATION AND CONCENTRATION. Because of the relatively small number
of issuers of high grade Ohio Tax-Exempt Obligations, the Fund may concentrate
its assets in the securities of a few issuers which Key Advisers or the
Sub-Adviser considers to be attractive investments, rather than invest in a
larger number of securities. While Key Advisers or the Sub-Adviser believes
that this ability to concentrate the investments of the Fund in particular
issuers is an advantage when investing in Ohio Tax-Exempt Obligations, such
concentration involves an increased risk of loss to the Fund should the issuer
be unable to make interest or principal payments thereon or should the market
value of such securities decline.
The Fund reserves the right to invest more than 25% of its assets in industrial
development revenue bonds. It is the policy of the Fund not to concentrate in
any industry, but it may invest up to 25% of its assets in industrial
development revenue bonds which are based, directly or indirectly, on the
credit of private entities in any one industry or in securities of private
issuers in any one industry (governmental issuers are not considered to be part
of any "industry").
- - THE OHIO ECONOMY. The economy of Ohio, while having become increasingly
reliant on the service sector, continues to rely in part on durable goods
manufacturing, which is largely concentrated in motor vehicles and equipment,
steel, rubber products and household appliances. As a result, general economic
activity in Ohio, as in many other industrial states, tends to be more cyclical
than in some other states and in the nation as a whole. Agriculture also is an
important segment of the Ohio economy, and the state has instituted several
programs to provide financial assistance to farmers. Ohio's economy, which in
recent years has been characterized by an unemployment rate usually somewhat
lower than the national average, varies among the different geographic areas of
the state and the political subdivisions located in such geographic areas.
Although revenue obligations of the state or its political subdivisions may be
payable from a specific source or project, there can be no assurance that
future economic difficulties and the resulting impact on state and local
government finances will not adversely affect the market value of the Ohio
Tax-Exempt
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Obligations in the Fund's portfolio or the ability of the respective obligors
to make timely payment of interest and principal on such obligations. See the
Statement of Additional Information for further discussion of special
considerations regarding investments in Ohio Tax-Exempt Obligations. The Fund,
in addition to investing primarily in Ohio Tax-Exempt Obligations, may invest
in a relatively high percentage of such bonds having other similar
characteristics. The issuers may be located in the same city or county, or may
pay their obligations from revenues of similar projects. In addition to fiscal
considerations applicable to issuers of Ohio Tax-Exempt Obligations generally,
this may make the Fund more susceptible to economic, political, or regulatory
occurrences. As the similarity in issuers increases, the potential for
fluctuation in the net asset value of the Fund's securities from such
occurrences also increases.
NOTE: The Statement of Additional Information contains information about
certain investment practices and portfolio securities of the Fund. The
Statement of Additional Information also contains information about investment
restrictions designed to reduce the risk of an investment in the Fund.
LIMITING INVESTMENT RISKS
The following summarizes the Fund's principal investment limitations. A
complete listing is contained in the Statement of Additional Information.
1. The Fund may not borrow money, except that (a) the Fund may enter into
commitments to purchase securities in accordance with the Fund's
investment program, including delayed-delivery and when-issued
securities and reverse repurchase agreements, provided that the total
amount of any such borrowing may not exceed 33 1/3% of the Fund's
total assets; and (b) the Fund may borrow money for temporary or
emergency purposes in an amount not exceeding 5% of the value of the
Fund's total assets at the time the loan is made. Any borrowings
representing more than 5% of the Fund's total assets must be repaid
before the Fund may make additional investments.
2. The Fund will not invest more than 15% of its net assets in illiquid
securities (securities that cannot be readily sold within seven days
in the usual course of business at approximately the price at which
the Fund has valued them), including restricted securities deemed to
be illiquid. Under the supervision of the Trustees, Key Advisers or
the Sub-Adviser determines the liquidity of the Fund's investments.
The absence of a trading market can make it difficult to ascertain a
market value for illiquid investments. Disposing of illiquid
investments may involve time-consuming negotiation and legal expenses,
and it may be difficult or impossible for the Fund to sell them
promptly at an acceptable price.
Except for the Fund's investment objective and limitation on borrowing in
limitation 1, the investment policies described in this Prospectus are not
fundamental. Non-fundamental limitations may be changed without shareholder
approval. Whenever an investment policy or limitation states a maximum
percentage of the Fund's assets that may be invested, such percentage
limitation will be determined immediately after and as a result of the
investment, except in the case of borrowing (or other activities that may be
deemed to result in the issuance of a "senior security" under the 1940 Act).
Any subsequent change in values, assets, or other circumstances will not be
considered when determining whether the investment complies with the Fund's
investment policies and limitations. If the value of a Fund's holdings of
illiquid securities at any time exceeds the percentage limitation applicable at
the time of acquisition due to subsequent fluctuations in value or other
reasons, the Board of Trustees will consider what actions, if any, are
appropriate to maintain adequate liquidity.
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PORTFOLIO TURNOVER
Although the primary objective of the Fund is current income, the Fund may
engage in the technique of short-term trading. Such trading involves the
selling of securities held for a short time, ranging from several months to
less than a day. The object of such short-term trading is to take advantage of
what Key Advisers or the Sub-Adviser believes are changes in market, industry
or individual company conditions or outlook. Any such trading would increase
the Fund's turnover rate and its transaction costs. In the fiscal year ended
October 31, 1995, the annual portfolio turnover rate was ____% for the Fund
compared to ____% for the prior year.
HOW TO INVEST, EXCHANGE AND REDEEM
HOW TO INVEST
Shares may be purchased directly or through an Investment Professional.
Investment Professionals are securities brokers or other financial institutions
that have entered into selling or servicing agreements with the Fund or the
Distributor. Shares are also available to clients of bank trust departments
who have qualified trust accounts. The minimum investment is $500 for the
initial purchase and $25 thereafter. Accounts set up through a bank trust
department or an Investment Professional may be subject to different minimums.
- - Investing Through Your Investment Professional. Your Investment
Professional will place your order with the Transfer Agent on your behalf. You
may be required to establish a brokerage or agency account. Your Investment
Professional will notify you whether subsequent trades should be directed to
the Investment Professional or directly to the Fund's Transfer Agent. Accounts
established with Investment Professionals may have different features,
requirements and fees. In addition, Investment Professionals may charge for
their services. Information regarding these features, requirements and fees
will be provided by the Investment Professional. If you are purchasing shares
of any Fund through a program of services offered or administered by your
Investment Professional, you should read the program materials in conjunction
with this Prospectus.
- - Investing Through The Systematic Investment Plan. You can use the
Systematic Investment Plan to purchase shares directly from your bank account.
Please refer to "Systematic Investment Plan" below for more details.
- - Investing Through Your Bank Trust Department. Your bank trust department
may require a minimum investment and may charge additional fees. Fee schedules
for such accounts are available upon request and are detailed in the agreements
by which a client opens the desired account. Your bank trust department may
require a completed and signed application for the Fund in which an investment
is made. Additional documents may be required from corporations, associations,
and certain fiduciaries. Any account information, such as balances, should be
obtained through your bank trust department. Additional purchases, exchanges
or redemptions should also be coordinated through your bank trust department.
Contact your bank trust department for instructions.
The services rendered by a bank trust department, including affiliates of Key
Advisers or the Sub-Adviser, in the management of its accounts are not
duplicative of any of the services for which Key Advisers or the Sub-Adviser as
the investment adviser or sub-adviser, respectively, is compensated for advising
the Fund. The charges paid by clients of bank trust departments, or their
affiliates, should be considered in calculating the net yield and return on
investments in the Fund, although such charges do not affect the Fund's
dividends and distributions.
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INVESTING DIRECTLY
BY MAIL: You may purchase shares by completing and signing an account
application (initial purchase only) and mailing it, together with a check (or
other negotiable bank draft or money order) in the amount of at least the
minimum investment requirement to, The Victory Ohio Municipal Bond Fund,
Primary Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741.
Subsequent purchases may be made in the same manner.
BY WIRE: Call 800-539-3863 to set up your Fund account to accommodate wire
transactions. YOU MUST CALL THE TRANSFER AGENT BEFORE WIRING FUNDS. You will
begin to earn dividends on the first business day following receipt of your
wire. Federal funds (monies transferred from one bank to another through the
Federal Reserve System with same-day availability) should be wired to:
Boston Safe Deposit & Trust Co.
ABA #011001234
Credit PFSC DDA #16-918-8
The Victory Portfolios: The Victory Ohio Municipal Bond Fund
You must include your account number, your name(s), tax identification
number(s) and the control number assigned by the Transfer Agent. The Fund does
not impose a fee for wire transactions, although your bank may charge you a fee
for this service.
Shares are sold at the public offering price based on the net asset value that
is next determined after the Transfer Agent receives the purchase order. In
most cases, to receive that day's offering price, the Transfer Agent must
receive your order as of the close of regular trading of the New York Stock
Exchange ("NYSE") (generally 4:00 p.m. Eastern time) (the "Valuation Time") on
each Business Day (as defined in "Net Asset Value Per Share") of the Fund. If
you buy shares through an Investment Professional, the Investment Professional
must receive your order in a timely fashion on a regular Business Day and
transmit it to the Transfer Agent so that it is received before the close of
business that day. The Transfer Agent may reject any purchase order for the
Fund's shares, in its sole discretion.
It is the responsibility of your Investment Professional to transmit your order
to purchase shares to the Transfer Agent in a timely fashion in order for you
to receive that day's share price. The Fund must receive payment within three
business days after an order is placed. Otherwise, the purchase order will be
canceled and you could be held liable for resulting fees and/or losses.
INVESTMENT REQUIREMENTS
All purchases must be made in U.S. dollars. Checks must be drawn on U.S.
banks. No cash will be accepted. If you make a purchase with more than one
check, each check must have a value of at least $25, and the minimum investment
requirement still applies. The Fund reserves the right to limit the number of
checks processed at one time. If your check does not clear, your purchase will
be canceled and you could be liable for any losses or fees incurred. Payment
for the purchase is expected at the time of the order. If payment is not
received within three business days of the date of the order, the order may be
canceled, and you could be held liable for resulting fees and/or losses.
Shares are sold at their offering price, which is normally net asset value plus
an initial sales charge. However, in some cases, described below, where
purchases are not subject to an initial sales charge, the offering price may be
net asset value. In some cases, reduced sales charges may be available, as
described below. When you invest, the Fund receives the net asset value for
your
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account. The sales charge varies depending on the amount of your purchase and
a portion may be retained by the Distributor and allocated to your Investment
Professional. The Victory Portfolios has a reinstatement policy which allows
an investor who redeems his/her shares originally purchased with a sales charge
to reinvest within 90 days without incurring an additional sales charge. The
current sales charge rates and commissions paid to Investment Professionals are
as follows:
<TABLE>
<CAPTION>
FRONT-END SALES CHARGE
AS A PERCENTAGE OF:
---------------------
OFFERING NET AMOUNT DEALER
AMOUNT OF PURCHASE PRICE INVESTED REALLOWANCE
- ------------------ -------- ---------- -----------
<S> <C> <C> <C>
Less than $49,999 4.75% 4.99% 4.00%
$50,000 to $99,999 4.50% 4.71% 4.00%
$100,000 to $249,999 3.50% 3.63% 3.00%
$250,000 to $499,999 2.25% 2.30% 2.00%
$500,000 to $999,999 1.75% 1.78% 1.50%
$1,000,000 and above 0.00% 0.00% *
</TABLE>
* There is no initial sales charge on purchases of $1 million or more.
Investment Professionals will be compensated at the rate of up to
0.25% of such purchases.
The Distributor reserves the right to reallow the entire commission to dealers.
If that occurs, the dealer may be considered an "underwriter" under Federal
securities laws.
The Distributor may pay all or a portion of any applicable sales charges and
service fees to Investment Professionals who sell shares of the Fund and
provide ongoing sales support services or shareholder support services. For
the three-year period commencing April 30, 1994, for activities in maintaining
and servicing accounts of customers invested in the Fund, First Albany
Corporation ("First Albany") and PFIC Securities Corporation ("PFIC") may
receive payments from the Distributor equal to two-thirds of the Dealer
Retention (as defined below) on any shares of the Fund (and other funds of the
Victory Portfolios) sold by First Albany or PFIC and their broker-dealer
affiliates. "Dealer Retention" is an amount equal to the difference between
the applicable sales charge and such part of the sales charge which is
reallowed to broker-dealers.
The Distributor, at its expense, may also provide additional cash compensation
to dealers in connection with sales of shares of the Fund. The maximum cash
compensation payable by the Distributor is currently 4.00% of the offering
price. In addition, the Distributor will, from time to time and at its own
expense, provide compensation, including financial assistance, to dealers in
connection with conferences, sales or training programs for their employees,
seminars for the public, advertising campaigns regarding one or more Victory
Portfolios and/or other dealer-sponsored special events including payment for
travel expenses, including lodging, incurred in connection with trips taken by
invited registered representatives and members of their families to locations
within or outside of the United States for meetings or seminars of a business
nature. Compensation will include the following types of non-cash compensation
offered through sales contests: (1) vacation trips including the provision of
travel arrangements and lodging; (2) tickets for entertainment events (such as
concerts, cruises and sporting events) and (3) merchandise (such as clothing,
trophies, clocks and pens). Dealers may not use sales of the Fund's shares to
qualify for this compensation to the extent such may be prohibited by the laws
of any state or any self-regulatory organization, such as the National
Association of Securities Dealers, Inc. None of the aforementioned compensation
is paid for by the Fund or its shareholders.
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REDUCED SALES CHARGES. You may be eligible to buy shares at reduced sales
charge rates in one or more of the following ways:
LETTER OF INTENT. An investor may obtain a reduced sales charge by means of a
written Letter of Intent which expresses the investor's intention to purchase
shares of the Fund at a specified total public offering price within a 13-month
period.
A Letter of Intent is not a binding obligation upon the investor to purchase
the full amount indicated. The minimum initial investment under a Letter of
Intent is 5% of the total amount. Shares purchased with the first 5% of such
amount will be held in escrow (while remaining registered in the name of the
investor) to secure payment of the higher sales charge applicable to the shares
actually purchased if the full amount indicated is not purchased, and such
escrowed shares will be involuntarily redeemed to pay the additional sales
charge, if necessary. Dividends (if any) on escrowed shares, whether paid in
cash or reinvested in additional shares, are not subject to escrow. The
escrowed shares will not be available for disposal by the investor until all
purchases pursuant to the Letter of Intent have been made or the higher sales
charge has been paid. When the full amount indicated has been purchased, the
escrow will be released. A Letter of Intent may include purchases of shares
made not more than 90 days prior to the date the investor signs a Letter of
Intent; however, the 13-month period during which the Letter of Intent is in
effect will begin on the date of the earliest purchase to be included. An
investor may combine purchases that are made in an individual capacity with (1)
purchases that are made by members of the investor's immediate family and (2)
purchases made by businesses that the investor owns as sole proprietorships,
for purposes of obtaining reduced sales charges by means of a written Letter of
Intent. In order to accomplish this, however, investors must designate on the
account application the accounts that are to be combined for this purpose.
Investors can only designate accounts that are open at the time the Letter of
Intent is executed.
If an investor qualifies for a further reduced sales charge because the
investor has either purchased more than the dollar amount indicated on the
Letter of Intent or has entered into a Letter of Intent which includes shares
purchased prior to the date of the Letter of Intent, the difference in the
sales charge will be used to purchase additional shares of the Fund on behalf
of the investor; thus the total purchases (included in the Letter of Intent)
will reflect the applicable reduced sales charge of the Letter of Intent.
For investors who purchase more than the dollar amount indicated on the Letter
of Intent or enter into a Letter of Intent that includes shares purchased prior
to the date of the Letter of Intent and qualify for a reduced sales charge, all
such additional shares will be immediately purchased in the form of additional
shares and credited to the investor's account at the then current public
offering price applicable to a single purchase of the total amount of the
purchases.
For further information about Letters of Intent, interested investors should
contact the Transfer Agent at 800-539-3863. This program, however, may be
modified or eliminated at any time without notice.
RIGHT OF ACCUMULATION AND CONCURRENT PURCHASES
A shareholder may qualify for a reduced sales charge on purchases of shares of
the Fund and other funds of the Victory Portfolios by combining a current
purchase with purchases of another fund(s) or with certain prior purchases of
shares of the Victory Portfolios. The applicable sales charge is based on the
sum of (i) the purchaser's current purchase plus (ii) the current public
offering price of the purchaser's previous purchases of (a) all shares held by
the purchaser in the Fund and (b) all shares held by the purchaser in any other
fund of the Victory Portfolios (except money market funds).
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<PAGE> 321
To receive the applicable public offering price pursuant to the right of
accumulation, shareholders must provide the Transfer Agent with sufficient
information at the time of purchase to permit confirmation of qualification.
Accumulation privileges may be amended or terminated without notice at any time
by the Distributor.
- - WAIVERS OF SALES CHARGES. No sales charge is imposed on sales of shares to
the following categories of persons (which categories may be changed or
eliminated at any time):
(1) Current or retired trustees of the Victory Portfolios; employees,
directors, trustees, and their family members of KeyCorp or an
Affiliated Provider (Affiliated Providers refer to affiliates and
subsidiaries of KeyCorp and service providers to the Victory
Portfolios and the Victory Shares (collectively, the "Victory
Group")), dealers having an agreement with the Distributor and any
trade organization to which Key Advisers, the Sub-Adviser or the
Administrator belongs;
(2) Investors who purchase shares for trust, investment management or
certain other advisory accounts established with KeyCorp or any of its
affiliates;
(3) Investors who purchase shares through a 401(k) plan sponsored by an
Affiliated Provider;
(4) Investors who reinvest assets received in a distribution from a
qualified, non-qualified or deferred compensation plan, agency, trust
or custody account that was either (a) maintained by KeyCorp or an
Affiliated Provider, or (b) invested in a fund of the Victory Group;
(5) Investors who, within 90 days of redemption, use the proceeds from the
redemption of shares of another mutual fund complex for which they
previously paid a front end sales charge or sales charge upon
redemption of shares; and
(6) Shareholders of the former Investors Preference Fund For Income, Inc.
and the Investors Preference New York Tax-Free Fund, Inc. who have
continuously maintained accounts with a fund or funds of the Victory
Group with a balance of $250,000 or more (investors with less than
$250,000 will pay any applicable sales loads).
SPECIAL INVESTOR SERVICES
- - THE SYSTEMATIC INVESTMENT PLAN. You can make regular investments in the
Fund and all other funds of the Victory Group with the Systematic Investment
Plan by completing the appropriate section of the account application and
attaching a voided personal check with your bank's magnetic ink coding number
across the front. If your bank account is jointly owned, be sure that all
owners sign. You must first meet the Fund's initial investment requirement of
$500, then investments may be made monthly by automatically deducting $25 or
more from your bank checking account. For officers, trustees, directors and
employees, including retired directors and employees, of the Victory Group,
KeyCorp and its affiliates, and the Administrator and its affiliates (and
family members of each of the foregoing, i.e., parents and children) who
participate in the Systematic Investment Plan, there is no minimum initial
investment required. You may change the amount of your monthly purchase at any
time. A bank draft form must be completed for this option. Your bank checking
account will be debited on the date indicated on your Account Application.
Shares will be purchased at the offering price next determined following
receipt of the order by the Transfer Agent. You may cancel the Systematic
Investment Plan at any time without payment
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<PAGE> 322
of a cancellation fee. Your monthly account statement will reflect systematic
investment transactions, and a debit entry will appear on your bank statement.
- - TELEPHONE TRANSACTIONS. You can initiate any transaction by telephone. You
may call the Transfer Agent toll-free at 800-539-3863 or call your Investment
Professional or bank trust department. See "Shareholder Account Rules and
Policies" for more information about telephone transactions.
- - THE SYSTEMATIC WITHDRAWAL PLAN. You can make regular withdrawals from your
account in any fund of the Victory Group with the Systematic Withdrawal Plan by
completing the appropriate section of the account application. If you own
shares in a fund worth $5,000 or more, you can have monthly, quarterly,
semi-annual or annual checks sent from your account directly to you, to a
person named by you, or to your bank checking account. The required minimum
withdrawal is $25. If you are having checks sent to your bank checking
account, attach a voided personal check with your bank's magnetic coding number
across the front of the account application. If your account is jointly owned,
be sure that all owners sign the application. You may obtain information about
the Systematic Withdrawal Plan by contacting your Investment Professional.
Your Systematic Withdrawal Plan payments are drawn from share redemptions. If
Systematic Withdrawal Plan redemptions exceed dividend distributions paid on
your Fund shares, your account eventually may be exhausted. If any applicable
sales charges are applied to new purchases of shares of the Fund, it is to your
disadvantage to buy shares of the Fund while also making systematic
redemptions.
Your account will be debited on the date you indicate on your Account
Application. Shares will be redeemed at the NAV as determined on the debit
date indicated on your Account Application. You may cancel the Systematic
Withdrawal Plan at any time without payment of a cancellation fee. Each
Systematic Withdrawal Plan transaction will appear as a debit entry on your
monthly account statement.
- - RETIREMENT PLANS. Retirement plans can be among the best tax-planning
vehicles available to individuals. Call your Investment Professional for more
information on the plans and their benefits, provisions and fees. Your
Investment Professional can set up your new account in the Fund under one of
several tax-sheltered plans. These plans let you invest for retirement and
shelter your investment income from current taxes. Plans include Individual
Retirement Accounts (IRAs) and Rollover IRAs. Other fees may be charged by the
IRA custodian or trustee.
HOW TO REDEEM SHARES
You may redeem all or a portion of your shares on any day that the Fund is open
for business (see "Share Price" below). Shares will be redeemed at the NAV
next calculated after the Transfer Agent has received the redemption request.
If the Fund account is closed, any accrued dividends will be paid at the
beginning of the following month.
You may redeem shares in several ways:
BY MAIL: Send a written request to: The Victory Portfolios:
Ohio Municipal Fund
P.O. Box 9741
Providence, RI 02940-9741
Write a "letter of instruction" with your name, the Fund's name, your Fund
account number, the dollar amount or number of shares to be redeemed, and any
additional requirements that apply to each particular account. You will need
the letter of instruction signed by all persons required to sign for
transactions, exactly as their names appear on the account application. A
signature guarantee is required if: you
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<PAGE> 323
wish to redeem more than $10,000 worth of shares; your Fund account
registration has changed within the last 60 days; the check is not being mailed
to the address on your account; the check is not being made out to the account
owner; or the redemption proceeds are being transferred to another Victory
Group account with a different registration. The following institutions should
be able to provide you with a signature guarantee: banks, brokers, dealers,
credit unions (if authorized under state law), securities exchanges and
associations, clearing agencies, and savings associations. A signature
guarantee may not be provided by a notary public. A signature guarantee is
designed to protect you, the Fund, and its agents from fraud. The Transfer
Agent reserves the right to reject any signature guarantee if (1) it has reason
to believe that the signature is not genuine, (2) it has reason to believe that
the transaction would otherwise be improper, or (3) the guarantor institution
is a broker or dealer that is neither a member of a clearing corporation nor
maintains net capital of at least $100,000.
BY WIRE: You may make redemptions by wire provided you have established a Fund
account to accommodate wire transactions. If telephone instructions are
received before Valuation Time (generally 4:00 p.m. Eastern time), proceeds of
the redemption will be wired as federal funds on the next Business Day to the
bank account designated with the Transfer Agent. You may change the bank
account designated to receive an amount redeemed at any time by sending a
letter of instruction with a signature guarantee to the Transfer Agent, Primary
Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741.
BY TELEPHONE: To redeem by telephone, you may call the Transfer Agent toll
free at 800-539-3863 or call your Investment Professional or bank trust
department. See "Shareholder Account Rules and Policies" for more information
about telephone transactions.
ADDITIONAL REDEMPTION REQUIREMENTS: The Fund may withhold payment on
redemptions until it is reasonably satisfied that investments made by check
have been collected, which can take up to 15 days. Also, when the NYSE is
closed (or when trading is restricted) for any reason other than its customary
weekend or holiday closings, or under any emergency circumstances as determined
by the Commission to merit such action, the right of redemption may be
suspended or the date of payment postponed for a period of time that may exceed
7 days. In addition, the Fund reserves the right to advance the time on that
day by which purchase and redemption orders must be received. To the extent
that portfolio securities are traded in other markets on days when the NYSE is
closed, the Fund's NAV may be affected on days when investors do not have
access to the Fund to purchase or redeem shares.
If you are unable to reach the Transfer Agent by telephone (for example, during
times of unusual market activity), consider placing your order by mail directly
to the Transfer Agent. In case of suspension of the right of redemption, you
may either withdraw your request for redemption or receive payment based on the
NAV next determined after the termination of the suspension. If your balance
in a Fund falls below $500, you may be given 60 days' notice to reestablish the
minimum balance (except with respect to officers, trustees, directors and
employees, including retired directors and employees, of the Victory
Portfolios, KeyCorp and its affiliates, and the Administrator and its
affiliates (and family members of each of the foregoing, i.e., parents,
children and household members) participating in the Systematic Investment
Plan, to whom no minimum balance requirement applies). If you do not increase
your balance, your account may be closed and the proceeds mailed to you at the
address on record. Shares will be redeemed at the last calculated NAV on the
day the account is closed.
HOW TO EXCHANGE SHARES
Shares of the Fund may be exchanged for shares of certain funds of the Victory
Group at net asset value per share at the time of exchange, without a sales
charge. To exchange shares, you must meet several conditions:
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- - Shares of the fund selected for exchange must be available for sale in
your state of residence.
- - The prospectuses of this Fund and the fund whose shares you want to
buy must offer the exchange privilege.
- - You must hold the shares you buy when you establish your account for
at least 7 days before you can exchange them; after the account is
open 7 days, you can exchange shares every regular Business Day.
- - You must meet the minimum purchase requirements for the fund you
purchase by exchange.
- - The registration and tax identification numbers of the two accounts
must be identical.
- - Before exchanging into a fund, obtain and read its prospectus.
Shares of a particular class may be exchanged only for shares of the same class
in the other funds of the Victory Group. For example, you can exchange shares
of this Fund only for Class A shares of another fund. At present, not all of
the funds offer the same two classes of shares. If a fund has only one class
of shares that does not have a class designation, they are "Class A" shares for
exchange purposes. In some cases, sales charges may be imposed on exchange
transactions. Certain funds offer Class A or Class B shares and a list can be
obtained by calling the Transfer Agent at 800-539-3863. Please refer to the
Statement of Additional Information for more details about this policy.
Telephone exchange requests may be made either by calling your Investment
Professional or the Transfer Agent at 800-539-3863 prior to valuation time
(generally 4:00 p.m. Eastern time) on any Business Day.
You can obtain a list of eligible funds of the Victory Group by calling the
Transfer Agent at 800-539-3863. Exchanges of shares involve a redemption of
the shares of the Fund and a purchase of shares of the other portfolio.
There are certain exchange policies you should be aware of:
- - Shares are normally redeemed from one fund and purchased from the other fund
in the exchange transaction on the same Business Day on which the Transfer
Agent receives an exchange request by Valuation Time (generally 4:00 p.m.
Eastern time) that is in proper form, but either fund may delay the purchase of
shares of the fund into which you are exchanging if it determines it would be
disadvantaged by a same-day transfer of the proceeds to buy shares. For
example, the receipt of multiple exchange requests from a dealer in a
"market-timing" strategy might require the disposition of securities at a time
or price disadvantageous to the Fund.
- - Because excessive trading can hurt fund performance and harm shareholders,
the Victory Portfolios reserves the right to refuse any exchange request that
will disadvantage it, or to refuse multiple exchange requests submitted by a
shareholder or dealer.
- - The Fund may amend, suspend or terminate the exchange privilege at any time
upon 60 days' written notice to shareholders.
- - If the Transfer Agent cannot exchange all the shares you request because of
a restriction cited above, only the shares eligible for exchange will be
exchanged.
- - Each exchange may produce a gain or loss for tax purposes.
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<PAGE> 325
Shareholders of the former Investors Preference Fund for Income, Inc. and
Investors Preference New York Tax-Free Fund, Inc. will not be subject to any
additional sales load upon an exchange of shares attributable to an Investors
Preference Funds account for shares of other funds of the Victory Portfolios.
SHAREHOLDER ACCOUNT RULES AND POLICIES
- - NET ASSET VALUE PER SHARE. The term "net asset value per share," or "NAV",
means the value of one share. The NAV is calculated by adding the value of all
its investments, plus cash and other assets, deducting liabilities, and then
dividing the result by the number of shares outstanding. The NAV of the Fund
is determined and its shares are priced as of the close of regular trading of
the New York Stock Exchange (NYSE), (generally 4:00 p.m. Eastern time) (the
"Valuation Time") on each Business Day of the Fund. A "Business Day" is a day
on which the NYSE is open for trading, the Federal Reserve Bank of Cleveland is
open, and any other day (other than a day on which no shares of the Fund are
tendered for redemption and no order to purchase any shares is received) during
which there is sufficient trading in its portfolio instruments that the Fund's
net asset value per share might be materially affected. The NYSE or the
Federal Reserve Bank of Cleveland will not be open in observance of the
following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day,
Veterans' Day, Thanksgiving Day, and Christmas Day.
The Fund's securities are valued primarily on the basis of market quotations
or, if quotations are not readily available, by a method that the Board of
Trustees believes accurately reflects fair value. Fair value of these
portfolio securities is determined by an independent pricing service approved
by the Trustees based primarily upon information concerning market transactions
and dealers quotations for similar securities.
- - THE OFFERING OF SHARES may be suspended during any period in which the
determination of net asset value is suspended, and the offering may be
suspended by the Trustees at any time the Trustees believe it is in the Fund's
best interest to do so.
- - TELEPHONE TRANSACTION PRIVILEGES for purchases, redemptions or exchanges
may be modified, suspended or terminated by the Fund at any time. If an
account has more than one owner, the Fund and the Transfer Agent may rely on
the instructions of any one owner. Telephone privileges apply to each owner of
the account and the dealer representative of record for the account unless and
until the Transfer Agent receives cancellation instructions from an owner of
the account.
- - TELEPHONE INSTRUCTIONS. Generally, neither the Fund, the bank trust
department nor the Transfer Agent will be responsible for any claims, losses or
expenses for acting on telephone instructions that are reasonably believed to
be genuine. The Transfer Agent and the Fund will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine and if they
do not employ reasonable procedures they may be liable for any losses due to
unauthorized or fraudulent instructions. The identification procedures may
include, but are not limited to, the following: account number, registration
and address, personalized security codes, taxpayer identification number and
other information particular to the account. Your Investment Professional,
bank trust department or the Transfer Agent may also record calls, and you
should verify the accuracy of your confirmation statements immediately after
you receive them.
- - REDEMPTION OR TRANSFER REQUESTS WILL NOT BE HONORED UNTIL THE TRANSFER AGENT
RECEIVES ALL REQUIRED DOCUMENTS IN PROPER FORM. From time to time, the
Transfer Agent in its discretion may waive certain of the requirements for
redemptions stated in this Prospectus.
- - DEALERS THAT CAN PERFORM ACCOUNT TRANSACTIONS FOR THEIR CLIENTS BY
PARTICIPATING IN NETWORKING through the National Securities Clearing
Corporation are responsible for obtaining their clients' permission to perform
those transactions and are responsible
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<PAGE> 326
to their clients who are shareholders of the Fund if the dealer performs any
transaction erroneously.
- - THE REDEMPTION PRICE FOR SHARES WILL VARY from day to day because the value
of the securities in the Fund fluctuates, and the value of your shares may be
more or less than their original cost.
- - PAYMENT FOR REDEEMED SHARES is made ordinarily in cash and forwarded by
check within three business days after the Transfer Agent receives redemption
instructions in proper form, except under unusual circumstances determined by
the Commission delaying or suspending such payments. The Transfer Agent may
delay forwarding a check for recently purchased shares, but only until the
purchase payment has cleared. That delay may be as much as 15 days from the
date the shares were purchased. That delay may be avoided if you arrange with
your bank to provide telephone or written assurance to the Transfer Agent that
your purchase payment has cleared.
- - INVOLUNTARY REDEMPTIONS OF SMALL ACCOUNTS. If your account value has fallen
below $500, you will be given 60 days' notice to reestablish the minimum
balance. If you do not increase your minimum balance, your account may be
closed and the proceeds mailed to you at the record address. In some cases
involuntary redemptions may be made to repay the Distributor for losses from
the cancellation of share purchase orders. Under unusual circumstances, shares
of the Fund may be redeemed "in kind," which means that the redemption proceeds
will be paid with securities from the Fund. Please refer to the Statement of
Additional Information for more details.
- - "BACKUP WITHHOLDING" of Federal income tax may be applied at the rate of 31%
from dividends, distributions and redemption proceeds (including exchanges) if
you fail to furnish the Victory Portfolios with a certified Social Security or
taxpayer identification number when you sign your application, or if you
violate Internal Revenue Service regulations on tax reporting of dividends.
- - THE VICTORY PORTFOLIOS DOES NOT CHARGE A REDEMPTION FEE, but if your
Investment Professional handles your redemption, they may charge a separate
service fee.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS. The Fund ordinarily declares and pays dividends from its net
investment income monthly. The Fund distributes substantially all net capital
gains, if any, to shareholders each year, to the extent necessary to qualify
for favorable federal tax treatment.
CAPITAL GAINS. The Fund may make distributions annually out of any net
short-term or long-term capital gains, and the Fund may make supplemental
distributions of dividends and capital gains following the end of its fiscal
year.
DISTRIBUTION OPTIONS
When you fill out your account application, you can specify how you want to
receive your dividend distributions. Currently, there are five available
options:
1. REINVESTMENT OPTION. Your income and capital gain dividends, if any,
will be automatically reinvested in additional shares of the Fund.
Income and capital gain dividends will be reinvested at the net asset
value of the Fund as of the day after the record date. If you do not
indicate a choice on your application, you will be assigned this
option.
2. CASH OPTION. You will receive a check for each income or capital gain
dividend, if any. Distribution checks will be mailed no later than 7
days after the dividend payment date which may be more than 7 days
after the dividend record date.
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3. INCOME EARNED OPTION. You will have your capital gain dividend
distributions, if any, reinvested automatically in the Fund and have
your income dividends paid in cash.
4. DIRECTED DIVIDENDS OPTION. You will have income and capital gain
dividends, or only capital gain dividends, automatically reinvested in
shares of another fund of the Victory Group. Shares will be purchased
at the NAV as of the dividend record date. If you are reinvesting
dividends of a fund sold without a sales charge in shares of a fund
sold with a sales charge, the shares will be purchased at the public
offering price. If you are reinvesting dividends of a fund sold with
a sales charge in shares of a fund sold with or without a sales
charge, the shares will be purchased at the net asset value of the
fund. Dividend distributions can be directed only to an existing
account with a registration that is identical to that of your Fund
account.
5. DIRECTED BANK ACCOUNT OPTION. You will have your income and capital
gain dividends, or only your income dividends, automatically
transferred to your bank checking or savings account. The amount will
be determined on the dividend record date and will normally be
transferred to your account within 7 days of the dividend record date.
Dividend distributions can be directed only to an existing account
with a registration that is identical to that of your Fund account.
Please call or write the Transfer Agent to learn more about this
dividend distribution option.
Any election or revocation of any of the above dividend distribution options
may be made in writing to the Fund and sent to Primary Funds Service
Corporation, P.O. Box 9741, Providence, RI 02940-9741, or by calling the
Transfer Agent at 800-539-3863, and will become effective with respect to
dividends having record dates after receipt of the application or request by
the Transfer Agent.
Reinvested dividend distributions receive the same tax treatment as dividend
distributions paid in cash.
COMPLETE REDEMPTIONS: If you request a complete redemption of all your Fund
shares, any dividend accrued to your account will be included in the redemption
check.
STATEMENTS AND REPORTS: You will receive a monthly statement reflecting all
transactions that affect the share balance or the registration of your Fund
account. You will receive a confirmation after every transaction that affected
the share balance of your Fund account, except for dividend reinvestment,
systematic investment and systematic withdrawal transactions. These
transactions will be detailed in your Fund account statement. Transactions
that affect the share balance of your Fund investment in an account established
with an Investment Professional or financial institution will be detailed in
regular statements or through confirmation procedures of the financial
institution. Certificates representing shares of the Fund will not be issued.
An IRS Form 1099-DIV with federal tax information will be mailed to you by
January 31 of each tax year and also will be filed with the IRS. At least
twice a year, you will receive the Fund's financial reports.
FEDERAL TAXES
The Fund intends to qualify each year and elect to be treated as a separate
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "IRS Code"). If the Fund is treated as a "regulated
investment company" and all its taxable income is distributed to its
shareholders in accordance with the timing requirements imposed by the IRS
Code, it will not be subject to federal income tax on its income. The Fund's
distributions that are attributable to its net investment income and short-term
capital gains are taxable as ordinary income, and its distributions from
long-term capital gains are taxed as long-term capital gains. Such
distributions are taxable when they are paid, whether taken in cash or
reinvested in additional shares, except that distributions declared in October,
November or December
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and paid during the following January are taxable as if paid and received on
December 31. Dividends received from the Fund by corporate shareholders are
not entitled to the dividends-received deduction. The Fund sends tax
statements to its shareholders (with copies to the Internal Revenue Service
(the "IRS")) by January 31 showing the amounts and tax status of distributions
made (or deemed made) during the preceding calendar year.
The federal tax-exempt and Ohio tax-exempt portions of dividends paid by the
fund for each year will be designated within 60 days after the end of that year
and will be based upon the ratios of such net tax-exempt income to total net
income earned by the Fund during the entire year. Those ratios may be
substantially different from those realized in any portion of the year. Thus,
a shareholder who holds shares for only a part of the year may be allocated
more or less tax-exempt dividends than would be the case if the allocation were
based on the ratio of net tax-exempt income to total net income actually earned
by the Fund while he or she was a shareholder.
Provided that the Fund elects to be treated, and continues to qualify as a
regulated investment company under the Code and that at all times at least 50%
of the value of the total assets of the Fund consists of obligations issued by
or on behalf of the State of Ohio, political subdivisions thereof or agencies
or instrumentalities of Ohio or its political subdivisions, or similar
obligations of other states or their subdivisions (but excluding obligations of
United States territories or possessions for purposes of the 50% test),
dividends received from the Fund that are properly attributable to interest on
Ohio Tax-Exempt Obligations are exempt from the Ohio personal income tax. The
description in this paragraph is based upon current statutes and regulations
and upon current policies of the Ohio Department of Taxation, all of which are
subject to change.
Under the Code, if a shareholder receives an exempt-interest dividend with
respect to any share and such share is held for six months or less, any loss on
the sale or exchange of such share will be disallowed to the extent of the
amount of such exempt-interest dividend.
To the extent that dividends paid to shareholders are derived from taxable
income (for example, from interest on certificates of deposit or repurchase
agreements), or from long-term or short-term capital gains, such dividends will
be subject to federal income tax, whether such dividends are paid in the form
of cash or additional shares. Distributions will be taxable as described above
even if the net asset value per share of the Fund is reduced below the
shareholder's cost by the distribution and the distribution is, as an economic
matter, a return of capital. It is anticipated that none of the distributions
from the Fund will be eligible for the dividends-received deduction for
corporations.
Income from certain "private activity bonds" issued after August 7, 1986 is an
item of tax preference for purposes of the individual and corporate alternative
minimum tax. These private activity bonds include certain bonds issued to
obtain funds to provide certain water, sewage and solid waste facilities,
qualified residential rental projects, certain local electric, gas and other
heating or cooling facilities, qualified hazardous waste facilities, and
government-owned airports, docks and wharves and mass commuting facilities;
certain qualified mortgage, student loan and redevelopment bonds; and certain
bonds issued as part of "small issues" for industrial facilities. If the Fund
invests in such private activity bonds, shareholders may become subject to the
alternative minimum tax on the portion of the Fund's distributions derived from
interest income on such bonds. It is the policy of the Fund not to invest more
than 20% of its net assets in obligations the interest on which is treated as a
preference item for purposes of the federal alternative minimum tax and in
other Taxable Obligations. Also, interest income on all Ohio Tax-Exempt
Obligations and private activity bonds is included in "adjusted current
earnings" for purposes of computing the alternative minimum tax applicable to
corporate shareholders of the Fund. State or local income tax consequences of
dividends on shares of the Fund may be different than those associated with
direct ownership of securities held or acquired
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<PAGE> 329
by the Fund.
The receipt of exempt-interest dividends may cause persons receiving Social
Security or Railroad Retirement benefits to be taxable on a portion of such
benefits. In addition, exempt-interest dividends that are attributable to
interest earned on certain private activity bonds will be taxable to any
shareholder who is a "substantial user" of a facility being financed by such
bonds or a "related person" to such a substantial user.
REDEMPTION OR EXCHANGES
Investors may realize a gain or loss when redeeming (selling) or exchanging
shares. For most types of accounts, the Fund reports the proceeds to the IRS
annually. Because the shareholders' tax treatment also depends on their
purchase price and personal tax positions, shareholders should keep their
regular account statements to use in determining their tax. See "Buying a
Dividend".
"BUYING A DIVIDEND"
On the record date for a distribution of ordinary income or capital gains
dividend, the net asset value of the Fund is reduced by the amount of the
distribution. An investor who buys shares just before the record date ("buying
a dividend") will pay the full price for the shares and then receive a portion
of the purchase price back as a taxable distribution.
OTHER TAX INFORMATION
The information above is only a summary of some of the federal income tax
consequences generally affecting the Fund and its shareholders, and no attempt
has been made to discuss individual tax consequences. A prospective investor
should also review the more detailed discussion of federal income tax
considerations in the Statement of Additional Information. In addition to
federal income tax, a shareholder may be subject to state or local taxes on the
shareholder's investment, depending on the laws in the shareholder's area.
Investors considering an investment in the Fund should consult their tax
adviser to determine whether the Fund is suitable to their particular tax
situation.
When investors sign their account application, they are asked to provide their
correct social security or taxpayer identification number and other required
certifications. If investors do not comply with IRS regulations, the IRS can
require the Fund to withhold 31% of taxable distributions and redemptions from
their account.
PERFORMANCE
From time to time, performance information for the Fund showing total return
may be presented in advertisements, sales literature and in reports to
shareholders. Such performance figures are based on historical earnings and
are not intended to indicate future performance. Average annual total return
will be calculated over a stated period of more than one year. Average annual
total return is measured by comparing the value of an investment at the
beginning of the relevant period (as adjusted for sales charges, if any) to the
redemption value of the investment at the end of the period (assuming immediate
reinvestment of any dividends or capital gains distributions) and annualizing
that figure. Aggregate total return is calculated similarly to average annual
total return, except that the resulting difference is not annualized.
From time to time performance information for the Fund showing the yield and/or
effective yield for each class of shares may also be presented in
advertisements, sales literature and in reports to shareholders. Yields
reflect the deduction of the maximum sales charge. Such performance figures
are based on historical earnings and are not intended to indicate future
performance. Yield will be computed by dividing the Fund's
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<PAGE> 330
net investment income per share earned during a recent thirty-day period by the
Fund's maximum offering price per share (reduced by any undeclared earned
income expected to be paid shortly as a dividend) on the last day of the period
and annualizing the result. Effective yield is computed in a similar manner,
but, when annualized, the income earned by an investment in the Fund is assumed
to be reinvested. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
Investors may also judge, and the Victory Portfolios may at times advertise,
the performance of the Fund by comparing it to the performance of other mutual
funds with comparable investment objectives and policies, which performance may
be contained in various unmanaged mutual fund or market indices or rankings
such as those prepared by Dow Jones & Co., Inc. and Standard & Poor's
Corporation, in publications issued by Lipper Analytical Services, Inc., and in
the following publications: IBC/Donoghue's Money Fund Reports, Ibbotson
Associates, Inc., Morningstar, CDA/Wiesenberger, Money Magazine, Forbes,
Barron's, The Wall Street Journal, The New York Times, Business Week, American
Banker, Fortune, Institutional Investor, U.S.A. Today and local newspapers.
In addition, general information about the Fund that appears in publications
such as those mentioned above may also be quoted or reproduced in
advertisements, sales literature or in reports to shareholders.
Performance is a function of the type and quality of instruments held in the
Fund's portfolio, operating expenses, and market conditions. Consequently,
current performance will fluctuate and is not necessarily representative of
future results. Any fees charged by service providers with respect to customer
accounts for investing in shares of the Fund will not be reflected in
performance calculations.
Additional information regarding the performance of each of the Victory
Portfolios is included in the Victory Portfolios' annual report, which is
available free of charge by calling 800-539-3863.
FUND ORGANIZATION AND FEES
The Victory Portfolios is an open-end management investment company, commonly
known as a mutual fund, and currently consisting of twenty-eight series
portfolios, four of which are inactive. The Victory Portfolios has been
operating continuously since 1986, when it was created under Massachusetts law
as a Massachusetts business trust, although certain of its funds have a prior
operating history from their predecessor funds. On or about February 29, 1996,
contingent upon shareholder approval, the Victory Portfolios converted from a
Massachusetts business trust to a Delaware business trust. The Victory
Portfolios' offices are located at 3435 Stelzer Road, Columbus, OH 43219-3035.
Overall responsibility for management of the Victory Portfolios rests with its
Board of Trustees, who are elected by the shareholders of the Victory
Portfolios.
INVESTMENT ADVISER AND SUB-ADVISER
Key Advisers is the investment adviser to the Fund. Key Advisers directs the
investment of the Victory Portfolios' assets, subject at all times to the
supervision of the Victory Portfolios' Board of Trustees. Key Advisers
continually supervises the investment and reinvestment of cash, securities and
other property comprising the assets of the Victory Portfolios.
Key Advisers was organized as an Ohio corporation on July 27, 1995 and is
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended. It is a wholly-owned subsidiary of KeyCorp Asset Management
Holdings, Inc., which is a wholly-owned subsidiary of Society National Bank, a
wholly-owned subsidiary of KeyCorp. Affiliates of Key Advisers manage
approximately $37 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals and mutual funds.
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For the services provided and expenses incurred pursuant to its investment
advisory agreement with the Victory Portfolios respecting the Fund, Key
Advisers receives a fee, computed daily and paid monthly, at the annual rate of
sixty one-hundredths of one percent (.60% ) of the average daily net assets of
the Fund. The advisory fees for the Fund have been determined to be fair and
reasonable in light of the services provided to the Fund. Key Advisers may
periodically waive all or a portion of its advisory fee with respect to the
Fund to increase the net income of the Fund available for distribution as
dividends. Prior to January 1, 1996, the Sub-Adviser (Society Asset
Management, Inc.) served as investment adviser to the Fund. During the Fund's
fiscal year ended October 31, 1995, Society Asset Management, Inc. received
investment advisory fees aggregating .__% of the average daily net assets of
the Fund.
Under an investment advisory agreement between the Victory Portfolios, on
behalf of the Fund, and Key Advisers, Key Advisers may delegate a portion of
its responsibilities to a sub-adviser. In addition, the investment advisory
agreement provides that Key Advisers may render services through its own
employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser of the Fund and are under the common
control of KeyCorp as long as all such persons are functioning as part of an
organized group of persons, managed by authorized officers of Key Advisers.
Key Advisers has entered into an investment sub-advisory agreement with its
affiliate, Society Asset Management, Inc., a registered investment adviser, on
behalf of each Fund. The Sub-Adviser is a wholly-owned subsidiary of KeyCorp
Asset Management Holdings, Inc. For its services under the investment
sub-advisory agreement, Key Advisers pays the Sub-Adviser sub-advisory fees as
a percentage of average daily net assets as follows: .40% of the first $10
million of average daily net assets; .30% of the next $15 million of average
daily net assets; .25% of the next $25 million of average daily net assets; and
.20% of average daily net assets in excess of $50 million.
The person primarily responsible for the investment management of each of the
Fund, as well as his previous experience, is as follows:
<TABLE>
<CAPTION>
PORTFOLIO MANAGING PREVIOUS
MANAGER THE FUND SINCE EXPERIENCE
--------- -------------- ----------
<S> <C> <C>
Paul A. Toft September, 1994 Vice President and Manager,
Nike Securities, L.P. since
1991; Assistant Vice President
from 1990 to 1991 and Senior
Administrator from 1986-1989
for Van Kampen Merritt.
</TABLE>
ADMINISTRATOR AND DISTRIBUTOR
Concord Holding Corporation is the Administrator for the Fund. Victory
Broker-Dealer Services, Inc. is the Fund's principal underwriter and
Distributor.
The Administrator generally assists in all aspects of the Fund's administration
and operation. For expenses incurred and services provided as Administrator
pursuant to its management and administration agreement with the Victory
Portfolios, the Administrator receives a fee from the Fund, computed daily and
paid monthly, at an annual rate of fifteen one-hundredths of one percent (.15%)
of the Fund's average daily net assets. The Administrator may periodically
waive all or a portion of its administrative fee with respect to the Fund to
increase the net income of the Fund available for distribution as dividends.
During the fiscal year ended October 31, 1995, the Fund paid administration
fees of .15% of its average daily net assets.
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TRANSFER AGENT AND FUND ACCOUNTANT
Primary Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741,
serves as the Fund's Transfer Agent pursuant to a Transfer Agency and
Shareholder Service Agreement with the Victory Portfolios and receives a fee
for such services based on various criteria, including assets, transactions and
the number of accounts. BISYS Fund Services Ohio, Inc., 3435 Stelzer Road,
Columbus, OH 43219, provides certain accounting services for the Fund pursuant
to a Fund Accounting Agreement and receives a fee for such services.
SHAREHOLDER SERVICING
Shareholder services are provided to the Fund pursuant to agreements between
the Victory Portfolios and various shareholder servicing agents, including Key
Trust Company of Ohio, N.A. and its affiliates and other financial institutions
and securities brokers (each a "Shareholder Servicing Agent"). Each
Shareholder Servicing Agent generally will provide support services to
shareholders by establishing and maintaining accounts and records, processing
dividend and distribution payments, providing account information, arranging
for bank wires, responding to routine inquires, forwarding shareholder
communication, assisting in the processing of purchase, exchange and redemption
requests, and assisting shareholders in changing dividend options, account
designations and addresses. For expenses incurred and services provided as
Shareholder Servicing Agent pursuant to its respective Shareholder Servicing
Agreement, the Fund pays each Shareholder Servicing Agent a fee computed daily
and paid monthly, in amounts aggregating not more than twenty-five
one-hundredths of one percent (.25%) of the average daily net assets of the
Fund per year. A Shareholder Servicing Agent may periodically waive all or a
portion of its respective shareholder servicing fees with respect to the Fund
to increase the net income of the Fund available for distribution as dividends.
During the fiscal year ended April 30, 1995, the Fund paid Shareholder
Servicing fees of __% of the Fund's average daily net assets.
EFFECT OF BANKING LAWS
Key Advisers and the Sub-Adviser believe that they may perform the investment
advisory services for the Fund contemplated by the investment advisory (and
Sub-Advisory) Agreement for the Fund (the "Advisory Agreements") with the
Victory Portfolios. In the Advisory Agreements, Key Advisers and the
Sub-Adviser have represented that they possess the legal authority to perform
the investment advisory services contemplated therein and described in this
Prospectus. Key Trust Company of Ohio, N.A. and its affiliates also believe
that they also may perform the services for the Victory Portfolios contemplated
by the Shareholder Servicing Agreement with the Victory Portfolios without
violating applicable banking laws and regulations. Future changes in federal
or state statutes and regulations relating to permissible activities of banks
or bank holding companies and their subsidiaries and affiliates, as well as
further judicial or administrative decisions or interpretations of present and
future statutes and regulations, could change the manner in which Key Advisers,
the Sub-Adviser, Key Trust Company of Ohio, N.A. and its affiliates could
continue to perform such services for the Victory Portfolios. See the
Statement of Additional Information ("Glass-Steagall Act") for further
discussion.
BUSINESS MANAGEMENT AGREEMENT
In connection with its obligations under its investment sub-advisory agreement
with Key Advisers, the Sub-Adviser has entered into a Business Management
Agreement with Key Advisers pursuant to which Key Advisers provides certain
administrative and support services to the Sub-Adviser. Such services include
preparing reports to the Company's Board of Trustees, recordkeeping services,
and services rendered in connection with the preparation of regulatory filings
and other reports, and regulatory and compliance systems and other
administrative and support services.
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<PAGE> 333
For such services, the Sub-Adviser pays fees to Key Advisers at an annual rate
as follows: .__% on the first $10 million of average daily net assets; .__% of
the next $15 million of average daily net assets ; .__% of the next $25 million
of average daily net assets; and .__% of average daily net assets in excess of
$50 million.
EXPENSES
For the fiscal year ended October 31, 1995, the Fund's total operating expenses
were .__% of the Fund's average net assets.
CUSTODIAN
Key Trust Company of Ohio, N.A. serves as custodian for the Fund and receives
fees for its services.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. serves as the Fund's independent accountants.
ADDITIONAL INFORMATION
The Victory Portfolios may issue an unlimited number of shares and classes of
the Fund. Shares of each class of the Fund participate equally in dividends
and distributions and have equal voting, liquidation and other rights. When
issued and paid for, shares will be fully paid and nonassessable by the Victory
Portfolios and will have no preference, conversion, exchange or preemptive
rights. Shareholders are entitled to one vote for each full share owned and
fractional votes for fractional shares owned. For those investors with
qualified trust accounts established with affiliates of the Adviser, the
trustee will vote the shares at meetings of the Fund's shareholders in
accordance with the shareholder's instructions or will vote in the same
percentage as shares that are not held in trust. The trustee will forward to
these shareholders all communications received by the trustee, including proxy
statements and financial reports. The Victory Portfolios and the Fund are not
required to hold annual meetings of shareholders and in ordinary circumstances
do not intend to hold such meetings. The Trustees may call special meetings of
shareholders for action by shareholder vote as may be required by the 1940 Act
or the Victory Portfolios' Delaware Trust Instrument. Under certain
circumstances, the Trustees may be removed by action of the Trustees or by the
shareholders. Shareholders holding 10% or more of the Victory Portfolios'
outstanding shares may call a special meeting of shareholders for the purpose
of voting upon the question of removal of Trustees.
The Victory Portfolio's Board of Trustees may authorize the Victory Portfolios
to offer other funds which may differ in the types of securities in which their
assets may be invested.
Key Advisers, the Sub-Adviser and the Victory Portfolios have adopted Codes of
Ethics (the "Codes") which require investment personnel (a) to pre-clear all
personal securities transactions, (b) to file reports regarding such
transactions, and (c) to refrain from personally engaging in (i) short-term
trading of a security, (ii) transactions involving a security within seven days
of a Victory fund transaction involving the same security, and (iii)
transactions involving securities being considered for investment by a Victory
fund. The Codes also prohibit investment personnel from purchasing securities
in an initial public offering. Personal trading reports are reviewed
periodically by Key Advisers or the Sub-Adviser, and the Board of Trustees
reviews annually such reports (including information on any substantial
violations of the Codes). Violations of the Codes may result in censure,
monetary penalties, suspension or termination of employment.
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<PAGE> 334
DELAWARE LAW
The Delaware Business Trust Act (the "Delaware Act") provides that a
shareholder of a Delaware business trust shall be entitled to the same
limitation of personal liability extended to stockholders of Delaware
corporations, and the Victory Portfolios' Delaware Trust Instrument provides
that shareholders will not be liable for obligations of the Victory Portfolios.
In light of Delaware law, the nature of the Victory Portfolios' business, and
the nature of its assets, management of the Victory Portfolios believes that
the risk of personal liability to a Fund shareholder would be extremely remote.
In the unlikely event a shareholder is held personally liable for the Victory
Portfolios' obligations, the Victory Portfolios is required to use its property
to protect or compensate the shareholder. On request, the Victory Portfolios
will defend any claim made and pay any judgment against a shareholder for any
act or obligation of the Victory Portfolios. Therefore, financial loss
resulting from liability as a shareholder will occur only if the Victory
Portfolios itself cannot meet its obligations to indemnify shareholders and pay
judgments against them.
Delaware law authorizes electronic or telephonic communications between
shareholders and the Victory Portfolios. Under Delaware law, the Successor
Company has the flexibility to respond to future business contingencies. For
example, the Trustees will have the power to incorporate the Victory
Portfolios, to merge or consolidate it with another entity, to cause each fund
to become a separate trust, and to change the Victory Portfolios' domicile
without a shareholder vote. This flexibility could help reduce the expense and
frequency of future shareholder meetings for non-investment related issues.
MISCELLANEOUS
Shareholders will receive Semi-Annual Reports, which are unaudited, and Annual
Reports, which are audited by independent public accountants, describing the
investment operations of the Fund. Each of these reports, when available for a
particular fiscal year end the end of a semi-annual fiscal period, is
incorporated herein by reference. The Victory Portfolios may include
information in their Annual Reports and Semi-Annual Reports to shareholders
that (1) describes general economic trends, (2) describes general trends within
the financial services industry or the mutual fund industry, (3) describes past
or anticipated portfolio holdings for the Fund or (4) describes investment
management strategies for the Victory Portfolios. Such information is provided
to inform shareholders of the activities of the Fund for the most recent fiscal
year the end of a semi-annual fiscal period and to provide the views of Key
Advisers, the Sub-Adviser and/or the Victory Portfolios' officers regarding
expected trends and strategies.
Inquiries regarding the Victory Portfolios or the Fund may be directed in
writing to the Victory Portfolios at Primary Funds Service Corporation, P.O.
Box 9741, Providence, RI 02940-9741, or by telephone, toll-free, at
800-539-3863.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
VICTORY PORTFOLIOS OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFERING BY THE VICTORY PORTFOLIOS OR BY THE DISTRIBUTOR IN ANY JURISDICTION
IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
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The
VICTORY
Portfolios
PRIME OBLIGATIONS FUND
PROSPECTUS For current yield, purchase and redemption information,
March 1, 1996 call 800-539-FUND or 800-539-3863
THE VICTORY PORTFOLIOS (the "Victory Portfolios") is a registered open-end
management investment company that offers investors a selection of money market,
fixed-income, municipal bond, domestic and international equity portfolios. This
Prospectus relates to the Victory Prime Obligations Fund (the "Fund"), a
diversified portfolio. KeyCorp Mutual Fund Advisers, Inc., Cleveland, Ohio, an
indirect subsidiary of KeyCorp, is the investment adviser to the Fund ("Key
Advisers" or the "Adviser"). Society Asset Management, Inc., Cleveland, Ohio, an
indirect subsidiary of KeyCorp, is the investment sub-adviser to the Fund (the
"Sub-Adviser" or "Society"). Concord Holding Corporation is the Fund's
administrator (the "Administrator"). Victory Broker-Dealer Services, Inc. is the
Fund's distributor (the "Distributor").
The Fund seeks to maintain a constant net asset value of $1.00 per unit of
beneficial interest. AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED
BY THE U.S. GOVERNMENT. THERE CAN BE NO ASSURANCE THAT THE PRIME OBLIGATIONS
FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER UNIT.
The Victory Prime Obligations Fund seeks current income with liquidity and
stability of principal. The Fund pursues this objective by investing in
short-term, high quality debt instruments.
Please read this Prospectus before investing. It is designed to provide you with
information and to help you decide if the Fund's goals match your own. Retain
this document for future reference. A Statement of Additional Information (dated
March 1, 1996) for the Fund and an annual report for the Fund's fiscal year
ended October 31, 1995 has been filed with the Securities and Exchange
Commission and is incorporated herein by reference. The Statement of Additional
Information is available without charge upon request by calling 800-539-3863.
SHARES OF THE FUND ARE:
- - NOT INSURED BY THE FDIC;
- - NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY KEYCORP
BANK, ANY OF ITS AFFILIATES, OR ANY OTHER BANK;
- - SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("COMMISSION") OR ANY SECURITIES REGULATORY AUTHORITY OF ANY
STATE, NOR HAS THE COMMISSION OR ANY SUCH STATE AUTHORITY PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE> 336
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
- ----------------- ----
<S> <C>
Summary of Fund Expenses 3
Financial Highlights 4
the Fund's Investment Objective 5
The Fund's Investment Policies and Risk Factors 5
How to Invest, Exchange and Redeem 9
Dividends, Distribution and Taxes 15
Performance 18
Fund Organization and Fees 19
Additional Information 21
</TABLE>
2
<PAGE> 337
SUMMARY OF FUND EXPENSES
The table below summarizes the expenses associated with the Fund. This standard
format was developed for use by all mutual funds to help you make your
investment decisions. Of course, you should consider this expense information
along with other important information in this Prospectus, including the Fund's
investment objective.
SHAREHOLDER TRANSACTION EXPENSES(1)
<TABLE>
<S> <C>
Maximum Sales Load None
Deferred Sales Load None
Redemption Fee None
Exchange Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES AFTER EXPENSE WAIVERS AND REIMBURSEMENTS (as a
percentage of average net assets)
<TABLE>
<S> <C>
Management Fees (2) .35%
Other Expenses(3) .28%
---
Total Operating Expenses(3) .63%
===
</TABLE>
(1) Subsidiaries, correspondents, affiliated banks, and non-bank affiliates
of KeyCorp may charge a Customer's account fees for automatic
investment and other cash management services provided in connection
with an investment in the Fund. (See "How to Invest, Exchange and
Redeem.")
(2) Key Advisers [and the Administrator] have agreed to reduce their fees
and/or reimburse expenses [for the indefinite future].
(3) These amounts include an estimate of the shareholder servicing fees the
Fund expects to pay. (See "Fund Organization and Fees - Shareholder
Servicing".)
EXAMPLE: You would pay the following expenses on a $1,000 investment,
assuming: (1) 5% annual return and (2) redemption at the end of each time
period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Prime Obligation Fund $6.00 $20.00 $35.00 $79.00
</TABLE>
The purpose of the table above is to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. See "Fund Organization and Fees" for a more complete discussion of
annual operating expenses of the Fund. THE FOREGOING EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN.
3
<PAGE> 338
FINANCIAL HIGHLIGHTS
THE FUND'S FINANCIAL HISTORY
The table below sets forth certain financial information with respect
to the per-share data and ratios for the Fund for the periods indicated. The
information below has been derived from financial statements audited (except as
indicated) by Coopers & Lybrand L.L.P., independent public accountants for the
Victory Portfolios, whose report thereon is included in the Statement of
Additional Information.
THE VICTORY PRIME OBLIGATIONS FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED YEAR ENDED OCTOBER 31,
OCTOBER 31, APRIL 30, ----------------------
1995 1995 1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ---- ----
(UNAUDITED)
[to be
inserted]
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Investment activities
Net investment income 0.025 0.035 0.030 0.037 0.061 0.078 0.087
Net realized losses on
investments (0.003)
-------- -------- -------- -------- -------- -------- --------
Total from Investment
Activities 0.025 0.320 0.300 0.370 0.610 0.780 0.870
Distributions
Net investment income (0.025) (0.035) (0.030) (0.037) (0.061) (0.078) (0.087)
-------- -------- -------- -------- -------- -------- --------
Capital transactions 0.003
-------- -------- -------- -------- -------- -------- --------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ======== ======== ======== ========
TOTAL RETURN 2.53%(a) 3.57% 3.05% 3.77% 6.32% 8.06% 9.02%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $430,000 $782,303 $720,024 $524,338 $442,263 $444,238 $304,186
Ratio of expenses to average
net assets 0.69%(b) 0.62% 0.60% 0.61% 0.62% 0.62% 0.61%
Ratio of net investment
income to average net assets 5.02%(b) 3.52% 2.96% 3.68% 6.14% 7.76% 8.69%
Ratio of expenses to average
net assets* 0.79% 0.60%
Ratio of net investment
income to average net assets* 3.35% 2.96%
</TABLE>
* During the period the administration and/or shareholder service fees
were voluntarily reduced. If such voluntary fee reductions had not
occurred, the ratios would be as indicated.
(a) Aggregate.
(b) Annualized.
4
<PAGE> 339
THE FUND'S INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek to provide current income
consistent with liquidity and stability of principal. The investment objective
of the Fund is fundamental and may not be changed without a vote of a majority
of its outstanding voting securities (as defined in the Statement of Additional
Information). There can be no assurance that the Fund will achieve its
investment objective.
THE FUND'S INVESTMENT POLICIES AND RISK FACTORS
The Fund pursues its objective by investing only in obligations which are
determined by Key Advisers and the Sub-Adviser to present minimal credit risks
under guidelines adopted by the Victory Portfolios' Board of Trustees (the
"Trustees"). All securities or instruments in which the Fund may invest must
have remaining maturities of up to 397 days, although securities subject to
repurchase agreements and certain variable interest rate instruments may bear
longer maturities. The average weighted maturity of the securities in the Fund
will not exceed 90 days.
The Fund invests in United States dollar-denominated, high-quality, short-term
debt instruments. The Fund's investments will be limited to those obligations
which, at the time of purchase, (i) possess the highest short-term rating from
at least two nationally recognized statistical ratings organizations ("NRSRO")
(for example, commercial paper rated "A-1" by Standard & Poor's Corporation
("S&P") or "P-1" by Moody's Investors Service, Inc. ("Moody's")) or (ii) do not
possess a rating (i.e., are unrated) but are determined by Key Advisers and the
Sub-Adviser to be of comparable quality to rated instruments eligible for
purchase by the Fund under guidelines adopted by the Trustees.
ACCEPTABLE INVESTMENTS AND ASSOCIATED RISKS. The Fund may invest in the
following short-term dollar-denominated debt instruments and may use the
following investment practices (such instruments and practices are described in
further detail in the Statement of Additional Information):
- - U.S. GOVERNMENT SECURITIES. The Fund may invest in obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. Government,
such as the Government National Mortgage Association and the Export-Import Bank
of the United States, are supported by the full faith and credit of the U.S.
Treasury; others, such as those of the Federal National Mortgage Association,
are supported by the right of the issuer to borrow from the Treasury; others,
such as those of the Student Loan Marketing Association, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, such as those of the Federal Farm Credit Banks, the
Federal Home Loan Bank or the Federal Home Loan Mortgage Corporation, are
supported only by the credit of the instrumentality. No assurance can be given
that the U.S. Government would provide financial support to U.S.
Government-sponsored agencies or instrumentalities if it is not obligated to do
so by law. The Fund will invest in the obligations of such agencies or
instrumentalities only when Key Advisers and the Sub-Adviser believe that the
credit risk with respect thereto is minimal.
- - CERTIFICATES OF DEPOSIT. Certificates of deposit and demand and time deposits
of U.S. and foreign banks, including Eurodollar Certificates of Deposits
("ECDs"), Eurodollar Time Deposits ("ETDs"), Canadian Time Deposits ("CTDs"),
and Yankee Certificates of Deposit ("Yankee CDs").
- - BANKERS' ACCEPTANCE. A Banker's Acceptance is a bill of exchange or time draft
drawn on and accepted by (i.e., made an obligation of) a commercial bank.
5
<PAGE> 340
It is used by corporations to finance the shipment and storage of goods and to
furnish dollar exchange. Maturities are generally six months or less.
- - COMMERCIAL PAPER ISSUES. These instruments are short-term promissory notes
issued by domestic and foreign corporations, including Canadian Commercial Paper
("CCP") and Europaper.
- - VARIABLE AMOUNT MASTER DEMAND NOTES. A master demand note represents an
unsecured loan by the Fund to the corporation that issues the note. The amount
of the loan will vary depending on the portion of the Fund's assets which Key
Advisers and the Sub- Adviser determine to invest in these notes. The interest
rate on the notes is adjusted periodically. Although there is no secondary
market in the notes, the Fund may demand payment of principal and accrued
interest at any time.
- - SHORT-TERM FUNDING AGREEMENTS. The Fund may invest in short-term funding
agreements (sometimes referred to as "GICs") issued by insurance companies.
Pursuant to a short-term funding agreement, the Fund invests an amount of cash
with an insurance company and the insurance company credits such investment on a
monthly basis with guaranteed interest which is based on an index. Short-term
funding agreements provide that this guaranteed interest will not be less than a
certain minimum rate. The Fund will purchase a short-term funding agreement only
when Key Advisers and the Sub-Adviser have determined, under guidelines
established by the Victory Portfolios' Board of Trustees, that the agreement
presents minimal credit risks to the Fund and is of comparable quality to
instruments that possess the highest short-term rating from an NRSRO not
affiliated with the issuer or guarantor of the instrument. The Fund may receive
all principal and accrued interest on a short-term funding agreement at any time
upon thirty days' written notice. Because the Fund may not receive the principal
amount of a short-term funding agreement from the insurance company on seven
days' notice or less, a short-term funding agreement is considered an illiquid
investment and, together with other instruments in the Fund which are not
readily marketable, will not exceed 10% of the Fund's total assets.
- - FOREIGN INVESTMENTS. Investments in ECDs, ETDs, CTDs, Yankee CDs, CCP, and
Europaper may subject the Fund to investment risks that differ in some respects
from those related to investments in obligations of U.S. domestic issuers. Such
risks include future adverse political and economic developments, the possible
imposition of withholding taxes on interest income, possible seizure,
nationalization, or expropriation of foreign deposits, the possible
establishment of exchange controls, or the adoption of other foreign
governmental restrictions which might adversely affect the payment of principal
and interest on such obligations. In addition, foreign branches of U.S. banks
and foreign banks may be subject to less stringent reserve requirements and to
different accounting, auditing, reporting, and recordkeeping standards than
those applicable to domestic branches of U.S. banks. The Fund will acquire
securities issued by foreign branches of U.S. banks, foreign banks, or other
foreign issuers only when Society believes that the risks associated with such
instruments are minimal.
- - VARIABLE AND FLOATING RATE NOTES. Securities purchased by the Fund may include
rated and unrated variable and floating rate tax-exempt notes, which may have a
stated maturity in excess of one year but which will be in such event, either
(a) issued or guaranteed by the United States government or any agency thereof
and have a variable rate of interest readjusted no less frequently than
annually; or (b) subject to a demand feature that will permit the Fund to demand
payment of the principal of the note either (i) at any time upon not more than
thirty days' notice or (ii) at specified intervals not exceeding thirteen months
and upon no more than thirty days' notice. There may be no active secondary
market with respect to a particular variable or floating rate note. The Fund
will not purchase variable or floating rate notes for which no readily available
market exists in amounts that, together with other illiquid securities held by
the Fund, exceed 10% of the Fund's total assets.
6
<PAGE> 341
- - SECURITIES LENDING. In order to generate additional income, the Fund may, from
time to time, lend portfolio securities to broker-dealers, banks or
institutional borrowers of securities. The Fund must receive collateral equal to
100% of the securities' value plus any interest due in the form of cash or U.S.
Government securities, which collateral must be marked to market daily by Key
Advisers and the Sub-Adviser. Should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund. During
the time portfolio securities are on loan, the borrower pays the Fund an amount
equal to any dividends or interest paid on such securities plus any interest
negotiated between the parties to the lending agreement. Loans are subject to
termination by the Fund or the borrower at any time. While the Fund does not
have the right to vote securities on loan, the Fund intends to terminate the
loan and regain the right to vote if that is considered important with respect
to the investment. The Fund will only enter into loan arrangements with
broker-dealers, banks or other institutions which Key Advisers and the Sub-
Adviser have determined are creditworthy under guidelines established by the
Victory Portfolios' Board of Trustees. The Fund intends to limit its securities
lending to 33 1/3% of total assets.
- - REPURCHASE AGREEMENTS. Under the terms of a repurchase agreement, the Fund
acquires securities from financial institutions or registered broker-dealers,
subject to the seller's agreement to repurchase such securities at a mutually
agreed upon date and price. The seller is required to maintain the value of
collateral held pursuant to the agreement at not less than the repurchase price
(including accrued interest). If the seller were to default on its repurchase
obligation or become insolvent, the Fund holding such obligation would suffer a
loss to the extent that the proceeds from a sale of the underlying portfolio
securities were less than the repurchase price, or to the extent that the
disposition of such securities by the Fund is delayed pending court action.
Repurchase agreements are considered by the staff of the Commission to be loans
by the Fund.
- - REVERSE REPURCHASE AGREEMENTS. The Fund may borrow funds for temporary
purposes by entering into reverse repurchase agreements. Pursuant to such
agreements, the Fund sells portfolio securities to financial institutions such
as banks and broker-dealers, and agrees to repurchase them at a mutually
agreed-upon date and price. At the time the Fund enters into a reverse
repurchase agreement, it must place in a segregated custodial account assets
having a value equal to the repurchase price (including accrued interest); the
collateral will be marked to market on a daily basis, and will be continuously
monitored to ensure that such equivalent value is maintained. Reverse repurchase
agreements involve the risk that the market value of the securities sold by the
Fund may decline below the price at which the Fund is obligated to repurchase
the securities. Reverse repurchase agreements are considered to be borrowings
under the Investment Company Act of 1940.
- - INVESTMENT COMPANY SECURITIES. The Fund may invest up to 5% of its total
assets in the securities of any one investment company, but may not own more
than 3% of the securities of any one investment company or invest more than 10%
of its total assets in the securities of other investment companies. To the
extent required by the laws of any state in which shares of a fund of the
Victory Portfolios are sold, Key Advisers and the Sub-Adviser will waive its
investment advisory fee as to all assets invested in other investment companies.
Because such other investment companies employ an investment adviser, such
investment by the Fund will cause shareholders to bear duplicative fees, such as
management fees, to the extent such fees are not waived by Key Advisers and the
Sub- Adviser.
- - PRIVATE PLACEMENT INVESTMENTS. The Fund may invest in commercial paper issued
in reliance on the exemption from registration afforded by Section 4(2) of the
1933 Act. Section 4(2) commercial paper is restricted as to disposition under
federal securities law and is generally sold to institutional investors, such as
the Fund, that agree they are purchasing the paper for investment purposes and
7
<PAGE> 342
not with a view to public distribution. Any resale by the purchaser must be in
an exempt transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity. The Fund believes that Section 4(2) commercial paper
and possibly certain other restricted securities that meet the criteria for
liquidity established by the Trustees are quite liquid. The Fund intends,
therefore, to treat the restricted securities that meet the criteria for
liquidity established by the Trustees, including Section 4(2) commercial paper,
as determined by Key Advisers or the Sub-Adviser, as liquid and not subject to
the investment limitation applicable to illiquid securities. Therefore, the Fund
will generally purchase Section 4(2) commercial paper without regard to the
Fund's restriction on illiquid securities.
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under a position of the Staff of the Commission set
forth in the adopting release for Rule 144A under the 1933 Act (the "Rule"). The
Rule is a nonexclusive safe-harbor for certain secondary market transactions
involving certain Restricted Securities under federal securities laws. The Rule
provides an exemption from registration for resales of Restricted Securities to
qualified institutional buyers. The Rule was expected to further enhance the
liquidity of the secondary market for the types of securities eligible for
resale under Rule 144A. The Victory Portfolios believes that the Staff of the
Commission has left the question of determining the liquidity of all Restricted
Securities to the Trustees. The Trustees consider the following criteria in
determining the liquidity of certain restricted securities: the frequency of
trades and quotes for the security; the number of dealers willing to purchase or
sell the security and the number of other potential buyers; dealer undertakings
to make a market in the security; and the nature of the security and the nature
of the marketplace trades.
The investment policies of the Fund may be changed without an affirmative vote
of the holders of a majority of the Fund's outstanding voting securities unless
(1) a policy is expressly deemed to be a fundamental policy of the Fund or (2)
policy is expressly deemed to be changeable only by such majority vote.
LIMITING INVESTMENT RISKS
The Fund follows specific guidelines in buying portfolio securities:
1. (a) The Fund may borrow money solely for temporary or emergency
purposes, but not in an amount exceeding 33 1/3% of its total assets.
(b) The Fund may borrow money from banks or by engaging in reverse
repurchase agreements. (c) The Fund will not purchase securities when
borrowings exceed 5% of its total assets. If the Fund borrows money,
its share price may be subject to greater fluctuation until the
borrowing is paid off. To this extent, purchasing securities when
borrowings are outstanding may involve an element of leverage.
2. The Fund will not purchase a security if, as a result, more than 10% of
its net assets would be invested in illiquid securities. The Fund may
invest up to 10% of its net assets in illiquid investments (investments
that cannot be readily sold within seven days in the usual course of
business at approximately the price at which the Fund has valued them),
including restricted securities deemed to be illiquid. Under the
supervision of the Trustees, Key Advisers or the Sub- Adviser
determines the liquidity of the Fund's investments. The absence of a
trading market can make it difficult to ascertain a market value for
illiquid investments. Disposing of illiquid investments may involve
time-consuming negotiation and legal expenses, and it may be difficult
or impossible for the Fund to sell them promptly at an acceptable
price.
8
<PAGE> 343
Except for the Fund's investment objective and limitation on borrowing in
limitation 1, the investment policies described in this Prospectus are not
fundamental. Non-fundamental limitations may be changed without shareholder
approval. Whenever an investment policy or limitation states a maximum
percentage of the Fund's assets that may be invested, such percentage limitation
will be determined immediately after and as a result of the investment, except
in the case of borrowing (or other activities that may be deemed to result in
the issuance of a "senior security" under the 1940 Act). Any subsequent change
in values, assets or other circumstances will not be considered when determining
whether the investment complies with the Fund's investment policies and
limitations. If the value of Fund's holdings of illiquid securities at any time
exceeds the percentage limitation applicable at the time of acquisition due to
subsequent fluctuations in value or other reasons, the Board of Trustees will
consider what actions, if any, are appropriate to maintain adequate liquidity.
HOW TO INVEST, EXCHANGE AND REDEEM
HOW TO INVEST
Shares may be purchased directly or through an Investment Professional.
Investment Professionals are securities brokers or other financial institutions
that have entered into selling or servicing agreements with the Fund or the
Distributor. Shares are also available to clients of bank trust departments who
have qualified trust accounts. The minimum investment is $500 for the initial
purchase and $25 thereafter. Accounts set up through a bank trust department or
an Investment Professional may be subject to different minimums.
- - Investing Through Your Investment Professional. Your Investment Professional
will place your order with the Transfer Agent on your behalf. You may be
required to establish a brokerage or agency account. Your Investment
Professional will notify you whether subsequent trades should be directed to the
Investment Professional or directly to the Fund's Transfer Agent. Accounts
established with Investment Professionals may have different features,
requirements and fees. In addition, Investment Professionals may charge for
their services. Information regarding these features, requirements and fees will
be provided by the Investment Professional. If you are purchasing shares of any
Fund through a program of services offered or administered by your Investment
Professional, you should read the program materials in conjunction with this
Prospectus.
- - Investing Through The Systematic Investment Plan. You can use the Systematic
Investment Plan to purchase shares directly from your bank account. Please refer
to "Systematic Investment Plan" below for more details.
- - Investing Through Your Bank Trust Department. Your bank trust department may
require a minimum investment and may charge additional fees. Fee schedules for
such accounts are available upon request and are detailed in the agreements by
which a client opens the desired account. Your bank trust department may require
a completed and signed application for the Fund in which an investment is made.
Additional documents may be required from corporations, associations, and
certain fiduciaries. Any account information, such as balances, should be
obtained through your bank trust department. Additional purchases, exchanges or
redemptions should also be coordinated through your bank trust department.
Contact your bank trust department for instructions.
The services rendered by a bank trust department, including affiliates of Key
Advisers or the Sub-Adviser, in the management of its accounts are not
duplicative of any of the services for which Key Advisers or the Sub-Adviser as
the investment adviser or sub- adviser, respectively, is compensated for
advising the Fund. The charges paid by clients of bank trust departments, or
their affiliates, should be considered in calculating the net yield and return
on
9
<PAGE> 344
investments in the Fund, although such charges do not affect the Fund's
dividends and distributions.
INVESTING DIRECTLY
BY MAIL: You may purchase shares by completing and signing an account
application (initial purchase only) and mailing it, together with a check (or
other negotiable bank draft or money order) in the amount of at least the
minimum investment requirement to, The Victory Prime Obligations Fund, Primary
Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741. Subsequent
purchases may be made in the same manner.
BY WIRE: Call 800-539-3863 to set up your Fund account to accommodate wire
transactions. YOU MUST CALL THE TRANSFER AGENT BEFORE WIRING FUNDS. You will
begin to earn dividends on the first business day following receipt of your
wire. Federal funds (monies transferred from one bank to another through the
Federal Reserve System with same-day availability) should be wired to:
Boston Safe Deposit & Trust Co.
ABA #011001234
Credit PFSC DDA #16-918-8
The Victory Portfolios: The Victory Prime Obligations Fund
You must include your account number, your name(s), tax identification number(s)
and the control number assigned by the Transfer Agent. The Fund does not impose
a fee for wire transactions, although your bank may charge you a fee for this
service.
Shares are sold at the public offering price based on the net asset value that
is next determined after the Transfer Agent receives the purchase order. In most
cases, to receive that day's offering price, the Transfer Agent must receive
your order as of the close of regular trading of the New York Stock Exchange
("NYSE") (generally 4:00 pm Eastern time) (the "Valuation Time") on each
Business Day (as defined in "Net Asset Value Per Share")of the Fund. If you buy
shares through an Investment Professional, the Investment Professional must
receive your order in a timely fashion on a regular Business Day and transmit it
to the Transfer Agent so that it is received before the close of business that
day. The Transfer Agent may reject any purchase order for the Fund's shares, in
its sole discretion.
It is the responsibility of your Investment Professional to transmit your order
to purchase shares to the Transfer Agent in a timely fashion in order for you to
receive that day's share price. The Fund must receive payment within three
business days after an order is placed. Otherwise, the purchase order will be
canceled and you could be held liable for resulting fees and/or losses.
INVESTMENT REQUIREMENTS
All purchases must be made in U.S. dollars. Checks must be drawn on U.S. banks.
No cash will be accepted. If you make a purchase with more than one check, each
check must have a value of at least $25, and the minimum investment requirement
still applies. The Fund reserves the right to limit the number of checks
processed at one time. If your check does not clear, your purchase will be
canceled and you could be liable for any losses or fees incurred. Payment for
the purchase is expected at the time of the order. If payment is not received
within three business days of the date of the order, the order may be canceled,
and you could be held liable for resulting fees and/or losses.
You may initiate any transaction by telephone either through your bank trust
department or through your Investment Professional or call the Transfer Agent at
800-539-3863. Subsequent investments by telephone may be made directly or
10
<PAGE> 345
through procedures established by your bank trust department or Investment
Professional. See "Redeeming Shares -- By Telephone" for more information about
telephone transactions.
SPECIAL INVESTOR SERVICES
- - THE SYSTEMATIC INVESTMENT PLAN. You can make regular investments in the Fund
and all other funds of the Victory Group with the Systematic Investment Plan by
completing the appropriate section of the account application and attaching a
voided personal check with your bank's magnetic ink coding number across the
front. If your bank account is jointly owned, be sure that all owners sign. You
must first meet the Fund's initial investment requirement of $500, then
investments may be made monthly by automatically deducting $25 or more from your
bank checking account. For officers, trustees, directors and employees,
including retired directors and employees, of the Victory Group, KeyCorp and its
affiliates, and the Administrator and its affiliates (and family members of each
of the foregoing, i.e., parents and children) who participate in the Systematic
Investment Plan, there is no minimum initial investment required. You may change
the amount of your monthly purchase at any time. A bank draft form must be
completed for this option. Your bank checking account will be debited on the
date indicated on your Account Application. Shares will be purchased at the
offering price next determined following receipt of the order by the Transfer
Agent. You may cancel the Systematic Investment Plan at any time without payment
of a cancellation fee. Your monthly account statement will reflect systematic
investment transactions, and a debit entry will appear on your bank statement.
- - THE SYSTEMATIC WITHDRAWAL PLAN. You can make regular withdrawals from your
account in any fund of the Victory Group with the Systematic Withdrawal Plan by
completing the appropriate section of the account application. If you own shares
in a fund worth $5,000 or more, you can have monthly, quarterly, semi-annual or
annual checks sent from your account directly to you, to a person named by you,
or to your bank checking account. The required minimum withdrawal is $25. If you
are having checks sent to your bank checking account, attach a voided personal
check with your bank's magnetic coding number across the front of the account
application. If your account is jointly owned, be sure that all owners sign the
application. You may obtain information about the Systematic Withdrawal Plan by
contacting your Investment Professional. Your Systematic Withdrawal Plan
payments are drawn from share redemptions. If Systematic Withdrawal Plan
redemptions exceed dividend distributions paid on your Fund shares, your account
eventually may be exhausted. If any applicable sales charges are applied to new
purchases of shares of the Fund, it is to your disadvantage to buy shares of the
Fund while also making systematic redemptions.
Your account will be debited on the date you indicate on your Account
Application. Shares will be redeemed at the NAV as determined on the debit date
indicated on your Account Application. You may cancel the Systematic Withdrawal
Plan at any time without payment of a cancellation fee. Each Systematic
Withdrawal Plan transaction will appear as a debit entry on your monthly account
statement.
- - RETIREMENT PLANS. Retirement plans can be among the best tax-planning vehicles
available to individuals. Call your Investment Professional for more information
on the plans and their benefits, provisions and fees. Your Investment
Professional can set up your new account in the Fund under one of several
tax-sheltered plans. These plans let you invest for retirement and shelter your
investment income from current taxes. Plans include Individual Retirement
Accounts (IRAs) and Rollover IRAs. Other fees may be charged by the IRA
custodian or trustee.
HOW TO REDEEM SHARES
11
<PAGE> 346
You may redeem all or a portion of your shares on any day that the Fund is open
for business (see "Share Price" below). Shares will be redeemed at the NAV next
calculated after the Transfer Agent has received the redemption request. If the
Fund account is closed, any accrued dividends will be paid at the beginning of
the following month.
You may redeem shares in several ways:
BY MAIL: Send a written request to: The Victory Portfolios:
Prime Obligations Fund
P.O. Box 9741
Providence, RI 02940-9741
Write a "letter of instruction" with your name, the Fund's name, your Fund
account number, the dollar amount or number of shares to be redeemed, and any
additional requirements that apply to each particular account. You will need the
letter of instruction signed by all persons required to sign for transactions,
exactly as their names appear on the account application. A signature guarantee
is required if: you wish to redeem more than $10,000 worth of shares; your Fund
account registration has changed within the last 60 days; the check is not being
mailed to the address on your account; the check is not being made out to the
account owner; or the redemption proceeds are being transferred to another
Victory Group account with a different registration. The following institutions
should be able to provide you with a signature guarantee: banks, brokers,
dealers, credit unions (if authorized under state law), securities exchanges and
associations, clearing agencies, and savings associations. A signature guarantee
may not be provided by a notary public. A signature guarantee is designed to
protect you, the Fund, and its agents from fraud. The Transfer Agent reserves
the right to reject any signature guarantee if (1) it has reason to believe that
the signature is not genuine, (2) it has reason to believe that the transaction
would otherwise be improper, or (3) the guarantor institution is a broker or
dealer that is neither a member of a clearing corporation nor maintains net
capital of at least $100,000.
BY WIRE: You may make redemptions by wire provided you have established a Fund
account to accommodate wire transactions. If telephone instructions are received
before Valuation Time (generally 4:00 p.m. Eastern time), proceeds of the
redemption will be wired as federal funds on the next Business Day to the bank
account designated with the Transfer Agent. You may change the bank account
designated to receive an amount redeemed at any time by sending a letter of
instruction with a signature guarantee to the Transfer Agent, Primary Funds
Service Corporation, P.O. Box 9741, Providence, RI 02940-9741.
BY TELEPHONE: To redeem by telephone, you may call the Transfer Agent toll free
at 800-539-3863 or call your Investment Professional or bank trust department.
See "Shareholder Account Rules and Policies" for more information about
telephone transactions.
ADDITIONAL REDEMPTION REQUIREMENTS: The Fund may withhold payment on redemptions
until it is reasonably satisfied that investments made by check have been
collected, which can take up to 15 days. Also, when the NYSE is closed (or when
trading is restricted) for any reason other than its customary weekend or
holiday closings, or under any emergency circumstances as determined by the
Commission to merit such action, the right of redemption may be suspended or the
date of payment postponed for a period of time that may exceed 7 days. In
addition, the Fund reserves the right to advance the time on that day by which
purchase and redemption orders must be received. To the extent that portfolio
securities are traded in other markets on days when the NYSE is closed, the
Fund's NAV may be affected on days when investors do not have access to the Fund
to purchase or redeem shares.
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If you are unable to reach the Transfer Agent by telephone (for example, during
times of unusual market activity), consider placing your order by mail directly
to the Transfer Agent. In case of suspension of the right of redemption, you may
either withdraw your request for redemption or receive payment based on the NAV
next determined after the termination of the suspension. If your balance in a
Fund falls below $500, you may be given 60 days' notice to reestablish the
minimum balance (except with respect to officers, trustees, directors and
employees, including retired directors and employees, of the Victory Portfolios,
KeyCorp and its affiliates, and the Administrator and its affiliates (and family
members of each of the foregoing, i.e., parents, children and household members)
participating in the Systematic Investment Plan, to whom no minimum balance
requirement applies). If you do not increase your balance, your account may be
closed and the proceeds mailed to you at the address on record. Shares will be
redeemed at the last calculated NAV on the day the account is closed.
HOW TO EXCHANGE SHARES
Shares of the Fund may be exchanged for shares of certain funds of the Victory
Group at net asset value per share at the time of exchange, without a sales
charge. To exchange shares, you must meet several conditions:
- - Shares of the fund selected for exchange must be available for sale in
your state of residence.
- - The prospectuses of this Fund and the fund whose shares you want to buy
must offer the exchange privilege.
- - You must hold the shares you buy when you establish your account for at
least 7 days before you can exchange them; after the account is open 7
days, you can exchange shares every regular Business Day.
- - You must meet the minimum purchase requirements for the fund you
purchase by exchange.
- - The registration and tax identification numbers of the two accounts
must be identical.
- - Before exchanging into a fund, obtain and read its prospectus.
Shares of a particular class may be exchanged only for shares of the same class
in the other funds of the Victory Group. For example, you can exchange shares of
this Fund only for Class A shares of another fund. At present, not all of the
funds offer the same two classes of shares. If a fund has only one class of
shares that does not have a class designation, they are "Class A" shares for
exchange purposes. In some cases, sales charges may be imposed on exchange
transactions. Certain funds offer Class A or Class B shares and a list can be
obtained by calling the Transfer Agent at 800-539-3863. Please refer to the
Statement of Additional Information for more details about this policy.
Telephone exchange requests may be made either by calling your Investment
Professional or the Transfer Agent at 800-539-3863 prior to valuation time
(generally 4:00 p.m. Eastern time) on any Business Day.
You can obtain a list of eligible funds of the Victory Group by calling the
Transfer Agent at 800-539-3863. Exchanges of shares involve a redemption of the
shares of the Fund and a purchase of shares of the other portfolio.
There are certain exchange policies you should be aware of:
- - Shares are normally redeemed from one fund and purchased from the other fund
in the exchange transaction on the same Business Day on which the Transfer Agent
receives an exchange request by Valuation Time (generally 4:00 p.m. Eastern
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<PAGE> 348
time) that is in proper form, but either fund may delay the purchase of shares
of the fund into which you are exchanging if it determines it would be
disadvantaged by a same-day transfer of the proceeds to buy shares. For example,
the receipt of multiple exchange requests from a dealer in a "market-timing"
strategy might require the disposition of securities at a time or price
disadvantageous to the Fund.
- - Because excessive trading can hurt fund performance and harm shareholders, the
Victory Portfolios reserves the right to refuse any exchange request that will
disadvantage it, or to refuse multiple exchange requests submitted by a
shareholder or dealer.
- - The Fund may amend, suspend or terminate the exchange privilege at any time
upon 60 days' written notice to shareholders.
- - If the Transfer Agent cannot exchange all the shares you request because of a
restriction cited above, only the shares eligible for exchange will be
exchanged.
- - Each exchange may produce a gain or loss for tax purposes.
Shareholders of the former Investors Preference Fund for Income, Inc. and
Investors Preference New York Tax-Free Fund, Inc. will not be subject to any
additional sales load upon an exchange of shares attributable to an Investors
Preference Funds account for shares of other funds of the Victory Portfolios.
SHAREHOLDER ACCOUNT RULES AND POLICIES
- - NET ASSET VALUE PER SHARE. The term "net asset value per share," or "NAV",
means the value of one share. The NAV is calculated by adding the value of all
its investments, plus cash and other assets, deducting liabilities, and then
dividing the result by the number of shares outstanding. The NAV of the Fund is
determined and its shares are priced as of the close of regular trading of the
New York Stock Exchange (NYSE) (generally 4:00 p.m. Eastern Time) (the
"Valuation Time") on each Business Day of the Fund. A "Business Day" is a day on
which the NYSE is open for trading, the Federal Reserve Bank of Cleveland is
open, and any other day (other than a day on which no shares of the Fund are
tendered for redemption and no order to purchase any shares is received) during
which there is sufficient trading in its portfolio instruments that the Fund's
net asset value per share might be materially affected. The NYSE or the Federal
Reserve Bank of Cleveland will not be open in observance of the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans' Day,
Thanksgiving Day, and Christmas Day.
The Fund's securities are valued primarily on the basis of market quotations or,
if quotations are not readily available, by a method that the Board of Trustees
believes accurately reflects fair value. Fair value of these portfolio
securities is determined by an independent pricing service approved by the
Trustees based primarily upon information concerning market transactions and
dealers quotations for similar securities.
- - THE OFFERING OF SHARES may be suspended during any period in which the
determination of net asset value is suspended, and the offering may be suspended
by the Trustees at any time the Trustees believe it is in the Fund's best
interest to do so.
- - TELEPHONE TRANSACTION PRIVILEGES for purchases, redemptions or exchanges may
be modified, suspended or terminated by the Fund at any time. If an account has
more than one owner, the Fund and the Transfer Agent may rely on the
instructions of any one owner. Telephone privileges apply to each owner of the
account and
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the dealer representative of record for the account unless and until the
Transfer Agent receives cancellation instructions from an owner of the account.
- - TELEPHONE INSTRUCTIONS. Generally, neither the Fund, the bank trust department
nor the Transfer Agent will be responsible for any claims, losses or expenses
for acting on telephone instructions that they reasonably believe to be genuine.
The Transfer Agent and the Fund will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine and if they do not
employ reasonable procedures they may be liable for any losses due to
unauthorized or fraudulent instructions. The identification procedures may
include, but are not limited to, the following: account number, registration and
address, personalized security codes, taxpayer identification number and other
information particular to the account. Your Investment Professional, bank trust
department or the Transfer Agent may also record calls, and you should verify
the accuracy of your confirmation statements immediately after you receive them.
- - REDEMPTION OR TRANSFER REQUESTS WILL NOT BE HONORED UNTIL THE TRANSFER AGENT
RECEIVES ALL REQUIRED DOCUMENTS IN PROPER FORM. From time to time, the Transfer
Agent in its discretion may waive certain of the requirements for redemptions
stated in this Prospectus.
- - DEALERS THAT CAN PERFORM ACCOUNT TRANSACTIONS FOR THEIR CLIENTS BY
PARTICIPATING IN NETWORKING through the National Securities Clearing Corporation
are responsible for obtaining their clients' permission to perform those
transactions and are responsible to their clients who are shareholders of the
Victory Portfolios if the dealer performs any transaction erroneously.
- - THE REDEMPTION PRICE FOR SHARES WILL VARY from day to day because the value of
the securities in the Fund fluctuates, and the value of your shares may be more
or less than their original cost.
- - PAYMENT FOR REDEEMED SHARES is made ordinarily in cash and forwarded by check
within three business days after the Transfer Agent receives redemption
instructions in proper form, except under unusual circumstances determined by
the Commission delaying or suspending such payments. The Transfer Agent may
delay forwarding a check for recently purchased shares, but only until the
purchase payment has cleared. That delay may be as much as 15 days from the date
the shares were purchased. That delay may be avoided if you arrange with your
bank to provide telephone or written assurance to the Transfer Agent that your
purchase payment has cleared.
- - INVOLUNTARY REDEMPTIONS OF SMALL ACCOUNTS. If your account value has fallen
below $500, you will be given 60 days' notice to reestablish the minimum
balance. If you do not increase your minimum balance, your account may be closed
and the proceeds mailed to you at the record address. In some cases involuntary
redemptions may be made to repay the Distributor for losses from the
cancellation of share purchase orders. Under unusual circumstances, shares of
the Fund may be redeemed "in kind," which means that the redemption proceeds
will be paid with securities from the Fund. Please refer to the Statement of
Additional Information for more details.
- - "BACKUP WITHHOLDING" of Federal income tax may be applied at the rate of 31%
from dividends, distributions and redemption proceeds (including exchanges) if
you fail to furnish the Victory Portfolios with a certified Social Security or
taxpayer identification number when you sign your application, or if you violate
Internal Revenue Service regulations on tax reporting of dividends.
- - THE VICTORY PORTFOLIOS DOES NOT CHARGE A REDEMPTION FEE, but if your
Investment Professional handles your redemption, they may charge a separate
service fee.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS. The Fund ordinarily declares and pays dividends from its net
investment income quarterly. The Fund distributes substantially all net capital
gains, if any, to shareholders each year, to the extent necessary to qualify for
favorable federal tax treatment.
CAPITAL GAINS. The Fund may make distributions annually out of any net
short-term or long-term capital gains, and the Fund may make supplemental
distributions of dividends and capital gains following the end of its fiscal
year.
DISTRIBUTION OPTIONS
When you fill out your account application, you can specify how you want to
receive your dividend distributions. Currently, there are five available
options:
1. REINVESTMENT OPTION. Your income and capital gain dividends, if any,
will be automatically reinvested in additional shares of the Fund.
Income and capital gain dividends will be reinvested at the net asset
value of the Fund as of the day after the record date. If you do not
indicate a choice on your application, you will be assigned this
option.
2. CASH OPTION. You will receive a check for each income or capital gain
dividend, if any. Distribution checks will be mailed no later than 7
days after the dividend payment date which may be more than 7 days
after the dividend record date.
3. INCOME EARNED OPTION. You will have your capital gain dividend
distributions, if any, reinvested automatically in the Fund and have
your income dividends paid in cash.
4. DIRECTED DIVIDENDS OPTION. You will have income and capital gain
dividends, or only capital gain dividends, automatically reinvested in
shares of another fund of the Victory Group. Shares will be purchased
at the NAV as of the dividend record date. If you are reinvesting
dividends of a fund sold without a sales charge in shares of a fund
sold with a sales charge, the shares will be purchased at the public
offering price. If you are reinvesting dividends of a fund sold with a
sales charge in shares of a fund sold with or without a sales charge,
the shares will be purchased at the net asset value of the fund.
Dividend distributions can be directed only to an existing account with
a registration that is identical to that of your Fund account.
5. DIRECTED BANK ACCOUNT OPTION. You will have your income and capital
gain dividends, or only your income dividends, automatically
transferred to your bank checking or savings account. The amount will
be determined on the dividend record date and will normally be
transferred to your account within 7 days of the dividend record date.
Dividend distributions can be directed only to an existing account with
a registration that is identical to that of your Fund account. Please
call or write the Transfer Agent to learn more about this dividend
distribution option.
Any election or revocation of any of the above dividend distribution options may
be made in writing to the Fund and sent to Primary Funds Service Corporation,
P.O. Box 9741, Providence, RI 02940-9741, or by calling the Transfer Agent at
800-539-3863, and will become effective with respect to dividends having record
dates after receipt of the application or request by the Transfer Agent.
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Reinvested dividend distributions receive the same tax treatment as dividend
distributions paid in cash.
COMPLETE REDEMPTIONS: If you request a complete redemption of all your Fund
shares, any dividend accrued to your account will be included in the redemption
check.
STATEMENTS AND REPORTS: You will receive a monthly statement reflecting all
transactions that affect the share balance or the registration of your Fund
account. You will receive a confirmation after every transaction that affected
the share balance of your Fund account, except for dividend reinvestment,
systematic investment and systematic withdrawal transactions. These transactions
will be detailed in your Fund account statement. Transactions that affect the
share balance of your Fund investment in an account established with an
Investment Professional or financial institution will be detailed in regular
statements or through confirmation procedures of the financial institution.
Certificates representing shares of the Fund will not be issued. An IRS Form
1099-DIV with federal tax information will be mailed to you by January 31 of
each tax year and also will be filed with the IRS. At least twice a year, you
will receive the Fund's financial reports.
FEDERAL TAXES
The Fund intends to qualify each year and elect to be treated as a separate
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "IRS Code"). If the Fund is treated as a "regulated
investment company" and all its taxable income is distributed to its
shareholders in accordance with the timing requirements imposed by the IRS Code,
it will not be subject to federal income tax on its income. The Fund's
distributions that are attributable to its net investment income and short-term
capital gains are taxable as ordinary income, and its distributions from
long-term capital gains are taxed as long-term capital gains. Such distributions
are taxable when they are paid, whether taken in cash or reinvested in
additional shares, except that distributions declared in October, November or
December and paid during the following January are taxable as if paid and
received on December 31. Dividends received from the Fund by corporate
shareholders are not entitled to the dividends-received deduction. The Fund
sends tax statements to its shareholders (with copies to the Internal Revenue
Service (the "IRS")) by January 31 showing the amounts and tax status of
distributions made (or deemed made) during the preceding calendar year.
Interest income received by direct holders of obligations of the U.S. Government
and certain of its agencies and instrumentalities is exempt from state and local
income taxation. The Fund's dividend distributions from investment income may,
to the extent such dividend distributions consist of interest from obligations
of the U.S. Government and certain of its agencies and instrumentalities, also
be exempt from state and local income taxes. The Fund intends to advise
shareholders of the proportion of their dividends which consist of such
interest. Shareholders are urged to consult their own tax advisers regarding the
possible exclusion of a portion of their dividend distributions for state and
local income tax purposes in their respective jurisdictions.
REDEMPTION OR EXCHANGES
Investors may realize a gain or loss when redeeming (selling) or exchanging
shares. For most types of accounts, the Fund reports the proceeds to the IRS
annually. Because the shareholders' tax treatment also depends on their purchase
price and personal tax positions, shareholders should keep their regular account
statements to use in determining their tax. See "Buying a Dividend".
BUYING A DIVIDEND
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On the record date for a distribution of ordinary income or capital gains
dividend, the net asset value of the Fund is reduced by the amount of the
distribution. An investor who buys shares just before the record date ("buying a
dividend") will pay the full price for the shares and then receive a portion of
the purchase price back as a taxable distribution.
OTHER TAX INFORMATION
The information above is only a summary of some of the federal income tax
consequences generally affecting the Fund and its shareholders, and no attempt
has been made to discuss individual tax consequences. A prospective investor
should also review the more detailed discussion of federal income tax
considerations in the Statement of Additional Information. In addition to
federal income tax, a shareholder may be subject to state or local taxes on the
shareholder's investment, depending on the laws in the shareholder's area.
Investors considering an investment in the Fund should consult their tax adviser
to determine whether the Fund is suitable to their particular tax situation.
When investors sign their account application, they are asked to provide their
correct social security or taxpayer identification number and other required
certifications. If investors do not comply with IRS regulations, the IRS can
require the Fund to withhold 31% of taxable distributions and redemptions from
their account.
PERFORMANCE
From time to time, performance information for the Fund showing total return may
be presented in advertisements, sales literature and in reports to shareholders.
Such performance figures are based on historical earnings and are not intended
to indicate future performance. Average annual total return will be calculated
over a stated period of more than one year. Average annual total return is
measured by comparing the value of an investment at the beginning of the
relevant period (as adjusted for sales charges, if any) to the redemption value
of the investment at the end of the period (assuming immediate reinvestment of
any dividends or capital gains distributions) and annualizing that figure.
Aggregate total return is calculated similarly to average annual total return,
except that the resulting difference is not annualized.
From time to time performance information for the Fund showing the yield and/or
effective yield for each class of shares may also be presented in
advertisements, sales literature and in reports to shareholders. Yields reflect
the deduction of the maximum sales charge. Such performance figures are based on
historical earnings and are not intended to indicate future performance. Yield
will be computed by dividing the Fund's net investment income per share earned
during a recent thirty-day period by the Fund's maximum offering price per share
(reduced by any undeclared earned income expected to be paid shortly as a
dividend) on the last day of the period and annualizing the result. Effective
yield is computed in a similar manner, but, when annualized, the income earned
by an investment in the Fund is assumed to be reinvested. The effective yield
will be slightly higher than the yield because of the compounding effect of this
assumed reinvestment.
Investors may also judge, and the Victory Portfolios may at times advertise, the
performance of the Fund by comparing it to the performance of other mutual funds
with comparable investment objectives and policies, which performance may be
contained in various unmanaged mutual fund or market indices or rankings such as
those prepared by Dow Jones & Co., Inc. and Standard & Poor's Corporation, in
publications issued by Lipper Analytical Services, Inc., and in the following
publications: IBC/Donoghue's Money Fund Reports, Ibbotson Associates, Inc.,
Morningstar, CDA/Wiesenberger, Money Magazine, Forbes, Barron's, The Wall Street
Journal, The New York Times, Business Week, American Banker, Fortune,
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<PAGE> 353
Institutional Investor, U.S.A. Today and local newspapers. In addition, general
information about the Fund that appears in publications such as those mentioned
above may also be quoted or reproduced in advertisements, sales literature or in
reports to shareholders.
Performance is a function of the type and quality of instruments held in the
Fund's portfolio, operating expenses, and market conditions. Consequently,
current performance will fluctuate and is not necessarily representative of
future results. Any fees charged by service providers with respect to customer
accounts for investing in shares of the Fund will not be reflected in
performance calculations.
Additional information regarding the performance of each of the Victory
Portfolios is included in the Victory Portfolios' annual report, which is
available free of charge by calling 800-539-3863.
FUND ORGANIZATION AND FEES
The Victory Portfolios is an open-end management investment company, commonly
known as a mutual fund, and currently consisting of twenty-eight series
portfolios, four of which are inactive. The Victory Portfolios has been
operating continuously since 1986, when it was created under Massachusetts law
as a Massachusetts business trust, although certain of its funds have a prior
operating history from their predecessor funds. On or about February 29, 1996,
contingent upon shareholder approval, the Victory Portfolios will convert from a
Massachusetts business trust to a Delaware business trust. The Victory
Portfolios' offices are located at 3435 Stelzer Road, Columbus, OH 43219-3035.
Overall responsibility for management of the Victory Portfolios rests with its
Board of Trustees, who are elected by the shareholders of the Victory
Portfolios.
INVESTMENT ADVISER AND SUB-ADVISER
Key Advisers is the investment adviser to the Fund. Key Advisers directs the
investment of the Victory Portfolios' assets, subject at all times to the
supervision of the Victory Portfolios' Board of Trustees. Key Advisers
continually supervises the investment and reinvestment of cash, securities and
other property comprising the assets of the Victory Portfolios.
Key Advisers was organized as an Ohio corporation on July 27, 1995 and is
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended. It is a wholly-owned subsidiary of KeyCorp Asset Management
Holdings, Inc., which is a wholly-owned subsidiary of Society National Bank, a
wholly-owned subsidiary of KeyCorp. Affiliates of Key Advisers manage
approximately $37 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals and mutual funds.
For the services provided and expenses incurred pursuant to its investment
advisory agreement with the Victory Portfolios respecting the Fund, Key Advisers
receives a fee, computed daily and paid monthly, at the annual rate of .35
one-hundredths of one percent (.35%) of the average daily net assets of the
Fund. The advisory fees for the Fund have been determined to be fair and
reasonable in light of the services provided to the Fund. Key Advisers may
periodically waive all or a portion of its advisory fee with respect to the Fund
to increase the net income of the Fund available for distribution as dividends.
Prior to January 1, 1996, the Sub-Adviser (Society Asset Management, Inc.)
served as investment adviser to the Fund. During the Fund's fiscal year ended
October 31, 1995, Society received investment advisory fees aggregating .__% of
the average daily net assets of the Fund.
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Under the investment advisory agreement between the Victory Portfolios, on
behalf of the Fund, and Key Advisers, Key Advisers may delegate a portion of its
responsibilities to a subadviser. In addition, the investment advisory agreement
provides that Key Advisers may render services through its own employees or the
employees of one or more affiliated companies that are qualified to act as an
investment adviser of the Fund and are under the common control of KeyCorp as
long as all such persons are functioning as part of an organized group of
persons, managed by authorized officers of Key Advisers.
Key Advisers has entered into an investment sub-advisory agreement with its
affiliate, Society Asset Management, Inc., a registered investment adviser, on
behalf of the Fund. The Sub-Adviser is a wholly-owned subsidiary of KeyCorp
Asset Management Holdings, Inc. For its services under the investment
sub-advisory agreement, Key Advisers pays the Sub-Adviser sub-advisory fees at
an annual rate as a percentage of the Fund's average daily net assets as
follows: .25% of the first $10 million of average daily net assets; .20% of the
next $15 million of average daily net assets; .15% of the next $25 million of
average daily net assets; and .125% of average daily net assets in excess of $50
million.
ADMINISTRATOR AND DISTRIBUTOR
Concord Holding Corporation is the Administrator for the Fund. Victory
Broker-Dealer Services, Inc. is the Fund's principal underwriter and
Distributor.
The Administrator generally assists in all aspects of the Fund's administration
and operation. For expenses incurred and services provided as Administrator
pursuant to its management and administration agreement with the Victory
Portfolios, the Administrator receives a fee from the Fund, computed daily and
paid monthly, at an annual rate of fifteen one-hundredths of one percent (.15%)
of the Fund's average daily net assets. The Administrator may periodically waive
all or a portion of its administrative fee with respect to the Fund to increase
the net income of the Fund available for distribution as dividends. During the
fiscal year ended October 31, 1995, the Fund paid administration fees of .15% of
its average daily net assets.
TRANSFER AGENT AND FUND ACCOUNTANT
Primary Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741,
serves as the Fund's Transfer Agent pursuant to a Transfer Agency and
Shareholder Service Agreement with the Victory Portfolios and receives a fee for
such services based on various criteria, including assets, transactions and the
number of accounts. BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus,
OH 43219, provides certain accounting services for the Fund pursuant to a Fund
Accounting Agreement and receives a fee for such services.
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SHAREHOLDER SERVICING
Shareholder services are provided to the Fund pursuant to agreements between the
Victory Portfolios and various shareholder servicing agents, including Key Trust
Company of Ohio, N.A. and its affiliates and other financial institutions and
securities brokers (each a "Shareholder Servicing Agent"). Each Shareholder
Servicing Agent generally will provide support services to shareholders by
establishing and maintaining accounts and records, processing dividend and
distribution payments, providing account information, arranging for bank wires,
responding to routine inquires, forwarding shareholder communication, assisting
in the processing of purchase, exchange and redemption requests, and assisting
shareholders in changing dividend options, account designations and addresses.
For expenses incurred and services provided as Shareholder Servicing Agent
pursuant to its respective Shareholder Servicing Agreement, the Fund pays each
Shareholder Servicing Agent a fee computed daily and paid monthly, in amounts
aggregating not more than twenty-five one-hundredths of one percent (.25%) of
the average daily net assets of the Fund per year. A Shareholder Servicing Agent
may periodically waive all or a portion of its respective shareholder servicing
fees with respect to the Fund to increase the net income of the Fund available
for distribution as dividends. During the fiscal year ended October 31, 1995,
the Fund paid shareholder servicing fees of % of the Fund's average
daily net assets.
EFFECT OF BANKING LAWS
Key Advisers and the Sub-Adviser believe that they may perform the investment
advisory services for the Fund contemplated by the Investment Advisory (and
Sub-Advisory) Agreements for the Fund (the "Advisory Agreements"). In the
Advisory Agreements, Key Advisers and the Sub-Adviser have represented that they
possess the legal authority to perform the investment advisory services
contemplated therein and described in this Prospectus. Key Trust Company of
Ohio, N.A. and its affiliates also believe that they also may perform the
services for the Victory Portfolios contemplated by the Shareholder Servicing
Agreement with the Victory Portfolios without violating applicable banking laws
and regulations. Future changes in federal or state statutes and regulations
relating to permissible activities of banks or bank holding companies and their
subsidiaries and affiliates, as well as further judicial or administrative
decisions or interpretations of present and future statutes and regulations,
could change the manner in which Key Advisers, the Sub-Adviser, Key Trust
Company of Ohio, N.A. and its affiliates could continue to perform such services
for the Victory Portfolios. See the Statement of Additional Information
("Glass-Steagall Act") for further discussion.
BUSINESS MANAGEMENT AGREEMENT
In connection with its obligations under its investment sub-advisory agreement
with Key Advisers, the Sub-Adviser has entered into a Business Management
Agreement with Key Advisers pursuant to which Key Advisers provides certain
administrative and support services to the Sub-Adviser. Such services include
preparing reports to the Company's Board of Trustees, recordkeeping services,
and services rendered in connection with the preparation of regulatory filings
and other reports, and regulatory and compliance systems and other
administrative and support services.
For such services, the Sub-Adviser pays fees to Key Advisers at an annual rate
as follows: .20% on the first $10 million of average daily net assets; .15% of
the next $15 million of average daily net assets; .10% of the next $25 million
of average daily net assets; and .075% of average daily net assets in excess of
$50 million.
21
<PAGE> 356
EXPENSES
For the fiscal year ended October 31, 1995, the Fund's total operating expenses
were .__% of the Fund's average net assets.
CUSTODIAN
Key Trust Company of Ohio, N.A. serves as custodian for the Fund and receives
fees for its services.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. serves as the Fund's independent accountants.
ADDITIONAL INFORMATION
The Victory Portfolios may issue an unlimited number of shares and classes of
the Fund. Shares of each class of the Fund participate equally in dividends and
distributions and have equal voting, liquidation and other rights. When issued
and paid for, shares will be fully paid and nonassessable by the Victory
Portfolios and will have no preference, conversion, exchange or preemptive
rights. Shareholders are entitled to one vote for each full share owned and
fractional votes for fractional shares owned. For those investors with qualified
trust accounts established with affiliates of the Adviser, the trustee will vote
the shares at meetings of the Fund's shareholders in accordance with the
shareholder's instructions or will vote in the same percentage as shares that
one not held in trust. The trustee will forward to these shareholders all
communications received by the trustee, including proxy statements and financial
reports. The Victory Portfolios and the Fund are not required to hold annual
meetings of shareholders and in ordinary circumstances do not intend to hold
such meetings. The Trustees may call special meetings of shareholders for action
by shareholder vote as may be required by the 1940 Act or the Victory
Portfolios' Delaware Trust Instrument. Under certain circumstances, the Trustees
may be removed by action of the Trustees or by the shareholders. Shareholders
holding 10% or more of the Victory Portfolios' outstanding shares may call a
special meeting of shareholders for the purpose of voting upon the question of
removal of Trustees.
The Victory Portfolio's Board of Trustees may authorize the Victory Portfolios
to offer other funds which may differ in the types of securities in which their
assets may be invested.
Key Advisers, the Sub-Adviser and the Victory Portfolios have adopted Codes of
Ethics ( the "Codes") which require investment personnel (a) to pre-clear all
personal securities transactions, (b) to file reports regarding such
transactions, and (c) to refrain from personally engaging in (i) short-term
trading of a security, (ii) transactions involving a security within seven days
of a Victory fund transaction involving the same security, and (iii)
transactions involving securities being considered for investment by a Victory
fund. The Codes also prohibit investment personnel from purchasing securities in
an initial public offering. Personal trading reports are reviewed periodically
by Key Advisers or the Sub-Adviser, and the Board of Trustees reviews annually
such reports (including information on any substantial violations of the Codes).
Violations of the Codes may result in censure, monetary penalties, suspension or
termination of employment.
22
<PAGE> 357
DELAWARE LAW
The Delaware Business Trust Act provides that a shareholder of a Delaware
business trust shall be entitled to the same limitation of personal liability
extended to stockholders of Delaware corporations, and the Victory Portfolios'
Delaware Trust Instrument provides that shareholders will not be liable for
obligations of the Victory Portfolios. In light of Delaware law, the nature of
the Victory Portfolios' business, and the nature of its assets, management of
the Victory Portfolios believes that the risk of personal liability to a Fund
shareholder would be extremely remote.
In the unlikely event a shareholder is held personally liable for the Victory
Portfolios' obligations, the Victory Portfolios is required to use its property
to protect or compensate the shareholder. On request, the Victory Portfolios
will defend any claim made and pay any judgment against a shareholder for any
act or obligation of the Victory Portfolios. Therefore, financial loss resulting
from liability as a shareholder will occur only if the Victory Portfolios itself
cannot meet its obligations to indemnify shareholders and pay judgments against
them.
Delaware law authorizes electronic or telephonic communications between
shareholders and the Victory Portfolios. Under Delaware law, the Successor
Company has the flexibility to respond to future business contingencies. For
example, the Trustees will have the power to incorporate the Victory Portfolios,
to merge or consolidate it with another entity, to cause each fund to become a
separate trust, and to change the Victory Portfolios' domicile without a
shareholder vote. This flexibility could help reduce the expense and frequency
of future shareholder meetings for non-investment related issues.
MISCELLANEOUS
Shareholders will receive Semi-Annual Reports, which are unaudited, and Annual
Reports, which are audited by independent public accountants, describing the
investment operations of the Fund. Each of these reports, when available for a
particular fiscal year end or the end of a semi-annual fiscal period, is
incorporated herein by reference. The Victory Portfolios may include information
in their Annual Reports and Semi-Annual Reports to shareholders that (i)
describes general economic trends, (ii) describes general trends within the
financial services industry or the mutual fund industry, (iii) describes past or
anticipated portfolio holdings for the Fund or (iv) describes investment
management strategies for the Victory Portfolios. Such information is provided
to inform shareholders of the activities of the Victory Portfolios for the most
recent fiscal year end of a semi-annual fiscal period and to provide the views
of Key Advisers, the Sub-Adviser and/or the Victory Portfolios' officers
regarding expected trends and strategies.
Inquiries regarding the Victory Portfolios or the Fund may be directed in
writing to the Victory Portfolios at Primary Funds Service Corporation, P.O. Box
9741, Providence, RI 02940-9741, or by telephone, toll-free, at 800-539-3863.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE VICTORY
PORTFOLIOS OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING
BY THE VICTORY PORTFOLIOS OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE.
23
<PAGE> 358
The
VICTORY
Portfolios
SPECIAL GROWTH FUND
PROSPECTUS For current yield, purchase and redemption information,
March 1, 1996 call 800-539-FUND or 800-539-3863
THE VICTORY PORTFOLIOS (the "Victory Portfolios") is a registered open-end
management investment company that offers investors a selection of money market,
fixed-income, municipal bond, domestic and international equity portfolios. This
Prospectus relates to the Special Growth Fund (the "Fund"), a diversified
portfolio. KeyCorp Mutual Fund Advisers, Inc., Cleveland, Ohio, an indirect
subsidiary of KeyCorp, is the investment adviser to the Fund ("Key Advisers" or
"Sub-Adviser"). T. Rowe Price Associates, Inc., is the investment sub-adviser to
the Fund ("Society" or the "Sub-Adviser"). Concord Holding Corporation is the
Fund's administrator (the "Administrator"). Victory Broker-Dealer Services, Inc.
is the Fund's distributor (the "Distributor").
The Fund seeks capital appreciation. The Fund seeks to meet its investment
objective by investing primarily in equity securities of companies that have
market capitalizations of $750 million or less at the time of purchase.
Please read this Prospectus before investing. It is designed to provide you with
information and to help you decide if the Fund's goals match your own. Retain
this document for future reference. A Statement of Additional Information (dated
March 1, 1996) for the Fund and an audited report for the Fund's fiscal period
ended October 31, 1995 for the Fund have been filed with the Securities and
Exchange Commission and are incorporated herein by reference. The Statement of
Additional Information is available without charge upon request by calling
800-539-3863.
SHARES OF THE FUND ARE:
- - NOT INSURED BY THE FDIC;
- - NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY KEYCORP
BANK, ANY OF ITS AFFILIATES, OR ANY OTHER BANK;
- - SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("COMMISSION") OR ANY SECURITIES REGULATORY AUTHORITY OF ANY
STATE, NOR HAS THE COMMISSION OR ANY SUCH STATE AUTHORITY PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
2
<PAGE> 359
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
- ----------------- ----
<S> <C>
Summary of Fund Expenses 2
Financial Highlights 3
The Fund's Investment Objective 3
The Fund's Investment Policies and Risk Factors 4
How to Invest, Exchange and Redeem 9
Dividends, Distributions and Taxes 15
Performance 17
Fund Organization and Fees 18
Additional Information 20
</TABLE>
3
<PAGE> 360
SUMMARY OF FUND EXPENSES
The table below summarizes the expenses associated with the Fund. This standard
format was developed for use by all mutual funds to help you make your
investment decisions. Of course, you should consider this expense information
along with other important information in this Prospectus, including the Fund's
investment objective, investment policies and risk factors, and financial
highlights.
SHAREHOLDER TRANSACTION EXPENSES(1) These represent charges paid when you
purchase, redeem or exchange shares of the Fund. See "How to Invest, Exchange
and Redeem".
<TABLE>
<S> <C>
Maximum Sales Charge Imposed on Purchases
(as a percentage of the offering price) 4.75%
Sales Charge Imposed on Reinvested Dividends None
Deferred Sales Charge Imposed on Redemptions None
Redemption Fee None
Exchange Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES. These are based on the Fund's estimated expenses
for the current fiscal year. (as a percentage of average net assets)
<TABLE>
<S> <C>
Management Fees(2) .76%
Administration Fees .15%
Other Expenses(3) .64%
----
Total Fund Operating Expenses(3) 1.55%
====
</TABLE>
(1) Subsidiaries, correspondents, affiliated banks and nonaffiliated banks
of KeyCorp may charge a customer's account fees for services provided
in connection with investment in the Fund. (See "How To Invest,
Exchange and Redeem" in the Prospectus.)
(2) Key Advisers has agreed to reduce its investment advisory fee for the
indefinite future. The Adviser may terminate this voluntary waiver at
any time at its sole discretion. Absent the voluntary reduction of
investment advisory fees, "Management Fees" as a percentage of average
daily net assets would be 1.00%.
(3) These amounts include an estimate of the shareholder servicing fees the
Fund expects to pay. (See "Fund Organization and Fees--Shareholder
Servicing" in the Prospectus.) If these voluntary fee reductions were
not in effect "Total Fund Operating Expenses" as a percentage of
average daily net asset would be 1.79%.
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return and (2) full redemption at the end of each time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Special Growth Fund $63 $94 $128 $223
</TABLE>
The purpose of the table above is to assist you in understanding the various
costs and expenses that an investor in the Fund will bear directly and
indirectly. See "Fund Organization and Fees" for a more complete discussion of
annual operating expenses of the Fund. The foregoing example is based upon
expenses for the fiscal year ended October 31, 1995 and expenses that the Fund
is expected to incur during the current fiscal year. THE FOREGOING EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES, SINCE
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
4
<PAGE> 361
FINANCIAL HIGHLIGHTS
THE FUND'S FINANCIAL HISTORY
On June 5, 1995, The Victory Funds--Aggressive Growth Portfolio merged into the
Special Growth Fund. The table below sets forth certain financial information
with respect to the financial highlights for the Fund and for the Aggressive
Growth Portfolio (the accounting survivor of the merger). The information below
has been derived from financial statements audited (except as indicated) by
Coopers & Lybrand L.L.P. (for the period ended October 31, 1995) and KPMG Peat
Marwick LLP (for earlier periods), independent auditors, whose report thereon,
together with the financial statements of the Fund and for the Aggressive Growth
Portfolio are incorporated by reference into the Statement of Additional
Information.
THE VICTORY SPECIAL GROWTH FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 11,
PERIOD ENDED YEAR ENDED 1994** TO
OCTOBER 31, APRIL 30, APRIL 30,
1995 1995 1994
---- ---- ----
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.82 $ 10.00
------- -------
Income from investment operations:
Net investment income (loss)(1) 0.02 (0.01)
Net realized and unrealized loss on investments 0.72 (0.17)
------- -------
Total from investment operations 0.74 (0.18)
------- -------
Distributions: [to be
Net investment income inserted] (0.02) --
In excess of net investment income -- +++ --
------- -------
Total Distributions (0.02)
------- -------
NET ASSET VALUE, END OF PERIOD $ 10.54 $ 9.82
======= =======
Total Return++ 7.51% (1.80)%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period (thousands) $20,796 $30,867
Ratio of expenses to average net assets(1) 1.04%+ 0.82%*
Ratio of net investment income (loss) to average
net assets 0.17% (0.27)%*
Portfolio turnover rate 102% 61%
</TABLE>
(1) During the period from January 11, 1994 to April 30, 1994, various fees
and expenses were voluntarily waived by Key Trust Company and Fidelity
Distributors Corporation, in the amount of $0.01 per share. During the
year ended April 30, 1995, expenses were voluntarily waived by Key
Trust Company, Society Asset Management, Inc. and Concord Holding
Corporation, in the amount of $0.05 per share. The ratio of expenses to
average daily net assets had such waiver not occurred is as follows:
<TABLE>
<S> <C> <C>
Ratio of expenses to average net assets 1.35% 1.47%*
</TABLE>
* Annualized
** Commencement of operations.
++ Total return does not include the one time sales charge and for a
period of less than one year is not annualized. Total returns would
have been lower had certain expenses not been reduced during the
period.
+++ Amount represents less than $0.01.
5
<PAGE> 362
THE FUND'S INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek capital appreciation. The
investment objective of the Fund is fundamental and may not be changed without a
vote of the holders of a majority of its outstanding voting securities (as
defined in the Statement of Additional Information). There can be no assurance
that Fund will achieve its investment objective.
THE FUND'S INVESTMENT POLICIES AND RISK FACTORS
The Fund pursues its objective by investing primarily in companies that have
market capitalizations of $750 million or less at the time of purchase. Under
normal circumstances at least 65% of the Fund's total assets will be invested in
equity securities of such companies.
The Fund may invest in all types of equity securities, consisting of common
stock, preferred stock, convertible preferred, debt convertible into equity
securities and securities convertible into common stock. Under normal conditions
the Fund's assets will be invested in companies with smaller market
capitalizations (i.e., those with market capitalization of $750 million or less
at the time of purchase) however, the Fund may invest a portion of its assets in
equity securities of companies with larger market capitalizations. When Key
Advisers or the Sub-Adviser determine that adverse market conditions exist,
including any period during which they believe that the return on the following
instruments would be more favorable than that obtainable through the Fund's
normal investment program, the Fund may, for temporary defensive purposes,
invest in investment-grade corporate bonds and notes, warrants, and high quality
short-term debt obligations (including variable amount master demand notes),
bankers acceptances, certificates of deposit, repurchase agreements, obligations
issued or guaranteed by the U.S. Government, its agencies and instrumentalities,
and demand and time deposits of domestic and foreign banks and savings and loan
associations.
The Fund may invest in obligations which are rated at the time of purchase
within the four highest rating categories assigned by a nationally recognized
statistical ratings organization (investment grade) or, if unrated, which Key
Advisers or the Sub-Adviser determine to be of comparable quality. The Fund may
also invest up to 5% of its total assets in lower-rated debt securities,
commonly referred to as "junk bonds", (those rated Ba to C by Moody's Investors
Service or BB to C by Standard & Poor's Corporation) or such other debt
securities which have poor protection against default in the payment of
principal or interest, or which are in default.
In addition, the Fund is permitted to make investments in the securities of
foreign issuers, including American Depository Receipts.
From time to time, the Fund, to the extent consistent with its investment
objective, policies and restrictions, may invest in securities of companies with
which Key Advisers or its affiliates has a lending relationship.
The Fund is designed for long-term stock investors. The Fund may be appropriate
for investors who are comfortable with assuming the added risks associated with
small capitalization stocks in return for the possibility of long-term rewards.
Smaller capitalization companies may have limited product lines, markets, or
financial resources. These conditions may make them more susceptible to setbacks
and reversals. Therefore their securities may be subject to more abrupt or
erratic movements than securities of larger companies. Small capitalization
stocks as a group may not respond to general market rallies or downturns as much
as other types of equity securities. By itself, the Fund does not constitute a
balanced investment plan; it stresses capital appreciation from stocks and other
equity securities, and should be considered a long-term investment for investors
who can afford to weather changes in the stock market. The Fund's share price
and total return fluctuate, and your investment may be worth more or less than
your original cost when you redeem your shares.
The investment policies of the Fund may be changed without an affirmative vote
of the holders of a majority of the Fund's outstanding voting securities (1) a
policy is expressly deemed to be a fundamental policy of the Fund or (2) a
policy is expressly deemed to be changeable only by such majority vote.
6
<PAGE> 363
The Fund is advised by Key Advisers, an indirect subsidiary of KeyCorp, which
purchases securities for the Fund consistent with its investment objective and
policies and which meet the quality and maturity characteristics established for
the Fund.
From time to time, the Fund, to the extent consistent with its investment
objective, policies and restrictions, may invest in securities of issuers with
which Key Advisers or the Sub-Adviser or its affiliates have a lending
relationship.
ADDITIONAL INFORMATION REGARDING SECURITIES IN WHICH THE FUND MAY INVEST
The following paragraphs provide a brief description of some of the types of
securities in which the Fund may invest, the transactions it may make and
strategies it may adopt. The Fund may, following notice to its shareholders,
take advantage of other investment practices which are not at present
contemplated for use by the Fund or which currently are not available but which
may be developed, to the extent such investment practices are both consistent
with the Fund's investment objective and legally permissible for the Fund. Such
investment practices, if they arise, may involve risks which exceed those
involved in the activities described in this Prospectus.
- - WARRANTS. The Fund may invest in warrants which entitle the holder to buy
equity securities at a specific price for a specific period of time. Warrants
may be considered more speculative than certain other types of investments
because they do not entitle a holder to dividends or voting rights with respect
to the securities which may be purchased, nor do they represent any rights in
the assets of the issuing company. The value of a warrant may be more volatile
than the value of the securities underlying the warrants. Also, the value of the
warrant does not necessarily change with the value of the underlying securities
and a warrant ceases to have value if it is not exercised prior to the
expiration date.
- - LOWER-RATED DEBT SECURITIES. The Fund may invest up to 5% of its total assets
in lower-rated debt securities, "junk bonds", that have poor protection against
default in the payment of principal and interest, or may be in default. These
securities are often considered to be speculative and involve greater risk of
loss or price changes due to changes in the issuer's capacity to pay. The market
prices of lower-rated debt securities may fluctuate more than those of
higher-rated debt securities, and may decline significantly in periods of
general economic difficulty, which may follow periods of rising interest rates.
- - SHORT-TERM OBLIGATIONS. While the Fund will normally be predominantly invested
in equity securities, there may be times when, in the opinion of Key Advisers or
the Sub-Adviser market conditions warrant that, for temporary defensive
purposes, the Fund may hold more than 20% of its total assets in short-term
obligations. To the extent that the Fund's assets are so invested, they will not
be invested so as to meet its investment objective. The instruments may include
high grade liquid debt securities such as commercial paper, certificates of
deposit, bankers' acceptances, repurchase agreements which mature in less than
seven days and United States Treasury bills. Bankers' acceptances are
instruments of United States banks which are drafts or bills of exchange
"accepted" by a bank or trust company as an obligation to pay on maturity. For a
discussion of repurchase agreements, see below.
- - INVESTMENT GRADE SECURITIES. The Fund may invest in obligations which are
rated at the time of purchase within the four highest rating categories assigned
by a nationally recognized statistical ratings organization ("NRSRO")
(investment grade) or, if unrated, which Key Advisers or the Sub-Adviser
determines to be of comparable quality. The applicable securities ratings are
described in the Appendix to the Statement of Additional Information.
- - FOREIGN SECURITIES. The Fund may invest in equity securities of foreign
issuers, including securities traded in the form of American Depository
Receipts. Any investments in foreign securities will be made in accordance with
the Fund's investment objective and policies. Foreign securities are subject to
special risks, which are described
7
<PAGE> 364
under the caption "Risk Factors--International Investments." The Fund will not
hold foreign currency as a result of investment in foreign securities.
- - OPTIONS. The Fund may invest in derivative securities, which are securities
whose values are based on other securities. The Fund may engage in writing put
and call options from time to time. Such options may be listed on a national
securities exchange and issued by the Options Clearing Corporation or traded
over-the-counter. In order to close out a call option it has written, the Fund
will enter into a "closing purchase transaction," i.e., the purchase of a call
option on the same security with the same exercise price and expiration date as
the call option which the Fund previously wrote on any particular security. When
a portfolio security subject to a call option is sold, the Fund will effect a
closing purchase transaction to close out any existing call option on that
security. If the Fund is unable to effect a closing purchase transaction, it
will not be able to sell the underlying security until the option expires or the
Fund delivers the underlying security upon exercise. The Fund may seek to
terminate its position in a put option it writes before exercise by closing out
the option in the secondary market at its current price. If the secondary market
is not liquid for a put option the Fund has written, however, the Fund must
continue to be prepared to pay the strike price while the option is outstanding,
regardless of price changes, and must continue to set aside assets to cover its
position. Upon the exercise of an option, the Fund is not entitled to the gains,
if any, on securities underlying the options.
The Fund may also purchase put options on securities for the purpose of hedging
against market risks related to its securities. The Fund may also purchase index
put and call options and write index options. Through the writing or purchase of
index options, the Fund can achieve many of the same objectives as through the
use of options on individual securities. Utilizing options is a specialized
investment technique that entails a substantial risk of a complete loss of the
amounts paid as premiums to writers of options.
The Fund will not: (a) sell futures contracts, purchase put options, or write
call options if, as a result, more than 25% of the Fund's total assets would be
hedged with futures and options under normal conditions; (b) purchase futures
contracts or write put options if, as a result, the Fund's total obligations
upon settlement or exercise of purchased futures contracts and written put
options would exceed 25% of its total assets; or (c) purchase call options if,
as a result, the current value of option premiums for call options purchased by
the Fund would exceed 5% of the Fund's total assets. These limitations do not
apply to options attached to or acquired or traded together with their
underlying securities.
- - FUTURES CONTRACTS. The Fund may also 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. For example, when interest rates are expected to rise or market values of
portfolio securities are expected to fall, the Fund can seek to offset a decline
in the value of its portfolio securities by entering into futures contract
transactions. When interest rates are expected to fall or market values are
expected to rise, the Fund, through the purchase of such contracts, can attempt
to secure better rates or prices than might later be available in the market
when it effects anticipated purchases.
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.
Aggregate initial margin deposits for futures contracts, and premiums paid for
related options, may not exceed 5% of the Fund's total assets (other than in
connection with bona fide hedging purposes), and the value of securities
8
<PAGE> 365
that are the subject of such futures and options (both for receipt and delivery)
may not exceed one-third of the market value of the Fund's total assets. Futures
transactions will be limited to the extent necessary to maintain each fund's
qualification as a regulated investment company.
Futures transactions involve brokerage costs and require a 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 move in an unanticipated
manner. Such unanticipated changes may also result in poorer 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.
- - ZERO COUPON BONDS. The Fund is permitted to purchase both zero coupon U.S.
government securities and zero coupon corporate securities ("zero coupon
bonds"). Zero coupon bonds are purchased at a discount from the face amount
because the buyer receives only the right to receive a fixed payment on a
certain date in the future and does not receive any periodic interest payments.
The effect of owning instruments which do not make current interest payments is
that a fixed yield is earned not only on the original investment but also, in
effect, on all discount accretion during the life of the obligations. This
implicit reinvestment of earnings at the same rate eliminates the risk of being
unable to reinvest distributions at a rate as high as the implicit yields on the
zero coupon bond, but at the same time eliminates the holder's ability to
reinvest at higher rates in the future. For this reason, zero coupon bonds are
subject to substantially greater price fluctuations during periods of changing
market interest rates than are comparable securities which pay interest
currently, which fluctuation increases the longer the period to maturity.
- - RECEIPTS. In addition to bills, notes and bonds issued by the U.S. Treasury,
the Fund may also purchase separately traded interest and principal component
parts of such obligations that are transferable through the Federal book entry
system, known as Separately Traded Registered Interest and Principal Securities
("STRIPS") and Coupon Under Book Entry Safekeeping ("CUBES"). These instruments
are issued by banks and brokerage firms and are created by depositing Treasury
notes and Treasury bonds into a special account at a custodian bank; the
custodian holds the interest and principal payments for the benefit of the
registered owners of the certificates or receipts. The custodian arranges for
the issuance of the certificates or receipts evidencing ownership and maintains
the register. Receipts include Treasury Receipts ("TRs"), Treasury Investment
Growth Receipts ("TIGRs") and Certificates of Accrual on Treasury Securities
("CATS").
STRIPS, CUBES, TRs, TIGRs and CATS are sold as zero coupon securities, which
means that they are sold at a substantial discount and redeemed at face value at
their maturity date without interim cash payments of interest or principal. This
discount is amortized over the life of the security, and such amortization will
constitute the income earned on the security for both accounting and tax
purposes. Because of these features, these securities may be subject to greater
interest rate volatility than interest-paying U.S. Treasury obligations. The
Fund will limit its investment in such instruments to 20% of its total assets.
- - SECURITIES LENDING. In order to generate additional income, the Fund may, from
time to time, lend its portfolio securities to broker-dealers, banks or
institutional borrowers of securities. The Fund must receive collateral equal to
100% of the securities in the form of cash or U.S. Government securities, plus
any interest due, which collateral must be marked to market daily by Key
Advisers or the Sub-Adviser. Should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund. During
the time portfolio securities are on loan, the borrower pays the Fund amounts
equal to any dividends or interest paid on such securities plus any interest
negotiated between the parties to the lending agreement. Loans are subject to
termination by the Fund or the borrower at any time. While the Fund does not
have the right to vote securities on loan, the Fund intends to terminate the
loan and regain the right to vote if that is considered important with respect
to the investment. The Fund will only enter into loan arrangements with
broker-dealers, banks or other institutions which Key Advisers
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or the Sub-Adviser has determined are creditworthy under guidelines established
by the Victory Portfolios' Board of Trustees. The Fund intends to limit its
securities lending to 33 1/3% of total assets.
- - WHEN-ISSUED SECURITIES. The Fund may purchase securities on a when-issued or
delayed delivery basis. These transactions are arrangements in which the Fund
purchases securities with payment and delivery scheduled for a future time. When
the Fund agrees to purchase securities on a when-issued basis, the Fund's
custodian must set aside cash or liquid portfolio securities equal to the amount
of that commitment in a separate account, and may be required to subsequently
place additional assets in the separate account to maintain equivalence with the
Fund's commitment. Prior to delivery of when-issued securities, their value is
subject to fluctuation and no income accrues until their receipt. The Fund
engages in when-issued and delayed delivery transactions only for the purpose of
acquiring portfolio securities consistent with its respective investment
objective and policies, and not for investment leverage. In when-issued and
delayed delivery transactions, the Fund relies on the seller to complete the
transaction; its failure to do so may cause the Fund to miss a price or yield
considered to be advantageous.
- - VARIABLE AND FLOATING RATE SECURITIES. The Fund may purchase variable and
floating rate notes with ratings within the three highest rating groups assigned
by an NRSRO or, if unrated, which Key Advisers or the Sub-Adviser deem to be of
comparable quality. The interest rates on the variable and floating rate notes
purchased by the Fund may be reset daily, weekly, monthly, quarterly, or some
other reset period, and may be subject to a floor or ceiling. There is a risk
that the current interest rate on such obligations may not accurately reflect
existing market interest rates. There may be no active secondary market with
respect to a particular variable or floating rate note. Variable and floating
rate notes for which no readily available market exists will be purchased in an
amount which, together with other illiquid securities held by the Fund, does not
exceed 15% of the Fund's total assets unless such notes are subject to a demand
feature that will permit the Fund to receive payment of the principal within
seven days after demand therefor.
- - REPURCHASE AGREEMENTS. Under the terms of a repurchase agreement, the Fund
acquires securities from financial institutions or registered broker-dealers,
subject to the seller's agreement to repurchase such securities at a mutually
agreed upon date and price. The seller is required to maintain the value of
collateral held pursuant to the agreement at not less than the repurchase price
(including accrued interest). If the seller were to default on its repurchase
obligation or become insolvent, the Fund holding such obligation would suffer a
loss to the extent that the proceeds from a sale of the underlying portfolio
securities were less than the repurchase price, or to the extent that the
disposition of such securities by the Fund is delayed pending court action.
Repurchase agreements are considered by the staff of the Commission to be loans
by the Fund.
- - REVERSE REPURCHASE AGREEMENTS. The Fund may borrow funds for temporary
purposes by entering into reverse repurchase agreements. Pursuant to such
agreements, the Fund sells portfolio securities to financial institutions such
as banks and broker-dealers, and agrees to repurchase them at a mutually
agreed-upon date and price. At the time the Fund enters into a reverse
repurchase agreement, it must place in a segregated custodial account assets
having a value equal to the repurchase price (including accrued interest); the
collateral will be marked to market on a daily basis, and will be continuously
monitored to ensure that such equivalent value is maintained. Reverse repurchase
agreements involve the risk that the market value of the securities sold by the
Fund may decline below the price at which the Fund is obligated to repurchase
the securities. Reverse repurchase agreements are considered to be borrowings
under the Investment Company Act of 1940 (the "1940 Act").
- - INVESTMENT COMPANY SECURITIES. The Fund may invest up to 5% of its total
assets in the securities of any one investment company, but may not own more
than 3% of the securities of any one investment company or invest more than 10%
of its total assets in the securities of other investment companies. Pursuant to
an exemptive order received by the Victory Portfolios from the Commission, the
Fund may invest in the Money Market Funds of the Victory Portfolios. The
Sub-Adviser and/or Key Advisers will waive their fees attributable to the Fund's
assets invested in a fund of the Victory Portfolios to the extent such fees are
duplicated, and, to the extent required by the laws of any state in which shares
of the Fund are sold, the Sub-Adviser and/or Key Advisers will waive their
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respective investment advisory fees as to all assets invested in other
investment companies. Because such other investment companies employ an
investment adviser, such investment by the Fund will cause shareholders to bear
duplicative fees, such as management fees, to the extent such fees are not
waived by Key Advisers or the Sub-Adviser.
- - BORROWING. The Fund may enter into commitments to purchase securities in
accordance with its investment program, including delayed-delivery and
when-issued securities and reverse repurchase agreements, provided that the
total amount of any such borrowing does not exceed 33 1/3% of the Fund's total
assets. The Fund may borrow money for temporary or emergency purposes in an
amount not exceeding 5% of the value of its total assets at the time when the
loan is made. Any borrowings representing more than 5% of the Fund's total
assets must be repaid before the Fund may make additional investments. The Fund
does not currently intend to borrow for leveraging purposes.
- - ILLIQUID INVESTMENTS AND RESTRICTED SECURITIES. The Fund may invest up to 15%
of its net assets in illiquid investments (investments that cannot be readily
sold within seven days in the usual course of business at approximately the
price at which the Fund has valued them), including Restricted Securities (as
defined below) deemed to be illiquid. Under the supervision of the Trustees, Key
Advisers or the Sub-Adviser determines the liquidity of the Fund's investments.
The absence of a trading market can make it difficult to ascertain a market
value for illiquid investments. Disposing of illiquid investments may involve
time-consuming negotiation and legal expenses, and it may be difficult or
impossible for the Fund to sell them promptly at an acceptable price.
"Restricted Securities" are securities which are subject to restrictions on
resale due to acquisition without registration under the Securities Act of 1933,
as amended (the "1933 Act"). Unless registered for sale, these securities can
only be sold in privately negotiated transactions or pursuant to an exemption
from registration. See "Private Placement Investments," below.
- - PRIVATE PLACEMENT INVESTMENTS. The Fund may invest in commercial paper issued
in reliance on the exemption from registration afforded by Section 4(2) of the
1933 Act. Section 4(2) commercial paper is restricted as to disposition under
federal securities law and is generally sold to institutional investors, such as
the Fund, that agree that they are purchasing the paper for investment purposes
and not with a view to public distribution. Any resale by the purchaser must be
in an exempt transaction. Section 4(2) commercial paper is normally resold to
other institutional investors like the Fund through or with the assistance of
the issuer or investment dealers who make a market in Section 4(2) commercial
paper, thus providing liquidity. The Fund believes that Section 4(2) commercial
paper and possibly certain other Restricted Securities that meet the criteria
for liquidity established by the Trustees are quite liquid. The Fund intends,
therefore, to treat the Restricted Securities that meet the criteria for
liquidity established by the Trustees, including Section 4(2) commercial paper,
as determined by Key Advisers or the Sub-Adviser, as liquid and not subject to
the investment limitation applicable to illiquid securities. Therefore, the Fund
will generally purchase Section 4(2) commercial paper without regard to the
Fund's restriction on illiquid securities.
The ability of the Trustees to determine the liquidity of certain Restricted
Securities is permitted under a position of the Staff of the Commission set
forth in the adopting release for Rule 144A under the 1933 Act (the "Rule"). The
Rule is a nonexclusive safe-harbor providing an exemption from registration
under the 1933 Act for resales of Restricted Securities to qualified
institutional buyers. The Rule was expected to further enhance the liquidity of
the secondary market for the types of securities eligible for resale under Rule
144A. The Victory Portfolios believes that the staff of the Commission has left
the question of determining the liquidity of all Restricted Securities to the
Trustees. The Trustees consider the following criteria in determining the
liquidity of certain restricted securities: the frequency of trades and quotes
for the security; the number of dealers willing to purchase or sell the security
and the number of other potential buyers; dealer undertakings to make a market
in the security; and the nature of the security and the nature of the
marketplace trades.
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INVESTMENT RISKS
- - INTERNATIONAL INVESTMENTS. Generally, investments in securities of foreign
companies involve greater risks than are present in U.S. investments. Compared
to U.S. and Canadian companies, there is generally less publicly available
information about foreign companies and there may be less governmental
regulation and supervision of foreign stock exchanges, brokers and listed
companies. Foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to U.S. companies. Securities of some foreign
companies are less liquid, and their prices more volatile, than securities of
comparable U.S. companies. Settlement of transactions in some foreign markets
may be delayed or may be less frequent than in the U.S., which could affect the
liquidity of the Fund's investment. In addition, with respect to some foreign
countries, there is the possibility of nationalization, expropriation or
confiscatory taxation; limitations on the removal of securities, property or
other assets of the Fund; political or social instability; increased difficulty
in obtaining legal judgments; or diplomatic developments which could affect U.S.
investments in those countries. The Fund's investment advisers will take such
factors into consideration in managing the Fund's investments.
- - CERTAIN INVESTMENT TECHNIQUES. Certain investment management techniques which
the Fund may use, such as the purchase and sale of futures and options,
described above, may expose the Fund to special risks. These products may be
used to adjust the risk and return characteristics of the Fund's portfolio of
investments. These various products may increase or decrease exposure to
security prices, interest rates, or other factors that affect security values,
regardless of the issuer's credit risk. Regardless of whether the intent was to
decrease risk or increase return, if market conditions do not perform
consistently with expectations, these products may result in a loss. In
addition, losses may occur if counterparties involved in transactions do not
perform as promised. These products may expose the Fund to potentially greater
risk of loss than more traditional equity investments.
NOTE: The Statement of Additional Information contains information about certain
investment practices and portfolio securities of the Fund. The Statement of
Additional Information also contains information about investment restrictions
designed to reduce the risk of an investment in the Fund.
BROKERAGE ALLOCATION
Subject to the supervision of the Trustees, Key Advisers and the Sub-Adviser are
authorized, subject to attempting to obtain best price and execution (which
shall mean quality execution at favorable securities prices), to place portfolio
transactions with brokerage firms that supply research. In the future, the
Trustees may also authorize the allocation of brokerage to affiliated
broker-dealers on an agency basis to effect portfolio transactions. In such
event, the Trustees will adopt procedures incorporating the standards of Rule
17e-1 of the 1940 Act, which require that the commission paid to affiliated
broker-dealers must be "reasonable and fair compared to the commission, fee or
other remuneration received, or to be received, by other brokers in connection
with comparable transactions involving similar securities during a comparable
period of time." At times, the Fund may also purchase portfolio securities
directly from dealers acting as principals, underwriters or market makers. As
these transactions are usually conducted on a net basis, no brokerage
commissions are paid by the Fund.
Transactions are allocated to various dealers selected by Key Advisers and the
Sub-Adviser primarily on the basis of prompt execution of orders at the most
favorable prices. The Board of Trustees has determined that the foregoing
arrangements are in the best interest of the Victory Portfolios and the Fund.
See "Portfolio Transactions" in the Statement of Additional Information for
further information.
LIMITING INVESTMENT RISKS
The following summarizes the Fund's principal investment limitations. A complete
listing is contained in the Statement of Additional Information.
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1. (a) The Fund may borrow money solely for temporary or emergency
purposes, but not in an amount exceeding 33 1/3% of its total assets.
(b) The Fund may borrow money from banks or by engaging in reverse
repurchase agreements. (c) The Fund will not purchase securities when
borrowings exceed 5% of its total assets. If the Fund borrows money,
its share price may be subject to greater fluctuation until the
borrowing is paid off. To this extent, purchasing securities when
borrowings are outstanding may involve an element of leverage.
2. The Fund will not purchase a security if, as a result, more than 15% of
its net assets would be invested in illiquid securities. The Fund may
invest up to 15% of its net assets in illiquid investments (investments
that cannot be readily sold within seven days in the usual course of
business at approximately the price at which the Fund has valued them),
including restricted securities deemed to be illiquid. Under the
supervision of the Trustees, Key Advisers or the Sub-Adviser determines
the liquidity of the Fund's investments. The absence of a trading
market can make it difficult to ascertain a market value for illiquid
investments. Disposing of illiquid investments may involve
time-consuming negotiation and legal expenses, and it may be difficult
or impossible for the Fund to sell them promptly at an acceptable
price.
Except for the Fund's investment objective and the percentage limitation on
borrowing in limitation 1(a), the investment policies described in this
Prospectus are not fundamental. Non-fundamental limitations may be changed
without shareholder approval. Whenever an investment policy or limitation states
a maximum percentage of the Fund's assets that may be invested, such percentage
limitation will be determined immediately after and as a result of the
investment, except in the case of borrowing (or other activities that may be
deemed to result in the issuance of a "senior security" under the 1940 Act). Any
subsequent change in values, assets, or other circumstances will not be
considered when determining whether the investment complies with the Fund's
investment policies and limitations. If the value of a Fund's holdings of
illiquid securities at any time exceeds the percentage limitation applicable at
the time of acquisition due to subsequent fluctuations in value or other
reasons, the Board of Trustees will consider what actions, if any, are
appropriate to maintain adequate liquidity.
PORTFOLIO TRANSACTIONS
Brokerage firms are utilized to conduct securities transactions for the Fund.
Broker-dealers are chosen by judging professional ability and quality of
service.
Key Advisers or the Sub-Adviser may allocate transactions to broker-dealers who
help distribute the Fund's shares or the shares of the other funds of the
Victory Portfolios, to the extent permitted by law. Key Advisers or the
Sub-Adviser will make such allocations only if brokerage fees are comparable to
those charged by non-affiliated, qualified broker-dealers for similar services.
Key Advisers or the Sub-Adviser may engage in short-term trading with respect to
the Fund when it believes it is consistent with the Fund's investment objective
and policies. The frequency of portfolio transactions--the Fund's turnover
rate--will vary from year for to year depending on market conditions.
For the fiscal periods ended April 30, 1995 and October 31, 1995, the annual
portfolio turnover rates for the Fund were 39.58% and _____%, respectively.
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HOW TO INVEST, EXCHANGE AND REDEEM
HOW TO INVEST
Shares may be purchased directly or through an Investment Professional.
Investment Professionals are securities brokers or other financial institutions
that have entered into selling or servicing agreements with the Fund or the
Distributor. Shares are also available to clients of bank trust departments who
have qualified trust accounts. The minimum investment is $500 for the initial
purchase and $25 thereafter. Accounts set up through a bank trust department or
an Investment Professional may be subject to different minimums.
- - Investing Through Your Investment Professional. Your Investment Professional
will place your order with the Transfer Agent on your behalf. You may be
required to establish a brokerage or agency account. Your Investment
Professional will notify you whether subsequent trades should be directed to the
Investment Professional or directly to the Fund's Transfer Agent. Accounts
established with Investment Professionals may have different features,
requirements and fees. In addition, Investment Professionals may charge for
their services. Information regarding these features, requirements and fees will
be provided by the Investment Professional. If you are purchasing shares of any
Fund through a program of services offered or administered by your Investment
Professional, you should read the program materials in conjunction with this
Prospectus.
- - Investing Through The Systematic Investment Plan. You can use the Systematic
Investment Plan to purchase shares directly from your bank account. Please refer
to "Systematic Investment Plan" below for more details.
- - Investing Through Your Bank Trust Department. Your bank trust department may
require a minimum investment and may charge additional fees. Fee schedules for
such accounts are available upon request and are detailed in the agreements by
which a client opens the desired account. Your bank trust department may require
a completed and signed application for the Fund in which an investment is made.
Additional documents may be required from corporations, associations, and
certain fiduciaries. Any account information, such as balances, should be
obtained through your bank trust department. Additional purchases, exchanges or
redemptions should also be coordinated through your bank trust department.
Contact your bank trust department for instructions.
The services rendered by a bank trust department, including affiliates of Key
Advisers or the Sub-Adviser, in the management of its accounts are not
duplicative of any of the services for which Key Advisers or the Sub-Adviser as
the investment adviser or sub-adviser, respectively, is compensated for advising
the Fund. The charges paid by clients of bank trust departments, or their
affiliates, should be considered in calculating the net yield and return on
investments in the Fund, although such charges do not affect the Fund's
dividends and distributions.
INVESTING DIRECTLY
BY MAIL: You may purchase shares by completing and signing an account
application (initial purchase only) and mailing it, together with a check (or
other negotiable bank draft or money order) in the amount of at least the
minimum investment requirement to, The Victory Special Growth Fund, Primary
Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741. Subsequent
purchases may be made in the same manner.
BY WIRE: Call 800-539-3863 to set up your Fund account to accommodate wire
transactions. YOU MUST CALL THE TRANSFER AGENT BEFORE WIRING FUNDS. You will
begin to earn dividends on the first business day following receipt of your
wire. Federal funds (monies transferred from one bank to another through the
Federal Reserve System with same-day availability) should be wired to:
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Boston Safe Deposit & Trust Co.
ABA #011001234
Credit PFSC DDA #16-918-8
The Victory Portfolios: Special Growth Fund
You must include your account number, your name(s), tax identification number(s)
and the control number assigned by the Transfer Agent. The Fund does not impose
a fee for wire transactions, although your bank may charge you a fee for this
service.
Shares are sold at the public offering price based on the net asset value that
is next determined after the Transfer Agent receives the purchase order. In most
cases, to receive that day's offering price, the Transfer Agent must receive
your order as of the close of regular trading of the New York Stock Exchange
("NYSE") (generally 4:00 pm Eastern time) (the "Valuation Time") on each
Business Day (as defined in "Net Asset Value Per Share") of the Fund. If you buy
shares through an Investment Professional, the Investment Professional must
receive your order in a timely fashion on a regular Business Day and transmit it
to the Transfer Agent so that it is received before the close of business that
day. The Transfer Agent may reject any purchase order for the Fund's shares, in
its sole discretion.
It is the responsibility of your Investment Professional to transmit your order
to purchase shares to the Transfer Agent in a timely fashion in order for you to
receive that day's share price. The Fund must receive payment within three
business days after an order is placed. Otherwise, the purchase order will be
canceled and you could be held liable for resulting fees and/or losses.
INVESTMENT REQUIREMENTS
All purchases must be made in U.S. dollars. Checks must be drawn on U.S. banks.
No cash will be accepted. If you make a purchase with more than one check, each
check must have a value of at least $25, and the minimum investment requirement
still applies. The Fund reserves the right to limit the number of checks
processed at one time. If your check does not clear, your purchase will be
canceled and you could be liable for any losses or fees incurred. Payment for
the purchase is expected at the time of the order. If payment is not received
within three business days of the date of the order, the order may be canceled,
and you could be held liable for resulting fees and/or losses.
Shares are sold at their offering price, which is normally net asset value plus
an initial sales charge. However, in some cases, described below, where
purchases are not subject to an initial sales charge, the offering price may be
net asset value. In some cases, reduced sales charges may be available, as
described below. When you invest, the Fund receives the net asset value for your
account. The sales charge varies depending on the amount of your purchase and a
portion may be retained by the Distributor and allocated to your Investment
Professional. The Victory Portfolios has a reinstatement policy which allows an
investor who redeems his/her shares originally purchased with a sales charge to
reinvest within 90 days without incurring an additional sales charge. The
current sales charge rates and commissions paid to Investment Professionals are
as follows:
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<TABLE>
<CAPTION>
FRONT-END SALES CHARGE
AS A PERCENTAGE OF:
-------------------
OFFERING NET AMOUNT DEALER
AMOUNT OF PURCHASE PRICE INVESTED REALLOWANCE
- ------------------ ----- -------- -----------
<S> <C> <C> <C>
Less than $49,999 4.75% 4.99% 4.00%
$50,000 to $99,999 4.50% 4.71% 4.00%
$100,000 to $249,999 3.50% 3.63% 3.00%
$250,000 to $499,999 2.25% 2.30% 2.00%
$500,000 to $999,999 1.75% 1.78% 1.50%
$1,000,000 and above 0.00% 0.00% *
</TABLE>
* There is no initial sales charge on purchases of $1 million or more.
Investment Professionals will be compensated at the rate of up to 0.25%
on such purchases.
The Distributor reserves the right to reallow the entire commission to dealers.
If that occurs, the dealer may be considered an "underwriter" under Federal
securities laws.
The Distributor may pay all or a portion of any applicable sales charges and
service fees to Investment Professionals who sell shares of the Fund and provide
ongoing sales support services or shareholder support services. For the
three-year period commencing April 30, 1994, for activities in maintaining and
servicing accounts of customers invested in the Fund, First Albany Corporation
("First Albany") and PFIC Securities Corporation ("PFIC") may receive payments
from the Distributor equal to two-thirds of the Dealer Retention (as defined
below) on any shares of the Fund (and other funds of the Victory Portfolios)
sold by First Albany or PFIC and their broker-dealer affiliates. "Dealer
Retention" is an amount equal to the difference between the applicable sales
charge and such part of the sales charge which is reallowed to broker-dealers.
The Distributor, at its expense, may also provide additional cash compensation
to dealers in connection with sales of shares of the Fund. The maximum cash
compensation payable by the Distributor is currently 4.00% of the offering
price. In addition, the Distributor will, from time to time and at its own
expense, provide compensation, including financial assistance, to dealers in
connection with conferences, sales or training programs for their employees,
seminars for the public, advertising campaigns regarding one or more Victory
Portfolios and/or other dealer-sponsored special events including payment for
travel expenses, including lodging, incurred in connection with trips taken by
invited registered representatives and members of their families to locations
within or outside of the United States for meetings or seminars of a business
nature. Compensation will include the following types of non-cash compensation
offered through sales contests: (1) vacation trips including the provision of
travel arrangements and lodging; (2) tickets for entertainment events (such as
concerts, cruises and sporting events) and (3) merchandise (such as clothing,
trophies, clocks and pens). Dealers may not use sales of the Fund's shares to
qualify for this compensation to the extent such may be prohibited by the laws
of any state or any self-regulatory organization, such as the National
Association of Securities Dealers, Inc. None of the aforementioned compensation
is paid for by the Fund or its shareholders.
REDUCED SALES CHARGES. You may be eligible to buy shares at reduced sales charge
rates in one or more of the following ways:
LETTER OF INTENT. An investor may obtain a reduced sales charge by means of a
written Letter of Intent which expresses the investor's intention to purchase
shares of the Fund at a specified total public offering price within a 13-month
period.
A Letter of Intent is not a binding obligation upon the investor to purchase the
full amount indicated. The minimum initial investment under a Letter of Intent
is 5% of the total amount. Shares purchased with the first 5% of such
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<PAGE> 373
amount will be held in escrow (while remaining registered in the name of the
investor) to secure payment of the higher sales charge applicable to the shares
actually purchased if the full amount indicated is not purchased, and such
escrowed shares will be involuntarily redeemed to pay the additional sales
charge, if necessary. Dividends (if any) on escrowed shares, whether paid in
cash or reinvested in additional shares, are not subject to escrow. The escrowed
shares will not be available for disposal by the investor until all purchases
pursuant to the Letter of Intent have been made or the higher sales charge has
been paid. When the full amount indicated has been purchased, the escrow will be
released. A Letter of Intent may include purchases of shares made not more than
90 days prior to the date the investor signs a Letter of Intent; however, the
13-month period during which the Letter of Intent is in effect will begin on the
date of the earliest purchase to be included. An investor may combine purchases
that are made in an individual capacity with (1) purchases that are made by
members of the investor's immediate family and (2) purchases made by businesses
that the investor owns as sole proprietorships, for purposes of obtaining
reduced sales charges by means of a written Letter of Intent. In order to
accomplish this, however, investors must designate on the account application
the accounts that are to be combined for this purpose. Investors can only
designate accounts that are open at the time the Letter of Intent is executed.
If an investor qualifies for a further reduced sales charge because the investor
has either purchased more than the dollar amount indicated on the Letter of
Intent or has entered into a Letter of Intent which includes shares purchased
prior to the date of the Letter of Intent, the difference in the sales charge
will be used to purchase additional shares of the Fund on behalf of the
investor; thus the total purchases (included in the Letter of Intent) will
reflect the applicable reduced sales charge of the Letter of Intent.
For investors who purchase more than the dollar amount indicated on the Letter
of Intent or enter into a Letter of Intent that includes shares purchased prior
to the date of the Letter of Intent and qualify for a reduced sales charge, all
such additional shares will be immediately purchased in the form of additional
shares and credited to the investor's account at the then current public
offering price applicable to a single purchase of the total amount of the
purchases.
For further information about Letters of Intent, interested investors should
contact the Transfer Agent at 800-539-3863. This program, however, may be
modified or eliminated at any time without notice.
RIGHT OF ACCUMULATION AND CONCURRENT PURCHASES
A shareholder may qualify for a reduced sales charge on purchases of shares of
the Fund and other funds of the Victory Portfolios by combining a current
purchase with purchases of another fund(s) or with certain prior purchases of
shares of the Victory Portfolios. The applicable sales charge is based on the
sum of (i) the purchaser's current purchase plus (ii) the current public
offering price of the purchaser's previous purchases of (a) all shares held by
the purchaser in the Fund and (b) all shares held by the purchaser in any other
fund of the Victory Portfolios (except money market funds).
To receive the applicable public offering price pursuant to the right of
accumulation, shareholders must provide the Transfer Agent with sufficient
information at the time of purchase to permit confirmation of qualification.
Accumulation privileges may be amended or terminated without notice at any time
by the Distributor.
- - WAIVERS OF SALES CHARGES. No sales charge is imposed on sales of shares to the
following categories of persons (which categories may be changed or eliminated
at any time):
(1) Current or retired trustees of the Victory Portfolios; employees,
directors, trustees, and their family members of KeyCorp or an
Affiliated Provider (Affiliated Providers refer to affiliates and
subsidiaries of KeyCorp and service providers to the Victory Portfolios
and the Victory Shares (collectively, the "Victory Group")), dealers
having an agreement with the Distributor and any trade organization to
which Key Advisers, the Sub-Adviser or the Administrator belongs;
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<PAGE> 374
(2) Investors who purchase shares for trust, investment management or
certain other advisory accounts established with KeyCorp or any of its
affiliates;
(3) Investors who purchase shares through a 401(k) plan sponsored by an
Affiliated Provider;
(4) Investors who reinvest assets received in a distribution from a
qualified, non-qualified or deferred compensation plan, agency, trust
or custody account that was either (a) maintained by KeyCorp or an
Affiliated Provider, or (b) invested in a fund of the Victory Group;
(5) Investors who, within 90 days of redemption, use the proceeds from the
redemption of shares of another mutual fund complex for which they
previously paid a front end sales charge or sales charge upon
redemption of shares; and
(6) Shareholders of the former Investors Preference Fund For Income, Inc.
and the Investors Preference New York Tax-Free Fund, Inc. who have
continuously maintained accounts with a fund or funds of the Victory
Group with a balance of $250,000 or more (investors with less than
$250,000 will pay any applicable sales loads).
SPECIAL INVESTOR SERVICES
- - THE SYSTEMATIC INVESTMENT PLAN. You can make regular investments in the Fund
and all other funds of the Victory Group with the Systematic Investment Plan by
completing the appropriate section of the account application and attaching a
voided personal check with your bank's magnetic ink coding number across the
front. If your bank account is jointly owned, be sure that all owners sign. You
must first meet the Fund's initial investment requirement of $500, then
investments may be made monthly by automatically deducting $25 or more from your
bank checking account. For officers, trustees, directors and employees,
including retired directors and employees, of the Victory Group, KeyCorp and its
affiliates, and the Administrator and its affiliates (and family members of each
of the foregoing, i.e., parents and children) who participate in the Systematic
Investment Plan, there is no minimum initial investment required. You may change
the amount of your monthly purchase at any time. A bank draft form must be
completed for this option. Your bank checking account will be debited on the
date indicated on your Account Application. Shares will be purchased at the
offering price next determined following receipt of the order by the Transfer
Agent. You may cancel the Systematic Investment Plan at any time without payment
of a cancellation fee. Your monthly account statement will reflect systematic
investment transactions, and a debit entry will appear on your bank statement.
- - TELEPHONE TRANSACTIONS. You can initiate any transaction by telephone. You may
call the Transfer Agent toll-free at 800-539-3863 or call your Investment
professional or bank trust department. See "Shareholder Account Rules and
Policies" for more information about telephone transactions.
- - THE SYSTEMATIC WITHDRAWAL PLAN. You can make regular withdrawals from your
account in any fund of the Victory Group with the Systematic Withdrawal Plan by
completing the appropriate section of the account application. If you own shares
in a fund worth $5,000 or more, you can have monthly, quarterly, semi-annual or
annual checks sent from your account directly to you, to a person named by you,
or to your bank checking account. The required minimum withdrawal is $25. If you
are having checks sent to your bank checking account, attach a voided personal
check with your bank's magnetic coding number across the front of the account
application. If your account is jointly owned, be sure that all owners sign the
application. You may obtain information about the Systematic Withdrawal Plan by
contacting your Investment Professional. Your Systematic Withdrawal Plan
payments are drawn from share redemptions. If Systematic Withdrawal Plan
redemptions exceed dividend distributions paid on your Fund shares, your account
eventually may be exhausted. If any applicable sales charges
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are applied to new purchases of shares of the Fund, it is to your disadvantage
to buy shares of the Fund while also making systematic redemptions.
Your account will be debited on the date you indicate on your Account
Application. Shares will be redeemed at the NAV as determined on the debit date
indicated on your Account Application. You may cancel the Systematic Withdrawal
Plan at any time without payment of a cancellation fee. Each Systematic
Withdrawal Plan transaction will appear as a debit entry on your monthly account
statement.
- - RETIREMENT PLANS. Retirement plans can be among the best tax-planning vehicles
available to individuals. Call your Investment Professional for more information
on the plans and their benefits, provisions and fees. Your Investment
Professional can set up your new account in the Fund under one of several
tax-sheltered plans. These plans let you invest for retirement and shelter your
investment income from current taxes. Plans include Individual Retirement
Accounts (IRAs) and Rollover IRAs. Other fees may be charged by the IRA
custodian or trustee.
HOW TO REDEEM SHARES
You may redeem all or a portion of your shares on any day that the Fund is open
for business (see "Share Price" below). Shares will be redeemed at the NAV next
calculated after the Transfer Agent has received the redemption request. If the
Fund account is closed, any accrued dividends will be paid at the beginning of
the following month.
You may redeem shares in several ways:
BY MAIL: Send a written request to: The Victory Portfolios: Special Growth Fund
P.O. Box 9741
Providence, RI 02940-9741
Write a "letter of instruction" with your name, the Fund's name, your Fund
account number, the dollar amount or number of shares to be redeemed, and any
additional requirements that apply to each particular account. You will need the
letter of instruction signed by all persons required to sign for transactions,
exactly as their names appear on the account application. A signature guarantee
is required if: you wish to redeem more than $10,000 worth of shares; your Fund
account registration has changed within the last 60 days; the check is not being
mailed to the address on your account; the check is not being made out to the
account owner; or the redemption proceeds are being transferred to another
Victory Group account with a different registration. The following institutions
should be able to provide you with a signature guarantee: banks, brokers,
dealers, credit unions (if authorized under state law), securities exchanges and
associations, clearing agencies, and savings associations. A signature guarantee
may not be provided by a notary public. A signature guarantee is designed to
protect you, the Fund, and its agents from fraud. The Transfer Agent reserves
the right to reject any signature guarantee if (1) it has reason to believe that
the signature is not genuine, (2) it has reason to believe that the transaction
would otherwise be improper, or (3) the guarantor institution is a broker or
dealer that is neither a member of a clearing corporation nor maintains net
capital of at least $100,000.
BY WIRE: You may make redemptions by wire provided you have established a Fund
account to accommodate wire transactions. If telephone instructions are received
before Valuation Time (generally 4:00 p.m. Eastern time), proceeds of the
redemption will be wired as federal funds on the next Business Day to the bank
account designated with the Transfer Agent. You may change the bank account
designated to receive an amount redeemed at any time by sending a letter of
instruction with a signature guarantee to the Transfer Agent, Primary Funds
Service Corporation, P.O. Box 9741, Providence, RI 02940-9741.
BY TELEPHONE: To redeem by telephone, you may call the Transfer Agent toll free
at 800-539-3863 or call your Investment Professional or bank trust department.
See "Shareholder Account Rules and Policies" for more information about
telephone transactions.
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ADDITIONAL REDEMPTION REQUIREMENTS: The Fund may hold payment on redemptions
until it is reasonably satisfied that investments made by check have been
collected, which can take up to 15 days. Also, when the NYSE is closed (or when
trading is restricted) for any reason other than its customary weekend or
holiday closings, or under any emergency circumstances as determined by the
Commission to merit such action, the right of redemption may be suspended or the
date of payment postponed for a period of time that may exceed 7 days. In
addition, the Fund reserves the right to advance the time on that day by which
purchase and redemption orders must be received. To the extent that portfolio
securities are traded in other markets on days when the NYSE is closed, the
Fund's NAV may be affected on days when investors do not have access to the Fund
to purchase or redeem shares.
If you are unable to reach the Transfer Agent by telephone (for example, during
times of unusual market activity), consider placing your order by mail directly
to the Transfer Agent. In case of suspension of the right of redemption, you may
either withdraw your request for redemption or receive payment based on the NAV
next determined after the termination of the suspension. If your balance in a
Fund falls below $500, you may be given 60 days' notice to reestablish the
minimum balance (except with respect to officers, trustees, directors and
employees, including retired directors and employees, of the Victory Portfolios,
KeyCorp and its affiliates, and the Administrator and its affiliates (and family
members of each of the foregoing, i.e., parents, children and household members)
participating in the Systematic Investment Plan, to whom no minimum balance
requirement applies). If you do not increase your balance, your account may be
closed and the proceeds mailed to you at the address on record. Shares will be
redeemed at the last calculated NAV on the day the account is closed.
HOW TO EXCHANGE SHARES
Shares of the Fund may be exchanged for shares of certain funds of the Victory
Group at net asset value per share at the time of exchange, without a sales
charge. To exchange shares, you must meet several conditions:
- - Shares of the fund selected for exchange must be available for sale in
your state of residence.
- - The prospectuses of this Fund and the fund whose shares you want to buy
must offer the exchange privilege.
- - You must hold the shares you buy when you establish your account for at
least 7 days before you can exchange them; after the account is open 7
days, you can exchange shares every regular Business Day.
- - You must meet the minimum purchase requirements for the fund you
purchase by exchange.
- - The registration and tax identification numbers of the two accounts
must be identical.
- - Before exchanging into a fund, obtain and read its prospectus.
Shares of a particular class may be exchanged only for shares of the same class
in the other funds of the Victory Group. For example, you can exchange shares of
this Fund only for Class A shares of another fund. At present, not all of the
funds offer the same two classes of shares. If a fund has only one class of
shares that does not have a class designation, they are "Class A" shares for
exchange purposes. In some cases, sales charges may be imposed on exchange
transactions. Certain funds offer Class A or Class B shares and a list can be
obtained by calling the Transfer Agent at 800-539-3863. Please refer to the
Statement of Additional Information for more details about this policy.
Telephone exchange requests may be made either by calling your Investment
Professional or the Transfer Agent at 800-539-3863 prior to valuation time
(generally 4:00 p.m. Eastern time) on any Business Day.
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You can obtain a list of eligible funds of the Victory Group by calling the
Transfer Agent at 800-539-3863. Exchanges of shares involve a redemption of the
shares of the Fund and a purchase of shares of the other portfolio.
There are certain exchange policies you should be aware of:
- - Shares are normally redeemed from one fund and purchased from the other fund
in the exchange transaction on the same Business Day on which the Transfer Agent
receives an exchange request by Valuation Time (generally 4:00 p.m. Eastern
time) that is in proper form, but either fund may delay the purchase of shares
of the fund into which you are exchanging if it determines it would be
disadvantaged by a same-day transfer of the proceeds to buy shares. For example,
the receipt of multiple exchange requests from a dealer in a "market-timing"
strategy might require the disposition of securities at a time or price
disadvantageous to the Fund.
- - Because excessive trading can hurt fund performance and harm shareholders, the
Victory Portfolios reserves the right to refuse any exchange request that will
disadvantage it, or to refuse multiple exchange requests submitted by a
shareholder or dealer.
- - The Fund may amend, suspend or terminate the exchange privilege at any time
upon 60 days' written notice to shareholders.
- - If the Transfer Agent cannot exchange all the shares you request because of a
restriction cited above, only the shares eligible for exchange will be
exchanged.
- - Each exchange may produce a gain or loss for tax purposes.
Shareholders of the former Investors Preference Fund for Income, Inc. and
Investors Preference New York Tax-Free Fund, Inc. will not be subject to any
additional sales load upon an exchange of shares attributable to an Investors
Preference Funds account for shares of other funds of the Victory Portfolios.
SHAREHOLDER ACCOUNT RULES AND POLICIES
- - NET ASSET VALUE PER SHARE. The term "net asset value per share," or "NAV",
means the value of one share. The NAV is calculated by adding the value of all
its investments, plus cash and other assets, deducting liabilities, and then
dividing the result by the number of shares outstanding. The NAV of the Fund is
determined and its shares are priced as of the close of regular trading of the
New York Stock Exchange (NYSE), (generally 4:00 p.m. Eastern Time) (the
"Valuation Time") on each Business Day of the Fund. A "Business Day" is a day on
which the NYSE is open for trading, the Federal Reserve Bank of Cleveland is
open, and any other day (other than a day on which no shares of the Fund are
tendered for redemption and no order to purchase any shares is received) during
which there is sufficient trading in its portfolio instruments that the Fund's
net asset value per share might be materially affected. The NYSE or the Federal
Reserve Bank of Cleveland will not be open in observance of the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans' Day,
Thanksgiving Day, and Christmas Day.
The Fund's securities are valued primarily on the basis of market quotations or,
if quotations are not readily available, by a method that the Board of Trustees
believes accurately reflects fair value. Fair value of these portfolio
securities is determined by an independent pricing service approved by the
Trustees based primarily upon information concerning market transactions and
dealers quotations for similar securities.
- - THE OFFERING OF SHARES may be suspended during any period in which the
determination of net asset value is suspended, and the offering may be suspended
by the Trustees at any time the Trustees believe it is in the Fund's best
interest to do so.
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- - TELEPHONE TRANSACTION PRIVILEGES for purchases, redemptions or exchanges may
be modified, suspended or terminated by the Fund at any time. If an account has
more than one owner, the Fund and the Transfer Agent may rely on the
instructions of any one owner. Telephone privileges apply to each owner of the
account and the dealer representative of record for the account unless and until
the Transfer Agent receives cancellation instructions from an owner of the
account.
- - TELEPHONE INSTRUCTIONS. Generally, neither the Fund, the bank trust department
nor the Transfer Agent will be responsible for any claims, losses or expenses
for acting on telephone instructions that are reasonably believed to be genuine.
The Transfer Agent and the Fund will employ reasonable procedures to confirm
that instructions communicated by telephone are genuine and if they do not
employ reasonable procedures they may be liable for any losses due to
unauthorized or fraudulent instructions. The identification procedures may
include, but are not limited to, the following: account number, registration and
address, personalized security codes, taxpayer identification number and other
information particular to the account. Your Investment Professional, bank trust
department or the Transfer Agent may also record calls, and you should verify
the accuracy of your confirmation statements immediately after you receive them.
- - REDEMPTION OR TRANSFER REQUESTS WILL NOT BE HONORED UNTIL THE TRANSFER AGENT
RECEIVES ALL REQUIRED DOCUMENTS IN PROPER FORM. From time to time, the Transfer
Agent in its discretion may waive certain of the requirements for redemptions
stated in this Prospectus.
- - DEALERS THAT CAN PERFORM ACCOUNT TRANSACTIONS FOR THEIR CLIENTS BY
PARTICIPATING IN NETWORKING through the National Securities Clearing Corporation
are responsible for obtaining their clients' permission to perform those
transactions and are responsible to their clients who are shareholders of the
Victory Portfolios if the dealer performs any transaction erroneously.
- - THE REDEMPTION PRICE FOR SHARES WILL VARY from day to day because the value of
the securities in the Fund fluctuates, and the value of your shares may be more
or less than their original cost.
- - PAYMENT FOR REDEEMED SHARES is made ordinarily in cash and forwarded by check
within three business days after the Transfer Agent receives redemption
instructions in proper form, except under unusual circumstances determined by
the Commission delaying or suspending such payments. The Transfer Agent may
delay forwarding a check for recently purchased shares, but only until the
purchase payment has cleared. That delay may be as much as 15 days from the date
the shares were purchased. That delay may be avoided if you arrange with your
bank to provide telephone or written assurance to the Transfer Agent that your
purchase payment has cleared.
- - INVOLUNTARY REDEMPTIONS OF SMALL ACCOUNTS. If your account value has fallen
below $500, you will be given 60 days' notice to reestablish the minimum
balance. If you do not increase your minimum balance, your account may be closed
and the proceeds mailed to you at the record address. In some cases involuntary
redemptions may be made to repay the Distributor for losses from the
cancellation of share purchase orders. Under unusual circumstances, shares of
the Fund may be redeemed "in kind," which means that the redemption proceeds
will be paid with securities from the Fund. Please refer to the Statement of
Additional Information for more details.
- - "BACKUP WITHHOLDING" of Federal income tax may be applied at the rate of 31%
from dividends, distributions and redemption proceeds (including exchanges) if
you fail to furnish the Victory Portfolios with a certified Social Security or
taxpayer identification number when you sign your application, or if you violate
Internal Revenue Service regulations on tax reporting of dividends.
- - THE VICTORY PORTFOLIOS DOES NOT CHARGE A REDEMPTION FEE, but if your
Investment Professional handles your redemption, they may charge a separate
service fee.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS. The Fund ordinarily declares and pays dividends from its net
investment income quarterly. The Fund distributes substantially all net capital
gains, if any, to shareholders each year, to the extent necessary to qualify for
favorable federal tax treatment.
CAPITAL GAINS. The Fund may make distributions annually out of any net
short-term or long-term capital gains, and the Fund may make supplemental
distributions of dividends and capital gains following the end of its fiscal
year.
DISTRIBUTION OPTIONS
When you fill out your account application, you can specify how you want to
receive your dividend distributions. Currently, there are five available
options:
1. REINVESTMENT OPTION. Your income and capital gain dividends, if any,
will be automatically reinvested in additional shares of the Fund.
Income and capital gain dividends will be reinvested at the net asset
value of the Fund as of the day after the record date. If you do not
indicate a choice on your application, you will be assigned this
option.
2. CASH OPTION. You will receive a check for each income or capital gain
dividend, if any. Distribution checks will be mailed no later than 7
days after the dividend payment date which may be more than 7 days
after the dividend record date.
3. INCOME EARNED OPTION. You will have your capital gain dividend
distributions, if any, reinvested automatically in the Fund and have
your income dividends paid in cash.
4. DIRECTED DIVIDENDS OPTION. You will have income and capital gain
dividends, or only capital gain dividends, automatically reinvested in
shares of another fund of the Victory Group. Shares will be purchased
at the NAV as of the dividend record date. If you are reinvesting
dividends of a fund sold without a sales charge in shares of a fund
sold with a sales charge, the shares will be purchased at the public
offering price. If you are reinvesting dividends of a fund sold with a
sales charge in shares of a fund sold with or without a sales charge,
the shares will be purchased at the net asset value of the fund.
Dividend distributions can be directed only to an existing account with
a registration that is identical to that of your Fund account.
5. DIRECTED BANK ACCOUNT OPTION. You will have your income and capital
gain dividends, or only your income dividends, automatically
transferred to your bank checking or savings account. The amount will
be determined on the dividend record date and will normally be
transferred to your account within 7 days of the dividend record date.
Dividend distributions can be directed only to an existing account with
a registration that is identical to that of your Fund account. Please
call or write the Transfer Agent to learn more about this dividend
distribution option.
Any election or revocation of any of the above dividend distribution options may
be made in writing to the Fund and sent to Primary Funds Service Corporation,
P.O. Box 9741, Providence, RI 02940-9741, or by calling the Transfer Agent at
800-539-3863, and will become effective with respect to dividends having record
dates after receipt of the application or request by the Transfer Agent.
Reinvested dividend distributions receive the same tax treatment as dividend
distributions paid in cash.
COMPLETE REDEMPTIONS: If you request a complete redemption of all your Fund
shares, any dividend accrued to your account will be included in the redemption
check.
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STATEMENTS AND REPORTS: You will receive a monthly statement reflecting all
transactions that affect the share balance or the registration of your Fund
account. You will receive a confirmation after every transaction that affected
the share balance of your Fund account, except for dividend reinvestment,
systematic investment and systematic withdrawal transactions. These transactions
will be detailed in your Fund account statement. Transactions that affect the
share balance of your Fund investment in an account established with an
Investment Professional or financial institution will be detailed in regular
statements or through confirmation procedures of the financial institution.
Certificates representing shares of the Fund will not be issued. An IRS Form
1099-DIV with federal tax information will be mailed to you by January 31 of
each tax year and also will be filed with the IRS. At least twice a year, you
will receive the Fund's financial reports.
FEDERAL TAXES
The Fund intends to qualify each year and elect to be treated as a separate
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "IRS Code"). If the Fund is treated as a "regulated
investment company" and all its taxable income is distributed to its
shareholders in accordance with the timing requirements imposed by the IRS Code,
it will not be subject to federal income tax on its income. The Fund's
distributions that are attributable to its net investment income and short-term
capital gains are taxable as ordinary income, and its distributions from
long-term capital gains are taxed as long-term capital gains. Such distributions
are taxable when they are paid, whether taken in cash or reinvested in
additional shares, except that distributions declared in October, November or
December and paid during the following January are taxable as if paid and
received on December 31. Dividends received from the Fund by corporate
shareholders are not entitled to the dividends-received deduction. The Fund
sends tax statements to its shareholders (with copies to the Internal Revenue
Service (the "IRS")) by January 31 showing the amounts and tax status of
distributions made (or deemed made) during the preceding calendar year.
REDEMPTION OR EXCHANGES
Investors may realize a gain or loss when redeeming (selling) or exchanging
shares. For most types of accounts, the Fund reports the proceeds to the IRS
annually. Because the shareholders' tax treatment also depends on their purchase
price and personal tax positions, shareholders should keep their regular account
statements to use in determining their tax. See "Buying a Dividend".
"BUYING A DIVIDEND"
On the record date for a distribution of ordinary income or capital gains
dividend, the net asset value of the Fund is reduced by the amount of the
distribution. An investor who buys shares just before the record date ("buying a
dividend") will pay the full price for the shares and then receive a portion of
the purchase price back as a taxable distribution.
OTHER TAX INFORMATION
The information above is only a summary of some of the federal income tax
consequences generally affecting the Fund and its shareholders, and no attempt
has been made to discuss individual tax consequences. A prospective investor
should also review the more detailed discussion of federal income tax
considerations in the Statement of Additional Information. In addition to
federal income tax, a shareholder may be subject to state or local taxes on the
shareholder's investment, depending on the laws in the shareholder's area.
Investors considering an investment in the Fund should consult their tax adviser
to determine whether the Fund is suitable to their particular tax situation.
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When investors sign their account application, they are asked to provide their
correct social security or taxpayer identification number and other required
certifications. If investors do not comply with IRS regulations, the IRS can
require the Fund to withhold 31% of taxable distributions and redemptions from
their account.
PERFORMANCE
From time to time, performance information for the Fund showing total return may
be presented in advertisements, sales literature and in reports to shareholders.
Such performance figures are based on historical earnings and are not intended
to indicate future performance. Average annual total return will be calculated
over a stated period of more than one year. Average annual total return is
measured by comparing the value of an investment at the beginning of the
relevant period (as adjusted for sales charges, if any) to the redemption value
of the investment at the end of the period (assuming immediate reinvestment of
any dividends or capital gains distributions) and annualizing that figure.
Aggregate total return is calculated similarly to average annual total return,
except that the resulting difference is not annualized.
From time to time performance information for the Fund showing the yield and/or
effective yield for each class of shares may also be presented in
advertisements, sales literature and in reports to shareholders. Yields reflect
the deduction of the maximum sales charge. Such performance figures are based on
historical earnings and are not intended to indicate future performance. Yield
will be computed by dividing the Fund's net investment income per share earned
during a recent thirty-day period by the Fund's maximum offering price per share
(reduced by any undeclared earned income expected to be paid shortly as a
dividend) on the last day of the period and annualizing the result. Effective
yield is computed in a similar manner, but, when annualized, the income earned
by an investment in the Fund is assumed to be reinvested. The effective yield
will be slightly higher than the yield because of the compounding effect of this
assumed reinvestment.
Investors may also judge, and the Victory Portfolios may at times advertise, the
performance of the Fund by comparing it to the performance of other mutual funds
with comparable investment objectives and policies, which performance may be
contained in various unmanaged mutual fund or market indices or rankings such as
those prepared by Dow Jones & Co., Inc. and Standard & Poor's Corporation, in
publications issued by Lipper Analytical Services, Inc., and in the following
publications: IBC/Donoghue's Money Fund Reports, Ibbotson Associates, Inc.,
Morningstar, CDA/Wiesenberger, Money Magazine, Forbes, Barron's, The Wall Street
Journal, The New York Times, Business Week, American Banker, Fortune,
Institutional Investor, U.S.A. Today and local newspapers. In addition, general
information about the Fund that appears in publications such as those mentioned
above may also be quoted or reproduced in advertisements, sales literature or in
reports to shareholders.
Performance is a function of the type and quality of instruments held in the
Fund's portfolio, operating expenses, and market conditions. Consequently,
current performance will fluctuate and is not necessarily representative of
future results. Any fees charged by service providers with respect to customer
accounts for investing in shares of the Fund will not be reflected in
performance calculations.
Additional information regarding the performance of each of the Victory
Portfolios is included in the Victory Portfolios' annual report, which is
available free of charge by calling 800-539-3863.
FUND ORGANIZATION AND FEES
The Victory Portfolios is an open-end management investment company, commonly
known as a mutual fund, and currently consisting of twenty-eight series
portfolios, four of which are inactive. The Victory Portfolios has been
operating continuously since 1986, when it was created under Massachusetts law
as a Massachusetts business trust although certain of its funds have a prior
operating history from their predecessor funds. On February 29, 1996 the Victory
Portfolios converted from a Massachusetts business trust to a Delaware business
trust. The Victory Portfolios' offices are located at 3435 Stelzer Road,
Columbus, OH 43219-3035.
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Overall responsibility for management of the Victory Portfolios rests with its
Board of Trustees, who are elected by the shareholders of the Victory
Portfolios.
INVESTMENT ADVISER AND SUB-ADVISER
KeyCorp Mutual Fund Advisers, Inc. is the investment adviser to the Fund. Key
Advisers directs the investment of the Victory Portfolios' assets, subject at
all times to the supervision of the Victory Portfolios' Board of Trustees. Key
Advisers continually supervises the investment and reinvestment of cash,
securities and other property comprising the assets of the Victory Portfolios.
Key Advisers was organized as an Ohio corporation on July 27, 1995 and is
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended. It is a wholly-owned subsidiary of KeyCorp Asset Management
Holdings, Inc., which is a wholly-owned subsidiary of Society National Bank, a
wholly-owned subsidiary of KeyCorp. Affiliates of Key Advisers manage
approximately $37 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals and mutual funds.
For the services provided and expenses incurred pursuant to its investment
advisory agreement with the Victory Portfolios respecting the Fund, Key Advisers
receives a fee, computed daily and paid monthly, at the annual rate of one
percent (1.00%) of the average daily net assets of the Fund. The advisory fees
for the Fund have been determined to be fair and reasonable in light of the
services provided to the Fund. Key Advisers may periodically waive all or a
portion of its advisory fee with respect to the Fund to increase the net income
of the Fund available for distribution as dividends. Prior to January 1, 1996,
the Sub-Adviser (Society Asset Management, Inc.) served as investment adviser to
the Fund. During the Fund's fiscal period ended October 31, 1995, the
Sub-Adviser received investment advisory fees aggregating .__% of the average
daily net assets of the Fund.
Under the investment advisory agreement between the Victory Portfolios, on
behalf of the Fund, and Key Advisers, Key Advisers may delegate a portion of its
responsibilities to a subadviser.
Key Advisers has entered into an investment sub-advisory agreement with T. Rowe
Price, on behalf of the Fund. For its services under the investment sub-advisory
agreement, Key Advisers pays the Sub-Adviser sub-advisory fees as a percentage
of average daily net assets as follows: 25% of average daily net assets up to
$100 million and .20% of average daily net assets in excess of $100 million.
T. Rowe Price serves as the investment sub-adviser for the Fund pursuant to an
investment sub-advisory agreement dated June 5, 1995 between Key Advisers and
the Sub-Adviser, which was approved by the shareholders of the Fund at the
shareholders' meeting held on May 19, 1995. The Sub-Adviser, which maintains its
principal office at 100 East Pratt Street, Baltimore, Maryland 21202, was
founded in 1937 by the late Thomas Rowe Price, Jr. As of December 31, 1994, the
firm and its affiliates managed over $57 billion for over 3 million individual
and institutional investor accounts.
The Investment Advisory Committee of the Sub-Adviser, which consists of Jonathan
M. Greene, Chairman, Richard T. Whitney, Donald J. Peters and K. D. Farrow, is
primarily responsible for the investment management of the Fund. The Committee
Chairman has day to day responsibility for managing the Fund and works with the
Committee in developing and executing the Fund's investment program. Mr. Greene,
Vice President, has been with the Sub-Adviser since 1974, and has been managing
investments since 1979.
ADMINISTRATOR AND DISTRIBUTOR
Concord Holding Corporation is the Administrator for the Fund. Victory
Broker-Dealer Services, Inc. is the Fund's principal underwriter and
Distributor.
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The Administrator generally assists in all aspects of the Fund's administration
and operation. For expenses incurred and services provided as Administrator
pursuant to its management and administration agreement with the Victory
Portfolios, the Administrator receives a fee from the Fund, computed daily and
paid monthly, at an annual rate of fifteen one-hundredths of one percent (.15%)
of the Fund's average daily net assets. The Administrator may periodically waive
all or a portion of its administrative fee with respect to the Fund to increase
the net income of the Fund available for distribution as dividends. During the
fiscal period May 1, 1995 to October 31, 1995, and the fiscal year ended April
30, 1995, the Fund paid administration fees of .15% of its average daily net
assets.
TRANSFER AGENT AND FUND ACCOUNTANT
Primary Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741,
serves as the Fund's Transfer Agent pursuant to a Transfer Agency and
Shareholder Service Agreement with the Victory Portfolios and receives a fee for
such services based on various criteria, including assets, transactions and the
number of Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, OH 43219,
provides certain accounting services for the Fund pursuant to a Fund Accounting
Agreement and receives a fee for such services.
SHAREHOLDER SERVICING
Shareholder services are provided to the Fund pursuant to agreements between the
Victory Portfolios and various shareholder servicing agents, including Key Trust
Company of Ohio, N.A. and its affiliates and other financial institutions and
securities brokers (each a "Shareholder Servicing Agent"). Each Shareholder
Servicing Agent generally will provide support services to shareholders by
establishing and maintaining accounts and records, processing dividend and
distribution payments, providing account information, arranging for bank wires,
responding to routine inquires, forwarding shareholder communication, assisting
in the processing of purchase, exchange and redemption requests, and assisting
shareholders in changing dividend options, account designations and addresses.
For expenses incurred and services provided as Shareholder Servicing Agent
pursuant to its respective Shareholder Servicing Agreement, the Fund pays each
Shareholder Servicing Agent a fee computed daily and paid monthly, in amounts
aggregating not more than twenty-five one-hundredths of one percent (.25%) of
the average daily net assets of the Fund per year. A Shareholder Servicing Agent
may periodically waive all or a portion of its respective shareholder servicing
fees with respect to the Fund to increase the net income of the Fund available
for distribution as dividends. During the fiscal year ended April 30, 1995, the
Fund paid Shareholder Servicing fees of _____% of the Fund's average daily net
assets. During the fiscal period ended October 31, 1995, the Fund paid
Shareholder Servicing fees of _____% of the Fund's average daily net assets.
EFFECT OF BANKING LAWS
Key Advisers and the Sub-Adviser believe that they may perform the investment
advisory services for the Fund contemplated by the investment advisory
(sub-advisory) agreements (the "Advisory Agreements") with the Fund. In the
Advisory Agreement with the Key Advisers and the Sub-Adviser have represented
that they possess the legal authority to perform the investment advisory
services contemplated therein and described in this Prospectus. Key Trust
Company of Ohio, N.A. and its affiliates also believe that they also may perform
the services for the Victory Portfolios contemplated by the Shareholder
Servicing Agreement with the Victory Portfolios without violating applicable
banking laws and regulations. Future changes in federal or state statutes and
regulations relating to permissible activities of banks or bank holding
companies and their subsidiaries and affiliates, as well as further judicial or
administrative decisions or interpretations of present and future statutes and
regulations, could change the manner in which Key Advisers, the Sub-Adviser, Key
Trust Company of Ohio, N.A. and its affiliates could continue to perform such
services for the Victory Portfolios. See the Statement of Additional Information
("Glass-Steagall Act") for further discussion.
27
<PAGE> 384
EXPENSES
For the fiscal year ended October 31, 1995, the Fund's total operating expenses
were [____%] of the Fund's average net assets.
CUSTODIAN
Key Trust Company of Ohio, N.A. serves as custodian for the Fund and receives
fees for its services.
INDEPENDENT ACCOUNTS
Coopers & Lybrand L.L.P. serves as the Fund's independent accountants.
ADDITIONAL INFORMATION
The Victory Portfolios may issue an unlimited number of shares and classes of
the Fund. Shares of each class of the Fund participate equally in dividends and
distributions and have equal voting, liquidation and other rights. When issued
and paid for, shares will be fully paid and nonassessable by the Victory
Portfolios and will have no preference, conversion, exchange or preemptive
rights. Shareholders are entitled to one vote for each full share owned and
fractional votes for fractional shares owned. For those investors with qualified
trust accounts, the trustee will vote the shares at meetings of the Fund's
shareholders in accordance with the shareholder's instructions. The trustee will
forward to these shareholders all communications received by the trustee,
including proxy statements and financial reports. The Victory Portfolios and the
Fund are not required to hold annual meetings of shareholders and in ordinary
circumstances do not intend to hold such meetings. The Trustees may call special
meetings of shareholders for action by shareholder vote as may be required by
the 1940 Act or the Victory Portfolio's Delaware Trust Instrument. Under certain
circumstances, the Trustees may be removed by action of the Trustees or by the
shareholders. Shareholders holding 10% or more of the Victory Portfolios'
outstanding shares may call a special meeting of shareholders for the purpose of
voting upon the question of removal of Trustees.
The Victory Portfolio's Board of Trustees may authorize the Victory Portfolios
to offer other funds which may differ in the types of securities in which their
assets may be invested.
Key Advisers, the Sub-Adviser and the Victory Portfolios have adopted Codes of
Ethics (the "Codes") which require investment personnel (a) to pre-clear all
personal securities transactions, (b) to file reports regarding such
transactions, and (c) to refrain from personally engaging in (i) short-term
trading of a security, (ii) transactions involving a security within seven days
of a Fund transaction involving the same security, and (iii) transactions
involving securities being considered for investment by a Fund. The Codes also
prohibit investment personnel from purchasing securities in an initial public
offering. Personal trading reports are reviewed periodically by Key Advisers or
the Sub-Adviser, and the Board of Trustees reviews annually such reports
(including information on any substantial violations of the Codes). Violations
of the Codes may result in censure, monetary penalties, suspension or
termination of employment.
DELAWARE LAW
The Delaware Business Trust Act provides that a shareholder of a Delaware
business trust shall be entitled to the same limitation of personal liability
extended to stockholders of Delaware corporations. In light of Delaware law, the
nature of the Victory Portfolios' business, and the nature of its assets,
management of Victory Portfolios believe that the risk of personal liability to
a Fund shareholder would be extremely remote.
28
<PAGE> 385
In the unlikely event a shareholder is held personally liable for the Victory
Portfolios' obligations, the Victory Portfolios is required to use its property
to protect or compensate the shareholder. On request, the Victory Portfolios
will defend any claim made and pay any judgment against a shareholder for any
act or obligation of the Victory Portfolios. Therefore, financial loss resulting
from liability as a shareholder will occur only if the Victory Portfolios itself
cannot meet its obligations to indemnify shareholders and pay judgments against
them.
Delaware law authorizes electronic or telephonic communications between
shareholders and the Victory Portfolios. Under Delaware law, the Successor
Company has the flexibility to respond to future business contingencies. For
example, the Trustees will have the power to incorporate the Victory Portfolios,
to merge or consolidate it with another entity, to cause each fund to become a
separate trust, and to change the Victory Portfolio's domicile without a
shareholder vote. This flexibility could help reduce the expense and frequency
of future shareholder meetings for non-investment related issues.
MISCELLANEOUS
Shareholders will receive Semi-Annual Reports, which are unaudited, and Annual
Reports, which are audited by independent public accountants, describing the
investment operations of the Fund. Each of these reports, when available for a
particular fiscal year end or the end of a semi-annual fiscal period, is
incorporated herein by reference. The Victory Portfolios may include information
in their Annual Reports and Semi-Annual Reports to shareholders that (i)
describes general economic trends, (ii) describes general trends within the
financial services industry or the mutual fund industry, (iii) describes past or
anticipated portfolio holdings for the Fund or (iv) describes investment
management strategies for the Victory Portfolios. Such information is provided
to inform shareholders of the activities of the Victory Portfolios for the most
recent fiscal year or semi-annual fiscal period and to provide the views of Key
Advisers, the Sub-Adviser and/or the Victory Portfolios' officers regarding
expected trends and strategies.
Inquiries regarding the Victory Portfolios or the Fund may be directed in
writing to the Victory Portfolios at Primary Funds Service Corporation, P.O. Box
9741, Providence, RI 02940-9741, or by telephone, toll-free, at 800-539-3863.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE VICTORY
PORTFOLIOS OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING
BY THE VICTORY PORTFOLIOS OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE.
29
<PAGE> 386
DRAFT
The
VICTORY
Portfolios
STOCK INDEX FUND
PROSPECTUS For current yield, purchase, and redemption information
March 1, 1996 call 800-539-FUND or 800-539-3863
THE VICTORY PORTFOLIOS (the "Victory Portfolios") is a registered open-end
management investment company that offers investors a selection of money market,
fixed-income, municipal bond, domestic and international equity portfolios. This
Prospectus relates to The Victory Stock Index Fund (the "Fund") a diversified
portfolio. KeyCorp Mutual Fund Advisers, Inc., Cleveland, Ohio, an indirect
subsidiary of KeyCorp, is the investment adviser to the Fund ("Key Advisers" or
the "Adviser"). Society Asset Management, Inc., Cleveland, Ohio, an indirect
subsidiary of KeyCorp, is the investment subadviser to the Fund ("Society" or
the "Sub-Adviser"). Concord Holding Corporation is the Fund's administrator (the
"Administrator"). Victory Broker-Dealer Services, Inc. is the Fund's distributor
(the "Distributor").
The Fund seeks to provide long-term capital appreciation by attempting to match
the investment performance of the Standard & Poor's 500 Composite Stock
Index.(1)
Please read this Prospectus before investing. It is designed to provide you with
information and to help you decide if the Fund's goals match your own. Retain
this document for future reference. A Statement of Additional Information (dated
March 1, 1996) for the Fund and an annual report for the Fund's fiscal year
ended October 31, 1995 have been filed with the Securities and Exchange
Commission and are incorporated herein by reference. The Statement of Additional
Information is available without charge upon request by calling 800-539-3863.
SHARES OF THE FUND ARE:
- - NOT INSURED BY THE FDIC;
- - NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY KEYCORP
BANK, ANY OF ITS AFFILIATES, OR ANY OTHER BANK;
- - SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("COMMISSION") OR ANY SECURITIES REGULATORY AUTHORITY OF ANY
STATE, NOR HAS THE COMMISSION OR ANY SUCH STATE AUTHORITY PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
(1) "Standard & Poor's 500" is a registered service mark of Standard &
Poor's Corporation, which does not sponsor and is in no way affiliated
with the Fund.
- 1 -
<PAGE> 387
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
- ----------------- ----
<S> <C>
Summary of Fund Expenses 2
Financial Highlights 3
The Fund's Investment Objective 4
The Fund's Investment Policies and Risk Factors 4
How to Invest, Exchange and Redeem 8
Dividends, Distributions and Taxes 14
Performance 16
Fund Organization and Fees 17
Additional Information 19
</TABLE>
- 2 -
<PAGE> 388
SUMMARY OF FUND EXPENSES
The table below summarizes the expenses associated with the Fund. This standard
format was developed for use by all mutual funds to help you make your
investment decisions. Of course, you should consider this expense information
along with other important information in this Prospectus, including the Fund's
investment objective, investment policies and risk factors, and financial
highlights.
SHAREHOLDER TRANSACTION EXPENSES(1)
<TABLE>
<S> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of offering
price) 4.75%
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee None
Exchange Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES AFTER EXPENSE WAIVERS AND REIMBURSEMENTS
(as a percentage of average net assets)
<TABLE>
<S> <C>
Management Fee .45%
Other Expenses .00%
Total Operating Expenses(2) .11%
----
0.56%
</TABLE>
(1) Subsidiaries, correspondents, affiliated banks and non-bank affiliates
of KeyCorp may charge a Customer's (as defined in the Prospectus)
account fees for services provided in connection with investment in the
Fund. (See "How To Invest, Exchange and Redeem.")
(2) These amounts include an estimate of the shareholder servicing fees the
Fund expects to pay. (See "Fund Organization and Fees-Shareholder
Servicing.)
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return and (2) full redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
The Stock Index Fund $53 $65 $77 $114
</TABLE>
The purpose of the table above is to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. See "Fund Organization and Fees" for a more complete discussion of
annual operating expenses of the Fund. The foregoing example is based upon
expenses for the fiscal year ended October 31, 1995 and expenses that the Fund
is expected to incur during the current fiscal year. THE FOREGOING EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
- 3 -
<PAGE> 389
FINANCIAL HIGHLIGHTS
THE FUND'S FINANCIAL HISTORY
The table below sets forth certain financial information with respect to the
financial highlights for the Fund for the period indicated. The information
below (except as indicated) has been derived from financial statements audited
by Coopers & Lybrand L.L.P., independent accountants for the Victory Portfolios,
whose report thereon, together with the financial statements of the Fund, are
incorporated by reference into or contained in the Statement of Additional
Information.
THE VICTORY STOCK INDEX FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FISCAL YEAR SIX MONTHS
ENDED ENDED DEC. 3, 1993
OCTOBER 31, APRIL 30, TO OCTOBER 31,
1995 1995 1994(A)
------------- ---------- -------
(Unaudited)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $10.18 $ 10.00
------ -------
Investment Activities
Net investment income [To be 0.12 0.20
Net realized and unrealized inserted]
gains (losses) on investments 0.92 0.16
---- ----
Total from Investment Activities 1.04 0.36
---- ----
Distributions
Net investment income (0.13) (0.18)
---- ------
NET ASSET VALUE, END OF PERIOD $11.09 $ 10.18
Total Return 10.28%(b) 3.66%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $105,834 $89,686
Ratio of expenses to average net
assets 0.58%(c) 0.58%(c)
Ratio of net investment income to
average net assets 2.48%(c) 2.35%(c)
Ratio of expenses to average net
assets* 0.92%(c) 1.10%(c)
Ratio of net investment income to
average net assets* 2.14%(c) 1.82%(c)
Portfolio Turnover 11.06% 1.44%
</TABLE>
* During the period the investment advisory, administration, fund
accounting and/or shareholder service fees were voluntarily reduced. If
such voluntary fee reductions had not occurred, the ratios would be as
indicated.
(a) Period from commencement of operations.
(b) Aggregate.
(c) Annualized.
- 4 -
<PAGE> 390
THE FUND'S INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital appreciation by attempting to match
the investment performance of the Standard & Poor's 500 Composite Stock Index
(the "S&P 500 Index" or the "Index"). The investment objective of the Fund is
fundamental and may not be changed without a vote of the holders of a majority
of the Fund's outstanding voting securities (as defined in the Statement of
Additional Information). There can be no assurance that the Fund will achieve
its investment objective.
THE FUND'S INVESTMENT POLICIES AND RISK FACTORS
The Fund pursues its objective by following a policy of attempting to duplicate
the capital performance and dividend income of the S&P 500 Index by investing
primarily in many of the stocks which comprise the S&P 500 Index and secondarily
in stock futures, while minimizing transaction costs. The S&P 500 Index is
composed of 500 common stocks chosen on the basis of market value and industry
diversification. While most issuers are among the 500 largest U.S. companies in
terms of aggregate market value, some other stocks are included for purposes of
diversification. The Fund attempts to duplicate the investment results of the
S&P 500 Index. No attempt is made to manage the Fund in the traditional sense
using economic, financial and market analysis. The Fund may hold only a
representative portion of the stocks in the Index due to the illiquidity of some
stocks or other factors. The Fund may compensate for the omission of certain
stocks by purchasing stocks not included in the Index that are similar to those
omitted if Key Advisers or the SubAdviser believes those purchases will reduce
"tracking error" (the difference between the Fund's investment results (before
expenses) and that of the Index). To minimize tracking error when the Fund does
not hold all stocks in the Index in proportion to their Index weighting, Key
Advisers or the Sub-Adviser may use statistical analyses in selecting stocks. In
connection with engaging in futures transactions, the Fund may hold cash, cash
equivalents, and/or U.S. Government Securities. See "Futures Contracts" in this
prospectus and in the Statement of Additional Information.
Because of the Fund's objective, securities may be purchased, retained, and sold
by the Fund when such transactions would not be consistent with traditional
investment criteria. Adverse performance will ordinarily not result in the
elimination of a stock from the Fund's portfolio. The Fund will generally remain
fully invested in common stocks even when stock prices are generally falling. In
addition, Key Advisers or the Sub-Adviser may eliminate one or more securities
or elect not to increase the Fund's position in such securities notwithstanding
the continued listing of such securities in the S&P 500 Index in the following
circumstances: (i) the stock is no longer publicly traded as in the case of a
leveraged buyout or merger; or (ii) an unexpected adverse development occurs
with respect to a company such as bankruptcy or insolvency. Accordingly, an
investor is exposed to a greater risk of loss (and a corresponding greater
prospect of gain) from fluctuations in the value of such securities than would
be the case if the Fund was not so invested in such securities. In addition, the
share price of the Fund is expected to be volatile, and investors should be able
to sustain sudden and sometimes substantial fluctuations in the value of their
investment. Brokerage costs, fees, operating expenses and tracking error may
cause the Fund's total return to be lower than that of the S&P 500 Index.
The Fund may invest in preferred stocks, investment-grade corporate bonds and
notes, warrants, and high quality short-term debt obligations (including
variable amount master demand notes), bankers' acceptances, certificates of
deposit, repurchase agreements, obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, and demand and time deposits of
domestic and foreign banks and savings and loan associations.
Changes in the value of portfolio securities will not affect cash income, if
any, derived from these securities but will affect the Fund's net asset value.
Because the Fund invests primarily in equity securities, which fluctuate in
value, the Fund's shares will fluctuate in value.
The investment policies of the Fund may be changed without an affirmative vote
of the holders of a majority of the Fund's outstanding voting securities unless
(1) a policy is expressly deemed to be a fundamental policy of the Fund or (2) a
policy is expressly deemed to be changeable only by such majority vote.
- 5 -
<PAGE> 391
The Fund is advised by Key Advisers, an indirect subsidiary of KeyCorp, which
purchases securities for the Fund consistent with its investment objective and
policies and which meet the quality and maturity characteristics established for
the Fund.
From time to time, the Fund, to the extent consistent with its investment
objective, policies and restrictions, may invest in securities of issuers with
which Key Advisers or the Sub-Adviser or its affiliates have a lending
relationship.
ADDITIONAL INFORMATION REGARDING SECURITIES IN WHICH THE FUND MAY INVEST
The following paragraphs provide a brief description of some of the types of
securities in which the Fund may invest, the transactions it may make and
strategies it may adopt. The Fund may, following notice to its shareholders,
take advantage of other investment practices which are not at present
contemplated for use by the Fund or which currently are not available but which
may be developed, to the extent such investment practices are both consistent
with the Fund's investment objective and legally permissible for the Fund. Such
investment practices, if they arise, may involve risks which exceed those
involved in the activities described in this Prospectus.
- - SHORT-TERM OBLIGATIONS. While the Fund will normally be predominantly invested
in equity securities, there may be times when, in the opinion of Key Advisers or
the Sub-Adviser, market conditions warrant that, for temporary defensive
purposes, the Fund may hold more than 20% of its total assets in short-term
obligations. To the extent that the Fund's assets are so invested, they will not
be invested so as to meet its investment objective. The instruments may include
high grade liquid debt securities such as commercial paper, certificates of
deposit, bankers' acceptances, repurchase agreements which mature in less than
seven days and United States Treasury bills. Bankers' acceptances are
instruments of United States banks which are drafts or bills of exchange
"accepted" by a bank or trust company as an obligation to pay on maturity. For a
discussion of repurchase agreements, see below.
- - INVESTMENT GRADE SECURITIES. The Fund may invest in obligations which are
rated at the time of purchase within the four highest rating categories assigned
by a nationally recognized statistical ratings organization ("NRSRO")
(investment grade) or, if unrated, which Key Advisers or the Sub-Adviser
determines to be of comparable quality. The applicable securities ratings are
described in the Appendix to the Statement of Additional Information.
- - OPTIONS. The Fund may engage in writing call options from time to time. The
Fund will write only covered call options (options on securities owned by the
Fund and index options). Such options must be listed on a national securities
exchange and issued by the Options Clearing Corporation. In order to close out a
call option it has written, the Fund will enter into a "closing purchase
transaction", i.e., the purchase of a call option on the same security with the
same exercise price and expiration date as the call option which the Fund
previously wrote on any particular security. When a portfolio security subject
to a call option is sold, the Fund will effect a closing purchase transaction to
close out any existing call option on that security. If the Fund is unable to
effect a closing purchase transaction, it will not be able to sell the
underlying security until the option expires or the Fund delivers the underlying
security upon exercise. Upon the exercise of an option, the Fund is not entitled
to the gains, if any, on securities underlying the options. The Fund intends to
limit its investment in call and index options to 25% of its total assets.
- - FUTURES CONTRACTS. The Fund may also 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. For example, when interest rates are expected to rise or market values of
portfolio securities are expected to fall, the Fund can seek to offset a decline
in the value of its portfolio securities by entering into futures contract
transactions. When interest rates
- 6 -
<PAGE> 392
are expected to fall or market values are expected to rise, the Fund, through
the purchase of such contracts, can attempt to secure better rates or prices
than might later be available in the market when it effects anticipated
purchases.
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.
Aggregate initial margin deposits for futures contracts, and premiums paid for
related options, may not exceed 5% of a fund's total assets (other than in
connection with bona fide hedging purposes), and the value of securities that
are the subject of such futures and options (both for receipt and delivery) may
not exceed one-third of the market value of a fund's total assets. Futures
transactions will be limited to the extent necessary to maintain each fund's
qualification as a regulated investment company.
Futures transactions involve brokerage costs and require the Fund to segregate
assets to cover contracts that would require it to purchase securities or
currencies. A fund may lose the expected benefit of futures transactions if
interest rates, exchange rates or securities prices move in an unanticipated
manner. Such unanticipated changes may also result in poorer overall performance
than if the fund had not entered into any futures transactions. In addition, the
value of a fund's futures positions may not prove to be perfectly or even highly
correlated with the value of its portfolio securities 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.
- - ZERO COUPON BONDS. The Fund is permitted to purchase both zero coupon U.S.
government securities and zero coupon corporate securities ("zero coupon
bonds"). Zero coupon bonds are purchased at a discount from the face amount
because the buyer receives only the right to receive a fixed payment on a
certain date in the future and does not receive any periodic interest payments.
The effect of owning instruments which do not make current interest payments is
that a fixed yield is earned not only on the original investment but also, in
effect, on all discount accretion during the life of the obligations. This
implicit reinvestment of earnings at the same rate eliminates the risk of being
unable to reinvest distributions at a rate as high as the implicit yields on the
zero coupon bond, but at the same time eliminates the holder's ability to
reinvest at higher rates in the future. For this reason, zero coupon bonds are
subject to substantially greater price fluctuations during periods of changing
market interest rates than are comparable securities which pay interest
currently, which fluctuation increases the longer the period to maturity.
- - RECEIPTS. In addition to bills, notes and bonds issued by the U.S. Treasury,
the Fund may also purchase separately traded interest and principal component
parts of such obligations that are transferable through the Federal book entry
system, known as Separately Traded Registered Interest and Principal Securities
("STRIPS") and Coupon Under Book Entry Safekeeping ("CUBES"). These instruments
are issued by banks and brokerage firms and are created by depositing Treasury
notes and Treasury bonds into a special account at a custodian bank; the
custodian holds the interest and principal payments for the benefit of the
registered owners of the certificates or receipts. The custodian arranges for
the issuance of the certificates or receipts evidencing ownership and maintains
the register. Receipts include Treasury Receipts ("TRs"), Treasury Investment
Growth Receipts ("TIGRs") and Certificates of Accrual on Treasury Securities
("CATS").
STRIPS, CUBES, TRs, TIGRs and CATS are sold as zero coupon securities, which
means that they are sold at a substantial discount and redeemed at face value at
their maturity date without interim cash payments of interest or principal. This
discount is amortized over the life of the security, and such amortization will
constitute the income earned on the security for both accounting and tax
purposes. Because of these features, these securities may be subject to greater
interest rate volatility than interest-paying U.S. Treasury obligations. The
Fund will limit its investment in such instruments to 20% of its total assets.
- - SECURITIES LENDING. In order to generate additional income, the Fund may, from
time to time, lend its portfolio securities to broker-dealers, banks or
institutional borrowers of securities. The Fund must receive collateral equal
- 7 -
<PAGE> 393
to 100% of the securities' value plus any interest due in the form of cash or
U.S. Government securities, which collateral must be marked to market daily by
Key Advisers or the Sub-Adviser Should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Fund. During
the time portfolio securities are on loan, the borrower pays the Fund amounts
equal to any dividends or interest paid on such securities plus any interest
negotiated between the parties to the lending agreement. Loans are subject to
termination by the Fund or the borrower at any time. While the Fund does not
have the right to vote securities on loan, the Fund intends to terminate the
loan and regain the right to vote if that is considered important with respect
to the investment. The Fund will only enter into loan arrangements with
broker-dealers, banks or other institutions which Key Advisers or the
Sub-Adviser has determined are creditworthy under guidelines established by the
Victory Portfolios' Board of Trustees. The Fund intends to limit its securities
lending to 33% of total assets.
- - WHEN-ISSUED SECURITIES. The Fund may purchase securities on a when-issued or
delayed delivery basis. These transactions are arrangements in which the Fund
purchases securities with payment and delivery scheduled for a future time. When
a fund agrees to purchase securities on a when-issued basis, such fund's
custodian must set aside cash or liquid portfolio securities equal to the amount
of that commitment in a separate account, and may be required to subsequently
place additional assets in the separate account to maintain equivalence with the
fund's commitment. Prior to delivery of when-issued securities, their value is
subject to fluctuation and no income accrues until their receipt. The Fund
engages in when-issued and delayed delivery transactions only for the purpose of
acquiring portfolio securities consistent with its respective investment
objective and policies, and not for investment leverage. In when-issued and
delayed delivery transactions, the Fund relies on the seller to complete the
transaction; its failure to do so may cause the Fund to miss a price or yield
considered to be advantageous.
- - VARIABLE AND FLOATING RATE SECURITIES. The Fund may purchase variable and
floating rate notes with ratings within the four highest rating groups assigned
by an NRSRO or, if unrated, which Key Advisers or the Sub-Adviser deems to be of
comparable quality. The interest rates on these securities may be reset daily,
weekly, quarterly, or some other reset period, and may be subject to a floor or
ceiling. There is a risk that the current interest rate on such obligations may
not accurately reflect existing market interest rates. There may be no active
secondary market with respect to a particular variable or floating rate note.
Variable and floating rate notes for which no readily available market exists
will be purchased in an amount which, together with other illiquid securities
held by the Fund, does not exceed 15% of the Fund's total assets unless such
notes are subject to a demand feature that will permit the Fund to receive
payment of the principal within seven days after demand therefor.
- - REPURCHASE AGREEMENTS. Under the terms of a repurchase agreement, the Fund
acquires securities from financial institutions or registered broker-dealers,
subject to the seller's agreement to repurchase such securities at a mutually
agreed upon date and price. The seller is required to maintain the value of
collateral held pursuant to the agreement at not less than the repurchase price
(including accrued interest). If the seller was to default on its repurchase
obligation or become insolvent, the Fund holding such obligation would suffer a
loss to the extent that the proceeds from a sale of the underlying portfolio
securities were less than the repurchase price, or to the extent that the
disposition of such securities by the Fund is delayed pending court action.
Repurchase agreements are considered by the staff of the Commission to be loans
by the Fund.
- - REVERSE REPURCHASE AGREEMENTS. The Fund may borrow funds for temporary
purposes by entering into reverse repurchase agreements. Pursuant to such
agreements, the Fund sells portfolio securities to financial institutions such
as banks and broker-dealers, and agrees to repurchase them at a mutually
agreed-upon date and price. At the time the Fund enters into a reverse
repurchase agreement, it must place in a segregated custodial account assets
having a value equal to the repurchase price (including accrued interest); the
collateral will be marked to market on a daily basis, and will be continuously
monitored to ensure that such equivalent value is maintained. Reverse repurchase
agreements involve the risk that the market value of the securities sold by the
Fund may decline below the price at which the Fund is obligated to repurchase
the securities. Reverse repurchase agreements are considered to be borrowings
under the Investment Company Act of 1940.
- - INVESTMENT COMPANY SECURITIES. The Fund may invest up to 5% of its total
assets in the securities of any one investment company, but may not own more
than 3% of the securities of any one investment company or invest
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more than 10% of its total assets in the securities of other investment
companies. Pursuant to an exemptive order received by the Victory Portfolios
from the Securities and Exchange Commission, the Fund may invest in the money
market funds of the Victory Portfolios. Key Advisers and/or the Sub-Adviser will
waive its fee attributable to the Fund's assets invested in a fund of the
Victory Portfolios, and, to the extent required by the laws of any state in
which shares of the Fund are sold, Key Advisers and/or the Sub-Adviser will
waive investment advisory fees as to all assets invested in other investment
companies. Because such other investment companies employ an investment adviser,
such investment by the Fund will cause shareholders to bear duplicative fees,
such as management fees, to the extent such fees are not waived by Key Advisers
and/or the Sub-Adviser.
- - PRIVATE PLACEMENT INVESTMENTS. The Fund may invest in commercial paper issued
in reliance on the exemption from registration afforded by Section 4(2) of the
1933 Act. Section 4(2) commercial paper is restricted as to disposition under
federal securities law and is generally sold to institutional investors, such as
the Fund, that agree they are purchasing the paper for investment purposes and
not with a view to public distribution. Any resale by the purchaser must be in
an exempt transaction. Section 4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with the assistance of the
issuer or investment dealers who make a market in Section 4(2) commercial paper,
thus providing liquidity. The Fund believes that Section 4(2) commercial paper
and possibly certain other restricted securities that meet the criteria for
liquidity established by the Trustees are quite liquid. The Fund intends,
therefore, to treat the restricted securities that meet the criteria for
liquidity established by the Trustees, including Section 4(2) commercial paper,
as determined by Key Advisers or the Sub-Adviser, as liquid and not subject to
the investment limitation applicable to illiquid securities. Therefore, the Fund
will generally purchase Section 4(2) commercial paper without regard to the
Fund's restriction on illiquid securities.
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under a position of the Staff of the Commission set
forth in the adopting release for Rule 144A under the 1933 Act (the "Rule"). The
Rule is a nonexclusive safe-harbor for certain secondary market transactions
involving certain Restricted Securities under federal securities laws. The Rule
provides an exemption from registration for resales of Restricted Securities to
qualified institutional buyers. The Rule was expected to further enhance the
liquidity of the secondary market for the types of securities eligible for
resale under Rule 144A. The Victory Portfolios believes that the Staff of the
Commission has left the question of determining the liquidity of all Restricted
Securities to the Trustees. The Trustees consider the following criteria in
determining the liquidity of certain restricted securities: the frequency of
trades and quotes for the security; the number of dealers willing to purchase or
sell the security and the number of other potential buyers; dealer undertakings
to make a market in the security; and the nature of the security and the nature
of the marketplace trades.
INVESTMENT RISKS
CERTAIN INVESTMENT TECHNIQUES. Certain investment management techniques which
the Fund may use, such as the purchase and sale of futures and options,
described above, may expose the Fund to special risks. These products may be
used to adjust the risk and return characteristics of the Fund's portfolio of
investments. These various products may increase or decrease exposure to
security prices, interest rates, or other factors that affect security values,
regardless of the issuer's credit risk. Regardless of whether the intent was to
decrease risk or increase return, if market conditions do not perform
consistently with expectations, these products may result in a loss. In
addition, losses may occur if counterparties involved in transactions do not
perform as promised. These products may expose the Fund to potentially greater
risk of loss than more traditional equity investments.
NOTE: The Statement of Additional Information contains information about certain
investment practices and portfolio securities of the Fund. The Statement of
Additional Information also contains information about investment restrictions
designed to reduce the risk of an investment in the Fund.
LIMITING INVESTMENT RISKS
The following summarizes the Fund's principal investment limitations. A complete
listing is contained in the Statement of Additional Information.
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1. (a) The Fund may borrow money solely for temporary or emergency
purposes, but not in an amount exceeding 33 1/3% of its total assets.
(b) The Fund may borrow money from banks or by engaging in reverse
repurchase agreements. (c) The Fund will not purchase securities when
borrowings exceed 5% of its total assets. If the Fund borrows money,
its share price may be subject to greater fluctuation until the
borrowing is paid off. To this extent, purchasing securities when
borrowings are outstanding may involve an element of leverage.
2. The Fund will not purchase a security if, as a result, more than 15% of
its net assets would be invested in illiquid securities. The Fund may
invest up to 15% of its net assets in illiquid investments (investments
that cannot be readily sold within seven days in the usual course of
business at approximately the price at which the Fund has valued them),
including restricted securities deemed to be illiquid. Under the
supervision of the Trustees, Key Advisers or the Sub-Adviser determines
the liquidity of the Fund's investments. The absence of a trading
market can make it difficult to ascertain a market value for illiquid
investments. Disposing of illiquid investments may involve
time-consuming negotiation and legal expenses, and it may be difficult
or impossible for the Fund to sell them promptly at an acceptable
price.
Except for the Fund's investment objective and the percentage limitation on
borrowing in limitation 1(a), the investment policies described in this
Prospectus are not fundamental. Non-fundamental limitations may be changed
without shareholder approval. Whenever an investment policy or limitation states
a maximum percentage of the Fund's assets that may be invested, such percentage
limitation will be determined immediately after and as a result of the
investment, except in the case of borrowing (or other activities that may be
deemed to result in the issuance of a "senior security" under the 1940 Act). Any
subsequent change in values, assets, or other circumstances will not be
considered when determining whether the investment complies with the Fund's
investment policies and limitations. If the value of a Fund's holdings of
illiquid securities at any time exceeds the percentage limitation applicable at
the time of acquisition due to subsequent fluctuations in value or other
reasons, the Board of Trustees will consider what actions, if any, are
appropriate to maintain adequate liquidity.
PORTFOLIO TRANSACTIONS
Brokerage firms are utilized to conduct securities transactions for the Fund.
Broker-dealers are chosen by judging professional ability and quality of
service.
Key Advisers or the Sub-Adviser may allocate transactions to broker-dealers who
help distribute the Fund's shares or the shares of the other funds of the
Victory Portfolios, to the extent permitted by law. Key Advisers or the
Sub-Adviser will make such allocations only if brokerage fees are comparable to
those charged by non-affiliated, qualified broker-dealers for similar services.
Key Advisers or the Sub-Adviser may engage in short-term trading with respect to
the Fund when it believes it is consistent with the Fund's investment objective
and policies. The frequency of portfolio transactions--the Fund's turnover
rate--will vary from year for to year depending on market conditions.
For the fiscal period ended October 31, 1995, the annual portfolio turnover rate
for the Fund was ______%, compared to _____% for the prior fiscal year.
HOW TO INVEST, EXCHANGE AND REDEEM
HOW TO INVEST
Shares may be purchased directly or through an Investment Professional.
Investment Professionals are securities brokers or other financial institutions
that have entered into selling or servicing agreements with the Fund or the
Distributor. Shares are also available to clients of bank trust departments who
have qualified trust accounts. The
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minimum investment is $500 for the initial purchase and $25 thereafter. Accounts
set up through a bank trust department or an Investment Professional may be
subject to different minimums.
- - Investing Through Your Investment Professional. Your Investment Professional
will place your order with the Transfer Agent on your behalf. You may be
required to establish a brokerage or agency account. Your Investment
Professional will notify you whether subsequent trades should be directed to the
Investment Professional or directly to the Fund's Transfer Agent. Accounts
established with Investment Professionals may have different features,
requirements and fees. In addition, Investment Professionals may charge for
their services. Information regarding these features, requirements and fees will
be provided by the Investment Professional. If you are purchasing shares of any
Fund through a program of services offered or administered by your Investment
Professional, you should read the program materials in conjunction with this
Prospectus.
- - Investing Through The Systematic Investment Plan. You can use the Systematic
Investment Plan to purchase shares directly from your bank account. Please refer
to "Systematic Investment Plan" below for more details.
- - Investing Through Your Bank Trust Department. Your bank trust department may
require a minimum investment and may charge additional fees. Fee schedules for
such accounts are available upon request and are detailed in the agreements by
which a client opens the desired account. Your bank trust department may require
a completed and signed application for the Fund in which an investment is made.
Additional documents may be required from corporations, associations, and
certain fiduciaries. Any account information, such as balances, should be
obtained through your bank trust department. Additional purchases, exchanges or
redemptions should also be coordinated through your bank trust department.
Contact your bank trust department for instructions.
The services rendered by a bank trust department, including affiliates of Key
Advisers or the Sub-Adviser, in the management of its accounts are not
duplicative of any of the services for which Key Advisers or the Sub-Adviser as
the investment adviser or sub-adviser, respectively, is compensated for advising
the Fund. The charges paid by clients of bank trust departments, or their
affiliates, should be considered in calculating the net yield and return on
investments in the Fund, although such charges do not affect the Fund's
dividends and distributions.
INVESTING DIRECTLY
BY MAIL: You may purchase shares by completing and signing an account
application (initial purchase only) and mailing it, together with a check (or
other negotiable bank draft or money order) in the amount of at least the
minimum investment requirement to, The Victory Stock Index Fund, Primary Funds
Service Corporation, P.O. Box 9741, Providence, RI 02940-9741. Subsequent
purchases may be made in the same manner.
BY WIRE: Call 800-539-3863 to set up your Fund account to accommodate wire
transactions. YOU MUST CALL THE TRANSFER AGENT BEFORE WIRING FUNDS. You will
begin to earn dividends on the first business day following receipt of your
wire. Federal funds (monies transferred from one bank to another through the
Federal Reserve System with same-day availability) should be wired to:
Boston Safe Deposit & Trust Co.
ABA #011001234
Credit PFSC DDA #16-918-8
The Victory Portfolios: Stock Index Fund
You must include your account number, your name(s), tax identification number(s)
and the control number assigned by the Transfer Agent. The Fund does not impose
a fee for wire transactions, although your bank may charge you a fee for this
service.
Shares are sold at the public offering price based on the net asset value that
is next determined after the Transfer Agent receives the purchase order. In most
cases, to receive that day's offering price, the Transfer Agent must
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receive your order as of the close of regular trading of the New York Stock
Exchange ("NYSE") (generally 4:00 pm Eastern time) (the "Valuation Time") on
each Business Day (as defined in "Net Asset Value Per Share")of the Fund. If you
buy shares through an Investment Professional, the Investment Professional must
receive your order in a timely fashion on a regular Business Day and transmit it
to the Transfer Agent so that it is received before the close of business that
day. The Transfer Agent may reject any purchase order for the Fund's shares, in
its sole discretion.
It is the responsibility of your Investment Professional to transmit your order
to purchase shares to the Transfer Agent in a timely fashion in order for you to
receive that day's share price. The Fund must receive payment within three
business days after an order is placed. Otherwise, the purchase order will be
canceled and you could be held liable for resulting fees and/or losses.
INVESTMENT REQUIREMENTS
All purchases must be made in U.S. dollars. Checks must be drawn on U.S. banks.
No cash will be accepted. If you make a purchase with more than one check, each
check must have a value of at least $25, and the minimum investment requirement
still applies. The Fund reserves the right to limit the number of checks
processed at one time. If your check does not clear, your purchase will be
canceled and you could be liable for any losses or fees incurred. Payment for
the purchase is expected at the time of the order. If payment is not received
within three business days of the date of the order, the order may be canceled,
and you could be held liable for resulting fees and/or losses.
Shares are sold at their offering price, which is normally net asset value plus
an initial sales charge. However, in some cases, described below, where
purchases are not subject to an initial sales charge, the offering price may be
net asset value. In some cases, reduced sales charges may be available, as
described below. When you invest, the Fund receives the net asset value for your
account. The sales charge varies depending on the amount of your purchase and a
portion may be retained by the Distributor and allocated to your Investment
Professional. The Victory Portfolios has a reinstatement policy which allows an
investor who redeems his/her shares originally purchased with a sales charge to
reinvest within 90 days without incurring an additional sales charge. The
current sales charge rates and commissions paid to Investment Professionals are
as follows:
<TABLE>
<CAPTION>
FRONT-END SALES CHARGE
AS A PERCENTAGE OF:
OFFERING NET AMOUNT DEALER
AMOUNT OF PURCHASE PRICE INVESTED REALLOWANCE
- ------------------ -------- ---------- -----------
<S> <C> <C>
Less than $49,999 4.75% 4.99% 4.00%
$50,000 to $99,999 4.50% 4.71% 4.00%
$100,000 to $249,999 3.50% 3.63% 3.00%
$250,000 to $499,999 2.25% 2.30% 2.00%
$500,000 to $999,999 1.75% 1.78% 1.50%
$1,000,000 and above 0.00% 0.00% *
</TABLE>
* There is no initial sales charge on purchases of $1 million or more.
Investment Professionals will be compensated at the rate of up to 0.25%
of such purchases.
The Distributor reserves the right to reallow the entire commission to dealers.
If that occurs, the dealer may be considered an "underwriter" under Federal
securities laws.
The Distributor may pay all or a portion of any applicable sales charges and
service fees to Investment Professionals who sell shares of the Fund and provide
ongoing sales support services or shareholder support services. For the
three-year period commencing April 30, 1994, for activities in maintaining and
servicing accounts of customers invested in the Fund, First Albany Corporation
("First Albany") and PFIC Securities Corporation ("PFIC") may
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<PAGE> 398
receive payments from the Distributor equal to two-thirds of the Dealer
Retention (as defined below) on any shares of the Fund (and other funds of the
Victory Portfolios) sold by First Albany or PFIC and their broker-dealer
affiliates. "Dealer Retention" is an amount equal to the difference between the
applicable sales charge and such part of the sales charge which is reallowed to
broker-dealers.
The Distributor, at its expense, may also provide additional cash compensation
to dealers in connection with sales of shares of the Fund. The maximum cash
compensation payable by the Distributor is currently 4.00% of the offering
price. In addition, the Distributor will, from time to time and at its own
expense, provide compensation, including financial assistance, to dealers in
connection with conferences, sales or training programs for their employees,
seminars for the public, advertising campaigns regarding one or more Victory
Portfolios and/or other dealer-sponsored special events including payment for
travel expenses, including lodging, incurred in connection with trips taken by
invited registered representatives and members of their families to locations
within or outside of the United States for meetings or seminars of a business
nature. Compensation will include the following types of non-cash compensation
offered through sales contests: (1) vacation trips including the provision of
travel arrangements and lodging; (2) tickets for entertainment events (such as
concerts, cruises and sporting events) and (3) merchandise (such as clothing,
trophies, clocks and pens). Dealers may not use sales of the Fund's shares to
qualify for this compensation to the extent such may be prohibited by the laws
of any state or any self-regulatory organization, such as the National
Association of Securities Dealers, Inc. None of the aforementioned compensation
is paid for by the Fund or its shareholders.
REDUCED SALES CHARGES. You may be eligible to buy shares at reduced sales charge
rates in one or more of the following ways:
LETTER OF INTENT. An investor may obtain a reduced sales charge by means of a
written Letter of Intent which expresses the investor's intention to purchase
shares of the Fund at a specified total public offering price within a 13-month
period.
A Letter of Intent is not a binding obligation upon the investor to purchase the
full amount indicated. The minimum initial investment under a Letter of Intent
is 5% of the total amount. Shares purchased with the first 5% of such amount
will be held in escrow (while remaining registered in the name of the investor)
to secure payment of the higher sales charge applicable to the shares actually
purchased if the full amount indicated is not purchased, and such escrowed
shares will be involuntarily redeemed to pay the additional sales charge, if
necessary. Dividends (if any) on escrowed shares, whether paid in cash or
reinvested in additional shares, are not subject to escrow. The escrowed shares
will not be available for disposal by the investor until all purchases pursuant
to the Letter of Intent have been made or the higher sales charge has been paid.
When the full amount indicated has been purchased, the escrow will be released.
A Letter of Intent may include purchases of shares made not more than 90 days
prior to the date the investor signs a Letter of Intent; however, the 13-month
period during which the Letter of Intent is in effect will begin on the date of
the earliest purchase to be included. An investor may combine purchases that are
made in an individual capacity with (1) purchases that are made by members of
the investor's immediate family and (2) purchases made by businesses that the
investor owns as sole proprietorships, for purposes of obtaining reduced sales
charges by means of a written Letter of Intent. In order to accomplish this,
however, investors must designate on the account application the accounts that
are to be combined for this purpose. Investors can only designate accounts that
are open at the time the Letter of Intent is executed.
If an investor qualifies for a further reduced sales charge because the investor
has either purchased more than the dollar amount indicated on the Letter of
Intent or has entered into a Letter of Intent which includes shares purchased
prior to the date of the Letter of Intent, the difference in the sales charge
will be used to purchase additional shares of the Fund on behalf of the
investor; thus the total purchases (included in the Letter of Intent) will
reflect the applicable reduced sales charge of the Letter of Intent.
For investors who purchase more than the dollar amount indicated on the Letter
of Intent or enter into a Letter of Intent that includes shares purchased prior
to the date of the Letter of Intent and qualify for a reduced sales charge, all
such additional shares will be immediately purchased in the form of additional
shares and credited to the
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<PAGE> 399
investor's account at the then current public offering price applicable to a
single purchase of the total amount of the purchases.
For further information about Letters of Intent, interested investors should
contact the Transfer Agent at 800-539-3863. This program, however, may be
modified or eliminated at any time without notice.
RIGHT OF ACCUMULATION AND CONCURRENT PURCHASES
A shareholder may qualify for a reduced sales charge on purchases of shares of
the Fund and other funds of the Victory Portfolios by combining a current
purchase with purchases of another fund(s) or with certain prior purchases of
shares of the Victory Portfolios. The applicable sales charge is based on the
sum of (i) the purchaser's current purchase plus (ii) the current public
offering price of the purchaser's previous purchases of (a) all shares held by
the purchaser in the Fund and (b) all shares held by the purchaser in any other
fund of the Victory Portfolios (except money market funds).
To receive the applicable public offering price pursuant to the right of
accumulation, shareholders must provide the Transfer Agent with sufficient
information at the time of purchase to permit confirmation of qualification.
Accumulation privileges may be amended or terminated without notice at any time
by the Distributor.
- - WAIVERS OF SALES CHARGES. No sales charge is imposed on sales of shares to the
following categories of persons (which categories may be changed or eliminated
at any time):
(1) Current or retired trustees of the Victory Portfolios; employees,
directors, trustees, and their family members of KeyCorp or an
Affiliated Provider (Affiliated Providers refer to affiliates and
subsidiaries of KeyCorp and service providers to the Victory Portfolios
and the Victory Shares (collectively, the "Victory Group")), dealers
having an agreement with the Distributor and any trade organization to
which Key Advisers, the Sub-Adviser or the Administrator belongs;
(2) Investors who purchase shares for trust, investment management or
certain other advisory accounts established with KeyCorp or any of its
affiliates;
(3) Investors who purchase shares through a 401(k) plan sponsored by an
Affiliated Provider;
(4) Investors who reinvest assets received in a distribution from a
qualified, non-qualified or deferred compensation plan, agency, trust
or custody account that was either (a) maintained by KeyCorp or an
Affiliated Provider, or (b) invested in a fund of the Victory Group;
(5) Investors who, within 90 days of redemption, use the proceeds from the
redemption of shares of another mutual fund complex for which they
previously paid a front end sales charge or sales charge upon
redemption of shares; and
(6) Shareholders of the former Investors Preference Fund For Income, Inc.
and the Investors Preference New York Tax-Free Fund, Inc. who have
continuously maintained accounts with a fund or funds of the Victory
Group with a balance of $250,000 or more (investors with less than
$250,000 will pay any applicable sales loads).
SPECIAL INVESTOR SERVICES
- - THE SYSTEMATIC INVESTMENT PLAN. You can make regular investments in the Fund
and all other funds of the Victory Group with the Systematic Investment Plan by
completing the appropriate section of the account application and attaching a
voided personal check with your bank's magnetic ink coding number across the
front. If your bank account is jointly owned, be sure that all owners sign. You
must first meet the Fund's initial investment
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<PAGE> 400
requirement of $500, then investments may be made monthly by automatically
deducting $25 or more from your bank checking account. For officers, trustees,
directors and employees, including retired directors and employees, of the
Victory Group, KeyCorp and its affiliates, and the Administrator and its
affiliates (and family members of each of the foregoing, i.e., parents and
children) who participate in the Systematic Investment Plan, there is no minimum
initial investment required. You may change the amount of your monthly purchase
at any time. A bank draft form must be completed for this option. Your bank
checking account will be debited on the date indicated on your Account
Application. Shares will be purchased at the offering price next determined
following receipt of the order by the Transfer Agent. You may cancel the
Systematic Investment Plan at any time without payment of a cancellation fee.
Your monthly account statement will reflect systematic investment transactions,
and a debit entry will appear on your bank statement.
- - TELEPHONE TRANSACTIONS. You can initiate any transaction by telephone. You may
call the Transfer Agent toll-free at 800-539-3863 or call your Investment
Professional or bank trust department. See "Shareholder Account Rules and
Policies" for more information about telephone transactions.
- - THE SYSTEMATIC WITHDRAWAL PLAN. You can make regular withdrawals from your
account in any fund of the Victory Group with the Systematic Withdrawal Plan by
completing the appropriate section of the account application. If you own shares
in a fund worth $5,000 or more, you can have monthly, quarterly, semi-annual or
annual checks sent from your account directly to you, to a person named by you,
or to your bank checking account. The required minimum withdrawal is $25. If you
are having checks sent to your bank checking account, attach a voided personal
check with your bank's magnetic coding number across the front of the account
application. If your account is jointly owned, be sure that all owners sign the
application. You may obtain information about the Systematic Withdrawal Plan by
contacting your Investment Professional. Your Systematic Withdrawal Plan
payments are drawn from share redemptions. If Systematic Withdrawal Plan
redemptions exceed dividend distributions paid on your Fund shares, your account
eventually may be exhausted. If any applicable sales charges are applied to new
purchases of shares of the Fund, it is to your disadvantage to buy shares of the
Fund while also making systematic redemptions.
Your account will be debited on the date you indicate on your Account
Application. Shares will be redeemed at the NAV as determined on the debit date
indicated on your Account Application. You may cancel the Systematic Withdrawal
Plan at any time without payment of a cancellation fee. Each Systematic
Withdrawal Plan transaction will appear as a debit entry on your monthly account
statement.
- - RETIREMENT PLANS. Retirement plans can be among the best tax-planning vehicles
available to individuals. Call your Investment Professional for more information
on the plans and their benefits, provisions and fees. Your Investment
Professional can set up your new account in the Fund under one of several
tax-sheltered plans. These plans let you invest for retirement and shelter your
investment income from current taxes. Plans include Individual Retirement
Accounts (IRAs) and Rollover IRAs. Other fees may be charged by the IRA
custodian or trustee.
HOW TO REDEEM SHARES
You may redeem all or a portion of your shares on any day that the Fund is open
for business (see "Share Price" below). Shares will be redeemed at the NAV next
calculated after the Transfer Agent has received the redemption request. If the
Fund account is closed, any accrued dividends will be paid at the beginning of
the following month.
You may redeem shares in several ways:
BY MAIL: Send a written request to: The Victory Portfolios: Stock Index Fund
P.O. Box 9741
Providence, RI 02940-9741
Write a "letter of instruction" with your name, the Fund's name, your Fund
account number, the dollar amount or number of shares to be redeemed, and any
additional requirements that apply to each particular account. You will
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<PAGE> 401
need the letter of instruction signed by all persons required to sign for
transactions, exactly as their names appear on the account application. A
signature guarantee is required if: you wish to redeem more than $10,000 worth
of shares; your Fund account registration has changed within the last 60 days;
the check is not being mailed to the address on your account; the check is not
being made out to the account owner; or the redemption proceeds are being
transferred to another Victory Group account with a different registration. The
following institutions should be able to provide you with a signature guarantee:
banks, brokers, dealers, credit unions (if authorized under state law),
securities exchanges and associations, clearing agencies, and savings
associations. A signature guarantee may not be provided by a notary public. A
signature guarantee is designed to protect you, the Fund, and its agents from
fraud. The Transfer Agent reserves the right to reject any signature guarantee
if (1) it has reason to believe that the signature is not genuine, (2) it has
reason to believe that the transaction would otherwise be improper, or (3) the
guarantor institution is a broker or dealer that is neither a member of a
clearing corporation nor maintains net capital of at least $100,000.
BY WIRE: You may make redemptions by wire provided you have established a Fund
account to accommodate wire transactions. If telephone instructions are received
before Valuation Time (generally 4:00 p.m. Eastern time), proceeds of the
redemption will be wired as federal funds on the next Business Day to the bank
account designated with the Transfer Agent. You may change the bank account
designated to receive an amount redeemed at any time by sending a letter of
instruction with a signature guarantee to the Transfer Agent, Primary Funds
Service Corporation, P.O. Box 9741, Providence, RI 02940-9741.
BY TELEPHONE: To redeem by telephone, you may call the Transfer Agent toll free
at 800-539-3863 or call your Investment Professional or bank trust department.
See "Shareholder Account Rules and Policies" for more information about
telephone transactions.
ADDITIONAL REDEMPTION REQUIREMENTS: The Fund may withhold payment on redemptions
until it is reasonably satisfied that investments made by check have been
collected, which can take up to 15 days. Also, when the NYSE is closed (or when
trading is restricted) for any reason other than its customary weekend or
holiday closings, or under any emergency circumstances as determined by the
Commission to merit such action, the right of redemption may be suspended or the
date of payment postponed for a period of time that may exceed 7 days. In
addition, the Fund reserves the right to advance the time on that day by which
purchase and redemption orders must be received. To the extent that portfolio
securities are traded in other markets on days when the NYSE is closed, the
Fund's NAV may be affected on days when investors do not have access to the Fund
to purchase or redeem shares.
If you are unable to reach the Transfer Agent by telephone (for example, during
times of unusual market activity), consider placing your order by mail directly
to the Transfer Agent. In case of suspension of the right of redemption, you may
either withdraw your request for redemption or receive payment based on the NAV
next determined after the termination of the suspension. If your balance in a
Fund falls below $500, you may be given 60 days' notice to reestablish the
minimum balance (except with respect to officers, trustees, directors and
employees, including retired directors and employees, of the Victory Portfolios,
KeyCorp and its affiliates, and the Administrator and its affiliates (and family
members of each of the foregoing, i.e., parents, children and household members)
participating in the Systematic Investment Plan, to whom no minimum balance
requirement applies). If you do not increase your balance, your account may be
closed and the proceeds mailed to you at the address on record. Shares will be
redeemed at the last calculated NAV on the day the account is closed.
HOW TO EXCHANGE SHARES
Shares of the Fund may be exchanged for shares of certain funds of the Victory
Group at net asset value per share at the time of exchange, without a sales
charge. To exchange shares, you must meet several conditions:
- - Shares of the fund selected for exchange must be available for sale in
your state of residence.
- - The prospectuses of this Fund and the fund whose shares you want to buy
must offer the exchange privilege.
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- - You must hold the shares you buy when you establish your account for at
least 7 days before you can exchange them; after the account is open 7
days, you can exchange shares every regular Business Day.
- - You must meet the minimum purchase requirements for the fund you
purchase by exchange.
- - The registration and tax identification numbers of the two accounts
must be identical.
- - Before exchanging into a fund, obtain and read its prospectus.
Shares of a particular class may be exchanged only for shares of the same class
in the other funds of the Victory Group. For example, you can exchange shares of
this Fund only for Class A shares of another fund. At present, not all of the
funds offer the same two classes of shares. If a fund has only one class of
shares that does not have a class designation, they are "Class A" shares for
exchange purposes. In some cases, sales charges may be imposed on exchange
transactions. Certain funds offer Class A or Class B shares and a list can be
obtained by calling the Transfer Agent at 800-539-3863. Please refer to the
Statement of Additional Information for more details about this policy.
Telephone exchange requests may be made either by calling your Investment
Professional or the Transfer Agent at 800-539-3863 prior to valuation time
(generally 4:00 p.m. Eastern time) on any Business Day.
You can obtain a list of eligible funds of the Victory Group by calling the
Transfer Agent at 800-539-3863. Exchanges of shares involve a redemption of the
shares of the Fund and a purchase of shares of the other portfolio.
There are certain exchange policies you should be aware of:
- - Shares are normally redeemed from one fund and purchased from the other fund
in the exchange transaction on the same Business Day on which the Transfer Agent
receives an exchange request by Valuation Time (generally 4:00 p.m. Eastern
time) that is in proper form, but either fund may delay the purchase of shares
of the fund into which you are exchanging if it determines it would be
disadvantaged by a same-day transfer of the proceeds to buy shares. For example,
the receipt of multiple exchange requests from a dealer in a "market-timing"
strategy might require the disposition of securities at a time or price
disadvantageous to the Fund.
- - Because excessive trading can hurt fund performance and harm shareholders, the
Victory Portfolios reserves the right to refuse any exchange request that will
disadvantage it, or to refuse multiple exchange requests submitted by a
shareholder or dealer.
- - The Fund may amend, suspend or terminate the exchange privilege at any time
upon 60 days' written notice to shareholders.
- - If the Transfer Agent cannot exchange all the shares you request because of a
restriction cited above, only the shares eligible for exchange will be
exchanged.
- - Each exchange may produce a gain or loss for tax purposes.
Shareholders of the former Investors Preference Fund for Income, Inc. and
Investors Preference New York Tax-Free Fund, Inc. will not be subject to any
additional sales load upon an exchange of shares attributable to an Investors
Preference Funds account for shares of other funds of the Victory Portfolios.
SHAREHOLDER ACCOUNT RULES AND POLICIES
- - NET ASSET VALUE PER SHARE. The term "net asset value per share," or "NAV",
means the value of one share. The NAV is calculated by adding the value of all
its investments, plus cash and other assets, deducting liabilities, and then
dividing the result by the number of shares outstanding. The NAV of the Fund is
determined and its
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<PAGE> 403
shares are priced as of the close of regular trading of the New York Stock
Exchange (NYSE), (generally 4:00 p.m. Eastern Time) (the "Valuation Time") on
each Business Day of the Fund. A "Business Day" is a day on which the NYSE is
open for trading, the Federal Reserve Bank of Cleveland is open, and any other
day (other than a day on which no shares of the Fund are tendered for redemption
and no order to purchase any shares is received) during which there is
sufficient trading in its portfolio instruments that the Fund's net asset value
per share might be materially affected. The NYSE or the Federal Reserve Bank of
Cleveland will not be open in observance of the following holidays: New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Columbus Day, Veterans' Day, Thanksgiving Day, and
Christmas Day.
The Fund's securities are valued primarily on the basis of market quotations or,
if quotations are not readily available, by a method that the Board of Trustees
believes accurately reflects fair value. Fair value of these portfolio
securities is determined by an independent pricing service approved by the
Trustees based primarily upon information concerning market transactions and
dealers quotations for similar securities.
- - THE OFFERING OF SHARES may be suspended during any period in which the
determination of net asset value is suspended, and the offering may be suspended
by the Trustees at any time the Trustees believe it is in the Fund's best
interest to do so.
- - TELEPHONE TRANSACTION PRIVILEGES for purchases, redemptions or exchanges may
be modified, suspended or terminated by the Fund at any time. If an account has
more than one owner, the Fund and the Transfer Agent may rely on the
instructions of any one owner. Telephone privileges apply to each owner of the
account and the dealer representative of record for the account unless and until
the Transfer Agent receives cancellation instructions from an owner of the
account.
- - TELEPHONE INSTRUCTIONS. Generally, neither the Fund, the bank trust department
nor the Transfer Agent will be responsible for any claims, losses or expenses
for acting on telephone instructions reasonably believed to be genuine. The
Transfer Agent and the Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine and if they do not employ
reasonable procedures they may be liable for any losses due to unauthorized or
fraudulent instructions. The identification procedures may include, but are not
limited to, the following: account number, registration and address,
personalized security codes, taxpayer identification number and other
information particular to the account. Your Investment Professional, bank trust
department or the Transfer Agent may also record calls, and you should verify
the accuracy of your confirmation statements immediately after you receive them.
- - REDEMPTION OR TRANSFER REQUESTS WILL NOT BE HONORED UNTIL THE TRANSFER AGENT
RECEIVES ALL REQUIRED DOCUMENTS IN PROPER FORM. From time to time, the Transfer
Agent in its discretion may waive certain of the requirements for redemptions
stated in this Prospectus.
- - DEALERS THAT CAN PERFORM ACCOUNT TRANSACTIONS FOR THEIR CLIENTS BY
PARTICIPATING IN NETWORKING through the National Securities Clearing Corporation
are responsible for obtaining their clients' permission to perform those
transactions and are responsible to their clients who are shareholders of the
Victory Portfolios if the dealer performs any transaction erroneously.
- - THE REDEMPTION PRICE FOR SHARES WILL VARY from day to day because the value of
the securities in the Fund fluctuates, and the value of your shares may be more
or less than their original cost.
- - PAYMENT FOR REDEEMED SHARES is made ordinarily in cash and forwarded by check
within three business days after the Transfer Agent receives redemption
instructions in proper form, except under unusual circumstances determined by
the Commission delaying or suspending such payments. The Transfer Agent may
delay forwarding a check for recently purchased shares, but only until the
purchase payment has cleared. That delay may be as much as 15 days from the date
the shares were purchased. That delay may be avoided if you arrange with your
bank to provide telephone or written assurance to the Transfer Agent that your
purchase payment has cleared.
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<PAGE> 404
- - INVOLUNTARY REDEMPTIONS OF SMALL ACCOUNTS. If your account value has fallen
below $500, you will be given 60 days' notice to reestablish the minimum
balance. If you do not increase your minimum balance, your account may be closed
and the proceeds mailed to you at the record address. In some cases involuntary
redemptions may be made to repay the Distributor for losses from the
cancellation of share purchase orders. Under unusual circumstances, shares of
the Fund may be redeemed "in kind," which means that the redemption proceeds
will be paid with securities from the Fund. Please refer to the Statement of
Additional Information for more details.
- - "BACKUP WITHHOLDING" of Federal income tax may be applied at the rate of 31%
from dividends, distributions and redemption proceeds (including exchanges) if
you fail to furnish the Victory Portfolios with a certified Social Security or
taxpayer identification number when you sign your application, or if you violate
Internal Revenue Service regulations on tax reporting of dividends.
- - THE VICTORY PORTFOLIOS DOES NOT CHARGE A REDEMPTION FEE, but if your
Investment Professional handles your redemption, they may charge a separate
service fee.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS. The Fund ordinarily declares and pays dividends from its net
investment income quarterly. The Fund distributes substantially all net capital
gains, if any, to shareholders each year, to the extent necessary to qualify for
favorable federal tax treatment.
CAPITAL GAINS. The Fund may make distributions annually out of any net
short-term or long-term capital gains, and the Fund may make supplemental
distributions of dividends and capital gains following the end of its fiscal
year.
DISTRIBUTION OPTIONS
When you fill out your account application, you can specify how you want to
receive your dividend distributions. Currently, there are five available
options:
1. REINVESTMENT OPTION. Your income and capital gain dividends, if any,
will be automatically reinvested in additional shares of the Fund.
Income and capital gain dividends will be reinvested at the net asset
value of the Fund as of the day after the record date. If you do not
indicate a choice on your application, you will be assigned this
option.
2. CASH OPTION. You will receive a check for each income or capital gain
dividend, if any. Distribution checks will be mailed no later than 7
days after the dividend payment date which may be more than 7 days
after the dividend record date.
3. INCOME EARNED OPTION. You will have your capital gain dividend
distributions, if any, reinvested automatically in the Fund and have
your income dividends paid in cash.
4. DIRECTED DIVIDENDS OPTION. You will have income and capital gain
dividends, or only capital gain dividends, automatically reinvested in
shares of another fund of the Victory Group. Shares will be purchased
at the NAV as of the dividend record date. If you are reinvesting
dividends of a fund sold without a sales charge in shares of a fund
sold with a sales charge, the shares will be purchased at the public
offering price. If you are reinvesting dividends of a fund sold with a
sales charge in shares of a fund sold with or without a sales charge,
the shares will be purchased at the net asset value of the fund.
Dividend distributions can be directed only to an existing account with
a registration that is identical to that of your Fund account.
5. DIRECTED BANK ACCOUNT OPTION. You will have your income and capital
gain dividends, or only your income dividends, automatically
transferred to your bank checking or savings account. The amount will
be determined on the dividend record date and will normally be
transferred to your account within 7 days
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<PAGE> 405
of the dividend record date. Dividend distributions can be directed
only to an existing account with a registration that is identical to
that of your Fund account. Please call or write the Transfer Agent to
learn more about this dividend distribution option.
Any election or revocation of any of the above dividend distribution options may
be made in writing to the Fund and sent to Primary Funds Service Corporation,
P.O. Box 9741, Providence, RI 02940-9741, or by calling the Transfer Agent at
800-539-3863, and will become effective with respect to dividends having record
dates after receipt of the application or request by the Transfer Agent.
Reinvested dividend distributions receive the same tax treatment as dividend
distributions paid in cash.
COMPLETE REDEMPTIONS: If you request a complete redemption of all your Fund
shares, any dividend accrued to your account will be included in the redemption
check.
STATEMENTS AND REPORTS: You will receive a monthly statement reflecting all
transactions that affect the share balance or the registration of your Fund
account. You will receive a confirmation after every transaction that affected
the share balance of your Fund account, except for dividend reinvestment,
systematic investment and systematic withdrawal transactions. These transactions
will be detailed in your Fund account statement. Transactions that affect the
share balance of your Fund investment in an account established with an
Investment Professional or financial institution will be detailed in regular
statements or through confirmation procedures of the financial institution.
Certificates representing shares of the Fund will not be issued. An IRS Form
1099-DIV with federal tax information will be mailed to you by January 31 of
each tax year and also will be filed with the IRS. At least twice a year, you
will receive the Fund's financial reports.
FEDERAL TAXES
The Fund intends to qualify each year and elect to be treated as a separate
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "IRS Code"). If the Fund is treated as a "regulated
investment company" and all its taxable income is distributed to its
shareholders in accordance with the timing requirements imposed by the IRS Code,
it will not be subject to federal income tax on its income. The Fund's
distributions that are attributable to its net investment income and short-term
capital gains are taxable as ordinary income, and its distributions from
long-term capital gains are taxed as long-term capital gains. Such distributions
are taxable when they are paid, whether taken in cash or reinvested in
additional shares, except that distributions declared in October, November or
December and paid during the following January are taxable as if paid and
received on December 31. Dividends received from the Fund by corporate
shareholders are not entitled to the dividends-received deduction. The Fund
sends tax statements to its shareholders (with copies to the Internal Revenue
Service (the "IRS")) by January 31 showing the amounts and tax status of
distributions made (or deemed made) during the preceding calendar year.
Interest income received by direct holders of obligations of the U.S. Government
and certain of its agencies and instrumentalities is exempt from state and local
income taxation. The Fund's dividends from investment income may, to the extent
such dividends consist of interest from obligations of the U.S. Government and
certain of its agencies and instrumentalities, also be exempt from state and
local income taxes. The Fund intends to advise shareholders of the proportion of
their dividends which consist of such interest. Shareholders are urged to
consult their tax advisers regarding the possible exclusion of such portion of
their dividends for state and local income tax purposes in their respective
jurisdictions.
REDEMPTION OR EXCHANGES
Investors may realize a gain or loss when redeeming (selling) or exchanging
shares. For most types of accounts, the Fund reports the proceeds to the IRS
annually. Because the shareholders' tax treatment also depends on their purchase
price and personal tax positions, shareholders should keep their regular account
statements to use in determining their tax. See "Buying a Dividend".
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<PAGE> 406
"BUYING A DIVIDEND"
On the record date for a distribution of ordinary income or capital gains
dividend, the net asset value of the Fund is reduced by the amount of the
distribution. An investor who buys shares just before the record date ("buying a
dividend") will pay the full price for the shares and then receive a portion of
the purchase price back as a taxable distribution.
OTHER TAX INFORMATION
The information above is only a summary of some of the federal income tax
consequences generally affecting the Fund and its shareholders, and no attempt
has been made to discuss individual tax consequences. A prospective investor
should also review the more detailed discussion of federal income tax
considerations in the Statement of Additional Information. In addition to
federal income tax, a shareholder may be subject to state or local taxes on the
shareholder's investment, depending on the laws in the shareholder's area.
Investors considering an investment in the Fund should consult their tax adviser
to determine whether the Fund is suitable to their particular tax situation.
When investors sign their account application, they are asked to provide their
correct social security or taxpayer identification number and other required
certifications. If investors do not comply with IRS regulations, the IRS can
require the Fund to withhold 31% of taxable distributions and redemptions from
their account.
PERFORMANCE
From time to time, performance information for the Fund showing total return may
be presented in advertisements, sales literature and in reports to shareholders.
Such performance figures are based on historical earnings and are not intended
to indicate future performance. Average annual total return will be calculated
over a stated period of more than one year. Average annual total return is
measured by comparing the value of an investment at the beginning of the
relevant period (as adjusted for sales charges, if any) to the redemption value
of the investment at the end of the period (assuming immediate reinvestment of
any dividends or capital gains distributions) and annualizing that figure.
Aggregate total return is calculated similarly to average annual total return,
except that the resulting difference is not annualized.
From time to time performance information for the Fund showing the yield and/or
effective yield for each class of shares may also be presented in
advertisements, sales literature and in reports to shareholders. Yields reflect
the deduction of the maximum sales charge. Such performance figures are based on
historical earnings and are not intended to indicate future performance. Yield
will be computed by dividing the Fund's net investment income per share earned
during a recent thirty-day period by the Fund's maximum offering price per share
(reduced by any undeclared earned income expected to be paid shortly as a
dividend) on the last day of the period and annualizing the result. Effective
yield is computed in a similar manner, but, when annualized, the income earned
by an investment in the Fund is assumed to be reinvested. The effective yield
will be slightly higher than the yield because of the compounding effect of this
assumed reinvestment.
Investors may also judge, and the Victory Portfolios may at times advertise, the
performance of the Fund by comparing it to the performance of other mutual funds
with comparable investment objectives and policies, which performance may be
contained in various unmanaged mutual fund or market indices or rankings such as
those prepared by Dow Jones & Co., Inc. and Standard & Poor's Corporation, in
publications issued by Lipper Analytical Services, Inc., and in the following
publications: IBC/Donoghue's Money Fund Reports, Ibbotson Associates, Inc.,
Morningstar, CDA/Wiesenberger, Money Magazine, Forbes, Barron's, The Wall Street
Journal, The New York Times, Business Week, American Banker, Fortune,
Institutional Investor, U.S.A. Today and local newspapers. In addition, general
information about the Fund that appears in publications such as those mentioned
above may also be quoted or reproduced in advertisements, sales literature or in
reports to shareholders.
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<PAGE> 407
Performance is a function of the type and quality of instruments held in the
Fund's portfolio, operating expenses, and market conditions. Consequently,
current performance will fluctuate and is not necessarily representative of
future results. Any fees charged by service providers with respect to customer
accounts for investing in shares of the Fund will not be reflected in
performance calculations.
Additional information regarding the performance of each of the Victory
Portfolios is included in the Victory Portfolios' annual report, which is
available free of charge by calling 800-539-3863.
FUND ORGANIZATION AND FEES
The Victory Portfolios is an open-end management investment company, commonly
known as a mutual fund currently consisting of twenty-eight series portfolios,
four of which are inactive. The Victory Portfolios has been operating
continuously since 1986, when it was created under Massachusetts law as a
Massachusetts business trust, although certain of its funds have a prior
operating history from their predecessor funds. On February 29, 1996 the Victory
Portfolios converted from a Massachusetts business trust to a Delaware business
trust. The Victory Portfolios' offices are located at 3435 Stelzer Road,
Columbus, OH 43219-3035.
Overall responsibility for management of the Victory Portfolios rests with its
Board of Trustees, who are elected by the shareholders of the Victory
Portfolios.
INVESTMENT ADVISER AND SUB-ADVISER
Key Advisers is the investment adviser to the Fund. Key Advisers directs the
investment of the Victory Portfolios' assets, subject at all times to the
supervision of the Victory Portfolios' Board of Trustees. Key Advisers
continually supervises the investment and reinvestment of cash, securities and
other property comprising the assets of the Victory Portfolios.
Key Advisers was organized as an Ohio corporation on July 27, 1995 and is
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended. It is a wholly-owned subsidiary of KeyCorp Asset Management
Holdings, Inc., which is a wholly-owned subsidiary of Society National Bank, a
wholly-owned subsidiary of KeyCorp. Affiliates of Key Advisers manage
approximately $37 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals and mutual funds.
For the services provided and expenses incurred pursuant to its investment
advisory agreement with the Victory Portfolios respecting the Fund, Key Advisers
receives a fee, computed daily and paid monthly, at the annual rate of sixty
one-hundredths of one percent (.60%) of the average daily net assets of the
Fund. The advisory fees for the Fund have been determined to be fair and
reasonable in light of the services provided to the Fund. Key Advisers may
periodically waive all or a portion of its advisory fee with respect to the Fund
to increase the net income of the Fund available for distribution as dividends.
Prior to January 1, 1996, the Sub-Adviser (Society Asset Management, Inc.)
served as the investment adviser to the Fund. During the Fund's fiscal year
ended October 31, 1995, Society received investment advisory fees aggregating
.__% of the average daily net assets of the Fund.
Under an investment advisory agreement between the Victory Portfolios, on behalf
of the Fund, and Key Advisers, Key Advisers may delegate a portion of its
responsibilities to a subadviser. In addition, the investment advisory agreement
provides that Key Advisers may render services through its own employees or the
employees of one or more affiliated companies that are qualified to act as an
investment adviser of the Fund and are under the common control of KeyCorp as
long as all such persons are functioning as part of an organized group of
persons, managed by authorized officers of Key Advisers.
Key Advisers has entered into an investment sub-advisory agreement with its
affiliate, Society Asset Management, Inc., a registered investment adviser, on
behalf of the Fund. The Sub-Adviser is a wholly-owned subsidiary of KeyCorp
Asset Management Holdings, Inc. For its services under the investment
sub-advisory agreement, Key
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Advisers pays the Sub-Adviser sub-advisory fees at an annual rate as a
percentage of the Fund's average daily net assets as follows: .65% of the first
$10 million of average daily net assets; .50% of the next $15 million of average
daily net assets; .40% of the next $25 million of average daily net assets; and
.35% of average daily net assets in excess of $50 million.
ADMINISTRATOR AND DISTRIBUTOR
Concord Holding Corporation is the Administrator for the Fund. Victory
Broker-Dealer Services, Inc. is the Fund's principal underwriter and
Distributor.
The Administrator generally assists in all aspects of the Fund's administration
and operation. For expenses incurred and services provided as Administrator
pursuant to its management and administration agreement with the Victory
Portfolios, the Administrator receives a fee from the Fund, computed daily and
paid monthly, at an annual rate of fifteen one-hundredths of one percent (.15%)
of the Fund's average daily net assets. The Administrator may periodically waive
all or a portion of its administrative fee with respect to the Fund to increase
the net income of the Fund available for distribution as dividends. During the
fiscal period ended October 31, 1995, the Fund paid administration fees of .15%
of its average daily net assets.
TRANSFER AGENT AND FUND ACCOUNTANT
Primary Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741,
serves as the Fund's Transfer Agent pursuant to a Transfer Agency and
Shareholder Service Agreement with the Victory Portfolios and receives a fee for
such services based on various criteria, including assets, transactions and the
number of accounts. BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus,
OH 43219, provides certain accounting services for the Fund pursuant to a Fund
Accounting Agreement and receives a fee for such services.
SHAREHOLDER SERVICING
Shareholder services are provided to the Fund pursuant to agreements between the
Victory Portfolios and various shareholder servicing agents, including Key Trust
Company of Ohio, N.A. and its affiliates and other financial institutions and
securities brokers (each a "Shareholder Servicing Agent"). Each Shareholder
Servicing Agent generally will provide support services to shareholders by
establishing and maintaining accounts and records, processing dividend and
distribution payments, providing account information, arranging for bank wires,
responding to routine inquires, forwarding shareholder communication, assisting
in the processing of purchase, exchange and redemption requests, and assisting
shareholders in changing dividend options, account designations and addresses.
For expenses incurred and services provided as Shareholder Servicing Agent
pursuant to its respective Shareholder Servicing Agreement, the Fund pays each
Shareholder Servicing Agent a fee computed daily and paid monthly, in amounts
aggregating not more than twenty-five one-hundredths of one percent (.25%) of
the average daily net assets of the Fund per year. A Shareholder Servicing Agent
may periodically waive all or a portion of its respective shareholder servicing
fees with respect to the Fund to increase the net income of the Fund available
for distribution as dividends. During the fiscal year ended October 31, 1995,
the Fund paid Shareholder Servicing fees of % the Fund's average daily net
assets.
EFFECT OF BANKING LAWS
Key Advisers and the Sub-Adviser believe that they may perform the investment
advisory services for the Fund contemplated by the Investment Advisory (and
Sub-Advisory) Agreements with the Fund. In the Advisory Agreements (the
"Advisory Agreements"), Key Advisers and the Sub-Adviser have represented that
they possess the legal authority to perform the investment advisory services
contemplated therein and described in this Prospectus. Key Trust Company of
Ohio, N.A. and its affiliates also believe that they also may perform the
services for the Victory Portfolios contemplated by the Shareholder Servicing
Agreement with the Victory Portfolios without violating applicable banking laws
and regulations. Future changes in federal or state statutes and regulations
relating to permissible activities of banks or bank holding companies and their
subsidiaries and affiliates, as well as further judicial or administrative
decisions or interpretations of present and future statutes and regulations,
could
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<PAGE> 409
change the manner in which Key Advisers, the Sub-Adviser, Key Trust Company of
Ohio, N.A. and its affiliates could continue to perform such services for the
Victory Portfolios. See the Statement of Additional Information ("Glass-Steagall
Act") for further discussion.
BUSINESS MANAGEMENT AGREEMENT
In connection with its obligations under the investment sub-advisory agreement
with Key Advisers, the Sub-Adviser has entered into a Business Management
Agreement with Key Advisers pursuant to which Key Advisers provides certain
administrative and support services to the Sub-Adviser. Such services include
preparing reports to the Company's Board of Trustees, recordkeeping services,
and services rendered in connection with the preparation of regulatory filings
and other reports, and regulatory and compliance systems and other
administrative and support services.
For such services, the Sub-Adviser pays fees to Key Advisers at an annual rate
as follows: .30% on the first $10 million of average daily net assets; .15% of
the next $15 million of average daily net assets; .05% of the next $25 million
of average daily net assets; and .0% of average daily net assets in excess of
$50 million.
EXPENSES
For the fiscal period ended October 31, 1995, the Fund's total operating
expenses were .___% of the Fund's average net assets.
CUSTODIAN
Key Trust Company of Ohio, N.A. serves as custodian for the Fund and receives
fees for its services.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. serves as the Fund's independent accountants.
ADDITIONAL INFORMATION
The Victory Portfolios may issue an unlimited number of shares and classes of
the Fund. Shares of each class of the Fund participate equally in dividends and
distributions and have equal voting, liquidation and other rights. When issued
and paid for, shares will be fully paid and nonassessable by the Victory
Portfolios and will have no preference, conversion, exchange or preemptive
rights. Shareholders are entitled to one vote for each full share owned and
fractional votes for fractional shares owned. For those investors with qualified
trust accounts established with affiliates of the Adviser, the trustee will vote
the shares at meetings of the Fund's shareholders in accordance with the
shareholder's instructions or will vote in the same percentage as shares that
are not held in trust. The trustee will forward to these shareholders all
communications received by the trustee, including proxy statements and financial
reports. The Victory Portfolios and the Fund are not required to hold annual
meetings of shareholders and in ordinary circumstances do not intend to hold
such meetings. The Trustees may call special meetings of shareholders for action
by shareholder vote as may be required by the 1940 Act or the Victory
Portfolios' Delaware Trust Instrument. Under certain circumstances, the Trustees
may be removed by action of the Trustees or by the shareholders. Shareholders
holding 10% or more of the Victory Portfolios' outstanding shares may call a
special meeting of shareholders for the purpose of voting upon the question of
removal of Trustees.
The Victory Portfolio's Board of Trustees may authorize the Victory Portfolios
to offer other funds which may differ in the types of securities in which their
assets may be invested.
Key Advisers, the Sub-Adviser and the Victory Portfolios have adopted Codes of
Ethics ( the "Codes") which require investment personnel (a) to pre-clear all
personal securities transactions, (b) to file reports regarding such
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<PAGE> 410
transactions, and (c) to refrain from personally engaging in (i) short-term
trading of a security, (ii) transactions involving a security within seven days
of a Victory fund transaction involving the same security, and (iii)
transactions involving securities being considered for investment by a Victory
fund. The Codes also prohibit investment personnel from purchasing securities in
an initial public offering. Personal trading reports are reviewed periodically
by Key Advisers or the Sub-Adviser, and the Board of Trustees reviews annually
such reports (including information on any substantial violations of the Codes).
Violations of the Codes may result in censure, monetary penalties, suspension or
termination of employment.
DELAWARE LAW
The Delaware Business Trust Act provides that a shareholder of a Delaware
business trust shall be entitled to the same limitation of personal liability
extended to stockholders of Delaware corporations, and the Delaware Trust
Instrument provides that no shareholder will be liable for obligations of the
Fund or the Victory Portfolios. In light of Delaware law, the nature of the
Victory Portfolios' business, and the nature of its assets, management of
Victory Portfolios believe that the risk of personal liability to a Fund
shareholder would be extremely remote.
In the unlikely event a shareholder is held personally liable for the Victory
Portfolios' obligations, the Victory Portfolios is required to use its property
to protect or compensate the shareholder. On request, the Victory Portfolios
will defend any claim made and pay any judgment against a shareholder for any
act or obligation of the Victory Portfolios. Therefore, financial loss resulting
from liability as a shareholder will occur only if the Victory Portfolios itself
cannot meet its obligations to indemnify shareholders and pay judgments against
them.
Delaware law authorizes electronic or telephonic communications between
shareholders and the Victory Portfolios. Under Delaware law, the Successor
Company has the flexibility to respond to future business contingencies. For
example, the Trustees will have the power to incorporate the Victory Portfolios,
to merge or consolidate it with another entity, to cause each fund to become a
separate trust, and to change the Victory Portfolios' domicile without a
shareholder vote. This flexibility could help reduce the expense and frequency
of future shareholder meetings for non-investment related issues.
MISCELLANEOUS
Shareholders will receive Semi-Annual Reports, which are unaudited, and Annual
Reports, which are audited by independent public accountants, describing the
investment operations of the Victory Portfolios. Each of these reports, when
available for a particular fiscal year end or half-year end, is incorporated
herein by reference. The Victory Portfolios may include information in their
Annual Reports and Semi-Annual Reports to shareholders that (i) describes
general economic trends, (ii) describes general trends within the financial
services industry or the mutual fund industry, (iii) describes past or
anticipated portfolio holdings for the Fund or (iv) describes investment
management strategies for the Victory Portfolios. Such information is provided
to inform shareholders of the activities of the Victory Portfolios for the most
recent fiscal year or half-year and to provide the views of Key Advisers, the
Sub-Adviser and/or the Victory Portfolios' officers regarding expected trends
and strategies.
Inquiries regarding the Victory Portfolios or the Fund may be directed in
writing to the Victory Portfolios at Primary Funds Service Corporation, P.O. Box
9741, Providence, RI 02940-9741, or by telephone, toll-free, at 800-539-3863.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE VICTORY
PORTFOLIOS OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING
BY THE VICTORY PORTFOLIOS OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE.
- 25 -
<PAGE> 411
The
VICTORY
Portfolios
TAX-FREE MONEY MARKET FUND
For current yield, purchase and redemption information, March 1, 1996 Prospectus
call 800-539-FUND or 800-539-3863.
THE VICTORY PORTFOLIOS (the "Victory Portfolios") is a registered open-end
management investment company that offers investors a selection of money market,
fixed-income, municipal bond, domestic and international equity portfolios. This
Prospectus relates to the Victory Tax-Free Money Market Fund (the "Fund"), a
diversified portfolio. KeyCorp Mutual Fund Advisers, Inc., Cleveland, Ohio, an
indirect subsidiary of KeyCorp, is the investment adviser to the Fund ("Key
Advisers" or the "Adviser"). Society Asset Management, Inc., Cleveland, Ohio, an
indirect subsidiary of KeyCorp, is the investment sub-adviser to the Fund (the
"Sub-Adviser" or "Society"). Concord Holding Corporation is the Fund's
administrator (the "Administrator"). Victory Broker-Dealer Services, Inc. is the
Fund's distributor (the "Distributor").
The Fund seeks to maintain a constant net asset value of $1.00 per unit of
beneficial interest. AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED
BY THE U.S. GOVERNMENT. THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER UNIT.
The Fund seeks to provide current interest income free from federal income taxes
consistent with relative liquidity and stability of principal. The Fund pursues
this objective by investing in short-term, high quality municipal securities.
Please read this Prospectus before investing. It is designed to provide you with
information and to help you decide if the Fund's goals match your own. Retain
this document for future reference. A Statement of Additional Information (dated
March 1, 1996) for the Fund and an annual report for the Fund's fiscal year
ended October 31, 1995 have been filed with the Securities and Exchange
Commission and are incorporated herein by reference. The Statement of Additional
Information is available without charge upon request by calling 800-539-3863.
SHARES OF THE FUND ARE:
- - NOT INSURED BY THE FDIC;
- - NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY KEYCORP
BANK, ANY OF ITS AFFILIATES, OR ANY OTHER BANK;
- - SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("COMMISSION") OR ANY SECURITIES REGULATORY AUTHORITY OF ANY
STATE, NOR HAS THE COMMISSION OR ANY SUCH STATE AUTHORITY PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE> 412
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
- ----------------- ----
<S> <C>
Summary of Fund Expenses 2
Financial Highlights 5
The Fund's Investment Objective 6
The Fund's Investment Policies 6
How to Invest, Exchange and Redeem 10
Dividends, Distributions and Taxes 18
Performance 21
Fund Organization and Fees 22
Additional Information 26
</TABLE>
-2-
<PAGE> 413
SUMMARY OF FUND EXPENSES
The table below summarizes the expenses associated with the Fund. This standard
format was developed for use by all mutual funds to help you make your
investment decisions. Of course, you should consider this expense information
along with other important information in this Prospectus, including the Fund's
investment objective, investment policies and risk factors, and financial
highlights.
SHAREHOLDER TRANSACTION EXPENSES(1)
<TABLE>
<S> <C>
Sales Load None
Deferred Sales Load None
Redemption Fee None
Exchange Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES after Expense Waivers and Reimbursements (as a
percentage of average net assets)
<TABLE>
<S> <C>
Management Fees .35%
Administration Fees .15%
Other Expenses(2) .29%
---
Total Fund Operating Expenses(4) .79%
</TABLE>
(1) Subsidiaries, correspondents, affiliated banks, and non-bank affiliates
of KeyCorp may charge a customer's account fees for services provided
in connection with an investment in the Fund. (See "How To Invest,
Exchange and Redeem.")
(2) The Fund may pay a maximum of 0.25% of its average daily net assets to
financial institutions (including affiliates of KeyCorp) who have
entered into a shareholder servicing agreement with the Fund. Had the
Fund paid a maximum of 0.25% of its average daily net assets, "Other
Expenses," as a percentage of the Fund's average daily net assets,
would be .__% and "Total Operating Expenses" would be .__%.
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming:
(1) 5% annual return and (2) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
$8 $25 $44 $98
</TABLE>
The purpose of the table above is to assist a potential investor in the
Fund in understanding the various costs and expenses that he or she will bear
directly or indirectly. See "Fund Organization and Fees" for a more complete
discussion of annual operating expenses of the Fund. THE FOREGOING EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
-3-
<PAGE> 414
FINANCIAL HIGHLIGHTS
THE FUND'S FINANCIAL HISTORY
The table below sets forth certain financial information with respect to the
per-share data and ratios for the Fund for the respective periods indicated. The
information below (except as indicated) has been derived from financial
statements audited by Coopers & Lybrand L.L.P., independent accountants for the
Victory Portfolios, whose report thereon is incorporated in the Statement of
Additional Information.
THE VICTORY TAX-FREE MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED Six Months Ended YEARS ENDED OCTOBER 31,
OCTOBER 31, April 30 -----------------------
1995 1995 1994 1993 1992 1991 1990 1989
----------- ----------------- -------- -------- -------- -------- -------- --------
(TO BE (UNAUDITED)
INSERTED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Beginning --------- -------- -------- -------- -------- -------- --------
of Period
Investment Activities 0.016 0.021 0.020 0.027 0.043 0.054 0.059
Net investment income
Distributions (0.016) (0.021) (0.020) (0.027) (0.043) (0.054) (0.059)
Net investment income --------- -------- -------- -------- -------- -------- --------
Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ======== ======== ======== ======== ======== ========
Total Return 1.66%(a) 2.17% 2.06% 2.77% 4.44% 5.48% 6.04%
Ratios/Supplemental Data:
Net Assets, End of Period (000) $ 209,606 $198,561 $ 189,351 $151,012 $129,601 $134,652 $85,556
Ratio of expenses to average 0.61%(b) 0.60% 0.59% 0.61% 0.62% 0.63% 0.58%
net assets
Ratio of net investment 3.32%(b) 2.14% 2.04% 2.70% 4.29% 5.32% 5.88%
income to average net assets
Ratio of expenses to 0.63%(b) 0.79% 0.60 0.67%
average net assets*
Ratio of net investment 3.30%(b) 1.95% 2.02% 5.79%
income to average net assets*
</TABLE>
- ---------------
*During the period the investment advisory, administration and/or shareholder
service fees were voluntarily reduced. If such voluntary fee reductions had not
occurred, the ratios would be as indicated.
(a) Aggregate.
(b) Annualized.
-4-
<PAGE> 415
INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek to provide current interest
income free from federal income taxes consistent with relative liquidity and
stability of principal. The investment objective of the Fund is fundamental and
may not be changed without a vote of a majority of its outstanding voting
securities (as defined in the Statement of Additional Information). There can be
no assurance that the Fund will achieve its investment objective.
INVESTMENT POLICIES AND RISK FACTORS
The Fund pursues its objective by investing only in obligations which are
determined by Key Advisers or the Sub-Adviser to present minimal credit risks
under guidelines adopted by the Victory Portfolios' Board of Trustees (the
"Trustees"). All securities or instruments in which the Fund may invest must
have remaining maturities of up to 397 days, although securities subject
agreements and certain variable interest rate instruments may bear longer
maturities. The average weighted maturity of the securities in the Fund will not
exceed 90 days.
Under normal market conditions, the Fund will invest at least 80% of its total
assets in bonds and notes issued by or on behalf of states (including the
District of Columbia), territories, and possessions of the United States and
their respective authorities, agencies, instrumentalities and political
sub-divisions, the interest on which is both exempt from federal income tax and
not treated as a preference item for purposes of the federal alternative minimum
tax ("Municipal Securities"). At times when Key Advisers or the Sub-Adviser
judges that unstable conditions in the markets for Municipal Securities make
pursuing the Fund's basic investment objective inconsistent with the best
interests of shareholders, Key Advisers or the Sub-Adviser may use temporary
"defensive" strategies, by purchasing short-term taxable obligations and by
holding uninvested cash reserves.
Investment in the Fund would not be appropriate for tax-deferred plans, such as
IRA and Keogh plans.
Changes in the value of portfolio securities will not affect cash income, if
any, derived from these securities but will affect the Fund's net asset value.
ACCEPTABLE INVESTMENTS AND ASSOCIATED RISKS. The Fund may invest in the
following securities and may use the following investment practices (such
instruments and practices are described in further detail in the Statement of
Additional Information):
- - MUNICIPAL SECURITIES. The two principal types of Municipal Securities that may
be held by the Fund are "general obligation" securities and "revenue"
securities. General obligation securities are secured by the issuer's pledge of
its full faith, credit and taxing power for the payment of principal and
interest. Revenue securities are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise tax or other specific revenue source such as the user of the
facility being financed. Private activity bonds held by the Fund are in most
cases revenue securities and are not payable from the unrestricted revenues of
the issuer. Consequently, the credit quality of private activity bonds is
usually directly related to the credit standing of the corporate user of the
facility involved. Municipal Securities in which the Fund may invest may also
include "moral obligation" securities, which are normally issued by special
purpose public authorities. If the issuer of moral obligation securities is
unable to meet its debt service obligations from current revenues, it may draw
on a reserve fund, the restoration of which is a moral commitment but not a
legal obligation of the state or municipality which created the issuer.
Investments by the Fund in refunded municipal bonds that are secured by escrowed
U.S. Government Securities are considered to be investments in U.S. Government
Securities for purposes of the diversification requirements to which the Fund is
subject under the Investment Company Act of 1940 (the "1940 Act"). As a result,
more than five percent of the Fund's assets may be invested in such refunded
bonds issued by a particular municipal issuer.
NOTE: Opinions relating to the validity of Municipal Securities and to the
exemption of interest thereon from federal income tax are rendered by bond
counsel to the respective issuers at the time of issuance. Neither the Fund nor
its
-5-
<PAGE> 416
investment adviser will review the proceedings relating to the issuance of
Municipal Securities or the basis for such opinions.
- - ZERO COUPON BONDS. The Fund is permitted to purchase zero coupon U.S.
Government securities and zero coupon corporate securities ("zero coupon
bonds"). Zero coupon bonds are purchased at a discount from the face amount
because the buyer receives only the right to receive a fixed payment on a
certain date in the future and does not receive any periodic interest payments.
The effect of owning instruments which do not make current interest payments is
that a fixed yield is earned not only on the original investment but also, in
effect, on all discount accretion during the life of the obligations. This
implicit reinvestment of earnings at the same rate eliminates the risk of being
unable to reinvest distributions at a rate as high as the implicit yields on the
zero coupon bond, but at the same time eliminates the holder's ability to
reinvest at higher rates in the future. For this reason, zero coupon bonds are
subject to substantially greater price fluctuations during periods of changing
market interest rates than are comparable securities which pay interest
currently, which fluctuations increase the longer the period to maturity.
- - WHEN-ISSUED SECURITIES. The Fund may purchase securities on a "when-issued" or
delayed delivery basis. These transactions are arrangements in which the Fund
purchases securities with payment and delivery scheduled for a future time,
thereby involving the risk that the yield obtained in the transaction will be
less than that available in the market when delivery takes place. When the Fund
agrees to purchase securities on a when-issued basis, the Fund's custodian will
set aside cash or liquid portfolio securities equal to the amount of that
commitment in a separate account, and may be required subsequently to place
additional assets in the separate account to maintain equivalence with the
Fund's commitment. The Fund will generally not pay for such securities and no
income accrues on the securities until they are received. Securities purchased
on a when-issued basis are recorded as assets and are subject to changes in
value prior to delivery based upon changes in the general level of interest
rates and other market factors. The Fund expects that commitments to purchase
when-issued securities will not exceed 25% of the value of its total assets
under normal market conditions, and that a commitment by the Fund to purchase
when-issued securities will not exceed 60 days. In the event its commitments to
purchase when-issued securities ever exceeded 25% of the value of its assets,
the Fund's liquidity and the investment adviser's ability to manage it might be
adversely affected. The Fund does not intend to purchase when-issued or delayed
delivery securities for speculative purposes but only for the purpose of
acquiring portfolio securities.
- - CONCENTRATION. The Fund may invest more than 25% of its assets in Municipal
Securities which are related in such a way that an economic, business, or
political development or change affecting one such security would likewise
affect other Municipal Securities held by the Fund. Examples of such securities
are obligations the repayment of which is dependent upon similar types of
projects or projects such as housing or industrial development projects located
in Ohio. To the extent that the Fund's assets are concentrated in Municipal
Securities that are so related, the Fund will be subject to the peculiar risks
presented by such Municipal Securities, such as negative developments in a
particular industry or state, to a greater extent than it would be if the Fund's
assets were not so concentrated. Changes in the political climate, or changes in
the economic or business environment, including cyclical downturns, fall off in
demand, or decreasing tax revenues, may increase the level of risk associated
with these projects.
- - TAXABLE OBLIGATIONS. The Fund may invest up to 20% of its net assets in
taxable obligations or debt securities the interest income from which may be
treated as an item of tax preference for purposes of the federal alternative
minimum tax if, for example, suitable tax-exempt obligations are unavailable or
if the acquisition of such securities is deemed appropriate for temporary
defensive purposes. Taxable obligations may include obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities (some of
which may be subject to repurchase agreements), certificates of deposit and
bankers' acceptances of domestic banks and domestic branches of foreign banks,
commercial paper meeting the Fund's quality standards (as described above) for
tax-exempt commercial paper, and shares issued by other open-end registered
investment companies issuing taxable dividends where the Adviser waives a pro
rata portion of its advisory fee; notwithstanding this waiver, such investments
involve a layering of certain costs and expenses. These obligations are
described further in the Statement of Additional Information.
- - PUTS. The Fund may acquire "puts" with respect to Municipal Securities held in
its portfolio. Under a put, the Fund has the right to sell specified Municipal
Securities within a specified period of time at a specified price. A put
-6-
<PAGE> 417
will be sold, transferred, or assigned only with the underlying Municipal
Securities. The Fund will acquire puts solely to facilitate portfolio liquidity,
shorten the maturity of underlying Municipal Securities, or permit the
investment of its assets at a more favorable rate of return. The Fund expects
that it will generally acquire puts only where the puts are available without
the payment of any direct or indirect consideration. However, if necessary or
advisable, the Fund may pay for a put either separately in cash or by paying a
higher price for portfolio securities which are acquired subject to the put
(thus reducing the yield to maturity otherwise available for the same
securities).
- - VARIABLE AND FLOATING RATE NOTES. Securities purchased by the Fund may include
rated and unrated variable and floating rate tax-exempt notes, which may have a
stated maturity in excess of one year but which will be in such event, either
(a) issued or guaranteed by the United States government or any agency thereof
and have a variable rate of interest readjusted no less frequently than
annually; or (b) subject to a demand feature that will permit such Fund to
demand payment of the principal of the note either (i) at any time upon not more
than thirty days notice or (ii) at specified intervals not exceeding thirteen
months and upon no more than thirty days notice. There may be no active
secondary market with respect to a particular variable or floating rate note.
The Fund will not purchase variable or floating rate notes for which no readily
available market exists in amounts that, together with other illiquid securities
held by the Fund, exceed 10% of the Fund's total assets.
- - REPURCHASE AGREEMENTS. Under the terms of a repurchase agreement, the Fund
acquires securities from financial institutions or registered broker-dealers,
subject to the seller's agreement to repurchase such securities at a mutually
agreed upon date and price. The seller is required to maintain the value of
collateral held pursuant to the agreement at not less than the repurchase price
(including accrued interest). If the seller were to default on its repurchase
obligation or become insolvent, the Fund holding such obligation would suffer a
loss to the extent that the proceeds from a sale of the underlying portfolio
securities were less than the repurchase price, or to the extent that the
disposition of such securities by the Fund is delayed pending court action.
Repurchase agreements are considered by the staff of the Commission to be loans
by the Fund.
- - REVERSE REPURCHASE AGREEMENTS. The Fund may borrow funds for temporary
purposes by entering into reverse repurchase agreements. Pursuant to such
agreements, the Fund sells portfolio securities to financial institutions such
as banks and broker-dealers, and agrees to repurchase them at a mutually
agreed-upon date and price. At the time the Fund enters into a reverse
repurchase agreement, it must place in a segregated custodial account assets
having a value equal to the repurchase price (including accrued interest); the
collateral will be marked to market on a daily basis, and will be continuously
monitored to ensure that such equivalent value is maintained. Reverse repurchase
agreements involve the risk that the market value of the securities sold by the
Fund may decline below the price at which the Fund is obligated to repurchase
the securities. Reverse repurchase agreements are considered to be borrowings
under the 1940 Act.
- - INVESTMENT COMPANY SECURITIES. The Fund may invest up to 5% of its total
assets in the securities of any one investment company, but may not own more
than 3% of the securities of any one investment company or invest more than 10%
of its total assets in the securities of other investment companies. To the
extent required by the laws of any state in which shares of a fund of the
Victory Portfolios are sold, Key Advisers and/or the Sub-Adviser will waive its
investment advisory fee as to all assets invested in other investment companies.
Because such other investment companies employ an investment adviser, such
investment by the Fund will cause shareholders to bear duplicative fees, such as
management fees, to the extent such fees are not waived by Key Advisers and/or
the Sub-Adviser. The Fund will invest only in the securities of other money
market funds which have similar investment policies and objectives and which
invest only in securities of equal or higher short-term ratings.
The investment policies of the Fund may be changed without an affirmative vote
of the holders of a majority of the Fund's outstanding voting securities unless
(1) a policy is expressly deemed to be a fundamental policy of the Fund or (2) a
policy is expressly deemed to be changeable only by such majority vote.
-7-
<PAGE> 418
HOW TO INVEST, EXCHANGE AND REDEEM
Shares may be purchased directly or through an Investment Professional.
Investment Professionals are securities brokers or other financial institutions
that have entered into selling or servicing agreements with the Fund or the
Distributor. Shares are also available to clients of bank trust departments who
have qualified trust accounts. The minimum initial investment in the Fund is
$500. The minimum subsequent investment is $25. Accounts set up through a bank
trust department or an Investment Professional may be subject to different
minimums.
INVESTING THROUGH YOUR INVESTMENT PROFESSIONAL
Shares are offered continuously to investors who engage an Investment
Professional for investment advice and may be purchased at an offering price
equal to the net asset value ("NAV" as defined below under "Share Price") next
determined after the Transfer Agent receives an investor's purchase order. If
you are investing through your Investment Professional, you may be required to
set up a brokerage or agency account. Call your Investment Professional for
information in establishing an account. Your Investment Professional will notify
you whether subsequent trades should be directed to the Investment Professional
or directly to the Fund's Transfer Agent. If you are purchasing shares of the
Fund through a program of services offered or administered by your Investment
Professional, you should read the program materials in conjunction with this
Prospectus. Certain features of the Fund may be modified by the Investment
Professional in these programs and charges may be imposed for the services
rendered. Your Investment Professional may offer any or all of the services
mentioned in this section. Contact your Investment Professional for information
on these services.
INVESTING THROUGH YOUR BANK TRUST DEPARTMENT
Your bank trust department may require a minimum investment and may charge
additional fees. Fee schedules for such accounts are available upon request and
are detailed in the agreements by which a client opens the desired account. Your
bank trust department may require a completed and signed application for the
Fund in which an investment is made. Additional documents may be required from
corporations, associations, and certain fiduciaries. Any account information,
such as balances, should be obtained through your bank trust department.
Additional purchases, exchanges or redemptions should also be coordinated
through your bank trust department. Contact your bank trust department for
instructions.
The services rendered by your bank trust department, including affiliates of Key
Advisers or the Sub-Adviser, in the management of their accounts are not
duplicative of any of the services for which Key Advisers or the Sub-Adviser as
the investment adviser and sub-adviser, respectively, is compensated for
advising the Fund. The charges paid by clients of bank trust departments, or
their affiliates, should be considered in calculating the net yield and return
on investments in the Fund, although such charges do not affect the Fund's
dividends and distributions.
INVESTING DIRECTLY
BY MAIL: You may purchase shares by completing and signing an account
application (initial purchase only) and mailing it, together with a check (or
other negotiable bank draft or money order) in the amount of at least the
minimum investment requirement to, The Victory Tax-Free Money Fund, Primary
Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741. Subsequent
purchases may be made in the same manner.
BY WIRE: Call the Transfer Agent at 800-539-3863 to set up your Fund account to
accommodate wire transactions. YOU MUST CALL TO NOTIFY THE TRANSFER AGENT BEFORE
WIRING FUNDS. If you call the Transfer Agent before 2:00 p.m., Eastern time, and
your wire is received that day, you will earn that day's dividend. If you call
the Transfer Agent after 2:00 p.m. but before 4:00 p.m. Eastern Time, your
purchase will be processed at the closing NAV (usually 4:00 p.m.) and you will
begin to earn dividends on the first business day following receipt of your
wire.
-8-
<PAGE> 419
Federal funds (monies transferred from one bank to another through the Federal
Reserve System with same-day availability) should be wired to:
Boston Safe Deposit & Trust Co.
ABA #011001234
Credit PFSC DDA #16-918-8
The Victory Portfolios: The Tax-Free Money Market Fund
You must include your account number, your name(s), tax identification number(s)
and the control number assigned by the Transfer Agent. The Fund does not impose
a fee for wire transactions, although your bank may charge you a fee for this
service.
SHAREHOLDER SERVICE AGREEMENTS
The Victory Portfolios may enter into Shareholder Service Agreements with bank
trust departments and other financial institutions ("Investment Professionals")
to pay costs incurred in connection with the personal service and maintenance of
accounts that hold Fund shares. Services to be provided include, among other
things, account maintenance, including responding to shareholder inquiries,
directing shareholder communications, account balances, maintenance and dividend
policy. Payments are made quarterly at an annual rate not to exceed 0.25% of the
average annual net assets of Fund shares held in accounts of the investment
professional of its customers.
INVESTMENT REQUIREMENTS
All purchases must be made in U.S. dollars. Checks must be drawn on U.S. banks.
No cash will be accepted. If you make a purchase with more than one check, each
check must have a value of at least $25, and the minimum investment requirement
still applies. The Fund reserves the right to limit the number of checks
processed at one time. If your check does not clear, your purchase may be
canceled and you could be liable for any losses or fees incurred. Payment for
the purchase is expected at the time of the order. If payment is not received
within three business days of the date of the order, the order will be canceled,
and you could be held liable for resulting fees and/or losses.
You may initiate any transaction by telephone either through your bank trust
department or through your Investment Professional or call the Transfer Agent at
800-539-3863. Subsequent investments by telephone may be made directly or
through procedures established by your bank trust department or Investment
Professional. See "Redeeming Shares--By Telephone" for more information about
telephone transactions.
SPECIAL INVESTOR SERVICES
THE SYSTEMATIC INVESTMENT PLAN. You may make regular investments in the Fund and
all other funds of the Victory Portfolios and Victory Shares (collectively, the
"Victory Group") with the Systematic Investment Plan by completing the
appropriate section of the account application and attaching a voided personal
check with your bank's magnetic ink coding number across the front. If your bank
account is jointly owned, be sure that all owners sign. You must first meet the
Fund's initial investment requirement of $500, then investments may be made
monthly by automatically deducting $25 or more from your bank checking account.
For officers, trustees, directors and employees, including retired directors and
employees, of the Victory Group, KeyCorp and its affiliates, and the
Administrator and its affiliates (and family members of each of the foregoing,
i.e., parents and children) who participate in the Systematic Investment Plan,
there is no minimum initial investment required. You may change the amount of
your monthly purchase at any time. Your bank checking account will be debited on
the date indicated on your Account Application. Shares will be purchased at the
offering price next determined following receipt of the order by the Transfer
Agent. You may cancel the Systematic Investment Plan at any time without payment
of a cancellation fee. Your monthly account statement will reflect systematic
investment transactions and a debit entry will appear on your bank statement.
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EXCHANGING SHARES
An exchange is the redemption of shares of one fund and the purchase of shares
of another. The exchange privilege is a convenient way to sell and buy shares of
other funds registered in your state. Shares of the Fund may be exchanged for
shares of another fund of the Victory Group. Exchanges into a fund with a sales
charge from the Fund will be processed at the offering price, unless the shares
of the Fund that you wish to exchange were acquired by exchanging shares of a
fund of the Victory Group that were originally purchased subject to a sales
charge; in that event, the shares will be exchanged on the basis of current net
asset values plus any difference in the sales charge originally paid and the
sales charge applicable to the shares you wish to acquire through the exchange.
You may execute exchange transactions by calling either your Investment
Professional, your bank trust department or the Transfer Agent at 800-539-3863
prior to Valuation Time (generally 4:00 p.m. Eastern time) on any Business Day,
as defined below. When making an exchange or opening an account in another fund
by exchange, the registration and tax identification numbers of the two accounts
must be identical. In order to open an account through exchange, the applicable
minimum initial investment must be met. It is the Fund's policy to mail to you
at your address of record, within five business days after any telephone call
transaction, a written confirmation of the transaction. All calls will be
recorded for your protection. See "Redeeming Shares -- By Telephone" for more
information about telephone transactions.
Each exchange may produce a gain or loss for tax purposes. The exchange
privilege is an important benefit. However, in order to protect the Fund's
performance and its shareholders, the Victory Portfolios discourages frequent
exchange activity in response to short-term market fluctuations. The Fund
reserves the right to refuse any specific purchase order, including certain
purchases by exchange if, in the Victory Portfolios' opinion, the Fund would be
unable to invest effectively in accordance with its investment objective and
policies, or would otherwise be affected adversely. Exchanges or purchase orders
may be restricted or refused if the Fund receives or anticipates individual or
simultaneous orders affecting significant portions of the Fund's assets.
Although the Fund will attempt to give prior notice whenever it is reasonably
able to do so, it may impose these restrictions at any time. The Fund reserves
the right to modify or withdraw the exchange privilege, and to suspend the
offering of shares in any class upon 60 days written notice to shareholders. The
exchange privilege is only available in states where the exchange can legally be
made.
INVESTING FOR RETIREMENT
You may wish to invest in the Victory Portfolios in connection with Individual
Retirement Accounts (IRAs) and other retirement plans such as Simplified
Employee Pension Plans (SEP/IRA), Salary Reduction Simplified Employee Pension
Plans (SAR-SEP/IRA), 401(k) Defined Contribution Plans, and 403(b) Defined
Compensation Plans. For more information about investing in the Victory
Portfolios through tax-favored accounts, call the Transfer Agent at
800-539-3863.
REDEEMING SHARES
You may redeem all or a portion of your shares on any day that the Fund is open
for business (a "Business Day" below). Shares will be redeemed at the NAV next
calculated after the Transfer Agent has received the redemption request.
You may redeem shares in several ways:
BY MAIL: Send a written request to:
The Victory Portfolios: Tax-Free Money Market Fund
P.O. Box 9741
Providence, RI 02940-9741
Write a "letter of instruction" with your name, the Fund's name, your Fund
account number, the dollar amount or number of shares to be redeemed, and any
additional requirements that apply to each particular account. You will
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need the letter of instruction signed by all persons required to sign for
transactions, exactly as their names appear on the account application. A
signature guarantee is required if: you wish to redeem more than $10,000 worth
of shares; your Fund account registration has changed within the last 60 days;
the check is not being mailed to the address on your account; the check is not
being made out to the account owner; or, if the redemption proceeds are
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being transferred to another Victory Group account with a different
registration. The following institutions should be able to provide you with a
signature guarantee: banks, brokers, dealers, credit unions (if authorized under
state law), securities exchanges and associations, clearing agencies, and
savings associations. A signature guarantee may not be provided by a notary
public. A signature guarantee is designed to protect you, the Fund, and its
agents from fraud. The Transfer Agent reserves the right to reject any signature
guarantee if (1) it has reason to believe that the signature is not genuine, (2)
it has reason to believe that the transaction would otherwise be improper, or
(3) the guarantor institution is a broker or dealer that is neither a member of
a clearing corporation nor maintains net capital of at least $100,000.
BY WIRE: You may make redemptions by wire provided you have established a Fund
account to accommodate wire transactions. If telephone instructions are received
before Valuation Time (generally 2:00 p.m. Eastern time), proceeds of the
redemption for the Fund will be wired as federal funds on the same Business Day
(as defined in "Share Price") to the bank account designated with the Transfer
Agent. You may change the bank account designated to receive an amount redeemed
at any time by sending a letter of instruction with a signature guarantee to the
Transfer Agent, Primary Funds Service Corporation at P. O. Box 9741, Providence,
RI 02940-9741.
BY TELEPHONE: To redeem by telephone, you may call the Transfer Agent toll free
at 800-539-3863 or call your Investment Professional or bank trust department.
Generally, neither the Fund, the bank trust department nor the Transfer Agent
will be responsible for any claims, losses or expenses for acting on telephone
instructions that they reasonably believe to be genuine. The Transfer Agent and
the Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine and if they do not employ reasonable
procedures they may be liable for any losses due to unauthorized or fraudulent
instructions. The identification procedures may include, but are not limited to,
the following: account number, registration and address, personalized security
codes, taxpayer identification number and other information particular to the
account. Your Investment Professional, bank trust department or the Transfer
Agent may also record calls, and you should verify the accuracy of your
confirmation or statements immediately after you receive them. See "How to
Invest, Exchange and Redeem--Exchanging Shares," for additional information with
respect to losses resulting from unauthorized telephone transactions.
CHECK WRITING: Check writing service is available to shareholders of the Fund,
whereby a shareholder may write checks on his or her Fund account for $100 or
more. Shareholders must comply with minimum balance requirements in order to
maintain check writing privileges. A shareholder will receive a supply of checks
once a signature card is received by the Fund. The check may be made payable to
any person, and the shareholder's account will continue to earn dividends until
the check clears. Because of the difficulty of determining in advance the exact
value of an account, a shareholder may not use a check to close an account. The
shareholder's account will be charged a fee for stopping payment of a check upon
the shareholder's request, if the check cannot be honored because of
insufficient funds (or other valid reasons), or in accordance with any schedule
of fees set forth in the account application. Shareholders should call the
Transfer Agent at 800-539-3863 to inquire as to the availability of the check
writing service and to receive a check writing signature card.
THE SYSTEMATIC WITHDRAWAL PLAN: You can make regular withdrawals from your
account in any fund of the Victory Group with the Systematic Withdrawal Plan by
completing the appropriate section of the account application. If you own shares
in a fund worth $5,000 or more, you can have checks sent from your account
directly to you, to a person named by you, or to your bank checking account on a
monthly, quarterly, semi-annual or annual basis. The required minimum withdrawal
is $25. If you are having checks sent to your bank checking account, attach a
voided personal check with your bank's magnetic coding number across the front
of the account application. If your bank checking account is jointly owned, be
sure that all owners sign the application. If your account is jointly owned be
sure that all owners sign the application. You may obtain information about the
Systematic Withdrawal Plan by contacting your Investment Professional. Your
Systematic Withdrawal Plan payments are drawn from share redemptions. If
Systematic Withdrawal Plan redemptions exceed dividend distributions paid on
your Fund shares, your Fund account eventually may be exhausted.
Your account will be debited on the date you indicate on your account
application. Shares will be redeemed at the NAV as determined on the debit date
indicated on your account application. You may cancel the Systematic
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Withdrawal Plan at any time without payment of a cancellation fee. Each
Systematic Withdrawal Plan transaction will appear as a debit entry on your
monthly account statement.
ADDITIONAL REDEMPTION REQUIREMENTS: The Fund may withhold payment on redemptions
until it is reasonably satisfied that investments made by check have been
collected, which can take up to 15 days. Also, when the NYSE is closed (or when
trading is restricted) for any reason other than its customary weekend or
holiday closings, or under any emergency circumstances as determined by the
Commission to merit such action, the right of redemption may be suspended or the
date of payment postponed for a period of time that may exceed 7 days. In
addition, the Fund reserves the right to advance the time on that day by which
purchase and redemption orders must be received. To the extent that portfolio
securities are traded in other markets on days when the NYSE is closed, the
Fund's NAV may be affected on days when investors do not have access to the Fund
to purchase or redeem shares.
If you are unable to reach the Transfer Agent by telephone (for example, during
times of unusual market activity), consider placing your order by mail directly
to the Transfer Agent. In case of suspension of the right of redemption, you may
either withdraw your request for redemption or receive payment based on the NAV
next determined after the termination of the suspension. If your balance in the
Fund falls below $500, you may be given 60 days' notice to reestablish the
minimum balance (except with respect to officers, trustees, directors and
employees, including retired directors and employees, of the Victory Portfolios,
KeyCorp and its affiliates, and the Administrator and its affiliates (and family
members of each of the foregoing, i.e., parents, children and household members)
participating in the Systematic Investment Plan, to whom no minimum balance
requirement applies). If you do not increase your balance, your account may be
closed and the proceeds mailed to you at the address on record. Shares will be
redeemed at the last calculated NAV on the day the account is closed.
SHARE PRICE
The term "net asset value per share," or "NAV", means the value of one share.
The NAV is calculated by adding the value of all the Fund's investments, plus
cash and other assets, deducting liabilities, and then dividing the result by
the number of shares outstanding. The Fund is open for business each Business
Day. A "Business Day" is a day on which the NYSE is open for trading, the
Federal Reserve Bank of Cleveland is open, and any other day (other than a day
on which no shares of the Fund are tendered for redemption and no order to
purchase any shares is received) during which there is sufficient trading in its
portfolio instruments that the Fund's net asset value per share might be
materially affected. The NYSE or the Federal Reserve Bank of Cleveland will not
be open in observance of the following holidays: New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Columbus Day, Veterans' Day, Thanksgiving Day, and Christmas Day. The
NAV of the Fund is calculated twice daily, at 2:00 p.m. Eastern time, and at the
close of the Fund's Business Day, which coincides with the close of normal
trading of the NYSE (normally 4:00 p.m. Eastern time).
The Fund's securities are valued on the basis of amortized cost. This means
valuation assumes a steady rate of payment from the date of purchase until
maturity instead of looking at actual changes in market value. Although the Fund
seeks to maintain an NAV of $1.00, there can be no assurance that it will be
able to do so.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DISTRIBUTIONS
The Fund distributes substantially all of its net investment income and net
capital gains, if any, to shareholders within each calendar year as well as on a
fiscal year basis to the extent necessary to qualify for favorable federal tax
treatment. The Fund accrues dividends daily and declares dividends from its net
investment income monthly and pays such dividends on or around the second
Business Day of the succeeding month.
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DISTRIBUTION OPTIONS
When you fill out your account application, you can specify how you want to
receive your dividend distributions. Currently, there are five available
options:
1. REINVESTMENT OPTION. Your income and capital gain dividends, if any,
will be automatically reinvested in additional shares of the Fund.
Income and capital gain dividends will be reinvested at the net asset
value of the Fund as of the day after the dividend payment date. If you
do not indicate a choice on your application, you will be assigned this
option.
2. CASH OPTION. You will receive a check for each income or capital gain
dividend, if any. Distribution checks will be mailed no later than 7
days after the last day of the preceding month.
3. INCOME EARNED OPTION. You will have your capital gain dividend
distributions, if any, reinvested automatically in the Fund and have
your income dividends paid in cash.
4. DIRECTED DIVIDENDS OPTION. You will have income and capital gain
dividends, or only capital gain dividends, automatically reinvested in
shares of another fund of the Victory Group. Shares will be purchased
as of the dividend payment date. If you are reinvesting dividends of a
fund sold without a sales charge in shares of a fund sold with a sales
charge, the shares will be purchased at the offering price. If you are
reinvesting dividends of a fund sold with a sales charge in shares of a
fund sold with or without a sales charge, the shares will be purchased
at net asset value. Dividend distributions can be directed only to an
existing account with a registration that is identical to that of your
Fund account.
5. DIRECTED BANK ACCOUNT OPTION. You will have your income and capital
gain dividends, or only your income dividends, automatically
transferred to your bank checking or savings account. The amount will
be determined on the dividend record date and will normally be
transferred to your account within 7 days of the dividend payment date.
Dividend distributions can be directed only to an existing account with
a registration that is identical to that of your Fund account. Please
call or write the Transfer Agent to learn more about this dividend
distribution option.
Any election or revocation of any of the above dividend distribution options may
be made in writing to the Fund and sent to Primary Funds Service Corporation,
P.O. Box 9741, Providence, RI 02940-9741, or by calling the Transfer Agent at
800-539-3863, and will become effective with respect to dividends having record
dates after receipt of the application or request by the Transfer Agent.
Reinvested dividend distributions receive the same tax treatment as dividend
distributions paid in cash.
COMPLETE REDEMPTIONS: If you request a complete redemption of all your Fund
shares, any dividend accrued to your account will be included in the redemption
check.
STATEMENT AND REPORTS: You will receive a monthly statement reflecting all
transactions that affect the share balance or the registration of your Fund
account. You will receive a confirmation after every transaction that affected
the share balance of your Fund account, except for dividend reinvestment,
systematic investment and systematic withdrawal transactions. These transactions
will be detailed in your Fund account statement. Transactions that affect the
share balance of your Fund investment in an account established with an
Investment Professional or financial institution will be detailed in regular
statements or through confirmation procedures of the financial institution.
Certificates representing shares of the Fund will not be issued. An IRS Form
1099-DIV with federal tax information will be mailed to you by January 31 of
each tax year and also will be filed with the IRS. At least twice a year, you
will receive the Fund's financial reports.
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FEDERAL TAXES
The Fund intends to qualify each year as a "regulated investment company" under
the Internal Revenue Code of 1986, as amended (the "IRS Code"), for so long as
such qualification is in the best interest of its shareholders. The Fund
contemplates declaring as dividends at least 100% of its net investment income
and capital gains, if any, for each year. Since all of the Fund's net investment
income is expected to be derived from earned interest, it is anticipated that no
part of any distribution will be eligible for the dividends received deduction
for corporations. The Fund does not expect to realize any long-term capital
gains.
To the extent that dividends paid to shareholders are derived from taxable
income (for example, interest on certificates of deposit or repurchase
agreements) or from capital gains, such dividends will be subject to federal
income tax whether received in cash or additional shares and may also be subject
to state and local taxes.
Dividends derived from exempt-interest income and designated as such by the Fund
may be treated by the Fund's shareholders as items of interest excludable from
their gross income for federal tax purposes. However, such dividends may be
taxable to shareholders under state or local law as ordinary income even though
all or a portion of the amounts may be derived from interest on tax-exempt
obligations which, if realized directly, would be exempt from such taxes.
(Shareholders are advised to consult their tax advisers whether exempt-interest
dividends would be excludable from gross income if a shareholder was treated
under the Code as a "substantial user" of facilities financed by an obligation
held by the Fund or as a "related person" to such user.)
Interest on indebtedness incurred by a shareholder to purchase or carry shares
is not deductible for federal income tax purposes to the extent the Fund
distributes exempt-interest dividends during the shareholder's taxable year.
Under the Code, if a shareholder receives an exempt-interest dividend with
respect to any share and such share is held for six months or less, any loss on
the sale or exchange of such share will be disallowed to the extent of the
amount of such exempt-interest dividend.
Under the Code, dividends attributable to interest on certain private activity
bonds issued after August 7, 1986 must be included in alternative minimum
taxable income for the purpose of determining liability (if any) for the
alternative minimum tax for individuals and corporations. Also, interest income
on all Municipal Securities and private activity bonds is included in "adjusted
current earnings" for purposes of computing the alternative minimum taxable
income of corporate shareholders. The receipt of exempt-interest dividends may
cause persons receiving Social Security or Railroad Retirement benefits to be
taxed on a portion of such benefits.
Dividends received by shareholders of the Fund in January of a given year will
be treated as received on December 31 of the preceding year provided that such
dividends were declared to shareholders of record on a date in October, November
or December of such preceding year.
The foregoing discussion is limited to federal income tax consequences and is
based on tax laws and regulations which are in effect as of the date of this
Prospectus; such laws and regulations may be changed by legislative or
administrative actions. Additional information regarding federal taxes is
contained in the Statement of Additional Information under the headings
"ADDITIONAL PURCHASE AND REDEMPTION INFORMATION--Additional Tax Information."
The foregoing and the additional material in the Statement of Additional
Information are only brief summaries of some of the important tax considerations
generally affecting the Fund and its shareholders. Accordingly, potential
investors are urged to consult their tax advisers with specific reference to
their own federal, state and other local tax situation.
The Victory Portfolios will provide shareholders at least annually with
information as to the federal income tax consequences of distributions made to
them during the year.
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INVESTING FOR RETIREMENT
You may wish to invest in the Victory Portfolios in connection with Individual
Retirement Accounts (IRAs) and other retirement plans such as Simplified
Employee Pension Plans (SEP/IRA), Salary Reduction Simplified Employee Pension
Plans (SAR-SEP/IRA), 401(k) Defined Contribution Plans, and 403(b) Defined
Compensation Plans. For more information about investing in the Victory
Portfolios through tax-favored accounts, call the Transfer Agent at
800-539-3863.
PERFORMANCE
From time to time, the Fund's "yield" and "effective yield" may be presented in
advertisements, sales literature and in reports to shareholders. The "yield" is
based upon the income earned by the Fund over a seven-day period, which is then
annualized, i.e., the income earned in the period is assumed to be earned every
seven days over a 52-week period and is stated as a percentage of the
investment. The "effective yield" is calculated similarly, but when annualized,
the income earned by the investment is assumed to be reinvested in shares of the
Fund and thus compounded in the course of a 52-week period. The effective yield
will be higher than the yield because of the compounding effect of this assumed
reinvestment.
In addition, performance information showing the total return may be presented
in advertisements, sales literature and in reports to shareholders. Such
performance figures are based on historical earnings and are not intended to
indicate future performance. Average annual total return and aggregate total
return will be calculated over a stated period of more than one year. Average
annual total return is measured by comparing the value of an investment in the
Fund at the beginning of the relevant period to the redemption value of the
investment at the end of the period (assuming immediate reinvestment of any
dividends or capital gains distributions) and annualizing that figure. Aggregate
total return is calculated similarly to average annual total return, the
resulting difference is not annualized.
Investors may also judge, and the Victory Portfolios may at times advertise, the
performance of the Fund by comparing it to the performance of other mutual funds
with comparable investment objectives and policies, which performance may be
contained in various unmanaged mutual fund or market indices or rankings such as
those prepared by Dow Jones & Co., Inc. and Standard & Poor's Corporation, in
publications issued by Lipper Analytical Services, Inc., and in the following
publications: IBC/Donoghue's Money Fund Reports, Ibbotson Associates of Chicago,
MorningStar, CDA/Wiesenberger, Money Magazine, Forbes, Barron's, The Wall Street
Journal, The New York Times, Business Week, American Banker, Fortune,
Institutional Investor, U.S.A. Today and local newspapers. In addition, general
information about the Fund that appears in publications such as those mentioned
above may also be quoted or reproduced in advertisements or in reports to
shareholders.
Performance is a function of the type and quality of instruments held in the
portfolio, operating expenses, and market conditions. Consequently, current
performance will fluctuate and is not necessarily representative of future
results. Any fees charged by service providers with respect to customer accounts
for investing in shares of the Victory Portfolios will not be reflected in
performance calculations.
Additional performance information for each fund of the Victory Portfolios is
included in the Victory Portfolios' Annual Report, which is available free of
charge by calling 800-539-3863.
FUND ORGANIZATION AND FEES
The Victory Portfolios is an open-end management investment company, commonly
known as a mutual fund, currently consisting of twenty-eight series portfolios,
four of which are inactive. The Victory Portfolios has been operating
continuously since 1986, when it was created under Massachusetts law as a
Massachusetts business trust, although certain of its funds have a prior
operating history from their predecessor funds. On or about February 29, 1996,
the Victory Portfolios converted from a Massachusetts business trust to a
Delaware business trust. The Victory Portfolios' offices are located at 3435
Stelzer Road, Columbus, OH 43219-3035.
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Overall responsibility for management of the Victory Portfolios rests with its
Board of Trustees, who are elected by the shareholders of the Victory
Portfolios.
[/R]
INVESTMENT ADVISER AND SUB-ADVISER
Key Advisers is the investment adviser to the Fund. Key Advisers directs the
investment of the Victory Portfolios' assets, subject at all times to the
supervision of the Victory Portfolio's Board of Trustees. Key Advisers
continually conducts investment research and supervision for the Victory
Portfolios and is responsible for the purchase or sale of the portfolio
instruments.
Key Advisers was organized as an Ohio corporation on July 27, 1995 and is
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended. It is a wholly-owned subsidiary of KeyCorp Asset Management
Holdings, Inc., which is a wholly-owned subsidiary of Society National Bank, a
wholly-owned subsidiary of KeyCorp. Affiliates of Key Advisers manage
approximately $37 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals and mutual funds.
For the services provided and expenses incurred pursuant to its investment
advisory agreement with the Victory Portfolios, Key Advisers receives a fee from
the Fund, computed daily and paid monthly, at the annual rate of thirty-five
one-hundredths of one percent (.35%) of the Fund's average daily net assets. Key
Advisers may periodically waive all or a portion of its advisory fee with
respect to the Fund to increase the net income of the Fund available for
distribution as dividends. Prior to January 1, 1996, Society (the Sub-Adviser)
served as investment adviser to the Fund. During the Fund's fiscal year ended
October 31, 1995, Key Advisers or the Sub-Adviser received investment advisory
fees aggregating .__% of the Fund's average daily net assets.
Under the investment advisory agreement between the Victory Portfolios, on
behalf of the Fund, and Key Advisers, Key Advisers may delegate a portion of its
responsibilities to a subadviser. In addition, the investment advisory agreement
provides that Key Advisers may render services through its own employees or the
employees of one or more affiliated companies that are qualified to act as an
investment adviser of the Fund and are under the common control of KeyCorp as
long as all such persons are functioning as part of an organized group of
persons, managed by authorized officers of Key Advisers.
Key Advisers has entered into an investment sub-advisory agreement with its
affiliate, the Sub-Adviser a registered investment adviser, on behalf of the
Fund. The Sub-Adviser is a wholly-owned subsidiary of KeyCorp Asset Management
Holdings, Inc. For its services under the investment sub-advisory agreement, Key
Advisers pays the Sub-Adviser sub-advisory fees at an annual rate as a
percentage of the Fund's average daily net assets as follows: .25% of the first
$10 million of average daily net assets; .20% of the next $15 million of average
daily net assets; .15% of the next $25 million of average daily net assets; and
.125% of average daily net assets in excess of $50 million.
ADMINISTRATOR AND DISTRIBUTOR
Concord Holding Corporation is the Administrator for the Fund, Victory
Broker-Dealer Services, Inc. is the Fund's principal underwriter and
Distributor.
The Administrator generally assists in all aspects of the Fund's administration
and operation. For expenses incurred and services provided as Administrator
pursuant to its management and administration agreements with the Victory
Portfolios, the Administrator receives a fee from the Fund, computed daily and
paid monthly, at an annual rate of fifteen one-hundredths of one percent (.15%)
of the Fund's average daily net assets. The Administrator may periodically waive
all or a portion of its administrative fee with respect to the Fund to increase
the net income of the Fund available for distribution as dividends. During the
fiscal year ended October 31, 1995, the Fund paid administration fees
aggregating .15% of its average daily net assets.
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[/R]
TRANSFER AGENT AND FUND ACCOUNTANT
[/R]
Primary Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741
serves as the Fund's transfer agent pursuant to a Transfer Agency and
Shareholder Service Agreement with the Victory Portfolios and receives a fee for
such services based on various criteria, including assets, transactions and the
number of accounts. BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus,
Ohio 43219, provides certain accounting services for the Fund pursuant to a Fund
Accounting Agreement and receives a fee for such services.
SHAREHOLDER SERVICING
Shareholder services are provided to the Fund pursuant to agreements between the
Victory Portfolios and various shareholder servicing agents, including Key
Advisers, the Sub-Adviser and other financial institutions and securities
brokers (each a "Shareholder Servicing Agent"). Each Shareholder Servicing Agent
generally will provide support services to shareholders by establishing and
maintaining accounts and records, processing dividend and distribution payments,
providing account information, arranging for bank wires, responding to routine
inquires, forwarding shareholder communications, assisting in the processing of
purchase, exchange and redemption requests, and assisting shareholders in
changing dividend options, account designations and addresses. For expenses
incurred and services provided as Shareholder Servicing Agent pursuant to its
respective Shareholder Servicing Agreement, the Fund pays each Shareholder
Servicing Agent a fee computed daily and paid monthly, in amounts that, in the
aggregate, will not exceed twenty-five one-hundredths of one percent (.25%) of
the average daily net assets of the Fund per year. A Shareholder Servicing Agent
may periodically waive all or a portion of its respective shareholder servicing
fees with respect to the Fund to increase the net income of the Fund available
for distribution as dividends. During the fiscal year ended October 31, 1995,
the Fund paid shareholder servicing fees of __% of its average daily net assets.
EFFECT OF BANKING LAWS
Key Advisers and the Sub-Adviser believe that they may perform the investment
advisory services for the Fund contemplated by the investment advisory (and
Sub-Advisory) agreements (the "Advisory Agreements") for the Fund.
In the Advisory Agreements, Key Advisers and the Sub-Adviser have represented
that they possess the legal authority to perform the investment advisory
services contemplated therein and described in this Prospectus. Key Trust
Company of Ohio, N.A. and its affiliates also believe that they may perform the
services for the Victory Portfolios contemplated by its Shareholder Servicing
Agreement with the Victory Portfolios without violating applicable banking laws
or regulations. Future changes in federal or state statutes and regulations
relating to permissible activities of banks or bank holding companies and their
subsidiaries and affiliates, as well as further judicial or administrative
decisions or interpretations of present and future statutes and regulations,
could change the manner in which Key Advisers, the Sub-Adviser or Key Trust
Company of Ohio, N.A. and its affiliates could continue to perform such services
for the Victory Portfolios. See the Statement of Additional Information
("Glass-Steagall Act") for further discussion.
BUSINESS MANAGEMENT AGREEMENT
In connection with its obligations under the investment sub-advisory agreement,
the Sub-Adviser has entered into a Business Management Agreement with Key
Advisers pursuant to which Key Advisers provides certain administrative and
support services to the Sub-Adviser. Such services include preparing reports to
the Company's Board of Trustees, recordkeeping services, and services rendered
in connection with the preparation of regulatory filings and other reports, and
regulatory and compliance systems and other administrative and support services.
For such services, the Sub-Adviser pays fees to Key Advisers as follows: .20% on
the first $10 million of average daily net assets; .15% of the next $15 million
of average daily net assets; .10% of the next $25 million of average daily net
assets; and .075% of average daily net assets in excess of $50 million.
-18-
<PAGE> 429
EXPENSES
For the fiscal year ended October 31, 1995, the Fund's total operating expenses
were .__% of its average net assets.
CUSTODIAN
Key Trust Company of Ohio, N.A. serves as custodian for the Fund and receives a
fee for its services.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. serves as the Fund's independent accountants.
ADDITIONAL INFORMATION
The Victory Portfolios may issue an unlimited number of shares and classes of
the Fund. Shares of each class of the Fund participate equally in dividends and
distributions and have equal voting, liquidation and other rights. When issued
and paid for, shares will be fully paid and nonassessable by the Victory
Portfolios and will have no preference, conversion, exchange or preemptive
rights. Shareholders are entitled to one vote for each full share owned and
fractional votes for fractional shares owned. For those investors with qualified
trust accounts established with affiliates of the Adviser, the trustee will vote
the shares at meetings of the Fund's shareholders in accordance with the
shareholder's instructions or will vote in the same percentage as shares that
are not held in trust. The trustee will forward to these shareholders all
communications received by the trustee, including proxy statements and financial
reports. The Victory Portfolios and the Fund are not required to hold annual
meetings of shareholders and in ordinary circumstances do not intend to hold
such meetings. The Trustees may call special meetings of shareholders for action
by shareholder vote as may be required by the 1940 Act or the Victory
Portfolios' Delaware Trust Instrument. Under certain circumstances, the Trustees
may be removed by action of the Trustees or by the shareholders. Shareholders
holding 10% or more of the Victory Portfolios' outstanding shares may call a
special meeting of shareholders for the purpose of voting upon the question of
removal of Trustees.
The Victory Portfolio's Board of Trustees may authorize the Victory Portfolios
to offer other funds which may differ in the types of securities in which their
assets may be invested.
Key Advisers, the Sub-Adviser and the Victory Portfolios have adopted Codes of
Ethics (the "Codes") which require investment personnel (a) to pre-clear all
personal securities transactions, (b) to file reports regarding such
transactions, and (c) to refrain from personally engaging in (i) short-term
trading of a security, (ii) transactions involving a security within seven days
of a Victory fund transaction involving the same security, and (iii)
transactions involving securities being considered for investment by a Victory
fund. The Codes also prohibit investment personnel from purchasing securities in
an initial public offering. Personal trading reports are reviewed periodically
by Key Advisers or the Sub-Adviser, and the Board of Trustees reviews annually
such reports (including information on any substantial violations of the Codes).
Violations of the Codes may result in censure, monetary penalties, suspension or
termination of employment.
DELAWARE LAW
The Delaware Business Trust Act provides that a shareholder of a Delaware
business trust shall be entitled to the same limitations of personal liability
extended to stockholders of Delaware corporations, and the Victory Portfolios'
Delaware Trust Instrument provides that no shareholder will be liable for the
obligations of the Fund. In light of Delaware law, the nature of the Victory
Portfolios' business, and the nature of its assets, management of the Victory
Portfolios believes that the risk of personal liability to a Fund shareholder
would be extremely remote.
In the unlikely event a shareholder is held personally liable for the Victory
Portfolios' obligations, the Victory Portfolios is required to use its property
to protect or compensate shareholder. On request, the Victory Portfolios will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of the Victory
-19-
<PAGE> 430
Portfolios. Therefore, financial loss resulting from liability as a shareholder
will occur only if the Victory Portfolios itself cannot meet its obligations to
indemnify shareholders and pay judgments against them.
Delaware law authorizes electronic or telephonic communications between
shareholders and the Victory Portfolios. Under Delaware law, the Successor
Company has the flexibility to respond to future business contingencies. For
example, the Trustees will have the power to incorporate the Victory Portfolios,
to merge or consolidate it with another entity, to cause each fund to become a
separate trust, and to change the Victory Portfolios' domicile without a
shareholder vote. This flexibility could help reduce the expense and frequency
of future shareholder meetings for non-investment related issues.
MISCELLANEOUS
Shareholders will receive Semi-Annual Reports, which are unaudited, and Annual
Reports, which are audited by independent public accountants, describing the
investment operations of the Fund. Each of these reports, when available for a
particular fiscal year end or the end of a semi-annual fiscal year-end period is
incorporated herein by reference. The Victory Portfolios may include information
in their Annual Reports and Semi-Annual Reports to shareholders that (i)
describes general economic trends, (ii) describes general trends within the
financial services industry or the mutual fund industry, (iii) describes past or
anticipated portfolio holdings for the Fund or (iv) describes investment
management strategies for the Victory Portfolios. Such information is provided
to inform shareholders of the activities of the Victory Portfolios for the most
recent fiscal year or semi-annual fiscal year-end period and to provide the
views of Key Advisers, the Sub-Adviser and/or the Victory Portfolios' officers
regarding expected trends and strategies.
Inquiries regarding the Victory Portfolios or the Fund may be directed in
writing to the Victory Portfolios at Primary Funds Service Corporation, P.O. Box
9741, Providence, RI 02940-9741, or by telephone, toll-free, at 800-539-3863.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE VICTORY
PORTFOLIOS OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING
BY THE VICTORY PORTFOLIOS OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE.
-20-
<PAGE> 431
The DRAFT
VICTORY
Portfolios
VALUE FUND
PROSPECTUS For current yield, purchase and redemption information,
March 1, 1996 call 800-539-FUND or 800-539-3863
THE VICTORY PORTFOLIOS (the "Victory Portfolios") is a registered open-end
management investment company that offers investors a selection of money
market, fixed-income, municipal bond, domestic and international equity
portfolios. This Prospectus relates to the Victory Value Fund (the "Fund"), a
diversified portfolio. KeyCorp Mutual Fund Advisers, Inc., Cleveland, Ohio, an
indirect subsidiary of KeyCorp, is the investment adviser to the Fund ("Key
Advisers" or the "Adviser"). Society Asset Management, Inc., Cleveland, Ohio,
an indirect subsidiary of KeyCorp, is the investment sub-adviser to the Fund
("Society" or the "Sub-Adviser"). Concord Holding Corporation is the Fund's
administrator (the "Administrator"). Victory Broker-Dealer Services, Inc. is
the Fund's distributor (the "Distributor").
The Fund seeks to provide long-term growth of capital and dividend income. The
Fund pursues this objective by investing primarily in a diversified group of
common stocks with an emphasis on companies with above average total return
potential.
Please read this Prospectus before investing. It is designed to provide you
with information and to help you decide if the Fund's goals match your own.
Retain this document for future reference. A Statement of Additional
Information (dated March 1, 1996) for the Fund and an audited report for the
Fund's fiscal year ended October 31, 1995 have been filed with the Securities
and Exchange Commission and are incorporated herein by reference. The
Statement of Additional Information is available without charge upon request by
calling 800-539-3863.
SHARES OF THE FUND ARE:
- - NOT INSURED BY THE FDIC;
- - NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY KEYCORP
BANK, ANY OF ITS AFFILIATES, OR ANY OTHER BANK;
- - SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION ("COMMISSION") OR ANY SECURITIES REGULATORY AUTHORITY OF
ANY STATE, NOR HAS THE COMMISSION OR ANY SUCH STATE AUTHORITY PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE> 432
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
<S> <C>
Summary of Fund Expenses 3
Financial Highlights 4
The Fund's Investment Objective 5
The Fund's Investment Policies and Risk Factors 5
How to Invest, Exchange and Redeem 11
Dividends, Distributions and Taxes 19
Performance 22
Fund Organization and Fees 22
Additional Information 25
</TABLE>
2
<PAGE> 433
SUMMARY OF FUND EXPENSES
The table below summarizes the expenses associated with the Fund. This
standard format was developed for use by all mutual funds to help you make your
investment decisions. Of course, you should consider this expense information
along with other important information in this Prospectus, including the Fund's
investment objective.
SHAREHOLDER TRANSACTION EXPENSES(1)
<TABLE>
<S> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of offering price) 4.75%
Maximum Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee None
Exchange Fee None
</TABLE>
ANNUAL FUND OPERATING EXPENSES AFTER EXPENSE WAIVERS AND REIMBURSEMENTS (AS A
PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<S> <C>
Management Fees (2) 1.00%
Administration Fees .15%
Other Expenses (3) .23%
----
Total Operating Expenses (3) 1.38%
====
</TABLE>
(1) Subsidiaries, correspondents, affiliated banks, and unaffiliated banks
of KeyCorp may charge a customer's account for services provided in
connection with investment in the Fund. (See "How to Invest, Exchange
and Redeem.")
(2) Key Advisers and the Administrator have agreed to reduce their fees
and/or reimburse expenses [for the indefinite future]. [Key Advisers
or the Administrator may terminate this voluntary waiver at any time
at its sole discretion]. Absent the voluntary reduction of investment
advisory and administration fees, "Management Fees" and
"Administration Fees" as a percentage of average daily net assets
would be ___% and ___%, respectively.
(3) These amounts include an estimate of the shareholder servicing fees
the Fund expects to pay. (See "Fund Organization and
Fees--Shareholder Servicing"). If the voluntary fee reductions and
reimbursements referred to in footnote (2) above were not in effect,
"Total Fund Operating Expenses" as a percentage of average daily net
assets would be ___%.
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return and (2) full redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
The Victory Value Fund $61 $89 $119 $205
</TABLE>
The purpose of the table above is to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. See "Fund Organization and Fees" for a more complete discussion of
annual operating expenses of the Fund. The foregoing example is based upon
expenses for the fiscal year ended October 31, 1995 and expenses that the Fund
is expected to incur during the current fiscal year. THE FOREGOING EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
3
<PAGE> 434
FINANCIAL HIGHLIGHTS
THE FUND'S FINANCIAL HISTORY
The table below sets forth certain financial information with respect to the
financial highlights for the Fund for the period indicated. The information
below (except as indicated) has been derived from financial statements audited
by Coopers & Lybrand L.L.P., independent accountants for the Victory
Portfolios, whose reports thereon, together with the financial statements of
the Fund, are incorporated by reference into or contained in the Statement of
Additional Information.
THE VICTORY VALUE FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR SIX MONTHS DECEMBER 10, 1993
ENDED ENDED TO OCTOBER 31,
OCTOBER 31, 1995 APRIL 30, 1995 1994(2)
---------------- -------------- -----------------
(unaudited)
<S> <C> <C> <C>
Net Asset Value, Beginning of Period [To be $ 10.13 $ 10.00
Income from Investment Activities inserted] -------- --------
Net investment income 0.14 0.21
Net realized and unrealized gains on investments 0.79 0.11
-------- --------
Total from Investment Activities 0.93 0.32
-------- --------
Distributions
Net investment income (0.14)
Net realized gains (0.17)
--------
Total Distributions (0.31) (0.19)
-------- --------
Net Asset Value, End of Period $ 10.75 $ 10.13
======== ========
Total Return (Excludes Sales Charge) 9.43%(3) 3.27%(3)
Ratios/Supplemental Data:
Net Assets, End of Period (000) $261,830 $188,184
Ratio of expenses to average net assets 0.91%(3) 0.92%(4)
Ratio of net investment income to average net assets 2.88%(3) 2.32%(4)
Ratio of expenses to average net assets(1) 1.29%(3) 1.48%(4)
Ratio of net investment income to average net assets(1) 2.50%(3) 1.76%(4)
Portfolio Turnover 8.95% 39.05%
</TABLE>
(1) During the period the investment advisory, administration, shareholder
service and/or fund accounting fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would be as
indicated.
(2) Period from commencement of operations.
(3) Aggregate.
(4) Annualized.
4
<PAGE> 435
THE FUND'S INVESTMENT OBJECTIVE
The Fund seeks to provide long-term growth of capital and dividend income. The
investment objective of the Fund is fundamental and may not be changed without
a vote of the holders of a majority of its outstanding voting securities (as
defined in the Statement of Additional Information). There can be no assurance
that the Fund will achieve its investment objective.
INVESTMENT POLICIES AND RISK FACTORS
The Fund pursues its objective by investing primarily in a diversified group of
common stocks with an emphasis on companies with above average total return
potential.
Under normal market conditions the Fund will invest primarily in a diversified
portfolio of common stocks of issuers listed on a nationally recognized
exchange with a preference for stocks with above average yields and below
average price/earnings, price/book value, and price/cash flow ratios, that are
statistically cheap and are believed to have improving investor sentiment.
Stocks will be purchased on the basis of a proprietary scoring system of
valuation models which incorporates Key Advisers or the Sub-Adviser's appraisal
of value of the shares, measures of statistical value, and a measure which
reflects revisions of earnings estimates.
The Fund may invest in preferred stocks, investment-grade corporate bonds and
notes, warrants, and high quality short-term debt obligations (including
variable amount master demand notes), bankers' acceptances, certificates of
deposit, repurchase agreements, obligations issued or guaranteed by the U.S.
Government, its agencies and instrumentalities, and demand and time deposits of
domestic and foreign banks and savings and loan associations. The Fund will
limit such investments to 20% of its total assets.
Changes in the value of portfolio securities will not affect cash income, if
any, derived from these securities but will affect the Fund's net asset value.
Because the Fund invests primarily in equity securities, which fluctuate in
value, the Fund's shares will fluctuate in value.
The investment policies of the Fund may be changed without an affirmative vote
of the holders of a majority of the Fund's outstanding voting securities unless
(1) a policy is expressly deemed to be a fundamental policy of the Fund or (2)
a policy is expressly deemed to be changeable only by such majority vote.
The Fund is advised by Key Advisers, an indirect subsidiary of KeyCorp, which
purchases securities for the Fund consistent with its investment objective and
policies and which meet the quality and maturity characteristics established
for the Fund.
From time to time, the Fund, to the extent consistent with its investment
objective, policies and restrictions, may invest in securities of issuers with
which Key Advisers or the Sub-Adviser or its affiliates have a lending
relationship.
ADDITIONAL INFORMATION REGARDING SECURITIES IN WHICH THE FUND MAY INVEST
The following paragraphs provide a brief description of some of the types of
securities in which the Fund may invest, the transactions it may make and
strategies it may adopt. The Fund may, following notice to its shareholders,
take advantage of other investment practices which are not at present
contemplated for use by the Fund or which currently are not available but which
may be developed, to the extent such investment practices are both consistent
with the Fund's investment objective and legally permissible for the Fund.
Such investment practices, if they arise, may involve risks which exceed those
involved in the activities described in this Prospectus.
- - SHORT-TERM OBLIGATIONS. While the Fund will normally be predominantly
invested in equity securities, there may be times when, in Key Advisers' or the
Sub-Adviser's opinion, market conditions warrant that, for temporary
5
<PAGE> 436
defensive purposes, the Fund may hold more than 20% of its total assets in
short-term obligations. To the extent that the Fund's assets are so invested,
they will not be invested so as to meet its investment objective. The
instruments may include high grade liquid debt securities such as commercial
paper, certificates of deposit, bankers' acceptances, repurchase agreements
which mature in less than seven days and United States treasury bills.
Bankers' acceptances are instruments of United States banks which are drafts or
bills of exchange "accepted" by a bank or trust company as an obligation to pay
on maturity. For a discussion of repurchase agreements, see below.
- - INVESTMENT GRADE SECURITIES. The Fund may invest in obligations which are
rated at the time of purchase within the four highest rating categories
assigned by a nationally recognized statistical ratings organization ("NRSRO")
(investment grade) or, if unrated, which Key Advisers or the Sub-Adviser
determines to be of comparable quality. The applicable securities ratings are
described in the Appendix to the Statement of Additional Information.
- - FOREIGN SECURITIES. The Fund may invest in equity securities of foreign
issuers, including securities traded in the form of American Depository
Receipts. Any investments in foreign securities will be made in accordance
with the Fund's investment objective and policies. Foreign securities are
subject to special risks, which are described under the caption "Risk
Factors--International Investments." The Fund will limit its investments in
such securities to 20% of its total assets. The Fund will not hold foreign
currency as a result of investment in foreign securities.
- - OPTIONS. The Fund may engage in writing call options from time to time.
The Fund will write only covered call options (options on securities owned by
the Fund and index options). Such options must be listed on a national
securities exchange and issued by the Options Clearing Corporation. In order
to close out a call option it has written, the Fund will enter into a "closing
purchase transaction", i.e., the purchase of a call option on the same security
with the same exercise price and expiration date as the call option which the
Fund previously wrote on any particular security. When a portfolio security
subject to a call option is sold, the Fund will effect a closing purchase
transaction to close out any existing call option on that security. If the
Fund is unable to effect a closing purchase transaction, it will not be able to
sell the underlying security until the option expires or the Fund delivers the
underlying security upon exercise. Upon the exercise of an option, the Fund is
not entitled to the gains, if any, on securities underlying the options. The
Fund intends to limit its investment in call and index options to 25% of its
total assets.
The Fund may also purchase put options on securities for the purpose of hedging
against market risks related to its securities. The Fund may also purchase
index put and call options and write index options. Through the writing or
purchase of index options, the Fund can achieve many of the same objectives as
through the use of options on individual securities. Utilizing options is a
specialized investment technique that entails a substantial risk of a complete
loss of the amounts paid as premiums to writers of options.
- - FUTURES CONTRACTS. The Fund may also 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. For example, when interest rates are expected to rise or market values
of portfolio securities are expected to fall, the Fund can seek to offset a
decline in the value of its portfolio securities by entering into futures
contract transactions. When interest rates are expected to fall or market
values are expected to rise, the Fund, through the purchase of such contracts,
can attempt to secure better rates or prices than might later be available in
the market when it effects anticipated purchases.
6
<PAGE> 437
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.
Aggregate initial margin deposits for futures contracts, and premiums paid for
related options, may not exceed 5% of the Fund's total assets (other than in
connection with bona fide hedging purposes), and the value of securities that
are the subject of such futures and options (both for receipt and delivery) may
not exceed one-third of the market value of the Fund's total assets. Futures
transactions will be limited to the extent necessary to maintain the Fund's
qualification as a regulated investment company.
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 move in an unanticipated
manner. Such unanticipated changes may also result in poorer 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.
- - ZERO COUPON BONDS. The Fund is permitted to purchase both zero coupon U.S.
government securities and zero coupon corporate securities ("zero coupon
bonds"). Zero coupon bonds are purchased at a discount from the face amount
because the buyer receives only the right to receive a fixed payment on a
certain date in the future and does not receive any periodic interest payments.
The effect of owning instruments which do not make current interest payments is
that a fixed yield is earned not only on the original investment but also, in
effect, on all discount accretion during the life of the obligations. This
implicit reinvestment of earnings at the same rate eliminates the risk of being
unable to reinvest distributions at a rate as high as the implicit yields on
the zero coupon bond, but at the same time eliminates the holder's ability to
reinvest at higher rates in the future. For this reason, zero coupon bonds are
subject to substantially greater price fluctuations during periods of changing
market interest rates than are comparable securities which pay interest
currently, which fluctuation increases the longer the period to maturity.
- - RECEIPTS. In addition to bills, notes and bonds issued by the U.S.
Treasury, the Victory Fund may also purchase separately traded interest and
principal component parts of such obligations that are transferable through the
Federal book entry system, known as Separately Traded Registered Interest and
Principal Securities ("STRIPS") and Coupon Under Book Entry Safekeeping
("CUBES"). These instruments are issued by banks and brokerage firms and are
created by depositing Treasury notes and Treasury bonds into a special account
at a custodian bank; the custodian holds the interest and principal payments
for the benefit of the registered owners of the certificates or receipts. The
custodian arranges for the issuance of the certificates or receipts evidencing
ownership and maintains the register. Receipts include Treasury Receipts
("TRs"), Treasury Investment Growth Receipts ("TIGRs") and Certificates of
Accrual on Treasury Securities ("CATS").
STRIPS, CUBES, TRs, TIGRs and CATS are sold as zero coupon securities, which
means that they are sold at a substantial discount and redeemed at face value
at their maturity date without interim cash payments of interest or principal.
This discount is amortized over the life of the security, and such amortization
will constitute the income earned on the security for both accounting and tax
purposes. Because of these features, these securities may be subject to
greater interest rate volatility than interest-paying U.S. Treasury
obligations. The Fund will limit its investment in such instruments to 20% of
its total assets.
- - SECURITIES LENDING. In order to generate additional income, the Fund may,
from time to time, lend its portfolio securities to broker-dealers, banks or
institutional borrowers of securities. The Fund must receive collateral equal
to 100% of the securities' value in the form of cash or U.S. Government
securities, plus any interest due, which collateral must be marked to market
daily by Key Advisers or the Sub-Adviser Should the market value of the loaned
securities increase, the borrower must furnish additional collateral to the
Fund. During the time portfolio
7
<PAGE> 438
securities are on loan, the borrower pays the Fund amounts equal to any
dividends or interest paid on such securities plus any interest negotiated
between the parties to the lending agreement. Loans are subject to termination
by the Fund or the borrower at any time. While the Fund does not have the
right to vote securities on loan, the Fund intends to terminate the loan and
regain the right to vote if that is considered important with respect to the
investment. The Fund will only enter into loan arrangements with
broker-dealers, banks or other institutions which Key Advisers or the
Sub-Adviser has determined are creditworthy under guidelines established by the
Trust's Board of Trustees. The Fund intends to limit its securities lending to
33% of total assets.
- - WHEN-ISSUED SECURITIES. The Fund may purchase securities on a when-issued
or delayed delivery basis. These transactions are arrangements in which the
Fund purchases securities with payment and delivery scheduled for a future
time. When the Fund agrees to purchase securities on a when-issued basis, the
Fund's custodian must set aside cash or liquid portfolio securities equal to
the amount of that commitment in a separate account, and may be required to
subsequently place additional assets in the separate account to maintain
equivalence with the Fund's commitment. Prior to delivery of when-issued
securities, their value is subject to fluctuation and no income accrues until
their receipt. The Fund engages in when-issued and delayed delivery
transactions only for the purpose of acquiring portfolio securities consistent
with its investment objective and policies, and not for investment leverage.
In when-issued and delayed delivery transactions, the Fund relies on the seller
to complete the transaction; its failure to do so may cause the Fund to miss a
price or yield considered to be advantageous.
- - VARIABLE AND FLOATING RATE SECURITIES. The Fund may purchase variable and
floating rate notes with ratings within the four highest rating groups assigned
by an NRSRO or, if unrated, which the Key Advisers or the Sub-Adviser deems to
be of comparable quality. The interest rates on these securities may be reset
daily, weekly, quarterly, or some other reset period and may be subject to a
floor or ceiling. There is a risk that the current interest rate on such
obligations may not accurately reflect existing market interest rates. There
may be no active secondary market with respect to a particular variable or
floating rate note. Variable and floating rate notes for which no readily
available market exists will be purchased in an amount which, together with
other illiquid securities held by the Fund, does not exceed 15% of the Fund's
total assets unless such notes are subject to a demand feature that will permit
the Fund to receive payment of the principal within seven days after demand
therefor.
- - REPURCHASE AGREEMENTS. Under the terms of a repurchase agreement, the Fund
acquires securities from financial institutions or registered broker-dealers,
subject to the seller's agreement to repurchase such securities at a mutually
agreed upon date and price. The seller is required to maintain the value of
collateral held pursuant to the agreement at not less than the repurchase price
(including accrued interest). If the seller were to default on its repurchase
obligation or become insolvent, the Fund would suffer a loss to the extent that
the proceeds from a sale of the underlying portfolio securities were less than
the repurchase price, or to the extent that the disposition of such securities
by the Fund was delayed pending court action. Repurchase agreements are
considered by the staff of the Commission to be loans by the Fund.
- - REVERSE REPURCHASE AGREEMENTS. The Fund may borrow funds for temporary
purposes by entering into reverse repurchase agreements. Pursuant to such
agreements, the Fund sells portfolio securities to financial institutions such
as banks and broker-dealers, and agrees to repurchase them at a mutually
agreed-upon date and price. At the time the Fund enters into a reverse
repurchase agreement, it must place in a segregated custodial account assets
having a value equal to the repurchase price (including accrued interest); the
collateral will be marked to market on a daily basis, and will be continuously
monitored to ensure that such equivalent value is maintained. Reverse
repurchase agreements involve the risk that the market value of the securities
sold by the Fund may decline below the price at which the Fund is obligated to
repurchase the securities. Reverse repurchase agreements are considered to be
borrowings under the Investment Company Act of 1940 (the "1940 Act").
- - INVESTMENT COMPANY SECURITIES. The Fund may invest up to 5% of its total
assets in the securities of any one investment company, but may not own more
than 3% of the securities of any one investment company or invest more than 10%
of its total assets in the securities of other investment companies. Pursuant
to an exemptive order received by the Victory Portfolios from the Commission,
the Fund may invest in the money market funds of the
8
<PAGE> 439
Victory Portfolios. Key Advisers or the Sub-Adviser will waive its fee
attributable to the Fund's assets invested in a fund of the Victory Portfolios,
and, to the extent required by the laws of any state in which shares of the
Fund are sold, Key Advisers or the Sub-Adviser will waive its investment
advisory fees as to all assets invested in other investment companies. Because
such other investment companies employ an investment adviser, such investment
by the Fund will cause shareholders to bear duplicative fees, such as
management fees, to the extent such fees are not waived by Key Advisers or the
Sub-Adviser.
- - BORROWING. The Fund may enter into commitments to purchase securities in
accordance with its investment program, including delayed-delivery and
when-issued securities and reverse repurchase agreements, provided that the
total amount of any such borrowing does not exceed 33 1/3% of the Fund's total
assets. The Fund may borrow money for temporary or emergency purposes in an
amount not exceeding 5% of the value of its total assets at the time when the
loan is made. Any borrowings representing more than 5% of the Fund's total
assets must be repaid before the Fund may make additional investments. The Fund
does not currently intend to borrow for leveraging purposes.
- - ILLIQUID INVESTMENTS AND RESTRICTED SECURITIES. The Fund may invest up to
15% of its net assets in illiquid investments (investments that cannot be
readily sold within seven days in the usual course of business at approximately
the price at which the Fund has valued them), including Restricted Securities
(as defined below) deemed to be illiquid. Under the supervision of the
Trustees, Key Advisers or the Sub-Adviser determines the liquidity of the
Fund's investments. The absence of a trading market can make it difficult to
ascertain a market value for illiquid investments. Disposing of illiquid
investments may involve time-consuming negotiation and legal expenses, and it
may be difficult or impossible for the Fund to sell them promptly at an
acceptable price. "Restricted Securities" are securities which are subject to
restrictions on resale due to acquisition without registration under the
Securities Act of 1933, as amended (the "1933 Act"). Unless registered for
sale, these securities can only be sold in privately negotiated transactions or
pursuant to an exemption from registration. See "Private Placement
Investments," below.
- - PRIVATE PLACEMENT INVESTMENTS. The Fund may invest in commercial paper
issued in reliance on the exemption from registration afforded by Section 4(2)
of the 1933 Act. Section 4(2) commercial paper is generally sold to
institutional investors, such as the Fund, that agree that they are purchasing
the paper for investment purposes and not with a view to public distribution.
Any resale by the purchaser must be in an exempt transaction. Section 4(2)
commercial paper is normally resold to other institutional investors like the
Fund through or with the assistance of the issuer or investment dealers who
make a market in Section 4(2) commercial paper, thus providing liquidity. The
Fund believes that Section 4(2) commercial paper and possibly certain other
Restricted Securities that meet the criteria for liquidity established by the
Trustees are quite liquid. The Fund intends, therefore, to treat the
Restricted Securities that meet the criteria for liquidity established by the
Trustees, including Section 4(2) commercial paper, as determined by Key
Advisers or the Sub-Adviser, as liquid and not subject to the investment
limitation applicable to illiquid securities. Therefore, the Fund will
generally purchase Section 4(2) commercial paper without regard to the Fund's
restriction on illiquid securities.
The ability of the Trustees to determine the liquidity of certain Restricted
Securities is permitted under a position of the Staff of the Commission set
forth in the adopting release for Rule 144A under the 1933 Act (the "Rule"). The
Rule is a nonexclusive safe-harbor providing an exemption from registration
under the 1933 Act for resales of Restricted Securities to qualified
institutional buyers. The Rule was expected to further enhance the liquidity of
the secondary market for the types of securities eligible for resale under Rule
144A. The Victory Portfolios believes that the staff of the Commission has left
the question of determining the liquidity of all Restricted Securities to the
Trustees. The Trustees consider the following criteria in determining the
liquidity of certain restricted securities: the frequency of trades and quotes
for the security; the number of dealers willing to purchase or sell the security
and the number of other potential buyers; dealer undertakings to make a market
in the security; and the nature of the security and the nature of the
marketplace trades.
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INVESTMENT RISKS
- - INTERNATIONAL INVESTMENTS. Generally, investments in securities of foreign
companies involve greater risks than are present in U.S. investments. Compared
to U.S. and Canadian companies, there is generally less publicly available
information about foreign companies and there may be less governmental
regulation and supervision of foreign stock exchanges, brokers and listed
companies. Foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to U.S. companies. Securities of some foreign
companies are less liquid, and their prices more volatile, than securities of
comparable U.S. companies. Settlement of transactions in some foreign markets
may be delayed or may be less frequent than in the U.S., which could affect the
liquidity of the Fund's investment. In addition, with respect to some foreign
countries, there is the possibility of nationalization, expropriation or
confiscatory taxation; limitations on the removal of securities, property or
other assets of the Fund; political or social instability; increased difficulty
in obtaining legal judgments; or diplomatic developments which could affect
U.S. investments in those countries. The Fund's investment advisers will take
such factors into consideration in managing the Fund's investments.
- - CERTAIN INVESTMENT TECHNIQUES. Certain investment management techniques
which the Fund may use, such as the purchase and sale of futures and options,
described above, may expose the Fund to special risks. These products may be
used to adjust the risk and return characteristics of the Fund's portfolio of
investments. These various products may increase or decrease exposure to
security prices, interest rates, or other factors that affect security values,
regardless of the issuer's credit risk. Regardless of whether the intent was
to decrease risk or increase return, if market conditions do not perform
consistently with expectations, these products may result in a loss. In
addition, losses may occur if counterparties involved in transactions do not
perform as promised. These products may expose the Fund to potentially greater
risk of loss than more traditional equity investments.
NOTE: The Statement of Additional Information contains information about
certain investment practices and portfolio securities of the Fund. The
Statement of Additional Information also contains information about investment
restrictions designed to reduce the risk of an investment in the Fund.
LIMITING INVESTMENT RISKS
The following summarizes the Fund's principal investment limitations. A
complete listing is contained in the Statement of Additional Information.
1. (a) The Fund may borrow money solely for temporary or emergency
purposes, but not in an amount exceeding 33% of its total assets. (b)
The Fund may borrow money from banks or by engaging in reverse
repurchase agreements. (c) The Fund will not purchase securities
when borrowings exceed 5% of its total assets. If the Fund borrows
money, its share price may be subject to greater fluctuation until the
borrowing is paid off. To this extent, purchasing securities when
borrowings are outstanding may involve an element of leverage.
2. The Fund will not purchase a security if, as a result, more than 15%
of its net assets would be invested in illiquid securities. The Fund
may invest up to 15% of its net assets in illiquid investments
(investments that cannot be readily sold within seven days in the
usual course of business at approximately the price at which the Fund
has valued them), including restricted securities deemed to be
illiquid. Under the supervision of the Trustees, Key Advisers or the
Sub- Adviser determines the liquidity of the Fund's investments. The
absence of a trading market can make it difficult to ascertain a
market value for illiquid investments. Disposing of illiquid
investments may involve time-consuming negotiation and legal expenses,
and it may be difficult or impossible for the Fund to sell them
promptly at an acceptable price.
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<PAGE> 441
Except for the Fund's investment objective and the percentage limitation on
borrowing in limitation 1(a), the investment policies described in this
Prospectus are not fundamental. Non-fundamental limitations may be changed
without shareholder approval. Whenever an investment policy or limitation
states a maximum percentage of the Fund's assets that may be invested, such
percentage limitation will be determined immediately after and as a result of
the investment, except in the case of borrowing (or other activities that may
be deemed to result in the issuance of a "senior security" under the 1940 Act).
Any subsequent change in values, assets, or other circumstances will not be
considered when determining whether the investment complies with the Fund's
investment policies and limitations. If the value of a Fund's holdings of
illiquid securities at any time exceeds the percentage limitation applicable at
the time of acquisition due to subsequent fluctuations in value or other
reasons, the Board of Trustees will consider what actions, if any, are
appropriate to maintain adequate liquidity.
PORTFOLIO TRANSACTIONS
Brokerage firms are utilized to conduct securities transactions for the Fund.
Broker-dealers are chosen by judging professional ability and quality of
service.
Key Advisers or the Sub-Adviser may allocate transactions to broker-dealers who
help distribute the Fund's shares or the shares of the other funds of the
Victory Portfolios, to the extent permitted by law. Key Advisers or the
Sub-Adviser will make such allocations only if brokerage fees are comparable to
those charged by non-affiliated, qualified broker-dealers for similar services.
Key Advisers or the Sub-Adviser may engage in short-term trading with respect
to the Fund when it believes it is consistent with the Fund's investment
objective and policies. The frequency of portfolio transactions--the Fund's
turnover rate--will vary from year for to year depending on market conditions.
For the fiscal year ended October 31, 1995, the annual portfolio turnover rate
for the Fund was ______%, compared to 39.05% for the prior fiscal year.
HOW TO INVEST, EXCHANGE AND REDEEM
HOW TO INVEST
Shares may be purchased directly or through an Investment Professional.
Investment Professionals are securities brokers or other financial institutions
that have entered into selling or servicing agreements with the Fund or the
Distributor. Shares are also available to clients of bank trust departments
who have qualified trust accounts. The minimum investment is $500 for the
initial purchase and $25 thereafter. Accounts set up through a bank trust
department or an Investment Professional may be subject to different minimums.
- - Investing Through Your Investment Professional. Your Investment
Professional will place your order with the Transfer Agent on your behalf. You
may be required to establish a brokerage or agency account. Your Investment
Professional will notify you whether subsequent trades should be directed to
the Investment Professional or directly to the Fund's Transfer Agent. Accounts
established with Investment Professionals may have different features,
requirements and fees. In addition, Investment Professionals may charge for
their services. Information regarding these features, requirements and fees
will be provided by the Investment Professional. If you are purchasing shares
of any Fund through a program of services offered or administered by your
Investment Professional, you should read the program materials in conjunction
with this Prospectus.
- - Investing Through The Systematic Investment Plan. You can use the
Systematic Investment Plan to purchase shares directly from your bank account.
Please refer to "Systematic Investment Plan" below for more details.
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- - Investing Through Your Bank Trust Department. Your bank trust department
may require a minimum investment and may charge additional fees. Fee schedules
for such accounts are available upon request and are detailed in the agreements
by which a client opens the desired account. Your bank trust department may
require a completed and signed application for the Fund in which an investment
is made. Additional documents may be required from corporations, associations,
and certain fiduciaries. Any account information, such as balances, should be
obtained through your bank trust department. Additional purchases, exchanges
or redemptions should also be coordinated through your bank trust department.
Contact your bank trust department for instructions.
The services rendered by a bank trust department, including affiliates of Key
Advisers or the Sub-Adviser, in the management of its accounts are not
duplicative of any of the services for which Key Advisers or the Sub-Adviser as
the investment adviser or sub- adviser, respectively, is compensated for
advising the Fund. The charges paid by clients of bank trust departments, or
their affiliates, should be considered in calculating the net yield and return
on investments in the Fund, although such charges do not affect the Fund's
dividends and distributions.
INVESTING DIRECTLY
BY MAIL: You may purchase shares by completing and signing an account
application (initial purchase only) and mailing it, together with a check (or
other negotiable bank draft or money order) in the amount of at least the
minimum investment requirement to, The Victory Value Fund, Primary Funds
Service Corporation, P.O. Box 9741, Providence, RI 02940-9741. Subsequent
purchases may be made in the same manner.
BY WIRE: Call 800-539-3863 to set up your Fund account to accommodate wire
transactions. YOU MUST CALL THE TRANSFER AGENT BEFORE WIRING FUNDS. You will
begin to earn dividends on the first business day following receipt of your
wire. Federal funds (monies transferred from one bank to another through the
Federal Reserve System with same-day availability) should be wired to:
Boston Safe Deposit & Trust Co.
ABA #011001234
Credit PFSC DDA#16-918-8
The Victory Portfolios: Value Fund
You must include your account number, your name(s), tax identification
number(s) and the control number assigned by the Transfer Agent. The Fund does
not impose a fee for wire transactions, although your bank may charge you a fee
for this service.
Shares are sold at the public offering price based on the net asset value that
is next determined after the Transfer Agent receives the purchase order. In
most cases, to receive that day's offering price, the Transfer Agent must
receive your order as of the close of regular trading of the New York Stock
Exchange ("NYSE") (generally 4:00 pm Eastern time) (the "Valuation Time") on
each Business Day (as defined in "Net Asset Value Per Share")of the Fund. If
you buy shares through an Investment Professional, the Investment Professional
must receive your order in a timely fashion on a regular Business Day and
transmit it to the Transfer Agent so that it is received before the close of
business that day. The Transfer Agent may reject any purchase order for the
Fund's shares, in its sole discretion.
It is the responsibility of your Investment Professional to transmit your order
to purchase shares to the Transfer Agent in a timely fashion in order for you
to receive that day's share price. The Fund must receive payment within three
business days after an order is placed. Otherwise, the purchase order will be
canceled and you could be held liable for resulting fees and/or losses.
INVESTMENT REQUIREMENTS
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All purchases must be made in U.S. dollars. Checks must be drawn on U.S.
banks. No cash will be accepted. If you make a purchase with more than one
check, each check must have a value of at least $25, and the minimum investment
requirement still applies. The Fund reserves the right to limit the number of
checks processed at one time. If your check does not clear, your purchase will
be canceled and you could be liable for any losses or fees incurred. Payment
for the purchase is expected at the time of the order. If payment is not
received within three business days of the date of the order, the order may be
canceled, and you could be held liable for resulting fees and/or losses.
Shares are sold at their offering price, which is normally net asset value plus
an initial sales charge. However, in some cases, described below, where
purchases are not subject to an initial sales charge, the offering price may be
net asset value. In some cases, reduced sales charges may be available, as
described below. When you invest, the Fund receives the net asset value for
your account. The sales charge varies depending on the amount of your purchase
and a portion may be retained by the Distributor and allocated to your
Investment Professional. The Victory Portfolios has a reinstatement policy
which allows an investor who redeems his/her shares originally purchased with a
sales charge to reinvest within 90 days without incurring an additional sales
charge. The current sales charge rates and commissions paid to Investment
Professionals are as follows:
<TABLE>
<CAPTION>
FRONT-END SALES CHARGE
AS A PERCENTAGE OF:
----------------------
OFFERING NET AMOUNT DEALER
AMOUNT OF PURCHASE PRICE INVESTED REALLOWANCE
- ------------------ -------- ---------- -----------
<S> <C> <C> <C>
Less than $49,999 4.75% 4.99% 4.00%
$50,000 to $99,999 4.50% 4.71% 4.00%
$100,000 to $249,999 3.50% 3.63% 3.00%
$250,000 to $499,999 2.25% 2.30% 2.00%
$500,000 to $999,999 1.75% 1.78% 1.50%
$1,000,000 and above 0.00% 0.00% *
</TABLE>
* There is no initial sales charge on purchases of $1 million or more.
Investment Professionals will be compensated at the rate of up to
0.25% of such purchases.
The Distributor reserves the right to reallow the entire commission to dealers.
If that occurs, the dealer may be considered an "underwriter" under Federal
securities laws.
The Distributor may pay all or a portion of any applicable sales charges and
service fees to Investment Professionals who sell shares of the Fund and
provide ongoing sales support services or shareholder support services. For
the three-year period commencing April 30, 1994, for activities in maintaining
and servicing accounts of customers invested in the Fund, First Albany
Corporation ("First Albany") and PFIC Securities Corporation ("PFIC") may
receive payments from the Distributor equal to two-thirds of the Dealer
Retention (as defined below) on any shares of the Fund (and other funds of the
Victory Portfolios) sold by First Albany or PFIC and their broker-dealer
affiliates. "Dealer Retention" is an amount equal to the difference between
the applicable sales charge and such part of the sales charge which is
reallowed to broker-dealers.
The Distributor, at its expense, may also provide additional cash compensation
to dealers in connection with sales of shares of the Fund. The maximum cash
compensation payable by the Distributor is currently 4.00% of the offering
price. In addition, the Distributor will, from time to time and at its own
expense, provide compensation, including financial assistance, to dealers in
connection with conferences, sales or training programs for their employees,
seminars for the public, advertising campaigns regarding one or more Victory
Portfolios and/or other dealer-sponsored special events including payment for
travel expenses, including lodging, incurred in connection with trips taken by
invited registered representatives and members of their families to locations
within or outside of the United States for meetings or seminars of a business
nature. Compensation will include the following types
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<PAGE> 444
of non-cash compensation offered through sales contests: (1) vacation trips
including the provision of travel arrangements and lodging; (2) tickets for
entertainment events (such as concerts, cruises and sporting events) and (3)
merchandise (such as clothing, trophies, clocks and pens). Dealers may not use
sales of the Fund's shares to qualify for this compensation to the extent such
may be prohibited by the laws of any state or any self-regulatory organization,
such as the National Association of Securities Dealers, Inc. None of the
aforementioned compensation is paid for by the Fund or its shareholders.
REDUCED SALES CHARGES. You may be eligible to buy shares at reduced sales
charge rates in one or more of the following ways:
LETTER OF INTENT. An investor may obtain a reduced sales charge by means of a
written Letter of Intent which expresses the investor's intention to purchase
shares of the Fund at a specified total public offering price within a 13-month
period.
A Letter of Intent is not a binding obligation upon the investor to purchase
the full amount indicated. The minimum initial investment under a Letter of
Intent is 5% of the total amount. Shares purchased with the first 5% of such
amount will be held in escrow (while remaining registered in the name of the
investor) to secure payment of the higher sales charge applicable to the shares
actually purchased if the full amount indicated is not purchased, and such
escrowed shares will be involuntarily redeemed to pay the additional sales
charge, if necessary. Dividends (if any) on escrowed shares, whether paid in
cash or reinvested in additional shares, are not subject to escrow. The
escrowed shares will not be available for disposal by the investor until all
purchases pursuant to the Letter of Intent have been made or the higher sales
charge has been paid. When the full amount indicated has been purchased, the
escrow will be released. A Letter of Intent may include purchases of shares
made not more than 90 days prior to the date the investor signs a Letter of
Intent; however, the 13-month period during which the Letter of Intent is in
effect will begin on the date of the earliest purchase to be included. An
investor may combine purchases that are made in an individual capacity with (1)
purchases that are made by members of the investor's immediate family and (2)
purchases made by businesses that the investor owns as sole proprietorships,
for purposes of obtaining reduced sales charges by means of a written Letter of
Intent. In order to accomplish this, however, investors must designate on the
account application the accounts that are to be combined for this purpose.
Investors can only designate accounts that are open at the time the Letter of
Intent is executed.
If an investor qualifies for a further reduced sales charge because the
investor has either purchased more than the dollar amount indicated on the
Letter of Intent or has entered into a Letter of Intent which includes shares
purchased prior to the date of the Letter of Intent, the difference in the
sales charge will be used to purchase additional shares of the Fund on behalf
of the investor; thus the total purchases (included in the Letter of Intent)
will reflect the applicable reduced sales charge of the Letter of Intent.
For investors who purchase more than the dollar amount indicated on the Letter
of Intent or enter into a Letter of Intent that includes shares purchased prior
to the date of the Letter of Intent and qualify for a reduced sales charge, all
such additional shares will be immediately purchased in the form of additional
shares and credited to the investor's account at the then current public
offering price applicable to a single purchase of the total amount of the
purchases.
For further information about Letters of Intent, interested investors should
contact the Transfer Agent at 800-539-3863. This program, however, may be
modified or eliminated at any time without notice.
RIGHT OF ACCUMULATION AND CONCURRENT PURCHASES
A shareholder may qualify for a reduced sales charge on purchases of shares of
the Fund and other funds of the Victory Portfolios by combining a current
purchase with purchases of another fund(s) or with certain prior purchases of
shares of the Victory Portfolios. The applicable sales charge is based on the
sum of (i) the purchaser's current purchase plus (ii) the current public
offering price of the purchaser's previous purchases of (a) all shares held by
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<PAGE> 445
the purchaser in the Fund and (b) all shares held by the purchaser in any other
fund of the Victory Portfolios (except money market funds).
To receive the applicable public offering price pursuant to the right of
accumulation, shareholders must provide the Transfer Agent with sufficient
information at the time of purchase to permit confirmation of qualification.
Accumulation privileges may be amended or terminated without notice at any time
by the Distributor.
- - WAIVERS OF SALES CHARGES. No sales charge is imposed on sales of shares to
the following categories of persons (which categories may be changed or
eliminated at any time):
(1) Current or retired trustees of the Victory Portfolios; employees,
directors, trustees, and their family members of KeyCorp or an
Affiliated Provider (Affiliated Providers refer to affiliates and
subsidiaries of KeyCorp and service providers to the Victory
Portfolios and the Victory Shares (collectively, the "Victory
Group")), dealers having an agreement with the Distributor and any
trade organization to which Key Advisers, the Sub-Adviser or the
Administrator belongs;
(2) Investors who purchase shares for trust, investment management or
certain other advisory accounts established with KeyCorp or any of its
affiliates;
(3) Investors who purchase shares through a 401(k) plan sponsored by an
Affiliated Provider;
(4) Investors who reinvest assets received in a distribution from a
qualified, non-qualified or deferred compensation plan, agency, trust
or custody account that was either (a) maintained by KeyCorp or an
Affiliated Provider, or (b) invested in a fund of the Victory Group;
(5) Investors who, within 90 days of redemption, use the proceeds from the
redemption of shares of another mutual fund complex for which they
previously paid a front end sales charge or sales charge upon
redemption of shares; and
(6) Shareholders of the former Investors Preference Fund For Income, Inc.
and the Investors Preference New York Tax-Free Fund, Inc. who have
continuously maintained accounts with a fund or funds of the Victory
Group with a balance of $250,000 or more (investors with less than
$250,000 will pay any applicable sales loads).
SPECIAL INVESTOR SERVICES
- - THE SYSTEMATIC INVESTMENT PLAN. You can make regular investments in the
Fund and all other funds of the Victory Group with the Systematic Investment
Plan by completing the appropriate section of the account application and
attaching a voided personal check with your bank's magnetic ink coding number
across the front. If your bank account is jointly owned, be sure that all
owners sign. You must first meet the Fund's initial investment requirement of
$500, then investments may be made monthly by automatically deducting $25 or
more from your bank checking account. For officers, trustees, directors and
employees, including retired directors and employees, of the Victory Group,
KeyCorp and its affiliates, and the Administrator and its affiliates (and
family members of each of the foregoing, i.e., parents and children) who
participate in the Systematic Investment Plan, there is no minimum initial
investment required. You may change the amount of your monthly purchase at any
time. A bank draft form must be completed for this option. Your bank checking
account will be debited on the date indicated on your Account Application.
Shares will be purchased at the offering price next determined following
receipt of the order by the Transfer Agent. You may cancel the Systematic
Investment Plan at any time without payment of a cancellation fee. Your
monthly account statement will reflect systematic investment transactions, and
a debit entry will appear on your bank statement.
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<PAGE> 446
- - TELEPHONE TRANSACTIONS. You can initiate any transaction by telephone. You
may call the Transfer Agent toll-free at 800-539-3863 or call your Investment
Professional or bank trust department. See "Shareholder Account Rules and
Policies" for more information about telephone transactions.
- - THE SYSTEMATIC WITHDRAWAL PLAN. You can make regular withdrawals from your
account in any fund of the Victory Group with the Systematic Withdrawal Plan by
completing the appropriate section of the account application. If you own
shares in a fund worth $5,000 or more, you can have monthly, quarterly,
semi-annual or annual checks sent from your account directly to you, to a
person named by you, or to your bank checking account. The required minimum
withdrawal is $25. If you are having checks sent to your bank checking
account, attach a voided personal check with your bank's magnetic coding number
across the front of the account application. If your account is jointly owned,
be sure that all owners sign the application. You may obtain information about
the Systematic Withdrawal Plan by contacting your Investment Professional.
Your Systematic Withdrawal Plan payments are drawn from share redemptions. If
Systematic Withdrawal Plan redemptions exceed dividend distributions paid on
your Fund shares, your account eventually may be exhausted. If any applicable
sales charges are applied to new purchases of shares of the Fund, it is to your
disadvantage to buy shares of the Fund while also making systematic
redemptions.
Your account will be debited on the date you indicate on your Account
Application. Shares will be redeemed at the NAV as determined on the debit
date indicated on your Account Application. You may cancel the Systematic
Withdrawal Plan at any time without payment of a cancellation fee. Each
Systematic Withdrawal Plan transaction will appear as a debit entry on your
monthly account statement.
- - RETIREMENT PLANS. Retirement plans can be among the best tax-planning
vehicles available to individuals. Call your Investment Professional for more
information on the plans and their benefits, provisions and fees. Your
Investment Professional can set up your new account in the Fund under one of
several tax-sheltered plans. These plans let you invest for retirement and
shelter your investment income from current taxes. Plans include Individual
Retirement Accounts (IRAs) and Rollover IRAs. Other fees may be charged by the
IRA custodian or trustee.
HOW TO REDEEM SHARES
You may redeem all or a portion of your shares on any day that the Fund is open
for business (see "Share Price" below). Shares will be redeemed at the NAV
next calculated after the Transfer Agent has received the redemption request.
If the Fund account is closed, any accrued dividends will be paid at the
beginning of the following month.
You may redeem shares in several ways:
BY MAIL: Send a written request to: The Victory Portfolios: Value Fund
P.O. Box 9741
Providence, RI 02940-9741
Write a "letter of instruction" with your name, the Fund's name, your Fund
account number, the dollar amount or number of shares to be redeemed, and any
additional requirements that apply to each particular account. You will need
the letter of instruction signed by all persons required to sign for
transactions, exactly as their names appear on the account application. A
signature guarantee is required if: you wish to redeem more than $10,000 worth
of shares; your Fund account registration has changed within the last 60 days;
the check is not being mailed to the address on your account; the check is not
being made out to the account owner; or the redemption proceeds are being
transferred to another Victory Group account with a different registration.
The following institutions should be able to provide you with a signature
guarantee: banks, brokers, dealers, credit unions (if authorized under state
law), securities exchanges and associations, clearing agencies, and savings
associations. A signature guarantee may not be provided by a notary public. A
signature guarantee is designed to protect you, the Fund, and its agents from
fraud. The Transfer Agent reserves the right to reject any signature guarantee
if (1) it has reason to believe that the signature is not genuine, (2) it has
reason to believe that the transaction would otherwise be improper, or (3) the
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<PAGE> 447
guarantor institution is a broker or dealer that is neither a member of a
clearing corporation nor maintains net capital of at least $100,000.
BY WIRE: You may make redemptions by wire provided you have established a Fund
account to accommodate wire transactions. If telephone instructions are
received before Valuation Time (generally 4:00 p.m. Eastern time), proceeds of
the redemption will be wired as federal funds on the next Business Day to the
bank account designated with the Transfer Agent. You may change the bank
account designated to receive an amount redeemed at any time by sending a
letter of instruction with a signature guarantee to the Transfer Agent, Primary
Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741.
BY TELEPHONE: To redeem by telephone, you may call the Transfer Agent toll
free at 800-539-3863 or call your Investment Professional or bank trust
department. See "Shareholder Account Rules and Policies" for more information
about telephone transactions.
ADDITIONAL REDEMPTION REQUIREMENTS: The Fund may withhold payment on
redemptions until it is reasonably satisfied that investments made by check
have been collected, which can take up to 15 days. Also, when the NYSE is
closed (or when trading is restricted) for any reason other than its customary
weekend or holiday closings, or under any emergency circumstances as determined
by the Commission to merit such action, the right of redemption may be
suspended or the date of payment postponed for a period of time that may exceed
7 days. In addition, the Fund reserves the right to advance the time on that
day by which purchase and redemption orders must be received. To the extent
that portfolio securities are traded in other markets on days when the NYSE is
closed, the Fund's NAV may be affected on days when investors do not have
access to the Fund to purchase or redeem shares.
If you are unable to reach the Transfer Agent by telephone (for example, during
times of unusual market activity), consider placing your order by mail directly
to the Transfer Agent. In case of suspension of the right of redemption, you
may either withdraw your request for redemption or receive payment based on the
NAV next determined after the termination of the suspension. If your balance
in a Fund falls below $500, you may be given 60 days' notice to reestablish the
minimum balance (except with respect to officers, trustees, directors and
employees, including retired directors and employees, of the Victory
Portfolios, KeyCorp and its affiliates, and the Administrator and its
affiliates (and family members of each of the foregoing, i.e., parents,
children and household members) participating in the Systematic Investment
Plan, to whom no minimum balance requirement applies). If you do not increase
your balance, your account may be closed and the proceeds mailed to you at the
address on record. Shares will be redeemed at the last calculated NAV on the
day the account is closed.
HOW TO EXCHANGE SHARES
Shares of the Fund may be exchanged for shares of certain funds of the Victory
Group at net asset value per share at the time of exchange, without a sales
charge. To exchange shares, you must meet several conditions:
- - Shares of the fund selected for exchange must be available for sale in
your state of residence.
- - The prospectuses of this Fund and the fund whose shares you want to
buy must offer the exchange privilege.
- - You must hold the shares you buy when you establish your account for
at least 7 days before you can exchange them; after the account is
open 7 days, you can exchange shares every regular Business Day.
- - You must meet the minimum purchase requirements for the fund you
purchase by exchange.
- - The registration and tax identification numbers of the two accounts
must be identical.
- - Before exchanging into a fund, obtain and read its prospectus.
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<PAGE> 448
Shares of a particular class may be exchanged only for shares of the same class
in the other funds of the Victory Group. For example, you can exchange shares
of this Fund only for Class A shares of another fund. At present, not all of
the funds offer the same two classes of shares. If a fund has only one class
of shares that does not have a class designation, they are "Class A" shares for
exchange purposes. In some cases, sales charges may be imposed on exchange
transactions. Certain funds offer Class A or Class B shares and a list can be
obtained by calling the Transfer Agent at 800-539-3863. Please refer to the
Statement of Additional Information for more details about this policy.
Telephone exchange requests may be made either by calling your Investment
Professional or the Transfer Agent at 800-539-3863 prior to valuation time
(generally 4:00 p.m. Eastern time) on any Business Day.
You can obtain a list of eligible funds of the Victory Group by calling the
Transfer Agent at 800-539-3863. Exchanges of shares involve a redemption of
the shares of the Fund and a purchase of shares of the other portfolio.
There are certain exchange policies you should be aware of:
- - Shares are normally redeemed from one fund and purchased from the other fund
in the exchange transaction on the same Business Day on which the Transfer
Agent receives an exchange request by Valuation Time (generally 4:00 p.m.
Eastern time) that is in proper form, but either fund may delay the purchase of
shares of the fund into which you are exchanging if it determines it would be
disadvantaged by a same-day transfer of the proceeds to buy shares. For
example, the receipt of multiple exchange requests from a dealer in a
"market-timing" strategy might require the disposition of securities at a time
or price disadvantageous to the Fund.
- - Because excessive trading can hurt fund performance and harm shareholders,
the Victory Portfolios reserves the right to refuse any exchange request that
will disadvantage it, or to refuse multiple exchange requests submitted by a
shareholder or dealer.
- - The Fund may amend, suspend or terminate the exchange privilege at any time
upon 60 days' written notice to shareholders.
- - If the Transfer Agent cannot exchange all the shares you request because of
a restriction cited above, only the shares eligible for exchange will be
exchanged.
- - Each exchange may produce a gain or loss for tax purposes.
Shareholders of the former Investors Preference Fund for Income, Inc. and
Investors Preference New York Tax-Free Fund, Inc. will not be subject to any
additional sales load upon an exchange of shares attributable to an Investors
Preference Funds account for shares of other funds of the Victory Portfolios.
SHAREHOLDER ACCOUNT RULES AND POLICIES
- - NET ASSET VALUE PER SHARE. The term "net asset value per share," or "NAV",
means the value of one share. The NAV is calculated by adding the value of all
its investments, plus cash and other assets, deducting liabilities, and then
dividing the result by the number of shares outstanding. The NAV of the Fund
is determined and its shares are priced as of the close of regular trading of
the New York Stock Exchange (NYSE), (generally 4:00 p.m. Eastern Time) (the
"Valuation Time") on each Business Day of the Fund. A "Business Day" is a day
on which the NYSE is open for trading, the Federal Reserve Bank of Cleveland is
open, and any other day (other than a day on which no shares of the Fund are
tendered for redemption and no order to purchase any shares is received) during
which there is sufficient trading in its portfolio instruments that the Fund's
net asset value per share might be materially affected. The NYSE or the
Federal Reserve Bank of Cleveland will not be open in observance of the
following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day,
Veterans' Day, Thanksgiving Day, and Christmas Day.
18
<PAGE> 449
The Fund's securities are valued primarily on the basis of market quotations
or, if quotations are not readily available, by a method that the Board of
Trustees believes accurately reflects fair value. Fair value of these
portfolio securities is determined by an independent pricing service approved
by the Trustees based primarily upon information concerning market transactions
and dealers quotations for similar securities.
- - THE OFFERING OF SHARES may be suspended during any period in which the
determination of net asset value is suspended, and the offering may be
suspended by the Trustees at any time the Trustees believe it is in the Fund's
best interest to do so.
- - TELEPHONE TRANSACTION PRIVILEGES for purchases, redemptions or exchanges
may be modified, suspended or terminated by the Fund at any time. If an
account has more than one owner, the Fund and the Transfer Agent may rely on
the instructions of any one owner. Telephone privileges apply to each owner of
the account and the dealer representative of record for the account unless and
until the Transfer Agent receives cancellation instructions from an owner of
the account.
- - TELEPHONE INSTRUCTIONS. Generally, neither the Fund, the bank trust
department nor the Transfer Agent will be responsible for any claims, losses or
expenses for acting on telephone instructions that are reasonably believed to
be genuine. The Transfer Agent and the Fund will employ reasonable procedures
to confirm that instructions communicated by telephone are genuine and if they
do not employ reasonable procedures they may be liable for any losses due to
unauthorized or fraudulent instructions. The identification procedures may
include, but are not limited to, the following: account number, registration
and address, personalized security codes, taxpayer identification number and
other information particular to the account. Your Investment Professional,
bank trust department or the Transfer Agent may also record calls, and you
should verify the accuracy of your confirmation statements immediately after
you receive them.
- - REDEMPTION OR TRANSFER REQUESTS WILL NOT BE HONORED UNTIL THE TRANSFER AGENT
RECEIVES ALL REQUIRED DOCUMENTS IN PROPER FORM. From time to time, the
Transfer Agent in its discretion may waive certain of the requirements for
redemptions stated in this Prospectus.
- - DEALERS THAT CAN PERFORM ACCOUNT TRANSACTIONS FOR THEIR CLIENTS BY
PARTICIPATING IN NETWORKING through the National Securities Clearing
Corporation are responsible for obtaining their clients' permission to perform
those transactions and are responsible to their clients who are shareholders of
the Victory Portfolios if the dealer performs any transaction erroneously.
- - THE REDEMPTION PRICE FOR SHARES WILL VARY from day to day because the value
of the securities in the Fund fluctuates, and the value of your shares may be
more or less than their original cost.
- - PAYMENT FOR REDEEMED SHARES is made ordinarily in cash and forwarded by
check within three business days after the Transfer Agent receives redemption
instructions in proper form, except under unusual circumstances determined by
the Commission delaying or suspending such payments. The Transfer Agent may
delay forwarding a check for recently purchased shares, but only until the
purchase payment has cleared. That delay may be as much as 15 days from the
date the shares were purchased. That delay may be avoided if you arrange with
your bank to provide telephone or written assurance to the Transfer Agent that
your purchase payment has cleared.
- - INVOLUNTARY REDEMPTIONS OF SMALL ACCOUNTS. If your account value has fallen
below $500, you will be given 60 days' notice to reestablish the minimum
balance. If you do not increase your minimum balance, your account may be
closed and the proceeds mailed to you at the record address. In some cases
involuntary redemptions may be made to repay the Distributor for losses from
the cancellation of share purchase orders. Under unusual circumstances, shares
of the Fund may be redeemed "in kind," which means that the redemption proceeds
will be paid with securities from the Fund. Please refer to the Statement of
Additional Information for more details.
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<PAGE> 450
- - "BACKUP WITHHOLDING" of Federal income tax may be applied at the rate of 31%
from dividends, distributions and redemption proceeds (including exchanges) if
you fail to furnish the Victory Portfolios with a certified Social Security or
taxpayer identification number when you sign your application, or if you
violate Internal Revenue Service regulations on tax reporting of dividends.
- - THE VICTORY PORTFOLIOS DOES NOT CHARGE A REDEMPTION FEE, but if your
Investment Professional handles your redemption, they may charge a separate
service fee.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS. The Fund ordinarily declares and pays dividends from its net
investment income quarterly. The Fund distributes substantially all net
capital gains, if any, to shareholders each year, to the extent necessary to
qualify for favorable federal tax treatment.
CAPITAL GAINS. The Fund may make distributions annually out of any net
short-term or long-term capital gains, and the Fund may make supplemental
distributions of dividends and capital gains following the end of its fiscal
year.
DISTRIBUTION OPTIONS
When you fill out your account application, you can specify how you want to
receive your dividend distributions. Currently, there are five available
options:
1. REINVESTMENT OPTION. Your income and capital gain dividends, if any,
will be automatically reinvested in additional shares of the Fund.
Income and capital gain dividends will be reinvested at the net asset
value of the Fund as of the day after the record date. If you do not
indicate a choice on your application, you will be assigned this
option.
2. CASH OPTION. You will receive a check for each income or capital gain
dividend, if any. Distribution checks will be mailed no later than 7
days after the dividend payment date which may be more than 7 days
after the dividend record date.
3. INCOME EARNED OPTION. You will have your capital gain dividend
distributions, if any, reinvested automatically in the Fund and have
your income dividends paid in cash.
4. DIRECTED DIVIDENDS OPTION. You will have income and capital gain
dividends, or only capital gain dividends, automatically reinvested in
shares of another fund of the Victory Group. Shares will be purchased
at the NAV as of the dividend record date. If you are reinvesting
dividends of a fund sold without a sales charge in shares of a fund
sold with a sales charge, the shares will be purchased at the public
offering price. If you are reinvesting dividends of a fund sold with
a sales charge in shares of a fund sold with or without a sales
charge, the shares will be purchased at the net asset value of the
fund. Dividend distributions can be directed only to an existing
account with a registration that is identical to that of your Fund
account.
5. DIRECTED BANK ACCOUNT OPTION. You will have your income and capital
gain dividends, or only your income dividends, automatically
transferred to your bank checking or savings account. The amount will
be determined on the dividend record date and will normally be
transferred to your account within 7 days of the dividend record date.
Dividend distributions can be directed only to an existing account
with a registration that is identical to that of your Fund account.
Please call or write the Transfer Agent to learn more about this
dividend distribution option.
Any election or revocation of any of the above dividend distribution options
may be made in writing to the Fund and sent to Primary Funds Service
Corporation, P.O. Box 9741, Providence, RI 02940-9741, or by calling the
20
<PAGE> 451
Transfer Agent at 800-539-3863, and will become effective with respect to
dividends having record dates after receipt of the application or request by
the Transfer Agent.
Reinvested dividend distributions receive the same tax treatment as dividend
distributions paid in cash.
COMPLETE REDEMPTIONS: If you request a complete redemption of all your Fund
shares, any dividend accrued to your account will be included in the redemption
check.
STATEMENTS AND REPORTS: You will receive a monthly statement reflecting all
transactions that affect the share balance or the registration of your Fund
account. You will receive a confirmation after every transaction that affected
the share balance of your Fund account, except for dividend reinvestment,
systematic investment and systematic withdrawal transactions. These
transactions will be detailed in your Fund account statement. Transactions
that affect the share balance of your Fund investment in an account established
with an Investment Professional or financial institution will be detailed in
regular statements or through confirmation procedures of the financial
institution. Certificates representing shares of the Fund will not be issued.
An IRS Form 1099-DIV with federal tax information will be mailed to you by
January 31 of each tax year and also will be filed with the IRS. At least
twice a year, you will receive the Fund's financial reports.
FEDERAL TAXES
The Fund intends to qualify each year and elect to be treated as a separate
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "IRS Code"). If the Fund is treated as a "regulated
investment company" and all its taxable income is distributed to its
shareholders in accordance with the timing requirements imposed by the IRS
Code, it will not be subject to federal income tax on its income. The Fund's
distributions that are attributable to its net investment income and short-term
capital gains are taxable as ordinary income, and its distributions from
long-term capital gains are taxed as long-term capital gains. Such
distributions are taxable when they are paid, whether taken in cash or
reinvested in additional shares, except that distributions declared in October,
November or December and paid during the following January are taxable as if
paid and received on December 31. Dividends received from the Fund by
corporate shareholders are not entitled to the dividends-received deduction.
The Fund sends tax statements to its shareholders (with copies to the Internal
Revenue Service (the "IRS")) by January 31 showing the amounts and tax status
of distributions made (or deemed made) during the preceding calendar year.
Income derived from securities of foreign issuers may be subject to foreign
withholding taxes. The Fund will not be able to elect to treat shareholders as
having paid their proportionate shares of such foreign taxes.
REDEMPTION OR EXCHANGES
Investors may realize a gain or loss when redeeming (selling) or exchanging
shares. For most types of accounts, the Fund reports the proceeds to the IRS
annually. Because the shareholders' tax treatment also depends on their
purchase price and personal tax positions, shareholders should keep their
regular account statements to use in determining their tax. See "Buying a
Dividend".
"BUYING A DIVIDEND"
On the record date for a distribution of ordinary income or capital gains
dividend, the net asset value of the Fund is reduced by the amount of the
distribution. An investor who buys shares just before the record date ("buying
a dividend") will pay the full price for the shares and then receive a portion
of the purchase price back as a taxable distribution.
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<PAGE> 452
OTHER TAX INFORMATION
The information above is only a summary of some of the federal income tax
consequences generally affecting the Fund and its shareholders, and no attempt
has been made to discuss individual tax consequences. A prospective investor
should also review the more detailed discussion of federal income tax
considerations in the Statement of Additional Information. In addition to
federal income tax, a shareholder may be subject to state or local taxes on the
shareholder's investment, depending on the laws in the shareholder's area.
Investors considering an investment in the Fund should consult their tax
adviser to determine whether the Fund is suitable to their particular tax
situation.
When investors sign their account application, they are asked to provide their
correct social security or taxpayer identification number and other required
certifications. If investors do not comply with IRS regulations, the IRS can
require the Fund to withhold 31% of taxable distributions and redemptions from
their account.
PERFORMANCE
From time to time, performance information for the Fund showing total return
may be presented in advertisements, sales literature and in reports to
shareholders. Such performance figures are based on historical earnings and
are not intended to indicate future performance. Average annual total return
will be calculated over a stated period of more than one year. Average annual
total return is measured by comparing the value of an investment at the
beginning of the relevant period (as adjusted for sales charges, if any) to the
redemption value of the investment at the end of the period (assuming immediate
reinvestment of any dividends or capital gains distributions) and annualizing
that figure. Aggregate total return is calculated similarly to average annual
total return, except that the resulting difference is not annualized.
From time to time performance information for the Fund showing the yield and/or
effective yield for each class of shares may also be presented in
advertisements, sales literature and in reports to shareholders. Yields
reflect the deduction of the maximum sales charge. Such performance figures
are based on historical earnings and are not intended to indicate future
performance. Yield will be computed by dividing the Fund's net investment
income per share earned during a recent thirty-day period by the Fund's maximum
offering price per share (reduced by any undeclared earned income expected to
be paid shortly as a dividend) on the last day of the period and annualizing
the result. Effective yield is computed in a similar manner, but, when
annualized, the income earned by an investment in the Fund is assumed to be
reinvested. The effective yield will be slightly higher than the yield because
of the compounding effect of this assumed reinvestment.
Investors may also judge, and the Victory Portfolios may at times advertise,
the performance of the Fund by comparing it to the performance of other mutual
funds with comparable investment objectives and policies, which performance may
be contained in various unmanaged mutual fund or market indices or rankings
such as those prepared by Dow Jones & Co., Inc. and Standard & Poor's
Corporation, in publications issued by Lipper Analytical Services, Inc., and in
the following publications: IBC/Donoghue's Money Fund Reports, Ibbotson
Associates, Inc., Morningstar, CDA/Wiesenberger, Money Magazine, Forbes,
Barron's, The Wall Street Journal, The New York Times, Business Week, American
Banker, Fortune, Institutional Investor, U.S.A. Today and local newspapers.
In addition, general information about the Fund that appears in publications
such as those mentioned above may also be quoted or reproduced in
advertisements, sales literature or in reports to shareholders.
Performance is a function of the type and quality of instruments held in the
Fund's portfolio, operating expenses, and market conditions. Consequently,
current performance will fluctuate and is not necessarily representative of
future results. Any fees charged by service providers with respect to customer
accounts for investing in shares of the Fund will not be reflected in
performance calculations.
Additional information regarding the performance of each of the Victory
Portfolios is included in the Victory Portfolios' annual report, which is
available free of charge by calling 800-539-3863.
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<PAGE> 453
FUND ORGANIZATION AND FEES
The Victory Portfolios is an open-end management investment company, commonly
known as a mutual fund, and currently consisting of twenty-eight series
portfolios, four of which are inactive. The Victory Portfolios has been
operating continuously since 1986, when it was created under Massachusetts law
as a Massachusetts business trust, although certain of its funds have a prior
operating history from their predecessor funds. On February 29, 1996, the
Victory Portfolios converted from a Massachusetts business trust to a Delaware
business trust. The Victory Portfolios' offices are located at 3435 Stelzer
Road, Columbus, OH 43219-3035.
Overall responsibility for management of the Victory Portfolios rests with its
Board of Trustees, who are elected by the shareholders of the Victory
Portfolios.
INVESTMENT ADVISERS AND SUB-ADVISER
Key Advisers is the investment adviser to the Fund. Key Advisers directs the
investment of the Victory Portfolios' assets, subject at all times to the
supervision of the Victory Portfolios' Board of Trustees. Key Advisers
continually supervises the investment and reinvestment of cash, securities and
other property comprising the assets of the Victory Portfolios.
Key Advisers was organized as an Ohio corporation on July 27, 1995 and is
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended. It is a wholly-owned subsidiary of KeyCorp Asset Management
Holdings, Inc., which is a wholly- owned subsidiary of Society National Bank, a
wholly-owned subsidiary of KeyCorp. Affiliates of Key Advisers manage
approximately $37 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals and mutual funds.
For the services provided and expenses incurred pursuant to its investment
advisory agreement with the Victory Portfolios respecting the Fund, Key
Advisers receives a fee, computed daily and paid monthly, at the annual rate of
one percent (1.00%) of the average daily net assets of the Fund. The advisory
fees for the Fund have been determined to be fair and reasonable in light of
the services provided to the Fund. Key Advisers may periodically waive all or
a portion of its advisory fee with respect to the Fund to increase the net
income of the Fund available for distribution as dividends. Prior to January
1, 1996, the Sub-Adviser (Society Asset Management, Inc.) served as investment
adviser to the Fund. During the Fund's fiscal year ended October 31, 1995, the
Sub- Adviser received investment advisory fees aggregating .__% of the average
daily net assets of the Fund.
Under the investment advisory agreement between the Victory Portfolios, on
behalf of the Fund, and Key Advisers, Key Advisers may delegate a portion of
its responsibilities to a subadviser. In addition, the investment advisory
agreement provides that Key Advisers may render services through its own
employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser of the Fund and are under the common
control of KeyCorp as long as all such persons are functioning as part of an
organized group of persons, managed by authorized officers of Key Advisers.
Key Advisers has entered into an investment sub-advisory agreement with its
affiliate, Society Asset Management, Inc., a registered investment adviser, on
behalf of the Fund. The Sub-Adviser is a wholly-owned subsidiary of KeyCorp
Asset Management Holdings, Inc. For its services under the investment
sub-advisory agreement, Key Advisers pays the Sub-Adviser sub-advisory fees at
an annual rate as a percentage of the Fund's average daily net assets as
follows: .65% of the first $10 million of average daily net assets; .50% of
the next $15 million of average daily net assets; .40% of the next $25 million
of average daily net assets; and .35% of average daily net assets in excess of
$50 million.
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<PAGE> 454
The person primarily responsible for the investment management of the
Fund as well as her previous experience is as follows:
<TABLE>
<CAPTION>
PORTFOLIO MANAGING PREVIOUS
MANAGER PORTFOLIO SINCE EXPERIENCE
------- --------------- ----------
<S> <C> <C>
Judith A. Jones Commencement of Portfolio manager with
Operations Society Asset Management,
Inc. since 1993; portfolio
manager with Ameritrust
from 1965 to 1992.
</TABLE>
ADMINISTRATOR AND DISTRIBUTOR
Concord Holding Corporation is the Administrator for the Fund. Victory
Broker-Dealer Services, Inc. is the Fund's principal underwriter and
Distributor.
The Administrator generally assists in all aspects of the Fund's administration
and operation. For expenses incurred and services provided as Administrator
pursuant to its management and administration agreement with the Victory
Portfolios, the Administrator receives a fee from the Fund, computed daily and
paid monthly, at an annual rate of fifteen one-hundredths of one percent (.15%)
of the Fund's average daily net assets. The Administrator may periodically
waive all or a portion of its administrative fee with respect to the Fund to
increase the net income of the Fund available for distribution as dividends.
During the fiscal year ended October 31, 1995, the Fund paid administration
fees of ___% of its average daily net assets.
TRANSFER AGENT AND FUND ACCOUNTANT
Primary Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741,
serves as the Fund's Transfer Agent pursuant to a Transfer Agency and
Shareholder Service Agreement with the Victory Portfolios and receives a fee
for such services based on various criteria, including assets, transactions and
the number of accounts. BISYS Fund Services Ohio, Inc., 3435 Stelzer Road,
Columbus, OH 43219, provides certain accounting services for the Fund pursuant
to a Fund Accounting Agreement and receives a fee for such services.
SHAREHOLDER SERVICING
Shareholder services are provided to the Fund pursuant to agreements between
the Victory Portfolios and various shareholder servicing agents, including Key
Trust Company of Ohio, N.A. and its affiliates and other financial institutions
and securities brokers (each a "Shareholder Servicing Agent"). Each
Shareholder Servicing Agent generally will provide support services to
shareholders by establishing and maintaining accounts and records, processing
dividend and distribution payments, providing account information, arranging
for bank wires, responding to routine inquires, forwarding shareholder
communication, assisting in the processing of purchase, exchange and redemption
requests, and assisting shareholders in changing dividend options, account
designations and addresses. For expenses incurred and services provided as
Shareholder Servicing Agent pursuant to its respective Shareholder Servicing
Agreement, the Fund pays each Shareholder Servicing Agent a fee computed daily
and paid monthly, in amounts aggregating not more than twenty-five
one-hundredths of one percent (.25%) of the average daily net assets of the
Fund per year. A Shareholder Servicing Agent may periodically waive all or a
portion of its respective shareholder servicing fees with respect to the Fund
to increase the net income of the Fund available for distribution as dividends.
During the fiscal year ended October 31, 1995, the Fund paid Shareholder
Servicing fees of __% of the Fund's average daily net assets.
EFFECT OF BANKING LAWS
24
<PAGE> 455
Key Advisers and the Sub-Adviser believe that they may perform the investment
advisory services for the Fund contemplated by the investment advisory (and
sub-advisory) agreements (the "Advisory Agreements") with the Fund. In the
Advisory Agreements Key Advisers and the Sub-Adviser have represented that they
possess the legal authority to perform the investment advisory services
contemplated therein and described in this Prospectus. Key Trust Company of
Ohio, N.A. and its affiliates also believe that they also may perform the
services for the Victory Portfolios contemplated by the Shareholder Servicing
Agreement with the Victory Portfolios without violating applicable banking laws
and regulations. Future changes in federal or state statutes and regulations
relating to permissible activities of banks or bank holding companies and their
subsidiaries and affiliates, as well as further judicial or administrative
decisions or interpretations of present and future statutes and regulations,
could change the manner in which Key Advisers, the Sub-Adviser, Key Trust
Company of Ohio, N.A. and its affiliates could continue to perform such
services for the Victory Portfolios. See the Statement of Additional
Information ("Glass-Steagall Act") for further discussion.
BUSINESS MANAGEMENT AGREEMENT
In connection with its obligations under its investment sub-advisory agreement
with Key Advisers, the Sub-Adviser has entered into a Business Management
Agreement with Key Advisers pursuant to which Key Advisers provides certain
administrative and support services to the Sub-Adviser. Such services include
preparing reports to the Company's Board of Trustees, recordkeeping services,
and services rendered in connection with the preparation of regulatory filings
and other reports, and regulatory and compliance systems and other
administrative and support services.
For such services, the Sub-Adviser pays fees to Key Advisers at an annual rate
as follows: .30% on the first $10 million of average daily net assets; .15% of
the next $15 million of average daily net assets ; .05% of the next $25 million
of average daily net assets; and .0% of average daily net assets in excess of
$50 million.
EXPENSES
For the fiscal year ended October 31, 1995, the Fund's total operating expenses
were .__% of the Fund's average net assets.
25
<PAGE> 456
CUSTODIAN
Key Trust Company of Ohio, N.A. serves as custodian for the Fund and receives
fees for its services.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. serves as the Fund's independent accountants.
ADDITIONAL INFORMATION
The Victory Portfolios may issue an unlimited number of shares and classes of
the Fund. Shares of each class of the Fund participate equally in dividends
and distributions and have equal voting, liquidation and other rights. When
issued and paid for, shares will be fully paid and nonassessable by the Victory
Portfolios and will have no preference, conversion, exchange or preemptive
rights. Shareholders are entitled to one vote for each full share owned and
fractional votes for fractional shares owned. For those investors with
qualified trust accounts established with affiliates of the Adviser, the
trustee will vote the shares at meetings of the Fund's shareholders in
accordance with the shareholder's instructions or will vote in the same
percentage as shares that are not held in trust. The trustee will forward to
these shareholders all communications received by the trustee, including proxy
statements and financial reports. The Victory Portfolios and the Fund are not
required to hold annual meetings of shareholders and in ordinary circumstances
do not intend to hold such meetings. The Trustees may call special meetings of
shareholders for action by shareholder vote as may be required by the 1940 Act
or the Victory Portfolios' Delaware Trust Instrument. Under certain
circumstances, the Trustees may be removed by action of the Trustees or by the
shareholders. Shareholders holding 10% or more of the Victory Portfolios'
outstanding shares may call a special meeting of shareholders for the purpose
of voting upon the question of removal of Trustees.
The Victory Portfolio's Board of Trustees may authorize the Victory Portfolios
to offer other funds which may differ in the types of securities in which their
assets may be invested.
Key Advisers, the Sub-Adviser and the Victory Portfolios have adopted Codes of
Ethics (the "Codes") which require investment personnel (a) to pre-clear all
personal securities transactions, (b) to file reports regarding such
transactions, and (c) to refrain from personally engaging in (i) short-term
trading of a security, (ii) transactions involving a security within seven days
of a Victory fund transaction involving the same security, and (iii)
transactions involving securities being considered for investment by a Victory
fund. The Codes also prohibit investment personnel from purchasing securities
in an initial public offering. Personal trading reports are reviewed
periodically by Key Advisers or the Sub-Adviser, and the Board of Trustees
reviews annually such reports (including information on any substantial
violations of the Codes). Violations of the Codes may result in censure,
monetary penalties, suspension or termination of employment.
DELAWARE LAW
The Delaware Business Trust Act provides that a shareholder of a Delaware
business trust shall be entitled to the same limitation of personal liability
extended to stockholders of Delaware corporations. In light of Delaware law,
the nature of the Victory Portfolios' business, and the nature of its assets,
management of Victory Portfolios believe that the risk of personal liability to
a Fund shareholder would be extremely remote.
In the unlikely event a shareholder is held personally liable for the Victory
Portfolios' obligations, the Victory Portfolios is required to use its property
to protect or compensate the shareholder. On request, the Victory Portfolios
will defend any claim made and pay any judgment against a shareholder for any
act or obligation of the Victory Portfolios. Therefore, financial loss
resulting from liability as a shareholder will occur only if the Victory
Portfolios itself cannot meet its obligations to indemnify shareholders and pay
judgments against them.
26
<PAGE> 457
Delaware law authorizes electronic or telephonic communications between
shareholders and the Victory Portfolios. Under Delaware law, the Successor
Company has the flexibility to respond to future business contingencies. For
example, the Trustees will have the power to incorporate the Victory
Portfolios, to merge or consolidate it with another entity, to cause each fund
to become a separate trust, and to change the Victory Portfolio's domicile
without a shareholder vote. This flexibility could help reduce the expense and
frequency of future shareholder meetings for non-investment related issues.
MISCELLANEOUS
Shareholders will receive Semi-Annual Reports, which are unaudited, and Annual
Reports, which are audited by independent public accountants, describing the
investment operations of the Fund. Each of these reports, when available for a
particular fiscal year end or the end of a semi-annual fiscal period, is
incorporated herein by reference. The Victory Portfolios may include
information in their Annual Reports and Semi-Annual Reports to shareholders
that (i) describes general economic trends, (ii) describes general trends
within the financial services industry or the mutual fund industry, (iii)
describes past or anticipated portfolio holdings for the Fund or (iv) describes
investment management strategies for the Victory Portfolios. Such information
is provided to inform shareholders of the activities of the Victory Portfolios
for the most recent fiscal year or semi-annual fiscal period and to provide the
views of Key Advisers, the Sub-Adviser and/or the Victory Portfolios' officers
regarding expected trends and strategies.
Inquiries regarding the Victory Portfolios or the Fund may be directed in
writing to the Victory Portfolios at Primary Funds Service Corporation, P.O.
Box 9741, Providence, RI 02940-9741, or by telephone, toll-free, at
800-539-3863.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE
OFFERING MADE BY THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
VICTORY PORTFOLIOS OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFERING BY THE VICTORY PORTFOLIOS OR BY THE DISTRIBUTOR IN ANY JURISDICTION
IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
27
<PAGE> 458
The Victory Portfolios
PART B
<PAGE> 459
<PAGE> 1
STATEMENT OF ADDITIONAL INFORMATION
THE VICTORY PORTFOLIOS
THE FINANCIAL RESERVES FUND
March 1, 1996
This Statement of Additional Information is not a Prospectus, but
should be read in conjunction with the Prospectus of The Victory Portfolios -
The Financial Reserves Fund, dated the same date as the date hereof (the
"Prospectus"). This Statement of Additional Information is incorporated by
reference in its entirety into the Prospectus. Copies of the Prospectus may be
obtained by writing The Victory Portfolios at Primary Funds Service Corporation,
P.O. Box 9741, Providence, RI 02940-9741, or by telephoning toll free
800-539-FUND or 800-539-3863.
<TABLE>
<S> <C> <C>
Investment Policies and Limitations 1 INVESTMENT ADVISER
Valuation of Portfolio Securities 4 KeyCorp Mutual Fund Advisers, Inc.
Additional Purchase, Exchange and Redemption Information 5
Management of the Victory Portfolios 8 INVESTMENT SUB-ADVISER
Advisory and Other Contracts 15 Society Asset Management, Inc.
Additional Information 22
Independent Auditor's Report 27 ADMINISTRATOR
Financial Statements 27 Concord Holding Corporation
Appendix 28
DISTRIBUTOR
Victory Broker-Dealer Services, Inc.
TRANSFER AGENT
Primary Funds Service Corporation
CUSTODIAN
Key Trust Company of Ohio, N.A.
</TABLE>
<PAGE> 2
STATEMENT OF ADDITIONAL INFORMATION
The Victory Portfolios (the "Victory Portfolios") is an open-end
management investment company. The Victory Portfolios consist of twenty-eight
series of units of beneficial interest ("shares"), four of which series are
currently inactive. The outstanding shares represent interests in the
twenty-four separate investment portfolios which are currently active. This
Statement of Additional Information relates to The Financial Reserves Fund (the
"Fund") only. Much of the information contained in this Statement of Additional
Information expands on subjects discussed in the Prospectus. Capitalized terms
not defined herein are used as defined in the Prospectus. No investment in
shares of the Fund should be made without first reading the Fund's Prospectus.
INVESTMENT POLICIES AND LIMITATIONS
The Fund's investment objective is to obtain as high a level of current
income as is consistent with preserving capital and providing liquidity through
investment primarily in high-quality, U.S. dollar-denominated money market
instruments.
The following are the Fund's fundamental investment limitations set forth in
their entirety. The Fund will not:
(1) purchase the securities of any issuer (other than obligations issued or
guaranteed as to principal and interest by the United States
government, its agencies or instrumentalities) if, as a result thereof:
(i) more than 5% of its total assets would be invested in the
securities of such issuer, provided, however, that in the case of
certificates of deposit, time deposits and bankers' acceptances, up to
25% of the Fund's total assets may be invested without regard to such
5% limitation, but shall instead be subject to a 10% limitation; (ii)
more than 25% of its total assets would be invested in the securities
of one or more issuers having their principal business activities in
the same industry, provided, however, that it may invest more than 25%
of its total assets in the obligations of domestic banks. Neither
finance companies as a group nor utility companies as a group are
considered a single industry for purposes of this policy (i.e., finance
companies will be considered a part of the industry they finance and
utilities will be divided according to the types of services they
provide);
(2) borrow money except (i) from a bank for temporary or emergency purposes
(not for leveraging or investment) or (ii) by engaging in reverse
repurchase agreements, provided that (i) and (ii) in combination
("borrowings") do not exceed an amount equal to one third of the
current value of its total assets (including the amount borrowed) less
liabilities (not including the amount borrowed) at the time the
borrowing is made;
(3) make loans to other persons, except (i) by the purchase of debt
obligations in which the Fund is authorized to invest in accordance
with its investment objective, and (ii) by engaging in repurchase
agreements. In addition, the Fund may lend its portfolio securities to
broker-dealers or other institutional investors, provided that the
borrower delivers cash or cash equivalents as collateral to the Fund
and agrees to maintain such collateral so that it equals at least 100%
of the value of the securities loaned. Any such securities loan may not
be made if, as a result thereof, the aggregate value of all securities
loaned exceeds 33 1/3% of the total assets of the Fund;
(4) act as an underwriter (except as it may be deemed such in a sale of
restricted securities);
(5) buy or sell real estate, commodities, or commodity (futures);
(6) the Fund may not issue any senior security (as defined in the 1940
Act), except that (a) the Fund may engage in transactions which may
result in the issuance of senior securities to the extent permitted
under applicable regulations and interpretations of the 1940 Act or an
exemptive order; (b) the Fund may acquire other
<PAGE> 3
securities that may be deemed senior securities to the extent permitted
under applicable regulations or interpretations of the 1940 Act; (c)
subject to certain restrictions, the Fund may borrow money as
authorized by the 1940 Act.
The following limitations are not fundamental and may be changed without
shareholder notification:
The Fund will not:
(1) purchase the securities of a company if such purchase, at the time
thereof, would cause more than 5% of the Fund's total assets to be
invested in securities of companies, which, including predecessors,
have a record of less than three years' continuous operation;
(2) pledge assets, except that the Fund may pledge not more than one third
of its total assets (taken at current value) to secure borrowings made
in accordance with limitation (3) above;
(3) invest more than 10% of the value of the Fund's net assets in
securities that are illiquid, including repurchase agreements providing
for settlement in more than seven days after notice or more than 15% of
its net assets in securities which are "restricted as to disposition";
(4) purchase or retain the securities of any issuer, any of whose officers,
directors, or security holders is a trustee, director, or officer of
the Fund or of its investment adviser, if or so long as the Board of
Trustees, directors, and officers of the Fund and of its Investment
Adviser together own beneficially more than 5% of any class of
securities of such issuer;
(5) purchase securities on margin (but the Fund may obtain such credits as
may be necessary for the clearance of purchases and sales of
securities);
(6) write or purchase any put or call option;
(7) make short sales of securities;
(8) invest in companies for the purpose of exercising control or management
and will not purchase the securities of any issuer if, as to 75% of its
total assets, it would own more than 10% of the voting securities of
any such issuer;
(9) the Fund shall not invest in the securities of other investment
companies, except that the Fund may invest in shares of money market
funds that are not "affiliated persons" of the Fund (unless permitted
by SEC regulations or exemptive relief) and that limit their
investments to securities appropriate for the Portfolio, provided
investment by the Fund is limited to: (a) ten percent of the Fund's
assets; (b) five percent of the Fund's total assets in the shares of a
single money market fund; and (c) not more than three percent of the
net assets of any one acquired money market fund. The investment
adviser will waive the portion of its fee attributable to the assets of
the Fund invested in such money market funds to the extent required by
the laws of any jurisdiction in which shares of the Fund are registered
for sale;
(10) invest more than 5% of its net assets in warrants, valued at lower of
cost or market. In addition the Fund will not invest more than 2% of
its net assets in warrants not listed on the New York or American Stock
Exchange; or
(11) invest in oil, gas or other mineral exploration or development program.
-2-
<PAGE> 4
Also, the Fund does not currently intend to:
(i) purchase obligations of savings and loan institutions and savings
banks.
(ii) purchase commercial paper which is not rated in the single highest
category by Duff & Phelps, Inc., Fitch Investors Service, Inc.,
Standard & Poor's Corporation, or Moody's Investors Service, Inc., or
if unrated, which is not deemed to be of equivalent quality pursuant to
procedures reviewed by the Trustees.
(iii) purchase securities for investment during periods when the sum of
temporary bank borrowings and reverse repurchase agreements (described
in fundamental limitation (3)) entered into to facilitate redemptions
exceeds 5% of its total assets.
(iv) lend more than 5% of its portfolio securities. Subject to this
restriction, the Fund may lend its securities if collateral values are
continuously maintained at not less than 100% by "marking-to-market"
daily.
(v) invest in oil, gas or other mineral leases or in real estate limited
partnerships.
Fundamental limitation (3) is construed in conformity with the Investment
Company Act of 1940, and if any time Fund borrowings exceed an amount equal to
one third of the current value of the Fund's total assets (including the amount
borrowed) less liabilities (other than borrowings) at the time the borrowing is
made due to a decline in net assets, such borrowings will be reduced within
three days (not including Sundays and holidays) to the extent necessary to
comply with the 33 1/3% limitation.
Repurchase agreements are transactions by which the Fund purchases a security
and simultaneously commits to resell that security to the seller at an agreed
upon price on an agreed upon date within a number of days (usually not more than
seven) from the date of purchase. The resale price reflects the purchase price
plus an agreed upon incremental amount which is unrelated to the coupon rate or
maturity of the purchased security. A repurchase agreement involves the
obligation of the seller to pay the agreed upon price, which obligation is in
effect secured by the value (at least equal to the amount of the agreed upon
resale price and marked to market daily) of the underlying security. The Fund
may engage in a repurchase agreement with respect to any security in which the
Fund is authorized to invest even though the underlying security matures in more
than one year. Whether a repurchase agreement is the purchase and sale of a
security or a collateralized loan has not been definitively established.
Repurchase agreements are considered by the staff of the Securities and Exchange
Commission ("SEC") to be loans by the Fund. This might become an issue in the
event of the bankruptcy of the other party to the transaction. While it does not
presently appear possible to eliminate all risks from these transactions
(particularly the possibility of a decline in the market value of the underlying
securities, as well as delay and costs to the Fund in connection with bankruptcy
proceedings), it is the policy of the Fund to limit repurchase transactions to
those member banks of the Federal Reserve System and primary dealers in U.S.
government securities whose creditworthiness has been reviewed and found
satisfactory by the Adviser under policies established and reviewed by the Board
of Trustees ("Trustees"). In a reverse repurchase agreement, the Fund
temporarily transfers possession of a portfolio instrument to another party,
such as a financial institution or broker-dealer, in return for cash. At the
same time, the Fund agrees to repurchase the instrument at an agreed upon time
(normally within seven days) and price including interest payment. The Fund
expects that it will engage in reverse repurchase agreements when it is able to
invest the cash so acquired at a rate higher than the rate reflected by the
agreement, which would increase the income earned by the Fund. The Fund could
also engage in reverse repurchase agreements as a means of raising cash to
satisfy redemption requests without the necessity of selling portfolio
instruments.
When the Fund engages in a reverse repurchase agreement, any fluctuations in the
market value of either the securities transferred to another party or the
securities in which the proceeds may be invested would affect the market value
of the Fund's assets. As a result, such transactions may increase fluctuation in
the market value of the Fund's assets (as opposed to the amortized cost value of
its assets used in determining its net asset value per share). While
-3-
<PAGE> 5
there is a potential risk that large fluctuations in the market value of the
Fund's assets could affect the Fund's net asset value per share, this risk is
not significantly increased by engaging in reverse repurchase agreements in the
Adviser's opinion. If the Fund reinvests the proceeds of a reverse repurchase
agreement at a rate lower than the rate reflected by the agreement, engaging in
the agreement will lower the Fund's yield.
At all times that a reverse repurchase agreement is outstanding, the Fund will
maintain cash and liquid securities in a segregated account at its custodian
bank with a value at least equal to its obligation under the agreement.
Securities and other assets held in the segregated account may not be sold while
the reverse repurchase agreement is outstanding, unless other suitable assets
are substituted.
While the Adviser (Sub-Adviser) does not consider reverse repurchase agreements
to involve borrowing money, reverse repurchase agreements will be included
within the aggregate limitation on "borrowings" contained in the Fund's
fundamental limitation (3).
State Regulations
The Victory Portfolios have agreed with a state securities
administrator on behalf of each fund of the Victory Portfolios that each such
fund will limit investment in warrants to no more than 5% of its net assets and,
of this 5%, no more than 2% will be invested in warrants which are not listed on
the New York Stock Exchange or the American Stock Exchange; provided, however,
that for the purposes of this limitation, warrants acquired in units or attached
to other securities will be deemed to be without value.
In addition, the Fund, so long as its shares are registered under the
securities laws of the State of Texas and such restrictions are required as a
consequence of such registration, is subject to the following non-fundamental
policy, which may be modified in the future by the Trustees without a vote of
the Fund's shareholders: the Victory Portfolios has represented to the Texas
State Securities Board, on behalf of the investment portfolios registered in
that state, that those investment portfolios will not invest in oil, gas or
mineral leases or purchase or sell real property (including limited partnership
interests, but excluding readily marketable securities of companies which invest
in real estate).
The policies and limitations above supplement those set forth in the
Prospectus. Unless otherwise noted, whenever an investment policy or limitation
states a maximum percentage of the Fund's assets that may be invested in any
security or other asset, or sets forth a policy regarding quality standards,
such standard or percentage limitation will be determined immediately after and
as a result of the Fund's acquisition of such security or other asset except in
the case of borrowing (or other activities that may be deemed to result in the
issuance of a "senior security" under the 1940 Act). Accordingly, any subsequent
change in values, net assets, or other circumstances will not be considered when
determining whether the investment complies with the Fund's investment policies
and limitations. If the value of the Fund's holdings of illiquid securities at
any time exceeds the percentage limitation applicable at the time of acquisition
due to subsequent fluctuations in value or other reasons, the Board will
consider what actions, if any, are appropriate to maintain adequate liquidity.
FUTURE DEVELOPMENTS
The Fund may take advantage of other investment practices which are not
at present contemplated for use by the Fund or which currently are not available
but which may be developed, to the extent such investment practices are both
consistent with the Fund's investment objective and are legally permissible for
the Fund. Such investment practices, if they arise, may involve risks which
exceed those involved in the activities described in the Prospectus and
Statement of Additional Information. Prior to commencing any new investment
practice, the Fund will notify shareholders by means of prospectus supplement.
Portfolio Turnover
-4-
<PAGE> 6
The turnover rate stated in the Prospectus for the Fund's investment
portfolio is calculated by dividing the lesser of the Fund's purchases or sales
of portfolio securities for the year by the monthly average value of the
portfolio securities. The calculation excludes all securities whose maturities,
at the time of acquisition, were one year or less. Because of this exclusion,
portfolio turnover is expected to be zero percent for regulatory purposes.
VALUATION OF PORTFOLIO SECURITIES
As indicated in the Prospectus, the net asset value ("NAV") of the Fund
is determined and the shares of the Fund are priced as of the close of regular
trading of the New York Stock Exchange ("NYSE") ("the Valuation Time(s)") on
each Business Day of the Fund. A "Business Day" is a day on which the NYSE is
open for trading, the Federal Reserve Bank of Cleveland is open and any other
day (other than a day on which no shares of the Fund are tendered for redemption
and no order to purchase any shares is received) during which there is
sufficient trading in portfolio instruments that the Fund's net asset value per
share might be materially affected. The NYSE, or the Federal Reserve Bank of
Cleveland will not open in observance of the following holidays: New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, and
Christmas Day.
When the NYSE is closed, or when trading is restricted for any reason
other than its customary weekend or holiday closings, or under emergency
circumstances as determined by the Commission to warrant such action, the Fund's
transfer agent will determine the Fund's NAV at the close of business, normally
4:00 p.m., eastern time. The Fund's NAV may be affected to the extent that its
securities are traded on days that are not Business Days.
The Fund has elected to use the amortized cost method of valuation
pursuant to Rule 2a-7 under the 1940 Act. This involves valuing an instrument at
its cost initially and thereafter assuming a constant amortization to maturity
of any discount or premium, regardless of the impact of fluctuating interest
rates on the market value of the instrument. This method may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price the Fund would receive if it sold the instrument. The value of securities
in the portfolio can be expected to vary inversely with changes in prevailing
interest rates.
Pursuant to Rule 2a-7, the Fund will maintain a dollar-weighted average
portfolio maturity appropriate to its objective of maintaining a stable net
asset value per share, provided that the Fund will not purchase any security
with a remaining maturity of more than 397 days (securities subject to
repurchase agreements may bear longer maturities) nor maintain a dollar-weighted
average portfolio maturity which exceeds 90 days. The Victory Portfolios'
Trustees have also undertaken to establish procedures reasonably designed,
taking into account current market conditions and the Victory Portfolios'
investment objectives, to stabilize the net asset value per share of the Fund
for purposes of sales and redemptions at $1.00. These procedures include review
by the Trustees, at such intervals as they deem appropriate, to determine the
extent, if any, to which the net asset value per share of the Fund calculated by
using available market quotations deviates from $1.00 per share. In the event
such deviation exceeds one-half of one percent, the Rule requires that the Board
promptly consider what action, if any, should be initiated. If the Trustees
believe that the extent of any deviation from the Fund's $1.00 amortized cost
price per share may result in material dilution or other unfair results to new
or existing investors, they will take such steps as they consider appropriate to
eliminate or reduce to the extent reasonably practicable any such dilution or
unfair results. These steps may include selling portfolio instruments prior to
maturity, shortening the dollar-weighted average portfolio maturity, withholding
or reducing dividends, reducing the number of the Fund's outstanding shares
without monetary consideration, or utilizing a net asset value per share
determined by using available market quotations.
-5-
<PAGE> 7
ADDITIONAL PURCHASE, EXCHANGE AND REDEMPTION INFORMATION
Matters Affecting Redemption
The Fund may suspend the right of redemption or postpone the date of
payment for shares during any period when (a) trading on the NYSE is restricted
by applicable rules and regulations of the Commission, (b) the NYSE is closed
for other than customary weekend and holiday closings, (c) the Commission has by
order permitted such suspension, or (d) an emergency exists as determined by the
Commission.
If, in the opinion of the Board of Trustees, conditions exist which
make cash payment undesirable, redemption payments may be made in whole or in
part in securities or other property, valued for this purpose as they are valued
in computing the Fund's NAV. Shareholders receiving securities or other property
on redemption may realize a gain or loss for tax purposes, and will incur any
costs of sale, as well as the associated inconveniences.
Pursuant to Rule 11a-3 under the 1940 Act, the Fund is required to give
shareholders at least 60 days' notice prior to terminating or modifying its
exchange privilege. Under the Rule, the 60-day notification requirement may be
waived if (i) the only effect of a modification would be to reduce or eliminate
an administrative fee, redemption fee, or deferred sales charge ordinarily
payable at the time of exchange, or (ii) a Fund temporarily suspends the
offering of shares as permitted under the 1940 Act or by the Commission, or
because it is unable to invest amounts effectively in accordance with its
investment objective and policies.
In the Prospectus, the Fund, Key Advisers and the Sub-Adviser have
notified shareholders that they reserve the right at any time without prior
notice to shareholders to refuse exchange purchases by any person or group if,
in Key Advisers' or the Sub-Adviser's judgment, the Fund would be unable to
invest effectively in accordance with its investment objective and policies, or
would otherwise potentially be adversely affected.
Purchasing Shares
Shares are sold at their net asset value without a sales charge on days
the NYSE and the Federal Reserve Wire System are open for business. The
procedure for purchasing shares of the Fund is explained in the prospectus under
"Investing in the Fund."
Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that
maximum interest may be earned. To this end, all payments from shareholders must
be in federal funds or be converted into federal funds. This conversion must be
made before shares are purchased. Converting the funds to federal funds is
normally accomplished within two business days of receipt of the check.
Redeeming Shares
The Fund redeems shares at the next computed net asset value after the
redemption request is received. Redemption procedures are explained in the
prospectus under "Redeeming Shares."
The Victory Portfolios may redeem shares involuntarily if redemption
appears appropriate in light of the Victory Portfolios' responsibilities under
the 1940 Act. (See "VALUATION" above.)]
-6-
<PAGE> 8
Additional Tax Information
It is the policy of the Fund to qualify for the favorable tax treatment
accorded regulated investment companies ("RICs") under Subchapter M of the Code,
for so long as such qualification is in the best interest of its shareholders.
By following such policy and distributing its income and gains currently with
respect to each taxable year, the Victory Portfolios expects to eliminate or
reduce to a nominal amount the federal income and excise taxes to which it may
otherwise be subject.
In order to qualify as a RIC, the Fund must, among other things, (1)
derive at least 90% of its gross income from dividends, interest, payments with
respect to securities loans, and gains from the sale or other disposition of
stock or securities, foreign currencies or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in stock, securities or currencies, (2) derive less than 30% of its
gross income from the sale or other disposition of stock, securities, options,
futures, forward contracts, and certain foreign currencies (or options, futures,
or forward contracts on foreign currencies) held for less than three months, and
(3) diversify its holdings so that at the end of each quarter of its taxable
year (i) at least 50% of the market value of the Fund's assets is represented by
cash or cash items, U.S. Government securities, securities of other RICs and
other securities limited, in respect of any one issuer, to an amount not greater
than 5% of the value of the Fund's total assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
total assets is invested in the securities of any one issuer (other than U.S.
Government securities) or of two or more issuers that the Fund controls and that
are engaged in the same, similar, or related trades or businesses. These
requirements may restrict the degree to which the Fund may engage in short-term
trading and concentrate investments. If the Fund qualifies as a RIC, it will not
be subject to federal income tax on the part of its net investment income and
net realized capital gains, if any, that it distributes to shareholders with
respect to each taxable year within the time limits specified in the Code.
A non-deductible excise tax is imposed on regulated investment
companies that do not distribute in each calendar year an amount equal to 98% of
their ordinary income for the year plus 98% of their capital gain net income for
the 1-year period ending on October 31 of such calendar year. The balance of
such income must be distributed during the following calendar year. If
distributions during a calendar year are less than the required amount, the Fund
is subject to a non-deductible excise tax equal to 4% of the deficiency.
Certain investment and hedging activities of the Fund, including
transactions in options, futures contracts, hedging transactions, forward
contracts, straddles, foreign currencies, and foreign securities, are subject to
special tax rules. In a given case, these rules may accelerate income to the
Fund, defer losses to the Fund, cause adjustments in the holding periods of the
Fund's securities, convert short-term capital losses into long-term capital
losses, or otherwise affect the character of the Fund's income. These rules
could therefore affect the amount, timing and character of distributions to
shareholders. The Fund will endeavor to make any available elections pertaining
to such transactions in a manner believed to be in the best interest of the Fund
and their securities.
The Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of taxable dividends paid to any shareholder who has failed to
provide (or provided an incorrect) tax identification number, or is subject to
withholding pursuant to a notice from the Internal Revenue Service for failure
to properly include on his or her income tax return payments of interest or
dividends. This "backup withholding" is not an additional tax, and any amounts
withheld may be credited against the shareholder's ultimate U.S. tax liability.
Information set forth in the Prospectus and this Statement of
Additional Information that relates to federal taxation is only a summary of
certain key federal tax considerations generally affecting purchasers of shares
of the Fund. No attempt has been made to present a complete explanation of the
federal tax treatment of the Fund or its shareholders, and this discussion is
not intended as a substitute for careful tax planning. Accordingly, potential
purchasers of shares of the Fund are urged to consult their tax advisers with
specific reference to their own tax
-7-
<PAGE> 9
circumstances. In addition, the tax discussion in the Prospectus and this
Statement of Additional Information is based on tax law in effect on the date of
the Prospectus and this Statement of Additional Information; such laws and
regulations may be changed by legislative, judicial or administrative action,
sometimes with retroactive effect.
MANAGEMENT OF THE VICTORY PORTFOLIOS
Board of Trustees
Overall responsibility for management of the Victory Portfolios rests
with the Trustees, who are elected by the shareholders of the Victory
Portfolios. The Victory Portfolios are managed by the Trustees in accordance
with the laws of the State of Delaware governing business trusts. There are
currently seven Trustees, six of whom are not "interested persons" of the
Victory Portfolios within the meaning of that term under the 1940 Act. The
Trustees, in turn, elect the officers of the Victory Portfolios to supervise
actively its day-to-day operations.
The Trustees of the Victory Portfolios, their addresses, ages and their
principal occupations during the past five years are as follows:
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- --------------------- ---------- -------------------
<S> <C> <C>
Leigh A. Wilson, 51* Trustee and From 1989 to present, Chairman and
Glenleigh International Ltd. President Chief Executive Officer, Glenleigh
53 Sylvan Road North International Limited; previously
Westport, CT 06880 Chief Executive Officer, Paribas
North America and Paribas
Corporation; Trustee, The Victory
Funds and Spears, Benzak, Salomon
and Farrell ("SBSF") Funds.
Robert G. Brown, 72 Trustee Retired; from October 1983 to
5460 N. Ocean Drive November 1990, President, Cleveland
Singer Island, Riviera Beach Advanced Manufacturing Program
Florida 33404 (non-profit corporation engaged in
regional economic development).
</TABLE>
- ------------
* Mr. Wilson is deemed to be an "interested person" of the Victory
Portfolios under the 1940 Act solely by reason of his position as
President.
-8-
<PAGE> 10
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Funds During Past 5 Years
- --------------------- ---------- -------------------
<S> <C> <C>
Edward P. Campbell, 46 Trustee From March 1, 1994 to present,
Nordson Corporation Executive Vice President and Chief
28601 Clemens Road Operating Officer of Nordson
Westlake, OH 44145 Corporation (manufacturer of
application equipment); from May
1988 to March 1994, Vice President
of Nordson Corporation; from 1987
to December 1994, member of the
Supervisory Committee of Society's
Collective Investment Retirement
Fund; from May 1991 to August 1994,
Trustee, Financial Reserves Fund
and from May 1993 to August 1994,
Trustee, Ohio Municipal Money
Market Fund; Trustee, The Victory
Funds and SBSF.
Dr. Harry Gazelle, 68 Trustee Retired radiologist, Drs. Hill and
17822 Lake Road Thomas Corp.; Trustee, The Victory
Lakewood, OH 44107 Funds.
Dr. Thomas F. Morrissey, 62 Trustee 1995 Visiting Scholar, Bond
Weatherhead School of University, Queensland, Australia;
Management Professor, Weatherhead School of
Case Western Reserve Management, Case Western Reserve
University University; from 1989 to 1995,
10900 Euclid Avenue Associate Dean of Weatherhead
Cleveland, OH 44106-7235 School of Management and Professor,
Case Western Reserve University;
from 1987 to December 1994, Member
of the Supervisory Committee of
Society's Collective Investment
Retirement Fund; from May 1991 to
August 1994, Trustee, Financial
Reserves Fund and from May 1993 to
August 1994, Trustee, Ohio
Municipal Money Market Fund;
Trustee, The Victory Funds.
Stanley I. Landgraf, 70 Trustee Retired; currently, Trustee,
41 Traditional Lane Rensselaer Polytechnic Institute;
Albany, NY 12211 Director, Elenel Corporation and
Mechanical Technology, Inc.;
Member, Board of Overseers, School
of Management, Rensselaer
Polytechnic Institute; Member, The
</TABLE>
-9-
<PAGE> 11
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Funds During Past 5 Years
- --------------------- ---------- -------------------
<S> <C> <C>
Fifty Group (a Capital Region
business organization); Trustee,
The Victory Funds.
H. Patrick Swygert, 52 Trustee President, Howard University;
Howard University formerly President, State
2400 6th Street, N.W. University of New York at Albany;
Suite 320 formerly, Executive Vice President,
Washington, DC 20059 Temple University; Trustee, The
Victory Funds.
</TABLE>
The Board presently has an Investment Policy Committee and a Business,
Legal, and Audit Committee. The members of the Investment Policy Committee are
Messrs. Landgraf (Chairman), Morrissey and Brown, who will serve until May 1996.
The function of the Investment Policy Committee is to review the existing
investment policies of the Victory Portfolios, including the levels of risk and
types of funds available to shareholders, and make recommendations to the Board
of Trustees regarding the revision of such policies or, if necessary, the
submission of such revisions to the Victory Portfolios' shareholders for their
consideration. The members of the Business, Legal and Audit Committee are
Messrs. Swygert (Chairman), Campbell and Gazelle who will serve until May 1996.
The function of the Business, Legal and Audit Committee is to recommend
independent auditors and monitor accounting and financial matters; to nominate
persons to serve as disinterested Trustees and Trustees to serve on committees
of the Board; and to review compliance and contract matters.
The Investment Policy Committee met four times during the 12 months
ended October 31, 1995. The Business, Legal and Audit Committee was constituted
on May 24, 1995 (and has met twice since then) and replaced the Audit Committee,
the Legal Committee and the Nominating Committee, which met three times, one
time and one time, respectively, during the 12 month period ended October 31,
1995.
REMUNERATION OF TRUSTEES AND CERTAIN EXECUTIVE OFFICERS
Effective June 1, 1995, each Trustee (other than Leigh A. Wilson)
receives an annual fee of $27,000 for serving as Trustee of all the funds of the
Victory Portfolios, and an additional per meeting fee ($2,400 in person and
$1,200 per telephonic meeting).
Effective June 1, 1995, Leigh A. Wilson receives an annual fee of
$33,000 for serving as President and Trustee for all of the funds of the Victory
Portfolios, and an additional per meeting fee ($3,000 in person and $1,500 per
telephonic meeting).
The following tables indicate the compensation received by each Trustee
from the Fund and from the Victory "Fund Complex"* for the 12 month period ended
October 31, 1995. For certain Trustees, the amounts include amounts paid by the
Predecessor Fund, a portfolio of The Victory Funds which was reorganized as the
Fund as of June 5, 1995.
-10-
<PAGE> 12
<TABLE>
<CAPTION>
Total Compensation Total
Pension or Retirement Estimated Annual from Fund Compensation
Benefits Accrued as Benefits ------------------ from Victory
Portfolio Expenses Upon Retirement "Fund Complex"*
--------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Leigh A. Wilson, Trustee . . . . -0- -0- $5,729.73 $46,716.97
Robert G. Brown, Trustee . . . . -0- -0- 4,834.58 39,815.98
Edward P. Campbell,
Trustee . . . . . . . . . . . . -0- -0- 3,549.91 33,799.68
Harry Gazelle, Trustee . . . . . -0- -0- 5,474.20 35,916.98
John W. Kemper, Trustee# . . . . -0- -0- 2,913.01 22,567.31
Stanley I. Landgraf, Trustee . . -0- -0- 5,112.02 34,615.98
Thomas F. Morrissey,
Trustee . . . . . . . . . . . . -0- -0- 4,996.26 40,366.98
H. Patrick Swygert, Trustee . . . -0- -0- 4,996.26 37,116.98
John D. Buckingham,
Trustee# . . . . . . . . . . . -0- -0- 2,598.87 18,841.89
John R. Young, Trustee# . . . . . -0- -0- 2,709.16 21,963.81
</TABLE>
# Resigned
- --------------
* For certain Trustees, these amounts include compensation received from
The Victory Funds (which were reorganized into the Victory Portfolios
as of June 5, 1995), the SBSF Funds (the investment adviser of which
was acquired by KeyCorp effective April, 1995) and Society's Collective
Investment Retirement Funds, which were reorganized into the Victory
Balanced Fund and Victory Government Mortgage Fund as of December 19,
1994. There are presently 28 mutual funds from which the above-named
Trustees are compensated in the Victory "Fund Complex," but not all of
the above-named Trustees serve on the boards of each fund in the "Fund
Complex."
Officers
The officers of the Victory Portfolios, their addresses, ages and
principal occupations during the past five years are as follows:
-11-
<PAGE> 13
<TABLE>
<CAPTION>
Position with the Principal occupation
Name Victory Portfolios during past 5 years
---- ------------------ --------------------
<S> <C> <C>
Leigh A. Wilson, 51 President and Trustee From 1989 to present, Chairman and
Glenleigh International Ltd. Chief Executive Officer, Glenleigh
53 Sylvan Road North International Limited; from 1984-
Westport, CT 06880 1989, Chief Executive Officer,
Paribas North America and Paribas
Corporation; Trustee to The Victory
Funds and SBSF Funds.
William B. Blundin, 57 Vice President Senior Vice President of BISYS Fund
BISYS Fund Services Services; officer of other
125 West 55th Street investment companies administered
New York, New York 10019 by BISYS Fund Services; President
and Chief Executive Officer of
Vista Broker-Dealer Services, Inc.,
Emerald Asset Management, Inc. and
BNY Hamilton Distributors, Inc.,
registered broker/dealers.
J. David Huber, 49 Vice President Executive Vice President, BISYS
BISYS Fund Services Fund Services.
3435 Stelzer Road
Columbus, OH 43219-3035
Scott A. Englehart, 33 Secretary From October 1990 to present,
BISYS Fund Services employee of BISYS Fund Services,
3435 Stelzer Road Inc.; from 1985 to October 1990,
Columbus, OH 43219-3035 Manager of Banking Center, Fifth
Third Bank.
George O. Martinez, 36 Assistant Secretary From March 1995 to present, Senior
BISYS Fund Services Vice President and Director of
3435 Stelzer Road Legal and Compliance Services,
Columbus, OH 43219-3035 BISYS Fund Services; from June
1989-March 1995, Vice President and
Associate General Counsel, Alliance
Capital Management.
Martin R. Dean, 32 Treasurer From May 1994 to present, employee
BISYS Fund Services of BISYS Fund Services; from
3435 Stelzer Road January 1987 - April 1994, Senior
Columbus, OH 43219-3035 Manager, KPMG Peat Marwick.
Adrian J. Waters, 33 Assistant Treasurer From May 1993 to present, employee
BISYS Fund Services (Ireland) of BISYS Fund Services; from 1989-
Limited May 1993, Manager, Price
ITI House Waterhouse.
12 Earlsfort Terrace
</TABLE>
-12-
<PAGE> 14
Dublin 2, Ireland
The mailing address of each of the officers of the Victory Portfolios
is 3435 Stelzer Road, Columbus, Ohio 43219-3035.
The officers of the Victory Portfolios (other than Leigh Wilson)
receive no compensation directly from the Victory Portfolios for performing the
duties of their offices. BISYS Fund Services, Inc. receives fees from the
Victory Portfolios for acting as Administrator.
As of December 1, 1995, the Trustees and officers as a group owned
beneficially less than 1% of the Fund.
Investment Adviser and Sub-Adviser
KeyCorp Mutual Fund Advisers, Inc. ("Key Advisers" or the "Adviser")
was organized as an Ohio corporation on July 27, 1995 and is registered as an
investment adviser under the Investment Advisers Act of 1940. It is a
wholly-owned subsidiary of KeyCorp Asset Management Holdings, Inc., which is a
wholly-owned subsidiary of Society National Bank, a wholly-owned subsidiary of
KeyCorp. Affiliates of Key Advisers manage approximately $37 billion for
numerous clients including large corporate and public retirement plans,
Taft-Hartley plans, foundations and endowments, high net worth individuals and
mutual funds.
KeyCorp, a financial services holding company, is headquartered at 127
Public Square, Cleveland, Ohio 44114. As of September 30, 1995, KeyCorp had an
asset base of $68 billion, with banking offices in 26 states from Maine to
Alaska, and trust and investment offices in 16 states. KeyCorp is the resulting
entity of the merger in 1994 of Society Corporation, the bank holding company of
which Society National Bank was a wholly-owned subsidiary, and KeyCorp, the
former bank holding company. KeyCorp's major business activities include
providing traditional banking and associated financial services to consumer,
business and commercial markets. Its non-bank subsidiaries include investment
advisory, securities brokerage, insurance, bank credit card processing, and
mortgage leasing companies. Society National Bank is the lead affiliate bank of
KeyCorp.
The following table lists the advisory fees for each mutual fund that
is advised by Key Advisers.
.25 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Institutional Money Market Fund*
.35 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Prime Obligations Fund*
Victory U.S. Government Obligations Fund*
Victory Tax-Free Money Market Fund*
.50 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Money Market Fund*
Victory Limited Term Income Fund*
Victory Government Mortgage Fund*
Victory Financial Reserves Fund*
Victory Fund for Income #
.55 OF 1% OF AVERAGE DAILY NET ASSETS
Victory National Municipal Bond Fund*
-13-
<PAGE> 15
Victory Government Bond Fund*
Victory New York Tax-Free Fund*
-14-
<PAGE> 16
.60 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Bond Fund*
Victory Stock Index Fund*
.65 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Diversified Stock Fund*
.75 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Intermediate Income Fund*
Victory Investment Quality Bond Fund*
Victory Ohio Regional Stock Fund*
1% OF AVERAGE DAILY NET ASSETS
Victory Balanced Fund*
Victory Value Fund*
Victory Growth Fund*
Victory Special Value Fund*
Victory Special Growth Fund+/-
1.10% OF AVERAGE DAILY ASSETS
Victory International Growth Fund*
# First Albany Asset Management Corporation serves as sub-adviser
to the Victory Fund for Income, for which it receives .20% of
average daily net assets.
+/- T. Rowe Price Associates, Inc. serves as sub-adviser to the
Victory Special Growth Fund, for which it receives .25% of
average daily net assets up to $100 million and .20% of average
daily net assets in excess of $100 million.
* Society Asset Management, Inc. (the Sub-Adviser) serves as
sub-adviser to each of these funds. For its services under the
investment sub-advisory agreement, Key Advisers pays the
Sub-Adviser sub-advisory fees at rates (based on an annual
percentage of average daily net assets) which vary according to
the table set forth below:
-15-
<PAGE> 17
<TABLE>
<CAPTION>
For the Victory Balanced Fund, Diversified Stock Fund, For the Victory International Growth Fund, Ohio
Growth Fund, Stock Index Fund and Value Fund: Regional Stock Fund and Special Value
Fund:
Rate of Rate of
Net Assets Sub-Advisory Fee* Net Assets Sub-Advisory Fee*
---------- ----------------- ---------- -----------------
<S> <C> <C> <C>
Up to $10,000,000 0.65% Up to $10,000,000 0.90%
Next $15,000,000 0.50% Next $15,000,000 0.70%
Next $25,000,000 0.40% Next $25,000,000 0.55%
Above $50,000,000 0.35% Above $50,000,000 0.45%
</TABLE>
- --------------------
* As a percentage of average daily net assets. The Sub-Adviser has the
right to voluntarily waive any portion of the sub-advisory fee from
time to time.
<TABLE>
<CAPTION>
For the Victory Intermediate Income Fund, Investment For the Victory Prime Obligations Fund, Tax-Free
Quality Bond Fund, Limited Term Income Fund, Money Market Fund, U.S. Government Obligations
Ohio Municipal Bond Fund, Government Bond Fund, Financial Reserves Fund, Institutional Money
Fund, Government Mortgage Fund, National Market Fund and Ohio Municipal Money Market
Municipal Bond Fund and New York Tax-Free Fund: Fund:
Rate of Rate of
Net Assets Sub-Advisory Fee* Net Assets Sub-Advisory Fee*
---------- ----------------- ---------- -----------------
<S> <C> <C> <C>
Up to $10,000,000 0.40% Up to $10,000,000 0.25%
Next $15,000,000 0.30% Next $15,000,000 0.20%
Next $25,000,000 0.25% Next $25,000,000 0.15%
Above $50,000,000 0.20% Above $50,000,000 0.125%
</TABLE>
- --------------------
* As a percentage of average daily net assets. The Sub-Adviser has the
right to voluntarily waive any portion of the sub- advisory fee from
time to time.
ADVISORY AND OTHER CONTRACTS
Unless sooner terminated, the Investment Advisory Agreement between Key
Advisers and the Funds provides that it will continue in effect as to a
particular Fund for an initial two-year term and for consecutive one-year terms
thereafter, provided that such continuance is approved at least annually by the
Victory Portfolios' Trustees or by vote of a majority of the outstanding shares
of such Fund (as defined under "GENERAL INFORMATION - Miscellaneous" in the
Prospectuses), and, in either case, by a majority of the Trustees who are not
parties to the Investment Advisory Agreement or interested persons (as defined
in the 1940 Act) of any party to the Investment Advisory Agreement, by votes
cast in person at a meeting called for such purpose.
The Investment Advisory Agreement is terminable as to a particular Fund
at any time on 60 days' written notice without penalty by the Trustees, by vote
of a majority of the outstanding shares of that Fund, or by Key Advisers. The
Investment Advisory Agreement also terminates automatically in the event of any
assignment, as defined in the 1940 Act.
-16-
<PAGE> 18
The Investment Advisory Agreement provides that KeyCorp Advisers shall
not be liable for any error of judgment or mistake of law or for any loss
suffered by the Victory Portfolios in connection with the performance of
services pursuant to the Investment Advisory Agreement, except a loss resulting
from a breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith, or gross
negligence on the part of Key Advisers in the performance of its duties, or from
reckless disregard by it of either duties and obligations thereunder.
Prior to January 1, 1996, Society Asset Management, Inc. ("Society")
served as investment adviser to the Fund. For the two month fiscal period ended
October 31, 1995 and the fiscal years ended August 31, 1995 and 1994 Society
earned an investment advisory fee of $187,594, $1,692,574 and $1,517,669,
respectively, after $244,500, $320,022 and $234,884, respectively, was
voluntarily waived, and $903,705 was voluntarily reimbursed in the year ended
August 31, 1995.
Under the Investment Advisory Agreement, Key Advisers has agreed to
provide the investment advisory services described in the Prospectus. For the
services provided and expenses assumed pursuant to the Investment Advisory
Agreement, the Fund pays Key Advisers a fee, computed daily and paid monthly, at
the annual rate of fifty one-hundredths of one percent (.50%) of the average
daily net assets of the Fund.
Prior to January 1993, Society National Bank served as investment
adviser to the Fund. From January 1, 1993 until December 31, 1995, Society Asset
Management, Inc. served as investment adviser to the Fund. For the fiscal years
ended October 31, 1994 and 1995 the Fund paid investment advisory fees of
$2,137,744, and _______, respectively, after fee reductions of $584,417 and
$_______, respectively.
Under the Investment Advisory Agreement, Key Advisers may delegate a
portion of its responsibilities to a sub-adviser. In addition, the Investment
Advisory Agreement provides that Key Advisers may render services through its
own employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser of the Fund and are under the common
control of KeyCorp as long as all such persons are functioning as part of an
organized group of persons, managed by authorized officers of Key Advisers.
Key Advisers has entered into an investment sub-advisory agreement with
its affiliate, Society Asset Management, Inc. on behalf of the Fund. The
Sub-Adviser is a wholly-owned subsidiary of KeyCorp Asset Management Holdings,
Inc. With respect to the day to day management of the Fund, under the
sub-advisory agreement, the Sub-Adviser makes decisions concerning, and places
all orders for, purchases and sales of securities and helps maintain the records
relating to such purchases and sales. The Sub-Adviser may, in its discretion,
provide such services through its own employees or the employees of one or more
affiliated companies that are qualified to act as an investment adviser to the
Company under applicable laws and are under the common control of KeyCorp;
provided that (i) all persons, when providing services under the sub-advisory
agreement, are functioning as part of an organized group of persons, and (ii)
such organized group of persons is managed at all times by authorized officers
of the Sub-Adviser. This arrangement will not result in the payment of
additional fees by the Fund.
-17-
<PAGE> 19
Glass-Steagall Act
In 1971 the United States Supreme Court held in Investment Company
Institute v. Camp that the federal statute commonly referred to as the
Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision: (a)
forbid a bank holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing, or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but (b) do not prohibit such
a holding company or affiliate from acting as investment adviser, transfer
agent, and custodian to such an investment company. In 1981 the United States
Supreme Court held in Board of Governors of the Federal Reserve System v.
Investment Company Institute that the Board did not exceed its authority under
the Holding Company Act when it adopted its regulation and interpretation
authorizing bank holding companies and their non-bank affiliates to act as
investment advisers to registered closed-end investment companies. In the Board
of Governors case, the Supreme Court also stated that if a national bank
complied with the restrictions imposed by the Board in its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to investment companies, a national bank
performing investment advisory services for an investment company would not
violate the Glass-Steagall Act.
Key Advisers and the Sub-Adviser believe that they may perform the
services for the Victory Portfolios contemplated by the Prospectus, this
Statement of Additional Information, and the Investment Advisory Agreement (and
Sub-Advisory Agreement) with the Victory Portfolios without violation of
applicable statutes and regulations and has so represented in its Investment
Advisory Agreement (and Sub-Advisory Agreement) with the Victory Portfolios. Key
Trust Company of Ohio, N. A. believes that it may perform the services for the
Victory Portfolios contemplated by the Prospectus, this Statement of Additional
Information, and the Shareholder Servicing Agreement with the Victory Portfolios
(as described below) without violation of applicable statutes and regulations
and has so represented in such Shareholder Servicing Agreement. Future changes
in either federal or state statutes and regulations relating to the permissible
activities of banks or bank holding companies and the subsidiaries or affiliates
of those entities, as well as further judicial or administrative decisions or
interpretations of present and future statutes and regulations, could prevent or
restrict Key Trust Company of Ohio, N. A., Key Advisers or the Sub-Adviser from
continuing to perform such services for the Victory Portfolios. Depending upon
the nature of any changes in the services which could be provided by Key Trust
Company of Ohio, N. A., Key Advisers or the Sub-Adviser, the Trustees of the
Victory Portfolios would review the Victory Portfolios' relationship with Key
Trust Company of Ohio, N. A., Key Advisers or the Sub-Adviser and consider
taking all action necessary in the circumstances.
Should future legislative, judicial, or administrative action prohibit
or restrict the proposed activities of Key Trust Company of Ohio, N. A., Key
Advisers or the Sub-Adviser and its affiliated and correspondent banks and other
non-bank affiliates in connection with customer purchases of shares of the
Victory Portfolios, the banks and such non-bank affiliates might be required to
alter materially or discontinue the services offered by them to customers. It is
not anticipated, however, that any change in the Victory Portfolios' method of
operations would affect its net asset value per share or result in financial
losses to any customer.
From time to time, advertisements, supplemental sales literature and
information furnished to present or prospective shareholders of the Fund may
include descriptions of Key Trust Company of Ohio, N. A., Key Advisers and the
Sub-Adviser including, but not limited to, (i) descriptions of the operations of
Key Trust Company of Ohio, N. A., Key Advisers and the Sub-Adviser; (ii)
descriptions of certain personnel and their functions; and (iii) statistics and
rankings related to the operations of Key Trust Company of Ohio, N. A., Key
Advisers and the Sub-Adviser.
-18-
<PAGE> 20
Portfolio Transactions
Pursuant to the Investment Advisory Agreement (and Sub-Advisory
Agreement), Key Advisers or the Sub-Adviser determines, subject to the general
supervision of the Trustees of the Victory Portfolios, and in accordance with
the Fund's investment objective and restrictions, which securities are to be
purchased and sold by the Fund, and which brokers are to be eligible to execute
its portfolio transactions. Purchases from underwriters and/or broker-dealers of
portfolio securities include a commission or concession paid by the issuer to
the underwriter and/or broker-dealer and purchases from dealers serving as
market makers may include the spread between the bid and asked price. While Key
Advisers and the Sub-Adviser generally seek competitive prices (inclusive of any
spread or commission), the Fund may not necessarily pay the lowest prices
available on each transaction, for reasons discussed below.
Allocation of transactions to dealers is determined by Key Advisers or
the Sub-Adviser in their best judgment and in a manner deemed fair and
reasonable to shareholders. The primary consideration is prompt execution of
orders in an effective manner at the most favorable price. Subject to this
consideration, dealers who provide supplemental investment research to Key
Advisers or the Sub-Adviser may receive orders for transactions by the Victory
Portfolios. Information so received is in addition to and not in lieu of
services required to be performed by Key Advisers or the Sub-Adviser and does
not reduce the advisory fees payable to Key Advisers by the Victory Portfolios.
Such information may be useful to Key Advisers or the Sub-Adviser in serving
both the Victory Portfolios and other clients and, conversely, such supplemental
research information obtained by the placement of orders on behalf of other
clients may be useful to Key Advisers or the Sub-Adviser in carrying out its
obligations to the Victory Portfolios. In the future, the Trustees may also
authorize the allocation of brokerage to affiliated broker-dealers on an agency
basis to effect portfolio transactions. In such event, the Trustees will adopt
procedures incorporating the standards of Rule 17e-1 under the 1940 Act, which
requires that the commission paid to affiliated broker-dealers must be
"reasonable and fair compared to the commission, fee or other remuneration
received, or to be received, by other brokers in connection with comparable
transactions involving similar securities during a comparable period of time."
The Fund, however, purchases portfolio securities directly from dealers acting
as principals, underwriters or market makers. As these transactions are usually
conducted on a net basis, no brokerage commissions are paid by the Fund.
The Victory Portfolios will not execute portfolio transactions through,
acquire portfolio securities issued by, make savings deposits in, or enter into
repurchase or reverse repurchase agreements with Key Advisers, the Sub-Adviser,
Key Trust Company of Ohio, N.A. or its affiliates, Concord Holding Corporation,
Victory Broker-Dealer Services, Inc. or their affiliates, and will not give
preference to Key Trust Company of Ohio, N.A.'s correspondent banks or
affiliates, or Concord Holding Corporation or Victory Broker-Dealer Services,
Inc. with respect to such transactions, securities, savings deposits, repurchase
agreements, and reverse repurchase agreements.
Investment decisions for the Fund are made independently from those for
the other funds or any other investment company or account managed by Key
Advisers (or Society). Any such other investment company or account may also
invest in the same securities as a particular fund. When a purchase or sale of
the same security is made at substantially the same time on behalf of the Fund
and another fund, investment company or account, the transaction will be
averaged as to price, and available investments allocated as to amount, in a
manner which Key Advisers (or Society) believes to be equitable to the Fund and
such other fund, investment company or account. In some instances, this
investment procedure may adversely affect the price paid or received by the Fund
or the size of the position obtained by the Fund. To the extent permitted by
law, Key Advisers (or Society) may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for the other funds or
for other investment companies or accounts in order to obtain best execution. As
provided by the Investment Advisory (and Sub-Advisory) Agreement, in making
investment recommendations for the Victory Portfolios, Key Advisers (or Society)
will not inquire or take into consideration whether an issuer of securities
proposed for purchase or sale by a
-19-
<PAGE> 21
Fund is a customer of Society, its parents or subsidiaries or affiliates and, in
dealing with their commercial customers, Key Advisers (Society), its parents,
subsidiaries, and affiliates will not inquire or take into consideration whether
securities of such customers are held by the Victory Portfolios.
Administrator
Currently, Concord Holding Corporation ("CHC") serves as general
manager and administrator (the "Administrator") to the Fund. The Administrator
assists in supervising all operations of each fund (other than those performed
by Key Advisers or the Sub- Adviser under the Investment Advisory (Sub-Advisory)
Agreement). The Administrator is a broker-dealer registered with the Commission,
and is a member of the National Association of Securities Dealers, Inc. The
Administrator provides financial services to institutional clients.
CHC receives a fee from each fund for its services as Administrator and
expenses assumed pursuant to the Administration Agreements, calculated daily and
paid monthly, at the annual rate of fifteen one hundredths of one percent (.15%)
of each fund's average daily net assets. CHC may periodically waive all or a
portion of its fee with respect to any fund in order to increase the net income
of one or more funds of the Victory Portfolios available for distribution as
dividends.
Unless sooner terminated, the Administration Agreement will continue in
effect as to the Fund for a period of two years, and for consecutive one-year
terms thereafter, provided that such continuance is ratified at least annually
by the Victory Portfolios' Trustees or by vote of a majority of the outstanding
shares of that Fund, and in either case by a majority of the Trustees who are
not parties to the Administration Agreement or interested persons (as defined in
the 1940 Act) of any party to the Administration Agreement, by votes cast in
person at a meeting called for such purpose.
The Administration Agreement provides that CHC shall not be liable for
any error of judgment or mistake of law or any loss suffered by the Victory
Portfolios in connection with the matters to which the Administration Agreement
relates, except a loss resulting from willful misfeasance, bad faith, or gross
negligence in the performance of its duties, or from the reckless disregard by
it of its obligations and duties thereunder.
Under the Administration Agreement, CHC assists in the Fund's
administration and operation, including providing statistical and research data,
clerical services, internal compliance and various other administrative
services, including among other responsibilities, forwarding certain purchase
and redemption requests to the Transfer Agent, participation in the updating of
the prospectus, coordinating the preparation, filing, printing and dissemination
of reports to shareholders, coordinating the preparation of income tax returns,
arranging for the maintenance of books and records and providing the office
facilities necessary to carry out the duties thereunder. Under the
Administration Agreement, CHC may delegate all or any part of its
responsibilities thereunder.
CHC receives an annual fee of .15% of the Fund's average net assets,
paid monthly, for services performed under the Fund's Administration Agreement.
CHC may, from time to time, agree to reimburse the Fund for expenses above a
specified percentage of average net assets.
Victory Broker-Dealer Services, Inc. sells shares of the Fund as agent
on behalf of the Victory Portfolios at no cost to the Fund. Key Advisers and the
Sub-Adviser neither participate in nor are they responsible for the underwriting
of Victory Portfolios shares.
In the fiscal years ended October 31, 1995 and October 31, 1994, the
Fund paid aggregate administration fees of $_________ and $278,025,
respectively.
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<PAGE> 22
Distribution and Service Plan
The Victory Portfolios on behalf of the Fund has adopted a Distribution
and Service Plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act (the
"Rule"). The Rule provides in substance that a mutual fund may not engage
directly or indirectly in financing any activity that is primarily intended to
result in the sale of shares of such mutual fund except pursuant to a plan
adopted by the Fund under the Rule. The Board of Trustees has adopted the Plan
to allow Key Advisers, the Sub-Adviser and the Distributor to incur certain
expenses that might be considered to constitute indirect payment by the Fund of
distribution expenses. Under the Plan, if a payment to Key Advisers or the
Sub-Adviser of management fees or to the Distributor of administrative fees
should be deemed to be indirect financing by the Victory Portfolios of the
distribution of their shares, such payment is authorized by the Plan.
The Plan specifically recognizes that Key Advisers, the Sub-Adviser or
the Distributor, directly or through an affiliate, may use its fee revenue, past
profits, or other resources, without limitation, to pay promotional and
administrative expenses in connection with the offer and sale of shares of the
Fund. In addition, the Plan provides that Key Advisers, the Sub-Adviser and the
Distributor may use their respective resources, including fee revenues, to make
payments to third parties that provide assistance in selling the Fund's shares,
or to third parties, including banks, that render shareholder support services.
The Plan has been approved by the Board of Trustees. As required by the
Rule, the Trustees carefully considered all pertinent factors relating to the
implementation of the Plan prior to its approval, and have determined that there
is a reasonable likelihood that the Plan will benefit the Fund and its
shareholders. In particular, the Trustees noted that the Plan does not authorize
payments by the Fund other than the advisory and administrative fees authorized
under the investment advisory and administration agreements. To the extent that
the Plan gives Key Advisers, the Sub-Adviser or the Distributor greater
flexibility in connection with the distribution of shares of the Fund,
additional sales of the Fund's shares may result. Additionally, certain
shareholder support services may be provided more effectively under the Plan by
local entities with whom shareholders have other relationships.
Business Management Agreement
In connection with its obligations under the Investment Sub-Advisory
Agreement, the Sub-Adviser has entered into a Business Management Agreement with
Key Advisers, pursuant to which Key Advisers provides certain administrative and
support services to the Sub-Adviser. Such services include preparing reports to
Victory Portfolios' Board of Trustees, recordkeeping services, and services
rendered in connection with the preparation of regulatory filings and other
reports, and regulatory and other administrative and compliance systems and
support services.
For such services to the Fund, the Sub-Adviser pays fees to Key
Advisers which vary according to a sliding scale containing "breakpoints" at
which decreases in the business management fees correspond to increases in the
average daily net asset values of the Fund as follows:
<TABLE>
<CAPTION>
Net Assets Rate of Business
of the Fund Management Fee*
----------- ---------------
<S> <C>
Up to $10,000,000 0.20%
Next $15,000,000 0.15%
Next $25,000,000 0.10%
Above $50,000,000 0.075%
</TABLE>
- --------------------
* As a percentage of average daily net assets.
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<PAGE> 23
Shareholder Servicing Plan
The Victory Portfolios, on behalf of the Fund, has adopted a
Shareholder Servicing Plan to provide payments to shareholder servicing agents
(including affiliates of the Adviser) (each a "shareholder Servicing Agent")
that provide administrative support services to customers who may from time to
time beneficially own shares, which services include: (i) aggregating and
processing purchase and redemption requests for shares from customers and
promptly transmitting net purchase and redemption orders to our distributor or
transfer agent; (ii) providing customers with a service that invests the assets
of their accounts in shares pursuant to specific or pre-authorized instructions;
(iii) processing dividend and distribution payments on behalf of customers; (iv)
providing information periodically to customers showing their positions in
shares; (v) arranging for bank wires; (vi) responding to customer inquiries;
(vii) providing subaccounting with respect to shares beneficially owned by
customers or providing the information to the Victory Portfolios necessary for
subaccounting; (viii) if required by law, forwarding shareholder communications
from us (such as proxies, shareholder reports, annual and semi-annual financial
statements and dividend, distribution and tax notices) to customers; (ix)
forwarding to customers proxy statements and proxies containing any proposals
regarding this Plan; and (x) providing such other similar services as we may
reasonably request to the extent you are permitted to do so under applicable
statutes, rules or regulations. For expenses incurred and services provided
pursuant to the Shareholder Servicing Agreement, the Fund pays each Shareholder
Servicing Agent a fee computed daily and paid monthly, in amounts aggregating
not more than twenty-five one-hundredths of one percent (.25%) of the average
daily net assets of the Fund per year. A Shareholder Servicing Agent may
periodically waive all or a portion of its respective shareholder servicing fees
with respect to the Fund to increase the net income of the Fund available for
distribution as dividends.
Expenses
The Fund bears the following expenses relating to its respective
operations: taxes, interest, brokerage fees and commissions, fees of the
Trustees of the Victory Portfolios, Commission fees, state securities
qualification fees, costs of preparing and printing prospectuses for regulatory
purposes and for distribution to current shareholders, outside auditing and
legal expenses, advisory and administration fees, fees and out-of-pocket
expenses of the custodian and transfer agent, certain insurance premiums, costs
of maintenance of the Fund's existence, costs of shareholders' reports and
meetings, and any extraordinary expenses incurred in the Fund's operation.
If total expenses borne by the Fund in any fiscal year exceeds expense
limitations imposed by applicable state securities regulations, Key Advisers,
the Sub-Adviser or the Administrator will waive their fees to the extent such
excess expenses exceed such expense limitations in proportion to their
respective fees. As of the date of this Statement of Additional Information, the
most restrictive expense limitation applicable to the Fund limits its aggregate
annual expenses, including management and advisory fees but excluding interest,
taxes, brokerage commissions, and certain other expenses, to 2.5% of the first
$30 million of its average net assets, 2.0% of the next $70 million of its
average net assets, and 1.5% of its remaining average net assets. Any expenses
to be borne by Key Advisers, the Sub-Adviser or the Administrator will be
estimated daily and reconciled and paid on a monthly basis. Fees imposed upon
customer accounts by Key Advisers, the Sub-Adviser, Key Trust Company of Ohio,
N.A. or its correspondents, affiliated banks and other non-bank affiliates for
cash management services are not fund expenses for purposes of any such expense
limitation.
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<PAGE> 24
Distributor
Victory Broker-Dealer Services, Inc. (the "Distributor") serves as
distributor for the continuous offering of the shares of each fund of the
Victory Portfolios pursuant to a Distribution Agreement. Unless otherwise
terminated, the Distribution Agreement will remain in effect for two years, and
thereafter for consecutive one-year terms, provided that it is approved at least
annually (i) by the Victory Portfolios' Trustees or by the vote of a majority of
the outstanding shares of the Victory Portfolios, and (ii) by the vote of a
majority of the Trustees of the Victory Portfolios who are not parties to the
Distribution Agreement or interested persons of any such party, cast in person
at a meeting called for the purpose of voting on such approval. The Distribution
Agreement will terminate in the event of its assignment, as defined in the 1940
Act. For the Victory Portfolios' fiscal years ended October 31, 1993 and October
31, 1994, the Distributor received no underwriting commission for underwriting
the Fund's shares.
Fund Accountant
BISYS Fund Services Ohio, Inc. serves as fund accountant for the Fund
pursuant to a fund accounting agreement with the Victory Portfolios dated June
5, 1995 (the "Fund Accounting Agreement"). As fund accountant for the Victory
Portfolios, BISYS Fund Services Ohio, Inc. calculates the Fund's Portfolios' net
asset value, the dividend and capital gain distributions, if any, and the yield.
BISYS Fund Services Ohio, Inc. also provides a current security position report,
a summary report of transactions and pending maturities, a current cash position
report, and maintains the general ledger accounting records for the Fund. Under
the Fund Accounting Agreement, BISYS Fund Services Ohio, Inc. is entitled to
receive annual fees of .03% of the first $100 million of a Fund's daily average
net assets, .02% of the next $100 million of the Fund's daily average net
assets, and .01% of the Fund's remaining daily average net assets. These annual
fees are subject to a minimum monthly assets charge of $2,917 per tax-free fund
and do not include out-of-pocket expenses or multiple class charges of $833 per
month assessed for each class of shares after the first class.
In the fiscal years ended October 31, 1993, and October 31, 1994, the
Victory Portfolios paid The Winsbury Service Corporation fund accounting fees
(after fee waivers) of $306,082.43 and $276,849, respectively, for the Fund. For
the fiscal year ended October 31, 1995, the Fund paid fund accounting fees of
$____.
Custodian
Cash and securities owned by the Fund are held by Key Trust Company of
Ohio, N.A. as custodian. Key Trust Company of Ohio, N.A. serves as custodian to
the Fund pursuant to a Custodian Agreement dated May 24, 1995. Under this
Agreement, Key Trust Company of Ohio, N.A. (i) maintains a separate account or
accounts in the name of Fund; (ii) make receipts and disbursements of money on
behalf of the Fund; (iii) collects and receives all income and other payments
and distributions on account of portfolio securities; (iv) responds to
correspondence from security brokers and others relating to its duties; and (v)
makes periodic reports to the Victory Portfolios' Trustees concerning the
Victory Portfolios' operations. Key Trust Company of Ohio, N.A. may, with the
approval of the Victory Portfolios and at the custodian's own expense, open and
maintain a sub-custody account or accounts on behalf of the Fund, provided that
Key Trust Company of Ohio, N.A. shall remain liable for the performance of all
of its duties under its respective Custodian Agreement.
-23-
<PAGE> 25
Transfer Agent
Primary Funds Service Corporation ("PFSC") serves as transfer agent and
dividend disbursing agent for the Fund, pursuant to a Transfer Agency and
Shareholder Servicing Agreement. Under its agreement with the Victory
Portfolios, PFSC has agreed (i) to issue and redeem shares of the Victory
Portfolios; (ii) to address and mail all communications by the Victory
Portfolios to its shareholders, including reports to shareholders, dividend and
distribution notices, and proxy material for its meetings of shareholders; (iii)
to respond to correspondence or inquiries by shareholders and others relating to
its duties; (iv) to maintain shareholder accounts and certain sub-accounts; and
(v) to make periodic reports to the Victory Portfolios' Trustees concerning the
Victory Portfolios' operations. For the services provided under the Transfer
Agency and Shareholder Servicing Agreement, PFSC receives a maximum monthly fee
of $1,250 from the Fund, and a maximum of $3.50 per account of the Fund.
Auditors
The financial highlights appearing in the Prospectus for the Fund,
other than unaudited information marked as such, has been derived from financial
statements of the Victory Portfolios appearing in or incorporated by reference
in this Statement of Additional Information which have been audited by Coopers &
Lybrand L.L.P., independent accountants, as set forth in their report appearing
elsewhere herein, and are included in reliance upon such report and on the
authority of such firm as experts in auditing and accounting. Coopers & Lybrand
L.L.P.'s address is 100 East Broad Street, Columbus, Ohio 43215.
Legal Counsel
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, 919 Third Avenue, New
York, New York 10022 is counsel to the Victory Portfolios.
ADDITIONAL INFORMATION
Description of Shares
The Victory Portfolios (sometimes referred to as the "Trust") is a
Delaware business trust. Its Delaware Trust Instrument was adopted on December
6, 1995 and a Certificate of Trust for the Trust was filed in Delaware on
December __, 1995. On February 29, 1996, the Victory Portfolios converted from a
Massachusetts business trust to a Delaware business trust.
The previously effective Massachusetts Declaration of Trust, pursuant
to which the Victory Portfolios was originally called the North Third Street
Fund, was filed with the Secretary of State of the Commonwealth of Massachusetts
on February 6, 1986. On September 22, 1986, an Amended and Restated Declaration
of Trust was filed to change the name of the Trust to The Emblem Fund and to
make certain other changes. A second amendment was filed October 23, 1986
providing for voting of shares in the aggregate except where voting of shares by
series is otherwise required by law. An amendment to the Amended and Restated
Declaration of Trust was filed on March 15, 1993 to change the name of the Trust
to The Society Funds. An Amended and Restated Declaration of Trust was then
filed on September 2, 1994 to change the name of the Trust to The Victory
Portfolios. On December 1, 1995 shareholders of The Victory Portfolios approved
a plan to reorganize the Victory Portfolios as a Delaware business trust.
The currently effective Delaware Trust Instrument authorizes the
Trustees to issue an unlimited number of shares, which are units of beneficial
interest, without par value. On or about February 29, 1996, contingent upon
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<PAGE> 26
shareholder approval, the Victory Portfolios will convert from a Massachusetts
business trust to a Delaware business trust. The Victory Portfolios presently
has twenty-eight series of shares, which represent interests in the U.S.
Government Obligations Fund, the Prime Obligations Fund, the Tax-Free Money
Market Fund, the Balanced Fund, the Stock Index Fund, the Value Fund, the
Diversified Stock Fund, the Growth Fund, the Special Value Fund, the Special
Growth Fund, the Ohio Regional Stock Fund, the International Growth Fund, the
Limited Term Income Fund, the Government Mortgage Fund, the Ohio Municipal Bond
Fund, the Intermediate Income Fund, the Investment Quality Bond Fund, the
Florida Tax-Free Bond Fund, the Municipal Bond Fund, the Convertible Securities
Fund, the Short-Term U.S. Government Income Fund, the Government Bond Fund, the
Fund for Income, the National Municipal Bond Fund, the New York Tax-Free Fund,
the Institutional Money Market Fund, the Financial Reserves Fund and the Ohio
Municipal Money Market Fund, respectively. The Victory Portfolios' Delaware
Trust Instrument authorizes the Trustees to divide or redivide any unissued
shares of the Victory Portfolios into one or more additional series by setting
or changing in any one or more respects their respective preferences, conversion
or other rights, voting power, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption.
Shares have no subscription or preemptive rights and only such
conversion or exchange rights as the Trustees may grant in their discretion.
When issued for payment as described in the Prospectus and this Statement of
Additional Information, the Victory Portfolios' shares will be fully paid and
non-assessable. In the event of a liquidation or dissolution of the Victory
Portfolios, shares of the Fund are entitled to receive the assets available for
distribution belonging to the Fund, and a proportionate distribution, based upon
the relative asset values of the respective funds of the Victory Portfolios, of
any general assets not belonging to any particular fund which are available for
distribution.
As described in the Prospectus under the caption "ADDITIONAL
INFORMATION -- Voting Rights," shares of the Victory Portfolios are entitled to
one vote per share (with proportional voting for fractional shares) on such
matters as shareholders are entitled to vote. On any matter submitted to a vote
of the shareholders, all shares are voted separately by individual series
(funds), and whenever the Trustees determine that the matter affects only
certain series, may be submitted for a vote by only such series, except (i) when
required by the 1940 Act, shares are voted in the aggregate and not by
individual series; and (ii) when the Trustees have determined that the matter
affects the interests of more than one series and that voting by shareholders of
all series would be consistent with the 1940 Act, then the shareholders of all
such series shall be entitled to vote thereon (either by individual series or by
shares voted in the aggregate, as the Trustees in their discretion may
determine). The Trustees may also determine that a matter affects only the
interests of one or more classes of a series, in which case (or if required
under the 1940 Act) such matter shall be voted on by such class or classes.
There will normally be no meetings of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority of the Trustees have
been elected by the shareholders, at which time the Trustees then in office will
call a shareholders' meeting for the election of Trustees. In addition, Trustees
may be removed from office by a vote of the holders of at least two-thirds of
the outstanding shares of the Victory Portfolios. A meeting shall be held for
such purpose upon the written request of the holders of not less than 10% of the
outstanding shares. Upon written request by ten or more shareholders meeting the
qualifications of Section 16(c) of the 1940 Act (i.e., person who have been
shareholders for at least six months, and who hold shares having an NAV of at
least $25,000 or constituting 1% of the outstanding shares), stating that such
shareholders wish to communicate with the other shareholders for the purpose of
obtaining the signatures necessary to demand a meeting to consider removal of a
Trustee, the Victory Portfolios will provide a list of shareholders or
disseminate appropriate materials (at the expense of the requesting
shareholders). Except as set forth above, the Trustees shall continue to hold
office and may appoint their successors.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Victory Portfolios shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each fund of the
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<PAGE> 27
Victory Portfolios affected by the matter. For purposes of determining whether
the approval of a majority of the outstanding shares of a fund will be required
in connection with a matter, a fund will be deemed to be affected by a matter
unless it is clear that the interests of each fund in the matter are identical,
or that the matter does not affect any interest of the fund. Under Rule 18f-2,
the approval of an investment advisory agreement or any change in investment
policy would be effectively acted upon with respect to a fund only if approved
by a majority of the outstanding shares of such fund. However, Rule 18f-2 also
provides that the ratification of independent public accountants, the approval
of principal underwriting contracts, and the election of Trustees may be
effectively acted upon by shareholders of all of the Victory Portfolios voting
without regard to series.
Shareholder and Trustee Liability
The Delaware Business Trust Act provides that a shareholder of a
Delaware business trust shall be entitled to the same limitation of personal
liability extended to shareholders of Delaware corporations. THE TRUST
INSTRUMENT PROVIDES THAT SHAREHOLDERS WILL NOT BE PERSONALLY LIABLE FOR
LIABILITIES OF THE VICTORY PORTFOLIOS. The Delaware Trust Instrument also
provides for indemnification out of the trust property of any shareholder held
personally liable solely by reason of his or her being or having been a
shareholder. The Delaware Trust Instrument also provides that the Victory
Portfolios shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Victory Portfolios, and shall
satisfy any judgment thereon. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is considered to be extremely
remote.
The Delaware Trust Instrument states further that no Trustee, officer,
or agent of the Victory Portfolios shall be personally liable in connection with
the administration or preservation of the assets of the Funds or the conduct of
the Victory Portfolios' business; nor shall any Trustee, officer, or agent be
personally liable to any person for any action or failure to act except for his
own bad faith, willful misfeasance, gross negligence, or reckless disregard of
his duties. The Declaration of Trust also provides that all persons having any
claim against the Trustees or the Victory Portfolios shall look solely to the
assets of the Victory Portfolios for payment.
Calculation of Performance Data
MONEY MARKET FUND YIELDS
Current yield for the Money Market Fund will be computed by determining
the net change, exclusive, exclusive of capital changes, at the beginning of a
seven-day period in the value of a hypothetical investment, subtracting any
deductions from shareholder accounts, and dividing the difference by the value
of the hypothetical investment at the beginning of the base period to obtain the
base period return. This base period return is then multiplied by (365/7) with
the resulting yield figure carried to at least the nearest hundredth of one
percent. Calculation of "effective yield" begins with the same "base period
return" used in the calculation of yield, which is then annualized to reflect
weekly compounding pursuant to the following formula:
Effective Yield = [(Base Period Return +1) to the 365/7th power]-1
Based on the seven-day period ended October 31, 1995 (the "base
period"), the yield and effective yield was ___% and ____%, respectively for the
Fund.
Performance information showing a fund's total return may be presented,
from time to time, in advertising and sales literature.
For the one year period ended October 31, 1995, the average annual
total return of the Fund was ____%. The average annual total return for the
Fund for the five year period ended October 31, 1995 was ____%. The
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<PAGE> 28
average annual return for the Fund from commencement of
operations (______________) through October 31, 1995 was ____%.
The Fund's average annual total return was determined by calculating
the change in the value of a hypothetical $1,000 investment in the Fund for each
of the periods shown. This figure is computed by determining the average annual
compounded rate of return over the applicable period that would equate the
initial amount invested to the ending redeemable value of the investment. The
ending redeemable value includes dividends and capital gain distributions
reinvested at net asset value. The resulting percentages indicated the positive
or negative investment results that an investor would have experienced from
changes in share price and reinvestment of dividends and capital gains
distributions.
Current yields will fluctuate, from time to time, and are not
necessarily representative of future results. Accordingly, the Fund's yield may
not provide a basis for comparison with bank deposits or other investments that
pay a fixed return for a stated period of time. Yield is a function of the
portfolio's quality, composition, and maturity, as well as expenses allocated to
the Fund. Fees imposed upon customer accounts by Key Advisers, the Sub-Adviser,
their correspondents, affiliated banks and other non-bank affiliates for cash
management services will reduce the Fund's effective yield to customers.
From time to time, performance information for the Fund showing the
Fund's average annual total return, aggregate total return, and/or yield may be
presented in advertisements, sales literature and in reports to shareholders.
Such performance figures are based on historical earnings and are not intended
to indicate future performance. Average annual total return will be calculated
over a stated period. Average annual total return is measured by comparing the
value of an investment in the Fund at the beginning of the relevant period (as
adjusted for sales charges, if any) to the redemption value of the investment at
the end of the period (assuming immediate reinvestment of any dividends or
capital gains distributions), and then analyzing that figure. Average annual
total return is a hypothetical return, and is generally not the same as actual
annual total return. Aggregate total return is calculated similarly to average
annual total return except that the return figure is aggregated over the
relevant period instead of annualized. Yield will be computed by dividing the
Fund's net investment income per share earned during a recent one-month period
by the Fund's maximum offering price per share (reduced by any undeclared earned
income expected to be paid shortly as a dividend) on the last day of the period.
From time to time, the Victory Portfolios may include the following
types of information in advertisements, supplemental sales literature and
reports to shareholders: (1) discussions of general economic or financial
principles (such as the effects of inflation, the power of compounding and the
benefits of dollar-cost averaging); (2) discussions of general economic trends;
(3) presentations of statistical data to supplement such discussions; (4)
descriptions of past or anticipated portfolio holdings for one or more funds of
the Victory Portfolios; (5) descriptions of investment strategies for one or
more of such funds; (6) descriptions or comparisons of various savings and
investment products (including but not limited to insured bank products,
annuities, qualified retirement plans and individual stocks and bonds) which may
or may not include the Victory Portfolios; (7) comparisons of investment
products (including the Victory Portfolios) with relevant market or industry
indices or other appropriate benchmarks; and (8) discussions of fund rankings or
ratings by NRSROs.
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<PAGE> 29
Miscellaneous
As used in the Prospectus and in this Statement of Additional
Information, "assets belonging to a fund" (or "assets belonging to the Fund")
means the consideration received by the Victory Portfolios upon the issuance or
sale of shares in that fund, together with all income, earnings, profits, and
proceeds derived from the investment thereof, including any proceeds from the
sale, exchange, or liquidation of such investments, and any funds or payments
derived from any reinvestment of such proceeds and any general assets of the
Victory Portfolios, which general liabilities and expenses are not readily
identified as belonging to a particular fund (or the Fund) that are allocated to
that fund (or the Fund) by the Victory Portfolios' Trustees. The Trustees may
allocate such general assets in any manner they deem fair and equitable. It is
anticipated that the formula that will be used by the Trustees in making
allocations of general assets to a particular fund of the Victory Portfolios
will be the relative net asset value of the respective fund at the time of
allocation. Assets belonging to a particular fund are charged with the direct
liabilities and expenses in respect of that fund, and with a share of the
general liabilities and expenses of that fund, and with a share of the general
liabilities and expenses of each of the funds not readily identified as
belonging to a particular fund that are allocated to each fund in accordance
with its proportionate share of the net asset values of the respective fund of
the Victory Portfolios at the time of allocation. The timing of allocations of
general assets and general liabilities and expenses of the Victory Portfolios to
a particular fund will be determined by the Trustees of the Victory Portfolios
and will be in accordance with generally accepted accounting principles.
Determinations by the Trustees of the Victory Portfolios as to the timing of the
allocation of general liabilities and expenses and as to the timing and
allocable portion of any general assets with respect to a particular fund are
conclusive.
As used in the Prospectus and in this Statement of Additional
Information, a "vote of a majority of the outstanding shares" or a "vote of
majority of the outstanding voting securities" of the Victory Portfolios or a
particular fund means the affirmative vote of the lesser of (a) 67% or more of
the shares of the Victory Portfolios or such fund present at a meeting at which
the holders of more than 50% of the outstanding shares of the Victory Portfolios
or such fund are represented in person or by proxy, or (b) more than 50% of the
outstanding votes of shareholders of the Victory Portfolios or such fund.
Organizational expenses are allocated to each of the Victory Portfolios
and are amortized over a period of two years from the commencement of the public
offering of shares of the Victory Portfolios.
As of January 1, 1996, the Trustees and officers of the Victory
Portfolios, as a group, owned less than one percent of the shares of the Fund.
As of that date, the Fund believes that Society National Bank was the
shareholder of record of _____% of the shares of the Fund.
As of January 1, 1996, National Financial Services Corp., For the
Benefit of our Customers, One World Financial Center, 200 Liberty St., 4th
Floor, New York, NY 10281-0000 owned beneficially ______________ shares (____%)
of the Fund.
Individual Trustees are elected by the shareholders and, subject to
removal by the vote of the holders of two-thirds of the outstanding shares of
the Victory Portfolios, serve for a term lasting until the next meeting of
shareholders at which trustees are elected. Such meetings are not required to be
held at any specific intervals. Individual Trustees may be removed by vote of
the shareholders voting not less than a majority of the shares then outstanding
cast in person or by proxy at any meeting called for that purpose, or by a
written declaration signed by shareholders voting not less than two-thirds of
the shares then outstanding.
The Victory Portfolios is registered with the Commission as an open-end
management investment company. Such registration does not involve supervision by
the Commission of the management or policies of the Victory Portfolios.
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<PAGE> 30
The Prospectus and this Statement of Additional Information omit
certain of the information contained in the Registration Statement filed with
the Securities and Exchange Commission. Copies of such information may be
obtained from the Commission upon payment of the prescribed fee.
The Prospectus and this Statement of Additional Information are not an
offering of the securities herein described in any state in which such offering
may not lawfully be made. No salesman, dealer, or other person is authorized to
give any information or make any representation other than those contained in
the Prospectus and this Statement of Additional Information.
The 1995 Annual Report to shareholders of The Victory Portfolios is
incorporated by reference herein. This report includes the financial statements
for the fiscal year ended October 31, 1995. The opinion in the Annual Report of
Coopers & Lybrand L.L.P., independent accountants, is incorporated by reference
herein in its entirety to such Annual Report, and such financial statements are
incorporated in their entirety in reliance upon such report of Coopers & Lybrand
L.L.P. and on the authority of such firm as experts in auditing and accounting.
Delaware law authorizes electronic or telephonic communications between
shareholders and the Victory Portfolios. Under Delaware law, the Successor
Company has the flexibility to respond to future business contingencies. For
example, the Trustees will have the power to incorporate the Victory Portfolios,
to merge or consolidate it with another entity, to cause each fund to become a
separate trust, and to change the Victory Portfolios' domicile without a
shareholder vote. This flexibility could help reduce the expense and frequency
of future shareholder meetings for non-investment related issues.
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<PAGE> 31
APPENDIX
The nationally recognized statistical rating organizations
(individually, an "NRSRO") that may be utilized by KeyCorp Advisers or Society
with regard to portfolio investments for the Fund include Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), Duff & Phelps,
Inc. ("Duff"), Fitch Investors Service, Inc. ("Fitch"), IBCA Limited and its
affiliate, IBCA Inc. (collectively, "IBCA"), and Thomson BankWatch, Inc.
("Thomson"). Set forth below is a description of the relevant ratings of each
such NRSRO. The NRSROs that may be utilized by Key Advisers or the Sub-Adviser
and the description of each NRSRO's ratings is as of the date of this Statement
of Additional Information, and may subsequently change.
Long-Term Debt Ratings (may be assigned, for example, to corporate and
municipal bonds)
Description of the five highest long-term debt ratings by Moody's
(Moody's applies numerical modifiers ( e.g., 1, 2, and 3) in each rating
category to indicate the security's ranking within the category):
Aaa. Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa. Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements -
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times in the future. Uncertainty of
position characterizes bonds in this class.
Description of the five highest long-term debt ratings by S&P (S&P may
apply a plus (+) or minus (-) to a particular rating classification to show
relative standing within that classification):
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
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<PAGE> 32
A. Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB. Debt rated BB is regarded, on balance, as predominately speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposure to adverse conditions.
Description of the three highest long-term debt ratings by Duff:
AAA. Highest credit quality. The risk factors are negligible being only
slightly more than for risk-free U.S. Treasury debt.
AA+. High credit quality Protection factors are strong.
AA. Risk is modest but may vary slightly from time to time
AA-. because of economic conditions.
A+. Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
Description of the three highest long-term debt ratings by Fitch (plus
or minus signs are used with a rating symbol to indicate the relative position
of the credit within the rating category):
AAA. Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA. Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA." Because
bonds rated in the "AAA" and "AA" categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these
issues is generally rated "[-]+."
A. Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
IBCA's description of its three highest long-term debt ratings:
AAA. Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic or
financial conditions are unlikely to increase investment risk
significantly.
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<PAGE> 33
AA. Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic, or financial
conditions may increase investment risk albeit not very significantly.
A. Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
Short-Term Debt Ratings (may be assigned, for example, to commercial
paper, master demand notes, bank instruments, and letters of credit)
Moody's description of its three highest short-term debt ratings:
Prime-1. Issuers rated Prime-1 (or supporting institutions) have a
superior capacity for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a
strong capacity for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
S&P's description of its three highest short-term debt ratings:
A-1. This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to have extremely
strong safety characteristics are denoted with a plus sign (+).
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1."
A-3. Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
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<PAGE> 34
Duff's description of its five highest short-term debt ratings (Duff
incorporates gradations of "1+" (one plus) and "1-" (one minus) to assist
investors in recognizing quality differences within the highest rating
category):
Duff 1+. Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
Duff 1. Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
Duff 1-. High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors are
very small.
Duff 2. Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good. Risk
factors are small.
Duff 3. Satisfactory liquidity and other protection factors qualify
issue as to investment grade.
Risk factors are larger and subject to more variation. Nevertheless,
timely payment is expected.
Fitch's description of its four highest short-term debt ratings:
F-1+. Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely
payment.
F-1. Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2. Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as for issues assigned F-1+ or F-1 ratings.
F-3. Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate, however, near-term adverse changes could cause
these securities to be rated below investment grade.
IBCA's description of its three highest short-term debt ratings:
A+. Obligations supported by the highest capacity for timely repayment.
A1. Obligations supported by a very strong capacity for timely
repayment.
A2. Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
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<PAGE> 35
Short-Term Loan/Municipal Note Ratings
Moody's description of its two highest short-term loan/municipal note
ratings:
MIG-1/VMIG-1. This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
MIG-2/VMIG-2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
S&P's description of its two highest municipal note ratings:
SP-1. Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
SP-2. Satisfactory capacity to pay principal and interest.
Short-Term Debt Ratings
Thomson BankWatch, Inc. ("TBW") ratings are based upon a qualitative
and quantitative analysis of all segments of the organization including, where
applicable, holding company and operating subsidiaries.
TBW Ratings do not constitute a recommendation to buy or sell
securities of any of these companies. Further, TBW does not suggest specific
investment criteria for individual clients.
The TBW Short-Term Ratings apply to commercial paper, other senior
short-term obligations and deposit obligations of the entities to which the
rating has been assigned.
The TBW Short-Term Ratings apply only to unsecured instruments that
have a maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an
untimely payment of principal or interest.
TBW-1. The highest category; indicates a very high degree of likelihood
that principal and interest will be paid on a timely basis.
TBW-2. The second highest category; while the degree of safety
regarding timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1".
TBW-3. The lowest investment grade category; indicates that while more
susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and interest in a
timely fashion is considered adequate.
TBW-4. The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
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<PAGE> 36
Definitions of Certain Money Market Instruments
Commercial Paper
Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.
Certificates of Deposit
Certificates of Deposit are negotiable certificates issued against
funds deposited in a commercial bank or a savings and loan association for a
definite period of time and earning a specified return.
Bankers' Acceptances
Bankers' acceptances are negotiable drafts or bills of exchange,
normally drawn by an importer or exporter to pay for specific merchandise, which
are "accepted" by a bank, meaning, in effect, that the bank unconditionally
agrees to pay the face value of the instrument on maturity.
U.S. Treasury Obligations
U.S. Treasury Obligations are obligations issued or guaranteed as to
payment of principal and interest by the full faith and credit of the U.S.
Government. These obligations may include Treasury bills, notes and bonds, and
issues of agencies and instrumentalities of the U.S. Government, provided such
obligations are guaranteed as to payment of principal and interest by the full
faith and credit of the U.S. Government.
U.S. Government Agency and Instrumentality Obligations
Obligations issued by agencies and instrumentalities of the U.S.
Government include such agencies and instrumentalities as the Government
National Mortgage Association, the Export-Import Bank of the United States, the
Tennessee Valley Authority, the Farmers Home Administration, the Federal Home
Loan Banks, the Federal Intermediate Credit Banks, the Federal Farm Credit
Banks, the Federal Land Banks, the Federal Housing Administration, the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation, and
the Student Loan Marketing Association. Some of these obligations, such as those
of the Government National Mortgage Association are supported by the full faith
and credit of the U.S. Treasury; others, such as those of the Export-Import Bank
of the United States, are supported by the right of the issuer to borrow from
the Treasury; others, such as those of the Federal National Mortgage
Association, are supported by the discretionary authority of the U.S. Government
to purchase the agency's obligations; still others, such as those of the Student
Loan Marketing Association, are supported only by the credit of the
instrumentality. No assurance can be given that the U.S. Government would
provide financial support to U.S. Government-sponsored instrumentalities if it
is not obligated to do so by law. A Fund will invest in the obligations of such
instrumentalities only when the investment adviser believes that the credit risk
with respect to the instrumentality is minimal.
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<PAGE> 37
STATEMENT OF ADDITIONAL INFORMATION
THE VICTORY PORTFOLIOS
The Fund for Income
March 1, 1996
This Statement of Additional Information is not a Prospectus, but
should be read in conjunction with the Prospectus of The Victory Portfolios -
The Fund for Income Fund, dated the same date as the date hereof (the
"Prospectus"). This Statement of Additional Information is incorporated by
reference in its entirety into the Prospectus. Copies of the Prospectus may be
obtained by writing the Victory Portfolios at Primary Funds Service
Corporation, P.O. Box 9741, Providence, RI 02940-9741, or by telephoning toll
free 800-539-FUND or 800-539-3863.
<TABLE>
<S> <C> <C>
Investment Policies and Limitations 1 INVESTMENT ADVISER
Valuation of Portfolio Securities 6 KeyCorp Mutual Fund Advisers, Inc.
Additional Purchase and Redemption Information 7
Management of the Victory Portfolios 10 INVESTMENT SUB-ADVISER
Advisory and Other Contracts 19 First Albany Asset Management Corporation
Additional Information 26
Independent Auditor's Report 31 ADMINISTRATOR
Financial Statements 31 Concord Holding Corporation
Appendix 32
DISTRIBUTOR
Victory Broker-Dealer Services, Inc.
TRANSFER AGENT
Primary Funds Service Corporation
CUSTODIAN
Key Trust Company of Ohio, N.A.
</TABLE>
<PAGE> 38
STATEMENT OF ADDITIONAL INFORMATION
The Victory Portfolios (the "Victory Portfolios") is an open-end
management investment company. The Victory Portfolios consist of twenty-eight
series of units of beneficial interest ("shares"), four of which series are
currently inactive. The outstanding shares represent interests in the
twenty-four separate investment portfolios which are currently active. This
Statement of Additional Information relates to the Fund for Income (the "Fund")
only. Much of the information contained in this Statement of Additional
Information expands on subjects discussed in the Prospectus. Capitalized terms
not defined herein are used as defined in the Prospectus. No investment in
shares of the Fund should be made without first reading the Fund's Prospectus.
INVESTMENT POLICIES AND LIMITATIONS
Additional Information on Fund Instruments
The following policies supplement the investment objectives and
policies of the Fund as set forth in the Prospectus.
Mortgage-Related Securities -- In General
Mortgage-related securities are backed by mortgage obligations
including, among others, conventional 30-year fixed rate mortgage obligations,
graduated payment mortgage obligations, 15-year mortgage obligations, and
adjustable rate mortgage obligations. All of these mortgage obligations can be
used to create pass-through securities. A pass-through security is created
when mortgage obligations are pooled together and undivided interests in the
pool or pools are sold. The cash flow from the mortgage obligations is passed
through to the holders of the securities in the form of periodic payments of
interest, principal and prepayments (net of a service fee). Prepayments occur
when the holder of an individual mortgage obligation prepays the remaining
principal before the mortgage obligation's scheduled maturity date. As a
result of the pass-through of prepayments of principal on the underlying
securities, mortgage-backed securities are often subject to more rapid
prepayment of principal than their stated maturity would indicate. Because the
prepayment characteristics of the underlying mortgage obligations vary, it is
not possible to predict accurately the realized yield or average life of a
particular issue of pass-through certificates. Prepayment rates are important
because of their effect on the yield and price of the securities. Accelerated
prepayments have an adverse impact on yields for pass-throughs purchased at a
premium (i.e., a price in excess of principal amount) and may involve
additional risk of loss of principal because the premium may not have been
fully amortized at the time the obligation is repaid. The opposite is true for
pass-throughs purchased at a discount. The Victory Portfolios may purchase
mortgage-related securities at a premium or at a discount. Among the U.S.
Government securities in which the Victory Portfolios may invest are government
"mortgage-backed" (or government guaranteed mortgage related securities). Such
guarantees do not extend to the value of yield of the mortgage-backed
securities themselves or of the Fund's shares.
GNMA Certificates. Certificates of the Government National Mortgage
Association ("GNMA") are mortgage-backed securities which evidence an undivided
interest in a pool or pools of mortgages. GNMA Certificates that the Fund may
purchase are the "modified pass-through" type, which entitle the holder to
receive timely payment of all interest and principal payments due on the
mortgage pool, net of fees paid to the "issuer" and GNMA, regardless of whether
or not the mortgagor actually makes the payment.
The National Housing Act authorizes GNMA to guarantee the timely
payment of principal and interest on securities backed by a pool of mortgages
insured by the Federal Housing Administration ("FHA") or guaranteed by the
Veterans Administration ("VA"). The GNMA guarantee is backed by the full faith
and
<PAGE> 39
credit of the U.S. Government. GNMA is also empowered to borrow without
limitation from the U.S. Treasury if necessary to make any payments required
under its guarantee.
The estimated average life of a GNMA Certificate is likely to be
substantially shorter than the original maturity of the mortgages underlying
the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greater part of principal
investment long before the maturity of the mortgages in the pool. Foreclosures
impose no risk to principal investment because of the GNMA guarantee, except to
the extent that the Fund has purchased the certificates above par in the
secondary market.
FHLMC Securities. The Federal Home Loan Mortgage Corporation
("FHLMC") was created in 1970 to promote development of a nationwide secondary
market in conventional residential mortgages. The FHLMC issues two types of
mortgage pass-through securities ("FHLMC Certificates"), mortgage participation
certificates ("PCs") and collateralized mortgage obligations ("CMOs"). PCs
resemble GNMA Certificates in that each PC represents a pro rata share of all
interest and principal payments made and owed on the underlying pool. The
FHLMC guarantees timely monthly payment of interest on PCs and the ultimate
payment of principal. Recently introduced FHLMC Gold PCs guarantee the timely
payment of both principal and interest.
CMOs are securities backed by a pool of mortgages in which the
principal and interest cash flows of the pool are channeled on a prioritized
basis into two or more classes, or tranches, of bonds. FHLMC CMOs are backed
by pools of agency mortgage-backed securities and the timely payment of
principal and interest of each tranche is guaranteed by the FHLMC. The FHLMC
guarantee is not backed by the full faith and credit of the U.S. Government.
FNMA Securities. The Federal National Mortgage Association ("FNMA")
was established in 1938 to create a secondary market in mortgages insured by
the FHA, but has expanded its activity to the secondary market for conventional
residential mortgages. FNMA primarily issues two types of mortgage-backed
securities, guaranteed mortgage pass-through certificates ("FNMA Certificates")
and CMOs. FNMA Certificates resemble GNMA Certificates in that each FNMA
Certificate represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. FNMA guarantees timely payment of
interest and principal on FNMA Certificates and CMOs. The FNMA guarantee is
not backed by the full faith and credit of the U.S. Government.
Investment Restrictions
The following investment restrictions are fundamental with respect to
the Fund and may be changed only by a vote of a majority of the outstanding
shares of the Fund as defined in "ADDITIONAL INFORMATION --Miscellaneous" of
this Statement of Additional Information).
The Fund may not:
(1) Purchase the securities of any issuer (except the United States
government, its agencies and instrumentalities), with regard to
50% of total assets, if as a result more than 5% of its total
assets would be invested in the securities of such issuer.
In determining the issuer of a tax-exempt security, each state and each
political subdivision, agency, and instrumentality of each state
and each multi-state agency of which such state is a member is a
separate issuer. Where securities are backed only by assets and
revenues of a particular instrumentality, facility or
subdivision, such entity is considered the issuer.
-2-
<PAGE> 40
(2) Invest more than 25% of its total assets in securities whose interest
payments are derived from revenue from similar projects;
(3) Borrow money, except for temporary or emergency purposes and not for
investment purposes, and then only in an amount not exceeding 5% of the
value of its total assets at the time of the borrowing;
(4) Pledge, mortgage or hypothecate its assets, except that, to secure
borrowings permitted by subparagraph (3) above, it may pledge
securities having a market value at the time of pledge not exceeding
10% of the value of its total assets;
(5) Issue any senior security (as defined in the 1940 Act), except that (a)
the Fund may engage in transactions which may result in the issuance
of senior securities to the extent permissible under the applicable
regulations and interpretations of the 1940 Act or an exemptive order;
(b) the Fund may acquire other securities that may be deemed senior
securities to the extent permitted under applicable regulations or
interpretations of the 1940 Act; (c) subject to the restrictions set
forth above, the Fund may borrow money as authorized by the 1940 Act;
(6) Underwrite any issue of securities;
(7) Purchase or sell commodities or commodity contracts, or oil, gas or
other mineral exploration or development programs;
(8) Make loans to other persons except through the use of repurchase
agreements or the purchase of commercial paper. For these purposes, the
purchase of a portion of an issue of debt securities which is part of an
issue to the public shall not be considered the making of a loan;
The following limitations are not fundamental and may be changed without
shareholder notification:
The Fund will not:
(1) Make short sales of securities or purchase any securities on margin,
except for such short-term credits as are necessary for the clearance of
transactions; or
(2) Participate on a joint, or a joint and several, basis in any trading
account in securities except pursuant to an exemptive order or otherwise
permitted by the 1940 Act; the "bunching" of orders for the sale or
purchase of portfolio securities with other funds advised by the
Adviser or its affiliates to reduce brokerage commissions or otherwise
to achieve best overall execution is not considered participation in a
trading account in securities;
With respect to non-municipal bond investments, in addition to the foregoing
limitations, the Fund will not purchase securities (other than securities of
the United States government, its agencies or instrumentalities), if as a
result of such purchase 25% or more of the total Fund's assets would be
invested in any one industry, or enter into a repurchase agreement if, as a
result thereof, more than 10% of its total assets would be subject to
repurchase agreements maturing in more than seven days.
In the event the Fund acquires liquid assets as a result of the exercise of a
security interest relating to municipal bonds, the Fund's trustees will dispose
of such assets as promptly as possible.
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<PAGE> 41
State Regulations
The Victory Portfolios has agreed with a state securities administrator
on behalf of each fund of the Victory Portfolios that each such fund will limit
investment in warrants to no more than 5% of its net assets and, of this 5%, no
more than 2% will be invested in warrants which are not listed on the New York
Stock Exchange or the American Stock Exchange; provided, however, that for the
purposes of this limitation, warrants acquired in units or attached to other
securities will be deemed to be without value.
In addition, the Fund, so long as its shares are registered under the
securities laws of the State of Texas and such restrictions are required as a
consequence of such registration, is subject to the following non-fundamental
policy, which may be modified in the future by the Trustees without a vote of
the Fund's shareholders: the Victory Portfolios has represented to the Texas
State Securities Board, on behalf of the investment portfolios registered in
that state, that those investment portfolios will not invest in oil, gas or
mineral leases or purchase or sell real property (including limited partnership
interests, but excluding readily marketable securities of companies which
invest in real estate).
The policies and limitations above supplement those set forth in the
Prospectus. Unless otherwise noted, whenever an investment policy or
limitation states a maximum percentage of the Fund's assets that may be
invested in any security or other asset, or sets forth a policy regarding
quality standards, such standard or percentage limitation will be determined
immediately after and as a result of the Fund's acquisition of such security or
other asset except in the case of borrowing (or other activities that may be
deemed to result in the issuance of a "senior security" under the 1940 Act).
Accordingly, any subsequent change in values, net assets, or other
circumstances will not be considered when determining whether the investment
complies with the Fund's investment policies and limitations. If the value of
the Fund's holdings of illiquid securities at any time exceeds the percentage
limitation applicable at the time of acquisition due to subsequent fluctuations
in value or other reasons, the Board will consider what actions, if any, are
appropriate to maintain adequate liquidity.
Future Developments
The Fund may take advantage of other investment practices which are not
at present contemplated for use by the Fund or which currently are not
available but which may be developed, to the extent such investment practices
are both consistent with the Fund's investment objective and are legally
permissible for the Fund. Such investment practices, if they arise, may
involve risks which exceed those involved in the activities described in the
Prospectus and Statement of Additional Information. Prior to commencing any
new investment practice, the Fund will notify shareholders by means of
prospectus supplement.
Portfolio Turnover
The turnover rate stated in the Prospectus for the Fund's investment
portfolio is calculated by dividing the lesser of the Fund's purchases or sales
of portfolio securities for the year by the monthly average value of the
portfolio securities. The calculation excludes all securities whose
maturities, at the time of acquisition, were one year or less. Because of this
exclusion, portfolio turnover is expected to be zero percent for regulatory
purposes.
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<PAGE> 42
VALUATION OF PORTFOLIO SECURITIES
As indicated in the Prospectus, the net asset value ("NAV") of the Fund
is determined and the shares of the Fund are priced as of the close of regular
trading of the New York Stock Exchange ("NYSE") ("the Valuation Time(s)") on
each Business Day of the Fund. A "Business Day" is a day on which the NYSE is
open for trading, the Federal Reserve Bank of Cleveland is open and any other
day (other than a day on which no shares of the Fund are tendered for
redemption and no order to purchase any shares is received) during which there
is sufficient trading in portfolio instruments that the Fund's net asset value
per share might be materially affected. The NYSE, or the Federal Reserve Bank
of Cleveland will not open in observance of the following holidays: New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving, and
Christmas.
When the NYSE is closed, or when trading is restricted for any reason
other than its customary weekend or holiday closings, or under emergency
circumstances as determined by the Commission to warrant such action, the
Fund's transfer agent will determine the Fund's NAV at the close of business,
normally 4:00 p.m., eastern time. The Fund's NAV may be affected to the extent
that its securities are traded on days that are not Business Days.
Investment securities held by the Fund are valued on the basis of
valuations provided by an independent pricing service, approved by the Board of
Trustees, which uses information with respect to transactions of a security,
quotations from dealers, market transactions in comparable securities, and
various relationships between securities, in determining value. Specific
investment securities which are not priced by the approved pricing service will
be valued according to quotations obtained from dealers who are market makers
in those securities. Investment securities with less than 60 days to maturity
when purchased are valued at amortized cost which approximates market value.
Investment securities not having readily available market quotations will be
priced at fair value using a methodology approved in good faith by the Board of
Trustees.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Matters Affecting Redemption
The Fund may suspend the right of redemption or postpone the date of
payment for shares during any period when (a) trading on the NYSE is restricted
by applicable rules and regulations of the Commission, (b) the NYSE is closed
for other than customary weekend and holiday closings, (c) the Commission has
by order permitted such suspension, or (d) an emergency exists as determined by
the Commission.
[If, in the opinion of the Board of Trustees, conditions exist which
make cash payment undesirable, redemption payments may be made in whole or in
part in securities or other property, valued for this purpose as they are
valued in computing the Fund's NAV. Shareholders receiving securities or other
property on redemption may realize a gain or loss for tax purposes, and will
incur any costs of sale, as well as the associated inconveniences.]
Pursuant to Rule 11a-3 under the 1940 Act, the Fund is required to give
shareholders at least 60 days' notice prior to terminating or modifying its
exchange privilege. Under the Rule, the 60-day notification requirement may be
waived if (i) the only effect of a modification would be to reduce or eliminate
an administrative fee, redemption fee, or deferred sales charge ordinarily
payable at the time of exchange, or (ii) a Fund temporarily suspends the
offering of shares as permitted under the 1940 Act or by the Commission, or
because it is unable to invest amounts effectively in accordance with its
investment objective and policies.
-5-
<PAGE> 43
In the Prospectus, the Fund, Key Advisers and the Sub-Adviser have
notified shareholders that they reserve the right at any time without prior
notice to shareholders to refuse exchange purchases by any person or group if,
in Key Advisers' or the Sub-Adviser's judgment, the Fund would be unable to
invest effectively in accordance with its investment objective and policies, or
would otherwise potentially be adversely affected.
Purchasing Shares
Shares are sold at their net asset value without a sales charge on days
the NYSE and the Federal Reserve Wire System are open for business. The
procedure for purchasing shares of the Fund is explained in the Prospectus
under "Investing in the Fund."
Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that
maximum interest may be earned. To this end, all payments from shareholders
must be in federal funds or be converted into federal funds. This conversion
must be made before shares are purchased. Converting the funds to federal
funds is normally accomplished within two business days of receipt of the
check.
Redeeming Shares
The Fund redeems shares at the next computed net asset value after the
redemption request is received. Redemption procedures are explained in the
Prospectus under "Redeeming Shares."
Redemption in Kind
Although the Fund intends to redeem shares in cash, it reserves the
right under certain circumstances to pay the redemption price in whole or in
part by a distribution of securities from the Fund. To the extent available,
such securities will be readily marketable.
Redemption in kind will be made in conformity with applicable Commission
rules, taking such securities at the same value employed in determining net
asset value and selecting the securities in a manner the Trustees determine to
be fair and equitable.
The Fund has elected to be governed by Rule 18f-1 of the 1940 Act under
which the Fund is obligated to redeem shares for any one shareholder in cash
only up to the lesser of $250,000 or 1% of the Fund's net asset value during
any 90-day period.]
The Victory Portfolios may redeem shares involuntarily if redemption
appears appropriate in light of the Victory Portfolios' responsibilities under
the 1940 Act. (See "VALUATION" above.)
Additional Tax Information
It is the policy of each fund of the Victory Portfolios to qualify for
the favorable tax treatment accorded regulated investment companies ("RICs")
under Subchapter M of the Code, for so long as such qualification is in the
best interest of its shareholders. By following such policy and distributing
its income and gains currently with respect to each taxable year, the Victory
Portfolios expects to eliminate or reduce to a nominal amount the federal
income and excise taxes to which it may otherwise be subject.
-6-
<PAGE> 44
In order to qualify as a RIC, the Fund must, among other things, (1)
derive at least 90% of its gross income from dividends, interest, payments with
respect to securities loans, and gains from the sale or other disposition of
stock or securities , foreign currencies or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in stock , securities or currencies, (2) derive less than 30% of its
gross income from the sale or other disposition of stock, securities ,
options, futures, forward contracts, and certain foreign currencies (or
options, futures, or forward contracts on foreign currencies) held for less
than three months, and (3) diversify its holdings so that at the end of each
quarter of its taxable year (i) at least 50% of the market value of the Fund's
assets is represented by cash or cash items, U.S. Government securities,
securities of other RICs and other securities limited, in respect of any one
issuer, to an amount not greater than 5% of the value of the fund's total
assets and 10% of the outstanding voting securities of such issuer, and (ii)
not more than 25% of the value of its total assets is invested in the
securities of any one issuer (other than U.S. Government securities) or of two
or more issuers that the Fund control and that are engaged in the same,
similar, or related trades or businesses. These requirements may restrict the
degree to which the Fund may engage in short-term trading and concentrate
investments. If the Fund qualifies as a RIC, it will not be subject to federal
income tax on the part of its net investment income and net realized capital
gains, if any, that it distributes to shareholders with respect to each taxable
year within the time limits specified in the Code.
A non-deductible excise tax is imposed on regulated investment companies
that do not distribute in each calendar year an amount equal to 98% of their
ordinary income for the year plus 98% of their capital gain net income for the
1-year period ending on October 31 of such calendar year. The balance of such
income must be distributed during the following calendar year. If
distributions during a calendar year are less than the required amount, the
fund is subject to a non-deductible excise tax equal to 4% of the deficiency.
Certain investment and hedging activities of the Fund, including
transactions in options, futures contracts, hedging transactions, forward
contracts, straddles, foreign currencies, and foreign securities, are subject
to special tax rules. In a given case, these rules may accelerate income to the
Fund, defer losses to the Fund, cause adjustments in the holding periods of the
Fund's securities, convert short-term capital losses into long-term capital
losses, or otherwise affect the character of the Fund's income. These rules
could therefore affect the amount, timing and character of distributions to
shareholders. The Victory Portfolios will endeavor to make any available
elections pertaining to such transactions in a manner believed to be in the
best interest of the Fund and its securities.
The Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of taxable dividends paid to any shareholder who has failed
to provide (or provided an incorrect) tax identification number, or is subject
to withholding pursuant to a notice from the Internal Revenue Service for
failure to properly include on his or her income tax return payments of
interest or dividends. This "backup withholding" is not an additional tax, and
any amounts withheld may be credited against the shareholder's ultimate U.S.
tax liability.
Information set forth in the Prospectus and this Statement of Additional
Information that relates to federal taxation is only a summary of certain key
federal tax considerations generally affecting purchasers of shares of the
Victory Portfolios. No attempt has been made to present a complete explanation
of the federal tax treatment of a fund or its shareholders, and this discussion
is not intended as a substitute for careful tax planning. Accordingly,
potential purchasers of shares of the Fund are urged to consult their tax
advisers with specific reference to their own tax circumstances. In addition,
the tax discussion in the Prospectus and this Statement of Additional
Information is based on tax law in effect on the date of the Prospectus and
this Statement of Additional Information; such laws and regulations may be
changed by legislative, judicial or administrative action, sometimes with
retroactive effect.
-7-
<PAGE> 45
MANAGEMENT OF THE VICTORY PORTFOLIOS
Board of Trustees
- -----------------
Overall responsibility for management of the Victory Portfolios rests
with the Trustees, who are elected by the shareholders of the Victory
Portfolios. The Victory Portfolios are managed by the Trustees in accordance
with the laws of the Commonwealth of Massachusetts governing business trusts.
There are currently seven Trustees, six of whom are not "interested persons"
of the Victory Portfolios within the meaning of that term under the 1940 Act.
The Trustees, in turn, elect the officers of the Victory Portfolios to
supervise actively its day-to-day operations.
The Trustees of the Victory Portfolios, their addresses, ages and their
principal occupations during the past five years are as follows:
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
--------------------- ---------------- --------------------
<S> <C> <C>
Leigh A. Wilson, 51* Trustee and From 1989 to present, Chairman and
Glenleigh International Ltd. President Chief Executive Officer, Glenleigh
53 Sylvan Road North International Limited; from 1984-
Westport, CT 06880 1989 Chief Executive Officer,
Paribas North America and Paribas
Corporation; Trustee, The Victory
Funds and Spears, Benzak, Salomon
and Farrell ("SBSF") Funds.
</TABLE>
-8-
<PAGE> 46
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Funds During Past 5 Years
--------------------- ---------------- --------------------
<S> <C> <C>
Robert G. Brown, 72 Trustee Retired; from October 1983 to
5460 N. Ocean Drive November 1990, President, Cleveland
Singer Island Advanced Manufacturing Program
Riviera Beach, FL 33404 (non-profit corporation engaged in
regional economic development).
Edward P. Campbell, 46 Trustee From March 1, 1994 to present,
Nordson Corporation Executive Vice President and Chief
28601 Clemens Road Operating Officer of Nordson
Westlake, OH 44145 Corporation (manufacturer of
application equipment); from May
1988 to March 1994, Vice President
of Nordson Corporation; from 1987
to December 1994, member of the
Supervisory Committee of Society's
Collective Investment Retirement
Fund; from May 1991 to August 1994,
Trustee, Financial Reserves Fund
and from May 1993 to August 1994,
Trustee, Ohio Municipal Money
Market Fund; Trustee, The Victory
Funds and SBSF Funds.
Dr. Harry Gazelle, 68 Trustee Retired radiologist, Drs. Hill and
17822 Lake Road Thomas Corp.; Trustee, The Victory
Lakewood, OH 44107 Funds.
<FN>
- ----------------
* Mr. Wilson is deemed to be an "interested person" of the Victory
Portfolios under the 1940 Act solely by reason of his position as President.
</TABLE>
-9-
<PAGE> 47
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Funds During Past 5 Years
- --------------------- ---------------- --------------------
<S> <C> <C>
Stanley I. Landgraf, 70 Trustee Retired; currently, Trustee,
41 Traditional Lane Rensselaer Polytechnic Institute;
Albany, NY 12211 Director, Elenel Corporation and
Mechanical Technology, Inc.;
Member, Board of Overseers, School
of Management, Rensselaer
Polytechnic Institute; Member, The
Fifty Group (a Capital Region
business organization); Trustee,
The Victory Funds.
Dr. Thomas F. Morrissey, 62 Trustee 1995 Visiting Scholar, Bond
Weatherhead School of University, Queensland, Australia;
Management Professor, Weatherhead School of
Case Western Reserve Management, Case Western Reserve
University University; from 1989 to 1995,
10900 Euclid Avenue Associate Dean of Weatherhead
Cleveland, OH 44106-7235 School of Management and Professor,
Case Western Reserve University;
from 1987 to December 1994, Member
of the Supervisory Committee of
Society's Collective Investment
Retirement Fund; from May 1991 to
August 1994, Trustee, Financial
Reserves Fund and from May 1993 to
August 1994, Trustee, Ohio
Municipal Money Market Fund;
Trustee , The Victory Funds.
H. Patrick Swygert, 52 Trustee President, Howard University;
Howard University formerly President, State
2400 6th Street, N.W. University of New York at Albany;
Suite 320 formerly, Executive Vice President,
Washington, DC 20059 Temple University; Trustee, The
Victory Funds.
</TABLE>
The Board presently has an Investment Policy Committee and a
Business, Legal, and Audit Committee. The members of the Investment Policy
Committee are Messrs. Landgraf (Chairman), Morrissey and Brown, who will serve
until May 1996. The function of the Investment Policy Committee is to review
the existing investment policies of the Victory Portfolios, including the
levels of risk and types of funds available to shareholders, and make
recommendations to the Board of Trustees regarding the revision of such
policies or, if necessary, the submission of such revisions to the Victory
Portfolios' shareholders for their consideration. The members of the
Business, Legal and Audit Committee are Messrs. Swygert (Chairman), Campbell
and Gazelle who will serve until May 1996. The function of the Business,
Legal and Audit Committee is to recommend
-10-
<PAGE> 48
independent auditors and monitor accounting and financial matters; to nominate
persons to serve as disinterested Trustees and Trustees to serve on
committees of the Board; and to review compliance and contract matters.
The Investment Policy Committee met four times during the 12
months ended October 31, 1995. The Business, Legal and Audit Committee was
constituted on May 24, 1995 (and has met twice since then) and replaced the
Audit Committee, the Legal Committee and the Nominating Committee, which met
three times, one time and one time, respectively, during the 12 month period
ended October 31, 1995.
REMUNERATION OF TRUSTEES AND CERTAIN EXECUTIVE OFFICERS
Effective June 1, 1995, each Trustee (other than Leigh A. Wilson)
receives an annual fee of $27,000 for serving as Trustee of all the funds of
the Victory Portfolios, and an additional per meeting fee ($2,400 in person and
$1,200 per telephonic meeting).
Effective June 1, 1995, Leigh A. Wilson receives an annual fee of
$33,000 for serving as President and Trustee for all of the funds of the
Victory Portfolios, and an additional per meeting fee ($3,000 in person and
$1,500 per telephonic meeting).
The following table indicates the compensation received by each
Trustee from the Fund and from the Victory "Fund Complex"* for the 12 month
period ended October 31, 1995. During the fiscal year of the Fund which ended
on October 31, 1995. For certain Trustees, these amounts include amounts paid
by the Predecessor Fund, a portfolio of The Victory Funds which was reorganized
as the Fund as of June 5, 1995:
<TABLE>
<CAPTION>
Pension or Estimated Total Total Compensation
Retirement Benefits Annual Benefits Compensation from Victory
Accrued as Upon Retirement from Fund "Fund Complex" *
Portfolio Expenses
<S> <C> <C> <C> <C>
Robert G. Brown, Trustee . . . -0- -0- $217.14 $39,815.98
John D. Buckingham,# Trustee. . -0- -0- 82.92 $18,841.89
Edward P. Campbell, Trustee . . -0- -0- 114.18 33,799.68
Harry Gazelle, Trustee . . . . -0- -0- 189.79 35,916.98
John W. Kemper, Trustee# . . . -0- -0- 161.55 22,567.31
Stanley I. Landgraf, Trustee . -0- -0- 157.16 34,615 .98
Thomas F. Morrissey, Trustee . -0- -0- 228.46 40,366.98
H. Patrick Swygert, Trustee . . -0- -0- 228.46 37,116.98
Leigh A. Wilson, Trustee . . . -0- -0- 248.70 46,716.97
John R. Young, Trustee# . . . . -0- -0- 140.67 21,963 .81
- ------------------------------
<FN>
# Resigned
* For certain Trustees, these amounts include compensation received from
The Victory Funds (which were reorganized into the Victory Portfolios as of
June 5, 1995), the SBSF Funds (the investment adviser of which was acquired by
KeyCorp effective April, 1995) and Society's Collective Investment Retirement
Funds, which were reorganized into the Victory Balanced Fund and Victory
Government Mortgage Fund as of December 19, 1994. There are presently 24
mutual funds from which the above-named Trustees are compensated in the Victory
"Fund Complex," but not all of the above-named Trustees serve on the boards of
each fund in the "Fund Complex."
</TABLE>
11
<PAGE> 49
Officers
- --------
The officers of the Victory Portfolios, their addresses, ages
and principal occupations during the past five years are as follows:
<TABLE>
<CAPTION>
Position with the Principal occupation
Name Victory Portfolios during past 5 years
- ------------------------- ------------------------ ------------------------------
<S> <C> <C>
Leigh A. Wilson, 51 President and Trustee From 1989 to present, Chairman
Glenleigh International Ltd. and Chief Executive Officer,
53 Sylvan Road North Glenleigh International Limited;
Westport, CT 06880 from 1984-1989, Chief Executive
Officer, Paribas North America
and Paribas Corporation; Trustee
to The Victory Funds and SBSF Funds.
William B. Blundin, 57 Vice President Senior Vice President of BISYS
BISYS Fund Services Fund Services; officer of other
125 West 55th Street investment companies administered
New York, New York 10019 by BISYS Fund Services; President
and Chief Executive Officer of
Vista Broker-Dealer Services, Inc.,
Emerald Asset Management, Inc.
and BNY Hamilton Distributors,
Inc., registered broker/dealers.
J. David Huber, 49 Vice President Executive Vice President, BISYS
BISYS Fund Services Fund Services.
3435 Stelzer Road
Columbus, OH 43219-3035
Scott A. Englehart, 33 Secretary From October 1990 to present,
BISYS Fund Services employee of BISYS Fund Services,
3435 Stelzer Road Inc.; From 1985 to October 1990,
Columbus, OH 43219-3035 Manager of Banking Center, Fifth
Third Bank.
George O. Martinez, 36 Assistant Secretary From March 1995 to present,
BISYS Fund Services Senior Vice President and Director
3435 Stelzer Road of Legal and Compliance Services,
Columbus, OH 43219-3035 BISYS Fund Services; from June
1989-March 1995, Vice President and
Associate General Counsel, Alliance
Capital Management.
</TABLE>
12
<PAGE> 50
<TABLE>
<S> <C>
Martin R. Dean, 32 Treasurer From May 1994 to present,
BISYS Fund Services employee of BISYS Fund Services;
3435 Stelzer Road from January 1987 - April 1994,
Columbus, OH 43219-3035 Senior Manager, KPMG Peat Marwick.
Adrian J. Waters, 33 Assistant Treasurer From May 1993 to present,
BISYS Fund Services (Ireland) employee of BISYS Fund Services;
Limited from 1989-May 1993, Manager,
ITI House Price Waterhouse.
12 Earlsfort Terrace
Dublin 2, Ireland
</TABLE>
The mailing address of each of the officers of the Victory Portfolios
is 3435 Stelzer Road, Columbus, Ohio 43219-3035.
The officers of the Victory Portfolios (other than Leigh Wilson)
receive no compensation directly from the Victory Portfolios for performing the
duties of their offices. BISYS Fund Services, Inc. Receives fees from the
Victory Portfolios for acting as Administrator.
As of January 6, 1996, the Trustees and officers as a group owned
beneficially less than 1% of the Fund.
Investment Adviser and Sub-Adviser
Key Advisers was organized as an Ohio corporation on July 27, 1995 and
is registered as an investment adviser under the Investment Advisers Act of
1940. It is a wholly-owned subsidiary of KeyCorp Asset Management Holdings,
Inc., which is a wholly-owned subsidiary of Society National Bank, a
wholly-owned subsidiary of KeyCorp. Affiliates of Key Advisers manage
approximately $37 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals and mutual funds.
KeyCorp, a financial services holding company, is headquartered at 127
Public Square, Cleveland, Ohio 44114. As of September 30, 1995, KeyCorp had an
asset base of $68 billion, with banking offices in 26 states from Maine to
Alaska, and trust and investment offices in 16 states. KeyCorp is the
resulting entity of the merger in 1994 of Society Corporation, the bank
holding company of which Society National Bank was a wholly-owned subsidiary,
and KeyCorp, the former bank holding company. KeyCorp's major business
activities include providing traditional banking and associated financial
services to consumer, business and commercial markets. Its non-bank
subsidiaries include investment advisory, securities brokerage, insurance, bank
credit card processing, and mortgage leasing companies. Society National Bank
is the lead affiliate bank of KeyCorp.
The following table lists the advisory fees for each mutual fund that
is advised by Key Advisers.
.25 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Institutional Money Market Fund*
13
<PAGE> 51
.35 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Prime Obligations Fund*
Victory U.S. Government Obligations Fund*
Victory Tax-Free Money Market Fund*
.50 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Money Market Fund*
Victory Limited Term Income Fund*
Victory Government Mortgage Fund*
Victory Financial Reserves Fund*
Victory Fund for Income #
.55 OF 1% OF AVERAGE DAILY NET ASSETS
Victory National Municipal Bond Fund*
Victory Government Bond Fund*
Victory New York Tax-Free Fund*
.60 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Bond Fund*
Victory Stock Index Fund*
.65 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Diversified Stock Fund*
.75 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Intermediate Income Fund*
Victory Investment Quality Bond Fund*
Victory Ohio Regional Stock Fund*
1% OF AVERAGE DAILY NET ASSETS
Victory Balanced Fund*
Victory Value Fund*
Victory Growth Fund*
Victory Special Value Fund*
Victory Special Growth Fund+
1.10% OF AVERAGE DAILY ASSETS
Victory International Growth Fund*
# First Albany Asset Management Corporation serves as sub-adviser to the
Victory Fund for Income, for which it receives .20% of average daily
net assets.
+ T. Rowe Price Associates, Inc. serves as sub-adviser to the Victory
Special Growth Fund, for which it receives .25% of average daily net
assets up to $100 million and .20% of average daily net assets in
excess of $100 million.
* Society Asset Management, Inc. Serves as sub-adviser to each of these
Funds. For its services under the investment sub-advisory agreement,
Key Advisers pays the Sub-Adviser sub-advisory fees at
-14-
<PAGE> 52
rates (based on an annual percentage of average daily net assets) which vary
according to the table set forth below:
-15-
<PAGE> 53
<TABLE>
<S> <C>
For the Victory Diversified Stock Fund, For the Victory International Growth
Growth Fund, Stock Index Fund and Value Fund: Fund, Ohio Regional Stock Fund and Special Value
Fund:
</TABLE>
<TABLE>
<CAPTION>
Rate of Rate of
Net Assets Sub-Advisory Fee* Net Assets Sub-Advisory Fee*
- ----------------- ----------------- --------------------- ------------------
<S> <C> <C> <C>
Up to $10,000,000 0.65% Up to $10,000,000 0.90%
Next $15,000,000 0.50% Next $15,000,000 0.70%
Next $25,000,000 0.40% Next $25,000,000 0.55%
Above $50,000,000 0.35% Above $50,000,000 0.45%
</TABLE>
<TABLE>
<S> <C>
For the Victory Intermediate Income Fund, Investment For the Victory Prime Obligations Fund, Tax-Free
Quality Bond Fund, Limited Term Income Fund, Money Market Fund, U.S. Government Obligations
Ohio Municipal Bond Fund, Government Bond Fund, Financial Reserves Fund, Institutional Money
Fund, Government Mortgage Fund, National Market Fund and Ohio Municipal Money Market
Municipal Bond Fund and New York Tax-Free Fund: Fund:
</TABLE>
<TABLE>
<CAPTION>
Rate of Rate of
Net Assets Sub-Advisory Fee* Net Assets Sub-Advisory Fee*
- ----------------- ----------------- --------------------- ------------------
<S> <C> <C> <C>
Up to $10,000,000 0.40% Up to $10,000,000 0.25%
Next $15,000,000 0.30% Next $15,000,000 0.20%
Next $25,000,000 0.25% Next $25,000,000 0.15%
Above $50,000,000 0.20% Above $50,000,000 0.125%
____________________
<FN>
* As a percentage of average daily net assets. The Sub-Adviser has the
right to voluntarily waive any portion of the sub-advisory fee from time to
time.
</TABLE>
ADVISORY AND OTHER CONTRACTS
Unless sooner terminated, the Investment Advisory Agreement between
Key Advisers and the Fund provides that it will continue in effect as to the
Fund for an initial two-year term and for consecutive one-year terms
thereafter, provided that such continuance is approved at least annually by the
Victory Portfolios' Trustees or by vote of a majority of the outstanding shares
of such Fund (as defined under "GENERAL INFORMATION - Miscellaneous" in the
Prospectuses), and, in either case, by a majority of the Trustees who are not
parties to the Investment Advisory Agreement or interested persons (as defined
in the 1940 Act) of any party to the Investment Advisory Agreement, by votes
cast in person at a meeting called for such purpose.
The Investment Advisory Agreement is terminable as to the Fund at any
time on 60 days' written notice without penalty by the Trustees, by vote of a
majority of the outstanding shares of the Fund, or by Key
-16-
<PAGE> 54
Advisers. The Investment Advisory Agreement also terminates automatically in
the event of any assignment, as defined under the 1940 Act.
The Investment Advisory Agreement provides that Key Advisers shall
not be liable for any error of judgment or mistake of law or for any loss
suffered by the Fund in connection with the performance of services pursuant
to the Investment Advisory Agreement, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith, or gross negligence on the
part of Key Advisers in the performance of its duties, or from reckless
disregard by it of either duties and obligations thereunder.
Under the Investment Advisory Agreement, Key Advisers has agreed to
provide the investment advisory services described in the Prospectus. For the
services provided and expenses assumed pursuant to the Investment Advisory
Agreement, the Fund pays Key Advisers a fee, computed daily and paid monthly,
at the annual rate of one percent (1.00%) of the average daily net assets of
the Fund.
Prior to January 1, 1995, Society Asset Management, Inc. Served as
investment adviser to the Fund. From May 1, 1994 to June 5, 1995, Society's
affiliate, Key Trust Company, served as the investment adviser to the Fund
and its Predecessor Fund. Prior to May 1, 1994, First Albany served as the
investment adviser to the Investors Preference Fund for Income, the Predecessor
to the Predecessor Fund. For the fiscal years ended October 31, 1995 and the
fiscal period ended October 31, 1994 the Fund paid investment advisory fees
of $_______, and $________, in investment advisory fees, respectively, and the
investment adviser reimbursed expenses amounting to $_______ and $_______,
respectively.
Under the Investment Advisory Agreement, Key Advisers may delegate a
portion of its responsibilities to a sub-adviser. In addition, the Investment
Advisory Agreement provides that Key Advisers may render services through its
own employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser of the Fund and are under the common
control of KeyCorp as long as all such persons are functioning as part of an
organized group of persons, managed by authorized officers of Key Advisers.
Key Advisers has entered into an investment sub-advisory agreement
with First Albany on behalf of the Fund. With respect to the day to day
management of the Fund, under the sub-advisory agreement, the Sub-Adviser makes
decisions concerning, and places all orders for, purchases and sales of
securities and helps maintain the records relating to such purchases and sales.
The Sub-Adviser may, in its discretion, provide such services through its own
employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser to the company under applicable laws
and are under the common control of KeyCorp; PROVIDED that (i) all persons,
when providing services under the sub-advisory agreement, are functioning as
part of an organized group of persons, and (ii) such organized group of persons
is managed at all times by authorized officers of the Sub-Adviser. This
arrangement will not result in the payment of additional fees by the Fund.
-17-
<PAGE> 55
Glass-Steagall Act
- ------------------
In 1971 the United States Supreme Court held in INVESTMENT COMPANY
INSTITUTE v. CAMP that the federal statute commonly referred to as the
Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision:
(a) forbid a bank holding company registered under the Federal Bank Holding
Company Act of 1956 (the "Holding Company Act") or any non-bank affiliate
thereof from sponsoring, organizing, or controlling a registered, open-end
investment company continuously engaged in the issuance of its shares, but (b)
do not prohibit such a holding company or affiliate from acting as investment
adviser, transfer agent, and custodian to such an investment company. In 1981
the United States Supreme Court held in Board of Governors of the Federal
Reserve System v. Investment Company Institute that the Board did not exceed
its authority under the Holding Company Act when it adopted its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to registered closed-end investment companies.
In the BOARD OF GOVERNORS case, the Supreme Court also stated that if a
national bank complied with the restrictions imposed by the Board in its
regulation and interpretation authorizing bank holding companies and their
non-bank affiliates to act as investment advisers to investment companies, a
national bank performing investment advisory services for an investment company
would not violate the Glass-Steagall Act.
Key Advisers believes that it may perform the services for the Funds
contemplated by the Prospectus, this Statement of Additional Information, and
the Investment Advisory Agreement without violation of applicable statutes and
regulations and has so represented in its Investment Advisory Agreement for
the Fund. Key Trust Company of Ohio, N.A. believes that it may perform the
services for the Victory Portfolios contemplated by the Prospectus, this
Statement of Additional Information, and the Shareholder Servicing Agreement
with the Victory Portfolios (as described below) without violation of
applicable statutes and regulations and has so represented in such Shareholder
Servicing Agreement. Future changes in either federal or state statutes and
regulations relating to the permissible activities of banks or bank holding
companies and the subsidiaries or affiliates of those entities, as well as
further judicial or administrative decisions or interpretations of present and
future statutes and regulations, could prevent or restrict Key Trust Company
of Ohio, N.A. or Key Advisers from continuing to perform such services for the
Victory Portfolios. Depending upon the nature of any changes in the services
which could be provided by Key Trust Company of Ohio, N.A. or Key Advisers,
the Trustees of the Victory Portfolios would review the Victory Portfolios'
relationship with Key Trust Company of Ohio, N.A. or Key Advisers and consider
taking all action necessary in the circumstances.
Should future legislative, judicial, or administrative action prohibit
or restrict the proposed activities of Key Trust Company of Ohio, N.A. or
Key Advisers and its affiliated and correspondent banks and other non-bank
affiliates in connection with customer purchases of shares of the Victory
Portfolios, the banks and such non-bank affiliates might be required to alter
materially or discontinue the services offered by them to customers. It is not
anticipated, however, that any change in the Victory Portfolios' method of
operations would affect its net asset value per share or result in financial
losses to any customer.
From time to time, advertisements, supplemental sales literature and
information furnished to present or prospective shareholders of the Fund may
include descriptions of Key Trust Company of Ohio, N.A., Key Advisers and the
Sub-Adviser including, but not limited to, (i) descriptions of the operations
of Key Trust Company of Ohio, N.A., Key Advisers and the Sub-Adviser; (ii)
descriptions of certain personnel and their functions; and (iii) statistics and
rankings related to the operations of Key Trust Company of Ohio, N.A., Key
Advisers and the Sub-Adviser.
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Portfolio transactions
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Pursuant to the Investment Advisory Agreement (and Sub-Advisory
Agreement), Key Advisers or the Sub-Adviser determines, subject to the general
supervision of the Trustees of the Victory Portfolios, and in accordance with
the Fund's investment objective and restrictions, which securities are to be
purchased and sold by the Fund, and which brokers are to be eligible to
execute its portfolio transactions. Purchases from underwriters and/or
broker-dealers of portfolio securities include a commission or concession paid
by the issuer to the underwriter and/or broker-dealer and purchases from
dealers serving as market makers may include the spread between the bid and
asked price. While Key Advisers and the Sub-Adviser generally seek
competitive prices (inclusive of any spread or commission), the Fund may not
necessarily pay the lowest prices available on each transaction, for reasons
discussed below.
Allocation of transactions to dealers is determined by Key Advisers
or the Sub-Adviser in their best judgment and in a manner deemed fair and
reasonable to shareholders. The primary consideration is prompt execution of
orders in an effective manner at the most favorable price. Subject to this
consideration, dealers who provide supplemental investment research to Key
Advisers or the Sub-Adviser may receive orders for transactions by the Victory
Portfolios. Information so received is in addition to and not in lieu of
services required to be performed by Key Adivsers or the Sub-Adviser and does
not reduce the advisory fees payable to Key Advisers by the Victory
Portfolios. Such information may be useful to Key Advisers or the Sub-Adviser
in serving both the Victory Portfolios and other clients and, conversely, such
supplemental research information obtained by the placement of orders on
behalf of other clients may be useful to Key Advisers or the Sub-Adviser in
carrying out its obligations to the Victory Portfolios. In the future, the
Trustees may also authorize the allocation of brokerage to affiliated
broker-dealers on an agency basis to effect portfolio transactions. In such
event, the Trustees will adopt procedures incorporating the standards of rule
17e-1 under the 1940 act, which requires that the commission paid to
affiliated broker-dealers be "reasonable and fair compared to the commission,
fee or other remuneration received, or to be received, by other brokers in
connection with comparable transactions involving similar securities during a
comparable period of time." At times, the Fund may also purchase portfolio
securities directly from dealers acting as principals, underwriters or market
makers. As these transactions are usually conducted on a net basis, no
brokerage commissions are paid by the Fund.
The Victory Portfolios will not execute portfolio transactions
through, acquire portfolio securities issued by, make savings deposits in, or
enter into repurchase or reverse repurchase agreements with Key Advisers, the
Sub-Adviser, Key Trust Company of Ohio, N.A. or its affiliates, Concord Holding
Corporation, Victory Broker-Dealer Services, Inc. or their affiliates, and will
not give preference to Key Trust Company of Ohio, N.A.'s correspondent banks
or affiliates, or Concord Holding Corporation or Victory Broker-Dealer
Services, Inc. with respect to such transactions, securities, savings deposits,
repurchase agreements, and reverse repurchase agreements.
Investment decisions for the Fund are made independently from those
for the other Funds or any other investment company or account managed by Key
Advisers (or Society). Any such other investment company or account may also
invest in the same securities as a particular Fund. When a purchase or sale of
the same security is made at substantially the same time on behalf of the Fund
and another fund, investment company or account, the transaction will be
averaged as to price, and available investments allocated as to amount, in a
manner which Key Advisers (or Society) believes to be equitable to the Fund
and such other Fund, investment company or account. In some instances, this
investment procedure may adversely affect the price paid or received by the
Fund or the size of the position obtained by the Fund. To the extent
permitted by law, Key Advisers (or Society) may aggregate the securities to be
sold or purchased for the Fund with those to be sold or purchased for the
other Funds or for other investment companies or accounts in order to obtain
best execution. As provided by the Investment
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<PAGE> 57
Advisory (and Sub-Advisory) Agreement, in making investment recommendations for
the Victory Portfolios, Key Advisers (or Society) will not inquire or take
into consideration whether an issuer of securities proposed for purchase or
sale by a Fund is a customer of Society, its parents or subsidiaries or
affiliates and, in dealing with their commercial customers, Key Advisers
(Society), its parents, subsidiaries, and affiliates will not inquire or take
into consideration whether securities of such customers are held by the Victory
Portfolios.
In the fiscal years ended October 31, 1994 and 1995, the Fund paid
$176,716, and $_______, respectively, in brokerage commissions.
Administrator
Currently, Concord Holding Corporation ("CHC") serves as general
manager and administrator (the "Administrator") to the Fund. The
Administrator assists in supervising all operations of the Fund (other than
those performed by Key Advisers or the Sub-Adviser under the Investment
Advisory Agreement and Sub-Advisory Agreement. Prior to june, 1995, the
Winsbury Company ("Winsbury") served as the Fund's administrator.
CHC receives a fee from the Fund for its services as Administrator
and expenses assumed pursuant to the Administration Agreements, calculated
daily and paid monthly, at the annual rate of fifteen one hundredths of one
percent (.15%) of the Fund's average daily net assets. CHC may periodically
waive all or a portion of its fee with respect to the Fund in order to
increase the net income of the Fund available for distribution as dividends.
Unless sooner terminated, the Administration Agreement will continue
in effect as to the Fund for a period of two years, and for consecutive
one-year terms thereafter, provided that such continuance is ratified at least
annually by the Victory Portfolios' Board of Trustees or by vote of a majority
of the outstanding shares of the Fund, and in either case by a majority of the
Trustees who are not parties to the Administration Agreement or interested
persons (as defined in the 1940 act) of any party to the Administration
Agreement, by votes cast in person at a meeting called for such purpose.
The Administration Agreement provides that CHC shall not be liable
for any error of judgment or mistake of law or any loss suffered by the Victory
Portfolios in connection with the matters to which the Administration
Agreement relates, except a loss resulting from willful misfeasance, bad faith,
or gross negligence in the performance of its duties, or from the reckless
disregard by it of its obligations and duties thereunder.
Under the Administration Agreement, CHC assists in the Fund's
administration and operation, including providing statistical and research
data, clerical services, internal compliance and various other administrative
services, including among other responsibilities, forwarding certain purchase
and redemption requests to the Transfer Agent, participation in the updating of
the prospectus, coordinating the preparation, filing, printing and
dissemination of reports to shareholders, coordinating the preparation of
income tax returns, arranging for the maintenance of books and records and
providing the office facilities necessary to carry out the duties thereunder.
Under the Administration Agreement, CHC may delegate all or any part of its
responsibilities thereunder.
In the fiscal years ended October 31, 1994 and October 31, 1995, the
Fund paid to Winsbury and CHC aggregate administration fees of $224,695, and
$_______, respectively, after fee reductions of $8,592, and $_____,
respectively.
Distributor
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Victory Broker-Dealer Services, Inc. (the "Distributor") serves as
distributor for the continuous offering of the shares of the Fund pursuant to a
Distribution Agreement between the Distributor and the Victory Portfolios.
Unless otherwise terminated, the Distribution Agreement will remain in effect
with respect to the fund for two years, and thereafter for consecutive one-year
terms, provided that it is approved at least annually (i) by the Victory
Portfolios' Board of Trustees or by the vote of a majority of the outstanding
shares of the fund, and (ii) by the vote of a majority of the Trustees of the
Victory Portfolios who are not parties to the Distribution Agreement or
interested persons of any such party, cast in person at a meeting called for
the purpose of voting on such approval. The Distribution Agreement will
terminate in the event of its assignment, as defined in the 1940 act. For the
fund's fiscal years ended October 31, 1994 and October 31, 1995, [Winsbury]
received $______ and $_______, respectively, in underwriting commissions, and
retained $____ and $__, respectively.
Shareholder Servicing Plan
- --------------------------
The Victory Portfolios, on behalf of the Fund, has adopted a
Shareholder Servicing PLan to provide payments to shareholder servicing agents
(each a "Shareholder Servicing Agent") that provide administrative support
services to customers who may from time to time beneficially own shares, which
services include: (i) aggregating and processing purchase and redemption
requests for shares from customers and promptly transmitting net purchase and
redemption orders to our distributor or transfer agent; (ii) providing
customers with a service that invests the assets of their accounts in shares
pursuant to specific or pre-authorized instructions; (iii) processing dividend
and distribution payments on behalf of customers; (iv) providing information
periodically to customers showing their positions in shares; (v) arranging for
bank wires; (vi) responding to customer inquiries ; (vii) providing
subaccounting with respect to shares beneficially owned by customers or
providing the information to the Victory Portfolios necessary for
subaccounting; (viii) if required by law, forwarding shareholder communications
from us (such as proxies, shareholder reports, annual and semi-annual financial
statements and dividend, distribution and tax notices) to customers; (ix)
forwarding to customers proxy statements and proxies containing any proposals
regarding this Plan; and (x) providing such other similar services as we may
reasonably request to the extent you are permitted to do so under applicable
statutes, rules or regulations. For expenses incurred and services provided
pursuant to the Shareholder Servicing Agreement, the Fund pays each Shareholder
Servicing Agent a fee computed daily and paid monthly, in amounts aggregating
not more than twenty-five one-hundredths of one percent (.25%) of the average
daily net assets of the Fund per year. A Shareholder Servicing Agent may
periodically waive all or a portion of its respective shareholder servicing
fees with respect to the Fund to increase the net income of the Fund available
for distribution as dividends.
Expenses
- --------
The Fund bears the following expenses relating to its operations:
taxes, interest, brokerage fees and commissions, fees of the Trustees of the
Victory Portfolios, Commission fees, state securities qualification fees,
costs of preparing and printing prospectuses for regulatory purposes and for
distribution to current shareholders, outside auditing and legal expenses,
advisory and administration fees, fees and out-of-pocket expenses of the
custodian and transfer agent, certain insurance premiums, costs of maintenance
of the Fund's existence, costs of shareholders' reports and meetings, and any
extraordinary expenses incurred in the Fund's operation.
If total expenses borne by the Fund in any fiscal year exceeds
expense limitations imposed by applicable state securities regulations, Key
Advisers, the Sub-Adviser or the Administrator will waive their fees to the
extent such excess expenses exceed such expense limitation in proportion to
their respective fees. As of the date of this statement of additional
information, the most restrictive expense limitation applicable to the Fund
limits its aggregate annual expenses, including management and advisory fees
but excluding interest, taxes, brokerage commissions, and certain other
expenses, to 2.5% Of the first $30 million of its average net assets, 2.0% Of
the
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<PAGE> 59
next $70 million of its average net assets, and 1.5% of its remaining
average net assets. Any expenses to be borne by Key Advisers, Sub-Adviser or
the Administrator will be estimated daily and reconciled and paid on a monthly
basis. Fees imposed upon customer accounts by Key Advisers, the Sub-Adviser,
Key Trust Company of Ohio, N.A. or its correspondents, affiliated banks and
other non-bank affiliates for cash management services are not fund expenses
for purposes of any such expense limitation.
Fund Accountant
BISYS Fund Services Ohio, Inc. serves as fund accountant for the Fund
pursuant to a Fund Accounting Agreement with the Victory Portfolios dated May
31, 1995 (the "Fund Accounting Agreement"). As fund accountant for the Victory
Portfolios, BISYS Fund Services Ohio, Inc. calculates the Fund's Portfolios'
net asset value, the dividend and capital gain distributions, if any, and the
yield. BISYS Fund Services Ohio, Inc. also provides a current security
position report, a summary report of transactions and pending maturities, a
current cash position report, and maintains the general ledger accounting
records for the Fund. Under the Fund accounting agreement, BISYS Fund
Services Ohio, Inc. is entitled to receive annual fees of .03% Of the first
$100 million of the Fund's daily average net assets, .02% Of the next $100
million of Fund's daily average net assets, and .01% Of the Fund's remaining
daily average net assets. These annual fees are subject to a minimum monthly
assets charge of $2,917 per tax-free fund, and do not include out-of-pocket
expenses or multiple class charges of $833 per month assessed for each class of
shares after the first class. In the fiscal years ended October 31, 1994, and
October 31, 1995, the Victory Portfolios paid The Winsbury Service Corporation
Fund accounting fees (after fee waivers) of $_______, and $_______,
respectively, for the Fund.
Custodian
Cash and securities owned by the Fund are held by Key Trust Company
of Ohio, N.A. as custodian. Key Trust Company of Ohio, N.A. serves as
custodian to the Fund pursuant to a Custodian Agreement dated May 24, 1995.
Under this Agreement, Key Trust Company of Ohio, N.A. (i) maintains a separate
account or accounts in the name of the Fund; (ii) makes receipts and
disbursements of money on behalf of the Fund; (iii) collects and receives all
income and other payments and distributions on account of portfolio securities;
(iv) responds to correspondence from security brokers and others relating to
its duties; and (v) makes periodic reports to the Victory Portfolios' Trustees
concerning the Victory Portfolios' operations. Key Trust Company of Ohio, N.A.
May, with the approval of the Victory Portfolios and the custodian's own
expense, open and maintain a sub-custody account or accounts on behalf of the
Fund, provided that Key Trust Company of Ohio, N.A. shall remain liable for
the performance of all of its duties under its respective Custodian Agreement.
Transfer Agent
Primary Funds Service Corporation ("PFSC") serves as transfer agent
and dividend disbursing agent for the Fund, pursuant to a Transfer Agency and
Shareholder Servicing Agreement. Under its agreement with the Victory
Portfolios, PFSC has agreed (i) to issue and redeem shares of the Victory
Portfolios; (ii) to address and mail all communications by the Victory
Portfolios to its shareholders, including reports to shareholders, dividend and
distribution notices, and proxy material for its meetings of shareholders;
(iii) to respond to correspondence or inquiries by shareholders and others
relating to its duties; (iv) to maintain shareholder accounts and certain
sub-accounts; and (v) to make periodic reports to the Victory Portfolios'
Trustees concerning the Victory Portfolios' operations. For the services
provided under the transfer agency and shareholder servicing agreement, PFSC
receives a maximum monthly fee of $1,250 from the Fund, and a maximum of $3.50
Per account of the Fund.
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<PAGE> 60
Auditors
The financial highlights appearing in the Prospectus for the Fund,
other than unaudited information marked as such, has been derived from
financial statements of the Victory Portfolios appearing in or incorporated by
reference in this Statement of Additional Information which have been audited
by Coopers & Lybrand L.L.P., independent accountants, as set forth in their
report appearing elsewhere herein, and are included in reliance upon such
report and on the authority of such firm as experts in auditing and accounting.
Coopers & Lybrand L.L.P.'s address is 100 East Broad Street, Columbus, Ohio
43215.
Legal Counsel
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, 919 Third Avenue,
New York, New York 10022 is counsel to the Victory Portfolios.
Additional Information
Description of Shares
The Victory Portfolios (sometimes referred to as the "Trust") is a
Delaware business Trust. Its Delaware Trust Instrument was adopted on December
6, 1995 and a certificate of Trust for the Trust was filed in Deleware on
December __, 1995. On February 29, 1996, the Victory Portfolios converted from
a Massachusetts business trust to a Delaware business trust.
The previously effective Massachusetts Declaration of Trust, pursuant
to which the Victory Portfolios was originally called the North Third Street
Fund, was filed with the Secretary of State of the Commonwealth of
Massachusetts on February 6, 1986. On September 22, 1986, an Amended and
Restated Declaration of Trust was filed to change the name of the Trust to the
Emblem Fund and to make certain other changes. A second amendment was filed
October 23, 1986 providing for voting of shares in the aggregate except where
voting of shares by series is otherwise required by law. An amendment to the
Amended and Restated Declaration of Trust was filed on March 15, 1993 to change
the name of the Trust to The Society Funds. An Amended and Restated
Declaration of Trust was then filed on September 2, 1994 to change the name of
the Trust to the Victory Portfolios.
The currently effective Delaware Trust Instrument authorizes the
Trustees to issue an unlimited number of shares, which are units of beneficial
interest, without par value. The Victory Portfolios presently has
twenty-eight series of shares, which represent interests in the U.S.
Government Obligations Fund, the Prime Obligations Fund, the Tax-Free Money
Market Fund, the Balanced Fund, the Stock Index Fund, the Value Fund, the
Diversified Stock Fund, the Growth Fund, the Special Value Fund, the Special
Growth Fund, the Ohio Regional Stock Fund, the International Growth Fund, the
Limited Term Income Fund, the Government Mortgage Fund, the Ohio Municipal Bond
Fund, the Intermediate Income Fund, the Investment Quality Bond Fund, the
Florida Tax-Free Bond Fund, the Municipal Bond Fund, the Convertible Securities
Fund, the Short-Term U.S. Government Income Fund, the Government Bond Fund, the
Fund For Income, the National Municipal Bond Fund, the New York Tax-Free
Fund, the Institutional Money Market Fund, the Financial Reserves Fund and the
Ohio Municipal Money Market Fund, respectively. The Victory Portfolios'
Delaware Trust Instrument authorizes the Trustees to divide or redivide any
unissued shares of the Victory Portfolios into one or more additional series by
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<PAGE> 61
setting or changing in any one or more respects their respective preferences,
conversion or other rights, voting power, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption.
Shares have no subscription or preemptive rights and only such
conversion or exchange rights as the Trustees may grant in their discretion.
When issued for payment as described in the Prospectus and this Statement of
Additional Information, the Victory Portfolios' shares will be fully paid and
non-assessable. In the event of a liquidation or dissolution of the Victory
Portfolios, shares of the Fund are entitled to receive the assets available
for distribution belonging to the Fund, and a proportionate distribution,
based upon the relative asset values of the respective funds of the Victory
Portfolios, of any general assets not belonging to any particular fund which
are available for distribution.
As described in the Prospectus under the caption "ADDITIONAL
INFORMATION -- Voting Rights," shares of the Victory Portfolios are entitled to
one vote per share (with proportional voting for fractional shares) on such
matters as shareholders are entitled to vote. On any matter submitted to a
vote of the shareholders, all shares are voted separately by individual series
(funds), and whenever the Trustees determine that the matter affects only
certain series, may be submitted for a vote by only such series, except (i)
when required by the 1940 Act, shares are voted in the aggregate and not by
individual series; and (ii) when the Trustees have determined that the matter
affects the interests of more than one series and that voting by shareholders
of all series would be consistent with the 1940 Act, then the shareholders of
all such series shall be entitled to vote thereon (either by individual series
or by shares voted in the aggregate, as the Trustees in their discretion may
determine). The Trustees may also determine that a matter affects only the
interests of one or more classes of a series, in which case (or if required
under the 1940 Act) such matter shall be voted on by such class or classes.
There will normally be no meetings of shareholders for the purpose of
electing Trustees unless and until such time as less than a majority of the
Trustees have been elected by the shareholders, at which time the Trustees then
in office will call a shareholders' meeting for the election of Trustees. In
addition, Trustees may be removed from office by a vote of the holders of at
least two-thirds of the outstanding shares of the Victory Portfolios. A
meeting shall be held for such purpose upon the written request of the holders
of not less than 10% of the outstanding shares. Upon written request by ten or
more shareholders meeting the qualifications of Section 16(c) of the 1940 Act,
(I.E., person who have been shareholders for at least six months, and who hold
shares having an NAV of at least $25,000 or constituting 1% of the outstanding
shares) stating that such shareholders wish to communicate with the other
shareholders for the purpose of obtaining the signatures necessary to demand a
meeting to consider removal of a Trustee, the Victory Portfolios will provide a
list of shareholders or disseminate appropriate materials (at the expense of
the requesting shareholders). Except as set forth above, the Trustees shall
continue to hold office and may appoint their successors.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Victory Portfolios shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each fund of the Victory Portfolios affected by the
matter. For purposes of determining whether the approval of a majority of the
outstanding shares of a fund will be required in connection with a matter, a
fund will be deemed to be affected by a matter unless it is clear that the
interests of each fund in the matter are identical, or that the matter does not
affect any interest of the fund. Under Rule 18f-2, the approval of an
investment advisory agreement or any change in investment policy would be
effectively acted upon with respect to a fund only if approved by a majority of
the outstanding shares of such fund. However, rule 18f-2 also provides that
the ratification of independent public accountants, the approval of principal
underwriting contracts, and the election of Trustees may be effectively acted
upon by shareholders of all of the Victory Portfolios voting without regard to
series.
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<PAGE> 62
Shareholder and Trustee Liability
The Delaware Business Trust Act provides that a shareholder of a
Delaware business trust shall be entitled to the same limitation of personal
liability extended to shareholders of Delaware corporations. The Delaware
Trust Instrument also provides for indemnification out of the trust property of
any shareholder held personally liable solely by reason of his or her being or
having been a shareholder. The Delaware Trust Instrument also provides that
the Victory Portfolios shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Victory
Portfolios, and shall satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
considered to be extremely remote.
The Delaware Trust Instrument states further that no Trustee,
officer, or agent of the Victory Portfolios shall be personally liable in
connection with the administration or preservation of the assets of the Funds
or the conduct of the Victory Portfolios' business; nor shall any Trustee,
officer, or agent be personally liable to any person for any action or failure
to act except for his own bad faith, willful misfeasance, gross negligence, or
reckless disregard of his duties. The Declaration of Trust also provides that
all persons having any claim against the Trustees or the Victory Portfolios
shall look solely to the assets of the Victory Portfolios for payment.
Miscellaneous
As used in the Prospectus and in this Statement of Additional
Information, "assets belonging to a fund" (or "assets belonging to the Fund")
means the consideration received by the Victory Portfolios upon the issuance or
sale of shares in that fund, together with all income, earnings, profits, and
proceeds derived from the investment thereof, including any proceeds from the
sale, exchange, or liquidation of such investments, and any funds or payments
derived from any reinvestment of such proceeds and any general assets of the
Victory Portfolios, which general liabilities and expenses are not readily
identified as belonging to a particular fund (or the Fund) that are allocated
to that fund (or the Fund) by the Victory Portfolios' Trustees. The Trustees
may allocate such general assets in any manner they deem fair and equitable.
It is anticipated that the formula that will be used by the Trustees in making
allocations of general assets to a particular fund of the Victory Portfolios
will be the relative net asset value of the respective Fund at the time of
allocation. Assets belonging to a particular Fund are charged with the direct
liabilities and expenses of that Fund, and with a share of the general
liabilities and expenses of each of the Funds not readily identified as
belonging to a particular Fund that are allocated to each Fund in accordance
with its proportionate share of the net asset values of the Victory Portfolios
at the time of allocation. The timing of allocations of general assets and
general liabilities and expenses of the Victory Portfolios to a particular Fund
will be determined by the Trustees of the Victory Portfolios and will be in
accordance with generally accepted accounting principles. Determinations by
the Trustees of the Victory Portfolios as to the timing of the allocation of
general liabilities and expenses and as to the timing and allocable portion of
any general assets with respect to a particular Fund are conclusive.
As used in the Prospectus and in this Statement of Additional
Information, a "vote of a majority of the outstanding shares" or a "vote of
majority of the outstanding voting securities" of the Victory Portfolios or a
particular Fund means the affirmative vote of the lesser of (a) 67% or more of
the shares of the Victory Portfolios or such Fund present at a meeting at which
the holders of more than 50% of the outstanding shares of the Victory
Portfolios or such fund are represented in person or by proxy, or (b) more than
50% of the outstanding shares of the Victory Portfolios or such fund.
Organizational expenses are allocated to each of the Victory
Portfolios and are amortized over a period of two years from the commencement
of the public offering of shares of the Victory Portfolios.
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<PAGE> 63
The Victory Portfolios is registered with the Commission as an
open-end management investment company. Such registration does not involve
supervision by the Commission of the management or policies of the Victory
Portfolios.
The Prospectus and this Statement of Additional Information omit
certain of the information contained in the Registration Statement filed with
the Commission. Copies of such information may be obtained from the Commission
upon payment of the prescribed fee.
The prospectus and this Statement of Additional Information are not an
offering of the securities herein described in any state in which such offering
may not lawfully be made. No salesman, dealer, or other person is authorized
to give any information or make any representation other than those contained
in the Prospectus and this Statement of Additional Information.
[The financial statements of the Fund for the period ended April 30,
1995 are set forth following this Part B of the Registration Statement.]
The 1995 Annual Report to shareholders of The Victory Portfolios is
incorporated by reference herein. This report includes the financial
statements for the ended October 31, 1995. The opinion in the Annual Report of
Coopers & Lybrand L.L.P., independent accountants, is incorporated by reference
herein in its entirety to such Annual Report, and such financial statements are
incorporated in their entirety in reliance upon such report of Coopers &
Lybrand L.L.P. and on the authority of such firm as experts in auditing and
accounting.
Delaware law authorizes electronic or telephonic communications
between shareholders and the Victory Portfolios. Under Delaware law, the
Successor Company has the flexibility to respond to future business
contingencies. For example, the Trustees will have the power to incorporate
the Victory Portfolios, to merge or consolidate it with another entity, to
cause each fund to become a separate trust, and to change the Victory
Portfolios' domicile without a shareholder vote. This flexibility could help
reduce the expense and frequency of future shareholder meetings for
non-investment related issues.
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<PAGE> 64
APPENDIX
The nationally recognized statistical rating organizations
(individually, an "NRSRO") that may be utilized by Key Advisers or the Sub-
Adviser with regard to portfolio investments for the Fund include Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"),
Duff & Phelps, Inc. ("Duff"), Fitch Investors Service, Inc. ("Fitch"), IBCA
Limited and its affiliate, IBCA Inc. (collectively, "IBCA"), and Thomson
BankWatch, Inc. ("Thomson"). Set forth below is a description of the relevant
ratings of each such NRSRO. The NRSROs that may be utilized by Key Advisers or
the Sub-Adviser and the description of each NRSRO's ratings is as of the date
of this Statement of Additional Information, and may subsequently change.
Long-Term Debt Ratings (may be assigned, for example, to corporate and
municipal bonds)
Description of the five highest long-term debt ratings by Moody's
(Moody's applies numerical modifiers (e.g., 1, 2, and 3) in each rating
category to indicate the security's ranking within the category):
Aaa. Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.
A. Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations.
Factors giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment some time
in the future.
Baa. Bonds which are rated Baa are considered as medium grade
obligations, I.E., They are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba. Bonds which are rated Ba are judged to have speculative elements
- - their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times in the future. Uncertainty of
position characterizes bonds in this class.
Description of the five highest long-term debt ratings by S&P (S&P
may apply a plus (+) or minus (-) to a particular rating classification to show
relative standing within that classification):
AAA. Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
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A. Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB. Debt rated BB is regarded, on balance, as predominately
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. While such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposure to adverse conditions.
Description of the three highest long-term debt ratings by Duff:
AAA. Highest credit quality. The risk factors are negligible being
only slightly more than for risk-free U.S. Treasury debt.
AA+. High credit quality protection factors are strong.
AA. Risk is modest but may vary slightly from time to time
AA-. because of economic conditions.
A+. Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
Description of the three highest long-term debt ratings by Fitch (plus
or minus signs are used with a rating symbol to indicate the relative position
of the credit within the rating category):
AAA. Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA. Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA."
Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of these issues is generally rated "[-]+."
A. Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse
changes in economic conditions and circumstances than bonds with
higher ratings.
IBCA's description of its three highest long-term debt ratings:
AAA. Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic or
financial conditions are unlikely to increase investment risk
significantly.
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AA. Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic, or
financial conditions may increase investment risk albeit not very
significantly.
A. Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial
conditions may lead to increased investment risk.
Short-Term Debt Ratings (may be assigned, for example, to commercial
paper, master demand notes, bank instruments, and letters of credit)
Moody's description of its three highest short-term debt ratings:
Prime-1. Issuers rated Prime-1 (or supporting institutions) have a
superior capacity for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a
strong capacity for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
S&P's description of its three highest short-term debt ratings:
A-1. This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to have extremely strong
safety characteristics are denoted with a plus sign (+).
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A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high
as for issues designated "A-1."
A-3. Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the
higher designations.
Duff's description of its five highest short-term debt ratings (Duff
incorporates gradations of "1+" (one plus) and "1-" (one minus) to assist
investors in recognizing quality differences within the highest rating
category):
Duff 1+. Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
Duff 1. Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
Duff 1-. High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors. Risk
factors are very small.
Duff 2. Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
Duff 3. Satisfactory liquidity and other protection factors qualify
issue as to investment grade.
Risk factors are larger and subject to more variation. Nevertheless,
timely payment is expected.
Fitch's description of its four highest short-term debt ratings:
F-1+. Exceptionally strong credit quality. Issues assigned this
rating are regarded as having the strongest degree of assurance for
timely payment.
F-1. Very strong credit quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than
issues rated F-1+.
F-2. Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as for issues assigned F-1+ or F-1 ratings.
F-3. Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate, however, near-term adverse changes could cause
these securities to be rated below investment grade.
IBCA's description of its three highest short-term debt ratings:
A+. Obligations supported by the highest capacity for timely
repayment.
A1. Obligations supported by a very strong capacity for timely
repayment.
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A2. Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
Short-Term Loan/Municipal Note Ratings
Moody's description of its two highest short-term loan/municipal note
ratings:
MIG-1/VMIG-1. This designation denotes best quality. There is
present strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
MIG-2/VMIG-2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
S&P's description of its two highest municipal note ratings:
SP-1. Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
SP-2. Satisfactory capacity to pay principal and interest.
Short-Term Debt Ratings
Thomson BankWatch, Inc. ("TBW") ratings are based upon a qualitative
and quantitative analysis of all segments of the organization including, where
applicable, holding company and operating subsidiaries.
TBW Ratings do not constitute a recommendation to buy or sell
securities of any of these companies. Further, TBW does not suggest specific
investment criteria for individual clients.
The TBW Short-Term Ratings apply to commercial paper, other senior
short-term obligations and deposit obligations of the entities to which the
rating has been assigned.
The TBW Short-Term Ratings apply only to unsecured instruments that
have a maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an
untimely payment of principal or interest.
TBW-1. The highest category; indicates a very high degree of
likelihood that principal and interest will be paid on a timely basis.
TBW-2. The second highest category; while the degree of safety
regarding timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1".
TBW-3. The lowest investment grade category; indicates that while
more susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and interest in
a timely fashion is considered adequate.
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TBW-4. The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
Definitions of Certain Money Market Instruments
Commercial Paper
Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.
Certificates of Deposit
Certificates of Deposit are negotiable certificates issued against
funds deposited in a commercial bank or a savings and loan association for a
definite period of time and earning a specified return.
Bankers' Acceptances
Bankers' Acceptances are negotiable drafts or bills of exchange,
normally drawn by an importer or exporter to pay for specific merchandise,
which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
U.S. Treasury Obligations
U.S. Treasury Obligations are obligations issued or guaranteed as to
payment of principal and interest by the full faith and credit of the U.S.
Government. These obligations may include Treasury bills, notes and bonds, and
issues of agencies and instrumentalities of the U.S. Government, provided such
obligations are guaranteed as to payment of principal and interest by the full
faith and credit of the U.S. Government.
U.S. Government Agency and Instrumentality Obligations
Obligations issued by agencies and instrumentalities of the U.S.
Government include such agencies and instrumentalities as the Government
National Mortgage Association, the Export-Import Bank of the United States, the
Tennessee Valley Authority, the Farmers Home Administration, the Federal Home
Loan Banks, the Federal Intermediate Credit Banks, the Federal Farm Credit
Banks, the Federal Land Banks, the Federal Housing Administration, the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation, and
the Student Loan Marketing Association. Some of these obligations, such as
those of the Government National Mortgage Association are supported by the full
faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others, such as
those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not obligated to do so by law. A Fund will invest
in the obligations of such instrumentalities only when the investment adviser
believes that the credit risk with respect to the instrumentality is minimal.
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STATEMENT OF ADDITIONAL INFORMATION
THE VICTORY PORTFOLIOS
THE GOVERNMENT BOND FUND
March 1, 1996
This Statement of Additional Information is not a Prospectus, but
should be read in conjunction with the Prospectus of The Victory Portfolios -
The Government Bond Fund, dated the same date as the date hereof (the
"Prospectus"). This Statement of Additional Information is incorporated by
reference in its entirety into the Prospectus. Copies of the Prospectus may be
obtained by writing The Victory Portfolios at Primary Funds Service
Corporation, P.O. Box 9741, Providence, RI 02940-9741, or by telephoning toll
free 800-539-FUND or 800-539-3863.
<TABLE>
<S> <C> <C>
Investment Policies and Limitations 1 INVESTMENT ADVISER
Valuation of Portfolio Securities 5 KeyCorp Mutual Fund Advisers, Inc.
Additional Purchase and Redemption Information 9
Management of the Victory Portfolios 14 INVESTMENT SUB-ADVISER
Advisory and Other Contracts 21 Society Asset Management, Inc.
Additional Information 29
Independent Auditor's Report 32 ADMINISTRATOR
Financial Statements 32 Concord Holding Corporation
Appendix 33
DISTRIBUTOR
Victory Broker-Dealer Services, Inc.
TRANSFER AGENT
Primary Funds Service Corporation
CUSTODIAN
Key Trust Company of Ohio, N.A.
</TABLE>
<PAGE> 71
STATEMENT OF ADDITIONAL INFORMATION
The Victory Portfolios (the "Victory Portfolios") is an open-end
management investment company. The Victory Portfolios consist of twenty-eight
series of units of beneficial interest ("shares"), four of which series are
currently inactive. The outstanding shares represent interests in the
twenty-four separate investment portfolios, which are currently active. This
Statement of Additional Information relates to The Victory Government Bond Fund
(the "Fund") only. Much of the information contained in this Statement of
Additional Information expands on subjects discussed in the Prospectus.
Capitalized terms not defined herein are used as defined in the Prospectus. No
investment in shares of the Fund should be made without first reading the
Fund's Prospectus.
INVESTMENT POLICIES AND LIMITATIONS
INVESTMENT LIMITATIONS
THE FUND MAY NOT (UNLESS OTHERWISE INDICATED):
(1) with respect to 75% of the Fund's total assets, purchase the securities
of any issuer (other than securities issued or guaranteed by the U.S. Government
or any of its agencies or instrumentalities) if, as a result, (a) more than 5%
of the Fund's total assets would be invested in the securities of that issuer,
or (b) the Fund would hold more than 10% of the outstanding voting securities of
that issuer;
(2) issue any senior security (as defined in the 1940 Act), except that (a)
the Fund may engage in transactions which may result in the issuance of senior
securities to the extent permissible under the applicable regulations and
interpretations of the 1940 Act or an exemptive order; (b) the Fund may acquire
other securities that may be deemed senior securities to the extent permitted
under applicable regulations or interpretations of the 1940 Act; (c) subject to
the restrictions set forth below, the Fund may borrow money as authorized by the
1940 Act;
(3) borrow money, except that the Fund may borrow money from banks for
temporary or emergency purposes (not for leveraging or investment), and engage
in reverse repurchase agreements in an amount not exceeding 33 1/3% of its total
assets, including the amount borrowed less liabilities other than borrowings
(any borrowings exceeding this amount will be reduced within three days (not
including Sundays and holidays) to the extent necessary to comply with the 33
1/3% limitation), provided that any such borrowings representing more than 5% of
the Fund's total assets must be repaid before the Fund may make additional
investments;
(4) underwrite securities issued by others, except to the extent that the
Fund may be considered an underwriter within the meaning of the Securities Act
of 1933 in the disposition of restricted securities;
(5) purchase or sell real estate unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the Fund from
investing in securities or other instrument backed by real estate);
(6) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments;
(7) lend any portfolio security or make any other loan if, as a result,
more than 33 1/3% of the Fund's total assets would be lent to other parties, but
this restriction does not apply to purchases of debt securities or to repurchase
agreements;
<PAGE> 72
THE FOLLOWING INVESTMENT LIMITATIONS ARE NONFUNDAMENTAL AND MAY BE CHANGED
WITHOUT SHAREHOLDER APPROVAL:
(i) The Fund may not sell securities short, unless it owns or has the right
to obtain securities equivalent in kind and amount to the securities sold short,
and provided that transactions in futures contracts and options are not deemed
to constitute selling securities short.
(ii) The Fund may purchase securities on margin, except that the Fund may
obtain such short-term credits as are necessary for the clearance of
transactions and provided that margin payments in connection with futures
contracts and options on futures contracts shall not constitute purchasing
securities on margin.
(iii) The Fund may not purchase any security while borrowings representing
more than 5% of the Fund's total assets are outstanding.
(iv) The Fund may not purchase any security or enter into a repurchase
agreement if, as a result, more than 15% of the Fund's net assets would be
invested in repurchase agreements not entitling the holder to payment of
principal and interest within seven days and in securities that are illiquid by
virtue of legal or contractual restriction on resale or the absence of a readily
available market.
(v) The Fund currently does not intend to purchase or sell futures
contracts or put or call options. This limitation does not apply to options
attached to, or acquired or traded together with, their underlying securities,
and does not apply to securities that incorporate features similar to options
or futures contracts.
(vi) The Fund shall not invest in the securities of other investment
companies, except that the Fund may invest in shares of money market funds that
are not "affiliated persons" of the fund and that limit their investment by the
Fund, provided investment by the Fund is limited to: (a) ten percent of the
Fund's assets; (b) five percent of the Fund's total assets in the shares of a
single money market fund; and (c) not more than three percent of the net assets
of any one acquired money market fund. The investment adviser will waive the
portion of its fee attributable to the assets of the Fund invested in such money
market funds to the extent required by the laws of any jurisdiction in which
shares of the Fund are registered for sale.
INVESTMENT POLICIES
DELAYED-DELIVERY TRANSACTIONS. The Fund may buy and sell securities on a
delayed-delivery or when-issued basis. These transactions involve a commitment
by the Fund to purchase or sell specific securities at a predetermined price or
yield, with payment and delivery taking place after the customary settlement
period for that type of security (and more than seven days in the future).
Typically, no interest accrues to the purchaser until the security is delivered.
The Fund may receive fees for entering into delayed delivery transactions.
When purchasing securities on a delayed-delivery basis, the Fund assumes the
rights and risks of ownership, including the risks of price and yield
fluctuations in addition to the risks associated with the Fund's other
investments. Because the Fund is not required to pay for securities until the
delivery date, these delayed-delivery purchases may result in a form of
leverage. When delayed-delivery purchases are outstanding, the Fund will set
aside cash and appropriate liquid assets in a segregated custodial account to
cover its purchase obligations. When the Fund has sold a security on a
delayed-delivery basis, it does not participate in further gains or losses with
respect to the security. If the other party to a delayed-delivery transaction
fails to deliver or pay for the securities, the Fund could miss a favorable
price or yield opportunity or suffer a loss.
The Fund may renegotiate delayed-delivery transactions after they are entered
into or may sell underlying securities before they are delivered, either of
which may result in capital gains or losses.
ILLIQUID INVESTMENTS are investments that cannot be sold or disposed of, within
seven business days, in the ordinary course of business at approximately the
prices at which they are valued. Under the supervision of the Trustees, the
Adviser determines the liquidity of the Fund's investments and, through reports
from the Adviser, the Trustees
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<PAGE> 73
monitor investments in illiquid instruments. In determining the liquidity of
the Fund's investments, the Adviser may consider various factors, including (1)
the frequency of trades and quotations, (2) the number of dealers and
prospective purchasers in the marketplace, (3) dealer undertakings to make a
market, (4) the nature of the security (including any demand or tender
features), and (5) the nature of the marketplace for trades (including the
ability to assign or offset the Fund's rights and obligations relating to the
investment). Investments currently considered by the Fund to be illiquid
include repurchase agreements not entitling the holder to payment of principal
and interest within seven days, over the counter options, non-government
stripped fixed-rate mortgage-backed securities, and Restricted Securities. Also,
Key Advisers or the Sub-Adviser may determine some government-stripped
fixed-rate mortgage backed securities, loans and other direct debt instruments,
and swap agreements to be illiquid. However, with respect to over-the-counter
options the Fund writes, all or a portion of the value of the underlying
instrument may be illiquid depending on the assets held to cover the option and
the nature and terms of any agreement the Fund may have to close out the option
before expiration. In the absence of market quotations, illiquid investments
are priced at fair value as determined in good faith by a committee appointed by
the Trustees. If through a change in values, net assets, or other
circumstances, the Fund were in a position where more than 10% of its net assets
were invested in illiquid securities, it would seek to take appropriate steps to
protect liquidity.
REPURCHASE AGREEMENTS. In a repurchase agreement, the Fund purchases a security
and simultaneously commits to resell that security to the seller at an agreed
upon price on an agreed upon date within a number of days from the date of
purchase. The resale price reflects the purchase price plus an agreed upon
incremental amount which is unrelated to the coupon rate or maturity of the
purchased security. A repurchase agreement involves the obligation of the
seller to pay the agreed upon price, which obligation is in effect secured by
the value (at least equal to the amount of the agreed upon resale price and
marked to market daily) of the underlying security. The Fund may engage in a
repurchase agreement with respect to any security in which it is authorized to
invest. Since it is not possible to eliminate all risks from these transactions
(particularly the possibility of a decline in the market value of the
underlying securities, as well as delays and costs to the Fund in connection
with bankruptcy proceedings), it is the Victory Portfolios' current policy to
limit repurchase agreements for the Fund to those parties whose creditworthiness
has been reviewed and found satisfactory by Key Advisers or the Sub-Adviser.
Repurchase agreements are considered by the staff of the Commission to be loans
by the Fund.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, the Fund
sells the portfolio instrument to another party, such as a bank or
broker-dealer, in return for cash and agrees to repurchase the instrument at a
particular price and time. While a reverse repurchase agreement is outstanding,
the Fund will maintain appropriate liquid assets in a segregated custodial
account to cover its obligation under the agreement. The Fund will enter into
reverse repurchase agreements only with parties whose creditworthiness is deemed
satisfactory by Key Advisers or the Sub-Adviser. Such transactions may increase
fluctuations in the market value of the Fund's assets, and may be viewed as a
form of leverage.
RESTRICTED SECURITIES generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the 1933 Act, or
in a registered public offering. Where registration is required, the Fund may
be obligated to pay all or part of the registration expense and a considerable
period may elapse between the time it decides to seek registration and the time
the Fund may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to develop,
the Fund might obtain a less favorable price than prevailed when it decided to
seek registration of the shares.
SECURITIES LENDING. The Fund may lend securities to parties such as
broker-dealers or institutional investors. Securities lending allows the Fund
to retain ownership of the securities loaned and, at the same time, to earn
additional income. Since there may be delays in the recovery of loaned
securities, or even a loss of rights in collateral supplied should the borrower
fail financially, loans will be made only to parties deemed by Key Advisers or
the Sub-Adviser to be of good standing. Furthermore, they will only be made if,
in Society's judgment, the consideration to be earned from such loans would
justify the risk.
It is the current view of the staff of the Commission that the Fund may engage
in loan transactions only under the following conditions: (1) the Fund must
receive 100% collateral in the form of cash or cash equivalents (e.g., U.S.
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<PAGE> 74
Treasury bills or notes) from the borrower; (2) the borrower must increase the
collateral whenever the market value of the securities loaned (determined on a
daily basis) rises above the value of the collateral; (3) after giving notice,
the Fund must be able to terminate the loan at any time; (4) the Fund must
receive reasonable interest on the loan or a flat fee from the borrower, as
well as amounts equivalent to any dividends, interest, or other distributions
on the securities loaned and to any increase in market value; (5) the Fund may
pay only reasonable custodian fees in connection with the loan; and (6) the
Board of Trustees must be able to vote proxies on the securities loaned,
either by terminating the loan or by entering into an alternative arrangement
with the borrower.
Cash received through loan transactions may be invested in any security in
which the Fund is authorized to invest. Investing this cash subjects that
investment, as well as the security loaned, to market forces (i.e., capital
appreciation or depreciation).
State Regulations
In addition, the Fund, so long as its shares are registered under the
securities laws of the State of Texas and such restrictions are required as a
consequence of such registration, is subject to the following non-fundamental
policies, which may be modified in the future by the Trustees without a vote of
the Fund's shareholders: (i) the Fund has represented to the Texas State
Securities Board that it will not invest in oil, gas or mineral leases or
purchase or sell real property (including limited partnership interests, but
excluding readily marketable securities of companies which invest in real
estate); and (ii) the Fund has represented to the Texas State Securities Board
that it will not invest more than 5% of their net assets in warrants valued at
the lower of cost or market; provided that, included within that amount, but
not to exceed 2% of net assets, may be warrants which are not listed on the New
York or American Stock Exchanges. For purposes of this restriction, warrants
acquired in units or attached to securities are deemed to be without value.
The policies and limitations listed above supplement those set forth
in the Prospectus. Unless otherwise noted, whenever an investment policy or
limitation states a maximum percentage of the Fund's assets that may be
invested in any security or other asset, or sets forth a policy regarding
quality standards, such standard or percentage limitation will be determined
immediately after and as a result of the Fund's acquisition of such security or
other asset except in the case of borrowing (or other activities that may be
deemed to result in the issuance of a "senior security" under the 1940 Act).
Accordingly, any subsequent change in values, net assets, or other
circumstances will not be considered when determining whether the investment
complies with the Fund's investment policies and limitations. If the value of
the Fund's holdings of illiquid securities at any time exceeds the percentage
limitation applicable at the time of acquisition due to subsequent fluctuations
in value or other reasons, the Board of Trustees will consider what actions, if
any, are appropriate to maintain adequate liquidity.
FUTURE DEVELOPMENTS
The Fund may take advantage of other investment practices which are
not at present contemplated for use by the Fund or which currently are not
available but which may be developed, to the extent such investment practices
are both consistent with the Fund's investment objective and are legally
permissible for the Fund. Such investment practices, if they arise, may
involve risks which exceed those involved in the activities described in the
Prospectus and Statement of Additional Information. Prior to commencing any
new investment practice, the Fund will notify shareholders by means of
prospectus supplement.
Portfolio Turnover
The turnover rate stated in the Prospectus for the Fund's investment
portfolio is calculated by dividing the lesser of the Fund's purchases or sales
of portfolio securities for the year by the monthly average value of the
portfolio securities. The calculation excludes all securities whose
maturities, at the time of acquisition, were one year or less.
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VALUATION OF PORTFOLIO SECURITIES
Investment securities held by the Fund are valued on the basis of
valuations provided by an independent pricing service, approved by the Board of
Trustees, which uses information with respect to transactions of a security,
quotations from dealers, market transactions in comparable securities, and
various relationships between securities, in determining value. Specific
investment securities which are not priced by the approved pricing service will
be valued according to quotations obtained from dealers who are market makers
in those securities. Investment securities with less than 60 days to maturity
when purchased are valued at amortized cost which approximates market value.
Investment securities not having readily available market quotations will be
priced at fair value using a methodology approved in good faith by the Board of
Trustees.
PERFORMANCE
As described in the Prospectus, from time to time the "standardized
yield," "dividend yield," "average annual total return," "total return," and
"total return at net asset value" of an investment in each class of Fund shares
may be advertised. An explanation of how yields and total returns are
calculated for each class and the components of those calculations are set
forth below.
Yield and total return information may be useful to investors in
reviewing the Fund's performance. The Fund's advertisement of its performance
must, under applicable Commission rules, include the average annual total
returns for each class of shares of the Fund for the 1, 5 and 10-year period
(or the life of the class, if less) as of the most recently ended calendar
quarter. This enables an investor to compare the Fund's performance to the
performance of other funds for the same periods. However, a number of factors
should be considered before using such information as a basis for comparison
with other investments. An investment in the Fund is not insured; its yield
and total return are not guaranteed and normally will fluctuate on a daily
basis. When redeemed, an investor's shares may be worth more or less than
their original cost. Yield and total return for any given past period are not
a prediction or representation by the Victory Portfolios of future yields or
rates of return on its shares. The yield and total returns of the Class A and
Class B shares of the Fund are affected by portfolio quality, portfolio
maturity, the type of investments the Fund holds and its operating expenses.
STANDARDIZED YIELDS. The Fund's "yield" (referred to as "standardized
yield") for a given 30-day period for a class of shares is calculated using the
following formula set forth in rules adopted by the Commission that apply to
all funds that quote yields:
Standardized Yield = 2 [(a-b + 1)6 - 1]
---
cd
The symbols above represent the following factors:
a = dividends and interest earned during the 30-day period.
b = expenses accrued for the period (net of any expense
reimbursements).
c = the average daily number of shares of that class outstanding
during the 30-day period that were entitled to receive
dividends.
d = the maximum offering price per share of the class on the last
day of the period, adjusted for undistributed net investment
income.
The standardized yield of a class of shares for a 30-day period may
differ from its yield for any other period. The Commission formula assumes
that the standardized yield for a 30-day period occurs at a constant rate for a
six-month period and is annualized at the end of the six-month period. This
standardized yield is not based on actual distributions paid by the Fund to
shareholders in the 30-day period, but is a hypothetical yield based upon
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the net investment income from the Fund's portfolio investments calculated for
that period. The standardized yield may differ from the "dividend yield" of
that class, described below. Additionally, because each class of shares is
subject to different expenses, it is likely that the standardized yields of the
Fund classes of shares will differ. The yield on Class A shares and the Class
B shares for the 30-day period ended October 31, 1995 was ____% and ___%,
respectively.
DIVIDEND YIELD AND DISTRIBUTION RETURN. From time to time the Fund may
quote a "dividend yield" or a "distribution return" for each class. Dividend
yield is based on the Class A or Class B share dividends derived from net
investment income during a stated period. Distribution return includes
dividends derived from net investment income and from realized capital gains
declared during a stated period. Under those calculations, the dividends and/or
distributions for that class declared during a stated period of one year or less
(for example, 30 days) are added together, and the sum is divided by the maximum
offering price per share of that class A) on the last day of the period. When
the result is annualized for a period of less than one year, the "dividend
yield" is calculated as follows:
Dividend Yield Number of days
of the Class = Dividends of the Class + (accrual period) x 365
--------------------------------
Max. Offering Price of the Class
(last day of period)
The maximum offering price for Class A shares includes the maximum
front-end sales charge. For Class B shares, the maximum offering price is the
net asset value per share, without considering the effect of contingent deferred
sales charges.
From time to time similar yield or distribution return calculations may
also be made using the Class A net asset value (instead of its respective
maximum offering price) at the end of the period. The dividend yields on Class
A shares at maximum offering price and net asset value for the 30-day period
ended ________, 1995 were ____% and ____%, respectively.
TOTAL RETURNS. The "average annual total return" of each class is an
average annual compounded rate of return for each year in a specified number of
years. It is the rate of return based on the change in value of a hypothetical
initial investment of $1,000 ("P" in the formula below) held for a number of
years ("n") to achieve an Ending Redeemable Value ("ERV"), according to the
following formula:
(ERV)(1n) - 1 = Average Annual Total Return
---
( P )
The cumulative "total return" calculation measures the change in value
of a hypothetical investment of $1,000 over an entire period of years. Its
calculation uses some of the same factors as average annual total return, but
it does not average the rate of return on an annual basis. Total return is
determined as follows:
ERV - P = Total Return
-------
P
In calculating total returns for Class A shares, the current maximum
sales charge of 4.75% (as a percentage of the offering price) is deducted from
the initial investment ("P") (unless the return is shown at net asset value, as
discussed below). For Class B shares, the payment of the applicable contingent
deferred sales charge (5.0% for the first year, 4.0% for the second year, 3.0%
for the third and fourth years, 2.0% in the fifth year, 1.0% in the sixth year
and none thereafter) is applied to the investment result for the time period
shown (unless the total return is shown any net asset value, as described
below). Total returns also assume that all dividends and capital gains
distributions during the period are reinvested to buy additional shares at net
asset value per share, and that the investment is redeemed at the end of the
period. The average annual total return and cumulative total return on Class A
shares for the period October 20, 1989 (commencement of operations) to October
31, 1995 (life of fund)
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at maximum offering price were ___% and ____%, respectively. For the one and
five year periods ended October 31, 1995 annual total returns for Class A
shares were ______% and _____%, respectively. The average annual total return
and cumulative total return on the Class B shares for the period September 26,
1994 (commencement of operations to October 31, 1995 were ___% and ___%,
respectively. For the one year period ended October 31, 1995, the annual total
return for Class B shares was ___%.
From time to time the Fund may also quote an "average annual total
return at net asset value" or a cumulative "total return at net asset value"
for Class A or Class B shares. It is based on the difference in net asset
value per share at the beginning and the end of the period for a hypothetical
investment in that class of shares (without considering front-end or contingent
sales charges) and takes into consideration the reinvestment of dividends and
capital gains distributions. The average annual total return and cumulative
total return on Class A shares for the period October 20, 1989 (commencement of
operations) to October 31, 1995 (life of fund), at net asset value, was ____%
and ___%, respectively. For the one and five year periods ended October 31,
1995, average annual total return for Class A shares was ___% and ___%,
respectively. For the one year period ended October 31, 1995, the average
annual total return for Class B shares was ___%.
OTHER PERFORMANCE COMPARISONS. From time to time the Fund may publish
the ranking of the performance of its Class A or Class B shares by Lipper
Analytical Services, Inc. ("Lipper"), a widely-recognized independent mutual
fund monitoring service. Lipper monitors the performance of regulated
investment companies, including the Fund, and ranks the performance of the
Fund's classes against (i) all other funds, excluding money market funds, and
(ii) all other government bond funds. The Lipper performance rankings are based
on total return that includes the reinvestment of capital gains distributions
and income dividends but does not take sales charges or taxes into
consideration.
From time to time the Fund may publish the ranking of the performance
of its Class A or Class B shares by Morningstar, Inc., an independent mutual
fund monitoring service that ranks mutual funds, including the Fund, in broad
investment categories (equity, taxable bond, tax-exempt and other) monthly,
based upon each fund's three, five and ten-year average annual total returns
(when available) and a risk adjustment factor that reflects Fund performance
relative to three-month U.S. Treasury bill monthly returns. Such returns are
adjusted for fees and sales loads. There are five ranking categories with a
corresponding number of stars: highest (5), above average (4), neutral (3),
below average (2) and lowest (1). Ten percent of the funds, series or classes
in an investment category receive 5 stars, 22.5% receive 4 stars, 35% receive 3
stars, 22.5% receive 2 stars, and the bottom 10% receive one star. Morningstar
ranks the Class A and Class B shares of the Fund in relation to other taxable
bond funds.
The total return on an investment made in Class A or Class B shares of
the Fund may be compared with the performance for the same period of one or more
of the following indices: the Consumer Price Index, the Salomon Brothers World
Government Bond Index, the Standard & Poor's 500 Index, the Shearson Lehman
Government/Corporate Bond Index, the Lehman Aggregate Bond Index, and the J.P.
Morgan Government Bond Index. Other indices may be used from time to time. The
Consumer Price Index is generally considered to be a measure of inflation. The
Salomon Brothers World Government Bond Index generally represents the
performance of government debt securities of various markets throughout the
world, including the United States. The Lehman Government/Corporate Bond Index
generally represents the performance of intermediate and long-term government
and investment grade corporate debt securities. The Lehman Aggregate Bond Index
measures the performance of U.S. corporate bond issues, U.S. government
securities and mortgaged-backed securities. The J.P. Morgan Government Bond
Index generally represents the performance of government bonds issued by various
countries including the United States. The S&P 500 Index is a composite index
of 500 common stocks generally regarded as an index of U.S. stock market
performance. The foregoing bond indices are unmanaged indices of securities
that do not reflect reinvestment of capital gains or take investment costs into
consideration, as these items are not application to indices.
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<PAGE> 78
From time to time, the yields and the total returns of Class A or
Class B shares of the Fund may be quoted in and compared to other mutual funds
with similar investment objective in advertisements, shareholder reports or
other communications to shareholders. The Fund may also include calculations in
such communications that describe hypothetical investment results. (Such
performance examples will be based on an express set of assumptions and are not
indicative of the performance of any Fund.) Such calculations may from time to
time include discussions or illustrations of the effects of compounding in
advertisements. "Compounding" refers to the fact that, if dividends or other
distributions on a Fund investment are reinvested by being paid in additional
Fund shares, any future income or capital appreciation of a Fund would increase
the value, not only of the original Fund investment, but also of the additional
Fund shares received through reinvestment. As a result, the value of the Fund
investment would increase more quickly than if dividends or other distributions
had been paid in cash. The Fund may also include discussions or illustrations
of the potential investment goals of a prospective investor (including but not
limited to tax and/or retirement planning), investment management techniques,
policies or investment suitability of Fund, economic conditions, legislative
developments (including pending legislation), the effects of inflation and
historical performance of various asset classes, including but not limited to
stocks, bonds and Treasury bills. From time to time advertisements or
communications to shareholders may summarize the substance of information
contained in shareholder reports (including the investment composition of a
Fund, as well as the views of the investment adviser as to current market,
economic, trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to Fund. The Fund may also include in advertisements, charts, graphs
or drawings which illustrate the potential risks and rewards of investment in
various investment vehicles, including but not limited to stock, bonds, Treasury
bills and shares of Fund as well as charts or graphs which illustrate strategies
such as dollar cost averaging, and comparisons of hypothetical yields of
investment in tax-exempt versus taxable investments. In addition,
advertisements or shareholder communications may include a discussion of certain
attributes or benefits to be derived by an investment in Fund. Such
advertisements or communications may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
therein. With proper authorization, Fund may reprint articles (or excerpts)
written regarding the Fund and provide them to prospective shareholders.
Performance information with respect to the Fund is generally available by
calling 1-800-539-3863.
Investors may also judge, and the Fund may at times advertise,
performance of Class A or Class B shares by comparing it to the performance of
other mutual funds or mutual fund portfolios with comparable investment
objectives and policies, which performance may be contained in various
unmanaged mutual fund or market indices or rankings such as those prepared by
Dow Jones & Co., Inc., Standard & Poor's Corporation, Lehman Brothers, Merrill
Lynch, and Salomon Brothers, and in publications issued by Lipper Analytical
Services, Inc. and in the following publications: IBC/Donoghue's Money Fund
Reports, Ibottson Associates, Inc., Morningstar, CDA/Wiesenberger, Money
Magazine, Forbes, Barron's, The Wall Street Journal, The New York Times,
Business Week, American Banker, Fortune, Institutional Investor, U.S.A. Today.
In addition to yield information, general information about the Fund that
appears in a publication such as those mentioned above may also be quoted or
reproduced in advertisements or in reports to shareholders.
Advertisements and sales literature may include discussions of
specifics of the portfolio manager's investment strategy and process,
including, but not limited to, descriptions of security selection and analysis.
Advertisements may also include descriptive information about the
investment adviser, including, but not limited to, its status within the
industry, other services and products it makes available, total assets under
management, its investment philosophy.
When comparing yield, total return and investment risk of an investment
in Class A or Class B shares of the Fund with other investments, investors
should understand that certain other investments have different risk
characteristics than an investment in shares of the Fund. For example,
certificates of deposit may have fixed rates of return and may be insured as to
principal and interest by the FDIC, while the Fund's returns will fluctuate and
its share values and returns are not guaranteed. Money market accounts offered
by banks also may be insured by
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<PAGE> 79
the FDIC and may offer stability of principal. U.S. Treasury securities are
guaranteed as to principal and interest by the full faith and credit of the
U.S. government. Money market mutual funds may seek to offer a fixed price per
share.
ADDITIONAL PURCHASE, EXCHANGE AND REDEMPTION INFORMATION
The Victory Portfolios (see "Description of Victory Portfolios" below)
is open for business and the NAV of each class of shares of the Fund is
calculated on each Business Day. A Business Day is every day on which the NYSE
is open for business, the Federal Reserve Bank of Cleveland is open and any
other day (other than a day on which no shares of the Fund are tendered for
redemption and no order to purchase any shares is received) during which there
is sufficient trading in portfolio instruments that the Fund's net asset value
per share might be materially affected. The NAV of each class is determined
and its shares are priced as of the close of regular trading of the NYSE
(generally 4:00 p.m. Eastern time (the "Valuation Time")) on each Business Day
of the Fund. The NYSE or the Federal Reserve Bank of Cleveland will not be
open in observance of the following holidays: New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day.
The holiday closing schedule is subject to change.
When the NYSE is closed, or when trading is restricted for any reason
other than its customary weekend or holiday closings, or under emergency
circumstances as determined by the Commission to warrant such action, the
Fund's Transfer Agent will determine the Fund's NAVs at Valuation Time. The
Fund's NAV may be affected to the extent that its securities are traded on days
that are not Business Days.
If, in the opinion of the Trustees, conditions exist which make cash
payment undesirable, redemption payments may be made in whole or in part in
securities or other property, valued for this purpose as they are valued in
computing the NAV of each class of the Fund. Shareholders receiving securities
or other property on redemption may realize a gain or loss for tax purposes and
will incur any costs of sale as well as the associated inconveniences.
Pursuant to Rule 11a-3 under the 1940 Act, the Fund is required to
give shareholders at least 60 days' notice prior to terminating or modifying
the Fund's exchange privilege. Under the Rule, the 60-day notification
requirement may be waived if (i) the only effect of a modification would be to
reduce or eliminate an administrative fee, redemption fee or deferred sales
charge ordinarily payable at the time of exchange or (ii) the Fund temporarily
suspends the offering of shares as permitted under the 1940 Act or by the SEC
or because it is unable to invest amounts effectively in accordance with its
investment objective and policies.
In the Prospectus, the Victory Portfolios, Key Advisers and the
Sub-Adviser have notified shareholders that they reserve the right at any time
without prior notice to shareholders to refuse exchange purchases by any person
or group if, in Key Advisers or the Sub-Adviser's judgment, the Fund would be
unable to invest effectively in accordance with its investment objective and
policies, or would otherwise potentially be adversely affected.
ADDITIONAL PURCHASE INFORMATION
ALTERNATIVE SALES ARRANGEMENTS - CLASS A AND CLASS B SHARES. The
Alternative Sales Arrangements permit an investor to choose the method of
purchasing shares that is more beneficial to the investor depending on the
amount of the purchase, the length of time the investor expects to hold shares
and other relevant circumstances. Investors should understand that the purpose
and function of the deferred sales charge and asset-based sales charge with
respect to Class B shares are the same as those of the initial sales charge with
respect to Class A shares. Any salesperson or other person entitled to receive
compensation for selling Fund shares may receive different compensation with
respect to one class of shares on behalf of a single investor (not including
dealer "street name"
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<PAGE> 80
or omnibus accounts) because generally it will be more advantageous for that
investor to purchase Class A shares of the Fund instead.
The two classes of shares each represent an interest in the same
portfolio investments of the Fund. However, each class has different
shareholder privileges and features. The net income attributable to Class B
shares and the dividends payable on Class B shares will be reduced by
incremental expenses borne solely by that class, including the asset-based
sales charge to which Class B shares are subject.
CLASS B CONVERSION FEATURE. Ninety-six months after an investor's
purchase order for Class B shares is accepted, such "Matured Class B Shares"
automatically will convert to Class A shares, on the basis of the relative net
asset value of the two classes, without the imposition of any sales load or
other charge. Each time any Matured Class B shares convert to Class A shares,
any Class B shares acquired by the reinvestment of dividends or distributions
on such Matured Class B shares that are still held will also convert to Class A
shares, on the same basis. The conversion feature is intended to relieve
holders of Matured Class B shares of the asset-based sales charge under the
Class B Distribution Plan after such shares have been outstanding long enough
that the Distributor may have been compensated for distribution expenses
related to such shares.
The conversion of Matured Class B shares to Class A shares is subject
to the continuing availability of a private letter ruling from the Internal
Revenue Service, or an opinion of counsel or tax adviser, to the effect that
the conversion of Matured Class B shares does not constitute a taxable event
for the holder under Federal income tax law. If such a revenue ruling or
opinion is no longer available, the automatic conversion feature may be
suspended, in which event no further conversion of Matured Class B shares would
occur while such suspension remained in effect. Although Matured Class B
shares could then be exchanged for Class A shares on the basis of relative net
asset value of the two classes, without the imposition of a sales charge or
fee, such exchange could constitute a taxable event for the holder, and absent
such exchange, Class B shares might continue to be subject to the asset-based
sales charge for longer than six years.
The methodology for calculating the net asset value, dividends and
distributions of the Fund Class A and Class B shares recognizes two types of
expenses. General expenses that do not pertain specifically to either class
are allocated pro rata to the shares of each class, based on the percentage of
the net assets of such class to the Fund's total net assets, and then equally
to each outstanding share within a given class. Such general expenses include
(i) management fees, (ii) legal, bookkeeping and audit fees, (iii) printing and
mailing costs of shareholder reports, prospectuses, statements of additional
information and other materials for current shareholders, (iv) fees to
unaffiliated Trustees, (v) custodian expenses, (vi) share issuance costs, (vii)
organization and start-up costs, (viii) interest, taxes and brokerage
commissions, and (ix) non-recurring expenses, such as litigation costs. Other
expenses that are directly attributable to a class are allocated equally to
each outstanding share within that class. Such expenses included (i)
Distribution Plan fees, (ii) incremental transfer and shareholder servicing
agent fees and expenses, (iii) registration fees and (iv) shareholder meeting
expenses, to the extent that such expenses pertain to a specific class rather
than to the Fund as a whole.
REDUCED SALES CHARGE. Reduced sales charges are applicable to
purchases of $50,000 or more of Class A shares of the Fund alone or in
combination with purchases of shares of other Victory Portfolios made at any
one time. To obtain the reduction of the sales charge, you or your investment
professional must notify the Transfer Agent at the time of purchase whenever a
quantity discount is applicable to your purchase. Upon such notification, you
will receive the lowest applicable sales charge.
The contingent deferred sales charge is waived on Class B shares in
the following cases: (i) shares sold to Key Advisers, the Sub-Adviser or their
affiliates; (ii) shares issued in plans of reorganization to which the Fund is
a party; and (iii) shares redeemed in involuntary redemptions.
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In addition to investing at one time in any combination of Class A
shares of the Victory Portfolios in an amount entitling you to a reduced sales
charge, you may qualify for a reduction in the sales charge under the following
programs:
COMBINED PURCHASES. When you invest in Class A shares of the Victory
Portfolios for several accounts at the same time, you may combine these
investments into a single transaction if purchased through one investment
professional, and if the total is $50,000 or more. The following may qualify
for this privilege: an individual, or "company" as defined in Section 2(a)(8)
of the 1940 Act; an individual, spouse, and their children under age 21
purchasing for his, her, or their own account; a trustee, administrator or
other fiduciary purchasing for a single trust estate or single fiduciary
account or for a single or a parent-subsidiary group of "employee benefit
plans" (as defined in Section 3(3) of ERISA); and tax-exempt organizations
under Section 501(c)(3) of the Internal Revenue Code.
RIGHTS OF ACCUMULATION. Your "Rights of Accumulation" permit reduced
sales charges on future purchases of Class A shares after you have reached a
new breakpoint. You can add the value of existing Victory Portfolios shares
held by you, your spouse, and your children under age 21, determined at the
previous day's NAV at the close of business, to the amount of your new purchase
valued at the current offering price to determine your reduced sales charge.
LETTER OF INTENT. If you anticipate purchasing $50,000 or more of
shares of the Fund alone or in combination with Class A shares of certain other
Victory Portfolios within a 13-month period, you may obtain shares of the
portfolios at the same reduced sales charge as though the total quantity were
invested in one lump sum, by filing a non-binding Letter of Intent (the
"Letter") within 90 days of the start of the purchases. Each investment you
make after signing the Letter will be entitled to the sales charge applicable to
the total investment indicated in the Letter. For example, a $2,500 purchase
toward a $60,000 Letter would receive the same reduced sales charge as if the
$60,000 had been invested at one time. To ensure that the reduced price will be
received on future purchases, you or your investment professional must inform
the transfer agent that the Letter is in effect each time shares are purchased.
Neither income dividends nor capital gain distributions taken in additional
shares will apply toward the completion of the Letter.
Your initial investment must be at least 5% of the total amount you
plan to invest. Out of the initial purchase, 5% of the dollar amount specified
in the Letter will be registered in your name and held in escrow. The shares
held in escrow cannot be redeemed or exchanged until the Letter is satisfied or
the additional sales charges have been paid. You will earn income dividends
and capital gain distributions on escrowed shares. The escrow will be released
when your purchase of the total amount has been completed. You are not
obligated to complete the Letter.
If you purchase more than the amount specified in the Letter and
qualify for a further sales charge reduction, the sales charge will be adjusted
to reflect your total purchase at the end of 13 months. Surplus funds will be
applied to the purchase of additional shares at the then current offering price
applicable to the total purchase.
If you do not complete your purchase under the Letter within the
13-month period, your sales charge will be adjusted upward, corresponding to
the amount actually purchased, and if after written notice, you do not pay the
increased sales charge, sufficient escrowed shares will be redeemed to pay such
charge.
ADDITIONAL EXCHANGE INFORMATION
Class A shares of the Fund (see "Description of Victory Portfolios"
below) may be exchanged for shares of any Victory money market fund or any
other fund of the Victory Portfolios with the same or a lower sales charge.
Shares of any Victory money market portfolio or any fund of the Victory
Portfolios with a reduced sales
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<PAGE> 82
charge may be exchanged for shares of the Fund upon payment of the difference
in the sales charge (or, if applicable, shares of any Victory money market
portfolio may be used to purchase Class B shares of the Fund.)
Class B shares of the Fund may be exchanged for shares of other
Victory Portfolios that offer Class B shares. The CDSC applicable to Class B
shares is imposed on Class B shares redeemed within six years of the initial
purchase of the exchanged Class B shares. When Class B shares are redeemed to
effect an exchange, the priorities described in "How to Invest" in the
Prospectus for the imposition of the Class B CDSC will be followed in
determining the order in which the shares are exchanged. Shareholders should
take into account the effect of any exchange on the applicability and rate of
any CDSC that might be imposed in the subsequent redemption of remaining
shares. Shareholders owning shares of both classes must specify whether they
intend to exchange Class A or Class B shares.
ADDITIONAL REDEMPTION INFORMATION
REINSTATEMENT PRIVILEGE. Within 90 days of a redemption, a
shareholder may reinvest all or part of the redemption proceeds of (i) Class A
shares, or (ii) Class B shares that were subject to the Class B contingent
deferred sales charge when redeemed, in Class A shares of the Fund or any of
the other Victory Portfolios into which shares of the Fund are exchangeable as
described below, at the net asset value next computed after receipt by the
Transfer Agent of the reinvestment order. No charge is currently made for
reinvestment in shares of the Fund but a reinvestment in shares of certain
other Victory Portfolios is subject to a $5.00 service fee. The shareholder
must ask the Distributor for such privilege at the time of reinvestment. Any
capital gain that was realized when the shares were redeemed is taxable, and
reinvestment will not alter any capital gains tax payable on that gain. If
there has been a capital loss on the redemption, some or all of the loss may
not be tax deductible, depending on the timing and amount of the reinvestment.
Under the Internal Revenue Code, if the redemption proceeds of Fund shares on
which a sales charge was paid are reinvested in shares of the Fund or another
of the Victory Portfolios within 90 days of payment of the sales charge, the
shareholder's basis in the shares of the Fund that were redeemed may not
include the amount of the sales charge paid. That would reduce the loss or
increase the gain recognized from redemption. The Fund may amend, suspend or
cease offering this reinvestment privilege at any time as to shares redeemed
after the date of such amendment, suspension or cessation. You must reinstate
your shares into an account with the same registration. This privilege may be
exercised only once by a shareholder with respect to the Fund. For information
on which funds are available for the Reinstatement Privilege, please consult
your program materials.
DIVIDENDS AND DISTRIBUTIONS
The Fund ordinarily declares and pays dividends separately for Class A
and Class B shares from its net investment income quarterly. The Fund
distributes substantially all of its net investment income and net capital
gains, if any, to shareholders within each calendar year as well as on a fiscal
year basis to the extent required for the Fund to qualify for favorable federal
tax treatment.
The amount of a class's distributions may vary from time to time
depending on market conditions, the composition of the Fund's portfolio, and
expenses borne by the Fund or borne separately by a class, as described in
"Alternative Sales Arrangements - Class A and Class B," above. Dividends are
calculated in the same manner, at the same time and on the same day for shares
of each class. However, dividends on Class B shares are expected to be lower
as a result of the asset-based sales charge on Class B shares, and Class B
dividends will also differ in amount as a consequence of any difference in net
asset value between Class A and Class B shares.
For this purpose, the net income of the Fund, from the time of the
immediately preceding determination thereof, shall consist of all interest
income accrued on the portfolio assets of the Fund, dividend income, if any,
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<PAGE> 83
income from securities loans, if any, and realized capital gains and losses on
the Fund assets, less all expenses and liabilities of the Fund chargeable
against income. Interest income shall include discount earned, including both
original issue and market discount, on discount paper accrued ratably to the
date of maturity. Expenses, including the compensation payable to Key Advisers
or the Sub-Adviser, are accrued each day. The expenses and liabilities of the
Fund shall include those appropriately allocable to the Fund as well as a share
of the general expenses and liabilities of the Victory Portfolios in proportion
to the Fund's share of the total net assets of the Victory Portfolios.
Additional Tax Information
It is the policy of the Fund to qualify for the favorable tax
treatment accorded regulated investment companies ("RICs") under Subchapter M
of the Code, for so long as such qualification is in the best interest of its
shareholders. By following such policy and distributing its income and gains
currently with respect to each taxable year, the Fund expects to eliminate or
reduce to a nominal amount the federal income and excise taxes to which it may
otherwise be subject.
In order to qualify as a RIC, the Fund must, among other things, (1)
derive at least 90% of its gross income from dividends, interest, payments with
respect to securities loans, and gains from the sale or other disposition of
stock or securities, foreign currencies or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in stock, securities or currencies, (2) derive less than 30% of its
gross income from the sale or other disposition of stock, securities, options,
futures, forward contracts, and certain foreign currencies (or options,
futures, or forward contracts on foreign currencies) held for less than three
months, and (3) diversify its holdings so that at the end of each quarter of
its taxable year (i) at least 50% of the market value of the Fund's assets is
represented by cash or cash items, U.S. Government securities, securities of
other RICs and other securities limited, in respect of any one issuer, to an
amount not greater than 5% of the value of the Fund's total assets and 10% of
the outstanding voting securities of such issuer, and (ii) not more than 25% of
the value of its total assets is invested in the securities of any one issuer
(other than U.S. Government securities) or of two or more issuers that the Fund
controls and that are engaged in the same, similar, or related trades or
businesses. These requirements may restrict the degree to which the Fund may
engage in short-term trading and concentrate investments. If the Fund
qualifies as a RIC, it will not be subject to federal income tax on the part of
its net investment income and net realized capital gains, if any, that it
distributes to shareholders with respect to each taxable year within the time
limits specified in the Code.
A non-deductible excise tax is imposed on regulated investment
companies that do not distribute in each calendar year an amount equal to 98%
of their ordinary income for the year plus 98% of their capital gain net income
for the 1-year period ending on October 31 of such calendar year. The balance
of such income must be distributed during the following calendar year. If
distributions during a calendar year are less than the required amount, the
fund is subject to a non-deductible excise tax equal to 4% of the deficiency.
Certain investment and hedging activities of the Fund, including
transactions in options, futures contracts, hedging transactions, forward
contracts, straddles, foreign currencies, and foreign securities, are subject
to special tax rules. In a given case, these rules may accelerate income to the
Fund, defer losses to the Fund, cause adjustments in the holding periods of the
Fund's securities, convert short-term capital losses into long-term capital
losses, or otherwise affect the character of the Fund's income. These rules
could therefore affect the amount, timing and character of distributions to
shareholders. The Fund will endeavor to make any available elections
pertaining to such transactions in a manner believed to be in the best interest
of the Fund and its shareholders.
The Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends paid to any shareholder who has
failed to provide (or provided an incorrect) tax identification number, or is
subject to withholding pursuant to a notice from the Internal Revenue Service
for failure to properly include on his or her income tax return payments of
interest or dividends. This "backup withholding" is not an additional tax, and
any amounts withheld may be credited against the shareholder's ultimate U.S.
tax liability.
-13-
<PAGE> 84
Information set forth in the Prospectus and this Statement of
Additional Information that relates to federal taxation is only a summary of
certain key federal tax considerations generally affecting purchasers of shares
of the Fund. No attempt has been made to present a complete explanation of the
federal tax treatment of the Fund or its shareholders, and this discussion is
not intended as a substitute for careful tax planning. Accordingly, potential
purchasers of shares of the Fund are urged to consult their tax advisers with
specific reference to their own tax circumstances. In addition, the tax
discussion in the Prospectus and this Statement of Additional Information is
based on tax law in effect on the date of the Prospectus and this Statement of
Additional Information; such laws and regulations may be changed by
legislative, judicial or administrative action, sometimes with retroactive
effect.
MANAGEMENT OF THE VICTORY PORTFOLIOS
Board of Trustees
Overall responsibility for management of the Victory Portfolios rests
with the Trustees, who are elected by the shareholders of the Victory
Portfolios. The Victory Portfolios are managed by the Trustees in accordance
with the laws of the State of Delaware governing business trusts. There are
currently seven Trustees, six of whom are not "interested persons" of the
Victory Portfolios within the meaning of that term under the 1940 Act. The
Trustees, in turn, elect the officers of the Victory Portfolios to supervise
actively its day-to-day operations.
The Trustees of the Victory Portfolios, their addresses, ages and
their principal occupations during the past five years are as follows:
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- --------------------- -------------------- ----------------------
<S> <C> <C>
Leigh A. Wilson, 51* Trustee and From 1989 to present, Chairman and
Glenleigh International Ltd. President Chief Executive Officer, Glenleigh
53 Sylvan Road North International Limited; previously
Westport, CT 06880 Chief Executive Officer, Paribas
North America and Paribas
Corporation; Trustee, The Victory
Funds and Spears, Benzak, Salomon
and Farrell ("SBSF") Funds.
Robert G. Brown, 72 Trustee Retired; from October 1983 to
5460 N. Ocean Drive November 1990, President,
Singer Island, Riviera Beach Cleveland Advanced Manufacturing
Florida 33404 Program (non-profit corporation
engaged in regional economic
development).
</TABLE>
____________
* Mr. Wilson is deemed to be an "interested person" of the Victory
Portfolios under the 1940 Act solely by reason of his position as
President.
-14-
<PAGE> 85
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- --------------------- -------------------- ----------------------
<S> <C> <C>
Edward P. Campbell, 46 Trustee From March 1, 1994 to present,
Nordson Corporation Executive Vice President and Chief
28601 Clemens Road Operating Officer of Nordson
Westlake, OH 44145 Corporation (manufacturer of
application equipment); from May
1988 to March 1994, Vice President
of Nordson Corporation; from 1987
to December 1994, member of the
Supervisory Committee of Society's
Collective Investment Retirement
Fund; from May 1991 to August
1994, Trustee, Financial Reserves
Fund and from May 1993 to August
1994, Trustee, Ohio Municipal
Money Market Fund; Trustee, The
Victory Funds and SBSF.
Dr. Harry Gazelle, 68 Trustee Retired radiologist, Drs. Hill and
17822 Lake Road Thomas Corp.; Trustee, The Victory
Lakewood, OH 44107 Funds.
Dr. Thomas F. Morrissey, 62 Trustee 1995 Visiting Scholar, Bond
Weatherhead School of University, Queensland, Australia;
Management Professor, Weatherhead School of
Case Western Reserve Management, Case Western Reserve
University University; from 1989 to 1995,
10900 Euclid Avenue Associate Dean of Weatherhead
Cleveland, OH 44106-7235 School of Management and
Professor, Case Western Reserve
University; from 1987 to December
1994, Member of the Supervisory
Committee of Society's Collective
Investment Retirement Fund; from
May 1991 to August 1994, Trustee,
Financial Reserves Fund and from
May 1993 to August 1994, Trustee,
Ohio Municipal Money Market Fund;
Trustee, The Victory Funds.
Stanley I. Landgraf, 70 Trustee Retired; currently, Trustee,
41 Traditional Lane Rensselaer Polytechnic Institute;
Albany, NY 12211 Director, Elenel Corporation and
Mechanical Technology, Inc.;
Member, Board of Overseers, School
of Management, Rensselaer
Polytechnic Institute; Member, The
Fifty Group (a Capital Region
business organization); Trustee,
The Victory Funds.
</TABLE>
-15-
<PAGE> 86
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- --------------------- -------------------- ----------------------
<S> <C> <C>
H. Patrick Swygert, 52 Trustee President, Howard University;
Howard University formerly President, State
2400 6th Street, N.W. University of New York at Albany;
Suite 320 formerly, Executive Vice
Washington, DC 20059 President, Temple University;
Trustee, The Victory Funds.
</TABLE>
The Board presently has an Investment Policy Committee and a Business,
Legal, and Audit Committee. The members of the Investment Policy Committee are
Messrs. Landgraf (Chairman), Morrissey and Brown, who will serve until May
1996. The function of the Investment Policy Committee is to review the
existing investment policies of the Victory Portfolios, including the levels of
risk and types of funds available to shareholders, and make recommendations to
the Board of Trustees regarding the revision of such policies or, if necessary,
the submission of such revisions to the Victory Portfolios' shareholders for
their consideration. The members of the Business, Legal and Audit Committee
are Messrs. Swygert (Chairman), Campbell and Gazelle who will serve until May
1996. The function of the Business, Legal and Audit Committee is to recommend
independent auditors and monitor accounting and financial matters; to nominate
persons to serve as disinterested Trustees and Trustees to serve on committees
of the Board; and to review compliance and contract matters.
The Investment Policy Committee met four times during the 12 months
ended October 31, 1995. The Business, Legal and Audit Committee was
constituted on May 24, 1995 (and has met twice since then) and replaced the
Audit Committee, the Legal Committee and the Nominating Committee, which met
three times, one time and one time, respectively, during the 12 month period
ended October 31, 1995.
REMUNERATION OF TRUSTEES AND CERTAIN EXECUTIVE OFFICERS
Effective June 1, 1995, each Trustee (other than Leigh A. Wilson)
receives an annual fee of $27,000 for serving as Trustee of all the Funds of
the Victory Portfolios, and an additional per meeting fee ($2,400 in person and
$1,200 per telephonic meeting).
Effective June 1, 1995, Leigh A. Wilson receives an annual fee of
$33,000 for serving as President and Trustee for all of the Funds of the
Victory Portfolios, and an additional per meeting fee ($3,000 in person and
$1,500 per telephonic meeting).
The following tables indicate the compensation received by each
Trustee from the Fund and from the Victory Fund Complex and the 12-month period
ended October 31, 1995. For certain Trustees, the amounts include amounts paid
by this Funds' Predecessor Fund, a Portfolio of the Victory Funds, which was
reorganized as the Fund as of June 5, 1995.
<TABLE>
<CAPTION>
Estimated
Pension or Annual Total Total
Retirement Benefits Compensation Compensation
Benefits Accrued as Upon from from Victory
Portfolio Expenses Retirement Fund "Fund Complex"*
------------------- ---------- ------------ ---------------
<S> <C> <C> <C> <C>
Robert G. Brown, Trustee ....... -0- -0- $733.66 $39,815.98
Edward P. Campbell, Trustee .... -0- -0- 389.76 33,799.68
Harry Gazelle, Trustee.......... -0- -0- 675.74 35,916.98
</TABLE>
-16-
<PAGE> 87
<TABLE>
<S> <C> <C> <C> <C>
John W. Kemper, Trustee# ....... -0- -0- 624.83 22,567.31
Thomas F. Morrissey, Trustee ... -0- -0- 819.94 40,366.98
Stanley I. Landgraf, Trustee.... -0- -0- 535.10 34,615.98
Leigh A. Wilson, Trustee ....... -0- -0- 874.92 46,716.97
H. Patrick Swygert, Trustee..... -0- -0- 819.94 37,116.98
John D. Buckingham,# Trustee.... -0- -0- 318.60 18,841.89
John R. Young, Trustee# ........ -0- -0- 535.81 21,963.81
</TABLE>
# Resigned
- ----------------------
* For certain Trustees, these amounts include compensation received from
The Victory Funds (which were reorganized into the Victory Portfolio
as of June 5, 1995), the SBSF Funds (the investment adviser of which
was acquired by KeyCorp effective April, 1995) and Society's
Collective Investment Retirement Funds, which were reorganized into
the Victory Balanced Fund and Victory Government Mortgage Fund as of
December 19, 1994. There are presently 24 mutual funds from which the
above- named Trustees are compensated in the Victory "Fund Complex,"
but not all of the above-named Trustees serve on the boards of each
fund in the "Fund Complex."
Officers
The officers of the Victory Portfolios, their addresses, ages and
principal occupations during the past five years are as follows:
<TABLE>
<CAPTION>
Position with the Principal occupation
Name Victory Portfolios during past 5 years
- ---- ------------------ --------------------
<S> <C> <C>
Leigh A. Wilson, 51 President and Trustee From 1989 to present, Chairman and
Glenleigh International Ltd. Chief Executive Officer, Glenleigh
53 Sylvan Road North International Limited; from 1984-
Westport, CT 06880 1989, Chief Executive Officer,
Paribas North America and Paribas
Corporation; Trustee to The Victory
Funds and SBSF Funds.
</TABLE>
-17-
<PAGE> 88
<TABLE>
<S> <C> <C>
William B. Blundin, 57 Vice President Senior Vice President of BISYS Fund
BISYS Fund Services Services; officer of other
125 West 55th Street investment companies administered
New York, New York 10019 by BISYS Fund Services; President
and Chief Executive Officer of
Vista Broker-Dealer Services, Inc.,
Emerald Asset Management, Inc. and
BNY Hamilton Distributors, Inc.,
registered broker/dealers.
J. David Huber, 49 Vice President Executive Vice President, BISYS
BISYS Fund Services Fund Services.
3435 Stelzer Road
Columbus, OH 43219-3035
Scott A. Englehart, 33 Secretary From October 1990 to present,
BISYS Fund Services employee of BISYS Fund Services,
3435 Stelzer Road Inc.; from 1985 to October 1990,
Columbus, OH 43219-3035 Manager of Banking Center, Fifth
Third Bank.
George O. Martinez, 36 Assistant Secretary From March 1995 to present, Senior
BISYS Fund Services Vice President and Director of
3435 Stelzer Road Legal and Compliance Services,
Columbus, OH 43219-3035 BISYS Fund Services; from June
1989-March 1995, Vice President and
Associate General Counsel, Alliance
Capital Management.
Martin R. Dean, 32 Treasurer From May 1994 to present, employee
BISYS Fund Services of BISYS Fund Services; from
3435 Stelzer Road January 1987 - April 1994, Senior
Columbus, OH 43219-3035 Manager, KPMG Peat Marwick.
Adrian J. Waters, 33 Assistant Treasurer From May 1993 to present, employee
BISYS Fund Services (Ireland) of BISYS Fund Services; from 1989-
Limited May 1993, Manager, Price Waterhouse.
ITI House
12 Earlsfort Terrace
Dublin 2, Ireland
</TABLE>
The mailing address of each of the officers of the Victory Portfolios
is 3435 Stelzer Road, Columbus, Ohio 43219-3035.
The officers of the Victory Portfolios (other than Leigh Wilson)
receive no compensation directly from the Victory Portfolios for performing the
duties of their offices. BISYS Fund Services, Inc. receives fees from the
Victory Portfolios for acting as Administrator.
As of January 6, 1996, the Trustees and officers as a group owned
beneficially less than 1% of the Fund.
Investment Adviser and Sub-Adviser
-18-
<PAGE> 89
KeyCorp Mutual Fund Advisers, Inc. ("Key Advisers" or the "Adviser")
was organized as an Ohio corporation on July 27, 1995 and is registered as an
investment adviser under the Investment Advisers Act of 1940. It is a
wholly-owned subsidiary of KeyCorp Asset Management Holdings, Inc., which is a
wholly-owned subsidiary of Society National Bank, a wholly-owned subsidiary of
KeyCorp. Affiliates of Key Advisers manage approximately $37 billion for
numerous clients including large corporate and public retirement plans,
Taft-Hartley plans, foundations and endowments, high net worth individuals and
mutual funds.
KeyCorp, a financial services holding company, is headquartered at 127
Public Square, Cleveland, Ohio 44114. As of June 30, 1995, KeyCorp had an
asset base of $67.5 billion, with banking offices in 25 states from Maine to
Alaska, and trust and investment offices in 16 states. KeyCorp is the
resulting entity of the merger in 1994 of Society Corporation, the bank holding
company of which Society National Bank was a wholly-owned subsidiary, and
KeyCorp, the former bank holding company. KeyCorp's major business activities
include providing traditional banking and associated financial services to
consumer, business and commercial markets. Its non-bank subsidiaries include
investment advisory, securities brokerage, insurance, bank credit card
processing, and mortgage leasing companies. Society National Bank is the lead
affiliate bank of KeyCorp.
The following table lists the advisory fees for each mutual fund that
is advised by Key Advisers.
.25 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Institutional Money Market Fund *
.35 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Prime Obligations Fund *
Victory U.S. Government Obligations Fund *
Victory Tax-Free Money Market Fund *
.50 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Money Market Fund *
Victory Limited Term Income Fund *
Victory Government Mortgage Fund *
Victory Financial Reserves Fund *
Victory Fund for Income #
.55 OF 1% OF AVERAGE DAILY NET ASSETS
Victory National Municipal Bond Fund *
Victory Government Bond Fund *
Victory New York Tax-Free Fund *
.60 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Bond Fund *
Victory Stock Index Fund *
.65 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Diversified Stock Fund *
.75 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Intermediate Income Fund *
Victory Investment Quality Bond Fund *
Victory Ohio Regional Stock Fund *
1% OF AVERAGE DAILY NET ASSETS
-19-
<PAGE> 90
Victory Balanced Fund *
Victory Value Fund *
Victory Growth Fund *
Victory Special Value Fund *
Victory Special Growth Fund+
1.10% OF AVERAGE DAILY ASSETS
Victory International Growth Fund *
# First Albany Asset Management Corporation serves as
sub-adviser to the Victory Fund for Income, for which it
receives .20% of average daily net assets.
+ T. Rowe Price Associates, Inc. serves as sub-adviser to
Society Special Growth Fund, for which it receives .25% of
average daily net assets up to $100 million and .20% of
average daily net assets in excess of $100 million.
* Society Asset Management, Inc. (the Sub-Advisor) serves as
sub-adviser to each of these funds. For its services under
the investment sub-advisory agreement, Key Advisers pays the
Sub-Adviser sub-advisory fees at rates (based on an annual
percentage of average daily net assets) which vary according
to the table set forth below:
For the Victory Balanced Fund, Diversified Stock Fund, Growth Fund, Stock Index
Fund and Value Fund:
<TABLE>
<CAPTION>
Rate of
Net Assets Sub-Advisory Fee*
---------- -----------------
<S> <C>
Up to $10,000,000 0.65%
Next $15,000,000 0.50%
Next $25,000,000 0.40%
Above $50,000,000 0.35%
</TABLE>
For the Victory International Growth Fund, Ohio Regional Stock Fund and Special
Value Fund:
<TABLE>
<CAPTION>
Rate of
Net Assets Sub-Advisory Fee*
---------- -----------------
<S> <C>
Up to $10,000,000 0.90%
Next $15,000,000 0.70%
Next $25,000,000 0.55%
Above $50,000,000 0.45%
</TABLE>
For the Victory Intermediate Income Fund, Investment Quality Bond Fund, Limited
Term Income Fund, Ohio Municipal Bond Fund, Government Bond Fund, Government
Mortgage Fund, National Municipal Bond Fund and New York Tax-Free Fund:
<TABLE>
<CAPTION>
Rate of
Net Assets Sub-Advisory Fee*
---------- -----------------
<S> <C>
Up to $10,000,000 0.40%
Next $15,000,000 0.30%
Next $25,000,000 0.25%
Above $50,000,000 0.20%
</TABLE>
For the Victory Prime Obligations Fund, Tax-Free Money Market Fund, U.S.
Government Obligations Fund, Financial Reserves Fund, Institutional Money Market
Fund and Ohio Municipal Money Market Fund:
<TABLE>
<CAPTION>
Rate of
Net Assets Sub-Advisory Fee*
---------- -----------------
<S> <C>
Up to $10,000,000 0.25%
Next $15,000,000 0.20%
Next $25,000,000 0.15%
Above $50,000,000 0.125%
</TABLE>
- --------------------
-20-
<PAGE> 91
* As a percentage of average daily net assets. The Sub-Adviser has the
right to voluntarily waive any portion of the sub- advisory fee from
time to time. Any such voluntary waiver will be irrevocable and
determined in advance of rendering sub-investment advisory services
by the Sub-Adviser, and shall be in writing and signed by the parties
hereto.
ADVISORY AND OTHER CONTRACTS
Unless sooner terminated, the Investment Advisory Agreement between
Key Advisers and the Fund provides that it will continue in effect as to the
Fund for an initial two-year term and for consecutive one-year terms
thereafter, provided that such continuance is approved at least annually by the
Victory Portfolios' Trustees or by vote of a majority of the outstanding shares
of the Fund (as defined under "GENERAL INFORMATION - Miscellaneous" in the
Prospectuses), and, in either case, by a majority of the Trustees who are not
parties to the Investment Advisory Agreement or interested persons (as defined
in the 1940 Act) of any party to the Investment Advisory Agreement, by votes
cast in person at a meeting called for such purpose.
The Investment Advisory Agreement is terminable as to the Fund at any
time on 60 days' written notice without penalty by the Trustees, by vote of a
majority of the outstanding shares of that Fund, or by Key Advisers. The
Investment Advisory Agreement also terminates automatically in the event of any
assignment, as defined in the 1940 Act.
The Investment Advisory Agreement provides that Key Advisers shall not
be liable for any error of judgment or mistake of law or for any loss suffered
by the Fund in connection with the performance of services pursuant to the
Investment Advisory Agreement, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith, or gross negligence on the
part of Key Advisers in the performance of its duties, or from reckless
disregard by it of either duties and obligations thereunder.
Under the Investment Advisory Agreement, Key Advisers has agreed to
provide investment advisory services described in the Prospectus. For the
services provided and expenses assumed pursuant to the Investment Advisory
Agreement, the Fund pays Key Advisers a fee, computed daily and paid monthly,
at the annual rate of sixty-five one-hundredths of one percent (.65%) of the
average daily net assets of the Fund.
Prior to June 5, 1995, Key Trust Company served as investment adviser
to the Fund. From June 5, 1995 until December 31, 1995, Society Asset
Management, Inc. served as investment adviser to the Fund. For the fiscal
years ended October 31, 1993, 1994 and 1995 the Fund paid investment advisory
fees of $1,563,647, $1,548,683, and $___, respectively, after fee reductions
of $33,190, $82,207 and $____, respectively.
Under an Investment Advisory Agreement, Key Advisers may delegate a
portion of its responsibilities to a sub-adviser. In addition, the Investment
Advisory Agreement provides that Key Advisers may render services through its
own employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser of the Fund and are under the common
control of KeyCorp as long as all such persons are functioning as part of an
organized group of persons, managed by authorized officers of Key Advisers.
Key Advisers has entered into an investment sub-advisory agreement
with its affiliate, Society Asset Management, Inc. on behalf of the Fund. The
Sub-Adviser is a wholly-owned subsidiary of KeyCorp Asset Management Holdings,
Inc. With respect to the day to day management of the Fund, under the
sub-advisory agreement, the Sub-Adviser makes decisions concerning, and places
all orders for, purchases and sales of securities and helps maintain the
records relating to such purchases and sales. The Sub-Adviser may, in its
discretion, provide such services through its own employees or the employees of
one or more affiliated companies that are qualified to act as an investment
adviser to the Company under applicable laws and are under the common control
of
-21-
<PAGE> 92
KeyCorp; provided that (i) all persons, when providing services under the
sub-advisory agreement, are functioning as part of an organized group of
persons, and (ii) such organized group of persons is managed at all times by
authorized officers of the Sub- Adviser. This arrangement will not result in
the payment of additional fees by the Fund.
Glass-Steagall Act
In 1971 the United States Supreme Court held in Investment Company
Institute v. Camp that the federal statute commonly referred to as the
Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision: (a)
forbid a bank holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing, or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but (b) do not prohibit such
a holding company or affiliate from acting as investment adviser, transfer
agent, and custodian to such an investment company. In 1981 the United States
Supreme Court held in Board of Governors of the Federal Reserve System v.
Investment Company Institute that the Board did not exceed its authority under
the Holding Company Act when it adopted its regulation and interpretation
authorizing bank holding companies and their non-bank affiliates to act as
investment advisers to registered closed-end investment companies. In the Board
of Governors case, the Supreme Court also stated that if a national bank
complied with the restrictions imposed by the Board in its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to investment companies, a national bank
performing investment advisory services for an investment company would not
violate the Glass-Steagall Act.
Key Advisers and the Sub-Adviser believe that they may perform the
services for the Victory Portfolios contemplated by the Prospectus, this
Statement of Additional Information, and the Investment Advisory Agreement (and
Sub-Advisory Agreement) with the Victory Portfolios without violation of
applicable statutes and regulations and has so represented in its Investment
Advisory Agreement (and Sub-Advisory Agreement) with the Victory Portfolios.
Key Trust Company of Ohio, N.A. believes that it may perform the services for
the Victory Portfolios contemplated by the Prospectus, this Statement of
Additional Information, and the Shareholder Servicing Agreement with the
Victory Portfolios (as described below) without violation of applicable
statutes and regulations and has so represented in such Shareholder Servicing
Agreement. Future changes in either federal or state statutes and regulations
relating to the permissible activities of banks or bank holding companies and
the subsidiaries or affiliates of those entities, as well as further judicial
or administrative decisions or interpretations of present and future statutes
and regulations, could prevent or restrict Key Trust Company of Ohio, N.A., Key
Advisers or the Sub-Adviser from continuing to perform such services for the
Victory Portfolios. Depending upon the nature of any changes in the services
which could be provided by Key Trust Company of Ohio, N.A., Key Advisers or the
Sub-Adviser the Trustees of the Victory Portfolios would review the Victory
Portfolios' relationship with Key Trust Company of Ohio, N.A., Key Advisers or
the Sub-Adviser and consider taking all action necessary in the circumstances.
Should future legislative, judicial, or administrative action prohibit
or restrict the proposed activities of Key Trust Company of Ohio, N.A., Key
Advisers or the Sub-Adviser and its affiliated and correspondent banks and
other non-bank affiliates in connection with customer purchases of shares of
the Victory Portfolios, the banks and such non-bank affiliates might be
required to alter materially or discontinue the services offered by them to
customers. It is not anticipated, however, that any change in the Victory
Portfolios' method of operations would affect its net asset value per share or
result in financial losses to any customer.
From time to time, advertisements, supplemental sales literature and
information furnished to present or prospective shareholders of the Fund may
include descriptions of Key Trust Company of Ohio, N.A., Key Advisers and the
Sub-Adviser including, but not limited to, (i) descriptions of the operations
of Key Trust Company of Ohio,
-22-
<PAGE> 93
N.A., Key Advisers and the Sub-Adviser; (ii) descriptions of certain personnel
and their functions; and (iii) statistics and rankings related to the
operations of Key Trust Company of Ohio, N.A., Key Advisers and the
Sub-Adviser.
Portfolio Transactions
Pursuant to the Investment Advisory (and Sub-Advisory) Agreement, Key
Advisers (Society) determines, subject to the general supervision of the
Trustees of the Victory Portfolios, and in accordance with the Fund's
investment objective and restrictions, which securities are to be purchased and
sold by the Fund, and which brokers are to be eligible to execute its portfolio
transactions. Purchases from underwriters and/or broker-dealers of portfolio
securities include a commission or concession paid by the issuer to the
underwriter and/or broker-dealer and purchases from dealers serving as market
makers may include the spread between the bid and asked price. While Key
Advisers and the Sub-Adviser generally seek competitive prices (inclusive of
spreads or commission), the Fund may not necessarily pay the lowest prices
available on each transaction, for reasons discussed below.
Allocation of transactions, including their frequency, to various
dealers is determined by Key Advisers or the Sub-Adviser in its best judgment
and in a manner deemed fair and reasonable to shareholders. The primary
consideration is prompt execution of orders in an effective manner at the most
favorable price. Subject to this consideration, dealers who provide
supplemental investment research to Key Advisers or the Sub-Adviser may receive
orders for transactions by the Victory Portfolios. Information so received is
in addition to and not in lieu of services required to be performed by Key
Advisers or the Sub-Adviser and does not reduce the advisory (sub-advisory)
fees payable to Key Advisers or the Sub-Adviser by the Victory Portfolios.
Such information may be useful to Key Advisers or the Sub-Adviser in serving
both the Victory Portfolios and other clients and, conversely, such
supplemental research information obtained by the placement of orders on behalf
of other clients may be useful to Key Advisers or the Sub-Adviser in carrying
out its obligations to the Victory Portfolios. In the future, the Trustees may
also authorize the allocation of brokerage to affiliated broker-dealers on an
agency basis to effect portfolio transactions. In such event, the Trustees
will adopt procedures incorporating the standards of Rule 17e-1 under the 1940
Act, which require that the commission paid to affiliated broker-dealers must
be "reasonable and fair compared to the commission, fee or other remuneration
received, or to be received, by other brokers in connection with comparable
transactions involving similar securities during a comparable period of time."
The Fund generally purchases portfolio securities directly from dealers acting
as principals, underwriters or market makers. As these transactions are
usually conducted on a net basis, no brokerage commissions are paid by the
Fund.
The Victory Portfolios will not execute portfolio transactions
through, acquire portfolio securities issued by, make savings deposits in, or
enter into repurchase or reverse repurchase agreements with Key Advisers, the
Sub-Adviser, Key Trust Company of Ohio, N.A. or its affiliates, Concord Holding
Corporation, Victory Broker-Dealer Services, Inc. or their affiliates, and will
not give preference to Key Trust Company of Ohio, N.A.'s correspondent banks or
affiliates, or Concord Holding Corporation or Victory Broker-Dealer Services,
Inc. with respect to such transactions, securities, savings deposits,
repurchase agreements, and reverse repurchase agreements.
Investment decisions for the Fund are made independently from those
for the other funds or any other investment company or account managed by Key
Advisers (or Society). Any such other investment company or account may also
invest in the same securities as a particular fund. When a purchase or sale of
the same security is made at substantially the same time on behalf of the Fund
and another fund, investment company or account, the transaction will be
averaged as to price, and available investments allocated as to amount, in a
manner which Key Advisers (or Society) believes to be equitable to the Fund
and such other fund, investment company or account. In some instances, this
investment procedure may adversely affect the price paid or received by the
Fund or the size of the position obtained by the Fund. To the extent permitted
by law, Key Advisers (or Society) may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for the other funds
or for other investment companies or accounts in order to obtain best
execution. As provided by the Investment Advisory (and Sub-Advisory)
Agreement, in making investment recommendations for the Victory Portfolios, Key
Advisers (or Society) will not inquire or take into consideration whether an
issuer of securities proposed for purchase or sale
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<PAGE> 94
by a Fund is a customer of Society, its parents or subsidiaries or affiliates
and, in dealing with their commercial customers, Key Advisers (Society), its
parents, subsidiaries, and affiliates will not inquire or take into
consideration whether securities of such customers are held by the Victory
Portfolios.
In the fiscal years ended October 31, 1993, 1994 and 1995, the Fund
paid $421,782, $550,131 and $______, respectively, in brokerage commissions.
Administrator
Currently, Concord Holding Corporation ("CHC") serves as general
manager and administrator (the "Administrator") to the Fund. The
Administrator assists in supervising all operations of the Fund (other than
those performed by Key Advisers or the Sub-Adviser under the Investment
Advisory Agreement and Sub-Advisory Agreement.
CHC receives a fee from the Fund for its services as Administrator and
expenses assumed pursuant to the Administration Agreements, calculated daily
and paid monthly, at the annual rate of fifteen one hundredths of one percent
(.15%) of the Fund's average daily net assets. CHC may periodically waive all
or a portion of its fee with respect to the Fund in order to increase the net
income of the Fund available for distribution as dividends.
Unless sooner terminated, the Administration Agreement will continue
in effect as to the Fund for a period of two years, and for consecutive
one-year terms thereafter, provided that such continuance is ratified at least
annually by the Victory Portfolios' Board of Trustees or by vote of a majority
of the outstanding shares of the Fund, and in either case by a majority of the
Trustees who are not parties to the Administration Agreement or interested
persons (as defined in the 1940 Act) of any party to the Administration
Agreement, by votes cast in person at a meeting called for such purpose.
The Administration Agreement provides that CHC shall not be liable for
any error of judgment or mistake of law or any loss suffered by the Victory
Portfolios in connection with the matters to which the Administration Agreement
relates, except a loss resulting from willful misfeasance, bad faith, or gross
negligence in the performance of its duties, or from the reckless disregard by
it of its obligations and duties thereunder.
Under the Administration Agreement, CHC assists in the Fund's
administration and operation, including providing statistical and research
data, clerical services, internal compliance and various other administrative
services, including among other responsibilities, forwarding certain purchase
and redemption requests to the Transfer Agent, participation in the updating of
the prospectus, coordinating the preparation, filing, printing and
dissemination of reports to shareholders, coordinating the preparation of
income tax returns, arranging for the maintenance of books and records and
providing the office facilities necessary to carry out the duties thereunder.
Under the Administration Agreement, CHC may delegate all or any part of its
responsibilities thereunder.
In the fiscal years ended October 31, 1994 and October 31, 1995, the
Fund paid to CHC aggregate administration fees of $_______, and $_______,
respectively, after fee reductions of $_____, and $_____, respectively.
Distributor
Victory Broker-Dealer Services, Inc. (the "Distributor") serves as
distributor for the continuous offering of the shares of the Fund pursuant to a
Distribution Agreement between the Distributor and the Victory Portfolios.
Unless otherwise terminated, the Distribution Agreement will remain in effect
with respect to the Fund for two years, and thereafter for consecutive one-year
terms, provided that it is approved at least annually (i) by the Victory
Portfolios' Board of Trustees or by the vote of a majority of the outstanding
shares of the Fund, and (ii) by the vote of a majority of the Trustees of the
Victory Portfolios who are not parties to the Distribution Agreement or
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<PAGE> 95
interested persons of any such party, cast in person at a meeting called for
the purpose of voting on such approval. The Distribution Agreement will
terminate in the event of its assignment, as defined in the 1940 Act. For the
Fund's fiscal years ended October 31, 1994 and October 31, 1995, [Concord]
received $______ and $_______, respectively, in underwriting commissions, and
retained $____ and $__, respectively.
Class B Shares Distribution Plan
The Victory Portfolios has adopted a Distribution Plan for Class B
shares of the Fund under Rule 12b-1 under the 1940 Act.
The Distribution Plan adopted by the Trustees with respect to the
Class B shares of the Fund provides that the Fund will pay the Distributor a
distribution fee under the Plan at the annual rate of 0.75% of the average
daily net assets of the Fund attributable to the Class B shares. The
distribution fees may be used by the Distributor for: (a) costs of printing and
distributing the Fund's prospectus, statement of additional information and
reports to prospective investors in the Fund; (b) costs involved in preparing,
printing and distributing sales literature pertaining to the Fund; (c) an
allocation of overhead and other branch office distribution-related expenses of
the Distributor; (d) payments to persons who provide support services in
connection with the distribution of the Fund's shares, including but not
limited to, office space and equipment, telephone facilities, answering routine
inquiries regarding the Fund, processing shareholder transactions and providing
any other shareholder services not otherwise provided by the Victory
Portfolios' transfer agent; (e) accruals for interest on the amount of the
foregoing expenses that exceed the distribution fee and the CDSC received by
the Distributor; and (f) any other expense primarily intended to result in the
sale of the Fund's shares, including, without limitation, payments to
salespersons and dealers at the time of the sale of shares, if applicable, and
continuing fees to each such salespersons and dealers, which fee shall begin to
accrue immediately after the sale of such shares.
The amount of the distribution fees payable by the Fund under the
Distribution Plan is not related directly to specific expenses incurred by the
Distributor, and the Distribution Plan does not obligate the Fund to reimburse
the Distributor for such expenses. The Distribution Fees set forth in the
Distribution Plan will be paid by the Fund to the Distributor unless and until
the Plan is terminated or not renewed with respect to the Fund; any
distribution or service expenses incurred by the Distributor on behalf of the
Fund in excess of payments of the distribution fees specified above which the
Distributor has accrued through the termination date are the sole
responsibility and liability of the Distributor and not an obligation of the
Fund.
The Distribution Plan for the Class B shares specifically recognizes
that either Key Advisers, the Sub-Adviser or the Distributor, directly or
through an affiliate, may use its fee revenue, past profits, or other
resources, without limitation, to pay promotional and administrative expenses
in connection with the offer and sale of shares of the Fund. In addition, the
Plan provides that Key Advisers, the Sub-Adviser and the Distributor may use
their respective resources, including fee revenues, to make payments to third
parties that provide assistance in selling the Fund's shares, or to third
parties, including banks, that render shareholder support services.
The Class B Distribution Plan has been approved by the Trustees
including a majority of the Independent Trustees at a meeting called for that
purpose and by the holders of a majority of Class B shares of the Fund. The
Trustees carefully considered all pertinent factors relating to the
implementation of the Plan prior to its approval, and determined that there is
a reasonable likelihood that the Plan will benefit the Fund and its
shareholders. To the extent that the Plan gives Key Advisers, the Sub- Adviser
or the Distributor greater flexibility in connection with the distribution of
shares of the Fund, additional sales of the Fund's shares may result.
Additionally, certain shareholder support services may be provided more
effectively under the Plan by local entities with whom shareholders have other
relationships.
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<PAGE> 96
The Plan has been approved by the Trustees including a majority of the
Independent Trustees at a meeting called for that purpose and by the holders of
a majority of shares of the class. As required by the Rule, the Trustees
carefully considered all pertinent factors relating to the implementation of
the Plan prior to its approval, and have determined that there is a reasonable
likelihood that the Plan will benefit the Fund and its shareholders. To the
extent that the Plan gives Key Advisers, the Sub- Adviser or the Distributor
greater flexibility in connection with the distribution of shares of the Fund,
additional sales of the Fund's shares may result. Additionally, certain
shareholder support services may be provided more effectively under the Plan by
local entities with whom shareholders have other relationships.
Business Management Agreement
In connection with its obligations under the Investment Sub-Advisory
Agreement, the Sub-Adviser has entered into a Business Management Agreement
with Key Advisers, pursuant to which Key Advisers provides certain
administrative and support services to the Sub-Adviser. Such services include
preparing reports to the Victory Portfolio's Board of Trustees, recordkeeping
services, and services rendered in connection with the preparation of
regulatory filings and other reports, and regulatory and other administrative
and compliance systems and support services.
For such services to the Fund, the Sub-Adviser pays fees to Key
Advisers which vary according to a sliding scale containing "breakpoints" at
which decreases in the business management fees correspond to increases in the
average daily net asset values of the Fund as follows:
<TABLE>
<CAPTION>
Net Assets Rate of Business
of the Fund Management Fee*
----------- ---------------
<S> <C>
Up to $10,000,000 0.25%
Next $15,000,000 0.15%
Next $25,000,000 0.10%
Above $50,000,000 0.05%
</TABLE>
____________________
* As a percentage of average daily net assets.
Shareholder Servicing Plan
The Victory Portfolios, on behalf of the Class A and Class B shares of
the Fund, has adopted a Shareholder Servicing Plan to provide payments to
shareholder servicing agents (each a "Shareholder Servicing Agent") that
provide administrative support services to customers who may from time to time
beneficially own shares, which include: (i) aggregating and processing purchase
and redemption requests for shares from customers and promptly transmitting net
purchase and redemption orders to our distributor or transfer agent; (ii)
providing customers with a service that invests the assets of their accounts in
shares pursuant to specific or pre-authorized instructions; (iii) processing
dividend and distribution payments from the Victory Portfolios on behalf of
customers; (iv) providing information periodically to customers showing their
positions in shares; (v) arranging for bank wires; (vi) responding to customer
inquiries concerning their investment in shares; (vii) providing subaccounting
with respect to shares beneficially owned by customers or providing the
information to us necessary for subaccounting; (viii) if required by law,
forwarding shareholder communications from us (such as proxies, shareholder
reports, annual and semi-annual financial statements and dividend, distribution
and tax notices) to customers; (ix) forwarding to customers proxy
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<PAGE> 97
statements and proxies containing any proposals regarding this Plan; and (x)
providing such other similar services as we may reasonably request to the
extent you are permitted to do so under applicable statutes, rules or
regulations. For expenses incurred and services provided as Shareholder
Servicing Agent pursuant to its respective Shareholder Servicing Agreement, the
Fund pays each Shareholder Servicing Agent a fee computed daily and paid
monthly, in amounts aggregating not more than twenty-five one-hundredths of one
percent (.25%) of the average daily net assets of the Fund per year. A
Shareholder Servicing Agent may periodically waive all or a portion of its
respective shareholder servicing fees with respect to the Fund to increase the
net income of the Fund available for distribution as dividends.
Expenses
Each fund bears the following expenses relating to its respective
operations: taxes, interest, brokerage fees and commissions, fees of the
Trustees of the Victory Portfolios, Commission fees, state securities
qualification fees, costs of preparing and printing prospectuses for regulatory
purposes and for distribution to current shareholders, outside auditing and
legal expenses, advisory and administration fees, fees and out-of-pocket
expenses of the custodian and transfer agent, certain insurance premiums, costs
of maintenance of the fund's existence, costs of shareholders' reports and
meetings, and any extraordinary expenses incurred in the fund's operation.
If total expenses borne by any of the Victory Portfolios in any fiscal
year exceeds expense limitations imposed by applicable state securities
regulations, Key Advisers or the Sub-Adviser as applicable, and the
Administrator will waive their fees to the extent such excess expenses exceed
such expense limitation in proportion to their respective fees. As of the date
of this Statement of Additional Information, the most restrictive expense
limitation applicable to the Victory Portfolios limits each fund's aggregate
annual expenses, including management and advisory fees but excluding interest,
taxes, brokerage commissions, and certain other expenses, to 2.5% of the first
$30 million of a fund's average net assets, 2.0% of the next $70 million of a
fund's average net assets, and 1.5% of a Fund's remaining average net assets.
Any expenses to be borne by Key Advisers or the Sub-Adviser or the
Administrator will be estimated daily and reconciled and paid on a monthly
basis. Fees imposed upon customer accounts by Key Advisers, the Sub-Adviser,
Key Trust Company of Ohio, N.A. or its correspondents, affiliated banks and
other non-bank affiliates for cash management services are not fund expenses
for purposes of any such expense limitation.
Fund Accountant
BISYS Fund Services Ohio, Inc. serves as fund accountant for the Fund
pursuant to a fund accounting agreement with the Fund dated June 5, 1995 (the
"Fund Accounting Agreement"). As fund accountant, BISYS Fund Services Ohio,
Inc. calculates the Fund's net asset value, the dividend and capital gain
distributions, if any, and the yield. BISYS Fund Services Ohio, Inc. also
provides a current security position report, a summary report of transactions
and pending maturities, a current cash position report, and maintains the
general ledger accounting records for the Fund. Under the Fund Accounting
Agreement, BISYS Fund Services Ohio, Inc. is entitled to receive annual fees of
.03% of the first $100 million of the Fund's daily average net assets, .02% of
the next $100 million of a Fund's daily average net assets, and .01% of the
Fund's remaining daily average net assets. [These annual fees are subject to a
minimum monthly assets charge of $2,500 per taxable Fund, $2,917 per tax-free
Fund, and $3,333 per international Fund and do not include out-of-pocket
expenses or multiple class charges of $833 per month assessed for each class of
shares after the first class.] In the fiscal years ended October 31, 1993,
October 31, 1994, and October 31, 1995, the Victory Portfolios paid fund
accounting fees (after fee waivers) of $144,288, $152,663 and $______________ ,
respectively, for the Fund.
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<PAGE> 98
Custodian
Cash and securities owned by the Fund are held by Key Trust Company of
Ohio, N.A. as custodian. Key Trust Company of Ohio, N.A. serves as custodian
to the Fund pursuant to a Custodian Agreement dated May 24, 1995. Under this
Agreement, Key Trust Company of Ohio, N.A. (i) maintains a separate account or
accounts in the name of the Fund; (ii) makes receipts and disbursements of
money on behalf of the Fund; (iii) collects and receives all income and other
payments and distributions on account of portfolio securities; (iv) responds to
correspondence from security brokers and others relating to its duties; and (v)
makes periodic reports to the Victory Portfolios' Trustees concerning the
Victory Portfolios' operations. Key Trust Company of Ohio, N.A. may, with the
approval of the Victory Portfolios and the custodian's own expense, open and
maintain a sub-custody account or accounts on behalf of the Fund, provided that
Key Trust Company of Ohio, N.A. shall remain liable for the performance of all
of its duties under its respective Custodian Agreement.
Transfer Agent
The Primary Funds Service Corporation ("PFSC") serves as transfer
agent and dividend disbursing agent for each fund, pursuant to a Transfer
Agency and Shareholder Servicing Agreement. Under its agreement with the
Victory Portfolios, PFSC has agreed (i) to issue and redeem shares of the
Victory Portfolios; (ii) to address and mail all communications by the Victory
Portfolios to its shareholders, including reports to shareholders, dividend and
distribution notices, and proxy material for its meetings of shareholders;
(iii) to respond to correspondence or inquiries by shareholders and others
relating to its duties; (iv) to maintain shareholder accounts and certain
sub-accounts; and (v) to make periodic reports to the Fund's Trustees
concerning the Victory Portfolios' operations. For the services provided under
the Transfer Agency and Shareholder Servicing Agreement, PFSC receives a
maximum monthly fee of $1,250 from the Fund, and to a maximum of $3.50 per
account of the Fund.
Auditors
The financial highlights appearing in the Prospectus for the Fund,
other than unaudited information marked as such, has been derived from
financial statements of the Fund incorporated by reference in this Statement of
Additional Information which, for the two month period ended October 31, 1995
and fiscal year ended August 31, 1995, has been audited by Coopers & Lybrand
L.L.P. as set forth in their report incorporated by reference herein, and are
included in reliance upon such report and on the authority of such firm as
experts in auditing and accounting. Information for the fiscal year ended
August 31, 1994 has been audited by KPMG Peat Marwick L.L.P., independent
accountants for the Predecessor Fund, as set forth in their report incorporated
by reference herein, and are included in reliance upon such report and on the
authority of such firm as experts in auditing and accounting. Information for
all other periods has been audited by Ernst & Young, L.L.P., independent
accountants to the predecessor to the Predecessor Fund. Coopers & Lybrand
L.L.P. serves as the Victory Portfolios' auditors. Coopers & Lybrand L.L.P.'s
address is 100 East Broad Street, Columbus, Ohio 43215.
Legal Counsel
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, 919 Third Avenue,
New York, New York 10022 are Fund counsel.
ADDITIONAL INFORMATION
Description of Shares
The Victory Portfolios (sometimes referred to as the "Trust") is a
Delaware business trust. Its Delaware Trust Instrument was adopted on December
6, 1995 and a certificate of Trust for the Trust was filed in Delaware on
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<PAGE> 99
December __, 1995. On February 29, 1996, the Victory Portfolios converted from
a Massachusetts business trust to a Delaware business trust.
The previously effective Massachusetts Declaration of Trust, pursuant
to which the Victory Portfolios was originally called the North Third Street
Fund, was filed with the Secretary of State of the Commonwealth of
Massachusetts on February 6, 1986. On September 22, 1986, an Amended and
Restated Declaration of Trust was filed to change the name of the Trust to The
Emblem Fund and to make certain other changes. A second amendment was filed
October 23, 1986 providing for voting of shares in the aggregate except where
voting of shares by series is otherwise required by law. An amendment to the
Amended and Restated Declaration of Trust was filed on March 15, 1993 to change
the name of the Trust to The Society Funds. An Amended and Restated
Declaration of Trust was then filed on September 2, 1994 to change the name of
the Trust to The Victory Portfolios.
The currently effective Delaware Trust Instrument authorizes the
Trustees to issue an unlimited number of shares, which are units of beneficial
interest, without par value. The Victory Portfolios presently has twenty-eight
series of shares, which represent interests in the U.S. Government Obligations
Fund, the Prime Obligations Fund, the Tax-Free Money Market Fund, the Balanced
Fund, the Stock Index Fund, the Value Fund, the Fund, the Growth Fund, the
Special Value Fund, the Special Growth Fund, the Ohio Regional Stock Fund, the
International Growth Fund, the Limited Term Income Fund, the Government
Mortgage Fund, the Ohio Municipal Bond Fund, the Intermediate Income Fund, the
Investment Quality Bond Fund, the Florida Tax-Free Bond Fund, the Municipal
Bond Fund, the Convertible Securities Fund, the Short-Term U.S. Government
Income Fund, the Government Bond Fund, the Fund for Income, the National
Municipal Bond Fund, the New York Tax-Free Fund, the Institutional Money Market
Fund, the Financial Reserves Fund and the Ohio Municipal Money Market Fund,
respectively. The Victory Portfolios' Delaware Trust Instrument authorizes the
Trustees to divide or redivide any unissued shares of the Victory Portfolios
into one or more additional series by setting or changing in any one or more
respects their respective preferences, conversion or other rights, voting
power, restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption.
Shares have no subscription or preemptive rights and only such
conversion or exchange rights as the Trustees may grant in their discretion.
When issued for payment as described in the Prospectus and this Statement of
Additional Information, the Victory Portfolios' shares will be fully paid and
non-assessable. In the event of a liquidation or dissolution of the Victory
Portfolios, shares of the Fund are entitled to receive the assets available for
distribution belonging to the Fund, and a proportionate distribution, based
upon the relative asset values of the respective funds of the Victory
Portfolios, of any general assets not belonging to any particular fund which
are available for distribution.
As described in the Prospectus under the caption "ADDITIONAL
INFORMATION -- Voting Rights," shares of the Victory Portfolios are entitled to
one vote per share (with proportional voting for fractional shares) on such
matters as shareholders are entitled to vote. On any matter submitted to a
vote of the shareholders, all shares are voted separately by individual series
(funds), and whenever the Trustees determine that the matter affects only
certain series, may be submitted for a vote by only such series, except (i)
when required by the 1940 Act, shares are voted in the aggregate and not by
individual series; and (ii) when the Trustees have determined that the matter
affects the interests of more than one series and that voting by shareholders
of all series would be consistent with the 1940 Act, then the shareholders of
all such series shall be entitled to vote thereon (either by individual series
or by shares voted in the aggregate, as the Trustees in their discretion may
determine). The Trustees may also determine that a matter affects only the
interests of one or more classes of a series, in which case (or if required
under the 1940 Act) such matter shall be voted on by such class or classes.
There will normally be no meetings of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority of the Trustees
have been elected by the shareholders, at which time the Trustees then in
office will call a shareholders' meeting for the election of Trustees. In
addition, Trustees may be removed from office by a vote of the holders of at
least two-thirds of the outstanding shares of the Victory Portfolios. A
meeting shall be held for such purpose upon the written request of the holders
of not less than 10% of the outstanding shares. Upon written request by ten or
more shareholders meeting the
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<PAGE> 100
qualifications of Section 16(c) of the 1940 Act, (i.e., person who have been
shareholders for at least six months, and who hold shares having an NAV of at
least $25,000 or constituting 1% of the outstanding shares) stating that such
shareholders wish to communicate with the other shareholders for the purpose of
obtaining the signatures necessary to demand a meeting to consider removal of a
Trustee, the Victory Portfolios will provide a list of shareholders or
disseminate appropriate materials (at the expense of the requesting
shareholders). Except as set forth above, the Trustees shall continue to hold
office and may appoint their successors.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Victory Portfolios shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each fund of the Victory Portfolios affected by the
matter. For purposes of determining whether the approval of a majority of the
outstanding shares of a fund will be required in connection with a matter, a
fund will be deemed to be affected by a matter unless it is clear that the
interests of each fund in the matter are identical, or that the matter does not
affect any interest of the fund. Under Rule 18f-2, the approval of an
investment advisory agreement or any change in investment policy would be
effectively acted upon with respect to a fund only if approved by a majority of
the outstanding shares of such fund. However, Rule 18f-2 also provides that
the ratification of independent public accountants, the approval of principal
underwriting contracts, and the election of Trustees may be effectively acted
upon by shareholders of all of the Victory Portfolios voting without regard to
series.
Shareholder and Trustee Liability
The Delaware Business Trust Act provides that a shareholder of a
Delaware business trust shall be entitled to the same limitation of personal
liability extended to shareholders of Delaware corporations. The Delaware
Trust Instrument also provides for indemnification out of the trust property of
any shareholder held personally liable solely by reason of his or her being or
having been a shareholder. The Delaware Trust Instrument also provides that
the Victory Portfolios shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Victory
Portfolios, and shall satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
considered to be extremely remote.
The Delaware Trust Instrument states further that no Trustee, officer,
or agent of the Victory Portfolios shall be personally liable in connection
with the administration or preservation of the assets of the Funds or the
conduct of the Victory Portfolios' business; nor shall any Trustee, officer, or
agent be personally liable to any person for any action or failure to act
except for his own bad faith, willful misfeasance, gross negligence, or
reckless disregard of his duties. The Declaration of Trust also provides that
all persons having any claim against the Trustees or the Victory Portfolios
shall look solely to the assets of the Victory Portfolios for payment.
Miscellaneous
As used in the Prospectus and in this Statement of Additional
Information, "assets belonging to a fund" (or "assets belonging to the Fund")
means the consideration received by the Victory Portfolios upon the issuance or
sale of shares in that fund, together with all income, earnings, profits, and
proceeds derived from the investment thereof, including any proceeds from the
sale, exchange, or liquidation of such investments, and any funds or payments
derived from any reinvestment of such proceeds and any general assets of the
Victory Portfolios, which general liabilities and expenses are not readily
identified as belonging to a particular fund (or the Fund) that are allocated
to that fund (or the Fund) by the Victory Portfolios' Trustees. The Trustees
may allocate such general assets in any manner they deem fair and equitable.
It is anticipated that the formula that will be used by the Trustees in making
allocations of general assets to a particular fund of the Victory Portfolios
will be the relative net asset value of the respective fund at the time of
allocation. Assets belonging to a particular fund are charged with the direct
liabilities and expenses of that fund, and with a share of the general
liabilities and expenses of each of the funds not readily identified as
belonging to a particular fund that are allocated to each fund in accordance
with its proportionate share of the net asset values of the Victory Portfolios
at the time of allocation. The timing of allocations of general assets
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<PAGE> 101
and general liabilities and expenses of the Victory Portfolios to a particular
fund will be determined by the Trustees of the Victory Portfolios and will be
in accordance with generally accepted accounting principles. Determinations by
the Trustees of the Victory Portfolios as to the timing of the allocation of
general liabilities and expenses and as to the timing and allocable portion of
any general assets with respect to a particular fund are conclusive.
As used in the Prospectus and in this Statement of Additional
Information, a "vote of a majority of the outstanding shares" or a "vote of
majority of the outstanding voting securities" of the Victory Portfolios or a
particular fund means the affirmative vote of the lesser of (a) 67% or more of
the shares of the Victory Portfolios or such fund present at a meeting at which
the holders of more than 50% of the outstanding shares of the Victory
Portfolios or such fund are represented in person or by proxy, or (b) more than
50% of the outstanding shares of the Victory Portfolios or such fund.
Organizational expenses are allocated to each of the Victory
Portfolios and are amortized over a period of two years from the commencement
of the public offering of shares of the Victory Portfolios.
The Victory Portfolios is registered with the Commission as an
open-end management investment company. Such registration does not involve
supervision by the Commission of the management or policies of the Victory
Portfolios.
The Prospectus and this Statement of Additional Information omit
certain of the information contained in the Registration Statement filed with
the Commission. Copies of such information may be obtained from the Commission
upon payment of the prescribed fee.
The Prospectus and this Statement of Additional Information are not an
offering of the securities herein described in any state in which such offering
may not lawfully be made. No salesman, dealer, or other person is authorized
to give any information or make any representation other than those contained
in the Prospectus and this Statement of Additional Information.
The 1995 Annual Report to shareholders of The Victory Portfolios is
incorporated by reference herein. This report includes the financial
statements for the fiscal year ended October 31, 1995. The opinion in the
Annual Report of Coopers & Lybrand L.L.P., independent accountants, is
incorporated by reference herein in its entirety to such Annual Report, and
such financial statements are incorporated in their entirety in reliance upon
such report of Coopers & Lybrand L.L.P. and on the authority of such firm as
experts in auditing and accounting.
Delaware law authorizes electronic or telephonic communications
between shareholders and the Victory Portfolios. Under Delaware law, the
Successor Company has the flexibility to respond to future business
contingencies. For example, the Trustees will have the power to incorporate
the Victory Portfolios, to merge or consolidate it with another entity, to
cause each fund to become a separate trust, and to change the Victory
Portfolios' domicile without a shareholder vote. This flexibility could help
reduce the expense and frequency of future shareholder meetings for
non-investment related issues.
INDEPENDENT AUDITOR'S REPORT
FINANCIAL STATEMENTS
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APPENDIX
The nationally recognized statistical rating organizations
(individually, an "NRSRO") that may be utilized by Key Advisers or the
Sub-Adviser with regard to portfolio investments for the Funds include Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"),
Duff & Phelps, Inc. ("Duff"), Fitch Investors Service, Inc. ("Fitch"), IBCA
Limited and its affiliate, IBCA Inc. (collectively, "IBCA"), and Thomson
BankWatch, Inc. ("Thomson"). Set forth below is a description of the relevant
ratings of each such NRSRO. The NRSROs that may be utilized by Key Advisers or
the Sub-Adviser and the description of each NRSRO's ratings is as of the date
of this Statement of Additional Information, and may subsequently change.
Long-Term Debt Ratings (may be assigned, for example, to corporate and
municipal bonds)
Description of the five highest long-term debt ratings by Moody's
(Moody's applies numerical modifiers ( e.g., 1, 2, and 3)
in each rating category to indicate the security's ranking within the
category):
Aaa. Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.
A. Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in the
future.
Baa. Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba. Bonds which are rated Ba are judged to have speculative elements
- - their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times in the future. Uncertainty of
position characterizes bonds in this class.
Description of the five highest long-term debt ratings by S&P (S&P may
apply a plus (+) or minus (-) to a particular rating classification to show
relative standing within that classification):
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
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BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB. Debt rated BB is regarded, on balance, as predominately
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. While such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposure to adverse conditions.
Description of the three highest long-term debt ratings by Duff:
AAA. Highest credit quality. The risk factors are negligible being
only slightly more than for risk-free U.S. Treasury debt.
AA+. High credit quality Protection factors are strong.
AA. Risk is modest but may vary slightly from time to time
AA-. because of economic conditions.
A+. Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
Description of the three highest long-term debt ratings by Fitch (plus
or minus signs are used with a rating symbol to indicate the relative position
of the credit within the rating category):
AAA. Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA. Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA."
Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of these issues is generally rated "[-]+."
A. Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher
ratings.
IBCA's description of its three highest long-term debt ratings:
AAA. Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic or
financial conditions are unlikely to increase investment risk
significantly.
AA. Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic, or
financial conditions may increase investment risk albeit not very
significantly.
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<PAGE> 104
A. Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial
conditions may lead to increased investment risk.
Short-Term Debt Ratings (may be assigned, for example, to commercial
paper, master demand notes, bank instruments, and letters of credit)
Moody's description of its three highest short-term debt ratings:
Prime-1. Issuers rated Prime-1 (or supporting institutions) have a
superior capacity for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a
strong capacity for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
S&P's description of its three highest short-term debt ratings:
A-1. This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to have extremely
strong safety characteristics are denoted with a plus sign (+).
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high
as for issues designated "A-1."
A-3. Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the
higher designations.
Duff's description of its five highest short-term debt ratings (Duff
incorporates gradations of "1+" (one plus) and "1-" (one minus) to assist
investors in recognizing quality differences within the highest rating
category):
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<PAGE> 105
Duff 1+. Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
Duff 1. Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
Duff 1-. High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors. Risk
factors are very small.
Duff 2. Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
Duff 3. Satisfactory liquidity and other protection factors qualify
issue as to investment grade.
Risk factors are larger and subject to more variation. Nevertheless,
timely payment is expected.
Fitch's description of its four highest short-term debt ratings:
F-1+. Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of assurance for
timely payment.
F-1. Very Strong Credit Quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than
issues rated F-1+.
F-2. Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as for issues assigned F-1+ or F-1 ratings.
F-3. Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate, however, near-term adverse changes could cause
these securities to be rated below investment grade.
IBCA's description of its three highest short-term debt ratings:
A+. Obligations supported by the highest capacity for timely
repayment.
A1. Obligations supported by a very strong capacity for timely
repayment.
A2. Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
Short-Term Loan/Municipal Note Ratings
Moody's description of its two highest short-term loan/municipal note
ratings:
MIG-1/VMIG-1. This designation denotes best quality. There is
present strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
MIG-2/VMIG-2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
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<PAGE> 106
S&P's description of its two highest municipal note ratings:
SP-1. Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
SP-2. Satisfactory capacity to pay principal and interest.
Short-Term Debt Ratings
Thomson BankWatch, Inc. ("TBW") ratings are based upon a qualitative
and quantitative analysis of all segments of the organization including, where
applicable, holding company and operating subsidiaries.
TBW Ratings do not constitute a recommendation to buy or sell
securities of any of these companies. Further, BankWatch does not suggest
specific investment criteria for individual clients.
The TBW Short-Term Ratings apply to commercial paper, other senior
short-term obligations and deposit obligations of the entities to which the
rating has been assigned.
The TBW Short-Term Ratings apply only to unsecured instruments that
have a maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an
untimely payment of principal or interest.
TBW-1. The highest category; indicates a very high degree of
likelihood that principal and interest will be paid on a timely basis.
TBW-2. The second highest category; while the degree of safety
regarding timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1".
TBW-3. The lowest investment grade category; indicates that while
more susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and interest in
a timely fashion is considered adequate.
TBW-4. The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
Definitions of Certain Money Market Instruments
Commercial Paper
Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.
Certificates of Deposit
Certificates of Deposit are negotiable certificates issued against
funds deposited in a commercial bank or a savings and loan association for a
definite period of time and earning a specified return.
Bankers' Acceptances
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<PAGE> 107
Bankers' acceptances are negotiable drafts or bills of exchange,
normally drawn by an importer or exporter to pay for specific merchandise,
which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
U.S. Treasury Obligations
U.S. Treasury Obligations are obligations issued or guaranteed as to
payment of principal and interest by the full faith and credit of the U.S.
Government. These obligations may include Treasury bills, notes and bonds, and
issues of agencies and instrumentalities of the U.S. Government, provided such
obligations are guaranteed as to payment of principal and interest by the full
faith and credit of the U.S. Government.
U.S. Government Agency and Instrumentality Obligations
Obligations issued by agencies and instrumentalities of the U.S.
Government include such agencies and instrumentalities as the Government
National Mortgage Association, the Export-Import Bank of the United States, the
Tennessee Valley Authority, the Farmers Home Administration, the Federal Home
Loan Banks, the Federal Intermediate Credit Banks, the Federal Farm Credit
Banks, the Federal Land Banks, the Federal Housing Administration, the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation, and
the Student Loan Marketing Association. Some of these obligations, such as
those of the Government National Mortgage Association are supported by the full
faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others, such as
those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not obligated to do so by law. A Fund will invest
in the obligations of such instrumentalities only when the investment adviser
believes that the credit risk with respect to the instrumentality is minimal.
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STATEMENT OF ADDITIONAL INFORMATION
THE VICTORY PORTFOLIOS
THE GOVERNMENT MORTGAGE FUND
March 1, 1996
This Statement of Additional Information is not a Prospectus, but
should be read in conjunction with the Prospectus of The Victory Portfolios -
The Government Mortgage Fund, dated the same date as the date hereof (the
"Prospectus"). This Statement of Additional Information is incorporated by
reference in its entirety into the Prospectus. Copies of the Prospectus may be
obtained by writing The Victory Portfolios at Primary Funds Service Corporation,
P.O. Box 9741, Providence, RI 02940-9741, or by telephoning toll free
800-539-FUND or 800-539-3863.
<TABLE>
<S> <C> <C>
Investment Policies and Limitations 1 INVESTMENT ADVISER
Valuation of Portfolio Securities 8 KeyCorp Mutual Fund Advisers, Inc.
Additional Purchase Exchange and
Redemption Information 12
Management of the Victory Portfolios 16 INVESTMENT SUB-ADVISER
Advisory and Other Contracts 23 Society Asset Management, Inc.
Additional Information 30
Independent Auditor's Report 34 ADMINISTRATOR
Financial Statements 34 Concord Holding Corporation
Appendix 35
DISTRIBUTOR
Victory Broker-Dealer Services, Inc.
TRANSFER AGENT
Primary Funds Service Corporation
CUSTODIAN
Key Trust Company of Ohio, N.A.
</TABLE>
<PAGE> 109
STATEMENT OF ADDITIONAL INFORMATION
The Victory Portfolios (the "Victory Portfolios") is an open-end
management investment company. The Victory Portfolios consist of twenty-eight
series of units of beneficial interest ("shares"), four of which series are
currently inactive. The outstanding shares represent interests in twenty-four
separate investment portfolios which are currently active. This Statement of
Additional Information relates to The Government Mortgage Fund (the "Fund")
only. Much of the information contained in this Statement of Additional
Information expands on subjects discussed in the Prospectus. Capitalized terms
not defined herein are used as defined in the Prospectus. No investment in
shares of the Fund should be made without first reading the Fund's Prospectus.
INVESTMENT POLICIES AND LIMITATIONS
Additional Information Regarding Fund Instruments
The following policies supplement the investment objectives and
policies of the Fund as set forth in the Prospectus.
Bankers' Acceptances and Certificates of Deposit. The Fund may invest
in bankers' acceptances, certificates of deposit, and demand and time deposits.
Bankers' acceptances are negotiable drafts or bills of exchange typically drawn
by an importer or exporter to pay for specific merchandise, which are "accepted"
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity. Certificates of deposit are
negotiable certificates issued against funds deposited in a commercial bank or a
savings and loan association for a definite period of time and earning a
specified return.
Bankers' acceptances will be those guaranteed by domestic and foreign
banks, if at the time of purchase such banks have capital, surplus, and
undivided profits in excess of $100,000,000 (as of the date of their most
recently published financial statements). Certificates of deposit and demand
and time deposits invested in by the Fund will be those of domestic and foreign
banks and savings and loan associations, if (a) at the time of purchase such
financial institutions have capital, surplus, and undivided profits in excess of
$100,000,000 (as of the date of their most recently published financial
statements) or (b) the principal amount of the instrument is insured in full by
the Federal Deposit Insurance Corporation or the Savings Association Insurance
Fund.
The Fund may also invest in Eurodollar Certificates of Deposit ("ECDs")
which are U.S. dollar-denominated certificates of deposit issued by branches of
foreign and domestic banks located outside the United States, Yankee
Certificates of Deposit ("Yankee CDs") which are certificates of deposit issued
by a U.S. branch of a foreign bank denominated in U.S. dollars and held in the
United States, Eurodollar Time Deposits ("ETDs") which are U.S.
dollar-denominated deposits in a foreign branch of a U.S. bank or a foreign
bank, and Canadian Time Deposits ("CTDs") which are U.S. dollar-denominated
certificates of deposit issued by Canadian offices of major Canadian Banks.
Variable Amount Master Demand Notes. Variable amount master demand
notes in which the Fund may invest are unsecured demand notes that permit the
indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate according to the terms of the instrument. Although there is no
secondary market for these notes, the Fund may demand payment of principal and
accrued interest at any time and may resell the notes at any time to a third
party. The absence of an active secondary market, however, could make it
difficult for the Fund to dispose of a variable amount master demand note if the
issuer defaulted on its payment obligations, and the Fund could, for this or
other reasons, suffer a loss to the extent of the default. While the notes are
not typically rated by credit rating agencies, issuers of variable amount master
demand notes must satisfy the same criteria as set forth above for unrated
commercial paper, and Key Advisers or the Sub-Adviser will continuously monitor
the issuer's financial status and ability to make payments due under the
instrument. Where necessary to ensure that
<PAGE> 110
a note is of "high quality," the Fund will require that the issuer's obligation
to pay the principal of the note be backed by an unconditional bank letter or
line of credit, guarantee or commitment to lend. For purposes of the Fund's
investment policies, a variable amount master note will be deemed to have a
maturity equal to the longer of the period of time remaining until the next
readjustment of its interest rate or the period of time remaining until the
principal amount can be recovered from the issuer through demand. (See Variable
and Floating Rate Notes, below.)
Variable and Floating Rate Notes. The Fund may acquire variable and
floating rate notes, subject to its investment objectives, policies and
restrictions. A variable rate note is one whose terms provide for the
readjustment of its interest rate on set dates and which, upon such
readjustment, can reasonably be expected to have a market value that
approximates its par value. A floating rate note is one whose terms provide for
the readjustment of its interest rate whenever a specified interest rate changes
and which, at any time, can reasonably be expected to have a market value that
approximates its par value. Such notes are frequently not rated by credit
rating agencies; however, unrated variable and floating rate notes purchased by
the Fund will only be those determined by Key Advisers or the Sub-Adviser, under
guidelines established by the Trustees, to pose minimal credit risks and to be
of comparable quality, at the time of purchase, to rated instruments eligible
for purchase under the Fund's investment policies. In making such
determinations, Key Advisers or the Sub-Adviser will consider the earning
power, cash flow and other liquidity ratios of the issuers of such notes (such
issuers include financial, merchandising, bank holding and other companies) and
will continuously monitor their financial condition. Although there may be no
active secondary market with respect to a particular variable or floating rate
note purchased by the Fund, the Fund may resell the note at any time to a third
party. The absence of an active secondary market, however, could make it
difficult for the Fund to dispose of a variable or floating rate note in the
event the issuer of the note defaulted on its payment obligations and the Fund
could, for this or other reasons, suffer a loss to the extent of the default.
Variable or floating rate notes may be secured by bank letters of credit.
Variable or floating rate notes may have maturities of more than one
year, as follows:
1. A note that is issued or guaranteed by the United States
government or any agency thereof and which has a variable rate of interest
readjusted no less frequently than annually will be deemed by the Fund to have a
maturity equal to the period remaining until the next readjustment of the
interest rate.
2. A variable rate note, the principal amount of which is
scheduled on the face of the instrument to be paid in one year or less, will be
deemed by the Fund to have a maturity equal to the period remaining until the
next readjustment of the interest rate.
3. A variable rate note that is subject to a demand feature
scheduled to be paid in one year or more will be deemed by the Fund to have a
maturity equal to the longer of the period remaining until the next readjustment
of the interest rate or the period remaining until the principal amount can be
recovered through demand.
4. A floating rate note that is subject to a demand feature will
be deemed by the Fund to have a maturity equal to the period remaining until the
principal amount can be recovered through demand.
As used above, a note is "subject to a demand feature" where the Fund
is entitled to receive the principal amount of the note either at any time on no
more than 30 days' notice or at specified intervals not exceeding one year and
upon no more than 30 days' notice.
"When-Issued" Securities. As discussed in the Prospectus, the Fund may
purchase securities on a "when issued" basis (i.e., for delivery beyond the
normal settlement date at a stated price and yield). When the Fund agrees to
purchase securities on a "when issued" basis, the Victory Portfolios' custodian
will set aside cash or liquid portfolio securities equal to the amount of the
commitment in a separate account. Normally, the custodian will set
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<PAGE> 111
aside portfolio securities to satisfy the purchase commitment, and in such a
case, the Fund may be required subsequently to place additional assets in the
separate account in order to assure that the value of the account remains equal
to the amount of the Fund's commitment. It may be expected that the Fund's net
assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
When the Fund engages in "when-issued" transactions, it relies on the
seller to consummate the trade. Failure of the seller to do so may result in
the Fund incurring a loss or missing the opportunity to obtain a price
considered to be advantageous. The Fund does not intend to purchase "when
issued" securities for speculative purposes, but only in furtherance of its
investment objective.
U.S. Government Obligations. The Fund may invest in obligations issued
or guaranteed by the U.S. Government, its agencies and instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. Government are
supported by the full faith and credit of the U.S. Treasury; others are
supported by the right of the issuer to borrow from the U.S. Treasury; others
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; and still others are supported only by the credit of
the agency or instrumentality. No assurance can be given that the U.S.
Government will provide financial support to U.S. Government-sponsored agencies
or instrumentalities if it is not obligated to do so by law. The Fund will
invest in the obligations of such agencies and instrumentalities only when Key
Advisers or the Sub-Adviser believes that the credit risk with respect thereto
is minimal.
Securities Lending. The Fund may lend its portfolio securities to
broker-dealers, banks or institutional borrowers of securities. The Fund must
receive a minimum of 100% collateral, plus any interest due in the form of cash
or U.S. Government securities. This collateral must be valued daily and should
the market value of the loaned securities increase, the borrower must furnish
additional collateral to the Fund. During the time portfolio securities are on
loan, the borrower will pay the Fund any dividends or interest paid on such
securities plus any interest negotiated between the parties to the lending
agreement. Loans will be subject to termination by the Fund or the borrower at
any time. While the Fund will not have the right to vote securities on loan, it
intends to terminate the loan and regain the right to vote if that is
considered important with respect to the investment. The Fund will only enter
into loan arrangements with broker-dealers, banks or other institutions which
Key Advisers or the Sub-Adviser has determined are creditworthy under
guidelines established by the Victory Portfolios' Trustees. The Fund intends to
limit its securities lending to 33 1/3% of total assets.
Other Investment Companies. The Fund may invest up to 5% of its total
assets in the securities of any one investment company, but may not own more
than 3% of the securities of any one investment company or invest more than 10%
of its total assets in the securities of other investment companies. Pursuant
to an exemptive order received by the Victory Portfolios from the Commission,
the Fund may invest in money market funds of the Victory Portfolios. Key
Advisers and/or the Sub-Adviser will waive its investment advisory fee as to all
assets invested in other investment companies. Because such other investment
companies employ an investment adviser, such investment by the Fund will cause
shareholders to bear duplicative fees, such as management fees.
Repurchase Agreements. Securities held by the Fund may be subject to
repurchase agreements. Under the terms of a repurchase agreement, the Fund
would acquire securities from financial institutions or registered
broker-dealers deemed creditworthy by Key Advisers or the Sub-Adviser pursuant
to guidelines adopted by the Victory Portfolios' Trustees, subject to the
seller's agreement to repurchase such securities at a mutually agreed upon date
and price. The seller is required to maintain the value of collateral held
pursuant to the agreement at not less than the repurchase price (including
accrued interest). If the seller were to default on its repurchase obligation
or become insolvent, the Fund would suffer a loss to the extent that the
proceeds from a sale of the underlying portfolio securities were less than the
repurchase price, or to the extent that the disposition of such securities by
the Fund is delayed pending court action. Repurchase agreements are considered
by the staff of the Commission to be loans by the Fund.
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<PAGE> 112
Reverse Repurchase Agreements. The Fund may borrow funds for temporary
purposes by entering into reverse repurchase agreements in accordance with the
investment restrictions described below. Pursuant to such agreements, the Fund
would sell portfolio securities to financial institutions such as banks and
broker-dealers, and agree to repurchase them at a mutually agreed-upon date and
price. At the time the Fund enters into a reverse repurchase agreement, it will
place in a segregated custodial account assets (such as cash or other liquid
high-grade securities) consistent with the Fund's investment restrictions having
a value equal to the repurchase price (including the accrued interest); the
collateral will be marked-to-market on a daily basis, and will be continuously
monitored to ensure that such equivalent value is maintained. Reverse
repurchase agreements involve the risk that the market value of the securities
sold by the Fund may decline below the price at which the Fund is obligated to
repurchase the securities. Reverse repurchase agreements are considered to be
borrowings under the Investment Company Act of 1940, as amended (the "1940
Act").
[/R]
The Fund also may invest, consistent with their investment objective
and policies, in zero coupon bonds, which are debt instruments that do not pay
current interest and are typically sold at prices greatly discounted from par
value. The return on a zero-coupon obligation, when held to maturity, equals
the difference between the par value and the original purchase price.
Zero-coupon obligations have greater price volatility than coupon obligations.
[/R]
[ADD TO FINANCIAL RESERVES FUND AND INSTITUTIONAL MONEY MARKET FUND:] Short-Term
Funding Agreements. The Fund may invest in short-term funding agreements
(sometimes referred to as "GICs") issued by insurance companies. Pursuant to
such agreements, the Fund makes cash contributions to a deposit fund of the
insurance company's general account. The insurance company then credits the
Fund, on a monthly basis, guaranteed interest which is based on an index. The
short-term funding agreements provide that this guaranteed interest will not be
less than a certain minimum rate. Because the principal amount of a short-term
funding agreement may not be received from the insurance company on seven days
notice or less, the agreement is considered to be an illiquid investment and,
together with other instruments in the Fund which are not readily marketable,
will not exceed 10% of the Fund's total assets. In determining dollar-weighted
average portfolio maturity, a short-term funding agreement will be deemed to
have a maturity equal to the period of time remaining until the next
readjustment of the guaranteed interest rate.
Temporary Investments. The Fund may also invest temporarily in high
quality investments or cash during times of unusual market conditions for
defensive purposes and in order to accommodate shareholder redemption requests
although currently it does not intend to do so. Any portion of the Fund's
assets maintained in cash will reduce the amount of assets in securities and
thereby reduce the Fund's yield or total return.
Government "Mortgage-backed" Securities. The Fund may invest in
obligations of certain agencies and instrumentalities of the U.S. Government.
Some such obligations, such as those issued by GNMA or the Export-Import Bank of
the United States, are supported by the full faith and credit of the U.S.
Treasury; others, such as those of FNMA, are supported by the right of the
issuer to borrow from the Treasury; others are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; still
others, such as those of the Federal Farm Credit Banks or FHLMC, are supported
only by the credit of the instrumentality. No assurance can be given that the
U.S. Government would provide financial support to U.S. Government-sponsored
agencies and instrumentalities if it is not obligated to do so by law.
The principal governmental (i.e., backed by the full faith and credit
of the U.S. Government) guarantor of mortgage-related securities is GNMA. GNMA
is a wholly owned U.S. Government corporation within the Department of Housing
and Urban Development. GNMA is authorized to guarantee, with the full faith and
credit of the U.S. Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and pools of FHA-insured or
VA-guaranteed mortgages. Government-related (i.e., not backed by the full faith
and credit of the U.S. Government) guarantors include FNMA and FHLMC. FNMA and
FHLMC are government-sponsored corporations owned entirely by private
stockholders. Pass-through securities issued by FNMA and FHLMC are
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guaranteed as to timely payment of principal and interest by FNMA and FHLMC,
respectively, but are not backed by the full faith and credit of the U.S.
Government.
MORTGAGE-RELATED SECURITIES -- IN GENERAL
Mortgage-related securities are backed by mortgage obligations
including, among others, conventional 30-year fixed rate mortgage obligations,
graduated payment mortgage obligations, 15-year mortgage obligations, and
adjustable rate mortgage obligations. All of these mortgage obligations can be
used to create pass-through securities. A pass-through security is created when
mortgage obligations are pooled together and undivided interests in the pool or
pools are sold. The cash flow from the mortgage obligations is passed through
to the holders of the securities in the form of periodic payments of interest,
principal and prepayments (net of a service fee). Prepayments occur when the
holder of an individual mortgage obligation prepays the remaining principal
before the mortgage obligation's scheduled maturity date. As a result of the
pass-through of prepayments of principal on the underlying securities,
mortgage-backed securities are often subject to more rapid prepayment of
principal than their stated maturity would indicate. Because the prepayment
characteristics of the underlying mortgage obligations vary, it is not possible
to predict accurately the realized yield or average life of a particular issue
of pass-through certificates. Prepayment rates are important because of their
effect on the yield and price of the securities. Accelerated prepayments have
an adverse impact on yields for pass-throughs purchased at a premium (i.e., a
price in excess of principal amount) and may involve additional risk of loss of
principal because the premium may not have been fully amortized at the time the
obligation is repaid. The opposite is true for pass-throughs purchased at a
discount. The Victory Portfolios may purchase mortgage-related securities at a
premium or at a discount. Among the U.S. Government securities in which the
Victory Portfolios may invest are government "mortgage-backed" (or government
guaranteed mortgage related securities). Such guarantees do not extend to the
value of yield of the mortgage-backed securities themselves or of the Fund's
shares.
GNMA Certificates. Certificates of the Government National Mortgage
Association ("GNMA") are mortgage-backed securities which evidence an undivided
interest in a pool or pools of mortgages. GNMA Certificates that the Fund may
purchase are the "modified pass-through" type, which entitle the holder to
receive timely payment of all interest and principal payments due on the
mortgage pool, net of fees paid to the "issuer" and GNMA, regardless of whether
or not the mortgagor actually makes the payment.
The National Housing Act authorizes GNMA to guarantee the timely
payment of principal and interest on securities backed by a pool of mortgages
insured by the Federal Housing Administration ("FHA") or guaranteed by the
Veterans Administration ("VA"). The GNMA guarantee is backed by the full faith
and credit of the U.S. Government. GNMA is also empowered to borrow without
limitation from the U.S. Treasury if necessary to make any payments required
under its guarantee.
The estimated average life of a GNMA Certificate is likely to be
substantially shorter than the original maturity of the mortgages underlying the
securities. Prepayments of principal by mortgagors and mortgage foreclosures
will usually result in the return of the greater part of principal investment
long before the maturity of the mortgages in the pool. Foreclosures impose no
risk to principal investment because of the GNMA guarantee, except to the extent
that the Fund has purchased the certificates above par in the secondary market.
FHLMC Securities. The Federal Home Loan Mortgage Corporation ("FHLMC")
was created in 1970 to promote development of a nationwide secondary market in
conventional residential mortgages. The FHLMC issues two types of mortgage
pass-through securities ("FHLMC Certificates"), mortgage participation
certificates ("PCs") and collateralized mortgage obligations ("CMOs"). PCs
resemble GNMA Certificates in that each PC represents a pro rata share of all
interest and principal payments made and owed on the underlying pool. The FHLMC
guarantees timely monthly payment of interest on PCs and the ultimate payment of
principal. Recently introduced FHLMC Gold PCs guarantee the timely payment of
both principal and interest.
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<PAGE> 114
CMOs are securities backed by a pool of mortgages in which the
principal and interest cash flows of the pool are channeled on a prioritized
basis into two or more classes, or tranches, of bonds. FHLMC CMOs are backed by
pools of agency mortgage-backed securities and the timely payment of principal
and interest of each tranche is guaranteed by the FHLMC. The FHLMC guarantee is
not backed by the full faith and credit of the U.S. Government.
FNMA Securities. The Federal National Mortgage Association ("FNMA")
was established in 1938 to create a secondary market in mortgages insured by the
FHA, but has expanded its activity to the secondary market for conventional
residential mortgages. FNMA primarily issues two types of mortgage-backed
securities, guaranteed mortgage pass-through certificates ("FNMA Certificates")
and CMOs. FNMA Certificates resemble GNMA Certificates in that each FNMA
Certificate represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. FNMA guarantees timely payment of
interest and principal on FNMA Certificates and CMOs. The FNMA guarantee is not
backed by the full faith and credit of the U.S. Government.
Investment Restrictions
The following investment restrictions are fundamental with respect to
the Fund and may be changed only by a vote of a majority of the outstanding
shares of the Fund as defined in "ADDITIONAL INFORMATION -- Miscellaneous" of
this Statement of Additional Information).
THE FUND MAY NOT:
1. Participate on a joint or joint and several basis in any
securities trading account.
2. Purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments (but this shall not prevent the
Fund from purchasing or selling options and futures contracts or from investing
in securities or other instruments backed by physical commodities).
3. Purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
Fund from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business). Investments by
the Fund in securities backed by mortgages on real estate or in marketable
securities of companies engaged in such activities are not hereby precluded.
4. Issue any senior security (as defined in the 1940 Act), except
that (a) the Fund may engage in transactions that may result in the issuance of
senior securities to the extent permitted under applicable regulations and
interpretations of the 1940 Act or an exemptive order; (b) the Fund may acquire
other securities, the acquisition of which may result in the issuance of a
senior security, to the extent permitted under applicable regulations or
interpretations of the 1940 Act; (c) subject to the restrictions set forth
below, the Fund may borrow money as authorized by the 1940 Act.
5. Borrow money, except that (a) the Fund may enter into commitments
to purchase securities in accordance with its investment program, including
delayed-delivery and when-issued securities and reverse repurchase agreements,
provided that the total amount of any such borrowing does not exceed 33 1/3% of
the Fund's total assets; and (b) the Fund may borrow money for temporary or
emergency purposes in an amount not exceeding 5% of the value of its total
assets at the time when the loan is made. Any borrowings representing more than
5% of the Fund's total assets must be repaid before the Fund may make additional
investments.
6. Lend any security or make any other loan if, as a result, more
than 33 1/3% of its total assets would be lent to other parties, but this
limitation does not apply to purchases of publicly issued debt securities or to
repurchase agreements.
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<PAGE> 115
7. Underwrite securities issued by others, except to the extent that
the Fund may be considered an underwriter within the meaning of the Securities
Act of 1933 in the disposition of restricted securities.
8. With respect to 75% of the Fund's total assets, the Fund may not
purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities)
if, as a result, (a) more than 5% of the Fund's total assets would be invested
in the securities of that issuer, or (b) the Fund would hold more than 10% of
the outstanding voting securities of that issuer.
9. Purchase the securities of any issuer (other than securities
issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities, or repurchase agreements secured thereby) if, as a result,
more than 25% of the Fund's total assets would be invested in the securities of
companies whose principal business activities are in the same industry. In the
utilities category, the industry shall be determined according to the service
provided. For example, gas, electric, water and telephone will be considered as
separate industries.
The following restrictions are not fundamental and may be changed without
shareholder approval:
1. The Fund will not purchase or retain securities of any issuer if
the officers or Trustees of the Victory Portfolios or the officers or directors
of its investment adviser owning beneficially more than one half of 1% of the
securities of such issuer together own beneficially more than 5% of such
securities.
2. The Fund will not invest more than 10% of its total assets in the
securities of issuers which together with any predecessors have a record of less
than three years of continuous operation.
3. The Fund will limit its investments in warrants to no more than 5%
of its net assets, and of this 5%, no more than 2% will be invested in warrants
which are not listed on the New York Stock Exchange or American Stock Exchange.
4. The Fund will not invest more than 15% of its net assets in
illiquid securities. Illiquid securities are securities that are not readily
marketable or cannot be disposed of promptly within seven days and in the usual
course of business at approximately the price at which the Fund has valued them.
Such securities include, but are not limited to, time deposits and repurchase
agreements with maturities longer than seven days. Securities that may be
resold under Rule 144A under, or securities offered pursuant to Section 4(2) of,
or securities otherwise subject to restrictions or limitations on resale under,
the 1933 Act ("Restricted Securities"), shall not be deemed illiquid solely by
reason of being unregistered. Key Advisers or the Sub-Adviser determine whether
a particular security is deemed to be liquid based on the trading markets for
the specific security and other factors. However, because state securities
laws may limit the Fund's investment in Restricted Securities (regardless of the
liquidity of the investment), investments in Restricted Securities resalable
under Rule 144A will continue to be subject to applicable state law requirements
until such time, if ever, that such limitations are changed.
5. The Fund will not make short sales of securities, other than short
sales "against the box," or purchase securities on margin except for short-term
credits necessary for clearance of portfolio transactions, provided that this
restriction will not be applied to limit the use of options, futures contracts
and related options, in the manner otherwise permitted by the investment
restrictions, policies and investment program of the Fund.
6. The Fund may invest up to 5% of its total assets in the securities
of any one investment company, but may not own more than 3% of the securities of
any one investment company or invest more than 10% of its total assets in the
securities of other investment companies. Pursuant to an exemptive order
received by the Victory Portfolios from the Commission, the Fund may invest in
the money market funds of the Victory Portfolios.
7. Buy state, municipal, or private activity bonds.
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<PAGE> 116
State Regulations
In addition, the Fund, so long as its shares are registered under the
securities laws of the State of Texas and such restrictions are required as a
consequence of such registration, is subject to the following non-fundamental
policies, which may be modified in the future by the Trustees without a vote of
the Funds' shareholders: (i) the Victory Portfolios has represented to the Texas
State Securities Board that it will not invest in oil, gas or mineral leases or
purchase or sell real property (including limited partnership interests, but
excluding readily marketable securities of companies which invest in real
estate); and (ii) the Fund has represented to the Texas State Securities Board
that it will not invest more than 5% of its net assets in warrants valued at the
lower of cost or market; provided that, included within that amount, but not to
exceed 2% of net assets, may be warrants which are not listed on the New York or
American Stock Exchanges. For purposes of this restriction, warrants acquired
in units or attached to securities are deemed to be without value.
The policies and limitations listed above supplement those set forth in
the Prospectus. Unless otherwise noted, whenever an investment policy or
limitation states a maximum percentage of the Fund's assets that may be invested
in any security or other asset, or sets forth a policy regarding quality
standards, such standard or percentage limitation will be determined immediately
after and as a result of the Fund's acquisition of such security or other asset
except in the case of borrowing (or other activities that may be deemed to
result in the issuance of a "senior security" under the 1940 Act). Accordingly,
any subsequent change in values, net assets, or other circumstances will not be
considered when determining whether the investment complies with the Fund's
investment policies and limitations. If the value of the Fund's holdings of
illiquid securities at any time exceeds the percentage limitation applicable at
the time of acquisition due to subsequent fluctuations in value or other
reasons, the Board of Trustees will consider what actions, if any, are
appropriate to maintain adequate liquidity.
FUTURE DEVELOPMENTS
The Fund may take advantage of other investment practices which are not
at present contemplated for use by the Fund or which currently are not available
but which may be developed, to the extent such investment practices are both
consistent with the Fund's investment objective and are legally permissible for
the Fund. Such investment practices, if they arise, may involve risks which
exceed those involved in the activities described in the Prospectus and
Statement of Additional Information. Prior to commencing any new investment
practice, the Fund will notify shareholders by means of prospectus supplement.
Portfolio Turnover
The turnover rate stated in the Prospectus for the Fund's investment
portfolio is calculated by dividing the lesser of the Fund's purchases or sales
of portfolio securities for the year by the monthly average value of the
portfolio securities. The calculation excludes all securities whose maturities,
at the time of acquisition, were one year or less.
VALUATION OF PORTFOLIO SECURITIES
Investment securities held by the Fund are valued on the basis of
valuations provided by an independent pricing service, approved by the Board of
Trustees, which uses information with respect to transactions of a security,
quotations from dealers, market transactions in comparable securities, and
various relationships between securities, in determining value. Specific
investment securities which are not priced by the approved pricing service will
be valued according to quotations obtained from dealers who are market makers in
those securities. Investment securities with less than 60 days to maturity when
purchased are valued at amortized cost which approximates market value.
Investment securities not having readily available market quotations will be
priced at fair value using a methodology approved in good faith by the Board of
Trustees.
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PERFORMANCE
As described in the Prospectus, from time to time the "standardized
yield," "dividend yield," "average annual total return," "total return," and
"total return at net asset value" of an investment in each class of Fund shares
may be advertised. An explanation of how yields and total returns are
calculated and the components of those calculations are set forth below.
Yield and total return information may be useful to investors in
reviewing the Fund's performance. The Fund's advertisement of its performance
must, under applicable Commission rules, include the average annual total
returns for the Fund for the 1, 5 and 10-year period (or the life of the class,
if less) as of the most recently ended calendar quarter. This enables an
investor to compare the Fund's performance to the performance of other funds for
the same periods. However, a number of factors should be considered before
using such information as a basis for comparison with other investments. An
investment in the Fund is not insured; its yield and total return are not
guaranteed and normally will fluctuate on a daily basis. When redeemed, an
investor's shares may be worth more or less than their original cost. Yield and
total return for any given past period are not a prediction or representation by
the Victory Portfolios of future yields or rates of return on its shares. The
yield and total returns of the Fund are affected by portfolio quality, portfolio
maturity, the type of investments the Fund holds and its operating expenses.
STANDARDIZED YIELDS. The Fund's "yield" (referred to as "standardized
yield") for a given 30-day period for a class of shares is calculated using the
following formula set forth in rules adopted by the Commission that apply to all
funds that quote yields:
Standardized Yield = 2 [(a-b + 1)6 - 1]
---
cd
The symbols above represent the following factors:
a = dividends and interest earned during the 30-day period.
b = expenses accrued for the period (net of any expense
reimbursements).
c = the average daily number of shares of that class outstanding
during the 30-day period that were entitled to receive
dividends.
d = the maximum offering price per share of the class on the last
day of the period, adjusted for undistributed net investment
income.
The standardized yield for a 30-day period may differ from its yield
for any other period. The Commission formula assumes that the standardized
yield for a 30-day period occurs at a constant rate for a six-month period and
is annualized at the end of the six-month period. This standardized yield is
not based on actual distributions paid by the Fund to shareholders in the 30-day
period, but is a hypothetical yield based upon the net investment income from
the Fund's portfolio investments calculated for that period. The standardized
yield may differ from the "dividend yield," described below. Additionally,
because each class of shares is subject to different expenses, it is likely that
the standardized yields of the Fund classes of shares will differ. The yield
for the 30-day period ended October 31, 1995 was ____% .
DIVIDEND YIELD AND DISTRIBUTION RETURN. From time to time the Fund may
quote a "dividend yield" or a "distribution return." Dividend yield is based on
the share dividends derived from net investment income during a stated period.
Distribution return includes dividends derived from net investment income and
from realized capital gains declared during a stated period. Under those
calculations, the dividends and/or distributions declared during a stated period
of one year or less (for example, 30 days) are added together, and the sum is
divided by the maximum offering price per share of that class A) on the last day
of the period. When the result is annualized for a period of less than one year,
the "dividend yield" is calculated as follows:
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<TABLE>
<S> <C> <C>
Dividend Yield = Dividends + Number of days (accrual period) x 365
----------------------------------------
Max. Offering Price (last day of period)
</TABLE>
The maximum offering price for shares includes the maximum front-end
sales charge.
From time to time similar yield or distribution return calculations may
also be made using the net asset value (instead of its respective maximum
offering price) at the end of the period. The dividend yields at maximum
offering price and net asset value for the 30-day period ended October 31, 1995
were ____% , respectively.
TOTAL RETURNS. The "average annual total return" is an average annual
compounded rate of return for each year in a specified number of years. It is
the rate of return based on the change in value of a hypothetical initial
investment of $1,000 ("P" in the formula below) held for a number of years ("n")
to achieve an Ending Redeemable Value ("ERV"), according to the following
formula:
( ERV )1n - 1 = Average Annual Total Return
-------
( P )
The cumulative "total return" calculation measures the change in value
of a hypothetical investment of $1,000 over an entire period of years. Its
calculation uses some of the same factors as average annual total return, but it
does not average the rate of return on an annual basis. Total return is
determined as follows:
ERV - P = Total Return
-------
P
In calculating total returns, the current maximum sales charge of 4.75%
(as a percentage of the offering price) is deducted from the initial investment
("P") (unless the return is shown at net asset value, as discussed below).
Total returns also assume that all dividends and capital gains distributions
during the period are reinvested to buy additional shares at net asset value per
share, and that the investment is redeemed at the end of the period. The
average annual total return and cumulative total return for the period from
September 26, 1994 (commencement of operations) to October 31, 1994, and for the
fiscal year ended October 31, 1995 at maximum offering price were ___% and
____%, respectively. For the one year period ended October 31, 1995 annual
total return was ______%.
From time to time the Fund may also quote an "average annual total
return at net asset value" or a cumulative "total return at net asset value." It
is based on the difference in net asset value per share at the beginning and the
end of the period for a hypothetical investment in that class of shares (without
considering front-end or contingent sales charges) and takes into consideration
the reinvestment of dividends and capital gains distributions. The average
annual total return and cumulative total return for the period from September
26, 1994 (commencement of operations) to October 31, 1995 (life of fund), at net
asset value, was ____% and ___%, respectively. For the one and five year
periods ended October 31, 1994, and for the fiscal year ended October 31, 1995,
average annual total return was ___% .
OTHER PERFORMANCE COMPARISONS. From time to time the Fund may publish
the ranking of the performance of its shares by Lipper Analytical Services, Inc.
("Lipper"), a widely-recognized independent mutual fund monitoring service.
Lipper monitors the performance of regulated investment companies, including the
Fund, and ranks the performance of the Fund against (i) all other funds,
excluding money market funds, and (ii) all other government bond funds. The
Lipper performance rankings are based on total return that includes the
reinvestment of capital gains distributions and income dividends but does not
take sales charges or taxes into consideration.
From time to time the Fund may publish the ranking of the performance
of its shares by Morningstar, Inc., an independent mutual fund monitoring
service that ranks mutual funds, including the Fund, in broad investment
categories (equity, taxable bond, tax-exempt and other) monthly, based upon each
fund's three, five and ten-year average annual total returns (when available)
and a risk adjustment factor that reflects Fund performance relative
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to three-month U.S. Treasury bill monthly returns. Such returns are adjusted
for fees and sales loads. There are five ranking categories with a
corresponding number of stars: highest (5), above average (4), neutral (3),
below average (2) and lowest (1). Ten percent of the funds, series or classes in
an investment category receive 5 stars, 22.5% receive 4 stars, 35% receive 3
stars, 22.5% receive 2 stars, and the bottom 10% receive one star. Morningstar
ranks the shares of the Fund in relation to other taxable bond funds.
The total return on an investment made in shares of the Fund may be
compared with the performance for the same period of one or more of the
following indices: the Consumer Price Index, the Salomon Brothers World
Government Bond Index, the Standard & Poor's 500 Index, the Shearson Lehman
Government/Corporate Bond Index, the Lehman Aggregate Bond Index, and the J.P.
Morgan Government Bond Index. Other indices may be used from time to time. The
Consumer Price Index is generally considered to be a measure of inflation. The
Salomon Brothers World Government Bond Index generally represents the
performance of government debt securities of various markets throughout the
world, including the United States. The Lehman Government/Corporate Bond Index
generally represents the performance of intermediate and long-term government
and investment grade corporate debt securities. The Lehman Aggregate Bond Index
measures the performance of U.S. corporate bond issues, U.S. government
securities and mortgaged-backed securities. The J.P. Morgan Government Bond
Index generally represents the performance of government bonds issued by various
countries including the United States. The S&P 500 Index is a composite index
of 500 common stocks generally regarded as an index of U.S. stock market
performance. The foregoing bond indices are unmanaged indices of securities
that do not reflect reinvestment of capital gains or take investment costs into
consideration, as these items are not application to indices.
From time to time, the yields and the total returns of the Fund may be
quoted in and compared to other mutual funds with similar investment objective
in advertisements, shareholder reports or other communications to shareholders.
The Fund may also include calculations in such communications that describe
hypothetical investment results. (Such performance examples will be based on an
express set of assumptions and are not indicative of the performance of any
Fund.) Such calculations may from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of the Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash. The Fund may also include discussions or illustrations of the potential
investment goals of a prospective investor (including but not limited to tax
and/or retirement planning), investment management techniques, policies or
investment suitability of Fund, economic conditions, legislative developments
(including pending legislation), the effects of inflation and historical
performance of various asset classes, including but not limited to stocks, bonds
and Treasury bills. From time to time advertisements or communications to
shareholders may summarize the substance of information contained in shareholder
reports (including the investment composition of the Fund, as well as the views
of the investment adviser as to current market, economic, trade and interest
rate trends, legislative, regulatory and monetary developments, investment
strategies and related matters believed to be of relevance to the Fund. The
Fund may also include in advertisements, charts, graphs or drawings which
illustrate the potential risks and rewards of investment in various investment
vehicles, including but not limited to stock, bonds, Treasury bills and shares
of Fund as well as charts or graphs which illustrate strategies such as dollar
cost averaging, and comparisons of hypothetical yields of investment in
tax-exempt versus taxable investments. In addition, advertisements or
shareholder communications may include a discussion of certain attributes or
benefits to be derived by an investment in Fund. Such advertisements or
communications may include symbols, headlines or other material which highlight
or summarize the information discussed in more detail therein. With proper
authorization, Fund may reprint articles (or excerpts) written regarding the
Fund and provide them to prospective shareholders. Performance information with
respect to the Fund is generally available by calling 1-800-539-3863.
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<PAGE> 120
Investors may also judge, and the Fund may at times advertise,
performance by comparing it to the performance of other mutual funds or mutual
fund portfolios with comparable investment objectives and policies, which
performance may be contained in various unmanaged mutual fund or market indices
or rankings such as those prepared by Dow Jones & Co., Inc., Standard & Poor's
Corporation, Lehman Brothers, Merrill Lynch, and Salomon Brothers, and in
publications issued by Lipper Analytical Services, Inc. and in the following
publications: IBC/Donoghue's Money Fund Reports, Ibottson Associates, Inc.,
Morningstar, CDA/Wiesenberger, Money Magazine, Forbes, Barron's, The Wall Street
Journal, The New York Times, Business Week, American Banker, Fortune,
Institutional Investor, U.S.A. Today. In addition to yield information, general
information about the Fund that appears in a publication such as those mentioned
above may also be quoted or reproduced in advertisements or in reports to
shareholders.
Advertisements and sales literature may include discussions of
specifics of the portfolio manager's investment strategy and process, including,
but not limited to, descriptions of security selection and analysis.
Advertisements may also include descriptive information about the
investment adviser, including, but not limited to, its status within the
industry, other services and products it makes available, total assets under
management, its investment philosophy.
When comparing yield, total return and investment risk of an investment
in the Fund with other investments, investors should understand that certain
other investments have different risk characteristics than an investment in
shares of the Fund. For example, certificates of deposit may have fixed rates
of return and may be insured as to principal and interest by the FDIC, while the
Fund's returns will fluctuate and its share values and returns are not
guaranteed. Money market accounts offered by banks also may be insured by the
FDIC and may offer stability of principal. U.S. Treasury securities are
guaranteed as to principal and interest by the full faith and credit of the U.S.
government. Money market mutual funds may seek to offer a fixed price per
share.
ADDITIONAL PURCHASE EXCHANGE AND REDEMPTION INFORMATION
The Victory Portfolios (see "Description of Victory Portfolios" below)
is open for business and the NAV is calculated on each Business Day. A Business
Day is every day on which the NYSE is open for business, the Federal Reserve
Bank of Cleveland is open and any other day (other than a day on which no shares
of the Fund are tendered for redemption and no order to purchase any shares is
received) during which there is sufficient trading in portfolio instruments that
the Fund's net asset value per share might be materially affected. The NAV of
each class is determined and its shares are priced as of the close of regular
trading of the NYSE (generally 4:00 p.m. Eastern time (the "Valuation Time")) on
each Business Day of the Fund. The NYSE or the Federal Reserve Bank of
Cleveland will not be open in observance of the following holidays: New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, and
Christmas Day. The holiday closing schedule is subject to change.
When the NYSE is closed, or when trading is restricted for any reason
other than its customary weekend or holiday closings, or under emergency
circumstances as determined by the Commission to warrant such action, the Fund's
Transfer Agent will determine the Fund's NAVs at Valuation Time. The Fund's
NAV may be affected to the extent that its securities are traded on days that
are not Business Days.
If, in the opinion of the Trustees, conditions exist which make cash
payment undesirable, redemption payments may be made in whole or in part in
securities or other property, valued for this purpose as they are valued in
computing the NAV of the Fund. Shareholders receiving securities or other
property on redemption may realize a gain or loss for tax purposes and will
incur any costs of sale as well as the associated inconveniences.
Pursuant to Rule 11a-3 under the 1940 Act, the Fund is required to give
shareholders at least 60 days' notice prior to terminating or modifying the
Fund's exchange privilege. Under the Rule, the 60-day notification
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<PAGE> 121
requirement may be waived if (i) the only effect of a modification would be to
reduce or eliminate an administrative fee, redemption fee or deferred sales
charge ordinarily payable at the time of exchange or (ii) the Fund temporarily
suspends the offering of shares as permitted under the 1940 Act or by the SEC or
because it is unable to invest amounts effectively in accordance with its
investment objective and policies.
In the Prospectus, the Victory Portfolios, Key Advisers and the
Sub-Adviser have notified shareholders that they reserve the right at any time
without prior notice to shareholders to refuse exchange purchases by any person
or group if, in Key Advisers or the Sub-Adviser's judgment, the Fund would be
unable to invest effectively in accordance with its investment objective and
policies, or would otherwise potentially be adversely affected.
ADDITIONAL PURCHASE INFORMATION
REDUCED SALES CHARGE. Reduced sales charges are applicable to
purchases of $50,000 or more alone or in combination with purchases of shares of
other Victory Portfolios made at any one time. To obtain the reduction of the
sales charge, you or your investment professional must notify the Transfer Agent
at the time of purchase whenever a quantity discount is applicable to your
purchase. Upon such notification, you will receive the lowest applicable sales
charge.
In addition to investing at one time in any combination of shares of
the Victory Portfolios in an amount entitling you to a reduced sales charge, you
may qualify for a reduction in the sales charge under the following programs:
COMBINED PURCHASES. When you invest in shares of the Victory
Portfolios for several accounts at the same time, you may combine these
investments into a single transaction if purchased through one investment
professional, and if the total is $50,000 or more. The following may qualify
for this privilege: an individual, or "company" as defined in Section 2(a)(8) of
the 1940 Act; an individual, spouse, and their children under age 21 purchasing
for his, her, or their own account; a trustee, administrator or other fiduciary
purchasing for a single trust estate or single fiduciary account or for a single
or a parent-subsidiary group of "employee benefit plans" (as defined in Section
3(3) of ERISA); and tax-exempt organizations under Section 501(c)(3) of the
Internal Revenue Code.
RIGHTS OF ACCUMULATION. Your "Rights of Accumulation" permit reduced
sales charges on future purchases of shares after you have reached a new
breakpoint. You can add the value of existing Victory Portfolios shares held by
you, your spouse, and your children under age 21, determined at the previous
day's NAV at the close of business, to the amount of your new purchase valued at
the current offering price to determine your reduced sales charge.
LETTER OF INTENT. If you anticipate purchasing $50,000 or more of
shares of the Fund alone or in combination with shares of certain other Victory
Portfolios within a 13-month period, you may obtain shares of the portfolios at
the same reduced sales charge as though the total quantity were invested in one
lump sum, by filing a non-binding Letter of Intent (the "Letter") within 90 days
of the start of the purchases. Each investment you make after signing the
Letter will be entitled to the sales charge applicable to the total investment
indicated in the Letter. For example, a $2,500 purchase toward a $60,000 Letter
would receive the same reduced sales charge as if the $60,000 had been invested
at one time. To ensure that the reduced price will be received on future
purchases, you or your investment professional must inform the transfer agent
that the Letter is in effect each time shares are purchased. Neither income
dividends nor capital gain distributions taken in additional shares will apply
toward the completion of the Letter.
Your initial investment must be at least 5% of the total amount you
plan to invest. Out of the initial purchase, 5% of the dollar amount specified
in the Letter will be registered in your name and held in escrow. The shares
held in escrow cannot be redeemed or exchanged until the Letter is satisfied or
the additional sales charges
-13-
<PAGE> 122
have been paid. You will earn income dividends and capital gain distributions
on escrowed shares. The escrow will be released when your purchase of the total
amount has been completed. You are not obligated to complete the Letter.
If you purchase more than the amount specified in the Letter and
qualify for a further sales charge reduction, the sales charge will be adjusted
to reflect your total purchase at the end of 13 months. Surplus funds will be
applied to the purchase of additional shares at the then current offering price
applicable to the total purchase.
If you do not complete your purchase under the Letter within the
13-month period, your sales charge will be adjusted upward, corresponding to the
amount actually purchased, and if after written notice, you do not pay the
increased sales charge, sufficient escrowed shares will be redeemed to pay such
charge.
ADDITIONAL EXCHANGE INFORMATION
Shares of the Victory Portfolios (see "Description of Victory
Portfolios" below) may be exchanged for shares of any Victory money market fund
or any other fund of the Victory Portfolios with the same or a lower sales
charge. Shares of any Victory money market portfolio or any fund of the Victory
Portfolios with a reduced sales charge may be exchanged for shares of the Fund
upon payment of the difference in the sales charge.
ADDITIONAL REDEMPTION INFORMATION
REINSTATEMENT PRIVILEGE. Within 90 days of a redemption, a shareholder
may reinvest all or part of the redemption proceeds of shares of the Fund or any
of the other Victory Portfolios into which shares of the Fund are exchangeable
as described below, at the net asset value next computed after receipt by the
Transfer Agent of the reinvestment order. No charge is currently made for
reinvestment in shares of the Fund but a reinvestment in shares of certain other
Victory Portfolios is subject to a $5.00 service fee. The shareholder must ask
the Distributor for such privilege at the time of reinvestment. Any capital
gain that was realized when the shares were redeemed is taxable, and
reinvestment will not alter any capital gains tax payable on that gain. If
there has been a capital loss on the redemption, some or all of the loss may not
be tax deductible, depending on the timing and amount of the reinvestment. Under
the Internal Revenue Code, if the redemption proceeds of Fund shares on which a
sales charge was paid are reinvested in shares of the Fund or another of the
Victory Portfolios within 90 days of payment of the sales charge, the
shareholder's basis in the shares of the Fund that were redeemed may not include
the amount of the sales charge paid. That would reduce the loss or increase the
gain recognized from redemption. The Fund may amend, suspend or cease offering
this reinvestment privilege at any time as to shares redeemed after the date of
such amendment, suspension or cessation. You must reinstate your shares into an
account with the same registration. This privilege may be exercised only once
by a shareholder with respect to the Fund. For information on which funds are
available for the Reinstatement Privilege, please consult your program
materials.
DIVIDENDS AND DISTRIBUTIONS
The Fund ordinarily declares and pays dividends from its net investment
income monthly. The Fund distributes substantially all of its net investment
income and net capital gains, if any, to shareholders within each calendar year
as well as on a fiscal year basis to the extent required for the Fund to qualify
for favorable federal tax treatment.
The amount of distributions may vary from time to time depending on
market conditions and the composition of the Fund's portfolio.
-14-
<PAGE> 123
For this purpose, the net income of the Fund, from the time of the
immediately preceding determination thereof, shall consist of all interest
income accrued on the portfolio assets of the Fund, dividend income, if any,
income from securities loans, if any, and realized capital gains and losses on
the Fund assets, less all expenses and liabilities of the Fund chargeable
against income. Interest income shall include discount earned, including both
original issue and market discount, on discount paper accrued ratably to the
date of maturity. Expenses, including the compensation payable to Key Advisers
or the Sub-Adviser, are accrued each day. The expenses and liabilities of the
Fund shall include those appropriately allocable to the Fund as well as a share
of the general expenses and liabilities of the Victory Portfolios in proportion
to the Fund's share of the total net assets of the Victory Portfolios.
Additional Tax Information
It is the policy the Fund to qualify for the favorable tax treatment
accorded regulated investment companies ("RICs") under Subchapter M of the Code,
for so long as such qualification is in the best interest of its shareholders.
By following such policy and distributing its income and gains currently with
respect to each taxable year, the Fund expects to eliminate or reduce to a
nominal amount the federal income and excise taxes to which it may otherwise be
subject.
In order to qualify as a RIC, the Fund must, among other things, (1)
derive at least 90% of its gross income from dividends, interest, payments with
respect to securities loans, and gains from the sale or other disposition of
stock or securities, foreign currencies or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in stock, securities or currencies, (2) derive less than 30% of its
gross income from the sale or other disposition of stock, securities, options,
futures, forward contracts, and certain foreign currencies (or options, futures,
or forward contracts on foreign currencies) held for less than three months, and
(3) diversify its holdings so that at the end of each quarter of its taxable
year (i) at least 50% of the market value of the Fund's assets is represented by
cash or cash items, U.S. Government securities, securities of other RICs and
other securities limited, in respect of any one issuer, to an amount not greater
than 5% of the value of the Fund's total assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
total assets is invested in the securities of any one issuer (other than U.S.
Government securities) or of two or more issuers that the Fund controls and that
are engaged in the same, similar, or related trades or businesses. These
requirements may restrict the degree to which the Fund may engage in short-term
trading and concentrate investments. If the Fund qualifies as a RIC, it will
not be subject to federal income tax on the part of its net investment income
and net realized capital gains, if any, that it distributes to shareholders with
respect to each taxable year within the time limits specified in the Code.
A non-deductible excise tax is imposed on regulated investment
companies that do not distribute in each calendar year an amount equal to 98% of
their ordinary income for the year plus 98% of their capital gain net income for
the 1-year period ending on October 31 of such calendar year. The balance of
such income must be distributed during the following calendar year. If
distributions during a calendar year are less than the required amount, the Fund
is subject to a non-deductible excise tax equal to 4% of the deficiency.
Certain investment and hedging activities of the Fund, including
transactions in options, futures contracts, hedging transactions, forward
contracts, straddles, foreign currencies, and foreign securities, are subject to
special tax rules. In a given case, these rules may accelerate income to the
fund, defer losses to the fund, cause adjustments in the holding periods of the
Fund's securities, convert short-term capital losses into long-term capital
losses, or otherwise affect the character of the Fund's income. These rules
could therefore affect the amount, timing and character of distributions to
shareholders. The Fund will endeavor to make any available elections pertaining
to such transactions in a manner believed to be in the best interest of the Fund
and its securities.
The Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of taxable dividends paid to any shareholder who has failed to
provide (or provided an incorrect) tax identification number, or is subject to
withholding pursuant to a notice from the Internal Revenue Service for failure
to properly include
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<PAGE> 124
on his or her income tax return payments of interest or dividends. This "backup
withholding" is not an additional tax, and any amounts withheld may be credited
against the shareholder's ultimate U.S. tax liability.
Information set forth in the Prospectus and this Statement of
Additional Information that relates to federal taxation is only a summary of
certain key federal tax considerations generally affecting purchasers of shares
of the Fund. No attempt has been made to present a complete explanation of the
federal tax treatment of the Fund or its shareholders, and this discussion is
not intended as a substitute for careful tax planning. Accordingly, potential
purchasers of shares of the Fund are urged to consult their tax advisers with
specific reference to their own tax circumstances. In addition, the tax
discussion in the Prospectus and this Statement of Additional Information is
based on tax law in effect on the date of the Prospectus and this Statement of
Additional Information; such laws and regulations may be changed by legislative,
judicial or administrative action, sometimes with retroactive effect.
MANAGEMENT OF THE VICTORY PORTFOLIOS
Board of Trustees
Overall responsibility for management of the Victory Portfolios rests
with the Trustees, who are elected by the shareholders of the Victory
Portfolios. The Victory Portfolios are managed by the Trustees in accordance
with the laws of the State of Delaware governing business trusts. There are
currently seven Trustees, six of whom are not "interested persons" of the
Victory Portfolios within the meaning of that term under the 1940 Act. The
Trustees, in turn, elect the officers of the Victory Portfolios to supervise
actively its day-to-day operations.
The Trustees of the Victory Portfolios, their addresses, ages and their
principal occupations during the past five years are as follows:
<TABLE>
<CAPTION>
Position(s) With
the Victory Principal Occupation
Name, Address and Age Portfolios Held During Past 5 Years
- --------------------- ---------------- ------------------------
<S> <C> <C>
Leigh A. Wilson, 51* Trustee and From 1989 to present, Chairman and
Glenleigh International Ltd. President Chief Executive Officer, Glenleigh
53 Sylvan Road North International Limited; from
Westport, CT 06880 1984-1989, Chief Executive
Officer, Paribas North America and
Paribas Corporation; Trustee, The
Victory Funds and SBSF Funds.
Robert G. Brown, 72 Trustee Retired; from October 1983 to
5460 N. Ocean Drive November 1990, President,
Singer Island, Riviera Beach Cleveland Advanced Manufacturing
FL 33404 Program (non-profit corporation
engaged in regional economic
development); Trustee, The Victory
Funds.
</TABLE>
- ------------
* Mr. Wilson is deemed to be an "interested person" of the Victory
Portfolios under the 1940 Act solely by reason of his position as
President.
-16-
<PAGE> 125
<TABLE>
<CAPTION>
Position(s) With
the Victory Principal Occupation
Name, Address and Age Portfolios Held During Past 5 Years
- --------------------- ---------------- ------------------------
<S> <C> <C>
Edward P. Campbell, 46 Trustee From March 1, 1994 to present,
Nordson Corporation Executive Vice President and Chief
28601 Clemens Road Operating Officer of Nordson
Westlake, OH 44145 Corporation (manufacturer of
application equipment); from May
1988 to March 1994, Vice President
of Nordson Corporation; from 1987
to December 1994, member of the
Supervisory Committee of Society's
Collective Investment Retirement
Fund; from May 1991 to August
1994, Trustee, Financial Reserves
Fund and from May 1993 to August
1994, Trustee, Ohio Municipal
Money Market Fund; Trustee, The
Victory Funds and Spears, Benzak,
Salomon and Farrell ("SBSF")
Funds.
Dr. Harry Gazelle, 68 Trustee Retired radiologist, Drs. Hill and
17822 Lake Road Thomas Corp; Trustee, The Victory
Lakewood, Ohio 44107 Funds.
Stanley I. Landgraf, 70 Trustee Retired; currently, Trustee,
41 Traditional Lane Rensselaer Polytechnic Institute;
Albany, NY 12211 Director, Elenel Corporation and
Mechanical Technology, Inc.;
Member, Board of Overseers, School
of Management, Rensselaer
Polytechnic Institute; Member, The
Fifty Group (a Capital Region
business organization); Trustee,
The Victory Funds.
Dr. Thomas F. Morrissey, 62 Trustee 1995 Visiting Scholar, Bond
Weatherhead School of University, Queensland, Australia;
Management Professor, Weatherhead School of
Case Western Reserve Management, Case Western Reserve
University University; from 1989 to 1995,
10900 Euclid Avenue Associate Dean of Weatherhead
Cleveland, OH 44106-7235 School of Management; from 1987 to
December of the Supervisory
Committee of Society's Collective
Investment Retirement Fund; from
May 1991 to August 1994, Trustee,
</TABLE>
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<PAGE> 126
<TABLE>
<CAPTION>
Position(s) With
the Victory Principal Occupation
Name, Address and Age Portfolios Held During Past 5 Years
- --------------------- ---------------- ------------------------
<S> <C> <C>
Financial Reserves Fund and from
May 1993 to August 1994, Trustee,
Ohio Municipal Money Market Fund;
Trustee, The Victory Funds.
H. Patrick Swygert, 52 Trustee President, Howard University;
Howard University formerly President, State
2400 6th Street, N.W. University of New York at Albany;
Suite 320 formerly, Executive Vice
Washington, D.C. 20059 President, Temple University;
Trustee, The Victory Funds.
</TABLE>
The Board presently has an Investment Policy Committee and a Business,
Legal, and Audit Committee. The members of the Investment Policy Committee are
Messrs. Landgraf (Chairman), Morrissey and Brown, who will serve until May 1996.
The function of the Investment Policy Committee is to review the existing
investment policies of the Victory Portfolios, including the levels of risk and
types of funds available to shareholders, and make recommendations to the Board
of Trustees regarding the revision of such policies or, if necessary, the
submission of such revisions to the Victory Portfolios' shareholders for their
consideration. The members of the Business, Legal and Audit Committee are
Messrs. Swygert (Chairman), Campbell and Gazelle who will serve until May 1996.
The function of the Business, Legal and Audit Committee is to recommend
independent auditors and monitor accounting and financial matters; to nominate
persons to serve as disinterested Trustees and Trustees to serve on committees
of the Board; and to review compliance and contract matters.
The Investment Policy Committee met four times during the fiscal year
ended October 31, 1995. The Business, Legal and Audit Committee was constituted
on May 24, 1995 (and has met twice since then) and replaced the Audit Committee,
the Legal Committee and the Nominating Committee, which met three times, one
time and one time, respectively, during the fiscal year ended October 31, 1995.
REMUNERATION OF TRUSTEES AND CERTAIN EXECUTIVE OFFICERS
Effective June 1, 1995, each Trustee (other than Leigh A. Wilson)
receives an annual fee of $27,000 for serving as Trustee of all the funds of the
Victory Portfolios, and an additional per meeting fee ($2,400 in person and
$1,200 per telephonic meeting).
Effective June 1, 1995, Leigh A. Wilson receives an annual fee of
$33,000 for serving as President and Trustee for all of the funds of the Victory
Portfolios, and an additional per meeting fee ($3,000 in person and $1,500 per
telephonic meeting).
The following table indicates the compensation received by each Trustee
from the Fund and from the Victory "Fund Complex"* for the 12 month period ended
on October 31, 1995. For certain Trustees, the amounts include amounts paid by
the Predecessor Fund, a portfolio of The Victory Funds which merged into the
Fund as of June 5, 1995:
- ----------------------
* For certain Trustees, these amounts include compensation received from
The Victory Funds (which were reorganized into the Victory Portfolios
as of June 5, 1995), the SBSF Funds (the investment adviser of which
was acquired by KeyCorp effective April, 1995) and Society's Collective
Investment Retirement Funds, which were reorganized into the Victory
Balanced Fund and Victory Government Mortgage Fund as of December 19,
1994. There are presently 28 mutual funds from which the above- named
Trustees are compensated in the Victory "Fund Complex," but not all of
the above-named Trustees serve on the boards of each fund in the "Fund
Complex."
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<PAGE> 127
<TABLE>
<CAPTION>
Pension or Retirement Estimated Annual Total Total Compensation
Benefits Accrued as Benefits Compensation from Victory
Portfolio Expenses Upon Retirement from Fund "Fund Complex"*
------------------ --------------- --------- ---------------
<S> <C> <C> <C> <C>
Robert G. Brown, -0- -0- $1,126.45 $39,815.98
Trustee . . . . . . . . .
Edward P. Campbell, -0- -0- 1,174.17 33,799.68
Trustee . . . . . . . . .
Harry Gazelle, Trustee. . -0- -0- 919.93 35,916.98
John W. Kemper, -0- -0- 589.95 22,567.31
Trustee# . . . . . . . .
Thomas F. Morrissey, -0- -0- 1,174.17 40,366.98
Trustee . . . . . . . . .
Stanley I. Landgraf, -0- -0- 949.17 34,615.98
Trustee . . . . . . . . .
Leigh A. Wilson, -0- -0- 1,021.27 46,716.97
Trustee . . . . . . . . .
H. Patrick Swygert, -0- -0- 949.17 37,116.98
Trustee . . . . . . . . .
John D. Buckingham, -0- -0- 589.95 18,841.89
Trustee . . . . . . . . .
John R. Young, -0- -0- 621.95 21,963.81
Trustee# . . . . . . . .
</TABLE>
# Resigned
- ------------------------------
* For certain Trustees, these amounts include compensation received from
The Victory Funds (which were reorganized into the Victory Portfolios
as of June 5, 1995), the SBSF Funds (the investment adviser of which
was acquired by KeyCorp effective April, 1995) and Society's Collective
Investment Retirement Funds, which were reorganized into the Victory
Balanced Fund and Victory Government Mortgage Fund as of December 19,
1994. There are presently 28 mutual funds from which the above- named
Trustees are compensated in the Victory "Fund Complex," but not all of
the above-named Trustees serve on the boards of each fund in the "Fund
Complex."
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<PAGE> 128
Officers
The officers of the Victory Portfolios, their addresses, ages
and principal occupations during the past five years are as follows:
<TABLE>
<CAPTION>
Position with the Principal occupation
Name Victory Portfolios during past 5 years
- ---- ------------------ -------------------
<S> <C> <C>
Leigh A. Wilson, 51 President and Trustee From 1989 to present, Chairman and
Glenleigh International Ltd. Chief Executive Officer, Glenleigh
53 Sylvan Road North International Limited; from 1984-
Westport, CT 06880 1989, Chief Executive Officer,
Paribas North America and Paribas
Corporation; Trustee to The Victory
Funds and SBSF Funds.
William B. Blundin, 57 Vice President Senior Vice President of BISYS Fund
BISYS Fund Services Services; officer of other
125 West 55th Street investment companies administered
New York, New York 10019 by BISYS Fund Services; President
and Chief Executive Officer of
Vista Broker-Dealer Services, Inc.,
Emerald Asset Management, Inc. and
BNY Hamilton Distributors, Inc.,
registered broker/dealers.
J. David Huber, 49 Vice President Executive Vice President, BISYS
BISYS Fund Services Fund Services.
3435 Stelzer Road
Columbus, OH 43219-3035
Scott A. Englehart, 33 Secretary From October 1990 to present,
BISYS Fund Services employee of BISYS Fund Services,
3435 Stelzer Road Inc.; from 1985 to October 1990,
Columbus, OH 43219-3035 Manager of Banking Center, Fifth
Third Bank.
George O. Martinez, 36 Assistant Secretary From March 1995 to present, Senior
BISYS Fund Services Vice President and Director of
3435 Stelzer Road Legal and Compliance Services,
Columbus, OH 43219-3035 BISYS Fund Services; from June
1989-March 1995, Vice President and
Associate General Counsel, Alliance
Capital Management.
Martin R. Dean, 32 Treasurer From May 1994 to present, employee
BISYS Fund Services of BISYS Fund Services; from
3435 Stelzer Road January 1987 - April 1994, Senior
Columbus, OH 43219-3035 Manager, KPMG Peat Marwick.
</TABLE>
-20-
<PAGE> 129
<TABLE>
<S> <C> <C>
Adrian J. Waters, 33 Assistant Treasurer From May 1993 to present, employee
BISYS Fund Services (Ireland) of BISYS Fund Services; from 1989-
Limited May 1993, Manager, Price
ITI House Waterhouse.
12 Earlsfort Terrace
Dublin 2, Ireland
</TABLE>
The mailing address of each of the officers of the Victory Portfolios is 3435
Stelzer Road, Columbus, Ohio 43219-3035.
The officers of the Victory Portfolios (other than Leigh Wilson) receive no
compensation directly from the Victory Portfolios for performing the duties of
their offices. BISYS Fund Services, Inc. receives fees from the Victory
Portfolios for acting as Administrator.
As of December 1, 1995, the Trustees and officers as a group owned beneficially
less than 1% of the Fund.
Investment Adviser and Sub-Adviser
Key Advisers was organized as an Ohio corporation on July 27, 1995 and
is registered as an investment adviser under the Investment Advisers Act of
1940. It is a wholly-owned subsidiary of KeyCorp Asset Management Holdings,
Inc., which is a wholly-owned subsidiary of Society National Bank, a
wholly-owned subsidiary of KeyCorp. Affiliates of Key Advisers manage
approximately $37 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals and mutual funds.
KeyCorp, a financial services holding company, is headquartered at 127
Public Square, Cleveland, Ohio 44114. As of September 30, 1995, KeyCorp had an
asset base of $68 billion, with banking offices in 26 states from Maine to
Alaska, and trust and investment offices in 16 states. KeyCorp is the resulting
entity of the merger in 1994 of Society Corporation, the bank holding company of
which Society National Bank was a wholly-owned subsidiary, and KeyCorp, the
former bank holding company. KeyCorp's major business activities include
providing traditional banking and associated financial services to consumer,
business and commercial markets. Its non-bank subsidiaries include investment
advisory, securities brokerage, insurance, bank credit card processing, and
mortgage leasing companies. Society National Bank is the lead affiliate bank of
KeyCorp.
The following table lists the advisory fees for each mutual fund that
is advised by Key Advsers:
.25 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Institutional Money Market Fund*
.35 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Prime Obligations Fund*
Victory U.S. Government Obligations Fund*
Victory Tax-Free Money Market Fund*
.50 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Money Market Fund*
Victory Limited Term Income Fund*
Victory Government Mortgage Fund*
Victory Financial Reserves Fund*
Victory Fund for Income #
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<PAGE> 130
.55 OF 1% OF AVERAGE DAILY NET ASSETS
Victory National Municipal Bond Fund*
Victory Government Bond Fund*
Victory New York Tax-Free Fund*
.60 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Bond Fund*
Victory Stock Index Fund*
.65 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Diversified Stock Fund*
.75 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Intermediate Income Fund*
Victory Investment Quality Bond Fund*
Victory Ohio Regional Stock Fund*
1% OF AVERAGE DAILY NET ASSETS
Victory Balanced Fund*
Victory Value Fund*
Victory Growth Fund*
Victory Special Value Fund*
Victory Special Growth Fund+
1.10% OF AVERAGE DAILY ASSETS
Victory International Growth Fund*
# First Albany Asset Management Corporation serves as sub-adviser
to the Victory Fund for Income, for which it receives .20% of
average daily net assets.
+ T. Rowe Price Associates, Inc. serves as sub-adviser to the
Victory Special Growth Fund, for which it receives .25% of
average daily net assets up to $100 million and .20% of average
daily net assets in excess of $100 million.
* Society Asset Management, Inc. (the Sub-Adviser) serves as
sub-adviser to each of these funds. For its services under the
investment sub-advisory agreement, Key Advisers pays the
Sub-Adviser sub-advisory fees at rates (based on an annual
percentage of average daily net assets) which vary according to
the table set forth below:
<TABLE>
<CAPTION>
For the Balanced Fund, Diversified Stock Fund, For the International Growth Fund, Ohio
Growth Fund, Stock Index Fund and Value Fund: Regional Stock Fund and Special Value
Fund:
Rate of Rate of
Net Assets Sub-Advisory Fee* Net Assets Sub-Advisory Fee*
---------- ----------------- ---------- -----------------
<S> <C> <C> <C>
Up to $10,000,000 0.65% Up to $10,000,000 0.90%
Next $15,000,000 0.50% Next $15,000,000 0.70%
Next $25,000,000 0.40% Next $25,000,000 0.55%
Above $50,000,000 0.35% Above $50,000,000 0.45%
</TABLE>
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<PAGE> 131
<TABLE>
<CAPTION>
For the Intermediate Income Fund, Investment For the Prime Obligations Fund, Tax-Free Money
Quality Bond Fund, Limited Term Income Fund, Market Fund, U.S. Government Obligations Fund,
Ohio Municipal Bond Fund, Government Bond Financial Reserves Fund, Institutional Money
Fund, Government Mortgage Fund, National Market Fund and Ohio Municipal Money Market
Municipal Bond Fund and New York Tax-Free Fund: Fund:
Rate of Rate of
Net Assets Sub-Advisory Fee* Net Assets Sub-Advisory Fee*
---------- ----------------- ---------- -----------------
<S> <C> <C> <C>
Up to $10,000,000 0.40% Up to $10,000,000 0.25%
Next $15,000,000 0.30% Next $15,000,000 0.20%
Next $25,000,000 0.25% Next $25,000,000 0.15%
Above $50,000,000 0.20% Above $50,000,000 0.125%
</TABLE>
- --------------------
* As a percentage of average daily net assets. The Sub-Adviser has the
right to voluntarily waive any portion of the sub- advisory fee from
time to time.
ADVISORY AND OTHER CONTRACTS
[/R]
Unless sooner terminated, the Investment Advisory Agreement between Key
Advisers and the Fund provides that it will continue in effect as to the Fund
for an initial two-year term and for consecutive one-year terms thereafter,
provided that such continuance is approved at least annually by the Victory
Portfolios' Trustees or by vote of a majority of the outstanding shares of such
Fund (as defined under "GENERAL INFORMATION - Miscellaneous" in the
Prospectuses), and, in either case, by a majority of the Trustees who are not
parties to the Investment Advisory Agreement or interested persons (as defined
in the 1940 Act) of any party to the Investment Advisory Agreement, by votes
cast in person at a meeting called for such purpose.
The Investment Advisory Agreement is terminable as to the Fund at any
time on 60 days' written notice without penalty by the Trustees, by vote of a
majority of the outstanding shares of the Fund, or by Key Advisers. The
Investment Advisory Agreement also terminates automatically in the event of any
assignment, as defined in the 1940 Act.
The Investment Advisory Agreement provides that Key Advisers shall not
be liable for any error of judgment or mistake of law or for any loss suffered
by the Fund in connection with the performance of services pursuant to the
Investment Advisory Agreement, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith, or gross negligence on the
part of Key Advisers in the performance of its duties, or from reckless
disregard by it of either duties and obligations thereunder.
Under the Investment Advisory Agreement, Key Advisers has agreed to
provide the investment advisory services described in the Prospectus. For the
services provided and expenses assumed pursuant to the Investment Advisory
Agreement, the Fund pays Key Advisers a fee, computed daily and paid monthly, at
the annual rate of fifty one-hundredths of one percent (.50%) of the average
daily net assets of the Fund.
Prior to January, 1993, Society National Bank served as investment
adviser to the Fund. From September 26, 1994 (commencement of operations) until
December 31, 1995, Society Asset Management, Inc. served as investment adviser
to the Fund. For the fiscal years ended October 31, 1993, October 31, 1994 and
October 31,
[/R]
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<PAGE> 132
1995 the Fund paid investment advisory fees of $505,509, $800,556 and $______,
respectively, after fee reductions of $5,458, $30,223 and $______,
respectively.
Under the Investment Advisory Agreement, Key Advisers may delegate a
portion of its responsibilities to a sub-adviser. In addition, the Investment
Advisory Agreement provides that Key Advisers may render services through its
own employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser of the Fund and are under the common
control of KeyCorp as long as all such persons are functioning as part of an
organized group of persons, managed by authorized officers of Key Advisers.
Key Advisers has entered into an investment sub-advisory agreement with
its affiliate, Society Asset Management, Inc. on behalf of the Fund. The
Sub-Adviser is a wholly-owned subsidiary of KeyCorp Asset Management Holdings,
Inc. With respect to the day to day management of the Fund, under the
sub-advisory agreement, the Sub-Adviser makes decisions concerning, and places
all orders for, purchases and sales of securities and helps maintain the records
relating to such purchases and sales. The Sub-Adviser may, in its discretion,
provide such services through its own employees or the employees of one or more
affiliated companies that are qualified to act as an investment adviser to the
Company under applicable laws and are under the common control of KeyCorp;
provided that (i) all persons, when providing services under the sub-advisory
agreement, are functioning as part of an organized group of persons, and (ii)
such organized group of persons is managed at all times by authorized officers
of the Sub-Adviser. This arrangement will not result in the payment of
additional fees by the Fund.
Glass-Steagall Act
In 1971 the United States Supreme Court held in Investment Company
Institute v. Camp that the federal statute commonly referred to as the
Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision: (a)
forbid a bank holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing, or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but (b) do not prohibit such
a holding company or affiliate from acting as investment adviser, transfer
agent, and custodian to such an investment company. In 1981 the United States
Supreme Court held in Board of Governors of the Federal Reserve System v.
Investment Company Institute that the Board did not exceed its authority under
the Holding Company Act when it adopted its regulation and interpretation
authorizing bank holding companies and their non-bank affiliates to act as
investment advisers to registered closed-end investment companies. In the Board
of Governors case, the Supreme Court also stated that if a national bank
complied with the restrictions imposed by the Board in its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to investment companies, a national bank
performing investment advisory services for an investment company would not
violate the Glass-Steagall Act.
Key Advisers and the Sub-Adviser believe that they may perform the
services for the Victory Portfolios contemplated by the Prospectus, this
Statement of Additional Information, and the Investment Advisory Agreement (and
Sub-Advisory Agreement) with the Victory Portfolios without violation of
applicable statutes and regulations and has so represented in its Investment
Advisory Agreement (and Sub-Advisory Agreement) with the Victory Portfolios. Key
Trust Company of Ohio, N.A. believes that it may perform the services for the
Victory Portfolios contemplated by the Prospectus, this Statement of Additional
Information, and the Shareholder Servicing Agreement with the Victory Portfolios
(as described below) without violation of applicable statutes and regulations
and has so represented in such Shareholder Servicing Agreement. Future changes
in either federal or state statutes and regulations relating to the permissible
activities of banks or bank holding companies and the subsidiaries or affiliates
of those entities, as well as further judicial or administrative decisions or
interpretations of present and future statutes and regulations, could prevent or
restrict Key Trust Company of Ohio, N.A., Key Advisers or the Sub-
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<PAGE> 133
Adviser from continuing to perform such services for the Victory Portfolios.
Depending upon the nature of any changes in the services which could be provided
by Key Trust Company of Ohio, N.A., Key Advisers or the Sub-Adviser the Trustees
of the Victory Portfolios would review the Victory Portfolios' relationship with
Key Trust Company of Ohio, N.A., Key Advisers or the Sub-Adviser and consider
taking all action necessary in the circumstances.
Should future legislative, judicial, or administrative action prohibit
or restrict the proposed activities of Key Trust Company of Ohio, N.A., Key
Advisers or the Sub-Adviser and its affiliated and correspondent banks and other
non-bank affiliates in connection with customer purchases of shares of the
Victory Portfolios, the banks and such non-bank affiliates might be required to
alter materially or discontinue the services offered by them to customers. It
is not anticipated, however, that any change in the Victory Portfolios' method
of operations would affect its net asset value per share or result in financial
losses to any customer.
From time to time, advertisements, supplemental sales literature and
information furnished to present or prospective shareholders of the Fund may
include descriptions of Key Trust Company of Ohio, N.A., Key Advisers and the
Sub-Adviser including, but not limited to, (i) descriptions of the operations of
Key Trust Company of Ohio, N.A., Key Advisers and the Sub-Adviser; (ii)
descriptions of certain personnel and their functions; and (iii) statistics and
rankings related to the operations of Key Trust Company of Ohio, N.A., Key
Advisers and the Sub-Adviser.
Portfolio Transactions
Pursuant to the Investment Advisory Agreement (and Sub-Advisory
Agreement), Key Advisers or the Sub-Adviser determines, subject to the general
supervision of the Trustees of the Victory Portfolios, and in accordance with
the Fund's investment objective and restrictions, which securities are to be
purchased and sold by the Fund, and which brokers are to be eligible to execute
its portfolio transactions. Purchases from underwriters and/or broker-dealers
of portfolio securities include a commission or concession paid by the issuer to
the underwriter and/or broker-dealer and purchases from dealers serving as
market makers may include the spread between the bid and asked price. While Key
Advisers and the Sub-Adviser generally seek competitive prices (inclusive of any
spreads or commission), the Fund may not necessarily pay the lowest prices
available on each transaction, for reasons discussed below.
Allocation of transactions, including their frequency, to various
dealers is determined by Key Advisers or the Sub-Adviser in their best judgment
and in a manner deemed fair and reasonable to shareholders. The primary
consideration is prompt execution of orders in an effective manner at the most
favorable price. Subject to this consideration, dealers who provide
supplemental investment research to Key Advisers or the Sub-Adviser may receive
orders for transactions by the Victory Portfolios. Information so received is
in addition to and not in lieu of services required to be performed by Key
Advisers or the Sub-Adviser and does not reduce the advisory (sub-advisory) fees
payable to Key Advisers or the Sub-Adviser by the Victory Portfolios. Such
information may be useful to Key Advisers or the Sub-Adviser in serving both the
Victory Portfolios and other clients and, conversely, such research supplemental
information obtained by the placement of orders on behalf of other clients may
be useful to Key Advisers or the Sub- Adviser in carrying out its obligations to
the Victory Portfolios. In the future, the Trustees may also authorize the
allocation of brokerage to affiliated broker-dealers on an agency basis to
effect portfolio transactions. In such event, the Trustees will adopt
procedures incorporating the standards of Rule 17e-1 under the 1940 Act, which
requires that the commission paid to affiliated broker-dealers must be
"reasonable and fair compared to the commission, fee or other remuneration
received, or to be received, by other brokers in connection with comparable
transactions involving similar securities during a comparable period of time."
At times, the Fund may also purchase portfolio securities directly from dealers
acting as principals, underwriters or market makers. As these transactions are
usually conducted on a net basis, no brokerage commissions are paid by the Fund.
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<PAGE> 134
The Victory Portfolios will not execute portfolio transactions through,
acquire portfolio securities issued by, make savings deposits in, or enter into
repurchase or reverse repurchase agreements with Key Advisers, the Sub-Adviser,
Key Trust Company of Ohio, N.A. or its affiliates, Concord Holding Corporation,
Victory Broker-Dealer Services, Inc. or their affiliates, and will not give
preference to Key Trust Company of Ohio, N.A.'s correspondent banks or
affiliates, or Concord Holding Corporation or Victory Broker-Dealer Services,
Inc. with respect to such transactions, securities, savings deposits, repurchase
agreements, and reverse repurchase agreements.
Investment decisions for the Fund are made independently from those for
the other funds or any other investment company or account managed by Key
Advisers (or Society). Any such other investment company or account may also
invest in the same securities as a particular fund. When a purchase or sale of
the same security is made at substantially the same time on behalf of the Fund
and another fund, investment company or account, the transaction will be
averaged as to price, and available investments allocated as to amount, in a
manner which Key Advisers (or Society) believes to be equitable to the Fund and
such other fund, investment company or account. In some instances, this
investment procedure may adversely affect the price paid or received by the Fund
or the size of the position obtained by the Fund. To the extent permitted by
law, Key Advisers (or Society) may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for the other funds or
for other investment companies or accounts in order to obtain best execution. As
provided by the Investment Advisory (and Sub-Advisory) Agreement, in making
investment recommendations for the Victory Portfolios, Key Advisers (or Society)
will not inquire or take into consideration whether an issuer of securities
proposed for purchase or sale by a Fund is a customer of Society, its parents or
subsidiaries or affiliates and, in dealing with their commercial customers, Key
Advisers (Society), its parents, subsidiaries, and affiliates will not inquire
or take into consideration whether securities of such customers are held by the
Victory Portfolios.
In the fiscal years ended October 31, 1994 and October 31, 1995, the
Fund paid $469 and $____ in brokerage commissions.
Administrator
Currently, Concord Holding Corporation ("CHC") serves as general
manager and administrator (the "Administrator") to the Fund. The Administrator
assists in supervising all operations of the Fund (other than those performed by
Key Advisers or the Sub- Adviser under the Investment Advisory Agreement and
Sub-Advisory Agreement. Prior to June, 1995, The Winsbury Company ("Winsbury")
served as the Fund's administrator.
CHC receives a fee from the Fund for its services as Administrator and
expenses assumed pursuant to the Administration Agreements, calculated daily and
paid monthly, at the annual rate of fifteen one hundredths of one percent (.15%)
of the Fund's average daily net assets. CHC may periodically waive all or a
portion of its fee with respect to the Fund in order to increase the net income
of the Fund available for distribution as dividends.
Unless sooner terminated, the Administration Agreement will continue in
effect as to the Fund for a period of two years, and for consecutive one-year
terms thereafter, provided that such continuance is ratified at least annually
by the Victory Portfolios' Board of Trustees or by vote of a majority of the
outstanding shares of the Fund, and in either case by a majority of the Trustees
who are not parties to the Administration Agreement or interested persons (as
defined in the 1940 Act) of any party to the Administration Agreement, by votes
cast in person at a meeting called for such purpose.
The Administration Agreement provides that CHC shall not be liable for
any error of judgment or mistake of law or any loss suffered by the Victory
Portfolios in connection with the matters to which the Administration Agreement
relates, except a loss resulting from willful misfeasance, bad faith, or gross
negligence in the performance of its duties, or from the reckless disregard by
it of its obligations and duties thereunder.
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<PAGE> 135
Under the Administration Agreement, CHC assists in the Fund's
administration and operation, including providing statistical and research data,
clerical services, internal compliance and various other administrative
services, including among other responsibilities, forwarding certain purchase
and redemption requests to the Transfer Agent, participation in the updating of
the prospectus, coordinating the preparation, filing, printing and dissemination
of reports to shareholders, coordinating the preparation of income tax returns,
arranging for the maintenance of books and records and providing the office
facilities necessary to carry out the duties thereunder. Under the
Administration Agreement, CHC may delegate all or any part of its
responsibilities thereunder.
In the fiscal years ended October 31, 1993, October 31, 1994 and
October 31, 1995, the Fund paid to Winsbury and CHC aggregate administration
fees of $151,653, $235,613 and $______, respectively, after fee reductions of
$1,711, $13,621 and $_____, respectively.
Business Management Agreement
In connection with its obligations under the Investment Sub-Advisory
Agreement, the Sub-Adviser has entered into a Business Management Agreement with
Key Advisers, pursuant to which Key Advisers provides certain administrative and
support services to the Sub-Adviser. Such services include preparing reports to
the Victory Portfolios' Board of Trustees, recordkeeping services, and services
rendered in connection with the preparation of regulatory filings and other
reports, and regulatory and other administrative and compliance systems and
support services.
For such services to the Fund the Sub-Adviser pays fees to Key Advisers
which vary according to a sliding scale containing "breakpoints" at which
decreases in the business management fees correspond to increases in the average
daily net asset values of the Fund as follows:
<TABLE>
<CAPTION>
Net Assets Rate of Business
of the Fund Management Fee*
----------- ---------------
<S> <C>
Up to $10,000,000 0.25%
Next $15,000,000 0.15%
Next $25,000,000 0.10%
Above $50,000,000 0.05%
</TABLE>
-----------------
* As a percentage of average daily net assets.
Shareholder Servicing Plan
The Victory Portfolios, on behalf of the Fund, has adopted a
Shareholder Servicing Plan to provide payments to shareholder servicing agents
(each a "Shareholder Servicing Agent") that provide administrative support
services to customers who may from time to time beneficially own shares, which
services include: (i) aggregating and processing purchase and redemption
requests for shares from customers and promptly transmitting net purchase and
redemption orders to our distributor or transfer agent; (ii) providing
customers with a service that invests the assets of their accounts in shares
pursuant to specific or pre-authorized instructions; (iii) processing dividend
and distribution payments from the Victory Portfolios on behalf of customers;
(iv) providing information periodically to customers showing their positions in
shares; (v) arranging for bank wires; (vi) responding to customer inquiries
concerning their investment in shares; (vii) providing subaccounting with
respect to shares beneficially owned by customers or providing the information
to the Victory Portfolios necessary for subaccounting; (viii) if required by
law, forwarding shareholder communications from us (such as proxies, shareholder
reports, annual and semi-annual
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<PAGE> 136
financial statements and dividend, distribution and tax notices) to customers;
(ix) forwarding to customers proxy statements and proxies containing any
proposals regarding this Plan; and (x) providing such other similar services as
we may reasonably request to the extent you are permitted to do so under
applicable statutes, rules or regulations. For expenses incurred and services
provided pursuant to the Shareholder Servicing Agreement, the Fund pays each
Shareholder Servicing Agent a fee computed daily and paid monthly, in amounts
aggregating not more than twenty-five one-hundredths of one percent (.25%) of
the average daily net assets of the Fund per year. A Shareholder Servicing
Agent may periodically waive all or a portion of its respective shareholder
servicing fees with respect to the Fund to increase the net income of the Fund
available for distribution as dividends.
Expenses
The Fund bears the following expenses relating to its operations:
taxes, interest, brokerage fees and commissions, fees of the Trustees of the
Victory Portfolios, Commission fees, state securities qualification fees, costs
of preparing and printing prospectuses for regulatory purposes and for
distribution to current shareholders, outside auditing and legal expenses,
advisory and administration fees, fees and out-of-pocket expenses of the
custodian and transfer agent, certain insurance premiums, costs of maintenance
of the Fund's existence, costs of shareholders' reports and meetings, and any
extraordinary expenses incurred in the Fund's operation.
If total expenses borne by the Fund in any fiscal year exceeds expense
limitations imposed by applicable state securities regulations, Key Advisers,
the Sub-Adviser or the Administrator will waive their fees to the extent such
excess expenses exceed such expense limitation in proportion to their respective
fees. As of the date of this Statement of Additional Information, the most
restrictive expense limitation applicable to the Fund limits its aggregate
annual expenses, including management and advisory fees but excluding interest,
taxes, brokerage commissions, and certain other expenses, to 2.5% of the first
$30 million of its average net assets, 2.0% of the next $70 million of its
average net assets, and 1.5% of its remaining average net assets. Any expenses
to be borne by Key Advisers, Sub-Adviser or the Administrator will be estimated
daily and reconciled and paid on a monthly basis. Fees imposed upon customer
accounts by Key Advisers, the Sub-Adviser, Key Trust Company of Ohio, N.A. or
its correspondents, affiliated banks and other non-bank affiliates for cash
management services are not fund expenses for purposes of any such expense
limitation.
Distributor
Victory Broker-Dealer Services, Inc. (the "Distributor") serves as
distributor for the continuous offering of the shares of the Fund pursuant to a
Distribution Agreement between the Distributor of the Victory Portfolios.
Unless otherwise terminated, the Distribution Agreement will remain in effect
with respect to the Fund for two years, and thereafter for consecutive one-year
terms, provided that it is approved at least annually (i) by the Victory
Portfolios' Trustees or by the vote of a majority of the outstanding shares of
the Fund, and (ii) by the vote of a majority of the Trustees of the Victory
Portfolios who are not parties to the Distribution Agreement or interested
persons of any such party, cast in person at a meeting called for the purpose of
voting on such approval. The Distribution Agreement will terminate in the event
of its assignment, as defined in the 1940 Act. For the Funds' fiscal years
ended October 31, 1994, and October 31, 1995, [Winsbury] received $212,021 and
$______, respectively, in underwriting commissions, and retained $15 and $___,
respectively.
Fund Accountant
BISYS Fund Services Ohio, Inc. serves as fund accountant for The Fund
pursuant to a fund accounting agreement with the Victory Portfolios dated June
5, 1995 (the "Fund Accounting Agreement"). As fund accountant for the Victory
Portfolios, BISYS Fund Services Ohio, Inc. calculates the Fund's net asset
value, the dividend and capital gain distributions, if any, and the yield. BISYS
Fund Services Ohio, Inc. also provides a current security position report, a
summary report of transactions and pending maturities, a current cash position
report, and maintains the general ledger accounting records for the Fund. Under
the Fund Accounting Agreement, BISYS Fund
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<PAGE> 137
Services Ohio, Inc. is entitled to receive annual fees of .03% of the first $100
million of the Fund's daily average net assets, .02% of the next $100 million of
the Fund's daily average net assets, and .01% of the Fund's remaining daily
average net assets. These annual fees are subject to a minimum monthly assets
charge of $2,917 per tax-free Fund and do not include out-of-pocket expenses or
multiple class charges of $833 per month assessed for each class of shares after
the first class. In the fiscal years ended October 31, 1993, October 31, 1994,
and October 31, 1995, the Victory Portfolios paid The Winsbury Service
Corporation fund accounting fees (after fee waivers) of $60,563.69, $106,719 and
$______, respectively, for the Fund.
Custodian
Cash and securities owned by the Fund are held by Key Trust Company of
Ohio, N.A. as custodian. Key Trust Company of Ohio, N.A. serves as custodian to
the Fund pursuant to a Custodian Agreement dated May 24, 1995. Under this
Agreement, Key Trust Company of Ohio, N.A. (i) maintains a separate account or
accounts in the name of the Fund; (ii) makes receipts and disbursements of money
on behalf of the Fund; (iii) collects and receives all income and other payments
and distributions on account of portfolio securities; (iv) responds to
correspondence from security brokers and others relating to its duties; and (v)
makes periodic reports to the Victory Portfolios' Trustees concerning the
Victory Portfolios' operations. Key Trust Company of Ohio, N.A. may, with the
approval of the Victory Portfolios and the custodian's own expense, open and
maintain a sub-custody account or accounts on behalf of the Fund, provided that
Key Trust Company of Ohio, N.A. shall remain liable for the performance of all
of its duties under the Custodian Agreement.
Transfer Agent
The Primary Funds Service Corporation ("PFSC") serves as transfer agent
and dividend disbursing agent for each fund, pursuant to a Transfer Agency and
Shareholder Servicing Agreement. Under its agreement with the Victory
Portfolios, PFSC has agreed (i) to issue and redeem shares of the Victory
Portfolios; (ii) to address and mail all communications by the Victory
Portfolios to its shareholders, including reports to shareholders, dividend and
distribution notices, and proxy material for its meetings of shareholders; (iii)
to respond to correspondence or inquiries by shareholders and others relating to
its duties; (iv) to maintain shareholder accounts and certain sub-accounts; and
(v) to make periodic reports to the Victory Portfolios' Trustees concerning the
Victory Portfolios' operations. For the services provided under the Transfer
Agency and Shareholder Servicing Agreement, PFSC receives a maximum monthly fee
of $1,250 per fund to a maximum of $3.50 per account per fund.
Auditors
The financial highlights appearing in the Prospectus for the Fund, other than
unaudited information marked as such, has been derived from financial statements
of the Fund incorporated by reference in this Statement of Additional
Information which, for the two month period ended October 31, 1995 and fiscal
year ended August 31, 1995, has been audited by Coopers & Lybrand L.L.P. as set
forth in their report incorporated by reference herein, and are included in
reliance upon such report and on the authority of such firm as experts in
auditing and accounting. Information for the fiscal year ended August 31, 1994
has been audited by KPMG Peat Marwick L.L.P., independent accountants for the
Predecessor Fund, as set forth in their report incorporated by reference herein,
and are included in reliance upon such report and on the authority of such firm
as experts in auditing and accounting. Information for all other periods has
been audited by Ernst & Young, L.L.P., independent accountants to the
predecessor to the Predecessor Fund. Coopers & Lybrand L.L.P. serves as the
Victory Portfolios' auditors. Coopers & Lybrand L.L.P.'s address is 100 East
Broad Street, Columbus, Ohio 43215.
Legal Counsel
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, 919 Third Avenue, New
York, New York 10022 is counsel to the Victory Portfolios.
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<PAGE> 138
ADDITIONAL INFORMATION
Description of Shares
The Victory Portfolios (sometimes referred to as the "Trust") is a
Delaware business trust. Its Delaware Trust Instrument was adopted on December
6, 1995 and a Certificate of Trust for the Trust was filed in Delaware on
December __, 1995.
The previously effective Massachusetts Declaration of Trust, pursuant
to which the Victory Portfolios was originally called the North Third Street
Fund, was filed with the Secretary of State of the Commonwealth of Massachusetts
on February 6, 1986. On September 22, 1986, an Amended and Restated Declaration
of Trust was filed to change the name of the Trust to The Emblem Fund and to
make certain other changes. A second amendment was filed October 23, 1986
providing for voting of shares in the aggregate except where voting of shares by
series is otherwise required by law. An amendment to the Amended and Restated
Declaration of Trust was filed on March 15, 1993 to change the name of the Trust
to The Society Funds. An Amended and Restated Declaration of Trust was then
filed on September 2, 1994 to change the name of the Trust to The Victory
Portfolios.
The currently effective Delaware Trust Instrument authorizes the
Trustees to issue an unlimited number of shares, which are units of beneficial
interest, without par value. The Victory Portfolios presently has twenty-eight
series of shares, which represent interests in the U.S. Government Obligations
Fund, the Prime Obligations Fund, the Tax-Free Money Market Fund, the Balanced
Fund, the Stock Index Fund, the Value Fund, the Fund, the Growth Fund, the
Special Value Fund, the Special Growth Fund, the Ohio Regional Stock Fund, the
International Growth Fund, the Limited Term Income Fund, the Government Mortgage
Fund, the Ohio Municipal Bond Fund, the Intermediate Income Fund, the Investment
Quality Bond Fund, the Florida Tax-Free Bond Fund, the Municipal Bond Fund, the
Convertible Securities Fund, the Short-Term U.S. Government Income Fund, the
Government Bond Fund, the Fund for Income, the National Municipal Bond Fund, the
New York Tax-Free Fund, the Institutional Money Market Fund, the Financial
Reserves Fund and the Ohio Municipal Money Market Fund, respectively. The
Victory Portfolios' Delaware Trust Instrument authorizes the Trustees to divide
or redivide any unissued shares of the Victory Portfolios into one or more
additional series by setting or changing in any one or more respects their
respective preferences, conversion or other rights, voting power, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption.
Shares have no subscription or preemptive rights and only such
conversion or exchange rights as the Trustees may grant in their discretion.
When issued for payment as described in the Prospectus and this Statement of
Additional Information, the Victory Portfolios' shares will be fully paid and
non-assessable. In the event of a liquidation or dissolution of the Victory
Portfolios, shares of the Fund are entitled to receive the assets available for
distribution belonging to the Fund, and a proportionate distribution, based upon
the relative asset values of the Victory Portfolios, of any general assets not
belonging to any particular fund which are available for distribution.
As described in the Prospectus under the caption "ADDITIONAL
INFORMATION -- Voting Rights," shares of the Victory Portfolios are entitled to
one vote per share (with proportional voting for fractional shares) on such
matters as shareholders are entitled to vote. On any matter submitted to a vote
of the shareholders, all shares are voted separately by individual series
(funds), and whenever the Trustees determine that the matter affects only
certain series, may be submitted for a vote by only such series, except (i) when
required by the 1940 Act, shares are voted in the aggregate and not by
individual series; and (ii) when the Trustees have determined that the matter
affects the interests of more than one series and that voting by shareholders of
all series would be consistent with the 1940 Act, then the shareholders of all
such series shall be entitled to vote thereon (either by individual series or by
shares voted in the aggregate, as the Trustees in their discretion may
determine). The Trustees may also determine that a matter affects only the
interests of one or more classes of a series, in which case (or if required
under the 1940 Act) such matter shall be voted on by such class or classes.
There will normally be no
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<PAGE> 139
meetings of shareholders for the purpose of electing Trustees unless and until
such time as less than a majority of the Trustees have been elected by the
shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees. In addition, Trustees may
be removed from office by a vote of the holders of at least two-thirds of the
outstanding shares of the Victory Portfolios. A meeting shall be held for such
purpose upon the written request of the holders of not less than 10% of the
outstanding shares. Upon written request by ten or more shareholders meeting
the qualifications of Section 16(c) of the 1940 Act, (i.e., person who have been
shareholders for at least six months, and who hold shares having an NAV of at
least $25,000 or constituting 1% of the outstanding shares) stating that such
shareholders wish to communicate with the other shareholders for the purpose of
obtaining the signatures necessary to demand a meeting to consider removal of a
Trustee, the Victory Portfolios will provide a list of shareholders or
disseminate appropriate materials (at the expense of the requesting
shareholders). Except as set forth above, the Trustees shall continue to hold
office and may appoint their successors.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Victory Portfolios shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each fund of the Victory Portfolios affected by the
matter. For purposes of determining whether the approval of a majority of the
outstanding shares of a fund will be required in connection with a matter, a
fund will be deemed to be affected by a matter unless it is clear that the
interests of each fund in the matter are identical, or that the matter does not
affect any interest of the fund. Under Rule 18f-2, the approval of an
investment advisory agreement or any change in investment policy would be
effectively acted upon with respect to a fund only if approved by a majority of
the outstanding shares of such fund. However, Rule 18f-2 also provides that the
ratification of independent public accountants, the approval of principal
underwriting contracts, and the election of Trustees may be effectively acted
upon by shareholders of all of the Victory Portfolios voting without regard to
series.
Shareholder and Trustee Liability
The Delaware Business Trust Act provides that a shareholder of a
Delaware business trust shall be entitled to the same limitation of personal
liability extended to shareholders of Delaware corporations. The Delaware Trust
Instrument also provides for indemnification out of the trust property of any
shareholder held personally liable solely by reason of his or her being or
having been a shareholder. The Delaware Trust Instrument also provides that the
Victory Portfolios shall, upon request, assume the defense of any claim made
against any shareholder for any act or obligation of the Victory Portfolios, and
shall satisfy any judgment thereon. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is considered to be extremely
remote.
The Delaware Trust Instrument states further that no Trustee, officer,
or agent of the Victory Portfolios shall be personally liable in connection with
the administration or preservation of the assets of the Funds or the conduct of
the Victory Portfolios' business; nor shall any Trustee, officer, or agent be
personally liable to any person for any action or failure to act except for his
own bad faith, willful misfeasance, gross negligence, or reckless disregard of
his duties. The Declaration of Trust also provides that all persons having any
claim against the Trustees or the Victory Portfolios shall look solely to the
assets of the Victory Portfolios for payment.
Miscellaneous
As used in the Prospectus and in this Statement of Additional
Information, "assets belonging to a fund" (or "assets belonging to the Fund")
means the consideration received by the Victory Portfolios upon the issuance or
sale of shares in that fund, together with all income, earnings, profits, and
proceeds derived from the investment thereof, including any proceeds from the
sale, exchange, or liquidation of such investments, and any funds or payments
derived from any reinvestment of such proceeds and any general assets of the
Victory Portfolios, which general liabilities and expenses are not readily
identified as belonging to a particular fund (or the Fund) that are allocated to
that fund (or the Fund) by the Victory Portfolios' Trustees. The Trustees may
allocate such general assets in
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any manner they deem fair and equitable. It is anticipated that the formula
that will be used by the Trustees in making allocations of general assets to a
particular fund of the Victory Portfolios will be the relative net asset value
of the respective fund at the time of allocation. Assets belonging to a
particular fund are charged with the direct liabilities and expenses of that
fund, and with a share of the general liabilities and expenses of each of the
funds not readily identified as belonging to a particular fund that are
allocated to each fund in accordance with its proportionate share of the net
asset values of the Victory Portfolios at the time of allocation. The timing of
allocations of general assets and general liabilities and expenses of the
Victory Portfolios to a particular fund will be determined by the Trustees of
the Victory Portfolios and will be in accordance with generally accepted
accounting principles. Determinations by the Trustees of the Victory Portfolios
as to the timing of the allocation of general liabilities and expenses and as to
the timing and allocable portion of any general assets with respect to a
particular fund are conclusive.
As used in the Prospectus and in this Statement of Additional
Information, a "vote of a majority of the outstanding shares" or a "vote of a
majority of the outstanding voting securities" of the Victory Portfolios or a
particular fund means the affirmative vote of the lesser of (a) 67% or more of
the shares of the Victory Portfolios or such fund present at a meeting at which
the holders of more than 50% of the outstanding shares of the Victory Portfolios
or such fund are represented in person or by proxy, or (b) more than 50% of the
outstanding shares of the Victory Portfolios or such fund.
Organizational expenses are allocated to each of the Victory Portfolios
and are amortized over a period of two years from the commencement of the public
offering of shares of the Victory Portfolios.
The Victory Portfolios is registered with the Commission as an open-end
management investment company. Such registration does not involve supervision
by the Commission of the management or policies of the Victory Portfolios.
The Prospectus and this Statement of Additional Information omit
certain of the information contained in the Registration Statement filed with
the Commission. Copies of such information may be obtained from the Commission
upon payment of the prescribed fee.
The Prospectus and this Statement of Additional Information are not an
offering of the securities herein described in any state in which such offering
may not lawfully be made. No salesman, dealer, or other person is authorized to
give any information or make any representation other than those contained in
the Prospectus and this Statement of Additional Information.
The 1995 Annual Report to shareholders of The Victory Portfolios is
incorporated by reference herein. This report includes the financial
statements for fiscal year ended October 31, 199. The opinion in the Annual
Report of Coopers & Lybrand L.L.P., independent accountants, is incorporated
by reference herein in its entirety to such Annual Report, and such financial
statements are incorporated in their entirety in reliance upon such report of
Coopers & Lybrand L.L.P. and on the authority of such firm as experts in
auditing and accounting.
Delaware law authorizes electronic or telephonic communications between
shareholders and the Victory Portfolios. Under Delaware law, the Successor
Company has the flexibility to respond to future business contingencies. For
example, the Trustees will have the power to incorporate the Victory Portfolios,
to merge or consolidate it with another entity, to cause each fund to become a
separate trust, and to change the Victory Portfolios' domicile without a
shareholder vote. This flexibility could help reduce the expense and frequency
of future shareholder meetings for non-investment related issues.
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INDEPENDENT AUDITOR'S REPORT
FINANCIAL STATEMENTS
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APPENDIX
The nationally recognized statistical rating organizations
(individually, an "NRSRO") that may be utilized by Key Advisers or the
Sub-Adviser with regard to portfolio investments for the Funds include Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), Duff
& Phelps, Inc. ("Duff"), Fitch Investors Service, Inc. ("Fitch"), IBCA Limited
and its affiliate, IBCA Inc. (collectively, "IBCA"), and Thomson BankWatch, Inc.
("Thomson"). Set forth below is a description of the relevant ratings of each
such NRSRO. The NRSROs that may be utilized by Key Advisers or the Sub-Adviser
and the description of each NRSRO's ratings is as of the date of this Statement
of Additional Information, and may subsequently change.
Long-Term Debt Ratings (may be assigned, for example, to corporate and
municipal bonds)
Description of the five highest long-term debt ratings by Moody's
(Moody's applies numerical modifiers (e.g., 1, 2, and 3) in each rating category
to indicate the security's ranking within the category):
Aaa. Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.
A. Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in the
future.
Baa. Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements -
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times in the future. Uncertainty of
position characterizes bonds in this class.
Description of the five highest long-term debt ratings by S&P (S&P may
apply a plus (+) or minus (-) to a particular rating classification to show
relative standing within that classification):
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
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BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB. Debt rated BB is regarded, on balance, as predominately
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. While such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposure to adverse conditions.
Description of the three highest long-term debt ratings by Duff:
AAA. Highest credit quality. The risk factors are negligible being
only slightly more than for risk-free U.S. Treasury debt.
AA+. High credit quality Protection factors are strong.
AA. Risk is modest but may vary slightly from time to time
AA-. because of economic conditions.
A+. Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
Description of the three highest long-term debt ratings by Fitch (plus
or minus signs are used with a rating symbol to indicate the relative position
of the credit within the rating category):
AAA. Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA. Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA."
Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments, short-term
debt of these issues is generally rated "[-]+."
A. Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
IBCA's description of its three highest long-term debt ratings:
AAA. Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic or
financial conditions are unlikely to increase investment risk
significantly.
AA. Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic, or
financial conditions may increase investment risk albeit not very
significantly.
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A. Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial
conditions may lead to increased investment risk.
Short-Term Debt Ratings (may be assigned, for example, to commercial
paper, master demand notes, bank instruments, and letters of credit)
Moody's description of its three highest short-term debt ratings:
Prime-1. Issuers rated Prime-1 (or supporting institutions) have a
superior capacity for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a
strong capacity for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
S&P's description of its three highest short-term debt ratings:
A-1. This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to have extremely
strong safety characteristics are denoted with a plus sign (+).
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1."
A-3. Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the
higher designations.
Duff's description of its five highest short-term debt ratings (Duff
incorporates gradations of "1+" (one plus) and "1-" (one minus) to assist
investors in recognizing quality differences within the highest rating
category):
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Duff 1+. Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
Duff 1. Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
Duff 1-. High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors. Risk
factors are very small.
Duff 2. Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
Duff 3. Satisfactory liquidity and other protection factors qualify
issue as to investment grade.
Risk factors are larger and subject to more variation. Nevertheless,
timely payment is expected.
Fitch's description of its four highest short-term debt ratings:
F-1+. Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of assurance for
timely payment.
F-1. Very Strong Credit Quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2. Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as for issues assigned F-1+ or F-1 ratings.
F-3. Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate, however, near-term adverse changes could cause
these securities to be rated below investment grade.
IBCA's description of its three highest short-term debt ratings:
A+. Obligations supported by the highest capacity for timely
repayment.
A1. Obligations supported by a very strong capacity for timely
repayment.
A2. Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
Short-Term Loan/Municipal Note Ratings
Moody's description of its two highest short-term loan/municipal note
ratings:
MIG-1/VMIG-1. This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
MIG-2/VMIG-2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
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S&P's description of its two highest municipal note ratings:
SP-1. Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
SP-2. Satisfactory capacity to pay principal and interest.
Short-Term Debt Ratings
Thomson BankWatch, Inc. ("TBW") ratings are based upon a qualitative
and quantitative analysis of all segments of the organization including, where
applicable, holding company and operating subsidiaries.
TBW Ratings do not constitute a recommendation to buy or sell
securities of any of these companies. Further, TBW does not suggest specific
investment criteria for individual clients.
The TBW Short-Term Ratings apply to commercial paper, other senior
short-term obligations and deposit obligations of the entities to which the
rating has been assigned.
The TBW Short-Term Ratings apply only to unsecured instruments that
have a maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an
untimely payment of principal or interest.
TBW-1. The highest category; indicates a very high degree of
likelihood that principal and interest will be paid on a timely basis.
TBW-2. The second highest category; while the degree of safety
regarding timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1".
TBW-3. The lowest investment grade category; indicates that while more
susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and interest in a
timely fashion is considered adequate.
TBW-4. The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
Definitions of Certain Money Market Instruments
Commercial Paper
Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.
Certificates of Deposit
Certificates of Deposit are negotiable certificates issued against
funds deposited in a commercial bank or a savings and loan association for a
definite period of time and earning a specified return.
Bankers' Acceptances
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Bankers' acceptances are negotiable drafts or bills of exchange,
normally drawn by an importer or exporter to pay for specific merchandise, which
are "accepted" by a bank, meaning, in effect, that the bank unconditionally
agrees to pay the face value of the instrument on maturity.
U.S. Treasury Obligations
U.S. Treasury Obligations are obligations issued or guaranteed as to
payment of principal and interest by the full faith and credit of the U.S.
Government. These obligations may include Treasury bills, notes and bonds, and
issues of agencies and instrumentalities of the U.S. Government, provided such
obligations are guaranteed as to payment of principal and interest by the full
faith and credit of the U.S. Government.
U.S. Government Agency and Instrumentality Obligations
Obligations issued by agencies and instrumentalities of the U.S.
Government include such agencies and instrumentalities as the Government
National Mortgage Association, the Export-Import Bank of the United States, the
Tennessee Valley Authority, the Farmers Home Administration, the Federal Home
Loan Banks, the Federal Intermediate Credit Banks, the Federal Farm Credit
Banks, the Federal Land Banks, the Federal Housing Administration, the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation, and
the Student Loan Marketing Association. Some of these obligations, such as
those of the Government National Mortgage Association are supported by the full
faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others, such as
those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not obligated to do so by law. A Fund will invest in
the obligations of such instrumentalities only when the investment adviser
believes that the credit risk with respect to the instrumentality is minimal.
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STATEMENT OF ADDITIONAL INFORMATION
THE VICTORY PORTFOLIOS
THE GROWTH FUND
March 1, 1996
This Statement of Additional Information is not a Prospectus, but
should be read in conjunction with the Prospectus of The Victory Portfolios -
The Growth Fund, dated the same date as the date hereof (the "Prospectus"). This
Statement of Additional Information is incorporated by reference in its entirety
into the Prospectus. Copies of the Prospectus may be obtained by writing The
Victory Portfolios at Primary Funds Service Corporation, P.O. Box 9741,
Providence, RI 02940-9741, or by telephoning toll free 800-539-FUND or
800-539-3863.
<TABLE>
<S> <C> <C>
Investment Policies and Limitations 1 INVESTMENT ADVISER
Valuation of Portfolio Securities 10 KeyCorp Mutual Fund Advisers, Inc.
Additional Purchase, Exchange
and Redemption Information 14 INVESTMENT SUB-ADVISER
Management of the Victory Portfolios 18 Society Asset Management, Inc
Advisory and Other Contracts 26
Additional Information 33 ADMINISTRATOR
Independent Auditor's Report 36 Concord Holding Corporation
Financial Statements 36
Appendix 37 DISTRIBUTOR
Victory Broker-Dealer Services, Inc.
TRANSFER AGENT
Primary Funds Service Corporation
CUSTODIAN
Key Trust Company of Ohio, N.A.
</TABLE>
<PAGE> 149
STATEMENT OF ADDITIONAL INFORMATION
The Victory Portfolios (the "Victory Portfolios") is an open-end
management investment company. The Victory Portfolios consist of twenty-eight
series of units of beneficial interest ("shares"), four of which series are
currently inactive. The outstanding shares represent the twenty-four separate
investment portfolios which are currently active. This Statement of Additional
Information relates to the Victory Growth Fund (the "Fund") only. Much of the
information contained in this Statement of Additional Information expands on
subjects discussed in the Prospectus. Capitalized terms not defined herein are
used as defined in the Prospectus. No investment in shares of the Fund should be
made without first reading the Fund's Prospectus.
INVESTMENT POLICIES AND LIMITATIONS
Additional Information Regarding Fund Instruments
The following policies supplement the investment objectives and
policies of the Fund set forth in the Prospectus.
Bankers' Acceptances and Certificates of Deposit. The Fund may invest
in bankers' acceptances, certificates of deposit, and demand and time deposits.
Bankers' acceptances are negotiable drafts or bills of exchange typically drawn
by an importer or exporter to pay for specific merchandise, which are "accepted"
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity. Certificates of deposit are negotiable
certificates issued against funds deposited in a commercial bank or a savings
and loan association for a definite period of time and earning a specified
return.
Bankers' acceptances will be those guaranteed by domestic and foreign
banks, if at the time of purchase such banks have capital, surplus, and
undivided profits in excess of $100,000,000 (as of the date of their most
recently published financial statements). Certificates of deposit and demand and
time deposits invested in by the Fund will be those of domestic and foreign
banks and savings and loan associations, if (a) at the time of purchase such
financial institutions have capital, surplus, and undivided profits in excess of
$100,000,000 (as of the date of their most recently published financial
statements) or (b) the principal amount of the instrument is insured in full by
the Federal Deposit Insurance Corporation or the Savings Association Insurance
Fund.
The Fund may also invest in Eurodollar Certificates of Deposit ("ECDs")
which are U.S. dollar-denominated certificates of deposit issued by branches of
foreign and domestic banks located outside the United States, Yankee
Certificates of Deposit ("Yankee CDs") which are certificates of deposit issued
by a U.S. branch of a foreign bank denominated in U.S. dollars and held in the
United States, Eurodollar Time Deposits ("ETDs") which are U.S.
dollar-denominated deposits in a foreign branch of a U.S. bank or a foreign
bank, and Canadian Time Deposits ("CTDs") which are U.S. dollar-denominated
certificates of deposit issued by Canadian offices of major Canadian Banks.
Commercial Paper. Commercial paper consists of unsecured promissory
notes issued by corporations. Except as noted below with respect to variable
amount master demand notes, issues of commercial paper normally have maturities
of less than nine months and fixed rates of return.
The Fund will purchase only commercial paper rated in one of the two
highest categories at the time of purchase by an NRSRO or, if not rated, found
by the Victory Portfolios' Board of Trustees to present minimal credit risks and
to be of comparable quality to instruments that are rated high quality (i.e., in
one of the two top ratings categories) by a NRSRO that is neither controlling,
controlled by, or under common control with the issuer of, or any
<PAGE> 150
issuer, guarantor, or provider of credit support for, the instruments. For a
description of the rating symbols of each NRSRO see the Appendix to this
Statement of Additional Information.
Variable Amount Master Demand Notes. Variable amount master demand
notes in which the Fund may invest are unsecured demand notes that permit the
indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate according to the terms of the instrument. Although there is no
secondary market for these notes, the Fund may demand payment of principal and
accrued interest at any time and may resell the notes at any time to a third
party. The absence of an active secondary market, however, could make it
difficult for the Fund to dispose of a variable amount master demand note if the
issuer defaulted on its payment obligations, and the Fund could, for this or
other reasons, suffer a loss to the extent of the default. While the notes are
not typically rated by credit rating agencies, issuers of variable amount master
demand notes must satisfy the same criteria as set forth above for unrated
commercial paper, and Key Advisers or the Sub-Adviser will continuously monitor
the issuer's financial status and ability to make payments due under the
instrument. Where necessary to ensure that a note is of "high quality," the Fund
will require that the issuer's obligation to pay the principal of the note be
backed by an unconditional bank letter or line of credit, guarantee or
commitment to lend. For purposes of the Fund's investment policies, a variable
amount master note will be deemed to have a maturity equal to the longer of the
period of time remaining until the next readjustment of its interest rate or the
period of time remaining until the principal amount can be recovered from the
issuer through demand. (See Variable and Floating Rate Notes, below.)
Foreign Investment. The Fund may invest in securities issued by foreign
branches of U.S. banks, foreign banks, or other foreign issuers, including
American Depository Receipts ("ADRs") and securities purchased on foreign
securities exchanges. Such investment may subject the Fund to investment risks
that differ in some respects from those related to investments in obligations of
U.S. domestic issuers or in U.S. securities markets. Such risks include future
adverse political and economic developments, possible seizure, nationalization,
or expropriation of foreign investments, less stringent disclosure requirements,
the possible establishment of exchange controls or taxation at the source, and
the adoption of other foreign governmental restrictions. Additional risks
include currency exchange risks, less publicly available information, the risk
that companies may not be subject to the accounting, auditing and financial
reporting standards and requirements of U.S. companies, the risk that foreign
securities markets may have less volume and therefore many securities traded in
these markets may be less liquid and their prices are more volatile than U.S.
securities, and the risk that custodian and brokerage costs may be higher.
Permissible investments include obligations or securities of foreign issuers,
foreign branches of U.S. banks and of foreign banks. The Fund will acquire such
securities only when Key Advisers or the Sub-Adviser believes the risks
associated with such investments are minimal.
Variable and Floating Rate Notes. The Fund may acquire variable and
floating rate notes, subject to its investment objectives, policies and
restrictions. A variable rate note is one whose terms provide for the
readjustment of its interest rate on set dates and which, upon such
readjustment, can reasonably be expected to have a market value that
approximates its par value. A floating rate note is one whose terms provide for
the readjustment of its interest rate whenever a specified interest rate changes
and which, at any time, can reasonably be expected to have a market value that
approximates its par value. Such notes are frequently not rated by credit rating
agencies; however, unrated variable and floating rate notes purchased by the
Fund will only be those determined by Key Advisers or the Sub-Adviser, under
guidelines established by the Trustees, to pose minimal credit risks and to be
of comparable quality, at the time of purchase, to rated instruments eligible
for purchase under the Fund's investment policies. In making such
determinations, Key Advisers or the Sub-Adviser will consider the earning power,
cash flow and other liquidity ratios of the issuers of such notes (such issuers
include financial, merchandising, bank holding and other companies) and will
continuously monitor their financial condition. Although there may be no active
secondary market with respect to a particular variable or floating rate note
purchased by the Fund, the Fund may resell the note at any time to a third
party. The absence of an active secondary market, however, could make it
difficult for the Fund to dispose of a variable or floating rate note in the
event the issuer of the note defaulted on its payment obligations and the Fund
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could, for this or other reasons, suffer a loss to the extent of the default.
Variable or floating rate notes may be secured by bank letters of credit.
Variable or floating rate notes may have maturities of more than one
year, as follows:
1. A note that is issued or guaranteed by the United States
government or any agency thereof and which has a variable rate of interest
readjusted no less frequently than annually will be deemed by the Fund to have a
maturity equal to the period remaining until the next readjustment of the
interest rate.
2. A variable rate note, the principal amount of which is scheduled
on the face of the instrument to be paid in one year or less, will be deemed by
the Fund to have a maturity equal to the period remaining until the next
readjustment of the interest rate.
3. A variable rate note that is subject to a demand feature
scheduled to be paid in one year or more will be deemed by the Fund to have a
maturity equal to the longer of the period remaining until the next readjustment
of the interest rate or the period remaining until the principal amount can be
recovered through demand.
4. A floating rate note that is subject to a demand feature will be
deemed by the Fund to have a maturity equal to the period remaining until the
principal amount can be recovered through demand.
As used above, a note is "subject to a demand feature" where the Fund
is entitled to receive the principal amount of the note either at any time on no
more than 30 days' notice or at specified intervals not exceeding one year and
upon no more than 30 days' notice.
Options. The Fund may sell (write) call options which are traded on
national securities exchanges with respect to common stock in its portfolio. The
Fund must at all times have in its portfolio the securities which it may be
obligated to deliver if the option is exercised. The Fund may write call options
on its common stocks in an attempt to realize a greater level of income than
would be realized on the securities alone. The Fund may also write call options
as a partial hedge against a possible stock market decline or to extend a
holding period on a stock which is under consideration for sale in order to
create a long-term capital gain. In view of its investment objective, the Fund
generally would write call options only in circumstances where Key Advisers or
the Sub-Adviser does not anticipate significant appreciation of the underlying
security in the near future or has otherwise determined to dispose of the
security. As the writer of a call option, the Fund receives a premium for
undertaking the obligation to sell the underlying security at a fixed price
during the option period, if the option is exercised. So long as the Fund
remains obligated as a writer of a call option, it forgoes the opportunity to
profit from increases in the market price of the underlying security above the
exercise price of the option, except insofar as the premium represents such a
profit (and retains the risk of loss should the value of the underlying security
decline). The Fund may also enter into "closing purchase transactions" in order
to terminate its obligation as a writer of a call option prior to the expiration
of the option. Although the writing of call options only on national securities
exchanges increases the likelihood of the Fund's ability to make closing
purchase transactions, there is no assurance that the Fund will be able to
effect such transactions at any particular time or at any acceptable price. The
writing of call options could result in increases in the Fund's portfolio
turnover rate, especially during periods when market prices of the underlying
securities appreciate.
Futures Contracts. The Fund may enter into futures contracts, options
on futures contracts and stock index futures contracts and options thereon for
the purposes of remaining fully invested and reducing transaction costs. Futures
contracts provide for the future sale by one party and purchase by another party
of a specified amount of a specific security, class of securities, or an index
at a specified future time and at a specified price. A stock index futures
contract is a bilateral agreement pursuant to which two parties agree to take or
make delivery of an amount of cash equal to a specified dollar amount times the
difference between the stock index value at the close of trading of
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the contracts and the price at which the futures contract is originally struck.
Futures contracts which are standardized as to maturity date and underlying
financial instrument are traded on national futures exchanges. Futures exchanges
and trading are regulated under the Commodity Exchange Act by the Commodity
Futures Trading Commission ("CFTC"), a U.S. Government agency.
Although futures contracts by their terms call for actual delivery and
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying a
contract which has previously been "sold," or "selling" a contract previously
purchased) in an identical contract to terminate the position. 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
acquisition of put and call options on futures contracts will, respectively,
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. Brokerage commissions are incurred when a
futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in
cash or government securities with a broker or custodian to initiate and
maintain open positions in futures contracts. A margin deposit is intended to
assure completion of the contract (delivery or acceptance of the underlying
security) if it is not terminated prior to the specified delivery date. Minimal
initial margin requirements are established by the futures exchange and may be
changed. Brokers may establish deposit requirements which are higher than the
exchange minimums. Initial margin deposits on futures contracts are customarily
set at levels much lower than the prices at which the underlying securities are
purchased and sold, typically ranging upward from less than 5% of the value of
the contract being traded.
After a futures contract position is opened, the value of the contract
is marked-to-market daily. If the futures contract price changes to the extent
that the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Fund
expects to earn interest income on its margin deposits.
When interest rates are expected to rise or market values of portfolio
securities are expected to fall, the Fund can seek through the sale of futures
contracts to offset a decline in the value of its portfolio securities. When
interest rates are expected to fall or market values are expected to rise, the
Fund, through the purchase of such contracts, can attempt to secure better rates
or prices for the Fund than might later be available in the market when it
effects anticipated purchases.
The Funds will only sell futures contracts to protect securities it
owns against price declines or purchase contracts to protect against an increase
in the price of securities it intends to purchase.
The Fund's ability to effectively utilize futures trading depends on
several factors. First, it is possible that there will not be a perfect price
correlation between the futures contracts and their underlying stock index.
Second, it is possible that a lack of liquidity for futures contracts could
exist in the secondary market, resulting in an inability to close a futures
position prior to its maturity date. Third, the purchase of a futures contract
involves the risk that the Fund could lose more than the original margin deposit
required to initiate a futures transaction.
Restrictions on the Use of Futures Contracts. The Fund will not enter
into futures contract transactions for purposes other than bona fide hedging
purposes to the extent that, immediately thereafter, the sum of its initial
margin deposits on open contracts exceeds 5% of the market value of the Fund's
total assets. In addition, the Fund will not enter into futures contracts to the
extent that the value of the futures contracts held would exceed 1/3 of the
Fund's
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total assets. Futures transactions will be limited to the extent necessary to
maintain the Fund's qualification as a regulated investment company.
The Victory Portfolios have undertaken to restrict their futures
contract trading as follows: first, the Victory Portfolios will not engage in
transactions in futures contracts for speculative purposes; second, the Victory
Portfolios will not market its funds to the public as commodity pools or
otherwise as vehicles for trading in the commodities futures or commodity
options markets; third, the Victory Portfolios will disclose to all prospective
shareholders the purpose of and limitations on its funds' commodity futures
trading; fourth, the Victory Portfolios will submit to the Commodity Futures
Trading Commission ("CFTC") special calls for information. Accordingly,
registration as a commodities pool operator with the CFTC is not required.
In addition to the margin restrictions discussed above, transactions in
futures contracts may involve the segregation of funds pursuant to requirements
imposed by the Securities and Exchange Commission. Under those requirements,
where the Fund has a long position in a futures contract, it may be required to
establish a segregated account (not with a futures commission merchant or
broker) containing cash or certain liquid assets equal to the purchase price of
the contract (less any margin on deposit). For a short position in futures or
forward contracts held by the Fund, those requirements may mandate the
establishment of a segregated account (not with a futures commission merchant or
broker) with cash or certain liquid assets that, when added to the amounts
deposited as margin, equal the market value of the instruments underlying the
futures contracts (but are not less than the price at which the short positions
were established). However, segregation of assets is not required if the Fund
"covers" a long position. For example, instead of segregating assets, the Fund,
when holding a long position in a futures contract, could purchase a put option
on the same futures contract with a strike price as high or higher than the
price of the contract held by the fund. In addition, where the Fund takes short
positions, or engages in sales of call options, it need not segregate assets if
it "covers" these positions. For example, where the Fund holds a short position
in a futures contract, it may cover by owning the instruments underlying the
contract. The Fund may also cover such a position by holding a call option
permitting it to purchase the same futures contract at a price no higher than
the price at which the short position was established. Where the Fund sells a
call option on a futures contract, it may cover either by entering into a long
position in the same contract at a price no higher than the strike price of the
call option or by owning the instruments underlying the futures contract. The
Fund could also cover this position by holding a separate call option permitting
it to purchase the same futures contract at a price no higher than the strike
price of the call option sold by the fund.
In addition, the extent to which the Fund may enter into transactions
involving futures contracts may be limited by the Internal Revenue Code's
requirements for qualification as a registered investment company and the Fund's
intention to qualify as such.
Risk Factors in Futures Transactions. Positions in futures contracts
may be closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, the Fund would continue to be required to make daily cash payments to
maintain the required margin. In such situations, if the Fund has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, the Fund may be
required to make delivery of the instruments underlying futures contracts it
holds. The inability to close options and futures positions also could have an
adverse impact on the ability to effectively hedge them. The Fund will minimize
the risk that it will be unable to close out a futures contract by only entering
into futures contracts which are traded on national futures exchanges and for
which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. Because the deposit
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requirements in the futures markets are less onerous than margin requirements in
the securities market, there may be increased participation by speculators in
the futures market which may also cause temporary price distortions. A
relatively small price movement in a futures contract may result in immediate
and substantial loss (as well as gain) to the investor. For example, if at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit if the contract
were closed out. Thus, a purchaser or sale of a futures contract may result in
losses in excess of the amount invested in the contract. However, because the
futures strategies engaged in by the Fund are only for hedging purposes, Key
Advisers and the Sub-Adviser do not believe that the Fund is subject to the
risks of loss frequently associated with futures transactions. The Fund would
presumably have sustained comparable losses if, instead of the futures contract,
it had invested in the underlying financial instrument and sold it after the
decline.
Utilization of futures transactions by the Fund does involve the risk
of imperfect or no correlation where the securities underlying futures contract
have different maturities than the portfolio securities being hedged. It is also
possible that the Fund could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the fund has an open position in a futures contract or related
option.
Puts. The Fund may acquire and sell put options on the securities held
in its portfolio.
A put is a right to sell a specified security (or securities) within a
specified period of time at a specified exercise price. The Fund may sell,
transfer, or assign a put only in conjunction with the sale, transfer, or
assignment of the underlying security or securities. The amount payable to the
Fund upon its exercise of a "put" is normally (i) the Fund's acquisition cost of
the securities (excluding any accrued interest which the Fund paid on the
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period the fund owned the securities, plus
(ii) all interest accrued on the securities since the last interest payment date
during that period.
Puts may be acquired by the Funds to facilitate the liquidity of its
portfolio assets. Puts may also be used to facilitate the reinvestment of the
Funds' assets at a rate of return more favorable than that of the underlying
security. Puts may, under certain circumstances, also be used to shorten the
maturity of underlying variable rate or floating rate securities for purposes of
calculating the remaining maturity of those securities and the dollar-weighted
average portfolio maturity of the Fund's assets. See "Variable and Floating Rate
Notes" and "VALUATION" in this Statement of Additional Information.
Temporary Investments. The Fund may also invest temporarily in high
quality investments or cash during times of unusual market conditions for
defensive purposes and in order to accommodate shareholder redemption requests
although currently it does not intend to do so. Any portion of the Fund's assets
maintained in cash will reduce the amount of assets in securities and thereby
reduce the Fund's yield or total return.
Miscellaneous Securities. The Fund can invest in various securities
issued by domestic and foreign corporations, including preferred stocks and
investment grade corporate bonds, notes, and warrants. Bonds are long-term
corporate debt instruments secured by some or all of the issuer's assets,
debentures are general corporate debt obligations backed only by the integrity
of the borrower, and warrants are instruments that entitle the holder to
purchase a certain amount of common stock at a specified price, which price is
usually higher than the current market price at the time of issuance. Preferred
stocks are instruments that combine qualities both of equity and debt
securities. Individual issues of preferred stock will have those rights and
liabilities that are spelled out in the governing document. Preferred stocks
usually pay a fixed dividend per quarter (or annum) and are senior to common
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stock in terms of liquidation and dividends rights, and preferred stocks
typically do not have voting rights. The Fund will only purchase preferred
stocks where the issuer is publicly traded and has capital in excess of $200
million.
The Fund also may invest, consistent with its investment objective and
policies, in zero coupon bonds, which are debt instruments that do not pay
current interest and are typically sold at prices greatly discounted from par
value. The return on a zero-coupon obligation, when held to maturity, equals the
difference between the par value and the original purchase price. Zero-coupon
obligations have greater price volatility than coupon obligations.
"When-Issued" Securities. As discussed in the Prospectus, the Fund may
purchase securities on a "when issued" basis (i.e., for delivery beyond the
normal settlement date at a stated price and yield). When the Fund agrees to
purchase securities on a "when issued" basis, the Victory Portfolios' custodian
will set aside cash or liquid portfolio securities equal to the amount of the
commitment in a separate account. Normally, the custodian will set aside
portfolio securities to satisfy the purchase commitment, and in such a case, the
Fund may be required subsequently to place additional assets in the separate
account in order to assure that the value of the account remains equal to the
amount of the Fund's commitment. It may be expected that the Fund's net assets
will fluctuate to a greater degree when it sets aside portfolio securities to
cover such purchase commitments than when it sets aside cash.
When the Fund engages in "when-issued" transactions, it relies on the
seller to consummate the trade. Failure of the seller to do so may result in the
Fund incurring a loss or missing the opportunity to obtain a price considered to
be advantageous. The Fund does not intend to purchase "when issued" securities
for speculative purposes, but only in furtherance of its investment objective.
U.S. Government Obligations. The Fund may invest in obligations issued
or guaranteed by the U.S. Government, its agencies and instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. Government are
supported by the full faith and credit of the U.S. Treasury; others are
supported by the right of the issuer to borrow from the U.S. Treasury; others
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; and still others are supported only by the credit of
the agency or instrumentality. No assurance can be given that the U.S.
Government will provide financial support to U.S. Government-sponsored agencies
or instrumentalities if it is not obligated to do so by law. The Fund will
invest in the obligations of such agencies and instrumentalities only when Key
Advisers or the Sub-Adviser believes that the credit risk with respect thereto
is minimal.
Securities Lending. The Fund may lend its portfolio securities to
broker-dealers, banks or institutional borrowers of securities. The Fund must
receive a minimum of 100% collateral, plus any interest due in the form of cash
or U.S. Government securities. This collateral must be valued daily and should
the market value of the loaned securities increase, the borrower must furnish
additional collateral to the Fund. During the time portfolio securities are on
loan, the borrower will pay the Fund any dividends or interest paid on such
securities plus any interest negotiated between the parties to the lending
agreement. Loans will be subject to termination by the Fund or the borrower at
any time. While the Fund will not have the right to vote securities on loan, it
intends to terminate the loan and regain the right to vote if that is considered
important with respect to the investment. The Fund will only enter into loan
arrangements with broker-dealers, banks or other institutions which Key Advisers
or the Sub-Adviser has determined are creditworthy under guidelines established
by the Victory Portfolios' Trustees. The Fund intends to limit its securities
lending to 33 1/3% of total assets.
Other Investment Companies. The Fund may invest up to 5% of its total
assets in the securities of any one investment company, but may not own more
than 3% of the securities of any one investment company or invest more than 10%
of its total assets in the securities of other investment companies. Pursuant to
an exemptive order received by the Victory Portfolios from the Commission, the
Fund may invest in money market funds of the Victory Portfolios. Key Advisers
and/or the Sub-Adviser will waive its investment advisory fee as to all assets
invested in
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other investment companies. Because such other investment companies employ an
investment adviser, such investment by the Fund will cause shareholders to bear
duplicative fees, such as management fees.
Repurchase Agreements. Securities held by the Fund may be subject to
repurchase agreements. Under the terms of a repurchase agreement, the Fund would
acquire securities from financial institutions or registered broker-dealers
deemed creditworthy by Key Advisers or the Sub-Adviser pursuant to guidelines
adopted by the Victory Portfolios' Trustees, subject to the seller's agreement
to repurchase such securities at a mutually agreed upon date and price. The
seller is required to maintain the value of collateral held pursuant to the
agreement at not less than the repurchase price (including accrued interest). If
the seller were to default on its repurchase obligation or become insolvent, the
Fund would suffer a loss to the extent that the proceeds from a sale of the
underlying portfolio securities were less than the repurchase price, or to the
extent that the disposition of such securities by the Fund is delayed pending
court action. Repurchase agreements are considered by the staff of the
Commission to be loans by the Fund.
Reverse Repurchase Agreements. The Fund may borrow funds for temporary
purposes by entering into reverse repurchase agreements in accordance with the
investment restrictions described below. Pursuant to such agreements, the Fund
would sell portfolio securities to financial institutions such as banks and
broker-dealers, and agree to repurchase them at a mutually agreed-upon date and
price. At the time the Fund enters into a reverse repurchase agreement, it will
place in a segregated custodial account assets (such as cash or other liquid
high-grade securities) consistent with the Fund's investment restrictions having
a value equal to the repurchase price (including the accrued interest); the
collateral will be marked-to-market on a daily basis, and will be continuously
monitored to ensure that such equivalent value is maintained. Reverse repurchase
agreements involve the risk that the market value of the securities sold by the
Fund may decline below the price at which the Fund is obligated to repurchase
the securities. Reverse repurchase agreements are considered to be borrowings
under the Investment Company Act of 1940, as amended (the "1940 Act").
Investment Restrictions
The following investment restrictions are fundamental with respect to
the Fund and may be changed only by a vote of a majority of the outstanding
shares of the Fund as defined in "ADDITIONAL INFORMATION -- Miscellaneous" of
this Statement of Additional Information).
THE FUND MAY NOT:
1. Participate on a joint or joint and several basis in any
securities trading account.
2. Purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments (but this shall not prevent the
Fund from purchasing or selling options and futures contracts or from investing
in securities or other instruments backed by physical commodities).
3. Purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
Fund from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business). Investments by the
Fund in securities backed by mortgages on real estate or in marketable
securities of companies engaged in such activities are not hereby precluded.
4. Issue any senior security (as defined in the 1940 Act), except
that (a) the Fund may engage in transactions that may result in the issuance of
senior securities to the extent permitted under applicable regulations and
interpretations of the 1940 Act or an exemptive order; (b) the Fund may acquire
other securities, the acquisition of which may result in the issuance of a
senior security, to the extent permitted under applicable regulations or
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interpretations of the 1940 Act; (c) subject to the restrictions set forth
below, the Fund may borrow money as authorized by the 1940 Act.
5. Borrow money, except that (a) the Fund may enter into commitments
to purchase securities in accordance with its investment program, including
delayed-delivery and when-issued securities and reverse repurchase agreements,
provided that the total amount of any such borrowing does not exceed 33 1/3% of
the Fund's total assets; and (b) the Fund may borrow money for temporary or
emergency purposes in an amount not exceeding 5% of the value of its total
assets at the time when the loan is made. Any borrowings representing more than
5% of the Fund's total assets must be repaid before the Fund may make additional
investments.
6. Lend any security or make any other loan if, as a result, more
than 33 1/3% of its total assets would be lent to other parties, but this
limitation does not apply to purchases of publicly issued debt securities or to
repurchase agreements.
7. Underwrite securities issued by others, except to the extent that
the Fund may be considered an underwriter within the meaning of the Securities
Act of 1933 in the disposition of restricted securities.
8. With respect to 75% of the Fund's total assets, the Fund may not
purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities)
if, as a result, (a) more than 5% of the Fund's total assets would be invested
in the securities of that issuer, or (b) the Fund would hold more than 10% of
the outstanding voting securities of that issuer.
9. Purchase the securities of any issuer (other than securities
issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities, or repurchase agreements secured thereby) if, as a result,
more than 25% of the Fund's total assets would be invested in the securities of
companies whose principal business activities are in the same industry. In the
utilities category, the industry shall be determined according to the service
provided. For example, gas, electric, water and telephone will be considered as
separate industries.
The following restrictions are not fundamental and may be changed
without shareholder approval:
1. The Fund will not purchase or retain securities of any issuer if
the officers or Trustees of the Victory Portfolios or the officers or directors
of its investment adviser owning beneficially more than one half of 1% of the
securities of such issuer together own beneficially more than 5% of such
securities.
2. The Fund will not invest more than 10% of its total assets in the
securities of issuers which together with any predecessors have a record of less
than three years of continuous operation.
3. The Fund will not invest more than 15% of its net assets in
illiquid securities. Illiquid securities are securities that are not readily
marketable or cannot be disposed of promptly within seven days and in the usual
course of business at approximately the price at which the Fund has valued them.
Such securities include, but are not limited to, time deposits and repurchase
agreements with maturities longer than seven days. Securities that may be resold
under Rule 144A or securities offered pursuant to Section 4(2) of, or securities
otherwise subject to restrictions on resale under, the 1933 Act ("Restricted
Securities"), shall not be deemed illiquid solely by reason of being
unregistered. Key Advisers or the Sub-Adviser determine whether a particular
security is deemed to be liquid based on the trading markets for the specific
security and other factors. However, because state securities laws may limit the
Fund's investment in Restricted Securities (regardless of the liquidity of the
investment), investments in Restricted Securities resalable under Rule 144A will
continue to be subject to applicable state law requirements until such time, if
ever, that such limitations are changed.
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4. The Fund will not make short sales of securities, other than
short sales "against the box," or purchase securities on margin except for
short-term credits necessary for clearance of portfolio transactions, provided
that this restriction will not be applied to limit the use of options, futures
contracts and related options, in the manner otherwise permitted by the
investment restrictions, policies and investment program of the Fund.
5. The Fund may invest up to 5% of its total assets in the
securities of any one investment company, but may not own more than 3% of the
securities of any one investment company or invest more than 10% of its total
assets in the securities of other investment companies. Pursuant to an exemptive
order received by the Victory Portfolios from the Commission, the Fund may
invest in the money market funds of the Victory Portfolios.
State Regulations
In addition, the Fund, so long as its shares are registered under the
securities laws of the State of Texas and such restrictions are required as a
consequence of such registration, is subject to the following non-fundamental
policies, which may be modified in the future by the Trustees without a vote of
the Funds' shareholders: (i) The Fund has represented to the Texas State
Securities Board, that it will not invest in oil, gas or mineral leases or
purchase or sell real property (including limited partnership interests, but
excluding readily marketable securities of companies which invest in real
estate); and (ii) The Fund has represented to the Texas State Securities Board
that it will not invest more than 5% of its net assets in warrants valued at the
lower of cost or market; provided that, included within that amount, but not to
exceed 2% of net assets, may be warrants which are not listed on the New York or
American Stock Exchanges. For purposes of this restriction, warrants acquired in
units or attached to securities are deemed to be without value.
The policies and limitations listed above supplement those set forth in
the Prospectus. Unless otherwise noted, whenever an investment policy or
limitation states a maximum percentage of the Fund's assets that may be invested
in any security or other asset, or sets forth a policy regarding quality
standards, such standard or percentage limitation will be determined immediately
after and as a result of the Fund's acquisition of such security or other asset
except in the case of borrowing (or other activities that may be deemed to
result in the issuance of a "senior security" under the 1940 Act). Accordingly,
any subsequent change in values, net assets, or other circumstances will not be
considered when determining whether the investment complies with the Fund's
investment policies and limitations. If the value of the Fund's holdings of
illiquid securities at any time exceeds the percentage limitation applicable at
the time of acquisition due to subsequent fluctuations in value or other
reasons, the Board of Trustees will consider what actions, if any, are
appropriate to maintain adequate liquidity.
FUTURE DEVELOPMENTS
The Fund may take advantage of other investment practices which are not
at present contemplated for use by the Fund or which currently are not available
but which may be developed, to the extent such investment practices are both
consistent with the Fund's investment objective and are legally permissible for
the Fund. Such investment practices, if they arise, may involve risks which
exceed those involved in the activities described in the Prospectus and
Statement of Additional Information. Prior to commencing any new investment
practice, the Fund will notify shareholders by means of prospectus supplement.
Portfolio Turnover
The turnover rate stated in the Prospectus for the Fund's investment
portfolio is calculated by dividing the lesser of the Fund's purchases or sales
of portfolio securities for the year by the monthly average value of the
portfolio securities. The calculation excludes all securities whose maturities,
at the time of acquisition, were one year or less.
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VALUATION OF PORTFOLIO SECURITIES
Investment securities held by the Fund are valued on the basis of
valuations provided by an independent pricing service, approved by the Board of
Trustees, which uses information with respect to transactions of a security,
quotations from dealers, market transactions in comparable securities, and
various relationships between securities, in determining value. Specific
investment securities which are not priced by the approved pricing service will
be valued according to quotations obtained from dealers who are market makers in
those securities. Investment securities with less than 60 days to maturity when
purchased are valued at amortized cost which approximates market value.
Investment securities not having readily available market quotations will be
priced at fair value using a methodology approved in good faith by the Board of
Trustees.
PERFORMANCE
As described in the Prospectus, from time to time the "standardized
yield," "dividend yield," "average annual total return," "total return," and
"total return at net asset value" of an investment Fund shares may be
advertised. An explanation of how yields and total returns are calculated and
the components of those calculations are set forth below.
Yield and total return information may be useful to investors in
reviewing the Funds' performance. The Fund's advertisement of its performance
must, under applicable Commission rules, include the average annual total
returns for the Fund for the 1, 5 and 10-year period (or the life of the class,
if less) as of the most recently ended calendar quarter. This enables an
investor to compare the Fund's performance to the performance of other funds for
the same periods. However, a number of factors should be considered before using
such information as a basis for comparison with other investments. An investment
in the Fund is not insured; its yield and total return are not guaranteed and
normally will fluctuate on a daily basis. When redeemed, an investor's shares
may be worth more or less than their original cost. Yield and total return for
any given past period are not a prediction or representation by the Victory
Portfolios of future yields or rates of return on its shares. The yield and
total returns of the Fund are affected by portfolio quality, portfolio maturity,
the type of investments the Fund holds and its operating expenses.
STANDARDIZED YIELDS. The Fund's "yield" (referred to as "standardized
yield") for a given 30-day period for a class of shares is calculated using the
following formula set forth in rules adopted by the Commission that apply to all
funds that quote yields:
Standardized Yield = 2 [(a-b + 1) to the 6th power - 1]
---
cd
The symbols above represent the following factors:
a = dividends and interest earned during the 30-day period.
b = expenses accrued for the period (net of any expense
reimbursements).
c = the average daily number of shares of that class outstanding
during the 30-day period that were entitled to receive dividends.
d = the maximum offering price per share of the class on the last day
of the period, adjusted for undistributed net investment income.
The standardized yield for a 30-day period may differ from its yield
for any other period. The Commission formula assumes that the standardized yield
for a 30-day period occurs at a constant rate for a six-month period and is
annualized at the end of the six-month period. This standardized yield is not
based on actual distributions paid by the Fund to shareholders in the 30-day
period, but is a hypothetical yield based upon the net investment income from
the
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<PAGE> 160
Fund's portfolio investments calculated for that period. The standardized yield
may differ from the "dividend yield," described below. Additionally, because
each class of shares is subject to different expenses, it is likely that the
standardized yields of the Fund classes of shares will differ. The yield for the
30-day period ended October 31, 1995 was ____%.
DIVIDEND YIELD AND DISTRIBUTION RETURN. From time to time the Fund may
quote a "dividend yield" or a "distribution return." Dividend yield is based on
the share dividends derived from net investment income during a stated period.
Distribution return includes dividends derived from net investment income and
from realized capital gains declared during a stated period. Under those
calculations, the dividends and/or distributions declared during a stated period
of one year or less (for example, 30 days) are added together, and the sum is
divided by the maximum offering price per share of that class A) on the last day
of the period. When the result is annualized for a period of less than one year,
the "dividend yield" is calculated as follows:
<TABLE>
<S> <C>
Dividend Yield = Dividends + Number of days (accrual period) x 365
---------------------------------------
Max. Offering Price (last day of period)
</TABLE>
The maximum offering price for shares includes the maximum front-end
sales charge.
From time to time similar yield or distribution return calculations may
also be made using the net asset value (instead of its respective maximum
offering price) at the end of the period. The dividend yields at maximum
offering price and net asset value for the 30-day period ended October 31, 1995
were ____% and ____%, respectively.
TOTAL RETURNS. The "average annual total return" is an average annual
compounded rate of return for each year in a specified number of years. It is
the rate of return based on the change in value of a hypothetical initial
investment of $1,000 ("P" in the formula below) held for a number of years ("n")
to achieve an Ending Redeemable Value ("ERV"), according to the following
formula:
(ERV)to the 1nth power - 1 = Average Annual Total Return
-----
(P)
The cumulative "total return" calculation measures the change in value
of a hypothetical investment of $1,000 over an entire period of years. Its
calculation uses some of the same factors as average annual total return, but it
does not average the rate of return on an annual basis. Total return is
determined as follows:
ERV - P = Total Return
-------
P
In calculating total returns, the current maximum sales charge of 4.75%
(as a percentage of the offering price) is deducted from the initial investment
("P") (unless the return is shown at net asset value, as discussed below). Total
returns also assume that all dividends and capital gains distributions during
the period are reinvested to buy additional shares at net asset value per share,
and that the investment is redeemed at the end of the period. The average annual
total return and cumulative total return for the period from December 3, 1993
(commencement of operations) to October 31, 1994 and for the fiscal year ended
October 31, 1995 at maximum offering price were ___% and ____%, respectively.
For the one year period ended October 31, 1995 annual total return was_____%.
From time to time the Fund may also quote an "average annual total
return at net asset value" or a cumulative "total return at net asset value." It
is based on the difference in net asset value per share at the beginning and the
end of the period for a hypothetical investment in that class of shares (without
considering front-end or contingent sales charges) and takes into consideration
the reinvestment of dividends and capital gains distributions. The average
annual total return and cumulative total return for the period December 3, 1993
(commencement of
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<PAGE> 161
operations) to October 31, 1995 (life of fund), at net asset value, was ____%
and ___%, respectively. For the one year period ended October 31, 1994 and for
the fiscal year ended October 31, 1995, average annual total return was ___%.
OTHER PERFORMANCE COMPARISONS. From time to time the Fund may publish
the ranking of the performance of its shares by Lipper Analytical Services, Inc.
("Lipper"), a widely-recognized independent mutual fund monitoring service.
Lipper monitors the performance of regulated investment companies, including the
Fund, and ranks the performance of the Fund against (i) all other funds,
excluding money market funds, and (ii) all other government bond funds. The
Lipper performance rankings are based on total return that includes the
reinvestment of capital gains distributions and income dividends but does not
take sales charges or taxes into consideration.
From time to time the Fund may publish the ranking of the performance
of its shares by Morningstar, Inc., an independent mutual fund monitoring
service that ranks mutual funds, including the Fund, in broad investment
categories (equity, taxable bond, tax-exempt and other) monthly, based upon each
fund's three, five and ten-year average annual total returns (when available)
and a risk adjustment factor that reflects Fund performance relative to
three-month U.S. Treasury bill monthly returns. Such returns are adjusted for
fees and sales loads. There are five ranking categories with a corresponding
number of stars: highest (5), above average (4), neutral (3), below average (2)
and lowest (1). Ten percent of the funds, series or classes in an investment
category receive 5 stars, 22.5% receive 4 stars, 35% receive 3 stars, 22.5%
receive 2 stars, and the bottom 10% receive one star. Morningstar ranks the
shares of the Fund in relation to other taxable bond funds.
The total return on an investment made in shares of the Fund may be
compared with the performance for the same period of one or more of the
following indices: the Consumer Price Index, the Salomon Brothers World
Government Bond Index, the Standard & Poor's 500 Index, the Shearson Lehman
Government/Corporate Bond Index, the Lehman Aggregate Bond Index, and the J.P.
Morgan Government Bond Index. Other indices may be used from time to time. The
Consumer Price Index is generally considered to be a measure of inflation. The
Salomon Brothers World Government Bond Index generally represents the
performance of government debt securities of various markets throughout the
world, including the United States. The Lehman Government/Corporate Bond Index
generally represents the performance of intermediate and long-term government
and investment grade corporate debt securities. The Lehman Aggregate Bond Index
measures the performance of U.S. corporate bond issues, U.S. government
securities and mortgaged-backed securities. The J.P. Morgan Government Bond
Index generally represents the performance of government bonds issued by various
countries including the United States. The S&P 500 Index is a composite index of
500 common stocks generally regarded as an index of U.S. stock market
performance. The foregoing bond indices are unmanaged indices of securities that
do not reflect reinvestment of capital gains or take investment costs into
consideration, as these items are not application to indices.
From time to time, the yields and the total returns of the Fund may be
quoted in and compared to other mutual funds with similar investment objective
in advertisements, shareholder reports or other communications to shareholders.
The Fund may also include calculations in such communications that describe
hypothetical investment results. (Such performance examples will be based on an
express set of assumptions and are not indicative of the performance of any
Fund.) Such calculations may from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of the Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash. The Fund may also include discussions or illustrations of the potential
investment goals of a prospective investor (including but not limited to tax
and/or retirement planning), investment management techniques, policies or
investment suitability of Fund, economic conditions, legislative developments
(including pending legislation), the effects of inflation and historical
performance of various asset classes, including but not limited to stocks, bonds
and Treasury bills. From time to time advertisements or
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<PAGE> 162
communications to shareholders may summarize the substance of information
contained in shareholder reports (including the investment composition of the
Fund, as well as the views of the investment adviser as to current market,
economic, trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to the Fund. The Fund may also include in advertisements, charts,
graphs or drawings which illustrate the potential risks and rewards of
investment in various investment vehicles, including but not limited to stock,
bonds, Treasury bills and shares of Fund as well as charts or graphs which
illustrate strategies such as dollar cost averaging, and comparisons of
hypothetical yields of investment in tax-exempt versus taxable investments. In
addition, advertisements or shareholder communications may include a discussion
of certain attributes or benefits to be derived by an investment in Fund. Such
advertisements or communications may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
therein. With proper authorization, Fund may reprint articles (or excerpts)
written regarding the Fund and provide them to prospective shareholders.
Performance information with respect to the Fund is generally available by
calling 1-800-539-3863.
Investors may also judge, and the Fund may at times advertise,
performance by comparing it to the performance of other mutual funds or mutual
fund portfolios with comparable investment objectives and policies, which
performance may be contained in various unmanaged mutual fund or market indices
or rankings such as those prepared by Dow Jones & Co., Inc., Standard & Poor's
Corporation, Lehman Brothers, Merrill Lynch, and Salomon Brothers, and in
publications issued by Lipper Analytical Services, Inc. and in the following
publications: IBC/Donoghue's Money Fund Reports, Ibottson Associates, Inc.,
Morningstar, CDA/Wiesenberger, Money Magazine, Forbes, Barron's, The Wall Street
Journal, The New York Times, Business Week, American Banker, Fortune,
Institutional Investor, U.S.A. Today. In addition to yield information, general
information about the Fund that appears in a publication such as those mentioned
above may also be quoted or reproduced in advertisements or in reports to
shareholders.
Advertisements and sales literature may include discussions of
specifics of the portfolio manager's investment strategy and process, including,
but not limited to, descriptions of security selection and analysis.
Advertisements may also include descriptive information about the
investment adviser, including, but not limited to, its status within the
industry, other services and products it makes available, total assets under
management, its investment philosophy.
When comparing yield, total return and investment risk of an investment
in the Fund with other investments, investors should understand that certain
other investments have different risk characteristics than an investment in
shares of the Fund. For example, certificates of deposit may have fixed rates of
return and may be insured as to principal and interest by the FDIC, while the
Fund's returns will fluctuate and its share values and returns are not
guaranteed. Money market accounts offered by banks also may be insured by the
FDIC and may offer stability of principal. U.S. Treasury securities are
guaranteed as to principal and interest by the full faith and credit of the U.S.
government. Money market mutual funds may seek to offer a fixed price per share.
ADDITIONAL PURCHASE, EXCHANGE AND REDEMPTION INFORMATION
The Victory Portfolios (see "Description of Victory Portfolios" below)
is open for business and the NAV is calculated on each Business Day. A Business
Day is every day on which the NYSE is open for business, the Federal Reserve
Bank of Cleveland is open and any other day (other than a day on which no shares
of the Fund are tendered for redemption and no order to purchase any shares is
received) during which there is sufficient trading in portfolio instruments that
the Fund's net asset value per share might be materially affected. The NAV of
each class is determined and its shares are priced as of the close of regular
trading of the NYSE (generally 4:00 p.m. Eastern time (the "Valuation Time")) on
each Business Day of the Fund. The NYSE or the Federal Reserve Bank of Cleveland
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<PAGE> 163
will not be open in observance of the following holidays: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day.
The holiday closing schedule is subject to change.
When the NYSE is closed, or when trading is restricted for any reason
other than its customary weekend or holiday closings, or under emergency
circumstances as determined by the Commission to warrant such action, the Fund's
Transfer Agent will determine the Fund's NAVs at Valuation Time. The Fund's NAV
may be affected to the extent that its securities are traded on days that are
not Business Days.
If, in the opinion of the Trustees, conditions exist which make cash
payment undesirable, redemption payments may be made in whole or in part in
securities or other property, valued for this purpose as they are valued in
computing the NAV of the Fund. Shareholders receiving securities or other
property on redemption may realize a gain or loss for tax purposes and will
incur any costs of sale as well as the associated inconveniences.
Pursuant to Rule 11a-3 under the 1940 Act, the Fund is required to give
shareholders at least 60 days' notice prior to terminating or modifying the
Fund's exchange privilege. Under the Rule, the 60-day notification requirement
may be waived if (i) the only effect of a modification would be to reduce or
eliminate an administrative fee, redemption fee or deferred sales charge
ordinarily payable at the time of exchange or (ii) the Fund temporarily suspends
the offering of shares as permitted under the 1940 Act or by the SEC or because
it is unable to invest amounts effectively in accordance with its investment
objective and policies.
In the Prospectus, the Victory Portfolios, Key Advisers and the
Sub-Adviser have notified shareholders that they reserve the right at any time
without prior notice to shareholders to refuse exchange purchases by any person
or group if, in Key Advisers or the Sub-Adviser's judgment, the Fund would be
unable to invest effectively in accordance with its investment objective and
policies, or would otherwise potentially be adversely affected.
ADDITIONAL PURCHASE INFORMATION
REDUCED SALES CHARGE. Reduced sales charges are applicable to purchases
of $50,000 or more alone or in combination with purchases of shares of other
Victory Portfolios made at any one time. To obtain the reduction of the sales
charge, you or your investment professional must notify the Transfer Agent at
the time of purchase whenever a quantity discount is applicable to your
purchase. Upon such notification, you will receive the lowest applicable sales
charge.
[/R]
In addition to investing at one time in any combination of shares of
the Victory Portfolios in an amount entitling you to a reduced sales charge, you
may qualify for a reduction in the sales charge under the following programs:
COMBINED PURCHASES. When you invest in shares of the Victory Portfolios
for several accounts at the same time, you may combine these investments into a
single transaction if purchased through one investment professional, and if the
total is $50,000 or more. The following may qualify for this privilege: an
individual, or "company" as defined in Section 2(a)(8) of the 1940 Act; an
individual, spouse, and their children under age 21 purchasing for his, her, or
their own account; a trustee, administrator or other fiduciary purchasing for a
single trust estate or single fiduciary account or for a single or a
parent-subsidiary group of "employee benefit plans" (as defined in Section 3(3)
of ERISA); and tax-exempt organizations under Section 501(c)(3) of the Internal
Revenue Code.
RIGHTS OF ACCUMULATION. Your "Rights of Accumulation" permit reduced
sales charges on future purchases of shares after you have reached a new
breakpoint. You can add the value of existing Victory Portfolios shares held
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<PAGE> 164
by you, your spouse, and your children under age 21, determined at the previous
day's NAV at the close of business, to the amount of your new purchase valued at
the current offering price to determine your reduced sales charge.
LETTER OF INTENT. If you anticipate purchasing $50,000 or more of
shares of the Fund alone or in combination with shares of certain other Victory
Portfolios within a 13-month period, you may obtain shares of the portfolios at
the same reduced sales charge as though the total quantity were invested in one
lump sum, by filing a non-binding Letter of Intent (the "Letter") within 90 days
of the start of the purchases. Each investment you make after signing the Letter
will be entitled to the sales charge applicable to the total investment
indicated in the Letter. For example, a $2,500 purchase toward a $60,000 Letter
would receive the same reduced sales charge as if the $60,000 had been invested
at one time. To ensure that the reduced price will be received on future
purchases, you or your investment professional must inform the transfer agent
that the Letter is in effect each time shares are purchased. Neither income
dividends nor capital gain distributions taken in additional shares will apply
toward the completion of the Letter.
Your initial investment must be at least 5% of the total amount you
plan to invest. Out of the initial purchase, 5% of the dollar amount specified
in the Letter will be registered in your name and held in escrow. The shares
held in escrow cannot be redeemed or exchanged until the Letter is satisfied or
the additional sales charges have been paid. You will earn income dividends and
capital gain distributions on escrowed shares. The escrow will be released when
your purchase of the total amount has been completed. You are not obligated to
complete the Letter.
If you purchase more than the amount specified in the Letter and
qualify for a further sales charge reduction, the sales charge will be adjusted
to reflect your total purchase at the end of 13 months. Surplus funds will be
applied to the purchase of additional shares at the then current offering price
applicable to the total purchase.
If you do not complete your purchase under the Letter within the
13-month period, your sales charge will be adjusted upward, corresponding to the
amount actually purchased, and if after written notice, you do not pay the
increased sales charge, sufficient escrowed shares will be redeemed to pay such
charge.
ADDITIONAL EXCHANGE INFORMATION
Shares of the Victory Portfolios (see "Description of Victory
Portfolios" below) may be exchanged for shares of any Victory money market fund
or any other fund of the Victory Portfolios with the same or a lower sales
charge. Shares of any Victory money market portfolio or any Victory Portfolios
with a reduced sales charge may be exchanged for shares of the Fund upon payment
of the difference in the sales charge.
ADDITIONAL REDEMPTION INFORMATION
REINSTATEMENT PRIVILEGE. Within 90 days of a redemption, a shareholder
may reinvest all or part of the redemption proceeds of shares of the Fund or any
of the other Victory Portfolios into which shares of the Fund are exchangeable
as described below, at the net asset value next computed after receipt by the
Transfer Agent of the reinvestment order. No charge is currently made for
reinvestment in shares of the Fund but a reinvestment in shares of certain other
Victory Portfolios is subject to a $5.00 service fee. The shareholder must ask
the Distributor for such privilege at the time of reinvestment. Any capital gain
that was realized when the shares were redeemed is taxable, and reinvestment
will not alter any capital gains tax payable on that gain. If there has been a
capital loss on the redemption, some or all of the loss may not be tax
deductible, depending on the timing and amount of the reinvestment. Under the
Internal Revenue Code, if the redemption proceeds of Fund shares on which a
sales charge was paid are reinvested in shares of the Fund or another of the
Victory Portfolios within 90 days of payment of the
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<PAGE> 165
sales charge, the shareholder's basis in the shares of the Fund that were
redeemed may not include the amount of the sales charge paid. That would reduce
the loss or increase the gain recognized from redemption. The Fund may amend,
suspend or cease offering this reinvestment privilege at any time as to shares
redeemed after the date of such amendment, suspension or cessation. You must
reinstate your shares into an account with the same registration. This privilege
may be exercised only once by a shareholder with respect to the Fund. For
information on which funds are available for the Reinstatement Privilege, please
consult your program materials.
DIVIDENDS AND DISTRIBUTIONS
The Fund ordinarily declares and pays dividends from its net investment
income quarterly. The Fund distributes substantially all of its net investment
income and net capital gains, if any, to shareholders within each calendar year
as well as on a fiscal year basis to the extent required for the Fund to qualify
for favorable federal tax treatment.
The amount of distributions may vary from time to time depending on
market conditions and the composition of the Fund's portfolio.
For this purpose, the net income of the Fund, from the time of the
immediately preceding determination thereof, shall consist of all interest
income accrued on the portfolio assets of the Fund, dividend income, if any,
income from securities loans, if any, and realized capital gains and losses on
the Fund assets, less all expenses and liabilities of the Fund chargeable
against income. Interest income shall include discount earned, including both
original issue and market discount, on discount paper accrued ratably to the
date of maturity. Expenses, including the compensation payable to Key Advisers
or the Sub-Adviser, are accrued each day. The expenses and liabilities of the
Fund shall include those appropriately allocable to the Fund as well as a share
of the general expenses and liabilities of the Victory Portfolios in proportion
to the Fund's share of the total net assets of the Victory Portfolios.
Additional Tax Information
It is the policy of the Fund of the Victory Portfolios to qualify for
the favorable tax treatment accorded regulated investment companies ("RICs")
under Subchapter M of the Code, for so long as such qualification is in the best
interest of its shareholders. By following such policy and distributing its
income and gains currently with respect to each taxable year, the Fund expects
to eliminate or reduce to a nominal amount the federal income and excise taxes
to which it may otherwise be subject.
In order to qualify as a RIC, the Fund must, among other things, (1) derive at
least 90% of its gross income from dividends, interest, payments with respect to
securities loans, and gains from the sale or other disposition of stock or
securities, foreign currencies or other income (including gains from options,
futures or forward contracts) derived with respect to its business of investing
in stock, securities or currencies, (2) derive less than 30% of its gross income
from the sale or other disposition of stock, securities, options, futures,
forward contracts, and certain foreign currencies (or options, futures, or
forward contracts on foreign currencies) held for less than three months, and
(3) diversify its holdings so that at the end of each quarter of its taxable
year (i) at least 50% of the market value of the Fund's assets is represented by
cash or cash items, U.S. Government securities, securities of other RICs and
other securities limited, in respect of any one issuer, to an amount not greater
than 5% of the value of the Fund's total assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
total assets is invested in the securities of any one issuer (other than U.S.
Government securities) or of two or more issuers that the Fund controls and that
are engaged in the same, similar, or related trades or businesses. These
requirements may restrict the degree to which the Fund may engage in short-term
trading and concentrate investments. If the Fund qualifies as a RIC, it will not
be subject to federal income tax on the part of its net investment income and
net realized capital gains, if any, that it distributes to shareholders with
respect to each taxable year within the time limits specified in the Code.
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<PAGE> 166
A non-deductible excise tax is imposed on regulated investment
companies that do not distribute in each calendar year an amount equal to 98% of
their ordinary income for the year plus 98% of their capital gain net income for
the 1-year period ending on October 31 of such calendar year. The balance of
such income must be distributed during the following calendar year. If
distributions during a calendar year are less than the required amount, the Fund
is subject to a non-deductible excise tax equal to 4% of the deficiency.
Certain investment and hedging activities of the Fund, including
transactions in options, futures contracts, hedging transactions, forward
contracts, straddles, foreign currencies, and foreign securities, are subject to
special tax rules. In a given case, these rules may accelerate income to the
Fund, defer losses to the Fund, cause adjustments in the holding periods of the
Fund's securities, convert short-term capital losses into long-term capital
losses, or otherwise affect the character of the Fund's income. These rules
could therefore affect the amount, timing and character of distributions to
shareholders. The Fund will endeavor to make any available elections pertaining
to such transactions in a manner believed to be in the best interest of the
Victory Portfolios and their securities.
The Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of taxable dividends paid to any shareholder who has failed to
provide (or provided an incorrect) tax identification number, or is subject to
withholding pursuant to a notice from the Internal Revenue Service for failure
to properly include on his or her income tax return payments of interest or
dividends. This "backup withholding" is not an additional tax, and any amounts
withheld may be credited against the shareholder's ultimate U.S. tax liability.
Information set forth in the Prospectus and this Statement of
Additional Information that relates to federal taxation is only a summary of
certain key federal tax considerations generally affecting purchasers of shares
of the Fund. No attempt has been made to present a complete explanation of the
federal tax treatment of the Fund or its shareholders, and this discussion is
not intended as a substitute for careful tax planning. Accordingly, potential
purchasers of shares of the Fund are urged to consult their tax advisers with
specific reference to their own tax circumstances. In addition, the tax
discussion in the Prospectus and this Statement of Additional Information is
based on tax law in effect on the date of the Prospectus and this Statement of
Additional Information; such laws and regulations may be changed by legislative,
judicial or administrative action, sometimes with retroactive effect.
MANAGEMENT OF THE VICTORY PORTFOLIOS
Board of Trustees
Overall responsibility for management of the Victory Portfolios rests
with the Trustees, who are elected by the shareholders of the Victory
Portfolios. The Victory Portfolios are managed by the Trustees in accordance
with the laws of the State of Delaware governing business trusts. There are
currently seven Trustees, six of whom are not "interested persons" of the
Victory Portfolios within the meaning of that term under the 1940 Act. The
Trustees, in turn, elect the officers of the Victory Portfolios to supervise
actively its day-to-day operations.
The Trustees of the Victory Portfolios, their addresses, ages and their
principal occupations during the past five years are as follows:
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- --------------------- -------------------- -------------------
<S> <C> <C>
Leigh A. Wilson, 51* Trustee and From 1989 to present, Chairman and
</TABLE>
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<PAGE> 167
<TABLE>
<S> <C> <C>
Glenleigh International Ltd. President Chief Executive Officer, Glenleigh
53 Sylvan Road North International Limited; previously
Westport, CT 06880 Chief Executive Officer, Paribas
North America and Paribas
Corporation; Trustee, The Victory
Funds and Spears, Benzak, Salomon
and Farrell ("SBSF") Funds.
</TABLE>
- ------------
* Mr. Wilson is deemed to be an "interested person" of the Victory
Portfolios under the 1940 Act solely by reason of his position as
President.
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<PAGE> 168
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Funds During Past 5 Years
- --------------------- -------------------- -------------------
<S> <C> <C>
Robert. G. Brown, 72 Trustee Retired; from October 1983 to
5460 N. Ocean Drive November 1990, President,
Singer Island, Riviera Beach, Cleveland Advanced Manufacturing
Florida 33404 Program (non-profit corporation
engaged in regional economic
development).
Edward P. Campbell, 46 Trustee From March 1, 1994 to present,
Nordson Corporation Executive Vice President and Chief
28601 Clemens Road Operating Officer of Nordson
Westlake, OH 44145 Corporation (manufacturer of
application equipment); from May
1988 to March 1994, Vice President
of Nordson Corporation; from 1987
to December 1994, member of the
Supervisory Committee of Society's
Collective Investment Retirement
Fund; from May 1991 to August 1994,
Trustee, Financial Reserves Fund
and from May 1993 to August 1994,
Trustee, Ohio Municipal Money
Market Fund; Trustee, The Victory
Funds and the SBSF Funds.
Dr. Harry Gazelle, 68 Trustee Retired radiologist, Drs. Hill and
17822 Lake Road Thomas Corp.; Trustee, The Victory
Lakewood, OH 44107 Funds.
Dr. Thomas F. Morrissey, 62 Trustee 1995 Visiting Scholar, Bond
Weatherhead School of University, Queensland, Australia;
Management Professor, Weatherhead School of
Case Western Reserve Management, Case Western Reserve
University University; from 1989 to 1995,
10900 Euclid Avenue Associate Dean of Weatherhead
Cleveland, OH 44106-7235 School of Management and
Professor, Case Western Reserve
University; from 1987 to December
1994, Member of the Supervisory
Committee of Society's Collective
Investment Retirement Fund; from
May 1991 to August 1994, Trustee,
Financial Reserves Fund and from
May 1993 to August 1994, Trustee,
Ohio Municipal Money Market Fund;
Trustee, The Victory Funds.
</TABLE>
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<PAGE> 169
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Funds During Past 5 Years
- --------------------- -------------------- -------------------
<S> <C> <C>
Stanley I. Landgraf, 70 Trustee Retired; currently, Trustee,
41 Traditional Lane Rensselaer Polytechnic Institute;
Albany, NY 12211 Director, Elenel Corporation and
Mechanical Technology, Inc.;
Member, Board of Overseers, School
of Management, Rensselaer
Polytechnic Institute; Member, The
Fifty Group (a Capital Region
business organization); Trustee,
The Victory Funds.
H. Patrick Swygert, 52 Trustee President, Howard University;
Howard University formerly President, State University
2400 6th Street, N.W. of New York at Albany; formerly,
Suite 320 Executive Vice President, Temple
Washington, DC 20059 University; Trustee, The Victory
Funds.
</TABLE>
The Board presently has an Investment Policy Committee and a Business,
Legal, and Audit Committee. The members of the Investment Policy Committee are
Messrs. Landgraf (Chairman), Morrissey and Brown, who will serve until May 1996.
The function of the Investment Policy Committee is to review the existing
investment policies of the Victory Portfolios, including the levels of risk and
types of funds available to shareholders, and make recommendations to the Board
of Trustees regarding the revision of such policies or, if necessary, the
submission of such revisions to the Victory Portfolios' shareholders for their
consideration. The members of the Business, Legal and Audit Committee are
Messrs. Swygert (Chairman), Campbell and Gazelle who will serve until May 1996.
The function of the Business, Legal and Audit Committee is to recommend
independent auditors and monitor accounting and financial matters; to nominate
persons to serve as disinterested Trustees and Trustees to serve on committees
of the Board; and to review compliance and contract matters.
The Investment Policy Committee met four times during the 12 months
ended October 31, 1995. The Business, Legal and Audit Committee was constituted
on May 24, 1995 (and has met twice since then) and replaced the Audit Committee,
the Legal Committee and the Nominating Committee, which met three times, one
time and one time, respectively, during the 12 month period ended October 31,
1995.
REMUNERATION OF TRUSTEES AND CERTAIN EXECUTIVE OFFICERS
Effective June 1, 1995, each Trustee (other than Leigh A. Wilson)
receives an annual fee of $27,000 for serving as Trustee of all the funds of the
Victory Portfolios, and an additional per meeting fee ($2,400 in person and
$1,200 per telephonic meeting).
Effective June 1, 1995, Leigh A. Wilson receives an annual fee of
$33,000 for serving as President and Trustee for all of the funds of the Victory
Portfolios, and an additional per meeting fee ($3,000 in person and $1,500 per
telephonic meeting).
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<PAGE> 170
The following table indicates the compensation received by each Trustee
from the Fund and from the Victory Fund Complex* for the 12 month period ended
on October 31, 1995. For certain Trustees, these amounts include amounts paid by
the Equity Portfolio of The Victory Funds, which merged into the Fund as of June
5, 1995:
<TABLE>
<CAPTION>
Pension or
Retirement Estimated Annual Total Total Compensation
Benefits Accrued as Benefits Compensation from Victory
Portfolio Expenses Upon Retirement from the Fund "Fund Complex"*
------------------- ---------------- ------------- ------------------
<S> <C> <C> <C> <C>
Leigh A. Wilson, Trustee........... -0- -0- $1,168.23 $46,716.97
Robert G. Brown, Trustee........... -0- -0- 740.45 39,815.98
Edward P. Campbell, Trustee........ -0- -0- 987.41 33,799.68
Harry Gazelle, Trustee............. -0- -0- 843.06 35,916.98
John W. Kemper,# Trustee........... -0- -0- 1,151.74 22,567.31
Stanley I. Landgraf, Trustee....... -0- -0- 842.51 34,615.98
Thomas F. Morrissey, Trustee....... -0- -0- 1,213.17 40,366.98
H. Patrick Swygert, Trustee........ -0- -0- 1,151.74 37,116.98
John D. Buckingham,# Trustee....... -0- -0- 226.15 18,841.89
John R. Young,# Trustee............ -0- -0- 750.08 21,963.81
</TABLE>
Officers
The officers of the Victory Portfolios, their addresses, ages and
principal occupations during the past five years are as follows:
- --------
* For certain Trustees, these amounts include compensation received from
The Victory Funds (which were reorganized into the Victory Portfolios
as of June 5, 1995), the SBSF Funds (the investment adviser of which
was acquired by KeyCorp effective April, 1995) and Society's Collective
Investment Retirement Funds, which were reorganized into the Victory
Balanced Fund and Victory Government Mortgage Fund as of December 19,
1994. There are presently 28 mutual funds from which the above-named
Trustees are compensated in the Victory "Fund Complex," but not all of
the above-named Trustees serve on the boards of each fund in the "Fund
Complex."
# Resigned
-22-
<PAGE> 171
<TABLE>
<CAPTION>
Position with the Principal occupation during past
Name Victory Portfolios 5 years and other
---- affiliates --------------------------------
------------------
<S> <C> <C>
Leigh A. Wilson, 51 President and Trustee From 1989 to present, Chairman and
Chief Executive Officer, Glenleigh
International Limited; from 1984-
1989, Chief Executive Officer,
Paribas North America and Paribas
Corporation; Trustee of The Victory
Funds and SBSF Funds.
William B. Blundin, 57 Vice President Senior Vice President of BISYS Fund
Services; officer of other investment
companies administered by BISYS
Fund Services; President and Chief
Executive Officer of Vista Broker-
Dealer Services, Inc., Emerald Asset
Management, Inc. and BNY
Hamilton Distributors, Inc.,
registered broker/dealers.
J. David Huber, 49 Vice President Executive Vice President, BISYS
Fund Services.
Scott A. Englehart, 33 Secretary From October 1990 to present,
employee of BISYS Fund Services,
Inc.; from 1985 to October 1990,
Manager of Banking Center, Fifth
Third Bank.
George O. Martinez, 36 Assistant Secretary From March 1995 to present, Senior
Vice President and Director of Legal
and Compliance Services, BISYS
Fund Services; from June 1989-
March 1995, Vice President and
Associate General Counsel, Alliance
Capital Management.
Martin R. Dean, 32 Treasurer From May 1994 to present, employee
of BISYS Fund Services; from
January 1987 - April 1994, Senior
Manager, KPMG Peat Marwick.
Adrian J. Waters, 33 Assistant Treasurer From May 1993 to present, employee
of BISYS Fund Services; from 1989-
May 1993, Manager, Price
Waterhouse.
</TABLE>
-23-
<PAGE> 172
The mailing address of each of the officers of the Victory Portfolios
is 3435 Stelzer Road, Columbus, Ohio 43219-3035.
The officers of the Victory Portfolios (other than Leigh Wilson)
receive no compensation directly from the Victory Portfolios for performing the
duties of their offices. Concord Holding Corporation receives fees from the
Victory Portfolios for acting as Administrator.
As of December 1, 1995, the Trustees and officers as a group owned
beneficially less than 1% of the Fund.
Investment Adviser and Sub-Adviser
Key Advisers, Inc. was organized as an Ohio corporation on July 27,
1995 and is registered as an investment adviser under the Investment Advisers
Act of 1940. It is a wholly-owned subsidiary of KeyCorp Asset Management
Holdings, Inc., which is a wholly-owned subsidiary of Society National Bank, a
wholly-owned subsidiary of KeyCorp. Affiliates of Key Advisers manage
approximately $37 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals and mutual funds.
KeyCorp, a financial services holding company, is headquartered at 127
Public Square, Cleveland, Ohio 44114. As of September 30, 1995, KeyCorp had an
asset base of $68 billion, with banking offices in 26 states from Maine to
Alaska, and trust and investment offices in 16 states. KeyCorp is the resulting
entity of the merger in 1994 of Society Corporation, the bank holding company of
which Society National Bank was a wholly-owned subsidiary, and KeyCorp, the
former bank holding company. KeyCorp's major business activities include
providing traditional banking and associated financial services to consumer,
business and commercial markets. Its non-bank subsidiaries include investment
advisory, securities brokerage, insurance, bank credit card processing, and
mortgage leasing companies. Society National Bank is the lead affiliate bank of
KeyCorp.
The following table lists the advisory fees for each mutual fund that
is advised by Key Advisers:
.25 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Institutional Money Market Fund*
.35 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Prime Obligations Fund*
Victory U.S. Government Obligations Fund*
Victory Tax-Free Money Market Fund*
.50 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Money Market Fund*
Victory Limited Term Income Fund*
Victory Government Mortgage Fund*
Victory Financial Reserves Fund*
Victory Fund for Income #
.55% OF 1% OF AVERAGE DAILY NET ASSETS
Victory National Municipal Bond Fund*
Victory Government Bond Fund*
Victory New York Tax-Free Fund*
.60 OF 1% OF AVERAGE DAILY NET ASSETS
-24-
<PAGE> 173
Victory Ohio Municipal Bond Fund*
Victory Stock Index Fund*
.65 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Diversified Stock Fund*
.75 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Intermediate Income Fund*
Victory Investment Quality Bond Fund*
Victory Ohio Regional Stock Fund*
1% OF AVERAGE DAILY NET ASSETS
Victory Balanced Fund*
Victory Value Fund*
Victory Growth Fund*
Victory Special Value Fund*
Victory Special Growth Fund+/-
1.10% OF AVERAGE DAILY ASSETS
Victory International Growth Fund*
# First Albany Asset Management Corporation serves as
sub-adviser to the Victory Fund for Income, for which it
receives .20% of average daily net assets.
+/- T. Rowe Price Associates, Inc. serves as sub-adviser to the
Victory Special Growth Fund, for which it receives .25% of
average daily net assets up to $100 million and .20% of
average daily net assets in excess of $100 million.
* Society Asset Management, Inc. (the Sub-Adviser serves as
sub-adviser to each of these funds. For its services under the
investment sub-advisory agreement, Key Advisers pays the
Sub-Adviser sub-advisory fees at rates (based on an annual
percentage of average daily net assets) which vary according
to the table set forth below:
<TABLE>
<CAPTION>
For the Victory Balanced Fund, Diversified Stock For the Victory International Growth Fund, Ohio
Fund, Growth Fund, Stock Index Fund and Value Fund: Regional Stock Fund and Special Value Fund:
Rate of Rate of
Net Assets Sub-Advisory Fee* Net Assets Sub-Advisory Fee*
---------- ----------------- ---------- -----------------
<S> <C> <C> <C>
Up to $10,000,000 0.65% Up to $10,000,000 0.90%
Next $15,000,000 0.50% Next $15,000,000 0.70%
Next $25,000,000 0.40% Next $25,000,000 0.55%
Above $50,000,000 0.35% Above $50,000,000 0.45%
</TABLE>
- ---------------
* As a percentage of average daily net assets. The Sub-Adviser has the
right to voluntarily waive any portion of the sub-advisory fee from
time to time.
-25-
<PAGE> 174
-26-
<PAGE> 175
<TABLE>
<CAPTION>
For the Victory Intermediate Income Fund, Investment For the Victory Prime Obligations Fund, Tax-Free
Quality Bond Fund, Limited Term Income Fund, Money Market Fund, U.S. Government Obligations
Ohio Municipal Bond Fund, Government Bond Fund, Financial Reserves Fund, Institutional Money
Fund, Government Mortgage Fund, National Market Fund and Ohio Municipal Money Market
Municipal Bond Fund and New York Tax-Free Fund: Fund:
Rate of Rate of
Net Assets Sub-Advisory Fee* Net Assets Sub-Advisory Fee*
---------- ----------------- ---------- ----------------
<S> <C> <C> <C>
Up to $10,000,000 0.40% Up to $10,000,000 0.25%
Next $15,000,000 0.30% Next $15,000,000 0.20%
Next $25,000,000 0.25% Next $25,000,000 0.15%
Above $50,000,000 0.20% Above $50,000,000 0.125%
</TABLE>
- --------------------
* As a percentage of average daily net assets. The Sub-Adviser has the
right to voluntarily waive any portion of the sub-advisory fee from
time to time.
ADVISORY AND OTHER CONTRACTS
Unless sooner terminated, the Investment Advisory Agreement between Key
Advisers and the Funds provides that it will continue in effect as to a
particular Fund for an initial two-year term and for consecutive one-year terms
thereafter, provided that such continuance is approved at least annually by the
Victory Portfolios' Trustees or by vote of a majority of the outstanding shares
of such Fund (as defined under "GENERAL INFORMATION--Miscellaneous" in the
Prospectuses), and, in either case, by a majority of the Trustees who are not
parties to the Investment Advisory Agreement or interested persons (as defined
in the 1940 Act) of any party to the Investment Advisory Agreement, by votes
cast in person at a meeting called for such purpose.
The Investment Advisory Agreement is terminable as to a particular Fund
at any time on 60 days' written notice without penalty by the Trustees, by vote
of a majority of the outstanding shares of that Fund, or by Key Advisers. The
Investment Advisory Agreement also terminates automatically in the event of any
assignment, as defined in the 1940 Act.
The Investment Advisory Agreement provides that Key Advisers shall not
be liable for any error of judgment or mistake of law or for any loss suffered
by the Victory Portfolios in connection with the performance of services
pursuant to the Investment Advisory Agreement, except a loss resulting from a
breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith, or gross
negligence on the part of Key Advisers in the performance of its duties, or from
reckless disregard by it of either duties and obligations thereunder.
Under the Investment Advisory Agreement, Key Advisers has agreed to
provide the investment advisory services described in the Prospectus. For the
services provided and expenses assumed pursuant to the Investment Advisory
Agreement, the Fund pays Key Advisers a fee, computed daily and paid monthly, at
the annual rate of one percent (1.00%) of the average daily net assets of the
Fund.
From December 3, 1993(commencement of operations) until December 31,
1995, Society Asset Management, Inc. served as investment adviser to the Fund.
For the fiscal years ended October 31, 1994 and 1995 the Fund paid investment
advisory fees of $361,755 and $_________________, respectively, after fee
reductions of $218,180 and $________________, respectively.
-27-
<PAGE> 176
Under the Investment Advisory Agreement, Key Advisers may delegate a
portion of its responsibilities to a sub-adviser. In addition, the Investment
Advisory Agreement provides that Key Advisers may render services through its
own employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser of the Fund and are under the common
control of KeyCorp as long as all such persons are functioning as part of an
organized group of persons, managed by authorized officers of Key Advisers.
Key Advisers has entered into an investment sub-advisory agreement with
its affiliate, Society Asset Management, Inc. on behalf of the Fund. The
Sub-Adviser is a wholly-owned subsidiary of KeyCorp Asset Management Holdings,
Inc. With respect to the day to day management of the Fund, under the
sub-advisory agreement, the Sub-Adviser makes decisions concerning, and places
all orders for, purchases and sales of securities and helps maintain the records
relating to such purchases and sales. The Sub-Adviser may, in its discretion,
provide such services through its own employees or the employees of one or more
affiliated companies that are qualified to act as an investment adviser to the
Company under applicable laws and are under the common control of KeyCorp;
provided that (i) all persons, when providing services under the sub-advisory
agreement, are functioning as part of an organized group of persons, and (ii)
such organized group of persons is managed at all times by authorized officers
of the Sub-Adviser. This arrangement will not result in the payment of
additional fees by the Fund.
Glass-Steagall Act
In 1971 the United States Supreme Court held in Investment Company
Institute v. Camp that the federal statute commonly referred to as the
Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision: (a)
forbid a bank holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing, or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but (b) do not prohibit such
a holding company or affiliate from acting as investment adviser, transfer
agent, and custodian to such an investment company. In 1981 the United States
Supreme Court held in Board of Governors of the Federal Reserve System v.
Investment Company Institute that the Board did not exceed its authority under
the Holding Company Act when it adopted its regulation and interpretation
authorizing bank holding companies and their non-bank affiliates to act as
investment advisers to registered closed-end investment companies. In the Board
of Governors case, the Supreme Court also stated that if a national bank
complied with the restrictions imposed by the Board in its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to investment companies, a national bank
performing investment advisory services for an investment company would not
violate the Glass-Steagall Act.
Key Advisers and the Sub-Adviser believe that they may perform the
services for the Victory Portfolios contemplated by the Prospectus, this
Statement of Additional Information, and the Investment Advisory Agreement (and
Sub-Advisory Agreement) with the Victory Portfolios without violation of
applicable statutes and regulations and has so represented in its Investment
Advisory Agreement (and Sub-Advisory Agreement) with the Victory Portfolios. Key
Trust Company of Ohio, N.A. believes that it may perform the services for the
Victory Portfolios contemplated by the Prospectus, this Statement of Additional
Information, and the Shareholder Servicing Agreement with the Victory Portfolios
(as described below) without violation of applicable statutes and regulations
and has so represented in such Shareholder Servicing Agreement. Future changes
in either federal or state statutes and regulations relating to the permissible
activities of banks or bank holding companies and the subsidiaries or affiliates
of those entities, as well as further judicial or administrative decisions or
interpretations of present and future statutes and regulations, could prevent or
restrict Key Trust Company of Ohio, N.A., Key Advisers or the Sub-Adviser from
continuing to perform such services for the Victory Portfolios. Depending upon
the nature of any changes in the services which could be provided by Key Trust
Company of Ohio, N.A., Key Advisers or the Sub-Adviser, the Trustees of the
Victory Portfolios would review the Victory Portfolios' relationship with Key
Trust Company of Ohio, N.A., Key Advisers or the Sub-Adviser and consider taking
all action necessary in the circumstances.
-28-
<PAGE> 177
Should future legislative, judicial, or administrative action prohibit
or restrict the proposed activities of Key Trust Company of Ohio, N.A., Key
Advisers or the Sub-Adviser and its affiliated and correspondent banks and other
non-bank affiliates in connection with customer purchases of shares of the
Victory Portfolios, the banks and such non-bank affiliates might be required to
alter materially or discontinue the services offered by them to customers. It is
not anticipated, however, that any change in the Victory Portfolios' method of
operations would affect its net asset value per share or result in financial
losses to any customer.
From time to time, advertisements, supplemental sales literature and
information furnished to present or prospective shareholders of the Fund may
include descriptions of Key Trust Company of Ohio, N.A., Key Advisers and the
Sub-Adviser including, but not limited to, (i) descriptions of the operations of
Key Trust Company of Ohio, N.A., Key Advisers and the Sub-Adviser; (ii)
descriptions of certain personnel and their functions; and (iii) statistics and
rankings related to the operations of Key Trust Company of Ohio, N.A., Key
Advisers and the Sub-Adviser.
Portfolio Transactions
Pursuant to the Investment Advisory Agreement (and Sub-Advisory
Agreement), Key Advisers or the Sub-Adviser determines, subject to the general
supervision of the Trustees of the Victory Portfolios, and in accordance with
the Fund's investment objective and restrictions, which securities are to be
purchased and sold by the Fund, and which brokers are to be eligible to execute
its portfolio transactions. Purchases from underwriters and/or broker/dealers of
portfolio securities include a commission or concession paid by the issuer to
the underwriter and/or broker/dealer and purchases from dealers serving as
market makers may include the spread between the bid and asked price. While Key
Advisers and the Sub-Adviser generally seek competitive prices (inclusive of any
spread or commission), the Fund may not necessarily pay the lowest prices
available on each transaction, for reasons discussed below.
Allocation of transactions to dealers is determined by Key Advisers or
the Sub-Adviser in their best judgment and in a manner deemed fair and
reasonable to shareholders. The primary consideration is prompt execution of
orders in an effective manner at the most favorable price. Subject to this
consideration, dealers who provide supplemental investment research to Key
Advisers or the Sub-Adviser may receive orders for transactions by the Victory
Portfolios. Information so received is in addition to and not in lieu of
services required to be performed by Key Advisers or the Sub-Adviser and does
not reduce the advisory fees payable to Key Advisers by the Victory Portfolios.
Such information may be useful to Key Advisers or the Sub-Adviser in serving
both the Victory Portfolios and other clients and, conversely, supplemental
research information obtained by the placement of orders on behalf of other
clients may be useful to Key Advisers or the Sub-Adviser in carrying out its
obligations to the Victory Portfolios. In the future, the Trustees may also
authorize the allocation of brokerage to affiliated broker-dealers on an agency
basis to effect portfolio transactions. In such event, the Trustees will adopt
procedures incorporating the standards of Rule 17e-1 under the 1940 Act, which
requires that the commission paid to affiliated broker-dealers must be
"reasonable and fair compared to the commission, fee or other remuneration
received, or to be received, by other brokers in connection with comparable
transactions involving similar securities during a comparable period of time."
At times, the Fund may also purchase portfolio securities directly from dealers
acting as principals, underwriters or market makers. As these transactions are
usually conducted on a net basis, no brokerage commissions are paid by the Fund.
The Victory Portfolios will not execute portfolio transactions through,
acquire portfolio securities issued by, make savings deposits in, or enter into
repurchase or reverse repurchase agreements with Key Advisers, the Sub-Adviser,
Key Trust Company of Ohio, N.A. or its affiliates, Concord Holding Corporation,
Victory Broker-Dealer Services, Inc. or their affiliates, and will not give
preference to Key Trust Company of Ohio, N.A.'s correspondent banks or
affiliates, or Concord Holding Corporation or Victory Broker-Dealer Services,
Inc. with respect to such transactions, securities, savings deposits, repurchase
agreements, and reverse repurchase agreements.
Investment decisions for the Fund are made independently from those for
the other funds or any other investment company or account managed by Key
Advisers (or Society). Any such other investment company or
-29-
<PAGE> 178
account may also invest in the same securities as a particular fund. When a
purchase or sale of the same security is made at substantially the same time on
behalf of the Fund and another fund, investment company or account, the
transaction will be averaged as to price, and available investments allocated as
to amount, in a manner which Key Advisers (or Society) believes to be equitable
to the Fund and such other fund, investment company or account. In some
instances, this investment procedure may adversely affect the price paid or
received by the Fund or the size of the position obtained by the Fund. To the
extent permitted by law, Key Advisers (or Society) may aggregate the securities
to be sold or purchased for the Fund with those to be sold or purchased for the
other funds or for other investment companies or accounts in order to obtain
best execution. As provided by the Investment Advisory (and Sub-Advisory)
Agreement, in making investment recommendations for the Victory Portfolios, Key
Advisers (or Society) will not inquire or take into consideration whether an
issuer of securities proposed for purchase or sale by a Fund is a customer of
Society, its parents or subsidiaries or affiliates and, in dealing with their
commercial customers, Key Advisers (Society), its parents, subsidiaries, and
affiliates will not inquire or take into consideration whether securities of
such customers are held by the Victory Portfolios.
In the fiscal years ended October 31, 1994 and 1995 the Fund paid
$59,306 and $______________, respectively, in brokerage commissions.
Administrator
Currently, Concord Holding Corporation ("CHC") serves as general
manager and administrator (the "Administrator") to the Fund. Prior to CHC
becoming administrator to the Fund, The Winsbury Company ("Winsbury") served as
administrator. The Administrator assists in supervising all operations of each
fund (other than those performed by Key Advisers or the Sub-Adviser under the
Investment Advisory (Sub-Advisory) Agreement). The Administrator is a
broker-dealer registered with the Commission, and is a member of the National
Association of Securities Dealers, Inc. The Administrator provides financial
services to institutional clients.
CHC receives a fee from each fund for its services as Administrator and
expenses assumed pursuant to the Administration Agreements, calculated daily and
paid monthly, at the annual rate of fifteen one hundredths of one percent (.15%)
of each fund's average daily net assets. CHC may periodically waive all or a
portion of its fee with respect to any fund in order to increase the net income
of one or more funds of the Victory Portfolios available for distribution as
dividends.
Unless sooner terminated, the Administration Agreement will continue in
effect as to the Fund for a period of two years, and for consecutive one-year
terms thereafter, provided that such continuance is ratified at least annually
by the Victory Portfolios' Trustees or by vote of a majority of the outstanding
shares of that Fund, and in either case by a majority of the Trustees who are
not parties to the Administration Agreement or interested persons (as defined in
the 1940 Act) of any party to the Administration Agreement, by votes cast in
person at a meeting called for such purpose.
The Administration Agreement provides that CHC shall not be liable for
any error of judgment or mistake of law or any loss suffered by the Victory
Portfolios in connection with the matters to which the Administration Agreement
relates, except a loss resulting from willful misfeasance, bad faith, or gross
negligence in the performance of its duties, or from the reckless disregard by
it of its obligations and duties thereunder.
Under the Administration Agreement, CHC assists in the Fund's
administration and operation, including providing statistical and research data,
clerical services, internal compliance and various other administrative
services, including among other responsibilities, forwarding certain purchase
and redemption requests to the Transfer Agent, participation in the updating of
the prospectus, coordinating the preparation, filing, printing and dissemination
of reports to shareholders, coordinating the preparation of income tax returns,
arranging for the maintenance of books and records and providing the office
facilities necessary to carry out the duties thereunder. Under the
Administration Agreement, CHC may delegate all or any part of its
responsibilities thereunder.
-30-
<PAGE> 179
CHC receives an annual fee of .15% of the Fund's average net assets,
paid monthly, for services performed under the Fund's Administration Agreement.
CHC may, from time to time, agree to reimburse the Fund for expenses above a
specified percentage of average net assets.
Victory Broker-Dealer Services, Inc. sells shares of the Fund as agent
on behalf of the Victory Portfolios at no cost to the Fund. Key Advisers and the
Sub-Adviser neither participate in nor are they responsible for the underwriting
of Victory Portfolios shares.
In the fiscal years ended October 31, 1995 and October 31, 1994, the
Fund paid aggregate administration fees of $_________ and $77,085, respectively
after fee reductions of $________ and $9,905, respectively.
Business Management Agreement
In connection with its obligations under the Investment Sub-Advisory
Agreement, the Sub-Adviser has entered into a Business Management Agreement with
Key Advisers, pursuant to which Key Advisers provides certain administrative and
support services to the Sub-Adviser. Such services include preparing reports to
Victory Portfolios' Board of Trustees, recordkeeping services, and services
rendered in connection with the preparation of regulatory filings and other
reports, and regulatory and other administrative and compliance systems and
support services.
For such services to the Fund, the Sub-Adviser pays fees to Key
Advisers which vary according to a sliding scale containing "breakpoints" at
which decreases in the business management fees correspond to increases in the
average daily net asset values of the Fund as follows:
<TABLE>
<CAPTION>
Rate of Business
Net Assets of the Fund Management Fee*
---------------------- ---------------
<S> <C>
Up to $10,000,000 0.30%
Next $15,000,000 0.15%
Next $25,000,000 0.05%
Above $50,000,000 0.00%
</TABLE>
- --------------------
* As a percentage of average daily net assets.
-31-
<PAGE> 180
Shareholder Servicing Plan
The Victory Portfolios, on behalf of the Fund, has adopted a
Shareholder Servicing Plan to provide payments to shareholder servicing agents
(each a "Shareholder Servicing Agent") that provide administrative support
services to customers who may from time to time beneficially own shares, which
services include: (i) aggregating and processing purchase and redemption
requests for shares from customers and promptly transmitting net purchase and
redemption orders to our distributor or transfer agent; (ii) providing customers
with a service that invests the assets of their accounts in shares pursuant to
specific or pre-authorized instructions; (iii) processing dividend and
distribution payments on behalf of customers; (iv) providing information
periodically to customers showing their positions in shares; (v) arranging for
bank wires; (vi) responding to customer inquiries; (vii) providing subaccounting
with respect to shares beneficially owned by customers or providing the
information to the Victory Portfolios necessary for subaccounting; (viii) if
required by law, forwarding shareholder communications from us (such as proxies,
shareholder reports, annual and semi-annual financial statements and dividend,
distribution and tax notices) to customers; (ix) forwarding to customers proxy
statements and proxies containing any proposals regarding this Plan; and (x)
providing such other similar services as we may reasonably request to the extent
you are permitted to do so under applicable statutes, rules or regulations. For
expenses incurred and services provided pursuant to the Shareholder Servicing
Agreement, the Fund pays each Shareholder Servicing Agent a fee computed daily
and paid monthly, in amounts aggregating not more than twenty-five
one-hundredths of one percent (.25%) of the average daily net assets of the Fund
per year. A Shareholder Servicing Agent may periodically waive all or a portion
of its respective shareholder servicing fees with respect to the Fund to
increase the net income of the Fund available for distribution as dividends.
Expenses
The Fund bears the following expenses relating to its respective
operations: taxes, interest, brokerage fees and commissions, fees of the
Trustees of the Victory Portfolios, Commission fees, state securities
qualification fees, costs of preparing and printing prospectuses for regulatory
purposes and for distribution to current shareholders, outside auditing and
legal expenses, advisory and administration fees, fees and out-of-pocket
expenses of the custodian and transfer agent, certain insurance premiums, costs
of maintenance of the Fund's existence, costs of shareholders' reports and
meetings, and any extraordinary expenses incurred in the Fund's operation.
If total expenses borne by the Fund in any fiscal year exceeds expense
limitations imposed by applicable state securities regulations, Key Advisers,
the Sub-Adviser or the Administrator will waive their fees to the extent such
excess expenses exceed such expense limitation in proportion to their respective
fees. As of the date of this Statement of Additional Information, the most
restrictive expense limitation applicable to the Fund limits its aggregate
annual expenses, including management and advisory fees but excluding interest,
taxes, brokerage commissions, and certain other expenses, to 2.5% of the first
$30 million of its average net assets, 2.0% of the next $70 million of its
average net assets, and 1.5% of its remaining average net assets. Any expenses
to be borne by Key Advisers, the Sub-Adviser or the Administrator will be
estimated daily and reconciled and paid on a monthly basis. Fees imposed upon
customer accounts by Key Advisers, the Sub-Adviser, Key Trust Company of Ohio,
N.A. or its correspondents, affiliated banks and other non-bank affiliates for
cash management services are not fund expenses for purposes of any such expense
limitation.
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Distributor
Victory Broker-Dealer Services, Inc. (the "Distributor") serves as
distributor for the continuous offering of the shares of each fund of the
Victory Portfolios pursuant to a Distribution Agreement. Prior to Victory
Broker-Dealer Services, Inc. becoming the Distributor, Winsbury Fund
Distributors ("Winsbury") served as distributor of the Fund. Unless otherwise
terminated, the Distribution Agreement will remain in effect for two years, and
thereafter for consecutive one-year terms, provided that it is approved at least
annually (i) by the Victory Portfolios' Trustees or by the vote of a majority of
the outstanding shares of the Victory Portfolios, and (ii) by the vote of a
majority of the Trustees of the Victory Portfolios who are not parties to the
Distribution Agreement or interested persons of any such party, cast in person
at a meeting called for the purpose of voting on such approval. The Distribution
Agreement will terminate in the event of its assignment, as defined in the 1940
Act. For the Victory Portfolios' fiscal years ended October 31, 1993 and October
31, 1994, Winsbury received $______ and $_______, respectively, in underwriting
commissions, and retained $0 and $15, respectively. For the fiscal year ended
October 31, 1995, the Distributor received $_______________ in underwriting
commissions, and retained $________________.
Fund Accountant
BISYS Fund Services Ohio, Inc., serves as fund accountant for the Fund
pursuant to a fund accounting agreement with the Victory portfolios dated June
5, 1995 (the "Fund Accounting Agreement"). As fund accountant for the Victory
Portfolios, BISYS Fund Services Ohio, Inc. calculates the Fund's Portfolios' net
asset value, the dividend and capital gain distributions, if any, and the yield.
BISYS Fund Services Ohio, Inc. also provides a current security position report,
a summary report of transactions and pending maturities, a current cash position
report, and maintains the general ledger accounting records for the Fund. Under
the Fund Accounting Agreement, BISYS Fund Services Ohio, Inc. is entitled to
receive annual fees of .03% of the first $100 million of the Fund's daily
average net assets, .02% of the next $100 million of Fund's daily average net
assets, and .01% of the Fund's remaining daily average net assets. These annual
fees are subject to a minimum monthly assets charge of $2,917 per tax-free fund,
and do not include out-of-pocket expenses or multiple class charges of $833 per
month assessed for each class of shares after the first class. In the fiscal
years ended October 31, 1993, October 31, 1994, and October 31, 1995, the
Victory Portfolios paid The Winsbury Service Corporation fund accounting fees
(after fee waivers) of $0, $36,706 and $_________, respectively, for the Fund.
Custodian
Cash and securities owned by the Fund are held by Key Trust Company of
Ohio, N.A. as custodian. Key Trust Company of Ohio, N.A. serves as custodian to
the Fund pursuant to a Custodian Agreement dated May 24, 1995. Under this
Agreement, Key Trust Company of Ohio, N.A. (i) maintains a separate account or
accounts in the mane of the Fund; (ii) makes receipts and disbursements of money
on behalf of the Fund; (iii) collects and receives all income and other payments
and distributions on account of portfolio securities; (iv) responds to
correspondence from security brokers and others relating to its duties; and (v)
makes periodic reports to the Victory Portfolios' Trustees concerning the
Victory Portfolios' operations. Key Trust Company of Ohio, N.A. may, with the
approval of the Victory Portfolios and the custodian's own expense, open and
maintain a sub-custody account or accounts on behalf of the Fund, provided that
Key Trust Company of Ohio, N.A. shall remain liable for the performance of all
of its duties under its respective Custodian Agreement.
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Transfer Agent
Primary Funds Service Corporation serves as transfer agent and dividend
disbursing agent for the Fund, pursuant to a Transfer Agency and Shareholder
Servicing Agreement. Under its agreement with the Victory Portfolios, Primary
Funds Service Corporation has agreed (i) to issue and redeem shares of the
Victory Portfolios; (ii) to address and mail all communications by the Victory
Portfolios to its shareholders, including reports to shareholders, dividend and
distribution notices, and proxy material for its meetings of shareholders; (iii)
to respond to correspondence or inquiries by shareholders and others relating to
its duties; (iv) to maintain shareholder accounts and certain sub-accounts; and
(v) to make periodic reports to the Victory Portfolios' Trustees concerning the
Victory Portfolios' operations. For the services provided under the Transfer
Agency and Shareholder Servicing Agreement, Primary Funds Service Corporation
receives a maximum monthly fee of $1,250 from the Fund, and to a maximum of
$3.50 per account of the Fund.
Auditors
The financial highlights appearing in the Prospectus for the Fund,
other than unaudited information marked as such, has been derived from financial
statements of the Victory Portfolios appearing in or incorporated by reference
in this Statement of Additional Information which have been audited by Coopers &
Lybrand L.L.P., independent accountants, as set forth in their report appearing
elsewhere herein, and are included in reliance upon such report and on the
authority of such firm as experts in auditing and accounting. Coopers & Lybrand
L.L.P.'s address is 100 East Broad Street, Columbus, Ohio 43215.
Legal Counsel
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, 919 Third Avenue, New
York, New York 10022 is counsel to the Victory Portfolios.
ADDITIONAL INFORMATION
Description of Shares
The Victory Portfolios (sometimes referred to as the "Trust") is a
Delaware business trust. Its Delaware Trust Instrument was adopted on December
6, 1995 and a certificate of Trust for the Trust was filed in Delaware on
December __, 1995. On February 29, 1996, the Victory Portfolios converted from a
Massachusetts business trust to a Delaware business trust.
The previously effective Massachusetts Declaration of Trust, pursuant
to which the Victory Portfolios was originally called the North Third Street
Fund, was filed with the Secretary of State of the Commonwealth of Massachusetts
on February 6, 1986. On September 22, 1986, an Amended and Restated Declaration
of Trust was filed to change the name of the Trust to The Emblem Fund and to
make certain other changes. A second amendment was filed October 23, 1986
providing for voting of shares in the aggregate except where voting of shares by
series is otherwise required by law. An amendment to the Amended and Restated
Declaration of Trust was filed on March 15, 1993 to change the name of the Trust
to The Society Funds. An Amended and Restated Declaration of Trust was then
filed on September 2, 1994 to change the name of the Trust to The Victory
Portfolios.
The currently effective Delaware Trust Instrument authorizes the
Trustees to issue an unlimited number of shares, which are units of beneficial
interest, without par value. The Victory Portfolios presently has twenty-eight
series of shares, which represent interests in the U.S. Government Obligations
Fund, the Prime Obligations Fund, the Tax-Free Money Market Fund, the Balanced
Fund, the Stock Index Fund, the Value Fund, the Diversified Stock Fund, the
Growth Fund, the Special Value Fund, the Special Growth Fund, the Ohio Regional
Stock Fund, the International Growth Fund, the Limited Term Income Fund, the
Government Mortgage Fund, the Ohio Municipal Bond Fund, the Intermediate Income
Fund, the Investment Quality Bond Fund, the Florida Tax-Free Bond Fund, the
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<PAGE> 183
Municipal Bond Fund, the Convertible Securities Fund, the Short-Term U.S.
Government Income Fund, the Government Bond Fund, the Fund for Income, the
National Municipal Bond Fund, the New York Tax-Free Fund, the Institutional
Money Market Fund, the Financial Reserves Fund and the Ohio Municipal Money
Market Fund, respectively. The Victory Portfolios' Delaware Trust Instrument
authorizes the Trustees to divide or redivide any unissued shares of the Victory
Portfolios into one or more additional series by setting or changing in any one
or more respects their respective preferences, conversion or other rights,
voting power, restrictions, limitations as to dividends, qualifications, and
terms and conditions of redemption.
Shares have no subscription or preemptive rights and only such
conversion or exchange rights as the Trustees may grant in their discretion.
When issued for payment as described in the Prospectus and this Statement of
Additional Information, the Victory Portfolios' shares will be fully paid and
non-assessable. In the event of a liquidation or dissolution of the Victory
Portfolios, shares of the Fund are entitled to receive the assets available for
distribution belonging to the Fund, and a proportionate distribution, based upon
the relative asset values of the respective funds of the Victory Portfolios, of
any general assets not belonging to any particular fund which are available for
distribution.
As described in the Prospectus under the caption "ADDITIONAL
INFORMATION -- Voting Rights," shares of the Victory Portfolios are entitled to
one vote per share (with proportional voting for fractional shares) on such
matters as shareholders are entitled to vote. On any matter submitted to a vote
of the shareholders, all shares are voted separately by individual series
(funds), and whenever the Trustees determine that the matter affects only
certain series, may be submitted for a vote by only such series, except (i) when
required by the 1940 Act, shares are voted in the aggregate and not by
individual series; and (ii) when the Trustees have determined that the matter
affects the interests of more than one series and that voting by shareholders of
all series would be consistent with the 1940 Act, then the shareholders of all
such series shall be entitled to vote thereon (either by individual series or by
shares voted in the aggregate, as the Trustees in their discretion may
determine). The Trustees may also determine that a matter affects only the
interests of one or more classes of a series, in which case (or if required
under the 1940 Act) such matter shall be voted on by such class or classes.
There will normally be no meetings of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority of the Trustees have
been elected by the shareholders, at which time the Trustees then in office will
call a shareholders' meeting for the election of Trustees. In addition, Trustees
may be removed from office by a vote of the holders of at least two-thirds of
the outstanding shares of the Victory Portfolios. A meeting shall be held for
such purpose upon the written request of the holders of not less than 10% of the
outstanding shares. Upon written request by ten or more shareholders meeting the
qualifications of Section 16(c) of the 1940 Act, (i.e., person who have been
shareholders for at least six months, and who hold shares having an NAV of at
least $25,000 or constituting 1% of the outstanding shares) stating that such
shareholders wish to communicate with the other shareholders for the purpose of
obtaining the signatures necessary to demand a meeting to consider removal of a
Trustee, the Victory Portfolios will provide a list of shareholders or
disseminate appropriate materials (at the expense of the requesting
shareholders). Except as set forth above, the Trustees shall continue to hold
office and may appoint their successors.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Victory Portfolios shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each fund of the Victory Portfolios affected by the
matter. For purposes of determining whether the approval of a majority of the
outstanding shares of a fund will be required in connection with a matter, a
fund will be deemed to be affected by a matter unless it is clear that the
interests of each fund in the matter are identical, or that the matter does not
affect any interest of the fund. Under Rule 18f-2, the approval of an investment
advisory agreement or any change in investment policy would be effectively acted
upon with respect to a fund only if approved by a majority of the outstanding
shares of such fund. However, Rule 18f-2 also provides that the ratification of
independent public accountants, the approval of principal underwriting
contracts, and the election of Trustees may be effectively acted upon by
shareholders of all of the Victory Portfolios voting without regard to series.
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Shareholder and Trustee Liability
The Delaware Business Trust Act provides that a shareholder of a
Delaware business trust shall be entitled to the same limitation of personal
liability extended to shareholders of Delaware corporations. The Delaware Trust
Instrument also provides for indemnification out of the trust property of any
shareholder held personally liable solely by reason of his or her being or
having been a shareholder. The Delaware Trust Instrument also provides that the
Victory Portfolios shall, upon request, assume the defense of any claim made
against any shareholder for any act or obligation of the Victory Portfolios, and
shall satisfy any judgment thereon. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is considered to be extremely
remote.
The Delaware Trust Instrument states further that no Trustee, officer,
or agent of the Victory Portfolios shall be personally liable in connection with
the administration or preservation of the assets of the Funds or the conduct of
the Victory Portfolios' business; nor shall any Trustee, officer, or agent be
personally liable to any person for any action or failure to act except for his
own bad faith, willful misfeasance, gross negligence, or reckless disregard of
his duties. The Declaration of Trust also provides that all persons having any
claim against the Trustees or the Victory Portfolios shall look solely to the
assets of the Victory Portfolios for payment.
Miscellaneous
As used in the Prospectus and in this Statement of Additional
Information, "assets belonging to a fund" (or "assets belonging to the Fund")
means the consideration received by the Victory Portfolios upon the issuance or
sale of shares in that fund, together with all income, earnings, profits, and
proceeds derived from the investment thereof, including any proceeds from the
sale, exchange, or liquidation of such investments, and any funds or payments
derived from any reinvestment of such proceeds and any general assets of the
Victory Portfolios, which general liabilities and expenses are not readily
identified as belonging to a particular fund (or the Fund) that are allocated to
that fund (or the Fund) by the Victory Portfolios' Trustees. The Trustees may
allocate such general assets in any manner they deem fair and equitable. It is
anticipated that the formula that will be used by the Trustees in making
allocations of general assets to a particular fund of the Victory Portfolios
will be the relative net asset value of the respective fund at the time of
allocation. Assets belonging to a particular fund are charged with the direct
liabilities and expenses of that fund, and with a share of the general
liabilities and expenses of each of the funds not readily identified as
belonging to a particular fund that are allocated to each fund in accordance
with its proportionate share of the net asset values of the Victory Portfolios
at the time of allocation. The timing of allocations of general assets and
general liabilities and expenses of the Victory Portfolios to a particular fund
will be determined by the Trustees of the Victory Portfolios and will be in
accordance with generally accepted accounting principles. Determinations by the
Trustees of the Victory Portfolios as to the timing of the allocation of general
liabilities and expenses and as to the timing and allocable portion of any
general assets with respect to a particular fund are conclusive.
As used in the Prospectus and in this Statement of Additional
Information, a "vote of a majority of the out standing shares" or a "vote of a
majority of the outstanding voting securities" of the Victory Portfolios or a
particular fund means the affirmative vote of the lesser of (a) 67% or more of
the shares of the Victory Portfolios or such fund present at a meeting at which
the holders of more than 50% of the outstanding shares of the Victory Portfolios
or such fund are represented in person or by proxy, or (b) more than 50% of the
outstanding shares of the Victory Portfolios or such fund.
Organizational expenses are allocated to each of the Victory Portfolios
and are amortized over a period of two years from the commencement of the public
offering of shares of the Victory Portfolios.
The Victory Portfolios is registered with the Commission as an open-end
management investment company. Such registration does not involve supervision by
the Commission of the management or policies of the Victory Portfolios.
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<PAGE> 185
The Prospectus and this Statement of Additional Information omit
certain of the information contained in the Registration Statement filed with
the Commission. Copies of such information may be obtained from the Commission
upon payment of the prescribed fee.
The Prospectus and this Statement of Additional Information are not an
offering of the securities herein described in any state in which such offering
may not lawfully be made. No salesman, dealer, or other person is authorized to
give any information or make any representation other than those contained in
the Prospectus and this Statement of Additional Information.
The 1995 Annual Report to shareholders of The Victory Portfolios is
incorporated by reference herein. This report includes the financial statements
for the fiscal year ended October 31, 1995. The opinion in the Annual Report of
Coopers & Lybrand L.L.P., independent accountants, is incorporated by reference
herein in its entirety to such Annual Report, and such financial statements are
incorporated in their entirety in reliance upon such report of Coopers & Lybrand
L.L.P. and on the authority of such firm as experts in auditing and accounting.
The following table indicates each person known by the Fund to own
beneficially 5% or more of the shares of the Fund as of December 1, 1995:
<TABLE>
<CAPTION>
Percent of Total
Outstanding
Name & Address Shares Shares of Fund
-------------- ------ --------------
<S> <C> <C>
KeyCorp Cash Balance 2,642,311.92 29.64%
Mutual/Equity Fund
127 Public Square
Cleveland, OH 44114
</TABLE>
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<PAGE> 186
APPENDIX
The nationally recognized statistical rating organizations
(individually, an "NRSRO") that may be utilized by Key Advisers or the
Sub-Adviser with regard to portfolio investments for the Fund include Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), Duff
& Phelps, Inc. ("Duff"), Fitch Investors Service, Inc. ("Fitch"), IBCA Limited
and its affiliate, IBCA Inc. (collectively, "IBCA"), and Thomson BankWatch, Inc.
("Thomson"). Set forth below is a description of the relevant ratings of each
such NRSRO. The NRSROs that may be utilized by Key Advisers or the Sub-Adviser
and the description of each NRSRO's ratings is as of the date of this Statement
of Additional Information, and may subsequently change.
Long-Term Debt Ratings (may be assigned, for example, to corporate and
municipal bonds)
Description of the five highest long-term debt ratings by Moody's
(Moody's applies numerical modifiers (e.g., 1, 2, and 3) in each rating category
to indicate the security's ranking within the category):
Aaa. Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa. Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements -
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times in the future. Uncertainty of
position characterizes bonds in this class.
Description of the five highest long-term debt ratings by S&P (S&P may
apply a plus (+) or minus (-) to a particular rating classification to show
relative standing within that classification):
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
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<PAGE> 187
BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB. Debt rated BB is regarded, on balance, as predominately speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposure to adverse conditions.
Description of the three highest long-term debt ratings by Duff:
AAA. Highest credit quality. The risk factors are negligible being only
slightly more than for risk-free U.S. Treasury debt.
AA+. High credit quality Protection factors are strong.
AA. Risk is modest but may vary slightly from time to time
AA-. because of economic conditions.
A+. Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
Description of the three highest long-term debt ratings by Fitch (plus
or minus signs are used with a rating symbol to indicate the relative position
of the credit within the rating category):
AAA. Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA. Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA." Because
bonds rated in the "AAA" and "AA" categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these
issues is generally rated "[-]+."
A. Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
IBCA's description of its three highest long-term debt ratings:
AAA. Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic or
financial conditions are unlikely to increase investment risk
significantly.
AA. Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic, or financial
conditions may increase investment risk albeit not very significantly.
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<PAGE> 188
A. Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
Short-Term Debt Ratings (may be assigned, for example, to commercial
paper, master demand notes, bank instruments, and letters of credit)
Moody's description of its three highest short-term debt ratings:
Prime-1. Issuers rated Prime-1 (or supporting institutions) have a
superior capacity for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a
strong capacity for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
S&P's description of its three highest short-term debt ratings:
A-1. This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to have extremely
strong safety characteristics are denoted with a plus sign (+).
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1."
A-3. Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
Duff's description of its five highest short-term debt ratings (Duff
incorporates gradations of "1+" (one plus) and "1-" (one minus) to assist
investors in recognizing quality differences within the highest rating
category):
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<PAGE> 189
Duff 1+. Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
Duff 1. Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
Duff 1-. High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors are
very small.
Duff 2. Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good.
Risk factors are small.
Duff 3. Satisfactory liquidity and other protection factors qualify
issue as to investment grade.
Risk factors are larger and subject to more variation. Nevertheless,
timely payment is expected.
Fitch's description of its four highest short-term debt ratings:
F-1+. Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely
payment.
F-1. Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2. Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as for issues assigned F-1+ or F-1 ratings.
F-3. Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate, however, near-term adverse changes could cause
these securities to be rated below investment grade.
IBCA's description of its three highest short-term debt ratings:
A+. Obligations supported by the highest capacity for timely repayment.
A1. Obligations supported by a very strong capacity for timely
repayment.
A2. Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
Short-Term Loan/Municipal Note Ratings
Moody's description of its two highest short-term loan/municipal note
ratings:
MIG-1/VMIG-1. This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
MIG-2/VMIG-2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
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S&P's description of its two highest municipal note ratings:
SP-1. Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
SP-2. Satisfactory capacity to pay principal and interest.
Short-Term Debt Ratings
Thomson BankWatch, Inc. ("TBW") ratings are based upon a qualitative
and quantitative analysis of all segments of the organization including, where
applicable, holding company and operating subsidiaries.
TBW Ratings do not constitute a recommendation to buy or sell
securities of any of these companies. Further, TBW does not suggest specific
investment criteria for individual clients.
The TBW Short-Term Ratings apply to commercial paper, other senior
short-term obligations and deposit obligations of the entities to which the
rating has been assigned.
The TBW Short-Term Ratings apply only to unsecured instruments that
have a maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an
untimely payment of principal or interest.
TBW-1. The highest category; indicates a very high degree of likelihood
that principal and interest will be paid on a timely basis.
TBW-2. The second highest category; while the degree of safety
regarding timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1".
TBW-3. The lowest investment grade category; indicates that while more
susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and interest in a
timely fashion is considered adequate.
TBW-4. The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
Definitions of Certain Money Market Instruments
Commercial Paper
Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.
Certificates of Deposit
Certificates of Deposit are negotiable certificates issued against
funds deposited in a commercial bank or a savings and loan association for a
definite period of time and earning a specified return.
Bankers' Acceptances
Bankers' acceptances are negotiable drafts or bills of exchange,
normally drawn by an importer or exporter to pay for specific merchandise, which
are "accepted" by a bank, meaning, in effect, that the bank unconditionally
agrees to pay the face value of the instrument on maturity.
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U.S. Treasury Obligations
U.S. Treasury Obligations are obligations issued or guaranteed as to
payment of principal and interest by the full faith and credit of the U.S.
Government. These obligations may include Treasury bills, notes and bonds, and
issues of agencies and instrumentalities of the U.S. Government, provided such
obligations are guaranteed as to payment of principal and interest by the full
faith and credit of the U.S. Government.
U.S. Government Agency and Instrumentality Obligations
Obligations issued by agencies and instrumentalities of the U.S.
Government include such agencies and instrumentalities as the Government
National Mortgage Association, the Export-Import Bank of the United States, the
Tennessee Valley Authority, the Farmers Home Administration, the Federal Home
Loan Banks, the Federal Intermediate Credit Banks, the Federal Farm Credit
Banks, the Federal Land Banks, the Federal Housing Administration, the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation, and
the Student Loan Marketing Association. Some of these obligations, such as those
of the Government National Mortgage Association are supported by the full faith
and credit of the U.S. Treasury; others, such as those of the Export-Import Bank
of the United States, are supported by the right of the issuer to borrow from
the Treasury; others, such as those of the Federal National Mortgage
Association, are supported by the discretionary authority of the U.S. Government
to purchase the agency's obligations; still others, such as those of the Student
Loan Marketing Association, are supported only by the credit of the
instrumentality. No assurance can be given that the U.S. Government would
provide financial support to U.S. Government-sponsored instrumentalities if it
is not obligated to do so by law. A Fund will invest in the obligations of such
instrumentalities only when the investment adviser believes that the credit risk
with respect to the instrumentality is minimal.
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STATEMENT OF ADDITIONAL INFORMATION
THE VICTORY PORTFOLIOS
THE INSTITUTIONAL MONEY MARKET FUND
March 1, 1996
This Statement of Additional Information is not a Prospectus, but
should be read in conjunction with the Prospectus of The Victory Portfolios -
The Institutional Money Market Fund, dated the same date as the date hereof
(the "Prospectus"). This Statement of Additional Information is incorporated
by reference in its entirety into the Prospectus. Copies of the Prospectus may
be obtained by writing The Victory Portfolios at Primary Funds Service
Corporation, P.O. Box 9741, Providence, RI 02940-9741, or by telephoning toll
free 800-539-FUND or 800-539-3863.
<TABLE>
<S> <C> <C>
Investment Policies and Limitations 1 INVESTMENT ADVISER
Valuation of Portfolio Securities 5 KeyCorp Mutual Fund Advisers, Inc.
Additional Purchase and Redemption Information 5
Management of the Victory Portfolios 8 INVESTMENT SUB-ADVISER
Advisory and Other Contracts 16 Society Asset Management, Inc.
Additional Information 24
26 ADMINISTRATOR
Independent Auditor's Report 29 Concord Holding Corporation
Financial Statements 29
Appendix 30 DISTRIBUTOR
Victory Broker-Dealer Services, Inc.
TRANSFER AGENT
Primary Funds Service Corporation
CUSTODIAN
Key Trust Company of Ohio, N.A.
</TABLE>
<PAGE> 193
STATEMENT OF ADDITIONAL INFORMATION
The Victory Portfolios (the "Victory Portfolios") is an open-end
management investment company. The Victory Portfolios consist of twenty-eight
series of units of beneficial interest ("shares") four of which series are
currently inactive. The outstanding shares represent interest in the twenty
four investment portfolios which are currently active. This Statement of
Additional Information relates to The Victory Institutional Money Market Fund
(the "Fund") only. Much of the information contained in this Statement of
Additional Information expands on subjects discussed in the Prospectus.
Capitalized terms not defined herein are used as defined in the Prospectus. No
investment in shares of the Fund should be made without first reading the
Fund's Prospectus.
INVESTMENT POLICIES AND LIMITATIONS
The Fund's investment objective is to obtain as high a level of
current income as is consistent with preserving capital and providing liquidity
through investment primarily in high-quality, U.S. dollar-denominated money
market instruments.
The following are the Fund's fundamental investment limitations set forth in
their entirety. The Fund will not:
(1) purchase the securities of any issuer (other than obligations issued
or guaranteed as to principal and interest by the United States
government, its agencies or instrumentalities) if, as a result
thereof: (i) more than 5% of its total assets would be invested in the
securities of such issuer, provided, however, that in the case of
certificates of deposit, time deposits and bankers' acceptances, up to
25% of the Fund's total assets may be invested without regard to such
5% limitation, but shall instead be subject to a 10% limitation; (ii)
more than 25% of its total assets would be invested in the securities
of one or more issuers having their principal business activities in
the same industry, provided, however, that it may invest more than 25%
of its total assets in the obligations of domestic banks. Neither
finance companies as a group nor utility companies as a group are
considered a single industry for purposes of this policy (i.e.,
finance companies will be considered a part of the industry they
finance and utilities will be divided according to the types of
services they provide.)
(2) borrow money except (i) from a bank for temporary or emergency
purposes (not for leveraging or investment) or (ii) by engaging in
reverse repurchase agreements, provided that (i) and (ii) in
combination ("borrowings") do not exceed an amount equal to one third
of the current value of its total assets (including the amount
borrowed) less liabilities (not including the amount borrowed) at the
time the borrowing is made;
(3) make loans to other persons, except (i) by the purchase of debt
obligations in which the Fund is authorized to invest in accordance
with its investment objective, and (ii) by engaging in repurchase
agreements. In addition, the Fund may lend its portfolio securities
to broker-dealers or other institutional investors, provided that the
borrower delivers cash or cash equivalents as collateral to the Fund
and agrees to maintain such collateral so that it equals at least 100%
of the value of the securities loaned. Any such securities loan may
not be made if, as a result thereof, the aggregate value of all
securities loaned exceeds 33 1/3% of the total assets of the Fund;
(4) act as an underwriter (except as it may be deemed such in a sale of
restricted securities);
(5) buy or sell real estate, commodities, or commodity (futures) contracts
or invest in oil, gas or other mineral exploration or development
programs; or
(6) issue any senior security (as defined in the 1940 Act), except that
(a) the Fund may engage in transactions which may result in the
issuance of senior securities to the extent permissible under the
applicable
<PAGE> 194
regulations and interpretations of the 1940 Act or an exemptive order;
(b) the Fund may acquire other securities that may be deemed senior
securities to the extent permitted under applicable regulations or
interpretations of the 1940 Act; (c) subject to the restrictions set
forth below, the Fund may borrow money as authorized by the 1940 Act;
The following limitations are not fundamental and may be changed
without shareholder notification:
The Fund will not:
(1) purchase the securities of a company if such purchase, at the time
thereof, would cause more than 5% of the Fund's total assets to be
invested in securities of companies, which, including predecessors,
have a record of less than three years' continuous operation;
(2) pledge assets, except that the Fund may pledge not more than one third
of its total assets (taken at current value) to secure borrowings made
in accordance with limitation (2) above;
(3) invest more than 10% of the value of the Fund's net assets in
securities that are illiquid, including repurchase agreements
providing for settlement in more than seven days after notice;
(4) purchase or retain the securities of any issuer, any of whose
officers, directors, or security holders is a trustee, director, or
officer of the Fund or of its investment adviser, if or so long as the
Board of Trustees, directors, and officers of the Fund and of its
Investment Adviser together own beneficially more than 5% of any class
of securities of such issuer;
(5) purchase securities on margin (but the Fund may obtain such credits as
may be necessary for the clearance of purchases and sales of
securities);
(6) write or purchase any put or call option;
(7) make short sales of securities;
(8) invest in companies for the purpose of exercising control or
management; or
(9) invest in the securities of other investment companies except that the
Fund may invest in shares of other money market funds that are not
"affiliated persons" of the Fund and that limit their investments to
securities appropriate for the Fund, provided investment by the Fund
is limited to: (a) ten percent (10%) of the Fund's assets; (b) five
percent (5%) of the Fund's total assets in the shares of a single
money market fund; and (c) not more than three percent (3%) of the net
assets of any one acquired money market fund. The investment adviser
will waive the portion of its fee attributable to the assets of the
Fund invested in such money market funds to the extent required by the
laws of any jurisdiction in which shares of the Fund are registered
for sale.
(10) The Fund may not participate on a joint, or a joint and several, basis
in any trading account in securities. The "bunching" of orders for
the sale or purchase of portfolio securities with other funds advised
by the investment adviser or its affiliates to reduce brokerage
commissions or otherwise to achieve best overall execution is not
considered participation in a trading account in securities.
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<PAGE> 195
Also, the Fund does not currently intend to:
(i) purchase commercial paper which is not rated in the single highest
category by one NRSRO such as Duff & Phelps, Inc., Fitch Investors
Service, Inc., Standard & Poor's Corporation, or Moody's Investors
Service, Inc., or if unrated, which is not deemed to be of equivalent
quality pursuant to procedures reviewed by the Trustees.
(ii) purchase securities for investment during periods when the sum of
temporary bank borrowings and reverse repurchase agreements (described
in fundamental limitation (2)) entered into to facilitate redemptions
exceeds 5% of its total assets.
(iii) lend more than 5% of its portfolio securities.
Fundamental limitation (3) is construed in conformity with the Investment
Company Act of 1940, and if any time Fund borrowings exceed an amount equal to
one third of the current value of the Fund's total assets (including the amount
borrowed) less liabilities (other than borrowings) at the time the borrowing is
made due to a decline in net assets, such borrowings will be reduced within
three days (not including Sundays and holidays) to the extent necessary to
comply with the 33 1/3% limitation.
Repurchase agreements are transactions by which the Fund purchases a security
and simultaneously commits to resell that security to the seller at an agreed
upon price on an agreed upon date within a number of days (usually not more
than seven) from the date of purchase. The resale price reflects the purchase
price plus an agreed upon incremental amount which is unrelated to the coupon
rate or maturity of the purchased security. A repurchase agreement involves
the obligation of the seller to pay the agreed upon price, which obligation is
in effect secured by the value (at least equal to the amount of the agreed upon
resale price and marked to market daily) of the underlying security. The Fund
may engage in a repurchase agreement with respect to any security in which the
Fund is authorized to invest even though the underlying security matures in
more than one year. Whether a repurchase agreement is the purchase and sale of
a security or a collateralized loan has not been definitively established.
This might become an issue in the event of the bankruptcy of the other party to
the transaction. While it does not presently appear possible to eliminate all
risks from these transactions (particularly the possibility of a decline in the
market value of the underlying securities, as well as delay and costs to the
Fund in connection with bankruptcy proceedings), it is the policy of the Fund
to limit repurchase transactions to those member banks of the Federal Reserve
System and primary dealers in U.S. government securities whose creditworthiness
has been reviewed and found satisfactory by the Adviser under policies
established and reviewed by the Board of Trustees ("Trustees"). Repurchase
Agreements are considered by the staff of the Securities and Exchange
Commission ("SEC") to be loans by the Fund. In a reverse repurchase agreement,
the Fund temporarily transfers possession of a portfolio instrument to another
party, such as a financial institution or broker-dealer, in return for cash.
At the same time, the Fund agrees to repurchase the instrument at an agreed
upon time (normally within seven days) and price including interest payment.
The Fund expects that it will engage in reverse repurchase agreements when it
is able to invest the cash so acquired at a rate higher than the rate reflected
by the agreement, which would increase the income earned by the Fund. The Fund
could also engage in reverse repurchase agreements as a means of raising cash
to satisfy redemption requests without the necessity of selling portfolio
instruments.
When the Fund engages in a reverse repurchase agreement, any fluctuations in
the market value of either the securities transferred to another party or the
securities in which the proceeds may be invested would affect the market value
of the Fund's assets. As a result, such transactions may increase fluctuation
in the market value of the Fund's assets (as opposed to the amortized cost
value of its assets used in determining its net asset value per share). While
there is a potential risk that large fluctuations in the market value of the
Fund's assets could affect the Fund's net asset value per share, this risk is
not significantly increased by engaging in reverse repurchase agreements in the
Adviser's opinion. If the Fund reinvests the proceeds of a reverse repurchase
agreement at a rate lower than the rate reflected by the agreement, engaging in
the agreement will lower the Fund's yield.
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<PAGE> 196
At all times that a reverse repurchase agreement is outstanding, the Fund will
maintain cash and liquid securities in a segregated account at its custodian
bank with a value at least equal to its obligation under the agreement.
Securities and other assets held in the segregated account may not be sold
while the reverse repurchase agreement is outstanding, unless other suitable
assets are substituted.
While the Adviser does not consider reverse repurchase agreements to involve
borrowing money, reverse repurchase agreements will be included within the
aggregate limitation on "borrowings" contained in the Fund's fundamental
limitation.
State Regulations
The Fund has agreed with a state securities administrator that it will
limit investment in warrants to no more than 5% of its net assets and, of this
5%, no more than 2% will be invested in warrants which are not listed on the
New York Stock Exchange or the American Stock Exchange; provided, however, that
for the purposes of this limitation, warrants acquired in units or attached to
other securities will be deemed to be without value.
In addition, the Fund, so long as its shares are registered under the
securities laws of the State of Texas and such restrictions are required as a
consequence of such registration, is subject to the following non-fundamental
policy, which may be modified in the future by the Trustees without a vote of
the Fund's shareholders: the Victory Portfolios has represented to the Texas
State Securities Board, on behalf of the investment portfolios registered in
that state, that those investment portfolios will not invest in oil, gas or
mineral leases or purchase or sell real property (including limited partnership
interests, but excluding readily marketable securities of companies which
invest in real estate).
The policies and limitations above supplement those set forth in the
Prospectus. Unless otherwise noted, whenever an investment policy or
limitation states a maximum percentage of the Fund's assets that may be
invested in any security or other asset, or sets forth a policy regarding
quality standards, such standard or percentage limitation will be determined
immediately after and as a result of the Fund's acquisition of such security or
other asset except in the case of borrowing (or other activities that may be
deemed to result in the issuance of a "senior security" under the 1940 Act).
Accordingly, any subsequent change in values, net assets, or other
circumstances will not be considered when determining whether the investment
complies with the Fund's investment policies and limitations. If the value of
the Fund's holdings of illiquid securities at any time exceeds the percentage
limitation applicable at the time of acquisition due to subsequent fluctuations
in value or other reasons, the Board will consider what actions, if any, are
appropriate to maintain adequate liquidity.
FUTURE DEVELOPMENTS
The Fund may take advantage of other investment practices which are
not at present contemplated for use by the Fund or which currently are not
available but which may be developed, to the extent such investment practices
are both consistent with the Fund's investment objective and are legally
permissible for the Fund. Such investment practices, if they arise, may
involve risks which exceed those involved in the activities described in the
Prospectus and Statement of Additional Information. Prior to commencing any
new investment practice, the Fund will notify shareholders by means of
prospectus supplement.
Portfolio Turnover
As stated in the Prospectus, the turnover rate for the Fund's
investment portfolio is calculated by dividing the lesser stated in the
Prospectus of the Fund's purchases or sales of portfolio securities for the
year by the monthly average value of the portfolio securities. The calculation
excludes all securities whose maturities, at the time of acquisition, were one
year or less. Because of this exclusion, portfolio turnover is expected to be
zero percent for regulatory purposes.
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VALUATION OF PORTFOLIO SECURITIES
As indicated in the Prospectus, the net asset value ("NAV") of the
Fund is determined and the shares of the Fund are priced as of the close of
regular trading of the New York Stock Exchange ("NYSE") ("the Valuation
Time(s)") on each Business Day of the Fund. A "Business Day" is a day on which
the NYSE is open for trading, the Federal Reserve Bank of Cleveland is open and
any other day (other than a day on which no shares of the Fund are tendered for
redemption and no order to purchase any shares is received) during which there
is sufficient trading in portfolio instruments that the Fund's net asset value
per share might be materially affected. The NYSE, or the Federal Reserve Bank
of Cleveland will not open in observance of the following holidays: New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, and
Christmas Day.
When the NYSE is closed, or when trading is restricted for any reason
other than its customary weekend or holiday closings, or under emergency
circumstances as determined by the Commission to warrant such action, the
Fund's transfer agent will determine the Fund's NAV at the close of business,
normally 4:00 p.m., eastern time. The Fund's NAV may be affected to the extent
that its securities are traded on days that are not Business Days.
The Fund has elected to use the amortized cost method of valuation
pursuant to Rule 2a-7 under the 1940 Act. This involves valuing an instrument
at its cost initially and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. This method may result
in periods during which value, as determined by amortized cost, is higher or
lower than the price the Fund would receive if it sold the instrument. The
value of securities in the portfolio can be expected to vary inversely with
changes in prevailing interest rates.
Pursuant to Rule 2a-7, the Fund will maintain a dollar-weighted
average portfolio maturity appropriate to its objective of maintaining a stable
net asset value per share, provided that the Fund will not purchase any
security with a remaining maturity of more than 397 days (securities subject to
repurchase agreements may bear longer maturities) nor maintain a
dollar-weighted average portfolio maturity which exceeds 90 days. The Victory
Portfolios' Trustees have also undertaken to establish procedures reasonably
designed, taking into account current market conditions and the Victory
Portfolios' investment objectives, to stabilize the net asset value per share
of the Fund for purposes of sales and redemptions at $1.00. These procedures
include review by the Trustees, at such intervals as they deem appropriate, to
determine the extent, if any, to which the net asset value per share of the
Fund calculated by using available market quotations deviates from $1.00 per
share. In the event such deviation exceeds one-half of one percent, the Rule
requires that the Board promptly consider what action, if any, should be
initiated. If the Trustees believe that the extent of any deviation from the
Fund's $1.00 amortized cost price per share may result in material dilution or
other unfair results to new or existing investors, they will take such steps as
they consider appropriate to eliminate or reduce to the extent reasonably
practicable any such dilution or unfair results. These steps may include
selling portfolio instruments prior to maturity, shortening the dollar-weighted
average portfolio maturity, withholding or reducing dividends, reducing the
number of the Fund's outstanding shares without monetary consideration, or
utilizing a net asset value per share determined by using available market
quotations.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Matters Affecting Redemption
The Fund may suspend the right of redemption or postpone the date of
payment for shares during any period when (a) trading on the NYSE is restricted
by applicable rules and regulations of the Commission, (b) the
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<PAGE> 198
NYSE is closed for other than customary weekend and holiday closings, (c) the
Commission has by order permitted such suspension, or (d) an emergency exists
as determined by the Commission.
[If, in the opinion of the Board of Trustees, conditions exist which
make cash payment undesirable, redemption payments may be made in whole or in
part in securities or other property, valued for this purpose as they are
valued in computing the Fund's NAV. Shareholders receiving securities or other
property on redemption may realize a gain or loss for tax purposes, and will
incur any costs of sale, as well as the associated inconveniences.]
Pursuant to Rule 11a-3 under the 1940 Act, the Fund is required to
give shareholders at least 60 days' notice prior to terminating or modifying
its exchange privilege. Under the Rule, the 60-day notification requirement
may be waived if (i) the only effect of a modification would be to reduce or
eliminate an administrative fee, redemption fee, or deferred sales charge
ordinarily payable at the time of exchange, or (ii) a Fund temporarily suspends
the offering of shares as permitted under the 1940 Act or by the Commission, or
because it is unable to invest amounts effectively in accordance with its
investment objective and policies.
In the Prospectus, the Fund, Key Advisers and the Sub-Adviser have
notified shareholders that they reserve the right at any time without prior
notice to shareholders to refuse exchange purchases by any person or group if,
in Key Advisers' or the Sub-Adviser's judgment, the Fund would be unable to
invest effectively in accordance with its investment objective and policies, or
would otherwise potentially be adversely affected.
Purchasing Shares
Shares are sold at their net asset value without a sales charge on
days the NYSE and the Federal Reserve Wire System are open for business. The
procedure for purchasing shares of the Fund is explained in the prospectus
under "Investing in the Fund."
Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that
maximum interest may be earned. To this end, all payments from shareholders
must be in federal funds or be converted into federal funds. This conversion
must be made before shares are purchased. Converting the funds to federal
funds is normally accomplished within two business days of receipt of the
check.
Redeeming Shares
The Fund redeems shares at the next computed net asset value after the
redemption request is received. Redemption procedures are explained in the
prospectus under "Redeeming Shares."
Redemption in Kind
Although the Fund intends to redeem shares in cash, it reserves the
right under certain circumstances to pay the redemption price in whole or in
part by a distribution of securities from the Fund. To the extent available,
such securities will be readily marketable.
Redemption in kind will be made in conformity with applicable
Commission rules, taking such securities at the same value employed in
determining net asset value and selecting the securities in a manner the
Trustees determine to be fair and equitable.
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The Fund has elected to be governed by Rule 18f-1 of the 1940 Act
under which the Fund is obligated to redeem shares for any one shareholder in
cash only up to the lesser of $250,000 or 1% of the Fund's net asset value
during any 90-day period.]
The Victory Portfolios may redeem shares involuntarily if redemption
appears appropriate in light of the Victory Portfolios' responsibilities under
the 1940 Act. (See "VALUATION" above.)
Additional Tax Information
It is the policy of the Fund to qualify for the favorable tax
treatment accorded regulated investment companies ("RICs") under Subchapter M
of the Code, for so long as such qualification is in the best interest of its
shareholders. By following such policy and distributing its income and gains
currently with respect to each taxable year, the Victory Portfolios expects to
eliminate or reduce to a nominal amount the federal income and excise taxes to
which it may otherwise be subject.
In order to qualify as a RIC, the Fund must, among other things, (1)
derive at least 90% of its gross income from dividends, interest, payments with
respect to securities loans, and gains from the sale or other disposition of
stock or securities, foreign currencies or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in stock, securities or currencies, (2) derive less than 30% of its
gross income from the sale or other disposition of stock, securities, options,
futures, forward contracts, and certain foreign currencies (or options,
futures, or forward contracts on foreign currencies) held for less than three
months, and (3) diversify its holdings so that at the end of each quarter of
its taxable year (i) at least 50% of the market value of the Fund's assets is
represented by cash or cash items, U.S. Government securities, securities of
other RICs and other securities limited, in respect of any one issuer, to an
amount not greater than 5% of the value of the fund's total assets and 10% of
the outstanding voting securities of such issuer, and (ii) not more than 25% of
the value of its total assets is invested in the securities of any one issuer
(other than U.S. Government securities) or of two or more issuers that the
Victory Portfolios control and that are engaged in the same, similar, or
related trades or businesses. These requirements may restrict the degree to
which the Fund may engage in short-term trading and concentrate investments.
If the Fund qualifies as a RIC, it will not be subject to federal income tax on
the part of its net investment income and net realized capital gains, if any,
that it distributes to shareholders with respect to each taxable year within
the time limits specified in the Code.
A non-deductible excise tax is imposed on regulated investment
companies that do not distribute in each calendar year an amount equal to 98%
of their ordinary income for the year plus 98% of their capital gain net income
for the 1-year period ending on October 31 of such calendar year. The balance
of such income must be distributed during the following calendar year. If
distributions during a calendar year are less than the required amount, the
fund is subject to a non-deductible excise tax equal to 4% of the deficiency.
Certain investment and hedging activities of the Fund, including
transactions in options, futures contracts, hedging transactions, forward
contracts, straddles, foreign currencies, and foreign securities, are subject
to special tax rules. In a given case, these rules may accelerate income to the
fund, defer losses to the fund, cause adjustments in the holding periods of the
Fund's securities, convert short-term capital losses into long-term capital
losses, or otherwise affect the character of the Fund's income. These rules
could therefore affect the amount, timing and character of distributions to
shareholders. The Victory Portfolios will endeavor to make any available
elections pertaining to such transactions in a manner believed to be in the
best interest of the Victory Portfolios and their securities.
The Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends paid to any shareholder who has
failed to provide (or provided an incorrect) tax identification number, or is
subject to withholding pursuant to a notice from the Internal Revenue Service
for failure to properly include
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on his or her income tax return payments of interest or dividends. This
"backup withholding" is not an additional tax, and any amounts withheld may be
credited against the shareholder's ultimate U.S. tax liability.
Information set forth in the Prospectus and this Statement of
Additional Information that relates to federal taxation is only a summary of
certain key federal tax considerations generally affecting purchasers of shares
of the Fund. No attempt has been made to present a complete explanation of the
federal tax treatment of a fund or its shareholders, and this discussion is not
intended as a substitute for careful tax planning. Accordingly, potential
purchasers of shares the Fund are urged to consult their tax advisers with
specific reference to their own tax circumstances. In addition, the tax
discussion in the Prospectus and this Statement of Additional Information is
based on tax law in effect on the date of the Prospectus and this Statement of
Additional Information; such laws and regulations may be changed by
legislative, judicial or administrative action, sometimes with retroactive
effect.
MANAGEMENT OF THE VICTORY PORTFOLIOS
Board of Trustees
Overall responsibility for management of the Victory Portfolios rests
with the Trustees, who are elected by the shareholders of the Victory
Portfolios. The Victory Portfolios are managed by the Trustees in accordance
with the laws of the State of Delaware governing business trusts. There are
currently seven Trustees, six of whom are not "interested persons" of the
Victory Portfolios within the meaning of that term under the 1940 Act. The
Trustees, in turn, elect the officers of the Victory Portfolios to supervise
actively its day-to-day operations.
The Trustees of the Victory Portfolios, their addresses, ages and
their principal occupations during the past five years are as follows:
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- --------------------- ---------------- --------------------
<S> <C> <C>
Leigh A. Wilson, 51* Trustee and From 1989 to present, Chairman and
Glenleigh International Ltd. President Chief Executive Officer, Glenleigh
53 Sylvan Road North International Limited; previously
Westport, CT 06880 Chief Executive Officer, Paribas
North America and Paribas
Corporation; Trustee, The Victory
Funds and Spears, Benzak, Salomon
and Farrel ("SBSF") Funds.
</TABLE>
- ---------------
* Mr. Wilson is deemed to be an "interested person" of the Victory
Portfolios under the 1940 Act solely by reason of his position as
President.
-8-
<PAGE> 201
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- --------------------- ---------------- --------------------
<S> <C> <C>
Robert G. Brown, 72
5460 N. Ocean Drive
Singer Island, Riviera Beach, Trustee Retired; from October 1983 to
Florida 33404 November 1990, President,
Cleveland Advanced Manufacturing
Program (non-profit corporation
engaged in regional economic
development).
Edward P. Campbell, 46 Trustee From March 1, 1994 to present,
Nordson Corporation Executive Vice President and Chief
28601 Clemens Road Operating Officer of Nordson
Westlake, OH 44145 Corporation (manufacturer of
application equipment); from May
1988 to March 1994, Vice President
of Nordson Corporation; from 1987
to December 1994, member of the
Supervisory Committee of Society's
Collective Investment Retirement
Fund; from May 1991 to August
1994, Trustee, Financial Reserves
Fund and from May 1993 to August
1994, Trustee, Ohio Municipal
Money Market Fund; Trustee, The
Victory Funds and SBSF Funds.
Dr. Harry Gazelle, 68 Trustee Retired radiologist, Drs. Hill and
17822 Lake Road Thomas Corp.; Trustee, The Victory
Lakewood, OH 44107 Funds.
Dr. Thomas F. Morrissey, 62 Trustee 1995 Visiting Scholar, Bond
Weatherhead School of University, Queensland, Australia;
Management Professor, Weatherhead School of
Case Western Reserve Management, Case Western Reserve
University University; from 1989 to 1995,
10900 Euclid Avenue Associate Dean of Weatherhead
Cleveland, OH 44106-7235 School of Management and
Professor, Case Western Reserve
University; from 1987 to December
1994, Member of the Supervisory
Committee of Society's Collective
Investment Retirement Fund; from
May 1991 to August 1994, Trustee,
Financial Reserves Fund and from
May 1993 to August 1994, Trustee,
Ohio Municipal Money Market Fund;
Trustee, The Victory Funds.
</TABLE>
-9-
<PAGE> 202
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Funds During Past 5 Years
- --------------------- ---------------- --------------------
<S> <C> <C>
Stanley I. Landgraf, 70 Trustee Retired; currently, Trustee,
41 Traditional Lane Rensselaer Polytechnic Institute;
Albany, NY 12211 Director, Elenel Corporation and
Mechanical Technology, Inc.;
Member, Board of Overseers, School
of Management, Rensselaer
Polytechnic Institute; Member, The
Fifty Group (a Capital Region
business organization); Trustee,
The Victory Funds.
H. Patrick Swygert, 52 Trustee President, Howard University;
Howard University formerly President, State
2400 6th Street, N.W. University of New York at Albany;
Suite 320 formerly, Executive Vice
Washington, DC 20059 President, Temple University;
Trustee, The Victory Funds.
</TABLE>
The Board presently has an Investment Policy Committee and a Business,
Legal, and Audit Committee. The members of the Investment Policy Committee are
Messrs. Landgraf (Chairman), Morrissey and Brown, who will serve until May
1996. The function of the Investment Policy Committee is to review the
existing investment policies of the Victory Portfolios, including the levels of
risk and types of funds available to shareholders, and make recommendations to
the Board of Trustees regarding the revision of such policies or, if necessary,
the submission of such revisions to the Victory Portfolios' shareholders for
their consideration. The members of the Business, Legal and Audit Committee
are Messrs. Swygert (Chairman), Campbell and Gazelle who will serve until May
1996. The function of the Business, Legal and Audit Committee is to recommend
independent auditors and monitor accounting and financial matters; to nominate
persons to serve as disinterested Trustees and Trustees to serve on committees
of the Board; and to review compliance and contract matters.
The Investment Policy Committee met four times during the 12 months
ended October 31, 1995. The Business, Legal and Audit Committee was
constituted on May 24, 1995 (and has met twice since then) and replaced the
Audit Committee, the Legal Committee and the Nominating Committee, which met
three times, one time and one time, respectively, during the 12 month period
ended October 31, 1995.
REMUNERATION OF TRUSTEES AND CERTAIN EXECUTIVE OFFICERS
Effective June 1, 1995, each Trustee (other than Leigh A. Wilson)
receives an annual fee of $27,000 for serving as Trustee of all the funds of
the Victory Portfolios, and an additional per meeting fee ($2,400 in person and
$1,200 per telephonic meeting).
Effective June 1, 1995, Leigh A. Wilson receives an annual fee of
$33,000 for serving as President and Trustee for all of the funds of the
Victory Portfolios, and an additional per meeting fee ($3,000 in person and
$1,500 per telephonic meeting).
The following table indicates the compensation received by each
Trustee from the Fund and from the Victory "Fund Complex"* for the 12 month
period October 31, 1995. For certain Trustees, the amounts include
-10-
<PAGE> 203
amounts paid by the Predecessor Fund, a portfolio of the Victory Funds which
merged into the Fund as of June 5, 1995.
<TABLE>
<CAPTION>
Pension or Estimated
Retirement Annuals Total
Benefits Accrued Benefits Total Compensation
as Upon Compensation from Victory
Portfolio Expenses Retirement from Fund "Fund Complex"*
------------------ ---------- ------------ ---------------
<S> <C> <C> <C> <C>
Robert G. Brown, -0- -0- $3,820.17 $39,815.98
Trustee . . . . . .
John D. Buckingham, -0- -0- 1,333.87 18,841.89
Trustee . . . . . .
Edward P. Campbell, -0- -0- 2,204.64 33,799.68
Trustee . . . . . . .
Harry Gazelle, -0- -0- 3,425.47 35,916.98
Trustee . . . . . .
John W. Kemper, -0- -0- 2,554.32 22,567.31
Trustee # . . . . .
Stanley I. Landgraf, -0- -0- 2,927.66 34,615.98
Trustee . . . . . .
Thomas F. Morrissey, -0- -0- 4,004.82 40,366.98
Trustee . . . . . .
H. Patrick Swygert, -0- -0- 4,004.82 37,116.98
Trustee . . . . . .
Leigh A. Wilson, -0- -0- 4,397.12 46,716.97
Trustee . . . . . .
John R. Young, -0- -0- 2,223.97 21,963.81
Trustee # . . . . .
</TABLE>
*Resigned
- ----------------------------
4/ For certain Trustees, these amounts include compensation received from The
Victory Funds (which were reorganized into the Current Company as of June 5,
1995), the SBSF Funds (the investment adviser of which was acquired by
KeyCorp effective April, 1995) and Society's Collective Investment
Retirement Funds, which were reorganized into the Balanced Fund and
Government Mortgage Fund as of December 19, 1994. There are presently 24
mutual funds from which the above-named Trustees are compensated in the
Victory "Fund Complex," but not all of the above-named Trustees serve on the
boards of each fund in the "Fund Complex."
-11-
<PAGE> 204
Officers
The officers of the Victory Portfolios, their addresses, ages and principal
occupations during the past five years are as follows:
<TABLE>
<CAPTION>
Position with the Principal occupation
Name Victory Portfolios during past 5 years
---- ------------------ -------------------
<S> <C> <C>
Leigh A. Wilson, 51 President and Trustee From 1989 to present, Chairman and
Glenleigh International Ltd. Chief Executive Officer, Glenleigh
53 Sylvan Road North International Limited; from 1984-
Westport, CT 06880 1989, Chief Executive Officer,
Paribas North America and Paribas
Corporation; Trustee to The Victory
Funds and SBSF Funds.
William B. Blundin, 57 Vice President Senior Vice President of BISYS Fund
BISYS Fund Services Services; officer of other
125 West 55th Street investment companies administered
New York, New York 10019 by BISYS Fund Services; President
and Chief Executive Officer of
Vista Broker-Dealer Services, Inc.,
Emerald Asset Management, Inc. and
BNY Hamilton Distributors, Inc.,
registered broker/dealers.
J. David Huber, 49 Vice President Executive Vice President, BISYS
BISYS Fund Services Fund Services.
3435 Stelzer Road
Columbus, OH 43219-3035
Scott A. Englehart, 33 Secretary From October 1990 to present,
BISYS Fund Services employee of BISYS Fund Services,
3435 Stelzer Road Inc.; from 1985 to October 1990,
Columbus, OH 43219-3035 Manager of Banking Center, Fifth
Third Bank.
George O. Martinez, 36 Assistant Secretary From March 1995 to present, Senior
BISYS Fund Services Vice President and Director of
3435 Stelzer Road Legal and Compliance Services,
Columbus, OH 43219-3035 BISYS Fund Services; from June
1989-March 1995, Vice President and
Associate General Counsel, Alliance
Capital Management.
Martin R. Dean, 32 Treasurer From May 1994 to present, employee
BISYS Fund Services of BISYS Fund Services; from
3435 Stelzer Road January 1987 - April 1994, Senior
Columbus, OH 43219-3035 Manager, KPMG Peat Marwick.
</TABLE>
-12-
<PAGE> 205
<TABLE>
<S> <C> <C>
Adrian J. Waters, 33 Assistant Treasurer From May 1993 to present, employee
BISYS Fund Services (Ireland) of BISYS Fund Services; from 1989-
Limited May 1993, Manager, Price Waterhouse.
ITI House
12 Earlsfort Terrace
Dublin 2, Ireland
</TABLE>
The mailing address of each of the officers of the Victory Portfolios
is 3435 Stelzer Road, Columbus, Ohio 43219-3035.
The officers of the Victory Portfolios (other than Leigh Wilson)
receive no compensation directly from the Victory Portfolios for performing the
duties of their offices. BISYS Fund Services, Inc. receives fees from the
Victory Portfolios for acting as Administrator.
As of January 6, 1996, the Trustees and officers as a group owned
beneficially less than 1% of the Fund.
Investment Adviser and Sub-Adviser
KeyCorp Mutual Fund Advisers, Inc. ("Key Advisers" or the "Adviser")
was organized as an Ohio corporation on July 27, 1995 and is registered as an
investment adviser under the Investment Advisers Act of 1940. It is a
wholly-owned subsidiary of KeyCorp Asset Management Holdings, Inc., which is a
wholly-owned subsidiary of Society National Bank, a wholly-owned subsidiary of
KeyCorp. Affiliates of Key Advisers manage approximately $37 billion for
numerous clients including large corporate and public retirement plans,
Taft-Hartley plans, foundations and endowments, high net worth individuals and
mutual funds.
KeyCorp, a financial services holding company, is headquartered at 127
Public Square, Cleveland, Ohio 44114. As of September 30, 1995, KeyCorp had an
asset base of $68 billion, with banking offices in 26 states from Maine to
Alaska, and trust and investment offices in 16 states. KeyCorp is the
resulting entity of the merger in 1994 of Society Corporation, the bank holding
company of which Society National Bank was a wholly-owned subsidiary, and
KeyCorp, the former bank holding company, which merger was consummated during
the first quarter of 1994. KeyCorp's major business activities include
providing traditional banking and associated financial services to consumer,
business and commercial markets. Its non-bank subsidiaries include investment
advisory, securities brokerage, insurance, bank credit card processing, and
mortgage leasing companies. Society National Bank is the lead affiliate bank
of KeyCorp.
The following table lists the advisory fees for each mutual fund that
is advised by Key Advisers.
.25 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Institutional Money Market Fund *
.35 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Prime Obligations Fund *
Victory U.S. Government Obligations Fund *
Victory Tax-Free Money Market Fund *
.50 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Money Market Fund *
Victory Limited Term Income Fund *
Victory Government Mortgage Fund *
Victory Financial Reserves Fund *
Victory Fund for Income #
-13-
<PAGE> 206
.55 OF 1% OF AVERAGE DAILY NET ASSETS
Victory National Municipal Bond Fund *
Victory Government Bond Fund *
Victory New York Tax-Free Fund *
.60 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Bond Fund *
Victory Stock Index Fund *
.65 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Diversified Stock Fund *
.75 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Intermediate Income Fund *
Victory Investment Quality Bond Fund *
Victory Ohio Regional Stock Fund *
1% OF AVERAGE DAILY NET ASSETS
Victory Balanced Fund *
Victory Value Fund *
Victory Growth Fund *
Victory Special Value Fund *
Victory Special Growth Fund+
1.10% OF AVERAGE DAILY ASSETS
Victory International Growth Fund *
# First Albany Asset Management Corporation serves as
sub-adviser to the Victory Fund for Income, for which it
receives .20% of average daily net assets.
+ T. Rowe Price Associates, Inc. serves as sub-adviser to the
Victory Growth Fund, for which it receives .25% of average
daily net assets up to $100 million and .20% of average daily
net assets in excess of $100 million.
* Society Asset Management, Inc. (the Sub-Adviser) serves as
sub-adviser to each of these funds. For its services under
the investment sub-advisory agreement, Key Advisers pays the
Sub-Adviser sub-advisory fees at rates (based on an annual
percentage of average daily net assets) which vary according
to the table set forth below:
<TABLE>
<S> <C>
For the Victory Balanced Fund, Diversified Stock Fund, For the Victory International Growth Fund, Ohio
Growth Fund, Stock Index Fund and Value Fund: Regional Stock Fund and Special Value
Fund:
<CAPTION>
Rate of Rate of
Net Assets Sub-Advisory Fee* Net Assets Sub-Advisory Fee*
---------- ----------------- ---------- -----------------
<S> <C> <C> <C>
Up to $10,000,000 0.65% Up to $10,000,000 0.90%
Next $15,000,000 0.50% Next $15,000,000 0.70%
Next $25,000,000 0.40% Next $25,000,000 0.55%
Above $50,000,000 0.35% Above $50,000,000 0.45%
</TABLE>
-14-
<PAGE> 207
<TABLE>
<S> <C>
For the Victory Intermediate Income Fund, Investment For the Victory Prime Obligations Fund, Tax-Free
Quality Bond Fund, Limited Term Income Fund, Money Market Fund, U.S. Government Obligations
Ohio Municipal Bond Fund, Government Bond Fund, Financial Reserves Fund, Institutional Money
Fund, Government Mortgage Fund, National Market Fund and Ohio Municipal Money Market
Municipal Bond Fund and New York Tax-Free Fund: Fund:
<CAPTION>
Rate of Rate of
Net Assets Sub-Advisory Fee* Net Assets Sub-Advisory Fee*
---------- ----------------- ---------- ----------------
<S> <C> <C> <C>
Up to $10,000,000 0.40% Up to $10,000,000 0.25%
Next $15,000,000 0.30% Next $15,000,000 0.20%
Next $25,000,000 0.25% Next $25,000,000 0.15%
Above $50,000,000 0.20% Above $50,000,000 0.125%
</TABLE>
- ---------------
* As a percentage of average daily net assets. The Sub-Adviser has the
right to voluntarily waive any portion of the sub- advisory fee from
time to time.
ADVISORY AND OTHER CONTRACTS
Unless sooner terminated, the Investment Advisory Agreement between
Key Advisers and the Funds provides that it will continue in effect as to a
particular Fund for an initial two-year term and for consecutive one-year terms
thereafter, provided that such continuance is approved at least annually by the
Victory Portfolios' Trustees or by vote of a majority of the outstanding shares
of such Fund (as defined under "GENERAL INFORMATION - Miscellaneous" in the
Prospectuses), and, in either case, by a majority of the Trustees who are not
parties to the Investment Advisory Agreement or interested persons (as defined
in the 1940 Act) of any party to the Investment Advisory Agreement, by votes
cast in person at a meeting called for such purpose.
The Investment Advisory Agreement is terminable as to the Fund at any
time on 60 days' written notice without penalty by the Trustees, by vote of a
majority of the outstanding shares of the Fund, or by Key Advisers. The
Investment Advisory Agreement also terminates automatically in the event of any
assignment, as defined under the 1940 Act.
The Investment Advisory Agreement provides that Key Advisers shall not
be liable for any error of judgment or mistake of law or for any loss suffered
by the Fund in connection with the performance of services pursuant to the
Investment Advisory Agreement, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith, or gross negligence on the
part of Key Advisers in the performance of its duties, or from reckless
disregard by it of either duties and obligations thereunder.
Under the Investment Advisory Agreement, Key Advisers has agreed to
provide the investment advisory services described in the Prospectus. For the
services provided and expenses assumed pursuant to the Investment Advisory
Agreement, the Fund pays Key Advisers a fee, computed daily and paid monthly,
at the annual rate of one percent (1.00%) of the average daily net assets of
the Fund.
Prior to January, 1993, Society National Bank served as investment
adviser to the Fund. From January 1, 1993 until December 31, 1995, Society
Asset Management, Inc. served as investment adviser to the Fund. For the
fiscal years ended April 30, 1993, 1994 and 1995, Key Trust received fees of
$388,942, $954,467 and $1,131,754, respectively, of which $18,022, $127,900 and
$1,087,613, respectively, was waived.
-15-
<PAGE> 208
Under an Investment Advisory Agreement, Key Advisers may delegate a
portion of its responsibilities to a sub-adviser. In addition, the Investment
Advisory Agreement provides that Key Advisers may render services through its
own employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser of the Fund and are under the common
control of KeyCorp as long as all such persons are functioning as part of an
organized group of persons, managed by authorized officers of Key Advisers.
Key Advisers has entered into an investment sub-advisory agreement
with its affiliate, Society Asset Management, Inc. on behalf of the Fund. The
Sub-Adviser is a wholly-owned subsidiary of KeyCorp Asset Management Holdings,
Inc. With respect to the day to day management of the Fund, under the
sub-advisory agreement, the Sub-Adviser makes decisions concerning, and places
all orders for, purchases and sales of securities and helps maintain the
records relating to such purchases and sales. The Sub-Adviser may, in its
discretion, provide such services through its own employees or the employees of
one or more affiliated companies that are qualified to act as an investment
adviser to the Company under applicable laws and are under the common control
of KeyCorp; provided that (i) all persons, when providing services under the
sub-advisory agreement, are functioning as part of an organized group of
persons, and (ii) such organized group of persons is managed at all times by
authorized officers of the Sub-Adviser. This arrangement will not result in the
payment of additional fees by the Fund.
Glass-Steagall Act
In 1971 the United States Supreme Court held in Investment Company
Institute v. Camp that the federal statute commonly referred to as the
Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision: (a)
forbid a bank holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing, or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but (b) do not prohibit such
a holding company or affiliate from acting as investment adviser, transfer
agent, and custodian to such an investment company. In 1981 the United States
Supreme Court held in Board of Governors of the Federal Reserve System v.
Investment Company Institute that the Board did not exceed its authority under
the Holding Company Act when it adopted its regulation and interpretation
authorizing bank holding companies and their non-bank affiliates to act as
investment advisers to registered closed-end investment companies. In the Board
of Governors case, the Supreme Court also stated that if a national bank
complied with the restrictions imposed by the Board in its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to investment companies, a national bank
performing investment advisory services for an investment company would not
violate the Glass-Steagall Act.
Key Advisers and the Sub-Adviser believe that they may perform the
services for the Victory Portfolios contemplated by the Prospectus, this
Statement of Additional Information, and the Investment Advisory Agreement (and
Sub-Advisory Agreement) with the Victory Portfolios without violation of
applicable statutes and regulations and has so represented in its Investment
Advisory Agreement (and Sub-Advisory Agreement) with the Victory Portfolios.
Key Trust Company of Ohio, N. A. believes that it may perform the services for
the Victory Portfolios contemplated by the Prospectus, this Statement of
Additional Information, and the Shareholder Servicing Agreement with the
Victory Portfolios (as described below) without violation of applicable
statutes and regulations and has so represented in such Shareholder Servicing
Agreement. Future changes in either federal or state statutes and regulations
relating to the permissible activities of banks or bank holding companies and
the subsidiaries or affiliates of those entities, as well as further judicial
or administrative decisions or interpretations of present and future statutes
and regulations, could prevent or restrict Key Trust Company of Ohio, N. A.,
Key Advisers or the Sub-Adviser from continuing to perform such services for
the Victory Portfolios. Depending upon the nature of any changes in the
services which could be provided by Key Trust Company of Ohio, N. A., Key
Advisers or the Sub-Adviser the Trustees of the Victory Portfolios would review
the Victory Portfolios' relationship with Key Trust
-16-
<PAGE> 209
Company of Ohio, N. A., Key Advisers or the Sub-Adviser and consider taking all
action necessary in the circumstances.
Should future legislative, judicial, or administrative action prohibit
or restrict the proposed activities of Key Trust Company of Ohio, N. A., Key
Advisers or the Sub-Adviser and its affiliated and correspondent banks and
other non-bank affiliates in connection with customer purchases of shares of
the Victory Portfolios, the banks and such non-bank affiliates might be
required to alter materially or discontinue the services offered by them to
customers. It is not anticipated, however, that any change in the Victory
Portfolios' method of operations would affect its net asset value per share or
result in financial losses to any customer.
From time to time, advertisements, supplemental sales literature and
information furnished to present or prospective shareholders of the Fund may
include descriptions of Key Trust Company of Ohio, N. A., Key Advisers and the
Sub-Adviser including, but not limited to, (i) descriptions of the operations
of Key Trust Company of Ohio, N. A., Key Advisers and the Sub-Adviser; (ii)
descriptions of certain personnel and their functions; and (iii) statistics and
rankings related to the operations of Key Trust Company of Ohio, N. A., Key
Advisers and the Sub-Adviser.
Portfolio Transactions
Pursuant to the Investment Advisory Agreement (and Sub-Advisory
Agreement), Key Advisers or the Sub-Adviser determines, subject to the general
supervision of the Trustees of the Victory Portfolios, and in accordance with
the Fund's investment objective and restrictions, which securities are to be
purchased and sold by the Fund, and which brokers are to be eligible to execute
its portfolio transactions. Purchases from underwriters and/or broker-dealers
of portfolio securities include a commission or concession paid by the issuer
to the underwriter and/or broker-dealer and purchases from dealers serving as
market makers may include the spread between the bid and asked price. While
Key Advisers and the Sub-Adviser generally seek competitive prices (inclusive
of any spread or commission), the Fund may not necessarily pay the lowest
prices available on each transaction, for reasons discussed below.
Allocation of transactions to dealers is determined by Key Advisers or
the Sub-Adviser in their best judgment and in a manner deemed fair and
reasonable to shareholders. The primary consideration is prompt execution of
orders in an effective manner at the most favorable price. Subject to this
consideration, dealers who provide supplemental investment research to Key
Advisers or the Sub-Adviser may receive orders for transactions by the Victory
Portfolios. Information so received is in addition to and not in lieu of
services required to be performed by Key Advisers or the Sub-Adviser and does
not reduce the advisory fees payable to Key Advisers by the Victory Portfolios.
Such information may be useful to Key Advisers or the Sub-Adviser in serving
both the Victory Portfolios and other clients and, conversely, such
supplemental research information obtained by the placement of orders on behalf
of clients may be useful to Key Advisers or the Sub-Adviser in carrying out its
obligations to the Victory Portfolios. In the future, the Trustees may also
authorize the allocation of brokerage to affiliated broker-dealers on an agency
basis to effect portfolio transactions. In such event, the Trustees will adopt
procedures incorporating the standards of Rule 17e-1 under the 1940 Act, which
requires that the commission paid to affiliated broker-dealers be "reasonable
and fair compared to the commission, fee or other remuneration received, or to
be received, by other brokers in connection with comparable transactions
involving similar securities during a comparable period of time." The Fund
purchases portfolio securities directly from dealers acting as principals,
underwriters or market makers. As these transactions are usually conducted on
a net basis, no brokerage commissions are paid by the Fund.
The Victory Portfolios will not execute portfolio transactions
through, acquire portfolio securities issued by, make savings deposits in, or
enter into repurchase or reverse repurchase agreements with Key Advisers, the
Sub-Adviser, Key Trust Company of Ohio, N.A. or its affiliates, Concord Holding
Corporation, Victory Broker-Dealer Services, Inc. or their affiliates, and will
not give preference to Key Trust Company of Ohio, N.A.'s
-17-
<PAGE> 210
correspondent banks or affiliates, or Concord Holding Corporation or Victory
Broker-Dealer Services, Inc. with respect to such transactions, securities,
savings deposits, repurchase agreements, and reverse repurchase agreements.
Investment decisions for the Fund are made independently from those
for the other funds or any other investment company or account managed by
KeyCorp Advisers (or Society). Any such other investment company or account
may also invest in the same securities as a particular fund. When a purchase
or sale of the same security is made at substantially the same time on behalf
of the Fund and another fund, investment company or account, the transaction
will be averaged as to price, and available investments allocated as to amount,
in a manner which KeyCorp Advisers (or Society) believes to be equitable to
the Fund and such other fund, investment company or account. In some
instances, this investment procedure may adversely affect the price paid or
received by the Fund or the size of the position obtained by the Fund. To the
extent permitted by law, KeyCorp Advisers (or Society) may aggregate the
securities to be sold or purchased for the Fund with those to be sold or
purchased for the other funds or for other investment companies or accounts in
order to obtain best execution. As provided by the Investment Advisory (and
Sub-Advisory) Agreement, in making investment recommendations for the Victory
Portfolios, KeyCorp Advisers (or Society) will not inquire or take into
consideration whether an issuer of securities proposed for purchase or sale by
a Fund is a customer of Society, its parents or subsidiaries or affiliates
and, in dealing with their commercial customers, KeyCorp Advisers (Society),
its parents, subsidiaries, and affiliates will not inquire or take into
consideration whether securities of such customers are held by the Victory
Portfolios.
Administrator
Currently, Concord Holding Corporation ("CHC") serves as general
manager and administrator (the "Administrator") to the Fund. The Administrator
assists in supervising all operations of the Fund (other than those performed
by Key Advisers or the Sub- Adviser under the Investment Advisory Agreement and
Sub-Advisory Agreement).
CHC receives a fee from the Fund for its services as Administrator and
expenses assumed pursuant to the Administration Agreements, calculated daily
and paid monthly, at the annual rate of fifteen one hundredths of one percent
(.15%) of the Fund's average daily net assets. CHC may periodically waive all
or a portion of its fee with respect to any fund in order to increase the net
income of one or more funds of the Victory Portfolios available for
distribution as dividends.
Unless sooner terminated, the Administration Agreement will continue
in effect as to the Fund for a period of two years, and for consecutive
one-year terms thereafter, provided that such continuance is ratified at least
annually by the Victory Portfolios' Board of Trustees or by vote of a majority
of the outstanding shares of the Fund, and in either case by a majority of the
Trustees who are not parties to the Administration Agreement or interested
persons (as defined in the 1940 Act) of any party to the Administration
Agreement, by votes cast in person at a meeting called for such purpose.
The Administration Agreement provides that CHC shall not be liable for
any error of judgment or mistake of law or any loss suffered by the Victory
Portfolios in connection with the matters to which the Administration Agreement
relates, except a loss resulting from willful misfeasance, bad faith, or gross
negligence in the performance of its duties, or from the reckless disregard by
it of its obligations and duties thereunder.
Under the Administration Agreement, CHC assists in the Fund's
administration and operation, including providing statistical and research
data, clerical services, internal compliance and various other administrative
services, including among other responsibilities, forwarding certain purchase
and redemption requests to the Transfer Agent, participation in the updating of
the prospectus, coordinating the preparation, filing, printing and
dissemination of reports to shareholders, coordinating the preparation of
income tax returns, arranging for the maintenance of books and records and
providing the office facilities necessary to carry out the duties thereunder.
Under the Administration Agreement, CHC may delegate all or any part of its
responsibilities thereunder.
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<PAGE> 211
For the fiscal years ended April 30, 1993, 1994 and 1995, and the six
month period ended October 31, 1995, the Fund paid $262,884, $568,509, $646,353
and ________, respectively, in administration fees before waiver of $72,006,
$72,569, $0, and $________, respectively.
Distribution and Service Plans
The Victory Portfolios has adopted a Distribution and Service Plan on
behalf of the Fund (the "Plan") under Rule 12b-1 under the 1940 Act (the
"Rule"). The Rule provides in substance that a mutual fund may not engage
directly or indirectly in financing any activity that is primarily intended to
result in the sale of shares of the Fund except pursuant to a plan adopted by
the Fund under the Rule. The Trustees have adopted the Plan to allow Key
Advisers or the Sub-Adviser and the Distributor to incur certain expenses that
might be considered to constitute indirect payment by the Funds of distribution
expenses. Under the Plan, if a payment to Key Advisers or the Sub-Adviser of
management fees or to the Distributor of administrative fees should be deemed
to be indirect financing by the Fund of the distribution of their shares, such
payment is authorized by the Plan.
The Plan specifically recognizes that either of Key Advisers, the
Sub-Adviser or the Distributor, directly or through an affiliate, may use its
fee revenue, past profits, or other resources, without limitation, to pay
promotional and administrative expenses in connection with the offer and sale
of shares of the Fund. In addition, the Plan provides that Key Advisers, the
Sub-Adviser and the Distributor may use their respective resources, including
fee revenues, to make payments to third parties that provide assistance in
selling the Fund shares, or to third parties, including banks, that render
shareholder support services. The Trustees have not authorized such payments
to date.
The Plan has been approved by the Trustees. As required by the Rule,
the Trustees carefully considered all pertinent factors relating to the
implementation of the Plan prior to its approval, and have determined that
there is a reasonable likelihood that the Plan will benefit the Fund and its
shareholders. In particular, the Trustees noted that the Plan does not
authorize payments by the Fund other than the advisory and administrative fees
authorized under the investment advisory and administration agreements. To the
extent that the Plan gives Key Advisers, the Sub-Adviser or the Distributor
greater flexibility in connection with the distribution of shares of the Fund,
additional sales of the Fund shares may result. Additionally, certain
shareholder support services may be provided more effectively under the Plan by
local entities with whom shareholders have other relationships. The Plan was
approved by shareholders of the Fund on June 5, 1995.
Business Management Agreement
In connection with its obligations under the Investment Sub-Advisory
Agreement, the Sub-Adviser has entered into a Business Management Agreement
with Key Advisers, pursuant to which Key Advisers provides certain
administrative and support services to the Sub-Adviser. Such services include
preparing reports to the Victoria Portfolios' Board of Trustees, recordkeeping
services, and services rendered in connection with the preparation of
regulatory filings and other reports, and regulatory and other administrative
and compliance systems and support services.
For such services to the Fund, the Sub-Adviser pays fees to Key
Advisers which vary according to a sliding scale containing "breakpoints" at
which decreases in the business management fees correspond to increases in the
average daily net asset values of the Fund as follows:
-19-
<PAGE> 212
<TABLE>
<CAPTION>
Net Assets Rate of Business
of the Fund Management Fee*
----------- ---------------
<S> <C>
Up to $10,000,000 0.25%
Next $15,000,000 0.15%
Next $25,000,000 0.10%
Above $50,000,000 0.05%
</TABLE>
- -------------------
* As a percentage of average daily net assets.
Shareholder Servicing Plan
The Victory Portfolios, on behalf of the Service Shares class of the Fund, has
adopted a Shareholder Servicing Plan to provide payments to shareholder
servicing agents (including affiliates of the Adviser) (each a "Shareholder
Servicing Agent") that provide administrative support services to customers who
may from time to time beneficially own shares, which services include: (i)
aggregating and processing purchase and redemption requests for shares from
customers and promptly transmitting net purchase and redemption orders to our
distributor or transfer agent; (ii) providing customers with a service that
invests the assets of their accounts in shares pursuant to specific or
pre-authorized instructions; (iii) processing dividend and distribution
payments on behalf of customers; (iv) providing information periodically to
customers showing their positions in shares; (v) arranging for bank wires; (vi)
responding to customer inquiries; (vii) providing subaccounting with respect to
shares beneficially owned by customers or providing the information to the
Victory Portfolios necessary for subaccounting; (viii) if required by law,
forwarding shareholder communications from us (such as proxies, shareholder
reports, annual and semi-annual financial statements and dividend, distribution
and tax notices) to customers; (ix) forwarding to customers proxy statements
and proxies containing any proposals regarding this Plan; and (x) providing
such other similar services as we may reasonably request to the extent you are
permitted to do so under applicable statutes, rules or regulations. For
expenses incurred and services provided pursuant to the Shareholder Servicing
Agent pursuant to the Shareholder Servicing Agreement, the Fund pays each
Shareholder Servicing Agent a fee computed daily and paid monthly, in amounts
aggregating not more than twenty-five one-hundredths of one percent (.25%) of
the average daily net assets of the Fund per year. A Shareholder Servicing
Agent may periodically waive all or a portion of its respective shareholder
servicing fees with respect to the Fund to increase the net income of the Fund
available for distribution as dividends.
Expenses
The Fund bears the following expenses relating to its operations:
taxes, interest, brokerage fees and commissions, fees of the Trustees of the
Victory Portfolios, Commission fees, state securities qualification fees, costs
of preparing and printing prospectuses for regulatory purposes and for
distribution to current shareholders, outside auditing and legal expenses,
advisory and administration fees, fees and out-of-pocket expenses of the
custodian and transfer agent, certain insurance premiums, costs of maintenance
of the Fund's existence, costs of shareholders' reports and meetings, and any
extraordinary expenses incurred in the Fund's operation.
If total expenses borne by the Fund in any fiscal year exceeds expense
limitations imposed by applicable state securities regulations, Key Advisers,
the Sub-Adviser or the Administrator will waive their fees to the extent such
excess expenses exceed such expense limitations in proportion to their
respective fees. As of the date of this Statement of Additional Information,
the most restrictive expense limitation applicable to the Fund limits its
aggregate annual expenses, including management and advisory fees but excluding
interest, taxes, brokerage commissions, and certain other expenses, to 2.5% of
the first $30 million of its average net assets, 2.0% of the next $70 million
of its average net assets, and 1.5% of its remaining average net assets. Any
expenses to be borne by Key Advisers, the Sub-Adviser or the Administrator will
be estimated daily and reconciled and paid on a monthly
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<PAGE> 213
basis. Fees imposed upon customer accounts by Key Advisers, the Sub-Adviser,
Key Trust Company of Ohio, N.A. or its correspondents, affiliated banks and
other non-bank affiliates for cash management services are not fund expenses
for purposes of any such expense limitation.
Distributor
Victory Broker-Dealer Services, Inc. (the "Distributor") serves as
distributor for the continuous offering of the shares of the Fund pursuant to a
Distribution Agreement between the Distributor and the Victory Portfolios.
Unless otherwise terminated, the Distribution Agreement will remain in effect
with respect to the Fund for two years, and thereafter for consecutive one-year
terms, provided that it is approved at least annually (i) by the Victory
Portfolios' Trustees or by the vote of a majority of the outstanding shares of
the Fund, and (ii) by the vote of a majority of the Trustees of the Victory
Portfolios who are not parties to the Distribution Agreement or interested
persons of any such party, cast in person at a meeting called for the purpose
of voting on such approval. The Distribution Agreement will terminate in the
event of its assignment, as defined in the 1940 Act. For the fiscal years
ended April 30, 1993, 1994, 1995 and the six months period ended October 31,
1995, the Fund paid __________, __________, ___________ and __________,
respectively, in underwriting commissions, and retained $0, $0 and $15,
respectively.
Fund Accountant
BISYS Fund Services Ohio, Inc. serves as fund accountant for the Fund
pursuant to a fund accounting agreement with the Victory Portfolios dated May
31, 1995 (the "Fund Accounting Agreement"). As fund accountant for the Victory
Portfolios, BISYS Fund Services Ohio, Inc. calculates the Fund's net asset
value, the dividend and capital gain distributions, if any, and the yield.
BISYS Fund Services Ohio, Inc. also provides a current security position
report, a summary report of transactions and pending maturities, a current cash
position report, and maintains the general ledger accounting records for the
Fund. Under the Fund Accounting Agreement with the Victory Portfolios, BISYS
Fund Services Ohio, Inc. is entitled to receive annual fees of .03% of the
first $100 million of the Fund's daily average net assets, .02% of the next
$100 million of the Fund's daily average net assets, and .01% of the Fund's
remaining daily average net assets. These annual fees are subject to a minimum
monthly assets charge of $2,917 per tax-free fund and do not include
out-of-pocket expenses or multiple class charges of $833 per month assessed for
each class of shares after the first class.
In the fiscal years ended April 30, 1993, 1994 and 1995, and the six
months period ended October 31, 1995, the Fund accounting fees of $15,452,
$31,744, $75,245 and _________, respectively, for the Fund.
Custodian
Cash and securities owned by the Fund are held by Key Trust Company of
Ohio, N.A. as custodian. Key Trust Company of Ohio, N.A. serves as custodian
to the Fund pursuant to a Custodian Agreement dated May 24, 1995. Under this
Agreement, Key Trust Company of Ohio, N.A. (i) maintains a separate account or
accounts in the name of the Fund; (ii) makes receipts and disbursements of
money on behalf of the Fund; (iii) collects and receives all income and other
payments and distributions on account of portfolio securities; (iv) responds to
correspondence from security brokers and others relating to its duties; and (v)
makes periodic reports to the Victory Portfolios' Trustees concerning the
Victory Portfolios' operations. Key Trust Company of Ohio, N.A. may, with the
approval of the Victory Portfolios and the custodian's own expense, open and
maintain a sub-custody account or accounts on behalf of the Fund, provided that
Key Trust Company of Ohio, N.A. shall remain liable for the performance of all
of its duties under the Custodian Agreement.
-21-
<PAGE> 214
Transfer Agent
Primary Funds Service Corporation ("PFSC") serves as transfer agent
and dividend disbursing agent for the Fund, pursuant to a Transfer Agency and
Shareholder Servicing Agreement. Under its agreement with the Victory
Portfolios, PFSC has agreed (i) to issue and redeem shares of the Victory
Portfolios; (ii) to address and mail all communications by the Victory
Portfolios to its shareholders, including reports to shareholders, dividend and
distribution notices, and proxy material for its meetings of shareholders;
(iii) to respond to correspondence or inquiries by shareholders and others
relating to its duties; (iv) to maintain shareholder accounts and certain
sub-accounts; and (v) to make periodic reports to the Victory Portfolios'
Trustees concerning the Victory Portfolios' operations. For the services
provided under the Transfer Agency and Shareholder Servicing Agreement,
receives a maximum monthly fee of $1,250 from the Fund, and a maximum of $3.50
per account of the Fund.
Auditors
The financial highlights appearing in the Prospectus for the Fund,
other than unaudited information marked as such, has been derived from
financial statements of the Victory Portfolios appearing in or incorporated by
reference in this Statement of Additional Information which have been audited
by Coopers & Lybrand L.L.P., independent accountants, as set forth in their
report appearing elsewhere herein, and are included in reliance upon such
report and on the authority of such firm as experts in auditing and accounting.
Coopers & Lybrand L.L.P.'s address is 100 East Broad Street, Columbus, Ohio
43215.
Legal Counsel
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, 919 Third Avenue,
New York, New York 10022 is counsel to the Victory Portfolios.
ADDITIONAL INFORMATION
Description of Shares
The Victory Portfolios (sometimes referred to as the "Trust") is a
Delaware business trust. Its Delaware Trust Instrument was adopted on December
6, 1995 and a certificate of Trust for the Trust was filed in Delaware on
December __, 1995. On February 29, 1996, the Victory Portfolios converted from
a Massachusetts business trust to a Delaware business trust.
The previously effective Massachusetts Declaration of Trust, pursuant
to which the Victory Portfolios was originally called the North Third Street
Fund, was filed with the Secretary of State of the Commonwealth of
Massachusetts on February 6, 1986. On September 22, 1986, an Amended and
Restated Declaration of Trust was filed to change the name of the Trust to The
Emblem Fund and to make certain other changes. A second amendment was filed
October 23, 1986 providing for voting of shares in the aggregate except where
voting of shares by series is otherwise required by law. An amendment to the
Amended and Restated Declaration of Trust was filed on March 15, 1993 to change
the name of the Trust to The Society Funds. An Amended and Restated
Declaration of Trust was then filed on September 2, 1994 to change the name of
the Trust to The Victory Portfolios.
The currently effective Delaware Trust Instrument authorizes the
Trustees to issue an unlimited number of shares, which are units of beneficial
interest, without par value. The Victory Portfolios presently has twenty-eight
series of shares, which represent interests in the U.S. Government Obligations
Fund, the Prime Obligations Fund, the Tax-Free Money Market Fund, the Balanced
Fund, the Stock Index Fund, the Value Fund, the Diversified Stock Fund, the
Growth Fund, the Special Value Fund, the Special Growth Fund, the Ohio Regional
Stock Fund, the International Growth Fund, the Limited Term Income Fund, the
Government Mortgage Fund, the
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<PAGE> 215
Ohio Municipal Bond Fund, the Intermediate Income Fund, the Investment Quality
Bond Fund, the Florida Tax-Free Bond Fund, the Municipal Bond Fund, the
Convertible Securities Fund, the Short-Term U.S. Government Income Fund, the
Government Bond Fund, the Fund for Income, the National Municipal Bond Fund,
the New York Tax-Free Fund, the Institutional Money Market Fund, the Financial
Reserves Fund and the Ohio Municipal Money Market Fund, respectively. The
Victory Portfolios' Delaware Trust Instrument authorizes the Trustees to divide
or redivide any unissued shares of the Victory Portfolios into one or more
additional series by setting or changing in any one or more respects their
respective preferences, conversion or other rights, voting power, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption.
Shares have no subscription or preemptive rights and only such
conversion or exchange rights as the Trustees may grant in their discretion.
When issued for payment as described in the Prospectus and this Statement of
Additional Information, the Victory Portfolios' shares will be fully paid and
non-assessable. In the event of a liquidation or dissolution of the Victory
Portfolios, shares of the Fund are entitled to receive the assets available for
distribution belonging to the Fund, and a proportionate distribution, based
upon the relative asset values of the respective funds of the Victory
Portfolios, of any general assets not belonging to any particular fund which
are available for distribution.
As described in the Prospectus under the caption "ADDITIONAL
INFORMATION -- Voting Rights," shares of the Victory Portfolios are entitled to
one vote per share (with proportional voting for fractional shares) on such
matters as shareholders are entitled to vote. On any matter submitted to a
vote of the shareholders, all shares are voted separately by individual series
(funds), and whenever the Trustees determine that the matter affects only
certain series, may be submitted for a vote by only such series, except (i)
when required by the 1940 Act, shares are voted in the aggregate and not by
individual series; and (ii) when the Trustees have determined that the matter
affects the interests of more than one series and that voting by shareholders
of all series would be consistent with the 1940 Act, then the shareholders of
all such series shall be entitled to vote thereon (either by individual series
or by shares voted in the aggregate, as the Trustees in their discretion may
determine). The Trustees may also determine that a matter affects only the
interests of one or more classes of a series, in which case (or if required
under the 1940 Act) such matter shall be voted on by such class or classes.
There will normally be no meetings of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority of the Trustees
have been elected by the shareholders, at which time the Trustees then in
office will call a shareholders' meeting for the election of Trustees. In
addition, Trustees may be removed from office by a vote of the holders of at
least two-thirds of the outstanding shares of the Victory Portfolios. A
meeting shall be held for such purpose upon the written request of the holders
of not less than 10% of the outstanding shares. Upon written request by ten or
more shareholders meeting the qualifications of Section 16(c) of the 1940 Act,
(i.e., persons who have been shareholders for at least six months, and who hold
shares having an NAV of at least $25,000 or constituting 1% of the outstanding
shares) stating that such shareholders wish to communicate with the other
shareholders for the purpose of obtaining the signatures necessary to demand a
meeting to consider removal of a Trustee, the Victory Portfolios will provide a
list of shareholders or disseminate appropriate materials (at the expense of
the requesting shareholders). Except as set forth above, the Trustees shall
continue to hold office and may appoint their successors.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Victory Portfolios shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each fund of the Victory Portfolios affected by the
matter. For purposes of determining whether the approval of a majority of the
outstanding shares of a fund will be required in connection with a matter, a
fund will be deemed to be affected by a matter unless it is clear that the
interests of each fund in the matter are identical, or that the matter does not
affect any interest of the fund. Under Rule 18f-2, the approval of an
investment advisory agreement or any change in investment policy would be
effectively acted upon with respect to a fund only if approved by a majority of
the outstanding shares of such fund. However, Rule 18f-2 also provides that
the ratification of independent public
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<PAGE> 216
accountants, the approval of principal underwriting contracts, and the election
of Trustees may be effectively acted upon by shareholders of all of the Victory
Portfolios voting without regard to series.
Shareholder and Trustee Liability
The Delaware Business Trust Act provides that a shareholder of a
Delaware business trust shall be entitled to the same limitation of personal
liability extended to shareholders of Delaware corporations. The Delaware
Trust Instrument also provides for indemnification out of the trust property of
any shareholder held personally liable solely by reason of his or her being or
having been a shareholder. The Delaware Trust Instrument also provides that
the Victory Portfolios shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Victory
Portfolios, and shall satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
considered to be extremely remote.
The Delaware Trust Instrument states further that no Trustee, officer,
or agent of the Victory Portfolios shall be personally liable in connection
with the administration or preservation of the assets of the Funds or the
conduct of the Victory Portfolios' business; nor shall any Trustee, officer, or
agent be personally liable to any person for any action or failure to act
except for his own bad faith, willful misfeasance, gross negligence, or
reckless disregard of his duties. The Declaration of Trust also provides that
all persons having any claim against the Trustees or the Victory Portfolios
shall look solely to the assets of the Victory Portfolios for payment.
Miscellaneous
As used in the Prospectus and in this Statement of Additional
Information, "assets belonging to a fund" (or "assets belonging to the Fund")
means the consideration received by the Victory Portfolios upon the issuance or
sale of shares in that fund, together with all income, earnings, profits, and
proceeds derived from the investment thereof, including any proceeds from the
sale, exchange, or liquidation of such investments, and any funds or payments
derived from any reinvestment of such proceeds and any general assets of the
Victory Portfolios, which general liabilities and expenses are not readily
identified as belonging to a particular fund (or the Fund) that are allocated
to that fund (or the Fund) by the Victory Portfolios' Trustees. The Trustees
may allocate such general assets in any manner they deem fair and equitable.
It is anticipated that the formula that will be used by the Trustees in making
allocations of general assets to a particular fund of the Victory Portfolios
will be the relative net asset value of the respective fund at the time of
allocation. Assets belonging to a particular fund are charged with the direct
liabilities and expenses of that fund, and with a share of the general
liabilities and expenses of each of the funds not readily identified as
belonging to a particular fund that are allocated to each fund in accordance
with its proportionate share of the net asset values of the Victory Portfolios
at the time of allocation. The timing of allocations of general assets and
general liabilities and expenses of the Victory Portfolios to a particular fund
will be determined by the Trustees of the Victory Portfolios and will be in
accordance with generally accepted accounting principles. Determinations by
the Trustees of the Victory Portfolios as to the timing of the allocation of
general liabilities and expenses and as to the timing and allocable portion of
any general assets with respect to a particular fund are conclusive.
As used in the Prospectus and in this Statement of Additional
Information, a "vote of a majority of the outstanding shares" or a "vote of a
majority of the outstanding voting securities" of the Victory Portfolios or a
particular fund means the affirmative vote of the lesser of (a) 67% or more of
the shares of the Victory Portfolios or such fund present at a meeting at which
the holders of more than 50% of the outstanding shares of the Victory
Portfolios or such fund are represented in person or by proxy, or (b) more than
50% of the outstanding shares of the Victory Portfolios or such fund.
Organizational expenses are allocated to each of the Victory
Portfolios and are amortized over a period of two years from the commencement
of the public offering of shares of the Victory Portfolios.
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<PAGE> 217
The Victory Portfolios is registered with the Commission as an
open-end management investment company. Such registration does not involve
supervision by the Commission of the management or policies of the Victory
Portfolios.
The Prospectus and this Statement of Additional Information omit
certain of the information contained in the Registration Statement filed with
the Commission. Copies of such information may be obtained from the Commission
upon payment of the prescribed fee.
The Prospectus and this Statement of Additional Information are not an
offering of the securities herein described in any state in which such offering
may not lawfully be made. No salesman, dealer, or other person is authorized
to give any information or make any representation other than those contained
in the Prospectus and this Statement of Additional Information.
The 1995 Annual Report to shareholders of The Victory Portfolios is
incorporated by reference herein. This report includes the financial
statements for the two month period ended October 31, 1995 and the fiscal year
ended August 31, 1995. The opinion in the Annual Report of Coopers & Lybrand
L.L.P., independent accountants, is incorporated by reference herein in its
entirety to such Annual Report, and such financial statements are incorporated
in their entirety in reliance upon such report of Coopers & Lybrand L.L.P. and
on the authority of such firm as experts in auditing and accounting.
Delaware law authorizes electronic or telephonic communications
between shareholders and the Victory Portfolios. Under Delaware law, the
Successor Company has the flexibility to respond to future business
contingencies. For example, the Trustees will have the power to incorporate
the Victory Portfolios, to merge or consolidate it with another entity, to
cause each fund to become a separate trust, and to change the Victory
Portfolios' domicile without a shareholder vote. This flexibility could help
reduce the expense and frequency of future shareholder meetings for
non-investment related issues.
The following table indicates each additional person known by the Fund
to own beneficially 5% or more of the shares of the Fund as of December 1,
1995:
<TABLE>
<CAPTION>
Percent of Total
Outstanding
Class Name & Address Shares Shares of Fund
- ----- -------------- ------ ----------------
<S> <C> <C> <C>
Service Class Whitely Manufacturing Inc. 1,564,357.64 43.10%
c/o Tim McGee
201 W. First St.
S. Whitely, IN 46787
Service Class Clymer Enterprises, Inc. 284,984.62 7.80%
c/o Gary Clymer
407 E. Washington
Pandora, OH 45877
Institutional Class KeyCorp 401(k) Plan 79,459,851.04 13.66%
127 Public Square
Cleveland, OH 44114
</TABLE>
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<PAGE> 218
APPENDIX
The nationally recognized statistical rating organizations
(individually, an "NRSRO") that may be utilized by KeyCorp Advisers or Society
with regard to portfolio investments for the Funds include Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), Duff &
Phelps, Inc. ("Duff"), Fitch Investors Service, Inc. ("Fitch"), IBCA Limited
and its affiliate, IBCA Inc. (collectively, "IBCA"), and Thomson BankWatch,
Inc. ("Thomson"). Set forth below is a description of the relevant ratings of
each such NRSRO. The NRSROs that may be utilized by Key Advisers or the
Sub-Adviser and the description of each NRSRO's ratings is as of the date of
this Statement of Additional Information, and may subsequently change.
Long-Term Debt Ratings (may be assigned, for example, to corporate and
municipal bonds)
Description of the five highest long-term debt ratings by Moody's
(Moody's applies numerical modifiers ( e.g., 1, 2, and 3) in each rating
category to indicate the security's ranking within the category):
Aaa. Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.
A. Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in the
future.
Baa. Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba. Bonds which are rated Ba are judged to have speculative elements
- - their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times in the future. Uncertainty of
position characterizes bonds in this class.
Description of the five highest long-term debt ratings by S&P (S&P may
apply a plus (+) or minus (-) to a particular rating classification to show
relative standing within that classification):
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
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<PAGE> 219
BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB. Debt rated BB is regarded, on balance, as predominately
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. While such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposure to adverse conditions.
Description of the three highest long-term debt ratings by Duff:
AAA. Highest credit quality. The risk factors are negligible being
only slightly more than for risk-free U.S. Treasury debt.
AA+. High credit quality Protection factors are strong.
AA. Risk is modest but may vary slightly from time to time
AA-. because of economic conditions.
A+. Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
Description of the three highest long-term debt ratings by Fitch (plus
or minus signs are used with a rating symbol to indicate the relative position
of the credit within the rating category):
AAA. Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA. Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA."
Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of these issues is generally rated "[-]+."
A. Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher
ratings.
IBCA's description of its three highest long-term debt ratings:
AAA. Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic or
financial conditions are unlikely to increase investment risk
significantly.
AA. Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic, or
financial conditions may increase investment risk albeit not very
significantly.
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A. Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial
conditions may lead to increased investment risk.
Short-Term Debt Ratings (may be assigned, for example, to commercial
paper, master demand notes, bank instruments, and letters of credit)
Moody's description of its three highest short-term debt ratings:
Prime-1. Issuers rated Prime-1 (or supporting institutions) have a
superior capacity for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a
strong capacity for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
S&P's description of its three highest short-term debt ratings:
A-1. This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to have extremely
strong safety characteristics are denoted with a plus sign (+).
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high
as for issues designated "A-1."
A-3. Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the
higher designations.
Duff's description of its five highest short-term debt ratings (Duff
incorporates gradations of "1+" (one plus) and "1-" (one minus) to assist
investors in recognizing quality differences within the highest rating
category):
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Duff 1+. Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
Duff 1. Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
Duff 1-. High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors. Risk
factors are very small.
Duff 2. Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
Duff 3. Satisfactory liquidity and other protection factors qualify
issue as to investment grade.
Risk factors are larger and subject to more variation. Nevertheless,
timely payment is expected.
Fitch's description of its four highest short-term debt ratings:
F-1+. Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of assurance for
timely payment.
F-1. Very Strong Credit Quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than
issues rated F-1+.
F-2. Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as for issues assigned F-1+ or F-1 ratings.
F-3. Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate, however, near-term adverse changes could cause
these securities to be rated below investment grade.
IBCA's description of its three highest short-term debt ratings:
A+. Obligations supported by the highest capacity for timely
repayment.
A1. Obligations supported by a very strong capacity for timely
repayment.
A2. Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
Short-Term Loan/Municipal Note Ratings
Moody's description of its two highest short-term loan/municipal note
ratings:
MIG-1/VMIG-1. This designation denotes best quality. There is
present strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
MIG-2/VMIG-2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
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S&P's description of its two highest municipal note ratings:
SP-1. Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
SP-2. Satisfactory capacity to pay principal and interest.
Short-Term Debt Ratings
Thomson BankWatch, Inc. ("TBW") ratings are based upon a qualitative
and quantitative analysis of all segments of the organization including, where
applicable, holding company and operating subsidiaries.
BankWatch Ratings do not constitute a recommendation to buy or sell
securities of any of these companies. Further, BankWatch does not suggest
specific investment criteria for individual clients.
The TBW Short-Term Ratings apply to commercial paper, other senior
short-term obligations and deposit obligations of the entities to which the
rating has been assigned.
The TBW Short-Term Ratings apply only to unsecured instruments that
have a maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an
untimely payment of principal or interest.
TBW-1. The highest category; indicates a very high degree of
likelihood that principal and interest will be paid on a timely basis.
TBW-2. The second highest category; while the degree of safety
regarding timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1".
TBW-3. The lowest investment grade category; indicates that while
more susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and interest in
a timely fashion is considered adequate.
TBW-4. The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
Definitions of Certain Money Market Instruments
Commercial Paper
Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.
Certificates of Deposit
Certificates of Deposit are negotiable certificates issued against
funds deposited in a commercial bank or a savings and loan association for a
definite period of time and earning a specified return.
Bankers' Acceptances
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Bankers' acceptances are negotiable drafts or bills of exchange,
normally drawn by an importer or exporter to pay for specific merchandise,
which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
U.S. Treasury Obligations
U.S. Treasury Obligations are obligations issued or guaranteed as to
payment of principal and interest by the full faith and credit of the U.S.
Government. These obligations may include Treasury bills, notes and bonds, and
issues of agencies and instrumentalities of the U.S. Government, provided such
obligations are guaranteed as to payment of principal and interest by the full
faith and credit of the U.S. Government.
U.S. Government Agency and Instrumentality Obligations
Obligations issued by agencies and instrumentalities of the U.S.
Government include such agencies and instrumentalities as the Government
National Mortgage Association, the Export-Import Bank of the United States, the
Tennessee Valley Authority, the Farmers Home Administration, the Federal Home
Loan Banks, the Federal Intermediate Credit Banks, the Federal Farm Credit
Banks, the Federal Land Banks, the Federal Housing Administration, the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation, and
the Student Loan Marketing Association. Some of these obligations, such as
those of the Government National Mortgage Association are supported by the full
faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others, such as
those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not obligated to do so by law. A Fund will invest
in the obligations of such instrumentalities only when the investment adviser
believes that the credit risk with respect to the instrumentality is minimal.
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STATEMENT OF ADDITIONAL INFORMATION
THE VICTORY PORTFOLIOS
THE INTERMEDIATE INCOME FUND
March 1, 1996
This Statement of Additional Information is not a Prospectus, but
should be read in conjunction with the Prospectus of The Victory Portfolios -
The Intermediate Income Fund, dated the same date as the date hereof (the
"Prospectus"). This Statement of Additional Information is incorporated by
reference in its entirety into the Prospectus. Copies of the Prospectus may be
obtained by writing The Victory Portfolios at Primary Funds Service
Corporation, P.O. Box 9741, Providence, RI 02940-9741, or by telephoning toll
free 800-539-FUND or 800-539-3863.
<TABLE>
<S> <C> <C>
Investment Objectives and Policies 1 INVESTMENT ADVISER
Valuation of Portfolio Securities 12 KeyCorp Mutual Fund Advisers, Inc.
Additional Purchase, Exchange
and Redemption Information 16 INVESTMENT SUB-ADVISER
Management of the Victory Portfolios 20 Society Asset Management, Inc.
Advisory and Other Contracts 29
Additional Information 37 ADMINISTRATOR
Independent Auditor's Report 40 Concord Holding Corporation
Financial Statements 40
Appendix 41 DISTRIBUTOR
Victory Broker-Dealer Services, Inc.
TRANSFER AGENT
Primary Funds Service Corporation
CUSTODIAN
Key Trust Company of Ohio, N.A.
</TABLE>
<PAGE> 225
STATEMENT OF ADDITIONAL INFORMATION
The Victory Portfolios (the "Victory Portfolios") is an open-end
management investment company. The Victory Portfolios consist of twenty-eight
series of units of beneficial interest ("shares"), four of which are currently
inactive. The outstanding shares represent interests in the twenty-four
separate investment portfolios which are currently active. This Statement of
Additional Information relates to the Victory Intermediate Income Fund (the
"Fund") only. Much of the information contained in this Statement of Additional
Information expands on subjects discussed in the Prospectus. Capitalized terms
not defined herein are used as defined in the Prospectus. No investment in
shares of the Fund should be made without first reading the Fund's Prospectus.
INVESTMENT OBJECTIVES AND POLICIES
Additional Information Regarding Fund Instruments
The following policies supplement the investment objective and
policies of the Fund as set forth in the Prospectus.
FOREIGN INVESTMENTS. Foreign investments can involve significant
risks in addition to the risks inherent in U.S. investments. The value of
securities denominated in or indexed to foreign currencies, and of dividends
and interest from such securities, can change significantly when foreign
currencies strengthen or weaken relative to the U.S. dollar. Foreign
securities markets generally have less trading volume and less liquidity than
U.S. markets, and prices on some foreign markets can be highly volatile. Many
foreign countries lack uniform accounting and disclosure standards comparable
to those applicable to U.S. companies, and it may be more difficult to obtain
reliable information regarding an issuer's financial condition and operations.
In addition, the costs of foreign investing, including withholding taxes,
brokerage commissions, and custodial costs, are generally higher than for U.S.
investments.
Foreign markets may offer less protection to investors than U.S.
markets. Foreign issuers, brokers, and securities markets may be subject to
less government supervision. Foreign security trading practices, including
those involving the release of assets in advance of payment, may involve
increased risks in the event of a failed trade or the insolvency of a
broker-dealer, and may involve substantial delays. It may also be difficult to
enforce legal rights in foreign countries.
Investing abroad also involves different political and economic risks.
Foreign investments may be affected by actions of foreign governments adverse
to the interests of U.S. investors, including the possibility of expropriation
or nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. There may be a greater possibility
of default by foreign governments or foreign government-sponsored enterprises.
Investments in foreign countries also involve a risk of local political,
economic, or social instability, military action or unrest, or adverse
diplomatic developments. There is no assurance that Key Advisers or the Sub-
Adviser will be able to anticipate these potential events or counter their
effects.
The considerations noted above generally are intensified for
investments in developing countries. Developing countries may have relatively
unstable governments, economies based on only a few industries, and securities
markets that trade a small number of securities.
The Fund may invest in foreign securities that impose restrictions on
transfer within the U.S. or to U.S. persons. Although securities subject to
transfer restrictions may be marketable abroad, they may be less liquid than
foreign securities of the same class that are not subject to such restrictions.
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AMERICAN DEPOSITORY RECEIPTS AND EUROPEAN DEPOSITORY RECEIPTS (ADRs
and EDRs) are certificates evidencing ownership of shares of a foreign-based
issuer held in trust by a bank or similar financial institution. Designed for
use in U.S. and European securities markets, respectively, ADRs and EDRs are
alternatives to the purchase of the underlying securities in their national
markets and currencies. ADRs may be sponsored or unsponsored; there is less
publicly available information with respect to unsponsored ADRs.
LOWER-RATED DEBT SECURITIES. The Fund may purchase lower-rated debt
securities commonly referred to as "junk bonds" (those rated Ba to C by Moody's
Investor Service, Inc. or BB to C by Standard and Poor's Corporation) that have
poor protection with respect to the payment of interest and repayment of
principal, or may be in default. These securities are often considered to be
speculative and involve greater risk of loss or price changes due to changes in
the issuer's capacity to pay. The market prices of lower-rated debt securities
may fluctuate more than those of higher-rated debt securities and may decline
significantly in periods of general economic difficulty, which may follow
periods of rising interest rates.
While the market for high-yield corporate debt securities has been in
existence for many years and has weathered previous economic downturns, the
1980s brought a dramatic increase in the use of such securities to fund highly
leveraged corporate acquisitions and restructurings. Past experience may not
provide an accurate indication of future performance of the high yield bond
market, especially during periods of economic recession. In fact, from 1989 to
1991, the percentage of lower-rated debt securities that defaulted rose
significantly above prior levels, although the default rate decreased in 1992.
The market for lower-rated securities may be thinner and less active
than that for higher-rated debt securities, which can adversely affect the
prices at which the former are sold. If market quotations are not available,
lower-rated debt securities will be valued in accordance with procedures
established by the Board of Trustees, including the use of outside pricing
services. Judgment plays a greater role in valuing high-yield corporate debt
securities than is the case for securities for which more external sources for
quotations and last-sale information are available. Adverse publicity and
changing investor perceptions may affect the ability of outside pricing
services to value lower-rated debt securities and the Fund's ability to sell
these securities.
Since the risk of default is higher for lower-rated debt securities,
Key Advisers' or the Sub-Adviser's research and credit analysis are an
especially important part of managing securities of this type held by the Fund.
In considering investments for the Fund, Key Advisers or the Sub-Adviser will
attempt to identify those issuers of high-yielding debt securities whose
financial condition is adequate to meet future obligations, has improved, or is
expected to improve in the future. Analysis of Key Advisers or the Sub-Adviser
focuses on relative values based on such factors as interest or dividend
coverage, asset coverage, earnings prospects, and the experience and managerial
strength of the issuer.
The Fund may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise exercise its rights as security holder to seek
to protect the interests of security holders if it determines this to be in the
best interest of the Fund's shareholders.
ILLIQUID INVESTMENTS are investments that cannot be sold or disposed
of in the ordinary course of business, within seven days, at approximately the
prices at which they are valued. Under the supervision of the Board of
Trustees, Key Advisers or the Sub-Adviser determines the liquidity of the
Fund's investments and, through reports from Key Advisers or the Sub-Adviser
the Board monitors investments in illiquid instruments. In determining the
liquidity of the Fund's investments, Key Advisers or the Sub- Adviser may
consider various factors, including (1) the frequency of trades and quotations,
(2) the number of dealers and prospective purchasers in the marketplace, (3)
dealer undertakings to make a market, (4) the nature of the security (including
any demand or tender features), and (5) the nature of the marketplace for
trades (including the ability to assign or offset the Fund's rights and
obligations relating to the investment). Investments currently considered by
the Fund to be illiquid include repurchase agreements not entitling the holder
to payment of principal and interest within seven days. Also, Key Advisers or
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the Sub-Adviser may determine some over-the-counter options, restricted
securities and loans and other direct debt instruments, and swap agreements to
be illiquid. However, with respect to over-the-counter options the Fund
writes, all or a portion of the value of the underlying instrument may be
illiquid depending on the assets held to cover the option and the nature and
terms of any agreement the Fund may have to close out the option before
expiration. In the absence of market quotations, illiquid investments are
priced at fair value as determined in good faith by a committee appointed by
the Board of Trustees. If through a change in values, net assets, or other
circumstances, the Fund were in a position where more than 15% of its net
assets were invested in illiquid securities, it would seek to take appropriate
steps to protect liquidity.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS are interests in amounts owed
by a corporate, governmental, or other borrower to another party. They may
represent amounts owed to lenders or lending syndicates (loans and loan
participations), to suppliers of goods or services (trade claims or other
receivables), or to other parties. Direct debt instruments involve a risk of
loss in case of default or insolvency of the borrower and may offer less legal
protection to the Fund in the event of fraud or misrepresentation. In
addition, loan participations involve a risk of insolvency of the lending bank
or other financial intermediary. Direct debt instruments may also include
standby financing commitments that obligate the Fund to supply additional cash
to the borrower on demand.
REPURCHASE AGREEMENTS. In a repurchase agreement, the Fund purchases
a security and simultaneously commits to resell that security to the seller at
an agreed upon price on an agreed upon date within a number of days from the
date of purchase. The resale price reflects the purchase price plus an agreed
upon incremental amount which is unrelated to the coupon rate or maturity of
the purchased security. A repurchase agreement involves the obligation of the
seller to pay the agreed upon price, which obligation is in effect secured by
the value (at least equal to the amount of the agreed upon resale price and
marked to market daily) of the underlying security. The Fund may engage in a
repurchase agreement with respect to any security in which it is authorized to
invest. Since it is not possible to eliminate all risks from these
transactions (particularly the possibility of a decline in the market value of
the underlying securities, as well as delays and costs to the Fund in
connection with bankruptcy proceedings), it is the Victory Portfolios' current
policy to limit repurchase agreements for the Fund to those parties whose
creditworthiness has been reviewed and found satisfactory by Key Advisers or
the Sub-Adviser. Repurchase agreements are considered by the staff of the
Securities and Exchange Commission to be loans by the Fund.
RESTRICTED SECURITIES generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the Securities
Act of 1933, or in a registered public offering. Where registration is
required, the Fund may be obligated to pay all or part of the registration
expense and a considerable period may elapse between the time it decides to
seek registration and the time the Fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, the Fund might obtain a less favorable price
than prevailed when it decided to seek registration of the shares. However, in
general, the Fund anticipates holding restricted securities to maturity or
selling them in an exempt transaction.
LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS. The Fund intends to
file a notice of eligibility for exclusion from the definition of the term
"commodity pool operator" with the Commodity Futures Trading Commission (CFTC)
and the National Futures Association, which regulate trading in the futures
markets, before engaging in any purchases or sales of futures contracts or
options on futures contracts. The Fund intends to comply with Section 4.5 of
the regulations under the Commodity Exchange Act, which limits the extent to
which the Fund can commit assets to initial margin deposits and option
premiums.
In addition, the Fund will not: (a) sell futures contracts, purchase
put options, or write call options if, as a result, more than 25% of the Fund's
total assets would be hedged with futures and options under normal conditions;
(b) purchase futures contracts or write put options if, as a result, the Fund's
total obligations upon settlement or exercise of purchased futures contracts
and written put options would exceed 25% of its total assets; or (c) purchase
call options if, as a result, the current value of option premiums for call
options purchased by the
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Fund would exceed 5% of the Fund's total assets. These limitations do not
apply to options attached to or acquired or traded together with their
underlying securities.
FUTURES CONTRACTS. When the Fund purchases a futures contract, it
agrees to purchase a specified underlying instrument at a specified future
date. When the Fund sells a futures contract, it agrees to sell the underlying
instrument at a specified future date. The price at which the purchase and
sale will take place is fixed when the Fund enters into the contract. Some
currently available futures contracts are based on specific securities, such as
U.S. Treasury bonds or notes, and some are based on indices of securities
prices, such as the Standard & Poor's 500 Composite Stock Price Index (S&P
500). Futures can be held until their delivery dates, or can be closed out
before then if a liquid secondary market is available.
The value of a futures contract tends to increase and decrease in
tandem with the value of its underlying instrument. Therefore, purchasing
futures contracts will tend to increase the Fund's exposure to positive and
negative price fluctuations in the underlying instrument, much as if it had
purchased the underlying instrument directly. When the Fund sells a futures
contract, by contrast, the value of its futures position will tend to move in a
direction contrary to the market. Selling futures contracts, therefore, will
tend to offset both positive and negative market price changes, much as if the
underlying instrument had been sold.
FUTURES MARGIN PAYMENTS. The purchaser or seller of a futures
contract is not required to deliver or pay for the underlying instrument unless
the contract is held until the delivery date. However, both the purchaser and
seller are required to deposit "initial margin" with a futures broker, known as
a futures commission merchant (FCM), when the contract is entered into. Initial
margin deposits are typically equal to a percentage of the contract's value. If
the value of either party's position declines, that party will be required to
make additional "variation margin" payments to settle the change in value on a
daily basis. The party that has a gain may be entitled to receive all or a
portion of this amount. Initial and variation margin payments do not constitute
purchasing securities on margin for purposes of the Fund's investment
limitations. In the event of the bankruptcy of an FCM that holds margin on
behalf of the Fund, the Fund may be entitled to return of margin owed to it only
in proportion to the amount received by the FCM's other customers, potentially
resulting in losses to the Fund.
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, the Fund
obtains the right (but not the obligation) to sell the option's underlying
instrument at a fixed strike price. In return for this right, the Fund pays the
current market price for the option (known as the option premium). Options have
various types of underlying instruments, including specific securities, indices
of securities prices, and futures contracts. The Fund may terminate its position
in a put option it has purchased by allowing it to expire or by exercising the
option. If the option is allowed to expire, the Fund will lose the entire
premium it paid. If the Fund exercises the option, it completes the sale of the
underlying instrument at the strike price. The Fund may also terminate a put
option position by closing it out in the secondary market at its current price,
if a liquid secondary market exists.
The buyer of a typical put option can expect to realize a gain if
security prices fall substantially. However, if the underlying instrument's
price does not fall enough to offset the cost of purchasing the option, a put
buyer can expect to suffer a loss (limited to the amount of the premium paid,
plus related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price. A call buyer typically attempts to participate in potential price
increases of the underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time, the buyer can expect to
suffer a loss if security prices do not rise sufficiently to offset the cost of
the option.
WRITING PUT AND CALL OPTIONS. When the Fund writes a put option, it
takes the opposite side of the transaction from the option's purchaser. In
return for receipt of the premium, the Fund assumes the obligation to pay the
strike price for the option's underlying instrument if the other party to the
option chooses to exercise it.
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When writing an option on a futures contract the Fund will be required to make
margin payments to an FCM as described above for futures contracts. The Fund
may seek to terminate its position in a put option it writes before exercise by
closing out the option in the secondary market at its current price. If the
secondary market is not liquid for a put option the Fund has written, however,
the Fund must continue to be prepared to pay the strike price while the option
is outstanding, regardless of price changes, and must continue to set aside
assets to cover its position.
If security prices rise, a put writer would generally expect to
profit, although its gain would be limited to the amount of the premium it
received. If security prices remain the same over time, it is likely that the
writer will also profit, because it should be able to close out the option at a
lower price. If security prices fall, the put writer would expect to suffer a
loss. This loss should be less than the loss from purchasing the underlying
instrument directly, however, because the premium received for writing the
option should mitigate the effects of the decline.
Writing a call option obligates the Fund to sell or deliver the
option's underlying instrument, in return for the strike price, upon exercise
of the option. The characteristics of writing call options are similar to
those of writing put options, except that writing calls generally is a
profitable strategy if prices remain the same or fall. Through receipt of the
option premium, a call writer mitigates the effects of a price decline. At the
same time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is
greater, a call writer gives up some ability to participate in security price
increases.
COMBINED POSITIONS. The Fund may purchase and write options in
combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of the overall
position. For example, the Fund may purchase a put option and write a call
option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call
option at one strike price and buying a call option at a lower price, in order
to reduce the risk of the written call option in the event of a substantial
price increase. Because combined options positions involve multiple trades,
they result in higher transaction costs and may be more difficult to open and
close out.
CORRELATION OF PRICE CHANGES. Because there are a limited number of
types of exchange-traded options and futures contracts, it is likely that the
standardized contracts available will not match the Fund's current or
anticipated investments exactly. The Fund may invest in options and futures
contracts based on securities with different issuers, maturities, or other
characteristics from the securities in which it typically invests which
involves a risk that the options or futures position will not track the
performance of the Fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the Fund's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price
fluctuation limits or trading halts. The Fund may purchase or sell options and
futures contracts with a greater or lesser value than the securities it wishes
to hedge or intends to purchase in order to attempt to compensate for
differences in volatility between the contract and the securities, although
this may not be successful in all cases. If price changes in the Fund's
options or futures positions are poorly correlated with its other investments,
the positions may fail to produce anticipated gains or result in losses that
are not offset by gains in other investments.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS. There is no assurance a
liquid secondary market will exist for any particular options or futures
contract at any particular time. Options may have relatively low trading
volume and liquidity if their strike prices are not close to the underlying
instrument's current price. In addition, exchanges may establish daily price
fluctuation limits for options and futures contracts, and may halt trading if a
contract's price moves upward or downward more than the limit in a given day.
On volatile trading days when the price
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fluctuation limit is reached or a trading halt is imposed, it may be impossible
for the Fund to enter into new positions or close out existing positions. If
the secondary market for a contract is not liquid because of price fluctuation
limits or otherwise, it could prevent prompt liquidation of unfavorable
positions, and potentially could require the Fund to continue to hold a
position until delivery or expiration regardless of changes in its value. As a
result, the Fund's access to other assets held to cover its options or futures
positions could also be impaired.
OTC OPTIONS. Unlike exchange-traded options, which are standardized
with respect to the underlying instrument, expiration date, contract size, and
strike price, the terms of over-the-counter options (options not traded on
exchanges) generally are established through negotiation with the other party
to the option contract. While this type of arrangement allows the Fund greater
flexibility to tailor an option to its needs, OTC options generally involve
greater credit risk than exchange-traded options, which are guaranteed by the
clearing organization of the exchanges where they are traded.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. The Fund will
comply with guidelines established by the SEC with respect to coverage of
options and futures strategies by mutual funds, and if the guidelines so
require will set aside appropriate liquid assets in a segregated custodial
account in the amount prescribed. Securities held in a segregated account
cannot be sold while the futures or option strategy is outstanding, unless they
are replaced with other suitable assets. As a result, there is a possibility
that segregation of a large percentage of the Fund's assets could impede
portfolio management or the Fund's ability to meet redemption requests or other
current obligations.
WARRANTS. Warrants are securities that give the Fund the right to
purchase equity securities from the issuer at a specific price (the strike
price) for a limited period of time. The strike price of warrants typically is
much lower than the current market price of the underlying securities, yet they
are subject to greater price fluctuations. As a result, warrants may be more
volatile investments than the underlying securities and may offer greater
potential for capital appreciation as well as capital loss.
Warrants do not entitle a holder to dividends or voting rights with
respect to the underlying securities and do not represent any rights in the
assets of the issuing company. Also, the value of the warrant does not
necessarily change with the value of the underlying securities and a warrant
ceases to have value if it is not exercised prior to the expiration date.
These factors can make warrants more speculative than other types of
investments.
BANKERS' ACCEPTANCES AND CERTIFICATES OF DEPOSIT. The Fund may invest
in bankers' acceptances, certificates of deposit, and demand and time deposits.
Bankers' acceptances are negotiable drafts or bills of exchange typically drawn
by an importer or exporter to pay for specific merchandise, which are "accepted"
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity. Certificates of deposit are
negotiable certificates issued against funds deposited in a commercial bank or a
savings and loan association for a definite period of time and earning a
specified return.
Bankers' acceptances will be those guaranteed by domestic and foreign
banks, if at the time of purchase such banks have capital, surplus, and
undivided profits in excess of $100,000,000 (as of the date of their most
recently published financial statements). Certificates of deposit and demand
and time deposits invested in by the Victory Portfolios will be those of
domestic and foreign banks and savings and loan associations, if (a) at the
time of purchase such financial institutions have capital, surplus, and
undivided profits in excess of $100,000,000 (as of the date of their most
recently published financial statements) or (b) the principal amount of the
instrument is insured in full by the Federal Deposit Insurance Corporation or
the Savings Association Insurance Fund.
The Fund may also invest in Eurodollar Certificates of Deposit
("ECDs") which are U.S. dollar-denominated certificates of deposit issued by
branches of foreign and domestic banks located outside the United States,
Yankee Certificates of Deposit ("Yankee CDs") which are certificates of deposit
issued by a U.S. branch of a foreign bank denominated in U.S. dollars and held
in the United States, Eurodollar Time Deposits
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("ETDs") which are U.S. dollar-denominated deposits in a foreign branch of a
U.S. bank or a foreign bank, and Canadian Time Deposits ("CTDs") which are U.S.
dollar-denominated certificates of deposit issued by Canadian offices of major
Canadian Banks.
COMMERCIAL PAPER. Commercial paper consists of unsecured promissory
notes issued by corporations. Except as noted below with respect to variable
amount master demand notes, issues of commercial paper normally have maturities
of less than nine months and fixed rates of return.
The Fund will purchase only commercial paper rated in one of the two
highest categories at the time of purchase by an NRSRO or, if not rated, found
by the Victory Portfolios' Board of Trustees to present minimal credit risks
and to be of comparable quality to instruments that are rated high quality
(i.e., in one of the two top ratings categories) by a NRSRO that is neither
controlling, controlled by, or under common control with the issuer of, or any
issuer, guarantor, or provider of credit support for, the instruments. For a
description of the rating symbols of each NRSRO see the Appendix to this
Statement of Additional Information.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand
notes, in which the Fund may invest, are unsecured demand notes that permit the
indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate according to the terms of the instrument. Although there is no
secondary market for these notes, the Fund may demand payment of principal and
accrued interest at any time and may resell the notes at any time to a third
party. The absence of an active secondary market, however, could make it
difficult for the Fund to dispose of a variable amount master demand note if the
issuer defaulted on its payment obligations, and the Fund could, for this or
other reasons, suffer a loss to the extent of the default. While the notes are
not typically rated by credit rating agencies, issuers of variable amount master
demand notes must satisfy the same criteria as set forth above for unrated
commercial paper, and Key Advisers or the Sub-Adviser will continuously monitor
the issuer's financial status and ability to make payments due under the
instrument. Where necessary to ensure that a note is of "high quality," the Fund
will require that the issuer's obligation to pay the principal of the note be
backed by an unconditional bank letter or line of credit, guarantee or
commitment to lend. For purposes of the Fund's investment policies, a variable
amount master note will be deemed to have a maturity equal to the longer of the
period of time remaining until the next readjustment of its interest rate or the
period of time remaining until the principal amount can be recovered from the
issuer through demand. (See Variable and Floating Rate Notes.)
VARIABLE AND FLOATING RATE NOTES. The Fund may acquire variable and
floating rate notes, subject to the Victory Portfolios' investment objectives,
policies and restrictions. A variable rate note is one whose terms provide for
the readjustment of its interest rate on set dates and which, upon such
readjustment, can reasonably be expected to have a market value that
approximates its par value. A floating rate note is one whose terms provide for
the readjustment of its interest rate whenever a specified interest rate changes
and which, at any time, can reasonably be expected to have a market value that
approximates its par value. Such notes are frequently not rated by credit rating
agencies; however, unrated variable and floating rate notes purchased by the
Fund will only be those determined by Key Advisers or the Sub-Adviser, under
guidelines established by the Trustees, to pose minimal credit risks and to be
of comparable quality, at the time of purchase, to rated instruments eligible
for purchase under the Fund's investment policies. In making such
determinations, Key Advisers or the Sub-Adviser will consider the earning power,
cash flow and other liquidity ratios of the issuers of such notes (such issuers
include financial, merchandising, bank holding and other companies) and will
continuously monitor their financial condition. Although there may be no active
secondary market with respect to a particular variable or floating rate note
purchased by the Fund, the Fund may resell the note at any time to a third
party. The absence of an active secondary market, however, could make it
difficult for the Fund to dispose of a variable or floating rate note in the
event the issuer of the note defaulted on its payment obligations and the fund
could, for this or other reasons, suffer a loss to the extent of the default.
Variable or floating rate notes may be secured by bank letters of credit.
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Variable or floating rate notes may have maturities of more than one
year, as follows:
1. A note that is issued or guaranteed by the United States
government or any agency thereof and which has a variable rate of interest
readjusted no less frequently than annually will be deemed by the Victory
Portfolios to have a maturity equal to the period remaining until the next
readjustment of the interest rate.
2. A variable rate note, the principal amount of which is
scheduled on the face of the instrument to be paid in one year or less, will be
deemed by the Victory Portfolios to have a maturity equal to the period
remaining until the next readjustment of the interest rate.
3. A variable rate note that is subject to a demand feature
scheduled to be paid in one year or more will be deemed by the Victory
Portfolios to have a maturity equal to the longer of the period remaining until
the next readjustment of the interest rate or the period remaining until the
principal amount can be recovered through demand.
4. A floating rate note that is subject to a demand feature will
be deemed by the Victory Portfolios to have a maturity equal to the period
remaining until the principal amount can be recovered through demand.
As used above, a note is "subject to a demand feature" where the Fund
is entitled to receive the principal amount of the note either at any time on
no more than 30 days' notice or at specified intervals not exceeding one year
and upon no more than 30 days' notice.
The Fund may also invest temporaily in high quality investments or
cash during times of unusual market conditions for defensive purposes and in
order to accommodate shareholder redemption requests although currently it does
not intend to do so. Any portion of the Fund's assets maintained in cash will
reduce the amount of assets in securities and thereby reduce the Fund's yield
or total return.
"WHEN-ISSUED" SECURITIES. As discussed in the Prospectus, the Fund
may purchase securities on a "when issued" basis (i.e., for delivery beyond the
normal settlement date at a stated price and yield). When the Fund agrees to
purchase securities on a "when issued" basis, the Victory Portfolios' custodian
will set aside cash or liquid portfolio securities equal to the amount of the
commitment in a separate account. Normally, the custodian will set aside
portfolio securities to satisfy the purchase commitment, and in such a case,
the Fund may be required subsequently to place additional assets in the
separate account in order to assure that the value of the account remains equal
to the amount of the Fund's commitment. It may be expected that the Fund's net
assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
When the Fund engages in "when-issued" transactions, it relies on the
seller to consummate the trade. Failure of the seller to do so may result in
the Fund incurring a loss or missing the opportunity to obtain a price
considered to be advantageous. The Fund does not intend to purchase "when
issued" securities for speculative purposes, but only in furtherance of its
investment objective
U.S. GOVERNMENT OBLIGATIONS. The Fund may invest in obligations
issued or guaranteed by the U.S. Government, its agencies and
instrumentalities. Obligations of certain agencies and instrumentalities of
the U.S. Government are supported by the full faith and credit of the U.S.
Treasury; others are supported by the right of the issuer to borrow from the
U.S. Treasury; others are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; and still others are supported
only by the credit of the agency or instrumentality. No assurance can be given
that the U.S. Government will provide financial support to U.S.
Government-sponsored agencies or instrumentalities if it is not obligated to do
so by law. The Fund will invest in the obligations of such agencies and
instrumentalities only when Key Advisers or the Sub-Adviser believes that the
credit risk with respect thereto is minimal.
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TEMPORARY INVESTMENT. The Fund may also invest temporarily in high
quality investments or cash during times of ;unusual market conditions for
defensive purposes and in order to accommodate shareholder redemption requests
although currently it does not intend to do so. Any portion of the Funds's
assets maintained in cash will reduce the amount of assets in securities and
thereby reduce the Fund's yield or total return.
SECURITIES LENDING. The Fund may lend its portfolio securities to
broker-dealers, banks or institutional borrowers of securities. The Fund must
receive a minimum of 100% collateral, plus any interest due in the form of cash
or U.S. Government securities. This collateral must be valued daily and should
the market value of the loaned securities increase, the borrower must furnish
additional collateral to the Fund. During the time portfolio securities are on
loan, the borrower will pay the Fund any dividends or interest paid on such
securities plus any interest negotiated between the parties to the lending
agreement. Loans will be subject to termination by the Fund or the borrower at
any time. While the Fund will not have the right to vote securities on loan,
it intends to terminate the loan and regain the right to vote if that is
considered important with respect to the investment. The Fund will only enter
into loan arrangements with broker-dealers, banks or other institutions which
Key Advisers or the Sub- Adviser has determined are creditworthy under
guidelines established by the Victory Portfolios' Trustees.
OTHER INVESTMENT COMPANIES. The Fund may invest up to 5% of its total
assets in the securities of any one investment company, but may not own more
than 3% of the securities of any one investment company or invest more than 10%
of its total assets in the securities of other investment companies.
Pursuant to an exemptive order received by the Victory Portfolios from the
Securities and Exchange Commission, the Fund may invest in the money market
funds of the Victory Portfolios. Key Advisers or the Sub-Adviser will waive its
fee with respect to assets of the Fund invested in any of the money market funds
of the Victory Portfolios, and, to the extent required by the laws of any state
in which the Fund's shares are sold, Key Advisers or the Sub-Adviser will waive
its investment advisory fee as to all assets invested in other investment
companies.
GOVERNMENT "MORTGAGE-BACKED" SECURITIES. The Fund may invest in
obligations of certain agencies and instrumentalities of the U.S. Government.
Some such obligations, such as those issued by GNMA or the Export-Import Bank
of the United States, are supported by the full faith and credit of the U.S.
Treasury; others, such as those of FNMA, are supported by the right of the
issuer to borrow from the Treasury; others are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; still
others, such as those of the Federal Farm Credit Banks or FHLMC, are supported
only by the credit of the instrumentality. No assurance can be given that the
U.S. Government would provide financial support to U.S. Government-sponsored
agencies and instrumentalities if it is not obligated to do so by law.
The principal governmental (i.e., backed by the full faith and credit
of the U.S. Government) guarantor of mortgage-related securities is GNMA. GNMA
is a wholly owned U.S. Government corporation within the Department of Housing
and Urban Development. GNMA is authorized to guarantee, with the full faith
and credit of the U.S. Government, the timely payment of principal and interest
on securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and pools of FHA-insured
or VA-guaranteed mortgages. Government-related (i.e., not backed by the full
faith and credit of the U.S. Government) guarantors include FNMA and FHLMC.
FNMA and FHLMC are government-sponsored corporations owned entirely by private
stockholders. Pass-through securities issued by FNMA and FHLMC are guaranteed
as to timely payment of principal and interest by FNMA and FHLMC, respectively,
but are not backed by the full faith and credit of the U.S. Government.
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MORTGAGE-RELATED SECURITIES -- IN GENERAL
Mortgage-related securities are backed by mortgage obligations
including, among others, conventional 30-year fixed rate mortgage obligations,
graduated payment mortgage obligations, 15-year mortgage obligations, and
adjustable rate mortgage obligations. All of these mortgage obligations can be
used to create pass-through securities. A pass-through security is created
when mortgage obligations are pooled together and undivided interests in the
pool or pools are sold. The cash flow from the mortgage obligations is passed
through to the holders of the securities in the form of periodic payments of
interest, principal and prepayments (net of a service fee). Prepayments occur
when the holder of an individual mortgage obligation prepays the remaining
principal before the mortgage obligation's scheduled maturity date. As a
result of the pass-through of prepayments of principal on the underlying
securities, mortgage-backed securities are often subject to more rapid
prepayment of principal than their stated maturity would indicate. Because the
prepayment characteristics of the underlying mortgage obligations vary, it is
not possible to predict accurately the realized yield or average life of a
particular issue of pass-through certificates. Prepayment rates are important
because of their effect on the yield and price of the securities. Accelerated
prepayments have an adverse impact on yields for pass-throughs purchased at a
premium (i.e., a price in excess of principal amount) and may involve
additional risk of loss of principal because the premium may not have been
fully amortized at the time the obligation is repaid. The opposite is true for
pass-throughs purchased at a discount. The Fund may purchase mortgage-related
securities at a premium or at a discount. Among the U.S. Government securities
in which the Fund may invest are government "mortgage-backed" (or government
guaranteed mortgage related securities). Such guarantees do not extend to the
value of yield of the mortgage-backed securities themselves or of the Fund's
shares.
GNMA CERTIFICATES. Certificates of the Government National Mortgage
Association ("GNMA") are mortgage-backed securities which evidence an undivided
interest in a pool or pools of mortgages. GNMA Certificates that the funds may
purchase are the "modified pass-through" type, which entitle the holder to
receive timely payment of all interest and principal payments due on the
mortgage pool, net of fees paid to the "issuer" and GNMA, regardless of whether
or not the mortgagor actually makes the payment.
The National Housing Act authorizes GNMA to guarantee the timely
payment of principal and interest on securities backed by a pool of mortgages
insured by the Federal Housing Administration ("FHA") or guaranteed by the
Veterans Administration ("VA"). The GNMA guarantee is backed by the full faith
and credit of the U.S. Government. GNMA is also empowered to borrow without
limitation from the U.S. Treasury if necessary to make any payments required
under its guarantee.
The estimated average life of a GNMA Certificate is likely to be
substantially shorter than the original maturity of the mortgages underlying
the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greater part of principal
investment long before the maturity of the mortgages in the pool. Foreclosures
impose no risk to principal investment because of the GNMA guarantee, except to
the extent that the Fund has purchased the certificates above par in the
secondary market.
FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation
("FHLMC") was created in 1970 to promote development of a nationwide secondary
market in conventional residential mortgages. The FHLMC issues two types of
mortgage pass-through securities ("FHLMC Certificates"), mortgage participation
certificates ("PCs") and collateralized mortgage obligations ("CMOs"). PCs
resemble GNMA Certificates in that each PC represents a pro rata share of all
interest and principal payments made and owed on the underlying pool. The
FHLMC guarantees timely monthly payment of interest on PCs and the ultimate
payment of principal. Recently introduced FHLMC Gold PCs guarantee the timely
payment of both principal and interest.
CMOs are securities backed by a pool of mortgages in which the
principal and interest cash flows of the pool are channeled on a prioritized
basis into two or more classes, or tranches, of bonds. FHLMC CMOs are backed
by pools of agency mortgage-backed securities and the timely payment of
principal and interest of each
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tranche is guaranteed by the FHLMC. The FHLMC guarantee is not backed by the
full faith and credit of the U.S. Government.
FNMA SECURITIES. The Federal National Mortgage Association ("FNMA")
was established in 1938 to create a secondary market in mortgages insured by
the FHA, but has expanded its activity to the secondary market for conventional
residential mortgages. FNMA primarily issues two types of mortgage-backed
securities, guaranteed mortgage pass-through certificates ("FNMA Certificates")
and CMOs. FNMA Certificates resemble GNMA Certificates in that each FNMA
Certificate represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. FNMA guarantees timely payment of
interest and principal on FNMA Certificates and CMOs. The FNMA guarantee is
not backed by the full faith and credit of the U.S. Government.
The Fund will only purchase preferred stocks where the issuer is publicly
traded and has capital in excess of $200 million.
MISCELLANEOUS SECURITIES. The Fund can invest in various securities
issued by domestic and foreign corporations, including preferred stocks and
investment grade corporate bonds, notes, and warrants. Bonds are long-term
corporate debt instruments secured by some or all of the issuer's assets,
debentures are general corporate debt obligations backed only by the integrity
of the borrower, and warrants are instruments that entitle the holder to
purchase a certain amount of common stock at a specified price, which price is
usually higher than the current market price at the time of issuance.
Preferred stocks are instruments that combine qualities both of equity and debt
securities. Individual issues of preferred stock will have those rights and
liabilities that are spelled out in the governing document. Preferred stocks
usually pay a fixed dividend per quarter (or annum) and are senior to common
stock in terms of liquidation and dividends rights, and preferred stocks
typically do not have voting rights. The Fund will only purchase preferred
stocks where the issuer is publicly traded and has capital in excess of $200
million.
The Fund also may invest, consistent with its investment objective and
policies, in zero coupon bonds, which are debt instruments that do not pay
current interest and are typically sold at prices greatly discounted from par
value. The return on a zero-coupon obligation, when held to maturity, equals
the difference between the par value and the original purchase price.
Zero-coupon obligations have greater price volatility than coupon obligations.
FUTURE DEVELOPMENTS. As discussed in the Prospectus, the Fund may
take advantage of other investment practices which are not at present
contemplated for use by the Fund or which currently are not available but which
may be developed, to the extent such investment practices are both consistent
with the Fund's investment objective and are legally permissible for the Fund.
Such investment practices, if they arise, may involve risks which exceed those
involved in the activities described in the Prospectus and Statement of
Additional Information. Prior to commencing any new investment practice, the
Fund will notify shareholders by means of prospectus supplement.
The Fund does not engage in trading for short-term profits, and its
portfolio turnover rate is not expected to exceed 200% (annualized).
Nevertheless, changes in the Fund will be made promptly when determined to be
advisable by reason of developments not foreseen at the time of the initial
investment decision and usually without reference to the length of time a
security has been held. Accordingly, portfolio turnover rates are not
considered a limiting factor in the execution of investment decisions.
INVESTMENT RESTRICTIONS
The following fundamental investment restrictions are fundamental and
with respect to the Fund and cannot be changed without approval by a "majority
of the outstanding voting securities" (as defined in the Investment Company Act
of 1940, as amended (the "1940 Act") of the Fund.
THE FUND MAY NOT (unless otherwise indicated):
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(1) issue any senior security (as defined in the 1940 Act), except
that (a) the Fund may engage in transactions which may result
in the issuance of senior securities to the extent permitted
under applicable regulations and interpretation of the 1940
Act or an exemptive order; (b) the Fund may acquire other
securities that may be deemed senior securities to the extent
permitted under applicable regulations or interpretations of
the 1940 Act; (c) subject to the restrictions set forth below,
the Fund may borrow money as authorized by the 1940 Act;
(2) with respect to 75% of the Fund's total assets, purchase the
securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, (a) more than 5% of the
Fund's total assets would be invested in the securities of
that issuer, or (b) the Fund would hold more than 10% of the
outstanding voting securities of that issuer;
(3) borrow money, except that (a) the Fund may enter into
commitments to purchase securities in accordance with the
company's investment program, including delayed-delivery and
when-issued securities and reverse repurchase agreements,
provided that the total amount of any such borrowing does not
exceed 33 1/3% of the Fund's total assets; and (b) the Fund
may borrow money for temporary or emergency purposes in an
amount not exceeding 5% of the value of its total assets at
the time when the loan is made. Any borrowings representing
more than 5% of the Fund's total assets must be repaid before
the Fund may make additional investments;
(4) underwrite securities issued by others, except to the extent
that the Fund may be considered an underwriter within the
meaning of the Securities Act of 1933 in the disposition of
restricted securities;
(5) purchase the securities of any issuer (other than securities
issued or guaranteed by the U.S. government or any of its
agencies or instrumentalities) if, as a result, more than 25%
of the Fund's total assets would be invested in the securities
of companies whose principal business activities are in the
same industry. In the utilities category, the industry shall
be determined according to the service provided. For example,
gas, electric, water and telephone will be considered as
separate industries;
(6) purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall
not prevent the Fund from investing in securities or other
instruments backed by real estate or securities of companies
engaged in the real estate business);
(7) purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments (but
this shall not prevent the fund from purchasing or selling
options and futures contracts or from investing in securities
or other instruments backed by physical commodities);
(8) lend any security or make any other loan if, as a result, more
than 33 1/3% of its total assets would be lent to other
parties, but this limitation does not apply to purchases of
debt securities or to repurchase agreements; or
(9) articipate on a joint or joint and several basis in any
securities trading account.
The following investment limitations are nonfundamental and may be
changed without shareholder approval:
(i) The Fund will not purchase or retain securities of any issuer if
the officers or Trustees of the Victory Portfolios or the
officers or directors of its investment adviser owning
beneficially more than one half of 1% of the securities of such
issuer together own beneficially more than 5% of such securities.
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<PAGE> 237
(ii) The Fund will not invest more than 10% of its total assets in the
securities of issuers which together with any predecessors have a
record of less than three years of continuous operation.
(iii) The Fund will not invest more than 15% of its net assets in
illiquid securities. Illiquid securities are securities that are
not readily marketable or cannot be disposed of promptly within
seven days and in the usual course of business at approximately
the price at which the Fund has valued them. Such securities
include, but are not limited to, time deposits and repurchase
agreements with maturities longer than seven days. Securities
that may be resold under Rule 144A ("Restricted Securities"), or
securities offered pursuant to Section 4(2) of, the 1933 Act,
shall not be deemed illiquid solely by reason of being
unregistered. Key Advisers or Sub-Adviser determine whether a
particular security is deemed to be liquid based on the trading
markets for the specific security and other factors. However,
because state securities laws may limit the Fund's investment in
Restricted Securities (regardless of the liquidity of the
investment), investments in Restricted Securities resalable under
Rule 144A will continue to be subject to applicable state law
requirements until such time, if ever, that such limitations are
changed.
(iv) The Fund will not make short sales of securities, other than
short sales "against the box," or purchase securities on margin
except for short-term credits necessary for clearance of
portfolio transactions, provided that this restriction will not
be applied to limit the use of options, futures contracts and
related options, in the manner otherwise permitted by the
investment restrictions, policies and investment program of the
Fund.
(v) The Fund may invest up to 5% of its total assets in the
securities of any one investment company, but may not own more
than 3% of the securities of any one investment company or invest
more than 10% of its total assets in the securities of other
investment companies. Pursuant to an exemptive order received by
the Victory Portfolio from the Commission, the Fund may invest in
the money market funds of the Victory Portfolios.
State Regulations
In addition, the Fund, so long as its shares are registered under the
securities laws of the State of Texas and such restrictions are required as a
consequence of such registration, is subject to the following non-fundamental
policies, which may be modified in the future by the Trustees without a vote of
the Fund's shareholders: (i) the Victory Portfolios has represented to the
Texas State Securities Board that it will not invest in oil, gas or mineral
leases or purchase or sell real property (including limited partnership
interests, but excluding readily marketable securities of companies which
invest in real estate); and (ii) the Fund has represented to the Texas State
Securities Board it will not invest more than 5% of its net assets in warrants
valued at the lower of cost or market; provided that, included within that
amount, but not to exceed 2% of net assets, may be warrants which are not
listed on the New York or American Stock Exchanges. For purposes of this
restriction, warrants acquired in units or attached to securities are deemed to
be without value.
The policies and limitations listed above supplement those set forth
in the Prospectus. Unless otherwise noted, whenever an investment policy or
limitation states a maximum percentage of the Fund's assets that may be
invested in any security or other asset, or sets forth a policy regarding
quality standards, such standard or percentage limitation will be determined
immediately after and as a result of the Fund's acquisition of such security or
other asset except in the case of borrowing (or other activities that may be
deemed to result in the issuance of a "senior security" under the 1940 Act).
Accordingly, any subsequent change in values, net assets, or other
circumstances will not be considered when determining whether the investment
complies with the Fund's investment policies and limitations. If the value of
the Fund's holdings of illiquid securities at any time exceeds the percentage
limitation applicable at the time of acquisition due to subsequent fluctuations
in value or other reasons, the Board of Trustees will consider what actions, if
any, are appropriate to maintain adequate liquidity.
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FUTURE DEVELOPMENTS
The Fund may take advantage of other investment practices which are
not at present contemplated for use by the Fund or which currently are not
available but which may be developed, to the extent such investment practices
are both consistent with the Fund's investment objective and are legally
permissible for the Fund. Such investment practices, if they arise, may
involve risks which exceed those involved in the activities described in the
Prospectus and Statement of Additional Information. Prior to commencing any
new investment practice, the Fund will notify shareholders by means of
prospectus supplement.
Portfolio Turnover
The turnover rate stated in the Prospectus for the Fund's investment
portfolio is calculated by dividing the lesser of the Fund's purchases or sales
of portfolio securities for the year by the monthly average value of the
portfolio securities. The calculation excludes all securities whose
maturities, at the time of acquisition, were one year or less.
VALUATION OF PORTFOLIO SECURITIES
Investment securities held by the Fund are valued on the basis of
valuations provided by an independent pricing service, approved by the Board of
Trustees, which uses information with respect to transactions of a security,
quotations from dealers, market transactions in comparable securities, and
various relationships between securities, in determining value. Specific
investment securities which are not priced by the approved pricing service will
be valued according to quotations obtained from dealers who are market makers
in those securities. Investment securities with less than 60 days to maturity
when purchased are valued at amortized cost which approximates market value.
Investment securities not having readily available market quotations will be
priced at fair value using a methodology approved in good faith by the Board of
Trustees.
PERFORMANCE
As described in the Prospectus, from time to time the "standardized
yield," "dividend yield," "average annual total return," "total return," and
"total return at net asset value" of an investment in each class of Fund shares
may be advertised. An explanation of how yields and total returns are
calculated and the components of those calculations are set forth below.
Yield and total return information may be useful to investors in
reviewing the Fund's performance. The Fund's advertisement of its performance
must, under applicable Commission rules, include the average annual total
returns for each class of shares of the Fund for the 1, 5 and 10-year period
(or the life of the class, if less) as of the most recently ended calendar
quarter. This enables an investor to compare the Fund's performance to the
performance of other funds for the same periods. However, a number of factors
should be considered before using such information as a basis for comparison
with other investments. An investment in the Fund is not insured; its yield
and total return are not guaranteed and normally will fluctuate on a daily
basis. When redeemed, an investor's shares may be worth more or less than
their original cost. Yield and total return for any given past period are not
a prediction or representation by the Victory Portfolios of future yields or
rates of return on its shares. The yield and total returns of the Fund are
affected by portfolio quality, portfolio maturity, the type of investments the
Fund holds and its operating expenses.
STANDARDIZED YIELDS. The Fund's "yield" (referred to as "standardized
yield") for a given 30-day period for a class of shares is calculated using the
following formula set forth in rules adopted by the Commission that apply to
all funds that quote yields:
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<PAGE> 239
Standardized Yield = 2 [(a-b + 1)to the 6th power - 1]
---
cd
The symbols above represent the following factors:
a = dividends and interest earned during the 30-day period.
b = expenses accrued for the period (net of any expense
reimbursements).
c = the average daily number of shares of that class outstanding
during the 30-day period that were entitled to receive
dividends.
d = the maximum offering price per share of the class on the last
day of the period, adjusted for undistributed net investment
income.
The standardized yield for a 30-day period may differ from its yield
for any other period. The Commission formula assumes that the standardized
yield for a 30-day period occurs at a constant rate for a six-month period and
is annualized at the end of the six-month period. This standardized yield is
not based on actual distributions paid by the Fund to shareholders in the
30-day period, but is a hypothetical yield based upon the net investment income
from the Fund's portfolio investments calculated for that period. The
standardized yield may differ from the "dividend yield," described below.
Additionally, because each class of shares is subject to different expenses, it
is likely that the standardized yields of the Fund classes of shares will
differ. The yield for the 30-day period ended October 31, 1995 was ____% .
DIVIDEND YIELD AND DISTRIBUTION RETURN. From time to time the Fund may
quote a "dividend yield" or a "distribution return." Dividend yield is based on
the share dividends derived from net investment income during a stated period.
Distribution return includes dividends derived from net investment income and
from realized capital gains declared during a stated period. Under those
calculations, the dividends and/or distributions declared during a stated period
of one year or less (for example, 30 days) are added together, and the sum is
divided by the maximum offering price per share of that class A) on the last day
of the period. When the result is annualized for a period of less than one
year, the "dividend yield" is calculated as follows:
Dividend Yield = Dividends + Number of days (accrual period) x 365
---------------------
Max. Offering Price (last day of period)
The maximum offering price for shares includes the maximum front-end
sales charge.
From time to time similar yield or distribution return calculations
may also be made using the net asset value (instead of its respective maximum
offering price) at the end of the period. The dividend yields at maximum
offering price and net asset value for the 30-day period ended October 31, 1995
were ____% and ____%, respectively.
TOTAL RETURNS. The "average annual total return" is an average annual
compounded rate of return for each year in a specified number of years. It is
the rate of return based on the change in value of a hypothetical initial
investment of $1,000 ("P" in the formula below) held for a number of years
("n") to achieve an Ending Redeemable Value ("ERV"), according to the following
formula:
(ERV)(1n) - 1 = Average Annual Total Return
---
( P )
The cumulative "total return" calculation measures the change in value
of a hypothetical investment of $1,000 over an entire period of years. Its
calculation uses some of the same factors as average annual total return, but
it does not average the rate of return on an annual basis. Total return is
determined as follows:
ERV - P = Total Return
-------
P
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<PAGE> 240
In calculating total returns, the current maximum sales charge of
4.75% (as a percentage of the offering price) is deducted from the initial
investment ("P") (unless the return is shown at net asset value, as discussed
below). Total returns also assume that all dividends and capital gains
distributions during the period are reinvested to buy additional shares at net
asset value per share, and that the investment is redeemed at the end of the
period. The average annual total return and cumulative total return for the
period from December 10, 1993 (commencement of operations) to October 31, 1994
and for the fiscal year ended October 31, 1995 at maximum offering price were
___% and ____%, respectively. For the one period ended October 31, 1995 annual
total return was ______%.
From time to time the Fund may also quote an "average annual total
return at net asset value" or a cumulative "total return at net asset value."
It is based on the difference in net asset value per share at the beginning and
the end of the period for a hypothetical investment in that class of shares
(without considering front-end or contingent sales charges) and takes into
consideration the reinvestment of dividends and capital gains distributions.
The average annual total return and cumulative total return for the period from
December 10, 1993 (commencement of operations) to October 31, 1994 and for the
fiscal year ended October 31, 1995, at net asset value, was ____% and ___%,
respectively. For the one period ended October 31, 1995, average annual total
return was ___%.
OTHER PERFORMANCE COMPARISONS. From time to time the Fund may publish
the ranking of the performance of its shares by Lipper Analytical Services, Inc.
("Lipper"), a widely-recognized independent mutual fund monitoring service.
Lipper monitors the performance of regulated investment companies, including the
Fund, and ranks the performance of the Fund against (i) all other funds,
excluding money market funds, and (ii) all other government bond funds. The
Lipper performance rankings are based on total return that includes the
reinvestment of capital gains distributions and income dividends but does not
take sales charges or taxes into consideration.
From time to time the Fund may publish the ranking of the performance
of its shares by Morningstar, Inc., an independent mutual fund monitoring
service that ranks mutual funds, including the Fund, in broad investment
categories (equity, taxable bond, tax-exempt and other) monthly, based upon
each fund's three, five and ten-year average annual total returns (when
available) and a risk adjustment factor that reflects Fund performance relative
to three-month U.S. Treasury bill monthly returns. Such returns are adjusted
for fees and sales loads. There are five ranking categories with a
corresponding number of stars: highest (5), above average (4), neutral (3),
below average (2) and lowest (1). Ten percent of the funds, series or classes
in an investment category receive 5 stars, 22.5% receive 4 stars, 35% receive 3
stars, 22.5% receive 2 stars, and the bottom 10% receive one star. Morningstar
ranks the shares of the Fund in relation to other taxable bond funds.
The total return on an investment made in shares of the Fund may be
compared with the performance for the same period of one or more of the
following indices: the Consumer Price Index, the Salomon Brothers World
Government Bond Index, the Standard & Poor's 500 Index, the Shearson Lehman
Government/Corporate Bond Index, the Lehman Aggregate Bond Index, and the J.P.
Morgan Government Bond Index. Other indices may be used from time to time.
The Consumer Price Index is generally considered to be a measure of inflation.
The Salomon Brothers World Government Bond Index generally represents the
performance of government debt securities of various markets throughout the
world, including the United States. The Lehman Government/Corporate Bond Index
generally represents the performance of intermediate and long-term government
and investment grade corporate debt securities. The Lehman Aggregate Bond
Index measures the performance of U.S. corporate bond issues, U.S. government
securities and mortgaged-backed securities. The J.P. Morgan Government Bond
Index generally represents the performance of government bonds issued by
various countries including the United States. The S&P 500 Index is a
composite index of 500 common stocks generally regarded as an index of U.S.
stock market performance. The foregoing bond indices are unmanaged indices of
securities that do not reflect reinvestment of capital gains or take investment
costs into consideration, as these items are not application to indices.
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<PAGE> 241
From time to time, the yields and the total returns of the Fund may be
quoted in and compared to other mutual funds with similar investment objective
in advertisements, shareholder reports or other communications to shareholders.
The Fund may also include calculations in such communications that describe
hypothetical investment results. (Such performance examples will be based on
an express set of assumptions and are not indicative of the performance of any
Fund.) Such calculations may from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on the Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of the Fund would increase the value, not only
of the original Fund investment, but also of the additional Fund shares
received through reinvestment. As a result, the value of the Fund investment
would increase more quickly than if dividends or other distributions had been
paid in cash. The Fund may also include discussions or illustrations of the
potential investment goals of a prospective investor (including but not limited
to tax and/or retirement planning), investment management techniques, policies
or investment suitability of the Fund, economic conditions, legislative
developments (including pending legislation), the effects of inflation and
historical performance of various asset classes, including but not limited to
stocks, bonds and Treasury bills. From time to time advertisements or
communications to shareholders may summarize the substance of information
contained in shareholder reports (including the investment composition of the
Fund, as well as the views of the investment adviser as to current market,
economic, trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to the Fund. The Fund may also include in advertisements, charts,
graphs or drawings which illustrate the potential risks and rewards of
investment in various investment vehicles, including but not limited to stock,
bonds, Treasury bills and shares of the Fund as well as charts or graphs which
illustrate strategies such as dollar cost averaging, and comparisons of
hypothetical yields of investment in tax-exempt versus taxable investments. In
addition, advertisements or shareholder communications may include a discussion
of certain attributes or benefits to be derived by an investment in the Fund.
Such advertisements or communications may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
therein. With proper authorization, the Fund may reprint articles (or
excerpts) written regarding the Fund and provide them to prospective
shareholders. Performance information with respect to the Fund is generally
available by calling 1-800-539-3863.
Investors may also judge, and the Fund may at times advertise,
performance by comparing it to the performance of other mutual funds or mutual
fund portfolios with comparable investment objectives and policies, which
performance may be contained in various unmanaged mutual fund or market indices
or rankings such as those prepared by Dow Jones & Co., Inc., Standard & Poor's
Corporation, Lehman Brothers, Merrill Lynch, and Salomon Brothers, and in
publications issued by Lipper Analytical Services, Inc. and in the following
publications: IBC/Donoghue's Money Fund Reports, Ibottson Associates, Inc.,
Morningstar, CDA/Wiesenberger, Money Magazine, Forbes, Barron's, The Wall
Street Journal, The New York Times, Business Week, American Banker, Fortune,
Institutional Investor, U.S.A. Today. In addition to yield information,
general information about the Fund that appears in a publication such as those
mentioned above may also be quoted or reproduced in advertisements or in
reports to shareholders.
Advertisements and sales literature may include discussions of
specifics of the portfolio manager's investment strategy and process,
including, but not limited to, descriptions of security selection and analysis.
Advertisements may also include descriptive information about the
investment adviser, including, but not limited to, its status within the
industry, other services and products it makes available, total assets under
management, its investment philosophy.
When comparing yield, total return and investment risk of an
investment in the Fund with other investments, investors should understand that
certain other investments have different risk characteristics than an
investment in shares of the Fund. For example, certificates of deposit may
have fixed rates of return and may be insured as to principal and interest by
the FDIC, while the Fund's returns will fluctuate and its share values and
returns are not guaranteed. Money market accounts offered by banks also may be
insured by the FDIC and may
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<PAGE> 242
offer stability of principal. U.S. Treasury securities are guaranteed as to
principal and interest by the full faith and credit of the U.S. government.
Money market mutual funds may seek to offer a fixed price per share.
ADDITIONAL PURCHASE, EXCHANGE AND REDEMPTION INFORMATION
The Victory Portfolios (see "Description of Victory Portfolios" below)
is open for business and the NAV is calculated on each Business Day. A
Business Day is every day on which the NYSE is open for business, the Federal
Reserve Bank of Cleveland is open and any other day (other than a day on which
no shares of the Fund are tendered for redemption and no order to purchase any
shares is received) during which there is sufficient trading in portfolio
instruments that the Fund's net asset value per share might be materially
affected. The NAV of each class is determined and its shares are priced as of
the close of regular trading of the NYSE (generally 4:00 p.m. Eastern time (the
"Valuation Time")) on each Business Day of the Fund. The NYSE or the Federal
Reserve Bank of Cleveland will not be open in observance of the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day,
Thanksgiving Day, and Christmas Day. The holiday closing schedule is subject
to change.
When the NYSE is closed, or when trading is restricted for any reason
other than its customary weekend or holiday closings, or under emergency
circumstances as determined by the Commission to warrant such action, the
Fund's Transfer Agent will determine the Fund's NAVs at Valuation Time. The
Fund's NAV may be affected to the extent that its securities are traded on days
that are not Business Days.
[If, in the opinion of the Trustees, conditions exist which make cash
payment undesirable, redemption payments may be made in whole or in part in
securities or other property, valued for this purpose as they are valued in
computing the NAV of each class of the Fund. Shareholders receiving securities
or other property on redemption may realize a gain or loss for tax purposes and
will incur any costs of sale as well as the associated inconveniences.]
Pursuant to Rule 11a-3 under the 1940 Act, the Fund is required to
give shareholders at least 60 days' notice prior to terminating or modifying
the Fund's exchange privilege. Under the Rule, the 60-day notification
requirement may be waived if (i) the only effect of a modification would be to
reduce or eliminate an administrative fee, redemption fee or deferred sales
charge ordinarily payable at the time of exchange or (ii) the Fund temporarily
suspends the offering of shares as permitted under the 1940 Act or by the SEC
or because it is unable to invest amounts effectively in accordance with its
investment objective and policies.
In the Prospectus, the Victory Portfolios, Key Advisers and the
Sub-Adviser have notified shareholders that they reserve the right at any time
without prior notice to shareholders to refuse exchange purchases by any person
or group if, in Key Advisers or the Sub-Adviser's judgment, the Fund would be
unable to invest effectively in accordance with its investment objective and
policies, or would otherwise potentially be adversely affected.
ADDITIONAL PURCHASE INFORMATION
REDUCED SALES CHARGE. Reduced sales charges are applicable to
purchases of $50,000 or more alone or in combination with purchases of shares
of other Victory Portfolios made at any one time. To obtain the reduction of
the sales charge, you or your investment professional must notify the Transfer
Agent at the time of purchase whenever a quantity discount is applicable to
your purchase. Upon such notification, you will receive the lowest applicable
sales charge.
In addition to investing at one time in any combination of shares of
the Victory Portfolios in an amount entitling you to a reduced sales charge,
you may qualify for a reduction in the sales charge under the following
programs:
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<PAGE> 243
COMBINED PURCHASES. When you invest in shares of the Victory
Portfolios for several accounts at the same time, you may combine these
investments into a single transaction if purchased through one investment
professional, and if the total is $50,000 or more. The following may qualify
for this privilege: an individual, or "company" as defined in Section 2(a)(8)
of the 1940 Act; an individual, spouse, and their children under age 21
purchasing for his, her, or their own account; a trustee, administrator or
other fiduciary purchasing for a single trust estate or single fiduciary
account or for a single or a parent-subsidiary group of "employee benefit
plans" (as defined in Section 3(3) of ERISA); and tax-exempt organizations
under Section 501(c)(3) of the Internal Revenue Code.
RIGHTS OF ACCUMULATION. Your "Rights of Accumulation" permit reduced
sales charges on future purchases of shares after you have reached a new
breakpoint. You can add the value of existing Victory Portfolios shares held
by you, your spouse, and your children under age 21, determined at the previous
day's NAV at the close of business, to the amount of your new purchase valued
at the current offering price to determine your reduced sales charge.
LETTER OF INTENT. If you anticipate purchasing $50,000 or more of
shares of the Fund alone or in combination with shares of certain other Victory
Portfolios within a 13-month period, you may obtain shares of the portfolios at
the same reduced sales charge as though the total quantity were invested in one
lump sum, by filing a non-binding Letter of Intent (the "Letter") within 90 days
of the start of the purchases. Each investment you make after signing the
Letter will be entitled to the sales charge applicable to the total investment
indicated in the Letter. For example, a $2,500 purchase toward a $60,000 Letter
would receive the same reduced sales charge as if the $60,000 had been invested
at one time. To ensure that the reduced price will be received on future
purchases, you or your investment professional must inform the transfer agent
that the Letter is in effect each time shares are purchased. Neither income
dividends nor capital gain distributions taken in additional shares will apply
toward the completion of the Letter.
Your initial investment must be at least 5% of the total amount you
plan to invest. Out of the initial purchase, 5% of the dollar amount specified
in the Letter will be registered in your name and held in escrow. The shares
held in escrow cannot be redeemed or exchanged until the Letter is satisfied or
the additional sales charges have been paid. You will earn income dividends
and capital gain distributions on escrowed shares. The escrow will be released
when your purchase of the total amount has been completed. You are not
obligated to complete the Letter.
If you purchase more than the amount specified in the Letter and
qualify for a further sales charge reduction, the sales charge will be adjusted
to reflect your total purchase at the end of 13 months. Surplus funds will be
applied to the purchase of additional shares at the then current offering price
applicable to the total purchase.
If you do not complete your purchase under the Letter within the
13-month period, your sales charge will be adjusted upward, corresponding to
the amount actually purchased, and if after written notice, you do not pay the
increased sales charge, sufficient escrowed shares will be redeemed to pay such
charge.
ADDITIONAL EXCHANGE INFORMATION
Shares of the Victory Portfolios (see "Description of Victory
Portfolios" below) may be exchanged for shares of any Victory money market fund
or any other fund of the Victory Portfolios with the same or a lower sales
charge. Shares of any Victory money market portfolio or any Victory Portfolios
with a reduced sales charge may be exchanged for shares of the Fund upon
payment of the difference in the sales charge.
ADDITIONAL REDEMPTION INFORMATION
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<PAGE> 244
REINSTATEMENT PRIVILEGE. Within 90 days of a redemption, a
shareholder may reinvest all or part of the redemption proceeds of shares of
the Fund or any of the other Victory Portfolios into which shares of the Fund
are exchangeable as described below, at the net asset value next computed after
receipt by the Transfer Agent of the reinvestment order. No charge is
currently made for reinvestment in shares of the Fund but a reinvestment in
shares of certain other Victory Portfolios is subject to a $5.00 service fee.
The shareholder must ask the Distributor for such privilege at the time of
reinvestment. Any capital gain that was realized when the shares were redeemed
is taxable, and reinvestment will not alter any capital gains tax payable on
that gain. If there has been a capital loss on the redemption, some or all of
the loss may not be tax deductible, depending on the timing and amount of the
reinvestment. Under the Internal Revenue Code, if the redemption proceeds of
Fund shares on which a sales charge was paid are reinvested in shares of the
Fund or another of the Victory Portfolios within 90 days of payment of the
sales charge, the shareholder's basis in the shares of the Fund that were
redeemed may not include the amount of the sales charge paid. That would
reduce the loss or increase the gain recognized from redemption. The Fund may
amend, suspend or cease offering this reinvestment privilege at any time as to
shares redeemed after the date of such amendment, suspension or cessation. You
must reinstate your shares into an account with the same registration. This
privilege may be exercised only once by a shareholder with respect to the Fund.
For information on which funds are available for the Reinstatement Privilege,
please consult your program materials.
DIVIDENDS AND DISTRIBUTIONS
The Fund ordinarily declares and pays dividends from its net
investment income quarterly. The Fund distributes substantially all of its net
investment income and net capital gains, if any, to shareholders within each
calendar year as well as on a fiscal year basis to the extent required for the
Fund to qualify for favorable federal tax treatment.
The amount of distributions may vary from time to time depending on
market conditions and the composition of the Fund's portfolio.
For this purpose, the net income of the Fund, from the time of the
immediately preceding determination thereof, shall consist of all interest
income accrued on the portfolio assets of the Fund, dividend income, if any,
income from securities loans, if any, and realized capital gains and losses on
the Fund assets, less all expenses and liabilities of the Fund chargeable
against income. Interest income shall include discount earned, including both
original issue and market discount, on discount paper accrued ratably to the
date of maturity. Expenses, including the compensation payable to Key Advisers
or the Sub-Adviser, are accrued each day. The expenses and liabilities of the
Fund shall include those appropriately allocable to the Fund as well as a share
of the general expenses and liabilities of the Victory Portfolios in proportion
to the Fund's share of the total net assets of the Victory Portfolios.
Additional Tax Information
It is the policy of the Fund to qualify for the favorable tax
treatment accorded regulated investment companies ("RICs") under Subchapter M
of the Code, for so long as such qualification is in the best interest of its
shareholders. By following such policy and distributing its income and gains
currently with respect to each taxable year, the Fund expects to eliminate or
reduce to a nominal amount the federal income and excise taxes to which it may
otherwise be subject.
In order to qualify as a RIC, the Fund must, among other things, (1)
derive at least 90% of its gross income from dividends, interest, payments with
respect to securities loans, and gains from the sale or other disposition of
stock or securities, foreign currencies or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in stock, securities or currencies, (2) derive less than 30% of its
gross income from the sale or other disposition of stock, securities, options,
futures, forward contracts, and certain foreign currencies (or options,
futures, or forward contracts on foreign currencies) held for less than three
months, and (3) diversify its holdings so that at the end of each quarter of
its taxable year (i) at least
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<PAGE> 245
50% of the market value of the Fund's assets is represented by cash or cash
items, U.S. Government securities, securities of other RICs and other
securities limited, in respect of any one issuer, to an amount not greater than
5% of the value of the Fund's total assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
assets is invested in the securities of any one issuer (other than U.S.
Government securities) or of two or more issuers that the Fund controls and
that are engaged in the same, similar, or related trades or businesses. These
requirements may restrict the degree to which the Fund may engage in short-term
trading and concentrate investments. If the Fund qualifies as a RIC, it will
not be subject to federal income tax on the part of its net investment income
and net realized capital gains, if any, that it distributes to shareholders
with respect to each taxable year within the time limits specified in the Code.
A non-deductible excise tax is imposed on regulated investment
companies that do not distribute in each calendar year an amount equal to 98%
of their ordinary income for the year plus 98% of their capital gain net income
for the 1-year period ending on October 31 of such calendar year. The balance
of such income must be distributed during the following calendar year. If
distributions during a calendar year are less than the required amount, the
fund is subject to a non-deductible excise tax equal to 4% of the deficiency.
Certain investment and hedging activities of the Fund, including
transactions in options, futures contracts, hedging transactions, forward
contracts, straddles, foreign currencies, and foreign securities, are subject
to special tax rules. In a given case, these rules may accelerate income to the
Fund, defer losses to the Fund, cause adjustments in the holding periods of the
Fund's securities, convert short-term capital losses into long-term capital
losses, or otherwise affect the character of the Fund's income. These rules
could therefore affect the amount, timing and character of distributions to
shareholders. The Fund will endeavor to make any available elections
pertaining to such transactions in a manner believed to be in the best interest
of the Fund and its securities.
The Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends paid to any shareholder who has
failed to provide (or provided an incorrect) tax identification number, or is
subject to withholding pursuant to a notice from the Internal Revenue Service
for failure to properly include on his or her income tax return payments of
interest or dividends. This "backup withholding" is not an additional tax, and
any amounts withheld may be credited against the shareholder's ultimate U.S.
tax liability.
Information set forth in the Prospectus and this Statement of
Additional Information that relates to federal taxation is only a summary of
certain key federal tax considerations generally affecting purchasers of shares
of the Fund. No attempt has been made to present a complete explanation of the
federal tax treatment of a fund or its shareholders, and this discussion is not
intended as a substitute for careful tax planning. Accordingly, potential
purchasers of shares of the Fund are urged to consult their tax advisers with
specific reference to their own tax circumstances. In addition, the tax
discussion in the Prospectus and this Statement of Additional Information is
based on tax law in effect on the date of the Prospectus and this Statement of
Additional Information; such laws and regulations may be changed by
legislative, judicial or administrative action, sometimes with retroactive
effect.
MANAGEMENT OF THE VICTORY PORTFOLIOS
Board of Trustees
Overall responsibility for management of the Victory Portfolios rests
with the Trustees, who are elected by the shareholders of the Victory
Portfolios. The Victory Portfolios are managed by the Trustees in accordance
with the laws of the State of Delaware governing business trusts. There are
currently seven Trustees, six of whom are not "interested persons" of the
Victory Portfolios within the meaning of that term under the 1940 Act. The
Trustees, in turn, elect the officers of the Victory Portfolios to supervise
actively its day-to-day operations.
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<PAGE> 246
The Trustees of the Victory Portfolios, their addresses, ages and
their principal occupations during the past five years are as follows:
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- --------------------- ---------------- --------------------
<S> <C> <C>
Leigh A. Wilson, 51* Trustee and President From 1989 to present, Chairman and
Glenleigh International Ltd. Chief Executive Officer, Glenleigh
53 Sylvan Road North International Limited; from 1984-
Westport, CT 06880 1989, Chief Executive Officer,
Paribas North America and Paribas
Corporations; Trustee, The Victory
Funds and Spears, Benzak, Salomon
and Farrell ("SBSF") Funds.
Robert G. Brown, 72 Trustee Retired; from October 1983 to
5460 N. Ocean Drive November 1990, President,
Singer Island, Riviera Beach Cleveland Advanced Manufacturing
FL 33404 Program (non-profit corporation
engaged in regional economic
development); Trustee, The Victory
Funds.
Edward P. Campbell, 46 Trustee From March, 1994 to present,
Nordson Corporation Executive Vice President and Chief
28601 Clemens Road Operating Officer of Nordson
Westlake, OH 44145 Corporation (manufacturer of
application equipment); from May,
1988 March 1994, Vice President of
Nordson Corporation; from 1987 to
December 1994, member of the
Supervisory Committee of Society's
Collective Investment Retirement
Fund; from May 1991 to August
1994, Trustee, Financial Reserves
Fund and from May 1993 to August
1994, Trustee, Ohio Municipal
Money Market Fund; Trustee, The
Victory Funds and SBSF Funds.
Dr. Harry Gazelle, 68 Trustee Retired radiologist, Drs. Hill and
17822 Lake Road Thomas Corp.; Trustee, The Victory
Lakewood, Ohio 44107 Funds.
</TABLE>
- ------------
* Mr. Wilson is deemed to be an "interested person" of the Victory Portfolios
under the 1940 Act solely by reason of his position as President.
-22-
<PAGE> 247
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Funds During Past 5 Years
- --------------------- ---------------- --------------------
<S> <C> <C>
Stanley I. Landgraf, 70 Trustee Retired; currently, Trustee,
41 Traditional Lane Rensselaer Polytechnic Institute;
Albany, NY 12211 Director, Elenel Corporation,
Albany International Corporation
and Mechanical Technology, Inc.;
Member, Board of Overseers, School
of Management, Rensselaer
Polytechnic Institute; Member, The
Fifty Group (a Capital Region
business organization); Trustee,
The Victory Funds.
Dr. Thomas F. Morrissey, 62 Trustee 1995 Visiting Scholar, Bond
Weatherhead School of University, Queensland, Australia;
Management Professor, Weatherhead School of
Case Western Reserve Management, Case Western Reserve
University University; from 1989 to 1995,
10900 Euclid Avenue Associate Dean of Weatherhead
Cleveland, OH 44106-7235 School of Management; from 1987 to
December 1994, Member of the
Supervisory Committee of Society's
Collective Investment Retirement
Fund; from May 1991 to August
1994, Trustee, Financial Reserves
Fund and from May 1993 to August
1994, Trustee, Ohio Municipal
Money Market Fund; Trustee, The
Victory Funds.
H. Patrick Swygert, 52 Trustee Currently President, Howard
Howard University University; Trustee, The Victory
2400 6th Street, N.W. Funds; formerly President, State
Suite 320 University of New York at Albany;
Washington, D.C. 20059 formerly, Executive Vice
President, Temple University.
</TABLE>
The Board presently has an Investment Policy Committee and a Business,
Legal, and Audit Committee. The members of the Investment Policy Committee are
Landgraf (Chairman), Morrissey and Brown, who will serve until May 1996. The
function of the Investment Policy Committee is to review the existing
investment policies of the Victory Portfolios, including the levels of risk and
types of funds available to shareholders, and make recommendations to the Board
of Trustees regarding the revision of such policies or, if necessary, the
submission of such revisions to the Victory Portfolios' shareholders for their
consideration. The members of the Business, Legal and Audit Committee are
Messrs. Swygert (Chairman), Campbell and Gazelle who will serve until May 1996.
The function of the Business, Legal and Audit Committee is to recommend
independent auditors and monitor accounting and financial matters; to nominate
persons to serve as disinterested Trustees and Trustees to serve on committees
of the Board; and to review compliance and contract matters.
-23-
<PAGE> 248
The Investment Policy Committee met four times during the current
fiscal year ended October 31, 1995. The Business, Legal and Audit Committee
was constituted on May 24, 1995 (and has met twice since then) and replaced the
Audit Committee, the Legal Committee and the Nominating Committee, which met
three times, one time and one time, respectively, during the fiscal year ended
October 31, 1995.
REMUNERATION OF TRUSTEES AND CERTAIN EXECUTIVE OFFICERS
Effective June 1, 1995, each Trustee (other than Leigh A. Wilson)
receives an annual fee of $27,000 for serving as Trustee of all the funds of
the Victory Portfolios, and an additional per meeting fee ($2,400 in person and
$1,200 per telephonic meeting).
Effective June 1, 1995, Leigh A. Wilson receives an annual fee of
$33,000 for serving as President and Trustee for all of the funds of the
Victory Portfolios, and an additional per meeting fee ($3,000 in person and
$1,500 per telephonic meeting).
The following tables indicate the compensation received by each
Trustee from the Fund and from the Victory "Fund Complex"* for the 12 month
period ending on October 31, 1995:
<TABLE>
<CAPTION>
Pension or Estimated
Retirement Annual
Benefits Accrued Benefits Total Total Compensation
as Upon Compensation from Victory
Portfolio Expenses Retirement from Fund "Fund Complex"*
------------------ ---------- ---------- ---------------
<S> <C> <C> <C> <C>
Robert G. Brown, -0- -0- $980.48 $39,815.98
John D. Buckingham #, -0- -0- 458.81 18,841.89
Edward P. Campbell, -0- -0- 841.67 33,799.68
Harry Gazelle, -0- -0- 809.59 35,916.98
John W. Kemper #, -0- -0- 458.91 22,567.31
Stanley I. Landgraf, -0- -0- 841.67 34,615.98
Thomas F. Morrissey, -0- -0- 841.67 40,366.98
H. Patrick Swygert, -0- -0- 841.67 37,116.98
Leigh A. Wilson, -0- -0- 920.59 46,716.97
John R. Young, -0- -0- 488.98 21,963.81
Trustee # . . . . . . .
</TABLE>
# Resigned
- ---------------
* For certain Trustees, these amounts include compensation received from
The Victory Funds (which were reorganized into the Victory Portfolios
as of June 5, 1995), the SBSF Funds (the investment adviser of which
was acquired by KeyCorp effective April, 1995) and Society's Collective
Investment Retirement Funds, which were reorganized into the Victory
Balanced Fund and Victory Government Mortgage Fund as of December 19,
1994. There are presently 28 mutual funds from which the above-named
Trustees are compensated in the Victory "Fund Complex," but not all of
the above-named Trustees serve on the boards of each fund in the "Fund
Complex."
-24-
<PAGE> 249
Officers
The officers of the Victory Portfolios, their addresses, ages and principal
occupations during the past five years are as follows:
<TABLE>
<CAPTION>
Position with the Principal occupation
Name Victory Portfolios during past 5 years
---- ------------------ -------------------
<S> <C> <C>
Leigh A. Wilson, 51 President and Trustee From 1989 to present, Chairman and
Glenleigh International Ltd. Chief Executive Officer, Glenleigh
53 Sylvan Road North International Limited; from 1984-
Westport, CT 06880 1989, Chief Executive Officer,
Paribas North America and Paribas
Corporation; Trustee to The Victory
Funds and SBSF Funds.
William B. Blundin, 57 Vice President Senior Vice President of BISYS Fund
BISYS Fund Services Services; officer of other
125 West 55th Street investment companies administered
New York, New York 10019 by BISYS Fund Services; President
and Chief Executive Officer of
Vista Broker-Dealer Services, Inc.,
Emerald Asset Management, Inc. and
BNY Hamilton Distributors, Inc.,
registered broker/dealers.
J. David Huber, 49 Vice President Executive Vice President, BISYS
BISYS Fund Services Fund Services.
3435 Stelzer Road
Columbus, OH 43219-3035
Scott A. Englehart, 33 Secretary From October 1990 to present,
BISYS Fund Services employee of BISYS Fund Services,
3435 Stelzer Road Inc.; from 1985 to October 1990,
Columbus, OH 43219-3035 Manager of Banking Center, Fifth
Third Bank.
George O. Martinez, 36 Assistant Secretary From March 1995 to present, Senior
BISYS Fund Services Vice President and Director of
3435 Stelzer Road Legal and Compliance Services,
Columbus, OH 43219-3035 BISYS Fund Services; from June
1989-March 1995, Vice President and
Associate General Counsel, Alliance
Capital Management.
Martin R. Dean, 32 Treasurer From May 1994 to present, employee
BISYS Fund Services of BISYS Fund Services; from
3435 Stelzer Road January 1987 - April 1994, Senior
Columbus, OH 43219-3035 Manager, KPMG Peat Marwick.
</TABLE>
-25-
<PAGE> 250
<TABLE>
<S> <C> <C>
Adrian J. Waters, 33 Assistant Treasurer From May 1993 to present, employee
BISYS Fund Services (Ireland) of BISYS Fund Services; from 1989-
Limited May 1993, Manager, Price Waterhouse.
ITI House
12 Earlsfort Terrace
Dublin 2, Ireland
</TABLE>
The mailing address of each of the officers of the Victory Portfolios is 3435
Stelzer Road, Columbus, Ohio 43219-3035.
The officers of the Victory Portfolios (other than Leigh Wilson) receive no
compensation directly from the Victory Portfolios for performing the duties of
their offices. BISYS Fund Services, Inc. receives fees from the Victory
Portfolios for acting as Administrator.
As of January 6, 1996, the Trustees and officers as a group owned beneficially
less than 1% of the Fund.
Investment Adviser and Sub-Adviser
Key Advisers was organized as an Ohio corporation on July 27, 1995 and
is registered as an investment adviser under the Investment Advisers Act of
1940. It is a wholly-owned subsidiary of KeyCorp Asset Management Holdings,
Inc., which is a wholly- owned subsidiary of Society National Bank, a
wholly-owned subsidiary of KeyCorp. Affiliates of Key Advisers manage
approximately $37 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals and mutual funds.
KeyCorp, a financial services holding company, is headquartered at 127
Public Square, Cleveland, Ohio 44114. As of September 30, 1995, KeyCorp had an
asset base of $68 billion, with banking offices in 26 states from Maine to
Alaska, and trust and investment offices in 16 states. KeyCorp is the
resulting entity of the merger in 1994 of Society Corporation, the bank holding
company of which Society National Bank was a wholly-owned subsidiary, and
KeyCorp, the former bank holding company. KeyCorp's major business activities
include providing traditional banking and associated financial services to
consumer, business and commercial markets. Its non-bank subsidiaries include
investment advisory, securities brokerage, insurance, bank credit card
processing, and mortgage leasing companies. Society National Bank is the lead
affiliate bank of KeyCorp.
The following table lists the advisory fees for each mutual fund that
is advised by Key Advisers:
.25 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Institutional Money Market Fund *
.35 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Prime Obligations Fund *
Victory U.S. Government Obligations Fund *
Victory Tax-Free Money Market Fund *
.50 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Money Market Fund *
Victory Limited Term Income Fund *
Victory Government Mortgage Fund *
Victory Financial Reserves Fund *
Victory Fund for Income #
-26-
<PAGE> 251
.55 OF 1% OF AVERAGE DAILY NET ASSETS
Victory National Municipal Bond Fund *
Victory Government Bond Fund *
Victory New York Tax-Free Fund *
.60 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Bond Fund *
Victory Stock Index Fund *
.65 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Diversified Stock Fund *
.75 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Intermediate Income Fund *
Victory Investment Quality Bond Fund *
Victory Ohio Regional Stock Fund *
1% OF AVERAGE DAILY NET ASSETS
Victory Balanced Fund *
Victory Value Fund *
Victory Growth Fund *
Victory Special Value Fund *
Victory Special Growth Fund+
1.10% OF AVERAGE DAILY ASSETS
Victory International Growth Fund *
- ---------------
# First Albany Asset Management Corporation serves as
sub-adviser to the Victory Fund for Income, for which it
receives .20% of average daily net assets.
+ T. Rowe Price Associates, Inc. serves as sub-adviser to the
Victory Special Growth Fund, for which it receives .25% of
average daily net assets up to $100 million and .20% of
average daily net assets in excess of $100.
* Society Asset Management, Inc. (the Sub-Adviser) serves as
sub-adviser to each of these funds. For its services under the
investment sub-advisory agreement, Key Advisers pays the
Sub-Adviser sub-advisory fees at rates (based on an annual
percentage of average daily net assets) which vary according to
the table set forth below:
For the Victory Balanced Fund, Diversified Stock Fund, Growth Fund, Stock Index
Fund and Value Fund:
<TABLE>
<CAPTION>
Rate of
Net Assets Sub-Advisory Fee*
---------- -----------------
<S> <C>
Up to $10,000,000 0.65%
Next $15,000,000 0.50%
Next $25,000,000 0.40%
Above $50,000,000 0.35%
</TABLE>
For the Victory International Growth Fund, Ohio Regional Stock Fund and Special
Value Fund:
<TABLE>
<CAPTION>
Rate of
Net Assets Sub-Advisory Fee*
---------- -----------------
<S> <C>
Up to $10,000,000 0.90%
Next $15,000,000 0.70%
Next $25,000,000 0.55%
Above $50,000,000 0.45%
</TABLE>
-27-
<PAGE> 252
For the Victory Intermediate Income Fund, Investment Quality Bond Fund, Limited
Term Income Fund, Ohio Municipal Bond Fund, Government Bond Fund, Government
Mortgage Fund, National Municipal Bond Fund and New York Tax-Free Fund:
<TABLE>
<CAPTION>
Rate of
Net Assets Sub-Advisory Fee*
---------- -----------------
<S> <C>
Up to $10,000,000 0.40%
Next $15,000,000 0.30%
Next $25,000,000 0.25%
Above $50,000,000 0.20%
</TABLE>
For the Victory Prime Obligations Fund, Tax-Free Money Market Fund, U.S.
Government Obligations Fund, Financial Reserves Fund, Institutional Money
Market Fund and Ohio Municipal Money Market Fund:
<TABLE>
<CAPTION>
Rate of
Net Assets Sub-Advisory Fee*
---------- -----------------
<S> <C>
Up to $10,000,000 0.25%
Next $15,000,000 0.20%
Next $25,000,000 0.15%
Above $50,000,000 0.125%
</TABLE>
- ---------------
* As a percentage of average daily net assets. The Sub-Adviser has the
right to voluntarily waive any portion of the sub- advisory fee from
time to time.
ADVISORY AND OTHER CONTRACTS
Unless sooner terminated, the Investment Advisory Agreement between
Key Advisers and the Funds provides that it will continue in effect as to the
Fund for an initial two-year term and for consecutive one-year terms
thereafter, provided that such continuance is approved at least annually by the
Victory Portfolios' Trustees or by vote of a majority of the outstanding shares
of such Fund (as defined under "GENERAL INFORMATION - Miscellaneous" in the
Prospectuses), and, in either case, by a majority of the Trustees who are not
parties to the Investment Advisory Agreement or interested persons (as defined
in the 1940 Act) of any party to the Investment Advisory Agreement, by votes
cast in person at a meeting called for such purpose.
The Investment Advisory Agreement is terminable as to the Fund at any
time on 60 days' written notice without penalty by the Trustees, by vote of a
majority of the outstanding shares of the Fund, or by Key Advisers. The
Investment Advisory Agreement also terminates automatically in the event of any
assignment, as defined under the 1940 Act.
The Investment Advisory Agreement provides that Key Advisers shall not
be liable for any error of judgment or mistake of law or for any loss suffered
by the Fund in connection with the performance of services pursuant to the
Investment Advisory Agreement, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith, or gross negligence on the
part of Key Advisers in the performance of its duties, or from reckless
disregard by it of either duties and obligations thereunder.
Under the Investment Advisory Agreement, Key Advisers has agreed to
provide the investment advisory services described in the Prospectus. For the
services provided and expenses assumed pursuant to the Investment Advisory
Agreement, the Fund pays Key Advisers a fee, computed daily and paid monthly,
at the annual rate of seventy five one-hundredths of one percent (.75%) of the
average daily net assets of the Fund.
-28-
<PAGE> 253
From December 10, 1993 (commencement of operations) to December 31,
1995, Society served as investment adviser to the Fund. For the period ended
October 31, 1994 and for the fiscal year ended October 31, 1995, the Fund paid
investment advisory fees of $469,249 and $_______, respectively, after fee
reductions of $247,239 and $_______, respectively
Under the Investment Advisory Agreement, Key Advisers may delegate a
portion of its responsibilities to a sub-adviser. In addition, the Investment
Advisory Agreement provides that Key Advisers may render services through its
own employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser of the Fund and are under the common
control of KeyCorp as long as all such persons are functioning as part of an
organized group of persons, managed by authorized officers of Key Advisers.
Key Advisers has entered into an investment sub-advisory agreement
(the "Sub-Advisory Agreement") with its affiliate, Society Asset Management,
Inc. on behalf of the Fund. The Sub-Adviser is a wholly-owned subsidiary of
KeyCorp Asset Management Holdings, Inc. With respect to the day to day
management of the Fund, under the Sub-Advisory Agreement, the Sub-Adviser makes
decisions concerning, and places all orders for, purchases and sales of
securities and helps maintain the records relating to such purchases and sales.
The Sub-Adviser may, in its discretion, provide such services through its own
employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser to the Company under applicable laws
and are under the common control of KeyCorp; provided that (i) all persons,
when providing services under the Sub-Advisory Agreement, are functioning as
part of an organized group of persons, and (ii) such organized group of persons
is managed at all times by authorized officers of the Sub-Adviser. This
arrangement will not result in the payment of additional fees by the Fund.
Glass-Steagall Act
In 1971 the United States Supreme Court held in Investment Company
Institute v. Camp that the federal statute commonly referred to as the
Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision: (a)
forbid a bank holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing, or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but (b) do not prohibit such
a holding company or affiliate from acting as investment adviser, transfer
agent, and custodian to such an investment company. In 1981 the United States
Supreme Court held in Board of Governors of the Federal Reserve System v.
Investment Company Institute that the Board did not exceed its authority under
the Holding Company Act when it adopted its regulation and interpretation
authorizing bank holding companies and their non-bank affiliates to act as
investment advisers to registered closed-end investment companies. In the Board
of Governors case, the Supreme Court also stated that if a national bank
complied with the restrictions imposed by the Board in its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to investment companies, a national bank
performing investment advisory services for an investment company would not
violate the Glass-Steagall Act.
Key Advisers and the Sub-Adviser believe that they may perform the
services for the Victory Portfolios contemplated by the Prospectus, this
Statement of Additional Information, and the Investment Advisory Agreement (and
Sub-Advisory Agreement) with the Victory Portfolios without violation of
applicable statutes and regulations and has so represented in its Investment
Advisory Agreement (and Sub-Advisory Agreement) with the Victory Portfolios.
Key Trust Company of Ohio, N.A. believes that it may perform the services for
the Victory Portfolios contemplated by the Prospectus, this Statement of
Additional Information, and the Shareholder Servicing Agreement with the
Victory Portfolios (as described below) without violation of applicable
statutes and regulations and has so represented in such Shareholder Servicing
Agreement. Future changes in either federal or state statutes and regulations
relating to the permissible activities of banks or bank holding companies and
the subsidiaries or affiliates
-29-
<PAGE> 254
of those entities, as well as further judicial or administrative decisions or
interpretations of present and future statutes and regulations, could prevent
or restrict Key Trust Company of Ohio, N.A., Key Advisers or the Sub-Adviser
from continuing to perform such services for the Victory Portfolios. Depending
upon the nature of any changes in the services which could be provided by Key
Trust Company of Ohio, N.A., Key Advisers or the Sub-Adviser the Trustees of
the Victory Portfolios would review the Victory Portfolios' relationship with
Key Trust Company of Ohio, N.A., Key Advisers or the Sub-Adviser and consider
taking all action necessary in the circumstances.
Should future legislative, judicial, or administrative action prohibit
or restrict the proposed activities of Key Trust Company of Ohio, N.A., Key
Advisers or the Sub-Adviser and its affiliated and correspondent banks and
other non-bank affiliates in connection with customer purchases of shares of
the Victory Portfolios, the banks and such non-bank affiliates might be
required to alter materially or discontinue the services offered by them to
customers. It is not anticipated, however, that any change in the Victory
Portfolios' method of operations would affect its net asset value per share or
result in financial losses to any customer.
From time to time, advertisements, supplemental sales literature and
information furnished to present or prospective shareholders of the Fund may
include descriptions of Key Trust Company of Ohio, N.A., Key Advisers and the
Sub-Adviser including, but not limited to, (i) descriptions of the operations
of Key Trust Company of Ohio, N.A., Key Advisers and the Sub-Adviser; (ii)
descriptions of certain personnel and their functions; and (iii) statistics and
rankings related to the operations of Key Trust Company of Ohio, N.A., Key
Advisers and the Sub-Adviser.
Portfolio Transactions
Pursuant to the Investment Advisory Agreement (and Sub-Advisory
Agreement), Key Advisers or the Sub-Adviser determines, subject to the general
supervision of the Trustees of the Victory Portfolios, and in accordance with
each Fund's investment objective and restrictions, which securities are to be
purchased and sold by the Fund, and which brokers are to be eligible to execute
its portfolio transactions. Purchases from underwriters and/or broker-dealers
of portfolio securities include a commission or concession paid by the issuer
to the underwriter and/or broker-dealer and purchases from dealers serving as
market makers may include the spread between the bid and asked price. While
Key Advisers and the Sub-Adviser generally seek competitive prices (inclusive
of any spread or commission), the Fund may not necessarily pay the prices
available on each transaction, for reasons discussed below.
Allocation of transaction to dealers is determined by Key Advisers or
the Sub-Adviser in their best judgment and in a manner deemed fair and
reasonable to shareholders. The primary consideration is prompt execution of
orders in an effective manner at the most favorable price. Subject to this
consideration, dealers who provide supplemental investment research to Key
Advisers or the Sub-Adviser may receive orders for transactions by the Victory
Portfolios. Information so received is in addition to and not in lieu of
services required to be performed by Key Advisers or the Sub-Adviser and does
not reduce the advisory fees payable to Key Advisers by the Victory Portfolios.
Such information may be useful to Key Advisers or the Sub-Adviser in serving
both the Victory Portfolios and other clients and, conversely, such
supplemental research information obtained by the placement of orders on behalf
of other clients may be useful to Key Advisers or the Sub-Adviser in carrying
out its obligations to the Victory Portfolios. In the future, the Trustees may
also authorize the allocation of brokerage to affiliated broker-dealers on an
agency basis to effect portfolio transactions. In such event, the Trustees
will adopt procedures incorporating the standards of Rule 17e-1 under the 1940
Act, which requires that the commission paid to affiliated broker-dealers must
be "reasonable and fair compared to the commission, fee or other remuneration
received, or to be received, by other brokers in connection with comparable
transactions involving similar securities during a comparable period of time."
At times, the Fund may also purchase portfolio securities directly from dealers
acting as principals, underwriters or market makers. As these transactions are
usually conducted on a net basis, no brokerage commissions are paid by the
Fund.
-30-
<PAGE> 255
The Victory Portfolios will not execute portfolio transactions
through, acquire portfolio securities issued by, make savings deposits in, or
enter into repurchase or reverse repurchase agreements with Key Advisers, the
Sub-Adviser, Key Trust Company of Ohio, N.A. or its affiliates, Concord Holding
Corporation, Victory Broker-Dealer Services, Inc. or their affiliates, and will
not give preference to Key Trust Company of Ohio, N.A.'s correspondent banks or
affiliates, or Concord Holding Corporation or Victory Broker-Dealer Services,
Inc. with respect to such transactions, securities, savings deposits,
repurchase agreements, and reverse repurchase agreements.
Investment decisions for the Fund are made independently from those
for the other funds or any other investment company or account managed by Key
Advisers (or Society). Any such other investment company or account may also
invest in the same securities as a particular fund. When a purchase or sale of
the same security is made at substantially the same time on behalf of the Fund
and another fund, investment company or account, the transaction will be
averaged as to price, and available investments allocated as to amount, in a
manner which Key Advisers (or Society) believes to be equitable to the Fund
and such other fund, investment company or account. In some instances, this
investment procedure may adversely affect the price paid or received by the
Fund or the size of the position obtained by the Fund. To the extent permitted
by law, Key Advisers (or Society) may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for the other funds
or for other investment companies or accounts in order to obtain best
execution. As provided by the Investment Advisory (and Sub-Advisory)
Agreement, in making investment recommendations for the Victory Portfolios, Key
Advisers (or Society) will not inquire or take into consideration whether an
issuer of securities proposed for purchase or sale by a Fund is a customer of
Society, its parents or subsidiaries or affiliates and, in dealing with their
commercial customers, Key Advisers (Society), its parents, subsidiaries, and
affiliates will not inquire or take into consideration whether securities of
such customers are held by the Victory Portfolios.
In the fiscal year ended October 31, 1995 and the fiscal period ended
October 31, 1994, the Fund paid $______ and $3,047, respectively, in brokerage
commissions.
Administrator
Currently, Concord Holding Corporation ("CHC") serves as general
manager and administrator (the "Administrator") to the Fund. The Administrator
assists in supervising all operations of each fund (other than those performed
by Key Advisers or the Sub- Adviser under the Investment Advisory Agreement and
Sub-Advisory Agreement. Prior to June, 1995, the Winsbury Company ("Winsbury")
served as the Fund's administrator.
CHC receives a fee from the Fund for its services as Administrator and
expenses assumed pursuant to the Administration Agreements the Fund, calculated
daily and paid monthly, at the annual rate of fifteen one hundredths of one
percent (.15%) of the Fund's average daily net assets. CHC may periodically
waive all or a portion of its fee with respect to the Fund in order to increase
the net income of the Fund available for distribution as dividends.
Unless sooner terminated, the Administration Agreement will continue
in effect as to the Fund for a period of two years, and for consecutive
one-year terms thereafter, provided that such continuance is ratified at least
annually by the Victory Portfolios' Board of Trustees or by vote of a majority
of the outstanding shares of the hat Fund, and in either case by a majority of
the Trustees who are not parties to the Administration Agreement or interested
persons (as defined in the 1940 Act) of any party to the Administration
Agreement, by votes cast in person at a meeting called for such purpose.
The Administration Agreement provides that CHC shall not be liable for
any error of judgment or mistake of law or any loss suffered by the Victory
Portfolios in connection with the matters to which the Administration Agreement
relates, except a loss resulting from willful misfeasance, bad faith, or gross
negligence in the performance of its duties, or from the reckless disregard by
it of its obligations and duties thereunder.
-31-
<PAGE> 256
Under the Administration Agreement, CHC assists in the Fund's
administration and operation, including providing statistical and research
data, clerical services, internal compliance and various other administrative
services, including among other responsibilities, forwarding certain purchase
and redemption requests to the Transfer Agent, participation in the updating of
the prospectus, coordinating the preparation, filing, printing and
dissemination of reports to shareholders, coordinating the preparation of
income tax returns, arranging for the maintenance of books and records and
providing the office facilities necessary to carry out the duties thereunder.
Under the Administration Agreement, CHC may delegate all or any part of its
responsibilities thereunder.
CHC receives an annual fee of .15% of the Fund's average net assets,
paid monthly, for services performed under the Fund's Administration Agreement.
CHC may, from time to time, agree to reimburse the Fund for expenses above a
specified percentage of average net assets.
Victory Broker-Dealer Services, Inc. sells shares of the Fund as agent
on behalf of the Victory Portfolios at no cost to the Fund. Key Advisers and
the Sub-Adviser neither participate in nor are they responsible for the
underwriting of Victory Portfolios shares.
In the fiscal year ended October 31, 1995 and the fiscal period ended
October 31, 1994, the Fund paid to CHC aggregate administration fees of $_____
and $134,787, respectively, after fee reductions of $______and $8,510,
respectively, before voluntary waiver of $______ and $0, respectively.
Business Management Agreement
In connection with its obligations under the investment sub-advisory
agreement, the Sub-Adviser has entered into a Business Management Agreement
with Key Advisers, pursuant to which Key Advisers provides certain
administrative and support services to the Sub-Adviser. Such services include
preparing reports to the Victory Portfolios' Board of Trustees, recordkeeping
services, and services rendered in connection with the preparation of
regulatory filings and other reports, and regulatory and other administrative
and compliance systems and support services.
For such services to the Fund, the Sub-Adviser pays fees to Key
Advisers which vary according to a sliding scale containing "breakpoints" at
which decreases in the business management fees correspond to increases in the
average daily net asset values of the Fund as follows:
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<TABLE>
<CAPTION>
Rate of Business
Net Assets of the Fund Management Fee*
- ---------------------- ----------------
<S> <C>
Up to $10,000,000 0.25%
Next $15,000,000 0.15%
Next $25,000,000 0.10%
Above $50,000,000 0.05%
</TABLE>
- --------------
* As a percentage of average daily net assets.
Shareholder Servicing Plan
The Victory Portfolios, on behalf of the Fund, has adopted a
Shareholder Servicing Plan to provide payments to shareholder servicing agents
(each a "Shareholder Servicing Agent") that provide administrative support
services to customers who may from time to time beneficially own shares, which
services include: (i) aggregating and processing purchase and redemption
requests for shares from customers and promptly transmitting net purchase and
redemption orders to our distributor or transfer agent; (ii) providing
customers with a service that invests the assets of their accounts in shares
pursuant to specific or pre-authorized instructions; (iii) processing dividend
and distribution payments on behalf of customers; (iv) providing information
periodically to customers showing their positions in shares; (v) arranging for
bank wires; (vi) responding to customer inquiries; (vii) providing
subaccounting with respect to shares beneficially owned by customers or
providing the information to the Victory Portfolios necessary for
subaccounting; (viii) if required by law, forwarding shareholder communications
from us (such as proxies, shareholder reports, annual and semi-annual financial
statements and dividend, distribution and tax notices) to customers; (ix)
forwarding to customers proxy statements and proxies containing any proposals
regarding this Plan; and (x) providing such other similar services as we may
reasonably request to the extent you are permitted to do so under applicable
statutes, rules or regulations. For expenses incurred and services provided
pursuant to the Shareholder Servicing Agreement, the Fund pays each Shareholder
Servicing Agent a fee computed daily and paid monthly, in amounts aggregating
not more than twenty-five one-hundredths of one percent (.25%) of the average
daily net assets of the Fund per year. A Shareholder Servicing Agent may
periodically waive all or a portion of its respective shareholder servicing
fees with respect to the Fund to increase the net income of the Fund available
for distribution as dividends.
Expenses
The Fund bears the following expenses relating to its operations:
taxes, interest, brokerage fees and commissions, fees of the Trustees of the
Victory Portfolios, Commission fees, state securities qualification fees, costs
of preparing and printing prospectuses for regulatory purposes and for
distribution to current shareholders, outside auditing and legal expenses,
advisory and administration fees, fees and out-of-pocket expenses of the
custodian and transfer agent, certain insurance premiums, costs of maintenance
of the Fund's existence, costs of shareholders' reports and meetings, and any
extraordinary expenses incurred in the Fund's operation.
If total expenses borne by the Fund in any fiscal year exceeds expense
limitations imposed by applicable state securities regulations, Key Advisers,
the Sub-Adviser or the Administrator will waive their fees to the extent such
excess expenses exceed such expense limitation in proportion to their
respective fees. As of the date of this Statement of Additional Information,
the most restrictive expense limitation applicable to the Fund limits its
aggregate annual expenses, including management and advisory fees but excluding
interest, taxes, brokerage commissions, and certain other expenses, to 2.5% of
the first $30 million of its average net assets, 2.0% of the next $70 million
of a fund's average net assets, and 1.5% of its remaining average net assets.
Any expenses to be borne by Key Advisers, the Sub-Adviser or the Administrator
will be estimated daily and reconciled and paid on a monthly basis. Fees
imposed upon customer accounts by Key Advisers, the Sub-Adviser, Key Trust
Company of Ohio, N.A. or its correspondents, affiliated banks and other
non-bank affiliates for cash management services are not fund expenses for
purposes of any such expense limitation.
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Distributor
Victory Broker-Dealer Services, Inc. (the "Distributor") serves as
distributor for the continuous offering of the shares of each fund of the
Victory Portfolios pursuant to a Distribution Agreement. Prior to Victory
Broker-Dealer Services, Inc. becoming the Distributor, Winsbury served as
distributor of each Fund. Unless otherwise terminated, the Distribution
Agreement will remain in effect for two years, and thereafter for consecutive
one-year terms, provided that it is approved at least annually (i) by the
Victory Portfolios' Trustees or by the vote of a majority of the outstanding
shares of the Victory Portfolios, and (ii) by the vote of a majority of the
Trustees of the Victory Portfolios who are not parties to the Distribution
Agreement or interested persons of any such party, cast in person at a meeting
called for the purpose of voting on such approval. The Distribution Agreement
will terminate in the event of its assignment, as defined in the 1940 Act. For
the Victory Portfolios' fiscal years ended October 31, 1993, 1994, and 1995,
[Winsbury] received $______, $_______, and $______, respectively, in
underwriting commissions, and retained $0, $__, and $___, respectively.
Fund Accountant
BISYS Fund Services Ohio, Inc. serves as fund accountant for the Fund
pursuant to a fund accounting agreement with the Victory Portfolios dated June
5, 1995 (the "Fund Accounting Agreement"). As fund accountant for the Victory
Portfolios, BISYS Fund Services Ohio, Inc. calculates the Fund's net asset
value, the dividend and capital gain distributions, if any, and the yield.
BISYS Fund Services Ohio, Inc. also provides a current security position
report, a summary report of transactions and pending maturities, a current cash
position report, and maintains the general ledger accounting records for the
Fund. Under its Fund Accounting Agreement with the Victory Portfolios, BISYS
Fund Services Ohio, Inc. is entitled to receive annual fees of .03% of the
first $100 million of the Fund's daily average net assets, .02% of the next
$100 million of the Fund's daily average net assets, and .01% of the Fund's
remaining daily average net assets. These annual fees are subject to a minimum
monthly assets charge of $2,500 per taxable fund, $2,917 per tax-free fund, and
$3,333 per international fund and do not include out-of-pocket expenses or
multiple class charges of $833 per month assessed for each class of shares
after the first class. In the fiscal years ended October 31, 1993, 1994, and
1995, the Victory Portfolios paid The Winsbury Service Corporation fund
accounting fees (after fee waivers) of $0, $62,855, and $________,
respectively.
Custodian
Cash and securities owned by the Fund are held by Key Trust Company of
Ohio, N.A. as custodian. Key Trust Company of Ohio, N.A. serves as custodian
to the Fund pursuant to a Custodian Agreement dated May 24, 1995. Under this
Agreement, Key Trust Company of Ohio, N.A. (i) maintains a separate account or
accounts in the name of the Fund; (ii) makes receipts and disbursements of
money on behalf of the fund; (iii) collects and receives all income and other
payments and distributions on account of portfolio securities; (iv) respond to
correspondence from security brokers and others relating to its duties; and (v)
makes periodic reports to the Victory Portfolios' Trustees concerning the
Victory Portfolios' operations. Key Trust Company of Ohio, N.A. may, with the
approval of the Fund and at the custodian's own expense, open and maintain a
sub-custody account or accounts on behalf of the Fund, provided that Key Trust
Company of Ohio, N.A. shall remain liable for the performance of all of its
duties under the Custodian Agreement.
Transfer Agent
The Primary Funds Service Corporation ("PFSC") serves as transfer
agent and dividend disbursing agent for the Fund, pursuant to a Transfer Agency
and Shareholder Servicing Agreement. Under its agreement with the Victory
Portfolios, PFSC has agreed (i) to issue and redeem shares of the Victory
Portfolios; (ii) to address and mail all communications by the Victory
Portfolios to its shareholders, including reports to shareholders, dividend and
distribution notices, and proxy material for its meetings of shareholders;
(iii) to respond to correspondence or inquiries by shareholders and others
relating to its duties; (iv) to maintain shareholder accounts and certain
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<PAGE> 259
sub-accounts; and (v) to make periodic reports to the Victory Portfolios'
Trustees concerning the Victory Portfolios' operations. For the services
provided under the Transfer Agency and Shareholder Servicing Agreement, PFSC
receives a maximum monthly fee of $1,250 from the Fund to a maximum of $3.50
per account of the Fund.
Auditors
The financial highlights appearing in the Prospectus for the Fund,
other than unaudited information marked as such, has been derived from
financial statements of the Fund incorporated by reference in this Statement of
Additional Information which, for the two month period ended October 31, 1995
and fiscal year ended August 31, 1995, has been audited by Coopers & Lybrand
L.L.P. as set forth in their report incorporated by reference herein, and are
included in reliance upon such report and on the authority of such firm as
experts in auditing and accounting. Information for the fiscal year ended
August 31, 1994 has been audited by KPMG Peat Marwick L.L.P., independent
accountants for the Predecessor Fund, as set forth in their report incorporated
by reference herein, and are included in reliance upon such report and on the
authority of such firm as experts in auditing and accounting. Information for
all other periods has been audited by Ernst & Young, L.L.P., independent
accountants to the predecessor to the Predecessor Fund. Coopers & Lybrand
L.L.P. serves as the Victory Portfolios' auditors. Coopers & Lybrand L.L.P.'s
address is 100 East Broad Street, Columbus, Ohio 43215.
Legal Counsel
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, 919 Third Avenue,
New York, New York 10022 is counsel to the Victory Portfolios.
ADDITIONAL INFORMATION
Description of Shares
The Victory Portfolios (sometimes referred to as the "Trust") is a
Delaware business trust. Its Delaware Trust Instrument was adopted on December
6, 1995 and a certificate of Trust for the Trust was filed in Delaware on
December __, 1995. On February 29, 1996, the Victory Portfolios converted from
a Massachusetts business trust to a Delaware business trust.
The previously effective Massachusetts Declaration of Trust, pursuant
to which the Victory Portfolios was originally called the North Third Street
Fund, was filed with the Secretary of State of the Commonwealth of
Massachusetts on February 6, 1986. On September 22, 1986, an Amended and
Restated Declaration of Trust was filed to change the name of the Trust to The
Emblem Fund and to make certain other changes. A second amendment was filed
October 23, 1986 providing for voting of shares in the aggregate except where
voting of shares by series is otherwise required by law. An amendment to the
Amended and Restated Declaration of Trust was filed on March 15, 1993 to change
the name of the Trust to The Society Funds. An Amended and Restated
Declaration of Trust was then filed on September 2, 1994 to change the name of
the Trust to The Victory Portfolios.
The currently effective Delaware Trust Instrument authorizes the
Trustees to issue an unlimited number of shares, which are units of beneficial
interest, without par value. The Victory Portfolios presently has twenty-eight
series of shares, which represent interests in the U.S. Government Obligations
Fund, the Prime Obligations Fund, the Tax-Free Money Market Fund, the Balanced
Fund, the Stock Index Fund, the Value Fund, the Diversified Stock Fund, the
Growth Fund, the Special Value Fund, the Special Growth Fund, the Ohio Regional
Stock Fund, the International Growth Fund, the Limited Term Income Fund, the
Government Mortgage Fund, the Ohio Municipal Bond Fund, the Intermediate Income
Fund, the Investment Quality Bond Fund, the Florida Tax-Free Bond Fund, the
Municipal Bond Fund, the Convertible Securities Fund, the Short-Term U.S.
Government Income Fund, the Government Bond Fund, the Fund for Income, the
National Municipal Bond Fund, the New York Tax-Free Fund,
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<PAGE> 260
the Institutional Money Market Fund, the Financial Reserves Fund and the Ohio
Municipal Money Market Fund, respectively. The Victory Portfolios' Delaware
Trust Instrument authorizes the Trustees to divide or redivide any unissued
shares of the Victory Portfolios into one or more additional series by setting
or changing in any one or more respects their respective preferences,
conversion or other rights, voting power, restrictions, limitations as to
dividends, qualifications, and terms and conditions of redemption.
Shares have no subscription or preemptive rights and only such
conversion or exchange rights as the Trustees may grant in their discretion.
When issued for payment as described in the Prospectus and this Statement of
Additional Information, the Victory Portfolios' shares will be fully paid and
non-assessable. In the event of a liquidation or dissolution of the Victory
Portfolios, shares of the Fund are entitled to receive the assets available for
distribution belonging to the Fund, and a proportionate distribution, based
upon the relative asset values of the respective funds of the Victory
Portfolios, of any general assets not belonging to any particular fund which
are available for distribution.
As described in the Prospectus under the caption "ADDITIONAL
INFORMATION -- Voting Rights," shares of the Victory Portfolios are entitled to
one vote per share (with proportional voting for fractional shares) on such
matters as shareholders are entitled to vote. On any matter submitted to a
vote of the shareholders, all shares are voted separately by individual series
(funds), and whenever the Trustees determine that the matter affects only
certain series, may be submitted for a vote by only such series, except (i)
when required by the 1940 Act, shares are voted in the aggregate and not by
individual series; and (ii) when the Trustees have determined that the matter
affects the interests of more than one series and that voting by shareholders
of all series would be consistent with the 1940 Act, then the shareholders of
all such series shall be entitled to vote thereon (either by individual series
or by shares voted in the aggregate, as the Trustees in their discretion may
determine). The Trustees may also determine that a matter affects only the
interests of one or more classes of a series, in which case (or if required
under the 1940 Act) such matter shall be voted on by such class or classes.
There will normally be no meetings of shareholders for the purposes of electing
Trustees unless and until such time as less than a majority of the Trustees
have been elected by the shareholders, at which time the Trustees then in
office will call a shareholders' meeting for the election of Trustees. In
addition, Trustees may be removed from office by vote of the holders of at
least two-thirds of the outstanding shares of the Victory Portfolios. A
meeting shall be held for such purpose upon the written request of the holders
of not less than 10% of the outstanding shares. Upon written request by ten or
more shareholders meeting the qualifications of Section 16(c) of the 1940 Act
(i.e., persons who have been shareholders for at least six months, and who hold
shares having an NAV of at least $25,000 or constituting 1% of the outstanding
shares) stating that such shareholders wish to communicate with the other
shareholders for the purpose of obtaining the signatures necessary to demand a
meeting to consider removal of a Trustee, the Victory Portfolios will provide a
list of shareholders or disseminate appropriate materials (at the expense of
the requesting shareholders). Except as set forth above, the Trustees shall
continue to hold office and may appoint their successors.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Victory Portfolios shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each fund of the Victory Portfolios affected by the
matter. For purposes of determining whether the approval of a majority of the
outstanding shares of a fund will be required in connection with a matter, a
fund will be deemed to be affected by a matter unless it is clear that the
interests of each fund in the matter are identical, or that the matter does not
affect any interest of the fund. Under Rule 18f-2, the approval of an
investment advisory agreement or any change in investment policy would be
effectively acted upon with respect to a fund only if approved by a majority of
the outstanding shares of such fund. However, Rule 18f-2 also provides that
the ratification of independent public accountants, the approval of principal
underwriting contracts, and the election of Trustees may be effectively acted
upon by shareholders of all of the Victory Portfolios voting without regard to
series.
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Shareholder and Trustee Liability
The Delaware Business Trust Act provides that a Shareholder of a
Delaware business trust shall be entitled to the same limitation of personal
liability extended to shareholders of Delaware corporation. The Delaware Trust
Instrument also provides for indemnification out of the trust property of any
shareholder held personally liable solely by reason of his or her being or
having been a shareholder. The Delaware Trust Instrument also provides that
the Victory Portfolios shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Victory
Portfolios, and shall satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
considered to be extremely remote.
The Delaware Trust Instrument states further that no Trustee, officer,
or agent of the Victory Portfolios shall be personally liable in connection
with the administration or preservation of the assets of the Funds or the
conduct of the Victory Portfolios' business; nor shall any Trustee, officer, or
agent be personally liable to any person for any action or failure to act
except for his own bad faith, willful misfeasance, gross negligence, or
reckless disregard of his duties. The Declaration of Trust also provides that
all persons having any claim against the Trustees or the Victory Portfolios
shall look solely to the assets of the Victory Portfolios for payment.
Miscellaneous
As used in the Prospectus and in this Statement of Additional
Information, "assets belonging to a fund" (or "assets belonging to the Funds")
means the consideration received by the Victory Portfolios upon the issuance or
sale of shares in that fund, together with all income, earnings, profits, and
proceeds derived from the investment thereof, including any proceeds from the
sale, exchange, or liquidation of such investments, and any funds or payments
derived from any reinvestment of such proceeds and any general assets of the
Victory Portfolios, which general liabilities and expenses are not readily
identified as belonging to a particular fund (or the Fund) that are allocated
to that fund (or the Fund) by the Victory Portfolios' Trustees. The Trustees
may allocate such general assets in any manner they deem fair and equitable.
It is anticipated that the formula that will be used by the Trustees in making
allocations of general assets to a particular fund of the Victory Portfolios
will be the relative net asset value of the respective fund at the time of
allocation. Assets belonging to a particular fund are charged with the direct
liabilities and expenses of that fund, and with a share of the general
liabilities and expenses of each of the funds not readily identified as
belonging to a particular fund that are allocated to each fund in accordance
with its proportionate share of the net asset values of the Victory Portfolios
at the time of allocation. The timing of allocations of general assets and
general liabilities and expenses of the Victory Portfolios to a particular fund
will be determined by the Trustees of the Victory Portfolios and will be in
accordance with generally accepted accounting principles. Determinations by
the Trustees of the Victory Portfolios as to the timing of the allocation of
general liabilities and expenses and as to the timing and allocable portion of
any general assets with respect to a particular fund are conclusive.
As used in the Prospectus and in this Statement of Additional
Information, a "vote of a majority of the outstanding shares"or a "vote of a
majority of the outstanding voting securities" of the Victory Portfolios or a
particular fund means the affirmative vote of the lesser of (a) 67% or more of
the shares of the Victory Portfolios or such fund present at a meeting at which
the holders of more than 50% of the outstanding shares of the Victory
Portfolios or such fund are represented in person or by proxy, or (b) more than
50% of the outstanding shares of the Victory Portfolios or such fund.
Organizational expenses are allocated to each of the Victory
Portfolios and are amortized over a period of two years from the commencement
of the public offering of shares of the Victory Portfolios.
Individual Trustees are elected by the shareholders and, subject to
removal by the vote of the holders of two-thirds of the outstanding shares of
the Victory Portfolios, serve for a term lasting until the next meeting of
shareholders at which trustees are elected. Such meetings are not required to
be held at any specific intervals.
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<PAGE> 262
Individual Trustees may be removed by vote of the shareholders voting not less
than a majority of the shares then outstanding cast in person or by proxy at
any meeting called for that purpose, or by a written declaration signed by
shareholders voting not less than two-thirds of the shares then outstanding.
The Victory Portfolios is registered with the Commission as an
open-end management investment company. Such registration does not involve
supervision by the Commission of the management or policies of the Victory
Portfolios.
The Prospectus and this Statement of Additional Information omit
certain of the information contained in the Registration Statement filed with
the Commission. Copies of such information may be obtained from the Commission
upon payment of the prescribed fee.
The Prospectus and this Statement of Additional Information are not an
offering of the securities herein described in any state in which such offering
may not lawfully be made. No salesman, dealer, or other person is authorized
to give any information or make any representation other than those contained
in the Prospectus and this Statement of Additional Information.
The financial statements of the Fund for the period ending April 30,
1995 are set forth following this Part B of the Registration Statement.
The 1995 Annual Report to shareholders of The Victory Portfolios is
incorporated by reference herein. This report includes the financial
statements for the two month period ended October 31, 1995 and the fiscal year
ended August 31, 1995. The opinion in the Annual Report of Coopers & Lybrand
L.L.P., independent accountants, is incorporated by reference herein in its
entirety to such Annual Report, and such financial statements are incorporated
in their entirety in reliance upon such report of Coopers & Lybrand L.L.P. and
on the authority of such firm as experts in auditing and accounting.
Delaware law authorizes electronic or telephonic communications
between shareholders and the Victory Portfolios. Under Delaware law, the
Successor Company has the flexibility to respond to future business
contingencies. For example, the Trustees will have the power to incorporate
the Victory Portfolios, to merge or consolidate it with another entity, to
cause each fund to become a separate trust, and to change the Victory
Portfolios' domicile without a shareholder vote. This flexibility could help
reduce the expense and frequency of future shareholder meetings for
non-investment related issues.
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APPENDIX
The nationally recognized statistical rating organizations
(individually, an "NRSRO") that may be utilized by Key Advisers or the
Sub-Adviser with regard to portfolio investments for the Funds include Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"),
Duff & Phelps, Inc. ("Duff"), Fitch Investors Service, Inc. ("Fitch"), IBCA
Limited and its affiliate, IBCA Inc. (collectively, "IBCA"), and Thomson
BankWatch, Inc. ("Thomson"). Set forth below is a description of the relevant
ratings of each such NRSRO. The NRSROs that may be utilized by Key Advisers or
the Sub-Adviser and the description of each NRSRO's ratings is as of the date
of this Statement of Additional Information, and may subsequently change.
Long-Term Debt Ratings (may be assigned, for example, to corporate and
municipal bonds)
Description of the five highest long-term debt ratings by Moody's
(Moody's applies numerical modifiers ( e.g., 1, 2, and 3) in each rating
category to indicate the security's ranking within the category):
Aaa. Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.
A. Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in the
future.
Baa. Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba. Bonds which are rated Ba are judged to have speculative elements
- - their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times in the future. Uncertainty of
position characterizes bonds in this class.
Description of the five highest long-term debt ratings by S&P (S&P may
apply a plus (+) or minus (-) to a particular rating classification to show
relative standing within that classification):
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
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<PAGE> 264
BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB. Debt rated BB is regarded, on balance, as predominately
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. While such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposure to adverse conditions.
Description of the three highest long-term debt ratings by Duff:
AAA. Highest credit quality. The risk factors are negligible being
only slightly more than for risk-free U.S. Treasury debt.
AA+. High credit quality Protection factors are strong.
AA. Risk is modest but may vary slightly from time to time
AA-. because of economic conditions.
A+. Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
Description of the three highest long-term debt ratings by Fitch (plus
or minus signs are used with a rating symbol to indicate the relative position
of the credit within the rating category):
AAA. Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA. Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA."
Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of these issues is generally rated "[-]+."
A. Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher
ratings.
IBCA's description of its three highest long-term debt ratings:
AAA. Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic or
financial conditions are unlikely to increase investment risk
significantly.
AA. Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic, or
financial conditions may increase investment risk albeit not very
significantly.
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A. Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial
conditions may lead to increased investment risk.
Short-Term Debt Ratings (may be assigned, for example, to commercial
paper, master demand notes, bank instruments, and letters of credit)
Moody's description of its three highest short-term debt ratings:
Prime-1. Issuers rated Prime-1 (or supporting institutions) have a
superior capacity for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a
strong capacity for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
S&P's description of its three highest short-term debt ratings:
A-1. This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to have extremely
strong safety characteristics are denoted with a plus sign (+).
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high
as for issues designated "A-1."
A-3. Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the
higher designations.
Duff's description of its five highest short-term debt ratings (Duff
incorporates gradations of "1+" (one plus) and "1-" (one minus) to assist
investors in recognizing quality differences within the highest rating
category):
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Duff 1+. Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
Duff 1. Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
Duff 1-. High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors. Risk
factors are very small.
Duff 2. Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
Duff 3. Satisfactory liquidity and other protection factors qualify
issue as to investment grade.
Risk factors are larger and subject to more variation. Nevertheless,
timely payment is expected.
Fitch's description of its four highest short-term debt ratings:
F-1+. Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of assurance for
timely payment.
F-1. Very Strong Credit Quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than
issues rated F-1+.
F-2. Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as for issues assigned F-1+ or F-1 ratings.
F-3. Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate, however, near-term adverse changes could cause
these securities to be rated below investment grade.
IBCA's description of its three highest short-term debt ratings:
A+. Obligations supported by the highest capacity for timely
repayment.
A1. Obligations supported by a very strong capacity for timely
repayment.
A2. Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
Short-Term Loan/Municipal Note Ratings
Moody's description of its two highest short-term loan/municipal note
ratings:
MIG-1/VMIG-1. This designation denotes best quality. There is
present strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
MIG-2/VMIG-2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
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S&P's description of its two highest municipal note ratings:
SP-1. Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
SP-2. Satisfactory capacity to pay principal and interest.
Short-Term Debt Ratings
Thomson BankWatch, Inc. ("TBW") ratings are based upon a qualitative
and quantitative analysis of all segments of the organization including, where
applicable, holding company and operating subsidiaries.
BankWatch Ratings do not constitute a recommendation to buy or sell
securities of any of these companies. Further, BankWatch does not suggest
specific investment criteria for individual clients.
The TBW Short-Term Ratings apply to commercial paper, other senior
short-term obligations and deposit obligations of the entities to which the
rating has been assigned.
The TBW Short-Term Ratings apply only to unsecured instruments that
have a maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an
untimely payment of principal or interest.
TBW-1. The highest category; indicates a very high degree of
likelihood that principal and interest will be paid on a timely basis.
TBW-2. The second highest category; while the degree of safety
regarding timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1".
TBW-3. The lowest investment grade category; indicates that while
more susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and interest in
a timely fashion is considered adequate.
TBW-4. The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
Definitions of Certain Money Market Instruments
Commercial Paper
Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.
Certificates of Deposit
Certificates of Deposit are negotiable certificates issued against
funds deposited in a commercial bank or a savings and loan association for a
definite period of time and earning a specified return.
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Bankers' Acceptances
Bankers' acceptances are negotiable drafts or bills of exchange,
normally drawn by an importer or exporter to pay for specific merchandise,
which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
U.S. Treasury Obligations
U.S. Treasury Obligations are obligations issued or guaranteed as to
payment of principal and interest by the full faith and credit of the U.S.
Government. These obligations may include Treasury bills, notes and bonds, and
issues of agencies and instrumentalities of the U.S. Government, provided such
obligations are guaranteed as to payment of principal and interest by the full
faith and credit of the U.S. Government.
U.S. Government Agency and Instrumentality Obligations
Obligations issued by agencies and instrumentalities of the U.S.
Government include such agencies and instrumentalities as the Government
National Mortgage Association, the Export-Import Bank of the United States, the
Tennessee Valley Authority, the Farmers Home Administration, the Federal Home
Loan Banks, the Federal Intermediate Credit Banks, the Federal Farm Credit
Banks, the Federal Land Banks, the Federal Housing Administration, the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation, and
the Student Loan Marketing Association. Some of these obligations, such as
those of the Government National Mortgage Association are supported by the full
faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others, such as
those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not obligated to do so by law. A Fund will invest
in the obligations of such instrumentalities only when the investment adviser
believes that the credit risk with respect to the instrumentality is minimal.
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STATEMENT OF ADDITIONAL INFORMATION
THE VICTORY PORTFOLIOS
THE INVESTMENT QUALITY BOND FUND
March 1, 1996
This Statement of Additional Information is not a Prospectus, but
should be read in conjunction with the Prospectus of The Victory Portfolios -
The Investment Quality Bond Fund, dated the same date as the date hereof (the
"Prospectus"). This Statement of Additional Information is incorporated by
reference in its entirety into the Prospectus. Copies of the Prospectus may be
obtained by writing The Victory Portfolios at Primary Funds Service
Corporation, P.O. Box 9741, Providence, RI 02940-9741, or by telephoning toll
free 800-539-FUND or 800-539-3863.
<TABLE>
<S> <C> <C>
Investment Objectives and Policies 1 INVESTMENT ADVISER
Valuation of Portfolio Securities 14 KeyCorp Mutual Fund Advisers, Inc.
Additional Purchase, Exchange and
Redemption Information 17
Management of the Victory Portfolios 21 INVESTMENT SUB-ADVISER
Advisory and Other Contracts 29 Society Asset Management, Inc.
Additional Information 37
Independent Auditor's Report 41 ADMINISTRATOR
Financial Statements 41 Concord Holding Corporation
Appendix 42
DISTRIBUTOR
Victory Broker-Dealer Services, Inc.
TRANSFER AGENT
Primary Funds Service Corporation
CUSTODIAN
Key Trust Company of Ohio, N.A.
</TABLE>
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STATEMENT OF ADDITIONAL INFORMATION
The Victory Portfolios (the "Victory Portfolios") is an open-end
management investment company. The Victory Portfolios consist of twenty-eight
series of units of beneficial interest ("shares"), four of which series are
currently inactive. The outstanding shares represent interests in the
twenty-four separate investment portfolios which are currently active. This
Statement of Additional Information relates to the Victory Investment Quality
Bond Fund (the "Fund") only. Much of the information contained in this
Statement of Additional Information expands on subjects discussed in the
Prospectus. Capitalized terms not defined herein are used as defined in the
Prospectus. No investment in shares of the Fund should be made without first
reading the Fund's Prospectus.
INVESTMENT OBJECTIVES AND POLICIES
Additional Information on Fund Instruments
The following policies supplement the investment objective and
policies of the Fund as set forth in the Prospectus.
FOREIGN INVESTMENTS. Foreign investments can involve significant
risks in addition to the risks inherent in U.S. investments. The value of
securities denominated in or indexed to foreign currencies, and of dividends
and interest from such securities, can change significantly when foreign
currencies strengthen or weaken relative to the U.S. dollar. Foreign
securities markets generally have less trading volume and less liquidity than
U.S. markets, and prices on some foreign markets can be highly volatile. Many
foreign countries lack uniform accounting and disclosure standards comparable
to those applicable to U.S. companies, and it may be more difficult to obtain
reliable information regarding an issuer's financial condition and operations.
In addition, the costs of foreign investing, including withholding taxes,
brokerage commissions, and custodial costs, are generally higher than for U.S.
investments.
Foreign markets may offer less protection to investors than U.S.
markets. Foreign issuers, brokers, and securities markets may be subject to
less government supervision. Foreign security trading practices, including
those involving the release of assets in advance of payment, may involve
increased risks in the event of a failed trade or the insolvency of a
broker-dealer, and may involve substantial delays. It may also be difficult to
enforce legal rights in foreign countries.
Investing abroad also involves different political and economic risks.
Foreign investments may be affected by actions of foreign governments adverse
to the interests of U.S. investors, including the possibility of expropriation
or nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. There may be a greater possibility
of default by foreign governments or foreign government-sponsored enterprises.
Investments in foreign countries also involve a risk of local political,
economic, or social instability, military action or unrest, or adverse
diplomatic developments. There is no assurance that Key Advisers or the Sub-
Adviser will be able to anticipate these potential events or counter their
effects.
The considerations noted above generally are intensified for
investments in developing countries. Developing countries may have relatively
unstable governments, economies based on only a few industries, and securities
markets that trade a small number of securities.
The Fund may invest in foreign securities that impose restrictions on
transfer within the U.S. or to U.S. persons. Although securities subject to
transfer restrictions may be marketable abroad, they may be less liquid than
foreign securities of the same class that are not subject to such restrictions.
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AMERICAN DEPOSITORY RECEIPTS AND EUROPEAN DEPOSITORY RECEIPTS (ADRs
and EDRs) are certificates evidencing ownership of shares of a foreign-based
issuer held in trust by a bank or similar financial institution. Designed for
use in U.S. and European securities markets, respectively, ADRs and EDRs are
alternatives to the purchase of the underlying securities in their national
markets and currencies. ADRs may be sponsored or unsponsored; there is less
publicly available information with respect to unsponsored ADRs.
LOWER-RATED DEBT SECURITIES. The Fund may purchase lower-rated debt
securities commonly referred to as "junk bonds" (those rated Ba to C by Moody's
Investor Service, Inc. or BB to C by Standard and Poor's Corporation) that have
poor protection with respect to the payment of interest and repayment of
principal, or may be in default. These securities are often considered to be
speculative and involve greater risk of loss or price changes due to changes in
the issuer's capacity to pay. The market prices of lower-rated debt securities
may fluctuate more than those of higher-rated debt securities and may decline
significantly in periods of general economic difficulty, which may follow
periods of rising interest rates.
While the market for high-yield corporate debt securities has been in
existence for many years and has weathered previous economic downturns, the
1980s brought a dramatic increase in the use of such securities to fund highly
leveraged corporate acquisitions and restructurings. Past experience may not
provide an accurate indication of future performance of the high yield bond
market, especially during periods of economic recession. In fact, from 1989 to
1991, the percentage of lower-rated debt securities that defaulted rose
significantly above prior levels, although the default rate decreased in 1992.
The market for lower-rated securities may be thinner and less active
than that for higher-rated debt securities, which can adversely affect the
prices at which the former are sold. If market quotations are not available,
lower-rated debt securities will be valued in accordance with procedures
established by the Board of Trustees, including the use of outside pricing
services. Judgment plays a greater role in valuing high-yield corporate debt
securities than is the case for securities for which more external sources for
quotations and last-sale information are available. Adverse publicity and
changing investor perceptions may affect the ability of outside pricing
services to value lower-rated debt securities and the Fund's ability to sell
these securities.
Since the risk of default is higher for lower-rated debt securities,
Key Advisers' or the Sub-Adviser's research and credit analysis are an
especially important part of managing securities of this type held by the Fund.
In considering investments for the Fund, Key Advisers or the Sub-Adviser will
attempt to identify those issuers of high-yielding debt securities whose
financial condition is adequate to meet future obligations, has improved, or is
expected to improve in the future. Analysis of Key Advisers or the Sub-Adviser
focuses on relative values based on such factors as interest or dividend
coverage, asset coverage, earnings prospects, and the experience and managerial
strength of the issuer.
The Fund may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise exercise its rights as security holder to seek
to protect the interests of security holders if it determines this to be in the
best interest of the Fund's shareholders.
ILLIQUID INVESTMENTS are investments that cannot be sold or disposed of
in the ordinary course of business, within seven days, at approximately the
prices at which they are valued. Under the supervision of the Board of
Trustees, Key Advisers or the Sub-Adviser determines the liquidity of the Fund's
investments and, through reports from Key Advisers or the Sub-Adviser the Board
monitors investments in illiquid instruments. In determining the liquidity of
the Fund's investments, Key Advisers or the Sub-Adviser may consider various
factors, including (1) the frequency of trades and quotations, (2) the number of
dealers and prospective purchasers in the marketplace, (3) dealer undertakings
to make a market, (4) the nature of the security (including any demand or tender
features), and (5) the nature of the marketplace for trades (including the
ability to assign or offset the Fund's rights and obligations relating to the
investment). Investments currently considered by the Fund to be illiquid
include repurchase agreements not entitling the holder to payment of principal
and interest within seven days. Also, Key Advisers or
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the Sub-Adviser may determine some over-the-counter options, restricted
securities and loans and other direct debt instruments, and swap agreements to
be illiquid. However, with respect to over-the-counter options the Fund
writes, all or a portion of the value of the underlying instrument may be
illiquid depending on the assets held to cover the option and the nature and
terms of any agreement the Fund may have to close out the option before
expiration. In the absence of market quotations, illiquid investments are
priced at fair value as determined in good faith by a committee appointed by
the Board of Trustees. If through a change in values, net assets, or other
circumstances, the Fund were in a position where more than 15% of its net
assets were invested in illiquid securities, it would seek to take appropriate
steps to protect liquidity.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS are interests in amounts owed
by a corporate, governmental, or other borrower to another party. They may
represent amounts owed to lenders or lending syndicates (loans and loan
participations), to suppliers of goods or services (trade claims or other
receivables), or to other parties. Direct debt instruments involve a risk of
loss in case of default or insolvency of the borrower and may offer less legal
protection to the Fund in the event of fraud or misrepresentation. In
addition, loan participations involve a risk of insolvency of the lending bank
or other financial intermediary. Direct debt instruments may also include
standby financing commitments that obligate the Fund to supply additional cash
to the borrower on demand.
REPURCHASE AGREEMENTS. In a repurchase agreement, the Fund purchases
a security and simultaneously commits to resell that security to the seller at
an agreed upon price on an agreed upon date within a number of days from the
date of purchase. The resale price reflects the purchase price plus an agreed
upon incremental amount which is unrelated to the coupon rate or maturity of
the purchased security. A repurchase agreement involves the obligation of the
seller to pay the agreed upon price, which obligation is in effect secured by
the value (at least equal to the amount of the agreed upon resale price and
marked to market daily) of the underlying security. The Fund may engage in a
repurchase agreement with respect to any security in which it is authorized to
invest. Since it is not possible to eliminate all risks from these
transactions (particularly the possibility of a decline in the market value of
the underlying securities, as well as delays and costs to the Fund in
connection with bankruptcy proceedings), it is the Victory Portfolios' current
policy to limit repurchase agreements for the Fund to those parties whose
creditworthiness has been reviewed and found satisfactory by Key Advisers or
the Sub-Adviser. Repurchase agreements are considered by the staff of the
Securities and Exchange Commission to be loans by the Fund.
RESTRICTED SECURITIES generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the Securities
Act of 1933, or in a registered public offering. Where registration is
required, the Fund may be obligated to pay all or part of the registration
expense and a considerable period may elapse between the time it decides to
seek registration and the time the Fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, the Fund might obtain a less favorable price
than prevailed when it decided to seek registration of the shares. However, in
general, the Fund anticipates holding restricted securities to maturity or
selling them in an exempt transaction.
LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS. The Fund intends to
file a notice of eligibility for exclusion from the definition of the term
"commodity pool operator" with the Commodity Futures Trading Commission (CFTC)
and the National Futures Association, which regulate trading in the futures
markets, before engaging in any purchases or sales of futures contracts or
options on futures contracts. The Fund intends to comply with Section 4.5 of
the regulations under the Commodity Exchange Act, which limits the extent to
which the Fund can commit assets to initial margin deposits and option
premiums.
In addition, the Fund will not: (a) sell futures contracts, purchase
put options, or write call options if, as a result, more than 25% of the Fund's
total assets would be hedged with futures and options under normal conditions;
(b) purchase futures contracts or write put options if, as a result, the Fund's
total obligations upon settlement or exercise of purchased futures contracts
and written put options would exceed 25% of its total assets; or (c) purchase
call options if, as a result, the current value of option premiums for call
options purchased by the
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Fund would exceed 5% of the Fund's total assets. These limitations do not
apply to options attached to or acquired or traded together with their
underlying securities.
FUTURES CONTRACTS. When the Fund purchases a futures contract, it
agrees to purchase a specified underlying instrument at a specified future
date. When the Fund sells a futures contract, it agrees to sell the underlying
instrument at a specified future date. The price at which the purchase and
sale will take place is fixed when the Fund enters into the contract. Some
currently available futures contracts are based on specific securities, such as
U.S. Treasury bonds or notes, and some are based on indices of securities
prices, such as the Standard & Poor's 500 Composite Stock Price Index (S&P
500). Futures can be held until their delivery dates, or can be closed out
before then if a liquid secondary market is available.
The value of a futures contract tends to increase and decrease in
tandem with the value of its underlying instrument. Therefore, purchasing
futures contracts will tend to increase the Fund's exposure to positive and
negative price fluctuations in the underlying instrument, much as if it had
purchased the underlying instrument directly. When the Fund sells a futures
contract, by contrast, the value of its futures position will tend to move in a
direction contrary to the market. Selling futures contracts, therefore, will
tend to offset both positive and negative market price changes, much as if the
underlying instrument had been sold.
FUTURES MARGIN PAYMENTS. The purchaser or seller of a futures
contract is not required to deliver or pay for the underlying instrument unless
the contract is held until the delivery date. However, both the purchaser and
seller are required to deposit "initial margin" with a futures broker, known as
a futures commission merchant (FCM), when the contract is entered into.
Initial margin deposits are typically equal to a percentage of the contract's
value. If the value of either party's position declines, that party will be
required to make additional "variation margin" payments to settle the change in
value on a daily basis. The party that has a gain may be entitled to receive
all or a portion of this amount. Initial and variation margin payments do not
constitute purchasing securities on margin for purposes of the Fund's
investment limitations. In the event of the bankruptcy of an FCM that holds
margin on behalf of the Fund, the Fund may be entitled to return of margin owed
to it only in proportion to the amount received by the FCM's other customers,
potentially resulting in losses to the Fund.
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, the Fund
obtains the right (but not the obligation) to sell the option's underlying
instrument at a fixed strike price. In return for this right, the Fund pays
the current market price for the option (known as the option premium). Options
have various types of underlying instruments, including specific securities,
indices of securities prices, and futures contracts. The Fund may terminate
its position in a put option it has purchased by allowing it to expire or by
exercising the option. If the option is allowed to expire, the Fund will lose
the entire premium it paid. If the Fund exercises the option, it completes the
sale of the underlying instrument at the strike price. The Fund may also
terminate a put option position by closing it out in the secondary market at
its current price, if a liquid secondary market exists.
The buyer of a typical put option can expect to realize a gain if
security prices fall substantially. However, if the underlying instrument's
price does not fall enough to offset the cost of purchasing the option, a put
buyer can expect to suffer a loss (limited to the amount of the premium paid,
plus related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price. A call buyer typically attempts to participate in potential price
increases of the underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time, the buyer can expect to
suffer a loss if security prices do not rise sufficiently to offset the cost of
the option.
WRITING PUT AND CALL OPTIONS. When the Fund writes a put option, it
takes the opposite side of the transaction from the option's purchaser. In
return for receipt of the premium, the Fund assumes the obligation to pay the
strike price for the option's underlying instrument if the other party to the
option chooses to exercise it.
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When writing an option on a futures contract the Fund will be required to make
margin payments to an FCM as described above for futures contracts. The Fund
may seek to terminate its position in a put option it writes before exercise by
closing out the option in the secondary market at its current price. If the
secondary market is not liquid for a put option the Fund has written, however,
the Fund must continue to be prepared to pay the strike price while the option
is outstanding, regardless of price changes, and must continue to set aside
assets to cover its position.
If security prices rise, a put writer would generally expect to
profit, although its gain would be limited to the amount of the premium it
received. If security prices remain the same over time, it is likely that the
writer will also profit, because it should be able to close out the option at a
lower price. If security prices fall, the put writer would expect to suffer a
loss. This loss should be less than the loss from purchasing the underlying
instrument directly, however, because the premium received for writing the
option should mitigate the effects of the decline.
Writing a call option obligates the Fund to sell or deliver the
option's underlying instrument, in return for the strike price, upon exercise
of the option. The characteristics of writing call options are similar to
those of writing put options, except that writing calls generally is a
profitable strategy if prices remain the same or fall. Through receipt of the
option premium, a call writer mitigates the effects of a price decline. At the
same time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is
greater, a call writer gives up some ability to participate in security price
increases.
COMBINED POSITIONS. The Fund may purchase and write options in
combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of the overall
position. For example, the Fund may purchase a put option and write a call
option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call
option at one strike price and buying a call option at a lower price, in order
to reduce the risk of the written call option in the event of a substantial
price increase. Because combined options positions involve multiple trades,
they result in higher transaction costs and may be more difficult to open and
close out.
CORRELATION OF PRICE CHANGES. Because there are a limited number of
types of exchange-traded options and futures contracts, it is likely that the
standardized contracts available will not match the Fund's current or
anticipated investments exactly. The Fund may invest in options and futures
contracts based on securities with different issuers, maturities, or other
characteristics from the securities in which it typically invests which
involves a risk that the options or futures position will not track the
performance of the Fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the Fund's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and the securities markets, from structural differences in how options and
futures and securities are traded, or from imposition of daily price
fluctuation limits or trading halts. The Fund may purchase or sell options and
futures contracts with a greater or lesser value than the securities it wishes
to hedge or intends to purchase in order to attempt to compensate for
differences in volatility between the contract and the securities, although
this may not be successful in all cases. If price changes in the Fund's
options or futures positions are poorly correlated with its other investments,
the positions may fail to produce anticipated gains or result in losses that
are not offset by gains in other investments.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS. There is no assurance a
liquid secondary market will exist for any particular options or futures
contract at any particular time. Options may have relatively low trading
volume and liquidity if their strike prices are not close to the underlying
instrument's current price. In addition, exchanges may establish daily price
fluctuation limits for options and futures contracts, and may halt trading if a
contract's price moves upward or downward more than the limit in a given day.
On volatile trading days when the price
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fluctuation limit is reached or a trading halt is imposed, it may be impossible
for the Fund to enter into new positions or close out existing positions. If
the secondary market for a contract is not liquid because of price fluctuation
limits or otherwise, it could prevent prompt liquidation of unfavorable
positions, and potentially could require the Fund to continue to hold a
position until delivery or expiration regardless of changes in its value. As a
result, the Fund's access to other assets held to cover its options or futures
positions could also be impaired.
OTC OPTIONS. Unlike exchange-traded options, which are standardized
with respect to the underlying instrument, expiration date, contract size, and
strike price, the terms of over-the-counter options (options not traded on
exchanges) generally are established through negotiation with the other party
to the option contract. While this type of arrangement allows the Fund greater
flexibility to tailor an option to its needs, OTC options generally involve
greater credit risk than exchange-traded options, which are guaranteed by the
clearing organization of the exchanges where they are traded.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. The Fund will
comply with guidelines established by the SEC with respect to coverage of
options and futures strategies by mutual funds, and if the guidelines so
require will set aside appropriate liquid assets in a segregated custodial
account in the amount prescribed. Securities held in a segregated account
cannot be sold while the futures or option strategy is outstanding, unless they
are replaced with other suitable assets. As a result, there is a possibility
that segregation of a large percentage of the Fund's assets could impede
portfolio management or the Fund's ability to meet redemption requests or other
current obligations.
WARRANTS. Warrants are securities that give the Fund the right to
purchase equity securities from the issuer at a specific price (the strike
price) for a limited period of time. The strike price of warrants typically is
much lower than the current market price of the underlying securities, yet they
are subject to greater price fluctuations. As a result, warrants may be more
volatile investments than the underlying securities and may offer greater
potential for capital appreciation as well as capital loss.
Warrants do not entitle a holder to dividends or voting rights with
respect to the underlying securities and do not represent any rights in the
assets of the issuing company. Also, the value of the warrant does not
necessarily change with the value of the underlying securities and a warrant
ceases to have value if it is not exercised prior to the expiration date.
These factors can make warrants more speculative than other types of
investments.
BANKERS' ACCEPTANCES AND CERTIFICATES OF DEPOSIT. The Fund may invest
in bankers' acceptances, certificates of deposit, and demand and time deposits.
Bankers' acceptances are negotiable drafts or bills of exchange typically drawn
by an importer or exporter to pay for specific merchandise, which are
"accepted" by a bank, meaning, in effect, that the bank unconditionally agrees
to pay the face value of the instrument on maturity. Certificates of deposit
are negotiable certificates issued against funds deposited in a commercial bank
or a savings and loan association for a definite period of time and earning a
specified return.
Bankers' acceptances will be those guaranteed by domestic and foreign
banks, if at the time of purchase such banks have capital, surplus, and
undivided profits in excess of $100,000,000 (as of the date of their most
recently published financial statements). Certificates of deposit and demand
and time deposits invested in by the Victory Portfolios will be those of
domestic and foreign banks and savings and loan associations, if (a) at the
time of purchase such financial institutions have capital, surplus, and
undivided profits in excess of $100,000,000 (as of the date of their most
recently published financial statements) or (b) the principal amount of the
instrument is insured in full by the Federal Deposit Insurance Corporation or
the Savings Association Insurance Fund.
The Fund may also invest in Eurodollar Certificates of Deposit
("ECDs") which are U.S. dollar-denominated certificates of deposit issued by
branches of foreign and domestic banks located outside the United States,
Yankee Certificates of Deposit ("Yankee CDs") which are certificates of deposit
issued by a U.S. branch of a foreign bank denominated in U.S. dollars and held
in the United States, Eurodollar Time Deposits
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("ETDs") which are U.S. dollar-denominated deposits in a foreign branch of a
U.S. bank or a foreign bank, and Canadian Time Deposits ("CTDs") which are U.S.
dollar-denominated certificates of deposit issued by Canadian offices of major
Canadian Banks.
COMMERCIAL PAPER. Commercial paper consists of unsecured promissory
notes issued by corporations. Except as noted below with respect to variable
amount master demand notes, issues of commercial paper normally have maturities
of less than nine months and fixed rates of return.
The Fund will purchase only commercial paper rated in one of the two
highest categories at the time of purchase by an NRSRO or, if not rated, found
by the Victory Portfolios' Board of Trustees to present minimal credit risks
and to be of comparable quality to instruments that are rated high quality
(i.e., in one of the two top ratings categories) by a NRSRO that is neither
controlling, controlled by, or under common control with the issuer of, or any
issuer, guarantor, or provider of credit support for, the instruments. For a
description of the rating symbols of each NRSRO see the Appendix to this
Statement of Additional Information.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand
notes, in which the Fund may invest, are unsecured demand notes that permit the
indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate according to the terms of the instrument. Although there is no
secondary market for these notes, the Fund may demand payment of principal and
accrued interest at any time and may resell the notes at any time to a third
party. The absence of an active secondary market, however, could make it
difficult for the Fund to dispose of a variable amount master demand note if
the issuer defaulted on its payment obligations, and the Fund could, for this
or other reasons, suffer a loss to the extent of the default. While the notes
are not typically rated by credit rating agencies, issuers of variable amount
master demand notes must satisfy the same criteria as set forth above for
unrated commercial paper, and Key Advisers or the Sub-Adviser will continuously
monitor the issuer's financial status and ability to make payments due under
the instrument. Where necessary to ensure that a note is of "high quality,"
the Fund will require that the issuer's obligation to pay the principal of the
note be backed by an unconditional bank letter or line of credit, guarantee or
commitment to lend. For purposes of the Fund's investment policies, a variable
amount master note will be deemed to have a maturity equal to the longer of the
period of time remaining until the next readjustment of its interest rate or
the period of time remaining until the principal amount can be recovered from
the issuer through demand. (See Variable and Floating Rate Notes.)
VARIABLE AND FLOATING RATE NOTES. The Fund may acquire variable and
floating rate notes, subject to the Victory Portfolios' investment objectives,
policies and restrictions. A variable rate note is one whose terms provide for
the readjustment of its interest rate on set dates and which, upon such
readjustment, can reasonably be expected to have a market value that
approximates its par value. A floating rate note is one whose terms provide
for the readjustment of its interest rate whenever a specified interest rate
changes and which, at any time, can reasonably be expected to have a market
value that approximates its par value. Such notes are frequently not rated by
credit rating agencies; however, unrated variable and floating rate notes
purchased by the Fund will only be those determined by Key Advisers or the
Sub-Adviser, under guidelines established by the Trustees, to pose minimal
credit risks and to be of comparable quality, at the time of purchase, to rated
instruments eligible for purchase under the Fund's investment policies. In
making such determinations, Key Advisers or the Sub-Adviser will consider the
earning power, cash flow and other liquidity ratios of the issuers of such
notes (such issuers include financial, merchandising, bank holding and other
companies) and will continuously monitor their financial condition. Although
there may be no active secondary market with respect to a particular variable
or floating rate note purchased by the Fund, the Fund may resell the note at
any time to a third party. The absence of an active secondary market, however,
could make it difficult for the Fund to dispose of a variable or floating rate
note in the event the issuer of the note defaulted on its payment obligations
and the fund could, for this or other reasons, suffer a loss to the extent of
the default. Variable or floating rate notes may be secured by bank letters of
credit.
Variable or floating rate notes may have maturities of more than one
year, as follows:
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1. A note that is issued or guaranteed by the United States
government or any agency thereof and which has a variable rate of interest
readjusted no less frequently than annually will be deemed by the Victory
Portfolios to have a maturity equal to the period remaining until the next
readjustment of the interest rate.
2. A variable rate note, the principal amount of which is
scheduled on the face of the instrument to be paid in one year or less, will be
deemed by the Victory Portfolios to have a maturity equal to the period
remaining until the next readjustment of the interest rate.
3. A variable rate note that is subject to a demand feature
scheduled to be paid in one year or more will be deemed by the Victory
Portfolios to have a maturity equal to the longer of the period remaining until
the next readjustment of the interest rate or the period remaining until the
principal amount can be recovered through demand.
4. A floating rate note that is subject to a demand feature will
be deemed by the Victory Portfolios to have a maturity equal to the period
remaining until the principal amount can be recovered through demand.
As used above, a note is "subject to a demand feature" where the Fund
is entitled to receive the principal amount of the note either at any time on
no more than 30 days' notice or at specified intervals not exceeding one year
and upon no more than 30 days' notice.
OTHER INVESTMENT COMPANIES. The Fund may invest up to 5% of its total
assets in the securities of any one investment company, but may not own more
than 3% of the securities of any one investment company or invest more than 10%
of its total assets in the securities of other investment companies. Pursuant
to an exemptive order received by the Victory Portfolios from the Securities
and Exchange Commission, the Fund may invest in the money market funds of the
Victory Portfolios. Key Advisers or the Sub-Adviser will waive its fee with
respect to assets of a fund of the Victory Portfolios invested in any of the
money market funds of the Victory Portfolios, and, to the extent required by
the laws of any state in which the Fund's shares are sold, Key Advisers or the
Sub-Adviser will waive its investment advisory fee as to all assets invested in
other investment companies. Because such other investment companies employ an
investment adviser, such investment by the Fund will cause shareholders to bear
duplicative fees, such as management fees.
TEMPORARY INVESTMENTS. The Fund may also invest temporarily in high
quality investments or cash during times of unusual market conditions for
defensive purposes and in order to accommodate shareholder redemption requests
although currently it does not intend to do so. Any portion of the Fund's
assets maintained in cash will reduce the amount of assets in securities and
thereby reduce the Fund's yield or total return.
"WHEN-ISSUED" SECURITIES. As discussed in the Prospectus, the Fund
may purchase securities on a "when issued" basis (i.e., for delivery beyond the
normal settlement date at a stated price and yield). When the Fund agrees to
purchase securities on a "when issued" basis, the Victory Portfolios' custodian
will set aside cash or liquid portfolio securities equal to the amount of the
commitment in a separate account. Normally, the custodian will set aside
portfolio securities to satisfy the purchase commitment, and in such a case,
the Fund may be required subsequently to place additional assets in the
separate account in order to assure that the value of the account remains equal
to the amount of the Fund's commitment. It may be expected that the Fund's net
assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
When the Fund engages in "when-issued" transactions, it relies on the
seller to consummate the trade. Failure of the seller to do so may result in
the Fund incurring a loss or missing the opportunity to obtain a price
considered to be advantageous. The Fund does not intend to purchase "when
issued" securities for speculative purposes, but only in furtherance of its
investment objective.
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U.S. GOVERNMENT OBLIGATIONS. The Fund may invest in obligations
issued or guaranteed by the U.S. Government, its agencies and
instrumentalities. Obligations of certain agencies and instrumentalities of
the U.S. Government are supported by the full faith and credit of the U.S.
Treasury; others are supported by the right of the issuer to borrow from the
U.S. Treasury; others are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; and still others are supported
only by the credit of the agency or instrumentality. No assurance can be given
that the U.S. Government will provide financial support to U.S.
Government-sponsored agencies or instrumentalities if it is not obligated to do
so by law. The Fund will invest in the obligations of such agencies and
instrumentalities only when Key Advisers or the Sub-Adviser believes that the
credit risk with respect thereto is minimal.
SECURITIES LENDING. The Fund may lend its portfolio securities to
broker-dealers, banks or institutional borrowers of securities. The Fund must
receive a minimum of 100% collateral, plus any interest due in the form of cash
or U.S. Government securities. This collateral must be valued daily and should
the market value of the loaned securities increase, the borrower must furnish
additional collateral to the Fund. During the time portfolio securities are on
loan, the borrower will pay the Fund any dividends or interest paid on such
securities plus any interest negotiated between the parties to the lending
agreement. Loans will be subject to termination by the Fund or the borrower at
any time. While the Fund will not have the right to vote securities on loan,
it intends to terminate the loan and regain the right to vote if that is
considered important with respect to the investment. The Fund will only enter
into loan arrangements with broker-dealers, banks or other institutions which
Key Advisers or the Sub-Adviser has determined are creditworthy under
guidelines established by the Victory Portfolios' Trustees.
GOVERNMENT "MORTGAGE-BACKED" SECURITIES. The Fund may invest in
obligations of certain agencies and instrumentalities of the U.S. Government.
Some such obligations, such as those issued by GNMA or the Export-Import Bank
of the United States, are supported by the full faith and credit of the U.S.
Treasury; others, such as those of FNMA, are supported by the right of the
issuer to borrow from the Treasury; others are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; still
others, such as those of the Federal Farm Credit Banks or FHLMC, are supported
only by the credit of the instrumentality. No assurance can be given that the
U.S. Government would provide financial support to U.S. Government-sponsored
agencies and instrumentalities if it is not obligated to do so by law.
The principal governmental (i.e., backed by the full faith and credit
of the U.S. Government) guarantor of mortgage-related securities is GNMA. GNMA
is a wholly owned U.S. Government corporation within the Department of Housing
and Urban Development. GNMA is authorized to guarantee, with the full faith
and credit of the U.S. Government, the timely payment of principal and interest
on securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and pools of FHA-insured
or VA-guaranteed mortgages. Government-related (i.e., not backed by the full
faith and credit of the U.S. Government) guarantors include FNMA and FHLMC.
FNMA and FHLMC are government-sponsored corporations owned entirely by private
stockholders. Pass-through securities issued by FNMA and FHLMC are guaranteed
as to timely payment of principal and interest by FNMA and FHLMC, respectively,
but are not backed by the full faith and credit of the U.S. Government.
MORTGAGE-RELATED SECURITIES -- IN GENERAL
Mortgage-related securities are backed by mortgage obligations
including, among others, conventional 30-year fixed rate mortgage obligations,
graduated payment mortgage obligations, 15-year mortgage obligations, and
adjustable rate mortgage obligations. All of these mortgage obligations can be
used to create pass-through securities. A pass-through security is created
when mortgage obligations are pooled together and undivided interests in the
pool or pools are sold. The cash flow from the mortgage obligations is passed
through to the holders of the securities in the form of periodic payments of
interest, principal and prepayments (net of a service fee). Prepayments occur
when the holder of an individual mortgage obligation prepays the remaining
principal before the mortgage obligation's scheduled maturity date. As a
result of the pass-through of prepayments of principal on the
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underlying securities, mortgage-backed securities are often subject to more
rapid prepayment of principal than their stated maturity would indicate.
Because the prepayment characteristics of the underlying mortgage obligations
vary, it is not possible to predict accurately the realized yield or average
life of a particular issue of pass-through certificates. Prepayment rates are
important because of their effect on the yield and price of the securities.
Accelerated prepayments have an adverse impact on yields for pass-throughs
purchased at a premium (i.e., a price in excess of principal amount) and may
involve additional risk of loss of principal because the premium may not have
been fully amortized at the time the obligation is repaid. The opposite is
true for pass-throughs purchased at a discount. The Fund may purchase
mortgage-related securities at a premium or at a discount. Among the U.S.
Government securities in which the Fund may invest are government
"mortgage-backed" (or government guaranteed mortgage related securities). Such
guarantees do not extend to the value of yield of the mortgage-backed
securities themselves or of the Fund's shares.
GNMA CERTIFICATES. Certificates of the Government National Mortgage
Association ("GNMA") are mortgage-backed securities which evidence an undivided
interest in a pool or pools of mortgages. GNMA Certificates that the funds may
purchase are the "modified pass-through" type, which entitle the holder to
receive timely payment of all interest and principal payments due on the
mortgage pool, net of fees paid to the "issuer" and GNMA, regardless of whether
or not the mortgagor actually makes the payment.
The National Housing Act authorizes GNMA to guarantee the timely
payment of principal and interest on securities backed by a pool of mortgages
insured by the Federal Housing Administration ("FHA") or guaranteed by the
Veterans Administration ("VA"). The GNMA guarantee is backed by the full faith
and credit of the U.S. Government. GNMA is also empowered to borrow without
limitation from the U.S. Treasury if necessary to make any payments required
under its guarantee.
The estimated average life of a GNMA Certificate is likely to be
substantially shorter than the original maturity of the mortgages underlying
the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greater part of principal
investment long before the maturity of the mortgages in the pool. Foreclosures
impose no risk to principal investment because of the GNMA guarantee, except to
the extent that the Fund has purchased the certificates above par in the
secondary market.
FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation
("FHLMC") was created in 1970 to promote development of a nationwide secondary
market in conventional residential mortgages. The FHLMC issues two types of
mortgage pass-through securities ("FHLMC Certificates"), mortgage participation
certificates ("PCs") and collateralized mortgage obligations ("CMOs"). PCs
resemble GNMA Certificates in that each PC represents a pro rata share of all
interest and principal payments made and owed on the underlying pool. The
FHLMC guarantees timely monthly payment of interest on PCs and the ultimate
payment of principal. Recently introduced FHLMC Gold PCs guarantee the timely
payment of both principal and interest.
CMOs are securities backed by a pool of mortgages in which the
principal and interest cash flows of the pool are channeled on a prioritized
basis into two or more classes, or tranches, of bonds. FHLMC CMOs are backed
by pools of agency mortgage-backed securities and the timely payment of
principal and interest of each tranche is guaranteed by the FHLMC. The FHLMC
guarantee is not backed by the full faith and credit of the U.S. Government.
FNMA SECURITIES. The Federal National Mortgage Association ("FNMA")
was established in 1938 to create a secondary market in mortgages insured by
the FHA, but has expanded its activity to the secondary market for conventional
residential mortgages. FNMA primarily issues two types of mortgage-backed
securities, guaranteed mortgage pass-through certificates ("FNMA Certificates")
and CMOs. FNMA Certificates resemble GNMA Certificates in that each FNMA
Certificate represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. FNMA guarantees timely payment of
interest and principal on FNMA Certificates and CMOs. The FNMA guarantee is
not backed by the full faith and credit of the U.S. Government.
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MISCELLANEOUS SECURITIES. The Fund can invest in various securities
issued by domestic and foreign corporations, including preferred stocks and
investment grade corporate bonds, notes, and warrants. Bonds are long-term
corporate debt instruments secured by some or all of the issuer's assets,
debentures are general corporate debt obligations backed only by the integrity
of the borrower, and warrants are instruments that entitle the holder to
purchase a certain amount of common stock at a specified price, which price is
usually higher than the current market price at the time of issuance.
Preferred stocks are instruments that combine qualities both of equity and debt
securities. Individual issues of preferred stock will have those rights and
liabilities that are spelled out in the governing document. Preferred stocks
usually pay a fixed dividend per quarter (or annum) and are senior to common
stock in terms of liquidation and dividends rights, and preferred stocks
typically do not have voting rights. The Fund will only purchase preferred
stocks where the issuer is publicly traded and has capital in excess of $200
million.
The Fund also may invest, consistent with its investment objective and
policies, in zero coupon bonds, which are debt instruments that do not pay
current interest and are typically sold at prices greatly discounted from par
value. The return on a zero-coupon obligation, when held to maturity, equals
the difference between the par value and the original purchase price.
Zero-coupon obligations have greater price volatility than coupon obligations.
The Fund does not engage in trading for short-term profits, and its
portfolio turnover rate is not expected to exceed 200% (annualized).
Nevertheless, changes in the Fund will be made promptly when determined to be
advisable by reason of developments not foreseen at the time of the initial
investment decision and usually without reference to the length of time a
security has been held. Accordingly, portfolio turnover rates are not
considered a limiting factor in the execution of investment decisions.
INVESTMENT RESTRICTIONS
The following fundamental investment limitations cannot be changed
without approval by a "majority of the outstanding voting securities" (as
defined in the Investment Company Act of 1940, as amended (the "1940 Act") of
the Fund.
The Fund may not (unless otherwise indicated):
(1) issue any senior security (as defined in the 1940 Act), except
that (a) the Fund may engage in transactions which may result
in the issuance of senior securities to the extent permitted
under applicable regulations and interpretation of the 1940
Act or an exemptive order; (b) the Fund may acquire other
securities that may be deemed senior securities to the extent
permitted under applicable regulations or interpretations of
the 1940 Act; (c) subject to the restrictions set forth below,
the Fund may borrow money as authorized by the 1940 Act;
(2) with respect to 75% of the Fund's total assets, purchase the
securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, (a) more than 5% of the
Fund's total assets would be invested in the securities of
that issuer, or (b) the Fund would hold more than 10% of the
outstanding voting securities of that issuer;
(3) borrow money, except that (a) the Fund may enter into
commitments to purchase securities in accordance with the
company's investment program, including delayed-delivery and
when-issued securities and reverse repurchase agreements,
provided that the total amount of any such borrowing does not
exceed 33 1/3% of the Fund's total assets; and (b) the Fund
may borrow money for temporary or emergency purposes in an
amount not exceeding 5% of the value of its
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total assets at the time when the loan is made. Any borrowings
representing more than 5% of the Fund's total assets must be
repaid before the Fund may make additional investments;
(4) underwrite securities issued by others, except to the extent
that the Fund may be considered an underwriter within the
meaning of the Securities Act of 1933 in the disposition of
restricted securities;
(5) purchase the securities of any issuer (other than securities
issued or guaranteed by the U.S. government or any of its
agencies or instrumentalities) if, as a result, more than 25%
of the Fund's total assets would be invested in the securities
of companies whose principal business activities are in the
same industry;
(6) purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall
not prevent the Fund from investing in securities or other
instruments backed by real estate or securities of companies
engaged in the real estate business);
(7) purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments (but
this shall not prevent the fund from purchasing or selling
options and futures contracts or from investing in securities
or other instruments backed by physical commodities);
(8) lend any security or make any other loan if, as a result, more
than 33 1/3% of its total assets would be lent to other
parties, but this limitation does not apply to purchases of
debt securities or to repurchase agreements; or
(9) participate on a joint or joint and several basis in any
securities trading account.
The following investment limitations are not fundamental and may be
changed without shareholder approval:
(i) The Fund will not purchase or retain securities of any issuer
if the officers or Trustees of the Victory Portfolios or the
officers or directors of its investment adviser owning
beneficially more than one half of 1% of the securities of
such issuer together own beneficially more than 5% of such
securities.
(ii) The Fund will not invest more than 10% of its total assets in
the securities of issuers which together with any predecessors
have a record of less than three years of continuous
operation.
(iii) The Fund will not invest more than 15% of its net assets in
illiquid securities. Illiquid securities are securities that
are not readily marketable or cannot be disposed of promptly
within seven days and in the usual course of business at
approximately the price at which the Fund has valued them.
Such securities include, but are not limited to, time deposits
and repurchase agreements with maturities longer than seven
days. Securities that may be resold under Rule 144A, or
securities offered pursuant to Section 4(2) of, or securities
otherwise subject to restrictions or limitations on resale
under, the 1933 Act ("Restricted Securities"), shall not be
deemed illiquid solely by reason of being unregistered. Key
Advisers or the Sub-Adviser determine whether a particular
security is deemed to be liquid based on the trading markets
for the specific security and other factors. However, because
state securities laws may limit the Fund's investment in
Restricted Securities (regardless of the liquidity of the
investment), investments in Restricted Securities resalable
under Rule 144A will continue to be subject to applicable
state law requirements until such time, if ever, that such
limitations are changed.
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(iv) The Fund will not make short sales of securities, other than
short sales "against the box," or purchase securities on
margin except for short-term credits necessary for clearance
of portfolio transactions, provided that this restriction will
not be applied to limit the use of options, futures contracts
and related options, in the manner otherwise permitted by the
investment restrictions, policies and investment program of
the Fund.
(v) The Fund may invest up to 5% of its total assets in the
securities of any one investment company, but may not own more
than 3% of the securities of any one investment company or
invest more than 10% of its total assets in the securities of
other investment companies. Pursuant to an exemptive order
received by the Victory Portfolios from the Commission, the
Fund may invest in the money market funds of the Victory
Portfolios.
State Regulations
In addition, the Fund, so long as its shares are registered under the
securities laws of the State of Texas and such restrictions are required as a
consequence of such registration, is subject to the following non-fundamental
policies, which may be modified in the future by the Trustees without a vote of
the Fund's shareholders: (i) the Fund has represented to the Texas State
Securities Board that it will not invest in oil, gas or mineral leases or
purchase or sell real property (including limited partnership interests, but
excluding readily marketable securities of companies which invest in real
estate); and (ii) the Fund has represented to the Texas State Securities Board
that it will not invest more than 5% of its net assets in warrants valued at
the lower of cost or market; provided that, included within that amount, but
not to exceed 2% of net assets, may be warrants which are not listed on the New
York or American Stock Exchanges. For purposes of this restriction, warrants
acquired in units or attached to securities are deemed to be without value.
The policies and limitations listed above supplement those set forth
in the Prospectus. Unless otherwise noted, whenever an investment policy or
limitation states a maximum percentage of the Fund's assets that may be
invested in any security or other asset, or sets forth a policy regarding
quality standards, such standard or percentage limitation will be determined
immediately after and as a result of the Fund's acquisition of such security or
other asset except in the case of borrowing (or other activities that may be
deemed to result in the issuance of a "senior security" under the 1940 Act).
Accordingly, any subsequent change in values, net assets, or other
circumstances will not be considered when determining whether the investment
complies with the Fund's investment policies and limitations. If the value of
the Fund's holdings of illiquid securities at any time exceeds the percentage
limitation applicable at the time of acquisition due to subsequent fluctuations
in value or other reasons, the Board of Trustees will consider what actions, if
any, are appropriate to maintain adequate liquidity.
FUTURE DEVELOPMENTS
The Fund may take advantage of other investment practices which are
not at present contemplated for use by the Fund or which currently are not
available but which may be developed, to the extent such investment practices
are both consistent with the Fund's investment objective and are legally
permissible for the Fund. Such investment practices, if they arise, may
involve risks which exceed those involved in the activities described in the
Prospectus and Statement of Additional Information. Prior to commencing any
new investment practice, the Fund will notify shareholders by means of
prospectus supplement.
Portfolio Turnover
The turnover rate indicated in the Prospectus for the Fund's
investment portfolio is calculated by dividing the lesser of the Fund's
purchases or sales of portfolio securities for the year by the monthly average
value of the portfolio securities. The calculation excludes all securities
whose maturities, at the time of acquisition, were one year or less.
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VALUATION OF PORTFOLIO SECURITIES
Investment securities held by the Fund are valued on the basis of
valuations provided by an independent pricing service, approved by the Board of
Trustees, which uses information with respect to transactions of a security,
quotations from dealers, market transactions in comparable securities, and
various relationships between securities, in determining value. Specific
investment securities which are not priced by the approved pricing service will
be valued according to quotations obtained from dealers who are market makers
in those securities. Investment securities with less than 60 days to maturity
when purchased are valued at amortized cost which approximates market value.
Investment securities not having readily available market quotations will be
priced at fair value using a methodology approved in good faith by the Board of
Trustees.
PERFORMANCE
As described in the Prospectus, from time to time the "standardized
yield," "dividend yield," "average annual total return," "total return," and
"total return at net asset value" of an investment in each class of Fund shares
may be advertised. An explanation of how yields and total returns are
calculated and the components of those calculations are set forth below.
Yield and total return information may be useful to investors in
reviewing the Fund's performance. The Fund's advertisement of its performance
must, under applicable Commission rules, include the average annual total
returns for each class of shares of the Fund for the 1, 5 and 10-year period
(or the life of the class, if less) as of the most recently ended calendar
quarter. This enables an investor to compare the Fund's performance to the
performance of other funds for the same periods. However, a number of factors
should be considered before using such information as a basis for comparison
with other investments. An investment in the Fund is not insured; its yield
and total return are not guaranteed and normally will fluctuate on a daily
basis. When redeemed, an investor's shares may be worth more or less than
their original cost. Yield and total return for any given past period are not
a prediction or representation by the Victory Portfolios of future yields or
rates of return on its shares. The yield and total returns of the Fund are
affected by portfolio quality, portfolio maturity, the type of investments the
Fund holds and its operating expenses.
STANDARDIZED YIELDS. The Fund's "yield" (referred to as "standardized
yield") for a given 30-day period for a class of shares is calculated using the
following formula set forth in rules adopted by the Commission that apply to
all funds that quote yields:
Standardized Yield = 2 [(a-b + 1)(6) - 1]
---
cd
The symbols above represent the following factors:
a = dividends and interest earned during the 30-day period.
b = expenses accrued for the period (net of any expense
reimbursements).
c = the average daily number of shares of that class outstanding
during the 30-day period that were entitled to receive
dividends.
d = the maximum offering price per share of the class on the last
day of the period, adjusted for undistributed net investment
income.
The standardized yield for a 30-day period may differ from its yield
for any other period. The Commission formula assumes that the standardized
yield for a 30-day period occurs at a constant rate for a six-month period and
is annualized at the end of the six-month period. This standardized yield is
not based on actual distributions paid by the Fund to shareholders in the
30-day period, but is a hypothetical yield based upon the net investment income
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<PAGE> 284
from the Fund's portfolio investments calculated for that period. The
standardized yield may differ from the "dividend yield," described below.
Additionally, because each class of shares is subject to different expenses, it
is likely that the standardized yields of the Fund classes of shares will
differ. The yield for the 30-day period ended October 31, 1995 was ____% .
DIVIDEND YIELD AND DISTRIBUTION RETURN. From time to time the Fund
may quote a "dividend yield" or a "distribution return." Dividend yield is
based on the share dividends derived from net investment income during a stated
period. Distribution return includes dividends derived from net investment
income and from realized capital gains declared during a stated period. Under
those calculations, the dividends and/or distributions declared during a stated
period of one year or less (for example, 30 days) are added together, and the
sum is divided by the maximum offering price per share of that class A) on the
last day of the period. When the result is annualized for a period of less
than one year, the "dividend yield" is calculated as follows:
Dividend Yield = Dividends + Number of days (accrual period) x 365
-------------------
Max. Offering Price (last day of period)
The maximum offering price for shares includes the maximum front-end
sales charge.
From time to time similar yield or distribution return calculations
may also be made using the net asset value (instead of its respective maximum
offering price) at the end of the period. The dividend yields at maximum
offering price and net asset value for the 30-day period ended October 31, 1995
were ____% and ____%, respectively.
TOTAL RETURNS. The "average annual total return" is an average annual
compounded rate of return for each year in a specified number of years. It is
the rate of return based on the change in value of a hypothetical initial
investment of $1,000 ("P" in the formula below) held for a number of years
("n") to achieve an Ending Redeemable Value ("ERV"), according to the following
formula:
(ERV) (1n) - 1 = Average Annual Total Return
---
( P )
The cumulative "total return" calculation measures the change in value
of a hypothetical investment of $1,000 over an entire period of years. Its
calculation uses some of the same factors as average annual total return, but
it does not average the rate of return on an annual basis. Total return is
determined as follows:
ERV - P = Total Return
-------
P
In calculating total returns, the current maximum sales charge of
4.75% (as a percentage of the offering price) is deducted from the initial
investment ("P") (unless the return is shown at net asset value, as discussed
below). Total returns also assume that all dividends and capital gains
distributions during the period are reinvested to buy additional shares at net
asset value per share, and that the investment is redeemed at the end of the
period. The average annual total return and cumulative total return for the
period from December 10, 1993 (commencement of operations) to October 31, 1994,
and for the fiscal year ended October 31, 1995 at maximum offering price were
___% and ____%, respectively. For the one year period ended October 31, 1995
annual total return was ______%.
From time to time the Fund may also quote an "average annual total
return at net asset value" or a cumulative "total return at net asset value."
It is based on the difference in net asset value per share at the beginning and
the end of the period for a hypothetical investment in that class of shares
(without considering front-end or contingent sales charges) and takes into
consideration the reinvestment of dividends and capital gains distributions.
The average annual total return and cumulative total return for the period from
December 10, 1993
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<PAGE> 285
(commencement of operations) to October 31, 1994, and for the fiscal year ended
October 31, 1995 at net asset value, was ____% and ___%, respectively. For the
one year period ended October 31, 1995, annual total return was ___%.
OTHER PERFORMANCE COMPARISONS. From time to time the Fund may publish
the ranking of the performance of its shares by Lipper Analytical Services,
Inc. ("Lipper"), a widely-recognized independent mutual fund monitoring
service. Lipper monitors the performance of regulated investment companies,
including the Fund, and ranks the performance of the Fund against (i) all other
funds, excluding money market funds, and (ii) all other government bond funds.
The Lipper performance rankings are based on total return that includes the
reinvestment of capital gains distributions and income dividends but does not
take sales charges or taxes into consideration.
From time to time the Fund may publish the ranking of the performance
of its shares by Morningstar, Inc., an independent mutual fund monitoring
service that ranks mutual funds, including the Fund, in broad investment
categories (equity, taxable bond, tax-exempt and other) monthly, based upon
each fund's three, five and ten-year average annual total returns (when
available) and a risk adjustment factor that reflects Fund performance relative
to three-month U.S. Treasury bill monthly returns. Such returns are adjusted
for fees and sales loads. There are five ranking categories with a
corresponding number of stars: highest (5), above average (4), neutral (3),
below average (2) and lowest (1). Ten percent of the funds, series or classes
in an investment category receive 5 stars, 22.5% receive 4 stars, 35% receive 3
stars, 22.5% receive 2 stars, and the bottom 10% receive one star. Morningstar
ranks the shares of the Fund in relation to other taxable bond funds.
The total return on an investment made in shares of the Fund may be
compared with the performance for the same period of one or more of the
following indices: the Consumer Price Index, the Salomon Brothers World
Government Bond Index, the Standard & Poor's 500 Index, the Shearson Lehman
Government/Corporate Bond Index, the Lehman Aggregate Bond Index, and the J.P.
Morgan Government Bond Index. Other indices may be used from time to time.
The Consumer Price Index is generally considered to be a measure of inflation.
The Salomon Brothers World Government Bond Index generally represents the
performance of government debt securities of various markets throughout the
world, including the United States. The Lehman Government/Corporate Bond Index
generally represents the performance of intermediate and long-term government
and investment grade corporate debt securities. The Lehman Aggregate Bond
Index measures the performance of U.S. corporate bond issues, U.S. government
securities and mortgaged-backed securities. The J.P. Morgan Government Bond
Index generally represents the performance of government bonds issued by
various countries including the United States. The S&P 500 Index is a
composite index of 500 common stocks generally regarded as an index of U.S.
stock market performance. The foregoing bond indices are unmanaged indices of
securities that do not reflect reinvestment of capital gains or take investment
costs into consideration, as these items are not application to indices.
From time to time, the yields and the total returns of the Fund may be
quoted in and compared to other mutual funds with similar investment objective
in advertisements, shareholder reports or other communications to shareholders.
The Fund may also include calculations in such communications that describe
hypothetical investment results. (Such performance examples will be based on
an express set of assumptions and are not indicative of the performance of any
Fund.) Such calculations may from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of the Fund would increase the value, not only
of the original Fund investment, but also of the additional Fund shares
received through reinvestment. As a result, the value of the Fund investment
would increase more quickly than if dividends or other distributions had been
paid in cash. The Fund may also include discussions or illustrations of the
potential investment goals of a prospective investor (including but not limited
to tax and/or retirement planning), investment management techniques, policies
or investment suitability of the Fund, economic conditions, legislative
developments (including pending legislation), the effects of inflation and
historical performance of various asset classes, including but not limited to
stocks, bonds and Treasury bills. From time to
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<PAGE> 286
time advertisements or communications to shareholders may summarize the
substance of information contained in shareholder reports (including the
investment composition of the Fund, as well as the views of the investment
adviser as to current market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
related matters believed to be of relevance to the Fund. The Fund may also
include in advertisements, charts, graphs or drawings which illustrate the
potential risks and rewards of investment in various investment vehicles,
including but not limited to stock, bonds, Treasury bills and shares of the
Fund as well as charts or graphs which illustrate strategies such as dollar
cost averaging, and comparisons of hypothetical yields of investment in
tax-exempt versus taxable investments. In addition, advertisements or
shareholder communications may include a discussion of certain attributes or
benefits to be derived by an investment in the Fund. Such advertisements or
communications may include symbols, headlines or other material which highlight
or summarize the information discussed in more detail therein. With proper
authorization, the Fund may reprint articles (or excerpts) written regarding
the Fund and provide them to prospective shareholders. Performance information
with respect to the Fund is generally available by calling 1- 800-539-3863.
Investors may also judge, and the Fund may at times advertise,
performance by comparing it to the performance of other mutual funds or mutual
fund portfolios with comparable investment objectives and policies, which
performance may be contained in various unmanaged mutual fund or market indices
or rankings such as those prepared by Dow Jones & Co., Inc., Standard & Poor's
Corporation, Lehman Brothers, Merrill Lynch, and Salomon Brothers, and in
publications issued by Lipper Analytical Services, Inc. and in the following
publications: IBC/Donoghue's Money Fund Reports, Ibottson Associates, Inc.,
Morningstar, CDA/Wiesenberger, Money Magazine, Forbes, Barron's, The Wall
Street Journal, The New York Times, Business Week, American Banker, Fortune,
Institutional Investor, U.S.A. Today. In addition to yield information,
general information about the Fund that appears in a publication such as those
mentioned above may also be quoted or reproduced in advertisements or in
reports to shareholders.
Advertisements and sales literature may include discussions of
specifics of the portfolio manager's investment strategy and process,
including, but not limited to, descriptions of security selection and analysis.
Advertisements may also include descriptive information about the
investment adviser, including, but not limited to, its status within the
industry, other services and products it makes available, total assets under
management, its investment philosophy.
When comparing yield, total return and investment risk of an
investment in the Fund with other investments, investors should understand that
certain other investments have different risk characteristics than an
investment in shares of the Fund. For example, certificates of deposit may
have fixed rates of return and may be insured as to principal and interest by
the FDIC, while the Fund's returns will fluctuate and its share values and
returns are not guaranteed. Money market accounts offered by banks also may be
insured by the FDIC and may offer stability of principal. U.S. Treasury
securities are guaranteed as to principal and interest by the full faith and
credit of the U.S. government. Money market mutual funds may seek to offer a
fixed price per share.
ADDITIONAL PURCHASE, EXCHANGE AND REDEMPTION INFORMATION
The Victory Portfolios (see "Description of Victory Portfolios" below)
is open for business and the NAV is calculated on each Business Day. A
Business Day is every day on which the NYSE is open for business, the Federal
Reserve Bank of Cleveland is open and any other day (other than a day on which
no shares of the Fund are tendered for redemption and no order to purchase any
shares is received) during which there is sufficient trading in portfolio
instruments that the Fund's net asset value per share might be materially
affected. The NAV of each class is determined and its shares are priced as of
the close of regular trading of the NYSE (generally 4:00 p.m. Eastern time (the
"Valuation Time")) on each Business Day of the Fund. The NYSE or the Federal
Reserve Bank of Cleveland will not be open in observance of the following
holidays: New Year's Day, Martin Luther King, Jr.
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<PAGE> 287
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day.
When the NYSE is closed, or when trading is restricted for any reason
other than its customary weekend or holiday closings, or under emergency
circumstances as determined by the Commission to warrant such action, the
Fund's Transfer Agent will determine the Fund's NAVs at Valuation Time. The
Fund's NAV may be affected to the extent that its securities are traded on days
that are not Business Days.
[If, in the opinion of the Trustees, conditions exist which make cash
payment undesirable, redemption payments may be made in whole or in part in
securities or other property, valued for this purpose as they are valued in
computing the NAV of each class of the Fund. Shareholders receiving securities
or other property on redemption may realize a gain or loss for tax purposes and
will incur any costs of sale as well as the associated inconveniences.]
Pursuant to Rule 11a-3 under the 1940 Act, the Fund is required to
give shareholders at least 60 days' notice prior to terminating or modifying
the Fund's exchange privilege. Under the Rule, the 60-day notification
requirement may be waived if (i) the only effect of a modification would be to
reduce or eliminate an administrative fee, redemption fee or deferred sales
charge ordinarily payable at the time of exchange or (ii) the Fund temporarily
suspends the offering of shares as permitted under the 1940 Act or by the SEC
or because it is unable to invest amounts effectively in accordance with its
investment objective and policies.
In the Prospectus, the Victory Portfolios, Key Advisers and the
Sub-Adviser have notified shareholders that they reserve the right at any time
without prior notice to shareholders to refuse exchange purchases by any person
or group if, in Key Advisers or the Sub-Adviser's judgment, the Fund would be
unable to invest effectively in accordance with its investment objective and
policies, or would otherwise potentially be adversely affected.
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<PAGE> 288
ADDITIONAL PURCHASE INFORMATION
REDUCED SALES CHARGE. Reduced sales charges are applicable to
purchases of $50,000 or more alone or in combination with purchases of shares
of other Victory Portfolios made at any one time. To obtain the reduction of
the sales charge, you or your investment professional must notify the Transfer
Agent at the time of purchase whenever a quantity discount is applicable to
your purchase. Upon such notification, you will receive the lowest applicable
sales charge.
In addition to investing at one time in any combination of shares of
the Victory Portfolios in an amount entitling you to a reduced sales charge,
you may qualify for a reduction in the sales charge under the following
programs:
COMBINED PURCHASES. When you invest in shares of the Victory
Portfolios for several accounts at the same time, you may combine these
investments into a single transaction if purchased through one investment
professional, and if the total is $50,000 or more. The following may qualify
for this privilege: an individual, or "company" as defined in Section 2(a)(8)
of the 1940 Act; an individual, spouse, and their children under age 21
purchasing for his, her, or their own account; a trustee, administrator or
other fiduciary purchasing for a single trust estate or single fiduciary
account or for a single or a parent-subsidiary group of "employee benefit
plans" (as defined in Section 3(3) of ERISA); and tax-exempt organizations
under Section 501(c)(3) of the Internal Revenue Code.
RIGHTS OF ACCUMULATION. Your "Rights of Accumulation" permit reduced
sales charges on future purchases of shares after you have reached a new
breakpoint. You can add the value of existing Victory Portfolios shares held
by you, your spouse, and your children under age 21, determined at the previous
day's NAV at the close of business, to the amount of your new purchase valued
at the current offering price to determine your reduced sales charge.
LETTER OF INTENT. If you anticipate purchasing $50,000 or more of
shares of the Fund alone or in combination with shares of certain other Victory
Portfolios within a 13-month period, you may obtain shares of the portfolios at
the same reduced sales charge as though the total quantity were invested in one
lump sum, by filing a non-binding Letter of Intent (the "Letter") within 90
days of the start of the purchases. Each investment you make after signing the
Letter will be entitled to the sales charge applicable to the total investment
indicated in the Letter. For example, a $2,500 purchase toward a $60,000 Letter
would receive the same reduced sales charge as if the $60,000 had been invested
at one time. To ensure that the reduced price will be received on future
purchases, you or your investment professional must inform the transfer agent
that the Letter is in effect each time shares are purchased. Neither income
dividends nor capital gain distributions taken in additional shares will apply
toward the completion of the Letter.
Your initial investment must be at least 5% of the total amount you
plan to invest. Out of the initial purchase, 5% of the dollar amount specified
in the Letter will be registered in your name and held in escrow. The shares
held in escrow cannot be redeemed or exchanged until the Letter is satisfied or
the additional sales charges have been paid. You will earn income dividends
and capital gain distributions on escrowed shares. The escrow will be released
when your purchase of the total amount has been completed. You are not
obligated to complete the Letter.
If you purchase more than the amount specified in the Letter and
qualify for a further sales charge reduction, the sales charge will be adjusted
to reflect your total purchase at the end of 13 months. Surplus funds will be
applied to the purchase of additional shares at the then current offering price
applicable to the total purchase.
If you do not complete your purchase under the Letter within the
13-month period, your sales charge will be adjusted upward, corresponding to
the amount actually purchased, and if after written notice, you do not pay the
increased sales charge, sufficient escrowed shares will be redeemed to pay such
charge.
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<PAGE> 289
ADDITIONAL EXCHANGE INFORMATION
Shares of the Victory Portfolios (see "Description of Victory
Portfolios" below) may be exchanged for shares of any Victory money market fund
or any other fund of the Victory Portfolios with the same or a lower sales
charge. Shares of any Victory money market portfolio or any Victory Portfolios
with a reduced sales charge may be exchanged for shares of the Fund upon
payment of the difference in the sales charge.
ADDITIONAL REDEMPTION INFORMATION
REINSTATEMENT PRIVILEGE. Within 90 days of a redemption, a
shareholder may reinvest all or part of the redemption proceeds of shares of
the Fund or any of the other Victory Portfolios into which shares of the Fund
are exchangeable as described below, at the net asset value next computed after
receipt by the Transfer Agent of the reinvestment order. No charge is
currently made for reinvestment in shares of the Fund but a reinvestment in
shares of certain other Victory Portfolios is subject to a $5.00 service fee.
The shareholder must ask the Distributor for such privilege at the time of
reinvestment. Any capital gain that was realized when the shares were redeemed
is taxable, and reinvestment will not alter any capital gains tax payable on
that gain. If there has been a capital loss on the redemption, some or all of
the loss may not be tax deductible, depending on the timing and amount of the
reinvestment. Under the Internal Revenue Code, if the redemption proceeds of
Fund shares on which a sales charge was paid are reinvested in shares of the
Fund or another of the Victory Portfolios within 90 days of payment of the
sales charge, the shareholder's basis in the shares of the Fund that were
redeemed may not include the amount of the sales charge paid. That would
reduce the loss or increase the gain recognized from redemption. The Fund may
amend, suspend or cease offering this reinvestment privilege at any time as to
shares redeemed after the date of such amendment, suspension or cessation. You
must reinstate your shares into an account with the same registration. This
privilege may be exercised only once by a shareholder with respect to the Fund.
For information on which funds are available for the Reinstatement Privilege,
please consult your program materials.
DIVIDENDS AND DISTRIBUTIONS
The Fund ordinarily declares and pays dividends from its net
investment income quarterly. The Fund distributes substantially all of its net
investment income and net capital gains, if any, to shareholders within each
calendar year as well as on a fiscal year basis to the extent required for the
Fund to qualify for favorable federal tax treatment.
The amount of distributions may vary from time to time depending on
market conditions and the composition of the Fund's portfolio.
For this purpose, the net income of the Fund, from the time of the
immediately preceding determination thereof, shall consist of all interest
income accrued on the portfolio assets of the Fund, dividend income, if any,
income from securities loans, if any, and realized capital gains and losses on
the Fund assets, less all expenses and liabilities of the Fund chargeable
against income. Interest income shall include discount earned, including both
original issue and market discount, on discount paper accrued ratably to the
date of maturity. Expenses, including the compensation payable to Key Advisers
or the Sub-Adviser, are accrued each day. The expenses and liabilities of the
Fund shall include those appropriately allocable to the Fund as well as a share
of the general expenses and liabilities of the Victory Portfolios in proportion
to the Fund's share of the total net assets of the Victory Portfolios.
Additional Tax Information
It is the policy of the Fund to qualify for the favorable tax
treatment accorded regulated investment companies ("RICs") under Subchapter M
of the Code, for so long as such qualification is in the best interest of its
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<PAGE> 290
shareholders. By following such policy and distributing its income and gains
currently with respect to each taxable year, the Fund expects to eliminate or
reduce to a nominal amount the federal income and excise taxes to which it may
otherwise be subject.
In order to qualify as a RIC, the Fund must, among other things, (1)
derive at least 90% of its gross income from dividends, interest, payments with
respect to securities loans, and gains from the sale or other disposition of
stock or securities, foreign currencies or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in stock, securities or currencies, (2) derive less than 30% of its
gross income from the sale or other disposition of stock, securities, options,
futures, forward contracts, and certain foreign currencies (or options,
futures, or forward contracts on foreign currencies) held for less than three
months, and (3) diversify its holdings so that at the end of each quarter of
its taxable year (i) at least 50% of the market value of the Fund's assets is
represented by cash or cash items, U.S. Government securities, securities of
other RICs and other securities limited, in respect of any one issuer, to an
amount not greater than 5% of the value of the Fund's total assets and 10% of
the outstanding voting securities of such issuer, and (ii) not more than 25% of
the value of its total assets is invested in the securities of any one issuer
(other than U.S. Government securities) or of two or more issuers that the Fund
controls and that are engaged in the same, similar, or related trades or
businesses. These requirements may restrict the degree to which the Fund may
engage in short-term trading and concentrate investments. If the Fund
qualifies as a RIC, it will not be subject to federal income tax on the part of
its net investment income and net realized capital gains, if any, that it
distributes to shareholders with respect to each taxable year within the time
limits specified in the Code.
A non-deductible excise tax is imposed on regulated investment
companies that do not distribute in each calendar year an amount equal to 98%
of their ordinary income for the year plus 98% of their capital gain net income
for the 1-year period ending on October 31 of such calendar year. The balance
of such income must be distributed during the following calendar year. If
distributions during a calendar year are less than the required amount, the
fund is subject to a non-deductible excise tax equal to 4% of the deficiency.
Certain investment and hedging activities of the Fund, including
transactions in options, futures contracts, hedging transactions, forward
contracts, straddles, foreign currencies, and foreign securities, are subject
to special tax rules. In a given case, these rules may accelerate income to the
Fund, defer losses to the Fund, cause adjustments in the holding periods of the
Fund's securities, convert short-term capital losses into long-term capital
losses, or otherwise affect the character of the Fund's income. These rules
could therefore affect the amount, timing and character of distributions to
shareholders. The Fund will endeavor to make any available elections
pertaining to such transactions in a manner believed to be in the best interest
of the Fund and its securities.
The Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends paid to any shareholder who has
failed to provide (or provided an incorrect) tax identification number, or is
subject to withholding pursuant to a notice from the Internal Revenue Service
for failure to properly include on his or her income tax return payments of
interest or dividends. This "backup withholding" is not an additional tax, and
any amounts withheld may be credited against the shareholder's ultimate U.S.
tax liability.
Information set forth in the Prospectus and this Statement of
Additional Information that relates to federal taxation is only a summary of
certain key federal tax considerations generally affecting purchasers of shares
of the Fund. No attempt has been made to present a complete explanation of the
federal tax treatment of a fund or its shareholders, and this discussion is not
intended as a substitute for careful tax planning. Accordingly, potential
purchasers of shares of the Fund are urged to consult their tax advisers with
specific reference to their own tax circumstances. In addition, the tax
discussion in the Prospectus and this Statement of Additional Information is
based on tax law in effect on the date of the Prospectus and this Statement of
Additional Information; such laws and regulations may be changed by
legislative, judicial or administrative action, sometimes with retroactive
effect.
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MANAGEMENT OF THE VICTORY PORTFOLIOS
Board of Trustees
Overall responsibility for management of the Victory Portfolios rests
with the Trustees, who are elected by the shareholders of the Victory
Portfolios. The Victory Portfolios are managed by the Trustees in accordance
with the laws of the State of Delaware governing business trusts. There are
currently seven Trustees, six of whom are not "interested persons" of the
Victory Portfolios within the meaning of that term under the 1940 Act. The
Trustees, in turn, elect the officers of the Victory Portfolios to supervise
actively its day-to-day operations.
The Trustees of the Victory Portfolios, their addresses, ages and
their principal occupations during the past five years are as follows:
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- --------------------- ---------------- --------------------
<S> <C> <C>
Leigh A. Wilson, 51* Trustee and From 1989 to present, Chairman and
Glenleigh International Ltd. President Chief Executive Officer, Glenleigh
53 Sylvan Road North International Limited; previously
Westport, CT 06880 Chief Executive Officer, Paribas
North America and Paribas
Corporation; Trustee, The Victory
Funds and Spears, Benzak, Salomon
and Farrell ("SBSF") Funds.
Robert G. Brown, 72 Trustee Retired; from October 1983 to
5460 N. Ocean Drive November 1990, President,
Singer Island, Riviera Beach, Cleveland Advanced Manufacturing
Florida 33404 Program (non-profit corporation
engaged in regional economic
development).
Edward P. Campbell, 46 Trustee From March 1, 1994 to present,
Nordson Corporation Executive Vice President and Chief
28601 Clemens Road Operating Officer of Nordson
Westlake, OH 44145 Corporation (manufacturer of
application equipment); from May
1988 to March 1994, Vice President
of Nordson Corporation; from 1987
to December 1994, member of the
Supervisory Committee of Society's
Collective Investment Retirement
Fund; from May 1991 to August
1994, Trustee, Financial Reserves
Fund and from May 1993 to August
1994, Trustee, Ohio Municipal
Money Market Fund; Trustee, The
Victory Funds and SBSF Funds.
</TABLE>
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<PAGE> 292
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Funds During Past 5 Years
- --------------------- ---------------- --------------------
<S> <C> <C>
Dr. Harry Gazelle, 68 Trustee Retired radiologist, Drs. Hill and
17822 Lake Road Thomas Corp.; Trustee, The Victory
Lakewood, OH 44107 Funds.
</TABLE>
- ---------------
* Mr. Wilson is deemed to be an "interested person" of the Victory
Portfolios under the 1940 Act solely by reason of his position as
President.
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<PAGE> 293
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Funds During Past 5 Years
- --------------------- ---------------- --------------------
<S> <C> <C>
Dr. Thomas F. Morrissey, 62 Trustee 1995 Visiting Scholar, Bond
Weatherhead School of University, Queensland, Australia;
Management Professor, Weatherhead School of
Case Western Reserve Management, Case Western Reserve
University University; from 1989 to 1995,
10900 Euclid Avenue Associate Dean of Weatherhead
Cleveland, OH 44106-7235 School of Management and
Professor, Case Western Reserve
University; from 1987 to December
1994, Member of the Supervisory
Committee of Society's Collective
Investment Retirement Fund; from
May 1991 to August 1994, Trustee,
Financial Reserves Fund and from
May 1993 to August 1994, Trustee,
Ohio Municipal Money Market Fund;
Trustee, The Victory Funds.
Stanley I. Landgraf, 70 Trustee Retired; currently, Trustee,
41 Traditional Lane Rensselaer Polytechnic Institute;
Albany, NY 12211 Director, Elenel Corporation and
Mechanical Technology, Inc.;
Member, Board of Overseers, School
of Management, Rensselaer
Polytechnic Institute; Member, The
Fifty Group (a Capital Region
business organization); Trustee,
The Victory Funds.
H. Patrick Swygert, 52 Trustee President, Howard University;
Howard University formerly President, State
2400 6th Street, N.W. University of New York at Albany;
Suite 320 formerly, Executive Vice
Washington, DC 20059 President, Temple University;
Trustee, The Victory Funds.
</TABLE>
The Board presently has an Investment Policy Committee and a Business,
Legal, and Audit Committee. The members of the Investment Policy Committee are
Messrs. Landgraf (Chairman), Morrissey and Brown, who will serve until May
1996. The function of the Investment Policy Committee is to review the
existing investment policies of the Victory Portfolios, including the levels of
risk and types of funds available to shareholders, and make recommendations to
the Board of Trustees regarding the revision of such policies or, if necessary,
the submission of such revisions to the Victory Portfolios' shareholders for
their consideration. The members of the Business, Legal and Audit Committee
are Messrs. Swygert (Chairman), Campbell and Gazelle who will serve until May
1996. The function of the Business, Legal and Audit Committee is to recommend
independent auditors and monitor accounting and financial matters; to nominate
persons to serve as disinterested Trustees and Trustees to serve on committees
of the Board; and to review compliance and contract matters.
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<PAGE> 294
The Investment Policy Committee met four times during the 12 months
ended October 31, 1995. The Business, Legal and Audit Committee was
constituted on May 24, 1995 (and has met twice since then) and replaced the
Audit Committee, the Legal Committee and the Nominating Committee, which met
three times, one time and one time, respectively, during the 12 month period
ended October 31, 1995.
The Board presently has an Investment Policy Committee and a Business,
Legal, and Audit Committee. The members of the Investment Policy Committee are
Messrs. Morrissey, Brown and Landgraf (Chairman), who will serve until May
1996. The function of the Investment Policy Committee is to review the
existing investment policies of the Victory Portfolios, including the levels of
risk and types of funds available to shareholders, and make recommendations to
the Board of Trustees regarding the revision of such policies or, if necessary,
the submission of such revisions to the Victory Portfolios' shareholders for
their consideration. The members of the Business, Legal and Audit Committee
are Messrs. Swygert (Chairman), Campbell and Gazelle who will serve until May
1996. The function of the Business, Legal and Audit Committee is to recommend
independent auditors and monitor accounting and financial matters; to nominate
persons to serve as disinterested Trustees and Trustees to serve on committees
of the Board; and to review compliance and contract matters.
The Investment Policy Committee met four times during the fiscal year
ended October 31, 1995. The Business, Legal and Audit Committee was
constituted on May 24, 1995 (and has met once since then) and replaced the
Audit Committee, the Legal Committee and the Nominating Committee, which met
three times, one time and one time, respectively, during the fiscal year ended
October 31, 1995.
REMUNERATION OF TRUSTEES AND CERTAIN EXECUTIVE OFFICERS
Effective June 1, 1995, each Trustee (other than Leigh A. Wilson)
receives an annual fee of $27,000 for serving as Trustee of all the funds of
the Victory Portfolios, and an additional per meeting fee ($2,400 in person and
$1,200 per telephonic meeting).
Effective June 1, 1995, Leigh A. Wilson receives an annual fee of
$33,000 for serving as President and Trustee for all of the funds of the
Victory Portfolios, and an additional per meeting fee ($3,000 in person and
$1,500 per telephonic meeting).
The following table indicates the compensation received by each
Trustee from the Fund and from the "Victory Fund Complex" during the fiscal
year of the Fund which ended on October 31, 1995. For certain Trustees, the
amounts include amounts paid by the Corporate Bond Portfolio of The Victory
Funds, which merged with the Fund as of June 5, 1995:
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<PAGE> 295
<TABLE>
<CAPTION>
Total
Compensa-
Total tion from
Pension or Retirement Estimated Annual Compensa- Victory
Benefits Accrued as Benefits tion from "Fund
Portfolio Expenses Upon Retirement Fund Complex"*
--------------------- ---------------- --------- ---------
<S> <C> <C> <C> <C>
Robert G. Brown, Trustee . . . . . -0- -0- $1,052.54 $39,815.98
John D. Buckingham, Trustee# . . . -0- -0- 504.76 18,841.89
Edward P. Campbell, Trustee . . . . -0- -0- 776.01 33,799.68
Harry Gazelle, Trustee . . . . . . -0- -0- 876.72 35,916.98
John W. Kemper, Trustee# . . . . . -0- -0- 644.08 22,567.31
Stanley I. Landgraf, Trustee . . . -0- -0- 827.74 34,615.98
Thomas F. Morrissey, Trustee . . . -0- -0- 966.09 40,366.98
H. Patrick Swygert, Trustee . . . . -0- -0- 966.09 37,116.98
Leigh A. Wilson, Trustee . . . . . -0- -0- 1,033.38 46,716.97
John R. Young, Trustee# . . . . . . -0- -0- 619.72 21,963.81
</TABLE>
# Resigned
- ---------------
* For certain Trustees, these amounts include compensation received from
The Victory Funds (which were reorganized into the Victory Portfolios
as of June 5, 1995), the SBSF Funds (the investment adviser of which
was acquired by KeyCorp effective April, 1995) and Society's Collective
Investment Retirement Funds, which were reorganized into the Victory
Balanced Fund and Victory Government Mortgage Fund as of December 19,
1994. There are presently 28 mutual funds from which the above-named
Trustees are compensated in the Victory "Fund Complex," but not all of
the above-named Trustees serve on the boards of each fund in the "Fund
Complex."
Officers
The officers of the Victory Portfolios, their addresses, ages and
principal occupations during the past five years are as follows:
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<PAGE> 296
<TABLE>
<CAPTION>
Position with the Principal occupation
Name Victory Portfolios during past 5 years
---- ------------------ --------------------
<S> <C> <C>
Leigh A. Wilson, 51 President and Trustee From 1989 to present, Chairman and
Glenleigh International Ltd. Chief Executive Officer, Glenleigh
53 Sylvan Road North International Limited; from 1984-
Westport, CT 06880 1989, Chief Executive Officer,
Paribas North America and Paribas
Corporation; Trustee to The Victory
Funds and SBSF Funds.
William B. Blundin, 57 Vice President Senior Vice President of BISYS Fund
BISYS Fund Services Services; officer of other
125 West 55th Street investment companies administered
New York, New York 10019 by BISYS Fund Services; President
and Chief Executive Officer of
Vista Broker-Dealer Services, Inc.,
Emerald Asset Management, Inc. and
BNY Hamilton Distributors, Inc.,
registered broker/dealers.
J. David Huber, 49 Vice President Executive Vice President, BISYS
BISYS Fund Services Fund Services.
3435 Stelzer Road
Columbus, OH 43219-3035
Scott A. Englehart, 33 Secretary From October 1990 to present,
BISYS Fund Services employee of BISYS Fund Services,
3435 Stelzer Road Inc.; from 1985 to October 1990,
Columbus, OH 43219-3035 Manager of Banking Center, Fifth
Third Bank.
George O. Martinez, 36 Assistant Secretary From March 1995 to present, Senior
BISYS Fund Services Vice President and Director of
3435 Stelzer Road Legal and Compliance Services,
Columbus, OH 43219-3035 BISYS Fund Services; from June
1989-March 1995, Vice President and
Associate General Counsel, Alliance
Capital Management.
Martin R. Dean, 32 Treasurer From May 1994 to present, employee
BISYS Fund Services of BISYS Fund Services; from
3435 Stelzer Road January 1987 - April 1994, Senior
Columbus, OH 43219-3035 Manager, KPMG Peat Marwick.
Adrian J. Waters, 33 Assistant Treasurer From May 1993 to present, employee
BISYS Fund Services (Ireland) of BISYS Fund Services; from 1989-
Limited May 1993, Manager, Price
ITI House Waterhouse.
12 Earlsfort Terrace
Dublin 2, Ireland
</TABLE>
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<PAGE> 297
The mailing address of each of the officers of the Victory Portfolios
is 3435 Stelzer Road, Columbus, Ohio 43219-3035.
The officers of the Victory Portfolios (other than Leigh Wilson)
receive no compensation directly from the Victory Portfolios for performing the
duties of their offices. BISYS Fund Services, Inc. receives fees from the
Victory Portfolios for acting as Administrator.
As of December 1, 1995, the Trustees and officers as a group owned
beneficially less than 1% of the Fund.
Investment Adviser and Sub-Adviser
Key Advisers was organized as an Ohio corporation on July 27, 1995 and
is registered as an investment adviser under the Investment Advisers Act of
1940. It is a wholly-owned subsidiary of KeyCorp Asset Management Holdings,
Inc., which is a wholly- owned subsidiary of Society National Bank, a
wholly-owned subsidiary of KeyCorp. Affiliates of Key Advisers manage
approximately $37 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals and mutual funds.
KeyCorp, a financial services holding company, is headquartered at 127
Public Square, Cleveland, Ohio 44114. As of September 30, 1995, KeyCorp had an
asset base of $68 billion, with banking offices in 26 states from Maine to
Alaska, and trust and investment offices in 16 states. KeyCorp is the
resulting entity of the merger in 1994 of Society Corporation, the bank holding
company of which Society National Bank was a wholly-owned subsidiary, and
KeyCorp, the former bank holding company. KeyCorp's major business activities
include providing traditional banking and associated financial services to
consumer, business and commercial markets. Its non-bank subsidiaries include
investment advisory, securities brokerage, insurance, bank credit card
processing, and mortgage leasing companies. Society National Bank is the lead
affiliate bank of KeyCorp.
The following table lists the advisory fees for each mutual fund that
is advised by Key Advisers.
.25 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Institutional Money Market Fund*
.35 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Prime Obligations Fund*
Victory U.S. Government Obligations Fund*
Victory Tax-Free Money Market Fund*
.50 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Money Market Fund*
Victory Limited Term Income Fund*
Victory Government Mortgage Fund*
Victory Financial Reserves Fund*
Victory Fund for Income #
.55 OF 1% OF AVERAGE DAILY NET ASSETS
Victory National Municipal Bond Fund*
Victory Government Bond Fund*
Victory New York Tax-Free Fund*
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<PAGE> 298
.60 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Bond Fund*
Victory Stock Index Fund*
.65 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Diversified Stock Fund*
.75 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Intermediate Income Fund*
Victory Investment Quality Bond Fund*
Victory Ohio Regional Stock Fund*
1% OF AVERAGE DAILY NET ASSETS
Victory Balanced Fund*
Victory Value Fund*
Victory Growth Fund*
Victory Special Value Fund*
Victory Special Growth Fund+
1.10% OF AVERAGE DAILY ASSETS
Victory International Growth Fund*
- ---------------
# First Albany Asset Management Corporation serves as sub-adviser to the
Victory Fund for Income, for which it receives .20% of average daily
net assets.
+ T. Rowe Price Associates, Inc. serves as sub-adviser to Society
Special Growth Fund, for which it receives .25% of average daily net
assets up to $100 million and .20% of average daily net assets in
excess of $100 million.
* Society Asset Management, Inc. (the Sub-Adviser) serves as sub-adviser
to each of these funds. For its services under the investment
sub-advisory agreement, Key Advisers pays the Sub-Adviser sub-advisory
fees at rates (based on an annual percentage of average daily net
assets) which vary according to the table set forth below:
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<PAGE> 299
For the Victory Balanced Fund, Diversified Stock Fund, Growth Fund, Stock Index
Fund and Value Fund:
<TABLE>
<CAPTION>
Rate of
Net Assets Sub-Advisory Fee*
---------- -----------------
<S> <C>
Up to $10,000,000 0.65%
Next $15,000,000 0.50%
Next $25,000,000 0.40%
Above $50,000,000 0.35%
</TABLE>
For the Victory International Growth Fund, Ohio Regional Stock Fund and Special
Value Fund:
<TABLE>
<CAPTION>
Rate of
Net Assets Sub-Advisory Fee*
---------- -----------------
<S> <C>
Up to $10,000,000 0.90%
Next $15,000,000 0.70%
Next $25,000,000 0.55%
Above $50,000,000 0.45%
</TABLE>
For the Victory Intermediate Income Fund, Investment Quality Bond Fund, Limited
Term Income Fund, Ohio Municipal Bond Fund, Government Bond Fund, Government
Mortgage Fund, National Municipal Bond Fund and New York Tax-Free Fund:
<TABLE>
<CAPTION>
Rate of
Net Assets Sub-Advisory Fee*
---------- -----------------
<S> <C>
Up to $10,000,000 0.40%
Next $15,000,000 0.30%
Next $25,000,000 0.25%
Above $50,000,000 0.20%
</TABLE>
For the Victory Prime Obligations Fund, Tax-Free Money Market Fund, U.S.
Government Obligations Fund, Financial Reserves Fund, Institutional Money
Market Fund and Ohio Municipal Money Market Fund:
<TABLE>
<CAPTION>
Rate of
Net Assets Sub-Advisory Fee*
---------- -----------------
<S> <C>
Up to $10,000,000 0.25%
Next $15,000,000 0.20%
Next $25,000,000 0.15%
Above $50,000,000 0.125%
</TABLE>
- ---------------
* As a percentage of average daily net assets. The Sub-Adviser has the
right to voluntarily waive any portion of the sub- advisory fee from
time to time.
ADVISORY AND OTHER CONTRACTS
Unless sooner terminated, the Investment Advisory Agreement between
Key Advisers and the Funds provides that it will continue in effect as to a the
Fund for an initial two-year term and for consecutive one-year terms
thereafter, provided that such continuance is approved at least annually by the
Victory Portfolios' Trustees or by vote of a majority of the outstanding shares
of such Fund (as defined under "GENERAL INFORMATION - Miscellaneous" in the
Prospectuses), and, in either case, by a majority of the Trustees who are not
parties to the Investment Advisory Agreement or interested persons (as defined
in the 1940 Act) of any party to the Investment Advisory Agreement, by votes
cast in person at a meeting called for such purpose.
The Investment Advisory Agreement is terminable as to the Fund at any
time on 60 days' written notice without penalty by the Trustees, by vote of a
majority of the outstanding shares of the Fund, or by Key Advisers. The
Investment Advisory Agreement also terminates automatically in the event of any
assignment, as defined under the 1940 Act.
The Investment Advisory Agreement provides that KeyCorp Advisers shall
not be liable for any error of judgment or mistake of law or for any loss
suffered by the Victory Portfolios in connection with the performance of
services pursuant to the Investment Advisory Agreement, except a loss resulting
from a breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith, or
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<PAGE> 300
gross negligence on the part of Key Advisers in the performance of its duties,
or from reckless disregard by it of either duties and obligations thereunder.
Under the Investment Advisory Agreement, Key Advisers has agreed to
provide the investment advisory services described in the Prospectus. For the
services provided and expenses assumed pursuant to the Investment Advisory
Agreement, the Fund pays Key Advisers a fee, computed daily and paid monthly,
at the annual rate of seventy-five one-hundredths of one percent (.75%) of the
average daily net assets of the Fund.
From commencement of operations in 1993 until January 1, 1995, Society
served as investment adviser to the Fund. For the period December 10, 1993
(commencement of operations) to October 31, 1994 and for the fiscal year ended
October 31, 1995, the Fund paid investment advisory fees of $436,637 and
$_______, respectively after fee reductions of $240,057 and $_______,
respectively.
Under the Investment Advisory Agreement, Key Advisers may delegate a
portion of its responsibilities to a sub-adviser. In addition, the Investment
Advisory Agreement provides that Key Advisers may render services through its
own employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser of the Fund and are under the common
control of KeyCorp as long as all such persons are functioning as part of an
organized group of persons, managed by authorized officers of Key Advisers.
Key Advisers has entered into an investment sub-advisory agreement
(the "Sub-Advisory Agreement") with its affiliate, Society Asset Management,
Inc. on behalf of the Fund. The Sub-Adviser is a wholly-owned subsidiary of
KeyCorp Asset Management Holdings, Inc. With respect to the day to day
management of the Fund, under the Sub-Advisory Agreement, the Sub-Adviser makes
decisions concerning, and places all orders for, purchases and sales of
securities and helps maintain the records relating to such purchases and sales.
The Sub-Adviser may, in its discretion, provide such services through its own
employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser to the Company under applicable laws
and are under the common control of KeyCorp; provided that (i) all persons,
when providing services under the Sub-Advisory Agreement, are functioning as
part of an organized group of persons, and (ii) such organized group of persons
is managed at all times by authorized officers of the Sub-Adviser. This
arrangement will not result in the payment of additional fees by the Fund.
Glass-Steagall Act
In 1971 the United States Supreme Court held in Investment Company
Institute v. Camp that the federal statute commonly referred to as the
Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision:
(a) forbid a bank holding company registered under the Federal Bank Holding
Company Act of 1956 (the "Holding Company Act") or any non-bank affiliate
thereof from sponsoring, organizing, or controlling a registered, open-end
investment company continuously engaged in the issuance of its shares, but (b)
do not prohibit such a holding company or affiliate from acting as investment
adviser, transfer agent, and custodian to such an investment company. In 1981
the United States Supreme Court held in Board of Governors of the Federal
Reserve System v. Investment Company Institute that the Board did not exceed
its authority under the Holding Company Act when it adopted its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to registered closed-end investment companies.
In the Board of Governors case, the Supreme Court also stated that if a
national bank complied with the restrictions imposed by the Board in its
regulation and interpretation authorizing bank holding companies and their
non-bank affiliates to act as investment advisers to investment companies, a
national bank performing investment advisory services for an investment company
would not violate the Glass-Steagall Act.
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<PAGE> 301
Key Advisers and the Sub-Adviser believe that they may perform the
services for the Victory Portfolios contemplated by the Prospectus, this
Statement of Additional Information, and the Investment Advisory Agreement (and
Sub-Advisory Agreement) with the Victory Portfolios without violation of
applicable statutes and regulations and has so represented in its Investment
Advisory Agreement (and Sub-Advisory Agreement) with the Victory Portfolios.
Key Trust Company of Ohio, N.A. believes that it may perform the services for
the Victory Portfolios contemplated by the Prospectus, this Statement of
Additional Information, and the Shareholder Servicing Agreement with the
Victory Portfolios (as described below) without violation of applicable
statutes and regulations and has so represented in such Shareholder Servicing
Agreement. Future changes in either federal or state statutes and regulations
relating to the permissible activities of banks or bank holding companies and
the subsidiaries or affiliates of those entities, as well as further judicial
or administrative decisions or interpretations of present and future statutes
and regulations, could prevent or restrict Key Trust Company of Ohio, N.A., Key
Advisers or the Sub-Adviser from continuing to perform such services for the
Victory Portfolios. Depending upon the nature of any changes in the services
which could be provided by Key Trust Company of Ohio, N.A., Key Advisers or the
Sub-Adviser the Trustees of the Victory Portfolios would review the Victory
Portfolios' relationship with Key Trust Company of Ohio, N.A., Key Advisers or
the Sub-Adviser and consider taking all action necessary in the circumstances.
Should future legislative, judicial, or administrative action prohibit
or restrict the proposed activities of Key Trust Company of Ohio, N.A., Key
Advisers or the Sub-Adviser and its affiliated and correspondent banks and
other non-bank affiliates in connection with customer purchases of shares of
the Victory Portfolios, the banks and such non-bank affiliates might be
required to alter materially or discontinue the services offered by them to
customers. It is not anticipated, however, that any change in the Victory
Portfolios' method of operations would affect its net asset value per share or
result in financial losses to any customer.
From time to time, advertisements, supplemental sales literature and
information furnished to present or prospective shareholders of the Fund may
include descriptions of Key Trust Company of Ohio, N.A., Key Advisers and the
Sub-Adviser including, but not limited to, (i) descriptions of the operations
of Key Trust Company of Ohio, N.A., Key Advisers and the Sub-Adviser; (ii)
descriptions of certain personnel and their functions; and (iii) statistics and
rankings related to the operations of Key Trust Company of Ohio, N.A., Key
Advisers and the Sub-Adviser.
Portfolio Transactions
Pursuant to the Investment Advisory Agreement (and Sub-Advisory
Agreement), Key Advisers or the Sub-Adviser determines, subject to the general
supervision of the Trustees of the Victory Portfolios, and in accordance with
the Fund's investment objective and restrictions, which securities are to be
purchased and sold by the Fund, and which brokers are to be eligible to execute
its portfolio transactions. Purchases from underwriters and/or broker-dealers
of portfolio securities include a commission or concession paid by the issuer
to the underwriter and/or broker-dealer and purchases from dealers serving as
market makers may include the spread between the bid and asked price. While
Key Advisers and the Sub-Adviser generally seek competitive prices (inclusive
of any spread or commission), the Fund may not necessarily pay the lowest
prices available on each transaction, for reasons discussed below.
Allocation of transactions to dealers is determined by Key Advisers or
the Sub-Adviser in their best judgment and in a manner deemed fair and
reasonable to shareholders. The primary consideration is prompt execution of
orders in an effective manner at the most favorable price. Subject to this
consideration, dealers who provide supplemental investment research to Key
Advisers or the Sub-Adviser may receive orders for transactions by the Victory
Portfolios. Information so received is in addition to and not in lieu of
services required to be performed by Key Advisers or the Sub-Adviser and does
not reduce the advisory fees payable to Key Advisers by the Victory Portfolios.
Such information may be useful to Key Advisers or the Sub-Adviser in serving
both the Victory Portfolios and other clients and, conversely, such
supplemental research information obtained by the placement of orders on behalf
of other clients may be useful to Key Advisers or the Sub-Adviser in carrying
out
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<PAGE> 302
its obligations to the Victory Portfolios. In the future, the Trustees may
also authorize the allocation of brokerage to affiliated broker-dealers on an
agency basis to effect portfolio transactions. In such event, the Trustees
will adopt procedures incorporating the standards of Rule 17e-1 under the 1940
Act, which requires that the commission paid to affiliated broker-dealers must
be "reasonable and fair compared to the commission, fee or other remuneration
received, or to be received, by other brokers in connection with comparable
transactions involving similar securities during a comparable period of time."
At times, the Fund may also purchase portfolio securities directly from dealers
acting as principals, underwriters or market makers. As these transactions in
which the Fund invests usually conducted on a net basis, no brokerage
commissions are paid by the Fund.
The Victory Portfolios will not execute portfolio transactions
through, acquire portfolio securities issued by, make savings deposits in, or
enter into repurchase or reverse repurchase agreements with Key Advisers, the
Sub-Adviser, Key Trust Company of Ohio, N.A. or its affiliates, Concord Holding
Corporation, Victory Broker-Dealer Services, Inc. or their affiliates, and will
not give preference to Key Trust Company of Ohio, N.A.'s correspondent banks or
affiliates, or Concord Holding Corporation or Victory Broker-Dealer Services,
Inc. with respect to such transactions, securities, savings deposits,
repurchase agreements, and reverse repurchase agreements.
Investment decisions for the Fund are made independently from those
for the other funds or any other investment company or account managed by
KeyCorp Advisers (or Society). Any such other investment company or account
may also invest in the same securities as a particular fund. When a purchase
or sale of the same security is made at substantially the same time on behalf
of the Fund and another fund, investment company or account, the transaction
will be averaged as to price, and available investments allocated as to amount,
in a manner which KeyCorp Advisers (or Society) believes to be equitable to
the Fund and such other fund, investment company or account. In some
instances, this investment procedure may adversely affect the price paid or
received by the Fund or the size of the position obtained by the Fund. To the
extent permitted by law, KeyCorp Advisers (or Society) may aggregate the
securities to be sold or purchased for the Fund with those to be sold or
purchased for the other funds or for other investment companies or accounts in
order to obtain best execution. As provided by the Investment Advisory (and
Sub-Advisory) Agreement, in making investment recommendations for the Victory
Portfolios, KeyCorp Advisers (or Society) will not inquire or take into
consideration whether an issuer of securities proposed for purchase or sale by
a Fund is a customer of Society, its parents or subsidiaries or affiliates
and, in dealing with their commercial customers, KeyCorp Advisers (Society),
its parents, subsidiaries, and affiliates will not inquire or take into
consideration whether securities of such customers are held by the Victory
Portfolios.
In the fiscal years ended October 31, 1995 and October 31, 1994, the
Fund paid $_______ and $4,033, respectively, in brokerage commissions.
Administrator
Currently, Concord Holding Corporation ("CHC") serves as general
manager and administrator (the "Administrator") to the Fund. The Administrator
assists in supervising all operations of each fund (other than those performed
by Key Advisers or the Sub-Adviser under the Investment Advisory Agreement and
Sub-Advisory Agreement. Prior to June, 1995, The Winsbury Company ("Winsbury")
served as the Fund's administrator.
CHC receives a fee from the Fund for its services as Administrator and
expenses assumed pursuant to the Administration Agreements, calculated daily
and paid monthly, at the annual rate of fifteen one hundredths of one percent
(.15%) of the Fund's average daily net assets. CHC may periodically waive all
or a portion of its fee with respect to the Fund in order to increase the net
income of the Fund available for distribution as dividends.
Unless sooner terminated, the Administration Agreement will continue
in effect as to the Fund for a period of two years, and for consecutive
one-year terms thereafter, provided that such continuance is ratified at least
annually by the Victory Portfolios' Board of Trustees or by vote of a majority
of the outstanding shares of the Fund, and in either case by a majority of the
Trustees who are not parties to the Administration Agreement or interested
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<PAGE> 303
persons (as defined in the 1940 Act) of any party to the Administration
Agreement, by votes cast in person at a meeting called for such purpose.
The Administration Agreement provides that CHC shall not be liable for
any error of judgment or mistake of law or any loss suffered by the Victory
Portfolios in connection with the matters to which the Administration Agreement
relates, except a loss resulting from willful misfeasance, bad faith, or gross
negligence in the performance of its duties, or from the reckless disregard by
it of its obligations and duties thereunder.
Under the Administration Agreement, CHC assists in the Fund's
administration and operation, including providing statistical and research
data, clerical services, internal compliance and various other administrative
services, including among other responsibilities, forwarding certain purchase
and redemption requests to the Transfer Agent, participation in the updating of
the prospectus, coordinating the preparation, filing, printing and
dissemination of reports to shareholders, coordinating the preparation of
income tax returns, arranging for the maintenance of books and records and
providing the office facilities necessary to carry out the duties thereunder.
Under the Administration Agreement, CHC may delegate all or any part of its
responsibilities thereunder.
[CHC receives an annual fee of .15% of the Fund's average net assets,
paid monthly, for services performed under the Fund's Administration Agreement.
CHC may, from time to time, agree to reimburse the Fund for expenses above a
specified percentage of average net assets.]
[Victory Broker-Dealer Services, Inc. sells shares of the Fund as
agent on behalf of the Victory Portfolios at no cost to the Fund. Key Advisers
and the Sub-Adviser neither participate in nor are they responsible for the
underwriting of Victory Portfolios shares.]
In the fiscal years ended October 31, 1995 and October 31, 1994, the
Fund paid to CHC and Winsbury aggregate administration fees of $_______ and
$126,903, respectively after fee reductions of $_______ and $8,436,
respectively.
Business Management Agreement
In connection with its obligations under the Investment Sub-Advisory
Agreement, the Sub-Adviser has entered into a Business Management Agreement
with Key Advisers, pursuant to which Key Advisers provides certain
administrative and support services to the Sub-Adviser. Such services include
preparing reports to the Victory Portfolios' Board of Trustees, recordkeeping
services, and services rendered in connection with the preparation of
regulatory filings and other reports, and regulatory and other administrative
and compliance systems and support services.
For such services to the Fund, the Sub-Adviser pays fees to Key
Advisers which vary according to a sliding scale containing "breakpoints" at
which decreases in the business management fees correspond to increases in the
average daily net asset values of the Fund as follows:
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<PAGE> 304
<TABLE>
<CAPTION>
Rate of Business
Net Assets of the Fund Management Fee*
---------------------- ----------------
<S> <C>
Up to $10,000,000 0.25%
Next $15,000,000 0.15%
Next $25,000,000 0.10%
Above $50,000,000 0.05%
</TABLE>
- ---------------
* As a percentage of average daily net assets.
Shareholder Servicing Plan
The Victory Portfolios, on behalf of the Fund, has adopted a
Shareholder Servicing Plan to provide payments to shareholder servicing agents
(each a "Shareholder Servicing Agent") that provide administrative support
services to customers who may from time to time beneficially own shares, which
services include: (i) aggregating and processing purchase and redemption
requests for shares from customers and promptly transmitting net purchase and
redemption orders to our distributor or transfer agent; (ii) providing
customers with a service that invests the assets of their accounts in shares
pursuant to specific or pre-authorized instructions; (iii) processing dividend
and distribution payments on behalf of customers; (iv) providing information
periodically to customers showing their positions in shares; (v) arranging for
bank wires; (vi) responding to customer inquiries; (vii) providing
subaccounting with respect to shares beneficially owned by customers or
providing the information to the Victory Portfolios necessary for
subaccounting; (viii) if required by law, forwarding shareholder communications
from us (such as proxies, shareholder reports, annual and semi-annual financial
statements and dividend, distribution and tax notices) to customers; (ix)
forwarding to customers proxy statements and proxies containing any proposals
regarding this Plan; and (x) providing such other similar services as we may
reasonably request to the extent you are permitted to do so under applicable
statutes, rules or regulations. For expenses incurred and services provided
pursuant to the Shareholder Servicing Agreement, the Fund pays each Shareholder
Servicing Agent a fee computed daily and paid monthly, in amounts aggregating
not more than twenty-five one-hundredths of one percent (.25%) of the average
daily net assets of the Fund per year. A Shareholder Servicing Agent may
periodically waive all or a portion of its respective shareholder servicing
fees with respect to the Fund to increase the net income of the Fund available
for distribution as dividends.
Expenses
The Fund bears the following expenses relating to its operations:
taxes, interest, brokerage fees and commissions, fees of the Trustees of the
Victory Portfolios, Commission fees, state securities qualification fees, costs
of preparing and printing prospectuses for regulatory purposes and for
distribution to current shareholders, outside auditing and legal expenses,
advisory and administration fees, fees and out-of-pocket expenses of the
custodian and transfer agent, certain insurance premiums, costs of maintenance
of the Fund's existence, costs of shareholders' reports and meetings, and any
extraordinary expenses incurred in the Fund's operation.
If total expenses borne by the Fund in any fiscal year exceeds expense
limitations imposed by applicable state securities regulations, Key Advisers,
the Sub-Adviser or the Administrator will waive their fees to the extent such
excess expenses exceed such expense limitation in proportion to their
respective fees. As of the date of this Statement of Additional Information,
the most restrictive expense limitation applicable to the Fund limits its
aggregate annual expenses, including management and advisory fees but excluding
interest, taxes, brokerage commissions, and certain other expenses, to 2.5% of
the first $30 million of its average net assets, 2.0% of the next $70 million
of its average net assets, and 1.5% of the Fund's remaining average net assets.
Any expenses to be
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borne by Key Advisers, the Sub-Adviser or the Administrator will be estimated
daily and reconciled and paid on a monthly basis. Fees imposed upon customer
accounts by Key Advisers, the Sub-Adviser, Key Trust Company of Ohio, N.A. or
its correspondents, affiliated banks and other non-bank affiliates for cash
management services are not fund expenses for purposes of any such expense
limitation.
Distributor
Victory Broker-Dealer Services, Inc. (the "Distributor") serves as
distributor for the continuous offering of the shares of each fund of the
Victory Portfolios pursuant to a Distribution Agreement. Prior to Victory
Broker-Dealer Services, Inc. becoming the Distributor, Winsbury served as
distributor of each Fund. Unless otherwise terminated, the Distribution
Agreement will remain in effect for two years, and thereafter for consecutive
one-year terms, provided that it is approved at least annually (i) by the
Victory Portfolios' Trustees or by the vote of a majority of the outstanding
shares of the Victory Portfolios, and (ii) by the vote of a majority of the
Trustees of the Victory Portfolios who are not parties to the Distribution
Agreement or interested persons of any such party, cast in person at a meeting
called for the purpose of voting on such approval. The Distribution Agreement
will terminate in the event of its assignment, as defined in the 1940 Act. For
the Victory Portfolios' fiscal years ended October 31, 1993, and October 31,
1994, Winsbury received $77,258 and $212,021, respectively, in underwriting
commissions, and retained $0 and $15, respectively. In the fiscal year ended
October 31, 1995 the Distributor received $______ in underwriting commissions
and retained $______.
Fund Accountant
BISYS Fund Services Ohio, Inc. serves as fund accountant for the Fund
pursuant to a fund accounting agreement with the Victory Portfolios dated May
31, 1995 (the "Fund Accounting Agreement"). As fund accountant for the Victory
Portfolios, BISYS Fund Services Ohio, Inc. calculates the Fund's net asset
value, the dividend and capital gain distributions, if any, and the yield.
BISYS Fund Services Ohio, Inc. also provides a current security position
report, a summary report of transactions and pending maturities, a current cash
position report, and maintains the general ledger accounting records for the
Fund. Under the Fund Accounting Agreement, BISYS Fund Services Ohio, Inc. is
entitled to receive annual fees of .03% of the first $100 million of the Fund's
daily average net assets, .02% of the next $100 million of the Fund's daily
average net assets, and .01% of the Fund's remaining daily average net assets.
These annual fees are subject to a minimum monthly asset charge of $2,500 per
taxable fund, $2,917 per tax-free fund, and $3,333 per international fund and
do not include out-of-pocket expenses or multiple class charges of $833 per
month assessed for each class of shares after the first class. In the fiscal
years ended October 31, 1993, October 31, 1994, and October 31, 1995, the Fund
paid The Winsbury Service Corporation fund accounting fees (after fee waivers)
of $0, $62,067 and $________, respectively. In the fiscal year ended October
31, 1995, the Fund paid BISYS Fund Services, Ohio, Inc. fund accounting fees
(after fee waivers) of $_____.
Custodian
Cash and securities owned by the Fund are held by Key Trust Company of
Ohio, N.A. as custodian. Key Trust Company of Ohio, N.A. serves as custodian
to the Fund pursuant to a Custodian Agreement dated May 24, 1995. Under this
Agreement, Key Trust Company of Ohio, N.A. (1) maintains a separate account or
accounts in the name the Fund; (2) makes receipts and disbursements of money on
behalf of the Fund; (3) collects and receives all income and other payments and
distributions on account of portfolio securities; (4) responds to
correspondence from security brokers and others relating to its duties; and (5)
makes periodic reports to the Victory Portfolios' Trustees concerning the
Victory Portfolios' operations. Key Trust Company of Ohio, N.A. may, with the
approval of the Victory Portfolios and the custodian's own expense, open and
maintain a sub-custody account or accounts on behalf of the Fund, provided that
Key Trust Company of Ohio, N.A. shall remain liable for the performance of all
of its duties under the Custodian Agreement.
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Transfer Agent
The Primary Funds Service Corporation ("PFSC") serves as transfer
agent and dividend disbursing agent for each the Fund, pursuant to a Transfer
Agency and Shareholder Servicing Agreement. Under its agreement with the
Victory Portfolios, PFSC has agreed (i) to issue and redeem shares of the
Victory Portfolios; (ii) to address and mail all communications by the Victory
Portfolios to its shareholders, including reports to shareholders, dividend and
distribution notices, and proxy material for its meetings of shareholders;
(iii) to respond to correspondence or inquiries by shareholders and others
relating to its duties; (iv) to maintain shareholder accounts and certain
sub-accounts; and (v) to make periodic reports to the Victory Portfolios'
Trustees concerning the Victory Portfolios' operations. For the services
provided under the Transfer Agency and Shareholder Servicing Agreement, PFSC
receives a maximum monthly fee of $1,250 from the Fund to a maximum of $3.50
per account of the Fund.
Auditors
The financial highlights appearing in the Prospectus for the Fund,
other than unaudited information marked as such, has been derived from
financial statements of the Fund incorporated by reference in this Statement of
Additional Information whichk for the two month period ended October 31, 1995
and fiscal year ended August 31, 1995, has been audited by Coopers & Lybrand
L.L.P. as set forth in their report incorporated by reference herein, and are
included in reliance upon such report and on the authority of such firm as
experts in auditing and accounting. Information for the fiscal year ended
August 31, 1994 has been audited by KPMG Peat Marwick L.L.P. independent
accountants for the Predecessor Fund, as set forth in their report incorporated
by reference herein, and are included in reliance upon such report and on the
authority of such firm as experts in auditing and accounting. Information for
all other periods has been audited by Ernst & Young, L.L.P., independent
accountants to the predecessor to the Predecessor Fund. Coopers & Lybrand
L.L.P. serves as the Victory Portfolios' auditors. Coopers & Lybrand L.L.P.'s
address is 100 East Broad Street, Columbus, Ohio 43215.
Legal Counsel
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, 919 Third Avenue,
New York, New York 10022 is counsel to the Victory Portfolios.
ADDITIONAL INFORMATION
Description of Shares
The Victory Portfolios (sometimes referred to as the "Trust") is a
Delaware business trust. Its Delaware Trust Instrument was adopted on December
6, 1995 and a Certificate of Trust for the Trust was filed in Delaware on
December __, 1995. On February 29, 1996, the Victory Portfolios converted from
a Massachusetts business trust to a Delaware business trust.
The previously effective Massachusetts Declaration of Trust, pursuant
to which the Victory Portfolios was originally called the North Third Street
Fund, was filed with the Secretary of State of the Commonwealth of
Massachusetts on February 6, 1986. On September 22, 1986, an Amended and
Restated Declaration of Trust was filed to change the name of the Trust to The
Emblem Fund and to make certain other changes. A second amendment was filed
October 23, 1986 providing for voting of shares in the aggregate except where
voting of shares by series is otherwise required by law. An amendment to the
Amended and Restated Declaration of Trust was filed on March 15, 1993 to change
the name of the Trust to The Society Funds. An Amended and Restated
Declaration of Trust was then filed on September 2, 1994 to change the name of
the Trust to The Victory Portfolios.
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The currently effective Delaware Trust Instrument authorizes the
Trustees to issue an unlimited number of shares, which are units of beneficial
interest, without par value. The Victory Portfolios presently has twenty-eight
series of shares, which represent interests in the U.S. Government Obligations
Fund, the Prime Obligations Fund, the Tax-Free Money Market Fund, the Balanced
Fund, the Stock Index Fund, the Value Fund, the Diversified Stock Fund, the
Growth Fund, the Special Value Fund, the Special Growth Fund, the Ohio Regional
Stock Fund, the International Growth Fund, the Limited Term Income Fund, the
Government Mortgage Fund, the Ohio Municipal Bond Fund, the Intermediate Income
Fund, the Investment Quality Bond Fund, the Florida Tax-Free Bond Fund, the
Municipal Bond Fund, the Convertible Securities Fund, the Short-Term U.S.
Government Income Fund, the Government Bond Fund, the Fund for Income, the
National Municipal Bond Fund, the New York Tax-Free Fund, the Institutional
Money Market Fund, the Financial Reserves Fund and the Ohio Municipal Money
Market Fund, respectively. The Victory Portfolios' Delaware Trust Instrument
authorizes the Trustees to divide or redivide any unissued shares of the
Victory Portfolios into one or more additional series by setting or changing in
any one or more respects their respective preferences, conversion or other
rights, voting power, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption.
Shares have no subscription or preemptive rights and only such
conversion or exchange rights as the Trustees may grant in their discretion.
When issued for payment as described in the Prospectus and this Statement of
Additional Information, the Victory Portfolios' shares will be fully paid and
non-assessable. In the event of a liquidation or dissolution of the Victory
Portfolios, shares of the Fund are entitled to receive the assets available for
distribution belonging to the Fund, and a proportionate distribution, based
upon the relative asset values of the respective funds of the Victory
Portfolios, of any general assets not belonging to any particular fund which
are available for distribution.
As described in the Prospectus under the caption "ADDITIONAL
INFORMATION -- Voting Rights," shares of the Victory Portfolios are entitled to
one vote per share (with proportional voting for fractional shares) on such
matters as shareholders are entitled to vote. On any matter submitted to a
vote of the shareholders, all shares are voted separately by individual series
(funds), and whenever the Trustees determine that the matter affects only
certain series, may be submitted for a vote by only such series, except (i)
when required by the 1940 Act, shares are voted in the aggregate and not by
individual series; and (ii) when the Trustees have determined that the matter
affects the interests of more than one series and that voting by shareholders
of all series would be consistent with the 1940 Act, then the shareholders of
all such series shall be entitled to vote thereon (either by individual series
or by shares voted in the aggregate, as the Trustees in their discretion may
determine). The Trustees may also determine that a matter affects only the
interests of one or more classes of a series, in which case (or if required
under the 1940 Act) such matter shall be voted on by such class or classes.
There will normally be no meetings of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority of the Trustees
have been elected by the shareholders, at which time the Trustees then in
office will call a shareholders' meeting for the election of Trustees. In
addition, Trustees may be removed from office by a vote of the holders of at
least two-thirds of the outstanding shares of the Victory Portfolios. A
meeting shall be held for such purpose upon the written request of the holders
of not less than 10% of the outstanding shares. Upon written request by ten or
more shareholders meeting the qualifications of Section 16(c) of the 1940 Act
(i.e., persons, who have been shareholders for at least six months, and who
hold shares having an NAV of at least $25,000 or constituting 1% of the
outstanding shares), stating that such shareholders wish to communicate with
the other shareholders for the purpose of obtaining the signatures necessary to
demand a meeting to consider removal of a Trustee, the Victory Portfolios will
provide a list of shareholders or disseminate appropriate materials (at the
expense of the requesting shareholders). Except as set forth above, the
Trustees shall continue to hold office and may appoint their successors.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Victory Portfolios shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each fund of the Victory Portfolios affected by the
matter. For purposes of determining whether the approval of a majority of
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the outstanding shares of a fund will be required in connection with a matter,
a fund will be deemed to be affected by a matter unless it is clear that the
interests of each fund in the matter are identical, or that the matter does not
affect any interest of the fund. Under Rule 18f-2, the approval of an
investment advisory agreement or any change in investment policy would be
effectively acted upon with respect to a fund only if approved by a majority of
the outstanding shares of such fund. However, Rule 18f-2 also provides that
the ratification of independent public accountants, the approval of principal
underwriting contracts, and the election of Trustees may be effectively acted
upon by shareholders of all of the Victory Portfolios voting without regard to
series.
Shareholder and Trustee Liability
The Delaware Business Trust Act provides that a Shareholder of a
Delaware business trust shall be entitled to the same limitation of personal
liability extended to shareholders of Delaware corporations. The Delaware
trust instrument also provides for indemnification out of the trust property of
any shareholder held personally liable solely by reason of his or her being or
having been a shareholder. The Delaware Trust Instrument also provides that
the Victory Portfolios shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Victory
Portfolios, and shall satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
considered to be extremely remote.
The Delaware Trust Instrument states further that no Trustee, officer,
or agent of the Victory Portfolios shall be personally liable in connection
with the administration or preservation of the assets of the Funds or the
conduct of the Victory Portfolios' business; nor shall any Trustee, officer, or
agent be personally liable to any person for any action or failure to act
except for his own bad faith, willful misfeasance, gross negligence, or
reckless disregard of his duties. The Declaration of Trust also provides that
all persons having any claim against the Trustees or the Victory Portfolios
shall look solely to the assets of the Victory Portfolios for payment.
Miscellaneous
As used in the Prospectus and in this Statement of Additional
Information, "assets belonging to a fund" (or "assets belonging to the Fund")
means the consideration received by the Victory Portfolios upon the issuance or
sale of shares in that fund, together with all income, earnings, profits, and
proceeds derived from the investment thereof, including any proceeds from the
sale, exchange, or liquidation of such investments, and any funds or payments
derived from any reinvestment of such proceeds and any general assets of the
Victory Portfolios, which general liabilities and expenses are not readily
identified as belonging to a particular fund (or the Fund) that are allocated
to that fund (or the Fund) by the Victory Portfolios' Trustees. The Trustees
may allocate such general assets in any manner they deem fair and equitable.
It is anticipated that the formula that will be used by the Trustees in making
allocations of general assets to a particular fund of the Victory Portfolios
will be the relative net asset value of the respective fund at the time of
allocation. Assets belonging to a particular fund are charged with the direct
liabilities and expenses of that fund, and with a share of the general
liabilities and expenses of each of the funds not readily identified as
belonging to a particular fund that are allocated to each fund in accordance
with its proportionate share of the net asset values of the Victory Portfolios
at the time of allocation. The timing of allocations of general assets and
general liabilities and expenses of the Victory Portfolios to a particular fund
will be determined by the Trustees of the Victory Portfolios and will be in
accordance with generally accepted accounting principles. Determinations by
the Trustees of the Victory Portfolios as to the timing of the allocation of
general liabilities and expenses and as to the timing and allocable portion of
any general assets with respect to a particular fund are conclusive.
As used in the Prospectus and in this Statement of Additional
Information, a "vote of a majority of the outstanding shares" or a "vote of a
majority of the outstanding voting securities" of the Victory Portfolios or a
particular fund means the affirmative vote of the lesser of (a) 67% or more of
the shares of the Victory Portfolios or such fund present at a meeting at which
the holders of more than 50% of the outstanding shares of the Victory
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Portfolios or such fund are represented in person or by proxy, or (b) more than
50% of the outstanding shares of the Victory Portfolios or such fund.
Organizational expenses are allocated to each of the Victory
Portfolios and are amortized over a period of two years from the commencement
of the public offering of shares of the Victory Portfolios.
Individual Trustees are elected by the shareholders and, subject to
removal by the vote of the holders of two-thirds of the outstanding shares of
the Victory Portfolios, serve for a term lasting until the next meeting of
shareholders at which trustees are elected. Such meetings are not required to
be held at any specific intervals. Individual Trustees may be removed by vote
of the shareholders voting not less than a majority of the shares then
outstanding cast in person or by proxy at any meeting called for that purpose,
or by a written declaration signed by shareholders voting not less than
two-thirds of the shares then outstanding.
The Victory Portfolios is registered with the Commission as an
open-end management investment company. Such registration does not involve
supervision by the Commission of the management or policies of the Victory
Portfolios.
The Prospectus and this Statement of Additional Information omit
certain of the information contained in the Registration Statement filed with
the Commission. Copies of such information may be obtained from the Commission
upon payment of the prescribed fee.
The Prospectus and this Statement of Additional Information are not an
offering of the securities herein described in any state in which such offering
may not lawfully be made. No salesman, dealer, or other person is authorized
to give any information or make any representation other than those contained
in the Prospectus and this Statement of Additional Information.
The 1995 Annual Report to shareholders of The Victory Portfolios is
incorporated by reference herein. This report includes the financial
statements for the fiscal year ended October 31, 1995. The opinion in the
Annual Report of Coopers & Lybrand L.L.P., independent accountants, is
incorporated by reference herein in its entirety to such Annual Report, and
such financial statements are incorporated in their entirety in reliance upon
such report of Coopers & Lybrand L.L.P. and on the authority of such firm as
experts in auditing and accounting.
Delaware law authorizes electronic or telephonic communications
between shareholders and the Victory Portfolios. Under Delaware law, the
Successor Company has the flexibility to respond to future business
contingencies. For example, the Trustees will have the power to incorporate
the Victory Portfolios, to merge or consolidate it with another entity, to
cause each fund to become a separate trust, and to change the Victory
Portfolios' domicile without a shareholder vote. This flexibility could help
reduce the expense and frequency of future shareholder meetings for
non-investment related issues.
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INDEPENDENT AUDITOR'S REPORT
FINANCIAL STATEMENTS
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APPENDIX
The nationally recognized statistical rating organizations
(individually, an "NRSRO") that may be utilized by Key Advisers or the
Sub-Adviser with regard to portfolio investments for the Funds include Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"),
Duff & Phelps, Inc. ("Duff"), Fitch Investors Service, Inc. ("Fitch"), IBCA
Limited and its affiliate, IBCA Inc. (collectively, "IBCA"), and Thomson
BankWatch, Inc. ("Thomson"). Set forth below is a description of the relevant
ratings of each such NRSRO. The NRSROs that may be utilized by Key Advisers or
the Sub-Adviser and the description of each NRSRO's ratings is as of the date
of this Statement of Additional Information, and may subsequently change.
Long-Term Debt Ratings (may be assigned, for example, to corporate and
municipal bonds)
Description of the five highest long-term debt ratings by Moody's
(Moody's applies numerical modifiers (e.g., 1, 2, and 3) in each rating
category to indicate the security's ranking within the category):
Aaa. Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.
A. Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in the
future.
Baa. Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba. Bonds which are rated Ba are judged to have speculative elements
- - their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times in the future. Uncertainty of
position characterizes bonds in this class.
Description of the five highest long-term debt ratings by S&P (S&P may
apply a plus (+) or minus (-) to a particular rating classification to show
relative standing within that classification):
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
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BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB. Debt rated BB is regarded, on balance, as predominately
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. While such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposure to adverse conditions.
Description of the three highest long-term debt ratings by Duff:
AAA. Highest credit quality. The risk factors are negligible being
only slightly more than for risk-free U.S. Treasury debt.
AA+. High credit quality Protection factors are strong.
AA. Risk is modest but may vary slightly from time to time
AA-. because of economic conditions.
A+. Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
Description of the three highest long-term debt ratings by Fitch (plus
or minus signs are used with a rating symbol to indicate the relative position
of the credit within the rating category):
AAA. Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA. Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA."
Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of these issues is generally rated "[-]+."
A. Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher
ratings.
IBCA's description of its three highest long-term debt ratings:
AAA. Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic or
financial conditions are unlikely to increase investment risk
significantly.
AA. Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic, or
financial conditions may increase investment risk albeit not very
significantly.
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A. Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial
conditions may lead to increased investment risk.
Short-Term Debt Ratings (may be assigned, for example, to commercial
paper, master demand notes, bank instruments, and letters of credit)
Moody's description of its three highest short-term debt ratings:
Prime-1. Issuers rated Prime-1 (or supporting institutions) have a
superior capacity for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a
strong capacity for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
S&P's description of its three highest short-term debt ratings:
A-1. This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to have extremely
strong safety characteristics are denoted with a plus sign (+).
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high
as for issues designated "A-1."
A-3. Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the
higher designations.
Duff's description of its five highest short-term debt ratings (Duff
incorporates gradations of "1+" (one plus) and "1-" (one minus) to assist
investors in recognizing quality differences within the highest rating
category):
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Duff 1+. Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
Duff 1. Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
Duff 1-. High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors. Risk
factors are very small.
Duff 2. Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
Duff 3. Satisfactory liquidity and other protection factors qualify
issue as to investment grade.
Risk factors are larger and subject to more variation. Nevertheless,
timely payment is expected.
Fitch's description of its four highest short-term debt ratings:
F-1+. Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of assurance for
timely payment.
F-1. Very Strong Credit Quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than
issues rated F-1+.
F-2. Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as for issues assigned F-1+ or F-1 ratings.
F-3. Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate, however, near-term adverse changes could cause
these securities to be rated below investment grade.
IBCA's description of its three highest short-term debt ratings:
A+. Obligations supported by the highest capacity for timely
repayment.
A1. Obligations supported by a very strong capacity for timely
repayment.
A2. Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
Short-Term Loan/Municipal Note Ratings
Moody's description of its two highest short-term loan/municipal note
ratings:
MIG-1/VMIG-1. This designation denotes best quality. There is
present strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
MIG-2/VMIG-2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
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S&P's description of its two highest municipal note ratings:
SP-1. Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
SP-2. Satisfactory capacity to pay principal and interest.
Short-Term Debt Ratings
Thomson BankWatch, Inc. ("TBW") ratings are based upon a qualitative
and quantitative analysis of all segments of the organization including, where
applicable, holding company and operating subsidiaries.
TBW Ratings do not constitute a recommendation to buy or sell
securities of any of these companies. Further, TBW does not suggest specific
investment criteria for individual clients.
The TBW Short-Term Ratings apply to commercial paper, other senior
short-term obligations and deposit obligations of the entities to which the
rating has been assigned.
The TBW Short-Term Ratings apply only to unsecured instruments that
have a maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an
untimely payment of principal or interest.
TBW-1. The highest category; indicates a very high degree of
likelihood that principal and interest will be paid on a timely basis.
TBW-2. The second highest category; while the degree of safety
regarding timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1".
TBW-3. The lowest investment grade category; indicates that while
more susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and interest in
a timely fashion is considered adequate.
TBW-4. The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
Definitions of Certain Money Market Instruments
Commercial Paper
Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.
Certificates of Deposit
Certificates of Deposit are negotiable certificates issued against
funds deposited in a commercial bank or a savings and loan association for a
definite period of time and earning a specified return.
Bankers' Acceptances
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Bankers' acceptances are negotiable drafts or bills of exchange,
normally drawn by an importer or exporter to pay for specific merchandise,
which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
U.S. Treasury Obligations
U.S. Treasury Obligations are obligations issued or guaranteed as to
payment of principal and interest by the full faith and credit of the U.S.
Government. These obligations may include Treasury bills, notes and bonds, and
issues of agencies and instrumentalities of the U.S. Government, provided such
obligations are guaranteed as to payment of principal and interest by the full
faith and credit of the U.S. Government.
U.S. Government Agency and Instrumentality Obligations
Obligations issued by agencies and instrumentalities of the U.S.
Government include such agencies and instrumentalities as the Government
National Mortgage Association, the Export-Import Bank of the United States, the
Tennessee Valley Authority, the Farmers Home Administration, the Federal Home
Loan Banks, the Federal Intermediate Credit Banks, the Federal Farm Credit
Banks, the Federal Land Banks, the Federal Housing Administration, the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation, and
the Student Loan Marketing Association. Some of these obligations, such as
those of the Government National Mortgage Association are supported by the full
faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others, such as
those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not obligated to do so by law. A Fund will invest
in the obligations of such instrumentalities only when the investment adviser
believes that the credit risk with respect to the instrumentality is minimal.
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STATEMENT OF ADDITIONAL INFORMATION
THE VICTORY PORTFOLIOS
THE LIMITED TERM INCOME FUND
March 1, 1996
This Statement of Additional Information is not a Prospectus, but
should be read in conjunction with the Prospectus of The Victory Portfolios -
The Limited Term Income Fund, dated the same date as the date hereof (the
"Prospectus"). This Statement of Additional Information is incorporated by
reference in its entirety into the Prospectus. Copies of the Prospectus may be
obtained by writing The Victory Portfolios at Primary Funds Service
Corporation, P.O. Box 9741, Providence, RI 02940-9741, or by telephoning toll
free 800-539-FUND or 800-539-3863.
<TABLE>
<S> <C> <C>
Investment Policies and Limitations 1 INVESTMENT ADVISER
Valuation of Portfolio Securities 9 KeyCorp Mutual Fund Advisers, Inc.
Additional Purchase and Redemption Information 13
Management of the Victory Portfolios 17 INVESTMENT SUB-ADVISER
Advisory and Other Contracts 23 Society Asset Management, Inc.
Additional Information 29
Independent Auditor's Report 33 ADMINISTRATOR
Financial Statements 33 Concord Holding Corporation
Appendix 34
DISTRIBUTOR
Victory Broker-Dealer Services, Inc.
TRANSFER AGENT
Primary Funds Service Corporation
CUSTODIAN
Key Trust Company of Ohio, N.A.
</TABLE>
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STATEMENT OF ADDITIONAL INFORMATION
The Victory Portfolios (the "Victory Portfolios") is an open-end
management investment company. The Victory Portfolios consist of twenty-eight
series of units of beneficial interest ("shares"), four of which series are
currently inactive. The outstanding shares representing interests in
twenty-four separate investment portfolios which are currently active. This
Statement of Additional Information relates to The Victory Limited Term Income
Fund (the "Fund") only. Much of the information contained in this Statement of
Additional Information expands on subjects discussed in the Prospectus.
Capitalized terms not defined herein are used as defined in the Prospectus. No
investment in shares of the Fund should be made without first reading the
Fund's Prospectus.
INVESTMENT POLICIES AND LIMITATIONS
Additional Information Regarding Fund Instruments
The following policies supplement the investment objectives and
policies of the Fund as set forth in the Prospectus.
Bankers' Acceptances and Certificates of Deposit. The Fund may invest
in bankers' acceptances, certificates of deposit, and demand and time deposits.
Bankers' acceptances are negotiable drafts or bills of exchange typically drawn
by an importer or exporter to pay for specific merchandise, which are
"accepted" by a bank, meaning, in effect, that the bank unconditionally agrees
to pay the face value of the instrument on maturity. Certificates of deposit
are negotiable certificates issued against funds deposited in a commercial bank
or a savings and loan association for a definite period of time and earning a
specified return.
Bankers' acceptances will be those guaranteed by domestic and foreign
banks, if at the time of purchase such banks have capital, surplus, and
undivided profits in excess of $100,000,000 (as of the date of their most
recently published financial statements). Certificates of deposit and demand
and time deposits invested in by the Fund will be those of domestic and foreign
banks and savings and loan associations, if (a) at the time of purchase such
financial institutions have capital, surplus, and undivided profits in excess
of $100,000,000 (as of the date of their most recently published financial
statements) or (b) the principal amount of the instrument is insured in full by
the Federal Deposit Insurance Corporation or the Savings Association Insurance
Fund.
The Fund may also invest in Eurodollar Certificates of Deposit
("ECDs") which are U.S. dollar-denominated certificates of deposit issued by
branches of foreign and domestic banks located outside the United States,
Yankee Certificates of Deposit ("Yankee CDs") which are certificates of deposit
issued by a U.S. branch of a foreign bank denominated in U.S. dollars and held
in the United States, Eurodollar Time Deposits ("ETDs") which are U.S.
dollar-denominated deposits in a foreign branch of a U.S. bank or a foreign
bank, and Canadian Time Deposits ("CTDs") which are U.S. dollar-denominated
certificates of deposit issued by Canadian offices of major Canadian Banks.
Variable Amount Master Demand Notes. Variable amount master demand
notes in which the Fund may invest are unsecured demand notes that permit the
indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate according to the terms of the instrument. Although there is no
secondary market for these notes, the Fund may demand payment of principal and
accrued interest at any time and may resell the notes at any time to a third
party. The absence of an active secondary market, however, could make it
difficult for the Fund to dispose of a variable amount master demand note if
the issuer defaulted on its payment obligations, and the Fund could, for this
or other reasons, suffer a loss to the extent of the default. While the notes
are not typically rated by credit rating agencies, issuers of variable amount
master demand notes must satisfy the same criteria as set forth above for
unrated commercial paper, and Key Advisers or the Sub-Adviser will continuously
monitor the issuer's financial status and ability to make payments due under
the instrument. Where necessary to ensure that a note is of "high quality,"
the Fund will require that the issuer's obligation to pay the principal of the
note be backed by an unconditional bank letter or line of credit, guarantee or
commitment to lend. For purposes of
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the Fund's investment policies, a variable amount master note will be deemed to
have a maturity equal to the longer of the period of time remaining until the
next readjustment of its interest rate or the period of time remaining until
the principal amount can be recovered from the issuer through demand. (See
Variable and Floating Rate Notes, below.)
Commercial Paper. Commercial paper consists of unsecured promissory
notes issued by corporations. Except as noted below with respect to variable
amount master demand notes, issues of commercial paper normally have maturities
of less than nine months and fixed rates of return.
The Fund will purchase instruments rated at the time of purchase in
one of the three highest categories by an NRSRO or, if not rated, found by the
Victory Portfolios' Board of Trustees to present minimal credit risks and to be
of comparable quality.
For a description of the rating symbols of each NRSRO see the Appendix
to this Statement of Additional Information.
Foreign Investment. The Fund may invest in securities issued by
foreign branches of U.S. banks, foreign banks, or other foreign issuers,
including American Depository Receipts ("ADRs") and securities purchased on
foreign securities exchanges. Such investment may subject the Fund to
investment risks that differ in some respects from those related to investments
in obligations of U.S. domestic issuers or in U.S. securities markets. Such
risks include future adverse political and economic developments, possible
seizure, nationalization, or expropriation of foreign investments, less
stringent disclosure requirements, the possible establishment of exchange
controls or taxation at the source, and the adoption of other foreign
governmental restrictions. Additional risks include currency exchange risks,
less publicly available information, the risk that companies may not be subject
to the accounting, auditing and financial reporting standards and requirements
of U.S. companies, the risk that foreign securities markets may have less
volume and therefore many securities traded in these markets may be less liquid
and their prices are more volatile than U.S. securities, and the risk that
custodian and brokerage costs may be higher. Permissible investments include
obligations or securities of foreign issuers, foreign branches of U.S. banks
and of foreign banks. The Fund will acquire such securities only when Key
Advisers or the Sub-Adviser believes the risks associated with such investments
are minimal.
Variable and Floating Rate Notes. The Fund may acquire variable and
floating rate notes, subject to its investment objectives, policies and
restrictions. A variable rate note is one whose terms provide for the
readjustment of its interest rate on set dates and which, upon such
readjustment, can reasonably be expected to have a market value that
approximates its par value. A floating rate note is one whose terms provide
for the readjustment of its interest rate whenever a specified interest rate
changes and which, at any time, can reasonably be expected to have a market
value that approximates its par value. Such notes are frequently not rated by
credit rating agencies; however, unrated variable and floating rate notes
purchased by the Fund will only be those determined by Key Advisers or the
Sub-Adviser, under guidelines established by the Trustees, to pose minimal
credit risks and to be of comparable quality, at the time of purchase, to rated
instruments eligible for purchase under the Fund's investment policies. In
making such determinations, Key Advisers or the Sub-Adviser will consider the
earning power, cash flow and other liquidity ratios of the issuers of such
notes (such issuers include financial, merchandising, bank holding and other
companies) and will continuously monitor their financial condition. Although
there may be no active secondary market with respect to a particular variable
or floating rate note purchased by the Fund, the Fund may resell the note at
any time to a third party. The absence of an active secondary market, however,
could make it difficult for the Fund to dispose of a variable or floating rate
note in the event the issuer of the note defaulted on its payment obligations
and the Fund could, for this or other reasons, suffer a loss to the extent of
the default. Variable or floating rate notes may be secured by bank letters of
credit.
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Variable or floating rate notes may have maturities of more than one
year, as follows:
1. A note that is issued or guaranteed by the United States
government or any agency thereof and which has a variable rate of interest
readjusted no less frequently than annually will be deemed by the Fund to have
a maturity equal to the period remaining until the next readjustment of the
interest rate.
2. A variable rate note, the principal amount of which is
scheduled on the face of the instrument to be paid in one year or less, will be
deemed by the Fund to have a maturity equal to the period remaining until the
next readjustment of the interest rate.
3. A variable rate note that is subject to a demand feature
scheduled to be paid in one year or more will be deemed by the Fund to have a
maturity equal to the longer of the period remaining until the next
readjustment of the interest rate or the period remaining until the principal
amount can be recovered through demand.
4. A floating rate note that is subject to a demand feature will
be deemed by the Fund to have a maturity equal to the period remaining until
the principal amount can be recovered through demand.
As used above, a note is "subject to a demand feature" where the Fund
is entitled to receive the principal amount of the note either at any time on
no more than 30 days' notice or at specified intervals not exceeding one year
and upon no more than 30 days' notice.
Temporary Investments. The Fund may also invest temporarily in high
quality investments or cash during times of unusual market conditions for
defensive purposes and in order to accommodate shareholder redemption requests
although currently it does not intend to do so. Any portion of the Fund's
assets maintained in cash will reduce the amount of assets in securities and
thereby reduce the Fund's yield or total return.
Miscellaneous Securities. The Fund can invest in various securities
issued by domestic and foreign corporations, including preferred stocks and
investment grade corporate bonds, notes, and warrants. Bonds are long-term
corporate debt instruments secured by some or all of the issuer's assets,
debentures are general corporate debt obligations backed only by the integrity
of the borrower, and warrants are instruments that entitle the holder to
purchase a certain amount of common stock at a specified price, which price is
usually higher than the current market price at the time of issuance.
Preferred stocks are instruments that combine qualities both of equity and debt
securities. Individual issues of preferred stock will have those rights and
liabilities that are spelled out in the governing document. Preferred stocks
usually pay a fixed dividend per quarter (or annum) and are senior to common
stock in terms of liquidation and dividends rights, and preferred stocks
typically do not have voting rights. The Fund will only purchase preferred
stocks where the issuer is publicly traded and has capital in excess of $200
million.
The Fund may also invest in equipment lease and trust certificates,
which represent interests in a trust formed to acquire and lease capital
equipment; such certificates provide a return based upon the income stream
generated by the leases owned by the trust.
The Fund may also invest in collateralized mortgage obligations, which
represent interests in a trust that holds an undivided pool of mortgages to
secure the obligations. Income on CMOs is generated by payments received under
the mortgages held by the trust, but there is no way for a holder of a CMO to
foreclose on any specific mortgage (or mortgages) in order to recoup the value
of his or her investment.
The Fund also may invest, consistent with its investment objective and
policies, in zero coupon bonds, which are debt instruments that do not pay
current interest and are typically sold at prices greatly discounted from par
value. The return on a zero-coupon obligation, when held to maturity, equals
the difference between the par
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value and the original purchase price. Zero-coupon obligations have greater
price volatility than coupon obligations.
"When-Issued" Securities. As discussed in the Prospectus, the Fund
may purchase securities on a "when issued" basis (i.e., for delivery beyond the
normal settlement date at a stated price and yield). When the Fund agrees to
purchase securities on a "when issued" basis, the Victory Portfolios' custodian
will set aside cash or liquid portfolio securities equal to the amount of the
commitment in a separate account. Normally, the custodian will set aside
portfolio securities to satisfy the purchase commitment, and in such a case,
the Fund may be required subsequently to place additional assets in the
separate account in order to assure that the value of the account remains equal
to the amount of the Fund's commitment. It may be expected that the Fund's net
assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
When the Fund engages in "when-issued" transactions, it relies on the
seller to consummate the trade. Failure of the seller to do so may result in
the Fund incurring a loss or missing the opportunity to obtain a price
considered to be advantageous. The Fund does not intend to purchase "when
issued" securities for speculative purposes, but only in furtherance of its
investment objective.
U.S. Government Obligations. The Fund may invest in obligations
issued or guaranteed by the U.S. Government, its agencies and
instrumentalities. Obligations of certain agencies and instrumentalities of
the U.S. Government are supported by the full faith and credit of the U.S.
Treasury; others are supported by the right of the issuer to borrow from the
U.S. Treasury; others are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; and still others are supported
only by the credit of the agency or instrumentality. No assurance can be given
that the U.S. Government will provide financial support to U.S.
Government-sponsored agencies or instrumentalities if it is not obligated to do
so by law. The Fund will invest in the obligations of such agencies and
instrumentalities only when Key Advisers or the Sub-Adviser believes that the
credit risk with respect thereto is minimal.
Securities Lending. The Fund may lend its portfolio securities to
broker-dealers, banks or institutional borrowers of securities. The Fund must
receive a minimum of 100% collateral, plus any interest due in the form of cash
or U.S. Government securities. This collateral must be valued daily and should
the market value of the loaned securities increase, the borrower must furnish
additional collateral to the Fund. During the time portfolio securities are
on loan, the borrower will pay the Fund any dividends or interest paid on such
securities plus any interest negotiated between the parties to the lending
agreement. Loans will be subject to termination by the Fund or the borrower at
any time. While the Fund will not have the right to vote securities on loan,
it intends to terminate the loan and regain the right to vote if that is
considered important with respect to the investment. The Fund will only enter
into loan arrangements with broker-dealers, banks or other institutions which
Key Advisers or the Sub- Adviser has determined are creditworthy under
guidelines established by the Victory Portfolios' Trustees. The Fund intends
to limit its securities lending to 33 1/3% of total assets.
Other Investment Companies. The Fund may invest up to 5% of its
total assets in the securities of any one investment company, but may not own
more than 3% of the securities of any one investment company or invest more
than 10% of its total assets in the securities of other investment companies.
Pursuant to an exemptive order received by the Victory Portfolios from the
Commission, the Fund may invest in money market funds of the Victory
Portfolios. Key Advisers and/or the Sub-Adviser will waive its investment
advisory fee as to all assets invested in other investment companies. Because
such other investment companies employ an investment adviser, such investment
by the Fund will cause shareholders to bear duplicative fees, such as
management fees.
Repurchase Agreements. Securities held by the Fund may be subject to
repurchase agreements. Under the terms of a repurchase agreement, the Fund
would acquire securities from financial institutions or registered
broker-dealers deemed creditworthy by Key Advisers or the Sub-Adviser pursuant
to guidelines adopted by the Victory Portfolios' Trustees, subject to the
seller's agreement to repurchase such securities at a mutually agreed upon date
and price. The seller is required to maintain the value of collateral held
pursuant to the agreement at not
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less than the repurchase price (including accrued interest). If the seller
were to default on its repurchase obligation or become insolvent, the Fund
would suffer a loss to the extent that the proceeds from a sale of the
underlying portfolio securities were less than the repurchase price, or to the
extent that the disposition of such securities by the Fund is delayed pending
court action. Repurchase agreements are considered by the staff of the
Commission to be loans by the Fund.
Reverse Repurchase Agreements. The Fund may borrow funds for
temporary purposes by entering into reverse repurchase agreements in accordance
with the investment restrictions described below. Pursuant to such agreements,
the Fund would sell portfolio securities to financial institutions such as
banks and broker-dealers, and agree to repurchase them at a mutually
agreed-upon date and price. At the time the Fund enters into a reverse
repurchase agreement, it will place in a segregated custodial account assets
(such as cash or other liquid high-grade securities) consistent with the Fund's
investment restrictions having a value equal to the repurchase price (including
the accrued interest); the collateral will be marked-to-market on a daily
basis, and will be continuously monitored to ensure that such equivalent value
is maintained. Reverse repurchase agreements involve the risk that the market
value of the securities sold by the Fund may decline below the price at which
the Fund is obligated to repurchase the securities. Reverse repurchase
agreements are considered to be borrowings under the Investment Company Act of
1940, as amended (the "1940 Act").
Government "Mortgage-backed" Securities. The Fund may invest in
obligations of certain agencies and instrumentalities of the U.S. Government.
Some such obligations, such as those issued by GNMA or the Export-Import Bank
of the United States, are supported by the full faith and credit of the U.S.
Treasury; others, such as those of FNMA, are supported by the right of the
issuer to borrow from the Treasury; others are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; still
others, such as those of the Federal Farm Credit Banks or FHLMC, are supported
only by the credit of the instrumentality. No assurance can be given that the
U.S. Government would provide financial support to U.S. Government-sponsored
agencies and instrumentalities if it is not obligated to do so by law.
The principal governmental (i.e., backed by the full faith and credit
of the U.S. Government) guarantor of mortgage-related securities is GNMA. GNMA
is a wholly owned U.S. Government corporation within the Department of Housing
and Urban Development. GNMA is authorized to guarantee, with the full faith
and credit of the U.S. Government, the timely payment of principal and interest
on securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and pools of FHA-insured
or VA-guaranteed mortgages. Government-related (i.e., not backed by the full
faith and credit of the U.S. Government) guarantors include FNMA and FHLMC.
FNMA and FHLMC are government-sponsored corporations owned entirely by private
stockholders. Pass-through securities issued by FNMA and FHLMC are guaranteed
as to timely payment of principal and interest by FNMA and FHLMC, respectively,
but are not backed by the full faith and credit of the U.S. Government.
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MORTGAGE-RELATED SECURITIES -- IN GENERAL
Mortgage-related securities are backed by mortgage obligations
including, among others, conventional 30-year fixed rate mortgage obligations,
graduated payment mortgage obligations, 15-year mortgage obligations, and
adjustable rate mortgage obligations. All of these mortgage obligations can be
used to create pass-through securities. A pass-through security is created
when mortgage obligations are pooled together and undivided interests in the
pool or pools are sold. The cash flow from the mortgage obligations is passed
through to the holders of the securities in the form of periodic payments of
interest, principal and prepayments (net of a service fee). Prepayments occur
when the holder of an individual mortgage obligation prepays the remaining
principal before the mortgage obligation's scheduled maturity date. As a
result of the pass-through of prepayments of principal on the underlying
securities, mortgage-backed securities are often subject to more rapid
prepayment of principal than their stated maturity would indicate. Because the
prepayment characteristics of the underlying mortgage obligations vary, it is
not possible to predict accurately the realized yield or average life of a
particular issue of pass-through certificates. Prepayment rates are important
because of their effect on the yield and price of the securities. Accelerated
prepayments have an adverse impact on yields for pass-throughs purchased at a
premium (i.e., a price in excess of principal amount) and may involve
additional risk of loss of principal because the premium may not have been
fully amortized at the time the obligation is repaid. The opposite is true for
pass-throughs purchased at a discount. The Victory Portfolios may purchase
mortgage-related securities at a premium or at a discount. Among the U.S.
Government securities in which the Victory Portfolios may invest are government
"mortgage-backed" (or government guaranteed mortgage related securities). Such
guarantees do not extend to the value of yield of the mortgage-backed
securities themselves or of the Fund's shares.
GNMA Certificates. Certificates of the Government National Mortgage
Association ("GNMA") are mortgage-backed securities which evidence an undivided
interest in a pool or pools of mortgages. GNMA Certificates that the Fund may
purchase are the "modified pass-through" type, which entitle the holder to
receive timely payment of all interest and principal payments due on the
mortgage pool, net of fees paid to the "issuer" and GNMA, regardless of whether
or not the mortgagor actually makes the payment.
The National Housing Act authorizes GNMA to guarantee the timely
payment of principal and interest on securities backed by a pool of mortgages
insured by the Federal Housing Administration ("FHA") or guaranteed by the
Veterans Administration ("VA"). The GNMA guarantee is backed by the full faith
and credit of the U.S. Government. GNMA is also empowered to borrow without
limitation from the U.S. Treasury if necessary to make any payments required
under its guarantee.
The estimated average life of a GNMA Certificate is likely to be
substantially shorter than the original maturity of the mortgages underlying
the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greater part of principal
investment long before the maturity of the mortgages in the pool. Foreclosures
impose no risk to principal investment because of the GNMA guarantee, except to
the extent that the Fund has purchased the certificates above par in the
secondary market.
FHLMC Securities. The Federal Home Loan Mortgage Corporation
("FHLMC") was created in 1970 to promote development of a nationwide secondary
market in conventional residential mortgages. The FHLMC issues two types of
mortgage pass-through securities ("FHLMC Certificates"), mortgage participation
certificates ("PCs") and collateralized mortgage obligations ("CMOs"). PCs
resemble GNMA Certificates in that each PC represents a pro rata share of all
interest and principal payments made and owed on the underlying pool. The
FHLMC guarantees timely monthly payment of interest on PCs and the ultimate
payment of principal. Recently introduced FHLMC Gold PCs guarantee the timely
payment of both principal and interest.
CMOs are securities backed by a pool of mortgages in which the
principal and interest cash flows of the pool are channeled on a prioritized
basis into two or more classes, or tranches, of bonds. FHLMC CMOs are backed
by pools of agency mortgage-backed securities and the timely payment of
principal and interest of each tranche is guaranteed by the FHLMC. The FHLMC
guarantee is not backed by the full faith and credit of the U.S. Government.
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FNMA Securities. The Federal National Mortgage Association ("FNMA")
was established in 1938 to create a secondary market in mortgages insured by
the FHA, but has expanded its activity to the secondary market for conventional
residential mortgages. FNMA primarily issues two types of mortgage-backed
securities, guaranteed mortgage pass-through certificates ("FNMA Certificates")
and CMOs. FNMA Certificates resemble GNMA Certificates in that each FNMA
Certificate represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. FNMA guarantees timely payment of
interest and principal on FNMA Certificates and CMOs. The FNMA guarantee is
not backed by the full faith and credit of the U.S. Government.
Investment Restrictions
The following investment restrictions are fundamental with respect to
the Fund and may be changed only by a vote of a majority of the outstanding
shares of the Fund as defined in "ADDITIONAL INFORMATION -- Miscellaneous" of
this Statement of Additional Information).
THE FUND MAY NOT:
1. Participate on a joint or joint and several basis in any
securities trading account.
2. Purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments (but this shall not prevent the
Fund from purchasing or selling options and futures contracts or from investing
in securities or other instruments backed by physical commodities).
3. Purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
Fund from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business). Investments by
the Fund in securities backed by mortgages on real estate or in marketable
securities of companies engaged in such activities are not hereby precluded.
4. Issue any senior security (as defined in the 1940 Act), except
that (a) the Fund may engage in transactions that may result in the issuance of
senior securities to the extent permitted under applicable regulations and
interpretations of the 1940 Act or an exemptive order; (b) the Fund may acquire
other securities, the acquisition of which may result in the issuance of a
senior security, to the extent permitted under applicable regulations or
interpretations of the 1940 Act; (c) subject to the restrictions set forth
below, the Fund may borrow money as authorized by the 1940 Act.
5. Borrow money, except that (a) the Fund may enter into commitments
to purchase securities in accordance with its investment program, including
delayed-delivery and when-issued securities and reverse repurchase agreements,
provided that the total amount of any such borrowing does not exceed 33 1/3% of
the Fund's total assets; and (b) the Fund may borrow money for temporary or
emergency purposes in an amount not exceeding 5% of the value of its total
assets at the time when the loan is made. Any borrowings representing more
than 5% of the Fund's total assets must be repaid before the Fund may make
additional investments.
6. Lend any security or make any other loan if, as a result, more
than 33 1/3% of its total assets would be lent to other parties, but this
limitation does not apply to purchases of publicly issued debt securities or to
repurchase agreements.
7. Underwrite securities issued by others, except to the extent that
the Fund may be considered an underwriter within the meaning of the Securities
Act of 1933 in the disposition of restricted securities.
8. With respect to 75% of the Fund's total assets, the Fund may not
purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities)
if, as
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a result, (a) more than 5% of the Fund's total assets would be invested in the
securities of that issuer, or (b) the Fund would hold more than 10% of the
outstanding voting securities of that issuer.
9. Purchase the securities of any issuer (other than securities
issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities, or repurchase agreements secured thereby) if, as a result,
more than 25% of the Fund's total assets would be invested in the securities of
companies whose principal business activities are in the same industry. In the
utilities category, the industry shall be determined according to the service
provided. For example, gas, electric, water and telephone will be considered
as separate industries.
The following restrictions are not fundamental and may be changed
without shareholder approval:
1. The Fund will not purchase or retain securities of any issuer if
the officers or Trustees of the Victory Portfolios or the officers or directors
of its investment adviser owning beneficially more than one half of 1% of the
securities of such issuer together own beneficially more than 5% of such
securities.
2. The Fund will not invest more than 10% of its total assets in the
securities of issuers which together with any predecessors have a record of
less than three years of continuous operation.
3. The Fund will not write (or sell) or purchase put options or call
options; in addition the Fund will not write (or sell) straddles, spreads or
combinations thereof.
4. The Fund will not invest more than 15% of its net assets in
illiquid securities. Illiquid securities are securities that are not readily
marketable or cannot be disposed of promptly within seven days and in the usual
course of business at approximately the price at which the Fund has valued
them. Such securities include, but are not limited to, time deposits and
repurchase agreements with maturities longer than seven days. Securities that
may be resold under Rule 144A, or securities offered pursuant to Section 4(2)
of, or securities otherwise subject to restrictions or limitations or resale
under, the 1933 Act ("Restricted Securities"), shall not be deemed illiquid
solely by reason of being unregistered. Key Advisers or the Sub-Adviser
determine whether a particular security is deemed to be liquid based on the
trading markets for the specific security and other factors. However, because
state securities laws may limit the Fund's investment in Restricted Securities
(regardless of the liquidity of the investment), investments in Restricted
Securities resalable under Rule 144A will continue to be subject to applicable
state law requirements until such time, if ever, that such limitations are
changed.
5. The Fund will not make short sales of securities, other than
short sales "against the box," or purchase securities on margin except for
short-term credits necessary for clearance of portfolio transactions, provided
that this restriction will not be applied to limit the use of options, futures
contracts and related options, in the manner otherwise permitted by the
investment restrictions, policies and investment program of the Fund.
6. The Fund may invest up to 5% of its total assets in the
securities of any one investment company, but may not own more than 3% of the
securities of any one investment company or invest more than 10% of its total
assets in the securities of other investment companies. Pursuant to an
exemptive order received by the Victory Portfolios from the Commission, the
Fund may invest in the money market funds of the Victory Portfolios.
7. Buy state, municipal, or private activity bonds.
State Regulations
In addition, the Fund, so long as its shares are registered under the
securities laws of the State of Texas and such restrictions are required as a
consequence of such registration, is subject to the following non-fundamental
policies, which may be modified in the future by the Trustees without a vote of
the Fund's shareholders: (i) the Fund has represented to the Texas State
Securities Board, that it will not invest in oil, gas or mineral leases or
purchase or sell real property (including limited partnership interests, but
excluding readily marketable securities of companies which invest in real
estate); and (ii) the Fund has represented to the Texas State Securities Board
that
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it will not invest more than 5% of its net assets in warrants valued at the
lower of cost or market; provided that, included within that amount, but not to
exceed 2% of net assets, may be warrants which are not listed on the New York
or American Stock Exchanges. For purposes of this restriction, warrants
acquired in units or attached to securities are deemed to be without value.
The policies and limitations listed above supplement those set forth in
the Prospectus. Unless otherwise noted, whenever an investment policy or
limitation states a maximum percentage of the Fund's assets that may be
invested in any security or other asset, or sets forth a policy regarding
quality standards, such standard or percentage limitation will be determined
immediately after and as a result of the Fund's acquisition of such security or
other asset except in the case of borrowing (or other activities that may be
deemed to result in the issuance of a "senior security" under the 1940 Act).
Accordingly, any subsequent change in values, net assets, or other
circumstances will not be considered when determining whether the investment
complies with the Fund's investment policies and limitations. If the value of
the Fund's holdings of illiquid securities at any time exceeds the percentage
limitation applicable at the time of acquisition due to subsequent fluctuations
in value or other reasons, the Board of Trustees will consider what actions, if
any, are appropriate to maintain adequate liquidity.
FUTURE DEVELOPMENTS
The Fund may take advantage of other investment practices which are not
at present contemplated for use by the Fund or which currently are not
available but which may be developed, to the extent such investment practices
are both consistent with the Fund's investment objective and are legally
permissible for the Fund. Such investment practices, if they arise, may
involve risks which exceed those involved in the activities described in the
Prospectus and Statement of Additional Information. Prior to commencing any
new investment practice, the Fund will notify shareholders by means of
prospectus supplement.
Portfolio Turnover
The turnover rate stated in the Prospectus for the Fund's investment
portfolio is calculated by dividing the lesser of the Fund's purchases or sales
of portfolio securities for the year by the monthly average value of the
portfolio securities. The calculation excludes all securities whose
maturities, at the time of acquisition, were one year or less.
VALUATION OF PORTFOLIO SECURITIES
Investment securities held by the Fund are valued on the basis of
valuations provided by an independent pricing service, approved by the Board of
Trustees, which uses information with respect to transactions of a security,
quotations from dealers, market transactions in comparable securities, and
various relationships between securities, in determining value. Specific
investment securities which are not priced by the approved pricing service will
be valued according to quotations obtained from dealers who are market makers
in those securities. Investment securities with less than 60 days to maturity
when purchased are valued at amortized cost which approximates market value.
Investment securities not having readily available market quotations will be
priced at fair value using a methodology approved in good faith by the Board of
Trustees.
PERFORMANCE
As described in the Prospectus, from time to time the "standardized
yield," "dividend yield," "average annual total return," "total return," and
"total return at net asset value" of an investment in each class of Fund shares
may be advertised. An explanation of how yields and total returns are
calculated and the components of those calculations are set forth below.
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Yield and total return information may be useful to investors in
reviewing the Fund's performance. The Fund's advertisement of its performance
must, under applicable Commission rules, include the average annual total
returns for the Fund for the 1, 5 and 10-year period (or the life of the class,
if less) as of the most recently ended calendar quarter. This enables an
investor to compare the Fund's performance to the performance of other funds
for the same periods. However, a number of factors should be considered before
using such information as a basis for comparison with other investments. An
investment in the Fund is not insured; its yield and total return are not
guaranteed and normally will fluctuate on a daily basis. When redeemed, an
investor's shares may be worth more or less than their original cost. Yield
and total return for any given past period are not a prediction or
representation by the Victory Portfolios of future yields or rates of return on
its shares. The yield and total returns of the Fund are affected by portfolio
quality, portfolio maturity, the type of investments the Fund holds and its
operating expenses.
STANDARDIZED YIELDS. The Fund's "yield" (referred to as "standardized
yield") for a given 30-day period for a class of shares is calculated using the
following formula set forth in rules adopted by the Commission that apply to
all funds that quote yields:
Standardized Yield = 2 [(a-b + 1)(6) - 1]
---
cd
The symbols above represent the following factors:
a = dividends and interest earned during the 30-day period.
b = expenses accrued for the period (net of any expense
reimbursements).
c = the average daily number of shares of that class outstanding
during the 30-day period that were entitled to receive
dividends.
d = the maximum offering price per share of the class on the last
day of the period, adjusted for undistributed net investment
income.
The standardized yield for a 30-day period may differ from its yield
for any other period. The Commission formula assumes that the standardized
yield for a 30-day period occurs at a constant rate for a six-month period and
is annualized at the end of the six-month period. This standardized yield is
not based on actual distributions paid by the Fund to shareholders in the
30-day period, but is a hypothetical yield based upon the net investment income
from the Fund's portfolio investments calculated for that period. The
standardized yield may differ from the "dividend yield," described below.
Additionally, because each class of shares is subject to different expenses, it
is likely that the standardized yields of the Fund classes of shares will
differ. The yield for the 30-day period ended October 31, 1995 was ____% .
DIVIDEND YIELD AND DISTRIBUTION RETURN. From time to time the Fund
may quote a "dividend yield" or a "distribution return." Dividend yield is
based on the share dividends derived from net investment income during a stated
period. Distribution return includes dividends derived from net investment
income and from realized capital gains declared during a stated period. Under
those calculations, the dividends and/or distributions declared during a stated
period of one year or less (for example, 30 days) are added together, and the
sum is divided by the maximum offering price per share of that class A) on the
last day of the period. When the result is annualized for a period of less
than one year, the "dividend yield" is calculated as follows:
Dividend Yield = Dividends + Number of days (accrual period) x 365
-------------------
Max. Offering Price (last day of period)
The maximum offering price for shares includes the maximum front-end
sales charge.
From time to time similar yield or distribution return calculations
may also be made using the net asset value (instead of its respective maximum
offering price) at the end of the period. The dividend yields at maximum
offering price and net asset value for the 30-day period ended October 31, 1995
were ____% and ____%, respectively.
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TOTAL RETURNS. The "average annual total return" is an average annual
compounded rate of return for each year in a specified number of years. It is
the rate of return based on the change in value of a hypothetical initial
investment of $1,000 ("P" in the formula below) held for a number of years
("n") to achieve an Ending Redeemable Value ("ERV"), according to the following
formula:
(ERV)(1n) - 1 = Average Annual Total Return
---
( P )
The cumulative "total return" calculation measures the change in value
of a hypothetical investment of $1,000 over an entire period of years. Its
calculation uses some of the same factors as average annual total return, but
it does not average the rate of return on an annual basis. Total return is
determined as follows:
ERV - P = Total Return
-------
P
In calculating total returns, the current maximum sales charge of
4.75% (as a percentage of the offering price) is deducted from the initial
investment ("P") (unless the return is shown at net asset value, as discussed
below). Total returns also assume that all dividends and capital gains
distributions during the period are reinvested to buy additional shares at net
asset value per share, and that the investment is redeemed at the end of the
period. The average annual total return and cumulative total return for the
period ________________ (commencement of operations) to October 31, 1995 (life
of fund) at maximum offering price were ___% and ____%, respectively. For the
one and five year periods ended _______________, 1995 annual total returns were
______% and _____%, respectively.
From time to time the Fund may also quote an "average annual total
return at net asset value" or a cumulative "total return at net asset value."
It is based on the difference in net asset value per share at the beginning and
the end of the period for a hypothetical investment in that class of shares
(without considering front-end or contingent sales charges) and takes into
consideration the reinvestment of dividends and capital gains distributions.
The average annual total return and cumulative total return for the period
________________ (commencement of operations) to October 31, 1995 (life of
fund), at net asset value, was ____% and ___%, respectively. For the one and
five year periods ended October 31, 1995, average annual total return was ___%
and ___%, respectively.
OTHER PERFORMANCE COMPARISONS. From time to time the Fund may publish
the ranking of the performance of its shares by Lipper Analytical Services,
Inc. ("Lipper"), a widely-recognized independent mutual fund monitoring
service. Lipper monitors the performance of regulated investment companies,
including the Fund, and ranks the performance of the Fund against (i) all other
funds, excluding money market funds, and (ii) all other government bond funds.
The Lipper performance rankings are based on total return that includes the
reinvestment of capital gains distributions and income dividends but does not
take sales charges or taxes into consideration.
From time to time the Fund may publish the ranking of the performance
of its shares by Morningstar, Inc., an independent mutual fund monitoring
service that ranks mutual funds, including the Fund, in broad investment
categories (equity, taxable bond, tax-exempt and other) monthly, based upon
each fund's three, five and ten-year average annual total returns (when
available) and a risk adjustment factor that reflects Fund performance relative
to three-month U.S. Treasury bill monthly returns. Such returns are adjusted
for fees and sales loads. There are five ranking categories with a
corresponding number of stars: highest (5), above average (4), neutral (3),
below average (2) and lowest (1). Ten percent of the funds, series or classes
in an investment category receive 5 stars, 22.5% receive 4 stars, 35% receive 3
stars, 22.5% receive 2 stars, and the bottom 10% receive one star. Morningstar
ranks the shares of the Fund in relation to other taxable bond funds.
The total return on an investment made in shares of the Fund may be
compared with the performance for the same period of one or more of the
following indices: the Consumer Price Index, the Salomon Brothers World
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Government Bond Index, the Standard & Poor's 500 Index, the Shearson Lehman
Government/Corporate Bond Index, the Lehman Aggregate Bond Index, and the J.P.
Morgan Government Bond Index. Other indices may be used from time to time.
The Consumer Price Index is generally considered to be a measure of inflation.
The Salomon Brothers World Government Bond Index generally represents the
performance of government debt securities of various markets throughout the
world, including the United States. The Lehman Government/Corporate Bond Index
generally represents the performance of intermediate and long-term government
and investment grade corporate debt securities. The Lehman Aggregate Bond
Index measures the performance of U.S. corporate bond issues, U.S. government
securities and mortgaged-backed securities. The J.P. Morgan Government Bond
Index generally represents the performance of government bonds issued by
various countries including the United States. The S&P 500 Index is a
composite index of 500 common stocks generally regarded as an index of U.S.
stock market performance. The foregoing bond indices are unmanaged indices of
securities that do not reflect reinvestment of capital gains or take investment
costs into consideration, as these items are not application to indices.
From time to time, the yields and the total returns of the Fund may be
quoted in and compared to other mutual funds with similar investment objective
in advertisements, shareholder reports or other communications to shareholders.
The Fund may also include calculations in such communications that describe
hypothetical investment results. (Such performance examples will be based on
an express set of assumptions and are not indicative of the performance of any
Fund.) Such calculations may from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of the Fund would increase the value, not only
of the original Fund investment, but also of the additional Fund shares
received through reinvestment. As a result, the value of the Fund investment
would increase more quickly than if dividends or other distributions had been
paid in cash. The Fund may also include discussions or illustrations of the
potential investment goals of a prospective investor (including but not limited
to tax and/or retirement planning), investment management techniques, policies
or investment suitability of Fund, economic conditions, legislative
developments (including pending legislation), the effects of inflation and
historical performance of various asset classes, including but not limited to
stocks, bonds and Treasury bills. From time to time advertisements or
communications to shareholders may summarize the substance of information
contained in shareholder reports (including the investment composition of the
Fund, as well as the views of the investment adviser as to current market,
economic, trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to the Fund. The Fund may also include in advertisements, charts,
graphs or drawings which illustrate the potential risks and rewards of
investment in various investment vehicles, including but not limited to stock,
bonds, Treasury bills and shares of Fund as well as charts or graphs which
illustrate strategies such as dollar cost averaging, and comparisons of
hypothetical yields of investment in tax-exempt versus taxable investments. In
addition, advertisements or shareholder communications may include a discussion
of certain attributes or benefits to be derived by an investment in Fund. Such
advertisements or communications may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
therein. With proper authorization, Fund may reprint articles (or excerpts)
written regarding the Fund and provide them to prospective shareholders.
Performance information with respect to the Fund is generally available by
calling 1-800- 539-3863.
Investors may also judge, and the Fund may at times advertise,
performance by comparing it to the performance of other mutual funds or mutual
fund portfolios with comparable investment objectives and policies, which
performance may be contained in various unmanaged mutual fund or market indices
or rankings such as those prepared by Dow Jones & Co., Inc., Standard & Poor's
Corporation, Lehman Brothers, Merrill Lynch, and Salomon Brothers, and in
publications issued by Lipper Analytical Services, Inc. and in the following
publications: IBC/Donoghue's Money Fund Reports, Ibottson Associates, Inc.,
Morningstar, CDA/Wiesenberger, Money Magazine, Forbes, Barron's, The Wall
Street Journal, The New York Times, Business Week, American Banker, Fortune,
Institutional Investor, U.S.A. Today. In addition to yield information,
general information about the Fund that appears in a publication such as those
mentioned above may also be quoted or reproduced in advertisements or in
reports to shareholders.
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<PAGE> 330
Advertisements and sales literature may include discussions of
specifics of the portfolio manager's investment strategy and process,
including, but not limited to, descriptions of security selection and analysis.
Advertisements may also include descriptive information about the
investment adviser, including, but not limited to, its status within the
industry, other services and products it makes available, total assets under
management, its investment philosophy.
When comparing yield, total return and investment risk of an
investment in the Fund with other investments, investors should understand that
certain other investments have different risk characteristics than an
investment in shares of the Fund. For example, certificates of deposit may
have fixed rates of return and may be insured as to principal and interest by
the FDIC, while the Fund's returns will fluctuate and its share values and
returns are not guaranteed. Money market accounts offered by banks also may be
insured by the FDIC and may offer stability of principal. U.S. Treasury
securities are guaranteed as to principal and interest by the full faith and
credit of the U.S. government. Money market mutual funds may seek to offer a
fixed price per share.
ADDITIONAL PURCHASE EXCHANGE AND REDEMPTION INFORMATION
The Victory Portfolios (see "Description of Victory Portfolios" below)
is open for business and the NAV is calculated on each Business Day. A
Business Day is every day on which the NYSE is open for business, the Federal
Reserve Bank of Cleveland is open and any other day (other than a day on which
no shares of the Fund are tendered for redemption and no order to purchase any
shares is received) during which there is sufficient trading in portfolio
instruments that the Fund's net asset value per share might be materially
affected. The NAV of each class is determined and its shares are priced as of
the close of regular trading of the NYSE (generally 4:00 p.m. Eastern time (the
"Valuation Time")) on each Business Day of the Fund. The NYSE or the Federal
Reserve Bank of Cleveland will not be open in observance of the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day,
Thanksgiving Day, and Christmas Day. The holiday closing schedule is subject
to change.
When the NYSE is closed, or when trading is restricted for any reason
other than its customary weekend or holiday closings, or under emergency
circumstances as determined by the Commission to warrant such action, the
Fund's Transfer Agent will determine the Fund's NAVs at Valuation Time. The
Fund's NAV may be affected to the extent that its securities are traded on days
that are not Business Days.
[If, in the opinion of the Trustees, conditions exist which make cash
payment undesirable, redemption payments may be made in whole or in part in
securities or other property, valued for this purpose as they are valued in
computing the NAV of the Fund. Shareholders receiving securities or other
property on redemption may realize a gain or loss for tax purposes and will
incur any costs of sale as well as the associated inconveniences.]
Pursuant to Rule 11a-3 under the 1940 Act, the Fund is required to
give shareholders at least 60 days' notice prior to terminating or modifying
the Fund's exchange privilege. Under the Rule, the 60-day notification
requirement may be waived if (i) the only effect of a modification would be to
reduce or eliminate an administrative fee, redemption fee or deferred sales
charge ordinarily payable at the time of exchange or (ii) the Fund temporarily
suspends the offering of shares as permitted under the 1940 Act or by the SEC
or because it is unable to invest amounts effectively in accordance with its
investment objective and policies.
In the Prospectus, the Victory Portfolios, Key Advisers and the
Sub-Adviser have notified shareholders that they reserve the right at any time
without prior notice to shareholders to refuse exchange purchases by any person
or group if, in Key Advisers or the Sub-Adviser's judgment, the Fund would be
unable to invest effectively in accordance with its investment objective and
policies, or would otherwise potentially be adversely affected.
ADDITIONAL PURCHASE INFORMATION
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REDUCED SALES CHARGE. Reduced sales charges are applicable to
purchases of $50,000 or more alone or in combination with purchases of shares
of other Victory Portfolios made at any one time. To obtain the reduction of
the sales charge, you or your investment professional must notify the Transfer
Agent at the time of purchase whenever a quantity discount is applicable to
your purchase. Upon such notification, you will receive the lowest applicable
sales charge.
In addition to investing at one time in any combination of shares of
the Victory Portfolios in an amount entitling you to a reduced sales charge,
you may qualify for a reduction in the sales charge under the following
programs:
COMBINED PURCHASES. When you invest in shares of the Victory
Portfolios for several accounts at the same time, you may combine these
investments into a single transaction if purchased through one investment
professional, and if the total is $50,000 or more. The following may qualify
for this privilege: an individual, or "company" as defined in Section 2(a)(8)
of the 1940 Act; an individual, spouse, and their children under age 21
purchasing for his, her, or their own account; a trustee, administrator or
other fiduciary purchasing for a single trust estate or single fiduciary
account or for a single or a parent-subsidiary group of "employee benefit
plans" (as defined in Section 3(3) of ERISA); and tax-exempt organizations
under Section 501(c)(3) of the Internal Revenue Code.
RIGHTS OF ACCUMULATION. Your "Rights of Accumulation" permit reduced
sales charges on future purchases of shares after you have reached a new
breakpoint. You can add the value of existing Victory Portfolios shares held
by you, your spouse, and your children under age 21, determined at the previous
day's NAV at the close of business, to the amount of your new purchase valued
at the current offering price to determine your reduced sales charge.
LETTER OF INTENT. If you anticipate purchasing $50,000 or more of
shares of the Fund alone or in combination with shares of certain other Victory
Portfolios within a 13-month period, you may obtain shares of the portfolios at
the same reduced sales charge as though the total quantity were invested in one
lump sum, by filing a non-binding Letter of Intent (the "Letter") within 90
days of the start of the purchases. Each investment you make after signing the
Letter will be entitled to the sales charge applicable to the total investment
indicated in the Letter. For example, a $2,500 purchase toward a $60,000 Letter
would receive the same reduced sales charge as if the $60,000 had been invested
at one time. To ensure that the reduced price will be received on future
purchases, you or your investment professional must inform the transfer agent
that the Letter is in effect each time shares are purchased. Neither income
dividends nor capital gain distributions taken in additional shares will apply
toward the completion of the Letter.
Your initial investment must be at least 5% of the total amount you
plan to invest. Out of the initial purchase, 5% of the dollar amount specified
in the Letter will be registered in your name and held in escrow. The shares
held in escrow cannot be redeemed or exchanged until the Letter is satisfied or
the additional sales charges have been paid. You will earn income dividends
and capital gain distributions on escrowed shares. The escrow will be released
when your purchase of the total amount has been completed. You are not
obligated to complete the Letter.
If you purchase more than the amount specified in the Letter and
qualify for a further sales charge reduction, the sales charge will be adjusted
to reflect your total purchase at the end of 13 months. Surplus funds will be
applied to the purchase of additional shares at the then current offering price
applicable to the total purchase.
If you do not complete your purchase under the Letter within the
13-month period, your sales charge will be adjusted upward, corresponding to
the amount actually purchased, and if after written notice, you do not pay the
increased sales charge, sufficient escrowed shares will be redeemed to pay such
charge.
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ADDITIONAL EXCHANGE INFORMATION
Shares of the Victory Portfolios (see "Description of Victory
Portfolios" below) may be exchanged for shares of any Victory money market fund
or any other fund of the Victory Portfolios with the same or a lower sales
charge. Shares of any Victory money market portfolio or any fund of the
Victory Portfolios with a reduced sales charge may be exchanged for shares of
the Fund upon payment of the difference in the sales charge.
ADDITIONAL REDEMPTION INFORMATION
REINSTATEMENT PRIVILEGE. Within 90 days of a redemption, a
shareholder may reinvest all or part of the redemption proceeds of shares of
the Fund or any of the other Victory Portfolios into which shares of the Fund
are exchangeable as described below, at the net asset value next computed after
receipt by the Transfer Agent of the reinvestment order. No charge is
currently made for reinvestment in shares of the Fund but a reinvestment in
shares of certain other Victory Portfolios is subject to a $5.00 service fee.
The shareholder must ask the Distributor for such privilege at the time of
reinvestment. Any capital gain that was realized when the shares were redeemed
is taxable, and reinvestment will not alter any capital gains tax payable on
that gain. If there has been a capital loss on the redemption, some or all of
the loss may not be tax deductible, depending on the timing and amount of the
reinvestment. Under the Internal Revenue Code, if the redemption proceeds of
Fund shares on which a sales charge was paid are reinvested in shares of the
Fund or another of the Victory Portfolios within 90 days of payment of the
sales charge, the shareholder's basis in the shares of the Fund that were
redeemed may not include the amount of the sales charge paid. That would
reduce the loss or increase the gain recognized from redemption. The Fund may
amend, suspend or cease offering this reinvestment privilege at any time as to
shares redeemed after the date of such amendment, suspension or cessation. You
must reinstate your shares into an account with the same registration. This
privilege may be exercised only once by a shareholder with respect to the Fund.
For information on which funds are available for the Reinstatement Privilege,
please consult your program materials.
DIVIDENDS AND DISTRIBUTIONS
The Fund ordinarily declares and pays dividends from its net
investment income quarterly. The Fund distributes substantially all of its net
investment income and net capital gains, if any, to shareholders within each
calendar year as well as on a fiscal year basis to the extent required for the
Fund to qualify for favorable federal tax treatment.
The amount of distributions may vary from time to time depending on
market conditions and the composition of the Fund's portfolio.
For this purpose, the net income of the Fund, from the time of the
immediately preceding determination thereof, shall consist of all interest
income accrued on the portfolio assets of the Fund, dividend income, if any,
income from securities loans, if any, and realized capital gains and losses on
the Fund assets, less all expenses and liabilities of the Fund chargeable
against income. Interest income shall include discount earned, including both
original issue and market discount, on discount paper accrued ratably to the
date of maturity. Expenses, including the compensation payable to Key Advisers
or the Sub-Adviser, are accrued each day. The expenses and liabilities of the
Fund shall include those appropriately allocable to the Fund as well as a share
of the general expenses and liabilities of the Victory Portfolios in proportion
to the Fund's share of the total net assets of the Victory Portfolios.
Additional Tax Information
It is the policy of the Fund to qualify for the favorable tax
treatment accorded regulated investment companies ("RICs") under Subchapter M
of the Code, for so long as such qualification is in the best interest of its
shareholders. By following such policy and distributing its income and gains
currently with respect to each taxable
-15-
<PAGE> 333
year, the Fund expects to eliminate or reduce to a nominal amount the federal
income and excise taxes to which it may otherwise be subject.
In order to qualify as a RIC, the Fund must, among other things, (1)
derive at least 90% of its gross income from dividends, interest, payments with
respect to securities loans, and gains from the sale or other disposition of
stock or securities, foreign currencies or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in stock, securities or currencies, (2) derive less than 30% of its
gross income from the sale or other disposition of stock, securities, options,
futures, forward contracts, and certain foreign currencies (or options,
futures, or forward contracts on foreign currencies) held for less than three
months, and (3) diversify its holdings so that at the end of each quarter of
its taxable year (i) at least 50% of the market value of the Fund's assets is
represented by cash or cash items, U.S. Government securities, securities of
other RICs and other securities limited, in respect of any one issuer, to an
amount not greater than 5% of the value of the Fund's total assets and 10% of
the outstanding voting securities of such issuer, and (ii) not more than 25% of
the value of its total assets is invested in the securities of any one issuer
(other than U.S. Government securities) or of two or more issuers that the Fund
controls and that are engaged in the same, similar, or related trades or
businesses. These requirements may restrict the degree to which the Fund may
engage in short-term trading and concentrate investments. If the Fund
qualifies as a RIC, it will not be subject to federal income tax on the part of
its net investment income and net realized capital gains, if any, that it
distributes to shareholders with respect to each taxable year within the time
limits specified in the Code.
A non-deductible excise tax is imposed on regulated investment
companies that do not distribute in each calendar year an amount equal to 98%
of their ordinary income for the year plus 98% of their capital gain net income
for the 1-year period ending on October 31 of such calendar year. The balance
of such income must be distributed during the following calendar year. If
distributions during a calendar year are less than the required amount, the
fund is subject to a non-deductible excise tax equal to 4% of the deficiency.
Certain investment and hedging activities of the Fund, including
transactions in options, futures contracts, hedging transactions, forward
contracts, straddles, foreign currencies, and foreign securities, are subject
to special tax rules. In a given case, these rules may accelerate income to the
Fund, defer losses to the Fund, cause adjustments in the holding periods of the
Fund's securities, convert short-term capital losses into long-term capital
losses, or otherwise affect the character of the Fund's income. These rules
could therefore affect the amount, timing and character of distributions to
shareholders. The Fund will endeavor to make any available elections
pertaining to such transactions in a manner believed to be in the best interest
of the Fund and its shareholders.
The Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends paid to any shareholder who has
failed to provide (or provided an incorrect) tax identification number, or is
subject to withholding pursuant to a notice from the Internal Revenue Service
for failure to properly include on his or her income tax return payments of
interest or dividends. This "backup withholding" is not an additional tax, and
any amounts withheld may be credited against the shareholder's ultimate U.S.
tax liability.
Information set forth in the Prospectus and this Statement of
Additional Information that relates to federal taxation is only a summary of
certain key federal tax considerations generally affecting purchasers of shares
of the Fund. No attempt has been made to present a complete explanation of the
federal tax treatment of a Fund or itsshareholders, and this discussion is not
intended as a substitute for careful tax planning. Accordingly, potential
purchasers of shares of the Fund of these Portfolios are urged to consult their
tax advisers with specific reference to their own tax circumstances. In
addition, the tax discussion in the Prospectus and this Statement of Additional
Information is based on tax law in effect on the date of the Prospectus and
this Statement of Additional Information; such laws and regulations may be
changed by legislative, judicial or administrative action, sometimes with
retroactive effect.
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<PAGE> 334
MANAGEMENT OF THE VICTORY PORTFOLIOS
Board of Trustees
Overall responsibility for management of the Victory Portfolios rests
with the Trustees, who are elected by the shareholders of the Victory
Portfolios. The Victory Portfolios are managed by the Trustees in accordance
with the laws of the State of Delaware governing business trusts. There are
currently seven Trustees, six of whom are not "interested persons" of the
Victory Portfolios within the meaning of that term under the 1940 Act. The
Trustees, in turn, elect the officers of the Victory Portfolios to supervise
actively its day-to-day operations.
The Trustees of the Victory Portfolios, their addresses, ages and
their principal occupations during the past five years are as follows:
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- --------------------- ---------------- --------------------
<S> <C> <C>
Leigh A. Wilson, 51* Trustee and From 1989 to present, Chairman and
Glenleigh International Ltd. President Chief Executive Officer, Glenleigh
53 Sylvan Road North International Limited; previously
Westport, CT 06880 Chief Executive Officer, Paribas
North America and Paribas
Corporation; Trustee, The Victory
Funds and Spears, Benzak, Salomon
and Farrell ("SBSF") Funds.
Robert G. Brown, 72 Trustee Retired; from October 1983 to
5460 N. Ocean Drive November 1990, President,
Singer Island, Rivera Beach, Cleveland Advanced Manufacturing
Florida 33404 Program (non-profit corporation
engaged in regional economic
development).
</TABLE>
- ---------------
* Mr. Wilson is deemed to be an "interested person" of the Victory
Portfolios under the 1940 Act solely by reason of his position as
President.
-17-
<PAGE> 335
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- --------------------- ---------------- --------------------
<S> <C> <C>
Edward P. Campbell, 46 Trustee From March 1, 1994 to present,
Nordson Corporation Executive Vice President and Chief
28601 Clemens Road Operating Officer of Nordson
Westlake, OH 44145 Corporation (manufacturer of
application equipment); from May
1988 to March 1994, Vice President
of Nordson Corporation; from 1987
to December 1994, member of the
Supervisory Committee of Society's
Collective Investment Retirement
Fund; from May 1991 to August
1994, Trustee, Financial Reserves
Fund and from May 1993 to August
1994, Trustee, Ohio Municipal
Money Market Fund; Trustee, The
Victory Funds and SBSF.
Dr. Harry Gazelle, 68 Trustee Retired radiologist, Drs. Hill and
17822 Lake Road Thomas Corp.; Trustee, The Victory
Lakewood, OH 44107 Funds.
Dr. Thomas F. Morrissey, 62 Trustee 1995 Visiting Scholar, Bond
Weatherhead School of University, Queensland, Australia;
Management Professor, Weatherhead School of
Case Western Reserve Management, Case Western Reserve
University University; from 1989 to 1995,
10900 Euclid Avenue Associate Dean of Weatherhead
Cleveland, OH 44106-7235 School of Management and
Professor, Case Western Reserve
University; from 1987 to December
1994, Member of the Supervisory
Committee of Society's Collective
Investment Retirement Fund; from
May 1991 to August 1994, Trustee,
Financial Reserves Fund and from
May 1993 to August 1994, Trustee,
Ohio Municipal Money Market Fund;
Trustee, The Victory Funds.
Stanley I. Landgraf, 70 Trustee Retired; currently, Trustee,
41 Traditional Lane Rensselaer Polytechnic Institute;
Albany, NY 12211 Director, Elenel Corporation and
Mechanical Technology, Inc.;
Member, Board of Overseers, School
of Management, Rensselaer
Polytechnic Institute; Member, The
Fifty Group (a Capital Region
business organization); Trustee,
The Victory Funds.
</TABLE>
-18-
<PAGE> 336
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- --------------------- ---------------- --------------------
<S> <C> <C>
H. Patrick Swygert, 52 Trustee President, Howard University;
Howard University formerly President, State
2400 6th Street, N.W. University of New York at Albany;
Suite 320 formerly, Executive Vice
Washington, DC 20059 President, Temple University;
Trustee, The Victory Funds.
</TABLE>
The Board presently has an Investment Policy Committee and a Business,
Legal, and Audit Committee. The members of the Investment Policy Committee are
Messrs. Landgraf (Chairman), Morrissey and Brown, who will serve until May
1996. The function of the Investment Policy Committee is to review the
existing investment policies of the Victory Portfolios, including the levels of
risk and types of funds available to shareholders, and make recommendations to
the Board of Trustees regarding the revision of such policies or, if necessary,
the submission of such revisions to the Victory Portfolios' shareholders for
their consideration. The members of the Business, Legal and Audit Committee
are Messrs. Swygert (Chairman), Campbell and Gazelle who will serve until May
1996. The function of the Business, Legal and Audit Committee is to recommend
independent auditors and monitor accounting and financial matters; to nominate
persons to serve as disinterested Trustees and Trustees to serve on committees
of the Board; and to review compliance and contract matters.
The Investment Policy Committee met four times during the 12 months
ended October 31, 1995. The Business, Legal and Audit Committee was
constituted on May 24, 1995 (and has met twice since then) and replaced the
Audit Committee, the Legal Committee and the Nominating Committee, which met
three times, one time and one time, respectively, during the 12 month period
ended October 31, 1995.
REMUNERATION OF TRUSTEES AND CERTAIN EXECUTIVE OFFICERS
Effective June 1, 1995, each Trustee (other than Leigh A. Wilson)
receives an annual fee of $27,000 for serving as Trustee of all the fnds of the
Victory Portfolios, and an additional per meeting fee ($2,400 in person and
$1,200 per telephonic meeting).
Effective June 1, 1995, Leigh A. Wilson receives an annual fee of
$33,000 for serving as President and Trustee for all of the fnds of the Victory
Portfolios, and an additional per meeting fee ($3,000 in person and $1,500 per
telephonic meeting).
The following table indicates the compensation received by each
Trustee from the Fund and from the Victory "Fund Comples"* during the fiscal
year ended October 31, 1995.
<TABLE>
<CAPTION>
Pension or
Retirement Estimated Annual Total Total Compensation
Benefits Accrued as Benefits Compensation from Victory
Portfolio Expenses Upon Retirement from Fund "Fund Complex"*
------------------- ---------------- ------------ ------------------
<S> <C> <C> <C> <C>
Robert G. Brown, Trustee . . -0- -0- $1,155.92 $39,815.98
Edward P. Campbell, Trustee . -0- -0- 922.20 33,799.68
Harry Gazelle, Trustee . . . -0- -0- 969.26 35,916.98
John W. Kemper,# Trustee . . -0- -0- 581.73 22,567.31
Thomas F. Morrissey, Trustee. -0- -0- 1,045.87 40,366.98
</TABLE>
-19-
<PAGE> 337
<TABLE>
<S> <C> <C> <C> <C>
Stanley I. Landgraf, Trustee. -0- -0- 960.31 34,615.98
Leigh A. Wilson, Trustee . . -0- -0- 1,143.77 46,716.97
H. Patrick Swygert, Trustee . -0- -0- 1,045.87 37,116.98
John D. Buckingham, Trustee . -0- -0- 495.35 18,841.89
John R. Young,# Trustee . . . -0- -0- 590.17 21,963.81
</TABLE>
# Resigned
- ---------------
* For certain Trustees, these amounts include compensation received from
The Victory Funds (which were reorganized into the Victory Portfolios
Current Company as of June 5, 1995), the SBSF Funds (the investment
adviser of which was acquired by KeyCorp effective April, 1995) and
Society's Collective Investment Retirement Funds, which were
reorganized into the Victory Balanced Fund and Victory Government
Mortgage Fund as of December 19, 1994. There are presently 28 mutual
funds from which the above-named Trustees are compensated in the
Victory "Fund Complex," but not all of the above-named Trustees serve
on the boards of each fund in the "Fund Complex."
Officers
The officers of the Victory Portfolios, their addresses, ages
and principal occupations during the past five years are as follows:
<TABLE>
<CAPTION>
Position with the Principal occupation
Name Victory Portfolios during past 5 years
---- ------------------ -------------------
<S> <C> <C>
Leigh A. Wilson, 51 President and Trustee From 1989 to present, Chairman and
Glenleigh International Ltd. Chief Executive Officer, Glenleigh
53 Sylvan Road North International Limited; from 1984-
Westport, CT 06880 1989, Chief Executive Officer,
Paribas North America and Paribas
Corporation; Trustee to The Victory
Funds and SBSF Funds.
William B. Blundin, 57 Vice President Senior Vice President of BISYS Fund
BISYS Fund Services Services; officer of other
125 West 55th Street investment companies administered
New York, New York 10019 by BISYS Fund Services; President
and Chief Executive Officer of
Vista Broker-Dealer Services, Inc.,
Emerald Asset Management, Inc. and
BNY Hamilton Distributors, Inc.,
registered broker/dealers.
J. David Huber, 49 Vice President Executive Vice President, BISYS
BISYS Fund Services Fund Services.
3435 Stelzer Road
Columbus, OH 43219-3035
Scott A. Englehart, 33 Secretary From October 1990 to present,
BISYS Fund Services employee of BISYS Fund Services,
</TABLE>
-20-
<PAGE> 338
<TABLE>
<S> <C> <C>
3435 Stelzer Road Inc.; from 1985 to October 1990,
Columbus, OH 43219-3035 Manager of Banking Center, Fifth
Third Bank.
George O. Martinez, 36 Assistant Secretary From March 1995 to present, Senior
BISYS Fund Services Vice President and Director of
3435 Stelzer Road Legal and Compliance Services,
Columbus, OH 43219-3035 BISYS Fund Services; from June
1989-March 1995, Vice President and
Associate General Counsel, Alliance
Capital Management.
Martin R. Dean, 32 Treasurer From May 1994 to present, employee
BISYS Fund Services of BISYS Fund Services; from
3435 Stelzer Road January 1987 - April 1994, Senior
Columbus, OH 43219-3035 Manager, KPMG Peat Marwick.
Adrian J. Waters, 33 Assistant Treasurer From May 1993 to present, employee
BISYS Fund Services (Ireland) of BISYS Fund Services; from 1989-
Limited May 1993, Manager, Price
ITI House Waterhouse.
12 Earlsfort Terrace
Dublin 2, Ireland
</TABLE>
The mailing address of each of the officers of the Victory Portfolios is 3435
Stelzer Road, Columbus, Ohio 43219-3035.
The officers of the Victory Portfolios (other than Leigh Wilson) receive no
compensation directly from the Victory Portfolios for performing the duties of
their offices. BISYS Fund Services, Inc. receives fees from the Victory
Portfolios for acting as Administrator.
As of January 6, 1996, the Trustees and officers as a group owned
beneficially less than 1% of the Fund.
Investment Adviser and Sub-Adviser
Key Advisers was organized as an Ohio corporation on July 27, 1995 and
is registered as an investment adviser under the Investment Act of 1940. It is
a wholly-owned subsidiary of KeyCorp Asset Management Holdings, Inc., which is
a wholly-owned subsidiary of Society National Bank, a wholly-owned subsidiary
of KeyCorp. Affiliates of Key Advisers manage approximately $37 billion for
numerous clients including large corporate and public retirement plans,
Taft-Hartley plans, foundations and endowments, high net worth individuals and
mutual funds.
KeyCorp, a financial services holding company, is headquartered at 127
Public Square, Cleveland, Ohio 44114. As of June 30, 1995, KeyCorp had an
asset base of $67.5 billion, with banking offices in 25 states from Maine to
Alaska, and trust and investment offices in 16 states. KeyCorp is the
resulting entity of the merger in 1994 of Society Corporation, the bank holding
company of which Society National Bank was a wholly-owned subsidiary, and
KeyCorp, the former bank holding company. KeyCorp's major business activities
include providing traditional banking and associated financial services to
consumer, business and commercial markets. Its non-bank subsidiaries include
investment advisory, securities brokerage, insurance, bank credit card
processing, and mortgage leasing companies. Society National Bank is the lead
affiliate bank of KeyCorp.
-21-
<PAGE> 339
The following table lists the advisory fees for each mutual fund that
is advised by Key Advisers.
.25 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Institutional Money Market Fund*
.35 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Prime Obligations Fund*
Victory U.S. Government Obligations Fund*
Victory Tax-Free Money Market Fund*
.50 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Money Market Fund*
Victory Limited Term Income Fund*
Victory Government Mortgage Fund*
Victory Financial Reserves Fund*
Victory Fund for Income #
.55 OF 1% OF AVERAGE DAILY NET ASSETS
Victory National Municipal Bond Fund*
Victory Government Bond Fund*
Victory New York Tax-Free Fund*
.60 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Bond Fund*
Victory Stock Index Fund*
.65 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Diversified Stock Fund*
.75 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Intermediate Income Fund*
Victory Investment Quality Bond Fund*
Victory Ohio Regional Stock Fund*
1% OF AVERAGE DAILY NET ASSETS
Victory Balanced Fund*
Victory Value Fund*
Victory Growth Fund*
Victory Special Value Fund*
Victory Special Growth Fund+
1.10% OF AVERAGE DAILY ASSETS
Victory International Growth Fund*
# First Albany Asset Management Corporation serves as sub-adviser to the
Victory Fund for Income, for which it receives .20% of average daily net
assets.
+/- T. Rowe Price Associates, Inc. serves as sub-adviser to Society Special
Growth Fund, for which it receives .25% of average daily net assets up
to $100 million and .20% of average daily net assets in excess of $100
million.
-22-
<PAGE> 340
* Society Asset Management, Inc. (the Sub-adviser) serves as sub-adviser
to each of these funds. For its services under the investment
sub-advisory agreement Key Advisers pays the Sub-Adviser sub-advisory
fees at rates (based on an annual percentage of average daily net
assets) whch vary according to the table set forth below:
-23-
<PAGE> 341
For the Victory Diversified Stock Fund, Growth Fund, Stock Index Fund and Value
Fund:
<TABLE>
<CAPTION>
Rate of
Net Assets Sub-Advisory Fee*
---------- -----------------
<S> <C>
Up to $10,000,000 0.65%
Next $15,000,000 0.50%
Next $25,000,000 0.40%
Above $50,000,000 0.35%
</TABLE>
For the Victory International Growth Fund, Ohio Regional Stock Fund and Special
Value Fund:
<TABLE>
<CAPTION>
Rate of
Net Assets Sub-Advisory Fee*
---------- -----------------
<S> <C>
Up to $10,000,000 0.90%
Next $15,000,000 0.70%
Next $25,000,000 0.55%
Above $50,000,000 0.45%
</TABLE>
- ---------------
* As a percentage of average daily net assets. The Sub-Adviser has the
right to voluntarily waive any portion of the sub- advisory fee from
time to time.
For the Victory Intermediate Income Fund, Investment Quality Bond Fund, Limited
Term Income Fund, Ohio Municipal Bond Fund, Government Bond Fund, Government
Mortgage Fund, National Municipal Bond Fund and New York Tax-Free Fund:
<TABLE>
<CAPTION>
Rate of
Net Assets Sub-Advisory Fee*
---------- -----------------
<S> <C>
Up to $10,000,000 0.40%
Next $15,000,000 0.30%
Next $25,000,000 0.25%
Above $50,000,000 0.20%
</TABLE>
For the Victory Prime Obligations Fund, Tax-Free Money Market Fund, U.S.
Government Obligations Fund, Financial Reserves Fund, Institutional Money
Market Fund and Ohio Municipal Money Market Fund:
<TABLE>
<CAPTION>
Rate of
Net Assets Sub-Advisory Fee*
---------- -----------------
<S> <C>
Up to $10,000,000 0.25%
Next $15,000,000 0.20%
Next $25,000,000 0.15%
Above $50,000,000 0.125%
</TABLE>
- ---------------
* As a percentage of average daily net assets. The Sub-Adviser has the
right to voluntarily waive any portion of the sub- advisory fee from
time to time.
ADVISORY AND OTHER CONTRACTS
Unless sooner terminated, the Investment Advisory Agreement between
Key Advisers and the Fund provides that it will continue in effect as to the
Fund for an initial two-year term and for consecutive one-year terms
thereafter, provided that such continuance is approved at least annually by the
Victory Portfolios' Trustees or by vote of a majority of the outstanding shares
of such Fund (as defined under "GENERAL INFORMATION - Miscellaneous" in the
Prospectuses), and, in either case, by a majority of the Trustees who are not
parties to the Investment Advisory Agreement or interested persons (as defined
in the 1940 Act) of any party to the Investment Advisory Agreement, by votes
cast in person at a meeting called for such purpose.
The Investment Advisory Agreement is terminable as to the Fund at any
time on 60 days' written notice without penalty by the Trustees, by vote of a
majority of the outstanding shares of the Fund, or by Key Advisers. The
Investment Advisory Agreement also terminates automatically in the event of any
assignment, as defined under the 1940 Act.
-24-
<PAGE> 342
The Investment Advisory Agreement provides that Key Advisers shall not
be liable for any error of judgment or mistake of law or for any loss suffered
by the Fund in connection with the performance of services pursuant to the
Investment Advisory Agreement, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith, or gross negligence on the
part of Key Advisers in the performance of its duties, or from reckless
disregard by it of either duties and obligations thereunder.
Under the Investment Advisory Agreement, Key Advisers has agreed to
provide the investment advisory services described in the Prospectus. For the
services provided and expenses assumed pursuant to the Investment Advisory
Agreement, the Fund pays Key Advisers a fee, computed daily and paid monthly,
at the annual rate of fifty one-hundredths of one percent (.50%) of the average
daily net assets of the Fund.
Prior to January, 1993, Society National Bank served as investment
adviser to the Fund. From January 1, 1993 until December 31, 1995, Society
Asset Management, Inc. served as investment adviser to the Fund. For the
fiscal years ended October 31, 1993, October 31, 1994 and 1995 the Fund paid
investment advisory fees of $336,168, $421,108, and ________, respectively,
after fee reductions of $4,560, $6,157 and $________ respectively.
Under the Investment Advisory Agreement, Key Advisers may delegate a
portion of its responsibilities to a sub-adviser. In addition, the Investment
Advisory Agreement provides that Key Advisers may render services through its
own employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser of the Fund and are under the common
control of KeyCorp as long as all such persons are functioning as part of an
organized group of persons, managed by authorized officers of Key Advisers.
Key Advisers has entered into an investment sub-advisory agreement
with its affiliate, Society Asset Management, Inc. on behalf of the Fund. The
Sub-Adviser is a wholly-owned subsidiary of KeyCorp Asset Management Holdings,
Inc. With respect to the day to day management of the Fund, under the
sub-advisory agreement, the Sub-Adviser makes decisions concerning, and places
all orders for, purchases and sales of securities and helps maintain the
records relating to such purchases and sales. The Sub-Adviser may, in its
discretion, provide such services through its own employees or the employees of
one or more affiliated companies that are qualified to act as an investment
adviser to the Company under applicable laws and are under the common control
of KeyCorp; provided that (i) all persons, when providing services under the
sub-advisory agreement, are functioning as part of an organized group of
persons, and (ii) such organized group of persons is managed at all times by
authorized officers of the Sub-Adviser. This arrangement will not result in the
payment of additional fees by the Fund.
-25-
<PAGE> 343
Glass-Steagall Act
In 1971 the United States Supreme Court held in Investment Company
Institute v. Camp that the federal statute commonly referred to as the
Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision:
(a) forbid a bank holding company registered under the Federal Bank Holding
Company Act of 1956 (the "Holding Company Act") or any non-bank affiliate
thereof from sponsoring, organizing, or controlling a registered, open-end
investment company continuously engaged in the issuance of its shares, but (b)
do not prohibit such a holding company or affiliate from acting as investment
adviser, transfer agent, and custodian to such an investment company. In 1981
the United States Supreme Court held in Board of Governors of the Federal
Reserve System v. Investment Company Institute that the Board did not exceed
its authority under the Holding Company Act when it adopted its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to registered closed-end investment companies.
In the Board of Governors case, the Supreme Court also stated that if a
national bank complied with the restrictions imposed by the Board in its
regulation and interpretation authorizing bank holding companies and their
non-bank affiliates to act as investment advisers to investment companies, a
national bank performing investment advisory services for an investment company
would not violate the Glass-Steagall Act.
Key Advisers and the Sub-Adviser believe that they may perform the
services for the Victory Portfolios contemplated by the Prospectus, this
Statement of Additional Information, and the Investment Advisory Agreemeent
(and Sub-Advisory Agreement) with the Victory Portfolios without violation of
applicable statutes and regulations and has so represented in its Investment
Advisory Agreement (Sub-Advisory Agreement) with the Victory Portfolios. Key
Trust Company of Ohio, N.A. believes that it may perform the services for the
Victory Portfolios contemplated by the Prospectus, this Statement of Additional
Information, and the Shareholder Servicing Agreement with the Victory
Portfolios (as described below) without violation of applicable statutes and
regulations and has so represented in such Shareholder Servicing Agreement.
Future changes in either federal or state statutes and regulations relating to
the permissible activities of banks or bank holding companies and the
subsidiaries or affiliates of those entities, as well as further judicial or
administrative decisions or interpretations of present and future statutes and
regulations, could prevent or restrict Key Trust Company of Ohio, N.A., Key
Advisers or the Sub-Adviser from continuing to perform such services for the
Victory Portfolios. Depending upon the nature of any changes in the services
which could be provided by Key Trust Company of Ohio, N.A., Key Advisers or the
Sub-Adviser the Trustees of the Victory Portfolios would review the Victory
Portfolios' relationship with Key Trust Company of Ohio, N.A., Key Advisers or
the Sub-Adviser and consider taking all action necessary in the circumstances.
Should future legislative, judicial, or administrative action prohibit
or restrict the proposed activities of Key Trust Company of Ohio, N.A., Key
Advisers or the Sub-Adviser and its affiliated and correspondent banks and
other non-bank affiliates in connection with customer purchases of shares of
the Victory Portfolios, the banks and such non-bank affiliates might be
required to alter materially or discontinue the services offered by them to
customers. It is not anticipated, however, that any change in the Victory
Portfolios' method of operations would affect its net asset value per share or
result in financial losses to any customer.
From time to time, advertisements, supplemental sales literature and
information furnished to present or prospective shareholders of the Fund may
include descriptions of Key Trust Company of Ohio, N.A., Key Advisers and the
Sub-Adviser including, but not limited to, (i) descriptions of the operations
of Key Trust Company of Ohio, N.A., Key Advisers and the Sub-Adviser; (ii)
descriptions of certain personnel and their functions; and (iii) statistics and
rankings related to the operations of Key Trust Company of Ohio, N.A., Key
Advisers and the Sub-Adviser.
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Portfolio Transactions
Pursuant to the Investment Advisory Agreement (Sub-Advisory
Agreement), Key Advisers or the Sub-Adviser determines, subject to the general
supervision of the Trustees of the Victory Portfolios, and in accordance with
the Fund's investment objective and restrictions, which securities are to be
purchased and sold by the Fund, and which brokers are to be eligible to execute
its portfolio transactions. Purchases from underwriters and/or broker-dealers
of portfolio securities include a commission or concession paid by the issuer
to the underwriter and/or broker-dealer and purchases from dealers serving as
market makers may include the spread between the bid and asked price. While
Key Advisers and the Sub-Adviser generally seek competitive prices (inclusive
of any spread or commission), the Fund may not necessarily pay the lowest
prices available on each transaction, for reasons discussed below.
Allocation of transactions, including their frequency, to various
dealers is determined by Key Advisers or the Sub-Adviser in their best judgment
and in a manner deemed fair and reasonable to shareholders. The primary
consideration is prompt execution of orders in an effective manner at the most
favorable price. Subject to this consideration, dealers who provide
supplemental investment research to Key Advisers or the Sub-Adviser may receive
orders for transactions by the Victory Portfolios. Information so received is
in addition to and not in lieu of services required to be performed by Key
Advisers or the Sub-Adviser and does not reduce the advisory (sub-advisory)
fees payable to Key Advisers or the Sub-Adviser by the Victory Portfolios.
Such information may be useful to Key Advisers or the Sub-Adviser in serving
both the Victory Portfolios and other clients and, conversely, such
supplemental research information obtained by the placement of orders on behalf
of other clients may be useful to Key Advisers or the Sub-Adviser in carrying
out its obligations to the Victory Portfolios. In the future, the Trustees may
also authorize the allocation of brokerage to affiliated broker-dealers on an
agency basis to effect portfolio transactions. In such event, the Trustees
will adopt procedures incorporating the standards of Rule 17e-1 under the 1940
Act, which requires that the commission paid to affiliated broker-dealers be
"reasonable and fair compared to the commission, fee or other remuneration
received, or to be received, by other brokers in connection with comparable
transactions involving similar securities during a comparable period of time."
At times, the Fund may also purchase portfolio securities directly from dealers
acting as principals, underwriters or market makers. As these transactions are
usually conducted on a net basis, no brokerage commissions are paid by the
Fund.
The Victory Portfolios will not execute portfolio transactions
through, acquire portfolio securities issued by, make savings deposits in, or
enter into repurchase or reverse repurchase agreements with Key Advisers, the
Sub-Adviser, Key Trust Company of Ohio, N.A. or its affiliates, Concord Holding
Corporation, Victory Broker-Dealer Services, Inc. or their affiliates, and will
not give preference to Key Trust Company of Ohio, N.A.'s correspondent banks or
affiliates, or Concord Holding Corporation or Victory Broker-Dealer Services,
Inc. with respect to such transactions, securities, savings deposits,
repurchase agreements, and reverse repurchase agreements.
Investment decisions for the Fund are made independently from those
for the other funds or any other investment company or account managed by Key
Advisers (or Society). Any such other investment company or account may also
invest in the same securities as a particular fund. When a purchase or sale of
the same security is made at substantially the same time on behalf of the Fund
and another fund, investment company or account, the transaction will be
averaged as to price, and available investments allocated as to amount, in a
manner which Key Advisers (or Society) believes to be equitable to the Fund
and such other fund, investment company or account. In some instances, this
investment procedure may adversely affect the price paid or received by the
Fund or the size of the position obtained by the Fund. To the extent permitted
by law, Key Advisers (or Society) may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for the other funds
or for other investment companies or accounts in order to obtain best
execution. As provided by the Investment Advisory (and Sub-Advisory)
Agreement, in making investment recommendations for the Victory Portfolios, Key
Advisers (or Society) will not inquire or take into consideration whether an
issuer of securities proposed for purchase or sale by a Fund is a customer of
Society, its parents or subsidiaries or affiliates and, in dealing with their
commercial
-27-
<PAGE> 345
customers, Key Advisers (Society), its parents, subsidiaries, and affiliates
will not inquire or take into consideration whether securities of such
customers are held by the Victory Portfolios.
In the fiscal years ended October 31, 1995 and October 31, 1994, the
Fund paid $__________ and $938 in brokerage commissions, respectively.
Administrator
Currently, Concord Holding Corporation ("CHC") serves as general
manager and administrator (the "Administrator") to the Fund. The
Administrator assists in supervising all operations of the Fund (other than
those performed by Key Advisers or the Sub-Adviser under the Investment
Advisory Agreement and Sub-Advisory Agreement. Prior to June, 1995, The
Winsbury Company ("Winsbury") served as the Fund's administrator.
CHC receives a fee from the Fund for its services as Administrator and
expenses assumed pursuant to the Administration Agreements, calculated daily
and paid monthly, at the annual rate of fifteen one hundredths of one percent
(.15%) of the Fund's average daily net assets. CHC may periodically waive all
or a portion of its fee with respect to the Fund in order to increase the net
income of the Fund available for distribution as dividends.
Unless sooner terminated, the Administration Agreement will continue
in effect as to the Fund for a period of two years, and for consecutive
one-year terms thereafter, provided that such continuance is ratified at least
annually by the Victory Portfolios' Board of Trustees or by vote of a majority
of the outstanding shares of the Fund, and in either case by a majority of the
Trustees who are not parties to the Administration Agreement or interested
persons (as defined in the 1940 Act) of any party to the Administration
Agreement, by votes cast in person at a meeting called for such purpose.
The Administration Agreement provides that CHC shall not be liable for
any error of judgment or mistake of law or any loss suffered by the Victory
Portfolios in connection with the matters to which the Administration Agreement
relates, except a loss resulting from willful misfeasance, bad faith, or gross
negligence in the performance of its duties, or from the reckless disregard by
it of its obligations and duties thereunder.
Under the Administration Agreement, CHC assists in the Fund's
administration and operation, including providing statistical and research
data, clerical services, internal compliance and various other administrative
services, including among other responsibilities, forwarding certain purchase
and redemption requests to the Transfer Agent, participation in the updating of
the prospectus, coordinating the preparation, filing, printing and
dissemination of reports to shareholders, coordinating the preparation of
income tax returns, arranging for the maintenance of books and records and
providing the office facilities necessary to carry out the duties thereunder.
Under the Administration Agreement, CHC may delegate all or any part of its
responsibilities thereunder.
In the fiscal years ended October 31, 1993, October 31, 1994 and
October 31, 1995, the Fund paid to Winsbury and CHC aggregate administration
fees of $100,850, $116,696, and $_______, respectively, after fee reductions of
$1,536, $11,483, and $_____, respectively.
Business Management Agreement
In connection with its obligations under the Investment Sub-Advisory
Agreement, the Sub-Adviser has entered into a Business Management Agreement
with Key Advisers, pursuant to which Key Advisers provides certain
administrative and support services to the Sub-Adviser. Such services include
preparing reports to the Victory Portfolios' Board of Trustees, recordkeeping
services, and services rendered in connection with the preparation of
regulatory filings and other reports, and regulatory and other administrative
and compliance systems and support services.
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<PAGE> 346
For such services to the Fund, the Sub-Adviser pays fees to Key
Advisers which vary according to a sliding scale containing "breakpoints" at
which decreases in the business management fees correspond to increases in the
average daily net asset values of the Fund as follows:
<TABLE>
<CAPTION>
Rate of Business
Net Assets of the Fund Management Fee*
---------------------- ----------------
<S> <C>
Up to $10,000,000 0.25%
Next $15,000,000 0.15%
Next $25,000,000 0.10%
Above $50,000,000 0.05%
</TABLE>
- --------------
* As a percentage of average daily net assets.
Shareholder Servicing Plan
The Victory Portfolios, on behalf of the Fund, has adopted a
Shareholder Servicing Plan to provide payments to shareholder servicing agents
(each a "Shareholder Servicing Agent") that provide administrative support
services to customers who may from time to time beneficially own shares, which
services include: (i) aggregating and processing purchase and redemption
requests for shares from customers and promptly transmitting net purchase and
redemption orders to our distributor or transfer agent; (ii) providing
customers with a service that invests the assets of their accounts in shares
pursuant to specific or pre-authorized instructions; (iii) processing dividend
and distribution payments from the Victory Portfolios on behalf of customers;
(iv) providing information periodically to customers showing their positions in
shares; (v) arranging for bank wires; (vi) responding to customer inquiries
concerning their investment in shares; (vii) providing subaccounting with
respect to shares beneficially owned by customers or providing the information
to the Victory Portfolios necessary for subaccounting; (viii) if required by
law, forwarding shareholder communications from us (such as proxies,
shareholder reports, annual and semi-annual financial statements and dividend,
distribution and tax notices) to customers; (ix) forwarding to customers proxy
statements and proxies containing any proposals regarding this Plan; and (x)
providing such other similar services as we may reasonably request to the
extent you are permitted to do so under applicable statutes, rules or
regulations. For expenses incurred and services provided pursuant to the
Shareholder Servicing Agreement, the Fund pays each Shareholder Servicing Agent
a fee computed daily and paid monthly, in amounts aggregating not more than
twenty-five one-hundredths of one percent (.25%) of the average daily net
assets of the Fund per year. A Shareholder Servicing Agent may periodically
waive all or a portion of its respective shareholder servicing fees with
respect to the Fund to increase the net income of the Fund available for
distribution as dividends.
Expenses
The fund bears the following expenses relating to its respective
operations: taxes, interest, brokerage fees and commissions, fees of the
Trustees of the Victory Portfolios, Commission fees, state securities
qualification fees, costs of preparing and printing prospectuses for regulatory
purposes and for distribution to current shareholders, outside auditing and
legal expenses, advisory and administration fees, fees and out-of-pocket
expenses of the custodian and transfer agent, certain insurance premiums, costs
of maintenance of the Fund's existence, costs of shareholders' reports and
meetings, and any extraordinary expenses incurred in the Fund's operation.
If total expenses borne by the Fund in any fiscal year exceeds expense
limitations imposed by applicable state securities regulations, Key Advisers,
the Sub-Adviser or the Administrator will waive their fees to the extent such
excess expenses exceed such expense limitation in proportion to their
respective fees. As of the date of this
-29-
<PAGE> 347
Statement of Additional Information, the most restrictive expense limitation
applicable to the Fund limits its aggregate annual expenses, including
management and advisory fees but excluding interest, taxes, brokerage
commissions, and certain other expenses, to 2.5% of the first $30 million of
its average net assets, 2.0% of the next $70 million of its average net assets,
and 1.5% of its remaining average net assets. Any expenses to be borne by Key
Advisers, Sub-Adviser or the Administrator will be estimated daily and
reconciled and paid on a monthly basis. Fees imposed upon customer accounts by
Key Advisers, the Sub-Adviser, Key Trust Company of Ohio, N.A. or its
correspondents, affiliated banks and other non-bank affiliates for cash
management services are not fund expenses for purposes of any such expense
limitation.
Distributor
Victory Broker-Dealer Services, Inc. (the "Distributor") serves as
distributor for the continuous offering of the shares of the Fund pursuant to a
Distribution Agreement between the Distributor and the Victory Portfolios.
Unless otherwise terminated, the Distribution Agreement will remain in effect
with respect to the Fund for two years, and thereafter for consecutive one-year
terms, provided that it is approved at least annually (i) by the Victory
Portfolios' Board of Trustees or by the vote of a majority of the outstanding
shares of the Fund, and (ii) by the vote of a majority of the Trustees of the
Victory Portfolios who are not parties to the Distribution Agreement or
interested persons of any such party, cast in person at a meeting called for
the purpose of voting on such approval. The Distribution Agreement will
terminate in the event of its assignment, as defined in the 1940 Act. For the
Fund's fiscal years ended October 31, 1994 and October 31, 1995, [Winsbury]
received $______ and $_______, respectively, in underwriting commissions, and
retained $____ and $__, respectively.
Fund Accountant
BISYS Fund Services Ohio, Inc. serves as fund accountant for the Fund
pursuant to a fund accounting agreement with the Victory Portfolios dated June
5, 1995 (the "Fund Accounting Agreement"). As fund accountant for the Victory
Portfolios, BISYS Fund Services Ohio, Inc. calculates the Fund Portfolios' net
asset value, the dividend and capital gain distributions, if any, and the
yield. BISYS Fund Services Ohio, Inc. also provides a current security
position report, a summary report of transactions and pending maturities, a
current cash position report, and maintains the general ledger accounting
records for the Fund. Under the Fund Accounting Agreement with the Victory
Portfolios, BISYS Fund Services Ohio, Inc. is entitled to receive annual fees
of .03% of the first $100 million of the Fund's daily average net assets, .02%
of the next $100 million of the Fund's daily average net assets, and .01% of
the Fund's remaining daily average net assets. These annual fees are subject
to a minimum monthly assets charge of $2,500 per taxable Fund, and do not
include out-of-pocket expenses or multiple class charges of $833 per month
assessed for each class of shares after the first class. In the fiscal years
ended October 31, 1993, October 31, 1994, and October 31, 1995, the Fund paid
The Winsbury Service Corporation fund accounting fees (after fee waivers) of
$40,297.04, $28,184, and $___________, respectively.
Custodian
Cash and securities owned by the Fund are held by Key Trust Company of
Ohio, N.A. as custodian. Key Trust Company of Ohio, N.A. serves as custodian
to the Fund pursuant to a Custodian Agreement dated May 24, 1995. Under this
Agreement, Key Trust Company of Ohio, N.A. (i) maintains a separate account or
accounts in the name of the Fund; (ii) makes receipts and disbursements of
money on behalf of the Fund; (iii) collects and receives all income and other
payments and distributions on account of portfolio securities; (iv) responds to
correspondence from security brokers and others relating to its duties; and (v)
makes periodic reports to the Victory Portfolios' Trustees concerning the
Victory Portfolios' operations. Key Trust Company of Ohio, N.A. may, with the
approval of the Victory Portfolios and the custodian's own expense, open and
maintain a sub-custody account or accounts on behalf of the Fund, provided that
Key Trust Company of Ohio, N.A. shall remain liable for the performance of all
of its duties under the Custodian Agreement.
Transfer Agent
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<PAGE> 348
The Primary Funds Service Corporation ("PFSC") serves as transfer
agent and dividend disbursing agent for each fund, pursuant to a Transfer
Agency and Shareholder Servicing Agreement. Under its agreement with the
Victory Portfolios, PFSC has agreed (i) to issue and redeem shares of the
Victory Portfolios; (ii) to address and mail all communications by the Victory
Portfolios to its shareholders, including reports to shareholders, dividend and
distribution notices, and proxy material for its meetings of shareholders;
(iii) to respond to correspondence or inquiries by shareholders and others
relating to its duties; (iv) to maintain shareholder accounts and certain
sub-accounts; and (v) to make periodic reports to the Victory Portfolios'
Trustees concerning the Victory Portfolios' operations. For the services
provided under the Transfer Agency and Shareholder Servicing Agreement, PFSC
receives a maximum monthly fee of $1,250 from the Fund, and a maximum of $3.50
per account of the Fund.
Auditors
The financial highlights appearing in the Prospectus for the Fund,
other than unaudited information marked as such, has been derived from
financial statements of the Fund incorporated by reference in this Statement of
Additional Information which, for the two month period ended October 31, 1995
and fiscal year ended August 31, 1995, has been audited by Coopers & Lybrand
L.L.P. as set forth in their report incorporated by reference herein, and are
included in reliance upon such report and on the authority of such firm as
experts in auditing and accounting. Information for the fiscal year ended
August 31, 1994 has been audited by KPMG Peat Marwick L.L.P., independent
accountants for the Predecessor Fund, as set forth in their report incorporated
by reference herein, and are included in reliance upon such report and on the
authority of such firm as experts in auditing and accounting. Information for
all other periods has been audited by Ernst & Young, L.L.P., independent
accountants to the predecessor to the Predecessor Fund. Coopers & Lybrand
L.L.P. serves as the Victory Portfolios' auditors. Coopers & Lybrand L.L.P.'s
address is 100 East Broad Street, Columbus, Ohio 43215.
Legal Counsel
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, 919 Third Avenue,
New York, New York 10022 is counsel to the Victory Portfolios.
ADDITIONAL INFORMATION
Description of Shares
The Victory Portfolios (sometimes referred to as the "Trust") is a
Delaware business trust. Its Delaware Trust Instrument was adopted on December
6, 1995 and a certificate of Trust for the Trust was filed in Delaware on
December __, 1995. On February 29, 1996, the Victory Portfolios converted from
a Massachusetts business trust to a Delaware business trust.
The previously effective Massachusetts Declaration of Trust, pursuant
to which the Victory Portfolios was originally called the North Third Street
Fund, was filed with the Secretary of State of the Commonwealth of
Massachusetts on February 6, 1986. On September 22, 1986, an Amended and
Restated Declaration of Trust was filed to change the name of the Trust to The
Emblem Fund and to make certain other changes. A second amendment was filed
October 23, 1986 providing for voting of shares in the aggregate except where
voting of shares by series is otherwise required by law. An amendment to the
Amended and Restated Declaration of Trust was filed on March 15, 1993 to change
the name of the Trust to The Society Funds. An Amended and Restated
Declaration of Trust was then filed on September 2, 1994 to change the name of
the Trust to The Victory Portfolios.
The currently effective Delaware Trust Instrument authorizes the
Trustees to issue an unlimited number of shares, which are units of beneficial
interest, without par value. The Victory Portfolios presently has twenty-eight
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<PAGE> 349
series of shares, which represent interests in the U.S. Government Obligations
Fund, the Prime Obligations Fund, the Tax-Free Money Market Fund, the Balanced
Fund, the Stock Index Fund, the Value Fund, the Diversified Stock Fund, the
Growth Fund, the Special Value Fund, the Special Growth Fund, the Ohio Regional
Stock Fund, the International Growth Fund, the Limited Term Income Fund, the
Government Mortgage Fund, the Ohio Municipal Bond Fund, the Intermediate Income
Fund, the Investment Quality Bond Fund, the Florida Tax-Free Bond Fund, the
Municipal Bond Fund, the Convertible Securities Fund, the Short-Term U.S.
Government Income Fund, the Government Bond Fund, the Fund for Income, the
National Municipal Bond Fund, the New York Tax-Free Fund, the Institutional
Money Market Fund, the Financial Reserves Fund and the Ohio Municipal Money
Market Fund, respectively. The Victory Portfolios' Delaware Trust Instrument
authorizes the Trustees to divide or redivide any unissued shares of the
Victory Portfolios into one or more additional series by setting or changing in
any one or more respects their respective preferences, conversion or other
rights, voting power, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption.
Shares have no subscription or preemptive rights and only such
conversion or exchange rights as the Trustees may grant in their discretion.
When issued for payment as described in the Prospectus and this Statement of
Additional Information, the Victory Portfolios' shares will be fully paid and
non-assessable. In the event of a liquidation or dissolution of the Victory
Portfolios, shares of the Fund are entitled to receive the assets available for
distribution belonging to the Fund, and a proportionate distribution, based
upon the relative asset values of the respective funds of the Victory
Portfolios, of any general assets not belonging to any particular fund which
are available for distribution.
As described in the Prospectus under the caption "ADDITIONAL
INFORMATION -- Voting Rights," shares of the Victory Portfolios are entitled to
one vote per share (with proportional voting for fractional shares) on such
matters as shareholders are entitled to vote. On any matter submitted to a
vote of the shareholders, all shares are voted separately by individual series
(funds), and whenever the Trustees determine that the matter affects only
certain series, may be submitted for a vote by only such series, except (i)
when required by the 1940 Act, shares are voted in the aggregate and not by
individual series; and (ii) when the Trustees have determined that the matter
affects the interests of more than one series and that voting by shareholders
of all series would be consistent with the 1940 Act, then the shareholders of
all such series shall be entitled to vote thereon (either by individual series
or by shares voted in the aggregate, as the Trustees in their discretion may
determine). The Trustees may also determine that a matter affects only the
interests of one or more classes of a series, in which case (or if required
under the 1940 Act) such matter shall be voted on by such class or classes.
There will normally be no meetings of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority of the Trustees
have been elected by the shareholders, at which time the Trustees then in
office will call a shareholders' meeting for the election of Trustees. In
addition, Trustees may be removed from office by a vote of the holders of at
least two-thirds of the outstanding shares of the Victory Portfolios. A
meeting shall be held for such purpose upon the written request of the holders
of not less than 10% of the outstanding shares. Upon written request by ten or
more shareholders meeting the qualifications of Section 16(c) of the 1940 Act,
(i.e., person who have been shareholders for at least six months, and who hold
shares having an NAV of at least $25,000 or constituting 1% of the outstanding
shares) stating that such shareholders wish to communicate with the other
shareholders for the purpose of obtaining the signatures necessary to demand a
meeting to consider removal of a Trustee, the Victory Portfolios will provide a
list of shareholders or disseminate appropriate materials (at the expense of
the requesting shareholders). Except as set forth above, the Trustees shall
continue to hold office and may appoint their successors.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Victory Portfolios shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each fund of the Victory Portfolios affected by the
matter. For purposes of determining whether the approval of a majority of the
outstanding shares of a fund will be required in connection with a matter, a
fund will be deemed to be affected by a matter unless it is clear that the
interests of each fund in the matter are identical, or that the matter does not
affect any interest of the fund. Under Rule 18f-2, the approval of an
investment advisory agreement or any change
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<PAGE> 350
in investment policy would be effectively acted upon with respect to a fund
only if approved by a majority of the outstanding shares of such fund.
However, Rule 18f-2 also provides that the ratification of independent public
accountants, the approval of principal underwriting contracts, and the election
of Trustees may be effectively acted upon by shareholders of all of the Victory
Portfolios voting without regard to series.
Shareholder and Trustee Liability
The Delaware Business Trust Act provides that a shareholder of a
Delaware business trust shall be entitled to the same limitation of personal
liability extended to shareholders of Delaware corporations. The Delaware
Trust Instrument also provides for indemnification out of the trust property of
any shareholder held personally liable solely by reason of his or her being or
having been a shareholder. The Delaware Trust Instrument also provides that
the Victory Portfolios shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Victory
Portfolios, and shall satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
considered to be extremely remote.
The Delaware Trust Instrument states further that no Trustee, officer,
or agent of the Victory Portfolios shall be personally liable in connection
with the administration or preservation of the assets of the Funds or the
conduct of the Victory Portfolios' business; nor shall any Trustee, officer, or
agent be personally liable to any person for any action or failure to act
except for his own bad faith, willful misfeasance, gross negligence, or
reckless disregard of his duties. The Declaration of Trust also provides that
all persons having any claim against the Trustees or the Victory Portfolios
shall look solely to the assets of the Victory Portfolios for payment.
Miscellaneous
As used in the Prospectus and in this Statement of Additional
Information, "assets belonging to a fund" (or "assets belonging to the Fund")
means the consideration received by the Victory Portfolios upon the issuance or
sale of shares in that fund, together with all income, earnings, profits, and
proceeds derived from the investment thereof, including any proceeds from the
sale, exchange, or liquidation of such investments, and any funds or payments
derived from any reinvestment of such proceeds and any general assets of the
Victory Portfolios, which general liabilities and expenses are not readily
identified as belonging to a particular fund (or the Fund) that are allocated
to that fund (or the Fund) by the Victory Portfolios' Trustees. The Trustees
may allocate such general assets in any manner they deem fair and equitable.
It is anticipated that the formula that will be used by the Trustees in making
allocations of general assets to a particular fund of the Victory Portfolios
will be the relative net asset value of the respective fund at the time of
allocation. Assets belonging to a particular fund are charged with the direct
liabilities and expenses of that fund, and with a share of the general
liabilities and expenses of each of the funds not readily identified as
belonging to a particular fund that are allocated to each fund in accordance
with its proportionate share of the net asset values of the Victory Portfolios
at the time of allocation. The timing of allocations of general assets and
general liabilities and expenses of the Victory Portfolios to a particular fund
will be determined by the Trustees of the Victory Portfolios and will be in
accordance with generally accepted accounting principles. Determinations by
the Trustees of the Victory Portfolios as to the timing of the allocation of
general liabilities and expenses and as to the timing and allocable portion of
any general assets with respect to a particular fund are conclusive.
As used in the Prospectus and in this Statement of Additional
Information, a "vote of a majority of the outstanding shares" or a "vote of a
majority of the outstanding voting securities" of the Victory Portfolios or a
particular fund means the affirmative vote of the lesser of (a) 67% or more of
the shares of the Victory Portfolios or such fund present at a meeting at which
the holders of more than 50% of the outstanding shares of the Victory
Portfolios or such fund are represented in person or by proxy, or (b) more than
50% of the outstanding shares of the Victory Portfolios or such fund.
Organizational expenses are allocated to each of the Victory
Portfolios and are amortized over a period of two years from the commencement
of the public offering of shares of the Victory Portfolios.
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<PAGE> 351
The Victory Portfolios is registered with the Commission as an
open-end management investment company. Such registration does not involve
supervision by the Commission of the management or policies of the Victory
Portfolios.
The Prospectus and this Statement of Additional Information omit
certain of the information contained in the Registration Statement filed with
the Commission. Copies of such information may be obtained from the Commission
upon payment of the prescribed fee.
The Prospectus and this Statement of Additional Information are not an
offering of the securities herein described in any state in which such offering
may not lawfully be made. No salesman, dealer, or other person is authorized
to give any information or make any representation other than those contained
in the Prospectus and this Statement of Additional Information.
The financial statements of the Fund for the period ended April 30,
1995 are set forth following this Part B of the Registration Statement.
The 1995 Annual Report to shareholders of The Victory Portfolios is
incorporated by reference herein. This report includes the financial
statements for the two month period ended October 31, 1995 and the fiscal year
ended August 31, 1995. The opinion in the Annual Report of Coopers & Lybrand
L.L.P., independent accountants, is incorporated by reference herein in its
entirety to such Annual Report, and such financial statements are incorporated
in their entirety in reliance upon such report of Coopers & Lybrand L.L.P. and
on the authority of such firm as experts in auditing and accounting.
Delaware law authorizes electronic or telephonic communications
between shareholders and the Victory Portfolios. Under Delaware law, the
Successor Company has the flexibility to respond to future business
contingencies. For example, the Trustees will have the power to incorporate
the Victory Portfolios, to merge or consolidate it with another entity, to
cause each fund to become a separate trust, and to change the Victory
Portfolios' domicile without a shareholder vote. This flexibility could help
reduce the expense and frequency of future shareholder meetings for
non-investment related issues.
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<PAGE> 352
The following table indicates each additional person known by the Fund
to own beneficially 5% or more of the shares of the Fund as of December 1,
1995:
<TABLE>
<CAPTION>
Percent of Total
Outstanding
Name & Address Shares Shares of Fund
-------------- ------ ----------------
<S> <C> <C>
Aultman Health Services 1,705,284.134 10.07%
2600 Sixth Street SW
Canton, OH 44710
KeyCorp 401(k) Plan Bond Fund 7,730,238.294 45.66%
127 Public Square
Cleveland, OH 44114
</TABLE>
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<PAGE> 353
APPENDIX
The nationally recognized statistical rating organizations (individually,
an "NRSRO") that may be utilized by Key Advisers or the Sub-Adviser with regard
to portfolio investments for the Funds include Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Corporation ("S&P"), Duff & Phelps, Inc.
("Duff"), Fitch Investors Service, Inc. ("Fitch"), IBCA Limited and its
affiliate, IBCA Inc. (collectively, "IBCA"), and Thomson BankWatch, Inc.
("Thomson"). Set forth below is a description of the relevant ratings of each
such NRSRO. The NRSROs that may be utilized by Key Advisers or the Sub-Adviser
and the description of each NRSRO's ratings is as of the date of this Statement
of Additional Information, and may subsequently change.
Long-Term Debt Ratings (may be assigned, for example, to corporate and
municipal bonds)
Description of the five highest long-term debt ratings by Moody's
(Moody's applies numerical modifiers ( e.g., 1, 2, and 3) in each rating
category to indicate the security's ranking within the category):
Aaa. Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.
A. Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in the
future.
Baa. Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba. Bonds which are rated Ba are judged to have speculative elements
- - their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times in the future. Uncertainty of
position characterizes bonds in this class.
Description of the five highest long-term debt ratings by S&P (S&P may
apply a plus (+) or minus (-) to a particular rating classification to show
relative standing within that classification):
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
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BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB. Debt rated BB is regarded, on balance, as predominately
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. While such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposure to adverse conditions.
Description of the three highest long-term debt ratings by Duff:
AAA. Highest credit quality. The risk factors are negligible being
only slightly more than for risk-free U.S. Treasury debt.
AA+. High credit quality Protection factors are strong.
AA. Risk is modest but may vary slightly from time to time
AA-. because of economic conditions.
A+. Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
Description of the three highest long-term debt ratings by Fitch (plus
or minus signs are used with a rating symbol to indicate the relative position
of the credit within the rating category):
AAA. Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA. Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA."
Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of these issues is generally rated "[-]+."
A. Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher
ratings.
IBCA's description of its three highest long-term debt ratings:
AAA. Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic or
financial conditions are unlikely to increase investment risk
significantly.
AA. Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic, or
financial conditions may increase investment risk albeit not very
significantly.
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A. Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial
conditions may lead to increased investment risk.
Short-Term Debt Ratings (may be assigned, for example, to commercial
paper, master demand notes, bank instruments, and letters of credit)
Moody's description of its three highest short-term debt ratings:
Prime-1. Issuers rated Prime-1 (or supporting institutions) have a
superior capacity for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a
strong capacity for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
S&P's description of its three highest short-term debt ratings:
A-1. This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to have extremely
strong safety characteristics are denoted with a plus sign (+).
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high
as for issues designated "A-1."
A-3. Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the
higher designations.
Duff's description of its five highest short-term debt ratings (Duff
incorporates gradations of "1+" (one plus) and "1-" (one minus) to assist
investors in recognizing quality differences within the highest rating
category):
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Duff 1+. Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
Duff 1. Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
Duff 1-. High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors. Risk
factors are very small.
Duff 2. Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
Duff 3. Satisfactory liquidity and other protection factors qualify
issue as to investment grade.
Risk factors are larger and subject to more variation. Nevertheless,
timely payment is expected.
Fitch's description of its four highest short-term debt ratings:
F-1+. Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of assurance for
timely payment.
F-1. Very Strong Credit Quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than
issues rated F-1+.
F-2. Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as for issues assigned F-1+ or F-1 ratings.
F-3. Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate, however, near-term adverse changes could cause
these securities to be rated below investment grade.
IBCA's description of its three highest short-term debt ratings:
A+. Obligations supported by the highest capacity for timely
repayment.
A1. Obligations supported by a very strong capacity for timely
repayment.
A2. Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
Short-Term Loan/Municipal Note Ratings
Moody's description of its two highest short-term loan/municipal note
ratings:
MIG-1/VMIG-1. This designation denotes best quality. There is
present strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
MIG-2/VMIG-2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
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S&P's description of its two highest municipal note ratings:
SP-1. Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
SP-2. Satisfactory capacity to pay principal and interest.
Short-Term Debt Ratings
Thomson BankWatch, Inc. ("TBW") ratings are based upon a qualitative
and quantitative analysis of all segments of the organization including, where
applicable, holding company and operating subsidiaries.
TBW Ratings do not constitute a recommendation to buy or sell
securities of any of these companies. Further, TBW does not suggest specific
investment criteria for individual clients.
The TBW Short-Term Ratings apply to commercial paper, other senior
short-term obligations and deposit obligations of the entities to which the
rating has been assigned.
The TBW Short-Term Ratings apply only to unsecured instruments that
have a maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an
untimely payment of principal or interest.
TBW-1. The highest category; indicates a very high degree of
likelihood that principal and interest will be paid on a timely basis.
TBW-2. The second highest category; while the degree of safety
regarding timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1".
TBW-3. The lowest investment grade category; indicates that while
more susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and interest in
a timely fashion is considered adequate.
TBW-4. The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
Definitions of Certain Money Market Instruments
Commercial Paper
Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.
Certificates of Deposit
Certificates of Deposit are negotiable certificates issued against
funds deposited in a commercial bank or a savings and loan association for a
definite period of time and earning a specified return.
Bankers' Acceptances
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Bankers' acceptances are negotiable drafts or bills of exchange,
normally drawn by an importer or exporter to pay for specific merchandise,
which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
U.S. Treasury Obligations
U.S. Treasury Obligations are obligations issued or guaranteed as to
payment of principal and interest by the full faith and credit of the U.S.
Government. These obligations may include Treasury bills, notes and bonds, and
issues of agencies and instrumentalities of the U.S. Government, provided such
obligations are guaranteed as to payment of principal and interest by the full
faith and credit of the U.S. Government.
U.S. Government Agency and Instrumentality Obligations
Obligations issued by agencies and instrumentalities of the U.S.
Government include such agencies and instrumentalities as the Government
National Mortgage Association, the Export-Import Bank of the United States, the
Tennessee Valley Authority, the Farmers Home Administration, the Federal Home
Loan Banks, the Federal Intermediate Credit Banks, the Federal Farm Credit
Banks, the Federal Land Banks, the Federal Housing Administration, the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation, and
the Student Loan Marketing Association. Some of these obligations, such as
those of the Government National Mortgage Association are supported by the full
faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others, such as
those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not obligated to do so by law. A Fund will invest
in the obligations of such instrumentalities only when the investment adviser
believes that the credit risk with respect to the instrumentality is minimal.
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STATEMENT OF ADDITIONAL INFORMATION
THE VICTORY PORTFOLIOS
THE NATIONAL MUNICIPAL BOND FUND
March 1, 1996
This Statement of Additional Information is not a Prospectus, but
should be read in conjunction with the Prospectus of The Victory Portfolios -
The National Municipal Bond Fund, dated the same date as the date hereof (the
"Prospectus"). This Statement of Additional Information is incorporated by
reference in its entirety into the Prospectus. Copies of the Prospectus may be
obtained by writing The Victory Portfolios at Primary Funds Service Corporation,
P.O. Box 9741, Providence, RI 02940-9741, or by telephoning toll free
800-539-FUND or 800-539-3863.
<TABLE>
<S> <C> <C>
Investment Policies and Limitations 1 INVESTMENT ADVISER
Valuation of Portfolio Securities 7 KeyCorp Mutual Fund Advisers, Inc.
Additional Purchase and Redemption Information 11
Management of the Victory Portfolios 16 INVESTMENT SUB-ADVISER
Advisory and Other Contracts 24 Society Asset Management, Inc.
Additional Information 32
Independent Auditor's Report 35 ADMINISTRATOR
Financial Statements 35 Concord Holding Corporation
Appendix 36
DISTRIBUTOR
Victory Broker-Dealer Services, Inc.
TRANSFER AGENT
Primary Funds Service Corporation
CUSTODIAN
Key Trust Company of Ohio, N.A.
</TABLE>
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STATEMENT OF ADDITIONAL INFORMATION
The Victory Portfolios (the "Victory Portfolios") is an open-end
management investment company. The Victory Portfolios consist of twenty-eight
series of units of beneficial interest ("shares"), four of which series are
currently inactive. The outstanding shares represent interests in the
twenty-four separate investment portfolios which are currently active. This
Statement of Additional Information relates to the Victory National Municipal
Bond Fund (the "Fund") only. Much of the information contained in this Statement
of Additional Information expands on subjects discussed in the Prospectus.
Capitalized terms not defined herein are used as defined in the Prospectus. No
investment in shares of the Fund should be made without first reading the Fund's
Prospectus.
INVESTMENT LIMITATIONS
THE FUND MAY NOT (UNLESS OTHERWISE INDICATED):
(1) issue any senior security (as defined in the 1940 Act), except that (a) the
Fund may engage in transactions which may result in the issuance of senior
securities to the extent permissible under the applicable regulations and
interpretations of the 1940 Act or an exemptive order; (b) the Fund may acquire
other securities that may be deemed senior securities to the extent permitted
under applicable regulations or interpretations of the 1940 Act; (c) subject to
the restrictions set forth below, the Fund may borrow money as authorized by the
1940 Act;
(2) borrow money, except that the Fund may borrow money from banks for
temporary or emergency purposes (not for leveraging or investment) and engage in
reverse repurchase agreements in an amount not exceeding 33 1/3% of the value of
its total assets (including the amount borrowed) less liabilities (other than
borrowings). Any borrowings that come to exceed this amount will be reduced
within three days (exclusive of Sundays and holidays) to the extent necessary to
comply with the 33 1/3% limitation;
(3) underwrite securities issued by others, except to the extent that the Fund
may be considered an underwriter within the meaning of the Securities Act of
1933 in the disposition of restricted securities;
(4) purchase securities (other than those issued or guaranteed by the U.S.
government or any securities of its agencies or instrumentalities or tax-exempt
obligations issued or guaranteed by a U.S. territory or possession or a state or
local government, or a political subdivision of the foregoing) if, as a result,
more than 25% of the Fund's total assets would be invested in securities of
companies whose principal business activities are in the same industry; for the
purpose of this restriction, utility companies will be divided according to
their services, for example, gas, gas transmission, electric and gas and
telephone will each be considered a separate industry. Industrial development
revenue bonds which are issued by nongovernmental entities within the same
industry shall be subject to this industry limitation;
(5) purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Fund from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business);
(6) purchase or sell physical commodities (but this shall not prevent the Fund
from purchasing and selling futures contracts and options on futures contracts
or from investing in securities or other instruments backed by physical
commodities) or;
(7) lend any security or make any other loan if, as a result, more than 33 1/3%
of its total assets would be lent to other parties, but this limitation does not
apply to purchases of debt securities or to repurchase agreements.
<PAGE> 361
THE FOLLOWING INVESTMENT LIMITATIONS ARE NOT FUNDAMENTAL AND MAY BE CHANGED
WITHOUT SHAREHOLDER APPROVAL.
(i) To meet federal tax requirements for qualification as a "regulated
investment company," the Fund limits its investments so that at the close of
each quarter of its taxable year: (a) with regard to at least 50% of total
assets, no more than 5% of total assets are invested in the securities of a
single issuer, and (b) no more than 25% of total assets are invested in the
securities of a single issuer. Limitations (a) and (b) do not apply to
"Government Securities" as defined for federal tax purposes.
(For such purposes, municipal obligations are not treated as "Government
Securities," and consequently they are subject to limitations (a) and (b).)
(ii) The Fund may not sell securities short, unless it owns or has the right
to obtain securities equivalent in kind and amount to the securities sold short.
(iii) The Fund may not purchase securities on margin, except that the Fund may
obtain such short-term credits as are necessary for the clearance of
transactions.
(iv) The Fund may not purchase any security while borrowings representing more
than 5% of its total assets are outstanding.
(v) The Fund may not purchase any security if, as a result, more than 15% of
its net assets would be invested in repurchase agreements not entitling the
holder to payment of principal and interest within seven days or in securities
that are illiquid by virtue of legal or contractual restrictions on resale or
the absence of a readily available market.
(vi) The Fund may not purchase securities of other investment companies,
except in the open market where no commission except the ordinary broker's
commission is paid. Such limitation does not apply to securities received as
dividends, through offers of exchange, or as a result of a reorganization,
consolidation, or merger.
(vii) The Fund may not hold more than 5% of its total assets in securities that
have been downgraded below investment grade.
(viii) The Fund may not invest in "private activity bonds" as defined in the Tax
Reform Act of 1986.
(ix) The Fund shall not invest in the securities of other investment
companies, except that the Fund may invest in shares of money market funds that
are not "affiliated persons" of the Fund and that limit their investments to
securities appropriate for the Fund, provided investment by the Fund is limited
to: (a) ten percent of the Fund's assets; (b) five percent of the Fund's total
assets in the shares of a single money market fund; and (c) not more than three
percent of the net assets of any one acquired money market fund. The investment
adviser will waive the portion of its fee attributable to the assets of the Fund
invested in such money market funds to the extent required by the laws of any
jurisdiction in which shares of the Fund are registered for sale.
For purposes of non-fundamental limitation (i) and fundamental limitation (4),
Key Corp Mutual Fund Advisers, Inc. ("KeyCorp Advisers" or the "Adviser") or
Society Asset Management, Inc. ("Society" or the "Sub-Adviser") identifies the
issuer of a security depending on its terms and conditions. In identifying the
issuer, Key Advisers or the Sub-Adviser will consider the entity or entities
responsible for payment of interest and repayment of principal and the source of
such payments; the way in which assets and revenues of an issuing political
subdivision are separated from those of other political entities; and whether a
governmental body is guaranteeing the security.
DELAYED-DELIVERY TRANSACTIONS. The Fund may buy and sell securities on a
delayed-delivery or when-issued basis. These transactions involve a commitment
by the Fund to purchase or sell specific securities at a predetermined price
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<PAGE> 362
or yield, with payment and delivery taking place after the customary settlement
period for that type of security (and more than seven days in the future).
Typically, no interest accrues to the purchaser until the security is delivered.
The Fund may receive fees for entering into delayed delivery transactions.
When purchasing securities on a delayed-delivery basis, the Fund assumes the
rights and risks of ownership, including the risks of price and yield
fluctuations in addition to the risks associated with the Fund's other
investments. Because the Fund is not required to pay for securities until the
delivery date, these delayed-delivery purchases may result in a form of
leverage. When delayed-delivery purchases are outstanding, the Fund will set
aside cash and appropriate liquid assets in a segregated custodial account to
cover its purchase obligations. When the Fund has sold a security on a
delayed-delivery basis, it does not participate in further gains or losses with
respect to the security. If the other party to a delayed-delivery transaction
fails to deliver or pay for the securities, the Fund could miss a favorable
price or yield opportunity or suffer a loss.
The Fund may renegotiate delayed-delivery transactions after they are entered
into or may sell underlying securities before they are delivered, either of
which may result in capital gains or losses.
REFUNDING CONTRACTS. The Fund generally will not be obligated to pay the
full purchase price if it fails to perform under a refunding contract. Instead,
refunding contracts generally provide for payment of liquidated damages to the
issuer (currently 15- 20% of the purchase price). The Fund may secure its
obligations under a refunding contract by depositing collateral or a letter of
credit equal to the liquidated damages provisions of the refunding contract.
When required by Commission guidelines, the Fund will place liquid assets in a
segregated custodial account equal in amount to its obligations under refunding
contracts.
VARIABLE OR FLOATING RATE OBLIGATIONS, including certain participation
interests in municipal instruments, have interest rate adjustment formulas that
help stabilize their market values. Many variable and floating rate instruments
also carry demand features that permit the funds to sell them at par value plus
accrued interest on short notice.
In many instances bonds and participation interests have tender options or
demand features that permit the Fund to tender the bonds to an institution at
periodic intervals and to receive the principal amount thereof. The Fund
considers variable rate instruments structured in this way (Participating VRDOs)
to be essentially equivalent to other VRDOs it purchases. The IRS has not ruled
whether the interest on Participating VRDOs is tax-exempt, and, accordingly, the
Fund intends to purchase these instruments based on opinions of bond counsel.
The Fund may also invest in fixed-rate bonds that are subject to third party
puts and in participation interests in such bonds held by a bank in trust or
otherwise.
STANDBY COMMITMENTS are puts that entitle holders to same-day settlement
at an exercise price equal to the amortized cost of the underlying security plus
accrued interest, if any, at the time of exercise. The Fund may acquire standby
commitments to enhance the liquidity of portfolio securities.
Ordinarily, the Fund may not transfer a standby commitment to a third party,
although it could sell the underlying municipal security to a third party at any
time. The Fund may purchase standby commitments separate from or in conjunction
with the purchase of securities subject to such commitments. In the latter case,
the Fund would pay a higher price for the securities acquired, thus reducing
their yield to maturity.
Standby commitments are subject to certain risks, including the ability of
issuers of standby commitments to pay for securities at the time the commitments
are exercised; the fact that standby commitments are not marketable by the Fund;
and the possibility that the maturities of the underlying securities may be
different from those of the commitments.
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MUNICIPAL LEASE OBLIGATIONS. The Fund may invest a portion of its assets
in municipal leases and participation interests therein. These obligations,
which may take the form of a lease, an installment purchase, or a conditional
sale contract, are issued by state and local governments and authorities to
acquire land and a wide variety of equipment and facilities. Generally, the Fund
will not hold such obligations directly as a lessor of the property, but will
purchase a participation interest in a municipal obligation from a bank or other
third party. A participation interest gives the Fund a specified, undivided
interest in the obligation in proportion to its purchased interest in the total
amount of the obligation.
Municipal leases frequently have risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set forth
requirements that states or municipalities must meet to incur debt. These may
include voter referenda, interest rate limits, or public sale requirements.
Leases, installment purchases, or conditional sale contracts (which normally
provide for title to the leased asset to pass to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting their constitutional and statutory requirements for the issuance
of debt. Many leases and contracts include "non-appropriation clauses" providing
that the governmental issuer has no obligation to make future payments under the
lease or contract unless money is appropriated for such purposes by the
appropriate legislative body on a yearly or other periodic basis.
Non-appropriation clauses free the issuer from debt issuance limitations.
LOWER-RATED MUNICIPAL SECURITIES. The Fund does not currently intend to
invest in lower-rated municipal securities. However, the Fund may hold up to 5%
of its assets in municipal securities that have been downgraded below investment
grade. While the market for New York municipal securities is considered to be
substantial, adverse publicity and changing investor perceptions may affect the
ability of outside pricing services used by the Fund to value portfolio
securities, and the Fund's ability to dispose of lower-rated securities. Outside
pricing services are consistently monitored to assure that securities are valued
by a method that the Board of Trustees believes accurately reflects fair value.
The impact of changing investor perceptions may be especially pronounced in
markets where municipal securities are thinly traded.
The Fund may choose, at its expense, or in conjunction with others, to pursue
litigation seeking to protect the interests of security holders if it determines
this to be in the best interest of shareholders.
FEDERALLY TAXABLE OBLIGATIONS. The Fund does not intend to invest in
securities whose interest is federally taxable; however, from time to time, the
Fund may invest a portion of its assets on a temporary basis in fixed-income
obligations whose interest is subject to federal income tax. For example, the
Fund may invest in obligations whose interest is federally taxable pending the
investment or reinvestment in municipal securities of proceeds from the sale of
its shares or sales of portfolio securities.
Should the Fund invest in federally taxable obligations, it would purchase
securities which in Key Advisers' or the Sub-Adviser's judgment are of high
quality. This would include obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities; obligations of domestic banks;
and repurchase agreements. The Fund's standards for high quality taxable
obligations are essentially the same as those described by Moody's Investors
Service, Inc. ("Moody's") in rating corporate obligations within its two highest
ratings of Prime-1 and Prime-2, and those described by Standard & Poor's
Corporation ("S&P") in rating corporate obligations within its two highest
ratings of A-1 and A-2. In making high quality determinations the Fund may also
consider the comparable ratings of other nationally recognized rating services.
The Supreme Court has held that Congress may subject the interest on municipal
obligations to federal income tax. Proposals to restrict or eliminate the
federal income tax exemption for interest on municipal obligations are
introduced before Congress from time to time. Proposals also may be introduced
before the New York legislature that would affect the state tax treatment of the
Fund's distributions. If such proposals were enacted, the availability
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<PAGE> 364
of municipal obligations and the value of the Fund's holdings would be affected
and the Trustees would reevaluate the Fund's investment objective and policies.
The Fund anticipates being as fully invested as practicable in municipal
securities; however, there may be occasions when, as a result of maturities of
portfolio securities, sales of Fund shares, or in order to meet redemption
requests, the Fund may hold cash that is not earning income. In addition, there
may be occasions when, in order to raise cash to meet redemptions, the Fund may
be required to sell securities at a loss.
ILLIQUID INVESTMENTS are investments that cannot be sold or disposed of, within
seven business days, in the ordinary course of business at approximately the
prices at which they are valued. Under the supervision of the Trustees, the
adviser determines the liquidity of the Fund's investments and, through reports
from the Adviser, the Trustees monitor investments in illiquid instruments. In
determining the liquidity of the Fund's investments, the Adviser may consider
various factors, including (1) the frequency of trades and quotations, (2) the
number of dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, (4) the nature of the security (including any
demand or tender features), and (5) the nature of the marketplace for trades
(including the ability to assign or offset the Fund's rights and obligations
relating to the investment). Investments currently considered by the Fund to be
illiquid include repurchase agreements not entitling the holder to payment of
principal and interest within seven days, over the counter options,
non-government stripped fixed-rate mortgage-backed securities, and Restricted
Securities. Also, Key Advisers or the Sub-Adviser may determine some
government-stripped fixed-rate mortgage backed securities, loans and other
direct debt instruments, and swap agreements to be illiquid. However, with
respect to over-the-counter options the Fund writes, all or a portion of the
value of the underlying instrument may be illiquid depending on the assets held
to cover the option and the nature and terms of any agreement the Fund may have
to close out the option before expiration. In the absence of market quotations,
illiquid investments are priced at fair value as determined in good faith by a
committee appointed by the Trustees. If through a change in values, net assets,
or other circumstances, the Fund were in a position where more than 15% of its
net assets were invested in illiquid securities, it would seek to take
appropriate steps to protect liquidity.
REPURCHASE AGREEMENTS. In a repurchase agreement, the Fund purchases a security
and simultaneously commits to resell that security to the seller at an agreed
upon price on an agreed upon date within a number of days from the date of
purchase. The resale price reflects the purchase price plus an agreed upon
incremental amount which is unrelated to the coupon rate or maturity of the
purchased security. A repurchase agreement involves the obligation of the seller
to pay the agreed upon price, which obligation is in effect secured by the value
(at least equal to the amount of the agreed upon resale price and marked to
market daily) of the underlying security. The Fund may engage in a repurchase
agreement with respect to any security in which it is authorized to invest.
Since it is not possible to eliminate all risks from these transactions
(particularly the possibility of a decline in the market value of the underlying
securities, as well as delays and costs to the Fund in connection with
bankruptcy proceedings), it is the Victory Portfolios' current policy to limit
repurchase agreements for the Fund to those parties whose creditworthiness has
been reviewed and found satisfactory by Key Advisers or the Sub-Adviser.
Repurchase agreements are considered by the staff of the Commission to be loans
by the Fund.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, the Fund sells
the portfolio instrument to another party, such as a bank or broker-dealer, in
return for cash and agrees to repurchase the instrument at a particular price
and time. While a reverse repurchase agreement is outstanding, the Fund will
maintain appropriate liquid assets in a segregated custodial account to cover
its obligation under the agreement. The Fund will enter into reverse repurchase
agreements only with parties whose creditworthiness is deemed satisfactory by
Key Advisers or the Sub-Adviser. Such transactions may increase fluctuations in
the market value of the Fund's assets, and may be viewed as a form of leverage.
RESTRICTED SECURITIES generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the 1933 Act, or
in a registered public offering. Where registration is required, the Fund may be
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obligated to pay all or part of the registration expense and a considerable
period may elapse between the time it decides to seek registration and the time
the Fund may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to develop,
the Fund might obtain a less favorable price than prevailed when it decided to
seek registration of the shares.
SECURITIES LENDING. The Fund may lend securities to parties such as
broker-dealers or institutional investors. Securities lending allows the Fund to
retain ownership of the securities loaned and, at the same time, to earn
additional income. Since there may be delays in the recovery of loaned
securities, or even a loss of rights in collateral supplied should the borrower
fail financially, loans will be made only to parties deemed by Key Advisers or
the Sub-Adviser to be of good standing. Furthermore, they will only be made if,
in the judgment of Key Advisers or the Sub-Adviser, the consideration to be
earned from such loans would justify the risk.
It is the current view of the staff of the Commission that the Fund may engage
in loan transactions only under the following conditions: (1) the Fund must
receive 100% collateral in the form of cash or cash equivalents (e.g., U.S.
Treasury bills or notes) from the borrower; (2) the borrower must increase the
collateral whenever the market value of the securities loaned (determined on a
daily basis) rises above the value of the collateral; (3) after giving notice,
the Fund must be able to terminate the loan at any time; (4) the Fund must
receive reasonable interest on the loan or a flat fee from the borrower, as well
as amounts equivalent to any dividends, interest, or other distributions on the
securities loaned and to any increase in market value; (5) the Fund may pay only
reasonable custodian fees in connection with the loan; and (6) the Board of
Trustees must be able to vote proxies on the securities loaned, either by
terminating the loan or by entering into an alternative arrangement with the
borrower.
Cash received through loan transactions may be invested in any security in which
the Fund is authorized to invest. Investing this cash subjects that investment,
as well as the security loaned, to market forces (i.e., capital appreciation or
depreciation).
Temporary Investments
The Fund may also invest temporarily in high quality investments or cash during
times of unusual market conditions for defensive purposes and in order to
accommodate shareholder redemption requests although currently it does not
intend to do so. Any portion of the Fund's assets maintained in cash will reduce
the amount of assets in securities and thereby reduce the Fund's yield or total
return.
State Regulations
In addition, the Fund, so long as its shares are registered under the
securities laws of the State of Texas and such restrictions are required as a
consequence of such registration, is subject to the following non-fundamental
policies, which may be modified in the future by the Trustees without a vote of
the Fund's shareholders: (i) the Victory Portfolios has represented to the Texas
State Securities Board, on behalf of the investment portfolios registered in
that state, that those investment portfolios will not invest in oil, gas or
mineral leases or purchase or sell real property (including limited partnership
interests, but excluding readily marketable securities of companies which invest
in real estate); and (ii) the Victory Portfolios has represented to the Texas
State Securities Board on behalf of the investment portfolios registered in that
state, that those investment portfolios will not invest more than 5% of their
net assets in warrants valued at the lower of cost or market; provided that,
included within that amount, but not to exceed 2% of net assets, may be warrants
which are not listed on the New York or American Stock Exchanges. For purposes
of this restriction, warrants acquired in units or attached to securities are
deemed to be without value.
The policies and limitations listed above supplement those set forth in
the Prospectus. Unless otherwise noted, whenever an investment policy or
limitation states a maximum percentage of the Fund's assets that may be invested
in any security or other asset, or sets forth a policy regarding quality
standards, such standard or percentage
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limitation will be determined immediately after and as a result of the Fund's
acquisition of such security or other asset except in the case of borrowing (or
other activities that may be deemed to result in the issuance of a "senior
security" under the 1940 Act). Accordingly, any subsequent change in values, net
assets, or other circumstances will not be considered when determining whether
the investment complies with the Fund's investment policies and limitations. If
the value of the Fund's holdings of illiquid securities at any time exceeds the
percentage limitation applicable at the time of acquisition due to subsequent
fluctuations in value or other reasons, the Board of Trustees will consider what
actions, if any, are appropriate to maintain adequate liquidity.
FUTURE DEVELOPMENTS
The Fund may take advantage of other investment practices which are not
at present contemplated for use by the Fund or which currently are not available
but which may be developed, to the extent such investment practices are both
consistent with the Fund's investment objective and are legally permissible for
the Fund. Such investment practices, if they arise, may involve risks which
exceed those involved in the activities described in the Prospectus and
Statement of Additional Information. Prior to commencing any new investment
practice, the Fund will notify shareholders by means of prospectus supplement.
Portfolio Turnover
The turnover rate stated in the Prospectus for the Fund's investment
portfolio is calculated by dividing the lesser of the Fund's purchases or sales
of portfolio securities for the year by the monthly average value of the
portfolio securities. The calculation excludes all securities whose maturities,
at the time of acquisition, were one year or less.
VALUATION OF PORTFOLIO SECURITIES
Investment securities held by the Fund are valued on the basis of
valuations provided by an independent pricing service, approved by the Board of
Trustees, which uses information with respect to transactions of a security,
quotations from dealers, market transactions in comparable securities, and
various relationships between securities, in determining value. Specific
investment securities which are not priced by the approved pricing service will
be valued according to quotations obtained from dealers who are market makers in
those securities. Investment securities with less than 60 days to maturity when
purchased are valued at amortized cost which approximates market value.
Investment securities not having readily available market quotations will be
priced at fair value using a methodology approved in good faith by the Board of
Trustees.
PERFORMANCE
As described in the Prospectus, from time to time the "standardized
yield," "dividend yield," "average annual total return," "total return," and
"total return at net asset value" of an investment in each class of Fund shares
may be advertised. An explanation of how yields and total returns are calculated
for each class and the components of those calculations are set forth below.
Yield and total return information may be useful to investors in
reviewing the Fund's performance. The Fund's advertisement of its performance
must, under applicable Commission rules, include the average annual total
returns for each class of shares of the Fund for the 1, 5 and 10-year period (or
the life of the class, if less) as of the most recently ended calendar quarter.
This enables an investor to compare the Fund's performance to the performance of
other funds for the same periods. However, a number of factors should be
considered before using such information as a basis for comparison with other
investments. An investment in the Fund is not insured; its
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yield and total return are not guaranteed and normally will fluctuate on a daily
basis. When redeemed, an investor's shares may be worth more or less than their
original cost. Yield and total return for any given past period are not a
prediction or representation by the Victory Portfolios of future yields or rates
of return on its shares. The yield and total returns of the Class A and Class B
shares of the Fund are affected by portfolio quality, portfolio maturity, the
type of investments the Fund holds and its operating expenses.
STANDARDIZED YIELDS. The Fund's "yield" (referred to as "standardized
yield") for a given 30-day period for a class of shares is calculated using the
following formula set forth in rules adopted by the Commission that apply to all
funds that quote yields:
Standardized Yield = 2 ((a-b + 1) to the 6th power - 1)
---
cd
The symbols above represent the following factors:
a = dividends and interest earned during the 30-day period.
b = expenses accrued for the period (net of any expense
reimbursements).
c = the average daily number of shares of that class outstanding
during the 30-day period that were entitled to receive
dividends.
d = the maximum offering price per share of the class on the last
day of the period, adjusted for undistributed net investment
income.
The standardized yield of a class of shares for a 30-day period may
differ from its yield for any other period. The Commission formula assumes that
the standardized yield for a 30-day period occurs at a constant rate for a
six-month period and is annualized at the end of the six-month period. This
standardized yield is not based on actual distributions paid by the Fund to
shareholders in the 30-day period, but is a hypothetical yield based upon the
net investment income from the Fund's portfolio investments calculated for that
period. The standardized yield may differ from the "dividend yield" of that
class, described below. Additionally, because each class of shares is subject to
different expenses, it is likely that the standardized yields of the Fund
classes of shares will differ. The yield on Class A shares for the 30-day period
ended October 31, 1995 was ____% .
DIVIDEND YIELD AND DISTRIBUTION RETURN. From time to time the Fund may
quote a "dividend yield" or a "distribution return" for each class. Dividend
yield is based on the Class A or Class B share dividends derived from net
investment income during a stated period. Distribution return includes dividends
derived from net investment income and from realized capital gains declared
during a stated period. Under those calculations, the dividends and/or
distributions for that class declared during a stated period of one year or less
(for example, 30 days) are added together, and the sum is divided by the maximum
offering price per share of that class A) on the last day of the period. When
the result is annualized for a period of less than one year, the "dividend
yield" is calculated as follows:
<TABLE>
<S> <C>
Dividend Yield of the Class = Dividends of the Class + Number of days (accrual period) x 365
----------------------------------------------------
Max. Offering Price of the Class (last day of period)
</TABLE>
The maximum offering price for Class A shares includes the maximum
front-end sales charge. For Class B shares, the maximum offering price is the
net asset value per share, without considering the effect of contingent deferred
sales charges.
From time to time similar yield or distribution return calculations may
also be made using the Class A net asset value (instead of its respective
maximum offering price) at the end of the period. The dividend yields on Class A
shares at maximum offering price and net asset value for the 30-day period ended
October 31, 1995 were ____% and ____%, respectively.
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TOTAL RETURNS. The "average annual total return" of each class is an
average annual compounded rate of return for each year in a specified number of
years. It is the rate of return based on the change in value of a hypothetical
initial investment of $1,000 ("P" in the formula below) held for a number of
years ("n") to achieve an Ending Redeemable Value ("ERV"), according to the
following formula:
(ERV) (1n) - 1 = Average Annual Total Return
-----
(P)
The cumulative "total return" calculation measures the change in value
of a hypothetical investment of $1,000 over an entire period of years. Its
calculation uses some of the same factors as average annual total return, but it
does not average the rate of return on an annual basis. Total return is
determined as follows:
ERV - P = Total Return
-------
P
In calculating total returns for Class A shares, the current maximum
sales charge of 4.75% (as a percentage of the offering price) is deducted from
the initial investment ("P") (unless the return is shown at net asset value, as
discussed below). For Class B shares, the payment of the applicable contingent
deferred sales charge (5.0% for the first year, 4.0% for the second year, 3.0%
for the third and fourth years, 2.0% in the fifth year, 1.0% in the sixth year
and none thereafter) is applied to the investment result for the time period
shown (unless the total return is shown any net asset value, as described
below). Total returns also assume that all dividends and capital gains
distributions during the period are reinvested to buy additional shares at net
asset value per share, and that the investment is redeemed at the end of the
period. The average annual total return and cumulative total return on Class A
shares for the period September 26, 1994 (commencement of operations) to October
31, 1995 (life of fund) at maximum offering price were ___% and ____%,
respectively. For the one year period ended October, 1995 annual total return
for Class A shares was _____%.
From time to time the Fund may also quote an "average annual total
return at net asset value" or a cumulative "total return at net asset value" for
Class A or Class B shares. It is based on the difference in net asset value per
share at the beginning and the end of the period for a hypothetical investment
in that class of shares (without considering front-end or contingent sales
charges) and takes into consideration the reinvestment of dividends and capital
gains distributions. The average annual total return and cumulative total return
on Class A shares for the period September 26, 1994 (commencement of operations)
to October 31, 1995 (life of fund), at net asset value, was ____% and ___%,
respectively. For the one year period ended October 31, 1995, annual total
return for Class A shares was ___%.
OTHER PERFORMANCE COMPARISONS. From time to time the Fund may publish
the ranking of the performance of its Class A or Class B shares by Lipper
Analytical Services, Inc. ("Lipper"), a widely-recognized independent mutual
fund monitoring service. Lipper monitors the performance of regulated investment
companies, including the Fund, and ranks the performance of the Fund's classes
against (i) all other funds, excluding money market funds, and (ii) all other
government bond funds. The Lipper performance rankings are based on total return
that includes the reinvestment of capital gains distributions and income
dividends but does not take sales charges or taxes into consideration.
From time to time the Fund may publish the ranking of the performance
of its Class A or Class B shares by Morningstar, Inc., an independent mutual
fund monitoring service that ranks mutual funds, including the Fund, in broad
investment categories (equity, taxable bond, tax-exempt and other) monthly,
based upon each fund's three, five and ten-year average annual total returns
(when available) and a risk adjustment factor that reflects Fund performance
relative to three-month U.S. Treasury bill monthly returns. Such returns are
adjusted for fees and sales loads. There
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are five ranking categories with a corresponding number of stars: highest
(5), above average (4), neutral (3), below average (2) and lowest (1). Ten
percent of the funds, series or classes in an investment category receive 5
stars, 22.5% receive 4 stars, 35% receive 3 stars, 22.5% receive 2 stars, and
the bottom 10% receive one star. Morningstar ranks the Class A and Class B
shares of the Fund in relation to other taxable bond funds.
The total return on an investment made in Class A or Class B shares of
the Fund may be compared with the performance for the same period of one or more
of the following indices: the Consumer Price Index, the Salomon Brothers World
Government Bond Index, the Standard & Poor's 500 Index, the Shearson Lehman
Government/Corporate Bond Index, the Lehman Aggregate Bond Index, and the J.P.
Morgan Government Bond Index. Other indices may be used from time to time. The
Consumer Price Index is generally considered to be a measure of inflation. The
Salomon Brothers World Government Bond Index generally represents the
performance of government debt securities of various markets throughout the
world, including the United States. The Lehman Government/Corporate Bond Index
generally represents the performance of intermediate and long-term government
and investment grade corporate debt securities. The Lehman Aggregate Bond Index
measures the performance of U.S. corporate bond issues, U.S. government
securities and mortgaged-backed securities. The J.P. Morgan Government Bond
Index generally represents the performance of government bonds issued by various
countries including the United States. The S&P 500 Index is a composite index of
500 common stocks generally regarded as an index of U.S. stock market
performance. The foregoing bond indices are unmanaged indices of securities that
do not reflect reinvestment of capital gains or take investment costs into
consideration, as these items are not application to indices.
From time to time, the yields and the total returns of Class A or Class
B shares of the Fund may be quoted in and compared to other mutual funds with
similar investment objective in advertisements, shareholder reports or other
communications to shareholders. The Fund may also include calculations in such
communications that describe hypothetical investment results. (Such performance
examples will be based on an express set of assumptions and are not indicative
of the performance of any Fund.) Such calculations may from time to time include
discussions or illustrations of the effects of compounding in advertisements.
"Compounding" refers to the fact that, if dividends or other distributions on a
Fund investment are reinvested by being paid in additional Fund shares, any
future income or capital appreciation of the Fund would increase the value, not
only of the original Fund investment, but also of the additional Fund shares
received through reinvestment. As a result, the value of the Fund investment
would increase more quickly than if dividends or other distributions had been
paid in cash. The Fund may also include discussions or illustrations of the
potential investment goals of a prospective investor (including but not limited
to tax and/or retirement planning), investment management techniques, policies
or investment suitability of Fund, economic conditions, legislative developments
(including pending legislation), the effects of inflation and historical
performance of various asset classes, including but not limited to stocks, bonds
and Treasury bills. From time to time advertisements or communications to
shareholders may summarize the substance of information contained in shareholder
reports (including the investment composition of the Fund, as well as the views
of the investment adviser as to current market, economic, trade and interest
rate trends, legislative, regulatory and monetary developments, investment
strategies and related matters believed to be of relevance to the Fund. The Fund
may also include in advertisements, charts, graphs or drawings which illustrate
the potential risks and rewards of investment in various investment vehicles,
including but not limited to stock, bonds, Treasury bills and shares of Fund as
well as charts or graphs which illustrate strategies such as dollar cost
averaging, and comparisons of hypothetical yields of investment in tax-exempt
versus taxable investments. In addition, advertisements or shareholder
communications may include a discussion of certain attributes or benefits to be
derived by an investment in Fund. Such advertisements or communications may
include symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein. With proper authorization, Fund
may reprint articles (or excerpts) written regarding the Fund and provide them
to prospective shareholders. Performance information with respect to the Fund is
generally available by calling 1-800-539-3863.
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Investors may also judge, and the Fund may at times advertise,
performance of Class A or Class B shares by comparing it to the performance of
other mutual funds or mutual fund portfolios with comparable investment
objectives and policies, which performance may be contained in various unmanaged
mutual fund or market indices or rankings such as those prepared by Dow Jones &
Co., Inc., Standard & Poor's Corporation, Lehman Brothers, Merrill Lynch, and
Salomon Brothers, and in publications issued by Lipper Analytical Services, Inc.
and in the following publications: IBC/Donoghue's Money Fund Reports, Ibottson
Associates, Inc., Morningstar, CDA/Wiesenberger, Money Magazine, Forbes,
Barron's, The Wall Street Journal, The New York Times, Business Week, American
Banker, Fortune, Institutional Investor, U.S.A. Today. In addition to yield
information, general information about the Fund that appears in a publication
such as those mentioned above may also be quoted or reproduced in advertisements
or in reports to shareholders.
Advertisements and sales literature may include discussions of
specifics of the portfolio manager's investment strategy and process, including,
but not limited to, descriptions of security selection and analysis.
Advertisements may also include descriptive information about the
investment adviser, including, but not limited to, its status within the
industry, other services and products it makes available, total assets under
management, its investment philosophy.
When comparing yield, total return and investment risk of an investment
in Class A or Class B shares of the Fund with other investments, investors
should understand that certain other investments have different risk
characteristics than an investment in shares of the Fund. For example,
certificates of deposit may have fixed rates of return and may be insured as to
principal and interest by the FDIC, while the Fund's returns will fluctuate and
its share values and returns are not guaranteed. Money market accounts offered
by banks also may be insured by the FDIC and may offer stability of principal.
U.S. Treasury securities are guaranteed as to principal and interest by the full
faith and credit of the U.S. government. Money market mutual funds may seek to
offer a fixed price per share.
ADDITIONAL PURCHASE, EXCHANGE AND REDEMPTION INFORMATION
The Victory Portfolios (see "Description of Victory Portfolios" below)
is open for business and the NAV of each class of shares of the Fund is
calculated on each Business Day. A Business Day is every day on which the NYSE
is open for business, the Federal Reserve Bank of Cleveland is open and any
other day (other than a day on which no shares of the Fund are tendered for
redemption and no order to purchase any shares is received) during which there
is sufficient trading in portfolio instruments that the Fund's net asset value
per share might be materially affected. The NAV of each class is determined and
its shares are priced as of the close of regular trading of the NYSE (generally
4:00 p.m. Eastern time (the "Valuation Time")) on each Business Day of the Fund.
The NYSE or the Federal Reserve Bank of Cleveland will not be open in observance
of the following holidays: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day. The holiday
closing schedule is subject to change.
When the NYSE is closed, or when trading is restricted for any reason
other than its customary weekend or holiday closings, or under emergency
circumstances as determined by the Commission to warrant such action, the Fund's
Transfer Agent will determine the Fund's NAVs at Valuation Time. The Fund's NAV
may be affected to the extent that its securities are traded on days that are
not Business Days.
(If, in the opinion of the Trustees, conditions exist which make cash
payment undesirable, redemption payments may be made in whole or in part in
securities or other property, valued for this purpose as they are valued in
computing the NAV of each class of the Fund. Shareholders receiving securities
or other property on redemption may realize a gain or loss for tax purposes and
will incur any costs of sale as well as the associated inconveniences.)
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Pursuant to Rule 11a-3 under the 1940 Act, the Fund is required to give
shareholders at least 60 days' notice prior to terminating or modifying the
Fund's exchange privilege. Under the Rule, the 60-day notification requirement
may be waived if (i) the only effect of a modification would be to reduce or
eliminate an administrative fee, redemption fee or deferred sales charge
ordinarily payable at the time of exchange or (ii) the Fund temporarily suspends
the offering of shares as permitted under the 1940 Act or by the SEC or because
it is unable to invest amounts effectively in accordance with its investment
objective and policies.
In the Prospectus, the Victory Portfolios, Key Advisers and the
Sub-Adviser have notified shareholders that they reserve the right at any time
without prior notice to shareholders to refuse exchange purchases by any person
or group if, in Key Advisers or the Sub-Adviser's judgment, the Fund would be
unable to invest effectively in accordance with its investment objective and
policies, or would otherwise potentially be adversely affected.
ADDITIONAL PURCHASE INFORMATION
ALTERNATIVE SALES ARRANGEMENTS - CLASS A AND CLASS B SHARES. The
Alternative Sales Arrangements permit an investor to choose the method of
purchasing shares that is more beneficial to the investor depending on the
amount of the purchase, the length of time the investor expects to hold shares
and other relevant circumstances. Investors should understand that the purpose
and function of the deferred sales charge and asset-based sales charge with
respect to Class B shares are the same as those of the initial sales charge with
respect to Class A shares. Any salesperson or other person entitled to receive
compensation for selling Fund shares may receive different compensation with
respect to one class of shares on behalf of a single investor (not including
dealer "street name" or omnibus accounts) because generally it will be more
advantageous for that investor to purchase Class A shares of the Fund instead.
The two classes of shares each represent an interest in the same
portfolio investments of the Fund. However, each class has different shareholder
privileges and features. The net income attributable to Class B shares and the
dividends payable on Class B shares will be reduced by incremental expenses
borne solely by that class, including the asset-based sales charge to which
Class B shares are subject.
CLASS B CONVERSION FEATURE. Ninety-six months after an investor's
purchase order for Class B shares is accepted, such "Matured Class B Shares"
automatically will convert to Class A shares, on the basis of the relative net
asset value of the two classes, without the imposition of any sales load or
other charge. Each time any Matured Class B shares convert to Class A shares,
any Class B shares acquired by the reinvestment of dividends or distributions on
such Matured Class B shares that are still held will also convert to Class A
shares, on the same basis. The conversion feature is intended to relieve holders
of Matured Class B shares of the asset-based sales charge under the Class B
Distribution Plan after such shares have been outstanding long enough that the
Distributor may have been compensated for distribution expenses related to such
shares.
The conversion of Matured Class B shares to Class A shares is subject
to the continuing availability of a private letter ruling from the Internal
Revenue Service, or an opinion of counsel or tax adviser, to the effect that the
conversion of Matured Class B shares does not constitute a taxable event for the
holder under Federal income tax law. If such a revenue ruling or opinion is no
longer available, the automatic conversion feature may be suspended, in which
event no further conversion of Matured Class B shares would occur while such
suspension remained in effect. Although Matured Class B shares could then be
exchanged for Class A shares on the basis of relative net asset value of the two
classes, without the imposition of a sales charge or fee, such exchange could
constitute a taxable event for the holder, and absent such exchange, Class B
shares might continue to be subject to the asset-based sales charge for longer
than six years.
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The methodology for calculating the net asset value, dividends and
distributions of the Fund Class A and Class B shares recognizes two types of
expenses. General expenses that do not pertain specifically to either class are
allocated pro rata to the shares of each class, based on the percentage of the
net assets of such class to the Fund's total net assets, and then equally to
each outstanding share within a given class. Such general expenses include (i)
management fees, (ii) legal, bookkeeping and audit fees, (iii) printing and
mailing costs of shareholder reports, prospectuses, statements of additional
information and other materials for current shareholders, (iv) fees to
unaffiliated Trustees, (v) custodian expenses, (vi) share issuance costs, (vii)
organization and start-up costs, (viii) interest, taxes and brokerage
commissions, and (ix) non-recurring expenses, such as litigation costs. Other
expenses that are directly attributable to a class are allocated equally to each
outstanding share within that class. Such expenses included (i) Distribution
Plan fees, (ii) incremental transfer and shareholder servicing agent fees and
expenses, (iii) registration fees and (iv) shareholder meeting expenses, to the
extent that such expenses pertain to a specific class rather than to the Fund as
a whole.
REDUCED SALES CHARGE. Reduced sales charges are applicable to purchases
of $50,000 or more of Class A shares of the Fund alone or in combination with
purchases of shares of other Victory Portfolios made at any one time. To obtain
the reduction of the sales charge, you or your investment professional must
notify the Transfer Agent at the time of purchase whenever a quantity discount
is applicable to your purchase. Upon such notification, you will receive the
lowest applicable sales charge.
The contingent deferred sales charge is waived on Class B shares in the
following cases: (i) shares sold to Key Advisers, the Sub-Adviser or their
affiliates; (ii) shares issued in plans of reorganization to which the Fund is a
party; and (iii) shares redeemed in involuntary redemptions.
In addition to investing at one time in any combination of Class A
shares of the Victory Portfolios in an amount entitling you to a reduced sales
charge, you may qualify for a reduction in the sales charge under the following
programs:
COMBINED PURCHASES. When you invest in Class A shares of the Victory
Portfolios for several accounts at the same time, you may combine these
investments into a single transaction if purchased through one investment
professional, and if the total is $50,000 or more. The following may qualify for
this privilege: an individual, or "company" as defined in Section 2(a)(8) of the
1940 Act; an individual, spouse, and their children under age 21 purchasing for
his, her, or their own account; a trustee, administrator or other fiduciary
purchasing for a single trust estate or single fiduciary account or for a single
or a parent-subsidiary group of "employee benefit plans" (as defined in Section
3(3) of ERISA); and tax-exempt organizations under Section 501(c)(3) of the
Internal Revenue Code.
RIGHTS OF ACCUMULATION. Your "Rights of Accumulation" permit reduced
sales charges on future purchases of Class A shares after you have reached a new
breakpoint. You can add the value of existing Victory Portfolios shares held by
you, your spouse, and your children under age 21, determined at the previous
day's NAV at the close of business, to the amount of your new purchase valued at
the current offering price to determine your reduced sales charge.
LETTER OF INTENT. If you anticipate purchasing $50,000 or more of
shares of the Fund alone or in combination with Class A shares of certain other
Victory Portfolios within a 13-month period, you may obtain shares of the
portfolios at the same reduced sales charge as though the total quantity were
invested in one lump sum, by filing a non-binding Letter of Intent (the
"Letter") within 90 days of the start of the purchases. Each investment you make
after signing the Letter will be entitled to the sales charge applicable to the
total investment indicated in the Letter. For example, a $2,500 purchase toward
a $60,000 Letter would receive the same reduced sales charge as if the $60,000
had been invested at one time. To ensure that the reduced price will be received
on future purchases, you or your investment professional must inform the
transfer agent that the Letter is in effect each time shares are
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<PAGE> 373
purchased. Neither income dividends nor capital gain distributions taken in
additional shares will apply toward the completion of the Letter.
Your initial investment must be at least 5% of the total amount you
plan to invest. Out of the initial purchase, 5% of the dollar amount specified
in the Letter will be registered in your name and held in escrow. The shares
held in escrow cannot be redeemed or exchanged until the Letter is satisfied or
the additional sales charges have been paid. You will earn income dividends and
capital gain distributions on escrowed shares. The escrow will be released when
your purchase of the total amount has been completed. You are not obligated to
complete the Letter.
If you purchase more than the amount specified in the Letter and
qualify for a further sales charge reduction, the sales charge will be adjusted
to reflect your total purchase at the end of 13 months. Surplus funds will be
applied to the purchase of additional shares at the then current offering price
applicable to the total purchase.
If you do not complete your purchase under the Letter within the
13-month period, your sales charge will be adjusted upward, corresponding to the
amount actually purchased, and if after written notice, you do not pay the
increased sales charge, sufficient escrowed shares will be redeemed to pay such
charge.
ADDITIONAL EXCHANGE INFORMATION
Class A shares of the Fund (see "Description of Victory Portfolios"
below) may be exchanged for shares of any Victory money market fund or any other
fund of the Victory Portfolios with the same or a lower sales charge. Shares of
any Victory money market portfolio or any Victory Portfolios with a reduced
sales charge may be exchanged for shares of the Fund upon payment of the
difference in the sales charge (or, if applicable, shares of any Victory money
market portfolio may be used to purchase Class B shares of the Fund.)
Class B shares of the Fund may be exchanged for shares of other Victory
Portfolios that offer Class B shares. The CDSC applicable to Class B shares is
imposed on Class B shares redeemed within six years of the initial purchase of
the exchanged Class B shares. When Class B shares are redeemed to effect an
exchange, the priorities described in "How to Invest" in the Prospectus for the
imposition of the Class B CDSC will be followed in determining the order in
which the shares are exchanged. Shareholders should take into account the effect
of any exchange on the applicability and rate of any CDSC that might be imposed
in the subsequent redemption of remaining shares. Shareholders owning shares of
both classes must specify whether they intend to exchange Class A or Class B
shares.
ADDITIONAL REDEMPTION INFORMATION
REINSTATEMENT PRIVILEGE. Within 90 days of a redemption, a shareholder
may reinvest all or part of the redemption proceeds of (i) Class A shares, or
(ii) Class B shares that were subject to the Class B contingent deferred sales
charge when redeemed, in Class A shares of the Fund or any of the other Victory
Portfolios into which shares of the Fund are exchangeable as described below, at
the net asset value next computed after receipt by the Transfer Agent of the
reinvestment order. No charge is currently made for reinvestment in shares of
the Fund but a reinvestment in shares of certain other Victory Portfolios is
subject to a $5.00 service fee. The shareholder must ask the Distributor for
such privilege at the time of reinvestment. Any capital gain that was realized
when the shares were redeemed is taxable, and reinvestment will not alter any
capital gains tax payable on that gain. If there has been a capital loss on the
redemption, some or all of the loss may not be tax deductible, depending on the
timing and amount of the reinvestment. Under the Internal Revenue Code, if the
redemption proceeds of Fund shares on which a sales charge was paid are
reinvested in shares of the Fund or another of the Victory Portfolios within 90
days of
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<PAGE> 374
payment of the sales charge, the shareholder's basis in the shares of the Fund
that were redeemed may not include the amount of the sales charge paid. That
would reduce the loss or increase the gain recognized from redemption. The Fund
may amend, suspend or cease offering this reinvestment privilege at any time as
to shares redeemed after the date of such amendment, suspension or cessation.
You must reinstate your shares into an account with the same registration. This
privilege may be exercised only once by a shareholder with respect to the Fund.
For information on which funds are available for the Reinstatement Privilege,
please consult your program materials.
-15-
<PAGE> 375
DIVIDENDS AND DISTRIBUTIONS
The Fund ordinarily declares and pays dividends separately for Class A
and Class B shares from its net investment income quarterly. The Fund
distributes substantially all of its net investment income and net capital
gains, if any, to shareholders within each calendar year as well as on a fiscal
year basis to the extent required for the Fund to qualify for favorable federal
tax treatment.
The amount of a class's distributions may vary from time to time
depending on market conditions, the composition of the Fund's portfolio, and
expenses borne by the Fund or borne separately by a class, as described in
"Alternative Sales Arrangements Class A and Class B," above. Dividends are
calculated in the same manner, at the same time and on the same day for shares
of each class. However, dividends on Class B shares are expected to be lower as
a result of the asset-based sales charge on Class B shares, and Class B
dividends will also differ in amount as a consequence of any difference in net
asset value between Class A and Class B shares.
For this purpose, the net income of the Fund, from the time of the
immediately preceding determination thereof, shall consist of all interest
income accrued on the portfolio assets of the Fund, dividend income, if any,
income from securities loans, if any, and realized capital gains and losses on
the Fund assets, less all expenses and liabilities of the Fund chargeable
against income. Interest income shall include discount earned, including both
original issue and market discount, on discount paper accrued ratably to the
date of maturity. Expenses, including the compensation payable to Key Advisers
or the Sub-Adviser, are accrued each day. The expenses and liabilities of the
Fund shall include those appropriately allocable to the Fund as well as a share
of the general expenses and liabilities of the Victory Portfolios in proportion
to the Fund's share of the total net assets of the Victory Portfolios.
Additional Tax Information
It is the policy of the Fund to qualify for the favorable tax treatment
accorded regulated investment companies ("RICs") under Subchapter M of the Code,
for so long as such qualification is in the best interest of its shareholders.
By following such policy and distributing its income and gains currently with
respect to each taxable year, the Victory Portfolios expects to eliminate or
reduce to a nominal amount the federal income and excise taxes to which it may
otherwise be subject.
In order to qualify as a RIC, the Fund must, among other things, (1)
derive at least 90% of its gross income from dividends, interest, payments with
respect to securities loans, and gains from the sale or other disposition of
stock or securities, foreign currencies or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in stock, securities or currencies, (2) derive less than 30% of its
gross income from the sale or other disposition of stock, securities, options,
futures, forward contracts, and certain foreign currencies (or options, futures,
or forward contracts on foreign currencies) held for less than three months, and
(3) diversify its holdings so that at the end of each quarter of its taxable
year (i) at least 50% of the market value of the Fund's assets is represented by
cash or cash items, U.S. Government securities, securities of other RICs and
other securities limited, in respect of any one issuer, to an amount not greater
than 5% of the value of the fund's total assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
total assets is invested in the securities of any one issuer (other than U.S.
Government securities) or of two or more issuers that the Victory Portfolios
control and that are engaged in the same, similar, or related trades or
businesses. These requirements may restrict the degree to which the Fund may
engage in short-term trading and concentrate investments. If the Fund qualifies
as a RIC, it will not be subject to federal income tax on the part of its net
investment income and net realized capital gains, if any, that it distributes to
shareholders with respect to each taxable year within the time limits specified
in the Code.
A non-deductible excise tax is imposed on regulated investment
companies that do not distribute in each calendar year an amount equal to 98% of
their ordinary income for the year plus 98% of their capital gain net income for
the 1-year period ending on October 31 of such calendar year. The balance of
such income must be distributed during the following calendar year. If
distributions during a calendar year are less than the required amount, the fund
is subject to a non-deductible excise tax equal to 4% of the deficiency.
-16-
<PAGE> 376
Certain investment and hedging activities of the Fund, including
transactions in options, futures contracts, hedging transactions, forward
contracts, straddles, foreign currencies, and foreign securities, are subject to
special tax rules. In a given case, these rules may accelerate income to the
Fund, defer losses to the Fund, cause adjustments in the holding periods of the
Fund's securities, convert short-term capital losses into long-term capital
losses, or otherwise affect the character of the Fund's income. These rules
could therefore affect the amount, timing and character of distributions to
shareholders. The Victory Portfolios will endeavor to make any available
elections pertaining to such transactions in a manner believed to be in the best
interest of the Victory Portfolios and their securities.
The Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of taxable dividends paid to any shareholder who has failed to
provide (or provided an incorrect) tax identification number, or is subject to
withholding pursuant to a notice from the Internal Revenue Service for failure
to properly include on his or her income tax return payments of interest or
dividends. This "backup withholding" is not an additional tax, and any amounts
withheld may be credited against the shareholder's ultimate U.S. tax liability.
Information set forth in the Prospectus and this Statement of
Additional Information that relates to federal taxation is only a summary of
certain key federal tax considerations generally affecting purchasers of shares
of the Fund. No attempt has been made to present a complete explanation of the
federal tax treatment of the Fund or its shareholders, and this discussion is
not intended as a substitute for careful tax planning. Accordingly, potential
purchasers of shares of the Fund are urged to consult their tax advisers with
specific reference to their own tax circumstances. In addition, the tax
discussion in the Prospectus and this Statement of Additional Information is
based on tax law in effect on the date of the Prospectus and this Statement of
Additional Information; such laws and regulations may be changed by legislative,
judicial or administrative action, sometimes with retroactive effect.
MANAGEMENT OF THE VICTORY PORTFOLIOS
Board of Trustees
Overall responsibility for management of the Victory Portfolios rests
with the Trustees, who are elected by the shareholders of the Victory
Portfolios. The Victory Portfolios are managed by the Trustees in accordance
with the laws of the State of Delaware governing business trusts. There are
currently seven Trustees, six of whom are not "interested persons" of the
Victory Portfolios within the meaning of that term under the 1940 Act. The
Trustees, in turn, elect the officers of the Victory Portfolios to supervise
actively its day-to-day operations.
The Trustees of the Victory Portfolios, their addresses, ages and their
principal occupations during the past five years are as follows:
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Funds During Past 5 Years
- --------------------- ---------------- --------------------
<S> <C> <C>
Leigh A. Wilson, 51* Trustee and From 1989 to present, Chairman and
Glenleigh International Ltd. President Chief Executive Officer, Glenleigh
53 Sylvan Road North International Limited; previously
Westport, CT 06880 Chief Executive Officer, Paribas
North America and Paribas
Corporation; Trustee, The Victory
Funds and Spears, Benzak, Salomon
and Farrell ("SBSF") Funds.
</TABLE>
- ------------
-17-
<PAGE> 377
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Funds During Past 5 Years
- --------------------- ---------------- --------------------
<S> <C> <C>
</TABLE>
* Mr. Wilson is deemed to be an "interested person" of the Victory
Portfolios under the 1940 Act solely by reason of his position as
President.
-18-
<PAGE> 378
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Funds During Past 5 Years
- --------------------- ---------------- --------------------
<S> <C> <C>
Robert G. Brown, 72
5460 N. Ocean Drive
Singer Island, Riviera Beach, Trustee Retired; from October 1983 to
Florida 33404 November 1990, President, Cleveland
Advanced Manufacturing Program
(non-profit corporation engaged in
regional economic development).
Edward P. Campbell, 46 Trustee From March 1, 1994 to present,
Nordson Corporation Executive Vice President and Chief
28601 Clemens Road Operating Officer of Nordson
Westlake, OH 44145 Corporation (manufacturer of
application equipment); from May
1988 to March 1994, Vice President
of Nordson Corporation; from 1987 to
December 1994, member of the
Supervisory Committee of Society's
Collective Investment Retirement
Fund; from May 1991 to August 1994,
Trustee, Financial Reserves Fund and
from May 1993 to August 1994,
Trustee, Ohio Municipal Money Market
Fund; Trustee, The Victory Funds and
SBSF Funds.
Dr. Harry Gazelle, 68 Trustee Retired radiologist, Drs. Hill and
17822 Lake Road Thomas Corp.; Trustee, The Victory
Lakewood, OH 44107 Funds.
Dr. Thomas F. Morrissey, 62 Trustee 1995 Visiting Scholar, Bond
Weatherhead School of University, Queensland, Australia;
Management Professor, Weatherhead School of
Case Western Reserve Management, Case Western Reserve
University University; from 1989 to 1995,
10900 Euclid Avenue Associate Dean of Weatherhead
Cleveland, OH 44106-7235 School of Management and Professor,
Case Western Reserve University;
from 1987 to December 1994, Member
of the Supervisory Committee of
Society's Collective Investment
Retirement Fund; from May 1991 to
August 1994, Trustee, Financial
Reserves Fund and from May 1993 to
August 1994, Trustee, Ohio Municipal
Money Market Fund; Trustee, The
Victory Funds.
</TABLE>
-19-
<PAGE> 379
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Funds During Past 5 Years
- --------------------- ---------------- --------------------
<S> <C> <C>
Stanley I. Landgraf, 70 Trustee Retired; currently, Trustee,
41 Traditional Lane Rensselaer Polytechnic Institute;
Albany, NY 12211 Director, Elenel Corporation and
Mechanical Technology, Inc.; Member,
Board of Overseers, School of
Management, Rensselaer Polytechnic
Institute; Member, The Fifty Group (a
Capital Region business
organization); Trustee, The Victory
Funds.
H. Patrick Swygert, 52 Trustee President, Howard University;
Howard University formerly President, State
2400 6th Street, N.W. University of New York at Albany;
Suite 320 formerly, Executive Vice President,
Washington, DC 20059 Temple University; Trustee, The
Victory Funds.
</TABLE>
The Board presently has an Investment Policy Committee and a Business,
Legal, and Audit Committee. The members of the Investment Policy Committee are
Messrs. Landgraf (Chairman), Morrissey and Brown, who will serve until May 1996.
The function of the Investment Policy Committee is to review the existing
investment policies of the Victory Portfolios, including the levels of risk and
types of funds available to shareholders, and make recommendations to the Board
of Trustees regarding the revision of such policies or, if necessary, the
submission of such revisions to the Victory Portfolios' shareholders for their
consideration. The members of the Business, Legal and Audit Committee are
Messrs. Swygert (Chairman), Campbell and Gazelle who will serve until May 1996.
The function of the Business, Legal and Audit Committee is to recommend
independent auditors and monitor accounting and financial matters; to nominate
persons to serve as disinterested Trustees and Trustees to serve on committees
of the Board; and to review compliance and contract matters.
The Investment Policy Committee met four times during the 12 months
ended October 31, 1995. The Business, Legal and Audit Committee was constituted
on May 24, 1995 (and has met twice since then) and replaced the Audit Committee,
the Legal Committee and the Nominating Committee, which met three times, one
time and one time, respectively, during the 12 month period ended October 31,
1995.
REMUNERATION OF TRUSTEES AND CERTAIN EXECUTIVE OFFICERS
Effective June 1, 1995, each Trustee (other than Leigh A. Wilson)
receives an annual fee of $27,000 for serving as Trustee of all the funds of the
Victory Portfolios, and an additional per meeting fee ($2,400 in person and
$1,200 per telephonic meeting).
Effective June 1, 1995, Leigh A. Wilson receives an annual fee of
$33,000 for serving as President and Trustee for all of the funds of the Victory
Portfolios, and an additional per meeting fee ($3,000 in person and $1,500 per
telephonic meeting).
-20-
<PAGE> 380
The following table indicates the compensation received by each Trustee
from the Fund and from the Victory "Fund Complex"* during the fiscal period
ended October 31, 1995:
<TABLE>
<CAPTION>
Pension or Total
Retirement Estimated Compensation
Benefits Accrued Annual from the Total Compensation
as Benefits National from Victory
Portfolio Expenses Upon Retirement Municipal Fund "Fund Complex"*
------------------ --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Robert G. Brown, Trustee . . . . -0- -0- $39.89 $39,815.98
Edward P. Campbell, Trustee . . . -0- -0- 26.78 33,799.68
Harry Gazelle, Trustee . . . . . -0- -0- 37.48 35,916.98
John W. Kemper,# Trustee . . . . -0- -0- 18.20 22,567.31
Thomas F. Morrissey, Trustee. . . -0- -0- 40.09 40,366.98
Stanley I. Landgraft, Trustee . . -0- -0- 38.83 34,615.98
Leigh A. Wilson, Trustee . . . . -0- -0- 49.44 46,716.97
H. Patrick Swygert, Trustee . . . -0- -0- 40.09 37,116.98
John D. Buckingham,# Trustee. . . -0- -0- 13.33 18,841.89
John R. Young,# Trustee . . . . . -0- -0- 18.91 21,963.81
</TABLE>
# Resigned
- --------------------------
* For certain Trustees, these amounts include compensation received from
The Victory Funds (which were reorganized into the Victory Portfolios
as of June 5, 1995), the SBSF Funds (the investment adviser of which
was acquired by KeyCorp effective April, 1995) and Society's Collective
Investment Retirement Funds, which were reorganized into the Victory
Balanced Fund and Victory Government Mortgage Fund as of December 19,
1994. There are presently 28 mutual funds from which the above-named
Trustees are compensated in the Victory "Fund Complex," but not all of
the above-named Trustees serve on the boards of each fund in the "Fund
Complex."
Officers
The officers of the Victory Portfolios, their addresses, ages and
principal occupations during the past five years are as follows:
<TABLE>
<CAPTION>
Position with the Principal occupation
Name Victory Portfolios during past 5 years
---- ------------------ --------------------
<S> <C> <C>
Leigh A. Wilson, 51 President and Trustee From 1989 to present, Chairman and
Glenleigh International Ltd. Chief Executive Officer, Glenleigh
53 Sylvan Road North International Limited; from 1984-
Westport, CT 06880 1989, Chief Executive Officer,
</TABLE>
-21-
<PAGE> 381
<TABLE>
<S> <C> <C>
Paribas North America and Paribas
Corporation; Trustee to The Victory
Funds and SBSF Funds.
William B. Blundin, 57 Vice President Senior Vice President of BISYS Fund
BISYS Fund Services Services; officer of other
125 West 55th Street investment companies administered
New York, New York 10019 by BISYS Fund Services; President
and Chief Executive Officer of
Vista Broker-Dealer Services, Inc.,
Emerald Asset Management, Inc. and
BNY Hamilton Distributors, Inc.,
registered broker/dealers.
J. David Huber, 49 Vice President Executive Vice President, BISYS
BISYS Fund Services Fund Services.
3435 Stelzer Road
Columbus, OH 43219-3035
Scott A. Englehart, 33 Secretary From October 1990 to present,
BISYS Fund Services employee of BISYS Fund Services,
3435 Stelzer Road Inc.; from 1985 to October 1990,
Columbus, OH 43219-3035 Manager of Banking Center, Fifth
Third Bank.
George O. Martinez, 36 Assistant Secretary From March 1995 to present, Senior
BISYS Fund Services Vice President and Director of
3435 Stelzer Road Legal and Compliance Services,
Columbus, OH 43219-3035 BISYS Fund Services; from June
1989-March 1995, Vice President and
Associate General Counsel, Alliance
Capital Management.
Martin R. Dean, 32 Treasurer From May 1994 to present, employee
BISYS Fund Services of BISYS Fund Services; from
3435 Stelzer Road January 1987 - April 1994, Senior
Columbus, OH 43219-3035 Manager, KPMG Peat Marwick.
Adrian J. Waters, 33 Assistant Treasurer From May 1993 to present, employee
BISYS Fund Services (Ireland) of BISYS Fund Services; from 1989-
Limited May 1993, Manager, Price
ITI House Waterhouse.
12 Earlsfort Terrace
Dublin 2, Ireland
</TABLE>
The mailing address of each of the officers of the Victory Portfolios is 3435
Stelzer Road, Columbus, Ohio 43219-3035.
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<PAGE> 382
The officers of the Victory Portfolios (other than Leigh Wilson) receive no
compensation directly from the Victory Portfolios for performing the duties of
their offices. BISYS Fund Services, Inc. receives fees from the Victory
Portfolios for acting as Administrator.
As of January 6, 1996, the Trustees and officers as a group owned
beneficially less than 1% of the Fund.
Investment Adviser and Sub-Adviser
Key Advisers was organized as an Ohio corporation on July 27, 1995 and
is registered as an investment adviser under the Investment Advisers Act of
1940. It is a wholly-owned subsidiary of KeyCorp Asset Management Holdings,
Inc., which is a wholly-owned subsidiary of Society National Bank, a
wholly-owned subsidiary of KeyCorp. Affiliates of Key Advisers manage
approximately $37 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals and mutual funds.
KeyCorp, a financial services holding company, is headquartered at 127
Public Square, Cleveland, Ohio 44114. As of June 30, 1995, KeyCorp had an asset
base of $67.5 billion, with banking offices in 25 states from Maine to Alaska,
and trust and investment offices in 16 states. KeyCorp is the resulting entity
of the merger in 1994 of Society Corporation, the bank holding company of which
Society National Bank was a wholly-owned subsidiary, and KeyCorp, the former
bank holding company. KeyCorp's major business activities include providing
traditional banking and associated financial services to consumer, business and
commercial markets. Its non-bank subsidiaries include investment advisory,
securities brokerage, insurance, bank credit card processing, and mortgage
leasing companies. Society National Bank is the lead affiliate bank of KeyCorp.
The following table lists the advisory fees for each mutual fund that
is advised by Key Advisers.
.25 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Institutional Money Market Fund*
.35 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Prime Obligations Fund*
Victory U.S. Government Obligations Fund*
Victory Tax-Free Money Market Fund*
.50 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Money Market Fund*
Victory Limited Term Income Fund*
Victory Government Mortgage Fund*
Victory Financial Reserves Fund*
Victory Fund for Income #
.55 OF 1% OF AVERAGE DAILY NET ASSETS
Victory National Municipal Bond Fund*
Victory Government Bond Fund*
Victory New York Tax-Free Fund*
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<PAGE> 383
.60 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Bond Fund*
Victory Stock Index Fund*
.65 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Diversified Stock Fund*
.75 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Intermediate Income Fund*
Victory Investment Quality Bond Fund*
Victory Ohio Regional Stock Fund*
1% OF AVERAGE DAILY NET ASSETS
Victory Balanced Fund*
Victory Value Fund*
Victory Growth Fund*
Victory Special Value Fund*
Victory Special Growth Fund+
1.10% OF AVERAGE DAILY ASSETS
Victory International Growth Fund*
# First Albany Asset Management Corporation serves as sub-adviser to the
Victory Fund for Income, for which it receives .20% of average daily
net assets.
+ T. Rowe Price Associates, Inc. serves as sub-adviser to the Victory
Special Growth Fund, for which it receives .25% of average daily net
assets up to $100 million and .20% of average daily net assets in
excess of $100 million.
* Society Asset Management, Inc. (the Sub-Adviser) serves as sub-adviser
to each of these funds. For its services under the investment
sub-advisory agreement, Key Advisers pays the Sub-Adviser sub-advisory
fees at rates (based on an annual percentage of average daily net
assets) which vary according to the table set forth below:
<TABLE>
<CAPTION>
For the Victory Balanced Fund, Diversified Stock Fund, For the Victory International Growth Fund, Ohio
Growth Fund, Stock Index Fund and Value Fund: Regional Stock Fund and Special Value
Fund:
Rate of Rate of
Net Assets Sub-Advisory Fee* Net Assets Sub-Advisory Fee*
---------- ----------------- ---------- -----------------
<S> <C> <C> <C>
Up to $10,000,000 0.65% Up to $10,000,000 0.90%
Next $15,000,000 0.50% Next $15,000,000 0.70%
Next $25,000,000 0.40% Next $25,000,000 0.55%
Above $50,000,000 0.35% Above $50,000,000 0.45%
</TABLE>
-24-
<PAGE> 384
<TABLE>
<CAPTION>
For the Victory Intermediate Income Fund, For the Victory Prime Obligations Fund, Tax-Free
Investment Quality Bond Fund, Limited Term Money Market Fund, U.S. Government Obligations
Income Fund, Ohio Municipal Bond Fund, Fund, Financial Reserves Fund, Institutional Money
Government Bond Fund, Government Mortgage Fund, Market Fund and Ohio Municipal Money Market Fund:
National Municipal Bond Fund and New York
Tax-Free Fund:
Rate of Rate of
Net Assets Sub-Advisory Fee* Net Assets Sub-Advisory Fee*
---------- ----------------- ---------- -----------------
<S> <C> <C> <C>
Up to $10,000,000 0.40% Up to $10,000,000 0.25%
Next $15,000,000 0.30% Next $15,000,000 0.20%
Next $25,000,000 0.25% Next $25,000,000 0.15%
Above $50,000,000 0.20% Above $50,000,000 0.125%
</TABLE>
- --------------------
* As a percentage of average daily net assets. The Sub-Adviser has the
right to voluntarily waive any portion of the sub- advisory fee from
time to time.
ADVISORY AND OTHER CONTRACTS
Unless sooner terminated, the Investment Advisory Agreement between Key
Advisers and the Fund provides that it will continue in effect as to the Fund
for an initial two-year term and for consecutive one-year terms thereafter,
provided that such continuance is approved at least annually by the Victory
Portfolios' Trustees or by vote of a majority of the outstanding shares of such
Fund (as defined under "GENERAL INFORMATION - Miscellaneous" in the
Prospectuses), and, in either case, by a majority of the Trustees who are not
parties to the Investment Advisory Agreement or interested persons (as defined
in the 1940 Act) of any party to the Investment Advisory Agreement, by votes
cast in person at a meeting called for such purpose.
The Investment Advisory Agreement is terminable as to the Fund at any
time on 60 days' written notice without penalty by the Trustees, by vote of a
majority of the outstanding shares of the Fund, or by Key Advisers. The
Investment Advisory Agreement also terminates automatically in the event of any
assignment, as defined under the 1940 Act.
The Investment Advisory Agreement provides that Key Advisers shall not
be liable for any error of judgment or mistake of law or for any loss suffered
by the Fund in connection with the performance of services pursuant to the
Investment Advisory Agreement, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith, or gross negligence on the
part of Key Advisers in the performance of its duties, or from reckless
disregard by it of either duties and obligations thereunder.
Under the Investment Advisory Agreement, Key Advisers has agreed to
provide the investment advisory services described in the Prospectus. For the
services provided and expenses assumed pursuant to the Investment Advisory
Agreement, the Fund pays Key Advisers a fee, computed daily and paid monthly, at
the annual rate of fifty-five one-hundredths of one percent (.55%) of the
average daily net assets of the Fund.
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Prior to January, 1993, Society National Bank served as investment
adviser to the Predecessor Fund and the Fund. From September 26, 1994
(commencement of operations) until December 31, 1995, Society Asset Management,
Inc. served as investment adviser to the Fund. For the fiscal years ended
October 31, 1994 and 1995 the Fund paid investment advisory fees of $_________,
and $________, respectively, after fee reductions of $______, and $________
respectively.
Under the Investment Advisory Agreement, Key Advisers may delegate a
portion of its responsibilities to a sub-adviser. In addition, the Investment
Advisory Agreement provides that Key Advisers may render services through its
own employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser of the Fund and are under the common
control of KeyCorp as long as all such persons are functioning as part of an
organized group of persons, managed by authorized officers of Key Advisers.
Key Advisers has entered into an investment sub-advisory agreement with
its affiliate, Society Asset Management, Inc. on behalf of the Fund. The
Sub-Adviser is a wholly-owned subsidiary of KeyCorp Asset Management Holdings,
Inc. With respect to the day to day management of the Fund, under the
sub-advisory agreement, the Sub-Adviser makes decisions concerning, and places
all orders for, purchases and sales of securities and helps maintain the records
relating to such purchases and sales. The Sub-Adviser may, in its discretion,
provide such services through its own employees or the employees of one or more
affiliated companies that are qualified to act as an investment adviser to the
Company under applicable laws and are under the common control of KeyCorp;
provided that (i) all persons, when providing services under the sub-advisory
agreement, are functioning as part of an organized group of persons, and (ii)
such organized group of persons is managed at all times by authorized officers
of the Sub-Adviser. This arrangement will not result in the payment of
additional fees by the Fund.
Glass-Steagall Act
In 1971 the United States Supreme Court held in Investment Company
Institute v. Camp that the federal statute commonly referred to as the
Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision: (a)
forbid a bank holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing, or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but (b) do not prohibit such
a holding company or affiliate from acting as investment adviser, transfer
agent, and custodian to such an investment company. In 1981 the United States
Supreme Court held in Board of Governors of the Federal Reserve System v.
Investment Company Institute that the Board did not exceed its authority under
the Holding Company Act when it adopted its regulation and interpretation
authorizing bank holding companies and their non-bank affiliates to act as
investment advisers to registered closed-end investment companies. In the Board
of Governors case, the Supreme Court also stated that if a national bank
complied with the restrictions imposed by the Board in its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to investment companies, a national bank
performing investment advisory services for an investment company would not
violate the Glass-Steagall Act.
Key Advisers and the Sub-Adviser believe that they may perform the
services for the Victory Portfolios contemplated by the Prospectus, this
Statement of Additional Information, and the Investment Advisory Agreement (and
Sub-Advisory Agreement) with the Victory Portfolios without violation of
applicable statutes and regulations and has so represented in its Investment
Advisory Agreement (and Sub-Advisory Agreement) with the Victory Portfolios. Key
Trust Company of Ohio, N.A. believes that it may perform the services for the
Victory Portfolios contemplated by the Prospectus, this Statement of Additional
Information, and the Shareholder Servicing Agreement with the
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<PAGE> 386
Victory Portfolios (as described below) without violation of applicable statutes
and regulations and has so represented in such Shareholder Servicing Agreement.
Future changes in either federal or state statutes and regulations relating to
the permissible activities of banks or bank holding companies and the
subsidiaries or affiliates of those entities, as well as further judicial or
administrative decisions or interpretations of present and future statutes and
regulations, could prevent or restrict Key Trust Company of Ohio, N.A., Key
Advisers or the Sub-Adviser from continuing to perform such services for the
Victory Portfolios. Depending upon the nature of any changes in the services
which could be provided by Key Trust Company of Ohio, N.A., Key Advisers or the
Sub-Adviser, the Trustees of the Victory Portfolios would review the Victory
Portfolios' relationship with Key Trust Company of Ohio, N.A., Key Advisers or
the Sub-Adviser and consider taking all action necessary in the circumstances.
Should future legislative, judicial, or administrative action prohibit
or restrict the proposed activities of Key Trust Company of Ohio, N.A., Key
Advisers or the Sub-Adviser and its affiliated and correspondent banks and other
non-bank affiliates in connection with customer purchases of shares of the
Victory Portfolios, the banks and such non-bank affiliates might be required to
alter materially or discontinue the services offered by them to customers. It is
not anticipated, however, that any change in the Victory Portfolios' method of
operations would affect its net asset value per share or result in financial
losses to any customer.
From time to time, advertisements, supplemental sales literature and
information furnished to present or prospective shareholders of the Fund may
include descriptions of Key Trust Company of Ohio, N.A., Key Advisers and the
Sub-Adviser including, but not limited to, (i) descriptions of the operations of
Key Trust Company of Ohio, N.A., Key Advisers and the Sub-Adviser; (ii)
descriptions of certain personnel and their functions; and (iii) statistics and
rankings related to the operations of Key Trust Company of Ohio, N.A., Key
Advisers and the Sub-Adviser.
Portfolio Transactions
Pursuant to the Investment Advisory Agreement (and Sub-Advisory
Agreement), Key Advisers or the Sub-Adviser determines, subject to the general
supervision of the Trustees of the Victory Portfolios, and in accordance with
the Fund's investment objective and restrictions, which securities are to be
purchased and sold by the Fund, and which brokers are to be eligible to execute
its portfolio transactions. Purchases from underwriters and/or broker-dealers of
portfolio securities include a commission or concession paid by the issuer to
the underwriter and/or broker-dealer and purchases from dealers serving as
market makers may include the spread between the bid and asked price. While Key
Advisers and the Sub-Adviser generally seek competitive prices (inclusive of any
spread or commission), the Fund may not necessarily pay the lowest prices
available on each transaction, for reasons discussed below.
Allocation of transactions to dealers is determined by Key Advisers or
the Sub-Adviser in their best judgment and in a manner deemed fair and
reasonable to shareholders. The primary consideration is prompt execution of
orders in an effective manner at the most favorable price. Subject to this
consideration, dealers who provide supplemental investment research to Key
Advisers or the Sub-Adviser may receive orders for transactions by the Victory
Portfolios. Information so received is in addition to and not in lieu of
services required to be performed by Key Advisers or the Sub-Adviser and does
not reduce the advisory fees payable to Key Advisers by the Victory Portfolios.
Such information may be useful to Key Advisers or the Sub-Adviser in serving
both the Victory Portfolios and other clients and, conversely, such supplemental
research information obtained by the placement of orders on behalf of other
clients may be useful to Key Advisers or the Sub-Adviser in carrying out its
obligations to the Victory Portfolios. In the future, the Trustees may also
authorize the allocation of brokerage to affiliated broker-dealers on an agency
basis to effect portfolio transactions. In such event, the Trustees will adopt
procedures incorporating the standards of Rule 17e-1 under the 1940 Act, which
requires that the commission paid to affiliated broker-dealers be "reasonable
and fair compared to the commission, fee or other remuneration received, or to
be received, by other brokers in connection with comparable transactions
involving similar securities during a comparable period of time." At times, the
Fund may also purchase portfolio securities directly from dealers acting as
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<PAGE> 387
principals, underwriters or market makers. As these transactions are usually
conducted on a net basis, no brokerage commissions are paid by the Fund.
The Victory Portfolios will not execute portfolio transactions through,
acquire portfolio securities issued by, make savings deposits in, or enter into
repurchase or reverse repurchase agreements with Key Advisers, the Sub-Adviser,
Key Trust Company of Ohio, N.A. or its affiliates, Concord Holding Corporation,
Victory Broker-Dealer Services, Inc. or their affiliates, and will not give
preference to Key Trust Company of Ohio, N.A.'s correspondent banks or
affiliates, or Concord Holding Corporation or Victory Broker-Dealer Services,
Inc. with respect to such transactions, securities, savings deposits, repurchase
agreements, and reverse repurchase agreements.
Investment decisions for the Fund are made independently from those for
the other funds or any other investment company or account managed by Key
Advisers (or Society). Any such other investment company or account may also
invest in the same securities as a particular fund. When a purchase or sale of
the same security is made at substantially the same time on behalf of the Fund
and another fund, investment company or account, the transaction will be
averaged as to price, and available investments allocated as to amount, in a
manner which Key Advisers (or Society) believes to be equitable to the Fund and
such other fund, investment company or account. In some instances, this
investment procedure may adversely affect the price paid or received by the Fund
or the size of the position obtained by the Fund. To the extent permitted by
law, Key Advisers (or Society) may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for the other funds or
for other investment companies or accounts in order to obtain best execution. As
provided by the Investment Advisory (and Sub-Advisory) Agreement, in making
investment recommendations for the Victory Portfolios, Key Advisers (or Society)
will not inquire or take into consideration whether an issuer of securities
proposed for purchase or sale by a Fund is a customer of Society, its parents or
subsidiaries or affiliates and, in dealing with their commercial customers, Key
Advisers (Society), its parents, subsidiaries, and affiliates will not inquire
or take into consideration whether securities of such customers are held by the
Victory Portfolios.
In the fiscal years ended October 31, 1994 and 1995, the Fund paid
$_______, and $_______, respectively, in brokerage commissions.
Business Management Agreement
In connection with its obligations under the Investment Sub-Advisory
Agreement, the Sub-Adviser has entered into a Business Management Agreement with
Key Advisers, pursuant to which Key Advisers provides certain administrative and
support services to the Sub-Adviser. Such services include preparing reports to
the Victory Portfolio's Board of Trustees, recordkeeping services, and services
rendered in connection with the preparation of regulatory filings and other
reports, and regulatory and other administrative and compliance systems and
support services.
For such services to the Fund, the Sub-Adviser pays fees to Key
Advisers which vary according to a sliding scale containing "breakpoints" at
which decreases in the business management fees correspond to increases in the
average daily net asset values of the Fund as follows:
<TABLE>
<CAPTION>
Rate of Business
Net Assets of the Fund Management Fee*
---------------------- ---------------
<S> <C>
Up to $10,000,000 0 .25%
Next $15,000,000 0 .15%
Next $25,000,000 0 .10%
Above $50,000,000 0 .05%
</TABLE>
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<PAGE> 388
- --------------------
* As a percentage of average daily net assets.
Administrator
Currently, Concord Holding Corporation ("CHC") serves as general
manager and administrator (the "Administrator") to the Fund. The Administrator
assists in supervising all operations of the Fund (other than those performed by
Key Advisers or the Sub- Adviser under the Investment Advisory Agreement and
Sub-Advisory Agreement.
CHC receives a fee from the Fund for its services as Administrator and
expenses assumed pursuant to the Administration Agreements, calculated daily and
paid monthly, at the annual rate of fifteen one hundredths of one percent (.15%)
of the Fund's average daily net assets. CHC may periodically waive all or a
portion of its fee with respect to the Fund in order to increase the net income
of the Fund available for distribution as dividends.
Unless sooner terminated, the Administration Agreement will continue in
effect as to the Fund for a period of two years, and for consecutive one-year
terms thereafter, provided that such continuance is ratified at least annually
by the Victory Portfolios' Board of Trustees or by vote of a majority of the
outstanding shares of the Fund, and in either case by a majority of the Trustees
who are not parties to the Administration Agreement or interested persons (as
defined in the 1940 Act) of any party to the Administration Agreement, by votes
cast in person at a meeting called for such purpose.
The Administration Agreement provides that CHC shall not be liable for
any error of judgment or mistake of law or any loss suffered by the Victory
Portfolios in connection with the matters to which the Administration Agreement
relates, except a loss resulting from willful misfeasance, bad faith, or gross
negligence in the performance of its duties, or from the reckless disregard by
it of its obligations and duties thereunder.
Under the Administration Agreement, CHC assists in the Fund's
administration and operation, including providing statistical and research data,
clerical services, internal compliance and various other administrative
services, including among other responsibilities, forwarding certain purchase
and redemption requests to the Transfer Agent, participation in the updating of
the prospectus, coordinating the preparation, filing, printing and dissemination
of reports to shareholders, coordinating the preparation of income tax returns,
arranging for the maintenance of books and records and providing the office
facilities necessary to carry out the duties thereunder. Under the
Administration Agreement, CHC may delegate all or any part of its
responsibilities thereunder.
In the fiscal years ended October 31, 1994 and October 31, 1995, the
Fund paid to CHC aggregate administration fees of $_______, and $_______,
respectively, after fee reductions of $_____, and $_____, respectively.
Distributor
Victory Broker-Dealer Services, Inc. (the "Distributor") serves as
distributor for the continuous offering of the shares of the Fund pursuant to a
Distribution Agreement between the Distributor and the Victory Portfolios.
Unless otherwise terminated, the Distribution Agreement will remain in effect
with respect to the Fund for two years, and thereafter for consecutive one-year
terms, provided that it is approved at least annually (i) by the Victory
Portfolios' Board of Trustees or by the vote of a majority of the outstanding
shares of the Fund, and (ii) by the vote of a majority of the Trustees of the
Victory Portfolios who are not parties to the Distribution Agreement or
interested
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<PAGE> 389
persons of any such party, cast in person at a meeting called for the purpose of
voting on such approval. The Distribution Agreement will terminate in the event
of its assignment, as defined in the 1940 Act. For the Fund's fiscal years ended
October 31, 1994 and October 31, 1995, [Concord] received $______ and $_______,
respectively, in underwriting commissions, and retained $____ and $__,
respectively.
Class B Shares Distribution Plan
The Victory Portfolios has adopted a Distribution Plan for Class B
shares of the Fund under Rule 12b-1 under the 1940 Act.
The Distribution Plan adopted by the Trustees with respect to the Class
B shares of the Fund provides that the Fund will pay the Distributor a
distribution fee under the Plan at the annual rate of 0.75% of the average daily
net assets of the Fund attributable to the Class B shares. The distribution fees
may be used by the Distributor for: (a) costs of printing and distributing the
Fund's prospectus, statement of additional information and reports to
prospective investors in the Fund; (b) costs involved in preparing, printing and
distributing sales literature pertaining to the Fund; (c) an allocation of
overhead and other branch office distribution-related expenses of the
Distributor; (d) payments to persons who provide support services in connection
with the distribution of the Fund's shares, including but not limited to, office
space and equipment, telephone facilities, answering routine inquiries regarding
the Fund, processing shareholder transactions and providing any other
shareholder services not otherwise provided by the Victory Portfolios' transfer
agent; (e) accruals for interest on the amount of the foregoing expenses that
exceed the distribution fee and the CDSC received by the Distributor; and (f)
any other expense primarily intended to result in the sale of the Fund's shares,
including, without limitation, payments to salespersons and dealers at the time
of the sale of shares, if applicable, and continuing fees to each such
salespersons and dealers, which fee shall begin to accrue immediately after the
sale of such shares.
The amount of the distribution fees payable by the Fund under the
Distribution Plan is not related directly to specific expenses incurred by the
Distributor, and the Distribution Plan does not obligate the Fund to reimburse
the Distributor for such expenses. The Distribution Fees set forth in the
Distribution Plan will be paid by the Fund to the Distributor unless and until
the Plan is terminated or not renewed with respect to the Fund; any distribution
or service expenses incurred by the Distributor on behalf of the Fund in excess
of payments of the distribution fees specified above which the Distributor has
accrued through the termination date are the sole responsibility and liability
of the Distributor and not an obligation of the Fund.
The Distribution Plan for the Class B shares specifically recognizes
that either Key Advisers, the Sub-Adviser or the Distributor, directly or
through an affiliate, may use its fee revenue, past profits, or other resources,
without limitation, to pay promotional and administrative expenses in connection
with the offer and sale of shares of the Fund. In addition, the Plan provides
that Key Advisers, the Sub-Adviser and the Distributor may use their respective
resources, including fee revenues, to make payments to third parties that
provide assistance in selling the Fund's shares, or to third parties, including
banks, that render shareholder support services.
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<PAGE> 390
The Class B Distribution Plan has been approved by the Trustees
including a majority of the Independent Trustees at a meeting called for that
purpose and by the holders of a majority of Class B shares of the Fund. The
Trustees carefully considered all pertinent factors relating to the
implementation of the Plan prior to its approval, and determined that there is a
reasonable likelihood that the Plan will benefit the Fund and its shareholders.
To the extent that the Plan gives Key Advisers, the Sub-Adviser or the
Distributor greater flexibility in connection with the distribution of shares of
the Fund, additional sales of the Fund's shares may result. Additionally,
certain shareholder support services may be provided more effectively under the
Plan by local entities with whom shareholders have other relationships.
Shareholder Servicing Plan
The Victory Portfolios, on behalf of the Class A and Class B shares of
the Fund, has adopted a Shareholder Servicing Plan to provide payments to
shareholder servicing agents (each a "Shareholder Servicing Agent") that provide
administrative support services to customers who may from time to time
beneficially own shares, which services include: (i) aggregating and processing
purchase and redemption requests for shares from customers and promptly
transmitting net purchase and redemption orders to our distributor or transfer
agent; (ii) providing customers with a service that invests the assets of their
accounts in shares pursuant to specific or pre-authorized instructions; (iii)
processing dividend and distribution payments on behalf of customers; (iv)
providing information periodically to customers showing their positions in
shares; (v) arranging for bank wires; (vi) responding to customer inquiries;
(vii) providing subaccounting with respect to shares beneficially owned by
customers or providing the information to the Victory Portfolios necessary for
subaccounting; (viii) if required by law, forwarding shareholder communications
from us (such as proxies, shareholder reports, annual and semi-annual financial
statements and dividend, distribution and tax notices) to customers; (ix)
forwarding to customers proxy statements and proxies containing any proposals
regarding this Plan; and (x) providing such other similar services as we may
reasonably request to the extent you are permitted to do so under applicable
statutes, rules or regulations. For expenses incurred and services provided
pursuant to the Shareholder Servicing Agreement, the Fund pays each Shareholder
Servicing Agent a fee computed daily and paid monthly, in amounts aggregating
not more than twenty-five one-hundredths of one percent (.25%) of the average
daily net assets of the Fund per year. A Shareholder Servicing Agent may
periodically waive all or a portion of its respective shareholder servicing fees
with respect to the Fund to increase the net income of the Fund available for
distribution as dividends.
Expenses
The Fund bears the following expenses relating to its operations:
taxes, interest, brokerage fees and commissions, fees of the Trustees of the
Victory Portfolios, Commission fees, state securities qualification fees, costs
of preparing and printing prospectuses for regulatory purposes and for
distribution to current shareholders, outside auditing and legal expenses,
advisory and administration fees, fees and out-of-pocket expenses of the
custodian and transfer agent, certain insurance premiums, costs of maintenance
of the Fund's existence, costs of shareholders' reports and meetings, and any
extraordinary expenses incurred in the Fund's operation.
If total expenses borne by the Fund in any fiscal year exceeds expense
limitations imposed by applicable state securities regulations, Key Advisers,
the Sub-Adviser or the Administrator will waive their fees to the extent such
excess expenses exceed such expense limitation in proportion to their respective
fees. As of the date of this Statement of Additional Information, the most
restrictive expense limitation applicable to the Fund limits its aggregate
annual expenses, including management and advisory fees but excluding interest,
taxes, brokerage commissions, and certain other expenses, to 2.5% of the first
$30 million of its average net assets, 2.0% of the next $70 million of its
average net assets, and 1.5% of its remaining average net assets. Any expenses
to be borne by Key Advisers, Sub-Adviser or the Administrator will be estimated
daily and reconciled and paid on a monthly basis. Fees imposed upon customer
accounts by Key Advisers, the Sub-Adviser, Key Trust Company of Ohio, N.A. or
its correspondents, affiliated banks
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<PAGE> 391
and other non-bank affiliates for cash management services are not fund expenses
for purposes of any such expense limitation.
Fund Accountant
BISYS Fund Services Ohio, Inc. serves as fund accountant for the Fund
pursuant to a fund accounting agreement with the Victory Portfolios dated June
5, 1995 (the "Fund Accounting Agreement"). As fund accountant for the Victory
Portfolios, BISYS Fund Services Ohio, Inc. calculates the Fund's Portfolios' net
asset value, the dividend and capital gain distributions, if any, and the yield.
BISYS Fund Services Ohio, Inc. also provides a current security position report,
a summary report of transactions and pending maturities, a current cash position
report, and maintains the general ledger accounting records for the Fund. Under
the Fund Accounting Agreement, BISYS Fund Services Ohio, Inc. is entitled to
receive annual fees of .03% of the first $100 million of the Fund's daily
average net assets, .02% of the next $100 million of Fund's daily average net
assets, and .01% of the Fund's remaining daily average net assets. These annual
fees are subject to a minimum monthly assets charge of $2,917 per tax-free fund,
and do not include out-of-pocket expenses or multiple class charges of $833 per
month assessed for each class of shares after the first class. In the fiscal
years ended October 31, 1994, and October 31, 1995, the Victory Portfolios paid
The Winsbury Service Corporation fund accounting fees (after fee waivers) of
$_______, and $_______, respectively, for the Fund.
Custodian
Cash and securities owned by the Fund are held by Key Trust Company of
Ohio, N.A. as custodian. Key Trust Company of Ohio, N.A. serves as custodian to
the Fund pursuant to a Custodian Agreement dated May 24, 1995. Under this
Agreement, Key Trust Company of Ohio, N.A. (i) maintains a separate account or
accounts in the name of the Fund; (ii) makes receipts and disbursements of money
on behalf of the Fund; (iii) collects and receives all income and other payments
and distributions on account of portfolio securities; (iv) responds to
correspondence from security brokers and others relating to its duties; and (v)
makes periodic reports to the Victory Portfolios' Trustees concerning the
Victory Portfolios' operations. Key Trust Company of Ohio, N.A. may, with the
approval of the Victory Portfolios and the custodian's own expense, open and
maintain a sub-custody account or accounts on behalf of the Fund, provided that
Key Trust Company of Ohio, N.A. shall remain liable for the performance of all
of its duties under its respective Custodian Agreement.
Transfer Agent
Primary Funds Service Corporation ("PFSC") serves as transfer agent and
dividend disbursing agent for the Fund, pursuant to a Transfer Agency and
Shareholder Servicing Agreement. Under its agreement with the Victory
Portfolios, PFSC has agreed (i) to issue and redeem shares of the Victory
Portfolios; (ii) to address and mail all communications by the Victory
Portfolios to its shareholders, including reports to shareholders, dividend and
distribution notices, and proxy material for its meetings of shareholders; (iii)
to respond to correspondence or inquiries by shareholders and others relating to
its duties; (iv) to maintain shareholder accounts and certain sub-accounts; and
(v) to make periodic reports to the Victory Portfolios' Trustees concerning the
Victory Portfolios' operations. For the services provided under the Transfer
Agency and Shareholder Servicing Agreement, PFSC receives a maximum monthly fee
of $1,250 from the Fund, and a maximum of $3.50 per account of the Fund.
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<PAGE> 392
Auditors
The financial highlights appearing in the Prospectus for the Fund, other than
unaudited information marked as such, has been derived from financial statements
of the Fund incorporated by reference in this Statement of Additional
Information which, for the two month period ended October 31, 1995 and fiscal
year ended August 31, 1995, has been audited by Coopers & Lybrand L.L.P. as set
forth in their report incorporated by reference herein, and are included in
reliance upon such report and on the authority of such firm as experts in
auditing and accounting. Information for the fiscal year ended August 31, 1994
has been audited by KPMG Peat Marwick L.L.P., independent accountants for the
Predecessor Fund, as set forth in their report incorporated by reference herein,
and are included in reliance upon such report and on the authority of such firm
as experts in auditing and accounting. Information for all other periods has
been audited by Ernst & Young, L.L.P., independent accountants to the
predecessor to the Predecessor Fund. Coopers & Lybrand L.L.P. serves as the
Victory Portfolios' auditors. Coopers & Lybrand L.L.P.'s address is 100 East
Broad Street, Columbus, Ohio 43215.
Legal Counsel
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, 919 Third Avenue, New
York, New York 10022 is counsel to the Victory Portfolios.
ADDITIONAL INFORMATION
Description of Shares
The Victory Portfolios (sometimes referred to as the "Trust") is a
Delaware business trust. Its Delaware Trust Instrument was adopted on December
6, 1995 and a certificate of Trust for the Trust was filed in Delaware on
December __, 1995. On February 29, 1996, the Victory Portfolios converted from a
Massachusetts business trust to a Delaware business trust.
The previously effective Massachusetts Declaration of Trust, pursuant
to which the Victory Portfolios was originally called the North Third Street
Fund, was filed with the Secretary of State of the Commonwealth of Massachusetts
on February 6, 1986. On September 22, 1986, an Amended and Restated Declaration
of Trust was filed to change the name of the Trust to The Emblem Fund and to
make certain other changes. A second amendment was filed October 23, 1986
providing for voting of shares in the aggregate except where voting of shares by
series is otherwise required by law. An amendment to the Amended and Restated
Declaration of Trust was filed on March 15, 1993 to change the name of the Trust
to The Society Funds. An Amended and Restated Declaration of Trust was then
filed on September 2, 1994 to change the name of the Trust to The Victory
Portfolios.
The currently effective Delaware Trust Instrument authorizes the
Trustees to issue an unlimited number of shares, which are units of beneficial
interest, without par value. The Victory Portfolios presently has twenty-eight
series of shares, which represent interests in the U.S. Government Obligations
Fund, the Prime Obligations Fund, the Tax-Free Money Market Fund, the Balanced
Fund, the Stock Index Fund, the Value Fund, the Fund, the Growth Fund, the
Special Value Fund, the Special Growth Fund, the Ohio Regional Stock Fund, the
International Growth Fund, the Limited Term Income Fund, the Government Mortgage
Fund, the Ohio Municipal Bond Fund, the Intermediate Income Fund, the Investment
Quality Bond Fund, the Florida Tax-Free Bond Fund, the Municipal Bond Fund, the
Convertible Securities Fund, the Short-Term U.S. Government Income Fund, the
Government Bond Fund, the Fund for Income, the National Municipal Bond Fund, the
New York Tax-Free Fund, the Institutional Money Market Fund, the Financial
Reserves Fund and the Ohio Municipal Money Market Fund, respectively. The
Victory
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<PAGE> 393
Portfolios' Delaware Trust Instrument authorizes the Trustees to divide
or redivide any unissued shares of the Victory Portfolios into one or more
additional series by setting or changing in any one or more respects their
respective preferences, conversion or other rights, voting power, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption.
Shares have no subscription or preemptive rights and only such
conversion or exchange rights as the Trustees may grant in their discretion.
When issued for payment as described in the Prospectus and this Statement of
Additional Information, the Victory Portfolios' shares will be fully paid and
non-assessable. In the event of a liquidation or dissolution of the Victory
Portfolios, shares of the Fund are entitled to receive the assets available for
distribution belonging to the Fund, and a proportionate distribution, based upon
the relative asset values of the respective funds of the Victory Portfolios, of
any general assets not belonging to any particular fund which are available for
distribution.
As described in the Prospectus under the caption "ADDITIONAL
INFORMATION -- Voting Rights," shares of the Victory Portfolios are entitled to
one vote per share (with proportional voting for fractional shares) on such
matters as shareholders are entitled to vote. On any matter submitted to a vote
of the shareholders, all shares are voted separately by individual series
(funds), and whenever the Trustees determine that the matter affects only
certain series, may be submitted for a vote by only such series, except (i) when
required by the 1940 Act, shares are voted in the aggregate and not by
individual series; and (ii) when the Trustees have determined that the matter
affects the interests of more than one series and that voting by shareholders of
all series would be consistent with the 1940 Act, then the shareholders of all
such series shall be entitled to vote thereon (either by individual series or by
shares voted in the aggregate, as the Trustees in their discretion may
determine). The Trustees may also determine that a matter affects only the
interests of one or more classes of a series, in which case (or if required
under the 1940 Act) such matter shall be voted on by such class or classes.
There will normally be no meetings of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority of the Trustees have
been elected by the shareholders, at which time the Trustees then in office will
call a shareholders' meeting for the election of Trustees. In addition, Trustees
may be removed from office by a vote of the holders of at least two-thirds of
the outstanding shares of the Victory Portfolios. A meeting shall be held for
such purpose upon the written request of the holders of not less than 10% of the
outstanding shares. Upon written request by ten or more shareholders meeting the
qualifications of Section 16(c) of the 1940 Act, (i.e., person who have been
shareholders for at least six months, and who hold shares having an NAV of at
least $25,000 or constituting 1% of the outstanding shares) stating that such
shareholders wish to communicate with the other shareholders for the purpose of
obtaining the signatures necessary to demand a meeting to consider removal of a
Trustee, the Victory Portfolios will provide a list of shareholders or
disseminate appropriate materials (at the expense of the requesting
shareholders). Except as set forth above, the Trustees shall continue to hold
office and may appoint their successors.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Victory Portfolios shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each fund of the Victory Portfolios affected by the
matter. For purposes of determining whether the approval of a majority of the
outstanding shares of a fund will be required in connection with a matter, a
fund will be deemed to be affected by a matter unless it is clear that the
interests of each fund in the matter are identical, or that the matter does not
affect any interest of the fund. Under Rule 18f-2, the approval of an investment
advisory agreement or any change in investment policy would be effectively acted
upon with respect to a fund only if approved by a majority of the outstanding
shares of such fund. However, Rule 18f-2 also provides that the ratification of
independent public accountants, the approval of principal underwriting
contracts, and the election of Trustees may be effectively acted upon by
shareholders of all of the Victory Portfolios voting without regard to series.
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Shareholder and Trustee Liability
The Delaware Business Trust Act provides that a shareholder of a
Delaware business trust shall be entitled to the same limitation of personal
liability extended to shareholders of Delaware corporations. The Delaware Trust
Instrument also provides for indemnification out of the trust property of any
shareholder held personally liable solely by reason of his or her being or
having been a shareholder. The Delaware Trust Instrument also provides that the
Victory Portfolios shall, upon request, assume the defense of any claim made
against any shareholder for any act or obligation of the Victory Portfolios, and
shall satisfy any judgment thereon. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is considered to be extremely
remote.
The Delaware Trust Instrument states further that no Trustee, officer,
or agent of the Victory Portfolios shall be personally liable in connection with
the administration or preservation of the assets of the Funds or the conduct of
the Victory Portfolios' business; nor shall any Trustee, officer, or agent be
personally liable to any person for any action or failure to act except for his
own bad faith, willful misfeasance, gross negligence, or reckless disregard of
his duties. The Declaration of Trust also provides that all persons having any
claim against the Trustees or the Victory Portfolios shall look solely to the
assets of the Victory Portfolios for payment.
Miscellaneous
As used in the Prospectus and in this Statement of Additional
Information, "assets belonging to a fund" (or "assets belonging to the Fund")
means the consideration received by the Victory Portfolios upon the issuance or
sale of shares in that fund, together with all income, earnings, profits, and
proceeds derived from the investment thereof, including any proceeds from the
sale, exchange, or liquidation of such investments, and any funds or payments
derived from any reinvestment of such proceeds and any general assets of the
Victory Portfolios, which general liabilities and expenses are not readily
identified as belonging to a particular fund (or the Fund) that are allocated to
that fund (or the Fund) by the Victory Portfolios' Trustees. The Trustees may
allocate such general assets in any manner they deem fair and equitable. It is
anticipated that the formula that will be used by the Trustees in making
allocations of general assets to a particular fund of the Victory Portfolios
will be the relative net asset value of the respective fund at the time of
allocation. Assets belonging to a particular fund are charged with the direct
liabilities and expenses of that fund, and with a share of the general
liabilities and expenses of each of the funds not readily identified as
belonging to a particular fund that are allocated to each fund in accordance
with its proportionate share of the net asset values of the Victory Portfolios
at the time of allocation. The timing of allocations of general assets and
general liabilities and expenses of the Victory Portfolios to a particular fund
will be determined by the Trustees of the Victory Portfolios and will be in
accordance with generally accepted accounting principles. Determinations by the
Trustees of the Victory Portfolios as to the timing of the allocation of general
liabilities and expenses and as to the timing and allocable portion of any
general assets with respect to a particular fund are conclusive.
As used in the Prospectus and in this Statement of Additional
Information, a "vote of a majority of the outstanding shares" or a "vote of
majority of the outstanding voting securities" of the Victory Portfolios or a
particular fund means the affirmative vote of the lesser of (a) 67% or more of
the shares of the Victory Portfolios or such fund present at a meeting at which
the holders of more than 50% of the outstanding shares of the Victory Portfolios
or such fund are represented in person or by proxy, or (b) more than 50% of the
outstanding shares of the Victory Portfolios or such fund.
Organizational expenses are allocated to each of the Victory Portfolios
and are amortized over a period of two years from the commencement of the public
offering of shares of the Victory Portfolios.
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The Victory Portfolios is registered with the Commission as an open-end
management investment company. Such registration does not involve supervision by
the Commission of the management or policies of the Victory Portfolios.
The Prospectus and this Statement of Additional Information omit
certain of the information contained in the Registration Statement filed with
the Commission. Copies of such information may be obtained from the Commission
upon payment of the prescribed fee.
The Prospectus and this Statement of Additional Information are not an
offering of the securities herein described in any state in which such offering
may not lawfully be made. No salesman, dealer, or other person is authorized to
give any information or make any representation other than those contained in
the Prospectus and this Statement of Additional Information.
The 1995 Annual Report to shareholders of The Victory Portfolios is
incorporated by reference herein. This report includes the financial statements
for the ended October 31, 1995. The opinion in the Annual Report of Coopers &
Lybrand L.L.P., independent accountants, is incorporated by reference herein in
its entirety to such Annual Report, and such financial statements are
incorporated in their entirety in reliance upon such report of Coopers & Lybrand
L.L.P. and on the authority of such firm as experts in auditing and accounting.
Delaware law authorizes electronic or telephonic communications between
shareholders and the Victory Portfolios. Under Delaware law, the Successor
Company has the flexibility to respond to future business contingencies. For
example, the Trustees will have the power to incorporate the Victory Portfolios,
to merge or consolidate it with another entity, to cause each fund to become a
separate trust, and to change the Victory Portfolios' domicile without a
shareholder vote. This flexibility could help reduce the expense and frequency
of future shareholder meetings for non-investment related issues.
INDEPENDENT AUDITOR'S REPORT
FINANCIAL STATEMENTS
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APPENDIX
The nationally recognized statistical rating organizations
(individually, an "NRSRO") that may be utilized by Key Advisers or the
Sub-Adviser with regard to portfolio investments for the Fund include Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), Duff
& Phelps, Inc. ("Duff"), Fitch Investors Service, Inc. ("Fitch"), IBCA Limited
and its affiliate, IBCA Inc. (collectively, "IBCA"), and Thomson BankWatch, Inc.
("Thomson"). Set forth below is a description of the relevant ratings of each
such NRSRO. The NRSROs that may be utilized by Key Advisers or the Sub-Adviser
and the description of each NRSRO's ratings is as of the date of this Statement
of Additional Information, and may subsequently change.
Long-Term Debt Ratings (may be assigned, for example, to corporate and
municipal bonds)
Description of the five highest long-term debt ratings by Moody's
(Moody's applies numerical modifiers ( e.g., 1, 2, and 3) in each rating
category to indicate the security's ranking within the category):
Aaa. Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa. Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements -
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times in the future. Uncertainty of
position characterizes bonds in this class.
Description of the five highest long-term debt ratings by S&P (S&P may
apply a plus (+) or minus (-) to a particular rating classification to show
relative standing within that classification):
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
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<PAGE> 397
A. Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB. Debt rated BB is regarded, on balance, as predominately speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposure to adverse conditions.
Description of the three highest long-term debt ratings by Duff:
AAA. Highest credit quality. The risk factors are negligible being only
slightly more than for risk-free U.S. Treasury debt.
AA+. High credit quality Protection factors are strong.
AA. Risk is modest but may vary slightly from time to time
AA-. because of economic conditions.
A+. Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
Description of the three highest long-term debt ratings by Fitch (plus
or minus signs are used with a rating symbol to indicate the relative position
of the credit within the rating category):
AAA. Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA. Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA." Because
bonds rated in the "AAA" and "AA" categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these
issues is generally rated "[-]+."
A. Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
IBCA's description of its three highest long-term debt ratings:
AAA. Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic or
financial conditions are unlikely to increase investment risk
significantly.
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<PAGE> 398
AA. Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic, or financial
conditions may increase investment risk albeit not very significantly.
A. Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
Short-Term Debt Ratings (may be assigned, for example, to commercial
paper, master demand notes, bank instruments, and letters of credit)
Moody's description of its three highest short-term debt ratings:
Prime-1. Issuers rated Prime-1 (or supporting institutions) have a
superior capacity for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a
strong capacity for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
S&P's description of its three highest short-term debt ratings:
A-1. This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to have extremely
strong safety characteristics are denoted with a plus sign (+).
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1."
A-3. Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
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Duff's description of its five highest short-term debt ratings (Duff
incorporates gradations of "1+" (one plus) and "1-" (one minus) to assist
investors in recognizing quality differences within the highest rating
category):
Duff 1+. Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
Duff 1. Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
Duff 1-. High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors are
very small.
Duff 2. Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good. Risk
factors are small.
Duff 3. Satisfactory liquidity and other protection factors qualify
issue as to investment grade.
Risk factors are larger and subject to more variation. Nevertheless,
timely payment is expected.
Fitch's description of its four highest short-term debt ratings:
F-1+. Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely
payment.
F-1. Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2. Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as for issues assigned F-1+ or F-1 ratings.
F-3. Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate, however, near-term adverse changes could cause
these securities to be rated below investment grade.
IBCA's description of its three highest short-term debt ratings:
A+. Obligations supported by the highest capacity for timely repayment.
A1. Obligations supported by a very strong capacity for timely
repayment.
A2. Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
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<PAGE> 400
Short-Term Loan/Municipal Note Ratings
Moody's description of its two highest short-term loan/municipal note
ratings:
MIG-1/VMIG-1. This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
MIG-2/VMIG-2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
S&P's description of its two highest municipal note ratings:
SP-1. Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
SP-2. Satisfactory capacity to pay principal and interest.
Short-Term Debt Ratings
Thomson BankWatch, Inc. ("TBW") ratings are based upon a qualitative
and quantitative analysis of all segments of the organization including, where
applicable, holding company and operating subsidiaries.
TBW Ratings do not constitute a recommendation to buy or sell
securities of any of these companies. Further, BankWatch does not suggest
specific investment criteria for individual clients.
The TBW Short-Term Ratings apply to commercial paper, other senior
short-term obligations and deposit obligations of the entities to which the
rating has been assigned.
The TBW Short-Term Ratings apply only to unsecured instruments that
have a maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an
untimely payment of principal or interest.
TBW-1. The highest category; indicates a very high degree of likelihood
that principal and interest will be paid on a timely basis.
TBW-2. The second highest category; while the degree of safety
regarding timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1".
TBW-3. The lowest investment grade category; indicates that while more
susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and interest in a
timely fashion is considered adequate.
TBW-4. The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
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Definitions of Certain Money Market Instruments
Commercial Paper
Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.
Certificates of Deposit
Certificates of Deposit are negotiable certificates issued against
funds deposited in a commercial bank or a savings and loan association for a
definite period of time and earning a specified return.
Bankers' Acceptances
Bankers' acceptances are negotiable drafts or bills of exchange,
normally drawn by an importer or exporter to pay for specific merchandise, which
are "accepted" by a bank, meaning, in effect, that the bank unconditionally
agrees to pay the face value of the instrument on maturity.
U.S. Treasury Obligations
U.S. Treasury Obligations are obligations issued or guaranteed as to
payment of principal and interest by the full faith and credit of the U.S.
Government. These obligations may include Treasury bills, notes and bonds, and
issues of agencies and instrumentalities of the U.S. Government, provided such
obligations are guaranteed as to payment of principal and interest by the full
faith and credit of the U.S. Government.
U.S. Government Agency and Instrumentality Obligations
Obligations issued by agencies and instrumentalities of the U.S.
Government include such agencies and instrumentalities as the Government
National Mortgage Association, the Export-Import Bank of the United States, the
Tennessee Valley Authority, the Farmers Home Administration, the Federal Home
Loan Banks, the Federal Intermediate Credit Banks, the Federal Farm Credit
Banks, the Federal Land Banks, the Federal Housing Administration, the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation, and
the Student Loan Marketing Association. Some of these obligations, such as those
of the Government National Mortgage Association are supported by the full faith
and credit of the U.S. Treasury; others, such as those of the Export-Import Bank
of the United States, are supported by the right of the issuer to borrow from
the Treasury; others, such as those of the Federal National Mortgage
Association, are supported by the discretionary authority of the U.S. Government
to purchase the agency's obligations; still others, such as those of the Student
Loan Marketing Association, are supported only by the credit of the
instrumentality. No assurance can be given that the U.S. Government would
provide financial support to U.S. Government-sponsored instrumentalities if it
is not obligated to do so by law. A Fund will invest in the obligations of such
instrumentalities only when the investment adviser believes that the credit risk
with respect to the instrumentality is minimal.
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STATEMENT OF ADDITIONAL INFORMATION
THE VICTORY PORTFOLIOS
THE NEW YORK TAX-FREE FUND
March 1, 1996
This Statement of Additional Information is not a Prospectus, but
should be read in conjunction with the Prospectus of The Victory Portfolios -
The New York Tax-Free Fund, dated the same date as the date hereof (the
"Prospectus"). This Statement of Additional Information is incorporated by
reference in its entirety into the Prospectus. Copies of the Prospectus may be
obtained by writing The Victory Portfolios at Primary Funds Service
Corporation, P.O. Box 9741, Providence, RI 02940-9741, or by telephoning toll
free 800-539-FUND or 800-539-3863.
<TABLE>
<S> <C> <C>
Investment Policies and Limitations 1 INVESTMENT ADVISER
Valuation of Portfolio Securities 5 KeyCorp Mutual Fund Advisers, Inc.
Additional Purchase and Redemption Information 9
Management of the Victory Portfolios 35 INVESTMENT SUB-ADVISER
Advisory and Other Contracts 43 Society Asset Management, Inc.
Additional Information 50
Independent Auditor's Report 53 ADMINISTRATOR
Financial Statements 53 Concord Holding Corporation
Appendix 54
DISTRIBUTOR
Victory Broker-Dealer Services, Inc.
TRANSFER AGENT
Primary Funds Service Corporation
CUSTODIAN
Key Trust Company of Ohio, N.A.
</TABLE>
<PAGE> 403
STATEMENT OF ADDITIONAL INFORMATION
The Victory Portfolios (the "Victory Portfolios") is an open-end
management investment company. The Victory Portfolios consist of twenty-eight
series of units of beneficial interest ("shares"), four of which series are
currently inactive. The outstanding shares represent interests in the
twenty-four separate investment portfolios which are currently active. This
Statement of Additional Information relates to the Victory New York Tax-Free
Fund (the "Fund") only. Much of the information contained in this Statement of
Additional Information expands on subjects discussed in the Prospectus.
Capitalized terms not defined herein are used as defined in the Prospectus. No
investment in shares of the Fund should be made without first reading the
Fund's Prospectus.
INVESTMENT LIMITATIONS
ADDITIONAL INFORMATION REGARDING FUND INSTRUMENTS
The following policies supplement the investment objectives and
policies of the Fund set forth in the Prospectus.
DELAYED-DELIVERY TRANSACTIONS. The Fund may buy and sell securities on a
delayed-delivery or when-issued basis. These transactions involve a commitment
by the Fund to purchase or sell specific securities at a predetermined price or
yield, with payment and delivery taking place after the customary settlement
period for that type of security (and more than seven days in the future).
Typically, no interest accrues to the purchaser until the security is
delivered. The Fund may receive fees for entering into delayed delivery
transactions.
When purchasing securities on a delayed-delivery basis, the Fund assumes the
rights and risks of ownership, including the risks of price and yield
fluctuations in addition to the risks associated with the Fund's other
investments. Because the Fund is not required to pay for securities until the
delivery date, these delayed-delivery purchases may result in a form of
leverage. When delayed-delivery purchases are outstanding, the Fund will set
aside cash and appropriate liquid assets in a segregated custodial account to
cover its purchase obligations. When the Fund has sold a security on a
delayed-delivery basis, it does not participate in further gains or losses with
respect to the security. If the other party to a delayed-delivery transaction
fails to deliver or pay for the securities, the Fund could miss a favorable
price or yield opportunity or suffer a loss.
The Fund may renegotiate delayed-delivery transactions after they are entered
into or may sell underlying securities before they are delivered, either of
which may result in capital gains or losses.
ILLIQUID INVESTMENTS are investments that cannot be sold or disposed of, within
seven business days, in the ordinary course of business at approximately the
prices at which they are valued. Under the supervision of the Trustees, the
adviser determines the liquidity of the Fund's investments and, through reports
from the Adviser, the Trustees monitor investments in illiquid instruments. In
determining the liquidity of the Fund's investments, the Adviser may consider
various factors, including (1) the frequency of trades and quotations, (2) the
number of dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, (4) the nature of the security (including any
demand or tender features), and (5) the nature of the marketplace for trades
(including the ability to assign or offset the Fund's rights and obligations
relating to the investment). Investments currently considered by the Fund to
be illiquid include repurchase agreements not entitling the holder to payment
of principal and interest within seven days, over the counter options,
non-government stripped fixed-rate mortgage-backed securities, and Restricted
Securities. Also, Key Advisers or the Sub-Adviser may determine some
securities to be illiquid. However, with respect to over-the- counter options
the Fund writes, all or a portion of the value of the underlying instrument may
be illiquid depending on the assets held to cover the option and the nature and
terms of any agreement the Fund may have to close out the option before
expiration. In the absence of market quotations, illiquid investments are
priced at fair value as determined in good faith by a committee appointed by
the Trustees. If through a change in values, net assets, or other
circumstances, the Fund were in a position where more than 15% of its net
assets were invested in illiquid securities, it would seek to take appropriate
steps to protect liquidity.
<PAGE> 404
REPURCHASE AGREEMENTS. In a repurchase agreement, the Fund purchases a
security and simultaneously commits to resell that security to the seller at an
agreed upon price on an agreed upon date within a number of days from the date
of purchase. The resale price reflects the purchase price plus an agreed upon
incremental amount which is unrelated to the coupon rate or maturity of the
purchased security. A repurchase agreement involves the obligation of the
seller to pay the agreed upon price, which obligation is in effect secured by
the value (at least equal to the amount of the agreed upon resale price and
marked to market daily) of the underlying security. The Fund may engage in a
repurchase agreement with respect to any security in which it is authorized to
invest. Since it is not possible to eliminate all risks from these
transactions (particularly the possibility of a decline in the market value of
the underlying securities, as well as delays and costs to the Fund in
connection with bankruptcy proceedings), it is the Victory Portfolios' current
policy to limit repurchase agreements for the Fund to those parties whose
creditworthiness has been reviewed and found satisfactory by Key Advisers or
the Sub-Adviser. Repurchase Agreements are considered by the staff of the
Commission to be loans by the Fund.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, the Fund
sells the portfolio instrument to another party, such as a bank or
broker-dealer, in return for cash and agrees to repurchase the instrument at a
particular price and time. While a reverse repurchase agreement is
outstanding, the Fund will maintain appropriate liquid assets in a segregated
custodial account to cover its obligation under the agreement. The Fund will
enter into reverse repurchase agreements only with parties whose
creditworthiness is deemed satisfactory by Key Advisers or the Sub-Adviser.
Such transactions may increase fluctuations in the market value of the Fund's
assets, and may be viewed as a form of leverage.
RESTRICTED SECURITIES generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the 1933 Act, or
in a registered public offering. Where registration is required, the Fund may
be obligated to pay all or part of the registration expense and a considerable
period may elapse between the time it decides to seek registration and the time
the Fund may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to
develop, the Fund might obtain a less favorable price than prevailed when it
decided to seek registration of the shares.
SECURITIES LENDING. The Fund may lend securities to parties such as
broker-dealers or institutional investors. Securities lending allows the Fund
to retain ownership of the securities loaned and, at the same time, to earn
additional income. Since there may be delays in the recovery of loaned
securities, or even a loss of rights in collateral supplied should the borrower
fail financially, loans will be made only to parties deemed by Key Advisers or
the Sub-Adviser to be of good standing. Furthermore, they will only be made
if, in the judgment of Key Advisers or the Sub-Adviser, the consideration to be
earned from such loans would justify the risk.
It is the current view of the staff of the Commission that the Fund may engage
in loan transactions only under the following conditions: (1) the Fund must
receive 100% collateral in the form of cash or cash equivalents (e.g., U.S.
Treasury bills or notes) from the borrower; (2) the borrower must increase the
collateral whenever the market value of the securities loaned (determined on a
daily basis) rises above the value of the collateral; (3) after giving notice,
the Fund must be able to terminate the loan at any time; (4) the Fund must
receive reasonable interest on the loan or a flat fee from the borrower, as
well as amounts equivalent to any dividends, interest, or other distributions
on the securities loaned and to any increase in market value; (5) the Fund may
pay only reasonable custodian fees in connection with the loan; and (6) the
Board of Trustees must be able to vote proxies on the securities loaned,
either by terminating the loan or by entering into an alternative arrangement
with the borrower.
Cash received through loan transactions may be invested in any security in
which the Fund are authorized to invest. Investing this cash subjects that
investment, as well as the security loaned, to market forces (i.e., capital
appreciation or depreciation).
The Fund does not normally engage in short-term trading but may do so when Key
Advisers or the Sub-Adviser believes a particular action will contribute to the
achievement of the Fund's investment objective. The portfolio turnover rates
for Class A Shares for the year ended December 31, 1993 and the period ended
October 31, 1994
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were 12% and 18%, respectively. The portfolio turnover rate for Class B Shares
for the period ended October 31, 1994 was 18%.
The Fund will not:
(1) Purchase the securities of any issuer (except the United States
government, its agencies and instrumentalities, and the State of New York and
its municipalities) if as a result more than 25% of its total assets are
invested in the securities of a single issuer, and with regard to 50% of total
assets, if as a result more than 5% of its total assets would be invested in
the securities of such issuer.
In determining the issuer of a tax-exempt security, each state and
each political subdivision, agency, and instrumentality of each state and each
multi-state agency of which such state is a member is a separate issuer. Where
securities are backed only by assets and revenues of a particular
instrumentality, facility or subdivision, such entity is considered the issuer.
(2) Invest more than 25% of the Fund's total assets in securities whose
interest payments are derived from revenue from similar projects;
(3) Borrow money, except that (a) the Fund manager may enter into
commitments to purchase securities in accordance with the Fund's investment
program including delayed delivery and when-issued securities and reverse
repurchase agreements, provided that the total amount of any such borrowing may
not exceed 33-1/3% of the Fund's total assets; and (b) the Fund may borrow
money for temporary or emergency purposes and not for investment purposes, and
then only in an amount not exceeding 5% of the value of the Fund's total assets
at the time of the borrowing;
(4) Issue any senior security (as defined in the 1940 Act), except that
(a) the Fund may engage in transactions which may result in the issuance of
senior securities to the extent permissible under the applicable regulations
and interpretations of the 1940 Act or an exemptive order; (b) the Fund may
acquire other securities that may be deemed senior securities to the extent
permitted under applicable regulations or interpretations of the 1940 Act; (c)
subject to the restrictions set forth below, the Fund may borrow money as
authorized by the 1940 Act;
(5) Underwrite any issue of securities;
(6) Purchase or sell commodities or commodity contracts;
(7) Make loans to other persons except through the use of repurchase
agreements, the purchase of commercial paper or by lending portfolio
securities. For these purposes, the purchase of a portion of an issue of debt
securities which is part of an issue to the public shall not be considered the
making of a loan.
With respect to non-municipal bond investments, in addition to the foregoing
limitations, the Fund will not purchase securities (other than securities of
the United States government, its agencies or instrumentalities), if as a
result of such purchase 25% or more of the total Fund's assets would be
invested in any one industry, or enter into a repurchase agreement if, as a
result thereof, more than 10% of its total assets would be subject to
repurchase agreements maturing in more than seven days.
THE FOLLOWING INVESTMENT LIMITATIONS ARE NOT FUNDAMENTAL AND MAY BE CHANGED
WITHOUT SHAREHOLDER APPROVAL.
(i) The Fund does not currently intend to purchase the securities of any
issuer if those officers and Trustees of the Victory Portfolios and those
officers and directors of the Administrator (as defined below) who individually
own more than 1/2 of 1% of the securities of such issuer together own more
than 5% of such issuer's securities.
(ii) The Fund does not currently intend to purchase the securities of any
issuer (other than securities issued or guaranteed by domestic or foreign
governments or political subdivisions thereof) if, as a result, more than 5% of
its
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<PAGE> 406
total assets would be invested in the securities of business enterprises that,
including predecessors, have a record of less than 3 years of continuous
operation.
(iii) The Fund may not purchase any security or enter into a repurchase
agreement if, as a result, more than 10% of the Fund's net assets would be
invested in repurchase agreements not entitling the holder to payment of
principal and interest within seven days and in securities that are illiquid by
virtue of legal or contractual restriction on resale or the absence of a
readily available market.
The Fund may not:
(iv) Make short sales of securities or purchase any securities on margin,
except for such short-term credits as are necessary for the clearance of
transactions;
(v) Pledge, mortgage or hypothecate its assets, except that, to secure
borrowings permitted by subparagraph (3) above under the Fund's fundamental
investment limitations, it may pledge securities having a market value at the
time of pledge not exceeding 10% of the value of the Fund's total assets;.
(vi) Purchase or sell oil, gas or other mineral exploration or development
programs; or
(vii) Participate on a joint, or a joint and several, basis in any trading
account in securities except pursuant to an exemptive order or otherwise
permitted by the 1940 Act; the "bunching" of orders for the sale or purchase of
portfolio securities with other funds advised by Society or its affiliates to
reduce brokerage commissions or otherwise to achieve best overall execution is
not considered participation in a trading account in securities; or
(viii) The Fund shall not invest in the securities of other investment
companies, except that the Fund may invest in shares of tax-exempt money market
funds that are not "affiliated persons" of the Fund and that limit their
investments to securities appropriate for the Fund, provided investment by the
Fund is limited to: (a) ten percent of the Fund's assets; (b) five percent of
the Fund's total assets in the shares of a single tax-exempt money market fund;
and (c) not more than three percent of the net assets of any one acquired
tax-exempt money market fund. The investment adviser will waive the portion of
its fee attributable to the assets of the Fund invested in such tax-exempt
money market funds to the extent required by the laws of any jurisdiction in
which shares of the Fund are registered for sale.
In the event the Fund acquires liquid assets as a result of the exercise of a
security interest relating to municipal bonds, the Fund's trustees will dispose
of such assets as promptly as possible.
State Regulations
In addition, the Fund, so long as its shares are registered under the
securities laws of the State of Texas and such restrictions are required as a
consequence of such registration, is subject to the following non-fundamental
policies, which may be modified in the future by the Trustees without a vote of
the Fund's shareholders: (i) the Victory Portfolios has represented to the
Texas State Securities Board, that it will not invest in oil, gas or mineral
leases or purchase or sell real property (including limited partnership
interests, but excluding readily marketable securities of companies which
invest in real estate); and (ii) the Victory Portfolios has represented to the
Texas State Securities Board will not invest more than 5% of its net assets in
warrants valued at the lower of cost or market; provided that, included within
that amount, but not to exceed 2% of net assets, may be warrants which are not
listed on the New York or American Stock Exchanges. For purposes of this
restriction, warrants acquired in units or attached to securities are deemed to
be without value.
The policies and limitations listed above supplement those set forth
in the Prospectus. Unless otherwise noted, whenever an investment policy or
limitation states a maximum percentage of the Fund's assets that may be
invested in any security or other asset, or sets forth a policy regarding
quality standards, such standard or percentage limitation will be determined
immediately after and as a result of the Fund's acquisition of such security or
other asset except in the case of borrowing (or other activities that may be
deemed to result in the issuance of a "senior security"
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under the 1940 Act). Accordingly, any subsequent change in values, net assets,
or other circumstances will not be considered when determining whether the
investment complies with the Fund's investment policies and limitations. If
the value of the Fund's holdings of illiquid securities at any time exceeds the
percentage limitation applicable at the time of acquisition due to subsequent
fluctuations in value or other reasons, the Board of Trustees will consider
what actions, if any, are appropriate to maintain adequate liquidity.
FUTURE DEVELOPMENTS
The Fund may take advantage of other investment practices which are
not at present contemplated for use by the Fund or which currently are not
available but which may be developed, to the extent such investment practices
are both consistent with the Fund's investment objective and are legally
permissible for the Fund. Such investment practices, if they arise, may
involve risks which exceed those involved in the activities described in the
Prospectus and Statement of Additional Information. Prior to commencing any
new investment practice, the Fund will notify shareholders by means of
prospectus supplement.
Portfolio Turnover
The turnover rate stated in the Prospectus for the Fund's investment
portfolio is calculated by dividing the lesser of the Fund's purchases or sales
of portfolio securities for the year by the monthly average value of the
portfolio securities. The calculation excludes all securities whose
maturities, at the time of acquisition, were one year or less.
VALUATION OF PORTFOLIO SECURITIES
Investment securities held by the Fund are valued on the basis of
valuations provided by an independent pricing service, approved by the Board of
Trustees, which uses information with respect to transactions of a security,
quotations from dealers, market transactions in comparable securities, and
various relationships between securities, in determining value. Specific
investment securities which are not priced by the approved pricing service will
be valued according to quotations obtained from dealers who are market makers
in those securities. Investment securities with less than 60 days to maturity
when purchased are valued at amortized cost which approximates market value.
Investment securities not having readily available market quotations will be
priced at fair value using a methodology approved in good faith by the Board of
Trustees.
PERFORMANCE
As described in the Prospectus, from time to time the "standardized
yield," "dividend yield," "average annual total return," "total return," and
"total return at net asset value" of an investment in each class of Fund shares
may be advertised. An explanation of how yields and total returns are
calculated for each class and the components of those calculations are set
forth below.
Yield and total return information may be useful to investors in
reviewing the Fund's performance. The Fund's advertisement of its performance
must, under applicable Commission rules, include the average annual total
returns for each class of shares of the Fund for the 1, 5 and 10-year period
(or the life of the class, if less) as of the most recently ended calendar
quarter. This enables an investor to compare the Fund's performance to the
performance of other funds for the same periods. However, a number of factors
should be considered before using such information as a basis for comparison
with other investments. An investment in the Fund is not insured; its yield
and total return are not guaranteed and normally will fluctuate on a daily
basis. When redeemed, an investor's shares may be worth more or less than
their original cost. Yield and total return for any given past period are not
a prediction or representation by the Victory Portfolios of future yields or
rates of return on its shares. The yield and total returns of the Class A and
Class B shares of the Fund are affected by portfolio quality, portfolio
maturity, the type of investments the Fund holds and its operating expenses.
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STANDARDIZED YIELDS. The Fund's "yield" (referred to as "standardized
yield") for a given 30-day period for a class of shares is calculated using the
following formula set forth in rules adopted by the Commission that apply to
all funds that quote yields:
Standardized Yield = 2 [(a-b + 1)6 - 1]
cd
The symbols above represent the following factors:
a = dividends and interest earned during the 30-day period.
b = expenses accrued for the period (net of any expense
reimbursements).
c = the average daily number of shares of that class outstanding
during the 30-day period that were entitled to receive
dividends.
d = the maximum offering price per share of the class on the last
day of the period, adjusted for undistributed net investment
income.
The standardized yield of a class of shares for a 30-day period may
differ from its yield for any other period. The Commission formula assumes
that the standardized yield for a 30-day period occurs at a constant rate for a
six-month period and is annualized at the end of the six-month period. This
standardized yield is not based on actual distributions paid by the Fund to
shareholders in the 30-day period, but is a hypothetical yield based upon the
net investment income from the Fund's portfolio investments calculated for that
period. The standardized yield may differ from the "dividend yield" of that
class, described below. Additionally, because each class of shares is subject
to different expenses, it is likely that the standardized yields of the Fund
classes of shares will differ. The yield on Class A shares for the 30-day
period ended October 31, 1995 was ____% .
DIVIDEND YIELD AND DISTRIBUTION RETURN. From time to time the Fund
may quote a "dividend yield" or a "distribution return" for each class.
Dividend yield is based on the Class A or Class B share dividends derived from
net investment income during a stated period. Distribution return includes
dividends derived from net investment income and from realized capital gains
declared during a stated period. Under those calculations, the dividends
and/or distributions for that class declared during a stated period of one year
or less (for example, 30 days) are added together, and the sum is divided by
the maximum offering price per share of that class A) on the last day of the
period. When the result is annualized for a period of less than one year, the
"dividend yield" is calculated as follows:
<TABLE>
<S> <C>
Dividend Yield of the Class = Dividends of the Class + Number of days
------------------------------------------------------ (accrual period) x 365
Max. Offering Price of the Class (last day of period)
</TABLE>
The maximum offering price for Class A shares includes the maximum
front-end sales charge. For Class B shares, the maximum offering price is the
net asset value per share, without considering the effect of contingent
deferred sales charges.
From time to time similar yield or distribution return calculations
may also be made using the Class A net asset value (instead of its respective
maximum offering price) at the end of the period. The dividend yields on Class
A shares at maximum offering price and net asset value for the 30-day period
ended October 31, 1995 were ____% and ____%, respectively.
TOTAL RETURNS. The "average annual total return" of each class is an
average annual compounded rate of return for each year in a specified number of
years. It is the rate of return based on the change in value of a hypothetical
initial investment of $1,000 ("P" in the formula below) held for a number of
years ("n") to achieve an Ending Redeemable Value ("ERV"), according to the
following formula:
( ERV )1n - 1 = Average Annual Total Return
---------
( P )
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<PAGE> 409
The cumulative "total return" calculation measures the change in value
of a hypothetical investment of $1,000 over an entire period of years. Its
calculation uses some of the same factors as average annual total return, but
it does not average the rate of return on an annual basis. Total return is
determined as follows:
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ERV - P = Total Return
-------
P
In calculating total returns for Class A shares, the current maximum
sales charge of 4.75% (as a percentage of the offering price) is deducted from
the initial investment ("P") (unless the return is shown at net asset value, as
discussed below). For Class B shares, the payment of the applicable contingent
deferred sales charge (5.0% for the first year, 4.0% for the second year, 3.0%
for the third and fourth years, 2.0% in the fifth year, 1.0% in the sixth year
and none thereafter) is applied to the investment result for the time period
shown (unless the total return is shown any net asset value, as described
below). Total returns also assume that all dividends and capital gains
distributions during the period are reinvested to buy additional shares at net
asset value per share, and that the investment is redeemed at the end of the
period. The average annual total return and cumulative total return on Class A
shares for the period October 20, 1989 (commencement of operations) to ____,
1995 (life of fund) at maximum offering price were ___% and ____%,
respectively. For the one and five year periods ended October 31, 1995 annual
total returns for Class A shares were ______% and _____%, respectively.
From time to time the Fund may also quote an "average annual total
return at net asset value" or a cumulative "total return at net asset value"
for Class A or Class B shares. It is based on the difference in net asset
value per share at the beginning and the end of the period for a hypothetical
investment in that class of shares (without considering front-end or contingent
sales charges) and takes into consideration the reinvestment of dividends and
capital gains distributions. The average annual total return and cumulative
total return on Class A shares for the period October 20, 1989 (commencement of
operations) to October 31, 1995 (life of fund), at net asset value, was ____%
and ___%, respectively. For the one and five year periods ended October 31,
1995, average annual total return for Class A shares was ___% and ___%,
respectively.
OTHER PERFORMANCE COMPARISONS. From time to time the Fund may publish
the ranking of the performance of its Class A or Class B shares by Lipper
Analytical Services, Inc. ("Lipper"), a widely-recognized independent mutual
fund monitoring service. Lipper monitors the performance of regulated
investment companies, including the Fund, and ranks the performance of the
Fund's classes against (i) all other funds, excluding money market funds, and
(ii) all other government bond funds. The Lipper performance rankings are
based on total return that includes the reinvestment of capital gains
distributions and income dividends but does not take sales charges or taxes
into consideration.
From time to time the Fund may publish the ranking of the performance
of its Class A or Class B shares by Morningstar, Inc., an independent mutual
fund monitoring service that ranks mutual funds, including the Fund, in broad
investment categories (equity, taxable bond, tax-exempt and other) monthly,
based upon each fund's three, five and ten- year average annual total returns
(when available) and a risk adjustment factor that reflects Fund performance
relative to three-month U.S. Treasury bill monthly returns. Such returns are
adjusted for fees and sales loads. There are five ranking categories with a
corresponding number of stars: highest (5), above average (4), neutral (3),
below average (2) and lowest (1). Ten percent of the funds, series or classes
in an investment category receive 5 stars, 22.5% receive 4 stars, 35% receive 3
stars, 22.5% receive 2 stars, and the bottom 10% receive one star. Morningstar
ranks the Class A and Class B shares of the Fund in relation to other taxable
bond funds.
The total return on an investment made in Class A or Class B shares of
the Fund may be compared with the performance for the same period of one or
more of the following indices: the Consumer Price Index, the Salomon Brothers
World Government Bond Index, the Standard & Poor's 500 Index, the Shearson
Lehman Government/Corporate Bond Index, the Lehman Aggregate Bond Index and the
J.P. Morgan Government Bond Index. Other indices may be used from time to
time. The Consumer Price Index is generally considered to be a measure of
inflation. The Salomon Brothers World Government Bond Index generally
represents the performance of government debt securities of various markets
throughout the world, including the United States. The Lehman
Government/Corporate Bond Index generally represents the performance of
intermediate and long-term government and investment grade corporate debt
securities. The Lehman Aggregate Bond Index measures the performance of U.S.
corporate bond issues, U.S. government securities and mortgaged-backed
securities. The J.P. Morgan Government Bond Index generally represents the
performance of government bonds issued by various countries
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including the United States. The S&P 500 Index is a composite index of 500
common stocks generally regarded as an index of U.S. stock market performance.
The foregoing bond indices are unmanaged indices of securities that do not
reflect reinvestment of capital gains or take investment costs into
consideration, as these items are not application to indices.
From time to time, the yields and the total returns of Class A or
Class B shares of the Fund may be quoted in and compared to other mutual funds
with similar investment objective in advertisements, shareholder reports or
other communications to shareholders. The Fund may also include calculations
in such communications that describe hypothetical investment results. (Such
performance examples will be based on an express set of assumptions and are not
indicative of the performance of any Fund.) Such calculations may from time to
time include discussions or illustrations of the effects of compounding in
advertisements. "Compounding" refers to the fact that, if dividends or other
distributions on a the Fund investment are reinvested by being paid in
additional Fund shares, any future income or capital appreciation of the Fund
would increase the value, not only of the original Fund investment, but also of
the additional Fund shares received through reinvestment. As a result, the
value of the Fund investment would increase more quickly than if dividends or
other distributions had been paid in cash. The Fund may also include
discussions or illustrations of the potential investment goals of a prospective
investor (including but not limited to tax and/or retirement planning),
investment management techniques, policies or investment suitability of Fund,
economic conditions, legislative developments (including pending legislation),
the effects of inflation and historical performance of various asset classes,
including but not limited to stocks, bonds and Treasury bills. From time to
time advertisements or communications to shareholders may summarize the
substance of information contained in shareholder reports (including the
investment composition of a Fund, as well as the views of the investment
adviser as to current market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
related matters believed to be of relevance to Fund. The Fund may also include
in advertisements, charts, graphs or drawings which illustrate the potential
risks and rewards of investment in various investment vehicles, including but
not limited to stock, bonds, Treasury bills and shares of Fund as well as
charts or graphs which illustrate strategies such as dollar cost averaging, and
comparisons of hypothetical yields of investment in tax-exempt versus taxable
investments. In addition, advertisements or shareholder communications may
include a discussion of certain attributes or benefits to be derived by an
investment in Fund. Such advertisements or communications may include symbols,
headlines or other material which highlight or summarize the information
discussed in more detail therein. With proper authorization, Fund may reprint
articles (or excerpts) written regarding the Fund and provide them to
prospective shareholders. Performance information with respect to the Fund is
generally available by calling 1-800-539-3863.
Investors may also judge, and the Fund may at times advertise,
performance of Class A or Class B shares by comparing it to the performance of
other mutual funds or mutual fund portfolios with comparable investment
objectives and policies, which performance may be contained in various
unmanaged mutual fund or market indices or rankings such as those prepared by
Dow Jones & Co., Inc., Standard & Poor's Corporation, Lehman Brothers, Merrill
Lynch, and Salomon Brothers, and in publications issued by Lipper Analytical
Services, Inc. and in the following publications: IBC/Donoghue's Money Fund
Reports, Ibottson Associates, Inc., Morningstar, CDA/Wiesenberger, Money
Magazine, Forbes, Barron's, The Wall Street Journal, The New York Times,
Business Week, American Banker, Fortune, Institutional Investor, U.S.A. Today.
In addition to yield information, general information about the Fund that
appears in a publication such as those mentioned above may also be quoted or
reproduced in advertisements or in reports to shareholders.
Advertisements and sales literature may include discussions of
specifics of the portfolio manager's investment strategy and process,
including, but not limited to, descriptions of security selection and analysis.
Advertisements may also include descriptive information about the
investment adviser, including, but not limited to, its status within the
industry, other services and products it makes available, total assets under
management, its investment philosophy.
When comparing yield, total return and investment risk of an
investment in Class A or Class B shares of the Fund with other investments,
investors should understand that certain other investments have different risk
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characteristics than an investment in shares of the Fund. For example,
certificates of deposit may have fixed rates of return and may be insured as to
principal and interest by the FDIC, while the Fund's returns will fluctuate and
its share values and returns are not guaranteed. Money market accounts offered
by banks also may be insured by the FDIC and may offer stability of principal.
U.S. Treasury securities are guaranteed as to principal and interest by the
full faith and credit of the U.S. government. Money market mutual funds may
seek to offer a fixed price per share.
ADDITIONAL INFORMATION CONCERNING NEW YORK ISSUERS
As described in the Prospectus, except during temporary periods, the Fund will
invest substantially all of its assets in New York municipal securities. In
addition, the specific New York municipal securities in which the Fund will
invest will change from time to time. The Fund is therefore susceptible to
political, economic, regulatory or other factors affecting issuers of New York
municipal securities. The following information constitutes only a brief
summary of a number of the complex factors which may affect issuers of New York
municipal securities and does not purport to be a complete or exhaustive
description of all adverse conditions to which issuers of New York municipal
securities may be subject. Such information is derived from official
statements utilized in connection with the issuance of New York municipal
securities, as well as from other publicly available documents. Such
information has not been independently verified by the Fund, and the Fund
assumes no responsibility for the completeness or accuracy of such information.
Additionally, many factors, including national, economic, social and
environmental policies and conditions, which are not within the control of such
issuers, could have a material adverse impact on the financial condition of
such issuers. The Fund cannot predict whether or to what extent such factors
or other factors may affect the issuers of New York municipal securities, the
market value or marketability of such securities or the ability of the
respective issuers of such securities acquired by the Fund to pay interest on
or principal of such securities. The creditworthiness of obligations issued by
local New York issuers may be unrelated to the creditworthiness of obligations
issued by the State of New York, and there is no responsibility on the part of
the State of New York to make payments on such local obligations. There may be
specific factors that are applicable in connection with investment in the
obligations of particular issuers located within New York, and it is possible
the Fund will invest in obligations of particular issuers as to which such
specific factors are applicable. However, the information set forth below is
intended only as a general summary and not as a discussion of any specific
factors that may affect any particular issuer of New York municipal securities.
The Fund may include municipal securities issued by New York State (the
"State"), by its various public bodies (the "Agencies") and/or by other
entities located within the State, including the City of New York (the "City")
and political subdivisions thereof and/or their agencies.
NEW YORK STATE
The State's most recently completed fiscal year commenced on April 1, 1994, and
ended on March 31, 1995, and is referred to herein as the State's 1994-95
fiscal year.
The State's budget for the 1994-95 fiscal year was enacted by the Legislature
on June 7, 1994, more than two months after the start of the fiscal year.
Prior to adoption of the budget, the Legislature enacted appropriations for
disbursements considered to be necessary for State operations and other
purposes, including all necessary appropriations for debt service. The State
Financial Plan for the 1994-95 fiscal year was formulated on June 16, 1994 and
is based on the State's budget as enacted by the Legislature and signed into
law by the Governor. The State Financial Plan will be updated pursuant to law
in July and October and by February 1.
1994-95 FISCAL YEAR STATE FINANCIAL PLAN
The State issued the third quarterly update to the current year State Financial
Plan on February 1, 1995. A discussion of the two prior quarterly updates
precedes the discussion of the third quarterly update.
Prior Quarterly Cash-basis Updates
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The State issued the first of the three required quarterly updates to the
cash-basis 1994-95 State Financial Plan on July 29, 1994. That update
reflected an analysis of actual receipts and disbursements in the first quarter
of the fiscal year, as well as the impact of legislative actions and other
developments after the enactment of the budget. Following so closely after the
initial formulation of the State Financial Plan reflecting the enactment of the
State's 1994-95 budget, the update reflected no significant changes and did not
alter the balanced position of the State's General Fund in the State Financial
Plan. The economic forecast at that time remained unchanged, following several
weeks of mixed news about the pace of the economy of the nation and New York
State.
The State issued its second quarterly, or mid-year, update to the cash-basis
1994-95 State Financial Plan on October 28, 1994. The update projected a
year-end surplus of $14 million in the General Fund, with estimated receipts
reduced by $267 million and estimated disbursements reduced by $281 million,
compared to the State Financial Plan as initially formulated. In that update
the State revised its forecast of national and State economic activity through
the end of calendar year 1995. Although the national economic forecast was
basically unchanged from that on which the initial formulation of the State
Financial Plan was based, the revised State economic forecast was marginally
weaker.
Receipts through the first two quarters of the 1994-95 fiscal year fell short
of expectations by $132 million. These shortfalls were concentrated in the
personal and business income taxes, where quarterly personal income, bank and
insurance tax payments were lower than expected. Based on the revised economic
outlook and this receipt shortfall, projected General Fund receipts for the
1994-95 fiscal year were reduced by $267 million. Estimates of the yield of
the personal income tax were lowered by $334 million, primarily reflecting weak
estimated tax collections and lower withholding collections due to reduced
expectations for wage and salary growth -- particularly securities industry
bonuses -- during the balance of the year. Business tax receipts were also
reduced modestly, reflecting revised estimates of liability and lower payments
from banks and insurance companies; however, these reductions were partially
offset by increases in the general business corporation and utility taxes.
Estimates in other receipt categories were increased by a total of $113
million. The largest increases were in the sales tax, reflecting collections
to date and the revised economic outlook, and estate taxes which were buoyed by
unexpectedly large collections during the first six months of the 1994-95
fiscal year. Increases were also made in estimates for the real property gains
tax and the real estate transfer tax, based on strong collections to date.
Disbursements through the first six months of the fiscal year fell short of
projections by $153 million, owing in part to changes in the timing of payments
but also to lower spending trends in certain programs, most notably in payments
for social services programs. Projections of 1994-95 General Fund
disbursements were reduced by $281 million, with savings in virtually every
category of the State Financial Plan. Payments for social services programs
were projected to be $140 million lower than projected in the State Financial
Plan as initially formulated, reflecting experience through the first six
months of the fiscal year and an initiative to increase Federal reimbursement
for administrative costs. Although school aid costs increased reflecting
revisions to the current and two prior school years based on final audits and
revised aid claims, these costs were expected to be offset by recoveries from
the Federal government in support of programs for pupils with disabilities.
Other reductions reflected lower pension costs, increased health insurance
dividends, debt management savings, and slower spending for certain programs
and capital projects. Higher spending was projected for a single program --
the Department of Correctional Services -- to accommodate an unanticipated
increase in the State's prison population.
Third Quarterly Cash-basis Update
On February 1, 1995, as part of his Executive Budget for the 1995-96 fiscal
year, the Governor submitted the third quarterly update to the State Financial
Plan for the current year. This update reflects changes to receipts and
disbursements based on: (1) an updated economic forecast for both the nation
and the State, (2) an analysis of actual receipts and disbursements through the
first nine months of the fiscal year, (3) an analysis of changing program
requirements, and (4) the Governor's proposed plan to close a potential $259
million deficit. The changes are reflected after the mid-year update to the
State Financial Plan was restated to conform to certain accounting treatments
used by the State Comptroller in reporting actual results, but do not affect
the actual closing cash position of the General Fund.
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Estimates of General Fund receipts for the current fiscal year have been
reduced by $585 million, from the mid-year update, and are down $1.058 billion
from the budget enacted in June 1994 (of which $227 million results from the
restatement of the State Financial Plan, noted above). The reductions from the
mid-year update are concentrated in (1) the personal income tax where lower
withholdings and estimated taxes reflect the cessation of job growth in the
last half of 1994, and even more severe reductions in brokerage industry
bonuses than expected earlier, and deferrals of capital gains realizations in
anticipation of potential Federal tax changes, and (2) the bank tax, where
substantial overpayments of 1993 liability have depressed net collections in
the current year. Offsetting this projected loss in receipts, however, are
projected reductions of $312 million in disbursements from the mid-year update,
attributable to lower spending through the first nine months of the fiscal
year, and to the use of greater-than-anticipated receipts from the State
lottery. The total reduction in projected disbursements from the budget
enacted in June -- including payments from reserve funds -- is $1.008 billion
(of which $182 million results from the restatement of the State Financial
Plan).
The net result of the projected reductions in receipts and disbursement is a
negative margin of $273 million against the mid-year update's projection of a
$14 million surplus, producing a potential deficit of $259 million for the
1994-95 fiscal year. The Governor has proposed to close this deficit through a
hiring freeze, a review of pending contracts, and spending cuts in certain
programs that were started or expanded in the 1994-95 budget. Major actions to
close the deficit include:
-- $84 million in savings from freezing non-essential capital
programs;
-- $59 million in savings from the general State agency hiring
and budget freeze and halting the development of additional
services for mental hygiene clients in community settings;
-- $21 million in receipts from excess balances in accounts of
the Environmental Facilities Corporation;
-- $30 million in a repayment from the Urban Development
Corporation for advances made by the State in prior years; and
-- $50 million in savings from canceling the Liberty Scholarships
program.
After these actions, the balance in the General Fund at the close of the
1994-95 fiscal year is expected to be $157 million. The required deposit to
the Tax Stabilization Reserve Fund is projected to add $23 million to the
existing balance of $134 million in that fund.
GAAP-basis Updates
The State issued its first update to the GAAP-basis Financial Plan for the
State's 1994-95 fiscal year on September 1, 1994, based on the first quarterly
cash-basis update to the 1994-95 State Financial Plan completed in July. In
that update, the Division of the Budget projected a General Fund operating
deficit of $690 million, primarily reflecting the impact of legislative changes
to the 1994-95 Executive Budget, including the use of the 1993-94 surplus to
finance 1994- 95 expenditures. For all governmental funds, the summary
GAAP-basis Financial Plan showed an excess of expenditures and other financing
uses over revenues and other financing sources of $687 million.
On February 1, 1994, the General Fund GAAP-basis Financial Plan for 1994-95 was
revised to show a projected deficit of $901 million, with total revenues of
$31.613 billion, total expenditures of $32.900 billion, and net other financing
sources and uses of $386 million. The increase in the deficit of $211 million
from the prior projection is primarily the result of projected revenue
shortfalls and the Governor's tax cut recommendation for the 1995 tax year.
For all governmental funds, the deficit is now projected at $854 million, $167
million greater than in the prior projection.
CURRENT FISCAL YEAR (1995-96 STATE FINANCIAL PLAN)
On February 1, the Governor presented his 1995-96 Executive Budget to the
Legislature, as required by the State Constitution. The Governor's budget is
balanced on a cash basis in the General Fund. The Governor may amend his
budget up to 30 days after its submission to the Legislature. There can be no
assurance that the Legislature will enact
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the proposed Executive Budget into law, or that actual results will not differ
materially and adversely from the projections set forth below.
The 1995-96 Executive Budget is the first to be submitted by the Governor, who
assumed office on January 1. It proposes actual reductions in the
year-over-year dollar levels of State spending from the General Fund for the
first time in over half a century with a proposed cut of 3.4 percent. Proposed
spending on State operations is projected to drop even more sharply, by 7.7
percent. Nominal spending from all State funding sources (i.e., excluding
Federal aid) is proposed to drop by 0.3 percent from the prior fiscal year, in
contrast to the prior decade when annual State-funded spending growth averaged
more than 6.0 percent. There are, however, risks and uncertainties concerning
whether or not certain tax and spending cuts proposed in the Executive Budget
will be enacted, or if enacted, will be upheld in the face of potential legal
challenges. For example, there can be no assurance that cuts in social-welfare
entitlement programs will not be challenged in court. Further, the Comptroller
has indicated his intention to challenge in court the proposed use of certain
pension reserves in the Executive Budget.
According to the Executive Budget, in the 1995-96 fiscal year, the State
Financial Plan, based on current-law provisions governing spending and
revenues, would be out of balance by almost $4.7 billion, as a result of three
key factors: (1) the projected structural deficit resulting from the ongoing
disparity between sluggish growth in receipts, the effect of prior-year tax
changes, and the rapid acceleration of spending growth ($2.1 billion); (2) the
impact of unfunded 1994-95 initiatives, including capital projects such as
sports and recreational facilities, an increase in revenue sharing to local
governments, further State takeover of local Medicaid costs, more school aid,
and increased tuition assistance ($1.1 billion); and (3) the use of one-time
solutions to fund recurring spending in the 1994-95 budget ($1.5 billion). Tax
cuts proposed to spur economic growth and provide relief for low and
middle-income tax payers add $240 million to the projected imbalance or budget
gap, bringing the total to approximately $5 billion.
The Executive Budget proposes to close this budget gap for the 1995-96 fiscal
year through (1) 1.9 billion from cost containment savings in social-welfare
programs, particularly Medicaid cost-containment recommendations ($1.277
billion), Income-Maintenance restructuring recommendations ($340 million), and
the consolidation of various child-care programs into a Family Services Block
Grant to counties and New York City; (2) $2.5 billion in savings from State
agency restructuring that is expected to reduce spending on the State
workforce, SUNY and CUNY, mental hygiene programs, capital projects, the prison
population, and public authorities; (3) $350 million in savings from local
assistance reforms, by freezing school aid, revenue sharing and county costs of
pre-school special education at current levels, while proposing program
legislation to provide relief from certain mandates that increase local
spending; and (4) $200 million in revenue measures, primarily a new Quick Draw
Lottery game and changes to tax-payment schedules.
The Executive Budget indicates that for years State revenues have grown at a
slower rate than State spending, producing an increasing structural deficit,
and that if the proposals in the Executive Budget are enacted (particularly the
spending cuts described above) the State will start to eliminate the structural
imbalance that has characterized the State's fiscal record. There can,
however, be no assurances that the tax and spending cuts proposed in the
Executive Budget will be enacted as proposed, or that if enacted, will
eliminate potential imbalances in future fiscal years. The Governor's
recommended multi-year personal income tax cuts are designed to reduce the
yield on that tax by about one- third by 1988, and could require significant
additional spending cuts in those years, increased economic growth to provide
additional revenues, additional revenue measures, or a combination of those
factors.
Economic Outlook
The national economy performed better in 1994 than in any year since the
recovery began in 1991. National job and income growth were substantial. In
response, the Federal Reserve Board (FRB) shifted to a policy of monetary
tightening by raising interest rates throughout the year. The federal funds
rate is currently up 300 basis points from the level of a year ago. As a
result, the economy is expected to slow sharply in the next several quarters,
as higher interest rates reduce the growth in consumer spending and business
investment. The Division of the Budget expects average annual growth in real
gross domestic product (GDP) to be 2.8 percent in 1995, following the 4 percent
pace
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estimated for 1994. This is somewhat more conservative than the 3.1 percent
growth rate expected by the Blue Chip consensus of leading economic
forecasters.
Inflationary pressures have increased due to strong national growth throughout
1994, with a fairly low unemployment rate and high capacity utilization, and
economic recoveries in Europe and Japan. However, foreign competition is
expected to help to moderate the increase in the inflation rate. With a
slowing economy and only a modest acceleration of inflation, wage and personal
income growth are expected to be moderate.
The State economy turned in a mixed performance during 1994. The moderate
employment growth that characterized 1993 continued into mid-1994, then
virtually ceased. After July, the trade and construction sectors stopped
adding jobs and government employment declined. Growth, though considerably
slower than earlier in the year, continued in the service sector. Wages grew
at around 3.5 percent, reflecting, in part, a plunge in bonus payments from
securities firms whose profits dropped in 1994. Personal income rose 4.0
percent in 1994.
Employment growth is expected to slow to less than 0.5 percent in 1995.
Continued restructuring by large corporations and all levels of government
largely account for the subdued growth rate in the forecast. Slow growth in
employment and average wages is expected to restrain wage growth to a modest
3.2 percent in 1995. Personal income is anticipated to receive a boost from
higher interest rates and rise by 4.4 percent.
Significant uncertainties exist in the forecasts. Consumer spending could be
more robust than anticipated, and recoveries in Europe and Japan may be
stronger than expected, leading to continued strong expansion throughout 1995.
Interest rates, on the other hand, may be at a level that will initiate a
sharper-than-expected slowdown. Financial instability, such as the foreign
exchange turmoil in Mexico, remains possible. The State forecast could fail to
estimate correctly the growth in average wages and the effect of corporate and
government downsizing.
Receipts
The Financial Plan for the 1995-96 fiscal year released on February 1, 1995,
projects General Fund receipts, including transfers from other funds, of
$32.516 billion, a reduction of $747 million from the revised 1994-95 State
Financial Plan. Tax receipts are projected at $29.391 billion for the 1995-96
fiscal year, a reduction of $1.071 billion from the prior year.
Although growth in the base for tax receipts is expected to accelerate during
the 1995-96 fiscal year, tax receipts are expected to fall by 3.5 percent,
principally due to the combined effect of implementing during the 1995-96
fiscal year (1) a portion of the tax reductions originally enacted in 1987 and
deferred each year since 1990, (2) additional tax cuts to prevent tax increases
also originally enacted in 1987 from taking effect, and (3) the proposed
employer day care credit ($5 million), together with the incremental cost of
the tax reductions enacted in 1994 (more than $500 million), which effectively
negate the effect of projected growth in the recurring revenue base. In
addition, certain nonrecurring revenues in the 1994-95 receipts base, including
the 1993-94 surplus of $1.026 billion, additional earmarking to dedicated funds
(more than $210 million) and other miscellaneous one-time receipts (more than
$100 million) are not available in the 1995-96 fiscal year, thereby reducing
potential year-over-year growth by another 4 percentage points.
Personal income tax receipts, which show a sharp increase in 1994-95 and a
projected decline in 1995-96, do not reflect the actual underlying pattern of
tax liability across those fiscal years. In 1994, tax liability is actually
estimated to have grown relatively slowly, less than 2.5 percent, with the
apparently strong reported increase in 1994-95 collections resulting from the
net drawdown of $869 million from the refund reserve, which increased stated
1994-95 cash receipts by that amount. In 1995, before the tax reductions
described below, tax liability would actually have been projected to rise about
6 percent, primarily owing to an acceleration in wage growth (largely
attributable to changes in the timing of bonus payments), a sharp rise in
interest income, and higher reported capital gains.
Personal income tax reductions recommended in the Executive Budget are
projected to produce taxpayer-savings of $720 million in calendar year 1995
reflecting the scheduled implementation of the 1987 tax reductions, which
include
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a reduction in the top tax rate from 7.875 percent to 7.59375 percent and an
increase in the standard deduction ranging from 10 to 14 percent, depending on
filing status, as well as the elimination of scheduled changes that would have
increased taxes for low- and middle-income taxpayers. The tax reductions
recommended by the Governor are part of a multi-year program designed to reduce
the yield of the income tax by about one-third by 1998.
Growth in user taxes and fees is expected to slow to about 1 percent in
1995-96, reflecting nearly $70 million of additional tax relief in this
category in the coming year resulting from tax reductions enacted in 1994, the
absence of extraordinary audit collections received in 1994-95, and a slowdown
in the underlying growth rate of sales and use tax collections from more than 5
percent in 1994-95 to 3.5 percent in the coming year, offset by a projected
improvement of $41 million as a result of recommended legislation to enhance
sales tax collection procedures. Business tax receipts are projected to fall
in the 1995-96 fiscal year largely reflecting the effect of tax reductions
enacted in 1994. Underlying liability, which is expected to rise only modestly
in 1995, is not expected to increase enough to offset the effect of those tax
reductions. Expected growth in other tax receipts in the 1995-96 fiscal year
reflects, among other factors, a slight increase in the cost of the 1994 tax
cuts, the diversion to the Environmental Protection Fund of a recommended $25
million in receipts from the real estate transfer tax and proposed legislation
accelerating remittance of the transfer tax to the State. Growth in overall
collections from miscellaneous receipts in the coming fiscal year is expected
to result largely from several discrete actions involving settlement of
environmental litigation, the recommended merger of public authorities, and
transactions with the Power Authority, which together account for over $200
million of projected miscellaneous receipts anticipated in 1995-96. Transfers
from other funds continue at prior year levels, with the addition of the
transfer of $220 million in excess funds from the Metropolitan Mass
Transportation Operating Assistance Fund.
Disbursements
Disbursements in the General Fund are projected to total $32.361 billion in
1995-96, a decrease of $1,144 million or 3.4 percent. This decline reflects a
broad agenda of cost containment actions, more than offsetting modest increases
for fixed costs, such as pensions, debt service on bonds sold during the
current year, and capital projects under construction.
In the category of grants to local governments, the 1995-96 Executive Budget
recommendations generally preserve support for direct aid, such as school aid,
revenue sharing, and public health programs, at 1994-95 levels. Operating aid
to public schools is capped at 1995-95 amounts, while reimbursements for
transportation and building aid follow current law. Costs for social welfare
programs, however, are recommended to be dramatically reduced, reflecting more
than $1.5 billion in cost containment actions. Medicaid decreases by $662
million, or 11.3 percent, to $5.215 billion; welfare costs decrease $109
million, or 4.9 percent, to $2.111 billion. State support for children's
services is recommended to be converted to a block grant, providing local
governments greater flexibility in administering these programs. All other
local programs decline, primarily reflecting the elimination of $128 million in
operating aid to the New York City Transit Authority, matching the reduction in
New York City support of the Authority.
Spending recommended for State operations is projected to decline by $485
million, or 7.7 percent, to the lowest level since the 1985-86 fiscal year.
Recommendations in the Executive Budget which would reduce the workforce by
approximately 11,400 positions (most of which reduce disbursements in this
category), are projected to result in personal service savings of more than
$300 million. Additional savings reflect initiatives of the State University
of New York and mental health agencies to maximize revenues to offset their
costs.
Spending recommended for general State charges is projected to increase $59
million, which reflects the 1995-96 cost associated with returning the New York
State and Local Employee Retirement Systems to the aggregate cost actuarial
method from the projected unit credit actuarial method, as required by the
Comptroller. Costs associated with the proposed early retirement program add
another $22 million. Health insurance costs are projected to increase six
percent and seven percent, for calendar years 1995 and 1996, respectively.
Workers' compensation costs are projected to grow at 3.5 percent. Unemployment
insurance costs are expected to double, in anticipation of up to 6,900 layoffs
of State employees in the 1995-96 fiscal year.
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The Executive Budget proposes to offset part of the increase in pension
contributions by using $110 million currently on deposit in the Retirement
Systems' reserves for pension supplementation, which, together with the other
minor changes in assumptions, is expected to reduce the State's 1995-96 pension
contribution to $286 million. The Executive Budget also recommends a similar
offset of $120 million to be provided toward pension bills of other
participating employers. The Comptroller, as sole trustee of the Common
Retirement Fund and administrative head of the Retirement Systems, has
indicated that, if the proposals are enacted, he would commence legal
proceedings to prevent the proposed use of those reserves, which he considers
to be a violation of the State Constitution. The Executive disagrees and
considers the use to comply with the State Constitution.
General Fund debt service on short-term obligations of the State reflects the
elimination of the State's spring borrowing. Transfers in support of debt
service are projected to grow steadily, as the State proposes to continue to
issue bonds to support approximately 48 percent of its capital projects.
Transfers in support of capital projects are projected to increase despite
significant proposed cutbacks in spending, owing in part to the loss of
non-recurring receipts from sources other than the General Fund.
Non-recurring Resources
The Division of the Budget estimates that the 1995-96 Financial Plan includes
approximately $650 million in non- recurring resources, approximately 2 percent
of the General Fund budget. The Budget Division believes that recommendations
included in the Executive Budget will provide fully annualized savings in
1996-97 which more than offset the non-recurring resources used in 1995-96.
General Fund Closing Fund Balance
The closing fund balance in the General Fund for the 1995-96 fiscal year is
projected to be $312 million, reflecting the required deposit of $15 million to
the Tax Stabilization Reserve Fund, raising the balance in that fund to $172
million at the close of the 1995-96 fiscal year. The remainder reflects the
recommended deposit of $140 million to the Contingency Reserve Fund (CRF) to
provide resources to finance potential costs associated with litigation against
the State.
Special Revenue Funds
For 1995-96, the State Financial Plan projects disbursements of $25.825 billion
from these funds. This includes $6.696 million from Special Revenue Funds
containing State revenues, and $19.129 billion from funds containing Federal
grants, primarily for social welfare programs. Disbursements recommended in
the Executive Budget from State Special Revenue Funds are projected to increase
$724 million or 12.1 percent from 1994-95. This increase reflects significant
growth in spending supported by lottery proceeds, State University revenues,
and dedicated taxes for transportation purposes. Total disbursements for
programs supported by Federal grants which account for approximately
three-quarters of all spending in the Special Revenue Funds, are estimated to
increase $478 million or 2.6 percent over projected 1994-95. The single
largest program is Medicaid, which comprises 60 percent of this Federal aid,
and is expected to amount to approximately $11.4 billion both in 1994-95 and
1995-96. Growth in other Federal spending is primarily attributable to the
expansion of the school lunch and breakfast programs, increased Federal
reimbursement of certain State costs under the Emergency Assistance to Families
program, and increased spending for the Women with Infant Children (WIC)
program. No significant changes in the type or level of Federal aid are
assumed.
Capital Projects Funds
Disbursements from the Capital Projects funds in 1995-96 are estimated at
$3.901 billion. The estimate is the result of a review required by the
Governor and the Budget Director of the necessity and affordability of
projects, as well as the impact on current and future revenues and debt service
requirements. This review reduced the amount the Division of the Budget
estimates would otherwise have been spent on capital projects by $555 million,
thereby
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avoiding an estimated increase of $227 million in General Fund support for
capital projects. Significant among the recommended cut-backs resulting from
that review are the following:
-- Freezing mental health community bed development and
cancellation of major modernization projects;
-- Scaling back economic development programs and canceling some
stadium projects;
-- Eliminating the school maintenance program;
-- Reducing new projects for CUNY and SUNY;
-- Constraining the highway and bridge improvement program and
deferring rail projects; and
-- Scaling back planned increases for environmental and
recreation programs.
Despite the actions described above, capital spending is still expected to
increase 10.5 percent over the 1994-95 projection of $3.531 billion, and
provides support for:
-- Highway and bridge contract letting at a $1.100 billion level;
-- Completion of mental health community beds already committed
and major institutional modernization projects;
-- Expansion and rehabilitation of prisons and youth facilities;
-- High-priority SUNY and CUNY projects; and
-- Increased "pay-as-you-go" funding for environmental and
recreation programs over 1994-95 levels.
The share of State-funded capital projects expected to be financed on a
"pay-as-you-go" basis is 38 percent in 1995-96 (as compared to 36 percent in
the 1994-95), and is projected to total $1.1 billion. This is attributable to
the full deposit of all authorized taxes into the Dedicated Highway and Bridge
Trust Fund, the initial deposit of a portion of the real estate transfer tax
into the Environmental Protection Fund, and an increase in the amount
transferred from the General Fund.
Debt Service Funds
Disbursements are estimated at $2.498 billion in the 1995-96 fiscal year, an
increase of $288 million or 13 percent from 1994-95. Of this increase, $61
million results from the loss of non-recurring resources available in the prior
fiscal year, including savings from refundings of State-supported debt. Debt
service would otherwise be projected to grow at 9 percent, reflecting $68
million for the General Debt Service Fund, $70 million for Dedicated Highway
and Bridge Fund bonds, $30 million for payments from the Mental Hygiene
Services Fund and $62 million for bonds of the Local Government Assistance
Corporation (LGAC).
The increase in debt service costs recommended in the Executive Budget
primarily reflects prior capital commitments financed by bonds issued by the
State and State-supported debt issued by its public authorities, and the
completion of the LGAC program. The increase has been moderated by the
reductions to bond-financed capital spending as discussed above, and reflects
debt issuances in 1994-95 and 1995-96 which are lower than they would have
been, absent the Governor's review of capital spending.
Cash Flow
For the second time in many years, the State will meet its cash flow needs
without relying on a spring borrowing. However, this achievement is predicated
on two actions: the issuance of all remaining LGAC bonds authorized in the
1990 statute; and the passage of proposed legislation permitting the State to
use, for cash flow purposes only, balances in the Lottery Fund. Temporary
transfers will be returned within five months so that all available Lottery
moneys as well as advances of additional aid can be paid to school districts in
September.
The lingering impact of the 1994-95 receipts shortfall -- as well as the impact
of the potential $5 billion 1995-96 imbalance on cash operations -- exerts
substantial pressures on the State's cash balance position in the first three
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months of the fiscal year. These pressures are expected to abate later in the
1995-96 fiscal year, as cash outlays decline from previous levels consistent
with cost-savings initiatives proposed in the Executive Budget.
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GAAP-Basis Financial Plan
In 1995-96, the General Fund GAAP basis Financial Plan shows total revenues of
$31.274 billion, total expenditures of $31.576 billion, and net other financing
sources and uses of $1.123 billion; the surplus of $821 million reflects the
$140 million available in the Contingency Reserve Fund (CRF), as well as the
impact of LGAC bonds. New York State's General Fund GAAP basis position for
1995-96 is improved by the ongoing financing program of the Local Government
Assistance Corporation (LGAC). The full amount of the LGAC bond proceeds --
$529 million in 1995-96 -- is treated as a financing source in the GAAP General
Fund operating statement.
Absent the impact of LGAC and the CRF, the 1995-96 GAAP-basis Financial Plan
would show a surplus of $152 million. For all governmental Funds, the summary
GAAP-basis Financial Plan shows an excess of revenues and other financing
sources over expenditures and financing uses of $494 million.
PRIOR FISCAL YEARS (1993-94 GAAP-BASIS RESULTS)
On July 29, 1994, the Office of the State Comptroller issued the General
Purpose Financial Statements of the State of New York for the 1993-94 fiscal
year. The Statements were prepared on GAAP-basis and were independently
audited in accordance with generally accepted auditing standards. The State's
Combined Balance Sheet as of March 31, 1994 showed an accumulated surplus in
its combined governmental funds of $370 million, reflecting liabilities of
$13.219 billion and assets of $13.589 billion. This accumulated Governmental
Funds surplus includes a $1.637 billion accumulated deficit in the General
Fund, as well as accumulated surpluses in the Special Revenue and Debt Service
fund types and a $622 million accumulated deficit in the Capital Projects Fund
type.
Year-End GAAP Financial Position
The State completed its 1993-94 fiscal year with a combined Governmental Funds
operating surplus of $1.051 billion, which included an operating surplus in the
General Fund of $914 million, in the Special Revenue Funds of $149 million and
in the Debt Service Funds of $23 million, and an operating deficit in the
Capital Projects Funds of $35 million.
GAAP Operating Results
General Fund
The State reported a General Fund operating surplus of $914 million for the
1993-94 fiscal year, as compared to an operating surplus of $2.065 billion for
the prior fiscal year. The 1993-94 fiscal year surplus reflects several major
factors, including the cash basis surplus recorded in 1993-94, the use of $671
million of the 1992-93 surplus to fund operating expenses in 1993-94, net
proceeds of $575 million in bonds issued by the Local Government Assistance
Corporation, and the accumulation of a $265 million balance in the Contingency
Reserve Fund. Revenues increased $543 million (1.7 percent) over prior fiscal
year revenues with the largest increase occurring in personal income taxes.
Expenditures increased $1.659 billion (5.6 percent) over the prior fiscal year,
with the largest increase occurring in State aid for social services programs.
Other financing sources declined more than 11 percent, with a net increase in
operating transfers from other funds more than offset by a decline in proceeds
from financing arrangements caused by lower LGAC bond sales.
Personal income and business taxes increased by $847 million and $247 million,
respectively, offset by reductions in consumption and use taxes and
miscellaneous revenues of $141 million and $318 million, respectively.
Personal income and business taxes increased primarily because the economy
performed at a higher level. General Fund revenues from consumption and use
taxes and fees declined primarily because revenues generated by both motor fuel
and highway use taxes were earmarked instead for the Dedicated Highway and
Bridge Trust Fund which is reported in the Capital Projects Funds.
Miscellaneous revenues declined because certain receipts recorded in the prior
year were nonrecurring.
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Expenditures for social services programs increased $1.047 billion primarily
due to increases in Medicaid and Income Maintenance. A $370 million increase
in departmental operations was caused primarily by the settlement of
outstanding labor contracts and unfavorable judicial decisions in previously
pending litigation.
Operating transfers from other funds increased, primarily reflecting the
receipt of $200 million from a prior-year claim settlement associated with the
Federal government. In addition, transfers of excess sales tax receipts from
the Local Government Assistance Tax Fund increased by nearly $170 million as a
result of higher sales tax receipts in the Debt Service Funds. The increase in
operating transfers to other funds was caused by an increase in operating
subsidies provided to both the State University of New York and the City
University of New York. Proceeds from financing arrangements declined over
$340 million, as a result of a decrease in the issuance of LGAC bonds.
Special Revenue, Debt Service and Capital Projects Funds
Special Revenue Funds ended with an operating surplus of $149 million for the
1993-94 fiscal year and, as a result, the accumulated fund balance has
increased to $837 million. Revenues increased $2.055 billion over the prior
fiscal year primarily as a result of an increase in Federal grants to finance
increased spending for social services programs, and in petroleum gross receipt
taxes. Expenditures increased by $1.568 billion primarily related to social
services programs. Other financing uses increased by approximately $500
million, representing increases in Federal reimbursement for Medicaid patient
services provided by various State health and mental hygiene facilities.
Debt Service Funds ended with an operating surplus of $23 million for the
1993-94 fiscal year, and as a result, the accumulated fund balance has
increased to $1.792 billion. Revenues increased $34 million, primarily as a
result of an increase in dedicated taxes partially offset by a decrease in
mental hygiene patient fees. Debt service expenditures increased $31 million.
Other financing sources representing transfers from other funds increased by
$220 million, as a result of an increase in Federal Medicaid reimbursement for
mental hygiene patients.
An operating deficit of $35 million was reported in the Capital Projects Funds
for the State's 1993-94 fiscal year, and, as a result, the accumulated deficit
fund balance has increased to $622 million. Revenues increased by $458 million
which was primarily attributable to the shifting of certain tax revenues from
the General Fund to the Dedicated Highway and Bridge Trust Fund. Capital
Projects Funds expenditures increased by $61 million. Expenditures for highway
and bridge construction increased by approximately $223 million, but this
increase was offset in large part by a decrease of $160 million relating to
reductions in spending for water pollution control, hazardous waste programs
and various miscellaneous State aid programs. Net other financing sources and
uses decreased $489 million primarily as a result of a reduction in general
obligation bond proceeds and a decrease in transfers from the General Fund.
ECONOMIC OUTLOOK
The national economy began to expand in 1991, although the growth rate for the
first two years of the expansion was modest by historical standards. The State
economy remained in recession until 1993, when employment growth resumed.
Since early 1993, the State has gained approximately 100,000 jobs. Employment
growth has been hindered during recent years by significant cutbacks in the
computer and instrument manufacturing, utility, and defense industries.
Personal income increased substantially in 1992 and 1993, aided significantly
by large bonus payments in banking and financial industries.
The State Financial Plan is based on a projection by DOB of national and State
economic activity. DOB forecasts that the overall rate of growth of the
national economy during calendar year 1994 will be similar to the "consensus"
of a widely followed survey of national economic forecasters. Growth in the
real gross domestic product during 1994 is projected to be moderate (3.5
percent), with declines in defense spending and net exports more than offset by
increases in consumption and investment. Continuing efforts by business to
reduce costs is expected to exert a drag on economic growth. Inflation, as
measured by the Consumer Price Index, is projected to remain about 3 percent
due to moderate wage growth and foreign competition. Growth rates for personal
income and wages are projected to increase.
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New York's economy is expected to continue to expand during 1994. Industries
that export goods and services to the rest of the country and abroad are
expected to benefit from growing national and international markets. Both
upstate and downstate regions are expected to share in this renewed growth.
Employment is expected to grow moderately throughout the year, although the
rate of increase is expected to be below the experience of the 1980's due to
cutbacks in Federal spending and employment, as well as continued downsizing by
large corporations. Both personal income and wages are expected to record
moderate gains in 1994. Bonus payments in the banking and financial industries
are expected to increase modestly from last year's level.
Receipts through the first two quarters of the 1994-95 fiscal year fell short
of expectations by $132 million. These shortfalls were concentrated in the
personal and business income taxes, where quarterly personal income, bank and
insurance
1994-95 STATE FINANCIAL PLAN
The four governmental fund types that comprise the State Financial Plan are the
General Fund, the Special Revenue Funds, the Capital Projects Funds, and the
Debt Service Funds. This fund structure adheres to accounting standards of the
Governmental Accounting Standards Board.
GENERAL FUND
The General Fund is the general operating fund of the State and is used to
account for all financial transactions, except those required to be accounted
for in another fund. It is the State's largest fund and receives almost all
State taxes and other resources not dedicated to particular purposes. In the
State's 1994-95 fiscal year, the General Fund is expected to account for
approximately 52 percent of total governmental-fund receipts and 51 percent of
total governmental-fund disbursements. General Fund moneys are also
transferred to other funds, primarily to support certain capital projects and
debt service payments in other fund types.
The General Fund is projected to be balanced on a cash basis for the 1994-95
fiscal year. Total receipts are projected to be $34.321 billion, an increase
of $2.092 billion over total receipts in the prior fiscal year. Total General
Fund disbursements are projected to be $34.248 billion, an increase of $2.351
billion over the total amount disbursed and transferred in the prior fiscal
year.
SPECIAL REVENUE FUNDS
Special Revenue Funds are used to account for the proceeds of specific revenue
sources such as Federal grants that are legally restricted, either by the
Legislature or outside parties, to expenditures for specified purposes.
Although activity in this fund type is expected to comprise 39 percent of total
government funds receipts and disbursements in the 1994-95 fiscal year, about
three-quarters of that activity relates to Federally-funded programs.
Projected receipts in this fund type total $24.598 billion, an increase of
$1.777 billion over the prior year. Total disbursements in this fund type
total $24.982 billion, an increase of $2.259 billion over 1993-94 levels.
Disbursements from Federal funds, primarily the Federal share of Medicaid and
other social services programs, are projected to total $19.048 billion in the
1994-95 fiscal year. Remaining projected spending of $5.934 billion primarily
reflects aid to SUNY supported by tuition and dormitory fees, education aid
funded from lottery receipts, operating aid payments to the Metropolitan
Transportation Authority funded from the proceeds of dedicated transportation
taxes, and costs of a variety of self-supporting programs which deliver
services financed by user fees.
CAPITAL PROJECTS FUNDS
Capital Projects Funds are used to account for the financial resources used for
the acquisition, construction, or rehabilitation of major state capital
facilities and for capital assistance grants to certain local governments or
public authorities. This fund type consists of the Capital Projects Fund,
which is supported by tax dollars transferred from
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the General Fund, and 37 other capital funds established to distinguish
specific capital construction purposes supported by other revenues. In the
1994-95 fiscal year, activity in these funds is expected to comprise 5 percent
of total governmental receipts and 6 percent of total governmental
disbursements in the State's 1994-95 fiscal year.
Disbursements from this fund type are projected to increase by $630 million
over prior-year levels, primarily reflecting higher spending for transportation
and mental hygiene projects. The Dedicated Highway and Bridge Trust Fund is
projected to comprise 26 percent of the activity in this fund type -- $982
million in 1994-95-- and is the single largest dedicated fund. Projected
disbursements from this dedicated fund reflect an increase of $339 million over
1993- 94 levels. Spending for capital projects will be financed through a
combination of sources: Federal grants (25 percent), public authority bond
proceeds (35 percent), general obligation bond proceeds (10 percent), and
current revenues (30 percent). Total receipts in this fund type are projected
at $3.233 billion, not including $374 million expected to be available from the
proceeds of general obligation bonds.
DEBT SERVICE FUNDS
Debt Service Funds are used to account for the payment of principal of, and
interest on, long-term debt of the State and to meet commitments under
lease-purchase and other contractual-obligation financing arrangements. This
fund is expected to comprise 4 percent of total governmental fund receipts and
disbursements in the 1994-95 fiscal year. December 7, 1995 Page -22- Receipts
in these funds in excess of debt service requirements are transferred to the
General Fund and Special Revenue Funds, pursuant to law.
The Debt Service fund type consists of the General Debt Service Fund, which is
supported primarily by tax dollars transferred from the General Fund, and seven
other funds. In the 1994-95 fiscal year, total disbursements in this fund type
are projected at $2.246 billion, an increase of $314 million or 16.3 percent.
The transfer from the General Fund of $1.443 billion is expected to finance 64
percent of these payments.
The remaining payments are expected to be financed by pledged revenues,
including $1.702 billion in taxes, $400 million in dedicated fees, and $889
billion in patient revenues. After impoundment for debt service, as required,
$3.357 billion is expected to be transferred to the General Fund and other
funds in support of State operations. The largest transfer -- $1.696 billion
- -- is made to the Special Revenue Fund type, in support of operations of the
mental hygiene agencies. Another $1.301 billion in excess sales taxes is
expected to be transferred to the General Fund, following payment of projected
debt service on bonds of the Local Government Assistance Corporation ("LGAC").
1994-95 BORROWING PLAN
The State anticipates that its capital programs will be financed, in part,
through borrowings by the State and public authorities in the 1994-95 fiscal
year. The State expects to issue $374 million in general obligation bonds
(including $140 million for purposes of redeeming outstanding BANs) and $140
million in general obligation commercial paper. The Legislature has also
authorized the issuance of up to $69 million in COPs during the State's 1994-95
fiscal year for equipment purchases. The projection of the State regarding its
borrowings for the 1994-95 fiscal year may change if circumstances require.
LGAC is authorized to provide net proceeds of up to $315 million during the
State's 1994-95 fiscal year, to fund payments to local governments.
Borrowings by other public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total $2.426 billion, including costs of issuances, reserve funds,
and other costs. Included therein are borrowings by (i) the Dormitory
Authority of the State of New York for SUNY, the City University of New York
("CUNY"), health facilities, and SUNY dormitories; (ii) MCFFA for mental health
facilities; (iii) Thruway Authority for the Dedicated Highway and Bridge Trust
Fund and Consolidated Highway Improvement Program; (iv) UDC for prison and
youth facilities and economic development programs; (v) the
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Housing Finance Agency for housing programs; and (vi) other borrowings by the
Environmental Facilities Corporation and the Energy Research and Development
Authority ("ERDA").
NEW YORK LOCAL GOVERNMENT ASSISTANCE CORPORATION
In June 1990, legislation was enacted creating the "New York Local Government
Assistance Corporation" (the "Corporation"), a public benefit corporation
empowered to issue long-term obligations to fund certain payments to local
governments traditionally funded through the State's annual seasonal borrowing.
Over a period of the next several years, the issuance of those long-term
obligations, which will be amortized over no more than 30 years, is expected to
result in eliminating the need for continuing short-term seasonal borrowing for
those purposes, because the timing of local assistance payments in future years
will correspond more closely with the State's available cash flow. The
legislation also imposed a cap on the annual seasonal borrowing of the State at
$4.7 billion, less net proceeds of bonds issued by the Corporation, except in
cases where the Governor and the legislative leaders have certified both the
need for additional borrowing and a schedule for reducing it to the cap. If
borrowing above the cap is thus permitted in any fiscal year, it is required by
law to be reduced to the cap by the fourth fiscal year after the limit was
first exceeded. The Corporation has issued bonds to provide net proceeds of
$3.856 billion and has been authorized to issue its bonds to provide net
proceeds of up to an additional $315 million during the State's 1994-95 fiscal
year. The impact of this borrowing, together with the availability of certain
cash reserves, is that, for the first time in nearly 35 years, the 1994-95
State Financial Plan includes no short-term seasonal borrowing. This reflects
the success of the LGAC program in permitting the State to accelerate local aid
payments from the first quarter of the current fiscal year to the fourth
quarter of the previous fiscal year.
1993-94 FISCAL YEAR
The State ended its 1993-94 fiscal year with a balance of $1.140 billion in the
tax refund reserve account, $265 million in its Contingency Reserve Fund
("CRF") and $134 million in its Tax Stabilization Reserve Fund. These fund
balances were primarily the result of an improving national economy, State
employment growth, tax collections that exceeded earlier projections and
disbursements that were below expectations. Deposits to the personal income
tax refund reserve have the effect of reducing reported personal income tax
receipts in the fiscal year when made and withdrawals from such reserve
increase receipts in the fiscal year when made. The balance in the tax refund
reserve account will be used to pay taxpayer refunds, rather than drawing from
1994-95 receipts.
Of the $1.140 billion deposited in the tax refund reserve account, $1,026
billion was available for budgetary planning purposes in the 1994-95 fiscal
year. The remaining $114 million will be redeposited in the tax refund reserve
account at the end of the State's 1994-95 fiscal year to continue the process
of restructuring the State's cash flow as part of the LGAC program. The
balance in the CRF will be used to meet the cost of litigation facing the
State. The Tax Stabilization Reserve Fund may be used only in the event of an
unanticipated General Fund cash-basis deficit during the 1994-95 fiscal year.
Before the deposit of $1.140 billion in the tax refund reserve account, General
Fund receipts in the 1993-94 exceeded those originally projected when the State
Financial Plan for that year was formulated on April 16, 1993 by $1.002
billion. Greater-than-expected receipts in the personal income tax, the bank
tax, the corporation franchise tax and the estate tax accounted for most of
this variance, and more than offset weaker-than-projected collections from the
sales and use tax and miscellaneous receipts. Collections from individual
taxes were affected by various factors including changes in Federal business
laws, sustained profitability of banks, strong performance of securities firms,
and higher- than-expected consumption of tobacco projects following price cuts.
The higher receipts resulted, in part, because the New York economy performed
better than forecasted. Employment growth started in the first quarter of the
State's 1993-94 fiscal year, and, although this lagged behind the national
economic recovery, the growth in New York began earlier than forecasted. The
New York economy exhibited signs of strength in the service sector, in
construction, and in trade. Long Island and the Mid-Hudson Valley continued to
lag behind the rest of the State in economic growth. The DOB believes that
approximately 100,000 jobs were added during the 1993-94 fiscal year.
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Disbursements and transfers from the General Fund were $303 million below the
level projected in April 1993, an amount that would have been $423 million had
the State not accelerated the payment of Medicaid billings, which in the April
1993 State Financial Plan were planned to be deferred into the 1994-95 fiscal
year. Compared to the estimates included in the State Financial Plan
formulated in April 1993, lower disbursements resulted from lower spending for
Medicaid, capital projects, and debt service (due to refundings) and $114
million used to restructure the State's cash flow as part of the LGAC program.
Disbursements were higher-than-expected for general support for public schools,
the State share of income maintenance, overtime for prison guards, and highways
now and ice removal. The State also made the first of six required payments to
the State of Delaware related to the settlement of Delaware's litigation
against the State regarding the disposition of abandoned property receipts.
During the 1993-94 fiscal year, the State also established and funded a
Contingency Reserve Fund ("CFR") as a way to assist the State in financing the
cost of litigation affecting the State. The CFR was initially funded with a
transfer of $100 million attributable to the positive margin recorded in the
1992-93 fiscal year. In addition, the State augmented this initial deposit
with $132 million in debt service savings attributable to the refinancing of
State and public authority bonds during 1993-94. A year-end transfer of $36
million was also made to the CRF, which, after a disbursement for authorized
fund purposes, brought the CRF balance at the end of 1993-94 to $265 million.
This amount was $165 million higher than the amount originally targeted for
this reserve fund.
1992-93 FISCAL YEAR
The State ended its 1992-93 fiscal year with a balance of $671 million in the
tax refund reserve account and $67 million in the Tax Stabilization Reserve
Fund.
The State's 1992-93 fiscal year was characterized by performance that was
better than projected for the national and regional economies. National gross
domestic product, State personal income, and State employment and unemployment
performed better than originally projected in April 1992. This favorable
economic performance, particularly at year end, combined with a tax-induced
acceleration of income into 1992, was the primary cause of the General Fund
surplus. Personal income tax collections were more than $700 million higher
than originally projected (before reflecting the tax refund reserve account
transaction), primarily in the withholding and estimated payment components of
the tax.
There were large, but mainly offsetting, variances in other categories of
receipts. Significantly higher-than-projected business tax collections and the
receipt of unbudgeted payments from the Medical Malpractice Insurance
Association ("MMIA") and the New York Racing Association approximately offset
the loss of an anticipated $200-million Federal reimbursement, the loss of
certain budgeted hospital differential revenue as a result of unfavorable court
decisions, and shortfalls in certain miscellaneous revenues.
Disbursements and transfers to other funds were $45 million above projections
in April 1992, although this includes a $150 million payment to health insurers
(financed with a receipt from the MMIA made pursuant to legislation passed in
january 1993). All other disbursements were $105 million lower than projected.
This reduction primarily reflected lower costs in virtually all categories of
spending, including Medicaid, local health programs, agency operations, fringe
benefits, capital projects and debt service as partially offset by
higher-than-anticipated costs for education programs.
1991-92 FISCAL YEAR
The 1991-92 State fiscal year was marked by a protracted delay in the adoption
of a budget, disagreements between the Executive and the Legislature over
receipts and disbursements projections, and continuing deterioration in the
State economy. Persistent underperformance of the economy led to revenue
shortfalls which were the primary cause of a $531- million deficit TRAN
borrowing and a $44-million withdrawal from the tax stabilization reserve fund,
depleting the balance in that fund. The tax refund reserve account had a
balance of $29 million at the end of the
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1991-92 fiscal year. The deposit to this account reduced personal income tax
collections by $29 million in the 1991-92 fiscal year.
The State Financial Plan was initially formulated on June 10, 1991, more than
two months after the beginning of the fiscal year. The State Financial Plan
was formulated after disagreement between the Governor and the legislative
leaders over spending levels, revenue-raising measures and estimates of the
impact of legislative actions, and after the Governor vetoed $937 million in
spending measures which the Legislature added to his proposed Executive Budget
without providing the necessary revenues.
The Legislature, after consultation with the Governor, subsequently passed
appropriation bills adding a net of $676 million in spending during the State's
1991-92 fiscal year. The additional spending was expected to be financed
through several actions including tax increases, projected audit revenues,
added operating support for tax enforcement efforts, nonrecurring revenues, and
administrative actions to reduce spending.
Although the economic forecast upon which the 1991-92 State Financial Plan was
based assumed a modest national recovery consistent with the consensus of
forecasters at the time and continued but moderating declines in State
employment, the expectations were too optimistic. The national economy was
much more sluggish than forecasted, and the State economy also fared
significantly worse with continued steep employment declines.
Budget projections for the 1991-92 fiscal year were adversely affected by
several factors, including shortfalls in receipts from the personal income tax
and user taxes and fees, higher-than-expected disbursements for Medicaid and
income maintenance, and the inability of the State to complete certain
nonrecurring transactions. Despite administrative cost savings from actions
taken during the fiscal year of $407 million, the State was required to finance
its operations through the deficit TRANs and fund transfer described above.
STATE FINANCIAL PRACTICES: GAAP BASIS
Historically, the State has accounted for, reported and budgeted its operations
on a cash basis. The State currently formulates a financial plan which
includes all funds required by generally accepted accounting principles
("GAAP"). The State as required by law, continues to prepare its financial
plan and financial reports on the cash basis of accounting as well.
The State's financial position on a GAAP basis as of March 31, 1993 included an
accumulated deficit in its combined governmental funds of $681 million.
Liabilities totaled $12.864 billion and assets of $12.183 billion were
available to liquidate these liabilities. The combined accumulated deficit
included deficits of $2.551 billion in the General Fund and $586 million in the
Capital Projects Funds, and accumulated surpluses of $1.768 billion in the Debt
Service Funds and $688 million in the Special Revenue Funds. During the
1992-93 fiscal year, the State recorded an operating surplus in the
governmental funds of $2.637 billion, including a General Fund operating
surplus of $2.065 billion.
As of March 31, 1992, the State's financial position included an accumulated
deficit in its combined governmental funds of $3.315 billion; liabilities were
reported at $14.166 billion and assets at $10.851 billion. The accumulated
governmental funds deficit included a $4.616 billion accumulated General Fund
deficit, and a net accumulated surplus of $1.301 billion for all other
governmental funds. During the 1991-92 fiscal year, the State recorded an
operating surplus in the General Fund of $1.668 billion plus a net surplus of
$1.301 billion for all other governmental funds.
GENERAL FUND
In 1992-93, the State recorded a General Fund operating surplus of $2.065
billion with a net increase in assets of $657 million and a net decrease in
liabilities of $1.408 billion. The increase in assets was comprised of
increases in cash of $430 million, other assets of $404 million and other
receivables of $276 million offset by a decrease in taxes receivable of $453
million. The decrease in liabilities was comprised of decreases in payables to
local governments of $688 million, tax and revenue anticipation notes payable
of $531 million and all other liabilities of 189 million.
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The 1991-92 fiscal year General Fund operating surplus of $1.688 billion was
primarily attributable to a net decrease in liabilities of $2.159 billion.
This was comprised of decreases in payables to local governments of $2.132
billion (primarily reflecting payments by LGAC of school aid) and TRANs payable
of $374 million, offset, in part, by increases in accrued liabilities of $283
million and all other liabilities of $64 million. The decrease in liabilities
was offset in part by a $491 million decline in assets.
ECONOMIC OVERVIEW
The State is the third most populous state in the nation and has a relatively
high level of personal wealth. The State's economy is diverse with a
comparatively large share of the nation's finance, insurance, transportation,
communications and services employment, and a very small share of the nation's
farming and mining activity. The State's location and its excellent air
transport facilities and natural harbors have made it an important link in
international commerce. Travel and tourism constitute an important part of the
economy. Like the rest of the nation, the State has a declining proportion of
its workforce engaged in manufacturing, and an increasing proportion engaged in
service industries.
The State has historically been one of the wealthiest states in the nation.
For decades, however, the State has grown more slowly than the nation as a
whole, gradually eroding its relative economic affluence. Statewide, urban
centers have experienced significant changes involving migration of the more
affluent to the suburbs and an influx of generally less affluent residents.
Regionally, the older Northeast cities have suffered because of the relative
success that the South and the West have had in attracting people and business.
During the calendar years 1982 and 1983, the State's economy in most respects
performed better than that of the nation. However, in the calendar years 1984
through 1991, the State's rate of economic expansion was somewhat slower than
that of the nation. The unemployment rate in the State dipped below the
national rate in the second half of 1981 and has generally remained lower until
1991. The total employment growth rate in the State has been below the
national average since 1984. Total personal income in the State has risen
slightly faster than the national average every year since 1983, with the
exception of 1985, 1990 and 1991.
The State has for many years had a very high State and local tax burden
relative to other states. The State and its localities have used these taxes
to develop and maintain their transportation networks, public schools and
colleges, public health systems, other social services and recreational
facilities. Despite these benefits, the burden of State and local taxation, in
combination with the many other causes of regional economic dislocation, may
have contributed to the decisions of some businesses and individuals to
relocate outside, or not locate within, the State.
To stimulate the State's economic growth, the State has developed programs,
including the provision of direct financial assistance by State-related
sources, designed to assist businesses to expand existing operations located
within the State and to attract new businesses to the State. Local industrial
development agencies raised an aggregate of approximately $7.8 billion in
separate tax-exempt bond issues through December 31, 1993. There are currently
over 100 county, city, town and village agencies. No new agencies have been
established since 1987. In addition, the New York State Urban Development
Corporation ("UDC") is empowered to issue, subject to approval by the Public
Authorities Control Board, bonds and notes on behalf of private corporations
for economic development projects. The State has also established the New York
Insurance Exchange which permits insurers and individual investors to combine
to compete with Lloyd's of London in the underwriting of large primary and
reinsurance risks. The State has also taken advantage of certain changes in
Federal bank regulations to establish a free international banking zone in the
City.
In addition, the State has provided various tax incentives to encourage
business relocation and expansion. These programs include direct tax abatement
from local property taxes for new facilities (subject to locality approval) and
investment tax credits that are applied against the State corporation franchise
tax. Furthermore, legislation passed in 1986 authorizes the creation of up to
40 "economic development zones" in economically distressed regions of the
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State. Businesses in these zones are provided a variety of tax and other
incentives to create jobs and make investments in the zones as the beginning of
the State's 1994-95 fiscal year, there were 19 such zones.
The 1994-95 budget contains a significant investment in efforts to spur
economic growth. The budget includes provisions to reduce the level of
business taxation in New York, with cuts in the corporate tax surcharge, the
alternative minimum tax imposed on business and the petroleum business tax,
repeal of the State's hotel occupancy tax, and reductions in the real property
gains tax to stimulate construction and facilitate the real estate industry's
access to capital. Complementing the elimination of the hotel tax is a $10
million investment of State funds in the "I Love New York" program designed to
spur tourism activity throughout the State.
To help strengthen the State's economic recovery, the 1994-95 budget also
includes more than $200 million in additional funding for economic development
programs. Special emphasis is placed on programs intended to enable New York
State to: (i) invest in high technology industries; (ii) expand access to
foreign markets; (iii) strengthen assistance to small businesses, particularly
those owned by women and minorities; (iv) retain and attract new manufacturing
jobs; (v) help companies and communities impacted by continued cutbacks in
Federal defense spending and ongoing corporate downsizings; and (vi) bolster
the tourism industry. In addition, the budget includes increased levels of
support for programs to rebuild and maintain State infrastructure, and
provisions to create 21 new economic development zones.
STATE AUTHORITIES
The fiscal stability of the State is related, in part, to the fiscal stability
of its public Authorities for financing, constructing and operating
revenue-producing public benefit facilities. Authorities are not subject to
the constitutional restrictions on the incurrence of debt which apply to the
State itself and may issue bonds and notes within the amounts of, and as
otherwise restricted by, their legislative authorization. As of September 30,
1993 there were 18 Authorities that had outstanding debt of $100 million or
more. The aggregate outstanding debt, including refunding bonds, of these 18
Authorities was $63.5 billion as of September 30, 1993. As of March 31, 1994,
aggregate public authority debt outstanding as State-supported debt was $21.1
billion and as State-related debt was $29.4 billion.
Moral obligation financing generally involves the issuance of debt by an
Authority to finance a revenue-producing project or other activity, and that
debt is secured by project revenues and statutory provisions of the State,
subject to appropriation by the Legislature, to make up any deficiencies which
may occur in the issuer's debt service reserve fund. Under lease-purchase or
contractual-obligation financing arrangements, Authorities and certain
municipalities have issued obligations to finance the construction and
rehabilitation of facilities or the acquisition and rehabilitation of
equipment, and expect to cover debt service and amortization of the obligations
through the receipt of rental or other contractual payments made by the State.
The State has also entered into a payment agreement with the New York Local
Government Assistance Corporation. State lease-purchase or
contractual-obligation financing arrangements involve a contractual undertaking
by the State to make payments to an Authority, municipality or other entity,
but the State's obligation to make such payments is generally expressly made
subject to appropriation by the Legislature and the actual availability of
money to the State for making the payments. The State also participates in the
issuance of certificates of participation in a pool of leases entered into by
the State's Office of General Services on behalf of several State departments
and agencies. The State has also participated in the issuance of certificates
of participation for the acquisition of real property which represent
proportionate interests in lease payments to be paid by the State. [Moral
obligation financing is an arrangement pursuant to which the State provides, by
statute, that it will pay such money as may be required to make up any
deficiency in a debt service reserve fund established to assure payment of
bonds. Lease-purchase financing is an arrangement pursuant to which the State
leases from a public benefit corporation or municipality for a term not less
than the amortization period of the debt obligations issued by the public
benefit corporation or municipality to finance acquisition or, pays rent which
is used to pay debt service on the obligations. Contractual-obligation
financing is an arrangement pursuant to which the State makes periodic payments
to a public benefit corporation under a contract with a term not less than the
amortization period of the debt obligations issued by such corporation in
connection with such contract.]
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Authorities are generally supported by revenues generated by the projects
financed or operated, such as fares, user fees on bridges, highway tolls and
rentals for dormitory rooms and housing. In recent years, however, the State
has provided financial assistance through appropriations, in some cases of a
recurring nature, to certain of the 18 Authorities for operation and other
expenses and, in fulfillment of its commitments on moral obligation
indebtedness or otherwise, for debt service. This assistance is expected to
continue to be required in future years.
Several Authorities have, in the past experienced financial difficulties.
Certain Authorities continue to experience financial difficulties, requiring
financial assistance from the State.
The Metropolitan Transportation Authority (the "MTA") oversees New York City's
subway and bus lines by its affiliates, the New York City Transit Authority and
the Manhattan and Bronx Surface Transit Operating Authority (collectively, the
"TA"). Through MTA's subsidiaries, the Long Island Rail Road Company, the
Metro-North Commuter Railroad Company and the Metropolitan Suburban Bus
Authority, the MTA operates certain commuter rail and bus lines in the New York
metropolitan area. In addition, the Staten Island Rapid Transit Operating
Authority, an MTA subsidiary, operates a rapid transit line on Staten Island.
Through its affiliated agency, the Triborough Bridge and Tunnel Authority (the
"TBTA"), the MTA operates certain intrastate toll bridges and tunnels. Because
fare revenues are not sufficient to finance the mass transit portion of these
operations, the MTA has depended and will continue to depend for operating
support upon a system of State, local government and TBTA support and, to the
extent available, Federal operating assistance, including loans, grants and
operating subsidies.
If current revenue projections are not realized and/or operating expenses
exceed current projections, the TA or commuter railroads may be required to
seek additional State assistance, raise rates or take other actions.
Over the past several years the State has enacted several taxes--including a
surcharge on the profits of banks, insurance corporations and general business
corporations doing business in the 12-county Metropolitan Transportation Region
served by the MTA and a special one-quarter of 1 percent regional sales and use
tax--that provide revenues for mass transit purposes, including assistance to
the MTA. The surcharge, which expires in November 1995, yielded approximately
$507 million in calendar year 1992, of which the MTA was entitled to receive
approximately 90 percent, or approximately $456 million. These amounts include
some receipts resulting from a change in State law to require taxpayers to make
estimated payments on their surcharge liabilities. In addition, in March 1987,
legislation was enacted that creates an additional source of recurring revenues
for the MTA. This legislation requires that the proceeds of a one-quarter of
1% mortgage recording tax paid on certain mortgages in the Metropolitan
Transportation Region that heretofore had been paid to the State of New York
Mortgage Agency be deposited in a special MTA fund. These tax proceeds may be
used by the MTA for either operating or capital (including debt service)
expenses. Further, in 1993, the State dedicated a portion of the State
petroleum business tax to fund operating or capital assistance to the MTA. For
the 1994-95 State fiscal year, total State assistance to the MTA is estimated
at approximately $1.3 billion.
In 1993, State legislation authorized the funding of a five-year $9.56 billion
MTA capital plan for the five-year period, 1992 through 1996 (the "1992-96
Capital Program"). The MTA has received approval of the 1992-96 Capital
Program based on this legislation from the 1992-96 Capital Program Review
Board, as State law requires. This is the third five- year plan since the
Legislature authorized procedures for the adoption, approval and amendment of a
five-year plan in 1981 for a capital program designed to upgrade the
performance of the MTA's transportation systems and to supplement, replace and
rehabilitate facilities and equipment. The MTA, the TBTA and the TA are
collectively authorized to issue an aggregate of $3.1 billion of bonds (net of
certain statutory exclusions) to finance a portion of the 1992-96 Capital
Program. The 1992-96 Capital Program is expected to be financed in significant
part through dedication of State petroleum business taxes referred to above.
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There can be no assurance that all the necessary governmental actions for the
Capital Program will be taken, that funding sources currently identified will
not be decreased or eliminated, or that the 1992-96 Capital Program, or parts
thereof, will not be delayed or reduced. Furthermore, the power of the MTA to
issue certain bonds expected to be supported by the appropriation of State
petroleum business taxes is currently the subject of a court challenge. If the
Capital Program is delayed or reduced, ridership and fare revenues may decline,
which could, among other things, impair the MTA's ability to meet its operating
expenses without additional State assistance.
CERTIFICATES OF PARTICIPATION
The New York Fund may invest at times in certificates of participation which
represent proportionate interests in certain lease or other payments made by
the State with respect to equipment or real property of the departments or
agencies of the State. Such payments are subject to annual appropriation by
the Legislature and the availability of money to the State for making such
payments.
NEW YORK CITY
On February 14, 1995, the Mayor released the Preliminary Budget for the City's
1996 fiscal year (commencing July 1), with addresses a projected $2.7 billion
budget gap. Most of the gap-closing initiatives may be implemented only with
the cooperation of the City's municipal unions, or the State or Federal
governments. The Office of the State Deputy Comptroller for the City of New
York (OSDC) and the State Financial Control Board continue their respective
oversight activities.
The fiscal health of the State is closely related to the fiscal health of its
localities, particularly the City, which has required and continues to require
significant financial assistance from the State. The City's independently
audited operating results for each of its 1981 through 1993 fiscal years, which
ended on June 30, show a General Fund surplus reported in accordance with GAAP.
The City has eliminated the cumulative deficit in its net General Fund
position. In addition, the City's financial statements for the 1993 fiscal year
received an unqualified opinion from the City's independent auditors, the
eleventh consecutive year the City has received such an opinion.
In response to the City's fiscal crisis in 1975, the State took a number of
steps to assist the City in returning to fiscal stability. Among these
actions, the State created the Municipal Assistance Corporation for the City of
New York ("MAC") to provide financing assistance to the City. The State also
enacted the New York State Financial Emergency Act for The City of New York
(the "Financial Emergency Act") which, among other things, established the New
York State Financial Control Board (the "Control Board") to oversee the City's
financial affairs. The State also established the Office of the State Deputy
Comptroller for the City of New York ("OSDC") to assist the Control Board in
exercising its powers and responsibilities.
The City operates under a four-year financial plan which is prepared annually
and is periodically updated. On June 30, 1986, the Control Board's powers of
approval over the City's financial plan were suspended pursuant to the
Financial Emergency Act. However, the Control Board, MAC and OSDC continue to
exercise various monitoring functions relating to the City's financial
position. The City submits its financial plans as well as the periodic updates
to the Control Board for its review.
Estimates of the City's revenues and expenditures are based on numerous
assumptions and are subject to various uncertainties. If expected Federal or
State aid is not forthcoming, if unforeseen developments in the economy
significantly reduce revenues derived from economically sensitive taxes or
necessitate increased expenditures for public assistance, if the City should
negotiate wage increases for its employees greater than the amounts provided
for in the City's financial plan or if other uncertainties materialize that
reduce expected revenues or increase projected expenditures, then, to avoid
operating deficits, the City may be required to implement additional actions,
including increases in taxes and reductions in essential City services. The
City might also seek additional assistance from the State.
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On July 8, 1994 the City submitted to the Control Board a four-year Financial
Plan covering fiscal years 1995 through 1998 (the "1995-1998 Financial Plan").
The 1995-98 Financial Plan reflects a program of proposed actions by the City,
State and Federal governments to close the gaps between projected revenues and
expenditures of $955 million, $1.547 billion and $2.024 billion for the 1996,
1997 and 1998 fiscal years, respectively.
City gap-closing actions total $705 million in the 1996 fiscal year, $1.072 in
the 1997 fiscal year and $1.299 billion in the 1998 fiscal year. These
actions, a substantial number of which are unspecified, include additional
spending reductions, the reduction of City personnel through attrition,
government efficiency initiatives, procurement initiatives and labor
productivity initiatives. Certain of these initiatives may be subject to
negotiation with the City's municipal unions.
State actions proposed in the gap-closing program total $200 million, $375
million and $525 million in the 1996, 1997 and 1998 fiscal years, respectively.
These actions include savings primarily from the proposed State assumption of
certain medicaid costs.
The Federal actions proposed in the gap-closing program are $50 million, $100
million and $200 million in increased Federal assistance in fiscal years 1996
through 1998, respectively.
Various actions proposed in the Financial Plan, including the proposed increase
in State aid, are subject to approval by the Governor and the State
Legislature, and the proposed increase in Federal aid is subject to approval by
Congress and the President. State and Federal actions are uncertain and no
assurance can be given that such actions will in fact be taken or that the
savings that the City projects will result from these actions will be realized.
The State Legislature failed to approve a substantial portion of the proposed
State assumption of Medicaid costs in the last session. The Financial Plan
assumes that these proposals will be approved by the State Legislature during
the 1996 fiscal year and that the Federal government will increase its share of
funding for the Medicaid program. If these measures cannot be implemented, the
City will be required to take other actions to decrease expenditures or
increase revenues to maintain a balanced financial plan.
The City's projected budget gaps for the 1997 and 1998 fiscal years do not
reflect the savings expected to result from prior years' programs to close the
gaps set forth in the Financial Plan. Thus, for example, recurring savings
anticipated from the actions which the City proposes to take to balance the
fiscal year 1996 budget are not take into account in projecting the budget gaps
for the 1997 and 1998 fiscal years.
Although the City has maintained balanced budgets in each of its last thirteen
fiscal years, and is projected to achieve balanced operating results for the
1995 fiscal year, there can be no assurance that the gap-closing actions
proposed in the Financial Plan can be successfully implemented or that the City
will maintain a balanced budget in future years without additional State aid,
revenue increases or expenditure reductions. Additional tax increases and
reductions in essential City services could adversely affect the City's
economic base.
On March 1, 1994, the City Comptroller issued a report on the state of the
City's economy. The report concluded that, while the City's long recession is
over, moderate growth is the best the City can expect, with the local economy
being held back by continuing weakness in important international economies.
On August 2, 1994, the City Comptroller issued a report on the City's July
Financial Plan. With respect to the 1995 fiscal year, the City Comptroller
stated that, after adjusting for the recently announced $250 million increased
reserve and $90 million decrease in the projected surplus for the 1994 fiscal
year, the total risk could be as much as $768 million to $968 million. Risks
which were identified as substantial risks included a possible $263 million
increase in overtime costs; approval by the State Legislature of a tort reform
program to limit damage claims against the City, which would result in savings
of $45 million; the $65 million proceeds from a proposed asset sale; possible
additional expenditures at HHC totaling $60 million; $60 million of possible
increased pension contributions resulting from lower than assumed pension fund
earnings; assumed improvement in the collection of taxes, fines and fees
totaling $50 million; renegotiation of the terms of certain Port Authority
leases totaling $75 million; the receipt of the $200 million of increased
Federal aid; and $41 million of possible increased expenditures for judgments
and claims.
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On October 14, 1994, the City Comptroller issued a report concluding that the
budget gap for the 1995 fiscal year had increased to $1.4 billion, due, in
part, to continuing shortfalls in tax revenues. The Comptroller also notes
that the gaps for the 1996 through 1998 fiscal years will increase
significantly as a result of an actuarial audit of the City's pension system,
to be completed in the near future. The City Comptroller has previously noted
that HHC is projecting an increase in Medicaid reimbursement, which could
result in approximately $40 million of additional Medicaid payments by the City
to HHC in the 1995 fiscal year.
On July 27, 1994, OSDC issued a report reviewing the July Financial Plan. The
report concluded that a potential budget gap of $616 million existed for the
1995 fiscal year, resulting primarily from $150 million of greater than
anticipated overtime costs in the uniformed agencies; the minimal possibility
of State approval for the tort reform initiative; the potential for $50 million
of increased pension costs as a result of lower than assumed pension fund
earnings; the possibility of $110 million of additional City assistance to HHC;
and uncertainties concerning the receipt of $50 million resulting from the
proposed increased collection efforts. The report identified additional risks
for the 1995 fiscal year totaling $152 million.
On October 14, 1994, OSDC issued a report on the local economy. The report
concluded that the expansion of the City's economy broadened and strengthened
in 1994 and is expected to continue. However, the report noted that if
national growth slows as some forecasts now indicate, it could dampen prospects
for key sectors in the local economy, especially professional services,
manufacturing, culture and media. The delayed recovery in the international
economies most closely tied to New York, particularly Continental Europe and
Japan, may slow the further recovery of the City's professional business
services until later in 1995. In addition, the extremely poor second quarter
profits in the securities industry have yet to fully reverberate throughout the
City's economy. Wall Street has announced job cutbacks and is expected to
lower its year-end bonuses, which the report found would slow the growth in
wages and person income. This would dampen the near-term outlook and constrain
the growth in the City tax revenues, notably the personal income, sale and
general corporation tax, in the coming months. Finally, local government will
continue to shed jobs and the rate of growth of local government expenditures
will abate.
On July 28, 1994, the staff of the Control Board issued a report on the July
Financial Plan. In its report the staff concluded that the City faced risks of
more than $1 billion in the 1995 fiscal year, as well as an additional risk of
greater than $165 million annually from increased pension costs if the State
Legislature enacts a pension supplementation bill increasing pension benefits.
The staff noted that the amount of risk involved this early in the fiscal year
is unprecedented and very worrisome. In addition, the staff indicated that the
risks for the 1996 fiscal year exceeded $2 billion and that the risks for each
of the 1997 and 1998 fiscal years approximated $3 billion. Risks for the 1995
through 1998 fiscal years included the potential for increased overtime and
pension costs and uncertainties concerning the proposed reduction in City
expenditures for health care costs, the anticipated revenues from renegotiation
of the terms of certain Port Authority leases, savings resulting from the
proposed tort reform program to limit damage claims against the City, and
increased Federal aid.
The City requires certain amounts of financing for seasonal and capital
spending purposes. The City has issued $1.75 billion of notes for seasonal
financing purposes during fiscal year 1994. The City's capital financing
program projects long-term financing requirements of approximately $17 billion
for the City's fiscal years 1995 through 1998. The major capital requirements
include expenditures for the City's water supply and sewage disposal systems,
roads, bridges, mass transit, schools, hospitals and housing.
OTHER LOCALITIES
Certain localities in addition to the City could have financial problems
leading to requests for additional State assistance during the State's 1994-95
fiscal year and thereafter. The potential impact on the State of such actions
by localities is not included in the projections of the State receipts and
disbursements in the State's 1994-95 fiscal year.
Fiscal difficulties experienced by the City of Yonkers ("Yonkers") resulted in
the creation of the Financial Control Board for the City of Yonkers (the
"Yonkers Board") by the State in 1984. The Yonkers Board is charged with
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oversight of the fiscal affairs of Yonkers. Future actions taken by the
Governor or the State Legislature to assist Yonkers could result in allocation
of State resources in amounts that cannot yet be determined.
CERTAIN MUNICIPAL INDEBTEDNESS
Certain localities in addition to the City could have financial problems
leading to requests for additional State assistance during the State's 1994-95
fiscal year and thereafter. The potential impact on the State of such requests
by localities is not included in the projections of the State's receipts and
disbursements for the State's 1994-95 fiscal year.
Fiscal difficulties experienced by the City of Yonkers resulted in the
re-establishment of the Financial Control Board for the City of Yonkers by the
State in 1984. That Board is charged with oversight of the fiscal affairs of
Yonkers. Future actions taken by the State to assist Yonkers could result in
allocation of State resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in substantial short-term and
long-term borrowings. In 1992, the total indebtedness of all localities in the
State other than New York City was approximately $15.7 billion. A small
portion (approximately $71.6 million) of that indebtedness represented
borrowing to finance budgetary deficits and was issued pursuant to State
enabling legislation. (For further information on the debt of New York
localities, see Table A-8 in Appendix A.) State law requires the Comptroller
to review and make recommendations concerning the budgets of those local
government units other than New York City authorized by State law to issue debt
to finance deficits during the period that such deficit financing is
outstanding. Seventeen localities had outstanding indebtedness for deficit
financing at the close of their fiscal year ending in 1992.
From time to time, Federal expenditure reductions could reduce, or in some
cases eliminate, Federal funding of some local programs and accordingly might
impose substantial increased expenditure requirements on affected localities.
If the State, the City or any of the public authorities were to suffer serious
financial difficulties jeopardizing their respective access to the public
credit markets, the marketability of notes and bonds issued by localities
within the State could be adversely affected. Localities also face anticipated
and potential problems resulting from certain pending litigation, judicial
decisions and long-range economic trends. Long-range potential problems of
declining urban population, increasing expenditures and other economic trends
could adversely affect localities and require increasing State assistance in
the future.
LITIGATION
The State is a defendant in numerous legal proceedings pertaining to matters
incidental to the performance of routine governmental operations. Such
litigation includes, but is not limited to, claims asserted against the State
arising from alleged torts, alleged breaches of contracts, condemnation
proceedings and other alleged violations of State and Federal laws.
Adverse developments in those proceedings or the initiation of new proceedings
could affect the ability of the State to maintain a balanced 1994-95 State
Financial Plan. Although other litigation is pending against the State, no
current litigation involves the State's authority, as a matter of law, to
contract indebtedness, issue its obligations, or pay such indebtedness when it
matures, or affects the State's power or ability, as a matter of law, to impose
or collect significant amounts of taxes and revenues. In its Notes to its
General Purpose Financial Statements for the fiscal year ended March 31, 1994,
the State reports its estimated liability for awarded and anticipated
unfavorable judgments at $675 million.
RATINGS
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As of June 28, 1993, Moody's rated the City's general obligation bonds Baa1 and
S&P rated such bonds A-. Such ratings reflect only the views of Moody's and
S&P, from which an explanation of the significance of such ratings may be
obtained. There is no assurance that such ratings will continue for any given
period of time or that they will not be revised downward or withdrawn entirely.
Any such downward revision or withdrawal could have an adverse effect on the
market prices of the City's bonds.
ADDITIONAL PURCHASE, EXCHANGE AND REDEMPTION INFORMATION
The Victory Portfolios (see "Description of Victory Portfolios" below)
is open for business and the NAV of each class of shares of the Fund is
calculated on each Business Day. A Business Day is every day on which the NYSE
is open for business, the Federal Reserve Bank of Cleveland is open and any
other day (other than a day on which no shares of the Fund are tendered for
redemption and no order to purchase any shares is received) during which there
is sufficient trading in portfolio instruments that the Fund's net asset value
per share might be materially affected. The NAV of each class is determined
and its shares are priced as of the close of regular trading of the NYSE
(generally 4:00 p.m. Eastern time (the "Valuation Time")) on each Business Day
of the Fund. The NYSE or the Federal Reserve Bank of Cleveland will not be
open in observance of the following holidays: New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day.
The holiday closing schedule is subject to change.
When the NYSE is closed, or when trading is restricted for any reason
other than its customary weekend or holiday closings, or under emergency
circumstances as determined by the Commission to warrant such action, the
Fund's Transfer Agent will determine the Fund's NAVs at Valuation Time. The
Fund's NAV may be affected to the extent that its securities are traded on days
that are not Business Days.
If, in the opinion of the Trustees, conditions exist which make cash
payment undesirable, redemption payments may be made in whole or in part in
securities or other property, valued for this purpose as they are valued in
computing the NAV of each class of the Fund. Shareholders receiving securities
or other property on redemption may realize a gain or loss for tax purposes and
will incur any costs of sale as well as the associated inconveniences.
Pursuant to Rule 11a-3 under the 1940 Act, the Fund is required to
give shareholders at least 60 days' notice prior to terminating or modifying
the Fund's exchange privilege. Under the Rule, the 60-day notification
requirement may be waived if (i) the only effect of a modification would be to
reduce or eliminate an administrative fee, redemption fee or deferred sales
charge ordinarily payable at the time of exchange or (ii) the Fund temporarily
suspends the offering of shares as permitted under the 1940 Act or by the SEC
or because it is unable to invest amounts effectively in accordance with its
investment objective and policies.
In the Prospectus, the Victory Portfolios, Key Advisers and the
Sub-Adviser have notified shareholders that they reserve the right at any time
without prior notice to shareholders to refuse exchange purchases by any person
or group if, in Key Advisers or the Sub-Adviser's judgment, the Fund would be
unable to invest effectively in accordance with its investment objective and
policies, or would otherwise potentially be adversely affected.
ADDITIONAL PURCHASE INFORMATION
ALTERNATIVE SALES ARRANGEMENTS - CLASS A AND CLASS B SHARES. The
Alternative Sales Arrangements permit an investor to choose the method of
purchasing shares that is more beneficial to the investor depending on the
amount of the purchase, the length of time the investor expects to hold shares
and other relevant circumstances. Investors should understand that the purpose
and function of the deferred sales charge and asset-based sales charge with
respect to Class B shares are the same as those of the initial sales charge
with respect to Class A shares. Any salesperson or other person entitled to
receive compensation for selling Fund shares may receive different compensation
with respect to one class of shares on behalf of a single investor (not
including dealer "street name" or
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omnibus accounts) because generally it will be more advantageous for that
investor to purchase Class A shares of the Fund instead.
The two classes of shares each represent an interest in the same
portfolio investments of the Fund. However, each class has different
shareholder privileges and features. The net income attributable to Class B
shares and the dividends payable on Class B shares will be reduced by
incremental expenses borne solely by that class, including the asset-based
sales charge to which Class B shares are subject.
CLASS B CONVERSION FEATURE. Ninety-six months after an investor's
purchase order for Class B shares is accepted, such "Matured Class B Shares"
automatically will convert to Class A shares, on the basis of the relative net
asset value of the two classes, without the imposition of any sales load or
other charge. Each time any Matured Class B shares convert to Class A shares,
any Class B shares acquired by the reinvestment of dividends or distributions
on such Matured Class B shares that are still held will also convert to Class A
shares, on the same basis. The conversion feature is intended to relieve
holders of Matured Class B shares of the asset-based sales charge under the
Class B Distribution Plan after such shares have been outstanding long enough
that the Distributor may have been compensated for distribution expenses
related to such shares.
The conversion of Matured Class B shares to Class A shares is subject
to the continuing availability of a private letter ruling from the Internal
Revenue Service, or an opinion of counsel or tax adviser, to the effect that
the conversion of Matured Class B shares does not constitute a taxable event
for the holder under Federal income tax law. If such a revenue ruling or
opinion is no longer available, the automatic conversion feature may be
suspended, in which event no further conversion of Matured Class B shares would
occur while such suspension remained in effect. Although Matured Class B
shares could then be exchanged for Class A shares on the basis of relative net
asset value of the two classes, without the imposition of a sales charge or
fee, such exchange could constitute a taxable event for the holder, and absent
such exchange, Class B shares might continue to be subject to the asset-based
sales charge for longer than six years.
The methodology for calculating the net asset value, dividends and
distributions of the Fund Class A and Class B shares recognizes two types of
expenses. General expenses that do not pertain specifically to either class
are allocated pro rata to the shares of each class, based on the percentage of
the net assets of such class to the Fund's total net assets, and then equally
to each outstanding share within a given class. Such general expenses include
(i) management fees, (ii) legal, bookkeeping and audit fees, (iii) printing and
mailing costs of shareholder reports, prospectuses, statements of additional
information and other materials for current shareholders, (iv) fees to
unaffiliated Trustees, (v) custodian expenses, (vi) share issuance costs, (vii)
organization and start-up costs, (viii) interest, taxes and brokerage
commissions, and (ix) non-recurring expenses, such as litigation costs. Other
expenses that are directly attributable to a class are allocated equally to
each outstanding share within that class. Such expenses included (i)
Distribution Plan fees, (ii) incremental transfer and shareholder servicing
agent fees and expenses, (iii) registration fees and (iv) shareholder meeting
expenses, to the extent that such expenses pertain to a specific class rather
than to the Fund as a whole.
REDUCED SALES CHARGE. Reduced sales charges are applicable to
purchases of $50,000 or more of Class A shares of the Fund alone or in
combination with purchases of shares of other Victory Portfolios made at any
one time. To obtain the reduction of the sales charge, you or your investment
professional must notify the Transfer Agent at the time of purchase whenever a
quantity discount is applicable to your purchase. Upon such notification, you
will receive the lowest applicable sales charge.
The contingent deferred sales charge is waived on Class B shares in
the following cases: (i) shares sold to Key Advisers, the Sub-Adviser or their
affiliates; (ii) shares issued in plans of reorganization to which the Fund is
a party; and (iii) shares redeemed in involuntary redemptions.
In addition to investing at one time in any combination of Class A
shares of the Victory Portfolios in an amount entitling you to a reduced sales
charge, you may qualify for a reduction in the sales charge under the following
programs:
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COMBINED PURCHASES. When you invest in Class A shares of the Victory
Portfolios for several accounts at the same time, you may combine these
investments into a single transaction if purchased through one investment
professional, and if the total is $50,000 or more. The following may qualify
for this privilege: an individual, or "company" as defined in Section 2(a)(8)
of the 1940 Act; an individual, spouse, and their children under age 21
purchasing for his, her, or their own account; a trustee, administrator or
other fiduciary purchasing for a single trust estate or single fiduciary
account or for a single or a parent-subsidiary group of "employee benefit
plans" (as defined in Section 3(3) of ERISA); and tax-exempt organizations
under Section 501(c)(3) of the Internal Revenue Code.
RIGHTS OF ACCUMULATION. Your "Rights of Accumulation" permit reduced
sales charges on future purchases of Class A shares after you have reached a
new breakpoint. You can add the value of existing Victory Portfolios shares
held by you, your spouse, and your children under age 21, determined at the
previous day's NAV at the close of business, to the amount of your new purchase
valued at the current offering price to determine your reduced sales charge.
LETTER OF INTENT. If you anticipate purchasing $50,000 or more of
shares of the Fund alone or in combination with Class A shares of certain other
Victory Portfolios within a 13-month period, you may obtain shares of the
portfolios at the same reduced sales charge as though the total quantity were
invested in one lump sum, by filing a non- binding Letter of Intent (the
"Letter") within 90 days of the start of the purchases. Each investment you
make after signing the Letter will be entitled to the sales charge applicable
to the total investment indicated in the Letter. For example, a $2,500 purchase
toward a $60,000 Letter would receive the same reduced sales charge as if the
$60,000 had been invested at one time. To ensure that the reduced price will
be received on future purchases, you or your investment professional must
inform the transfer agent that the Letter is in effect each time shares are
purchased. Neither income dividends nor capital gain distributions taken in
additional shares will apply toward the completion of the Letter.
Your initial investment must be at least 5% of the total amount you
plan to invest. Out of the initial purchase, 5% of the dollar amount specified
in the Letter will be registered in your name and held in escrow. The shares
held in escrow cannot be redeemed or exchanged until the Letter is satisfied or
the additional sales charges have been paid. You will earn income dividends
and capital gain distributions on escrowed shares. The escrow will be released
when your purchase of the total amount has been completed. You are not
obligated to complete the Letter.
If you purchase more than the amount specified in the Letter and
qualify for a further sales charge reduction, the sales charge will be adjusted
to reflect your total purchase at the end of 13 months. Surplus funds will be
applied to the purchase of additional shares at the then current offering price
applicable to the total purchase.
If you do not complete your purchase under the Letter within the
13-month period, your sales charge will be adjusted upward, corresponding to
the amount actually purchased, and if after written notice, you do not pay the
increased sales charge, sufficient escrowed shares will be redeemed to pay such
charge.
ADDITIONAL EXCHANGE INFORMATION
Class A shares of the Fund (see "Description of Victory Portfolios"
below) may be exchanged for shares of any Victory money market fund or any
other fund of the Victory Portfolios with the same or a lower sales charge.
Shares of any Victory money market portfolio or any Victory Portfolios with a
reduced sales charge may be exchanged for shares of the Fund upon payment of
the difference in the sales charge (or, if applicable, shares of any Victory
money market portfolio may be used to purchase Class B shares of the Fund.)
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Class B shares of the Fund may be exchanged for shares of other
Victory Portfolios that offer Class B shares. The CDSC applicable to Class B
shares is imposed on Class B shares redeemed within six years of the initial
purchase of the exchanged Class B shares. When Class B shares are redeemed to
effect an exchange, the priorities described in "How to Invest" in the
Prospectus for the imposition of the Class B CDSC will be followed in
determining the order in which the shares are exchanged. Shareholders should
take into account the effect of any exchange on the applicability and rate of
any CDSC that might be imposed in the subsequent redemption of remaining
shares. Shareholders owning shares of both classes must specify whether they
intend to exchange Class A or Class B shares.
ADDITIONAL REDEMPTION INFORMATION
REINSTATEMENT PRIVILEGE. Within 90 days of a redemption, a
shareholder may reinvest all or part of the redemption proceeds of (i) Class A
shares, or (ii) Class B shares that were subject to the Class B contingent
deferred sales charge when redeemed, in Class A shares of the Fund or any of
the other Victory Portfolios into which shares of the Fund are exchangeable as
described below, at the net asset value next computed after receipt by the
Transfer Agent of the reinvestment order. No charge is currently made for
reinvestment in shares of the Fund but a reinvestment in shares of certain
other Victory Portfolios is subject to a $5.00 service fee. The shareholder
must ask the Distributor for such privilege at the time of reinvestment. Any
capital gain that was realized when the shares were redeemed is taxable, and
reinvestment will not alter any capital gains tax payable on that gain. If
there has been a capital loss on the redemption, some or all of the loss may
not be tax deductible, depending on the timing and amount of the reinvestment.
Under the Internal Revenue Code, if the redemption proceeds of Fund shares on
which a sales charge was paid are reinvested in shares of the Fund or another
of the Victory Portfolios within 90 days of payment of the sales charge, the
shareholder's basis in the shares of the Fund that were redeemed may not
include the amount of the sales charge paid. That would reduce the loss or
increase the gain recognized from redemption. The Fund may amend, suspend or
cease offering this reinvestment privilege at any time as to shares redeemed
after the date of such amendment, suspension or cessation. You must reinstate
your shares into an account with the same registration. This privilege may be
exercised only once by a shareholder with respect to the Fund. For information
on which funds are available for the Reinstatement Privilege, please consult
your program materials.
DIVIDENDS AND DISTRIBUTIONS
The Fund ordinarily declares and pays dividends separately for Class A
and Class B shares from its net investment income quarterly. The Fund
distributes substantially all of its net investment income and net capital
gains, if any, to shareholders within each calendar year as well as on a fiscal
year basis to the extent required for the Fund to qualify for favorable federal
tax treatment.
The amount of a class's distributions may vary from time to time
depending on market conditions, the composition of the Fund's portfolio, and
expenses borne by the Fund or borne separately by a class, as described in
"Alternative Sales Arrangements - Class A and Class B," above. Dividends are
calculated in the same manner, at the same time and on the same day for shares
of each class. However, dividends on Class B shares are expected to be lower
as a result of the asset-based sales charge on Class B shares, and Class B
dividends will also differ in amount as a consequence of any difference in net
asset value between Class A and Class B shares.
For this purpose, the net income of the Fund, from the time of the
immediately preceding determination thereof, shall consist of all interest
income accrued on the portfolio assets of the Fund, dividend income, if any,
income from securities loans, if any, and realized capital gains and losses on
the Fund assets, less all expenses and liabilities of the Fund chargeable
against income. Interest income shall include discount earned, including both
original issue and market discount, on discount paper accrued ratably to the
date of maturity. Expenses, including the compensation payable to Key Advisers
or the Sub-Adviser, are accrued each day. The expenses and liabilities of the
Fund shall include those appropriately allocable to the Fund as well as a share
of the general expenses and liabilities of the Victory Portfolios in proportion
to the Fund's share of the total net assets of the Victory Portfolios.
Additional Tax Information
-36-
<PAGE> 439
It is the Fund's policy to qualify for the favorable tax treatment
accorded regulated investment companies ("RICs") under Subchapter M of the
Code, for so long as such qualification is in the best interest of its
shareholders. By following such policy and distributing its income and gains
currently with respect to each taxable year, the Fund expects to eliminate or
reduce to a nominal amount the federal income and excise taxes to which it may
otherwise be subject.
In order to qualify as a RIC, the Fund must, among other things, (1)
derive at least 90% of its gross income from dividends, interest, payments with
respect to securities loans, and gains from the sale or other disposition of
stock or securities, foreign currencies or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in stock, securities or currencies, (2) derive less than 30% of its
gross income from the sale or other disposition of stock, securities, options,
futures, forward contracts, and certain foreign currencies (or options,
futures, or forward contracts on foreign currencies) held for less than three
months, and (3) diversify its holdings so that at the end of each quarter of
its taxable year (i) at least 50% of the market value of the Fund's assets is
represented by cash or cash items, U.S. Government securities, securities of
other RICs and other securities limited, in respect of any one issuer, to an
amount not greater than 5% of the value of the Fund's total assets and 10% of
the outstanding voting securities of such issuer, and (ii) not more than 25% of
the value of its total assets is invested in the securities of any one issuer
(other than U.S. Government securities) or of two or more issuers that the Fund
controls and that are engaged in the same, similar, or related trades or
businesses. These requirements may restrict the degree to which the Fund may
engage in short-term trading and concentrate investments. If the Fund
qualifies as a RIC, it will not be subject to federal income tax on the part of
its net investment income and net realized capital gains, if any, that it
distributes to shareholders with respect to each taxable year within the time
limits specified in the Code.
A non-deductible excise tax is imposed on regulated investment
companies that do not distribute in each calendar year an amount equal to 98%
of their ordinary income for the year plus 98% of their capital gain net income
for the 1-year period ending on October 31 of such calendar year. The balance
of such income must be distributed during the following calendar year. If
distributions during a calendar year are less than the required amount, the
Fund is subject to a non-deductible excise tax equal to 4% of the deficiency.
Certain investment and hedging activities of a fund, including
transactions in options, futures contracts, hedging transactions, forward
contracts, straddles, foreign currencies, and foreign securities, are subject
to special tax rules. In a given case, these rules may accelerate income to the
fund, defer losses to the fund, cause adjustments in the holding periods of the
fund's securities, convert short-term capital losses into long-term capital
losses, or otherwise affect the character of the fund's income. These rules
could therefore affect the amount, timing and character of distributions to
shareholders. The Victory Portfolios will endeavor to make any available
elections pertaining to such transactions in a manner believed to be in the
best interest of the Victory Portfolios and their securities.
The Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends paid to any shareholder who has
failed to provide (or provided an incorrect) tax identification number, or is
subject to withholding pursuant to a notice from the Internal Revenue Service
for failure to properly include on his or her income tax return payments of
interest or dividends. This "backup withholding" is not an additional tax, and
any amounts withheld may be credited against the shareholder's ultimate U.S.
tax liability.
Information set forth in the Prospectus and this Statement of
Additional Information that relates to federal taxation is only a summary of
certain key federal tax considerations generally affecting purchasers of shares
of the Fund. No attempt has been made to present a complete explanation of the
federal tax treatment of the Fund or its shareholders, and this discussion is
not intended as a substitute for careful tax planning. Accordingly, potential
purchasers of shares of the Fund are urged to consult their tax advisers with
specific reference to their own tax circumstances. In addition, the tax
discussion in the Prospectus and this Statement of Additional Information is
based on tax law in effect on the date of the Prospectus and this Statement of
Additional Information; such laws and regulations may be changed by
legislative, judicial or administrative action, sometimes with retroactive
effect.
-37-
<PAGE> 440
MANAGEMENT OF THE VICTORY PORTFOLIOS
Board of Trustees
Overall responsibility for management of the Victory Portfolios rests
with the Trustees, who are elected by the shareholders of the Victory
Portfolios. The Victory Portfolios are managed by the Trustees in accordance
with the laws of the State of Delaware governing business trusts. There are
currently seven Trustees, six of whom are not "interested persons" of the
Victory Portfolios within the meaning of that term under the 1940 Act. The
Trustees, in turn, elect the officers of the Victory Portfolios to supervise
actively its day-to-day operations.
The Trustees of the Victory Portfolios, their addresses, ages and
their principal occupations during the past five years are as follows:
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- --------------------- ---------------- --------------------
<S> <C> <C>
Leigh A. Wilson, 51* Trustee and From 1989 to present, Chairman and
Glenleigh International Ltd. President Chief Executive Officer, Glenleigh
53 Sylvan Road North International Limited; previously
Westport, CT 06880 Chief Executive Officer, Paribas
North America and Paribas
Corporation; Trustee, The Victory
Funds and Spears, Benzak, Salomon
and Farrell ("SBSF") Funds.
Robert G. Brown, 72
5460 N. Ocean Drive
Singer Island Trustee Retired; from October 1983 to
Riviera Beach, FL 33404 November 1990, President, Cleveland
Advanced Manufacturing Program
(non-profit corporation engaged in
regional economic development).
Edward P. Campbell, 46 Trustee From March 1, 1994 to present,
Nordson Corporation Executive Vice President and Chief
28601 Clemens Road Operating Officer of Nordson
Westlake, OH 44145 Corporation (manufacturer of
application equipment); from May
1988 to March 1994, Vice President
of Nordson Corporation; from 1987
to December 1994, member of the
Supervisory Committee of Society's
Collective Investment Retirement
Fund; from May 1991 to August 1994,
Trustee, Financial Reserves Fund
and from May 1993 to August 1994,
Trustee, Ohio Municipal Money
Market Fund; Trustee, The Victory
Funds and SBSF Funds.
</TABLE>
-38-
<PAGE> 441
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- --------------------- ---------------- --------------------
<S> <C> <C>
Dr. Harry Gazelle, 68 Trustee Retired radiologist, Drs. Hill and
17822 Lake Road Thomas Corp.; Trustee, The Victory
Lakewood, OH 44107 Funds.
</TABLE>
____________
* Mr. Wilson is deemed to be an "interested person" of the Victory
Portfolios under the 1940 Act solely by reason of his position as
President.
-39-
<PAGE> 442
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- --------------------- ---------------- --------------------
<S> <C> <C>
Dr. Thomas F. Morrissey, 62 Trustee 1995 Visiting Scholar, Bond
Weatherhead School of University, Queensland, Australia;
Management Professor, Weatherhead School of
Case Western Reserve Management, Case Western Reserve
University University; from 1989 to 1995,
10900 Euclid Avenue Associate Dean of Weatherhead
Cleveland, OH 44106-7235 School of Management and Professor,
Case Western Reserve University;
from 1987 to December 1994, Member
of the Supervisory Committee of
Society's Collective Investment
Retirement Fund; from May 1991 to
August 1994, Trustee, Financial
Reserves Fund and from May 1993 to
August 1994, Trustee, Ohio
Municipal Money Market Fund;
Trustee, The Victory Funds.
Stanley I. Landgraf, 70 Trustee Retired; currently, Trustee,
41 Traditional Lane Rensselaer Polytechnic Institute;
Albany, NY 12211 Director, Elenel Corporation and
Mechanical Technology, Inc.;
Member, Board of Overseers, School
of Management, Rensselaer
Polytechnic Institute; Member, The
Fifty Group (a Capital Region
business organization); Trustee,
The Victory Funds.
H. Patrick Swygert, 52 Trustee President, Howard University;
Howard University formerly President, State
2400 6th Street, N.W. University of New York at Albany;
Suite 320 formerly, Executive Vice President,
Washington, DC 20059 Temple University; Trustee, The
Victory Funds.
</TABLE>
The Board presently has an Investment Policy Committee and a
Business, Legal, and Audit Committee. The members of the Investment Policy
Committee are Messrs. Landgraf (Chairman), Morrissey and Brown, who will serve
until May 1996. The function of the Investment Policy Committee is to review
the existing investment policies of the Victory Portfolios, including the
levels of risk and types of funds available to shareholders, and make
recommendations to the Board of Trustees regarding the revision of such
policies or, if necessary, the submission of such revisions to the Victory
Portfolios' shareholders for their consideration. The members of the Business,
Legal and Audit Committee are Messrs. Swygert (Chairman), Campbell and Gazelle
who will serve until May 1996. The function of the Business, Legal and Audit
Committee is to recommend independent auditors and monitor accounting and
financial matters; to nominate persons to serve as disinterested Trustees and
Trustees to serve on committees of the Board; and to review compliance and
contract matters.
-40-
<PAGE> 443
The Investment Policy Committee met four times during the 12
months ended October 31, 1995. The Business, Legal and Audit Committee was
constituted on May 24, 1995 (and has met twice since then) and replaced the
Audit Committee, the Legal Committee and the Nominating Committee, which met
three times, one time and one time, respectively, during the 12 month period
ended October 31, 1995.
REMUNERATION OF TRUSTEES AND CERTAIN EXECUTIVE OFFICERS
Effective June 1, 1995, each Trustee (other than Leigh A. Wilson)
receives an annual fee of $27,000 for serving as Trustee of all the funds of
the Victory Portfolios, and an additional per meeting fee ($2,400 in person and
$1,200 per telephonic meeting).
Effective June 1, 1995, Leigh A. Wilson receives an annual fee of
$33,000 for serving as President and Trustee for all of the Funds of the
Victory Portfolios, and an additional per meeting fee ($3,000 in person and
$1,500 per telephonic meeting).
The following table indicate the compensation received by each Trustee
from the Fund and from the Victory "Fund Complex" during the fiscal year ended
October 31, 1995. For certain Trustees, the amount from the Fund includes
amounts paid by the Predecessor Fund which was reorganized as the Fund as of
June 5, 1995:
<TABLE>
<CAPTION>
Pension or Compensation
Retirement Estimated Annual from the New Total Compensation
Benefits Accrued as Benefits York Tax- from Victory
Portfolio Expenses Upon Retirement Free Fund "Fund Complex"*
------------------ --------------- --------- ---------------
<S> <C> <C> <C> <C>
Robert G. Brown, Trustee . . . . -0- -0- $141.29 $39,815.98
Edward P. Campbell, Trustee . . . -0- -0- 76.45 33,799.68
Harry Gazelle, Trustee . . . . . -0- -0- 123.38 35,916.98
John W. Kemper,# Trustee . . . . -0- -0- 100.45 22,567.31
Thomas F. Morrissey, Trustee . . -0- -0- 148.08 40,366.98
Stanley I. Landgraft, Trustee . . -0- -0- 104.47 34,615.98
Leigh A. Wilson, Trustee . . . . -0- -0- 162.90 46,716.97
H. Patrick Swygert, Trustee . . . -0- -0- 148.08 37,116.98
John D. Buckingham,# Trustee . . -0- -0- 51.65 18,841.89
John R. Young,# Trustee . . . . . -0- -0- 88.31 21,963.81
</TABLE>
# Resigned
- ----------------
* For certain Trustees, these amounts include compensation received from The
Victory Funds (which were reorganized into the Victory Portfolios as of June
5, 1995), the SBSF Funds (the investment adviser of which was acquired by
KeyCorp effective April, 1995) and Society's Collective Investment Retirement
Funds, which were reorganized into the Victory Balanced Fund and Victory
Government Mortgage Fund as of December 19, 1994. There are presently 28
mutual funds from which the above-named Trustees are compensated in the
Victory "Fund Complex," but not all of the above-named Trustees serve on the
boards of each fund in the "Fund Complex."
-41-
<PAGE> 444
Officers
The officers of the Victory Portfolios, their addresses, ages and
principal occupations during the past five years are as follows:
<TABLE>
<CAPTION>
Position with the Principal occupation
Name Victory Portfolios during past 5 years
---- ------------------ -------------------
<S> <C> <C>
Leigh A. Wilson, 51 President and Trustee From 1989 to present, Chairman and
Chief Executive Officer, Glenleigh
International Limited; from 1984-
1989, Chief Executive Officer,
Paribas North America and Paribas
Corporation; Trustee of The Victory
Funds and SBSF Funds.
William B. Blundin, 57 Vice President Senior Vice President of BISYS Fund
Services; officer of other
investment companies administered
by BISYS Fund Services; President
and Chief Executive Officer of
Vista Broker-Dealer Services, Inc.,
Emerald Asset Management, Inc. and
BNY Hamilton Distributors, Inc.,
registered broker/dealers.
J. David Huber, 49 Vice President Executive Vice President, BISYS
Fund Services.
Scott A. Englehart, 33 Secretary From October 1990 to present,
employee of BISYS Fund Services,
Inc.; from 1985 to October 1990,
Manager of Banking Center, Fifth
Third Bank.
George O. Martinez, 36 Assistant Secretary From March 1995 to present, Senior
Vice President and Director of
Legal and Compliance Services,
BISYS Fund Services; from June
1989-March 1995, Vice President and
Associate General Counsel, Alliance
Capital Management.
Martin R. Dean, 32 Treasurer From May 1994 to present, employee
of BISYS Fund Services; from
January 1987 - April 1994, Senior
Manager, KPMG Peat Marwick.
Adrian J. Waters, 33 Assistant Treasurer From May 1993 to present, employee
of BISYS Fund Services; from 1989-
May 1993, Manager, Price
Waterhouse.
</TABLE>
-42-
<PAGE> 445
The mailing address of each of the officers of the Victory Portfolios
is 3435 Stelzer Road, Columbus, Ohio 43219-3035.
The officers of the Victory Portfolios (other than Leigh Wilson)
receive no compensation directly from the Victory Portfolios for performing the
duties of their offices. Concord Holding Corporation receives fees from the
Victory Portfolios for acting as Administrator.
As of December 1, 1995, the Trustees and officers as a group owned
beneficially less than 1% of the Fund.
Investment Adviser and Sub-Adviser
Key Advisers was organized as an Ohio corporation on July 27, 1995 and
is registered as an investment adviser under the Investment Advisers Act of
1940. It is a wholly-owned subsidiary of KeyCorp Asset Management Holdings,
Inc., which is a wholly-owned subsidiary of Society National Bank, a
wholly-owned subsidiary of KeyCorp. Affiliates of Key Advisers manage
approximately $37 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals and mutual funds.
KeyCorp, a financial services holding company, is headquartered at 127
Public Square, Cleveland, Ohio 44114. As of September 30, 1995, KeyCorp had an
asset base of $68 billion, with banking offices in 26 states from Maine to
Alaska, and trust and investment offices in 16 states. KeyCorp is the
resulting entity of the merger in 1994 of Society Corporation, the bank holding
company of which Society National Bank was a wholly-owned subsidiary, and
KeyCorp, the former bank holding company, which merger was consummated during
the first quarter of 1994. KeyCorp's major business activities include
providing traditional banking and associated financial services to consumer,
business and commercial markets. Its non-bank subsidiaries include investment
advisory, securities brokerage, insurance, bank credit card processing, and
mortgage leasing companies. Society National Bank is the lead affiliate bank
of KeyCorp.
The following table lists the advisory fees for each mutual fund that
is advised by Key Advisers.
.25 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Institutional Money Market Fund*
.35 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Prime Obligations Fund *
Victory U.S. Government Obligations Fund*
Victory Tax-Free Money Market Fund*
.50 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Money Market Fund*
Victory Limited Term Income Fund*
Victory Government Mortgage Fund*
Victory Financial Reserves Fund*
Victory Fund for Income #
.55 OF 1% OF AVERAGE DAILY NET ASSETS
Victory National Municipal Bond Fund*
Victory Government Bond Fund*
Victory New York Tax-Free Fund*
-43-
<PAGE> 446
.60 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Bond Fund*
Victory Stock Index Fund*
.65 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Diversified Stock Fund*
.75 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Intermediate Income Fund*
Victory Investment Quality Bond Fund*
Victory Ohio Regional Stock Fund*
1% OF AVERAGE DAILY NET ASSETS
Victory Balanced Fund*
Victory Value Fund*
Victory Growth Fund*
Victory Special Value Fund*
Victory Special Growth Fund+-
1.10% OF AVERAGE DAILY ASSETS
Victory International Growth Fund*
# First Albany Asset Management Corporation serves as
sub-adviser to the Victory Fund for Income, for which it
receives .20% of average daily net assets.
+- T. Rowe Price Associates, Inc. serves as sub-adviser to the
Victory Special Growth Fund, for which it receives .25% of
average daily net assets up to $100 million and .20% of
average daily net assets in excess of $100 million.
* Society Asset Management, Inc. (the Sub-Adviser) serves as
sub-adviser to each of these funds. For its services under
the investment sub-advisory agreement, Key Advisers pays the
Sub-Adviser sub-advisory fees at rates (based on an annual
percentage of average daily net assets) which vary according
to the table set forth below:
<TABLE>
<S> <C>
For the Balanced Fund, Diversified Stock Fund, For the International Growth Fund, Ohio
Growth Fund, Stock Index Fund and Value Fund: Regional Stock Fund and Special Value Fund:
</TABLE>
<TABLE>
<CAPTION>
Rate of Rate of
Net Assets Sub-Advisory Fee* Net Assets Sub-Advisory Fee*
---------- ----------------- ---------- -----------------
<S> <C> <C> <C>
Up to $10,000,000 0.65% Up to $10,000,000 0.90%
Next $15,000,000 0.50% Next $15,000,000 0.70%
Next $25,000,000 0.40% Next $25,000,000 0.55%
Above $50,000,000 0.35% Above $50,000,000 0.45%
</TABLE>
<TABLE>
<S> <C>
For the Victory Intermediate Income Fund, Investment For the Victory Prime Obligations Fund, Tax-Free
Quality Bond Fund, Limited Term Income Fund, Money Market Fund, U.S. Government Obligations Ohio Municipal
Bond Fund, Government Bond Fund, Financial Reserves Fund, Institutional
Money
</TABLE>
-44-
<PAGE> 447
<TABLE>
<S> <C>
Fund, Government Mortgage Fund, National Market Fund and Ohio Municipal Money Market
Municipal Bond Fund and New York Tax-Free Fund: Fund:
</TABLE>
-45-
<PAGE> 448
<TABLE>
<CAPTION>
Rate of Rate of
Net Assets Sub-Advisory Fee* Net Assets Sub-Advisory Fee*
---------- ----------------- ---------- -----------------
<S> <C> <C> <C>
Up to $10,000,000 0.40% Up to $10,000,000 0.25%
Next $15,000,000 0.30% Next $15,000,000 0.20%
Next $25,000,000 0.25% Next $25,000,000 0.15%
Above $50,000,000 0.20% Above $50,000,000 0.125%
</TABLE>
____________________
* As a percentage of average daily net assets. The Sub-Adviser has the
right to voluntarily waive any portion of the sub-advisory fee from
time to time.
ADVISORY AND OTHER CONTRACTS
Unless sooner terminated, the Investment Advisory Agreement between
Key Advisers and the Fund provides that it will continue in effect as to the
Fund for an initial two-year term and for consecutive one-year terms
thereafter, provided that such continuance is approved at least annually by the
Victory Portfolios' Trustees or by vote of a majority of the outstanding shares
of the Fund (as defined under "GENERAL INFORMATION - Miscellaneous" in the
Prospectuses), and, in either case, by a majority of the Trustees who are not
parties to the Investment Advisory Agreement or interested persons (as defined
in the 1940 Act) of any party to the Investment Advisory Agreement, by votes
cast in person at a meeting called for such purpose.
The Investment Advisory Agreement is terminable as to the Fund at any
time on 60 days' written notice without penalty by the Trustees, by vote of a
majority of the outstanding shares of that Fund, or by Key Advisers. The
Investment Advisory Agreement also terminates automatically in the event of any
assignment, as defined in the 1940 Act.
The Investment Advisory Agreement provides that Key Advisers shall not
be liable for any error of judgment or mistake of law or for any loss suffered
by the Fund in connection with the performance of services pursuant to the
Investment Advisory Agreement, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith, or gross negligence on the
part of Key Advisers in the performance of its duties, or from reckless
disregard by it of either duties and obligations thereunder.
Under the Investment Advisory Agreement, Key Advisers has agreed to
provide investment advisory services described in the Prospectus. For the
services provided and expenses assumed pursuant to the Investment Advisory
Agreement, the Fund pays Key Advisers a fee, computed daily and paid monthly,
at the annual rate of sixty-five one-hundredths of one percent (.65%) of the
average daily net assets of the Fund.
Prior to January 1, 1995, Society Asset Management, Inc. served as
investment adviser to the Fund. From May 1, 1994 to June 5, 1995, Society's
affiliate, Key Trust Company, served as the investment adviser to the Fund and
its Predecessor Fund. Prior to May 1, 1994, First Albany Asset Management
Corporation served as the investment adviser to the Investors Preference New
York Tax-Free Fund, the predecessor to the Predecessor Fund. For the fiscal
years ended October 31, 1995 and the fiscal period ended October 31, 1994 the
Fund paid investment advisory fees of $_______, and $________, in investment
advisory fees, respectively, and the investment adviser reimbursed expenses
amounting to $_______ and $_______, respectively.
Under the Investment Advisory Agreement Key Advisers may delegate a
portion of its responsibilities to a sub- adviser. In addition, the Investment
Advisory Agreement provides that Key Advisers may render services through its
own employees or the employees of one or more affiliated companies that are
qualified to act as an
-46-
<PAGE> 449
investment adviser of the Fund and are under the common control of KeyCorp as
long as all such persons are functioning as part of an organized group of
persons, managed by authorized officers of Key Advisers.
Key Advisers has entered into an investment sub-advisory agreement
with its affiliate, Society Asset Management, Inc. on behalf of the Fund. The
Sub-Adviser is a wholly-owned subsidiary of KeyCorp Asset Management Holdings,
Inc. With respect to the day to day management of the Fund, under the
sub-advisory agreement, the Sub-Adviser makes decisions concerning, and places
all orders for, purchases and sales of securities and helps maintain the
records relating to such purchases and sales. The Sub-Adviser may, in its
discretion, provide such services through its own employees or the employees of
one or more affiliated companies that are qualified to act as an investment
adviser to the Company under applicable laws and are under the common control
of KeyCorp; provided that (i) all persons, when providing services under the
sub-advisory agreement, are functioning as part of an organized group of
persons, and (ii) such organized group of persons is managed at all times by
authorized officers of the Sub-Adviser. This arrangement will not result in the
payment of additional fees by the Fund.
Glass-Steagall Act
In 1971 the United States Supreme Court held in Investment Company
Institute v. Camp that the federal statute commonly referred to as the
Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision:
(a) forbid a bank holding company registered under the Federal Bank Holding
Company Act of 1956 (the "Holding Company Act") or any non-bank affiliate
thereof from sponsoring, organizing, or controlling a registered, open-end
investment company continuously engaged in the issuance of its shares, but (b)
do not prohibit such a holding company or affiliate from acting as investment
adviser, transfer agent, and custodian to such an investment company. In 1981
the United States Supreme Court held in Board of Governors of the Federal
Reserve System v. Investment Company Institute that the Board did not exceed
its authority under the Holding Company Act when it adopted its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to registered closed-end investment companies.
In the Board of Governors case, the Supreme Court also stated that if a
national bank complied with the restrictions imposed by the Board in its
regulation and interpretation authorizing bank holding companies and their
non-bank affiliates to act as investment advisers to investment companies, a
national bank performing investment advisory services for an investment company
would not violate the Glass-Steagall Act.
Key Advisers and the Sub-Adviser believe that they may perform the
services for the Victory Portfolios contemplated by the Prospectus, this
Statement of Additional Information, and the Investment Advisory Agreement (and
Sub-Advisory Agreement) with the Victory Portfolios without violation of
applicable statutes and regulations and has so represented in its Investment
Advisory Agreement (and Sub-Advisory Agreement) with the Victory Portfolios.
Key Trust Company of Ohio, N.A. believes that it may perform the services for
the Victory Portfolios contemplated by the Prospectus, this Statement of
Additional Information, and the Shareholder Servicing Agreement with the
Victory Portfolios (as described below) without violation of applicable
statutes and regulations and has so represented in such Shareholder Servicing
Agreement. Future changes in either federal or state statutes and regulations
relating to the permissible activities of banks or bank holding companies and
the subsidiaries or affiliates of those entities, as well as further judicial
or administrative decisions or interpretations of present and future statutes
and regulations, could prevent or restrict Key Trust Company of Ohio, N.A., Key
Advisers or the Sub-Adviser from continuing to perform such services for the
Victory Portfolios. Depending upon the nature of any changes in the services
which could be provided by Key Trust Company of Ohio, N.A., Key Advisers or the
Sub-Adviser, the Trustees of the Victory Portfolios would review the Victory
Portfolios' relationship with Key Trust Company of Ohio, N.A., Key Advisers or
the Sub-Adviser and consider taking all action necessary in the circumstances.
Should future legislative, judicial, or administrative action prohibit
or restrict the proposed activities of Key Trust Company of Ohio, N.A., Key
Advisers or the Sub-Adviser and its affiliated and correspondent banks and
other non-bank affiliates in connection with customer purchases of shares of
the Victory Portfolios, the banks and
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<PAGE> 450
such non-bank affiliates might be required to alter materially or discontinue
the services offered by them to customers. It is not anticipated, however,
that any change in the Victory Portfolios' method of operations would affect
its net asset value per share or result in financial losses to any customer.
From time to time, advertisements, supplemental sales literature and
information furnished to present or prospective shareholders of the Fund may
include descriptions of Key Trust Company of Ohio, N.A., Key Advisers and the
Sub-Adviser including, but not limited to, (i) descriptions of the operations
of Key Trust Company of Ohio, N.A., Key Advisers and the Sub-Adviser; (ii)
descriptions of certain personnel and their functions; and (iii) statistics and
rankings related to the operations of Key Trust Company of Ohio, N.A., Key
Advisers and the Sub-Adviser.
Portfolio Transactions
Pursuant to the Investment Advisory Agreement (and Sub-Advisory
Agreement) , Key Advisers or the Sub-Adviser determines, subject to the general
supervision of the Trustees of the Victory Portfolios, and in accordance with
the Fund's investment objective and restrictions, which securities are to be
purchased and sold by the Fund, and which brokers are to be eligible to execute
its portfolio transactions. Purchases from underwriters and/or broker/dealers
of portfolio securities include a commission or concession paid by the issuer
to the underwriter and/or broker/dealer and purchases from dealers serving as
market makers may include the spread between the bid and asked price. While
Key Advisers and the Sub-Adviser generally seek competitive spreads or
commissions, the Fund may not necessarily pay the lowest spread or commission
available on each transaction, for reasons discussed below.
Allocation of transactions, including their frequency, to various
dealers is determined by Key Advisers or the Sub-Adviser in its best judgment
and in a manner deemed fair and reasonable to shareholders. The primary
consideration is prompt execution of orders in an effective manner at the most
favorable price. Subject to this consideration, dealers who provide
supplemental investment research to Key Advisers or the Sub-Adviser may receive
orders for transactions by the Victory Portfolios. Information so received is
in addition to and not in lieu of services required to be performed by Key
Advisers or the Sub-Adviser and does not reduce the advisory (sub-advisory)
fees payable to Key Advisers or the Sub-Adviser by the Victory Portfolios.
Such information may be useful to Key Advisers or the Sub- Adviser in serving
both the Victory Portfolios and other clients and, conversely, such
supplemental research information obtained by the placement of orders on behalf
of business or other clients may be useful to Key Advisers or the Sub- Adviser
in carrying out its obligations to the Victory Portfolios. In the future, the
Trustees may also authorize the allocation of brokerage to affiliated
broker-dealers on an agency basis to effect portfolio transactions. In such
event, the Trustees will adopt procedures incorporating the standards of Rule
17e-1 under the 1940 Act, which requires that the commission paid to affiliated
broker-dealers must be "reasonable and fair compared to the commission, fee or
other remuneration received, or to be received, by other brokers in connection
with comparable transactions involving similar securities during a comparable
period of time." At times, the Fund may also purchase portfolio securities
directly from dealers acting as principals, underwriters or market makers. As
these transactions are usually conducted on a net basis, no brokerage
commissions are paid by the Fund.
The Victory Portfolios will not execute portfolio transactions
through, acquire portfolio securities issued by, make savings deposits in, or
enter into repurchase or reverse repurchase agreements with Key Advisers, the
Sub-Adviser, Key Trust Company of Ohio, N.A. or its affiliates, Concord Holding
Corporation, Victory Broker-Dealer Services, Inc. or their affiliates, and will
not give preference to Key Trust Company of Ohio, N.A.'s correspondent banks or
affiliates, or Concord Holding Corporation or Victory Broker-Dealer Services,
Inc. with respect to such transactions, securities, savings deposits,
repurchase agreements, and reverse repurchase agreements.
Investment decisions for the Fund are made independently from those
for the other funds or any other investment company or account managed by Key
Advisers (or Society). Any such other investment company or account may also
invest in the same securities as a particular fund. When a purchase or sale of
the same security is made at substantially the same time on behalf of the Fund
and another fund, investment company or account, the transaction will be
averaged as to price, and available investments allocated as to amount, in a
manner which Key Advisers (or Society) believes to be equitable to the Fund
and such other fund, investment company or account. In
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<PAGE> 451
some instances, this investment procedure may adversely affect the price paid
or received by the Fund or the size of the position obtained by the Fund. To
the extent permitted by law, Key Advisers (or Society) may aggregate the
securities to be sold or purchased for the Fund with those to be sold or
purchased for the other funds or for other investment companies or accounts in
order to obtain best execution. As provided by the Investment Advisory (and
Sub-Advisory) Agreement, in making investment recommendations for the Victory
Portfolios, Key Advisers (or Society) will not inquire or take into
consideration whether an issuer of securities proposed for purchase or sale by
a Fund is a customer of Society, its parents or subsidiaries or affiliates
and, in dealing with their commercial customers, Key Advisers (Society), its
parents, subsidiaries, and affiliates will not inquire or take into
consideration whether securities of such customers are held by the Victory
Portfolios.
In the fiscal years ended October 31, 1993, 1994 and 1995, the Fund
paid $421,782, $550,131 and $_______, respectively, in brokerage commissions.
Administrator
Currently, Concord Holding Corporation ("CHC") serves as general
manager and administrator (the "Administrator") to the Fund. The
Administrator assists in supervising all operations of the Fund (other than
those performed by Key Advisers or the Sub-Adviser under the Investment
Advisory Agreement and Sub-Advisory Agreement.
CHC receives a fee from the Fund for its services as Administrator and
expenses assumed pursuant to the Administration Agreements, calculated daily
and paid monthly, at the annual rate of fifteen one hundredths of one percent
(.15%) of the Fund's average daily net assets. CHC may periodically waive all
or a portion of its fee with respect to the Fund in order to increase the net
income of the Fund available for distribution as dividends.
Unless sooner terminated, the Administration Agreement will continue
in effect as to the Fund for a period of two years, and for consecutive
one-year terms thereafter, provided that such continuance is ratified at least
annually by the Victory Portfolios' Board of Trustees or by vote of a majority
of the outstanding shares of the Fund, and in either case by a majority of the
Trustees who are not parties to the Administration Agreement or interested
persons (as defined in the 1940 Act) of any party to the Administration
Agreement, by votes cast in person at a meeting called for such purpose.
The Administration Agreement provides that CHC shall not be liable for
any error of judgment or mistake of law or any loss suffered by the Victory
Portfolios in connection with the matters to which the Administration Agreement
relates, except a loss resulting from willful misfeasance, bad faith, or gross
negligence in the performance of its duties, or from the reckless disregard by
it of its obligations and duties thereunder.
Under the Administration Agreement, CHC assists in the Fund's
administration and operation, including providing statistical and research
data, clerical services, internal compliance and various other administrative
services, including among other responsibilities, forwarding certain purchase
and redemption requests to the Transfer Agent, participation in the updating of
the prospectus, coordinating the preparation, filing, printing and
dissemination of reports to shareholders, coordinating the preparation of
income tax returns, arranging for the maintenance of books and records and
providing the office facilities necessary to carry out the duties thereunder.
Under the Administration Agreement, CHC may delegate all or any part of its
responsibilities thereunder.
In the fiscal years ended October 31, 1994 and October 31, 1995, the
Fund paid to CHC aggregate administration fees of $_______, and $_______,
respectively, after fee reductions of $_____, and $_____, respectively.
Distributor
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<PAGE> 452
Victory Broker-Dealer Services, Inc. (the "Distributor") serves as
distributor for the continuous offering of the shares of the Fund pursuant to a
Distribution Agreement between the Distributor and the Victory Portfolios.
Unless otherwise terminated, the Distribution Agreement will remain in effect
with respect to the Fund for two years, and thereafter for consecutive one-year
terms, provided that it is approved at least annually (i) by the Victory
Portfolios' Board of Trustees or by the vote of a majority of the outstanding
shares of the Fund, and (ii) by the vote of a majority of the Trustees of the
Victory Portfolios who are not parties to the Distribution Agreement or
interested persons of any such party, cast in person at a meeting called for
the purpose of voting on such approval. The Distribution Agreement will
terminate in the event of its assignment, as defined in the 1940 Act. For the
Fund's fiscal years ended October 31, 1994 and October 31, 1995, [Concord]
received $______ and $_______, respectively, in underwriting commissions, and
retained $____ and $__, respectively.
Class B Shares Distribution Plan
The Victory Portfolios has adopted a Distribution Plan for Class B
shares of the Fund under Rule 12b-1 under the 1940 Act.
The Distribution Plan adopted by the Trustees with respect to the
Class B shares of the Fund provides that the Fund will pay the Distributor a
distribution fee under the Plan at the annual rate of 0.75% of the average
daily net assets of the Fund attributable to the Class B shares. The
distribution fees may be used by the Distributor for: (a) costs of printing and
distributing the Fund's prospectus, statement of additional information and
reports to prospective investors in the Fund; (b) costs involved in preparing,
printing and distributing sales literature pertaining to the Fund; (c) an
allocation of overhead and other branch office distribution-related expenses of
the Distributor; (d) payments to persons who provide support services in
connection with the distribution of the Fund's shares, including but not
limited to, office space and equipment, telephone facilities, answering routine
inquiries regarding the Fund, processing shareholder transactions and providing
any other shareholder services not otherwise provided by the Victory
Portfolios' transfer agent; (e) accruals for interest on the amount of the
foregoing expenses that exceed the distribution fee and the CDSC received by
the Distributor; and (f) any other expense primarily intended to result in the
sale of the Fund's shares, including, without limitation, payments to
salespersons and dealers at the time of the sale of shares, if applicable, and
continuing fees to each such salespersons and dealers, which fee shall begin to
accrue immediately after the sale of such shares.
The amount of the distribution fees payable by the Fund under the
Distribution Plan is not related directly to specific expenses incurred by the
Distributor, and the Distribution Plan does not obligate the Fund to reimburse
the Distributor for such expenses. The Distribution Fees set forth in the
Distribution Plan will be paid by the Fund to the Distributor unless and until
the Plan is terminated or not renewed with respect to the Fund; any
distribution or service expenses incurred by the Distributor on behalf of the
Fund in excess of payments of the distribution fees specified above which the
Distributor has accrued through the termination date are the sole
responsibility and liability of the Distributor and not an obligation of the
Fund.
The Distribution Plan for the Class B shares specifically recognizes
that either Key Advisers, the Sub-Adviser or the Distributor, directly or
through an affiliate, may use its fee revenue, past profits, or other
resources, without limitation, to pay promotional and administrative expenses
in connection with the offer and sale of shares of the Fund. In addition, the
Plan provides that Key Advisers, the Sub-Adviser and the Distributor may use
their respective resources, including fee revenues, to make payments to third
parties that provide assistance in selling the Fund's shares, or to third
parties, including banks, that render shareholder support services.
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<PAGE> 453
The Class B Distribution Plan has been approved by the Trustees
including a majority of the Independent Trustees at a meeting called for that
purpose and by the holders of a majority of Class B shares of the Fund. The
Trustees carefully considered all pertinent factors relating to the
implementation of the Plan prior to its approval, and determined that there is
a reasonable likelihood that the Plan will benefit the Fund and its
shareholders. To the extent that the Plan gives Key Advisers, the Sub-Adviser
or the Distributor greater flexibility in connection with the distribution of
shares of the Fund, additional sales of the Fund's shares may result.
Additionally, certain shareholder support services may be provided more
effectively under the Plan by local entities with whom shareholders have other
relationships.
Business Management Agreement
In connection with its obligations under the Investment Sub-Advisory
Agreement, the Sub-Adviser has entered into a Business Management Agreement
with Key Advisers, pursuant to which Key Advisers provides certain
administrative and support services to the Sub-Adviser. Such services include
preparing reports to the Victory Portfolio's Board of Trustees, recordkeeping
services, and services rendered in connection with the preparation of
regulatory filings and other reports, and regulatory and other administrative
and compliance systems and support services.
For such services to the Fund, the Sub-Adviser pays fees to Key
Advisers which vary according to a sliding scale containing "breakpoints" at
which decreases in the business management fees correspond to increases in the
average daily net asset values of the Fund as follows:
<TABLE>
<CAPTION>
Rate of Business
Net Assets of the Fund Management Fee*
- ---------------------- ---------------
<S> <C>
Up to $10,000,000 0.25%
Next $15,000,000 0.15%
Next $25,000,000 0.10%
Above $50,000,000 0.05%
</TABLE>
____________________
* As a percentage of average daily net assets.
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<PAGE> 454
Shareholder Servicing Plan
The Victory Portfolios, on behalf of the Class A and Class B shares of
the Fund, has adopted a Shareholder Servicing Plan to provide payments to
shareholder servicing agents (each a "Shareholder Servicing Agent") that
provide administrative support services to customers who may from time to time
beneficially own shares, which services include: (i) aggregating and processing
purchase and redemption requests for shares from customers and promptly
transmitting net purchase and redemption orders to our distributor or transfer
agent; (ii) providing customers with a service that invests the assets of
their accounts in shares pursuant to specific or pre-authorized instructions;
(iii) processing dividend and distribution payments from the Victory Portfolios
on behalf of customers; (iv) providing information periodically to customers
showing their positions in shares; (v) arranging for bank wires; (vi)
responding to customer inquiries concerning their investment in shares; (vii)
providing subaccounting with respect to shares beneficially owned by customers
or providing the information to the Victory Portfolios necessary for
subaccounting; (viii) if required by law, forwarding shareholder communications
from us (such as proxies, shareholder reports, annual and semi-annual financial
statements and dividend, distribution and tax notices) to customers; (ix)
forwarding to customers proxy statements and proxies containing any proposals
regarding this Plan; and (x) providing such other similar services as we may
reasonably request to the extent you are permitted to do so under applicable
statutes, rules or regulations. For expenses incurred and services provided
pursuant to the Shareholder Servicing Agreement, the Fund pays each Shareholder
Servicing Agent a fee computed daily and paid monthly, in amounts aggregating
not more than twenty-five one-hundredths of one percent (.25%) of the average
daily net assets of the Fund per year. A Shareholder Servicing Agent may
periodically waive all or a portion of its respective shareholder servicing
fees with respect to the Fund to increase the net income of the Fund available
for distribution as dividends.
Expenses
The Fund bears the following expenses relating to its respective
operations: taxes, interest, brokerage fees and commissions, fees of the
Trustees of the Victory Portfolios, Commission fees, state securities
qualification fees, costs of preparing and printing prospectuses for regulatory
purposes and for distribution to current shareholders, outside auditing and
legal expenses, advisory and administration fees, fees and out-of-pocket
expenses of the custodian and transfer agent, certain insurance premiums, costs
of maintenance of the Fund's existence, costs of shareholders' reports and
meetings, and any extraordinary expenses incurred in the Fund's operation.
If total expenses borne by the Fund in any fiscal year exceeds expense
limitations imposed by applicable state securities regulations, Key Advisers,
the Sub-Adviser or the Administrator as applicable, and the Administrator will
waive their fees to the extent such excess expenses exceed such expense
limitation in proportion to their respective fees. As of the date of this
Statement of Additional Information, the most restrictive expense limitation
applicable to the Fund limits its aggregate annual expenses, including
management and advisory fees but excluding interest, taxes, brokerage
commissions, and certain other expenses, to 2.5% of the first $30 million of
its average net assets, 2.0% of the next $70 million of its average net assets,
and 1.5% of its remaining average net assets. Any expenses to be borne by Key
Advisers, the Sub-Adviser or the Administrator will be estimated daily and
reconciled and paid on a monthly basis. Fees imposed upon customer accounts by
Key Advisers, the Sub-Adviser, Key Trust Company of Ohio, N.A. or its
correspondents, affiliated banks and other non-bank affiliates for cash
management services are not fund expenses for purposes of any such expense
limitation.
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<PAGE> 455
Fund Accountant
BISYS Fund Services Ohio, Inc. serves as fund accountant for the Fund
pursuant to a fund accounting agreement with the Victory Portfolios dated May
31, 1995 (the "Fund Accounting Agreement"). As fund accountant for the Victory
Portfolios, BISYS Fund Services Ohio, Inc. calculates the Fund's net asset
value, the dividend and capital gain distributions, if any, and the yield.
BISYS Fund Services Ohio, Inc. also provides a current security position
report, a summary report of transactions and pending maturities, a current cash
position report, and maintains the general ledger accounting records for the
Fund. Under the Fund Accounting Agreement with the Victory Portfolios, BISYS
Fund Services Ohio, Inc. is entitled to receive annual fees of .03% of the
first $100 million of the Fund's daily average net assets, .02% of the next
$100 million of the Fund's daily average net assets, and .01% of the Fund's
remaining daily average net assets. These annual fees are subject to a minimum
monthly assets charge of $2,917 per tax-free Fund and do not include
out-of-pocket expenses or multiple class charges of $833 per month assessed for
each class of shares after the first class. In the fiscal years ended October
31, 1993, and October 31, 1994, the Victory Portfolios paid The Winsbury
Service Corporation fund accounting fees (after fee waivers) of $144,288 and
$152,663, respectively, for the Fund. In fiscal year ended October 31, 1995,
the Victory Portfolios paid ________ fund accounting fees (after fee waivers)
of $_______ for the Fund.
Custodian
Cash and securities owned by the Fund are held by Key Trust Company of
Ohio, N.A. as custodian. Key Trust Company of Ohio, N.A. serves as custodian
to the Fund pursuant to a Custodian Agreement dated May 24, 1995. Under this
Agreement, Key Trust Company of Ohio, N.A. (i) maintains a separate account or
accounts in the name of the Fund; (ii) makes receipts and disbursements of
money on behalf of the Fund; (iii) collects and receives all income and other
payments and distributions on account of portfolio securities; (iv) responds to
correspondence from security brokers and others relating to its duties; and (v)
makes periodic reports to the Victory Portfolios' Trustees concerning the
Victory Portfolios' operations. Key Trust Company of Ohio, N.A. may, with the
approval of the Victory Portfolios and the custodian's own expense, open and
maintain a sub-custody account or accounts on behalf of the Fund, provided that
Key Trust Company of Ohio, N.A. shall remain liable for the performance of all
of its duties under the Custodian Agreement.
Transfer Agent
Primary Funds Service Corporation serves as transfer agent and
dividend disbursing agent for the Fund, pursuant to a Transfer Agency and
Shareholder Servicing Agreement. Under its agreement with the Victory
Portfolios, Primary Funds Service Corporation has agreed (i) to issue and
redeem shares of the Victory Portfolios; (ii) to address and mail all
communications by the Victory Portfolios to its shareholders, including reports
to shareholders, dividend and distribution notices, and proxy material for its
meetings of shareholders; (iii) to respond to correspondence or inquiries by
shareholders and others relating to its duties; (iv) to maintain shareholder
accounts and certain sub-accounts; and (v) to make periodic reports to the
Victory Portfolios' Trustees concerning the Victory Portfolios' operations.
For the services provided under the Transfer Agency and Shareholder Servicing
Agreement, Primary Funds Service Corporation receives a maximum monthly fee of
$1,250 from the Fund, and a maximum of $3.50 per account of the Fund.
Auditors
The financial highlights appearing in the Prospectus for the Fund,
other than unaudited information marked as such, has been derived from
financial statements of the Victory Portfolios appearing in or incorporated by
reference in this Statement of Additional Information which have been audited
by Coopers & Lybrand L.L.P., independent accountants, as set forth in their
report appearing elsewhere herein, and are included in reliance upon such
report and on the authority of such firm as experts in auditing and accounting.
Coopers & Lybrand L.L.P.'s address is 100 East Broad Street, Columbus, Ohio
43215.
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<PAGE> 456
Legal Counsel
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, 919 Third Avenue,
New York, New York 10022 is counsel to the Victory Portfolios.
ADDITIONAL INFORMATION
Description of Shares
The Victory Portfolios (sometimes referred to as the "Trust") is a
Delaware business trust. Its Delaware Trust Instrument was adopted on December
6, 1995 and a certificate of Trust for the Trust was filed in Delaware on
December __, 1995. On February 29, 1996, the Victory Portfolios converted from
a Massachusetts business trust to a Delaware business trust.
The previously effective Massachusetts Declaration of Trust, pursuant
to which the Victory Portfolios was originally called the North Third Street
Fund, was filed with the Secretary of State of the Commonwealth of
Massachusetts on February 6, 1986. On September 22, 1986, an Amended and
Restated Declaration of Trust was filed to change the name of the Trust to The
Emblem Fund and to make certain other changes. A second amendment was filed
October 23, 1986 providing for voting of shares in the aggregate except where
voting of shares by series is otherwise required by law. An amendment to the
Amended and Restated Declaration of Trust was filed on March 15, 1993 to change
the name of the Trust to The Society Funds. An Amended and Restated
Declaration of Trust was then filed on September 2, 1994 to change the name of
the Trust to The Victory Portfolios.
The currently effective Delaware Trust Instrument authorizes the
Trustees to issue an unlimited number of shares, which are units of beneficial
interest, without par value. The Victory Portfolios presently has twenty-eight
series of shares, which represent interests in the U.S. Government Obligations
Fund, the Prime Obligations Fund, the Tax-Free Money Market Fund, the Balanced
Fund, the Stock Index Fund, the Value Fund, the Diversified Stock Fund, the
Growth Fund, the Special Value Fund, the Special Growth Fund, the Ohio Regional
Stock Fund, the International Growth Fund, the Limited Term Income Fund, the
Government Mortgage Fund, the Ohio Municipal Bond Fund, the Intermediate Income
Fund, the Investment Quality Bond Fund, the Florida Tax-Free Bond Fund, the
Municipal Bond Fund, the Convertible Securities Fund, the Short-Term U.S.
Government Income Fund, the Government Bond Fund, the Fund for Income, the
National Municipal Bond Fund, the New York Tax-Free Fund, the Institutional
Money Market Fund, the Financial Reserves Fund and the Ohio Municipal Money
Market Fund, respectively. The Victory Portfolios' Delaware Trust Instrument
authorizes the Trustees to divide or redivide any unissued shares of the
Victory Portfolios into one or more additional series by setting or changing in
any one or more respects their respective preferences, conversion or other
rights, voting power, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption.
Shares have no subscription or preemptive rights and only such
conversion or exchange rights as the Trustees may grant in their discretion.
When issued for payment as described in the Prospectus and this Statement of
Additional Information, the Victory Portfolios' shares will be fully paid and
non-assessable. In the event of a liquidation or dissolution of the Victory
Portfolios, shares of the Fund are entitled to receive the assets available for
distribution belonging to the Fund, and a proportionate distribution, based
upon the relative asset values of the respective funds of the Victory
Portfolios, of any general assets not belonging to any particular fund which
are available for distribution.
As described in the Prospectus under the caption "ADDITIONAL
INFORMATION -- Voting Rights," shares of the Victory Portfolios are entitled to
one vote per share (with proportional voting for fractional shares) on such
matters as shareholders are entitled to vote. On any matter submitted to a
vote of the shareholders, all shares are voted separately by individual series
(funds), and whenever the Trustees determine that the matter affects only
certain series, may be submitted for a vote by only such series, except (i)
when required by the 1940 Act, shares are voted in the
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<PAGE> 457
aggregate and not by individual series; and (ii) when the Trustees have
determined that the matter affects the interests of more than one series and
that voting by shareholders of all series would be consistent with the 1940
Act, then the shareholders of all such series shall be entitled to vote thereon
(either by individual series or by shares voted in the aggregate, as the
Trustees in their discretion may determine). The Trustees may also determine
that a matter affects only the interests of one or more classes of a series, in
which case (or if required under the 1940 Act) such matter shall be voted on by
such class or classes. There will normally be no meetings of shareholders for
the purpose of electing Trustees unless and until such time as less than a
majority of the Trustees have been elected by the shareholders, at which time
the Trustees then in office will call a shareholders' meeting for the election
of Trustees. In addition, Trustees may be removed from office by a vote of the
holders of at least two-thirds of the outstanding shares of the Victory
Portfolios. A meeting shall be held for such purpose upon the written request
of the holders of not less than 10% of the outstanding shares. Upon written
request by ten or more shareholders meeting the qualifications of Section 16(c)
of the 1940 Act, (i.e., person who have been shareholders for at least six
months, and who hold shares having an NAV of at least $25,000 or constituting
1% of the outstanding shares) stating that such shareholders wish to
communicate with the other shareholders for the purpose of obtaining the
signatures necessary to demand a meeting to consider removal of a Trustee, the
Victory Portfolios will provide a list of shareholders or disseminate
appropriate materials (at the expense of the requesting shareholders). Except
as set forth above, the Trustees shall continue to hold office and may appoint
their successors.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Victory Portfolios shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each fund of the Victory Portfolios affected by the
matter. For purposes of determining whether the approval of a majority of the
outstanding shares of a fund will be required in connection with a matter, a
fund will be deemed to be affected by a matter unless it is clear that the
interests of each fund in the matter are identical, or that the matter does not
affect any interest of the fund. Under Rule 18f-2, the approval of an
investment advisory agreement or any change in investment policy would be
effectively acted upon with respect to a fund only if approved by a majority of
the outstanding shares of such fund. However, Rule 18f-2 also provides that
the ratification of independent public accountants, the approval of principal
underwriting contracts, and the election of Trustees may be effectively acted
upon by shareholders of all of the Victory Portfolios voting without regard to
series.
Shareholder and Trustee Liability
The Delaware Business Trust Act provides that a shareholder of a
Delaware business trust shall be entitled to the same limitation of personal
liability extended to shareholders of Delaware corporations. The Delaware
Trust Instrument also provides for indemnification out of the trust property of
any shareholder held personally liable solely by reason of his or her being or
having been a shareholder. The Delaware Trust Instrument also provides that
the Victory Portfolios shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Victory
Portfolios, and shall satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
considered to be extremely remote.
The Delaware Trust Instrument states further that no Trustee, officer,
or agent of the Victory Portfolios shall be personally liable in connection
with the administration or preservation of the assets of the Funds or the
conduct of the Victory Portfolios' business; nor shall any Trustee, officer, or
agent be personally liable to any person for any action or failure to act
except for his own bad faith, willful misfeasance, gross negligence, or
reckless disregard of his duties. The Declaration of Trust also provides that
all persons having any claim against the Trustees or the Victory Portfolios
shall look solely to the assets of the Victory Portfolios for payment.
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<PAGE> 458
Miscellaneous
As used in the Prospectus and in this Statement of Additional
Information, "assets belonging to a fund" (or "assets belonging to the Fund")
means the consideration received by the Victory Portfolios upon the issuance or
sale of shares in that fund, together with all income, earnings, profits, and
proceeds derived from the investment thereof, including any proceeds from the
sale, exchange, or liquidation of such investments, and any funds or payments
derived from any reinvestment of such proceeds and any general assets of the
Victory Portfolios, which general liabilities and expenses are not readily
identified as belonging to a particular fund (or the Fund) that are allocated
to that fund (or the Fund) by the Victory Portfolios' Trustees. The Trustees
may allocate such general assets in any manner they deem fair and equitable.
It is anticipated that the formula that will be used by the Trustees in making
allocations of general assets to a particular fund of the Victory Portfolios
will be the relative net asset value of the respective fund at the time of
allocation. Assets belonging to a particular fund are charged with the direct
liabilities and expenses of that fund, and with a share of the general
liabilities and expenses of each of the funds not readily identified as
belonging to a particular fund that are allocated to each fund in accordance
with its proportionate share of the net asset values of the Victory Portfolios
at the time of allocation. The timing of allocations of general assets and
general liabilities and expenses of the Victory Portfolios to a particular fund
will be determined by the Trustees of the Victory Portfolios and will be in
accordance with generally accepted accounting principles. Determinations by
the Trustees of the Victory Portfolios as to the timing of the allocation of
general liabilities and expenses and as to the timing and allocable portion of
any general assets with respect to a particular fund are conclusive.
As used in the Prospectus and in this Statement of Additional
Information, a "vote of a majority of the outstanding shares" or a "vote of
majority of the outstanding voting securities" of the Victory Portfolios or a
particular fund means the affirmative vote of the lesser of (a) 67% or more of
the shares of the Victory Portfolios or such fund present at a meeting at which
the holders of more than 50% of the outstanding shares of the Victory
Portfolios or such fund are represented in person or by proxy, or (b) more than
50% of the outstanding shares of the Victory Portfolios or such fund.
Organizational expenses are allocated to each of the Victory
Portfolios and are amortized over a period of two years from the commencement
of the public offering of shares of the Victory Portfolios.
The Victory Portfolios is registered with the Commission as an
open-end management investment company. Such registration does not involve
supervision by the Commission of the management or policies of the Victory
Portfolios.
The Prospectus and this Statement of Additional Information omit
certain of the information contained in the Registration Statement filed with
the Commission. Copies of such information may be obtained from the Commission
upon payment of the prescribed fee.
The Prospectus and this Statement of Additional Information are not an
offering of the securities herein described in any state in which such offering
may not lawfully be made. No salesman, dealer, or other person is authorized
to give any information or make any representation other than those contained
in the Prospectus and this Statement of Additional Information.
The 1995 Annual Report to shareholders of The Victory Portfolios is
incorporated by reference herein. This report includes the financial
statements for the fiscal year ended October 31, 1995. The opinion in the
Annual Report of Coopers & Lybrand L.L.P., independent accountants, is
incorporated by reference herein in its entirety to such Annual Report, and
such financial statements are incorporated in their entirety in reliance upon
such report of Coopers & Lybrand L.L.P. and on the authority of such firm as
experts in auditing and accounting.
Delaware law authorizes electronic or telephonic communications
between shareholders and the Victory Portfolios. Under Delaware law, the
Successor Company has the flexibility to respond to future business
contingencies. For example, the Trustees will have the power to incorporate
the Victory Portfolios, to merge or
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consolidate it with another entity, to cause each fund to become a separate
trust, and to change the Victory Portfolios' domicile without a shareholder
vote. This flexibility could help reduce the expense and frequency of future
shareholder meetings for non-investment related issues.
INDEPENDENT AUDITOR'S REPORT
FINANCIAL STATEMENTS
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APPENDIX
The nationally recognized statistical rating organizations
(individually, an "NRSRO") that may be utilized by Key Advisers or the
Sub-Adviser with regard to portfolio investments for the Funds include Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"),
Duff & Phelps, Inc. ("Duff"), Fitch Investors Service, Inc. ("Fitch"), IBCA
Limited and its affiliate, IBCA Inc. (collectively, "IBCA"), and Thomson
BankWatch, Inc. ("Thomson"). Set forth below is a description of the relevant
ratings of each such NRSRO. The NRSROs that may be utilized by Key Advisers or
the Sub-Adviser and the description of each NRSRO's ratings is as of the date
of this Statement of Additional Information, and may subsequently change.
Long-Term Debt Ratings (may be assigned, for example, to corporate and
municipal bonds)
Description of the five highest long-term debt ratings by Moody's
(Moody's applies numerical modifiers (e.g., 1, 2, and 3) in each rating
category to indicate the security's ranking within the category):
Aaa. Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.
A. Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in the
future.
Baa. Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba. Bonds which are rated Ba are judged to have speculative elements
- - their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times in the future. Uncertainty of
position characterizes bonds in this class.
Description of the five highest long-term debt ratings by S&P (S&P may
apply a plus (+) or minus (-) to a particular rating classification to show
relative standing within that classification):
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
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BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB. Debt rated BB is regarded, on balance, as predominately
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. While such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposure to adverse conditions.
Description of the three highest long-term debt ratings by Duff:
AAA. Highest credit quality. The risk factors are negligible being
only slightly more than for risk-free U.S. Treasury debt.
AA+. High credit quality Protection factors are strong.
AA. Risk is modest but may vary slightly from time to time.
AA-. because of economic conditions.
A+. Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
Description of the three highest long-term debt ratings by Fitch (plus
or minus signs are used with a rating symbol to indicate the relative position
of the credit within the rating category):
AAA. Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA. Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA."
Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of these issues is generally rated "[-]+."
A. Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher
ratings.
IBCA's description of its three highest long-term debt ratings:
AAA. Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic or
financial conditions are unlikely to increase investment risk
significantly.
AA. Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic, or
financial conditions may increase investment risk albeit not very
significantly.
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A. Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial
conditions may lead to increased investment risk.
Short-Term Debt Ratings (may be assigned, for example, to commercial
paper, master demand notes, bank instruments, and letters of credit)
Moody's description of its three highest short-term debt ratings:
Prime-1. Issuers rated Prime-1 (or supporting institutions) have a
superior capacity for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a
strong capacity for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
S&P's description of its three highest short-term debt ratings:
A-1. This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to have extremely
strong safety characteristics are denoted with a plus sign (+).
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high
as for issues designated "A-1."
A-3. Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the
higher designations.
Duff's description of its five highest short-term debt ratings (Duff
incorporates gradations of "1+" (one plus) and "1-" (one minus) to assist
investors in recognizing quality differences within the highest rating
category):
Duff 1+. Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
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Duff 1. Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
Duff 1-. High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors. Risk
factors are very small.
Duff 2. Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
Duff 3. Satisfactory liquidity and other protection factors qualify
issue as to investment grade.
Risk factors are larger and subject to more variation. Nevertheless,
timely payment is expected.
Fitch's description of its four highest short-term debt ratings:
F-1+. Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of assurance for
timely payment.
F-1. Very Strong Credit Quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than
issues rated F-1+.
F-2. Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as for issues assigned F-1+ or F-1 ratings.
F-3. Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate, however, near-term adverse changes could cause
these securities to be rated below investment grade.
IBCA's description of its three highest short-term debt ratings:
A+. Obligations supported by the highest capacity for timely
repayment.
A1. Obligations supported by a very strong capacity for timely
repayment.
A2. Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
Short-Term Loan/Municipal Note Ratings
Moody's description of its two highest short-term loan/municipal note
ratings:
MIG-1/VMIG-1. This designation denotes best quality. There is
present strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
MIG-2/VMIG-2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
S&P's description of its two highest municipal note ratings:
SP-1. Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
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SP-2. Satisfactory capacity to pay principal and interest.
Short-Term Debt Ratings
Thomson BankWatch, Inc. ("TBW") ratings are based upon a qualitative
and quantitative analysis of all segments of the organization including, where
applicable, holding company and operating subsidiaries.
TBW Ratings do not constitute a recommendation to buy or sell
securities of any of these companies. Further, BankWatch does not suggest
specific investment criteria for individual clients.
The TBW Short-Term Ratings apply to commercial paper, other senior
short-term obligations and deposit obligations of the entities to which the
rating has been assigned.
The TBW Short-Term Ratings apply only to unsecured instruments that
have a maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an
untimely payment of principal or interest.
TBW-1. The highest category; indicates a very high degree of
likelihood that principal and interest will be paid on a timely basis.
TBW-2. The second highest category; while the degree of safety
regarding timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1".
TBW-3. The lowest investment grade category; indicates that while
more susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and interest in
a timely fashion is considered adequate.
TBW-4. The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
Definitions of Certain Money Market Instruments
Commercial Paper
Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.
Certificates of Deposit
Certificates of Deposit are negotiable certificates issued against
funds deposited in a commercial bank or a savings and loan association for a
definite period of time and earning a specified return.
Bankers' Acceptances
Bankers' acceptances are negotiable drafts or bills of exchange,
normally drawn by an importer or exporter to pay for specific merchandise,
which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
U.S. Treasury Obligations
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U.S. Treasury Obligations are obligations issued or guaranteed as to
payment of principal and interest by the full faith and credit of the U.S.
Government. These obligations may include Treasury bills, notes and bonds, and
issues of agencies and instrumentalities of the U.S. Government, provided such
obligations are guaranteed as to payment of principal and interest by the full
faith and credit of the U.S. Government.
U.S. Government Agency and Instrumentality Obligations
Obligations issued by agencies and instrumentalities of the U.S.
Government include such agencies and instrumentalities as the Government
National Mortgage Association, the Export-Import Bank of the United States, the
Tennessee Valley Authority, the Farmers Home Administration, the Federal Home
Loan Banks, the Federal Intermediate Credit Banks, the Federal Farm Credit
Banks, the Federal Land Banks, the Federal Housing Administration, the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation, and
the Student Loan Marketing Association. Some of these obligations, such as
those of the Government National Mortgage Association are supported by the full
faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others, such as
those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not obligated to do so by law. A Fund will invest
in the obligations of such instrumentalities only when the investment adviser
believes that the credit risk with respect to the instrumentality is minimal.
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STATEMENT OF ADDITIONAL INFORMATION
THE VICTORY PORTFOLIOS
THE OHIO MUNICIPAL BOND FUND
March 1, 1996
This Statement of Additional Information is not a Prospectus, but
should be read in conjunction with the Prospectus of The Victory Portfolios -
The Victory Ohio Municipal Bond Fund, dated the same date as the date hereof
(the "Prospectus"). This Statement of Additional Information is incorporated
by reference in its entirety into the Prospectus. Copies of the Prospectus may
be obtained by writing The Victory Portfolios at Primary Funds Service
Corporation, P.O. Box 9741, Providence, RI 02940-9741, or by telephoning toll
free 800-539-FUND or 800-539-3863.
<TABLE>
<S> <C> <C>
Investment Policies and Limitations 1 INVESTMENT ADVISER
Valuation of Portfolio Securities 15 KeyCorp Mutual Fund Advisers, Inc.
Additional Purchase and Redemption Information 16
Management of the Victory Portfolios 19 INVESTMENT SUB-ADVISER
Advisory and Other Contracts 26 Society Asset Management, Inc.
Additional Information 33
Independent Auditor's Report 38 ADMINISTRATOR
Financial Statements 38 Concord Holding Corporation
Appendix 39
DISTRIBUTOR
Victory Broker-Dealer Services, Inc.
TRANSFER AGENT
Primary Funds Service Corporation
CUSTODIAN
Key Trust Company of Ohio, N.A.
</TABLE>
<PAGE> 467
STATEMENT OF ADDITIONAL INFORMATION
The Victory Portfolios (the "Victory Portfolios") is an open-end
management investment company. The Victory Portfolios consist of twenty-eight
series of units of beneficial interest ("shares"), four of which series are
currently inactive. The outstanding shares represent interests in twenty-four
separate investment portfolios which are currently active. This Statement of
Additional Information relates to the Victory Ohio Municipal Bond Fund (the
"Fund") only. Much of the information contained in this Statement of Additional
Information expands on subjects discussed in the Prospectus. Capitalized terms
not defined herein are used as defined in the Prospectus. No investment in
shares of the Fund should be made without first reading the Fund's Prospectus.
INVESTMENT POLICIES AND LIMITATIONS
Additional Information Fund Instruments
The following policies supplement the investment objectives and
policies of the Fund set forth in the Prospectus.
Bankers' Acceptances and Certificates of Deposit. The Fund may invest
in bankers' acceptances, certificates of deposit, and demand and time deposits.
Bankers' acceptances are negotiable drafts or bills of exchange typically drawn
by an importer or exporter to pay for specific merchandise, which are "accepted"
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity. Certificates of deposit are negotiable
certificates issued against funds deposited in a commercial bank or a savings
and loan association for a definite period of time and earning a specified
return.
Bankers' acceptances will be those guaranteed by domestic and foreign
banks, if at the time of purchase such banks have capital, surplus, and
undivided profits in excess of $100,000,000 (as of the date of their most
recently published financial statements). Certificates of deposit and demand
and time deposits invested in by the Fund will be those of domestic and foreign
banks and savings and loan associations, if (a) at the time of purchase such
financial institutions have capital, surplus, and undivided profits in excess
of $100,000,000 (as of the date of their most recently published financial
statements) or (b) the principal amount of the instrument is insured in full by
the Federal Deposit Insurance Corporation or the Savings Association Insurance
Fund.
The Fund may also invest in Eurodollar Certificates of Deposit
("ECDs") which are U.S. dollar-denominated certificates of deposit issued by
branches of foreign and domestic banks located outside the United States,
Yankee Certificates of Deposit ("Yankee CDs") which are certificates of deposit
issued by a U.S. branch of a foreign bank denominated in U.S. dollars and held
in the United States, Eurodollar Time Deposits ("ETDs") which are U.S.
dollar-denominated deposits in a foreign branch of a U.S. bank or a foreign
bank, and Canadian Time Deposits ("CTDs") which are U.S. dollar-denominated
certificates of deposit issued by Canadian offices of major Canadian Banks.
Commercial Paper. Commercial paper consists of unsecured promissory
notes issued by corporations. Except as noted below with respect to variable
amount master demand notes, issues of commercial paper normally have maturities
of less than nine months and fixed rates of return.
The Fund may invest only in commercial paper which is rated at the
time of purchase in the highest category by an NRSRO or which is determined to
be of comparable quality by the Fund's investment adviser pursuant to
guidelines established by the Board of Trustees. For a description of the
rating symbols of each NRSRO see the Appendix to this Statement of Additional
Information.
<PAGE> 468
U.S. Government Obligations. The Fund may invest in obligations
issued or guaranteed by the U.S. Government, its agencies and
instrumentalities. Obligations of certain agencies and instrumentalities of
the U.S. Government are supported by the full faith and credit of the U.S.
Treasury; others are supported by the right of the issuer to borrow from the
U.S. Treasury; others are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; and still others are supported
only by the credit of the agency or instrumentality. No assurance can be given
that the U.S. Government will provide financial support to U.S.
Government-sponsored agencies or instrumentalities if it is not obligated to do
so by law. The Fund will invest in the obligations of such agencies and
instrumentalities only when Key Advisers or the Sub-Adviser believes that the
credit risk with respect thereto is minimal.
Variable and Floating Rate Notes. The Fund may acquire variable and
floating rate notes, subject to its investment objectives, policies and
restrictions. A variable rate note is one whose terms provide for the
readjustment of its interest rate on set dates and which, upon such
readjustment, can reasonably be expected to have a market value that
approximates its par value. A floating rate note is one whose terms provide for
the readjustment of its interest rate whenever a specified interest rate changes
and which, at any time, can reasonably be expected to have a market value that
approximates its par value. Such notes are frequently not rated by credit rating
agencies; however, unrated variable and floating rate notes purchased by the
Fund will only be those determined by Key Advisers or the Sub-Adviser under
guidelines established by the Trustees, to pose minimal credit risks and to be
of comparable quality, at the time of purchase, to rated instruments eligible
for purchase under the Fund's investment policies. In making such
determinations, Key Advisers or the Sub-Adviser will consider the earning power,
cash flow and other liquidity ratios of the issuers of such notes (such issuers
include financial, merchandising, bank holding and other companies) and will
continuously monitor their financial condition. Although there may be no active
secondary market with respect to a particular variable or floating rate note
purchased by the Fund, the Fund may resell the note at any time to a third
party. The absence of an active secondary market, however, could make it
difficult for the Fund to dispose of a variable or floating rate note in the
event the issuer of the note defaulted on its payment obligations and the Fund
could, for this or other reasons, suffer a loss to the extent of the default.
Variable or floating rate notes may be secured by bank letters of credit.
Variable or floating rate notes may have maturities of more than one
year, as follows:
1. A note that is issued or guaranteed by the United States
government or any agency thereof and which has a variable rate of interest
readjusted no less frequently than annually will be deemed by the Fund to have
a maturity equal to the period remaining until the next readjustment of the
interest rate.
2. A variable rate note, the principal amount of which is
scheduled on the face of the instrument to be paid in one year or less, will be
deemed by the Fund to have a maturity equal to the period remaining until the
next readjustment of the interest rate.
3. A variable rate note that is subject to a demand feature
scheduled to be paid in one year or more will be deemed by the Fund to have a
maturity equal to the longer of the period remaining until the next
readjustment of the interest rate or the period remaining until the principal
amount can be recovered through demand.
4. A floating rate note that is subject to a demand feature will
be deemed by the Fund to have a maturity equal to the period remaining until
the principal amount can be recovered through demand.
As used above, a note is "subject to a demand feature" where the Fund
is entitled to receive the principal amount of the note either at any time on
no more than 30 days' notice or at specified intervals not exceeding one year
and upon no more than 30 days' notice.
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Other Investment Companies. The Fund may invest up to 5% of its total
assets in the securities of any one investment company, but may not own more
than 3% of the securities of any one investment company or invest more than 10%
of its total assets in the securities of other investment companies. Pursuant
to an exemptive order received by the Victory Portfolios from the Securities and
Exchange Commission, the Fund may invest in the money market funds of the
Victory Portfolios. Key Advisers will waive its fee with respect to assets of
the Fund invested in any of the money market funds of the Victory Portfolios,
and, to the extent required by the laws of any state in which the Fund's shares
are sold, Key Advisers will waive its investment advisory fee as to all assets
invested in other investment companies. Because such other investment companies
employ an investment adviser, such investment by the Fund will cause
shareholders to bear duplicative fees, such as management fees.
Temporary Investments. The Fund may also invest temporarily in high
quality investments or cash during times of unusual market conditions for
defensive purposes and in order to accommodate shareholder redemption requests
although currently it does not intend to do so. Any portion of the Fund's
assets maintained in cash will reduce the amount of assets in securities and
thereby reduce the Fund's yield or total return.
Municipal Securities Purchased by the Fund. As stated in the
prospectus of the Fund, the assets of the Fund will be primarily invested in
bonds and notes issued by or on behalf of the State of Ohio and its respective
authorities, agencies, instrumentalities, and political subdivisions, the
interest on which is both exempt from federal income tax and not treated as a
preference item for individuals for purposes of the federal alternative minimum
tax ("Municipal Securities"). Under normal market conditions, at least 80% of
the total assets of the Fund will be invested in Municipal Securities.
Municipal Securities include debt obligations issued by governmental
entities to obtain funds for various public purposes, such as the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses, and the extension of loans to other
public institutions and facilities. Private activity bonds that are issued by
or on behalf of public authorities to finance various privately operated
facilities are included within the term Municipal Securities if the interest
paid thereon is both exempt from federal income tax and not treated as a
preference item for individuals for purposes of the federal alternative minimum
tax.
Among other types of Municipal Securities, the Fund may purchase
short-term General Obligation Notes, Tax Anticipation Notes, Bond Anticipation
Notes, Revenue Anticipation Notes, Tax-Exempt Commercial Paper, Construction
Loan Notes and other forms of short-term tax-exempt loans. Such instruments
are issued with a short-term maturity in anticipation of the receipt of tax
funds, the proceeds of bond placements or other revenues.
Project Notes are issued by a state or local housing agency and are
sold by the Department of Housing and Urban Development. While the issuing
agency has the primary obligation with respect to its Project Notes, they are
also secured by the full faith and credit of the United States through
agreements with the issuing authority which provide that, if required, the U.S.
government will lend the issuer an amount equal to the principal of and
interest on the Project Notes.
As described in the Prospectus, the two principal classifications of
Municipal Securities consist of "general obligation" and "revenue" issues. The
Fund may also acquire "moral obligation" issues, which are normally issued by
special purpose authorities. There are, of course, variations in the quality
of Municipal Securities, both within a particular classification and between
classifications, and the yields on Municipal Securities depend upon a variety
of factors, including general money market conditions, the financial condition
of the issuer (or other entities whose financial resources are supporting the
Municipal Security), general conditions of the municipal bond market, the size
of a particular offering, the maturity of the obligation and the rating(s) of
the issue. The ratings of NRSROs represent their opinions as to the quality of
Municipal Securities. In this regard, it should be emphasized that the ratings
of any NRSRO are general and are not absolute standards of quality, and
Municipal Securities with the same maturity, interest rate and rating may have
different yields, while Municipal Securities of the same maturity and
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<PAGE> 470
interest rate with different ratings may have the same yield. Subsequent to
purchases by the Fund, an issue of Municipal Securities may cease to be rated
or its rating may be reduced below the minimum rating required for purchase by
the Fund. Key Advisers or the Sub-Adviser will consider such an event in
determining whether the Fund should continue to hold the obligation.
An issuer's obligations under its Municipal Securities are subject to
the provisions of bankruptcy, insolvency, and other laws affecting the rights
and remedies of creditors, such as the federal bankruptcy code, and laws, if
any, which may be enacted by Congress or state legislatures extending the time
for payment of principal or interest, or both, or imposing other constraints
upon the enforcement of such obligations or upon the ability of municipalities
to levy taxes. The power or ability of an issuer to meet its obligations for
the payment of interest on and principal of its Municipal Securities may be
materially adversely affected by litigation or other conditions.
In addition, in accordance with its investment objective, the Fund may
invest in private activity bonds, which may constitute Municipal Securities
depending on the tax treatment of such bonds. The source of payment and
security for such bonds is the financial resources of the private entity
involved; the full faith and credit and the taxing power of the issuer in
normal circumstances will not be pledged. The payment obligations of the
private entity also will be subject to bankruptcy as well as other exceptions
similar to those described above.
Key Advisers believes that it is likely that sufficient Municipal
Securities will be available to satisfy the Fund's investment objective and
policies. In meeting its investment policies, the Fund may invest all or any
part of its total assets in Municipal Securities which are private activity
bonds. Moreover, although the Fund does not presently intend to do so on a
regular basis, it may invest more than 25% of its total assets in Municipal
Securities which are related in such a way that an economic, business or
political development or change affecting one such security would likewise
affect the other Municipal Securities. Examples of such securities are
obligations, the repayment of which is dependent upon similar types of projects
or projects located in the same state. Such investments would be made only if
deemed necessary or appropriate by Key Advisers or the Sub-Adviser.
Refunded Municipal Bonds. Investments by the Fund in refunded
municipal bonds that are secured by escrowed obligations issued or guaranteed by
the U.S. Government or its agencies or instrumentalities are considered to be
investments in U.S. Government obligations for purposes of the diversification
requirements to which the Fund is subject under the 1940 Act. As a result, more
than 5% of the Fund's total assets may be invested in such refunded bonds issued
by a particular municipal issuer. The escrowed securities securing such
refunded municipal bonds will consist exclusively of U.S. Government
obligations, and will be held by an independent escrow agent or be subject to an
irrevocable pledge of the escrow account to the debt service on the original
bonds.
Ohio Tax-Exempt Obligations. As used in the Prospectus and this
Statement of Additional Information, the term "Ohio Tax-Exempt Obligations"
refers to debt obligations issued by the State of Ohio and its political
subdivisions, the interest on which is, in the opinion of the issuer's bond
counsel, at the time of issuance, excluded from gross income for purposes of
both federal income taxation and Ohio personal income tax (as used herein the
terms "income tax" and "taxation" do not include any possible incidence of any
alternative minimum tax). Ohio Tax-Exempt Obligations are issued to obtain
funds for various public purposes, including the construction of a wide range
of public facilities such as bridges, highways, roads, schools, water and sewer
works, and other utilities. Other public purposes for which Ohio Tax-Exempt
Obligations may be issued include refunding outstanding obligations and
obtaining funds to lend to other public institutions and facilities. In
addition, certain debt obligations known as "private activity bonds" may be
issued by or on behalf of municipalities and public authorities to obtain funds
to provide certain water, sewage and solid waste facilities, qualified
residential rental projects, certain local electric, gas and other heating or
cooling facilities, qualified hazardous waste facilities, high-speed inter-city
rail facilities, government-owned airports, docks and wharves and mass
commuting facilities, certain qualified mortgages, student loan and
redevelopment bonds and bonds used for certain organizations exempt from
federal income taxation. Certain debt obligations known as "industrial
development bonds" under prior federal tax law may
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have been issued by or on behalf of public authorities to obtain funds to
provide certain privately operated housing facilities, sports facilities,
industrial parks, convention or trade show facilities, airport, mass transit,
port or parking facilities, air or water pollution control facilities, sewage
or solid waste disposal facilities, and certain local facilities for water
supply or other heating or cooling facilities. Other private activity bonds
and industrial development bonds issued to fund the construction, improvement
or equipment of privately-operated industrial, distribution, research or
commercial facilities may also be Ohio Tax-Exempt Obligations, but the size of
such issues is limited under current and prior federal tax law. The aggregate
amount of most private activity bonds and industrial development bonds is
limited (except in the case of certain types of facilities) under federal tax
law by an annual "volume cap." The volume cap limits the annual aggregate
principal amount of such obligations issued by or on behalf of all government
instrumentalities in the state. Such obligations are included within the term
Ohio Tax-Exempt Obligations if the interest paid thereon is, in the opinion of
bond counsel, at the time of issuance, excluded from gross income for purposes
of both federal income taxation (including any alternative minimum tax) and
Ohio personal income tax. The Fund may not be a desirable investment for
"substantial users" of facilities financed by private activity bonds or
industrial development bonds or for "related persons" of substantial users.
See "Dividends and Taxes" in the Prospectus.
The two principal classifications of tax-exempt bonds are general
obligation bonds and special obligation (or revenue) bonds. General obligation
bonds are obligations involving the credit of an issuer possessing taxing power
and are payable from the issuer's general unrestricted revenues and not from
any particular fund or source. The characteristics and method of enforcement
of general obligation bonds vary according to the law applicable to the
particular issuer. Special obligation or revenue bonds are payable only from
the revenues derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a specific revenue source. Private activity
bonds and industrial development bonds generally are revenue bonds and not
payable from the resources or unrestricted revenues of the issuer. The credit
and quality of industrial development revenue bonds is usually directly related
to the credit of the corporate user of the facilities. Payment of principal of
and interest on industrial development revenue bonds is the responsibility of
the corporate user (and any guarantor).
Prices and yields on Ohio Tax-Exempt Obligations are dependent on a
variety of factors, including general money market conditions, the financial
condition of the issuer, general conditions in the market for tax-exempt
obligations, the size of a particular offering, the maturity of the obligation
and ratings of particular issues, and are subject to change from time to time.
Current information about the financial condition of an issuer of tax-exempt
bonds or notes is usually not as extensive as that which is made available by
corporations whose securities are publicly traded.
The ratings of NRSROs represent their opinions and are not absolute
standards of quality. Tax-exempt obligations with the same maturity, interest
rate and rating may have different yields while tax-exempt obligations of the
same maturity and interest rate with different ratings may have the same yield.
Obligations of subdivision issuers of tax-exempt bonds and notes may
be subject to the provisions of bankruptcy, insolvency and other laws, such as
the Federal Bankruptcy Reform Act of 1978, as amended, affecting the rights and
remedies of creditors. Congress or state legislatures may seek to extend the
time for payment of principal or interest, or both, or to impose other
constraints upon enforcement of such obligations. There is also the
possibility that, as a result of litigation or other conditions, the power or
ability of certain issuers to meet their obligations to pay interest on and
principal of their tax-exempt bonds or notes may be materially impaired or
their obligations may be found to be invalid or unenforceable. Such litigation
or conditions may, from time to time, have the effect of introducing
uncertainties in the market for tax-exempt obligations or certain segments
thereof, or may materially affect the credit risk with respect to particular
bonds or notes. Adverse economic, business, legal or political developments
might affect all or a substantial portion of the Fund's tax-exempt bonds and
notes in the same manner.
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From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption for
interest on tax-exempt bonds, and similar proposals may be introduced in the
future. A recent decision of the U.S. Supreme Court has held that Congress has
the constitutional authority to enact such legislation. It is not possible to
determine what effect the adoption of such proposals could have on the
availability of tax-exempt bonds for investment by the Fund and the value of
its portfolio.
The Internal Revenue Code of 1986, as amended (the "Code") imposes
certain continuing requirements on issuers of tax-exempt bonds regarding the
use, expenditure and investment of bond proceeds and the payment of rebate to
the United States of America. Failure by the issuer to comply subsequent to
the issuance of tax-exempt bonds with certain of these requirements could cause
interest on the bonds to become includable in gross income retroactive to the
date of issuance.
The Fund may invest in Ohio Tax-Exempt Obligations either by
purchasing them directly or by purchasing certificates of accrual or similar
instruments evidencing direct ownership of interest payments or principal
payments, or both, on Ohio Tax-Exempt Obligations, provided that, in the
opinion of counsel to the initial seller of each such certificate or
instrument, any discount accruing on such certificate or instrument that is
purchased at a yield not greater than the coupon rate of interest on the
related Ohio Tax-Exempt Obligations will be exempt from federal income tax and
Ohio personal income tax to the same extent as interest on such Ohio Tax-Exempt
Obligations. The Fund may also invest in Ohio Tax-Exempt Obligations by
purchasing from banks participation interests in all or part of specific
holdings of Ohio Tax-Exempt Obligations. Such participations may be backed in
whole or in part by an irrevocable letter of credit or guarantee of the selling
bank. The selling bank may receive a fee from the Fund in connection with the
arrangement. The Fund will not purchase participation interests unless it
receives an opinion of counsel or a ruling of the Internal Revenue Service that
interest earned by it on Ohio Tax-Exempt Obligations in which it holds such a
participation interest is exempt from federal income tax and Ohio personal
income tax.
Special Considerations Regarding Investments in Ohio Tax-Exempt
Obligations. As described above, the Fund will invest most of its net assets
in securities issued by or on behalf of (or in certificates of participation in
lease-purchase obligations of) the State of Ohio, political subdivisions of the
State, or agencies or instrumentalities of the State or its political
subdivisions ("Ohio Obligations"). The Fund is therefore susceptible to
general or particular economic, political or regulatory factors that may affect
issuers of Ohio Obligations. The following information constitutes only a
brief summary of some of the many complex factors that may have an effect. The
information does not apply to "conduit" obligations on which the public issuer
itself has no financial responsibility. This information is derived from
official statements of certain Ohio issuers published in connection with their
issuance of securities and from other publicly available information, and is
believed to be accurate. No independent verification has been made of any of
the following information.
Generally the creditworthiness of Ohio Obligations of local issuers is
unrelated to that of obligations of the State itself, and the State has no
responsibility to make payments on those local obligations.
There may be specific factors that at particular times apply in
connection with investment in particular Ohio Obligations or in those
obligations of particular Ohio issuers. It is possible that the investment may
be in particular Ohio Obligations, or in those of particular issuers, as to
which those factors apply. However, the information below is intended only as
a general summary, and is not intended as a discussion of any specific factors
that may affect any particular obligation or issuer.
Ohio is the seventh most populous state. The 1990 Census count of
10,847,000 indicated a 0.5% population increase from 1980. The Census estimate
for 1993 is 11,091,000.
While diversifying more into the service and other non-manufacturing
areas, the Ohio economy continues to rely in part on durable goods
manufacturing largely concentrated in motor vehicles and equipment, steel,
rubber products and household appliances. As a result, general economic
activity, as in many other industrially-developed
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states, tends to be more cyclical than in some other states and in the nation
as a whole. Agriculture is an important segment of the economy, with over half
the State's area devoted to farming and approximately 15% of total employment
in agribusiness.
In prior years, the State's overall unemployment rate was commonly
somewhat higher than the national figure. For example, the reported 1990
average monthly State rate was 5.7%, compared to the 5.5% national figure.
However, for the last four years the State rates were below the national rates
(5.6% versus 6.1% in 1994). The unemployment rate and its effects vary among
particular geographic areas of the State.
There can be no assurance that future national, regional or state-wide
economic difficulties, and the resulting impact on State or local government
finances generally, will not adversely affect the market value of Ohio
Obligations held in the Fund or the ability of particular obligors to make
timely payments of debt service on (or lease payments relating to) those
Obligations.
The State operates on the basis of a fiscal biennium for its
appropriations and expenditures, and is precluded by law from ending its July 1
to June 30 fiscal year ("FY") or fiscal biennium in a deficit position. Most
State operations are financed through the General Revenue Fund ("GRF"), for
which personal income and sales-use taxes are the major sources. Growth and
depletion of GRF ending fund balances show a consistent pattern related to
national economic conditions, with the ending FY balance reduced during less
favorable and increased during more favorable economic periods. The State has
well-established procedures for, and has timely taken, necessary actions to
ensure resource/expenditure balances during less favorable economic periods.
Those procedures included general and selected reductions in appropriations
spending.
Key biennium-ending fund balances at June 30, 1989 were $475.1 million
in the GRF and $353 million in the Budget Stabilization Fund ("BSF"), a cash
and budgetary management fund. June 30, 1991 ending fund balances were $135.3
million (GRF) and $300 million (BSF).
The next biennium, 1992-93, presented significant challenges to State
finances, successfully addressed. To allow time to resolve certain budget
differences, an interim appropriations act was enacted effective July 1, 1991;
it included debt service and lease rental appropriations for the entire
biennium, while continuing most other appropriations for a month. Pursuant to
the general appropriations act for the entire biennium, passed on July 11,
1991, $200 million was transferred from the BSF to the GRF in FY 1992.
Based on updated results and forecasts in the course of that FY, both
in light of the continuing uncertain nationwide economic situation, there was
projected and timely addressed an FY 1992 imbalance in GRF resources and
expenditures. In response, the Governor ordered most State agencies to reduce
GRF spending in the last six months of FY 1992 by a total of approximately $184
million; the $100.4 million BSF balance, and additional amounts from certain
other funds, were transferred late in the FY to the GRF; and adjustments were
made in the timing of certain tax payments.
A significant GRF shortfall (approximately $520 million) was then
projected for FY 1993. It was addressed by appropriate legislative and
administrative actions, including the Governor's ordering $300 million in
selected GRF spending reductions and subsequent executive and legislative
action (a combination of tax revisions and additional spending reductions).
The June 30, 1993 ending GRF fund balance was approximately $111 million, of
which, as a first step to BSF replenishment, $21 million was deposited in the
BSF.
None of the spending reductions were applied to appropriations needed
for debt service or lease rentals on any State obligations.
The 1994-95 biennium presented a more affirmative financial picture.
Based on June 30, 1994 balances, an additional $260 million was deposited in
the BSF. The biennium ended June 30, 1995 with a GRF ending fund
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balance of $928 million, of which $535.2 million has been transferred into the
BSF (which had a November 21, 1995 balance of over $828 million).
The GRF appropriations act for the 1995-96 biennium was passed on June
28, 1995 and promptly signed (after selective vetoes) by the Governor. All
necessary GRF appropriations for State debt service and lease rental payments
then projected for the biennium were included in that act. In accordance with
the appropriations act, the significant June 30, 1995 GRF fund balance, after
leaving in the GRF an unreserved and undesignated balance of $70 million, has
been transferred to the BSF and other funds including school assistance funds
and, in anticipation of possible federal program changes, a human services
stabilization fund.
The State's incurrence or assumption of debt without a vote of the
people is, with limited exceptions, prohibited by current State constitutional
provisions. The State may incur debt, limited in amount to $750,000, to cover
casual deficits or failures in revenues or to meet expenses not otherwise
provided for. The Constitution expressly precludes the State from assuming the
debts of any local government or corporation. (An exception is made in both
cases for any debt incurred to repel invasion, suppress insurrection or defend
the State in war.)
By 14 constitutional amendments, the last adopted in 1995, Ohio voters
have authorized the incurrence of State debt and the pledge of taxes or excises
to its payment. At December 2, 1995, $778 million (excluding certain highway
bonds payable primarily from highway use charges) of this debt was outstanding.
The only such State debt at that date still authorized to be incurred were
portions of the highway bonds, and the following: (a) up to $100 million of
obligations for coal research and development may be outstanding at any one
time ($45.3 million outstanding(b) $360 million of obligations previously
authorized far local infrastructure improvements, no more than $120 million of
which may be issued in any calendar year ($685.4 million outstanding); and (c)
up to $200 million in general obligation bonds for parks, recreation and
natural resources purposes which may be outstanding at any one time ($47.2
million outstanding, with no more than $50 million to be issued in any one
year).
The electors approved in November 1995 a constitutional amendment that
extends the local infrastructure bond program (authorizing an additional $1.2
billion of State full faith and credit obligations to be issued over 10 years
for the purpose), and authorizes additional highway bonds (expected to be
payable primarily from highway use receipts). The latter supersedes the prior
$500 million highway obligation authorization, and authorizes not more that
$1.2 billion to be outstanding at any time and not more than $220 million to be
issued in a fiscal year.
Common resolutions are pending in both houses of the General Assembly
that would submit a constitutional amendment relating to certain other aspects
of State debt. The proposal would authorize, among other things, the issuance
of State general obligation debt for a variety of purposes, with debt service
on all State general obligation debt and GRF-supported obligations not to
exceed 5% of the preceding fiscal year's GRF expenditures.
The Constitution also authorizes the issuance of State obligations for
certain purposes, the owners of which do not have the right to have excises or
taxes levied to pay debt service. Those special obligations include
obligations issued by the Ohio Public Facilities Commission and the Ohio
Building Authority and certain obligations issued by the State Treasurer, $4.5
billion of which was outstanding or awaiting delivery at December 2, 1995.
A 1990 constitutional amendment authorizes greater State and political
subdivision participation (including financing) in the provision of housing.
The General Assembly may for that purpose authorize the issuance of State
obligations secured by a pledge of all or such portion as it authorizes of
State revenues or receipts (but not by a pledge of the State's full faith and
credit).
A 1994 constitutional amendment pledges the full faith and credit and
taxing power of the State to meeting certain guarantees under the State's
tuition credit program which provides for purchase of tuition credits, for the
benefit of State residents, guaranteed to cover a specified amount when applied
to the cost of higher education tuition. (A 1965 constitutional provision that
authorized student loan guarantees payable from available State
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moneys has never been implemented, apart from a "guarantee fund" approach
funded essentially from program revenues.)
The House has adopted a resolution that would submit to the electors a
constitutional amendment prohibiting the General Assembly from imposing a new
tax or increasing an existing tax unless approved by a three-fifths vote of
each house or by a majority vote of the electors. It cannot be predicted
whether required Senate concurrence to submission will be received.
State and local agencies issue obligations that are payable from
revenues from or relating to certain facilities (but not from taxes). By
judicial interpretation, these obligations are not "debt" within constitutional
provisions. In general, payment obligations under lease-purchase agreements of
Ohio public agencies (in which certificates of participation may be issued) are
limited in duration to the agency's fiscal period, and are renewable only upon
appropriations being made available for the subsequent fiscal period.
Local school districts in Ohio receive a major portion (state-wide
aggregate in the range of 44% in recent years) of their operating moneys from
State subsidies, but are dependent on local property taxes, and in 120
districts from voter-authorized income taxes, for significant portions of their
budgets. Litigation, similar to that in other states, is pending questioning
the constitutionality of Ohio's system of school funding. The trial court
concluded that aspects of the system (including basic operating assistance) are
unconstitutional, and ordered the State to provide for and fund a system
complying with the Ohio Constitution. The State appealed and a court of
appeals reversed the trial court's findings for plaintiff districts. The
plaintiff coalition has filed an appeal of the court of appeals decision to the
Ohio Supreme Court. A small number of the State's 612 local school districts
have in any year required special assistance to avoid year-end deficits. A
current program provides for school district cash need borrowing directly from
commercial lenders, with diversion of State subsidy distributions to repayment
if needed. Recent borrowings under this program totalled $94.5 million for 27
districts (including $75 million for one) in FY 1993, $41.1 million for 28
districts in FY 1994, and $71.1 million for 29 districts in FY 1995.
Ohio's 943 incorporated cities and villages rely primarily on property
and municipal income taxes for their operations. With other subdivisions, they
also receive local government support and property tax relief moneys
distributed by the State. For those few municipalities that on occasion have
faced significant financial problems, there are statutory procedures for a
joint State/local commission to monitor the municipality's fiscal affairs and
for development of a financial plan to eliminate deficits and cure any
defaults. Since inception in 1979, these procedures have been applied to 23
cites and villages; for 18 of them the fiscal situation was resolved and the
procedures terminated.
At present the State itself does not levy ad valorem taxes on real or
tangible personal property. Those taxes are levied by political subdivisions
and other local taxing districts. The Constitution has since 1934 limited to
1% of true value in money the amount of the aggregate levy (including a levy
for unvoted general obligations) of property taxes by all overlapping
subdivisions, without a vote of the electors or a municipal charter provision,
and statutes limit the amount of that aggregate levy to 10 mills per $1 of
assessed valuation (commonly referred to as the "ten-mill limitation"). Voted
general obligations of subdivisions are payable from property taxes that are
unlimited as to amount or rate.
Repurchase Agreements. Securities held by the Fund may be subject to
repurchase agreements. Under the terms of a repurchase agreement, the Fund
would acquire securities from financial institutions or registered
broker-dealers deemed creditworthy by Key Advisers or the Sub-Adviser pursuant
to guidelines adopted by its Trustees, subject to the seller's agreement to
repurchase such securities at a mutually agreed upon date and price. The
seller is required to maintain the value of collateral held pursuant to the
agreement at not less than the repurchase price (including accrued interest).
If the seller were to default on its repurchase obligation or become insolvent,
the Fund holding such obligation would suffer a loss to the extent that the
proceeds from a sale of the
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underlying portfolio securities were less than the repurchase price, or to the
extent that the disposition of such securities by the Fund is delayed pending
court action.
Reverse Repurchase Agreements. The Fund may borrow funds for temporary
purposes by entering into reverse repurchase agreements in accordance with the
investment restrictions described below. Pursuant to such agreements, the Fund
would sell portfolio securities to financial institutions such as banks and
broker-dealers, and agree to repurchase them at a mutually agreed-upon date and
price. At the time the Fund enters into a reverse repurchase agreement, it will
place in a segregated custodial account assets (such as cash or other liquid
high-grade securities) consistent with the Fund's investment restrictions having
a value equal to the repurchase price (including accrued interest); the
collateral will be marked-to-market on a daily basis, and will be continuously
monitored to ensure that such equivalent value is maintained. Reverse
repurchase agreements involve the risk that the market value of the securities
sold by the Fund may decline below the price at which the Fund is obligated to
repurchase the securities.
"When-Issued" Securities. As discussed in its Prospectus, the Fund
may purchase securities on a "when issued" basis (i.e., for delivery beyond the
normal settlement date at a stated price and yield). When the Fund agrees to
purchase securities on a "when issued" basis, the Fund's custodian will set
aside cash or liquid portfolio securities equal to the amount of the commitment
in a separate account. Normally, the custodian will set aside portfolio
securities to satisfy the purchase commitment, and in such a case, the Fund may
be required subsequently to place additional assets in the separate account in
order to assure that the value of the account remains equal to the amount of
the Fund's commitment. It may be expected that the Fund's net assets will
fluctuate to a greater degree when it sets aside portfolio securities to cover
such purchase commitments than when it sets aside cash.
When the Fund engages in "when-issued" transactions, it relies on the
seller to consummate the trade. Failure of the seller to do so may result in
the Fund incurring a loss or missing the opportunity to obtain a price
considered to be advantageous. The Fund does not intend to purchase "when
issued" securities for speculative purposes, but only in furtherance of its
investment objective.
Government "Mortgage-backed" Securities. The Fund may invest in
obligations of certain agencies and instrumentalities of the U.S. Government.
Some such obligations, such as those issued by GNMA or the Export-Import Bank
of the United States, are supported by the full faith and credit of the U.S.
Treasury; others, such as those of FNMA, are supported by the right of the
issuer to borrow from the Treasury; others are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; still
others, such as those of the Federal Farm Credit Banks or FHLMC, are supported
only by the credit of the instrumentality. No assurance can be given that the
U.S. Government would provide financial support to U.S. Government- sponsored
agencies and instrumentalities if it is not obligated to do so by law.
The principal governmental (i.e., backed by the full faith and credit
of the U.S. Government) guarantor of mortgage-related securities is GNMA. GNMA
is a wholly owned U.S. Government corporation within the Department of Housing
and Urban Development. GNMA is authorized to guarantee, with the full faith
and credit of the U.S. Government, the timely payment of principal and interest
on securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and pools of FHA-insured
or VA-guaranteed mortgages. Government-related (i.e., not backed by the full
faith and credit of the U.S. Government) guarantors include FNMA and FHLMC.
FNMA and FHLMC are government-sponsored corporations owned entirely by private
stockholders. Pass- through securities issued by FNMA and FHLMC are guaranteed
as to timely payment of principal and interest by FNMA and FHLMC, respectively,
but are not backed by the full faith and credit of the U.S. Government.
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MORTGAGE-RELATED SECURITIES -- IN GENERAL
Mortgage-related securities are backed by mortgage obligations
including, among others, conventional 30-year fixed rate mortgage obligations,
graduated payment mortgage obligations, 15-year mortgage obligations, and
adjustable rate mortgage obligations. All of these mortgage obligations can be
used to create pass-through securities. A pass-through security is created
when mortgage obligations are pooled together and undivided interests in the
pool or pools are sold. The cash flow from the mortgage obligations is passed
through to the holders of the securities in the form of periodic payments of
interest, principal and prepayments (net of a service fee). Prepayments occur
when the holder of an individual mortgage obligation prepays the remaining
principal before the mortgage obligation's scheduled maturity date. As a
result of the pass-through of prepayments of principal on the underlying
securities, mortgage-backed securities are often subject to more rapid
prepayment of principal than their stated maturity would indicate. Because the
prepayment characteristics of the underlying mortgage obligations vary, it is
not possible to predict accurately the realized yield or average life of a
particular issue of pass-through certificates. Prepayment rates are important
because of their effect on the yield and price of the securities. Accelerated
prepayments have an adverse impact on yields for pass-throughs purchased at a
premium (i.e., a price in excess of principal amount) and may involve
additional risk of loss of principal because the premium may not have been
fully amortized at the time the obligation is repaid. The opposite is true for
pass-throughs purchased at a discount. The Fund may purchase mortgage-related
securities at a premium or at a discount. Among the U.S. Government securities
in which the Fund may invest are government "mortgage- backed" (or government
guaranteed mortgage related securities). Such guarantees do not extend to the
value of yield of the mortgage-backed securities themselves or of the Fund's
shares.
GNMA Certificates. Certificates of the Government National Mortgage
Association ("GNMA") are mortgage-backed securities which evidence an undivided
interest in a pool or pools of mortgages. GNMA Certificates that the Fund may
purchase are the "modified pass-through" type, which entitle the holder to
receive timely payment of all interest and principal payments due on the
mortgage pool, net of fees paid to the "issuer" and GNMA, regardless of whether
or not the mortgagor actually makes the payment.
The National Housing Act authorizes GNMA to guarantee the timely
payment of principal and interest on securities backed by a pool of mortgages
insured by the Federal Housing Administration ("FHA") or guaranteed by the
Veterans Administration ("VA"). The GNMA guarantee is backed by the full faith
and credit of the U.S. Government. GNMA is also empowered to borrow without
limitation from the U.S. Treasury if necessary to make any payments required
under its guarantee.
The estimated average life of a GNMA Certificate is likely to be
substantially shorter than the original maturity of the mortgages underlying
the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greater part of principal
investment long before the maturity of the mortgages in the pool. Foreclosures
impose no risk to principal investment because of the GNMA guarantee, except to
the extent that the Fund has purchased the certificates above par in the
secondary market.
FHLMC Securities. The Federal Home Loan Mortgage Corporation
("FHLMC") was created in 1970 to promote development of a nationwide secondary
market in conventional residential mortgages. The FHLMC issues two types of
mortgage pass-through securities ("FHLMC Certificates"), mortgage participation
certificates ("PCs") and collateralized mortgage obligations ("CMOs"). PCs
resemble GNMA Certificates in that each PC represents a pro rata share of all
interest and principal payments made and owed on the underlying pool. The
FHLMC guarantees timely monthly payment of interest on PCs and the ultimate
payment of principal. Recently introduced FHLMC Gold PCs guarantee the timely
payment of both principal and interest.
CMOs are securities backed by a pool of mortgages in which the
principal and interest cash flows of the pool are channeled on a prioritized
basis into two or more classes, or tranches, of bonds. FHLMC CMOs are backed
by pools of agency mortgage-backed securities and the timely payment of
principal and interest of each
-11-
<PAGE> 478
tranche is guaranteed by the FHLMC. The FHLMC guarantee is not backed by the
full faith and credit of the U.S. Government.
FNMA Securities. The Federal National Mortgage Association ("FNMA")
was established in 1938 to create a secondary market in mortgages insured by
the FHA, but has expanded its activity to the secondary market for conventional
residential mortgages. FNMA primarily issues two types of mortgage-backed
securities, guaranteed mortgage pass-through certificates ("FNMA Certificates")
and CMOs. FNMA Certificates resemble GNMA Certificates in that each FNMA
Certificate represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. FNMA guarantees timely payment of
interest and principal on FNMA Certificates and CMOs. The FNMA guarantee is
not backed by the full faith and credit of the U.S. Government.
Puts. The Fund may acquire "puts" with respect to Ohio Tax-Exempt
Obligations held in its portfolio.
A put is a right to sell a specified security (or securities) within a
specified period of time at a specified exercise price. The Fund may sell,
transfer, or assign a put only in conjunction with the sale, transfer, or
assignment of the underlying security or securities. The amount payable to the
Fund upon its exercise of a "put" is normally (i) the Fund's acquisition cost
of the securities (excluding any accrued interest which the Fund paid on the
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period the Fund owned the securities, plus
(ii) all interest accrued on the securities since the last interest payment
date during that period.
Puts may be acquired by the Fund to facilitate the liquidity of its
portfolio assets. Puts may also be used to facilitate the reinvestment of the
Fund's assets at a rate of return more favorable than that of the underlying
security. Puts may, under certain circumstances, also be used to shorten the
maturity of underlying variable rate or floating rate securities for purposes
of calculating the remaining maturity of those securities and the
dollar-weighted average portfolio maturity of the Fund's assets. See "Variable
and Floating Rate Notes" and "VALUATION" in this Statement of Additional
Information.
The Fund expects that it will generally acquire puts only where the
puts are available without the payment of any direct or indirect consideration.
However, if necessary or advisable, the Fund may pay for puts either separately
in cash or by paying a higher price for portfolio securities which are acquired
subject to the puts (thus reducing the yield to maturity otherwise available
for the same securities).
The Fund intends to enter into puts only with dealers, banks, and
broker-dealers which, in Key Advisers' or the Sub- Adviser's opinion, present
minimal credit risks.
The Fund may invest, consistent with their investment objective and
policies, in zero coupon bonds, which are debt instruments that do not pay
current interest and are typically sold at prices greatly discounted from par
value. The return on a zero-coupon obligation, when held to maturity, equals
the difference between the par value and the original purchase price.
Zero-coupon obligations have greater price volatility than coupon obligations.
Non-Diversification. The Fund is non-diversified, thus, there is no
limit on the percentage of assets which can be invested in any single issuer
except as indicated below. An investment in the Fund, therefore, will entail
greater risk than would exist in a diversified portfolio because the higher
percentage of investments among fewer issuers may result in greater fluctuation
in the total market value of the Fund. Any economic, political, or regulatory
developments affecting the value of the securities in the Fund will have a
greater impact on the total value of the Fund than would be the case if the Fund
were diversified among more issuers.
The Fund intends to comply with Subchapter M of the Internal Revenue Code.
This undertaking requires that at the end of each quarter of the taxable year,
with regard to at least 50% of the Fund's total assets, no more than 5%
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<PAGE> 479
of its total assets are invested in the assets of a single issuer; beyond that,
no more than 25% of its total assets are invested in the securities of a single
issuer.
Investment Restrictions
The following investment restrictions are fundamental with respect to
the Fund and may be changed only by a vote of a majority of the outstanding
shares of the Fund as defined in "ADDITIONAL INFORMATION -- Miscellaneous" of
this Statement of Additional Information).
THE FUND MAY NOT:
1. Participate on a joint or joint and several basis in any
securities trading account.
2. Purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments (but this shall not prevent the
Fund from purchasing or selling options and futures contracts or from investing
in securities or other instruments backed by physical commodities).
3. Purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
Fund from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business). Investments by
the Fund in securities backed by mortgages on real estate or in marketable
securities of companies engaged in such activities are not hereby precluded.
4. Issue any senior security (as defined in the 1940 Act), except
that (a) the Fund may engage in transactions that may result in the issuance of
senior securities to the extent permitted under applicable regulations and
interpretations of the 1940 Act or an exemptive order; (b) the Fund may acquire
other securities, the acquisition of which may result in the issuance of a
senior security, to the extent permitted under applicable regulations or
interpretations of the 1940 Act; (c) subject to the restrictions set forth
below, the Fund may borrow money as authorized by the 1940 Act.
5. Borrow money, except that (a) the Fund may enter into commitments
to purchase securities in accordance with its investment program, including
delayed-delivery and when-issued securities and reverse repurchase agreements,
provided that the total amount of any such borrowing does not exceed 33 1/3% of
the Fund's total assets; and (b) the Fund may borrow money for temporary or
emergency purposes in an amount not exceeding 5% of the value of its total
assets at the time when the loan is made. Any borrowings representing more
than 5% of the Fund's total assets must be repaid before the Fund may make
additional investments.
6. Lend any security or make any other loan if, as a result, more
than 33 1/3% of its total assets would be lent to other parties, but this
limitation does not apply to purchases of publicly issued debt securities or to
repurchase agreements.
7. Underwrite securities issued by others, except to the extent that
the Fund may be considered an underwriter within the meaning of the Securities
Act of 1933 in the disposition of restricted securities.
8. Purchase the securities of any issuer (other than securities
issued or guaranteed by the U.S. government or any of its agencies or
instrumentalities, or repurchase agreements secured thereby) if, as a result,
more than 25% of the Fund's total assets would be invested in the securities of
companies whose principal business activities are in the same industry;
provided that this limitation shall not apply to Municipal Securities or
governmental guarantees of Municipal Securities; but for these purposes only,
industrial development bonds that are backed only by the assets and revenues of
a non-governmental user shall not be deemed to be Municipal Securities.
-13-
<PAGE> 480
The following restrictions are not fundamental and may be changed
without shareholder approval:
1. The Fund will not purchase or retain securities of any issuer if
the officers or Trustees of the Victory Portfolios or the officers or directors
of its investment adviser owning beneficially more than one half of 1% of the
securities of such issuer together own beneficially more than 5% of such
securities.
2. The Fund will not invest more than 10% of its total assets in the
securities of issuers which together with any predecessors have a record of
less than three years of continuous operation.
3. The Fund will not write or sell puts, straddles, spreads or
combinations thereof or purchase put options (except that the Fund may acquire
puts with respect to Municipal Securities in its portfolio and sell those puts
in connection with a sale of such Municipal Securities). In addition, the Fund
may not purchase call options.
4. The Fund will not invest more than 15% of its net assets in
illiquid securities. Illiquid securities are securities that are not readily
marketable or cannot be disposed of promptly within seven days and in the usual
course of business at approximately the price at which the Fund has valued
them. Such securities include, but are not limited to, time deposits and
repurchase agreements with maturities longer than seven days. Securities that
may be resold under Rule 144A ("Restricted Securities"), or securities offered
pursuant to Section 4(2) of, or securities otherwise subject to restriction or
limitations on resale under, the 1933 Act ("Restricted Securities"), shall not
be deemed illiquid solely by reason of being unregistered. Key Advisers or the
Sub-Adviser determine whether a particular security is deemed to be liquid
based on the trading markets for the specific security and other factors.
However, because state securities laws may limit the Fund's investment in
Restricted Securities (regardless of the liquidity of the investment),
investments in Restricted Securities resalable under Rule 144A will continue to
be subject to applicable state law requirements until such time, if ever, that
such limitations are changed.
5. The Fund will not make short sales of securities, other than
short sales "against the box," or purchase securities on margin except for
short-term credits necessary for clearance of portfolio transactions, provided
that this restriction will not be applied to limit the use of options, futures
contracts and related options, in the manner otherwise permitted by the
investment restrictions, policies and investment program of the Fund.
6. The Fund may invest up to 5% of its total assets in the
securities of any one investment company, but may not own more than 3% of the
securities of any one investment company or invest more than 10% of its total
assets in the securities of other investment companies. Pursuant to an
exemptive order received by the Victory Portfolios from the Commission, the
Fund may invest in the money market funds of the Victory Portfolios.
State Regulations
In addition, the Fund, so long as its shares are registered under the
securities laws of the State of Texas and such restrictions are required as a
consequence of such registration, is subject to the following non-fundamental
policies, which may be modified in the future by the Trustees without a vote of
the Fund's shareholders: the Fund has represented to the Texas State
Securities Board that it: (i) will not invest in oil, gas or mineral leases or
purchase or sell real property (including limited partnership interests, but
excluding readily marketable securities of companies which invest in real
estate); and (ii) will not invest more than 5% of its net assets in warrants
valued at the lower of cost or market; provided that, included within that
amount, but not to exceed 2% of net assets, may be warrants which are not
listed on the New York or American Stock Exchanges. For purposes of this
restriction, warrants acquired in units or attached to securities are deemed to
be without value.
The policies and limitations listed above supplement those set forth in
the Prospectus. Unless otherwise noted, whenever an investment policy or
limitation states a maximum percentage of the Fund's assets that may be
invested in any security or other asset, or sets forth a policy regarding
quality standards, such standard or percentage
-14-
<PAGE> 481
limitation will be determined immediately after and as a result of the Fund's
acquisition of such security or other asset except in the case of borrowing (or
other activities that may be deemed to result in the issuance of a "senior
security" under the 1940 Act). Accordingly, any subsequent change in values,
net assets, or other circumstances will not be considered when determining
whether the investment complies with the Fund's investment policies and
limitations. If the value of the Fund's holdings of illiquid securities at any
time exceeds the percentage limitation applicable at the time of acquisition
due to subsequent fluctuations in value or other reasons, the Board of Trustees
will consider what actions, if any, are appropriate to maintain adequate
liquidity.
FUTURE DEVELOPMENTS
The Fund may take advantage of other investment practices which are not
at present contemplated for use by the Fund or which currently are not
available but which may be developed, to the extent such investment practices
are both consistent with the Fund's investment objective and are legally
permissible for the Fund. Such investment practices, if they arise, may
involve risks which exceed those involved in the activities described in the
Prospectus and Statement of Additional Information. Prior to commencing any
new investment practice, the Fund will notify shareholders by means of
prospectus supplement.
Portfolio Turnover
The turnover rate stated in the Prospectus for the Fund's investment
portfolio is calculated by dividing the lesser of the Fund's purchases or sales
of portfolio securities for the year by the monthly average value of the
portfolio securities. The calculation excludes all securities whose
maturities, at the time of acquisition, were one year or less. Portfolio
turnover may vary greatly from year to year as well as within a particular
year, and may also be affected by cash requirements for redemptions of shares
and by requirements which enable the Trust to receive certain favorable tax
treatments. Portfolio turnover will not be a limiting factor in making
portfolio decisions.
VALUATION OF PORTFOLIO SECURITIES
As indicated in the Prospectus, the net asset value ("NAV") of the Fund
is determined and the shares of the Fund are priced as of the close of regular
trading of the New York Stock Exchange ("NYSE") ("the Valuation Time(s)") on
each Business Day of the Fund. A "Business Day" is a day on which the NYSE is
open for trading, the Federal Reserve Bank of Cleveland is open and any other
day (other than a day on which no shares of the Fund are tendered for
redemption and no order to purchase any shares is received) during which there
is sufficient trading in portfolio instruments that the Fund's net asset value
per share might be materially affected. The NYSE, or the Federal Reserve Bank
of Cleveland will not open in observance of the following holidays: New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving, and
Christmas.
When the NYSE is closed, or when trading is restricted for any reason
other than its customary weekend or holiday closings, or under emergency
circumstances as determined by the Commission to warrant such action, the
Fund's transfer agent will determine the Fund's NAV at the close of business,
normally 4:00 p.m., eastern time. The Fund's NAV may be affected to the extent
that its securities are traded on days that are not Business Days.
-15-
<PAGE> 482
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Matters Affecting Redemption
The Fund may suspend the right of redemption or postpone the date of
payment for shares during any period when (a) trading on the NYSE is restricted
by applicable rules and regulations of the Commission, (b) the NYSE is closed
for other than customary weekend and holiday closings, (c) the Commission has
by order permitted such suspension, or (d) an emergency exists as determined by
the Commission.
If, in the opinion of the Board of Trustees, conditions exist which make
cash payment undesirable, redemption payments may be made in whole or in part
in securities or other property, valued for this purpose as they are valued in
computing the Fund's NAV. Shareholders receiving securities or other property
on redemption may realize a gain or loss for tax purposes, and will incur any
costs of sale, as well as the associated inconveniences.
Pursuant to Rule 11a-3 under the 1940 Act, the Fund is required to give
shareholders at least 60 days' notice prior to terminating or modifying its
exchange privilege. Under the Rule, the 60-day notification requirement may be
waived if (i) the only effect of a modification would be to reduce or eliminate
an administrative fee, redemption fee, or deferred sales charge ordinarily
payable at the time of exchange, or (ii) the Fund temporarily suspends the
offering of shares as permitted under the 1940 Act or by the Commission, or
because it is unable to invest amounts effectively in accordance with its
investment objective and policies.
In the Prospectus, the Fund, Key Advisers and the Sub-Adviser have
notified shareholders that they reserve the right at any time without prior
notice to shareholders to refuse exchange purchases by any person or group if,
in Key Advisers' or the Sub- Adviser's judgment, the Fund would be unable to
invest effectively in accordance with its investment objective and policies, or
would otherwise potentially be adversely affected.
Purchasing Shares
Shares are sold at their net asset value without a sales charge on days
the NYSE and the Federal Reserve Wire System are open for business. The
procedure for purchasing shares of the Fund is explained in the prospectus
under "Investing in the Fund."
Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that
maximum interest may be earned. To this end, all payments from shareholders
must be in federal funds or be converted into federal funds. This conversion
must be made before shares are purchased. Converting the funds to federal
funds is normally accomplished within two business days of receipt of the
check.
Redeeming Shares
The Fund redeems shares at the next computed net asset value after the
redemption request is received. Redemption procedures are explained in the
prospectus under "Redeeming Shares."
[Redemption in Kind
Although the Fund intends to redeem shares in cash, it reserves the
right under certain circumstances to pay the redemption price in whole or in
part by a distribution of securities from the Fund. To the extent available,
such securities will be readily marketable.
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<PAGE> 483
Redemption in kind will be made in conformity with applicable Commission
rules, taking such securities at the same value employed in determining net
asset value and selecting the securities in a manner the Trustees determine to
be fair and equitable.
The Fund has elected to be governed by Rule 18f-1 of the 1940 Act under
which the Fund is obligated to redeem shares for any one shareholder in cash
only up to the lesser of $250,000 or 1% of the Fund's net asset value during
any 90-day period.]
The Victory Portfolios may redeem shares involuntarily if redemption
appears appropriate in light of the Victory Portfolios' responsibilities under
the 1940 Act. (See "VALUATION" above.)
Additional Tax Information
It is the policy of the Fund to qualify for the favorable tax treatment
accorded regulated investment companies ("RICs") under Subchapter M of the
Code, for so long as such qualification is in the best interest of its
shareholders. By following such policy and distributing its income and gains
currently with respect to each taxable year, the Victory Portfolios expects to
eliminate or reduce to a nominal amount the federal income and excise taxes to
which it may otherwise be subject.
In order to qualify as a RIC, the Fund must, among other things, (1)
derive at least 90% of its gross income from dividends, interest, payments with
respect to securities loans, and gains from the sale or other disposition of
stock or securities, foreign currencies or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in stock, securities or currencies, (2) derive less than 30% of its
gross income from the sale or other disposition of stock, securities, options,
futures, forward contracts, and certain foreign currencies (or options,
futures, or forward contracts on foreign currencies) held for less than three
months, and (3) diversify its holdings so that at the end of each quarter of
its taxable year (i) at least 50% of the market value of the Fund's assets is
represented by cash or cash items, U.S. Government securities, securities of
other RICs and other securities limited, in respect of any one issuer, to an
amount not greater than 5% of the value of the Fund's total assets and 10% of
the outstanding voting securities of such issuer, and (ii) not more than 25% of
the value of its total assets is invested in the securities of any one issuer
(other than U.S. Government securities) or of two or more issuers that the
Victory Portfolios control and that are engaged in the same, similar, or
related trades or businesses. These requirements may restrict the degree to
which the Victory Portfolios may engage in short-term trading and concentrate
investments. If the Fund qualifies as a RIC, it will not be subject to federal
income tax on the part of its net investment income and net realized capital
gains, if any, that it distributes to shareholders with respect to each taxable
year within the time limits specified in the Code.
A non-deductible excise tax is imposed on regulated investment companies
that do not distribute in each calendar year an amount equal to 98% of their
ordinary income for the year plus 98% of their capital gain net income for the
1-year period ending on October 31 of such calendar year. The balance of such
income must be distributed during the following calendar year. If
distributions during a calendar year are less than the required amount, the
Fund is subject to a non-deductible excise tax equal to 4% of the deficiency.
The Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of taxable dividends paid to any shareholder who has failed
to provide (or provided an incorrect) tax identification number, or is subject
to withholding pursuant to a notice from the Internal Revenue Service for
failure to properly include on his or her income tax return payments of
interest or dividends. This "backup withholding" is not an additional tax, and
any amounts withheld may be credited against the shareholder's ultimate U.S.
tax liability.
Information set forth in the Prospectus and this Statement of Additional
Information that relates to federal taxation is only a summary of certain key
federal tax considerations generally affecting purchasers of shares of the
Victory Portfolios. No attempt has been made to present a complete explanation
of the federal tax treatment of the
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<PAGE> 484
Fund or its shareholders, and this discussion is not intended as a substitute
for careful tax planning. Accordingly, potential purchasers of shares of the
Fund are urged to consult their tax advisers with specific reference to their
own tax circumstances. In addition, the tax discussion in the Prospectus and
this Statement of Additional Information is based on tax law in effect on the
date of the Prospectus and this Statement of Additional Information; such laws
and regulations may be changed by legislative, judicial or administrative
action, sometimes with retroactive effect.
As indicated in the Prospectus, the Fund is designed to provide
shareholders with current interest income free from federal income taxation.
The Fund is not intended to constitute a balanced investment program and is not
designed for investors seeking capital appreciation; moreover, the Fund is not
designed for investors seeking maximum tax-exempt income irrespective of
fluctuations in principal. Shares of the Fund would not be suitable for
tax-exempt institutions and may not be suitable for retirement plans qualified
under Section 401 of the Code, so-called Keogh or H.R. 10 plans, and individual
retirement accounts. Such plans and accounts are generally tax-exempt and,
therefore, would not benefit from the fact that dividends from the Fund are
tax-exempt; moreover, such dividends would be ultimately taxable to the
beneficiaries when distributed to them. In addition, shareholders who under
Code section 147(a) are "substantial users" or "related persons" to substantial
users with respect to facilities financed through any of the tax-exempt
obligations held by the Fund should consult a tax adviser whether
exempt-interest dividends would remain excludable from gross income in their
hands for federal tax purposes under Section 103 of the Code.
The Code permits a RIC that invests at least 50% of its assets in
tax-exempt Municipal Securities to pass through to its investors, on a
tax-exempt basis, net Municipal Securities interest income. The policy of the
Fund is to pay each year as dividends substantially all of its Municipal
Securities interest income net of certain deductions, but not to exceed in the
aggregate the net exempt-interest income received by the Fund during the
taxable year. An exempt-interest dividend is any dividend or part thereof
(other than a capital gain dividend) paid by the Fund and designated as an
exempt-interest dividend in a written notice mailed to shareholders after the
close of the Fund's taxable year. The percentage of the total dividends paid
for any taxable year which qualifies as federal exempt-interest dividends will
be the same for all shareholders receiving dividends from the Fund,
respectively, during such year, regardless of the period for which the shares
were held.
While the Fund does not expect to realize any significant amount of
long-term capital gains, any net realized capital gains (the excess, if any, of
net long-term capital gains over net short-term capital losses) will be
distributed annually. Distributions of net capital gain will be taxable to
shareholders as long-term capital gains, regardless of how long a shareholder
has held the Fund's shares. If a shareholder disposes of shares of the Fund,
at a loss, before holding such shares longer than 6 months, the loss will be
treated as a long-term capital loss (unless disallowed as specified in the next
sentence) to the extent that the shareholder has received a capital gain
dividend on the shares. In addition, if a shareholder receives one or more
exempt-interest dividends with respect to any share and such share is held for
6 months or less, any loss on the sale or exchange of such share will be
disallowed to the extent of the amount of such dividend(s).
While the Fund does not expect to earn a significant amount of taxable
investment income or short-term gains, such income or short-term gains earned
by the Fund will be distributed to shareholders and will be taxable to them as
ordinary income (whether paid in cash or additional shares).
As indicated in the Prospectus, the Fund may acquire puts with respect
to Municipal Securities held in its portfolio. The policy of the Fund is to
limit its acquisition of puts to those under which the Fund will be treated for
federal income tax purposes as the owner of the underlying Municipal Securities
acquired subject to the put, so that the interest on those Securities
Obligations will be tax-exempt to the Fund. Although the Service has issued a
published ruling that provides some guidance regarding the tax consequences of
the purchase of puts, there is currently no guidance available from the
Internal Revenue Service that definitively establishes the tax consequences of
many of the types of puts that the Fund could acquire under the 1940 Act.
Therefore, although the Fund will only acquire a put after concluding that it
will have the tax consequences described above, the Internal Revenue
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<PAGE> 485
Service could reach a different conclusion. If the Fund were not treated as
the owner of the Municipal Securities, income from such securities would
probably not be tax-exempt.
Although the Fund expects to qualify as a RIC and to be relieved of all
or substantially all federal income taxes, the Fund may be subject to the tax
laws of states or localities in which their offices are maintained, in which
their agents or independent contractors are located, or in which they are
otherwise deemed to be conducting business, depending upon the extent of its
activities in such states and localities. In addition, if for any taxable year
the Fund does not qualify for the special federal tax treatment afforded RICs,
all of its taxable income will be subject to federal income tax at the Fund
level at regular corporate rates (without any deduction for distributions to
shareholders). When distributed, such income, as well as the Fund's Municipal
Securities interest income, although not taxed at the Fund level would be
taxable to shareholders as an ordinary dividend.
MANAGEMENT OF THE VICTORY PORTFOLIOS
Board of Trustees
Overall responsibility for management of the Victory Portfolios rests
with the Trustees, who are elected by the shareholders of the Victory
Portfolios. The Victory Portfolios are managed by the Trustees in accordance
with the laws of the State of Delaware governing business trusts. There are
currently seven Trustees, six of whom are not "interested persons" of the
Victory Portfolios within the meaning of that term under the 1940 Act. The
Trustees, in turn, elect the officers of the Victory Portfolios to supervise
actively its day-to-day operations.
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- --------------------- ---------------- ----------------------
<S> <C> <C>
Leigh A. Wilson, 51* Trustee and From 1989 to present, Chairman and
Glenleigh International Ltd. President Chief Executive Officer, Glenleigh
53 Sylvan Road North International Limited; previously
Westport, CT 06880 Chief Executive Officer, Paribas
North America and Paribas
Corporation; Trustee, The Victory
Funds and Sears, Benzak, Solomon
and Farrell ("SBSP") Funds.
Robert G. Brown, 72 Trustee Retired; from October 1983 to
5460 N. Ocean DriveTrustee November 1990, President,
Singer Island, Riviera Beach, Cleveland Advanced Manufacturing
Florida 33404 Program (non-profit corporation
engaged in regional economic
development).
</TABLE>
- ------------
* Mr. Wilson is deemed to be an "interested person" of the Victory
Portfolios under the 1940 Act solely by reason of his position as
President.
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<PAGE> 486
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Funds During Past 5 Years
- --------------------- ---------------- -------------
<S> <C> <C>
Edward P. Campbell, 46 Trustee From March 1, 1994 to present,
Nordson Corporation Executive Vice President and Chief
28601 Clemens Road Operating Officer of Nordson
Westlake, OH 44145 Corporation (manufacturer of
application equipment); from May
1988 to March 1994, Vice President
of Nordson Corporation; from 1987
to December 1994, member of the
Supervisory Committee of Society's
Collective Investment Retirement
Fund; from May 1991 to August
1994, Trustee, Financial Reserves
Fund and from May 1993 to August
1994, Trustee, Ohio Municipal
Money Market Fund; Trustee, The
Victory Funds and SBSF.
Dr. Harry Gazelle, 68 Trustee Retired radiologist, Drs. Hill and
17822 Lake Road Thomas Corp.; Trustee, The Victory
Lakewood, OH 44107 Funds.
Dr. Thomas F. Morrissey, 62 Trustee 1995 Visiting Scholar, Bond
Weatherhead School of University, Queensland, Australia;
Management Professor, Weatherhead School of
Case Western Reserve Management, Case Western Reserve
University University; from 1989 to 1995,
10900 Euclid Avenue Associate Dean of Weatherhead
Cleveland, OH 44106-7235 School of Management and
Professor, Case Western Reserve
University; from 1987 to December
1994, Member of the Supervisory
Committee of Society's Collective
Investment Retirement Fund; from
May 1991 to August 1994, Trustee,
Financial Reserves Fund and from
May 1993 to August 1994, Trustee,
Ohio Municipal Money Market Fund;
Trustee, The Victory Funds.
Stanley I. Landgraf, 70 Trustee Retired; currently, Trustee,
41 Traditional Lane Rensselaer Polytechnic Institute;
Albany, NY 12211 Director, Elenel Corporation and
Mechanical Technology, Inc.;
Member, Board of Overseers, School
of Management, Rensselaer
</TABLE>
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<PAGE> 487
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Funds During Past 5 Years
- --------------------- ---------------- ---------------------
<S> <C> <C>
Polytechnic Institute; Member, The
Fifty Group (a Capital Region
business organization); Trustee,
The Victory Funds.
H. Patrick Swygert, 52 Trustee President, Howard University;
Howard University formerly President, State
2400 6th Street, N.W. University of New York at Albany;
Suite 320 formerly, Executive Vice
Washington, DC 20059 President, Temple University;
Trustee, The Victory Funds.
</TABLE>
The Board presently has an Investment Policy Committee and a
Business, Legal, and Audit Committee. The members of the Investment Policy
Committee are Messrs. Landgraf (Chairman), Morrissey and Brown, who will serve
until May 1996. The function of the Investment Policy Committee is to review
the existing investment policies of the Victory Portfolios, including the
levels of risk and types of funds available to shareholders, and make
recommendations to the Board of Trustees regarding the revision of such
policies or, if necessary, the submission of such revisions to the Victory
Portfolios' shareholders for their consideration. The members of the Business,
Legal and Audit Committee are Messrs. Swygert (Chairman), Campbell and Gazelle
who will serve until May 1996. The function of the Business, Legal and Audit
Committee is to recommend independent auditors and monitor accounting and
financial matters; to nominate persons to serve as disinterested Trustees and
Trustees to serve on committees of the Board; and to review compliance and
contract matters.
The Investment Policy Committee met four times during the 12
months ended October 31, 1995. The Business, Legal and Audit Committee was
constituted on May 24, 1995 (and has met twice since then) and replaced the
Audit Committee, the Legal Committee and the Nominating Committee, which met
three times, one time and one time, respectively, during the 12 month period
ended October 31, 1995.
REMUNERATION OF TRUSTEES AND CERTAIN EXECUTIVE OFFICERS
Effective June 1, 1995, each Trustee (other than Leigh A. Wilson)
receives an annual fee of $27,000 for serving as Trustee of all the funds of
the Victory Portfolios, and an additional per meeting fee ($2,400 in person and
$1,200 per telephonic meeting).
Effective June 1, 1995, Leigh A. Wilson receives an annual fee of
$33,000 for serving as President and Trustee for all of the funds of the
Victory Portfolios, and an additional per meeting fee ($3,000 in person and
$1,500 per telephonic meeting).
The following table indicates the compensation received by each Trustee
from the Fund and from the Victory "Fund Complex"* for the 12 month period
ended October 31, 1995.
-21-
<PAGE> 488
<TABLE>
<CAPTION>
Pension or
Retirement Estimated Total
Benefits Annual Total Compensation
Accrued as Benefits Compensation from Victory
Portfolio Upon From "Fund
Expenses Retirement Fund Complex"*
---------- ---------- ---- -------
<S> <C> <C> <C> <C>
Robert G. Brown, Trustee . . . . -0- -0- $443.98 $39,815.98
John D. Buckingham, Trustee . . . -0- -0- 223.59 18,841.89
Edward P. Campbell, Trustee . . . -0- -0- 376.72 33,799.68
Harry Gazelle, Trustee . . . . . -0- -0- 364.09 35,916.98
John W. Kemper, Trustee # . . . . -0- -0- 223.59 22,567.31
Stanley I. Landgraf, Trustee. . . -0- -0- 376.72 34,615.98
Thomas F. Morrissey, Trustee. . . -0- -0- 376.72 40,366.98
H. Patrick Swygert, Trustee . . . -0- -0- 376.72 37,116.98
Leigh A. Wilson, Trustee . . . . -0- -0- 407.85 46,716.97
John R. Young, Trustee # . . . . -0- -0- 236.57 21,963.81
</TABLE>
# Resigned
- ----------------------------------
* For certain Trustees, these amounts include compensation received from
the Victory Funds (which were reorganized into the Victory Portfolios as
of June 5, 1995), the SBSF Funds (the investment adviser of which was
acquired by KeyCorp effective April, 1995) and Society's Collective
Investment Retirement Funds, which were reorganized into the Victory
Balanced Fund and Victory Government Mortgage Fund as of December 19,
1994. There are presently 24 mutual funds from which the above-named
Trustees are compensated in the Victory "Fund Complex," but not all of
the above-named Trustees serve on the boards of each fund in the "Fund
Complex."
Officers
The officers of the Victory Portfolios, their addresses, ages and
principal occupations during the past five years are as follows:
<TABLE>
<CAPTION>
Position with the Principal occupation
Name Victory Portfolios during past 5 years
---- ------------------ -------------------
<S> <C> <C>
Leigh A. Wilson, 51 President and Trustee From 1989 to present, Chairman and
Glenleigh International Ltd. Chief Executive Officer, Glenleigh
53 Sylvan Road North International Limited; from 1984-
Westport, CT 06880 1989, Chief Executive Officer,
Paribas North America and Paribas
Corporation; Trustee to The Victory
Funds and SBSF Funds.
</TABLE>
-22-
<PAGE> 489
<TABLE>
<S> <C> <C>
William B. Blundin, 57 Vice President Senior Vice President of BISYS Fund
BISYS Fund Services Services; officer of other
125 West 55th Street investment companies administered
New York, New York 10019 by BISYS Fund Services; President
and Chief Executive Officer of
Vista Broker-Dealer Services, Inc.,
Emerald Asset Management, Inc. and
BNY Hamilton Distributors, Inc.,
registered broker/dealers.
J. David Huber, 49 Vice President Executive Vice President, BISYS
BISYS Fund Services Fund Services.
3435 Stelzer Road
Columbus, OH 43219-3035
Scott A. Englehart, 33 Secretary From October 1990 to present,
BISYS Fund Services employee of BISYS Fund Services,
3435 Stelzer Road Inc.; from 1985 to October 1990,
Columbus, OH 43219-3035 Manager of Banking Center, Fifth
Third Bank.
George O. Martinez, 36 Assistant Secretary From March 1995 to present, Senior
BISYS Fund Services Vice President and Director of
3435 Stelzer Road Legal and Compliance Services,
Columbus, OH 43219-3035 BISYS Fund Services; from June
1989-March 1995, Vice President and
Associate General Counsel, Alliance
Capital Management.
Martin R. Dean, 32 Treasurer From May 1994 to present, employee
BISYS Fund Services of BISYS Fund Services; from
3435 Stelzer Road January 1987 - April 1994, Senior
Columbus, OH 43219-3035 Manager, KPMG Peat Marwick.
Adrian J. Waters, 33 Assistant Treasurer From May 1993 to present, employee
BISYS Fund Services (Ireland) of BISYS Fund Services; from 1989-
Limited May 1993, Manager, Price Waterhouse.
ITI House
12 Earlsfort Terrace
Dublin 2, Ireland
</TABLE>
The mailing address of each of the officers of the Victory Portfolios is 3435
Stelzer Road, Columbus, Ohio 43219-3035.
The officers of the Victory Portfolios (other than Leigh Wilson) receive no
compensation directly from the Victory Portfolios for performing the duties of
their offices. BISYS Fund Services, Inc. receives fees from the Victory
Portfolios for acting as Administrator.
As of December 1, 1995, the Trustees and officers as a group owned beneficially
less than 1% of the Fund.
-23-
<PAGE> 490
Investment Adviser and Sub-Adviser
Key Advisers was organized as an Ohio corporation on July 27, 1995 and
is registered as an investment adviser under the Investment Advisers Act of
1940. It is a wholly-owned subsidiary of KeyCorp Asset Management Holdings,
Inc., which is a wholly- owned subsidiary of Society National Bank, a
wholly-owned subsidiary of KeyCorp. Affiliates of Key Advisers manage
approximately $37 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals and mutual funds.
KeyCorp, a financial services holding company, is headquartered at 127
Public Square, Cleveland, Ohio 44114. As of September 30, 1995, KeyCorp had an
asset base of $68 billion, with banking offices in 26 states from Maine to
Alaska, and trust and investment offices in 16 states. KeyCorp is the
resulting entity of the merger in 1994 of Society Corporation, the bank holding
company of which Society National Bank was a wholly-owned subsidiary, and
KeyCorp, the former bank holding company. KeyCorp's major business activities
include providing traditional banking and associated financial services to
consumer, business and commercial markets. Its non-bank subsidiaries include
investment advisory, securities brokerage, insurance, bank credit card
processing, and mortgage leasing companies. Society National Bank is the lead
affiliate bank of KeyCorp.
The following schedule lists the advisory fees for each mutual fund
that is advised by Key Advisers.
.25 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Institutional Money Market Fund*
.35 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Prime Obligations Fund*
Victory U.S. Government Obligations Fund*
Victory Tax-Free Money Market Fund*
.50 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Money Market Fund*
Victory Limited Term Income Fund*
Victory Government Mortgage Fund*
Victory Financial Reserves Fund*
Victory Fund for Income #
.55 OF 1% OF AVERAGE DAILY NET ASSETS
Victory National Municipal Bond Fund*
Victory Government Bond Fund*
Victory New York Tax-Free Fund*
.60 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Bond Fund*
Victory Stock Index Fund*
.65 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Diversified Stock Fund*
.75 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Intermediate Income Fund*
Victory Investment Quality Bond Fund*
Victory Ohio Regional Stock Fund*
-24-
<PAGE> 491
1% OF AVERAGE DAILY NET ASSETS
Victory Balanced Fund*
Victory Value Fund*
Victory Growth Fund*
Victory Special Value Fund*
Victory Special Growth Fund+
1.10% OF AVERAGE DAILY ASSETS
Victory International Growth Fund*
# First Albany Asset Management Corporation serves as
sub-adviser to the Victory Fund for Income, for which it
receives .20% of average daily net assets.
+ T. Rowe Price Associates, Inc. serves as sub-adviser to the
Victory Special Growth Fund, for which it receives .25% of
average daily net assets up to $100 million and .20% of
average daily net assets in excess of $100 million.
* Society Asset Management, Inc. (the Sub-Adviser) serves as
subadviser to each of these funds. For its services under the
investment sub-advisory agreement, Key Advisers pays the
Sub-Adviser sub-advisory fees at rates (based on an annual
percentage of average daily net assets) which vary according
to the table set forth below:
<TABLE>
<CAPTION>
For the Victory Balanced Fund, Diversified Stock For the Victory International Growth Fund, Ohio
Fund, Growth Fund, Stock Index Fund and Value Fund: Regional Stock Fund and Special Value Fund:
Rate of Rate of
Net Assets Sub-Advisory Fee* Net Assets Sub-Advisory Fee*
---------- ----------------- ---------- -----------------
<S> <C> <C> <C>
Up to $10,000,000 0.65% Up to $10,000,000 0.90%
Next $15,000,000 0.50% Next $15,000,000 0.70%
Next $25,000,000 0.40% Next $25,000,000 0.55%
Above $50,000,000 0.35% Above $50,000,000 0.45%
</TABLE>
-25-
<PAGE> 492
<TABLE>
<CAPTION>
For the Victory Intermediate Income Fund, Investment For the Victory Prime Obligations Fund, Tax-Free
Quality Bond Fund, Limited Term Income Fund, Ohio Money Market Fund, U.S. Government Obligations Fund,
Municipal Bond Fund, Government Bond Fund, Government Financial Reserves Fund, Institutional Money Market
Mortgage Fund, National Municipal Bond Fund and New York Fund and Ohio Municipal Money Market Fund:
Tax-Free Fund:
Rate of Rate of
Net Assets Sub-Advisory Fee* Net Assets Sub-Advisory Fee*
---------- ----------------- ---------- -----------------
<S> <C> <C> <C>
Up to $10,000,000 0.40% Up to $10,000,000 0.25%
Next $15,000,000 0.30% Next $15,000,000 0.20%
Next $25,000,000 0.25% Next $25,000,000 0.15%
Above $50,000,000 0.20% Above $50,000,000 0.125%
</TABLE>
* As a percentage of average daily net assets. The Sub-Adviser has the
right to voluntarily waive any portion of the sub- advisory fee from
time to time.
ADVISORY AND OTHER CONTRACTS
Unless sooner terminated, the Investment Advisory Agreement between
Key Advisers and the Fund provides that it will continue in effect as to the
Fund for an initial two-year term and for consecutive one-year terms
thereafter, provided that such continuance is approved at least annually by the
Victory Portfolios' Trustees or by vote of a majority of the outstanding shares
of such Fund (as defined under "GENERAL INFORMATION - Miscellaneous" in the
Prospectus), and, in either case, by a majority of the Trustees who are not
parties to the Investment Advisory Agreement or interested persons (as defined
in the 1940 Act) of any party to the Investment Advisory Agreement, by votes
cast in person at a meeting called for such purpose.
The Investment Advisory Agreement is terminable as to the Fund at any
time on 60 days' written notice without penalty by the Trustees, by vote of a
majority of the outstanding shares of that Fund, or by Key Advisers. The
Investment Advisory Agreement also terminates automatically in the event of any
assignment, as defined in the 1940 Act.
The Investment Advisory Agreement provides that Key Advisers shall not
be liable for any error of judgment or mistake of law or for any loss suffered
by the Fund in connection with the performance of services pursuant to the
Investment Advisory Agreement, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith, or gross negligence on the
part of Key Advisers in the performance of its duties, or from reckless
disregard by it of either duties and obligations thereunder.
Under the Investment Advisory Agreement, Key Advisers has agreed to
provide the investment advisory services described in the Prospectus. For the
services provided and expenses assumed pursuant to the Investment Advisory
Agreement, the Fund pays Key Advisers a fee, computed daily and paid monthly,
at the annual rate of sixty one-hundredths of one percent (.60%) of the average
daily net assets of the Fund.
Prior to January, 1993, Society National Bank served as investment
adviser to the Fund. From January, 1993 to December 31, 1995, Society Asset
Management, Inc. served as investment adviser to the Fund. For the fiscal
years ended October 31, 1993, 1994 and 1995 the Fund paid investment advisory
fees of $208,387, $163,736, and $_________, respectively after fee reductions
of $122,469, $173,917 and $______ respectively.
-26-
<PAGE> 493
Under the Investment Advisory Agreement, Key Advisers may delegate a
portion of its responsibilities to a subadviser. In addition, the investment
advisory agreement provides that Key Advisers may render services through its
own employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser of the Fund and are under the common
control of KeyCorp as long as all such persons are functioning as part of an
organized group of persons, managed by authorized officers of Key Advisers.
Key Advisers has entered into an investment sub-advisory agreement
with its affiliate, Society Asset Management, Inc. on behalf of the Fund. The
Sub-Adviser is a wholly-owned subsidiary of KeyCorp Asset Management Holdings,
Inc. With respect to the day to day management of the Fund, under the
sub-advisory agreement, the Sub-Adviser makes decisions concerning, and places
all orders for, purchases and sales of securities and helps maintain the
records relating to such purchases and sales. The Sub-Adviser may, in its
discretion, provide such services through its own employees or the employees of
one or more affiliated companies that are qualified to act as an investment
adviser to the Company under applicable laws and are under the common control
of KeyCorp; provided that (i) all persons, when providing services under the
sub-advisory agreement, are functioning as part of an organized group of
persons, and (ii) such organized group of persons is managed at all times by
authorized officers of the Sub-Adviser. This arrangement will not result in the
payment of additional fees by the Fund.
Glass-Steagall Act
In 1971 the United States Supreme Court held in Investment Company
Institute v. Camp that the federal statute commonly referred to as the
Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision: (a)
forbid a bank holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing, or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but (b) do not prohibit such
a holding company or affiliate from acting as investment adviser, transfer
agent, and custodian to such an investment company. In 1981 the United States
Supreme Court held in Board of Governors of the Federal Reserve System v.
Investment Company Institute that the Board did not exceed its authority under
the Holding Company Act when it adopted its regulation and interpretation
authorizing bank holding companies and their non-bank affiliates to act as
investment advisers to registered closed-end investment companies. In the Board
of Governors case, the Supreme Court also stated that if a national bank
complied with the restrictions imposed by the Board in its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to investment companies, a national bank
performing investment advisory services for an investment company would not
violate the Glass-Steagall Act.
Key Advisers and the Sub-Adviser believe that they may perform the
services for the Victory Portfolios contemplated by the Prospectus, this
Statement of Additional Information, and the Investment Advisory Agreement (and
Sub-Advisory Agreement) with the Victory Portfolios without violation of
applicable statutes and regulations and has so represented in its Investment
Advisory (and Sub-Advisory Agreement) with the Victory Portfolios. Key Trust
Company of Ohio, N. A. believes that it may perform the services for the
Victory Portfolios contemplated by the Prospectus, this Statement of Additional
Information, and the Shareholder Servicing Agreement with the Victory
Portfolios (as described below) without violation of applicable statutes and
regulations and has so represented in such Shareholder Servicing Agreement.
Future changes in either federal or state statutes and regulations relating to
the permissible activities of banks or bank holding companies and the
subsidiaries or affiliates of those entities, as well as further judicial or
administrative decisions or interpretations of present and future statutes and
regulations, could prevent or restrict Key Trust Company of Ohio, N. A., Key
Advisers or the Sub-Adviser from continuing to perform such services for the
Victory Portfolios. Depending upon the nature of any changes in the services
which could be provided by Key Trust Company of Ohio, N. A., Key Advisers or
the Sub-Adviser; the Trustees of the Victory Portfolios would review the
Victory Portfolios' relationship with Key Trust Company of Ohio, N. A., Key
Advisers or the Sub-Adviser and consider taking all action necessary in the
circumstances.
-27-
<PAGE> 494
Should future legislative, judicial, or administrative action prohibit
or restrict the proposed activities of Key Trust Company of Ohio, N. A., Key
Advisers or the Sub-Adviser and its affiliated and correspondent banks and
other non-bank affiliates in connection with customer purchases of shares of
the Victory Portfolios, the banks and such non-bank affiliates might be
required to alter materially or discontinue the services offered by them to
customers. It is not anticipated, however, that any change in the Victory
Portfolios' method of operations would affect its net asset value per share or
result in financial losses to any customer.
From time to time, advertisements, supplemental sales literature and
information furnished to present or prospective shareholders of the Fund may
include descriptions of Key Trust Company of Ohio, N. A., Key Advisers and the
Sub-Adviser including, but not limited to, (i) descriptions of the operations
of Key Trust Company of Ohio, N. A., Key Advisers and the Sub-Adviser; (ii)
descriptions of certain personnel and their functions; and (iii) statistics and
rankings related to the operations of Key Trust Company of Ohio, N. A., Key
Advisers and the Sub-Adviser.
Portfolio Transactions
Pursuant to the Investment Advisory Agreement (and Sub-Advisory
Agreement), Key Advisers or the Sub-Adviser determines, subject to the general
supervision of the Trustees of the Victory Portfolios, and in accordance with
the Fund's investment objective and restrictions, which securities are to be
purchased and sold by the Fund, and which brokers are to be eligible to execute
its portfolio transactions. Purchases from underwriters and/or broker-dealers
of portfolio securities include a commission or concession paid by the issuer
to the underwriter and/or broker-dealer and purchases from dealers serving as
market makers may include the spread between the bid and asked price. While
Key Advisers and the Sub-Adviser generally seek competitive prices (inclusive
of any spread or commission), the Fund may not necessarily pay the lowest
prices available on each transaction, for reasons discussed below.
Allocation of transactions to dealers is determined by Key Advisers
or the Sub-Adviser in their best judgment and in a manner deemed fair and
reasonable to shareholders. The primary consideration is prompt execution of
orders in an effective manner at the most favorable price. Subject to this
consideration, dealers who provide supplemental investment research to Key
Advisers or the Sub-Adviser may receive orders for transactions by the Victory
Portfolios. Information so received is in addition to and not in lieu of
services required to be performed by Key Advisers or the Sub-Adviser and does
not reduce the advisory fees payable to Key Advisers by the Victory Portfolios.
Such information may be useful to Key Advisers or the Sub-Adviser in serving
both the Victory Portfolios and other clients and, conversely, such
supplemental research information obtained by the placement of orders on behalf
of other clients may be useful to Key Advisers or the Sub-Adviser in carrying
out its obligations to the Victory Portfolios. In the future, the Trustees may
also authorize the allocation of brokerage to affiliated broker-dealers on an
agency basis to effect portfolio transactions. In such event, the Trustees
will adopt procedures incorporating the standards of Rule 17e-1 under the 1940
Act, which requires that the commission paid to affiliated broker-dealers be
"reasonable and fair compared to the commission, fee or other remuneration
received, or to be received, by other brokers in connection with comparable
transactions involving similar securities during a comparable period of time."
At times, the Fund may also purchase portfolio securities directly from dealers
acting as principals, underwriters or market makers. As these transactions are
usually conducted on a net basis, no brokerage commissions are paid by the
Fund.
The Victory Portfolios will not execute portfolio transactions
through, acquire portfolio securities issued by, make savings deposits in, or
enter into repurchase or reverse repurchase agreements with Key Advisers, the
Sub-Adviser, Key Trust Company of Ohio, N.A. or its affiliates, Concord Holding
Corporation, Victory Broker-Dealer Services, Inc. or their affiliates, and will
not give preference to Key Trust Company of Ohio, N.A.'s correspondent banks or
affiliates, or Concord Holding Corporation or Victory Broker-Dealer Services,
Inc. with respect to such transactions, securities, savings deposits,
repurchase agreements, and reverse repurchase agreements.
Investment decisions for the Fund are made independently from those
for the other funds or any other investment company or account managed by Key
Advisers (or Society). Any such other investment company or account may also
invest in the same securities as a particular fund. When a purchase or sale of
the same security is made at substantially the same time on behalf of the Fund
and another fund, investment company or account, the transaction will be
averaged as to price, and available investments allocated as to amount, in a
manner which Key
-28-
<PAGE> 495
Advisers (or Society) believes to be equitable to the Fund and such other
fund, investment company or account. In some instances, this investment
procedure may adversely affect the price paid or received by the Fund or the
size of the position obtained by the Fund. To the extent permitted by law, Key
Advisers (or Society) may aggregate the securities to be sold or purchased for
the Fund with those to be sold or purchased for the other funds or for other
investment companies or accounts in order to obtain best execution. As
provided by the Investment Advisory (and Sub-Advisory) Agreement, in making
investment recommendations for the Victory Portfolios, Key Advisers (or
Society) will not inquire or take into consideration whether an issuer of
securities proposed for purchase or sale by a Fund is a customer of Society,
its parents or subsidiaries or affiliates and, in dealing with their
commercial customers, Key Advisers (Society), its parents, subsidiaries, and
affiliates will not inquire or take into consideration whether securities of
such customers are held by the Victory Portfolios.
Business Management Agreement
In connection with its obligations under the Investment Sub-Advisory
Agreement, the Sub-Adviser has entered into a Business Management Agreement
with Key Advisers, pursuant to which Key Advisers provides certain
administrative and support services to the Sub-Adviser. Such services include
preparing reports to the Victory Portfolios' Board of Trustees, recordkeeping
services, and services rendered in connection with the preparation of
regulatory filings and other reports, and regulatory and other administrative
and compliance systems and support services.
For such services to the Fund, the Sub-Adviser pays fees to Key
Advisers which vary according to a sliding scale containing "breakpoints" at
which decreases in the business management fees correspond to increases in the
average daily net asset values of the Fund as follows:
<TABLE>
<CAPTION>
Net Assets Rate of Business
of the Fund Management Fee*
----------- ---------------
<S> <C>
Up to $10,000,000 0.25%
Next $15,000,000 0.15%
Next $25,000,000 0.10%
Above $50,000,000 0.05%
</TABLE>
- --------------------
* As a percentage of average daily net assets.
Administrator
Currently, Concord Holding Corporation ("CHC") serves as general
manager and administrator (the "Administrator") to the Fund. The
Administrator assists in supervising all operations of the Fund (other than
those performed by Key Advisers or the Sub- Adviser under the Investment
Advisory Agreement and Sub-Advisory Agreement. Prior to June, 1995, The
Winsbury Company ("Winsbury") served as the Fund's administrator.
CHC receives a fee from the Fund for its services as Administrator and
expenses assumed pursuant to the Administration Agreements, calculated daily
and paid monthly, at the annual rate of fifteen one hundredths of one percent
(.15%) of the Fund's average daily net assets. CHC may periodically waive all
or a portion of its fee with respect to the Fund in order to increase the net
income of the Fund available for distribution as dividends.
Unless sooner terminated, the Administration Agreement will continue
in effect as to the Fund for a period of two years, and for consecutive
one-year terms thereafter, provided that such continuance is ratified at least
annually by the Victory Portfolios' Board of Trustees or by vote of a majority
of the outstanding shares of the Fund, and in either case by a majority of the
Trustees who are not parties to the Administration Agreement or interested
persons (as defined in the 1940 Act) of any party to the Administration
Agreement, by votes cast in person at a meeting called for such purpose.
-29-
<PAGE> 496
The Administration Agreement provides that CHC shall not be liable for
any error of judgment or mistake of law or any loss suffered by the Victory
Portfolios in connection with the matters to which the Administration Agreement
relates, except a loss resulting from willful misfeasance, bad faith, or gross
negligence in the performance of its duties, or from the reckless disregard by
it of its obligations and duties thereunder.
Under the Administration Agreement, CHC assists in the Fund's
administration and operation, including providing statistical and research
data, clerical services, internal compliance and various other administrative
services, including among other responsibilities, forwarding certain purchase
and redemption requests to the Transfer Agent, participation in the updating of
the prospectus, coordinating the preparation, filing, printing and
dissemination of reports to shareholders, coordinating the preparation of
income tax returns, arranging for the maintenance of books and records and
providing the office facilities necessary to carry out the duties thereunder.
Under the Administration Agreement, CHC may delegate all or any part of its
responsibilities thereunder.
In the fiscal years ended October 31, 1993, 1994 and 1995, the Fund
paid to Winsbury and CHC aggregate administration fees of $52,097, $39,988 and
$_______, respectively, after fee reductions of $30,095, $44,425 and $_______,
respectively.
Distributor
Victory Broker-Dealer Services, Inc. (the "Distributor") serves as
distributor for the continuous offering of the shares of the Fund pursuant to a
Distribution Agreement between the Distributor and the Victory Portfolios.
Unless otherwise terminated, the Distribution Agreement will remain in effect
with respect to the Fund for two years, and thereafter for consecutive one-year
terms, provided that it is approved at least annually (i) by the Victory
Portfolios' Board of Trustees or by the vote of a majority of the outstanding
shares of the Fund, and (ii) by the vote of a majority of the Trustees of the
Victory Portfolios who are not parties to the Distribution Agreement or
interested persons of any such party, cast in person at a meeting called for
the purpose of voting on such approval. The Distribution Agreement will
terminate in the event of its assignment, as defined in the 1940 Act. For the
Fund's fiscal years ended October 31, 1993, 1994 and 1995, Winsbury received
$_______, $______ and $_______, respectively, in underwriting commissions, and
retained $____ and $____, respectively.
Shareholder Servicing Plan
The Victory Portfolios, on behalf of the Fund, has adopted a
Shareholder Servicing Plan to provide payments to shareholder servicing agents
(each a "Shareholder Servicing Agent") that provide administrative support
services to customers who may from time to time beneficially own shares, which
services include: (i) aggregating and processing purchase and redemption
requests for shares from customers and promptly transmitting net purchase and
redemption orders to our distributor or transfer agent; (ii) providing
customers with a service that invests the assets of their accounts in shares
pursuant to specific or pre-authorized instructions; (iii) processing dividend
and distribution payments on behalf of customers; (iv) providing information
periodically to customers showing their positions in shares; (v) arranging for
bank wires; (vi) responding to customer inquiries; (vii) providing
subaccounting with respect to shares beneficially owned by customers or
providing the information to the Victory Portfolios necessary for
subaccounting; (viii) if required by law, forwarding shareholder communications
from us (such as proxies, shareholder reports, annual and semi-annual financial
statements and dividend, distribution and tax notices) to customers; (ix)
forwarding to customers proxy statements and proxies containing any proposals
regarding this Plan; and (x) providing such other similar services as we may
reasonably request to the extent you are permitted to do so under applicable
statutes, rules or regulations. For expenses incurred and services provided
pursuant to the Shareholder Servicing Agreement, the Fund pays each Shareholder
Servicing Agent a fee computed daily and paid monthly, in amounts aggregating
not more than twenty-five one-hundredths of one percent (.25%) of the average
daily net assets of the Fund per year. A Shareholder Servicing Agent may
periodically waive all or a portion of its respective shareholder servicing
fees with respect to the Fund to increase the net income of the Fund available
for distribution as dividends.
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Expenses
The Fund bears the following expenses relating to its operations:
taxes, interest, brokerage fees and commissions, fees of the Trustees of the
Victory Portfolios, Commission fees, state securities qualification fees, costs
of preparing and printing prospectuses for regulatory purposes and for
distribution to current shareholders, outside auditing and legal expenses,
advisory and administration fees, fees and out-of-pocket expenses of the
custodian and transfer agent, certain insurance premiums, costs of maintenance
of the Fund's existence, costs of shareholders' reports and meetings, and any
extraordinary expenses incurred in the Fund's operation.
If total expenses borne by the Fund in any fiscal year exceeds expense
limitations imposed by applicable state securities regulations, Key Advisers,
the Sub-Adviser or the Administrator will waive their fees to the extent such
excess expenses exceed such expense limitation in proportion to their
respective fees. As of the date of this Statement of Additional Information,
the most restrictive expense limitation applicable to the Fund limits its
aggregate annual expenses, including management and advisory fees but excluding
interest, taxes, brokerage commissions, and certain other expenses, to 2.5% of
the first $30 million of its average net assets, 2.0% of the next $70 million
of its average net assets, and 1.5% of its remaining average net assets. Any
expenses to be borne by Key Advisers, Sub-Adviser or the Administrator will be
estimated daily and reconciled and paid on a monthly basis. Fees imposed upon
customer accounts by Key Advisers, the Sub-Adviser, Key Trust Company of Ohio,
N.A. or its correspondents, affiliated banks and other non-bank affiliates for
cash management services are not fund expenses for purposes of any such expense
limitation.
Fund Accountant
BISYS Fund Services Ohio, Inc. serves as fund accountant for the Fund
pursuant to a fund accounting agreement with the Victory Portfolios dated May
31, 1995 (the "Fund Accounting Agreement"). As fund accountant for the Victory
Portfolios, BISYS Fund Services Ohio, Inc. calculates the Fund's Portfolios'
net asset value, the dividend and capital gain distributions, if any, and the
yield. BISYS Fund Services Ohio, Inc. also provides a current security
position report, a summary report of transactions and pending maturities, a
current cash position report, and maintains the general ledger accounting
records for the Fund. Under the Fund Accounting Agreement, BISYS Fund Services
Ohio, Inc. is entitled to receive annual fees of .03% of the first $100 million
of the Fund's daily average net assets, .02% of the next $100 million of the
Fund's daily average net assets, and .01% of the Fund's remaining daily average
net assets. These annual fees are subject to a minimum monthly assets charge
of $2,917 per tax-free fund, and do not include out-of-pocket expenses or
multiple class charges of $833 per month assessed for each class of shares
after the first class. In the fiscal years ended October 31, 1993, 1994 and
1995, the Victory Portfolios paid The Winsbury Service Corporation fund
accounting fees (after fee waivers) of $8,805.19, $39,520 and $_______,
respectively, for the Fund.
Custodian
Cash and securities owned by the Fund are held by Key Trust Company of
Ohio, N.A. as custodian. Key Trust Company of Ohio, N.A. serves as custodian
to the Fund pursuant to a Custodian Agreement dated May 24, 1995. Under this
Agreement, Key Trust Company of Ohio, N.A. (i) maintains a separate account or
accounts in the name of the Fund; (ii) makes receipts and disbursements of
money on behalf of the Fund; (iii) collects and receives all income and other
payments and distributions on account of portfolio securities; (iv) responds to
correspondence from security brokers and others relating to its duties; and (v)
makes periodic reports to the Victory Portfolios' Trustees concerning the
Victory Portfolios' operations. Key Trust Company of Ohio, N.A. may, with the
approval of the Victory Portfolios and the custodian's own expense, open and
maintain a sub-custody account or accounts on behalf of the Fund, provided that
Key Trust Company of Ohio, N.A. shall remain liable for the performance of all
of its duties under the Custodian Agreement.
Transfer Agent
Primary Funds Service Corporation ("PFSC") serves as transfer agent
and dividend disbursing agent for the Fund, pursuant to a Transfer Agency and
Shareholder Servicing Agreement. Under its agreement with the Victory
Portfolios, PFSC has agreed (i) to issue and redeem shares of the Victory
Portfolios; (ii) to address and mail all communications by the Victory
Portfolios to its shareholders, including reports to shareholders, dividend
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and distribution notices, and proxy material for its meetings of shareholders;
(iii) to respond to correspondence or inquiries by shareholders and others
relating to its duties; (iv) to maintain shareholder accounts and certain
sub-accounts; and (v) to make periodic reports to the Victory Portfolios'
Trustees concerning the Victory Portfolios' operations. For the services
provided under the Transfer Agency and Shareholder Servicing Agreement, PFSC
receives a maximum monthly fee of $1,250 from the Fund, and a maximum of $3.50
per account of the Fund.
Auditors
The financial highlights appearing in the Prospectus for the Fund,
other than unaudited information marked as such, has been derived from
financial statements of the Victory Portfolios appearing in or incorporated by
reference in this Statement of Additional Information which have been audited
by Coopers & Lybrand L.L.P., independent accountants, as set forth in their
report appearing elsewhere herein, and are included in reliance upon such
report and on the authority of such firm as experts in auditing and accounting.
Coopers & Lybrand L.L.P.'s address is 100 East Broad Street, Columbus, Ohio
43215.
Legal Counsel
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, 919 Third Avenue,
New York, New York 10022 is counsel to the Victory Portfolios.
ADDITIONAL INFORMATION
Description of Shares
The Victory Portfolios (sometimes referred to as the "Trust") is a
Delaware business trust. Its Delaware Trust Instrument was adopted on December
6, 1995 and a certificate of Trust for the Trust was filed in Delaware on
December __, 1995. On February 29, 1996, the Victory Portfolios converted from
a Massachusetts business trust to a Delaware business trust.
The previously effective Massachusetts Declaration of Trust, pursuant
to which the Victory Portfolios was originally called the North Third Street
Fund, was filed with the Secretary of State of the Commonwealth of
Massachusetts on February 6, 1986. On September 22, 1986, an Amended and
Restated Declaration of Trust was filed to change the name of the Trust to The
Emblem Fund and to make certain other changes. A second amendment was filed
October 23, 1986 providing for voting of shares in the aggregate except where
voting of shares by series is otherwise required by law. An amendment to the
Amended and Restated Declaration of Trust was filed on March 15, 1993 to change
the name of the Trust to The Society Funds. An Amended and Restated
Declaration of Trust was then filed on September 2, 1994 to change the name of
the Trust to The Victory Portfolios.
The currently effective Delaware Trust Instrument authorizes the
Trustees to issue an unlimited number of shares, which are units of beneficial
interest, without par value. The Victory Portfolios presently has twenty-eight
series of shares, which represent interests in the U.S. Government Obligations
Fund, the Prime Obligations Fund, the Tax-Free Money Market Fund, the Balanced
Fund, the Stock Index Fund, the Value Fund, the Diversified Stock Fund, the
Growth Fund, the Special Value Fund, the Special Growth Fund, the Ohio Regional
Stock Fund, the International Growth Fund, the Limited Term Income Fund, the
Government Mortgage Fund, the Ohio Municipal Bond Fund, the Intermediate Income
Fund, the Investment Quality Bond Fund, the Florida Tax-Free Bond Fund, the
Municipal Bond Fund, the Convertible Securities Fund, the Short-Term U.S.
Government Income Fund, the Government Bond Fund, the Fund for Income, the
National Municipal Bond Fund, the New York Tax-Free Fund, the Institutional
Money Market Fund, the Financial Reserves Fund and the Ohio Municipal Money
Market Fund, respectively. The Victory Portfolios' Delaware Trust Instrument
authorizes the Trustees to divide or redivide any unissued shares of the
Victory Portfolios into one or more additional series by setting or changing in
any one or more respects their respective preferences, conversion or other
rights, voting power, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption.
Shares have no subscription or preemptive rights and only such
conversion or exchange rights as the Trustees may grant in their discretion.
When issued for payment as described in the Prospectus and this Statement
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of Additional Information, the Victory Portfolios' shares will be fully paid
and non-assessable. In the event of a liquidation or dissolution of the
Victory Portfolios, shares of the Fund are entitled to receive the assets
available for distribution belonging to the Fund, and a proportionate
distribution, based upon the relative asset values of the respective funds of
the Victory Portfolios, of any general assets not belonging to any particular
fund which are available for distribution.
As described in the Prospectus under the caption "ADDITIONAL
INFORMATION -- Voting Rights," shares of the Victory Portfolios are entitled to
one vote per share (with proportional voting for fractional shares) on such
matters as shareholders are entitled to vote. On any matter submitted to a
vote of the shareholders, all shares are voted separately by individual series
(funds), and whenever the Trustees determine that the matter affects only
certain series, may be submitted for a vote by only such series, except (i)
when required by the 1940 Act, shares are voted in the aggregate and not by
individual series; and (ii) when the Trustees have determined that the matter
affects the interests of more than one series and that voting by shareholders
of all series would be consistent with the 1940 Act, then the shareholders of
all such series shall be entitled to vote thereon (either by individual series
or by shares voted in the aggregate, as the Trustees in their discretion may
determine). The Trustees may also determine that a matter affects only the
interests of one or more classes of a series, in which case (or if required
under the 1940 Act) such matter shall be voted on by such class or classes.
There will normally be no meetings of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority of the Trustees
have been elected by the shareholders, at which time the Trustees then in
office will call a shareholders' meeting for the election of Trustees. In
addition, Trustees may be removed from office by a vote of the holders of at
least two-thirds of the outstanding shares of the Victory Portfolios. A
meeting shall be held for such purpose upon the written request of the holders
of not less than 10% of the outstanding shares. Upon written request by ten or
more shareholders meeting the qualifications of Section 16(c) of the 1940 Act,
(i.e., person who have been shareholders for at least six months, and who hold
shares having an NAV of at least $25,000 or constituting 1% of the outstanding
shares) stating that such shareholders wish to communicate with the other
shareholders for the purpose of obtaining the signatures necessary to demand a
meeting to consider removal of a Trustee, the Victory Portfolios will provide a
list of shareholders or disseminate appropriate materials (at the expense of
the requesting shareholders). Except as set forth above, the Trustees shall
continue to hold office and may appoint their successors.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Victory Portfolios shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each fund of the Victory Portfolios affected by the
matter. For purposes of determining whether the approval of a majority of the
outstanding shares of a fund will be required in connection with a matter, a
fund will be deemed to be affected by a matter unless it is clear that the
interests of each fund in the matter are identical, or that the matter does not
affect any interest of the fund. Under Rule 18f-2, the approval of an
investment advisory agreement or any change in investment policy would be
effectively acted upon with respect to a fund only if approved by a majority of
the outstanding shares of such fund. However, Rule 18f-2 also provides that
the ratification of independent public accountants, the approval of principal
underwriting contracts, and the election of Trustees may be effectively acted
upon by shareholders of all of the Victory Portfolios voting without regard to
series.
Shareholder and Trustee Liability
The Delaware Business Trust Act provides that a shareholder of a
Delaware business trust shall be entitled to the same limitation of personal
liability extended to shareholders of Delaware corporations. The Delaware
Trust Instrument also provides for indemnification out of the trust property of
any shareholder held personally liable solely by reason of his or her being or
having been a shareholder. The Delaware Trust Instrument also provides that
the Victory Portfolios shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Victory
Portfolios, and shall satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
considered to be extremely remote.
The Delaware Trust Instrument states further that no Trustee, officer,
or agent of the Victory Portfolios shall be personally liable in connection
with the administration or preservation of the assets of the funds or the
conduct of the Victory Portfolios' business; nor shall any Trustee, officer, or
agent be personally liable to any person for any action or failure to act
except for his own bad faith, willful misfeasance, gross negligence, or
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<PAGE> 500
reckless disregard of his duties. The Declaration of Trust also provides that
all persons having any claim against the Trustees or the Victory Portfolios
shall look solely to the assets of the Victory Portfolios for payment.
Calculation of Performance Data
Performance information showing the Fund's total return may be
presented, from time to time, in advertising and sales literature.
Performance information showing a Fund's total return and/or 30-day
yield may be presented, from time to time, in advertising and sales literature.
Based on the 30-day period ended October 31, 1995 ("30-day base period"), the
30-day yield for the Fund was ___%. A 30-day yield is calculated by dividing
the net investment income per-share earned during the 30-day base period by the
maximum offering price per share on the last day of the period, according to
the following formula:
a-b
30-Day Yield = 2[( ----- +1) to the 6th power -1]
cd
In the above formula, "a" represents dividends and interest earned
during the 30-day base period; "b" represents expenses accrued for the 30-day
base period (net of reimbursements); "c" represents the average daily number of
shares outstanding during the 30-day base period that were entitled to receive
dividends; and "d" represents the maximum offering price per share on the last
day of the 30-day base period.
From time to time, the tax equivalent 30-day yield of the Fund may be
presented in advertising and sales literature. The tax equivalent 30-day yield
will be computed by dividing that portion of the Funds' yield which is
tax-exempt by one minus a stated tax rate and adding the product to that
portion, if any, of the yield of the Fund that is not tax-exempt. For the
30-day period ended October 31, 1995 the tax equivalent 30-day yield for the
Fund was ___%.
For the one year period ended October 31, 1995, the average annual
total return of the Fund was ____%. The average annual total return for the
Fund for the five year period ended October 31, 1995 was ____%. The average
annual return for the Fund from commencement of operations (______ __, 19__)
through October 31, 1995 was ____%.
The Fund's average annual total return was determined by calculating
the change in the value of a hypothetical $1,000 investment in the Fund for
each of the periods shown. This figure is computed by determining the average
annual compounded rate of return over the applicable period that would equate
the initial amount invested to the ending redeemable value of the investment.
The ending redeemable value includes dividends and capital gain distributions
reinvested at net asset value. The resulting percentages indicated the
positive or negative investment results that an investor would have experienced
from changes in share price and reinvestment of dividends and capital gains
distributions.
Current yields will fluctuate, from time to time, and are not
necessarily representative of future results. Accordingly, the Fund's yield
may not provide a basis for comparison with bank deposits or other investments
that pay a fixed return for a stated period of time. Yield is a function of
the portfolio's quality, composition, and maturity, as well as expenses
allocated to the Fund. Fees imposed upon customer accounts by Key Advisers,
the Sub-Adviser, their correspondents, affiliated banks and other non-bank
affiliates for cash management services will reduce the Fund's effective yield
to customers.
From time to time, performance information for the Fund showing the
Fund's average annual total return, aggregate total return, and/or yield may be
presented in advertisements, sales literature and in reports to shareholders.
Such performance figures are based on historical earnings and are not intended
to indicate future performance. Average annual total return will be calculated
over a stated period. Average annual total return is measured by comparing the
value of an investment in the Fund at the beginning of the relevant period (as
adjusted for sales charges, if any) to the redemption value of the investment
at the end of the period (assuming immediate reinvestment of any dividends or
capital gains distributions), and then annualizing that figure. Average annual
total
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<PAGE> 501
return is a hypothetical return, and is generally not the same as actual annual
total return. Aggregate total return is calculated similarly to average annual
total return except that the return figure is aggregated over the relevant
period instead of annualized. Yield will be computed by dividing the Fund's
net investment income per share earned during a recent one-month period by the
Fund's maximum offering price per share (reduced by any undeclared earned
income expected to be paid shortly as a dividend) on the last day of the
period.
Investors may also judge, and the Victory Portfolios may at times
advertise, the performance of the Fund by comparing it to the performance of
other mutual funds or mutual fund portfolios with comparable investment
objectives and policies, which performance may be contained in various
unmanaged mutual fund or market indices or rankings such as those prepared by
Dow Jones & Co., Inc., Standard & Poor's Corporation, Lehman Brothers, Merrill
Lynch, and Salomon Brothers, and in publications issued by Lipper Analytical
Services, Inc. and in the following publications: IBC/Donoghue's Money Fund
Reports, Ibbotson Associates, Inc., Morningstar, CDA/Wiesenberger, Money
Magazine, Forbes, Barron's, The Wall Street Journal, The New York Times,
Business Week, American Banker, Fortune, Institutional Investor, U.S.A. Today.
In addition to yield information, general information about the Victory
Portfolios that appear in a publication such as those mentioned above may also
be quoted or reproduced in advertisements or in reports to shareholders.
From time to time, the Victory Portfolios may include the following
types of information in advertisements, supplemental sales literature and
reports to shareholders: (1) discussions of general economic or financial
principles (such as the effects of inflation, the power of compounding and the
benefits of dollar-cost averaging); (2) discussions of general economic trends;
(3) presentations of statistical data to supplement such discussions; (4)
descriptions of past or anticipated portfolio holdings for one or more funds of
the Victory Portfolios; (5) descriptions of investment strategies for one or
more of such funds; (6) descriptions or comparisons of various savings and
investment products (including but not limited to insured bank products,
annuities, qualified retirement plans and individual stocks and bonds) which
may or may not include the Victory Portfolios; (7) comparisons of investment
products (including the Victory Portfolios) with relevant market or industry
indices or other appropriate benchmarks; and (8) discussions of fund rankings
or ratings by NRSROs.
Yield and performance are functions of the type and quality of
instruments held in the portfolio, operating expenses, and market conditions.
Consequently, current yields and performance will fluctuate and are not
necessarily representative of future results. Any fees charged by Key
Advisers, the Sub-Adviser or other service providers with respect to customer
accounts for investing in the Victory Portfolios will not be reflected in
performance calculations.
Miscellaneous
As used in the Prospectus and in this Statement of Additional
Information, "assets belonging to a fund" (or "assets belonging to the Fund")
means the consideration received by the Victory Portfolios upon the issuance or
sale of shares in that fund, together with all income, earnings, profits, and
proceeds derived from the investment thereof, including any proceeds from the
sale, exchange, or liquidation of such investments, and any funds or payments
derived from any reinvestment of such proceeds and any general assets of the
Victory Portfolios, which general liabilities and expenses are not readily
identified as belonging to a particular fund (or the Fund) that are allocated
to that fund (or the Fund) by the Victory Portfolios' Trustees. The Trustees
may allocate such general assets in any manner they deem fair and equitable.
It is anticipated that the formula that will be used by the Trustees in making
allocations of general assets to a particular fund of the Victory Portfolios
will be the relative net asset value of the respective fund at the time of
allocation. Assets belonging to a particular fund are charged with the direct
liabilities and expenses of that fund, and with a share of the general
liabilities and expenses of each of the funds not readily identified as
belonging to a particular fund but that are allocated to each fund in
accordance with its proportionate share of the net asset values of the Victory
Portfolios at the time of allocation. The timing of allocations of general
assets and general liabilities and expenses of the Victory Portfolios to a
particular fund will be determined by the Trustees of the Victory Portfolios
and will be in accordance with generally accepted accounting principles.
Determinations by the Trustees of the Victory Portfolios as to the timing of
the allocation of general liabilities and expenses and as to the timing and
allocable portion of any general assets with respect to a particular fund are
conclusive.
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As used in the Prospectus and in this Statement of Additional
Information, a "vote of a majority of the outstanding shares" or a "vote of a
majority of the outstanding voting securities" of the Victory Portfolios or a
particular fund means the affirmative vote of the lesser of (a) 67% or more of
the shares of the Victory Portfolios or such fund present at a meeting at which
the holders of more than 50% of the outstanding shares of the Victory
Portfolios or such fund are represented in person or by proxy, or (b) more than
50% of the outstanding shares of the Victory Portfolios or such fund.
Organizational expenses are allocated to each of the Victory
Portfolios and are amortized over a period of two years from the commencement
of the public offering of shares of the Victory Portfolios.
As of February 1, 1996, the Trustees and officers of the Victory
Portfolios, as a group, owned less than one percent of the shares of the Fund.
Individual Trustees are elected by the shareholders and, subject to
removal by the vote of the holders of two-thirds of the outstanding shares of
the Victory Portfolios, serve for a term lasting until the next meeting of
shareholders at which trustees are elected. Such meetings are not required to
be held at any specific intervals. Individual Trustees may be removed by vote
of the shareholders voting not less than a majority of the shares then
outstanding cast in person or by proxy at any meeting called for that purpose,
or by a written declaration signed by shareholders voting not less than
two-thirds of the shares then outstanding.
The Victory Portfolios is registered with the Commission as an
open-end management investment company. Such registration does not involve
supervision by the Commission of the management or policies of the Victory
Portfolios.
The Prospectus and this Statement of Additional Information omit
certain of the information contained in the Registration Statement filed with
the Securities and Exchange Commission. Copies of such information may be
obtained from the Commission upon payment of the prescribed fee.
The Prospectus and this Statement of Additional Information are not an
offering of the securities herein described in any state in which such offering
may not lawfully be made. No salesman, dealer, or other person is authorized
to give any information or make any representation other than those contained
in the Prospectus and this Statement of Additional Information.
[The financial statements of the Fund for the period ended April 30,
1995 are set forth following this Part B of the Registration Statement.
The 1995 Annual Report to shareholders of The Victory Portfolios is
incorporated by reference herein. This report includes the financial
statements for the two month period ended October 31, 1995 and the fiscal year
ended August 31, 1995. The opinion in the Annual Report of Coopers & Lybrand
L.L.P., independent accountants, is incorporated by reference herein in its
entirety to such Annual Report, and such financial statements are incorporated
in their entirety in reliance upon such report of Coopers & Lybrand L.L.P. and
on the authority of such firm as experts in auditing and accounting.
Delaware law authorizes electronic or telephonic communications
between shareholders and the Victory Portfolios. Under Delaware law, the
Successor Company has the flexibility to respond to future business
contingencies. For example, the Trustees will have the power to incorporate
the Victory Portfolios, to merge or consolidate it with another entity, to
cause each fund to become a separate trust, and to change the Victory
Portfolios' domicile without a shareholder vote. This flexibility could help
reduce the expense and frequency of future shareholder meetings for
non-investment related issues.
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<PAGE> 503
INDEPENDENT AUDITOR'S REPORT
FINANCIAL STATEMENTS
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<PAGE> 504
APPENDIX
The nationally recognized statistical rating organizations
(individually, an "NRSRO") that may be utilized by KeyCorp Advisers or Society
with regard to portfolio investments for the Fund include Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), Duff &
Phelps, Inc. ("Duff"), Fitch Investors Service, Inc. ("Fitch"), IBCA Limited
and its affiliate, IBCA Inc. (collectively, "IBCA"), and Thomson BankWatch,
Inc. ("Thomson"). Set forth below is a description of the relevant ratings of
each such NRSRO. The NRSROs that may be utilized by Key Advisers or the
Sub-Adviser and the description of each NRSRO's ratings is as of the date of
this Statement of Additional Information, and may subsequently change.
Long-Term Debt Ratings (may be assigned, for example, to corporate and
municipal bonds)
Description of the five highest long-term debt ratings by Moody's
(Moody's applies numerical modifiers ( e.g., 1, 2, and 3) in each rating
category to indicate the security's ranking within the category):
Aaa. Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.
A. Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in the
future.
Baa. Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba. Bonds which are rated Ba are judged to have speculative elements
- - their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times in the future. Uncertainty of
position characterizes bonds in this class.
Description of the five highest long-term debt ratings by S&P (S&P may
apply a plus (+) or minus (-) to a particular rating classification to show
relative standing within that classification):
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
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<PAGE> 505
BB. Debt rated BB is regarded, on balance, as predominately
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. While such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposure to adverse conditions.
Description of the three highest long-term debt ratings by Duff:
AAA. Highest credit quality. The risk factors are negligible being
only slightly more than for risk-free U.S. Treasury debt.
AA+. High credit quality Protection factors are strong.
AA. Risk is modest but may vary slightly from time to time
AA-. because of economic conditions.
A+. Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
Description of the three highest long-term debt ratings by Fitch (plus
or minus signs are used with a rating symbol to indicate the relative position
of the credit within the rating category):
AAA. Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA. Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA."
Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of these issues is generally rated "[-]+."
A. Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher
ratings.
IBCA's description of its three highest long-term debt ratings:
AAA. Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic or
financial conditions are unlikely to increase investment risk
significantly.
AA. Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic, or
financial conditions may increase investment risk albeit not very
significantly.
A. Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial
conditions may lead to increased investment risk.
Short-Term Debt Ratings (may be assigned, for example, to commercial
paper, master demand notes, bank instruments, and letters of credit)
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<PAGE> 506
Moody's description of its three highest short-term debt ratings:
Prime-1. Issuers rated Prime-1 (or supporting institutions) have a
superior capacity for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a
strong capacity for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
S&P's description of its three highest short-term debt ratings:
A-1. This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to have extremely
strong safety characteristics are denoted with a plus sign (+).
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high
as for issues designated "A-1."
A-3. Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the
higher designations.
Duff's description of its five highest short-term debt ratings (Duff
incorporates gradations of "1+" (one plus) and "1-" (one minus) to assist
investors in recognizing quality differences within the highest rating
category):
Duff 1+. Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
Duff 1. Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
Duff 1-. High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors. Risk
factors are very small.
Duff 2. Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
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<PAGE> 507
Duff 3. Satisfactory liquidity and other protection factors qualify
issue as to investment grade.
Risk factors are larger and subject to more variation. Nevertheless,
timely payment is expected.
Fitch's description of its four highest short-term debt ratings:
F-1+. Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of assurance for
timely payment.
F-1. Very Strong Credit Quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than
issues rated F-1+.
F-2. Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as for issues assigned F-1+ or F-1 ratings.
F-3. Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate, however, near-term adverse changes could cause
these securities to be rated below investment grade.
IBCA's description of its three highest short-term debt ratings:
A+. Obligations supported by the highest capacity for timely
repayment.
A1. Obligations supported by a very strong capacity for timely
repayment.
A2. Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
Short-Term Loan/Municipal Note Ratings
Moody's description of its two highest short-term loan/municipal note
ratings:
MIG-1/VMIG-1. This designation denotes best quality. There is
present strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
MIG-2/VMIG-2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
S&P's description of its two highest municipal note ratings:
SP-1. Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
SP-2. Satisfactory capacity to pay principal and interest.
Short-Term Debt Ratings
Thomson BankWatch, Inc. ("TBW") ratings are based upon a qualitative
and quantitative analysis of all segments of the organization including, where
applicable, holding company and operating subsidiaries.
TBW Ratings do not constitute a recommendation to buy or sell
securities of any of these companies. Further, BankWatch does not suggest
specific investment criteria for individual clients.
The TBW Short-Term Ratings apply to commercial paper, other senior
short-term obligations and deposit obligations of the entities to which the
rating has been assigned.
The TBW Short-Term Ratings apply only to unsecured instruments that
have a maturity of one year or less.
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<PAGE> 508
The TBW Short-Term Ratings specifically assess the likelihood of an
untimely payment of principal or interest.
TBW-1. The highest category; indicates a very high degree of
likelihood that principal and interest will be paid on a timely basis.
TBW-2. The second highest category; while the degree of safety
regarding timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1".
TBW-3. The lowest investment grade category; indicates that while
more susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and interest in
a timely fashion is considered adequate.
TBW-4. The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
Definitions of Certain Money Market Instruments
Commercial Paper
Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.
Certificates of Deposit
Certificates of Deposit are negotiable certificates issued against
funds deposited in a commercial bank or a savings and loan association for a
definite period of time and earning a specified return.
Bankers' Acceptances
Bankers' acceptances are negotiable drafts or bills of exchange,
normally drawn by an importer or exporter to pay for specific merchandise,
which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
U.S. Treasury Obligations
U.S. Treasury Obligations are obligations issued or guaranteed as to
payment of principal and interest by the full faith and credit of the U.S.
Government. These obligations may include Treasury bills, notes and bonds, and
issues of agencies and instrumentalities of the U.S. Government, provided such
obligations are guaranteed as to payment of principal and interest by the full
faith and credit of the U.S. Government.
U.S. Government Agency and Instrumentality Obligations
Obligations issued by agencies and instrumentalities of the U.S.
Government include such agencies and instrumentalities as the Government
National Mortgage Association, the Export-Import Bank of the United States, the
Tennessee Valley Authority, the Farmers Home Administration, the Federal Home
Loan Banks, the Federal Intermediate Credit Banks, the Federal Farm Credit
Banks, the Federal Land Banks, the Federal Housing Administration, the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation, and
the Student Loan Marketing Association. Some of these obligations, such as
those of the Government National Mortgage Association are supported by the full
faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others, such as
those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not
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obligated to do so by law. The Fund will invest in the obligations of such
instrumentalities only when the investment adviser believes that the credit
risk with respect to the instrumentality is minimal.
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<PAGE> 510
STATEMENT OF ADDITIONAL INFORMATION
THE VICTORY PORTFOLIOS
THE PRIME OBLIGATIONS FUND
March 1, 1996
This Statement of Additional Information is not a Prospectus, but
should be read in conjunction with the Prospectus of The Victory Portfolios -
The Victory Prime Obligations Fund, dated the same date as the date hereof (the
"Prospectus"). This Statement of Additional Information is incorporated by
reference in its entirety into the Prospectus. Copies of the Prospectus may be
obtained by writing The Victory Portfolios at Primary Funds Service
Corporation, P.O. Box 9741, Providence, RI 02940-9741, or by telephoning toll
free 800-539-FUND or 800-539-3863.
<TABLE>
<S> <C> <C>
Investment Policies and Limitations 1 INVESTMENT ADVISER
Valuation of Portfolio Securities 6 KeyCorp Mutual Fund Advisers, Inc.
Additional Purchase and Redemption Information 7
Management of the Victory Portfolios 10 INVESTMENT SUB-ADVISER
Advisory and Other Contracts 19 Society Asset Management, Inc.
Additional Information 26
Independent Auditor's Report 31 ADMINISTRATOR
Financial Statements 31 Concord Holding Corporation
Appendix 32
DISTRIBUTOR
Victory Broker-Dealer Services, Inc.
TRANSFER AGENT
Primary Funds Service Corporation
CUSTODIAN
Key Trust Company of Ohio, N.A.
</TABLE>
<PAGE> 511
STATEMENT OF ADDITIONAL INFORMATION
The Victory Portfolios (the "Victory Portfolios") is an open-end
management investment company. The Victory Portfolios consist of twenty-eight
series of units of beneficial interest ("shares"), four of which series are
currently inactive. The outstanding shares represent interests in the
twenty-four separate investment portfolios which are currently active. This
Statement of Additional Information relates to the Victory Prime Obligations
Fund (the "Fund") only. Much of the information contained in this Statement of
Additional Information expands on subjects discussed in the Prospectus.
Capitalized terms not defined herein are used as defined in the Prospectus. No
investment in shares of the Fund should be made without first reading the
Fund's Prospectus.
INVESTMENT POLICIES AND LIMITATIONS
Additional Information Regarding Fund Instruments
The following policies supplement the investment objectives and
policies of the Fund set forth in the Prospect.
High Quality Investments . As noted in the Prospectus for the Fund,
the Fund may invest only in obligations determined by Key Advisers to present
minimal credit risks under guidelines adopted by the Fund's Board of Trustees
(the "Board of Trustees" or the "Trustees").
Investments will be limited to those obligations which, at the time of
purchase, (i) possess the highest short-term ratings from at least two
nationally recognized statistical rating organizations ("NRSROs"); or (ii) do
not possess a rating (i.e., are unrated) but are determined by Society Asset
Management, Inc. to be of comparable quality to the rated instruments eligible
for purchase by the Fund under guidelines adopted by the Trustees. For
purposes of these investment limitations, a security that has not received a
rating will be deemed to possess the rating assigned to an outstanding class of
the issuer's short-term debt obligations if determined by Society Asset
Management, Inc. to be comparable in priority and security to the obligation
selected for purchase by the Fund. (The above described securities which may
be purchased by the Fund are hereinafter referred to as "Eligible Securities.")
A security subject to a tender or demand feature will be considered an
Eligible Security only if both the demand feature and the underlying security
possess a high quality rating, or, if such do not possess a rating, are
determined by Society Asset Management, Inc. to be of comparable quality;
provided, however, that where the demand feature would be readily exercisable
in the event of a default in payment of principal or interest on the underlying
security, this obligation may be acquired based on the rating possessed by the
demand feature or, if the demand feature does not possess a rating, a
determination of comparable quality by Society Asset Management, Inc. A
security which at the time of issuance had a maturity exceeding 397 days but,
at the time of purchase, has remaining maturity of 397 days or less, is not
considered an Eligible Security if it does not possess a high quality rating
and the long-term rating, if any, is not within the two highest rating
categories.
Pursuant to Rule 2a-7 under the Investment Company Act of 1940 (the
"1940 Act"), the Fund will maintain a dollar-weighted average portfolio
maturity which does not exceed 90 days.
The Fund will not invest more than 5% of its total assets in the
securities of any one issuer, except that the Fund may invest up to 25% of its
total assets in securities of one or more issuers each representing more than
5% of its total assets for a period of up to three business days. If a
percentage limitation is satisfied at the time of purchase, a later increase in
such percentage resulting from a change in the Fund's net asset value or a
subsequent change in a security's qualification as an Eligible Security will
not constitute a violation of the limitation. In addition, there is no limit
on the percentage of the Fund's assets that may be invested in obligations
issued or guaranteed by the U.S. Government, its agencies and instrumentalities
and repurchase agreements fully collateralized by such obligations.
<PAGE> 512
In the event that a security is a second tier security, the Fund will
not have invested more than: (1) the greater of one percent of its total
assets or one million dollars in securities issued by that issuer, which when
acquired by the Fund (either initially or upon any subsequent rollover) were
second tier securities; and (2) 5% of its total assets in securities which,
when acquired by the Fund (either initially or upon subsequent rollover) were
second tier securities.
Under the guidelines adopted by the Fund's Trustees and in accordance
with Rule 2a-7 under the 1940 Act, Key Advisers or the Sub-Adviser may be
required to dispose promptly of an obligation held by the Fund in the event of
certain developments that indicate a diminution of the instrument's credit
quality, such as where an NRSRO downgrades an obligation below the second
highest rating category, or in the event of a default relating to the financial
condition of the issuer. In this regard, the Trustees have established
procedures designed to stabilize, to the extent reasonably possible, the price
per share of the Fund as computed for the purpose of distribution, redemption
and repurchase at $1.00. Such procedures will include review of the Fund's
portfolio holdings by the Trustees, at such intervals as they may deem
appropriate, to determine whether the net asset value of the Fund, calculated
by using readily available market quotations, deviates from $1.00 per share,
and, if so, whether such deviation may result in material dilution or is
otherwise unfair to existing shareholders (a "Material Deviation"). In the
event the Trustees determine that a Material Deviation exists, they will take
such corrective action as they regard as necessary and appropriate, including
selling portfolio instruments prior to maturity to realize capital gains or
losses or to shorten average portfolio maturity, withholding dividends, paying
shareholder redemption requests in portfolio securities at their then-current
market value, or establishing a net asset value per share by using readily
available market quotations.
The Appendix of this Statement of Additional Information identifies
each NRSRO which may be utilized by Key Advisers or the Sub-Adviser with regard
to portfolio investments for the Fund and provides a description of relevant
ratings assigned by each such NRSRO. A rating by an NRSRO may be utilized only
where the NRSRO is neither controlling, controlled by, or under common control
with the issuer of, or any issuer, guarantor, or provider of credit support
for, the instrument.
Bankers' Acceptances and Certificates of Deposit . The Fund may
invest in bankers' acceptances, certificates of deposit, and demand and time
deposits. Bankers' acceptances are negotiable drafts or bills of exchange
typically drawn by an importer or exporter to pay for specific merchandise,
which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank or a savings and loan association for a definite
period of time and earning a specified return.
Bankers' acceptances will be those guaranteed by domestic and foreign
banks, if at the time of purchase such banks have capital, surplus, and
undivided profits in excess of $100,000,000 (as of the date of their most
recently published financial statements). Certificates of deposit and demand
and time deposits invested in by the Fund will be those of domestic and foreign
banks and savings and loan associations, if (a) at the time of purchase such
financial institutions have capital, surplus, and undivided profits in excess
of $100,000,000 (as of the date of their most recently published financial
statements) or (b) the principal amount of the instrument is insured in full by
the Federal Deposit Insurance Corporation or the Savings Association Insurance
Fund.
The Fund may also invest in Eurodollar Certificates of Deposit
("ECDs") which are U.S. dollar-denominated certificates of deposit issued by
branches of foreign and domestic banks located outside the United States,
Yankee Certificates of Deposit ("Yankee CDs") which are certificates of deposit
issued by a U.S. branch of a foreign bank denominated in U.S. dollars and held
in the United States, Eurodollar Time Deposits ("ETDs") which are U.S.
dollar-denominated deposits in a foreign branch of a U.S. bank or a foreign
bank, and Canadian Time Deposits ("CTDs") which are U.S. dollar-denominated
certificates of deposit issued by Canadian offices of major Canadian Banks.
Commercial Paper. Commercial paper consists of unsecured promissory
notes issued by corporations. Except as noted below with respect to variable
amount master demand notes, issues of commercial paper normally have maturities
of less than nine months and fixed rates of return.
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<PAGE> 513
Variable Amount Master Demand Notes . Variable amount master demand
notes, in which the Fund may invest, are unsecured demand notes that permit the
indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate according to the terms of the instrument. Although there is no
secondary market for these notes, the Fund may demand payment of principal and
accrued interest at any time and may resell the notes at any time to a third
party. The absence of an active secondary market, however, could make it
difficult for the Fund to dispose of a variable amount master demand note if the
issuer defaulted on its payment obligations, and the Fund could, for this or
other reasons, suffer a loss to the extent of the default. While the notes are
not typically rated by credit rating agencies, issuers of variable amount master
demand notes must satisfy the same criteria as set forth above for unrated
commercial paper, and Key Advisers or the Sub-Adviser will continuously monitor
the issuer's financial status and ability to make payments due under the
instrument. Where necessary to ensure that a note is of "high quality," the Fund
will require that the issuer's obligation to pay the principal of the note be
backed by an unconditional bank letter or line of credit, guarantee or
commitment to lend. For purposes of the Fund's investment policies, a variable
amount master note will be deemed to have a maturity equal to the longer of the
period of time remaining until the next readjustment of its interest rate or the
period of time remaining until the principal amount can be recovered from the
issuer through demand. (See Variable and Floating Rate Notes.)
Foreign Investment. The Fund may invest in securities issued by
foreign branches of U.S. banks, foreign banks, or other foreign issuers,
including American Depository Receipts ("ADRs") and securities purchased on
foreign securities exchanges. Such investment may subject the Fund to
investment risks that differ in some respects from those related to investments
in obligations of U.S. domestic issuers or in U.S. securities markets. Such
risks include future adverse political and economic developments, possible
seizure, nationalization, or expropriation of foreign investments, less
stringent disclosure requirements, the possible establishment of exchange
controls or taxation at the source, and the adoption of other foreign
governmental restrictions. Additional risks include currency exchange risks,
less publicly available information, the risk that companies may not be subject
to the accounting, auditing and financial reporting standards and requirements
of U.S. companies, the risk that foreign securities markets may have less
volume and therefore many securities traded in these markets may be less liquid
and their prices are more volatile than U.S. securities, and the risk that
custodian and brokerage costs may be higher. Permissible investments include
obligations or securities of foreign issuers, foreign branches of U.S. banks
and of foreign banks. The Fund will acquire such securities only when Key
Advisers or the Sub-Adviser believes the risks associated with such investments
are minimal.
Short-Term Funding Agreements . The Fund may invest in short-term
funding agreements (sometimes referred to as "GICs") issued by insurance
companies. Pursuant to such agreements, the Fund makes cash contributions to a
deposit fund of the insurance company's general account. The insurance company
then credits the Fund, on a monthly basis, guaranteed interest which is based on
an index. The short-term funding agreements provide that this guaranteed
interest will not be less than a certain minimum rate. Because the principal
amount of a short-term funding agreement may not be received from the insurance
company on seven days notice or less, the agreement is considered to be an
illiquid investment and, together with other instruments in the Fund which are
not readily marketable, will not exceed 10% of the Fund's total assets. In
determining dollar-weighted average portfolio maturity, a short-term funding
agreement will be deemed to have a maturity equal to the period of time
remaining until the next readjustment of the guaranteed interest rate.
U.S. Government Obligations. The Fund may invest in obligations
issued or guaranteed by the U.S. Government, its agencies and
instrumentalities. Obligations of certain agencies and instrumentalities of
the U.S. Government are supported by the full faith and credit of the U.S.
Treasury; others are supported by the right of the issuer to borrow from the
U.S. Treasury; others are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; and still others are supported
only by the credit of the agency or instrumentality. No assurance can be given
that the U.S. Government will provide financial support to U.S.
Government-sponsored agencies or instrumentalities if it is not obligated to do
so by law. The Fund will invest in the obligations of such agencies and
instrumentalities only when Key Advisers believes that the credit risk with
respect thereto is minimal.
Securities Lending. The Fund may lend its portfolio securities to
broker-dealers, banks or institutional borrowers of securities. The Fund must
receive a minimum of 100% collateral, plus any interest due in the form
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<PAGE> 514
of cash or U.S. Government securities. This collateral must be valued daily
and should the market value of the loaned securities increase, the borrower
must furnish additional collateral to the fund. During the time portfolio
securities are on loan, the borrower will pay the Fund any interest paid on
such securities plus any interest negotiated between the parties to the lending
agreement. Loans will be subject to termination by the Fund or the borrower at
any time. The Fund will only enter into loan arrangements with broker-dealers,
banks or other institutions which Key Advisers or the Sub-Adviser has
determined are creditworthy under guidelines established by the Fund's
Trustees.
Variable and Floating Rate Notes . The Fund may acquire variable and
floating rate notes subject to its investment objectives, policies and
restrictions. A variable rate note is one whose terms provide for the
readjustment of its interest rate on set dates and which, upon such
readjustment, can reasonably be expected to have a market value that
approximates its par value. A floating rate note is one whose terms provide for
the readjustment of its interest rate whenever a specified interest rate changes
and which, at any time, can reasonably be expected to have a market value that
approximates its par value. Such notes are frequently not rated by credit rating
agencies; however, unrated variable and floating rate notes purchased by the
Fund will only be those determined by Key Advisers or the Sub-Adviser, under
guidelines established by the Trustees, to pose minimal credit risks and to be
of comparable quality, at the time of purchase, to rated instruments eligible
for purchase under these Fund's investment policies. In making such
determinations, Key Advisers or the Sub-Adviser will consider the earning power,
cash flow and other liquidity ratios of the issuers of such notes (such issuers
include financial, merchandising, bank holding and other companies) and will
continuously monitor their financial condition. Although there may be no active
secondary market with respect to a particular variable or floating rate note
purchased by the Fund, the Fund may resell the note at any time to a third
party. The absence of an active secondary market, however, could make it
difficult for the Fund to dispose of a variable or floating rate note in the
event the issuer of the note defaulted on its payment obligations and the fund
could, for this or other reasons, suffer a loss to the extent of the default.
Variable or floating rate notes may be secured by bank letters of credit.
Variable or floating rate notes may have maturities of more than one
year, as follows:
1. A note that is issued or guaranteed by the United States
government or any agency thereof and which has a variable rate of interest
readjusted no less frequently than annually will be deemed by the Fund to have
a maturity equal to the period remaining until the next readjustment of the
interest rate.
2. A variable rate note, the principal amount of which is
scheduled on the face of the instrument to be paid in one year or less, will be
deemed by the Fund to have a maturity equal to the period remaining until the
next readjustment of the interest rate.
3. A variable rate note that is subject to a demand feature
scheduled to be paid in one year or more will be deemed by the Fund to have a
maturity equal to the longer of the period remaining until the next
readjustment of the interest rate or the period remaining until the principal
amount can be recovered through demand.
4. A floating rate note that is subject to a demand feature will
be deemed by the Fund to have a maturity equal to the period remaining until
the principal amount can be recovered through demand.
As used above, a note is "subject to a demand feature" where the Fund
is entitled to receive the principal amount of the note either at any time on
no more than 30 days' notice or at specified intervals not exceeding one year
and upon no more than 30 days' notice.
Other Investment Companies . The Fund may invest up to 5% of its
total assets in the securities of any one investment company, but may not own
more than 3% of the securities of any one investment company or invest more than
10% of its total assets in the securities of other investment companies. To the
extent required by the laws of any state in which Fund's shares are sold, Key
Advisers will waive its investment advisory fee as to all assets invested in
other investment companies. Because such other investment companies employ an
investment adviser, such investment by the Fund will cause shareholders to bear
duplicative fees, such as management fees.
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<PAGE> 515
Repurchase Agreements. Securities held by the Fund may be subject to
repurchase agreements. Under the terms of a repurchase agreement, the Fund
would acquire securities from financial institutions or registered
broker-dealers deemed creditworthy by Key Advisers or the Sub-Adviser pursuant
to guidelines adopted by the Fund's Trustees, subject to the seller's agreement
to repurchase such securities at a mutually agreed upon date and price. The
seller is required to maintain the value of collateral held pursuant to the
agreement at not less than the repurchase price (including accrued interest).
If the seller were to default on its repurchase obligation or become insolvent,
the Fund holding such obligation would suffer a loss to the extent that the
proceeds from a sale of the underlying portfolio securities were less than the
repurchase price, or to the extent that the disposition of such securities by
the fund is delayed pending court action.
Reverse Repurchase Agreements . The Fund may borrow funds for
temporary purposes by entering into reverse repurchase agreements in accordance
with the investment restrictions described below. Pursuant to such agreements,
the Fund would sell portfolio securities to financial institutions such as banks
and broker-dealers, and agree to repurchase them at a mutually agreed-upon date
and price. At the time the Fund enters into a reverse repurchase agreement, it
will place in a segregated custodial account assets (such as cash or other
liquid high-grade securities) consistent with its investment restrictions having
a value equal to the repurchase price (including accrued interest); the
collateral will be marked-to-market on a daily basis, and will be continuously
monitored to ensure that such equivalent value is maintained. Reverse repurchase
agreements involve the risk that the market value of the securities sold by the
Fund may decline below the price at which the fund is obligated to repurchase
the securities.
Temporary Investments. The Fund may also invest temporarily in high
quality investments or cash during time of unusual market conditions for
defensive purposes and in order to accommodate shareholder redemption requests
although currently it does not intend to do so. Any portion of the Fund's
assets maintained in cash will reduce the amount of assets in securities and
thereby reduce the Fund's yield or total return.
Government "Mortgage-backed" Securities. The Fund may invest in
obligations of certain agencies and instrumentalities of the U.S. Government.
Some such obligations, such as those issued by GNMA or the Export-Import Bank
of the United States, are supported by the full faith and credit of the U.S.
Treasury; others, such as those of FNMA, are supported by the right of the
issuer to borrow from the Treasury; others are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; still
others, such as those of the Federal Farm Credit Banks or FHLMC, are supported
only by the credit of the instrumentality. No assurance can be given that the
U.S. Government would provide financial support to U.S. Government-sponsored
agencies and instrumentalities if it is not obligated to do so by law.
The principal governmental (i.e., backed by the full faith and credit
of the U.S. Government) guarantor of mortgage-related securities is GNMA. GNMA
is a wholly owned U.S. Government corporation within the Department of Housing
and Urban Development. GNMA is authorized to guarantee, with the full faith
and credit of the U.S. Government, the timely payment of principal and interest
on securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and pools of FHA-insured
or VA-guaranteed mortgages. Government-related (i.e., not backed by the full
faith and credit of the U.S. Government) guarantors include FNMA and FHLMC.
FNMA and FHLMC are government-sponsored corporations owned entirely by private
stockholders. Pass-through securities issued by FNMA and FHLMC are guaranteed
as to timely payment of principal and interest by FNMA and FHLMC, respectively,
but are not backed by the full faith and credit of the U.S. Government.
MORTGAGE-RELATED SECURITIES -- IN GENERAL
Mortgage-related securities are backed by mortgage obligations
including, among others, conventional 30-year fixed rate mortgage obligations,
graduated payment mortgage obligations, 15-year mortgage obligations, and
adjustable rate mortgage obligations. All of these mortgage obligations can be
used to create pass-through securities. A pass-through security is created
when mortgage obligations are pooled together and undivided interests in the
pool or pools are sold. The cash flow from the mortgage obligations is passed
through to the holders of the securities in the form of periodic payments of
interest, principal and prepayments (net of a service fee). Prepayments occur
when the holder of an individual mortgage obligation prepays the remaining
principal before the
-5-
<PAGE> 516
mortgage obligation's scheduled maturity date. As a result of the pass-through
of prepayments of principal on the underlying securities, mortgage-backed
securities are often subject to more rapid prepayment of principal than their
stated maturity would indicate. Because the prepayment characteristics of the
underlying mortgage obligations vary, it is not possible to predict accurately
the realized yield or average life of a particular issue of pass-through
certificates. Prepayment rates are important because of their effect on the
yield and price of the securities. Accelerated prepayments have an adverse
impact on yields for pass-throughs purchased at a premium (i.e., a price in
excess of principal amount) and may involve additional risk of loss of
principal because the premium may not have been fully amortized at the time the
obligation is repaid. The opposite is true for pass-throughs purchased at a
discount. The Fund may purchase mortgage-related securities at a premium or at
a discount. Among the U.S. Government securities in which the Fund may invest
are government "mortgage-backed" (or government guaranteed mortgage related
securities). Such guarantees do not extend to the value of yield of the
mortgage-backed securities themselves or of the Fund's shares.
GNMA Certificates. Certificates of the Government National Mortgage
Association ("GNMA") are mortgage-backed securities which evidence an undivided
interest in a pool or pools of mortgages. GNMA Certificates that the Fund may
purchase are the "modified pass-through" type, which entitle the holder to
receive timely payment of all interest and principal payments due on the
mortgage pool, net of fees paid to the "issuer" and GNMA, regardless of whether
or not the mortgagor actually makes the payment.
The National Housing Act authorizes GNMA to guarantee the timely
payment of principal and interest on securities backed by a pool of mortgages
insured by the Federal Housing Administration ("FHA") or guaranteed by the
Veterans Administration ("VA"). The GNMA guarantee is backed by the full faith
and credit of the U.S. Government. GNMA is also empowered to borrow without
limitation from the U.S. Treasury if necessary to make any payments required
under its guarantee.
The estimated average life of a GNMA Certificate is likely to be
substantially shorter than the original maturity of the mortgages underlying
the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greater part of principal
investment long before the maturity of the mortgages in the pool. Foreclosures
impose no risk to principal investment because of the GNMA guarantee, except to
the extent that the Fund has purchased the certificates above par in the
secondary market.
FHLMC Securities. The Federal Home Loan Mortgage Corporation
("FHLMC") was created in 1970 to promote development of a nationwide secondary
market in conventional residential mortgages. The FHLMC issues two types of
mortgage pass-through securities ("FHLMC Certificates"), mortgage participation
certificates ("PCs") and collateralized mortgage obligations ("CMOs"). PCs
resemble GNMA Certificates in that each PC represents a pro rata share of all
interest and principal payments made and owed on the underlying pool. The
FHLMC guarantees timely monthly payment of interest on PCs and the ultimate
payment of principal. Recently introduced FHLMC Gold PCs guarantee the timely
payment of both principal and interest.
CMOs are securities backed by a pool of mortgages in which the
principal and interest cash flows of the pool are channeled on a prioritized
basis into two or more classes, or tranches, of bonds. FHLMC CMOs are backed
by pools of agency mortgage-backed securities and the timely payment of
principal and interest of each tranche is guaranteed by the FHLMC. The FHLMC
guarantee is not backed by the full faith and credit of the U.S. Government.
FNMA Securities. The Federal National Mortgage Association ("FNMA")
was established in 1938 to create a secondary market in mortgages insured by
the FHA, but has expanded its activity to the secondary market for conventional
residential mortgages. FNMA primarily issues two types of mortgage-backed
securities, guaranteed mortgage pass-through certificates ("FNMA Certificates")
and CMOs. FNMA Certificates resemble GNMA Certificates in that each FNMA
Certificate represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. FNMA guarantees timely payment of
interest and principal on FNMA Certificates and CMOs. The FNMA guarantee is
not backed by the full faith and credit of the U.S. Government.
-6-
<PAGE> 517
Investment Restrictions
The following investment restrictions are fundamental with respect to
the Fund and may be changed only by a vote of a majority of the outstanding
shares of the Fund as defined in "ADDITIONAL INFORMATION --Miscellaneous" of
this Statement of Additional Information).
THE FUND MAY NOT:
1. Participate on a joint or joint and several basis in any
securities trading account.
2. Purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments (but this shall not prevent the
Fund from purchasing or selling options and futures contracts or from investing
in securities or other instruments backed by physical commodities).
3. Purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
Fund from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business). Investments by
the Fund in securities backed by mortgages on real estate or in marketable
securities of companies engaged in such activities are not hereby precluded.
4. Issue any senior security (as defined in the 1940 Act), except
that (a) the Fund may engage in transactions that may result in the issuance of
senior securities to the extent permitted under applicable regulations and
interpretations of the 1940 Act or an exemptive order; (b) the Fund may acquire
other securities, the acquisition of which may result in the issuance of a
senior security, to the extent permitted under applicable regulations or
interpretations of the 1940 Act; (c) subject to the restrictions set forth
below, the Fund may borrow money as authorized by the 1940 Act.
5. Borrow money, except that (a) the Fund may enter into commitments
to purchase securities in accordance with its investment program, including
delayed-delivery and when-issued securities and reverse repurchase agreements,
provided that the total amount of any such borrowing does not exceed 33 1/3% of
the Fund's total assets; and (b) the Fund may borrow money for temporary or
emergency purposes in an amount not exceeding 5% of the value of its total
assets at the time when the loan is made. Any borrowings representing more
than 5% of the Fund's total assets must be repaid before the Fund may make
additional investments.
6. Lend any security or make any other loan if, as a result, more
than 33 1/3% of its total assets would be lent to other parties, but this
limitation does not apply to purchases of publicly issued debt securities or to
repurchase agreements.
7. Underwrite securities issued by others, except to the extent that
the Fund may be considered an underwriter within the meaning of the Securities
Act of 1933 in the disposition of restricted securities.
8. With respect to 75% of the Fund's total assets, the Fund may not
purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities)
if, as a result, (a) more than 5% of the Fund's total assets would be invested
in the securities of that issuer, or (b) the Fund would hold more than 10% of
the outstanding voting securities of that issuer.
9. Purchase the securities of any issuer (other than securities
issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities, or repurchase agreements secured thereby) if, as a result,
more than 25% of the Fund's total assets would be invested in the securities of
companies whose principal business activities are in the same industry./ In
the utilities category, the industry shall be determined according to the
service provided. For example, gas, electric, water and telephone will be
considered as separate industries.
- ------------------------
(1) Insert special Footnote as per tabbed page of attachment.
-7-
<PAGE> 518
The following restrictions are not fundamental and may be changed
without shareholder approval:
1. The Fund will not purchase or retain securities of any issuer if
the officers or Trustees of the Victory Portfolios or the officers or directors
of its investment adviser owning beneficially more than one half of 1% of the
securities of such issuer together own beneficially more than 5% of such
securities.
[/R]
2. The Fund will not invest more than 10% of its total assets in the
securities of issuers which together with any predecessors have a record of
less than three years of continuous operation.
3. The Fund will not write or purchase put options or purchase call
options.
4. The Fund will not invest more than 10% of its net assets in
illiquid securities. Illiquid securities are securities that are not readily
marketable or cannot be disposed of promptly within seven days and in the usual
course of business at approximately the price at which the Fund has valued
them. Such securities include, but are not limited to, time deposits and
repurchase agreements with maturities longer than seven days. Securities that
may be resold under Rule 144A, or securities offered pursuant to Section 4(2)
of, or securities otherwise subject to restrictions or limitations on resale
under, the 1933 Act ("Restricted Securities"), shall not be deemed illiquid
solely by reason of being unregistered. Key Advisers or the Sub-Adviser
determine whether a particular security is deemed to be liquid based on the
trading markets for the specific security and other factors. However, because
state securities laws may limit the Fund's investment in Restricted Securities
(regardless of the liquidity of the investment), investments in Restricted
Securities resalable under Rule 144A will continue to be subject to applicable
state law requirements until such time, if ever, that such limitations are
changed.
5. The Fund will not make short sales of securities, other than
short sales "against the box," or purchase securities on margin except for
short-term credits necessary for clearance of portfolio transactions, provided
that this restriction will not be applied to limit the use of options, futures
contracts and related options, in the manner otherwise permitted by the
investment restrictions, policies and investment program of the Fund.
6. The Fund may invest up to 5% of its total assets in the
securities of any one investment company, but may not own more than 3% of the
securities of any one investment company or invest more than 10% of its total
assets in the securities of other investment companies. Pursuant to an
exemptive order received by the Victory Portfolios from the Commission, the
Fund may invest in the money market funds of the Victory Portfolios.
7. Buy state, municipal, or private activity bonds.
State Regulations
In addition, the Fund, so long as its shares are registered under the
securities laws of the State of Texas and such restrictions are required as a
consequence of such registration, is subject to the following non-fundamental
policies, which may be modified in the future by the Trustees without a vote of
the Fund's shareholders: the Fund has represented to the Texas State
Securities Board that it: (i) will not invest in oil, gas or mineral leases or
purchase or sell real property (including limited partnership interests, but
excluding readily marketable securities of companies which invest in real
estate); and (ii) will not invest more than 5% of its net assets in warrants
valued at the lower of cost or market; provided that, included within that
amount, but not to exceed 2% of net assets, may be warrants which are not
listed on the New York or American Stock Exchanges. For purposes of this
restriction, warrants acquired in units or attached to securities are deemed to
be without value.
The policies and limitations above supplement those set forth in the
Prospectus. Unless otherwise noted, whenever an investment policy or
limitation states a maximum percentage of the Fund's assets that may be
invested in any security or other asset, or sets forth a policy regarding
quality standards, such standard or percentage limitation will be determined
immediately after and as a result of the Fund's acquisition of such security or
other asset except in the case of borrowing (or other activities that may be
deemed to result in the issuance of a "senior security" under the 1940 Act).
Accordingly, any subsequent change in values, net assets, or other
circumstances
-8-
<PAGE> 519
will not be considered when determining whether the investment complies with
the Fund's investment policies and limitations. If the value of the Fund's
holdings of illiquid securities at any time exceeds the percentage limitation
applicable at the time of acquisition due to subsequent fluctuations in value
or other reasons, the Board of Trustees will consider what actions, if any, are
appropriate to maintain adequate liquidity.
FUTURE DEVELOPMENTS
The Fund may take advantage of other investment practices which are not
at present contemplated for use by the Fund or which currently are not
available but which may be developed, to the extent such investment practices
are both consistent with the Fund's investment objective and are legally
permissible for the Fund. Such investment practices, if they arise, may
involve risks which exceed those involved in the activities described in the
Prospectus and Statement of Additional Information. Prior to commencing any
new investment practice, the Fund will notify shareholders by means of
prospectus supplement.
Portfolio Turnover
The turnover rate stated in the Prospectus for the Fund's investment
portfolio is calculated by dividing the lesser of the Fund's purchases or sales
of portfolio securities for the year by the monthly average value of the
portfolio securities. The calculation excludes all securities whose
maturities, at the time of acquisition, were one year or less. Because of this
exclusion, portfolio turnover is expected to be zero percent for regulatory
purposes.
VALUATION OF PORTFOLIO SECURITIES
As indicated in the Prospectus, the net asset value ("NAV") of the Fund
is determined and the shares of the Fund are priced as of the close of regular
trading of the New York Stock Exchange ("NYSE") ("the Valuation Time(s)") on
each Business Day of the Fund. A "Business Day" is a day on which the NYSE is
open for trading, the Federal Reserve Bank of Cleveland is open and any other
day (other than a day on which no shares of the Fund are tendered for
redemption and no order to purchase any shares is received) during which there
is sufficient trading in portfolio instruments that the Fund's net asset value
per share might be materially affected. The NYSE, or the Federal Reserve Bank
of Cleveland will not open in observance of the following holidays: New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving, and
Christmas.
When the NYSE is closed, or when trading is restricted for any reason
other than its customary weekend or holiday closings, or under emergency
circumstances as determined by the Commission to warrant such action, the
Fund's transfer agent will determine the Fund's NAV at the close of business,
normally 4:00 p.m., eastern time. The Fund's NAV may be affected to the extent
that its securities are traded on days that are not Business Days.
The Fund has elected to use the amortized cost method of valuation
pursuant to Rule 2a-7 under the 1940 Act. This involves valuing an instrument
at its cost initially and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. This method may result
in periods during which value, as determined by amortized cost, is higher or
lower than the price the Fund would receive if it sold the instrument. The
value of securities in the portfolio can be expected to vary inversely with
changes in prevailing interest rates.
Pursuant to Rule 2a-7, the Fund will maintain a dollar-weighted average
portfolio maturity appropriate to its objective of maintaining a stable net
asset value per share, provided that the Fund will not purchase any security
with a remaining maturity of more than 397 days (securities subject to
repurchase agreements may bear longer maturities) nor maintain a
dollar-weighted average portfolio maturity which exceeds 90 days. The Victory
Portfolios' Trustees have also undertaken to establish procedures reasonably
designed, taking into account current market conditions and the Victory
Portfolios' investment objectives, to stabilize the net asset value per share
of the Fund for purposes of sales and redemptions at $1.00. These procedures
include review by the Trustees, at such
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<PAGE> 520
intervals as they deem appropriate, to determine the extent, if any, to which
the net asset value per share of the Fund calculated by using available market
quotations deviates from $1.00 per share. In the event such deviation exceeds
one-half of one percent, the Rule requires that the Board promptly consider
what action, if any, should be initiated. If the Trustees believe that the
extent of any deviation from the Fund's $1.00 amortized cost price per share
may result in material dilution or other unfair results to new or existing
investors, they will take such steps as they consider appropriate to eliminate
or reduce to the extent reasonably practicable any such dilution or unfair
results. These steps may include selling portfolio instruments prior to
maturity, shortening the dollar-weighted average portfolio maturity,
withholding or reducing dividends, reducing the number of the Fund's
outstanding shares without monetary consideration, or utilizing a net asset
value per share determined by using available market quotations.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Matters Affecting Redemption
The Fund may suspend the right of redemption or postpone the date of
payment for shares during any period when (a) trading on the NYSE is restricted
by applicable rules and regulations of the Commission, (b) the NYSE is closed
for other than customary weekend and holiday closings, (c) the Commission has
by order permitted such suspension, or (d) an emergency exists as determined by
the Commission.
If, in the opinion of the Board of Trustees, conditions exist which make
cash payment undesirable, redemption payments may be made in whole or in part
in securities or other property, valued for this purpose as they are valued in
computing the Fund's NAV. Shareholders receiving securities or other property
on redemption may realize a gain or loss for tax purposes, and will incur any
costs of sale, as well as the associated inconveniences.
Pursuant to Rule 11a-3 under the 1940 Act, the Fund is required to give
shareholders at least 60 days' notice prior to terminating or modifying its
exchange privilege. Under the Rule, the 60-day notification requirement may be
waived if (i) the only effect of a modification would be to reduce or eliminate
an administrative fee, redemption fee, or deferred sales charge ordinarily
payable at the time of exchange, or (ii) the Fund temporarily suspends the
offering of shares as permitted under the 1940 Act or by the Commission, or
because it is unable to invest amounts effectively in accordance with its
investment objective and policies.
In the Prospectus, the Fund, Key Advisers and the Sub-Adviser have
notified shareholders that they reserve the right at any time without prior
notice to shareholders to refuse exchange purchases by any person or group if,
in Key Advisers' or the Sub- Adviser's judgment, the Fund would be unable to
invest effectively in accordance with its investment objective and policies, or
would otherwise potentially be adversely affected.
Purchasing Shares
Shares are sold at their net asset value without a sales charge on days
the NYSE and the Federal Reserve Wire System are open for business. The
procedure for purchasing shares of the Fund is explained in the prospectus
under "Investing in the Fund."
Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that
maximum interest may be earned. To this end, all payments from shareholders
must be in federal funds or be converted into federal funds. This conversion
must be made before shares are purchased. Converting the funds to federal
funds is normally accomplished within two business days of receipt of the
check.
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<PAGE> 521
Redeeming Shares
The Fund redeems shares at the next computed net asset value after the
redemption request is received. Redemption procedures are explained in the
prospectus under "Redeeming Shares."
[Redemption in Kind
Although the Fund intends to redeem shares in cash, it reserves the
right under certain circumstances to pay the redemption price in whole or in
part by a distribution of securities from the Fund. To the extent available,
such securities will be readily marketable.
Redemption in kind will be made in conformity with applicable Commission
rules, taking such securities at the same value employed in determining net
asset value and selecting the securities in a manner the Trustees determine to
be fair and equitable.
The Fund has elected to be governed by Rule 18f-1 of the 1940 Act under
which the Fund is obligated to redeem shares for any one shareholder in cash
only up to the lesser of $250,000 or 1% of the Fund's net asset value during
any 90-day period.]
The Victory Portfolios may redeem shares involuntarily if redemption
appears appropriate in light of the Victory Portfolios' responsibilities under
the 1940 Act. (See "VALUATION" above.)
Additional Tax Information
It is the policy of the Fund to qualify for the favorable tax treatment
accorded regulated investment companies ("RICs") under Subchapter M of the
Code, for so long as such qualification is in the best interest of its
shareholders. By following such policy and distributing its income and gains
currently with respect to each taxable year, the Victory Portfolios expects to
eliminate or reduce to a nominal amount the federal income and excise taxes to
which it may otherwise be subject.
In order to qualify as a RIC, the Fund must, among other things, (1)
derive at least 90% of its gross income from dividends, interest, payments with
respect to securities loans, and gains from the sale or other disposition of
stock or securities, foreign currencies or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in stock, securities or currencies, (2) derive less than 30% of its
gross income from the sale or other disposition of stock, securities, options,
futures, forward contracts, and certain foreign currencies (or options,
futures, or forward contracts on foreign currencies) held for less than three
months, and (3) diversify its holdings so that at the end of each quarter of
its taxable year (i) at least 50% of the market value of the Fund's assets is
represented by cash or cash items, U.S. Government securities, securities of
other RICs and other securities limited, in respect of any one issuer, to an
amount not greater than 5% of the value of the Fund's total assets and 10% of
the outstanding voting securities of such issuer, and (ii) not more than 25% of
the value of its total assets is invested in the securities of any one issuer
(other than U.S. Government securities) or of two or more issuers that the
Victory Portfolios control and that are engaged in the same, similar, or
related trades or businesses. These requirements may restrict the degree to
which the Victory Portfolios may engage in short-term trading and concentrate
investments. If the Fund qualifies as a RIC, it will not be subject to federal
income tax on the part of its net investment income and net realized capital
gains, if any, that it distributes to shareholders with respect to each taxable
year within the time limits specified in the Code.
A non-deductible excise tax is imposed on regulated investment companies
that do not distribute in each calendar year an amount equal to 98% of their
ordinary income for the year plus 98% of their capital gain net income for the
1-year period ending on October 31 of such calendar year. The balance of such
income must be distributed during the following calendar year. If
distributions during a calendar year are less than the required amount, the
Fund is subject to a non-deductible excise tax equal to 4% of the deficiency.
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<PAGE> 522
The Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of taxable dividends paid to any shareholder who has failed
to provide (or provided an incorrect) tax identification number, or is subject
to withholding pursuant to a notice from the Internal Revenue Service for
failure to properly include on his or her income tax return payments of
interest or dividends. This "backup withholding" is not an additional tax, and
any amounts withheld may be credited against the shareholder's ultimate U.S.
tax liability.
Information set forth in the Prospectus and this Statement of Additional
Information that relates to federal taxation is only a summary of certain key
federal tax considerations generally affecting purchasers of shares of the
Victory Portfolios. No attempt has been made to present a complete explanation
of the federal tax treatment of the Fund or its shareholders, and this
discussion is not intended as a substitute for careful tax planning.
Accordingly, potential purchasers of shares of the Fund are urged to consult
their tax advisers with specific reference to their own tax circumstances. In
addition, the tax discussion in the Prospectus and this Statement of Additional
Information is based on tax law in effect on the date of the Prospectus and
this Statement of Additional Information; such laws and regulations may be
changed by legislative, judicial or administrative action, sometimes with
retroactive effect.
MANAGEMENT OF THE VICTORY PORTFOLIOS
Board of Trustees
Overall responsibility for management of the Victory Portfolios rests
with the Trustees, who are elected by the shareholders of the Victory
Portfolios. The Victory Portfolios are managed by the Trustees in accordance
with the laws of the State of Delaware governing business trusts. There are
currently seven Trustees, six of whom are not "interested persons" of the
Victory Portfolios within the meaning of that term under the 1940 Act. The
Trustees, in turn, elect the officers of the Victory Portfolios to supervise
actively its day-to-day operations.
The Trustees of the Victory Portfolios, their addresses, ages and their
principal occupations during the past five years are as follows:
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- --------------------- -------------------- ----------------------
<S> <C> <C>
Leigh A. Wilson, 51* Trustee and From 1989 to present, Chairman and
Glenleigh International Ltd. President Chief Executive Officer, Glenleigh
53 Sylvan Road North International Limited; previously
Westport, CT 06880 Chief Executive Officer, Paribas
North America and Paribas
Corporation; Trustee, The Victory
Funds and Spears, Benzak, Salomon
and Farrell ("SBSF") Funds.
Robert G. Brown, 72 Trustee Retired; from October 1983 to
5460 N. Ocean Drive November 1990, President, Cleveland
Singer Island, Riviera Beach, Advanced Manufacturing Program
Florida 33404 (non-profit corporation engaged in
regional economic development).
</TABLE>
- --------------
* Mr. Wilson is deemed to be an "interested person" of the Victory
Portfolios under the 1940 Act solely by reason of his position as
President.
-12-
<PAGE> 523
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- --------------------- -------------------- ----------------------
<S> <C> <C>
Edward P. Campbell, 46 Trustee From March 1, 1994 to present,
Nordson Corporation Executive Vice President and Chief
28601 Clemens Road Operating Officer of Nordson
Westlake, OH 44145 Corporation (manufacturer of
application equipment); from May
1988 to March 1994, Vice President
of Nordson Corporation; from 1987
to December 1994, member of the
Supervisory Committee of Society's
Collective Investment Retirement
Fund; from May 1991 to August 1994,
Trustee, Financial Reserves Fund
and from May 1993 to August 1994,
Trustee, Ohio Municipal Money
Market Fund; Trustee, The Victory
Funds and SBSF.
Dr. Harry Gazelle, 68 Trustee Retired radiologist, Drs. Hill and
17822 Lake Road Thomas Corp.; Trustee, The Victory
Lakewood, OH 44107 Funds.
Dr. Thomas F. Morrissey, 62 Trustee 1995 Visiting Scholar, Bond
Weatherhead School of University, Queensland, Australia;
Management Professor, Weatherhead School of
Case Western Reserve Management, Case Western Reserve
University University; from 1989 to 1995,
10900 Euclid Avenue Associate Dean of Weatherhead
Cleveland, OH 44106-7235 School of Management and Professor,
Case Western Reserve University;
from 1987 to December 1994, Member
of the Supervisory Committee of
Society's Collective Investment
Retirement Fund; from May 1991 to
August 1994, Trustee, Financial
Reserves Fund and from May 1993 to
August 1994, Trustee, Ohio
Municipal Money Market Fund;
Trustee, The Victory Funds.
Stanley I. Landgraf, 70 Trustee Retired; currently, Trustee,
41 Traditional Lane Rensselaer Polytechnic Institute;
Albany, NY 12211 Director, Elenel Corporation and
Mechanical Technology, Inc.;
Member, Board of Overseers, School
of Management, Rensselaer
Polytechnic Institute; Member, The
Fifty Group (a Capital Region
</TABLE>
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<PAGE> 524
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- --------------------- -------------------- ----------------------
<S> <C> <C>
business organization); Trustee,
The Victory Funds.
H. Patrick Swygert, 52 Trustee President, Howard University;
Howard University formerly President, State
2400 6th Street, N.W. University of New York at Albany;
Suite 320 formerly, Executive Vice President,
Washington, DC 20059 Temple University; Trustee, The
Victory Funds.
</TABLE>
The Board presently has an Investment Policy Committee and a Business,
Legal, and Audit Committee. The members of the Investment Policy Committee are
Messrs. Landgraf (Chairman), Morrissey and Brown, who will serve until May
1996. The function of the Investment Policy Committee is to review the
existing investment policies of the Victory Portfolios, including the levels of
risk and types of funds available to shareholders, and make recommendations to
the Board of Trustees regarding the revision of such policies or, if necessary,
the submission of such revisions to the Victory Portfolios' shareholders for
their consideration. The members of the Business, Legal and Audit Committee
are Messrs. Swygert (Chairman), Campbell and Gazelle who will serve until May
1996. The function of the Business, Legal and Audit Committee is to recommend
independent auditors and monitor accounting and financial matters; to nominate
persons to serve as disinterested Trustees and Trustees to serve on committees
of the Board; and to review compliance and contract matters.
The Investment Policy Committee met four times during the 12 months
ended October 31, 1995. The Business, Legal and Audit Committee was
constituted on May 24, 1995 (and has met twice since then) and replaced the
Audit Committee, the Legal Committee and the Nominating Committee, which met
three times, one time and one time, respectively, during the 12 month period
ended October 31, 1995.
REMUNERATION OF TRUSTEES AND CERTAIN EXECUTIVE OFFICERS
Effective June 1, 1995, each Trustee (other than Leigh A. Wilson)
receives an annual fee of $27,000 for serving as Trustee of all the funds of
the Victory Portfolios, and an additional per meeting fee ($2,400 in person and
$1,200 per telephonic meeting).
Effective June 1, 1995, Leigh A. Wilson receives an annual fee of
$33,000 for serving as President and Trustee for all of the funds of the
Victory Portfolios, and an additional per meeting fee ($3,000 in person and
$1,500 per telephonic meeting).
The following table indicates the compensation received by each Trustee
from the Fund and from the Victory "Fund Complex" for the 12 month period ended
October 31, 1995:
<TABLE>
<CAPTION>
Pension or
Retirement Estimated Annual Total Total Compensation
Benefits Accrued as Benefits Compensation from Victory
Portfolio Expenses Upon Retirement from the Fund "Fund Complex"*
------------------ --------------- ------------- --------------
<S> <C> <C> <C> <C>
Robert G. Brown, Trustee . . -0- -0- $4,747.58 $39,815.98
John D. Buckingham,# Trustee -0- -0- 2,818.92 18,841.89
Edward P. Campbell, Trustee . -0- -0- 3,921.95 33,799.68
Harry Gazelle, Trustee . . . -0- -0- 3,832.26 35,916.98
</TABLE>
-14-
<PAGE> 525
<TABLE>
<S> <C> <C> <C> <C>
John W. Kemper,# Trustee . . -0- -0- 2,818.92 22,567.31
Stanley I. Landgraf, Trustee -0- -0- 3,921.95 34,615.98
Thomas F. Morrissey, Trustee -0- -0- 3,921.95 40,366.98
H. Patrick Swygert, Trustee . -0- -0- 3,921.95 37,116.98
Leigh A. Wilson, Trustee . . -0- -0- 4,143.70 46,716.97
John R. Young,# Trustee . . . -0- -0- 2,915.30 21,963.81
</TABLE>
# Resigned
- ------------------------
* For certain Trustees, these amounts include compensation received from
the Victory Funds (which were reorganized into the Victory Portfolios as
of June 5, 1995), the SBSF Funds (the investment adviser of which was
acquired by KeyCorp effective April, 1995) and Society's Collective
Investment Retirement Funds, which were reorganized into the Victory
Balanced Fund and Victory Government Mortgage Fund as of December 19,
1994. There are presently 24 mutual funds from which the above-named
Trustees are compensated in the Victory "Fund Complex," but not all of
the above-named Trustees serve on the boards of each fund in the "Fund
Complex."
Officers
The officers of the Victory Portfolios, their addresses, ages and
principal occupations during the past five years are as follows:
<TABLE>
<CAPTION>
Position with the Principal occupation
Name Victory Portfolios during past 5 years
---- ------------------ -------------------
<S> <C> <C>
Leigh A. Wilson, 51 President and Trustee From 1989 to present, Chairman and
Glenleigh International Ltd. Chief Executive Officer, Glenleigh
53 Sylvan Road North International Limited; from 1984-
Westport, CT 06880 1989, Chief Executive Officer,
Paribas North America and Paribas
Corporation; Trustee to The Victory
Funds and SBSF Funds.
William B. Blundin, 57 Vice President Senior Vice President of BISYS Fund
BISYS Fund Services Services; officer of other
125 West 55th Street investment companies administered
New York, New York 10019 by BISYS Fund Services; President
and Chief Executive Officer of
Vista Broker-Dealer Services, Inc.,
Emerald Asset Management, Inc. and
BNY Hamilton Distributors, Inc.,
registered broker/dealers.
J. David Huber, 49 Vice President Executive Vice President, BISYS
BISYS Fund Services Fund Services.
3435 Stelzer Road
Columbus, OH 43219-3035
</TABLE>
-15-
<PAGE> 526
<TABLE>
<S> <C> <C>
Scott A. Englehart, 33 Secretary From October 1990 to present,
BISYS Fund Services employee of BISYS Fund Services,
3435 Stelzer Road Inc.; from 1985 to October 1990,
Columbus, OH 43219-3035 Manager of Banking Center, Fifth
Third Bank.
George O. Martinez, 36 Assistant Secretary From March 1995 to present, Senior
BISYS Fund Services Vice President and Director of
3435 Stelzer Road Legal and Compliance Services,
Columbus, OH 43219-3035 BISYS Fund Services; from June
1989-March 1995, Vice President and
Associate General Counsel, Alliance
Capital Management.
Martin R. Dean, 32 Treasurer From May 1994 to present, employee
BISYS Fund Services of BISYS Fund Services; from
3435 Stelzer Road January 1987 - April 1994, Senior
Columbus, OH 43219-3035 Manager, KPMG Peat Marwick.
Adrian J. Waters, 33 Assistant Treasurer From May 1993 to present, employee
BISYS Fund Services (Ireland) of BISYS Fund Services; from 1989-
Limited May 1993, Manager, Price
ITI House Waterhouse.
12 Earlsfort Terrace
Dublin 2, Ireland
</TABLE>
The mailing address of each of the officers of the Victory Portfolios
is 3435 Stelzer Road, Columbus, Ohio 43219-3035.
The officers of the Victory Portfolios (other than Leigh Wilson)
receive no compensation directly from the Victory Portfolios for performing the
duties of their offices. BISYS Fund Services, Inc. receives fees from the
Victory Portfolios for acting as Administrator.
As of January 1, 1996, the Trustees and officers as a group owned
beneficially less than 1% of the Fund.
Investment Adviser and Sub-Adviser
Key Advisers was organized as an Ohio corporation on July 27, 1995 and
is registered as an investment adviser under the Investment Advisers Act of
1940. It is a wholly-owned subsidiary of KeyCorp Asset Management Holdings,
Inc., which is a wholly-owned subsidiary of Society National Bank, a
wholly-owned subsidiary of KeyCorp. Affiliates of Key Advisers manage
approximately $37 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals and mutual funds.
KeyCorp, a financial services holding company, is headquartered at 127
Public Square, Cleveland, Ohio 44114. As of September 30, 1995, KeyCorp had an
asset base of $68 billion, with banking offices in 26 states from Maine to
Alaska, and trust and investment offices in 16 states. KeyCorp is the
resulting entity of the merger in 1994 of Society Corporation, the bank holding
company of which Society National Bank was a wholly-owned subsidiary, and
KeyCorp, the former bank holding company. KeyCorp's major business activities
include providing traditional banking and associated financial services to
consumer, business and commercial markets. Its non-bank subsidiaries include
investment advisory, securities brokerage, insurance, bank credit card
processing, and mortgage leasing companies. Society National Bank is the lead
affiliate bank of KeyCorp.
-16-
<PAGE> 527
The following schedule lists the advisory fees for each mutual fund
that is advised by Key Advisers.
.25 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Institutional Money Market Fund *
.35 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Prime Obligations Fund *
Victory U.S. Government Obligations Fund *
Victory Tax-Free Money Market Fund *
.50 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Money Market Fund *
Victory Limited Term Income Fund *
Victory Government Mortgage Fund *
Victory Financial Reserves Fund *
Victory Fund for Income #
.55 OF 1% OF AVERAGE DAILY NET ASSETS
Victory National Municipal Bond Fund *
Victory Government Bond Fund *
Victory New York Tax-Free Fund *
.60 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Bond Fund *
Victory Stock Index Fund *
.65 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Diversified Stock Fund *
.75 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Intermediate Income Fund *
Victory Investment Quality Bond Fund *
Victory Ohio Regional Stock Fund *
1% OF AVERAGE DAILY NET ASSETS
Victory Balanced Fund *
Victory Value Fund *
Victory Growth Fund *
Victory Special Value Fund *
Victory Special Growth Fund+
1.10% OF AVERAGE DAILY ASSETS
Victory International Growth Fund *
# First Albany Asset Management Corporation serves as
sub-adviser to the Victory Fund for Income, for which it
receives .20% of average daily net assets.
+ T. Rowe Price Associates, Inc. serves as sub-adviser to the
- Victory Special Growth Fund, for which it receives .25% of
average daily net assets up to $100 million and .20% of
average daily net assets in excess of $100 million.
* Society Asset Management, Inc. (the Sub-Adviser) serves as
sub-adviser to each of these funds. For its services under
the investment sub-advisory agreement, Key Advisers pays the
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<PAGE> 528
Sub-adviser sub-advisory fees at rates (based on an annual
percentage of average daily net assets) which vary according
to the table set forth below:
<TABLE>
For the Victory Balanced Fund, Diversified Stock Fund, For the Victory International Growth Fund,
Growth Fund, Stock Index Fund and Value Fund: Ohio Regional Stock Fund and Special Value
Fund:
<CAPTION>
Rate of Rate of
Net Assets Sub-Advisory Fee* Net Assets Sub-Advisory Fee*
---------- ----------------- ---------- ----------------
<S> <C> <C> <C>
Up to $10,000,000 0.65% Up to $10,000,000 0.90%
Next $15,000,000 0.50% Next $15,000,000 0.70%
Next $25,000,000 0.40% Next $25,000,000 0.55%
Above $50,000,000 0.35% Above $50,000,000 0.45%
For the Victory Intermediate Income Fund, Investment For the Victory Prime Obligations Fund, Tax-Free
Quality Bond Fund, Limited Term Income Fund, Money Market Fund, U.S. Government Obligations
Ohio Municipal Bond Fund, Government Bond Fund, Financial Reserves Fund, Institutional Money
Fund, Government Mortgage Fund, National Market Fund and Ohio Municipal Money Market
Municipal Bond Fund and New York Tax-Free Fund: Fund:
<CAPTION>
Rate of Rate of
Net Assets Sub-Advisory Fee* Net Assets Sub-Advisory Fee*
---------- ----------------- ---------- ----------------
<S> <C> <C> <C>
Up to $10,000,000 0.40% Up to $10,000,000 0.25%
Next $15,000,000 0.30% Next $15,000,000 0.20%
Next $25,000,000 0.25% Next $25,000,000 0.15%
Above $50,000,000 0.20% Above $50,000,000 0.125%
</TABLE>
- --------------
* As a percentage of average daily net assets. The Sub-Adviser has the
right to voluntarily waive any portion of the sub-advisory fee from
time to time.
ADVISORY AND OTHER CONTRACTS
Unless sooner terminated, the Investment Advisory Agreement between
Key Advisers and the Fund provides that it will continue in effect as to the
Fund for an initial two-year term and for consecutive one-year terms
thereafter, provided that such continuance is approved at least annually by the
Victory Portfolios' Trustees or by vote of a majority of the outstanding shares
of such Fund (as defined under "GENERAL INFORMATION - Miscellaneous" in the
Prospectus), and, in either case, by a majority of the Trustees who are not
parties to the Investment Advisory Agreement or interested persons (as defined
in the 1940 Act) of any party to the Investment Advisory Agreement, by votes
cast in person at a meeting called for such purpose.
The Investment Advisory Agreement is terminable as to the Fund at any
time on 60 days' written notice without penalty by the Trustees, by vote of a
majority of the outstanding shares of that Fund, or by Key Advisers. The
Investment Advisory Agreement also terminates automatically in the event of any
assignment, as defined in the 1940 Act.
The Investment Advisory Agreement provides that Key Advisers shall not
be liable for any error of judgment or mistake of law or for any loss suffered
by the Fund in connection with the performance of services pursuant to the
Investment Advisory Agreement, except a loss resulting from a breach of
fiduciary duty with respect
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<PAGE> 529
to the receipt of compensation for services or a loss resulting from willful
misfeasance, bad faith, or gross negligence on the part of Key Advisers in the
performance of its duties, or from reckless disregard by it of either duties
and obligations thereunder.
Under the Investment Advisory Agreement, Key Advisers has agreed to
provide the investment advisory services described in the Prospectus. For the
services provided and expenses assumed pursuant to the Investment Advisory
Agreement, the Fund pays Key Advisers a fee, computed daily and paid monthly,
at the annual rate of thirty-five one-hundredths of one percent (.35%) of the
average daily net assets of the Fund.
Prior to January, 1993, Society National Bank served as investment
adviser to the Fund. From January, 1993 to December 31, 1995, Society Asset
Management, Inc. served as investment adviser to the Fund. For the fiscal
years ended October 31, 1993, 1994 and 1995, the Fund paid investment advisory
fees of $2,131,049, $2,649,796 and $________, respectively.
Under an Investment Advisory Agreement, Key Advisers may delegate a
portion of its responsibilities to a subadviser. In addition, the Investment
Advisory Agreement provides that Key Advisers may render services through its
own employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser of the Fund and are under the common
control of KeyCorp as long as all such persons are functioning as part of an
organized group of persons, managed by authorized officers of Key Advisers.
Key Advisers has entered into an investment sub-advisory agreement
with its affiliate, Society Asset Management, Inc. on behalf of the Fund. The
Sub-Adviser is a wholly-owned subsidiary of KeyCorp Asset Management Holdings,
Inc. With respect to the day to day management of the Fund, under the
sub-advisory agreement, the Sub-Adviser makes decisions concerning, and places
all orders for, purchases and sales of securities and helps maintain the
records relating to such purchases and sales. The Sub-Adviser may, in its
discretion, provide such services through its own employees or the employees of
one or more affiliated companies that are qualified to act as an investment
adviser to the Company under applicable laws and are under the common control
of KeyCorp; provided that (i) all persons, when providing services under the
sub-advisory agreement, are functioning as part of an organized group of
persons, and (ii) such organized group of persons is managed at all times by
authorized officers of the Sub-Adviser. This arrangement will not result in the
payment of additional fees by the Fund.
Glass-Steagall Act
In 1971 the United States Supreme Court held in
Investment Company Institute v. Camp
that the federal statute commonly referred to as the Glass-Steagall Act
prohibits a national bank from operating a fund for the collective investment
of managing agency accounts. Subsequently, the Board of Governors of the
Federal Reserve System (the "Board") issued a regulation and interpretation to
the effect that the Glass-Steagall Act and such decision: (a) forbid a bank
holding company registered under the Federal Bank Holding Company Act of 1956
(the "Holding Company Act") or any non-bank affiliate thereof from sponsoring,
organizing, or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but (b) do not prohibit
such a holding company or affiliate from acting as investment adviser, transfer
agent, and custodian to such an investment company. In 1981 the United States
Supreme Court held in Board of Governors of the Federal Reserve System v.
Investment Company Institute that the Board did not exceed its authority under
the Holding Company Act when it adopted its regulation and interpretation
authorizing bank holding companies and their non-bank affiliates to act as
investment advisers to registered closed-end investment companies. In the
Board of Governors case, the Supreme Court also stated that if a national bank
complied with the restrictions imposed by the Board in its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to investment companies, a national bank
performing investment advisory services for an investment company would not
violate the Glass-Steagall Act.
Key Advisers and the Sub-Adviser believe that they may perform the
services for the Victory Portfolios contemplated by the Prospectus, this
Statement of Additional Information, and the Investment Advisory (Sub-Advisory)
Agreement with the Victory Portfolios without violation of applicable statutes
and regulations and has
-19-
<PAGE> 530
so represented in its Investment Advisory (Sub-Advisory) Agreement with the
Victory Portfolios. Key Trust Company of Ohio, N.A. believes that it may
perform the services for the Victory Portfolios contemplated by the Prospectus,
this Statement of Additional Information, and the Shareholder Servicing
Agreement with the Victory Portfolios (as described below) without violation of
applicable statutes and regulations and has so represented in such Shareholder
Servicing Agreement. Future changes in either federal or state statutes and
regulations relating to the permissible activities of banks or bank holding
companies and the subsidiaries or affiliates of those entities, as well as
further judicial or administrative decisions or interpretations of present and
future statutes and regulations, could prevent or restrict Key Trust Company of
Ohio, N.A., Key Advisers or the Sub-Adviser from continuing to perform such
services for the Victory Portfolios. Depending upon the nature of any changes
in the services which could be provided by Key Trust Company of Ohio, N.A., Key
Advisers or the Sub-Adviser the Trustees of the Victory Portfolios would review
the Victory Portfolios' relationship with Key Trust Company of Ohio, N. A., Key
Advisers or the Sub-Adviser and consider taking all action necessary in the
circumstances.
Should future legislative, judicial, or administrative action prohibit
or restrict the proposed activities of Key Trust Company of Ohio, N.A., Key
Advisers or the Sub-Adviser and its affiliated and correspondent banks and
other non-bank affiliates in connection with customer purchases of shares of
the Victory Portfolios, the banks and such non-bank affiliates might be
required to alter materially or discontinue the services offered by them to
customers. It is not anticipated, however, that any change in the Victory
Portfolios' method of operations would affect its net asset value per share or
result in financial losses to any customer.
From time to time, advertisements, supplemental sales literature and
information furnished to present or prospective shareholders of the Fund may
include descriptions of Key Trust Company of Ohio, N.A., Key Advisers and the
Sub-Adviser including, but not limited to, (i) descriptions of the operations
of Key Trust Company of Ohio, N.A., Key Advisers and the Sub-Adviser; (ii)
descriptions of certain personnel and their functions; and (iii) statistics and
rankings related to the operations of Key Trust Company of Ohio, N.A., Key
Advisers and the Sub-Adviser.
Portfolio Transactions
Pursuant to the Investment Advisory Agreement (and Sub-Advisory
Agreement), Key Advisers or the Sub-Adviser determines, subject to the general
supervision of the Trustees of the Victory Portfolios, and in accordance with
the Fund's investment objective and restrictions, which securities are to be
purchased and sold by the Fund, and which brokers are to be eligible to execute
its portfolio transactions. Purchases from underwriters and/or broker-dealers
of portfolio securities include a commission or concession paid by the issuer
to the underwriter and/or broker-dealer and purchases from dealers serving as
market makers may include the spread between the bid and asked price. While
Key Advisers and the Sub-Adviser generally seek competitive prices (inclusive
of any spread or commission), the Fund may not necessarily pay the lowest
prices available on each transaction, for reasons discussed below.
Allocation of transactions to dealers is determined by Key Advisers
or the Sub-Adviser in their best judgment and in a manner deemed fair and
reasonable to shareholders. The primary consideration is prompt execution of
orders in an effective manner at the most favorable price. Subject to this
consideration, dealers who provide supplemental investment research to Key
Advisers or the Sub-Adviser may receive orders for transactions by the Victory
Portfolios. Information so received is in addition to and not in lieu of
services required to be performed by Key Advisers or the Sub-Adviser and does
not reduce the advisory fees payable to Key Advisers by the Victory Portfolios.
Such information may be useful to Key Advisers or the Sub-Adviser in serving
both the Victory Portfolios and other clients and, conversely, such
supplemental research information obtained by the placement of orders on behalf
of other clients may be useful to Key Advisers or the Sub-Adviser in carrying
out its obligations to the Victory Portfolios. In the future, the Trustees may
also authorize the allocation of brokerage to affiliated broker-dealers on an
agency basis to effect portfolio transactions. In such event, the Trustees
will adopt procedures incorporating the standards of Rule 17e-1 under the 1940
Act, which requires that the commission paid to affiliated broker-dealers be
"reasonable and fair compared to the commission, fee or other remuneration
received, or to be received, by other brokers in connection with comparable
transactions involving similar securities during a comparable period of time."
At times, the Fund may also purchase portfolio securities directly from dealers
acting
-20-
<PAGE> 531
as principals, underwriters or market makers. As these transactions are
usually conducted on a net basis, no brokerage commissions are paid by the
Fund.
The Victory Portfolios will not execute portfolio transactions
through, acquire portfolio securities issued by, make savings deposits in, or
enter into repurchase or reverse repurchase agreements with Key Advisers, the
Sub-Adviser, Key Trust Company of Ohio, N.A. or its affiliates, Concord Holding
Corporation, Victory Broker-Dealer Services, Inc. or their affiliates, and will
not give preference to Key Trust Company of Ohio, N.A.'s correspondent banks or
affiliates, or Concord Holding Corporation or Victory Broker-Dealer Services,
Inc. with respect to such transactions, securities, savings deposits,
repurchase agreements, and reverse repurchase agreements.
Investment decisions for the Fund are made independently from those
for the other funds or any other investment company or account managed by Key
Advisers (or Society). Any such other investment company or account may also
invest in the same securities as a particular fund. When a purchase or sale of
the same security is made at substantially the same time on behalf of the Fund
and another fund, investment company or account, the transaction will be
averaged as to price, and available investments allocated as to amount, in a
manner which Key Advisers (or Society) believes to be equitable to the Fund
and such other fund, investment company or account. In some instances, this
investment procedure may adversely affect the price paid or received by the
Fund or the size of the position obtained by the Fund. To the extent permitted
by law, Key Advisers (or Society) may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for the other funds
or for other investment companies or accounts in order to obtain best
execution. As provided by the Investment Advisory (and Sub-Advisory)
Agreement, in making investment recommendations for the Victory Portfolios, Key
Advisers (or Society) will not inquire or take into consideration whether an
issuer of securities proposed for purchase or sale by a Fund is a customer of
Society, its parents or subsidiaries or affiliates and, in dealing with their
commercial customers, Key Advisers (Society), its parents, subsidiaries, and
affiliates will not inquire or take into consideration whether securities of
such customers are held by the Victory Portfolios.
Business Management Agreement
In connection with its obligations under the Investment Sub-Advisory
Agreement, the Sub-Adviser has entered into a Business Management Agreement
with Key Advisers, pursuant to which Key Advisers provides certain
administrative and support services to the Sub-Adviser. Such services include
preparing reports to the Victory Portfolios' Board of Trustees, recordkeeping
services, and services rendered in connection with the preparation of
regulatory filings and other reports, and regulatory and other administrative
and compliance systems and support services.
For such services to the Fund, the Sub-Adviser pays fees to Key
Advisers which vary according to a sliding scale containing "breakpoints" at
which decreases in the business management fees correspond to increases in the
average daily net asset values of the Fund as follows:
<TABLE>
<CAPTION>
Rate of Business
Net Assets of the Fund Management Fee*
---------------------- ---------------
<S> <C>
Up to $10,000,000 0.20%
Next $15,000,000 0.15%
Next $25,000,000 0.10%
Above $50,000,000 0.075%
</TABLE>
- --------------
* As a percentage of average daily net assets.
Administrator
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<PAGE> 532
Currently, Concord Holding Corporation ("CHC") serves as general
manager and administrator (the "Administrator") to the Fund. The
Administrator assists in supervising all operations of the Fund (other than
those performed by Key Advisers or the Sub- Adviser under the Investment
Advisory Agreement and Sub-Advisory Agreement. Prior to June, 1995, The
Winsbury Company ("Winsbury") served as the Fund's administrator.
CHC receives a fee from the Fund for its services as Administrator and
expenses assumed pursuant to the Administration Agreements, calculated daily
and paid monthly, at the annual rate of fifteen one hundredths of one percent
(.15%) of the Fund's average daily net assets. CHC may periodically waive all
or a portion of its fee with respect to the Fund in order to increase the net
income of the Fund available for distribution as dividends.
Unless sooner terminated, the Administration Agreement will continue
in effect as to the Fund for a period of two years, and for consecutive
one-year terms thereafter, provided that such continuance is ratified at least
annually by the Victory Portfolios' Board of Trustees or by vote of a majority
of the outstanding shares of the Fund, and in either case by a majority of the
Trustees who are not parties to the Administration Agreement or interested
persons (as defined in the 1940 Act) of any party to the Administration
Agreement, by votes cast in person at a meeting called for such purpose.
The Administration Agreement provides that CHC shall not be liable for
any error of judgment or mistake of law or any loss suffered by the Victory
Portfolios in connection with the matters to which the Administration Agreement
relates, except a loss resulting from willful misfeasance, bad faith, or gross
negligence in the performance of its duties, or from the reckless disregard by
it of its obligations and duties thereunder.
Under the Administration Agreement, CHC assists in the Fund's
administration and operation, including providing statistical and research
data, clerical services, internal compliance and various other administrative
services, including among other responsibilities, forwarding certain purchase
and redemption requests to the Transfer Agent, participation in the updating of
the prospectus, coordinating the preparation, filing, printing and
dissemination of reports to shareholders, coordinating the preparation of
income tax returns, arranging for the maintenance of books and records and
providing the office facilities necessary to carry out the duties thereunder.
Under the Administration Agreement, CHC may delegate all or any part of its
responsibilities thereunder.
In the fiscal years ended October 31, 1993, 1994 and 1995, the Fund
paid to Winsbury and CHC aggregate administration fees of $913,307, $1,122,585
and $______, respectively, after fee reductions of $1,726, $13,042 and
$________, respectively.
Distributor
Victory Broker-Dealer Services, Inc. (the "Distributor") serves as
distributor for the continuous offering of the shares of the Fund pursuant to a
Distribution Agreement between the Distributor and the Victory Portfolios.
Unless otherwise terminated, the Distribution Agreement will remain in effect
with respect to the Fund for two years, and thereafter for consecutive one-year
terms, provided that it is approved at least annually (i) by the Victory
Portfolios' Board of Trustees or by the vote of a majority of the outstanding
shares of the Fund, and (ii) by the vote of a majority of the Trustees of the
Victory Portfolios who are not parties to the Distribution Agreement or
interested persons of any such party, cast in person at a meeting called for
the purpose of voting on such approval. The Distribution Agreement will
terminate in the event of its assignment, as defined in the 1940 Act. For the
Fund's fiscal years ended October 31, 1993, 1994 and 1995, Winsbury received
$______, $_______ and $_______, respectively, in underwriting commissions, and
retained $____, $_____ and $__, respectively.
Shareholder Servicing Plan
The Victory Portfolios, on behalf of the Fund, has adopted a
Shareholder Servicing Plan to provide payments to shareholder servicing agents
(each a "Shareholder Servicing Agent") that provide administrative support
services to customers who may from time to time beneficially own shares, which
services include: (i) aggregating and processing purchase and redemption
requests for shares from customers and promptly transmitting net purchase and
redemption orders to our distributor or transfer agent; (ii) providing
customers with a service that invests the
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<PAGE> 533
assets of their accounts in shares pursuant to specific or pre-authorized
instructions; (iii) processing dividend and distribution payments on behalf of
customers; (iv) providing information periodically to customers showing their
positions in shares; (v) arranging for bank wires; (vi) responding to customer
inquiries; (vii) providing subaccounting with respect to shares beneficially
owned by customers or providing the information to the Victory Portfolios
necessary for subaccounting; (viii) if required by law, forwarding shareholder
communications from us (such as proxies, shareholder reports, annual and
semi-annual financial statements and dividend, distribution and tax notices) to
customers; (ix) forwarding to customers proxy statements and proxies containing
any proposals regarding this Plan; and (x) providing such other similar
services as we may reasonably request to the extent you are permitted to do so
under applicable statutes, rules or regulations. For expenses incurred and
services provided pursuant to the Shareholder Servicing Agreement, the Fund
pays each Shareholder Servicing Agent a fee computed daily and paid monthly, in
amounts aggregating not more than twenty-five one-hundredths of one percent
(.25%) of the average daily net assets of the Fund per year. A Shareholder
Servicing Agent may periodically waive all or a portion of its respective
shareholder servicing fees with respect to the Fund to increase the net income
of the Fund available for distribution as dividends.
Expenses
The Fund bears the following expenses relating to its operations:
taxes, interest, brokerage fees and commissions, fees of the Trustees of the
Victory Portfolios, Commission fees, state securities qualification fees, costs
of preparing and printing prospectuses for regulatory purposes and for
distribution to current shareholders, outside auditing and legal expenses,
advisory and administration fees, fees and out-of-pocket expenses of the
custodian and transfer agent, certain insurance premiums, costs of maintenance
of the Fund's existence, costs of shareholders' reports and meetings, and any
extraordinary expenses incurred in the Fund's operation.
If total expenses borne by the Fund in any fiscal year exceeds expense
limitations imposed by applicable state securities regulations, Key Advisers,
the Sub-Adviser or the Administrator will waive their fees to the extent such
excess expenses exceed such expense limitation in proportion to their
respective fees. As of the date of this Statement of Additional Information,
the most restrictive expense limitation applicable to the Fund limits its
aggregate annual expenses, including management and advisory fees but excluding
interest, taxes, brokerage commissions, and certain other expenses, to 2.5% of
the first $30 million of its average net assets, 2.0% of the next $70 million
of its average net assets, and 1.5% of its remaining average net assets. Any
expenses to be borne by Key Advisers, Sub-Adviser or the Administrator will be
estimated daily and reconciled and paid on a monthly basis. Fees imposed upon
customer accounts by Key Advisers, the Sub-Adviser, Key Trust Company of Ohio,
N.A. or its correspondents, affiliated banks and other non-bank affiliates for
cash management services are not fund expenses for purposes of any such expense
limitation.
Fund Accountant
BISYS Fund Services Ohio, Inc. serves as fund accountant for the Fund
pursuant to a fund accounting agreement with the Victory Portfolios dated June
5, 1995 (the "Fund Accounting Agreement"). As fund accountant for the Victory
Portfolios, BISYS Fund Services Ohio, Inc. calculates the Fund's Portfolios'
net asset value, the dividend and capital gain distributions, if any, and the
yield. BISYS Fund Services Ohio, Inc. also provides a current security
position report, a summary report of transactions and pending maturities, a
current cash position report, and maintains the general ledger accounting
records for the Fund. Under the Fund Accounting Agreement, BISYS Fund Services
Ohio, Inc. is entitled to receive annual fees of .03% of the first $100 million
of the Fund's daily average net assets, .02% of the next $100 million of Fund's
daily average net assets, and .01% of the Fund's remaining daily average net
assets. These annual fees are subject to a minimum monthly assets charge of
$2,917 per tax-free fund, and do not include out-of-pocket expenses or multiple
class charges of $833 per month assessed for each class of shares after the
first class. In the fiscal years ended October 31, 1993, 1994 and 1995, the
Victory Portfolios paid The Winsbury Service Corporation fund accounting fees
(after fee waivers) of $365,322.69, $454,251 and $_______, respectively, for
the Fund.
Custodian
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Cash and securities owned by the Fund are held by Key Trust Company of
Ohio, N.A. as custodian. Key Trust Company of Ohio, N.A. serves as custodian
to the Fund pursuant to a Custodian Agreement dated May 24, 1995. Under this
Agreement, Key Trust Company of Ohio, N.A. (i) maintains a separate account or
accounts in the name of the Fund; (ii) makes receipts and disbursements of
money on behalf of the Fund; (iii) collects and receives all income and other
payments and distributions on account of portfolio securities; (iv) responds to
correspondence from security brokers and others relating to its duties; and (v)
makes periodic reports to the Victory Portfolios' Trustees concerning the
Victory Portfolios' operations. Key Trust Company of Ohio, N.A. may, with the
approval of the Victory Portfolios and the custodian's own expense, open and
maintain a sub-custody account or accounts on behalf of the Fund, provided that
Key Trust Company of Ohio, N.A. shall remain liable for the performance of all
of its duties under its respective Custodian Agreement.
Transfer Agent
Primary Funds Service Corporation ("PFSC") serves as transfer agent
and dividend disbursing agent for the Fund, pursuant to a Transfer Agency and
Shareholder Servicing Agreement. Under its agreement with the Victory
Portfolios, PFSC has agreed (i) to issue and redeem shares of the Victory
Portfolios; (ii) to address and mail all communications by the Victory
Portfolios to its shareholders, including reports to shareholders, dividend and
distribution notices, and proxy material for its meetings of shareholders;
(iii) to respond to correspondence or inquiries by shareholders and others
relating to its duties; (iv) to maintain shareholder accounts and certain
sub-accounts; and (v) to make periodic reports to the Victory Portfolios'
Trustees concerning the Victory Portfolios' operations. For the services
provided under the Transfer Agency and Shareholder Servicing Agreement, PFSC
receives a maximum monthly fee of $1,250 from the Fund, and a maximum of $3.50
per account of the Fund.
Auditors
The financial highlights appearing in the Prospectus for the Fund,
other than unaudited information marked as such, has been derived from
financial statements of the Fund incorporated by reference in this Statement of
Additional Information which, for the two month period ended October 31, 1995
and fiscal year ended August 31, 1995, has been audited by Coopers & Lybrand
L.L.P. as set forth in their report incorporated by reference herein, and are
included in reliance upon such report and on the authority of such firm as
experts in auditing and accounting. Information for the fiscal year ended
August 31, 1994 has been audited by KPMG Peat Marwick L.L.P., independent
accountants for the Predecessor Fund, as set forth in their report incorporated
by reference herein, and are included in reliance upon such report and on the
authority of such firm as experts in auditing and accounting. Information for
all other periods has been audited by Ernst & Young, L.L.P., independent
accountants to the predecessor to the Predecessor Fund. Coopers & Lybrand
L.L.P. serves as the Victory Portfolios' auditors. Coopers & Lybrand L.L.P.'s
address is 100 East Broad Street, Columbus, Ohio 43215.
Legal Counsel
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, 919 Third Avenue,
New York, New York 10022 is counsel to the Victory Portfolios.
ADDITIONAL INFORMATION
Description of Shares
The Victory Portfolios (sometimes referred to as the "Trust") is a
Delaware business trust. Its Delaware Trust Instrument was adopted on December
6, 1995 and a certificate of Trust for the Trust was filed in Delaware on
December __, 1995. On February 29, 1996, the Victory Portfolios converted from
a Massachusetts business trust to a Delaware business trust.
The previously effective Massachusetts Declaration of Trust, pursuant
to which the Victory Portfolios was originally called the North Third Street
Fund, was filed with the Secretary of State of the Commonwealth of
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<PAGE> 535
Massachusetts on February 6, 1986. On September 22, 1986, an Amended and
Restated Declaration of Trust was filed to change the name of the Trust to The
Emblem Fund and to make certain other changes. A second amendment was filed
October 23, 1986 providing for voting of shares in the aggregate except where
voting of shares by series is otherwise required by law. An amendment to the
Amended and Restated Declaration of Trust was filed on March 15, 1993 to change
the name of the Trust to The Society Funds. An Amended and Restated
Declaration of Trust was then filed on September 2, 1994 to change the name of
the Trust to The Victory Portfolios.
The currently effective Delaware Trust Instrument authorizes the
Trustees to issue an unlimited number of shares, which are units of beneficial
interest, without par value. The Victory Portfolios presently has twenty-eight
series of shares, which represent interests in the U.S. Government Obligations
Fund, the Prime Obligations Fund, the Tax-Free Money Market Fund, the Balanced
Fund, the Stock Index Fund, the Value Fund, the Fund, the Growth Fund, the
Special Value Fund, the Special Growth Fund, the Ohio Regional Stock Fund, the
International Growth Fund, the Limited Term Income Fund, the Government
Mortgage Fund, the Ohio Municipal Bond Fund, the Intermediate Income Fund, the
Investment Quality Bond Fund, the Florida Tax-Free Bond Fund, the Municipal
Bond Fund, the Convertible Securities Fund, the Short-Term U.S. Government
Income Fund, the Government Bond Fund, the Fund for Income, the National
Municipal Bond Fund, the New York Tax-Free Fund, the Institutional Money Market
Fund, the Financial Reserves Fund and the Ohio Municipal Money Market Fund,
respectively. The Victory Portfolios' Delaware Trust Instrument authorizes the
Trustees to divide or redivide any unissued shares of the Victory Portfolios
into one or more additional series by setting or changing in any one or more
respects their respective preferences, conversion or other rights, voting
power, restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption.
Shares have no subscription or preemptive rights and only such
conversion or exchange rights as the Trustees may grant in their discretion.
When issued for payment as described in the Prospectus and this Statement of
Additional Information, the Victory Portfolios' shares will be fully paid and
non-assessable. In the event of a liquidation or dissolution of the Victory
Portfolios, shares of the Fund are entitled to receive the assets available for
distribution belonging to the Fund, and a proportionate distribution, based
upon the relative asset values of the respective funds of the Victory
Portfolios, of any general assets not belonging to any particular fund which
are available for distribution.
As described in the Prospectus under the caption "ADDITIONAL
INFORMATION -- Voting Rights," shares of the Victory Portfolios are entitled to
one vote per share (with proportional voting for fractional shares) on such
matters as shareholders are entitled to vote. On any matter submitted to a
vote of the shareholders, all shares are voted separately by individual series
(funds), and whenever the Trustees determine that the matter affects only
certain series, may be submitted for a vote by only such series, except (i)
when required by the 1940 Act, shares are voted in the aggregate and not by
individual series; and (ii) when the Trustees have determined that the matter
affects the interests of more than one series and that voting by shareholders
of all series would be consistent with the 1940 Act, then the shareholders of
all such series shall be entitled to vote thereon (either by individual series
or by shares voted in the aggregate, as the Trustees in their discretion may
determine). The Trustees may also determine that a matter affects only the
interests of one or more classes of a series, in which case (or if required
under the 1940 Act) such matter shall be voted on by such class or classes.
There will normally be no meetings of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority of the Trustees
have been elected by the shareholders, at which time the Trustees then in
office will call a shareholders' meeting for the election of Trustees. In
addition, Trustees may be removed from office by a vote of the holders of at
least two-thirds of the outstanding shares of the Victory Portfolios. A
meeting shall be held for such purpose upon the written request of the holders
of not less than 10% of the outstanding shares. Upon written request by ten or
more shareholders meeting the qualifications of Section 16(c) of the 1940 Act,
(i.e., person who have been shareholders for at least six months, and who hold
shares having an NAV of at least $25,000 or constituting 1% of the outstanding
shares) stating that such shareholders wish to communicate with the other
shareholders for the purpose of obtaining the signatures necessary to demand a
meeting to consider removal of a Trustee, the Victory Portfolios will provide a
list of shareholders or disseminate appropriate materials (at the expense of
the requesting shareholders). Except as set forth above, the Trustees shall
continue to hold office and may appoint their successors.
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<PAGE> 536
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Victory Portfolios shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each fund of the Victory Portfolios affected by the
matter. For purposes of determining whether the approval of a majority of the
outstanding shares of a fund will be required in connection with a matter, a
fund will be deemed to be affected by a matter unless it is clear that the
interests of each fund in the matter are identical, or that the matter does not
affect any interest of the fund. Under Rule 18f-2, the approval of an
investment advisory agreement or any change in investment policy would be
effectively acted upon with respect to a fund only if approved by a majority of
the outstanding shares of such fund. However, Rule 18f-2 also provides that
the ratification of independent public accountants, the approval of principal
underwriting contracts, and the election of Trustees may be effectively acted
upon by shareholders of all of the Victory Portfolios voting without regard to
series.
Shareholder and Trustee Liability
The Delaware Business Trust Act provides that a shareholder of a
Delaware business trust shall be entitled to the same limitation of personal
liability extended to shareholders of Delaware corporations. The Delaware
Trust Instrument also provides for indemnification out of the trust property of
any shareholder held personally liable solely by reason of his or her being or
having been a shareholder. The Delaware Trust Instrument also provides that
the Victory Portfolios shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Victory
Portfolios, and shall satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
considered to be extremely remote.
The Delaware Trust Instrument states further that no Trustee, officer,
or agent of the Victory Portfolios shall be personally liable in connection
with the administration or preservation of the assets of the funds or the
conduct of the Victory Portfolios' business; nor shall any Trustee, officer, or
agent be personally liable to any person for any action or failure to act
except for his own bad faith, willful misfeasance, gross negligence, or
reckless disregard of his duties. The Declaration of Trust also provides that
all persons having any claim against the Trustees or the Victory Portfolios
shall look solely to the assets of the Victory Portfolios for payment.
Calculation of Performance Data
Based on the seven-day period ended October 31, 1995 (the "base
period"), the yield and effective yield was ____% and ____%, respectively for
the Fund. The Fund's yield is computed by determining the percentage net
change, excluding capital changes, in the value of an investment in one share
of the Fund over the base period, and multiplying the net change by 365/7 (or
approximately 52 weeks). The Fund's effective yield represents a compounding
of the yield by adding 1 to the number representing the percentage change in
value of the investment during the base period, raising that sum to a power
equal to 365/7, and subtracting 1 from the result.
Performance information showing the Fund's total return may be
presented, from time to time, in advertising and sales literature.
For the one year period ended October 31, 1995, the average annual
total return of the Fund was _____%. The average annual total return for the
Fund for the five year period ended October 31, 1995 was ____%. The average
annual return for the Fund from commencement of operations (____________)
through October 31, 1995 was ______%.
The Fund's average annual total return was determined by calculating
the change in the value of a hypothetical $1,000 investment in the Fund for
each of the periods shown. This figure is computed by determining the average
annual compounded rate of return over the applicable period that would equate
the initial amount invested to the ending redeemable value of the investment.
The ending redeemable value includes dividends and capital gain distributions
reinvested at net asset value. The resulting percentages indicated the
positive or negative investment results that an investor would have experienced
from changes in share price and reinvestment of dividends and capital gains
distributions.
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<PAGE> 537
Current yields will fluctuate, from time to time, and are not
necessarily representative of future results. Accordingly, the Fund's yield
may not provide a basis for comparison with bank deposits or other investments
that pay a fixed return for a stated period of time. Yield is a function of
the portfolio's quality, composition, and maturity, as well as expenses
allocated to the Fund. Fees imposed upon customer accounts by Key Advisers,
the Sub-Adviser, their correspondents, affiliated banks and other non-bank
affiliates for cash management services will reduce the Fund's effective yield
to customers.
From time to time, performance information for the Fund showing the
Fund's average annual total return, aggregate total return, and/or yield may be
presented in advertisements, sales literature and in reports to shareholders.
Such performance figures are based on historical earnings and are not intended
to indicate future performance. Average annual total return will be calculated
over a stated period. Average annual total return is measured by comparing the
value of an investment in the Fund at the beginning of the relevant period (as
adjusted for sales charges, if any) to the redemption value of the investment
at the end of the period (assuming immediate reinvestment of any dividends or
capital gains distributions), and then annualizing that figure. Average annual
total return is a hypothetical return, and is generally not the same as actual
annual total return. Aggregate total return is calculated similarly to average
annual total return except that the return figure is aggregated over the
relevant period instead of annualized. Yield will be computed by dividing the
Fund's net investment income per share earned during a recent one-month period
by the Fund's maximum offering price per share (reduced by any undeclared
earned income expected to be paid shortly as a dividend) on the last day of the
period.
Investors may also judge, and the Victory Portfolios may at times
advertise, the performance of the Fund by comparing it to the performance of
other mutual funds or mutual fund portfolios with comparable investment
objectives and policies, which performance may be contained in various
unmanaged mutual fund or market indices or rankings such as those prepared by
Dow Jones & Co., Inc., Standard & Poor's Corporation, Lehman Brothers, Merrill
Lynch, and Salomon Brothers, and in publications issued by Lipper Analytical
Services, Inc. and in the following publications: IBC/Donoghue's Money Fund
Reports, Ibbotson Associates, Inc., Morningstar, CDA/Wiesenberger, Money
Magazine, Forbes, Barron's, The Wall Street Journal, The New York Times,
Business Week, American Banker, Fortune, Institutional Investor, U.S.A. Today.
In addition to yield information, general information about the Victory
Portfolios that appear in a publication such as those mentioned above may also
be quoted or reproduced in advertisements or in reports to shareholders.
From time to time, the Victory Portfolios may include the following
types of information in advertisements, supplemental sales literature and
reports to shareholders: (1) discussions of general economic or financial
principles (such as the effects of inflation, the power of compounding and the
benefits of dollar-cost averaging); (2) discussions of general economic trends;
(3) presentations of statistical data to supplement such discussions; (4)
descriptions of past or anticipated portfolio holdings for one or more funds of
the Victory Portfolios; (5) descriptions of investment strategies for one or
more of such funds; (6) descriptions or comparisons of various savings and
investment products (including but not limited to insured bank products,
annuities, qualified retirement plans and individual stocks and bonds) which
may or may not include the Victory Portfolios; (7) comparisons of investment
products (including the Victory Portfolios) with relevant market or industry
indices or other appropriate benchmarks; and (8) discussions of fund rankings
or ratings by NRSROs.
Yield and performance are functions of the type and quality of
instruments held in the portfolio, operating expenses, and market conditions.
Consequently, current yields and performance will fluctuate and are not
necessarily representative of future results. Any fees charged by Key
Advisers, the Sub-Adviser or other service providers with respect to customer
accounts for investing in the Victory Portfolios will not be reflected in
performance calculations.
Miscellaneous
As used in the Prospectus and in this Statement of Additional
Information, "assets belonging to a fund" (or "assets belonging to the Fund")
means the consideration received by the Victory Portfolios upon the issuance or
sale of shares in that fund, together with all income, earnings, profits, and
proceeds derived from the investment thereof, including any proceeds from the
sale, exchange, or liquidation of such investments, and any funds or payments
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<PAGE> 538
derived from any reinvestment of such proceeds and any general assets of the
Victory Portfolios, which general liabilities and expenses are not readily
identified as belonging to a particular fund (or the Fund) that are allocated
to that fund (or the Fund) by the Victory Portfolios' Trustees. The Trustees
may allocate such general assets in any manner they deem fair and equitable.
It is anticipated that the formula that will be used by the Trustees in making
allocations of general assets to a particular fund of the Victory Portfolios
will be the relative net asset value of the respective fund at the time of
allocation. Assets belonging to a particular fund are charged with the direct
liabilities and expenses of that fund, and with a share of the general
liabilities and expenses of each of the funds not readily identified as
belonging to a particular fund that are allocated to each fund in accordance
with its proportionate share of the net asset values of the Victory Portfolios
at the time of allocation. The timing of allocations of general assets and
general liabilities and expenses of the Victory Portfolios to a particular fund
will be determined by the Trustees of the Victory Portfolios and will be in
accordance with generally accepted accounting principles. Determinations by
the Trustees of the Victory Portfolios as to the timing of the allocation of
general liabilities and expenses and as to the timing and allocable portion of
any general assets with respect to a particular fund are conclusive.
As used in the Prospectus and in this Statement of Additional
Information, a "vote of a majority of the outstanding shares" or a "vote of
majority of the outstanding voting securities" of the Victory Portfolios or a
particular fund means the affirmative vote of the lesser of (a) 67% or more of
the shares of the Victory Portfolios or such fund present at a meeting at which
the holders of more than 50% of the outstanding shares of the Victory
Portfolios or such fund are represented in person or by proxy, or (b) more than
50% of the outstanding shares of the Victory Portfolios or such fund.
Organizational expenses are allocated to each of the Victory
Portfolios and are amortized over a period of two years from the commencement
of the public offering of shares of the Victory Portfolios.
As of February 1, 1996, the Trustees and officers of the Victory
Portfolios, as a group, owned less than one percent of the shares of the Fund.
The following table indicates each additional person known by the Fund
to own beneficially 5% or more of the shares of the Fund as of December 1,
1995:
<TABLE>
<S> <C> <C>
Percent of Total
Outstanding
Name & Address Shares Shares of Fund
-------------- ------ ----------------
</TABLE>
Individual Trustees are elected by the shareholders and, subject to
removal by the vote of the holders of two-thirds of the outstanding shares of
the Victory Portfolios, serve for a term lasting until the next meeting of
shareholders at which trustees are elected. Such meetings are not required to
be held at any specific intervals. Individual Trustees may be removed by vote
of the shareholders voting not less than a majority of the shares then
outstanding cast in person or by proxy at any meeting called for that purpose,
or by a written declaration signed by shareholders voting not less than
two-thirds of the shares then outstanding.
The Victory Portfolios is registered with the Commission as an
open-end management investment company. Such registration does not involve
supervision by the Commission of the management or policies of the Victory
Portfolios.
The Prospectus and this Statement of Additional Information omit
certain of the information contained in the Registration Statement filed with
the Securities and Exchange Commission. Copies of such information may be
obtained from the Commission upon payment of the prescribed fee.
The Prospectus and this Statement of Additional Information are not an
offering of the securities herein described in any state in which such offering
may not lawfully be made. No salesman, dealer, or other person is
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<PAGE> 539
authorized to give any information or make any representation other than those
contained in the Prospectus and this Statement of Additional Information.
The financial statements of the Fund for the period ended April 30,
1995 are set forth following this Part B of the Registration Statement.
The 1995 Annual Report to shareholders of The Victory Portfolios is
incorporated by reference herein. This report includes the financial
statements for the fiscal year ended October 31, 1995. The opinion in the
Annual Report of Coopers & Lybrand L.L.P., independent accountants, is
incorporated by reference herein in its entirety to such Annual Report, and
such financial statements are incorporated in their entirety in reliance upon
such report of Coopers & Lybrand L.L.P. and on the authority of such firm as
experts in auditing and accounting.
Delaware law authorizes electronic or telephonic communications
between shareholders and the Victory Portfolios. Under Delaware law, the
Successor Company has the flexibility to respond to future business
contingencies. For example, the Trustees will have the power to incorporate
the Victory Portfolios, to merge or consolidate it with another entity, to
cause each fund to become a separate trust, and to change the Victory
Portfolios' domicile without a shareholder vote. This flexibility could help
reduce the expense and frequency of future shareholder meetings for
non-investment related issues.
INDEPENDENT AUDITOR'S REPORT
FINANCIAL STATEMENTS
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<PAGE> 540
APPENDIX
The nationally recognized statistical rating organizations
(individually, an "NRSRO") that may be utilized by KeyCorp Advisers or Society
with regard to portfolio investments for the Fund include Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), Duff &
Phelps, Inc. ("Duff"), Fitch Investors Service, Inc. ("Fitch"), IBCA Limited
and its affiliate, IBCA Inc. (collectively, "IBCA"), and Thomson BankWatch,
Inc. ("Thomson"). Set forth below is a description of the relevant ratings of
each such NRSRO. The NRSROs that may be utilized by Key Advisers or the
Sub-Adviser and the description of each NRSRO's ratings is as of the date of
this Statement of Additional Information, and may subsequently change.
Long-Term Debt Ratings (may be assigned, for example, to corporate and
municipal bonds)
Description of the five highest long-term debt ratings by Moody's
(Moody's applies numerical modifiers ( e.g., 1, 2, and 3)
in each rating category to indicate the security's ranking within the
category):
Aaa. Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.
A. Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in the
future.
Baa. Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba. Bonds which are rated Ba are judged to have speculative elements
- - their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times in the future. Uncertainty of
position characterizes bonds in this class.
Description of the five highest long-term debt ratings by S&P (S&P may
apply a plus (+) or minus (-) to a particular rating classification to show
relative standing within that classification):
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing
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<PAGE> 541
circumstances are more likely to lead to a weakened capacity to pay interest
and repay principal for debt in this category than in higher rated categories.
BB. Debt rated BB is regarded, on balance, as predominately
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. While such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposure to adverse conditions.
Description of the three highest long-term debt ratings by Duff:
AAA. Highest credit quality. The risk factors are negligible being
only slightly more than for risk-free U.S. Treasury debt.
AA+. High credit quality Protection factors are strong.
AA. Risk is modest but may vary slightly from time to time
AA-. because of economic conditions.
A+. Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
Description of the three highest long-term debt ratings by Fitch (plus
or minus signs are used with a rating symbol to indicate the relative position
of the credit within the rating category):
AAA. Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA. Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA."
Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of these issues is generally rated "[-]+."
A. Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher
ratings.
IBCA's description of its three highest long-term debt ratings:
AAA. Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic or
financial conditions are unlikely to increase investment risk
significantly.
AA. Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic, or
financial conditions may increase investment risk albeit not very
significantly.
A. Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial
conditions may lead to increased investment risk.
Short-Term Debt Ratings (may be assigned, for example, to commercial
paper, master demand notes, bank instruments, and letters of credit)
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<PAGE> 542
Moody's description of its three highest short-term debt ratings:
Prime-1. Issuers rated Prime-1 (or supporting institutions) have a
superior capacity for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a
strong capacity for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
S&P's description of its three highest short-term debt ratings:
A-1. This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to have extremely
strong safety characteristics are denoted with a plus sign (+).
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high
as for issues designated "A-1."
A-3. Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the
higher designations.
Duff's description of its five highest short-term debt ratings (Duff
incorporates gradations of "1+" (one plus) and "1-" (one minus) to assist
investors in recognizing quality differences within the highest rating
category):
Duff 1+. Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
Duff 1. Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
Duff 1-. High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors. Risk
factors are very small.
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Duff 2. Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
Duff 3. Satisfactory liquidity and other protection factors qualify
issue as to investment grade.
Risk factors are larger and subject to more variation. Nevertheless,
timely payment is expected.
Fitch's description of its four highest short-term debt ratings:
F-1+. Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of assurance for
timely payment.
F-1. Very Strong Credit Quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than
issues rated F-1+.
F-2. Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as for issues assigned F-1+ or F-1 ratings.
F-3. Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate, however, near-term adverse changes could cause
these securities to be rated below investment grade.
IBCA's description of its three highest short-term debt ratings:
A+. Obligations supported by the highest capacity for timely
repayment.
A1. Obligations supported by a very strong capacity for timely
repayment.
A2. Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
Short-Term Loan/Municipal Note Ratings
Moody's description of its two highest short-term loan/municipal note
ratings:
MIG-1/VMIG-1. This designation denotes best quality. There is
present strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
MIG-2/VMIG-2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
S&P's description of its two highest municipal note ratings:
SP-1. Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
SP-2. Satisfactory capacity to pay principal and interest.
Short-Term Debt Ratings
Thomson BankWatch, Inc. ("TBW") ratings are based upon a qualitative
and quantitative analysis of all segments of the organization including, where
applicable, holding company and operating subsidiaries.
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TBW Ratings do not constitute a recommendation to buy or sell
securities of any of these companies. Further, TBW does not suggest specific
investment criteria for individual clients.
The TBW Short-Term Ratings apply to commercial paper, other senior
short-term obligations and deposit obligations of the entities to which the
rating has been assigned.
The TBW Short-Term Ratings apply only to unsecured instruments that
have a maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an
untimely payment of principal or interest.
TBW-1. The highest category; indicates a very high degree of
likelihood that principal and interest will be paid on a timely basis.
TBW-2. The second highest category; while the degree of safety
regarding timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1".
TBW-3. The lowest investment grade category; indicates that while
more susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and interest in
a timely fashion is considered adequate.
TBW-4. The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
Definitions of Certain Money Market Instruments
Commercial Paper
Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.
Certificates of Deposit
Certificates of Deposit are negotiable certificates issued against
funds deposited in a commercial bank or a savings and loan association for a
definite period of time and earning a specified return.
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<PAGE> 545
Bankers' Acceptances
Bankers' acceptances are negotiable drafts or bills of exchange,
normally drawn by an importer or exporter to pay for specific merchandise,
which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
U.S. Treasury Obligations
U.S. Treasury Obligations are obligations issued or guaranteed as to
payment of principal and interest by the full faith and credit of the U.S.
Government. These obligations may include Treasury bills, notes and bonds, and
issues of agencies and instrumentalities of the U.S. Government, provided such
obligations are guaranteed as to payment of principal and interest by the full
faith and credit of the U.S. Government.
U.S. Government Agency and Instrumentality Obligations
Obligations issued by agencies and instrumentalities of the U.S.
Government include such agencies and instrumentalities as the Government
National Mortgage Association, the Export-Import Bank of the United States, the
Tennessee Valley Authority, the Farmers Home Administration, the Federal Home
Loan Banks, the Federal Intermediate Credit Banks, the Federal Farm Credit
Banks, the Federal Land Banks, the Federal Housing Administration, the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation, and
the Student Loan Marketing Association. Some of these obligations, such as
those of the Government National Mortgage Association are supported by the full
faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others, such as
those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not obligated to do so by law. The Fund will invest
in the obligations of such instrumentalities only when the investment adviser
believes that the credit risk with respect to the instrumentality is minimal.
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STATEMENT OF ADDITIONAL INFORMATION
THE VICTORY PORTFOLIOS
THE SPECIAL GROWTH FUND
March 1, 1996
This Statement of Additional Information is not a Prospectus, but
should be read in conjunction with the Prospectus of The Victory Portfolios -
The Special Growth Fund, dated the same date as the date hereof (the
"Prospectus"). This Statement of Additional Information is incorporated by
reference in its entirety into the Prospectus. Copies of the Prospectus may be
obtained by writing The Victory Portfolios at Primary Funds Service
Corporation, P.O. Box 9741, Providence, RI 02940-9741, or by telephoning toll
free 800-539-FUND or 800-539-3863.
<TABLE>
<S> <C> <C>
Investment Policies and Limitations 1 INVESTMENT ADVISER
Valuation of Portfolio Securities 7 KeyCorp Mutual Fund Advisers, Inc.
Additional Purchase and Redemption Information 8
Management of the Victory Portfolios 10 INVESTMENT SUB-ADVISER
Advisory and Other Contracts 19 Society Asset Management, Inc.
Additional Information 26
Independent Auditor's Report 31 ADMINISTRATOR
Financial Statements 31 Concord Holding Corporation
Appendix 32
DISTRIBUTOR
Victory Broker-Dealer Services, Inc.
TRANSFER AGENT
Primary Funds Service Corporation
CUSTODIAN
Key Trust Company of Ohio, N.A.
</TABLE>
<PAGE> 547
STATEMENT OF ADDITIONAL INFORMATION
The Victory Portfolios (the "Victory Portfolios") is an open-end
management investment company. The Victory Portfolios consist of twenty-eight
series of units of beneficial interest ("shares"), four of which series are
currently inactive. The outstanding shares represent interests in the
twenty-four separate investment portfolios which are currently active. This
Statement of Additional Information relates to The Victory Special Growth Fund
(the "Fund") only. Much of the information contained in this Statement of
Additional Information expands on subjects discussed in the Prospectus.
Capitalized terms not defined herein are used as defined in the Prospectus. No
investment in shares of the Fund should be made without first reading the
Fund's Prospectus.
INVESTMENT OBJECTIVES AND POLICIES
Additional Information on Fund Instruments
The following policies supplement the investment objective and
policies of the Fund as set forth in the Prospectus.
FOREIGN INVESTMENTS. Foreign investments can involve significant
risks in addition to the risks inherent in U.S. investments. The value of
securities denominated in or indexed to foreign currencies, and of dividends
and interest from such securities, can change significantly when foreign
currencies strengthen or weaken relative to the U.S. dollar. Foreign
securities markets generally have less trading volume and less liquidity than
U.S. markets, and prices on some foreign markets can be highly volatile. Many
foreign countries lack uniform accounting and disclosure standards comparable
to those applicable to U.S. companies, and it may be more difficult to obtain
reliable information regarding an issuer's financial condition and operations.
In addition, the costs of foreign investing, including withholding taxes,
brokerage commissions, and custodial costs, are generally higher than for U.S.
investments.
Foreign markets may offer less protection to investors than U.S.
markets. Foreign issuers, brokers, and securities markets may be subject to
less government supervision. Foreign security trading practices, including
those involving the release of assets in advance of payment, may involve
increased risks in the event of a failed trade or the insolvency of a
broker-dealer, and may involve substantial delays. It may also be difficult to
enforce legal rights in foreign countries.
Investing abroad also involves different political and economic risks.
Foreign investments may be affected by actions of foreign governments adverse
to the interests of U.S. investors, including the possibility of expropriation
or nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. There may be a greater possibility
of default by foreign governments or foreign government-sponsored enterprises.
Investments in foreign countries also involve a risk of local political,
economic, or social instability, military action or unrest, or adverse
diplomatic developments. There is no assurance that Key Advisers or the Sub-
Adviser will be able to anticipate these potential events or counter their
effects.
The considerations noted above generally are intensified for
investments in developing countries. Developing countries may have relatively
unstable governments, economies based on only a few industries, and securities
markets that trade a small number of securities.
The Fund may invest in foreign securities that impose restrictions on
transfer within the U.S. or to U.S. persons. Although securities subject to
transfer restrictions may be marketable abroad, they may be less liquid than
foreign securities of the same class that are not subject to such restrictions.
<PAGE> 548
AMERICAN DEPOSITORY RECEIPTS AND EUROPEAN DEPOSITORY RECEIPTS (ADRs
and EDRs) are certificates evidencing ownership of shares of a foreign-based
issuer held in trust by a bank or similar financial institution. Designed for
use in U.S. and European securities markets, respectively, ADRs and EDRs are
alternatives to the purchase of the underlying securities in their national
markets and currencies. ADRs may be sponsored or unsponsored; there is less
publicly available information with respect to unsponsored ADRs.
LOWER-RATED DEBT SECURITIES. The Fund may purchase lower-rated debt
securities commonly referred to as "junk bonds" (those rated Ba to C by Moody's
Investor Service, Inc. or BB to C by Standard and Poor's Corporation) that have
poor protection with respect to the payment of interest and repayment of
principal, or may be in default. These securities are often considered to be
speculative and involve greater risk of loss or price changes due to changes in
the issuer's capacity to pay. The market prices of lower-rated debt securities
may fluctuate more than those of higher-rated debt securities and may decline
significantly in periods of general economic difficulty, which may follow
periods of rising interest rates.
While the market for high-yield corporate debt securities has been in
existence for many years and has weathered previous economic downturns, the
1980s brought a dramatic increase in the use of such securities to fund highly
leveraged corporate acquisitions and restructurings. Past experience may not
provide an accurate indication of future performance of the high yield bond
market, especially during periods of economic recession. In fact, from 1989 to
1991, the percentage of lower-rated debt securities that defaulted rose
significantly above prior levels, although the default rate decreased in 1992.
The market for lower-rated securities may be thinner and less active
than that for higher-rated debt securities, which can adversely affect the
prices at which the former are sold. If market quotations are not available,
lower-rated debt securities will be valued in accordance with procedures
established by the Board of Trustees, including the use of outside pricing
services. Judgment plays a greater role in valuing high-yield corporate debt
securities than is the case for securities for which more external sources for
quotations and last-sale information are available. Adverse publicity and
changing investor perceptions may affect the ability of outside pricing
services to value lower-rated debt securities and the Fund's ability to sell
these securities.
Since the risk of default is higher for lower-rated debt securities,
Key Advisers' or the Sub-Adviser's research and credit analysis are an
especially important part of managing securities of this type held by the Fund.
In considering investments for the Fund, Key Advisers or the Sub-Adviser will
attempt to identify those issuers of high-yielding debt securities whose
financial condition is adequate to meet future obligations, has improved, or is
expected to improve in the future. Analysis of Key Advisers or the Sub-Adviser
focuses on relative values based on such factors as interest or dividend
coverage, asset coverage, earnings prospects, and the experience and managerial
strength of the issuer.
The Fund may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise exercise its rights as security holder to seek
to protect the interests of security holders if it determines this to be in the
best interest of the Fund's shareholders.
ILLIQUID INVESTMENTS are investments that cannot be sold or disposed
of in the ordinary course of business, within seven days, at approximately the
prices at which they are valued. Under the supervision of the Board of
Trustees, Key Advisers or the Sub-Adviser determines the liquidity of the
Fund's investments and, through reports from Key Advisers or the Sub-Adviser
the Board monitors investments in illiquid instruments. In determining the
liquidity of the Fund's investments, Key Advisers or the Sub- Adviser may
consider various factors, including (1) the frequency of trades and quotations,
(2) the number of dealers and prospective purchasers in the marketplace, (3)
dealer undertakings to make a market, (4) the nature of the security (including
any demand or tender features), and (5) the nature of the marketplace for
trades (including the ability to assign or offset the Fund's rights and
obligations
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<PAGE> 549
relating to the investment). Investments currently considered by the Fund to
be illiquid include repurchase agreements not entitling the holder to payment
of principal and interest within seven days. Also, Key Advisers or the
Sub-Adviser may determine some over-the-counter options, restricted securities
and loans and other direct debt instruments, and swap agreements to be
illiquid. However, with respect to over-the-counter options the Fund writes,
all or a portion of the value of the underlying instrument may be illiquid
depending on the assets held to cover the option and the nature and terms of
any agreement the Fund may have to close out the option before expiration. In
the absence of market quotations, illiquid investments are priced at fair value
as determined in good faith by a committee appointed by the Board of Trustees.
If through a change in values, net assets, or other circumstances, the Fund
were in a position where more than 15% of its net assets were invested in
illiquid securities, it would seek to take appropriate steps to protect
liquidity.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS are interests in amounts owed
by a corporate, governmental, or other borrower to another party. They may
represent amounts owed to lenders or lending syndicates (loans and loan
participations), to suppliers of goods or services (trade claims or other
receivables), or to other parties. Direct debt instruments involve a risk of
loss in case of default or insolvency of the borrower and may offer less legal
protection to the Fund in the event of fraud or misrepresentation. In
addition, loan participations involve a risk of insolvency of the lending bank
or other financial intermediary. Direct debt instruments may also include
standby financing commitments that obligate the Fund to supply additional cash
to the borrower on demand.
REPURCHASE AGREEMENTS. In a repurchase agreement, the Fund purchases
a security and simultaneously commits to resell that security to the seller at
an agreed upon price on an agreed upon date within a number of days from the
date of purchase. The resale price reflects the purchase price plus an agreed
upon incremental amount which is unrelated to the coupon rate or maturity of
the purchased security. A repurchase agreement involves the obligation of the
seller to pay the agreed upon price, which obligation is in effect secured by
the value (at least equal to the amount of the agreed upon resale price and
marked to market daily) of the underlying security. The Fund may engage in a
repurchase agreement with respect to any security in which it is authorized to
invest. Since it is not possible to eliminate all risks from these
transactions (particularly the possibility of a decline in the market value of
the underlying securities, as well as delays and costs to the Fund in
connection with bankruptcy proceedings), it is the Victory Portfolios' current
policy to limit repurchase agreements for the Fund to those parties whose
creditworthiness has been reviewed and found satisfactory by Key Advisers or
the Sub-Adviser. Repurchase agreements are considered by the staff of the
Securities and Exchange Commission to be loans by the Fund.
RESTRICTED SECURITIES generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the Securities
Act of 1933, or in a registered public offering. Where registration is
required, the Fund may be obligated to pay all or part of the registration
expense and a considerable period may elapse between the time it decides to
seek registration and the time the Fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, the Fund might obtain a less favorable price
than prevailed when it decided to seek registration of the shares. However, in
general, the Fund anticipates holding restricted securities to maturity or
selling them in an exempt transaction.
LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS. The Fund intends to
file a notice of eligibility for exclusion from the definition of the term
"commodity pool operator" with the Commodity Futures Trading Commission (CFTC)
and the National Futures Association, which regulate trading in the futures
markets, before engaging in any purchases or sales of futures contracts or
options on futures contracts. The Fund intends to comply with Section 4.5 of
the regulations under the Commodity Exchange Act, which limits the extent to
which the Fund can commit assets to initial margin deposits and option
premiums.
In addition, the Fund will not: (a) sell futures contracts, purchase
put options, or write call options if, as a result, more than 25% of the Fund's
total assets would be hedged with futures and options under normal conditions;
(b) purchase futures contracts or write put options if, as a result, the Fund's
total obligations upon settlement or
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<PAGE> 550
exercise of purchased futures contracts and written put options would exceed
25% of its total assets; or (c) purchase call options if, as a result, the
current value of option premiums for call options purchased by the Fund would
exceed 5% of the Fund's total assets. These limitations do not apply to
options attached to or acquired or traded together with their underlying
securities.
FUTURES CONTRACTS. The Fund may enter into futures contracts, options
on futures contracts and stock index futures contracts and options thereon for
the purposes of remaining fully invested and reducing transaction costs.
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of a specific security, class of
securities, or an index at a specified future time and at a specified price. A
stock index futures contract is a bilateral agreement pursuant to which two
parties agree to take or make delivery of an amount of cash equal to a
specified dollar amount times the difference between the stock index value at
the close of trading of the contracts and the price at which the futures
contract is originally struck. Futures contracts which are standardized as to
maturity date and underlying financial instrument are traded on national
futures exchanges. Futures exchanges and trading are regulated under the
Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC"), a
U.S. Government agency.
Although futures contracts by their terms call for actual delivery and
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery.
Closing out an open futures position is done by taking an opposite position
("buying a contract which has previously been "sold," or "selling" a contract
previously purchased) in an identical contract to terminate the position. 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 acquisition of put and call options on futures contracts will,
respectively, 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. Brokerage commissions are
incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in
cash or government securities with a broker or custodian to initiate and
maintain open positions in futures contracts. A margin deposit is intended to
assure completion of the contract (delivery or acceptance of the underlying
security) if it is not terminated prior to the specified delivery date.
Minimal initial margin requirements are established by the futures exchange and
may be changed. Brokers may establish deposit requirements which are higher
than the exchange minimums. Initial margin deposits on futures contracts are
customarily set at levels much lower than the prices at which the underlying
securities are purchased and sold, typically ranging upward from less than 5%
of the value of the contract being traded.
After a futures contract position is opened, the value of the contract
is marked-to-market daily. If the futures contract price changes to the extent
that the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to
and from the futures broker for as long as the contract remains open. The Fund
expects to earn interest income on its margin deposits.
When interest rates are expected to rise or market values of portfolio
securities are expected to fall, the Fund can seek through the sale of futures
contracts to offset a decline in the value of its portfolio securities. When
interest rates are expected to fall or market values are expected to rise, the
Fund, through the purchase of such contracts, can attempt to secure better
rates or prices for the Fund than might later be available in the market when
it effects anticipated purchases.
The Funds will only sell futures contracts to protect securities it
owns against price declines or purchase contracts to protect against an
increase in the price of securities it intends to purchase.
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<PAGE> 551
The Fund's ability to effectively utilize futures trading depends on
several factors. First, it is possible that there will not be a perfect price
correlation between the futures contracts and their underlying stock index.
Second, it is possible that a lack of liquidity for futures contracts could
exist in the secondary market, resulting in an inability to close a futures
position prior to its maturity date. Third, the purchase of a futures contract
involves the risk that the Fund could lose more than the original margin
deposit required to initiate a futures transaction.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. The Fund will not enter
into futures contract transactions for purposes other than bona fide hedging
purposes to the extent that, immediately thereafter, the sum of its initial
margin deposits on open contracts exceeds 5% of the market value of the Fund's
total assets. In addition, the Fund will not enter into futures contracts to
the extent that the value of the futures contracts held would exceed 1/3 of the
Fund's total assets. Futures transactions will be limited to the extent
necessary to maintain the Fund's qualification as a regulated investment
company.
The Victory Portfolios have undertaken to restrict their futures
contract trading as follows: first, the Victory Portfolios will not engage in
transactions in futures contracts for speculative purposes; second, the Victory
Portfolios will not market its funds to the public as commodity pools or
otherwise as vehicles for trading in the commodities futures or commodity
options markets; third, the Victory Portfolios will disclose to all prospective
shareholders the purpose of and limitations on its funds' commodity futures
trading; fourth, the Victory Portfolios will submit to the Commodity Futures
Trading Commission ("CFTC") special calls for information. Accordingly,
registration as a commodities pool operator with the CFTC is not required.
In addition to the margin restrictions discussed above, transactions
in futures contracts may involve the segregation of funds pursuant to
requirements imposed by the Securities and Exchange Commission. Under those
requirements, where the Fund has a long position in a futures contract, it may
be required to establish a segregated account (not with a futures commission
merchant or broker) containing cash or certain liquid assets equal to the
purchase price of the contract (less any margin on deposit). For a short
position in futures or forward contracts held by the Fund, those requirements
may mandate the establishment of a segregated account (not with a futures
commission merchant or broker) with cash or certain liquid assets that, when
added to the amounts deposited as margin, equal the market value of the
instruments underlying the futures contracts (but are not less than the price
at which the short positions were established). However, segregation of assets
is not required if the Fund "covers" a long position. For example, instead of
segregating assets, the Fund, when holding a long position in a futures
contract, could purchase a put option on the same futures contract with a
strike price as high or higher than the price of the contract held by the fund.
In addition, where the Fund takes short positions, or engages in sales of call
options, it need not segregate assets if it "covers" these positions. For
example, where the Fund holds a short position in a futures contract, it may
cover by owning the instruments underlying the contract. The Fund may also
cover such a position by holding a call option permitting it to purchase the
same futures contract at a price no higher than the price at which the short
position was established. Where the Fund sells a call option on a futures
contract, it may cover either by entering into a long position in the same
contract at a price no higher than the strike price of the call option or by
owning the instruments underlying the futures contract. The Fund could also
cover this position by holding a separate call option permitting it to purchase
the same futures contract at a price no higher than the strike price of the
call option sold by the fund.
In addition, the extent to which the Fund may enter into transactions
involving futures contracts may be limited by the Internal Revenue Code's
requirements for qualification as a registered investment company and the
Fund's intention to qualify as such.
RISK FACTORS IN FUTURES TRANSACTIONS . Positions in futures contracts
may be closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may
not be possible to
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<PAGE> 552
close a futures position. In the event of adverse price movements, the Fund
would continue to be required to make daily cash payments to maintain the
required margin. In such situations, if the Fund has insufficient cash, it may
have to sell portfolio securities to meet daily margin requirements at a time
when it may be disadvantageous to do so. In addition, the Fund may be required
to make delivery of the instruments underlying futures contracts it holds. The
inability to close options and futures positions also could have an adverse
impact on the ability to effectively hedge them. The Fund will minimize the
risk that it will be unable to close out a futures contract by only entering
into futures contracts which are traded on national futures exchanges and for
which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can
be substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. Because the deposit
requirements in the futures markets are less onerous than margin requirements
in the securities market, there may be increased participation by speculators
in the futures market which may also cause temporary price distortions. A
relatively small price movement in a futures contract may result in immediate
and substantial loss (as well as gain) to the investor. For example, if at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit if the contract
were closed out. Thus, a purchaser or sale of a futures contract may result in
losses in excess of the amount invested in the contract. However, because the
futures strategies engaged in by the Fund are only for hedging purposes, Key
Advisers and the Sub-Adviser do not believe that the Fund is subject to the
risks of loss frequently associated with futures transactions. The Fund would
presumably have sustained comparable losses if, instead of the futures
contract, it had invested in the underlying financial instrument and sold it
after the decline.
Utilization of futures transactions by the Fund does involve the risk
of imperfect or no correlation where the securities underlying futures contract
have different maturities than the portfolio securities being hedged. It is
also possible that the Fund could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the fund has an open position in a futures contract or related
option.
FUTURES MARGIN PAYMENTS . The purchaser or seller of a futures
contract is not required to deliver or pay for the underlying instrument unless
the contract is held until the delivery date. However, both the purchaser and
seller are required to deposit "initial margin" with a futures broker, known as
a futures commission merchant (FCM), when the contract is entered into. Initial
margin deposits are typically equal to a percentage of the contract's value. If
the value of either party's position declines, that party will be required to
make additional "variation margin" payments to settle the change in value on a
daily basis. The party that has a gain may be entitled to receive all or a
portion of this amount. Initial and variation margin payments do not constitute
purchasing securities on margin for purposes of the Fund's investment
limitations. In the event of the bankruptcy of an FCM that holds margin on
behalf of the Fund, the Fund may be entitled to return of margin owed to it only
in proportion to the amount received by the FCM's other customers, potentially
resulting in losses to the Fund.
PURCHASING PUT AND CALL OPTIONS . By purchasing a put option, the Fund
obtains the right (but not the obligation) to sell the option's underlying
instrument at a fixed strike price. In return for this right, the Fund pays the
current market price for the option (known as the option premium). Options have
various types of underlying instruments, including specific securities, indices
of securities prices, and futures contracts. The Fund may terminate its
position in a put option it has purchased by allowing it to expire or by
exercising the option. If the option is allowed to expire, the Fund will lose
the entire premium it paid. If the Fund exercises the option, it completes the
sale of the underlying instrument at the strike price. The Fund may also
terminate a put option position by closing it out in the secondary market at its
current price, if a liquid secondary market exists.
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The buyer of a typical put option can expect to realize a gain if
security prices fall substantially. However, if the underlying instrument's
price does not fall enough to offset the cost of purchasing the option, a put
buyer can expect to suffer a loss (limited to the amount of the premium paid,
plus related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price. A call buyer typically attempts to participate in potential price
increases of the underlying instrument with risk limited to the cost of the
option if security prices fall. At the same time, the buyer can expect to
suffer a loss if security prices do not rise sufficiently to offset the cost of
the option.
WRITING PUT AND CALL OPTIONS . When the Fund writes a put option, it
takes the opposite side of the transaction from the option's purchaser. In
return for receipt of the premium, the Fund assumes the obligation to pay the
strike price for the option's underlying instrument if the other party to the
option chooses to exercise it. When writing an option on a futures contract the
Fund will be required to make margin payments to an FCM as described above for
futures contracts. The Fund may seek to terminate its position in a put option
it writes before exercise by closing out the option in the secondary market at
its current price. If the secondary market is not liquid for a put option the
Fund has written, however, the Fund must continue to be prepared to pay the
strike price while the option is outstanding, regardless of price changes, and
must continue to set aside assets to cover its position.
If security prices rise, a put writer would generally expect to
profit, although its gain would be limited to the amount of the premium it
received. If security prices remain the same over time, it is likely that the
writer will also profit, because it should be able to close out the option at a
lower price. If security prices fall, the put writer would expect to suffer a
loss. This loss should be less than the loss from purchasing the underlying
instrument directly, however, because the premium received for writing the
option should mitigate the effects of the decline.
Writing a call option obligates the Fund to sell or deliver the
option's underlying instrument, in return for the strike price, upon exercise
of the option. The characteristics of writing call options are similar to
those of writing put options, except that writing calls generally is a
profitable strategy if prices remain the same or fall. Through receipt of the
option premium, a call writer mitigates the effects of a price decline. At the
same time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is
greater, a call writer gives up some ability to participate in security price
increases.
COMBINED POSITIONS. The Fund may purchase and write options in
combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of the overall
position. For example, the Fund may purchase a put option and write a call
option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call
option at one strike price and buying a call option at a lower price, in order
to reduce the risk of the written call option in the event of a substantial
price increase. Because combined options positions involve multiple trades,
they result in higher transaction costs and may be more difficult to open and
close out.
CORRELATION OF PRICE CHANGES. Because there are a limited number of
types of exchange-traded options and futures contracts, it is likely that the
standardized contracts available will not match the Fund's current or
anticipated investments exactly. The Fund may invest in options and futures
contracts based on securities with different issuers, maturities, or other
characteristics from the securities in which it typically invests which
involves a risk that the options or futures position will not track the
performance of the Fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the Fund's
investments well. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time
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remaining until expiration of the contract, which may not affect security
prices the same way. Imperfect correlation may also result from differing
levels of demand in the options and futures markets and the securities markets,
from structural differences in how options and futures and securities are
traded, or from imposition of daily price fluctuation limits or trading halts.
The Fund may purchase or sell options and futures contracts with a greater or
lesser value than the securities it wishes to hedge or intends to purchase in
order to attempt to compensate for differences in volatility between the
contract and the securities, although this may not be successful in all cases.
If price changes in the Fund's options or futures positions are poorly
correlated with its other investments, the positions may fail to produce
anticipated gains or result in losses that are not offset by gains in other
investments.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS. There is no assurance a
liquid secondary market will exist for any particular options or futures
contract at any particular time. Options may have relatively low trading
volume and liquidity if their strike prices are not close to the underlying
instrument's current price. In addition, exchanges may establish daily price
fluctuation limits for options and futures contracts, and may halt trading if a
contract's price moves upward or downward more than the limit in a given day.
On volatile trading days when the price fluctuation limit is reached or a
trading halt is imposed, it may be impossible for the Fund to enter into new
positions or close out existing positions. If the secondary market for a
contract is not liquid because of price fluctuation limits or otherwise, it
could prevent prompt liquidation of unfavorable positions, and potentially
could require the Fund to continue to hold a position until delivery or
expiration regardless of changes in its value. As a result, the Fund's access
to other assets held to cover its options or futures positions could also be
impaired.
OTC OPTIONS. Unlike exchange-traded options, which are standardized
with respect to the underlying instrument, expiration date, contract size, and
strike price, the terms of over-the-counter options (options not traded on
exchanges) generally are established through negotiation with the other party
to the option contract. While this type of arrangement allows the Fund greater
flexibility to tailor an option to its needs, OTC options generally involve
greater credit risk than exchange-traded options, which are guaranteed by the
clearing organization of the exchanges where they are traded.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. The Fund will
comply with guidelines established by the SEC with respect to coverage of
options and futures strategies by mutual funds, and if the guidelines so
require will set aside appropriate liquid assets in a segregated custodial
account in the amount prescribed. Securities held in a segregated account
cannot be sold while the futures or option strategy is outstanding, unless they
are replaced with other suitable assets. As a result, there is a possibility
that segregation of a large percentage of the Fund's assets could impede
portfolio management or the Fund's ability to meet redemption requests or other
current obligations.
WARRANTS. Warrants are securities that give the Fund the right to
purchase equity securities from the issuer at a specific price (the strike
price) for a limited period of time. The strike price of warrants typically is
much lower than the current market price of the underlying securities, yet they
are subject to greater price fluctuations. As a result, warrants may be more
volatile investments than the underlying securities and may offer greater
potential for capital appreciation as well as capital loss.
Warrants do not entitle a holder to dividends or voting rights with
respect to the underlying securities and do not represent any rights in the
assets of the issuing company. Also, the value of the warrant does not
necessarily change with the value of the underlying securities and a warrant
ceases to have value if it is not exercised prior to the expiration date.
These factors can make warrants more speculative than other types of
investments.
BANKERS' ACCEPTANCES AND CERTIFICATES OF DEPOSIT . The Fund may invest
in bankers' acceptances, certificates of deposit, and demand and time deposits.
Bankers' acceptances are negotiable drafts or bills of exchange typically drawn
by an importer or exporter to pay for specific merchandise, which are "accepted"
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity.
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Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank or a savings and loan association for a definite
period of time and earning a specified return.
Bankers' acceptances will be those guaranteed by domestic and foreign
banks, if at the time of purchase such banks have capital, surplus, and
undivided profits in excess of $100,000,000 (as of the date of their most
recently published financial statements). Certificates of deposit and demand
and time deposits invested in by the Victory Portfolios will be those of
domestic and foreign banks and savings and loan associations, if (a) at the
time of purchase such financial institutions have capital, surplus, and
undivided profits in excess of $100,000,000 (as of the date of their most
recently published financial statements) or (b) the principal amount of the
instrument is insured in full by the Federal Deposit Insurance Corporation or
the Savings Association Insurance Fund.
The Fund may also invest in Eurodollar Certificates of Deposit
("ECDs") which are U.S. dollar-denominated certificates of deposit issued by
branches of foreign and domestic banks located outside the United States,
Yankee Certificates of Deposit ("Yankee CDs") which are certificates of deposit
issued by a U.S. branch of a foreign bank denominated in U.S. dollars and held
in the United States, Eurodollar Time Deposits ("ETDs") which are U.S.
dollar-denominated deposits in a foreign branch of a U.S. bank or a foreign
bank, and Canadian Time Deposits ("CTDs") which are U.S. dollar-denominated
certificates of deposit issued by Canadian offices of major Canadian Banks.
COMMERCIAL PAPER. Commercial paper consists of unsecured promissory
notes issued by corporations. Except as noted below with respect to variable
amount master demand notes, issues of commercial paper normally have maturities
of less than nine months and fixed rates of return.
The Fund will purchase only commercial paper rated in one of the two
highest categories at the time of purchase by an NRSRO or, if not rated, found
by the Victory Portfolios' Board of Trustees to present minimal credit risks
and to be of comparable quality to instruments that are rated high quality
(i.e., in one of the two top ratings categories) by a NRSRO that is neither
controlling, controlled by, or under common control with the issuer of, or any
issuer, guarantor, or provider of credit support for, the instruments. For a
description of the rating symbols of each NRSRO see the Appendix to this
Statement of Additional Information.
VARIABLE AMOUNT MASTER DEMAND NOTES . Variable amount master demand
notes, in which the Fund may invest, are unsecured demand notes that permit the
indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate according to the terms of the instrument. Although there is no
secondary market for these notes, the Fund may demand payment of principal and
accrued interest at any time and may resell the notes at any time to a third
party. The absence of an active secondary market, however, could make it
difficult for the Fund to dispose of a variable amount master demand note if the
issuer defaulted on its payment obligations, and the Fund could, for this or
other reasons, suffer a loss to the extent of the default. While the notes are
not typically rated by credit rating agencies, issuers of variable amount master
demand notes must satisfy the same criteria as set forth above for unrated
commercial paper, and Key Advisers or the Sub-Adviser will continuously monitor
the issuer's financial status and ability to make payments due under the
instrument. Where necessary to ensure that a note is of "high quality," the Fund
will require that the issuer's obligation to pay the principal of the note be
backed by an unconditional bank letter or line of credit, guarantee or
commitment to lend. For purposes of the Fund's investment policies, a variable
amount master note will be deemed to have a maturity equal to the longer of the
period of time remaining until the next readjustment of its interest rate or the
period of time remaining until the principal amount can be recovered from the
issuer through demand. (See Variable and Floating Rate Notes.)
U.S. GOVERNMENT OBLIGATIONS. The Fund may invest in obligations
issued or guaranteed by the U.S. Government, its agencies and
instrumentalities. Obligations of certain agencies and instrumentalities of
the U.S. Government are supported by the full faith and credit of the U.S.
Treasury; others are supported by the right of the issuer to borrow from the
U.S. Treasury; others are supported by the discretionary authority of the U.S.
Government
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<PAGE> 556
to purchase the agency's obligations; and still others are supported only by
the credit of the agency or instrumentality. No assurance can be given that
the U.S. Government will provide financial support to U.S. Government-sponsored
agencies or instrumentalities if it is not obligated to do so by law. The Fund
will invest in the obligations of such agencies and instrumentalities only when
Key Advisers or the Sub-Adviser believes that the credit risk with respect
thereto is minimal.
SECURITIES LENDING. The Fund may lend its portfolio securities to
broker-dealers, banks or institutional borrowers of securities. The Fund must
receive a minimum of 100% collateral, plus any interest due in the form of cash
or U.S. Government securities. This collateral must be valued daily and should
the market value of the loaned securities increase, the borrower must furnish
additional collateral to the Fund. During the time portfolio securities are on
loan, the borrower will pay the Fund any dividends or interest paid on such
securities plus any interest negotiated between the parties to the lending
agreement. Loans will be subject to termination by the Fund or the borrower at
any time. While the Fund will not have the right to vote securities on loan,
it intends to terminate the loan and regain the right to vote if that is
considered important with respect to the investment. The Fund will only enter
into loan arrangements with broker-dealers, banks or other institutions which
Key Advisers or the Sub- Adviser has determined are creditworthy under
guidelines established by the Victory Portfolios' Trustees.
VARIABLE AND FLOATING RATE NOTES . The Fund may acquire variable and
floating rate notes, subject to the Victory Portfolios' investment objectives,
policies and restrictions. A variable rate note is one whose terms provide for
the readjustment of its interest rate on set dates and which, upon such
readjustment, can reasonably be expected to have a market value that
approximates its par value. A floating rate note is one whose terms provide for
the readjustment of its interest rate whenever a specified interest rate changes
and which, at any time, can reasonably be expected to have a market value that
approximates its par value. Such notes are frequently not rated by credit rating
agencies; however, unrated variable and floating rate notes purchased by the
Fund will only be those determined by Key Advisers or the Sub-Adviser, under
guidelines established by the Trustees, to pose minimal credit risks and to be
of comparable quality, at the time of purchase, to rated instruments eligible
for purchase under the Fund's investment policies. In making such
determinations, Key Advisers or the Sub-Adviser will consider the earning power,
cash flow and other liquidity ratios of the issuers of such notes (such issuers
include financial, merchandising, bank holding and other companies) and will
continuously monitor their financial condition. Although there may be no active
secondary market with respect to a particular variable or floating rate note
purchased by the Fund, the Fund may resell the note at any time to a third
party. The absence of an active secondary market, however, could make it
difficult for the Fund to dispose of a variable or floating rate note in the
event the issuer of the note defaulted on its payment obligations and the fund
could, for this or other reasons, suffer a loss to the extent of the default.
Variable or floating rate notes may be secured by bank letters of credit.
Variable or floating rate notes may have maturities of more than one
year, as follows:
1. A note that is issued or guaranteed by the United States
government or any agency thereof and which has a variable rate of interest
readjusted no less frequently than annually will be deemed by the Victory
Portfolios to have a maturity equal to the period remaining until the next
readjustment of the interest rate.
2. A variable rate note, the principal amount of which is
scheduled on the face of the instrument to be paid in one year or less, will be
deemed by the Victory Portfolios to have a maturity equal to the period
remaining until the next readjustment of the interest rate.
3. A variable rate note that is subject to a demand feature
scheduled to be paid in one year or more will be deemed by the Victory
Portfolios to have a maturity equal to the longer of the period remaining until
the next readjustment of the interest rate or the period remaining until the
principal amount can be recovered through demand.
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<PAGE> 557
4. A floating rate note that is subject to a demand feature will
be deemed by the Victory Portfolios to have a maturity equal to the period
remaining until the principal amount can be recovered through demand.
As used above, a note is "subject to a demand feature" where the Fund
is entitled to receive the principal amount of the note either at any time on
no more than 30 days' notice or at specified intervals not exceeding one year
and upon no more than 30 days' notice.
OTHER INVESTMENT COMPANIES . The Fund may invest up to 5% of its total
assets in the securities of any one investment company, but may not own more
than 3% of the securities of any one investment company or invest more than 10%
of its total assets in the securities of other investment companies. Pursuant
to an exemptive order received by the Victory Portfolios from the Securities and
Exchange Commission, the Fund may invest in the money market funds of the
Victory Portfolios. Key Advisers or the Sub-Adviser will waive its fee with
respect to assets of a fund of the Victory Portfolios invested in any of the
money market funds of the Victory Portfolios, and, to the extent required by the
laws of any state in which the Fund's shares are sold, Key Advisers or the
Sub-Adviser will waive its investment advisory fee as to all assets invested in
other investment companies. Because such other investment companies employ an
investment adviser, such investment by the Fund will cause shareholders to bear
duplicative fees, such as management fees.
REVERSE REPURCHASE AGREEMENTS . The Fund may borrow funds for
temporary purposes by entering into reverse repurchase agreements in accordance
with the investment restrictions described below. Pursuant to such agreements,
the Fund would sell portfolio securities to financial institutions such as banks
and broker-dealers, and agree to repurchase them at a mutually agreed-upon date
and price. At the time the Fund enters into a reverse repurchase agreement, it
will place in a segregated custodial account assets (such as cash or other
liquid high-grade securities) consistent with the Fund's investment restrictions
having a value equal to the repurchase price (including accrued interest); the
collateral will be marked-to-market on a daily basis, and will be continuously
monitored to ensure that such equivalent value is maintained. Reverse
repurchase agreements involve the risk that the market value of the securities
sold by the Fund may decline below the price at which the Fund is obligated to
repurchase the securities.
TEMPORARY INVESTMENTS. The Fund may also invest temporarily in high
quality investments or cash during times of unusual market conditions for
defensive purposes and in order to accommodate shareholder redemption requests
although currently it does not intend to do so. Any portion of the Fund's
assets maintained in cash will reduce the amount of assets in securities and
thereby reduce the Fund's yield or total return.
"WHEN-ISSUED" SECURITIES. As discussed in the Prospectus, the Fund
may purchase securities on a "when issued" basis (i.e., for delivery beyond the
normal settlement date at a stated price and yield). When the Fund agrees to
purchase securities on a "when issued" basis, the Victory Portfolios' custodian
will set aside cash or liquid portfolio securities equal to the amount of the
commitment in a separate account. Normally, the custodian will set aside
portfolio securities to satisfy the purchase commitment, and in such a case,
the Fund may be required subsequently to place additional assets in the
separate account in order to assure that the value of the account remains equal
to the amount of the Fund's commitment. It may be expected that the Fund's net
assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
When the Fund engages in "when-issued" transactions, it relies on the
seller to consummate the trade. Failure of the seller to do so may result in
the Fund incurring a loss or missing the opportunity to obtain a price
considered to be advantageous. The Fund does not intend to purchase "when
issued" securities for speculative purposes, but only in furtherance of its
investment objective.
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<PAGE> 558
MISCELLANEOUS SECURITIES. The Fund can invest in various securities
issued by domestic and foreign corporations, including preferred stocks and
investment grade corporate bonds, notes, and warrants. Bonds are long-term
corporate debt instruments secured by some or all of the issuer's assets,
debentures are general corporate debt obligations backed only by the integrity
of the borrower, and warrants are instruments that entitle the holder to
purchase a certain amount of common stock at a specified price, which price is
usually higher than the current market price at the time of issuance.
Preferred stocks are instruments that combine qualities both of equity and debt
securities. Individual issues of preferred stock will have those rights and
liabilities that are spelled out in the governing document. Preferred stocks
usually pay a fixed dividend per quarter (or annum) and are senior to common
stock in terms of liquidation and dividends rights, and preferred stocks
typically do not have voting rights.
The Fund also may invest, consistent with its investment objective and
policies, in zero coupon bonds, which are debt instruments that do not pay
current interest and are typically sold at prices greatly discounted from par
value. The return on a zero-coupon obligation, when held to maturity, equals
the difference between the par value and the original purchase price.
Zero-coupon obligations have greater price volatility than coupon obligations.
FUTURE DEVELOPMENTS. As discussed in the Prospectus, the Fund may
take advantage of other investment practices which are not at present
contemplated for use by the Fund or which currently are not available but which
may be developed, to the extent such investment practices are both consistent
with the Fund's investment objective and are legally permissible for the Fund.
Such investment practices, if they arise, may involve risks which exceed those
involved in the activities described in the Prospectus and Statement of
Additional Information. Prior to commencing any new investment practice, the
Fund will notify shareholders by means of prospectus supplement.
The Fund does not engage in trading for short-term profits, and its
portfolio turnover rate is not expected to exceed 200% (annualized).
Nevertheless, changes in the Fund will be made promptly when determined to be
advisable by reason of developments not foreseen at the time of the initial
investment decision and usually without reference to the length of time a
security has been held. Accordingly, portfolio turnover rates are not
considered a limiting factor in the execution of investment decisions.
The following fundamental investment limitations cannot be changed
without approval by a "majority of the outstanding voting securities" (as
defined in the Investment Company Act of 1940, as amended (the "1940 Act") of
the Fund.
The Fund may not (unless otherwise indicated):
(1) issue any senior security (as defined in the 1940 Act), except
that (a) the Fund may engage in transactions which may result
in the issuance of senior securities to the extent permitted
under applicable regulations and interpretation of the 1940
Act or an exemptive order; (b) the Fund may acquire other
securities that may be deemed senior securities to the extent
permitted under applicable regulations or interpretations of
the 1940 Act; (c) subject to the restrictions set forth below,
the Fund may borrow money as authorized by the 1940 Act;
(2) with respect to 75% of the Fund's total assets, purchase the
securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, (a) more than 5% of the
Fund's total assets would be invested in the securities of
that issuer, or (b) the Fund would hold more than 10% of the
outstanding voting securities of that issuer;
(3) borrow money, except that (a) the Fund may enter into
commitments to purchase securities in accordance with its
investment program, including delayed-delivery and when-issued
securities and reverse repurchase agreements, provided that
the total amount of any such borrowing does not
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<PAGE> 559
exceed 33 1/3% of the Fund's total assets; and (b) the Fund
may borrow money for temporary or emergency purposes in an
amount not exceeding 5% of the value of its total assets at
the time when the loan is made. Any borrowings representing
more than 5% of the Fund's total assets must be repaid before
the Fund may make additional investments;
(4) underwrite securities issued by others, except to the extent
that the Fund may be considered an underwriter within the
meaning of the Securities Act of 1933 in the disposition of
restricted securities;
(5) purchase the securities of any issuer (other than securities
issued or guaranteed by the U.S. government or any of its
agencies or instrumentalities) if, as a result, more than 25%
of the Fund's total assets would be invested in the securities
of companies whose principal business activities are in the
same industry;
(6) purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall
not prevent the Fund from investing in securities or other
instruments backed by real estate or securities of companies
engaged in the real estate business);
(7) purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments (but
this shall not prevent the fund from purchasing or selling
options and futures contracts or from investing in securities
or other instruments backed by physical commodities); or
(8) lend any security or make any other loan if, as a result, more
than 33 1/3% of its total assets would be lent to other
parties, but this limitation does not apply to purchases of
debt securities or to repurchase agreements.
The following investment limitations are nonfundamental and may be
changed without shareholder approval:
(i) The Fund does not currently intend to sell securities short,
unless it owns or has the right to obtain securities equivalent in
kind and amount to the securities sold short, and provided that
transactions in futures contracts and options are not deemed to
constitute selling securities short.
(ii) The Fund does not currently intend to purchase securities on
margin, except that the Fund may obtain such short-term credits
as are necessary for the clearance of transactions, and provided
that margin payments in connection with futures contracts and
options on futures contracts shall not constitute purchasing
securities on margin.
(iii) The Fund may borrow money only from a bank.
(iv) The Fund does not currently intend to purchase any security if,
as a result, more than 15% of its net assets would be invested in
securities that are deemed to be illiquid because they are
subject to legal or contractual restrictions on resale or because
they cannot be sold or disposed of in the ordinary course of
business at approximately the prices at which they are valued.
(v) The Fund does not currently intend to invest in securities of
real estate investment trusts that are not readily marketable, or
to invest in securities of real estate limited partnerships that
are not listed on the New York Stock Exchange or the American
Stock Exchange or traded on the NASDAQ National Market System.
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<PAGE> 560
(vi) The Fund does not currently intend to make loans, but this
limitation does not apply to purchases of debt securities or to
repurchase agreements.
(vii) The Fund shall not invest in the securities of other investment
companies, except that the Fund may invest in the securities of
other investment companies that are not "affiliated persons" of
the Fund (unless permitted by SEC regulations or exemptive
relief) and that limit their investments to securities
appropriate for the Fund, provided investment by the Fund is
limited to: (a) ten percent of the Fund's assets; (b) five
percent of the Fund's total assets in the shares of a single
investment company; and (c) not more than three percent of the
net assets of any one acquired investment company. The
investment adviser will waive the portion of its fee attributable
to the assets of the Fund invested in such investment companies
to the extent required by the laws of any jurisdiction in which
shares of the Fund are registered for sale.
State Regulations
In addition, the Fund, so long as its shares are registered under the
securities laws of the State of Texas and such restrictions are required as a
consequence of such registration, is subject to the following non-fundamental
policies, which may be modified in the future by the Trustees without a vote of
the Fund's shareholders: (i) Fund has represented to the Texas State Securities
Board, that it will not invest in oil, gas or mineral leases or purchase or
sell real property (including limited partnership interests, but excluding
readily marketable securities of companies which invest in real estate); and
(ii) Fund has represented to the Texas State Securities Board that it will not
invest more than 5% of their net assets in warrants valued at the lower of cost
or market; provided that, included within that amount, but not to exceed 2% of
net assets, may be warrants which are not listed on the New York or American
Stock Exchanges. For purposes of this restriction, warrants acquired in units
or attached to securities are deemed to be without value.
The policies and limitations listed above supplement those set forth
in the Prospectus. Unless otherwise noted, whenever an investment policy or
limitation states a maximum percentage of the Fund's assets that may be
invested in any security or other asset, or sets forth a policy regarding
quality standards, such standard or percentage limitation will be determined
immediately after and as a result of the Fund's acquisition of such security or
other asset except in the case of borrowing (or other activities that may be
deemed to result in the issuance of a "senior security" under the 1940 Act).
Accordingly, any subsequent change in values, net assets, or other
circumstances will not be considered when determining whether the investment
complies with the Fund's investment policies and limitations. If the value of
the Fund's holdings of illiquid securities at any time exceeds the percentage
limitation applicable at the time of acquisition due to subsequent fluctuations
in value or other reasons, the Board of Trustees will consider what actions, if
any, are appropriate to maintain adequate liquidity.
FUTURE DEVELOPMENTS
The Fund may take advantage of other investment practices which are
not at present contemplated for use by the Fund or which currently are not
available but which may be developed, to the extent such investment practices
are both consistent with the Fund's investment objective and are legally
permissible for the Fund. Such investment practices, if they arise, may
involve risks which exceed those involved in the activities described in the
Prospectus and Statement of Additional Information. Prior to commencing any
new investment practice, the Fund will notify shareholders by means of
prospectus supplement.
Portfolio Turnover
The turnover rate stated in the Prospectus for the Fund's investment
portfolio is calculated by dividing the lesser of the Fund's purchases or sales
of portfolio securities for the year by the monthly average value of the
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portfolio securities. The calculation excludes all securities whose
maturities, at the time of acquisition, were one year or less.
VALUATION OF PORTFOLIO SECURITIES
Investment securities held by the Fund are valued on the basis of
valuations provided by an independent pricing service, approved by the Board of
Trustees, which uses information with respect to transactions of a security,
quotations from dealers, market transactions in comparable securities, and
various relationships between securities, in determining value. Specific
investment securities which are not priced by the approved pricing service will
be valued according to quotations obtained from dealers who are market makers
in those securities. Investment securities with less than 60 days to maturity
when purchased are valued at amortized cost which approximates market value.
Investment securities not having readily available market quotations will be
priced at fair value using a methodology approved in good faith by the Board of
Trustees.
PERFORMANCE
As described in the Prospectus, from time to time the "standardized
yield," "dividend yield," "average annual total return," "total return," and
"total return at net asset value" of an investment in each class of Fund shares
may be advertised. An explanation of how yields and total returns are
calculated and the components of those calculations are set forth below.
Yield and total return information may be useful to investors in
reviewing the Fund's performance. The Fund's advertisement of its performance
must, under applicable Commission rules, include the average annual total
returns for the Fund for the 1, 5 and 10-year period (or the life of the class,
if less) as of the most recently ended calendar quarter. This enables an
investor to compare the Fund's performance to the performance of other funds
for the same periods. However, a number of factors should be considered before
using such information as a basis for comparison with other investments. An
investment in the Fund is not insured; its yield and total return are not
guaranteed and normally will fluctuate on a daily basis. When redeemed, an
investor's shares may be worth more or less than their original cost. Yield
and total return for any given past period are not a prediction or
representation by the Victory Portfolios of future yields or rates of return on
its shares. The yield and total returns of the Fund are affected by portfolio
quality, portfolio maturity, the type of investments the Fund holds and its
operating expenses.
STANDARDIZED YIELDS. The Fund's "yield" (referred to as "standardized
yield") for a given 30-day period for a class of shares is calculated using the
following formula set forth in rules adopted by the Commission that apply to
all funds that quote yields:
Standardized Yield = 2 [(a-b + 1)6 - 1]
---
cd
The symbols above represent the following factors:
a = dividends and interest earned during the 30-day period.
b = expenses accrued for the period (net of any expense
reimbursements).
c = the average daily number of shares of that class outstanding
during the 30-day period that were entitled to receive
dividends.
d = the maximum offering price per share of the class on the last
day of the period, adjusted for undistributed net investment
income.
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<PAGE> 562
The standardized yield for a 30-day period may differ from its yield
for any other period. The Commission formula assumes that the standardized
yield for a 30-day period occurs at a constant rate for a six-month period and
is annualized at the end of the six-month period. This standardized yield is
not based on actual distributions paid by the Fund to shareholders in the
30-day period, but is a hypothetical yield based upon the net investment income
from the Fund's portfolio investments calculated for that period. The
standardized yield may differ from the "dividend yield," described below.
Additionally, because each class of shares is subject to different expenses, it
is likely that the standardized yields of the Fund classes of shares will
differ. The yield for the 30-day period ended October 31, 1995 was ____% .
DIVIDEND YIELD AND DISTRIBUTION RETURN . From time to time the Fund
may quote a "dividend yield" or a "distribution return." Dividend yield is
based on the share dividends derived from net investment income during a stated
period. Distribution return includes dividends derived from net investment
income and from realized capital gains declared during a stated period. Under
those calculations, the dividends and/or distributions declared during a stated
period of one year or less (for example, 30 days) are added together, and the
sum is divided by the maximum offering price per share of that class A) on the
last day of the period. When the result is annualized for a period of less than
one year, the "dividend yield" is calculated as follows:
Dividend Yield = Dividends + Number of days (accrual period) x 365
---------------------
Max. Offering Price (last day of period)
The maximum offering price for shares includes the maximum front-end
sales charge.
From time to time similar yield or distribution return calculations
may also be made using the net asset value (instead of its respective maximum
offering price) at the end of the period. The dividend yields at maximum
offering price and net asset value for the 30-day period ended ________, 1995
were ____% and ____%, respectively.
TOTAL RETURNS. The "average annual total return" is an average annual
compounded rate of return for each year in a specified number of years. It is
the rate of return based on the change in value of a hypothetical initial
investment of $1,000 ("P" in the formula below) held for a number of years
("n") to achieve an Ending Redeemable Value ("ERV"), according to the following
formula:
(ERV)(1n) - 1 = Average Annual Total Return
---
( P )
The cumulative "total return" calculation measures the change in value
of a hypothetical investment of $1,000 over an entire period of years. Its
calculation uses some of the same factors as average annual total return, but
it does not average the rate of return on an annual basis. Total return is
determined as follows:
ERV - P = Total Return
---
P
In calculating total returns, the current maximum sales charge of
4.75% (as a percentage of the offering price) is deducted from the initial
investment ("P") (unless the return is shown at net asset value, as discussed
below). Total returns also assume that all dividends and capital gains
distributions during the period are reinvested to buy additional shares at net
asset value per share, and that the investment is redeemed at the end of the
period. The average annual total return and cumulative total return for the
Fund and the Predecessor Fund for the period ________________ to October 31,
1994 and for the fiscal year ended October 31, 1995 at maximum offering price
were ___% and ____%, respectively. For the one and five year periods ended
October 31, 1995, average annual total return was ______% and _____%,
respectively.
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<PAGE> 563
From time to time the Fund may also quote an "average annual total
return at net asset value" or a cumulative "total return at net asset value."
It is based on the difference in net asset value per share at the beginning and
the end of the period for a hypothetical investment in that class of shares
(without considering front-end or contingent sales charges) and takes into
consideration the reinvestment of dividends and capital gains distributions.
The average annual total return and cumulative total return for the Fund and
the Predecessor Fund for the period ________________ to October 31, 1994 and
for the fiscal year ended October 31, 1995, at net asset value, was ____% and
___%, respectively. For the one and five year periods ended October 31, 1995,
average annual total return was ___% and ___%, respectively.
OTHER PERFORMANCE COMPARISONS . From time to time the Fund may publish
the ranking of the performance of its shares by Lipper Analytical Services, Inc.
("Lipper"), a widely-recognized independent mutual fund monitoring service.
Lipper monitors the performance of regulated investment companies, including the
Fund, and ranks the performance of the Fund against (i) all other funds,
excluding money market funds, and (ii) all other government bond funds. The
Lipper performance rankings are based on total return that includes the
reinvestment of capital gains distributions and income dividends but does not
take sales charges or taxes into consideration.
From time to time the Fund may publish the ranking of the performance
of its shares by Morningstar, Inc., an independent mutual fund monitoring
service that ranks mutual funds, including the Fund, in broad investment
categories (equity, taxable bond, tax-exempt and other) monthly, based upon
each fund's three, five and ten-year average annual total returns (when
available) and a risk adjustment factor that reflects Fund performance relative
to three-month U.S. Treasury bill monthly returns. Such returns are adjusted
for fees and sales loads. There are five ranking categories with a
corresponding number of stars: highest (5), above average (4), neutral (3),
below average (2) and lowest (1). Ten percent of the funds, series or classes
in an investment category receive 5 stars, 22.5% receive 4 stars, 35% receive 3
stars, 22.5% receive 2 stars, and the bottom 10% receive one star. Morningstar
ranks the shares of the Fund in relation to other taxable bond funds.
The total return on an investment made in shares of the Fund may be
compared with the performance for the same period of one or more of the
following indices: the Consumer Price Index, the Salomon Brothers World
Government Bond Index, the Standard & Poor's 500 Index, the Shearson Lehman
Government/Corporate Bond Index, the Lehman Aggregate Bond Index, and the J.P.
Morgan Government Bond Index. Other indices may be used from time to time.
The Consumer Price Index is generally considered to be a measure of inflation.
The Salomon Brothers World Government Bond Index generally represents the
performance of government debt securities of various markets throughout the
world, including the United States. The Lehman Government/Corporate Bond Index
generally represents the performance of intermediate and long-term government
and investment grade corporate debt securities. The Lehman Aggregate Bond
Index measures the performance of U.S. corporate bond issues, U.S. government
securities and mortgaged-backed securities. The J.P. Morgan Government Bond
Index generally represents the performance of government bonds issued by
various countries including the United States. The S&P 500 Index is a
composite index of 500 common stocks generally regarded as an index of U.S.
stock market performance. The foregoing bond indices are unmanaged indices of
securities that do not reflect reinvestment of capital gains or take investment
costs into consideration, as these items are not application to indices.
From time to time, the yields and the total returns of the Fund may be
quoted in and compared to other mutual funds with similar investment objective
in advertisements, shareholder reports or other communications to shareholders.
The Fund may also include calculations in such communications that describe
hypothetical investment results. (Such performance examples will be based on
an express set of assumptions and are not indicative of the performance of any
Fund.) Such calculations may from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of the Fund would increase the value, not only
of the original Fund investment, but also of the additional Fund shares
received through reinvestment. As a result, the value of the Fund investment
would increase more quickly than if
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<PAGE> 564
dividends or other distributions had been paid in cash. The Fund may also
include discussions or illustrations of the potential investment goals of a
prospective investor (including but not limited to tax and/or retirement
planning), investment management techniques, policies or investment suitability
of Fund, economic conditions, legislative developments (including pending
legislation), the effects of inflation and historical performance of various
asset classes, including but not limited to stocks, bonds and Treasury bills.
From time to time advertisements or communications to shareholders may
summarize the substance of information contained in shareholder reports
(including the investment composition of the Fund, as well as the views of the
investment adviser as to current market, economic, trade and interest rate
trends, legislative, regulatory and monetary developments, investment
strategies and related matters believed to be of relevance to the Fund. The
Fund may also include in advertisements, charts, graphs or drawings which
illustrate the potential risks and rewards of investment in various investment
vehicles, including but not limited to stock, bonds, Treasury bills and shares
of Fund as well as charts or graphs which illustrate strategies such as dollar
cost averaging, and comparisons of hypothetical yields of investment in
tax-exempt versus taxable investments. In addition, advertisements or
shareholder communications may include a discussion of certain attributes or
benefits to be derived by an investment in Fund. Such advertisements or
communications may include symbols, headlines or other material which highlight
or summarize the information discussed in more detail therein. With proper
authorization, Fund may reprint articles (or excerpts) written regarding the
Fund and provide them to prospective shareholders. Performance information
with respect to the Fund is generally available by calling 1-800-539-3863.
Investors may also judge, and the Fund may at times advertise,
performance by comparing it to the performance of other mutual funds or mutual
fund portfolios with comparable investment objectives and policies, which
performance may be contained in various unmanaged mutual fund or market indices
or rankings such as those prepared by Dow Jones & Co., Inc., Standard & Poor's
Corporation, Lehman Brothers, Merrill Lynch, and Salomon Brothers, and in
publications issued by Lipper Analytical Services, Inc. and in the following
publications: IBC/Donoghue's Money Fund Reports, Ibottson Associates, Inc.,
Morningstar, CDA/Wiesenberger, Money Magazine, Forbes, Barron's, The Wall
Street Journal, The New York Times, Business Week, American Banker, Fortune,
Institutional Investor, U.S.A. Today. In addition to yield information,
general information about the Fund that appears in a publication such as those
mentioned above may also be quoted or reproduced in advertisements or in
reports to shareholders.
Advertisements and sales literature may include discussions of
specifics of the portfolio manager's investment strategy and process,
including, but not limited to, descriptions of security selection and analysis.
Advertisements may also include descriptive information about the
investment adviser, including, but not limited to, its status within the
industry, other services and products it makes available, total assets under
management, its investment philosophy.
When comparing yield, total return and investment risk of an
investment in the Fund with other investments, investors should understand that
certain other investments have different risk characteristics than an
investment in shares of the Fund. For example, certificates of deposit may
have fixed rates of return and may be insured as to principal and interest by
the FDIC, while the Fund's returns will fluctuate and its share values and
returns are not guaranteed. Money market accounts offered by banks also may be
insured by the FDIC and may offer stability of principal. U.S. Treasury
securities are guaranteed as to principal and interest by the full faith and
credit of the U.S. government. Money market mutual funds may seek to offer a
fixed price per share.
ADDITIONAL PURCHASE EXCHANGE AND REDEMPTION INFORMATION
The Victory Portfolios (see "Description of Victory Portfolios" below)
is open for business and the NAV is calculated on each Business Day. A
Business Day is every day on which the NYSE is open for business, the Federal
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<PAGE> 565
Reserve Bank of Cleveland is open and any other day (other than a day on which
no shares of the Fund are tendered for redemption and no order to purchase any
shares is received) during which there is sufficient trading in portfolio
instruments that the Fund's net asset value per share might be materially
affected. The NAV of each class is determined and its shares are priced as of
the close of regular trading of the NYSE (generally 4:00 p.m. Eastern time (the
"Valuation Time")) on each Business Day of the Fund. The NYSE or the Federal
Reserve Bank of Cleveland will not be open in observance of the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day,
Thanksgiving Day, and Christmas Day. The holiday closing schedule is subject
to change.
When the NYSE is closed, or when trading is restricted for any reason
other than its customary weekend or holiday closings, or under emergency
circumstances as determined by the Commission to warrant such action, the
Fund's Transfer Agent will determine the Fund's NAVs at Valuation Time. The
Fund's NAV may be affected to the extent that its securities are traded on days
that are not Business Days.
If, in the opinion of the Trustees, conditions exist which make cash
payment undesirable, redemption payments may be made in whole or in part in
securities or other property, valued for this purpose as they are valued in
computing the NAV of each class of the Fund. Shareholders receiving securities
or other property on redemption may realize a gain or loss for tax purposes and
will incur any costs of sale as well as the associated inconveniences.
Pursuant to Rule 11a-3 under the 1940 Act, the Fund is required to
give shareholders at least 60 days' notice prior to terminating or modifying
the Fund's exchange privilege. Under the Rule, the 60-day notification
requirement may be waived if (i) the only effect of a modification would be to
reduce or eliminate an administrative fee, redemption fee or deferred sales
charge ordinarily payable at the time of exchange or (ii) the Fund temporarily
suspends the offering of shares as permitted under the 1940 Act or by the SEC
or because it is unable to invest amounts effectively in accordance with its
investment objective and policies.
In the Prospectus, the Victory Portfolios, Key Advisers and the
Sub-Adviser have notified shareholders that they reserve the right at any time
without prior notice to shareholders to refuse exchange purchases by any person
or group if, in Key Advisers or the Sub-Adviser's judgment, the Fund would be
unable to invest effectively in accordance with its investment objective and
policies, or would otherwise potentially be adversely affected.
ADDITIONAL PURCHASE INFORMATION
REDUCED SALES CHARGE. Reduced sales charges are applicable to
purchases of $50,000 or more alone or in combination with purchases of shares
of other Victory Portfolios made at any one time. To obtain the reduction of
the sales charge, you or your investment professional must notify the Transfer
Agent at the time of purchase whenever a quantity discount is applicable to
your purchase. Upon such notification, you will receive the lowest applicable
sales charge.
In addition to investing at one time in any combination of shares of
the Victory Portfolios in an amount entitling you to a reduced sales charge,
you may qualify for a reduction in the sales charge under the following
programs:
COMBINED PURCHASES. When you invest in shares of the Victory
Portfolios for several accounts at the same time, you may combine these
investments into a single transaction if purchased through one investment
professional, and if the total is $50,000 or more. The following may qualify
for this privilege: an individual, or "company" as defined in Section 2(a)(8)
of the 1940 Act; an individual, spouse, and their children under age 21
purchasing for his, her, or their own account; a trustee, administrator or
other fiduciary purchasing for a single trust estate or single
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<PAGE> 566
fiduciary account or for a single or a parent-subsidiary group of "employee
benefit plans" (as defined in Section 3(3) of ERISA); and tax-exempt
organizations under Section 501(c)(3) of the Internal Revenue Code.
RIGHTS OF ACCUMULATION. Your "Rights of Accumulation" permit reduced
sales charges on future purchases of shares after you have reached a new
breakpoint. You can add the value of existing Victory Portfolios shares held
by you, your spouse, and your children under age 21, determined at the previous
day's NAV at the close of business, to the amount of your new purchase valued
at the current offering price to determine your reduced sales charge.
LETTER OF INTENT . If you anticipate purchasing $50,000 or more of
shares of the Fund alone or in combination with shares of certain other Victory
Portfolios within a 13-month period, you may obtain shares of the portfolios at
the same reduced sales charge as though the total quantity were invested in one
lump sum, by filing a non-binding Letter of Intent (the "Letter") within 90 days
of the start of the purchases. Each investment you make after signing the
Letter will be entitled to the sales charge applicable to the total investment
indicated in the Letter. For example, a $2,500 purchase toward a $60,000 Letter
would receive the same reduced sales charge as if the $60,000 had been invested
at one time. To ensure that the reduced price will be received on future
purchases, you or your investment professional must inform the transfer agent
that the Letter is in effect each time shares are purchased. Neither income
dividends nor capital gain distributions taken in additional shares will apply
toward the completion of the Letter.
Your initial investment must be at least 5% of the total amount you
plan to invest. Out of the initial purchase, 5% of the dollar amount specified
in the Letter will be registered in your name and held in escrow. The shares
held in escrow cannot be redeemed or exchanged until the Letter is satisfied or
the additional sales charges have been paid. You will earn income dividends
and capital gain distributions on escrowed shares. The escrow will be released
when your purchase of the total amount has been completed. You are not
obligated to complete the Letter.
If you purchase more than the amount specified in the Letter and
qualify for a further sales charge reduction, the sales charge will be adjusted
to reflect your total purchase at the end of 13 months. Surplus funds will be
applied to the purchase of additional shares at the then current offering price
applicable to the total purchase.
If you do not complete your purchase under the Letter within the
13-month period, your sales charge will be adjusted upward, corresponding to
the amount actually purchased, and if after written notice, you do not pay the
increased sales charge, sufficient escrowed shares will be redeemed to pay such
charge.
ADDITIONAL EXCHANGE INFORMATION
Shares of the Victory Portfolios (see "Description of Victory
Portfolios" below) may be exchanged for shares of any Victory money market fund
or any other fund of the Victory Portfolios with the same or a lower sales
charge. Shares of any Victory money market portfolio or any Victory Portfolios
with a reduced sales charge may be exchanged for shares of the Fund upon
payment of the difference in the sales charge.
ADDITIONAL REDEMPTION INFORMATION
REINSTATEMENT PRIVILEGE. Within 90 days of a redemption, a
shareholder may reinvest all or part of the redemption proceeds of shares of
the Fund or any of the other Victory Portfolios into which shares of the Fund
are exchangeable as described below, at the net asset value next computed after
receipt by the Transfer Agent of the reinvestment order. No charge is
currently made for reinvestment in shares of the Fund but a reinvestment in
shares of certain other Victory Portfolios is subject to a $5.00 service fee.
The shareholder must ask the Distributor for
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such privilege at the time of reinvestment. Any capital gain that was realized
when the shares were redeemed is taxable, and reinvestment will not alter any
capital gains tax payable on that gain. If there has been a capital loss on
the redemption, some or all of the loss may not be tax deductible, depending on
the timing and amount of the reinvestment. Under the Internal Revenue Code, if
the redemption proceeds of Fund shares on which a sales charge was paid are
reinvested in shares of the Fund or another of the Victory Portfolios within 90
days of payment of the sales charge, the shareholder's basis in the shares of
the Fund that were redeemed may not include the amount of the sales charge
paid. That would reduce the loss or increase the gain recognized from
redemption. The Fund may amend, suspend or cease offering this reinvestment
privilege at any time as to shares redeemed after the date of such amendment,
suspension or cessation. You must reinstate your shares into an account with
the same registration. This privilege may be exercised only once by a
shareholder with respect to the Fund. For information on which funds are
available for the Reinstatement Privilege, please consult your program
materials.
DIVIDENDS AND DISTRIBUTIONS
The Fund ordinarily declares and pays dividends from its net
investment income quarterly. The Fund distributes substantially all of its net
investment income and net capital gains, if any, to shareholders within each
calendar year as well as on a fiscal year basis to the extent required for the
Fund to qualify for favorable federal tax treatment.
The amount of distributions may vary from time to time depending on
market conditions and the composition of the Fund's portfolio.
For this purpose, the net income of the Fund, from the time of the
immediately preceding determination thereof, shall consist of all interest
income accrued on the portfolio assets of the Fund, dividend income, if any,
income from securities loans, if any, and realized capital gains and losses on
the Fund assets, less all expenses and liabilities of the Fund chargeable
against income. Interest income shall include discount earned, including both
original issue and market discount, on discount paper accrued ratably to the
date of maturity. Expenses, including the compensation payable to Key Advisers
or the Sub-Adviser, are accrued each day. The expenses and liabilities of the
Fund shall include those appropriately allocable to the Fund as well as a share
of the general expenses and liabilities of the Victory Portfolios in proportion
to the Fund's share of the total net assets of the Victory Portfolios.
Additional Tax Information
It is the policy of the fund of the Fund to qualify for the favorable
tax treatment accorded regulated investment companies ("RICs") under Subchapter
M of the Code, for so long as such qualification is in the best interest of its
shareholders. By following such policy and distributing its income and gains
currently with respect to each taxable year, the Fund expects to eliminate or
reduce to a nominal amount the federal income and excise taxes to which it may
otherwise be subject.
In order to qualify as a RIC, the Fund must, among other things, (1)
derive at least 90% of its gross income from dividends, interest, payments with
respect to securities loans, and gains from the sale or other disposition of
stock or securities, foreign currencies or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in stock, securities or currencies, (2) derive less than 30% of its
gross income from the sale or other disposition of stock, securities, options,
futures, forward contracts, and certain foreign currencies (or options,
futures, or forward contracts on foreign currencies) held for less than three
months, and (3) diversify its holdings so that at the end of each quarter of
its taxable year (i) at least 50% of the market value of the Fund's assets is
represented by cash or cash items, U.S. Government securities, securities of
other RICs and other securities limited, in respect of any one issuer, to an
amount not greater than 5% of the value of the Fund's total assets and 10% of
the outstanding voting securities of such issuer, and (ii) not more than 25% of
the value of its total assets is invested in the securities of any one issuer
(other than U.S. Government securities) or of two or more issuers
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that the Fund controls and that are engaged in the same, similar, or related
trades or businesses. These requirements may restrict the degree to which the
Fund may engage in short-term trading and concentrate investments. If the Fund
qualifies as a RIC, it will not be subject to federal income tax on the part of
its net investment income and net realized capital gains, if any, that it
distributes to shareholders with respect to each taxable year within the time
limits specified in the Code.
A non-deductible excise tax is imposed on regulated investment
companies that do not distribute in each calendar year an amount equal to 98%
of their ordinary income for the year plus 98% of their capital gain net income
for the 1-year period ending on October 31 of such calendar year. The balance
of such income must be distributed during the following calendar year. If
distributions during a calendar year are less than the required amount, the
fund is subject to a non-deductible excise tax equal to 4% of the deficiency.
Certain investment and hedging activities of the Fund, including
transactions in options, futures contracts, hedging transactions, forward
contracts, straddles, foreign currencies, and foreign securities, are subject
to special tax rules. In a given case, these rules may accelerate income to the
Fund, defer losses to the Fund, cause adjustments in the holding periods of the
Fund's securities, convert short-term capital losses into long-term capital
losses, or otherwise affect the character of the Fund's income. These rules
could therefore affect the amount, timing and character of distributions to
shareholders. The Fund will endeavor to make any available elections
pertaining to such transactions in a manner believed to be in the best interest
of the Fund and their securities.
The Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends paid to any shareholder who has
failed to provide (or provided an incorrect) tax identification number, or is
subject to withholding pursuant to a notice from the Internal Revenue Service
for failure to properly include on his or her income tax return payments of
interest or dividends. This "backup withholding" is not an additional tax, and
any amounts withheld may be credited against the shareholder's ultimate U.S.
tax liability.
Information set forth in the Prospectus and this Statement of
Additional Information that relates to federal taxation is only a summary of
certain key federal tax considerations generally affecting purchasers of shares
of the Fund. No attempt has been made to present a complete explanation of the
federal tax treatment of a fund or its shareholders, and this discussion is not
intended as a substitute for careful tax planning. Accordingly, potential
purchasers of shares of the Fund are urged to consult their tax advisers with
specific reference to their own tax circumstances. In addition, the tax
discussion in the Prospectus and this Statement of Additional Information is
based on tax law in effect on the date of the Prospectus and this Statement of
Additional Information; such laws and regulations may be changed by
legislative, judicial or administrative action, sometimes with retroactive
effect.
MANAGEMENT OF THE VICTORY PORTFOLIOS
Board of Trustees
Overall responsibility for management of the Victory Portfolios rests
with the Trustees, who are elected by the shareholders of the Victory
Portfolios. The Victory Portfolios are managed by the Trustees in accordance
with the laws of the State of Delaware governing business trusts. There are
currently seven Trustees, six of whom are not "interested persons" of the
Victory Portfolios within the meaning of that term under the 1940 Act. The
Trustees, in turn, elect the officers of the Victory Portfolios to supervise
actively its day-to-day operations.
The Trustees of the Victory Portfolios, their addresses, ages and
their principal occupations during the past five years are as follows:
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<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- --------------------- ---------------- --------------------
<S> <C> <C>
Leigh A. Wilson, 51* Trustee and From 1989 to present, Chairman and
Glenleigh International Ltd. President Chief Executive Officer, Glenleigh
53 Sylvan Road North International Limited; previously
Westport, CT 06880 Chief Executive Officer, Paribas
North America and Paribas
Corporation; Trustee, The Victory
Funds and Spears, Benzak, Salomon
and Farrell ("SBSF") Funds.
</TABLE>
- ------------
* Mr. Wilson is deemed to be an "interested person" of the Victory
Portfolios under the 1940 Act solely by reason of his position as
President.
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<PAGE> 570
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Funds During Past 5 Years
- --------------------- ---------------- --------------------
<S> <C> <C>
Robert G. Brown, 72 Trustee Retired; from October 1983 to
5460 N. Ocean Drive November 1990, President, Cleveland
Singer Island, Riviera Beach, Advanced Manufacturing Program
Florida 33404 (non-profit corporation engaged in
regional economic development).
Edward P. Campbell, 46 Trustee From March 1, 1994 to present,
Nordson Corporation Executive Vice President and Chief
28601 Clemens Road Operating Officer of Nordson
Westlake, OH 44145 Corporation (manufacturer of
application equipment); from May
1988 to March 1994, Vice President
of Nordson Corporation; from 1987
to December 1994, member of the
Supervisory Committee of Society's
Collective Investment Retirement
Fund; from May 1991 to August 1994,
Trustee, Financial Reserves Fund
and from May 1993 to August 1994,
Trustee, Ohio Municipal Money
Market Fund; Trustee, The Victory
Funds and SBSF.
Dr. Harry Gazelle, 68 Trustee Retired radiologist, Drs. Hill and
17822 Lake Road Thomas Corp.; Trustee, The Victory
Lakewood, OH 44107 Funds.
Dr. Thomas F. Morrissey, 62 Trustee 1995 Visiting Scholar, Bond
Weatherhead School of University, Queensland, Australia;
Management Professor, Weatherhead School of
Case Western Reserve Management, Case Western Reserve
University University; from 1989 to 1995,
10900 Euclid Avenue Associate Dean of Weatherhead
Cleveland, OH 44106-7235 School of Management and Professor,
Case Western Reserve University;
from 1987 to December 1994, Member
of the Supervisory Committee of
Society's Collective Investment
Retirement Fund; from May 1991 to
August 1994, Trustee, Financial
Reserves Fund and from May 1993 to
August 1994, Trustee, Ohio
Municipal Money Market Fund;
Trustee, The Victory Funds.
</TABLE>
-24-
<PAGE> 571
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Funds During Past 5 Years
- --------------------- ---------------- --------------------
<S> <C> <C>
Stanley I. Landgraf, 70 Trustee Retired; currently, Trustee,
41 Traditional Lane Rensselaer Polytechnic Institute;
Albany, NY 12211 Director, Elenel Corporation and
Mechanical Technology, Inc.;
Member, Board of Overseers, School
of Management, Rensselaer
Polytechnic Institute; Member, The
Fifty Group (a Capital Region
business organization); Trustee,
The Victory Funds.
H. Patrick Swygert, 52 Trustee President, Howard University;
Howard University formerly President, State
2400 6th Street, N.W. University of New York at Albany;
Suite 320 formerly, Executive Vice President,
Washington, DC 20059 Temple University; Trustee, The
Victory Funds.
</TABLE>
The Board presently has an Investment Policy Committee and a Business,
Legal, and Audit Committee. The members of the Investment Policy Committee are
Messrs. Landgraf (Chairman), Morrissey and Brown, who will serve until May
1996. The function of the Investment Policy Committee is to review the
existing investment policies of the Victory Portfolios, including the levels of
risk and types of funds available to shareholders, and make recommendations to
the Board of Trustees regarding the revision of such policies or, if necessary,
the submission of such revisions to the Victory Portfolios' shareholders for
their consideration. The members of the Business, Legal and Audit Committee
are Messrs. Swygert (Chairman), Campbell and Gazelle who will serve until May
1996. The function of the Business, Legal and Audit Committee is to recommend
independent auditors and monitor accounting and financial matters; to nominate
persons to serve as disinterested Trustees and Trustees to serve on committees
of the Board; and to review compliance and contract matters.
The Investment Policy Committee met four times during the 12 months
ended October 31, 1995. The Business, Legal and Audit Committee was
constituted on May 24, 1995 (and has met twice since then) and replaced the
Audit Committee, the Legal Committee and the Nominating Committee, which met
three times, one time and one time, respectively, during the 12 month period
ended October 31, 1995.
REMUNERATION OF TRUSTEES AND CERTAIN EXECUTIVE OFFICERS
Effective June 1, 1995, each Trustee (other than Leigh A. Wilson)
receives an annual fee of $27,000 for serving as Trustee of all the funds of
the Victory Portfolios, and an additional per meeting fee ($2,400 in person and
$1,200 per telephonic meeting).
Effective June 1, 1995, Leigh A. Wilson receives an annual fee of
$33,000 for serving as President and Trustee for all of the funds of the
Victory Portfolios, and an additional per meeting fee ($3,000 in person and
$1,500 per telephonic meeting).
The following table indicates the compensation received by each
Trustee from the Fund and from the Victory "Fund Complex"* for the 12 month
period ended on October 31, 1995. For certain Trustees, the amounts
-25-
<PAGE> 572
from the Fund include amounts paid by the Aggressive Growth Portfolio, a
portfolio of the Victory Funds which was reorganized as the Fund as of June 5,
1995.
<TABLE>
<CAPTION>
Pension or
Retirement Estimated Annual Total Total Compensation
Benefits Accrued as Benefits Compensation from Victory
Portfolio Expenses Upon Retirement from the Fund "Fund Complex"*
------------------ ---------------- ------------- ------------------
<S> <C> <C> <C> <C>
Robert G. Brown, Trustee . . -0- -0- $401.99 $39,815.98
Edward P. Campbell, Trustee . -0- -0- 272.35 33,799.68
Harry Gazelle, Trustee . . . -0- -0- 341.34 35,916.98
John W. Kemper,# Trustee . . -0- -0- 260.65 22,567.31
Thomas F. Morrissey, Trustee -0- -0- 388.49 40,366.98
Stanley I. Landgraft, Trustee -0- -0- 307.57 34,615.98
Leigh A. Wilson, Trustee . . -0- -0- 417.32 46,716.97
H. Patrick Swygert, Trustee . -0- -0- 388.49 37,116.98
John D. Buckingham,# Trustee -0- -0- 177.06 18,841.89
John R. Young,# Trustee . . . -0- -0- 238.89 21,963.81
</TABLE>
# Resigned
- ------------------------------
* For certain Trustees, these amounts include compensation received from
The Victory Funds (which were reorganized into the Victory Portfolios
as of June 5, 1995), the SBSF Funds (the investment adviser of which
was acquired by KeyCorp effective April, 1995) and Society's
Collective Investment Retirement Funds, which were reorganized into
the Victory Balanced Fund and Victory Government Mortgage Fund as of
December 19, 1994. There are presently 24 mutual funds from which the
above- named Trustees are compensated in the Victory "Fund Complex,"
but not all of the above-named Trustees serve on the boards of each
fund in the "Fund Complex."
-26-
<PAGE> 573
Officers
The officers of the Victory Portfolios, their addresses, ages and
principal occupations during the past five years are as follows:
<TABLE>
<CAPTION>
Position with the Principal occupation
Name Victory Portfolios during past 5 years
- ---- ------------------ -------------------
<S> <C> <C>
Leigh A. Wilson, 51 President and Trustee From 1989 to present, Chairman and
Glenleigh International Ltd. Chief Executive Officer, Glenleigh
53 Sylvan Road North International Limited; from 1984-
Westport, CT 06880 1989, Chief Executive Officer,
Paribas North America and Paribas
Corporation; Trustee to The Victory
Funds and SBSF Funds.
William B. Blundin, 57 Vice President Senior Vice President of BISYS Fund
BISYS Fund Services Services; officer of other
125 West 55th Street investment companies administered
New York, New York 10019 by BISYS Fund Services; President
and Chief Executive Officer of
Vista Broker-Dealer Services, Inc.,
Emerald Asset Management, Inc. and
BNY Hamilton Distributors, Inc.,
registered broker/dealers.
J. David Huber, 49 Vice President Executive Vice President, BISYS
BISYS Fund Services Fund Services.
3435 Stelzer Road
Columbus, OH 43219-3035
Scott A. Englehart, 33 Secretary From October 1990 to present,
BISYS Fund Services employee of BISYS Fund Services,
3435 Stelzer Road Inc.; from 1985 to October 1990,
Columbus, OH 43219-3035 Manager of Banking Center, Fifth
Third Bank.
George O. Martinez, 36 Assistant Secretary From March 1995 to present, Senior
BISYS Fund Services Vice President and Director of
3435 Stelzer Road Legal and Compliance Services,
Columbus, OH 43219-3035 BISYS Fund Services; from June
1989-March 1995, Vice President and
Associate General Counsel, Alliance
Capital Management.
Martin R. Dean, 32 Treasurer From May 1994 to present, employee
BISYS Fund Services of BISYS Fund Services; from
3435 Stelzer Road January 1987 - April 1994, Senior
Columbus, OH 43219-3035 Manager, KPMG Peat Marwick.
</TABLE>
-27-
<PAGE> 574
<TABLE>
<CAPTION>
Position with the Principal occupation
Name Victory Portfolios during past 5 years
- ---- ------------------ -------------------
<S> <C> <C>
Adrian J. Waters, 33 Assistant Treasurer From May 1993 to present, employee
BISYS Fund Services (Ireland) of BISYS Fund Services; from 1989-
Limited May 1993, Manager, Price
ITI House Waterhouse.
12 Earlsfort Terrace
Dublin 2, Ireland
</TABLE>
The mailing address of each of the officers of the Victory Portfolios is 3435
Stelzer Road, Columbus, Ohio 43219-3035.
The officers of the Victory Portfolios (other than Leigh Wilson) receive no
compensation directly from the Victory Portfolios for performing the duties of
their offices. BISYS Fund Services, Inc. receives fees from the Victory
Portfolios for acting as Administrator.
As of December 1, 1995, the Trustees and officers as a group owned beneficially
less than 1% of the Fund.
Investment Adviser and Sub-Adviser
Key Advisers was organized as an Ohio corporation on July 27, 1995 and
is registered as an investment adviser under the Investment Advisers Act of
1940. It is a wholly-owned subsidiary of KeyCorp Asset Management Holdings,
Inc., which is a wholly- owned subsidiary of Society National Bank, a
wholly-owned subsidiary of KeyCorp. Affiliates of Key Advisers manage
approximately $37 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals and mutual funds.
KeyCorp, a financial services holding company, is headquartered at 127
Public Square, Cleveland, Ohio 44114. As of September 30, 1995, KeyCorp had an
asset base of $68 billion, with banking offices in 26 states from Maine to
Alaska, and trust and investment offices in 16 states. KeyCorp is the
resulting entity of a merger in 1994 of Society Corporation, the bank holding
company of which Society National Bank was a wholly-owned subsidiary, and
KeyCorp, the former bank holding company. KeyCorp, the former bank holding
company, which merger was consummated during the first quarter of 1994.
KeyCorp's major business activities include providing traditional banking and
associated financial services to consumer, business and commercial markets.
Its non-bank subsidiaries include investment advisory, securities brokerage,
insurance, bank credit card processing, and mortgage leasing companies.
Society National Bank is the lead affiliate bank of KeyCorp.
-28-
<PAGE> 575
The following table lists the advisory fees for each mutual fund that
is advised by Key Advisers.
.25 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Institutional Money Market Fund*
.35 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Prime Obligations Fund*
Victory U.S. Government Obligations Fund*
Victory Tax-Free Money Market Fund*
.50 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Money Market Fund*
Victory Limited Term Income Fund*
Victory Government Mortgage Fund*
Victory Financial Reserves Fund*
Victory Fund for Income #
.55 OF 1% OF AVERAGE DAILY NET ASSETS
Victory National Municipal Bond Fund*
Victory Government Bond Fund*
Victory New York Tax-Free Fund*
.60 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Bond Fund*
Victory Stock Index Fund*
.65 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Diversified Stock Fund*
.75 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Intermediate Income Fund*
Victory Investment Quality Bond Fund*
Victory Ohio Regional Stock Fund*
1% OF AVERAGE DAILY NET ASSETS
Victory Balanced Fund*
Victory Value Fund*
Victory Growth Fund*
Victory Special Value Fund*
Victory Special Growth Fund+/-
1.10% OF AVERAGE DAILY ASSETS
Victory International Growth Fund*
# First Albany Asset Management Corporation serves as sub-adviser to the
Victory Fund for Income, for which it receives .20% of average daily
net assets.
-29-
<PAGE> 576
+/- T. Rowe Price Associates, Inc. serves as sub-adviser to the Victory
Special Growth Fund, for which it receives .25% of average daily net
assets up to $100 million and .20% of average daily net assets in
excess of $100 million.
* Society Asset Management, Inc. (the Sub-Adviser) serves as sub-adviser
to each of these funds. For its services under the investment
sub-advisory agreement, Key Advisers pays the Sub-Adviser sub-advisory
fees at rates (based on an annual percentage of average daily net
assets) which vary according to the table set forth below:
-30-
<PAGE> 577
For the Victory Balanced Fund, Diversified Stock Fund, Growth Fund, Stock Index
Fund and Value Fund:
<TABLE>
<CAPTION>
Rate of
Net Assets Sub-Advisory Fee*
---------- -----------------
<S> <C>
Up to $10,000,000 0.65%
Next $15,000,000 0.50%
Next $25,000,000 0.40%
Above $50,000,000 0.35%
</TABLE>
For the Victory International Growth Fund, Ohio Regional Stock Fund and Special
Value Fund:
<TABLE>
<CAPTION>
Rate of
Net Assets Sub-Advisory Fee*
---------- -----------------
<S> <C>
Up to $10,000,000 0.90%
Next $15,000,000 0.70%
Next $25,000,000 0.55%
Above $50,000,000 0.45%
</TABLE>
For the Victory Intermediate Income Fund, Investment Quality Bond Fund, Limited
Term Income Fund, Ohio Municipal Bond Fund, Government Bond Fund, Government
Mortgage Fund, National Municipal Bond Fund and New York Tax-Free Fund:
<TABLE>
<CAPTION>
Rate of
Net Assets Sub-Advisory Fee*
---------- -----------------
<S> <C>
Up to $10,000,000 0.40%
Next $15,000,000 0.30%
Next $25,000,000 0.25%
Above $50,000,000 0.20%
</TABLE>
For the Victory Prime Obligations Fund, Tax-Free Money Market Fund, U.S.
Government Obligations Fund, Financial Reserves Fund, Institutional Money
Market Fund and Ohio Municipal Money Market Fund:
<TABLE>
<CAPTION>
Rate of
Net Assets Sub-Advisory Fee*
---------- -----------------
<S> <C>
Up to $10,000,000 0.25%
Next $15,000,000 0.20%
Next $25,000,000 0.15%
Above $50,000,000 0.125%
</TABLE>
- --------------------
* As a percentage of average daily net assets. The Sub-Adviser has the
right to voluntarily waive any portion of the sub- advisory fee from
time to time.
ADVISORY AND OTHER CONTRACTS
Unless sooner terminated, the Investment Advisory Agreement between
Key Advisers and the Fund provides that it will continue in effect as to the
Fund for an initial two-year term and for consecutive one-year terms
thereafter, provided that such continuance is approved at least annually by the
Victory Portfolios' Trustees or by vote of a majority of the outstanding shares
of such Fund (as defined under "GENERAL INFORMATION - Miscellaneous" in the
Prospectuses), and, in either case, by a majority of the Trustees who are not
parties to the Investment Advisory Agreement or interested persons (as defined
in the 1940 Act) of any party to the Investment Advisory Agreement, by votes
cast in person at a meeting called for such purpose.
The Investment Advisory Agreement is terminable as to the Fund at any
time on 60 days' written notice without penalty by the Trustees, by vote of a
majority of the outstanding shares of the Fund, or by Key Advisers. The
Investment Advisory Agreement also terminates automatically in the event of any
assignment, as defined under the 1940 Act.
The Investment Advisory Agreement provides that Key Advisers shall not
be liable for any error of judgment or mistake of law or for any loss suffered
by the Fund in connection with the performance of services pursuant to the
Investment Advisory Agreement, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith, or gross negligence
-31-
<PAGE> 578
on the part of Key Advisers in the performance of its duties, or from reckless
disregard by it of either duties and obligations thereunder.
Under the Investment Advisory Agreement, Key Advisers has agreed to
provide the investment advisory services described in the Prospectus. For the
services provided and expenses assumed pursuant to the Investment Advisory
Agreement, the Fund pays Key Advisers a fee, computed daily and paid monthly,
at the annual rate of one percent (1.00%) of the average daily net assets of
the Fund.
Prior to January, 1993, Society National Bank served as investment
adviser to the Fund. From January 1, 1993 until December 31, 1995, Society
Asset Management, Inc. served as investment adviser to the Fund. For the
fiscal years ended October 31, 1994 and 1995 the Fund paid investment advisory
fees of $152,165 and ________, respectively, after fee reductions of $93,307
and $________ respectively.
Under the Investment Advisory Agreement, Key Advisers may delegate a
portion of its responsibilities to a sub-adviser. In addition, the Investment
Advisory Agreement provides that Key Advisers may render services through its
own employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser of the Fund and are under the common
control of KeyCorp as long as all such persons are functioning as part of an
organized group of persons, managed by authorized officers of Key Advisers.
Key Advisers has entered into an investment sub-advisory agreement
with its affiliate, Society Asset Management, Inc. on behalf of the Fund. The
Sub-Adviser is a wholly-owned subsidiary of KeyCorp Asset Management Holdings,
Inc. With respect to the day to day management of the Fund, under the
sub-advisory agreement, the Sub-Adviser makes decisions concerning, and places
all orders for, purchases and sales of securities and helps maintain the
records relating to such purchases and sales. The Sub-Adviser may, in its
discretion, provide such services through its own employees or the employees of
one or more affiliated companies that are qualified to act as an investment
adviser to the Company under applicable laws and are under the common control
of KeyCorp; provided that (i) all persons, when providing services under the
sub-advisory agreement, are functioning as part of an organized group of
persons, and (ii) such organized group of persons is managed at all times by
authorized officers of the Sub-Adviser. This arrangement will not result in the
payment of additional fees by the Fund.
Glass-Steagall Act
In 1971 the United States Supreme Court held in Investment Company
Institute v. Camp that the federal statute commonly referred to as the
Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision: (a)
forbid a bank holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing, or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but (b) do not prohibit such
a holding company or affiliate from acting as investment adviser, transfer
agent, and custodian to such an investment company. In 1981 the United States
Supreme Court held in Board of Governors of the Federal Reserve System v.
Investment Company Institute that the Board did not exceed its authority under
the Holding Company Act when it adopted its regulation and interpretation
authorizing bank holding companies and their non-bank affiliates to act as
investment advisers to registered closed-end investment companies. In the Board
of Governors case, the Supreme Court also stated that if a national bank
complied with the restrictions imposed by the Board in its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to investment companies, a national bank
performing investment advisory services for an investment company would not
violate the Glass-Steagall Act.
-32-
<PAGE> 579
Key Advisers and the Sub-Adviser believe that they may perform the
services for the Victory Portfolios contemplated by the Prospectus, this
Statement of Additional Information, and the Investment Advisory Agreement (and
Sub-Advisory Agreement) with the Victory Portfolios without violation of
applicable statutes and regulations and has so represented in its Investment
Advisory Agreement (and Sub-Advisory Agreement) with the Victory Portfolios.
Key Trust Company of Ohio, N.A. believes that it may perform the services for
the Victory Portfolios contemplated by the Prospectus, this Statement of
Additional Information, and the Shareholder Servicing Agreement with the
Victory Portfolios (as described below) without violation of applicable
statutes and regulations and has so represented in such Shareholder Servicing
Agreement. Future changes in either federal or state statutes and regulations
relating to the permissible activities of banks or bank holding companies and
the subsidiaries or affiliates of those entities, as well as further judicial
or administrative decisions or interpretations of present and future statutes
and regulations, could prevent or restrict Key Trust Company of Ohio, N.A., Key
Advisers or the Sub-Adviser from continuing to perform such services for the
Victory Portfolios. Depending upon the nature of any changes in the services
which could be provided by Key Trust Company of Ohio, N.A., Key Advisers or the
Sub-Adviser, the Trustees of the Victory Portfolios would review the Victory
Portfolios' relationship with Key Trust Company of Ohio, N.A., Key Advisers or
the Sub-Adviser and consider taking all action necessary in the circumstances.
Should future legislative, judicial, or administrative action prohibit
or restrict the proposed activities of Key Trust Company of Ohio, N.A., Key
Advisers or the Sub-Adviser and its affiliated and correspondent banks and
other non-bank affiliates in connection with customer purchases of shares of
the Victory Portfolios, the banks and such non-bank affiliates might be
required to alter materially or discontinue the services offered by them to
customers. It is not anticipated, however, that any change in the Victory
Portfolios' method of operations would affect its net asset value per share or
result in financial losses to any customer.
From time to time, advertisements, supplemental sales literature and
information furnished to present or prospective shareholders of the Fund may
include descriptions of Key Trust Company of Ohio, N.A., Key Advisers and the
Sub-Adviser including, but not limited to, (i) descriptions of the operations
of Key Trust Company of Ohio, N.A., Key Advisers and the Sub-Adviser; (ii)
descriptions of certain personnel and their functions; and (iii) statistics and
rankings related to the operations of Key Trust Company of Ohio, N.A., Key
Advisers and the Sub-Adviser.
Portfolio Transactions
Pursuant to the Investment Advisory Agreement (and Sub-Advisory
Agreement), Key Advisers or the Sub-Adviser determines, subject to the general
supervision of the Trustees of the Victory Portfolios, and in accordance with
the Fund's investment objective and restrictions, which securities are to be
purchased and sold by the Fund, and which brokers are to be eligible to execute
its portfolio transactions. Purchases from underwriters and/or broker-dealers
of portfolio securities include a commission or concession paid by the issuer
to the underwriter and/or broker-dealer and purchases from dealers serving as
market makers may include the spread between the bid and asked price. While
Key Advisers and the Sub-Adviser generally seek competitive prices (inclusive
of any spread or commission), the Fund may not necessarily pay the lowest
prices available on each transaction, for reasons discussed below.
Allocation of transactions to dealers is determined by Key Advisers
or the Sub-Adviser in their best judgment and in a manner deemed fair and
reasonable to shareholders. The primary consideration is prompt execution of
orders in an effective manner at the most favorable price. Subject to this
consideration, dealers who provide supplemental investment research to Key
Advisers or the Sub-Adviser may receive orders for transactions by the Victory
Portfolios. Information so received is in addition to and not in lieu of
services required to be performed by Key Advisers or the Sub-Adviser and does
not reduce the advisory fees payable to Key Advisers by the Victory Portfolios.
Such information may be useful to Key Advisers or the Sub-Adviser in serving
both the Victory Portfolios and other clients and, conversely, such
supplemental research information obtained by the placement of orders on behalf
of other clients may be useful to Key Advisers or the Sub-Adviser in carrying
out its obligations to
-33-
<PAGE> 580
the Victory Portfolios. In the future, the Trustees may also authorize the
allocation of brokerage to affiliated broker-dealers on an agency basis to
effect portfolio transactions. In such event, the Trustees will adopt
procedures incorporating the standards of Rule 17e-1 under the 1940 Act, which
requires that the commission paid to affiliated broker-dealers be "reasonable
and fair compared to the commission, fee or other remuneration received, or to
be received, by other brokers in connection with comparable transactions
involving similar securities during a comparable period of time." At times,
the Fund may also purchase portfolio securities directly from dealers acting as
principals, underwriters or market makers. As these transactions are usually
conducted on a net basis, no brokerage commissions are paid by the Fund.
The Victory Portfolios will not execute portfolio transactions
through, acquire portfolio securities issued by, make savings deposits in, or
enter into repurchase or reverse repurchase agreements with Key Advisers, the
Sub-Adviser, Key Trust Company of Ohio, N.A. or its affiliates, Concord Holding
Corporation, Victory Broker-Dealer Services, Inc. or their affiliates, and will
not give preference to Key Trust Company of Ohio, N.A.'s correspondent banks or
affiliates, or Concord Holding Corporation or Victory Broker-Dealer Services,
Inc. with respect to such transactions, securities, savings deposits,
repurchase agreements, and reverse repurchase agreements.
Investment decisions for the Fund are made independently from those
for the other funds or any other investment company or account managed by Key
Advisers (or Society). Any such other investment company or account may also
invest in the same securities as a particular fund. When a purchase or sale of
the same security is made at substantially the same time on behalf of the Fund
and another fund, investment company or account, the transaction will be
averaged as to price, and available investments allocated as to amount, in a
manner which Key Advisers (or Society) believes to be equitable to the Fund
and such other fund, investment company or account. In some instances, this
investment procedure may adversely affect the price paid or received by the
Fund or the size of the position obtained by the Fund. To the extent permitted
by law, Key Advisers (or Society) may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for the other funds
or for other investment companies or accounts in order to obtain best
execution. As provided by the Investment Advisory (and Sub-Advisory)
Agreement, in making investment recommendations for the Victory Portfolios, Key
Advisers (or Society) will not inquire or take into consideration whether an
issuer of securities proposed for purchase or sale by a Fund is a customer of
Society, its parents or subsidiaries or affiliates and, in dealing with their
commercial customers, Key Advisers (Society), its parents, subsidiaries, and
affiliates will not inquire or take into consideration whether securities of
such customers are held by the Victory Portfolios.
In the fiscal years ended October 31, 1994 and 1995, the Fund paid
$92,278, and $_______, respectively, in brokerage commissions.
Business Management Agreement
In connection with its obligations under the Investment Sub-Advisory
Agreement, the Sub-Adviser has entered into a Business Management Agreement
with Key Advisers, pursuant to which Key Advisers provides certain
administrative and support services to the Sub-Adviser. Such services include
preparing reports to the Victory Portfolios' Board of Trustees, recordkeeping
services, and services rendered in connection with the preparation of
regulatory filings and other reports, and regulatory and other administrative
and compliance systems and support services.
For such services to the Fund, the Sub-Adviser pays fees to Key
Advisers which vary according to a sliding scale containing "breakpoints" at
which decreases in the business management fees correspond to increases in the
average daily net asset values of the Fund as follows:
-34-
<PAGE> 581
<TABLE>
<CAPTION>
Rate of Business
Net Assets of the Fund Management Fee*
- ---------------------- ---------------
<S> <C>
Up to $10,000,000 0.55%
Next $15,000,000 0.35%
Next $25,000,000 0.20%
Above $50,000,000 0.15%
</TABLE>
- --------------------
* As a percentage of average daily net assets
Administrator
Currently, Concord Holding Corporation ("CHC") serves as general
manager and administrator (the "Administrator") to the Fund. The
Administrator assists in supervising all operations of the Fund (other than
those performed by Key Advisers or the Sub- Adviser under the Investment
Advisory Agreement and Sub-Advisory Agreement. Prior to June, 1995, The
Winsbury Company ("Winsbury") served as the Fund's administrator.
CHC receives a fee from the Fund for its services as Administrator and
expenses assumed pursuant to the Administration Agreements, calculated daily
and paid monthly, at the annual rate of fifteen one hundredths of one percent
(.15%) of the Fund's average daily net assets. CHC may periodically waive all
or a portion of its fee with respect to the Fund in order to increase the net
income of the Fund available for distribution as dividends.
Unless sooner terminated, the Administration Agreement will continue
in effect as to the Fund for a period of two years, and for consecutive
one-year terms thereafter, provided that such continuance is ratified at least
annually by the Victory Portfolios' Board of Trustees or by vote of a majority
of the outstanding shares of the Fund, and in either case by a majority of the
Trustees who are not parties to the Administration Agreement or interested
persons (as defined in the 1940 Act) of any party to the Administration
Agreement, by votes cast in person at a meeting called for such purpose.
The Administration Agreement provides that CHC shall not be liable for
any error of judgment or mistake of law or any loss suffered by the Victory
Portfolios in connection with the matters to which the Administration Agreement
relates, except a loss resulting from willful misfeasance, bad faith, or gross
negligence in the performance of its duties, or from the reckless disregard by
it of its obligations and duties thereunder.
Under the Administration Agreement, CHC assists in the Fund's
administration and operation, including providing statistical and research
data, clerical services, internal compliance and various other administrative
services, including among other responsibilities, forwarding certain purchase
and redemption requests to the Transfer Agent, participation in the updating of
the prospectus, coordinating the preparation, filing, printing and
dissemination of reports to shareholders, coordinating the preparation of
income tax returns, arranging for the maintenance of books and records and
providing the office facilities necessary to carry out the duties thereunder.
Under the Administration Agreement, CHC may delegate all or any part of its
responsibilities thereunder.
In the fiscal years ended October 31, 1994 and October 31, 1995, the
Fund paid to Winsbury and CHC aggregate administration fees of $28,373, and
$_______, respectively, after fee reductions of $8,447, and $_____,
respectively.
Distributor
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<PAGE> 582
Victory Broker-Dealer Services, Inc. (the "Distributor") serves as
distributor for the continuous offering of the shares of the Fund pursuant to a
Distribution Agreement between the Distributor and the Victory Portfolios.
Unless otherwise terminated, the Distribution Agreement will remain in effect
with respect to the Fund for two years, and thereafter for consecutive one-year
terms, provided that it is approved at least annually (i) by the Victory
Portfolios' Board of Trustees or by the vote of a majority of the outstanding
shares of the Fund, and (ii) by the vote of a majority of the Trustees of the
Victory Portfolios who are not parties to the Distribution Agreement or
interested persons of any such party, cast in person at a meeting called for
the purpose of voting on such approval. The Distribution Agreement will
terminate in the event of its assignment, as defined in the 1940 Act. For the
Fund's fiscal years ended October 31, 1994 and October 31, 1995, [Winsbury]
received $______ and $_______, respectively, in underwriting commissions, and
retained $____ and $__, respectively.
Shareholder Servicing Plan
The Victory Portfolios, on behalf of the Fund, has adopted a
Shareholder Servicing Plan to provide payments to shareholder servicing agents
(each a "Shareholder Servicing Agent") that provide administrative support
services to customers who may from time to time beneficially own shares, which
services include: (i) aggregating and processing purchase and redemption
requests for shares from customers and promptly transmitting net purchase and
redemption orders to our distributor or transfer agent; (ii) providing
customers with a service that invests the assets of their accounts in shares
pursuant to specific or pre-authorized instructions; (iii) processing dividend
and distribution payments on behalf of customers; (iv) providing information
periodically to customers showing their positions in shares; (v) arranging for
bank wires; (vi) responding to customer inquiries; (vii) providing
subaccounting with respect to shares beneficially owned by customers or
providing the information to the Victory Portfolios necessary for
subaccounting; (viii) if required by law, forwarding shareholder communications
from us (such as proxies, shareholder reports, annual and semi-annual financial
statements and dividend, distribution and tax notices) to customers; (ix)
forwarding to customers proxy statements and proxies containing any proposals
regarding this Plan; and (x) providing such other similar services as we may
reasonably request to the extent you are permitted to do so under applicable
statutes, rules or regulations. For expenses incurred and services provided
pursuant to the Shareholder Servicing Agreement, the Fund pays each Shareholder
Servicing Agent a fee computed daily and paid monthly, in amounts aggregating
not more than twenty-five one-hundredths of one percent (.25%) of the average
daily net assets of the Fund per year. A Shareholder Servicing Agent may
periodically waive all or a portion of its respective shareholder servicing
fees with respect to the Fund to increase the net income of the Fund available
for distribution as dividends.
Expenses
The Fund bears the following expenses relating to its operations:
taxes, interest, brokerage fees and commissions, fees of the Trustees of the
Victory Portfolios, Commission fees, state securities qualification fees, costs
of preparing and printing prospectuses for regulatory purposes and for
distribution to current shareholders, outside auditing and legal expenses,
advisory and administration fees, fees and out-of-pocket expenses of the
custodian and transfer agent, certain insurance premiums, costs of maintenance
of the Fund's existence, costs of shareholders' reports and meetings, and any
extraordinary expenses incurred in the Fund's operation.
If total expenses borne by the Fund in any fiscal year exceeds expense
limitations imposed by applicable state securities regulations, Key Advisers,
the Sub-Adviser or the Administrator will waive their fees to the extent such
excess expenses exceed such expense limitation in proportion to their
respective fees. As of the date of this Statement of Additional Information,
the most restrictive expense limitation applicable to the Fund limits its
aggregate annual expenses, including management and advisory fees but excluding
interest, taxes, brokerage commissions, and certain other expenses, to 2.5% of
the first $30 million of its average net assets, 2.0% of the next $70 million
of its average net assets, and 1.5% of its remaining average net assets. Any
expenses to be borne by Key Advisers, Sub-
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<PAGE> 583
Adviser or the Administrator will be estimated daily and reconciled and paid on
a monthly basis. Fees imposed upon customer accounts by Key Advisers, the
Sub-Adviser, Key Trust Company of Ohio, N.A. or its correspondents, affiliated
banks and other non-bank affiliates for cash management services are not fund
expenses for purposes of any such expense limitation.
Fund Accountant
BISYS Fund Services Ohio, Inc. serves as fund accountant for the Fund
pursuant to a fund accounting agreement with the Victory Portfolios dated May
31, 1995 (the "Fund Accounting Agreement"). As fund accountant for the Victory
Portfolios, BISYS Fund Services Ohio, Inc. calculates the Fund's Portfolios'
net asset value, the dividend and capital gain distributions, if any, and the
yield. BISYS Fund Services Ohio, Inc. also provides a current security
position report, a summary report of transactions and pending maturities, a
current cash position report, and maintains the general ledger accounting
records for the Fund. Under the Fund Accounting Agreement, BISYS Fund Services
Ohio, Inc. is entitled to receive annual fees of .03% of the first $100 million
of the Fund's daily average net assets, .02% of the next $100 million of the
Fund's daily average net assets, and .01% of the Fund's remaining daily average
net assets. These annual fees are subject to a minimum monthly asset charge of
$2,917 per tax-free fund, and do not include out-of-pocket expenses or multiple
class charges of $833 per month assessed for each class of shares after the
first class. In the fiscal years ended October 31, 1994, and October 31, 1995,
the Victory Portfolios paid The Winsbury Service Corporation fund accounting
fees (after fee waivers) of $16,783, and $_______, respectively, for the Fund.
Custodian
Cash and securities owned by the Fund are held by Key Trust Company of
Ohio, N.A. as custodian. Key Trust Company of Ohio, N.A. serves as custodian
to the Fund pursuant to a Custodian Agreement dated May 24, 1995. Under this
Agreement, Key Trust Company of Ohio, N.A. (i) maintains a separate account or
accounts in the name of the Fund; (ii) makes receipts and disbursements of
money on behalf of the Fund; (iii) collects and receives all income and other
payments and distributions on account of portfolio securities; (iv) responds to
correspondence from security brokers and others relating to its duties; and (v)
makes periodic reports to the Victory Portfolios' Trustees concerning the
Victory Portfolios' operations. Key Trust Company of Ohio, N.A. may, with the
approval of the Victory Portfolios and the custodian's own expense, open and
maintain a sub-custody account or accounts on behalf of the Fund, provided that
Key Trust Company of Ohio, N.A. shall remain liable for the performance of all
of its duties under the Custodian Agreement.
Transfer Agent
Primary Funds Service Corporation ("PFSC") serves as transfer agent
and dividend disbursing agent for the Fund, pursuant to a Transfer Agency and
Shareholder Servicing Agreement. Under its agreement with the Victory
Portfolios, PFSC has agreed (i) to issue and redeem shares of the Victory
Portfolios; (ii) to address and mail all communications by the Victory
Portfolios to its shareholders, including reports to shareholders, dividend and
distribution notices, and proxy material for its meetings of shareholders;
(iii) to respond to correspondence or inquiries by shareholders and others
relating to its duties; (iv) to maintain shareholder accounts and certain
sub-accounts; and (v) to make periodic reports to the Victory Portfolios'
Trustees concerning the Victory Portfolios' operations. For the services
provided under the Transfer Agency and Shareholder Servicing Agreement, PFSC
receives a maximum monthly fee of $1,250 from the Fund, and a maximum of $3.50
per account of the Fund.
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<PAGE> 584
Auditors
The financial highlights appearing in the Prospectus for the Fund,
other than unaudited information marked as such, has been derived from
financial statements of the Victory Portfolios appearing in or incorporated by
reference in this Statement of Additional Information which have been audited
by Coopers & Lybrand L.L.P., independent accountants, as set forth in their
report appearing elsewhere herein, and are included in reliance upon such
report and on the authority of such firm as experts in auditing and accounting.
Coopers & Lybrand L.L.P.'s address is 100 East Broad Street, Columbus, Ohio
43215.
Legal Counsel
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, 919 Third Avenue,
New York, New York 10022 is counsel to the Victory Portfolios.
ADDITIONAL INFORMATION
Description of Shares
The Victory Portfolios (sometimes referred to as the "Trust") is a
Delaware business trust. Its Delaware Trust Instrument was adopted on December
6, 1995 and a certificate of Trust for the Trust was filed in Delaware on
December __, 1995. On February 29, 1996, the Victory Portfolios converted from
a Massachusetts business trust to a Delaware business trust.
The previously effective Massachusetts Declaration of Trust, pursuant
to which the Victory Portfolios was originally called the North Third Street
Fund, was filed with the Secretary of State of the Commonwealth of
Massachusetts on February 6, 1986. On September 22, 1986, an Amended and
Restated Declaration of Trust was filed to change the name of the Trust to The
Emblem Fund and to make certain other changes. A second amendment was filed
October 23, 1986 providing for voting of shares in the aggregate except where
voting of shares by series is otherwise required by law. An amendment to the
Amended and Restated Declaration of Trust was filed on March 15, 1993 to change
the name of the Trust to The Society Funds. An Amended and Restated
Declaration of Trust was then filed on September 2, 1994 to change the name of
the Trust to The Victory Portfolios.
The currently effective Delaware Trust Instrument authorizes the
Trustees to issue an unlimited number of shares, which are units of beneficial
interest, without par value. The Victory Portfolios presently has twenty-eight
series of shares, which represent interests in the U.S. Government Obligations
Fund, the Prime Obligations Fund, the Tax-Free Money Market Fund, the Balanced
Fund, the Stock Index Fund, the Value Fund, the Diversified Stock Fund, the
Growth Fund, the Special Value Fund, the Special Growth Fund, the Ohio Regional
Stock Fund, the International Growth Fund, the Limited Term Income Fund, the
Government Mortgage Fund, the Ohio Municipal Bond Fund, the Intermediate Income
Fund, the Investment Quality Bond Fund, the Florida Tax-Free Bond Fund, the
Municipal Bond Fund, the Convertible Securities Fund, the Short-Term U.S.
Government Income Fund, the Government Bond Fund, the Fund for Income, the
National Municipal Bond Fund, the New York Tax-Free Fund, the Institutional
Money Market Fund, the Financial Reserves Fund and the Ohio Municipal Money
Market Fund, respectively. The Victory Portfolios' Delaware Trust Instrument
authorizes the Trustees to divide or redivide any unissued shares of the
Victory Portfolios into one or more additional series by setting or changing in
any one or more respects their respective preferences, conversion or other
rights, voting power, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption.
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<PAGE> 585
Shares have no subscription or preemptive rights and only such
conversion or exchange rights as the Trustees may grant in their discretion.
When issued for payment as described in the Prospectus and this Statement of
Additional Information, the Victory Portfolios' shares will be fully paid and
non-assessable. In the event of a liquidation or dissolution of the Victory
Portfolios, shares of the Fund are entitled to receive the assets available for
distribution belonging to the Fund, and a proportionate distribution, based
upon the relative asset values of the respective funds of the Victory
Portfolios, of any general assets not belonging to any particular fund which
are available for distribution.
As described in the Prospectus under the caption "ADDITIONAL
INFORMATION -- Voting Rights," shares of the Victory Portfolios are entitled to
one vote per share (with proportional voting for fractional shares) on such
matters as shareholders are entitled to vote. On any matter submitted to a
vote of the shareholders, all shares are voted separately by individual series
(funds), and whenever the Trustees determine that the matter affects only
certain series, may be submitted for a vote by only such series, except (i)
when required by the 1940 Act, shares are voted in the aggregate and not by
individual series; and (ii) when the Trustees have determined that the matter
affects the interests of more than one series and that voting by shareholders
of all series would be consistent with the 1940 Act, then the shareholders of
all such series shall be entitled to vote thereon (either by individual series
or by shares voted in the aggregate, as the Trustees in their discretion may
determine). The Trustees may also determine that a matter affects only the
interests of one or more classes of a series, in which case (or if required
under the 1940 Act) such matter shall be voted on by such class or classes.
There will normally be no meetings of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority of the Trustees
have been elected by the shareholders, at which time the Trustees then in
office will call a shareholders' meeting for the election of Trustees. In
addition, Trustees may be removed from office by a vote of the holders of at
least two-thirds of the outstanding shares of the Victory Portfolios. A
meeting shall be held for such purpose upon the written request of the holders
of not less than 10% of the outstanding shares. Upon written request by ten or
more shareholders meeting the qualifications of Section 16(c) of the 1940 Act,
(i.e., person who have been shareholders for at least six months, and who hold
shares having an NAV of at least $25,000 or constituting 1% of the outstanding
shares) stating that such shareholders wish to communicate with the other
shareholders for the purpose of obtaining the signatures necessary to demand a
meeting to consider removal of a Trustee, the Victory Portfolios will provide a
list of shareholders or disseminate appropriate materials (at the expense of
the requesting shareholders). Except as set forth above, the Trustees shall
continue to hold office and may appoint their successors.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Victory Portfolios shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each fund of the Victory Portfolios affected by the
matter. For purposes of determining whether the approval of a majority of the
outstanding shares of a fund will be required in connection with a matter, a
fund will be deemed to be affected by a matter unless it is clear that the
interests of each fund in the matter are identical, or that the matter does not
affect any interest of the fund. Under Rule 18f-2, the approval of an
investment advisory agreement or any change in investment policy would be
effectively acted upon with respect to a fund only if approved by a majority of
the outstanding shares of such fund. However, Rule 18f-2 also provides that
the ratification of independent public accountants, the approval of principal
underwriting contracts, and the election of Trustees may be effectively acted
upon by shareholders of all of the Victory Portfolios voting without regard to
series.
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<PAGE> 586
Shareholder and Trustee Liability
The Delaware Business Trust Act provides that a shareholder of a
Delaware business trust shall be entitled to the same limitation of personal
liability extended to shareholders of Delaware corporations. The Delaware
Trust Instrument also provides for indemnification out of the trust property of
any shareholder held personally liable solely by reason of his or her being or
having been a shareholder. The Delaware Trust Instrument also provides that
the Victory Portfolios shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Victory
Portfolios, and shall satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
considered to be extremely remote.
The Delaware Trust Instrument states further that no Trustee, officer,
or agent of the Victory Portfolios shall be personally liable in connection
with the administration or preservation of the assets of the Funds or the
conduct of the Victory Portfolios' business; nor shall any Trustee, officer, or
agent be personally liable to any person for any action or failure to act
except for his own bad faith, willful misfeasance, gross negligence, or
reckless disregard of his duties. The Declaration of Trust also provides that
all persons having any claim against the Trustees or the Victory Portfolios
shall look solely to the assets of the Victory Portfolios for payment.
Miscellaneous
As used in the Prospectus and in this Statement of Additional
Information, "assets belonging to a fund" (or "assets belonging to the Fund")
means the consideration received by the Victory Portfolios upon the issuance or
sale of shares in that fund, together with all income, earnings, profits, and
proceeds derived from the investment thereof, including any proceeds from the
sale, exchange, or liquidation of such investments, and any funds or payments
derived from any reinvestment of such proceeds and any general assets of the
Victory Portfolios, which general liabilities and expenses are not readily
identified as belonging to a particular fund (or the Fund) that are allocated
to that fund (or the Fund) by the Victory Portfolios' Trustees. The Trustees
may allocate such general assets in any manner they deem fair and equitable.
It is anticipated that the formula that will be used by the Trustees in making
allocations of general assets to a particular fund of the Victory Portfolios
will be the relative net asset value of the respective fund at the time of
allocation. Assets belonging to a particular fund are charged with the direct
liabilities and expenses of that fund, and with a share of the general
liabilities and expenses of each of the funds not readily identified as
belonging to a particular fund that are allocated to each fund in accordance
with its proportionate share of the net asset values of the Victory Portfolios
at the time of allocation. The timing of allocations of general assets and
general liabilities and expenses of the Victory Portfolios to a particular fund
will be determined by the Trustees of the Victory Portfolios and will be in
accordance with generally accepted accounting principles. Determinations by
the Trustees of the Victory Portfolios as to the timing of the allocation of
general liabilities and expenses and as to the timing and allocable portion of
any general assets with respect to a particular fund are conclusive.
As used in the Prospectus and in this Statement of Additional
Information, a "vote of a majority of the outstanding shares" or a "vote of a
majority of the outstanding voting securities" of the Victory Portfolios or a
particular fund means the affirmative vote of the lesser of (a) 67% or more of
the shares of the Victory Portfolios or such fund present at a meeting at which
the holders of more than 50% of the outstanding shares of the Victory
Portfolios or such fund are represented in person or by proxy, or (b) more than
50% of the outstanding shares of the Victory Portfolios or such fund.
Organizational expenses are allocated to each of the Victory
Portfolios and are amortized over a period of two years from the commencement
of the public offering of shares of the Victory Portfolios.
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<PAGE> 587
The Victory Portfolios is registered with the Commission as an
open-end management investment company. Such registration does not involve
supervision by the Commission of the management or policies of the Victory
Portfolios.
The Prospectus and this Statement of Additional Information omit
certain of the information contained in the Registration Statement filed with
the Commission. Copies of such information may be obtained from the Commission
upon payment of the prescribed fee.
The Prospectus and this Statement of Additional Information are not an
offering of the securities herein described in any state in which such offering
may not lawfully be made. No salesman, dealer, or other person is authorized
to give any information or make any representation other than those contained
in the Prospectus and this Statement of Additional Information.
The financial statements of the Fund and the Predecessor Fund for the
period ended April 30, 1995 are set forth following this Part B of the
Registration Statement.
The 1995 Annual Report to shareholders of The Victory Portfolios is
incorporated by reference herein. This report includes the financial
statements for the fiscal year ended October 31, 1995. The opinion in the
Annual Report of Coopers & Lybrand L.L.P., independent accountants, is
incorporated by reference herein in its entirety to such Annual Report, and
such financial statements are incorporated in their entirety in reliance upon
such report of Coopers & Lybrand L.L.P. and on the authority of such firm as
experts in auditing and accounting.
Delaware law authorizes electronic or telephonic communications between
shareholders and the Victory Portfolios. Under Delaware law, the Successor
Company has the flexibility to respond to future business contingencies. For
example, the Trustees will have the power to incorporate the Victory
Portfolios, to merge or consolidate it with another entity, to cause each fund
to become a separate trust, and to change the Victory Portfolios' domicile
without a shareholder vote. This flexibility could help reduce the expense and
frequency of future shareholder meetings for non-investment related issues.
The following table indicates each additional person known by the Fund
to own beneficially 5% or more of the shares of the Fund as of December 1,
1995:
<TABLE>
<CAPTION>
Percent of Total
Outstanding
Name & Address Shares Shares of Fund
-------------- ------ ----------------
<S> <C> <C>
KeyCorp Cash Balance Mutual 1,940,402.297 40.83%
Equity Fund
127 Public Square
Cleveland, OH 44114
</TABLE>
INDEPENDENT AUDITOR'S REPORT
FINANCIAL STATEMENTS
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<PAGE> 588
APPENDIX
The nationally recognized statistical rating organizations
(individually, an "NRSRO") that may be utilized by Key Advisers or the
Sub-Adviser with regard to portfolio investments for the Fund include Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), Duff
& Phelps, Inc. ("Duff"), Fitch Investors Service, Inc. ("Fitch"), IBCA Limited
and its affiliate, IBCA Inc. (collectively, "IBCA"), and Thomson BankWatch, Inc.
("Thomson"). Set forth below is a description of the relevant ratings of each
such NRSRO. The NRSROs that may be utilized by Key Advisers or the Sub-Adviser
and the description of each NRSRO's ratings is as of the date of this Statement
of Additional Information, and may subsequently change.
Long-Term Debt Ratings (may be assigned, for example, to corporate and
municipal bonds)
Description of the five highest long-term debt ratings by Moody's
(Moody's applies numerical modifiers ( e.g., 1, 2, and 3) in each rating
category to indicate the security's ranking within the category):
Aaa. Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.
A. Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in the
future.
Baa. Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba. Bonds which are rated Ba are judged to have speculative elements
- - their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times in the future. Uncertainty of
position characterizes bonds in this class.
Description of the five highest long-term debt ratings by S&P (S&P may
apply a plus (+) or minus (-) to a particular rating classification to show
relative standing within that classification):
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
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<PAGE> 589
A. Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB. Debt rated BB is regarded, on balance, as predominately
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. While such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposure to adverse conditions.
Description of the three highest long-term debt ratings by Duff:
AAA. Highest credit quality. The risk factors are negligible being
only slightly more than for risk-free U.S. Treasury debt.
AA+. High credit quality Protection factors are strong.
AA. Risk is modest but may vary slightly from time to time
AA-. because of economic conditions.
A+. Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
Description of the three highest long-term debt ratings by Fitch (plus
or minus signs are used with a rating symbol to indicate the relative position
of the credit within the rating category):
AAA. Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA. Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA."
Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of these issues is generally rated "[-]+."
A. Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher
ratings.
IBCA's description of its three highest long-term debt ratings:
AAA. Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic or
financial conditions are unlikely to increase investment risk
significantly.
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<PAGE> 590
AA. Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic, or
financial conditions may increase investment risk albeit not very
significantly.
A. Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial
conditions may lead to increased investment risk.
Short-Term Debt Ratings (may be assigned, for example, to commercial
paper, master demand notes, bank instruments, and letters of credit)
Moody's description of its three highest short-term debt ratings:
Prime-1. Issuers rated Prime-1 (or supporting institutions) have a
superior capacity for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a
strong capacity for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
S&P's description of its three highest short-term debt ratings:
A-1. This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to have extremely
strong safety characteristics are denoted with a plus sign (+).
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high
as for issues designated "A-1."
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<PAGE> 591
A-3. Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the
higher designations.
Duff's description of its five highest short-term debt ratings (Duff
incorporates gradations of "1+" (one plus) and "1-" (one minus) to assist
investors in recognizing quality differences within the highest rating
category):
Duff 1+. Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
Duff 1. Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
Duff 1-. High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors. Risk
factors are very small.
Duff 2. Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
Duff 3. Satisfactory liquidity and other protection factors qualify
issue as to investment grade.
Risk factors are larger and subject to more variation. Nevertheless,
timely payment is expected.
Fitch's description of its four highest short-term debt ratings:
F-1+. Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of assurance for
timely payment.
F-1. Very Strong Credit Quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than
issues rated F-1+.
F-2. Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as for issues assigned F-1+ or F-1 ratings.
F-3. Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate, however, near-term adverse changes could cause
these securities to be rated below investment grade.
IBCA's description of its three highest short-term debt ratings:
A+. Obligations supported by the highest capacity for timely
repayment.
A1. Obligations supported by a very strong capacity for timely
repayment.
A2. Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
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<PAGE> 592
Short-Term Loan/Municipal Note Ratings
Moody's description of its two highest short-term loan/municipal note
ratings:
MIG-1/VMIG-1. This designation denotes best quality. There is
present strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
MIG-2/VMIG-2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
S&P's description of its two highest municipal note ratings:
SP-1. Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
SP-2. Satisfactory capacity to pay principal and interest.
Short-Term Debt Ratings
Thomson BankWatch, Inc. ("TBW") ratings are based upon a qualitative
and quantitative analysis of all segments of the organization including, where
applicable, holding company and operating subsidiaries.
TBW Ratings do not constitute a recommendation to buy or sell
securities of any of these companies. Further, TBW does not suggest specific
investment criteria for individual clients.
The TBW Short-Term Ratings apply to commercial paper, other senior
short-term obligations and deposit obligations of the entities to which the
rating has been assigned.
The TBW Short-Term Ratings apply only to unsecured instruments that
have a maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an
untimely payment of principal or interest.
TBW-1. The highest category; indicates a very high degree of
likelihood that principal and interest will be paid on a timely basis.
TBW-2. The second highest category; while the degree of safety
regarding timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1".
TBW-3. The lowest investment grade category; indicates that while
more susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and interest in
a timely fashion is considered adequate.
TBW-4. The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
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<PAGE> 593
Definitions of Certain Money Market Instruments
Commercial Paper
Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.
Certificates of Deposit
Certificates of Deposit are negotiable certificates issued against
funds deposited in a commercial bank or a savings and loan association for a
definite period of time and earning a specified return. Bankers' Acceptances
Bankers' acceptances are negotiable drafts or bills of exchange,
normally drawn by an importer or exporter to pay for specific merchandise,
which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
U.S. Treasury Obligations
U.S. Treasury Obligations are obligations issued or guaranteed as to
payment of principal and interest by the full faith and credit of the U.S.
Government. These obligations may include Treasury bills, notes and bonds, and
issues of agencies and instrumentalities of the U.S. Government, provided such
obligations are guaranteed as to payment of principal and interest by the full
faith and credit of the U.S. Government.
U.S. Government Agency and Instrumentality Obligations
Obligations issued by agencies and instrumentalities of the U.S.
Government include such agencies and instrumentalities as the Government
National Mortgage Association, the Export-Import Bank of the United States, the
Tennessee Valley Authority, the Farmers Home Administration, the Federal Home
Loan Banks, the Federal Intermediate Credit Banks, the Federal Farm Credit
Banks, the Federal Land Banks, the Federal Housing Administration, the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation, and
the Student Loan Marketing Association. Some of these obligations, such as
those of the Government National Mortgage Association are supported by the full
faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others, such as
those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not obligated to do so by law. A Fund will invest
in the obligations of such instrumentalities only when the investment adviser
believes that the credit risk with respect to the instrumentality is minimal.
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<PAGE> 594
STATEMENT OF ADDITIONAL INFORMATION
THE VICTORY PORTFOLIOS
THE STOCK INDEX FUND
March 1, 1996
This Statement of Additional Information is not a Prospectus, but
should be read in conjunction with the Prospectus of The Victory Portfolios -
The Stock Index Fund, dated the same date as the date hereof (the
"Prospectus"). This Statement of Additional Information is incorporated by
reference in its entirety into the Prospectus. Copies of the Prospectus may be
obtained by writing The Victory Portfolios at Primary Funds Service
Corporation, P.O. Box 9741, Providence, RI 02940-9741, or by telephoning toll
free 800-539-FUND or 800-539-3863.
<TABLE>
<S> <C> <C>
Investment Policies and Limitations 1 INVESTMENT ADVISER
Valuation of Portfolio Securities 7 KeyCorp Mutual Fund Advisers, Inc.
Performance 7
Additional Purchase, Exchange and INVESTMENT SUB-ADVISER
Redemption Information 11 Society Asset Management, Inc.
Additional Purchase Information 11
Additional Exchange Information 12 ADMINISTRATOR
Additional Redemption Information 13 Concord Holding Corporation
Dividends and Distribution 13
Management of the Victory Portfolios 14 DISTRIBUTOR
Advisory and Other Contracts 23 Victory Broker-Dealer Services, Inc.
Additional Information 31
Independent Auditor's Report 35 TRANSFER AGENT
Financial Statements 35 Primary Funds Service Corporation
Appendix 36
CUSTODIAN
Key Trust Company of Ohio, N.A.
</TABLE>
<PAGE> 595
STATEMENT OF ADDITIONAL INFORMATION
The Victory Portfolios (the "Victory Portfolios") is an open-end
management investment company. The Victory Portfolios consist of twenty-eight
series of units of beneficial interest ("shares"), four of which series are
currently inactive. The outstanding shares represent interests in the
twenty-four separate investment portfolios which are currently active. This
Statement of Additional Information relates to The Stock Index Fund (the
"Fund") only. Much of the information contained in this Statement of Additional
Information expands on subjects discussed in the Prospectus. Capitalized terms
not defined herein are used as defined in the Prospectus. No investment in
shares of the Fund should be made without first reading the Fund's Prospectus.
INVESTMENT POLICIES AND LIMITATIONS
Additional Information on Fund Instruments
The following policies supplement the investment objectives and
policies of the Fund as set forth in the Prospectus.
Bankers' Acceptances and Certificates of Deposit. The Fund may invest
in bankers' acceptances, certificates of deposit, and demand and time deposits.
Bankers' acceptances are negotiable drafts or bills of exchange typically drawn
by an importer or exporter to pay for specific merchandise, which are
"accepted" by a bank, meaning, in effect, that the bank unconditionally agrees
to pay the face value of the instrument on maturity. Certificates of deposit
are negotiable certificates issued against funds deposited in a commercial bank
or a savings and loan association for a definite period of time and earning a
specified return.
Bankers' acceptances will be those guaranteed by domestic and foreign
banks, if at the time of purchase such banks have capital, surplus, and
undivided profits in excess of $100,000,000 (as of the date of their most
recently published financial statements). Certificates of deposit and demand
and time deposits invested in by the Fund will be those of domestic and foreign
banks and savings and loan associations, if (a) at the time of purchase such
financial institutions have capital, surplus, and undivided profits in excess
of $100,000,000 (as of the date of their most recently published financial
statements) or (b) the principal amount of the instrument is insured in full by
the Federal Deposit Insurance Corporation or the Savings Association Insurance
Fund.
The Fund may also invest in Eurodollar Certificates of Deposit
("ECDs") which are U.S. dollar-denominated certificates of deposit issued by
branches of foreign and domestic banks located outside the United States,
Yankee Certificates of Deposit ("Yankee CDs") which are certificates of deposit
issued by a U.S. branch of a foreign bank denominated in U.S. dollars and held
in the United States, Eurodollar Time Deposits ("ETDs") which are U.S.
dollar-denominated deposits in a foreign branch of a U.S. bank or a foreign
bank, and Canadian Time Deposits ("CTDs") which are U.S. dollar-denominated
certificates of deposit issued by Canadian offices of major Canadian Banks.
Commercial Paper. Commercial paper consists of unsecured promissory
notes issued by corporations. Except as noted below with respect to variable
amount master demand notes, issues of commercial paper normally have maturities
of less than nine months and fixed rates of return.
The Fund will purchase only commercial paper rated in one of the two
highest categories at the time of purchase by an NRSRO or, if not rated, found
by the Victory Portfolios' Board of Trustees to present minimal credit risks
and to be of comparable quality to instruments that are rated high quality
(i.e., in one of the two top ratings categories) by a NRSRO that is neither
controlling, controlled by, or under common control with the issuer of, or any
issuer, guarantor, or provider of credit support for, the instruments. For a
description of the rating symbols of each NRSRO see the Appendix to this
Statement of Additional Information.
<PAGE> 596
Variable Amount Master Demand Notes. Variable amount master demand
notes in which the Fund may invest are unsecured demand notes that permit the
indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate according to the terms of the instrument. Although there is no
secondary market for these notes, the Fund may demand payment of principal and
accrued interest at any time and may resell the notes at any time to a third
party. The absence of an active secondary market, however, could make it
difficult for the Fund to dispose of a variable amount master demand note if
the issuer defaulted on its payment obligations, and the Fund could, for this
or other reasons, suffer a loss to the extent of the default. While the notes
are not typically rated by credit rating agencies, issuers of variable amount
master demand notes must satisfy the same criteria as set forth above for
unrated commercial paper, and Key Advisers or the Sub-Adviser will continuously
monitor the issuer's financial status and ability to make payments due under
the instrument. Where necessary to ensure that a note is of "high quality,"
the Fund will require that the issuer's obligation to pay the principal of the
note be backed by an unconditional bank letter or line of credit, guarantee or
commitment to lend. For purposes of the Fund's investment policies, a variable
amount master note will be deemed to have a maturity equal to the longer of the
period of time remaining until the next readjustment of its interest rate or
the period of time remaining until the principal amount can be recovered from
the issuer through demand. (See Variable and Floating Rate Notes.)
Variable and Floating Rate Notes. The Fund may acquire variable and
floating rate notes, subject to its investment objectives, policies and
restrictions. A variable rate note is one whose terms provide for the
readjustment of its interest rate on set dates and which, upon such
readjustment, can reasonably be expected to have a market value that
approximates its par value. A floating rate note is one whose terms provide
for the readjustment of its interest rate whenever a specified interest rate
changes and which, at any time, can reasonably be expected to have a market
value that approximates its par value. Such notes are frequently not rated by
credit rating agencies; however, unrated variable and floating rate notes
purchased by the Fund will only be those determined by Key Advisers or the
Sub-Adviser, under guidelines established by the Trustees, to pose minimal
credit risks and to be of comparable quality, at the time of purchase, to rated
instruments eligible for purchase under the Fund's investment policies. In
making such determinations, Key Advisers or the Sub-Adviser will consider the
earning power, cash flow and other liquidity ratios of the issuers of such
notes (such issuers include financial, merchandising, bank holding and other
companies) and will continuously monitor their financial condition. Although
there may be no active secondary market with respect to a particular variable
or floating rate note purchased by the Fund, the Fund may resell the note at
any time to a third party. The absence of an active secondary market, however,
could make it difficult for the Fund to dispose of a variable or floating rate
note in the event the issuer of the note defaulted on its payment obligations
and the Fund could, for this or other reasons, suffer a loss to the extent of
the default. Variable or floating rate notes may be secured by bank letters of
credit.
Variable or floating rate notes may have maturities of more than one
year, as follows:
1. A note that is issued or guaranteed by the United States
government or any agency thereof and which has a variable rate of interest
readjusted no less frequently than annually will be deemed by the Fund to have
a maturity equal to the period remaining until the next readjustment of the
interest rate.
2. A variable rate note, the principal amount of which is
scheduled on the face of the instrument to be paid in one year or less, will be
deemed by the Fund to have a maturity equal to the period remaining until the
next readjustment of the interest rate.
3. A variable rate note that is subject to a demand feature
scheduled to be paid in one year or more will be deemed by the Fund to have a
maturity equal to the longer of the period remaining until the next
readjustment of the interest rate or the period remaining until the principal
amount can be recovered through demand.
4. A floating rate note that is subject to a demand feature will
be deemed by the Fund to have a maturity equal to the period remaining until
the principal amount can be recovered through demand.
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<PAGE> 597
As used above, a note is "subject to a demand feature" where the Fund
is entitled to receive the principal amount of the note either at any time on
no more than 30 days' notice or at specified intervals not exceeding one year
and upon no more than 30 days' notice.
Call Options. The Fund may sell (write) call options which are traded
on national securities exchanges with respect to common stock in its portfolio.
The Fund must at all times have in its portfolio the securities which it may be
obligated to deliver if the option is exercised. The Fund may write call
options on its common stocks in an attempt to realize a greater current return
than would be realized on the securities alone. The Fund may also write call
options as a partial hedge against a possible stock market decline or to extend
a holding period on a stock which is under consideration for sale in order to
create a long-term capital gain. In view of its investment objective, the Fund
generally would write call options only in circumstances where Key Advisers or
the Sub-Adviser does not anticipate significant appreciation of the underlying
security in the near future or has otherwise determined to dispose of the
security. As the writer of a call option, the Fund receives a premium for
undertaking the obligation to sell the underlying security at a fixed price
during the option period, if the option is exercised. So long as the Fund
remains obligated as a writer of a call option, it forgoes the opportunity to
profit from increases in the market price of the underlying security above the
exercise price of the option, except insofar as the premium represents such a
profit (and retains the risk of loss should the value of the underlying
security decline). The Fund may also enter into "closing purchase
transactions" in order to terminate its obligation as a writer of a call option
prior to the expiration of the option. Although the writing of call options
only on national securities exchanges increases the likelihood of the Fund's
ability to make closing purchase transactions, there is no assurance that the
Fund will be able to effect such transactions at any particular time or at any
acceptable price. The writing of call options could result in increases in the
Fund's portfolio turnover rate, especially during periods when market prices of
the underlying securities appreciate.
Puts. The Fund may acquire and sell put options on the securities
held in its portfolio.
A put is a right to sell a specified security (or securities) within a
specified period of time at a specified exercise price. The Fund may sell,
transfer, or assign a put only in conjunction with the sale, transfer, or
assignment of the underlying security or securities. The amount payable to the
Fund upon its exercise of a "put" is normally (i) the Fund's acquisition cost
of the securities (excluding any accrued interest which the Fund paid on the
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period the fund owned the securities, plus
(ii) all interest accrued on the securities since the last interest payment
date during that period.
Puts may be acquired by the Funds to facilitate the liquidity of its
portfolio assets. Puts may also be used to facilitate the reinvestment of the
Funds' assets at a rate of return more favorable than that of the underlying
security. Puts may, under certain circumstances, also be used to shorten the
maturity of underlying variable rate or floating rate securities for purposes
of calculating the remaining maturity of those securities and the
dollar-weighted average portfolio maturity of the Fund's assets. See "Variable
and Floating Rate Notes" and "VALUATION" in this Statement of Additional
Information.
Temporary Investments
The Fund may also invest temporarily in high quality investments or
cash during times of unusual market conditions for defensive purposes and in
order to accommodate shareholder redemption requests although currently it does
not intend to do so. Any portion of the Fund's assets maintained in cash will
reduce the amount of assets in securities and thereby reduce the Fund's yield
or total return.
"When-Issued" Securities. As discussed in the Prospectus, the Fund
may purchase securities on a "when issued" basis (i.e., for delivery beyond the
normal settlement date at a stated price and yield). When the Fund agrees to
purchase securities on a "when issued" basis, the Victory Portfolios' custodian
will set aside cash or liquid
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<PAGE> 598
portfolio securities equal to the amount of the commitment in a separate
account. Normally, the custodian will set aside portfolio securities to
satisfy the purchase commitment, and in such a case, the Fund may be required
subsequently to place additional assets in the separate account in order to
assure that the value of the account remains equal to the amount of the Fund's
commitment. It may be expected that the Fund's net assets will fluctuate to a
greater degree when it sets aside portfolio securities to cover such purchase
commitments than when it sets aside cash.
When the Fund engages in "when-issued" transactions, it relies on the
seller to consummate the trade. Failure of the seller to do so may result in
the Fund incurring a loss or missing the opportunity to obtain a price
considered to be advantageous. The Fund does not intend to purchase "when
issued" securities for speculative purposes, but only in furtherance of its
investment objective.
U.S. Government Obligations. The Fund may invest in obligations
issued or guaranteed by the U.S. Government, its agencies and
instrumentalities. Obligations of certain agencies and instrumentalities of
the U.S. Government are supported by the full faith and credit of the U.S.
Treasury; others are supported by the right of the issuer to borrow from the
U.S. Treasury; others are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; and still others are supported
only by the credit of the agency or instrumentality. No assurance can be given
that the U.S. Government will provide financial support to U.S.
Government-sponsored agencies or instrumentalities if it is not obligated to do
so by law. The Fund will invest in the obligations of such agencies and
instrumentalities only when Key Advisers or the Sub-Adviser believes that the
credit risk with respect thereto is minimal.
Securities Lending. The Fund may lend its portfolio securities to
broker-dealers, banks or institutional borrowers of securities. The Fund must
receive a minimum of 100% collateral, plus any interest due in the form of cash
or U.S. Government securities. This collateral must be valued daily and should
the market value of the loaned securities increase, the borrower must furnish
additional collateral to the Fund. During the time portfolio securities are
on loan, the borrower will pay the Fund any dividends or interest paid on such
securities plus any interest negotiated between the parties to the lending
agreement. Loans will be subject to termination by the Fund or the borrower at
any time. While the Fund will not have the right to vote securities on loan,
it intends to terminate the loan and regain the right to vote if that is
considered important with respect to the investment. The Fund will only enter
into loan arrangements with broker-dealers, banks or other institutions which
Key Advisers or the Sub-Adviser has determined are creditworthy under
guidelines established by the Victory Portfolios' Trustees. The Fund intends
to limit its securities lending to 33 1/3% of total assets.
Other Investment Companies. The Fund may invest up to 5% of its total
assets in the securities of any one investment company, but may not own more
than 3% of the securities of any one investment company or invest more than 10%
of its total assets in the securities of other investment companies. Pursuant
to an exemptive order received by the Victory Portfolios from the Commission,
the Fund may invest in money market funds of the Victory Portfolios. Key
Advisers and/or the Sub-Adviser will waive its investment advisory fee as to
all assets invested in other investment companies. Because such other
investment companies employ an investment adviser, such investment by the Fund
will cause shareholders to bear duplicative fees, such as management fees.
Repurchase Agreements. Securities held by the Fund may be subject to
repurchase agreements. Under the terms of a repurchase agreement, the Fund
would acquire securities from financial institutions or registered
broker-dealers deemed creditworthy by Key Advisers or the Sub-Adviser pursuant
to guidelines adopted by the Victory Portfolios' Trustees, subject to the
seller's agreement to repurchase such securities at a mutually agreed upon date
and price. The seller is required to maintain the value of collateral held
pursuant to the agreement at not less than the repurchase price (including
accrued interest). If the seller were to default on its repurchase obligation
or become insolvent, the Fund would suffer a loss to the extent that the
proceeds from a sale of the underlying portfolio securities were less than the
repurchase price, or to the extent that the disposition of such securities by
the
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<PAGE> 599
Fund is delayed pending court action. Repurchase agreements are considered by
the staff of the Commission to be loans by the Fund.
Reverse Repurchase Agreements. The Fund may borrow funds for
temporary purposes by entering into reverse repurchase agreements in accordance
with the investment restrictions described below. Pursuant to such agreements,
the Fund would sell portfolio securities to financial institutions such as
banks and broker-dealers, and agree to repurchase them at a mutually
agreed-upon date and price. At the time the Fund enters into a reverse
repurchase agreement, it will place in a segregated custodial account assets
(such as cash or other liquid high-grade securities) consistent with the Fund's
investment restrictions having a value equal to the repurchase price (including
the accrued interest); the collateral will be marked-to-market on a daily
basis, and will be continuously monitored to ensure that such equivalent value
is maintained. Reverse repurchase agreements involve the risk that the market
value of the securities sold by the Fund may decline below the price at which
the Fund is obligated to repurchase the securities. Reverse repurchase
agreements are considered to be borrowings under the Investment Company Act of
1940, as amended (the "1940 Act").
Futures Contracts. The Fund may enter into futures contracts, options
on futures contracts and stock index futures contracts and options thereon for
the purposes of remaining fully invested and reducing transaction costs.
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of a specific security, class of
securities, or an index at a specified future time and at a specified price. A
stock index futures contract is a bilateral agreement pursuant to which two
parties agree to take or make delivery of an amount of cash equal to a
specified dollar amount times the difference between the stock index value at
the close of trading of the contracts and the price at which the futures
contract is originally struck. Futures contracts which are standardized as to
maturity date and underlying financial instrument are traded on national
futures exchanges. Futures exchanges and trading are regulated under the
Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC"), a
U.S. Government agency.
Although futures contracts by their terms call for actual delivery and
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery.
Closing out an open futures position is done by taking an opposite position
("buying a contract which has previously been "sold," or "selling" a contract
previously purchased) in an identical contract to terminate the position. 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 acquisition of put and call options on futures contracts will,
respectively, 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. Brokerage commissions are
incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in
cash or government securities with a broker or custodian to initiate and
maintain open positions in futures contracts. A margin deposit is intended to
assure completion of the contract (delivery or acceptance of the underlying
security) if it is not terminated prior to the specified delivery date.
Minimal initial margin requirements are established by the futures exchange and
may be changed. Brokers may establish deposit requirements which are higher
than the exchange minimums. Initial margin deposits on futures contracts are
customarily set at levels much lower than the prices at which the underlying
securities are purchased and sold, typically ranging upward from less than 5%
of the value of the contract being traded.
After a futures contract position is opened, the value of the contract
is marked-to-market daily. If the futures contract price changes to the extent
that the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to
-5-
<PAGE> 600
and from the futures broker for as long as the contract remains open. The Fund
expects to earn interest income on its margin deposits.
When interest rates are expected to rise or market values of portfolio
securities are expected to fall, the Fund can seek through the sale of futures
contracts to offset a decline in the value of its portfolio securities. When
interest rates are expected to fall or market values are expected to rise, the
Fund, through the purchase of such contracts, can attempt to secure better
rates or prices for the Fund than might later be available in the market when
it effects anticipated purchases.
The Funds will only sell futures contracts to protect securities it
owns against price declines or purchase contracts to protect against an
increase in the price of securities it intends to purchase.
The Fund's ability to effectively utilize futures trading depends on
several factors. First, it is possible that there will not be a perfect price
correlation between the futures contracts and their underlying stock index.
Second, it is possible that a lack of liquidity for futures contracts could
exist in the secondary market, resulting in an inability to close a futures
position prior to its maturity date. Third, the purchase of a futures contract
involves the risk that the Fund could lose more than the original margin
deposit required to initiate a futures transaction.
Restrictions on the Use of Futures Contracts. The Fund will not enter
into futures contract transactions for purposes other than bona fide hedging
purposes to the extent that, immediately thereafter, the sum of its initial
margin deposits on open contracts exceeds 5% of the market value of the Fund's
total assets. In addition, the Fund will not enter into futures contracts to
the extent that the value of the futures contracts held would exceed 1/3 of the
Fund's total assets. Futures transactions will be limited to the extent
necessary to maintain the Fund's qualification as a regulated investment
company.
The Victory Portfolios have undertaken to restrict their futures
contract trading as follows: first, the Victory Portfolios will not engage in
transactions in futures contracts for speculative purposes; second, the Victory
Portfolios will not market its funds to the public as commodity pools or
otherwise as vehicles for trading in the commodities futures or commodity
options markets; third, the Victory Portfolios will disclose to all prospective
shareholders the purpose of and limitations on its funds' commodity futures
trading; fourth, the Victory Portfolios will submit to the Commodity Futures
Trading Commission ("CFTC") special calls for information. Accordingly,
registration as a commodities pool operator with the CFTC is not required.
In addition to the margin restrictions discussed above, transactions
in futures contracts may involve the segregation of funds pursuant to
requirements imposed by the Securities and Exchange Commission. Under those
requirements, where the Fund has a long position in a futures contract, it may
be required to establish a segregated account (not with a futures commission
merchant or broker) containing cash or certain liquid assets equal to the
purchase price of the contract (less any margin on deposit). For a short
position in futures or forward contracts held by the Fund, those requirements
may mandate the establishment of a segregated account (not with a futures
commission merchant or broker) with cash or certain liquid assets that, when
added to the amounts deposited as margin, equal the market value of the
instruments underlying the futures contracts (but are not less than the price
at which the short positions were established). However, segregation of assets
is not required if the Fund "covers" a long position. For example, instead of
segregating assets, the Fund, when holding a long position in a futures
contract, could purchase a put option on the same futures contract with a
strike price as high or higher than the price of the contract held by the fund.
In addition, where the Fund takes short positions, or engages in sales of call
options, it need not segregate assets if it "covers" these positions. For
example, where the Fund holds a short position in a futures contract, it may
cover by owning the instruments underlying the contract. The Fund may also
cover such a position by holding a call option permitting it to purchase the
same futures contract at a price no higher than the price at which the short
position was established. Where the Fund sells a call option on a futures
contract, it may cover either by entering into a long position in the same
contract at a price no higher than the strike price of the call option or by
owning the instruments underlying the futures contract. The Fund could also
cover this
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<PAGE> 601
position by holding a separate call option permitting it to purchase the same
futures contract at a price no higher than the strike price of the call option
sold by the fund.
In addition, the extent to which the Fund may enter into transactions
involving futures contracts may be limited by the Internal Revenue Code's
requirements for qualification as a registered investment company and the
Fund's intention to qualify as such.
Risk Factors in Futures Transactions. Positions in futures contracts
may be closed out only on an exchange which provides a secondary market for
such futures. However, there can be no assurance that a liquid secondary
market will exist for any particular futures contract at any specific time.
Thus, it may not be possible to close a futures position. In the event of
adverse price movements, the Fund would continue to be required to make daily
cash payments to maintain the required margin. In such situations, if the Fund
has insufficient cash, it may have to sell portfolio securities to meet daily
margin requirements at a time when it may be disadvantageous to do so. In
addition, the Fund may be required to make delivery of the instruments
underlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on the ability to
effectively hedge them. The Fund will minimize the risk that it will be unable
to close out a futures contract by only entering into futures contracts which
are traded on national futures exchanges and for which there appears to be a
liquid secondary market.
The risk of loss in trading futures contracts in some strategies can
be substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. Because the deposit
requirements in the futures markets are less onerous than margin requirements
in the securities market, there may be increased participation by speculators
in the futures market which may also cause temporary price distortions. A
relatively small price movement in a futures contract may result in immediate
and substantial loss (as well as gain) to the investor. For example, if at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit if the contract
were closed out. Thus, a purchaser or sale of a futures contract may result in
losses in excess of the amount invested in the contract. However, because the
futures strategies engaged in by the Fund are only for hedging purposes, Key
Advisers and the Sub-Adviser do not believe that the Fund is subject to the
risks of loss frequently associated with futures transactions. The Fund would
presumably have sustained comparable losses if, instead of the futures
contract, it had invested in the underlying financial instrument and sold it
after the decline.
Utilization of futures transactions by the Fund does involve the risk
of imperfect or no correlation where the securities underlying futures contract
have different maturities than the portfolio securities being hedged. It is
also possible that the Fund could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the fund has an open position in a futures contract or related
option.
The Fund also may invest, consistent with their investment objective
and policies, in zero coupon bonds, which are debt instruments that do not pay
current interest and are typically sold at prices greatly discounted from par
value. The return on a zero-coupon obligation, when held to maturity, equals
the difference between the par value and the original purchase price.
Zero-coupon obligations have greater price volatility than coupon obligations.
INVESTMENT RESTRICTIONS
The following investment restrictions are fundamental with respect to
the Fund and may be changed only by a vote of a majority of the outstanding
shares of the Fund as defined in "ADDITIONAL INFORMATION -- Miscellaneous" of
this Statement of Additional Information).
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<PAGE> 602
THE FUND MAY NOT:
1. Participate on a joint or joint and several basis in any
securities trading account.
2. Purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments (but this shall not prevent the
Fund from purchasing or selling options and futures contracts or from investing
in securities or other instruments backed by physical commodities).
3. Purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
Fund from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business). Investments by
the Fund in securities backed by mortgages on real estate or in marketable
securities of companies engaged in such activities are not hereby precluded.
4. Issue any senior security (as defined in the 1940 Act), except
that (a) the Fund may engage in transactions that may result in the issuance of
senior securities to the extent permitted under applicable regulations and
interpretations of the 1940 Act or an exemptive order; (b) the Fund may acquire
other securities, the acquisition of which may result in the issuance of a
senior security, to the extent permitted under applicable regulations or
interpretations of the 1940 Act; (c) subject to the restrictions set forth
below, the Fund may borrow money as authorized by the 1940 Act.
5. Borrow money, except that (a) the Fund may enter into commitments
to purchase securities in accordance with its investment program, including
delayed-delivery and when-issued securities and reverse repurchase agreements,
provided that the total amount of any such borrowing does not exceed 33 1/3% of
the Fund's total assets; and (b) the Fund may borrow money for temporary or
emergency purposes in an amount not exceeding 5% of the value of its total
assets at the time when the loan is made. Any borrowings representing more
than 5% of the Fund's total assets must be repaid before the Fund may make
additional investments.
6. Lend any security or make any other loan if, as a result, more
than 33 1/3% of its total assets would be lent to other parties, but this
limitation does not apply to purchases of publicly issued debt securities or to
repurchase agreements.
7. Underwrite securities issued by others, except to the extent that
the Fund may be considered an underwriter within the meaning of the Securities
Act of 1933 in the disposition of restricted securities.
8. With respect to 75% of the Fund's total assets, the Fund may not
purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities)
if, as a result, (a) more than 5% of the Fund's total assets would be invested
in the securities of that issuer, or (b) the Fund would hold more than 10% of
the outstanding voting securities of that issuer.
9. Purchase the securities of any issuer (other than securities
issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities, or repurchase agreements secured thereby) if, as a result,
more than 25% of the Fund's total assets would be invested in the securities of
companies whose principal business activities are in the same industry. In the
utilities category, the industry shall be determined according to the service
provided. For example, gas, electric, water and telephone will be considered
as separate industries.
The following restrictions are not fundamental and may be changed without
shareholder approval:
1. The Fund will not purchase or retain securities of any issuer if
the officers or Trustees of the Victory Portfolios or the officers or directors
of its investment adviser owning beneficially more than one half of 1% of the
securities of such issuer together own beneficially more than 5% of such
securities.
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<PAGE> 603
2. The Fund will not invest more than 10% of its total assets in the
securities of issuers which together with any predecessors have a record of
less than three years of continuous operation.
3. The Fund will not invest more than 15% of its net assets in
illiquid securities. Illiquid securities are securities that are not readily
marketable or cannot be disposed of promptly within seven days and in the usual
course of business at approximately the price at which the Fund has valued
them. Such securities include, but are not limited to, time deposits and
repurchase agreements with maturities longer than seven days. Securities that
may be resold under Rule 144A under securities acquired in a transaction or
chain of transactions pursuant to Section 4(2) of, or securities otherwise
subject to restrictions or limitations on resale, under the 1933 Act
("Restricted Securities"), shall not be deemed illiquid solely by reason of
being unregistered. Key Advisers or the Sub-Adviser determine whether a
particular security is deemed to be liquid based on the trading markets for the
specific security and other factors. However, because state securities laws
may limit the Fund's investment in Restricted Securities (regardless of the
liquidity of the investment), investments in Restricted Securities resalable
under Rule 144A will continue to be subject to applicable state law
requirements until such time, if ever, that such limitations are changed.
4. The Fund will not make short sales of securities, other than
short sales "against the box," or purchase securities on margin except for
short-term credits necessary for clearance of portfolio transactions, provided
that this restriction will not be applied to limit the use of options, futures
contracts and related options, in the manner otherwise permitted by the
investment restrictions, policies and investment program of the Fund.
5. The Fund may invest up to 5% of its total assets in the
securities of any one investment company, but may not own more than 3% of the
securities of any one investment company or invest more than 10% of its total
assets in the securities of other investment companies. Pursuant to an
exemptive order received by the Victory Portfolios from the Commission, the
Fund may invest in the money market funds of the Victory Portfolios.
State Regulations
In addition, the Fund, so long as its shares are registered under the
securities laws of the State of Texas and such restrictions are required as a
consequence of such registration, is subject to the following non-fundamental
policies, which may be modified in the future by the Trustees without a vote of
the Fund's shareholders: (i) the Fund has represented to the Texas State
Securities Board that it will not invest in oil, gas or mineral leases or
purchase or sell real property (including limited partnership interests, but
excluding readily marketable securities of companies which invest in real
estate); and (ii) the Fund has represented to the Texas State Securities Board
that it will not invest more than 5% of their net assets in warrants valued at
the lower of cost or market; provided that, included within that amount, but
not to exceed 2% of net assets, may be warrants which are not listed on the New
York or American Stock Exchanges. For purposes of this restriction, warrants
acquired in units or attached to securities are deemed to be without value.
The policies and limitations listed above supplement those set forth in
the Prospectus. Unless otherwise noted, whenever an investment policy or
limitation states a maximum percentage of the Fund's assets that may be
invested in any security or other asset, or sets forth a policy regarding
quality standards, such standard or percentage limitation will be determined
immediately after and as a result of the Fund's acquisition of such security or
other asset except in the case of borrowing (or other activities that may be
deemed to result in the issuance of a "senior security" under the 1940 Act).
Accordingly, any subsequent change in values, net assets, or other
circumstances will not be considered when determining whether the investment
complies with the Fund's investment policies and limitations. If the value of
the Fund's holdings of illiquid securities at any time exceeds the percentage
limitation applicable at the time of acquisition due to subsequent fluctuations
in value or other reasons, the Board of Trustees will consider what actions, if
any, are appropriate to maintain adequate liquidity.
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<PAGE> 604
FUTURE DEVELOPMENTS
The Fund may take advantage of other investment practices which are not
at present contemplated for use by the Fund or which currently are not
available but which may be developed, to the extent such investment practices
are both consistent with the Fund's investment objective and are legally
permissible for the Fund. Such investment practices, if they arise, may
involve risks which exceed those involved in the activities described in the
Prospectus and Statement of Additional Information. Prior to commencing any
new investment practice, the Fund will notify shareholders by means of
prospectus supplement.
Portfolio Turnover
The turnover rate stated in the Prospectus for the Fund's investment
portfolio is calculated by dividing the lesser of the Fund's purchases or sales
of portfolio securities for the year by the monthly average value of the
portfolio securities. The calculation excludes all securities whose
maturities, at the time of acquisition, were one year or less. In the fiscal
year ended October 31, 1995 and the fiscal period ended October 31, 1994, the
Fund's portfolio turnover rates were _____% and 11.06%, respectively.
VALUATION OF PORTFOLIO SECURITIES
Investment securities held by the Fund are valued on the basis of
valuations provided by an independent pricing service, approved by the Board of
Trustees, which uses information with respect to transactions of a security,
quotations from dealers, market transactions in comparable securities, and
various relationships between securities, in determining value. Specific
investment securities which are not priced by the approved pricing service will
be valued according to quotations obtained from dealers who are market makers
in those securities. Investment securities with less than 60 days to maturity
when purchased are valued at amortized cost which approximates market value.
Investment securities not having readily available market quotations will be
priced at fair value using a methodology approved in good faith by the Board of
Trustees.
PERFORMANCE
As described in the Prospectus, from time to time the "standardized
yield," "dividend yield," "average annual total return," "total return," and
"total return at net asset value" of an investment in Fund shares may be
advertised. An explanation of how yields and total returns are calculated and
the components of those calculations are set forth below.
Yield and total return information may be useful to investors in
reviewing the Fund's performance. The Fund's advertisement of its performance
must, under applicable Commission rules, include the average annual total
returns for the Fund for the 1, 5 and 10-year period (or the life of the class,
if less) as of the most recently ended calendar quarter. This enables an
investor to compare the Fund's performance to the performance of other funds
for the same periods. However, a number of factors should be considered before
using such information as a basis for comparison with other investments. An
investment in the Fund is not insured; its yield and total return are not
guaranteed and normally will fluctuate on a daily basis. When redeemed, an
investor's shares may be worth more or less than their original cost. Yield
and total return for any given past period are not a prediction or
representation by the Victory Portfolios of future yields or rates of return on
its shares. The yield and total returns of the Fund are affected by portfolio
quality, portfolio maturity, the type of investments the Fund holds and its
operating expenses.
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<PAGE> 605
STANDARDIZED YIELDS. The Fund's "yield" (referred to as "standardized
yield") for a given 30-day period for a class of shares is calculated using the
following formula set forth in rules adopted by the Commission that apply to
all funds that quote yields:
Standardized Yield = 2 [(a-b + 1)(6) - 1]
---
cd
The symbols above represent the following factors:
a = dividends and interest earned during the 30-day period.
b = expenses accrued for the period (net of any expense
reimbursements).
c = the average daily number of shares of that class outstanding
during the 30-day period that were entitled to receive
dividends.
d = the maximum offering price per share of the class on the last
day of the period, adjusted for undistributed net investment
income.
The standardized yield for a 30-day period may differ from its yield
for any other period. The Commission formula assumes that the standardized
yield for a 30-day period occurs at a constant rate for a six-month period and
is annualized at the end of the six-month period. This standardized yield is
not based on actual distributions paid by the Fund to shareholders in the
30-day period, but is a hypothetical yield based upon the net investment income
from the Fund's portfolio investments calculated for that period. The
standardized yield may differ from the "dividend yield," described below.
Additionally, because each class of shares is subject to different expenses, it
is likely that the standardized yields of the Fund classes of shares will
differ. The yield for the 30-day period ended October 31, 1995 was ____% .
DIVIDEND YIELD AND DISTRIBUTION RETURN. From time to time the Fund
may quote a "dividend yield" or a "distribution return." Dividend yield is
based on the share dividends derived from net investment income during a stated
period. Distribution return includes dividends derived from net investment
income and from realized capital gains declared during a stated period. Under
those calculations, the dividends and/or distributions declared during a stated
period of one year or less (for example, 30 days) are added together, and the
sum is divided by the maximum offering price per share of that class A) on the
last day of the period. When the result is annualized for a period of less
than one year, the "dividend yield" is calculated as follows:
Dividend Yield = Dividends + Number of days (accrual period) x 365
-----------------
Max. Offering Price (last day of period)
The maximum offering price for shares includes the maximum front-end
sales charge.
From time to time similar yield or distribution return calculations may
also be made using the net asset value (instead of its respective maximum
offering price) at the end of the period. The dividend yields at maximum
offering price and net asset value for the 30-day period ended October 31, 1995
were ____% and ____%, respectively.
TOTAL RETURNS. The "average annual total return" is an average annual
compounded rate of return for each year in a specified number of years. It is
the rate of return based on the change in value of a hypothetical initial
investment of $1,000 ("P" in the formula below) held for a number of years
("n") to achieve an Ending Redeemable Value ("ERV"), according to the following
formula:
(ERV)(1n) - 1 = Average Annual Total Return
---
( P )
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<PAGE> 606
The cumulative "total return" calculation measures the change in value
of a hypothetical investment of $1,000 over an entire period of years. Its
calculation uses some of the same factors as average annual total return, but
it does not average the rate of return on an annual basis. Total return is
determined as follows:
ERV - P = Total Return
-------
P
In calculating total returns, the current maximum sales charge of 4.75%
(as a percentage of the offering price) is deducted from the initial investment
("P") (unless the return is shown at net asset value, as discussed below).
Total returns also assume that all dividends and capital gains distributions
during the period are reinvested to buy additional shares at net asset value
per share, and that the investment is redeemed at the end of the period. The
average annual total return and cumulative total return for the period from
December 3, 1993 (commencement of operations) to October 31, 1995 (life of
fund) at maximum offering price were ___% and ____%, respectively. For the one
year period ended October 31, 1995 annual total return was ______%.
From time to time the Fund may also quote an "average annual total
return at net asset value" or a cumulative "total return at net asset value."
It is based on the difference in net asset value per share at the beginning and
the end of the period for a hypothetical investment in that class of shares
(without considering front-end or contingent sales charges) and takes into
consideration the reinvestment of dividends and capital gains distributions.
The average annual total return and cumulative total return for the period
December 3, 1993 (commencement of operations) to October 31, 1995 (life of
fund), at net asset value, was ____% and ___%, respectively. For the one year
period ended October 31, 1995, average annual total return was ___%.
OTHER PERFORMANCE COMPARISONS. From time to time the Fund may publish
the ranking of the performance of its shares by Lipper Analytical Services,
Inc. ("Lipper"), a widely-recognized independent mutual fund monitoring
service. Lipper monitors the performance of regulated investment companies,
including the Fund, and ranks the performance of the Fund against (i) all other
funds, excluding money market funds, and (ii) all other government bond funds.
The Lipper performance rankings are based on total return that includes the
reinvestment of capital gains distributions and income dividends but does not
take sales charges or taxes into consideration.
From time to time the Fund may publish the ranking of the performance
of its shares by Morningstar, Inc., an independent mutual fund monitoring
service that ranks mutual funds, including the Fund, in broad investment
categories (equity, taxable bond, tax-exempt and other) monthly, based upon
each fund's three, five and ten-year average annual total returns (when
available) and a risk adjustment factor that reflects Fund performance relative
to three-month U.S. Treasury bill monthly returns. Such returns are adjusted
for fees and sales loads. There are five ranking categories with a
corresponding number of stars: highest (5), above average (4), neutral (3),
below average (2) and lowest (1). Ten percent of the funds, series or classes
in an investment category receive 5 stars, 22.5% receive 4 stars, 35% receive 3
stars, 22.5% receive 2 stars, and the bottom 10% receive one star. Morningstar
ranks the shares of the Fund in relation to other taxable bond funds.
The total return on an investment made in shares of the Fund may be
compared with the performance for the same period of one or more of the
following indices: the Consumer Price Index, the Salomon Brothers World
Government Bond Index, the Standard & Poor's 500 Index, the Shearson Lehman
Government/Corporate Bond Index, the Lehman Aggregate Bond Index, and the J.P.
Morgan Government Bond Index. Other indices may be used from time to time.
The Consumer Price Index is generally considered to be a measure of inflation.
The Salomon Brothers World Government Bond Index generally represents the
performance of government debt securities of various markets throughout the
world, including the United States. The Lehman Government/Corporate Bond Index
generally represents the performance of intermediate and long-term government
and investment grade corporate debt securities. The Lehman Aggregate Bond
Index measures the performance of U.S. corporate bond issues, U.S. government
securities and mortgaged-backed securities. The J.P. Morgan Government Bond
Index generally represents the performance of government bonds issued by
various countries including the United States.
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<PAGE> 607
The S&P 500 Index is a composite index of 500 common stocks generally regarded
as an index of U.S. stock market performance. The foregoing bond indices are
unmanaged indices of securities that do not reflect reinvestment of capital
gains or take investment costs into consideration, as these items are not
application to indices.
From time to time, the yields and the total returns of the Fund may be
quoted in and compared to other mutual funds with similar investment objective
in advertisements, shareholder reports or other communications to shareholders.
The Fund may also include calculations in such communications that describe
hypothetical investment results. (Such performance examples will be based on
an express set of assumptions and are not indicative of the performance of any
Fund.) Such calculations may from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of the Fund would increase the value, not only
of the original Fund investment, but also of the additional Fund shares
received through reinvestment. As a result, the value of the Fund investment
would increase more quickly than if dividends or other distributions had been
paid in cash. The Fund may also include discussions or illustrations of the
potential investment goals of a prospective investor (including but not limited
to tax and/or retirement planning), investment management techniques, policies
or investment suitability of Fund, economic conditions, legislative
developments (including pending legislation), the effects of inflation and
historical performance of various asset classes, including but not limited to
stocks, bonds and Treasury bills. From time to time advertisements or
communications to shareholders may summarize the substance of information
contained in shareholder reports (including the investment composition of the
Fund, as well as the views of the investment adviser as to current market,
economic, trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to the Fund. The Fund may also include in advertisements, charts,
graphs or drawings which illustrate the potential risks and rewards of
investment in various investment vehicles, including but not limited to stock,
bonds, Treasury bills and shares of Fund as well as charts or graphs which
illustrate strategies such as dollar cost averaging, and comparisons of
hypothetical yields of investment in tax-exempt versus taxable investments. In
addition, advertisements or shareholder communications may include a discussion
of certain attributes or benefits to be derived by an investment in Fund. Such
advertisements or communications may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
therein. With proper authorization, Fund may reprint articles (or excerpts)
written regarding the Fund and provide them to prospective shareholders.
Performance information with respect to the Fund is generally available by
calling 1-800-539-3863.
Investors may also judge, and the Fund may at times advertise,
performance by comparing it to the performance of other mutual funds or mutual
fund portfolios with comparable investment objectives and policies, which
performance may be contained in various unmanaged mutual fund or market indices
or rankings such as those prepared by Dow Jones & Co., Inc., Standard & Poor's
Corporation, Lehman Brothers, Merrill Lynch, and Salomon Brothers, and in
publications issued by Lipper Analytical Services, Inc. and in the following
publications: IBC/Donoghue's Money Fund Reports, Ibottson Associates, Inc.,
Morningstar, CDA/Wiesenberger, Money Magazine, Forbes, Barron's, The Wall
Street Journal, The New York Times, Business Week, American Banker, Fortune,
Institutional Investor, U.S.A. Today. In addition to yield information,
general information about the Fund that appears in a publication such as those
mentioned above may also be quoted or reproduced in advertisements or in
reports to shareholders.
Advertisements and sales literature may include discussions of
specifics of the portfolio manager's investment strategy and process,
including, but not limited to, descriptions of security selection and analysis.
Advertisements may also include descriptive information about the
investment adviser, including, but not limited to, its status within the
industry, other services and products it makes available, total assets under
management, its investment philosophy.
-13-
<PAGE> 608
When comparing yield, total return and investment risk of an investment
in the Fund with other investments, investors should understand that certain
other investments have different risk characteristics than an investment in
shares of the Fund. For example, certificates of deposit may have fixed rates
of return and may be insured as to principal and interest by the FDIC, while
the Fund's returns will fluctuate and its share values and returns are not
guaranteed. Money market accounts offered by banks also may be insured by the
FDIC and may offer stability of principal. U.S. Treasury securities are
guaranteed as to principal and interest by the full faith and credit of the
U.S. government. Money market mutual funds may seek to offer a fixed price per
share.
ADDITIONAL PURCHASE, EXCHANGE AND REDEMPTION INFORMATION
The Victory Portfolios (see "Description of Victory Portfolios" below)
is open for business and the NAV is calculated on each Business Day. A
Business Day is every day on which the NYSE is open for business, the Federal
Reserve Bank of Cleveland is open and any other day (other than a day on which
no shares of the Fund are tendered for redemption and no order to purchase any
shares is received) during which there is sufficient trading in portfolio
instruments that the Fund's net asset value per share might be materially
affected. The NAV of each class is determined and its shares are priced as of
the close of regular trading of the NYSE (generally 4:00 p.m. Eastern time (the
"Valuation Time")) on each Business Day of the Fund. The NYSE or the Federal
Reserve Bank of Cleveland will not be open in observance of the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day,
Thanksgiving Day, and Christmas Day. The holiday closing schedule is subject
to change.
When the NYSE is closed, or when trading is restricted for any reason
other than its customary weekend or holiday closings, or under emergency
circumstances as determined by the Commission to warrant such action, the
Fund's Transfer Agent will determine the Fund's NAVs at Valuation Time. The
Fund's NAV may be affected to the extent that its securities are traded on days
that are not Business Days.
[If, in the opinion of the Trustees, conditions exist which make cash
payment undesirable, redemption payments may be made in whole or in part in
securities or other property, valued for this purpose as they are valued in
computing the NAV of the Fund. Shareholders receiving securities or other
property on redemption may realize a gain or loss for tax purposes and will
incur any costs of sale as well as the associated inconveniences.]
Pursuant to Rule 11a-3 under the 1940 Act, the Fund is required to give
shareholders at least 60 days' notice prior to terminating or modifying the
Fund's exchange privilege. Under the Rule, the 60-day notification requirement
may be waived if (i) the only effect of a modification would be to reduce or
eliminate an administrative fee, redemption fee or deferred sales charge
ordinarily payable at the time of exchange or (ii) the Fund temporarily
suspends the offering of shares as permitted under the 1940 Act or by the SEC
or because it is unable to invest amounts effectively in accordance with its
investment objective and policies.
In the Prospectus, the Victory Portfolios, Key Advisers and the
Sub-Adviser have notified shareholders that they reserve the right at any time
without prior notice to shareholders to refuse exchange purchases by any person
or group if, in Key Advisers or the Sub-Adviser's judgment, the Fund would be
unable to invest effectively in accordance with its investment objective and
policies, or would otherwise potentially be adversely affected.
-14-
<PAGE> 609
ADDITIONAL PURCHASE INFORMATION
REDUCED SALES CHARGE. Reduced sales charges are applicable to
purchases of $50,000 or more alone or in combination with purchases of shares
of other Victory Portfolios made at any one time. To obtain the reduction of
the sales charge, you or your investment professional must notify the Transfer
Agent at the time of purchase whenever a quantity discount is applicable to
your purchase. Upon such notification, you will receive the lowest applicable
sales charge.
In addition to investing at one time in any combination of shares of
the Victory Portfolios in an amount entitling you to a reduced sales charge,
you may qualify for a reduction in the sales charge under the following
programs:
COMBINED PURCHASES. When you invest in shares of the Victory
Portfolios for several accounts at the same time, you may combine these
investments into a single transaction if purchased through one investment
professional, and if the total is $50,000 or more. The following may qualify
for this privilege: an individual, or "company" as defined in Section 2(a)(8)
of the 1940 Act; an individual, spouse, and their children under age 21
purchasing for his, her, or their own account; a trustee, administrator or
other fiduciary purchasing for a single trust estate or single fiduciary
account or for a single or a parent-subsidiary group of "employee benefit
plans" (as defined in Section 3(3) of ERISA); and tax-exempt organizations
under Section 501(c)(3) of the Internal Revenue Code.
RIGHTS OF ACCUMULATION. Your "Rights of Accumulation" permit reduced
sales charges on future purchases of shares after you have reached a new
breakpoint. You can add the value of existing Victory Portfolios shares held
by you, your spouse, and your children under age 21, determined at the previous
day's NAV at the close of business, to the amount of your new purchase valued
at the current offering price to determine your reduced sales charge.
LETTER OF INTENT. If you anticipate purchasing $50,000 or more of
shares of the Fund alone or in combination with shares of certain other Victory
Portfolios within a 13-month period, you may obtain shares of the portfolios at
the same reduced sales charge as though the total quantity were invested in one
lump sum, by filing a non-binding Letter of Intent (the "Letter") within 90
days of the start of the purchases. Each investment you make after signing the
Letter will be entitled to the sales charge applicable to the total investment
indicated in the Letter. For example, a $2,500 purchase toward a $60,000 Letter
would receive the same reduced sales charge as if the $60,000 had been invested
at one time. To ensure that the reduced price will be received on future
purchases, you or your investment professional must inform the transfer agent
that the Letter is in effect each time shares are purchased. Neither income
dividends nor capital gain distributions taken in additional shares will apply
toward the completion of the Letter.
Your initial investment must be at least 5% of the total amount you
plan to invest. Out of the initial purchase, 5% of the dollar amount specified
in the Letter will be registered in your name and held in escrow. The shares
held in escrow cannot be redeemed or exchanged until the Letter is satisfied or
the additional sales charges have been paid. You will earn income dividends
and capital gain distributions on escrowed shares. The escrow will be released
when your purchase of the total amount has been completed. You are not
obligated to complete the Letter.
If you purchase more than the amount specified in the Letter and
qualify for a further sales charge reduction, the sales charge will be adjusted
to reflect your total purchase at the end of 13 months. Surplus funds will be
applied to the purchase of additional shares at the then current offering price
applicable to the total purchase.
-15-
<PAGE> 610
If you do not complete your purchase under the Letter within the
13-month period, your sales charge will be adjusted upward, corresponding to
the amount actually purchased, and if after written notice, you do not pay the
increased sales charge, sufficient escrowed shares will be redeemed to pay such
charge.
ADDITIONAL EXCHANGE INFORMATION
Shares of the Victory Portfolios (see "Description of Victory
Portfolios" below) may be exchanged for shares of any Victory money market fund
or any other fund of the Victory Portfolios with the same or a lower sales
charge. Shares of any Victory money market portfolio or any other fund of the
Victory Portfolios with a reduced sales charge may be exchanged for shares of
the Fund upon payment of the difference in the sales charge.
ADDITIONAL REDEMPTION INFORMATION
REINSTATEMENT PRIVILEGE. Within 90 days of a redemption, a shareholder
may reinvest all or part of the redemption proceeds of shares of the Fund or
any of the other Victory Portfolios into which shares of the Fund are
exchangeable as described below, at the net asset value next computed after
receipt by the Transfer Agent of the reinvestment order. No charge is
currently made for reinvestment in shares of the Fund but a reinvestment in
shares of certain other Victory Portfolios is subject to a $5.00 service fee.
The shareholder must ask the Distributor for such privilege at the time of
reinvestment. Any capital gain that was realized when the shares were redeemed
is taxable, and reinvestment will not alter any capital gains tax payable on
that gain. If there has been a capital loss on the redemption, some or all of
the loss may not be tax deductible, depending on the timing and amount of the
reinvestment. Under the Internal Revenue Code, if the redemption proceeds of
Fund shares on which a sales charge was paid are reinvested in shares of the
Fund or another of the Victory Portfolios within 90 days of payment of the
sales charge, the shareholder's basis in the shares of the Fund that were
redeemed may not include the amount of the sales charge paid. That would
reduce the loss or increase the gain recognized from redemption. The Fund may
amend, suspend or cease offering this reinvestment privilege at any time as to
shares redeemed after the date of such amendment, suspension or cessation. You
must reinstate your shares into an account with the same registration. This
privilege may be exercised only once by a shareholder with respect to the Fund.
For information on which funds are available for the Reinstatement Privilege,
please consult your program materials.
DIVIDENDS AND DISTRIBUTIONS
The Fund ordinarily declares and pays dividends from its net investment
income quarterly. The Fund distributes substantially all of its net investment
income and net capital gains, if any, to shareholders within each calendar year
as well as on a fiscal year basis to the extent required for the Fund to
qualify for favorable federal tax treatment.
The amount of distributions may vary from time to time depending on
market conditions and the composition of the Fund's portfolio.
For this purpose, the net income of the Fund, from the time of the
immediately preceding determination thereof, shall consist of all interest
income accrued on the portfolio assets of the Fund, dividend income, if any,
income from securities loans, if any, and realized capital gains and losses on
the Fund assets, less all expenses and liabilities of the Fund chargeable
against income. Interest income shall include discount earned, including both
original issue and market discount, on discount paper accrued ratably to the
date of maturity. Expenses, including the compensation payable to Key Advisers
or the Sub-Adviser, are accrued each day. The expenses and liabilities of the
Fund shall include those appropriately allocable to the Fund as well as a share
of the general expenses and liabilities of the Victory Portfolios in proportion
to the Fund's share of the total net assets of the Victory Portfolios.
Additional Tax Information
-16-
<PAGE> 611
It is the policy of the Fund to qualify for the favorable tax treatment
accorded regulated investment companies ("RICs") under Subchapter M of the
Code, for so long as such qualification is in the best interest of its
shareholders. By following such policy and distributing its income and gains
currently with respect to each taxable year, the Fund expects to eliminate or
reduce to a nominal amount the federal income and excise taxes to which it may
otherwise be subject.
In order to qualify as a RIC, the Fund must, among other things, (1)
derive at least 90% of its gross income from dividends, interest, payments with
respect to securities loans, and gains from the sale or other disposition of
stock or securities, foreign currencies or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in stock, securities or currencies, (2) derive less than 30% of its
gross income from the sale or other disposition of stock, securities, options,
futures, forward contracts, and certain foreign currencies (or options,
futures, or forward contracts on foreign currencies) held for less than three
months, and (3) diversify its holdings so that at the end of each quarter of
its taxable year (i) at least 50% of the market value of the Fund's assets is
represented by cash or cash items, U.S. Government securities, securities of
other RICs and other securities limited, in respect of any one issuer, to an
amount not greater than 5% of the value of the Fund's total assets and 10% of
the outstanding voting securities of such issuer, and (ii) not more than 25% of
the value of its total assets is invested in the securities of any one issuer
(other than U.S. Government securities) or of two or more issuers that the Fund
controls and that are engaged in the same, similar, or related trades or
businesses. These requirements may restrict the degree to which the Fund may
engage in short-term trading and concentrate investments. If the Fund
qualifies as a RIC, it will not be subject to federal income tax on the part of
its net investment income and net realized capital gains, if any, that it
distributes to shareholders with respect to each taxable year within the time
limits specified in the Code.
A non-deductible excise tax is imposed on regulated investment
companies that do not distribute in each calendar year an amount equal to 98%
of their ordinary income for the year plus 98% of their capital gain net income
for the 1-year period ending on October 31 of such calendar year. The balance
of such income must be distributed during the following calendar year. If
distributions during a calendar year are less than the required amount, the
fund is subject to a non-deductible excise tax equal to 4% of the deficiency.
Certain investment and hedging activities of the Fund, including
transactions in options, futures contracts, hedging transactions, forward
contracts, straddles, foreign currencies, and foreign securities, are subject
to special tax rules. In a given case, these rules may accelerate income to the
Fund, defer losses to the Fund, cause adjustments in the holding periods of the
Fund's securities, convert short-term capital losses into long-term capital
losses, or otherwise affect the character of the fund's income. These rules
could therefore affect the amount, timing and character of distributions to
shareholders. The Fund will endeavor to make any available elections
pertaining to such transactions in a manner believed to be in the best interest
of the Fund and its securities.
The Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of taxable dividends paid to any shareholder who has failed
to provide (or provided an incorrect) tax identification number, or is subject
to withholding pursuant to a notice from the Internal Revenue Service for
failure to properly include on his or her income tax return payments of
interest or dividends. This "backup withholding" is not an additional tax, and
any amounts withheld may be credited against the shareholder's ultimate U.S.
tax liability.
Information set forth in the Prospectus and this Statement of
Additional Information that relates to federal taxation is only a summary of
certain key federal tax considerations generally affecting purchasers of shares
of the Fund. No attempt has been made to present a complete explanation of the
federal tax treatment of the Fund or its shareholders, and this discussion is
not intended as a substitute for careful tax planning. Accordingly, potential
purchasers of shares of the Fund of these Portfolios are urged to consult their
tax advisers with specific reference to their own tax circumstances. In
addition, the tax discussion in the Prospectus and this Statement of Additional
Information is based on tax law in effect on the date of the Prospectus and
this Statement of Additional Information;
-17-
<PAGE> 612
such laws and regulations may be changed by legislative, judicial or
administrative action, sometimes with retroactive effect.
MANAGEMENT OF THE VICTORY PORTFOLIOS
Board of Trustees
Overall responsibility for management of the Victory Portfolios rests
with the Trustees, who are elected by the shareholders of the Victory
Portfolios. The Victory Portfolios are managed by the Trustees in accordance
with the laws of the State of Delaware governing business trusts. There are
currently seven Trustees, six of whom are not "interested persons" of the
Victory Portfolios within the meaning of that term under the 1940 Act. The
Trustees, in turn, elect the officers of the Victory Portfolios to supervise
actively its day-to-day operations.
The Trustees of the Victory Portfolios, their addresses, ages and their
principal occupations during the past five years are as follows:
<TABLE>
<CAPTION>
Position(s) Held Principal Occupation
With the Victory During Past 5 Years
Name, Address and Age Portfolios AND OTHER AFFILIATES
- --------------------- ---------------- --------------------
<S> <C> <C>
Leigh A. Wilson*, 51 Trustee and From 1989 to present, Chairman and
Glenleigh International Ltd. President Chief Executive Officer, Glenleigh
53 Sylvan Road North International Limited; previously
Westport, CT 06880 Chief Executive Officer, Paribas
North America and Paribas
Corporation; Trustee, The Victory
Funds and Spears, Benzak, Salomon
and Farrell Funds.
Robert G. Brown, 72 Trustee Retired; from October 1983 to
5460 N. Ocean Drive November 1990, President,
Singer Island, Riveria Beach Cleveland Advanced Manufacturing
FL 33404 Program (non-profit corporation
engaged in regional economic
development).
Edward P. Campbell, 46 Trustee From March, 1994 to present,
Nordson Corporation Executive Vice President and Chief
28601 Clemens Road Operating Officer of Nordson
Westlake, OH 44145 Corporation (manufacturer of
application equipment); from May,
1988 to March 1994, Vice President
of Nordson Corporation; from 1987
to December 1994, member of the
Supervisory Committee of Society's
Collective Investment Retirement
Fund; from May 1991 to August
1994, Trustee, Financial Reserves
Fund and from May 1993 to August
1994, Trustee, Ohio Municipal
Money Market Fund; Trustee, The
Victory Funds and SBSF Funds.
</TABLE>
-18-
<PAGE> 613
- ---------------
* Mr. Wilson is deemed to be an "interested person" of the Victory
Portfolios under the 1940 Act solely by reason of his position as
President.
-19-
<PAGE> 614
<TABLE>
<CAPTION>
Position(s) Held Principal Occupation
With the Victory During Past 5 Years
Name, Address and Age Funds AND OTHER AFFILIATES
- --------------------- ------------------------ --------------------
<S> <C> <C>
Dr. Harry Gazelle, 68 Trustee Retired radiologist, Drs. Hill and
17822 Lake Road Thomas Corp. Trustee, The Victory
Lakewood, Ohio 44107 Funds.
Dr. Thomas F. Morrissey, 62 Trustee 1995 Visiting Scholar, Bond
Weatherhead School of University, Queensland, Australia;
Management Professor, Weatherhead School of
Case Western Reserve Management, Case Western Reserve
University University; from 1989 to 1995,
10900 Euclid Avenue Associate Dean of Weatherhead
Cleveland, OH 44106-7235 School of Management and
Professor, Case Western Reserve
University; from 1987 to December
1994, Member of the Supervisory
Committee of Society's Collective
Investment Retirement Fund; from
May 1991 to August 1994, Trustee,
Financial Reserves Fund and from
May 1993 to August 1994, Trustee,
Ohio Municipal Money Market Fund;
Trustee, The Victory Funds.
Stanley I. Landgraf, 70 Trustee Retired; currently, Trustee,
41 Traditional Lane Rensselaer Polytechnic Institute;
Albany, NY 12211 Director, Elenel Corporation and
Mechanical Technology, Inc.;
Member, Board of Overseers, School
of Management, Rensselaer
Polytechnic Institute; Member, The
Fifty Group (a Capital Region
business organization); Trustee,
The Victory Funds.
H. Patrick Swygert, 52 Trustee President, Howard University;
Howard University formerly President, State
2400 6th Street, N.W. University of New York at Albany;
Suite 320 formerly, Executive Vice
Washington, D.C. 20059 President, Temple University;
Trustee, The Victory Funds.
</TABLE>
The Board presently has an Investment Policy Committee and a Business,
Legal, and Audit Committee. The members of the Investment Policy Committee are
Landgraf (Chairman), Morrissey and Brown, who will serve until May 1996. The
function of the Investment Policy Committee is to review the existing
investment policies of the Victory Portfolios, including the levels of risk and
types of funds available to shareholders, and make recommendations to the Board
of Trustees regarding the revision of such policies or, if necessary, the
submission of such revisions to the Victory Portfolios' shareholders for their
consideration. The members of the Business, Legal and Audit Committee are
Messrs. Swygert (Chairman), Campbell and Gazelle who will serve until May 1996.
-20-
<PAGE> 615
The function of the Business, Legal and Audit Committee is to recommend
independent auditors and monitor accounting and financial matters; to nominate
persons to serve as disinterested Trustees and Trustees to serve on committees
of the Board; and to review compliance and contract matters.
The Investment Policy Committee met four times during the 12 months
ended October 31, 1995. The Business, Legal and Audit Committee was
constituted on May 24, 1995 (and has met twice since then) and replaced the
Audit Committee, the Legal Committee and the Nominating Committee, which met
three times, one time and one time, respectively, during the 12 month period
ended October 31, 1995.
REMUNERATION OF TRUSTEES AND CERTAIN EXECUTIVE OFFICERS
Effective June 1, 1995, each Trustee (other than Leigh A. Wilson)
receives an annual fee of $27,000 for serving as Trustee of all the funds of
the Victory Portfolios, and an additional per meeting fee ($2,400 in person and
$1,200 per telephonic meeting).
Effective June 1, 1995, Leigh A. Wilson receives an annual fee of
$33,000 for serving as President and Trustee for all of the funds of the
Victory Portfolios, and an additional per meeting fee ($3,000 in person and
$1,500 per telephonic meeting).
The following tables indicate the compensation received by each Trustee
from the Fund and from the Victory "Fund Complex"* for the 12 month period
ended on October 31, 1995. For certain Trustees, the amounts from the Fund
include amounts paid by the Predecessor Fund, a portfolio of The Victory Funds
which was recognized as the Fund as of June 5, 1995.
-21-
<PAGE> 616
<TABLE>
<CAPTION>
Pension or Total
Retirement Benefits Estimated Annual Compensa- Total Compensation
Accrued as Benefits tion from from Victory
Portfolio Expenses Upon Retirement Fund "Fund Complex"*
------------------- ----------------- --------- ------------------
<S> <C> <C> <C> <C>
Leigh A. Wilson, Trustee . . . -0- -0- $759.38 $46,716.97
Robert G. Brown, Trustee . . . -0- -0- 797.69 39,815.98
Edward P. Campbell, Trustee . . -0- -0- 689.90 33,799.68
Harry Gazelle, Trustee . . . . -0- -0- 661.40 35,916.98
John W. Kemper, Trustee# . . . -0- -0- 356.16 22,567.31
Stanley I. Landgraf, Trustee . -0- -0- 689.90 34,615.98
Thomas F. Morrissey, Trustee . -0- -0- 689.90 40,366.98
H. Patrick Swygert, Trustee . . -0- -0- 689.90 37,116.98
John D. Buckingham, Trustee# . -0- -0- 356.6 18,841.89
John R. Young, Trustee# . . . . -0- -0- 379.85 21,963.81
</TABLE>
# Resigned
- ---------------
* For certain Trustees, these amounts include compensation received from
The Victory Funds (which were reorganized into the Victory Portfolios
as of June 5, 1995), the SBSF Funds (the investment adviser of which
was acquired by KeyCorp effective April, 1995) and Society's Collective
Investment Retirement Funds, which were reorganized into the Victory
Balanced Fund and Victory Government Mortgage Fund as of December 19,
1994. There are presently 24 mutual funds from which the above-named
Trustees are compensated in the Victory "Fund Complex," but not all of
the above-named Trustees serve on the boards of each fund in the "Fund
Complex."
-22-
<PAGE> 617
Officers
The officers of the Victory Portfolios, their addresses, ages and
principal occupations during the past five years are as follows:
<TABLE>
<CAPTION>
Principal occupation
Position with the during past 5 years
Name Victory Portfolios AND OTHER AFFILIATES
---- ------------------ --------------------
<S> <C> <C>
Leigh A. Wilson, 51 President and Trustee From 1989 to present, Chairman and
Glenleigh International Ltd. Chief Executive Officer, Glenleigh
53 Sylvan Road North International Limited; from 1984-
Westport, CT 06880 1989, Chief Executive Officer,
Paribas North America and Paribas
Corporation; Trustee to The Victory
Funds and SBSF Funds.
William B. Blundin, 57 Vice President Senior Vice President of BISYS Fund
BISYS Fund Services Services; officer of other
125 West 55th Street investment companies administered
New York, New York 10019 by BISYS Fund Services; President
and Chief Executive Officer of
Vista Broker-Dealer Services, Inc.,
Emerald Asset Management, Inc. and
BNY Hamilton Distributors, Inc.,
registered broker/dealers.
J. David Huber, 49 Vice President Executive Vice President, BISYS
BISYS Fund Services Fund Services.
3435 Stelzer Road
Columbus, OH 43219-3035
Scott A. Englehart, 33 Secretary From October 1990 to present,
BISYS Fund Services employee of BISYS Fund Services,
3435 Stelzer Road Inc.; from 1985 to October 1990,
Columbus, OH 43219-3035 Manager of Banking Center, Fifth
Third Bank.
George O. Martinez, 36 Assistant Secretary From March 1995 to present, Senior
BISYS Fund Services Vice President and Director of
3435 Stelzer Road Legal and Compliance Services,
Columbus, OH 43219-3035 BISYS Fund Services; from June
1989-March 1995, Vice President and
Associate General Counsel, Alliance
Capital Management.
Martin R. Dean, 32 Treasurer From May 1994 to present, employee
BISYS Fund Services of BISYS Fund Services; from
3435 Stelzer Road January 1987 - April 1994, Senior
Columbus, OH 43219-3035 Manager, KPMG Peat Marwick.
</TABLE>
-23-
<PAGE> 618
<TABLE>
<S> <C> <C>
Adrian J. Waters, 33 Assistant Treasurer From May 1993 to present, employee
BISYS Fund Services (Ireland) of BISYS Fund Services; from 1989-
Limited May 1993, Manager, Price
ITI House Waterhouse.
12 Earlsfort Terrace
Dublin 2, Ireland
</TABLE>
The mailing address of each of the officers of the Victory Portfolios
is 3435 Stelzer Road, Columbus, Ohio 43219-3035.
The officers of the Victory Portfolios (other than Leigh Wilson)
receive no compensation directly from the Victory Portfolios for performing the
duties of their offices. Concord Holding Corporation receives fees from the
Victory Portfolios for acting as Administrator.
As of January 6, 1996, the Trustees and officers as a group owned
beneficially less than 1% of the Fund.
Investment Adviser and Sub-Adviser
Key Advisers was organized as an Ohio corporation on July 27, 1995 and
is registered as an investment adviser under the Investment Advisers Act of
1940. It is a wholly-owned subsidiary of KeyCorp Asset Management Holdings,
Inc., which is a wholly-owned subsidiary of Society National Bank, a
wholly-owned subsidiary of KeyCorp. Affiliates of Key Advisers manage
approximately $37 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals and mutual funds.
KeyCorp, a financial services holding company, is headquartered at 127
Public Square, Cleveland, Ohio 44114. As of September 30, 1995, KeyCorp had an
asset base of $68 billion, with banking offices in 26 states from Maine to
Alaska, and trust and investment offices in 16 states. KeyCorp is the
resulting entity of the merger in 1994 of Society Corporation, the bank holding
company of which Society National Bank was a wholly-owned subsidiary, and
KeyCorp, the former bank holding company, which merger was consummated during
the first quarter of 1994. KeyCorp's major business activities include
providing traditional banking and associated financial services to consumer,
business and commercial markets. Its non-bank subsidiaries include investment
advisory, securities brokerage, insurance, bank credit card processing, and
mortgage leasing companies. Society National Bank is the lead affiliate bank
of KeyCorp.
The following table lists the advisory fees for each mutual fund that
is advised by Key Advisers.
.25 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Institutional Money Market Fund*
.35 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Prime Obligations Fund*
Victory U.S. Government Obligations Fund*
Victory Tax-Free Money Market Fund*
.50 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Money Market Fund*
Victory Limited Term Income Fund*
Victory Government Mortgage Fund*
Victory Financial Reserves Fund*
Victory Fund for Income #
-24-
<PAGE> 619
.55 OF 1% OF AVERAGE DAILY NET ASSETS
Victory National Municipal Bond Fund*
Victory Government Bond Fund*
Victory New York Tax-Free Fund*
.60 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Bond Fund*
Victory Stock Index Fund*
.65 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Diversified Stock Fund*
.75 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Intermediate Income Fund*
Victory Investment Quality Bond Fund*
Victory Ohio Regional Stock Fund*
1% OF AVERAGE DAILY NET ASSETS
Victory Balanced Fund*
Victory Value Fund*
Victory Growth Fund*
Victory Special Value Fund*
Victory Special Growth Fund+
1.10% OF AVERAGE DAILY ASSETS
Victory International Growth Fund*
# First Albany Asset Management Corporation serves as
sub-adviser to the Victory Fund for Income, for which it
receives .20% of average daily net assets.
+ T. Rowe Price Associates, Inc. serves as sub-adviser to the
Victory Special Growth Fund, for which it receives .25% of
average daily net assets up to $100 million and .20% of
average daily net assets in excess of $100 million.
* Society Asset Management, Inc. (the Sub-Adviser) serves as
sub-adviser to each of these funds. For its services under
the investment sub-advisory agreement, Key Advisers pays the
Sub-Adviser sub-advisory fees at rates (based on an annual
percentage of average daily net assets) which vary according
to the table set forth below:
For the Victory Balanced Fund, Diversified Stock Fund, Growth Fund, Stock Index
Fund and Value Fund:
<TABLE>
<CAPTION>
Rate of
Net Assets Sub-Advisory Fee*
---------- -----------------
<S> <C>
Up to $10,000,000 0.65%
Next $15,000,000 0.50%
Next $25,000,000 0.40%
Above $50,000,000 0.35%
</TABLE>
For the Victory International Growth Fund, Ohio Regional Stock Fund and Special
Value Fund:
<TABLE>
<CAPTION>
Rate of
Net Assets Sub-Advisory Fee*
---------- -----------------
<S> <C>
Up to $10,000,000 0.90%
Next $15,000,000 0.70%
Next $25,000,000 0.55%
Above $50,000,000 0.45%
</TABLE>
-25-
<PAGE> 620
For the Victory Intermediate Income Fund, Investment Quality Bond Fund, Limited
Term Income Fund, Ohio Municipal Bond Fund, Government Bond Fund, Government
Mortgage Fund, National Municipal Bond Fund and New York Tax-Free Fund:
<TABLE>
<CAPTION>
Rate of
Net Assets Sub-Advisory Fee*
---------- -----------------
<S> <C>
Up to $10,000,000 0.40%
Next $15,000,000 0.30%
Next $25,000,000 0.25%
Above $50,000,000 0.20%
</TABLE>
For the Victory Prime Obligations Fund, Tax-Free Money Market Fund, U.S.
Government Obligations Fund, Financial Reserves Fund, Institutional Money
Market Fund and Ohio Municipal Money Market Fund:
<TABLE>
<CAPTION>
Rate of
Net Assets Sub-Advisory Fee*
---------- -----------------
<S> <C>
Up to $10,000,000 0.25%
Next $15,000,000 0.20%
Next $25,000,000 0.15%
Above $50,000,000 0.125%
</TABLE>
- ---------------
* As a percentage of average daily net assets. The Sub-Adviser has the
right to voluntarily waive any portion of the sub- advisory fee from
time to time.
ADVISORY AND OTHER CONTRACTS
Unless sooner terminated, the Investment Advisory Agreement between
Key Advisers and the Funds provides that it will continue in effect as to a
particular Fund for an initial two-year term and for consecutive one-year terms
thereafter, provided that such continuance is approved at least annually by the
Victory Portfolios' Trustees or by vote of a majority of the outstanding shares
of such Fund (as defined under "GENERAL INFORMATION - Miscellaneous" in the
Prospectuses), and, in either case, by a majority of the Trustees who are not
parties to the Investment Advisory Agreement or interested persons (as defined
in the 1940 Act) of any party to the Investment Advisory Agreement, by votes
cast in person at a meeting called for such purpose.
The Investment Advisory Agreement is terminable as to a particular
Fund at any time on 60 days' written notice without penalty by the Trustees, by
vote of a majority of the outstanding shares of that Fund, or by Key Advisers.
The Investment Advisory Agreement also terminates automatically in the event of
any assignment, as defined in the 1940 Act.
The Investment Advisory Agreement provides that Key Advisers shall not
be liable for any error of judgment or mistake of law or for any loss suffered
by the Victory Portfolios in connection with the performance of services
pursuant to the Investment Advisory Agreement, except a loss resulting from a
breach of fiduciary duty with respect to the receipt of compensation for
services or a loss resulting from willful misfeasance, bad faith, or gross
negligence on the part of Key Advisers in the performance of its duties, or
from reckless disregard by it of either duties and obligations thereunder.
Under the Investment Advisory Agreement, Key Advisers has agreed to
provide the investment advisory services described in the Prospectus. For the
services provided and expenses assumed pursuant to the Investment Advisory
Agreement, the Fund pays Key Advisers a fee, computed daily and paid monthly,
at the annual rate of sixty one-hundredths of one percent (.60%) of the average
daily net assets of the Fund.
Prior to January, 1993, Society National Bank served as investment
adviser to the Fund. From January 1, 1993 until December 31, 1995, Society
Asset Management, Inc. served as investment adviser to the Fund. For the
fiscal years ended October 31, 1994 and October 31, 1995, the Fund paid
investment advisory fees of $_______ and $286,360, respectively, after fee
reductions of $_______ and $100,857, respectively.
-26-
<PAGE> 621
Under the Investment Advisory Agreement, Key Advisers may delegate a
portion of its responsibilities to a sub-adviser. In addition, the Investment
Advisory Agreement provides that Key Advisers may render services through its
own employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser of the Fund and are under the common
control of KeyCorp as long as all such persons are functioning as part of an
organized group of persons, managed by authorized officers of Key Advisers.
Key Advisers has entered into an investment sub-advisory agreement
with its affiliate, Society Asset Management, Inc. on behalf of the Fund. The
Sub-Adviser is a wholly-owned subsidiary of KeyCorp Asset Management Holdings,
Inc. With respect to the day to day management of the Fund, under the
sub-advisory agreement, the Sub-Adviser makes decisions concerning, and places
all orders for, purchases and sales of securities and helps maintain the
records relating to such purchases and sales. The Sub-Adviser may, in its
discretion, provide such services through its own employees or the employees of
one or more affiliated companies that are qualified to act as an investment
adviser to the Company under applicable laws and are under the common control
of KeyCorp; provided that (i) all persons, when providing services under the
sub-advisory agreement, are functioning as part of an organized group of
persons, and (ii) such organized group of persons is managed at all times by
authorized officers of the Sub-Adviser. This arrangement will not result in the
payment of additional fees by the Fund.
Glass-Steagall Act
In 1971 the United States Supreme Court held in Investment Company
Institute v. Camp that the federal statute commonly referred to as the
Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision:
(a) forbid a bank holding company registered under the Federal Bank Holding
Company Act of 1956 (the "Holding Company Act") or any non-bank affiliate
thereof from sponsoring, organizing, or controlling a registered, open-end
investment company continuously engaged in the issuance of its shares, but (b)
do not prohibit such a holding company or affiliate from acting as investment
adviser, transfer agent, and custodian to such an investment company. In 1981
the United States Supreme Court held in Board of Governors of the Federal
Reserve System v. Investment Company Institute that the Board did not exceed
its authority under the Holding Company Act when it adopted its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to registered closed-end investment companies.
In the Board of Governors case, the Supreme Court also stated that if a
national bank complied with the restrictions imposed by the Board in its
regulation and interpretation authorizing bank holding companies and their
non-bank affiliates to act as investment advisers to investment companies, a
national bank performing investment advisory services for an investment company
would not violate the Glass-Steagall Act.
Key Advisers and the Sub-Adviser believe that they may perform the
services for the Victory Portfolios contemplated by the Prospectus, this
Statement of Additional Information, and the Investment Advisory Agreement (and
Sub-Advisory Agreement) with the Victory Portfolios without violation of
applicable statutes and regulations and has so represented in its Investment
Advisory Agreement (and Sub-Advisory Agreement) with the Victory Portfolios.
Key Trust Company of Ohio, N.A. believes that it may perform the services for
the Victory Portfolios contemplated by the Prospectus, this Statement of
Additional Information, and the Shareholder Servicing Agreement with the
Victory Portfolios (as described below) without violation of applicable
statutes and regulations and has so represented in such Shareholder Servicing
Agreement. Future changes in either federal or state statutes and regulations
relating to the permissible activities of banks or bank holding companies and
the subsidiaries or affiliates of those entities, as well as further judicial
or administrative decisions or interpretations of present and future statutes
and regulations, could prevent or restrict Key Trust Company of Ohio, N.A., Key
Advisers or the Sub-Adviser from continuing to perform such services for the
Victory Portfolios. Depending upon the nature of any changes in the services
which could be provided by Key Trust Company of Ohio, N.A., Key Advisers or the
Sub-Adviser, the Trustees of the Victory Portfolios would review the Victory
Portfolios' relationship with Key Trust
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Company of Ohio, N.A., Key Advisers or the Sub-Adviser and consider taking all
action necessary in the circumstances.
Should future legislative, judicial, or administrative action prohibit
or restrict the proposed activities of Key Trust Company of Ohio, N.A., Key
Advisers or the Sub-Adviser and its affiliated and correspondent banks and
other non-bank affiliates in connection with customer purchases of shares of
the Victory Portfolios, the banks and such non-bank affiliates might be
required to alter materially or discontinue the services offered by them to
customers. It is not anticipated, however, that any change in the Victory
Portfolios' method of operations would affect its net asset value per share or
result in financial losses to any customer.
From time to time, advertisements, supplemental sales literature and
information furnished to present or prospective shareholders of the Fund may
include descriptions of Key Trust Company of Ohio, N.A., Key Advisers and the
Sub-Adviser including, but not limited to, (i) descriptions of the operations
of Key Trust Company of Ohio, N.A., Key Advisers and the Sub-Adviser; (ii)
descriptions of certain personnel and their functions; and (iii) statistics and
rankings related to the operations of Key Trust Company of Ohio, N.A., Key
Advisers and the Sub-Adviser.
Portfolio Transactions
Pursuant to the Investment Advisory (Sub-Advisory), Agreement, Key
Advisers determines, subject to the general supervision of the Trustees of the
Victory Portfolios, and in accordance with each Fund's investment objective and
restrictions, which securities are to be purchased and sold by the Fund, and
which brokers are to be eligible to execute its portfolio transactions.
Purchases from underwriters and/or broker-dealers of portfolio securities
include a commission or concession paid by the issuer to the underwriter and/or
broker-dealer and purchases from dealers serving as market makers may include
the spread between the bid and asked price. While Key Advisers and the
Sub-Adviser generally seek competitive prices (inclusive of any spread or
commission), the Fund may not necessarily pay the lowest prices available on
each transaction, for reasons discussed below.
Allocation of transactions to dealers is determined by Key Advisers or
the Sub-Adviser in their best judgment and in a manner deemed fair and
reasonable to shareholders. The primary consideration is prompt execution of
orders in an effective manner at the most favorable price. Subject to this
consideration, dealers who provide supplemental investment research to Key
Advisers or the Sub-Adviser may receive orders for transactions by the Victory
Portfolios. Information so received is in addition to and not in lieu of
services required to be performed by Key Advisers or the Sub-Adviser and does
not reduce the advisory fees payable to Key Advisers by the Victory Portfolios.
Such information may be useful to Key Advisers or the Sub-Adviser in serving
both the Victory Portfolios and other clients and, conversely, such
supplemental research information obtained by the placement of orders on behalf
of other clients may be useful to Key Advisers or the Sub-Adviser in carrying
out its obligations to the Victory Portfolios. In the future, the Trustees may
also authorize the allocation of brokerage to affiliated broker-dealers on an
agency basis to effect portfolio transactions. In such event, the Trustees
will adopt procedures incorporating the standards of Rule 17e-1 under the 1940
Act, which requires that the commission paid to affiliated broker-dealers be
"reasonable and fair compared to the commission, fee or other remuneration
received, or to be received, by other brokers in connection with comparable
transactions involving similar securities during a comparable period of time."
At times, the Fund may also purchase portfolio securities directly from dealers
acting as principals, underwriters or market makers. As these transactions are
usually conducted on a net basis, no brokerage commissions are paid by the
Fund.
The Victory Portfolios will not execute portfolio transactions
through, acquire portfolio securities issued by, make savings deposits in, or
enter into repurchase or reverse repurchase agreements with Key Advisers, the
Sub-Adviser, Key Trust Company of Ohio, N.A. or its affiliates, Concord Holding
Corporation, Victory Broker-Dealer Services, Inc. or their affiliates, and will
not give preference to Key Trust Company of Ohio, N.A.'s correspondent banks or
affiliates, or Concord Holding Corporation or Victory Broker-Dealer Services,
Inc. with respect to such transactions, securities, savings deposits,
repurchase agreements, and reverse repurchase agreements.
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<PAGE> 623
Investment decisions for the Fund are made independently from those
made for the other funds or any other investment company or account managed by
Key Advisers (or Society). Any such other investment company or account may
also invest in the same securities as a particular fund. When a purchase or
sale of the same security is made at substantially the same time on behalf of
the Fund and another fund, investment company or account, the transaction will
be averaged as to price, and available investments allocated as to amount, in a
manner which Key Advisers (or Society) believes to be equitable to the Fund and
such other fund, investment company or account. In some instances, this
investment procedure may adversely affect the price paid or received by the
Fund or the size of the position obtained by the Fund. To the extent permitted
by law, Key Advisers (or Society) may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for the other funds
or for other investment companies or accounts in order to obtain best
execution. As provided by the Investment Advisory (and Sub-Advisory)
Agreement, in making investment recommendations for the Victory Portfolios, Key
Advisers (or Society) will not inquire or take into consideration whether an
issuer of securities proposed for purchase or sale by a Fund is a customer of
Society, its parents or subsidiaries or affiliates and, in dealing with their
commercial customers, Key Advisers (Society), its parents, subsidiaries, and
affiliates will not inquire or take into consideration whether securities of
such customers are held by the Victory Portfolios.
In the fiscal years ended October 31, 1995 and October 31, 1994, the
Fund paid $_______ and $12,176, respectively, in brokerage commissions.
Administrator
Currently, Concord Holding Corporation ("CHC") serves as general
manager and administrator (the "Administrator") to the Fund. The Administrator
assists in supervising all operations of each fund (other than those performed
by Key Advisers or the Sub-Adviser under the Investment Advisory
(Sub-Advisory) Agreement). Prior to CHC becoming administrator to the Fund,
The Winsbury Company ("Winsbury") served as administrator.
CHC receives a fee from each fund for its services as Administrator
and expenses assumed pursuant to the Administration Agreements, calculated
daily and paid monthly, at the annual rate of fifteen one hundredths of one
percent (.15%) of each fund's average daily net assets. CHC may periodically
waive all or a portion of its fee with respect to any fund in order to increase
the net income of one or more funds of the Victory Portfolios available for
distribution as dividends.
Unless sooner terminated, the Administration Agreement will continue
in effect as to the Fund for a period of two years, and for consecutive
one-year terms thereafter, provided that such continuance is ratified at least
annually by the Victory Portfolios' Trustees or by vote of a majority of the
outstanding shares of that Fund, and in either case by a majority of the
Trustees who are not parties to the Administration Agreement or interested
persons (as defined in the 1940 Act) of any party to the Administration
Agreement, by votes cast in person at a meeting called for such purpose.
The Administration Agreement provides that CHC shall not be liable for
any error of judgment or mistake of law or any loss suffered by the Victory
Portfolios in connection with the matters to which the Administration Agreement
relates, except a loss resulting from willful misfeasance, bad faith, or gross
negligence in the performance of its duties, or from the reckless disregard by
it of its obligations and duties thereunder.
Under the Administration Agreement, CHC assists in the Fund's
administration and operation, including providing statistical and research
data, clerical services, internal compliance and various other administrative
services, including among other responsibilities, forwarding certain purchase
and redemption requests to the Transfer Agent, participation in the updating of
the prospectus, coordinating the preparation, filing, printing and
dissemination of reports to shareholders, coordinating the preparation of
income tax returns, arranging for the maintenance of books and records and
providing the office facilities necessary to carry out the duties thereunder.
Under the Administration Agreement, CHC may delegate all or any part of its
responsibilities thereunder.
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<PAGE> 624
CHC receives an annual fee of .15% of the Fund's average net assets,
paid monthly, for services performed under the Fund's Administration Agreement.
CHC may, from time to time, agree to reimburse the Fund for expenses above a
specified percentage of average net assets.
Victory Broker-Dealer Services, Inc. sells shares of the Fund as agent
on behalf of the Victory Portfolios at no cost to the Fund. Key Advisers and
the Sub-Adviser neither participate in nor are they responsible for the
underwriting of Victory Portfolios shares.
In the fiscal years ended October 31, 1995 and October 31, 1994, the
Fund paid aggregate administration fees of $__ and $0, respectively, after fee
reductions of $___ and $96,804, respectively.
Business Management Agreement
In connection with its obligations under the Investment Sub-Advisory
Agreement, the Sub-Adviser has entered into a Business Management Agreement
with Key Advisers, pursuant to which Key Advisers provides certain
administrative and support services to the Sub-Adviser. Such services include
preparing reports to the Victory Portfolios' Board of Trustees, recordkeeping
services, and services rendered in connection with the preparation of
regulatory filings and other reports, and regulatory and other administrative
and compliance systems and support services.
For such services to the Fund, the Sub-Adviser pays fees to Key
Advisers which vary according to a sliding scale containing "breakpoints" at
which decreases in the business management fees correspond to increases in the
average daily net asset values of the Fund as follows:
<TABLE>
<CAPTION>
Rate of
Net Assets Sub-Advisory Fee*
---------- -----------------
<S> <C>
Up to $10,000,000 0.30%
Next $15,000,000 0.15%
Next $25,000,000 0.05%
Above $50,000,000 0.00%
</TABLE>
- --------------
* As a percentage of average daily net assets.
Shareholder Servicing Plan
The Victory Portfolios, on behalf of the Fund, has adopted a
Shareholder Servicing Plan to provide payments to shareholder servicing agents
(including affiliates of the Adviser) (each a "Shareholder Servicing Agent")
that provide administrative support services to customers who may from time to
time beneficially own shares, which services include: (i) aggregating and
processing purchase and redemption requests for shares from customers and
promptly transmitting net purchase and redemption orders to our distributor or
transfer agent; (ii) providing customers with a service that invests the
assets of their accounts in shares pursuant to specific or pre-authorized
instructions; (iii) processing dividend and distribution payments on behalf of
customers; (iv) providing information periodically to customers showing their
positions in shares; (v) arranging for bank wires; (vi) responding to customer
inquiries; (vii) providing subaccounting with respect to shares beneficially
owned by customers or providing the information to the Victory Portfolios
necessary for subaccounting; (viii) if required by law, forwarding shareholder
communications from us (such as proxies, shareholder reports, annual and
semi-annual financial statements and dividend, distribution and tax notices) to
customers; (ix) forwarding to customers proxy statements and proxies containing
any proposals regarding this Plan; and (x) providing such other similar
services as we may
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<PAGE> 625
reasonably request to the extent you are permitted to do so under applicable
statutes, rules or regulations. For expenses incurred and services provided
pursuant to the Shareholder Servicing Agreement, the Fund pays each Shareholder
Servicing Agent a fee computed daily and paid monthly, in amounts aggregating
not more than twenty-five one-hundredths of one percent (.25%) of the average
daily net assets of the Fund per year. A Shareholder Servicing Agent may
periodically waive all or a portion of its respective shareholder servicing
fees with respect to the Fund to increase the net income of the Fund available
for distribution as dividends.
Expenses
The Fund bears the following expenses relating to its operations:
taxes, interest, brokerage fees and commissions, fees of the Trustees of the
Victory Portfolios, Commission fees, state securities qualification fees, costs
of preparing and printing prospectuses for regulatory purposes and for
distribution to current shareholders, outside auditing and legal expenses,
advisory and administration fees, fees and out-of-pocket expenses of the
custodian and transfer agent, certain insurance premiums, costs of maintenance
of the Fund's existence, costs of shareholders' reports and meetings, and any
extraordinary expenses incurred in the Fund's operation.
If total expenses borne by the Fund in any fiscal year exceeds expense
limitations imposed by applicable state securities regulations, Key Advisers,
the Sub-Adviser or the Administrator will waive their fees to the extent such
excess expenses exceed such expense limitation in proportion to their
respective fees. As of the date of this Statement of Additional Information,
the most restrictive expense limitation applicable to the Fund limits its
aggregate annual expenses, including management and advisory fees but excluding
interest, taxes, brokerage commissions, and certain other expenses, to 2.5% of
the first $30 million of its average net assets, 2.0% of the next $70 million
of its average net assets, and 1.5% of its remaining average net assets. Any
expenses to be borne by Key Advisers, the Sub-Adviser or the Administrator will
be estimated daily and reconciled and paid on a monthly basis. Fees imposed
upon customer accounts by Key Advisers, the Sub-Adviser, Key Trust Company of
Ohio, N.A. or its correspondents, affiliated banks and other non-bank
affiliates for cash management services are not fund expenses for purposes of
any such expense limitation.
Distributor
Victory Broker-Dealer Services, Inc. (the "Distributor") serves as
distributor for the continuous offering of the shares of each fund of the
Victory Portfolios pursuant to a Distribution Agreement. Prior to Victory
Broker-Dealer Services, Inc. becoming the Distributor, Winsbury Fund
Distributors ("Winsbury") served as distributor of the Fund. Unless otherwise
terminated, the Distribution Agreement will remain in effect for two years, and
thereafter for consecutive one-year terms, provided that it is approved at
least annually (i) by the Victory Portfolios' Trustees or by the vote of a
majority of the outstanding shares of the Victory Portfolios, and (ii) by the
vote of a majority of the Trustees of the Victory Portfolios who are not
parties to the Distribution Agreement or interested persons of any such party,
cast in person at a meeting called for the purpose of voting on such approval.
The Distribution Agreement will terminate in the event of its assignment, as
defined in the 1940 Act. For the Victory Portfolio's fiscal years ended
October 31, 1994, and October 31, 1995, Winsbury received $______ and $______,
respectively, in underwriting commissions, and retained $0 and $15,
respectively. For the fiscal year ended October 31, 1995, the Distributor
received $________ in underwriting commissions and retained $________.
Fund Accountant
BISYS Fund Services Ohio, Inc. serves as fund accountant for the Fund
pursuant to a fund accounting agreement with the Victory Portfolios dated June
5, 1995 (the "Fund Accounting Agreement"). As fund accountant for the Victory
Portfolios, BISYS Fund Services Ohio, Inc. calculates the Fund's Portfolios'
net asset value, the dividend and capital gain distributions, if any, and the
yield. BISYS Fund Services Ohio, Inc. also provides a current security
position report, a summary report of transactions and pending maturities, a
current cash position report, and maintains the general ledger accounting
records for the Fund. Under the Fund Accounting Agreement
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<PAGE> 626
with the Victory Portfolios, BISYS Fund Services Ohio, Inc. is entitled to
receive annual fees of .03% of the first $100 million of the Fund's daily
average net assets, .02% of the next $100 million of the Fund's daily average
net assets, and .01% of the Fund's remaining daily average net assets. These
annual fees are subject to a minimum monthly assets charge of $2,917 per
tax-free fund, and do not include out-of-pocket expenses or multiple class
charges of $833 per month assessed for each class of shares after the first
class.
In the fiscal years ended October 31, 1994, and October 31, 1995, the
Victory Portfolios paid The Winsbury Service Corporation fund accounting fees
(after fee waivers) of $306,082.43 and $_______, respectively, for the Fund.
For the fiscal years ended October 31, 1993, October 31, 1994 and October 31,
1995, the Fund paid fund accounting fees of $0, $15,844 and $_______,
respectively.
Custodian
Cash and securities owned by the Fund are held by Key Trust Company of
Ohio, N.A. as custodian. Key Trust Company of Ohio, N.A. serves as custodian
to the Fund pursuant to a Custodian Agreement dated May 24, 1995. Under this
Agreement, Key Trust Company of Ohio, N.A. (i) maintains a separate account or
accounts in the name of the Fund; (ii) makes receipts and disbursements of
money on behalf of the Fund; (iii) collects and receives all income and other
payments and distributions on account of portfolio securities; (iv) responds to
correspondence from security brokers and others relating to its duties; and (v)
makes periodic reports to the Victory Portfolios' Trustees concerning the
Victory Portfolios' operations. Key Trust Company of Ohio, N.A. may, with the
approval of the Victory Portfolios and the custodian's own expense, open and
maintain a sub-custody account or accounts on behalf of the Fund, provided that
Key Trust Company of Ohio, N.A. shall remain liable for the performance of all
of its duties under its respective Custodian Agreement.
Transfer Agent
Primary Funds Service Corporation ('PFSC") serves as transfer agent
and dividend disbursing agent for the Fund, pursuant to a Transfer Agency and
Shareholder Servicing Agreement. Under its agreement with the Victory
Portfolios, PFSC has agreed (i) to issue and redeem shares of the Victory
Portfolios; (ii) to address and mail all communications by the Victory
Portfolios to its shareholders, including reports to shareholders, dividend and
distribution notices, and proxy material for its meetings of shareholders;
(iii) to respond to correspondence or inquiries by shareholders and others
relating to its duties; (iv) to maintain shareholder accounts and certain
sub-accounts; and (v) to make periodic reports to the Victory Portfolios'
Trustees concerning the Victory Portfolios' operations. For the services
provided under the Transfer Agency and Shareholder Servicing Agreement, PFSC
receives a maximum monthly fee of $1,250 from the Fund, and a maximum of $3.50
per account of the Fund.
Auditors
The financial highlights appearing in the Prospectus for the Fund,
other than unaudited information marked as such, has been derived from
financial statements of the Fund incorporated by reference in this Statement of
Additional Information which, for the two month period ended October 31, 1995
and fiscal year ended August 31, 1995, has been audited by Coopers & Lybrand
L.L.P. as set forth in their report incorporated by reference herein, and are
included in reliance upon such report and on the authority of such firm as
experts in auditing and accounting. Information for the fiscal year ended
August 31, 1994 has been audited by KPMG Peat Marwick L.L.P. independent
accountants for the Predecessor Fund, as set forth in their report incorporated
by reference herein, and are included in reliance upon such report and on the
authority of such firm as experts in auditing and accounting. Information for
all other periods has been audited by Ernst & Young, L.L.P., independent
accountants to the predecessor to the Predecessor Fund. Coopers & Lybrand
L.L.P. serves as the Victory Protfolios' auditors. Coopers & Lybrand L.L.P.'s
address is 10 East Broad Street, Columbus, Ohio 43215.
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<PAGE> 627
Legal Counsel
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, 919 Third Avenue,
New York, New York 10022 is counsel to the Victory Portfolios.
ADDITIONAL INFORMATION
Description of Shares
The Victory Portfolios (sometimes referred to as the "Trust") is a
Delaware business trust. On February 29, 1996, the Victory Portfolios
converted from a Massachusetts business trust to a Delaware business trust.
Its Delaware Trust Instrument was adopted on December 6, 1995 and a Certificate
of Trust for the Trust was filed in Delaware on December __, 1995. The Victory
Portfolios' Declaration of Trust, pursuant to which the Victory Portfolios was
originally called the North Third Street Fund, was filed with the Secretary of
State of the Commonwealth of Massachusetts on February 6, 1986. On September
22, 1986, an Amended and Restated Declaration of Trust was filed to change the
name of the Trust to The Emblem Fund and to make certain other changes. A
second amendment was filed October 23, 1986 providing for voting of shares in
the aggregate except where voting of shares by series is otherwise required by
law. An amendment to the Amended and Restated Declaration of Trust was filed
on March 15, 1993 to change the name of the Trust to The Society Funds. An
Amended and Restated Declaration of Trust was then filed on September 2, 1994
to change the name of the Trust to The Victory Portfolios. The Declaration of
Trust, as amended, authorizes the Trustees to issue an unlimited number of
shares, which are units of beneficial interest, without par value.
The Victory Portfolios presently has twenty-eight series of shares,
which represent interests in the U.S. Government Obligations Fund, the Prime
Obligations Fund, the Tax-Free Money Market Fund, the Balanced Fund, the Stock
Index Fund, the Value Fund, the Fund, the Growth Fund, the Special Value Fund,
the Special Growth Fund, the Ohio Regional Stock Fund, the International Growth
Fund, the Limited Term Income Fund, the Government Mortgage Fund, the Ohio
Municipal Bond Fund, the Intermediate Income Fund, the Investment Quality Bond
Fund, the Florida Tax-Free Bond Fund, the Municipal Bond Fund, the Convertible
Securities Fund, the Short-Term U.S. Government Income Fund, the Government
Bond Fund, the Fund for Income, the National Municipal Bond Fund, the New York
Tax-Free Fund, the Institutional Money Market Fund, the Financial Reserves Fund
and the Ohio Municipal Money Market Fund, respectively. The Victory
Portfolios' Declaration of Trust authorizes the Trustees to divide or redivide
any unissued shares of the Victory Portfolios into one or more additional
series by setting or changing in any one or more respects their respective
preferences, conversion or other rights, voting power, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption.
Shares have no subscription or preemptive rights and only such
conversion or exchange rights as the Trustees may grant in their discretion.
When issued for payment as described in the Prospectus and this Statement of
Additional Information, the Victory Portfolios' shares will be fully paid and
non-assessable. In the event of a liquidation or dissolution of the Victory
Portfolios, shares of the Fund are entitled to receive the assets available for
distribution belonging to the Fund, and a proportionate distribution, based
upon the relative asset values of the respective funds of the Victory
Portfolios, of any general assets not belonging to any particular fund which
are available for distribution.
As described in the Prospectus under the caption "ADDITIONAL
INFORMATION -- Voting Rights," shares of the Victory Portfolios are entitled to
one vote per share (with proportional voting for fractional shares) on such
matters as shareholders are entitled to vote. On any matter submitted to a
vote of the shareholders, all shares are voted separately by individual series
(funds), and whenever the Trustees determine that the matter affects only
certain series, may be submitted for a vote by only such series, except (i)
when required by the 1940 Act, shares are voted in the aggregate and not by
individual series; and (ii) when the Trustees have determined that the
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<PAGE> 628
matter affects the interests of more than one series and that voting by
shareholders of all series would be consistent with the 1940 Act, then the
shareholders of all such series shall be entitled to vote thereon (either by
individual series or by shares voted in the aggregate, as the Trustees in their
discretion may determine). The Trustees may also determine that a matter
affects only the interests of one or more classes of a series, in which case
(or if required under the 1940 Act) such matter shall be voted on by such class
or classes. There will normally be no meetings of shareholders for the purpose
of electing Trustees unless and until such time as less than a majority of the
Trustees have been elected by the shareholders, at which time the Trustees then
in office will call a shareholders' meeting for the election of Trustees. In
addition, Trustees may be removed from office by a vote of the holders of at
least two-thirds of the outstanding shares of the Victory Portfolios. A
meeting shall be held for such purpose upon the written request of the holders
of not less than 10% of the outstanding shares. Upon written request by ten or
more shareholders meeting the qualifications of Section 16(c) of the 1940 Act,
(i.e., person who have been shareholders for at least six months, and who hold
shares having an NAV of at least $25,000 or constituting 1% of the outstanding
shares) stating that such shareholders wish to communicate with the other
shareholders for the purpose of obtaining the signatures necessary to demand a
meeting to consider removal of a Trustee, the Victory Portfolios will provide a
list of shareholders or disseminate appropriate materials (at the expense of
the requesting shareholders). Except as set forth above, the Trustees shall
continue to hold office and may appoint their successors.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Victory Portfolios shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each fund of the Victory Portfolios affected by the
matter. For purposes of determining whether the approval of a majority of the
outstanding shares of a fund will be required in connection with a matter, a
fund will be deemed to be affected by a matter unless it is clear that the
interests of each fund in the matter are identical, or that the matter does not
affect any interest of the fund. Under Rule 18f-2, the approval of an
investment advisory agreement or any change in investment policy would be
effectively acted upon with respect to a fund only if approved by a majority of
the outstanding shares of such fund. However, Rule 18f-2 also provides that
the ratification of independent public accountants, the approval of principal
underwriting contracts, and the election of Trustees may be effectively acted
upon by shareholders of the Victory Portfolios voting without regard to series.
Shareholder and Trustee Liability
The Delaware Business Trust Act provides that a shareholder of a
Delaware business trust shall be entitled to the same limitation of personal
liability extended to shareholders of Delaware corporations. The Delaware
Trust Instrument also provides for indemnification out of the trust property of
any shareholder held personally liable solely by reason of his or her being or
having been a shareholder. The Delaware Trust Instrument also provides that
the Victory Portfolios shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Victory
Portfolios, and shall satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
considered to be extremely remote.
The Delaware Trust Instrument states further that no Trustee, officer,
or agent of the Victory Portfolios shall be personally liable in connection
with the administration or preservation of the assets of the Funds or the
conduct of the Victory Portfolios' business; nor shall any Trustee, officer, or
agent be personally liable to any person for any action or failure to act
except for his own bad faith, willful misfeasance, gross negligence, or
reckless disregard of his duties. The Declaration of Trust also provides that
all persons having any claim against the Trustees or the Victory Portfolios
shall look solely to the assets of the Victory Portfolios for payment.
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<PAGE> 629
Delaware Law
The Delaware Business Trust Act provides that a shareholder of a Delaware
business trust shall be entitled to the same limitation of personal liability
extended to stockholders of Delaware corporations. THE TRUST INSTRUMENT
PROVIDES THAT SHAREHOLDERS WILL NOT BE PERSONALLY LIABLE FOR LIABILITIES OF THE
VICTORY PORTFOLIOS. In light of Delaware law, the nature of the Victory
Portfolios' business, and the nature of its assets, management of Victory
Portfolios believe that the risk of personal liability to a Fund shareholder
would be extremely remote.
In the unlikely event a shareholder is held personally liable for the Victory
Portfolios' obligations, the Victory Portfolios is required to use its property
to protect or compensate the shareholder. On request, the Victory Portfolios
will defend any claim made and pay any judgment against a shareholder for any
act or obligation of the Victory Portfolios. Therefore, financial loss
resulting from liability as a shareholder will occur only if the Victory
Portfolios itself cannot meet its obligations to indemnify shareholders and pay
judgments against them.
Delaware law authorizes electronic or telephonic communications between
shareholders and the Victory Portfolios. Under Delaware law, the Successor
Company has the flexibility to respond to future business contingencies. For
example, the Trustees will have the power to incorporate the Victory
Portfolios, to merge or consolidate it with another entity, to cause each fund
to become a separate trust, and to change the Victory Portfolio's domicile
without a shareholder vote. This flexibility could help reduce the expense and
frequency of future shareholder meetings for non-investment related issues.
Miscellaneous
As used in the Prospectus and in this Statement of Additional
Information, "assets belonging to a fund" (or "assets belonging to the Fund")
means the consideration received by the Victory Portfolios upon the issuance or
sale of shares in that fund, together with all income, earnings, profits, and
proceeds derived from the investment thereof, including any proceeds from the
sale, exchange, or liquidation of such investments, and any funds or payments
derived from any reinvestment of such proceeds and any general assets of the
Victory Portfolios, which general liabilities and expenses are not readily
identified as belonging to a particular fund (or the Fund) that are allocated
to that fund (or the Fund) by the Victory Portfolios' Trustees. The Trustees
may allocate such general assets in any manner they deem fair and equitable.
It is anticipated that the formula that will be used by the Trustees in making
allocations of general assets to a particular fund of the Victory Portfolios
will be the relative net asset value of the respective fund at the time of
allocation. Assets belonging to a particular fund are charged with the direct
liabilities and expenses of that fund, and with a share of the general
liabilities and expenses of each of the funds not readily identified as
belonging to a particular fund that are allocated to each fund in accordance
with its proportional share of the net asset values of the Victory Portfolios
at the time of allocation. The timing of allocations of general assets and
general liabilities and expenses of the Victory Portfolios to a particular fund
will be determined by the Trustees of the Victory Portfolios and will be in
accordance with generally accepted accounting principles. Determinations by
the Trustees of the Victory Portfolios as to the timing of the allocation of
general liabilities and expenses and as to the timing and allocable portion of
any general assets with respect to a particular fund are conclusive.
As used in the Prospectus and in this Statement of Additional
Information, a "vote of a majority of the outstanding shares" or a "vote of
majority of the outstanding voting securities" of the Victory Portfolios or a
particular fund means the affirmative vote of the lesser of (a) 67% or more of
the shares of the Victory Portfolios or such fund present at a meeting at which
the holders of more than 50% of the outstanding shares of the Victory
Portfolios or such fund are represented in person or by proxy, or (b) more than
50% of the outstanding shares of the Victory Portfolios or such fund.
-35-
<PAGE> 630
Organizational expenses are allocated to each of the Victory
Portfolios and are amortized over a period of two years from the commencement
of the public offering of shares of the Victory Portfolios.
Individual Trustees are elected by the shareholders and, subject to
removal by the vote of the holders of two-thirds of the outstanding shares of
the Victory Portfolios, serve for a term lasting until the next meeting of
shareholders at which trustees are elected. Such meetings are not required to
be held at any specific intervals. Individual Trustees may be removed by vote
of the shareholders voting not less than a majority of the shares then
outstanding cast in person or by proxy at any meeting called for that purpose,
or by a written declaration signed by shareholders voting not less than
two-thirds of the shares then outstanding.
The Victory Portfolios is registered with the Commission as an
open-end management company. Such registration does not involve supervision by
the Commission of the management or policies of the Victory Portfolios.
The Prospectus and this Statement of Additional Information omit
certain of the information contained in the Registration Statement filed with
the Commission. Copies of such information may be obtained from the Commission
upon payment of the prescribed fee.
The Prospectus and this Statement of Additional Information are not an
offering of the securities herein described in any state in which such offering
may not lawfully be made. No salesman, dealer, or other person is authorized
to give any information or make any representation other than those contained
in the Prospectus and this Statement of Additional Information.
The 1995 Annual Report to shareholders of The Victory Portfolios is
incorporated by reference herein. This report includes the financial
statements for the fiscal year ended October 31, 1995. The opinion in the
Annual Report of Coopers & Lybrand L.L.P., independent accountants, is
incorporated by reference herein in its entirety to such Annual Report, and
such financial statements are incorporated in their entirety in reliance upon
such report of Coopers & Lybrand L.L.P. and on the authority of such firm as
experts in auditing and accounting.
Delaware law authorizes electronic or telephone communications between
shareholders and the Victory Portfolios. Under Delaware law, the Successor
Company has the flexibility to respond to future business contingencies. For
example, the Trustees will have the power to incorporate the Victory
Portfolios, to merge or consolidate it with another entity, to cause each fund
to become a separate trust, and to change the Victory Portfolios' domicile
without a shareholder vote. This flexibility could help reduce the expense and
frequency of future shareholder meetings for non-investment related issues.
-36-
<PAGE> 631
The following table indicates each additional person known by the Fund
to own beneficially 5% or more of the shares of the Fund as of December 1,
1995:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Percent of Total
Outstanding
Name and Address Shares Shares of Fund
- ---------------- ------ ----------------
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Northern Trust 814,133.10 6.32%
Attn: Mutual Funds
P.O. Box 92956
Chicago, IL 60675-2956
- ----------------------------------------------------------------------------------------------------------
Eaton SPIP Victory Stock Index 883,793.086 6.84%
Eaton Corporation
Eaton Center
Cleveland, OH 44114
- ----------------------------------------------------------------------------------------------------------
Aultman Hospital 1,083,351.957 8.40%
2600 6th Street SW
Canton, OH 44710
==========================================================================================================
</TABLE>
-37-
<PAGE> 632
APPENDIX
The nationally recognized statistical rating organizations (individually,
an "NRSRO") that may be utilized by Key Advisers or the Sub-Adviser with regard
to portfolio investments for the Fund include Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Corporation ("S&P"), Duff & Phelps, Inc.
("Duff"), Fitch Investors Service, Inc. ("Fitch"), IBCA Limited and its
affiliate, IBCA Inc. (collectively, "IBCA"), and Thomson BankWatch, Inc.
("Thomson"). Set forth below is a description of the relevant ratings of each
such NRSRO. The NRSROs that may be utilized by Key Advisers or the Sub-Adviser
and the description of each NRSRO's ratings is as of the date of this Statement
of Additional Information, and may subsequently change.
Long-Term Debt Ratings (may be assigned, for example, to corporate
and municipal bonds)
Description of the five highest long-term debt ratings by Moody's
(Moody's applies numerical modifiers (e.g., 1, 2, and 3) in each rating
category to indicate the security's ranking within the category):
Aaa. Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.
A. Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in the
future.
Baa. Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba. Bonds which are rated Ba are judged to have speculative elements
- - their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times in the future. Uncertainty of
position characterizes bonds in this class.
Description of the five highest long-term debt ratings by S&P (S&P may
apply a plus (+) or minus (-) to a particular rating classification to show
relative standing within that classification):
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
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<PAGE> 633
BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB. Debt rated BB is regarded, on balance, as predominately
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. While such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposure to adverse conditions.
Description of the three highest long-term debt ratings by Duff:
AAA. Highest credit quality. The risk factors are negligible being
only slightly more than for risk-free U.S. Treasury debt.
AA+. High credit quality Protection factors are strong.
AA. Risk is modest but may vary slightly from time to time
AA-. because of economic conditions.
A+. Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
Description of the three highest long-term debt ratings by Fitch (plus
or minus signs are used with a rating symbol to indicate the relative position
of the credit within the rating category):
AAA. Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA. Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA."
Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of these issues is generally rated "[-]+."
A. Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher
ratings.
IBCA's description of its three highest long-term debt ratings:
AAA. Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic or
financial conditions are unlikely to increase investment risk
significantly.
AA. Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic, or
financial conditions may increase investment risk albeit not very
significantly.
-39-
<PAGE> 634
A. Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial
conditions may lead to increased investment risk.
Short-Term Debt Ratings (may be assigned, for example, to commercial
paper, master demand notes, bank instruments, and letters of credit)
Moody's description of its three highest short-term debt ratings:
Prime-1. Issuers rated Prime-1 (or supporting institutions) have a
superior capacity for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a
strong capacity for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
S&P's description of its three highest short-term debt ratings:
A-1. This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to have extremely
strong safety characteristics are denoted with a plus sign (+).
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high
as for issues designated "A-1."
A-3. Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the
higher designations.
Duff's description of its five highest short-term debt ratings (Duff
incorporates gradations of "1+" (one plus) and "1-" (one minus) to assist
investors in recognizing quality differences within the highest rating
category):
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<PAGE> 635
Duff 1+. Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
Duff 1. Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
Duff 1-. High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors. Risk
factors are very small.
Duff 2. Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
Duff 3. Satisfactory liquidity and other protection factors qualify
issue as to investment grade.
Risk factors are larger and subject to more variation. Nevertheless,
timely payment is expected.
Fitch's description of its four highest short-term debt ratings:
F-1+. Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of assurance for
timely payment.
F-1. Very Strong Credit Quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than
issues rated F-1+.
F-2. Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as for issues assigned F-1+ or F-1 ratings.
F-3. Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate, however, near-term adverse changes could cause
these securities to be rated below investment grade.
IBCA's description of its three highest short-term debt ratings:
A+. Obligations supported by the highest capacity for timely
repayment.
A1. Obligations supported by a very strong capacity for timely
repayment.
A2. Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
Short-Term Loan/Municipal Note Ratings
Moody's description of its two highest short-term loan/municipal note
ratings:
MIG-1/VMIG-1. This designation denotes best quality. There is
present strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
MIG-2/VMIG-2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
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<PAGE> 636
S&P's description of its two highest municipal note ratings:
SP-1. Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
SP-2. Satisfactory capacity to pay principal and interest.
Short-Term Debt Ratings
Thomson BankWatch, Inc. ("TBW") ratings are based upon a qualitative
and quantitative analysis of all segments of the organization including, where
applicable, holding company and operating subsidiaries.
TBW Ratings do not constitute a recommendation to buy or sell
securities of any of these companies. Further, TBW does not suggest specific
investment criteria for individual clients.
The TBW Short-Term Ratings apply to commercial paper, other senior
short-term obligations and deposit obligations of the entities to which the
rating has been assigned.
The TBW Short-Term Ratings apply only to unsecured instruments that
have a maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an
untimely payment of principal or interest.
TBW-1. The highest category; indicates a very high degree of
likelihood that principal and interest will be paid on a timely basis.
TBW-2. The second highest category; while the degree of safety
regarding timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1".
TBW-3. The lowest investment grade category; indicates that while
more susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and interest in
a timely fashion is considered adequate.
TBW-4. The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
Definitions of Certain Money Market Instruments
Commercial Paper
Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.
Certificates of Deposit
Certificates of Deposit are negotiable certificates issued against
funds deposited in a commercial bank or a savings and loan association for a
definite period of time and earning a specified return.
-42-
<PAGE> 637
Bankers' Acceptances
Bankers' acceptances are negotiable drafts or bills of exchange,
normally drawn by an importer or exporter to pay for specific merchandise,
which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
U.S. Treasury Obligations
U.S. Treasury Obligations are obligations issued or guaranteed as to
payment of principal and interest by the full faith and credit of the U.S.
Government. These obligations may include Treasury bills, notes and bonds, and
issues of agencies and instrumentalities of the U.S. Government, provided such
obligations are guaranteed as to payment of principal and interest by the full
faith and credit of the U.S. Government.
U.S. Government Agency and Instrumentality Obligations
Obligations issued by agencies and instrumentalities of the U.S.
Government include such agencies and instrumentalities as the Government
National Mortgage Association, the Export-Import Bank of the United States, the
Tennessee Valley Authority, the Farmers Home Administration, the Federal Home
Loan Banks, the Federal Intermediate Credit Banks, the Federal Farm Credit
Banks, the Federal Land Banks, the Federal Housing Administration, the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation, and
the Student Loan Marketing Association. Some of these obligations, such as
those of the Government National Mortgage Association are supported by the full
faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others, such as
those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality. No assurance can be given that the U.S.
Government would provide financial support to U.S. Government-sponsored
instrumentalities if it is not obligated to do so by law. A Fund will invest
in the obligations of such instrumentalities only when the investment adviser
believes that the credit risk with respect to the instrumentality is minimal.
-43-
<PAGE> 638
STATEMENT OF ADDITIONAL INFORMATION
THE VICTORY PORTFOLIOS
THE VICTORY TAX-FREE MONEY MARKET FUND
March 1, 1996
This Statement of Additional Information is not a Prospectus, but
should be read in conjunction with the Prospectus of The Victory Portfolios -
The Victory Tax-Free Money Market Fund, dated the same date as the date hereof
(the "Prospectus"). This Statement of Additional Information is incorporated
by reference in its entirety into the Prospectus. Copies of the Prospectus may
be obtained by writing The Victory Portfolios at Primary Funds Service
Corporation, P.O. Box 9741, Providence, RI 02940-9741, or by telephoning toll
free 800-539-FUND or 800-539-3863.
<TABLE>
<S> <C> <C>
Investment Policies and Limitations 1 INVESTMENT ADVISER
Valuation of Portfolio Securities 11 KeyCorp Mutual Fund Advisers, Inc.
Additional Purchase and Redemption Information 12
Management of the Victory Portfolios 15 INVESTMENT SUB-ADVISER
Advisory and Other Contracts 23 Society Asset Management, Inc.
Additional Information 30
Independent Auditor's Report 35 ADMINISTRATOR
Financial Statements 35 Concord Holding Corporation
Appendix 36
DISTRIBUTOR
Victory Broker-Dealer Services, Inc.
TRANSFER AGENT
Primary Funds Service Corporation
CUSTODIAN
Key Trust Company of Ohio, N.A.
</TABLE>
<PAGE> 639
STATEMENT OF ADDITIONAL INFORMATION
The Victory Portfolios (the "Victory Portfolios") is an open-end
management investment company. The Victory Portfolios consist of twenty-eight
series of units of beneficial interest ("shares"), four of which series are
currently inactive. The outstanding shares represent interests in the
twenty-four separate investment portfolios which are currently active. This
Statement of Additional Information relates to the Victory Tax-Free Money
Market Fund (the "Fund") only. Much of the information contained in this
Statement of Additional Information expands on subjects discussed in the
Prospectus. Capitalized terms not defined herein are used as defined in the
Prospectus. No investment in shares of the Fund should be made without first
reading the Fund's Prospectus.
INVESTMENT POLICIES AND LIMITATIONS
Additional Information Fund Instruments
The following policies supplement the investment objectives and
policies of the Fund as set forth in the Prospectus.
High Quality Investments. As noted in the Prospectus for the Fund,
the Fund may invest only in obligations determined by Key Advisers to present
minimal credit risks under guidelines adopted by the Fund's Board of Trustees
(the "Board of Trustees" or the "Trustees").
Investments will be limited to those obligations which, at the time of
purchase, (i) possess one of the two highest short-term ratings from an NRSRO
or (ii) possess, in the case of multiple-rated securities, one of the two
highest short-term ratings by at least two NRSROs; or (iii) do not possess a
rating (i.e. are unrated) but are determined by Key Advisers or the Sub-
Adviser to be of comparable quality to the rated instruments eligible for
purchase by the Fund under the guidelines adopted by the Trustees. For
purposes of these investment limitations, a security that has not received a
rating will be deemed to possess the rating assigned to an outstanding class of
the issuer's short-term debt obligations if determined by Key Advisers or the
Sub-Adviser to be comparable in priority and security to the obligation
selected for purchase by the Fund. (The above described securities which may
be purchased by the Fund are hereinafter referred to as "Eligible Securities.")
A security subject to a tender or demand feature will be considered an
Eligible Security only if both the demand feature and the underlying security
possess a high quality rating, or, if such do not possess a rating, are
determined by Key Advisers or the Sub-Adviser to be of comparable quality;
provided, however, that where the demand feature would be readily exercisable
in the event of a default in payment of principal or interest on the underlying
security, this obligation may be acquired based on the rating possessed by the
demand feature or, if the demand feature does not possess a rating, a
determination of comparable quality by Key Advisers or the Sub-Adviser. A
security which at the time of issuance had a maturity exceeding 397 days but,
at the time of purchase, has remaining maturity of 397 days or less, is not
considered an Eligible Security if it does not possess a high quality rating
and the long-term rating, if any, is not within the two highest rating
categories.
Pursuant to Rule 2a-7 under the Investment Company Act of 1940 (the
"1940 Act"), the Fund will maintain a dollar-weighted average portfolio
maturity which does not exceed 90 days.
Under the guidelines adopted by the Fund's Trustees and in accordance
with Rule 2a-7 under the 1940 Act, Key Advisers or the Sub-Adviser may be
required to dispose promptly of an obligation held by the Fund in the event of
certain developments that indicate a diminution of the instrument's credit
quality, such as where an NRSRO downgrades an obligation below the second
highest rating category, or in the event of a default relating to the financial
condition of the issuer. In this regard, the Trustees have established
procedures designed to stabilize, to the extent reasonably possible, the price
per share of each of the Fund as computed for the purpose of distribution,
<PAGE> 640
redemption and repurchase at $1.00. Such procedures will include review of the
Fund's portfolio holdings by the Trustees, at such intervals as they may deem
appropriate, to determine whether the net asset value of the Fund, calculated
by using readily available market quotations, deviates from $1.00 per share,
and, if so, whether such deviation may result in material dilution or is
otherwise unfair to existing shareholders (a "Material Deviation"). In the
event the Trustees determine that a Material Deviation exists, they will take
such corrective action as they regard as necessary and appropriate, including
selling portfolio instruments prior to maturity to realize capital gains or
losses or to shorten average portfolio maturity, withholding dividends, paying
shareholder redemption requests in portfolio securities at their then-current
market value, or establishing a net asset value per share by using readily
available market quotations.
The Appendix of this Statement of Additional Information identifies
each NRSRO which may be utilized by Key Advisers or the Sub-Adviser with regard
to portfolio investments for the Fund and provides a description of relevant
ratings assigned by each such NRSRO. A rating by an NRSRO may be utilized only
where the NRSRO is neither controlling, controlled by, or under common control
with the issuer of, or any issuer, guarantor, or provider of credit support
for, the instrument.
Bankers' Acceptances and Certificates of Deposit. The Fund may
invest in bankers' acceptances, certificates of deposit, and demand and time
deposits. Bankers' acceptances are negotiable drafts or bills of exchange
typically drawn by an importer or exporter to pay for specific merchandise,
which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank or a savings and loan association for a definite
period of time and earning a specified return.
Bankers' acceptances will be those guaranteed by domestic and foreign
banks, if at the time of purchase such banks have capital, surplus, and
undivided profits in excess of $100,000,000 (as of the date of their most
recently published financial statements). Certificates of deposit and demand
and time deposits invested in by the Fund will be those of domestic and foreign
banks and savings and loan associations, if (a) at the time of purchase such
financial institutions have capital, surplus, and undivided profits in excess
of $100,000,000 (as of the date of their most recently published financial
statements) or (b) the principal amount of the instrument is insured in full by
the Federal Deposit Insurance Corporation or the Savings Association Insurance
Fund.
The Fund may also invest in Eurodollar Certificates of Deposit
("ECDs") which are U.S. dollar-denominated certificates of deposit issued by
branches of foreign and domestic banks located outside the United States,
Yankee Certificates of Deposit ("Yankee CDs") which are certificates of deposit
issued by a U.S. branch of a foreign bank denominated in U.S. dollars and held
in the United States, Eurodollar Time Deposits ("ETDs") which are U.S.
dollar-denominated deposits in a foreign branch of a U.S. bank or a foreign
bank, and Canadian Time Deposits ("CTDs") which are U.S. dollar-denominated
certificates of deposit issued by Canadian offices of major Canadian Banks.
Commercial Paper. Commercial paper consists of unsecured promissory
notes issued by corporations. Except as noted below with respect to variable
amount master demand notes, issues of commercial paper normally have maturities
of less than nine months and fixed rates of return.
U.S. Government Obligations. The Fund may invest in obligations
issued or guaranteed by the U.S. Government, its agencies and
instrumentalities. Obligations of certain agencies and instrumentalities of
the U.S. Government are supported by the full faith and credit of the U.S.
Treasury; others are supported by the right of the issuer to borrow from the
U.S. Treasury; others are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; and still others are supported
only by the credit of the agency or instrumentality. No assurance can be given
that the U.S. Government will provide financial support to U.S.
Government-sponsored agencies or instrumentalities if it is not obligated to do
so by law. The Fund will invest in
-2-
<PAGE> 641
the obligations of such agencies and instrumentalities only when Key Advisers
believes that the credit risk with respect thereto is minimal.
Securities Lending. The Fund may lend its portfolio securities to
broker-dealers, banks or institutional borrowers of securities. The Fund must
receive a minimum of 100% collateral, plus any interest due in the form of cash
or U.S. Government securities. This collateral must be valued daily and should
the market value of the loaned securities increase, the borrower must furnish
additional collateral to the Fund. During the time portfolio securities are on
loan, the borrower will pay the Fund any interest paid on such securities plus
any interest negotiated between the parties to the lending agreement. Loans
will be subject to termination by the Fund or the borrower at any time. The
Fund will only enter into loan arrangements with broker-dealers, banks or other
institutions which Key Advisers or the Sub-Adviser has determined are
creditworthy under guidelines established by the Fund's Trustees.
Variable and Floating Rate Notes. The Fund may acquire variable and
floating rate notes, subject to its investment objectives, policies and
restrictions. A variable rate note is one whose terms provide for the
readjustment of its interest rate on set dates and which, upon such
readjustment, can reasonably be expected to have a market value that
approximates its par value. A floating rate note is one whose terms provide
for the readjustment of its interest rate whenever a specified interest rate
changes and which, at any time, can reasonably be expected to have a market
value that approximates its par value. Such notes are frequently not rated by
credit rating agencies; however, unrated variable and floating rate notes
purchased by the Fund will only be those determined by Key Advisers or the
Sub-Adviser, under guidelines established by the Trustees, to pose minimal
credit risks and to be of comparable quality, at the time of purchase, to rated
instruments eligible for purchase under the Fund's investment policies. In
making such determinations, Key Advisers or the Sub-Adviser will consider the
earning power, cash flow and other liquidity ratios of the issuers of such
notes (such issuers include financial, merchandising, bank holding and other
companies) and will continuously monitor their financial condition. Although
there may be no active secondary market with respect to a particular variable
or floating rate note purchased by the Fund, the Fund may resell the note at
any time to a third party. The absence of an active secondary market, however,
could make it difficult for the Fund to dispose of a variable or floating rate
note in the event the issuer of the note defaulted on its payment obligations
and the fund could, for this or other reasons, suffer a loss to the extent of
the default. Variable or floating rate notes may be secured by bank letters of
credit.
Variable or floating rate notes may have maturities of more than one
year, as follows:
1. A note that is issued or guaranteed by the United States
government or any agency thereof and which has a variable rate of interest
readjusted no less frequently than annually will be deemed by the Fund to have
a maturity equal to the period remaining until the next readjustment of the
interest rate.
2. A variable rate note, the principal amount of which is
scheduled on the face of the instrument to be paid in one year or less, will be
deemed by the Fund to have a maturity equal to the period remaining until the
next readjustment of the interest rate.
3. A variable rate note that is subject to a demand feature
scheduled to be paid in one year or more will be deemed by the Fund to have a
maturity equal to the longer of the period remaining until the next
readjustment of the interest rate or the period remaining until the principal
amount can be recovered through demand.
4. A floating rate note that is subject to a demand feature will
be deemed by the Fund to have a maturity equal to the period remaining until
the principal amount can be recovered through demand.
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<PAGE> 642
As used above, a note is "subject to a demand feature" where the Fund
is entitled to receive the principal amount of the note either at any time on
no more than 30 days' notice or at specified intervals not exceeding one year
and upon no more than 30 days' notice.
Other Investment Companies. The Fund may invest up to 5% of its total
assets in the securities of any one investment company, but may not own more
than 3% of the securities of any one investment company or invest more than 10%
of its total assets in the securities of other investment companies. To the
extent required by the laws of any state in which the Fund's shares are sold,
Key Advisers or the Sub-Adviser will waive its investment advisory fee as to
all assets invested in other investment companies. Because such other
investment companies employ an investment adviser, such investment by the Fund
will cause shareholders to bear duplicative fees, such as management fees.
Municipal Securities. As stated in the Prospectus, the assets of the
Fund will be primarily invested in bonds and notes issued by or on behalf of
states (including the District of Columbia), territories, and possessions of
the United States and their respective authorities, agencies,
instrumentalities, and political subdivisions, the interest on which is both
exempt from federal income tax and not treated as a preference item for
individuals for purposes of the federal alternative minimum tax ("Municipal
Securities"). Under normal market conditions, at least 80% of the total assets
of the Fund will be invested in Municipal Securities.
Municipal Securities include debt obligations issued by governmental
entities to obtain funds for various public purposes, such as the construction
of a wide range of public facilities, the refunding of outstanding obligations,
the payment of general operating expenses, and the extension of loans to other
public institutions and facilities. Private activity bonds that are issued by
or on behalf of public authorities to finance various privately operated
facilities are included within the term Municipal Securities if the interest
paid thereon is both exempt from federal income tax and not treated as a
preference item for individuals for purposes of the federal alternative minimum
tax.
Among other types of Municipal Securities, the Fund may purchase
short-term General Obligation Notes, Tax Anticipation Notes, Bond Anticipation
Notes, Revenue Anticipation Notes, Tax-Exempt Commercial Paper, Construction
Loan Notes and other forms of short-term tax-exempt loans. Such instruments
are issued with a short-term maturity in anticipation of the receipt of tax
funds, the proceeds of bond placements or other revenues. In addition, the
Fund may invest in other types of tax-exempt instruments, provided they have
remaining maturities of 397 days or less at the time of purchase.
Project Notes are issued by a state or local housing agency and are
sold by the Department of Housing and Urban Development. While the issuing
agency has the primary obligation with respect to its Project Notes, they are
also secured by the full faith and credit of the United States through
agreements with the issuing authority which provide that, if required, the U.S.
government will lend the issuer an amount equal to the principal of and
interest on the Project Notes.
As described in the Prospectus, the two principal classifications of
Municipal Securities consist of "general obligation" and "revenue" issues. The
Fund may also acquire "moral obligation" issues, which are normally issued by
special purpose authorities. There are, of course, variations in the quality
of Municipal Securities, both within a particular classification and between
classifications, and the yields on Municipal Securities depend upon a variety
of factors, including general money market conditions, the financial condition
of the issuer (or other entities whose financial resources are supporting the
Municipal Security), general conditions of the municipal bond market, the size
of a particular offering, the maturity of the obligation and the rating(s) of
the issue. The ratings of NRSROs represent their opinions as to the quality of
Municipal Securities. In this regard, it should be emphasized that the ratings
of any NRSRO are general and are not absolute standards of quality, and
Municipal Securities with the same maturity, interest rate and rating may have
different yields, while Municipal Securities of the same maturity and interest
rate with different ratings may have the same yield. Subsequent to purchases
by the Fund, an issue of
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<PAGE> 643
Municipal Securities may cease to be rated or its rating may be reduced below
the minimum rating required for purchase by the Fund. Key Advisers will
consider such an event in determining whether the Fund should continue to hold
the obligation.
An issuer's obligations under its Municipal Securities are subject to
the provisions of bankruptcy, insolvency, and other laws affecting the rights
and remedies of creditors, such as the federal bankruptcy code, and laws, if
any, which may be enacted by Congress or state legislatures extending the time
for payment of principal or interest, or both, or imposing other constraints
upon the enforcement of such obligations or upon the ability of municipalities
to levy taxes. The power or ability of an issuer to meet its obligations for
the payment of interest on and principal of its Municipal Securities may be
materially adversely affected by litigation or other conditions.
In addition, in accordance with its investment objective, the Fund may
invest in private activity bonds, which may constitute Municipal Securities
depending on the tax treatment of such bonds. The source of payment and
security for such bonds is the financial resources of the private entity
involved; the full faith and credit and the taxing power of the issuer in
normal circumstances will not be pledged. The payment obligations of the
private entity also will be subject to bankruptcy as well as other exceptions
similar to those described above.
Key Advisers believes that it is likely that sufficient Municipal
Securities will be available to satisfy the Fund's investment objective and
policies. In meeting its investment policies, the Fund may invest all or any
part of its total assets in Municipal Securities which are private activity
bonds. Moreover, although the Fund does not presently intend to do so on a
regular basis, it may invest more than 25% of its total assets in Municipal
Securities which are related in such a way that an economic, business or
political development or change affecting one such security would likewise
affect the other Municipal Securities. Examples of such securities are
obligations, the repayment of which is dependent upon similar types of projects
or projects located in the same state. Such investments would be made only if
deemed necessary or appropriate by Key Advisers. To the extent that the assets
of the Fund are concentrated in Municipal Securities payable from revenues on
similar projects, it will be subject to the peculiar risks presented by such
projects to a greater extent than each would be if the Fund's assets were not
so concentrated.
Refunded Municipal Bonds. Investments by the Fund in refunded
municipal bonds that are secured by escrowed obligations issued or guaranteed
by the U.S. Government or its agencies or instrumentalities are considered to
be investments in U.S. Government obligations for purposes of the
diversification requirements to which the Fund is subject under the 1940 Act.
As a result, more than 5% of the Fund's total assets may be invested in such
refunded bonds issued by a particular municipal issuer. The escrowed
securities securing such refunded municipal bonds will consist exclusively of
U.S. Government obligations, and will be held by an independent escrow agent or
be subject to an irrevocable pledge of the escrow account to the debt service
on the original bonds. As a diversified fund, the Fund will not invest more
than 25% of its total assets in pre-refunded bonds of the same municipal
issuer.
Repurchase Agreements. Securities held by the Fund may be subject to
repurchase agreements. Under the terms of a repurchase agreement, the Fund
would acquire securities from financial institutions or registered
broker-dealers deemed creditworthy Key Advisers pursuant to guidelines adopted
by the Fund's Trustees, subject to the seller's agreement to repurchase such
securities at a mutually agreed upon date and price. The seller is required to
maintain the value of collateral held pursuant to the agreement at not less
than the repurchase price (including accrued interest). If the seller were to
default on its repurchase obligation or become insolvent, the Fund would suffer
a loss to the extent that the proceeds from a sale of the underlying portfolio
securities were less than the repurchase price, or to the extent that the
disposition of such securities by the Fund is delayed pending court action.
Reverse Repurchase Agreements. The Fund may borrow funds for
temporary purposes by entering into reverse repurchase agreements in accordance
with the investment restrictions described below. Pursuant to such
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<PAGE> 644
agreements, the Fund would sell portfolio securities to financial institutions
such as banks and broker-dealers, and agree to repurchase them at a mutually
agreed-upon date and price. At the time the Fund enters into a reverse
repurchase agreement, it will place in a segregated custodial account assets
(such as cash or other liquid high-grade securities) consistent with the Fund's
investment restrictions having a value equal to the repurchase price (including
accrued interest); the collateral will be marked-to-market on a daily basis,
and will be continuously monitored to ensure that such equivalent value is
maintained. Reverse repurchase agreements involve the risk that the market
value of the securities sold by the Fund may decline below the price at which
the Fund is obligated to repurchase the securities.
Temporary Investments. The Fund may also invest temporarily in high
quality investments or cash during times of unusual market conditions for
defensive purposes and in order to accommodate shareholder redemption requests
although currently it does not intend to do so. Any portion of the Fund's
assets maintained in cash will reduce the amount of assets in securities and
thereby reduce the Fund's yield or total return.
"When-Issued" Securities. As discussed in its Prospectus, the Fund
may purchase securities on a "when issued" basis (i.e., for delivery beyond the
normal settlement date at a stated price and yield). When the Fund agrees to
purchase securities on a "when issued" basis, its custodian will set aside cash
or liquid portfolio securities equal to the amount of the commitment in a
separate account. Normally, the custodian will set aside portfolio securities
to satisfy the purchase commitment, and in such a case, the Fund may be
required subsequently to place additional assets in the separate account in
order to assure that the value of the account remains equal to the amount of
the fund's commitment. It may be expected that the Fund's net assets will
fluctuate to a greater degree when it sets aside portfolio securities to cover
such purchase commitments than when it sets aside cash.
When the Fund engages in "when-issued" transactions, it relies on the
seller to consummate the trade. Failure of the seller to do so may result in
the fund incurring a loss or missing the opportunity to obtain a price
considered to be advantageous. The Fund does not intend to purchase "when
issued" securities for speculative purposes, but only in furtherance of its
investment objective.
Government "Mortgage-backed" Securities. The Fund may invest in
obligations of certain agencies and instrumentalities of the U.S. Government.
Some such obligations, such as those issued by GNMA or the Export-Import Bank
of the United States, are supported by the full faith and credit of the U.S.
Treasury; others, such as those of FNMA, are supported by the right of the
issuer to borrow from the Treasury; others are supported by the discretionary
authority of the U.S. Government to purchase the agency's obligations; still
others, such as those of the Federal Farm Credit Banks or FHLMC, are supported
only by the credit of the instrumentality. No assurance can be given that the
U.S. Government would provide financial support to U.S. Government-sponsored
agencies and instrumentalities if it is not obligated to do so by law.
The principal governmental (i.e., backed by the full faith and credit
of the U.S. Government) guarantor of mortgage-related securities is GNMA. GNMA
is a wholly owned U.S. Government corporation within the Department of Housing
and Urban Development. GNMA is authorized to guarantee, with the full faith
and credit of the U.S. Government, the timely payment of principal and interest
on securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and pools of FHA-insured
or VA-guaranteed mortgages. Government-related (i.e., not backed by the full
faith and credit of the U.S. Government) guarantors include FNMA and FHLMC.
FNMA and FHLMC are government-sponsored corporations owned entirely by private
stockholders. Pass-through securities issued by FNMA and FHLMC are guaranteed
as to timely payment of principal and interest by FNMA and FHLMC, respectively,
but are not backed by the full faith and credit of the U.S. Government.
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<PAGE> 645
MORTGAGE-RELATED SECURITIES -- IN GENERAL
Mortgage-related securities are backed by mortgage obligations
including, among others, conventional 30-year fixed rate mortgage obligations,
graduated payment mortgage obligations, 15-year mortgage obligations, and
adjustable rate mortgage obligations. All of these mortgage obligations can be
used to create pass-through securities. A pass-through security is created
when mortgage obligations are pooled together and undivided interests in the
pool or pools are sold. The cash flow from the mortgage obligations is passed
through to the holders of the securities in the form of periodic payments of
interest, principal and prepayments (net of a service fee). Prepayments occur
when the holder of an individual mortgage obligation prepays the remaining
principal before the mortgage obligation's scheduled maturity date. As a
result of the pass-through of prepayments of principal on the underlying
securities, mortgage-backed securities are often subject to more rapid
prepayment of principal than their stated maturity would indicate. Because the
prepayment characteristics of the underlying mortgage obligations vary, it is
not possible to predict accurately the realized yield or average life of a
particular issue of pass-through certificates. Prepayment rates are important
because of their effect on the yield and price of the securities. Accelerated
prepayments have an adverse impact on yields for pass-throughs purchased at a
premium (i.e., a price in excess of principal amount) and may involve
additional risk of loss of principal because the premium may not have been
fully amortized at the time the obligation is repaid. The opposite is true for
pass-throughs purchased at a discount. The Fund may purchase mortgage-related
securities at a premium or at a discount. Among the U.S. Government securities
in which the Fund may invest are government "mortgage-backed" (or government
guaranteed mortgage related securities). Such guarantees do not extend to the
value of yield of the mortgage-backed securities themselves or of the Fund's
shares.
GNMA Certificates. Certificates of the Government National Mortgage
Association ("GNMA") are mortgage-backed securities which evidence an undivided
interest in a pool or pools of mortgages. GNMA Certificates that the Fund may
purchase are the "modified pass-through" type, which entitle the holder to
receive timely payment of all interest and principal payments due on the
mortgage pool, net of fees paid to the "issuer" and GNMA, regardless of whether
or not the mortgagor actually makes the payment.
The National Housing Act authorizes GNMA to guarantee the timely
payment of principal and interest on securities backed by a pool of mortgages
insured by the Federal Housing Administration ("FHA") or guaranteed by the
Veterans Administration ("VA"). The GNMA guarantee is backed by the full faith
and credit of the U.S. Government. GNMA is also empowered to borrow without
limitation from the U.S. Treasury if necessary to make any payments required
under its guarantee.
The estimated average life of a GNMA Certificate is likely to be
substantially shorter than the original maturity of the mortgages underlying
the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greater part of principal
investment long before the maturity of the mortgages in the pool. Foreclosures
impose no risk to principal investment because of the GNMA guarantee, except to
the extent that the Fund has purchased the certificates above par in the
secondary market.
FHLMC Securities. The Federal Home Loan Mortgage Corporation
("FHLMC") was created in 1970 to promote development of a nationwide secondary
market in conventional residential mortgages. The FHLMC issues two types of
mortgage pass-through securities ("FHLMC Certificates"), mortgage participation
certificates ("PCs") and collateralized mortgage obligations ("CMOs"). PCs
resemble GNMA Certificates in that each PC represents a pro rata share of all
interest and principal payments made and owed on the underlying pool. The
FHLMC guarantees timely monthly payment of interest on PCs and the ultimate
payment of principal. Recently introduced FHLMC Gold PCs guarantee the timely
payment of both principal and interest.
CMOs are securities backed by a pool of mortgages in which the
principal and interest cash flows of the pool are channeled on a prioritized
basis into two or more classes, or tranches, of bonds. FHLMC CMOs are backed
by pools of agency mortgage-backed securities and the timely payment of
principal and interest of each
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<PAGE> 646
tranche is guaranteed by the FHLMC. The FHLMC guarantee is not backed by the
full faith and credit of the U.S. Government.
FNMA Securities. The Federal National Mortgage Association ("FNMA")
was established in 1938 to create a secondary market in mortgages insured by
the FHA, but has expanded its activity to the secondary market for conventional
residential mortgages. FNMA primarily issues two types of mortgage-backed
securities, guaranteed mortgage pass-through certificates ("FNMA Certificates")
and CMOs. FNMA Certificates resemble GNMA Certificates in that each FNMA
Certificate represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. FNMA guarantees timely payment of
interest and principal on FNMA Certificates and CMOs. The FNMA guarantee is
not backed by the full faith and credit of the U.S. Government.
Puts. The Fund may acquire "puts" with respect to Municipal
Securities held in its portfolio.
A put is a right to sell a specified security (or securities) within a
specified period of time at a specified exercise price. The Fund may sell,
transfer, or assign a put only in conjunction with the sale, transfer, or
assignment of the underlying security or securities. The amount payable to the
Fund upon its exercise of a "put" is normally (i) the Fund's acquisition cost
of the securities (excluding any accrued interest which the Fund paid on the
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period the fund owned the securities, plus
(ii) all interest accrued on the securities since the last interest payment
date during that period.
Puts may be acquired by the Fund to facilitate the liquidity of its
portfolio assets. Puts may also be used to facilitate the reinvestment of the
Fund's assets at a rate of return more favorable than that of the underlying
security. Puts may, under certain circumstances, also be used to shorten the
maturity of underlying variable rate or floating rate securities for purposes
of calculating the remaining maturity of those securities and the
dollar-weighted average portfolio maturity of the Fund's assets. See "Variable
and Floating Rate Notes" and "VALUATION" in this Statement of Additional
Information.
The Fund expects that it will generally acquire puts only where the
puts are available without the payment of any direct or indirect consideration.
However, if necessary or advisable, the Fund may pay for puts either separately
in cash or by paying a higher price for portfolio securities which are acquired
subject to the puts (thus reducing the yield to maturity otherwise available
for the same securities).
The Fund intends to enter into puts only with dealers, banks, and
broker-dealers which, in Key Advisers' or the Sub-Adviser's opinion, present
minimal credit risks.
The Fund may invest, consistent with its investment objective and
policies, in zero coupon bonds, which are debt instruments that do not pay
current interest and are typically sold at prices greatly discounted from par
value. The return on a zero-coupon obligation, when held to maturity, equals
the difference between the par value and the original purchase price.
Zero-coupon obligations have greater price volatility than coupon obligations.
Investment Restrictions
The following investment restrictions are fundamental with respect to
the Fund and may be changed only by a vote of a majority of the outstanding
shares of the Fund as defined in "ADDITIONAL INFORMATION -- Miscellaneous" of
this Statement of Additional Information).
THE FUND MAY NOT:
1. Participate on a joint or joint and several basis in any securities
trading account.
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<PAGE> 647
2. Purchase or sell physical commodities unless acquired as a result
of ownership of securities or other instruments (but this shall not prevent the
Fund from purchasing or selling options and futures contracts or from investing
in securities or other instruments backed by physical commodities).
3. Purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
Fund from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business). Investments by
the Fund in securities backed by mortgages on real estate or in marketable
securities of companies engaged in such activities are not hereby precluded.
4. Issue any senior security (as defined in the 1940 Act), except
that (a) the Fund may engage in transactions that may result in the issuance of
senior securities to the extent permitted under applicable regulations and
interpretations of the 1940 Act or an exemptive order; (b) the Fund may acquire
other securities, the acquisition of which may result in the issuance of a
senior security, to the extent permitted under applicable regulations or
interpretations of the 1940 Act; (c) subject to the restrictions set forth
below, the Fund may borrow money as authorized by the 1940 Act.
5. Borrow money, except that (a) the Fund may enter into commitments
to purchase securities in accordance with its investment program, including
delayed-delivery and when-issued securities and reverse repurchase agreements,
provided that the total amount of any such borrowing does not exceed 33 1/3% of
the Fund's total assets; and (b) the Fund may borrow money for temporary or
emergency purposes in an amount not exceeding 5% of the value of its total
assets at the time when the loan is made. Any borrowings representing more
than 5% of the Fund's total assets must be repaid before the Fund may make
additional investments.
6. Lend any security or make any other loan if, as a result, more
than 33 1/3% of its total assets would be lent to other parties, but this
limitation does not apply to purchases of publicly issued debt securities or to
repurchase agreements.
7. Underwrite securities issued by others, except to the extent that
the Fund may be considered an underwriter within the meaning of the Securities
Act of 1933 in the disposition of restricted securities.
8. Purchase securities of any one issuer, other than obligations
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities if, immediately after such purchase, more than 5% of the
value of its total assets would be invested in such issuer, except that up to
25% of the value of the Tax-Free Money Market Fund's total assets may be
invested without regard to such 5% limitation. For purposes of this
limitation, a security is considered to be issued by the government entity (or
entities) whose assets and revenues guarantee or back the security; with
respect to a private activity bond that is backed only by the assets and
revenues of a non-governmental user, a security is considered to be issued by
such non-governmental user.
9. Purchase the securities of any issuer (other than securities
issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities, or repurchase agreements secured thereby) if, as a result,
more than 25% of the Fund's total assets would be invested in the securities of
companies whose principal business activities are in the same industry. In the
utilities category, the industry shall be determined according to the service
provided. For example, gas, electric, water and telephone will be considered
as separate industries.
The following restrictions are not fundamental and may be changed
without shareholder approval:
1. The Fund will not purchase or retain securities of any issuer if
the officers or Trustees of the Victory Portfolios or the officers or directors
of its investment adviser owning beneficially more than one half of 1% of the
securities of such issuer together own beneficially more than 5% of such
securities.
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<PAGE> 648
2. The Fund will not invest more than 10% of its total assets in the
securities of issuers which together with any predecessors have a record of
less than three years of continuous operation.
3. The Fund will not write or sell puts, straddles, spreads or
combinations thereof or purchase put options (except that the Fund may acquire
puts with respect to Municipal Securities in its portfolio and sell those puts
in connection with a sale of such Municipal Securities). In addition, the Fund
may not purchase call options.
4. The Fund will not invest more than 10% of its net assets in
illiquid securities. Illiquid securities are securities that are not readily
marketable or cannot be disposed of promptly within seven days and in the usual
course of business at approximately the price at which the Fund has valued
them. Such securities include, but are not limited to, time deposits and
repurchase agreements with maturities longer than seven days. Securities that
may be resold under Rule 144A, or under securities offered pursuant to Section
4(2) of, or securities otherwise subject to restriction or limitations on
resale under, the 1933 Act ("Restricted Securities"), shall not be deemed
illiquid solely by reason of being unregistered. Key Advisers or the
Sub-Adviser determine whether a particular security is deemed to be liquid
based on the trading markets for the specific security and other factors.
However, because state securities laws may limit the Fund's investment in
Restricted Securities (regardless of the liquidity of the investment),
investments in Restricted Securities resalable under Rule 144A will continue to
be subject to applicable state law requirements until such time, if ever, that
such limitations are changed.
5. The Fund will not make short sales of securities, other than
short sales "against the box," or purchase securities on margin except for
short-term credits necessary for clearance of portfolio transactions, provided
that this restriction will not be applied to limit the use of options, futures
contracts and related options, in the manner otherwise permitted by the
investment restrictions, policies and investment program of the Fund.
6. The Fund may invest up to 5% of its total assets in the
securities of any one investment company, but may not own more than 3% of the
securities of any one investment company or invest more than 10% of its total
assets in the securities of other investment companies. Pursuant to an
exemptive order received by the Victory Portfolios from the Commission, the
Fund may invest in the money market funds of the Victory Portfolios.
7. The Fund may not acquire an over the counter put if, immediately
after such acquisition, more than 5% of the value of the Fund's total assets
would be subject to over the counter puts from the same institution except that
(i) up to 25% of the value of the Fund's total assets may be subject to puts
without regard to such 5% limitation and (ii) the 5% limitation is inapplicable
to puts that, by their terms, would be readily exercisable in the event of a
default in payment of principal or interest on the underlying securities. In
applying the above-described limitation, the Fund will aggregate securities
subject to over the counter puts from any one institution with the Fund's
investments, if any, in securities issued or guaranteed by that institution.
In addition, the Fund may not acquire an over the counter put that, by its
terms, would be readily exercisable in the event of a default in payment of
principal or interest on the underlying security or securities if, immediately
after that acquisition, the value of the security or securities underlying that
put, when aggregated with the value of any other securities issued or
guaranteed by the issuer of the put, would exceed 10% of the value of the
Fund's total assets.
State Regulations
In addition, the Fund, so long as its shares are registered under the
securities laws of the State of Texas and such restrictions are required as a
consequence of such registration, is subject to the following non-fundamental
policies, which may be modified in the future by the Trustees without a vote of
the Fund's shareholders: the Fund has represented to the Texas State
Securities Board that it: (i) will not invest in oil, gas or mineral leases or
purchase or sell real property (including limited partnership interests, but
excluding readily marketable securities of companies which invest in real
estate); and (ii) will not invest more than 5% of its net assets in warrants
valued at the lower of cost or market; provided that, included within that
amount, but not to exceed 2% of net assets, may
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<PAGE> 649
be warrants which are not listed on the New York or American Stock Exchanges.
For purposes of this restriction, warrants acquired in units or attached to
securities are deemed to be without value.
The policies and limitations listed above supplement those set forth in
the Prospectus. Unless otherwise noted, whenever an investment policy or
limitation states a maximum percentage of the Fund's assets that may be
invested in any security or other asset, or sets forth a policy regarding
quality standards, such standard or percentage limitation will be determined
immediately after and as a result of the Fund's acquisition of such security or
other asset except in the case of borrowing (or other activities that may be
deemed to result in the issuance of a "senior security" under the 1940 Act).
Accordingly, any subsequent change in values, net assets, or other
circumstances will not be considered when determining whether the investment
complies with the Fund's investment policies and limitations. If the value of
the Fund's holdings of illiquid securities at any time exceeds the percentage
limitation applicable at the time of acquisition due to subsequent fluctuations
in value or other reasons, the Board of Trustees will consider what actions, if
any, are appropriate to maintain adequate liquidity.
FUTURE DEVELOPMENTS
The Fund may take advantage of other investment practices which are not
at present contemplated for use by the Fund or which currently are not
available but which may be developed, to the extent such investment practices
are both consistent with the Fund's investment objective and are legally
permissible for the Fund. Such investment practices, if they arise, may
involve risks which exceed those involved in the activities described in the
Prospectus and Statement of Additional Information. Prior to commencing any
new investment practice, the Fund will notify shareholders by means of
prospectus supplement.
Portfolio Turnover
The turnover rate stated in the Prospectus for the Fund's investment
portfolio is calculated by dividing the lesser of the Fund's purchases or sales
of portfolio securities for the year by the monthly average value of the
portfolio securities. The calculation excludes all securities whose
maturities, at the time of acquisition, were one year or less. Because of this
exclusion, portfolio turnover is expected to be zero percent for regulatory
purposes.
VALUATION OF PORTFOLIO SECURITIES
As indicated in the Prospectus, the net asset value ("NAV") of the Fund
is determined and the shares of the Fund are priced as of the close of regular
trading of the New York Stock Exchange ("NYSE") ("the Valuation Time(s)") on
each Business Day of the Fund. A "Business Day" is a day on which the NYSE is
open for trading, the Federal Reserve Bank of Cleveland is open and any other
day (other than a day on which no shares of the Fund are tendered for
redemption and no order to purchase any shares is received) during which there
is sufficient trading in portfolio instruments that the Fund's net asset value
per share might be materially affected. The NYSE, or the Federal Reserve Bank
of Cleveland will not open in observance of the following holidays: New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving, and
Christmas.
When the NYSE is closed, or when trading is restricted for any reason
other than its customary weekend or holiday closings, or under emergency
circumstances as determined by the Commission to warrant such action, the
Fund's transfer agent will determine the Fund's NAV at the close of business,
normally 4:00 p.m., eastern time. The Fund's NAV may be affected to the extent
that its securities are traded on days that are not Business Days.
The Fund has elected to use the amortized cost method of valuation
pursuant to Rule 2a-7 under the 1940 Act. This involves valuing an instrument
at its cost initially and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of
-11-
<PAGE> 650
the instrument. This method may result in periods during which value, as
determined by amortized cost, is higher or lower than the price the Fund would
receive if it sold the instrument. The value of securities in the portfolio
can be expected to vary inversely with changes in prevailing interest rates.
Pursuant to Rule 2a-7, the Fund will maintain a dollar-weighted average
portfolio maturity appropriate to its objective of maintaining a stable net
asset value per share, provided that the Fund will not purchase any security
with a remaining maturity of more than 397 days (securities subject to
repurchase agreements may bear longer maturities) nor maintain a
dollar-weighted average portfolio maturity which exceeds 90 days. The Victory
Portfolios' Trustees have also undertaken to establish procedures reasonably
designed, taking into account current market conditions and the Victory
Portfolios' investment objectives, to stabilize the net asset value per share
of the Fund for purposes of sales and redemptions at $1.00. These procedures
include review by the Trustees, at such intervals as they deem appropriate, to
determine the extent, if any, to which the net asset value per share of the
Fund calculated by using available market quotations deviates from $1.00 per
share. In the event such deviation exceeds one-half of one percent, the Rule
requires that the Board promptly consider what action, if any, should be
initiated. If the Trustees believe that the extent of any deviation from the
Fund's $1.00 amortized cost price per share may result in material dilution or
other unfair results to new or existing investors, they will take such steps as
they consider appropriate to eliminate or reduce to the extent reasonably
practicable any such dilution or unfair results. These steps may include
selling portfolio instruments prior to maturity, shortening the dollar-weighted
average portfolio maturity, withholding or reducing dividends, reducing the
number of the Fund's outstanding shares without monetary consideration, or
utilizing a net asset value per share determined by using available market
quotations.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Matters Affecting Redemption
The Fund may suspend the right of redemption or postpone the date of
payment for shares during any period when (a) trading on the NYSE is restricted
by applicable rules and regulations of the Commission, (b) the NYSE is closed
for other than customary weekend and holiday closings, (c) the Commission has
by order permitted such suspension, or (d) an emergency exists as determined by
the Commission.
If, in the opinion of the Board of Trustees, conditions exist which make
cash payment undesirable, redemption payments may be made in whole or in part
in securities or other property, valued for this purpose as they are valued in
computing the Fund's NAV. Shareholders receiving securities or other property
on redemption may realize a gain or loss for tax purposes, and will incur any
costs of sale, as well as the associated inconveniences.
Pursuant to Rule 11a-3 under the 1940 Act, the Fund is required to give
shareholders at least 60 days' notice prior to terminating or modifying its
exchange privilege. Under the Rule, the 60-day notification requirement may be
waived if (i) the only effect of a modification would be to reduce or eliminate
an administrative fee, redemption fee, or deferred sales charge ordinarily
payable at the time of exchange, or (ii) the Fund temporarily suspends the
offering of shares as permitted under the 1940 Act or by the Commission, or
because it is unable to invest amounts effectively in accordance with its
investment objective and policies.
In the Prospectus, the Fund, Key Advisers and the Sub-Adviser have
notified shareholders that they reserve the right at any time without prior
notice to shareholders to refuse exchange purchases by any person or group if,
in Key Advisers' or the Sub-Adviser's judgment, the Fund would be unable to
invest effectively in accordance with its investment objective and policies, or
would otherwise potentially be adversely affected.
-12-
<PAGE> 651
Purchasing Shares
Shares are sold at their net asset value without a sales charge on days
the NYSE and the Federal Reserve Wire System are open for business. The
procedure for purchasing shares of the Fund is explained in the prospectus
under "Investing in the Fund."
Conversion to Federal Funds
It is the Fund's policy to be as fully invested as possible so that
maximum interest may be earned. To this end, all payments from shareholders
must be in federal funds or be converted into federal funds. This conversion
must be made before shares are purchased. Converting the funds to federal
funds is normally accomplished within two business days of receipt of the
check.
Redeeming Shares
The Fund redeems shares at the next computed net asset value after the
redemption request is received. Redemption procedures are explained in the
prospectus under "Redeeming Shares."
[Redemption in Kind
Although the Fund intends to redeem shares in cash, it reserves the
right under certain circumstances to pay the redemption price in whole or in
part by a distribution of securities from the Fund. To the extent available,
such securities will be readily marketable.
Redemption in kind will be made in conformity with applicable Commission
rules, taking such securities at the same value employed in determining net
asset value and selecting the securities in a manner the Trustees determine to
be fair and equitable.
The Fund has elected to be governed by Rule 18f-1 of the 1940 Act under
which the Fund is obligated to redeem shares for any one shareholder in cash
only up to the lesser of $250,000 or 1% of the Fund's net asset value during
any 90-day period.]
The Victory Portfolios may redeem shares involuntarily if redemption
appears appropriate in light of the Victory Portfolios' responsibilities under
the 1940 Act. (See "VALUATION" above.)
Additional Tax Information
It is the policy of the Fund to qualify for the favorable tax treatment
accorded regulated investment companies ("RICs") under Subchapter M of the
Code, for so long as such qualification is in the best interest of its
shareholders. By following such policy and distributing its income and gains
currently with respect to each taxable year, the Victory Portfolios expects to
eliminate or reduce to a nominal amount the federal income and excise taxes to
which it may otherwise be subject.
In order to qualify as a RIC, the Fund must, among other things, (1)
derive at least 90% of its gross income from dividends, interest, payments with
respect to securities loans, and gains from the sale or other disposition of
stock or securities, foreign currencies or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in stock, securities or currencies, (2) derive less than 30% of its
gross income from the sale or other disposition of stock, securities, options,
futures, forward contracts, and certain foreign currencies (or options,
futures, or forward contracts on foreign currencies) held for less than three
months, and (3) diversify its holdings so that at the end of each quarter of
its taxable year (i) at least 50% of the market value of the Fund's assets is
represented by cash or cash items, U.S. Government securities, securities of
other RICs
-13-
<PAGE> 652
and other securities limited, in respect of any one issuer, to an amount not
greater than 5% of the value of the Fund's total assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its total assets is invested in the securities of any one issuer
(other than U.S. Government securities) or of two or more issuers that the
Victory Portfolios control and that are engaged in the same, similar, or
related trades or businesses. These requirements may restrict the degree to
which the Victory Portfolios may engage in short-term trading and concentrate
investments. If the Fund qualifies as a RIC, it will not be subject to federal
income tax on the part of its net investment income and net realized capital
gains, if any, that it distributes to shareholders with respect to each taxable
year within the time limits specified in the Code.
A non-deductible excise tax is imposed on regulated investment companies
that do not distribute in each calendar year an amount equal to 98% of their
ordinary income for the year plus 98% of their capital gain net income for the
1-year period ending on October 31 of such calendar year. The balance of such
income must be distributed during the following calendar year. If
distributions during a calendar year are less than the required amount, the
Fund is subject to a non-deductible excise tax equal to 4% of the deficiency.
The Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of taxable dividends paid to any shareholder who has failed
to provide (or provided an incorrect) tax identification number, or is subject
to withholding pursuant to a notice from the Internal Revenue Service for
failure to properly include on his or her income tax return payments of
interest or dividends. This "backup withholding" is not an additional tax, and
any amounts withheld may be credited against the shareholder's ultimate U.S.
tax liability.
Information set forth in the Prospectus and this Statement of Additional
Information that relates to federal taxation is only a summary of certain key
federal tax considerations generally affecting purchasers of shares of the
Victory Portfolios. No attempt has been made to present a complete explanation
of the federal tax treatment of the Fund or its shareholders, and this
discussion is not intended as a substitute for careful tax planning.
Accordingly, potential purchasers of shares of the Fund are urged to consult
their tax advisers with specific reference to their own tax circumstances. In
addition, the tax discussion in the Prospectus and this Statement of Additional
Information is based on tax law in effect on the date of the Prospectus and
this Statement of Additional Information; such laws and regulations may be
changed by legislative, judicial or administrative action, sometimes with
retroactive effect.
As indicated in the Prospectus, the Fund is designed to provide
shareholders with current interest income free from federal income taxation.
The Fund is not intended to constitute a balanced investment program and is not
designed for investors seeking capital appreciation; moreover, the Fund is not
designed for investors seeking maximum tax-exempt income irrespective of
fluctuations in principal. Shares of the Fund would not be suitable for
tax-exempt institutions and may not be suitable for retirement plans qualified
under Section 401 of the Code, so-called Keogh or H.R. 10 plans, and individual
retirement accounts. Such plans and accounts are generally tax-exempt and,
therefore, would not benefit from the fact that dividends from the Fund are
tax-exempt; moreover, such dividends would be ultimately taxable to the
beneficiaries when distributed to them. In addition, shareholders who under
Code section 147(a) are "substantial users" or "related persons" to substantial
users with respect to facilities financed through any of the tax-exempt
obligations held by the Fund should consult a tax adviser whether
exempt-interest dividends would remain excludable from gross income in their
hands for federal tax purposes under Section 103 of the Code.
The Code permits a RIC that invests at least 50% of its assets in
tax-exempt Municipal Securities to pass through to its investors, on a
tax-exempt basis, net Municipal Securities interest income. The policy of the
Fund is to pay each year as dividends substantially all of its Municipal
Securities interest income net of certain deductions, but not to exceed in the
aggregate the net exempt-interest income received by the Fund during the
taxable year. An exempt-interest dividend is any dividend or part thereof
(other than a capital gain dividend) paid by the Fund and designated as an
exempt-interest dividend in a written notice mailed to shareholders after the
close of the Fund's taxable year. The percentage of the total dividends paid
for any taxable year which qualifies as federal
-14-
<PAGE> 653
exempt-interest dividends will be the same for all shareholders receiving
dividends from the Fund, respectively, during such year, regardless of the
period for which the shares were held.
While the Fund does not expect to realize any significant amount of
long-term capital gains, any net realized capital gains (the excess, if any, of
net long-term capital gains over net short-term capital losses) will be
distributed annually. Distributions of net capital gain will be taxable to
shareholders as long-term capital gains, regardless of how long a shareholder
has held the Fund's shares. If a shareholder disposes of shares of the Fund,
at a loss, before holding such shares longer than 6 months, the loss will be
treated as a long-term capital loss (unless disallowed as specified in the next
sentence) to the extent that the shareholder has received a capital gain
dividend on the shares. In addition, if a shareholder receives one or more
exempt-interest dividends with respect to any share and such share is held for
6 months or less, any loss on the sale or exchange of such share will be
disallowed to the extent of the amount of such dividend(s).
While the Fund does not expect to earn a significant amount of taxable
investment income or short-term gains, such income or short-term gains earned
by the Fund will be distributed to shareholders and will be taxable to them as
ordinary income (whether paid in cash or additional shares).
As indicated in the Prospectus, the Fund may acquire puts with respect
to Municipal Securities held in its portfolio. The policy of the Fund is to
limit its acquisition of puts to those under which the Fund will be treated for
federal income tax purposes as the owner of the underlying Municipal Securities
acquired subject to the put, so that the interest on those Securities
Obligations will be tax-exempt to the Fund. Although the Service has issued a
published ruling that provides some guidance regarding the tax consequences of
the purchase of puts, there is currently no guidance available from the
Internal Revenue Service that definitively establishes the tax consequences of
many of the types of puts that the Fund could acquire under the 1940 Act.
Therefore, although the Fund will only acquire a put after concluding that it
will have the tax consequences described above, the Internal Revenue Service
could reach a different conclusion. If the Fund were not treated as the owner
of the Municipal Securities, income from such securities would probably not be
tax-exempt.
Although the Fund expects to qualify as a RIC and to be relieved of all
or substantially all federal income taxes, the Fund may be subject to the tax
laws of states or localities in which their offices are maintained, in which
their agents or independent contractors are located, or in which they are
otherwise deemed to be conducting business, depending upon the extent of its
activities in such states and localities. In addition, if for any taxable year
the Fund does not qualify for the special federal tax treatment afforded RICs,
all of its taxable income will be subject to federal income tax at the Fund
level at regular corporate rates (without any deduction for distributions to
shareholders). When distributed, such income, as well as the Fund's Municipal
Securities interest income, although not taxed at the Fund level would be
taxable to shareholders as an ordinary dividend.
MANAGEMENT OF THE VICTORY PORTFOLIOS
Board of Trustees
Overall responsibility for management of the Victory Portfolios rests
with the Trustees, who are elected by the shareholders of the Victory
Portfolios. The Victory Portfolios are managed by the Trustees in accordance
with the laws of the State of Delaware governing business trusts. There are
currently seven Trustees, six of whom are not "interested persons" of the
Victory Portfolios within the meaning of that term under the 1940 Act. The
Trustees, in turn, elect the officers of the Victory Portfolios to supervise
actively its day-to-day operations.
The Trustees of the Victory Portfolios, their addresses, ages and their
principal occupations during the past five years are as follows:
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<PAGE> 654
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- --------------------- ---------------- --------------------
<S> <C> <C>
Leigh A. Wilson, 51* Trustee and From 1989 to present, Chairman and
Glenleigh International Ltd. President Chief Executive Officer, Glenleigh
53 Sylvan Road North International Limited; previously
Westport, CT 06880 Chief Executive Officer, Paribas
North America and Paribas
Corporation; Trustee, The Victory
Funds and Spears, Benzak, Salomon
and Farrell ("SBSF") Funds.
Robert G. Brown, 72 Trustee Retired; from October 1983 to
5460 N. Ocean Drive November 1990, President,
Singer Island, Riviera Beach, Cleveland Advanced Manufacturing
Florida 33404 Program (non-profit corporation
engaged in regional economic
development).
Edward P. Campbell, 46 Trustee From March 1, 1994 to present,
Nordson Corporation Executive Vice President and Chief
28601 Clemens Road Operating Officer of Nordson
Westlake, OH 44145 Corporation (manufacturer of
application equipment); from May
1988 to March 1994, Vice President
of Nordson Corporation; from 1987
to December 1994, member of the
Supervisory Committee of Society's
Collective Investment Retirement
Fund; from May 1991 to August
1994, Trustee, Financial Reserves
Fund and from May 1993 to August
1994, Trustee, Ohio Municipal
Money Market Fund; Trustee, The
Victory Funds and SBSF.
</TABLE>
- ---------------
* Mr. Wilson is deemed to be an "interested person" of the Victory
Portfolios under the 1940 Act solely by reason of his position as
President.
-16-
<PAGE> 655
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Funds During Past 5 Years
- --------------------- ---------------- --------------------
<S> <C> <C>
Dr. Harry Gazelle, 68 Trustee Retired radiologist, Drs. Hill and
17822 Lake Road Thomas Corp.; Trustee, The Victory
Lakewood, OH 44107 Funds.
Dr. Thomas F. Morrissey, 62 Trustee 1995 Visiting Scholar, Bond
Weatherhead School of University, Queensland, Australia;
Management Professor, Weatherhead School of
Case Western Reserve Management, Case Western Reserve
University University; from 1989 to 1995,
10900 Euclid Avenue Associate Dean of Weatherhead
Cleveland, OH 44106-7235 School of Management and
Professor, Case Western Reserve
University; from 1987 to December
1994, Member of the Supervisory
Committee of Society's Collective
Investment Retirement Fund; from
May 1991 to August 1994, Trustee,
Financial Reserves Fund and from
May 1993 to August 1994, Trustee,
Ohio Municipal Money Market Fund;
Trustee, The Victory Funds.
Stanley I. Landgraf, 70 Trustee Retired; currently, Trustee,
41 Traditional Lane Rensselaer Polytechnic Institute;
Albany, NY 12211 Director, Elenel Corporation and
Mechanical Technology, Inc.;
Member, Board of Overseers, School
of Management, Rensselaer
Polytechnic Institute; Member, The
Fifty Group (a Capital Region
business organization); Trustee,
The Victory Funds.
H. Patrick Swygert, 52 Trustee President, Howard University;
Howard University formerly President, State
2400 6th Street, N.W. University of New York at Albany;
Suite 320 formerly, Executive Vice
Washington, DC 20059 President, Temple University;
Trustee, The Victory Funds.
</TABLE>
The Board presently has an Investment Policy Committee and a Business,
Legal, and Audit Committee. The members of the Investment Policy Committee are
Messrs. Landgraf (Chairman), Morrissey and Brown, who will serve until May
1996. The function of the Investment Policy Committee is to review the
existing investment policies of the Victory Portfolios, including the levels of
risk and types of funds available to shareholders, and make recommendations to
the Board of Trustees regarding the revision of such policies or, if necessary,
the submission of such revisions to the Victory Portfolios' shareholders for
their consideration. The members of the Business, Legal and Audit Committee
are Messrs. Swygert (Chairman), Campbell and Gazelle who will serve until May
1996.
-17-
<PAGE> 656
The function of the Business, Legal and Audit Committee is to recommend
independent auditors and monitor accounting and financial matters; to nominate
persons to serve as disinterested Trustees and Trustees to serve on committees
of the Board; and to review compliance and contract matters.
The Investment Policy Committee met four times during the 12 months
ended October 31, 1995. The Business, Legal and Audit Committee was
constituted on May 24, 1995 (and has met twice since then) and replaced the
Audit Committee, the Legal Committee and the Nominating Committee, which met
three times, one time and one time, respectively, during the 12 month period
ended October 31, 1995.
REMUNERATION OF TRUSTEES AND CERTAIN EXECUTIVE OFFICERS
Effective June 1, 1995, each Trustee (other than Leigh A. Wilson)
receives an annual fee of $27,000 for serving as Trustee of all the funds of
the Victory Portfolios, and an additional per meeting fee ($2,400 in person and
$1,200 per telephonic meeting).
Effective June 1, 1995, Leigh A. Wilson receives an annual fee of
$33,000 for serving as President and Trustee for all of the funds of the
Victory Portfolios, and an additional per meeting fee ($3,000 in person and
$1,500 per telephonic meeting).
The following table indicates the compensation received by each Trustee
from the Fund and from the Victory "Fund Complex"* for the 12 month period
ended October 31, 1995:
<TABLE>
<CAPTION>
Pension or
Retirement Estimated Total Total
Benefits Accrued Annual Compensation Compensation
as Benefits from from Victory
Portfolio Expenses Upon Retirement Fund "Fund Complex"*
------------------ --------------- ------------ ---------------
<S> <C> <C> <C> <C>
Robert G. Brown, -0- -0- $1,781.03 $39,815.98
Trustee . . . . . . .
John D. Buckingham, -0- -0- 853.51 18,841.89
Trustee . . . . . .
Edward P. Campbell, -0- -0- 1,523.27 33,799.68
Trustee . . . . . . .
Harry Gazelle, -0- -0- 1,467.67 35,916.98
Trustee . . . . . . .
John W. Kemper, -0- -0- 853.51 22,567.31
Trustee # . . . . . .
Stanley I. Landgraf, -0- -0- 1,523.57 34,615.98
Trustee . . . . . . .
Thomas F. Morrissey, -0- -0- 1,523.57 40,366.98
Trustee . . . . . . .
H. Patrick Swygert, -0- -0- 1,523.57 37,116.98
Trustee . . . . . . .
Leigh A. Wilson, -0- -0- 1,661.60 46,716.97
Trustee . . . . . . .
John R. Young, -0- -0- 900.37 21,963.81
Trustee # . . . . . .
</TABLE>
-18-
<PAGE> 657
- ---------------
# Resigned
* For certain Trustees, these amounts include compensation received from
the Victory Funds (which were reorganized into the Victory Portfolios as
of June 5, 1995), the SBSF Funds (the investment adviser of which was
acquired by KeyCorp effective April, 1995) and Society's Collective
Investment Retirement Funds, which were reorganized into the Victory
Balanced Fund and Victory Government Mortgage Fund as of December 19,
1994. There are presently 28 mutual funds from which the above-named
Trustees are compensated in the Victory "Fund Complex," but not all of
the above-named Trustees serve on the boards of each fund in the "Fund
Complex."
Officers
The officers of the Victory Portfolios, their addresses, ages and
principal occupations during the past five years are as follows:
<TABLE>
<CAPTION>
Position with the Principal occupation
Name Victory Portfolios during past 5 years
---- ------------------ --------------------
<S> <C> <C>
Leigh A. Wilson, 51 President and Trustee From 1989 to present, Chairman and
Glenleigh International Ltd. Chief Executive Officer, Glenleigh
53 Sylvan Road North International Limited; from 1984-
Westport, CT 06880 1989, Chief Executive Officer,
Paribas North America and Paribas
Corporation; Trustee to The Victory
Funds and SBSF Funds.
William B. Blundin, 57 Vice President Senior Vice President of BISYS Fund
BISYS Fund Services Services; officer of other
125 West 55th Street investment companies administered
New York, New York 10019 by BISYS Fund Services; President
and Chief Executive Officer of
Vista Broker-Dealer Services, Inc.,
Emerald Asset Management, Inc. and
BNY Hamilton Distributors, Inc.,
registered broker/dealers.
J. David Huber, 49 Vice President Executive Vice President, BISYS
BISYS Fund Services Fund Services.
3435 Stelzer Road
Columbus, OH 43219-3035
Scott A. Englehart, 33 Secretary From October 1990 to present,
BISYS Fund Services employee of BISYS Fund Services,
3435 Stelzer Road Inc.; from 1985 to October 1990,
Columbus, OH 43219-3035 Manager of Banking Center, Fifth
Third Bank.
</TABLE>
-19-
<PAGE> 658
<TABLE>
<S> <C> <C>
George O. Martinez, 36 Assistant Secretary From March 1995 to present, Senior
BISYS Fund Services Vice President and Director of
3435 Stelzer Road Legal and Compliance Services,
Columbus, OH 43219-3035 BISYS Fund Services; from June
1989-March 1995, Vice President and
Associate General Counsel, Alliance
Capital Management.
Martin R. Dean, 32 Treasurer From May 1994 to present, employee
BISYS Fund Services of BISYS Fund Services; from
3435 Stelzer Road January 1987 - April 1994, Senior
Columbus, OH 43219-3035 Manager, KPMG Peat Marwick.
Adrian J. Waters, 33 Assistant Treasurer From May 1993 to present, employee
BISYS Fund Services (Ireland) of BISYS Fund Services; from 1989-
Limited May 1993, Manager, Price
ITI House Waterhouse.
12 Earlsfort Terrace
Dublin 2, Ireland
</TABLE>
The mailing address of each of the officers of the Victory Portfolios
is 3435 Stelzer Road, Columbus, Ohio 43219-3035.
The officers of the Victory Portfolios (other than Leigh Wilson)
receive no compensation directly from the Victory Portfolios for performing the
duties of their offices. BISYS Fund Services, Inc. receives fees from the
Victory Portfolios for acting as Administrator.
As of January 1, 1996, the Trustees and officers as a group owned
beneficially less than 1% of the Fund.
Investment Adviser and Sub-Adviser
Estimated Annual
Key Advisers was organized as an Ohio corporation on July 27, 1995 and
is registered as an investment adviser under the Investment Advisers Act of
1940. It is a wholly-owned subsidiary of KeyCorp Asset Management Holdings,
Inc., which is a wholly- owned subsidiary of Society National Bank, a
wholly-owned subsidiary of KeyCorp. Affiliates of Key Advisers manage
approximately $37 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals and mutual funds.
KeyCorp, a financial services holding company, is headquartered at 127
Public Square, Cleveland, Ohio 44114. As of September 30, 1995, KeyCorp had an
asset base of $68 billion, with banking offices in 26 states from Maine to
Alaska, and trust and investment offices in 16 states. KeyCorp is the
resulting entity of the merger in 1994 of Society Corporation, the bank holding
company of which Society National Bank was a wholly-owned subsidiary, and
KeyCorp, the former bank holding company. KeyCorp's major business activities
include providing traditional banking and associated financial services to
consumer, business and commercial markets. Its non-bank subsidiaries include
investment advisory, securities brokerage, insurance, bank credit card
processing, and mortgage leasing companies. Society National Bank is the lead
affiliate bank of KeyCorp.
The following schedule lists the advisory fees for each mutual fund
that is advised by Key Advisers.
.25 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Institutional Money Market Fund*
-20-
<PAGE> 659
.35 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Prime Obligations Fund*
Victory U.S. Government Obligations Fund*
Victory Tax-Free Money Market Fund*
.50 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Money Market Fund*
Victory Limited Term Income Fund*
Victory Government Mortgage Fund*
Victory Financial Reserves Fund*
Victory Fund for Income #
.55 OF 1% OF AVERAGE DAILY NET ASSETS
Victory National Municipal Bond Fund*
Victory Government Bond Fund*
Victory New York Tax-Free Fund*
.60 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Bond Fund*
Victory Stock Index Fund*
.65 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Diversified Stock Fund*
.75 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Intermediate Income Fund*
Victory Investment Quality Bond Fund*
Victory Ohio Regional Stock Fund*
1% OF AVERAGE DAILY NET ASSETS
Victory Balanced Fund*
Victory Value Fund*
Victory Growth Fund*
Victory Special Value Fund*
Victory Special Growth Fund+
1.10% OF AVERAGE DAILY ASSETS
Victory International Growth Fund*
# First Albany Asset Management Corporation serves as
sub-adviser to the Victory Fund for Income, for which it
receives .20% of average daily net assets.
+ T. Rowe Price Associates, Inc. serves as sub-adviser to the
Victory Special Growth Fund, for which it receives .25% of
average daily net assets up to $100 million and .20% of
average daily net assets in excess of $100 million.
* Society Asset Management, Inc. (the Sub-Adviser) serves as
subadviser to each of these funds. For its services under the
investment sub-advisory agreement, Key Advisers pays the
Sub-Adviser sub-advisory fees at rates (based on an annual
percentage of average daily net assets) which vary according
to the table set forth below:
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<PAGE> 660
For the Victory Balanced Fund, Diversified Stock Fund, Growth Fund, Stock Index
Fund and Value Fund:
<TABLE>
<CAPTION>
Rate of
Net Assets Sub-Advisory Fee*
---------- -----------------
<S> <C>
Up to $10,000,000 0.65%
Next $15,000,000 0.50%
Next $25,000,000 0.40%
Above $50,000,000 0.35%
</TABLE>
For the Victory International Growth Fund, Ohio Regional Stock Fund and Special
Value Fund:
<TABLE>
<CAPTION>
Rate of
Net Assets Sub-Advisory Fee*
---------- -----------------
<S> <C>
Up to $10,000,000 0.90%
Next $15,000,000 0.70%
Next $25,000,000 0.55%
Above $50,000,000 0.45%
</TABLE>
For the Victory Intermediate Income Fund, Investment Quality Bond Fund, Limited
Term Income Fund, Ohio Municipal Bond Fund, Government Bond Fund, Government
Mortgage Fund, National Municipal Bond Fund and New York Tax-Free Fund:
<TABLE>
<CAPTION>
Rate of
Net Assets Sub-Advisory Fee*
---------- -----------------
<S> <C>
Up to $10,000,000 0.40%
Next $15,000,000 0.30%
Next $25,000,000 0.25%
Above $50,000,000 0.20%
</TABLE>
For the Victory Prime Obligations Fund, Tax-Free Money Market Fund, U.S.
Government Obligations Fund, Financial Reserves Fund, Institutional Money Market
Fund and Ohio Municipal Money Market Fund:
<TABLE>
<CAPTION>
Rate of
Net Assets Sub-Advisory Fee*
---------- -----------------
<S> <C>
Up to $10,000,000 0.25%
Next $15,000,000 0.20%
Next $25,000,000 0.15%
Above $50,000,000 0.125%
</TABLE>
- ---------------
* As a percentage of average daily net assets. The Sub-Adviser has the
right to voluntarily waive any portion of the sub-advisory fee from
time to time.
ADVISORY AND OTHER CONTRACTS
Unless sooner terminated, the Investment Advisory Agreement between
Key Advisers and the Fund provides that it will continue in effect as to the
Fund for an initial two-year term and for consecutive one-year terms
thereafter, provided that such continuance is approved at least annually by the
Victory Portfolios' Trustees or by vote of a majority of the outstanding shares
of such Fund (as defined under "GENERAL INFORMATION - Miscellaneous" in the
Prospectus), and, in either case, by a majority of the Trustees who are not
parties to the Investment Advisory Agreement or interested persons (as defined
in the 1940 Act) of any party to the Investment Advisory Agreement, by votes
cast in person at a meeting called for such purpose.
The Investment Advisory Agreement is terminable as to the Fund at any
time on 60 days' written notice without penalty by the Trustees, by vote of a
majority of the outstanding shares of that Fund, or by Key Advisers. The
Investment Advisory Agreement also terminates automatically in the event of any
assignment, as defined in the 1940 Act.
-22-
<PAGE> 661
The Investment Advisory Agreement provides that Key Advisers shall not
be liable for any error of judgment or mistake of law or for any loss suffered
by the Fund in connection with the performance of services pursuant to the
Investment Advisory Agreement, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith, or gross negligence on the
part of Key Advisers in the performance of its duties, or from reckless
disregard by it of either duties and obligations thereunder.
Under the Investment Advisory Agreement, Key Advisers has agreed to
provide the investment advisory services described in the Prospectus. For the
services provided and expenses assumed pursuant to the Investment Advisory
Agreement, the Fund pays Key Advisers a fee, computed daily and paid monthly,
at the annual rate of thirty-five one-hundredths of one percent (.35%) of the
average daily net assets of the Fund.
Prior to January, 1993, Society National Bank served as investment
adviser to the Fund. From January, 1993 to December 31, 1995, Society Asset
Management, Inc. served as investment adviser to the Fund. For the fiscal
years ended October 31, 1993, 1994 and 1995 the Fund paid investment advisory
fees of $627,366, $707,270, and $_________, respectively after fee reductions
of $22,975, $34,905 and $______ respectively.
Under the Investment Advisory Agreement, Key Advisers may delegate a
portion of its responsibilities to a subadviser. In addition, the investment
advisory agreement provides that Key Advisers may render services through its
own employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser of the Fund and are under the common
control of KeyCorp as long as all such persons are functioning as part of an
organized group of persons, managed by authorized officers of Key Advisers.
Key Advisers has entered into an investment sub-advisory agreement
with its affiliate, Society Asset Management, Inc. on behalf of the Fund. The
Sub-Adviser is a wholly-owned subsidiary of KeyCorp Asset Management Holdings,
Inc. With respect to the day to day management of the Fund, under the
sub-advisory agreement, the Sub-Adviser makes decisions concerning, and places
all orders for, purchases and sales of securities and helps maintain the
records relating to such purchases and sales. The Sub-Adviser may, in its
discretion, provide such services through its own employees or the employees of
one or more affiliated companies that are qualified to act as an investment
adviser to the Company under applicable laws and are under the common control
of KeyCorp; provided that (i) all persons, when providing services under the
sub-advisory agreement, are functioning as part of an organized group of
persons, and (ii) such organized group of persons is managed at all times by
authorized officers of the Sub-Adviser. This arrangement will not result in the
payment of additional fees by the Fund.
Glass-Steagall Act
In 1971 the United States Supreme Court held in Investment Company
Institute v. Camp that the federal statute commonly referred to as the
Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision:
(a) forbid a bank holding company registered under the Federal Bank Holding
Company Act of 1956 (the "Holding Company Act") or any non-bank affiliate
thereof from sponsoring, organizing, or controlling a registered, open-end
investment company continuously engaged in the issuance of its shares, but (b)
do not prohibit such a holding company or affiliate from acting as investment
adviser, transfer agent, and custodian to such an investment company. In 1981
the United States Supreme Court held in Board of Governors of the Federal
Reserve System v. Investment Company Institute that the Board did not exceed
its authority under the Holding Company Act when it adopted its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to registered closed-end investment companies.
In the Board of Governors case, the Supreme Court also stated that if a
national bank complied with the restrictions imposed by the Board in its
regulation and interpretation authorizing bank holding companies and their
non-bank affiliates to act as investment advisers to investment companies, a
national bank performing investment advisory services for an investment company
would not violate the Glass-Steagall Act.
-23-
<PAGE> 662
Key Advisers and the Sub-Adviser believe that they may perform the
services for the Victory Portfolios contemplated by the Prospectus, this
Statement of Additional Information, and the Investment Advisory Agreement (and
Sub-Advisory Agreement) with the Victory Portfolios without violation of
applicable statutes and regulations and has so represented in its Investment
Advisory (and Sub-Advisory Agreement) with the Victory Portfolios. Key Trust
Company of Ohio, N. A. believes that it may perform the services for the
Victory Portfolios contemplated by the Prospectus, this Statement of Additional
Information, and the Shareholder Servicing Agreement with the Victory
Portfolios (as described below) without violation of applicable statutes and
regulations and has so represented in such Shareholder Servicing Agreement.
Future changes in either federal or state statutes and regulations relating to
the permissible activities of banks or bank holding companies and the
subsidiaries or affiliates of those entities, as well as further judicial or
administrative decisions or interpretations of present and future statutes and
regulations, could prevent or restrict Key Trust Company of Ohio, N. A., Key
Advisers or the Sub-Adviser from continuing to perform such services for the
Victory Portfolios. Depending upon the nature of any changes in the services
which could be provided by Key Trust Company of Ohio, N. A., Key Advisers or
the Sub-Adviser; the Trustees of the Victory Portfolios would review the
Victory Portfolios' relationship with Key Trust Company of Ohio, N. A., Key
Advisers or the Sub-Adviser and consider taking all action necessary in the
circumstances.
Should future legislative, judicial, or administrative action prohibit
or restrict the proposed activities of Key Trust Company of Ohio, N. A., Key
Advisers or the Sub-Adviser and its affiliated and correspondent banks and
other non-bank affiliates in connection with customer purchases of shares of
the Victory Portfolios, the banks and such non-bank affiliates might be
required to alter materially or discontinue the services offered by them to
customers. It is not anticipated, however, that any change in the Victory
Portfolios' method of operations would affect its net asset value per share or
result in financial losses to any customer.
From time to time, advertisements, supplemental sales literature and
information furnished to present or prospective shareholders of the Fund may
include descriptions of Key Trust Company of Ohio, N. A., Key Advisers and the
Sub-Adviser including, but not limited to, (i) descriptions of the operations
of Key Trust Company of Ohio, N. A., Key Advisers and the Sub-Adviser; (ii)
descriptions of certain personnel and their functions; and (iii) statistics and
rankings related to the operations of Key Trust Company of Ohio, N. A., Key
Advisers and the Sub-Adviser.
Portfolio Transactions
Pursuant to the Investment Advisory Agreement (and Sub-Advisory
Agreement), Key Advisers or the Sub-Adviser determines, subject to the general
supervision of the Trustees of the Victory Portfolios, and in accordance with
the Fund's investment objective and restrictions, which securities are to be
purchased and sold by the Fund, and which brokers are to be eligible to execute
its portfolio transactions.
Purchases and sales of portfolio securities of the Fund usually are
principal transactions; portfolio securities for the Fund are normally
purchased directly from the issuer or from an underwriter or market maker for
the securities. While Key Advisers and the Sub-Adviser generally see
competitive spreads or commissions, the Fund may not necessarily pay the lowest
spread or commission available on each transaction, for reasons discussed
below.
Allocation of transactions to dealers is determined by Key Advisers
or the Sub-Adviser in their best judgment and in a manner deemed fair and
reasonable to shareholders. The primary consideration is prompt execution of
orders in an effective manner at the most favorable price. Subject to this
consideration, dealers who provide supplemental investment research to Key
Advisers or the Sub-Adviser may receive orders for transactions by the Victory
Portfolios. Information so received is in addition to and not in lieu of
services required to be performed by Key Advisers or the Sub-Adviser and does
not reduce the advisory fees payable to Key Advisers by the Victory Portfolios.
Such information may be useful to Key Advisers or the Sub-Adviser in serving
both the Victory Portfolios and other clients and, conversely, such
supplemental research information obtained by the placement of orders on behalf
of other clients may be useful to Key Advisers or the Sub-Adviser in carrying
out its obligations to the Victory Portfolios. In the future, the Trustees may
also authorize the allocation of brokerage to affiliated broker-dealers on an
agency basis to effect portfolio transactions. In such event, the Trustees
will adopt procedures incorporating the standards of Rule 17e-1 under the 1940
Act, which requires that the commission paid
-24-
<PAGE> 663
to affiliated broker-dealers be "reasonable and fair compared to the
commission, fee or other remuneration received, or to be received, by other
brokers in connection with comparable transactions involving similar securities
during a comparable period of time." At times, the Fund may also purchase
portfolio securities directly from dealers acting as principals, underwriters
or market makers. As these transactions are usually conducted on a net basis,
no brokerage commissions are paid by the Fund.
The Victory Portfolios will not execute portfolio transactions
through, acquire portfolio securities issued by, make savings deposits in, or
enter into repurchase or reverse repurchase agreements with Key Advisers, the
Sub-Adviser, Key Trust Company of Ohio, N.A. or its affiliates, Concord Holding
Corporation, Victory Broker-Dealer Services, Inc. or their affiliates, and will
not give preference to Key Trust Company of Ohio, N.A.'s correspondent banks or
affiliates, or Concord Holding Corporation or Victory Broker-Dealer Services,
Inc. with respect to such transactions, securities, savings deposits,
repurchase agreements, and reverse repurchase agreements.
Investment decisions for the Fund are made independently from those
for the other funds or any other investment company or account managed by Key
Advisers (or Society). Any such other investment company or account may also
invest in the same securities as a particular fund. When a purchase or sale of
the same security is made at substantially the same time on behalf of the Fund
and another fund, investment company or account, the transaction will be
averaged as to price, and available investments allocated as to amount, in a
manner which Key Advisers (or Society) believes to be equitable to the Fund
and such other fund, investment company or account. In some instances, this
investment procedure may adversely affect the price paid or received by the
Fund or the size of the position obtained by the Fund. To the extent permitted
by law, Key Advisers (or Society) may aggregate the securities to be sold or
purchased for the Fund with those to be sold or purchased for the other funds
or for other investment companies or accounts in order to obtain best
execution. As provided by the Investment Advisory (and Sub-Advisory)
Agreement, in making investment recommendations for the Victory Portfolios, Key
Advisers (or Society) will not inquire or take into consideration whether an
issuer of securities proposed for purchase or sale by a Fund is a customer of
Society, its parents or subsidiaries or affiliates and, in dealing with their
commercial customers, Key Advisers (Society), its parents, subsidiaries, and
affiliates will not inquire or take into consideration whether securities of
such customers are held by the Victory Portfolios.
In the fiscal years ended October 31, 1993, 1994 and 1995, the Fund
paid $_______, $_______ and $_______, respectively, in brokerage commissions.
Business Management Agreement
In connection with its obligations under the Investment Sub-Advisory
Agreement, the Sub-Adviser has entered into a Business Management Agreement
with Key Advisers, pursuant to which Key Advisers provides certain
administrative and support services to the Sub-Adviser. Such services include
preparing reports to the Victory Portfolios' Board of Trustees, recordkeeping
services, and services rendered in connection with the preparation of
regulatory filings and other reports, and regulatory and other administrative
and compliance systems and support services.
For such services to the Fund, the Sub-Adviser pays fees to Key
Advisers which vary according to a sliding scale containing "breakpoints" at
which decreases in the business management fees correspond to increases in the
average daily net asset values of the Fund as follows:
<TABLE>
<CAPTION>
Rate of Business
Net Assets of the Fund Management Fee*
---------------------- ----------------
<S> <C>
Up to $10,000,000 0.20%
Next $15,000,000 0.15%
Next $25,000,000 0.10%
Above $50,000,000 0.075%
</TABLE>
- ---------------
* As a percentage of average daily net assets.
-25-
<PAGE> 664
Administrator
Currently, Concord Holding Corporation ("CHC") serves as general
manager and administrator (the "Administrator") to the Fund. The
Administrator assists in supervising all operations of the Fund (other than
those performed by Key Advisers or the Sub- Adviser under the Investment
Advisory Agreement and Sub-Advisory Agreement. Prior to June, 1995, The
Winsbury Company ("Winsbury") served as the Fund's administrator.
CHC receives a fee from the Fund for its services as Administrator and
expenses assumed pursuant to the Administration Agreements, calculated daily
and paid monthly, at the annual rate of fifteen one hundredths of one percent
(.15%) of the Fund's average daily net assets. CHC may periodically waive all
or a portion of its fee with respect to the Fund in order to increase the net
income of the Fund available for distribution as dividends.
Unless sooner terminated, the Administration Agreement will continue
in effect as to the Fund for a period of two years, and for consecutive
one-year terms thereafter, provided that such continuance is ratified at least
annually by the Victory Portfolios' Board of Trustees or by vote of a majority
of the outstanding shares of the Fund, and in either case by a majority of the
Trustees who are not parties to the Administration Agreement or interested
persons (as defined in the 1940 Act) of any party to the Administration
Agreement, by votes cast in person at a meeting called for such purpose.
The Administration Agreement provides that CHC shall not be liable for
any error of judgment or mistake of law or any loss suffered by the Victory
Portfolios in connection with the matters to which the Administration Agreement
relates, except a loss resulting from willful misfeasance, bad faith, or gross
negligence in the performance of its duties, or from the reckless disregard by
it of its obligations and duties thereunder.
Under the Administration Agreement, CHC assists in the Fund's
administration and operation, including providing statistical and research
data, clerical services, internal compliance and various other administrative
services, including among other responsibilities, forwarding certain purchase
and redemption requests to the Transfer Agent, participation in the updating of
the prospectus, coordinating the preparation, filing, printing and
dissemination of reports to shareholders, coordinating the preparation of
income tax returns, arranging for the maintenance of books and records and
providing the office facilities necessary to carry out the duties thereunder.
Under the Administration Agreement, CHC may delegate all or any part of its
responsibilities thereunder.
In the fiscal years ended October 31, 1993, 1994 and 1995, the Fund
paid to Winsbury and CHC aggregate administration fees of $268,871, $306,609
and $_______, respectively, after fee reductions of $1,413, $12,066 and
$_______, respectively.
Distributor
Victory Broker-Dealer Services, Inc. (the "Distributor") serves as
distributor for the continuous offering of the shares of the Fund pursuant to a
Distribution Agreement between the Distributor and the Victory Portfolios.
Unless otherwise terminated, the Distribution Agreement will remain in effect
with respect to the Fund for two years, and thereafter for consecutive one-year
terms, provided that it is approved at least annually (i) by the Victory
Portfolios' Board of Trustees or by the vote of a majority of the outstanding
shares of the Fund, and (ii) by the vote of a majority of the Trustees of the
Victory Portfolios who are not parties to the Distribution Agreement or
interested persons of any such party, cast in person at a meeting called for
the purpose of voting on such approval. The Distribution Agreement will
terminate in the event of its assignment, as defined in the 1940 Act. For the
Fund's fiscal years ended October 31, 1993, 1994 and 1995, Winsbury received
$_______, $______ and $_______, respectively, in underwriting commissions, and
retained $____ and $____, respectively.
Shareholder Servicing Plan
The Victory Portfolios, on behalf of the Fund, has adopted a
Shareholder Servicing Plan to provide payments to shareholder servicing agents
(each a "Shareholder Servicing Agent") that provide administrative support
services to customers who may from time to time beneficially own shares, which
services include: (i) aggregating and processing purchase and redemption
requests for shares from customers and promptly transmitting net purchase
-26-
<PAGE> 665
and redemption orders to our distributor or transfer agent; (ii) providing
customers with a service that invests the assets of their accounts in shares
pursuant to specific or pre-authorized instructions; (iii) processing dividend
and distribution payments on behalf of customers; (iv) providing information
periodically to customers showing their positions in shares; (v) arranging for
bank wires; (vi) responding to customer inquiries; (vii) providing
subaccounting with respect to shares beneficially owned by customers or
providing the information to the Victory Portfolios necessary for
subaccounting; (viii) if required by law, forwarding shareholder communications
from us (such as proxies, shareholder reports, annual and semi-annual financial
statements and dividend, distribution and tax notices) to customers; (ix)
forwarding to customers proxy statements and proxies containing any proposals
regarding this Plan; and (x) providing such other similar services as we may
reasonably request to the extent you are permitted to do so under applicable
statutes, rules or regulations. For expenses incurred and services provided
pursuant to the Shareholder Servicing Agreement, the Fund pays each Shareholder
Servicing Agent a fee computed daily and paid monthly, in amounts aggregating
not more than twenty-five one-hundredths of one percent (.25%) of the average
daily net assets of the Fund per year. A Shareholder Servicing Agent may
periodically waive all or a portion of its respective shareholder servicing
fees with respect to the Fund to increase the net income of the Fund available
for distribution as dividends.
Expenses
The Fund bears the following expenses relating to its operations:
taxes, interest, brokerage fees and commissions, fees of the Trustees of the
Victory Portfolios, Commission fees, state securities qualification fees, costs
of preparing and printing prospectuses for regulatory purposes and for
distribution to current shareholders, outside auditing and legal expenses,
advisory and administration fees, fees and out-of-pocket expenses of the
custodian and transfer agent, certain insurance premiums, costs of maintenance
of the Fund's existence, costs of shareholders' reports and meetings, and any
extraordinary expenses incurred in the Fund's operation.
If total expenses borne by the Fund in any fiscal year exceeds expense
limitations imposed by applicable state securities regulations, Key Advisers,
the Sub-Adviser or the Administrator will waive their fees to the extent such
excess expenses exceed such expense limitation in proportion to their
respective fees. As of the date of this Statement of Additional Information,
the most restrictive expense limitation applicable to the Fund limits its
aggregate annual expenses, including management and advisory fees but excluding
interest, taxes, brokerage commissions, and certain other expenses, to 2.5% of
the first $30 million of its average net assets, 2.0% of the next $70 million
of its average net assets, and 1.5% of its remaining average net assets. Any
expenses to be borne by Key Advisers, Sub-Adviser or the Administrator will be
estimated daily and reconciled and paid on a monthly basis. Fees imposed upon
customer accounts by Key Advisers, the Sub-Adviser, Key Trust Company of Ohio,
N.A. or its correspondents, affiliated banks and other non-bank affiliates for
cash management services are not fund expenses for purposes of any such expense
limitation.
Fund Accountant
BISYS Fund Services Ohio, Inc. serves as fund accountant for the Fund
pursuant to a fund accounting agreement with the Victory Portfolios dated May
31, 1995 (the "Fund Accounting Agreement"). As fund accountant for the Victory
Portfolios, BISYS Fund Services Ohio, Inc. calculates the Fund's Portfolios'
net asset value, the dividend and capital gain distributions, if any, and the
yield. BISYS Fund Services Ohio, Inc. also provides a current security
position report, a summary report of transactions and pending maturities, a
current cash position report, and maintains the general ledger accounting
records for the Fund. Under the Fund Accounting Agreement, BISYS Fund Services
Ohio, Inc. is entitled to receive annual fees of .03% of the first $100 million
of the Fund's daily average net assets, .02% of the next $100 million of the
Fund's daily average net assets, and .01% of the Fund's remaining daily average
net assets. These annual fees are subject to a minimum monthly assets charge
of $2,917 per tax-free fund, and do not include out-of-pocket expenses or
multiple class charges of $833 per month assessed for each class of shares
after the first class. In the fiscal years ended October 31, 1993, 1994 and
1995, the Victory Portfolios paid The Winsbury Service Corporation fund
accounting fees (after fee waivers) of $107,548, $129,044 and $_______,
respectively, for the Fund.
-27-
<PAGE> 666
Custodian
Cash and securities owned by the Fund are held by Key Trust Company of
Ohio, N.A. as custodian. Key Trust Company of Ohio, N.A. serves as custodian
to the Fund pursuant to a Custodian Agreement dated May 24, 1995. Under this
Agreement, Key Trust Company of Ohio, N.A. (i) maintains a separate account or
accounts in the name of the Fund; (ii) makes receipts and disbursements of
money on behalf of the Fund; (iii) collects and receives all income and other
payments and distributions on account of portfolio securities; (iv) responds to
correspondence from security brokers and others relating to its duties; and (v)
makes periodic reports to the Victory Portfolios' Trustees concerning the
Victory Portfolios' operations. Key Trust Company of Ohio, N.A. may, with the
approval of the Victory Portfolios and the custodian's own expense, open and
maintain a sub-custody account or accounts on behalf of the Fund, provided that
Key Trust Company of Ohio, N.A. shall remain liable for the performance of all
of its duties under the Custodian Agreement.
Transfer Agent
Primary Funds Service Corporation ("PFSC") serves as transfer agent
and dividend disbursing agent for the Fund, pursuant to a Transfer Agency and
Shareholder Servicing Agreement. Under its agreement with the Victory
Portfolios, PFSC has agreed (i) to issue and redeem shares of the Victory
Portfolios; (ii) to address and mail all communications by the Victory
Portfolios to its shareholders, including reports to shareholders, dividend and
distribution notices, and proxy material for its meetings of shareholders;
(iii) to respond to correspondence or inquiries by shareholders and others
relating to its duties; (iv) to maintain shareholder accounts and certain
sub-accounts; and (v) to make periodic reports to the Victory Portfolios'
Trustees concerning the Victory Portfolios' operations. For the services
provided under the Transfer Agency and Shareholder Servicing Agreement, PFSC
receives a maximum monthly fee of $1,250 from the Fund, and a maximum of $3.50
per account of the Fund.
Auditors
The financial highlights appearing in the Prospectus for the Fund,
other than unaudited information marked as such, has been derived from
financial statements of the Fund incorporated by reference in this Statement of
Additional Information which, for the two month period ended October 31, 1995
and fiscal year ended August 31, 1995, has been audited by Coopers & Lybrand
L.L.P. as set forth in their report incorporated by reference herein, and are
included in reliance upon such report and on the authority of such firm as
experts in auditing and accounting. Information for the fiscal year ended
August 31, 1994 has been audited by KPMG Peat Marwick L.L.P. independent
accountants for the Predecessor Fund, as set forth in their report incorporated
by reference herein, and are included in reliance upon such report and on the
authority of such firm as experts in auditing and accounting. Information for
all other periods has been audited by Ernst & Young, L.L.P., independent
accountants to the predecessor to the Predecessor Fund. Coopers & Lybrand
L.L.P. serves as the Victory Portfolios' auditors. Coopers & Lybrand L.L.P.'s
address is 100 East Broad Street, Columbus, Ohio 43215.
Legal Counsel
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, 919 Third Avenue,
New York, New York 10022 is counsel to the Victory Portfolios.
ADDITIONAL INFORMATION
Description of Shares
The Victory Portfolios (sometimes referred to as the "Trust") is a
Delaware business trust. Its Delaware Trust Instrument was adopted on December
6, 1995 and a certificate of Trust for the Trust was filed in Delaware on
December __, 1995. On February 29, 1996, the Victory Portfolios converted from
a Massachusetts business trust to a Delaware business trust.
-28-
<PAGE> 667
The previously effective Massachusetts Declaration of Trust, pursuant
to which the Victory Portfolios was originally called the North Third Street
Fund, was filed with the Secretary of State of the Commonwealth of
Massachusetts on February 6, 1986. On September 22, 1986, an Amended and
Restated Declaration of Trust was filed to change the name of the Trust to The
Emblem Fund and to make certain other changes. A second amendment was filed
October 23, 1986 providing for voting of shares in the aggregate except where
voting of shares by series is otherwise required by law. An amendment to the
Amended and Restated Declaration of Trust was filed on March 15, 1993 to change
the name of the Trust to The Society Funds. An Amended and Restated
Declaration of Trust was then filed on September 2, 1994 to change the name of
the Trust to The Victory Portfolios.
The currently effective Delaware Trust Instrument authorizes the
Trustees to issue an unlimited number of shares, which are units of beneficial
interest, without par value. The Victory Portfolios presently has twenty-eight
series of shares, which represent interests in the U.S. Government Obligations
Fund, the Prime Obligations Fund, the Tax-Free Money Market Fund, the Balanced
Fund, the Stock Index Fund, the Value Fund, the Diversified Stock Fund, the
Growth Fund, the Special Value Fund, the Special Growth Fund, the Ohio Regional
Stock Fund, the International Growth Fund, the Limited Term Income Fund, the
Government Mortgage Fund, the Ohio Municipal Bond Fund, the Intermediate Income
Fund, the Investment Quality Bond Fund, the Florida Tax-Free Bond Fund, the
Municipal Bond Fund, the Convertible Securities Fund, the Short-Term U.S.
Government Income Fund, the Government Bond Fund, the Fund for Income, the
National Municipal Bond Fund, the New York Tax-Free Fund, the Institutional
Money Market Fund, the Financial Reserves Fund and the Ohio Municipal Money
Market Fund, respectively. The Victory Portfolios' Delaware Trust Instrument
authorizes the Trustees to divide or redivide any unissued shares of the
Victory Portfolios into one or more additional series by setting or changing in
any one or more respects their respective preferences, conversion or other
rights, voting power, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption.
Shares have no subscription or preemptive rights and only such
conversion or exchange rights as the Trustees may grant in their discretion.
When issued for payment as described in the Prospectus and this Statement of
Additional Information, the Victory Portfolios' shares will be fully paid and
non-assessable. In the event of a liquidation or dissolution of the Victory
Portfolios, shares of the Fund are entitled to receive the assets available for
distribution belonging to the Fund, and a proportionate distribution, based
upon the relative asset values of the respective funds of the Victory
Portfolios, of any general assets not belonging to any particular fund which
are available for distribution.
As described in the Prospectus under the caption "ADDITIONAL
INFORMATION -- Voting Rights," shares of the Victory Portfolios are entitled to
one vote per share (with proportional voting for fractional shares) on such
matters as shareholders are entitled to vote. On any matter submitted to a
vote of the shareholders, all shares are voted separately by individual series
(funds), and whenever the Trustees determine that the matter affects only
certain series, may be submitted for a vote by only such series, except (i)
when required by the 1940 Act, shares are voted in the aggregate and not by
individual series; and (ii) when the Trustees have determined that the matter
affects the interests of more than one series and that voting by shareholders
of all series would be consistent with the 1940 Act, then the shareholders of
all such series shall be entitled to vote thereon (either by individual series
or by shares voted in the aggregate, as the Trustees in their discretion may
determine). The Trustees may also determine that a matter affects only the
interests of one or more classes of a series, in which case (or if required
under the 1940 Act) such matter shall be voted on by such class or classes.
There will normally be no meetings of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority of the Trustees
have been elected by the shareholders, at which time the Trustees then in
office will call a shareholders' meeting for the election of Trustees. In
addition, Trustees may be removed from office by a vote of the holders of at
least two-thirds of the outstanding shares of the Victory Portfolios. A
meeting shall be held for such purpose upon the written request of the holders
of not less than 10% of the outstanding shares. Upon written request by ten or
more shareholders meeting the qualifications of Section 16(c) of the 1940 Act,
(i.e., person who have been shareholders for at least six months, and who hold
shares having an NAV of at least $25,000 or constituting 1% of the outstanding
shares) stating that such shareholders wish to communicate with the other
shareholders for the purpose of obtaining the signatures necessary to demand a
meeting to consider removal of a Trustee, the Victory Portfolios will provide a
list of shareholders or disseminate appropriate materials (at the expense of
the requesting shareholders). Except as set forth above, the Trustees shall
continue to hold office and may appoint their successors.
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Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Victory Portfolios shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each fund of the Victory Portfolios affected by the
matter. For purposes of determining whether the approval of a majority of the
outstanding shares of a fund will be required in connection with a matter, a
fund will be deemed to be affected by a matter unless it is clear that the
interests of each fund in the matter are identical, or that the matter does not
affect any interest of the fund. Under Rule 18f-2, the approval of an
investment advisory agreement or any change in investment policy would be
effectively acted upon with respect to a fund only if approved by a majority of
the outstanding shares of such fund. However, Rule 18f-2 also provides that
the ratification of independent public accountants, the approval of principal
underwriting contracts, and the election of Trustees may be effectively acted
upon by shareholders of all of the Victory Portfolios voting without regard to
series.
Shareholder and Trustee Liability
The Delaware Business Trust Act provides that a shareholder of a
Delaware business trust shall be entitled to the same limitation of personal
liability extended to shareholders of Delaware corporations. The Delaware
Trust Instrument also provides for indemnification out of the trust property of
any shareholder held personally liable solely by reason of his or her being or
having been a shareholder. The Delaware Trust Instrument also provides that
the Victory Portfolios shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Victory
Portfolios, and shall satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
considered to be extremely remote.
The Delaware Trust Instrument states further that no Trustee, officer,
or agent of the Victory Portfolios shall be personally liable in connection
with the administration or preservation of the assets of the funds or the
conduct of the Victory Portfolios' business; nor shall any Trustee, officer, or
agent be personally liable to any person for any action or failure to act
except for his own bad faith, willful misfeasance, gross negligence, or
reckless disregard of his duties. The Declaration of Trust also provides that
all persons having any claim against the Trustees or the Victory Portfolios
shall look solely to the assets of the Victory Portfolios for payment.
Calculation of Performance Data
Based on the seven-day period ended October 31, 1995 (the "base
period"), the yield and effective yield was ____% and ____%, respectively for
the Fund. The Fund's yield is computed by determining the percentage net
change, excluding capital changes, in the value of an investment in one share
of the Fund over the base period, and multiplying the net change by 365/7 (or
approximately 52 weeks). The Fund's effective yield represents a compounding
of the yield by adding 1 to the number representing the percentage change in
value of the investment during the base period, raising that sum to a power
equal to 365/7, and subtracting 1 from the result.
Based on the base period ending October 31, 1995, the tax equivalent
yield for the Fund was ____%, and its tax equivalent effective yield was ____%.
The tax equivalent yield for the Fund is computed by dividing that portion of
the Fund's yield which is tax-exempt by one minus a stated income tax rate and
adding the product to that portion, if any, of the yield of the Fund that is
not tax-exempt. The tax equivalent effective yield for the Fund is computed by
dividing that portion of the effective yield of the Fund which is tax-exempt by
one minus a stated income tax rate and adding the product to that portion, if
any, of the effective yield of the Fund that is not tax-exempt.
Performance information showing the Fund's total return may be
presented, from time to time, in advertising and sales literature.
For the one year period ended October 31, 1995, the average annual
total return of the Fund was ____%. The average annual total return for the
Fund for the five year period ended October 31, 1995 was ____%. The average
annual return for the Fund from commencement of operations (______ __, 19__)
through October 31, 1995 was ____%.
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<PAGE> 669
The Fund's average annual total return was determined by calculating
the change in the value of a hypothetical $1,000 investment in the Fund for
each of the periods shown. This figure is computed by determining the average
annual compounded rate of return over the applicable period that would equate
the initial amount invested to the ending redeemable value of the investment.
The ending redeemable value includes dividends and capital gain distributions
reinvested at net asset value. The resulting percentages indicated the
positive or negative investment results that an investor would have experienced
from changes in share price and reinvestment of dividends and capital gains
distributions.
Current yields will fluctuate, from time to time, and are not
necessarily representative of future results. Accordingly, the Fund's yield
may not provide a basis for comparison with bank deposits or other investments
that pay a fixed return for a stated period of time. Yield is a function of
the portfolio's quality, composition, and maturity, as well as expenses
allocated to the Fund. Fees imposed upon customer accounts by Key Advisers,
the Sub-Adviser, their correspondents, affiliated banks and other non-bank
affiliates for cash management services will reduce the Fund's effective yield
to customers.
From time to time, performance information for the Fund showing the
Fund's average annual total return, aggregate total return, and/or yield may be
presented in advertisements, sales literature and in reports to shareholders.
Such performance figures are based on historical earnings and are not intended
to indicate future performance. Average annual total return will be calculated
over a stated period. Average annual total return is measured by comparing the
value of an investment in the Fund at the beginning of the relevant period (as
adjusted for sales charges, if any) to the redemption value of the investment
at the end of the period (assuming immediate reinvestment of any dividends or
capital gains distributions), and then annualizing that figure. Average annual
total return is a hypothetical return, and is generally not the same as actual
annual total return. Aggregate total return is calculated similarly to average
annual total return except that the return figure is aggregated over the
relevant period instead of annualized. Yield will be computed by dividing the
Fund's net investment income per share earned during a recent one-month period
by the Fund's maximum offering price per share (reduced by any undeclared
earned income expected to be paid shortly as a dividend) on the last day of the
period.
Investors may also judge, and the Victory Portfolios may at times
advertise, the performance of the Fund by comparing it to the performance of
other mutual funds or mutual fund portfolios with comparable investment
objectives and policies, which performance may be contained in various
unmanaged mutual fund or market indices or rankings such as those prepared by
Dow Jones & Co., Inc., Standard & Poor's Corporation, Lehman Brothers, Merrill
Lynch, and Salomon Brothers, and in publications issued by Lipper Analytical
Services, Inc. and in the following publications: IBC/Donoghue's Money Fund
Reports, Ibbotson Associates, Inc., Morningstar, CDA/Wiesenberger, Money
Magazine, Forbes, Barron's, The Wall Street Journal, The New York Times,
Business Week, American Banker, Fortune, Institutional Investor, U.S.A. Today.
In addition to yield information, general information about the Victory
Portfolios that appear in a publication such as those mentioned above may also
be quoted or reproduced in advertisements or in reports to shareholders.
From time to time, the Victory Portfolios may include the following
types of information in advertisements, supplemental sales literature and
reports to shareholders: (1) discussions of general economic or financial
principles (such as the effects of inflation, the power of compounding and the
benefits of dollar-cost averaging); (2) discussions of general economic trends;
(3) presentations of statistical data to supplement such discussions; (4)
descriptions of past or anticipated portfolio holdings for one or more funds of
the Victory Portfolios; (5) descriptions of investment strategies for one or
more of such funds; (6) descriptions or comparisons of various savings and
investment products (including but not limited to insured bank products,
annuities, qualified retirement plans and individual stocks and bonds) which
may or may not include the Victory Portfolios; (7) comparisons of investment
products (including the Victory Portfolios) with relevant market or industry
indices or other appropriate benchmarks; and (8) discussions of fund rankings
or ratings by NRSROs.
Yield and performance are functions of the type and quality of
instruments held in the portfolio, operating expenses, and market conditions.
Consequently, current yields and performance will fluctuate and are not
necessarily representative of future results. Any fees charged by Key
Advisers, the Sub-Adviser or other service providers with respect to customer
accounts for investing in the Victory Portfolios will not be reflected in
performance calculations.
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Miscellaneous
As used in the Prospectus and in this Statement of Additional
Information, "assets belonging to a fund" (or "assets belonging to the Fund")
means the consideration received by the Victory Portfolios upon the issuance or
sale of shares in that fund, together with all income, earnings, profits, and
proceeds derived from the investment thereof, including any proceeds from the
sale, exchange, or liquidation of such investments, and any funds or payments
derived from any reinvestment of such proceeds and any general assets of the
Victory Portfolios, which general liabilities and expenses are not readily
identified as belonging to a particular fund (or the Fund) that are allocated
to that fund (or the Fund) by the Victory Portfolios' Trustees. The Trustees
may allocate such general assets in any manner they deem fair and equitable.
It is anticipated that the formula that will be used by the Trustees in making
allocations of general assets to a particular fund of the Victory Portfolios
will be the relative net asset value of the respective fund at the time of
allocation. Assets belonging to a particular fund are charged with the direct
liabilities and expenses of that fund, and with a share of the general
liabilities and expenses of each of the funds not readily identified as
belonging to a particular fund but that are allocated to each fund in
accordance with its proportionate share of the net asset values of the Victory
Portfolios at the time of allocation. The timing of allocations of general
assets and general liabilities and expenses of the Victory Portfolios to a
particular fund will be determined by the Trustees of the Victory Portfolios
and will be in accordance with generally accepted accounting principles.
Determinations by the Trustees of the Victory Portfolios as to the timing of
the allocation of general liabilities and expenses and as to the timing and
allocable portion of any general assets with respect to a particular fund are
conclusive.
As used in the Prospectus and in this Statement of Additional
Information, a "vote of a majority of the outstanding shares" or a "vote of a
majority of the outstanding voting securities" of the Victory Portfolios or a
particular fund means the affirmative vote of the lesser of (a) 67% or more of
the shares of the Victory Portfolios or such fund present at a meeting at which
the holders of more than 50% of the outstanding shares of the Victory
Portfolios or such fund are represented in person or by proxy, or (b) more than
50% of the outstanding shares of the Victory Portfolios or such fund.
Organizational expenses are allocated to each of the Victory
Portfolios and are amortized over a period of two years from the commencement
of the public offering of shares of the Victory Portfolios.
As of February 1, 1996, the Trustees and officers of the Victory
Portfolios, as a group, owned less than one percent of the shares of the Fund.
As of that date, the Fund believes that Society National Bank was the
shareholder of record of ____% of the shares of the Fund.
The following table indicates each additional person known by the Fund
to own beneficially 5% or more of the shares of the Fund as of December 1,
1995:
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<TABLE>
<CAPTION>
Percent of Total
Outstanding
Name & Address Shares Shares of Fund
-------------- ------ ----------------
<S> <C> <C>
</TABLE>
Individual Trustees are elected by the shareholders and, subject to
removal by the vote of the holders of two-thirds of the outstanding shares of
the Victory Portfolios, serve for a term lasting until the next meeting of
shareholders at which trustees are elected. Such meetings are not required to
be held at any specific intervals. Individual Trustees may be removed by vote
of the shareholders voting not less than a majority of the shares then
outstanding cast in person or by proxy at any meeting called for that purpose,
or by a written declaration signed by shareholders voting not less than
two-thirds of the shares then outstanding.
The Victory Portfolios is registered with the Commission as an
open-end management investment company. Such registration does not involve
supervision by the Commission of the management or policies of the Victory
Portfolios.
The Prospectus and this Statement of Additional Information omit
certain of the information contained in the Registration Statement filed with
the Securities and Exchange Commission. Copies of such information may be
obtained from the Commission upon payment of the prescribed fee.
The Prospectus and this Statement of Additional Information are not an
offering of the securities herein described in any state in which such offering
may not lawfully be made. No salesman, dealer, or other person is authorized
to give any information or make any representation other than those contained
in the Prospectus and this Statement of Additional Information.
The 1995 Annual Report to shareholders of the Victory Portfolios is
incorporated by reference herein. This report includes the financial
statements for the fiscal year ended October 31, 1995. The opinion in the
Annual Report of Coopers & Lybrand L.L.P., independent accountants, is
incorporated by reference herein in its entirety to such Annual Report, and
such financial statements are incorporated in their entirety in reliance upon
such report of Coopers & Lybrand L.L.P. and on the authority of such firm as
experts in auditing and accounting.
Delaware law authorizes electronic or telephonic communications
between shareholders and the Victory Portfolios. Under Delaware law, the
Successor Company has the flexibility to respond to future business
contingencies. For example, the Trustees will have the power to incorporate
the Victory Portfolios, to merge or consolidate it with another entity, to
cause each fund to become a separate trust, and to change the Victory
Portfolios' domicile without a shareholder vote. This flexibility could help
reduce the expense and frequency of future shareholder meetings for
non-investment related issues.
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APPENDIX
The nationally recognized statistical rating organizations
(individually, an "NRSRO") that may be utilized by KeyCorp Advisers or Society
with regard to portfolio investments for the Fund include Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), Duff &
Phelps, Inc. ("Duff"), Fitch Investors Service, Inc. ("Fitch"), IBCA Limited
and its affiliate, IBCA Inc. (collectively, "IBCA"), and Thomson BankWatch,
Inc. ("Thomson"). Set forth below is a description of the relevant ratings of
each such NRSRO. The NRSROs that may be utilized by Key Advisers or the
Sub-Adviser and the description of each NRSRO's ratings is as of the date of
this Statement of Additional Information, and may subsequently change.
Long-Term Debt Ratings (may be assigned, for example, to corporate and
municipal bonds)
Description of the five highest long-term debt ratings by Moody's
(Moody's applies numerical modifiers (e.g., 1, 2, and 3) in each rating
category to indicate the security's ranking within the category):
Aaa. Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than in Aaa
securities.
A. Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in the
future.
Baa. Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba. Bonds which are rated Ba are judged to have speculative elements
- - their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times in the future. Uncertainty of
position characterizes bonds in this class.
Description of the five highest long-term debt ratings by S&P (S&P may
apply a plus (+) or minus (-) to a particular rating classification to show
relative standing within that classification):
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing
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<PAGE> 673
circumstances are more likely to lead to a weakened capacity to pay interest
and repay principal for debt in this category than in higher rated categories.
BB. Debt rated BB is regarded, on balance, as predominately
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. While such debt will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposure to adverse conditions.
Description of the three highest long-term debt ratings by Duff:
AAA. Highest credit quality. The risk factors are negligible being
only slightly more than for risk-free U.S. Treasury debt.
AA+. High credit quality Protection factors are strong.
AA. Risk is modest but may vary slightly from time to time
AA-. because of economic conditions.
A+. Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
Description of the three highest long-term debt ratings by Fitch (plus
or minus signs are used with a rating symbol to indicate the relative position
of the credit within the rating category):
AAA. Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA. Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA."
Because bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of these issues is generally rated "[-]+."
A. Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher
ratings.
IBCA's description of its three highest long-term debt ratings:
AAA. Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic or
financial conditions are unlikely to increase investment risk
significantly.
AA. Obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic, or
financial conditions may increase investment risk albeit not very
significantly.
A. Obligations for which there is a low expectation of investment
risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial
conditions may lead to increased investment risk.
Short-Term Debt Ratings (may be assigned, for example, to commercial
paper, master demand notes, bank instruments, and letters of credit)
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<PAGE> 674
Moody's description of its three highest short-term debt ratings:
Prime-1. Issuers rated Prime-1 (or supporting institutions) have a
superior capacity for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a
strong capacity for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
S&P's description of its three highest short-term debt ratings:
A-1. This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to have extremely
strong safety characteristics are denoted with a plus sign (+).
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high
as for issues designated "A-1."
A-3. Issues carrying this designation have adequate capacity for
timely payment. They are, however, more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the
higher designations.
Duff's description of its five highest short-term debt ratings (Duff
incorporates gradations of "1+" (one plus) and "1-" (one minus) to assist
investors in recognizing quality differences within the highest rating
category):
Duff 1+. Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
Duff 1. Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
Duff 1-. High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors. Risk
factors are very small.
Duff 2. Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
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<PAGE> 675
Duff 3. Satisfactory liquidity and other protection factors qualify
issue as to investment grade.
Risk factors are larger and subject to more variation. Nevertheless,
timely payment is expected.
Fitch's description of its four highest short-term debt ratings:
F-1+. Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of assurance for
timely payment.
F-1. Very Strong Credit Quality. Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than
issues rated F-1+.
F-2. Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as for issues assigned F-1+ or F-1 ratings.
F-3. Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate, however, near-term adverse changes could cause
these securities to be rated below investment grade.
IBCA's description of its three highest short-term debt ratings:
A+. Obligations supported by the highest capacity for timely
repayment.
A1. Obligations supported by a very strong capacity for timely
repayment.
A2. Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
Short-Term Loan/Municipal Note Ratings
Moody's description of its two highest short-term loan/municipal note
ratings:
MIG-1/VMIG-1. This designation denotes best quality. There is
present strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing.
MIG-2/VMIG-2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
S&P's description of its two highest municipal note ratings:
SP-1. Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
SP-2. Satisfactory capacity to pay principal and interest.
Short-Term Debt Ratings
Thomson BankWatch, Inc. ("TBW") ratings are based upon a qualitative
and quantitative analysis of all segments of the organization including, where
applicable, holding company and operating subsidiaries.
TBW Ratings do not constitute a recommendation to buy or sell
securities of any of these companies. Further, BankWatch does not suggest
specific investment criteria for individual clients.
The TBW Short-Term Ratings apply to commercial paper, other senior
short-term obligations and deposit obligations of the entities to which the
rating has been assigned.
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The TBW Short-Term Ratings apply only to unsecured instruments that
have a maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an
untimely payment of principal or interest.
TBW-1. The highest category; indicates a very high degree of
likelihood that principal and interest will be paid on a timely basis.
TBW-2. The second highest category; while the degree of safety
regarding timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1".
TBW-3. The lowest investment grade category; indicates that while
more susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and interest in
a timely fashion is considered adequate.
TBW-4. The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
Definitions of Certain Money Market Instruments
Commercial Paper
Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.
Certificates of Deposit
Certificates of Deposit are negotiable certificates issued against
funds deposited in a commercial bank or a savings and loan association for a
definite period of time and earning a specified return.
Bankers' Acceptances
Bankers' acceptances are negotiable drafts or bills of exchange,
normally drawn by an importer or exporter to pay for specific merchandise,
which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
U.S. Treasury Obligations
U.S. Treasury Obligations are obligations issued or guaranteed as to
payment of principal and interest by the full faith and credit of the U.S.
Government. These obligations may include Treasury bills, notes and bonds, and
issues of agencies and instrumentalities of the U.S. Government, provided such
obligations are guaranteed as to payment of principal and interest by the full
faith and credit of the U.S. Government.
U.S. Government Agency and Instrumentality Obligations
Obligations issued by agencies and instrumentalities of the U.S.
Government include such agencies and instrumentalities as the Government
National Mortgage Association, the Export-Import Bank of the United States, the
Tennessee Valley Authority, the Farmers Home Administration, the Federal Home
Loan Banks, the Federal Intermediate Credit Banks, the Federal Farm Credit
Banks, the Federal Land Banks, the Federal Housing Administration, the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation, and
the Student Loan Marketing Association. Some of these obligations, such as
those of the Government National Mortgage Association are supported by the full
faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of the United States, are supported by the right of the
issuer to borrow from the Treasury; others, such as those of the Federal
National Mortgage Association, are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; still others, such as
those of the Student Loan
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<PAGE> 677
Marketing Association, are supported only by the credit of the instrumentality.
No assurance can be given that the U.S. Government would provide financial
support to U.S. Government-sponsored instrumentalities if it is not obligated
to do so by law. The Fund will invest in the obligations of such
instrumentalities only when the investment adviser believes that the credit
risk with respect to the instrumentality is minimal.
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<PAGE> 678
STATEMENT OF ADDITIONAL INFORMATION
THE VICTORY PORTFOLIOS
THE VALUE FUND
March 1, 1996
This Statement of Additional Information is not a Prospectus, but
should be read in conjunction with the Prospectus of The Victory Portfolios -
The Value Fund, dated the same date as the date hereof (the "Prospectus"). This
Statement of Additional Information is incorporated by reference in its entirety
into the Prospectus. Copies of the Prospectus may be obtained by writing The
Victory Portfolios at Primary Funds Service Corporation, P.O. Box 9741,
Providence, RI 02940-9741, or by telephoning toll free 800-539-FUND or
800-539-3863.
<TABLE>
<S> <C> <C>
Investment Policies and Limitations 1 INVESTMENT ADVISER
Valuation of Portfolio Securities 11 KeyCorp Mutual Fund Advisers, Inc.
Performance 11
Additional Purchase, Exchange INVESTMENT SUB-ADVISER
and Redemption Information 14 Society Asset Management, Inc.
Dividends and Distributions 17
Management of the Victory Portfolios 18 ADMINISTRATOR
Advisory and Other Contracts 26 Concord Holding Corporation
Additional Information 33
Independent Auditor's Report 36 DISTRIBUTOR
Financial Statements 36 Victory Broker-Dealer Services, Inc.
Appendix 37
TRANSFER AGENT
Primary Funds Service Corporation
CUSTODIAN
Key Trust Company of Ohio, N.A.
</TABLE>
<PAGE> 679
STATEMENT OF ADDITIONAL INFORMATION
The Victory Portfolios (the "Victory Portfolios") is an open-end
management investment company. The Victory Portfolios consist of twenty-eight
series of units of beneficial interest ("shares"), four of which series are
currently inactive. The outstanding shares represent interests in the
twenty-four separate investment portfolios which are currently active. This
Statement of Additional Information relates to the Victory Value Fund (the
"Fund") only. Much of the information contained in this Statement of Additional
Information expands on subjects discussed in the Prospectus. Capitalized terms
not defined herein are used as defined in the Prospectus. No investment in
shares of the Fund should be made without first reading the Fund's Prospectus.
INVESTMENT POLICIES AND LIMITATIONS
Additional Information Regarding Fund Instruments
The following policies supplement the investment objectives and
policies of the Fund set forth in the Prospectus.
Bankers' Acceptances and Certificates of Deposit. The Fund may invest
in bankers' acceptances, certificates of deposit, and demand and time deposits.
Bankers' acceptances are negotiable drafts or bills of exchange typically drawn
by an importer or exporter to pay for specific merchandise, which are "accepted"
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity. Certificates of deposit are negotiable
certificates issued against funds deposited in a commercial bank or a savings
and loan association for a definite period of time and earning a specified
return.
Bankers' acceptances will be those guaranteed by domestic and foreign
banks, if at the time of purchase such banks have capital, surplus, and
undivided profits in excess of $100,000,000 (as of the date of their most
recently published financial statements). Certificates of deposit and demand and
time deposits invested in by the Fund will be those of domestic and foreign
banks and savings and loan associations, if (a) at the time of purchase such
financial institutions have capital, surplus, and undivided profits in excess of
$100,000,000 (as of the date of their most recently published financial
statements) or (b) the principal amount of the instrument is insured in full by
the Federal Deposit Insurance Corporation or the Savings Association Insurance
Fund.
The Fund may also invest in Eurodollar Certificates of Deposit ("ECDs")
which are U.S. dollar-denominated certificates of deposit issued by branches of
foreign and domestic banks located outside the United States, Yankee
Certificates of Deposit ("Yankee CDs") which are certificates of deposit issued
by a U.S. branch of a foreign bank denominated in U.S. dollars and held in the
United States, Eurodollar Time Deposits ("ETDs") which are U.S.
dollar-denominated deposits in a foreign branch of a U.S. bank or a foreign
bank, and Canadian Time Deposits ("CTDs") which are U.S. dollar-denominated
certificates of deposit issued by Canadian offices of major Canadian Banks.
Commercial Paper. Commercial paper consists of unsecured promissory
notes issued by corporations. Except as noted below with respect to variable
amount master demand notes, issues of commercial paper normally have maturities
of less than nine months and fixed rates of return.
The Fund will purchase only commercial paper rated in one of the two
highest categories at the time of purchase by an NRSRO or, if not rated, found
by the Victory Portfolios' Board of Trustees to present minimal credit risks and
to be of comparable quality to instruments that are rated high quality (i.e., in
one of the two top ratings categories) by a NRSRO that is neither controlling,
controlled by, or under common control with the issuer of, or any
<PAGE> 680
issuer, guarantor, or provider of credit support for, the instruments. For a
description of the rating symbols of each NRSRO see the Appendix to this
Statement of Additional Information.
Variable Amount Master Demand Notes. Variable amount master demand
notes in which the Fund may invest are unsecured demand notes that permit the
indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate according to the terms of the instrument. Although there is no
secondary market for these notes, the Fund may demand payment of principal and
accrued interest at any time and may resell the notes at any time to a third
party. The absence of an active secondary market, however, could make it
difficult for the Fund to dispose of a variable amount master demand note if the
issuer defaulted on its payment obligations, and the Fund could, for this or
other reasons, suffer a loss to the extent of the default. While the notes are
not typically rated by credit rating agencies, issuers of variable amount master
demand notes must satisfy the same criteria as set forth above for unrated
commercial paper, and Key Advisers or the Sub-Adviser will continuously monitor
the issuer's financial status and ability to make payments due under the
instrument. Where necessary to ensure that a note is of "high quality," the Fund
will require that the issuer's obligation to pay the principal of the note be
backed by an unconditional bank letter or line of credit, guarantee or
commitment to lend. For purposes of the Fund's investment policies, a variable
amount master note will be deemed to have a maturity equal to the longer of the
period of time remaining until the next readjustment of its interest rate or the
period of time remaining until the principal amount can be recovered from the
issuer through demand. (See Variable and Floating Rate Notes, below.)
Foreign Investment. The Fund may invest in securities issued by foreign
branches of U.S. banks, foreign banks, or other foreign issuers, including
American Depository Receipts ("ADRs") and securities purchased on foreign
securities exchanges. Such investment may subject the Fund to investment risks
that differ in some respects from those related to investments in obligations of
U.S. domestic issuers or in U.S. securities markets. Such risks include future
adverse political and economic developments, possible seizure, nationalization,
or expropriation of foreign investments, less stringent disclosure requirements,
the possible establishment of exchange controls or taxation at the source, and
the adoption of other foreign governmental restrictions. Additional risks
include currency exchange risks, less publicly available information, the risk
that companies may not be subject to the accounting, auditing and financial
reporting standards and requirements of U.S. companies, the risk that foreign
securities markets may have less volume and therefore many securities traded in
these markets may be less liquid and their prices are more volatile than U.S.
securities, and the risk that custodian and brokerage costs may be higher.
Permissible investments include obligations or securities of foreign issuers,
foreign branches of U.S. banks and of foreign banks. The Fund will acquire such
securities only when Key Advisers or the Sub-Adviser believes the risks
associated with such investments are minimal.
Variable and Floating Rate Notes. The Fund may acquire variable and
floating rate notes, subject to its investment objectives, policies and
restrictions. A variable rate note is one whose terms provide for the
readjustment of its interest rate on set dates and which, upon such
readjustment, can reasonably be expected to have a market value that
approximates its par value. A floating rate note is one whose terms provide for
the readjustment of its interest rate whenever a specified interest rate changes
and which, at any time, can reasonably be expected to have a market value that
approximates its par value. Such notes are frequently not rated by credit rating
agencies; however, unrated variable and floating rate notes purchased by the
Fund will only be those determined by Key Advisers or the Sub-Adviser, under
guidelines established by the Trustees, to pose minimal credit risks and to be
of comparable quality, at the time of purchase, to rated instruments eligible
for purchase under the Fund's investment policies. In making such
determinations, Key Advisers or the Sub-Adviser will consider the earning power,
cash flow and other liquidity ratios of the issuers of such notes (such issuers
include financial, merchandising, bank holding and other companies) and will
continuously monitor their financial condition. Although there may be no active
secondary market with respect to a particular variable or floating rate note
purchased by the Fund, the Fund may resell the note at any time to a third
party. The absence of an active secondary market, however, could make it
difficult for the Fund to dispose of a variable or floating rate note in the
event the issuer of the note defaulted on its payment obligations and the Fund
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<PAGE> 681
could, for this or other reasons, suffer a loss to the extent of the default.
Variable or floating rate notes may be secured by bank letters of credit.
Variable or floating rate notes may have maturities of more than one
year, as follows:
1. A note that is issued or guaranteed by the United States government
or any agency thereof and which has a variable rate of interest readjusted no
less frequently than annually will be deemed by the Fund to have a maturity
equal to the period remaining until the next readjustment of the interest rate.
2. A variable rate note, the principal amount of which is scheduled on
the face of the instrument to be paid in one year or less, will be deemed by the
Fund to have a maturity equal to the period remaining until the next
readjustment of the interest rate.
3. A variable rate note that is subject to a demand feature scheduled
to be paid in one year or more will be deemed by the Fund to have a maturity
equal to the longer of the period remaining until the next readjustment of the
interest rate or the period remaining until the principal amount can be
recovered through demand.
4. A floating rate note that is subject to a demand feature will be
deemed by the Fund to have a maturity equal to the period remaining until the
principal amount can be recovered through demand.
As used above, a note is "subject to a demand feature" where the Fund
is entitled to receive the principal amount of the note either at any time on no
more than 30 days' notice or at specified intervals not exceeding one year and
upon no more than 30 days' notice.
Options. The Fund may sell (write) call options which are traded on
national securities exchanges with respect to common stock in its portfolio. The
Fund must at all times have in its portfolio the securities which it may be
obligated to deliver if the option is exercised. The Fund may write call options
on its common stocks in an attempt to realize a greater level of income than
would be realized on the securities alone. The Fund may also write call options
as a partial hedge against a possible stock market decline or to extend a
holding period on a stock which is under consideration for sale in order to
create a long-term capital gain. In view of its investment objective, the Fund
generally would write call options only in circumstances where Key Advisers or
the Sub-Adviser does not anticipate significant appreciation of the underlying
security in the near future or has otherwise determined to dispose of the
security. As the writer of a call option, the Fund receives a premium for
undertaking the obligation to sell the underlying security at a fixed price
during the option period, if the option is exercised. So long as the Fund
remains obligated as a writer of a call option, it forgoes the opportunity to
profit from increases in the market price of the underlying security above the
exercise price of the option, except insofar as the premium represents such a
profit (and retains the risk of loss should the value of the underlying security
decline). The Fund may also enter into "closing purchase transactions" in order
to terminate its obligation as a writer of a call option prior to the expiration
of the option. Although the writing of call options only on national securities
exchanges increases the likelihood of the Fund's ability to make closing
purchase transactions, there is no assurance that the Fund will be able to
effect such transactions at any particular time or at any acceptable price. The
writing of call options could result in increases in the Fund's portfolio
turnover rate, especially during periods when market prices of the underlying
securities appreciate.
Temporary Investments. The Fund may also invest temporarily in high
quality investments or cash during times of unusual market conditions for
defensive purposes and in order to accommodate shareholder redemption requests
although currently it does not intend to do so. Any portion of the Fund's assets
maintained in cash will reduce the amount of assets in securities and thereby
reduce the Fund's yield or total return.
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<PAGE> 682
Miscellaneous Securities. The Fund can invest in various securities
issued by domestic and foreign corporations, including preferred stocks and
investment grade corporate bonds, notes, and warrants. Bonds are long-term
corporate debt instruments secured by some or all of the issuer's assets,
debentures are general corporate debt obligations backed only by the integrity
of the borrower, and warrants are instruments that entitle the holder to
purchase a certain amount of common stock at a specified price, which price is
usually higher than the current market price at the time of issuance. Preferred
stocks are instruments that combine qualities both of equity and debt
securities. Individual issues of preferred stock will have those rights and
liabilities that are spelled out in the governing document. Preferred stocks
usually pay a fixed dividend per quarter (or annum) and are senior to common
stock in terms of liquidation and dividends rights, and preferred stocks
typically do not have voting rights. The Fund will only purchase preferred
stocks where the issuer is publicly traded and has capital in excess of $200
million.
U.S. Government Obligations. The Fund may invest in obligations issued
or guaranteed by the U.S. Government, its agencies and instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. Government are
supported by the full faith and credit of the U.S. Treasury; others are
supported by the right of the issuer to borrow from the U.S. Treasury; others
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; and still others are supported only by the credit of
the agency or instrumentality. No assurance can be given that the U.S.
Government will provide financial support to U.S. Government-sponsored agencies
or instrumentalities if it is not obligated to do so by law.
Securities Lending. The Fund may lend its portfolio securities to
broker-dealers, banks or institutional borrowers of securities. The Fund must
receive a minimum of 100% collateral, plus any interest due in the form of cash
or U.S. Government securities. This collateral must be valued daily and should
the market value of the loaned securities increase, the borrower must furnish
additional collateral to the Fund. During the time portfolio securities are on
loan, the borrower will pay the Fund any dividends or interest paid on such
securities plus any interest negotiated between the parties to the lending
agreement. Loans will be subject to termination by the Fund or the borrower at
any time. While the Fund will not have the right to vote securities on loan, it
intends to terminate the loan and regain the right to vote if that is considered
important with respect to the investment. The Fund will only enter into loan
arrangements with broker-dealers, banks or other institutions which Key Advisers
or the Sub-Adviser has determined are creditworthy under guidelines established
by the Victory Portfolios' Trustees.
Other Investment Companies. The Fund may invest up to 5% of its total
assets in the securities of any one investment company, but may not own more
than 3% of the securities of any one investment company or invest more than 10%
of its total assets in the securities of other investment companies.
Pursuant to an exemptive order received by the Victory Portfolios from the
Securities and Exchange Commission, the Fund may invest in the money market
funds of the Victory Portfolios. Key Advisers or the Sub-Adviser will waive its
fee with respect to assets of the Fund invested in any of the money market funds
of the Victory Portfolios, and, to the extent required by the laws of any state
in which the Fund's shares are sold, Key Advisers or the Sub-Adviser will waive
its investment advisory fee as to all assets invested in other investment
companies.
Repurchase Agreements. Securities held by the Fund may be subject to
repurchase agreements. Under the terms of a repurchase agreement, the Fund would
acquire securities from financial institutions or registered broker-dealers
deemed creditworthy by Key Advisers or the Sub-Adviser pursuant to guidelines
adopted by the Victory Portfolios' Trustees, subject to the seller's agreement
to repurchase such securities at a mutually agreed upon date and price. The
seller is required to maintain the value of collateral held pursuant to the
agreement at not less than the repurchase price (including accrued interest). If
the seller were to default on its repurchase obligation or become insolvent, the
fund holding such obligation would suffer a loss to the extent that the proceeds
from a sale of the underlying portfolio securities were less than the repurchase
price, or to the extent that the disposition of such securities by the Fund is
delayed pending court action.
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<PAGE> 683
Reverse Repurchase Agreements. The Fund may borrow funds for temporary
purposes by entering into reverse repurchase agreements in accordance with the
investment restrictions described below. Pursuant to such agreements, the Fund
would sell portfolio securities to financial institutions such as banks and
broker-dealers, and agree to repurchase them at a mutually agreed-upon date and
price. At the time the Fund enters into a reverse repurchase agreement, it will
place in a segregated custodial account assets (such as cash or other liquid
high-grade securities) consistent with such fund's investment restrictions
having a value equal to the repurchase price (including accrued interest); the
collateral will be marked-to-market on a daily basis, and will be continuously
monitored to ensure that such equivalent value is maintained. Reverse repurchase
agreements involve the risk that the market value of the securities sold by the
Fund may decline below the price at which the fund is obligated to repurchase
the securities.
"When-Issued" Securities. As discussed in the Prospectus, the Fund may
purchase securities on a "when issued" basis (i.e., for delivery beyond the
normal settlement date at a stated price and yield). When the Fund agrees to
purchase securities on a "when issued" basis, the Victory Portfolios' custodian
will set aside cash or liquid portfolio securities equal to the amount of the
commitment in a separate account. Normally, the custodian will set aside
portfolio securities to satisfy the purchase commitment, and in such a case, the
Fund may be required subsequently to place additional assets in the separate
account in order to assure that the value of the account remains equal to the
amount of the Fund's commitment. It may be expected that the Fund's net assets
will fluctuate to a greater degree when it sets aside portfolio securities to
cover such purchase commitments than when it sets aside cash.
When the Fund engages in "when-issued" transactions, it relies on the
seller to consummate the trade. Failure of the seller to do so may result in the
fund incurring a loss or missing the opportunity to obtain a price considered to
be advantageous. The Fund does not intend to purchase "when issued" securities
for speculative purposes, but only in furtherance of its investment objective.
Futures Contracts. The Fund may enter into futures contracts, options
on futures contracts and stock index futures contracts and options thereon for
the purposes of remaining fully invested and reducing transaction costs. Futures
contracts provide for the future sale by one party and purchase by another party
of a specified amount of a specific security, class of securities, or an index
at a specified future time and at a specified price. A stock index futures
contract is a bilateral agreement pursuant to which two parties agree to take or
make delivery of an amount of cash equal to a specified dollar amount times the
difference between the stock index value at the close of trading of the
contracts and the price at which the futures contract is originally struck.
Futures contracts which are standardized as to maturity date and underlying
financial instrument are traded on national futures exchanges. Futures exchanges
and trading are regulated under the Commodity Exchange Act by the Commodity
Futures Trading Commission ("CFTC"), a U.S. Government agency.
Although futures contracts by their terms call for actual delivery and
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying a
contract which has previously been "sold," or "selling" a contract previously
purchased) in an identical contract to terminate the position. 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
acquisition of put and call options on futures contracts will, respectively,
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. Brokerage commissions are incurred when a
futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in
cash or government securities with a broker or custodian to initiate and
maintain open positions in futures contracts. A margin deposit is intended to
assure completion of the contract (delivery or acceptance of the underlying
security) if it is not terminated prior to the
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<PAGE> 684
specified delivery date. Minimal initial margin requirements are established by
the futures exchange and may be changed. Brokers may establish deposit
requirements which are higher than the exchange minimums. Initial margin
deposits on futures contracts are customarily set at levels much lower than the
prices at which the underlying securities are purchased and sold, typically
ranging upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract
is marked-to-market daily. If the futures contract price changes to the extent
that the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Fund
expects to earn interest income on its margin deposits.
When interest rates are expected to rise or market values of portfolio
securities are expected to fall, the Fund can seek through the sale of futures
contracts to offset a decline in the value of its portfolio securities. When
interest rates are expected to fall or market values are expected to rise, the
Fund, through the purchase of such contracts, can attempt to secure better rates
or prices for the Fund than might later be available in the market when it
effects anticipated purchases.
The Funds will only sell futures contracts to protect securities it
owns against price declines or purchase contracts to protect against an increase
in the price of securities it intends to purchase.
The Fund's ability to effectively utilize futures trading depends on
several factors. First, it is possible that there will not be a perfect price
correlation between the futures contracts and their underlying stock index.
Second, it is possible that a lack of liquidity for futures contracts could
exist in the secondary market, resulting in an inability to close a futures
position prior to its maturity date. Third, the purchase of a futures contract
involves the risk that the Fund could lose more than the original margin deposit
required to initiate a futures transaction.
Restrictions on the Use of Futures Contracts. The Fund will not enter
into futures contract transactions for purposes other than bona fide hedging
purposes to the extent that, immediately thereafter, the sum of its initial
margin deposits on open contracts exceeds 5% of the market value of the Fund's
total assets. In addition, the Fund will not enter into futures contracts to the
extent that the value of the futures contracts held would exceed 1/3 of the
Fund's total assets. Futures transactions will be limited to the extent
necessary to maintain the Fund's qualification as a regulated investment
company.
The Victory Portfolios have undertaken to restrict their futures
contract trading as follows: first, the Victory Portfolios will not engage in
transactions in futures contracts for speculative purposes; second, the Victory
Portfolios will not market its funds to the public as commodity pools or
otherwise as vehicles for trading in the commodities futures or commodity
options markets; third, the Victory Portfolios will disclose to all prospective
shareholders the purpose of and limitations on its funds' commodity futures
trading; fourth, the Victory Portfolios will submit to the Commodity Futures
Trading Commission ("CFTC") special calls for information. Accordingly,
registration as a commodities pool operator with the CFTC is not required.
In addition to the margin restrictions discussed above, transactions in
futures contracts may involve the segregation of funds pursuant to requirements
imposed by the Securities and Exchange Commission. Under those requirements,
where the Fund has a long position in a futures contract, it may be required to
establish a segregated account (not with a futures commission merchant or
broker) containing cash or certain liquid assets equal to the purchase price of
the contract (less any margin on deposit). For a short position in futures or
forward contracts held by the Fund, those requirements may mandate the
establishment of a segregated account (not with a futures commission merchant or
broker) with cash or certain liquid assets that, when added to the amounts
deposited as
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<PAGE> 685
margin, equal the market value of the instruments underlying the futures
contracts (but are not less than the price at which the short positions were
established). However, segregation of assets is not required if the Fund
"covers" a long position. For example, instead of segregating assets, the Fund,
when holding a long position in a futures contract, could purchase a put option
on the same futures contract with a strike price as high or higher than the
price of the contract held by the fund. In addition, where the Fund takes short
positions, or engages in sales of call options, it need not segregate assets if
it "covers" these positions. For example, where the Fund holds a short position
in a futures contract, it may cover by owning the instruments underlying the
contract. The Fund may also cover such a position by holding a call option
permitting it to purchase the same futures contract at a price no higher than
the price at which the short position was established. Where the Fund sells a
call option on a futures contract, it may cover either by entering into a long
position in the same contract at a price no higher than the strike price of the
call option or by owning the instruments underlying the futures contract. The
Fund could also cover this position by holding a separate call option permitting
it to purchase the same futures contract at a price no higher than the strike
price of the call option sold by the fund.
In addition, the extent to which the Fund may enter into transactions
involving futures contracts may be limited by the Internal Revenue Code's
requirements for qualification as a registered investment company and the Fund's
intention to qualify as such.
Risk Factors in Futures Transactions. Positions in futures contracts
may be closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, the Fund would continue to be required to make daily cash payments to
maintain the required margin. In such situations, if the Fund has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, the Fund may be
required to make delivery of the instruments underlying futures contracts it
holds. The inability to close options and futures positions also could have an
adverse impact on the ability to effectively hedge them. The Fund will minimize
the risk that it will be unable to close out a futures contract by only entering
into futures contracts which are traded on national futures exchanges and for
which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. Because the deposit
requirements in the futures markets are less onerous than margin requirements in
the securities market, there may be increased participation by speculators in
the futures market which may also cause temporary price distortions. A
relatively small price movement in a futures contract may result in immediate
and substantial loss (as well as gain) to the investor. For example, if at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit if the contract
were closed out. Thus, a purchaser or sale of a futures contract may result in
losses in excess of the amount invested in the contract. However, because the
futures strategies engaged in by the Fund are only for hedging purposes, Key
Advisers and the Sub-Adviser do not believe that the Fund is subject to the
risks of loss frequently associated with futures transactions. The Fund would
presumably have sustained comparable losses if, instead of the futures contract,
it had invested in the underlying financial instrument and sold it after the
decline.
Utilization of futures transactions by the Fund does involve the risk
of imperfect or no correlation where the securities underlying futures contract
have different maturities than the portfolio securities being hedged. It is also
possible that the Fund could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the fund has an open position in a futures contract or related
option.
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<PAGE> 686
Puts. The Fund may acquire and sell put options on the securities held
in its portfolio.
A put is a right to sell a specified security (or securities) within a
specified period of time at a specified exercise price. The Fund may sell,
transfer, or assign a put only in conjunction with the sale, transfer, or
assignment of the underlying security or securities. The amount payable to the
Fund upon its exercise of a "put" is normally (i) the Fund's acquisition cost of
the securities (excluding any accrued interest which the Fund paid on the
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period the fund owned the securities, plus
(ii) all interest accrued on the securities since the last interest payment date
during that period.
Puts may be acquired by the Funds to facilitate the liquidity of its
portfolio assets. Puts may also be used to facilitate the reinvestment of the
Funds' assets at a rate of return more favorable than that of the underlying
security. Puts may, under certain circumstances, also be used to shorten the
maturity of underlying variable rate or floating rate securities for purposes of
calculating the remaining maturity of those securities and the dollar-weighted
average portfolio maturity of the Fund's assets. See "Variable and Floating Rate
Notes" and "VALUATION" in this Statement of Additional Information.
The Fund also may invest, consistent with their investment objective
and policies, in zero coupon bonds, which are debt instruments that do not pay
current interest and are typically sold at prices greatly discounted from par
value. The return on a zero-coupon obligation, when held to maturity, equals the
difference between the par value and the original purchase price. Zero-coupon
obligations have greater price volatility than coupon obligations.
Investment Restrictions
The following investment restrictions are fundamental with respect to
the Fund and may be changed only by a vote of a majority of the outstanding
shares of the Fund as defined in "ADDITIONAL INFORMATION --Miscellaneous" of
this Statement of Additional Information).
THE FUND MAY NOT:
1. Participate on a joint or joint and several basis in any securities
trading account.
2. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
Fund from purchasing or selling options and futures contracts or from investing
in securities or other instruments backed by physical commodities).
3. Purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
Fund from investing in securities or other instruments backed by real estate or
securities of companies engaged in the real estate business). Investments by the
Fund in securities backed by mortgages on real estate or in marketable
securities of companies engaged in such activities are not hereby precluded.
4. Issue any senior security (as defined in the 1940 Act), except that
(a) the Fund may engage in transactions that may result in the issuance of
senior securities to the extent permitted under applicable regulations and
interpretations of the 1940 Act or an exemptive order; (b) the Fund may acquire
other securities, the acquisition of which may result in the issuance of a
senior security, to the extent permitted under applicable regulations or
interpretations of the 1940 Act; (c) subject to the restrictions set forth
below, the Fund may borrow money as authorized by the 1940 Act.
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5. Borrow money, except that (a) the Fund may enter into commitments to
purchase securities in accordance with its investment program, including
delayed-delivery and when-issued securities and reverse repurchase agreements,
provided that the total amount of any such borrowing does not exceed 33 1/3% of
the Fund's total assets; and (b) the Fund may borrow money for temporary or
emergency purposes in an amount not exceeding 5% of the value of its total
assets at the time when the loan is made. Any borrowings representing more than
5% of the Fund's total assets must be repaid before the Fund may make additional
investments.
6. Lend any security or make any other loan if, as a result, more than
33 1/3% of its total assets would be lent to other parties, but this limitation
does not apply to purchases of publicly issued debt securities or to repurchase
agreements.
7. Underwrite securities issued by others, except to the extent that
the Fund may be considered an underwriter within the meaning of the Securities
Act of 1933 in the disposition of restricted securities.
8. With respect to 75% of the Fund's total assets, the Fund may not
purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities)
if, as a result, (a) more than 5% of the Fund's total assets would be invested
in the securities of that issuer, or (b) the Fund would hold more than 10% of
the outstanding voting securities of that issuer.
9. Purchase the securities of any issuer (other than securities issued
or guaranteed by the U.S. Government or any of its agencies or
instrumentalities, or repurchase agreements secured thereby) if, as a result,
more than 25% of the Fund's total assets would be invested in the securities of
companies whose principal business activities are in the same industry. In the
utilities category, the industry shall be determined according to the service
provided. For example, gas, electric, water and telephone will be considered as
separate industries.
The following restrictions are not fundamental and may be changed
without shareholder approval:
1. The Fund will not purchase or retain securities of any issuer if the
officers or Trustees of the Victory Portfolios or the officers or directors of
its investment adviser owning beneficially more than one half of 1% of the
securities of such issuer together own beneficially more than 5% of such
securities.
2. The Fund will not invest more than 10% of its total assets in the
securities of issuers which together with any predecessors have a record of less
than three years of continuous operation.
3. The Fund will not invest more than 15% of its net assets in illiquid
securities. Illiquid securities are securities that are not readily marketable
or cannot be disposed of promptly within seven days and in the usual course of
business at approximately the price at which the Fund has valued them. Such
securities include, but are not limited to, time deposits and repurchase
agreements with maturities longer than seven days. Securities that may be resold
under Rule 144A, or securities offered pursuant to Section 4(2) of, or
securities otherwise subject to restrictions or limitations on resale under, the
1933 Act ("Restricted Securities"), shall not be deemed illiquid solely by
reason of being unregistered. Key Advisers or the Sub-Adviser determine whether
a particular security is deemed to be liquid based on the trading markets for
the specific security and other factors. However, because state securities laws
may limit the Fund's investment in Restricted Securities (regardless of the
liquidity of the investment), investments in Restricted Securities resalable
under Rule 144A will continue to be subject to applicable state law requirements
until such time, if ever, that such limitations are changed.
4. The Fund will not make short sales of securities, other than short
sales "against the box," or purchase securities on margin except for short-term
credits necessary for clearance of portfolio transactions, provided that this
restriction will not be applied to limit the use of options, futures contracts
and related options, in the manner otherwise permitted by the investment
restrictions, policies and investment program of the Fund.
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5. The Fund may invest up to 5% of its total assets in the securities
of any one investment company, but may not own more than 3% of the securities of
any one investment company or invest more than 10% of its total assets in the
securities of other investment companies. Pursuant to an exemptive order
received by the Victory Portfolios from the Commission, the Fund may invest in
the money market funds of the Victory Portfolios.
State Regulations
In addition, the Fund, so long as its shares are registered under the
securities laws of the State of Texas and such restrictions are required as a
consequence of such registration, is subject to the following non-fundamental
policies, which may be modified in the future by the Trustees without a vote of
the Fund's shareholders: (i) the Fund has represented to the Texas State
Securities Board that it will not invest in oil, gas or mineral leases or
purchase or sell real property (including limited partnership interests, but
excluding readily marketable securities of companies which invest in real
estate); and (ii) the Fund has represented to the Texas State Securities Board
that it will not invest more than 5% of its net assets in warrants valued at the
lower of cost or market; provided that, included within that amount, but not to
exceed 2% of net assets, may be warrants which are not listed on the New York or
American Stock Exchanges. For purposes of this restriction, warrants acquired in
units or attached to securities are deemed to be without value.
The policies and limitations listed above supplement those set forth in
the Prospectus. Unless otherwise noted, whenever an investment policy or
limitation states a maximum percentage of the Fund's assets that may be invested
in any security or other asset, or sets forth a policy regarding quality
standards, such standard or percentage limitation will be determined immediately
after and as a result of the Fund's acquisition of such security or other asset
except in the case of borrowing (or other activities that may be deemed to
result in the issuance of a "senior security" under the 1940 Act). Accordingly,
any subsequent change in values, net assets, or other circumstances will not be
considered when determining whether the investment complies with the Fund's
investment policies and limitations. If the value of the Fund's holdings of
illiquid securities at any time exceeds the percentage limitation applicable at
the time of acquisition due to subsequent fluctuations in value or other
reasons, the Board of Trustees will consider what actions, if any, are
appropriate to maintain adequate liquidity.
FUTURE DEVELOPMENTS
The Fund may take advantage of other investment practices which are not
at present contemplated for use by the Fund or which currently are not available
but which may be developed, to the extent such investment practices are both
consistent with the Fund's investment objective and are legally permissible for
the Fund. Such investment practices, if they arise, may involve risks which
exceed those involved in the activities described in the Prospectus and
Statement of Additional Information. Prior to commencing any new investment
practice, the Fund will notify shareholders by means of prospectus supplement.
Portfolio Turnover
The turnover rate stated in the Prospectus for the Fund's investment
portfolio is calculated by dividing the lesser of the Fund's purchases or sales
of portfolio securities for the year by the monthly average value of the
portfolio securities. The calculation excludes all securities whose maturities,
at the time of acquisition, were one year or less.
VALUATION OF PORTFOLIO SECURITIES
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<PAGE> 689
Investment securities held by the Fund are valued on the basis of
valuations provided by an independent pricing service, approved by the Board of
Trustees, which uses information with respect to transactions of a security,
quotations from dealers, market transactions in comparable securities, and
various relationships between securities, in determining value. Specific
investment securities which are not priced by the approved pricing service will
be valued according to quotations obtained from dealers who are market makers in
those securities. Investment securities with less than 60 days to maturity when
purchased are valued at amortized cost which approximates market value.
Investment securities not having readily available market quotations will be
priced at fair value using a methodology approved in good faith by the Board of
Trustees.
PERFORMANCE
As described in the Prospectus, from time to time the "standardized
yield," "dividend yield," "average annual total return," "total return," and
"total return at net asset value" of an investment in each class of Fund shares
may be advertised. An explanation of how yields and total returns are calculated
and the components of those calculations are set forth below.
Yield and total return information may be useful to investors in
reviewing the Fund's performance. The Fund's advertisement of its performance
must, under applicable Commission rules, include the average annual total
returns for the Fund for the 1, 5 and 10-year period (or the life of the class,
if less) as of the most recently ended calendar quarter. This enables an
investor to compare the Fund's performance to the performance of other funds for
the same periods. However, a number of factors should be considered before using
such information as a basis for comparison with other investments. An investment
in the Fund is not insured; its yield and total return are not guaranteed and
normally will fluctuate on a daily basis. When redeemed, an investor's shares
may be worth more or less than their original cost. Yield and total return for
any given past period are not a prediction or representation by the Victory
Portfolios of future yields or rates of return on its shares. The yield and
total returns of the Fund are affected by portfolio quality, portfolio maturity,
the type of investments the Fund holds and its operating expenses.
STANDARDIZED YIELDS. The Fund's "yield" (referred to as "standardized
yield") for a given 30-day period for a class of shares is calculated using the
following formula set forth in rules adopted by the Commission that apply to all
funds that quote yields:
Standardized Yield = 2 [(a-b + 1)(6) - 1]
cd
The symbols above represent the following factors:
a = dividends and interest earned during the 30-day period.
b = expenses accrued for the period (net of any expense
reimbursements).
c = the average daily number of shares of that class outstanding
during the 30-day period that were entitled to receive
dividends.
d = the maximum offering price per share of the class on the last
day of the period, adjusted for undistributed net investment
income.
The standardized yield for a 30-day period may differ from its yield
for any other period. The Commission formula assumes that the standardized yield
for a 30-day period occurs at a constant rate for a six-month period and is
annualized at the end of the six-month period. This standardized yield is not
based on actual distributions paid by the Fund to shareholders in the 30-day
period, but is a hypothetical yield based upon the net investment income from
the Fund's portfolio investments calculated for that period. The standardized
yield may differ from the "dividend yield," described below. Additionally,
because each class of shares is subject to different expenses, it is likely that
the
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<PAGE> 690
standardized yields of the Fund classes of shares will differ. The yield for the
30-day period ended October 31, 1995 was ____% .
DIVIDEND YIELD AND DISTRIBUTION RETURN. From time to time the Fund may
quote a "dividend yield" or a "distribution return." Dividend yield is based on
the share dividends derived from net investment income during a stated period.
Distribution return includes dividends derived from net investment income and
from realized capital gains declared during a stated period. Under those
calculations, the dividends and/or distributions declared during a stated period
of one year or less (for example, 30 days) are added together, and the sum is
divided by the maximum offering price per share of that class A) on the last day
of the period. When the result is annualized for a period of less than one year,
the "dividend yield" is calculated as follows:
Dividend Yield = Dividends + Number of days (accrual period) x 365
-------------------
Max. Offering Price (last day of period)
The maximum offering price for shares includes the maximum front-end
sales charge.
From time to time similar yield or distribution return calculations may
also be made using the net asset value (instead of its respective maximum
offering price) at the end of the period. The dividend yields at maximum
offering price and net asset value for the 30-day period ended October 31, 1995
were ____% and ____%, respectively.
TOTAL RETURNS. The "average annual total return" is an average annual
compounded rate of return for each year in a specified number of years. It is
the rate of return based on the change in value of a hypothetical initial
investment of $1,000 ("P" in the formula below) held for a number of years ("n")
to achieve an Ending Redeemable Value ("ERV"), according to the following
formula:
(ERV)(1n) - 1 = Average Annual Total Return
---
( P )
The cumulative "total return" calculation measures the change in value
of a hypothetical investment of $1,000 over an entire period of years. Its
calculation uses some of the same factors as average annual total return, but it
does not average the rate of return on an annual basis. Total return is
determined as follows:
ERV - P = Total Return
---
P
In calculating total returns, the current maximum sales charge of 4.75%
(as a percentage of the offering price) is deducted from the initial investment
("P") (unless the return is shown at net asset value, as discussed below). Total
returns also assume that all dividends and capital gains distributions during
the period are reinvested to buy additional shares at net asset value per share,
and that the investment is redeemed at the end of the period. The average annual
total return and cumulative total return for the period from December 10, 1993
(commencement of operations) to October 31, 1995 (life of fund) at maximum
offering price were ___% and ____%, respectively. For the one year period ended
October 31, 1995 annual total return was ______%.
From time to time the Fund may also quote an "average annual total
return at net asset value" or a cumulative "total return at net asset value." It
is based on the difference in net asset value per share at the beginning and the
end of the period for a hypothetical investment in that class of shares (without
considering front-end or contingent sales charges) and takes into consideration
the reinvestment of dividends and capital gains distributions. The average
annual total return and cumulative total return for the period from December 10,
1993 (commencement of operations) to October 31, 1995 (life of fund), at net
asset value, was ____% and ___%, respectively. For the one year period ended
October 31, 1995, average annual total return was ___%.
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<PAGE> 691
OTHER PERFORMANCE COMPARISONS. From time to time the Fund may publish
the ranking of the performance of its shares by Lipper Analytical Services, Inc.
("Lipper"), a widely-recognized independent mutual fund monitoring service.
Lipper monitors the performance of regulated investment companies, including the
Fund, and ranks the performance of the Fund against (i) all other funds,
excluding money market funds, and (ii) all other government bond funds. The
Lipper performance rankings are based on total return that includes the
reinvestment of capital gains distributions and income dividends but does not
take sales charges or taxes into consideration.
From time to time the Fund may publish the ranking of the performance
of its shares by Morningstar, Inc., an independent mutual fund monitoring
service that ranks mutual funds, including the Fund, in broad investment
categories (equity, taxable bond, tax-exempt and other) monthly, based upon each
fund's three, five and ten-year average annual total returns (when available)
and a risk adjustment factor that reflects Fund performance relative to
three-month U.S. Treasury bill monthly returns. Such returns are adjusted for
fees and sales loads. There are five ranking categories with a corresponding
number of stars: highest (5), above average (4), neutral (3), below average (2)
and lowest (1). Ten percent of the funds, series or classes in an investment
category receive 5 stars, 22.5% receive 4 stars, 35% receive 3 stars, 22.5%
receive 2 stars, and the bottom 10% receive one star. Morningstar ranks the
shares of the Fund in relation to other taxable bond funds.
The total return on an investment made in shares of the Fund may be
compared with the performance for the same period of one or more of the
following indices: the Consumer Price Index, the Salomon Brothers World
Government Bond Index, the Standard & Poor's 500 Index, the Shearson Lehman
Government/Corporate Bond Index, the Lehman Aggregate Bond Index, and the J.P.
Morgan Government Bond Index. Other indices may be used from time to time. The
Consumer Price Index is generally considered to be a measure of inflation. The
Salomon Brothers World Government Bond Index generally represents the
performance of government debt securities of various markets throughout the
world, including the United States. The Lehman Government/Corporate Bond Index
generally represents the performance of intermediate and long-term government
and investment grade corporate debt securities. The Lehman Aggregate Bond Index
measures the performance of U.S. corporate bond issues, U.S. government
securities and mortgaged-backed securities. The J.P. Morgan Government Bond
Index generally represents the performance of government bonds issued by various
countries including the United States. The S&P 500 Index is a composite index of
500 common stocks generally regarded as an index of U.S. stock market
performance. The foregoing bond indices are unmanaged indices of securities that
do not reflect reinvestment of capital gains or take investment costs into
consideration, as these items are not application to indices.
From time to time, the yields and the total returns of the Fund may be
quoted in and compared to other mutual funds with similar investment objective
in advertisements, shareholder reports or other communications to shareholders.
The Fund may also include calculations in such communications that describe
hypothetical investment results. (Such performance examples will be based on an
express set of assumptions and are not indicative of the performance of any
Fund.) Such calculations may from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of the Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash. The Fund may also include discussions or illustrations of the potential
investment goals of a prospective investor (including but not limited to tax
and/or retirement planning), investment management techniques, policies or
investment suitability of Fund, economic conditions, legislative developments
(including pending legislation), the effects of inflation and historical
performance of various asset classes, including but not limited to stocks, bonds
and Treasury bills. From time to time advertisements or communications to
shareholders may summarize the substance of information contained in shareholder
reports (including the investment composition of the Fund, as well as the views
of the investment adviser as to current market, economic, trade and interest
rate trends, legislative, regulatory and monetary developments, investment
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<PAGE> 692
strategies and related matters believed to be of relevance to the Fund. The Fund
may also include in advertisements, charts, graphs or drawings which illustrate
the potential risks and rewards of investment in various investment vehicles,
including but not limited to stock, bonds, Treasury bills and shares of Fund as
well as charts or graphs which illustrate strategies such as dollar cost
averaging, and comparisons of hypothetical yields of investment in tax-exempt
versus taxable investments. In addition, advertisements or shareholder
communications may include a discussion of certain attributes or benefits to be
derived by an investment in Fund. Such advertisements or communications may
include symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein. With proper authorization, Fund
may reprint articles (or excerpts) written regarding the Fund and provide them
to prospective shareholders. Performance information with respect to the Fund is
generally available by calling 1-800-539-3863.
Investors may also judge, and the Fund may at times advertise,
performance by comparing it to the performance of other mutual funds or mutual
fund portfolios with comparable investment objectives and policies, which
performance may be contained in various unmanaged mutual fund or market indices
or rankings such as those prepared by Dow Jones & Co., Inc., Standard & Poor's
Corporation, Lehman Brothers, Merrill Lynch, and Salomon Brothers, and in
publications issued by Lipper Analytical Services, Inc. and in the following
publications: IBC/Donoghue's Money Fund Reports, Ibottson Associates, Inc.,
Morningstar, CDA/Wiesenberger, Money Magazine, Forbes, Barron's, The Wall Street
Journal, The New York Times, Business Week, American Banker, Fortune,
Institutional Investor, U.S.A. Today. In addition to yield information, general
information about the Fund that appears in a publication such as those mentioned
above may also be quoted or reproduced in advertisements or in reports to
shareholders.
Advertisements and sales literature may include discussions of
specifics of the portfolio manager's investment strategy and process, including,
but not limited to, descriptions of security selection and analysis.
Advertisements may also include descriptive information about the
investment adviser, including, but not limited to, its status within the
industry, other services and products it makes available, total assets under
management, its investment philosophy.
When comparing yield, total return and investment risk of an investment
in the Fund with other investments, investors should understand that certain
other investments have different risk characteristics than an investment in
shares of the Fund. For example, certificates of deposit may have fixed rates of
return and may be insured as to principal and interest by the FDIC, while the
Fund's returns will fluctuate and its share values and returns are not
guaranteed. Money market accounts offered by banks also may be insured by the
FDIC and may offer stability of principal. U.S. Treasury securities are
guaranteed as to principal and interest by the full faith and credit of the U.S.
government. Money market mutual funds may seek to offer a fixed price per share.
ADDITIONAL PURCHASE, EXCHANGE AND REDEMPTION INFORMATION
The Victory Portfolios (see "Description of Victory Portfolios" below)
is open for business and the NAV is calculated on each Business Day. A Business
Day is every day on which the NYSE is open for business, the Federal Reserve
Bank of Cleveland is open and any other day (other than a day on which no shares
of the Fund are tendered for redemption and no order to purchase any shares is
received) during which there is sufficient trading in portfolio instruments that
the Fund's net asset value per share might be materially affected. The NAV of
each class is determined and its shares are priced as of the close of regular
trading of the NYSE (generally 4:00 p.m. Eastern time (the "Valuation Time")) on
each Business Day of the Fund. The NYSE or the Federal Reserve Bank of Cleveland
will not be open in observance of the following holidays: New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day.
The holiday closing schedule is subject to change.
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<PAGE> 693
When the NYSE is closed, or when trading is restricted for any reason
other than its customary weekend or holiday closings, or under emergency
circumstances as determined by the Commission to warrant such action, the Fund's
Transfer Agent will determine the Fund's NAVs at Valuation Time. The Fund's NAV
may be affected to the extent that its securities are traded on days that are
not Business Days.
If, in the opinion of the Trustees, conditions exist which make cash
payment undesirable, redemption payments may be made in whole or in part in
securities or other property, valued for this purpose as they are valued in
computing the NAV of the Fund. Shareholders receiving securities or other
property on redemption may realize a gain or loss for tax purposes and will
incur any costs of sale as well as the associated inconveniences.
Pursuant to Rule 11a-3 under the 1940 Act, the Fund is required to give
shareholders at least 60 days' notice prior to terminating or modifying the
Fund's exchange privilege. Under the Rule, the 60-day notification requirement
may be waived if (i) the only effect of a modification would be to reduce or
eliminate an administrative fee, redemption fee or deferred sales charge
ordinarily payable at the time of exchange or (ii) the Fund temporarily suspends
the offering of shares as permitted under the 1940 Act or by the SEC or because
it is unable to invest amounts effectively in accordance with its investment
objective and policies.
In the Prospectus, the Victory Portfolios, Key Advisers and the
Sub-Adviser have notified shareholders that they reserve the right at any time
without prior notice to shareholders to refuse exchange purchases by any person
or group if, in Key Advisers or the Sub-Adviser's judgment, the Fund would be
unable to invest effectively in accordance with its investment objective and
policies, or would otherwise potentially be adversely affected.
ADDITIONAL PURCHASE INFORMATION
REDUCED SALES CHARGE. Reduced sales charges are applicable to purchases
of $50,000 or more alone or in combination with purchases of shares of other
Victory Portfolios made at any one time. To obtain the reduction of the sales
charge, you or your investment professional must notify the Transfer Agent at
the time of purchase whenever a quantity discount is applicable to your
purchase. Upon such notification, you will receive the lowest applicable sales
charge.
In addition to investing at one time in any combination of shares of
the Victory Portfolios in an amount entitling you to a reduced sales charge, you
may qualify for a reduction in the sales charge under the following programs:
COMBINED PURCHASES. When you invest in shares of the Victory Portfolios
for several accounts at the same time, you may combine these investments into a
single transaction if purchased through one investment professional, and if the
total is $50,000 or more. The following may qualify for this privilege: an
individual, or "company" as defined in Section 2(a)(8) of the 1940 Act; an
individual, spouse, and their children under age 21 purchasing for his, her, or
their own account; a trustee, administrator or other fiduciary purchasing for a
single trust estate or single fiduciary account or for a single or a
parent-subsidiary group of "employee benefit plans" (as defined in Section 3(3)
of ERISA); and tax-exempt organizations under Section 501(c)(3) of the Internal
Revenue Code.
RIGHTS OF ACCUMULATION. Your "Rights of Accumulation" permit reduced
sales charges on future purchases of shares after you have reached a new
breakpoint. You can add the value of existing Victory Portfolios shares held by
you, your spouse, and your children under age 21, determined at the previous
day's NAV at the close of business, to the amount of your new purchase valued at
the current offering price to determine your reduced sales charge.
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<PAGE> 694
LETTER OF INTENT. If you anticipate purchasing $50,000 or more of
shares of the Fund alone or in combination with shares of certain other Victory
Portfolios within a 13-month period, you may obtain shares of the portfolios at
the same reduced sales charge as though the total quantity were invested in one
lump sum, by filing a non-binding Letter of Intent (the "Letter") within 90 days
of the start of the purchases. Each investment you make after signing the Letter
will be entitled to the sales charge applicable to the total investment
indicated in the Letter. For example, a $2,500 purchase toward a $60,000 Letter
would receive the same reduced sales charge as if the $60,000 had been invested
at one time. To ensure that the reduced price will be received on future
purchases, you or your investment professional must inform the transfer agent
that the Letter is in effect each time shares are purchased. Neither income
dividends nor capital gain distributions taken in additional shares will apply
toward the completion of the Letter.
Your initial investment must be at least 5% of the total amount you
plan to invest. Out of the initial purchase, 5% of the dollar amount specified
in the Letter will be registered in your name and held in escrow. The shares
held in escrow cannot be redeemed or exchanged until the Letter is satisfied or
the additional sales charges have been paid. You will earn income dividends and
capital gain distributions on escrowed shares. The escrow will be released when
your purchase of the total amount has been completed. You are not obligated to
complete the Letter.
If you purchase more than the amount specified in the Letter and
qualify for a further sales charge reduction, the sales charge will be adjusted
to reflect your total purchase at the end of 13 months. Surplus funds will be
applied to the purchase of additional shares at the then current offering price
applicable to the total purchase.
If you do not complete your purchase under the Letter within the
13-month period, your sales charge will be adjusted upward, corresponding to the
amount actually purchased, and if after written notice, you do not pay the
increased sales charge, sufficient escrowed shares will be redeemed to pay such
charge.
ADDITIONAL EXCHANGE INFORMATION
Shares of the Victory Portfolios (see "Description of Victory
Portfolios" below) may be exchanged for shares of any Victory money market fund
or any other fund of the Victory Portfolios with the same or a lower sales
charge. Shares of any Victory money market portfolio or any Victory Portfolios
with a reduced sales charge may be exchanged for shares of the Fund upon payment
of the difference in the sales charge.
ADDITIONAL REDEMPTION INFORMATION
REINSTATEMENT PRIVILEGE. Within 90 days of a redemption, a shareholder
may reinvest all or part of the redemption proceeds of shares of the Fund or any
of the other Victory Portfolios into which shares of the Fund are exchangeable
as described below, at the net asset value next computed after receipt by the
Transfer Agent of the reinvestment order. No charge is currently made for
reinvestment in shares of the Fund but a reinvestment in shares of certain other
Victory Portfolios is subject to a $5.00 service fee. The shareholder must ask
the Distributor for such privilege at the time of reinvestment. Any capital gain
that was realized when the shares were redeemed is taxable, and reinvestment
will not alter any capital gains tax payable on that gain. If there has been a
capital loss on the redemption, some or all of the loss may not be tax
deductible, depending on the timing and amount of the reinvestment. Under the
Internal Revenue Code, if the redemption proceeds of Fund shares on which a
sales charge was paid are reinvested in shares of the Fund or another of the
Victory Portfolios within 90 days of payment of the sales charge, the
shareholder's basis in the shares of the Fund that were redeemed may not include
the amount of the sales charge paid. That would reduce the loss or increase the
gain recognized from redemption. The Fund may amend, suspend or cease offering
this reinvestment privilege at any time as to shares redeemed after the date of
such
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<PAGE> 695
amendment, suspension or cessation. You must reinstate your shares into an
account with the same registration. This privilege may be exercised only once by
a shareholder with respect to the Fund. For information on which funds are
available for the Reinstatement Privilege, please consult your program
materials.
DIVIDENDS AND DISTRIBUTIONS
The Fund ordinarily declares and pays dividends from its net investment
income quarterly. The Fund distributes substantially all of its net investment
income and net capital gains, if any, to shareholders within each calendar year
as well as on a fiscal year basis to the extent required for the Fund to qualify
for favorable federal tax treatment.
The amount of distributions may vary from time to time depending on
market conditions and the composition of the Fund's portfolio.
For this purpose, the net income of the Fund, from the time of the
immediately preceding determination thereof, shall consist of all interest
income accrued on the portfolio assets of the Fund, dividend income, if any,
income from securities loans, if any, and realized capital gains and losses on
the Fund assets, less all expenses and liabilities of the Fund chargeable
against income. Interest income shall include discount earned, including both
original issue and market discount, on discount paper accrued ratably to the
date of maturity. Expenses, including the compensation payable to Key Advisers
or the Sub-Adviser, are accrued each day. The expenses and liabilities of the
Fund shall include those appropriately allocable to the Fund as well as a share
of the general expenses and liabilities of the Victory Portfolios in proportion
to the Fund's share of the total net assets of the Victory Portfolios.
Additional Tax Information
It is the policy of the Fund to qualify for the favorable tax treatment
accorded regulated investment companies ("RICs") under Subchapter M of the Code,
for so long as such qualification is in the best interest of its shareholders.
By following such policy and distributing its income and gains currently with
respect to each taxable year, the Fund expects to eliminate or reduce to a
nominal amount the federal income and excise taxes to which it may otherwise be
subject.
In order to qualify as a RIC, the Fund must, among other things, (1)
derive at least 90% of its gross income from dividends, interest, payments with
respect to securities loans, and gains from the sale or other disposition of
stock or securities, foreign currencies or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in stock, securities or currencies, (2) derive less than 30% of its
gross income from the sale or other disposition of stock, securities, options,
futures, forward contracts, and certain foreign currencies (or options, futures,
or forward contracts on foreign currencies) held for less than three months, and
(3) diversify its holdings so that at the end of each quarter of its taxable
year (i) at least 50% of the market value of the Fund's assets is represented by
cash or cash items, U.S. Government securities, securities of other RICs and
other securities limited, in respect of any one issuer, to an amount not greater
than 5% of the value of the Fund's total assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
total assets is invested in the securities of any one issuer (other than U.S.
Government securities) or of two or more issuers that the Fund controls and that
are engaged in the same, similar, or related trades or businesses. These
requirements may restrict the degree to which the Fund may engage in short-term
trading and concentrate investments. If the Fund qualifies as a RIC, it will not
be subject to federal income tax on the part of its net investment income and
net realized capital gains, if any, that it distributes to shareholders with
respect to each taxable year within the time limits specified in the Code.
A non-deductible excise tax is imposed on regulated investment
companies that do not distribute in each calendar year an amount equal to 98% of
their ordinary income for the year plus 98% of their capital gain net income
-17-
<PAGE> 696
for the 1-year period ending on October 31 of such calendar year. The balance of
such income must be distributed during the following calendar year. If
distributions during a calendar year are less than the required amount, the fund
is subject to a non-deductible excise tax equal to 4% of the deficiency.
Certain investment and hedging activities of the Fund, including
transactions in options, futures contracts, hedging transactions, forward
contracts, straddles, foreign currencies, and foreign securities, are subject to
special tax rules. In a given case, these rules may accelerate income to the
Fund, defer losses to the Fund, cause adjustments in the holding periods of the
Fund's securities, convert short-term capital losses into long-term capital
losses, or otherwise affect the character of the Fund's income. These rules
could therefore affect the amount, timing and character of distributions to
shareholders. The Fund will endeavor to make any available elections pertaining
to such transactions in a manner believed to be in the best interest of the Fund
and its securities.
The Fund will be required in certain cases to withhold and remit to the
U.S. Treasury 31% of taxable dividends paid to any shareholder who has failed to
provide (or provided an incorrect) tax identification number, or is subject to
withholding pursuant to a notice from the Internal Revenue Service for failure
to properly include on his or her income tax return payments of interest or
dividends. This "backup withholding" is not an additional tax, and any amounts
withheld may be credited against the shareholder's ultimate U.S. tax liability.
Information set forth in the Prospectus and this Statement of
Additional Information that relates to federal taxation is only a summary of
certain key federal tax considerations generally affecting purchasers of shares
of the Fund. No attempt has been made to present a complete explanation of the
federal tax treatment of the Fund or its shareholders, and this discussion is
not intended as a substitute for careful tax planning. Accordingly, potential
purchasers of shares of the Fund are urged to consult their tax advisers with
specific reference to their own tax circumstances. In addition, the tax
discussion in the Prospectus and this Statement of Additional Information is
based on tax law in effect on the date of the Prospectus and this Statement of
Additional Information; such laws and regulations may be changed by legislative,
judicial or administrative action, sometimes with retroactive effect.
MANAGEMENT OF THE VICTORY PORTFOLIOS
Board of Trustees
Overall responsibility for management of the Victory Portfolios rests
with the Trustees, who are elected by the shareholders of the Victory
Portfolios. The Victory Portfolios are managed by the Trustees in accordance
with the laws of the State of Delaware governing business trusts. There are
currently seven Trustees, six of whom are not "interested persons" of the
Victory Portfolios within the meaning of that term under the 1940 Act. The
Trustees, in turn, elect the officers of the Victory Portfolios to supervise
actively its day-to-day operations.
The Trustees of the Victory Portfolios, their addresses, ages and their
principal occupations during the past five years are as follows:
-18-
<PAGE> 697
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- --------------------- -------------------- -------------------
<S> <C> <C>
Leigh A. Wilson*, 51 Trustee and From 1989 to present, Chairman and
Glenleigh International Ltd. President Chief Executive Officer, Glenleigh
53 Sylvan Road North International Limited; from
Westport, CT 06880 1984-1989, Chief Executive Officer,
Paribas North America and Paribas
Corporation; Trustee, The Victory
Funds and Spears, Benzak, Salomon
and Farrell ("SBSF") Funds.
Robert G. Brown, 72 Trustee Retired; from October 1983 to
5460 N. Ocean Drive November 1990, President, Cleveland
Singer Island, Riviera Beach Advanced Manufacturing Program
FL 33404 (non-profit corporation engaged in
regional economic development);
Trustee, The Victory Funds.
Edward P. Campbell, 46 Trustee From March 1, 1994 to present,
Nordson Corporation Executive Vice President and Chief
28601 Clemens Road Operating Officer of Nordson
Westlake, OH 44145 Corporation (manufacturer of
application equipment); from May 1988
to March 1994, Vice President of
Nordson Corporation; from 1987 to
December 1994, member of the
Supervisory Committee of Society's
Collective Investment Retirement
Fund; from May 1991 to August 1994,
Trustee, Financial Reserves Fund and
from May 1993 to August 1994,
Trustee, Ohio Municipal Money Market
Fund; Trustee, The Victory Funds and
SBSF Funds.
</TABLE>
- ------------
* Mr. Wilson is deemed to be an "interested person" of the Victory
Portfolios under the 1940 Act solely by reason of his position as
President.
-19-
<PAGE> 698
<TABLE>
<CAPTION>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- --------------------- -------------------- -------------------
<S> <C> <C>
Dr. Harry Gazelle, 68 Trustee Retired radiologist, Drs. Hill and
17822 Lake Road Thomas Corp; Trustee, The Victory
Lakewood, Ohio 44107 Funds.
Stanley I. Landgraf, 70 Trustee Retired; currently, Trustee,
41 Traditional Lane Rensselaer Polytechnic Institute;
Albany, NY 12211 Director, Elenel Corporation and
Mechanical Technology, Inc.; Member,
Board of Overseers, School of
Management, Rensselaer Polytechnic
Institute; Member, The Fifty Group (a
Capital Region business
organization); Trustee, The Victory
Funds.
Dr. Thomas F. Morrissey, 62 Trustee 1995 Visiting Scholar, Bond
Weatherhead School of University, Queensland, Australia;
Management Professor, Weatherhead School of
Case Western Reserve Management, Case Western Reserve
University University; from 1989 to 1995,
10900 Euclid Avenue Associate Dean of Weatherhead School
Cleveland, OH 44106-7235 of Management; from 1987 to December
1994, Member of the Supervisory
Committee of Society's Collective
Investment Retirement Fund; from May
1991 to August 1994, Trustee,
Financial Reserves Fund and from May
1993 to August 1994, Trustee, Ohio
Municipal Money Market Fund; Trustee,
The Victory Funds.
H. Patrick Swygert, 52 Trustee President, Howard University;
Howard University formerly President, State University
2400 6th Street, N.W. of New York at Albany; formerly,
Suite 320 Executive Vice President, Temple
Washington, D.C. 20059 University; Trustee, The Victory
Funds.
</TABLE>
The Board presently has an Investment Policy Committee and a Business,
Legal, and Audit Committee. The members of the Investment Policy Committee are
Messrs. Landgraf (Chairman), Morrisey and Brown, who will serve until May 1996.
The function of the Investment Policy Committee is to review the existing
investment policies of the Victory Portfolios, including the levels of risk and
types of funds available to shareholders, and make recommendations to the Board
of Trustees regarding the revision of such policies or, if necessary, the
submission of such revisions to the Victory Portfolios' shareholders for their
consideration. The members of the Business, Legal
-20-
<PAGE> 699
and Audit Committee are Messrs. Swygert (Chairman), Campbell and Gazelle who
will serve until May 1996. The function of the Business, Legal and Audit
Committee is to recommend independent auditors and monitor accounting and
financial matters; to nominate persons to serve as disinterested Trustees and
Trustees to serve on committees of the Board; and to review compliance and
contract matters.
The Investment Policy Committee met four times during the fiscal year
ended October 31, 1995. The Business, Legal and Audit Committee was constituted
on May 24, 1995 (and has met twice since then) and replaced the Audit Committee,
the Legal Committee and the Nominating Committee, which met three times, one
time and one time, respectively, during the fiscal year ended October 31, 1995.
REMUNERATION OF TRUSTEES AND CERTAIN EXECUTIVE OFFICERS
Effective June 1, 1995, each Trustee (other than Leigh A. Wilson)
receives an annual fee of $27,000 for serving as Trustee of all the funds of the
Victory Portfolios, and an additional per meeting fee ($2,400 in person and
$1,200 per telephonic meeting).
Effective June 1, 1995, Leigh A. Wilson receives an annual fee of
$33,000 for serving as President and Trustee for all of the funds of the Victory
Portfolios, and an additional per meeting fee ($3,000 in person and $1,500 per
telephonic meeting).
-21-
<PAGE> 700
The following table indicates the compensation received by each Trustee
from the Fund and from the Victory "Fund Complex"* during the fiscal year ended
October 31, 1995. For certain Trustees, the amounts for the Fund include amounts
paid by the Equity Income Portfolio, a portfolio of The Victory Funds which
merged into the Fund as of June 5, 1995:
<TABLE>
<CAPTION>
Total
Pension or Retirement Estimated Annual Compensation
Benefits Accrued as Benefits Upon Total Compensation from Victory
Portfolio Expenses Retirement from Fund "Fund Complex" *
--------------------- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Robert G. Brown, Trustee... -0- -0- $1,842.48 $39,815.98
John D. Buckingham,# -0- -0- 840.54 $18,841.89
Trustee....................
Edward P. Campbell, -0- -0- 1,581.23 33,799.68
Trustee..................
Harry Gazelle, Trustee..... -0- -0- 1,522.01 35,916.98
John W. Kemper, -0- -0- 841.91 22,567.31
Trustee#.................
Stanley I. Landgraf, -0- -0- 1,580.86 34,615..98
Trustee..................
Thomas F. Morrissey, -0- -0- 1,583.17 40,366.98
Trustee..................
H. Patrick Swygert, -0- -0- 1,583.17 37,116.98
Trustee..................
Leigh A. Wilson, Trustee... -0- -0- 1,732.57 46,716.97
John R. Young, Trustee#.... -0- -0- 899.81 21,963.81
========================================================================================================================
</TABLE>
# Resigned
- ------------------------------
* For certain Trustees, these amounts include compensation received from
The Victory Funds (which were reorganized into the Victory Portfolios
as of June 5, 1995), the SBSF Funds (the investment adviser of which
was acquired by KeyCorp effective April, 1995) and Society's Collective
Investment Retirement Funds, which were reorganized into the Victory
Balanced Fund and Victory Government Mortgage Fund as of December 19,
1994. There are presently 28 mutual funds from which the above-named
Trustees are compensated in the Victory "Fund Complex," but not all of
the above-named Trustees serve on the boards of each fund in the "Fund
Complex."
-22-
<PAGE> 701
Officers
The officers of the Victory Portfolios, their addresses, ages and
principal occupations during the past five years are as follows:
<TABLE>
<CAPTION>
Position with the Principal occupation
Name Victory Portfolios during past 5 years
---- ------------------ -------------------
<S> <C> <C>
Leigh A. Wilson, 51 President and Trustee From 1989 to present, Chairman and
Chief Executive Officer, Glenleigh
International Limited; from 1984-1989,
Chief Executive Officer, Paribas North
America and Paribas Corporation;
Trustee to The Victory Funds and SBSF
Funds.
William B. Blundin, 57 Vice President Senior Vice President of BISYS Fund
Services; officer of other investment
companies administered by BISYS Fund
Services; President and Chief Executive
Officer of Vista Broker-Dealer
Services, Inc., Emerald Asset
Management, Inc. and BNY Hamilton
Distributors, Inc., registered
broker/dealers.
J. David Huber, 49 Vice President Executive Vice President, BISYS Fund
Services.
Scott A. Englehart, 33 Secretary From October 1990 to present,
employee of BISYS Fund Services,
Inc.; from 1985 to October 1990,
Manager of Banking Center, Fifth
Third Bank.
George O. Martinez, 36 Assistant Secretary From March 1995 to present, Senior
Vice President and Director of Legal
and Compliance Services, BISYS Fund
Services; from June 1989-March 1995,
Vice President and Associate General
Counsel, Alliance Capital Management.
Martin R. Dean, 32 Treasurer From May 1994 to present, employee
of BISYS Fund Services; from January
1987 - April 1994, Senior Manager,
KPMG Peat Marwick.
Adrian J. Waters, 33 Assistant Treasurer From May 1993 to present, employee
of BISYS Fund Services; from
1989-May 1993, Manager, Price
Waterhouse.
</TABLE>
-23-
<PAGE> 702
The mailing address of each of the officers of the Victory Portfolios
is 3435 Stelzer Road, Columbus, Ohio 43219-3035.
The officers of the Victory Portfolios (other than Leigh Wilson)
receive no compensation directly from the Victory Portfolios for performing the
duties of their offices. Concord Holding Corporation receives fees from the
Victory Portfolios for acting as Administrator.
As of January 6, 1996, the Trustees and officers as a group owned
beneficially less than 1% of the Fund.
Investment Adviser and Sub-Adviser
KeyCorp Mutual Fund Advisers, Inc. ("Key Advisers" or the "Adviser")
was organized as an Ohio corporation on July 27, 1995 and is registered as an
investment adviser under the Investment Advisers Act of 1940. It is a
wholly-owned subsidiary of KeyCorp Asset Management Holdings, Inc., which is a
wholly-owned subsidiary of Society National Bank, a wholly-owned subsidiary of
KeyCorp. Affiliates of Key Advisers manage approximately $37 billion for
numerous clients including large corporate and public retirement plans,
Taft-Hartley plans, foundations and endowments, high net worth individuals and
mutual funds.
KeyCorp, a financial services holding company, is headquartered at 127
Public Square, Cleveland, Ohio 44114. As of September 30, 1995, KeyCorp had an
asset base of $68 billion, with banking offices in 26 states from Maine to
Alaska, and trust and investment offices in 16 states. KeyCorp is the resulting
entity of the merger in 1994 of Society Corporation, the bank holding company of
which Society National Bank was a wholly-owned subsidiary, and KeyCorp, the
former bank holding company. KeyCorp's major business activities include
providing traditional banking and associated financial services to consumer,
business and commercial markets. Its non-bank subsidiaries include investment
advisory, securities brokerage, insurance, bank credit card processing, and
mortgage leasing companies. Society National Bank is the lead affiliate bank of
KeyCorp.
The following table lists the advisory fees for each mutual fund that
is advised by Key Advisers.
.25 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Institutional Money Market Fund*
.35 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Prime Obligations Fund*
Victory U.S. Government Obligations Fund*
Victory Tax-Free Money Market Fund*
.50 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Money Market Fund*
Victory Limited Term Income Fund*
Victory Government Mortgage Fund*
Victory Financial Reserves Fund*
Victory Fund for Income #
.55 OF 1% OF AVERAGE DAILY NET ASSETS
Victory National Municipal Bond Fund*
Victory Government Bond Fund*
-24-
<PAGE> 703
Victory New York Tax-Free Fund*
.60 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Bond
Fund* Victory Stock Index Fund*
.65 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Diversified Stock Fund*
.75 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Intermediate Income Fund*
Victory Investment Quality Bond Fund*
Victory Ohio Regional Stock Fund*
1% OF AVERAGE DAILY NET ASSETS
Victory Balanced Fund*
Victory Value Fund*
Victory Growth Fund*
Victory Special Value Fund*
Victory Special Growth Fund+/-
1.10% OF AVERAGE DAILY ASSETS
Victory International Growth Fund*
# First Albany Asset Management Corporation serves as sub-adviser to the
Victory Fund for Income, for which it receives .20% of average daily
net assets.
+/- T. Rowe Price Associates, Inc. serves as sub-adviser to the Victory
Special Growth Fund, for which it receives .25% of average daily net
assets up to $100 million and .20% of average daily net assets in
excess of $100 million.
* Society Asset Management, Inc. (the Sub-Adviser) serves as sub-adviser
to each of these funds. For its services under the investment
sub-advisory agreement, Key Advisers pays the Sub-Adviser sub-advisory
fees at rates (based on an annual percentage of average daily net
assets) which vary according to the table set forth below:
-25-
<PAGE> 704
For the Victory Balanced Fund, Diversified Stock Fund, Growth Fund, Stock Index
Fund and Value Fund:
<TABLE>
<CAPTION>
Rate of
Net Assets Sub-Advisory Fee*
---------- -----------------
<S> <C>
Up to $10,000,000 0.65%
Next $15,000,000 0.50%
Next $25,000,000 0.40%
Above $50,000,000 0.35%
</TABLE>
For the Victory International Growth Fund, Ohio Regional Stock Fund and Special
Value Fund:
<TABLE>
<CAPTION>
Rate of
Net Assets Sub-Advisory Fee*
---------- -----------------
<S> <C>
Up to $10,000,000 0.90%
Next $15,000,000 0.70%
Next $25,000,000 0.55%
Above $50,000,000 0.45%
</TABLE>
For the Victory Intermediate Income Fund, Investment Quality Bond Fund, Limited
Term Income Fund, Ohio Municipal Bond Fund, Government Bond Fund, Government
Mortgage Fund, National Municipal Bond Fund and New York Tax-Free Fund:
<TABLE>
<CAPTION>
Rate of
Net Assets Sub-Advisory Fee*
---------- -----------------
<S> <C>
Up to $10,000,000 0.40%
Next $15,000,000 0.30%
Next $25,000,000 0.25%
Above $50,000,000 0.20%
</TABLE>
For the Victory Prime Obligations Fund, Tax-Free Money Market Fund, U.S.
Government Obligations Fund, Financial Reserves Fund, Institutional Money Market
Fund and Ohio Municipal Money Market Fund:
<TABLE>
<CAPTION>
Rate of
Net Assets Sub-Advisory Fee*
---------- -----------------
<S> <C>
Up to $10,000,000 0.25%
Next $15,000,000 0.20%
Next $25,000,000 0.15%
Above $50,000,000 0.125%
</TABLE>
- --------------------
* As a percentage of average daily net assets. The Sub-Adviser has the
right to voluntarily waive any portion of the sub-advisory fee from
time to time.
ADVISORY AND OTHER CONTRACTS
Unless sooner terminated, the Investment Advisory Agreement between Key
Advisers and the Fund provides that it will continue in effect as to the Fund
for an initial two-year term and for consecutive one-year terms thereafter,
provided that such continuance is approved at least annually by the Victory
Portfolios' Trustees or by vote of a majority of the outstanding shares of such
Fund (as defined under "GENERAL INFORMATION Miscellaneous" in the Prospectuses),
and, in either case, by a majority of the Trustees who are not parties to the
Investment Advisory Agreement or interested persons (as defined in the 1940 Act)
of any party to the Investment Advisory Agreement, by votes cast in person at a
meeting called for such purpose.
The Investment Advisory Agreement is terminable as to the Fund at any
time on 60 days' written notice without penalty by the Trustees, by vote of a
majority of the outstanding shares of the Fund, or by Key Advisers. The
Investment Advisory Agreement also terminates automatically in the event of any
assignment, as defined under the 1940 Act.
-26-
<PAGE> 705
The Investment Advisory Agreement provides that Key Advisers shall not
be liable for any error of judgment or mistake of law or for any loss suffered
by the Fund in connection with the performance of services pursuant to the
Investment Advisory Agreement, except a loss resulting from a breach of
fiduciary duty with respect to the receipt of compensation for services or a
loss resulting from willful misfeasance, bad faith, or gross negligence on the
part of Key Advisers in the performance of its duties, or from reckless
disregard by it of either duties and obligations thereunder.
Under the Investment Advisory Agreement, Key Advisers has agreed to
provide the investment advisory services described in the Prospectus. For the
services provided and expenses assumed pursuant to the Investment Advisory
Agreement, the Fund pays Key Advisers a fee, computed daily and paid monthly, at
the annual rate of one percent (1.00%) of the average daily net assets of the
Fund.
Prior to January, 1993, Society National Bank served as investment
adviser to the Fund. From January 1, 1993 until December 31, 1995, Society Asset
Management, Inc. served as investment adviser to the Fund. For the fiscal years
ended October 31, 1994 and 1995 the Fund paid investment advisory fees of
$979,887, and ________, respectively, after fee reductions of $575,355 and
$________ respectively.
Under the Investment Advisory Agreement, Key Advisers may delegate a
portion of its responsibilities to a sub-adviser. In addition, the Investment
Advisory Agreement provides that Key Advisers may render services through its
own employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser of the Fund and are under the common
control of KeyCorp as long as all such persons are functioning as part of an
organized group of persons, managed by authorized officers of Key Advisers.
Key Advisers has entered into an investment sub-advisory agreement with
its affiliate, Society Asset Management, Inc. on behalf of the Fund. The
Sub-Adviser is a wholly-owned subsidiary of KeyCorp Asset Management Holdings,
Inc. With respect to the day to day management of the Fund, under the
sub-advisory agreement, the Sub-Adviser makes decisions concerning, and places
all orders for, purchases and sales of securities and helps maintain the records
relating to such purchases and sales. The Sub-Adviser may, in its discretion,
provide such services through its own employees or the employees of one or more
affiliated companies that are qualified to act as an investment adviser to the
Company under applicable laws and are under the common control of KeyCorp;
provided that (i) all persons, when providing services under the sub-advisory
agreement, are functioning as part of an organized group of persons, and (ii)
such organized group of persons is managed at all times by authorized officers
of the Sub-Adviser. This arrangement will not result in the payment of
additional fees by the Fund.
-27-
<PAGE> 706
Glass-Steagall Act
In 1971 the United States Supreme Court held in Investment Company
Institute v. Camp that the federal statute commonly referred to as the
Glass-Steagall Act prohibits a national bank from operating a fund for the
collective investment of managing agency accounts. Subsequently, the Board of
Governors of the Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such decision: (a)
forbid a bank holding company registered under the Federal Bank Holding Company
Act of 1956 (the "Holding Company Act") or any non-bank affiliate thereof from
sponsoring, organizing, or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but (b) do not prohibit such
a holding company or affiliate from acting as investment adviser, transfer
agent, and custodian to such an investment company. In 1981 the United States
Supreme Court held in Board of Governors of the Federal Reserve System v.
Investment Company Institute that the Board did not exceed its authority under
the Holding Company Act when it adopted its regulation and interpretation
authorizing bank holding companies and their non-bank affiliates to act as
investment advisers to registered closed-end investment companies. In the Board
of Governors case, the Supreme Court also stated that if a national bank
complied with the restrictions imposed by the Board in its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to investment companies, a national bank
performing investment advisory services for an investment company would not
violate the Glass-Steagall Act.
Key Advisers and the Sub-Adviser believe that they may perform the
services for the Victory Portfolios contemplated by the Prospectus, this
Statement of Additional Information, and the Investment Advisory Agreement (and
Sub-Advisory Agreement) with the Victory Portfolios without violation of
applicable statutes and regulations and has so represented in its Investment
Advisory Agreement (and Sub-Advisory Agreement) with the Victory Portfolios. Key
Trust Company of Ohio, N.A. believes that it may perform the services for the
Victory Portfolios contemplated by the Prospectus, this Statement of Additional
Information, and the Shareholder Servicing Agreement with the Victory Portfolios
(as described below) without violation of applicable statutes and regulations
and has so represented in such Shareholder Servicing Agreement. Future changes
in either federal or state statutes and regulations relating to the permissible
activities of banks or bank holding companies and the subsidiaries or affiliates
of those entities, as well as further judicial or administrative decisions or
interpretations of present and future statutes and regulations, could prevent or
restrict Key Trust Company of Ohio, N.A., Key Advisers or the Sub-Adviser from
continuing to perform such services for the Victory Portfolios. Depending upon
the nature of any changes in the services which could be provided by Key Trust
Company of Ohio, N.A., Key Advisers or the Sub-Adviser, the Trustees of the
Victory Portfolios would review the Victory Portfolios' relationship with Key
Trust Company of Ohio, N.A., Key Advisers or the Sub-Adviser and consider taking
all action necessary in the circumstances.
Should future legislative, judicial, or administrative action prohibit
or restrict the proposed activities of Key Trust Company of Ohio, N.A., Key
Advisers or the Sub-Adviser and its affiliated and correspondent banks and other
non-bank affiliates in connection with customer purchases of shares of the
Victory Portfolios, the banks and such non-bank affiliates might be required to
alter materially or discontinue the services offered by them to customers. It is
not anticipated, however, that any change in the Victory Portfolios' method of
operations would affect its net asset value per share or result in financial
losses to any customer.
From time to time, advertisements, supplemental sales literature and
information furnished to present or prospective shareholders of the Fund may
include descriptions of Key Trust Company of Ohio, N.A., Key Advisers and the
Sub-Adviser including, but not limited to, (i) descriptions of the operations of
Key Trust Company of Ohio, N.A., Key Advisers and the Sub-Adviser; (ii)
descriptions of certain personnel and their functions; and (iii) statistics and
rankings related to the operations of Key Trust Company of Ohio, N.A., Key
Advisers and the Sub-Adviser.
-28-
<PAGE> 707
Portfolio Transactions
Pursuant to the Investment Advisory Agreement (and Sub-Advisory
Agreement), Key Advisers or the Sub-Adviser determines, subject to the general
supervision of the Trustees of the Victory Portfolios, and in accordance with
the Fund's investment objective and restrictions, which securities are to be
purchased and sold by the Fund, and which brokers are to be eligible to execute
its portfolio transactions. Purchases from underwriters and/or broker-dealers of
portfolio securities include a commission or concession paid by the issuer to
the underwriter and/or broker-dealer and purchases from dealers serving as
market makers may include the spread between the bid and asked price. While Key
Advisers and the Sub-Adviser generally seek competitive prices (inclusive of any
spread or commission), the Fund may not necessarily pay the lowest prices
available on each transaction, for reasons discussed below.
Allocation of transactions to dealers is determined by Key Advisers or
the Sub-Adviser in their best judgment and in a manner deemed fair and
reasonable to shareholders. The primary consideration is prompt execution of
orders in an effective manner at the most favorable price. Subject to this
consideration, dealers who provide supplemental investment research to Key
Advisers or the Sub-Adviser may receive orders for transactions by the Victory
Portfolios. Information so received is in addition to and not in lieu of
services required to be performed by Key Advisers or the Sub-Adviser and does
not reduce the advisory fees payable to Key Advisers by the Victory Portfolios.
Such information may be useful to Key Advisers or the Sub-Adviser in serving
both the Victory Portfolios and other clients and, conversely, such supplemental
research information obtained by the placement of orders on behalf of other
clients may be useful to Key Advisers or the Sub-Adviser in carrying out its
obligations to the Victory Portfolios. In the future, the Trustees may also
authorize the allocation of brokerage to affiliated broker-dealers on an agency
basis to effect portfolio transactions. In such event, the Trustees will adopt
procedures incorporating the standards of Rule 17e-1 under the 1940 Act, which
requires that the commission paid to affiliated broker-dealers be "reasonable
and fair compared to the commission, fee or other remuneration received, or to
be received, by other brokers in connection with comparable transactions
involving similar securities during a comparable period of time." At times, the
Fund may also purchase portfolio securities directly from dealers acting as
principals, underwriters or market makers. As these transactions are usually
conducted on a net basis, no brokerage commissions are paid by the Fund.
The Victory Portfolios will not execute portfolio transactions through,
acquire portfolio securities issued by, make savings deposits in, or enter into
repurchase or reverse repurchase agreements with Key Advisers, the Sub-Adviser,
Key Trust Company of Ohio, N.A. or its affiliates, Concord Holding Corporation,
Victory Broker-Dealer Services, Inc. or their affiliates, and will not give
preference to Key Trust Company of Ohio, N.A.'s correspondent banks or
affiliates, or Concord Holding Corporation or Victory Broker-Dealer Services,
Inc. with respect to such transactions, securities, savings deposits, repurchase
agreements, and reverse repurchase agreements.
Investment decisions for the Fund are made independently from those
made for the other funds of the Victory Portfolios or any other investment
company or account managed by Key Advisers or the Sub-Adviser. Such other funds,
investment companies or accounts may also invest in the securities in which the
Fund invests. When a purchase or sale of the same security is made at
substantially the same time on behalf of the Fund and another fund, investment
company or account, the transaction will be averaged as to price, and available
investments allocated as to amount, in a manner which Key Advisers or the
Sub-Adviser believes to be equitable to the Fund and such other fund, investment
company or account. In some instances, this investment procedure may affect the
price paid or received by the Fund or the size of the position obtained by the
Fund in an adverse manner relative to the result that would have been obtained
if only the Fund had participated in or been allocated such trades. To the
extent permitted by law, Key Advisers or the Sub-Adviser may aggregate the
securities to be sold or purchased for the Fund with those to be sold or
purchased for the other funds of the Victory Portfolios or for other investment
companies or accounts in order to obtain best execution. In making investment
recommendations for the Victory Portfolios, Key
-29-
<PAGE> 708
Advisers (and the Sub-Adviser) will not inquire or take into consideration
whether an issuer of securities proposed for purchase or sale by the Fund is a
customer of Key Advisers or the Sub-Adviser, their parents or subsidiaries or
affiliates and, in dealing with their commercial customers, Key Advisers or the
Sub-Adviser, their parents, subsidiaries, and affiliates will not inquire or
take into consideration whether securities of such customers are held by the
Victory Portfolios.
In the fiscal years ended October 31, 1994 and 1995, the Fund paid
$196,716, and $_______, respectively, in brokerage commissions.
Business Management Agreement
In connection with its obligations under the Investment Sub-Advisory
Agreement, the Sub-Adviser has entered into a Business Management Agreement with
Key Advisers, pursuant to which Key Advisers provides certain administrative and
support services to the Sub-Adviser. Such services include preparing reports to
the Victory Portfolios' Board of Trustees, recordkeeping services, and services
rendered in connection with the preparation of regulatory filings and other
reports, and regulatory and other administrative and compliance systems and
support services.
For such services to the Fund, the Sub-Adviser pays fees to Key
Advisers which vary according to a sliding scale containing "breakpoints" at
which decreases in the business management fees correspond to increases in the
average daily net asset values of the Fund as follows:
<TABLE>
<CAPTION>
Rate of Business
Net Assets of the Fund Management Fee*
- ---------------------- ----------------
<S> <C>
Up to $10,000,000 0.55%
Next $15,000,000 0.35%
Next $25,000,000 0.20%
Above $50,000,000 0.10%
</TABLE>
- --------------------
* As a percentage of average daily net assets.
Administrator
Currently, Concord Holding Corporation ("CHC") serves as general
manager and administrator (the "Administrator") to the Fund. The Administrator
assists in supervising all operations of the Fund (other than those performed by
Key Advisers or the Sub-Adviser under the Investment Advisory Agreement and
Sub-Advisory Agreement. Prior to June, 1995, The Winsbury Company ("Winsbury")
served as the Fund's administrator.
CHC receives a fee from the Fund for its services as Administrator and
expenses assumed pursuant to the Administration Agreements, calculated daily and
paid monthly, at the annual rate of fifteen one hundredths of one percent (.15%)
of the Fund's average daily net assets. CHC may periodically waive all or a
portion of its fee with respect to the Fund in order to increase the net income
of the Fund available for distribution as dividends.
-30-
<PAGE> 709
Unless sooner terminated, the Administration Agreement will continue in
effect as to the Fund for a period of two years, and for consecutive one-year
terms thereafter, provided that such continuance is ratified at least annually
by the Victory Portfolios' Board of Trustees or by vote of a majority of the
outstanding shares of the Fund, and in either case by a majority of the Trustees
who are not parties to the Administration Agreement or interested persons (as
defined in the 1940 Act) of any party to the Administration Agreement, by votes
cast in person at a meeting called for such purpose.
The Administration Agreement provides that CHC shall not be liable for
any error of judgment or mistake of law or any loss suffered by the Victory
Portfolios in connection with the matters to which the Administration Agreement
relates, except a loss resulting from willful misfeasance, bad faith, or gross
negligence in the performance of its duties, or from the reckless disregard by
it of its obligations and duties thereunder.
Under the Administration Agreement, CHC assists in the Fund's
administration and operation, including providing statistical and research data,
clerical services, internal compliance and various other administrative
services, including among other responsibilities, forwarding certain purchase
and redemption requests to the Transfer Agent, participation in the updating of
the prospectus, coordinating the preparation, filing, printing and dissemination
of reports to shareholders, coordinating the preparation of income tax returns,
arranging for the maintenance of books and records and providing the office
facilities necessary to carry out the duties thereunder. Under the
Administration Agreement, CHC may delegate all or any part of its
responsibilities thereunder.
In the fiscal years ended October 31, 1994 and October 31, 1995, the
Fund paid to Winsbury and CHC aggregate administration fees of $224,695, and
$_______, respectively, after fee reductions of $8,592, and $_____,
respectively.
Distributor
Victory Broker-Dealer Services, Inc. (the "Distributor") serves as
distributor for the continuous offering of the shares of the Fund pursuant to a
Distribution Agreement between the Distributor and the Victory Portfolios.
Unless otherwise terminated, the Distribution Agreement will remain in effect
with respect to the Fund for two years, and thereafter for consecutive one-year
terms, provided that it is approved at least annually (i) by the Victory
Portfolios' Board of Trustees or by the vote of a majority of the outstanding
shares of the Fund, and (ii) by the vote of a majority of the Trustees of the
Victory Portfolios who are not parties to the Distribution Agreement or
interested persons of any such party, cast in person at a meeting called for the
purpose of voting on such approval. The Distribution Agreement will terminate in
the event of its assignment, as defined in the 1940 Act. For the Fund's fiscal
years ended October 31, 1994 and October 31, 1995, [Winsbury] received $______
and $_______, respectively, in underwriting commissions, and retained $____ and
$__, respectively.
-31-
<PAGE> 710
Shareholder Servicing Plan
The Victory Portfolios, on behalf of the Fund, has adopted a
Shareholder Servicing Plan to provide payments to shareholder servicing agents
(each a "Shareholder Servicing Agent") that provide administrative support
services to customers who may from time to time beneficially own shares, which
services include: (i) aggregating and processing purchase and redemption
requests for shares from customers and promptly transmitting net purchase and
redemption orders to our distributor or transfer agent; (ii) providing customers
with a service that invests the assets of their accounts in shares pursuant to
specific or pre-authorized instructions; (iii) processing dividend and
distribution payments on behalf of customers; (iv) providing information
periodically to customers showing their positions in shares; (v) arranging for
bank wires; (vi) responding to customer inquiries; (vii) providing subaccounting
with respect to shares beneficially owned by customers or providing the
information to the Victory Portfolios necessary for subaccounting; (viii) if
required by law, forwarding shareholder communications from us (such as proxies,
shareholder reports, annual and semi-annual financial statements and dividend,
distribution and tax notices) to customers; (ix) forwarding to customers proxy
statements and proxies containing any proposals regarding this Plan; and (x)
providing such other similar services as we may reasonably request to the extent
you are permitted to do so under applicable statutes, rules or regulations. For
expenses incurred and services provided pursuant to the Shareholder Servicing
Agreement, the Fund pays each Shareholder Servicing Agent a fee computed daily
and paid monthly, in amounts aggregating not more than twenty-five
one-hundredths of one percent (.25%) of the average daily net assets of the Fund
per year. A Shareholder Servicing Agent may periodically waive all or a portion
of its respective shareholder servicing fees with respect to the Fund to
increase the net income of the Fund available for distribution as dividends.
Expenses
The Fund bears the following expenses relating to its operations:
taxes, interest, brokerage fees and commissions, fees of the Trustees of the
Victory Portfolios, Commission fees, state securities qualification fees, costs
of preparing and printing prospectuses for regulatory purposes and for
distribution to current shareholders, outside auditing and legal expenses,
advisory and administration fees, fees and out-of-pocket expenses of the
custodian and transfer agent, certain insurance premiums, costs of maintenance
of the Fund's existence, costs of shareholders' reports and meetings, and any
extraordinary expenses incurred in the Fund's operation.
If total expenses borne by the Fund in any fiscal year exceeds expense
limitations imposed by applicable state securities regulations, Key Advisers,
the Sub-Adviser or the Administrator will waive their fees to the extent such
excess expenses exceed such expense limitation in proportion to their respective
fees. As of the date of this Statement of Additional Information, the most
restrictive expense limitation applicable to the Fund limits its aggregate
annual expenses, including management and advisory fees but excluding interest,
taxes, brokerage commissions, and certain other expenses, to 2.5% of the first
$30 million of its average net assets, 2.0% of the next $70 million of its
average net assets, and 1.5% of its remaining average net assets. Any expenses
to be borne by Key Advisers, Sub-Adviser or the Administrator will be estimated
daily and reconciled and paid on a monthly basis. Fees imposed upon customer
accounts by Key Advisers, the Sub-Adviser, Key Trust Company of Ohio, N.A. or
its correspondents, affiliated banks and other non-bank affiliates for cash
management services are not fund expenses for purposes of any such expense
limitation.
-32-
<PAGE> 711
Fund Accountant
BISYS Fund Services Ohio, Inc. serves as fund accountant for the Fund
pursuant to a fund accounting agreement with the Victory Portfolios dated May
31, 1995 (the "Fund Accounting Agreement"). As fund accountant for the Victory
Portfolios, BISYS Fund Services Ohio, Inc. calculates the Fund's Portfolios' net
asset value, the dividend and capital gain distributions, if any, and the yield.
BISYS Fund Services Ohio, Inc. also provides a current security position report,
a summary report of transactions and pending maturities, a current cash position
report, and maintains the general ledger accounting records for the Fund. Under
the Fund Accounting Agreement, BISYS Fund Services Ohio, Inc. is entitled to
receive annual fees of .03% of the first $100 million of the Fund's daily
average net assets, .02% of the next $100 million of the Fund's daily average
net assets, and .01% of the Fund's remaining daily average net assets. These
annual fees are subject to a minimum monthly assets charge of $2,917 per
tax-free fund, and do not include out-of-pocket expenses or multiple class
charges of $833 per month assessed for each class of shares after the first
class. In the fiscal years ended October 31, 1993, October 31, 1994, and October
31, 1995, the Victory Portfolios paid The Winsbury Service Corporation fund
accounting fees (after fee waivers) of $0, $96,327, and $_______, respectively,
for the Fund.
Custodian
Cash and securities owned by the Fund are held by Key Trust Company of
Ohio, N.A. as custodian. Key Trust Company of Ohio, N.A. serves as custodian to
the Fund pursuant to a Custodian Agreement dated May 24, 1995. Under this
Agreement, Key Trust Company of Ohio, N.A. (i) maintains a separate account or
accounts in the name of the Fund; (ii) makes receipts and disbursements of money
on behalf of the Fund; (iii) collects and receives all income and other payments
and distributions on account of portfolio securities; (iv) responds to
correspondence from security brokers and others relating to its duties; and (v)
makes periodic reports to the Victory Portfolios' Trustees concerning the
Victory Portfolios' operations. Key Trust Company of Ohio, N.A. may, with the
approval of the Victory Portfolios and the custodian's own expense, open and
maintain a sub-custody account or accounts on behalf of the Fund, provided that
Key Trust Company of Ohio, N.A. shall remain liable for the performance of all
of its duties under the Custodian Agreement.
Transfer Agent
Primary Funds Service Corporation serves as transfer agent and dividend
disbursing agent for the Fund, pursuant to a Transfer Agency and Shareholder
Servicing Agreement. Under its agreement with the Victory Portfolios, Primary
Funds Service Corporation has agreed (i) to issue and redeem shares of the
Victory Portfolios; (ii) to address and mail all communications by the Victory
Portfolios to its shareholders, including reports to shareholders, dividend and
distribution notices, and proxy material for its meetings of shareholders; (iii)
to respond to correspondence or inquiries by shareholders and others relating to
its duties; (iv) to maintain shareholder accounts and certain sub-accounts; and
(v) to make periodic reports to the Victory Portfolios' Trustees concerning the
Victory Portfolios' operations. For the services provided under the Transfer
Agency and Shareholder Servicing Agreement, Primary Funds Service Corporation
receives a maximum monthly fee of $1,250 from the Fund, and a maximum of $3.50
per account of the Fund.
-33-
<PAGE> 712
Auditors
The financial highlights appearing in the Prospectus for the Fund,
other than unaudited information marked as such, has been derived from financial
statements of the Victory Portfolios appearing in or incorporated by reference
in this Statement of Additional Information which have been audited by Coopers &
Lybrand L.L.P., independent accountants, as set forth in their report appearing
elsewhere herein, and are included in reliance upon such report and on the
authority of such firm as experts in auditing and accounting. Coopers & Lybrand
L.L.P.'s address is 100 East Broad Street, Columbus, Ohio 43215.
Legal Counsel
Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, 919 Third Avenue, New
York, New York 10022 is counsel to the Victory Portfolios.
ADDITIONAL INFORMATION
Description of Shares
The Victory Portfolios (sometimes referred to as the "Trust") is a
Delaware business trust. Its Delaware Trust Instrument was adopted on December
6, 1995 and a certificate of Trust for the Trust was filed in Delaware on
December __, 1995. On February 29, 1996, the Victory Portfolios converted from a
Massachusetts business trust to a Delaware business trust.
The previously effective Massachusetts Declaration of Trust, pursuant
to which the Victory Portfolios was originally called the North Third Street
Fund, was filed with the Secretary of State of the Commonwealth of Massachusetts
on February 6, 1986. On September 22, 1986, an Amended and Restated Declaration
of Trust was filed to change the name of the Trust to The Emblem Fund and to
make certain other changes. A second amendment was filed October 23, 1986
providing for voting of shares in the aggregate except where voting of shares by
series is otherwise required by law. An amendment to the Amended and Restated
Declaration of Trust was filed on March 15, 1993 to change the name of the Trust
to The Society Funds. An Amended and Restated Declaration of Trust was then
filed on September 2, 1994 to change the name of the Trust to The Victory
Portfolios.
The currently effective Delaware Trust Instrument authorizes the
Trustees to issue an unlimited number of shares, which are units of beneficial
interest, without par value. The Victory Portfolios presently has twenty-eight
series of shares, which represent interests in the U.S. Government Obligations
Fund, the Prime Obligations Fund, the Tax-Free Money Market Fund, the Balanced
Fund, the Stock Index Fund, the Value Fund, the Diversified Stock Fund, the
Growth Fund, the Special Value Fund, the Special Growth Fund, the Ohio Regional
Stock Fund, the International Growth Fund, the Limited Term Income Fund, the
Government Mortgage Fund, the Ohio Municipal Bond Fund, the Intermediate Income
Fund, the Investment Quality Bond Fund, the Florida Tax-Free Bond Fund, the
Municipal Bond Fund, the Convertible Securities Fund, the Short-Term U.S.
Government Income Fund, the Government Bond Fund, the Fund for Income, the
National Municipal Bond Fund, the New York Tax-Free Fund, the Institutional
Money Market Fund, the Financial Reserves Fund and the Ohio Municipal Money
Market Fund, respectively. The Victory Portfolios' Delaware Trust Instrument
authorizes the Trustees to divide or redivide any unissued shares of the Victory
Portfolios into one or more additional series by setting or changing in any one
or more respects their respective preferences, conversion or other rights,
voting power, restrictions, limitations as to dividends, qualifications, and
terms and conditions of redemption.
-34-
<PAGE> 713
Shares have no subscription or preemptive rights and only such
conversion or exchange rights as the Trustees may grant in their discretion.
When issued for payment as described in the Prospectus and this Statement of
Additional Information, the Victory Portfolios' shares will be fully paid and
non-assessable. In the event of a liquidation or dissolution of the Victory
Portfolios, shares of the Fund are entitled to receive the assets available for
distribution belonging to the Fund, and a proportionate distribution, based upon
the relative asset values of the respective funds of the Victory Portfolios, of
any general assets not belonging to any particular fund which are available for
distribution.
As described in the Prospectus under the caption "ADDITIONAL
INFORMATION -- Voting Rights," shares of the Victory Portfolios are entitled to
one vote per share (with proportional voting for fractional shares) on such
matters as shareholders are entitled to vote. On any matter submitted to a vote
of the shareholders, all shares are voted separately by individual series
(funds), and whenever the Trustees determine that the matter affects only
certain series, may be submitted for a vote by only such series, except (i) when
required by the 1940 Act, shares are voted in the aggregate and not by
individual series; and (ii) when the Trustees have determined that the matter
affects the interests of more than one series and that voting by shareholders of
all series would be consistent with the 1940 Act, then the shareholders of all
such series shall be entitled to vote thereon (either by individual series or by
shares voted in the aggregate, as the Trustees in their discretion may
determine). The Trustees may also determine that a matter affects only the
interests of one or more classes of a series, in which case (or if required
under the 1940 Act) such matter shall be voted on by such class or classes.
There will normally be no meetings of shareholders for the purpose of electing
Trustees unless and until such time as less than a majority of the Trustees have
been elected by the shareholders, at which time the Trustees then in office will
call a shareholders' meeting for the election of Trustees. In addition, Trustees
may be removed from office by a vote of the holders of at least two-thirds of
the outstanding shares of the Victory Portfolios. A meeting shall be held for
such purpose upon the written request of the holders of not less than 10% of the
outstanding shares. Upon written request by ten or more shareholders meeting the
qualifications of Section 16(c) of the 1940 Act, (i.e., person who have been
shareholders for at least six months, and who hold shares having an NAV of at
least $25,000 or constituting 1% of the outstanding shares) stating that such
shareholders wish to communicate with the other shareholders for the purpose of
obtaining the signatures necessary to demand a meeting to consider removal of a
Trustee, the Victory Portfolios will provide a list of shareholders or
disseminate appropriate materials (at the expense of the requesting
shareholders). Except as set forth above, the Trustees shall continue to hold
office and may appoint their successors.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Victory Portfolios shall not be deemed to have been
effectively acted upon unless approved by the holders of a majority of the
outstanding shares of each fund of the Victory Portfolios affected by the
matter. For purposes of determining whether the approval of a majority of the
outstanding shares of a fund will be required in connection with a matter, a
fund will be deemed to be affected by a matter unless it is clear that the
interests of each fund in the matter are identical, or that the matter does not
affect any interest of the fund. Under Rule 18f-2, the approval of an investment
advisory agreement or any change in investment policy would be effectively acted
upon with respect to a fund only if approved by a majority of the outstanding
shares of such fund. However, Rule 18f-2 also provides that the ratification of
independent public accountants, the approval of principal underwriting
contracts, and the election of Trustees may be effectively acted upon by
shareholders of all of the Victory Portfolios voting without regard to series.
-35-
<PAGE> 714
Shareholder and Trustee Liability
The Delaware Business Trust Act provides that a shareholder of a
Delaware business trust shall be entitled to the same limitation of personal
liability extended to shareholders of Delaware corporations. The Delaware Trust
Instrument also provides for indemnification out of the trust property of any
shareholder held personally liable solely by reason of his or her being or
having been a shareholder. The Delaware Trust Instrument also provides that the
Victory Portfolios shall, upon request, assume the defense of any claim made
against any shareholder for any act or obligation of the Victory Portfolios, and
shall satisfy any judgment thereon. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is considered to be extremely
remote.
The Delaware Trust Instrument states further that no Trustee, officer,
or agent of the Victory Portfolios shall be personally liable in connection with
the administration or preservation of the assets of the Funds or the conduct of
the Victory Portfolios' business; nor shall any Trustee, officer, or agent be
personally liable to any person for any action or failure to act except for his
own bad faith, willful misfeasance, gross negligence, or reckless disregard of
his duties. The Declaration of Trust also provides that all persons having any
claim against the Trustees or the Victory Portfolios shall look solely to the
assets of the Victory Portfolios for payment.
Miscellaneous
As used in the Prospectus and in this Statement of Additional
Information, "assets belonging to a fund" (or "assets belonging to the Fund")
means the consideration received by the Victory Portfolios upon the issuance or
sale of shares in that fund, together with all income, earnings, profits, and
proceeds derived from the investment thereof, including any proceeds from the
sale, exchange, or liquidation of such investments, and any funds or payments
derived from any reinvestment of such proceeds and any general assets of the
Victory Portfolios, which general liabilities and expenses are not readily
identified as belonging to a particular fund (or the Fund) that are allocated to
that fund (or the Fund) by the Victory Portfolios' Trustees. The Trustees may
allocate such general assets in any manner they deem fair and equitable. It is
anticipated that the formula that will be used by the Trustees in making
allocations of general assets to a particular fund of the Victory Portfolios
will be the relative net asset value of the respective fund at the time of
allocation. Assets belonging to a particular fund are charged with the direct
liabilities and expenses of that fund, and with a share of the general
liabilities and expenses of each of the funds not readily identified as
belonging to a particular fund that are allocated to each fund in accordance
with its proportionate share of the net asset values of the Victory Portfolios
at the time of allocation. The timing of allocations of general assets and
general liabilities and expenses of the Victory Portfolios to a particular fund
will be determined by the Trustees of the Victory Portfolios and will be in
accordance with generally accepted accounting principles. Determinations by the
Trustees of the Victory Portfolios as to the timing of the allocation of general
liabilities and expenses and as to the timing and allocable portion of any
general assets with respect to a particular fund are conclusive.
As used in the Prospectus and in this Statement of Additional
Information, a "vote of a majority of the outstanding shares" or a "vote of a
majority of the outstanding voting securities" of the Victory Portfolios or a
particular fund means the affirmative vote of the lesser of (a) 67% or more of
the shares of the Victory Portfolios or such fund present at a meeting at which
the holders of more than 50% of the outstanding shares of the Victory Portfolios
or such fund are represented in person or by proxy, or (b) more than 50% of the
outstanding shares of the Victory Portfolios or such fund.
Organizational expenses are allocated to each of the Victory Portfolios
and are amortized over a period of two years from the commencement of the public
offering of shares of the Victory Portfolios.
-36-
<PAGE> 715
The Victory Portfolios is registered with the Commission as an open-end
management investment company. Such registration does not involve supervision by
the Commission of the management or policies of the Victory Portfolios.
The Prospectus and this Statement of Additional Information omit
certain of the information contained in the Registration Statement filed with
the Commission. Copies of such information may be obtained from the Commission
upon payment of the prescribed fee.
The Prospectus and this Statement of Additional Information are not an
offering of the securities herein described in any state in which such offering
may not lawfully be made. No salesman, dealer, or other person is authorized to
give any information or make any representation other than those contained in
the Prospectus and this Statement of Additional Information.
[The financial statements of the Fund for the period ended April 30,
1995 are set forth following this Part B of the Registration Statement.]
[The 1995 Annual Report to shareholders of The Victory Portfolios is
incorporated herein. This report includes the financial statements for the
fiscal year ended October 31, 1995.] The opinion in the Annual Report of Coopers
& Lybrand L.L.P., independent accountants, is incorporated herein in its
entirety to such Annual Report, and such financial statements are incorporated
in their entirety in reliance upon such report of Coopers & Lybrand L.L.P. and
on the authority of such firm as experts in auditing and accounting.
The following table indicates each person known by the Fund to own
beneficially 5% or more of the shares of the Fund as of December 1, 1995:
<TABLE>
<CAPTION>
Percent of Total
Outstanding
Name & Address Shares Shares of Fund
-------------- ------ ----------------
<S> <C> <C>
KeyCorp 401(K) Plan Equity Fund 12,312,980,459 48.91%
127 Public Square
Cleveland, OH 44114
</TABLE>
INDEPENDENT AUDITOR'S REPORT
FINANCIAL STATEMENTS
-37-
<PAGE> 716
APPENDIX
The nationally recognized statistical rating organizations
(individually, an "NRSRO") that may be utilized by Key Advisers or the
Sub-Adviser with regard to portfolio investments for the Fund include Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"), Duff
& Phelps, Inc. ("Duff"), Fitch Investors Service, Inc. ("Fitch"), IBCA Limited
and its affiliate, IBCA Inc. (collectively, "IBCA"), and Thomson BankWatch, Inc.
("Thomson"). Set forth below is a description of the relevant ratings of each
such NRSRO. The NRSROs that may be utilized by Key Advisers or the Sub-Adviser
and the description of each NRSRO's ratings is as of the date of this Statement
of Additional Information, and may subsequently change.
Long-Term Debt Ratings (may be assigned, for example, to corporate and
municipal bonds)
Description of the five highest long-term debt ratings by Moody's
(Moody's applies numerical modifiers (e.g., 1, 2, and 3) in each rating category
to indicate the security's ranking within the category):
Aaa. Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa. Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements -
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times in the future. Uncertainty of
position characterizes bonds in this class.
Description of the five highest long-term debt ratings by S&P (S&P may
apply a plus (+) or minus (-) to a particular rating classification to show
relative standing within that classification):
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
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<PAGE> 717
A. Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB. Debt rated BB is regarded, on balance, as predominately speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposure to adverse conditions.
Description of the three highest long-term debt ratings by Duff:
AAA. Highest credit quality. The risk factors are negligible being only
slightly more than for risk-free U.S. Treasury debt.
AA+. High credit quality Protection factors are strong.
AA. Risk is modest but may vary slightly from time to time
AA-. because of economic conditions.
A+. Protection factors are average but adequate. However, risk factors
are more variable and greater in periods of economic stress.
Description of the three highest long-term debt ratings by Fitch (plus
or minus signs are used with a rating symbol to indicate the relative position
of the credit within the rating category):
AAA. Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA. Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA." Because
bonds rated in the "AAA" and "AA" categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these
issues is generally rated "[-]+."
A. Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
IBCA's description of its three highest long-term debt ratings:
AAA. Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic or
financial conditions are unlikely to increase investment risk
significantly.
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<PAGE> 718
AA. Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic, or financial
conditions may increase investment risk albeit not very significantly.
A. Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
Short-Term Debt Ratings (may be assigned, for example, to commercial
paper, master demand notes, bank instruments, and letters of credit)
Moody's description of its three highest short-term debt ratings:
Prime-1. Issuers rated Prime-1 (or supporting institutions) have a
superior capacity for repayment of senior short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a
strong capacity for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
S&P's description of its three highest short-term debt ratings:
A-1. This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to have extremely
strong safety characteristics are denoted with a plus sign (+).
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1."
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<PAGE> 719
A-3. Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
Duff's description of its five highest short-term debt ratings (Duff
incorporates gradations of "1+" (one plus) and "1-" (one minus) to assist
investors in recognizing quality differences within the highest rating
category):
Duff 1+. Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
Duff 1. Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
Duff 1-. High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors are
very small.
Duff 2. Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good. Risk
factors are small.
Duff 3. Satisfactory liquidity and other protection factors qualify
issue as to investment grade.
Risk factors are larger and subject to more variation. Nevertheless,
timely payment is expected.
Fitch's description of its four highest short-term debt ratings:
F-1+. Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely
payment.
F-1. Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2. Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as for issues assigned F-1+ or F-1 ratings.
F-3. Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate, however, near-term adverse changes could cause
these securities to be rated below investment grade.
IBCA's description of its three highest short-term debt ratings:
A+. Obligations supported by the highest capacity for timely repayment.
A1. Obligations supported by a very strong capacity for timely
repayment.
A2. Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
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<PAGE> 720
Short-Term Loan/Municipal Note Ratings
Moody's description of its two highest short-term loan/municipal note
ratings:
MIG-1/VMIG-1. This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
MIG-2/VMIG-2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
S&P's description of its two highest municipal note ratings: SP-1. Very
strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will be given
a plus (+) designation.
SP-2. Satisfactory capacity to pay principal and interest.
Short-Term Debt Ratings
Thomson BankWatch, Inc. ("TBW") ratings are based upon a qualitative
and quantitative analysis of all segments of the organization including, where
applicable, holding company and operating subsidiaries.
TBW Ratings do not constitute a recommendation to buy or sell
securities of any of these companies. Further, TBW does not suggest specific
investment criteria for individual clients.
The TBW Short-Term Ratings apply to commercial paper, other senior
short-term obligations and deposit obligations of the entities to which the
rating has been assigned.
The TBW Short-Term Ratings apply only to unsecured instruments that
have a maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an
untimely payment of principal or interest.
TBW-1. The highest category; indicates a very high degree of likelihood
that principal and interest will be paid on a timely basis.
TBW-2. The second highest category; while the degree of safety
regarding timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1".
TBW-3. The lowest investment grade category; indicates that while more
susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and interest in a
timely fashion is considered adequate.
TBW-4. The lowest rating category; this rating is regarded as
non-investment grade and therefore speculative.
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<PAGE> 721
Definitions of Certain Money Market Instruments
Commercial Paper
Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.
Certificates of Deposit
Certificates of Deposit are negotiable certificates issued against
funds deposited in a commercial bank or a savings and loan association for a
definite period of time and earning a specified return. Bankers' Acceptances
Bankers' acceptances are negotiable drafts or bills of exchange,
normally drawn by an importer or exporter to pay for specific merchandise, which
are "accepted" by a bank, meaning, in effect, that the bank unconditionally
agrees to pay the face value of the instrument on maturity.
U.S. Treasury Obligations
U.S. Treasury Obligations are obligations issued or guaranteed as to
payment of principal and interest by the full faith and credit of the U.S.
Government. These obligations may include Treasury bills, notes and bonds, and
issues of agencies and instrumentalities of the U.S. Government, provided such
obligations are guaranteed as to payment of principal and interest by the full
faith and credit of the U.S. Government.
U.S. Government Agency and Instrumentality Obligations
Obligations issued by agencies and instrumentalities of the U.S.
Government include such agencies and instrumentalities as the Government
National Mortgage Association, the Export-Import Bank of the United States, the
Tennessee Valley Authority, the Farmers Home Administration, the Federal Home
Loan Banks, the Federal Intermediate Credit Banks, the Federal Farm Credit
Banks, the Federal Land Banks, the Federal Housing Administration, the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation, and
the Student Loan Marketing Association. Some of these obligations, such as those
of the Government National Mortgage Association are supported by the full faith
and credit of the U.S. Treasury; others, such as those of the Export-Import Bank
of the United States, are supported by the right of the issuer to borrow from
the Treasury; others, such as those of the Federal National Mortgage
Association, are supported by the discretionary authority of the U.S. Government
to purchase the agency's obligations; still others, such as those of the Student
Loan Marketing Association, are supported only by the credit of the
instrumentality. No assurance can be given that the U.S. Government would
provide financial support to U.S. Government-sponsored instrumentalities if it
is not obligated to do so by law. A Fund will invest in the obligations of such
instrumentalities only when the investment adviser believes that the credit risk
with respect to the instrumentality is minimal.
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<PAGE> 1
The Victory Portfolios
EX-99.B1(a)
Delaware Trust Instrument
C-19
<PAGE> 2
THE VICTORY PORTFOLIOS
TRUST INSTRUMENT
DATED DECEMBER 6, 1995
<PAGE> 3
THE VICTORY PORTFOLIOS
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
ARTICLE I - NAME AND DEFINITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.01 Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.02 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II - BENEFICIAL INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 2.01 Shares Of Beneficial Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 2.02 Issuance of Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 2.03 Register of Shares and Share Certificates . . . . . . . . . . . . . . . . . . . . . 3
Section 2.04 Transfer of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.05 Treasury Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.06 Establishment of Series . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.07 Investment in the Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.08 Assets and Liabilities of Series . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 2.09 No Preemptive Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.10 No Personal Liability of Shareholder . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.11 Assent to Trust Instrument . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE III - THE TRUSTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.01 Management of the Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.02 Initial Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.03 Term of Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.04 Vacancies and Appointments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 3.05 Temporary Absence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 3.06 Number of Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 3.07 Effect of Ending of a Trustee's Service . . . . . . . . . . . . . . . . . . . . . . 7
Section 3.08 Ownership of Assets of the Trust . . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE IV - POWERS OF THE TRUSTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.01 Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 4.02 Issuance and Repurchase of Shares . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 4.03 Trustees and Officers as Shareholders . . . . . . . . . . . . . . . . . . . . . . . 11
Section 4.04 Action by the Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 4.05 Chairman of the Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 4.06 Principal Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE V - EXPENSES OF THE TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE VI - INVESTMENT ADVISER, PRINCIPAL UNDERWRITER,
ADMINISTRATOR AND TRANSFER AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 6.01 Investment Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 6.02 Principal Underwriter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
i
<PAGE> 4
<TABLE>
<S> <C>
Section 6.03 Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 6.04 Transfer Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 6.05 Parties to Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 6.06 Provisions and Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE VII - SHAREHOLDERS' VOTING POWERS AND MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 7.01 Voting Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 7.02 Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 7.03 Quorum and Required Vote . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE VIII - CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 8.01 Appointment and Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 8.02 Central Certificate System . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE IX - DISTRIBUTIONS AND REDEMPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 9.01 Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 9.02 Redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 9.03 Determination of Net Asset Value and Valuation of Portfolio . . . . . . . . . . .
Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 9.04 Suspension of the Right of Redemption . . . . . . . . . . . . . . . . . . . . . . . 19
Section 9.05 Redemption of Shares in Order to Qualify as Regulated Investment Company . . . . . 19
ARTICLE X - LIMITATION OF LIABILITY AND INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 10.01 Limitation of Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 10.02 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 10.03 Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE XI - MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 11.1 Trust Not A Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 11.02 Trustee's Good Faith Action, Expert Advice, No Bond or Surety . . . . . . . . . . 21
Section 11.03 Establishment of Record Dates . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 11.04 Termination of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 11.05 Reorganization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 11.06 Filing of Copies, References, Headings . . . . . . . . . . . . . . . . . . . . . 23
Section 11.07 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 11.08 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 11.09 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 11.10 Name Reservation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 11.11 Provisions in Conflict With Law . . . . . . . . . . . . . . . . . . . . . . . . . 25
</TABLE>
ii
<PAGE> 5
THE VICTORY PORTFOLIOS
December 6, 1995
TRUST INSTRUMENT, made by Robert G. Brown, Edward P. Campbell, Harry
Gazelle, Thomas F. Morrissey, Stanley I. Landgraf, Leigh A. Wilson, H. Patrick
Swygert and (the "Trustees").
WHEREAS, the Trustees desire to establish a business trust for the
investment and reinvestment of funds contributed thereto;
NOW THEREFORE, the Trustees declare that all money and property
contributed to the trust hereunder shall be held and managed in trust under
this Trust Instrument as herein set forth below.
ARTICLE I
NAME AND DEFINITION
SECTION 1.01 NAME. The name of the trust created hereby is "The
Victory Portfolios."
SECTION 1.02 DEFINITIONS. Wherever used herein, unless otherwise
required by the context or specifically provided:
(a) The "1940 Act" means the Investment Company Act of 1940, as
amended from time to time. Whenever reference is made hereunder to the 1940
Act, such references shall be interpreted as including any applicable order or
orders of the Commission or any rules or regulations adopted by the Commission
thereunder or interpretive releases of the Commission staff;
(b) "Bylaws" means the Bylaws of the Trust as adopted by the
Trustees, as amended from time to time;
(c) "Commission" has the meaning given it in the 1940 Act. In
addition, "Affiliated Person," "Assignment," "Interested Person" and "Principal
Underwriter" shall have the respective meanings given them in the 1940 Act.
"Majority Shareholder Vote" shall have the same meaning as the term "vote of a
majority of the outstanding voting securities" under the 1940 Act;
(d) "Delaware Act" refers to Chapter 38 of Title 12 of the
Delaware Code entitled "Treatment of Delaware Business Trusts," as amended from
time to time;
(e) "Net Asset Value" means the net asset value of each Series of
the Trust determined in the manner provided in Article IX, Section 9.03 hereof;
(f) "Outstanding Shares" means those Shares shown from time to
time in the books of the Trust or its transfer agent as then issued and
outstanding, but shall not include Shares
<PAGE> 6
which have been redeemed or repurchased by the Trust and which are at the time
held in the treasury of the Trust;
(g) "Series" means a series of Shares of the Trust established in
accordance with the provisions of Article II, Section 2.06 hereof;
(h) "Shareholder" means a record owner of Outstanding Shares of
the Trust;
(i) "Shares" means the equal proportionate transferable units of
beneficial interest into which the beneficial interest of each Series of the
Trust or class thereof shall be divided and may include fractions of Shares as
well as whole Shares;
(j) The "Trust" means The Victory Portfolios, a Delaware business
trust, and reference to the Trust when applicable to one or more Series of the
Trust, shall refer to any such Series;
(k) The "Trustees" means the person or persons who has or have
signed this Trust Instrument so long as he or they shall continue in office in
accordance with the terms hereof and all other persons who may from time to
time be duly qualified and serving as Trustees in accordance with the
provisions of Article III hereof, and reference herein to a Trustee or to the
Trustees shall refer to the individual Trustees in their respective capacity as
Trustees hereunder;
(l) "Trust Property" means any and all property, real or personal,
tangible or intangible, which is owned or held by or for the account of one or
more of the Trust or any Series, or the Trustees on behalf of the Trust or any
Series.
ARTICLE II
BENEFICIAL INTEREST
SECTION 2.01 SHARES OF BENEFICIAL INTEREST. The beneficial interest
in the Trust shall be divided into such Shares of one or more separate and
distinct Series or classes of a Series as set forth in Section 2.06 or as the
Trustees shall otherwise from time to time create and establish as provided in
Section 2.06. The number of Shares of each Series and class thereof authorized
hereunder is unlimited. Each Share shall have no par value. All Shares issued
hereunder, including without limitation Shares issued in connection with a
dividend paid in Shares or a split or reverse split of Shares, shall be fully
paid and nonassessable.
SECTION 2.02 ISSUANCE OF SHARES. The Trustees in their discretion
may, from time to time, without a vote of the Shareholders, issue Shares, in
addition to the then issued and outstanding Shares and Shares held in the
treasury, to such party or parties and for such amount and type of
consideration, subject to applicable law, including cash or securities, at such
time or times and on such terms as the Trustees may deem appropriate, and may
in such manner acquire other assets (including the acquisition of assets
subject to, and in connection with, the assumption of liabilities) and
businesses. In connection with any issuance of Shares, the Trustees may issue
fractional Shares and Shares held in the treasury. The Trustees may from
-2-
<PAGE> 7
time to time divide or combine the Shares into a greater or lesser number
without thereby changing the proportionate beneficial interests in the Trust.
Contributions to the Trust may be accepted for, and Shares shall be redeemed
as, whole Shares and/or 1/1000th of a Share or integral multiples thereof. The
Trustees or any person the Trustees may authorize for the purpose may, in their
discretion, reject any application for the issuance of shares.
SECTION 2.03 REGISTER OF SHARES AND SHARE CERTIFICATES. A register
shall be kept at the principal office of the Trust or an office of the Trust's
transfer agent which shall contain the names and addresses of the Shareholders
of each Series, the number of Shares of that Series (or any class or classes
thereof) held by them respectively and a record of all transfers thereof. No
share certificates shall be issued by the Trust except as the Trustees may
otherwise authorize, and the persons indicated as shareholders in such register
shall be entitled to receive dividends or other distributions or otherwise to
exercise or enjoy the rights of Shareholders. No Shareholder shall be entitled
to receive payment of any dividend or other distribution, nor to have notice
given to him as herein or in the Bylaws provided, until he has given his
address to the transfer agent or such officer or other agent of the Trustees as
shall keep the said register for entry thereon.
SECTION 2.04 TRANSFER OF SHARES. Except as otherwise provided by the
Trustees, Shares shall be transferable on the records of the Trust only by the
record holder thereof or by his agent thereunto duly authorized in writing,
upon delivery to the Trustees or the Trust's transfer agent of a duly executed
instrument of transfer and such evidence of the genuineness of such execution
and authorization and of such other matters as may be required by the Trustees.
Upon such delivery the transfer shall be recorded on the register of the Trust.
Until such record is made, the Shareholder of record shall be deemed to be the
holder of such Shares for all purposes hereunder and neither the Trustees nor
the Trust, nor any transfer agent or registrar nor any officer, employee or
agent of the Trust shall be affected by any notice of the proposed transfer.
SECTION 2.05 TREASURY SHARES. Shares held in the treasury shall,
until reissued pursuant to Section 2.02 hereof, not confer any voting rights on
the Trustees, nor shall such Shares be entitled to any dividends or other
distributions declared with respect to the Shares.
SECTION 2.06 ESTABLISHMENT OF SERIES AND CLASSES. The Trust created
hereby shall consist initially of twenty-four Series, each of which corresponds
to a series of shares of The Victory Portfolios, a Massachusetts business trust
(the "Predecessor Trust"), and which is specified by name on Schedule A
attached hereto, and each Series shall initially consist of such classes of
Shares as are designated on Schedule A, which correspond to those of the
respective series of the Predecessor Trust. Distinct records shall be
maintained by the Trust for each Series and the assets associated with each
Series shall be held and accounted for separately from the assets of the Trust
or any other Series. The Trustees shall have full power and authority, in
their sole discretion and without obtaining any prior authorization or vote of
the Shareholders of any Series, to establish and designate and to change in any
manner any Series or any classes of initial or additional Series and to fix
such preferences, voting powers, rights and privileges of such Series or
classes thereof as the Trustees may from time to time determine, to divide or
combine the Shares or any Series or classes thereof into a greater or lesser
number, to classify or reclassify any issued Shares or any Series or classes
thereof into one or more Series or classes
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of Shares, and to take such other action with respect to the Shares as the
Trustees may deem desirable. The establishment and designation of any Series
(other than those established pursuant to the first sentence of this Section
2.06) shall be effective upon the adoption of a resolution by a majority of the
Trustees setting forth such establishment and designation and the relative
rights and preferences of the Shares of such Series. A Series may issue any
number of Shares, but need not issue Shares. At any time that there are no
Shares outstanding of any particular Series previously established and
designated, the Trustees may by a majority vote abolish that Series and the
establishment and designation thereof.
All references to Shares in this Trust Instrument shall be deemed to
be Shares of any or all Series, or classes thereof as the context may require.
All provisions herein relating to the Trust shall apply equally to each Series
of the Trust, and each class thereof, except as the context otherwise requires.
Each Share of a Series of the Trust shall represent an equal
beneficial interest in the net assets of such Series. Each holder of Shares of
a Series shall be entitled to receive his proportionate share of all
distributions made with respect to such Series, based upon the number of full
and fractional Shares of the Series held. Upon redemption of his Shares, such
Shareholder shall be paid solely out of the funds and property of such Series
of the Trust.
SECTION 2.07 INVESTMENT IN THE TRUST. The Trustees shall accept
investments in any Series from such persons and on such terms as they may from
time to time authorize. At the Trustees' discretion, such investments, subject
to applicable law, may be in the form of cash or securities in which the
affected Series is authorized to invest, valued as provided in Article IX
Section 9.03 hereof. Investments in a Series shall be credited to each
Shareholder's account in the form of full and fractional Shares at the net
asset value per Share next determined after the investment is received or
accepted as may be determined by the Trustees; provided, however, that the
Trustees may, in their sole discretion, (a) fix minimum amounts for initial and
subsequent investments or (b) impose a sales charge upon investments in such
manner and at such time determined by the Trustees.
SECTION 2.08 ASSETS AND LIABILITIES OF SERIES. All consideration
received by the Trust for the issue or sale of Shares of a particular Series,
together with all assets in which such consideration is invested or reinvested,
all income, earnings, profits, and proceeds thereof including any proceeds
derived from the sale, exchange or liquidation of such assets, and any funds or
payments derived from any reinvestment of such proceeds in whatever form the
same may be, shall be held and accounted for separately from the other assets
of the Trust and of every other Series and may be referred to herein as "assets
belonging to" that Series. The assets belonging to a particular Series shall
belong to that Series for all purposes, and to no other Series, and shall be
subject only to the rights of creditors of that Series. In addition, any
assets, income, earnings, profits or funds, or payments and proceeds with
respect thereto, which are not readily identifiable as belonging to any
particular Series shall be allocated by the Trustees between and among one or
more of the Series in such manner as the Trustees, in their sole discretion,
deem fair and equitable. Each such allocation shall be conclusive and binding
upon the Shareholders of all Series for all purposes, and such assets, income,
earnings, profits or funds, or payments and proceeds with respect thereto shall
be assets belonging to that Series.
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The assets belonging to a particular Series shall be so recorded upon the books
of the Trust, and shall be held by the Trustees in trust for the benefit of the
holders of Shares of that Series. The assets belonging to each particular
Series shall be charged with the liabilities of that Series and all expenses,
costs, charges and reserves attributable to that Series. Any general
liabilities, expenses, costs, charges or reserves of the Trust which are not
readily identifiable as belonging to any particular Series shall be allocated
and charged by the Trustees between or among any one or more of the Series in
such manner as the Trustees in their sole discretion deem fair and equitable.
Each such allocation shall be conclusive and binding upon the Shareholders of
all Series for all purposes. Without limitation of the foregoing provisions of
this Section 2.08, but subject to the right of the Trustees in their discretion
to allocate general liabilities, expenses, costs, changes or reserves as herein
provided, the debts, liabilities, obligations and expenses incurred, contracted
for or otherwise existing with respect to a particular Series shall be
enforceable against the assets of such Series only, and not against the assets
of the Trust generally. Notice of this contractual limitation on inter-Series
liabilities may, in the Trustee's sole discretion, be set forth in the
certificate of trust of the Trust (whether originally or by amendment) as filed
or to be filed in the Office of the Secretary of State of the State of Delaware
pursuant to the Delaware Act, and upon the giving of such notice in the
certificate of trust, the statutory provisions of Section 3804 of the Delaware
Act relating to limitations on inter-Series liabilities (and the statutory
effect under Section 3804 of setting forth such notice in the certificate of
trust) shall become applicable to the Trust and each Series. Any person
extending credit to, contracting with or having any claim against any Series
may look only to the assets of that Series to satisfy or enforce any debt, with
respect to that Series. No Shareholder or former Shareholder of any Series
shall have a claim on or any right to any assets allocated or belonging to any
other Series.
SECTION 2.09 NO PREEMPTIVE RIGHTS. Shareholders shall have no
preemptive or other right to subscribe to any additional Shares or other
securities issued by the Trust or the Trustees, whether of the same or other
Series.
SECTION 2.10 NO PERSONAL LIABILITY OF SHAREHOLDER. No Shareholder
shall be personally liable for the debts, liabilities, obligation and expenses
incurred by, contracted for, or otherwise existing with respect to, the Trust
or by or on behalf of any Series. The Trustees shall have no power to bind any
Shareholder personally or to call upon any Shareholder for the payment of any
sum of money or assessment whatsoever other than such as the Shareholder may at
any time personally agree to pay by way of subscription for any Shares or
otherwise. Every note, bond, contract or other understanding issued by or on
behalf of the Trust or the Trustees relating to the Trust or to a Series shall
include a recitation limiting the obligation represented thereby to the Trust
or to one or more Series and its or their assets (but the omission of such a
recitation shall not operate to bind any Shareholder or Trustee of the Trust).
SECTION 2.11 ASSENT TO TRUST INSTRUMENT. Every Shareholder, by virtue
of having purchased a Share or by virtue of having received a Share in
connection with the conversion of the Predecessor Trust, shall become a
Shareholder and shall be held to have expressly assented and agreed to be bound
by the terms hereof.
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ARTICLE III
THE TRUSTEES
SECTION 3.01 MANAGEMENT OF THE TRUST. The Trustees shall have
exclusive and absolute control over the Trust Property and over the business of
the Trust to the same extent as if the Trustees were the sole owners of the
Trust Property and business in their own right, but with such powers of
delegation as may be permitted by this Trust Instrument. The Trustees shall
have power to conduct the business of the Trust and carry on its operations in
any and all of its branches and maintain offices both within and without the
State of Delaware, in any and all states of the United States of America, in
the District of Columbia, in any and all commonwealths, territories,
dependencies, colonies, or possessions of the United States of America, and in
any foreign jurisdiction and to do all such other things and execute all such
instruments as they deem necessary, proper or desirable in order to promote the
interests of the Trust although such things are not herein specifically
mentioned. Any determination as to what is in the interests of the Trust made
by the Trustees in good faith shall be conclusive. In construing the
provisions of this Trust Instrument, the presumption shall be in favor of a
grant of power to the Trustees.
The enumeration of any specific power in this Trust Instrument shall
not be construed as limiting the aforesaid power. The powers of the Trustees
may be exercised without order of or resort to any court.
Except for the Trustees named herein or appointed to fill vacancies
pursuant to Section 3.04 of this Article III, the Trustees shall be elected by
the Shareholders owning of record a plurality of the Shares voting at a meeting
of Shareholders. Any Shareholder meeting held for such purpose shall be held
on a date fixed by the Trustees. In the event that less than a majority of the
Trustees holding office have been elected by Shareholders, the Trustees then in
office will call a Shareholders' meeting for the election of Trustees in
accordance with the provisions of the 1940 Act.
SECTION 3.02 INITIAL TRUSTEES. The initial Trustees shall be the
persons named herein. The (i) election of Trustees and (ii) an approval of the
Plan of Conversion for the transfer of assets from the Predecessor Trust to the
Trust, at the Special Meeting of the Shareholders to be conducted in accordance
with the Proxy Statement of the Predecessor Trust dated October __, 1995 shall
be deemed to constitute an election of Trustees for all purposes hereunder,
including for purposes of the last sentence of Section 3.01.
SECTION 3.03 TERM OF OFFICE. The Trustees shall hold office during
the lifetime of this Trust, and until its termination as herein provided;
except (a) that any Trustee may resign his trust by written instrument signed
by him and delivered to the other Trustees, which shall take effect upon such
delivery or upon such later date as is specified therein; (b) that any Trustee
may be removed at any time by written instrument, signed by at least two-thirds
of the number of Trustees prior to such removal specifying the date when such
removal shall become effective; (c) that any Trustee who requests in writing to
be retired or who has died, become physically or mentally incapacitated by
reason of illness or otherwise, or is otherwise unable to serve, may be retired
by written instrument signed by a majority of the other Trustees, specifying
the date
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of his retirement; and (d) that a Trustee may be removed at any meeting of the
Shareholders of the Trust by a vote of Shareholders owning at least two-thirds
of the Outstanding Shares of the Trust.
SECTION 3.04 VACANCIES AND APPOINTMENTS. In case of a Trustee's
declination to serve, death, resignation, retirement, removal, physical or
mental incapacity by reason of illness, disease or otherwise, or if a Trustee
is otherwise unable to serve, or if there is an increase in the number of
Trustees, a vacancy shall occur. Whenever a vacancy in the Board of Trustees
shall occur, until such vacancy is filled, the other Trustees shall have all
the powers hereunder and the certificate of the other Trustees of such vacancy
shall be conclusive. In the case of a vacancy, the remaining Trustees shall
fill such vacancy by appointing such other person as they in their discretion
see fit, to the extent consistent with the limitations provided under the 1940
Act. Such appointment shall be evidenced by a written instrument signed by a
majority of the Trustees in office or by resolution of the Trustees, duly
adopted, which shall be recorded in the minutes of a meeting of the Trustees,
whereupon the appointment shall take effect.
An appointment of a Trustee may be made by the Trustees then in office
in anticipation of a vacancy to occur by reason of retirement, resignation or
increase in number of Trustees effective at a later date, provided that said
appointment shall become effective only at or after the effective date of said
retirement, resignation or increase in number of Trustees. As soon as any
person appointed as a Trustee pursuant to this Section 3.04 shall have accepted
this Trust, the trust estate shall vest in the new Trustee or Trustees,
together with the continuing Trustees, without any further act or conveyance,
and such person shall be deemed a Trustee.
SECTION 3.05 TEMPORARY ABSENCE. Any Trustee may, by power of
attorney, delegate his power for a period not exceeding six months at any time
to any other Trustee or Trustees, provided that in no case shall fewer than two
Trustees personally exercise the other powers hereunder except as herein
otherwise expressly provided.
SECTION 3.06 NUMBER OF TRUSTEES. The number of Trustees shall be at
least three (3), and thereafter shall be such number as shall be fixed from
time to time by a majority of the Trustees, provided, however, that the number
of Trustees shall in no event be more than twelve (12).
SECTION 3.07 EFFECT OF ENDING OF A TRUSTEE'S SERVICE. The
declination to serve, death, resignation, retirement, removal, incapacity, or
inability of the Trustees, or any one of them, shall not operate to terminate
the trust or to revoke any existing agency created pursuant to the terms of
this Trust Instrument.
SECTION 3.08 OWNERSHIP OF ASSETS OF THE TRUST. The assets of the
Trust and of each Series shall be held separate and apart from any assets now
or hereafter held in any capacity other than as Trustee hereunder by the
Trustees or any successor Trustees. Legal title in all of the assets of the
Trust and the right to conduct any business shall at all times be considered as
vested in the Trustees on behalf of the Trust, except that the Trustees may
cause legal title to any Trust Property to be held by, or in the name of, the
Trust or in the name of any person as nominee. No Shareholder shall be deemed
to have a severable ownership in any individual asset
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of the Trust or of any Series or any right of partition or possession thereof
but each Shareholder shall have, except as otherwise provided for herein, a
proportionate undivided beneficial interest in the Trust or Series based upon
the number of Shares owned. The Shares shall be personal property giving only
the rights specifically set forth in this Trust Instrument.
ARTICLE IV
POWERS OF THE TRUSTEES
SECTION 4.01 POWERS. The Trustees in all instances shall act as
principals, and are and shall be free from the control of the Shareholders.
The Trustees shall have full power and authority to do any and all acts and to
make and execute any and all contracts and instruments that they may consider
necessary or appropriate in connection with the management of the Trust. The
Trustees shall not in any way be bound or limited by present or future laws or
customs in regard to trust investments, but shall have full authority and power
to make any and all investments which they, in their sole discretion, shall
deem proper to accomplish the purpose of this Trust without recourse to any
court or other authority. Subject to any applicable limitation in this Trust
Instrument or the Bylaws of the Trust, the Trustees shall have the power and
authority:
(a) To invest and reinvest cash and other property (including
investment, notwithstanding any other provision hereof, of all of the assets of
any Series in a single open-end investment company, including investment by
means of transfer of such assets in exchange for an interest or interests in
such investment company), and to hold cash or other property of the Trust
uninvested, without in any event being bound or limited by any present or
future law or custom in regard to investments by trustees, and to sell,
exchange, lend, pledge, mortgage, hypothecate, write options on and lease any
or all of the assets of the Trust:
(b) To operate as and carry on the business of an investment
company, and exercise all the powers necessary and appropriate to the conduct
of such operations;
(c) To borrow money and in this connection issue notes or other
evidence of indebtedness; to secure borrowings by mortgaging, pledging or
otherwise subjecting as security the Trust Property; to endorse, guarantee, or
undertake the performance of an obligation or engagement of any other Person
and to lend Trust Property;
(d) To provide for the distribution of interests of the Trust
either through a principal underwriter in the manner hereinafter provided for
or by the Trust itself, or both, or otherwise pursuant to a plan of
distribution of any kind;
(e) To adopt Bylaws not inconsistent with this Trust Instrument
providing for the conduct of the business of the Trust and to amend and repeal
them to the extent that they do not reserve that right to the Shareholders;
such Bylaws shall be deemed incorporated and included in this Trust Instrument;
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(f) To elect and remove such officers and appoint and terminate
such agents as they consider appropriate;
(g) To employ one or more banks, trust companies or companies that
are members of a national securities exchange or such other entities as the
Commission may permit as custodians of any assets of the Trust subject to any
conditions set forth in this Trust Instrument or in the Bylaws;
(h) To retain one or more transfer agents and shareholder
servicing agents, or both;
(i) To set record dates in the manner provided herein or in the
Bylaws;
(j) To delegate such authority as they consider desirable to any
officers of the Trust and to any investment adviser, manager, custodian,
underwriter or other agent or independent contractor;
(k) To sell or exchange any or all of the assets of the Trust,
subject to the provisions of Article XI, subsection 11.04(b) hereof;
(l) To vote or give assent, or exercise any rights of ownership,
with respect to stock or other securities or property, and to execute and
deliver powers of attorney to such person or persons as the Trustees shall deem
proper, granting to such person or persons such power and discretion with
relation to securities or property as the Trustees shall deem proper;
(m) To exercise powers and rights of subscription or otherwise
which in any manner arise out of ownership of securities;
(n) To hold any security or property in a form not indicating any
trust, whether in bearer, book entry, unregistered or other negotiable form; or
either in the name of the Trust or in the name of a custodian or a nominee or
nominees, subject in either case to proper safeguards according to the usual
practice of Delaware business trusts or investment companies;
(o) To establish separate and distinct Series with separately
defined investment objectives and policies and distinct investment purposes in
accordance with the provisions of Article II hereof and to establish classes of
such Series having relative rights, powers and duties as they may provide
consistent with applicable law;
(p) Subject to the provisions of Section 3804 of the Delaware Act,
to allocate assets, liabilities and expenses of the Trust to a particular
Series or to apportion the same between or among two or more Series, provided
that any liabilities or expenses incurred by a particular Series shall be
payable solely out of the assets belonging to that Series as provided for in
Article II hereof;
(q) To consent to or participate in any plan for the
reorganization, consolidation or merger of any corporation or concern, any
security of which is held in the Trust; to consent to
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any contract, lease, mortgage, purchase, or sale of property by such
corporation or concern, and to pay calls or subscriptions with respect to any
security held in the Trust;
(r) To compromise, arbitrate, or otherwise adjust claims in favor
of or against the Trust or any matter in controversy including, but not limited
to, claims for taxes;
(s) To make distributions of income and of capital gains to
Shareholders in the manner provided herein;
(t) To establish, from time to time, a minimum investment for
Shareholders in the Trust or in one or more Series or class, and to require the
redemption of the Shares of any Shareholders whose investment is less than such
minimum upon giving notice to such Shareholder;
(u) To establish one or more committees, to delegate any of the
powers of the Trustees to said committees and to adopt a committee charter
providing for such responsibilities, membership (including Trustees, officers
or other agents of the Trust therein) and any other characteristics of said
committees as the Trustees may deem proper. Notwithstanding the provisions of
this Article IV, and in addition to such provisions or any other provision of
this Trust Instrument or of the Bylaws, the Trustees may by resolution appoint
a committee consisting of less than the whole number of Trustees then in
office, which committee may be empowered to act for and bind the Trustees and
the Trust, as if the acts of such committee were the acts of all the Trustees
then in office, with respect to the institution, prosecution, dismissal,
settlement, review or investigation of any action, suit or proceeding which
shall be pending or threatened to be brought before any court, administrative
agency or other adjudicatory body;
(v) To interpret the investment policies, practices or limitations
of any Series;
(w) To establish a registered office and have a registered
agent in the state of Delaware; and
(x) In general to carry on any other business in connection with
or incidental to any of the foregoing powers, to do everything necessary,
suitable or proper for the accomplishment of any purpose or the attainment of
any object or the furtherance of any power hereinbefore set forth, either alone
or in association with others, and to do every other act or thing incidental or
appurtenant to or growing out of or connected with the aforesaid business or
purposes, objects or powers.
The foregoing clauses shall be construed as objects and powers, and
the foregoing enumeration of specific powers shall not be held to limit or
restrict in any manner the general powers of the Trustees. Any action by one
or more of the Trustees in their capacity as such hereunder shall be deemed an
action on behalf of the Trust or the applicable Series, and not an action in an
individual capacity.
The Trustees shall not be limited to investing in obligations maturing
before the possible termination of the Trust.
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No one dealing with the Trustees shall be under any obligation to make
any inquiry concerning the authority of the Trustees, or to see the application
of any payments made or property transferred to the Trustees or upon their
order.
SECTION 4.02 ISSUANCE AND REPURCHASE OF SHARES. The Trustees shall
have the power to issue, sell, repurchase, redeem, retire, cancel, acquire,
hold, resell, reissue, dispose of and otherwise deal in Shares and, subject to
the provisions set forth in Article II and Article IX, to apply to any such
repurchase, redemption, retirement, cancellation or acquisition of Shares any
funds or property of the Trust, or the particular Series of the Trust, with
respect to which such Shares are issued.
SECTION 4.03 TRUSTEES AND OFFICERS AS SHAREHOLDERS. Any Trustee,
officer or other agent of the Trust may acquire, own and dispose of Shares to
the same extent as if he were not a Trustee, officer or agent; and the Trustees
may issue and sell or cause to be issued and sold Shares to and buy such Shares
from any such person or any firm or company in which he is interested, subject
only to the general limitations herein contained as to the sale and purchase of
such Shares; and all subject to any restrictions which may be contained in the
Bylaws.
SECTION 4.04 ACTION BY THE TRUSTEES. In any action taken by the
Trustees hereunder, unless otherwise specified, the Trustees shall act by
majority vote at a meeting duly called or by unanimous written consent without
a meeting or by telephone meeting provided a quorum of Trustees participate in
any such telephone meeting, unless the 1940 Act requires that a particular
action be taken only at a meeting at which the Trustees are present in person.
At any meeting of the Trustees, a majority of the Trustees shall constitute a
quorum. Meetings of the Trustees may be called orally or in writing by the
Chairman of the Board of Trustees or by any two other Trustees. Notice of the
time, date and place of all meetings of the Trustees shall be given by the
person calling the meeting to each Trustee by telephone, facsimile or other
electronic mechanism sent to his home or business address at least twenty-four
hours in advance of the meeting or by written notice mailed to his home or
business address at least seventy-two hours in advance of the meeting. Notice
need not be given to any Trustee who attends the meeting without objecting to
the lack of notice or who executes a written waiver of notice with respect to
the meeting. Any meeting conducted by telephone shall be deemed to take place
at the principal office of the Trust, as determined by the Bylaws or by the
Trustees. Subject to the requirements of the 1940 Act, the Trustees by
majority vote may delegate to any one or more of their number their authority
to approve particular matters or take particular actions on behalf of the
Trust. Written consents or waivers of the Trustees may be executed in one or
more counterparts. Execution of a written consent or waiver and delivery
thereof to the Trust may be accomplished by facsimile or other similar
electronic mechanism.
SECTION 4.05 CHAIRMAN OF THE TRUSTEES. The Trustees shall appoint one
of their number to be Chairman of the Board of Trustees. The Chairman shall
preside at all meetings of the Trustees, shall be responsible for the execution
of policies established by the Trustees and the administration of the Trust,
and may be (but is not required to be) the chief executive, financial and/or
accounting officer of the Trust.
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SECTION 4.06 PRINCIPAL TRANSACTIONS. Except to the extent prohibited
by applicable law, the Trustees may, on behalf of the Trust, buy any securities
from or sell any securities to, or lend any assets of the Trust to, any Trustee
or officer of the Trust or any firm of which any such Trustee or officer is a
member acting as principal, or have any such dealings with any investment
adviser, administrator, distributor or transfer agent for the Trust or with any
Interested Person of such person; and the Trust may employ any such person, or
firm or company in which such person is an Interested Person, as broker, legal
counsel, registrar, investment adviser, administrator, distributor, transfer
agent, dividend disbursing agent, custodian or in any other capacity upon
customary terms.
ARTICLE V
EXPENSES OF THE TRUST
Subject to the provisions of Article II, Section 2.08 hereof, the
Trustees shall be reimbursed from the Trust estate or the assets belonging to
the appropriate Series for their expenses and disbursements, including, without
limitation, interest charges, taxes, brokerage fees and commissions; expenses
of issue, repurchase and redemption of Shares; certain insurance premiums;
applicable fees, interest charges and expenses of third parties, including the
Trust's investment advisers, managers, administrators, distributors, custodian,
transfer agent and fund accountant; fees of pricing, interest, dividend, credit
and other reporting services; costs of membership in trade associations;
telecommunications expenses; funds transmission expenses; auditing, legal and
compliance expenses; costs of forming the Trust and maintaining its existence;
costs of preparing and printing the Trust's prospectuses, statements of
additional information and shareholder reports and delivering them to existing
Shareholders; expenses of meetings of Shareholders and proxy solicitations
therefor; costs of maintaining books and accounts; costs of reproduction,
stationery and supplies; fees and expenses of the Trust's trustees;
compensation of the Trust's officers and employees and costs of other personnel
performing services for the Trust; costs of Trustee meetings; Commission
registration fees and related expenses; state or foreign securities laws
registration fees and related expenses and for such non-recurring items as may
arise, including litigation to which the Trust (or a Trustee acting as such) is
a party, and for all losses and liabilities by them incurred in administering
the Trust, and for the payment of such expenses, disbursements, losses and
liabilities the Trustees shall have a lien on the assets belonging to the
appropriate Series, or in the case of an expense allocable to more than one
Series, on the assets of each such Series, prior to any rights or interests of
the Shareholders thereto. This section shall not preclude the Trust from
directly paying any of the aforementioned fees and expenses.
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ARTICLE VI
INVESTMENT ADVISER, PRINCIPAL UNDERWRITER,
ADMINISTRATOR AND TRANSFER AGENT
SECTION 6.01 INVESTMENT ADVISER.
(a) The Trustees may in their discretion, from time to time, enter
into an investment advisory contract or contracts with respect to the Trust or
any Series whereby the other party or parties to such contract or contracts
shall undertake to furnish the Trustees with such investment advisory,
statistical and research facilities and services and such other facilities and
services, if any, all upon such terms and conditions (including any Shareholder
vote) that may be required under the 1940 Act, as may be prescribed in the
Bylaws, or as the Trustees may in their discretion determine (such terms and
conditions not to be inconsistent with the provisions of this Trust Instrument
or of the Bylaws). Notwithstanding any other provision of this Trust
Instrument, the Trustees may authorize any investment adviser (subject to such
general or specific instructions as the Trustees may from time to time adopt)
to effect purchases, sales or exchanges of portfolio securities, other
investment instruments of the Trust, or other Trust Property on behalf of the
Trustees, or may authorize any officer, agent, or Trustee to effect such
purchases, sales or exchanges pursuant to recommendations of the investment
adviser (and all without further action by the Trustees). Any such purchases,
sales and exchanges shall be deemed to have been authorized by all of the
Trustees.
(b) The Trustees may authorize the investment adviser to employ,
from time to time, one or more sub-advisers to perform such of the acts and
services of the investment adviser, and upon such terms and conditions, as may
be agreed upon between the investment adviser and subadviser (such terms and
conditions not to be inconsistent with the provisions of this Trust Instrument
or of the Bylaws). Any reference in this Trust Instrument to the investment
adviser shall be deemed to include such sub-advisers, unless the context
otherwise requires; provided that no Shareholder approval shall be required
with respect to any sub-adviser unless required under the 1940 Act or other
law, contract or order applicable to the Trust.
SECTION 6.02 PRINCIPAL UNDERWRITER. The Trustees may in their
discretion from time to time enter into an exclusive or non-exclusive
underwriting contract or contracts providing for the sale of Shares, whereby
the Trust may either agree to sell Shares to the other party to the contract or
appoint such other party its sales agent for such Shares. In either case, the
contract shall be on such terms and conditions as may be prescribed in the
Bylaws and as the Trustees may in their discretion determine (such terms and
conditions not to be inconsistent with the provisions of this Trust Instrument
or of the Bylaws); and such contract may also provide for the repurchase or
sale of Shares by such other party as principal or as agent of the Trust.
SECTION 6.03 ADMINISTRATION. The Trustees may in their discretion
from time to time enter into one or more management or administrative contracts
whereby the other party or parties shall undertake to furnish the Trustees with
management or administrative services. The contract or contracts shall be on
such terms and conditions as may be prescribed in the Bylaws and as the
Trustees may in their discretion determine (such terms and conditions not to be
inconsistent with the provisions of this Trust Instrument or of the Bylaws).
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SECTION 6.04 TRANSFER AGENT. The Trustees may in their discretion
from time to time enter into one or more transfer agency and shareholder
service contracts whereby the other party or parties shall undertake to furnish
the Trustees with transfer agency and shareholder services. The contract or
contracts shall be on such terms and conditions as may be prescribed in the
Bylaws and as the Trustees may in their discretion determine (such terms and
conditions not to be inconsistent with the provisions of this Trust Instrument
or of the Bylaws).
SECTION 6.05 PARTIES TO CONTRACT. Any contract of the character
described in Sections 6.01, 6.02, 6.03 and 6.04 of this Article VI or any
contract of the character described in Article VIII hereof may be entered into
with any corporation, firm, partnership, trust or association, although one or
more of the Trustees or officers of the Trust may be an officer, director,
trustee, shareholder, or member of such other party to the contract, and no
such contract shall be invalidated or rendered void or voidable by reason of
the existence of any relationship, nor shall any person holding such
relationship be disqualified from voting on or executing the same in his
capacity as Shareholder and/or Trustee, nor shall any person holding such
relationship be liable merely by reason of such relationship for any loss or
expense to the Trust under or by reason of said contract or accountable for any
profit realized directly or indirectly therefrom, provided that the contract
when entered into was not inconsistent with the provisions of this Article VI
or Article VIII hereof or of the Bylaws. The same person (including a
corporation, firm, partnership, trust, or association) may be the other party
to contracts entered into pursuant to Sections 6.01, 6.02, 6.03 and 6.04 of
this Article VI or pursuant to Article VIII hereof and any individual may be
financially interested or otherwise affiliated with persons who are parties to
any or all of the contracts mentioned in this Section 6.05.
SECTION 6.06 PROVISIONS AND AMENDMENTS. Any contract entered into
pursuant to Section 6.01 or 6.02 of this Article VI shall be consistent with
and subject to the requirements of Section 15 of the 1940 Act, if applicable,
or other applicable Act of Congress hereafter enacted with respect to its
continuance in effect, its termination, and the method of authorization and
approval of such contract or renewal thereof, and no amendment to any contract
entered into pursuant to Section 6.01 of this Article VI shall be effective
unless assented to in a manner consistent with the requirements of said Section
15, as modified by any applicable rule, regulation or order of the Commission.
ARTICLE VII
SHAREHOLDERS' VOTING POWERS AND MEETINGS
SECTION 7.01 VOTING POWERS.
(a) The Shareholders shall have power to vote only (a) for the
election of Trustees to the extent provided in Article III, Section 3.01
hereof, (b) for the removal of Trustees to the extent provided in Article III,
Section 3.03(d) hereof, (c) with respect to any investment advisory contract to
the extent provided in Article VI, Section 6.01 hereof, (d) with respect to an
amendment of this Trust Instrument, to the extent provided in Article XI,
Section 11.08, and (e) with respect to such additional matters relating to the
Trust as may be required by law, by this
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Trust Instrument, or any registration of the Trust with the Commission or any
State, or as the Trustees may consider desirable.
(b) Notwithstanding paragraph (a) of this Section 7.01 or any other
provision of this Trust Instrument (including the Bylaws) which would by its
terms provide for or require a vote of Shareholders, the Trustees may take
action without a Shareholder vote if (i) the Trustees shall have obtained an
opinion of counsel that a vote or approval of such action by Shareholders is
not required under (A) the 1940 Act or any other applicable laws, or (B) any
registrations, undertakings or agreements of the Trust known to such counsel,
and the taking of such action without a Shareholder vote would be consistent
with the best interests of the Shareholders.
(c) On any matter submitted to a vote of the Shareholders, all
Shares shall be voted separately by individual Series, and whenever the
Trustees determine that the matter affects only certain Series, may be
submitted for a vote by only such Series, except (i) when required by the 1940
Act, Shares shall be voted in the aggregate and not by individual Series; and
(ii) when the Trustees have determined that the matter affects the interests of
more than one Series and that voting by shareholders of all Series would be
consistent with the 1940 Act, then the Shareholders of all such Series shall be
entitled to vote thereon (either by individual Series or by Shares voted in the
aggregate, as the Trustees in their discretion may determine). The Trustees
may also determine that a matter affects only the interests of one or more
classes of a Series, in which case (or if required under the 1940 Act) such
matter shall be voted on by such class or classes. Each whole Share shall be
entitled to one vote as to any matter on which it is entitled to vote, and each
fractional Share shall be entitled to a proportionate fractional vote. There
shall be no cumulative voting in the election of Trustees. Shares may be voted
in person or by proxy or in any manner provided for in the Bylaws. A proxy may
be given in writing. The Bylaws may provide that proxies may also, or may
instead, be given by any electronic or telecommunications device or in any
other manner. Notwithstanding anything else herein or in the Bylaws, in the
event a proposal by anyone other than the officers or Trustees of the Trust is
submitted to a vote of the Shareholders, or in the event of any proxy contest
or proxy solicitation or proposal in opposition to any proposal by the officers
or Trustees of the Trust, Shares may be voted only in person or by written
proxy. Until Shares are issued, the Trustees may exercise all rights of
Shareholders and may take any action required or permitted by law, this Trust
Instrument or any of the Bylaws of the Trust to be taken by Shareholders.
SECTION 7.02 MEETINGS. The Shareholders' meeting held in order to
elect the initial Trustees shall be the meeting provided for in Section 3.02 of
Article III hereof. Meetings may be held within or without the State of
Delaware. Special meetings of the Shareholders of any Series may be called by
the Trustees and shall be called by the Trustees upon the written request of
Shareholders owning at least one tenth of the Outstanding Shares of the Trust
entitled to vote. Whenever ten or more Shareholders meeting the qualifications
set forth in Section 16(c) of the 1940 Act, as the same may be amended from
time to time, seek the opportunity of furnishing materials to the other
Shareholders with a view to obtaining signatures on such a request for a
meeting, the Trustees shall comply with the provisions of said Section 16(c)
with respect to providing such Shareholders access to the list of the
Shareholders of record of the Trust or the mailing of such materials to such
Shareholders of record, subject to any rights provided to the Trust or any
Trustees provided by said Section 16(c). Notice shall be sent, by First Class
Mail
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or such other means determined by the Trustees, at least 10 days prior to any
such meeting. Notwithstanding anything to the contrary in this Section 7.02,
the Trustees shall not be required to call a special meeting of the
Shareholders of any Series or to provide Shareholders seeking the opportunity
of furnishing the materials to other Shareholders with a view to obtaining
signatures on a request for a meeting except to the extent required under the
1940 Act.
SECTION 7.03 QUORUM AND REQUIRED VOTE. One-third of Shares
outstanding and entitled to vote in person or by proxy as of the record date
for a Shareholders' meeting shall be a quorum for the transaction of business
at such Shareholders' meeting, except that where any provision of law or of
this Trust Instrument permits or requires that holders of any Series shall vote
as a Series (or that holders of a class shall vote as a class), then one-third
of the aggregate number of Shares of that Series (or that class) entitled to
vote shall be necessary to constitute a quorum for the transaction of business
by that Series (or that class). Any meeting of Shareholders may be adjourned
from time to time by a majority of the votes properly cast upon the question of
adjourning a meeting to another date and time, whether or not a quorum is
present. Any adjourned session or sessions may be held, within a reasonable
time after the date set for the original meeting, without the necessity of
further notice. Except when a larger vote is required by law or by any
provision of this Trust Instrument or the Bylaws, a majority of the Shares
voted in person or by proxy shall decide any questions and a plurality shall
elect a Trustee, provided that where any provision of law or of this Trust
Instrument permits or requires that the holders of any Series shall vote as a
Series (or that the holders of any class shall vote as a class), then a
majority of the Shares present in person or by proxy of that Series (or class),
voted on the matter in person or by proxy shall decide that matter insofar as
that Series (or class) is concerned. Shareholders may act by unanimous written
consent, to the extent not inconsistent with the 1940 Act, and any such actions
taken by a Series (or class) may be consented to unanimously in writing by
Shareholders of that Series (or class).
ARTICLE VIII
CUSTODIAN
SECTION 8.01 APPOINTMENT AND DUTIES. The Trustees shall employ a
bank, a company that is a member of a national securities exchange, or a trust
company, that in each case shall have capital, surplus and undivided profits of
at least twenty million dollars ($20,000,000) and that is a member of the
Depository Trust Company (or such other person or entity as may be permitted to
act as custodian of the Trust's assets under the 1940 Act) as custodian with
authority as its agent, but subject to such restrictions, limitations and other
requirements, if any, as may be contained in the Bylaws of the Trust: (a) to
hold the securities owned by the Trust and deliver the same upon written order
or oral order confirmed in writing; (b) to receive and receipt for any moneys
due to the Trust and deposit the same in its own banking department or
elsewhere as the Trustees may direct; and (c) to disburse such funds upon
orders or vouchers.
The Trustees may also authorize the custodian to employ one or more
sub-custodians from time to time to perform such of the acts and services of
the custodian, and upon such terms and conditions, as may be agreed upon
between the custodian and such sub-custodian and approved by the Trustees,
provided that in every case such sub-custodian shall be a bank, a company that
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is a member of a national securities exchange, or a trust company organized
under the laws of the United States or one of the states thereof and having
capital, surplus and undivided profits of at least twenty million dollars
($20,000,000) and that is a member of the Depository Trust Company or such
other person or entity as may be permitted by the Commission or is otherwise
able to act as custodian of the Trust's assets in accordance with the 1940 Act.
SECTION 8.02 CENTRAL CERTIFICATE SYSTEM. Subject to the 1940 Act and
such other rules, regulations and orders as the Commission may adopt, the
Trustees may direct the custodian to deposit all or any part of the securities
owned by the Trust in a system for the central handling of securities
established by a national securities exchange or a national securities
association registered with the Commission under the Securities Exchange Act of
1934, as amended, or such other person as may be permitted by the Commission,
or otherwise in accordance with the 1940 Act, pursuant to which system all
securities of any particular class or series of any issuer deposited within the
system are treated as fungible and may be transferred or pledged by bookkeeping
entry without physical delivery of such securities, provided that all such
deposits shall be subject to withdrawal only upon the order of the Trust or its
custodians, sub-custodians or other agents.
ARTICLE IX
DISTRIBUTIONS AND REDEMPTIONS
SECTION 9.01 DISTRIBUTIONS.
(a) The Trustees may from time to time declare and pay dividends
or other distributions with respect to any Series and/or class of a Series.
The amount of such dividends or distributions and the payment of them and
whether they are in cash or any other Trust Property shall be wholly in the
discretion of the Trustees.
(b) Dividends and other distributions may be paid or made to the
Shareholders of record at the time of declaring a dividend or other
distribution or among the Shareholders of record at such other date or time or
dates or times as the Trustees shall determine, which dividends or
distributions, at the election of the Trustees, may be paid pursuant to a
standing resolution or resolutions adopted only once or with such frequency as
the Trustees may determine. The Trustees may adopt and offer to Shareholders
such dividend reinvestment plans, cash dividend payout plans or related plans
as the Trustees shall deem appropriate.
(c) Anything in this Trust Instrument to the contrary
notwithstanding, the Trustees may at any time declare and distribute a stock
dividend to the Shareholders of a particular Series, or class thereof, as of
the record date of that Series fixed as provided in Subsection 9.01(b) hereof.
SECTION 9.02 REDEMPTIONS. In case any holder of record of Shares of
a particular Series desires to dispose of his Shares or any portion thereof he
may deposit at the office of the transfer agent or other authorized agent of
that Series a written request or such other form of request as the Trustees may
from time to time authorize, requesting that the Series purchase the Shares in
accordance with this Section 9.02; and, subject to Section 9.04 hereof, the
Shareholder so
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requesting shall be entitled to require the Series to purchase, and the Series
or the principal underwriter of the Series shall purchase his said Shares, but
only at the Net Asset Value thereof (as described in Section 9.03 of this
Article IX). The Series shall make payment for any such Shares to be redeemed,
as aforesaid, in cash or property from the assets of that Series and, subject
to Section 9.04 hereof, payment for such Shares shall be made by the Series or
the principal underwriter of the Series to the Shareholder of record within
seven (7) days after the date upon which the request is effective. Upon
redemption, shares shall become Treasury shares and may be re-issued from time
to time.
SECTION 9.03 DETERMINATION OF NET ASSET VALUE AND VALUATION OF
PORTFOLIO ASSETS. The term "Net Asset Value" of any Series shall mean that
amount by which the assets of that Series exceed its liabilities, all as
determined by or under the direction of the Trustees. The Trustees may
delegate any of their powers and duties under this Section 9.03 with respect to
valuation of assets and liabilities. Such value shall be determined separately
for each Series and shall be determined on such days and at such times as the
Trustees may determine. Such determination shall be made with respect to
securities for which market quotations are readily available, at the market
value of such securities; and with respect to other securities and assets, at
the fair value as determined in good faith by the Trustees; provided, however,
that the Trustees, without Shareholder approval, may alter the method of
valuing portfolio securities insofar as permitted under the 1940 Act. The
resulting amount, which shall represent the total Net Asset Value of the
particular Series, shall be divided by the total number of shares of that
Series outstanding at the time and the quotient so obtained shall be the Net
Asset Value per Share of that Series. At any time the Trustees may cause the
Net Asset Value per Share last determined to be determined again in similar
manner and may fix the time when such redetermined value shall become
effective.
The Trustees shall not be required to adopt, but may at any time
adopt, discontinue or amend a practice of seeking to maintain the Net Asset
Value per Share of the Series at a constant amount. If, for any reason, the
net income of any Series, determined at any time, is a negative amount, the
Trustees shall have the power with respect to that Series (a) to offset each
Shareholder's pro rata share of such negative amount from the accrued dividend
account of such Shareholder, (b) to reduce the number of Outstanding Shares of
such Series by reducing the number of Shares in the account of each Shareholder
by a pro rata portion of that number of full and fractional Shares which
represents the amount of such excess negative net income, (c) to cause to be
recorded on the books of such Series an asset account in the amount of such
negative net income (provided that the same shall thereupon become the property
of such Series with respect to such Series and shall not be paid to any
Shareholder), which account may be reduced by the amount of dividends declared
thereafter upon the Outstanding Shares of such Series on the day such negative
net income is experienced, until such asset account is reduced to zero; (d) to
combine the methods described in clauses (a) and (b) and (c) of this sentence;
or (e) to take any other action they deem appropriate, in order to cause (or in
order to assist in causing) the Net Asset Value per Share of such Series to
remain at a constant amount per Outstanding Share immediately after each such
determination and declaration. The Trustees shall also have the power not to
declare a dividend out of net income for the purpose of causing the Net Asset
Value per Share to be increased.
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In the event that any Series is divided into classes, the provisions
of this Section 9.03, to the extent applicable as determined in the discretion
of the Trustees and consistent with the 1940 Act and other applicable law, may
be equally applied to each such class.
SECTION 9.04 SUSPENSION OF THE RIGHT OF REDEMPTION. The Trustees may
declare a suspension of the right of redemption or postpone the date of payment
if permitted under the 1940 Act. Such suspension shall take effect at such
time as the Trustees shall specify but not later than the close of business on
the business day next following the declaration of suspension, and thereafter
there shall be no right of redemption or payment until the Trustees shall
declare the suspension at an end. In the case of a suspension of the right of
redemption, a Shareholder may either withdraw his request for redemption or
receive payment based on the Net Asset Value per Share next determined after
the termination of the suspension.
SECTION 9.05 REDEMPTION OF SHARES IN ORDER TO QUALIFY AS REGULATED
INVESTMENT COMPANY. If the Trustees shall, at any time and in good faith, be
of the opinion that direct or indirect ownership of Shares of any Series has or
may become concentrated in any Person to an extent which would disqualify any
Series as a regulated investment company under the Internal Revenue Code, then
the Trustees shall have the power (but not the obligation) by lot or other
means deemed equitable by them (a) to call for redemption by any such person of
a number, or principal amount, of Shares sufficient to maintain or bring the
direct or indirect ownership of Shares into conformity with the requirements
for such qualification and (b) to refuse to transfer or issue Shares to any
person whose acquisition of Shares in question would result in such
disqualification. The redemption shall be effected at the redemption price and
in the manner provided in this Article IX.
The holders of Shares shall upon demand disclose to the Trustees in
writing such information with respect to direct and indirect ownership of
Shares as the Trustees deem necessary to comply with the requirements of any
taxing authority or this Section 9.05.
ARTICLE X
LIMITATION OF LIABILITY AND INDEMNIFICATION
SECTION 10.01 LIMITATION OF LIABILITY. Neither a Trustee nor an
officer of the Trust, when acting in such capacity, shall be personally liable
to any person other than the Trust or the Shareholders for any act, omission or
obligation of the Trust, any Trustee or any officer of the Trust. Neither a
Trustee nor an officer of the Trust shall not be liable for any act or omission
or any conduct whatsoever in his capacity as Trustee or as an officer of the
Trust, provided that nothing contained herein or in the Delaware Act shall
protect any Trustee or any officer of the Trust against any liability to the
Trust or to Shareholders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of the office of Trustee or officer of the Trust
hereunder.
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SECTION 10.02 INDEMNIFICATION.
(a) Subject to the exceptions and limitations contained in
Subsection 10.02(b):
(i) every person who is, or has been, a Trustee or
officer of the Trust (hereinafter referred to as a "Covered Person")
shall be indemnified by the Trust to the fullest extent permitted by
law against liability and against all expenses reasonably incurred or
paid by him in connection with any claim, action, suit or proceeding
in which he becomes involved as a party or otherwise by virtue of his
being or having been a Trustee or officer and against amounts paid or
incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding"
shall apply to all claims, actions, suits or proceedings (civil,
criminal or other, including appeals), actual or threatened while in
office or thereafter, and the words "liability" and "expenses" shall
include, without limitation, attorneys' fees, costs, judgments,
amounts paid in settlement, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Covered
Person:
(i) who shall have been adjudicated by a court or body
before which the proceeding was brought (A) to be liable to the Trust
or its Shareholders by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct
of his office or (B) not to have acted in good faith in the reasonable
belief that his action was in the best interest of the Trust; or
(ii) in the event of a settlement, unless there has been a
determination that such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office, (A) by the court or
other body approving the settlement; (B) by at least a majority of
those Trustees who are neither Interested Persons of the Trust nor are
parties to the matter based upon a review of readily available facts
(as opposed to a full trial-type inquiry); or (C) by written opinion
of independent legal counsel based upon a review of readily available
facts (as opposed to a full trial-type inquiry).
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall not be
exclusive of or affect any other rights to which any Covered Person may now or
hereafter be entitled, shall continue as to a person who has ceased to be a
Covered Person and shall inure to the benefit of the heirs, executors and
administrators of such a person. Nothing contained herein shall affect any
rights to indemnification to which Trust personnel, other than Covered Persons,
and other persons may be entitled by contract or otherwise under law.
(d) Expenses in connection with the preparation and presentation
of a defense to any claim, action, suit or proceeding of the character
described in Subsection (a) of this Section 10.02 may be paid by the Trust or
Series from time to time prior to final disposition thereof upon receipt of an
undertaking by or on behalf of such Covered Person that such amount will be
paid
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over by him to the Trust or Series if it is ultimately determined that he is
not entitled to indemnification under this Section 10.02; provided, however,
that either (i) such Covered Person shall have provided appropriate security
for such undertaking, (ii) the Trust is insured against losses arising out of
any such advance payments or (iii) either a majority of the Trustees who are
neither Interested Persons of the Trust nor parties to the matter, or
independent legal counsel in a written opinion, shall have determined, based
upon a review of readily available facts (as opposed to a trial-type inquiry or
full investigation), that there is reason to believe that such Covered Person
will be found entitled to indemnification under this Section 10.02.
SECTION 10.03 SHAREHOLDERS. In case any Shareholder of any Series
shall be held to be personally liable solely by reason of his being or having
been a Shareholder of such Series and not because of his acts or omissions or
for some other reason, the Shareholder or former Shareholder (or his heirs,
executors, administrators or other legal representatives, or, in the case of a
corporation or other entity, its corporate or other general successor) shall be
entitled out of the assets belonging to the applicable Series to be held
harmless from and indemnified against all loss and expense arising from such
liability. The Trust, on behalf of the affected Series, shall, upon request by
the Shareholder, assume the defense of any claim made against the Shareholder
for any act or obligation of the Series and satisfy any judgment thereon from
the assets of the Series.
ARTICLE XI
MISCELLANEOUS
SECTION 11.01 TRUST NOT A PARTNERSHIP. It is hereby expressly
declared that a trust and not a partnership is created hereby. No Trustee
hereunder shall have any power to bind personally either the Trust officers or
any Shareholder. All persons extending credit to, contracting with or having
any claim against the Trust or the Trustees shall look only to the assets of
the appropriate Series or (if the Trustees shall have yet to have established
Series) of the Trust for payment under such credit, contract or claim; and
neither the Shareholders nor the Trustees, nor any of their agents, whether
past, present or future, shall be personally liable therefor. Nothing in this
Trust Instrument shall protect a Trustee against any liability to which the
Trustee would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
the office of Trustee hereunder.
SECTION 11.02 TRUSTEE'S GOOD FAITH ACTION, EXPERT ADVICE, NO BOND OR
SURETY. The exercise by the Trustees or the officers of the Trust of their
powers and discretion hereunder in good faith and with reasonable care under
the circumstances then prevailing shall be binding upon everyone interested.
Subject to the provisions of Article X hereof and to Section 11.01 of this
Article XI, the Trustees and the officers of the Trust shall not be liable for
errors of judgment or mistakes of fact or law. The Trustees and the officers
of the Trust may take advice of counsel or other experts with respect to the
meaning and operation of this Trust Instrument, and subject to the provisions
of Article X hereof and Section 11.01 of this Article XI, shall be under no
liability for any act or omission in accordance with such advice or for failing
to follow such advice. The Trustees and the officers of the Trust shall not be
required to give any bond as such, nor any surety if a bond is obtained.
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SECTION 11.03 ESTABLISHMENT OF RECORD DATES. The Trustees may close
the Share transfer books of the Trust for a period not exceeding sixty (60)
days preceding the date of any meeting of Shareholders, or the date for the
payment of any dividends or other distributions, or the date for the allotment
of rights, or the date when any change or conversion or exchange of Shares
shall go into effect; or in lieu of closing the stock transfer books as
aforesaid, the Trustees may fix in advance a date, not exceeding sixty (60)
days preceding the date of any meeting of Shareholders, or the date for payment
of any dividend or other distribution, or the date for the allotment of rights,
or the date when any change or conversion or exchange of Shares shall go into
effect, as a record date for the determination of the Shareholders entitled to
notice of, and to vote at, any such meeting, or entitled to receive payment of
any such dividend or other distribution, or to any such allotment of rights, or
to exercise the rights in respect of any such change, conversion or exchange of
Shares, and in such case such Shareholders and only such Shareholders as shall
be Shareholders of record on the date so fixed shall be entitled to such notice
of, and to vote at, such meeting, or to receive payment of such dividend or
other distribution, or to receive such allotment or rights, or to exercise such
rights, as the case may be, notwithstanding any transfer of any Shares on the
books of the Trust after any such record date fixed as aforesaid.
SECTION 11.04 TERMINATION OF TRUST.
(a) This Trust shall continue without limitation of time but
subject to the provisions of Subsection 11.04(b).
(b) The Trustees may, subject to any necessary Shareholder,
Trustee, and regulatory approvals:
(i) sell and convey all or substantially all of the
assets of the Trust or any affected Series to another trust,
partnership, association or corporation, or to a separate series of
shares thereof, organized under the laws of any state which trust,
partnership, association or corporation is an open-end management
investment company as defined in the 1940 Act, or is a series thereof,
for adequate consideration which may include the assumption of all
outstanding obligations, taxes and other liabilities, accrued or
contingent, of the Trust or any affected Series, and which may include
shares of beneficial interest, stock or other ownership interests of
such trust, partnership, association or corporation or of a series
thereof;
(ii) enter into a plan of liquidation in order to
terminate and liquidate any Series (or class) of the Trust, or the
Trust; or
(iii) at any time sell and convert into money all of the
assets of the Trust or any affected Series.
Upon making reasonable provision, in the determination of the Trustees, for the
payment of all liabilities by assumption or otherwise, the Trustees shall
distribute the remaining proceeds or assets (as the case may be) of each Series
(or class) ratably among the holders of Shares of the affected Series, based
upon the ratio that each Shareholder's Shares bears to the number of Shares of
such Series (or class) then outstanding.
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(c) Upon completion of the distribution of the remaining proceeds
or the remaining assets as provided in Subsection 11.04(b), the Trust or any
affected Series shall terminate and the Trustees and the Trust shall be
discharged of any and all further liabilities and duties hereunder and the
right, title and interest of all parties with respect to the Trust or Series
shall be cancelled and discharged.
Upon termination of the Trust, following completion of winding up of
its business, the Trustees shall cause a certificate of cancellation of the
Trust's certificate of trust to be filed in accordance with the Delaware Act,
which certificate of cancellation may be signed by any one Trustee.
SECTION 11.05 REORGANIZATION.
(a) Notwithstanding anything else herein, the Trustees, in order to
change the form or jurisdiction of organization of the Trust, may (i) cause the
Trust to merge or consolidate with or into one or more trusts, partnerships
(general or limited), associations or corporations so long as the surviving or
resulting entity is an open-end management investment company under the 1940
Act, or is a series thereof, that will succeed to or assume the Trust's
registration under that Act and which is formed, organized or existing under
the laws of a state, commonwealth, possession or colony of the United States or
(ii) cause the Trust to incorporate under the laws of Delaware.
(b) The Trustees may, subject to a vote of a majority of the
Trustees and any shareholder vote required under the 1940 Act, if any, cause
the Trust to merge or consolidate with or into one or more Trusts, partnerships
(general or limited), associations, limited liability companies or corporations
formed, organized or existing under the laws of a state, commonwealth,
possession or colony of the United States.
(c) Any agreement of merger or consolidation or certificate of
merger or consolidation may be signed by a majority of Trustees and facsimile
signatures conveyed by electronic or telecommunication means shall be valid.
(d) Pursuant to and in accordance with the provisions of Section
3815(f) of the Delaware Act, and notwithstanding anything to the contrary
contained in this Trust Instrument, an agreement of merger or consolidation
approved by the Trustees in accordance with paragraph (a) or (b) this Section
11.05 may effect any amendment to the Trust Instrument or effect the adoption
of a new trust instrument of the Trust if it is the surviving or resulting
trust in the merger or consolidation.
SECTION 11.06 FILING OF COPIES, REFERENCES, HEADINGS. The original
or a copy of this Trust Instrument and of each amendment hereof or Trust
Instrument supplemental hereto shall be kept at the office of the Trust where
it may be inspected by any Shareholder. Anyone dealing with the Trust may rely
on a certificate by an officer or Trustee of the Trust as to whether or not any
such amendments or supplements have been made and as to any matters in
connection with the Trust hereunder, and with the same effect as if it were the
original, may rely on a copy certified by an officer or Trustee of the Trust to
be a copy of this Trust Instrument or of any such amendment or supplemental
Trust Instrument. In this Trust Instrument or in any such amendment
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<PAGE> 28
or supplemental Trust Instrument, references to this Trust Instrument, and all
expressions like "herein," "hereof" and "hereunder," shall be deemed to refer
to this Trust Instrument as amended or affected by any such supplemental Trust
Instrument. All expressions like "his," "he" and "him," shall be deemed to
include the feminine and neuter, as well as masculine, genders. Headings are
placed herein for convenience of reference only and in case of any conflict,
the text of this Trust Instrument, rather than the headings, shall control.
This Trust Instrument may be executed in any number of counterparts each of
which shall be deemed an original.
SECTION 11.07 APPLICABLE LAW. The trust set forth in this instrument
is made in the State of Delaware, and the Trust and this Trust Instrument, and
the rights and obligations of the Trustees and Shareholders hereunder, are to
be governed by and construed and administered according to the Delaware Act and
the laws of said State; provided, however, that there shall not be applicable
to the Trust, the Trustees or this Trust Instrument (a) the provisions of
Section 3540 of Title 12 of the Delaware Code or (b) any provisions of the laws
(statutory or common) of the State of Delaware (other than the Delaware Act)
pertaining to trusts which relate to or regulate (i) the filing with any court
or governmental body or agency of trustee accounts or schedules of trustee fees
and charges, (ii) affirmative requirements to post bonds for trustees,
officers, agents or employees of a trust, (iii) the necessity for obtaining
court or other governmental approval concerning the acquisition, holding or
disposition of real or personal property, (iv) fees or other sums payable to
trustees, officers, agents or employees of a trust, (v) the allocation of
receipts and expenditures to income or principal, (vi) restrictions or
limitations on the permissible nature, amount or concentration of trust
investments or requirements relating to the titling, storage or other manner of
holding of trust assets, or (vii) the establishment of fiduciary or other
standards of responsibilities or limitations on the acts or powers of trustees,
which are inconsistent with the limitations or liabilities or authorities and
powers of the Trustees set forth or referenced in this Trust Instrument. The
Trust shall be of the type commonly called a "business trust," and without
limiting the provisions hereof, the Trust may exercise all powers which are
ordinarily exercised by such a trust under Delaware law. The Trust
specifically reserves the right to exercise any of the powers or privileges
afforded to trusts or actions that may be engaged in by trusts under the
Delaware Act, and the absence of a specific reference herein to any such power,
privilege or action shall not imply that the Trust may not exercise such power
or privilege or take such actions.
SECTION 11.08 AMENDMENTS. Except as specifically provided herein,
the Trustees may, without shareholder vote, amend or otherwise supplement this
Trust Instrument by making an amendment, a Trust Instrument supplemental hereto
or an amended and restated trust instrument. Shareholders shall have the right
to vote (a) on any amendment which would adversely affect their rights under
this Trust Instrument, (b) on any amendment to this Section 11.08, (c) on any
amendment as may be required by law or by the Trust's registration statement
filed with the Commission and (d) on any amendment submitted to them by the
Trustees. Any amendment required or permitted to be submitted to Shareholders
which, as the Trustees determine, shall affect the Shareholders of one or more
Series shall be authorized by vote of the Shareholders of each Series affected
and no vote of shareholders of a Series not affected shall be required.
Notwithstanding any other provision of this Trust Instrument, any amendment to
Article X hereof shall not limit the rights to indemnification or insurance
provided therein with respect to action or omission of Covered Persons prior to
such amendment.
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<PAGE> 29
SECTION 11.09 FISCAL YEAR. The fiscal year of the Trust shall end on
a specified date as set forth in the Bylaws, provided, however, that the
Trustees may change the fiscal year of the Trust.
SECTION 11.10 NAME RESERVATION. The Trustees on behalf of the Trust
acknowledge that KeyCorp, through its subsidiary Key Trust Company ("Key
Trust") has licensed to the Trust the non-exclusive right to use the name
"Victory" as part of the name of the Trust, and has reserved the right to grant
the non-exclusive use of the name "Victory" or any derivative thereof to any
other party. In addition, Key Trust reserves the right to grant the
non-exclusive use of the name "Victory" to, and to withdraw such right from,
any other business or other enterprise. Key Trust reserves the right to
withdraw from the Trust the right to use said name "Victory" and will withdraw
such right if the Trust ceases to employ, for any reason, KeyCorp, an affiliate
or any successor as adviser of the Trust.
SECTION 11.11 PROVISIONS IN CONFLICT WITH LAW. The provisions of
this Trust Instrument are severable, and if the Trustees shall determine, with
the advice of counsel, that any of such provision is in conflict with the 1940
Act, the regulated investment company provisions of the Internal Revenue Code
or with other applicable laws and regulations, the conflicting provision shall
be deemed never to have constituted a part of this Trust Instrument; provided,
however, that such determination shall not affect any of the remaining
provisions of this Trust Instrument or render invalid or improper any action
taken or omitted prior to such determination. If any provision of this Trust
Instrument shall be held invalid or unenforceable in any jurisdiction, such
invalidity or unenforceability shall attach only to such provision in such
jurisdiction and shall not in any matter affect such provision in any other
jurisdiction or any other provision of this Trust Instrument in any
jurisdiction.
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<PAGE> 30
IN WITNESS WHEREOF, the undersigned, being all of the initial Trustees
of the Trust, have executed this instrument as of date first written above.
____________________________________ ____________________________________
Robert G. Brown, as Trustee Edward P. Campbell, as Trustee
and not individually and not individually
____________________________________ ___________________________________
Stanley I. Landgraf, as Trustee Harry Gazelle, as Trustee
and not individually and not individually
____________________________________ ___________________________________
H. Patrick Swygert, as Trustee Thomas F. Morrissey, as Trustee
and not individually and not individually
____________________________________
Leigh A. Wilson, as Trustee
and not individually
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<PAGE> 31
SCHEDULE A
Balanced
Diversified Stock
Government Mortgage
Growth
Intermediate Income
International Growth
Investment Quality Bond
Limited Term Income
Ohio Municipal Bond
Ohio Regional Stock
Prime Obligations
Special Value
Stock Index
Tax-Free Money Market
U.S. Government Obligations
Value
Financial Reserves
Fund for Income
Government Bond (Class A and Class B)
Institutional Money Market (Service Class and Institutional Class)
National Municipal Bond (Class A and Class B)
New York Tax-Free (Class A and Class B)
Ohio Municipal Money Market
Special Growth
-27-
<PAGE> 1
The Victory Portfolios
EX-99.B2
By-Laws
C-20
<PAGE> 2
THE VICTORY PORTFOLIOS
BYLAWS
DECEMBER 6, 1995
<PAGE> 3
THE VICTORY PORTFOLIOS
BYLAWS
These Bylaws of The Victory Portfolios (the "Trust"), a
Delaware business trust, are subject to the Trust Instrument of the Trust,
dated December 6, 1995, as from time to time amended, supplemented or restated
(the "Trust Instrument"). Capitalized terms used herein which are defined in
the Trust Instrument are used as therein defined.
ARTICLE I
PRINCIPAL OFFICE
The principal office of the Trust shall be located in
Cleveland, Ohio or such other location as the Trustees may, from time to time,
determine. The Trust may establish and maintain such other offices and places
of business as the Trustees may, from time to time, determine.
ARTICLE II
OFFICERS AND THEIR ELECTION
SECTION 2.01 OFFICERS. The officers of the Trust shall be a
President, a Treasurer, a Secretary, and such other officers as the Trustees
may from time to time elect. The Trustees may delegate to any officer or
committee the power to appoint any subordinate officers or agents. It shall
not be necessary for any Trustee or other officer to be a holder of Shares in
the Trust.
SECTION 2.02 ELECTION OF OFFICERS. The Treasurer and Secretary
shall be chosen by the Trustees. The President shall be chosen by and from the
Trustees. Two or more offices may be held by a single person except the
offices of President and Secretary. Subject to the provisions of Section 3.13
hereof the President, the Treasurer and the Secretary shall each hold office
until their successors are chosen and qualified and all other officers shall
hold office at the pleasure of the Trustees.
SECTION 2.03 RESIGNATIONS. Any officer of the Trust may
resign, notwithstanding Section 2.02 hereof, by filing a written resignation
with the President, the Trustees or the Secretary, which resignation shall take
effect on being so filed or at such time as may be therein specified.
ARTICLE III
POWERS AND DUTIES OF OFFICERS AND TRUSTEES
SECTION 3.01 MANAGEMENT OF THE TRUST. The business and
affairs of the Trust shall be managed by, or under the direction
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<PAGE> 4
of the Trustees, and they shall have all powers necessary and desirable to
carry out their responsibilities, so far as such powers are not inconsistent
with the laws of the State of Delaware, the Trust Instrument or with these
Bylaws.
SECTION 3.02 EXECUTIVE AND OTHER COMMITTEES. The Trustees may
elect from their own number an executive committee, which shall have any or all
of the powers of the Board of Trustees while the Board of Trustees is not in
session. The Trustees may also elect from their own number other committees
from time to time. The number composing such committees and the powers
conferred upon the same are to be determined by vote of a majority of the
Trustees. All members of such committees shall hold such offices at the
pleasure of the Trustees. The Trustees may abolish any such committee at any
time. Any committee to which the Trustees delegate any of their powers or
duties shall keep records of its meetings and shall report its actions to the
Trustees. The Trustees shall have power to rescind any action of any
committee, but no such rescission shall have retroactive effect.
SECTION 3.03 COMPENSATION. Each Trustee and each committee
member may receive such compensation for his services and reimbursement for his
expenses as may be fixed from time to time by resolution of the Trustees.
SECTION 3.04 CHAIRMAN OF THE TRUSTEES. The Trustees may
appoint from among their number a Chairman who shall serve as such at the
pleasure of the Trustees. When present, he shall preside at all meetings of
the Shareholders and the Trustees, and he may, subject to the approval of the
Trustees, appoint a Trustee to preside at such meetings in his absence. He
shall perform such other duties as the Trustees may from time to time
designate.
SECTION 3.05 PRESIDENT. The President shall be the chief
executive officer of the Trust and, subject to the direction of the Trustees,
shall have general administration of the business and policies of the Trust.
Except as the Trustees may otherwise order, the President shall have the power
to grant, issue, execute or sign such powers of attorney, process, agreements
or other documents as may be deemed advisable or necessary in the furtherance
of the interests of the Trust or any Series thereof. He shall also have the
power to employ attorneys, accountants and other advisors and agents and
counsel for the Trust. The President shall perform such duties additional to
all of the foregoing as the Trustees may from time to time designate.
SECTION 3.06 TREASURER. The Treasurer shall be the principal
financial and accounting officer of the Trust. He shall deliver all funds and
securities of the Trust which may come into his hands to such company as the
Trustees shall employ as Custodian in accordance with the Trust Instrument and
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<PAGE> 5
applicable provisions of law. He shall make annual reports regarding the
business and condition of the Trust, which reports shall be preserved in Trust
records, and he shall furnish such other reports regarding the business and
condition of the Trust as the Trustees may from time to time require. The
Treasurer shall perform such additional duties as the Trustees may from time to
time designate.
SECTION 3.07 SECRETARY. The Secretary shall record in books
kept for the purpose all votes and proceedings of the Trustees and the
Shareholders at their respective meetings. He shall have the custody of the
seal of the Trust. The Secretary shall perform such additional duties as the
Trustees may from time to time designate.
SECTION 3.08 VICE PRESIDENT. Any Vice President of the Trust
shall perform such duties as the Trustees or the President may from time to
time designate. At the request or in the absence or disability of the
President, the Vice President (or, if there are two or more Vice Presidents,
then the senior of the Vice Presidents) present and able to act may perform all
the duties of the President and, when so acting, shall have all the powers of
and be subject to all the restrictions upon the President.
SECTION 3.09 ASSISTANT TREASURER. Any Assistant Treasurer of
the Trust shall perform such duties as the Trustees or the Treasurer may from
time to time designate, and, in the absence of the Treasurer, the senior
Assistant Treasurer, present and able to act, may perform all the duties of the
Treasurer and, when so acting, shall have all the powers of and be subject to
all the restrictions upon the Treasurer.
SECTION 3.10 ASSISTANT SECRETARY. Any Assistant Secretary of
the Trust shall perform such duties as the Trustees or the Secretary may from
time to time designate, and, in the absence of the Secretary, the senior
Assistant Secretary, present and able to act, may perform all the duties of the
Secretary and, when so acting, shall have all the powers of and be subject to
all the restrictions upon the Secretary.
SECTION 3.11 SUBORDINATE OFFICERS. The Trustees from time to
time may appoint such officers or agents as they may deem advisable, each of
whom shall have such title, hold office for such period, have such authority
and perform such duties as the Trustees may determine. The Trustees from time
to time may delegate to one or more officers or committees of Trustees the
power to appoint any such subordinate officers or agents and to prescribe their
respective terms of office, authorities and duties.
SECTION 3.12 SURETY BONDS. The Trustees may require any
officer or agent of the Trust to execute a bond (including without limitation,
any bond required by the 1940 Act and the
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<PAGE> 6
rules and regulations of the Commission) to the Trust in such sum and with such
surety or sureties as the Trustees may determine, conditioned upon the faithful
performance of his duties to the Trust including responsibility for negligence
and for the accounting of any of the Trust's property, funds or securities that
may come into his hands.
SECTION 3.13 REMOVAL. Any officer may be removed from office,
with or without cause, whenever in the judgment of the Trustees the best
interest of the Trust will be served thereby, by the vote of a majority of the
Trustees given at any regular meeting or any special meeting of the Trustees.
In addition, any officer or agent appointed in accordance with the provisions
of Section 3.10 hereof may be removed, either with or without cause, by any
officer upon whom such power of removal shall have been conferred by the
Trustees.
SECTION 3.14 REMUNERATION. The salaries or other
compensation, if any, of the officers of the Trust shall be fixed from time to
time by resolution of the Trustees.
ARTICLE IV
SHAREHOLDERS' MEETINGS
SECTION 4.01 SPECIAL MEETINGS. A special meeting of the
shareholders shall be called by the Secretary whenever (a) ordered by the
Trustees or (b) requested in writing by the holder or holders of at least 10%
of the Outstanding Shares entitled to vote. If the Secretary, when so ordered
or requested, refuses or neglects for more than 30 days to call such special
meeting, the Trustees or the Shareholders so requesting may, in the name of the
Secretary, call the meeting by giving notice thereof in the manner required
when notice is given by the Secretary. If the meeting is a meeting of the
Shareholders of one or more Series or classes of Shares, but not a meeting of
all Shareholders of the Trust, then only special meetings of the Shareholders
of such one or more Series or classes shall be called and only the shareholders
of such one or more Series or classes shall be entitled to notice of and to
vote at such meeting.
SECTION 4.02 NOTICES. Except as provided in Section 4.01,
notices of any meeting of the Shareholders shall be given by the Secretary by
delivering or mailing, postage prepaid, to each Shareholder entitled to vote at
said meeting, written or printed notification of such meeting at least ten (10)
days before the meeting, to such address as may be registered with the Trust by
the Shareholder. Notice of any Shareholder meeting need not be given to any
Shareholder if a written waiver of notice, executed before or after such
meeting, is filed with the records of such meeting, or to any Shareholder who
shall attend such meeting in person or by proxy. Notice of adjournment of a
Shareholder's meeting to another time or place need not be given, if such time
and place are announced at the meeting or reasonable
- 4 -
<PAGE> 7
notice is given to persons present at the meeting and the adjourned meeting is
held within a reasonable time after the date set for the original meeting.
SECTION 4.03 VOTING-PROXIES. Subject to the provisions of the
Trust Instrument, shareholders entitled to vote may vote either in person or by
proxy, provided that either (a) an instrument authorizing such proxy to act is
executed by the Shareholder in writing and dated not more than eleven (11)
months before the meeting, unless the instrument specifically provides for a
longer period or (b) the Trustees adopt by resolution an electronic,
telephonic, computerized or other alternative to execution of a written
instrument authorizing the proxy to act, which authorization is received not
more than eleven (11) months before the meeting. Proxies shall be delivered to
the Secretary of the Trust or other person responsible for recording the
proceedings before being voted. A proxy with respect to shares held in the
name of two or more persons shall be valid if executed by one of them unless at
or prior to exercise of such proxy the Trust receives a specific written notice
from any one of them. Unless otherwise specifically limited by their terms,
proxies shall entitle the holder thereof to vote at any adjournment of a
meeting. A proxy purporting to be exercised by or on behalf of a Shareholder
shall be deemed valid unless challenged at or prior to its exercise and the
burden or proving invalidity shall rest on the challenger. At all meetings of
the Shareholders, unless the voting is conducted by inspectors, all questions
relating to the qualifications of voters, the validity of proxies, and the
acceptance or rejection of votes shall be decided by the Chairman of the
meeting. Except as otherwise provided herein or in the Trust Instrument, as
these Bylaws or such Trust Instrument may be amended or supplemented from time
to time, all matters relating to the giving, voting or validity of proxies
shall be governed by the General Corporation Law of the State of Delaware
relating to proxies, and judicial interpretations thereunder, as if the Trust
were a Delaware corporation and the Shareholders were shareholders of a
Delaware corporation.
SECTION 4.04 PLACE OF MEETING. All special meetings of the
Shareholders shall be held at the principal place of business of the Trust or
at such other place in the United States as the Trustees may designate.
SECTION 4.05 ACTION WITHOUT A MEETING. Any action to be taken
by Shareholders may be taken without a meeting if all Shareholders entitled to
vote on the matter consent to the action in writing and the written consents
are filed with the records of meetings of Shareholders of the Trust. Such
consent shall be treated for all purposes as a vote at a meeting of the
Shareholders held at the principal place of business of the Trust.
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<PAGE> 8
ARTICLE V
TRUSTEES' MEETINGS
SECTION 5.01 SPECIAL MEETINGS. Special meetings of the
Trustees may be called orally or in writing by the Chairman of the Board of
Trustees or any two other Trustees.
SECTION 5.02 REGULAR MEETINGS. Regular meetings of the
Trustees may be held at such places and at such times as the Trustees may from
time to time determine; each Trustee present at such determination shall be
deemed a party calling the meeting and no call or notice will be required to
such Trustee provided that any Trustee who is absent when such determination is
made shall be given notice of the determination by the Chairman or any two
other Trustees, as provided for in Section 4.04 of the Trust Instrument.
SECTION 5.03 QUORUM. A majority of the Trustees shall
constitute a quorum for the transaction of business at any meeting and an
action of a majority of the Trustees in attendance constituting a quorum shall
constitute action of the Trustees.
SECTION 5.04 NOTICE. Except as otherwise provided, notice of
any special meeting of the Trustees shall be given by the party calling the
meeting to each of the Trustees, as provided for in Section 4.04 of the Trust
Instrument. A written notice may be mailed, postage prepaid, addressed to him
at his address as registered on the books of the Trust or, if not so
registered, at his last known address.
SECTION 5.05 PLACE OF MEETING. All special meetings of the
Trustees shall be held at the principal place of business of the Trust or such
other place as the Trustees may designate. Any meeting may adjourn to any
place.
SECTION 5.06 SPECIAL ACTION. When all the Trustees shall be
present at any meeting however called or wherever held, or shall assent to the
holding of the meeting without notice, or shall sign a written assent thereto
filed with the records of such meeting, the acts of such meeting shall be valid
as if such meeting had been regularly held.
SECTION 5.07 ACTION BY CONSENT. Any action by the Trustees
may be taken without a meeting if a written consent thereto is signed by all
the Trustees and filed with the records of the Trustees' meeting. Such consent
shall be treated, for all purposes, as a vote at a meeting of the Trustees held
at the principal place of business of the Trustees.
SECTION 5.08 PARTICIPATION IN MEETINGS BY CONFERENCE
TELEPHONE. Except when presence in person is required at a meeting under the
1940 Act or other applicable laws, Trustees may participate in a meeting of
Trustees by conference telephone or similar communications equipment by means
of which all persons
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<PAGE> 9
participating in the meeting can hear each other, and such participation shall
constitute presence in person at such meeting. Any meeting conducted by
telephone shall be deemed to take place at and from the principal office of the
Trust.
ARTICLE VI
FISCAL YEAR; REGISTERED OFFICE AND REGISTERED AGENT
SECTION 6.01 FISCAL YEAR. The fiscal year of the Trust and of
each Series of the Trust shall end on October 31 of each year; provided that
the last fiscal year of the Trust and each Series shall end on the date on
which the Trust or each such Series is terminated, as applicable; and further
provided that the Trustees by resolution and without a Shareholder vote may at
any time change the fiscal year of the Trust and of any or all Series (and the
Trust and each Series may have different fiscal years as determined by the
Trustees).
SECTION 6.02 REGISTERED OFFICE AND REGISTERED AGENT. The
initial registered office of the Trust in the State of Delaware shall be
located at 1201 North Market Street, Wilmington, Delaware 19801. The
registered agent of the Trust at such location shall be Delaware Corporation
Organizers, Inc.; provided that the Trustees by resolution and without a
Shareholder vote may at any time change the Trust's registered office or its
registered agent, or both.
ARTICLE VII
INSPECTION OF BOOKS
The Trustees shall from time to time determine whether and to
what extent, and at what times and places, and under what conditions and
regulations the accounts and books of the Trust or any of them shall be open to
the inspection of the Shareholders; and no Shareholder shall have any right to
inspect any account or book or document of the Trust except as conferred by law
or otherwise by the Trustees or by resolution of the Shareholders.
ARTICLE VIII
INSURANCE OF OFFICERS, TRUSTEES, AND EMPLOYEES
The Trust may purchase and maintain insurance on behalf of any
Covered Person (as defined in Section 10.02 of the Trust Instrument) or
employee of the Trust, including any Covered Person or employee of the Trust
who is or was serving at the request of the Trust as a Trustee, officer or
employee of a corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against him and claimed by him in any
such capacity or arising out of his status as such, whether or not the Trustees
would have the power to indemnify him against such liability.
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<PAGE> 10
The Trust may not acquire or obtain a contract for insurance
that protects or purports to protect any Trustee or officer of the Trust
against any liability to the Trust of its Shareholders to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
ARTICLE IX
SEAL
The seal of the Trust shall be circular in form bearing the
inscription:
"THE VICTORY PORTFOLIOS, DECEMBER __, 1995
THE STATE OF DELAWARE"
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<PAGE> 11
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I
PRINCIPAL OFFICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II
OFFICERS AND THEIR ELECTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2.01 Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2.02 Election of Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2.03 Resignations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE III
POWERS AND DUTIES OF OFFICERS AND TRUSTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 3.01 Management of the Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 3.02 Executive And Other Committees . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 3.03 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 3.04 Chairman Of The Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 3.05 President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 3.06 Treasurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 3.07 Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 3.08 Vice President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 3.09 Assistant Treasurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 3.10 Assistant Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 3.11 Subordinate Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 3.12 Surety Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 3.13 Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 3.14 Remuneration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE IV
SHAREHOLDERS' MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 4.01 Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 4.02 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 4.03 Voting-Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 4.04 Place of Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 4.05 Action Without a Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE V
TRUSTEES' MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 5.01 Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 5.02 Regular Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 5.03 Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 5.04 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 5.05 Place of Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 5.06 Special Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 5.07 Action by Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 5.08 Participation in Meetings By Conference Telephone . . . . . . . . . . . . . . . . . 6
ARTICLE VI
FISCAL YEAR; REGISTERED OFFICE AND REGISTERED AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 6.01 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 6.02 Registered Office and Registered Agent . . . . . . . . . . . . . . . . . . . . . . 6
</TABLE>
- 9 -
<PAGE> 12
<TABLE>
<S> <C>
ARTICLE VII
INSPECTION OF BOOKS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE VIII
INSURANCE OF OFFICERS, TRUSTEES AND EMPLOYEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE IX
SEAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
</TABLE>
- 10 -
<PAGE> 1
The Victory Portfolios
EX-99.B9(d)
Shareholder Servicing Plan
C-21
<PAGE> 2
THE VICTORY PORTFOLIOS
SHAREHOLDER SERVICING PLAN
This Shareholder Servicing Plan (the "Plan") is adopted by The Victory
Portfolios, a business trust organized under the laws of the Commonwealth of
Massachusetts (the "Company"), on behalf of each of its Funds (individually, a
"Fund," and collectively, the "Funds") as set forth in Schedule I, as amended
from time to time, subject to the following terms and conditions:
SECTION 1. ANNUAL FEES.
Shareholder Services Fee. Each Fund (or Class thereof, as the case may
be) may pay to the distributor of its shares (the "Distributor") or financial
institutions that provide certain services to the Funds, a shareholder services
fee under the Plan at an annual rate not to exceed 0.25% of the average daily
net assets of the Fund or Class attributable to the Distributor or financial
institution thereof (the "Services Fee").
Adjustment to Fees. Any Fund may pay a Services Fee to the Distributor
or financial institution at a lesser rate than the fees specified in Section 1
hereof as agreed upon by the Board of Trustees and the Distributor or financial
institution and approved in the manner specified in Section 3 of this Plan.
Payment of Fees. The Services Fees will be calculated daily and paid
monthly by each Fund at the annual rates indicated above.
SECTION 2. EXPENSES COVERED BY THE PLAN.
Services Fees may be used by the Distributor or financial institution
for payments to financial institutions and persons who provide administrative
and support services to their customers who may from time to time beneficially
own shares, which may include (i) establishing and maintaining accounts and
records relating to shareholders; (ii) processing dividend and distribution
payments from the Fund on behalf of shareholders; (iii) providing information
periodically to shareholders showing their positions in shares and integrating
such statements with those of other transactions and balances in shareholders'
other accounts serviced by such financial institution; (iv) arranging for bank
wires; (v) responding to shareholder inquiries relating to the services
performed; (vi) responding to routine inquiries from shareholders concerning
their investments; (vii) providing subaccounting with respect to shares
beneficially owned by shareholders, or the information to the Fund necessary
for subaccounting; (viii) if required by law, forwarding shareholder
communications from the Fund (such as proxies, shareholder reports, annual and
semi-annual financial statements and dividend, distribution and tax notices) to
shareholders; (ix) assisting in processing purchase, exchange and redemption
requests from shareholders and in placing such orders with our service
contractors; (x) assisting shareholders in changing dividend options, account
designations and addresses; (xi) providing shareholders with a service that
invests the assets of their accounts in shares pursuant to specific
<PAGE> 3
or pre-authorized instructions; and (xii) providing such other similar services
as the Fund may reasonably request to the extent the Distributor or financial
institution is permitted to do so under applicable statutes, rules and
regulations.
SECTION 3. APPROVAL OF TRUSTEES.
Neither the Plan nor any related agreements will take effect until
approved by a majority of both (a) the full Board of Trustees of the Company
and (b) those Trustees who are not interested persons of the Company and who
have no direct or indirect financial interest in the operation of the Plan or
in any agreements related to it (the "Qualified Trustees"), cast in person at a
meeting called for the purpose of voting on the Plan and the related
agreements.
SECTION 4. CONTINUANCE OF THE PLAN.
The Plan will continue in effect until June 5, 1996, and thereafter
for successive twelve-month periods: provided, however, that such continuance
is specifically approved at least annually by the Trustees of the Fund and by a
majority of the Qualified Trustees.
SECTION 5. TERMINATION.
The Plan may be terminated at any time with respect to a Fund (i) by
the Company without the payment of any penalty, by the vote of a majority of
the outstanding voting securities of the Fund (or, the shareholders of a
particular class, if applicable) or (ii) by a vote of the Qualified Trustees.
The Plan may remain in effect with respect to a Fund even if the Plan has been
terminated in accordance with this Section 5 with respect to any other Fund.
SECTION 6. AMENDMENTS.
No material amendment to the Plan may be made unless approved by the
Company's Board of Trustees in the manner described in Section 3 above.
SECTION 7. SELECTION OF CERTAIN TRUSTEES.
While the Plan is in effect, the selection and nomination of the
Company's Trustees who are not interested persons of the Fund will be committed
to the discretion of the Trustees then in office who are not interested persons
of the Company.
SECTION 8. WRITTEN REPORTS.
In each year during which the Plan remains in effect, a person
authorized to direct the disposition of monies paid or payable by a Fund
pursuant to the Plan or any related agreement will prepare and furnish to the
Company's Board of Trustees, and the Board will review, at least quarterly,
written reports complying with the requirements of the Rule which set out the
amounts expended under the Plan and the purposes for which those expenditures
were made.
2
<PAGE> 4
SECTION 9. PRESERVATION OF MATERIALS.
The Company will preserve copies of the Plan, any agreement relating
to the Plan and any report made pursuant to Section 8 above, for a period of
not less than six years (the first two years in an easily accessible place)
from the date of the Plan, agreement or report.
SECTION 10. LIMIT OF LIABILITY.
The limitation of shareholder liability set forth in the Company's
Declaration of Trust is hereby acknowledged. The obligations of the Company
under this Plan, if any, shall not be binding upon the Trustees individually or
upon holders of shares of the Company individually but shall be binding only
upon the assets and property of the Company, and upon the Trustees insofar as
they hold title thereto.
SECTION 11. MEANINGS OF CERTAIN TERMS.
As used in the Plan, the terms "interested person" and "majority of
the outstanding voting securities" will be deemed to have the same meaning that
those terms have under the 1940 Act by the Securities and Exchange Commission.
IN WITNESS WHEREOF, the Company executed this Plan as
of June 5, 1995.
The Victory Portfolios
By: __________________________
President
3
<PAGE> 5
SCHEDULE I
This Shareholder Servicing Plan shall be adopted with respect to the
following Funds (and Classes) of The Victory Portfolios:
<TABLE>
<CAPTION>
Name of Fund Class
- ------------ -----
<S> <C>
The Victory Balanced Fund A
The Victory Diversified Stock Fund A
The Victory Government Mortgage Fund A
The Victory Growth Fund A
The Victory Intermediate Income Fund A
The Victory International Growth Fund A
The Victory Investment Quality Bond Fund A
The Victory Limited Term Income Fund A
The Victory Ohio Municipal Bond Fund A
The Victory Ohio Regional Stock Fund A
The Victory Prime Obligations Fund A
The Victory Special Value Fund A
The Victory Tax-Free Money Market Fund A
The Victory U.S. Government Obligations Fund A
The Victory Value Fund A
The Victory Stock Index Fund A
The Victory Fund for Income A
The Victory Government Bond Fund A/B
The Victory National Municipal Bond Fund A/B
The Victory New York Tax-Free Fund A/B
The Victory Ohio Municipal Money Market Fund A
The Victory Special Growth Fund A
The Victory Institutional Money Market Fund-
Service Shares
The Victory Financial Reserves Fund A
</TABLE>
<PAGE> 1
The Victory Portfolios
EX-99.B9(e)
Form of Shareholder Servicing Agreement
C-22
<PAGE> 2
SHAREHOLDER SERVICING AGREEMENT
THE VICTORY PORTFOLIOS
3435 STELTZER ROAD
COLUMBUS, OHIO 43219-3035
To: _______________
We (the "Trust") wish to enter into this Servicing Agreement with you
concerning the provision of support services to your client ("Clients") who may
from time to time beneficially own shares ("Shares") of the Funds (the "Funds")
offered by us.
The terms and conditions of this Servicing Agreement are as follows:
SECTION 1. You agree to provide the following support services to
Clients who may from time to time beneficially own Shares: 1 (i) establishing
and maintaining accounts and records relating to Clients that invest in Shares;
(ii) processing dividend and distribution payments from us on behalf of
Clients; (iii) providing information periodically to Clients showing their
positions in Shares and integrating such statements with those of other
transactions and balances in Clients' other accounts serviced by you; (iv)
arranging for bank wires; (v) responding to Client inquiries relating to the
services performed by you; (vi) responding to routine inquiries from Clients
concerning their investments in Shares; (vii) providing subaccounting with
respect to Shares beneficially owned by Clients, or the information to us
necessary for subaccounting; (viii) if required by law, forwarding shareholder
communications from us (such as proxies, shareholder reports, annual and
semi-annual financial statements and dividend, distribution and tax notices) to
Clients; (ix) assisting in processing purchase, exchange and redemption
requests from Clients and in placing such orders with our service contractors;
(x) assisting Clients in changing dividend options, account designations and
addresses; (xi) providing Clients with a service that invests the assets of
their accounts in Shares pursuant to specific or pre-authorized instructions;
and (xii) providing such other similar services as we may reasonably request to
the extent you are permitted to do so under applicable statutes, rules and
regulations.
SECTION 2. You will provide such office space and equipment, telephone
facilities and personnel (which may be any part of the space, equipment and
facilities currently used in your business, or any personnel employed by you)
as may be reasonably necessary or beneficial in order to provide the
aforementioned services and assistance to Clients.
__________________________________
1 Series may be modified or omitted in the particular case and items
renumbered.
<PAGE> 3
SECTION 3. Neither you nor any of your officers, employees or agents
are authorized to make any representations concerning us or the Shares except
those contained in our then current prospectuses and statement of additional
information, copies of which will be supplied by us to you, or in such
supplemental literature or advertising as may be authorized by us in writing.
SECTION 4. For all purposes of this Agreement you will be deemed to be
an independent contractor, and will have no authority to act as agent for us in
any matter or in any respect. By your written acceptance of this Agreement, you
agree to and do release, indemnify and hold us harmless from and against any
and all direct or indirect liabilities or losses resulting from requests,
directions, actions, or inactions of or by you or your officers, employees or
agents regarding your responsibilities hereunder or the purchase, 6 redemption,
transfer or registration of Shares (or orders relating to the same) by or on
behalf of Clients. You and your employees will, upon request, be available
during normal business hours to consult with us or our designees concerning the
performance of your responsibilities under this Agreement.
SECTION 5. In consideration of the services and facilities provided by
you hereunder, we will pay to you, and you will accept as full payment
therefor, a fee at the annual rate of ____ one-hundredths of one percent (.__%)
of the average daily net asset value of the shares beneficially owned by your
Clients for whom you are the dealer of record or holder of record or with whom
you have a servicing relationship (the "Clients' Shares"), which fee will be
computed daily (on the basis of 360-day year) and payable monthly. For purposes
of determining the fees payable under this Section 5, the average daily net
asset value of the Clients' Shares will be computed in the manner specified in
our Registration Statement (as the same is in effect from time to time) in
connection with the computation of the net asset value of Shares for purposes
of purchases and redemptions. By your written acceptance of this Agreement, you
agree to and do waive such portion of any fee payable to you hereunder to the
extent necessary to assure that such fee and other expenses required to be
accrued by us on any day with respect to the Clients' Share in any Fund that
declares its net investment income as a dividend to shareholders on a daily
basis does not exceed the income to be accrued by us to such Shares on that
day. The fee rate stated above may be prospectively increased or decreased by
us, in our sole discretion, at any time upon notice to you. Further, we may, in
our discretion and without notice, suspend or withdraw the sale of Shares,
including the sale of Shares to you for the account of any Client or Clients.
SECTION 6. Any person authorized to direct the disposition of monies
paid or payable by us pursuant to this Agreement will provide to our Board of
Trustees, and our trustees will review, at least quarterly, a written report of
the amounts so expended and the purposes for which such expenditures were made.
In addition, you will furnish us or our designees with such information as we
or they may reasonably request (including, without limitation, periodic
certifications confirming the provision to Clients of the services described
herein), and will otherwise cooperate with us and our designees (including,
without limitation, any auditors designated by us), in connection with the
preparation of reports to our Board of Trustees concerning this Agreement and
the monies paid or payable by us pursuant hereto, as well as any other reports
or filings that may be required by law.
<PAGE> 4
SECTION 7. We may enter into other similar Servicing Agreements with
any other person or persons without your consent.
SECTION 8. By your written acceptance of this Agreement, you
represent, warrant and agree that: (i) the compensation payable to you in
connection with the investment of your Clients' assets in Shares will be
disclosed by you to your Clients, will be authorized by your Clients and will
not be excessive; and (ii) the series provided by you under this Agreement will
in no event be primarily intended to result in the sale of Shares.
SECTION 9. This Agreement will become effective on the date a fully
executed copy of this Agreement is received by us or our designee. Unless
sooner terminated, this Agreement will continue automatically for successive
annual periods provided such continuance is specifically approved at least
annually by us in the manner described in Section 12. This Agreement is
terminable without penalty at any time by us (which termination may be by a
vote of a majority of the Disinterested Trustees as defined in Section 12) or
by you upon written notice to the other party hereto.
SECTION 10. All notices and other communications to either you or us
will be duly given if mailed, telegraphed, telexed or transmitted by similar
telecommunication device to the appropriate address stated herein, or to such
other address as either party shall so provide the other.
SECTION 11. This Agreement will be construed in accordance with the
laws of the State of Ohio and is non-assignable by the parties hereto.
SECTION 12. This Agreement has been approved by vote of a majority of
(i) our Board of Trustees and (ii) those Trustees who are not "interested
persons" (as defined in the Investment Company Act of 1940) of us and have no
direct or indirect financial interest in this Agreement ("Disinterested
Trustees"), cast in person at a meeting called for the purpose of voting on
such approval.
SECTION 13. The names "The Victory Portfolios" and the "Board of
Trustees" refer respectively to the Trust created and the Trustees, as trustees
but not individually or personally, acting from time to time under an Amended
and Restated Declaration of Trust filed at the office of the State Secretary of
the Commonwealth of Massachusetts on September 6, 1994. The obligations of "The
Victory Portfolios" entered into in the name or on behalf thereof by any of the
Trustees, representatives or agents are made not individually but in such
capacities, and are not binding upon any of the Trustees, Shareholders or
representatives of the Trust personally, but bind only the Trust Property (as
defined in the Declaration of Trust), and all persons dealing with any class of
Shares of ours must look solely to the Trust Property belonging to such class
for the enforcement of any claims against us.
<PAGE> 5
If you agree to be legally bound by the provisions of this Agreement,
please sign a copy of this letter where indicated below and promptly return it
to us, c/o Concord Holding Corporation, Administrator, 3435 Steltzer Road,
Columbus, Ohio 43219-3035.
Very truly yours,
THE VICTORY PORTFOLIOS
Date: ____________________ By: ______________________
(Authorized Officer)
Title:
Accepted and Agreed to:
Date: ____________________ By: ______________________
(Authorized Officer)
Title:
<PAGE> 1
The Victory Portfolios
EX-99.B11(a)
Consent of Kramer, Levin, Naftalis, Nessen, Kamin & Frankel
C-23
<PAGE> 2
December 28, 1995
The Victory Portfolios
3435 Stelzer Road
Columbus, Ohio 43219
Re: The Victory Portfolios
File No. 33-8982
Post-Effective Amendment to Registration Statement on Form N-1A
Gentlemen:
We hereby consent to the reference of our firm as counsel in
Post-Effective Amendment No. 26 to the Registration Statement on Form N-1A.
Very truly yours,
/s/ Kramer, Levin, Naftalis,
Nessen, Kamin and Frankel
<PAGE> 1
EX-99.B11(b)
Consent of Coopers & Lybrand L.L.P.
<PAGE> 2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to incorporation by reference in this Post-Effective Amendment No.
26 to the Registration Statement on Form N-1A (File No. 33-8982) of The Victory
Portfolios of our report dated December 19, 1994 on our audits of the financial
statements and financial highlights of The Victory Portfolios (comprising the
U.S. Government Obligations Fund, Prime Obligations Fund, Tax-Free Money Market
Fund (formerly the Tax-Exempt Fund), Limited Term Income Fund, Government
Mortgage Fund (formerly the U.S. Government Income Fund), Intermediate Income
Fund, Investment Quality Bond Fund, Ohio Municipal Bond Fund (formerly the Ohio
Tax-Free Bond Fund), Balanced Fund, Stock Index Fund, Value Fund (formerly the
Value Stock Fund), Diversified Stock Fund, Growth Fund (formerly the Growth
Stock Fund), Special Value Fund (formerly the Special Growth Stock Fund), Ohio
Regional Stock Fund, and International Growth Fund) as of October 31, 1994 and
for the periods then ended. We also consent to the reference to our Firm under
the caption "Auditors" in the Prospectuses, and "Auditors" and "Miscellaneous"
in the Statements of Additional Information relating to The Victory Portfolios
in this Post-Effective Amendment No. 26 to the Registration Statement on Form
N-1A (File No. 33-8982).
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
December 22, 1995
<PAGE> 1
EX-99.B11(c)
Consent of KPMG Peat Marwick LLP
<PAGE> 2
Exhibit 11(c)
INDEPENDENT AUDITORS' CONSENT
The Trustees and Shareholders
The Victory Portfolios
We consent to the use of our reports dated December 2, 1994 and June 20,
1995 on the financial statements of The Victory Funds and to the reference to
our firm under the captions "Financial Highlights" in the Prospectuses and
"Advisory and Other Contracts - Auditors" in the Statements of Additional
Information of the following series portfolios of The Victory Portfolios:
National Municipal Bond Fund, New York Tax-Free Fund, Institutional Money
Market Fund, Government Bond Fund, Fund for Income, Financial Reserves Fund and
Special Growth Fund.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
December 27, 1995
<PAGE> 1
EX-99.B11(d)
Consent of Price Waterhouse LLP
<PAGE> 2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the reference to us under the heading "Financial
Highlights" in the Prospectus of The Victory Financial Reserve Fund constituting
part of this Post-Effective Amendment No. 26 to the Registration Statement of
The Victory Portfolios on Form N-1A.
Price Waterhouse LLP
Boston, Massachusetts
December 19, 1995
<PAGE> 1
EX-99.B11(e)
Consent of LeMaster & Daniels, PLLC
<PAGE> 2
ACCOUNTANTS' CONSENT TO USE OF CERTIFICATES
AND FINANCIAL STATEMENTS
The Victory Portfolios
3435 Stelzer Rd.
Columbus, Ohio 43219
We served as independent public accountants for Investors Preference Fund for
Income, Inc. (IPIN) since its inception on May 8, 1987 and Investors Preference
NY Tax-Free Fund, Inc. (IPNY) since its inception on February 11, 1991. Under a
plan of reorganization, effective April 29, 1994, IPIN and IPNY became portfolio
companies of the Victory Fund. Specifically, IPIN became the Victory Fund for
Income Portfolio and IPNY became the Victory NY Tax-Free Portfolio.
We hereby consent to the use of our independent auditors' reports on the
financial statements of IPIN and IPNY, including the financial highlights, from
the periods from inception through January 31, 1994, relating to a registration
statement on Form N-1A for the Victory Portfolios to be filed with the
Securities and Exchange Commission.
/s/ LeMaster & Daniels, PLLC
- ----------------------------
Certified Public Accountants
Spokane, Washington
December 26, 1995
<PAGE> 1
EX-99.B12
Financial Statements
<PAGE> 2
THE VICTORY FUNDS Portfolio of Investments
FUND FOR INCOME PORTFOLIO October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) (NOTE 1)
<S> <C> <C>
- -----------------------------------------------------
U.S. TREASURY OBLIGATION (1.3%)
U.S. TREASURY STRIP (INTEREST ONLY)
8.25%+, 8/15/20
(Cost $384,126) $3,000 $ 370,230
- -----------------------------------------------------
MORTGAGE-BACKED SECURITIES (97.8%)
COLLATERALIZED MORTGAGE OBLIGATIONS (48.2%)
Bear Stearns Mortgage
Capital Corp., Series
1991-A/B1
9.40%, 6/25/21 1,093 1,092,688
Bear Stearns Secured
Investors Trust, Series
1991-2/H
7.50%, 9/20/20 2,139 1,966,198
Capstead Security Corp.
III, Series 1991-2/G
9.50%, 6/25/21 106 107,031
Citicorp Mortgage
Securities, Inc., Series
1991-8/A6
8.50%, 6/25/06 3,292 3,285,549
Citicorp Mortgage
Securities, Inc., Series
1992-10/A3
8.00%, 5/25/21 86 85,531
Drexal, Burnham & Lambert
Trust, Series U/1
9.30%, 6/1/17 139 143,409
GE Capital Mortgage
Services, Inc., Series
1993-4F/F5
6.00%, 3/25/08 1,000 859,539
GE Capital Mortgage
Services, Inc., Series
1993-4F/F6
7.00%, 3/25/08 1,000 908,019
Housing Securities, Inc.,
Series 1993-B/B4M
7.25%, 4/25/08 2,040 1,864,324
Kidder, Peabody Acceptance
Corp., Series 1993-C1/A3
6.80%, 9/1/06 1,000 874,509
Marine Midland Bank, Series
1990-2/6
9.50%, 10/25/15 16 15,896
Merrill Lynch Trust, Series
27/D
8.90%, 10/20/15 197 199,228
Prudential Home Mortgage,
Series 1992-42/M
7.00%, 1/25/08 1,397 1,266,354
Resolution Trust Corp.,
Series 1992-2/B4
8.20%, 11/25/21 1,500 1,472,003
-----------
14,140,278
-----------
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) (NOTE 1)
<S> <C> <C>
FEDERAL HOME LOAN MORTGAGE
CORPORATION (4.6%)
8.50%, 4/15/20 $ 468 $ 475,990
9.30%, 8/15/15 145 147,760
9.50%, 8/1/19-11/1/19 412 425,993
10.00%, 2/1/17-9/1/19 263 277,259
12.00%, 10/1/10-7/1/14 22 23,959
-----------
1,350,961
-----------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (16.1%)
7.50%, 6/25/17 690 690,615
8.00%, 11/25/20 1,254 1,064,144
8.50%, 8/1/24-10/1/24 2,637 2,616,409
9.50%, 1/1/19 28 29,160
10.00%, 5/1/13-2/1/18 174 184,544
10.50%, 1/1/18 10 10,874
12.00%, 8/1/13-4/1/15 68 75,082
13.00%, 12/1/12 37 41,212
-----------
4,712,040
-----------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION (14.3%)
9.50%, 8/15/17-10/15/19
1,283 1,341,710
10.00%, 3/15/16-6/15/21
2,351 2,519,442
10.25%, 3/15/19-6/15/19
140 148,689
10.50%, 2/15/16 115 125,411
11.00%, 9/20/14 67 73,323
-----------
4,208,575
-----------
REAL ESTATE MORTGAGE INVESTMENT
CONDUITS (14.6%)
Federal National Mortgage
Association,
Series 1991-149/E
7.50%, 3/25/05 1,000 1,001,549
<CAPTION>
MATURITY
AMOUNT
(000)
<S> <C> <C>
Series 1991-13/C
8.25%, 3/25/04 1,000 997,570
Series G-18/6
8.75%, 7/25/01 426 428,029
Series 1988-4/Z
9.25%, 3/25/18 1,834 1,858,329
-----------
4,285,477
- -----------------------------------------------------
TOTAL MORTGAGE BACKED SECURITIES
(Cost $29,008,300) 28,697,331
- -----------------------------------------------------
</TABLE>
8
<PAGE> 3
THE VICTORY FUNDS Portfolio of Investments
FUND FOR INCOME PORTFOLIO October 31, 1994--Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MATURITY
AMOUNT
(000)
<S> <C> <C>
- -----------------------------------------------------
REPURCHASE AGREEMENT (0.9%)
Donaldson, Lufkin &
Jenrette Securities Corp.
4.80%, dated 10/31/94,
due 11/1/94,
collateralized by
$271,000 U.S. Treasury
Notes, 4.25%, due 1/31/95
(Cost $267,000) $ 267 267,000
- -----------------------------------------------------
TOTAL INVESTMENTS (100%)
(COST $29,659,426) $29,334,561
- -----------------------------------------------------
</TABLE>
- ---------------
+-- Interest rate disclosed for U.S. Treasury Obligation represents current
yield based on market value at October 31, 1994.
N/R--Not Rated.
For the period ended January 31, 1994, Fund for Income had a capital loss
carryover of approximately $839,171 which is available to offset future capital
gains, to the extent provided in regulations, which will expire on April 30,
2002.
INCOME TAX INFORMATION:
At October 31, 1994, the net unrealized depreciation based on cost for income
tax purposes of $29,693,086 was as follows:
<TABLE>
<S> <C>
Aggregate gross unrealized appreciation for
all investments in which there was an excess
of value over tax cost $ 519,036
Aggregate gross unrealized depreciation for
all investments in which there was an excess
of tax cost over value (877,561)
---------
Net unrealized depreciation $(358,525)
=========
</TABLE>
OTHER INFORMATION:
Purchases and sales of U.S. Government and Agency Securities, other than
short-term securities, for the nine-month period ended October 31, 1994
aggregated $5,894,339 and $16,151,938, respectively.
9
<PAGE> 4
THE VICTORY FUNDS Statement of Assets and Liabilities
FUND FOR INCOME PORTFOLIO October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS
Investments, at value (cost $29,659,426) (Note 1) $29,334,561
Cash 830
Receivable for investments sold 414,070
Receivable for fund shares sold 4,944
Interest receivable 280,765
Receivable from adviser (Note 2) 25,048
- -----------------------------------------------------------------------------------------------------------
Total Assets 30,060,218
- -----------------------------------------------------------------------------------------------------------
LIABILITIES
Payable for investments purchased $420,715
Payable for fund shares redeemed 117,017
Dividends payable 129,579
Accrued administration fee (Note 2) 3,835
Other payables and accrued expenses 30,938
- -----------------------------------------------------------------------------------------------------------
Total Liabilities 702,084
- -----------------------------------------------------------------------------------------------------------
NET ASSETS
Paid in capital $31,169,874
Accumulated distributions in excess of net interest income (49,697)
Accumulated net realized loss on investments (1,437,178)
Net unrealized depreciation in value of investments (324,865)
- -----------------------------------------------------------------------------------------------------------
Net Assets $29,358,134
- -----------------------------------------------------------------------------------------------------------
Net asset value and redemption price per share
($29,358,134/3,112,214 shares outstanding) $9.43
- -----------------------------------------------------------------------------------------------------------
Maximum offering price per share (100/98 of $9.43) $9.62
- -----------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
10
<PAGE> 5
THE VICTORY FUNDS
FUND FOR INCOME PORTFOLIO Statement of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 1,
1994
TO
OCTOBER 31,
1994
-----------
<S> <C> <C>
Interest Income $ 2,270,953
- ----------------------------------------------------------------------------------------------------------
EXPENSES
Advisory fee (Note 2) 130,842
Administration fee (Note 2) 46,473
Transfer agent fees 3,299
Distribution plan expenses (Note 2) 16,928
Shareholders' Servicing (Note 2) 60,981
Accounting fees 28,574
Trustees' compensation 15,226
Custodian fees and expenses 16,279
Registration fees 8,537
Audit 10,148
Legal 2,625
Miscellaneous 2,462
- ----------------------------------------------------------------------------------------------------------
Total expenses before waiver and reimbursement 342,374
- ----------------------------------------------------------------------------------------------------------
Waiver and reimbursement of expenses (Note 2) (38,074) 304,300
- ----------------------------------------------------------------------------------------------------------
Net interest income 1,966,653
Net realized loss on investments (654,030)
Change in net unrealized depreciation (2,074,569)
- ----------------------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $ (761,946)
- ----------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
11
<PAGE> 6
THE VICTORY FUNDS
FUND FOR INCOME PORTFOLIO Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 1,
1994
TO YEAR ENDED
OCTOBER 31, JANUARY 31,
1994 1994
----------- ------------
<S> <C> <C>
DECREASE IN NET ASSETS
OPERATIONS
Net interest income $ 1,966,653 $ 4,063,041
Net realized loss on investments (654,030) (839,171)
Change in net unrealized depreciation (2,074,569) (1,329,774)
- -------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations (761,946) 1,894,096
- -------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net interest income (1,910,630) (4,053,224)
In excess of net interest income (49,697) --
Net realized gain -- (85,597)
- -------------------------------------------------------------------------------------------------------
Net decrease in net assets resulting from distributions (1,960,327) (4,138,821)
- -------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS(1)
Proceeds from sales of shares 3,073,372 17,079,015
Reinvested dividends 525,146 3,044,230
Cost of shares redeemed (18,150,344) (26,321,727)
- -------------------------------------------------------------------------------------------------------
Net decrease in net assets resulting from share transactions (14,551,826) (6,198,482)
- -------------------------------------------------------------------------------------------------------
Total decrease in net assets (17,274,099) (8,443,207)
- -------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of period 46,632,233 55,075,440
- -------------------------------------------------------------------------------------------------------
End of period (including accumulated distributions in excess of net
interest income of $49,697 at October 31, 1994) $29,358,134 $ 46,632,233
- -------------------------------------------------------------------------------------------------------
- ---------------
(1) Shares issued and redeemed:
Issued 312,318 1,645,312
Distributions reinvested 53,668 294,150
Redeemed (1,853,135) (2,549,680)
---------------------------------------------------------------------------------------------------
Net decrease in shares outstanding (1,487,149) (610,218)
---------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
12
<PAGE> 7
THE VICTORY FUNDS
FUND FOR INCOME PORTFOLIO Financial Highlights
- --------------------------------------------------------------------------------
SELECTED PER SHARE DATA
<TABLE>
<CAPTION>
PERIOD
FROM
FEBRUARY
1, 1994
TO
OCTOBER YEAR ENDED JANUARY 31,
31, ---------------------------------------------------
1994 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.14 $ 10.57 $ 10.55 $ 10.19 $ 9.90 $ 9.73
Income from investment operations
Net interest income(1) 0.52 0.80 0.80 0.85 0.91 0.93
Net realized and unrealized gain (loss)
on investments (0.71) (0.41) 0.06 0.36 0.29 0.17
- -------------------------------------------------------------------------------------------------------------
Total from Investment Operations (0.19) 0.39 0.86 1.21 1.20 1.10
- -------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.51) (0.80) (0.80) (0.85) (0.91) (0.93)
In excess of net interest income (0.01) -- -- -- -- --
Net realized gain -- (0.02) (0.04) -- -- --
- -------------------------------------------------------------------------------------------------------------
Total Distributions (0.52) (0.82) (0.84) (0.85) (0.91) (0.93)
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 9.43 $ 10.14 $ 10.57 $ 10.55 $ 10.19 $ 9.90
- -------------------------------------------------------------------------------------------------------------
Total Return++ (1.99)% 3.75% 8.45% 12.34% 12.75% 11.77%
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) $29,358 $46,632 $55,075 $58,055 $44,097 $35,788
Ratio of expenses to average net assets
(1) 1.12%* 1.13% 1.12% 0.92% 0.50% 0.29%
Ratio of net interest income to average
net assets 7.21%* 7.65% 7.56% 8.18% 9.15% 9.34%
Portfolio turnover rate 18% 47% 23% 24% 5% 5%
</TABLE>
- ---------------
(1) During the period from May 8, 1987 to April 30, 1991, various fees and
expenses were voluntarily waived and reimbursed by First Albany Asset
Management Corporation. For the period ended October 31, 1994, a portion of
operating expenses equal to 0.14% of average daily net assets were
voluntarily waived and reimbursed by Key Trust Company and Concord Holding
Corporation.
* Annualized
** Commencement of operations
++ Total return does not include the one time sales charge and for a period of
less than one year is not annualized. Total returns would have been lower
had certain expenses not been reduced during the period
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
13
<PAGE> 8
THE VICTORY FUNDS Portfolio of Investments
NEW YORK TAX-FREE PORTFOLIO October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) (NOTE 1)
<S> <C> <C>
- -----------------------------------------------------
MUNICIPAL BONDS AND NOTES (96.8%)
Metropolitan Transportation
Authority, New York
Revenue Bond, Series I,
AMBAC,
7.00%, 7/1/09 $ 250 $ 265,330
Revenue Bond, Series J,
FGIC,
6.50%, 7/1/18 250 244,075
Service Contract,
Refunding Revenue Bond,
Series K, AMBAC,
7.50%, 7/1/17 1,200 1,313,352
Nassau County, New York,
Industrial Development
Agency, Civic Facilities
Revenue Bond, Hofstra
University Project,
AMBAC,
6.75%, 8/1/11 250 256,265
New York City, New York,
City Housing Development,
Refunding Revenue Bond,
Multi-Unit Mortgage,
Series A, FHA,
7.30%, 6/1/10 700 740,586
Revenue Bond, Series 1,
MBIA,
7.38%, 4/1/17 335 352,118
Refunding Revenue Bond,
Multi-Unit Mortgage,
Series A, FHA,
7.35%, 6/1/19 675 711,787
New York City, New York,
City Transportation
Authority, Revenue Bond,
Livingston Plaza Project,
FSA,
7.50%, 1/1/20 220 244,011
New York City, New York,
Cultural Resources,
Revenue Bond, AMBAC,
6.63%, 1/1/11 680 686,650
New York City, New York,
General Obligation Bond,
Series B, FSA,
7.00%, 10/1/18 300 308,868
Series C, FGIC,
7.00%, 2/1/12 350 363,016
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) (NOTE 1)
<S> <C> <C>
New York City, New York,
Municipal Water Finance
Authority, Water & Sewer
System Revenue Bonds,
Series A, FGIC,
6.75%, 6/15/16 $ 750 $ 757,027
New York State Dormitory
Authority, Revenue Bonds,
Ithaca College, MBIA,
6.50%, 7/1/10 750 754,845
City University System,
Series C, FGIC,
7.00%, 7/1/14 725 750,948
State University
Educational System,
Series B, AMBAC,
6.00%, 5/15/17 500 462,845
Mount Sinai School of
Medicine, MBIA,
6.75%, 7/1/15 750 764,175
Judicial Facilities Leases,
Series B, MBIA,
7.00%, 4/15/16 225 232,072
New York State General
Obligation Bonds, AMBAC,
6.75%, 8/1/18 370 376,542
6.75%, 8/1/19 325 330,746
New York State Medical Care
Facilities Finance
Agency,
Prerefunded Revenue Bond,
MBIA,
7.375%, 8/15/19 290 319,708
Unrefunded/Revenue Bond,
MBIA,
7.375%, 8/15/19 500 534,105
Refunding Revenue Bond,
North Shore University
Hospital, MBIA,
7.20%, 11/1/20 815 854,291
Revenue Bond, Series A,
BIG,
7.10%, 2/15/27 550 573,139
Revenue Bond, St. Luke's,
Series B, MBIA,
7.45%, 2/15/29 340 376,955
New York State Power
Authority, Revenue Bond,
Series AA, MBIA,
6.25%, 1/1/23 500 475,240
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
14
<PAGE> 9
THE VICTORY FUND Portfolio of Investments
NEW YORK TAX-FREE PORTFOLIO October 31, 1994--Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
(000) (NOTE 1)
<S> <C> <C>
New York State Urban
Development Correctional
Facilities, Revenue Bond,
Series D, AMBAC,
7.50%, 1/1/12 $ 1,500 $ 1,627,635
Series 1, FSA,
7.50%, 1/1/20 400 443,656
Triborough Bridge & Tunnel
Authority,
Revenue Bond, Series T,
MBIA,
7.00%, 1/1/20 900 983,079
Special Obligation
Refunding Revenue Bond,
Series B, AMBAC,
6.875%, 1/1/15 1,000 1,025,580
- -----------------------------------------------------
TOTAL MUNICIPAL BONDS AND
NOTES (Cost
$16,556,616) 17,128,646
- -----------------------------------------------------
- -----------------------------------------------------
OTHER INVESTMENTS (3.2%)
Municipal Fund for New
York (Cost $569,480) $569,480 $ 569,480
- -----------------------------------------------------
TOTAL INVESTMENTS (100%)
(COST $17,126,096) $17,698,126
- -----------------------------------------------------
</TABLE>
- ---------------
N/R--Not Rated.
INCOME TAX INFORMATION:
At October 31, 1994, the net unrealized appreciation based on cost for income
tax purposes of $17,126,096 was as follows:
<TABLE>
<S> <C>
Aggregate gross unrealized appreciation for
all investments in which there was an
excess of value over tax cost $635,527
Aggregate gross unrealized depreciation for
all investments in which there was an
excess of tax cost over value (63,497)
--------
Net unrealized depreciation $572,030
========
</TABLE>
OTHER INFORMATION:
Purchases and sales of securities, other than short-term securities, for the
ten-month period ended October 31, 1994 aggregated $3,549,455 and $12,168,350,
respectively.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
15
<PAGE> 10
THE VICTORY FUNDS Statement of Assets and Liabilities
NEW YORK TAX-FREE PORTFOLIO October 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS
Investments, at value (cost $17,126,096) (Note 1) $17,698,126
Interest receivable 373,324
Receivable from adviser (Note 2) 51,034
- -----------------------------------------------------------------------------------------------------------
Total Assets 18,122,484
- -----------------------------------------------------------------------------------------------------------
LIABILITIES
Payable for fund shares redeemed $200,624
Dividends payable 55,249
Accrued administration fee (Note 2) 2,362
Other payables and accrued expenses 24,065
- -----------------------------------------------------------------------------------------------------------
Total Liabilities 282,300
- -----------------------------------------------------------------------------------------------------------
NET ASSETS
Paid in capital $17,038,952
Distributions in excess of net interest income (84)
Accumulated net realized gain on investments 229,286
Net unrealized appreciation in value of investments. 572,030
- -----------------------------------------------------------------------------------------------------------
Net Assets $17,840,184
- -----------------------------------------------------------------------------------------------------------
Class A:
NET ASSET VALUE and redemption price per share ($17,840,085/1,439,661 shares
outstanding) $12.39
- -----------------------------------------------------------------------------------------------------------
Maximum offering price per share (100/95.25 of $12.39) $13.01
- -----------------------------------------------------------------------------------------------------------
Class B:
NET ASSET VALUE offering price and redemption price per share ($98.76/7.97
shares outstanding) $12.39
- -----------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
16
<PAGE> 11
THE VICTORY FUNDS
NEW YORK TAX-FREE PORTFOLIO Statement of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1994
TO
OCTOBER 31,
1994
-----------
<S> <C> <C>
Interest Income $ 1,209,600
- -----------------------------------------------------------------------------------------------------------
EXPENSES
Advisory fee (Note 2) $97,386
Administration fee (Note 2) 33,508
Transfer agent fees 18,237
Shareholders' Servicing: Class A (Note 2) 24,372
Accounting fees 29,445
Trustees' compensation 16,536
Custodian fees and expenses 618
Registration fees 5,231
Audit 8,736
Legal 2,409
Miscellaneous 4,871
- -----------------------------------------------------------------------------------------------------------
Total expenses before waiver and reimbursement 241,349
- -----------------------------------------------------------------------------------------------------------
Waiver and reimbursement of expenses (Note 2) (64,505) 176,844
- -----------------------------------------------------------------------------------------------------------
Net interest income 1,032,756
Net realized gain on investments 229,286
Change in net unrealized appreciation (depreciation) (2,384,092)
- -----------------------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations $(1,122,050)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
17
<PAGE> 12
THE VICTORY FUNDS
NEW YORK TAX-FREE PORTFOLIO Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1994 YEAR ENDED
TO DECEMBER
OCTOBER 31, 31,
1994 1993
------------ -----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net interest income $ 1,032,756 $ 1,536,540
Net realized gain on investments 229,286 142,352
Change in net unrealized appreciation (depreciation) (2,384,092) 1,661,357
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations (1,122,050) 3,340,249
- ---------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net interest income:
Class A (1,033,170) (1,536,540)
Class B (1) --
Net realized gain:
Class A -- (117,133)
- ---------------------------------------------------------------------------------------------------------
Net decrease in net assets resulting from distributions (1,033,171) (1,653,673)
- ---------------------------------------------------------------------------------------------------------
SHARE TRANSACTIONS(1)
Proceeds from sales of shares 6,305,291 7,437,524
Reinvested dividends 455,059 1,285,282
Cost of shares redeemed (15,294,981) (7,913,599)
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from share transactions (8,534,631) 809,207
- ---------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets (10,689,852) 2,495,783
NET ASSETS
Beginning of period 28,530,036 26,034,253
- ---------------------------------------------------------------------------------------------------------
End of period (including distributions in excess of net interest income
of $84 at October 31, 1994) $ 17,840,184 $28,530,036
- ---------------------------------------------------------------------------------------------------------
- ---------------
(1) Dollars issued and redeemed:
Class A:
Issued $ 6,305,191 $ 7,437,524
Distributions reinvested 455,058 1,285,282
Redeemed (15,294,981) (7,913,599)
-----------------------------------------------------------------------------------------------------
Net increase (decrease) $ (8,534,732) $ 809,207
-----------------------------------------------------------------------------------------------------
Class B:
Issued $ 100 $ --
Distributions reinvested 1 --
-----------------------------------------------------------------------------------------------------
Net increase $ 101 $ --
-----------------------------------------------------------------------------------------------------
Shares issued and redeemed:
Class A:
Issued 481,728 566,260
Distributions reinvested 35,117 96,591
Redeemed (1,184,675) (595,263)
-----------------------------------------------------------------------------------------------------
Net increase (decrease) (667,830) 67,588
-----------------------------------------------------------------------------------------------------
Class B:
Issued 8 --
-----------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
18
<PAGE> 13
THE VICTORY FUNDS
NEW YORK TAX-FREE PORTFOLIO Financial Highlights
- --------------------------------------------------------------------------------
SELECTED PER SHARE DATA
<TABLE>
<CAPTION>
CLASS
B CLASS A
------ -----------------------------------------
PERIOD PERIOD PERIOD
FROM FROM FROM
SEPTEMBER JANUARY FEBRUARY
26** 1, 1994 11,
TO TO YEARS ENDED 1991**
OCTOBER OCTOBER DECEMBER 31, TO
31, 31, ----------------- DECEMBER
1994 1994 1993 1992 31, 1991
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.62 $ 13.54 $ 12.76 $ 12.50 $ 12.00
- --------------------------------------------------------------------------------------------------------------
Income from investment operations
Net interest income(1) 0.07 0.57 0.70 0.74 0.64
Net realized and unrealized gain (loss) on
investments (0.23) (1.15) 0.84 0.26 0.50
- --------------------------------------------------------------------------------------------------------------
Total from Investment Operations (0.16) (0.58) 1.54 1.00 1.14
- --------------------------------------------------------------------------------------------------------------
Distributions
Net investment income (0.07) (0.57) (0.70) (0.74) (0.64)
Net realized gain -- -- (0.06) -- --
- --------------------------------------------------------------------------------------------------------------
Total Distributions (0.07) (0.57) (0.76) (0.74) (0.64)
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.39 $ 12.39 $ 13.54 $ 12.76 $ 12.50
- --------------------------------------------------------------------------------------------------------------
Total Return++ (1.25)% (4.31)% 12.34% 8.26% 11.06%*
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (000) -- $17,840 $28,530 $26,034 $20,995
Ratio of expenses to average net assets(1) 0.52%* 0.91%* 0.87% 0.66% 0.45%*
Ratio of net interest income to average net
assets 5.94%* 5.33%* 5.28% 5.89% 6.28%*
Portfolio turnover rate 18% 18% 12% 14% 61%
</TABLE>
- ---------------
(1) During the period from February 11, 1991** to May 10, 1991, all operating
expenses were voluntarily waived by First Albany Asset Management
Corporation. During the period from May 11, 1991 to December 31, 1991, all
operating expenses in excess of 0.50% of average daily net assets were
voluntarily waived by First Albany Asset Management Corporation. For the
year ended December 31, 1992, a portion of operating expenses equal to 0.30%
of average daily net assets were voluntarily waived by First Albany Asset
Management Corporation. For the year ended December 31, 1993, a portion of
operating expenses equal to 0.09% of average daily net assets were
voluntarily waived by First Albany Asset Management Corporation. For the
period ended October 31, 1994, a portion of operating expenses equal to
0.34% of average daily net assets were voluntarily waived and reimbursed by
Key Trust Company and Concord Holding Corporation.
* Annualized
** Commencement of operations
++ Total return does not include the one time sales charge and for a period of
less than one year is not annualized. Total returns would have been lower
had certain expenses not been reduced during the period.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
19
<PAGE> 14
Notes to Financial Statements
THE VICTORY FUNDS October 31, 1994
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING AND OPERATING POLICIES
On April 30, 1994, all of the assets and liabilities of the Investors Preference
New York Tax-Free Fund, Inc. ("IPNY") and the Investors Preference Fund for
Income, Inc. ("IPFFI") were acquired by the New York Tax-Free Portfolio and the
Fund for Income Portfolio, respectively, of The Victory Funds (the "Fund")
pursuant to separate Agreements and Plans of Reorganization approved by the
shareholders of each of IPNY and IPFFI.
The Fund, organized as a Massachusetts business trust on January 6, 1982, is an
open-end management investment company registered under the Investment Company
Act of 1940, as amended (the "1940 Act"). The Fund's Declaration of Trust
permits the Board of Trustees (the "Trustees") to create an unlimited number of
Portfolios. Each Portfolio's capitalization consists of an unlimited number of
shares of beneficial interest without par value.
The Fund's financial statements are prepared in accordance with generally
accepted accounting principals.
The following is a summary of significant accounting policies for New York
Tax-Free Portfolio and Fund for Income Portfolio (the "Portfolios").
VALUATION OF SECURITIES
- ----------------------
The securities of Fund for Income Portfolio that are traded on an exchange or on
the over-the-counter market are valued based upon the last sale price, or if no
sale has occurred, at the closing bid price. Securities for which market
quotations are not readily available are valued at the closing over-the-counter
bid price, if available, or at their fair value as determined in good faith by
management following procedures approved by the Fund's Trustees. Short term debt
instruments with remaining maturities of 60 days or less at the time of purchase
are valued at amortized cost or original cost plus accrued interest, both of
which approximate market value.
The securities of New York Tax-Free Portfolio are valued by a pricing service
based upon a computerized matrix system or appraisals, in each case in reliance
upon information concerning market transactions and quotations from recognized
municipal securities dealers. Securities for which market quotations are not
readily available are valued at fair value as determined in good faith by
management following procedures approved by the Fund's Trustees.
REPURCHASE AGREEMENTS
- ----------------------
When each Portfolio enters into a repurchase agreement, the repurchase price of
the securities will generally equal the amount paid by each Portfolio plus a
negotiated interest amount. The seller under the repurchase agreement will be
required to provide securities (collateral) to each Portfolio whose value will
be at least equal to the repurchase agreement amount. Each Portfolio monitors
the value of the collateral on a daily basis, and if the value of the collateral
falls below required levels, each Portfolio intends to seek additional
collateral from the seller to terminate the repurchase agreements. If the seller
defaults, each Portfolio would suffer a loss to the extent that the proceeds
from the sale of the underlying securities were less than the repurchase price.
Any such loss would be increased by any cost incurred on the disposing of such
securities. A repurchase agreement entered into by each Portfolio will be
limited to transactions with broker-dealers or domestic banks believed to
present minimal credit risks, and each Portfolio will take delivery of all
securities underlying the repurchase agreement until such agreement expires.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
- -----------------------------------------------
The New York Tax-Free Portfolio may engage in when-issued or delayed delivery
transactions. To the extent the Portfolio engages in such transactions, it will
do so for the purpose of acquiring portfolio securities consistent with its
investment objectives and policies and not for the purpose of investment
leverage. The Portfolio will record a when-issued security and the related
liability on the trade date. Until the securities are received and paid for, the
Portfolio will maintain security positions such that sufficient liquid assets
will be available to make payment for the securities purchased. Securities
purchased on a when-issued or delayed delivery basis are marked to market daily
and begin earning interest on settlement date.
INCOME TAXES
- -------------
Each Portfolio intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code, whereby each Portfolio is not subject
to income taxes to the extent that it distributes all of its taxable income for
its fiscal year.
INTEREST INCOME
- ---------------
Interest income is accrued as earned. Interest income consists of interest
accrued and discount earned (including original issue and market discount), less
amortization of premium.
20
<PAGE> 15
Notes to Financial Statements--Continued
THE VICTORY FUNDS October 31, 1994
- --------------------------------------------------------------------------------
DISTRIBUTION TO SHAREHOLDERS
- ---------------------------
Distributions from the Portfolios are declared daily and paid monthly from net
investment income. Any net capital gains earned by each Portfolio will normally
be distributed in June and December to the extent necessary to avoid federal
income and excise taxes.
Dividends and distributions are determined in accordance with Federal Income tax
regulations which may differ from generally accepted accounting principles.
These differences are primarily due to differing treatments for wash sales and
paydown gains and losses for financial statement and income tax purposes.
OTHER
- -----
Investment security transactions are accounted for on the trade date. Realized
gains and losses from security transactions are determined using the identified
cost basis for both financial reporting and income tax purposes.
2. INVESTMENT ADVISORY AND ADMINISTRATIVE FEES AND OTHER TRANSACTIONS WITH
AFFILIATES
ADVISORY AGREEMENT
- -------------------
Prior to May 1, 1994, First Albany Asset Management Corporation ("First Albany")
served as investment adviser to IPNY and IPFFI. First Albany earned a fee of
$39,904 and $46,572 for IPNY and IPFFI, respectively, for the four-month period
and three-month period ended April 30, 1994 as compensation for statistical,
research, and management services. The fee was based upon an annual rate of
0.45% of each Funds' average daily net assets.
Effective May 1, 1994 Key Trust is the investment adviser for each Portfolio and
receives a fee based on average daily net assets at the annual rate of 0.55% and
0.50% for New York Tax-Free Portfolio and Fund for Income Portfolio,
respectively. For the period ended October 31, 1994, Key Trust accrued $57,482
and 84,270 in advisory fees, of which $10,537 and $2,027 was voluntarily waived,
for New York Tax-Free Portfolio and Fund for Income Portfolio, respectively. In
addition the investment adviser reimbursed expenses amounting to $53,968 and
$36,047 for New York Tax-Free and Fund for Income Portfolios, respectively.
ADMINISTRATION AND TRANSFER AGENT AGREEMENT
- --------------------------------------------
Murphy Favre Securities Services, Inc. received fees of $3,999 and $7,452 for
IPNY and IPFFI, respectively, for the four months and three months ended April
30, 1994 for services incident to issuance and transfer of shares, maintaining
stockholders' lists, and issuing and mailing dividend distributions and reports.
Murphy Favre Securities Services, Inc. also received fees of $17,735 and $20,699
from IPNY and IPFFI, respectively, for the four months and three months ended
April 30, 1994 for administrative services, including office space, maintaining
accounting records, and ordinary clerical, bookkeeping, and recordkeeping
services. The administrative services fee is based on an annual rate of 0.20% of
each fund's average daily net assets.
For the period May 1, 1994 to July 1, 1994, Fidelity Distributors Corporation
("Fidelity") was the administrator to the Portfolios under separate
administration and distribution agreements. Fidelity was compensated at an
annual rate of .15% of average annual net assets for services provided to the
Portfolios and received fees of $5,397 and $9,195 from the New York Tax-Free
Portfolio and the Fund for Income Portfolio, respectively, during such period.
Effective July 1, 1994, Concord Holding Corporation (the "Administrator") is the
Administrator to each Portfolio under an Administration Agreement with respect
to each Portfolio. The Administrator receives an annual fee of 0.15% of each
Portfolios average net assets for services performed under each Portfolio's
Administration Agreement. For the period ended October 31, 1994, the
administrator accrued $10,357 and $16,209 from the New York Tax-Free Portfolio
and Fund for Income Portfolio, respectively, in administration fees, none of
which were waived.
DISTRIBUTION AGREEMENT
- ----------------------
Prior to April 30, 1994, IPNY and IPFFI each had a plan of distribution (the
"Plan") pursuant to which it reimbursed First Albany Corporation for a portion
of its costs incurred in distributing the Fund's shares, including amounts paid
to brokers or dealers, at an annual rate not to exceed 0.25% of the Fund's
average daily net assets. For the four months ended April 30, 1994, no expenses
were reimbursed under this plan by IPNY. For the three months ended April 30,
1994, IPFFI incurred fees totaling $16,928 pursuant to the Plan.
21
<PAGE> 16
Notes to Financial Statements--Continued
THE VICTORY FUNDS October 31, 1994
- --------------------------------------------------------------------------------
For the period May 1, 1994 to July 1, 1994, Fidelity was the distributor to the
Portfolios under separate distribution agreements with respect to each
Portfolio. Fidelity sold shares of the Portfolios as Agent of the Fund at no
cost to the Portfolios.
Effective July 1, 1994, Concord Financial Group (the "Distributor"), an
affiliate of the Administrator, serves as Distributor to each Portfolio. The
Distributor sells shares of the Portfolios as agent on behalf of the Fund at no
cost to the Portfolios. The Fund has adopted a Distribution and Service Plan
(the "Plan") for the Class A shares of New York Tax-Free Portfolio and The Fund
for Income Portfolio under Rule 12b-1 under the Investment Company Act of 1940.
Under the Plan, the Adviser or Distributor may use their fee revenues, or other
resources to pay expenses associated with activities primarily intended to
result in the sale of the shares of the Portfolios. The Fund has adopted a
Distribution Plan for Class B shares of New York Tax-Free Portfolio to
compensate the Distributor for its services and costs in distributing Class B
shares and servicing accounts. Under the Distribution Plan, the Fund pays the
Distributor an annual "asset-based sales charge" of 0.75% per year on Class B
shares that are outstanding for six years or less. This fee is computed on the
average annual net assets of Class B shares, determined as of the close of each
regular business day.
Directors fees and expenses of $6,007 and $4,807 for IPNY and IPFFI,
respectively, for the four and three months ended April 30, 1994 were paid to
directors having no affiliation with the Fund other than in their capacity as
directors. Director Fees and expenses for the period May 1, 1994 to October 31,
1994 were $10,529 and $10,419 for New York Tax-Free Portfolio and Fund for
Income Portfolio, respectively.
- --------------------------------------------------------------------------------
This report and the financial statements contained herein are submitted for the
general information of the shareholders of the Fund. The report is not
authorized for distribution to prospective investors in the Fund., unless
preceded or accompanied by an effective prospectus. Neither the Fund nor Concord
Holding Corporation is a bank and Fund shares are not backed or guaranteed by
any bank or insured by the FDIC, the Federal Reserve Board, or any other agency.
Concord Holding Corporation, which distributes The Victory Funds, is not
affiliated with Key Trust Company. Investing in mutual funds involves risks,
including the possible loss of principal amount invested. An investment in a
money market Portfolio is not insured or guaranteed by the U.S. Government, and
there can be no assurance that a money market Portfolio will maintain a stable
$1.00 share price.
- --------------------------------------------------------------------------------
22
<PAGE> 17
THE VICTORY FUNDS Report of Independent Accountants
- --------------------------------------------------------------------------------
The Trustees and Shareholders
The Victory Funds
We have audited the accompanying statements of assets and liabilities of the
New York Tax-Free Portfolio (formerly the Investors Preference NY Tax-Free Fund,
Inc.) and the Fund for Income Portfolio (formerly the Investors Preference Fund
for Income, Inc.), portfolios of The Victory Funds, including the portfolios of
investments, as of October 31, 1994, and the related statements of operations,
statements of changes in net assets and financial highlights for the period from
January 1, 1994 to October 31, 1994 for the New York Tax-Free Portfolio, except
for the financial highlights for Class B shares which is for the period from
September 26, 1994 (date of initial public investment) to October 31, 1994, and
for the period from February 1, 1994 to October 31, 1994 for the Fund for Income
Portfolio. These financial statements and financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit. The statement of changes in net assets for the year ended December 31,
1993 and the financial highlights for each of the years in the two-year period
then ended and for the period from February 11, 1991 (commencement of
operations) to December 31, 1991 for the New York Tax-Free Portfolio and the
statement of changes in net assets for the year ended January 31, 1994 and the
financial highlights for each of the years in the five-year period then ended
for the Fund for Income Portfolio, were audited by other auditors, whose reports
thereon dated January 13, 1994 for the New York Tax-Free Portfolio and February
28, 1994 for the Fund for Income Portfolio, expressed unqualified opinions on
those financial statements and financial highlights.
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 of securities owned as of
October 31, 1994 by correspondence with the custodian and brokers. 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
New York Tax-Free Portfolio and the Fund for Income Portfolio, portfolios of The
Victory Funds, as of October 31, 1994, the results of their operations, the
changes in their net assets and the financial highlights for the period from
January 1, 1994 to October 31, 1994 for the New York Tax-Free Portfolio and for
the period from February 11, 1994 to October 31, 1994 for the Fund for Income
Portfolio in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
December 2, 1994
23
<PAGE> 1
EX-99.B15(b)
Schedule adopted December 6, 1995 to Distribution Plan dated June 5, 1995, for
Class B Shares of the Balanced Fund, Diversified Stock Fund, International
Growth Fund, Ohio Regional Stock Fund, Special Value Fund and U.S.
Government Obligations Fund
<PAGE> 2
THE VICTORY PORTFOLIOS
DISTRIBUTION PLAN
CLASS B SHARES
This Distribution Plan (the "Plan") is adopted in accordance with Rule
12b-1 (the "Rule") under the Investment Company Act of 1940, as amended (the
"1940 Act"), by The Victory Portfolios, a business trust organized under the
laws of the Commonwealth of Massachusetts (the "Company"), on behalf of the
Class B shares, a class of shares of its Funds (individually, a "Fund," and
collectively, the "Funds") as set forth in Schedule I, as amended from time to
time, subject to the following terms and conditions:
SECTION 1. ANNUAL FEES.
DISTRIBUTION FEE. Each Fund will pay to the distributor of its
shares, Concord Holdings Corporation (the "Distributor"), a distribution fee
under the Plan at the annual rate of 0.75% of the average daily net assets of
the Fund attributable to the Class B shares (the "Distribution Fee").
ADJUSTMENT TO FEES. Class B of any Fund may pay a Distribution Fee to
the Distributor at a lesser rate than the fees specified in Section 1 hereof as
agreed upon by the Board of Trustees and the Distributor and approved in the
manner specified in Section 4 of this Plan.
PAYMENT OF FEES. The Distribution Fees will be calculated daily and
paid monthly by each Fund with respect to the Class B shares at the annual
rates indicated above.
SECTION 2. EXPENSES COVERED BY THE PLAN.
Distribution Fees may be used by the Distributor for: (a) costs of
printing and distributing a Fund's prospectus, statement of additional
information and reports to prospective investors in the Fund; (b) costs
involved in preparing, printing and distributing sales literature pertaining to
a Fund; (c) an allocation of overhead and other branch office
distribution-related expenses of the Distributor; (d) payments to persons who
provide support services in connection with the distribution of a Fund's
shares, including but not limited to, office space and equipment, telephone
facilities, answering routine inquiries regarding a Fund, processing
shareholder transactions and providing any other shareholder services not
otherwise provided by a Fund's transfer agent; (e) accruals for interest on the
amount of the foregoing expenses that exceed the Distribution Fee
<PAGE> 3
and the contingent deferred sales charge received by the Distributor; and (f)
any other expense primarily intended to result in the sale of a Fund's
shares, including, without limitation, payments to salesmen and selling dealers
at the time of the sale of shares, if applicable, and continuing fees to each
such salesmen and selling dealers, which fee shall begin to accrue immediately
after the sale of such shares.
The amount of the Distribution Fees payable by any Fund under Section
1 hereof is not related directly to expenses incurred by the Distributor and
this Section 2 does not obligate a Fund to reimburse the Distributor for such
expenses. The Distribution Fees set forth in Section 1 will be paid by a Fund
to the Distributor unless and until the Plan is terminated or not renewed with
respect to a Fund or Class thereof, any distribution or service expenses
incurred by the Distributor on behalf of a Fund in excess of payments of the
Distribution Fees specified in Section 1 hereof which the Distributor has
accrued through the termination date are the sole responsibility and liability
of the Distributor and not an obligation of a Fund.
SECTION 3. INDIRECT EXPENSES.
While each Fund is authorized to make payments under this Plan to the
Fund's Distributor for expenses described above, it is expressly recognized
that each Fund presently pays, and will continue to pay, an investment advisory
fee to its Investment Adviser and an administration fee to the Administrator.
To the extent that any payments made by any Fund to the Investment Adviser or
Administrator, including payment of fees under the Investment Advisory
Agreement or the Administration Agreement, respectively, should be deemed to be
indirect financing of any activity primarily intended to result in the sale of
shares of the Portfolio within the context of Rule 12b-1 under the 1940 Act,
then such payments shall be deemed to be authorized by this Plan.
SECTION 4. APPROVAL OF TRUSTEES.
Neither the Plan nor any related agreements will take effect until
approved by a majority of both (a) the full Board of Trustees of the Company
and (b) those Trustees who are not interested persons of the Company and who
have no direct or indirect financial interest in the operation of the Plan or
in any agreements related to it (the "Qualified Trustees"), cast in person at a
meeting called for the purpose of voting on the Plan and the related
agreements.
SECTION 5. CONTINUANCE OF THE PLAN.
The Plan will continue in effect until __________, 1996, and thereafter
for successive twelve-month periods: provided, however,
-2-
<PAGE> 4
that such continuance is specifically approved at least annually by the
Trustees of the Company and by a majority of the Qualified Trustees.
SECTION 6. TERMINATION.
The Plan may be terminated at any time with respect to a Fund (i) by
the Company the without payment of any penalty, by the vote of a majority of
the outstanding voting securities of the Class B of any Fund or (ii) by a vote
of the Qualified Trustees. The Plan may remain in effect with respect to a
Fund even if the Plan has been terminated in accordance with this Section 5
with respect to any other Fund.
SECTION 7. AMENDMENTS.
The Plan may not be amended with respect to any Fund so as to increase
materially the amounts of the fees described in Section 1 above, unless the
amendment is approved by a vote of the holders of at least a majority of the
outstanding voting securities of Class B of that Fund. No material amendment
to the Plan may be made unless approved by the Company's Board of Trustees in
the manner described in Section 4 above.
SECTION 8. SELECTION OF CERTAIN TRUSTEES.
While the Plan is in effect, the selection and nomination of the
Company's Trustees who are not interested persons of the Company will be
committed to the discretion of the Trustees then in office who are not
interested persons of the Company.
SECTION 9. WRITTEN REPORTS.
In each year during which the Plan remains in effect, a person
authorized to direct the disposition of monies paid or payable by a Fund
pursuant to the Plan or any related agreement will prepare and furnish to the
Company's Board of Trustees, and the Board will review, at least quarterly,
written reports complying with the requirements of the Rule which set out the
amounts expended under the Plan and the purposes for which those expenditures
were made.
SECTION 10. PRESERVATION OF MATERIALS.
The Company will preserve copies of the Plan, any agreement relating
to the Plan and any report made pursuant to Section 8 above, for a period of
not less than six years (the first two years in an easily accessible place)
from the date of the Plan, agreement or report.
-3-
<PAGE> 5
SECTION 11. MEANINGS OR CERTAIN TERMS.
As used in the Plan, the terms "interested person" and "majority of
the outstanding voting securities" will be deemed to have the same meaning that
those terms have under the 1940 Act by the Securities and Exchange Commission.
IN WITNESS WHEREOF, the Company executed this Plan as of _________,
1995.
The Victory Portfolios
By: __________________
President
-4-
<PAGE> 6
SCHEDULE I
This Plan shall be adopted with respect to Class B shares of the following
Funds of The Victory Portfolios:
Balanced Fund
Diversified Stock Fund
Government Bond Fund
International Growth Fund
New York Tax-Free Fund
National Municipal Bond Fund
Ohio Regional Stock Fund
Special Value Fund
-5-
<PAGE> 1
EX-99.B18(b)
Amended and Restated Rule 18f-3
Multi-Class Plan
<PAGE> 2
THE VICTORY PORTFOLIOS
AMENDED AND RESTATED
RULE 18f-3 MULTI-CLASS PLAN
---------------------------
I. INTRODUCTION.
------------
Pursuant to Rule 18f-3 under the Investment Company Act of
1940, as amended (the "1940 Act"), the following sets forth the method for
allocating fees and expenses among each class of shares of the underlying
investment funds of The Victory Portfolios (the "Company") that issues multiple
classes of shares (the "Multi-Class Funds"). In addition, this Rule 18f-3
Multi-Class Plan (the "Plan") sets forth the shareholder servicing
arrangements, distribution arrangements, conversion features, exchange
privileges and other shareholder services of each class of shares in the
Multi-Class Funds.
The Company is an open-end series investment company
registered under the 1940 Act, the shares of which are registered on Form N-1A
under the Securities Act of 1933 (Registration Nos. 33-8982 and 811-4851).
Upon the effective date of this Plan, the Company hereby elects to offer
multiple classes of shares in the Multi-Class Funds pursuant to the provisions
of Rule 18f-3 and this Plan. This Plan does not make any material changes to
the general class arrangements and expense allocations previously approved by
the Board of Trustees of the Company.
The Company currently consists of the following twenty-eight
separate Funds:
Balanced Fund
Convertible Securities Fund (inactive)
Diversified Stock Fund
Financial Reserves Fund
Florida Tax-Free Bond Fund (inactive)
Fund For Income
Government Bond Fund
Government Mortgage Fund
Growth Fund
Institutional Money Market Fund
International Growth Fund
Intermediate Income Fund
Investment Quality Bond Fund
Limited Term Income Fund
Municipal Bond Fund (inactive)
National Municipal Bond Fund
New York Tax-Free Fund
<PAGE> 3
Ohio Municipal Bond Fund
Ohio Municipal Money Market Fund
Ohio Regional Stock Fund
Prime Obligations Fund
Short-Term U.S. Government Income Fund (Inactive)
Special Growth Fund
Special Value Fund
Stock Index Fund
Tax-Free Money Market Fund
U.S. Government Obligations Money Market Fund
Value Fund
Each of the following Funds is a Multi-Class Fund, authorized
to issue the following classes of shares representing interests in the same
underlying portfolio of assets of the respective Fund:
Class A Shares and Class B Shares (the "Non-Money
-------------------------------------------------
Market Funds"):
--------------
Balanced Fund
Diversified Stock Fund
Government Bond Fund
International Growth Fund
National Municipal Bond Fund
New York Tax-Free Fund
Ohio Regional Stock Fund
Special Value Fund
Service Class Shares and Institutional Class Shares:
---------------------------------------------------
(the "Money Market Funds")
--------------------------
Institutional Money Market Fund
U.S. Government Obligations Money Market Fund
II. CLASS ARRANGEMENTS.
------------------
The following summarizes the front-end sales charges,
contingent deferred sales charges, Rule 12b-1 distribution fees, shareholder
servicing fees, conversion features, exchange privileges and other shareholder
services applicable to each class of shares of the Multi-Class Funds.
Additional details regarding such fees and services are set forth in each
Fund's current Prospectus and Statement of Additional Information.
-2-
<PAGE> 4
A. NON-MONEY MARKET FUNDS - CLASS A SHARES:
1. INITIAL SALES LOAD: 4.75% (of the
offering price).
2. CONTINGENT DEFERRED SALES CHARGE:
None.
3. RULE 12b-1 DISTRIBUTION FEES: None.
4. SHAREHOLDER SERVICING FEES: Up to
.25% per annum of average daily net
assets.
5. CONVERSION FEATURES: None.
6. EXCHANGE PRIVILEGES: Subject to
restrictions and conditions set
forth in the Prospectus, may be
exchanged for Class A shares of any
other Non-Money Market Fund. Shares
of non-money market Funds that are
not Multi-Class Funds are deemed to
be Class A shares for this purpose.
Shares of Money Market Funds that
are not multi-class Funds are deemed
to be Service Class shares for this
purpose (other than Financial
Reserves Fund).
7. OTHER SHAREHOLDER SERVICES: As
provided in the Prospectus.
Services do not differ from those
applicable to Class B shares.
B. NON-MONEY MARKET FUNDS - CLASS B SHARES:
1. INITIAL SALES LOAD: None
2. CONTINGENT DEFERRED SALES CHARGE:
5% in the first year, declining to
1% in the sixth year and eliminated
thereafter.
(Based upon the lesser of the net asset
value of the shares at the time of
redemption or the original purchase
price. Not applicable to shares
purchased by the reinvestment of
dividends or capital gains
distributions.)
3. RULE 12b-1 DISTRIBUTION FEES: .75%
per annum of the average daily net
assets.
4. SHAREHOLDER SERVICING FEES: Up to
.25% of the average daily net
assets.
-3-
<PAGE> 5
5. CONVERSION FEATURES: Convert to
Class A shares 96 months after
purchase, based on relative net
asset values of the two classes.
Shares acquired by the reinvestment
of dividends and distributions are
included in the conversion.
6. EXCHANGE PRIVILEGES: May be
exchanged for Class B shares of
other Multi-class Funds.
7. OTHER SHAREHOLDER SERVICES: As
provided in the Prospectus.
Services do not differ from those
applicable to Class A shares.
C. MONEY MARKET FUNDS - INSTITUTIONAL SHARES:
1. MAXIMUM INITIAL SALES LOAD: None.
2. CONTINGENT DEFERRED SALES CHARGE:
None.
3. RULE 12b-1 DISTRIBUTION FEES: None.
"Defensive" Rule 12b-1 Plan covers
fees paid to the adviser and
administrator.
4. SHAREHOLDER SERVICING FEES: None.
5. CONVERSION FEATURES: None.
6. EXCHANGE PRIVILEGES: None.
D. MONEY MARKET FUNDS - SERVICE SHARES:
1. MAXIMUM INITIAL SALES LOAD: None.
2. CONTINGENT DEFERRED SALES CHARGE:
None.
3. RULE 12b-1 DISTRIBUTION FEES: None.
"Defensive" Rule 12b-1 Plan covers
fees paid to the adviser and
administrator.
4. SHAREHOLDER SERVICING FEES: Up to
.25% of the average daily net
assets.
5. CONVERSION FEATURES: None.
6. EXCHANGE PRIVILEGES: None.
-4-
<PAGE> 6
III. ALLOCATION OF EXPENSES.
----------------------
Pursuant to Rule 18f-3 under the 1940 Act, the Company shall
allocate to each class of shares in a Multi-Class Fund (i) any fees and
expenses incurred by the Company in connection with the distribution of such
class of shares (other than with respect to the Money Market Funds) under a
distribution plan adopted for such class of shares pursuant to Rule 12b-1
("Rule 12b-1 fees"), and (ii) any fees and expenses incurred by the Company
under a shareholder servicing plan in connection with the provision of
shareholder services to the holders of such class of shares ("Service Plan
fees"). In addition, pursuant to Rule 18f-3, the Company may allocate the
following fees and expenses (the "Class Expenses") to a particular class of
shares in a single Multi-Class Fund:
(i) transfer agent fees identified by the transfer agent
as being attributable to such class of shares;
(ii) printing and postage expenses related to
preparing and distributing materials such as
shareholder reports, prospectuses, reports,
and proxies to current shareholder of such
class of shares or to regulatory agencies
with respect to such class of shares;
(iii) blue sky registration or qualification fees incurred by
such class of shares;
(iv) Securities and Exchange Commission registration fees
incurred by such class of shares;
(v) the expense of administrative personnel and
services (including, but not limited to,
those of a fund accountant or dividend paying
agent charged with calculating net asset
values or determining or paying dividends) as
required to support the shareholders of such
class of shares;
(vi) litigation or other legal expenses relating
solely to such class of shares;
(vii) fees of the Company's Trustees incurred as result of
issues relating to such class of shares; and
(viii) independent accountants' fees relating solely
to such class of shares; and
(ix) shareholder meeting expenses for meetings of a
particular class.
Class Expenses, Rule 12b-1 fees and Service Plan fees are the
only expenses allocated to the classes disproportionately. The Class Expenses
allocated to each share of a
-5-
<PAGE> 7
class during a year will differ from the Class Expenses allocated to each share
of any other class by less than 50 basis points of the average daily net asset
value of the class of shares with the smallest average daily net asset value.
The initial determination of fees and expenses that will be
allocated by the Company to a particular class of shares and any subsequent
changes thereto will be reviewed by the Board of Trustees and approved by a
vote of the Trustees of the Company, including a majority of the Trustees who
are not interested persons of the Company. The Trustees will monitor conflicts
of interest among the classes and agree to take any action necessary to
eliminate conflicts.
Income, realized and unrealized capital gains and losses, and
any expenses of a Money Market Funds not allocated to a particular class of
such Fund by this Plan shall be allocated to each class of such Fund on the
basis of the relative net assets (settled shares), as defined in Rule 18f-3, of
that class in relation to the net assets of such Fund.
Income, realized and unrealized capital gains and losses, and
any expenses of the Non-Money Market Funds not allocated to a particular class
of any such Fund pursuant to this Plan shall be allocated to each class of the
Fund on the basis of the net asset value of that class in relation to the net
asset value of the Fund.
Any dividends and other distributions on shares of a class
will differ from dividends and other distributions on shares of other classes
only as a result of the allocation of Class Expenses, Rule 12b-1 fees, Service
Plan fees and the effects of such allocations.
The Investment Adviser will waive or reimburse its management
fee in whole or in part only if the fee is waived or reimbursed to all shares
of a Fund in proportion to their relative average daily net asset values. The
Investment Adviser, and any entity related to the Investment Adviser, who
charges a fee for a Class Expense will waive or reimburse that fee in whole or
in part only if the revised fee more accurately reflects the relative costs of
providing to each class the service for which the Class Expense is charged.
IV. BOARD REVIEW.
------------
The Board of Trustees of the Company shall review this Plan as
frequently as it deems necessary. Prior to any material amendment(s) to this
Plan, the Company's Board of Trustees, including a majority of the Trustees
that are not interested persons of the Company, shall find that the Plan, as
proposed to be amended (including any proposed amendments to the method of
allocating Class Expenses and/or fund expenses), is in the best interest of
each class of shares of a Multi-Class Fund individually and the Fund as a
whole. In considering whether to approve any proposed amendment(s) to the
Plan, the Trustees of the Company shall request and evaluate such information
as they consider reasonably necessary to evaluate the proposed amendment(s) to
the Plan. Such information shall address
-6-
<PAGE> 8
the issue of whether any waivers or reimbursements of advisory or
administrative fees could be considered a cross-subsidization of one class by
another, and other potential conflicts of interest between classes.
In making its initial determination to approve this Plan, the
Board has focused on, among other things, the relationship between or among the
classes and has examined potential conflicts of interest among classes
(including those potentially involving a cross-subsidization between classes)
regarding the allocation of fees, services, waivers and reimbursements of
expenses, and voting rights. The Board has evaluated the level of services
provided to each class and the cost of those services to ensure that the
services are appropriate and the allocation of expenses is reasonable. In
approving any subsequent amendments to this Plan, the Board shall focus on and
evaluate such factors as well as any others deemed necessary by the Board.
Adopted May 24, 1995; Effective June 5, 1995
Amended And Restated December 6, 1995
-7-
<PAGE> 1
EX.99.B P of A
Powers of Attorney
<PAGE> 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Trustee of THE VICTORY
PORTFOLIOS, a Delaware business trust, (the "Trust") constitutes and appoints
Carl Frischling and Jay G. Baris my true and lawful attorneys-in-fact, with full
power of substitution and resubstitution, for me and in my name, place and
stead, in any and all capacities as a trustee of the Trust, to sign for me and
in my name in the appropriate capacity, any and all Pre-Effective Amendments to
any Registration Statement of the Trust, any and all Post-Effective Amendments
to said Registration Statements, any Registration Statements on Form N-14, and
any supplements or other instruments in connection therewith, and generally to
do all such things in my name and behalf in connection therewith as said
attorneys-in-fact deem necessary or appropriate, to comply with the provisions
of the Securities Act of 1933, as amended, and the Investment Company Act of
1940, as amended, and all related requirements of the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorneys-in-fact or
their substitutes may do or cause to be done by virtue hereof.
Witness my hand on this 18th day of December, 1995.
/s/ Robert G. Brown
-------------------
Robert G. Brown
<PAGE> 3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Trustee of THE VICTORY
PORTFOLIOS, a Delaware business trust, (the "Trust") constitutes and appoints
Carl Frischling and Jay G. Baris my true and lawful attorneys-in-fact, with full
power of substitution and resubstitution, for me and in my name, place and
stead, in any and all capacities as a trustee of the Trust, to sign for me and
in my name in the appropriate capacity, any and all Pre-Effective Amendments to
any Registration Statement of the Trust, any and all Post-Effective Amendments
to said Registration Statements, any Registration Statements on Form N-14, and
any supplements or other instruments in connection therewith, and generally to
do all such things in my name and behalf in connection therewith as said
attorneys-in-fact deem necessary or appropriate, to comply with the provisions
of the Securities Act of 1933, as amended, and the Investment Company Act of
1940, as amended, and all related requirements of the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorneys-in-fact or
their substitutes may do or cause to be done by virtue hereof.
Witness my hand on this 18th day of December, 1995.
/s/ Edward P. Campbell
----------------------
Edward P. Campbell
<PAGE> 4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Trustee of THE VICTORY
PORTFOLIOS, a Delaware business trust, (the "Trust") constitutes and appoints
Carl Frischling and Jay G. Baris my true and lawful attorneys-in-fact, with full
power of substitution and resubstitution, for me and in my name, place and
stead, in any and all capacities as a trustee of the Trust, to sign for me and
in my name in the appropriate capacity, any and all Pre-Effective Amendments to
any Registration Statement of the Trust, any and all Post-Effective Amendments
to said Registration Statements, any Registration Statements on Form N-14, and
any supplements or other instruments in connection therewith, and generally to
do all such things in my name and behalf in connection therewith as said
attorneys-in-fact deem necessary or appropriate, to comply with the provisions
of the Securities Act of 1933, as amended, and the Investment Company Act of
1940, as amended, and all related requirements of the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorneys-in-fact or
their substitutes may do or cause to be done by virtue hereof.
Witness my hand on this 18th day of December, 1995.
/s/ Harry Gazelle
-----------------
Harry Gazelle
<PAGE> 5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Trustee of THE VICTORY
PORTFOLIOS, a Delaware business trust, (the "Trust") constitutes and appoints
Carl Frischling and Jay G. Baris my true and lawful attorneys-in-fact, with full
power of substitution and resubstitution, for me and in my name, place and
stead, in any and all capacities as a trustee of the Trust, to sign for me and
in my name in the appropriate capacity, any and all Pre-Effective Amendments to
any Registration Statement of the Trust, any and all Post-Effective Amendments
to said Registration Statements, any Registration Statements on Form N-14, and
any supplements or other instruments in connection therewith, and generally to
do all such things in my name and behalf in connection therewith as said
attorneys-in-fact deem necessary or appropriate, to comply with the provisions
of the Securities Act of 1933, as amended, and the Investment Company Act of
1940, as amended, and all related requirements of the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorneys-in-fact or
their substitutes may do or cause to be done by virtue hereof.
Witness my hand on this 18th day of December, 1995.
/s/ Stanley I. Landgraf
-----------------------
Stanley I. Landgraf
<PAGE> 6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Trustee of THE VICTORY
PORTFOLIOS, a Delaware business trust, (the "Trust") constitutes and appoints
Carl Frischling and Jay G. Baris my true and lawful attorneys-in-fact, with full
power of substitution and resubstitution, for me and in my name, place and
stead, in any and all capacities as a trustee of the Trust, to sign for me and
in my name in the appropriate capacity, any and all Pre-Effective Amendments to
any Registration Statement of the Trust, any and all Post-Effective Amendments
to said Registration Statements, any Registration Statements on Form N-14, and
any supplements or other instruments in connection therewith, and generally to
do all such things in my name and behalf in connection therewith as said
attorneys-in-fact deem necessary or appropriate, to comply with the provisions
of the Securities Act of 1933, as amended, and the Investment Company Act of
1940, as amended, and all related requirements of the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorneys-in-fact or
their substitutes may do or cause to be done by virtue hereof.
Witness my hand on this 18th day of December, 1995.
/s/ Thomas F. Morrissey
-----------------------
Thomas F. Morrissey
<PAGE> 7
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Trustee of THE VICTORY
PORTFOLIOS, a Delaware business trust, (the "Trust") constitutes and appoints
Carl Frischling and Jay G. Baris my true and lawful attorneys-in-fact, with full
power of substitution and resubstitution, for me and in my name, place and
stead, in any and all capacities as a trustee of the Trust, to sign for me and
in my name in the appropriate capacity, any and all Pre-Effective Amendments to
any Registration Statement of the Trust, any and all Post-Effective Amendments
to said Registration Statements, any Registration Statements on Form N-14, and
any supplements or other instruments in connection therewith, and generally to
do all such things in my name and behalf in connection therewith as said
attorneys-in-fact deem necessary or appropriate, to comply with the provisions
of the Securities Act of 1933, as amended, and the Investment Company Act of
1940, as amended, and all related requirements of the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorneys-in-fact or
their substitutes may do or cause to be done by virtue hereof.
Witness my hand on this 18th day of December, 1995.
/s/ H. Patrick Swygert
----------------------
H. Patrick Swygert
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<ARTICLE> 6
<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
<SERIES>
<NUMBER> 1
<NAME> THE VICTORY FINANCIAL RESERVES FUND
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
<SERIES>
<NUMBER> 2
<NAME> FUND FOR INCOME FUND
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> NOV-01-1994
<PERIOD-END> APR-30-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 24172
<INVESTMENTS-AT-VALUE> 23,678
<RECEIVABLES> 312
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<PAYABLE-FOR-SECURITIES> 64
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<OTHER-ITEMS-LIABILITIES> 220
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<PAID-IN-CAPITAL-COMMON> 26,101
<SHARES-COMMON-STOCK> 2,571
<SHARES-COMMON-PRIOR> 7,640
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<OVERDISTRIBUTION-GAINS> 1,807
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<NET-INVESTMENT-INCOME> 905
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<APPREC-INCREASE-CURRENT> 834
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<NUMBER-OF-SHARES-SOLD> 218
<NUMBER-OF-SHARES-REDEEMED> 779
<SHARES-REINVESTED> 20
<NET-CHANGE-IN-ASSETS> (4,645)
<ACCUMULATED-NII-PRIOR> (49)
<ACCUMULATED-GAINS-PRIOR> (2,176)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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<GROSS-EXPENSE> 192
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<PER-SHARE-NAV-BEGIN> 9.43
<PER-SHARE-NII> (0.05)
<PER-SHARE-GAIN-APPREC> 0.58
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.35
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.61
<EXPENSE-RATIO> 0.57
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
<SERIES>
<NUMBER> 3
<NAME> GOVERNMENT BOND FUND
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1995
<PERIOD-START> MAY-01-1994
<PERIOD-END> APR-30-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 82465
<INVESTMENTS-AT-VALUE> 82,723
<RECEIVABLES> 2,234
<ASSETS-OTHER> 622
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 85,579
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<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 857
<TOTAL-LIABILITIES> 857
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<SHARES-COMMON-STOCK> 8,963
<SHARES-COMMON-PRIOR> 12,752
<ACCUMULATED-NII-CURRENT> 146
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<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 10,448
<ACCUM-APPREC-OR-DEPREC> 871
<NET-ASSETS> 84,722
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,270
<OTHER-INCOME> 0
<EXPENSES-NET> 699
<NET-INVESTMENT-INCOME> 6,571
<REALIZED-GAINS-CURRENT> (7,388)
<APPREC-INCREASE-CURRENT> 5,974
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<NUMBER-OF-SHARES-SOLD> 1,475
<NUMBER-OF-SHARES-REDEEMED> 5,266
<SHARES-REINVESTED> 8
<NET-CHANGE-IN-ASSETS> 35,914
<ACCUMULATED-NII-PRIOR> (29)
<ACCUMULATED-GAINS-PRIOR> 6,203
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,017
<AVERAGE-NET-ASSETS> 84,722
<PER-SHARE-NAV-BEGIN> 9.45
<PER-SHARE-NII> 0.55
<PER-SHARE-GAIN-APPREC> (0.02)
<PER-SHARE-DIVIDEND> 0.54
<PER-SHARE-DISTRIBUTIONS> 0.00
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<PER-SHARE-NAV-END> 9.44
<EXPENSE-RATIO> 0.63
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
<SERIES>
<NUMBER> 4
<NAME> GOVERNMENT MORTGAGE FUND
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> NOV-01-1994
<PERIOD-END> APR-30-1995
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<INVESTMENTS-AT-VALUE> 142,962
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<NET-ASSETS> 143,435
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<INTEREST-INCOME> 5,718
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<NET-INVESTMENT-INCOME> 5,148
<REALIZED-GAINS-CURRENT> (1,978)
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<NET-CHANGE-IN-ASSETS> (4,733)
<ACCUMULATED-NII-PRIOR> 1,552
<ACCUMULATED-GAINS-PRIOR> (4,594)
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<GROSS-EXPENSE> 582
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
<SERIES>
<NUMBER> 5
<NAME> GROWTH FUND
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<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> NOV-01-1994
<PERIOD-END> APR-30-1995
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</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
<SERIES>
<NUMBER> 6
<NAME> INSTITUTIONAL MONEY MARKET FUND
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<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> YEAR
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<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
<SERIES>
<NUMBER> 7
<NAME> INTERMEDIATE INCOME FUND
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> OTHER
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000802716
<NAME> THE VICTORY PORTFOLIOS
<SERIES>
<NUMBER> 8
<NAME> INVESTMENT QUALITY BOND FUND
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> NOV-01-1994
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<OVERDISTRIBUTION-GAINS> (5,067)
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<NAME> THE VICTORY PORTFOLIOS
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<NAME> THE VICTORY PORTFOLIOS
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<NAME> THE VICTORY PORTFOLIOS
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<NAME> THE VICTORY PORTFOLIOS
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<NAME> THE VICTORY PORTFOLIOS
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