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Rule 497(c)
Registration No. 33-8982
[LOGO]
The Victory Funds
PROSPECTUS
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THE VICTORY OHIO MUNICIPAL MONEY MARKET FUND
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J A N U A R Y 1 , 1 9 9 6
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The
VICTORY
Portfolios
Ohio Municipal Money Market Fund
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PROSPECTUS For current yield, purchase and redemption information,
January 1, 1996 call 800-539-FUND or 800-539-3863
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THE VICTORY PORTFOLIOS is a registered open-end management investment company
that offers investors a selection of money market, fixed-income, municipal bond
and domestic and international equity portfolios. This Prospectus relates to the
OHIO MUNICIPAL MONEY MARKET FUND (the "Fund"), a non-diversified 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 ("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 current income exempt from federal regular income tax
and the personal income taxes imposed by the State of Ohio and Ohio
municipalities consistent with stability of principal. (Federal regular income
tax does not include the federal alternative minimum tax for individuals and
corporations.) The Fund pursues this investment objective by investing primarily
in a portfolio of short-term Ohio municipal securities. Shares of the Fund are
offered at net asset value.
Please read this Prospectus before investing. It is designed to provide the
investor 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 January 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 (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 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.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE 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.
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TABLE OF CONTENTS PAGE
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Fund Expenses............................................................................ 2
Financial Highlights..................................................................... 3
Investment Objective..................................................................... 4
Investment Policies and Risk Factors..................................................... 4
Additional Information Regarding Securities in Which the Fund May Invest................. 5
Investment Risks......................................................................... 7
Limiting Investment Risks................................................................ 8
How to Invest, Exchange and Redeem....................................................... 9
Dividends, Distributions and Taxes....................................................... 13
Performance.............................................................................. 15
Fund Organization and Fees............................................................... 16
Additional Information................................................................... 19
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FUND EXPENSES
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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, such as the Fund's
investment objective.
A. SHAREHOLDER TRANSACTION EXPENSE
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Maximum Sales Charge Imposed on Purchases (as a percentage of the
offering price)...................................................... None
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Sales Charge Imposed on Reinvested Dividends........................... None
Deferred Sales Load (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
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B. ANNUAL FUND OPERATING EXPENSES AFTER EXPENSE WAIVERS AND REIMBURSEMENTS (as a
percentage of average net assets)
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Management Fee(1)...................................................... .20%
Administration Fee..................................................... .15%
Other Expenses(2)...................................................... .30%
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Total Fund Operating Expenses(3)....................................... .65%
</TABLE>
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(1) The investment management fee has been reduced to reflect the voluntary
waiver of a portion of the fee by Key Advisers. The Adviser has agreed to
waive a portion of its management fee, to the extent necessary, to maintain
the operating expense ratio of the Fund at .65% until at least August 31,
1996. The maximum management fee absent waiver is .50%.
(2) Includes a maximum .25% shareholder servicing fee payable to certain
financial institutions. See "Fund Organization and Fees -- Shareholder
Servicing."
(3) Without the voluntary waiver, the total operating expense ratio of the Fund
would be .95%.
C. EXAMPLE: You would pay the following expenses on a $1,000 investment in the
Fund, assuming (1) a 5% annual return and (2) redemption at the end of each time
period.
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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Ohio Municipal MMF..................... 7 21 36 81
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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. 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 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 ACTUAL OR EXPECTED FUND PERFORMANCE OR
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
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FINANCIAL HIGHLIGHTS
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The following information for the two month period ended October 31, 1995 and
the year ended August 31, 1995 represent selected data for a single share
outstanding of the Fund and has been audited by Coopers & Lybrand, L.L.P.,
independent accountants to the Fund. The information for the year ended August
31, 1994 represents selected data for a single share outstanding of The Victory
Funds: Ohio Municipal Money Market Portfolio (the "Predecessor Fund") and has
been audited by KPMG Peat Marwick LLP, independent accountants for the
Predecessor Fund. All other information represents selected data for a single
share outstanding of A.T. Ohio Municipal Money Fund, the predecessor to The
Victory Funds: Ohio Municipal Money Market Portfolio, throughout each of the
periods shown. Such information has been audited by Ernst & Young LLP,
independent accountants for the A. T. Ohio Municipal Money Market Fund for the
fiscal years indicated in the table below. The Financial Statements and
independent accountants' reports as of October 31, 1995 are incorporated by
reference in this Prospectus and the Statement of Additional Information.
THE VICTORY OHIO MUNICIPAL MONEY MARKET FUND
SELECTED PER SHARE DATA
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TWO YEARS ENDED AUGUST 31,
MONTHS ENDED -------------------------------------------------------------------
OCTOBER 31, 1995(G) 1995(B) 1994(C) 1993(A)(C)
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Net asset value, beginning of
period.......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............. 0.006 0.033 0.021 0.021
LESS DISTRIBUTIONS:
Dividends to shareholders from net
investment income............... (0.006) (0.033) (0.021) (0.021)
-------- -------- -------- --------
Net asset value, end of period.... $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ======== ======== ========
TOTAL RETURN...................... 0.55%(d) %3.33 %2.10 %2.14
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................... $ 510,414 $ 502,453 $ 318,132 $ 262,681
Ratio of expenses to average net
assets.......................... 0.64%(e)(f) %0.63(f) %0.65(f) %0.65(f)
Ratio of net interest income to
average net assets.............. 3.31%(e)(f) %3.33(f) %2.08(f) %2.12(f)
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1992(A)(C) 1991(A)(C) 1990(C) 1989(C)
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Net asset value, beginning of
period.......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............. 0.031 0.046 0.053 0.056
LESS DISTRIBUTIONS:
Dividends to shareholders from net
investment income............... (0.031) (0.046) (0.053) (0.056)
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Net asset value, end of period.... $ 1.00 $ 1.00 $ 1.00 $ 1.00
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TOTAL RETURN...................... %3.18 %4.67 %5.50 %5.76
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................... $ 252,705 $ 253,177 $ 297,845 $ 278,337
Ratio of expenses to average net
assets.......................... %0.65(f) %0.64(f) %0.65 %0.65
Ratio of net interest income to
average net assets.............. %3.13(f) %4.59(f) %5.36 %5.60
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1988(C) 1987(C) 1986(C)
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Net asset value, beginning of
period.......................... $ 1.00 $ 1.00 $ 1.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income............. 0.044 0.036 0.045
LESS DISTRIBUTIONS:
Dividends to shareholders from net
investment income............... (0.044) (0.036) (0.045)
-------- -------- --------
Net asset value, end of period.... $ 1.00 $ 1.00 $ 1.00
======== ======== ========
TOTAL RETURN...................... %4.50 %3.75 %4.60
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................... $ 257,002 $ 223,677 $ 160,061
Ratio of expenses to average net
assets.......................... %0.63(f) %0.62 %0.63(f)
Ratio of net interest income to
average net assets.............. %4.41(f) %3.71 %4.30(f)
</TABLE>
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(a)Effective February 27, 1991, Ameritrust Company National Association became
investment adviser to the Predecessor Fund. Effective March 16, 1992, the
Predecessor Fund's investment adviser was acquired by Society Corporation.
Effective July 13, 1992, the adviser was merged into Society National Bank,
another wholly-owned subsidiary of Society Corporation. Effective February 3,
1993, Society Asset Management, Inc., a wholly-owned subsidiary of Society
National Bank, was named investment adviser to the Predecessor Fund.
(b)Effective June 5, 1995, the Predecessor Fund merged into the Fund.
(c)Audited by other auditors (as indicated above).
(d)Not annualized.
(e)Annualized.
(f)For the two month period ended October 31, 1995 and fiscal years ended August
31, 1995, 1994, 1993, 1992, 1991, 1988 and 1986, the former investment
advisers waived all or a portion of their fees and the administrator and
former administrator waived all or a portion of their fees and/or voluntarily
reimbursed certain other operating expenses of the Fund and the predecessor
funds. Had the investment advisers and administrators not undertaken such
action, the ratios of expenses and net investment income to average net
assets would have been 0.92% and 3.03% (annualized), 0.94% and 3.02%, 0.76%
and 1.97%, 0.72% and 2.05%, 0.68% and 3.10%, 0.66% and 4.57%, 0.66% and
4.38%, 0.73% and 4.21%, respectively, on an annualized basis.
(g)Effective January 1, 1996, KeyCorp Mutual Fund Advisers, Inc., a wholly-owned
subsidiary of KeyCorp Asset Management Holdings, Inc., became investment
adviser and Society Asset Management, Inc. became sub-adviser to the Fund.
The Fund's fiscal year was changed to the period ended October 31 of each
year.
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INVESTMENT OBJECTIVE
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The investment objective of the Fund is to seek to provide current income exempt
from federal regular income tax and the personal income taxes imposed by the
State of Ohio and Ohio municipalities consistent with stability of principal.
This is a fundamental objective which cannot be changed without approval of the
Fund's shareholders.
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INVESTMENT POLICIES AND RISK FACTORS
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Key Advisers and the Sub-Adviser intend to achieve the Fund's objective by
primarily investing in a portfolio of short-term Ohio Municipal Securities, as
defined below. As a matter of fundamental policy, under normal market
conditions, the Fund invests so that at least 80% of its annual interest income
is exempt from federal regular income tax and Ohio state income tax. (Federal
regular income tax does not include the federal individual alternative minimum
tax or the federal alternative minimum tax for corporations.) Most Ohio
municipalities do not subject dividend and interest income to local income tax.
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. Income distributed by the Fund may not necessarily be exempt from
state or municipal taxes in states other than Ohio.
The investment policies described below may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in these policies becomes effective.
ACCEPTABLE INVESTMENTS
The Fund will invest primarily in Ohio municipal securities with remaining
maturities of 397 days or less at the time of purchase by the Fund. The average
maturity of these securities, computed on a dollar weighted basis, will be 90
days or less. Ohio municipal securities which, under normal market conditions,
will comprise at least 65% of the Fund's assets, are debt obligations issued by
or on behalf of the State of Ohio, its political subdivisions, or agencies; debt
obligations of any state, territory or possession of the United States,
including the District of Columbia; and any political subdivision or financing
authority of any of these, the income from which is, in the opinion of qualified
legal counsel, exempt from both federal regular income tax and the personal
income tax imposed by the State of Ohio ("Municipal Securities"). The Fund may
invest, without limit, in securities the income from which is subject to federal
alternative minimum tax. Municipal Securities consist of:
- - tax and revenue anticipation notes ("TRANs") issued to finance working capital
needs in anticipation of receiving taxes or other revenues;
- - bond anticipation notes ("BANs") that are intended to be refinanced through a
later issuance of longer-term bonds;
- - municipal commercial paper and other short-term notes;
- - variable rate demand notes;
- - municipal bonds (including bonds having serial maturities and pre-refunded
bonds); and
- - participation interests in any of the foregoing obligations.
RATINGS. The Municipal Securities in which the Fund invests must be rated in
one of the two highest short-term rating categories by a nationally recognized
statistical rating organization ("NRSRO") or be of comparable quality to
securities having such ratings. A NRSRO's two highest rating categories are
determined without regard for sub-categories and gradations. For example,
securities rated SP-1+, SP-1 or SP-2 by Standard & Poor's Corporation ("S&P"),
MIG1 or MIG2 by Moody's Investors Service, Inc. ("Moody's"), or FIN-1+, FIN-1,
or FIN-2 by Fitch Investors Service, Inc. ("Fitch") are all considered rated in
one of the two highest short-term rating categories. The Fund will follow
applicable regulations in determining whether a security rated by more than one
NRSRO can be treated as being in one of the two highest short-term rating
categories; currently, such a security must be rated by two NRSROs in one of
these categories. See "Limiting Investment Risks -- Regulatory Compliance."
- - CREDIT ENHANCEMENT. The acceptable investments of the Fund may have a credit
enhancement provided by a guaranty, letter of credit or insurance. The Fund
typically evaluates the credit quality and ratings of securities so enhanced
based upon the financial condition and ratings of the party providing the credit
enhancement (the "credit
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enhancer"), rather than the issuer. However, such securities will not be treated
as having been issued by the credit enhancer for diversification purposes,
unless the Fund has invested more than 10% of its assets in securities issued,
guaranteed or otherwise enhanced by the credit enhancer, in which case the
securities will be treated as having been issued both by the issuer and the
credit enhancer. The bankruptcy, receivership or default of the credit enhancer
will adversely affect the quality and marketability of the underlying security.
The Fund may have more than 25% of its total assets invested in securities which
are subject to credit enhancements provided by domestic banks.
- - TEMPORARY INVESTMENTS. The Fund invests its assets so that at least 80% of
its annual interest income is exempt from federal regular income tax and Ohio
state income taxes. However, from time to time, when the Adviser determines that
market conditions call for a temporary defensive posture, the Fund may invest in
temporary investments with remaining maturities of 397 days or less at the time
of purchase by the Fund or hold Fund assets in cash. Interest income from such
temporary investments may be taxable to shareholders as ordinary income. These
temporary investments consist of obligations issued by or on behalf of municipal
or corporate issuers having the same quality characteristics as Ohio Municipal
Securities purchased by the Fund; marketable obligations issued or guaranteed by
the U.S. government, its agencies, or instrumentalities; instruments issued by a
U.S. branch of a domestic bank or other depository institutions having capital,
surplus, and undivided profits in excess of $100,000,000 at the time of
investment; repurchase agreements (arrangements in which the organization
selling the Fund a temporary investment agrees at the time of sale to repurchase
it at a mutually agreed upon time and price); and commercial paper rated in one
of the two highest short-term rating categories by NRSROs. See "Ratings" above.
Although the Fund is permitted to make taxable temporary investments, there is
no current intention of generating income subject to federal regular or Ohio
income taxes.
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ADDITIONAL INFORMATION REGARDING SECURITIES
IN WHICH THE FUND MAY INVEST
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The following paragraphs provide a brief description of some of the 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.
- - 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 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
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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.
The Fund may acquire an underlying debt instrument for a relatively short period
(usually not more than one business day) subject to an obligation of the seller
to repurchase and the Fund to resell the instrument at a fixed price. In the
event the seller defaults on this agreement to repurchase the instrument, the
Fund may suffer a loss because of a decline in the value of the underlying debt
instrument.
- - REPURCHASE AGREEMENTS. A repurchase agreement is a purchase of and
simultaneous commitment to resell at an agreed upon price and date (which is
usually not more than seven days from the date of purchase). The Fund will enter
into repurchase agreements only with domestic banks or recognized dealers, with
respect to any of the above-mentioned securities. To limit risk, repurchase
agreements maturing in more than seven days and other illiquid assets will not
exceed 10% of the net assets of the Fund. The Fund requires daily valuation of
the underlying debt instrument for any repurchase agreement maturing in more
than one business day and requires that the market value of the collateral be
maintained at a minimum of 100% of the transaction value. The Fund maintains
constructive possession of the securities through a safekeeping arrangement with
third parties who qualify as custodians under Section 17(f) of the Investment
Company Act of 1940, as amended (the "1940 Act"). Repurchase Agreements are
considered by the staff of the Commission to be loans by the Fund.
- - REVERSE REPURCHASE AGREEMENTS. A reverse repurchase agreement is a
transaction where 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.
- - PARTICIPATION INTERESTS. The Fund may purchase interests in Municipal
Securities from financial institutions such as commercial and investment banks,
savings and loan associations and insurance companies and consequently will deem
the participation interest to be issued by such entity. These interests may take
the form of participation interests or any other form of indirect ownership that
allows the Fund to treat the income from the investment as exempt from federal
income tax. 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 Municipal Securities.
- - DEMAND FEATURES. The Fund may acquire securities that are subject to puts and
standby commitments ("demand features") to purchase the securities at their
principal amount (usually with accrued interest) within a fixed period (usually
seven days) following a demand by the Fund. The demand feature may be issued by
the issuer of the underlying securities, a dealer in the securities or by
another third party, and may not be transferred separately from the underlying
security. The Fund uses these arrangements to provide the Fund with liquidity
and not to protect against changes in the market value of the underlying
securities. The bankruptcy, receivership or default by the issuer of the demand
feature, or a default on the underlying security or other event that terminates
the demand feature before its exercise, will adversely affect the liquidity of
the underlying security. Demand features that are exercisable even after a
payment default on the underlying security may be treated as a form of credit
enhancement.
- - RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest in restricted
securities. Restricted securities are any securities in which the Fund may
invest pursuant to its investment objective and policies but which are subject
to restrictions on resale under federal securities laws. Under criteria
established by the Board of Trustees, certain restricted securities are
considered liquid. To the extent that restricted securities are not found to be
liquid, the Portfolio will limit their purchase, together with other securities
considered to be illiquid to 10% of its net assets.
- - OHIO MUNICIPAL SECURITIES. Ohio Municipal Securities are generally issued to
finance public works, such as airports, bridges, highways, housing, hospitals,
mass transportation projects, schools, streets, and water and sewer works. They
are also issued to repay outstanding obligations, to raise funds for general
operating expenses, and to make loans to other public institutions and
facilities.
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Ohio Municipal Securities include industrial development bonds issued by or on
behalf of public authorities to provide financing aid to acquire sites or to
construct and equip facilities for privately or publicly owned businesses. The
availability of this financing encourages these businesses to locate within the
sponsoring communities and State and thereby increases local employment.
The two principal classifications of Municipal Securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment of
principal and interest. Interest on and principal of revenue bonds, however, are
payable only from the revenue generated by the facility financed by the bond or
other specified sources of revenue. Revenue bonds do not represent a pledge of
credit or create any debt of or charge against the general revenues of a
municipality or public authority. Industrial development bonds are typically
classified as revenue bonds.
The Fund may invest in serial municipal bonds and pre-refunded municipal bonds.
Serial municipal bonds mature in stages (usually annually) in order to maintain
acceptable levels of debt payments by the issuer and often are non-callable,
which means that the issuer cannot force the holder to redeem the bonds if
interest rates fall (among other circumstances). The principal and interest on
pre-refunded municipal bonds are no longer paid from the original revenue source
for such securities. Instead, the source of the payments typically is an escrow
fund consisting of U.S. Government securities. The assets in the escrow fund are
derived from the proceeds of refunding bonds issued by the same issuer as the
pre-refunded municipal bond.
Yields on Ohio Municipal Securities depend on a variety of factors, including
the general conditions of the short-term municipal note market and of the
municipal bond market; the size of the particular offering; the maturity of the
obligations; and the rating of the issue.
- - 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 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. 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.
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INVESTMENT RISKS
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- - OHIO MUNICIPAL SECURITIES. Any adverse economic conditions or developments
affecting the State of Ohio or its municipalities could impact the Fund. While
diversifying more into the service and 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
states, tends to be more cyclical than in some other states and in the nation as
a whole. In prior years, the State's overall unemployment rate was commonly
somewhat higher than the national figure. The unemployment rate and its effects
vary among geographic areas of the State.
Generally, the creditworthiness of Ohio Municipal Securities 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. Local school
districts in Ohio receive a major portion (state-wide aggregate in the range of
46% in recent years) of their operating monies from State subsidies, but are
dependent on local property taxes, and in 107 districts from voter-authorized
income taxes, for significant portions of their budgets. Litigation, similar to
that of other states, is pending questioning the constitutionality of Ohio's
system of school funding. A trial court recently 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 has appealed. Ohio municipalities rely primarily on property and
municipal income taxes for their operations. 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.
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<PAGE> 9
The ability of the Fund to achieve its investment objective also depends on the
continuing ability of the issuers of Ohio Municipal Securities and demand
features, or the credit enhancers of either, to meet their obligations for the
payment of interest and principal when due. Investing in Ohio Municipal
Securities which meet the Fund's quality standards may not be possible if the
State of Ohio and its municipalities do not maintain their current credit
ratings. In addition, certain Ohio constitutional amendments, legislative
measures, executive orders, administrative regulations, and voter initiatives
could result in adverse consequences affecting Ohio Municipal Securities.
- - NON-DIVERSIFICATION. The Fund is non-diversified, thus, there is no limit on
the percentage of assets that may be invested in any single issuer. However, 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% 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. 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 could have a greater impact on the total value of the
Fund than would be the case if the Fund was required to be diversified among
more issuers.
SEE THE STATEMENT OF ADDITIONAL INFORMATION FOR AN EXPANDED DISCUSSION OF THE
RISK CONSIDERATIONS FOR THE FUND.
- --------------------------------------------------------------------------------
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 Victory Portfolios on behalf of the Fund as fundamental policies. These
fundamental policies cannot be changed without the approval of a majority of the
outstanding shares of the Fund.
The Fund will not:
- - invest its assets so that less than 80% of its annual interest income is
exempt from federal regular income tax and Ohio income tax; or
- - 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 certain restrictions the Fund may borrow money as authorized by the
1940 Act.
With respect to the latter limitation, the Fund will not borrow money or engage
in reverse repurchase agreements for investment leverage, but rather as a
temporary, extraordinary, or emergency measure or to facilitate management of
the Fund by enabling the Fund to meet redemption requests when the liquidation
of Fund securities would be inconvenient or disadvantageous. The Fund will not
purchase any securities while any such borrowings (including reverse repurchase
agreements) are outstanding.
The above investment limitations cannot be changed without shareholder approval.
The following limitations, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material changes
in these limitations become effective.
The Fund will not:
- - pledge assets, except it may pledge assets having a market value not exceeding
10% of the value of its total assets to secure borrowings;
- - invest more than 5% of its total assets in securities of issuers (or in the
alternative, guarantors, where applicable) that have records of less than
three years of continuous operations; or
- - with respect to securities representing 75% of its assets, invest more than
10% of its assets in the securities of any one issuer (except under certain
circumstances described in the Statement of Additional Information); or
8
<PAGE> 10
- - invest more than 10% of its net assets in securities which are illiquid,
including repurchase agreements providing for settlement in more than seven
days after notice.
These limitations and the policies discussed in this Prospectus are considered
and applied by Key Advisers and the Sub-Adviser at the time of purchase; the
sale of securities is not required in the event of a subsequent change in
circumstances.
CONCENTRATION OF INVESTMENTS
The Fund may invest 25% or more of its assets in industrial development bonds.
REGULATORY COMPLIANCE
The Fund may follow non-fundamental operational policies that are more
restrictive than its fundamental investment limitations, as set forth in this
Prospectus and its Statement of Additional Information, in order to comply with
applicable laws and regulations, including the provisions of any regulations
under the 1940 Act. In particular, the Fund will comply with the various
requirements of Rule 2a-7, which regulates money market mutual funds. The Fund
will also determine the effective maturity of its investments, as well as its
ability to consider a security as having received the requisite short-term
ratings by NRSROs, according to Rule 2a-7. The Fund may change these operational
policies to reflect changes in the laws and regulations without the approval of
its shareholders.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Key Advisers and the Sub-Adviser are 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.
Key Advisers' and 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, Key Advisers and the Sub-Adviser may, in
their discretion, effect transactions with dealers that furnish statistical,
research or other information or services which are deemed by them to be
beneficial to the Fund's investment program. Certain research services furnished
by dealers may be useful to Key Advisers and the Sub-Adviser with respect to
clients other than the Fund. Similarly, any research services received by Key
Advisers and the Sub-Adviser through placement of portfolio transactions of
other clients may be of value to them in fulfilling their obligations to the
Fund.
- --------------------------------------------------------------------------------
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. The minimum investment is $500 for the initial purchase and $25
thereafter. Shares are also available to clients of bank trust departments who
have qualified trust accounts. 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 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
9
<PAGE> 11
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 its accounts are not
duplicative of any of the services for which Key Advisers is compensated for
advising the Fund. The charges paid by clients of your bank trust department, or
its 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 at least the minimum required
investment amount to: The Victory Ohio Municipal 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 12:00 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 12:00 p.m. but before 4:00 p.m. Eastern time, your
purchase will be processed at the closing NAV (generally 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: Ohio Municipal 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.
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 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. Subsequent investments by
telephone may be made directly. See "How to Redeem -- By Telephone" for more
information about telephone transactions.
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<PAGE> 12
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)
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. 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.
HOW TO EXCHANGE
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 the 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 "How to Redeem -- 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 its shares upon 60 days written notice to shareholders. The exchange
privilege is only available in states where the exchange can legally be made.
HOW TO REDEEM
You may redeem all or a portion of your shares on any day that the Fund is open
for business (see the definition of "Business Day" under "Share Price" 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: Ohio Municipal
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
11
<PAGE> 13
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.
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 12:00 p.m. Eastern time, proceeds of the redemption for the Fund will be
wired as federal funds on the same 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, 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 -- How to Exchange" 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 portfolio of the Victory Group with the Systematic Withdrawal
Plan by completing the appropriate section of the account application. If you
own shares in a portfolio 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 ink coding
number across the front. If your bank checking 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 may eventually become 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 New York Stock
Exchange ("NYSE") is closed (or when trading is restricted) for any reason other
than its customary
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<PAGE> 14
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.
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. 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. The Fund will not,
however, exercise this mandatory redemption practice with regard to shares
obtained through the reorganizations of the A.T. Ohio Municipal Money Fund
and/or the Predecessor Fund.
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, President's 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 12:00 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 (generally 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 reduction of any difference between the price
paid and the par or principal amount payable upon maturity between the date of
purchase and maturity instead of giving effect to changes in actual 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 the Fund as of
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
13
<PAGE> 15
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.
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 affects
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
(which the Fund intends to do), it will not be subject to federal income tax on
any of its income. Further, as a regulated investment company, federally
tax-exempt interest earned by the Fund retains its tax-exempt character when
distributed to you as "exempt-interest dividends." The Fund's dividends derived
from any taxable investment income and the excess, if any, of net short-term
capital gains over long-term capital losses are taxable as ordinary income and
are treated as dividends for federal income tax purposes, but do not qualify for
the dividends received deduction. Distributions from a Fund's net long-term
capital gains over its net short-term capital losses, that are designated as
capital gain dividends are taxable to the shareholders as long-term capital
gains regardless of the length of time the shareholder held the shares. The
Fund's distributions are taxable when they are paid, whether taken in cash or
reinvested in additional Fund shares, except that distributions declared in
October, November or December and paid in January are treated 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.
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 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
supertax. Interest on indebtedness incurred, or continued, to purchase or carry
shares of the Fund is not deductible. Further, entities or persons who may be
14
<PAGE> 16
"substantial users" (or persons related to "substantial users") of facilities
financed by Municipal Securities should consult with their own tax advisers
before purchasing shares of the Fund.
REDEMPTIONS OR EXCHANGES
Investors may realize a gain or loss for federal tax purposes when redeeming
(selling) or exchanging shares of the Fund, although no gain or loss would
normally be expected in the case of the Fund if its NAV per share does not
deviate from $1.00. Any loss realized upon a taxable disposition of shares
within six months from the date of their purchase will be disallowed to the
extent of any exempt-interest dividends received on such shares and (to the
extent not disallowed) will be treated as a long-term capital loss to the extent
of any capital gain dividends received on such shares. All or a portion of any
loss realized upon a taxable disposition of shares of the Fund may be disallowed
if other shares of the Fund are purchased within 30 days before or after such
disposition.
For most types of accounts, the Fund will report the proceeds of your
redemptions to you annually. However, because the tax treatment also depends on
your purchase price and your personal tax position, you should keep your regular
account statements for use in determining your tax.
STATE OF OHIO INCOME TAXES
Provided that the Fund continues to qualify as a regulated investment company
under the IRS Code, and that at all times at least 50% of the value of its total
assets consists of obligations issued by or on behalf of the State of Ohio, its
political subdivisions thereof or agencies or instrumentalities of the State or
its political subdivisions ("Ohio Obligations"), or similar obligations of other
states or their subdivisions, (a) dividends paid by the Fund that are properly
attributable to interest on Ohio Obligations or on obligations issued by the
governments of Puerto Rico, the Virgin Islands or Guam will be exempt from Ohio
personal income tax, and municipal and school district income taxes in Ohio, and
will be excluded from net income for purposes of the Ohio corporation franchise
tax, and (b) distributions of "capital gain dividends," as defined in the IRS
Code, that are properly attributable to the Fund's sale or other disposition of
Ohio Obligations will be exempt from Ohio personal income tax, and municipal and
school district income taxes in Ohio, and will be excluded from net income for
purposes of the Ohio corporation franchise tax. However, other distributions
from the Fund will generally not be exempt from Ohio personal income tax,
municipal tax (where applicable to intangible income) on school district income
taxes in Ohio, and shares of the Fund will not be excluded from net worth for
purposes of the Ohio corporation franchise tax.
OTHER STATE AND LOCAL TAXES
Income from the Fund is not necessarily free from regular state income taxes in
states other than Ohio or from personal property taxes. State laws differ on
this issue, and shareholders are urged to consult their own tax advisers
regarding the status of their accounts under state and local tax laws.
OTHER TAX INFORMATION. The information above is only a summary of some of the
tax consequences generally affecting the Fund and its shareholders, and no
attempt has been made to discuss all tax consequences affecting shareholders
based on their particular circumstances. A prospective investor should also
review the more detailed discussion of tax considerations in the Statement of
Additional Information, and should consult his tax adviser to determine whether
an investment in the Fund is suitable to his particular tax situation.
When an investor signs his Account Application, he will be asked to certify that
the social security or other taxpayer identification number provided is the
correct number and that he is not subject to 31% backup withholding for failing
to report interest or dividend income to the IRS. If an investor violates IRS
regulations, the IRS can require the Fund to withhold 31% of his taxable
distributions and the proceeds of redemptions and exchanges.
- --------------------------------------------------------------------------------
PERFORMANCE
- --------------------------------------------------------------------------------
The Fund's performance may be quoted in advertising in terms of yield or
effective yield. Yields refer to the income generated by an investment in the
Fund over a period of time (seven days for a money market fund), expressed as an
annual percentage rate based on its share price. An effective yield is
calculated similarly but assumes that Fund share dividends declared are
reinvested. (The effective yield will be slightly higher than the yield because
of the compounding effect of this assumed reinvestment.) Yield is calculated
according to accounting methods that are standardized for all money market
funds.
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<PAGE> 17
The performance of the Fund may also be quoted in advertising in terms of total
return. Both types of performance are based on historical results and are not
intended to indicate future performance. Total returns are based on the overall
dollar or percentage change in the value of a hypothetical investment in the
Fund and assumes that all dividend distributions are reinvested. A cumulative
total return reflects a Fund's performance over a stated period of time. An
average annual total return reflects the hypothetical annually compounded rate
that would have produced the same cumulative total return if performance had
been constant over the entire period. Because average annual returns eliminate
variations in a Fund's performance, investors should recognize that they are not
the same as actual year-by-year results. To illustrate the components of overall
performance, the cumulative and average annual total returns of a Fund may be
separated into income results and capital gain or loss. The total return of the
Fund may be quoted on a before or after tax basis. Investing in a mutual fund
involves risks, including the possible loss of principal.
The Fund may also quote taxable equivalent yields, which show the taxable yields
an investor would have to earn, before taxes, to equal the Fund's tax-free
yields. A taxable equivalent yield is calculated by dividing the Fund's tax-
exempt yield by the result of one minus the sum of the federal and Ohio State
and municipal tax rates, which may take into account the deductibility of Ohio
State and municipal taxes on an investor's federal income tax return. If only a
portion of a Fund's income is tax-exempt, only that portion is adjusted in the
calculation.
- --------------------------------------------------------------------------------
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 portfolios,
four of which are inactive. On or about February 29, 1996, the Victory
Portfolios will convert from a Massachusetts business trust to a Delaware
business trust. 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. The Victory Portfolios' offices are located at 3435 Stelzer
Road, Columbus, Ohio 43219-3035.
REORGANIZATION WITH PREDECESSOR FUND
The Predecessor Fund was a portfolio of The Victory Funds. Effective June 5,
1995, 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 ceased operations. The Fund had no
assets and did not begin operations until the Reorganization occurred.
INVESTMENT ADVISER AND SUB-ADVISER
KeyCorp Mutual Fund Advisers, Inc. is the investment adviser to the Fund. Key
Advisers directs the investment of the Fund's assets, subject at all times to
the supervision of the Victory Portfolios' Board of Trustees. Key Advisers
continually conducts investment research and supervision for the Fund and is
responsible for the purchase or sale of the Fund 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 an indirect wholly-owned subsidiary of Society National
Bank, a wholly-owned subsidiary of KeyCorp. Affiliates of Key Advisers manage
approximately $66 billion for numerous clients including large corporate and
public retirement plans, Taft-Hartley plans, foundations and endowments, high
net worth individuals and mutual funds.
Under an investment advisory agreement between the Victory Portfolios, on behalf
of the Fund, and Key Advisers, the Adviser 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.
For the services provided and expenses incurred pursuant to its investment
advisory agreement with the Victory Portfolios respecting the Fund, Key Advisers
is entitled to receive a fee, computed daily and paid monthly, at an
16
<PAGE> 18
annual rate of one half 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 has
agreed to waive its advisory fee with respect to the Fund to the extent
necessary to maintain the operating expense ratio of the Fund at .65% until at
least August 31, 1996. Prior to January 1, 1996, the Sub-Adviser served as
investment adviser to the Fund. For the two month period ended October 31, 1995,
Society earned an investment advisory fee of .22% of average daily net assets
after voluntary waivers and reimbursements of .28% of average daily net assets.
For the year ended August 31, 1995, Society earned an investment advisory fee of
.20% of average daily net assets after voluntary waivers and reimbursements of
.30% of average daily net assets.
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. The sub-advisory agreement provides that the
Sub-Adviser may render services through its own employees or the employees of
one or more affiliated companies that are qualified to act as an investment
sub-adviser to 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 the Sub-Adviser. For its services under the
investment sub-advisory agreement, Key Advisers pays the Sub-Adviser fees as a
percentage of 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
the average daily net assets in excess of $50 million.
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, custodian or shareholder
servicing agent 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 Key Advisers, the Sub-Adviser or the Fund from compensating third
parties for performing such functions. Key Advisers, the Sub-Adviser and their
affiliates are subject to such banking laws and regulations.
Key Advisers and the Sub-Adviser believe that they may perform the investment
advisory services for the Fund contemplated by the investment advisory agreement
with the Fund and investment sub-advisory agreement with the Sub-Adviser without
violating the Glass-Steagall Act or other applicable banking laws or regulations
and that they or their affiliates can perform the other services indicated
above. 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 Key Advisers and the
Sub-Adviser and their affiliates from continuing to perform all or a part of the
above services for their 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 service then being provided by Key Advisers, the Sub-Adviser
and their affiliates, and the Trustees would consider alternate investment
advisers and other means of continuing available services. It is not expected
that the Fund's shareholders would suffer any adverse financial consequences (if
other service providers are retained) as a result of any of these occurrences.
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 operations. 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 one-hundredths of one percent (.15%) of the Fund's
average daily assets. The Administrator may periodically waive all or a portion
of its administrative fee with respect to the Fund to increase the net income
available for distribution as dividends.
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<PAGE> 19
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 responsible for the underwriting of
Fund shares.
For the two month period ended October 31, 1995 and the year ended August 31,
1995, the Administrator earned .15% of the Fund's average daily net assets. For
the year ended August 31, 1995, the Administrator voluntarily waived a portion
of its fee equal to .0013% of 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 1940 Act. No separate payments are
authorized to be made by the Fund under the Plan. Rather, the Plan recognizes
that Key Advisers, the Administrator and any sub-adviser may use fee revenues,
or other resources to pay expenses associated with activities primarily intended
to result in the sale of Fund shares. The Plan also provides that Key Advisers,
the Administrator and any sub-adviser 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 Fund shares. See
"Effect of Banking Laws" with respect to certain prohibitions under the
Glass-Steagall Act.
TRANSFER AGENT
Primary Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9741,
serves as the Fund's Transfer Agent pursuant to a Transfer Agency Agreement with
the Victory Portfolios and receives a fee for such services based on various
criteria, including assets, transactions and the number of accounts.
CUSTODIAN
Key Trust Company of Ohio, N.A., an affiliate of the Adviser and Sub-Adviser,
serves as custodian for the Fund and may receive fees for the services it
performs as custodian.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. serves as independent accountants to the Fund.
SHAREHOLDER SERVICING
Shareholder services are provided to the Victory Portfolios pursuant to
agreements between the Victory Portfolios and various shareholder servicing
agents, including Key Trust Company of Ohio, N.A., 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 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 two month period ended October 31, 1995 and the year ended August 31, 1995,
Shareholder Servicing Agents earned $130,040 and $567,378, 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 compliance systems and other administrative and
support services.
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<PAGE> 20
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.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
The Victory Portfolios may issue an unlimited number of shares and classes of
the Fund. Shares or classes 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 Key Advisers or the Sub-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 so 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 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 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 a Code of
Ethics (the "Code") which requires 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 Code also prohibits investment personnel from purchasing securities in
an initial public offering. Personal trading reports are reviewed periodically
by Key Advisers and the Sub-Adviser; and the Board of Trustees reviews such
reports annually (including information on any substantial violations of the
Code). Violations of the Code may result in censure, monetary penalties,
suspension or termination of employment.
MASSACHUSETTS LAW
The Victory Portfolios is currently organized as a Massachusetts business trust.
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for obligations of the Victory Portfolios. To
protect its shareholders, the Victory Portfolios has filed legal documents with
Massachusetts that expressly disclaim the liability of its shareholders for acts
or obligations of the Victory Portfolios. These documents require notice of this
disclaimer to be given in each agreement, obligation, or instrument the Fund or
its Trustees enter into or sign.
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
On or about February 29, 1996, the Victory Portfolios will convert to a Delaware
business trust. 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 believes that the risk of personal liability to a Fund
shareholder would be extremely remote.
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<PAGE> 21
In the unlikely event a shareholder is held personally liable for the Victory
Portfolios' obligations, the Delaware successor to the Victory Portfolios will
be required to use its property to protect or compensate the shareholder. On
request, the Delaware successor to 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 Delaware successor to 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 Delaware
successor to the Victory Portfolios will have 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 (a)
describes general economic trends, (b) describes general trends within the
financial services industry or the mutual fund industry, (c) describes past or
anticipated portfolio holdings for the Fund or (d) 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.
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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.
20
<PAGE> 22
THE VICTORY PORTFOLIOS 3435 STELZER ROAD
OHIO MUNICIPAL MONEY MARKET FUND COLUMBUS, OHIO 43219
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the current Prospectus, dated January 1, 1996 (the
"Prospectus"). The Financial Statements and Independent Accountants' Report as
of October 31, 1995 of the Fund are incorporated by reference in this Statement
of Additional Information. Please retain this document for future reference.
Copies of the Prospectus may be obtained by writing The Victory Portfolios at
Primary Funds Service Corporation, P.O. Box 9741, Providence, RI 02940-9711 or
by telephoning toll free 800-539-FUND or 800-539-3863.
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
INVESTMENT OBJECTIVE AND POLICIES 2 INVESTMENT ADVISER
PORTFOLIO TRANSACTIONS 9 KeyCorp Mutual Fund Advisers, Inc.
DETERMINING NET ASSET VALUE 10
PERFORMANCE COMPARISONS 12 SUB-ADVISER
ADDITIONAL PURCHASE, EXCHANGE AND Society Asset Management, Inc.
REDEMPTION INFORMATION 14
DIVIDENDS AND DISTRIBUTIONS 15 ADMINISTRATOR
TAXES 15 Concord Holding Corporation
TRUSTEES AND OFFICERS 19
ADVISORY AND OTHER CONTRACTS 24 DISTRIBUTOR
FINANCIAL STATEMENTS 31 Victory Broker-Dealer Services, Inc.
ADDITIONAL INFORMATION 31
APPENDIX 35 TRANSFER AGENT
DESCRIPTION OF SECURITY RATINGS 35 Primary Funds Service Corporation
CUSTODIAN
Key Trust Company of Ohio N.A.
</TABLE>
January 1, 1996
<PAGE> 23
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 Ohio Municipal 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 OBJECTIVE AND POLICIES
The following policies and limitations 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. 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.
The Fund's fundamental investment policies and 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. However, except where noted below, the investment policies and
limitations described in this Statement of Additional Information are not
fundamental and may be changed without shareholder approval.
The Fund's investment objective is to provide current income exempt from
federal regular income tax and personal income taxes imposed by the State
of Ohio and Ohio municipalities consistent with stability of principal.
ACCEPTABLE INVESTMENTS
The Fund invests primarily in Ohio municipal securities with remaining
maturities of 397 days or less at the time of purchase by the Fund. The
average maturity of these securities, computed on a dollar weighted basis, will
be 90 days or less. Ohio municipal securities are debt obligations issued by
or on behalf of the State of Ohio, its political subdivisions, or agencies,
debt obligations of any state, territory or possession of the United
States, including the District of Columbia, and any political subdivisions or
financing authority of any of these, the income from which is, in the opinion
of qualified legal counsel, exempt from both federal regular income tax and the
personal income tax imposed by the State of Ohio ("Municipal Securities").
CHARACTERISTICS
When determining whether a Municipal Security presents minimal credit risks,
the Adviser considers the creditworthiness of the issuer of an Ohio Municipal
Security. The holder of a demand feature has the unconditional right to demand
payment on the security from the guarantor of payment.
The Fund is not required to sell an Ohio Municipal Security if the security's
rating is reduced below the required minimum subsequent to the Fund's purchase
of the security. The Adviser considers this event, however, in its
determination of whether the Fund should continue to hold the security. If
ratings made by Moody's Investors Services, Inc., Standard & Poor's
Corporation, Fitch Investor Service, Inc. or other Nationally Recognized
Statistical Rating Organization ("NRSRO") change because of changes in those
organizations or in their rating systems, the Fund will try to use comparable
ratings as standards in accordance with the investment policies described in
the Fund's Prospectus.
- 2 -
<PAGE> 24
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are arrangements in which the Fund purchases securities with
payment and delivery scheduled for a future time. The Fund engages in
when-issued and delayed delivery transactions only for the purpose of acquiring
portfolio securities consistent with the Fund's investment objective and
policies, not for investment leverage. These transactions are made to secure
what is considered to be an advantageous price and yield for the Fund.
Settlement dates may be a month or more after entering into these transactions,
and the market values of the securities purchased may vary from the purchase
prices. Normally, liquid assets of the Fund in a dollar amount sufficient to
make payment for the obligations to be purchased, are segregated at the
trade date. These securities are marked to market daily and maintained until
the transaction is settled. The Fund may engage in these transactions to an
extent that would cause the segregation of an amount up to 20% of the total
value of its assets.
REPURCHASE AGREEMENTS
Repurchase agreements are arrangements in which banks, broker/dealers, and
other recognized financial institutions sell U.S. government securities or
certificates of deposit to the Fund and agree at the time of sale to repurchase
them at a mutually agreed upon time and price within one year from the date of
acquisition. The Fund or its custodian will take possession of the securities
subject to repurchase agreements and these securities will be marked to market
daily. To the extent that the original seller does not repurchase the
securities from the Fund, the Fund could receive less than the repurchase price
on any sale of such securities. In the event that such a defaulting seller
filed for bankruptcy or became insolvent, disposition of such securities by the
Fund might be delayed pending court action. The Fund believes that under the
regular procedures normally in effect for custody of the Fund's securities
subject to repurchase agreements, a court of competent jurisdiction would rule
in favor of the Fund and allow retention or disposition of such securities.
The Fund will only enter into repurchase agreements with domestic banks and
other recognized financial institutions such as broker/dealers which are deemed
to be creditworthy by Key Advisers or the Sub-Adviser pursuant to guidelines
established by the Trustees. Repurchase agreements are considered by the staff
of the Commission to be loans by the Fund.
REVERSE REPURCHASE AGREEMENTS
The Fund may also enter into reverse repurchase agreements. This transaction
is similar to borrowing cash. In a reverse repurchase agreement the Fund
transfers possession of a Fund instrument to another person, such as a
financial institution, broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Fund will repurchase the Fund instrument by remitting the original
consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable the Fund to avoid selling Fund
instruments at a time when a sale may be deemed to be disadvantageous, but the
ability to enter into reverse repurchase agreements does not ensure that the
Fund will be able to avoid selling Fund instruments at a disadvantageous time.
When effecting reverse repurchase agreements, liquid assets of the Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated on the Fund's records at the trade date. These securities are
marked to market daily and maintained until the transaction is settled.
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 a prospectus supplement.
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<PAGE> 25
OHIO INVESTMENT RISKS
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 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).
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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 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 for 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
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<PAGE> 27
receipts). The latter supersedes the prior $500 million highway obligation
authorization, and authorizes not more than $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 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
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<PAGE> 28
procedures have been applied to 23 cities 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.
INVESTMENT LIMITATIONS
CONCENTRATION OF INVESTMENTS. The Fund will not purchase securities (other
than securities issued or guaranteed by the U.S. government, its agencies, or
instrumentalities) if, as a result of such purchase, 25% or more of the value
of the Fund's total assets would be invested in any one industry. The Fund
will not invest 25% or more of its assets in securities, the interest upon
which is paid from revenues of similar type projects. The Fund may invest
25% or more of its assets in industrial development bonds.
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 will attempt to minimize the risks associated with a non-diversified
portfolio so as not to impair its ability to stabilize its net asset value at
$1.00 per share by limiting, with respect to 75% of the Fund's total assets,
investments in one issuer to not more than 10% of the value of its total
assets. The total amount of the remaining 25% of the value of the Fund's total
assets could be invested in a single issuer if the Adviser believes such a
strategy to be prudent. Under Rule 2a-7 under the 1940 Act, the Fund is also
subject to certain diversification requirements. In addition, 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% 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.
INVESTING IN COMMODITIES. The Fund will not purchase or sell commodities or
commodity contracts.
INVESTING IN REAL ESTATE. The Fund will not purchase or sell real estate,
although it may invest in Ohio Municipal Securities secured by real estate
or interests in real estate.
ISSUING SENIOR SECURITIES. The Fund will not issue senior securities, except
as permitted by its investment objective and policies, and except that the Fund
(i) may borrow money and engage in reverse repurchase agreements in amounts up
to one-third of the value of the Fund's net assets including the amounts
borrowed, and (ii) purchase securities on a when-issued or delayed delivery
basis.
The Fund will not borrow money or engage in reverse repurchase agreements for
investment leverage, but rather as a temporary, extraordinary, or emergency
measure or to facilitate management of the Fund by enabling the Fund to meet
redemption requests when the liquidation of Fund securities would be
inconvenient or disadvantageous. The Fund will not purchase any securities
while any such borrowings (including reverse repurchase agreements) are
outstanding.
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<PAGE> 29
LENDING CASH OR SECURITIES. The Fund will not lend any of its assets, except
through the purchase of a position of publicly distributed debt instruments or
repurchase agreements and through the lending of its portfolio securities. The
Fund may lend its securities if collateral values are continuously
maintained at no less than 100% of the current market value of such securities
by marking to market daily.
UNDERWRITING. The Fund will not underwrite any issue of securities, except as
it may be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its investment
objective, policies, and limitations.
INVESTING IN TAX-FREE SECURITIES. The Fund will not invest its assets so that
less than 80% of its annual interest income is exempt from the federal income
tax and Ohio taxes.
The above investment limitations cannot be changed without shareholder
approval. The following limitations, however, may be changed by the
Trustees without shareholder approval. Shareholders will be notified before
any material change in these limitations becomes effective.
PLEDGING ASSETS. The Fund will not mortgage, pledge, or hypothecate any assets
except to secure permitted borrowings. In those cases, it may mortgage,
pledge, or hypothecate assets having a market value not exceeding 10% of the
value of total assets at the time of the pledge.
In addition the Fund will not borrow, pledge, mortgage or hypothecate any
assets in excess of one third of the Fund's total assets.
SELLING SHORT AND BUYING ON MARGIN. The Fund will not sell any securities
short or purchase any securities on margin but may obtain such short-term
credits as may be necessary for clearance of purchases and sales of securities.
ACQUIRING SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund will not invest
any of its assets in the securities of other investment companies, except by
purchase in the open market where no commission or profit to a sponsor or
dealer results from the purchase other than the customary broker's commission,
or except when the purchase is part of a plan of merger, consolidation,
reorganization or acquisition.
INVESTING IN NEW ISSUERS. The Fund will not invest more than 5% of the value
of its total assets in securities of issuers (or in the alternative,
guarantors, where applicable) which have records of less than three years of
continuous operations, including the operation of any predecessor.
INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS OF THE FUND. The
Fund will not purchase or retain the securities of any issuer if the officers
and Trustees of the Fund or its Investment Adviser owning individually more
than 1/2 of 1% of the issuer's securities together own more than 5% of the
issuer's securities.
INVESTING IN MINERALS. The Fund will not purchase or sell oil, gas, or other
mineral exploration or development programs, or related leases.
INVESTING IN ILLIQUID SECURITIES. The Fund will not invest more than 10% of
the value of its net assets in securities which are illiquid, including
repurchase agreements providing for settlement in more than seven days after
notice.
DEALING IN PUTS AND CALLS. The Fund will not purchase or sell puts, calls,
straddles, spreads, or any combination of them, except that the Fund may
purchase Municipal Securities accompanied by agreements of sellers to
repurchase them at the Fund's option.
INVESTMENTS IN ANY ONE ISSUER. With respect to securities comprising 75% of
its total assets, the Fund will not invest more than 10% of its total assets in
the securities of any one issuer. In addition, the Fund intends to comply with
Subchapter M of the Internal Revenue Code (see "Non-Diversification," above).
If a security is guaranteed
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<PAGE> 30
or secured by a letter of credit issued by a party other than the issuer of the
security, that guarantee or letter of credit will be considered a separate
security.
Under this limitation, each governmental subdivision, including states and the
District of Columbia, territories, possessions of the United States, or their
political subdivisions, agencies, authorities, instrumentalities, or similar
entities, will be considered a separate issuer if its assets and revenues
are separate from those of the governmental body creating it and the security
is backed only by its own assets and revenues.
Industrial development bonds backed only by the assets and revenues of a
nongovernmental user are considered to be issued solely by that user. If in
the case of an industrial development bond or governmental-issued security, a
governmental or other entity guarantees the security, such guarantee would be
considered a separate security issued by the guarantor as well as the other
issuer, subject to limited exclusions allowed by the 1940 Act.
INVESTING IN WARRANTS. The Fund will not 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 Exchanges.
QUALITY OF PORTFOLIO SECURITIES. The Fund will invest at least 95% of its
total assets in securities rated in one of the two highest short-term rating
categories by a NRSRO or be of comparable quality to securities having such
ratings. The Fund will invest no more than 5% of its total assets in
securities that would be considered to be in the second highest rating category
("Second Tier Securities"), and subject to this limitation the Fund will not
invest more than the greater of 1% of its total assets or $1 million in Second
Tier Securities of any one issuer.
INVESTMENT LIMITATIONS -- IN GENERAL. 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.
PORTFOLIO TRANSACTIONS
Pursuant to the investment advisory agreement and sub-investment advisory
agreement for the Funds, Key Advisers and the Sub-Adviser determine, subject to
the general supervision of the Trustees of the Victory Portfolios, and in
accordance with the Fund's investment objective, policies 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. Since purchases and
sales of portfolio securities by the Fund are usually principal transactions,
the Fund incurs little or no brokerage commissions. For the two month fiscal
period ended October 31, 1995 and the fiscal year ended August 31, 1995, the
Fund paid no brokerage fees. 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 the spread retained by the underwriter from the proceeds
of the offering to the issuer.
The Fund does not seek to profit from short-term trading, and will generally
(but not always) hold portfolio securities to maturity, but Key Advisers and
the Sub-Adviser may seek to enhance the yield of the Fund by taking advantage
of yield disparities or other factors that occur in the money markets. For
example, market conditions frequently result in similar securities trading at
different prices. Key Advisers and the Sub-Adviser may dispose of any
portfolio security prior to its maturity if such disposition and reinvestment
of proceeds are expected to enhance yield consistent with Key Advisers' or
the Sub-Adviser's judgment as to desirable portfolio maturity
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<PAGE> 31
structure or if such disposition is believed to be advisable due to other
circumstances or conditions. The investment policy of the Fund requires that
investments mature in 90 days or less. Thus, there is likely to be relatively
high portfolio turnover, but since brokerage commissions are not normally paid
on money market instruments, the high rate of portfolio turnover is not
expected to have a material effect on the net income or expenses of the Fund.
Key Advisers' and 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. Allocation of transactions, including their frequency,
among various dealers is determined by Key Advisers and the Sub-Adviser in
their best judgment and in a manner deemed fair and reasonable to shareholders.
The Fund 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., Concord Holding Corporation, or 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 the Sub-Adviser. Any such other investment company or account may also
invest in the same securities as the 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 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 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 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 or for other
investment companies or accounts in order to obtain best execution. In making
investment recommendations for the Fund, Key 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, the Sub-Adviser,
or their parents, subsidiaries or affiliates and, in dealing with their
commercial customers, Key Advisers, the Sub-Adviser and their parents,
subsidiaries, and affiliates will not inquire or take into consideration
whether securities of such customers are held by the Fund.
DETERMINING NET ASSET VALUE
The Fund attempts to stabilize the value of a share at $1.00. The net asset
value is calculated by the Fund twice daily. See "Additional Purchase and
Redemption Information."
USE OF THE AMORTIZED COST METHOD
The Trustees have decided that the best method for determining the value of Fund
instruments is by use of the amortized cost method. Under this method,
Fund instruments are valued at the acquisition cost as adjusted for amortization
of premium or accumulation of discount rather than at current market value.
The Fund's use of the amortized cost method of valuing Fund instruments depends
on its compliance with certain conditions contained in Rule 2a- 7 (the "Rule")
under the 1940 Act. Under the Rule, the Trustees must establish procedures
reasonably designed to stabilize the net asset value per share ("NAV"), as
computed for purposes of distribution and redemption, at $1.00 per share, taking
into account current market conditions and the Fund's investment objective.
Under the Rule, the Fund is permitted to purchase instruments which are subject
to demand features or standby commitments. As defined by the Rule, a demand
feature entitles the Fund to receive the principal amount of the instrument from
the issuer or a third party on (1) no more than 30 days' notice of and (2) at
specified intervals not
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<PAGE> 32
exceeding one year on no more than 30 days' notice. A standby commitment
entitles the Fund to achieve same day settlement and to receive an
exercise price equal to the amortized cost of the underlying instrument plus
accrued interest at the time of exercise.
Although demand features and standby commitments are techniques and are defined
as "puts" under the Rule, the Fund does not consider them to be "puts" as that
term is used in the Fund's investment limitations. Demand features and standby
commitments are features which enhance an instrument's liquidity, and the
investment limitation which proscribes puts is designed to prohibit the
purchase and sale of put and call options and is not designed to prohibit
the Fund from using techniques which enhance the liquidity of Fund instruments.
MONITORING PROCEDURES
The Trustees' procedures include monitoring the relationship between the
amortized cost value per share and the net asset value per share based upon
available indications of market value. The Trustees will decide what, if any,
steps should be taken if there is a difference of more than 0.5% between the
two values. The Trustees will take any steps they consider appropriate (such
as redemption in kind or shortening the average Fund maturity) to minimize any
material dilution or other unfair results arising from differences between the
two methods of determining net asset value.
INVESTMENT RESTRICTIONS
The Rule requires that the Fund limit its investments to instruments that, in
the opinion of the Trustees, present minimal credit risks and have received the
requisite rating from one or more NRSRO. The Fund will limit the percentage
allocation of its investments so as to comply with the Rule, which generally
limits to 5% of total assets the amount which may be invested in the securities
of any one issuer. If the instruments are not rated, the Trustees must
determine that they are of comparable quality. The Rule also requires the Fund
to maintain a dollar weighted average portfolio maturity (not more than 90
days) appropriate to the objective of maintaining a stable net asset value of
$1.00 per share. In addition, no instrument with a remaining maturity of more
than 397 days can be purchased by the Fund.
Should the disposition of a portfolio security result in a dollar weighted
average portfolio maturity of more than 90 days, the Fund will invest its
available cash to reduce the average maturity to 90 days or less as soon as
possible.
The Fund may attempt to increase yield by trading portfolio securities to take
advantage of short-term market variations. This policy may, from time to time,
result in high portfolio turnover. Under the amortized cost method of
valuation, neither the amount of daily income nor the net asset value is
affected by any unrealized appreciation or depreciation of the portfolio.
In periods of declining interest rates, the indicated daily yield on shares of
the Fund computed by dividing the annualized daily income on the Fund's
portfolio by the net asset value computed as above may tend to be higher than a
similar computation made by using a method of valuation based upon market
prices and estimates.
In periods of rising interest rates, the indicated daily yield on shares of the
Fund computed the same way may tend to be lower than a similar computation
made by using a method of calculation based upon market prices and estimates.
YIELD
The Fund calculates its yield daily, based upon the seven days ending on the
day of the calculation, called the "base period." This yield is
computed by:
o determining the net change in the value of a hypothetical account with
a balance of one share at the beginning of the base period, with
the net change excluding capital changes but including the value of any
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<PAGE> 33
additional shares purchased with dividends earned from the original
one share and all dividends declared on the original and any
purchased shares;
o dividing the net change in the account's value by the value
of the account at the beginning of the base period to determine the
base period return; and
o multiplying the base period return by (365/7).
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with the Fund, the yield
will be reduced for those shareholders paying those fees. For the seven-day
period ended October 31, 1995, the Fund's yield was 3.36%.
EFFECTIVE YIELD
The Fund's effective yield is computed by compounding the unannualized
base period return by:
o adding 1 to the base period return;
o raising the sum to the 365/7th power; and
o subtracting 1 from the result.
For the seven-day period ended October 31, 1995, the Fund's effective
yield was 3.42%.
TAXABLE-EQUIVALENT YIELD
The Fund's taxable-equivalent yield is calculated similarly to the yield, but
reflects the taxable yield that the Fund would have had to earn to equal its
actual yield, assuming a tax rate of 39.6%, and assuming that income earned by
the Fund is 100% tax-exempt on a regular federal, state, and local basis.
For the seven-day period ended October 31, 1995, the Fund's taxable-equivalent
yield and taxable-equivalent effective yield was 5.56% and 5.66%,
respectively.
PERFORMANCE COMPARISONS
The Fund's performance depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is invested;
o changes in interest rates on money market instruments;
o changes in Fund expenses; and
o the relative amount of Fund cash flow.
From time to time the Fund may advertise its performance compared to similar
funds or portfolios using certain indices, reporting services, and financial
publications. The Fund may also refer to the performance of the Predecessor
Fund or the A.T. Ohio Municipal Money Market Fund, its predecessor. These may
include the following:
- 12 -
<PAGE> 34
TOTAL RETURN CALCULATIONS
TOTAL RETURNS quoted in advertising reflect all aspects of the Fund's return,
including the effect of reinvesting dividends and capital gain distributions
(if any), and any change in each Fund's net asset value per share ("NAV") over
the period. AVERAGE ANNUAL TOTAL RETURNS are calculated by determining the
growth or decline in value of a hypothetical historical investment in the Fund
over a stated period, and then calculating the annually compounded percentage
rate that would have produced the same result if the rate of growth or decline
in value had been constant over the period. For example, a cumulative total
return of 100% over ten years would produce an average annual total return of
7.18%, which is the steady annual rate of return that would equal 100% growth
on an annually compounded basis in ten years. While average annual total
returns are a convenient means of comparing investment alternatives, investors
should realize that a Fund's performance is not constant over time, but changes
from year to year, and that average annual total returns represent averaged
figures as opposed to the actual year-to- year performance of the Fund. When
using total return and yield to compare the Fund with other mutual funds,
investors should take into consideration permitted portfolio composition
methods used to value portfolio securities and computing offering price. The
Fund's average annual total returns for one-, five-, ten-year periods ended
October 31, 1995 were 3.42%, 2.97% and 3.85%, respectively.
In addition to average annual total returns, the Fund may quote unaveraged or
CUMULATIVE TOTAL RETURNS reflecting the total income over a stated period.
Average annual and cumulative total returns may be quoted as a percentage or as
a dollar amount, and may be calculated for a single investment, a series of
investments, or a series of redemptions, over any time period. Total returns
may be broken down into their components of income and capital (including
capital gains and changes in share price) in order to illustrate the
relationship of these factors and their contributions to total return. Total
returns, yields, and other performance information may be quoted numerically or
in a table, graph, or similar illustration. The Fund's cumulative total
returns for the one-, five-, and ten-year periods ended October 31, 1995 were
3.42%, 15.77% and 45.91%, respectively.
LIPPER ANALYTICAL SERVICES, INC. AND OTHER STATISTICS AND PUBLICATIONS
The Fund's performance may be compared to the performance of other mutual funds
in general, or to the performance of particular types of mutual funds. These
comparisons may be expressed as mutual fund rankings prepared by Lipper
Analytical Services, Inc. ("Lipper"), an independent service located in Summit,
New Jersey which monitors the performance of mutual funds. Lipper generally
ranks funds on the basis of total return, assuming reinvestment of
distributions, but does not take sales charges or redemption fees into
consideration, and is prepared without regard to tax consequences. Lipper may
also rank the Fund based on yield. In addition to the mutual fund rankings,
the Fund's performance may be compared to mutual fund performance indices
prepared by Lipper. Of course, when comparing Fund performance to any index,
factors such as composition of the index and prevailing market conditions
should be considered in assessing the significance of such comparisons.
Comparisons of performance may also utilize other indices, such as those
prepared by Dow Jones & Co., Inc. and Standard & Poor's Corporation, and other
publications, such as 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.
The Fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, the
investor invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares had been purchased at those intervals. In evaluating
such a plan, investors should consider their ability to continue purchasing
shares through periods of low price levels.
Advertisements and sales literature may also include discussions of a
prospective shareholder's financial concerns and a variety of investment
goals, including, but not limited to, college funding, retirement planning and
providing for long term health care costs. The discussions may also include
statistics (regarding the cost of college tuition, health care, social
security, retirement savings, etc.) from a variety of sources and address
the need for early and regular investing in order to meet these investment
goals.
- 13 -
<PAGE> 35
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.
ADDITIONAL PURCHASE, EXCHANGE AND REDEMPTION INFORMATION
The holiday closing schedule indicated in the Prospectus for the NYSE
and the Federal Reserve Bank of Cleveland 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 SEC to warrant such action, the Fund's
transfer agent will determine the Fund's NAV 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 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.
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 "How to Invest, Exchange and Redeem."
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.
EXCHANGING SHARES
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 (1) 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 (2) 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.
The Fund, Key Advisers and the Sub-Adviser 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.
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 "How to Invest, Exchange and Redeem."
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<PAGE> 36
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 1940 Act 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.
DIVIDENDS AND DISTRIBUTIONS
The Fund ordinarily declares dividends from its net investment income daily and
pays such dividends on or around the second business day of the succeeding
month. 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.
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 assets of the Fund, dividend income, if any, income from securities
loans, if any, and realized capital gains and losses on Fund assets, if any,
less all expenses and liabilities of that 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, 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 Fund in proportion to the Fund's share of the total net
assets of the Fund.
TAXES
The following is only a summary of certain additional tax considerations
generally affecting the Fund and its shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Fund or its shareholders, and the discussions here and in the
Prospectus are not intended as substitutes for careful tax planning.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
The Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "IRS Code").
As a regulated investment company, the Fund is not subject to federal income
tax on the portion of its net investment income (i.e., taxable interest,
dividends and other taxable ordinary income, net of expenses) and capital gain
net income (i.e., the excess of capital gains over capital losses) that it
distributes to shareholders, provided that it distributes at least 90% of its
investment company taxable income (i.e., net investment income and the excess
of net short-term capital gain over net long-term capital loss) and at least
90% of its tax- exempt income (net of expenses allocable thereto) for the
taxable year (the "Distribution Requirement"), and satisfies certain other
requirements of the IRS Code that are described below. Distributions by a Fund
made during the taxable year or, under specified circumstances, within twelve
months after the close of the taxable year, will be considered distributions of
income and gains of the taxable year and can therefore satisfy the Distribution
Requirement.
In addition to satisfying the Distribution Requirement, a regulated investment
company must: (1) derive at least 90% of its gross income from dividends,
interest, certain payments with respect to securities loans, gains from the
sale or other disposition of stock or securities or foreign currencies (to the
extent such currency gains are directly related to the regulated investment
company's principal business of investing in stock or securities) and other
income
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<PAGE> 37
(including but not limited to gains from options, futures or forward contracts)
derived with respect to its business of investing in such stock, securities or
currencies (the "Income Requirement"); and (2) derive less than 30% of its
gross income (exclusive of certain gains on designated hedging transactions
that are offset by realized or unrealized losses on offsetting positions) from
the sale or other disposition of stock, securities or foreign currencies (or
options, futures or forward contracts thereon) held for less than three months
(the "Short-Short Gain Test"). For purposes of these calculations, gross
income includes tax-exempt income. However, foreign currency gains, including
those derived from options, futures and forwards, will not in any event be
characterized as Short-Short Gain if they are directly related to the regulated
investment company's investments in stock or securities (or options or futures
thereon). Because of the Short-Short Gain Test, the Fund may have to limit the
sale of appreciated securities that it has held for less than three months.
However, the Short-Short Gain Test will not prevent a Fund from disposing of
investments at a loss, since the recognition of a loss before the expiration of
the three-month holding period is disregarded for this purpose. Interest
(including original issue discount) received by a Fund at maturity or upon the
disposition of a security held for less than three months will not be treated
as gross income derived from the sale or other disposition of such security
within the meaning of the Short-Short Gain Test. However, income that is
attributable to realized market appreciation will be treated as gross income
from the sale or other disposition of securities for this purpose.
In general, gain or loss recognized by the Fund on the disposition of an asset
will be a capital gain or loss. However, gain recognized on the disposition of
a debt obligation (including municipal obligations) purchased by a Fund at a
market discount (generally, at a price less than its principal amount)
will be treated as ordinary income to the extent of the portion of the market
discount which accrued during the period of time the Fund held the debt
obligation.
Treasury Regulations permit a regulated investment company, in determining its
investment company taxable income and net capital gain (i.e., the excess of net
long-term capital gain over net short-term capital loss) for any taxable year,
to elect (unless it has made a taxable year election for excise tax purposes as
discussed below) to treat all or any part of any net capital loss, any net
long-term capital loss or any net foreign currency loss incurred after
October 31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above, the Fund must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of the
Fund's taxable year, at least 50% of the value of the Fund's assets must
consist of cash and cash items, U.S. Government securities, securities of other
regulated investment companies, and securities of other issuers (as to which
the Fund has not invested more than 5% of the value of the Fund's total assets
in securities of such issuer and as to which the Fund does not hold more than
10% of the outstanding voting securities of such issuer), and no more than 25%
of the value of its total assets may be invested in the securities of any one
issuer (other than U.S. Government securities and securities of other regulated
investment companies), or in two or more issuers which the Fund controls and
which are engaged in the same or similar trades or businesses. For purposes of
asset diversification testing, obligations issued or guaranteed by agencies or
instrumentalities of the U.S. Government such as the Federal Agricultural
Mortgage Corporation, the Farm Credit System Financial Assistance Corporation,
a Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation, the
Federal National Mortgage Association, the Government National Mortgage
Corporation, and the Student Loan Marketing Association are treated as
U.S. Government securities.
If for any taxable year the Fund does not qualify as a regulated investment
company, all of its taxable income (including its net capital gain) will be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions generally will be
eligible for the dividends-received deduction in the case of corporate
shareholders.
EXCISE TAX ON REGULATED INVESTMENT COMPANIES
A 4% non-deductible excise tax is imposed on a regulated investment company
that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net
income for the one-year period ended on October 31 of such calendar year (or,
at the election of a regulated investment company having a taxable year ending
November 30 or December 31, for its taxable year (a "taxable year
election")). (Tax-exempt interest on municipal obligations is not subject to
the excise tax.) The balance of
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<PAGE> 38
such income must be distributed during the next calendar year. For the
foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable
year ending in such calendar year.
The Fund intends to make sufficient distributions or deemed distributions of
its ordinary taxable income and capital gain net income prior to the end of
each calendar year to avoid liability for the excise tax. However, investors
should note that the Fund may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid
excise tax liability.
FUND DISTRIBUTIONS
The Fund anticipates distributing substantially all of its investment company
taxable income for each taxable year. Such distributions will be taxable to
shareholders as ordinary income and treated as dividends for federal income tax
purposes, but will not qualify for the 70% dividends-received deduction for
corporate shareholders. The Fund also intends to distribute to shareholders its
net capital gain for each taxable year. Net capital gain that is distributed
and designated as a capital gain dividend will be taxable to shareholders as
long-term capital gain, regardless of the length of time the shareholder has
held his shares or whether such gain was recognized by the Fund prior to the
date on which the shareholder acquired his shares.
The Fund intends to qualify to pay exempt-interest dividends by satisfying the
requirement that at the close of each quarter of the Fund's taxable year at
least 50% of its total assets consists of tax-exempt municipal obligations.
Distributions from the Fund will constitute exempt-interest dividends to the
extent of the Fund's tax-exempt interest income (net of expenses and amortized
bond premium). Exempt-interest dividends distributed to shareholders are
excluded by them from gross income for federal income tax purposes. However,
shareholders required to file a federal income tax return will be required to
report the receipt of exempt-interest dividends on their returns. Moreover,
while exempt-interest dividends are excluded from gross income for federal
income tax purposes, they may be subject to the alternative minimum tax ("AMT")
in certain circumstances and may have other collateral tax consequences
discussed below. Distributions by the Fund of any investment company taxable
income or of any net capital gain will be taxable to shareholders as discussed
above.
AMT is imposed in addition to, but only if and to the extent that it exceeds,
the regular tax and is computed -- at a maximum marginal rate of 28% for
noncorporate taxpayers and 20% for corporate taxpayers -- on the excess of the
taxpayer's alternative minimum taxable income ("AMTI") over an exemption
amount. In addition, under the Superfund Amendments and Reauthorization Act of
1986, a tax is imposed for taxable years beginning after 1986 and before 1996
at the rate of 0.12% on the excess of a corporate taxpayer's AMTI (determined
without regard to the deduction for this tax and the AMT net operating loss
deduction) over $2 million. Exempt-interest dividends derived from certain
"private activity" municipal obligations issued after August 7, 1986 will
generally constitute an item of tax preference includable in AMTI for both
corporate and noncorporate taxpayers. In addition, exempt-interest dividends
derived from all municipal obligations, regardless of the date of issue, must
be included in adjusted current earnings, which are used in computing another
corporate preference item (i.e., 75% of the excess of a corporate taxpayer's
adjusted current earnings over its AMTI (determined without regard to this item
and the AMT net operating loss deduction)) includable in AMTI.
Exempt-interest dividends must be taken into account in computing the portion,
if any, of social security or railroad retirement benefits that must be
included in an individual shareholder's gross income and subject to, federal
income tax. Further, a shareholder of the Fund is denied a deduction for
interest on indebtedness incurred or continued to purchase or carry shares of
the Fund. Moreover, a shareholder who is (or is "related" to, within the
meaning of Section 147(a) of the IRS Code) a "substantial user" of a facility
financed by industrial development bonds (as defined in Treasury regulations
section 1.103-11) held by the Fund will likely be subject to tax on dividends
paid by the Fund that are derived from interest on such bonds. Accordingly,
the Fund may not be an appropriate investment vehicle for such users. Receipt
of exempt- interest dividends may result in other collateral federal income tax
consequences to certain taxpayers, including financial institutions,
property and casualty insurance companies and foreign corporations engaged in a
trade or business in the United States. Prospective investors should consult
their own tax advisers as to such consequences.
- 17 -
<PAGE> 39
Distributions by the Fund that do not constitute ordinary income dividends,
exempt-interest dividends or capital gain dividends will be treated as a return
of capital to the extent of (and in reduction of) the shareholder's tax basis
in his shares; any excess will be treated as gain from a sale of the
shares, as discussed below.
Distributions by a Fund will be treated in the manner described above whether
such distributions are paid in cash or reinvested in additional shares of the
Fund (or of another fund). Shareholders receiving a distribution in the form
of additional shares will be treated as receiving a distribution in an amount
equal to the fair market value of the shares received, determined as of the
reinvestment date. In addition, if the net asset value at the time a
shareholder purchases shares of the Fund reflects undistributed income or gain,
or unrealized appreciation in the value of assets held by the Fund, a
subsequent distribution of such amounts will be taxable to the shareholder in
the manner described above, although it economically constitutes a return
of capital.
Ordinarily, shareholders are required to take distributions by the Fund into
account in the year in which they are made. However, dividends declared in
October, November or December of any year and payable to shareholders of record
on a specified date in such a month will be deemed to have been received by the
shareholders (and made by the Fund) on December 31 of such calendar year if
such dividends are actually paid in January of the following year.
Shareholders will be advised annually as to the U.S. federal income tax
consequences of distributions made (or deemed made) to them during the year.
The Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of ordinary income and capital gain dividends, and the proceeds of
redemption of shares, paid to any shareholder who (1) has provided either an
incorrect tax identification number or no number at all, (2) is subject to
backup withholding by the IRS for failure to report the receipt of interest or
dividend income properly, or (3) has failed to certify to the Fund that it
is not subject to backup withholding or that it is a corporation or other
"exempt recipient."
SALE OR REDEMPTION OF SHARES
The Fund seeks to maintain a stable net asset value of $1.00 per share;
however, there can be no assurance that the Fund will be able to do so. If the
value varies, a shareholder will recognize gain or loss on a sale or redemption
of shares of the Fund in an amount equal to the difference between the proceeds
of the sale or redemption and the shareholder's adjusted tax basis in the
shares. All or a portion of any loss so recognized may be disallowed if the
shareholder purchases other shares of the Fund within 30 days before or after
the sale or redemption. In general, any gain or loss arising from (or treated
as arising from) the sale or redemption of shares of the Fund will be
considered capital gain or loss and will be long-term capital gain or loss if
the shares were held longer than one year. However, any capital loss arising
from a sale or redemption of shares held for six months or less will be
disallowed to the extent of the amount of exempt-interest dividends received on
such shares and (to the extent not disallowed) will be treated as a long-term
capital loss to the extent of the amount of capital gain dividends received on
such shares. For this purpose, the special holding period rules of IRS Code
Section 246(c)(3) and (4) generally will apply in determining the holding
period of shares. Long-term capital gains of noncorporate taxpayers are
currently taxed at a maximum rate 11.6% lower than the maximum rate applicable
to ordinary income. Capital losses in any year are deductible only to the
extent of capital gains plus, in the case of noncorporate taxpayers, $3,000 of
ordinary income.
FOREIGN SHAREHOLDERS
Taxation of a shareholder who, as to the United States, is a nonresident alien
individual, foreign trust or estate, foreign corporation, or foreign
partnership ("foreign shareholder"), depends on whether or not the income from
the Fund is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from the Fund is not effectively connected with a U.S. trade or
business of a foreign shareholder, ordinary income dividends paid to the
shareholder will be subject to U.S. withholding tax at the rate of 30% (or
lower applicable treaty rate) on the gross amount of the dividend. Such a
foreign shareholder would generally be exempt from U.S. federal income tax on
gains realized on the sale of shares of the Fund, capital gain dividends
and exempt-interest dividends.
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<PAGE> 40
If the income from the Fund is effectively connected with a U.S. trade or
business of a foreign shareholder, then ordinary income and capital gain
dividends received in respect of, and any gains realized on the sale of, shares
of the Fund will be subject to U.S. federal income tax at the rates
applicable to U.S. citizens or domestic corporations.
In the case of a foreign noncorporate shareholder, the Fund may be required to
withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding (or taxable at a reduced treaty rate), unless
the shareholder furnishes the Fund with proper notification of its foreign
status.
The tax consequences to a foreign shareholder entitled to claim the benefits of
an applicable tax treaty may be different from those described herein. Foreign
shareholders are urged to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in the Fund,
including the applicability of foreign taxes.
EFFECT OF FUTURE LEGISLATION; LOCAL TAX CONSIDERATIONS
The foregoing general discussion of U.S. federal income tax consequences is
based on the IRS Code and Treasury Regulations issued thereunder as in effect
on the date of this Statement. Future legislative or administrative changes or
court decisions may significantly change the conclusions expressed herein,
perhaps with retroactive effect.
Rules of state and local taxation of ordinary income dividends, exempt-interest
dividends and capital gain dividends from regulated investment companies often
differ from the rules for U.S. federal income taxation described above.
Shareholders are urged to consult their tax advisers as to the consequences
to them of federal, state and local tax rules with respect to an investment in
the Victory Portfolios.
TRUSTEES AND OFFICERS
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 Massachusetts governing business trusts (effective on or about
February 29, 1996, the Victory Portfolios will be converted to a Delaware
business trust.) 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 ages, addresses and their
principal occupations during the past five years are as follows:
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<PAGE> 41
<TABLE>
<CAPTION>
Position(s) Held
with the Victory Principal Occupation
Name, Age and Address 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 the 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 Cleveland Advanced Manufacturing
Riviera Beach, FL 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.
Dr. Harry Gazelle, 68 Trustee Retired radiologist, Drs. Hill and
17822 Lake Road Thomas Corp.; Trustee, The Victory
Lakewood, OH 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.
<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>
- 20 -
<PAGE> 42
<TABLE>
<CAPTION>
Position(s) Held
with the Victory Principal Occupation
Name, Age and Address 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.
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).
- 21 -
<PAGE> 43
The following table indicates the compensation received by each Trustee from the
Victory "Fund Complex"* for the 12 month period ended 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>
Total
Pension or Retirement Estimated Annual 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- $2,962 $39,815.98
John D. Buckingham, -0- -0- 1,784 18,841.89
Trustee#. . . . . . . . .
Edward P. Campbell, -0- -0- 4,899 33,799.68
Trustee . . . . . . . . .
Harry Gazelle, Trustee . -0- -0- 3,548 35,916.98
John W. Kemper, Trustee# -0- -0- 1,893 22,567.31
Stanley I. Landgraf, -0- -0- 3,183 34,615.98
Trustee . . . . . . . . .
Thomas F. Morrissey, -0- -0- 5,602 40,366.98
Trustee . . . . . . . . .
H. Patrick Swygert, -0- -0- 3,102 37,116.98
Trustee . . . . . . . . .
Leigh A. Wilson, Trustee -0- -0- 3,424 46,716.97
John R. Young, Trustee# . -0- -0- 1,661 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 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."
</TABLE>
OFFICERS
The officers of the Victory Portfolios, their addresses, ages and principal
occupations during the past five years are as follows:
<TABLE>
<CAPTION>
Position(s) with the Principal Occupation
Name, Age and Address 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 to
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>
- 22 -
<PAGE> 44
<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 of BISYS Fund Services; from 1989-
(Ireland) Limited May 1993, Manager, Price
Floor 2, Block 2 Waterhouse.
Harcourt Center, 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 December 1, 1995, the Trustees and officers as a group owned beneficially
less than 1% of the Fund.
- 23 -
<PAGE> 45
ADVISORY AND OTHER CONTRACTS
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,
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 $66 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 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 (1)
.35 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Prime Obligations Fund (1)
Victory U.S. Government Obligations Fund (1)
Victory Tax-Free Money Market Fund (1)
.50 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Money Market Fund (1)
Victory Limited Term Income Fund (1)
Victory Government Mortgage Fund (1)
Victory Financial Reserves Fund (1)
Victory Fund for Income (2)
.55 OF 1% OF AVERAGE DAILY NET ASSETS
Victory National Municipal Bond Fund (1)
Victory Government Bond Fund (1)
Victory New York Tax-Free Fund (1)
.60 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Bond Fund (1)
Victory Stock Index Fund (1)
.65 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Diversified Stock Fund (1)
.75 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Intermediate Income Fund (1)
Victory Investment Quality Bond Fund (1)
Victory Ohio Regional Stock Fund (1)
- 24 -
<PAGE> 46
1% OF AVERAGE DAILY NET ASSETS
Victory Balanced Fund (1)
Victory Value Fund (1)
Victory Growth Fund (1)
Victory Special Value Fund (1)
Victory Special Growth Fund(3)
1.10% OF AVERAGE DAILY NET ASSETS
Victory International Growth Fund (1)
- --------------------------------------
(1) 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 rates (based on
an annual percentage of average daily net assets) which vary according
to the table set forth below, following these footnotes.
(2) 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.
(3) T. Rowe Price Associates, Inc. serves as sub-adviser to the 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.
The sub-investment advisory fees payable by Key Advisers to the Sub-Adviser are
as follows:
<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(1) Net Assets Sub-Advisory Fee(1)
---------- ------------------- ---------- ------------------
<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%
<FN>
____________________
(1) As a percentage of average daily net assets. The Sub-Adviser has the right, but not the obligation, to voluntarily waive
any portion of the sub-investment 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 will be in writing.
</TABLE>
- 25 -
<PAGE> 47
<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
Municipal Bond Fund, Government Bond Fund, Government Fund, Financial Reserves Fund, Institutional Money
Mortgage Fund, National Municipal Bond Fund and New York Market Fund and Ohio Municipal Money Market Fund:
Tax-Free Fund:
Rate of Rate of
Net Assets Sub-Advisory Fee(1) Net Assets Sub-Advisory Fee(1)
---------- ------------------ ---------- ------------------
<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>
____________________
(1) As a percentage of average daily net assets. The Sub-Adviser has the right, but not the obligation, to voluntarily waive
any portion of the sub-investment 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 will be in writing.
</TABLE>
THE FUND'S INVESTMENT ADVISORY AND SUB-INVESTMENT ADVISORY AGREEMENTS
Unless sooner terminated, the investment advisory agreement between Key
Advisers and the Victory Portfolios on behalf of the Fund (the "Investment
Advisory Agreement") provides that it will continue in effect 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 "Additional Information -- Miscellaneous"), 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.
Prior to January 1, 1996, Society Asset Management, Inc. served as investment
adviser to the Fund. For the two month period ended October 31, 1995 and the
fiscal years ended August 31, 1995, 1994 and 1995, Society earned an investment
advisory fee of $187,594, $1,692,574, $1,517,669 and $1,298,426, respectively,
after $244,500, $320,022, $234,884 and $265,632, respectively, was voluntarily
waived, and $903,705 was voluntarily reimbursed in the year ended August 31,
1995.
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
- 26 -
<PAGE> 48
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 an investment advisers to investment companies, a national bank
performing investment advisory services for an investment company would not
violate the Glass-Steagall Act.
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.
ADMINISTRATOR
Currently, Concord Holding Corporation ("CHC") serves as 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-Investment Advisory
Agreement. Prior to August 31, 1994, Federated Administrative Securities
("Federated") 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.
- 27 -
<PAGE> 49
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.
For the two month period ended October 31, 1995, CHC earned an administration
fee of $129,644 after $0 in voluntary fee waivers. For the period June 5, 1995
to August 31, 1995, CHC earned administration fees of $165,282 from the Fund
after voluntary fees waived of $4,709. Prior to that, from August 31, 1994 to
June 4, 1995, Primary Fund Service Corporation earned $433,288 from the Fund
after voluntary fees waived of $500.
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
two-month period ended October 31, 1995 and the fiscal year ended August 31,
1995, the Distributor and its predecessor earned no underwriting fees.
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 (or an
affiliate) 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:
Rate of Business
Net Assets of the Fund Management Fee(1)
---------------------- -----------------
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%
___________________
[FN]
(1) As a percentage of average daily net assets.
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. Rule
12b-1 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 its shares except pursuant to a plan adopted by the Fund under Rule
12b-1. The Board of Trustees has adopted the Plan to allow the Adviser, any
sub-adviser and the Distributor to incur certain expenses that might be
considered to constitute indirect payment
- 28 -
<PAGE> 50
by the Fund of distribution expenses. Under the Plan, if a payment to the
Adviser of management fees or to the Administrator of administrative fees
should be deemed to be indirect financing by the Fund of the distribution of
its shares, such payment is authorized by the Plan.
The Plan specifically recognizes that the Adviser, any sub-adviser or the
Administrator, 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 the Adviser, any sub-adviser and the
Administrator 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.
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.
SHAREHOLDER SERVICING PLAN
The Victory Portfolios, on behalf of the Fund, has adopted a Shareholder
Servicing Plan to provide payments to shareholder servicing agents which may
include affiliates of two Advisers (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
- 29 -
<PAGE> 51
$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.
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. For the period ended October 31, 1995, BISYS Fund Services Ohio,
Inc. earned accounting fees of $13,370. For the period from June 5, 1995
through August 31, 1995, BISYS Fund Services Ohio, Inc. earned accounting fees
of $30,071. In the fiscal year ended August 31, 1994, Primary Funds Service
Corporation ("PFSC") and Federated Administrative Services earned accounting
fees of $140,235 and $259,581, 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. (1) maintains a separate account or
accounts in the name of 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 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
Primary Funds Service Corporation serves as transfer agent and dividend
disbursing agent for the Fund, pursuant to a Transfer Agency 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. For the period ended August 31, 1995
and the two month period ended October 31, 1995, PFSC earned transfer agency
fees of $16,669 and $10,000, respectively.
AUDITORS
The financial highlights appearing in the Prospectus, 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
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reliance upon such report and on the authority of such firm as experts in
auditing and accounting. 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, serves as counsel to the Victory Portfolios.
FINANCIAL STATEMENTS
The 1995 Annual Report to shareholders of The Victory Portfolios is
incorporated by reference herein. This report includes the financial
statements of the Fund 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.
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES
The Victory Portfolios (sometimes referred to as the "Trust") is a
Massachusetts business trust. 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 funds 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 authorizes the
Trustees to issue an unlimited number of Shares, which are units of beneficial
interest, without par value. The Victory Portfolios presently have twenty-eight
series of 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' 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 a 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 any general assets
not belonging to any particular fund which are available for distribution.
As of December 4, 1995, the Fund believes that SNBOC & Company, Society
National Bank - Private Banking, and Key Clearing Corp. are shareholders of
record of 24.6%, 55.3% and 10.2%, respectively, of the outstanding shares of
the Fund.
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<PAGE> 53
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 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 UNDER MASSACHUSETTS LAW
Under Massachusetts law, holders of units of interest in a business trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the trust. However, the Victory Portfolios' Declaration of Trust
provides that shareholders shall not be subject to any personal liability for
the obligations of the Victory Portfolios, and that every written agreement,
obligation, instrument, or undertaking made by the Victory Portfolios shall
contain a provision to the effect that the shareholders are not personally
liable thereunder. The Declaration of Trust 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 Declaration of
Trust 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 limited to circumstances in which the Funds would be unable to meet their
obligations.
The Declaration of Trust 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> 54
SHAREHOLDER AND TRUSTEE LIABILITY UNDER DELAWARE LAW
On December 1, 1995 shareholders of The Victory Portfolios approved a plan to
convert the Victory Portfolios to a Delaware business trust. The conversion is
expected to occur on or about February 29, 1996. 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 of a fund (or the 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 Fund means the affirmative vote of the
lesser of (a) 67% or more of the shares of the Fund present at a meeting at
which the holders of more than 50% of the outstanding shares of the Fund are
represented in person or by proxy, or (b) more than 50% of the outstanding
shares of the Fund.
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.
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<PAGE> 55
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> 56
APPENDIX
Dollar-Weighted Average Maturity for the Fund is derived by dividing the value
of each investment by the total value of all investments and multiplying the
quotient by the number of days remaining to its maturity, adding these
calculations, and then dividing the total by the value of the portfolio. An
obligation's maturity is typically determined on a stated final maturity basis,
although there are some expectations to this rule.
For example, if it is probable that the issuer of an instrument will take
advantage of a maturity-shortening device, such as a call, refunding, or
redemption provision, the date on which the instrument will probably be called,
refunded, or redeemed may be considered to be its maturity date. Also, the
maturities of mortgage-backed securities and some asset-backed securities, such
as collateralized mortgage obligations, are determined on a weighted average
life basis, which is the average time for principal to be repaid. For a
mortgage security, this average time is calculated by assuming a constant
prepayment rate for the life of the mortgage. The weighted average life of
these securities is likely to be substantially shorter than their stated final
maturity.
The descriptions that follow are examples of eligible ratings for the Fund.
The Fund may, however, consider the ratings for other types of investments and
the ratings assigned by other rating organizations when determining the
eligibility of a particular investment.
DESCRIPTION OF SECURITY RATINGS
The following summarizes the two highest ratings used by Moody's for short-term
municipal notes and variable rate demand obligations:
MIG-1/VMIG-1 -- Obligations bearing these designations are of the best
quality, enjoying strong protection from established cash flows,
superior liquidity support or demonstrated broad-based access to
the market for refinancing.
MIG-2/VMIG-2 -- Obligations bearing these designations are of high
quality, with ample margins of protection although not so large
as in the preceding group.
The following summarizes the two highest ratings used by S&P for short-term
municipal notes:
SP-1 -- Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics
are given a "plus" (+) designation.
SP-2 -- Satisfactory capacity to pay principal and interest.
The three highest rating categories of Duff & Phelps ("D&P") for short-term
debt, each of which denotes that the securities are investment grade, are Duff
1, Duff 2 and Duff 3. D&P employs three designations, Duff 1+, Duff 1 and Duff
1-, within the highest rating category. Duff 1+ indicates highest certainty of
timely payment. Short-term liquidity, including internal operating factors
and/or access to alternative sources of funds, is judged to be "outstanding,
and safety is just below risk-free U.S. Treasury short-term obligations." Duff
1 indicates very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors
are considered to be minor. Duff 1- indicates high certainty of timely
payment. Liquidity factors are strong and supported by good fundamental
protection factors. Risk factors are very small. Duff 2 indicates 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 indicates satisfactory liquidity and other protection factors which qualify
the issue as investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.
The following summarizes the three highest rating categories used by Fitch for
short-term obligations, each of which denotes securities that are investment
grade:
F-1+ securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree
of assurance for timely payment.
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F-1 securities possess 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 securities possess good credit quality. Issues carrying this
rating have a satisfactory degree of assurance for timely
payment, but the margin of safety is not as great as for issues
assigned the F-1+ and F-1 ratings.
Commercial paper rated A-1 by S&P indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted A-1+. Capacity for timely payment on
commercial paper rated A-2 is satisfactory, but the relative degree of safety
is not as high as for issues designated A-1.
The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated Prime-1 (or related supporting institutions) are considered to
have a superior capacity for repayment of senior short-term promissory
obligations. Issuers rated Prime-2 (or related supporting institutions) are
considered to have a strong capacity for repayment of senior short-term
promissory obligations. This will normally be evidenced by many of the
characteristics of issuers rated Prime-1, but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected
by external conditions. Ample alternate liquidity is maintained.
D&P uses the short-term ratings described above for commercial paper. Fitch
uses the short-term ratings described above for commercial paper.
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