Rule 497(c)
Registration No. 33-8982
VICTORY FUNDS
PROSPECTUS
BALANCED
FUND
DIVERSIFIED
STOCK FUND
VALUE FUND
STOCK INDEX FUND
OHIO REGIONAL
STOCK FUND
GROWTH
FUND
SPECIAL
VALUE FUND
SPECIAL
GROWTH FUND
INTERNATIONAL
GROWTH FUND
800-KEY-FUND(R) or 800-539-3863
March 1, 1997
<PAGE>
THE VICTORY PORTFOLIOS
BALANCED FUND
DIVERSIFIED STOCK FUND
VALUE FUND
STOCK INDEX FUND
OHIO REGIONAL STOCK FUND
GROWTH FUND
SPECIAL VALUE FUND
SPECIAL GROWTH FUND
INTERNATIONAL
GROWTH FUND
800-KEY-FUND(R) 800-539-3863
This prospectus describes the following funds:
Balanced Fund
Diversified Stock Fund
Value Fund
Stock Index Fund
Ohio Regional Stock Fund
Growth Fund
Special Value Fund
Special Growth Fund
International Growth Fund
The nine Victory Funds discussed in this prospectus (the Funds) are
a part of The Victory Portfolios (Victory), an open-end investment
management company. The Funds are diversified mutual funds.
This prospectus explains the objectives, policies, risks, and strategies
of the Funds. You should read this prospectus before investing
in one of these Funds and keep it for future reference. A detailed Statement
of Additional Information (SAI) describing each of the Funds is also
available for your review. The SAI has been filed with the Securities and
Exchange Commission (SEC), and is incorporated in this prospectus by
reference. If you would like a free copy of the SAI, please request one
by calling us at 800-KEY-FUND.
<PAGE>
TABLE OF CONTENTS
Introduction 2
AN OVERVIEW OF EACH OF THE FUNDS
A fund-by-fund analysis which includes objectives, policies,
strategies, expenses, and financial highlights
Balanced Fund 4
Diversified Stock Fund 6
Value Fund 8
Stock Index Fund 10
Ohio Regional Stock Fund 12
Growth Fund 14
Special Value Fund 16
Special Growth Fund 18
International Growth Fund 20
Risk Factors 22
Investment Limitations 23
Investment Performance 24
Share Price 24
Dividends, Distributions, and Taxes 25
INVESTING WITH VICTORY 27
Choosing a Share Class 27
How to Purchase Shares 30
How to Exchange Shares 32
How to Redeem Shares 33
Organization and Management
of the Funds 34
Additional Information 37
Other Securities and
Investment Practices 38
Shares of the Funds are:
Not insured by the FDIC;
Not deposits or other
obligations of, or guaranteed by,
any KeyBank, any of its affiliates,
or any other bank;
Subject to investment risks, including
possible loss of the principal amount invested.
These securities have not been approved or disapproved
by the Securities and Exchange Commission or any securities
regulatory authority of any state, nor has the Securities and
Exchange Commission or any such state authority passed upon the
accuracy or adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
<PAGE>
KEY
TO FUND
INFORMATION
Objective and Strategy
The goals and the strategy that
a Fund plans to use in pursuing
its investment objective.
Risk Factors
The risks that you may assume
as an investor in a Fund.
Expenses
The costs that you will pay
as an investor in a Fund,
including sales charges and ongoing expenses.
Financial Highlights
A table which shows a Fund's historical performance by share class.
This table also summarizes previous operating expenses.
Investment Objective and Strategy
Objective The Balanced Fund seeks to provide income and long-term
growth of capital.
The Diversified Stock Fund seeks to provide long-term
growth of capital.
The Value Fund seeks to provide long-term growth of capital
and dividend income.
The Stock Index Fund seeks to provide long-term capital
appreciation by attempting to match the investment
performance of the Standard & Poor's 500 Composite
Stock Index.1
The Ohio Regional Stock Fund seeks to provide capital
appreciation.
The Growth Fund seeks to provide long-term growth of capital.
The Special Value Fund seeks to provide long-term growth of
capital and dividend income.
The Special Growth Fund seeks capital appreciation.
The International Growth Fund seeks to provide capital growth
consistent with reasonable investment risk.
Strategy Each of the Funds pursues its investment objective by investing
primarily in equity securities. However, each of the Funds has
unique investment strategies and its own risk/reward profile.
Please review the section about the Fund in which you are
interested in investing and "Other Securities and Investment
Practices" for an overview of the Funds.
Risk Factors
The Funds are not insured by the FDIC. Since equity securities fluctuate
in value, the Funds' shares also will fluctuate in value. This fluctuation
may be in response to the activities of an individual company, or in
response to general market or economic conditions. Debt securities are
subject to interest rate, inflation and credit risks.
The Balanced Fund is subject to the risks of both equity and debt securities,
since it is permitted to invest in both types of securities.
The Growth Fund, International Growth Fund, and Special Growth Fund
invest primarily in equity securities of companies that do not pay out a
significant portion of their earnings as dividends. Therefore, these funds
will not pay significant dividend income.
The International Growth Fund invests primarily in foreign equity securities.
An investment in a fund holding foreign securities may be subject to more
economic, currency, or political risks than an investment in a domestic
equity fund.
The Ohio Regional Stock Fund invests primarily in the securities of
companies whose headquarters are located in the State of Ohio. An
investment in a state specific fund can involve additional economic or
political risks specific to the state.
The Special Growth Fund and Special Value Fund invest primarily in
securities of small and mid-capitalization companies. Smaller, less
seasoned companies may be subject to greater business risks than larger,
established companies.
In addition, there are other potential risks, which are discussed in the
section "Risk Factors."
Who Should Invest
Investors willing to accept higher short-term risk along with higher
potential long-term returns
Investors seeking capital appreciation over the long term
Investors seeking funds for the growth portion of a diversified portfolio
Investors who are investing for goals that are many years in the future
Fees and Expenses
The Value Fund, Stock Index Fund, Growth Fund, and Special Growth
Fund offer only Class A Shares, while the Balanced Fund, Diversified Stock
Fund, Ohio Regional Stock Fund, Special Value Fund, and International
Growth Fund offer both Class A and Class B Shares. See "Choosing a Share
Class." If you purchase Class A Shares of a Fund, you may pay a sales charge
of up to 4.75% of the offering price, depending on the Fund in which you
invest and the amount you invest. If you purchase Class B Shares of a Fund,
you will not pay an initial sales charge; however, you may pay a deferred
sales charge if you sell (redeem) your shares within six years of purchase,
and you will pay additional distribution expenses. In either case, you also
will incur expenses for investment advisory, management, administrative,
and shareholder services, all of which are included in a Fund's expense
ratio. See "Choosing a Share Class."
1/ "Standard & Poor's 500" is a registered service mark of Standard and
Poor's Corporation, which does not sponsor and is in no way affiliated
with the Stock Index Fund.
- 2 -
<PAGE>
Purchases
The minimum initial investment is $500 for most accounts $250 for
Individual Retirement Accounts and $25 thereafter. An initial investment
must be accompanied by a Fund's Account Application. Fund shares may
be purchased by check, Automated Clearing House, or wire. See "How to
Purchase Shares."
Redemptions
You can redeem Fund shares by written request or telephone. When the
Transfer Agent receives a redemption request in proper form, a Fund will
redeem the shares and credit your bank account or send the proceeds to the
address designated on your Account Application. See "How to Redeem Shares."
Dividends/Distributions
Ordinarily, the Balanced Fund declares and pays dividends from its net
investment income monthly. All other Funds in this prospectus declare
and pay dividends, if any, from their net investment income quarterly.
Any net capital gains realized by a Fund are paid as dividends annually.
A Fund can send your dividends directly to you by mail, credit them to
your bank account, reinvest them in the Fund, or invest them in another
fund of the Victory Group. The "Victory Group" includes other funds of
The Victory Portfolios and Key Mutual Funds. You can make this choice
when you fill out an account application. See "Dividends, Distributions,
and Taxes."
Other Services
Victory offers a number of other services to better serve shareholders
including exchange privileges and automated investment and withdrawal
plans. See "How to Exchange Shares" and "How to Redeem Shares."
Our toll-free fax number is 800-529-2244. You can reach Victory's
Telecommunication Device for the Deaf (TDD) at 800-970-5296.
<TABLE>
General Information about each of the Funds
<CAPTION>
Annual
Victory Fund Inception Expenses Maximum Newspaper
Date After Waivers Sales Charge Abbreviation<F1>
(as a % of net assets)
<S> <C> <C> <C> <C>
Balanced Fund -- Class A 12/10/93 1.25% 4.75% Victory BalncdA
Balanced Fund -- Class B 3/1/96 2.62% 5.00% Victory BalncdB
Diversified Stock
Fund -- Class A 10/20/89 1.05% 4.75% Victory DvsStkA
Diversified Stock
Fund -- Class B 3/1/96 2.02% 5.00% Victory DvsStkB
Value Fund -- Class A 12/3/93 1.40% 4.75% Victory Value
Stock Index
Fund -- Class A 12/3/93 0.56% 4.75% Victory StkIdx
Ohio Regional Stock
Fund -- Class A 10/20/89 1.40% 4.75% Victory OH RegA
Ohio Regional Stock
Fund -- Class B 3/1/96 2.77% 5.00% Victory OH RegB
Growth Fund -- Class A 12/3/93 1.40% 4.75% Victory Growth
Special Value
Fund -- Class A 12/3/93 1.40% 4.75% Victory SplValA
Special Value
Fund -- Class B 3/1/96 2.79% 5.00% Victory SplValB
Special Growth
Fund -- Class A 1/11/94 1.53% 4.75% Victory SplGwth
International Growth
Fund -- Class A 5/18/90 1.75% 4.75% Victory IntlGrA
International Growth
Fund -- Class B 3/1/96 3.10% 5.00% Victory IntlGrA
<FN>
<F1> All newspapers do not use the same abbreviation.
</FN>
</TABLE>
The following pages provide you with separate overviews of each Fund.
Please look at the objective, policies, strategies, risks, expenses, and
financial history to determine which Fund will best suit your risk tolerance
and investment needs. You also should review the "Other Securities and
Investment Practices" for additional information about the individual
securities in which the Funds can invest and the risks related to these
investments.
- 3 -
<PAGE>
BALANCED FUND
Investment Objective
The Balanced Fund seeks to provide income and long-term growth of capital.
Investment Policies and Strategy
The Balanced Fund pursues its investment objective by investing in equity
securities and fixed income securities. The Balanced Fund may invest in
any type or class of security.
Under normal market conditions, the Balanced Fund will:
Invest 40% to 70% of its total assets in equity securities and securities
convertible or exchangeable into common stock
Invest at least 25% of its total assets in fixed income securities
Invest up to 10% of its total assets in equity securities (including American
Depository Receipts) of foreign companies that derive more than 50% of
their gross revenues from, or have more than 50% of their assets, outside
the United States.
Important Characteristics of the Balanced Fund's Investments:
In making investment decisions involving Equity Securities, the Adviser
considers:
The growth and profitability prospects for the economic sector and markets
in which the company operates and for the products or services it provides
The financial condition of the company
The price of the security and how that price compares to historical price
levels, to current price levels in the general market, and to prices of
competing companies; projected earnings estimates; and the earnings
growth rate of the company
In making investment decisions involving Debt Securities, the Adviser
considers:
Quality: The Balanced Fund primarily purchases investment-grade
corporate debt securities.
Maturity: The average weighted maturity of the Balanced Fund's fixed
income securities will range from 5 to 15 years. This range may be
changed in response to changes in market conditions.
In making investment decisions involving Preferred Stock, the Adviser
considers:
The issuer's financial strength, including its historic and current financial
condition
The issuer's projected earnings, cash flow, and borrowing requirements
The issuer's continuing ability to meet its obligations
The Balanced Fund is designed for long-term investors. The Balanced
Fund is subject to the risks common to all mutual funds and the risks
common to mutual funds that invest in equity securities, debt securities,
and foreign issuer risk. By itself, the Balanced Fund does not constitute
a complete investment plan and should be considered a long-term investment
for investors who can afford to weather changes in the value of their
investment and in the level of income they receive from their investment.
Please read "Risk Factors" carefully before investing.
Portfolio Management
Denise Coyne and Richard T. Heine are the Portfolio Managers of the
Balanced Fund. Richard Heine has been the Portfolio Manager of the
Balanced Fund since its inception in December 1993. Richard Heine is
a Portfolio Manager and Director of Key Asset Management Inc., and
has been in the investment business since 1976. Denise Coyne has been
a Portfolio Manager of the Balanced Fund since January 1995. She is a
Portfolio Manager and Director for Key Asset Management Inc., and has
been in the investment business since 1985.
Fund Expenses
This section will help you understand the costs and expenses you would
pay, directly or indirectly, if you invest in the Balanced Fund.
<TABLE>
<CAPTION>
Shareholder Class A Class B
Transaction Expenses<F1> Shares Shares
<S> <C> <C>
Maximum Sales Charge 4.75% None
Imposed on Purchases
(as a percentage of
offering price)
Sales Charge Imposed None None
on Reinvested Dividends
Deferred Sales Charge None 5.00%<F2>
Redemption Fees None None
Exchange Fees None None
<FN>
<F1>You may be charged additional fees if you purchase, exchange, or
redeem shares through a broker or agent.
<F2>5% in the first year, declining to 1% in the sixth year, with no
charge after the sixth year.
</FN>
</TABLE>
The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Balanced Fund.
These expenses are charged directly to the Balanced Fund. Expenses include
management fees, as well as the costs of maintaining accounts, administering
the Balanced Fund, providing shareholder services, and other activities. The
expenses shown are estimated based on historical or projected expenses of the
Balanced Fund.
<TABLE>
<CAPTION>
Annual Fund Operating Expenses Class A Class B
(After expense waivers and reimbursements) Shares Shares
<S> <C> <C>
(as a percentage of average daily
net assets)
Management Fees<F1> .87% .87%
Rule 12b-1 Distribution Fees .00% .75%
Other Expenses<F2> .38% 1.00%
---- ----
Total Fund Operating Expenses<F1> 1.25% 2.62%
==== ====
<FN>
<F1> These fees have been voluntarily reduced. Without this waiver, the Management
Fee would be 1.00%, and the Total Fund Operating Expenses would be 1.38% for Class A Shares,
and 2.75% for Class B Shares.
<F2> Other Expenses includes an estimate of shareholder servicing fees the Balanced Fund
expects to pay. See "Organization and Management of the Funds--Shareholder Servicing Plan."
</FN>
</TABLE>
The following example is designed to help you understand the various
costs you will bear, directly or indirectly, as an investor in the Balanced
Fund.
Example: You would pay the following expenses on a $1,000 investment
in the Balanced Fund, assuming: (1) a 5% annual return, and (2) redemption
at the end of each time period.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A Shares $60 $ 85 $113 $191
Class B Shares $77 $111 $159 $262
</TABLE>
This example is only an illustration.
Actual expenses and returns will vary.
- 4 -
<PAGE>
Financial Highlights
Balanced Fund
The Financial Highlights describe the Balanced Fund's returns and
operating expenses over time. This table shows the results of an investment
in one share of the Balanced Fund for each of the periods indicated.
<TABLE>
<CAPTION>
CLASS B CLASS A
March 1, Year Year Dec. 10,
1996 Ended Ended 1993
through Oct. 31, Oct. 31, through
Oct. 31, 1996<F4> 1995 Oct. 31,
1996<F4> 1994<F1>
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 11.51 $ 11.01 $ 9.62 $ 10.00
-------- -------- -------- --------
Investment Activities
Net investment income 0.14 0.36 0.41 0.33
Net realized and unrealized
gains (losses) from
investments and foreign currencies 0.85 1.39 1.40 (0.39)
---- ---- ---- -----
Total from Investment Activities 0.99 1.75 1.81 (0.06)
---- ---- ---- -----
Distributions
Net investment income (0.14) (0.36) (0.41) (0.32)
In excess of net investment income (0.02) -- (0.01) --
Net realized gains -- (0.07) -- --
---- ---- ---- -----
Total Distributions (0.16) (0.43) (0.42) (0.32)
----- ----- ----- -----
Net Asset Value, End of Period $ 12.34 $ 12.33 $ 11.01 $ 9.62
======== ======== ======== ========
Total Return (excludes sales charge) 15.73%<F5> 16.27% 19.24% (0.57%)<F2>
Ratios/Supplemental Data:
Net Assets, End of Period (000) $ 1,432 $273,553 $201,073 $127,285
Ratio of expenses to
average net assets 2.46%<F3> 1.27% 0.98% 0.87%<F3>
Ratio of net investment income
to average net assets 1.78%<F3> 3.14% 4.05% 3.97%<F3>
Ratio of expenses to
average net assets<F8> 2.67%<F3> 1.43% 1.36% 1.49%<F3>
Ratio of net investment income
to average net assets<F8> 1.57%<F3> 2.98% 3.67% 3.35%<F3>
Portfolio turnover<F6> 80% 80% 69% 118%
Average commission rate paid<F7> $ 0.0084 $ 0.0084 -- --
The financial highlights were audited by Coopers & Lybrand L.L.P. This information
should be read in conjunction with the Balanced Fund's most recent Annual Report
to shareholders, which is incorporated by reference in the SAI. If you would like
a copy of the Annual Report, write or call us at 800-KEY-FUND.
<FN>
<F1> Period from commencement of operations.
<F2> Not annualized.
<F3> Annualized.
<F4> Effective March 1, 1996, the Balanced Fund designated the existing shares as Class A Shares and
began offering Class B Shares.
<F5> Represents total return for the Balanced Fund for the period November 1, 1995 through February 29,
1996 plus total return for Class B Shares for the period March 1, 1996 through October 31, 1996.
<F6> Portfolio turnover is calculated on the basis of the Balanced Fund as a whole without distinguishing
between the classes of shares issued.
<F7> Represents the total dollar amount of commissions paid on portfolio security transactions divided by
total number of shares purchased and sold
by the Balanced Fund for which commissions were charged.
<F8> During the period certain fees were voluntarily reduced. If such voluntary fee reductions had not
occurred, the ratios would have been as indicated.
</FN>
</TABLE>
- 5 -
<PAGE>
DIVERSIFIED STOCK FUND
Investment Objective
The Diversified Stock Fund seeks to provide long-term growth of capital.
Investment Policies and Strategy
The Diversified Stock Fund pursues its investment objective by investing
primarily in equity securities and securities convertible into common stocks
issued by established domestic and foreign companies.
The Adviser seeks to invest in securities that it considers undervalued in
relation to historical earnings and the value of the issuer's underlying
assets. In making investment decisions, the Adviser may consider cash flow,
book value, dividend yield, growth potential, quality of management, adequacy
of revenues, earnings, capitalization, and expected future relative earnings
growth. The Adviser will pursue investments that provide above average
dividend yield or potential for appreciation.
Under normal market conditions, the Diversified Stock Fund:
Will invest at least 80% of its total assets in equity securities and
securities convertible or exchangeable into common stock
May invest up to 20% of its total assets in:
Investment-grade corporate debt securities
Short-term debt obligations
U.S. Government obligations
The Diversified Stock Fund is designed for long-term investors. The
Diversified Stock Fund is subject to the risks common to all mutual
funds and the risks common to mutual funds that invest in equity
securities. By itself, the Diversified Stock Fund does not constitute a
complete investment plan and should be considered a long-term investment
for investors who can afford to weather changes in the value of their
investment. Please read "Risk Factors" carefully before investing.
Portfolio Management
Lawrence G. Babin is the Portfolio Manager of the Diversified Stock
Fund, a position he has held since its inception in October 1989. He is a
Portfolio Manager and Managing Director of Key Asset Management Inc.,
and has been in the investment business since 1982.
Fund Expenses
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the Diversified Stock Fund.
<TABLE>
<CAPTION>
Shareholder Class A Class B
Transaction Expenses<F1> Shares Shares
<S> <C> <C>
Maximum Sales Charge 4.75% None
Imposed on Purchases
(as a percentage of offering price)
Sales Charge Imposed None None
on Reinvested Dividends
Deferred Sales Charge None 5.00%<F2>
Redemption Fees None None
Exchange Fee None None
<FN>
<F1>You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent.
<F2>5% in the first year, declining to 1% in the sixth year, with no charge after
the sixth year.
</FN>
</TABLE>
The Annual Fund Operating Expenses table below illustrates the
estimated operating expenses that you will incur as a shareholder
of the Diversified Stock Fund. These expenses are charged directly
to the Diversified Stock Fund. Expenses include management fees
as well as the costs of maintaining accounts, administering the
Diversified Stock Fund, providing shareholder services, and other
activities. The expenses shown are estimated based on historical or
projected expenses of the Diversified Stock Fund.
<TABLE>
<CAPTION>
Annual Fund Class A Class B
Operating Expenses Shares Shares
<S> <C> <C>
(as a percentage of
average daily net assets)
Management Fees .65% .65%
Rule 12b-1 Distribution Fees .00% .75%
Other Expenses<F1> .40% .62%
---- ----
Total Fund Operating Expenses 1.05% 2.02%
==== ====
<FN>
<F1> Other Expenses include an estimate of shareholder servicing fees
the Diversified Stock Fund expects to pay. See "Organization and
Management of the Funds -- Shareholder Servicing Plan."
</FN>
</TABLE>
The following example is designed to help you understand the various
costs you will bear, directly or indirectly, as an investor in the
Diversified Stock Fund.
Example: You would pay the following expenses on a $1,000 investment in
the Diversified Stock Fund, assuming: (1) a 5% annual return, and (2)
redemption at the end of each time period.
1 Year 3 Years 5 Years 10 Years
Class A Shares $58 $79 $103 $170
Class B Shares $71 $93 $129 $210
This example is only an illustration.
Actual expenses and returns will vary.
- 6 -
Financial Highlights
Diversified Stock Fund
The Financial Highlights describe the Diversified Stock Fund's returns
and operating expenses over time. This table shows the results of an
investment in one share of the Diversified Stock Fund for each of the
periods indicated.
<TABLE>
<CAPTION>
CLASS B CLASS A
March 1, Year Year Year Year Year Year Year Period From
1996 Ended Ended Ended Ended Ended Ended Ended Oct. 20,
through Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct, 31, Dec. 31, Dec. 31, 1989 to
Oct. 31, 1996<F1> 1995 1994 1993 1992 1991 1990 Oct. 31,
1996<F1> 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 14.18 $ 13.62 $ 12.68 $ 13.39 $ 12.16 $ 11.44 $ 9.25 $ 9.90 $ 10.00
-------- -------- -------- -------- -------- -------- -------- -------- --------
Investment Activities:
Net investment income 0.07 0.20 0.27 0.25 0.18 0.19 0.23 0.26
Net realized
and unrealized
gains (losses)
from investments 1.57 3.21 2.33 0.64 1.50 1.11 2.20 (0.67) (0.10)
---- ---- ---- ---- ---- ---- ---- ----- -----
Total from
investment
activities 1.64 3.41 2.60 0.89 1.68 1.30 2.43 (0.41) (0.10)
---- ---- ---- ---- ---- ---- ---- ----- -----
Distributions
Net investment income (0.07) (0.19) (0.27) (0.23) (0.21) (0.19) (0.24) (0.24)
In excess of net
investment income (0.04) -- (0.01) -- -- -- -- -- --
Net realized gains -- (1.09) (1.38) (1.37) (0.24) (0.39)
---- ---- ---- ---- ---- ---- ---- ----- -----
Total distributions (0.11) (1.28) (1.66) (1.60) (0.45) (0.58) (0.24) (0.24)
---- ---- ---- ---- ---- ---- ---- ----- -----
Net Asset Value,
End of Period $ 15.71 $ 15.75 $ 13.62 $ 12.68 $ 13.39 $ 12.16 $ 11.44 $ 9.25 $ 9.90
======== ======== ======== ======== ======== ======== ======== ======== ========
Total Return
(excludes
sales charge) 26.61% 27.16% 23.54% 7.39% 14.04% 11.57% 27.50% (4.29%) (1.00%)
<F3>
Ratios/Supplemental
Data:
Net Assets,
End of Period (000) $ 8,228 $571,153 $409,549 $263,227 $257,405 $227,839 $177,472 $121,754 $ 80,046
Ratio of expenses
to average net assets 2.07% 1.05% 0.92% 0.89% 0.89% 0.91% 0.91% 0.91% 0.75%
<F2> <F2>
Ratio of net
investment income
(loss) to average
net assets 0.11% 1.40% 2.11% 2.06% 1.45% 1.63% 2.06% 2.75% 1.39%
<F2> <F2>
Ratio of expenses to
average net assets<F7> 2.08% 1.08% 0.95% 1.10% 0.90%
<F2>
Ratio of net
investment income
(loss) to average
net assets<F7> 0.10% 1.37% 2.07% 1.86% 1.43%
<F2>
Portfolio turnover<F4> 94% 94% 75% 104% 86% 75% 51% 63% 3%
Average commission
rate paid<F5> $ 0.0504 $ 0.0504
The financial highlights were audited by Coopers & Lybrand L.L.P. This information
should be read in conjunction with the Diversified Stock Fund's most recent
Annual Report to shareholders, which is incorporated by reference in the SAI. If you would
like a copy of the Annual Report, write or call us at 800-KEY-FUND.
<FN>
<F1> Effective March 1, 1996, the Diversified Stock Fund designated the existing
shares as Class A Shares and began offering Class B Shares.
<F2> Annualized.
<F3> Represents total return for the Diversified Stock Fund for the period
November 1, 1995 through February 29, 1996 plus total return for Class B
Shares for the period March 1, 1996 through October 31, 1996.
<F4> Portfolio turnover is calculated on the basis of the Diversified Stock Fund
as a whole without distinguishing between the classes of shares issued.
<F5> Represents the total dollar amount of commissions paid on portfolio
security transactions divided by total number of shares purchased and sold
by the Diversified Stock Fund for which commissions were charged.
<F7> During the period certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
</FN>
</TABLE>
- 7 -
<PAGE>
Investment Objective
The Value Fund seeks to provide long-term growth of capital and dividend
income.
Investment Policies and Strategy
The Value Fund pursues its investment objective by investing primarily in a
diversified group of equity securities with an emphasis on companies with
above average total return potential. The securities in the Value Fund
usually are listed on a national exchange.
The Adviser seeks equity securities of under-valued companies.
Under normal market conditions, the Value Fund:
Will invest at least 80% of its total assets in equity securities and
securities convertible or exchangeable into common stock
May invest up to 20% of its total assets in:
Preferred stocks
Investment-grade corporate debt securities
Short-term debt obligations
U.S. Government obligations
The Value Fund is designed for long-term investors. The Value Fund is
subject to the risks common to all mutual funds and the risks common to
mutual funds that invest in equity securities. By itself, the Value Fund
does not constitute a complete investment plan and should be considered
a long-term investment for investors who can afford to weather changes
in the value of their investment. Please read "Risk Factors" carefully
before investing.
Portfolio Management
Judith A. Jones is the Portfolio Manager of the Value Fund, a position
she has held since its inception in December 1993. She is a Portfolio
Manager and Managing Director of Key Asset Management Inc., and
has been in the investment business since 1967.
Fund Expenses
This section will help you understand the costs and expenses you would
pay, directly or indirectly, if you invested in the Value Fund.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses<F1> Class A Shares
<S> <C>
Maximum Sales Charge Imposed on Purchases 4.75%
(as a percentage of offering price)
Sales Charge Imposed on Reinvested Dividends None
Deferred Sales Charge None
Redemption Fees None
Exchange Fees None
<FN>
<F1>You may be charged additional fees if you purchase, exchange, or redeem
shares through a broker or agent.
</FN>
</TABLE>
The Annual Fund Operating Expenses table below illustrates the
estimated operating expenses that you will incur as a shareholder
of the Value Fund. These expenses are charged directly to the Value
Fund. Expenses include management fees as well as the costs of
maintaining accounts, administering the Value Fund, providing
shareholder services, and other activities. The expenses shown are
estimated based on historical or projected expenses of the Value Fund.
<TABLE>
<CAPTION>
Annual Fund Operating Expenses Class A Shares
(as a percentage of average daily net assets)
<S> <C>
Management Fees 1.00%
Other Expenses<F1> .40%
----
Total Fund Operating Expenses 1.40%
====
<FN>
<F1> Other Expenses include an estimate of shareholder servicing fees the
Value Fund expects to pay. See "Organization and Management of the
Funds--Shareholder Servicing Plan."
</FN>
</TABLE>
The following example is designed to help you understand the various
costs you will bear, directly or indirectly, as an investor in the Value
Fund.
Example: You would pay the following expenses on a $1,000 investment
in the Value Fund, assuming: (1) a 5% annual return, and (2) redemption
at the end of each time period.
1 Year 3 Years 5 Years 10 Years
Class A Shares $61 $90 $120 $207
This example is only an illustration.
Actual expenses and returns will vary.
- 8 -
<PAGE>
Financial Highlights
Value Fund
The Financial Highlights describe the Value Fund's returns and operating
expenses over time. This table shows the results of an investment in one
share of the Value Fund for each of the periods indicated.
<TABLE>
<CAPTION>
Year Ended Year Ended December 3, 1993
October 31, October 31, to October 31,
1996 1995<F4> 1994<F1>
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 11.87 $ 10.13 $ 10.00
-------- -------- --------
Investment Activities
Net investment income 0.20 0.27 0.21
Net realized and unrealized gains
from investments 2.65 1.92 0.11
-------- -------- --------
Total from Investment Activities 2.85 2.19 0.32
-------- -------- --------
Distributions
Net investment income (0.20) (0.27) (0.19)
In excess of net investment income -- (0.01) --
Net realized gains (0.34) (0.17) --
-------- -------- --------
Total Distributions (0.54) (0.45) (0.19)
-------- -------- --------
Net Asset Value, End of Period $ 14.18 $ 11.87 $ 10.13
======== ======== ========
Total Return (excludes sales charge) 24.66% 22.28% 3.27%<F2>
Ratios/Supplemental Data:
Net Assets, End of Period (000) $382,083 $295,871 $188,184
Ratio of expenses to average
net assets 1.33% 0.99% 0.92%<F3>
Ratio of net investment income
to average net assets 1.56% 2.55% 2.32%<F3>
Ratio of expenses to average
net assets<F6> 1.35% 1.30% 1.48%<F3>
Ratio of net investment income
to average net assets<F6> 1.54% 2.24% 1.76%<F3>
Portfolio turnover 28% 23% 39%
Average commission rate paid<F5> $ 0.0524
The financial highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Value Fund's most
recent Annual Report to shareholders, which is incorporated by reference
in the SAI. If you would like a copy of the Annual Report, write or
call us at 800-KEY-FUND.
<FN>
<F1> Period from commencement of operations.
<F2> Not annualized.
<F3> Annualized.
<F4> Effective June 5, 1995, the Victory Equity Income Portfolio merged
into the Value Fund. Financial highlights for the periods prior to
June 5, 1995 represent the Value Fund.
<F5> Represents the total dollar amount of commissions paid on portfolio
security transactions divided by total number of shares purchased and sold by
the Value Fund for which commissions were charged.
<F6> During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been as
indicated.
</FN>
</TABLE>
- 9 -
<PAGE>
STOCK INDEX FUND
Investment Objective
The Stock Index Fund seeks to provide long-term capital appreciation by
attempting to match the investment performance of the Standard & Poor's
500 Composite Stock Index (S&P 500 Index).
Investment Policies and Strategy
The Stock Index Fund pursues its investment objective by attempting to
duplicate the capital performance and dividend income of the S&P 500
Index. The Stock Index Fund primarily invests in many of the equity
securities that are in the S&P 500 Index, including American Depository
Receipts (ADRs), and secondarily in related futures and options contracts.
The S&P 500 Index is comprised of 500 common stocks. To minimize
small positions and transactions expenses, the Stock Index Fund need
not invest in every stock included in the S&P 500 Index. The Stock Index
Fund may purchase stocks that are not included in the S&P 500 Index if the
Adviser believes that these investments will reduce "tracking error" (the
difference between the Stock Index Fund's investment results, before
expenses, and that of the S&P 500 Index).
The Stock Index Fund is not managed in the traditional sense using
economic, financial, and market analysis. Therefore, the Stock Index
Fund will not necessarily sell a stock that is underperforming. Brokerage
costs, fees, operating expenses, and tracking errors may cause the Stock
Index Fund's total return to be lower than that of the S&P 500 Index.
In connection with its futures and options transactions, the Stock Index
Fund may invest in:
Preferred stocks
Investment-grade corporate debt securities
Short-term debt obligations
U.S. Government obligations
The Stock Index Fund is designed for long-term investors. The Stock Index
Fund is subject to the risks common to all mutual funds and the risks common
to mutual funds that invest in equity securities. The Stock Index Fund may
purchase, retain, and sell securities when such transactions would not be
consistent with traditional investment criteria. The Stock Index Fund
generally will remain fully invested in common stocks even when stock
prices generally are falling. Accordingly, an investor is exposed to a
greater risk of loss (or conversely, a greater prospect of gain) from
fluctuations in the value of such securities than would be the case if
the Stock Index Fund was not fully invested, regardless of market
conditions. By itself, the Stock Index Fund does not constitute a
complete investment plan and should be considered a long-term
investment for investors who can afford to weather sudden and sometimes
substantial changes in the value of their investment. Please read
"Risk Factors" carefully before investing.
Portfolio Management
Malini S. Menon is the Portfolio Manager of the Stock Index Fund, a position
she has held since April, 1996. She is a Portfolio Manager and Director of
Key Asset Management Inc., and has been in the investment business
since 1990.
Fund Expenses
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invested in the Stock Index Fund.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses<F1> Class A Shares
<S> <C>
Maximum Sales Charge Imposed on Purchases 4.75%
(as a percentage of the offering price)
Sales Charge Imposed on Reinvested Dividends None
Deferred Sales Charge None
Redemption Fees None
Exchange Fees None
<FN>
<F1> You may be charged additional fees if you purchase, exchange, or
redeem shares through a broker or agent.
</FN>
</TABLE>
The Annual Fund Operating Expenses table below illustrates the
estimated operating expenses that you will incur as a shareholder of
the Stock Index Fund. These expenses are charged directly to the Stock
Index Fund. Expenses include management fees, as well as the costs of
maintaining accounts, administering the Stock Index Fund, and other
activities. The expenses shown are estimated based on historical or
projected expenses of the Stock Index Fund.
<TABLE>
<CAPTION>
Annual Fund Operating Expenses Class A Shares
(After expense waivers and reimbursements)
(as a percentage of average daily net assets)
<S> <C>
Management Fees<F1> .45%
Other Expenses<F1> .11%
---
Total Fund Operating Expenses<F1> .56%
===
<FN>
<F1> These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be .60%. If the waivers were not in place, the
Total Fund Operating Expenses would be .86%.
</FN>
</TABLE>
The following example is designed to help you understand the various
costs you will bear, directly or indirectly, as an investor in the Stock
Index Fund.
Example: You would pay the following expenses on a $1,000 investment
in the Stock Index Fund, assuming: (1) a 5% annual return, and (2)
redemption at the end of each time period.
1 Year 3 Years 5 Years 10 Years
Class A Shares $53 $65 $77 $114
This example is only an illustration.
Actual expenses and returns will vary.
- 10 -
<PAGE>
Financial Highlights
Stock Index Fund
The Financial Highlights describe the Stock Index Fund's returns and
operating expenses over time. This table shows the results of an
investment in one share of the Stock Index Fund for each of the
periods indicated.
<TABLE>
<CAPTION>
Year Ended Year Ended December 3, 1993
October 31, October 31, to October 31,
1996 1995 1994<F1>
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 12.50 $ 10.18 $ 10.00
-------- -------- -------
Investment Activities
Net investment income 0.28 0.27 0.20
Net realized and unrealized gains
on investments 2.58 2.31 0.16
-------- -------- -------
Total from Investment Activities 2.86 2.58 0.36
-------- -------- -------
Distributions
Net investment income (0.28) (0.26) (0.18)
In excess of net investment income -- -- --
Net realized gains (0.23) -- --
-------- -------- -------
Total Distributions (0.51) (0.26) (0.18)
-------- -------- -------
Net Asset Value, End of Period $ 14.85 $ 12.50 $ 10.18
======== ======== =======
Total Return (excludes sales charge) 23.38% 25.72% 3.66%<F2>
Ratios/Supplemental Data:
Net Assets, End of Period (000) $277,124 $160,822 $89,686
Ratio of expenses to average
net assets 0.57% 0.55% 0.58%<F3>
Ratio of net investment income
to average net assets 2.14% 2.53% 2.35%<F3>
Ratio of expenses to average
net assets<F4> 0.89% 0.87% 1.10%<F3>
Ratio of net investment income
to average net assets<F4> 1.82% 2.21% 1.82%<F3>
Portfolio turnover 4% 12% 1%
Average commission rate paid<F5> $ 0.0186
The financial highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Stock Index Fund's
most recent Annual Report to shareholders, which is incorporated by
reference in the SAI. If you would like a copy of the Annual Report,
write or call us at 800-KEY-FUND.
<FN>
<F1> Period from commencement of operations.
<F2> Not annualized.
<F3> Annualized.
<F4> During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been
as indicated.
<F5> Represents the total dollar amount of commissions paid on portfolio
security transactions divided by total number of shares
purchased and sold by the Stock Index Fund for which commissions
were charged.
</FN>
</TABLE>
- 11 -
<PAGE>
OHIO REGIONAL STOCK FUND
Investment Objective
The Ohio Regional Stock Fund seeks to provide capital appreciation.
Investment Policies and Strategy
The Ohio Regional Stock Fund pursues its investment objective
by investing at least 80% of the Fund's total assets in equity securities
issued by companies headquartered in the State of Ohio.
In making investment decisions, the Adviser analyzes cash flow, book value,
dividend growth potential, quality of management, earnings, and
capitalization. The Ohio Regional Stock Fund looks at any information
that reflects the potential for future earnings growth. The Ohio Regional
Stock Fund invests in nationally recognized companies and lesser-known
companies that may have smaller capitalization, but also the potential
for growth.
Under normal market conditions, the Ohio Regional Stock Fund:
Will invest at least 80% of its total assets in common
stocks and securities convertible or exchangeable into
common stocks.
May invest up to 20% of its total assets in:
Short-term debt obligations
Investment-grade corporate debt securities
Investment company securities
Preferred stock
U.S. Government obligations
The Ohio Regional Stock Fund is designed for long-term investors.
The Ohio Regional Stock Fund is subject to the risks common to all
mutual funds and the risks common to mutual funds that invest in
equity securities. The Ohio Regional Stock Fund may be appropriate
for investors who are comfortable with assuming the added risks
associated with an investment in a fund that concentrates its investments
in a single state. By itself, the Ohio Regional Stock Fund does not
constitute a complete investment plan and should be considered a
long-term investment for investors who can afford to weather changes
in the value of their investment. Since the Ohio Regional Stock Fund
concentrates its investments in the State of Ohio, its assets may be
at greater risk because of economic, political, or regulatory risks
associated with the state. The Ohio Regional Stock Fund is subject
to additional risks because it concentrates its investments in a
single geographic area and it may invest more than 5% of its assets
in the securities of a single issuer. Please read "Risk Factors"
carefully before investing.
Portfolio Management
Lynn S. Hamilton is the Portfolio Manager of the Ohio Regional Stock
Fund, a position he has held since October, 1991. He is a Portfolio
Manager of Key Asset Management Inc., and has been in the investment
business since 1977.
Fund Expenses
This section will help you understand the costs and expenses you would
pay, directly or indirectly, if you invest in the Ohio Regional Stock Fund.
<TABLE>
<CAPTION>
Shareholder Class A Class B
Transaction Expenses<F1> Shares Shares
<S> <C> <C>
Maximum Sales Charge 4.75% None
Imposed on Purchases
(as a percentage of the offering price)
Sales Charge Imposed None None
on Reinvested Dividends
Deferred Sales Charge None 5.00%<F2>
Redemption Fees None None
Exchange Fees None None
<FN>
<F1>You may be charged additional fees if you purchase, exchange, or
redeem shares through a broker or agent.
<F2>5% in the first year, declining to 1% in the sixth year, with no
charge after the sixth year.
</FN>
</TABLE>
The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Ohio Regional
Stock Fund. These expenses are charged directly to the Ohio Regional Stock
Fund. Expenses include management fees as well as the costs of maintaining
accounts, administering the Ohio Regional Stock Fund, providing shareholder
services, and other activities. The expenses shown are estimated based on
historical or projected expenses of the Ohio Regional Stock Fund.
<TABLE>
<CAPTION>
Annual Fund Class A Class B
Operating Expenses Shares Shares
(as a percentage of average daily net assets)
<S> <C> <C>
Management Fees .75% .75%
Rule 12b-1 Distribution Fees .00% .75%
Other Expenses<F1> .65% 1.27%
---- ----
Total Fund Operating Expenses 1.40% 2.77%
==== ====
<FN>
<F1> Other Expenses includes an estimate of shareholder servicing fees the
Ohio Regional Stock Fund expects to pay. See "Organization and Management
of the Funds--Shareholder Servicing Plan."
</FN>
</TABLE>
The following example is designed to help you understand the various
costs you will bear, directly or indirectly, as an investor in the Ohio
Regional Stock Fund.
Example: You would pay the following expenses on a $1,000 investment
in the Ohio Regional Stock Fund, assuming: (1) a 5% annual return, and
(2) redemption at the end of each time period.
1 Year 3 Years 5 Years 10 Years
Class A Shares $61 $ 90 $120 $207
Class B Shares $78 $116 $166 $277
This example is only an illustration.
Actual expenses and returns will vary.
- 12 -
<PAGE>
Financial Highlights
Ohio Regional Stock Fund
The Financial Highlights describe the Ohio Regional Stock
Fund's return and operating expenses over time. This table
shows the results of an investment in one share of the Ohio
Regional Stock Fund for each of the periods indicated.
<TABLE>
<CAPTION>
CLASS B CLASS A
March 1, Year Year Year Year Year Year Year Period From
1996 Ended Ended Ended Ended Ended Ended Ended Oct. 20,
through Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct, 31, Dec. 31, Dec. 31, 1989 to
Oct. 31, 1996<F5> 1995 1994 1993 1992 1991 1990<F6> Oct. 31,
1996<F5> 1989
<F1><F6>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 16.43 $ 15.94 $ 14.56 $ 14.69 $ 12.12 $ 11.15 $ 6.75 $ 9.72 $ 10.00
-------- -------- -------- -------- -------- -------- -------- -------- --------
Investment Activities:
Net investment
income (loss) (0.03) 0.14 0.17 0.18 0.16 0.20 0.21 0.24
Net realized
and unrealized
gains (losses)
from investments 1.51 2.62 2.13 0.39 2.63 1.07 4.39 (2.98) (0.28)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total from
Investment Activities 1.48 2.76 2.30 0.57 2.79 1.27 4.60 (2.74) (0.28)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Distributions
Net investment income -- (0.14) (0.17) (0.17) (0.18) (0.21) (0.20) (0.23) --
In excess of net
investment income (0.04) -- (0.01) -- -- -- -- -- --
Net realized gains -- (0.36) (0.65) (0.53) (0.04) (0.09) -- -- --
In excess of net
realized gains -- (0.25) (0.09) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Distributions (0.04) (0.75) (0.92) (0.70) (0.22) (0.30) (0.20) (0.23)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net Asset Value,
End of Period $ 17.87 $ 17.95 $ 15.94 $ 14.56 $ 14.69 $ 12.12 $ 11.15 $ 6.75 $ 9.72
======== ======== ======== ======== ======== ======== ======== ======== ========
Total Return
(excludes sales charge) 16.95% 17.79% 16.93% 3.96% 23.16% 11.50% 68.68% (28.63%) (2.80%)
<F7>
Ratios/Supplemental Data:
Net Assets,
End of Period (000) $ 326 $ 45,294 $ 39,048 $ 33,965 $ 34,926 $ 36,115 $ 27,092 $ 13,039 $ 20,277
Ratio of expenses
to average
net assets 2.61% 1.39% 1.20% 1.04% 1.04% 1.04% 1.08% 1.11% 0.88%
<F3> <F3>
Ratio of net
investment income
(loss) to average
net assets (0.60%) 0.79% 1.13% 1.27% 1.17% 1.73% 2.16% 2.66% 0.47%
<F3> <F3>
Ratio of expenses to
average net assets<F4> 3.50% 1.40% 1.24% 1.27% 1.06% -- -- -- --
<F3>
Ratio of net
investment income
(loss) to average
net assets<F4> (1.49%) 0.78% 1.09% 1.04% 1.15% -- -- -- --
<F3>
Portfolio turnover<F8> 6% 6% 11% 14% 7% 8% 15% 11% --
Average commission
paid<F9> $ 0.0513 $ 0.0513
The financial highlights were audited by Coopers & Lybrand. This
information should be read in conjunction with the Ohio Regional Stock Fund's
most recent Annual Report to shareholders, which is incorporated by reference
in the SAI. If you would like a copy of the Annual Report, write or
call us at 800-KEY-FUND.
<FN>
<F1> Period from commencement of operations.
<F3> Annualized.
<F4> During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been
as indicated.
<F5> Effective March 1, 1996, the Ohio Regional Stock Fund designated
the existing shares as Class A Shares and began offering Class B Shares.
<F6> This information is not included in the financial statements audited
by Coopers & Lybrand L.L.P.
<F7> Represents total return for the Ohio Regional Stock Fund for the
period November 1, 1995 through February 29, 1996 plus total return for
Class B Shares for the period March 1, 1996 through October 31, 1996.
<F8> Portfolio turnover is calculated on the basis of the Ohio Regional
Stock Fund as a whole without distinguishing between the classes of shares
issued.
<F9> Represents the total dollar amount of commissions paid on portfolio
security transactions divided by total number of shares purchased and sold
by the Ohio Regional Stock Fund for which commissions were charged.
</FN>
</TABLE>
- 13 -
<PAGE>
GROWTH FUND
Investment Objective
The Growth Fund seeks to provide long-term growth of capital.
Investment Policies and Strategy
The Growth Fund pursues its investment objective by investing primarily
in equity securities of companies with superior prospects for long-term
earnings growth and price appreciation. The issuers usually are listed
on a nationally recognized exchange.
In making investment decisions, the Adviser will look for above average
growth rates, high return on equity, issuers that reinvest their earnings
in their business, and strong balance sheets.
Under normal market conditions, the Growth Fund:
Will invest at least 80% of its total assets in common stocks and
securities convertible into
common stocks
May invest up to 20% of its total assets in:
Preferred stocks
Investment-grade corporate debt securities
Short-term debt obligations
U.S. Government obligations
The Growth Fund is designed for long-term investors. The Growth
Fund is subject to the risks common to all mutual funds and the risks
common to mutual funds that invest in equity securities. The Growth
Fund may be appropriate for investors who are comfortable with
assuming the added risks associated with stocks that do not pay out
significant portions of their earnings as dividends. By itself, the Growth
Fund does not constitute a complete investment plan and should be
considered a long-term investment for investors who can afford to
weather changes in the value of their investment and do not require
significant current income from their investments. Please read
"Risk Factors" carefully before investing.
Portfolio Management
William F. Ruple is the Portfolio Manager of the Growth Fund, a position
he has held since June, 1995. He is a Portfolio Manager and Director of
Key Asset Management Inc., and has been in the investment advisory
business since 1970.
Fund Expenses
This section will help you understand the costs and expenses you would
pay, directly or indirectly, if you invested in the Growth Fund.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses<F1> Class A Shares
<S> <C>
Maximum Sales Charge Imposed on Purchases 4.75%
(as a percentage of offering price)
Sales Charge Imposed on Reinvested Dividends None
Deferred Sales Charge None
Redemption Fees None
Exchange Fees None
<FN>
<F1>You may be charged additional fees if you purchase, exchange, or
redeem shares through a broker or agent.
</FN>
</TABLE>
The Annual Fund Operating Expenses table below illustrates the
estimated operating expenses that you will incur as a shareholder
of the Growth Fund. These expenses are charged directly to the
Growth Fund's income before it is paid to you. Expenses include
management fees as well as the costs of maintaining accounts,
administering the Growth Fund, providing shareholder services,
and other activities. The expenses shown are estimated based on
historical or projected expenses of the Growth Fund.
<TABLE>
<CAPTION>
Annual Fund Operating Expenses Class A Shares
(as a percentage of average daily net assets)
<S> <C>
Management Fees 1.00%
Other Expenses<F1> .40%
----
Total Fund Operating Expenses 1.40%
====
<FN>
<F1> Other Expenses includes an estimate of shareholder servicing
fees the Growth Fund expects to pay. See "Organization and Management
of the Funds--Shareholder Servicing Plan."
</FN>
</TABLE>
The following example is designed to help you understand the various
costs you will bear, directly or indirectly, as an investor in the
Growth Fund.
Example: You would pay the following expenses on a $1,000 investment
in the Growth Fund, assuming: (1) a 5% annual return, and (2)
redemption at the end of each time period.
1 Year 3 Years 5 Years 10 Years
Class A Shares $61 $90 $120 $207
This example is only an illustration.
Actual expenses and returns will vary.
- 14 -
<PAGE>
Financial Highlights
Growth Fund
The Financial Highlights describe the Growth Fund's returns and
operating expenses over time. This following table shows the results
of an investment in one share of the Growth Fund for each of the
periods indicated.
<TABLE>
<CAPTION>
Year Ended Year Ended December 3, 1993
October 31, October 31, to October 31,
1996 1995<F4> 1994<F1><F5>
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 12.15 $ 10.23 $ 10.00
-------- -------- --------
Investment Activities
Net investment income (loss) 0.08 0.11 0.10
Net realized and unrealized gains
(losses) on investments 2.93 1.97 0.22
-------- -------- --------
Total from Investment Activities 3.01 2.08 0.32
-------- -------- --------
Distributions
Net investment income (0.08) (0.11) (0.09)
In excess of net investment income -- -- --
Net realized gains (0.51) (0.05) --
-------- -------- --------
Total Distributions (0.59) (0.16) (0.09)
-------- -------- --------
Net Asset Value, End of Period $ 14.57 $ 12.15 $ 10.23
======== ======== ========
Total Return (excludes sales charge) 25.66% 20.54% 3.22%<F2>
Ratios/Supplemental Data:
Net Assets, End of Period (000) $147,753 $108,253 $ 66,921
Ratio of expenses to average
net assets 1.33% 1.07% 0.94%<F3>
Ratio of net investment income
to average net assets 0.64% 1.00% 1.10%<F3>
Ratio of expenses to average
net assets<F6> 1.39% 1.42% 1.51%<F3>
Ratio of net investment income
to average net assets<F6> 0.58% 0.65% 0.53%<F3>
Portfolio turnover 27% 107% 28%
Average commission rate paid<F7> $ 0.0618
The financial highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Growth Fund's most
recent Annual Report to shareholders, which is incorporated by
reference in the SAI. If you would like a copy of the Annual Report,
write or call us at 800-KEY-FUND.
<FN>
<F1> Period from commencement of operations.
<F2> Not annualized.
<F3> Annualized.
<F4> Effective June 5, 1995, the Victory Equity Portfolio merged into the
Growth Fund. Financial highlights for the period prior to June 5, 1995
represent the Growth Fund.
<F5> Effective March 17, 1994, the Society Earnings Momentum Fund merged
into the Growth Fund. Financial highlights for the period prior to
March 17, 1994 represent the Growth Fund.
<F6> During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been
as indicated.
<F7> Represents the total dollar amount of commissions paid on portfolio
security transactions divided by total number of shares purchased and
sold by the Growth Fund for which commissions were charged.
</FN>
</TABLE>
- 15 -
<PAGE>
SPECIAL VALUE FUND
Investment Objective
The Special Value Fund seeks to provide long-term growth of
capital and dividend income.
Investment Policies and Strategy
The Special Value Fund pursues its investment objective by investing
primarily in equity securities of small- and medium-sized companies
listed on a national exchange. Small-sized companies are defined as
those having market capitalization of less than $1 billion, and
medium-sized companies are defined as those having a market
capitalization of between $1 billion and $5 billion.
The Adviser looks for companies with above average total return
potential whose equity securities are under-valued and considered
statistically cheap.
Under normal market conditions the Special Value Fund will:
Invest at least 65% of its total assets in:
Common and preferred stocks
Securities convertible into common stock of small- and medium-sized companies
Invest up to 35% of its total assets in:
Investment-grade debt securities
The Special Value Fund is designed for long-term investors. The Special
Value Fund is subject to the risks common to all mutual funds and the
risks common to mutual funds that invest in equity securities. The
Special Value Fund may be appropriate for investors who are comfortable
with assuming the added risks associated with small capitalization stocks
in return for the possibility of long-term rewards. The smaller, less
seasoned companies in which the Special Value Fund may invest may
be subject to greater business risks than larger, established companies.
They may be at greater risk to changes in economic conditions and factors
affecting the profits of corporations. By itself, the Special Value Fund
does not constitute a complete investment plan and should be considered a
long-term investment for investors who can afford to weather changes in the
value of their investment. Please read "Risk Factors" carefully before
investing.
Portfolio Management
Anthony Aveni, Barbara Myers, and Paul Danes are the Portfolio Managers
of the Special Value Fund. Anthony Aveni has been a Portfolio Manager of
the Special Value Fund since its inception in December, 1993. He is a
Managing Director with Key Asset Management Inc., and has been in the
investment business since 1981. Barbara Myers has been a Portfolio
Manager of the Special Value Fund since June, 1995. She is a Portfolio
Manager and Director with Key Asset Management Inc. and has been in
the investment business since 1987. Paul Danes has been a Portfolio
Manager of the Special Value Fund since October, 1995. He is a Portfolio
Manager and Director with Key Asset Management Inc., and has been in
the investment business since 1987.
Fund Expenses
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invested in the Special Value Fund.
<TABLE>
<CAPTION>
Shareholder Class A Class B
Transaction Expenses<F1> Shares Shares
<S> <C> <C>
Maximum Sales Charge 4.75% None
Imposed on Purchases
(as a percentage of the offering price)
Sales Charge Imposed None None
on Reinvested Dividends
Deferred Sales Charge None 5.00%<F2>
Redemption Fees None None
Exchange Fee None None
<FN>
<F1> You may be charged additional fees if you purchase, exchange, or
redeem shares through a broker or agent.
<F2> 5% in the first year, declining to 1% in the sixth year, with no
charge after the sixth year.
</FN>
</TABLE>
The Annual Fund Operating Expenses table below illustrates the
estimated operating expenses that you will incur as a shareholder
of the Special Value Fund. These expenses are charged directly to
the Special Value Fund. Expenses include management fees, as well
as the costs of maintaining accounts, administering the Special Value
Fund, providing shareholder services, and other activities. The expenses
shown are estimated based on historical or projected expenses of the
Special Value Fund.
<TABLE>
<CAPTION>
Annual Fund Class A Class B
Operating Expenses Shares Shares
(as a percentage of average daily net assets)
<S> <C> <C>
Management Fees 1.00% 1.00%
Rule 12b-1 Distribution Fees .00% .75%
Other Expenses<F1> .40% 1.04%
---- ----
Total Fund Operating Expenses 1.40% 2.79%
==== ====
<FN>
<F1> Other Expenses includes an estimate of shareholder servicing fees the
Special Value Fund expects to pay. See "Organization and Management of
the Funds--Shareholder Servicing Plan."
</FN>
</TABLE>
The following example is designed to help you understand the various
costs you will bear, directly or indirectly, as an investor in the
Special Value Fund.
Example: You would pay the following expenses on a $1,000 investment
in the Special Value Fund, assuming: (1) a 5% annual return, and
(2) redemption at the end of each time period.
1 Year 3 Years 5 Years 10 Years
Class A Shares $61 $ 90 $120 $207
Class B Shares $78 $117 $167 $278
This example is only an illustration.
Actual expenses and returns will vary.
- 16 -
<PAGE>
Financial Highlights
Special Value Fund
The Financial Highlights describe the Special Value Fund's returns and
operating expenses over time. This table shows the results of an investment
in one share of the Special Value Fund for each of the periods indicated.
<TABLE>
<CAPTION>
CLASS B CLASS A
March 1, Year Year Dec. 3,
1996 Ended Ended 1993
through Oct. 31, Oct. 31, through
Oct. 31, 1996<F5> 1995 Oct. 31,
1996<F5> 1994<F1>
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 12.89 $ 12.15 $ 10.49 $ 10.00
-------- -------- -------- --------
Investment Activities
Net investment income 0.01 0.12 0.15 0.11
Net realized and
unrealized gains (losses)
from investments and
foreign currencies 1.23 2.33 1.71 0.48
-------- -------- -------- --------
Total from Investment Activities 1.24 2.45 1.86 0.59
-------- -------- -------- --------
Distributions
Net investment income (0.01) (0.11) (0.15) (0.10)
In excess of net investment income (0.03) -- -- --
Net realized gains -- (0.34) (0.05)
-------- -------- -------- --------
Total Distributions (0.04) (0.45) (0.20) (0.10)
-------- -------- -------- --------
Net Asset Value, End of Period $ 14.09 $ 14.15 $ 12.15 $ 10.49
======== ======== ======== ========
Total Return (excludes sales charge) 19.80%<F6> 20.60% 18.01% 5.92%<F2>
Ratios/Supplemental Data:
Net Assets, End of Period (000) $ 386 $289,460 $194,700 $118,600
Ratio of expenses to
average net assets 2.51%<F3> 1.37% 1.04% 1.00%<F3>
Ratio of net investment income
to average net assets (0.31%)<F3> 0.88% 1.35% 1.23%<F3>
Ratio of expenses to
average net assets<F4> 3.75%<F3> 1.40% 1.30% 1.49%<F3>
Ratio of net investment income
to average net assets<F4> (1.55%)<F3> 0.85% 1.09% 0.74%<F3>
Portfolio turnover<F7> 55% 55% 39% 18%
Average commission rate paid<F8> $ 0.0501 $ 0.0501
The financial highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Special Value Fund's
most recent Annual Report to shareholders, which is incorporated by
reference in the SAI. If you would like a copy of the Annual Report,
write or call us at 800-KEY-FUND.
<FN>
<F1> Period from commencement of operations.
<F2> Not annualized.
<F3> Annualized.
<F4> During the period, certain fees were voluntarily reduced. If such
voluntary waivers or fee reductions had not occurred, the ratios would
have been as indicated.
<F5> Effective March 1, 1996, the Special Value Fund designated the existing
shares as Class A Shares and began offering Class B Shares.
<F6> Represents total return for the Special Value Fund for the period
November 1, 1995 through February 29, 1996 plus total return for
Class B Shares for the period March 1, 1996 through October 31, 1996.
<F7> Portfolio turnover is calculated on the basis of the Special Value Fund
as a whole without distinguishing between the classes of shares issued.
<F8> Represents the total dollar amount of commissions paid on portfolio
security transactions divided by total number of shares purchased and
sold by the Special Value Fund for which commissions were charged.
</FN>
</TABLE>
- 17 -
<PAGE>
SPECIAL GROWTH FUND
Investment Objective
The Special Growth Fund seeks to provide capital appreciation.
Investment Policies and Strategy
The Special Growth Fund pursues its investment objective by investing
primarily in equity securities of companies with market capitalization
of $750 million or less.
In making investment decisions, the Adviser will look for above average
growth rates, high return on equity, issuers that reinvest their earnings
in their business, and strong balance sheets.
Under normal market conditions, the Special Growth Fund:
Will invest at least 65% of its total assets in equity securities of
companies with market capitalization of $750 million or less.
These equity investments include:
Common stock
Preferred stock
Convertible preferred stock
Debt convertible or exchangeable into equity securities
Securities convertible into common stock
May invest up to 35% of its total assets in:
Equity securities of companies with market capitalization's of
up to approximately $1 billion
Investment-grade debt securities
May invest up to 5% of its total assets in lower-rated debt
securities, commonly referred to as "junk bonds."
The Special Growth Fund is designed for long-term equity investors.
The Special Growth Fund may be appropriate for investors who are
comfortable with assuming the added risks associated with small
capitalization stocks in return for the
possibility of long-term rewards. Smaller capitalization companies
may have limited product lines, markets, or financial resources,
which may make them more susceptible to setbacks and reversals.
These securities may be subject to more abrupt or erratic price
fluctuations than securities of larger companies. Small capitalization
stocks as a group may not respond to general market rallies or downturns
as much as other types of equity securities. The Special Growth Fund may
be appropriate for investors who are comfortable with assuming the added
risks associated with stocks that do not pay out significant portions of
their earnings as dividends. By itself, the Special Growth Fund does
not constitute a complete investment plan and should be considered
a long-term investment for investors who can afford to weather changes
in the value of their investment and do not require significant current
income from their investments. Please read "Risk Factors" carefully
before investing.
Portfolio Management
Annette Geddes is the Portfolio Manager of the Special Growth Fund, a
position she has held since June, 1996. She is a Portfolio Manager and
Managing Director of Key Asset Management Inc., and has been in the
investment business since 1967.
Fund Expenses
This section will help you understand the costs and expenses you would
pay, directly or indirectly, if you invest in the Special Growth Fund.
<TABLE>
<CAPTION>
Shareholder Class A
Transaction Expenses<F1> Shares
<S> <C>
Maximum Sales Charge 4.75%
Imposed on Purchases
(as a percentage of the offering price)
Sales Charge Imposed None
on Reinvested Dividends
Deferred Sales Charge None
Redemption Fees None
Exchange Fee None
<FN>
<F1>You may be charged additional fees if you purchase, exchange, or
redeem shares through a broker or agent.
</FN>
</TABLE>
The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Special
Growth Fund. These expenses are charged directly to the Special
Growth Fund. Expenses include management fees as well as costs
of maintaining accounts, administering the Special Growth Fund,
providing shareholder services, and other activities. The expenses
shown are estimated based on historical or projected expenses of the
Special Growth Fund.
<TABLE>
<CAPTION>
Annual Fund Class A
Operating Expenses Shares
(as a percentage of average daily net assets)
<S> <C>
Management Fees 1.00%
Other Expenses<F1> .53%
----
Total Fund Operating Expenses 1.53%
====
<FN>
<F1> Other Expenses includes an estimate of shareholder servicing fees the
Special Growth Fund expects to pay. See "Organization and Management of
the Funds--Shareholder Servicing Plan."
</FN>
</TABLE>
The following example is designed to help you understand the various
costs you will bear, directly or indirectly, as an investor in the Special
Growth Fund.
Example: You would pay the following expenses on a $1,000 investment
in the Special Growth Fund, assuming: (1) a 5% annual return, and
(2) redemption at the end of each time period.
1 Year 3 Years 5 Years 10 Years
Class A Shares $62 $94 $127 $221
This example is only an illustration.
Actual expenses and returns will vary.
- 18 -
<PAGE>
Financial Highlights
Special Growth Fund
The Financial Highlights describe the Special Growth Fund's returns and
operating expenses over time. This table shows the results of an investment
in one share of the Special Growth Fund for each of the periods indicated.
<TABLE>
<CAPTION>
Year Six Months Year Jan. 11,
Ended Ended Ended 1994
Oct. 31, Oct. 31, April 30, through
1996 1995 1995<F4> April 30,
1994<F1><F4>
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 11.81 $ 10.54 $ 9.82 $ 10.00
-------- -------- -------- --------
Investment Activities
Net investment income (0.07) -- 0.02 (0.01)
Net realized and unrealized gains
(losses) on investments 2.40 1.27 0.72 (0.17)
-------- -------- -------- --------
Total from Investment Activities 2.33 1.27 0.74 (0.18)
-------- -------- -------- --------
Distributions
Net investment income -- -- (0.02) --
-------- -------- -------- --------
Total Distributions -- -- (0.02) --
-------- -------- -------- --------
Net Asset Value, End of Period $ 14.14 $ 11.81 $ 10.54 $ 9.82
======== ======== ======== ========
Total Return (excludes sales charge) 19.73% 12.05%<F2> 7.51% (1.80%)<F2>
Ratios/Supplemental Data:
Net Assets, End of Period (000) $ 87,837 $ 54,335 $ 20,796 $ 30,867
Ratio of expenses to
average net assets 1.47% 0.65%<F3> 1.04% 0.82%<F3>
Ratio of net investment income
loss to average net assets (0.62%) (0.13%)<F3> 0.17% (0.27%)<F3>
Ratio of expenses to
average net assets<F6> 1.51% 1.40%<F3> 1.35% 1.47%<F3>
Ratio of net investment income
(loss) to average net assets<F6> (0.66%) (0.88%)<F3> (0.14%) (0.92%)<F3>
Portfolio turnover 152% 54% 102% 61%
Average commission rate paid<F5> $ 0.0468
The financial highlights were audited by Coopers & Lybrand L.L.P. for the
period ended 1995 and 1996, and by other auditors for all earlier periods.
This information should be read in conjunction with the Special Growth Fund's
most recent Annual Report to shareholders, which is incorporated by
reference in the SAI. If you would like a copy of the Annual Report,
write or call us at 800-KEY-FUND.
<FN>
<F1> Period from commencement of operations.
<F2> Not annualized.
<F3> Annualized.
<F4> Effective June 5, 1995, the Victory Aggressive Growth Portfolio merged
into the Special Growth Fund. Financial highlights for the periods prior
to June 5, 1995 represent the Aggressive Growth Portfolio.
<F5> Represents the total dollar amount of commissions paid on portfolio
security transactions divided by total number of shares purchased and
sold by the Special Growth Fund for which commissions were charged.
<F6> During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been
as indicated.
</FN>
</TABLE>
- 19 -
<PAGE>
INTERNATIONAL GROWTH FUND
Investment Objective
The International Growth Fund seeks to provide capital growth
consistent with reasonable investment risk.
Investment Policies and Strategy
The International Growth Fund pursues its investment objective by
investing primarily in equity securities of foreign corporations, most
of which are denominated in foreign currencies.
The International Growth Fund will invest most of its assets in securities
of companies located either in developed countries in Western Europe or
in Japan, although it may purchase securities of companies located in
developing countries and other developed countries. In making investment
decisions, the Adviser may analyze the economies of foreign countries and
the growth potential for individual sectors and securities.
Under normal market conditions, the International Growth Fund:
Will invest at least 65% of its total assets in:
Securities (including American Depository Receipts) of companies that derive
more than 50% of their gross revenues from, or have more than 50% of their
assets, outside the United States.
Securities for which the principal trading markets are located in at least
three different countries (excluding the United States).
May invest up to 35% of its total assets in:
Domestic money market securities
Securities convertible into common stock
"Sponsored" and "unsponsored" American Depository Receipts and
similar securities
Investment grade corporate debt obligations
U.S. Government Obligations
May invest up to 20% of its total assets in securities of companies located
in developing countries
The International Growth Fund is designed for long-term investors.
The International Growth Fund is subject to the risks common to all
mutual funds and to the risks common to mutual funds that invest in
equity securities and foreign securities. The International Growth Fund
may be appropriate for investors who are comfortable with assuming the
added risks associated with stocks that do not pay out significant portions
of their earnings as dividends. The International Growth Fund may be
appropriate for investors who are comfortable with assuming the added
risks associated with investments in foreign countries and investments
denominated in foreign currencies. By itself, the International Growth Fund
does not constitute a complete investment plan and should be considered a
long-term investment for investors who can afford to weather changes in the
value of their investment and do not require significant current income
from their investments. Please read "Risk Factors" carefully
before investing.
Portfolio Management
Conrad R. Metz is the Portfolio Manager of the International Growth Fund,
a position he has held since October, 1995. From 1993-1995 he was Senior
Vice President, International Equities, at Bailard Biehl & Kaiser and has
held other responsible positions managing or researching international
investments since 1983. He is a Portfolio Manager and Managing Director
of Key Asset Management Inc., and has been in the investment business
since 1978.
Fund Expenses
This section will help you understand the costs and expenses you would
pay, directly or indirectly, if you invested in the International
Growth Fund.
<TABLE>
<CAPTION>
Shareholder Class A Class B
Transaction Expenses<F1> Shares Shares
<S> <C> <C>
Maximum Sales Charge 4.75% None
Imposed on Purchases
(as a percentage of the offering price)
Sales Charge Imposed None None
on Reinvested Dividends
Deferred Sales Charge None 5.00%<F2>
Redemption Fees None None
Exchange Fee None None
<FN>
<F1> You may be charged additional fees if you purchase, exchange,
or redeem shares through a broker or agent.
<F2> 5% in the first year, declining to 1% in the sixth year with no
charge after the sixth year.
</FN>
<PAGE>
</TABLE>
The Annual Fund Operating Expenses table below illustrates the
estimated operating expenses that you will incur as a shareholder
of the International Growth Fund. These expenses are charged
directly to the International Growth Fund. Expenses include
management fees as well as the costs of maintaining accounts,
administering the International Growth Fund, providing shareholder
services, and other activities. The expenses shown are estimated based
on historical or projected expenses of the International Growth Fund.
<TABLE>
<CAPTION>
Annual Fund Class A Class B
Operating Expenses Shares Shares
(as a percentage of average daily net assets)
<S> <C> <C>
Management Fees 1.10% 1.10%
Rule 12b-1 Distribution Fees .00% .75%
Other Expenses<F1> .65% 1.25%
---- ----
Total Fund Operating Expenses<F1> 1.75% 3.10%
==== ====
<FN>
<F1> Other Expenses includes an estimate of shareholder servicing
fees the International Growth Fund expects to pay. See "Organization
and Management of the Funds--Shareholder Servicing Plan."
</FN>
</TABLE>
The following example is designed to help you understand the various
costs you will bear, directly or indirectly, as an investor in the
International Growth Fund.
Example: You would pay the following expenses on a $1,000 investment
in the International Growth Fund, assuming: (1) a 5% annual return, and
(2) redemption at the end of each time period.
1 Year 3 Years 5 Years 10 Years
Class A Shares $64 $100 $138 $244
Class B Shares $81 $126 $183 $310
This example is only an illustration.
Actual expenses and returns will vary.
- 20 -
<PAGE>
Financial Highlights
International Growth Fund
The Financial Highlights describe the International Growth Fund's returns
and operating expenses over time. This table shows the results of an
investment in one share of the International Growth Fund for each of
the periods indicated.
<TABLE>
<CAPTION>
CLASS B CLASS A
March 1, Year Year Year Year Year Year May 18,
1996 Ended Ended Ended Ended Ended Ended 1990
through Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct, 31, Oct. 31, through
Oct. 31, 1996<F1> 1995<F2> 1994 1993 1992 1991<F9> Oct. 31,
1996<F1> 1990<F8><F9>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 12.79 $ 12.33 $ 13.32 $ 11.93 $ 8.93 $ 9.20 $ 9.46 $ 10.00
-------- -------- -------- -------- -------- -------- -------- --------
Investment Activities:
Net investment
income (loss) -- 0.08 (0.05) (0.01) (0.03) (0.02) 0.51 0.09
Net realized
and unrealized
gains (losses)
from investments
from foreign currencies 0.14 0.62 (0.42) 1.40 3.03 (0.17) (0.25) (0.55)
-------- -------- -------- -------- -------- -------- -------- --------
Total from
Investment Activities 0.14 0.70 (0.37) 1.39 3.00 (0.19) 0.26 (0.46)
-------- -------- -------- -------- -------- -------- -------- --------
Distributions
Net investment income -- (0.02) -- -- -- (0.01) (0.52) (0.08)
Net realized gains -- -- (0.55) -- -- (0.07) -- --
Tax return of capital -- -- (0.07) -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total Distributions -- (0.02) (0.62) -- -- (0.08) (0.52) (0.08)
-------- -------- -------- -------- -------- -------- -------- --------
Net Asset Value,
End of Period $ 12.93 $ 13.01 $ 12.33 $ 13.32 $ 11.93 $ 8.93 $ 9.20 $ 9.46
======== ======== ======== ======== ======== ======== ======== ========
Total Return
(excludes sales charge) 4.89%<F3> 5.65% (2.50%) (11.65%) 33.59% (2.08%) 2.93% (4.54%)
<F10>
Ratios/Supplemental
Data:
Net Assets,
End of Period (000) $ 118 $121,517 $106,477 $ 81,307 $ 30,629 $ 11,091 $ 5,682 $ 9,878
Ratio of expenses
to average net assets 2.91%<F4> 1.73% 1.53% 1.48% 1.46% 1.56% 1.72% 1.70%
<F4><F7>
Ratio of net
investment income
(loss) to average
net assets (0.10%)<F4> 0.64% 0.75% (0.51%) (0.74%) (0.20%) 5.97% 2.51%
<F4><F7>
Ratio of expenses
to average net assets<F7> 6.46%<F4> 1.75% 1.65% 1.83% 1.63% 1.72%
Ratio of net
investment loss
to average
net assets<F7> (3.65%)<F4> 0.62% 0.63% (0.86%) (0.91%) (0.35%)
Portfolio turnover<F5> 178% 178% 68% 51% 45% 92% 103% 12%
Average commission paid<F6> $ 0.0242 $ 0.0242
The financial highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the International
Growth Fund's most recent Annual Report to shareholders, which is
incorporated by reference in the SAI. If you would like a copy of the
Annual Report, write or call us at 800-KEY-FUND.
<FN>
<F1> Effective March 1, 1996, the International Growth Fund designated the
existing shares of Class A Shares and began offering Class B Shares.
<F2> Effective June 5, 1995, the Victory Foreign Markets Portfolio merged
into the International Growth Fund. Financial highlights for the periods
prior to June 5, 1995 represent the International Growth Fund.
<F3> Represents total return for the International Growth Fund for the period
November 1, 1995 through February 29, 1996 plus total return for
Class B Shares for the Period March 1, 1995 through October 31, 1996.
<F4> Annualized.
<F5> Portfolio turnover is calculated on the basis of the International Growth
Fund as a whole without distinguishing between the classes of shares issued.
<F6> Represents the total dollar amount of commissions paid on portfolio
security transactions divided by total number of shares purchased and
sold by the International Growth Fund for which commissions were charged.
<F7> During the period certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios would have been as
indicated.
<F8> Period from commencement of operations.
<F9> This information is not included in the financial statements audited
by Coopers & Lybrand L.L.P.
<F10> Not annualized.
</FN>
</TABLE>
- 21 -
<PAGE>
Risk Factors
It is important to keep in mind one basic principle of investing: the
greater the risk, the greater the potential reward. The reverse is also
generally true: the lower the risk, the lower the potential reward.
This prospectus describes some of the risks that you may assume as an
investor in the Funds. By matching your investment objective with a
comfortable level of risk, you can create your own customized investment
plan. Some limitations on the Funds' investments are described in the
section that follows. "Other Securities and Investment Practices" at the
end of this prospectus provides additional information on the securities
mentioned in the overview of each of the Funds. As with any mutual fund,
there is no guarantee that a Fund will earn income or show a positive total
return over time. A Fund's price, yield, and total return will fluctuate. You
may lose money if a Fund's investments do not perform well.
The following risks are common
to all mutual funds:
Market risk is the risk that the market value of a security will fluctuate,
depending on the supply and demand for that type of security. As a result
of this fluctuation, a security may be worth more or less than the price a
Fund originally paid for it, or less than the security was worth at an
earlier time. Market risk may affect a single security, an industry, a
sector of the economy, or the entire market, and is common to
all investments.
Manager risk is the risk that a Fund's Portfolio Manager may use a
strategy that does not produce the intended result.
The following risk is common
to mutual funds that invest in
equity securities:
Equity risk is the risk that the value of the security will fluctuate in
response to changes in earnings or other conditions affecting the
issuer's profitability. Unlike debt securities, which have preference to a
company's earnings and cash flow, equity securities are entitled to the
residual value after the company meets its other obligations.
For example, holders of debt securities have priority over holders of
equity securities to a company's assets in the event of bankruptcy.
The following risks are common
to mutual funds that invest
in foreign securities:
Currency risk is the risk that fluctuations in the exchange rates
between the U.S. dollar and foreign currencies may negatively
affect an investment. Adverse changes in exchange rates may
erode or reverse any gains produced by foreign currency
denominated investments and may widen any losses.
Foreign issuer risk. Compared to U.S. and Canadian companies,
there generally is less publicly available information about foreign
companies and there may be less governmental regulation and supervision
of foreign stock exchanges, brokers, and listed companies. Foreign
issuers may not be subject to the uniform accounting, auditing, and
financial reporting standards and practices used by domestic issuers.
In addition, foreign securities markets may be less liquid, more
volatile, and less subject to governmental supervision than in the
U.S. Investments in foreign countries could be affected by factors
not present in the U.S., including expropriation, confiscation of
property, and difficulties in enforcing contracts. All of these
factors can make foreign investments, especially those in
developing countries, more volatile than U.S. investments.
- 22 -
<PAGE>
The following risks are common
to mutual funds that invest in
debt securities:
Interest rate risk. The value of a debt security typically changes in the
opposite direction from a change in interest rates. Therefore, when
interest rates go up, the value of a fixed-rate security typically goes down.
When interest rates go down, the value of these securities typically
goes up. Generally, the market values of securities with longer maturities
are more sensitive to changes in interest rates.
Inflation risk is the risk that inflation will erode the purchasing power
of the cash flows generated by debt securities held by a Fund.
Fixed-rate debt securities are more susceptible to this risk than
floating-rate debt securities.
Reinvestment risk is the risk that when interest income is reinvested,
interest rates will have declined so that income must be reinvested
at a lower interest rate. Generally, interest rate risk and reinvestment risk
have offsetting effects.
Credit (or default) risk is the risk that the issuer of a debt security will
be unable to make timely payments of interest or principal. Although
the Funds generally invest in only high-quality securities, the interest or
principal payments may not be insured or guaranteed on all securities.
The following risk is common
to mutual funds that invest in
the securities of a single state:
Concentration and diversification risk is the risk that only a limited
number of high-quality securities of a particular type may be
available. Concentration and diversification risk is greater for
Funds that primarily invest in the securities of a single state
or geographic area.
Investment Limitations
The SEC and IRS have certain restrictions with which all mutual funds must
comply. The Funds monitor these limitations on an ongoing basis.
To help reduce risk, the Funds have adopted limitations on some
investment policies. These limits involve a Fund's ability to
borrow money and the amount it can invest in various types
of securities. Certain limitations can be changed only with the
approval of shareholders. Victory's Board of Trustees can change
other investment limitations without shareholder approval.
See "Other Securities and Investment Practices" and the SAI
for more information.
Each Fund limits to 25% of its total assets the amount that it
may invest in any single industry (other than U.S. Government
obligations). Each Fund limits its borrowing to 33 1/3% of
its total assets. Borrowing would be in the form of selling a
security that it owns and agreeing to repurchase that security
later at a higher price. The Funds do not intend to borrow for
leveraging purposes.
Diversification Requirements
SEC Requirement: Each Fund is "diversified" according to
certain federal securities provisions regarding
the diversification of its assets. Generally, under these
provisions, a Fund must invest at least 75% of its
total assets so that no more than 5% of its total assets
are invested in the securities of any one issuer.
IRS Requirement: Each Fund also intends to comply
with certain federal tax requirements regarding the
diversification of its assets, which generally are less
restrictive than the securities provisions. These diversification
provisions and requirements are discussed in the SAI.
- 23 -
<PAGE>
Investment Performance
Past performance does not guarantee future results. You may
obtain the current 30-day yield by calling 800-KEY-FUND.
Our Shareholder Servicing representatives are available
from 8:00 a.m. to 7:00 p.m. Eastern Time Monday through Friday.
Victory may advertise the performance of a Fund by comparing
it to other mutual funds with similar objectives and policies.
Performance information may also appear in various publications.
Any fees charged by Investment Professionals may not be
reflected in these performance calculations. Performance
information is contained in the annual and semi-annual reports.
You may obtain a copy free of charge, by calling 800-KEY-FUND.
The "30-day yield" is an "annualized" figure--the amount you would
earn if you stayed in a Fund for a year and the Fund continued to
earn the same net income throughout that year. To calculate 30-day yield,
a Fund's net investment income per share for the most recent 30 days is
divided by the maximum offering price per share for Class A Shares,
or by the NAV for Class B Shares.
To calculate "total return," a Fund starts with the total number of shares
that you can buy for $1,000 at the beginning of the period. Then the
Fund adds all dividends and distributions paid as if they were reinvested
in additional shares (this takes into account the Fund's dividend payments,
if any). The total number of shares is multiplied by the net asset value on
the last day of the period and the result is divided by the initial
$1,000 investment to determine the percentage gain or loss. For periods
of more than one year, the cumulative total return is adjusted to get an
average annual total return.
Yield is a measure of net interest and dividend income.
Average annual total return is a hypothetical measure of past
dividend income plus capital appreciation.
It is the sum of all of the parts of a Fund's investment return for periods
greater than one year.
Total return is the sum of all of the parts of a Fund's investment return.
Whenever you see information on a Fund's performance, do not
consider the past performance to be an indication of the performance
you could expect by making an investment in a Fund today. The past
is an imperfect guide to the future. History does not always repeat itself.
Share Price
The daily NAV is useful to you as a shareholder because
the NAV, multiplied by the number of Fund shares you own,
gives you the dollar amount and value of your investment.
Each Fund's share price, called its net asset value (the NAV), is calculated
each business day (normally at 4:00 p.m. Eastern Time). Shares are
purchased at the next share price calculated after your investment
instructions are received and accepted. A business day is a day on
which the New York Stock Exchange is open for trading or any day
in which enough trading has occurred in the securities held by a Fund to
materially affect the NAV. If your account is established with an
Investment Professional or a bank, you may not be able to purchase
or sell shares on other holidays when the Federal Reserve Bank of
Cleveland is closed and the New York Stock Exchange is closed.
The NAV is calculated by adding up the total value of a Fund's investments
and other assets, subtracting its liabilities, and then dividing that
figure by the number of outstanding shares of the Fund:
Total Assets-Liabilities
NAV = ----------------------------
Number of Shares Outstanding
Each Fund's net asset value can be found daily in The Wall Street
Journal and other newspapers.
- 24 -
<PAGE>
Dividends, Distributions, and Taxes
Buying a Dividend. You should check a Fund's distribution
schedule before you invest. If you buy shares of a Fund shortly
before it makes a distribution, some of your investment may come
back to you as a taxable distribution.
As a shareholder, you are entitled to your share of net income
and capital gains on a Fund's investments. The Funds pass their
earnings along to investors in the form of dividends. Dividend
distributions are the dividends or interest earned on investments
after expenses. If a Fund makes a capital gain distribution, it
is paid once a year. As with any investment, you should consider
the tax consequences of an investment in a Fund.
Ordinarily, the Balanced Fund declares and pays dividends from
its net investment income monthly. All other Funds in this prospectus
declare and pay dividends from their net investment income quarterly.
Any net capital gains realized by the Funds are paid as dividends at
least annually. The Funds declare and pay dividends separately for
Class A and Class B Shares of the Funds. Shareholders who earn a
dividend of less than $10.00 will have dividends reinvested
automatically into their accounts. Distributions can be received
in one of the following ways:
Reinvestment Option
You can have distributions automatically reinvested in additional
shares of a Fund. If you do not indicate another choice on your
Account Application, this option will be assigned to you automatically.
Cash Option
A check will be mailed to you no later than 7 days after the pay date.
Income Earned Option
Dividends can be reinvested automatically in a Fund in which you
have invested and your capital gains can be paid in cash, or
capital gains can be reinvested and dividends paid in cash.
Directed Dividends Option
You can have distributions automatically reinvested in shares
of another fund of the Victory Group. The "Victory Group"
includes other funds of the Victory Portfolios and Key Mutual Funds.
If distributions from Class A Shares are reinvested in Class A Shares
of another fund, you will not pay a sales charge on the reinvested
distributions.
Directed Bank Account Option
In most cases, you can have distributions transferred
automatically to your bank checking or savings account.
Under normal circumstances, a dividend will be transferred
within 7 days of the dividend payment date. The bank account
must have a registration identical to that of your Fund account.
Your choice of distribution should be set up on the original
Account Application. If you would like to change the option
you selected, please call the Transfer Agent at 800-KEY-FUND.
- 25 -
<PAGE>
Important Information about Taxes
Each Fund intends to continue to qualify as a regulated investment
company, in which case it pays no federal income tax on the
earnings or capital gains it distributes to its shareholders.
Ordinary dividends from a Fund are taxable as ordinary income;
dividends from a Fund's long-term capital gains are taxable as
capital gain.
Dividends are treated in the same manner for federal income tax
purposes whether you receive them in cash or in additional shares.
They may also be subject to state and local taxes.
Dividends from the Funds that are attributable to interest on certain
U.S. Government obligations may be exempt from certain state and
local income taxes. The extent to which ordinary dividends are attributable
to U.S. Government obligations will be provided on the tax statements
you receive from a Fund.
Certain dividends paid to you in January will be taxable as
if they had been paid to you the previous December.
Tax statements will be mailed from a Fund every January
showing the amounts and tax status of distributions made
to you.
Under certain circumstances, a Fund may be in a position
to (in which case it would) "pass-through" to you the right
to a credit or deduction for income or other tax credits earned
from foreign investments.
Because your tax treatment depends on your purchase price
and tax position, you should keep your regular account
statements for use in determining your tax.
You should review the more detailed discussion of federal income tax
considerations in the SAI.
THE TAX INFORMATION IN THIS PROSPECTUS IS PROVIDED
AS GENERAL INFORMATION. YOU SHOULD CONSULT YOUR
OWN TAX ADVISER ABOUT THE TAX CONSEQUENCES OF
AN INVESTMENT IN A FUND.
- 26 -
<PAGE>
Investing with Victory
If you are looking for a convenient way to open an account for
yourself or a minor child, or to add money to an existing account,
Victory can help. The section on "Choosing a Share Class" will help
you decide whether it would be more to your advantage to purchase
Class A or Class B Shares of a Fund. The following sections will
describe how to open an account, how to access information on
your account, and how to purchase, exchange, and redeem shares
of a Fund. We want to make it simple for you to do business with us.
The sections that follow will serve as a guide to your investments
with Victory. If you have questions about any of this information,
please call your Investment Professional or one of our
customer service representatives at 800-KEY-FUND.
They will be happy to assist you.
All you need to do to get started is to fill out an application.
Choosing a Share Class
Some of the funds described in this prospectus offer only Class A
Shares, while others offer both Class A and B shares of the funds.
The following chart shows which funds offer one or both classes
of shares:
<TABLE>
<CAPTION>
Only Class A Shares Both Class A and Class B Shares
<S> <C>
Growth Fund Balanced Fund
Special Growth Fund Diversified Stock Fund
Stock Index Fund International Growth Fund
Value Fund Ohio Regional Stock Fund
Special Value Fund
</TABLE>
Each class has its own cost structure, allowing you to choose
the one that best meets your requirements. Your Investment
Professional can also help you decide.
For historical expense information on Class A and B shares,
see the financial highlights in the Fund overviews earlier in
this prospectus.
Class A
Front-end sales charges, as described below. There are several
ways to reduce these charges.
Lower annual expenses than Class B shares.
Class B
No front-end sales charge. All your money goes to work
for you right away.
Higher annual expenses than Class A shares.
A deferred sales charge on shares you sell within 6 years of
purchase, as described on the next page.
Automatic conversion to Class A shares after 8 years, thus reducing
future annual expenses.
- 27 -
<PAGE>
Calculation of Sales Charges--Class A
Class A Shares are sold at their public offering price, which includes the
initial sales charge. The sales charge as a percentage of your investment
decreases as the amount you invest increases. The current sales charge
rates and commissions paid to Investment Professionals are as follows:
<TABLE>
<CAPTION>
Your Investment Sales Charge Sales Charge Dealer Reallowance
as a % of as a % of as a % of the
Offering Price Your Investment Offering Price
<S> <C> <C> <C>
Up to $50,000 4.75% 4.99% 4.00%
$50,000 up to $100,000 4.50% 4.71% 4.00%
$100,000 up to $250,000 3.50% 3.63% 3.00%
$250,000 up to $500,000 2.25% 2.30% 2.00%
$500,000 up to $1,000,000 1.75% 1.78% 1.50%
$1,000,000 and above<F1> 0.00% 0.00% <F1>
<FN>
<F1>There is no initial sales charge on purchases of $1 million or more.
However, a contingent deferred sales charge (CDSC) of up to 1.00% of the
purchase price will be charged to the shareholder if shares are redeemed in
the first year after purchase, or at .50% within two years of the purchase.
This charge will be based on either the cost of the shares or current net
asset value at the time of redemption, whichever is lower. There will be no
CDSC on reinvested dividends. Investment Professionals may be paid at a
rate of up to 1.00% of the purchase price.
</FN>
</TABLE>
The Distributor reserves the right to pay the entire commission to dealers.
If that occurs, the dealer may be considered an "underwriter" under federal
securities laws.
Sales Charge Reductions and Waivers for Class A Shares
There are several ways you can combine multiple purchases in the
Victory Funds and take advantage of reduced sales charges.
You may qualify for reduced sales charges in the following cases:
1. A Letter of Intent lets you purchase Class A Shares of a fund over a
13-month period and receive the same sales charge as if all shares had
been purchased at one time. You must start with a minimum initial
investment of 5% of the total amount.
2. Rights of Accumulation allow you to add the value of any Class A Shares
you already own to the amount of your next Class A investment for purposes
of calculating the sales charge at the time of purchase.
3. You can combine Class A Shares of multiple Victory Funds, (excluding
money market funds) for purposes of calculating the sales charge. The
combination privilege also allows you to combine the total investments
from the accounts of household members of your immediate family
(spouse and children under 21) for a reduced sales charge at the time
of purchase.
4. Waivers for certain investors:
a. Current and retired Fund Trustees, directors, trustees, employees, and
family members of employees of KeyCorp or "Affiliated Providers,"* and
dealers who have an agreement with the Distributor and any trade
organization to which the Adviser or the Administrator belong.
b. Investors who purchase shares for trust or other advisory accounts
established with KeyCorp or its affiliates.
c. Investors who reinvest a distribution from a deferred compensation
plan, agency, trust, or custody account that was maintained by
KeyBank National Associates and its affiliates, the Victory Group, or
invested in a fund of the Victory Group.
d. Investors who reinvest shares from another mutual fund complex
or the Victory Group within 90 days after redemption, if they paid
a sales charge for those shares.
e. Investment Professionals who invest in shares of a Fund for fee-based
investment products or accounts, and selling brokers and their
sales representatives.
*Affiliated Providers are affiliates and subsidiaries of KeyCorp, and
any organization that provides services to Victory and
Key Mutual Funds (the Victory Group).
- 28 -
<PAGE>
Deferred Sales Charges--Class B
Shares are offered at their NAV per share, without an initial sales charge.
When you sell the shares within six years of buying them, there is a
contingent deferred sales charge (CDSC). The CDSC is based on the
original purchase cost of your investment or the NAV at the time of
redemption, whichever is lower.
Eight years after Class B Shares are purchased, they automatically will
convert to Class A Shares. Class A shareholders are not subject to the
asset-based sales charge that normally would apply to Class B shares,
as described in "Distribution Plan for Class B Shares." Also see the SAI
for additional details.
<TABLE>
<CAPTION>
Years After CDSC on Shares
Purchase Being Sold
<S> <C>
0-1 5.0%
1-2 4.0%
2-3 3.0%
3-4 3.0%
4-5 2.0%
5-6 1.0%
After 6 Years None
</TABLE>
The Distributor pays sales commissions of 4.00% of the purchase price
to dealers at the time of sale.
There is no CDSC on reinvested dividends. The longer the time
between the purchase and sale of shares, the lower the rate of the CDSC.
Sales Charge Reductions and Waivers for Class B Shares
The CDSC will be waived for the following redemptions:
1. Distributions from retirement plans if the distributions are made:
a. Under the Systematic Withdrawal Plan after age 59 1/2 for up to 12%
of the account value annually; or
b. Following the death or disability of the participant or beneficial owner;
2. Redemption's from accounts other than retirement accounts following
the death or disability of the shareholder;
3. Returns of excess contributions to retirement plans;
4. Distributions of less than 12% of the annual account value under a
Systematic Withdrawal Plan;
5. Shares issued in a plan of reorganization sponsored by Victory, or
shares redeemed involuntarily in a similar situation.
- 29 -
<PAGE>
How to Purchase Shares
All you need to do to get started is to fill out an application.
Class A and Class B Shares can be purchased in a number of different ways.
You can send in your investment by check, wire transfer, exchange from
another Victory Fund, or through arrangements with your Investment
Professional. An Investment Professional is a salesperson, financial
planner, investment adviser, or trust officer who provides you with
investment information. Sometimes they will charge you for these
services. Their fee will be in addition to, and unrelated to, the fees
and expenses charged by a Fund.
Make your check payable to:
The Victory Funds
Keep the following addresses handy for purchases, exchanges, or redemptions:
Regular U.S. Mail Address
Send completed Account Applications with your check, bank draft,
or money order to:
The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527
Overnight Mail Address
Use the following address ONLY for overnight packages.
The Victory Funds
c/o Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
PHONE: 800-KEY-FUND
Wire Address
The Transfer Agent does not charge a wire fee, but your originating
bank may charge a fee. Always call the Transfer Agent at 800-KEY-FUND
BEFORE wiring funds to obtain a control number.
State Street Bank and Trust Co.
ABA #011000028
For Credit to DDA
Account #9905-201-1
For Further Credit to Account #
(insert account number, name,
and control number assigned
by the Transfer Agent)
Telephone
800-KEY-FUND
800-539-3863
FAX Number:
800-529-2244
Telecommunication Device for the Deaf (TDD):
800-970-5296
- 30 -
<PAGE>
ACH
After your account is set up, your purchase amount can be transferred
by Automated Clearing House (ACH). Only domestic member banks
may be used. It takes about 15 days to set up the ACH feature. The
Funds do is not currently charge a fee for ACH transfers.
Statements and Reports
You will receive a periodic statement reflecting any transactions that
affect the balance or registration of your account. You will receive a
confirmation after any purchase, exchange, or redemption. If your
account has been set up by an Investment Professional, account activity
will be detailed in their statements to you. Share certificates are not
issued. Twice a year, you will receive the financial reports of the Funds.
By January 31 of each year, you will be mailed an IRS Form
reporting account distributions for the previous year, which
also will be filed with the IRS.
Systematic Investment Plan
To enroll in the Systematic Investment Plan, you should check this
box on the Account Application. We will need your bank account
information and the amount and frequency of your investment. You can
select monthly, quarterly, semi-annual, or annual investments. You should
attach a voided personal check so the proper information can be obtained.
You must first meet the minimum investment requirement of $500, then
we will make automatic withdrawals of the amount you indicate ($25 or more)
from your bank account and invest in shares of a Fund.
Retirement Plans
You can use the Funds as part of your retirement portfolio. Your Investment
Professional can set up your new account under one of several tax sheltered
plans. Please contact your Investment Professional or the Fund for details
regarding an IRA or other retirement plan that works best for your
financial situation.
If you would like to make additional investments after your account
is already established, use the Investment Stub attached to your
statement and send it with your check to the address indicated.
All purchases must be made in U.S. Dollars and drawn on U.S. banks.
The Transfer Agent may reject any purchase order in its sole discretion.
If your check is returned for any reason, you may be charged
for any resulting fees and/or losses. Third party checks will not be
accepted. You may only invest or exchange into fund shares legally
available in your state. If your account falls below $500, we may ask you
to re-establish the minimum investment. If you do not do so within 60 days,
we may close your account and send you the value of your account.
- 31 -
<PAGE>
How to Exchange Shares
An exchange is the selling of shares of one fund of the Victory Group to
purchase shares of another. You may exchange shares of one Victory fund
for shares of the same class of any other, generally without paying any
additional sales charges. The "Victory Group" includes funds offered as a
part of the Victory Funds and Key Mutual Funds. Key Mutual Funds is
affiliated with KeyCorp.
You can obtain a list of funds available for exchange by
calling the Transfer Agent at 800-KEY-FUND.
You can exchange shares of the Fund by writing or calling the
Transfer Agent at 800-KEY-FUND. When you exchange shares
of the Funds, you should keep the following in mind:
Shares of the fund selected for exchange must be available for sale
in your state of residence.
The Fund whose shares you would like to exchange and the Fund
whose shares you want to buy must offer the exchange privilege.
Shares of a Fund may be exchanged at relative net asset value. This
means that if you own Class A Shares of the Fund, you can only
exchange them for Class A Shares of another fund and not pay a
sales charge. The same rules apply to Class B Shares.
You must meet the minimum purchase requirements
for the fund you purchase by exchange.
The registration and tax identification numbers of the two accounts
must be identical.
You must hold the shares you buy when you establish your account
for at least 7 days before you can exchange them; after the account is
open 7 days, you can exchange shares on any business day.
Before exchanging, read the prospectus of the fund you wish to purchase
by exchange.
- 32 -
<PAGE>
How to Redeem Shares
There are a number of convenient ways to redeem shares of a Fund.
You can use the same mailing addresses listed for purchases.
You will earn dividends up to the date your redemption request
is processed.
If we receive your request by 4:00 p.m. Eastern Time, your redemption
will be processed the same day.
By Telephone
The easiest way to redeem shares is by calling 800-KEY-FUND. When you
fill out your original application, be sure to check the box marked
"Telephone Authorization." Then when you are ready to redeem, call us
and tell us which one of the following options you would like to use:
Mail a check to the address of record;
Wire funds to a domestic financial institution;
Mail to a previously designated alternate address; or
Electronically transfer the funds via ACH.
All telephone calls are recorded for your protection and measures are taken
to verify the identity of the caller. If we properly act on telephone
instructions and follow reasonable procedures to ensure against
unauthorized transactions, neither Victory nor its servicing agents, the
Adviser, nor the Transfer Agent will be responsible for any losses. If these
procedures are not followed, the Transfer Agent may be liable to you for
losses resulting from unauthorized instructions.
If there is an unusual amount of market activity and you cannot reach the
Transfer Agent by telephone, consider placing your order by mail.
By Mail
Use the Regular U.S. Mail or Overnight Mail Address to redeem shares.
Send us a letter of instruction indicating your Fund account number,
amount of redemption, and where to send the proceeds. All account
owners must sign. A signature guarantee is required for the following
redemption requests:
Redemptions over $10,000;
Your account registration has changed within the last 15 days;
The check is not being mailed to the address on your account;
The check is not being made payable to the owner of the account; or
If the redemption proceeds are being transferred to another Victory Group
account with a different registration.
A signature guarantee can be obtained from a financial institution such as a
bank, broker-dealer, credit union, clearing agency, or savings association.
- 33 -
<PAGE>
By Wire
If you want to redeem funds by wire, you must establish a Fund account which
will accommodate wire transactions. If you call by 4:00 p.m. Eastern Time,
your funds will be wired on the next business day.
By ACH
Normally, your redemption will be processed on the same day, or the next day
if your instructions are received after 4:00 p.m. Eastern Time. It will be
transferred by ACH as long as the transfer is to a domestic bank.
Under certain emergency circumstances, the right of redemption may be
suspended. Redemption proceeds from the sale of shares purchased by a
check may be held until the purchase check has cleared. If you request a
complete redemption, any dividends declared will be included with the
redemption proceeds.
Systematic Withdrawal Plan
If you check this box on the Account Application, we will send monthly,
quarterly, semi-annual, or annual payments to the person you designate.
The minimum withdrawal is $25, and you must have an account
value of $5,000 or more to begin withdrawals. Once again, we will
need a voided personal check to activate this feature. You should
be aware that your account eventually may be depleted. However,
you cannot automatically close your account using the Systematic
Withdrawal Plan. If your account value falls below $500, we may
ask you to bring the account back to the $500 minimum. If you
decide not to increase your account to the minimum balance,
your account may be closed and the proceeds mailed to you.
Organization and Management of the Funds
We want you to know who plays what role in your investment
and how they are related. This section discusses the organizations
employed by the Funds to service their shareholders. They are
paid a fee for their services.
About Victory
Each Fund is a member of the Victory Funds, a group of 26 distinct
investment portfolios, organized as a Delaware business trust. Some
of the Victory Funds have been operating continuously since 1983.
The Board of Trustees of Victory has the overall responsibility for the
management of the Funds. They are elected by the shareholders.
The Investment Advisers
One of a Fund's most important contracts is its Advisory Agreement
with Key Asset Management Inc. (KAM or the Adviser), a New York
Corporation registered as an investment adviser with the SEC. KAM
is a subsidiary of KeyBank National Association, a wholly-owned
subsidiary of KeyCorp. On February 28, 1997, KAM became the
surviving corporation after the reorganization of four indirect investment
adviser subsidiaries of KeyCorp. Affiliates of the Adviser manage
approximately $50 billion for a limited number of individual and
institutional clients.
- 34 -
<PAGE>
The Advisory Agreement allows the Adviser to hire employees. It also
allows KAM to choose brokers or dealers to handle the purchase and
sales of a Fund's securities. Subject to Board approval, Key Investments,
Inc. (KII) and/or Key Clearing Corporation (KCC) may act as clearing
broker for the Fund's security transactions in accordance with procedures
adpoted by the Funds, and receive commissions or fees in connection
with their services to the Funds. Both KII and KCC wholly-owned
indirect subsidiaries of KeyCorp and affiliates of the Adviser.
Prior to February 28, 1997, KeyCorp Mutual Fund Advisers, Inc. was
the adviser. Society Asset Management, Inc. (formerly the adviser) was
the sub-adviser to each of the Funds except the Special Growth Fund.
During the fiscal year ended October 31, 1996, KeyCorp Mutual Fund
Advisers, Inc. was paid an advisory fee at an annual rate based on the
average daily net assets of each Fund (after waivers) as follows:
<TABLE>
<CAPTION>
Balanced Diversified Value Stock Ohio Growth Special Special International
Fund Stock Fund Index Regional Fund Value Growth Growth
Fund Fund Stock Fund Fund Fund
Fund
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Advisory Fees .84% .64% .98% .43% .74% .94% .97% .95%<F1> 1.07%
<FN>
<F1> .16% was paid to the former sub-adviser, T. Rowe Price Associates, Inc.
</FN>
</TABLE>
The Administrator, Distributor,
and Fund Accountant
BISYS Fund Services is the Administrator and Distributor. BISYS is paid a
fee at an annual rate of .15% of each Fund's average daily net assets as the
Administrator, but does not charge a fee for its services as Distributor.
BISYS Fund Services Ohio, Inc. receives a fee as the Funds' Accountant.
The Distributor may provide sales support, including cash or other
compensation to dealers for selling shares of a Fund. Payments may
be in the form of trips, tickets, and/or merchandise offered through sales
contests. It does this at its own expense and not at the expense of a Fund
or its shareholders.
Shareholder Servicing Plan
Victory has a Shareholder Servicing Plan for each class of shares of the
Funds except the Stock Index Fund. The shareholder servicing agent
performs a number of services for their customers who are shareholders of
- 35 -
<PAGE>
the Funds. It establishes and maintains accounts and records, processes
dividend payments, arranges for bank wires, assists in transactions, and
changes account information. For these services a Fund pays a fee at an
annual rate of up to .25% of the average daily net assets of the appropriate
class of shares serviced by the agent. The Funds have agreements with
various shareholder servicing agents, including KeyBank National
Association and its affiliates, other financial institutions, and
securities brokers. Shareholder servicing agents may waive all or a
portion of their fee periodically.
Distribution Plan
Under Rule 12b-1 of the Investment Company Act of 1940, Victory
has adopted a Distribution and Service Plan for Class B Shares of the
five funds that sell Class B Shares. Victory pays the Distributor an
annual asset-based sales charge of 0.75%. The fee is computed on the
average daily net assets of those shares. The Distributor then uses the
asset-based sales charge to recoup these sales commissions and the
costs for financing them. See the SAI for more details regarding
this plan.
Independent Accountants
Coopers & Lybrand L.L.P. serves as independent accountants to the Funds.
Legal Counsel
Kramer, Levin, Naftalis & Frankel serves as legal counsel to the Funds.
Management of the Fund
Trustees
Supervise each Fund's activities.
Investment Adviser
Key Asset Management Inc.
127 Public Square
Cleveland, OH 44114
Manages each Fund's business
and investment activities.
The Fund is supervised by the Board of Trustees who monitor the
services provided to investors.
How the Funds Are Organized
Shareholders
Financial Services Firms and their Investment Professionals
Advise current and prospective shareholders on their Fund investments.
Transfer Agent/Servicing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
Handles services such as record-keeping, statements, processing of buy
and sell requests, distribution of dividends, and servicing of
shareholders' accounts.
Administrator, Distributor,
and Fund Accountant
BISYS Fund Services, Inc. and
BISYS Fund Services Ohio, Inc.
3435 Stelzer Road
Columbus, OH 43219
Markets the Funds, distributes shares through investment professionals, and
calculates the value of shares.
Custodian
Key Trust Company of Ohio, N.A.
127 Public Square
Cleveland, OH 44114
Provides for safekeeping of the Funds' investments and cash, and
settles trades made by the Funds.
- 36 -
<PAGE>
Additional Information
Some additional information you should know about the Funds.
If you would like to receive additional copies of any materials,
please call the Funds at 800-KEY-FUND.
The Funds offer only the classes of shares described in this prospectus,
but at some future date, the Funds may offer additional classes of shares
through a separate prospectus.
Your Rights as a Shareholder
All shareholders have equal voting, liquidation, and other rights. As a
shareholder of a Fund, you have rights and privileges similar to those
enjoyed by other corporate shareholders. Delaware Trust law limits
the liability of shareholders.
If any matters are to be voted on by shareholders (such as a change in a
fundamental investment objective or the election of Trustees), each share
outstanding at that point would be entitled to one vote. If you have
a qualified trust account, the trustee will vote your shares on your
behalf or in the same percentage voted on shares that are not held
in trust. Shareholders with more than 10% of the outstanding shares
of a Fund may call a special meeting for removal of a Trustee.
Normally, Victory is not required to hold annual meetings of
shareholders. However, shareholders may request one under
certain circumstances, as described in the SAI.
Code of Ethics
Victory and the Advisers have each adopted a Code of Ethics to which
all investment personnel and all other access persons to the Fund must
conform. Investment personnel must refrain from certain trading
practices and are required to report certain personal investment activities.
Violations of the Code of Ethics can result in penalties, suspension, or
termination of employment.
Banking Laws
Banking laws, including the Glass-Steagall Act, prevent a bank holding
company or its affiliates from sponsoring, organizing, or controlling a
registered, open-end investment company. However, bank holding company
subsidiaries may act as investment adviser, transfer agent, custodian or
shareholder servicing agent. They also may purchase shares of such a
company for their customers and pay third parties for performing these
functions. Should these laws ever change in the future, the Trustees would
consider selecting another qualified firm so that all services
would continue.
Shareholder Communications
You will receive unaudited Semi-Annual Reports and audited Annual Reports
on a regular basis from each Fund. In addition, you will also receive
updated prospectuses or supplements to this prospectus. In order to
eliminate duplicate mailings to an address at which two or more shareholders
with the same last name reside, the Fund will send only one copy of the
above communications.
The securities described in this prospectus and the SAI are not offered in
any state in which they may not lawfully be sold. No sales representative,
dealer, or other person is authorized to give any information or make any
representation other than those contained in this prospectus and the SAI.
- 37 -
<PAGE>
Other Securities and Investment Practices
The following table lists some of the types of securities each of the Funds
may choose to purchase under normal market conditions. Each Fund invests
primarily in equity securities. However, the Funds also are permitted to
invest in the non-equity securities as shown in the table below and in
the SAI. For temporary defensive purposes, each Fund may hold up to
100% of its total assets in cash or short-term money market instruments.
For more information on ratings and detailed descriptions of each of the
investments below, see the SAI.
<TABLE>
<CAPTION>
List of Allowable Investments Balanced Diversified Value Stock Index Ohio Regional
and Investment Practices Fund Stock Fund Fund Fund<F1> Stock Fund
<S> <C> <C> <C> <C> <C>
U.S. Equity
Securities.
Can include
common stock,
preferred stock,
and securities
convertible
into stock of
U.S. corporations. 40-70% 80-100% 80-100% 80-100% 80-100%
Foreign Equity
Securities.
Can include
common stock,
preferred stock,
and convertible
preferred stock
of non-U.S.
corporations. 10% None None None None
U.S. Corporate
Debt Obligations.
Debt instruments
issued by
U.S. public
corporations.
They may be
secured or
unsecured. 60% 20% 20% 20% 20%
U.S. Government
Securities.
Securities issued
or guaranteed
by the U.S.
government,
its agencies, or
instrumentalities.
Some are direct
obligations
of the U.S.
Treasury;
others are
obligations only
of the U.S. agency. 60% 20% 20% 20% 20%
Short-term Debt
Obligations.
Includes bankers'
acceptances,
certificates of
deposit, prime
qualitycommercial
paper, Eurodollar
obligations, cash,
and cash equivalents. 35% 20% 20% 20% 20%
Foreign Debt
Securities.
Debt securities
of foreign
issuers including
international
bonds traded in
the United States
and abroad. 10% None None None None
Warrants. The right
to purchase an
equity security
at a stated
price for a
limited
period of time. 10% 10% 10% 10% 10%
When-Issued and
Delayed-Delivery
Securities.
A security
that is
purchased for
delivery at a
later time. 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%
The market
value may change
before the
delivery date,
and the value
is included
in the NAV
of the Fund.
<F3>Receipts.
Separately
traded interest
or principal
components of
U.S. Government
securities. 10% 20% 20% 20% 20%
Repurchase
Agreements.
An agreement
to sell
and repurchase
a security at
a stated
price plus
interest.
The seller's
obligation
to the Fund
is secured
by collateral. 35% 20% 20% 20% 20%
Commercial Paper.
Short-term
obligations
issued by
corporations
and financial
institutions.
The Funds only
use prime
quality
commercial
paper. 35% 20% 20% 20% 20%
Illiquid
Securities.
Investments
that cannot
be readily
sold within
seven days
in the usual
course of
business at
approximately
the price
at which a
Fund values
them, including
forward
contracts<F2>
to hedge
currency risk. 15% of net 15% of net 15% of net 15% of net 15% of net
assets<F2> assets assets assets assets
Restricted
Securities.
Securities
that are not
registered
under federal
securities
laws but that
may be traded
among
qualified
institutional
investors and
the Fund.
Some of these
securities
may be illiquid. 35% 20% 20% 20% 20%
<F3>Futures
Contracts
and Options
on Futures
Contracts.
Contracts
involving
the right or
obligation to
deliver or
receive
assets or
money
depending on
the performance
of one
or more assets
or a securities
index. To reduce
the effects of
leverage,
liquid assets
equal to
the contract
commitment
are set aside
to cover the
commitment
limit. The Funds
may invest in
futures in 5% in margins 5% in margins 5% in margins 5% in margins 5% in margins
an effort to hedge and premiums; and premiums; and premiums; and premiums; and premiums;
against market
risk. 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%
subject subject subject subject subject
to futures to futures to futures to futures to futures
or options or options or options or options or options
on futures on futures on futures on futures on futures
<F3>Options.
A Fund may
write, or sell,
a covered
call option
on a security
that it owns
or on an
index to
hedge its
position or
generate
additional
income.
The Special
Growth
Fund may
purchase
call options,
purchase put
options,
write put
options,
or write
uncovered call
and 5% in call
options for
speculative 25% in 25% in 25% in 25% in 25% in
investments. covered calls covered calls covered calls covered calls covered calls
Borrowing,
Reverse
Repurchase
Agreements.
The borrowing
of money
from banks
(up to 5%
of total
assets) or
through reverse
repurchase
agreements
(up to 33 1/3%
of total assets).
The Funds
will not use
borrowing 5% 5% 5% 5% 5%
to create
leverage. 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%
Securities
Lending.
In order
to generate
additional
income, a
Fund may
lend its
portfolio
securities.
A Fund will
receive
collateral
for the value
of the security
plus any
interest due.
A Fund only
will enter
into loan
arrangements
with
entities that
the Adviser
has determined
are creditworthy. 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%
% Percentage of total assets.
- 38 -
<PAGE>
<CAPTION>
List of Allowable Investments Growth Special Value Special Growth International
and Investment Practices Fund Fund Fund Growth Fund
<S> <C> <C> <C> <C>
U.S. Equity
Securities.
Can include
common stock,
preferred stock,
and securities
convertible
into stock of
U.S. corporations. 80-100% 65-100% 65-100% None
Foreign Equity
Securities.
Can include
common stock,
preferred stock,
and convertible
preferred stock
of non-U.S.
corporations. None None None 65-100%
U.S. Corporate
Debt Obligations.
Debt instruments
issued by
U.S. public
corporations.
They may be
secured or
unsecured. 20% 35% 35% 35%
U.S. Government
Securities.
Securities issued
or guaranteed
by the U.S.
government,
its agencies, or
instrumentalities.
Some are direct
obligations
of the U.S.
Treasury;
others are
obligations only
of the U.S. agency. 20% 35% 35% 35%
Short-term Debt
Obligations.
Includes bankers'
acceptances,
certificates of
deposit, prime
qualitycommercial
paper, Eurodollar
obligations, cash,
and cash equivalents. 20% 35% 35% 35%
Foreign Debt
Securities.
Debt securities
of foreign
issuers including
international
bonds traded in
the United States
and abroad. None None None 20%
Warrants. The right
to purchase an
equity security
at a stated
price for a
limited
period of time. 10% 10% 10% 10%
When-Issued and
Delayed-Delivery
Securities.
A security
that is
purchased for
delivery at a
later time. 33 1/3% 33 1/3% 33 1/3% 33 1/3%
The market
value may change
before the
delivery date,
and the value
is included
in the NAV
of the Fund.
<F3>Receipts.
Separately
traded interest
or principal
components of
U.S. Government
securities. 20% 20% 20% 20%
Repurchase
Agreements.
An agreement
to sell
and repurchase
a security at
a stated
price plus
interest.
The seller's
obligation
to the Fund
is secured
by collateral. 20% 35% 35% 35%
Commercial Paper.
Short-term
obligations
issued by
corporations
and financial
institutions.
The Funds only
use prime
quality
commercial
paper. 20% 35% 35% 35%
Illiquid
Securities.
Investments
that cannot
be readily
sold within
seven days
in the usual
course of
business at
approximately
the price
at which a
Fund values
them, including
forward
contracts<F2>
to hedge
currency risk. 15% of net 15% of net 15% of net 15% of net
assets assets assets assets<F2>
Restricted
Securities.
Securities
that are not
registered
under federal
securities
laws but that
may be traded
among
qualified
institutional
investors and
the Fund.
Some of these
securities
may be illiquid. 20% 35% 35% 35%
<F3>Futures
Contracts
and Options
on Futures
Contracts.
Contracts
involving
the right or
obligation to
deliver or
receive
assets or
money
depending on
the performance
of one
or more assets
or a securities
index. To reduce
the effects of
leverage,
liquid assets
equal to
the contract
commitment
are set aside
to cover the
commitment
limit. The Funds
may invest in
futures in 5% in margins 5% in margins 5% in margins 5% in margins
an effort to hedge and premiums; and premiums; and premiums; and premiums;
against market
risk. 33 1/3% 33 1/3% 33 1/3% 33 1/3%
subject subject subject subject
to futures to futures to futures to futures
or options or options or options or options
on futures on futures on futures on futures
<F3>Options.
A Fund may
write, or sell,
a covered
call option
on a security
that it owns
or on an
index to
hedge its
position or
generate
additional
income.
The Special
Growth
Fund may
purchase
call options,
purchase put
options,
write put
options,
or write
uncovered call
and 5% in call
options for
speculative 25% in 25% in 25% in covered 25% in
investments. covered calls covered calls call options covered calls
and 5% in all
or put options
Borrowing,
Reverse
Repurchase
Agreements.
The borrowing
of money
from banks
(up to 5%
of total
assets) or
through reverse
repurchase
agreements
(up to 33 1/3%
of total assets).
The Funds
will not use
borrowing 5% 5% 5% 5%
to create leverage. 33 1/3% 33 1/3% 33 1/3% 33 1/3%
Securities
Lending.
In order
to generate
additional
income, a
Fund may
lend its
portfolio
securities.
A Fund will
receive
collateral
for the value
of the security
plus any
interest due.
A Fund only
will enter
into loan
arrangements
with
entities that
the Adviser
has determined
are creditworthy. 33 1/3% 33 1/3% 33 1/3% 33 1/3%
% Percentage of total assets.
<FN>
<F1> Assets subject to S&P 500 futures are considered U.S. Equity
investments.
<F2> Only the Balanced Fund and the International Growth Fund may use
forward contracts this way.
<F3> Indicates a "derivative security," whose value is linked to, or
derived from another security, instrument, or index.
</FN>
</TABLE>
- 39 -
<PAGE>
This page is intentionally left blank.
<PAGE>
Bulk Rate
U.S. Postage
PAID
Cleveland, OH
Permit No. 469
VICTORY FUNDS
PRINTED ON RECYCLED PAPER
VF/EQTY-PRO (2/97)
<PAGE>
Rule 497(c)
Registration No. 33-8982
Victory Funds
PROSPECTUS
FUND FOR INCOME
GOVERNMENT MORTGAGE FUND
INTERMEDIATE INCOME FUND
INVESTMENT QUALITY BOND FUND
LIMITED TERM INCOME FUND
800-KEY-FUND(R) or 800-539-3863
March 1, 1997
<PAGE>
THE VICTORY PORTFOLIOS
FUND FOR INCOME
GOVERNMENT MORTGAGE FUND
INTERMEDIATE INCOME FUND
INVESTMENT QUALITY BOND FUND
LIMITED TERM INCOME FUND
800-KEY-FUND(R) 800-539-3863
This prospectus describes the following funds:
Fund for Income
Government Mortgage Fund
Intermediate Income Fund
Investment Quality Bond Fund
Limited Term Income Fund
The five Victory Funds discussed in this prospectus (the Funds) are a part
of The Victory Portfolios (Victory), an open-end investment management
company. The Funds are diversified mutual funds. This prospectus explains
the objectives, policies, risks, and strategies of the Funds. You should
read this prospectus before investing in one of these Funds and keep it
for future reference. A detailed Statement of Additional Information (SAI)
describing each of the Funds is also available for your review. The SAI
has been filed with the Securities and Exchange Commission (SEC), and is
incorporated in this prospectus by reference. If you would like a free
copy of the SAI, please request one by calling us at 800-KEY-FUND.
- 1 -
<PAGE>
TABLE OF CONTENTS
Introduction 4
AN OVERVIEW OF EACH OF THE FUNDS
A fund-by-fund analysis which includes objectives, policies, strategies,
expenses, and financial highlights
Fund for Income 6
Government Mortgage Fund 8
Intermediate Income Fund 10
Investment Quality Bond Fund 12
Limited Term Income Fund 14
Risk Factors 16
Investment Limitations 17
Investment Performance 17
Share Price 18
Dividends, Distributions, and Taxes 18
INVESTING WITH VICTORY 21
How to Purchase Shares 23
How to Exchange Shares 25
How to Redeem Shares 26
Organization and Management of the Funds 27
Additional Information 29
Other Securities and Investment Practices 30
Shares of the Funds are:
Not insured by the FDIC;
Not deposits or other obligations of, or guaranteed by, any KeyBank, any
of its affiliates, or any other bank;
Subject to investment risks, including possible loss of the principal
amount invested.
These securities have not been approved or disapproved by the Securities
and Exchange Commission or any securities regulatory authority of any
state, nor has the Securities and Exchange Commission or any such state
authority passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
- 3 -
<PAGE>
KEY TO FUND INFORMATION
OBJECTIVE AND STRATEGY
The goals and the strategy that a Fund plans to use in pursuing its
investment objective.
RISK FACTORS
The risks that you will assume as an investor in a Fund.
EXPENSES
The costs that you will pay as an investor in a Fund, including sales
charges and ongoing expenses.
FINANCIAL HIGHLIGHTS
A table which shows the historical performance of a Fund by share class.
This table also summarizes previous operating expenses.
Investment Objective and Strategy
Objective
The Fund for Income seeks to provide a high level of current income
consistent with preservation of shareholders' capital.
The Government Mortgage Fund seeks to provide a high level of current
income consistent with safety of principal.
The Intermediate Income Fund seeks to provide a high level of income.
The Investment Quality Bond Fund seeks to provide a high level of income.
The Limited Term Income Fund seeks to provide income consistent with
limited fluctuation of principal.
Strategy
Each of the Funds pursues its objective by investing primarily in debt
securities. However, each of the Funds has unique investment strategies
and its own risk/reward profile. Please review the section about the Fund
in which you are interested in investing and "Other Securities and
Investment Practices" for an overview of the Funds.
Risk Factors
The Funds are not insured by the FDIC. In addition, there are other
potential risks, discussed in the section "Risk Factors."
Who Should Invest
Investors seeking income
Investors seeking higher potential returns than provided by money market
funds
Investors willing to accept the risk of price and dividend fluctuations
Fees and Expenses
All of the Funds in this prospectus offer only Class A shares. If you
purchase Class A shares of a Fund, you may pay a sales charge of up to
4.75% of the offering price, depending on the Fund in which you invest and
the amount you invest. You also will incur expenses for investment
advisory, management, administrative, and shareholder services, all of
which are included in a Fund's expense ratio. See "Choosing a Share
Class."
- 4 -
<PAGE>
Purchases
The minimum initial investment is $500 for most accounts ($250 for
Individual Retirement Accounts) and $25 thereafter. An initial investment
must be accompanied by a Fund's Account Application. Fund shares may be
purchased by check, Automated Clearing House, or wire. See "How to
Purchase Shares."
Redemptions
You can redeem Fund shares by written request or telephone. When the
Transfer Agent receives a redemption request in proper form, a Fund will
redeem the shares and credit your bank account or send the proceeds to the
address designated on your Account Application. See "How to Redeem
Shares."
Dividends/Distributions
Income is accrued daily and is declared and paid monthly. Any net capital
gains realized by a Fund are paid as dividends at least annually. A Fund
can send your dividends directly to you by mail, credit them to your bank
account, reinvest them in the Fund, or invest them in another fund of the
Victory Group. The "Victory Group" includes other funds of The Victory
Portfolios and Key Mutual Funds. You can make this choice when you fill
out an Account Application. See "Dividends, Distributions, and Taxes."
Other Services
Victory offers a number of other services to better serve shareholders
including exchange privileges and automated investment and withdrawal
plans. See "How to Exchange Shares" and "How to Redeem Shares." Our toll-
free fax number is 800-529-2244. You can reach Victory's Telecommunication
Device for the Deaf (TDD) at 800-970-5296.
<TABLE>
General Information about each of the Funds
<CAPTION>
Estimated Annual
Victory Fund Inception Expenses Maximum Newspaper
Date After Waivers Sales Charge Abbreviation<F1>
(as a % of net assets)
<S> <C> <C> <C> <C>
Fund for Income--
Class A 5/8/87 1.00% 2.00% Victory Incm
Government Victory
Mortgage Fund--
Class A 5/18/90 .90% 4.75% Gvt Mtg
Intermediate Income Victory
Fund--Class A 12/10/93 .95% 4.75% IntmInc
Investment Quality Victory
Bond Fund--Class A 12/10/93 1.00% 4.75% InvQulBd
Limited Term Income
Fund--Class A 10/20/89 .86% 2.00% Victory Ltd In
<FN>
<F1> All newspapers do not use the same abbreviation.
</FN>
</TABLE>
The following pages provide you with separate overviews of each Fund.
Please look at the objective, policies, strategies, risks, expenses, and
financial history to determine which Fund will best suit your risk
tolerance and investment needs. You should also review the "Other
Securities and Investment Practices" section for additional information
about the individual securities in which the Funds can invest and the
risks related to these investments.
- 5 -
<PAGE>
FUND FOR INCOME
Investment Objective
The Fund for Income seeks to provide a high level of current income
consistent with preservation of shareholders' capital.
Investment Policies and Strategy
The Fund for Income pursues its investment objective by investing at least
65% of the Fund's total assets in mortgage-related securities rated in the
top two rating categories by an NRSRO.*
Under normal conditions, the Fund for Income primarily invests in:
Mortgage-related securities issued by non-governmental entities
Collateralized mortgage obligations and real estate mortgage investment
conduits
Government mortgage-backed securities
Important Characteristics of the Fund for Income's Investments:
Quality: Mortgage-related securities rated AA or above at the time of
purchase by Standard & Poor's Corp. (S&P), Fitch, Moody's or another
NRSRO, or, if unrated, of comparable quality. For more information on
ratings, see the Appendix to the SAI.
Maturity: The dollar weighted effective average maturity of the Fund for
Income generally will not exceed 10 years. Individual assets held by the
Fund for Income may vary from the average maturity of the Fund. Under
certain market conditions, the Portfolio Manager may go outside these
boundaries.
* An NRSRO is a nationally recognized statistical ratings organization
like S&P, Fitch, or Moody's which assigns credit ratings to securities
based on the borrower's ability to meet its obligation to make principal
and interest payments.
The Fund for Income may invest up to 35% of total assets in short-term
investment-grade corporate securities, commercial paper, obligations
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, and short-term obligations of domestic or foreign
branches of U.S. banks.
The Fund for Income is subject to the risks common to mutual funds that
invest in debt securities: Interest rate risk, credit risk, reinvestment
risk, and inflation risk. It also is subject to the risks common to
mortgage-related securities, like prepayment risk and extension risk.
Please read "Risk Factors" carefully before investing.
Portfolio Management
Robert H. Fernald is the Portfolio Manager of the Fund for Income, a
position he has held since May, 1996. A Portfolio Manager and Director of
Key Asset Management Inc., he has been working in the fixed income markets
for over 20 years.
Fund Expenses
This section will help you understand the costs and expenses you would
pay, directly or indirectly, if you invested in the Fund for Income.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses<F1> Class A Shares
<S> <C>
Maximum Sales Charge Imposed on Purchases 2.00%
(as a percentage of offering price)
Sales Charge Imposed on Reinvested Dividends None
Deferred Sales Charge None
Redemption Fees None
Exchange Fees None
<FN>
<F1> You may be charged additional fees if you purchase, exchange, or
redeem shares through a broker or agent.
</FN>
</TABLE>
The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Fund for
Income. These expenses are charged directly to the Fund for Income.
Expenses include management fees as well as the costs of maintaining
accounts, administering the Fund for Income, providing shareholder
services, and other activities. The expenses shown are estimated based on
historical or projected expenses of the Fund for Income.
<TABLE>
<CAPTION>
Annual Operating Expenses Class A Shares
After expense waivers and reimbursements
(as a percentage of average daily net assets)
<S> <C>
Management Fees<F1> 0%
Other Expenses<F1>,<F2> 1.00%
----
Total Fund Operating Expenses<F1> 1.00%
====
<FN>
<F1> Some of these fees have been voluntarily reduced. Without this waiver, the Management Fee would be .50%, and Total
Fund Operating Expenses would be 1.73%.
<F2> Other Expenses include an estimate of shareholder servicing fees the Fund for Income expects to pay. See
"Organization and Management of the Funds--Shareholder Servicing Plan."
</FN>
</TABLE>
The following example is designed to help you understand the various costs
you will bear, directly or indirectly, as an investor in the Fund for
Income.
Example: You would pay the following expenses on a $1,000 investment in
the Fund for Income, assuming: (1) a 5% annual return, and (2) redemption
at the end of each time period.
1 Year 3 Years 5 Years 10 Years
Class A Shares $30 $51 $74 $140
This example is only an illustration. Actual expenses and returns will
vary.
- 6 -
<PAGE>
Financial Highlights
Fund for Income
The Financial Highlights describe the Fund for Income's returns and
operating expenses over time. This table shows the results of an
investment in one share of the Fund for Income for each of the periods
indicated.
<TABLE>
<CAPTION>
Year Year Period from Year Year
Ended Ended Feb. 1, 1994 Ended Ended
Oct. 31, Oct. 31, to Oct. 31, Jan. 31, Jan. 31,
1996 1995<F4> 1994<F3> 1994<F3> 1993<F3>
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 9.93 $ 9.43 $ 10.14 $ 10.57 $ 10.55
------- ------- ------- -------- -------
Investment Activities
Net investment income 0.68 0.73 0.52 0.80 0.80
Net realized and
unrealized gains
(losses) on investments (0.08) 0.43 (0.71) (0.41) 0.06
------- ------- ------- -------- -------
Total from
Investment Activities 0.60 1.16 (0.19) 0.39 0.86
------- ------- ------- -------- -------
Distributions
Net investment income (0.68) (0.66) (0.51) (0.80) (0.80)
In excess of net
investment income (0.03) -- (0.01) -- --
Net realized gains -- -- -- (0.02) (0.04)
Tax return of capital (0.05) -- -- -- --
------- ------- ------- -------- -------
Total Distributions (0.76) (0.66) (0.52) (0.82) (0.84)
------- ------- ------- -------- -------
Net Asset Value,
End of Period $ 9.77 $ 9.93 $ 9.43 $ 10.14 $ 10.57
======= ======= ======= ======= =======
Total Return (excludes
sales charge) 6.35% 12.75% (1.99%)<F1> 3.75% 8.45%
Ratios/Supplemental Data:
Net Assets, End of Period $20,816 $22,756 $29,358 $46,632 $55,075
Ratio of expenses to
average net assets 1.02% 1.12% 1.12%<F2> 1.13% 1.12%
Ratio of net investment income
to average net assets 7.05% 7.62% 7.21%<F2> 7.65% 7.56%
Ratio of expenses to
average net assets<F5> 1.73% 1.58% 1.26%<F2>
Ratio of net investment income
to average net assets<F5> 6.34% 7.16% 7.07%<F2>
Portfolio turnover 25% 35% 18% 47% 23%
<CAPTION>
Year Year Year Year Year
Ended Ended Ended Ended Ended
Jan. 31, Jan. 31, Jan. 31, Jan. 31, Jan. 31,
1992<F3> 1991<F3> 1990<F3> 1989<F3> 1988<F3><F6>
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 10.19 $ 9.90 $ 9.73 $ 9.95 $10.00
------- ------- ------- ------- ------
Investment Activities
Net investment income 0.85 0.91 0.93 0.94 0.66
Net realized and
unrealized gains
(losses) on investments 0.36 0.29 0.17 (0.22) (0.05)
------- ------- ------- ------- ------
Total from
Investment Activities 1.21 1.20 1.10 0.72 0.61
------- ------- ------- ------- ------
Distributions
Net investment income (0.85) (0.91) (0.93) (0.94) (0.66)
In excess of net
investment income -- -- -- -- --
Net realized gains -- -- -- -- --
Tax return of capital -- -- -- -- --
Total Distributions (0.85) (0.91) (0.93) (0.94) (0.66)
------- ------- ------- ------- ------
Net Asset Value,
End of Period $ 10.55 $ 10.19 $ 9.90 $ 9.73 $ 9.95
======= ======= ======= ======= ======
Total Return (excludes
sales charge) 12.34% 12.75% 11.77% 7.58% --
Ratios/Supplemental Data:
Net Assets, End of Period $58,055 $44,097 $35,788 $22,664 $6,221
Ratio of expenses to
average net assets 0.92% 0.50% 0.29% 0.22% 0.12%
Ratio of net investment income
to average net assets 8.18% 9.15% 9.34% 9.53% 6.72%
Ratio of expenses to
average net assets<F5>
Ratio of net investment income
to average net assets<F5>
Portfolio turnover 24% 5% 5% 15% 20%
<FN>
<F1> Not annualized.
<F2> Annualized.
<F3> Audited by other auditors.
<F4> Effective June 5, 1995, the Victory Fund for Income Portfolio became the Fund For Income.
<F5> During the period, certain fees were voluntarily reduced. If such voluntary fee reductions had not occurred, the
ratios would have been as indicated.
<F6> Information for the year ended January 31, 1988 is presented from May 8, 1987, the date registration became effective
under the Investment Company Act of 1940, as amended.
</FN>
</TABLE>
The financial highlights were audited by Coopers & Lybrand L.L.P. for the
1995 and 1996 periods, and by other auditors for all earlier periods. This
information should be read in conjunction with the Fund for Income's most
recent Annual Report to shareholders, which is incorporated by reference
in the SAI. If you would like a copy of the Annual Report, write or call
us at 800-KEY-FUND.
- 7 -
<PAGE>
GOVERNMENT MORTGAGE FUND
Investment Objective
The Government Mortgage Fund seeks to provide a high level of current
income consistent with safety of principal.
Investment Policies and Strategy
The Government Mortgage Fund pursues its investment objective by investing
exclusively in obligations issued or guaranteed by the U.S. Government or
its agencies or instrumentalities. Under normal market conditions, at
least 80% of the total assets of the Government Mortgage Fund will be
invested in U.S. Government mortgage-backed securities.
In addition to the above securities, the Government Mortgage Fund may also
invest in the following:
Receipts, and STRIPS,* which are sold as zero coupon securities
Collateralized mortgage obligations
Futures contracts and put and call options on futures contracts
Treasury notes and agencies
IOs and POs
Important Characteristics of the Government Mortgage Fund's Investments:
Quality: Securities purchased by the Government Mortgage Fund are
considered to be of the highest quality. For more information on ratings,
see the Appendix to the SAI.
Maturity: The dollar-weighted effective average maturity of the Government
Mortgage Fund generally will not exceed 10 years. Under certain market
conditions, the Portfolio Manager may go outside these boundaries.
* Separately Traded Registered Interest and Principal Securities (STRIPS),
Interest Only (IOs), and Principal Only (POs) are derivatives of bonds.
Securities dealers separate the interest or principal payments from a bond
or mortgage-backed security and sell only that portion as one of the above
securities.
Up to 20% of the Government Mortgage Fund's total assets may be invested
in short-term notes, commercial paper, and short-term obligations of
domestic and foreign branches of U.S. banks.
The Government Mortgage Fund is subject to the risks common to mutual
funds that invest in debt securities: interest rate risk, credit risk,
reinvestment risk, and inflation risk. It also is subject to the risks
common to mortgage-related securities, like prepayment risk and extension
risk. Please read "Risk Factors" carefully before investing.
Portfolio Management
Robert H. Fernald is the Portfolio Manager of the Government Mortgage
Fund, a position he has held since May, 1996. A Portfolio Manager and
Director of Key Asset Management Inc., he has been working in the fixed
income markets for over 20 years.
Fund Expenses
This section will help you understand the costs and expenses you would
pay, directly or indirectly, if you invested in the Government Mortgage
Fund.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses<F1> Class A Shares
<S> <C>
Maximum Sales Charge Imposed on Purchases 4.75%
(as a percentage of offering price)
Sales Charge Imposed on Reinvested Dividends None
Deferred Sales Charge None
Redemption Fees None
Exchange Fees None
<FN>
<F1> You may be charged additional fees if you purchase, exchange, or
redeem shares through a broker or agent.
</FN>
</TABLE>
The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Government
Mortgage Fund. These expenses are charged directly to the Government
Mortgage Fund. Expenses include management fees as well as the costs of
maintaining accounts, administering the Government Mortgage Fund,
providing shareholder services, and other activities. The expenses shown
are estimated based on historical or projected expenses of the Government
Mortgage Fund.
<TABLE>
<CAPTION>
Annual Fund Operating Expenses Class A Shares
<S> <C>
(as a percentage of average daily net assets)
Management Fees .50%
Other Expenses<F1> .40%
---
Total Fund Operating Expenses .90%
===
<FN>
<F1> Other Expenses includes an estimate of shareholder servicing fees the Government Mortgage Fund expects to pay. See
"Organization and Management of the Funds--Shareholder Servicing Plan."
</FN>
</TABLE>
The following example is designed to help you understand the various costs
you will bear, directly or indirectly, as an investor in the Government
Mortgage Fund.
Example: You would pay the following expenses on a $1,000 investment in
the Government Mortgage Fund, assuming: (1) a 5% annual return and (2)
redemption at the end of each time period.
- 8 -
<PAGE>
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A Shares $56 $75 $95 $153
</TABLE>
This example is only an illustration. Actual expenses and returns will
vary.
Financial Highlights
Government Mortgage Fund
The Financial Highlights describe the Government Mortgage Fund's returns
and operating expenses over time. The following table shows the results of
an investment in one share of the Government Mortgage Fund for each of the
periods indicated.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended
Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1996 1995 1994 1993
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.86 $ 10.33 $ 11.36 $ 11.07
-------- -------- -------- --------
Investment Activities
Net investment income 0.70 0.72 0.68 0.66
Net realized and unrealized gains
(losses) on investments (0.12) 0.62 (1.02) 0.32
-------- -------- -------- --------
Total from Investment Activities 0.58 1.34 (0.34) 0.98
-------- -------- -------- --------
Distributions
Net investment income (0.67) (0.71) (0.67) (0.66)
Net realized gains -- -- (0.02) (0.03)
In excess of net realized gains -- (0.08) -- --
Tax return of capital (0.01) (0.02) -- --
-------- -------- -------- --------
Total Distributions (0.68) (0.81) (0.69) (0.69)
-------- -------- -------- --------
Net Asset Value, End of Period $ 10.76 $ 10.86 $ 10.33 $ 11.36
======== ======== ======== ========
Total Return (excludes sales charge) 5.54% 13.55% (3.01%) 9.05%
Ratios/Supplemental Data:
Net Assets, End of Period (000) $125,992 $136,103 $148,168 $132,738
Ratio of expenses to average net assets 0.89% 0.77% 0.76% 0.75%
Ratio of net investment income to
average net assets 6.46% 6.81% 6.38% 5.92%
Ratio of expenses to average net assets<F4> 0.90% 0.79% 0.96% 0.76%
Ratio of net investment income to
average net assets<F4> 6.45% 6.80% 6.18% 5.92%
Portfolio turnover 127% 59% 132% 50%
<CAPTION>
May 18,
Year Ended Year Ended 1990 to
Oct. 31, Oct. 31, Oct. 31,
1992 1991 1990<F1>
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.73 $ 10.18 $ 10.00
------- ------- -------
Investment Activities
Net investment income 0.74 0.80 0.35
Net realized and unrealized gains
(losses) on investments 0.34 0.55 0.18
------- ------- -------
Total from Investment Activities 1.08 1.35 0.53
------- ------- -------
Distributions
Net investment income (0.74) (0.80) (0.35)
Net realized gains --
In excess of net realized gains --
Tax return of capital --
------- ------- -------
Total Distributions (0.74) (0.80) (0.35)
------- ------- -------
Net Asset Value, End of Period $ 11.07 $ 10.73 $ 10.18
======= ======= =======
Total Return (excludes sales charge) 10.34% 13.77% 5.37%<F3>
Ratios/Supplemental Data:
Net Assets, End of Period (000) $73,660 $42,616 $31,972
Ratio of expenses to average net assets 0.77% 0.78% 0.82%<F2>
Ratio of net investment income to
average net assets .82% 7.68% 7.98%<F2>
Ratio of expenses to average net assets<F4>
Ratio of net investment income to
average net assets<F4>
Portfolio turnover 11% 21%
<FN>
<F1> Period from commencement of operations.
<F2> Annualized.
<F3> Not annualized.
<F4> During the period, certain fees were voluntarily waived or the expenses reimbursed. If such voluntary waivers or
reimbursements had not occurred, the ratios would have been as indicated.
</FN>
</TABLE>
The financial highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Government Mortgage
Fund's most recent Annual Report to shareholders, which is incorporated by
reference in the SAI. If you would like a copy of the Annual Report, write
or call us at 800-KEY-FUND.
- 9 -
<PAGE>
INTERMEDIATE INCOME FUND
Investment Objective
The Intermediate Income Fund seeks to provide a high level of income.
Investment Policies and Strategy
The Intermediate Income Fund pursues its investment objective by investing
in debt securities. Some of these debt securities are issued by
corporations, the U.S. Government and its agencies and instrumentalities.
"Investment grade" obligations are rated within the top four rating
categories by an NRSRO.
Under normal conditions, the Intermediate Income Fund will invest at least
65% of its total assets in:
Investment grade corporate securities, including bonds, debentures, and
notes, asset-backed securities, convertible, or exchangeable debt
securities
Mortgage-related securities
First mortgage loans and participation certificates in pools of mortgages
issued or guaranteed by the U.S. Government
Important Characteristics of the Intermediate Income Fund's Investments:
Quality: Investment grade corporate securities rated in the top four
rating categories at the time of purchase by S&P, Fitch, Moody's or
another NRSRO,* or if unrated, of comparable quality.
Maturity: The dollar-weighted effective average maturity of the
Intermediate Income Fund generally will range from 3 to 10 years. Under
certain market conditions, the Portfolio Manager may go outside these
boundaries.
* An NRSRO is a nationally recognized statistical ratings organization
like Standard & Poor's Corp. (S&P), Fitch, or Moody's which assigns credit
ratings to securities based on the borrower's ability to meet its
obligation to make principal and interest payments.
Up to 35% of the Intermediate Income Fund's total assets may be invested
in high-quality, short-term debt. In addition, up to 20% of total assets
may be invested in preferred and convertible preferred stock and
separately traded interest and principal component parts of U.S. Treasury
obligations.
The Intermediate Income Fund also is permitted to invest in international
bonds, foreign securities, and future contracts and options related to
these securities. Some of the securities in which the Intermediate Income
Fund invests may have warrants or options attached. These investments tend
to be riskier than some of the other investments of the Intermediate
Income Fund. The Intermediate Income Fund is subject to the risks common
to mutual funds that invest in debt securities: interest rate risk, credit
risk, reinvestment risk, inflation risk, and foreign issuer risk. Please
read "Risk Factors" carefully before investing.
Portfolio Management
David M. Baccile is the Portfolio Manager of the Intermediate Income Fund,
a position he has held since March, 1996. A Portfolio Manager of Key Asset
Management Inc., he has been in the investment advisory business since
1993.
Fund Expenses
This section will help you understand the costs and expenses you would
pay, directly or indirectly, if you invested in the Intermediate Income
Fund.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses<F1> Class A Shares
<S> <C>
Maximum Sales Charge Imposed on Purchases 4.75%
(as a percentage of offering price)
Sales Charge Imposed on Reinvested Dividends None
Deferred Sales Charge None
Redemption Fees None
Exchange Fees None
<FN>
<F1> You may be charged additional fees if you purchase, exchange, or redeem shares through a broker or agent.
</FN>
</TABLE>
The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the
Intermediate Income Fund. These expenses are charged directly to the
Intermediate Income Fund. Expenses include management fees as well as the
costs of maintaining accounts, administering the Intermediate Income Fund,
providing shareholder services, and other activities. The expenses shown
are estimated based on historical or projected expenses of the
Intermediate Income Fund.
<TABLE>
<CAPTION>
Annual Operating Expenses Class A Shares
After expense waivers and reimbursements
<S> <C>
(as a percentage of average daily net assets)
Management Fees<F1> .62%
Other Expenses<F2> .33%
---
Total Fund Operating Expenses<F1> .95%
===
<FN>
<F1> These fees have been voluntarily reduced. Without this waiver, the Management Fee would be .75% and Total Fund
Operating Expenses as a percentage of average daily net assets would be 1.08%.
<F2> These amounts include an estimate of the shareholder servicing fees the Intermediate Income Fund expects to pay. See
"Organization and Management of the Fund--Shareholder Servicing Plan."
</FN>
</TABLE>
The following example is designed to help you understand the various costs
you will bear, directly or indirectly, as an investor in the Intermediate
Income Fund.
Example: You would pay the following expenses on a $1,000 investment,
assuming: (1) a 5% annual return and (2) redemption at the end of each
time period.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A Shares $57 $76 $98 $159
</TABLE>
- 10 -
<PAGE>
This example is only an illustration. Actual expenses and returns will
vary.
Financial Highlights
Intermediate Income Fund
The Financial Highlights describe the Intermediate Income Fund's returns
and operating expenses over time. The following table shows the results of
an investment in one share of the Intermediate Income Fund for each of the
periods indicated.
<TABLE>
<CAPTION>
Year Ended Year Ended December 10, 1993
October 31, October 31, to October 31,
1996 1995 1994<F1>
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 9.69 $ 9.25 $ 10.00
-------- -------- --------
Investment Activities
Net investment income 0.56 0.60 0.52
Net realized and unrealized gains
(losses) from investments (0.13) 0.44 (0.76)
-------- -------- --------
Total from Investment Activities 0.43 1.04 (0.24)
-------- -------- --------
Distributions
Net investment income (0.56) (0.60) (0.51)
In excess of net investment income -- -- --
Tax return on capital -- -- --
-------- -------- --------
Total Distributions (0.56) (0.60) (0.51)
-------- -------- --------
Net Asset Value, End of Period $ 9.56 $ 9.69 $ 9.25
======== ======== ========
Total Return (excludes sales charge) 4.56% 11.65% (2.48%)<F2>
Net Assets, End of Period (000) $272,087 $163,281 $112,923
Ratios/Supplemental Data:
Ratio of expenses to average net assets 0.94% 0.82% 0.79%<F3>
Ratio of net investment income
to average net assets 5.81% 6.32% 6.23%<F3>
Ratio of expenses to average net assets<F4> 1.11% 1.06% 1.25%<F3>
Ratio of net investment income
to average net assets<F4> 5.64% 6.08% 5.77%<F3>
Portfolio turnover 164% 98% 55%
<FN>
<F1> Period from commencement of operations.
<F2> Not annualized.
<F3> Annualized.
<F4> During the period, certain fees were voluntarily reduced. If such voluntary fee reductions had not occurred, the
ratios would have been as indicated.
</FN>
</TABLE>
The financial highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Intermediate Income
Fund's most recent Annual Report to shareholders, which is incorporated by
reference in the SAI. If you would like a copy of the Annual Report, write
or call us at 800-KEY-FUND.
- 11 -
<PAGE>
INVESTMENT QUALITY BOND FUND
Investment Objective
The Investment Quality Bond Fund seeks to provide a high level of income.
Investment Policies and Strategy
The Investment Quality Bond Fund pursues its investment objective by
investing primarily in investment-grade bonds issued by corporations and
the U.S. Government and its agencies or instrumentalities. "Investment
grade" obligations are rated within the top four rating categories by an
NRSRO.
Under normal conditions, the Investment Quality Bond Fund will invest at
least 80% of its total assets in the following securities:
Investment grade corporate securities, including asset-backed securities
and convertible and exchangeable debt securities
Mortgage-related securities issued by non-governmental entities
Obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities
Government mortgage-backed securities
Important Characteristics of the Investment Quality Bond Fund's
Investments:
Quality: All instruments will be rated, at the time of purchase, within
the four highest rating categories by S&P, Fitch, Moody's, or another
NRSRO,* or, if unrated, be of comparable quality. For more information on
ratings, see the Appendix to the SAI.
Maturity: The dollar-weighted effective average maturity of the Investment
Quality Bond Fund will range from 5 to 15 years. Individual assets held by
the Investment Quality Bond Fund may vary from the average maturity of the
Fund. Under certain market conditions, the Portfolio Manager may go
outside these boundaries.
* An NRSRO is a nationally recognized statistical ratings organization
like Standard & Poor's Corp. (S&P), Fitch, or Moody's which assigns credit
ratings to securities based on the borrower's ability to meet its
obligation to make principal and interest payments.
Up to 20% of the Investment Quality Bond Fund's total assets may be
invested in preferred and convertible preferred stocks, and separately
traded interest and principal component parts of U.S. Treasury
obligations. Up to 35% of the Fund's total assets may be invested in high
quality, short-term debt.
The Investment Quality Bond Fund also is permitted to invest in
international bonds, foreign securities, futures contracts and options
related to these securities. These investments tend to be riskier than
some of the other investments of the Investment Quality Bond Fund. The
Investment Quality Bond Fund is subject to the risks common to mutual
funds that invest in debt securities: interest rate risk, credit risk,
reinvestment risk, inflation risk and foreign issuer risk. Please read
"Risk Factors" carefully before investing.
Portfolio Management
Richard T. Heine is the Portfolio Manager of the Investment Quality Bond
Fund, a position he has held since its inception in 1993. A Portfolio
Manager and Director with Key Asset Management Inc., he has been in the
investment advisory business since 1977.
Fund Expenses
This section will help you understand the costs and expenses you would
pay, directly or indirectly, if you invested in the Investment Quality
Bond Fund.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses<F1> Class A Shares
<S> <C>
Maximum Sales Charge Imposed on Purchases 4.75%
(as a percentage of the offering price)
Sales Charge Imposed on Reinvested Dividends None
Deferred Sales Charge None
Redemption Fees None
Exchange Fees None
<FN>
<F1> You may be charged additional fees if you purchase, exchange, or redeem shares through a broker or agent.
</FN>
</TABLE>
The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Investment
Quality Bond Fund. These expenses are charged directly to the Investment
Quality Bond Fund. Expenses include management fees as well as the costs
of maintaining accounts, administering the Investment Quality Bond Fund,
providing shareholder services, and other activities. The expenses shown
are estimated based on historical or projected expenses of the Investment
Quality Bond Fund.
<TABLE>
<CAPTION>
Annual Fund Operating Expenses Class A Shares
After expense waivers and reimbursements
<S> <C>
(as a percentage of average daily net assets)
Management Fees<F1> .62%
Other Expenses<F2> .38%
---
Total Fund Operating Expenses<F1> 1.00%
====
<FN>
<F1> These fees have been voluntarily reduced. Without this waiver, the Management Fee would be .75% and Total Fund
Operating Expenses as a percentage of average daily net assets would be 1.13%.
<F2> These amounts include an estimate of the shareholder servicing fees the Investment Quality Bond Fund expects to pay
(see "Organization and Management of the Fund--Shareholder Servicing Plan.")
</FN>
</TABLE>
The following example is designed to help you understand the various costs
you will bear, directly or indirectly, as an investor in the Investment
Quality Bond Fund.
Example: You would pay the following expenses on a $1,000 investment in
the Investment Quality Bond Fund, assuming: (1) a 5% annual return and (2)
redemption at the end of each time period.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A Shares $57 $78 $100 $164
</TABLE>
This example is only an illustration. Actual expenses and returns will
vary.
- 12 -
<PAGE>
Financial Highlights
Investment Quality Bond Fund
The Financial Highlights describe the Investment Quality Bond Fund's
returns and operating expenses over time. The following table shows the
results of an investment in one share of the Investment Quality Bond Fund
for each of the periods indicated.
<TABLE>
<CAPTION>
Year Ended Year Ended December 10, 1993
October 31, October 31, to October 31,
1996 1995<F4> 1994<F1>
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 9.76 $ 9.10 $ 10.00
-------- -------- -------
Investment Activities
Net investment income 0.57 0.62 0.53
Net realized and unrealized gains
(losses) on investments (0.13) 0.67 (0.92)
-------- -------- -------
Total from Investment Activities 0.44 1.29 (0.39)
-------- -------- -------
Distributions
Net investment income (0.56) (0.62) (0.51)
In excess of net investment income -- (0.01) --
Tax return of capital (0.01) -- --
-------- -------- -------
Total Distributions (0.57) (0.63) (0.51)
-------- -------- -------
Net Asset Value, End of Period $ 9.63 $ 9.76 $ 9.10
======== ======== =======
Total Return (excludes sales charge) 4.65% 14.63% (3.92%)<F2>
Ratios/Supplemental Data:
Net Assets, End of Period (000) $150,807 $125,248 $94,685
Ratio of expenses to average net assets 1.01% 0.88% 0.79%<F3>
Ratio of net investment income
to average net assets 5.99% 6.59% 6.33%<F3>
Ratio of expenses to average net assets<F5> 1.14% 1.10% 1.25%<F3>
Ratio of net investment income
to average net assets<F5> 5.86% 6.37% 5.87%<F3>
Portfolio turnover 182% 160% 90%
<FN>
<F1> Period from commencement of operations.
<F2> Not annualized.
<F3> Annualized.
<F4> Effective June 5, 1995, the Victory Corporate Bond Portfolio merged into the Investment Quality Bond Fund. Financial
highlights for the periods prior to June 5, 1995 represent the Investment Quality Bond Fund.
<F5> During the period, certain fees were voluntarily reduced. If such voluntary fee reductions had not occurred, the
ratios would have been as indicated.
</FN>
</TABLE>
The financial highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Investment Quality Bond
Fund's most recent Annual Report to shareholders, which is incorporated by
reference in the SAI. If you would like a copy of the Annual Report, write
or call us at 800-KEY-FUND.
- 13 -
<PAGE>
LIMITED TERM INCOME FUND
Investment Objective
The Limited Term Income Fund seeks to provide income consistent with
limited fluctuation of principal.
Investment Policies and Strategy
The Limited Term Income Fund pursues its investment objective by investing
in a portfolio of high grade, fixed income securities with a dollar-
weighted average maturity of one to five years, based on remaining
maturities.
Under normal conditions, the Limited Term Income Fund primarily invests in:
Investment-grade corporate securities, including asset-backed securities
and convertible and exchangeable debt securities
Obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities
Mortgage-backed securities issued by government agencies and non-
governmental entities
Commercial Paper
Important Characteristics of the Limited Term Income Fund's Investments:
Quality: The Limited Term Income Fund will only invest in high-grade debt
securities rated in one of the top three rating categories at the time of
purchase by S&P, Fitch, Moody's, or another NRSRO,* or if unrated, of
comparable quality. For more information on ratings, see the Appendix to
the SAI.
Maturity: The dollar-weighted effective average maturity of the Limited
Term Income Fund will generally range from one to five years. Under
certain market conditions, the Portfolio Manager may go outside these
boundaries.
* An NRSRO is a nationally recognized statistical ratings organization
like Standard & Poor's Corp. (S&P), Fitch, or Moody's which assigns credit
ratings to securities based on the borrower's ability to meet its
obligation to make principal and interest payments.
Up to 20% of the Limited Term Income Fund's total assets may be invested
in preferred and convertible preferred stock, and separately traded
interest and principal component parts of U.S. Treasury obligations.
The Limited Term Income Fund is also permitted to invest in international
bonds, foreign securities, futures contracts, separately traded interest
and principal component parts of U.S. Treasury obligations. Some of the
securities in which the Limited Term Income Fund invests may have warrants
or options attached. These investments tend to be riskier than some of the
other investments of the Limited Term Income Fund. The Limited Term Income
Fund is subject to the risks common to mutual funds that invest in debt
securities: interest rate risk, credit risk, reinvestment risk, inflation
risk, and foreign issuer risk. Please read "Risk Factors" carefully before
investing.
Portfolio Management
Robert H. Fernald is the Portfolio Manager of the Limited Term Income
Fund, a position he has held since January, 1995. A Portfolio Manager and
Director of Key Asset Management Inc., he has been working in the fixed
income markets for over 20 years.
Fund Expenses
This section will help you understand the costs and expense you would pay,
directly or indirectly, if you invested in the Limited Term Income Fund.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses<F1> Class A Shares
<S> <C>
Maximum Sales Charge Imposed on Purchases 2.00%
(as a percentage of offering price)
Sales Charge Imposed on Reinvested Dividends None
Deferred Sales Charge None
Redemption Fees None
Exchange Fees None
<FN>
<F1> You may be charged additional fees if you purchase, exchange, or redeem shares through a broker or agent.
</FN>
</TABLE>
The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Limited
Term Income Fund. These expenses are charged directly to the Limited Term
Income Fund. Expenses include management fees as well as the costs of
maintaining accounts, administering the Limited Term Income Fund,
providing shareholder services, and other activities. The expenses shown
are estimated based on historical or projected expenses of the Limited
Term Income Fund.
<TABLE>
<CAPTION>
Annual Fund Operating Expenses Class A Shares
<S> <C>
(as a percentage of average daily net assets)
Management Fees .50%
Other Expenses<F1> .36%
---
Total Fund Operating Expenses .86%
===
<FN>
<F1> Other Expenses include an estimate of the shareholder servicing fees the Limited Term Income Fund expects to pay. See
"Organization and Management of the Funds--Shareholder Servicing Plan."
</FN>
</TABLE>
The following example is designed to help you understand the various costs
you will bear, directly or indirectly, as an investor in the Limited Term
Income Fund.
Example: You would pay the following expenses on a $1,000 investment in
the Limited Term Income Fund, assuming: (1) a 5% annual return and (2)
redemption at the end of each time period.
<PAGE>
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A Shares $29 $47 $67 $124
</TABLE>
This example is only an illustration. Actual expenses and returns will
vary.
- 14 -
<PAGE>
Financial Highlights
Limited Term Income Fund
The Financial Highlights describe the Limited Term Income Fund's returns
and operating expenses over time. The following table shows the results of
an investment in one share of the Limited Term Income Fund for each of the
periods indicated.
<TABLE>
<CAPTION>
Year Year Year Year
Ended Ended Ended Ended
Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1996 1995<F4> 1994 1993
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 10.15 $ 9.88 $ 10.53 $ 10.45
------- -------- ------- -------
Investment Activities
Net investment income 0.63 0.57 0.54 0.57
Net realized and
unrealized gains(losses)
from investments (0.14) 0.27 (0.61) 0.08
------- -------- ------- -------
Total from
Investment Activities 0.49 0.84 (0.07) 0.65
------- -------- ------- -------
Distributions
Net investment income (0.62) (0.57) (0.54) (0.57)
In excess of net
investment income (0.01) -- -- --
Net realized gains -- -- (0.04) --
------- -------- ------- -------
Total Distributions (0.63) (0.57) (0.58) (0.57)
------- -------- ------- -------
Net Asset Value, End of Period $ 10.01 $ 10.15 $ 9.88 $ 10.53
======= ======= ======= =======
Total Return
(excludes sales charge) 4.94% 8.77% (0.66%) 6.39%
Ratios/Supplemental Data:
Net Assets,
End of Period (000) $90,019 $172,002 $79,150 $81,771
Ratio of expenses to
average net assets 0.86% 0.78% 0.79% 0.77%
Ratio of net investment income
to average net assets 5.90% 5.77% 5.29% 5.49%
Ratio of expenses to average
net assets<F5> 0.89% 0.79% 0.97% 0.78%
Ratio of net investment income
to average net assets<F5> 5.87% 5.76% 5.10% 5.48%
Portfolio turnover 221% 97% 41% 50%
<CAPTION>
Year Year Year Year
Ended Ended Ended Ended
Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1992 1991 1990 1989<F1>
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 10.33 $ 10.02 $ 10.04 $ 10.00
------- ------- ------- -------
Investment Activities
Net investment income 0.64 0.73 0.76 0.02
Net realized and
unrealized gains(losses)
from investments 0.13 0.31 (0.01) 0.02
------- ------- ------- -------
Total from
Investment Activities 0.77 1.04 0.75 0.04
------- ------- ------- -------
Distributions
Net investment income (0.64) (0.73) (0.77) --
In excess of net
investment income -- -- -- --
Net realized gains (0.01) -- -- --
------- ------- ------- -------
Total Distributions (0.65) (0.73) (0.77) --
------- ------- ------- -------
Net Asset Value, End of Period $ 10.45 $ 10.33 $ 10.02 $ 10.04
======= ======= ======= =======
Total Return
(excludes sales charge) 7.77% 10.82% 7.75% 0.40%<F3>
Ratios/Supplemental Data:
Net Assets,
End of Period (000) $55,565 $43,763 $31,303 $29,834
Ratio of expenses to
average net assets 0.78% 0.80% 0.82% 0.64%<F2>
Ratio of net investment income
to average net assets 6.18% 7.20% 7.63% 7.56%<F2>
Ratio of expenses to average
net assets<F5>
Ratio of net investment income
to average net assets<F5>
Portfolio turnover 15% 10%
<FN>
<F1> Period from commencement of operations.
<F2> Annualized.
<F3> Not annualized.
<F4> Effective June 5, 1995, the Victory Short-Term Government Income Portfolio merged into the Limited Term Income Fund.
Financial highlights for the periods prior to June 5, 1995 represent the Limited Term Income Fund.
<F5> During the period, certain fees were voluntarily reduced. If such voluntary fee reductions had not occurred, the
ratios would have been as indicated.
</FN>
</TABLE>
The financial highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Limited Term Income
Fund's most recent Annual Report to shareholders, which is incorporated by
reference in the SAI. If you would like a copy of the Annual Report, write
or call us at 800-KEY-FUND.
- 15 -
<PAGE>
Risk Factors
It is important to keep in mind one basic principle of investing: the
greater the risk, the greater the potential reward. The reverse is also
generally true: the lower the risk, the lower the potential reward.
This prospectus describes some of the risks that you may assume as an
investor in the Funds. By matching your investment objective with a
comfortable level of risk, you can create your own customized investment
plan. Some limitations on the Funds' investments are described in the
section that follows. "Other Securities and Investment Practices" at the
end of this prospectus provides additional information on the securities
mentioned in the overview of each of the Funds. As with any mutual fund,
there is no guarantee that a Fund will earn income or show a positive
total return over time. A Fund's price, yield, and total return will
fluctuate. You may lose money if a Fund's investments do not perform well.
The following risks are common to all mutual funds:
Market risk is the risk that the market value of a security will
fluctuate, depending on the supply and demand for that type of security.
As a result of this fluctuation, a security may be worth more or less than
the price a Fund originally paid for it, or less than the security was
worth at an earlier time. Market risk may affect a single issuer, an
industry, a sector of the economy, or the entire market, and is common to
all investments.
Manager risk is the chance that a Fund's Portfolio Manager may use a
strategy that does not produce the intended result.
The following risks are common to mutual funds that invest in debt
securities:
Interest rate risk. The value of a debt security typically changes in the
opposite direction from a change in interest rates. Therefore, when
interest rates go up, the value of a fixed-rate security typically goes
down. When interest rates go down, the value of these securities typically
goes up. Generally, the market values of securities with longer maturities
are more sensitive to changes in interest rates.
Inflation risk is the risk that inflation will erode the purchasing power
of the cash flows generated by debt securities held by a Fund. Fixed-rate
debt securities are more susceptible to this risk than floating-rate debt
securities.
Reinvestment risk is the risk that when interest income is reinvested,
interest rates will have declined so that income must be reinvested at a
lower interest rate. Generally, interest rate risk and reinvestment risk
have offsetting effects.
Credit risk (or default risk) is the risk that an issuer of a debt
security will be unable to make timely payments of interest or principal.
Although the Funds generally invest in only high-quality securities, the
interest or principal payments may not be insured or guaranteed on all
securities.
The following risks are common to mutual funds that invest in mortgage-
related securities:
Prepayment risk. Prepayments of principal on mortgage-related securities
affect the average life of a pool of mortgage-related securities. Mortgage
prepayments are affected by the level of interest rates and other factors.
In periods of rising interest rates, the prepayment rate tends to
decrease, lengthening the average life of a pool of mortgage-related
securities. In periods of falling interest rates, the prepayment rate
tends to increase, shortening the average life of a pool of mortgage-
related securities. Prepayment risk is the risk that, because prepayments
generally occur when interest rates are falling, a Fund may have to
reinvest the proceeds from prepayments at lower interest rates.
Extension risk is the risk that anticipated payments on principal may not
occur, typically because of a rise in interest rates, and the expected
maturity of the security will increase.
The following risk is common to mutual funds that invest in foreign
securities:
Foreign issuer risk. Compared to U.S. and Canadian companies, there
generally is less publicly available information about foreign companies
and there may be less governmental regulation and supervision of foreign
stock exchanges, brokers, and listed companies. Foreign issuers may not be
subject to the uniform accounting, auditing, and financial reporting
standards and practices used by domestic issuers. In addition, foreign
securities markets may be less liquid, more volatile, and less subject to
governmental supervision than in the U.S. Investments in foreign countries
could be affected by factors not present in the U.S., including
expropriation, confiscation of property, and difficulties in enforcing
contracts. All of these factors can make foreign investments, especially
those in developing countries, more volatile than U.S. investments.
- 16 -
<PAGE>
Investment Limitations
The SEC and IRS have certain restrictions with which all mutual funds must
comply. The Funds monitor these limitations on an ongoing basis.
To help reduce risk, the Funds have adopted limitations on some investment
policies. These limits involve a Fund's ability to borrow money and the
amount it can invest in various types of securities including illiquid
securities. Certain limitations can be changed only with the approval of
shareholders. Victory's Board of Trustees can change other investment
limitations without shareholder approval. See "Other Securities and
Investment Practices" and the SAI for more information.
Each Fund limits to 25% of total assets the amount it may invest in any
single industry (other than U.S. Government obligations and U.S. banks).
Each Fund limits its borrowing to 33 1/3% of total assets. Borrowing may
be in the form of selling a security and agreeing to repurchase that
security later at a higher price.
Diversification Requirements
SEC Requirement: Each Fund is "diversified" according to certain federal
securities provisions regarding the diversification of its assets.
Generally, under these provisions, a Fund must invest at least 75% of its
total assets so that no more than 5% of its total assets are invested in
the securities of any one issuer.
IRS Requirement: Each Fund also intends to comply with certain federal tax
requirements regarding the diversification of its assets, which generally
are less restrictive than the federal requirements. These diversification
requirements are discussed in the SAI.
Investment Performance
Past performance does not guarantee future results. You may obtain the
current 30-day yield by calling 800-KEY-FUND. Our Shareholder Servicing
representatives are available from 8:00 a.m. to 7:00 p.m. Eastern Time
Monday through Friday.
Victory may advertise the performance of a Fund by comparing it to other
mutual funds with similar objectives and policies. Performance information
may also appear in various publications. Any fees charged by Investment
Professionals may not be reflected in these performance calculations.
Performance information is contained in the annual and semi-annual
reports. You may obtain a copy free of charge by calling 800-KEY-FUND.
The "30-day yield" is an "annualized" figure--the amount you would earn if
you stayed in a Fund for a year and the Fund continued to earn the same
net interest income throughout that year. To calculate 30-day yield, a
Fund's net investment income per share for the most recent 30 days is
divided by the maximum offering price per share for Class A shares.
To calculate "total return," a Fund starts with the total number of shares
that you could buy for $1,000 at the beginning of the period. Then the
Fund adds all dividends and distributions paid as if they were reinvested
in additional shares. (This takes into account the Fund's dividend
distributions, if any.) The total number of shares is multiplied by the
net asset value on the last day of the period and the result is divided by
the initial $1,000 investment to determine the percentage gain or loss.
For periods of more than one year, the cumulative total return is adjusted
to get an average annual total return.
Yield is a measure of net interest income.
Average annual total return is a hypothetical measure of past dividend
income plus capital appreciation. It is the sum of all parts of a Fund's
investment return for periods greater than one year.
Total return is the sum of all parts of a Fund's investment return.
Whenever you see information on a Fund's performance, do not consider the
past performance to be an indication of the performance you could expect
by making an investment in a Fund today. The past is an imperfect guide to
the future. History does not always repeat itself.
- 17 -
<PAGE>
Share Price
The daily NAV is useful to you as a shareholder because the NAV,
multiplied by the number of Fund shares you own, gives you the dollar
amount and value of your investment.
The net asset value (the NAV) for each Fund is calculated each business
day (normally at 4:00 p.m. Eastern time, also known as the "Valuation
Time"). Shares are purchased at the next share price calculated after your
investment instructions are received and accepted. A business day is a day
on which the New York Stock Exchange is open for trading or any day in
which enough trading has occurred in the securities held by a Fund to
materially affect the NAV. If your account is established with an
Investment Professional or a bank, you may not be able to purchase or sell
shares on other holidays when the Federal Reserve Bank of Cleveland is
closed.
The NAV is calculated by adding up the total value of a Fund's investments
and other assets, subtracting its liabilities, and then dividing that
figure by the number of outstanding shares of the Fund:
Total Assets-Liabilities
NAV= -----------------------------
Number of Shares Outstanding
Each Fund's net asset value can be found daily in The Wall Street Journal
and other local newspapers.
Dividends, Distributions, and Taxes
Your choice of distribution should be set up on the original Account
Application. If you would like to change the option you selected, please
call the Transfer Agent at 800-KEY-FUND.
As a shareholder, you are entitled to your share of net income and capital
gains on a Fund's investments. The Funds pass their earnings along to
investors in the form of dividends. Dividend distributions are the net
interest earned on investments after expenses. If a Fund makes a capital
gain distribution, it is paid once a year. As with any investment, you
should consider the tax consequences of an investment in a Fund.
Ordinarily, net income earned on securities owned by a Fund accrues daily
and is declared and paid monthly. Any net capital gains realized by a Fund
are paid as dividends at least annually. Shareholders who earn a dividend
of less than $10.00 will have dividends reinvested automatically into
their accounts.
- 18 -
<PAGE>
Buying a Dividend.
You should check a Fund's distribution schedule before you invest. If you
buy shares of a fund shortly before it makes a distribution, some of your
investment may come back to you as a taxable distribution.
Distributions can be received in one of the following ways:
Reinvestment Option
You can have distributions automatically reinvested in additional shares
of a Fund. If you do not indicate another choice on your Account
Application, you will be assigned this option automatically.
Cash Option
You will be mailed a check no later than 7 days after the pay date.
Income Earned Option
Dividends can be automatically reinvested in the Fund in which you have
invested and your capital gains can be paid in cash; or capital gains can
be reinvested and dividends paid in cash.
Directed Dividends Option
You can have distributions automatically reinvested in shares of another
fund of the Victory Group. The "Victory Group" includes other funds of The
Victory Portfolios and Key Mutual Funds. If distributions from Class A
shares are reinvested in Class A shares of another fund, you will not pay
a sales charge on the reinvested distributions.
Directed Bank Account Option
In most cases, distributions can be automatically transferred to your bank
checking or savings account. Under normal circumstances, dividends will be
transferred within 7 days of the dividend payment date. The bank account
must have a registration identical to that of your Fund account.
- 19 -
<PAGE>
Important Information about Taxes
Each Fund intends to continue to qualify as a regulated investment
company, in which case it will pay no federal income tax on the earnings
it distributes to its shareholders.
Dividends from the Fund's long-term capital gain are taxable as capital
gain; dividends from other sources are generally taxable as ordinary
income.
Dividends are treated in the same manner for federal income tax purposes
whether you receive them in cash or in additional shares. They may also be
subject to state and local taxes.
Dividends from the Fund that are attributable to interest on certain U.S.
Government obligations may be exempt from certain state and local income
taxes. The extent to which ordinary dividends are attributable to U.S.
Government obligations will be provided with tax statements you receive
from a Fund.
Certain dividends paid to you in January will be taxable as if they had
been paid to you the previous December.
Tax statements will be mailed from a Fund every January showing the
amounts and tax status of distributions made to you.
Because your tax treatment depends on your purchase price and tax
position, you should keep your regular account statements for use in
determining your tax.
You should review the more detailed discussion of federal income tax
considerations in the SAI.
THE TAX INFORMATION IN THIS PROSPECTUS IS PROVIDED AS GENERAL INFORMATION.
YOU SHOULD CONSULT YOUR OWN TAX ADVISER ABOUT THE TAX CONSEQUENCES OF AN
INVESTMENT IN A FUND.
- 20 -
<PAGE>
Investing with Victory
All you need to do to get started is to fill out an application.
If you are looking for a convenient way to open an account for yourself or
a minor child, or to add money to an existing account, Victory can help.
The sections that follow will serve as a guide to your investments with
Victory. The following sections will describe how to open an account, how
to access information on your account, and how to purchase, exchange, and
redeem shares of the Fund. We want to make it simple for you to do
business with us. If you have questions about any of this information,
please call your Investment Professional or one of our customer service
representatives at 800-KEY-FUND. They will be happy to assist you.
The Funds in this prospectus offer only Class A shares. Class A shares
have a front-end sales charge of 2.00% to 4.75%, depending upon which Fund
you invest in. Please look at the "Fund Expenses" section of the Fund in
which you are investing to find the sales charge.
For historical expense information, see the "Financial Highlights" in the
Fund overviews earlier in this prospectus.
Calculation of Sales Charges--Class A
Class A shares are sold at their public offering price, which includes the
initial sales charge. The sales charge as a percentage of your investment
decreases as the amount you invest increases. The current sales charge
rates and missions paid to Investment Professionals are as follows:
<TABLE>
<CAPTION>
Your Investment in:
Government Mortgage Fund
Intermediate Income Fund Sales Charge Sales Charge Dealer Reallowance
Investment Quality as a % of as a % of as a % of the
Bond Fund Offering Price Your Investment Offering Price
<S> <C> <C> <C>
Up to $50,000 4.75% 4.99% 4.00%
$50,000 up to $100,000 4.50% 4.71% 4.00%
$100,000 up to $250,000 3.50% 3.63% 3.00%
$250,000 up to $500,000 2.25% 2.30% 2.00%
$500,000 up to $1,000,000 1.75% 1.78% 1.50%
$1,000,000 and above<F1> 0.00% 0.00% <F1>
<FN>
<F1> There is no initial sales charge on purchases of $1 million or more. However, a contingent deferred sales charge
(CDSC) of up to 1.00% of the purchase price will be charged to the shareholder if shares are redeemed in the first year
after purchase, or at .50% within two years of the purchase. This charge will be based on either the cost of the shares or
net asset value at the time of redemption, whichever is lower. There will be no CDSC on reinvested distributions.
Investment Professionals may be paid at a rate of up to 1.00% of the purchase price.
</FN>
</TABLE>
- 21 -
<PAGE>
<TABLE>
<CAPTION>
Your Investment in:
Fund for Income Sales Charge Sales Charge Dealer Reallowance
Limited Term as a % of as a % of as a % of the
Income Fund Offering Price Your Investment Offering Price
<S> <C> <C> <C>
Up to $50,000 2.00% 2.04% 1.50%
$50,000 up to $100,000 1.75% 1.78% 1.25%
$100,000 up to $250,000 1.50% 1.52% 1.00%
$250,000 up to $500,000 1.25% 1.27% 0.75%
$500,000 up to $1,000,000 1.00% 1.01% 0.50%
$1,000,000 and above<F1> 0.00% 0.00% <F1>
<FN>
<F1> There is no initial sales charge on purchases of $1 million or more. However, a contingent deferred sales charge
(CDSC) of up to 1.00% of the purchase price will be charged to the shareholder if shares are redeemed in the first year
after purchase, or at .50% within two years of the purchase. This charge will be based on either the cost of the shares or
net asset value at the time of redemption, whichever is lower. There will be no CDSC on reinvested distributions.
Investment Professionals may be paid at a rate of up to 1.00% of the purchase price.
</FN>
</TABLE>
The Distributor reserves the right to pay the entire commission to
dealers. If that occurs, the dealer may be considered an "underwriter"
under federal securities laws.
Sales Charge Reductions and Waivers for Class A Shares
There are several ways you can combine multiple purchases in the Victory
Funds and take advantage of reduced sales charges.
You may qualify for reduced sales charges in the following cases:
1. A Letter of Intent lets you purchase Class A shares of a fund over a
13-month period and receive the same sales charge as if all shares had
been purchased at one time. You must start with a minimum initial
investment of 5% of the total amount.
2. Rights of Accumulation allow you to add the value of any Class A shares
you already own to the amount of your next Class A investment for purposes
of calculating the sales charge at the time of purchase.
3. You can combine Class A shares of multiple Victory Funds (excluding the
money market funds) for purposes of calculating the sales charge. The
combination privilege also allows you to combine the total investments
from the accounts of household members of your immediate family (spouse
and children under 21) for a reduced sales charge at the time of purchase.
4. Waivers for certain investors:
a. Current and retired Fund Trustees, directors, trustees, employees, and
family members of employees of KeyCorp or "Affiliated Providers",* and
dealers who have an agreement with the Distributor and any trade
organization to which the Adviser or the Administrator belong.
b. Investors who purchase shares for trust or other advisory accounts
established with KeyCorp or its affiliates.
c. Investors who reinvest a distribution from a deferred compensation
plan, agency, trust, or custody account that was maintained by KeyBank
National Association or its affiliates, the Victory Group, or invested in
a fund of the Victory Group.
d. Investors who reinvest shares from another mutual fund complex or the
Victory Group within 90 days after redemption, if they paid a sales charge
for those shares.
e. Investment Professionals who invest in shares of a Fund for fee-based
investment products or accounts, selling brokers, and their sales
representatives.
* Affiliated Providers are affiliates and subsidiaries of KeyCorp, and any
organization that provides services to Victory and Key Mutual Funds (the
"Victory Group").
- 22 -
<PAGE>
How to Purchase Shares
All you need to do to get started is to fill out an application.
Class A Shares can be purchased in a number of different ways.
You can send in your investment by check, wire transfer, exchange from
another Victory Fund, or through arrangements with your Investment
Professional. An Investment Professional is a salesperson, financial
planner, investment adviser, or trust officer who provides you with
investment information. Sometimes they will charge you for these services.
Their fee will be in addition to, and unrelated to, the fees and expenses
charged by the Funds.
Make your check payable to:
The Victory Funds
Keep the following addresses handy for purchases, exchanges, or
redemptions.
FAX Number: 800-529-2244
Telecommunication Device for the Deaf (TDD): 800-970-5296
Regular U.S. Mail Address
Send completed Account Applications with your check, bank draft or money
order to:
The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527
Overnight Mail Address
Use this address ONLY for overnight packages.
The Victory Funds
c/o Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
PHONE: 800-KEY-FUND
Wire Address
The Transfer Agent does not charge a wire fee. Always call the Transfer
Agent at 800-KEY-FUND BEFORE wiring funds to obtain a control number.
State Street Bank and Trust Co.
ABA #011000028
For Credit to DDA Account #9905-201-1
For Further Credit to Account # (insert account number, name, and control
number assigned by the Transfer Agent)
Telephone
800-KEY-FUND
800-539-3863
- 23 -
<PAGE>
ACH
After your account is set up, your purchase amount can be transferred by
Automated Clearing House (ACH). Only domestic member banks may be used. It
takes about 15 days to set up the ACH feature. A fee is not currently
being charged for ACH transfers.
Statements and Reports
You will receive a periodic statement reflecting any transactions that
affect the balance or registration of your account. You will receive a
confirmation after any purchase, exchange, or redemption. If your account
has been set up by an Investment Professional, account activity will be
detailed in their statements to you. Share certificates are not issued.
Twice a year, you will receive the financial reports of the Funds. By
January 31 of each year, you will be mailed an IRS Form reporting
distributions for the previous year, which will also be filed with the
IRS.
Systematic Investment Plan
To enroll in the Systematic Investment Plan, you should check this box on
the Account Application. We will need your bank account information and
the amount and frequency of your investment. You can select monthly,
quarterly, semi-annual, or annual investments. You should attach a voided
personal check so the proper information can be obtained. You must first
meet the minimum investment requirement of $500, then we will make
automatic withdrawals of the amount you indicate ($25 or more) from your
bank account and invest it in shares of a Fund.
Retirement Plans
You can use the Funds as part of your retirement portfolio. Your
investment professional can set up your new account under one of several
tax sheltered plans. Please contact your Investment Professional or the
Fund for details regarding an IRA or other retirement plan that works best
for your financial situation.
If you would like to make additional investments after your account is
already established, use the Investment Stub attached to your statement
and send it with your check to the address indicated.
All purchases must be made in U.S. Dollars and drawn on U.S. banks. The
Transfer Agent may reject any purchase order in its sole discretion. If
your check is returned for any reason, you may be charged for any
resulting fees and/or losses. Third party checks will not be accepted. You
may only invest or exchange into fund shares legally available in your
state. If your account falls below $500, we may ask you to re-establish
the minimum investment. If you do not do so within 60 days, we may close
your account and send you the value of your account.
- 24 -
<PAGE>
How to Exchange Shares
An exchange is the selling of shares of one fund of the Victory Group to
purchase shares of another. You may exchange shares of one Victory fund
for shares of the same class of any other, generally without paying any
additional sales charges. (See Item 3 below for the exception.) The
"Victory Group" includes funds offered as a part of the Victory Funds and
Key Mutual Funds. Key Mutual Funds is affiliated with KeyCorp.
You can obtain a list of funds available for exchange by calling the
Transfer Agent at 800-KEY-FUND.
You can exchange shares of the Funds by writing or calling the Transfer
Agent at 800-KEY-FUND. When you exchange shares of the Funds, you should
keep the following in mind:
Shares of the fund selected for exchange must be available for sale in
your state of residence.
The Fund whose shares you want to exchange and the fund whose shares you
want to buy must offer the exchange privilege.
Shares of a Fund may be exchanged at relative net asset value. This means
that if you own Class A shares of a Fund, you can only exchange them for
Class A shares of another fund and not pay a sales charge. If you exchange
into a fund with a higher sales charge, you pay the percentage-point
difference between that fund's sales charge and any sales charge you have
previously paid in connection with the shares you are exchanging. If you
exchange from the Fund for Income or the Limited Term Income Fund to
purchase Class A shares of another fund in the Victory Group that has a
4.75% sales charge, you would pay the 2.75% difference in sales charge.
You must meet the minimum purchase requirements for the fund you purchase
by exchange.
The registration and tax identification numbers of the two accounts must
be identical.
You must hold the shares you buy when you establish your account for at
least 7 days before you can exchange them; after the account is open 7
days, you can exchange shares on any business day.
Before exchanging, read the prospectus of the fund you wish to purchase by
exchange.
- 25 -
<PAGE>
How to Redeem Shares
If we receive your request by 4:00 p.m. Eastern Time, your redemption will
be processed the same day.
There are a number of convenient ways to redeem shares of the Funds. You
can use the same mailing addresses listed for purchases. You will earn
dividends up to the date your redemption request is processed.
By Telephone
The easiest way to redeem shares is by calling 800-KEY-FUND. When you fill
out your original application, be sure to check the box marked "Telephone
Authorization." Then when you are ready to redeem, call us and tell us
which one of the following options you would like to use:
Mail a check to the address of record;
Wire funds to a domestic financial institution;
Mail to a previously designated alternate address; or
Electronically transfer the funds via ACH.
All telephone calls are recorded for your protection and measures are
taken to verify the identity of the caller. If we properly act on
telephone instructions and follow reasonable procedures to ensure against
unauthorized transactions, neither Victory nor its servicing agents, the
Adviser, nor the Transfer Agent will be responsible for any losses. If
these procedures are not followed, the Transfer Agent may be liable to you
for losses resulting from unauthorized instructions.
If there is an unusual amount of market activity and you cannot reach the
Transfer Agent by telephone, consider placing your order by mail.
By Mail
Use the Regular U.S. Mail or Overnight Mail Address to redeem shares. Send
us a letter of instruction indicating your Fund account number, amount of
redemption, and where to send the proceeds. All account owners must sign.
A signature guarantee is required for the following redemption requests:
Redemptions over $10,000;
Your account registration has changed within the last 15 days;
The check is not being mailed to the address on your account;
The check is not being made payable to the owner of the account; or
If the redemption proceeds are being transferred to another Victory Group
account with a different registration.
A signature guarantee can be obtained from a financial institution such as
a bank, broker-dealer, credit union, clearing agency, or savings
association.
By Wire
If you want to redeem funds by wire, you must establish a Fund account
which will accommodate wire transactions. If you call by 4:00 p.m. Eastern
time, your funds will be wired on the next business day.
By ACH
Normally, your redemption will be processed on the same day, or the next
day if your instructions are received after 4:00 p.m. Eastern Time. It
will be transferred by ACH as long as the transfer is to a domestic bank.
Under certain emergency circumstances, the right of redemption may be
suspended. Redemption proceeds from the sale of shares purchased by a
check may be held until the purchase check has cleared. If you request a
complete redemption, any dividends declared will be included with the
redemption proceeds.
Systematic Withdrawal Plan
If you check this box on the Account Application, we will send monthly,
quarterly, semi-annual, or annual payments to you or the person you
designate. The minimum withdrawal is $25, and you must have an account
value of $5,000 or more to start withdrawals. Once again, we will need a
voided personal check to activate this feature. You should be aware that
your account eventually may be depleted. However, you cannot automatically
close your account using the Systematic Withdrawal Plan. If your account
value falls below $500, we may ask you to bring the account back to the
$500 minimum. If you decide not to increase your account to the minimum
balance, your account may be closed and the proceeds mailed to you.
- 26 -
<PAGE>
Organization and Management of the Funds
We want you to know who plays what role in your investment and how they
are related. This section discusses the organizations employed by the
Funds to service the shareholders. They are paid a fee for their services.
About Victory
Each Fund is a member of the Victory Funds, a group of 26 distinct
investment portfolios, organized as a Delaware business trust. Some of the
Victory Funds have been operating since 1983.
The Board of Trustees of Victory has the overall responsibility for the
management of the Funds. They are elected by the shareholders.
The Investment Adviser
One of a Fund's most important contracts is its Advisory Agreement with
Key Asset Management Inc. (KAM or the Adviser), a New York Corporation
registered as an investment adviser with the SEC. KAM is a subsidiary of
KeyBank National Association, a wholly-owned subsidiary of KeyCorp. On
February 28, 1997, KAM became the surviving corporation after the
reorganization of four indirect investment adviser subsidiaries of
KeyCorp. Affiliates of the Adviser manage approximately $50 billion for a
limited number of individual and institutional clients.
The Advisory Agreement allows the Adviser to hire employees. It also
allows KAM to choose brokers or dealers to handle the purchases and sales
of a Fund's securities. Subject to Board approval, Key Investments, Inc.
(KII) and/or Key Clearing Corporation (KCC) may act as clearing broker for
the Funds' security transactions in accordance with procedures adopted by
the Funds, and receive commissions or fees in connection with their
services to the Funds. Both KII and KCC are wholly-owned indirect
subsidiaries of KeyCorp and affiliates of the adviser.
Prior to February 28, 1997, KeyCorp Mutual Fund Advisers, Inc. was the
adviser and Society Asset Management, Inc. (formerly the adviser) was the
sub-adviser to each of the Funds. During the fiscal year ended October 31,
1996, KeyCorp Mutual Fund Advisers, Inc. was paid an advisory fee at an
annual rate based on a percentage of the average daily net assets of each
Fund (after waivers) as follows:
<TABLE>
<CAPTION>
Advisory
Fund Fees
<S> <C>
Fund for Income .10%<F1>
Government Mortgage Fund .50%
Intermediate Income Fund .58%
Investment Quality Bond Fund .61%
Limited Term Income Fund .47%
<FN>
<F1> Paid to the former sub-adviser, First Albany Asset Management Corporation.
</FN>
</TABLE>
MANAGEMENT OF THE FUNDS
Trustees
Supervise each Fund's activities.
Investment Adviser
Key Asset Management Inc.
127 Public Square
Cleveland, OH 44114
Manages each Fund's business
and investment activities.
The Administrator, Distributor, and Fund Accountant
BISYS Fund Services is the Administrator and the Distributor. BISYS is
paid a fee at an annual rate of .15% of the Fund's average daily net
assets as the Administrator, but does not charge a fee for its services as
Distributor. BISYS Fund Services Ohio, Inc. receives a fee as the Funds'
Accountant.
The Distributor may provide sales support, including cash or other
compensation to dealers for selling shares of a Fund. Payments may be in
the form of trips, tickets, and/or merchandise offered through sales
contests. It does this at its own expense, and not at the expense of a
Fund or its shareholders.
The Funds are supervised by the Board of Trustees, who monitor the
services provided to investors.
- 27 -
<PAGE>
Shareholder Servicing Plan
Victory has a Shareholder Servicing Plan for each class of shares of the
Funds. The shareholder servicing agent performs a number of services for
its customers who are shareholders of a Fund. It establishes and maintains
accounts and records, processes dividend payments, arranges for bank
wires, assists in transactions, and changes account information. For these
services a Fund pays a fee at an annual rate of up to .25% of the average
daily net assets of the Fund serviced by the agent. The Funds have
agreements with various shareholder servicing agents, including KeyBank
National Association and its affiliates, other financial institutions, and
securities brokers. Shareholder servicing agents may waive all or a
portion of their fee periodically.
Distribution Plan
Under Rule 12b-1 of the Investment Company Act of 1940, Victory has
adopted a Distribution and Service Plan for the Fund for Income. Class A
Shares of the Funds currently do not pay expenses under this plan.
Independent Accountants
Coopers & Lybrand L.L.P. serves as independent accountants to the Funds.
Legal Counsel
Kramer, Levin, Naftalis & Frankel serves as legal counsel to the Funds.
HOW THE FUNDS ARE ORGANIZED
Shareholders
Financial Services Firms and their Investment Professionals
Advise current and prospective
shareholders on their Fund investments.
Transfer Agent/Servicing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110-2875
Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
Handles services such as record-keeping, statements, processing of buy and
sell requests, distribution of dividends, and servicing of shareholder's
accounts.
Administrator, Distributor, and Fund Accountant
BISYS Fund Services, Inc. and
BISYS Fund Services Ohio, Inc.
3435 Stelzer Road
Columbus, OH 43219
Markets the Funds, distributes shares
through Investment Professionals,
and calculates the value of shares.
Custodian
Key Trust Company of Ohio, N.A.
127 Public Square
Cleveland, OH 44114
Provides for safekeeping of the Funds' investments and cash, and settles
trades made by the Funds.
- 28 -
<PAGE>
Additional Information
Some additional information you should know about the Funds.
The Funds offer only the class of shares described in this prospectus, but
at some future date, the Funds may offer additional classes of shares
through a separate prospectus.
Your Rights as a Shareholder
All shareholders have equal voting, liquidation, and other rights. As a
shareholder of a Fund, you have rights and privileges similar to those
enjoyed by other corporate shareholders. Delaware Trust law limits the
liability of shareholders.
If any matters are to be voted on by shareholders (such as a change in a
fundamental investment objective or the election of Trustees), each share
outstanding at that point would be entitled to one vote. If you have a
qualified trust account, the trustee will vote your shares on your behalf
or in the same percentage voted on shares that are not held in trust.
Shareholders with more than 10% of the outstanding shares of a Fund may
call a special meeting for removal of a Trustee. Normally, Victory is not
required to hold annual meetings of shareholders. However, shareholders
may request one under certain circumstances, as described in the SAI.
Code of Ethics
Victory and the Adviser have each adopted a Code of Ethics to which all
investment personnel and all other access persons to the Funds must
conform. Investment personnel must refrain from certain trading practices
and are required to report certain personal investment activities.
Violations of the Code of Ethics can result in penalties, suspension, or
termination of employment.
Banking Laws
Banking laws, including the Glass-Steagall Act, prevent a bank holding
company or its affiliates from sponsoring, organizing or controlling a
registered, open-end investment company. However, bank holding company
subsidiaries may act as investment adviser, transfer agent, custodian, or
shareholder servicing agent. They may also purchase shares of such a
company for their customers and pay third parties for performing these
functions. Should these laws change in the future, the Trustees would
consider selecting another qualified firm so that all services would
continue.
Shareholder Communications
You will receive unaudited Semi-Annual Reports and audited Annual Reports
on a regular basis from each Fund. In addition, you will also receive
updated prospectuses or supplements to this prospectus. In order to
eliminate duplicate mailings to an address at which two or more
shareholders with the same last name reside, the Funds will send only one
copy of the above communications.
If you would like to receive additional copies of any materials, please
call the Funds at 800-KEY-FUND.
The securities described in this prospectus and the SAI are not offered in
any state in which they may not lawfully be sold. No sales representative,
dealer, or other person is authorized to give any information or make any
representation other than those contained in this prospectus and the SAI.
- 29 -
<PAGE>
Other Securities and Investment Practices
The following table lists some of the types of securities each of the
Funds may choose to purchase under normal market conditions. The majority
of the portfolio for each of the Funds is made up of mortgage-backed
securities and corporate debt obligations. However, the Funds are also
permitted to invest in the securities in the table below and in the SAI.
<TABLE>
<CAPTION>
List of Allowable Investments Fund Government Intermediate Investment Limited Term
and Investment Practices for Mortgage Income Quality Income
Income Fund Fund Bond Fund Fund
<S> <C> <C> <C> <C> <C>
U.S. Government Securities. Notes and bonds issued
or guaranteed by the U.S. government, its agencies
or instrumentalities. Some are direct obligations <F1> 20% <F1> <F1> <F1>
of the U.S. Treasury; others are obligations only
of the U.S. agency.
Corporate Debt Obligations. Debt instruments
issued bypublic corporations. They may be
secured or unsecured. 35% 20% <F1> <F1> <F1>
Convertible or Exchangeable Corporate Debt
Obligations. Debt instruments which may be 35% 20% <F1> <F1> <F1>
exchanged or converted to other securities.
Preferred and Convertible Preferred Stock of
U.S. Corporations. none none 20% 20% 20%
Mortgage-Backed Securities. Instruments
secured by a mortgage or pools of mortgages.
<F2> Collateralized Mortgage Obligations. Debt
obligations that are secured by mortgage-backed 65-100% 80-100% <F1> <F1> <F1>
certificates. Some are issued by U.S. (U.S.
government agencies and instrumentalities. Gov't)
Short-term Debt Obligations. Includes bankers' 20%
acceptances, certificates of deposit, prime 35% (commercial 35% 35% <F1>
quality commercial paper, Eurodollar obligations, paper only)
cash, and cash equivalents
When-Issued and Delayed-Delivery Securities.
A security that is purchased for delivery at
a later time. The market value may change before 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%
the delivery date, and the value is included
in the NAV of the Fund.
Zero Coupon Bonds. These securities are
purchased at a discount from the face value.
The face value is received at maturity, 20% 20% 20% 20% 20%
with no interest payments before then. (U.S.
These may be subject to greater risks Gov't.)
of price fluctuation.
<F2> Variable & Floating Rate Securities.
Investment grade instruments, some of which 35% 20% <F1> <F1> <F1>
may be derivatives and illiquid, with (U.S.
interest rates that reset periodically. Gov't.)
Yankee Securities. Debt instruments issued by
non-domestic issuers and traded in U.S. currency. none none 20% 20% 20%
Foreign Securities. Debt securities of foreign
issuersincluding international bonds denominated
in foreign or domestic currencies traded in the none none 20% 20% 20%
United States and abroad.
<F2> Receipts. Separately traded interest
or principal components of U.S. Government none 20% 20% 20% 20%
securities.
- 30 -
<PAGE>
Repurchase Agreements. An agreement to sell
and repurchase a security at a stated price 35% 20% 35% 35% 35%
plus interest. The seller's obligation to
the Fund is secured by collateral.
Tax, Revenue and Bond Anticipation Notes. Issued in
expectation of future revenues. Only purchased when 35% 20% <F1> <F1> <F1>
their yields are competitive with taxable obligations.
Illiquid Securities. Investments that cannot
be readily sold within seven days in the usual 15% of net 15% of net 15% of net 15% of net 15% of net
course of business at approximately the price assets assets assets assets assets
at which a Fund values them.
Restricted Securities. Securities that are not
registered under federal securities laws but 35% 20% <F1> <F1> <F1>
that may be traded among qualified institutional
investors and the Fund. Some of these securities
may be illiquid.
<F2> Futures Contracts and Options on
Futures Contracts. Contracts involving 5% in 5% in 5% in 5% in
the right or obligation to deliver or margins and margins and margins and margins an
receive assets or money depending on premiums; premiums; premiums; premiums;
the performance of one or more assets 33 1/3% 33 1/3% 33 1/3% 33 1/3%
or a securities index. To reduce the none subject to subject to subject to subject to
effects of leverage, liquid assets equal futures or futures or futures or futures or
to the contract commitment are set aside options on options on options on options on
to cover the commitment. The Funds futures futures futures futures
may invest in futures in an effort to hedge
against market risk.
Borrowing, Reverse Repurchase Agreements.
The borrowing of money from banks (up to 5% 5% 5% 5% 5% 5%
of total assets) or through reverse repurchase 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%
agreements (up to 33 1/3% of total assets).
The Funds will not use borrowing to create leverage.
Securities Lending. In order to generate additional
income, a Fund may lend its portfolio securities.
A Fund will receive collateral for the value of the
security plus any interest due. A Fund only will 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%
enter into loan arrangements with entities that
the Adviser has determined are creditworthy.
Dollar Weighted Effective Average Maturity.
Based on the value of a Fund's investments in
securities with different maturity dates. This
measures the sensitivity of a debt security's value
to changes in interest rates. Longer term debt
securities are more volatile than shorter term debt {10 years {10 years 3-10 years 5-15 years 1-5 years
securities because their prices are more sensitive
to interest rate changes. Therefore, the NAV of
a fund with a longer dollar weighted effective
average maturity may fluctuate more.
<FN>
% Percentage of total assets.
<F1> No limitation of usage; Fund may be using currently.
<F2> Indicates a "derivative security," whose value is linked to, or derived from, another security, instrument or index.
</FN>
</TABLE>
For temporary defensive purposes the Funds may hold up to 100% of their
total assets in cash or short-term obligations. For more information on
ratings and detailed descriptions of each of the above investment
vehicles, see the SAI.
<PAGE>
This page is intentionally left blank.
<PAGE>
Bulk Rate
U.S. Postage
PAID
Cleveland, OH
Permit No. 469
VICTORY FUNDS LOGO
PRINTED ON RECYCLED PAPER
VF/TXFI-PRO (2/97)
<PAGE>
Rule 497(c)
Registration No. 33-8982
Victory Funds
PROSPECTUS
NATIONAL MUNICIPAL BOND FUND
NEW YORK TAX-FREE FUND
OHIO MUNICIPAL BOND FUND
800-KEY-FUND(R) or 800-539-3863 March 1, 1997
<PAGE>
THE VICTORY PORTFOLIOS
NATIONAL MUNICIPAL BOND FUND
NEW YORK TAX-FREE FUND
OHIO MUNICIPAL BOND FUND
800-KEY-FUND(R) 800-539-3863
This prospectus describes the following funds:
National Municipal Bond Fund
New York Tax-Free Fund
Ohio Municipal Bond Fund
The three Victory Funds discussed in this prospectus (the Funds) are a
part of The Victory Portfolios (Victory), an open-end investment
management company. The Funds are non-diversified mutual funds. This
prospectus explains the objectives, policies, risks, and strategies of
the Funds. You should read this prospectus before investing in one of
these Funds and keep it for future reference. A detailed Statement of
Additional Information (SAI) describing each of the Funds is also
available for your review. The SAI has been filed with the Securities
and Exchange Commission (SEC), and is incorporated into this prospectus
by reference. If you would like a free copy of the SAI, please request
one by calling us at 800-KEY-FUND.
<PAGE>
TABLE OF CONTENTS
Introduction 2
AN OVERVIEW OF EACH OF THE FUNDS
A fund-by-fund analysis which includes objectives, policies, strategies,
expenses, and financial highlights
National Municipal Bond Fund 4
New York Tax-Free Fund 6
Ohio Municipal Bond Fund 8
Risk Factors 10
Investment Limitations 11
Investment Performance 12
Share Price 12
Dividends, Distributions, and Taxes 13
INVESTING WITH VICTORY 15
Choosing a Share Class 15
How to Purchase Shares 18
How to Exchange Shares 20
How to Redeem Shares 21
Organization and Management of the Funds 22
Additional Information 24
Other Securities and Investment Practices 25
Shares of the Funds are:
Not insured by the FDIC;
Not deposits or other obligations of, or guaranteed by, KeyBank, any of
its affiliates, or any other bank;
Subject to investment risks, including possible loss of the principal
amount invested.
These securities have not been approved or disapproved by the Securities
and Exchange Commission or any securities regulatory authority of any
state, nor has the Securities and Exchange Commission or any such state
authority passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
<PAGE>
KEY TO FUND INFORMATION
OBJECTIVE AND STRATEGY
The goals and the strategy that a Fund plans to use in pursuing its
investment objective.
RISK FACTORS
The risks that you may assume as an investor in a Fund.
EXPENSES
The costs you will pay as an investor in a Fund, including sales charges
and ongoing expenses.
FINANCIAL HIGHLIGHTS
A table which shows a Fund's historical performance by share class. This
table also summarizes previous operating expenses.
Investment Objective and Strategy
Objective
The National Municipal Bond Fund seeks to provide a high level of
current interest income exempt from federal income tax, as is consistent
with the preservation of capital.
The New York Tax-Free Fund seeks to provide a high level of current
income exempt from federal, New York State, and New York City income
taxes, consistent with the preservation of shareholders' capital.
The Ohio Municipal Bond Fund seeks to provide a high level of current
interest income which is exempt from both federal income tax and Ohio
personal income tax.
Strategy
Each of the Funds pursues its investment objective by investing
primarily in general obligation bonds and revenue bonds. However, each
of the Funds has unique investment strategies and its own risk/reward
profile. Please review the section about the Fund in which you are
interested in investing and "Other Securities and Investment Practices"
for an overview of the Funds.
Risk Factors
The Funds are not insured by the FDIC. The New York Tax-Free Fund and
Ohio Municipal Bond Fund generally limit their investments to a single
state. Therefore, an investment in one of these Funds may involve
additional risks, including economic, political, or credit risks
specific to that state. In addition, there are other potential risks,
which are discussed in the section "Risk Factors."
Who Should Invest
Investors in higher tax brackets seeking tax-exempt income
Investors seeking income over the long term
Investors with moderate risk tolerance
Investors seeking higher potential returns than are provided by money
market funds
Investors willing to accept price and dividend fluctuations
Fees and Expenses
The National Municipal Bond Fund and New York Tax-Free Fund offer two
classes of shares: Class A and Class B. The Ohio Municipal Bond Fund
offers only Class A shares. If you purchase Class A shares of a Fund,
you may pay a sales charge of up to 4.75% of the offering price,
depending on the amount you invest. If you purchase Class B shares of a
Fund, you will not pay an initial sales charge; however, you may pay a
deferred sales charge if you sell ("redeem") your shares within six
years of purchase, and you will pay additional distribution expenses. In
either case, you also will incur expenses for investment advisory,
management, administrative, and shareholder services, all of which are
included in a Fund's expense ratio. See "Choosing a Share Class."
- 2 -
<PAGE>
Purchases
The minimum initial investment is $500 for most accounts ($250 for
Individual Retirement Accounts) and $25 thereafter. An initial
investment must be accompanied by a Fund's Account Application. Fund
shares may be purchased by check, Automated Clearing House, or wire. See
"How to Purchase Shares." Generally, municipal bond funds are not
appropriate investments for IRA accounts.
Redemptions
You can redeem Fund shares by written request or telephone. When the
Transfer Agent receives a redemption request in proper form, a Fund will
redeem the shares and credit your bank account or send the proceeds to
the address designated on your Account Application. See "How to Redeem
Shares."
Dividends/Distributions
Income is accrued daily and is declared and paid monthly. Any net
capital gains realized by a Fund are paid as dividends annually. A Fund
can send your dividends directly to you by mail, credit them to your
bank account, reinvest them in the Fund, or invest them in another fund
of the Victory Group. The "Victory Group" includes other funds of The
Victory Portfolios and Key Mutual Funds. You can make this choice when
you fill out an account application. See "Dividends, Distributions, and
Taxes."
Other Services
Victory offers a number of other services to better serve shareholders
including exchange privileges and automated investment and withdrawal
plans. See "How to Exchange Shares" and "How to Redeem Shares." Our
toll-free fax number is 800-529-2244. You can reach Victory's
Telecommunication Device for the Deaf (TDD) at 800-970-5296.
<TABLE>
General Information about each of the Funds
<CAPTION>
Estimated
Victory Fund Inception Annual Expenses Maximum Newspaper
Date After Waivers Sales Charge Abbreviation<F1>
(as a % of net assets)
<S> <C> <C> <C> <C>
National Municipal
Bond Fund--Class A 2/3/94 0.30% 4.75% Victory NatMunA
National Municipal
Bond Fund--Class B 9/26/94 1.54% 5.00% Victory NatMunB
New York Tax-Free
Fund--Class A 2/11/91 .93% 4.75% Victory NYTxFA
New York Tax-Free
Fund--Class B 9/26/94 2.17% 5.00% Victory NYTxFB
Ohio Municipal
Bond Fund--Class A 5/18/90 .90% 4.75% Victory OH Muni
<FN>
<F1>All newspapers do not carry the same abbreviation.
</FN>
</TABLE>
The following pages provide you with separate overviews of each Fund.
Please look at the objective, policies, strategies, risks, expenses, and
financial history to determine which Fund will best suit your risk
tolerance and investment needs. You also should review the "Other
Securities and Investment Practices" section for additional information
about the individual securities in which the Funds can invest and the
risks related to these investments.
- 3 -
<PAGE>
NATIONAL MUNICIPAL BOND FUND
Investment Objective
The National Municipal Bond Fund seeks to provide a high level of
current interest income exempt from federal income tax, as is consistent
with the preservation of capital.
Investment Policies and Strategy
The National Municipal Bond Fund pursues its investment objective by
primarily investing in municipal bonds. The interest on these bonds is
exempt from federal income tax. Under normal circumstances, at least 80%
of the National Municipal Bond Fund's income distributions will be
exempt from federal income taxes, including the alternative minimum tax.
Under normal market conditions, the National Municipal Bond Fund
primarily invests in:
Municipal securities with fixed, variable, or floating interest rates
Zero coupon, tax, revenue, and bond anticipation notes
Tax-exempt commercial paper
Important Characteristics of the National Municipal Bond Fund's
Investments:
Quality: Municipal securities rated A or above at the time of purchase
by Standard & Poor's (S&P), Fitch, Moody's, or another NRSRO,* or if
unrated, of comparable quality. For more information on ratings, see the
Appendix to the SAI.
Maturity: The dollar-weighted effective average maturity of the Fund
generally will range from 5 to 11 years. Under certain market
conditions, the Portfolio Manager may go outside these boundaries.
Municipal securities are issued to raise money for public purposes.
General obligation bonds are backed by the taxing power of a state or
municipality. This means the issuing authority can raise taxes to cover
the payments. Revenue bonds are backed by revenues from a specific tax,
project, or facility. Principal and interest payments on some municipal
securities are insured by private insurance companies.
*An NRSRO is a nationally recognized statistical ratings organization
such as S&P, Fitch, or Moody's which assigns credit ratings to
securities based on the borrower's ability to meet its obligation to
make principal and interest payments.
Risk
The National Municipal Bond Fund primarily invests in municipal
securities from several states, rather than from a single state. The
National Municipal Bond Fund is subject to the risks common to mutual
funds that invest in debt securities, that is, interest rate risk,
credit risk, reinvestment risk, and inflation risk. It is also subject
to the risks common to mutual funds that invest in municipal debt
securities. These include the risk that certain investments could lose
their tax-exempt status. Please read "Risk Factors" carefully before
investing.
Portfolio Management
Paul A. Toft has served as the Portfolio Manager for the National
Municipal Bond Fund since September, 1994. He is a Portfolio Manager and
Director of Key Asset Management Inc., and has been in the investment
business since 1986.
Fund Expenses
This section will help you understand the costs and expenses you would
pay, directly or indirectly, if you invest in the National Municipal
Bond Fund.
<TABLE>
<CAPTION>
Shareholder Class A Class B
Transaction Expenses<F1> Shares Shares
<S> <C> <C>
Maximum Sales Charge
Imposed on Purchases 4.75% None
(as a percentage of
offering price)
Sales Charge Imposed
on Reinvested Dividends None None
Deferred Sales Charge None 5.00%<F2>
Redemption Fees None None
Exchange Fees None None
<FN>
<F1>You may be charged additional fees if you purchase, exchange, or redeem
shares through a broker or agent.
<F2>5% in the first year, declining to 1% in the sixth year, with no
charge after the sixth year.
</FN>
</TABLE>
The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the National
Municipal Bond Fund. These expenses are charged directly to the National
Municipal Bond Fund. Expenses include management fees as well as the
costs of maintaining accounts, administering the National Municipal Bond
Fund, providing shareholder services, and other activities. The expenses
shown are estimated based on historical or projected expenses of the
National Municipal Bond Fund.
<TABLE>
<CAPTION>
Annual Fund Operating Expenses Class A Class B
After expense waivers Shares Shares
and reimbursements
(as a percentage of average
daily net assets)
<S> <C> <C>
Management Fees<F1> NONE NONE
Rule 12b-1 Distribution Fees NONE .75%
Other Expenses<F1><F2> .30% .79%
---- ----
Total Fund Operating Expenses<F1> .30% 1.54%
==== ====
<FN>
<F1>These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be .55%; and the Total Fund Operating Expenses
would be 1.34% for Class A Shares, and would be 2.09% for Class B
Shares.
<F2>Other Expenses includes an estimate of shareholder servicing fees
the National Municipal Bond Fund expects to pay. See "Organization and
Management of the Funds--Shareholder Servicing Plan."
</FN>
</TABLE>
The following example is designed to help you understand the various
costs you will bear, directly or indirectly, as an investor in the
National Municipal Bond Fund.
Example: You would pay the following expenses on a $1,000 investment in
the National Municipal Bond Fund, assuming: (1) a 5% annual return, and
(2) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A Shares $50 $57 $ 64 $ 84
Class B Shares $66 $79 $104 $150
</TABLE>
This example is only an illustration. Actual expenses and returns will
vary.
- 4 -
<PAGE>
Financial Highlights
National Municipal Bond Fund
The Financial Highlights describe the National Municipal Bond Fund's
returns and operating expenses over time. This table shows the results
of an investment in one share of the National Municipal Bond Fund for
each of the periods indicated.
<TABLE>
<CAPTION>
CLASS B CLASS A
Year Six Months Sept. 26, Year Six Months Year Feb. 3,
Ended Ended 1994 Ended Ended Ended 1994
Oct. 31, Oct. 31, to Oct. 31, Oct. 31, April 30, to
1996 1995<F4> April 30, 1996 1995<F4> 1995<F5> April 30,
1995<F1> 1994<F1>
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 10.07 $ 9.59 $ 9.53 $ 10.06 $ 9.59 $ 9.64 $ 10.00
------- ------- ------- ------- ------- ------- -------
Investment Activities
Net investment income 0.35 0.20 0.28 0.44 0.24 0.44 0.08
Net realized and
unrealized gains
(losses) from
investments 0.13 0.47 0.05 0.13 0.46 (0.05) (0.36)
------- ------- ------- ------- ------- ------- -------
Total from Investment
Activities 0.48 0.67 0.33 0.57 0.70 0.39 (0.28)
------- ------- ------- ------- ------- ------- -------
Distributions
Net investment income (0.35) (0.19) (0.27) (0.44) (0.23) (0.44) (0.08)
In excess of net
investment income (0.01) -- -- -- -- -- --
Net realized gains (0.03) -- -- -- -- -- --
In excess of net
realized gains -- -- -- (0.03) -- -- --
------- ------- ------- ------- ------- ------- -------
Total Distributions (0.39) (0.19) (0.27) (0.47) (0.23) (0.44) (0.08)
------- ------- ------- ------- ------- ------- -------
Net Asset Value,
End of Period $ 10.16 $ 10.07 $ 9.59 $ 10.16 $ 10.06 $ 9.59 $ 9.64
======= ======= ======= ======= ======= ======= =======
Total Return
(excludes sales
charges) 4.85% 6.99%<F2> 3.54%<F2> 5.83% 7.39%<F2> 4.21% (2.82%)<F2>
Ratios/Supplemental Data:
Net Assets,
End of Period (000) $ 1,808 $ 456 $ 147 $36,958 $11,964 $ 5,118 $ 494
Ratio of expenses to
average net assets 1.20% 0.96%<F3> (0.05%)<F3> 0.29% 0.02%<F3> 0.20% 0.65%
Ratio of net
investment income
(loss) to average
net income 3.50% 4.15%<F3> 4.35%<F3> 4.37% 5.11%<F3> 5.01% 3.15%
Ratio of expenses to
average net assets<F7> 2.17% 3.67%<F3> 2.63%<F3> 1.35% 2.57%<F3> 3.95% 26.10%<F3>
Ratio of net investment
income (loss) to
average net assets<F7> 2.53% 1.44%<F3> 1.67%<F3> 3.31% 2.56%<F3> 1.26% (22.30%)<F3>
Portfolio turnover<F6> 143% 72% 52% 143% 72% 52% 13%
<FN>
<F1>Period from commencement of operations.
<F2>Not annualized.
<F3>Annualized.
<F4>Effective June 5, 1995, the Victory National Municipal Bond
Portfolio became the National Municipal Bond Fund.
<F5>Effective September 26, 1994, the National Municipal Bond Fund
designated the existing shares as Class A Shares and
commenced offering Class B Shares.
<F6>Portfolio turnover is calculated on the basis of the National
Municipal Bond Fund as a whole without distinguishing between
the classes of shares issued.
<F7>During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios
would have been as indicated.
</FN>
</TABLE>
The financial highlights were audited by Coopers & Lybrand L.L.P. for
the 1995 and 1996 periods, and by other auditors for all earlier
periods. This information should be read in conjunction with the
National Municipal Bond Fund's most recent Annual Report to
shareholders, which is incorporated by reference in the SAI. If you
would like a copy of the Annual Report, write or call us at 800-KEY-
FUND.
- 5 -
<PAGE>
NEW YORK TAX-FREE FUND
Investment Objective
The New York Tax-Free Fund seeks to provide a high level of current
income exempt from federal, New York State, and New York City income
taxes, consistent with the preservation of shareholders' capital.
Investment Policies and Strategy
The New York Tax-Free Fund pursues its investment objective by investing
at least 80% of its total assets in securities that have interest income
that is exempt from federal income tax, including the federal
alternative minimum tax. At least 65% of the portfolio will be invested
in insured municipal securities that pay interest exempt from New York
State and New York City income taxes.
Under normal market conditions, the New York Tax-Free Fund primarily
invests in:
Municipal securities with fixed, variable, and floating interest rates
Zero coupon, tax, and revenue anticipation notes
Tax-exempt commercial paper
Important Characteristics of the New York Tax-Free Fund's Investments:
Quality: Municipal securities rated A or above at the time of purchase
by S&P, Fitch, Moody's, or another NRSRO, or if unrated, of comparable
quality. For more information on ratings, see the Appendix to the SAI.
Maturity: The dollar-weighted effective average maturity of the New York
Tax-Free Fund at the time of purchase generally will range from 20 to 30
years. Under certain market conditions, the Portfolio Manager may go
outside these boundaries.
Insurance policies for the municipal securities held by the Fund
generally are obtained either by the issuer of the security or by a
third party from a private insurer. The insurance company guarantees
timely payments of principal and interest. This insurance reduces risk,
but these high quality bonds may yield less than uninsured bonds.
Risk
The New York Tax-Free Fund primarily invests in municipal securities
issued by the State of New York and its municipalities, including New
York City. The New York Tax-Free Fund is subject to the risks common to
mutual funds that invest in debt securities, that is, interest-rate
risk, credit risk, reinvestment risk, and inflation risk. It also is
subject to the risks common to mutual funds that invest in municipal
debt securities. These include the risk that certain investments could
lose their tax-exempt status. The New York Tax-Free Fund is subject to
additional risks because it concentrates its investments in a single
geographic area, and it may invest more than 5% of its assets in the
securities of a single issuer. This could make the New York Tax-Free
Fund more susceptible to economic, political, or credit risks than a
fund that invests in a more diversified geographic area. In the past,
New York State, New York City, and other municipalities have experienced
financial difficulties that jeopardized their ability to repay their
debt obligations. If similar difficulties were to occur again, the New
York Tax-Free Fund's investments may lose value or default. The SAI
explains the risks specific to investments in New York municipal
securities. Please read "Risk Factors" carefully before investing.
Portfolio Management
Paul A. Toft has served as the Portfolio Manager for the New York Tax-
Free Fund since September, 1994. He is a Portfolio Manager and Director
of Key Asset Management Inc., and has been in the investment business
since 1986.
Fund Expenses
This section will help you understand the costs and expenses you would
pay, directly or indirectly, if you invest in the New York Tax Free
Fund.
<TABLE>
<CAPTION>
Shareholder Class A Class B
Transaction Expenses<F1> Shares Shares
<S> <C> <C>
Maximum Sales Charge
Imposed on Purchases 4.75% None
(as a percentage of
offering price)
Sales Charge Imposed
on Reinvested Dividends None None
Deferred Sales Charge None 5.00%<F2>
Redemption Fees None None
Exchange Fees None None
<FN>
<F1>You may be charged additional fees if you purchase, exchange, or redeem
shares through a broker or agent.
<F2>5% in the first year, declining to 1% in the sixth year, with no
charge after the sixth year.
</FN>
</TABLE>
The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the New York
Tax-Free Fund. These expenses are charged directly to the New York Tax-
Free Fund. Expenses include management fees as well as the costs of
maintaining accounts, administering the New York Tax-Free Fund,
providing shareholder services, and other activities. The expenses shown
are estimated based on historical or projected expenses of the New York
Tax-Free Fund.
<TABLE>
<CAPTION>
Annual Fund Operating Expenses Class A Class B
After expense waivers and reimbursements Shares Shares
(as a percentage of average
daily net assets)
<S> <C> <C>
Management Fees<F1> 0% 0%
Rule 12b-1 Distribution Fees NONE .75%
Other Expenses<F1><F2> .93% 1.42%
---- ----
Total Fund Operating Expenses<F1><F2> .93% 2.17%
==== ====
<FN>
<F1>These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be .55%; and the Total Fund Operating Expenses
would be 1.57% for Class A Shares and would be 2.81% for Class B Shares.
<F2>Other Expenses includes an estimate of shareholder servicing fees
the New York Tax-Free Fund expects to pay. See "Organization and
Management of the Funds--Shareholder Servicing Plan."
</FN>
</TABLE>
The following example is designed to help you understand the various
costs you will bear, directly or indirectly, as an investor in the New
York Tax-Free Fund.
Example: You would pay the following expenses on a $1,000 investment in
the New York Tax-Free Fund, assuming: (1) a 5% annual return, and (2)
redemption at the end of each time period.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A Shares $57 $76 $ 97 $156
Class B Shares $72 $98 $136 $218
</TABLE>
This example is only an illustration. Actual expenses and returns will
vary.
- 6 -
<PAGE>
Financial Highlights
New York Tax-Free Fund
The Financial Highlights describe the New York Tax-Free Fund's returns
and operating expenses over time. This table shows the results of an
investment in one share of the New York Tax-Free Fund for each of the
periods indicated.
<TABLE>
<CAPTION>
CLASS B CLASS A
Period Period Period
Year Year From Year Year From Year Year From
Ended Ended Sept. 26, Ended Ended Jan. 1, Ended Ended Feb. 11,
Oct. 31, Oct. 31, 1994 to Oct. 31, Oct. 31, 1994 to Dec. 31, Dec. 31, 1991 to
1996 1995 Oct. 31, 1996 1995 Oct. 31, 1993 1992 Dec. 31,
<F1> 1994 <F1> 1994 1991
<F4> <F4> <F8>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 12.86 $ 12.39 $ 12.62 $ 12.85 $ 12.39 $ 13.54 $ 12.76 $ 12.50 $ 12.00
-------- -------- -------- -------- -------- -------- -------- -------- --------
Investment Activities:
Net investment income 0.57 0.85 0.07 0.68 0.87 0.57 0.70 0.74 0.64
Net realized and
unrealized gains
(losses) from
investments (0.10) 0.36 (0.23) (0.11) 0.42 (1.15) 0.84 0.26 0.50
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total from
investment
activities 0.47 1.21 (0.16) 0.57 1.29 (0.58) 1.54 1.00 1.14
-------- -------- -------- -------- -------- -------- -------- -------- --------
Distributions
Net investment income (0.57) (0.74) (0.07) (0.68) (0.83) (0.57) (0.70) (0.74) (0.64)
In excess of net
investment income (0.01) -- -- -- -- -- -- -- --
Net realized gains (0.01) -- -- (0.01) -- -- (0.06) -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total distributions (0.59) (0.74) (0.07) (0.69) (0.83) (0.57) (0.76) (0.74) (0.64)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net Asset Value,
End of Period $ 12.74 $ 12.86 $ 12.39 $ 12.73 $ 12.85 $ 12.39 $ 13.54 $ 12.76 $ 12.50
======== ======== ======== ======== ======== ======== ======== ======== ========
Total Return
(excludes sales
charge) 3.72% 10.18% (1.25%) 4.53% 10.82% (4.31%) 12.34% 8.26% 11.06%
<F2> <F2> <F2>
Ratios/Supplemental
Data:
Net Assets,
End of Period (000) $ 2,515 $ 1,953 <F5> $ 13,754 $ 15,374 $ 17,840 $ 28,530 $ 26,034 $ 20,995
Ratio of expenses
to average net
assets 1.65% 2.02% 0.52% 0.93% 1.16% 0.91% 0.87% 0.66% 0.45%
<F3> <F3> <F3>
Ratio of net
investment income
(loss) to average
net income 4.52% 5.94% 5.94% 5.25% 5.50% 5.33% 5.28% 5.89% 6.28%
<F3> <F3> <F3>
Ratio of expenses to
average net
assets<F7> 2.34% 2.25% 0.86% 1.58% 1.96% 1.25% 0.96% 0.96% 0.95%
<F3> <F3> <F3>
Ratio of net
investment income
(loss) to average
net assets<F7> 3.83% 5.71% 5.60% 4.60% 4.70% 4.99% 5.19% 5.59% 5.78%
<F3> <F3> <F3>
Portfolio turnover<F6> 0% 18% 18% 0% 18% 18% 12% 14% 61%
<FN>
<F1>Effective June 5, 1995, the Victory New York Tax-Free Portfolio
became the New York Tax-Free Fund.
<F2>Not annualized.
<F3>Annualized.
<F4>Effective September 26, 1994, the Fund designated the existing
shares as Class A Shares and commenced offering Class B
Shares.
<F5>Amount is less than $1,000.
<F6>Portfolio turnover is calculated on the basis of the Fund as a
whole without distinguishing between the classes of shares
issued.
<F7>During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios
would have been as indicated.
<F8>Period from commencement of operations.
</FN>
</TABLE>
The financial highlights were audited by Coopers & Lybrand L.L.P. for
the 1995 and 1996 periods, and by other auditors for all earlier
periods. This information should be read in conjunction with the New
York Tax-Free Fund's most recent Annual Report to shareholders, which is
incorporated by reference in the SAI. If you would like a copy of the
Annual Report, write or call us at 800-KEY-FUND.
- 7 -
<PAGE>
OHIO MUNICIPAL BOND FUND
Investment Objective
The Ohio Municipal Bond Fund seeks to provide a high level of current
interest income which is exempt from both federal income tax and Ohio
personal income tax.
Investment Policies and Strategy
The Ohio Municipal Bond Fund pursues its investment objective by
investing at least 80% of its total assets in investment grade
obligations. The interest on these obligations is exempt from federal
income taxes, including the federal alternative minimum tax. The Ohio
Municipal Bond Fund expects to invest at least 65% of its total assets
in bonds that pay interest which is also exempt from Ohio state income
tax.
Under normal market conditions, the Ohio Municipal Bond Fund primarily
invests in:
Municipal securities with fixed, variable, or floating interest rates
Zero coupon, tax, revenue, and bond anticipation notes
Tax-exempt commercial paper
Important Characteristics of the Ohio Municipal Bond Fund's Investments:
Quality: Municipal securities rated A or above at the time of purchase
by S&P, Fitch, Moody's, or another NRSRO, or if unrated, of comparable
quality. For more information on ratings, see the Appendix to the SAI.
Maturity: The dollar-weighted effective average maturity of the Ohio
Municipal Bond Fund generally will range from 5 to 15 years. Under
certain market conditions, the Portfolio Manager may go outside these
boundaries.
Ohio's economic activity includes the service sector, durable goods
manufacturing, and agricultural industries. Manufacturing activity is
concentrated in cyclical industries; therefore, the Ohio economy may be
more cyclical than other states.
Risk
The Ohio Municipal Bond Fund primarily invests in municipal securities
issued by the State of Ohio and its municipalities. The Ohio Municipal
Bond Fund is subject to the risks common to mutual funds that invest in
debt securities; that is, interest-rate risk, credit risk, reinvestment
risk, and inflation risk. It also is subject to the risks common to
mutual funds that invest in municipal debt securities. These include the
risk that certain investments could lose their tax-exempt status. The
Ohio Municipal Bond Fund is subject to additional risks because it
concentrates its investments in a single geographic area, and it may
invest more than 5% of its assets in the securities of a single issuer.
This could make the Ohio Municipal Bond Fund more susceptible to
economic, political, or credit risks than a fund that invests in a more
diversified geographic area. The SAI explains the risks specific to
investments in Ohio municipal securities. Please read "Risk Factors"
carefully before investing.
Portfolio Management
Paul A. Toft has served as the Portfolio Manager for the Ohio Municipal
Bond Fund since September, 1994. He is a Portfolio Manager and Director
of Key Asset Management Inc., and has been in the investment business
since 1986.
Fund Expenses
This section will help you understand the costs and expenses you would
pay, directly or indirectly, if you invested in the Ohio Municipal Bond
Fund.
<TABLE>
<CAPTION>
Shareholder Class A
Transaction Expenses<F1> Shares
<S> <C>
Maximum Sales Charge
Imposed on Purchases 4.75%
(as a percentage of
offering price)
Sales Charge Imposed
on Reinvested Dividends None
Deferred Sales Charge None
Redemption Fees None
Exchange Fee None
<FN>
<F1>You may be charged additional fees if you purchase, exchange, or
redeem shares through a broker or agent.
</FN>
</TABLE>
The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will pay as a shareholder of the Ohio
Municipal Bond Fund. These expenses are charged directly to the Ohio
Municipal Bond Fund. Expenses include management fees as well as the
costs of maintaining accounts, administering the Ohio Municipal Bond
Fund, providing shareholder services, and other activities. The expenses
shown are estimated based on historical or projected expenses of the
Ohio Municipal Bond Fund.
<TABLE>
<CAPTION>
Annual Fund Operating Expenses Class A
After expense waivers Shares
and reimbursements
(as a percentage of
average daily net assets)
<S> <C>
Management Fees<F1> .51%
Other Expenses<F2> .39%
---
Total Fund Operating Expenses<F1> .90%
===
<FN>
<F1>These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be .60%, and Total Fund Operating Expenses would be
1.04%.
<F2>Other Expenses include an estimate of the shareholder servicing
fees the Ohio Municipal Bond Fund expects to pay. See "Organization and
Management of the Funds--Shareholder Servicing Plan."
</FN>
</TABLE>
The following example is designed to help you understand the various
costs you will bear, directly or indirectly, as an investor in the Ohio
Municipal Bond Fund.
Example: You would pay the following expenses on a $1,000 investment in
the Ohio Municipal Bond Fund, assuming: (1) a 5% annual return, and (2)
redemption at the end of each time period.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A Shares $56 $75 $95 $153
</TABLE>
- 8 -
<PAGE>
This example is only an illustration. Actual expenses and returns will
vary.
Financial Highlights
Ohio Municipal Bond Fund
The Financial Highlights describe the Ohio Municipal Bond Fund's returns
and operating expenses over time. This table shows the results of an
investment in one share of the Ohio Municipal Bond Fund for each of the
periods indicated.
<TABLE>
<CAPTION>
Year Year Year Year Year Year May 18,
Ended Ended Ended Ended Ended Ended 1990 to
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1996 1995 1994 1993 1992 1991 1990
<F1><F5>
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 11.32 $ 10.33 $ 11.52 $ 10.52 $ 10.37 $ 10.06 $ 10.00
------- ------- ------- ------- ------- ------- -------
Investment Activities
Net investment income 0.54 0.52 0.49 0.52 0.60 0.65 0.28
Net realized and
unrealized gains
------- ------- ------- ------- ------- ------- -------
(losses) from investments 0.11 1.00 (0.94) 1.00 0.15 0.31 0.04
Total from
Investment Activities 0.65 1.52 (0.45) 1.52 0.75 0.96 0.32
------- ------- ------- ------- ------- ------- -------
Distributions
Net investment income (0.54) (0.52) (0.49) (0.52) (0.60) (0.65) (0.26)
In excess of net
investment income -- (0.01) -- -- -- -- --
Net realized gains -- -- (0.25) -- -- -- --
------- ------- ------- ------- ------- ------- -------
Total Distributions (0.54) (0.53) (0.74) (0.52) (0.60) (0.65) (0.26)
------- ------- ------- ------- ------- ------- -------
Net Asset Value,
End of Period $ 11.43 $ 11.32 $ 10.33 $ 11.52 $ 10.52 $ 10.37 $ 10.06
======= ======= ======= ======= ======= ======= =======
Total Return
(excludes sales charge) 5.87% 15.03% (4.08%) 14.75% 7.34% 9.87% 3.27%<F3>
Ratios/Supplemental Data:
Net Assets, End of Period (000) $73,463 $60,031 $57,704 $50,676 $17,676 $ 8,042 $ 6,315
Ratio of expenses to
average net assets 0.89% 0.66% 0.51% 0.42% 0.09% 0.01% 0.38%<F2>
Ratio of net investment
income to average
net assets 4.72% 4.78% 4.58% 4.77% 5.76% 6.39% 6.11%<F2>
Ratio of expenses to
average net assets<F4> 1.05% 0.94% 1.09% 0.86% 0.84% 1.17%<F2>
Ratio of net investment income
to average net assets<F4> 4.56% 4.49% 4.01% 4.33% 5.01% 5.32%<F2>
Portfolio turnover 81% 125% 53% 151% 47% 15% 18%
<FN>
<F1>Period from commencement of operations.
<F2>Annualized.
<F3>Not annualized.
<F4>During the period, certain fees were voluntarily reduced. If such
voluntary fee reductions had not occurred, the ratios
would have been as indicated.
<F5>This information is not included in the financial statements
audited by Coopers & Lybrand L.L.P.
</FN>
</TABLE>
The financial highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Ohio Municipal Bond
Fund's most recent Annual Report to shareholders, which is incorporated
by reference into the SAI. If you would like a copy of the Annual
Report, write or call us at 800-KEY-FUND.
- 9 -
<PAGE>
Risk Factors
This prospectus describes some of the risks that you may assume as an
investor in the Funds. By matching your investment objective with a
comfortable level of risk, you can create your own customized investment
plan. Some limitations on the Funds' investments are described in the
section that follows. "Other Securities and Investment Practices" at the
end of this prospectus provides additional information on the securities
mentioned in the overview of each of the Funds. As with any mutual fund,
there is no guarantee that a Fund will earn income or show a positive
total return over time. A Fund's price, yield, and total return will
fluctuate. You may lose money if a Fund's investments do not perform
well.
The following risks are common to all mutual funds:
Market risk is the risk that the market value of a security will
fluctuate, depending on the supply and demand for that type of security.
As a result of this fluctuation, a security may be worth more or less
than the price a Fund originally paid for it, or less than the security
was worth at an earlier time. Market risk may affect a single issuer, an
industry, a sector of the economy, or the entire market and is common to
all investments.
Manager risk is the risk that a Fund's Portfolio Manager may use a
strategy that does not produce the intended result.
The following risks are common to mutual funds that invest in debt
securities:
Interest rate risk. The value of a debt security typically changes in
the opposite direction from a change in interest rates. Therefore, when
interest rates go up, the value of a fixed-rate security typically goes
down. When interest rates go down, the value of these securities
typically goes up. Generally, the market values of securities with
longer maturities are more sensitive to changes in interest rates.
Inflation risk is the risk that inflation will erode the purchasing
power of the cash flows generated by debt securities held by a Fund.
Fixed rate debt securities are more susceptible to this risk than
floating-rate debt securities.
Reinvestment risk is the risk that when interest income is reinvested,
interest rates will have declined so that income must be reinvested at a
lower interest rate. Generally, interest rate risk and reinvestment risk
have offsetting effects.
Credit (or default) risk is the risk that the issuer of a debt security
will be unable to make timely payments of interest or principal.
Although the Funds generally invest in only high-quality securities, the
interest or principal payments may not be insured or guaranteed on all
securities.
The following risk is common to mutual funds that invest in municipal
debt securities:
Tax-exempt status risk is the risk that a municipal debt security issued
as a tax-exempt security may be declared by the Internal Revenue Service
to be taxable.
The following risk is common to mutual funds that invest in the
securities of a single state:
Concentration and diversification risk is the risk that only a limited
number of high-quality securities of a particular type may be available.
Concentration and diversification risk is greater for funds that
primarily invest in the securities of a single state.
- 10 -
<PAGE>
The following risks are common to mutual funds that invest in mortgage-
related securities:
Prepayment risk. Prepayments of principal on mortgage-related securities
affect the average life of a pool of mortgage-related securities.
Mortgage prepayments are affected by the level of interest rates and
other factors. In periods of rising interest rates, the prepayment rate
tends to decrease, lengthening the average life of a pool of mortgage-
related securities. In periods of falling interest rates, the prepayment
rate tends to increase, shortening the average life of a pool of
mortgage-related securities. Prepayment risk is the risk that, because
prepayments generally occur when interest rates are falling, a Fund may
have to reinvest the proceeds from prepayments at lower interest rates.
Extension risk is the risk that the rate of anticipated payments on
principal will lengthen; typically because of a rise in interest rates.
It is important to keep in mind one basic principle of investing: the
greater the risk, the greater the potential reward. The reverse is also
generally true: the lower the risk, the lower the potential reward.
Investment Limitations
To help reduce risk, the Funds have adopted limitations on some
investment policies. These limits involve a Fund's ability to borrow
money and the amount it can invest in various types of securities,
including illiquid securities. Certain limitations can be changed only
with the approval of shareholders. Victory's Board of Trustees can
change other investment limitations without shareholder approval. See
"Other Securities and Investment Practices" and the SAI for more
information.
Each Fund limits to 25% of its total assets the amount it may invest in
any single industry (other than U.S. Government obligations). Each Fund
limits its borrowing to 33-1/3% of its total assets. Borrowing may be in
the form of selling a security that it owns and agreeing to repurchase
that security later at a higher price.
Diversification Requirements
SEC Requirement: The Funds are not "diversified" according to certain
federal securities provisions regarding diversification of their assets.
As a non-diversified investment company, a Fund may devote a larger
portion of its assets to the securities of a single issuer, than if it
were diversified.
IRS Requirement: Each Fund intends to comply with certain federal tax
requirements regarding the diversification of its assets. Generally,
under these requirements, a Fund must invest at least 50% of its total
assets so that no more than 5% of its total assets are invested in the
securities of any one issuer at the time of purchase. These
diversification provisions and requirements are discussed in the SAI.
The SEC and IRS have certain restrictions with which all mutual funds
must comply. The Funds monitor these limitations on an ongoing basis.
- 11 -
<PAGE>
Investment Performance
Victory may advertise the performance of a Fund by comparing it to other
mutual funds with similar objectives and policies. Performance
information may also appear in various publications. Any fees charged by
Investment Professionals may not be reflected in these performance
calculations. Performance information is contained in the annual and
semi-annual reports. You may obtain a copy free of charge by calling
800-KEY-FUND.
The "30-day yield" is an "annualized" figure--the amount you would earn
if you stayed in a Fund for a year and the Fund continued to earn the
same net interest income throughout that year. To calculate 30-day
yield, a Fund's net investment income per share for the most recent 30
days is divided by the maximum offering price per share for Class A
shares, or by the NAV for Class B shares.
To calculate "total return," a Fund starts with the total number of
shares that you could buy for $1,000 at the beginning of the period.
Then the Fund adds all dividends and distributions paid as if they were
reinvested in additional shares. (This takes into account the Fund's
dividend distributions, if any.) The total number of shares is
multiplied by the net asset value on the last day of the period and the
result is divided by the initial $1,000 investment to determine the
percentage gain or loss. For periods of more than one year, the
cumulative total return is adjusted to get an average annual total
return.
Yield is a measure of net interest income.
Tax-equivalent yield shows the taxable income you would have to earn to
obtain a yield equal to an investment in one of the Funds.
Average annual total return is a hypothetical measure of past dividend
income plus capital appreciation. It is the sum of all parts of a Fund's
investment return for periods greater than one year.
Total return is the sum of all parts of a Fund's investment return.
Whenever you see information on the Fund's performance, do not consider
the past performance to be an indication of the performance you could
expect by making an investment in a Fund today. The past is an imperfect
guide to the future. History does not always repeat itself.
Past performance is not a guarantee of future results. You may obtain
the current 30-day yield by calling 800-KEY-FUND. Our Shareholder
Servicing representatives are available from 8:00 a.m. to 7:00 p.m.
Eastern Time Monday through Friday.
Share Price
Each Fund's share price, called its net asset value (NAV), is calculated
each business day (normally at 4:00 p.m. Eastern time). Shares are
purchased at the next share price calculated after your order is
received and accepted. A business day is a day on which the New York
Stock Exchange is open for trading or any day in which enough trading
has occurred in the securities held by a Fund to materially affect the
NAV. If your account is established with an Investment Professional or a
bank, you may not be able to purchase or sell shares on other holidays
when the Federal Reserve Bank of Cleveland is closed, but the New York
Stock Exchange is open.
The NAV is calculated by adding up the total value of a Fund's
investments and other assets, subtracting its liabilities, and then
dividing that figure by the number of outstanding shares of the Fund:
NAV = Total Assets--Liabilities
Number of Shares Outstanding
Each Fund's net asset value can be found daily in The Wall Street
Journal and other newspapers.
- 12 -
<PAGE>
The daily NAV is useful to you as a shareholder because the NAV,
multiplied by the number of Fund shares you own, gives you the dollar
amount and value of your investment.
Dividends, Distributions, and Taxes
As a shareholder, you are entitled to your share of net income and
capital gains on a Fund's investments. The Funds pass their earnings
along to investors in the form of dividends. Dividend distributions are
the net interest earned on investments after expenses. If a Fund makes a
capital gain distribution, it usually occurs in December. As with any
investment, you should consider the tax consequences of an investment in
a Fund.
Ordinarily, net income earned on securities owned by a Fund accrues
daily and is paid monthly. Any net capital gains realized by a Fund are
paid as dividends at least annually. The National Municipal Bond Fund
and New York Tax-Free Fund declare and pay dividends separately for
Class A and Class B shares. Shareholders who earn a dividend of less
than $10.00 will have dividends reinvested automatically into their
accounts. Distributions can be received in one of the following ways:
Reinvestment Option
You can have distributions automatically reinvested in additional shares
of a Fund. If you do not indicate another choice on your Account
Application, this option will be assigned to you automatically.
Cash Option
A check will be mailed to you no later than 7 days after the pay date.
Income Earned Option
Dividends can be automatically reinvested in a Fund in which you have
invested and your capital gains can be paid in cash, or capital gains
can be reinvested and dividends paid in cash.
Directed Dividends Option
You can have distributions automatically reinvested in shares of another
fund of the Victory Group. The "Victory Group" includes other funds of
The Victory Portfolios and Key Mutual Funds. If distributions from Class
A shares are reinvested in Class A shares of another fund, you will not
pay a sales charge on the reinvested distributions.
Directed Bank Account Option
In most cases, you can have distributions automatically transferred to
your bank checking or savings account. Under normal circumstances,
dividends will be transferred within 7 days of the dividend payment
date. The bank account must have a registration identical to that of
your Fund account.
Buying a Dividend. You should check a Fund's distribution schedule
before you invest. If you buy shares of a fund shortly before it makes a
distribution, some of your investment may come back to you as a taxable
distribution.
Your choice of distribution should be set up on the original Account
Application. If you would like to change the option you selected, please
call the Transfer Agent at 800-KEY-FUND.
- 13 -
<PAGE>
Important Information about Taxes
Each Fund intends to continue to qualify as a regulated investment
company, in which case it will pay no federal income tax on the earnings
or capital gains it distributes to shareholders.
Certain dividends from a Fund will be "exempt-interest dividends," which
are exempt from federal income tax. However, exempt-interest dividends
are not necessarily exempt from state or local taxes.
Ordinary dividends from a Fund, if taxable, are treated as ordinary
income; dividends from a Fund's long-term capital gain are taxable as
capital gain.
Dividends are treated in the same manner for federal income tax purposes
whether you receive them in cash or in additional shares. They may also
be subject to state and local taxes.
Certain dividends paid to you in January may be taxable as if they had
been paid to you December of the previous year.
Tax statements will be mailed from a Fund every January showing the
amounts and tax status of distributions made to you.
Certain dividends from the Ohio Municipal Bond Fund will be exempt from
certain Ohio state and local taxes.
Certain dividends from the New York Tax-Free Fund will be exempt from
certain New York state and local taxes.
Because your tax treatment depends on your purchase price and tax
position, you should keep your regular account statements for use in
determining your tax.
You should review the more detailed discussion of federal income tax
considerations in the SAI.
THE TAX INFORMATION IN THIS PROSPECTUS IS PROVIDED AS GENERAL
INFORMATION. YOU SHOULD CONSULT YOUR OWN TAX ADVISER ABOUT THE TAX
CONSEQUENCES OF AN INVESTMENT IN A FUND.
- 14 -
<PAGE>
Investing with Victory
If you are looking for a convenient way to open an account for yourself
or a minor child, or to add money to an existing account, Victory can
help. The section on "Choosing a Share Class" will help you decide
whether it would be more to your advantage to purchase Class A or Class
B shares of a Fund. The following sections will describe how to open an
account, how to access information on your account, and how to purchase,
exchange, and redeem shares of a Fund. We want to make it simple for you
to do business with us. The sections that follow will serve as a guide
to your investments with Victory. If you have questions about any of
this information, please call your Investment Professional or one of our
customer service representatives at 800-KEY-FUND. They will be happy to
assist you.
All you need to do to get started is to fill out an application.
Choosing a Share Class
The Ohio Municipal Bond Fund offers only Class A shares. The National
Municipal Bond Fund and the New York Tax-Free Fund offer two classes of
shares: Class A and Class B. Each class has its own cost structure,
allowing you to choose the one that best meets your requirements. Your
Investment Professional also can help you decide.
CLASS A
Front-end sales charges, as described below. There are several ways to
reduce these charges.
Lower annual expenses than Class B shares.
CLASS B
No front-end sales charge. All your money goes to work for you
immediately.
Higher annual expenses than Class A shares.
A deferred sales charge on shares you sell within 6 years of purchase,
as described on the next page.
Automatic conversion to Class A shares after 8 years, thus reducing
future annual expenses.
For historical expense information on Class A and B shares, see the
financial highlights in the fund overviews earlier in this prospectus.
- 15 -
<PAGE>
Calculation of Sales Charges--Class A
Class A shares are sold at their public offering price, which includes
the initial sales charge. The sales charge as a percentage of your
investment decreases as the amount you invest increases. The current
sales charge rates and commissions paid to Investment Professionals are
as follows:
<TABLE>
<CAPTION>
Sales Charge Sales Charge Dealer Reallowance
as a % of as a % of as a % of the
Your Investment Offering Price Your Investment Offering Price
<S> <C> <C> <C>
Up to $50,000 4.75% 4.99% 4.00%
$50,000 up to $100,000 4.50% 4.71% 4.00%
$100,000 up to $250,000 3.50% 3.63% 3.00%
$250,000 up to $500,000 2.25% 2.30% 2.00%
$500,000 up to $1,000,000 1.75% 1.78% 1.50%
$1,000,000 and above<F1> 0.00% 0.00% <F1>
<FN>
<F1>There is no initial sales charge on purchases of $1 million or more.
However, a contingent deferred sales charge (CDSC) of up to 1.00% of the purchase price will
be charged to the shareholder if shares are redeemed in the first year after purchase, or
at .50% within two years of the purchase. This charge will be based on either the cost of
the shares or net asset value at the time of redemption, whichever is lower. There will be
no CDSC on reinvested distributions. Investment Professionals may be paid at a rate
of up to 1.00% of the purchase price.
</FN>
</TABLE>
The Distributor reserves the right to pay the entire commission to
dealers. If that occurs, the dealer may be considered an "underwriter"
under federal securities laws.
Sales Charge Reductions and Waivers for Class A Shares
You may qualify for reduced sales charges in the following cases:
1. A Letter of Intent lets you purchase Class A shares of a fund over a
13-month period and receive the same sales charge as if all shares had
been purchased at one time. You must start with a minimum initial
investment of 5% of the total amount.
2. Rights of Accumulation allow you to add the value of any Class A
shares you already own to the amount of your next Class A investment for
purposes of calculating the sales charge at the time of purchase.
3. You can combine Class A shares of multiple Victory Funds (excluding
the money market funds) for purposes of calculating the sales charge.
The combination privilege also allows you to combine the total
investments from the accounts of household members of your immediate
family (spouse and children under 21) for a reduced sales charge at the
time of purchase.
4. Waivers for certain investors:
a. Current and retired Fund Trustees, directors, trustees, employees,
and family members of employees of KeyCorp or "Affiliated
Providers,"* and dealers who have an agreement with the Distributor
and any trade organization to which the Adviser or the Administrator
belong.
b. Investors who purchase shares for trust or other advisory accounts
established with KeyCorp or its affiliates.
c. Investors who reinvest a distribution from a deferred compensation
plan, agency, trust, or custody account that was maintained by KeyBank
National Association and its affiliates, the Victory Group, or invested
in a fund of the Victory Group.
d. Investors who reinvest shares from another mutual fund complex or
the Victory Group within 90 days after redemption, if they paid a sales
charge for those shares.
e. Investment Professionals who invest in shares of a Fund for fee-
based investment products or accounts, and selling brokers and their
sales representatives
*Affiliated Providers are affiliates and subsidiaries of KeyCorp,
and any organization that provides services to Victory and Key Mutual
Funds (the Victory Group).
There are several ways you can combine multiple purchases in the Victory
Funds and take advantage of reduced sales charges.
- 16 -
<PAGE>
Deferred Sales Charges--Class B
Shares are offered at their NAV per share, without an initial sales
charge. When you sell the shares within six years of buying them, there
is a contingent deferred sales charge (CDSC). The CDSC is based on the
original purchase cost of your investment or the NAV at the time of
redemption, whichever is lower.
Eight years after Class B shares are purchased, they will automatically
convert to Class A shares. Class A shareholders are not subject to the
asset-based sales charge that would normally apply to Class B shares, as
described in "Distribution Plan for Class B Shares." Also see the SAI
for additional details.
<TABLE>
<CAPTION>
Years After CDSC on Shares
Purchase Being Sold
<S> <C> <C>
0-1 5.0%
1-2 4.0%
2-3 3.0%
3-4 3.0%
4-5 2.0%
5-6 1.0%
After 6 Years None
</TABLE>
The Distributor pays sales commissions of 4.00% of the purchase price to
dealers at the time of sale.
Sales Charge Reductions and Waivers for Class B Shares
The CDSC will be waived for the following redemptions:
1. Distributions from retirement plans if the distributions are made:
a. under the Systematic Withdrawal Plan after age 59 1/2 for up to 12%
of the account value annually; or
b. following the death or disability of the participant or beneficial
owner;
2. Redemptions from accounts other than retirement accounts following
the death or disability of the shareholder;
3. Returns of excess contributions to retirement plans;
4. Distributions of less than 12% of the annual account value under a
Systematic Withdrawal Plan; and
5. Shares issued in a plan of reorganization sponsored by Victory, or
shares redeemed involuntarily in a similar situation.
There is no CDSC on reinvested dividends. The longer the time between
the purchase and sale of shares, the lower the rate of the CDSC.
- 17 -
<PAGE>
How to Purchase Shares
Class A and Class B Shares can be purchased in a number of different
ways.
You can send in your investment by check, wire transfer, exchange from
another Victory Fund, or through arrangements with your Investment
Professional. An Investment Professional is a salesperson, financial
planner, investment adviser, or trust officer who provides you with
investment information. Sometimes they will charge you for these
services. Their fee will be in addition to, and unrelated to, the fees
and expenses charged by a Fund.
All you need to do to get started is to fill out an application.
Make your check payable to: The Victory Funds
Keep the following addresses handy for purchases, exchanges, or
redemptions.
Regular U.S. Mail Address
Send completed Account Applications with your check, bank draft or money
order to:
The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527
Overnight Mail Address
Use this address ONLY for overnight packages.
The Victory Funds
c/o Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
PHONE: 800-KEY-FUND
Wire Address
The Transfer Agent does not charge a wire fee. Always call the Transfer
Agent at 800-KEY-FUND BEFORE wiring funds to obtain a control number.
State Street Bank and Trust Co.
ABA #011000028
For Credit to DDA
Account #9905-201-1
For Further Credit to Account #
(insert account number, name,
and control number
assigned by the
Transfer Agent)
Telephone
800-KEY-FUND
800-539-3863
FAX Number:
800-529-2244
Telecommunication Device for the Deaf (TDD):
800-970-5296
- 18 -
<PAGE>
ACH
After your account is set up, your purchase amount can be transferred by
Automated Clearing House (ACH). Only domestic member banks may be used.
It takes about 15 days to set up the ACH feature. The Funds do not
currently charge a fee for ACH transfers.
Statements and Reports
You will receive a periodic statement reflecting any transactions that
affect the balance or registration of your account. You will receive a
confirmation after any purchase, exchange, or redemption. If your
account has been set up by an Investment Professional, account activity
will be detailed in their statements to you. Share certificates are not
issued. Twice a year, you will receive the financial reports of the
Funds. By January 31 of each year, you will be mailed an IRS Form
reporting distributions for the previous year, which will also be filed
with the IRS.
Systematic Investment Plan
To enroll in the Systematic Investment Plan, you should check this box
on the Account Application. We will need your bank account information
and the amount and frequency of your investment. You can select monthly,
quarterly, semi-annual, or annual investments. You should attach a
voided personal check so the proper information can be obtained. You
must first meet the minimum investment requirement of $500, then we will
make automatic withdrawals of the amount you indicate ($25 or more) from
your bank account and invest in shares of a Fund.
Retirement Plans
You can use the Funds as part of your retirement portfolio. Your
Investment Professional can set up your new account under one of several
tax sheltered plans. Please contact your Investment Professional or the
Fund for details regarding an IRA or other retirement plan that works
best for your financial situation. Generally, funds that pay tax-free
income are not appropriate investments for retirement plans.
If you would like to make additional investments after your account is
already established, use the Investment Stub attached to your statement
and send it with your check to the address indicated.
All purchases must be made in U.S. Dollars and drawn on U.S. banks. The
Transfer Agent may reject any purchase order in its sole discretion. If
your check is returned for any reason, you may be charged for any
resulting fees and/or losses. Third party checks will not be accepted.
You may only invest or exchange into fund shares legally available in
your state. If your account falls below $500, we may ask you to re-
establish the minimum investment. If you do not do so within 60 days, we
may close your account and send you the value of your account.
- 19 -
<PAGE>
How to Exchange Shares
An exchange is the selling of shares of one fund of the Victory Group to
purchase shares of another. You may exchange shares of one Victory fund
for shares of the same class of any other, generally without paying any
additional sales charges. The "Victory Group" includes funds offered as
a part of the Victory Funds and Key Mutual Funds. Key Mutual Funds is
affiliated with KeyCorp.
You can exchange shares of the Funds by writing or calling the Transfer
Agent at 800-KEY-FUND. When you exchange shares of the Funds, you should
keep the following in mind:
Shares of the fund selected for exchange must be available for sale in
your state of residence.
The Fund whose shares you want to exchange and the fund whose shares you
want to buy must offer the exchange privilege.
Shares of the Fund may be exchanged at relative net asset value. This
means that if you own Class A shares of the Fund, you can only exchange
them for Class A shares of another fund and not pay a sales charge. The
same rules apply to Class B shares.
You must meet the minimum purchase requirements for the fund you
purchase by exchange.
The registration and tax identification numbers of the two accounts must
be identical.
You must hold the shares you buy when you establish your account for at
least 7 days before you can exchange them; after the account is open 7
days, you can exchange shares on any business day.
Before exchanging, read the prospectus of the fund you wish to purchase
by exchange.
You can obtain a list of funds available for exchange by calling the
Transfer Agent at 800-KEY-FUND.
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<PAGE>
How to Redeem Shares
If we receive your request by 4:00 p.m. Eastern time, your redemption
will be processed the same day.
By Telephone
The easiest way to redeem shares is by calling 800-KEY-FUND. When you
fill out your original application, be sure to check the box marked
"Telephone Authorization." Then when you are ready to redeem, call us
and tell us which one of the following options you would like to use:
Mail a check to the address of record;
Wire funds to a domestic financial institution;
Mail to a previously designated alternate address; or
Electronically transfer the funds via ACH.
All telephone calls are recorded for your protection and measures are
taken to verify the identity of the caller. If we properly act on
telephone instructions and follow reasonable procedures to ensure
against unauthorized transactions, neither Victory nor its servicing
agents, the Adviser, nor the Transfer Agent will be responsible for any
losses. If these procedures are not followed, the Transfer Agent may be
liable to you for losses resulting from unauthorized instructions.
If there is an unusual amount of market activity and you cannot reach
the Transfer Agent by telephone, consider placing your order by mail.
By Mail
Use the Regular U.S. Mail or Overnight Mail Address to redeem shares.
Send us a letter of instruction indicating your Fund account number,
amount of redemption, and where to send the proceeds. All account owners
must sign. A signature guarantee is required for the following
redemption requests:
Redemptions over $10,000;
Your account registration has changed within the last 15 days;
The check is not being mailed to the address on your account;
The check is not being made payable to the owner of the account; or
If the redemption proceeds are being transferred to another Victory
Group account with a different registration.
A signature guarantee can be obtained from a financial institution such
as a bank, broker-dealer, credit union, clearing agency, or savings
association.
By Wire
If you want to redeem funds by wire, you must establish a Fund account
which will accommodate wire transactions. If you call by 4:00 p.m.
Eastern time, your funds will be wired on the next business day.
By ACH
Normally, your redemption will be processed on the same day, or the next
day if your instructions are received after 4:00 p.m. Eastern Time. It
will be transferred by ACH as long as the transfer is to a domestic
bank.
Under certain emergency circumstances, the right of redemption may be
suspended. Redemption proceeds from the sale of shares purchased by a
check may be held until the purchase check has cleared. If you request a
complete redemption, any dividends declared will be included with the
redemption proceeds.
Systematic Withdrawal Plan
If you check this box on the Account Application, we will send monthly,
quarterly, semi-annual, or annual payments to you or the person you
designate. The minimum withdrawal is $25, and you must have an account
value of $5,000 or more to start withdrawals. Once again, we will need a
voided personal check to activate this feature. You should be aware that
your account eventually may be depleted. However, you cannot
automatically close your account using the Systematic Withdrawal Plan.
If your account value falls below $500, we may ask you to bring the
account back to the $500 minimum. If you decide not to increase your
account to the minimum balance, your account may be closed and the
proceeds mailed to you.
There are a number of convenient ways to redeem shares of a Fund. You
can use the same mailing addresses listed for purchases. You will earn
dividends up to the date your redemption request is processed.
- 21 -
<PAGE>
Organization and Management of the Funds
We want you to know who plays what role in your investment and how they
are related. This section discusses the organizations employed by the
Funds to service their shareholders. They are paid a fee for their
services.
About Victory
Each Fund is a member of the Victory Funds, a group of 26 distinct
investment portfolios organized as a Delaware business trust. Some of
the Victory Funds have been operating since 1983.
The Board of Trustees of Victory has the overall responsibility for the
management of the Funds. They are elected by the shareholders.
The Investment Adviser
One of a Fund's most important contracts is its Advisory Agreement with
Key Asset Management Inc. (KAM or the Adviser), a New York Corporation
registered as an investment adviser with the SEC. KAM is a subsidiary of
KeyBank National Association, a wholly-owned subsidiary of KeyCorp. On
February 28, 1997, KAM became the surviving corporation after the
reorganization of four indirect investment adviser subsidiaries of
KeyCorp. Affiliates of the Adviser manage approximately $50 billion for
a limited number of individual and institutional clients.
The Advisory Agreement allows the Adviser to hire employees. It also
allows KAM to choose brokers or dealers to handle the purchases and
sales of a Fund's securities. Subject to Board approval, Key
Investments, Inc. (KII) and/or Key Clearing Corporation (KCC) may act as
clearing broker for the Funds' Fund's security transactions in
accordance with procedures adopted by the Funds, and receive commissions
or fees in connection with their services to the Funds. Both KII and KCC
are wholly-owned indirect subsidiaries of KeyCorp and affiliates of the
adviser.
Prior to February 28, 1997, KeyCorp Mutual Fund Advisers, Inc. was the
adviser and Society Asset Management, Inc. (formerly the adviser) was
the sub-adviser to each of the Funds. During the fiscal year ended
October 31, 1996, KeyCorp Mutual Fund Advisers, Inc. was paid an
advisory fee at an annual rate based on a percentage of the average
daily net assets of each Fund (after waivers) as follows:
<TABLE>
<CAPTION>
National New York Ohio
Municipal Tax-Free Municipal
Bond Fund Fund Bond Fund
<S> <C> <C> <C>
Advisory Fees 0% .05% .45%
</TABLE>
MANAGEMENT OF THE FUNDS
Trustees
Supervise each Fund's activities.
Investment Adviser
Key Asset Management Inc.
127 Public Square
Cleveland, OH 44114
Manages each Fund's business
and investment activities.
The Administrator, Distributor, and Fund Accountant
BISYS Fund Services is the Administrator and Distributor. BISYS is paid
a fee at an annual rate of .15% of each Fund's average daily net assets
as the Administrator, but does not charge a fee for its services as
Distributor. BISYS Fund Services Ohio, Inc. receives a fee as the Funds'
Accountant.
The Distributor may provide sales support, including cash or other
compensation to dealers for selling shares of a Fund. Payments may be in
the form of trips, tickets, and/or merchandise offered through sales
contests. It does this at its own expense, and not at the expense of a
Fund or its shareholders.
Shareholder Servicing Plan
Victory has a Shareholder Servicing Plan for each class of shares of the
Fund. The shareholder servicing agent performs a number of services for
its customers who are shareholders of the Funds. It establishes and
maintains accounts and records, processes dividend payments, arranges
for bank wires, assists in transactions, and changes account
information. For these services a Fund pays a fee at an annual rate of
up to .25%
- 22 -
<PAGE>
of the average daily net assets of the shares serviced by the agent. The Funds
have agreements with various shareholder servicing agents, including KeyBank
National Association and its affiliates, other financial institutions, and
securities brokers. Shareholder servicing agents may waive all or a portion of
their fee periodically.
Distribution Plan
Under Rule 12b-1 of the Investment Company Act of 1940, Victory has
adopted a Distribution and Service Plan for the Class A shares of the
National Municipal Bond Fund and the New York Tax-Free Fund. The Class A
Shares currently do not pay expenses under this plan.
Victory has adopted a Distribution and Service Plan for Class B Shares
of the National Municipal Bond Fund and the New York Tax-Free Fund.
Victory pays the Distributor an annual asset-based sales charge of
0.75%. The fee is computed on the average daily net assets of those
shares. The Distributor then uses the asset-based sales charge to recoup
these sales commissions and the costs for financing them. See the SAI
for more details regarding this plan.
Independent Accountant
Coopers & Lybrand L.L.P. serves as independent accountant to the Funds.
Legal Counsel
Kramer, Levin, Naftalis & Frankel serves as legal counsel to the Funds.
HOW THE FUNDS ARE ORGANIZED
Shareholders
Financial Services Firms and their
Investment Professionals
Advise current and prospective
shareholders on their Fund investments.
Transfer Agent/Servicing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
Handles services such as record-keeping, statements, processing of buy
and sell requests, distribution of dividends, and servicing of
shareholders' accounts.
Administrator, Distributor,
and Fund Accountant
BISYS Fund Services, Inc. and
BISYS Fund Services Ohio, Inc.
3435 Stelzer Road
Columbus, OH 43219
Markets the Funds, distributes shares through investment professionals,
and calculates the value of shares.
Custodian
Key Trust Company of Ohio, N.A.
127 Public Square
Cleveland, OH 44114
Provides for safekeeping of the Funds' investments and cash, and settles
trades made by the Funds.
The Fund is supervised by the Board of Trustees who monitors the
services provided to investors.
- 23 -
<PAGE>
Additional Information
The Funds offer only the classes of shares described in this prospectus,
but at some future date, the Funds may offer additional classes of
shares through a separate prospectus.
Your Rights as a Shareholder
All shareholders of each class have equal voting, liquidation, and other
rights. As a shareholder of a Fund, you have rights and privileges
similar to those enjoyed by other corporate shareholders. Delaware Trust
law limits the liability of shareholders.
If any matters are to be voted on by shareholders (such as a change in a
fundamental investment objective or the election of Trustees), each
share outstanding at that point would be entitled to one vote. If you
have a qualified trust account, the trustee will vote your shares on
your behalf or in the same percentage voted on shares that are not held
in trust. Shareholders with more than 10% of the outstanding shares of a
Fund may call a special meeting for removal of a Trustee. Normally,
Victory is not required to hold annual meetings of shareholders.
However, shareholders may request one under certain circumstances, as
described in the SAI.
Code of Ethics
Victory and the Adviser have each adopted a Code of Ethics to which all
investment personnel and all other access persons to the Funds must
conform. Investment personnel must refrain from certain trading
practices and are required to report certain personal investment
activities. Violations of the Code of Ethics can result in penalties,
suspension, or termination of employment.
Banking Laws
Banking laws, including the Glass-Steagall Act, prevent a bank holding
company or its affiliates from sponsoring, organizing or controlling a
registered, open-end investment company. However, bank holding company
subsidiaries may act as investment adviser, transfer agent, custodian,
or shareholder servicing agent. They may also purchase shares of such a
company for their customers and pay third parties for performing these
functions. Should these laws change in the future, the Trustees would
consider selecting another qualified firm so that all services would
continue.
Shareholder Communications
You will receive unaudited Semi-Annual Reports and audited Annual
Reports on a regular basis from each Fund. In addition, you will also
receive updated prospectuses or supplements to this prospectus. In order
to eliminate duplicate mailings to an address at which two or more
shareholders with the same last name reside, the Funds will send only
one copy of the above communications.
Some additional information you should know about the Funds.
If you would like to receive additional copies of any materials, please
call the Funds at 800-KEY-FUND.
The securities described in this prospectus and the SAI are not offered
in any state in which they may not lawfully be sold. No sales
representative, dealer, or other person is authorized to give any
information or make any representation other than those contained in
this prospectus and the SAI.
- 24 -
<PAGE>
Other Securities and Investment Practices
The following table lists some of the types of securities each of the
Funds may choose to purchase under normal market conditions. The
majority of the portfolio for each of the Funds is made up of general
obligation bonds and revenue bonds. However, the Funds are also
permitted to invest in securities as shown in the table below and in the
SAI. For temporary defensive purposes each Fund may hold up to 100% of
its total assets in cash or short-term money market instruments.
<TABLE>
<CAPTION>
National New York Ohio
List of Allowable Investments and Municipal Tax-Free Municipal
Investment Practices Bond Fund Fund Bond Fund
<S> <C> <C> <C>
Revenue Bonds. Payable only from the proceeds of
a specific revenue source, such as the users of
a municipal facility. <F2> <F2> <F2>
General Obligation Bonds. Secured by the issuer's
full faith, credit, and taxing power for payment
of interest and principal. <F2> <F2> <F2>
When-Issued and Delayed-Delivery Securities. A security
That is purchased for delivery at a later time.
The market value may change before the delivery date,
and the value is included in the NAV of the Fund. 33 1/3% 33 1/3% 33 1/3%
Zero Coupon Bonds. These securities are purchased at
a discount from the face value. The face value is
received at maturity, with no interest payments
before then. These may be subject to greater risks
of price fluctuation. <F2> <F2> <F2>
Investment Company Securities. Shares of other
mutual funds with similar investment objectives.
The following limitations apply: (1) No more than
5% of the Fund's total assets may be invested in
one mutual fund, (2) a Fund and its affiliates may
not own more than 3% of the securities of any one 5% 5% 5%
mutual fund, and (3) no more than 10% of the Fund's 3% 3% 3%
total assets in combined mutual fund holdings. 10% 10% 10%
Municipal Lease Obligations. Issued to acquire land,
equipment, or facilities. They may become taxable
if the lease is assigned. The lease could terminate,
resulting in default. 30% 30% 30%
Certificates of Participation. A certificate that states
that an investor willreceive a portion of the lease
payments from a municipality. 20% 20% 20%
Refunding Contracts. Issued to refinance an issuer's debt.
The Fund buys these at a stated price for a future
settlement date. <F2> <F2> <F2>
Tax, Revenue and Bond Anticipation Notes. Issued in
expectation of future revenues. <F2> <F2> <F2>
U.S. Government Securities. Securities issued or
guaranteed by the U.S. government, its agencies
or instrumentalities. Some are direct obligations
of the U.S. Treasury; others are obligations only
of the U.S. agency. 20% 20% 20%
Restricted Securities. Securities that are not
registered under federal securities laws but
that may be traded among qualified institutional
investors and the Fund. Some of these securities
may be illiquid. <F2> <F2> <F2>
<F1>Variable & Floating Rate Securities. Investment
grade instruments, some of which may be derivatives
and illiquid, with interest rates that
reset periodically<F1>. <F2> <F2> <F2>
Mortgage-Backed Securities, Tax-Exempt. Tax-exempt
investments secured by a mortgage or pools
of mortgages. 35% 35% 35%
<F1>Collateralized Mortgage Obligations, Tax-Exempt.
Debt obligations that are secured by mortgage-
backed certificates. Some are issued by U.S.
government agencies and instrumentalities.<F1> 25% 25% 25%
- 25 -
<PAGE>
Resource Recovery Bonds. Issued to build
waste-to-energy facilities and equipment. <F2> <F2> <F2>
Tax Preference Items. Tax-exempt obligations that
pay interest which is subject to the federal
"alternative minimum tax." 20% 20% 20%
Industrial Development Bonds and Private Activity Bonds.
Secured by lease payments made by a corporation, these
bonds are issued for financing large industrial projects;
i.e., building industrial parks or factories. 25% 25% 25%
Tax-Exempt, Commercial Paper. Short-term obligations
that are exempt from state and federal income tax. <F2> <F2> <F2>
<F1>Futures Contracts and Options on Futures Contracts. 5% in 5% in 5% in
Contracts involving the right or obligation to margins margins margins
deliver or receive assets or money depending and and and
on the performance of one or more assets or a premiums; premiums; premiums;
securities index. To reduce the effects of 33 1/3% 33 1/3% 33 1/3%
leverage, liquid assets equal to the contract subject to subject to subject to
commitment are set aside to cover the commitment futures or futures or futures or
limit. The Funds may invest in futures in an options on options on options on
effort to hedge against market risk.<F1> futures futures futures
Repurchase Agreements. An agreement to sell and
repurchase a security at a stated price plus
interest. The seller's obligation to the
Fund is secured by collateral. 20% 20% 20%
Demand Features, or "puts." Contract for the
right to sell or redeem a security at a
predetermined price on or before a stated date.
Usually the issuer may obtain either a stand-by
or direct pay letter of credit or guarantee from
banks as backup. <F2> <F2> <F2>
Taxable Obligations. Only used for temporary
investments. Fund does not intend to use. 20% 20% 20%
Illiquid Securities. Investments that cannot be
readily sold within seven days in the usual
course of business at approximately the price 15% of 15% of 15% of
at which a Fund values them. net assets net assets net assets
Borrowing, Reverse Repurchase Agreements.
The borrowing of money from banks (up to 5%
of total assets) or through reverse repurchase
agreements (up to 33 1/3% of total assets). The 5% 5% 5%
Funds will not use borrowing to create leverage. 33 1/3% 33 1/3% 33 1/3%
Securities Lending. In order to generate additional
income, a Fund may lend its portfolio securities.
A Fund will receive collateral for the value of
the security plus any interest due. A Fund only
will enter into loan arrangements with entities
that the Adviser has determined are creditworthy. 33 1/3% 33 1/3% 33 1/3%
Dollar Weighted Effective Average Maturity. Based
on the value at the time of purchase of a fund's
investments in securities with different maturity
dates. This measures the sensitivity of a debt
security's value to changes in interest rates.
Longer term debt securities are more volatile
than shorter term debt securities because their
prices are more sensitive to interest rate
changes. Therefore, the NAV of a fund with a
longer dollar weighted effective average 5-11 20-30 5-15
maturity may fluctuate more. years years years
% Percantage of total assets.
<FN>
<F1>Indicates a "derivative security," whose value is linked to, or
derived from another security, instrument, or index.
<F2> No limitation of usage; Fund may be using currently.
</FN>
</TABLE>
The Funds may also hold cash for temporary defensive purposes. For more
information on ratings and detailed descriptions of each of the above
investment vehicles, see the SAI.
- 26 -
<PAGE>
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<PAGE>
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<PAGE>
Bulk Rate
U.S. Postage
PAID
Cleveland, OH
Permit No. 469
Victory Funds
PRINTED ON RECYCLED PAPER
VF/TEFI-PRO (2/97)
<PAGE>
Rule 497(c)
Registration No. 33-8982
Victory Funds
PROSPECTUS
FINANCIAL RESERVES FUND
OHIO MUNICIPAL MONEY MARKET FUND
PRIME OBLIGATIONS FUND
TAX-FREE MONEY MARKET FUND
U.S. GOVERNMENT OBLIGATIONS FUND
800-KEY-FUND(R) or 800-539-3863
March 1, 1997
<PAGE>
THE VICTORY PORTFOLIOS
FINANCIAL RESERVES FUND
OHIO MUNICIPAL MONEY MARKET FUND
PRIME OBLIGATIONS FUND
TAX-FREE MONEY MARKET FUND
U.S. GOVERNMENT OBLIGATIONS FUND
800-KEY-FUND(R) 800-539-3863
This prospectus describes the following funds:
Financial Reserves Fund
Ohio Municipal Money Market Fund
Prime Obligations Fund
Tax-Free Money Market Fund
U.S. Government Obligations Fund
The five Victory Funds discussed in this prospectus (the Funds) are a part
of The Victory Portfolios (Victory), an open-end investment management
company. The Ohio Municipal Money Market Fund is a non-diversified money
market mutual fund. The other four Funds are diversified money market mutual
funds. This prospectus explains the objectives, policies, risks, and
strategies of the Funds. You should read this prospectus before investing in
one of these Funds and keep it for future reference. A detailed Statement of
Additional Information (SAI) describing each of the Funds is also available
for your review. The SAI has been filed with the Securities and Exchange
Commission (SEC), and is incorporated into this prospectus by reference. If
you would like a free copy of the SAI, please request one by calling us at
800-KEY-FUND.
<PAGE>
TABLE OF CONTENTS
Introduction 2
AN OVERVIEW OF EACH OF THE FUNDS
A fund-by-fund analysis which includes objectives, policies, strategies,
expenses, and financial highlights
Financial Reserves Fund 4
Ohio Municipal Money Market Fund 6
Prime Obligations Fund 8
Tax-Free Money Market Fund 10
U.S. Government Obligations Fund 12
Risk Factors 14
Investment Limitations 15
Investment Performance 15
Share Price 16
Dividends, Distributions, and Taxes 16
INVESTING WITH VICTORY 18
How to Purchase Shares 18
How to Exchange Shares 20
How to Redeem Shares 21
Organization and Management of the Funds 23
Additional Information 25
Other Securities and Investment Practices 26
An investment in a Fund is neither insured nor guaranteed by the U.S.
Government. There can be no assurance that a Fund will be able to maintain a
stable net asset value of $1.00 per share.
Shares of the Funds are:
Not insured by the FDIC;
Not deposits or other obligations of, or guaranteed by, any KeyBank, any of
its affiliates, or any other bank;
Subject to investment risks, including possible loss of the principal amount
invested.
These securities have not been approved or disapproved by the Securities and
Exchange Commission or any securities regulatory authority of any state, nor
has the Securities and Exchange Commission or any such state authority
passed upon the accuracy or adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
<PAGE>
KEY TO FUND INFORMATION
OBJECTIVE AND STRATEGY
The goals and the strategy that a Fund plans to use in pursuing its
investment objective.
RISK FACTORS
The risks that you may assume as an investor in the Fund.
EXPENSES
The costs that you will pay as an investor in the Fund, including sales
charges and ongoing expenses.
FINANCIAL HIGHLIGHTS
A table which shows a Fund's historical performance. This table also
summarizes previous operating expenses.
Investment Objective and Strategy
Objective
The Financial Reserves Fund seeks to provide as high a level of current
income as is consistent with preserving capital and providing liquidity.
The Ohio Municipal Money Market 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.
The Prime Obligations Fund seeks to provide current income consistent with
liquidity and stability of principal.
The Tax-Free Money Market Fund seeks to provide current interest income free
from federal income taxes consistent with relative liquidity and stability
of principal.
The U.S. Government Obligations Fund seeks to provide current income
consistent with liquidity and stability of principal.
Strategy
Each of the Funds pursues its investment objective by investing in a
diversified portfolio of high-quality, short-term U.S. dollar-denominated
money market instruments. However, each of the Funds has unique investment
strategies and its own risk/reward profile. The Funds seek to maintain a
constant net asset value of $1.00 per share, and shares are offered at net
asset value. Please review the section about the Fund in which you are
interested in investing and "Other Securities and Investment Practices" for
an overview of the Funds.
Risk Factors
The Funds are not insured by the FDIC, and while each Fund attempts to
maintain a $1.00 per share price, there is no guarantee that it will be able
to do so. The Ohio Municipal Money Market Fund primarily invests in
securities issued by the State of Ohio and its municipalities. This could
make the Ohio Municipal Money Market Fund more susceptible to economic,
political, or credit risks than a fund that invests in a more diversified
geographic area. In addition, there are other potential risks which are
discussed in the section "Risk Factors."
Who Should Invest
Investors seeking relative safety and easy access to investments
Investors with a low risk tolerance
Investors seeking preservation of capital
Investors willing to accept lower potential returns in return for safety
Fees and Expenses
No Load or sales commission is charged to investors in the Funds. You will,
however, incur expenses for investment advisory, management, administrative,
and shareholder services, all of which are included in a Fund's expense
ratio. The U.S. Government Obligations Fund offers two classes of shares:
Investor Shares and Select Shares. The Financial Reserves Fund and the
Investor Shares of the U.S. Government Obligations Fund are available to
certain institutions or individuals that meet minimum investment
requirements, and are not subject to a shareholder servicing fee. The Select
Shares are available to certain institutions and are subject to a
shareholder servicing fee of up to .25% of the net assets of that class. See
"Organization and Management of the Funds--Shareholder Servicing Plan."
- 2 -
<PAGE>
Purchases
The minimum initial investment is $500 for most accounts ($250 for
Individual Retirement Accounts) and $25 thereafter. An initial investment
must be accompanied by a Fund's Account Application. Fund shares may be
purchased by check, Automated Clearing House, or wire. See "How to Purchase
Shares."
Redemptions
You can redeem Fund shares by written request or telephone. When the
Transfer Agent receives a redemption request in proper form, a Fund will
redeem the shares and credit your bank account or send the proceeds to the
address designated on your Account Application. See "How to Redeem Shares."
Dividends/Distributions
Income is accrued and declared daily by each Fund, and is paid monthly. Any
net capital gains realized by a Fund are paid as dividends annually. A Fund
can send your dividends directly to you by mail, credit them to your bank
account, reinvest them in the Fund, or invest them in another fund of the
Victory Group. The "Victory Group" includes other funds of The Victory
Portfolios and Key Mutual Funds. You can make this choice when you fill out
an account application. See "Dividends, Distributions, and Taxes."
Other Services
Victory offers a number of other services to better serve shareholders
including exchange privileges, automated investment and withdrawal plans,
and free check writing services for certain funds (minimum $100 per check).
See "How to Exchange Shares" and "How to Redeem Shares." Our toll-free fax
number is 800-529-2244. You can reach Victory's Telecommunication Device for
the Deaf (TDD) at 800-970-5296.
<TABLE>
General Information About Each of the Funds
<CAPTION>
Estimated Annual
Inception Expenses Newspaper
Victory Fund Date After Waivers Abbreviation<F1>
(as a % of net assets)
<S> <C> <C> <C>
Financial Reserves Fund 4/4/83 .67% Victory FRF
Ohio Municipal Money Market Fund 7/3/85 .75% Victory OH
Prime Obligations Fund 11/18/86 .90% Victory PrOb
Tax-Free Money Market Fund 8/24/88 .79% Victory TF
U.S. Government Obligations Fund--Investor Shares 1/8/97 .60% VictryUSGvI
U.S. Government Obligations Fund--Select Shares 11/18/86 .85% VictryUSGvS
<FN>
<F1>All newspapers do not use the same abbreviation.
</FN>
</TABLE>
The following pages provide you with separate overviews of each Fund. Please
look at the objective, policies, strategies, risks, expenses, and financial
history to determine which Fund will best suit your risk tolerance and
investment needs. You should also review the "Other Securities and
Investment Practices" section for additional information about the
individual securities in which the Funds can invest and the risks related to
these investments.
- 3 -
<PAGE>
FINANCIAL RESERVES FUND
Investment Objective
The Financial Reserves Fund seeks to provide as high a level of current
income as is consistent with preserving capital and providing liquidity.
Investment Policies and Strategy
The Financial Reserves Fund pursues its investment objective by investing
primarily in a portfolio of high-quality U.S. dollar-denominated money
market instruments.
Under normal market conditions, the Financial Reserves Fund primarily
invests in:
Negotiable certificates of deposit, time deposits, and bankers' acceptances
of U.S. banks and U.S. branches of foreign banks
Short-term corporate obligations, such as commercial paper, notes, and bonds
Repurchase Agreements
Other debt obligations such as master demand notes, short-term funding
agreements, variable and floating rate securities, and private placement
investments
U.S. Treasury obligations and obligations of government sponsored agencies
such as GNMA, FNMA, SLMA, FFCB, FHL, and FHLMC
When-issued or delayed-delivery securities
Eurodollar debt obligations
Important Characteristics of the Financial Reserves Fund's Investments:
Quality: The Financial Reserves Fund invests only in instruments that are
rated at the time of purchase in the highest category by two or more
NRSROs,* or in the highest category if rated by only one NRSRO, or if
unrated, determined to be of equivalent quality. The Board of Trustees has
established policies to ensure that the Financial Reserves Fund invests in
high quality, liquid instruments. For more information on ratings, see the
Appendix to the SAI.
Maturity: Weighted average maturity of 90 days or less. Individual
investments may be purchased with remaining maturities ranging from one day
to 397 days.
*An NRSRO is a nationally recognized statistical rating organization such as
Standard & Poor's (S&P), Fitch, or Moody's which assigns credit ratings to
securities based on the borrower's ability to meet its obligation to make
principal and interest payments.
The Financial Reserves Fund is only available to certain institutions or
individuals that meet minimum investment requirements and have trust or
advisory accounts set up through KeyCorp or its affiliates.
The Financial Reserves Fund is subject to credit risk, interest rate risk,
inflation risk, and market risk. Please read "Risk Factors" carefully before
investing.
Fund Expenses
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the Financial Reserves Fund. You
will note in the table that you do not pay fees of any kind when you
purchase, exchange, or redeem shares of the Financial Reserves Fund.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses<F1>
<S> <C>
Sales Charge Imposed on Purchases NONE
(as a percentage of offering price)
Sales Charge Imposed on Reinvested Dividends NONE
Deferred Sales Charge NONE
Redemption Fees NONE
Exchange Fees NONE
<FN>
<F1>You may be charged additional fees if you purchase, exchange, or redeem
shares through a broker or agent.
</FN>
</TABLE>
The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Financial
Reserves Fund. These expenses are charged directly to the Financial Reserves
Fund. Expenses include management fees as well as the costs of maintaining
accounts, administering the Financial Reserves Fund, and other activities.
The expenses shown are estimated based on historical or projected expenses
of the Financial Reserves Fund.
<TABLE>
<CAPTION>
Annual Fund Operating Expenses
After expense waivers and reimbursements
(as a percentage of average daily net assets)
<S> <C>
Management Fee<F1> .46%
Other Expenses .21%
---
Total Fund Operating Expenses<F1> .67%
===
<FN>
<F1>These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be .50%, and Total Fund Operating Expenses would be
.73%.
</FN>
</TABLE>
The following example is designed to help you understand the various costs
you will bear, directly or indirectly, as an investor in the Financial
Reserves Fund.
Example: You would pay the following expenses on a $1,000 investment in the
Financial Reserves Fund, assuming: (1) a 5% annual return, and (2)
redemption at the end of each time period.
1 Year 3 Years 5 Years 10 Years
Financial Reserves Fund $7 $21 $37 $83
This example is only an illustration. Actual expenses and returns will vary.
For more information about other securities in which the Financial Reserves
Fund can invest, see "Other Securities and Investment Practices" and the
SAI.
- 4 -
<PAGE>
Financial Highlights
Financial Reserves Fund
The Financial Highlights describe the Financial Reserves Fund's returns and
operating expenses over time. This table shows the results of an investment
in one share of the Financial Reserves Fund for each of the periods
indicated.
<TABLE>
<CAPTION>
Year Year Year Year Year Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended Ended Ended Ended Ended Ended
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<F3> <F2> <F1><F2> <F1><F2> <F1><F2> <F2> <F2> <F2> <F2> <F2>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Investment
Activities
Net investment
income 0.049 0.054 0.035 0.030 0.040 0.060 0.080 0.090 0.070 0.060 0.070
Distributions
Net investment
income (0.049) (0.054) (0.035) (0.030) (0.040) (0.060) (0.080) (0.090) (0.070) (0.060) (0.070)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net Asset Value,
End of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Total Return 5.00% 5.50% 3.57% 2.81% 3.76% 6.28% 8.12% 9.14% 7.13% 6.19% 6.87%
Ratios/
Supplemental Data:
Net Assets,
End of
Period (000) $767,990 $762,870 $433,266 $457,872 $523,889 $412,542 $432,905 $369,582 $409,440 $388,938 $231,823
Ratio of
expenses to
average net
assets 0.67% 0.60% 0.57% 0.55% 0.55% 0.55% 0.55% 0.56% 0.54% 0.56% 0.57%
Ratio of net
investment income
to average
net assets 4.89% 5.40% 3.48% 2.78% 3.67% 6.12% 7.84% 8.77% 6.92% 6.06% 6.55%
Ratio of expenses
to average
net assets<F4> 0.75% 0.76% 0.73% 0.70% 0.70% 0.62%
Ratio of net
investment
income to average
net assets<F4> 4.81% 5.24% 3.32% 2.63% 3.52% 6.05%
<FN>
<F1>Effective May 16, 1991, Ameritrust Company National Association became investment adviser to the Fund. Effective March 16,
1992, Ameritrust was acquired by Society Corporation and merged into Society National Bank, a wholly-owned subsidiary of Society
Corporation, on July 13, 1992. On January 7, 1993, Society Asset Management, Inc., a wholly-owned subsidiary of Society
Corporation, was named investment adviser to the Fund.
<F2>Audited by other auditors.
<F3>Effective June 5, 1995, the Victory Financial Reserves Portfolio became the Financial Reserves Fund.
<F4>During the period, certain fees were voluntarily reduced. If such voluntary fee reductions had not occurred, the ratios
would have been as indicated.
</FN>
</TABLE>
The Financial Highlights were audited by Coopers & Lybrand L.L.P. for the
1995 and 1996 periods, and by other auditors for all earlier periods. This
information should be read in conjunction with the Financial Reserves Fund's
most recent Annual Report to shareholders, which is incorporated by
reference in the SAI. If you would like a copy of the Annual Report, write
or call us at 800-KEY-FUND.
- 5 -
<PAGE>
OHIO MUNICIPAL MONEY MARKET FUND
Investment Objective
The Ohio Municipal Money Market 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.
Investment Policies and Strategy
The Ohio Municipal Money Market Fund pursues its investment objective by
investing at least 80% of its total assets in short-term municipal
securities. The interest income on these securities is exempt from federal
regular income tax. Federal regular income tax does not include the
individual or corporate federal alternative minimum tax. The Ohio Municipal
Money Market Fund expects to invest at least 65% of its total assets in debt
securities that pay interest which is also exempt from Ohio state income
tax.
Under normal market conditions, the Ohio Municipal Money Market Fund
primarily invests in:
Short-term municipal obligations, such as commercial paper, notes, and bonds
Tax, revenue, and bond anticipation notes
Variable rate demand notes, municipal bonds, and participation interests in
any of the above obligations
Important Characteristics of the Ohio Municipal Money Market Fund's
Investments:
Quality: The Ohio Municipal Money Market Fund invests only in instruments
that are rated at the time of purchase in the highest category by two or
more NRSROs,* in the highest category if rated by only one NRSRO, or if
unrated, determined to be of equivalent quality. The Board of Trustees has
established policies to ensure that the Ohio Municipal Money Market Fund
invests in high quality, liquid instruments. For more information on
ratings, see the Appendix to the SAI.
Maturity: Weighted average maturity of 90 days or less. Individual
investments may be purchased with remaining maturities ranging from one day
to 397 days.
*An NRSRO is a nationally recognized statistical rating organization such as
Standard & Poor's (S&P), Fitch, or Moody's which assigns credit ratings to
securities based on the borrower's ability to meet its obligation to make
principal and interest payments.
The Ohio Municipal Money Market Fund primarily invests in securities issued
by the State of Ohio and its municipalities. This could make the Ohio
Municipal Money Market Fund more susceptible to economic, political, or
credit risks than a fund that invests in a more diversified geographic area.
The SAI explains the risks specific to investments in Ohio securities. A
large portion of the securities held by the Ohio Municipal Money Market Fund
are supported by letters of credit from banks and other financial
institutions. Changes in the credit quality of these institutions could
cause losses to the Ohio Municipal Money Market Fund and affect its share
price. The Ohio Municipal Money Market Fund is subject to credit risk,
interest rate risk, inflation risk, and market risk. The Ohio Municipal
Money Market Fund is also subject to the risks common to mutual funds that
invest in municipal debt securities, i.e., tax-exempt status risk,
concentration risk, and diversification risk. Please read "Risk Factors"
carefully before investing.
Fund Expenses
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the Ohio Municipal Money Market
Fund. You will note in the table that you do not pay fees of any kind when
you purchase, exchange, or redeem shares of the Ohio Municipal Money Market
Fund.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses<F1>
<S> <C>
Sales Charge Imposed on Purchases NONE
(as a percentage of offering price)
Sales Charge Imposed on Reinvested Dividends NONE
Deferred Sales Charge NONE
Redemption Fees NONE
Exchange Fees NONE
<FN>
<F1>You may be charged additional fees if you purchase, exchange, or redeem
shares through a broker or agent.
</FN>
</TABLE>
The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Ohio
Municipal Money Market Fund. These expenses are charged directly to the Ohio
Municipal Money Market Fund. Expenses include management fees as well as the
costs of maintaining accounts, administering the Ohio Municipal Money Market
Fund, providing shareholder services, and other activities. The expenses
shown are estimated based on historical or projected expenses of the Ohio
Municipal Money Market Fund.
<TABLE>
<CAPTION>
Annual Fund Operating Expenses
After expense waivers and reimbursements
<S> <C>
(as a percentage of average daily net assets)
Management Fee<F1> .44%
Other Expenses<F1><F2> .31%
---
Total Fund Operating Expenses<F1> .75%
===
<FN>
<F1>These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be .50%, and Total Fund Operating Expenses would be
.90%.
<F2>Other Expenses includes an estimate of the shareholder servicing fees
the Ohio Municipal Money Market Fund expects to pay. See "Organization and
Management of the Funds--Shareholder Servicing Plan."
</FN>
</TABLE>
The following example is designed to help you understand the various costs
you will bear, directly or indirectly, as an investor in the Ohio Municipal
Money Market Fund.
Example: You would pay the following expenses on a $1,000 investment in the
Ohio Municipal Money Market Fund, assuming: (1) a 5% annual return, and (2)
redemption at the end of each time period.
1 Year 3 Years 5 Years 10 Years
Ohio Municipal
Money Market Fund $8 $24 $42 $93
This example is only an illustration. Actual expenses and returns will vary.
For more information about other securities in which the Ohio Municipal
Money Market Fund can invest, see "Other Securities and Investment
Practices" and the SAI.
- 6 -
<PAGE>
Financial Highlights
Ohio Municipal Money Market Fund
The Financial Highlights describe the Ohio Municipal Money Market Fund's
returns and operating expenses over time. This table shows the results of an
investment in one share of the Ohio Municipal Money Market Fund for each of
the periods indicated.
<TABLE>
<CAPTION>
Two
Year Months Year Year Year Year Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended Ended Ended Ended Ended Ended Ended
Oct. 31, Oct. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31,
1996 1995 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<F2> <F3> <F1><F3> <F1><F3> <F1><F3> <F3> <F3> <F3> <F3> <F3>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset
Value,
Beginning of
Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Investment
Activities
Net investment
income 0.030 0.006 0.033 0.021 0.021 0.031 0.046 0.053 0.056 0.044 0.036 0.045
Distributions
Net investment
income (0.030) (0.006) (0.033) (0.021) (0.021) (0.031) (0.046) (0.053) (0.056) (0.044) (0.036) (0.045)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net Asset Value,
End Of
Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Total Return 3.11% 0.55%<F4> 3.33% 2.10% 2.14% 3.18% 4.67% 5.50% 5.76% 4.50% 3.75% 4.60%
Ratios/
Supplemental
Data:
Net Assets,
End of
Period
(000) $561,131 $510,632 $502,453 $318,132 $262,681 $252,705 $253,177 $297,845 $278,337 $257,002 $223,677 $160,061
Ratio of
expenses to
average net
assets 0.67% 0.64%<F5> 0.63% 0.65% 0.65% 0.65% 0.64% 0.65% 0.65% 0.63% 0.62% 0.63%
Ratio of net
interest
income to
average
net assets 3.03% 3.31%<F5> 3.33% 2.08% 2.12% 3.13% 4.59% 5.36% 5.60% 4.41% 3.71% 4.30%
Ratio of expenses
to average
net assets<F6> 0.97% 0.92%<F5> 0.94% 0.76% 0.72% 0.68% 0.66% 0.66% 0.73%
Ratio of net
interest
income to
average
net assets<F6> 2.73% 3.03%<F5> 3.02% 1.97% 2.05% 3.10% 4.57% 4.38% 4.21%
<FN>
<F1>Effective February 27, 1991, Ameritrust Company National Association became investment adviser to the Fund. Effective March
16, 1992, Ameritrust was acquired by Society Corporation, and merged into Society National Bank, a wholly-owned subsidiary of
Society Corporation on July 13, 1992. Effective February 3, 1993, Society Asset Management, Inc., a wholly-owned subsidiary of
Society Corporation, was named investment adviser to the Fund.
<F2>Effective June 5, 1995, the Victory Ohio Municipal Money Market Portfolio became the Ohio Municipal Money Market Fund.
<F3>Audited by other auditors.
<F4>Not annualized.
<F5>Annualized.
<F6>During the period, certain fees were voluntarily reduced. If such voluntary fee reductions had not occurred, the ratios would
have been as indicated.
</FN>
</TABLE>
The Financial Highlights were audited by Coopers & Lybrand L.L.P. for the
1995 and 1996 periods, and by other auditors for all earlier periods. This
information should be read in conjunction with the Ohio Municipal Money
Market Fund's most recent Annual Report to shareholders, which is
incorporated by reference in the SAI. If you would like a copy of the Annual
Report, write or call us at 800-KEY-FUND.
- 7 -
<PAGE>
PRIME OBLIGATIONS FUND
Investment Objective
The Prime Obligations Fund seeks to provide current income consistent with
liquidity and stability of principal.
Investment Policies and Strategy
The Prime Obligations Fund pursues its investment objective by investing
primarily in short-term, high-quality debt instruments.
Under normal market conditions, the Prime Obligations Fund primarily invests
in:
Negotiable certificates of deposit, time deposits, and bankers' acceptances
of U.S. banks and U.S. branches of foreign banks
Short-term corporate obligations, such as commercial paper, notes, and bonds
Repurchase Agreements
Other debt obligations such as master demand notes, short-term funding
agreements, variable and floating rate securities, and private placement
investments
U.S. Treasury obligations and obligations of government sponsored agencies,
such as GNMA, FNMA, SLMA, FFCB, FHL, and FHLMC
When-issued or delayed-delivery securities
Eurodollar debt obligations
Important Characteristics of the Prime Obligations Fund's Investments:
Quality: The Prime Obligations Fund invests only in instruments that are
rated at the time of purchase in the highest category by two or more
NRSROs,* or in the highest category if rated by only one NRSRO, or if
unrated, determined to be of equivalent quality. The Board of Trustees has
established policies to ensure that the Prime Obligations Fund invests in
high quality, liquid instruments. For more information on ratings, see the
Appendix to the SAI.
Maturity: Weighted average maturity of 90 days or less. Individual
investments may be purchased with remaining maturities ranging from one day
to 397 days.
*An NRSRO is a nationally recognized statistical rating organization such as
Standard & Poor's (S&P), Fitch, or Moody's which assigns credit ratings to
securities based on the borrower's ability to meet its obligation to make
principal and interest payments.
The Prime Obligations Fund is subject to credit risk, interest rate risk,
inflation risk, and market risk. Please read "Risk Factors" carefully before
investing.
Fund Expenses
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the Prime Obligations Fund. You
will note in the table that you do not pay fees of any kind when you
purchase, exchange, or redeem shares of the Prime Obligations Fund.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses<F1>
<S> <C>
Sales Charge Imposed on Purchases NONE
(as a percentage of offering price)
Sales Charge Imposed on Reinvested Dividends NONE
Deferred Sales Charge NONE
Redemption Fees NONE
Exchange Fees NONE
<FN>
<F1>You may be charged additional fees if you purchase, exchange, or redeem
shares through a broker or agent.
</FN>
</TABLE>
The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Prime
Obligations Fund. These expenses are charged directly to the Prime
Obligations Fund. Expenses include management fees as well as the costs of
maintaining accounts, administering the Prime Obligations Fund, providing
shareholder services, and other activities. The expenses shown are estimated
based on historical or projected expenses of the Prime Obligations Fund.
<TABLE>
<CAPTION>
Annual Fund Operating Expenses
(as a percentage of average daily net assets)
<S> <C>
Management Fee .35%
Other Expenses<F1> .55%
---
Total Fund Operating Expenses .90%
===
<FN>
<F1>Other Expenses includes an estimate of the shareholder servicing fees
the Prime Obligations Fund expects to pay. See "Organization and Management
of the Funds--Shareholder Servicing Plan."
</FN>
</TABLE>
The following example is designed to help you understand the various costs
you will bear, directly or indirectly, as an investor in the Prime
Obligations Fund.
Example: You would pay the following expenses on a $1,000 investment in the
Prime Obligations Fund, assuming: (1) a 5% annual return, and (2) redemption
at the end of each time period.
1 Year 3 Years 5 Years 10 Years
Prime Obligations Fund $9 $29 $50 $111
This example is only an illustration. Actual expenses and returns will vary.
For more information about other securities in which the Prime Obligations
Fund can invest, see "Other Securities and Investment Practices" and the
SAI.
- 8 -
<PAGE>
Financial Highlights
Prime Obligations Fund
The Financial Highlights describe the Prime Obligations Fund's returns and
operating expenses over time. This table shows the results of an investment
in one share of the Prime Obligations Fund for each of the periods
indicated.
<TABLE>
<CAPTION>
Year Year Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended Ended Ended
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1996 1995 1994 1993 1992 1991 1990<F2> 1989<F2>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- -------- -------- -------- --------
Investment Activities
Net investment income 0.047 0.051 0.035 0.030 0.037 0.061 0.078 0.087
Net realized losses from
investment transactions -- -- (0.003) -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total from
Investment Activities 0.047 0.051 0.032 0.030 0.037 0.061 0.078 0.087
Distributions
Net investment income (0.047) (0.051) (0.035) (0.030) (0.037) (0.061) (0.078) (0.087)
-------- -------- -------- -------- -------- -------- -------- --------
Capital transactions -- -- 0.003<F1> -- -- -- -- --
Net Asset Value,
End of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== ======== ======== ======== ======== ========
Total Return 4.81% 5.26% 3.57% 3.05% 3.77% 6.32% 8.06% 9.02%
Ratios/Supplemental Data:
Net Assets,
End of Period (000) $496,019 $456,266 $782,303 $720,024 $524,338 $442,263 $444,238 $304,186
Ratio of expenses to
average net assets 0.87% 0.74% 0.62% 0.60% 0.61% 0.62% 0.62% 0.61%
Ratio of net investment
income to average net assets 4.72% 5.09% 3.52% 2.96% 3.68% 6.14% 7.76% 8.69%
Ratio of expenses to
average net assets<F3> 0.79%
Ratio of net investment
income to average
net assets<F3> 3.35%
<FN>
<F1>During 1994, KeyCorp made a capital contribution of approximately $2,506,000 for losses realized from the disposition of
certain securities.
<F2>Audited by other auditors.
<F3>During the period, certain fees were voluntarily reduced. If such voluntary fee reductions had not occurred, the ratios would
have been as indicated.
</FN>
</TABLE>
The Financial Highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Prime Obligations Fund's
most recent Annual Report to shareholders, which is incorporated by
reference in the SAI. If you would like a copy of the Annual Report, write
or call us at 800-KEY-FUND.
- 9 -
<PAGE>
TAX-FREE MONEY MARKET FUND
Investment Objective
The Tax-Free Money Market Fund seeks to provide current interest income free
from federal income taxes consistent with relative liquidity and stability
of principal.
Investment Policies and Strategy
The Tax-Free Money Market Fund pursues its investment objective by investing
at least 80% of its total assets in short-term, high-quality municipal
securities issued by or on behalf of U.S. states, territories, and
possessions. The interest income on these securities is exempt from federal
regular income tax and alternative minimum tax.
Under normal market conditions, the Tax-Free Money Market Fund primarily
invests in:
Short-term municipal obligations such as commercial paper, notes, and bonds
Tax, revenue, and bond anticipation notes
Variable rate demand notes and municipal bonds, and participation interests
in any of these obligations
Important Characteristics of the Tax-Free Money Market Fund's Investments:
Quality: The Tax-Free Money Market Fund invests only in instruments that are
rated at the time of purchase in the highest category by two or more NRSROs*
or in the highest category if rated by only one NRSRO, or if unrated,
determined to be of equivalent quality. The Board of Trustees has
established policies to ensure that the Tax-Free Money Market Fund invests
in high quality, liquid instruments. For more information on ratings, see
the Appendix to the SAI.
Maturity: Weighted average maturity of 90 days or less. Individual
investments may be purchased with remaining maturities ranging from one day
to 397 days.
*An NRSRO is a nationally recognized statistical rating organization such as
Standard & Poor's (S&P), Fitch, or Moody's which assigns credit ratings to
securities based on the borrower's ability to meet its obligation to make
principal and interest payments.
A large portion of the securities held by the Tax-Free Money Market Fund are
supported by letters of credit from banks and other financial institutions.
Changes in the credit quality of these institutions could cause losses to
the Tax-Free Money Market Fund and affect its share price. The Tax-Free
Money Market Fund is subject to credit risk, interest rate risk, inflation
risk, and market risk. The Tax-Free Money Market Fund is also subject to the
risks common to mutual funds that invest in municipal debt securities, i.e.,
tax-exempt status risk. Please read "Risk Factors" carefully before
investing.
Fund Expenses
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the Tax-Free Money Market Fund. You
will note in the table that you do not pay fees of any kind when you
purchase, exchange, or redeem shares of the Tax-Free Money Market Fund.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses<F1>
<S> <C>
Sales Charge Imposed on Purchases NONE
(as a percentage of offering price)
Sales Charge Imposed on Reinvested Dividends NONE
Deferred Sales Charge NONE
Redemption Fees NONE
Exchange Fees NONE
<FN>
<F1>You may be charged additional fees if you purchase, exchange, or redeem
shares through a broker or agent.
</FN>
</TABLE>
The Annual Fund Operating Expense table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Tax-Free
Money Market Fund. These expenses are charged directly to the Tax-Free Money
Market Fund. Expenses include management fees as well as the costs of
maintaining accounts, administering the Tax-Free Money Market Fund,
providing shareholder services, and other activities. The expenses shown are
estimated based on historical or projected expenses of the Tax-Free Money
Market Fund.
<TABLE>
<CAPTION>
Annual Fund Operating Expenses
(as a percentage of average daily net assets)
<S> <C>
Management Fee .35%
Other Expenses<F1> .44%
---
Total Fund Operating Expenses .79%
===
<FN>
<F1>Other Expenses includes an estimate of shareholder servicing fees the
Tax-Free Money Market Fund expects to pay. See "Organization and Management
of the Funds--Shareholder Servicing Plan."
</FN>
</TABLE>
The following example is designed to help you understand the various costs
you will bear, directly or indirectly, as an investor in the Tax-Free Money
Market Fund.
Example: You would pay the following expenses on a $1,000 investment in the
Tax-Free Money Market Fund, assuming: (1) a 5% annual return, and (2)
redemption at the end of each time period.
1 Year 3 Years 5 Years 10 Years
Tax-Free Money
Market Fund $8 $25 $44 $98
This example is only an illustration. Actual expenses and returns will vary.
For more information about other securities in which the Tax-Free Money
Market Fund can invest, see "Other Securities and Investment Practices" and
the SAI.
- 10 -
<PAGE>
Financial Highlights
Tax-Free Money Market Fund
The Financial Highlights describe the Tax-Free Money Market Fund's returns
and operating expenses over time. This table shows the results of an
investment in one share of the Tax-Free Money Market Fund for each of the
periods indicated.
<TABLE>
<CAPTION>
Year Year Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended Ended Ended
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1996 1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- -------- -------- -------- -------
Investment Activities
Net investment income 0.030 0.034 0.021 0.020 0.027 0.043 0.054 0.059
Distributions
Net investment income (0.030) (0.034) (0.021) (0.020) (0.027) (0.043) (0.054) (0.059)
-------- -------- -------- -------- -------- -------- -------- -------
Net Asset Value,
End of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== ======== ======== ======== ======== =======
Total Return 3.04% 3.42% 2.17% 2.06% 2.77% 4.44% 5.48% 6.04%
Ratios/Supplemental Data:
Net Assets,
End of Period (000) $344,796 $307,726 $198,561 $189,351 $151,012 $129,601 $134,652 $85,556
Ratio of expenses to
average net assets 0.78% 0.61% 0.60% 0.59% 0.61% 0.62% 0.63% 0.58%
Ratio of net investment
income to average
net assets 2.97% 3.36% 2.14% 2.04% 2.70% 4.29% 5.32% 5.88%
Ratio of expenses to
average net assets<F1> 0.80% 0.62% 0.79% 0.60% 0.67%
Ratio of net investment
income to average
net assets<F1> 2.95% 3.35% 1.95% 2.02% 5.79%
<FN>
<F1>During the period, certain fees were voluntarily reduced. If such voluntary fee reductions had not occurred, the ratios would
have been as indicated.
</FN>
</TABLE>
The Financial Highlights were audited by Coopers & Lybrand L.L.P. This
information should be read in conjunction with the Tax-Free Money Market
Fund's most recent Annual Report to shareholders, which is incorporated by
reference into the SAI. If you would like a copy of the Annual Report, write
or call us at 800-KEY-FUND.
- 11 -
<PAGE>
U.S. GOVERNMENT OBLIGATIONS FUND
Investment Objective
The U.S. Government Obligations Fund seeks to provide current income
consistent with liquidity and stability of principal.
Investment Policies and Strategy
The U.S. Government Obligations Fund pursues its investment objective by
investing only in short-term U.S. Government securities backed by the full
faith and credit of the U.S. Treasury, and repurchase agreements
collateralized by these securities.
Under normal market conditions, the U.S. Government Obligations Fund
primarily invests in:
U.S. Treasury bills, notes, and other obligations issued or guaranteed by
the U.S. Government
Repurchase Agreements collateralized by obligations of the U.S. Government
Important Characteristics of the U.S. Government Obligations Fund's
Investments:
Quality: The U.S. Government Obligations Fund invests only in obligations of
the U.S. Government. The Board of Trustees has established policies to
ensure that the U.S. Government Obligations invests in high quality, liquid
instruments and repurchase agreements. For more information on ratings, see
the Appendix to the SAI.
Maturity: Weighted average maturity of 90 days or less. Individual
investments may be purchased with remaining maturities ranging from one day
to 397 days.
The U.S. Government Obligations Fund is subject to interest rate risk,
inflation risk, and market risk. Please read "Risk Factors" carefully before
investing.
For more information about other securities in which the U.S. Government
Obligations Fund can invest, see "Other Securities and Investment Practices"
and the SAI.
Fund Expenses
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the U.S. Government Obligations
Fund. You will note in the table that you do not pay fees of any kind when
you purchase, exchange, or redeem shares of the U.S. Government Obligations
Fund.
<TABLE>
<CAPTION>
Shareholder Investor Select
Transaction Expenses<F1> Shares Shares
<S> <C> <C>
Sales Charge Imposed on Purchases NONE NONE
Sales Charge Imposed on Reinvested Dividends NONE NONE
Deferred Sales Charge NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
<FN>
<F1>You may be charged additional fees if you purchase, exchange, or redeem
shares through a broker or agent.
</FN>
</TABLE>
The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the U.S.
Government Obligations Fund. These expenses are charged directly to the U.S.
Government Obligations Fund. Expenses include management fees as well as the
costs of maintaining accounts, administering the U.S. Government Obligations
Fund, providing shareholder services, and other activities. The expenses
shown are estimated based on historical or projected expenses of the U.S.
Government Obligations Fund.
<TABLE>
<CAPTION>
Annual Fund Investor Select
Operating Expenses Shares Shares
(as a percentage of average daily net assets)
<S> <C> <C>
Management Fee .35% .35%
Other Expenses .25% .50%<F1>
--- ---
Total Fund Operating Expenses .60% .85%
=== ===
<FN>
<F1>Other Expenses includes an estimate of shareholder servicing fees
the U.S. Government Obligations Fund expects to pay. See "Organization
and Management of the Funds--Shareholder Servicing Plan."
</FN>
</TABLE>
The following example is designed to help you understand the various costs
you will bear, directly or indirectly, as an investor in the U.S. Government
Obligations Fund.
Example: You would pay the following expenses on a $1,000 investment in the
U.S. Government Obligations Fund, assuming: (1) a 5% annual return, and (2)
redemption at the end of each time period.
1 Year 3 Years 5 Years 10 Years
Investor Shares $6 $19 $33 $ 75
Select Shares $9 $27 $47 $105
This example is only an illustration. Actual expenses and returns will vary.
- 12 -
<PAGE>
Financial Highlights
U.S. Government Obligations Fund
The Financial Highlights describe the U.S. Government Obligations Fund's
returns and operating expenses over time. This table shows the results of an
investment in one share of the U.S. Government Obligations Fund for each of
the periods indicated.
<TABLE>
<CAPTION>
SELECT SHARES
Year Year Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended Ended Ended
Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31, Oct. 31,
1996 1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
---------- -------- -------- -------- -------- -------- -------- --------
Investment Activities
Net investment income 0.049 0.052 0.032 0.026 0.036 0.060 0.076 0.081
Distributions
Net investment income (0.049) (0.052) (0.032) (0.026) (0.036) (0.060) (0.076) (0.081)
---------- -------- -------- -------- -------- -------- -------- --------
Net Asset Value,
End of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
========== ======== ======== ======== ======== ======== ======== ========
Total Return 4.96% 5.38% 3.30% 2.62% 3.66% 6.14% 7.83% 8.44%
Ratios/Supplemental Data:
Net Assets,
End of Period (000) $1,357,817 $964,929 $412,048 $515,734 $579,836 $430,248 $376,021 $152,718
Ratio of expenses to
average net assets 0.61% 0.58% 0.63% 0.60% 0.60% 0.60% 0.62% 0.62%
Ratio of net investment
income to average
net assets 4.84% 5.28% 3.20% 2.57% 3.50% 5.92% 7.56% 8.16%
Ratio of expenses to
average net assets<F1> 0.60% 0.80%
Ratio of net investment
income to average
net assets<F1> 5.26% 3.03%
<FN>
<F1>During the period, certain fees were voluntarily reduced. If such voluntary fee reductions had not occurred, the ratios would
have been as indicated.
</FN>
</TABLE>
The financial highlights were audited by Coopers & Lybrand L.L.P. There is
no information on Investor Shares, since they were not sold prior to January
8, 1997. This information should be read in conjunction with the U.S.
Government Obligations Fund's most recent Annual Report to shareholders,
which is incorporated by reference in the SAI. If you would like a copy of
the Annual Report, write or call us at 800-KEY-FUND.
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<PAGE>
Risk Factors
This prospectus describes some of the risks that you may assume as an
investor in the Funds. By matching your investment objective with a
comfortable level of risk you can create your own customized investment
plan. Some limitations on the Funds' investments are described in the
section that follows. "Other Securities and Investment Practices" at the end
of this prospectus provides additional information about the securities
mentioned in the overview of each of the Funds. As with any mutual fund,
there is no guarantee that a Fund will earn income or show a positive total
return over time. Over time, money market mutual funds have offered
investors the least amount of principal risk; therefore, the potential
return usually is lower than for other types of investments.
The following risk is common to all mutual funds:
Market risk is the risk that the market value of a security will fluctuate,
depending on the supply and demand for that type of security. As a result of
this fluctuation, a security may be worth more or less than the price a Fund
originally paid for it, or less than the security was worth at an earlier
time. Market risk may affect a single issuer, an industry, a sector of the
economy, or the entire market, and is common to all investments.
The following risks are common to all money market mutual funds:
Interest rate risk. The value of a debt security typically changes in the
opposite direction from a change in interest rates. Therefore, when interest
rates go up, the value of a fixed-rate security typically goes down. When
interest rates go down, the value of these securities typically goes up.
Generally, the market values of securities with longer maturities are more
sensitive to changes in interest rates.
Credit (or default) risk is the risk that the issuer of a debt security will
be unable to make timely payments of interest or principal. Although the
Funds invest in only high-quality securities, the interest or principal
payments are not insured or guaranteed. This risk does not apply to the U.S.
Government Obligations Fund.
Inflation risk is the risk that inflation will erode the purchasing power of
the cash flows generated by debt securities held by a Fund. Fixed-rate debt
securities are more susceptible to this risk than floating-rate debt
securities.
The following risk is common to mutual funds that invest in municipal debt
securities:
Tax-exempt status risk is the risk that a municipal debt security issued as
a tax-exempt security may be declared taxable by the Internal Revenue
Service.
The following risk is common to mutual funds that invest in the securities
of a single state:
Concentration and diversification risk is the risk that only a limited
number of high-quality securities of a particular type may be available.
Concentration and diversification risk is greater for Funds that invest
primarily in the securities of a single state.
It is important to keep in mind one basic principle of investing: the
greater the risk, the greater the potential reward. The reverse is also
generally true: the lower the risk, the lower the potential reward.
- 14 -
<PAGE>
Investment Limitations
To help reduce risk and maintain its $1.00 per share price, the Funds have
adopted limitations on some investment policies. These limits involve a
Fund's ability to borrow money and the amount it can invest in various types
of securities, including illiquid securities. Certain limitations can be
changed only with the approval of shareholders. Victory's Board of Trustees
can change other investment limitations without shareholder approval. See
"Other Securities and Investment Practices" and the SAI for more
information.
Each Fund limits to 25% of its total assets the amount it may invest in any
single industry (other than U.S. Government obligations and U.S. banks).
Each Fund limits its borrowing to 33 1/3% of its total assets. Borrowing may
be in the form of selling a security that it owns and agreeing to repurchase
that security later at a higher price.
Diversification Requirements
SEC Requirement: Each Fund, except the Ohio Municipal Money Market Fund, is
"diversified" according to certain federal securities provisions regarding
the diversification of its assets. Generally, under those provisions, a Fund
must invest at least 75% of its total assets so that no more than 5% of its
total assets are invested in the securities of any one issuer.
IRS Requirement: Each Fund, including the Ohio Municipal Money Market Fund,
intends to comply with certain federal tax requirements regarding the
diversification of its assets. Generally, under these requirements, a Fund
must invest at least 50% of its total assets so that no more than 5% of its
total assets are invested in the securities of any one issuer.
SEC Money Market Mutual Fund Requirement: Each Fund also intends to comply
with certain more stringent federal securities diversification provisions
for money market funds. Generally, to comply with those provisions, no Fund
(except Ohio Municipal Money Market Fund) will invest more than 5% of its
total assets in the securities of any one issuer at the time of purchase.
The Ohio Municipal Money Market Fund must invest at least 75% of its total
assets so that no more than 5% of its total assets are invested in the
securities of any one issuer at the time of purchase. These diversification
requirements are discussed in the SAI.
The SEC and IRS have certain restrictions with which all mutual funds must
comply. The Funds monitor these limitations on an ongoing basis.
Investment Performance
Victory may advertise the performance of a Fund by comparing it to other
mutual funds with similar objectives and policies. Performance information
may also appear in various publications. Any fees charged by Investment
Professionals may not be reflected in these performance calculations.
Performance information is contained in the annual and semi-annual reports.
You may obtain a copy free of charge by calling 800-KEY-FUND.
The "7-day yield" is an "annualized" figure--the amount you would earn if
you stayed in a Fund for a year and the Fund continued to earn the same net
interest income throughout that year. To calculate 7-day yield, net
investment income per share for the most recent 7 days is multiplied by 52
(52 weeks/year), then divided by the NAV ($1.00) to get a percentage, which
is the 7-day yield.
Yield is a measure of net interest income.
Effective yield is similar to yield, except it is assumed that dividends are
reinvested and compounded.
Tax-equivalent yield shows the taxable yield you would have to earn before
taxes to receive a yield equal to an investment in one of the tax-free
funds.
Average annual total return is a hypothetical measure of past dividend
income plus capital appreciation. It is the sum of all parts of your
investment return for periods greater than one year.
Total return is the sum of all parts of a Fund's investment return.
Whenever you see information on a Fund's performance, do not consider the
past performance to be an indication of the performance you could expect by
making an investment in a Fund today. The past is an imperfect guide to the
future. History does not always repeat itself.
Past performance is not a guarantee of future results. You may obtain the
current 7-day yield by calling 800-KEY-FUND. Our Shareholder Servicing
representatives are available from 8:00 a.m. to 7:00 p.m. Eastern Time
Monday through Friday.
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<PAGE>
Share Price
Each Fund's share price, called its net asset value (NAV), is calculated
each business day (normally at 2:00 p.m. Eastern time). The Ohio Municipal
Money Market Fund's NAV is normally calculated at 12:00 p.m. Eastern time.
Shares are purchased at the next share price calculated after your
investment is received and accepted. A business day is a day on which the
Federal Reserve Bank of Cleveland and the New York Stock Exchange are open
for trading or any day in which enough trading has occurred in the
securities held by a Fund to materially affect the NAV. If your account is
established with an Investment Professional or a bank, you may not be able
to purchase or sell shares on other holidays when the Federal Reserve Bank
of Cleveland is closed, even though the New York Stock Exchange is open.
The Fund seeks to maintain a $1.00 NAV, therefore an accounting system
called the "Amortized Cost Method" is used to value individual holdings.
This system is described in the SAI.
Each Fund's performance can be found once a week in The Wall Street Journal
and other newspapers.
Dividends, Distributions, and Taxes
As a shareholder, you are entitled to your share of net income and capital
gains on a Fund's investments. The Funds pass their earnings along to
investors in the form of dividends. Dividend distributions are the interest
earned on investments after expenses. Money market funds usually don't
realize capital gains; however, if a Fund does make a capital gain
distribution, it usually occurs in December. As with any investment, you
should consider the tax consequences of an investment in a Fund.
Ordinarily, net income earned on securities owned by a Fund accrues daily,
is declared daily, and is paid monthly. Shareholders who earn a dividend of
less than $10.00 will have dividends reinvested automatically into their
accounts. Distributions can be received in one of the following ways:
Reinvestment Option
You can have distributions automatically reinvested in additional shares of
a Fund. If you do not indicate another choice on your Account Application,
this option will be assigned to you automatically.
Cash Option
A check will be mailed to you no later than 7 days after the pay date.
Directed Dividends Option
You can have distributions automatically reinvested in shares of another
fund of the Victory Group. The "Victory Group" includes other funds of The
Victory Portfolios and Key Mutual Funds. You may pay a sales charge on the
reinvested distributions.
Directed Bank Account Option
In most cases, you can have distributions automatically transferred to your
bank checking or savings account. Under normal circumstances, a dividend
will be transferred within 7 days of the dividend payment date. The bank
account must have a registration identical to that of your Fund account.
Your choice of distribution should be set up on the original Account
Application. If you would like to change the option you selected, please
call the Transfer Agent at 800-KEY-FUND.
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<PAGE>
Important Information about Taxes
Each Fund intends to continue to qualify as a regulated investment company,
in which case it pays no federal income tax on the earnings or capital gains
it distributes to its shareholders.
Dividends from a Fund's long-term capital gain are taxable as capital gain;
dividends from other sources are generally taxable as ordinary income, if
taxable.
Dividends are treated in the same manner for federal income tax purposes
whether you receive them in cash or in additional shares. They may also be
subject to state and local taxes.
Certain dividends paid to you in January will be taxable as if they had been
paid to you in December of the previous year.
When you sell (redeem) or exchange shares of a Fund, you must recognize any
gain or loss. However, as long as the Fund's NAV per share does not deviate
from $1.00, there will be no gain or loss.
Tax statements will be mailed from the Fund every January showing the
amounts and tax status of distributions made to you.
Certain dividends from the Tax-Free Money Market Fund and the Ohio Municipal
Money Market Fund will be exempt from federal regular income tax.
Certain dividends from the Ohio Municipal Money Market Fund will be exempt
from Ohio state and local taxes.
Because your tax treatment depends on your purchase price and tax position,
you should keep your regular account statements for use in determining your
tax.
You should review the more detailed discussion of federal income tax
considerations in the SAI.
THE TAX INFORMATION IN THIS PROSPECTUS IS PROVIDED AS GENERAL INFORMATION.
YOU SHOULD CONSULT YOUR OWN TAX ADVISER ABOUT THE TAX CONSEQUENCES OF AN
INVESTMENT IN THE FUND.
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<PAGE>
Investing with Victory
If you are looking for a convenient way to open an account for yourself or
to add money to an existing account, Victory can help. The following
sections will describe how to open an account, how to access information on
your account, and how to purchase, exchange, and redeem shares of a Fund. We
want to make it simple for you to do business with us. The sections that
follow will serve as a guide to your investments with Victory. If you have
questions about any of this information, please call one of our customer
service representatives at 800-KEY-FUND. They will be happy to assist you.
All you need to do to get started is to fill out an application.
How to Purchase Shares
Shares of the Funds can be purchased in a number of different ways. All you
need to do to get started is to fill out an application. You can send in
your investment by check, wire transfer, exchange from another Victory Fund,
or through arrangements with your Investment Professional. An Investment
Professional is a salesperson, financial planner, investment adviser, or
trust officer who provides you with investment information. Sometimes they
will charge you for these services. Their fee will be in addition to, and
unrelated to, the fees and expenses charged by a Fund.
The Financial Reserves Fund is only available to certain institutions or
individuals that meet minimum investment requirements and have trust or
advisory accounts set up through KeyCorp or its affiliates. The U.S.
Government Obligations Fund offers Investor Shares and Select Shares. The
Investor Shares are available to certain institutions or individuals that
meet minimum investment requirements, and are not subject to a shareholder
servicing fee. The Select Shares are available to certain institutions and
are subject to a shareholder servicing fee of up to .25% of the net assets
of that class.
Make your check payable to:
The Victory Funds
When you buy shares of a Fund, your cost will be $1.00 per share.
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<PAGE>
Keep the following addresses handy for purchases, exchanges, or redemptions.
Regular U.S. Mail Address
Send completed Account Applications with your check, bank draft, or money
order to:
The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527
Overnight Mail Address
Use this address ONLY for overnight packages.
The Victory Funds
c/o Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
PHONE: 800-KEY-FUND
Wire Address
The Transfer Agent does not charge a wire fee, but your originating bank may
charge a fee. Always call the Transfer Agent at 800-KEY-FUND BEFORE wiring
funds to obtain a control number.
State Street Bank and Trust Co.
ABA #011000028
For Credit to DDA
Account #9905-201-1
For Further Credit to Account #
(insert account number, name, and control number assigned by the
Transfer Agent)
Telephone Number:
800-KEY-FUND
800-539-3863
FAX Number:
800-529-2244
Telecommunication Device for the Deaf (TDD):
800-970-5296
ACH
After your account is set up, your purchase amount can be transferred by
Automated Clearing House (ACH). Only domestic member banks may be used. It
takes about 15 days to set up the ACH feature. The Funds do not currently
charge a fee for ACH transfers.
Statements and Reports
You will receive a periodic statement reflecting any transactions that
affect the balance or registration of your account. You will receive a
confirmation after any purchase, exchange, or redemption. If your account
has been set up by an Investment Professional, account activity will be
detailed in their statements to you. Share certificates are not issued.
Twice a year, you will receive the financial reports of the Funds. By
January 31 of each year, you will be mailed an IRS Form reporting dividends
for the previous year, which will also be filed with the IRS.
Systematic Investment Plan
To enroll in the Systematic Investment Plan, you should check this box on
the Account Application. We will need your bank account information and the
amount and frequency of your investment. You can select monthly, quarterly,
semi-annual, or annual investments. You should attach a voided personal
check so the proper information can be obtained. You must first meet the
minimum investment requirement of $500, then we will make automatic
withdrawals of the amount you indicate ($25 or more) from your bank account
and invest in shares of a Fund.
Retirement Plans
You can use the Funds as part of your retirement portfolio. Your Investment
Professional can set up your new account under one of several tax sheltered
plans. Please contact your Investment Professional for details regarding an
IRA or other retirement plan that works best for your financial situation.
Generally, funds that pay tax-free dividends are not appropriate investments
for retirement accounts.
All purchases must be made in U.S. Dollars and drawn on U.S. banks. The
Transfer Agent may reject any purchase order in its sole discretion. If your
check is returned for any reason, you may be charged for any resulting fees
and/or losses. Third party checks will not be accepted. You may only invest
or exchange into fund shares legally available in your state. If your
account falls below $500, we may ask you to re-establish the minimum
investment. If you do not do so within 60 days, we may close your account
and send you the value of your account.
If you would like to make additional investments after your account is
already established, use the Investment Stub attached to your statement and
send it with your check to the address indicated.
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<PAGE>
How to Exchange Shares
An exchange is the selling of shares of one fund of the Victory Group to
purchase shares of another. You may exchange shares of one Victory fund for
shares of the same class of any other, generally without paying any
additional sales charges. (See the more complete explanation below.) The
"Victory Group" includes funds offered as a part of the Victory Funds and
Key Mutual Funds. Key Mutual Funds is affiliated with KeyCorp.
You can exchange shares of a Fund by writing or calling the Transfer Agent
at 800-KEY-FUND. When you exchange shares of a Fund, you should keep the
following in mind:
Shares of the fund selected for exchange must be available for sale in your
state of residence.
The Fund whose shares you want to exchange and the fund whose shares you
want to buy must offer the exchange privilege.
Shares of the Funds may be exchanged at relative net asset value. However,
if you exchange into a fund with a sales charge, you pay the percentage-
point difference between that fund's sales charge and any sales charge you
have previously paid in connection with the shares you are exchanging. Since
the money market funds do not have a sales charge, if you were to purchase
another fund in the Victory Group that has a 4.75% sales charge, you would
pay the 4.75% sales charge.
You must meet the minimum purchase requirements for the fund you purchase by
exchange.
The registration and tax identification numbers of the two accounts must be
identical.
You must hold the shares you buy when you establish your account for at
least 7 days before you can exchange them; after the account is open 7 days,
you can exchange shares on any business day.
Before exchanging, read the prospectus of the fund you wish to purchase by
exchange.
You can obtain a list of funds available for exchange by calling the
Transfer Agent at 800-KEY-FUND.
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<PAGE>
How to Redeem Shares
If we receive your request by 2:00 p.m. Eastern Time (12:00 p.m. for Ohio
Municipal Money Market Fund), your redemption will be processed the same
day.
By Telephone
The easiest way to redeem shares is by calling 800-KEY-FUND. When you fill
out your original application, be sure to check the box marked "Telephone
Authorization." Then when you are ready to redeem, call us and tell us which
one of the following options you would like to use:
Mail a check to the address of record;
Wire funds to a domestic financial institution;
Mail to a previously designated alternate address; or
Electronically transfer the funds via ACH.
All telephone calls are recorded for your protection and measures are taken
to verify the identity of the caller. If we properly act on telephone
instructions and follow reasonable procedures to ensure against unauthorized
transactions, neither Victory nor its servicing agents, the Adviser, nor the
Transfer Agent will be responsible for any losses. If these procedures are
not followed, the Transfer Agent may be liable to you for losses resulting
from unauthorized instructions.
If there is an unusual amount of market activity and you cannot reach the
Transfer Agent by telephone, consider placing your order by mail.
By Mail
Use the Regular U.S. Mail or Overnight Mail Address to redeem shares. Send
us a letter of instruction indicating your Fund account number, amount of
redemption, and where to send the proceeds. All account owners must sign. A
signature guarantee is required for the following redemption requests:
Redemptions over $10,000;
Your account registration has changed within the last 15 days;
The check is not being mailed to the address on your account;
The check is not being made payable to the owner of the account; or
If the redemption proceeds are being transferred to another Victory Group
account with a different registration.
A signature guarantee can be obtained from a financial institution such as a
bank, broker-dealer, credit union, clearing agency, or savings association.
By Wire
If you want to redeem funds by wire, you must establish a Fund account which
will accommodate wire transactions. If you call by 2:00 p.m. Eastern time
(12:00 p.m. for Ohio Municipal Money Market Fund), your funds will be wired
on the same business day.
By ACH
Normally, your redemption will be processed on the same day or the next day
if your instructions are received after 2:00 p.m. Eastern Time (12:00 p.m.
for Ohio Municipal Money Market Fund). It will be transferred by ACH as long
as the transfer is to a domestic bank.
There are a number of convenient ways to redeem shares of a Fund. You can
use the same mailing addresses listed for purchases. You will earn dividends
up to the date your redemption request is processed.
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<PAGE>
Under certain emergency circumstances, the right of redemption may be
suspended. Redemption proceeds from the sale of shares purchased by a check
may be held until the purchase check has cleared. If you request a complete
redemption, any dividends accrued will be included with the redemption
proceeds.
Check Writing
Shareholders of the following funds may withdraw funds by writing a check
for $100.00 or more:
Ohio Municipal Money Market Fund
Prime Obligations Fund
Tax-Free Money Market Fund
U.S. Government Obligations--Investor Shares
In order to activate the check writing option on your account, you must sign
a signature card. After your completed signature card is received, an
initial supply of checks will be mailed to you in about three weeks. There
is no charge for checks; however, you will be charged for stopping payment
of a check or for insufficient funds. You may not close your account by
writing a check. Please call 800-KEY-FUND to request a signature card.
Systematic Withdrawal Plan
If you check this box on the Account Application, we will send monthly,
quarterly, semi-annual, or annual payments to you or the person you
designate. The minimum withdrawal is $25, and you must have an account value
of $5,000 or more to start withdrawals. Once again, we will need a voided
personal check to activate this feature. You should be aware that your
account eventually may be depleted. However, you cannot automatically close
your account using the Systematic Withdrawal Plan. If your account value
falls below $500, we may ask you to bring the account back to the $500
minimum. If you decide not to increase your account to the minimum balance,
your account may be closed and the proceeds mailed to you.
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<PAGE>
Organization and Management of the Funds
About Victory
Each Fund is a member of the Victory Funds, a group of 26 distinct
investment portfolios, and is organized as a Delaware business trust. Some
of the Victory Funds have been operating since 1983.
The Board of Trustees of Victory has the overall responsibility for the
management of the Funds. They are elected by the shareholders.
The Investment Adviser
One of a Fund's most important contracts is its Advisory Agreement with Key
Asset Management Inc. (KAM or the Adviser), a New York Corporation
registered as an investment adviser with the SEC. KAM is a subsidiary of
KeyBank National Association, a wholly-owned subsidiary of KeyCorp. On
February 28, 1997, KAM became the surviving corporation after the
reorganization of four indirect investment adviser subsidiaries of KeyCorp.
Affiliates of the Adviser manage approximately $50 billion for a limited
number of individual and institutional clients.
The Advisory Agreement allows the Adviser to hire employees of its
affiliates. It also allows KAM to choose brokers or dealers to handle the
purchases and sales of the Fund's securities. Subject to Board approval, Key
Investments, Inc. (KII) and/or Key Clearing Corporation (KCC) may act as
clearing broker for the Funds' security transactions in accordance with
procedures adopted by the Funds, and receive commissions or fees in
connection with their services to the Funds. Both KII and KCC are wholly-
owned indirect subsidiaries of KeyCorp and affiliates of the Adviser.
Prior to February 28, 1997, KeyCorp Mutual Fund Advisers, Inc. was the
adviser and Society Asset Management, Inc. (formerly the adviser) was the
sub-adviser to each of the Funds. During the fiscal year ended October 31,
1996, KeyCorp Mutual Fund Advisers, Inc. was paid an advisory fee at an
annual rate based on the average daily net assets of each Fund as follows:
Fund Advisory Fees
Financial Reserves Fund .42%
Ohio Municipal Money Market Fund .20%
Prime Obligations Fund .35%
Tax-Free Money Market Fund .35%
U.S. Government Obligations Fund .35%
MANAGEMENT OF THE FUNDS
Trustees
Supervise each Fund's activities.
Investment Adviser
Key Asset Management Inc.
127 Public Square
Cleveland, OH 44114
Manages each Fund's business and investment activities.
We want you to know who plays what role in your investment and how they are
related. This section discusses the organizations employed by the Funds to
service their shareholders. They are paid a fee for their services.
The Administrator, Distributor, and Fund Accountant
BISYS Fund Services is the Administrator and the Distributor. BISYS is paid
a fee at an annual rate of .15% of each Fund's average daily net assets as
the Administrator, but does not charge a fee for its services as
Distributor. BISYS Fund Services Ohio, Inc. receives a fee as the Funds'
Accountant.
The Distributor may provide sales support, including cash or other
compensation, to dealers for selling shares of the Funds. Payments may be in
the form of trips, tickets, and/or merchandise offered through sales
contests. It does this at its own expense, and not at the expense of a Fund
or its shareholders.
The Funds are supervised by the Board of Trustees, who monitor the services
provided to investors.
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<PAGE>
Shareholder Servicing Plan
Victory has a Shareholder Servicing Plan for shares of the following funds:
Ohio Municipal Money Market Fund
Prime Obligations Fund
Tax-Free Money Market Fund
U.S. Government Obligations Fund--Select Shares
The shareholder servicing agent performs a number of services for their
customers who are shareholders of a Fund. It establishes and maintains
accounts and records, processes dividend and distribution payments, arranges
for bank wires, assists in transactions, and changes account information.
For these services the Funds pay a fee at an annual rate of up to .25% of
the average daily net assets of the appropriate class of shares. The Funds
have agreements with various shareholder servicing agents, including
KeyBank National Association and its affiliates, other financial
institutions, and securities brokers. Shareholder servicing agents may waive
all or a portion of their fee periodically.
Distribution Plan
Under Rule 12b-1 of the Investment Company Act of 1940, Victory has adopted
a Distribution and Service Plan for the Financial Reserves Fund, the Ohio
Municipal Money Market Fund, and the Investor Shares of the U.S. Government
Obligations Fund. The shares of these Funds currently do not pay expenses
under this plan.
Independent Accountants
Coopers & Lybrand L.L.P. serves as independent accountant to the Funds.
Legal Counsel
Kramer, Levin, Naftalis & Frankel serves as legal counsel to the Funds.
HOW THE FUNDS ARE ORGANIZED
Shareholders
Financial Services Firms and their Investment Professionals
Advise current and prospective shareholders on their Fund investments.
Transfer Agent/Servicing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
Handles services such as record-keeping, statements, processing of buy and
sell requests, distribution of dividends, and servicing of shareholders'
accounts.
Administrator, Distributor, and Fund Accountant
BISYS Fund Services, Inc. and
BISYS Fund Services Ohio Inc.
3435 Stelzer Road
Columbus, OH 43219
Markets the Funds, distributes shares through Investment Professionals, and
calculates the value of shares.
Custodian
Key Trust Company of Ohio, N.A.
127 Public Square
Cleveland, OH 44114
Provides for safekeeping of the Funds' investments and cash, and settles
trades made by the Funds.
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<PAGE>
Additional Information
Some additional information you should know about the Funds.
The Funds offer only the classes of shares described in this prospectus, but
at some future date, the Funds may offer additional classes of shares
through a separate prospectus.
Your Rights as a Shareholder
All shareholders of each class have equal voting, liquidation, and other
rights. As a shareholder of a Fund, you have rights and privileges similar
to those enjoyed by other corporate shareholders. Delaware Trust law limits
the liability of shareholders.
If any matters are to be voted on by shareholders (such as a change in a
fundamental investment objective or the election of trustees), each share
outstanding at that point would be entitled to one vote. If you have a
qualified trust account, the trustee will vote your shares on your behalf or
in the same percentage voted on shares that are not held in trust.
Shareholders with more than 10% of the outstanding shares of a Fund may call
a special meeting for removal of a Trustee. Normally, Victory is not
required to hold annual meetings of shareholders. However, shareholders may
request one under certain circumstances, as described in the SAI.
Code of Ethics
Victory and the Adviser have each adopted a Code of Ethics to which all
investment personnel and all other access persons to each Fund must conform.
Investment personnel must refrain from certain trading practices and are
required to report certain personal investment activities. Violations of the
Code of Ethics can result in penalties, suspension, or termination of
employment.
Banking Laws
Banking laws, including the Glass-Steagall Act, prevent a bank holding
company or its affiliates from sponsoring, organizing, or controlling a
registered, open-end investment company. However, bank holding company
subsidiaries may act as investment adviser, transfer agent, custodian, or
shareholder servicing agent. They may also purchase shares of such a company
and pay third parties for performing these functions for their customers.
Should these laws change in the future, the Trustees would consider
selecting another qualified firm so that all services would continue.
Shareholder Communications
You will receive unaudited Semi-Annual Reports and audited Annual Reports on
a regular basis from each Fund. In addition, you will also receive updated
prospectuses or supplements to this prospectus. In order to eliminate
duplicate mailings to an address at which two or more shareholders with the
same last name reside, the Funds will send only one copy of the above
communications.
If you would like to receive additional copies of any materials, please call
the Funds at 800-KEY-FUND.
The securities described in this prospectus and the SAI are not offered in
any state in which they may not lawfully be sold. No sales representative,
dealer, or other person is authorized to give any information or make any
representation other than those contained in this prospectus and the SAI.
- 25 -
<PAGE>
Other Securities and Investment Practices
The following table lists some of the types of securities each of the Funds
may choose to purchase under normal market conditions. The majority of the
portfolio for each of the Funds other than the tax-exempt Funds is made up
of repurchase agreements, short-term debt obligations, and U.S. Government
obligations, while the tax-exempt Funds are made up of municipal securities.
However, the Funds are also permitted to invest in other securities as shown
in the table below. For temporary defensive purposes, each Fund may hold up
to 100% of its total assets in cash or short-term money market instruments.
For more information on ratings and detailed descriptions of each of the
investments below, see the SAI.
<TABLE>
<CAPTION>
List of Allowable Investments Financial Ohio Municipal Prime Tax-Free U.S. Government
and Investment Practices Reserves Money Market Obligations Money Market Obligations
Fund Fund Fund Fund Fund
<S> <C> <C> <C> <C> <C>
Commercial Paper. Short-term obligations issued <F1> <F1>
by banks, corporations, broker dealers and other <F1> (20% <F1> (20% none
entities to finance their current operations. taxable) taxable)
Repurchase Agreements. An agreement to sell and <F1>
repurchase a security at a stated price plus Collateralized
interest. The seller's obligation to the <F1> 20% <F1> 20% by U.S. Gov't.
Fund is secured by collateral. obligations
Certificates of Deposit. A commercial
bank's obligations to repay funds
deposited with it, earning specified <F1> 20% <F1> 20% none
rates of interest over given periods.
Master Demand Notes. Unsecured obligations that
permit the investment of fluctuating amounts <F1> 20% <F1> 20% none
by the Funds at varying interest rates.
Short-Term Funding Agreements. Similar to
guaranteed investment contracts, or "GIC's," and
issued by insurance companies. The Funds invest 10% none 10% none none
cash for a specified period and guaranteed amount
of interest as stated in the contract.
(Contracts cannot be sold and may be
considered illiquid.)
U.S. Government Securities. Securities issued or
guaranteed by the U.S. Government, its agencies, Only direct
or instrumentalities. Some are direct obligations <F1> 20% <F1> 20% Treasury
of the U.S. Treasury; others are obligations only obligations
of the U.S. agency or instrumentality.
Restricted Securities. Securities that are
not registered under federal securities <F1> <F1>
laws but that may be traded among qualified <F1> (20% <F1> (20% none
institutional investors and the Fund. taxable) taxable)
Some of these securities may be illiquid
Time Deposits. Non-negotiable deposits
in banks that pay a specified rate of . <F1> 20% <F1> 20% none
interest over a set period of time
Tax and Bond Anticipation Notes. Issued in
expectation of future revenues. none 80-100% none 80-100% none
- 26 -
<PAGE>
<F2>Variable and Floating Rate Securities.
Investment grade instruments, some of which
may be derivatives and illiquid, with <F1> <F1> <F1> <F1> none
interest rates that reset periodically.
Tax-Exempt Commercial Paper. Short-term
obligations that are exempt from state <F1> 80-100% <F1> 80-100% none
and/or federal income tax.
Eurodollar Obligations. Obligations of
foreign branches of U.S. Banks. . 25% 20% 25% 20% none
Subject to 25% concentration by industry
When-Issued and Delayed-Delivery Securities.
A security that is purchased for delivery
at a later time. The market value may change is 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%
before the delivery date, and the value
included in the NAV.
Zero Coupon Bonds. These securities are purchased
at a discount from the face value. The face value
is received at maturity, with no interest <F1> <F1> <F1> <F1> <F1> <F1>
before then. These may be subject to greater risks tax-exempt tax-exempt
of price fluctuation than securities that
periodically pay interest.
<F2>Mortgage-Backed Securities. Instruments
secured by a pool of mortgages.
U.S. Government. Issued or guaranteed by the
U.S. Government or its agencies; i.e., GNMAs, <F1> <F1> <F1> <F1> <F1>
FNMAs, SLMAs. <F3> tax-exempt tax-exempt
Non-U.S. Government. Secured by
non-government entities.
Investment Company Securities. Shares of other
mutual funds with similar investment objectives.
The following limitations apply: (1) no more than 5% 5%
5% of a Fund's total assets may be invested in one 5% 3% 5% 3% 5%
mutual fund, (2) a Fund may not own more than 10% 10%
3% of the securities of any one mutual fund, and
(3) no more than 10% of a Fund's total assets in
combined mutual fund holdings.
Illiquid Securities. Investments that cannot be
sold readily within seven days in the usual course 10% of 10% of 10% of 10% of 10% of
of business at approximately the price at which net assets net assets net assets net assets net assets
a Fund values them.
no more with respect no more no more no more
Securities of Any One Issuer. than 5% to 75%, no than 5% than 5% than 5%
more than 5%
Borrowing, Reverse Repurchase Agreements. The
borrowing of money from banks (up to 5% of total 5% 5% 5% 5% 5%
assets) or through reverse repurchase agreements 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%
(up to 33 1/3% of total assets). The Funds
will not use borrowing to create leverage.
Securities Lending. In order to generate additional
income, a Fund may lend its portfolio securities.
A Fund will receive collateral for the value of the
security plus any interest due. A Fund only will 33 1/3% 33 1/3% 33 1/3% 33 1/3% 33 1/3%
enter into loan arrangements with entities that
the Adviser has determined are creditworthy.
% Percentage of total assets.
<FN>
<F1>No limitation of usage; Fund may be using currently.
<F2>Indicates a "derivative security," whose value is linked to, or derived from, another security, instrument, or index.
<F3>Obligations of entities such as the Government National Mortgage Association (GNMA) and the Export-Import Bank of the U.S. are
backed by the full faith and credit of the U.S. Treasury. Others, such as the Federal National Mortgage Association (FNMA) are
supported by the right of the issuer to borrow from the U.S. Treasury. Still others, such as the Student Loan Marketing
Association (SLMA), Federal Farm Credit Bank (FFCB), Federal Home Loan Bank (FHL), and the Federal Home Loan Mortgage Corporation
(FHLMC) are supported only by the credit of the federal agency.
</FN>
</TABLE>
- 27 -
<PAGE>
This page is intentionally left blank.
<PAGE>
Bulk Rate
U.S. Postage
PAID
Cleveland, OH
Permit No. 469
Victory Funds
PRINTED ON RECYCLED PAPER
VF/MMMF-PRO (2/97)
<PAGE>
Rule 497(c)
Registration No. 33-8982
Victory Funds
PROSPECTUS
INSTITUTIONAL MONEY MARKET FUND
800-KEY-FUND(R) or 800-539-3863
March 1, 1997
<PAGE>
THE VICTORY PORTFOLIOS
THE VICTORY INSTITUTIONAL MONEY MARKET FUND
800-KEY-FUND(R) 800-539-3863
This prospectus describes the Victory Institutional Money Market Fund (the
Fund). The Fund is a diversified money market mutual fund and is a part of The
Victory Portfolios (Victory), an open-end investment management company. You
should read this prospectus before investing in the Fund and keep it for future
reference. A detailed Statement of Additional Information (SAI) is also
available for your review. The SAI has been filed with the Securities and
Exchange Commission (SEC), and is incorporated into this prospectus by
reference. If you would like a free copy of the SAI, please request one by
calling us at 800-KEY-FUND.
<PAGE>
TABLE OF CONTENTS
Introduction 2
Fund Expenses 4
Financial Highlights 5
Investment Objective, Policies, and Strategies 6
An analysis including objective, policies, strategies, expenses, and financial
highlights
Risk Factors 7
Investment Limitations 7
Investment Performance 8
Share Price 8
Dividends, Distributions, and Taxes 9
INVESTING WITH VICTORY 11
How to Purchase Shares 11
How to Exchange Shares 13
How to Redeem Shares 14
Organization and Management of the Fund 15
Additional Information 17
Other Securities and Investment Practices 18
An investment in the Fund is neither insured nor guaranteed by the U.S.
Government. There can be no assurance that the Fund will be able to maintain a
stable net asset value of $1.00 per unit. Shares of the Fund are:
Not insured by the FDIC;
Not deposits or other obligations of, or guaranteed by, any KeyBank, any of its
affiliates, or any other bank;
Subject to investment risks, including possible loss of the principal amount
invested.
These securities have not been approved or disapproved by the Securities and
Exchange Commission or any securities regulatory authority of any state, nor has
the Securities and Exchange Commission or any such state authority passed upon
the accuracy or adequacy of this prospectus. Any representation to the contrary
is a criminal offense.
-1-
<PAGE>
KEY TO FUND INFORMATION
OBJECTIVE AND STRATEGY
The goals and the strategy the Fund plans to use in pursuing its investment
objective.
RISK FACTORS
The risks that you may assume as an investor in the Fund.
EXPENSES
The costs that you will pay as an investor in the Fund, including sales
charges and ongoing expenses.
FINANCIAL HIGHLIGHTS
A table which shows the historical performance of the Fund by share class.
This table also summarizes previous operating expenses.
Investment Objective and Strategy
Objective
The investment objective of the Institutional Money Market Fund is to obtain as
high a level of current income as is consistent with preserving capital and
providing liquidity.
Strategy
The Fund pursues its investment objective by investing in a diversified
portfolio of high-quality, short-term U.S. dollar-denominated money market
instruments. The Fund seeks to maintain a constant net asset value of $1.00 per
share, and shares are offered at net asset value.
Risk Factors
The Fund is not insured by the FDIC, and while it attempts to maintain a $1.00
per share price, there is no guarantee that it will be able to do so. In
addition, there are potential credit, interest rate, and market risks. These
risks are discussed in the section "Risk Factors."
Who Should Invest
Investors seeking relative safety and easy access to investments
Investors with a low risk tolerance
Investors seeking preservation of capital
Investors willing to accept lower potential returns in return for safety
Fees and Expenses
No Load or sales commission is charged to investors in this Fund. You will,
however, incur expenses for investment advisory, management, administrative, and
shareholder services, all of which are included in the Fund's expense ratio.
This prospectus offers two classes of shares: Investor Shares and Select Shares.
The Investor Shares are available to certain institutions or individuals that
meet minimum investment requirements, and are not subject to a shareholder
servicing fee. The Select Shares are available to certain institutions that
provide additional services to investors. The Select Shares Class pays a
shareholder servicing fee at an annual rate of up to .25% of the average daily
net assets of that class serviced by each servicing agent. See "Organization and
Management of the Fund--Shareholder Servicing--Select Shares."
-2-
<PAGE>
Purchases
The minimum initial investment is $1,000,000 and $500 thereafter. The initial
investment must be accompanied by the Fund's Account Application. Fund shares
may be purchased by check, Automated Clearing House, or wire. See "How to
Purchase Shares."
Redemptions
You can redeem Fund shares by written request or telephone. When the Transfer
Agent receives a redemption request in proper form, the Fund will redeem the
shares and credit your bank account or send the proceeds to the address
designated on your Account Application. See "How to Redeem Shares."
Dividends/Distributions
Income is accrued and declared daily by the Fund and is paid monthly. Any
capital gains realized by the Fund are paid as dividends annually. The Fund can
send your dividends directly to you by mail, credit them to your bank account,
reinvest them in the Fund, or invest them in another fund of the Victory Group.
The "Victory Group" includes other funds of The Victory Portfolios and Key
Mutual Funds. You can make this choice when you fill out an account application.
See "Dividends, Distributions, and Taxes."
Other Services
Victory offers a number of other services to better serve shareholders including
exchange privileges. See "How to Exchange Shares" and "How to Redeem Shares."
Our toll-free fax number is 800-529-2244. You can reach Victory's
Telecommunication Device for the Deaf (TDD) at 800-970-5296.
<TABLE>
General Information About the Institutional Money Market Fund
<CAPTION>
Investor Shares Select Shares
<S> <C> <C>
Inception Date 1/20/83 6/5/95
Estimated Annual Expenses
(as a percentage of net assets) .27% .52%
Newspaper Abbreviation<F1> VictoryInst VictoryInstS
<FN>
<F1> All newspapers do not carry the same abbreviation.
</FN>
</TABLE>
The following pages provide you with an overview of the Fund. Please look at the
objective, policies, strategies, risks, expenses, and financial history to
determine if this Fund will suit your risk tolerance and investment needs. You
should also review the "Other Securities and Investment Practices" section for
additional information about the individual securities in which the Fund can
invest and the risks related to these investments.
-3-
<PAGE>
Fund Expenses
Institutional Money Market Fund
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the Institutional Money Market Fund.
You will note in the table that you do not pay fees of any kind when you buy,
sell, or exchange shares of the Fund.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses<F1> Investor Shares Select Shares
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases NONE NONE
Sales Charge Imposed on Reinvested Dividends NONE NONE
Deferred Sales Charge NONE NONE
Redemption Fees NONE NONE
Exchange Fees NONE NONE
<FN>
<F1> You may be charged additional fees if you purchase, exchange, or redeem
shares through a broker or agent.
</FN>
</TABLE>
This example is designed to help you understand the various costs you will bear,
directly or indirectly, as an investor in the Fund.
<TABLE>
<CAPTION>
Annual Fund Investor Select Operating Expenses
Shares Shares
After expense waivers and reimbursements
(as a percentage of average daily net assets)
<S> <C> <C>
Management Fee<F1> .20% .20%
Other Expenses<F1> .07% .30%<F2>
Total Fund Operating Expenses<F1> .27% .52%
<FN>
<F1> These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be .25%, and the Total Fund Operating Expenses would be
.47% for Investor Shares and .72% for Select Shares.
<F2> Other Expenses includes an estimate of shareholder servicing fees the Fund
expects to pay. (See "Organization and Management of the Fund--Shareholder
Servicing Plan.")
</FN>
</TABLE>
The Annual Fund Operating Expense table illustrates the estimated operating
expenses that you will incur as a shareholder of the Fund. These expenses are
charged directly to the Fund. Expenses include management fees as well as the
costs of maintaining accounts, administering the Fund, providing shareholder
services, and other activities. The expenses shown are estimated based on
historical or projected expenses of the Fund.
Example: You would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return, and (2) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 Year 2 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Investor Shares $3 $ 9 $15 $34
Select Shares $5 $17 $29 $65
</TABLE>
This example is only an illustration. Actual expenses and returns will vary. The
Financial Highlights describe the Fund's returns and operating expenses over
time. This table shows the results of an investment in one share of the Fund for
each of the periods indicated.
Financial Highlights
The financial highlights were audited by Coopers & Lybrand L.L.P. for the 1995
and 1996 periods and by other auditors for all earlier periods. This information
should be read in conjunction with the Fund's most recent Annual Report to
shareholders, which is incorporated by reference into the SAI. If you would like
a copy of the Annual Report, write or call the Fund at 800-KEY- FUND.
<TABLE>
<CAPTION>
INVESTOR Shares<F5> SELECT Shares<F5>
Year Ended Six Months Ended Year Ended June 5, 1995 to
October 31, 1996 October 31, 1995<F4> October 31, 1996 October 31, 1995<F4>
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000
Income from Investment Activities
Net investment income 0.053 0.290 0.050 0.012
Distributions
Net investment income (0.053) (0.290)<F2> (0.050) (0.012)
-------- -------- -------- -------
Net Asset Value,
End of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== =======
Total Return 5.41% 2.90%<F2> 5.16% 1.23%<F2>
Ratios/Supplemental Data:
Net Assets,
End of Period (000) $671,575 $504,536 $373,090 $11,479
Ratio of expenses to
average net assets 0.27% 0.26%<F3> 0.52% 0.51%<F3>
Ratio of net investment
income to average net assets 5.27% 5.69%<F3> 4.97% 5.33%<F3>
Ratio of expenses to
average net assets<F7> 0.48% 0.49%<F3> 0.73% 1.00%<F3>
Ratio of net investment
income to average net assets<F7> 5.06% 5.46%<F3> 4.77% 4.84%<F3>
-4-
<PAGE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended
April 30, 1995<F8> April 30, 1994<F8> April 30, 1993<F8> April 30, 1992<F8>
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000
Income from Investment Activities
Net investment income 0.500 0.028 0.032 0.051
Distributions
Net investment income (0.500) (0.028) (0.032) (0.051)
-------- -------- -------- --------
Net Asset Value,
End of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== ========
Total Return 4.91% 2.80% 3.26% 5.21%
Ratios/Supplemental Data:
Net Assets,
End of Period (000) $449,814 $541,229 $155,097 $177,640
Ratio of expenses to
average net assets 0.27% 0.55% 0.43% 0.30%
Ratio of net investment
income to average net assets 4.91% 2.78% 3.19% 5.06%
Ratio of expenses to
average net assets<F7> 0.51% 0.55% 0.48% 0.42%
Ratio of net investment
income to average net assets<F7> 4.67% 2.78% 3.14% 4.94%
<CAPTION>
Year Ended Year Ended Year Ended Year Ended
April 30, 1991<F8> April 30, 1990<F8> April 30, 1989<F8> April 30, 1988<F8>
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000
Income from Investment Activities
Net investment income 0.076 0.087 0.082 0.068
Distributions
Net investment income (0.076) (0.087) (0.082) (0.068)<F6>
-------- -------- -------- --------
Net Asset Value,
End of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== ========
Total Return 7.83% 8.95% 8.46% 6.98%
Ratios/Supplemental Data:
Net Assets,
End of Period (000) $248,515 $178,208 $133,492 $172,151
Ratio of expenses to
average net assets 0.30% 0.30% 0.29% 0.25%
Ratio of net investment
income to average net assets 7.46% 8.63% 8.21% 6.94%
Ratio of expenses to
average net assets<F7> 0.44% 0.43% 0.36% 0.25%
Ratio of net investment
income to average net assets<F7> 7.32%
<CAPTION>
Year Ended Year Ended
April 30, 1987<F8> April 30, 1986<F8>
<S> <C> <C>
Net Asset Value,
Beginning of Period $ 1.000 $ 1.000
Income from Investment Activities
Net investment income 0.061 0.075
Distributions
Net investment income (0.061)<F6> (0.075)
-------- -------
Net Asset Value,
End of Period $ 1.000 $ 1.000
======== =======
Total Return 6.21% 7.72%
Ratios/Supplemental Data:
Net Assets,
End of Period (000) $106,961 $56,260
Ratio of expenses to
average net assets 0.24% 0.39%
Ratio of net investment
income to average net assets 6.02%<F6> 7.58%<F6>
Ratio of expenses to
average net assets<F7> 0.24% 0.39%
Ratio of net investment
income to average net assets<F7>
<FN>
<F2> Not annualized.
<F3> Annualized.
<F4> Effective June 5, 1995, the Victory Institutional Money Market Portfolio
became the Institutional Money Market Fund, and the Fund commenced offering
separate share classes.
<F5> Effective March 1, 1996, the Fund designated Institutional Shares as
Investor Shares and Service Shares as Select Shares.
<F6> Through March 13, 1988, distributions were declared from the total of net
investment income, net realized gain/(loss) on investments and unrealized
appreciation (depreciation) of investments. Subsequently, distributions have
been declared solely from net investment income.
<F7> During the period, certain fees were voluntarily reduced and/or reimbursed.
If such voluntary fee reductions and/or reimbursements had not occurred, the
ratios would have been as indicated.
<F8> Audited by other auditors.
</FN>
</TABLE>
-5-
<PAGE>
Investment Objective, Policies, and Strategies
Investment Objective
FThe investment objective of the Fund is to obtain as high a level of current
income as is consistent with preserving capital and providing liquidity.
Investment Policies and Strategy
The Fund pursues its investment objective by primarily investing in short- term,
high-quality debt instruments.
Under normal market conditions, the Fund primarily invests in:
Negotiable certificates of deposit, time deposits, and bankers' acceptances of
U.S. banks and U.S. branches of foreign banks
Short-term corporate obligations, such as commercial paper, notes, and bonds
Repurchase Agreements
Other debt obligations such as master demand notes, short-term funding
agreements, variable and floating rate securities, and private placement
investments
U.S. Treasury obligations and obligations of government sponsored agencies, such
as GNMA, FNMA, SLMA, FFCB, FHL, and FHLMC1/
When-issued or delayed-delivery securities
Eurodollar debt obligations
Important Characteristics of the Fund's Investments:
Quality: The Fund invests only in instruments that are rated at the time of
purchase in the highest category by two or more NRSROs2/, or in the highest
category if rated by only one NRSRO, or if unrated, determined to be of
equivalent quality. The Board of Trustees has established policies to ensure
that the Fund invests in high quality, liquid instruments. For more information
on ratings, see the Appendix to the SAI.
Maturity: Weighted average maturity of 90 days or less. Individual investments
may be purchased with remaining maturities ranging from one day to 397 days.
Risk
The Fund is subject to credit risk, interest rate risk, inflation risk, and
market risk. Please read "Risk Factors" carefully before investing. For more
information about other securities in which the Fund can invest, see "Other
Securities and Investment Practices" and the SAI.The Board of Trustees has
established policies to ensure that the Fund invests in high quality, liquid
instruments.
1/Obligations of entities such as the Government National Mortgage
Association (GNMA) and the Export-Import Bank of the U.S. are backed by the full
faith and credit of the U.S. Treasury. Others, such as the Federal National
Mortgage Association (FNMA) are supported by the right of the issuer to borrow
from the Treasury. Still others, such as the Student Loan Marketing Association
(SLMA), Federal Farm Credit Banks (FFCB), Federal Home Loan Bank (FHLB), and the
Federal Home Loan Mortgage Corporation (FHLMC) are supported only by the credit
of the federal agency.
2/An NRSRO is a nationally recognized statistical rating organization such
as Standard & Poor's (S&P), Fitch, or Moody's which assigns credit ratings to
securities based on the borrower's ability to meet its obligation to make
principal and interest payments.
-6-
<PAGE>
Risk Factors
This prospectus describes some of the risks that you may assume as an investor
in the Fund. Some limitations on the Fund's investments are described in the
section that follows. "Other Securities and Investment Practices" at the end
of this prospectus provides additional information on the securities mentioned
in the overview of the Fund. As with any mutual fund, there is no guarantee
that the Fund will earn income. Over time, money market mutual funds have
offered investors the least amount of principal risk; therefore, the potential
return is usually lower than for other types of investments.
The following risk is common to all mutual funds:
Market risk is the risk that the market value of a debt security may fluctuate,
depending on the supply and demand for that type of security. As a result of
this fluctuation, a security may be worth more or less than the price the Fund
originally paid for it, or less than the security was worth at an earlier time.
Market risk may affect a single issuer, an industry, a sector of the economy, or
the entire market, and is common to all investments.
The following risks are common to all money market mutual funds: Credit (or
default) risk is the possibility that the issuer of a security will be unable to
make timely payments of interest or principal. Although the Fund invests only in
high-quality securities, the interest or principal payments are not insured or
guaranteed.
Inflation risk is the risk that inflation will erode the purchasing power of the
cash flows generated by debt securities held by the Fund. Fixed-rate debt
securities are more susceptible to this risk than floating-rate debt securities.
Interest rate risk. The value of a debt security typically changes in the
opposite direction from a change in interest rates. Therefore, when interest
rates go up, the value of a fixed-rate security typically goes down. When
interest rates go down, the value of these securities typically goes up.
Generally, the market values of securities with longer maturities are more
sensitive to changes in interest rates.
It is important to keep in mind one basic principle of investing: the greater
the risk, the greater the potential reward. The reverse is also generally true:
the lower the risk, the lower the potential reward.
Investment Limitations
To help reduce risk and maintain its $1.00 per share price, the Fund has adopted
limitations on some investment policies. These limits involve the Fund's ability
to borrow money and the amount it can invest in various types of securities,
including illiquid securities. Certain limitations can be changed only with the
approval of shareholders. Victory's Board of Trustees can change other
investment limitations without shareholder approval. See "Other Securities and
Investment Practices" and the SAI for more information.
The Fund limits to 25% of its total assets the amount it may invest in any
single industry (other than U.S. Government obligations and U.S. banks). The
Fund limits its borrowing to 33 1/3% of its total assets. Borrowing would be in
the form of selling a security that it owns and agreeing to repurchase that
security later at a higher price. The Fund does not intend to borrow for
leverage purposes.
The SEC and IRS have certain restrictions with which all mutual funds must
comply. The Fund monitors these limitations on an ongoing basis.
-7-
<PAGE>
Diversification Requirements
SEC Requirement: The Fund is "diversified" according to certain federal
securities provisions regarding the diversification of its assets. Generally,
under those provisions, the Fund must invest at least 75% of its total assets so
that no more than 5% of its total assets are invested in the securities of any
one issuer.
IRS Requirement: The Fund also intends to comply with certain federal tax
requirements regarding the diversification of its assets, which generally are
less restrictive than the securities provisions.
SEC Money Market Mutual Fund Requirement: The Fund also intends to comply with
certain more stringent federal securities diversification provisions for money
market funds. Generally, to comply with those provisions, the Fund will not
invest more than 5% of its total assets in the securities of any one issuer at
the time of purchase. These diversification provisions and requirements are
discussed in the SAI.
Past performance is not a guarantee of future results. You may obtain the
current 7-day yield by calling 800-KEY-FUND. Our Shareholder Servicing
representatives are available from 8:00 a.m. to 7:00 p.m. Eastern Time Monday
through Friday.
Investment Performance
Victory may advertise the performance of the Fund by comparing it to other
mutual funds with similar objectives and policies. Performance information may
also appear in various publications. Any fees charged by Investment
Professionals may not be reflected in these performance calculations.
Performance information is contained in the annual and semi-annual reports. You
may obtain a copy free of charge by calling 800-KEY-FUND.
The "7-day yield" is an "annualized" figure--the amount you would earn if you
stayed in the Fund for a year and the Fund continued to earn the same net
interest income throughout that year. To calculate 7-day yield, net investment
income per share for the most recent 7 days is multiplied by 52 (52 weeks/year),
then divided by the NAV ($1.00) to get a percentage, which is the 7-day yield.
Yield is a measure of net interest income.
Effective yield is similar to yield, except it is assumed that dividends are
reinvested daily and compounded.
Average annual total return is a hypothetical measure of past dividend income
plus capital appreciation.
It is the sum of all parts of your investment return for periods greater than
one year.
Total return is the sum of all parts of a Fund's investment return.
Whenever you see information on the Fund's performance, do not consider the past
performance to be an indication of the performance you could expect by making an
investment in the Fund today. The past is an imperfect guide to the future. As
you know, history does not always repeat itself.
Share Price
The Fund's share price, called its net asset value (NAV), is calculated each
business day (normally at 2:00 p.m. Eastern Time). Shares are purchased at the
next share price calculated after your order is received and accepted. A
business day is a day on which the Federal Reserve Bank of Cleveland and the New
York Stock Exchange is open for trading or any day in which enough trading has
occurred in the
-8-
<PAGE>
securities held by the Fund to materially affect the NAV. If your account is
established with an Investment Professional or a bank, you may not be able to
purchase or sell shares on other holidays when the Federal Reserve Bank of
Cleveland is closed, even though the New York Stock Exchange is open.
Since the Fund seeks to maintain a $1.00 NAV, an accounting system called the
"Amortized Cost Method" is used to value individual holdings. You can read about
this system in the SAI.
The Fund's performance can be found once a week in The Wall Street Journal and
other local newspapers.
Dividends, Distributions, and Taxes
As a shareholder, you are entitled to your share of net income and capital gains
on the Fund's investments less expenses. The Fund passes its earnings along to
investors in the form of dividends. Dividend distributions are the interest
earned on investments after expenses. Money market funds usually don't
distribute capital gains; however, if the Fund does make a distribution, it
usually occurs in December. As with any investment, you should consider the tax
consequences of an investment in the Fund.
Ordinarily, net income earned on securities owned by a fund accrues daily, is
declared daily, and is paid monthly. Shareholders who earn a dividend of less
than $10.00 will have dividends reinvested automatically into their accounts.
Distributions can be received in one of the following ways:
Reinvestment Option
You can have distributions automatically reinvested in additional shares of the
Fund. If you do not indicate another choice on your Account Application, you
will be assigned this option automatically.
Cash Option
You will be mailed a check no later than 7 days after the pay date.
Directed Dividends Option
You can have distributions automatically reinvested in shares of another fund of
the Victory Group. The "Victory Group" includes other funds of The Victory
Portfolios and Key Mutual Funds. If distributions are reinvested in a different
class of another fund, you may pay a sales charge on the reinvested
distributions.
Directed Bank Account Option
In most cases, you can have distributions automatically transferred to your bank
checking or savings account. Under normal circumstances, it would be transferred
within 7 days of the dividend payment date. The bank account must have a
registration identical to that of your Fund account.
Your choice of distribution should be set up on the original Account
Application. If you would like to change the option you selected, please call
the Transfer Agent at 800-KEY-FUND.
-9-
<PAGE>
Important Information about Taxes
The Fund intends to continue to qualify as a regulated investment company, in
which case it pays no federal income tax on the earnings or capital gains it
distributes to its shareholders.
Dividends from the Fund's long-term capital gain are taxable as capital gain;
dividends from other sources are generally taxable as ordinary income.
Dividends are treated in the same manner for federal income tax purposes whether
you receive them in cash or in additional shares. They may also be subject to
state and local taxes.
Certain dividends paid to you in January will be taxable as if they had been
paid to you in December of the previous year.
When you sell (redeem) or exchange shares of the Fund, you must recognize any
gain or loss. However, as long as the Fund's NAV per share does not deviate from
$1.00, there will be no gain or loss.
You will receive tax statements from the Fund every January showing the amounts
and tax status of distributions made to you.
Because your tax treatment depends on your purchase price and tax position, you
should keep your regular account statements for use in determining your tax.
You should review the more detailed discussion of federal income tax
considerations in the SAI.
THE TAX INFORMATION IN THIS PROSPECTUS IS PROVIDED AS GENERAL INFORMATION. YOU
SHOULD CONSULT YOUR OWN TAX ADVISER ABOUT THE TAX CONSEQUENCES OF AN INVESTMENT
IN THE FUND.
-10-
<PAGE>
Investing with Victory
If you are looking for a convenient way to open an account for yourself or to
add money to an existing account, Victory can help. This section will describe
how to open an account, how to access information on your account, and how to
purchase, exchange, and redeem shares of the Fund. We want to make it simple for
you to do business with us. The sections that follow will serve as a guide to
your investments with Victory. If you have questions about any of this
information, please call your Investment Professional or one of our customer
service representatives at 800-KEY-FUND. They will be happy to assist you.
How to Purchase Shares
Investor and Select Shares can be purchased in a number of different ways. All
you need to do to get started is to fill out an application. You can send in
your investment by check, wire transfer, exchange from another Victory Fund, or
through arrangements with your Investment Professional. An Investment
Professional is a salesperson, financial planner, investment adviser, or trust
officer who provides you with investment information. Sometimes they will charge
you for these services. Their fee will be in addition to, and unrelated to, the
fees and expenses charged by the Fund.
When you buy shares of the Fund, your cost will be $1.00 per share.
Make your check payable to: The Victory Funds
-11-
<PAGE>
Keep the following addresses handy for purchases, exchanges, or redemptions.
Regular U.S. Mail Address
Send completed Account Applications with your check, bank draft, or money order
to:
The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527
Overnight Mail Address
Use the following address ONLY for overnight packages.
The Victory Funds
c/o Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
PHONE: 800-KEY-FUND
Wire Address
The Transfer Agent does not charge a wire fee, but your originating bank may
charge a fee. Always call the Transfer Agent at 800-KEY-FUND BEFORE wiring funds
to obtain a control number.
State Street Bank and Trust Co.
ABA #011000028
For Credit to DDA
Account #9905-201-1
For Further Credit to Account # (insert account number, name and control number
assigned by the Transfer Agent)
Telephone Number:
800-KEY-FUND
800-539-3863
Fax Number:
800-529-2244
Telecommunication Device for the Deaf (TDD):
800-970-5296
ACH
If you would like to make additional investments after your account is already
established, use the Investment Stub attached to your confirmation statement and
send it with your check to the address indicated.
After your account is set up, your purchase amount can be transferred by
Automated Clearing House (ACH). Only domestic member banks may be used. It takes
about 15 days to set up the ACH feature. The Funds do not currently charge a fee
for ACH transfers.
Statements and Reports
You will receive a periodic statement reflecting any transactions that affect
the balance or registration of your account. You will receive a confirmation
after any purchases, exchanges, or redemptions. If your account has been set up
by an Investment Professional, account dividends will be detailed in their
statements to you. Share certificates are not issued. Twice a year, you will
receive the financial reports of the Fund. By January 31 of each year, you will
be mailed an IRS form reporting account distributions for the previous year,
which will also be filed with the IRS.
All purchases must be made in U.S. Dollars and drawn on U.S. banks. The Transfer
Agent may reject any purchase order at its sole discretion. If your check is
returned for any reason, you may be charged for any resulting fees and/or
losses. Third party checks will not be accepted. You may only invest or exchange
into fund shares legally available in your state.
If you would like to make additional investments after your account is already
established, use the Investment Stub attached to your confirmation statement and
send it with your check to the address indicated.
-12-
<PAGE>
How to Exchange Shares
An exchange is the selling of shares of one fund of the Victory Group to
purchase shares of another. You may exchange shares of one Victory fund for
shares of the same class of any other, generally without paying any additional
sales charges. (See the more complete explanation below.) The "Victory Group"
includes funds offered as a part of the Victory Funds and Key Mutual Funds. Key
Mutual Funds is affiliated with KeyCorp.
You can obtain a list of funds available for exchange by calling the Transfer
Agent at 800-KEY-FUND.
You can exchange shares of the Fund by writing or calling the Transfer Agent at
800-KEY-FUND. When you exchange shares of the Fund, you should keep the
following in mind:
Shares of the Fund selected for exchange must be available for sale in your
state of residence.
The Fund whose shares you want to exchange and the fund whose shares you want to
buy must offer the exchange privilege.
Shares of the Fund may be exchanged at relative net asset value. However, if you
exchange into a fund with a sales charge, you pay the percentage-point
difference between that fund's sales charge and any sales charge you have
previously paid in connection with the shares you are exchanging. Since the Fund
does not have a sales charge, if you were to purchase another fund in the
Victory Group that has a 4.75% sales charge, you would pay the 4.75% sales
charge.
You must meet the minimum purchase requirements for the fund you purchase by
exchange.
The registration and tax identification numbers of the two accounts must be
identical.
You must hold the shares you buy when you establish your account for at least 7
days before you can exchange them; after the account is open 7 days, you can
exchange shares on any business day.
Before exchanging, read the prospectus of the fund you wish to purchase by
exchange.
-13-
<PAGE>
How to Redeem Shares
If we receive your request by 2:00 p.m. Eastern Time, your
redemption will be processed the same day.
There are a number of convenient ways to redeem shares of the Fund. You can use
the same mailing and wiring addresses listed for purchases. You will earn
dividends up to and including the date your redemption request is processed.
By Telephone
The easiest way to redeem shares is by calling 800-KEY-FUND. When you fill out
your original application, be sure to check the box marked "Telephone
Authorization". Then when you are ready to redeem, call us and tell us which one
of the following options you would like to use:
Mail a check to the address of record;
Wire funds to a domestic financial institution;
Mail to a previously designated alternate address; or
Electronically transfer the funds via ACH.
All telephone calls are recorded for your protection and measures are taken to
verify the identity of the caller. If we properly act on telephone instructions
and follow reasonable procedures to ensure against unauthorized transactions,
neither Victory nor its servicing agents, the Adviser, nor the Transfer Agent
will be responsible for any losses. If these procedures are not followed, the
Transfer Agent may be liable to you for losses resulting from unauthorized
instructions.
If there is an unusual amount of market activity and you cannot reach the
Transfer Agent by telephone, consider placing your order by mail.
By Mail
Use the Regular U.S. Mail or Overnight Mail Address to redeem shares. Send us a
letter of instruction indicating your Fund account number, amount of redemption,
and where to send the proceeds. All account owners must sign. A signature
guarantee is required for the following redemption requests:
Redemptions over $10,000;
Your account registration has changed within the last 15 days;
The check is not being mailed to the address on your account;
The check is not being made payableto the owner of the account; or
If the redemption proceeds are being transferred to another Victory Group
account with a different registration.
A signature guarantee can be obtained from a financial institution such as a
bank, broker-dealer, credit union, clearing agency, or savings association.
By Wire
If you want to redeem funds by wire, you must establish a Fund account which
will accommodate wire transactions. If you call by 2:00 p.m. Eastern Time, your
funds will be wired on the same business day.
By ACH
Normally, your redemption will be processed on the same day, or the next day if
your instructions are received after 2:00 p.m. Eastern Time. It will be
transferred by ACH as long as the transfer is to a domestic bank.
Under certain emergency circumstances, the right of redemption may be suspended.
Redemption proceeds from the sale of shares purchased by a check may be held
until the purchase check has cleared. If you request a complete redemption, any
dividend accrued will be included with the redemption proceeds.
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<PAGE>
Organization and Management of the Fund
About Victory
The Fund is a member of the Victory Funds, a group of 26 distinct investment
portfolios. Some of the Victory Funds have been operating since 1983.
The Board of Trustees of Victory has the overall responsibility for the
management of the Fund. They are elected by the shareholders.
The Investment Advisers
We want you to know who plays what role in your investment and how they are
related. This section discusses the organizations employed by the Fund to
service the shareholders. They are paid a fee for their services.
One of the Fund's most important contracts is its Advisory Agreement with Key
Asset Management Inc. (KAM or the Adviser), a New York Corporation registered as
an investment adviser with the SEC. KAM is a subsidiary of KeyBank National
Association, a wholly-owned subsidiary of KeyCorp. Effective February 28, 1997,
KAM became the surviving corporation after the reorganization of four indirect
investment adviser subsidiaries of KeyCorp. Affiliates of the Adviser manage
approximately $50 billion for a limited number of individual and institutional
clients.
The Advisory Agreement allows the Adviser to hire employees of its affiliates.
It also allows KAM to choose brokers or dealers to handle the purchases and
sales of the Fund's securities, subject to Board approval. Key Investments, Inc.
(KII) and/or Key Clearing Corporation (KCC) may act as clearing broker for the
Funds' security transactions in accordance with procedures adopted by the Funds,
and receive commissions or fees in connection with their services to the Funds.
Both KII and KCC are wholly-owned indirect subsidiaries of KeyCorp and
affiliates of the adviser.
Prior to February 28, 1997, KeyCorp Mutual Fund Advisers, Inc. was the adviser
and Society Asset Management, Inc. (formerly the adviser) was the sub-adviser to
the Fund. During the fiscal year ended October 31, 1996, KeyCorp Mutual Fund
Advisers, Inc. was paid an advisory fee at an annual rate based on the average
daily net assets of the Fund as follows:
<TABLE>
<CAPTION>
Advisory Fees
(after waivers and reimbursements)
<S> <C>
Investor Shares .13%
Select Shares .13%
</TABLE>
Management of the Fund
Trustees
Supervise the Fund's activities.
Investment Adviser
Key Asset Management Inc.
127 Public Square
Cleveland, OH 44114
Manages the Fund's business
and investment activities.
The Administrator, Distributor, and Fund Accountant
BISYS Fund Services is the Administrator and the Distributor. BISYS is paid a
fee at an annual rate of .15% of the Fund's average daily net assets as the
Administrator, but does not charge a fee for its services as Distributor. BISYS
Fund Services Ohio, Inc. receives a fee as the Fund's Accountant.
The Distributor may provide sales support, including cash or other compensation,
to dealers for selling shares of the Fund. Payments may be in the form of trips,
tickets, and/or merchandise offered through sales contests. It does this at its
own expense, and not at the expense of the Fund or its shareholders.
Shareholder Servicing--Select Shares
Victory has a Shareholder Servicing Plan for the Select Shares class of the
Fund. The shareholder servicing agent performs a number of services for their
customers who are shareholders of the Fund. It establishes and maintains
accounts and records, processes dividend and distribu-
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<PAGE>
tion payments, arranges for bank wires, assists in transactions, and changes
account information. For these services, the Fund pays a fee at an annual rate
of up to .25% of the average daily net assets of the shares serviced by the
agent. The Fund has agreements with various shareholder servicing agents,
including KeyBank National Association and its affiliates, other financial
institutions, and securities brokers. Shareholder servicing agents may waive all
or a portion of their fee periodically.
Distribution Plan
Under Rule 12b-1 of the Investment Company Act of 1940, Victory has adopted a
Distribution and Service Plan for the Fund. The Fund does not currently pay
expenses under this plan.
Independent Accountants
Coopers & Lybrand L.L.P. serves as independent accountants to the Fund.
Legal Counsel
Kramer, Levin, Naftalis & Frankel serves as legal counsel to the Fund. The Fund
is supervised by the Board of Trustees who monitor the services provided to
investors.
How the Fund is Organized
Shareholders
Financial Services Firms and their Investment Professionals
Advise current and prospective shareholders on their fund investments.
Transfer Agent/Servicing Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
Handles services like record-keeping, statements, processing of buy and sell
requests, distribution of dividends, and servicing of shareholders' accounts.
Administrator, Distributor,and Fund Accountant
BISYS Fund Services, Inc. and
BISYS Fund Services Ohio, Inc.
3435 Stelzer Road
Columbus, OH 43219
Markets the Fund, distributes shares through Investment Professionals, and
calculates the value of shares
Custodian
Key Trust Company of Ohio, N.A.
127 Public Square
Cleveland, OH 44114
Provides for safekeeping of the Fund's investments and cash, and settles trades
made by the Fund.
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<PAGE>
Additional Information
Some additional information you should know about the Fund.
Share Classes
The Fund offers only the classes of shares described in this prospectus, but at
some future date, the Fund may offer additional classes of shares through a
separate prospectus.
Your Rights as a Shareholder
All shareholders of each class have equal voting, liquidation, and other rights.
As a shareholder of a Fund, you have rights and privileges similar to those
enjoyed by other corporate shareholders. Delaware Trust law limits the liability
of shareholders.
If any matters are to be voted on by shareholders (such as a change in a
fundamental investment objective or the election of trustees), each share
outstanding at that point would be entitled to one vote. If you have a qualified
trust account, the trustee will vote your shares on your behalf or in the same
percentage voted on shares that are not held in trust. Shareholders with more
than 10% of the outstanding shares of the Fund may call a special meeting for
removal of a Trustee. Normally, Victory is not required to hold annual meetings
of shareholders. However, shareholders may request one under certain
circumstances, as described in the SAI.
Code of Ethics
Victory and the Adviser have each adopted a Code of Ethics to which all
investment personnel and all other access persons to the Fund must conform.
Investment personnel must refrain from certain trading practices and are
required to report certain personal investment activities. Violations of the
Code of Ethics can result in penalties, suspension, or termination of
employment.
Banking Laws
Banking laws, including the Glass-Steagall Act, prevent a bank holding company
or its affiliates from sponsoring, organizing or controlling a registered,
open-end investment company. However, bank holding company subsidiaries may act
as investment adviser, transfer agent, custodian, or shareholder servicing
agent. They may also purchase shares of such a company and pay third parties for
performing these functions for their customers. Should these laws change in the
future, the Trustees would consider selecting another qualified firm so that all
services would continue.
Shareholder Communications
You will receive unaudited Semi-Annual Reports and audited Annual Reports on a
regular basis from the Fund. In addition, you will also receive updated
prospectuses or supplements to this prospectus. In order to eliminate duplicate
mailings to an address at which two or more shareholders with the same last name
reside, the Fund will send only one copy of the above communications.
The securities described in this prospectus and the SAI are not offered in any
state in which they may not lawfully be sold. No sales representative, dealer,
or other person is authorized to give any information or make any representation
other than those contained in this prospectus and the SAI.
If you would like to receive additional copies of any materials, please call the
Fund at 800-KEY-FUND.
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<PAGE>
Other Securities and Investment Practices
The following table lists some of the types of securities the Fund may choose to
purchase under normal market conditions. The majority of the portfolio for the
Fund is made up of repurchase agreements, short-term obligations, and/or U.S.
Government obligations. However, the Fund is also permitted to invest in the
securities as shown in the table below.
<TABLE>
<CAPTION>
List of Allowable Investments and Investment Practices Institutional Money Market
<S> <C>
Repurchase Agreements. An agreement to sell and repurchase a security at a stated
price plus interest. The seller's obligation to the Fund is secured by collateral. <F1>
Commercial Paper. Short-term obligations issued by banks, corporations, and
other entities to finance their current operations. <F1>
Certificates of Deposit. A commercial bank's obligation to repay funds deposited
with it, earning specified rates of interest over given periods. <F1>
Master Demand Notes. Unsecured obligations that permit the investment of
fluctuating amounts by the Fund at varying interest rates. <F1>
Short-Term Funding Agreements. Similar to guaranteed investment contracts, or 10% of
"GIC's," and issued by insurance companies. The Fund invests cash for a net assets
specified period and 10% of a guaranteed amount of interest as stated in the
contract. (Contracts cannot be sold net assets and may be considered illiquid.)
U.S. Government Securities. Securities issued or guaranteed by the U.S. <F1>
Government, its agencies or instrumentalities. Some are direct obligations of
the U.S. Treasury; others are obligations only of the U.S. agency.
Restricted Securities. Securities that are not registered under federal <F1>
securities laws but that may be traded among qualified institutional investors
and the Fund. Some of these securities may be illiquid.
Time Deposits. Non-negotiable deposits in banks that pay a specified rate of
interest over a set period of time. <F1>
<F2>Variable & Floating Rate Securities. Investment grade instruments, some of
which may be derivatives and illiquid, with interest rates that reset
periodically. <F1>
Eurodollar Obligations. Obligations of foreign branches of U.S. Banks. Subject
to 25% concentration by industry. 25%
When-Issued and Delayed-Delivery Securities. A security that is purchased for 33 1/3%
delivery at a later time. The market value may change before the delivery date
and the value is included in the NAV.
Zero Coupon Bonds. These securities are purchased at a discount from the face <F1>
value. The face value is received at maturity, with no interest payments before
then. These
-18-
<PAGE>
<F2>Mortgage-Backed Securities. Securities backed by a pool of mortgages. U.S. <F1>
Government. Issued or guaranteed by the U.S. Government or its agencies; i.e.,
GNMAs, FNMAs, SLMAs. Non-U.S. Government. Backed by non-government
entities.
Illiquid Securities. Investments that cannot be sold readily within seven days 10% of
in the 10% of usual course of business at approximately the price at which a net assets
Fund values them. net assets
Securities of Any One Issuer. no more
than 5%
Borrowing, Reverse Repurchase Agreements. The borrowing of money from banks (up
to 5% of total assets) or through reverse repurchase agreements (up to 33 1/3% 5%
of 5% total assets). The Fund will not use borrowing to create leverage. 33 1/3%
Securities Lending. In order to generate additional income, a Fund may lend its 33 1/3%
portfolio securities. A Fund will receive collateral for the value of the
security plus any interest due. A Fund only will enter into loan arrangements
with entities that the Adviser has determined are creditworthy.
<FN>
% Percentage of total assets.
<F1> No limitation of usage; Fund may be using currently.
<F2> Indicates a "derivative security," whose value is linked to, or derived
from, another security, instrument or index.
</FN>
</TABLE>
The Fund also may hold cash for temporary defensive purposes. For more
information on ratings and detailed descriptions of each of the above investment
vehicles, see the SAI.
-19-
<PAGE>
This page is intentionally left blank.
<PAGE>
Bulk Rate
U.S. Postage
PAID
Cleveland, OH
Permit No. 469
Victory Funds
PRINTED ON RECYCLED PAPER
VF/IMMF-PRO (2/97)
<PAGE>
Rule 497(c)
Registration No. 33-8982
Victory Funds
PROSPECTUS
THE VICTORY LAKEFRONT FUND
800-KEY-FUND(R) or 800-539-3863
March 1, 1997
<PAGE>
TABLE OF CONTENTS
Introduction 3
Investment Objective, Policies, and Strategies 5
An analysis including objectives, policies, strategies, and expenses
Risk Factors 7
Investment Limitations 8
Investment Performance 9
Share Price 9
Dividends, Distributions, and Taxes 10
Investing with Victory 12
Calculation of Sales Charges 12
How to Purchase Shares 14
How to Exchange Shares 16
How to Redeem Shares 17
Organization and Management of the Fund 18
Additional Information 20
Other Securities and Investment Practices 21
Shares of the Fund are:
Not insured by the FDIC;
Not deposits or other obligations of, or guaranteed by, any KeyBank,
any of its affiliates, or any other bank;
Subject to investment risks, including possible loss of the principal
amount invested.
These securities have not been approved or disapproved by the Securities
and Exchange Commission or any securities regulatory authority of
any state, nor has the Securities and Exchange Commission or any such
state authority passed upon the accuracy or adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
<PAGE>
THE VICTORY PORTFOLIOS
THE VICTORY LAKEFRONT FUND
800-KEY-FUND(R) 800-539-3863
This prospectus describes the Lakefront Fund (the Fund). The Fund
is a diversified mutual fund and is a part of The Victory Portfolios
(Victory), an open-end investment management company. This prospectus
explains the objective, policies, risks, and strategies of the Fund.
You should read this prospectus before investing and keep it for future
reference. A detailed Statement of Additional Information (SAI) is
also available for your review. The SAI has been filed with the Securities
and Exchange Commission (SEC), and is incorporated in this prospectus
by reference. If you would like a free copy of the SAI, please request
one by calling us at 800-KEY-FUND.
- 2 -
<PAGE>
KEY TO FUND INFORMATION
Objective and Strategy
The goals and the strategy that the Fund plans to use in pursuing
its investment objective.
Risk Factors
The risks that you may assume as an investor in the Fund.
Expenses
The costs that you will pay as an investor in the Fund, including
sales charges and ongoing expenses.
Investment Objective and Strategy
Objective
The Lakefront Fund seeks to provide long-term growth of capital and
income.
Strategy
The Fund pursues its investment objective by investing primarily in
a diversified group of equity securities with an emphasis on high-quality,
financially strong companies whose stocks are believed to be undervalued.
In making investment decisions, the Sub-Adviser may consider a company's
demonstrated commitment to diversity among its employees and suppliers
as a means of enhancing the company's competitive advantage. Please
review "Investment Objective, Policies, and Strategies" and "Other
Securities and Investment Practices" for an overview of the Fund.
Risk Factors
The Fund is not insured by the FDIC. Since equity securities fluctuate
in value, the Fund's shares also will fluctuate in value. In addition,
there are other potential risks, which are discussed in the section
"Risk Factors."
Who Should Invest
Investors willing to accept higher short-term risk along with higher
potential long-term returns
Investors seeking capital appreciation over the long-term
Investors seeking funds for the growth portion of a diversified portfolio
Investors who are investing for goals that are many years in the future
Investors seeking to support diversity through their participation
in the Fund
Fees and Expenses
You may pay a sales charge of up to 4.75% of the offering price, depending
on the amount you invest. You also will incur expenses for investment
advisory, management, administrative, and shareholder services, all
of which are included in the Fund's expense ratio.
- 3 -
<PAGE>
Purchases
The minimum initial investment is $500 for most accounts ($250 for
Individual Retirement Accounts) and $25 thereafter. The initial investment
must be accompanied by the Fund's Account Application. Fund shares
may be purchased by check, Automated Clearing House, or wire. See
"How to Purchase Shares."
Redemptions
You can redeem Fund shares by written request or telephone. When the
Transfer Agent receives a redemption request in proper form, the Fund
will redeem the shares and credit your bank account or send the proceeds
to the address designated on your Account Application. See "How to
Redeem Shares."
Dividends/Distributions
Ordinarily, the Fund declares and pays dividends from its net investment
income quarterly. Any net capital gains realized by the Fund are paid
as dividends at least annually. The Fund can send your dividends directly
to you by mail, credit them to your bank account, reinvest them in
the Fund, or invest them in another fund of the Victory Group. The
"Victory Group" includes other funds of The Victory Portfolios and
Key Mutual Funds. You can make this choice when you fill out an Account
Application. See "Dividends, Distributions, and Taxes."
Other Services
Victory offers a number of other services to better serve shareholders
including exchange privileges and automated investment and withdrawal
plans. See "How to Exchange Shares" and "How to Redeem Shares." Our
toll-free fax number is 800-529-2244. You can reach Victory's Telecommunication
Device for the Deaf (TDD) at 800-970-5296.
<TABLE>
<CAPTION>
General Information about The Lakefront Fund
<S> <C>
Inception Date 3/3/97
Estimated Annual Expenses After Waivers and Reimbursements 0%
(as a percentage of net assets)
Maximum Sales Charge 4.75%
</TABLE>
The following pages provide you with an overview of the Fund. Please
look at the objective, policies, strategies, risks, expenses, and
financial history to determine whether the Fund will suit your risk
tolerance and investment needs. You should also review the "Other
Securities and Investment Practices" section for additional information
about the individual securities in which the Fund can invest and the
risks related to these investments.
- 4 -
<PAGE>
Please read "Risk Factors" carefully before investing.
Investment Objective, Policies, and Strategies
Investment Objective
The Fund seeks to provide long-term growth of capital and income.
Investment Policies and Strategy
The Fund pursues its objective by investing primarily in a diversified
group of equity securities of established companies, emphasizing companies
with above average total return potential. The Fund's portfolio securities
usually are listed on a nationally recognized exchange. The Sub-Adviser
seeks equity securities that it considers undervalued in relation
to historical and projected earnings and the value of the issuer's
underlying assets. In evaluating potential investments as part of
the investment analysis, the Sub-Adviser may also consider a company's
demonstrated commitment to diversity among its employees and suppliers.
The Sub-Adviser believes that a company's commitment to diversity
is likely to enhance the company's competitive advantage and shareholder
value. The Sub-Adviser will invest in securities issued by these companies
only if the securities meet the Fund's investment criteria.
Under normal market conditions, the Fund:
Will invest at least 80% of its total assets in equity securities
or securities convertible into common stock
May invest up to 20% of its total assets in:
Preferred stocks
Investment-grade corporate debt securities
Short-term debt obligations
U.S. Government obligations
Risk
The Fund is designed for long-term investors. The Fund is subject
to the risks common to all mutual funds and the risks common to mutual
funds that invest in equity securities. By itself, the Fund does not
constitute a complete investment plan and should be considered a long-term
investment for investors who can afford to weather changes in the
value of their investment.
Portfolio Management
Nathaniel E. Carter is the Portfolio Manager of the Fund, a position
he has held since the Fund's inception in March 1997. He is the President
of Lakefront Capital Investors, Inc., and has been in the investment
business since 1987.
Lakefront Capital Investors, Inc. (Lakefront) will serve as Sub-Adviser
to the Fund. Lakefront is a registered investment advisory firm that
has been providing equity investment services to public and corporate
pension funds since its founding in 1991. Lakefront is the largest
African-American owned institutional investment advisory firm in the
state of Ohio.
Adviser: Key Asset Management, Inc. (KAM)
Sub-Adviser: Lakefront Capital Investors, Inc. (Lakefront)
-5 -
<PAGE>
Fund Expenses
This section will help you understand the costs and expenses you will
pay, directly or indirectly, if you invest in the Fund.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses* CLASS A SHARES
<S> <C>
Maximum Sales Charge Imposed on Purchases 4.75%
(as a percentage of the offering price)
Sales Charge Imposed on Reinvested Dividends NONE
Deferred Sales Charge NONE
Redemption Fees NONE
Exchange Fees NONE
*You may be charged additional fees if you purchase, exchange, or
redeem shares through a broker or agent.
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Annual Fund Operating Expenses CLASS A SHARES
After Expense Waivers and Reimbursements
(as a percentage of average daily net assets)
Management Fee<F1> 0%
Other Expenses<F1>,<F2> 0%
Total Fund Operating Expenses<F1> 0%
<FN>
<F1> All fees and expenses are being voluntarily waived or reimbursed.
Without the waiver and reimbursement, the annual Management Fee would
be 1.00% and the Fund's Total Operating Expenses would be 1.40%.
<F2> Other Expenses includes an estimate of shareholder servicing fees
the Fund expects to pay. See "Organization and Management of the Fund
- - -- Shareholder Servicing Plan."
</FN>
</TABLE>
The Annual Fund Operating Expenses table illustrates the estimated
operating expenses that you will incur as a shareholder of the Fund.
These expenses are charged directly to the Fund. Expenses include
management fees as well as the costs of maintaining accounts, administering
the Fund, providing shareholder services, and other activities. The
expenses shown are estimated based on historical or projected expenses
of the Fund.
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.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
<S> <C> <C>
Class A Shares $0 $0
</TABLE>
This example is only an illustration. Actual expenses and returns
will vary.
This example is designed to help you understand the various costs
you will bear, directly or indirectly, as an investor in the Fund.
-6 -
<PAGE>
Risk Factors
This prospectus describes some of the risks that you may assume as
an investor in the Fund. By matching your investment objective with
a comfortable level of risk, you can create your own customized investment
plan. Some limitations on the Fund's investments are described in
the section that follows. "Other Securities and Investment Practices"
at the end of this prospectus provides additional information on the
securities mentioned in the overview of the Fund. As with any mutual
fund, there is no guarantee that the Fund will earn income or show
a positive total return over time. The Fund's price, yield, and total
return will fluctuate. You may lose money if the Fund's investments
do not perform well.
The following risks are common to all mutual funds:
Market risk is the risk that the market value of a security will fluctuate,
depending on the supply and demand for that type of security. As a
result of this fluctuation, a security may be worth less than the
price the Fund originally paid for it, or less than the security was
worth at an earlier time. Market risk may affect a single security,
an industry, a sector of the economy, or the entire market, and is
common to all investments.
Manager risk is the risk that the Fund's Portfolio Manager may use
a strategy that does not produce the intended result.
The following risk is common to mutual funds that invest in equity
securities:
Equity risk is the risk that the value of the security will fluctuate
in response to changes in earnings or other conditions affecting the
issuer's profitability. Unlike debt securities, which have preference
to a company's earnings and cash flow, equity securities are entitled
to the residual value after the company meets its other obligations.
For example, holders of debt securities have priority over holders
of equity securities to a company's assets in the event of bankruptcy.
The following risks are common to mutual funds that invest in debt
securities:
Interest rate risk. The value of a debt security typically changes
in the opposite direction from a change in interest rates. When interest
rates go up, the value of a fixed-rate security typically goes down.
When interest rates go down, the value of these securities typically
goes up. Generally, the market values of securities with longer maturities
are more sensitive to changes in interest rates.
Inflation risk is the risk that inflation will erode the purchasing
power of the cash flows generated by debt securities held by the Fund.
Fixed-rate debt securities are more susceptible to this risk than
floating-rate debt securities.
- 7 -
<PAGE>
Reinvestment risk is the risk that when interest income is reinvested,
interest rates will have declined so that income must be reinvested
at a lower interest rate. Generally, interest rate risk and reinvestment
risk have offsetting effects.
Credit (or default) risk is the risk that the issuer of a debt security
will be unable to make timely payments of interest or principal. Although
the Fund generally invests in only high-quality securities, the interest
or principal payments may not be insured or guaranteed on all securities.
Credit risk is measured by NRSROs* such as Moody's, Fitch, or S&P.
*An NRSRO is a nationally recognized statistical ratings organization
such as Standard and Poor's (S&P), Fitch, or Moody's which assigns
credit ratings to securities based on the borrower's ability to meet
its obligation to make principal and interest payments.
It is important to keep in mind one basic principle of investing:
the greater the risk, the greater the potential reward. The reverse
is also generally true: the lower the risk, the lower the potential
reward.
Investment Limitations
To help reduce risk, the Fund has adopted limitations on some investment
policies. These limits involve the Fund's ability to borrow money
and the amount it can invest in various types of securities, including
illiquid securities. Certain limitations can be changed only with
the approval of shareholders. Victory's Board of Trustees can change
other investment limitations without shareholder approval. See "Other
Securities and Investment Practices" and the SAI for more information.
The Fund limits to 25% of total assets the amount it may invest in
any single industry (other than U.S. Government obligations). The
Fund limits its borrowing to 33 1/3% of its total assets. Borrowing
would be in the form of selling a security that it owns and agreeing
to repurchase that security later at a higher price. The Fund will
not borrow for leverage purposes.
Diversification Requirements
The SEC and IRS have certain restrictions with which all mutual funds
must comply. The Fund monitors these limitations on an ongoing basis.
SEC Requirement: The Fund is "diversified" according to certain federal
securities provisions regarding diversification of its assets. Generally,
under these provisions, the Fund must invest at least 75% of its total
assets so that no more than 5% of its total assets are invested in
the securities of any one issuer.
IRS Requirement: The Fund also intends to comply with certain federal
tax requirements regarding the diversification of its assets, which
generally are less restrictive than the federal requirements. These
diversification provisions and requirements are discussed in the SAI.
- 8 -
<PAGE>
Investment Performance
Victory may advertise the performance of the Fund by comparing it
to other mutual funds with similar objectives and policies. Performance
information may also appear in various publications. Any fees charged
by Investment Professionals may not be reflected in these performance
calculations. Performance information is contained in the annual and
semi-annual reports. You may obtain a copy of the annual and semi-annual
reports free of charge.
The "30-day yield" is an "annualized" figure--the amount you would
earn if you stayed in the Fund for a year and the Fund continued to
earn the same net interest income throughout that year. To calculate
30-day yield, the Fund's net investment income per share for the most
recent 30 days is divided by the maximum offering price per share.
To calculate "total return," the Fund starts with the total number
of shares that you can buy for $1,000 at the beginning of the period.
Then the Fund adds all dividends and distributions paid as if they
were reinvested in additional shares. (This takes into account the
Fund's dividend distributions, if any.) The total number of shares
is multiplied by the net asset value on the last day of the period
and the result is divided by the initial $1,000 investment to determine
the percentage gain or loss. For periods of more than one year, the
cumulative total return is adjusted to get an average annual total
return.
Yield is a measure of net dividend income.
Average annual total return is a hypothetical measure of past dividend
income plus capital appreciation. It is the sum of all parts of a
Fund's investment return for periods greater than one year.
Total return is the sum of all parts of a Fund's investment return.
Whenever you see information on the Fund's performance, do not consider
the past performance to be an indication of the performance you could
expect by making an investment in the Fund today. The past is an imperfect
guide to the future. History does not always repeat itself.
Past performance does not guarantee future results. You may obtain
the current 30-day yield by calling 800-KEY-FUND. Our Shareholder
Servicing representatives are available from 8:00 a.m. to 7:00 p.m.
Eastern Time Monday through Friday.
Share Price
The Fund's share price, called its net asset value (NAV) is calculated
each business day (normally at 4:00 p.m. Eastern Time). Shares are
purchased at the next share price calculated after your order is received
and accepted. A business day is a day on which the New York Stock
Exchange is open for trading or any day in which enough trading has
occurred in the securities held by the Fund to materially affect the
NAV. If your account is established with an Investment Professional
or a bank, you may not be able to purchase or sell shares on other
holidays when the Federal Reserve Bank of Cleveland is closed.
The NAV is calculated by adding up the total value of the Fund's investments
and other assets, subtracting its liabilities, and then dividing that
figure by the number of outstanding shares of the Fund.
NAV = Total Assets--Liabilities
------------------------------
Number of Shares Outstanding
The daily NAV is useful to you as a shareholder because the NAV, multiplied
by the number of Fund shares you own, gives you the dollar amount
and value of your investment.
- 9 -
<PAGE>
Dividends, Distributions, and Taxes
As a shareholder, you are entitled to your share of net income and
capital gains on the Fund's investments. The Fund passes its earnings
along to investors in the form of dividends. Dividend distributions
are the net dividends or interest earned on investments after expenses.
If the Fund makes a capital gain distribution, it is paid once a year.
As with any investment, you should consider the tax consequences of
an investment in the Fund.
Ordinarily, the Fund declares and pays dividends from its net investment
income quarterly. Any net capital gains realized by the Fund are paid
as dividends at least annually. Shareholders who earn a dividend of
less than $10.00 will have dividends reinvested automatically into
their accounts. Distributions can be received in one of the following
ways:
Reinvestment Option
You can have distributions automatically reinvested in additional
shares of the Fund. If you do not indicate another choice on your
Account Application, this option will be assigned to you automatically.
Cash Option
A check will be mailed to you no later than 7 days after the pay date.
Income Earned Option
Dividends can be reinvested automatically in the Fund and your capital
gains can be paid in cash, or capital gains can be reinvested and
dividends paid in cash.
Directed Dividends Option
You can have distributions automatically reinvested in shares of another
fund of the Victory Group. The "Victory Group" includes other funds
of the Victory Portfolios and Key Mutual Funds. If distributions are
reinvested in shares of another fund, you will not pay a sales charge
on the reinvested distributions.
Directed Bank Account Option
In most cases, you can have distributions automatically transferred
to your bank checking or savings account. Under normal circumstances,
a dividend will be transferred within 7 days of the dividend payment
date. The bank account must have a registration identical to that
of your Fund account.
Your choice of distribution should be set up on the original Account
Application. If you would like to change the option you selected,
please call the Transfer Agent at 800-KEY-FUND.
Buying a Dividend.
You should check the Fund's distribution schedule
before you invest. If you buy shares of the fund shortly before it
makes a distribution, some of your investment may come back to you
as a taxable distribution.
- 10 -
<PAGE>
Important Information about Taxes
The Fund intends to qualify as a regulated investment company, in
which case it pays no federal income tax on the earnings or capital
gains it distributes to its shareholders.
The Fund's long-term capital gains are taxable as capital gain.
Dividends are treated in the same manner for federal income tax purposes
whether you receive them in cash or in additional shares. They may
also be subject to state and local taxes.
Dividends from the Fund that are attributable to interest on certain
U.S. Government obligations may be exempt from certain state and local
income taxes. The extent to which ordinary dividends are attributable
to U.S. Government obligations will be provided to you with the tax
statements you receive from the Fund.
Certain dividends paid to you in January will be taxable as if they
had been paid to you the previous December.
Tax statements will be mailed from the Fund every January showing
the amounts and tax status of distributions made to you.
Because your tax treatment depends on your purchase price and tax
position, you should keep your regular account statements for use
in determining your tax.
You should review the more detailed discussion of federal income tax
considerations in the SAI.
The tax information in this prospectus is provided as general information.
You should consult your own tax adviser about the tax consequences
of an investment in the Fund.
- 11 -
<PAGE>
Investing with Victory
If you are looking for a convenient way to open an account for yourself
or a minor child, or to add money to an existing account, Victory
can help. The sections that follow will serve as a guide to your investments
with Victory. The following sections will describe how to open an
account, how to access information on your account, and how to purchase,
exchange, and redeem shares of the Fund. We want to make it simple
for you to do business with us. If you have questions about any of
this information, please call your Investment Professional or one
of our customer service representatives at 800-KEY-FUND. They will
be happy to assist you.
All you need to do to get started is to fill out an application.
The Funds in this prospectus offer only Class A shares. Class A shares
have a front-end sales charge of 4.75%. Please look at the "Fund Expenses"
section of the Fund to find the sales charge.
Calculation of Sales Charges
Shares are sold at their public offering price, which includes the
initial sales charge. The sales charge as a percentage of your investment
decreases as the amount you invest increases. The current sales charge
rates and commissions paid to Investment Professionals are as follows:
<TABLE>
<CAPTION>
Sales Charge Sales Charge Dealer Reallowance
Your Investment As a Percentage As a Percentage As a Percentage
of Offering Price of Your Investment of Offering Price
<S> <C> <C> <C>
Up to $50,000 4.75% 4.99% 4.00%
$50,000 up to $100,000 4.50% 4.71% 4.00%
$100,000 up to $250,000 3.50% 3.63% 3.00%
$250,000 up to $500,000 2.25% 2.30% 2.00%
$500,000 up to $1,000,000 1.75% 1.78% 1.50%
$1,000,000 and above* 0.00% 0.00% *
*There is no initial sales charge on purchases of $1 million or more.
However, a contingent deferred sales charge (CDSC) of up to 1.00%
of the purchase price will be charged to the shareholder if shares
are redeemed in the first year after purchase, or at .50% within two
years of purchase. This charge will be based on either the cost of
the shares or net asset value at the time of redemption, whichever
is lower. There will be no CDSC on reinvested distributions. Investment
Professionals may be paid at a rate of up to 1.00% of the purchase
price.
</TABLE>
The Distributor reserves the right to pay the entire commission to
dealers. If that occurs, the dealer may be considered an "underwriter"
under federal securities laws.
- 12 -
<PAGE>
Sales Charge Reductions and Waivers
There are several ways you can combine multiple purchases in the Victory
Funds and take advantage of reduced sales charges.
You may qualify for reduced sales charges in the following cases:
A Letter of Intent lets you purchase Class A shares of the Fund over
a 13-month period and receive the same sales charge as if all shares
had been purchased at one time. You must start with a minimum initial
investment of 5% of the total amount you will invest.
Rights of Accumulation allow you to add the value of any Class A shares
you already own to the amount of your next Class A investment for
purposes of calculating the sales charge at the time of purchase.
You can combine Class A shares of multiple Victory Funds (except money
market funds) for purposes of calculating the sales charge. The combination
privilege also allows you to combine the total investments from the
accounts of household members of your immediate family (spouse and
children under the age of 21) for a reduced sales charge at the time
of purchase.
Waivers for certain investors:
Current and retired Fund Trustees, directors, trustees, employees,
and family members of employees of KeyCorp or "Affiliated Providers"*,
dealers who have an agreement with the Distributor, and any trade
organization to which the Advisers or the Administrator belong.
Investors who purchase shares for trust or other advisory accounts
established with KeyCorp or its affiliates.
Investors who reinvest a distribution from a deferred compensation
plan, agency, trust, or custody account that was maintained by KeyBank
National Association and its affiliates, the Victory Group, or who
invested in a fund of the Victory Group.
Investors who reinvest shares from another mutual fund complex or
the Victory Group within 90 days after redemption, if they paid a
sales charge for those shares.
Investment Professionals who purchase Fund shares for fee-based investment
products or accounts, and selling brokers and their sales representatives.
*Affiliated Providers are affiliates and subsidiaries of KeyCorp,
and any organization that provides services to Victory and Key Mutual
Funds (the Victory Group).
- 13 -
<PAGE>
How to Purchase Shares
Shares can be purchased in a number of different ways. You can send
in your investment by check, wire transfer, exchange from another
Victory Fund, or through arrangements with your Investment Professional.
An Investment Professional is a salesperson, financial planner, investment
adviser, or trust officer who provides you with investment information.
Sometimes they will charge you for these services. Their fee will
be in addition to, and unrelated to, the fees and expenses charged
by the Fund.
All you need to do to get started is to fill out an application.
Keep the following addresses handy for purchases, exchanges, or redemptions.
Regular U.S. Mail Address
Send completed Account Application with your check, bank draft, or
money order to:
The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527
Overnight Mail Address
Use the following address ONLY for overnight packages:
The Victory Funds
c/o Boston Financial Data Services
Two Heritage Drive
Quincy, MA 02171
PHONE: 800-KEY-FUND
Wire Address
The Transfer Agent does not charge a wire fee. Always call the Transfer
Agent at 800-KEY-FUND BEFORE wiring funds to obtain a control number.
State Street Bank and Trust Co.
ABA #011000028
For Credit to DDA
Account #9905-201-1
For Further Credit to Account #
(insert account number, name, and
control number assigned by the Transfer Agent)
Telephone
800-KEY-FUND
800-539-3863
Make your check payable to:
The Victory Funds
Fax Number:
800-529-2244
Telecommunication Device for the Deaf (TDD):
800-970-5296
- 14 -
<PAGE>
ACH
After your account is set up, your purchase amount can be transferred
by Automated Clearing House (ACH). Only domestic members banks may
be used. It takes about 15 days to set up the ACH feature. A fee is
not currently being charged for ACH transfers.
Statements and Reports
You will receive a periodic statement reflecting any transactions
that affect the balance or registration of your account. You will
receive a confirmation after any purchase, exchange, or redemption.
If your account has been set up by an Investment Professional, account
activity will be detailed in their statements to you. Share certificates
are not issued. Twice a year, you will receive the financial reports
of the Fund. By January 31 of each year, you will be mailed an IRS
form reporting distributions for the previous year, which will also
be filed with the IRS.
Systematic Investment Plan
To enroll in the Systematic Investment Plan, you should check this
box on the Account Application. We will need your bank account information
and the amount and frequency of your investment. You can select monthly,
quarterly, semi-annual, or annual investments. You should attach a
voided personal check so the proper information can be obtained. You
must first meet the minimum investment requirement of $500, then we
will make automatic withdrawals of the amount you indicate ($25 or
more) from your bank account and invest it into shares of the Fund.
Retirement Plans
You can use the Fund as part of your retirement portfolio. Your Investment
Professional can set up your new account under one of several tax
sheltered plans. Please contact your Investment Professional or the
Fund for details regarding an IRA or other retirement plan that works
best for your financial situation.
All purchases must be made in U.S. Dollars and drawn on U.S. banks.
The Transfer Agent may reject any purchase order, at its sole discretion.
If your check is returned for any reason, you may be charged for any
resulting fees and/or losses. Third party checks will not be accepted.
You may only invest or exchange into fund shares legally available
in your state. If your account falls below $500, we may ask you to
re-establish the minimum investment. If you do not do so within 60
days, we may close your account and send you the value of your account.
If you would like to make additional investments after your account
is already established, use the Investment Stub attached to your statement
and send it with your check to the address indicated.
- 15 -
<PAGE>
How to Exchange Shares
An exchange is the selling of shares of one fund of the Victory Group
to purchase shares of another. You may exchange shares of one Victory
fund for shares of the same class of any other, generally without
paying any additional sales charges. The "Victory Group" includes
funds offered as a part of the Victory Funds and Key Mutual Funds.
Key Mutual Funds is affiliated with KeyCorp.
You can exchange shares of the Fund by writing or calling the Transfer
Agent at 800-KEY-FUND. When you exchange shares of the Fund, you should
keep the following in mind:
Shares of the fund selected for exchange must be available for sale
in your state of residence.
The prospectus of the Fund and the fund whose shares you want to buy
must offer the exchange privilege.
Shares of the Fund may be exchanged at relative net asset value. This
means that if you own Class A shares of the Fund, you can only exchange
them for Class A shares of another fund and not pay a sales charge.
You must meet the minimum purchase requirements for the fund you purchase
by exchange.
The registration and tax identification numbers of the two accounts
must be identical.
You must hold the shares you buy when you establish your account for
at least 7 days before you can exchange them; after the account is
open 7 days, you can exchange shares on any business day.
Before exchanging, read the prospectus of the fund you wish to purchase
by exchange.
You can obtain a list of funds available for exchange by calling the
Transfer Agent at 800-KEY-FUND.
- 16 -
<PAGE>
How to Redeem Shares
There are a number of convenient ways to redeem shares of the Fund.
You can use the same mailing addresses listed for purchases. You will
earn dividends up to the date your redemption request is processed.
If we receive your request by 4:00 p.m. Eastern Time, your redemption
will be processed the same day.
By Telephone
The easiest way to redeem shares is by calling 800-KEY-FUND. When
you fill out your original application, be sure to check the box marked
"Telephone Authorization". Then when you are ready to redeem, call
us and tell us which one of the following options you would like to
use:
Mail a check to the address of record;
Wire funds to a domestic financial institution;
Mail to a previously designated alternate address; or
Electronically transfer the funds via ACH.
All telephone calls are recorded for your protection and measures
are taken to verify the identity of the caller. If we properly act
on telephone instructions and follow reasonable procedures to ensure
against unauthorized transactions, neither Victory nor its servicing
agents, the Adviser, the Sub-Adviser, nor the Transfer Agent will
be responsible for any losses. If these procedures are not followed,
the Transfer Agent may be liable to you for losses resulting from
unauthorized instructions.
If there is an unusual amount of market activity and you cannot reach
the Transfer Agent by telephone, consider placing your order by mail.
By Mail
Use the Regular U.S. Mail or Overnight Mail Address to redeem shares.
Send us a letter of instruction indicating your Fund account number,
amount of redemption, and where to send the proceeds. All account
owners must sign. A signature guarantee is required for the following
redemption requests:
Redemptions over $10,000;
Your account registration has changed within the last 15 days;
The check is not being mailed to the address on your account;
The check is not being made payable to the owner of the account; or
If the redemption proceeds are being transferred to another Victory
Group account with a different registration.
A signature guarantee can be obtained from a financial institution
such as a bank, broker-dealer, credit union, clearing agency, or savings
association.
By Wire
If you want to redeem funds by wire, you must establish a Fund account
which will accommodate wire transactions. If you call by 4:00 p.m.
Eastern Time, your funds will be wired on the same business day.
By ACH
Normally, your redemption will be processed on the same day, or the
next day if your instructions are received after 4:00 p.m. Eastern
Time. It will be transferred by ACH as long as the transfer is to
a domestic bank.
Under certain emergency circumstances, the right of redemption may
be suspended. Redemption proceeds from the sale of shares purchased
by a check may be held until the purchase check has cleared. If you
request a complete redemption, any dividends declared will be included
with the redemption proceeds.
Systematic Withdrawal Plan
The minimum withdrawal is $25, and you must have an account value
of $5,000 or more to start withdrawals. Once again, we will need a
voided personal check to activate this feature. You should be aware
that your account eventually may be depleted. However, you cannot
automatically close your account using the Systematic Withdrawal Plan.
If your account value falls below $500, we may ask you to bring the
account back to the $500 minimum. If you decide not to increase your
account to the minimum balance, your account may be closed and the
proceeds mailed to you.
If you check this box on the Account Application, we will send monthly,
quarterly, semi-annual, or annual payments to the person you designate.
- 17 -
<PAGE>
Organization and Management of the Fund
We want you to know who plays what role in your investment and how
they are related. This section discusses the organizations employed
by the Fund to service its shareholders. They are paid a fee for their
services.
About Victory
The Fund is a member of the Victory Funds, a group of 26 distinct
investment portfolios, organized as a Delaware business trust. Some
of the Victory Funds have been operating continuously since 1983.
The Board of Trustees of Victory has the overall responsibility for
the management of the Fund. They are elected by the shareholders.
The Investment Advisers
One of the Fund's most important contracts is its Advisory Agreement
with Key Asset Management Inc. (KAM or the Adviser), a New York Corporation
registered as an investment adviser with the SEC. KAM is a subsidiary
of KeyBank National Association, a wholly-owned subsidiary of KeyCorp.
On February 28, 1997, KAM became the surviving corporation after the
reorganization of four indirect investment adviser subsidiaries of
KeyCorp. Affiliates of the Adviser manage approximately $50 billion
for a limited number of individual and institutional clients.
The Adviser has hired a sub-adviser, Lakefront Capital Investors,
Inc. (the Sub-Adviser, and together with KAM, the Advisers) to manage
the Fund. The advisory and sub-advisory agreements authorize the Advisers
to choose brokers or dealers to handle the purchases and sales of
the Fund's securities. Subject to Board approval, Key Investments,
Inc. (KII) and/or Key Clearing Corporation (KCC) may act as clearing
broker for the Funds' security transactions in accordance with procedures
adopted by the Funds, and receive commissions or fees in connection
with their services to the Funds. Both KII and KCC are wholly-owned
indirect subsidiaries of KeyCorp and affiliates of the adviser. KAM
will be paid a monthly fee of 1.00% of the average annual daily net
assets of the Fund.
KAM will pay the Sub-Adviser a monthly fee of .50% of the Fund's average
annual daily net assets from its advisory fee. KAM intends to obtain
an option to purchase 19.9% of the capital stock of Lakefront Capital
Investors, Inc.
Management of the Fund
Trustees
Supervise the Fund's activities.
Investment Adviser
Key Asset Management Inc. 127 Public Square Cleveland, OH 44114
Manages the Fund's business and investment activities.
Investment Sub-Adviser
Lakefront Capital Investors, Inc.
Suite 840, The Hanna Building
1422 Euclid Avenue
Cleveland, OH 44115
Provides portfolio management services to the Fund.
The Administrator, Distributor, and Fund Accountant
BISYS Fund Services is the Administrator and Distributor. BISYS is
paid a fee at an annual rate of .15% of the Fund's average daily net
assets as the Administrator, but does not charge a fee for its services
as Distributor. BISYS Fund Services Ohio, Inc. receives a fee as the
Fund's Accountant.
The Distributor may provide sales support, including cash or other
compensation to dealers for selling shares of the Fund. Payments may
be in the form of trips, tickets, and/or merchandise offered through
sales contests. It does this at its own expense, and not at the expense
of the Fund or its shareholders.
BISYS Fund Services has retained Lakefront Capital Investors, Inc.
as a consultant and from time to time may pay Lakefront a fee for
its services.
- 18 -
<PAGE>
Shareholder Servicing Plan
The Fund has adopted a Shareholder Servicing Plan. The shareholder
servicing agent performs a number of services for its customers who
are shareholders of the Fund. It establishes and maintains accounts
and records, processes dividend and distribution payments, arranges
for bank wires, assists in transactions, and changes account information.
For these services the Fund pays a fee at an annual rate of up to
.25% of the average daily net assets of the Fund serviced by the agent.
The Fund may enter into agreements with various shareholder servicing
agents, including KeyBank National Association and its affiliates,
other financial institutions, and securities brokers. Shareholder
servicing agents may waive all or a portion of their fee periodically.
Distribution Plan
Under Rule 12b-1 of the Investment Company Act of 1940, Victory has
adopted a Distribution and Service Plan for the Fund. The Fund does
not currently pay expenses under this plan.
Brokerage
The Fund may buy and sell securities through an affiliate of KAM.
The Board of Trustees has adopted procedures to ensure that these
transactions are fair and in the best interest of the Fund.
Independent Accountant
Coopers & Lybrand L.L.P. serves as independent accountant to the Fund.
Legal Counsel
Kramer, Levin, Naftalis & Frankel serves as legal counsel to the Fund.
How the Fund is Organized
Shareholders
Financial Services Firms and their Investment Professionals
Advise current and prospective shareholders on
their fund investments.
Transfer Agent/Servicing Agent
State Street Bank and Trust Company Boston Financial Data Services
225 Franklin Street Two Heritage Drive
Boston, MA 02110 Quincy, MA 02171
Handles services such as record-keeping, statements, processing of
buy and sell requests, distribution of dividends, and servicing of
shareholders' accounts.
Administrator, Distributor, Custodian
and Fund Accountant
BISYS Fund Services, Inc. and Key Trust Company of Ohio, N.A.
BISYS Fund Services Ohio Inc. 127 Public Square
3435 Stelzer Road Cleveland, OH 44114
Columbus, OH 43219
Markets the Fund, distributes Provides for safekeeping of the
shares through Investment Fund's investments and cash, and
Professionals, and calculates settles trades made by the Fund.
the value of shares.
The Funds are supervised by the Board of Trustees, who monitor the
services provided to investors.
Additional Information
Some additional information you should know about the Fund.
- 19 -
<PAGE>
Share Classes
The Fund offers only the class of shares described in this prospectus,
but at some future date, the Fund may offer additional classes of
shares through a separate prospectus.
Your Rights as a Shareholder
All shareholders have equal voting, liquidation, and other rights.
As a shareholder of the Fund, you have rights and privileges similar
to those enjoyed by other corporate shareholders. Delaware Trust law
limits the liability of shareholders.
If any matters are to be voted on by shareholders (such as a change
in a fundamental investment objective or the election of Trustees),
each share outstanding at that point would be entitled to one vote.
If you have a qualified trust account, the trustee will vote your
shares on your behalf or in the same percentage voted on shares that
are not held in trust. Shareholders with more than 10% of the outstanding
shares of the Fund may call a special meeting for removal of a Trustee.
Normally, Victory is not required to hold annual meetings of shareholders.
However, shareholders may request one under certain circumstances,
as described in the SAI.
Code of Ethics
Victory and the Advisers have each adopted a Code of Ethics to which
all investment personnel and all other access persons to the Fund
must conform. Investment personnel must refrain from certain trading
practices and are required to report certain personal investment activities.
Violations of the Code of Ethics can result in penalties, suspension,
or termination of employment.
Banking Laws
Banking laws, including the Glass-Steagall Act, prevent a bank holding
company or its affiliates from sponsoring, organizing, or controlling
a registered, open-end investment company. However, bank holding company
subsidiaries may act as investment adviser, transfer agent, custodian
or shareholder servicing agent. They may also purchase shares of such
a company and pay third parties for performing these functions for
their customers. Should these laws ever change in the future, the
Trustees would consider selecting another qualified firm so that all
services would continue.
Shareholder Communications
You will receive unaudited Semi-Annual Reports and audited Annual
Reports on a regular basis from the Fund. In addition, you will also
receive updated prospectuses or supplements to this prospectus. In
order to eliminate duplicate mailings to an address at which two or
more shareholders with the same last name reside, the Fund will send
only one copy of the above communications.
The securities described in this prospectus and the SAI are not offered
in any state in which they may not be sold lawfully. No sales representative,
dealer, or other person is authorized to give any information or make
any representation other than those contained in this prospectus and
the SAI.
If you would like to receive additional copies of any materials, please call
the Fund at 800-KEY-FUND.
- 20 -
<PAGE>
Other Securities and Investment Practices
The following table lists the types of securities the Fund may choose
to purchase. The majority of the portfolio for the Fund is made up
of equity securities. However, the Fund is also permitted to invest
in the securities listed in the table below and the SAI.
<TABLE>
<CAPTION>
List of Allowable Investments and Investment Practices The Lakefront Fund
<S> <C>
Equity Securities. Can include common stock, preferred stock, and 80-100%
securities convertible or exchangeable into common stock.
Corporate Debt Obligations. Debt instruments issued by public corporations 20%
which are traded on major exchanges. They may be secured or unsecured
by property.
<F2>Futures Contracts and Options on Futures Contracts. Contracts 5% in margins
involving the right or obligation to deliver or receive assets or and premiums
money depending on the performance of one or more assets or a securities 33 1/3% subject to
index. To reduce the effects of leverage, liquid assets equal to the futures or options
contract commitment are set aside to cover the commitment. The Fund on futures
may invest in futures in an effort to hedge against market risk.
<F2>Options. The Fund may write, or sell, a covered call option on a security 25% in
that the Fund owns or on an index. covered calls
Warrants. The right to purchase an equity security at a stated price for a 10%
limited period of time.
When-Issued and Delayed-Delivery Securities. A security that is purchased for 33 1/3%
delivery at a later time. The market value may change before the delivery date.
Zero Coupon Bonds. These securities are purchased at a discount from the face 20%
value. The face value is received at maturity, with no interest payments before
then. These may be subject to greater risks of price fluctuation.
<F2>Variable & Floating Rate Securities. Investment grade instruments, some of which 20%
may be derivatives and illiquid, with interest rates that reset periodically.
Short-term Debt Obligations. Including bankers' acceptances, certificates of 20%
deposit, prime quality commercial paper, cash and cash equivalents.
U.S. Government Securities. Securities issued or guaranteed by the U.S. Government, 20%
its agencies or instrumentalities. Some are direct obligations of the U.S. Treasury;
others are obligations only of the U.S. agency.
<F2>Receipts. Separately traded interest or principal components of U.S. Government 20%
securities.
Repurchase Agreements. An agreement to sell and repurchase a security at the same 33 1/3%
price plus interest. The seller's obligation to the Fund is secured with collateral.
% Percentage of total assets.
- 21 -
<PAGE>
Investment Company Securities. Shares of other mutual funds with similar investment
objectives. The following limitations apply: (1) No more than 5% of the Fund's total 5%
assets may be invested in one mutual fund, (2) No more than 3% of the outstanding 3%
voting securities of any one mutual fund, and (3) No more than 10% of the Fund's 10%
total assets in combined mutual fund holdings.
Commercial Paper. Short-term obligations issued by corporations and financial 20%
institutions. The Fund only uses prime quality commercial paper.
Restricted Securities. Securities that are not registered under federal securities 20%
laws but that may be traded among qualified institutional investors and the
Fund. Some of these securities may be illiquid.
Illiquid Securities. Investments that cannot be sold readily within seven days 15%
in the usual course of business at approximately the price at which the Fund net assets
values them.
Short-Term Trading. Selling a security soon after purchasing it. Short-term trading <F1>
increases turnover and transaction costs.
Borrowing; Reverse Repurchase Agreements. The borrowing of money from banks (up to 5%
5% of total assets) or through reverse repurchase agreements (up to 33 1/3% of 33 1/3%
total assets). The Fund will not use borrowing to create leverage.
Securities Lending. In order to generate additional income, a Fund may lend its 33 1/3%
portfolio securities. A Fund will receive collateral for the value of the security
plus any interest due. A Fund only will enter into loan arrangements with entities
that the Adviser has determined are creditworthy.
<FN>
<F1> No limitation of usage; Fund may be using currently.
<F2> Indicates a "derivative security," whose value is linked to,
or derived from, another security, instrument or index.
</FN>
</TABLE>
For temporary defensive purposes, the Fund may invest up to 100% of
its total assets in U.S. Government securities, or short-term, high
quality debt obligations. For more information on ratings and detailed
descriptions of each of the above investment vehicles, see the SAI.
- 22 -
<PAGE>
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<PAGE>
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<PAGE>
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<PAGE>
Rule 497(c)
Registration No. 33-8982
Victory Funds
GOVERNMENT BOND FUND
800-KEY-FUND(R)
or
800-539-3863
MARCH 1, 1997
<PAGE>
The
VICTORY
Portfolios
GOVERNMENT BOND FUND
PROSPECTUS For current yield, purchase and redemption information,
March 1, 1997 call 800-KEY-FUND(R) or 800-539-3863
THE VICTORY PORTFOLIOS (the "Victory Portfolios") is a registered open-end
management investment company that offers investors a selection of money market,
fixed-income, municipal bond, domestic and international equity portfolios. This
Prospectus relates to the GOVERNMENT BOND FUND (the "Fund"), a diversified
portfolio. Key Asset Management Inc., Cleveland, Ohio, an indirect subsidiary of
KeyCorp, is the investment adviser to the Fund ("KAM" or the "Adviser"). BISYS
Fund Services ("BISYS") is the Fund's administrator (the "Administrator") and
distributor (the "Distributor").
ON FEBRUARY 19, 1997 THE VICTORY PORTFOLIOS, ON BEHALF OF THE FUND, HAS ENTERED
INTO A PLAN OF LIQUIDATION AND REORGANIZATION (THE "PLAN"), SUBJECT TO APPROVAL
BY THE FUND'S SHAREHOLDERS. THE PLAN PROVIDES FOR THE TRANSFER OF SUBSTANTIALLY
ALL THE FUND'S ASSETS AND STATED LIABILITIES TO THE VICTORY INVESTMENT QUALITY
BOND FUND. IN EXCHANGE, THE FUND WILL RECEIVE SHARES OF THE VICTORY INVESTMENT
QUALITY BOND FUND. THE FUND WILL DISTRIBUTE THOSE SHARES TO ITS SHAREHOLDERS PRO
RATA. THE FUND WILL THEN LIQUIDATE. IT IS CONTEMPLATED THAT THE REORGANIZATION
WILL BE TAX FREE.
The Fund seeks to provide as high a level of current income as is consistent
with preservation of capital by investing in U.S. Government securities. The
Fund's dollar-weighted average maturity will not exceed ten years.
The Fund offers two classes of shares: (1) Class A shares, which are offered at
net asset value plus the applicable sales charge (maximum of 4.75% of public
offering price) and (2) Class B shares, which are offered at net asset value
with a maximum contingent deferred sales charge ("CDSC") of 5.0% imposed on
certain redemptions. At the end of the sixth year after a purchase, the CDSC
will no longer apply to redemptions. Class B shares have higher ongoing expenses
than Class A shares, but automatically convert to Class A shares eight years
after purchase.
Please read this Prospectus before investing. It is designed to provide you with
information and to help you decide if the Fund's goals match your own. Retain
this document for future reference. A Statement of Additional Information (dated
March 1, 1997) for the Fund and an audited annual report for the Fund's fiscal
period ended October 31, 1996 have been filed with the Securities and Exchange
Commission ("Commission") and are incorporated herein by reference. The
Statement of Additional Information is available without charge upon request by
writing to The Victory Funds, P.O. Box 8527, Boston, MA 02266-8527, or by
calling 800-KEY-FUND.
SHARES OF THE FUND ARE:
O NOT INSURED BY THE FDIC;
O NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY KEYCORP BANK,
ANY OF ITS AFFILIATES, OR ANY OTHER BANK;
O SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL
AMOUNT INVESTED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY SECURITIES REGULATORY AUTHORITY OF ANY STATE, NOR HAS
THE COMMISSION OR ANY SUCH STATE AUTHORITY PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS PAGE
Fund Expenses............................................................ 2
Financial Highlights..................................................... 3
Investment Objective..................................................... 4
Investment Policies and Risk Factors..................................... 4
How to Invest, Exchange and Redeem....................................... 7
Dividends, Distributions and Taxes....................................... 18
Performance.............................................................. 20
Fund Organization and Fees............................................... 20
Additional Information................................................... 23
- 1 -
<PAGE>
FUND EXPENSES
The table below summarizes the expenses associated with the Fund. This standard
format was developed for use by all mutual funds to help an investor make
investment decisions. You should consider this expense information along with
other important information in this Prospectus, including the Fund's investment
objective, policies and risk factors.
SHAREHOLDER TRANSACTION EXPENSES(1)
CLASS A CLASS B
------- -------
Maximum Sales Charge Imposed on Purchases
(as a percentage of the offering price) 4.75% none
Maximum Sales Charge Imposed on Reinvested
Dividends none none
Deferred Sales Charge none 5% in the first
year, declining to
1% in the sixth year
and eliminated
thereafter
Redemption Fees none none
Exchange Fee none none
ANNUAL FUND OPERATING EXPENSES AFTER EXPENSE WAIVERS AND REIMBURSEMENTS (as a
percentage of average daily net assets)
CLASS A CLASS B
------- -------
Management Fees(2) 0.40% 0.40%
Rule 12b-1 Distribution Fees 0.00% 0.75%
Other Expenses(3) 0.79% 1.41%(2)
---- ----
Total Fund Operating Expenses(2)(3) 1.19% 2.56%
==== ====
(1) Investors may be charged a fee if they effect transactions in Fund shares
through a broker or agent, including affiliated banks and non-bank
affiliates of the Adviser and KeyCorp. (See "How to Invest, Exchange and
Redeem.")
(2) These fees have been voluntarily reduced and expenses reimbursed. Absent
the voluntary reduction of investment advisory fees, "Management Fees" as a
percentage of average daily net assets would be .55% and "Total Fund
Operating Expenses" as a percentage of average daily net assets would be
1.34% for Class A Shares and 3.33% for Class B Shares.
(3) These amounts include an estimate of the shareholder servicing fees the
Fund expects to pay. (See "Fund Organization and Fees -- Shareholder
Servicing Plan.")
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return and (2) full redemption at the end of each time period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Government Bond Fund -- Class A Shares $59 $ 83 $110 $185
Government Bond Fund -- Class B Shares $76 $110 $156 $256
The purpose of the table above is to assist the investor in understanding the
various costs and expenses that an investor in the Fund will bear directly or
indirectly. See "Fund Organization and Fees" for a more complete discussion of
annual operating expenses of the Fund. The foregoing example is based upon
expenses for the fiscal year ended October 31, 1996 and expenses that the Fund
is expected to incur during the current fiscal year. THE FOREGOING EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
- 2 -
<PAGE>
FINANCIAL HIGHLIGHTS
The table below sets forth certain financial information with respect to the
financial highlights for the periods indicated. The information below has been
derived from financial statements audited by Coopers & Lybrand L.L.P. for the
fiscal year ended 1996 and the fiscal period ended 1995 (and by other auditors
for all earlier periods) whose reports thereon, together with the financial
statements of the Fund and the Victory Government Bond Portfolio (the
"Predecessor Fund"), are incorporated by reference into the Statement of
Additional Information. No Class B shares were publicly issued prior to
September 26, 1994, and therefore no information on Class B shares is reflected
in the table below for periods prior to September 26, 1994.
The information set forth below is for a share of the Fund outstanding for each
period indicated.
THE VICTORY GOVERNMENT BOND FUND
<TABLE>
<CAPTION>
Class B Class A
--------------------------------------------------------------------------------
SIX MONTHS SEPTEMBER 26,
YEAR ENDED ENDED 1994 TO YEAR ENDED
OCTOBER 31, OCTOBER 31, APRIL 30, OCTOBER 31,
1996 1995(d) 1995(e)(h) 1996
---- ------- ------------- ----
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 9.85 $ 9.43 $ 9.25 $ 9.87
------- ------- ------- -------
Investment Activities
Net investment income 0.46 0.25 0.31 0.55
Net realized and
unrealized gains (losses)
from investments
(0.20) 0.45 0.17 (0.22)
Total from Investment
Activities 0.26 0.70 0.48 0.33
------- ---- ---- -------
Distributions
Net investment income (0.46) (0.22) (0.30) (0.55)
In excess of net
invest- (0.01) (0.06) -- --
ment income
Net realized gains -- -- -- --
Total Distributions (0.47) (0.28) (0.30) (0.55 )
-------- -------- -------- ---------
NET ASSET VALUE, END
OF PERIOD $ 9.64 $ 9.85 $ 9.43 $ 9.65
======= ======= ======= =======
Total Return (excludes
sales charges) 2.77% $ 7.47%(b) 5.26%(b) 3.52%
RATIOS/SUPPLEMENTAL
DATA:
Net Assets, End of Period
(000) $ 1,498 $ 909 $ 155 $24,632
Ratio of expenses to
average net assets 1.84% 1.82%(c) 1.43%(c) 0.98%
Ratio of net investment
income to average net
assets 4.78% 4.98%(c) 5.03%(c) 5.64%
Ratio of expenses to
average net assets(g) 2.06% 2.12%(c) 1.60%(c) 1.22%
Ratio of net investment
income to average net
assets(g) 4.56% 4.68%(c) 4.86%(c) 5.40%
Portfolio turnover(f) 378% 69% 127% 378%
<PAGE>
Class A
---------------------------------
SIX MONTHS
ENDED YEAR ENDED MAY 3, 1993 TO
OCTOBER 31, APRIL 30, APRIL 30,
1995(d) 1995(e)(h) 1994(a)(h)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING ------- ---------- ----------
OF PERIOD $ 9.44 $ 9.45 $ 10.00
Investment Activities ------- ------- --------
Net investment income
Net realized and
unrealized gains (losses) 0.33 0.55 0.45
from investments
Total from Investment
Activities (0.40) (0.02) (0.54)
0.73 0.53 (0.09)
Distributions ------- ------- ---------
Net investment income
In excess of net
investment income (0.29) (0.54) (0.45)
Net realized gains (0.01) -- --
Total Distributions
-- -- (0.01)
(0.30) (0.54) (0.46)
NET ASSET VALUE, END -------- -------- ---------
OF PERIOD
$ 9.87 $ 9.44 $ 9.45
Total Return (excludes ======= ======= ========
sales charges)
RATIOS/SUPPLEMENTAL 7.86%(b) 5.87% (1.06%)
DATA:
Net Assets, End of Period
(000)
Ratio of expenses to
average net assets $27,856 $84,567 $120,636
Ratio of net investment
income to average net
assets 0.92%(c) 0.63% 0.38%(c)
Ratio of expenses to
average net assets(h) 6.04%(c) 5.97% 4.61%(c)
Ratio of net investment
income to average net
assets(h) 1.06%(c) 0.98% 0.96%(c)
Portfolio turnover(g)
5.90%(c) 5.62% 4.03%(c)
69% 127% 121%
</TABLE>
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Effective June 5, 1995, the Victory Government Bond Portfolio became
the Government Bond Fund.
(e) Effective September 26, 1994, the Fund designated the existing shares as
Class A Shares and commenced offering Class B Shares.
(f) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
(g) During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(h) Audited by other auditors.
- 3 -
<PAGE>
INVESTMENT OBJECTIVE
The Fund seeks to provide as high a level of current income as is consistent
with preservation of capital by investing in U.S. Government securities. The
investment objective of the Fund is fundamental and therefore may not be changed
without a vote of the holders of a majority of the outstanding voting securities
(as defined in the Statement of Additional Information). There can be no
assurance that the Fund will achieve its investment objective.
INVESTMENT POLICIES AND RISK FACTORS
SUMMARY OF PRINCIPAL INVESTMENT POLICIES
The Fund pursues its objective by investing in a portfolio of U.S. government
securities. As a fundamental policy, the Fund normally invests 100% of its total
assets in U.S. government securities such as U.S. Treasury bonds, notes and
bills and mortgage-backed securities issued by the Government National Mortgage
Association ("GNMA"), and in repurchase agreements secured by those securities
in such a manner that the Fund's dollar-weighted average maturity does not
exceed ten years. However, the Fund normally holds some U.S. government
securities with remaining maturities of 18 months or less. When the Adviser
believes market conditions warrant a temporary defensive position, the Fund may
invest up to 100% of its assets in short-term securities such as bankers'
acceptances, certificates of deposit and other bank obligations, repurchase
agreements, short-term government or government agency obligations, and
commercial paper and other short-term corporate obligations, having remaining
maturities of one year or less.
The value of the Fund's securities will fluctuate in response to market
conditions and the value of a share in the Fund may vary. Investors should
review the investment objective and policies of the Fund and carefully consider
the ability to assume any risk involved in purchasing shares of the Fund,
including the risk of possible loss of principal.
Generally, bond funds offer higher yields than money market funds although
unlike money market funds, the share price of bond funds fluctuates in response
to changes in prevailing interest rates and may be affected by other market and
credit factors. Fixed-income securities (except securities with floating or
variable interest rates) are generally considered to be interest rate sensitive,
which means that their value (and a Fund's share price) will tend to decrease
when interest rates rise and increase when interest rates fall. Securities with
shorter maturities, while offering lower yields, generally provide greater price
stability than longer-term securities and are less affected by changes in
interest rates. The share prices and yields of the Fund are not insured or
guaranteed by the U.S. Government.
ADDITIONAL INFORMATION REGARDING THE FUND'S INVESTMENTS
The following paragraphs provide a brief description of some of the types of
securities in which the Fund may invest in accordance with its investment
objective, policies and limitations, including certain transactions it may make
and strategies it may adopt. The following also contains a brief description of
certain risk factors. 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 are 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.
o MONEY MARKET INSTRUMENTS. The Fund may invest in money market instruments,
which are short-term, high-quality debt securities, including U.S. Government
obligations, commercial paper, certificates of deposit, bankers' acceptances,
time deposits and short-term corporate obligations. Money market instruments may
carry fixed rates of return or have variable or floating interest rates. The
Fund may only invest in U.S. Government securities and money market instruments.
- 4 -
<PAGE>
o COMMERCIAL PAPER. The Fund may invest in commercial paper, which consists of
short-term obligations issued by banks, broker-dealers, corporations and other
entities for purposes such as financing their current operations.
o CERTIFICATES OF DEPOSIT. The Fund may invest in certificates of deposit, which
are negotiable certificates representing a commercial bank's obligations to
repay funds deposited with it, earning specified rates of interest over given
periods.
o BANKERS' ACCEPTANCES. The Fund may invest in bankers' acceptances, which are
negotiable obligations of a bank to pay a draft which has been drawn on it by a
customer. These obligations are backed by large banks and usually backed by
goods in international trade.
o TIME DEPOSITS. The Fund may invest in time deposits, which are non-negotiable
deposits in a banking institution earning a specified interest rate over a given
period of time.
o WHEN-ISSUED SECURITIES. The Fund may purchase securities on a when-issued or
delayed delivery basis. These transactions are arrangements in which the Fund
purchases securities with payment and delivery scheduled for a future time. When
the Fund agrees to purchase securities on a when-issued basis, the Fund's
custodian must set aside cash or liquid portfolio securities equal to the amount
of that commitment in a separate account, and may be required to subsequently
place additional assets in the separate account to reflect any increase in the
Fund's commitment. Prior to delivery of when-issued securities, their value is
subject to fluctuation and no income accrues until their receipt. The Fund
engages in when-issued and delayed delivery transactions only for the purpose of
acquiring portfolio securities consistent with its investment objective and
policies, and not for investment leverage. In when-issued and delayed delivery
transactions, the Fund relies on the seller to complete the transaction; its
failure to do so may cause the Fund to miss a price or yield considered to be
advantageous.
o REPURCHASE AGREEMENTS. Under the terms of a repurchase agreement, the Fund
acquires securities from financial institutions or registered broker-dealers,
subject to the seller's agreement to repurchase such securities at a mutually
agreed upon date and price. The seller is required to maintain the value of
collateral held pursuant to the agreement at not less than the repurchase price
(including accrued interest). If the seller were to default on its repurchase
obligation or become insolvent, the Fund would suffer a loss to the extent that
the proceeds from a sale of the underlying portfolio securities were less than
the repurchase price, or to the extent that the disposition of such securities
by the Fund was delayed pending court action.
o ZERO COUPON BONDS. The Fund is permitted to purchase both zero coupon U.S.
government securities and zero coupon corporate securities ("Zero Coupon
Bonds"). Zero Coupon Bonds are purchased at a discount from the face amount
because the buyer receives only the right to a fixed payment on a certain date
in the future and does not receive any periodic interest payments. The effect of
owning instruments which do not make current interest payments is that a fixed
yield is earned not only on the original investment but also, in effect, on
accretion during the life of the obligations. This implicit reinvestment of
earnings at the same rate eliminates the risk of being unable to reinvest
distributions at a rate as high as the implicit yields on the Zero Coupon Bond,
but at the same time eliminates the holder's ability to reinvest at higher
rates. For this reason, Zero Coupon Bonds are subject to substantially greater
price fluctuations during periods of changing market interest rates than are
comparable securities which pay interest periodically. The amount of price
fluctuation tends to increase as maturity of the security increases.
o RECEIPTS. In addition to bills, notes and bonds issued by the U.S. Treasury,
the Fund may also purchase separately traded interest and principal component
parts of such obligations that are transferable through the Federal book entry
system, known as Separately Traded Registered Interest and Principal Securities
("STRIPS") and Coupon Under Book Entry Safekeeping ("CUBES"). These instruments
are issued by banks and brokerage firms and are created by depositing Treasury
notes and Treasury bonds into a special account at a custodian bank; the
custodian holds the interest and principal payments for the benefit of the
registered owners of the certificates or receipts. The custodian arranges for
the issuance of the certificates or receipts evidencing ownership and maintains
the register. Receipts include Treasury Receipts ("TRs"), Treasury Investment
Growth Receipts ("TIGRs") and Certificates of Accrual on Treasury Securities
("CATS").
- 5 -
<PAGE>
STRIPS, CUBES, TRs, TIGRs and CATS are sold as zero coupon securities, which
means that they are sold at a substantial discount and redeemed at face value at
their maturity date without interim cash payments of interest or principal. This
discount is amortized over the life of the security, and such amortization will
constitute the income earned on the security for both accounting and tax
purposes. Because of these features, these securities may be subject to greater
fluctuations in value due to changes in interest rates than interest-paying U.S.
Treasury obligations.
o MORTGAGE-BACKED SECURITIES. Mortgage-backed securities purchased by the Fund
are securities issued or guaranteed by agencies or instrumentalities of the U.S.
Government and non-government entities such as banks, mortgage lenders, or other
financial institutions. A mortgage-backed security may be an obligation of the
issuer backed by a mortgage or pool of mortgages or a direct interest in an
underlying pool of mortgages. Some mortgage-backed securities make payments of
both principal and interest at a variety of intervals; others make semiannual
interest payments at a predetermined rate and repay principal at maturity (like
a typical bond). Mortgage-backed securities are based on different types of
mortgages including those on commercial real estate or residential properties.
Other types of mortgage-backed securities will likely be developed in the
future, and the Fund may invest in them if the Adviser determines they are
consistent with the Fund's investment objective and policies. The Fund will not
acquire "residual" interests in real estate mortgage investment conduits
(REMICs) under current tax law in order to avoid certain potential adverse tax
consequences.
The value of mortgage-backed securities may change due to shifts in the market's
perception of issuers. In addition, regulatory or tax changes may adversely
affect the mortgage securities market as a whole. Non-government,
mortgage-backed securities may offer higher yields than those issued by
government entities, but also may be subject to greater price changes than
government issues. Mortgage-backed securities are subject to prepayment risk.
Prepayment, which occurs when unscheduled or early payments are made on the
underlying mortgages, may shorten the effective maturities of these securities
and may lower their total returns.
o EXTENDIBLE DEBT SECURITIES. The Fund may purchase extendible debt securities,
which can be retired at the option of the Fund at various dates prior to
maturity.
o INVESTMENT COMPANY SECURITIES. The Fund may invest up to 5% of its total
assets in the securities of any one investment company that follows the Fund's
investment policy, but may not own more than 3% of the securities of any one
investment company or invest more than 10% of its total assets in the securities
of other investment companies. Pursuant to an exemptive order received by The
Victory Portfolios from the Commission, the Fund may invest in the money market
funds of The Victory Portfolios. The Adviser will waive its fee attributable to
the Fund's assets invested in a fund of The Victory Portfolios and, to the
extent required by the laws of any state in which shares of the Fund are sold,
the Adviser will waive its investment advisory fee as to all assets invested in
other investment companies. Because such other investment companies employ an
investment adviser, such investment by the Fund will cause shareholders to bear
duplicative fees, such as management fees, to the extent such fees are not
waived by the Adviser. The Fund will invest only in the securities of money
market funds which invest only in securities of equal or higher short-term
ratings as the securities in which the Fund may invest.
o PORTFOLIO TRANSACTIONS. The Fund may engage in the technique of short-term
trading. Such trading involves the selling of securities held for a short time,
ranging from several months to less than a day. The object of such short-term
trading is to take advantage of what the Adviser believes are changes in market,
industry or individual company conditions or outlook. Any such trading would
increase the Fund's turnover rate and its transaction costs. High turnover will
generally result in higher brokerage costs and possible tax consequences for the
Fund. In the fiscal period ended October 31, 1995, the portfolio turnover rate
was 68.82% compared to 127.00% in the fiscal year ended April 30, 1995.
From time to time, the Fund, to the extent consistent with its investment
objective, policies and restrictions, may invest in securities of issuers with
which the Adviser or its affiliates have a lending relationship.
- 6 -
<PAGE>
NOTE: The Statement of Additional Information contains additional information
about the investment practices of the Fund and risk factors. The investment
policies and limitations of the Fund may be changed by the Trustees without any
vote of shareholders unless (1) a policy is expressly deemed to be a fundamental
policy of the Fund or (2) a policy is expressly deemed to be changeable only by
such majority vote.
INVESTMENT LIMITATIONS
The following summarizes some of the Fund's principal investment limitations.
The Statement of Additional Information contains a complete listing of the
Fund's investment limitations and provides additional information about
investment restrictions designed to reduce the risk of an investment in the
Fund.
1. The Fund may not invest more than 5% of its total assets in the securities
of any issuer (except U.S. Government securities, except that up to 25% of
the Fund's total assets may be invested without regard to this limitation).
2. The Fund may not borrow money except that the Fund may borrow money from
banks for temporary or emergency purposes (not for leveraging or
investment), and engage in reverse repurchase agreements in an amount not
exceeding 33 1/3% of its total assets, including the amount borrowed less
liabilities other than borrowings (any borrowings exceeding this amount
will be reduced within three days (not including Sundays and holidays) to
the extent necessary to comply with the 33 1/3% limitation), provided that
any such borrowings representing more than 5% of the Fund's total assets
must be repaid before the Fund may make additional investments.
3. The Fund will not purchase a security if, as a result, more than 15% of its
net assets would be invested in illiquid securities. Illiquid securities
are investments that cannot be readily sold within seven days in the usual
course of business at approximately the price at which the Fund has valued
them. Under the supervision of the Trustees, the Adviser determines the
liquidity of the Fund's investments. The absence of a trading market can
make it difficult to ascertain a market value for illiquid investments.
Disposing of illiquid investments may involve time-consuming negotiation
and legal expenses, and it may be difficult or impossible for the Fund to
sell them promptly at an acceptable price.
Each of the investment limitations indicated above in this subsection are
fundamental, except for the limitation pertaining to illiquid securities.
Non-fundamental limitations may be changed without shareholder approval.
Whenever an investment policy or limitation states a maximum percentage of the
Fund's assets that may be invested, such percentage limitation will be
determined immediately after and as a result of the investment and any
subsequent change in values, assets, or other circumstances will not be
considered when determining whether the investment complies with the Fund's
investment policies and limitations, 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). If the value of the Fund's illiquid securities at any time
exceeds the percentage limitation applicable at the time of acquisition due to
subsequent fluctuations in value or for other reasons, the Trustees will
consider what actions, if any, are appropriate to maintain adequate liquidity.
HOW TO INVEST, EXCHANGE AND REDEEM
HOW TO INVEST
This prospectus offers investors two different classes of shares. The different
classes of shares represent investments in the same portfolio of securities but
are subject to different expenses and will likely have different share prices.
o CLASS A SHARES AND CLASS B SHARES. If Class A shares are purchased, there is
an initial sales charge (on investments up to $1 million). If Class B shares are
purchased, there is no sales charge at the time of purchase, but if the shares
are redeemed within six years, you will normally pay a contingent deferred sales
charge ("CDSC") that varies depending on how long you own your shares.
- 7 -
<PAGE>
o WHICH CLASS OF SHARES SHOULD YOU CHOOSE? Once you decide that the Fund is an
appropriate investment for you, the decision as to which class of shares is
better suited to your needs depends on a number of factors which you should
discuss with your financial adviser:
1. AMOUNT OF INVESTMENT. If you plan to invest a substantial amount, the
reduced sales charges available for larger purchases of Class A shares may
be more beneficial to you. Any order for $1 million or more will only be
accepted as Class A shares for that reason.
2. INVESTMENT HORIZON. While future financial needs cannot be predicted with
certainty, investors who prefer not to pay an initial sales charge and who
plan to hold their shares for more than six years might consider Class B
shares. Investors who plan to redeem shares within eight years might prefer
Class A shares.
3. DIFFERENCES IN ACCOUNT FEATURES. The dividends payable to Class B
shareholders will be reduced by the additional expenses borne solely by
that class, such as the asset-based sales charge to which Class B shares
are subject, as described below and in the Statement of Additional
Information.
A salesperson, financial planner, investment adviser or trust officer who
provides you with information regarding the investment of your assets (an
"Investment Professional") or other person who is entitled to receive
compensation for selling Fund shares may receive different compensation for
selling one class than for selling another class. Both the CDSC (an asset-based
sales charge) for Class B shares and the front-end sales charge on sales of
Class A shares are used primarily to compensate such persons.
o HOW ARE SHARES PURCHASED? Shares may be purchased directly or through an
Investment Professional of a securities broker or other financial institution
that has entered into a selling agreement with the Fund or the Distributor.
Shares are also available to clients of bank trust departments. The minimum
investment is $500 ($250 for Individual Retirement Accounts) for the initial
purchase and $25 thereafter. Accounts set up through a bank
trust department or an Investment Professional may be subject to different
minimums. When you buy shares, be sure to specify Class A or Class B shares. If
you do not make a selection, your investment will be made in Class A shares.
O INVESTING THROUGH YOUR INVESTMENT PROFESSIONAL. Your Investment Professional
will place your order with the Transfer Agent (see "Fund Organization and Fees
- - -- Transfer Agent") on your behalf. You may be required to establish a brokerage
or agency account. Your Investment Professional will inform you if whether
subsequent trades should be directed to the Investment Professional or directly
to the Fund's Transfer Agent. Accounts established with Investment Professionals
may have different features, requirements and fees. In addition, Investment
Professionals may charge for their services. Information regarding these
features, requirements and fees will be provided by the Investment Professional.
If you are purchasing shares of any Fund through a program of services offered
or administered by your Investment Professional, you should read the program
materials in conjunction with this Prospectus. You may initiate any transaction
by telephone through your Investment Professional. Subsequent investments by
telephone may be made directly. See "Special Investor Services" for more
information about telephone transactions.
o 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 Account Application for the Fund in which an investment
is made. Additional documents may be required from corporations, associations,
and certain fiduciaries. Any account information, such as balances, should be
obtained through your bank trust department. Additional purchases, exchanges or
redemptions should also be coordinated through your bank trust department.
Contact your bank trust department for instructions.
The services rendered by a bank trust department, including Key Trust Company of
Ohio, N.A. and other affiliates of the Adviser are not duplicative of any of the
services for which KAM as the investment adviser is compensated for advising the
Fund. The charges paid by clients of bank trust departments, or their
affiliates, should also be considered by the investor in addition to the net
yield and return on the investment in the Fund, although such charges do not
affect the Fund's dividends or distributions.
- 8 -
<PAGE>
o INVESTING THROUGH THE SYSTEMATIC INVESTMENT PLAN. You can use the Systematic
Investment Plan to purchase shares directly from your bank account. Please refer
to "The Systematic Investment Plan" for more details.
INVESTING DIRECTLY
o BY MAIL. You may purchase shares by completing and signing an Account
Application (initial purchase only payable to the Victory Funds) and mailing it,
together with a check (or other negotiable bank draft or money order) in the
amount of at least the minimum investment requirement to:
The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527
o By Wire.YOU MUST CALL THE TRANSFER AGENT BEFORE WIRING FUNDS. Federal funds
should be wired to:
State Street Bank and Trust Company
ABA #011000028
For Credit to DDA Account #9905-201-1
For Further Credit to Account # (insert your account
number, name, and 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.
o BY ACH. The purchase amount will be transferred between the bank account
designated and your fund account via Automated Clearing House ("ACH"). Only a
bank account maintained in a domestic financial institution which is an ACH
member may be so designated. The Fund may modify or terminate the telephone
and/or ACH privilege at any time or charge a service fee upon notice to
shareholders. No such fee is currently contemplated by the Fund; however, your
bank may charge you a fee for this service. If the designated bank account does
not contain sufficient assets at the time your order is processed, the order may
be cancelled, and you could be liable for resulting fees and/or losses. NOTE
THAT THIS SERVICE REQUIRES APPROXIMATELY 15 DAYS TO ESTABLISH. THEREFORE, IT MAY
NOT BE APPLICABLE TO REQUEST YOUR INITIAL PURCHASE UTILIZING THIS METHOD.
Class A shares are sold at the public offering price based on the net asset
value that is next determined after the Transfer Agent receives the purchase
order. Class B shares are sold at net asset value per share, but may be subject
to a CDSC (see "Class B Shares"). In most cases, to receive that day's offering
price, the Transfer Agent must receive your order as of the close of regular
trading of the New York Stock Exchange ("NYSE") which is normally 4:00 p.m.
Eastern time (the "Valuation Time") on each Business Day (as defined in
"Shareholder Account Rules and Policies -- Share Price") . If you buy shares
through an Investment Professional, the Investment Professional must receive
your order in a timely fashion on a regular Business Day . It is the
responsibility of your Investment Professional to transmit your order to
purchase shares to the Transfer Agent in a timely fashion in order for you to
receive that day's share price. The Transfer Agent may reject any purchase order
for the Fund's shares, in its sole discretion.
INVESTMENT REQUIREMENTS
All purchases must be made in U.S. dollars and made payable to the Victory
Funds, or in the case of a retirement account, the custodian or trustee. Third
party checks will not be accepted. Checks must be drawn on U.S. banks. No cash
will be accepted. If you make a purchase with more than one check, each check
must have a value of at least $25, and the minimum investment requirement still
applies. The Fund reserves the right to limit the number of checks processed at
one time. If your check does not clear, your purchase will be canceled and you
could be liable for any losses or fees incurred. Payment for the purchase is
expected at the time of the order. If payment is not received within three
business days of the date of the order, the order may be canceled, and you could
be held liable for resulting fees and/or losses. When purchases are made by
check or periodic account investment, redemptions will not be allowed until the
investment being redeemed has been in the account for 15 calendar days.
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<PAGE>
CLASS A SHARES. Class A shares are sold at their offering price, which is
normally net asset value plus an initial sales charge. However, in some cases,
described below, where purchases are not subject to an initial sales charge, the
offering price may be net asset value. In some cases, reduced sales charges may
be available, as described below. When you invest, the Fund receives the net
asset value for your account. The sales charge varies depending on the amount of
your purchase and a portion may be retained by the Distributor and allocated to
your Investment Professional. The Victory Portfolios has a reinstatement policy
which allows an investor who redeems shares originally purchased with a sales
charge to reinvest within 90 days without incurring an additional sales charge.
The current sales charge rates and commissions paid to Investment Professionals
are as follows:
CLASS A SALES CHARGE DEALER
---------------------------- REALLOWANCE
AS A % OF AS A % OF AS A % OF
OFFERING NET AMOUNT OFFERING
AMOUNT OF PURCHASE PRICE INVESTMENT PRICE
- - ------------------ -------- ---------- ------------
Less than $49,999 4.75% 4.99% 4.00%
$50,000 to $99,999 4.50% 4.71% 4.00%
$100,000 to $249,999 3.50% 3.63% 3.00%
$250,000 to $499,999 2.25% 2.30% 2.00%
$500,000 to $999,999 1.75% 1.78% 1.50%
$1,000,000 and above 0.00% 0.00% (1)
(1) There is no initial sales charge on purchases of $1 million or more.
However, a CDSC of up to 1.00% of the purchase price will be charged to the
Shareholder if shares are redeemed in the first year after purchase, or at .50%
within two years of the purchase. This charge will be based on either the cost
of the shares or net asset value at the time of redemption, whichever is lower.
There will be no CDSC on reinvested distributions. Investment Professionals may
be paid at a rate of up to 1.00% of the purchase price.
The Distributor reserves the right to pay the entire commission to dealers.
If that occurs, the dealer may be considered an "underwriter" under Federal
securities laws.
The Distributor may pay all or a portion of any applicable sales charges and
service fees to Investment Professionals who sell shares of the Fund and provide
ongoing sales support services or shareholder support services. For the
three-year period commencing April 30, 1994, for maintaining and servicing
accounts of customers invested in the Fund, First Albany Corporation ("First
Albany") and PFIC Securities Corporation ("PFIC") may receive payments from the
Distributor equal to two-thirds of the Dealer Retention (as defined below) on
any shares of the Fund (and other funds of The Victory Portfolios) sold by First
Albany or PFIC and their broker-dealer affiliates. "Dealer Retention" is an
amount equal to the difference between the applicable sales charge and such part
of the sales charge which is reallowed to broker-dealers.
o REDUCED SALES CHARGES FOR CLASS A SHARES. You may be eligible to buy Class A
shares at reduced sales charge rates in one or more of the following ways:
o LETTER OF INTENT FOR CLASS A SHARES. An investor may obtain a reduced sales
charge by means of a written Letter of Intent which expresses the investor's
intention to purchase shares of the Fund at a specified total public offering
price within a 13-month period.
A Letter of Intent is not a binding obligation upon the investor to purchase the
full amount indicated. The minimum initial investment under a Letter of Intent
is 5% of the total amount. Shares purchased with the first 5% of such amount
will be held in escrow (while remaining registered in the name of the investor)
to secure payment of the higher sales charge applicable to the shares actually
purchased if the full amount indicated is not purchased, and such escrowed
shares will be involuntarily redeemed to pay the additional sales charge, if
necessary. Dividends (if any) on escrowed shares, whether paid in cash or
reinvested in additional shares, are not subject to escrow. The escrowed shares
will not be available for redemption, exchange or other disposal by the investor
until all purchases pursuant to the Letter of Intent have been made or the
higher sales charge has been paid. When the full amount indicated has been
- 10 -
<PAGE>
purchased, the escrow will be released. A Letter of Intent may include purchases
of shares made not more than 90 days prior to the date the investor signs a
Letter of Intent; however, the 13-month period during which the Letter of Intent
is in effect will begin on the date of the earliest purchase to be included. An
investor may combine purchases that are made in an individual capacity with (1)
purchases that are made by members of the investor's immediate family and (2)
purchases made by businesses that the investor owns as sole proprietorships, for
purposes of obtaining reduced sales charges by means of a written Letter of
Intent. In order to accomplish this, however, investors must designate on the
Account Application the accounts that are to be combined for this purpose.
Investors can only designate accounts that are open at the time the Letter of
Intent is executed.
If an investor qualifies for a further reduced sales charge because the investor
has either purchased more than the dollar amount indicated on the Letter of
Intent or has entered into a Letter of Intent which includes shares purchased
prior to the date of the Letter of Intent, the difference in the sales charge
will be used to purchase additional shares of the Fund on behalf of the
investor; thus the total purchases (included in the Letter of Intent) will
reflect the applicable reduced sales charge of the Letter of Intent.
For further information about Letters of Intent, interested investors should
contact the Transfer Agent at 800- KEY-FUND. This program, however, may be
modified or eliminated at any time without notice.
o RIGHTS OF ACCUMULATION AND CONCURRENT PURCHASES. A shareholder may qualify for
a reduced sales charge on purchases of Class A Shares of the Fund, and other
funds of The Victory Portfolios, by combining a current purchase with purchases
of another fund(s), or with certain prior purchases of shares of The Victory
Portfolios. The applicable sales charge is based on the sum of (1) the
purchaser's current purchase plus (2) the current public offering price of the
purchaser's previous purchases of (a) all shares held by the purchaser in the
Fund and (b) all shares held by the purchaser in any other fund of The Victory
Portfolios (except money market funds).
To receive the applicable public offering price pursuant to the right of
accumulation, shareholders must provide the Transfer Agent with sufficient
information at the time of purchase to permit confirmation of qualification.
Accumulation privileges may be amended or terminated without notice at any time
by the Distributor. See "Combined Purchases" and "Rights of Accumulation" in the
Statement of Additional Information.
o WAIVERS OF CLASS A SALES CHARGES. No sales charge is imposed on sales of Class
A shares to the following categories of persons (which categories may be changed
or eliminated at any time):
(1) Current or retired Trustees of The Victory Portfolio and Victory Shares,
employees, directors, trustees, and their family members of KeyCorp or an
"Affiliated Provider" ("Affiliated Providers" refer to affiliates and
subsidiaries of KeyCorp and service providers to The Victory Portfolios and
the Victory Shares (collectively, the "Victory Group")), dealers having an
agreement with the Distributor and any trade organization to which the
Adviser or the Administrator belongs;
(2) Investors who purchase shares for trust, investment management or certain
other advisory accounts established with KeyCorp or any of its affiliates;
(3) Investors who reinvest assets received in a distribution from a qualified,
non-qualified or deferred compensation plan, agency, trust or custody
account that was either (a) maintained by KeyCorp or an Affiliated
Provider, or (b) invested in a fund of the Victory Group;
(4) Investors who, within 90 days of redemption, use the proceeds from the
redemption of shares of another mutual fund complex for which they
previously paid a front end sales charge or sales charge upon redemption of
shares;
(5) Shareholders of the former Investors Preference Fund For Income, Inc. and
the Investors Preference New York Tax-Free Fund, Inc. who have continuously
maintained accounts with a fund or funds of the Victory Group with a
balance of $250,000 or more (investors with less than $250,000 will pay any
applicable sales charges); and
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<PAGE>
(6) Investment advisers or financial planners who place trades for their own
accounts or the accounts of their clients and who charge a management,
consulting or other fee for their services; and clients of such investment
advisers or financial planners who place trades for their own accounts if
the accounts are linked to the master account of such investment adviser or
financial planner on the books and records of the broker or agent. Such
accounts include retirement and deferred compensation plans and trusts used
to fund those plans, including, but not limited to, those defined in
sections 401(a), 403(b), or 457 of the Internal Revenue Code and "rabbi
trusts."
CLASS B SHARES. Class B shares are sold at net asset value per share without an
initial sales charge. However, if Class B shares are redeemed within six years
of their purchase, a CDSC will be deducted from the redemption proceeds. That
sales charge will not apply to shares purchased by the reinvestment of dividends
or capital gains distributions. The charge will be assessed on the lesser of the
net asset value of the shares at the time of redemption or the original purchase
price. The CDSC is not imposed on the amount of your account value represented
by the increase in net asset value over the initial purchase price (including
increases due to the reinvestment of dividends and capital gains distributions).
The Class B CDSC is paid to the Distributor to reimburse its expenses of
providing distribution-related services to the Fund in connection with the sale
of Class B shares.
To determine whether the CDSC applies to a redemption, The Victory Portfolios
redeems shares in the following order: (1) shares acquired by reinvestment of
dividends and capital gains distributions, (2) shares held for over six years,
and (3) shares held the longest during the 6-year period. The amount of the CDSC
will depend on the number of years since you invested and the dollar amount
being redeemed, according to the following schedule:
CONTINGENT DEFERRED SALES CHARGE
YEARS SINCE PURCHASE ON REDEMPTIONS IN THAT YEAR
PAYMENT WAS MADE (AS % OF AMOUNT SUBJECT TO CHARGE)
-------------------- ----------------------------------
0-1 5.0%
1-2 4.0%
2-3 3.0%
3-4 3.0%
4-5 2.0%
5-6 1.0%
6 and following none
In the table, a "year" is a 12-month period. All purchases are considered to
have been made on the first regular business day of the month in which the
purchase was made.
o WAIVERS OF CLASS B CDSC. The Class B CDSC will be waived if the shareholder
requests it for any of the following redemptions: (1) distributions to
participants or beneficiaries from Retirement Plans, if the distributions are
made (a) under an Automatic Withdrawal Plan after the participant reaches age 59
1/2, as long as the payments are no more than 12% of the account value annually
(measured from the date the Transfer Agent receives the request), or (b)
following the death or disability (as defined in the Internal Revenue Code) of
the participant or beneficial owner; (2) redemptions from accounts other than
Retirement Plans following the death or disability of the shareholder (as
evidenced by a determination of disability by the Social Security
Administration); (3) returns of excess contributions to Retirement Plans; and
(4) distributions of not more than 12% of the account value annually.
The CDSC is also waived on Class B shares in the following cases: (1) shares
sold to the Adviser or its affiliates; (2) shares issued in plans of
reorganization to which The Victory Portfolios is a party; and (3) shares
redeemed in involuntary redemptions as described above.
o AUTOMATIC CONVERSION OF CLASS B SHARES. Eight years after Class B shares are
purchased, those shares will automatically convert to Class A shares. This
conversion feature relieves Class B shareholders of the asset-based sales charge
that applies to Class B shares under the Class B Distribution Plan, described
below. The conversion is based on the relative net asset value of the two
classes, and no sales charge or other charge is imposed. When Class B shares
convert, any other Class B shares that were acquired by the reinvestment of
dividends and distributions on the converted shares will also convert to Class A
shares.
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<PAGE>
The conversion feature is subject to the continued availability of a tax
ruling described in "Alternative Sales Arrangements -- Class B Conversion
Feature" in the Statement of Additional Information.
o DISTRIBUTION PLAN FOR CLASS B SHARES. The Victory Portfolios has adopted a
Distribution Plan (the "Plan") under Rule 12b-1 of the 1940 Act for Class B
shares to compensate the Distributor for its services and costs in distributing
Class B shares and servicing accounts. Under the Plan, The Victory Portfolios
pays the Distributor an annual "asset-based sales charge" of 0.75% per year on
Class B shares. This fee is computed on the average daily net assets of Class B
shares and paid monthly. The asset-based sales charge allows investors to buy
Class B shares without a front-end sales charge while allowing the Distributor
to compensate dealers that sell Class B shares. The asset-based sales charge
increases Class B expenses by up to 0.75% of average net assets per year.
The Distributor pays sales commissions of 4.00% of the purchase price to dealers
from its own resources at the time of sale. For maintaining and servicing
accounts of customers invested in the Fund, First Albany and PFIC Securities
Corporation may receive payments from the Distributor equal to two-thirds of the
excess of the scheduled CDSC over any commission paid to the selling broker. The
Distributor retains the asset-based sales charge to recoup the sales commissions
it pays and its financing costs. If the Plan is terminated by The Victory
Portfolios, it provides that the Trustees may elect to continue payments for
certain expenses already incurred. The payments under the Plan increase the
annual expenses of Class B shares. For more details, please refer to "Advisory
and Other Contracts -- Class B Shares Distribution Plan" in the Statement of
Additional Information.
SPECIAL INVESTOR SERVICES
o THE SYSTEMATIC INVESTMENT PLAN. You can make regular investments in the Fund
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, quarterly,
semi-annually, or annually by automatically deducting $25 or more from your bank
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. Your bank checking account will be debited on the date
indicated on your Account Application. Shares will be purchased at the offering
price next determined following receipt of the order by the Transfer Agent. You
may cancel the Systematic Investment Plan at any time without payment of a
cancellation fee. Your monthly account statement will reflect systematic
investment transactions, and a debit entry will appear on your bank statement.
o THE SYSTEMATIC WITHDRAWAL PLAN. You can make regular withdrawals from your
account with the Systematic Withdrawal Plan by completing the appropriate
section of the Account Application. If you own shares in a fund worth $5,000 or
more, you can have monthly, quarterly, semi-annual or annual checks sent from
your account directly to you, to a person named by you, or to your bank checking
account. The 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 account is jointly owned, be sure
that all owners sign. You may obtain information about the Systematic Withdrawal
Plan by contacting the Transfer Agent. Your Systematic Withdrawal Plan payments
are drawn from share redemptions. If Systematic Withdrawal Plan redemptions
exceed income dividends and capital gain dividend distributions earned on your
Fund shares, your account eventually may be exhausted. If any applicable sales
charges are applied to new purchases of shares of the Fund, it is to your
disadvantage to buy shares of the Fund while also making systematic redemptions.
Your account will be debited on the date you indicate on your Account
Application. Shares will be redeemed at the net asset value per share (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.
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<PAGE>
o TELEPHONE TRANSACTIONS. You can initiate most transactions by telephone. You
may call the Transfer Agent toll-free at 800- KEY-FUND or call your Investment
Professional or bank trust department. Telephone transaction privileges for
purchases, exchanges or redemptions may be modified, suspended or terminated by
the Fund at any time. If an account has more than one owner, the Fund and the
Transfer Agent may rely on the instructions of any one owner. Telephone
privileges apply to each owner of the account and the dealer representative of
record for the account unless and until the Transfer Agent receives cancellation
instructions from an owner of the account.
Generally, neither the Fund, the bank trust department nor the Transfer Agent
will be responsible for any claims, losses or expenses for acting on telephone
instructions that they reasonably believe to be genuine. The Transfer Agent and
the Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine and if they do not employ reasonable
procedures they may be liable for any losses due to unauthorized or fraudulent
instructions. The identification procedures may include, but are not limited to,
the following: account number, registration and address, personalized security
codes, taxpayer identification number and other information particular to the
account. Your Investment Professional, bank trust department or the Transfer
Agent may also record calls, and you should verify the accuracy of your
confirmation statements immediately after you receive them.
o RETIREMENT PLANS. Retirement plans can be among the best tax-planning vehicles
available to individuals. Call your Investment Professional for more information
on the plans and their benefits, provisions and fees. Your Investment
Professional can set up your new account in the Fund under one of several
tax-sheltered plans. These plans let you invest for retirement and shelter your
investment income from current taxes. Plans include Individual Retirement
Accounts (IRAs) and Rollover IRAs. Other fees may be charged by the IRA
custodian or trustee.
HOW TO EXCHANGE
Shares of the Fund may be exchanged for shares of certain funds of the Victory
Group at relative net asset value per share at the time of exchange, without a
sales charge. To exchange shares, you must meet several conditions:
(1) Shares of the fund selected for exchange must be available for sale in your
state of residence.
(2) The prospectuses of this Fund and the fund whose shares you want to buy
must offer the exchange privilege.
(3) You must hold the shares you buy when you establish your account for at
least 7 days before you can exchange them; after the account is open 7
days, you can exchange shares on any Business Day.
(4) You must meet the minimum purchase requirements for the fund you purchase
by exchange.
(5) The registration and tax identification numbers of the two accounts must be
identical.
(6) BEFORE EXCHANGING, OBTAIN AND READ THE PROSPECTUS FOR THE FUND YOU WISH TO
PURCHASE BY EXCHANGE.
SHARES OF A PARTICULAR CLASS MAY BE EXCHANGED ONLY FOR SHARES OF THE SAME CLASS
IN THE OTHER FUNDS OF THE VICTORY GROUP. For example, you can exchange Class A
shares of this Fund only for Class A shares of another fund. At present, not all
of the funds offer the same two classes of shares. If a fund has only one class
of shares that does not have a class designation, they are "Class A" shares for
exchange purposes. In some cases, sales charges may be imposed on exchange
transactions. Certain funds offer Class A or Class B shares and a list can be
obtained by calling the Transfer Agent at 800- KEY-FUND. Please refer to the
Statement of Additional Information for more details about this policy.
Telephone exchange requests may be made either by calling your Investment
Professional or the Transfer Agent at 800- KEY-FUND prior to Valuation Time on
any Business Day (see "Shareholder Account Rules and Policies -- Share Price").
You can obtain a list of eligible funds of the Victory Group by calling the
Transfer Agent at 800- KEY-FUND. Exchanges of shares involve a redemption of the
shares of the Fund and a purchase of shares of the other fund of the Victory
Group.
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<PAGE>
There are certain exchange policies you should be aware of:
o Shares are normally redeemed from one fund and issued by the other fund in the
exchange transaction on the same Business Day on which the Transfer Agent
receives an exchange request by Valuation Time (normally 4:00 p.m. Eastern time)
that is in proper form, but either fund may delay the issuance of shares of the
fund into which you are exchanging if it determines it would be disadvantaged by
a same-day transfer of the proceeds to buy shares. For example, the receipt of
multiple exchange requests from a dealer in a "market-timing" strategy might
create excessive turnover in the Fund's portfolio and associated expenses
disadvantageous to the Fund.
o Because excessive trading can hurt fund performance and harm shareholders, The
Victory Portfolios reserves the right to refuse any exchange request that will
impede the Fund's ability to invest effectively or otherwise have the potential
to disadvantage the Fund or to refuse multiple exchange requests submitted by a
shareholder or dealer.
o The Victory Portfolios may amend, suspend or terminate the exchange privilege
at any time upon 60 days' written notice to shareholders.
o If the Transfer Agent cannot exchange all the shares you request because of a
restriction cited above, only the shares eligible for exchange will be
exchanged.
o Each exchange may produce a gain or loss for tax purposes.
Shareholders of the former Investors Preference Fund for Income, Inc. and
Investors Preference New York Tax-Free Fund, Inc. will not be subject to any
additional sales charge upon an exchange of shares attributable to an Investors
Preference Funds account for shares of other funds of The Victory Portfolios.
Key Mutual Funds, which is managed by KAM, is part of the Victory Group.
Exchange privileges applicable to the Victory Portfolios will also apply to Key
Mutual Funds.
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 "Shareholder Account
Rules and Policies -- Share Price"). Shares will be redeemed at the NAV next
calculated after the Transfer Agent has received the redemption request. If the
Fund account is closed, any accrued dividends will be paid at the beginning of
the following month.
You may redeem shares in several ways:
BY MAIL. Send a written request to:
The Victory Funds
P.O. Box 8527
Boston, MA 02266-8527
Write a "letter of instruction" with your name, the Fund's name, your Fund
account number, the dollar amount or number of shares to be redeemed, and any
additional requirements that apply to each particular account. You will need the
letter of instruction signed by all persons required to sign for transactions,
exactly as their names appear on the Account Application. A signature guarantee
is required if: you wish to redeem more than $10,000 worth of shares; your Fund
account registration has changed within the last 60 days; the check is not being
mailed to the address on your account; the check is not being made out to the
account owner; or if the redemption proceeds are being transferred to another
Victory Group account with a different registration. The following institutions
should be able to provide you with a signature guarantee: banks, brokers,
dealers, credit unions (if authorized under state law), securities exchanges and
associations, clearing agencies, and savings associations. A signature guarantee
may not be provided by a notary public. A signature guarantee is designed to
protect you, the Fund and its agents from fraud. The Transfer Agent reserves the
right to reject any signature guarantee if (1) it has reason to believe that the
signature is not genuine, (2) it has reason to believe that the transaction
would otherwise be improper, or (3) the guarantor institution is a broker or
dealer that is neither a member of a clearing corporation nor maintains net
capital of at least $100,000.
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<PAGE>
o BY WIRE. You may make redemptions by wire provided you have established a Fund
account to accommodate wire transactions. If telephone instructions are received
before Valuation Time (normally 4:00 p.m. Eastern time), proceeds of the
redemption will be wired as federal funds on the next Business Day to the bank
account designated with the Transfer Agent. You may change the bank account
designated to receive an amount redeemed at any time by sending a letter of
instruction with a signature guarantee to the Victory Funds P.O. Box 8527,
Boston, MA 02266-8527.
o BY TELEPHONE. To redeem by telephone, you may call the Transfer Agent toll
free at 800- KEY-FUND or call your Investment Professional or bank trust
department. See "Special Investor Services" for more information about telephone
transactions.
o ADDITIONAL REDEMPTION REQUIREMENTS. The Fund may delay payment on redemptions
until it is reasonably satisfied that investments made by check have been
collected, which can take up to 15 days. Also, when the NYSE is closed (or when
trading is restricted) for any reason other than its customary weekend or
holiday closings, or under any emergency circumstances as determined by the
Commission to merit such action, the right of redemption may be suspended or the
date of payment postponed for a period of time that may exceed 7 days. In
addition, the Fund reserves the right to advance the time on that day by which
purchase and redemption orders must be received. To the extent that portfolio
securities are traded in other markets on days when the NYSE is closed, the
Fund's NAV may be affected on days when investors do not have access to the Fund
to purchase or redeem shares.
If you are unable to reach the Transfer Agent by telephone (for example, during
times of unusual market activity), consider placing your order by mail directly
to the Transfer Agent. In case of suspension of the right of redemption, you may
either withdraw your request for redemption or receive payment based on the NAV
next determined after the termination of the suspension. If your balance in the
Fund falls below $500, you may be given 60 days' notice to reestablish the
minimum balance (except with respect to officers, trustees, directors and
employees, including retired directors and employees, of The Victory Portfolios,
KeyCorp and its affiliates, and the Administrator and its affiliates (and family
members of each of the foregoing) participating in the Systematic Investment
Plan, to whom no minimum balance requirement applies). If you do not increase
your balance, your account may be closed and the proceeds mailed to you at the
address on record. Shares will be redeemed at the last calculated NAV on the day
the account is closed.
SHAREHOLDER ACCOUNT RULES AND POLICIES
SHARE PRICE. The term "net asset value per share," or "NAV", means the value of
one share. The NAV of each class of shares is calculated by adding the value all
the Fund's investments, plus cash and other assets, deducting liabilities of the
Fund and of the class, and then dividing the result by the number of shares of
the class outstanding. The NAV of the Fund is determined and its shares are
priced as of the close of regular trading of the NYSE, which is normally 4:00
p.m. Eastern time (the "Valuation Time") on each Business Day of the Fund. A
"Business Day" is a day on which the NYSE is open for trading, the Federal
Reserve Bank of Cleveland is open, and any other day (other than a day on which
no shares of the Fund are tendered for redemption and no order to purchase any
shares is received) during which there is sufficient trading in its portfolio
instruments that the Fund's net asset value per share might be materially
affected. The NYSE or the Federal Reserve Bank of Cleveland will not be open in
observance of the following holidays: New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Columbus Day, Veterans' Day, Thanksgiving and Christmas.
The Fund's securities are valued primarily on the basis of market quotations or,
if quotations are not readily available, by a method that the Board of Trustees
believes accurately reflects fair value. Fair value of these portfolio
securities is determined by an independent pricing service based primarily upon
information concerning market transactions and dealers quotations for comparable
securities.
o The offering of shares may be suspended during any period in which the
determination of NAV is suspended, and the offering may be suspended by the
Trustees at any time the Trustees believe it is in the Fund's best interest to
do so.
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<PAGE>
o Redemption or transfer requests will not be honored until the Transfer Agent
receives all required documents in proper form. From time to time, the Transfer
Agent in its discretion may waive certain of the requirements for redemptions
stated in this Prospectus.
o Dealers that can perform account transactions for their client by
participating in NETWORKING through the National Securities Clearing Corporation
are responsible for obtaining their clients' permission to perform those
transactions and are responsible to their clients who are shareholders of The
Victory Portfolios if the dealer performs any transaction erroneously.
o The redemption price for shares will vary from day to day because the value of
the securities in the Fund fluctuates, and the value of your shares may be more
or less than their original cost.
o Payment for redeemed shares is ordinarily made in cash and forwarded by check
within three business days after the Transfer Agent receives redemption
instructions in proper form, except under unusual circumstances determined by
the Securities and Exchange Commission delaying or suspending such payments. The
Transfer Agent may delay forwarding a check for recently purchased shares, but
only until the purchase payment has cleared. That delay may be as much as 15
days from the date the shares were purchased. That delay may be avoided if you
arrange with your bank to provide telephone or written assurance to the Transfer
Agent that your purchase payment has cleared.
o If your account value has fallen below $500 you may be given 60 days' notice
to reestablish the minimum balance. If you do not increase your minimum balance,
your account may be closed and the proceeds mailed to you at the record address.
In some cases involuntary redemptions may be made to repay the Distributor for
losses from the cancellation of share purchase orders. Under unusual
circumstances, shares of the Fund may be redeemed "in kind," which means that
the redemption proceeds will be paid with securities from the Fund. Please refer
to the Statement of Additional Information for more details.
o "Backup Withholding" of Federal income tax may be applied at the rate of 31%
from dividends, distributions and redemption proceeds (including exchanges) if
you fail to furnish The Victory Portfolios with a certified Social Security or
taxpayer identification number when you sign your Account Application, or if you
violate Internal Revenue Service regulations on tax reporting of dividends.
o The Victory Portfolios does not charge a redemption fee, but if your
Investment Professional handles your redemption, the Investment Professional may
charge a separate service fee. Under the circumstances described in "How to
Invest," you may be subject to a CDSC when redeeming Class B shares.
o The Distributor, at its expense, may also provide additional cash compensation
to dealers in connection with sales of shares of the Fund. The maximum cash
compensation payable by the Distributor is currently 4.00% of the offering
price. In addition, the Distributor will, from time to time and at its own
expense, provide compensation, including financial assistance, to dealers in
connection with conferences, sales or training programs for their employees,
seminars for the public, advertising campaigns regarding one or more Victory
Portfolios and/or other dealer-sponsored special events including payment for
travel expenses, including lodging, incurred in connection with trips taken by
invited registered representatives and members of their families to locations
within or outside of the United States for meetings or seminars of a business
nature. Compensation will include the following types of non-cash compensation
offered through sales contests: (1) vacation trips including the provision of
travel arrangements and lodging; (2) tickets for entertainment events (such as
concerts, cruises and sporting events) and (3) merchandise (such as clothing,
trophies, clocks and pens). Dealers may not use sales of the Fund's shares to
qualify for this compensation if prohibited by the laws of any state or any
self-regulatory organization, such as the National Association of Securities
Dealers, Inc. None of the aforementioned compensation is paid for by the Fund or
its shareholders.
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<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS
The Fund ordinarily declares and pays dividends separately for Class A and Class
B shares from its net investment income monthly. The Fund may make distributions
at least annually out of any net realized capital gains, and the Fund may make
supplemental distributions of dividends and capital gains following the end of
its fiscal year.
DISTRIBUTION OPTIONS
When you fill out your Account Application, you can specify how you want to
receive your dividend distributions.
Currently, there are five available options:
1. REINVESTMENT OPTION. Your income and capital gain dividends, if any, will
be automatically reinvested in additional shares of the Fund. Income and
capital gain dividends will be reinvested at the net asset value of the
Fund as of the day after the record date. If you do not indicate a choice
on your Account Application, you will be assigned this option.
2. CASH OPTION. You will receive a check for each income or capital gain
dividend, if any. Distribution checks will be mailed no later than 7 days
after the dividend payment date which may be more than 7 days after the
dividend record date.
3. INCOME EARNED OPTION. You will have your capital gain dividend
distributions, if any, reinvested automatically in the Fund at the NAV as
of the day after the record date and have your income dividends paid in
cash.
4. DIRECTED DIVIDENDS OPTION. You will have income and capital gain dividends,
or only capital gain dividends, automatically reinvested in shares of
another fund of the Victory Group. Shares will be purchased at the NAV as
of the day after the record date. If you are reinvesting dividends of a
fund sold without a sales charge in shares of a fund sold with a sales
charge, the shares will be purchased at the public offering price. If you
are reinvesting dividends of a fund sold with a sales charge in shares of a
fund sold with or without a sales charge, the shares will be purchased at
the net asset value of the fund. Dividend distributions can be directed
only to an existing account with a registration that is identical to that
of your Fund account.
5. DIRECTED BANK ACCOUNT OPTION. You will have your income and capital gain
dividends, or only your income dividends, automatically transferred to your bank
checking or savings account. The amount will be determined on the dividend
record date and will normally be transferred to your account within 7 days of
the dividend record date. Dividend distributions can be directed only to an
existing account with a registration that is identical to that of your Fund
account. Please call or write the Transfer Agent to learn more about this
dividend distribution option.
Any election or revocation of any of the above dividend distribution options may
be made in writing to the Fund and sent to the Victory Funds , P.O. Box 8527,
Boston, MA 02266-8527, or by calling the Transfer Agent at 800- KEY-FUND, and
will become effective with respect to dividends having record dates after
receipt of the Account Application or request by the Transfer Agent.
Reinvested dividend distributions receive the same tax treatment as dividend
distributions paid in cash.
o STATEMENTS AND REPORTS. You will receive a monthly statement reflecting all
transactions that affect the share balance or the registration of your Fund
account. You will receive a confirmation after every transaction that affected
the share balance of your Fund account, except for dividend reinvestment,
systematic investment and systematic withdrawal transactions. These transactions
will be detailed in your Fund account statement. Transactions that affect the
share balance of your Fund investment in an account established with an
Investment Professional or financial institution will be detailed in regular
statements
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<PAGE>
or through confirmation procedures of the financial institution.
Certificates representing shares of the Fund will not be issued. An IRS Form
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.
o REDEMPTION OR EXCHANGES. Investors may realize a gain or loss when redeeming
(selling) or exchanging shares. For most types of accounts, the Fund reports the
proceeds to the IRS annually. Because the shareholders' tax treatment also
depends on their purchase price and personal tax positions, shareholders should
keep their regular account statements to use in determining their tax. See
"Buying a Dividend."
o 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.
o BUYING A DIVIDEND. On the record date for a distribution of ordinary income or
capital gains dividend, the net asset value of the Fund is reduced by the amount
of the distribution. An investor who buys shares just before the record date
("buying a dividend") will pay the full price for the shares and then receive a
portion of the purchase price back as a taxable distribution.
FEDERAL TAXES
The Fund intends to qualify as a regulated investment company by satisfying the
requirements under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "IRS Code"). The Fund contemplates the distribution of all of its net
investment income and capital gains, if any, in accordance with the timing
requirements imposed by the IRS Code, so that it will not be subject to federal
income taxes or the 4% excise tax on undistributed income.
Distributions by the Fund of its net investment income and the excess, if any,
of its net short-term capital gain over its net long-term capital loss are
taxable to shareholders as ordinary income. These distributions are treated as
dividends for federal income tax purposes, but only a portion thereof may
qualify for the 70% dividends received deduction for corporate shareholders
(which portion may not exceed the aggregate amount of qualifying dividends from
domestic corporations received by the Fund and must be designated by the Fund as
so qualifying). Distributions by the Fund of the excess, if any, of its net
long-term capital gain over its net short-term capital loss are designated as
capital gain dividends and are taxable to shareholders as long-term capital
gain, regardless of the length of time shareholders have held their shares. Such
distributions are not eligible for the dividends-received deduction . If a
shareholder disposes of shares in the Fund at a loss before holding such shares
for more than six months, the loss will be treated as a long-term capital loss
to the extent that the shareholder has received a capital gain dividend on those
shares.
Distributions to shareholders of the Fund will be treated in the same manner for
federal income tax purposes whether received in cash or in additional shares and
may also be subject to state and local taxes. Distributions received by
shareholders of the Fund in January of a given year will be treated as received
on December 31 of the preceding year provided that they were declared to
shareholders of record on a date in October, November or December of such
preceding year. The Fund sends tax statements to its shareholders (with copies
to the Internal Revenue Service (the "IRS")) by January 31 showing the amounts
and tax status of distributions made (or deemed made) during the preceding
calendar year.
Income from securities of foreign issuers may be subject to foreign withholding
taxes. Credit for such foreign taxes, if any, will not pass through to the
shareholders.
o OTHER TAX INFORMATION. The information above is only a summary of some of the
federal income tax consequences generally affecting the Fund and its U.S.
shareholders, and no attempt has been made to discuss individual tax
consequences. A prospective investor should also review the more detailed
discussion of federal income tax considerations in the Statement of Additional
Information. In addition to the federal income tax, a shareholder may be subject
to state or local taxes on his or her investment in the Fund, depending on the
laws of the shareholder's jurisdiction. INVESTORS CONSIDERING AN INVESTMENT IN
THE FUND SHOULD CONSULT THEIR TAX ADVISERS TO DETERMINE WHETHER THE FUND IS
SUITABLE TO THEIR PARTICULAR TAX SITUATION.
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<PAGE>
When investors sign their Account Application, they are asked to provide their
correct social security or taxpayer identification number and other required
certifications. If investors do not comply with IRS regulations, the IRS
requires the Fund to withhold 31% of amounts distributed to them by the Fund as
dividends or in redemption of their shares.
PERFORMANCE
From time to time, performance information for each class of shares of the Fund
showing total return of each class of shares may be presented in advertisements,
sales literature and in reports to shareholders. Such performance figures are
based on historical earnings and are not intended to indicate future
performance.
Average annual total return will be calculated over a stated period of more than
one year. Average annual total return is measured by comparing the value of an
investment in a class at the beginning of the relevant period (as adjusted for
sales charges, if any) to the redemption value of the investment at the end of
the period (assuming immediate reinvestment of any dividends or capital gains
distributions) and annualizing that figure. Cumulative total return is
calculated similarly to average annual total return, except that the resulting
difference is not annualized.
Yield will be computed by dividing the Fund's net investment income per share
earned during a recent thirty-day period by the Fund's maximum offering price
per share (reduced by any undeclared earned income expected to be paid shortly
as a dividend) on the last day of the period and annualizing the result.
Investors may also judge, and The Victory Portfolios may at times advertise, the
performance of the Fund by comparing it to the performance of other mutual funds
with comparable investment objectives and policies, which performance may be
contained in various unmanaged mutual fund or market indices or rankings such as
those prepared by Dow Jones & Co., Inc. and Standard & Poor's Corporation, in
publications issued by Lipper Analytical Services, Inc., and in the following
publications: IBC's Money Fund Reports, Value Line Mutual Fund Survey,
Morningstar, CDA/Wiesenberger, Money Magazine, Forbes, Barron's, The Wall Street
Journal, The New York Times, Business Week, American Banker, Fortune,
Institutional Investor, U.S.A. Today and local newspapers. In addition, general
information about the Fund that appears in publications such as those mentioned
above may also be quoted or reproduced in advertisements, sales literature or in
reports to shareholders.
Performance is a function of the type and quality of instruments held in the
Fund's portfolio, operating expenses, and market conditions. Consequently,
performance will fluctuate and is not necessarily representative of future
results. Any fees charged by service providers with respect to customer accounts
for investing in shares of the Fund will not be reflected in performance
calculations.
Additional information regarding the performance of each fund of The Victory
Portfolios is included in The Victory Portfolios' annual and semi-annual reports
which are available without charge upon request by calling 800- KEY-FUND.
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- six series
portfolios. Some of the Victory Portfolios have been operating continuously
since 1983, when they were created under Massachusetts law as a Massachusetts
business trust although certain of its funds have a prior operating history from
their predecessor funds. On February 29, 1996, The Victory Portfolios converted
from a Massachusetts business trust to a Delaware business trust. The Victory
Portfolios' offices are located at 3435 Stelzer Road, Columbus, Ohio 43219-3035.
Overall responsibility for management of The Victory Portfolios rests with its
Board of Trustees, who are elected by the shareholders of The Victory
Portfolios.
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<PAGE>
INVESTMENT ADVISER
One of the Fund's most important contracts is with its investment adviser, Key
Asset Management Inc. ("KAM" or the "Adviser"), a New York corporation
registered as an investment adviser with the Securities and Exchange Commission.
KAM is a wholly owned subsidiary of KeyBank National Association ("KeyBank"), a
wholly-owned subsidiary of KeyCorp. Effective February 28, 1997, KAM became the
surviving corporation of the reorganization of four indirect investment adviser
subsidiaries of KeyCorp--KeyCorp Mutual Fund Advisers, Inc. ("Key Advisers"),
Society Asset Management, Inc. ("SAM"), Spears, Benzak, Salomon & Farrell, Inc.
("SBSF") and Applied Technologies, Inc. ("ATI"), each registered with the
Securities and Exchange Commission as an investment adviser. Key Advisers, SAM
and ATI were merged with and into SBSF, a New York corporation organized on
February 22, 1972. Pursuant to the terms of the reorganization SBSF changed its
name to Key Asset Management Inc. SAM, SBSF and ATI will continue to operate
under their existing names as separate divisions of KAM.
An advisory agreement allows the Adviser to hire employees of affiliates as
sub-advisers to the Funds. It also allows KAM to choose brokers or dealers to
handle the purchases and sales of a Fund's securities. Subject to Board
approval, Key Investments, Inc. (KII) and/or Key Clearing Corporation (KCC)may
act as clearing broker the Funds' security transactions in accordance with
procedures adopted by the Funds, and receive commissions or fees in connection
with their sevices to the Funds. Both KII and KCC are wholly-owned indirect
subsidiaries of KeyCorp and affiliates of the adviser. to February 28, 1997,
KeyCorp Mutual Fund Advisers, Inc. was the adviser and Society Asset Management,
Inc. (formerly the adviser) was the sub-adviser to each of the Funds. During the
fiscal year ended October 31, 1996, KeyCorp Mutual Fund Advisers, Inc. earned
investment advisory fees aggregating .31% of the average daily net assets of the
Fund.
For the services provided and expenses incurred pursuant to the investment
advisory agreement between The Victory Portfolios respecting the Fund, the
Adviser is entitled to receive a fee, computed daily and paid monthly, at an
annual rate of fifty-five one hundredths of one percent (.55%) of the average
daily net assets of the Fund. The advisory fees for the Fund have been
determined to be fair and reasonable in light of the services provided to the
Fund. The Adviser may periodically waive all or a portion of their advisory fee
with respect to the Fund. Prior to January, 1996, Society Asset Management, Inc.
served as investment adviser to the Fund. During the Fund's fiscal period ended
October 31, 1995, Society Asset Management, Inc. earned investment advisory fees
aggregating .42% of the average daily net assets of the Fund.
Under the investment advisory agreement between The Victory Portfolios, on
behalf of the Fund, and the Adviser (the "Investment Advisory Agreement"), the
Adviser may delegate a portion of its responsibilities to a sub-adviser.
The person primarily responsible for the investment management of the Fund as
well as his previous experience is as follows:
MANAGING FUND
PORTFOLIO MANAGER SINCE PREVIOUS EXPERIENCE
- - ------------------ ------------- -------------------
Robert H. Fernald March, 1994 Portfolio Manager and Managing Director,
Key Asset Management, Inc.; Portfolio
Manager with Key Asset Management Inc.
(formerly SAM) since 1993, and with
Society National Bank since 1992;
Portfolio Manager,Ameritrust Company
National Association 1991-1992.
- 21 -
<PAGE>
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 the Adviser or the Fund from compensating third parties for performing
such functions. The Adviser and its affiliates are subject to such banking laws
and regulations.
The Adviser believes that it may perform the investment advisory services for
the Fund contemplated by the Investment Advisory Agreement 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 the Adviser and its 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 the Adviser and its 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
BISYS Fund Services is the administrator , principal underwriter and Distributor
for the Fund.
The Administrator generally assists in all aspects of the Fund's administration
and operation. For expenses incurred and services provided as Administrator
pursuant to its management and administration agreement with The Victory
Portfolios, the Administrator receives a fee from the Fund, computed daily and
paid monthly, at an annual rate of fifteen one-hundredths of one percent (.15%)
of the Fund's average daily net assets. The Administrator may periodically waive
all or a portion of its administrative fee with respect to the Fund.
BISYS sells shares of the Fund as agent on behalf of The Victory Portfolios at
no cost to the Fund. The Adviser does not participate in nor is it responsible
for the underwriting of Fund shares.
TRANSFER AGENT
State Street Bank and Trust Company, 225 Franklin Street, Boston, MA 02110-3875
("State Street" or the "Transfer Agent") serve as the Transfer Agent for the
Fund, and receives a fee for such services based on various criteria, including
assets, transactions and number of accounts. Boston Financial Data Services,
Inc., Two Heritage Drive, Quincy, MA 02171 ("BFDS") is the dividend disbursing
agent and shareholder servicing agent for the Fund.
SHAREHOLDER SERVICING PLAN
The Victory Portfolios has adopted a Shareholder Servicing Plan for each class
of shares of the Fund. In accordance with the Shareholder Servicing Plan, the
Fund may enter into Shareholder Service Agreements under which the Fund pays
fees of up to .25% of the average daily net assets of each class for fees
incurred in connection with the personal service and maintenance of accounts
holding the shares of such class. Such agreements are entered into between The
Victory Portfolios and various shareholder servicing agents, including the
Distributor, Key Trust Company of Ohio, N.A. and its affiliates, and other
financial institutions and securities brokers (each, a "Shareholder Servicing
Agent"). Each Shareholder Servicing Agent generally will provide support
services to shareholders by establishing and maintaining accounts and records,
processing dividend and distribution payments, providing account information,
arranging for bank wires, responding to routine inquires, forwarding shareholder
communication,
- 22 -
<PAGE>
assisting in the processing of purchase, exchange and redemption requests, and
assisting shareholders in changing dividend options, account designations and
addresses. Shareholder Servicing Agents may periodically waive all or a portion
of their respective shareholder servicing fees with respect to the Fund.
FUND ACCOUNTANT
BISYS Fund Services Ohio, Inc., 3435 Stelzer Road, Columbus, OH 43219, provides
certain accounting services for the Fund pursuant to a Fund Accounting Agreement
and receives a fee for such services.
CUSTODIAN
Key Trust Company of Ohio, N.A., an affiliate of the Adviser serves as custodian
for the Fund and receives fees for the services it performs as custodian.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. serves as independent accountants to the Fund.
FUND COUNSEL
Kramer, Levin, Naftalis & Frankel serves as legal counsel to the Fund.
EXPENSES
For the fiscal year ended October 31, 1996, the Fund's total operating expenses
for Class A and Class B shares were 1.22% and 2.06%, respectively, of the Fund's
average daily net assets, excluding certain voluntary fee reductions or
reimbursements.
ADDITIONAL INFORMATION
The Victory Portfolios may issue an unlimited number of shares and classes of
the Fund. Shares of each class of the Fund participate equally in dividends and
distributions and have equal voting, liquidation and other rights. When issued
and paid for, shares will be fully paid and nonassessable by The Victory
Portfolios and will have no preference, conversion, exchange or preemptive
rights. Shareholders are entitled to one vote for each full share owned and
fractional votes for fractional shares owned. For those investors with qualified
trust accounts, the trustee will vote the shares at meetings of the Fund's
shareholders in accordance with the shareholder's instructions 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 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.
The Adviser and The Victory Portfolios have each adopted a Code of Ethics (the
"Codes") which require investment personnel (a) to pre-clear all personal
securities transactions, (b) to file reports regarding such transactions, and
(c) to refrain from personally engaging in (i) short-term trading of a security,
(ii) transactions involving a security within seven days of a Fund transaction
involving the same security, and (iii) transactions involving securities being
considered for investment by a Victory fund. The Codes also prohibit investment
personnel from purchasing securities in an initial public offering. Personal
trading reports are reviewed periodically by the Adviser and the Board of
Trustees reviews their Codes and any substantial violations of the Codes.
Violations of the Codes may result in censure, monetary penalties, suspension or
termination of employment.
- 23 -
<PAGE>
DELAWARE LAW
On February 29, 1996, The Victory Portfolios converted 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 and 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 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.
In the unlikely event a shareholder is held personally liable for The Victory
Portfolios' obligations, The Victory Portfolios will be required to use its
property to protect or compensate the shareholder. On request, The Victory
Portfolios will defend any claim made and pay any judgment against a shareholder
for any act or obligation of
The Victory Portfolios. Therefore, financial loss resulting from liability as a
shareholder will occur only if The Victory Portfolios itself cannot meet its
obligations to indemnify shareholders and pay judgments against them.
Delaware law authorizes electronic or telephone communications between
shareholders and The Victory Portfolios. Under Delaware law, The Victory
Portfolios have the flexibility to respond to future business contingencies. For
example, the Trustees have the power to incorporate The Victory Portfolios, to
merge or consolidate it with another entity, to cause each fund to become a
separate trust, and to change the Victory Portfolio's domicile without a
shareholder vote. This flexibility could help reduce the expense and frequency
of future shareholder meetings for non-investment related issues.
MISCELLANEOUS
As of the date of this Prospectus, the Fund offers only the classes of shares
that are offered by this Prospectus. Subsequent to the date of this Prospectus,
the Fund may offer additional classes of shares through a separate prospectus.
Any such additional classes may have different sales charges and other expenses,
which would affect investment performance. Further information may be obtained
by contacting your Investment Professional or by calling 800- KEY-FUND.
Shareholders will receive Semi-Annual Reports, which are unaudited, and Annual
Reports, which are audited by independent public accountants ("Reports"),
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 period,
is incorporated herein by reference. The Victory Portfolios may include
information in their 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 period and to provide the views of the Adviser and/or The Victory
Portfolios' officers regarding expected trends and strategies.
The Fund intends to eliminate duplicate mailings of Reports to an address at
which more than one shareholder of record with the same last name has indicated
that mail is to be delivered. Shareholders may receive additional copies of any
Reports at no cost by writing to the Fund at the address below.
Inquiries regarding The Victory Portfolios or the Fund may be directed in
writing to The Victory Portfolios at the Victory Funds , P.O. Box 8527, Boston,
MA 02266-8527, or by telephone, toll-free, at 800- KEY-FUND.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE VICTORY
PORTFOLIOS OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING
BY THE VICTORY PORTFOLIOS OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE.
- 24 -
<PAGE>
Rule 497(c)
Registration No. 33-8982
STATEMENT OF ADDITIONAL INFORMATION
THE VICTORY PORTFOLIOS
The Victory Balanced Fund
The Victory Diversified Stock Fund
The Victory Financial Reserves Fund
The Victory Fund For Income
The Victory Government Mortgage Fund
The Victory Growth Fund
The Victory Institutional Money Market Fund
The Victory Intermediate Income Fund
The Victory International Growth Fund
The Victory Investment Quality Bond Fund
The Victory Lakefront Fund
The Victory Limited Term Income Fund
The Victory National Municipal Bond Fund
The Victory New York Tax-Free Fund
The Victory Ohio Municipal Bond Fund
The Victory Ohio Municipal Money Market Fund
The Victory Ohio Regional Stock Fund
The Victory Prime Obligations Fund
The Victory Real Estate Investment Fund
The Victory Special Growth Fund
The Victory Special Value Fund
The Victory Stock Index Fund
The Victory Tax-Free Money Market Fund
The Victory U.S. Government Obligations Fund
The Victory Value Fund
March 1, 1997
<PAGE>
This Statement of Additional Information is not a prospectus, but should be read
in conjunction with each prospectus of The Victory Portfolios (individually, a
"Prospectus," and collectively, the "Prospectuses"), each of which is dated the
same date as the date hereof. This Statement of Additional Information is
incorporated by reference in its entirety into the Prospectuses. Copies of the
Prospectuses may be obtained by writing The Victory Portfolios at P.O Box 8527,
Boston, MA 02266-8527, or by calling toll free 800-KEY FUND(R) or 800-539-3863.
INVESTMENT ADVISER
Key Asset Management Inc.
ADMINISTRATOR
BISYS Fund Services
DISTRIBUTOR
BISYS Fund Services
TRANSFER AGENT
State Street Bank and Trust Company
DIVIDEND DISBURSING AGENT AND SHAREHOLDER SERVICING AGENT
Boston Financial and Data Services, Inc.
CUSTODIAN
Key Trust Company of Ohio, N.A.
INDEPENDENT CERTIFIED ACCOUNTANTS
Coopers & Lybrand L.L.P.
COUNSEL
Kramer, Levin, Naftalis & Frankel
<PAGE>
Table of Contents
INVESTMENT OBJECTIVES AND INVESTMENT POLICIES AND LIMITATIONS................ 9
THE VICTORY BALANCED FUND.................................................... 9
THE VICTORY DIVERSIFIED STOCK FUND........................................... 9
THE VICTORY FINANCIAL RESERVES FUND......................................... 10
THE VICTORY FUND FOR INCOME................................................. 11
THE VICTORY GOVERNMENT MORTGAGE FUND........................................ 11
THE VICTORY GROWTH FUND..................................................... 12
THE VICTORY INSTITUTIONAL MONEY MARKET FUND................................. 12
THE VICTORY INTERMEDIATE INCOME FUND........................................ 13
THE VICTORY INTERNATIONAL GROWTH FUND....................................... 14
THE VICTORY INVESTMENT QUALITY BOND FUND.................................... 14
THE VICTORY LAKEFRONT FUND.................................................. 15
THE VICTORY LIMITED TERM INCOME FUND........................................ 16
THE VICTORY NATIONAL MUNICIPAL BOND FUND.................................... 17
THE VICTORY NEW YORK TAX-FREE FUND.......................................... 17
THE VICTORY OHIO MUNICIPAL BOND FUND........................................ 18
THE VICTORY OHIO MUNICIPAL MONEY MARKET FUND................................ 18
THE VICTORY OHIO REGIONAL STOCK FUND........................................ 19
THE VICTORY PRIME OBLIGATIONS FUND.......................................... 19
THE VICTORY REAL ESTATE INVESTMENT FUND..................................... 20
THE VICTORY SPECIAL GROWTH FUND............................................. 21
THE VICTORY SPECIAL VALUE FUND.............................................. 21
THE VICTORY STOCK INDEX FUND................................................ 22
THE VICTORY TAX-FREE MONEY MARKET FUND...................................... 23
THE VICTORY U.S. GOVERNMENT OBLIGATIONS FUND................................ 23
THE VICTORY VALUE FUND...................................................... 24
FUNDAMENTAL RESTRICTIONS OF THE FUNDS....................................... 25
NON-FUNDAMENTAL RESTRICTIONS OF THE FUNDS................................... 33
INSTRUMENTS IN WHICH THE FUNDS CAN INVEST................................... 36
Eligible Securities for Money Market Funds......................... 36
U.S. Corporate Debt Obligations.................................... 36
Short-Term Obligations..............................................37
Short-Term Corporate Obligations....................................37
Demand Features.....................................................37
Bankers' Acceptances............................................... 37
Certificates of Deposit............................................ 37
Eurodollar Certificates of Deposit................................. 37
Yankee Certificates of Deposit..................................... 38
Eurodollar Time Deposits........................................... 38
Canadian Time Deposits............................................. 38
Commercial Paper................................................... 38
International Bonds................................................ 38
Foreign Debt Securities ........................................... 38
Repurchase Agreements.............................................. 38
Reverse Repurchase Agreements...................................... 39
Short-Term Funding Agreements...................................... 39
Variable Amount Master Demand Notes................................ 39
Variable Rate Demand Notes......................................... 39
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<PAGE>
Variable and Floating Rate Notes................................... 39
Extendible Debt Securities......................................... 40
Receipts........................................................... 40
Zero-Coupon Bonds.................................................. 40
High-Yield Debt Securities......................................... 41
Loans and Other Direct Debt Instruments............................ 41
Securities of Other Investment Companies........................... 42
U.S. Government Obligations........................................ 42
Municipal Securities............................................... 42
Ohio Tax-Exempt Obligations........................................ 45
Municipal Lease Obligations........................................ 46
Lower-Rated Municipal Securities................................... 47
Federally Taxable Obligations...................................... 47
Refunded Municipal Bonds........................................... 47
When-Issued Securities............................................. 48
Delayed-Delivery Transactions...................................... 48
Mortgage-Backed Securities......................................... 48
In General................................................ 48
U.S. Government Mortgage-Backed Securities................ 49
GNMA Certificates......................................... 49
FHLMC Securities.......................................... 49
FNMA Securities........................................... 49
Collateralized Mortgage Obligations....................... 50
Non-Government Mortgage-Backed Securities................. 50
Asset-Backed Securities............................................ 50
Futures and Options................................................ 51
Futures Contracts......................................... 51
Restrictions on the Use of Futures Contracts.............. 52
Risk Factors in Futures Transactions...................... 53
Options................................................... 53
Puts...................................................... 54
Illiquid Investments...................................... 54
Restricted Securities..................................... 55
Securities Lending Transactions........................... 55
Short Sales Against-the-Box........................................ 55
Investment-Grade and High Quality Investments...................... 56
Participation Interests............................................ 56
Warrants........................................................... 56
Refunding Contracts................................................ 56
Standby Commitments................................................ 56
Foreign Investment................................................. 56
Miscellaneous Securities........................................... 57
Additional Information Concerning Ohio Issuers..................... 58
Additional Information Concerning New York Issuers................. 61
DETERMINING NET ASSET VALUE FOR THE MONEY MARKET FUNDS...................... 81
ALUATION OF PORTFOLIOS SECURITIES FOR THE MONEY MARKET FUNDS...............132
VALUATION OF PORTFOLIO SECURITIES FOR THE TAXABLE BOND FUNDS
AND THE TAX-FREE BOND FUNDS.................................................133
- 4 -
<PAGE>
PERFORMANCE OF THE MONEY MARKET FUNDS....................................... 83
PERFORMANCE OF THE NON-MONEY MARKET FUNDS................................... 86
ADDITIONAL PURCHASE, EXCHANGE, AND REDEMPTION INFORMATION................... 96
DIVIDENDS AND DISTRIBUTIONS................................................. 99
TAXES.......................................................................100
TRUSTEES AND OFFICERS.......................................................108
ADVISORY AND OTHER CONTRACTS................................................112
ADDITIONAL INFORMATION......................................................125
APPENDIX....................................................................135
- 5 -
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
The Victory Portfolios (the "Victory Portfolios") is an open-end management
investment company. The Victory Portfolios consists of 26 series (each a "Fund,"
and collectively, the "Funds") of units of beneficial interest ("shares"). The
outstanding shares represent interests in the 26 separate investment portfolios.
This Statement of Additional Information (the "SAI") relates to the shares of 25
of the 26 Funds and their respective classes, and are listed below. Much of the
information contained in this Statement of Additional Information expands on
subjects discussed in the Prospectuses. Capitalized terms not defined herein are
used as defined in the Prospectuses. No investment in shares of a Fund should be
made without first reading that Fund's Prospectus.
THE VICTORY PORTFOLIOS:
The Victory Balanced Fund
Class A Shares
Class B Shares
The Victory Diversified Stock Fund
Class A Shares
Class B Shares
The Victory Financial Reserves Fund
The Victory Fund For Income Fund
The Victory Government Mortgage Fund
The Victory Growth Fund
The Victory Institutional Money Market Fund
Select Shares
Investor Shares
The Victory Intermediate Income Fund
The Victory International Growth Fund
Class A Shares
Class B Shares
The Victory Investment Quality Bond Fund
The Victory Lakefront Fund
The Victory Limited Term Income Fund
The Victory National Municipal Bond Fund
Class A Shares
Class B Shares
The Victory New York Tax-Free Fund
Class A Shares
Class B Shares
The Victory Ohio Municipal Bond Fund
The Victory Ohio Municipal Money Market Fund
The Victory Ohio Regional Stock Fund
Class A Shares
Class B Shares
The Victory Prime Obligations Fund
The Victory Real Estate Investment Fund
The Victory Special Growth Fund
The Victory Special Value Fund
Class A Shares
Class B Shares
- 6 -
<PAGE>
The Victory Stock Index Fund
The Victory Tax-Free Money Market Fund
The Victory U.S. Government Obligations Fund
Select Shares
Investor Shares
The Victory Value Fund
- 7 -
<PAGE>
INVESTMENT OBJECTIVES AND INVESTMENT POLICIES AND LIMITATIONS
Each Fund's investment objective is fundamental and may not be changed without a
vote of the holders of a majority of the Fund's outstanding voting securities.
There can be no assurance that a Fund will achieve its investment objective.
ADDITIONAL INFORMATION REGARDING FUND INVESTMENTS.
The following policies and limitations supplement the Funds' investment policies
set forth in the Prospectuses. The Funds' investments in the following
securities and other financial instruments are subject to the other investment
policies and limitations described in the Prospectuses and this SAI.
Unless otherwise noted in the prospectus or this SAI, a Fund may invest no more
than 5% of its total assets in any of the securities or financial instruments
described below (unless the context requires otherwise).
Unless otherwise noted, whenever an investment policy or limitation states a
maximum percentage of a 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 Investment Company Act of 1940 (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 a
Fund's investment policies and limitations. If the value of a Fund's holdings of
illiquid securities at any time exceeds the percentage limitation applicable at
the time of acquisition due to subsequent fluctuations in value or other
reasons, the Trustees will consider what actions, if any, are appropriate to
maintain adequate liquidity.
The investment policies of a Fund may be changed without an affirmative vote of
the holders of a majority of that Fund's outstanding voting securities unless
(1) a policy expressly is deemed to be a fundamental policy of the Fund or (2) a
policy expressly is deemed to be changeable only by such majority vote. A Fund
may, following notice to its shareholders, take advantage of other investment
practices which presently are not 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 a
Fund's Prospectus.
The following sections list each Fund's investment objective and its investment
policies, limitations, and restrictions. The securities in which the Funds can
invest and the risks associated with these securities are discussed in the
section "Instruments in Which the Funds Can Invest."
DEFINED TERMS. All capitalized terms listed in a Fund's Investment Policies and
Limitations section referring to permissible investments are described in the
section "Instruments in Which the Funds Can Invest."
The following terms are used throughout the Investment Objective and Investment
Policies and Limitations sections.
S&P: Standard & Poor's Ratings Group
Moody's: Moody's Investors Service, Inc.
Fitch: Fitch Investors Service, Inc.
NRSRO: Nationally Recognized Statistical Ratings Organization
- 8 -
<PAGE>
THE VICTORY BALANCED FUND
The Balanced Fund can invest in:
o U.S. Equity Securities
o U.S. Corporate Debt Obligations
o Short-Term Obligations
o Bankers' Acceptances
o Certificates of Deposit
o Eurodollar Certificates of Deposit
o Yankee Certificates of Deposit
o Eurodollar Time Deposits
o Canadian Time Deposits
o Commercial Paper
o Repurchase Agreements
o Reverse Repurchase Agreements
o Variable Amount Master Demand Notes
o Variable and Floating Rate Notes
o Receipts
o Zero-Coupon Bonds
o Securities of Other Investment Companies
o U.S. Government Obligations
o When-Issued Securities
o Delayed-Delivery Transactions
o U.S. Government Mortgage-Backed Securities
o GNMA Certificates
o FHLMC Securities
o FNMA Securities
o Futures Contracts
o Options
o Illiquid Investments
o Restricted Securities
o Securities Lending Transactions
o Investment-Grade and High-Quality Investments
o Foreign Investments
o Miscellaneous Securities
THE VICTORY DIVERSIFIED STOCK FUND
The Diversified Stock Fund can invest in:
o U.S. Equity Securities
o Bankers' Acceptances
o Certificates of Deposit
o Eurodollar Certificates of Deposit
o Yankee Certificates of Deposit
o Eurodollar Time Deposits
o Canadian Time Deposits
o Commercial Paper
o Repurchase Agreements
o Reverse Repurchase Agreements
- 9 -
<PAGE>
o Variable Amount Master Demand Notes
o Variable and Floating Rate Notes
o Receipts
o Zero-Coupon Bonds
o Securities of Other Investment Companies
o U.S. Government Obligations
o When-Issued Securities
o Delayed-Delivery Transactions
o Options
o Illiquid Investments
o Restricted Securities
o Securities Lending Transactions
o Investment-Grade and High-Quality Investments
o Foreign Investments
o Miscellaneous Securities
THE VICTORY FINANCIAL RESERVES FUND
The Financial Reserves Fund can invest in:
o Eligible Securities for Money Market Funds
o U.S. Corporate Debt Obligations
o Short-Term Corporate Obligations
o Bankers' Acceptances
o Certificates of Deposit
o Eurodollar Certificates of Deposit
o Yankee Certificates of Deposit
o Eurodollar Time Deposits
o Canadian Time Deposits
o Commercial Paper
o Repurchase Agreements
o Reverse Repurchase Agreements
o Short-Term Funding Agreements
o Variable Amount Master Demand Notes
o Variable and Floating Rate Notes
o Receipts
o Zero-Coupon Bonds
o Securities of Other Investment Companies
o U.S. Government Obligations
o When-Issued Securities
o Delayed-Delivery Transactions
o U.S. Government Mortgage-Backed Securities
o GNMA Certificates
o FHLMC Securities
o FNMA Securities
o Non-Governmental Mortgage-Backed Securities
o Illiquid Investments
o Restricted Securities
o Securities Lending Transactions
o Investment-Grade and High-Quality Investments
o Foreign Investments
- 10 -
<PAGE>
THE VICTORY FUND FOR INCOME
The Fund for Income can invest in:
o U.S. Corporate Debt Obligations
o Bankers' Acceptances
o Certificates of Deposit
o Commercial Paper
o Repurchase Agreements
o Reverse Repurchase Agreements
o Securities of Other Investment Companies
o U.S. Government Obligations
o When-Issued Securities
o Delayed-Delivery Transactions
o Mortgage-Backed Securities
o U.S. Government Mortgage-Backed Securities
o GNMA Certificates
o FHLMC Securities
o FNMA Securities
o Collateralized Mortgage Obligations
o Non-Governmental Mortgage-Backed Securities
o Illiquid Investments
o Restricted Securities
o Securities Lending Transactions
THE VICTORY GOVERNMENT MORTGAGE FUND
The Government Mortgage Fund can invest in:
o Bankers' Acceptances
o Certificates of Deposit
o Eurodollar Certificates of Deposit
o Yankee Certificates of Deposit
o Eurodollar Time Deposits
o Canadian Time Deposits
o Repurchase Agreements
o Reverse Repurchase Agreements
o Short-Term Funding Agreements
o Variable Amount Master Demand Notes
o Variable and Floating Rate Notes
o Receipts
o Securities of Other Investment Companies
o U.S. Government Obligations
o When-Issued Securities
o Delayed-Delivery Transactions
o Mortgage-Backed Securities
o GNMA Certificates
o FHLMC Securities
o FNMA Securities
o Collateralized Mortgage Obligations
o Futures Contracts
- 11 -
<PAGE>
o Options
o Illiquid Investments
o Restricted Securities
o Securities Lending Transactions
THE VICTORY GROWTH FUND
The Growth Fund can invest in:
o U.S. Equity Securities
o U.S. Corporate Debt Obligations
o Short-Term Corporate Obligations
o Bankers' Acceptances
o Certificates of Deposit
o Eurodollar Certificates of Deposit
o Yankee Certificates of Deposit
o Eurodollar Time Deposits
o Canadian Time Deposits
o Commercial Paper
o Repurchase Agreements
o Reverse Repurchase Agreements
o Variable Amount Master Demand Notes
o Variable and Floating Rate Notes
o Receipts
o Zero-Coupon Bonds
o Securities of Other Investment Companies
o U.S. Government Obligations
o When-Issued Securities
o Delayed-Delivery Transactions
o Futures and Options
o Futures Contracts
o Options
o Puts
o Securities Lending Transactions
o Investment-Grade and High-Quality Investments
o Foreign Investments
o Illiquid Investments
o Restricted Securities
THE VICTORY INSTITUTIONAL MONEY MARKET FUND
The Institutional Money Market Fund can invest in:
o Eligible Securities for Money Market Funds
o Short-Term Corporate Obligations
o Bankers' Acceptances
o Certificates of Deposit
o Eurodollar Certificates of Deposit
o Yankee Certificates of Deposit
o Eurodollar Time Deposits
o Canadian Time Deposits
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o Commercial Paper
o Repurchase Agreements
o Reverse Repurchase Agreements
o Short-Term Funding Agreements
o Variable Amount Master Demand Notes
o Variable Rate Demand Notes
o Variable and Floating Rate Notes
o Extendible Debt Securities
o Receipts
o Zero-Coupon Bonds
o Securities of Other Investment Companies
o U.S. Government Obligations
o When-Issued Securities
o Delayed-Delivery Transactions
o Mortgage-Backed Securities
o U.S. Government Mortgage-Backed Securities
o GNMA Certificates
o FHLMC Securities
o FNMA Securities
o Illiquid Investments
o Restricted Securities
o Securities Lending Transactions
o Participation Interests
THE VICTORY INTERMEDIATE INCOME FUND
The Intermediate Income Fund can invest in:
o U.S. Corporate Debt Obligations
o Short-Term Obligations
o Bankers' Acceptances
o Certificates of Deposit
o Eurodollar Certificates of Deposit
o Yankee Certificates of Deposit
o Eurodollar Time Deposits
o Canadian Time Deposits
o International Bonds
o Repurchase Agreements
o Reverse Repurchase Agreements
o Variable Amount Master Demand Notes
o Variable and Floating Rate Notes
o Receipts
o Zero-Coupon Bonds
o High-Yield Debt Securities
o Loans and Other Direct Debt Instruments
o Securities of Other Investment Companies
o U.S. Government Obligations
o Municipal Securities
o When-Issued Securities
o Delayed-Delivery Transactions
o Mortgage-Backed Securities
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<PAGE>
o U.S. Government Mortgage-Backed Securities
o GNMA Certificates
o FHLMC Securities
o FNMA Securities
o Collateralized Mortgage Obligations
o Non-Governmental Mortgage-Backed Securities
o Futures and Options
o Futures Contracts
o Options
o Illiquid Investments
o Restricted Securities
o Securities Lending Transactions
o Investment-Grade and High-Quality Investments
o Foreign Investments
o Miscellaneous Securities
THE VICTORY INTERNATIONAL GROWTH FUND
The International Growth Fund can invest in:
o Foreign Investments
o Bankers' Acceptances
o Certificates of Deposit
o Eurodollar Certificates of Deposit
o Yankee Certificates of Deposit
o Eurodollar Time Deposits
o Canadian Time Deposits
o Commercial Paper
o Repurchase Agreements
o Reverse Repurchase Agreements
o Variable Amount Master Demand Notes
o Variable and Floating Rate Notes
o Receipts
o Zero-Coupon Bonds
o Securities of Other Investment Companies
o U.S. Government Obligations
o When-Issued Securities
o Delayed-Delivery Transactions
o Futures Contracts
o Options
o Illiquid Investments
o Restricted Securities
o Securities Lending Transactions
THE VICTORY INVESTMENT QUALITY BOND FUND
The Investment Quality Bond Fund can invest in:
o U.S. Corporate Debt Obligations
o Bankers' Acceptances
o Certificates of Deposit
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o Eurodollar Certificates of Deposit
o Yankee Certificates of Deposit
o Eurodollar Time Deposits
o Canadian Time Deposits
o Commercial Paper
o International Bonds
o Repurchase Agreements
o Reverse Repurchase Agreements
o Variable Amount Master Demand Notes
o Variable and Floating Rate Notes
o Receipts
o Zero-Coupon Bonds
o High-Yield Debt Securities
o Loans and Other Direct Debt Instruments
o Securities of Other Investment Companies
o U.S. Government Obligations
o Municipal Securities
o When-Issued Securities
o Delayed-Delivery Transactions
o Mortgage-Backed Securities
o U.S. Government Mortgage-Backed Securities
o GNMA Certificates
o FHLMC Securities
o FNMA Securities
o Collateralized Mortgage Obligations
o Non-Governmental Mortgage-Backed Securities
o Futures and Options
o Futures Contracts
o Options
o Illiquid Investments
o Restricted Securities
o Securities Lending Transactions
o Investment-Grade and High-Quality Investments
o Warrants
o Foreign Investments
o Miscellaneous Securities
THE VICTORY LAKEFRONT FUND
The Lakefront Fund can invest in:
o U.S. Equity Securities
o U.S. Corporate Debt Obligations
o Short-Term Obligations
o Bankers' Acceptances
o Certificates of Deposit
o Eurodollar Certificates of Deposit
o Yankee Certificates of Deposit
o Eurodollar Time Deposits
o Canadian Time Deposits
o Commercial Paper
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<PAGE>
o Repurchase Agreements
o Reverse Repurchase Agreements
o Variable Amount Master Demand Notes
o Variable and Floating Rate Notes
o Receipts
o Zero-Coupon Bonds
o Securities of Other Investment Companies
o U.S. Government Obligations
o When-Issued Securities
o Delayed-Delivery Transactions
o Options
o Illiquid Investments
o Restricted Securities
o Securities Lending Transactions
o Investment-Grade and High-Quality Investments
o Warrants
o Foreign Investments
THE VICTORY LIMITED TERM INCOME FUND
The Limited Term Income Fund can invest in:
o U.S. Corporate Debt Obligations
o Short-Term Obligations
o Bankers' Acceptances
o Certificates of Deposit
o Eurodollar Certificates of Deposit
o Yankee Certificates of Deposit
o Eurodollar Time Deposits
o Canadian Time Deposits
o Commercial Paper
o International Bonds
o Foreign Debt Securities
o Repurchase Agreements
o Reverse Repurchase Agreements
o Variable Amount Master Demand Notes
o Variable and Floating Rate Notes
o Receipts
o Zero-Coupon Bonds
o Securities of Other Investment Companies
o U.S. Government Obligations
o Municipal Securities
o When-Issued Securities
o Delayed-Delivery Transactions
o Mortgage-Backed Securities
o U.S. Government Mortgage-Backed Securities
o GNMA Certificates
o FHLMC Securities
o FNMA Securities
o Collateralized Mortgage Obligations
o Non-Governmental Mortgage-Backed Securities
o Asset-Backed Securities
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<PAGE>
o Futures Contracts
o Options
o Illiquid Investments
o Restricted Securities
o Securities Lending Transactions
o Miscellaneous Securities
THE VICTORY NATIONAL MUNICIPAL BOND FUND
The National Municipal Bond Fund can invest in:
o Repurchase Agreements
o Reverse Repurchase Agreements
o Variable and Floating Rate Notes
o Zero-Coupon Bonds
o Securities of Other Investment Companies
o Municipal Securities
o Municipal Lease Obligations
o Lower-Rated Municipal Securities
o Federally Taxable Obligations
o When-Issued Securities
o Delayed-Delivery Transactions
o Futures and Options
o Futures Contracts
o Options
o Illiquid Investments
o Restricted Securities
o Securities Lending Transactions
o Refunding Contracts
o Standby Commitments
THE VICTORY NEW YORK TAX-FREE FUND
The New York Tax-Free Fund can invest in:
o New York Municipal Obligations
o Repurchase Agreements
o Reverse Repurchase Agreements
o Variable Rate Demand Notes
o Variable and Floating Rate Notes
o Zero-Coupon Bonds
o Securities of Other Investment Companies
o Municipal Securities
o Municipal Lease Obligations
o When-Issued Securities
o Delayed-Delivery Transactions
o Illiquid Investments
o Restricted Securities
o Refunding Contracts
o Standby Commitments
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<PAGE>
THE VICTORY OHIO MUNICIPAL BOND FUND
The Ohio Municipal Bond Fund can invest in:
o Bankers' Acceptances
o Certificates of Deposit
o Eurodollar Certificates of Deposit
o Yankee Certificates of Deposit
o Eurodollar Time Deposits
o Canadian Time Deposits
o Commercial Paper
o Repurchase Agreements
o Reverse Repurchase Agreements
o Variable and Floating Rate Notes
o Receipts
o Securities of Other Investment Companies
o U.S. Government Obligations
o Municipal Securities
o Ohio Tax-Exempt Obligations
o Federally Taxable Obligations
o Refunded Municipal Bonds
o When-Issued Securities
o Delayed-Delivery Transactions
o Mortgage-Backed Securities
o U.S. Government Mortgage-Backed Securities
o GNMA Certificates
o FHLMC Securities
o FNMA Securities
o Collateralized Mortgage Obligations
o Non-Governmental Mortgage-Backed Securities
o Futures and Options
o Futures Contracts
o Options
o Puts
o Illiquid Investments
o Restricted Securities
o Standby Commitments
o Ohio Municipal Obligations
THE VICTORY OHIO MUNICIPAL MONEY MARKET FUND
The Ohio Municipal Money Market Fund can invest in:
o Eligible Securities for Money Market Funds
o Repurchase Agreements
o Reverse Repurchase Agreements
o Variable Rate Demand Notes
o Securities of Other Investment Companies
o Ohio Tax-Exempt Obligations
o When-Issued Securities
o Delayed-Delivery Transactions
o Illiquid Investments
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o Restricted Securities
o Warrants
o Ohio Municipal Obligations
THE VICTORY OHIO REGIONAL STOCK FUND
The Ohio Regional Stock Fund can invest in:
o Short-Term Corporate Obligations
o Bankers' Acceptances
o Certificates of Deposit
o Eurodollar Certificates of Deposit
o Yankee Certificates of Deposit
o Eurodollar Time Deposits
o Canadian Time Deposits
o Commercial Paper
o Repurchase Agreements
o Reverse Repurchase Agreements
o Variable Amount Master Demand Notes
o Variable and Floating Rate Notes
o Receipts
o Zero-Coupon Bonds
o Securities of Other Investment Companies
o U.S. Government Obligations
o When-Issued Securities
o Delayed-Delivery Transactions
o Options
o Illiquid Investments
o Restricted Securities
o Securities Lending Transactions
o High-Quality Investments
o Foreign Investments
THE VICTORY PRIME OBLIGATIONS FUND
The Prime Obligations Fund can invest in:
o Eligible Securities for Money Market Funds
o Short-Term Corporate Obligations
o Bankers' Acceptances
o Certificates of Deposit
o Eurodollar Certificates of Deposit
o Yankee Certificates of Deposit
o Eurodollar Time Deposits
o Canadian Time Deposits
o Commercial Paper
o Repurchase Agreements
o Reverse Repurchase Agreements
o Short-Term Funding Agreements
o Variable Amount Master Demand Notes
o Variable Rate Demand Notes
o Variable and Floating Rate Notes
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<PAGE>
o Receipts
o Zero-Coupon Bonds
o Securities of Other Investment Companies
o U.S. Government Obligations
o When-Issued Securities
o Delayed-Delivery Transactions
o Mortgage-Backed Securities
o U.S. Government Mortgage-Backed Securities
o GNMA Certificates
o FHLMC Securities
o FNMA Securities
o Non-Government Mortgage-Backed Securities
o Illiquid Investments
o Restricted Securities
o Securities Lending Transactions
o Participation Interests
o Foreign Investments
THE VICTORY REAL ESTATE INVESTMENT FUND
The Real Estate Investment Fund can invest in:
o U.S. Equity Securities of companies with real estate-related interests
o U.S. Corporate Debt Obligations
o Bankers' Acceptances
o Certificates of Deposit
o Eurodollar Certificates of Deposit
o Yankee Certificates of Deposit
o Eurodollar Time Deposits
o Canadian Time Deposits
o Commercial Paper
o Repurchase Agreements
o Reverse Repurchase Agreements
o Variable Amount Master Demand Notes
o Variable and Floating Rate Notes
o Receipts
o Zero-Coupon Bonds
o Securities of Other Investment Companies
o U.S. Government Obligations
o When-Issued Securities
o Delayed-Delivery Transactions
o Puts
o Illiquid Investments
o Restricted Securities
o Securities Lending Transactions
o Warrants
o Foreign Investments
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<PAGE>
THE VICTORY SPECIAL GROWTH FUND
The Special Growth Fund can invest in:
o U.S. Equity Securities
o U.S. Corporate Debt Obligations
o Short-Term Obligations
o Bankers' Acceptances
o Certificates of Deposit
o Eurodollar Certificates of Deposit
o Yankee Certificates of Deposit
o Eurodollar Time Deposits
o Canadian Time Deposits
o Commercial Paper
o Repurchase Agreements
o Reverse Repurchase Agreements
o Variable Amount Master Demand Notes
o Variable and Floating Rate Notes
o Receipts
o Zero-Coupon Bonds
o High-Yield Debt Securities
o Loans and Other Direct Debt Instruments
o Securities of Other Investment Companies
o U.S. Government Obligations
o When-Issued Securities
o Delayed-Delivery Transactions
o Futures Contracts
o Options
o Puts
o Illiquid Investments
o Restricted Securities
o Securities Lending Transactions
o High-Quality Investments
o Warrants
o Foreign Investments
o Miscellaneous Securities
The Special Growth Fund also may invest in the following securities: ADRs,
Bankers Acceptances, certificates of deposit, commercial paper, foreign
securities, loans and other direct debt instruments, master demand notes,
receipts, repurchase agreements, reverse repurchase agreements, variable and
floating rate securities, warrants, when-issued securities and zero-coupon
bonds.
THE VICTORY SPECIAL VALUE FUND
The Special Value Fund can invest in:
o U.S. Equity Securities
o Short-Term Corporate Obligations
o Bankers' Acceptances
o Certificates of Deposit
o Eurodollar Certificates of Deposit
o Yankee Certificates of Deposit
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<PAGE>
o Eurodollar Time Deposits
o Canadian Time Deposits
o Commercial Paper
o Foreign Debt Securities
o Repurchase Agreements
o Reverse Repurchase Agreements
o Variable Amount Master Demand Notes
o Variable and Floating Rate Notes
o Receipts
o Zero-Coupon Bonds
o Securities of Other Investment Companies
o U.S. Government Obligations
o When-Issued Securities
o Delayed-Delivery Transactions
o Futures Contracts
o Options
o Illiquid Investments
o Restricted Securities
o Securities Lending Transactions
o Investment-Grade and High-Quality Investments
o Foreign Investments
THE VICTORY STOCK INDEX FUND
The Stock Index Fund can invest in:
o U.S. Equity Securities
o Short-Term Corporate Obligations
o Bankers' Acceptances
o Certificates of Deposit
o Eurodollar Certificates of Deposit
o Yankee Certificates of Deposit
o Eurodollar Time Deposits
o Canadian Time Deposits
o Commercial Paper
o Repurchase Agreements
o Reverse Repurchase Agreements
o Variable Amount Master Demand Notes
o Variable and Floating Rate Notes
o Receipts
o Zero-Coupon Bonds
o Securities of Other Investment Companies
o U.S. Government Obligations
o When-Issued Securities
o Delayed-Delivery Transactions
o Futures and Options
o Futures Contracts
o Options
o Puts
o Illiquid Investments
o Restricted Securities
o Securities Lending Transactions
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<PAGE>
THE VICTORY TAX-FREE MONEY MARKET FUND
The Tax-Free Money Market Fund can invest in:
o Eligible Securities for Money Market Funds
o Short-Term Corporate Obligations
o Bankers' Acceptances
o Certificates of Deposit
o Eurodollar Certificates of Deposit
o Yankee Certificates of Deposit
o Eurodollar Time Deposits
o Canadian Time Deposits
o Commercial Paper
o Repurchase Agreements
o Reverse Repurchase Agreements
o Variable and Floating Rate Notes
o Extendible Debt Securities
o Zero-Coupon Bonds
o U.S. Government Obligations
o Securities of Other Investment Companies
o Municipal Securities
o Refunded Municipal Bonds
o When-Issued Securities
o Delayed-Delivery Transactions
o Mortgage-Backed Securities
o GNMA Certificates
o FHLMC Securities
o FNMA Securities
o Puts
o Illiquid Investments
o Securities Lending Transactions
o Participation Interests
o Federally Taxable Obligations
THE VICTORY U.S. GOVERNMENT OBLIGATIONS FUND
The U.S. Government Obligations Fund can invest in:
o Repurchase Agreements
o Reverse Repurchase Agreements
o U.S. Government Obligations
o When-Issued Securities
o Delayed-Delivery Transactions
o Mortgage-Backed Securities
o U.S. Government Mortgage-Backed Securities
o GNMA Certificates
o Illiquid Investments
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<PAGE>
THE VICTORY VALUE FUND
The Value Fund can invest in:
o U.S. Equity Securities
o Short-Term Corporate Obligations
o Bankers' Acceptances
o Certificates of Deposit
o Eurodollar Certificates of Deposit
o Yankee Certificates of Deposit
o Eurodollar Time Deposits
o Canadian Time Deposits
o Commercial Paper
o Repurchase Agreements
o Reverse Repurchase Agreements
o Variable Amount Master Demand Notes
o Variable and Floating Rate Notes
o Receipts
o Zero-Coupon Bonds
o Securities of Other Investment Companies
o U.S. Government Obligations
o When-Issued Securities
o Delayed-Delivery Transactions
o Futures and Options
o Futures Contracts
o Options
o Puts
o Illiquid Investments
o Restricted Securities
o Securities Lending Transactions
o Investment-Grade and High-Quality Investments
o Foreign Investments
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<PAGE>
FUNDAMENTAL RESTRICTIONS OF THE FUNDS
1. SENIOR SECURITIES
No fund may:
Issue any senior security (as defined in the Investment Company Act of 1940, as
amended (the "1940 Act")), except that (a) each Fund may engage in transactions
that may result in the issuance of senior securities to the extent permitted
under applicable regulations and interpretations of the 1940 Act or an exemptive
order; (b) each Fund may acquire other securities, the acquisition of which may
result in the issuance of a senior security, to the extent permitted under
applicable regulations or interpretations of the 1940 Act; (c) subject to the
restrictions set forth below, the Fund may borrow money as authorized by the
1940 Act.
2. UNDERWRITING
The Funds may not:
Underwrite securities issued by others, except to the extent that the Fund may
be considered an underwriter within the meaning of the Securities Act of 1933
(the "1933 Act") in the disposition of restricted securities.
3. BORROWING
The Balanced Fund, Diversified Stock Fund, Government Mortgage Fund, Growth
Fund, Intermediate Income Fund, International Growth Fund, Investment Quality
Bond Fund, Lakefront Fund, Limited Term Income Fund, New York Tax-Free Fund,
Ohio Municipal Bond Fund, Ohio Regional Stock Fund, Prime Obligations Fund, Real
Estate Investment Fund, Special Growth Fund, Special Value Fund, Stock Index
Fund, Tax-Free Money Market Fund, U.S. Government Obligations Fund and Value
Fund may not:
Borrow money, except that (a) each Fund may enter into commitments to purchase
securities in accordance with its investment program, including delayed-delivery
and when-issued securities and reverse repurchase agreements, provided that the
total amount of any such borrowing does not exceed 33 1/3 % of the Fund's total
assets; and (b) each Fund may borrow money for temporary or emergency purposes
in an amount not exceeding 5% of the value of its total assets at the time when
the loan is made. Any borrowings representing more than 5% of a Fund's total
assets must be repaid before the Fund may make additional investments.
The Financial Reserves Fund and Institutional Money Market Fund may not:
Borrow money, except (a) from a bank for temporary or emergency purposes (not
for leveraging or investment) or (b) by engaging in reverse repurchase
agreements, provided that (a) and (b) in combination ("borrowings") do not
exceed an amount equal to one third of the current value of its total assets
(including the amount borrowed) less liabilities (not including the amount
borrowed) at the time the borrowing is made. This fundamental limitation is
construed in conformity with the 1940 Act, and if at any time Fund borrowings
exceed an amount equal to 33 1/3 of the current value of the Fund's total assets
(including the amount borrowed) less liabilities (other than borrowings) at the
time the borrowing is made due to a decline in net assets, such borrowings will
be reduced within three days (not including Sundays and holidays) to the extent
necessary to comply with the 33 1/3% limitation.
The Fund for Income may not:
Borrow money, except for temporary or emergency purposes and not for investment
purposes, and then only in an amount not exceeding 5% of the value of its total
assets at the time of the borrowing.
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The National Municipal Bond Fund may not:
Borrow money, except that the Fund may borrow money from banks for temporary or
emergency purposes (not for leveraging or investment) and engage in reverse
repurchase agreements in an amount not exceeding 33 1/3% of the value of its
total assets (including the amount borrowed) less liabilities (other than
borrowings). Any borrowings that come to exceed this amount will be reduced
within three days (exclusive of Sundays and holidays) to the extent necessary to
comply with the 33 1/3% limitation.
The Ohio Municipal Money Market Fund:
(a) 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 (b) 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.
4. REAL ESTATE
The Balanced Fund, Diversified Stock Fund, Government Mortgage Fund, Growth
Fund, Intermediate Income Fund, International Growth Fund, Investment Quality
Bond Fund, Lakefront Fund, Limited Term Income Fund, Ohio Municipal Bond Fund,
Ohio Regional Stock Fund, Prime Obligations Fund, Special Growth Fund, Special
Value Fund, Stock Index Fund, Tax-Free Money Market Fund and Value Fund may not:
Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent each Fund from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business). Investments by the Funds in
securities backed by mortgages on real estate or in marketable securities of
companies engaged in such activities are not hereby precluded.
The National Municipal Bond Fund may not:
Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent each Fund from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business).
The Financial Reserves Fund may not:
Buy or sell real estate, commodities, or commodities (futures) contracts.
The Institutional Money Market Fund may not:
Buy or sell real estate, commodities, or commodity (futures) contracts or invest
in oil, gas or other mineral exploration or development programs.
The Intermediate Income Fund may not:
Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent each Fund from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business).
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<PAGE>
The Ohio Municipal Money Market 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.
The U.S. Government Obligations Fund may not:
Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments.
The Real Estate Investment Fund may not:
Purchase or sell real estate, except that the Fund may purchase securities
issued by companies in the real estate industry and will, as a matter of
fundamental policy, concentrate its investments in such securities.
5. LENDING
The Balanced Fund, Diversified Stock Fund, Government Mortgage Fund, Growth
Fund, Intermediate Income Fund, International Growth Fund, Investment Quality
Bond Fund, Lakefront Fund, Limited Term Income Fund, National Municipal Bond
Fund, Ohio Municipal Bond Fund, Ohio Regional Stock Fund, Prime Obligations
Fund, Real Estate Investment Fund, Special Growth Fund, Special Value Fund,
Stock Index Fund, Tax-Free Money Market Fund, U.S. Government Obligations Fund
and Value Fund may not:
Lend any security or make any other loan if, as a result, more than 33 1/3% of
its total assets would be lent to other parties, but this limitation does not
apply to purchases of publicly issued debt securities or to repurchase
agreements.
The Financial Reserves Fund and Institutional Money Market Fund may not:
Make loans to other persons, except (a) by the purchase of debt obligations in
which the Fund is authorized to invest in accordance with its investment
objective, and (b) by engaging in repurchase agreements. In addition, each Fund
may lend its portfolio securities to broker-dealers or other institutional
investors, provided that the borrower delivers cash or cash equivalents as
collateral to the Fund and agrees to maintain such collateral so that it equals
at least 100% of the value of the securities loaned. Any such securities loan
may not be made if, as a result thereof, the aggregate value of all securities
loaned exceeds 33 1/3% of the total assets of the Fund.
The Fund for Income may not:
Make loans to other persons except through the use of repurchase agreements or
the purchase of commercial paper. For these purposes, the purchase of a portion
of an issue of debt securities which is part of an issue to the public shall not
be considered the making of a loan.
The New York Tax-Free Fund may not:
Make loans to other persons except through the use of repurchase agreements, the
purchase of commercial paper or by lending portfolio securities. For these
purposes, the purchase of a portion of an issue of debt securities which is part
of an issue to the public shall not be considered the making of a loan.
The Ohio Municipal Money Market 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
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<PAGE>
collateral values are continuously maintained at no less than 100% of the
current market value of such securities by marking to market daily.
6. COMMODITIES
The Diversified Stock Fund, Government Mortgage Fund, Intermediate Income Fund,
International Growth Fund, Investment Quality Bond Fund, Lakefront Fund, Limited
Term Income Fund, Ohio Municipal Bond Fund, Ohio Regional Stock Fund, Prime
Obligations Fund, Real Estate Investment Fund, Special Growth Fund, Stock Index
Fund and Tax-Free Money Market Fund may not:
Purchase or sell physical commodities unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the Funds from
purchasing or selling options and futures contracts or from investing in
securities or other instruments backed by physical commodities).
The New York Tax-Free Fund and Ohio Municipal Money Market Fund may not:
Purchase or sell commodities or commodity contracts.
The Balanced Fund, Growth Fund, Special Value Fund, U.S. Government Obligations
Fund and Value Fund may not:
Purchase or sell physical commodities unless acquired as a result of ownership
of securities or other instruments.
The Fund for Income may not:
Purchase or sell commodities or commodity contracts, oil, gas or other mineral
exploration or development programs.
The National Municipal Bond Fund may not:
Purchase or sell physical commodities (but this shall not prevent the Fund from
purchasing or selling futures contracts and options on futures contracts or from
investing in securities or other instruments backed by physical commodities).
7. JOINT TRADING ACCOUNTS
The Balanced Fund, Diversified Stock Fund, Government Mortgage Fund, Growth
Fund, Intermediate Income Fund, International Growth Fund, Investment Quality
Bond Fund, Limited Term Income Fund, Ohio Municipal Bond Fund, Ohio Regional
Stock Fund, Prime Obligations Fund, Special Growth Fund, Special Value Fund,
Stock Index Fund, Tax-Free Money Market Fund and Value Fund may not:
Participate on a joint or joint and several basis in any securities trading
account.
8. DIVERSIFICATION
The Balanced Fund, Diversified Stock Fund, Government Mortgage Fund, Growth
Fund, Intermediate Income Fund, International Growth Fund, Investment Quality
Bond Fund, Limited Term Income Fund, Ohio Regional Stock Fund, Special Growth
Fund, Special Value Fund, Stock Index Fund and Value Fund may not:
With respect to 75% of a Fund's total assets, purchase the securities of any
issuer (other than securities issued or guaranteed by the U.S. Government or any
of its agencies or instrumentalities) if, as a result, (a) more than 5% of the
Fund's total assets would be invested in the securities of that issuer, or (b)
the Fund would hold more than 10% of the outstanding voting securities of that
issuer.
The Prime Obligations Fund may not:
With respect to 75% of a Fund's total assets, purchase the securities of any
issuer (other than securities issued or guaranteed by the U.S. Government or any
of its agencies or instrumentalities) if, as a result, (a) more than
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<PAGE>
5% of the Fund's total assets would be invested in the securities of that
issuer, or (b) the Fund would hold more than 10% of the outstanding voting
securities of that issuer. (Note: In accordance with Rule 2a-7 under the 1940
Act, the Fund may invest up to 25% of its total assets in securities of a single
issuer for a period of up to three days.)
The New York Tax-Free Fund may not:
Purchase the securities of any issuer (except the United States government, its
agencies and instrumentalities, and the State of New York and its
municipalities) if as a result more than 25% of its total assets are invested in
the securities of a single issuer, and with regard to 50% of total assets, if as
a result more than 5% of its total assets would be invested in the securities of
such issuer. In determining the issuer of a tax-exempt security, each state and
each political subdivision, agency, and instrumentality of each state and each
multi-state agency, of which such state is a member, is a separate issuer. Where
securities are backed only by assets and revenues of a particular
instrumentality, facility or subdivision, such entity is considered the issuer.
With respect to non-municipal bond investments, in addition to the foregoing
limitations, the Fund will not purchase securities (other than securities of the
United States government, its agencies or instrumentalities), if as a result of
such purchase 25% or more of the total Fund's assets would be invested in any
one industry, or enter into a repurchase agreement if, as a result thereof, more
than 10% of its total assets would be subject to repurchase agreements maturing
in more than seven days.
The National Municipal Bond Fund:
To meet federal tax requirements for qualification as a "regulated investment
company," the Fund limits its investments so that at the close of each quarter
of its taxable year: (a) with regard to at least 50% of total assets, no more
than 5% of total assets are invested in the securities of a single issuer, and
(b) no more than 25% of total assets are invested in the securities of a single
issuer. Limitations (a) and (b) do not apply to "Government Securities" as
defined for federal tax purposes. (For such purposes, municipal obligations are
not treated as "Government Securities," and consequently they are subject to
limitations (a) and (b).)
The Ohio Municipal Money Market Fund will limit:
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.
The Tax-Free Money Market Fund may not:
Purchase securities of any one issuer, other than obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities if,
immediately after such purchase, more than 5% of the value of its total assets
would be invested in such issuer, except that up to 25% of the value of the
Tax-Free Money Market Fund's total assets may be invested without regard to such
5% limitation. For purposes of this limitation, a security is considered to be
issued by the government entity (or entities) whose assets and revenues
guarantee or back the security; with respect to a private activity bond that is
backed only by the assets and revenues of a non-governmental issuer, a security
is considered to be issued by such non-governmental issuer.
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The Fund for Income may not:
Purchase the securities of any issuer (except the United States government, its
agencies and instrumentalities), with regard to 50% of total assets, if as a
result more than 5% of its total assets would be invested in the securities of
such issuer. In determining the issuer of a tax-exempt security, each state and
each political subdivision, agency, and instrumentality of each state and each
multi-state agency of which such state is a member is a separate issuer. Where
securities are backed only by assets and revenues of a particular
instrumentality, facility or subdivision, such entity is considered the issuer.
9. CONCENTRATION
The Balanced Fund, Diversified Stock Fund, Growth Fund, Intermediate Income
Fund, International Growth Fund, Investment Quality Bond Fund, Limited Term
Income Fund, Ohio Regional Stock Fund, Special Value Fund, Stock Index Fund and
Value Fund may not:
Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities,
or repurchase agreements secured thereby) if, as a result, more than 25% of the
Fund's total assets would be invested in the securities of companies whose
principal business activities are in the same industry. In the utilities
category, the industry shall be determined according to the service provided.
For example, gas, electric, water and telephone will be considered as separate
industries.
The Prime Obligations Fund may not:
Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities,
or repurchase agreements secured thereby) if, as a result, more than 25% of the
Fund's total assets would be invested in the securities of companies whose
principal business activities are in the same industry. Notwithstanding the
foregoing, there is no limitation with respect to certificates of deposit and
banker's acceptances issued by domestic banks, or repurchase agreements secured
thereby. In the utilities category, the industry shall be determined according
to the service provided. For example, gas, electric, water and telephone will be
considered as separate industries.
The Tax-Free Money Market Fund may not:
Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities,
or repurchase agreements secured thereby) if, as a result, more than 25% of the
Fund's total assets would be invested in the securities of companies whose
principal business activities are in the same industry; provided that this
limitation shall not apply to Municipal Securities or governmental guarantees of
Municipal Securities; but for these purposes only, industrial development bonds
that are backed by the assets and revenues of a non-governmental user shall not
be deemed to be Municipal Securities. Notwithstanding the foregoing, there is no
limitation with respect to certificates of deposit and banker's acceptances
issued by domestic banks, or repurchase agreements secured thereby. In the
utilities category, the industry shall be determined according to the service
provided. For example, gas, electric, water and telephone will be considered as
separate industries.
The Ohio Municipal Bond Fund may not:
Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or instrumentalities,
or repurchase agreements secured thereby) if, as a result, more than 25% of the
Fund's total assets would be invested in the securities of companies whose
principal business activities are in the same industry; provided that this
limitation shall not apply to Municipal Securities or governmental guarantees of
Municipal Securities; but for these purposes only, industrial development bonds
that are backed only by the assets and revenues of a non-governmental user shall
not be deemed to be Municipal Securities. In
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the utilities category, the industry shall be determined according to the
service provided. For example, gas, electric, water and telephone will be
considered as separate industries.
The National Municipal Bond Fund may not:
Purchase securities (other than those issued or guaranteed by the U.S.
government or any securities of its agencies or instrumentalities or tax-exempt
obligations issued or guaranteed by a U.S. territory or possession or a state or
local government, or a political subdivision of the foregoing) if, as a result,
more than 25% of the Fund's total assets would be invested in securities of
companies whose principal business activities are in the same industry; for the
purpose of this restriction, utility companies will be divided according to
their services, for example, gas, gas transmission, electric and gas and
telephone will each be considered a separate industry. Industrial development
revenue bonds which are issued by nongovernmental entities within the same
industry shall be subject to this industry limitation.
The Ohio Municipal Money Market Fund:
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.
The Financial Reserves Fund and Institutional Money Market Fund may not:
Purchase the securities of any issuer (other than obligations issued or
guaranteed as to principal and interest by the United States government, its
agencies or instrumentalities) if, as a result thereof: (i) more than 5% of its
total assets would be invested in the securities of such issuer, provided,
however, that in the case of certificates of deposit, time deposits and bankers'
acceptances, up to 25% of the Fund's total assets may be invested without regard
to such 5% limitation, but shall instead be subject to a 10% limitation; (ii)
more than 25% of its total assets would be invested in the securities of one or
more issuers having their principal business activities in the same industry,
provided, however, that it may invest more than 25% of its total assets in the
obligations of domestic banks. Neither finance companies as a group nor utility
companies as a group are considered a single industry for purposes of this
policy (i.e., finance companies will be considered a part of the industry they
finance and utilities will be divided according to the types of services they
provide).
The Real Estate Investment Fund may not:
Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities,
or repurchase agreements secured thereby) if, as a result, more than 25% of the
Fund's total assets would be invested in the securities of companies whose
principal business activities are in the same industry. In the utilities
category, the industry shall be determined according to the service provided.
For example, gas, electric, water and telephone will be considered as separate
industries. Notwithstanding the foregoing, the Fund will concentrate its
investments in securities in the real estate industry.
The New York Tax-Free Fund may not:
With respect to non-municipal investments, purchase securities (other than
securities of the United States government, its agencies or instrumentalities),
if as a result of such purchase 25% or more of the Fund's total assets would be
invested in any one industry, or enter into a repurchase agreement if, as a
result thereof, more than 10% of its total assets would be subject to repurchase
agreements maturing in more than seven days.
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The Special Growth Fund may not:
Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities,
or repurchase agreements secured thereby) if, as a result, more than 25% of the
Fund's total assets would be invested in the securities of companies whose
principal business activities are in the same industry.
The Fund for Income and New York Tax-Free Fund may not:
Invest more than 25% of the Fund's total assets in securities whose interest
payments are derived from revenue from similar projects.
10. MISCELLANEOUS
a. TAX-EXEMPT INCOME
The Ohio Municipal Money Market Fund may not:
Invest its assets so that less than 80% of its annual interest income is exempt
from the federal income tax and Ohio taxes.
b. USE OF ASSETS AS SECURITY
The Fund for Income may not:
Pledge, mortgage, or hypothecate its assets, except that, to secure borrowings
permitted by its fundamental restriction on borrowing, it may pledge securities
having a market value at the time of pledge not exceeding 10% of the value of
its total assets.
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NON-FUNDAMENTAL RESTRICTIONS
1. ILLIQUID SECURITIES
The Balanced Fund, Diversified Stock Fund, Fund for Income, Government Mortgage
Fund, Growth Fund, Intermediate Income Fund, International Growth Fund,
Investment Quality Bond Fund, Lakefront Fund, Limited Term Income Fund, National
Municipal Bond Fund, New York Tax-Free Fund, Ohio Municipal Bond Fund, Ohio
Regional Stock Fund, Real Estate Investment Fund, Special Growth Fund, Special
Value Fund, Stock Index Fund and Value Fund:
Will not invest more than 15% of its net assets in illiquid securities. Illiquid
securities are securities that are not readily marketable or cannot be disposed
of promptly within seven days and in the usual course of business at
approximately the price at which the Fund has valued them. Such securities
include, but are not limited to, time deposits and repurchase agreements with
maturities longer than seven days. Securities that may be resold under Rule
144A, securities offered pursuant to Section 4(2) of, or securities otherwise
subject to restrictions or limitations on resale under the 1933 Act ("Restricted
Securities") shall not be deemed illiquid solely by reason of being
unregistered. Key Asset Management Inc. determines whether a particular security
is deemed to be liquid based on the trading markets for the specific security
and other factors.
The Financial Reserves Fund, Institutional Money Market Fund, Ohio Municipal
Money Market Fund, Prime Obligations Fund, Tax-Free Money Market Fund, and U.S.
Government Obligations Fund:
Will not invest more than 10% of its net assets in illiquid securities. Illiquid
securities are securities that are not readily marketable or cannot be disposed
of promptly within seven days and in the usual course of business at
approximately the price at which the Fund has valued them. Such securities
include, but are not limited to, time deposits and repurchase agreements with
maturities longer than seven days. Securities that may be resold under Rule
144A, securities offered pursuant to Section 4(2) of, or securities otherwise
subject to restrictions or limitations on resale under the 1933 Act ("Restricted
Securities") shall not be deemed illiquid solely by reason of being
unregistered. Key Asset Management Inc. determines whether a particular security
is deemed to be liquid based on the trading markets for the specific security
and other factors.
2. SHORT SALES AND PURCHASES ON MARGIN
The Balanced Fund, Diversified Stock Fund, Government Mortgage Fund, Growth
Fund, Intermediate Income Fund, Investment Quality Bond Fund, Limited Term
Income Fund, Ohio Municipal Bond Fund, Ohio Regional Stock Fund, Prime
Obligations Fund, Special Growth Fund, Special Value Fund, Stock Index Fund,
Tax-Free Money Market Fund, U.S. Government Obligations Fund and Value Fund:
Will not make short sales of securities, other than short sales "against the
box," or purchase securities on margin except for short-term credits necessary
for clearance of portfolio transactions, provided that this restriction will not
be applied to limit the use of options, futures contracts and related options,
in the manner otherwise permitted by the investment restrictions, policies and
investment program of the Fund.
The International Growth Fund may not:
Will not make short sales of securities, other than short sales "against the
box," or purchase securities on margin except for short-term credits necessary
for clearance of portfolio transactions, provided that this restriction will not
be applied to limit the use of options, futures contracts and related options,
in the manner otherwise permitted by the investment restrictions, policies and
investment program of the Fund, and shall not limit the Fund's ability to make
margin payments in connection with transactions in currency future options.
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The Financial Reserves Fund and Institutional Money Market Fund may not:
1. Purchase securities on margin (but the Fund may obtain such credits as may be
necessary for the clearance of purchases and sales of securities).
2. Make short sales of securities.
The Fund for Income and New York Tax-Free Fund:
Will not make short sales of securities or purchase any securities on margin,
except for such short-term credits as are necessary for the clearance of
transactions.
The National Municipal Bond Fund:
1. May not sell securities short, unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short. 2. May
not purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions.
The Ohio Municipal Money Market 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.
The Special Growth Fund:
Does not currently intend to purchase securities on margin, except that the Fund
may obtain such short-term credits as are necessary for the clearance of
transactions and provided that margin payments in connection with futures
contracts shall not constitute purchasing securities on margin.
3. OTHER INVESTMENT COMPANIES
The Lakefront Fund, National Municipal Bond Fund, New York Tax-Free Fund and
Ohio Municipal Bond Fund:
May invest up to 5% of their total assets in the securities of any one
investment company, but may not own more than 3% of the securities of any one
investment company or invest more than 10% of its total assets in the securities
of other investment companies. Pursuant to an exemptive order received by the
Victory Portfolios from the Securities and Exchange Commission (the "SEC"), the
Funds may invest in the other money market funds of the Victory Portfolios. Each
Fund will waive the portion of its fee attributable to the assets of each Fund
invested in such money market funds to the extent required by the laws of any
jurisdiction in which shares of the Funds are registered for sale.
The Funds may not:
Purchase the securities of any registered open-end investment company or
registered unit investment trust in reliance on Section 12(d)(1)(G) or Section
12(d)(1)(F) of the 1940 Act, which permits operation as a "fund of funds."
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The National Municipal Bond Fund may not:
Purchase securities of other investment companies, except in the open market
where no commission except the ordinary broker's commission is paid. Such
limitation does not apply to securities received as dividends, through offers of
exchange, or as a result of a reorganization, consolidation, or merger.
The Ohio Municipal Money Market 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.
4. MISCELLANEOUS
a. INVESTMENT GRADE OBLIGATIONS
The National Municipal Bond Fund, New York Tax-Free Fund and Ohio Municipal Bond
Fund may not:
Hold more than five percent of its total assets in securities that have been
downgraded below investment grade.
b. CONCENTRATION
The Fund for Income may not:
With respect to non-municipal bond investments, purchase securities (other than
securities of the United States government, its agencies or instrumentalities),
if as a result of such purchase 25% or more of the total Fund's assets would be
invested in any one industry.
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INSTRUMENTS IN WHICH THE FUNDS CAN INVEST
The instruments in which the Funds can invest, according to their investment
policies and limitations are described below.
The following paragraphs provide a brief description of some of the types of
securities in which the Funds may invest in accordance with their investment
objective, policies, and limitations, including certain transactions the Funds
may make and strategies they may adopt. The following also contains a brief
description of certain risk factors. The Funds may, following notice to their
shareholders, take advantage of other investment practices which presently are
not contemplated for use by the Funds or which currently are not available but
which may be developed, to the extent such investment practices are both
consistent with a 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 a Fund's Prospectus and
this Statement of Additional Information.
ELIGIBLE SECURITIES FOR MONEY MARKET FUNDS. High-quality investments are those
obligations which, at the time of purchase, (i) possess one of the two highest
short-term ratings from an NRSRO or (ii) possess, in the case of multiple-rated
securities, one of the two highest short-term ratings by at least two NRSROs; or
(iii) do not possess a rating (i.e. are unrated) but are determined by the
Adviser to be of comparable quality to the rated instruments described in (i)
and (ii). For purposes of these investment limitations, a security that has not
received a rating will be deemed to possess the rating assigned to an
outstanding class of the issuer's short-term debt obligations if determined by
the Adviser to be comparable in priority and security to the obligation selected
for purchase by a Fund. (The above described securities which may be purchased
by the money market Funds are hereinafter referred to as "Eligible Securities.")
A security subject to a tender or demand feature will be considered an Eligible
Security only if both the demand feature and the underlying security possess a
high quality rating, or, if such do not possess a rating, are determined by the
Adviser to be of comparable quality; provided, however, that where the demand
feature would be readily exercisable in the event of a default in payment of
principal or interest on the underlying security, this obligation may be
acquired based on the rating possessed by the demand feature or, if the demand
feature does not possess a rating, a determination of comparable quality by the
Adviser. A security which at the time of issuance had a maturity exceeding 397
days but, at the time of purchase, has remaining maturity of 397 days or less,
is not considered an Eligible Security if it does not possess a high quality
rating and the long-term rating, if any, is not within the two highest rating
categories.
Pursuant to Rule 2a-7 under the new 1940 Act (the "Rule"), the Money Market
Funds will maintain a dollar-weighted average portfolio maturity which does not
exceed 90 days.
The weighted average maturity of the U.S. Government Obligations Fund will
usually be 60 days or less since rating agencies normally require shorter
maturities. However, the permitted weighted average maturity for the U.S.
Government Obligations Fund is 90 days.
The Appendix of this SAI identifies each NRSRO which may be utilized by the
Adviser with regard to portfolio investments for the Funds and provides a
description of relevant ratings assigned by each such NRSRO. A rating by an
NRSRO may be utilized only where the NRSRO is neither controlling, controlled
by, or under common control with the issuer of, or any issuer, guarantor, or
provider of credit support for, the instrument.
U.S. CORPORATE DEBT OBLIGATIONS. U.S. Corporate Debt Obligations include bonds,
debentures, and notes. Debentures represent unsecured promises to pay, while
notes and bonds may be secured by mortgages on real property or security
interests in personal property. Bonds include, but are not limited to, debt
instruments with maturities of approximately one year or more, debentures,
mortgage-related securities, stripped government securities, and zero coupon
obligations. Bonds, notes, and debentures in which the Funds may invest may
differ in interest rates, maturities, and times of issuance. The market value of
a Fund's fixed income
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investments will change in response to interest rate changes and other factors.
During periods of falling interest rates, the values of outstanding fixed income
securities generally rise. Conversely, during periods of rising interest rates,
the values of such securities generally decline. Moreover, while securities with
longer maturities tend to produce higher yields, the price of longer maturity
securities are also subject to greater market fluctuations as a result of
changes in interest rates.
Changes by recognized agencies in the rating of any fixed income security and in
the ability of an issuer to make payments of interest and principal also affect
the value of these investments. Except under conditions of default, changes in
the value of a Fund's securities will not affect cash income derived from these
securities but will affect the Fund's net asset value.
SHORT-TERM OBLIGATIONS. These include high quality, short-term obligations such
as domestic and foreign commercial paper (including variable-amount master
demand notes), bankers' acceptances, certificates of deposit and demand and time
deposits of domestic and foreign branches of U.S. banks and foreign banks, and
repurchase agreements. (See "Foreign Securities" for a description of risks
associated with investments in foreign securities.)
SHORT-TERM CORPORATE OBLIGATIONS. Corporate obligations are bonds issued by
corporations and other business organizations in order to finance their
long-term credit needs. Corporate bonds in which a Fund may invest generally
consist of those rated in the two highest rating categories of an NRSRO that
possess many favorable investment attributes. In the lower end of this category,
credit quality may be more susceptible to potential future changes in
circumstances.
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.
BANKERS' ACCEPTANCES. Bankers' Acceptances are negotiable drafts or bills of
exchange typically drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Bankers' Acceptances will be those guaranteed by domestic and foreign banks, if
at the time of purchase such banks have capital, surplus, and undivided profits
in excess of $100,000,000 (as of the date of their most recently published
financial statements).
CERTIFICATES OF DEPOSIT. Certificates of Deposit are negotiable certificates
issued against funds deposited in a commercial bank or a savings and loan
association for a definite period of time and earning a specified return.
Certificates of Deposit and demand and time deposits invested in by a Fund will
be those of domestic and foreign banks and savings and loan associations, if (a)
at the time of purchase such financial institutions have capital, surplus, and
undivided profits in excess of $100,000,000 (as of the date of their most
recently published financial statements) or (b) the principal amount of the
instrument is insured in full by the Federal Deposit Insurance Corporation (the
"FDIC") or the Savings Association Insurance Fund.
EURODOLLAR CERTIFICATES OF DEPOSIT ("ECDs") are U.S. dollar-denominated
certificates of deposit issued by branches of foreign and domestic banks located
outside the United States.
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YANKEE CERTIFICATES OF DEPOSIT ("Yankee CDs") are certificates of deposit issued
by a U.S. branch of a foreign bank denominated in U.S. dollars and held in the
United States.
EURODOLLAR TIME DEPOSITS ("ETDs") are U.S. dollar-denominated deposits in a
foreign branch of a U.S. bank or a foreign bank.
CANADIAN TIME DEPOSITS ("CTDs") are U.S. dollar-denominated certificates of
deposit issued by Canadian offices of major Canadian Banks.
COMMERCIAL PAPER. Commercial paper is unsecured promissory notes issued by
corporations. Except as noted below with respect to variable amount master
demand notes, issues of commercial paper normally have maturities of less than
nine months and fixed rates of return.
The Funds will purchase only commercial paper rated in one of the two highest
categories at the time of purchase by an NRSRO or, if not rated, found by the
Trustees to present minimal credit risks and to be of comparable quality to
instruments that are rated high quality (i.e., in one of the two top ratings
categories) by an NRSRO that is neither controlling, controlled by, or under
common control with the issuer of, or any issuer, guarantor, or provider of
credit support for, the instruments. For a description of the rating symbols of
each NRSRO see the Appendix to this Statement of Additional Information.
INTERNATIONAL BONDS. International Bonds include Euro and Yankee obligations,
which are U.S. dollar-denominated international bonds for which the primary
trading market is in the United States ("Yankee Bonds"), or for which the
primary trading market is abroad ("Eurodollar Bonds"). International Bonds also
include Canadian and Supranational Agency Bonds (e.g., International Monetary
Fund). (See "Foreign Debt Securities" for a description of risks associated with
investments in foreign securities.)
FOREIGN DEBT SECURITIES. Investments in securities of foreign companies
generally involve greater risks than are present in U.S. investments. Compared
to U.S. and Canadian companies, there generally is less publicly available
information about foreign companies and there may be less governmental
regulation and supervision of foreign stock exchanges, brokers and listed
companies. Foreign companies generally are not subject to uniform accounting,
auditing, and financial reporting standards, practices, and requirements
comparable to those applicable to U.S. companies. Securities of some foreign
companies are less liquid, and their prices more volatile, than securities of
comparable U.S. companies. Settlement of transactions in some foreign markets
may be delayed or may be less frequent than in the U.S., which could affect the
liquidity of a Fund's investment. In addition, with respect to some foreign
countries, there is the possibility of nationalization, expropriation, or
confiscatory taxation; limitations on the removal of securities, property, or
other assets of a Fund; there may be political or social instability; there may
be increased difficulty in obtaining legal judgments; or diplomatic developments
which could affect U.S. investments in those countries. The Adviser will take
such factors into consideration in managing a Fund's investments. A Fund will
not hold foreign currency in amounts exceeding 5% of its assets as a result of
such investments.
REPURCHASE AGREEMENTS. Securities held by a Fund may be subject to Repurchase
Agreements. Under the terms of a Repurchase Agreement, a Fund would acquire
securities from financial institutions or registered broker-dealers deemed
creditworthy by the Adviser pursuant to guidelines adopted by the Trustees,
subject to the seller's agreement to repurchase such securities at a mutually
agreed upon date and price. The seller is required to maintain the value of
collateral held pursuant to the agreement at not less than the repurchase price
(including accrued interest).
If the seller were to default on its repurchase obligation or become insolvent,
a Fund would suffer a loss to the extent that the proceeds from a sale of the
underlying portfolio securities were less than the repurchase price, or to the
extent that the disposition of such securities by the Fund is delayed pending
court action.
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REVERSE REPURCHASE AGREEMENTS. A Fund may borrow funds for temporary purposes by
entering into reverse Repurchase Agreements. Reverse Repurchase Agreements are
considered to be borrowings under the 1940 Act. Pursuant to such agreement, a
Fund would sell a portfolio security to a financial institution such as a bank
and a broker-dealer, and agree to repurchase such security at a mutually
agreed-upon date and price. At the time a Fund enters into a Reverse Repurchase
Agreement, it will place in a segregated custodial account assets (such as cash
or other liquid high-grade securities) consistent with the Fund's investment
restrictions having a value equal to the repurchase price (including accrued
interest). The collateral will be marked-to-market on a daily basis, and will be
monitored continuously to ensure that such equivalent value is maintained.
Reverse Repurchase Agreements involve the risk that the market value of the
securities sold by a Fund may decline below the price at which the Fund is
obligated to repurchase the securities.
SHORT-TERM FUNDING AGREEMENTS. A Fund may invest in Short-Term Funding
Agreements (sometimes referred to as "GICs") issued by insurance companies.
Pursuant to such agreements, a Fund makes cash contributions to a deposit fund
of the insurance company's general account. The insurance company then credits
the Fund, on a monthly basis, guaranteed interest which is based on an index.
The Short-Term Funding Agreement provides that this guaranteed interest will not
be less than a certain minimum rate. Because the principal amount of a
Short-Term Funding Agreement may not be received from the insurance company on
seven days notice or less, the agreement is considered to be an illiquid
investment and, together with other instruments in a Fund which are not readily
marketable, will not exceed 10% of the Fund's total assets. In determining
dollar-weighted average portfolio maturity, a Short-Term Funding Agreement will
be deemed to have a maturity equal to the period of time remaining until the
next readjustment of the guaranteed interest rate.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable Amount Master Demand Notes are
unsecured demand notes that permit the indebtedness thereunder to vary and
provide for periodic adjustments in the interest rate according to the terms of
the instrument. Although there is no secondary market for these notes, a Fund
may demand payment of principal and accrued interest at any time and may resell
the notes at any time to a third party. The absence of an active secondary
market, however, could make it difficult for a Fund to dispose of a Variable
Amount Master Demand Note if the issuer defaulted on its payment obligations,
and the Fund could, for this or other reasons, suffer a loss to the extent of
the default. While the notes typically are not rated by credit rating agencies,
issuers of Variable Amount Master Demand Notes must satisfy the same criteria as
set forth above for unrated commercial paper, and the Adviser will monitor
continuously the issuer's financial status and ability to make payments due
under the instrument. Where necessary to ensure that a note is of "high
quality," a Fund will require that the issuer's obligation to pay the principal
of the note be backed by an unconditional bank letter or line of credit,
guarantee or commitment to lend. For purposes of a Fund's investment policies, a
Variable Amount Master Demand Note will be deemed to have a maturity equal to
the longer of the period of time remaining until the next readjustment of its
interest rate or the period of time remaining until the principal amount can be
recovered from the issuer through demand.
VARIABLE RATE DEMAND NOTES. Variable Rate Demand Notes are tax-exempt
obligations containing a floating or variable interest rate adjustment formula,
together with an unconditional right to demand payment of the unpaid principal
balance plus accrued interest upon a short notice period, generally not to
exceed seven days. The Funds also may invest in participation Variable Rate
Demand Notes, which provide a Fund with an undivided interest in underlying
Variable Rate Demand Notes held by major investment banking institutions. Any
purchase of Variable Rate Demand Notes will meet applicable diversification and
concentration requirements.
VARIABLE AND FLOATING RATE NOTES. A Variable Rate Note is one whose terms
provide for the readjustment of its interest rate on set dates and which, upon
such readjustment, reasonably can be expected to have a market value that
approximates its par value. A Floating Rate Note is one whose terms provide for
the readjustment of its interest rate whenever a specified interest rate changes
and which, at any time, reasonably can be expected to have a market value that
approximates its par value. Such notes frequently are not rated by credit rating
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agencies; however, unrated Variable and Floating Rate Notes purchased by the
Fund will only be those determined by the Adviser, under guidelines established
by the Trustees, to pose minimal credit risks and to be of comparable quality,
at the time of purchase, to rated instruments eligible for purchase under the
Fund's investment policies. In making such determinations, the Adviser will
consider the earning power, cash flow and other liquidity ratios of the issuers
of such notes (such issuers include financial, merchandising, bank holding and
other companies) and will continuously monitor their financial condition.
Although there may be no active secondary market with respect to a particular
Variable or Floating Rate Note purchased by a Fund, the Fund may resell the note
at any time to a third party. The absence of an active secondary market,
however, could make it difficult for a Fund to dispose of a Variable or Floating
Rate Note in the event that the issuer of the note defaulted on its payment
obligations and a Fund could, for this or other reasons, suffer a loss to the
extent of the default. Variable or Floating Rate Notes may be secured by bank
letters of credit.
Variable or Floating Rate Notes may have maturities of more than one year, as
follows:
1. A Variable or Floating Rate Note that is issued or guaranteed by the United
States government or any agency thereof and which has a variable rate of
interest readjusted no less frequently than annually will be deemed to have a
maturity equal to the period remaining until the next readjustment of the
interest rate.
2. A Variable or Floating Rate Note, the principal amount of which is scheduled
on the face of the instrument to be paid in one year or less, will be deemed by
the Fund to have a maturity equal to the period remaining until the next
readjustment of the interest rate.
3. A Variable or Floating Rate Note that is subject to a demand feature
scheduled to be paid in one year or more will be deemed to have a maturity equal
to the longer of the period remaining until the next readjustment of the
interest rate or the period remaining until the principal amount can be
recovered through demand.
4. A Variable or Floating Rate Note that is subject to a demand feature will be
deemed to have a maturity equal to the period remaining until the principal
amount can be recovered through demand.
As used above, a note is "subject to a demand feature" where a Fund is entitled
to receive the principal amount of the note either at any time on no more than
30 days' notice or at specified intervals not exceeding one year and upon no
more than 30 days' notice.
EXTENDIBLE DEBT SECURITIES. Extendible Debt Securities are securities that can
be retired at the option of a Fund at various dates prior to maturity. In
calculating average portfolio maturity, a Fund may treat Extendible Debt
Securities as maturing on the next optional retirement date.
RECEIPTS. Receipts are separately traded interest and principal component parts
of bills, notes, and bonds issued by the U.S. Treasury that are transferable
through the Federal book entry system, known as Separately Traded Registered
Interest and Principal Securities ("STRIPS") and Coupon Under Book Entry
Safekeeping ("CUBES"). These instruments are issued by banks and brokerage firms
and are created by depositing Treasury notes and Treasury bonds into a special
account at a custodian bank; the custodian holds the interest and principal
payments for the benefit of the registered owners of the certificates or
receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
Treasury Receipts ("TRs"), Treasury Investment Growth Receipts ("TIGRs"), and
Certificates of Accrual on Treasury Securities ("CATS").
ZERO-COUPON BONDS. Zero-Coupon Bonds are purchased at a discount from the face
amount because the buyer receives only the right to a fixed payment on a certain
date in the future and does not receive any periodic interest payments. The
effect of owning instruments which do not make current interest payments is that
a fixed yield is earned not only on the original investment but also, in effect,
on accretion during the life of the obligations. This implicit reinvestment of
earnings at the same rate eliminates the risk of being unable to
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reinvest distributions at a rate as high as the implicit yields on the
Zero-Coupon Bond, but at the same time eliminates the holder's ability to
reinvest at higher rates. For this reason, Zero-Coupon Bonds are subject to
substantially greater price fluctuations during periods of changing market
interest rates than are comparable securities which pay interest currently,
which fluctuation increases in accordance with the length of the period to
maturity.
HIGH-YIELD DEBT SECURITIES. High-Yield Debt Securities are lower-rated debt
securities, commonly referred to as "junk bonds" (those rated Ba to C by Moody's
or BB to C by S&P), that have poor protection with respect to the payment of
interest and repayment of principal, or may be in default. These securities are
often considered to be speculative and involve greater risk of loss or price
changes due to changes in the issuer's capacity to pay. The market prices of
High-Yield Debt Securities may fluctuate more than those of higher-rated debt
securities and may decline significantly in periods of general economic
difficulty, which may follow periods of rising interest rates.
While the market for High-Yield Debt Securities has been in existence for many
years and has weathered previous economic downturns, the 1980s brought a
dramatic increase in the use of such securities to fund highly-leveraged
corporate acquisitions and restructurings. Past experience may not provide an
accurate indication of future performance of the high yield bond market,
especially during periods of economic recession. In fact, from 1989 to 1991, the
percentage of High-Yield Debt Securities that defaulted rose significantly above
prior levels, although the default rate decreased in 1992.
The market for High-Yield Debt Securities may be thinner and less active than
that for higher-rated debt securities, which can adversely affect the prices at
which the former are sold. If market quotations are not available, High-Yield
Debt Securities will be valued in accordance with procedures established by the
Victory Portfolios' Board of Trustees, including the use of outside pricing
services.
Judgment plays a greater role in valuing High-Yield Debt Securities than is the
case for securities for which more external sources for quotations and last-sale
information are available. Adverse publicity and changing investor perceptions
may affect the ability of outside pricing services to value High-Yield Debt
Securities and a Fund's ability to sell these securities.
Since the risk of default is higher for High-Yield Debt Securities, the
Adviser's research and credit analysis are an especially important part of
managing securities of this type held by a Fund. In considering investments for
a Fund, the Adviser will attempt to identify those issuers of high-yielding debt
securities whose financial condition is adequate to meet future obligations, has
improved, or is expected to improve in the future. Analysis of the Adviser
focuses on relative values based on such factors as interest or dividend
coverage, asset coverage, earnings prospects, and the experience and managerial
strength of the issuer.
A Fund may choose, at its expense or in conjunction with others, to pursue
litigation or otherwise exercise its rights as security holder to seek to
protect the interests of security holders if it determines this to be in the
best interest of the Fund's shareholders.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS. Loans and Other Direct Debt Instruments
are interests in amounts owed by a corporate, governmental, or other borrower to
another party. They may represent amounts owed to lenders or lending syndicates
(loans and loan participations), to suppliers of goods or services (trade claims
or other receivables), or to other parties. Direct Debt Instruments involve a
risk of loss in case of default or insolvency of the borrower and may offer less
legal protection to a Fund in the event of fraud or misrepresentation. In
addition, loan participations involve a risk of insolvency of the lending bank
or other financial intermediary. Direct Debt Instruments may also include
standby financing commitments that obligate a Fund to supply additional cash to
the borrower on demand.
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SECURITIES OF OTHER INVESTMENT COMPANIES. A Fund may invest up to 5% of its
total assets in the securities of any one investment company, but may not own
more than 3% of the securities of any one investment company or invest more than
10% of its total assets in the securities of other investment companies.
Pursuant to an exemptive order received by the Victory Portfolios from the SEC,
a Fund may invest in the money market funds of the Victory Portfolios. The
Adviser will waive its investment advisory fee with respect to assets of a Fund
invested in any of the money market funds of the Victory Portfolios, and, to the
extent required by the laws of any state in which a Fund's shares are sold, the
Adviser will waive its investment advisory fee as to all assets invested in
other investment companies.
U.S. GOVERNMENT OBLIGATIONS. U.S. Government Obligations are obligations issued
or guaranteed by the U.S. Government, its agencies, and instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. Government are
supported by the full faith and credit of the U.S. Treasury; others are
supported by the right of the issuer to borrow from the U.S. Treasury; others
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; and still others are supported only by the credit of
the agency or instrumentality. No assurance can be given that the U.S.
Government will provide financial support to U.S. Government-sponsored agencies
or instrumentalities if it is not obligated to do so by law.
MUNICIPAL SECURITIES. Municipal Securities are obligations, typically bonds and
notes, issued by or on behalf of states, territories, and possessions of the
United States and the District of Columbia and their political subdivisions,
agencies, authorities, and instrumentalities, the interest on which, in the
opinion of the issuer's bond counsel at the time of issuance, is both exempt
from federal income tax and not treated as a preference item for individuals for
purposes of the federal alternative minimum tax.
Two specific types of Municipal Securities are "Ohio Tax-Exempt Obligations" and
"New York Tax-Exempt Obligations." Ohio Tax-Exempt Obligations are Municipal
Securities issued by the State of Ohio and its political subdivisions, the
interest on which is, in the opinion of the issuer's bond counsel at the time of
issuance, excluded from gross income for purposes of both federal income
taxation and Ohio personal income tax. New York Tax-Exempt Obligations are
Municipal Securities issued by the State of New York and its political
subdivisions, the interest on which is, in the opinion of the issuer's bond
counsel at the time of issuance, excluded from gross income for purposes of both
federal income taxation and New York personal income tax.
Generally, Municipal Securities are issued by governmental entities to obtain
funds for various public purposes, such as the construction of a wide range of
public facilities, the refunding of outstanding obligations, the payment of
general operating expenses, and the extension of loans to other public
institutions and facilities. Municipal Securities may include fixed, variable,
or floating rate obligations. Municipal Securities may be purchased on a
when-issued or delayed-delivery basis (including refunding contracts).
The two principal categories of Municipal Securities are "general obligation"
issues and "revenue" issues. Other categories of Municipal Securities are "moral
obligation" issues, private activity bonds, and industrial development bonds.
The prices and yields on Municipal Securities are subject to change from time to
time and depend upon a variety of factors, including general money market
conditions, the financial condition of the issuer (or other entities whose
financial resources are supporting the Municipal Security), general conditions
in the market for tax-exempt obligations, the size of a particular offering, the
maturity of the obligation, and the rating(s) of the issue. There are variations
in the quality of Municipal Securities, both within a particular category of
Municipal Securities and between categories. Current information about the
financial condition of an issuer of tax-exempt bonds or notes usually is not as
extensive as that which is made available by corporations whose securities are
publicly traded.
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The term Municipal Securities, as used in this SAI, includes private activity
bonds issued and industrial development bonds by or on behalf of public
authorities to finance various privately-operated facilities if the interest
paid thereon is both exempt from federal income tax and not treated as a
preference item for individuals for purposes of the federal alternative minimum
tax. The term Municipal Securities also includes short-term instruments issued
in anticipation of the receipt of tax funds, the proceeds of bond placements, or
other revenues, such as short-term general obligation notes, tax anticipation
notes, bond anticipation notes, revenue anticipation notes, tax-exempt
commercial paper, construction loan notes, and other forms of short-term
tax-exempt loans. Additionally, the term Municipal Securities includes project
notes, which are issued by a state or local housing agency and are sold by the
Department of Housing and Urban Development.
An issuer's obligations under its Municipal Securities are subject to the
provisions of bankruptcy, insolvency, and other laws affecting the rights and
remedies of creditors, such as the federal bankruptcy code. Congress or state
legislatures may enact laws extending the time for payment of principal or
interest, or both, or imposing other constraints upon the enforcement of such
obligations or upon the ability of municipalities to levy taxes. The power or
ability of an issuer to meet its obligations for the payment of interest on and
principal of its Municipal Securities may be materially adversely affected by
litigation or other conditions. There is also the possibility that, as a result
of litigation or other conditions, the power or ability of certain issuers to
meet their obligations to pay interest on and principal of their tax-exempt
bonds or notes may be materially impaired or their obligations may be found to
be invalid or unenforceable. Such litigation or conditions may, from time to
time, have the effect of introducing uncertainties in the market for tax-exempt
obligations or certain segments thereof, or may materially affect the credit
risk with respect to particular bonds or notes. Adverse economic, business,
legal, or political developments might affect all or a substantial portion of
the Fund's tax-exempt bonds and notes in the same manner.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on tax-exempt bonds, and similar proposals may be introduced in the
future. The U.S. Supreme Court has held that Congress has the constitutional
authority to enact such legislation. It is not possible to determine what effect
the adoption of such proposals could have on the availability of tax-exempt
bonds for investment by the Fund and the value of its portfolio. Proposals also
may be introduced before state legislatures that would affect the state tax
treatment of Municipal Securities. If such proposals were enacted, the
availability of Municipal Securities and their value would be affected.
The Internal Revenue Code of 1986, as amended (the "Code"), imposes certain
continuing requirements on issuers of tax-exempt bonds regarding the use,
expenditure and investment of bond proceeds and the payment of rebate to the
United States of America. Failure by the issuer to comply with certain of these
requirements subsequent to the issuance of tax-exempt bonds could cause interest
on the bonds to become includable in gross income retroactive to the date of
issuance.
General obligation issues are backed by the full taxing power of a state or
municipality and are payable from the issuer's general unrestricted revenues and
not from any particular fund or source. The characteristics and method of
enforcement of general obligation bonds vary according to the law applicable to
the particular issuer. Revenue issues or special obligation issues are backed
only by the revenues from a specific tax, project, or facility. "Moral
obligation" issues are normally issued by special purpose authorities.
Private activity bonds and industrial development bonds generally are revenue
bonds and not payable from the resources or unrestricted revenues of the issuer.
The credit and quality of industrial development revenue bonds is usually
directly related to the credit of the corporate user of the facilities. Payment
of principal of and interest on industrial development revenue bonds is the
responsibility of the corporate user (and any guarantor).
Private activity bonds, as discussed above, may constitute Municipal Securities
depending on their tax treatment. The source of payment and security for such
bonds is the financial resources of the private entity involved; the full faith
and credit and the taxing power of the issuer normally will not be pledged. The
payment obligations
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of the private entity also will be subject to bankruptcy as well as other
exceptions similar to those described above. Certain debt obligations known as
"industrial development bonds" under prior federal tax law may have been issued
by or on behalf of public authorities to obtain funds to provide certain
privately operated housing facilities, sports facilities, industrial parks,
convention or trade show facilities, airport, mass transit, port or parking
facilities, air or water pollution control facilities, sewage or solid waste
disposal facilities, and certain local facilities for water supply or other
heating or cooling facilities. Other private activity bonds and industrial
development bonds issued to fund the construction, improvement or equipment of
privately-operated industrial, distribution, research or commercial facilities
may also be Municipal Securities, but the size of such issues is limited under
current and prior federal tax law. The aggregate amount of most private activity
bonds and industrial development bonds is limited (except in the case of certain
types of facilities) under federal tax law by an annual "volume cap." The volume
cap limits the annual aggregate principal amount of such obligations issued by
or on behalf of all government instrumentalities in the state. Such obligations
are included within the term Municipal Securities if the interest paid thereon
is, in the opinion of bond counsel, at the time of issuance, excluded from gross
income for purposes of both federal income taxation (including any alternative
minimum tax) and state personal income tax. The Fund may not be a desirable
investment for "substantial users" of facilities financed by private activity
bonds or industrial development bonds or for "related persons" of substantial
users.
Project notes are secured by the full faith and credit of the United States
through agreements with the issuing authority which provide that, if required,
the U.S. government will lend the issuer an amount equal to the principal of and
interest on the project notes, although the issuing agency has the primary
obligation with respect to its project notes.
Some municipal securities are insured by private insurance companies, while
others may be supported by letters of credit furnished by domestic or foreign
banks. Insured investments are covered by an insurance policy applicable to a
specific security, either obtained by the issuer of the security or by a third
party from a private insurer. Insurance premiums for the municipal bonds are
paid in advance by the issuer or the third party obtaining such insurance. Such
policies are noncancellable and continue in force as long as the municipal bonds
are outstanding and the respective insurers remain in business.
The insurer unconditionally guarantees the timely payment of the principal of
and interest on the insured municipal bonds when and as such payments become due
but shall not be paid by the issuer, except that in the event of any
acceleration of the due date of the principal by reason of mandatory or optional
redemption (other than acceleration by reason of a mandatory sinking fund
payment), default, or otherwise, the payments guaranteed will be made in such
amounts and at such times as payments of principal would have been due had there
not been such acceleration. The insurer will be responsible for such payments
less any amounts received by the bondholder from any trustee for the municipal
bond issuers or from any other source. The insurance does not guarantee the
payment of any redemption premium, the value of the shares of a Fund, or
payments of any tender purchase price upon the tender of the municipal bonds.
With respect to small issue industrial development municipal bonds and pollution
control revenue municipal bonds, the insurer guarantees the full and complete
payments required to be made by or on behalf of an issuer of such municipal
bonds if there occurs any change in the tax-exempt status of interest on such
municipal bonds, including principal, interest, or premium payments, if any, as
and when required to be made by or on behalf of the issuer pursuant to the terms
of such municipal bonds. This insurance is intended to reduce financial risk,
but the cost thereof will reduce the yield available to shareholders of a Fund.
The ratings of NRSROs represent their opinions as to the quality of Municipal
Securities. In this regard, it should be emphasized that the ratings of any
NRSRO are general and are not absolute standards of quality, and Municipal
Securities with the same maturity, interest rate, and rating may have different
yields, while Municipal Securities of the same maturity and interest rate with
different ratings may have the same yield. Subsequent to purchase by a Fund, an
issue of Municipal Securities may cease to be rated or its rating may be reduced
below
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the minimum rating required for purchase by the Fund. The Adviser will
consider such an event in determining whether the Fund should continue to hold
the obligation.
The Adviser believes that it is likely that sufficient Municipal Securities will
be available to satisfy the Fund's investment objective and policies. In meeting
its investment policies, the Fund may invest all or any part of its total assets
in Municipal Securities which are private activity bonds. Moreover, although the
Fund does not presently intend to do so on a regular basis, it may invest more
than 25% of its total assets in Municipal Securities which are related in such a
way that an economic, business or political development or change affecting one
such security would likewise affect the other Municipal Securities. Examples of
such securities are obligations, the repayment of which is dependent upon
similar types of projects or projects located in the same state. Such
investments would be made only if deemed necessary or appropriate by the
Adviser.
OHIO TAX-EXEMPT OBLIGATIONS. As used in the Prospectus and this Statement of
Additional Information, the term "Ohio Tax-Exempt Obligations" refers to debt
obligations issued by the State of Ohio and its political subdivisions, the
interest on which is, in the opinion of the issuer's bond counsel, at the time
of issuance, excluded from gross income for purposes of both federal income
taxation and Ohio personal income tax (as used herein the terms "income tax" and
"taxation" do not include any possible incidence of any alternative minimum
tax). Ohio Tax-Exempt Obligations are issued to obtain funds for various public
purposes, including the construction of a wide range of public facilities such
as bridges, highways, roads, schools, water and sewer works, and other
utilities. Other public purposes for which Ohio Tax-Exempt Obligations may be
issued include refunding outstanding obligations and obtaining funds to lend to
other public institutions and facilities. In addition, certain debt obligations
known as "private activity bonds" may be issued by or on behalf of
municipalities and public authorities to obtain funds to provide certain water,
sewage and solid waste facilities, qualified residential rental projects,
certain local electric, gas and other heating or cooling facilities, qualified
hazardous waste facilities, high-speed inter-city rail facilities,
government-owned airports, docks and wharves and mass commuting facilities,
certain qualified mortgages, student loan and redevelopment bonds and bonds used
for certain organizations exempt from federal income taxation. Certain debt
obligations known as "industrial development bonds" under prior federal tax law
may have been issued by or on behalf of public authorities to obtain funds to
provide certain privately operated housing facilities, sports facilities,
industrial parks, convention or trade show facilities, airport, mass transit,
port or parking facilities, air or water pollution control facilities, sewage or
solid waste disposal facilities, and certain local facilities for water supply
or other heating or cooling facilities. Other private activity bonds and
industrial development bonds issued to fund the construction, improvement or
equipment of privately-operated industrial, distribution, research or commercial
facilities may also be Ohio Tax-Exempt Obligations, but the size of such issues
is limited under current and prior federal tax law. The aggregate amount of most
private activity bonds and industrial development bonds is limited (except in
the case of certain types of facilities) under federal tax law by an annual
"volume cap." The volume cap limits the annual aggregate principal amount of
such obligations issued by or on behalf of all government instrumentalities in
the state. Such obligations are included within the term Ohio Tax-Exempt
Obligations if the interest paid thereon is, in the opinion of bond counsel, at
the time of issuance, excluded from gross income for purposes of both federal
income taxation (including any alternative minimum tax) and Ohio personal income
tax. A Fund which invests in Ohio Tax-Exempt Obligations may not be a desirable
investment for "substantial users" of facilities financed by private activity
bonds or industrial development bonds or for "related persons" of substantial
users. See "Dividends, Distributions, and Taxes" in the Prospectus.
Prices and yields on Ohio Tax-Exempt Obligations are dependent on a variety of
factors, including general money market conditions, the financial condition of
the issuer, general conditions in the market for tax-exempt obligations, the
size of a particular offering, the maturity of the obligation and ratings of
particular issues, and are subject to change from time to time. Current
information about the financial condition of an issuer of tax-exempt bonds or
notes is usually not as extensive as that which is made available by
corporations whose securities are publicly traded.
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Obligations of subdivision issuers of tax-exempt bonds and notes may be subject
to the provisions of bankruptcy, insolvency and other laws, such as the Federal
Bankruptcy Reform Act of 1978, as amended, affecting the rights and remedies of
creditors. Congress or state legislatures may seek to extend the time for
payment of principal or interest, or both, or to impose other constraints upon
enforcement of such obligations. There is also the possibility that, as a result
of litigation or other conditions, the power or ability of certain issuers to
meet their obligations to pay interest on and principal of their tax-exempt
bonds or notes may be materially impaired or their obligations may be found to
be invalid or unenforceable. Such litigation or conditions may, from time to
time, have the effect of introducing uncertainties in the market for tax-exempt
obligations or certain segments thereof, or may materially affect the credit
risk with respect to particular bonds or notes. Adverse economic, business,
legal or political developments might affect all or a substantial portion of the
Funds' tax-exempt bonds and notes in the same manner.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on tax-exempt bonds, and similar proposals may be introduced in the
future. A recent decision of the U.S. Supreme Court has held that Congress has
the constitutional authority to enact such legislation. It is not possible to
determine what effect the adoption of such proposals could have on the
availability of tax-exempt bonds for investment by a Fund and the value of its
portfolio.
The Code imposes certain continuing requirements on issuers of tax-exempt bonds
regarding the use, expenditure and investment of bond proceeds and the payment
of rebate to the United States of America. Failure by the issuer to comply
subsequent to the issuance of tax-exempt bonds with certain of these
requirements could cause interest on the bonds to become includable in gross
income retroactive to the date of issuance.
A Fund may invest in Ohio Tax-Exempt Obligations either by purchasing them
directly or by purchasing certificates of accrual or similar instruments
evidencing direct ownership of interest payments or principal payments, or both,
on Ohio Tax-Exempt Obligations, provided that, in the opinion of counsel to the
initial seller of each such certificate or instrument, any discount accruing on
such certificate or instrument that is purchased at a yield not greater than the
coupon rate of interest on the related Ohio Tax-Exempt Obligations will be
exempt from federal income tax and Ohio personal income tax to the same extent
as interest on such Ohio Tax-Exempt Obligations. A Fund may also invest in Ohio
Tax-Exempt Obligations by purchasing from banks participation interests in all
or part of specific holdings of Ohio Tax-Exempt Obligations. Such participations
may be backed in whole or in part by an irrevocable letter of credit or
guarantee of the selling bank. The selling bank may receive a fee from the Fund
in connection with the arrangement. A Fund will not purchase participation
interests unless it receives an opinion of counsel or a ruling of the Internal
Revenue Service that interest earned by it on Ohio Tax-Exempt Obligations in
which it holds such a participation interest is exempt from federal income tax
and Ohio personal income tax.
MUNICIPAL LEASE OBLIGATIONS. A Fund may invest a portion of its assets in
municipal leases and participation interests therein. These obligations, which
may take the form of a lease, an installment purchase, or a conditional sale
contract, are issued by state and local governments and authorities to acquire
land and a wide variety of equipment and facilities. Generally, Funds will not
hold such obligations directly as a lessor of the property, but will purchase a
participation interest in a municipal obligation from a bank or other third
party. A participation interest gives a Fund a specified, undivided interest in
the obligation in proportion to its purchased interest in the total amount of
the obligation.
Municipal leases frequently have risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set forth
requirements that states or municipalities must meet to incur debt. These may
include voter referenda, interest rate limits, or public sale requirements.
Leases, installment purchases, or conditional sale contracts (which normally
provide for title to the leased asset to pass to the governmental issuer) have
evolved as a means for governmental issuers to acquire property and equipment
without meeting their constitutional and statutory requirements for the issuance
of debt. Many leases and
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contracts include "non-appropriation clauses" providing that the governmental
issuer has no obligation to make future payments under the lease or contract
unless money is appropriated for such purposes by the appropriate legislative
body on a yearly or other periodic basis. Non-appropriation clauses free the
issuer from debt issuance limitations.
LOWER-RATED MUNICIPAL SECURITIES. The Fund does not currently intend to invest
in lower-rated municipal securities. However, the Fund may hold up to 5% of its
assets in municipal securities that have been downgraded below investment grade.
While the market for New York municipal securities is considered to be
substantial, adverse publicity and changing investor perceptions may affect the
ability of outside pricing services used by the Fund to value portfolio
securities, and the Fund's ability to dispose of lower-rated securities. Outside
pricing services are consistently monitored to assure that securities are valued
by a method that the Board of Trustees believes accurately reflects fair value.
The impact of changing investor perceptions may be especially pronounced in
markets where municipal securities are thinly traded.
The Fund may choose, at its expense, or in conjunction with others, to pursue
litigation seeking to protect the interests of security holders if it determines
this to be in the best interest of shareholders.
FEDERALLY TAXABLE OBLIGATIONS. The Fund does not intend to invest in securities
whose interest is federally taxable; however, from time to time, the Fund may
invest a portion of its assets on a temporary basis in fixed-income obligations
whose interest is subject to federal income tax. For example, the Fund may
invest in obligations whose interest is federally taxable pending the investment
or reinvestment in municipal securities of proceeds from the sale of its shares
of portfolio securities.
Should the Fund invest in federally taxable obligations, it would purchase
securities which in the Adviser's judgment are of high quality. This would
include obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; obligations of domestic banks; and repurchase agreements. The
Fund's standards for high quality taxable obligations are essentially the same
as those described by Moody's in rating corporate obligations within its two
highest ratings of Prime-1 and Prime-2, and those described by S&P in rating
corporate obligations within its two highest ratings of A-1 and A-2. In making
high quality determinations the Fund may also consider the comparable ratings of
other nationally recognized rating services.
The Supreme Court has held that Congress may subject the interest on municipal
obligations to federal income tax. Proposals to restrict or eliminate the
federal income tax exemption for interest on municipal obligations are
introduced before Congress from time to time. Proposals also may be introduced
before the New York legislature that would affect the state tax treatment of the
Fund's distributions. If such proposals were enacted, the availability of
municipal obligations and the value of the Fund's holdings would be affected and
the Trustees would reevaluate the Fund's investment objective and policies.
The Fund anticipates being as fully invested as practicable in municipal
securities; however, there may be occasions when, as a result of maturities of
portfolio securities, sales of Fund shares, or in order to meet redemption
requests, the Fund may hold cash that is not earning income. In addition, there
may be occasions when, in order to raise cash to meet redemptions, the Fund may
be required to sell securities at a loss.
REFUNDED MUNICIPAL BONDS. Investments by a Fund in refunded municipal bonds that
are secured by escrowed obligations issued or guaranteed by the U.S. Government
or its agencies or instrumentalities are considered to be investments in U.S.
Government obligations for purposes of the diversification requirements to which
the Funds is subject under the 1940 Act. As a result, more than 5% of a Fund's
total assets may be invested in such refunded bonds issued by a particular
municipal issuer. The escrowed securities securing such refunded municipal bonds
will consist exclusively of U.S. Government obligations, and will be held by an
independent escrow agent or be subject to an irrevocable pledge of the escrow
account to the debt service on the original bonds.
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WHEN-ISSUED SECURITIES. A Fund may purchase securities on a when-issued basis
(i.e., for delivery beyond the normal settlement date at a stated price and
yield). When a Fund agrees to purchase securities on a when issued basis, the
custodian will set aside cash or liquid portfolio securities equal to the amount
of the commitment in a separate account. Normally, the custodian will set aside
portfolio securities to satisfy the purchase commitment, and in such a case, the
Fund may be required subsequently to place additional assets in the separate
account in order to assure that the value of the account remains equal to the
amount of the Fund's commitment. It may be expected that a Fund's net assets
will fluctuate to a greater degree when it sets aside portfolio securities to
cover such purchase commitments than when it sets aside cash. When a Fund
engages in when-issued transactions, it relies on the seller to consummate the
trade. Failure of the seller to do so may result in the Fund incurring a loss or
missing the opportunity to obtain a price considered to be advantageous. The
Funds do not intend to purchase when issued securities for speculative purposes,
but only in furtherance of its investment objective.
DELAYED-DELIVERY TRANSACTIONS. A Fund may buy and sell securities on a
delayed-delivery basis. These transactions involve a commitment by the Fund to
purchase or sell specific securities at a predetermined price or yield, with
payment and delivery taking place after the customary settlement period for that
type of security (and more than seven days in the future). Typically, no
interest accrues to the purchaser until the security is delivered. The Fund may
receive fees for entering into delayed delivery transactions.
When purchasing securities on a delayed-delivery basis, a Fund assumes the
rights and risks of ownership, including the risks of price and yield
fluctuations in addition to the risks associated with the Fund's other
investments. Because a Fund is not required to pay for securities until the
delivery date, these delayed-delivery purchases may result in a form of
leverage. When delayed-delivery purchases are outstanding, the Fund will set
aside cash and appropriate liquid assets in a segregated custodial account to
cover its purchase obligations.
When the Fund has sold a security on a delayed-delivery basis, it does not
participate in further gains or losses with respect to the security. If the
other party to a delayed-delivery transaction fails to deliver or pay for the
securities, the Fund could miss a favorable price or yield opportunity or suffer
a loss.
The Fund may renegotiate delayed-delivery transactions after they are entered
into or may sell underlying securities before they are delivered, either of
which may result in capital gains or losses.
MORTGAGE-BACKED SECURITIES--IN GENERAL. Mortgage-Backed Securities are backed by
mortgage obligations including, among others, conventional 30-year fixed rate
mortgage obligations, graduated payment mortgage obligations, 15-year mortgage
obligations, and adjustable-rate mortgage obligations. All of these mortgage
obligations can be used to create pass-through securities. A pass-through
security is created when mortgage obligations are pooled together and undivided
interests in the pool or pools are sold. The cash flow from the mortgage
obligations is passed through to the holders of the securities in the form of
periodic payments of interest, principal, and prepayments (net of a service
fee). Prepayments occur when the holder of an individual mortgage obligation
prepays the remaining principal before the mortgage obligation's scheduled
maturity date. As a result of the pass-through of prepayments of principal on
the underlying securities, Mortgage-Backed Securities are often subject to more
rapid prepayment of principal than their stated maturity indicates. Because the
prepayment characteristics of the underlying mortgage obligations vary, it is
not possible to predict accurately the realized yield or average life of a
particular issue of pass-through certificates. Prepayment rates are important
because of their effect on the yield and price of the securities. Accelerated
prepayments have an adverse impact on yields for pass-throughs purchased at a
premium (i.e., a price in excess of principal amount) and may involve additional
risk of loss of principal because the premium may not have been fully amortized
at the time the obligation is repaid. The opposite is true for pass-throughs
purchased at a discount. A Fund may purchase Mortgage-Backed Securities at a
premium or at a discount. Among the U.S. Government securities in which a Fund
may invest are Government Mortgage-Backed Securities (or government guaranteed
mortgage-related securities). Such guarantees do not extend to the value of
yield of the Mortgage-Backed Securities themselves or of the Fund's shares.
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U.S. GOVERNMENT MORTGAGE-BACKED SECURITIES. Certain obligations of certain
agencies and instrumentalities of the U.S. Government are Mortgage-Backed
Securities. Some such obligations, such as those issued by GNMA are supported by
the full faith and credit of the U.S. Treasury; others, such as those of FNMA,
are supported by the right of the issuer to borrow from the Treasury; others are
supported by the discretionary authority of the U.S. Government to purchase the
agency's obligations; still others, such as those of the Federal Farm Credit
Banks or FHLMC, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored agencies and instrumentalities if it is not
obligated to do so by law.
The principal governmental (i.e., backed by the full faith and credit of the
U.S. Government) guarantor of Mortgage-Backed Securities is GNMA. GNMA is a
wholly owned U.S. Government corporation within the Department of Housing and
Urban Development. GNMA is authorized to guarantee, with the full faith and
credit of the U.S. Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks, and mortgage bankers) and pools of FHA-insured
or VA-guaranteed mortgages. Government-related (i.e., not backed by the full
faith and credit of the U.S. Government) guarantors include FNMA and FHLMC. FNMA
and FHLMC are government-sponsored corporations owned entirely by private
stockholders. Pass-through securities issued by FNMA and FHLMC are guaranteed as
to timely payment of principal and interest by FNMA and FHLMC, respectively, but
are not backed by the full faith and credit of the U.S. Government.
GNMA CERTIFICATES. Certificates of the GNMA are mortgage-backed securities which
evidence an undivided interest in a pool or pools of mortgages. GNMA
Certificates that a Fund may purchase are the "modified pass-through" type,
which entitle the holder to receive timely payment of all interest and principal
payments due on the mortgage pool, net of fees paid to the "issuer" and GNMA,
regardless of whether or not the mortgagor actually makes the payment.
The National Housing Act authorizes GNMA to guarantee the timely payment of
principal and interest on securities backed by a pool of mortgages insured by
the Federal Housing Administration ("FHA") or guaranteed by the Veterans
Administration ("VA"). The GNMA guarantee is backed by the full faith and credit
of the U.S. Government. GNMA is also empowered to borrow without limitation from
the U.S. Treasury if necessary to make any payments required under its
guarantee.
The estimated average life of a GNMA Certificate is likely to be substantially
shorter than the original maturity of the mortgages underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures usually will
result in the return of the greater part of principal investment long before the
maturity of the mortgages in the pool. Foreclosures impose no risk to principal
investment because of the GNMA guarantee, except to the extent that a Fund has
purchased the certificates above par in the secondary market.
FHLMC SECURITIES. The FHLMC was created in 1970 to promote development of a
nationwide secondary market in conventional residential mortgages. The FHLMC
issues two types of mortgage pass-through securities ("FHLMC Certificates"),
mortgage participation certificates, and collateralized mortgage obligations
("CMOs"). Participation Certificates resemble GNMA Certificates in that each
Participation Certificate represents a pro rata share of all interest and
principal payments made and owed on the underlying pool. The FHLMC guarantees
timely monthly payment of interest on PCs and the ultimate payment of principal.
Recently introduced FHLMC Gold Participation Certificates guarantee the timely
payment of both principal and interest.
FHLMC CMOs are backed by pools of agency mortgage-backed securities and the
timely payment of principal and interest of each tranche is guaranteed by the
FHLMC. The FHLMC guarantee is not backed by the full faith and credit of the
U.S. Government.
FNMA SECURITIES. The FNMA was established in 1938 to create a secondary market
in mortgages insured by the FHA, but has expanded its activity to the secondary
market for conventional residential mortgages. FNMA
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primarily issues two types of mortgage-backed securities, guaranteed mortgage
pass-through certificates ("FNMA Certificates") and CMOs. FNMA Certificates
resemble GNMA Certificates in that each FNMA Certificate represents a pro rata
share of all interest and principal payments made and owed on the underlying
pool. FNMA guarantees timely payment of interest and principal on FNMA
Certificates and CMOs. The FNMA guarantee is not backed by the full faith and
credit of the U.S. Government.
COLLATERALIZED MORTGAGE OBLIGATIONS. Mortgage-Backed Securities in which a Fund
may invest may also include CMOs. CMOs are securities backed by a pool of
mortgages in which the principal and interest cash flows of the pool are
channeled on a prioritized basis into two or more classes, or tranches, of
bonds.
NON-GOVERNMENTAL MORTGAGE-BACKED SECURITIES. A Fund may invest in
mortgage-related securities issued by non-governmental entities. Commercial
banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers, and other secondary market issuers also create pass-through
pools of conventional residential mortgage loans. Such issuers also may be the
originators of the underlying mortgage loans as well as the guarantors of the
mortgage-related securities. Pools created by such non-governmental issuers
generally offer a higher rate of interest than government and government-related
pools because there are not direct or indirect government guarantees of payments
in the former pools. However, timely payment of interest and principal of these
pools is supported by various forms of insurance or guarantees, including
individual loan, title, pool, and hazard insurance. The insurance and guarantees
are issued by government entities, private insurers and the mortgage poolers.
Such insurance and guarantees and the creditworthiness of the issuers, thereof
will be considered in determining whether a Non-Governmental Mortgage-Backed
Security meets a Fund's investment quality standards. There can be no assurance
that the private insurers can meet their obligations under the policies. A Fund
may buy Non-Governmental Mortgage-Backed Related Securities without insurance or
guarantees if, through an examination of the loan experience and practices of
the poolers, the Adviser determines that the securities meet the Fund's quality
standards. Although the market for such securities is becoming increasingly
liquid, securities issued by certain private organizations may not be readily
marketable. A Fund will not purchase mortgage-related securities or any other
assets which in the opinion of the Adviser are illiquid if, as a result, more
than 15% of the value of the Fund's net assets will be invested in illiquid
securities.
A Fund may purchase mortgage-related securities with stated maturities in excess
of 10 years. Mortgage-related securities include CMOs and participation
certificates in pools of mortgages. The average life of mortgage-related
securities varies with the maturities of the underlying mortgage instruments,
which have maximum maturities of 40 years. The average life is likely to be
substantially less than the original maturity of the mortgage pools underlying
the securities as the result of mortgage prepayments. The rate of such
prepayments, and hence the average life of the certificates, will be a function
of current market interest rates and current conditions in the relevant housing
markets. The impact of prepayment of mortgages is described under "Government
Mortgage-Backed Securities." Estimated average life will be determined by the
Adviser. Various independent mortgage-related securities dealers publish
estimated average life data using proprietary models, and in making such
determinations, the Adviser will rely on such data except to the extent such
data are deemed unreliable by the Adviser. The Adviser might deem data
unreliable which appeared to present a significantly different estimated average
life for a security than data relating to the estimated average life of
comparable securities as provided by other independent mortgage-related
securities dealers.
ASSET-BACKED SECURITIES. Asset-backed securities are debt securities backed by
pools of automobile or other commercial or consumer finance loans. The
collateral backing asset-backed securities cannot be foreclosed upon. These
issues are normally traded over-the-counter and typically have a short to
intermediate maturity structure, depending on the paydown characteristics of the
underlying financial assets which are passed through to the security holder.
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FUTURES AND OPTIONS
FUTURES CONTRACTS. The Funds may enter into futures contracts, options on
futures contracts, and stock index futures contracts and options thereon for the
purposes of remaining fully invested and reducing transaction costs. Futures
contracts provide for the future sale by one party and purchase by another party
of a specified amount of a specific security, class of securities, or an index
at a specified future time and at a specified price. A stock index futures
contract is a bilateral agreement pursuant to which two parties agree to take or
make delivery of an amount of cash equal to a specified dollar amount times the
difference between the stock index value at the close of trading of the
contracts and the price at which the futures contract is originally struck.
Futures contracts which are standardized as to maturity date and underlying
financial instrument are traded on national futures exchanges. Futures exchanges
and trading are regulated under the Commodity Exchange Act by the Commodity
Futures Trading Commission (the "CFTC"), a U.S. Government agency.
The Funds may enter into contracts for the future delivery of securities and
futures contracts based on a specific security, class of securities or an index,
purchase or sell options on any such futures contracts and engage in related
closing transactions. A futures contract on a securities index is an agreement
obligating either party to pay, and entitling the other party to receive, while
the contract is outstanding, cash payments based on the level of a specified
securities index.
Although futures contracts by their terms call for actual delivery and
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position (buying a
contract which has previously been "sold," or "selling" a contract previously
purchased) in an identical contract to terminate the position. A futures
contract on a securities index is an agreement obligating either party to pay,
and entitling the other party to receive, while the contract is outstanding,
cash payments based on the level of a specified securities index. The
acquisition of put and call options on futures contracts will, respectively,
give a Fund the right (but not the obligation), for a specified price, to sell
or to purchase the underlying futures contract, upon exercise of the option, at
any time during the option period. Brokerage commissions are incurred when a
futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Initial margin deposits on futures contracts are customarily set at
levels much lower than the prices at which the underlying securities are
purchased and sold, typically ranging upward from less than 5% of the value of
the contract being traded.
After a futures contract position is opened, the value of the contract is
marked-to-market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Funds
expect to earn interest income on its margin deposits.
When interest rates are expected to rise or market values of portfolio
securities are expected to fall, a Fund can seek through the sale of futures
contracts to offset a decline in the value of its portfolio securities. When
interest rates are expected to fall or market values are expected to rise, a
Fund, through the purchase of such contracts, can attempt to secure better rates
or prices for a Fund than might later be available in the market when it effects
anticipated purchases.
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The Funds will only sell futures contracts to protect securities it owns against
price declines or purchase contracts to protect against an increase in the price
of securities it intends to purchase.
The Funds' ability to use futures trading effectively depends on several
factors. First, it is possible that there will not be a perfect price
correlation between a futures contract and its underlying stock index. Second,
it is possible that a lack of liquidity for futures contracts could exist in the
secondary market, resulting in an inability to close a futures position prior to
its maturity date. Third, the purchase of a futures contract involves the risk
that a Fund could lose more than the original margin deposit required to
initiate a futures transaction.
Futures transactions involve brokerage costs and require a Fund to segregate
assets to cover contracts that would require it to purchase securities or
currencies. A Fund may lose the expected benefit of futures transactions if
interest rates, exchange rates or securities prices move in an unanticipated
manner. Such unanticipated changes may also result in poorer overall performance
than if a Fund had not entered into any futures transactions. In addition, the
value of a Fund's futures positions may not prove to be perfectly or even highly
correlated with the value of its portfolio securities, limiting a Fund's ability
to hedge effectively against interest rate and/or market risk and giving rise to
additional risks. There is no assurance of liquidity in the secondary market for
purposes of closing out futures positions.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. The Funds will not enter into
futures contract transactions for purposes other than bona fide hedging purposes
to the extent that, immediately thereafter, the sum of its initial margin
deposits on open contracts exceeds 5% of the market value of a Fund's total
assets. In addition, a Fund will not enter into futures contracts to the extent
that the value of the futures contracts held would exceed 1/3 of the Fund's
total assets. Futures transactions will be limited to the extent necessary to
maintain a Fund's qualification as a regulated investment company.
The Victory Portfolios have undertaken to restrict their futures contract
trading as follows: first, the Victory Portfolios will not engage in
transactions in futures contracts for speculative purposes; second, the Victory
Portfolios will not market its funds to the public as commodity pools or
otherwise as vehicles for trading in the commodities futures or commodity
options markets; third, the Victory Portfolios will disclose to all prospective
shareholders the purpose of and limitations on its funds' commodity futures
trading; fourth, the Victory Portfolios will submit to the CFTC special calls
for information. Accordingly, registration as a Commodities Pool Operator with
the CFTC is not required.
In addition to the margin restrictions discussed above, transactions in futures
contracts may involve the segregation of funds pursuant to requirements imposed
by the SEC. Under those requirements, where a Fund has a long position in a
futures contract, it may be required to establish a segregated account (not with
a futures commission merchant or broker) containing cash or certain liquid
assets equal to the purchase price of the contract (less any margin on deposit).
For a short position in futures or forward contracts held by the Fund, those
requirements may mandate the establishment of a segregated account (not with a
futures commission merchant or broker) with cash or certain liquid assets that,
when added to the amounts deposited as margin, equal the market value of the
instruments underlying the futures contracts (but are not less than the price at
which the short positions were established). However, segregation of assets is
not required if a Fund "covers" a long position. For example, instead of
segregating assets, a Fund, when holding a long position in a futures contract,
could purchase a put option on the same futures contract with a strike price as
high or higher than the price of the contract held by a Fund. In addition, where
a Fund takes short positions, or engages in sales of call options, it need not
segregate assets if it "covers" these positions. For example, where a Fund holds
a short position in a futures contract, it may cover by owning the instruments
underlying the contract. A Fund may also cover such a position by holding a call
option permitting it to purchase the same futures contract at a price no higher
than the price at which the short position was established. Where a Fund sells a
call option on a futures contract, it may cover either by entering into a long
position in the same contract at a price no higher than the strike price of the
call option or by owning the instruments underlying the futures contract. A Fund
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could also cover this position by holding a separate call option permitting it
to purchase the same futures contract at a price no higher than the strike price
of the call option sold by a Fund.
In addition, the extent to which a Fund may enter into transactions involving
futures contracts may be limited by the Code's requirements for qualification as
a registered investment company and a Fund's intention to qualify as such.
RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a Fund would continue to be required to make daily cash payments to
maintain the required margin. In such situations, if a Fund has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, a Fund may be
required to make delivery of the instruments underlying futures contracts it
holds. The inability to close options and futures positions also could have an
adverse impact on the ability to effectively hedge them. A Fund will minimize
the risk that they will be unable to close out a futures contract by only
entering into futures contracts which are traded on national futures exchanges
and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. Because the deposit
requirements in the futures markets are less onerous than margin requirements in
the securities market, there may be increased participation by speculators in
the futures market which may also cause temporary price distortions. A
relatively small price movement in a futures contract may result in immediate
and substantial loss (as well as gain) to the investor. For example, if at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit if the contract
were closed out. Thus, a purchaser or sale of a futures contract may result in
losses in excess of the amount invested in the contract. However, because the
futures strategies engaged in by the Funds are only for hedging purposes, the
Adviser does not believe that the Funds are subject to the risks of loss
frequently associated with futures transactions. The Funds would presumably have
sustained comparable losses if, instead of the futures contract, it had invested
in the underlying financial instrument and sold it after the decline.
Use of futures transactions by the Funds involve the risk of imperfect or no
correlation where the securities underlying futures contract have different
maturities than the portfolio securities being hedged. It is also possible that
the Funds could both lose money on futures contracts and also experience a
decline in value of its portfolio securities. There is also the risk of loss by
the Funds of margin deposits in the event of bankruptcy of a broker with whom
the Funds have open positions in a futures contract or related option.
OPTIONS. The Funds may sell (write) call options which are traded on national
securities exchanges with respect to common stock in its portfolio. A Fund must
at all times have in its portfolio the securities which it may be obligated to
deliver if the option is exercised, except the Special Growth Fund, which may
write uncovered calls, that is, call options on securities that it does not own.
The risk of writing uncovered call options is that the writer of the option may
be forced to acquire the underlying security at a price in excess of the
exercise price of the option, that is, the price at which the writer has agreed
to sell the underlying security to the purchaser of the option. A Fund may write
call options in an attempt to realize a greater level of current income than
would be realized on the securities alone. A Fund may also write call options as
a partial hedge against a possible stock market decline or to extend a holding
period on a stock which is under consideration for sale in order to create a
long-term capital gain. In view of their investment objective, a Fund generally
would write call options only in circumstances where the Adviser does not
anticipate significant appreciation of the underlying security in the near
future or has otherwise determined to dispose of the security. As the writer of
a
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call option, a Fund receives a premium for undertaking the obligation to sell
the underlying security at a fixed price during the option period, if the option
is exercised. So long as a Fund remains obligated as a writer of a call option,
it forgoes the opportunity to profit from increases in the market price of the
underlying security above the exercise price of the option, except insofar as
the premium represents such a profit. A Fund retains the risk of loss should the
value of the underlying security decline. A Fund may also enter into "closing
purchase transactions" in order to terminate its obligation as a writer of a
call option prior to the expiration of the option. Although the writing of call
options only on national securities exchanges increases the likelihood of a
Fund's ability to make closing purchase transactions, there is no assurance that
a Fund will be able to effect such transactions at any particular time or at any
acceptable price. The writing of call options could result in increases in a
Fund's portfolio turnover rate, especially during periods when market prices of
the underlying securities appreciate.
PUTS. A put is a right to sell a specified security (or securities) within a
specified period of time at a specified exercise price. A Fund may sell,
transfer, or assign a put only in conjunction with the sale, transfer, or
assignment of the underlying security or securities. The amount payable to a
Fund upon its exercise of a "put" is normally (i) a Fund's acquisition cost of
the securities (excluding any accrued interest which a Fund paid on the
acquisition), less any amortized market premium or plus any amortized market or
original issue discount during the period a Fund owned the securities, plus (ii)
all interest accrued on the securities since the last interest payment date
during that period. Puts may be acquired by a Fund to facilitate the liquidity
of its portfolio assets. Puts may also be used to facilitate the reinvestment of
a Fund's assets at a rate of return more favorable than that of the underlying
security. Puts may, under certain circumstances, also be used to shorten the
maturity of underlying variable rate or floating rate securities for purposes of
calculating the remaining maturity of those securities and the dollar-weighted
average portfolio maturity of a Fund's assets. See "Variable and Floating Rate
Notes" and "Valuation" in this SAI.
A Fund generally will acquire puts only where the puts are available without the
payment of any direct or indirect consideration. However, if necessary or
advisable, a Fund may pay for puts either separately in cash or by paying a
higher price for portfolio securities which are acquired subject to the puts
(thus reducing the yield to maturity otherwise available for the same
securities). The Funds intends to enter into puts only with dealers, banks, and
broker-dealers which, in the Adviser's opinion, present minimal credit risks.
The Special Value Fund may write put options from time to time. Such options may
be listed on a national securities exchange and issued by the Options Clearing
Corporation or traded over-the-counter. The Special Growth Fund may seek to
terminate its position in a put option it writes before exercise by closing out
the option in the secondary market at its current price. If the secondary market
is not liquid for a put option the Special Growth Fund has written, however, the
Special Growth Fund must continue to be prepared to pay the strike price while
the option is outstanding, regardless of price changes, and must continue to set
aside assets to cover its position. Upon the exercise of an option, the Fund is
not entitled to the gains, if any, on securities underlying the options. The
Special Growth Fund also may purchase index put and call options and write index
options. Through the writing or purchase of index options, the Special Growth
Fund can achieve many of the same objectives as through the use of options on
individual securities. Utilizing options is a specialized investment technique
that entails a substantial risk of a complete loss of the amounts paid as
premiums to writers of options.
ILLIQUID INVESTMENTS. Illiquid investments are investments that cannot be sold
or disposed of, within seven business days, in the ordinary course of business
at approximately the prices at which they are valued.
Under the supervision of the Victory Portfolios' Board of Trustees, the Adviser
determines the liquidity of the Funds' investments and, through reports from the
Adviser, the Trustees monitor investments in illiquid instruments. In
determining the liquidity of a Fund's investments, the Adviser may consider
various factors,
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including (1) the frequency of trades and quotations, (2) the number of dealers
and prospective purchasers in the marketplace, (3) dealer undertakings to make a
market, (4) the nature of the security (including any demand or tender
features), and (5) the nature of the marketplace for trades (including the
ability to assign or offset the Funds' rights and obligations relating to the
investment).
Investments currently considered by a Fund to be illiquid include repurchase
agreements not entitling the holder to payment of principal and interest within
seven days, over the counter options, non-government stripped fixed-rate
mortgage-backed securities, and Restricted Securities.
Also, the Adviser may determine some securities to be illiquid.
However, with respect to over-the-counter options a Fund writes, all or a
portion of the value of the underlying instrument may be illiquid depending on
the assets held to cover the option and the nature and terms of any agreement a
Fund may have to close out the option before expiration.
In the absence of market quotations, illiquid investments are priced at fair
value as determined in good faith by a committee appointed by the Trustees.
If through a change in values, net assets, or other circumstances, a Fund were
in a position where more than 15% of its net assets were invested in illiquid
securities, it would seek to take appropriate steps to protect liquidity.
RESTRICTED SECURITIES. Restricted securities generally can be sold in privately
negotiated transactions, pursuant to an exemption from registration under the
1933 Act, or in a registered public offering.
Where registration is required, a Fund may be obligated to pay all or part of
the registration expense and a considerable period may elapse between the time
it decides to seek registration and the time the Fund may be permitted to sell a
security under an effective registration statement.
If, during such a period, adverse market conditions were to develop, a Fund
might obtain a less favorable price than prevailed when it decided to seek
registration of the shares.
SECURITIES LENDING TRANSACTIONS. The Funds may from time to time lend securities
from their portfolio to broker-dealers, banks, financial institutions and
institutional borrowers of securities and receive collateral in the form of cash
or U.S. Government Obligations. Under the Funds' current practices (which are
subject to change), the loan collateral must be maintained at all times in an
amount equal to at least 102% of the current market value of the loaned
securities. The Funds will not lend portfolio securities in excess of 20% of the
value of their total assets, nor will the Funds lend their portfolio securities
to any officer, director, employee, or affiliate of the Funds, The Victory
Portfolios, the Adviser, or the Distributor. A Fund must receive a minimum of
100% collateral, plus any interest due in the form of cash or U.S. Government
Obligations. This collateral must be valued daily and should the market value of
the loaned securities increase, the borrower must furnish additional collateral
to a Fund. During the time portfolio securities are on loan, the borrower will
pay the Fund any dividends or interest paid on such securities plus any interest
negotiated between the parties to the lending agreement. Loans will be subject
to termination by the Funds or the borrower at any time. While a Fund will not
have the right to vote securities on loan, they intend to terminate loans and
regain the right to vote if that is considered important with respect to the
investment. A Fund will only enter into loan arrangements with broker-dealers,
banks or other institutions which the Adviser has determined are creditworthy
under guidelines established by the Trustees. The Funds will limit their
securities lending to 33 1/3% of total assets.
SHORT SALES AGAINST-THE-BOX. The Funds will not make short sales of securities,
other than short sales "against-the-box." In a short sale against-the-box, a
Fund sells a security that it owns, or a security equivalent in kind and amount
to the security sold short that the Fund has the right to obtain for delivery at
a specified
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date in the future. A Fund will enter into short sales against-the-box to hedge
against unanticipated declines in the market price of portfolio securities or to
defer and unrealized gain. If the value of the securities sold short increases
prior to the scheduled delivery date, a Fund loses the opportunity to
participate in the gain.
INVESTMENT GRADE AND HIGH QUALITY SECURITIES. The Funds may invest in
"investment grade" obligations, which are those rated at the time of purchase
within the four highest rating categories assigned by an NRSRO or, if unrated,
are obligations that the Adviser determines to be of comparable quality. The
applicable securities ratings are described in the Appendix. "High-quality"
short-term obligations are those obligations which, at the time of purchase, (1)
possess a rating in one of the two highest ratings categories from at least one
NRSRO (for example, commercial paper rated "A-1" or "A-2" by S&P or "P-1" or
"P-2" by Moody's) or (2) are unrated by an NRSRO but are determined by the
Adviser to present minimal credit risks and to be of comparable quality to rated
instruments eligible for purchase by the Funds under guidelines adopted by the
Board of Trustees.
PARTICIPATION INTERESTS. The Funds may purchase interests in securities from
financial institutions such as commercial and investment banks, savings and loan
associations and insurance companies. These interests may take the form of
participation, beneficial interests in a trust, partnership interests or any
other form of indirect ownership. The Funds invest in these participation
interests, in order to obtain credit enhancement or demand features that would
not be available through direct ownership of the underlying securities.
WARRANTS. Warrants are securities that give a Fund the right to purchase equity
securities from the issuer at a specific price (the strike price) for a limited
period of time. The strike price of warrants typically is much lower than the
current market price of the underlying securities, yet they are subject to
greater price fluctuations. As a result, warrants may be more volatile
investments than the underlying securities and may offer greater potential for
capital appreciation as well as capital loss.
REFUNDING CONTRACTS. A Fund generally will not be obligated to pay the full
purchase price if it fails to perform under a refunding contract. Instead,
refunding contracts generally provide for payment of liquidated damages to the
issuer (currently 15-20% of the purchase price). A Fund may secure its
obligations under a refunding contract by depositing collateral or a letter of
credit equal to the liquidated damages provisions of the refunding contract.
When required by SEC guidelines, a Fund will place liquid assets in a segregated
custodial account equal in amount to its obligations under refunding contracts.
STANDBY COMMITMENTS. A Fund may enter into standby commitments, which are puts
that entitle holders to same-day settlement at an exercise price equal to the
amortized cost of the underlying security plus accrued interest, if any, at the
time of exercise. The Funds may acquire standby commitments to enhance the
liquidity of portfolio securities.
Ordinarily, the Funds may not transfer a standby commitment to a third party,
although they could sell the underlying municipal security to a third party at
any time. The Funds may purchase standby commitments separate from or in
conjunction with the purchase of securities subject to such commitments. In the
latter case, the Funds would pay a higher price for the securities acquired,
thus reducing their yield to maturity.
Standby commitments are subject to certain risks, including the ability of
issuers of standby commitments to pay for securities at the time the commitments
are exercised; the fact that standby commitments are not marketable by the
Funds; and the possibility that the maturities of the underlying securities may
be different from those of the commitments.
FOREIGN INVESTMENTS. A Fund may invest in securities issued by foreign branches
of U.S. banks, foreign banks, or other foreign issuers, including sponsored and
unsponsored American Depository Receipts ("ADRs") and securities purchased on
foreign securities exchanges. Such investment may subject the Fund to
significant investment risks that are different from, and additional to, those
related to investments in obligations of U.S. domestic issuers or in U.S.
securities markets. Unsponsored ADRs may involve additional risks.
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The value of securities denominated in or indexed to foreign currencies, and of
dividends and interest from such securities, can change significantly when
foreign currencies strengthen or weaken relative to the U.S. dollar. Foreign
securities markets generally have less trading volume and less liquidity than
U.S. markets, and prices on some foreign markets can be highly volatile. Many
foreign countries lack uniform accounting and disclosure standards comparable to
those applicable to U.S. companies, and it may be more difficult to obtain
reliable information regarding an issuer's financial condition and operations.
In addition, the costs of foreign investing, including withholding taxes,
brokerage commissions, and custodial costs, are generally higher than for U.S.
investments.
Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers, and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It may also be difficult to enforce legal rights
in foreign countries.
Investing abroad also involves different political and economic risks. Foreign
investments may be affected by actions of foreign governments adverse to the
interests of U.S. investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. There may be a greater possibility of
default by foreign governments or foreign government-sponsored enterprises.
Investments in foreign countries also involve a risk of local political,
economic, or social instability, military action or unrest, or adverse
diplomatic developments. There is no assurance that the Advisers will be able to
anticipate these potential events or counter their effects.
The considerations noted above generally are intensified for investments in
developing countries. Developing countries may have relatively unstable
governments, economies based on only a few industries, and securities markets
that trade a small number of securities.
A Fund may invest in foreign securities that impose restrictions on transfer
within the U.S. or to U.S. persons. Although securities subject to transfer
restrictions may be marketable abroad, they may be less liquid than foreign
securities of the same class that are not subject to such restrictions.
The International Growth Fund currently invests in the securities of issuers
based in a number of foreign countries. The Adviser continuously evaluates
issuers based in countries all over the world. Accordingly, the Fund may invest
in the securities of issuers based in any country, subject to approval by the
Trustees, when such securities met the investment criteria of the Adviser and
are consistent with the investment objectives and policies of the Fund.
MISCELLANEOUS SECURITIES. The Funds can invest in various securities issued by
domestic and foreign corporations, including preferred stocks and investment
grade corporate bonds, notes, and warrants. Bonds are long-term corporate debt
instruments secured by some or all of the issuer's assets, debentures are
general corporate debt obligations backed only by the integrity of the borrower,
and warrants are instruments that entitle the holder to purchase a certain
amount of common stock at a specified price, which price is usually higher than
the current market price at the time of issuance. Preferred stocks are
instruments that combine qualities both of equity and debt securities.
Individual issues of preferred stock will have those rights and liabilities that
are spelled out in the governing document. Preferred stocks usually pay a fixed
dividend per quarter (or annum) and are senior to common stock in terms of
liquidation and dividends rights, and preferred stocks typically do not have
voting rights.
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ADDITIONAL INFORMATION CONCERNING OHIO ISSUERS
The Ohio Municipal Bond Fund and the Ohio Municipal Money Market will invest
most of their 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 Ohio Municipal
Bond Fund and Ohio Municipal Money Market Fund are 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 on the
performance of the Funds. 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 1995 is
11,157,000.
Although manufacturing (including auto-related manufacturing) in Ohio remains an
important part of the State's economy, the greatest growth in employment in Ohio
in recent years, consistent with national trend, has been in the
non-manufacturing area. Ohio ranked fourth in the nation in 1991 gross state
product derived from manufacturing. Manufacturing was 26.3% of Ohio's gross
state product, compared to 17.1% of that total being from "services." In
addition, agriculture and "agribusiness," continue as important elements to the
Ohio economy. Over half of the State's area is devoted to farming and
approximately 16% of total employment is 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 (4.8% versus 5.6% in
1995). 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
by the Ohio Municipal Bond Fund and Ohio Municipal Money Market 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.
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The biennium-ending fund balances at June 30, 1989 were $475.1 million in the
GRF and $353 million in the Budget Stabilization Fund ("BSF"), a cash and
budgetary management fund. June 30, 1991 ending fund balances were $135.3
million (GRF) and $300 million (BSF).
The next biennium, 1992-93, presented significant challenges to State finances,
successfully addressed. To allow time to resolve certain budget differences, an
interim appropriations act was enacted effective July 1, 1991; it included debt
service and lease rental appropriations for the entire biennium, while
continuing most other appropriations for a month. Pursuant to the general
appropriations act for the entire biennium, passed on July 11, 1991, $200
million was transferred from the BSF to the GRF in FY 1992.
Based on updated results and forecasts in the course of that FY, both in light
of the continuing uncertain nationwide economic situation, there was projected
and timely addressed an FY 1992 imbalance in GRF resources and expenditures. In
response, the Governor ordered most State agencies to reduce GRF spending in the
last six months of FY 1992 by a total of approximately $184 million; the $100.4
million BSF balance, and additional amounts from certain other funds, were
transferred late in the FY to the GRF; and adjustments were made in the timing
of certain tax payments.
A significant GRF shortfall (approximately $520 million) was then projected for
FY 1993. It was addressed by appropriate legislative and administrative actions,
including the Governor's ordering $300 million in selected GRF spending
reductions and subsequent executive and legislative action (a combination of tax
revisions and additional spending reductions). The June 30, 1993 ending GRF fund
balance was approximately $111 million, of which, as a first step to BSF
replenishment, $21 million was deposited in the BSF.
None of the spending reductions were applied to appropriations needed for debt
service or lease rentals on any State obligations.
The 1994-95 biennium presented a more affirmative financial picture. Based on
June 30, 1994 balances, an additional $260 million was deposited in the BSF. The
biennium ended June 30, 1995 with a GRF ending fund balance of $928 million, of
which $535.2 million had been transferred into the BSF (which had a November 21,
1995 balance of over $828 million).
The GRF appropriations act for the current biennium was passed on June 28, 1995
and promptly signed (after selective vetoes) by the Governor. That act provided
for total GRF biennial expenditures of approximately $33.5 billion, with the
following examples of GRF major program biennial expenditures increases over
those for the prior biennium: higher educations, 13.1%; mental health and mental
retardation; 4.8%; primary and secondary education, 15.4%, human services 9.5%;
justice and corrections, 28%.
Necessary GRF debt service and lease-rental appropriations for the entire
biennium were requested in the Governor's proposed budget and incorporated in
the related appropriations bill as introduced, and in the bill's version as
passed by the House and the Senate in the act as passed and signed. The same is
true for the separate appropriations acts for the Department of Transportation,
Department of Public Safety and Bureau of Workers' Compensation, which included
lease-rental appropriations for certain OBA-financed ODOT, DPS and BWC projects.
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
$70,000,000, was transferred to a variety of funds, including $535,200,000 to
the BSF (which has a current balance of $828,300,000), and $322,800,000 to other
funds, including school assistance funds and, in anticipation of possible
federal programs changes, a human services stabilization fund.
The June 30, 1996 GRF ending fund balance was over $781,000,000, which was
higher than forecast. In accordance with General Assembly directions,
$100,000,000 was promptly transferred from the GRF to the
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fund providing for the elementary and secondary school computer network, and
$30,000,000 to a new fund for State transportation infrastructure. Approximately
$400,800,000 is serving as a basis for temporary 1996 personal income tax
reductions aggregating that amount.
Litigation pending in federal district court contests the Ohio Department of
Human Services' (ODHS) prior Medicaid financial eligibility rules for married
couples where one spouse is living in a nursing facility and the other spouse
resides in the community. ODHS promulgated new eligibility rules effective
January 1, 1996. It is appealing a court order directing it to provide notice to
persons potentially affected by the former rules from 1990 through 1995. It is
not possible at this time to state whether this appeal will be successful or,
should plaintiffs prevail, the period (beyond the current fiscal year) during
which necessary additional Medicaid expenditures would have to be made.
Plaintiffs have estimated total additional Medicaid expenditures at $600,000,000
for the retroactive period and, based on current law, it is estimated that the
State's share of those additional expenditures is approximately $240,000,000.
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.)
From 1921 to date Ohio votes approved 15 constitutional amendments authorizing
the incurrence of State debt to which taxes or excises were pledged for payment.
All related to capital facilities financing, except for three veteran's bonuses.
The only such tax-supported debt still authorized to be incurred are highways
and local infrastructure bonds, and general obligation coal development and
natural resources bonds.
The electors approved in November 1995 a constitutional amendment that extends
the local infrastructure bond program (authorizing an additional $1.2 billion of
State full faith and credit obligations to be issued over 10 years for the
purpose), and authorizes additional highway bonds (expected to be payable
primarily from highway use receipts). The latter supersedes the prior $500
million highway obligation authorization, and authorizes not more that $1.2
billion to be outstanding at any time and not more than $220 million to be
issued in a fiscal year.
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.
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 in 1995 has adopted a resolution that would have submitted 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. The
Senate did not act on
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the resolution. A new General Assembly has convened. Proposals do not carry over
between General Assemblies.
The State and State agencies have issued revenue bonds that are payable from net
revenues of or relating to revenue-producing facilities or categories of
facilities, such as those issued by the Ohio Turnpike Commission. Under
interpretations by Ohio courts those bonds are not "debt" within the state's
Constitution. The Constitution authorizes State bonds (issued by the Ohio
Housing Finance Agency) for certain housing purposes; tax moneys may not be
obligated or pledged to these bonds. 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, $71.1 million for 29 districts in FY 1995 and $87.2
million for 20 districts in FY 1996.
Ohio's 943 incorporated cities and villages rely primarily on property and
municipal income taxes for their operations. With other subdivisions, they also
receive local government support and property tax relief moneys distributed by
the State. For those few municipalities that on occasion have faced significant
financial problems, there are statutory procedures for a joint State/local
commission to monitor the municipality's fiscal affairs and for development of a
financial plan to eliminate deficits and cure any defaults. Since inception in
1979, these procedures have been applied to 23 cites and villages; for 18 of
them the fiscal situation was resolved and the procedures terminated.
At present the State itself does not levy ad valorem taxes on real or tangible
personal property. Those taxes are levied by political subdivisions and other
local taxing districts. The Constitution has since 1934 limited to 1% of true
value in money the amount of the aggregate levy (including a levy for unvoted
general obligations) of property taxes by all overlapping subdivisions, without
a vote of the electors or a municipal charter provision, and statutes limit the
amount of that aggregate levy to 10 mills per $1 of assessed valuation (commonly
referred to as the "ten-mill limitation"). Voted general obligations of
subdivisions are payable from property taxes that are unlimited as to amount or
rate.
ADDITIONAL INFORMATION CONCERNING NEW YORK ISSUERS
The New York Tax-Free Fund will invest substantially all of its assets in New
York municipal securities. In addition, the specific New York municipal
securities in which the New York Tax-Free Fund will invest will change from time
to time. The New York Tax-Free Fund is therefore susceptible to political,
economic, regulatory or other factors affecting issuers of New York municipal
securities. The following information constitutes only a brief summary of a
number of the complex factors which may affect issuers of New York municipal
securities and does not purport to be a complete or exhaustive description of
all adverse conditions to which issuers of New York municipal securities may be
subject. Such information is derived from official statements utilized in
connection with the issuance of New York municipal securities, as well as from
other
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publicly available documents. Such information has not been independently
verified by the New York Tax-Free Fund, and the New York Tax-Free Fund assumes
no responsibility for the completeness or accuracy of such information.
Additionally, many factors, including national, economic, social and
environmental policies and conditions, which are not within the control of such
issuers, could have a material adverse impact on the financial condition of such
issuers. The New York Tax-Free Fund cannot predict whether or to what extent
such factors or other factors may affect the issuers of New York municipal
securities, the market value or marketability of such securities or the ability
of the respective issuers of such securities acquired by the Fund to pay
interest on or principal of such securities. The creditworthiness of obligations
issued by local New York issuers may be unrelated to the creditworthiness of
obligations issued by the State of New York, and there is no responsibility on
the part of the State of New York to make payments on such local obligations.
There may be specific factors that are applicable in connection with investment
in the obligations of particular issuers located within New York, and it is
possible the Fund will invest in obligations of particular issuers as to which
such specific factors are applicable. However, the information set forth below
is intended only as a general summary and not as a discussion of any specific
factors that may affect any particular issuer of New York municipal securities.
The New York Tax-Free Fund may invest in municipal securities issued by New York
State (the "State"), by its various public bodies (the "Agencies") and/or by
other entities located within the State, including the City of New York (the
"City") and political subdivisions thereof and/or their agencies.
NEW YORK STATE. The State's current fiscal year commenced on April 1, 1996, and
ends on March 31, 1997, and is referred to herein as the State's 1996-97 fiscal
year. The State's budget for the 1996-97 fiscal year was enacted by the
Legislature on July 13, 1996, more than three months after the start of the
fiscal year. Prior to adoption of the budget, the Legislature enacted
appropriations for disbursements considered to be necessary for State operations
and other purposes, including necessary appropriations for all State-supported
debt service. The State Financial Plan for the 1996-97 fiscal year was
formulated on July 25, 1996 and is based on the State's budget as enacted by the
Legislature and signed into law by the Governor, as well as actual results for
the first quarter of the current fiscal year. The 1996-97 State Financial Plan
will be updated in October and January.
1996-97 FISCAL YEAR STATE FINANCIAL PLAN. The 1996-97 State Financial Plan is
projected to be balanced on a cash basis. As compared to the Governor's proposed
budget as revised on March 20, 1996, the State's adopted budget for 1996-97
increases General Fund spending by $842 million, primarily from increases for
education, special education and higher education ($563 million). The balance
represents funding increases to a variety of other programs, including community
projects and increased assistance to fiscally distressed cities. Resources used
to fund these additional expenditures include $540 million in increased revenues
projected for 1996-97 based on higher-than-projected tax collections during the
first half of calendar 1996, $110 million in projected receipts from a new State
tax amnesty program, and other resources including certain non-recurring
resources. The total amount of non-recurring resources included in the 1996-97
State budget is projected by the Division of Budget to be $1.3 billion, or 3.9
percent of total General Fund receipts.
The economic and financial condition of the State may be affected by various
financial, social, economic and political factors. Those factors can be very
complex, may vary from fiscal year to fiscal year, and are frequently the result
of actions taken not only by the State and its agencies and instrumentalities,
but also by entities, such as the federal government, that are not under the
control of the State. In addition, the State Financial Plan is based upon
forecasts of national and State economic activity. Economic forecasts have
frequently failed to predict accurately the timing and magnitude of changes in
the national and the State economies. The Division of Budget believes that its
projections of receipts and disbursements relating to the current State
Financial Plan, and the assumptions on which they are based, are reasonable.
Actual results, however, could differ materially and adversely from the
projections set forth in this Statement of Additional Information, and those
projections may be changed materially and adversely from time to time. There are
also risks and uncertainties concerning the future-year impact of actions taken
in the 1996-97 budget.
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The four government fund types that comprise the State Financial Plan are the
General Fund, the Special Revenue Funds, the Capital Projects Funds, and the
Debt Service Funds. This fund structure adheres to accounting standards of the
Governmental Accounting Standards Board. This section discusses first the
General Fund and then the other governmental funds. Receipts and disbursements
trends are presented in tabular form for each component of the General Fund.
GENERAL FUND. The General Fund is the principal operating fund of the State and
is used to account for all financial transactions, except those required to be
accounted for in another fund. It is the State's largest fund and receives
almost all State taxes and other resources not dedicated to particular purposes.
In the State's 1996-97 fiscal year, the General Fund is expected to account for
approximately 47 percent of total Governmental Funds disbursements and 71
percent of total State Funds disbursements. General Fund moneys are also
transferred to other funds, primarily to support certain capital projects and
debt service payments in other fund types. The following are the projected
shares of General Fund receipts and disbursements: Receipts: Personal Income Tax
- - - 51.55%, User Taxes and Fees - 29.51%, Business Taxes - 13.93%, Other Taxes -
2.86%, Miscellaneous - 7.16%; Disbursements: Local Assistance - 69.84%; State
Operations - 17.56%, Debt Service - 4.85%, General State Charges - 6.70%,
Capital/Other - 1.04%.
STATE FISCAL YEAR 1996-97. The General Fund is projected to be balanced on a
cash basis for the 1996-97 fiscal year. Total receipts and transfers from other
funds are projected to be $33.17 billion, an increase of $365 million from the
prior fiscal year. Total General Fund disbursements and transfers to other funds
are projected to be $33.12 billion, an increase of $444 million from the total
in the prior fiscal year.
PROJECTED GENERAL FUND RECEIPTS
The discussion below summarizes the State's projections of General Fund tax
revenues and other receipts for the 1996-97 fiscal year. Major statutory changes
adopted with the 1996-97 budget that affect 1996-97 include: tax reductions
totaling $83 million, adoption of a tax amnesty program expected to increase
receipts by $110 million, and a variety of measures increasing miscellaneous
receipts by approximately $675 million.
THE PERSONAL INCOME TAX is imposed on the income of individuals, estates and
trusts and is based on federal definitions of income and deductions with certain
modifications. In 1995, the State enacted a tax-reduction program designed to
reduce receipts from the personal income tax by 20 percent over three years.
Prior to 1995, the tax had remained substantially unchanged since 1989 as a
result of annual deferrals of tax reductions originally enacted in 1987. The
tax-reduction program is estimated to reduce receipts by $2.3 billion in the
1996-97 fiscal year, compared to what tax receipts would have been under the
pre-1995 rate structure. The maximum rate was reduced from the 7.875 percent in
effect between 1989 and 1994 to 7.59375 percent for 1995, to 7.125 percent for
1996, and is scheduled under current law to be reduced to 6.85 percent for 1997
and thereafter. In addition to significant reductions in overall tax rates, the
program also includes increases in the standard deduction, widening tax brackets
to increase the income thresholds to which higher tax rates apply, and
modification of certain tax credits.
The projected yield of the tax for the 1996-97 fiscal year is $17.1 billion, an
increase of $103 million from reported collections in the State's 1995-96 fiscal
year. The increase reflects both the effects of the tax reductions noted above
and the fact that reported collections in the preceding year were affected by
net refund and tax refund reserve account transactions that depressed
collections in 1995-96 by $500 million. Without these statutory and
administrative changes, the yield of the tax would have grown by more than $1
billion (nearly 7 percent), reflecting liability growth for the 1996 tax year
projected at approximately the same rate. The income base for the tax is
projected to rise approximately 5 percent for the 1996 tax year.
USER TAXES AND FEES are comprised of three-quarters of the State four percent
sales and use tax (the balance, one percent, flows to support Local Government
Assistance Corporation ("LGAC") debt service requirements), cigarette, alcoholic
beverage container, and auto rental taxes, and a portion of the motor fuel
excise levies.
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Also included in this category are receipts from the motor vehicle registration
fees and alcoholic beverage license fees. Beginning in 1993-94, a portion of the
motor fuel tax and motor vehicle registration fees and all of the highway use
tax are earmarked for dedicated transportation funds.
Receipts in this category in the State's 1996-97 fiscal year are expected to
total $6.73 billion, an increase of $97 million from reported 1995-96 results.
Underlying growth in the continuing sales tax base is forecast to be 5 percent,
accounting for the increase in the category as a whole. Projected receipts in
1996-97 are adversely affected by the full-year effects of reductions in the
diesel motor fuel, container and beer taxes adopted in 1995 by a temporary
reduction of the sales tax on clothing enacted in 1996.
BUSINESS TAXES include franchise taxes based generally on net income of general
business, bank and insurance corporations, as well as gross-receipts-based taxes
on utilities and gallonage-based petroleum business taxes. Through 1993, these
levies had been subject to a 15 percent surcharge initially imposed in 1990.
Beginning in 1994, the surcharge rate has been phased out and, for most
taxpayers, there will be no surcharge liability for taxable periods ending in
1997 and thereafter.
Total business tax receipts in the State's 1996-97 fiscal year are projected at
$4.62 billion, a decline of $360 million from reported 1995-96 results. The
decline results from the continuing effects of tax reductions originally enacted
in 1994 and 1995, valued at approximately $300 million more in 1996-97 than in
1995-96, and the previously scheduled diversion of petroleum business and other
tax receipts to dedicated transportation funds (valued at approximately $130
million more in 1996-97 than in 1995-96). These factors outweigh the modest
growth projected in the bases of the continuing tax structure. Tax reductions
enacted in the preceding two years included, in addition to a reduction in the
surcharge rate, a lowering of the alternative minimum tax rate and a variety of
smaller changes to the tax on general business corporations, as well as several
changes to reduce the burden of the petroleum business tax on selected
industries.
OTHER TAXES include estate, gift and real estate transfer taxes, a tax on gains
from the sale or transfer of certain real estate where the total consideration
exceeds $1 million, a pari-mutuel tax and other minor levies.
Total receipts from this category in the State's 1996-97 fiscal year are
projected at $948 million, $151 million less than in the preceding year. The
estimates reflect pre-1996 legislation reducing the burden of the real property
gains tax and the estate tax as well as legislation enacted in 1996 repealing
the real property gains tax (valued at approximately $120 million more in
1996-97 than in 1995-96), and diversion of real estate transfer tax proceeds to
the Environmental Protection Fund (valued at approximately $44 million more in
1996-97 than in 1995-96).
MISCELLANEOUS RECEIPTS include investment income, abandoned property receipts,
medical provider assessments, receipts from public authorities, and certain
other license and fee revenues. Receipts in this category in the State's 1996-97
fiscal year are expected to total $2.1 billion, an increase of $683 million
above the amount received in the prior State fiscal year. This includes $481
million in surplus revenues from the Medical Malpractice Insurance Association
("MMIA"), and other various non-recurring resources. MMIA is a
statutorily-created joint underwriting association of property/casualty
insurance companies authorized to write certain personal liability insurance in
the State which provides primary and excess medical malpractice insurance for
medical service providers in the State. It has been reported that certain health
care providers are considering a challenge to the State's right to these surplus
revenues.
TRANSFER FROM OTHER FUNDS to the General Fund consist primarily of tax revenues
in excess of debt service requirements, particularly the one percent sales tax
used to support payments to LGAC. In the 1996-97 fiscal year, excess sales tax
revenues are projected to be $1.4 billion, $75 million more than in the 1995-96
fiscal year. All other transfers are projected to decrease by $82 million,
primarily reflecting the non-recurring transfer of $117 million from the Mass
Transportation Operating Assistance Fund to the Revenue Accumulation Fund in
1995-96. As a result, total transfers are virtually unchanged year-to-year.
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PROJECTED GENERAL FUND DISBURSEMENTS
GRANTS TO LOCAL GOVERNMENTS is the largest category of General Fund
disbursements, and accounts for approximately 70 percent of overall General Fund
spending. Disbursements from this category are projected to total $23.13 billion
in the 1996-97 State Financial Plan, an increase of $597 million (2.6 percent)
from 1995-96 levels. Of this amount, approximately $300 million is attributable
to transactions which were not accounted for in a comparable way in 1995-96,
primarily $271 million in spending related to the issuance of LGAC bonds. This
category of the State Financial Plan includes $11.27 billion in aid for
elementary, secondary, and higher education, accounting for 49 cents of every
dollar spent in this category. On a school year basis, formula-based elementary
and secondary education aid increases $217 million from 1995-96 levels. General
Fund payments for Medicaid are projected to be $5.29 billion, virtually
unchanged from the level of $5.34 billion in 1995-96 and down from $5.79 billion
in 1994-95. This slow growth is due primarily to continuation of cost
containment measures enacted in 1995-96, new reforms included in the 1996-97
adopted budget, and forecasts for lower caseload based upon actual experience
through May 1996. Other social service spending is forecast to increase by only
$7 million to $3.17 billion in 1996-97, down from $3.34 billion in 1994-95.
Remaining disbursements primarily support community-based mental hygiene
programs, community and public health programs, local transportation programs,
and revenue sharing.
STATE OPERATIONS spending reflects the administrative costs of operating the
State's agencies, including the prison system, mental hygiene institutions, the
State University system ("SUNY"), the Legislature, and the court system.
Personal service costs account for approximately 76 percent of this category in
1996-97. Since January 1995, the State's workforce has been reduced by about
15,000 positions, with a decrease of 5,000 positions expected in 1996-97. State
employees will not receive a general salary increase this year as part of the
collective bargaining agreements recently negotiated for the 1995-96 through
1998-99 fiscal years. Collective bargaining agreements have been ratified by
employee bargaining units representing most State employees subject to such
agreements. Negotiations are ongoing with the remaining units. For more
information on the State's workforce, see the section entitled "State
Organization--State Government Employment."
Disbursements for State operations are projected at $5.82 billion, a decrease of
$135 million or 2.3 percent. The lack of growth in this category reflects the
workforce reduction program for 1996-97 that will be accomplished primarily
through attrition, a continued hiring freeze and implementation of a retirement
incentive program. Most agencies will spend less in 1996-97 than in 1995-96;
however, criminal justice spending will increase modestly to reflect the impact
of stricter sentencing laws.
GENERAL STATE CHARGES primarily reflect the costs of providing fringe benefits
for State employees, including contributions to pension systems, the employer's
share of social security contributions, employer contributions toward the cost
of health insurance, and the costs of providing worker's compensation and
unemployment insurance benefits. This category also reflects certain fixed costs
such as payments in lieu of taxes, and payments of judgments against the State
or its public officers. Disbursements in this category are projected to total
$2.22 billion in the 1996-97 State Financial Plan, an increase of $138 million
from the 1995-96 levels. Fringe benefit costs in 1995-96 are depressed by the
one-time application of more than $100 million in reimbursements traditionally
budgeted in other categories of the Financial Plan. Pension costs do not
increase in 1996-97 assuming savings will be achieved as planned from the
refinancing of certain pension liabilities. Other fringe benefit costs
(including unemployment insurance) decline, due to workforce reductions
accomplished primarily through attrition and early retirements.
DEBT SERVICE paid from the General Fund for 1996-97 reflects only the $10
million interest cost of the State's commercial paper program. No cost is
included for a TRAN borrowing, since none is expected to be undertaken. The
State's annual spring borrowing has been eliminated, as discussed in the section
entitled "Debt and Other Financing Activities--Local Government Assistance
Corporation." Debt service on long-term obligations is paid from Debt Service
Funds as described below.
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TRANSFERS TO OTHER FUNDS from the General Fund are made primarily to finance
certain portions of State capital project spending and debt service on long-term
bonds, where these costs are not funded from other sources. Transfers are
projected to total $1.94 billion, a decrease of $161 million or 7.7 percent from
1995-96 levels. Transfers in support of capital projects decrease $210 million
due to the availability of non-recurring revenues which will be deposited
directly to the Capital Projects Funds in 1996-97 and the reclassification of
economic development programs from capital projects to grants to local
governments. Transfers in support of debt service increase $60 million
reflecting prior year bond sales for prisons, housing programs, and SUNY. All
other transfers decrease $11 million from previous year levels.
CAPITAL PROJECTS paid directly from the General Fund represent pay-as-you-go
capital expenditures for certain youth and environmental projects. This is a new
Financial Plan category created as a part of the 1996-97 adopted budget. Other
pay-as-you-go capital expenditures are accounted for in the Capital Projects
Fund type.
The 1996-97 State Financial Plan includes actions that will have an effect on
the budget outlook for the State fiscal year 1996-97 and beyond. The Division of
the Budget estimates that the 1996-97 State Financial Plan contains actions that
provide non-recurring resources or savings totaling approximately $1.3 billion.
These include the use of $481 million in surplus funds available from MMIA, $134
million in savings from a refinancing of certain pension obligations, $88
million in projected savings from bond refundings, and $36
million in surplus fund transfers. The balance is composed of $314 million in
resources carried forward from the State's 1995-96 fiscal year and various other
actions, including that portion of the proposed tax amnesty program that is
projected to be non-recurring.
The State closed projected budget gaps of $5.0 billion and $3.9 billion for its
1995-96 and 1996-97 fiscal years, respectively. The 1997-98 gap was projected at
$1.44 billion, based on the Governor's proposed budget of December 1995. As a
result of changes made in the enacted budget, that gap is now expected to be
larger. However, the gap is not expected to be as large as those faced in the
prior two fiscal years. The Governor has indicated that he will propose to close
any potential imbalance primarily through General Fund expenditure reductions
and without increases in taxes or deferrals of scheduled tax reductions.
The out-year projection will be impacted by a variety of factors. Enacted tax
reductions, which reduced receipts in the 1996-97 fiscal year by an incremental
$2.4 billion, are projected to reduce receipts in the 1997-98 fiscal year by an
additional increment of $2.1 billion. The use of up to $1.3 billion of
non-recurring resources in 1996- 97, and the annualized costs of certain program
increases in the 1996-97 enacted budget, will both add additional pressure in
closing the 1997-98 gap.
Actions undertaken in the State's 1996-97 fiscal year, such as workforce
reductions, health care and education reforms, and strict controls on State
agency spending, are expected to provide larger recurring savings in 1997-98.
Sustained growth in the State's economy and continued declines in welfare
caseload and Medicaid costs would produce additional savings in the 1997-98
Financial Plan. Finally, future federal reforms of welfare and/or Medicaid could
potentially provide savings to the State in the State fiscal year 1997-98. See
"Special Considerations" below in this section for a description of the risks
and uncertainties associated with the State Financial Plan process.
The 1996-97 opening fund balance of $287 million includes $237 million which is
reserved in the Tax Stabilization Reserve Fund ("TSRF"), $41 million which is on
deposit in the Contingency Reserve Fund ("CRF") (see the discussion of this Fund
under the heading "Prior Fiscal Years"), and $9 million in the Revenue
Accumulation Fund which has been drawn down for use in the 1996-97 fiscal year.
The projected closing fund balance in the General Fund of $337 million reflects
a balance of $252 million in the TSRF, following an additional payment of $15
million during the year, and a balance of $85 million in the CRF.
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In addition to the General Fund, the State Financial Plan includes Special
Revenue Funds, Capital Projects Funds and Debt Service Funds which are discussed
below. Amounts below do not include other sources and uses of funds transferred
to or from other fund types.
Special Revenue Funds are used to account for the proceeds of specific revenue
sources such as federal grants that are legally restricted, either by the
Legislature or outside parties, to expenditures for specified purposes. Although
activity in this fund type is expected to comprise approximately 43 percent of
total government funds receipts in the 1996-97 fiscal year, three-quarters of
that activity relates to federally-funded programs.
Projected receipts in this fund type total $28.04 billion, an increase of $2.43
billion (9.5 percent) over the prior year. Projected disbursements in this fund
type total $28.51 billion, an increase of $2.25 billion (8.6 percent) over
1995-96 levels. Disbursements from federal funds, primarily the federal share of
Medicaid and other social services programs, are projected to total $21.31
billion in the 1996-97 fiscal year. Remaining projected spending of $7.20
billion primarily reflects aid to SUNY supported by tuition and dormitory fees,
education aid funded from lottery receipts, operating aid payments to the
Metropolitan Transportation Authority funded from the proceeds of dedicated
transportation taxes, and costs of a variety of self-supporting programs which
deliver services financed by user fees.
Capital Projects Funds are used to account for the financial resources used for
the acquisition, construction, or rehabilitation of major State capital
facilities and for capital assistance grants to certain local governments or
public authorities. This fund type consists of the Capital Projects Fund, which
is supported by tax receipts transferred from the General Fund, and 37 other
capital funds established to distinguish specific capital construction purposes
supported by other revenues. In the 1996-97 fiscal year, activity in these funds
is expected to comprise 6 percent of total governmental receipts.
Total receipts in this fund type are projected at $3.58 billion. Disbursements
from this fund type are projected to be $3.85 billion, a decrease of $120
million (3.1 percent) over prior-year levels, due in part to a reclassification
of economic development projects to the category of grants to local governments
in the General Fund. The Dedicated Highway and Bridge Trust Fund is the single
largest dedicated fund, comprising an estimated $920 million (24 percent) of the
activity in this fund type. Total spending for capital projects will be financed
through a combination of sources: federal grants (28 percent), public authority
bond proceeds (34 percent), general obligation bond proceeds (12 percent), and
pay-as-you-go revenues (26 percent).
Debt Service Funds are used to account for the payment of principal of, and
interest on, long-term debt of the State and to meet communications under
lease-purchase and other contractual-obligation financing arrangements. (See the
section entitled "Debt and Other Financing Activities--Outstanding Debt of the
State and Certain Authorities" below.) This fund type is expected to comprise 4
percent of total government fund receipts and disbursements in the 1996-97
fiscal year. Receipts in these funds in excess of debt service requirements may
be transferred to the General Fund and Special Revenue Funds, pursuant to law.
The Debt Service fund type consists of the General Debt Service Fund, which is
supported primarily by tax receipts transferred from the General Fund, and other
funds established to accumulate moneys for the payment of debt service. In the
1996-97 fiscal year, total disbursements in this fund type are projected at
$2.58 billion, an increase of $164 million or 6.8 percent. The projected
transfer from the General Fund of $1.59 billion is expected to finance 62
percent of these payments.
The remaining payments are expected to be financed by pledged revenues,
including $1.83 billion in taxes, $234 million in dedicated fees, and $2.35
billion in patient revenues, including transfers of federal and state
reimbursements and state dedicated taxes. After required impoundment for debt
service, $3.7 billion is expected to be transferred to the General Fund and
other funds in support of State operations. The largest transfer - $1.9 billion
- - - is made to the Special Revenue Fund type in support of operations of the
mental hygiene
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agencies. Another $1.4 billion in excess sales taxes is expected to be
transferred to the General Fund, following payment of projected debt service on
LGAC bonds.
SPECIAL CONSIDERATIONS. The economic and financial condition of the State may be
affected by various financial, social, economic and political factors. These
factors can be very complex, may vary from fiscal year to fiscal year, and are
frequently the result of actions taken not only by the State and its agencies
and instrumentalities, but also by entities, such as the federal government,
that are not under the control of the State. For example, various proposals
relating to federal tax and spending policies that are currently being publicly
discussed and debated could, if enacted, have a significant impact on the
State's financial condition in the current and future fiscal years. Because of
the uncertainty and unpredictability of the changes, their impact cannot, as a
practical matter, be included in the assumptions underlying the State's
projections at this time.
The State Financial Plan is based upon forecasts and national and State economic
activity developed through both internal analysis and review of State and
national economic forecasts prepared by commercial forecasting services and
other public and private forecasters. Economic forecasts have frequently failed
to predict accurately the timing and magnitude of changes in the national and
the State economies. Many uncertainties exist in forecasts of both the national
and State economies, including consumer attitudes toward spending, the extent of
corporate and governmental restructuring, federal fiscal and monetary policies,
the level of interest rates, and the condition of the world economy, which could
have an adverse effect on the State. There can be no assurance that the State
economy will not experience results in the current fiscal year that are worse
than predicted, with corresponding material and adverse effects on the State's
projections of receipts and disbursements.
Projections of total State receipts in the State Financial Plan are based on the
State tax structure in effect during the fiscal year and on assumptions relating
to basic economic factors and their historical relationships to State tax
receipts. In preparing projections of State receipts, economic forecasts
relating to personal income, wages, consumption, profits and employment have
been particularly important. The projection of receipts from most tax or revenue
sources is generally made by estimating the change in yield of such tax or
revenue source caused by economic and other factors, rather than by estimating
the total yield of such tax or revenue source from its estimated tax base. The
forecasting methodology, however, ensures that State fiscal year estimates for
taxes that are based on computation of annual liability, such as the business
and personal income taxes, are consistent with estimates of total liability
under such taxes.
Projections of total State disbursements are based on assumptions relating to
economic and demographic factors, levels of disbursements for various services
provided by local governments (where the cost is partially reimbursed by the
State), and the results of various administrative and statutory mechanisms in
controlling disbursements for State operations. Factors that may affect the
level of disbursements in the fiscal year include uncertainties relating to the
economy of the nation and the State, the policies of the federal government, and
changes in the demand for and use of State services.
The Division of the Budget believes that its projections of receipts and
disbursements relating to the current State Financial Plan, and the assumptions
on which they are based, are reasonable. Actual results, however, could differ
materially and adversely form the projections set forth in this Annual
Information Statement. In the past, the State has taken management actions and
made use of internal sources to address potential State Financial Plan
shortfalls, and DOB believes it could take similar actions should variances
occur in its projections for the current fiscal year.
In recent years, State actions affecting the level of receipts and
disbursements, the relative strength of the State and regional economy, actions
of the federal government and other factors, have created structural budget gaps
for the State. These gaps resulted from a significant disparity between
recurring revenues and the costs of maintaining or increasing the level of
support for State programs. To address a potential imbalance in any given fiscal
year, the State would be required to take actions to increase receipts and/or
reduce disbursements as
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it enacts the budget for that year, and under the State Constitution, the
Governor is required to propose a balanced budget each year. There can be no
assurance, however, that the Legislature will enact the Governor's proposals or
that the State's actions will be sufficient to preserve budgetary balance in a
given fiscal year or to align recurring receipts and disbursements in future
fiscal year.
CASH-BASIS RESULTS FOR PRIOR FISCAL YEARS. The State reports its financial
results on two bases of accounting: the cash basis, showing receipts and
disbursements; and the modified accrual basis, prescribed by GAAP, showing
revenues and expenditures. These financial terms are described in the Glossary
of Financial Terms in Exhibit A to this Annual Information Statement.
GENERAL FUND 1993-94 THROUGH 1995-96. The General Fund is the principal
operating fund of the State and is used to account for all financial
transactions, except those required to be accounted for in another fund. It is
the State's largest fund and receives almost all State taxes and other resources
not dedicated to particular purposes. General Fund moneys are also transferred
to other funds, primarily to support certain capital projects and debt service
payments in other fund types. A narrative description of cash-basis results in
the General Fund is presented below, followed by a tabular presentation of the
actual General Fund results for the prior three fiscal years. For a description
of the principal State taxes and fees, see Exhibit B to this Annual Information
Statement.
New York State's financial operations have improved during recent fiscal years.
During the period 1989-90 through 1991-92, the State incurred General Fund
operating deficits that were closed with receipts from the issuance of tax and
revenue anticipation notes ("TRANs"). A national recession, followed by the
lingering economic slowdown in the New York and regional economy, resulted in
repeated shortfalls in receipts and three budget deficits during those years.
During its last four fiscal years, however, the State has recorded balanced
budget on a cash basis, with positive fund balances as described below.
The State ended its 1995-96 fiscal year on March 31, 1996 with a General Fund
cash surplus. The Division of the Budget reported that revenues exceeded
projections by $270 million, while spending for social service programs was
lower than forecast by $120 million and all other spending was lower by $55
million. From the resulting benefit of $445 million, a $65 million voluntary
deposit was made into the TSRF, and $380 million was used to reduce 1996-97
Financial Plan liabilities by accelerating 1996-97 payments, deferring 1995-96
revenues, and making a deposit to the tax refund reserve account. (For more
information on the tax refund reserve account, see Table 5).
The General Fund closing fund balance was $287 million, an increase of $129
million from 1994-95 levels. The $129 million change in fund balance is
attributable to the $65 million voluntary deposit to the TSRF, a $15 million
required deposit to the TSRF, a $40 million deposit to the CRF, and a $9 million
deposit to the Revenue Accumulation Fund. The closing fund balance includes $237
million on deposit in the TSRF, to be used in the event of any future General
Fund deficit as provided under the State Constitution and State Finance Law. In
addition, $41 million is on deposit in the CRF. The CRF was established in State
fiscal year 1993-94 to assist the State in financing the costs of extraordinary
litigation. The remaining $9 million reflects amounts on deposit in the Revenue
Accumulation Fund. This fund was created to hold certain tax receipts
temporarily before their deposit to other accounts. In addition, $678 million
was on deposit in the tax refund reserve account, of which $521 million was
necessary to complete the restructuring of the State's cash flow under the LGAC
program.
General Fund receipts totaled $32.81 billion, a decrease of 1.1 percent from
1994-95 levels. This decrease reflects the impact of tax reductions enacted and
effective in both 1994 and 1995. General Fund disbursements totaled $32.68
billion for the 1995-96 fiscal year, a decrease of 2.2 percent from 1994-95
levels. Mid-year spending reductions, taken as part of a management review
undertaken in October at the direction of the Governor, yielded savings from
Medicaid utilization controls, office space consolidation, overtime and
contractual expense reductions, and statewide productivity improvements achieved
by State agencies. Together
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with decreased social services spending, this management review accounts for the
bulk of the decline in spending.
The State ended its 1994-95 fiscal year with the General Fund in balance. The
$241 million decline in the fund balance reflects the planned use of $264
million from the CRF, partially offset by the required deposit of $23 million to
the TSRF. In addition, $278 million was on deposit in the tax refund reserve
account, $250 million of which was deposited to continue the process of
restructuring the State's cash flow as part of the LGAC program. The closing
fund balance of $158 million reflects $157 million in the TSRF and $1 million in
the CRF.
General Fund receipts totaled $33.16 billion, an increase of 2.9 percent from
1993-94 levels. General Fund disbursements totaled $33.40 billion for the
1994-95 fiscal year, an increase of 4.7 percent from the previous fiscal year.
The increase in disbursements was primarily the result of one-time litigation
costs for the State, funded by the use of the CRF, offset by $188 million in
spending reductions initiated in January 1995 to avert a potential gap in the
1994-95 State Financial Plan. These actions included savings from a hiring
freeze, halting the development of certain services, and the suspension of
non-essential capital projects.
The State ended its 1993-94 fiscal year with a General Fund cash surplus,
primarily the result of an improving national economy, State employment growth,
tax collections that exceeded earlier projections and disbursements that were
below expectations. A deposit of $268 million was made to the CRF, with a
withdrawal during the year of $3 million, and a deposit of $67 million was made
to the TSRF. These three transactions result in the change balance of $332
million. In addition, a deposit of $1.14 billion was made to the tax refund
reserve account, of which $1.03 billion was available for budgetary purposes in
the 1994-95 fiscal year. (For more information on the personal income tax refund
reserve account, see Table 5.) The remaining $114 million was redeposited in the
tax refund reserve account at the end of the State's 1994-95 fiscal year to
continue the process of restructuring the State's cash flow as part of the LGAC
program. The General Fund closing balance was $399 million, of which $265
million was on deposit in the CRF and $134 million in the TSRF. The CRF was
initially funded with a transfer of $100 million attributable to a positive
margin recorded in the 1992-93 fiscal year.
General Fund receipts totaled $32.23 billion, an increase of 2.6 percent from
1992-93 levels. General Fund disbursements totaled $31.90 billion for the
1993-94 fiscal year, 3.5 percent higher than the previous fiscal year. Receipts
were higher in part due to improved tax collections from renewed State economic
growth, although the State continued to lag behind the national economic
recovery. Disbursements were higher due in part to increased local assistance
costs for school aid and social services, accelerated payment of certain
Medicaid expenses, and the cost of an additional payroll for State employees.
Activity in the three other governmental funds has remained relatively stable
over the last three fiscal years, with federally-funded programs comprising
approximately two-thirds of these funds. The most significant change in the
structure of these funds has been the redirection, beginning in the 1993-94
fiscal year, of a portion of transportation-related revenues from the General
Fund to two new dedicated funds in the Special Revenue and Capital Projects Fund
types. These revenues are used to support the capital programs of the Department
of Transportation and the Metropolitan Transportation Authority ("MTA").
In the Special Revenue Funds, disbursements increased from $22.72 billion to
$26.26 billion over the last three years, primarily as a result of increased
costs for the federal share of Medicaid. Other activity reflected dedication of
taxes to a new fund for mass transportation, new lottery games, and new fees for
criminal justice programs.
Disbursements in the Capital Projects Funds grew from $3.10 billion to $3.97
billion over the last three years, as spending for transportation and mental
hygiene programs increased, partially offset by declines for corrections and
environmental programs. The composition of this fund type's receipts also
changed as the
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dedicated transportation taxes began to be deposited, general obligation bond
proceeds declined substantially, federal grants remained stable, and
reimbursements from public authority bonds (primarily transportation related)
increased. The increase in the negative fund balance in 1994-95 resulted from
delays in reimbursements caused by delays in the timing of public authority bond
sales.
Activity in the Debt Service Funds reflected increased use of bonds during the
three-year period for improvements to the State's capital facilities and the
continued implementation of the LGAC fiscal reform program. The increases were
moderated by the refunding savings achieved by the State over the last several
years using strict present value savings criteria. The growth in LGAC debt
service was offset by reduced short-term borrowing costs reflected in the
General Fund.
GAAP-BASIS RESULTS FOR PRIOR FISCAL YEARS. The Comptroller prepares a
comprehensive annual financial report on the basis of generally accepted
accounting principles ("GAAP") for governments as promulgated by the
Governmental Accounting Standards Board. The report, generally released in July
each year, contains general purpose financial statements with a Combined Balance
Sheet and its Combined Statement of Revenues, Expenditures and Changes in Fund
Balances. These statements are audited by independent certified public
accountants.
The State completed its 1995-96 fiscal year with a combined Governmental Funds
operating surplus of $432 million, which included an operating surplus in the
General Fund of $380 million, in the Capital Projects Funds of $276 million and
in the Debt Service Funds of $185 million. There was an operating deficit of
$409 million in the Special Revenue Funds. The State's Combined Balance Sheet as
of March 31, 1996 showed an accumulated deficit in its combined Governmental
Funds of $1.23 billion, reflecting liabilities of $14.59 billion and assets of
$13.35 billion. This accumulated Governmental Funds deficit includes a $2.93
billion accumulated deficit in the General Fund and an accumulated deficit of
$712 million in the Capital Projects Fund type as partially offset by
accumulated surpluses of $468 million and $1.94 billion in the Special Revenue
and Debt Service fund types, respectively.
The State reported a General Fund operating surplus of $380 million for the
1995-96 fiscal year, as compared to an operating deficit of $1.43 billion for
the prior fiscal year. The 1995-96 fiscal year surplus reflects several major
factors, including the cash-basis surplus and the benefit of $529 million in
LGAC bond proceeds which were used to fund various local assistance programs.
This was offset in part by a $437 million increase in tax refund liability
primarily resulting from the effects of ongoing tax reductions and (to a lesser
extent) changes in accrual measurement policies, and increases in various other
expenditure accruals.
Revenues increased $530 million (nearly 1.7 percent) over the prior fiscal year
with an increase in personal income taxes and miscellaneous revenues offset by
decreases in business and other taxes. Personal income taxes grew $715 million,
an increase of 4.3 percent. The increase in personal income taxes was caused by
moderate employment and wage growth and the strong financial markets during
1995. Business taxes declined $295 million or 5.8 percent, resulting primarily
from changes in the tax law that modified the distribution of taxes between the
General Fund and other fund types, and reduced business tax liability.
Miscellaneous revenues increased primarily because of an increase in receipts
from medical provider assessments.
Expenditures decreased $716 million (2.2 percent) from the prior fiscal year
with the largest decrease occurring in State aid for social services program and
State operations spending. Social services expenditures decreased $739 million
(7.5 percent) due mainly to implementation of cost containment strategies by the
State and local governments, and reduced caseloads. General purpose and health
and environment expenditures grew $139 million (20.2 percent) and $121 million
(33.3 percent), respectively. Health and environment spending increased as a
result of increases enacted with the 1995-96 Budget. In State operations,
personal service costs and fringe benefits declined $241 million (3.8 percent)
and $55 million (3.6 percent), respectively, due to staffing reductions. The
decline in non-personal service costs of $170 million (8.6 percent) was caused
by a
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decline in the litigation accrual. Pension contributions increased $103 million
(66.4 percent) as a result of the return to the aggregate cost method used to
determine employer contributions.
Net other financing sources nearly tripled, increasing $561 million, due
primarily to an increase in bonds issued by LGAC, a transfer from the Mass
Transportation Operating Assistance Fund and transfers from public benefit
corporations.
An operating deficit of $409 million was reported for Special Revenue Funds for
the 1995-96 fiscal year which decreased the accumulated fund balance to $468
million. Revenues increased $1.45 billion over the prior fiscal year (5.8
percent) as a result of increases in federal grants and lottery revenues.
Expenditures increased $1.21 billion (5.4 percent) as a result of increased
costs for social services programs and an increase in the distribution of
lottery proceeds to school districts. Other financing uses increased $693
million (25.1 percent) primarily because of an increase in federal
reimbursements transferred to other funds.
Debt Service Funds ended the 1995-96 fiscal year with an operating surplus of
over $185 million and, as a result the accumulated fund balance, increased to
$1.94 billion. Revenues increased $10 million (0.5 percent) because of increases
in both dedicated taxes and mental hygiene patient fees. Debt service
expenditures increased $201 million (9.5 percent). Net other financing sources
increased threefold to $299 million, due primarily to increases in patient
reimbursement revenues.
An operating surplus of $276 million was reported in the Capital Projects Funds
for the State's 1995-96 fiscal year and, as a result, the accumulated deficit
fund balance in this fund type decreased to $712 million. Revenues increased
$260 million (14.9 percent) primarily because a larger share of the petroleum
business tax was shifted from the General Fund to the Dedicated Highway and
Bridge Trust Fund, and by an increase in federal grant revenues for
transportation and local waste water treatment projects. Capital Projects Funds
expenditures increased $194 million (5.7 percent) in State fiscal year 1995-96
because of increased expenditures for education and health and environmental
projects. Net other financing sources increased by $577 million as a result of
an increased in proceeds from financing arrangements.
The State completed its 1994-95 fiscal year with a combined Governmental Funds
operating deficit of $1.79 billion, which included operating deficits in the
General Fund of $1.43 billion, in the Capital Projects Funds of $366 million,
and in the Debt Service Funds of $38 million. There was an operating surplus in
the Special Revenue Funds of $39 million.
The State reported a General Fund operating deficit of $1.43 billion for the
1994-95 fiscal year, as compared to an operating surplus of $914 million for the
prior fiscal year. The 1994-95 fiscal year deficit was caused by several
factors, including the use of $1.03 billion of the 1993-94 cash-based surplus to
fund operating expenses in 1994- 95, and the adoption of changes in accounting
methodologies by the State Comptroller. These factors were offset by net
proceeds of $315 million in bonds issued by LGAC.
Total revenues for 1994-95 were $31.46 billion. Revenues decreased by $173
million over the prior fiscal year, a decrease of less than one percent.
Personal income taxes grew by $103 million, an increase of 0.6 percent.
Similarly, consumption and use taxes increased by $376 million or 6.0 percent.
The increase in personal income and sales taxes was due to modest growth in the
State's economy. Business taxes declined by $751 million or 12.8 percent from
the previous year. The decline in business taxes was caused primarily by a
decline in taxable earnings in the insurance, bank and petroleum industries and
the beginning of the phase-out of the corporate tax surcharges. Other revenues
and miscellaneous receipts showed modest increases.
Total 1994-95 expenditures were $33.08 billion, an increase of $2.08 billion, or
6.7 percent over the prior fiscal year. In Grants to Local Governments, social
service and education expenditures grew by $927 million (10.3 percent) and $727
million (7.6 percent), collectively. Social services spending increased in
Medicaid and Income Maintenance, while education spending grew as a result of
increases enacted with the 1994-95 budget.
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General purpose local assistance declined by $205 million (22.9 percent) as a
result of prior year spending reductions. Other local assistance spending showed
modest increases. In State Operations, personal service costs grew by $322
million (5.4 percent) while non-personal service declined by $70 million (3.4
percent). Pension contributions more than doubled, increasing by $95 million,
while other fringe benefit costs increased by $151 million (10.9 percent). State
Operations growth was primarily from labor contracts that resulted in salary
increases and retroactive payments.
Net other financing sources and uses declined from $282 million (as restated) to
$198 million, and $84 million (29.8 percent) decline from the previous year,
primarily because of a reduction in bonds issued by LGAC.
Special Revenue, Debt Services and Capital Projects Fund Types
An operating surplus of $39 million was reported for Special Revenue Funds for
the 1994-95 fiscal year which increased the accumulated fund balance to $877
million. Revenues increased $1.62 billion over the prior fiscal year (6.9
percent) as a result of increase in federal grants and lottery revenues.
Expenditures increased $1.89 billion (9.3 percent) as a result of increased
costs for social services programs and an increase in the distribution of
lottery proceeds to school districts. Other financing used declined $166 million
(5.7 percent) primarily because of a decline in federal reimbursements and
transferred to other funds.
Debt Service Funds ended the 1994-95 fiscal year with an operation deficit of
over $38 million and, as a result, the accumulated fund balance declined to
41.75 billion. Revenues increased $145 million (7.1 percent) because of
increases in both dedicated taxes and mental hygiene patient fees. Debt service
expenditures increased $106 million (5.3 percent). Net other financing uses
increased $101 million, due primarily to a decrease in net operating transfers
of $158 million offset in part by a $57 million increase in proceeds from other
financing arrangements.
An operating deficit of $366 million was reported in the Capital Projects Funds
for the State's 1994-95 fiscal year and, as a result, the accumulated deficit
fund balance in this fund type increased to $988 million. Revenues increased
$256 million (17.3 percent) primarily because a larger share of the petroleum
business tax was shifted from the General Fund to the Dedicated Highway and
Bridge Trust fund, and by an increase in federal grant revenues for
transportation and local waste water treatment projects. Capital Projects Funds
expenditures increased $585 million (20.7 percent) in State fiscal year 1994-95
because of increased expenditures for transportation and correctional projects.
Net other financing sources (uses) declined by less than $2 million.
1994-95 FISCAL YEAR
The State reported a General Fund operating surplus of $914 million for the
1993-94 fiscal year, as compared to an operating surplus of $2.07 billion for
the prior fiscal year. The 1993-94 fiscal year surplus reflects several major
factors, including the cash basis surplus recorded in 1993-94, the use of $671
million of the 1992-93 surplus to fund operating expenses in 1993-94, net
proceeds of $575 million in bonds issued by LGAC and the accumulation of a $265
million balance in the CRF. Revenues increased $543 million (1.7 percent) over
prior fiscal year revenues with the largest increase occurring in personal
income taxes. Expenditures increased $1.66 billion (5.6 percent) over the prior
fiscal year, with the largest increase occurring in State aid for social
services programs. Other financing sources declined more than 11 percent, with a
net increase in operating transfers from other funds more than offset by a
decline in proceeds from financing arrangements caused by lower LGAC bond sales.
GENERAL FUND
Personal income and business taxes increased by $847 million and $267 million,
respectively, offset by reductions in consumption and use taxes and
miscellaneous revenues of $141 million and $318 million,
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respectively. Personal income and business taxes increased primarily because the
economy performed at a higher level. General Fund revenues from consumption and
use taxes and fees declined primarily because revenues generated by both motor
fuel and highway and use taxes were earmarked instead for the Dedicated Highway
and Bridge Trust Fund which is reported in the Capital Projects Funds.
Miscellaneous revenues declined because certain receipts recorded in the prior
year were nonrecurring.
Expenditures for social services programs increased $1.05 billion primarily due
to increases in Medicaid and Income Maintenance. A $365 million increase in
departmental operations was caused primarily by the settlement of outstanding
labor contracts and unfavorable judicial decisions in previously pending
litigation.
Operating transfers from other funds increased, primarily reflecting the receipt
of $200 million from a prior-year claim settlement associated with the federal
government. In addition, transfers of excess sales tax receipts from the Local
Government Assistance Tax Fund increased by nearly $166 million as a result of
higher sales tax receipts in the Debt Service Funds. The increase in operating
transfers to other funds was caused by an increase in operating subsidies
provided to both the SUNY and the CUNY. Proceeds from financing arrangements
declined over $340 million, as a result of a decrease in the issuance of LGAC
bonds.
Special Revenue Funds ended with an operating surplus of $149 million for the
1993-94 fiscal year and, as a result, the accumulated fund balance increased to
$837 million. Revenues increased $2.06 billion over the prior fiscal year
primarily as a result of an increase in federal grants to finance increased
spending for social services programs, and in petroleum gross receipt taxes.
Expenditures increased by $1.57 billion primarily related to social services
programs. Other financing use increased by approximately $500 million,
representing increases in federal reimbursement for Medicaid patient services
provided by various State health and mental hygiene facilities.
Debt Service Funds ended with an operating surplus of $23 million for the
1993-94 fiscal year, and as a result, the accumulated fund balance increased to
$1.79 billion. Revenues increased $34 million, primarily as a result of an
increase in dedicated taxes partially offset by a decrease in mental hygiene
patient fees. Debt service expenditures increased $31 million. Net other
financing sources decreased $361 million due to a net decline of $430 million in
proceeds from financing arrangements offset in part by a $70 million increase in
net operating transfers.
An operating deficit of $35 million was reported in the Capital Projects Funds
for the State's 1993-94 fiscal year, and, as a result, the accumulated deficit
fund balance increased to $622 million. Revenues increased by $458 million which
was primarily attributable to the shifting of certain tax revenues from the
General Fund to the Dedicated Highway and Bridge Trust Fund. Capital Projects
Funds expenditures increased by $61 million. Expenditures for highway and bridge
construction increased by approximately $223 million, but this increase was
offset in large part by a decrease of $160 million relating to reductions in
spending for water pollution control, hazardous waste programs and various
miscellaneous State aid programs. Net other financing sources (uses) decreased
$489 million primarily as a result of a reduction in general obligation bond
proceeds and a decrease in transfers from the General Fund.
ECONOMICS AND DEMOGRAPHICS. This section presents economic information about the
State which may be relevant in evaluating the future prospects of the State.
However, the demographic information and statistical data, which have been
obtained from the sources indicated, do not present all factors which may have a
bearing on the State's fiscal and economic affairs. Further, such information
requires economic and demographic analysis in order to assess the import of the
data presented. The data analysis may be interpreted differently, according to
the economist or other expert consulted.
The State Financial Plan is based upon a June 1996 projection by DOB of national
and State economic activity. The information in this section and in tables 15
and 16 below summarize the economic outlook upon which projections of receipts
and certain disbursements were made for the 1996-97 fiscal year.
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The national economy has resumed a more robust rate of growth after a "soft
landing" in 1995, with over 11 million jobs added nationally since early 1992.
The State economy has continued to expand, but growth remains somewhat slower
than in the nation. Although the State has added approximately 240,000 jobs
since late 1992, employment growth in the State has been hindered during recent
years by significant cutbacks in the computer and instrument manufacturing,
utility, defense, and banking industries. Government downsizing has also
moderated these job gains.
DOB forecasts that national economic growth will be quite strong in the fist
half of calendar 1996, but will moderate considerably as the year progresses.
The overall growth rate of the national economy during calendar year 1996 is
expected to be just slightly below the "consensus" of a widely followed survey
of national economic forecasters. Growth in real Gross Domestic Product during
1996 is projected to be moderate at 2.1 percent, with anticipated declines in
federal spending and net exports more than offset by increases in consumption
and investment. Inflation, as measured by the Consumer Price Index, is projected
to be contained at about 3 percent due to moderate wage growth and foreign
competition. Personal income and wages are projected to increase by about 5
percent.
The forecast of the State's economy shows modest expansion during the first half
of calendar 1996, but some slowdown is projected during the second half of the
year. Although industries that export goods and services are expected to
continue to do well, growth is expected to be slowed by government cutbacks at
all levels and by tight fiscal constraints on health and social services. On an
average annual basis, employment growth in the State is expected to be up
slightly from the 1995 rate. Personal income is expected to record moderate
gains in 1996. Bonus payments in the securities industry are expected to
increase further from last year's record level.
The forecast for continued slow growth, and any resultant impact on the State's
1996-97 Financial Plan, contains some uncertainties. Stronger-than-expected
gains in employment could lead to a significant improvement in consumption
spending. Investments could also remain robust. Conversely, the prospect of a
continuing deadlock on federal budget deficit reduction or fears of excessively
rapid economic growth could create upward pressures on interest rates. In
addition, the State economic forecast could over- or underestimate the level of
future bonus payments or inflation growth, resulting in forecasted average wage
growth that could differ significantly from actual growth. Similarly, the State
forecast could fail to correctly account for expected declines in government and
banking employment and the direction of employment change that is likely to
accompany telecommunications deregulation.
THE NEW YORK ECONOMY. New York is the third most populous state in the nation
and has a relatively high level of personal wealth. The State's economy is
diverse, with a comparatively large share of the nation's finance, insurance,
transportation, communications and services employment, and a very small share
of the nation's farming and mining activity. The State's location and its
excellent air transport facilities and natural harbors have made it an important
link in international commerce. Travel and tourism constitute an important part
of the economy. Like the rest of the nation, New York has a declining proportion
of its workforce engaged in manufacturing, and an increasing proportion engaged
in service industries.
Services: The services sector which includes entertainment, personal services,
such as health care and auto repairs, and business-related services, such as
information processing, law and accounting, is the State's leading economic
sector. The services sector accounts for more than three of every ten
nonagricultural jobs in New York. New York's economy is somewhat more reliant
than the rest of the nation on this sector; this sector has added more jobs
(825,000) than has the State's economy as a whole (665,000) since 1980.
Manufacturing: Manufacturing employment continues to decline in importance in
New York, as in most other states, and New York's economy is less reliant on
this sector than is the nation. Manufacturing's share of total employment
declined from 20.1 to 12.0 percent between 1980 and 1995. The principal
manufacturing industries in recent years produced printing and publishing
materials, instruments and related products,
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machinery, apparel and finished fabric products, electronic and other electric
equipment, food and related products, chemicals and allied products, and
fabricated metal products.
Trade: Wholesale and retail trade is the second largest sector in terms of
nonagricultural jobs in New York but is considerably smaller when measured by
income share. Trade consists of wholesale businesses and retail businesses, such
as department stores and eating and drinking establishments.
Finance, Insurance and Real Estate: New York City is the nation's leading center
of banking and finance and, as a result, this is a far more important sector in
the State than in the nation as a whole. Although this sector accounts for under
one-tenth of all nonagricultural jobs in the State, it contributes one-seventh
of all nonfarm labor and proprietors' income.
Agriculture: Farming is an important part of the economy of large regions of the
State, although it constitutes a very minor part of total State output.
Principal agricultural products of the State include milk and dairy products,
greenhouse and nursery products, apples and other fruits, and fresh vegetables.
New York ranks among the nation's leaders in the production of these
commodities.
Government: Federal, State and local government account for almost 18 percent of
nonagricultural State employment and 16 percent of nonfarm labor income.
The importance of the different sectors of the State's economy relative to the
national economy is shown in the following table, which compares nonagricultural
employment and income by industrial categories for the State and the nation as a
whole. Relative to the nation, the State has a smaller share of manufacturing
and construction and a larger share of service-related industries. The State is
likely to be less affected than the nation as a whole during an economic
recession that is concentrated in manufacturing and construction, but likely to
be more affected during a recession that is concentrated more in the
service-producing sector.
ECONOMIC AND DEMOGRAPHIC TRENDS. During the 1982-83 recession, overall economic
activity in the State declined less than that of the nation as a whole. However,
in the calendar years 1987 through 1995, the State's rate of economic growth was
somewhat slower than that of the nation. In particular, during the 1990-91
recession and post-recession period, the economy of the State, and that of the
rest of the Northeast, was more heavily damaged than that of the nation as a
whole and has been slower to recover. The total employment growth rate in the
State has been below the national average since 1987. The unemployment rate in
the State dipped below the national rate in the second half of 1981 and remained
lower until 1991; since then, it has been higher. According to data published by
the US Bureau of Economic Analysis, during the past ten years, total personal
income in the State rose slightly faster than the national average only from
1986 through 1988.
The State's population has grown since 1930, except for a period of decline
during the 1970s and a virtual standstill the past two years.
State per capita personal income has historically been significantly higher than
the national average, although the ratio has varied substantially. Because the
City is a regional employment center for a multi-state region, state personal
income measured on a residence basis understates the relative importance of the
State to the national economy and the size of the base to which State taxation
applies.
DEBT AND OTHER FINANCING ACTIVITIES
LEGAL CATEGORIES OF STATE DEBT AND OTHER FINANCINGS
State financing activities include general obligation debt of the State and
State-guaranteed debt, to which the full faith and credit of the State has been
pledged, as well as lease-purchase and contractual-obligation financings, moral
obligation financings and other financings, through public authorities and
municipalities, where the State's
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legal obligation to make payments to those public authorities and municipalities
for their debt service is subject to annual appropriation by the Legislature.
These categories are described in the Glossary of Financial Terms in Exhibit A
to this Annual Information Statement and in more detail below.
General Obligations and State-Guaranteed Financing
There are a number of methods by which the State itself may incur debt. The
State may issue general obligation bonds. Under the State Constitution, the
State may not, with limited exceptions for emergencies, undertake long-term
general obligation borrowing (i.e., borrowing for more than one year) unless the
borrowing is authorized in a specific amount for a single work or purpose by the
Legislature and approved by the voters. There is no limitation on the amount of
long-term general obligation debt that may be so authorized and subsequently
incurred by the State. With the exception of general obligation housing bonds
(which must be paid in equal annual installments or installments that result in
substantially level or declining debt service payments, within 50 years after
issuance, commencing no more than three years after issuance), general
obligation bonds must be paid in equal annual installments or installments that
result in substantially level or declining debt service payments, within 40
years after issuance, beginning not more than one year after issuance of such
bonds.
The State may undertake short-term borrowings without voter approval (i) in
anticipation of the receipt of taxes and revenues, by issuing tax and revenue
anticipation notes ("TRANs"), and (ii) in anticipation of the receipt of
proceeds from the sale of duly authorized but unissued general obligation bonds,
by issuing bond anticipation notes ("BANs"). TRANs must mature within one year
from their dates of issuance and may not be refunded or refinanced beyond such
period. BANs may only be issued for the purposes and within the amounts for
which bonds may be issued pursuant to voter authorizations. Such BANs must be
paid from the proceeds of the sale of bonds in anticipation of which they were
issued or from other sources within two years of the date of issuance or, in the
case of BANs for housing purposes, within five years of the date of issuance.
Pursuant to specific constitutional authorization, the State may also directly
guarantee certain public authority obligations. The State Constitution provides
for the State guarantee of the repayment of certain borrowings for designated
projects of the New York State Thruway Authority, the Job Development Authority
and the Port Authority of New York and New Jersey. The State has never been
called upon to make any direct payments pursuant to such guarantees. The
constitutional provisions allowing a State guarantee of certain Port Authority
of New York and New Jersey debt stipulates that no such guaranteed debt may be
outstanding after December 31, 1996. State-guaranteed bonds issued by the
Thruway Authority were fully retired on July 1, 1995.
Payments of debt service on State general obligation and State-guaranteed bonds
and notes are legally enforceable obligations of the State.
Lease-Purchases and Contractual-Obligation Financing
The State employs additional long-term financing mechanisms, lease-purchase and
contractual obligation financings, which involve obligations of public
authorities or municipalities that are State-supported but not general
obligations of the State. Under these financing arrangements, certain public
authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment, and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a
contractual-obligation financing arrangement with LGAC to restructure the way
the State makes certain local aid payments (see "Local Government Assistance
Corporation" below in this section).
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The State also participates in the issuance of certificates of participation
("COPs") in a pool of leases entered into by the State's Office of General
Services on behalf of several State departments and agencies interested in
acquiring operational equipment, or in certain cases, real property. Legislation
enacted in 1986 established restrictions upon and centralized State control,
through the Comptroller and the Director of the Budget, over the issuance of
COPs representing the State's contractual obligation, subject to annual
appropriation by the Legislature and availability of money, to make installment
or lease-purchase payments for the State's acquisition of such equipment or real
property.
The State has never defaulted on any of its general obligation indebtedness or
its obligations under lease-purchase or contractual-obligation financing
arrangements and has never been called upon to make any direct payments pursuant
to its guarantees.
Moral Obligation and Other Financing
Moral obligation financing generally involves the issuance of debt by a public
authority to finance a revenue-producing project or other activity. The debt is
secured by project revenues and includes statutory provisions requiring the
State, subject to appropriation by the Legislature, to make up any deficiencies
which may occur in the issuer's debt service reserve fund. There has never been
a default on any moral obligation debt of any public authority. The State does
not intend to increase statutory authorizations for moral obligation bond
programs. From 1976 through 1987, the State was called upon to appropriate and
make payments totaling $162.8 million to make up deficiencies in the debt
service reserve funds of the Housing Finance Agency pursuant to moral obligation
provisions. In the same period, the State also expended additional funds to
assist the Project Finance Agency, the Urban Development Corporation ("UDC") and
other public authorities which had moral obligation debt outstanding. The State
has not been called upon to make any payments pursuant to any moral obligations
since the 1986-87 fiscal year and no such requirements are anticipated during
the 1996-97 fiscal year.
In addition to the moral obligation financing arrangements described above,
State law provides for the creation of State municipal assistance corporations,
which are public authorities established to aid financially troubled localities.
The Municipal Assistance Corporation for the City of New York ("NYC MAC") was
created in 1975 to provide financing assistance to New York City. To enable NYC
MAC to pay debt service on its obligations, NYC MAC receives, subject to annual
appropriation by the Legislature, receipts from the 4 percent New York State
sales tax for the benefit of New York City, the State-imposed stock transfer tax
and, subject to certain prior liens, certain local assistance payments otherwise
payable to New York City. The legislation creating NYC MAC also includes a moral
obligation provision. Under its enabling legislation, NYC MAC's authority to
issue moral obligation bonds and notes (other than refunding bonds and notes)
expired on December 31, 1984. In 1995, the State created the Municipal
Assistance Corporation for the City of Troy ("Troy MAC"). The bonds expected to
be issued by Troy MAC would not be subject to the State's moral obligation.
The State also provides for contingent contractual-obligation financing for the
Secured Hospital Program pursuant to legislation enacted in 1985. Under this
financing method, the State contracts to pay debt service, subject to annual
appropriations, on bonds formerly issued by the New York State Medical Care
Facilities Finance Agency ("MCFFA") and now issued by the Dormitory Authority of
the State of New York ("DASNY") in the event there are shortfalls of revenues
from other sources. The State has never been required to make any payments
pursuant to this financing arrangement, nor does it anticipate being required to
do so during the 1996-97 fiscal year.
LOCAL GOVERNMENT ASSISTANCE CORPORATION
In 1990, as part of a State fiscal reform program, legislation was enacted
creating LGAC, a public benefit corporation empowered to issue long-term
obligations to fund certain payments to local governments that had been
traditionally funded through the State's annual seasonal borrowing. The
legislation authorized LGAC to
- 78 -
<PAGE>
issue its bonds and notes in an amount to yield net proceeds not in excess of
$4.7 billion (exclusive of certain refunding bonds). Over a period of years, the
issuance of these long-term obligations, which are to be amortized over no more
than 30 years, was expected to eliminate the need for continued short-term
seasonal borrowing. The legislation also dedicated revenues equal to one-quarter
of the four cent State sales and use tax to pay debt service on these bonds. The
legislation also imposed a cap on the annual seasonal borrowing of the State at
$4.7 billion, less net proceeds of bonds issued by LGAC and bonds issued to
provide for capitalized interest, except in cases where the Governor and the
legislative leaders have certified the need for additional borrowing and
provided a schedule for reducing it to the cap. If borrowing above the cap is
thus permitted in any fiscal year, it is required by law to be reduced to the
cap by the fourth fiscal year after the limit was first exceeded. This provision
capping the seasonal borrowing was included as a covenant with LGAC's
bondholders in the resolution authorizing such bonds.
As of June 1995, LGAC had issued bonds and notes to provide net proceeds of $4.7
billion, completing the program. The impact of LGAC's borrowing is that the
State has been able to meet its cash flow needs throughout the fiscal year
without relying on short-term seasonal borrowings. The 1996-97 State Financial
Plan includes no seasonal borrowing; this reflects the success of the LGAC
program in permitting the State to accelerate local aid payments from the first
quarter of the current fiscal year to the fourth quarter of the previous fiscal
year.
1996-97 BORROWING PLAN
The State anticipates that its capital programs will be financed, in part,
through borrowings by the State and public authorities in the 1996-97 fiscal
year. The State expects to issue $411 million in general obligation bonds
(including $153.6 million for purposes of redeeming outstanding BANs) and $154
million in general obligation commercial paper. The Legislature has also
authorized the issuance of up to $101 million in COPs during the State's 1996-97
fiscal year for equipment purchases. The projection of the State regarding its
borrowings for the 1996-97 fiscal year may change if circumstances require.
Borrowings by other public authorities pursuant to lease-purchase and
contractual-obligation financings for capital programs of the State are
projected to total $2.15 billion, including costs of issuances, reserve funds,
and other costs, net of anticipated refundings and other adjustments for 1996-97
capital projects. Included therein are borrowings by (i) DASNY for SUNY, The
City University of New York ("CUNY"), health facilities, and mental health
facilities; (ii) Thruway Authority for the Dedicated Highway and Bridge Trust
Fund and Consolidated Highway Improvement Program; (iii) UDC (doing business as
the Empire State Development Corporation) for prison and youth facilities; (iv)
the Housing Finance Agency ("HFA") for housing programs; and (v) borrowings by
the Environmental Facilities Corporation ("EFC") and other authorities. In
addition, the Legislature has authorized DASNY to refinance a $787 million
pension obligation of the State.
In the 1996 legislative session, the Legislature approved the Governor's
proposal to present to the voters in November 1996 a $1.75 billion State general
obligation bond referendum to finance various environmental improvement and
remediation projects. If the Clean Water, Clean Air Bond Act is approved by the
voters, the amount of general obligation bonds issued during the 1996-97 fiscal
year may increase above the $411 million currently included in the 1996-97
Borrowing Plan to finance a portion of this new program.
OUTSTANDING DEBT OF THE STATE AND CERTAIN AUTHORITIES
For purposes of analyzing the financial condition of the State, debt of the
State and of certain public authorities may be classified as State-supported
debt, which includes general obligation debt of the State and lease-purchase and
contractual obligations of public authorities (and municipalities) where debt
service is paid from State appropriations (including dedicated-tax sources, and
other revenues such as patient charges and dormitory facilities rentals). In
addition, a broader classification, referred to as State-related debt, includes
State-supported debt, as well as certain
- 79 -
<PAGE>
types of contingent obligations, including moral-obligation financing, certain
contingent contractual-obligation financing arrangements, and State-guaranteed
debt described above, where debt service is expected to be paid from other
sources and State appropriations are contingent in that they may be made and
used only under certain circumstances.
STATE-SUPPORTED DEBT OUTSTANDING
General Obligation Bond Programs
The first type of State-supported debt, general obligation debt, is currently
authorized for three programmatic categories: transportation, environmental and
housing. The State has issued bonds only if the first two categories in recent
years, with the size of the issues generally decreasing as existing
authorizations are diminished. The amount of general obligation bonds and BANs
issued in the 1993-94 through 1995-96 fiscal years (excluding bonds issued to
redeem BANs) were $388 million, $250 million and $333 million, respectively.
Transportation-related bonds are issued for State highway and bridge
improvements, aviation, highway and mass transportation projects and purposes,
and rapid transit, rail, canal, port and waterway programs and projects.
Environmental bonds are issued to fund environmentally-sensitive land
acquisitions, air and water quality improvements, municipal non-hazardous waste
landfill closures and hazardous waste site cleanup projects. As of March 31,
1996, the total amount of outstanding general obligation debt was $5.05 billion,
including $293.6 million in BANs.
The foregoing information as to certain New York risk factors is given to
investors in view of the Fund's policy of concentrating its investments in New
York Issuers. Such information constitutes only a brief summary and does not
purport to be a complete description. See Appendix A to this Statement of
Additional Information for a description of municipal securities ratings.
- 80 -
<PAGE>
DETERMINING NET ASSET VALUE FOR THE MONEY MARKET FUNDS
The Financial Reserves Fund, the Institutional Money Market Fund, the Ohio
Municipal Money Market Fund, the Prime Obligations Fund, the Tax-Free Money
Market Fund, and the U.S. Government Obligations Fund (the "Money Market Funds")
use the amortized cost method to determine their net asset value.
USE OF THE AMORTIZED COST METHOD. The Money Market Funds' use of the amortized
cost method of valuing their instruments depends on their compliance with
certain conditions contained in Rule 2a-7 of the 1940 Act. Under Rule 2a-7, 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 Money Market Funds' investment objectives.
The Money Market Funds have elected to use the amortized cost method of
valuation pursuant to Rule 2a-7. This involves valuing an instrument at its cost
initially and thereafter assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument. This method may result in periods during
which value, as determined by amortized cost, is higher or lower than the price
a Money Market Fund would receive if it sold the instrument. The value of
securities in a Money Market Fund can be expected to vary inversely with changes
in prevailing interest rates.
Pursuant to Rule 2a-7, the Money Market Funds will maintain a dollar-weighted
average portfolio maturity appropriate to its objective of maintaining a stable
net asset value per share, provided that a Money Market Fund will not purchase
any security with a remaining maturity of more than 397 days (securities subject
to repurchase agreements may bear longer maturities) nor maintain a
dollar-weighted average portfolio maturity which exceeds 90 days. Should the
disposition of a Money Market Fund's security result in a dollar weighted
average portfolio maturity of more than 90 days, the Money Market Fund will
invest its available cash to reduce the average maturity to 90 days or less as
soon as possible.
The Victory Portfolios' Trustees also have established procedures reasonably
designed, taking into account current market conditions and the Victory
Portfolios' investment objectives, to stabilize the net asset value per share of
the Money Market Funds for purposes of sales and redemptions at $1.00. These
procedures include review by the Trustees, at such intervals as they deem
appropriate, to determine the extent, if any, to which the net asset value per
share of the Money Market Funds calculated by using available market quotations
deviates from $1.00 per share. In the event such deviation exceeds one-half of
one percent, Rule 2a-7 requires that the Board promptly consider what action, if
any, should be initiated. If the Trustees believe that the extent of any
deviation from a Money Market Fund's $1.00 amortized cost price per share may
result in material dilution or other unfair results to new or existing
investors, they will take such steps as they consider appropriate to eliminate
or reduce to the extent reasonably practicable any such dilution or unfair
results. These steps may include selling portfolio instruments prior to
maturity, shortening the dollar-weighted average portfolio maturity, withholding
or reducing dividends, reducing the number of a Money Market Fund's outstanding
shares without monetary consideration, or using a net asset value per share
determined by using available market quotations.
MONITORING PROCEDURES
The Trustee's 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 a Money Market Fund's average maturity) to
minimize any material dilution or other unfair results arising from differences
between the two methods of determining net asset value.
INVESTMENT RESTRICTIONS
Rule 2a-7 requires that the Money Market Funds limit their investments to
instruments that, in the opinion of the Trustees, present minimal credit risks
and are "Eligible Securities" as defined by Rule 2a-7. See
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<PAGE>
"Investments in which the Funds Can Invest." An Eligible Security generally must
be rated. Such rating may be of the particular security or of a class of debt
obligations or a debt obligation in that class that is comparable in priority
and security issued by that issuer. If the instruments are not rated, the
Trustees must determine that they are of comparable quality. The Money Market
Funds will limit the percentage allocation of their investments so as to comply
with Rule 2a-7, which generally (except in the case of the Ohio Municipal Money
Market Fund) limits to 5% of total assets in the First-Tier Securities (as that
term is defined by Rule 2a-7 (generally, a First-Tier Security is a security
that has received a rating in the highest short-term rating category)) of a
single issuer for a period of up to three days after the purchase of such a
security. this exception is available to all Money Market Funds other than the
Ohio Municipal Money Market Fund. Additionally, under Rule 2a-7 the Ohio
Municipal Money Market Fund, as a single state money market fund, must limit the
amount which it invests in the securities of any one issuer to 5% of its total
assets only with respect to 75% of its total assets; provided, however, that no
more than 5% of its total assets may be invested in the securities of any one
issuer unless those securities are First-Tier Securities.
The Money Market Funds will purchase only First-Tier Securities. However, a
Money Market Fund will not necessarily dispose of a security if it ceases to be
a First-Tier Security, although if a First-Tier Security is downgraded to a
Second-Tier Security (as that term is defined by Rule 2a-7) the adviser will
reassess promptly whether such security continues to present minimal credit
risks and will cause the Money Market Fund to take such action as it determines
is in the best interests of the Money Market Fund and its shareholders.
Rule 2a-7 imposes special diversification requirements on puts. Generally, with
respect to 75% of its total assets, immediately after the acquisition of a put,
a money market fund may have no more than 10% of its total assets invested in
securities issued by, or subject to puts from, the same institution. With
respect to the remaining 75% of its total assets, a money market fund may invest
more than 10% of its assets in puts issued by a non-controlled person so long as
the puts are First-Tier Securities. Where a put is a Second-Tier Security, no
more than 5% of the money market fund's total assets may be invested in
securities issued by, or subject to puts from, the same institution.
The Money Market Funds 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 Money Market Funds computed by dividing the annualized daily income on a
Money Market 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
Money Market Funds 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.
VALUATION OF PORTFOLIOS SECURITIES FOR THE MONEY MARKET FUNDS
The net asset value of the Money Market Funds is determined and the shares of
each Money Market Fund are priced as of the Valuation Time(s) on each Business
Day. A "Business Day" is a day on which the New York Stock Exchange and the
Federal Reserve Bank of Cleveland is open for trading and any other day (other
than a day on which no shares of a Money Market Fund are tendered for redemption
and no order to purchase any shares is received) during which there is
sufficient trading in portfolio instruments that a Money Market Fund's net
assets value per share might be materially affected. The New York Stock Exchange
will not open in observance of the following holidays: New Year's Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, and Christmas.
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<PAGE>
VALUATION OF PORTFOLIO SECURITIES FOR THE TAXABLE BOND FUNDS AND THE
TAX-FREE BOND FUNDS
Investment securities held by the Fund For Income, the Government Mortgage Fund,
the Intermediate Income Fund, the Investment Quality Bond Fund, and the Limited
Term Income Fund (the "Taxable Bond Funds") and the National Municipal Bond
Fund, the New York Tax-Free Fund, and the Ohio Municipal Bond Fund (the
"Tax-Free Bond Funds") are valued on the basis of security valuations provided
by an independent pricing service, approved by the Trustees, which determines
value by using information with respect to transactions of a security,
quotations from dealers, market transactions in comparable securities, and
various relationships between securities. Specific investment securities which
are not priced by the approved pricing service will be valued according to
quotations obtained from dealers who are market makers in those securities.
Investment securities with less than 60 days to maturity when purchased are
valued at amortized cost which approximates market value. Investment securities
not having readily available market quotations will be priced at fair value
using a methodology approved in good faith by the Trustees.
VALUATION OF PORTFOLIO SECURITIES FOR THE EQUITY FUNDS.
Each equity security held by a Fund is valued at its last sales price on the
exchange where the security is principally traded or, lacking any sales on a
particular day, the security is valued at the mean between the closing bid and
asked prices on that day. Exchange listed convertible debt securities are valued
at the mean between the last bid and asked prices obtained from broker-dealers
or a comparable alternative, such as Bloomberg or Telerate. Each security traded
in the over-the-counter market (but not including securities reported on the
NASDAQ National Market System) is valued at the mean between the last bid and
asked prices based upon quotes furnished by market makers for such securities.
Each security reported on the NASDAQ National Market System is valued at the
sales price on the valuation date or absent a last sales price, at the mean
between the closing bid and asked prices on that day. Non-convertible debt
securities are valued on the
basis of prices provided by an independent pricing service. Prices provided by
the pricing service may be determined without exclusive reliance on quoted
prices, and may reflect appropriate factors such as institution-size trading in
similar groups of securities, developments related to special securities, yield,
quality, coupon rate, maturity, type of issue, individual trading
characteristics and other market data. Securities for which market quotations
are not readily available are valued at fair value as determined in good faith
by or under the supervision of the Victory Portfolios' officers in a manner
specifically authorized by the Board of Trustees. Short-term obligations having
60 days or less to maturity are valued on the basis of amortized cost. For
purposes of determining net asset value per share, futures and options contracts
generally will be valued 15 minutes after the close of trading of the NYSE.
Generally, trading in foreign securities, corporate bonds, U.S. Government
securities and money market instruments is substantially completed each day at
various times prior to the close of the NYSE. The values of such securities used
in computing the net asset value of each Fund's shares are determined at such
times. Foreign currency exchange rates are also generally determined prior the
close of the NYSE. Occasionally, events affecting the values of such securities
and such exchange rates may occur between the times at which such values are
determined and the close of the NYSE which will not be reflected in the
computation of a Fund's net asset value. If events materially affecting the
value of such securities occur during such period, then these securities will be
valued at their fair value as determined in good faith by or under the
supervision of the Board of Trustees.
PERFORMANCE OF THE MONEY MARKET FUNDS
Performance for a class of shares of a Money Market Fund 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 (class) expenses; and
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<PAGE>
o the relative amount of Fund (class) cash flow.
From time to time the Money Market Funds may advertise the performance of each
class compared to similar funds or portfolios using certain indices, reporting
services, and financial publications.
YIELD. The Money Market Funds calculate the yield for a class 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
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 Money Market Funds,
the yield for a class will be reduced for those shareholders paying those fees.
The seven-day yields of the Money Market Funds for the seven-day period ending
October 31, 1996 are listed in the following table.
<TABLE>
<CAPTION>
========================================================================================================================
Yield for the Seven-Day Period Ending
Fund October 31, 1996
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C>
Financial Reserves Fund 4.79%
- - ------------------------------------------------------------------------------------------------------------------------
Institutional Money Market Fund: Investor Shares 5.21%
- - ------------------------------------------------------------------------------------------------------------------------
Institutional Money Market Fund: Select Shares 4.97%
- - ------------------------------------------------------------------------------------------------------------------------
Ohio Municipal Money Market 2.97%
- - ------------------------------------------------------------------------------------------------------------------------
Prime Obligations Fund 4.54%
- - ------------------------------------------------------------------------------------------------------------------------
Tax-Free Money Market 2.99%
- - ------------------------------------------------------------------------------------------------------------------------
U.S. Government Obligations: Investor Shares Had not commenced operations as of
10/31/96
- - ------------------------------------------------------------------------------------------------------------------------
U.S. Government Obligations: Select Shares 4.79%
========================================================================================================================
</TABLE>
EFFECTIVE YIELD. The Money Market Funds' effective yields are 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.
- 84 -
<PAGE>
The effective yields of Money Market Funds for the seven-day period ending
October 31, 1996 are listed below.
<TABLE>
<CAPTION>
========================================================================================================================
Effective Yield for the Seven-Day Period
Fund Ending October 31, 1996
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C>
Financial Reserves Fund 4.90%
- - ------------------------------------------------------------------------------------------------------------------------
Institutional Money Market Fund: Investor Shares 5.35%
- - ------------------------------------------------------------------------------------------------------------------------
Institutional Money Market Fund: Select Shares 5.10%
- - ------------------------------------------------------------------------------------------------------------------------
Ohio Municipal Money Market 3.01%
- - ------------------------------------------------------------------------------------------------------------------------
Prime Obligations Fund 4.64%
- - ------------------------------------------------------------------------------------------------------------------------
Tax-Free Money Market 3.03%
- - ------------------------------------------------------------------------------------------------------------------------
U.S. Government Obligations: Investor Shares Had not commenced operations as of
10/31/96
- - ------------------------------------------------------------------------------------------------------------------------
U.S. Government Obligations: Select Shares 4.90%
========================================================================================================================
</TABLE>
TOTAL RETURN CALCULATIONS. Total returns quoted in advertising reflect all
aspects of a Fund's return, including the effect of reinvesting dividends and
net capital gain distributions (if any), and any change in the net asset value
per share of a Fund over the period. Average annual total returns are calculated
by determining the growth or decline in value of a hypothetical historical
investment in a 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 (or "annualized total return") are a convenient means of
comparing investment alternatives, investors should realize that performance for
a Fund 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 a Fund. When using total return and yield to compare
a Fund with other mutual funds, investors should take into consideration
permitted portfolio composition methods used to value portfolio securities and
computing offering price. The total returns of the Money Market Funds for the
one year, five year and ten year periods ending October 31, 1996 and the period
since inception of each Money Market Fund are as follows:
<TABLE>
<CAPTION>
=================================================================================================================================
For the Period Ending October 31, 1996
---------------------------------------------------------------------
One-Year Five- Ten- Period Since
Period Year Year Inception
Fund Period Period
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Reserves Fund 5.00% 4.10% 5.60% 6.27%
- - ---------------------------------------------------------------------------------------------------------------------------------
Institutional Money Market Fund: Investor Shares 5.41% 4.34% 5.92% 6.65%
- - ---------------------------------------------------------------------------------------------------------------------------------
Institutional Money Market Fund: Select Shares 5.16% N/A N/A 4.53%
- - ---------------------------------------------------------------------------------------------------------------------------------
Ohio Municipal Money Market 3.11% 2.73% 3.73% 3.81%
- - ---------------------------------------------------------------------------------------------------------------------------------
Prime Obligations Fund 4.81% 4.08% N/A 5.68%
- - ---------------------------------------------------------------------------------------------------------------------------------
Tax-Free Money Market 3.04% 2.69% N/A 3.70%
- - ---------------------------------------------------------------------------------------------------------------------------------
- 85 -
<PAGE>
- - ---------------------------------------------------------------------------------------------------------------------------------
U.S. Government Obligations: Investor Shares Had not
commenced
operations
as of
10/31/96
- - ---------------------------------------------------------------------------------------------------------------------------------
U.S. Government Obligations: Select Shares 4.96% 3.98% N/A 5.44%
=================================================================================================================================
</TABLE>
In addition to average annual total returns, the Money Market Funds, on behalf
of a class, 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 cumulative total
returns of the Money Market Funds for the five year and ten year periods ending
October 31, 1996 and the period since inception are as follows:
<TABLE>
<CAPTION>
=====================================================================================================================
Cumulative Total Returns for the Periods
Ending October 31, 1996
=====================================================================================================================
Five-Year Ten-Year Period Since
Fund Period Period Inception
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financial Reserves Fund 22.25% 72.44% 128.52%
- - ---------------------------------------------------------------------------------------------------------------------
Institutional Money Market Fund: Investor 23.67% 77.74% 143.52%
Shares
- - ---------------------------------------------------------------------------------------------------------------------
Institutional Money Market Fund: Select N/A N/A 6.45%
Shares
- - ---------------------------------------------------------------------------------------------------------------------
Ohio Municipal Money Market Fund 14.42% 44.22% 52.76%
- - ---------------------------------------------------------------------------------------------------------------------
Prime Obligations Fund 22.13% N/A 73.40%
- - ---------------------------------------------------------------------------------------------------------------------
Tax-Free Money Market Fund 14.19% N/A 34.73%
- - ---------------------------------------------------------------------------------------------------------------------
U.S. Government Obligations Fund: N/A N/A N/A
Investor Shares
- - ---------------------------------------------------------------------------------------------------------------------
U.S. Government Obligations Fund: 21.55% N/A 69.51%
Select Shares
=====================================================================================================================
</TABLE>
PERFORMANCE OF THE NON-MONEY MARKET FUNDS
From time to time, the "standardized yield," "distribution return," "dividend
yield," "average annual total return," "total return," and "total return at net
asset value" of an investment in each class of Non-Money Market Fund shares may
be advertised. An explanation of how yields and total returns are calculated for
each class and the components of those calculations are set forth below.
Yield and total return information may be useful to investors in reviewing the
Non-Money Market Fund's performance. A Non-Money Market Fund's advertisement of
its performance must, under applicable SEC rules, include the average annual
total returns for each class of shares of a Non-Money Market Fund for the 1, 5,
and 10-year period (or the life of the class, if less) as of the most recently
ended calendar quarter. This enables an investor to compare the Non-Money Market
Fund's performance to the performance of other funds
- 86 -
<PAGE>
for the same periods. However, a number of factors should be considered before
using such information as a basis for comparison with other investments.
Investments in a Non-Money Market Fund are not insured; their yield and total
return are not guaranteed and normally will fluctuate on a daily basis. When
redeemed, an investor's shares may be worth more or less than their original
cost. Yield and total return for any given past period are not a prediction or
representation by The Victory Portfolios of future yields or rates of return on
its shares. The yield and total returns of the Class A and Class B shares of the
Non-Money Market Funds are affected by portfolio quality, portfolio maturity,
the type of investments the Non-Money Market Fund holds, and operating expenses.
PERFORMANCE - CLASS B SHARES
Class B shares of the Funds were initially offered on the dates listed below.
The performance figures for Class B shares for periods prior to such dates
represent the performance for Class A shares of the Funds, which have been
restated to reflect the applicable CDSC payable at redemption within 6 years
from purchase. Class B Shares are subject to an asset based sales charge of
0.75% of average daily net assets per year and other class-specific expenses.
Had these fees and expenses been reflected, performances quoted would have been
lower.
===============================================================================
Date Class B Shares Were
Fund Initially Offered
- - -------------------------------------------------------------------------------
Balanced Fund: Class B 3/1/96
- - -------------------------------------------------------------------------------
Diversified Stock Fund: Class B 3/1/96
- - -------------------------------------------------------------------------------
International Growth Fund: Class B 3/1/96
- - -------------------------------------------------------------------------------
National Municipal Bond Fund: Class B 9/26/94
- - -------------------------------------------------------------------------------
New York Tax-Free Fund: Class B 9/26/94
- - -------------------------------------------------------------------------------
Ohio Regional Stock Fund: Class B 3/1/96
- - -------------------------------------------------------------------------------
Special Value Fund: Class B 3/1/96
===============================================================================
STANDARDIZED YIELD. The "yield" (referred to as "standardized yield") of the
Non-Money Market Funds for a given 30-day period for a class of shares is
calculated using the following formula set forth in rules adopted by the SEC
that apply to all funds that quote yields:
Standardized Yield = 2 [(a-b + 1)^6 - 1]
--
cd
The symbols above represent the following factors:
a = dividends and interest earned during the 30-day period.
b = expenses accrued for the period (net of any expense reimbursements).
c = the average daily number of shares of that class outstanding
during the 30-day period that were entitled to receive
dividends.
d = the maximum offering price per share of the class on the last day of
the period, adjusted for undistributed net investment income.
The standardized yield of a class of shares for a 30-day period may differ from
its yield for any other period. The SEC formula assumes that the standardized
yield for a 30-day period occurs at a constant rate for a six-month period and
is annualized at the end of the six-month period. This standardized yield is not
based on actual distributions paid by a Fund to shareholders in the 30-day
period, but is a hypothetical yield based upon the net investment income from a
Fund's portfolio investments calculated for that period. The standardized yield
may differ from the "dividend yield" of that class, described below.
Additionally, because each class of
- 87 -
<PAGE>
shares of a Fund is subject to different expenses, it is likely that the
standardized yields of the share classes of the Funds will differ. The yields on
the Funds for the 30-day period ended October 31, 1996 were as follows.
<TABLE>
<CAPTION>
===============================================================================================================
Yield for the 30-Day Period
Fund Ended October 31, 1996
- - ---------------------------------------------------------------------------------------------------------------
<S> <C>
Balanced Fund: Class A 2.475934%
- - ---------------------------------------------------------------------------------------------------------------
Balanced Fund: Class B 1.242256%
- - ---------------------------------------------------------------------------------------------------------------
Diversified Stock Fund: Class A 1.030993%
- - ---------------------------------------------------------------------------------------------------------------
Diversified Stock Fund: Class B (.034264)%
- - ---------------------------------------------------------------------------------------------------------------
Fund for Income: Class A 6.821101%
- - ---------------------------------------------------------------------------------------------------------------
Government Mortgage Fund: Class A 5.702492%
- - ---------------------------------------------------------------------------------------------------------------
Growth Fund: Class A .495293%
- - ---------------------------------------------------------------------------------------------------------------
Intermediate Income Fund: Class A 5.123653%
- - ---------------------------------------------------------------------------------------------------------------
International Growth Fund: Class A 0
- - ---------------------------------------------------------------------------------------------------------------
International Growth Fund: Class B 0
- - ---------------------------------------------------------------------------------------------------------------
Investment Quality Bond Fund: Class A 5.415394%
- - ---------------------------------------------------------------------------------------------------------------
Limited Term Income Fund: Class A 5.179452%
- - ---------------------------------------------------------------------------------------------------------------
National Municipal Bond Fund: Class A 4.246924%
- - ---------------------------------------------------------------------------------------------------------------
National Municipal Bond Fund: Class B 3.172017%
- - ---------------------------------------------------------------------------------------------------------------
New York Tax-Free Fund: Class A 3.907110%
- - ---------------------------------------------------------------------------------------------------------------
New York Tax-Free Fund: Class B 3.388541%
- - ---------------------------------------------------------------------------------------------------------------
Ohio Municipal Bond Fund: Class A 4.322468%
- - ---------------------------------------------------------------------------------------------------------------
Ohio Regional Stock Fund: Class A .772088%
- - ---------------------------------------------------------------------------------------------------------------
Ohio Regional Stock Fund: Class B (.541703)%
- - ---------------------------------------------------------------------------------------------------------------
Special Growth Fund: Class A (.680886)%
- - ---------------------------------------------------------------------------------------------------------------
Special Value Fund: Class A .686329%
- - ---------------------------------------------------------------------------------------------------------------
Special Value Fund: Class B (.383830)%
- - ---------------------------------------------------------------------------------------------------------------
Stock Index Fund: Class A 2.160275%
- - ---------------------------------------------------------------------------------------------------------------
Value Fund: Class A 1.159815%
===============================================================================================================
</TABLE>
DIVIDEND YIELD AND DISTRIBUTION RETURNS. From time to time a Non-Money Market
Fund may quote a "dividend yield" or a "distribution return" for each class.
Dividend yield is based on the Class A or Class B share dividends derived from
net investment income during a stated period. Distribution return includes
dividends derived from net investment income and from net realized capital gains
declared during a stated period. Under those calculations, the dividends and/or
distributions for that class declared during a stated period of one year or less
(for example, 30 days) are added together, and the sum is divided by the maximum
- 88 -
<PAGE>
offering price per share of that class on the last day of the period. When the
result is annualized for a period of less than one year, the "dividend yield" is
calculated as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Dividend Yield = Dividends of the Class Number of days (accrual period) x 365
of the Class -------------------------------------------------- +
Max. Offering Price of the Class (last day of period)
</TABLE>
For Class A shares, the maximum offering price includes the maximum front-end
sales charge. For Class B shares, the maximum offering price is the net asset
value per share, without considering the effect of the CDSC.
From time to time similar yield or distribution return calculations may also be
made using the Class A net asset value (instead of its respective maximum
offering price) at the end of the period. The dividend yields on Class A shares
at maximum offering price and net asset value, and distribution returns on Class
A shares at maximum offering price and net asset value as of October 31, 1996
were as follows:
<TABLE>
<CAPTION>
================================================================================================================================
For the One-Year Period Ended October 31, 1996
================================================================================================================================
Distribution
Dividend Dividend Return at Distribution
Yield Yield Maximum Return
Fund at Maximum at Net Asset Offering at Net Asset
Offering Price Value Price Value
- - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balanced Fund: Class A 2.81% 2.95% 3.37% 3.54%
- - --------------------------------------------------------------------------------------------------------------------------------
Diversified Stock Fund: Class A 1.17% 1.23% 7.77% 8.16%
- - --------------------------------------------------------------------------------------------------------------------------------
Fund for Income: Class A 7.64% 7.80% 7.64% 7.80%
- - --------------------------------------------------------------------------------------------------------------------------------
Government Mortgage Fund 6.01% 6.32% 6.01% 6.32%
- - --------------------------------------------------------------------------------------------------------------------------------
Growth Fund: Class A 0.53% 0.56% 3.85% 4.04%
- - --------------------------------------------------------------------------------------------------------------------------------
Intermediate Income Fund: Class A 5.54% 5.81% 5.54% 5.81%
- - --------------------------------------------------------------------------------------------------------------------------------
International Growth Fund: Class A 0.12% 0.12% 0.12% 0.12%
- - --------------------------------------------------------------------------------------------------------------------------------
Investment Quality Bond Fund 5.60% 5.88% 5.60% 5.88%
- - --------------------------------------------------------------------------------------------------------------------------------
Limited Term Income Fund 6.13% 6.25% 6.13% 6.25%
- - --------------------------------------------------------------------------------------------------------------------------------
National Municipal Bond Fund: 4.14% 4.35% 4.43% 4.65%
Class A
- - --------------------------------------------------------------------------------------------------------------------------------
New York Tax-Free Fund: Class A 5.08% 5.33% 5.73% 5.39%
- - --------------------------------------------------------------------------------------------------------------------------------
Ohio Municipal Bond Fund 4.48% 4.70% 4.48% 4.70%
- - --------------------------------------------------------------------------------------------------------------------------------
Ohio Regional Stock Fund: Class A 0.72% 0.75% 3.93% 4.13%
- - --------------------------------------------------------------------------------------------------------------------------------
Special Growth Fund -- -- -- --
- - --------------------------------------------------------------------------------------------------------------------------------
Special Value Fund: Class A 0.71% 0.75% 2.97% 3.12%
- - --------------------------------------------------------------------------------------------------------------------------------
Stock Index Fund 1.82% 1.91% 3.27% 3.43%
- - --------------------------------------------------------------------------------------------------------------------------------
Value Fund 1.37% 1.44% 3.63% 3.81%
================================================================================================================================
</TABLE>
- 89 -
<PAGE>
The dividend yield on Class B shares with and without the CDSC, and distribution
returns on Class B shares with and without the CDSC as of October 31, 1996 were
as follows.
<TABLE>
<CAPTION>
================================================================================================================================
For the One-Year Period Ended October 31, 1996
================================================================================================================================
Dividend
Dividend Yield Distribution Distribution
Yield with without Returns with Returns
Fund CDSC CDSC CDSC without CDSC
- - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balanced Fund: Class B 2.42 2.42 3.01 3.01
- - --------------------------------------------------------------------------------------------------------------------------------
Diversified Stock Fund: Class B 1.06 1.06 8.01 8.01
- - --------------------------------------------------------------------------------------------------------------------------------
International Growth Fund: Class B .02 .02 .02 .02
- - --------------------------------------------------------------------------------------------------------------------------------
National Municipal Bond Fund:
Class B 3.53 3.53 3.83 3.83
- - --------------------------------------------------------------------------------------------------------------------------------
New York Tax-Free Fund: Class B 4.54 4.54 4.60 4.60
- - --------------------------------------------------------------------------------------------------------------------------------
Ohio Regional Stock Fund: Class B .48 .48 3.87 3.87
- - --------------------------------------------------------------------------------------------------------------------------------
Special Value Fund: Class B .52 .52 2.90 2.90
================================================================================================================================
</TABLE>
TOTAL RETURNS. The "average annual total return" of a Fund, or of each class of
a Fund, is an average annual compounded rate of return for each year in a
specified number of years. It is the rate of return based on the change in value
of a hypothetical initial investment of $1,000 ("P" in the formula below) held
for a number of years ("n") to achieve an Ending Redeemable Value ("ERV"),
according to the following formula:
( ERV )^1n - 1 = Average Annual Total Return
-----
( P )
The cumulative "total return" calculation measures the change in value of a
hypothetical investment of $1,000 over an entire period of years. Its
calculation uses some of the same factors as average annual total return, but it
does not average the rate of return on an annual basis. Total return is
determined as follows:
ERV - P = Total Return
-------
P
In calculating total returns for the Funds, and for Class A shares of the Funds,
the current maximum sales charge (as a percentage of the offering price) is
deducted from the initial investment ("P") (unless the return is shown at net
asset value, as discussed below). For Class B shares, the payment of the
applicable CDSC (5.0% for the first year, 4.0% for second year, 3.0% for the
third and fourth years, 2.0% for the fifth year, 1.0% for the sixth year and
none thereafter) is applied to the investment result for the time period shown
(unless the total return is shown at net asset value, as described below). Total
returns also assume that all dividends and net capital gains distributions
during the period are reinvested to buy additional shares at net asset value per
share, and that the investment is redeemed at the end of the period. The average
annual total return and cumulative total return on Fund shares, and Class A
shares, for the period from the commencement of operations to October 31, 1996
(life of fund) at maximum offering price is shown on the table that follows. The
average annual total return for the one and five year periods (when applicable)
ended October 31, 1996 also are shown on the table that follows.
- 90 -
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Average
Annual Average Annual
Total Cumulative Average Annual Total Return at
Return for Total Return Total Return at Maximum
the Life of for the Life Maximum Offering Price*
the Fund at of the Fund at Offering Price* for the Five-
Maximum Maximum for the One-Year Year Period
Maximum Offering Offering Period Ended Ended October
Fund Sales Charge Price* Price* October 31, 1996 31, 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balanced Fund: 4.75% 9.86 31.29 10.74 N/A
Class A
- - -----------------------------------------------------------------------------------------------------------------------------------
Balanced Fund: 5.00% 10.71 34.22 11.73 N/A
Class B
- - -----------------------------------------------------------------------------------------------------------------------------------
Diversified 4.75% 13.69 146.78 21.11 15.36
Stock Fund:
Class A
- - -----------------------------------------------------------------------------------------------------------------------------------
Diversified 5.00% 14.42 158.01 22.61 16.28
Stock Fund:
Class B
- - -----------------------------------------------------------------------------------------------------------------------------------
Fund for Income 2.00% 8.19 111.31 4.25 5.86
- - -----------------------------------------------------------------------------------------------------------------------------------
Government 4.75% 7.51 59.69 0.54 5.89
Mortgage Fund
- - -----------------------------------------------------------------------------------------------------------------------------------
Growth Fund 4.75% 14.63 48.90 19.65 N/A
- - -----------------------------------------------------------------------------------------------------------------------------------
Intermediate 4.75% 2.83 8.42 (0.38) N/A
Income Fund
- - -----------------------------------------------------------------------------------------------------------------------------------
International 4.75% 5.44 40.78 6.65 7.45
Growth Fund:
Class A
- - -----------------------------------------------------------------------------------------------------------------------------------
International 5.00% 6.12 46.77 0.89 8.21
Growth Fund:
Class B
- - -----------------------------------------------------------------------------------------------------------------------------------
Investment 4.75% 3.27 9.77 (0.35) N/A
Quality Bond
Fund
- - -----------------------------------------------------------------------------------------------------------------------------------
Limited Term 2.00% 6.21 52.81 2.81 4.97
Income Fund
- - -----------------------------------------------------------------------------------------------------------------------------------
National 4.75% 3.40 9.61 0.82 N/A
Municipal Bond
Fund: Class A
- - -----------------------------------------------------------------------------------------------------------------------------------
National 5.00% 3.57 10.11 0.85 N/A
Municipal Bond
Fund: Class B
- 91 -
<PAGE>
====================================================================================================================================
Average
Annual Average Annual
Total Cumulative Average Annual Total Return at
Return for Total Return Total Return at Maximum
the Life of for the Life Maximum Offering Price*
the Fund at of the Fund at Offering Price* for the Five-
Maximum Maximum for the One-Year Year Period
Maximum Offering Offering Period Ended Ended October
Fund Sales Charge Price* Price* October 31, 1996 31, 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
New York Tax- 4.75% 6.18 41.01 (0.42) 5.62
Free Fund:
Class A
- - -----------------------------------------------------------------------------------------------------------------------------------
New York Tax- 5.00% 6.65 44.60 (0.24) 6.15
Free Fund:
Class B
- - -----------------------------------------------------------------------------------------------------------------------------------
Ohio Municipal 4.75% 7.06 55.45 0.88 6.50
Bond Fund
- - -----------------------------------------------------------------------------------------------------------------------------------
Ohio Regional 4.75% 11.79 119.11 12.23 13.36
Stock Fund:
Class A
- - -----------------------------------------------------------------------------------------------------------------------------------
Ohio Regional 5.00% 12.46 128.42 12.95 14.20
Stock Fund:
Class B
- - -----------------------------------------------------------------------------------------------------------------------------------
Special Growth 4.75% 11.25 34.89 14.03 N/A
Fund
- - -----------------------------------------------------------------------------------------------------------------------------------
Special Value 4.75% 13.21 43.57 14.84 N/A
Fund: Class A
- - -----------------------------------------------------------------------------------------------------------------------------------
Special Value 5.00% 14.08 46.75 15.80 N/A
Fund: Class B
- - -----------------------------------------------------------------------------------------------------------------------------------
Stock Index 4.75% 15.74 53.14 17.55 N/A
Fund
- - -----------------------------------------------------------------------------------------------------------------------------------
Value Fund 4.75% 14.90 49.92 18.76 N/A
===================================================================================================================================
</TABLE>
*For Class B Shares, the calculations are made with the CDSC.
From time to time the Non-Money Market Funds also may quote an "average annual
total return at net asset value" or a cumulative "total return at net asset
value." It is based on the difference in net asset value per share at the
beginning and the end of the period for a hypothetical investment in that class
of shares (without considering front-end or contingent deferred sales charges)
and takes into consideration the reinvestment of dividends and capital gains
distributions. The average annual total return and cumulative total return on
Fund shares, and Class A shares of the Funds, at net asset value for the period
from the commencement of operations to October 31, 1996 (life of fund) are shown
in the table that follows. The average annual total return and cumulative total
return on Class B shares without the CDSC for the period from the commencement
of operations to October 31, 1996 are also shown below.
- 92 -
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================================================
For period from commencement of operations to Average Annual Total
October 31, 1996 Return at Net Asset
Value* For Year Ended
October 31, 1996
FUND
----------------------------------------------------------------
Average Annual Total Cumulative Total Return
Return at Net Asset at Net Asset Value*
Value*
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced Fund: Class
A 11.72% 37.86% 16.27%
- - -----------------------------------------------------------------------------------------------------------------------------
Balanced Fund: Class
B 11.56% 37.22% 15.73%
- - -----------------------------------------------------------------------------------------------------------------------------
Diversified Stock Fund:
Class A 14.48% 159.12% 27.16%
- - -----------------------------------------------------------------------------------------------------------------------------
Diversified Stock Fund:
Class B 14.42% 158.01% 26.61%
- - -----------------------------------------------------------------------------------------------------------------------------
Fund for Income 8.42% 115.34% 6.35%
- - -----------------------------------------------------------------------------------------------------------------------------
Government Mortgage
Fund 8.33% 67.67% 5.54%
- - -----------------------------------------------------------------------------------------------------------------------------
Growth Fund 16.57% 56.35% 25.66%
- - -----------------------------------------------------------------------------------------------------------------------------
Intermediate Income
Fund 4.58% 13.84% 4.56%
- - -----------------------------------------------------------------------------------------------------------------------------
International Growth
Fund: Class A 6.23% 47.82% 5.65%
- - -----------------------------------------------------------------------------------------------------------------------------
International Growth
Fund: Class B 6.12% 46.77% 4.89%
- - -----------------------------------------------------------------------------------------------------------------------------
Investment Quality
Bond Fund 5.03% 15.26% 4.65%
- - -----------------------------------------------------------------------------------------------------------------------------
Limited Term Income
Fund 6.51% 55.87% 4.94%
- - -----------------------------------------------------------------------------------------------------------------------------
National Municipal
Bond Fund: Class A 5.25% 15.09% 5.83%
- - -----------------------------------------------------------------------------------------------------------------------------
National Municipal
Bond Fund: Class B 4.59% 13.11% 4.85%
- - -----------------------------------------------------------------------------------------------------------------------------
New York Tax-Free
Fund: Class A 7.09% 48.06% 4.53%
- - -----------------------------------------------------------------------------------------------------------------------------
New York Tax-Free
Fund: Class B 6.78% 45.60% 3.72%
- - -----------------------------------------------------------------------------------------------------------------------------
Ohio Municipal Bond
Fund 7.88% 63.22% 5.87%
- - -----------------------------------------------------------------------------------------------------------------------------
Ohio Regional Stock
Fund: Class A 12.57% 130.07% 17.79%
- 93 -
<PAGE>
- - -----------------------------------------------------------------------------------------------------------------------------
Ohio Regional Stock
Fund: Class B 12.46% 128.42% 16.95%
- - -----------------------------------------------------------------------------------------------------------------------------
Special Growth Fund 13.19% 41.63% 19.73%
- - -----------------------------------------------------------------------------------------------------------------------------
Special Value Fund:
Class A 15.12% 50.75% 20.60%
- - -----------------------------------------------------------------------------------------------------------------------------
Special Value Fund:
Class B 14.87% 49.75% 19.80%
- - -----------------------------------------------------------------------------------------------------------------------------
Stock Index Fund 17.70% 60.80% 23.38%
- - -----------------------------------------------------------------------------------------------------------------------------
Value Fund 16.84% 57.41% 24.66%
=============================================================================================================================
</TABLE>
* For Class B shares, calculations are made without the CDSC.
OTHER PERFORMANCE COMPARISONS.
From time to time a Fund may publish the ranking of its performance or the
performance of its Class A or Class B shares by Lipper Analytical Services, Inc.
("Lipper"), a widely-recognized independent mutual fund monitoring service.
Lipper monitors the performance of regulated investment companies, including the
Non-Money Market Funds, and ranks the performance of the Funds and their classes
against all other funds in similar categories, for both equity and fixed income
funds. The Lipper performance rankings are based on total return that includes
the reinvestment of capital gains distributions and income dividends but does
not take sales charges or taxes into consideration.
From time to time a Fund may publish the ranking of its performance or
performance of its Class A or Class B shares by Morningstar, Inc., an
independent mutual fund monitoring service that ranks mutual funds, including
the Non-Money Market Funds, in broad investment categories (domestic equity,
international equity taxable bond, municipal bond or other) monthly, based upon
each fund's three, five, and ten-year average annual total returns (when
available) and a risk adjustment factor that reflects fund performance relative
to three-month U.S. Treasury bill monthly returns. Such returns are adjusted for
fees and sales loads. There are five ranking categories with a corresponding
number of stars: highest (5), above average (4), neutral (3), below average (2)
and lowest (1). Ten percent of the funds, series or classes in an investment
category receive five stars, 22.5% receive four stars, 35% receive three stars,
22.5% receive two stars, and the bottom 10% receive one star.
The total return on an investment made in a Fund or in Class A or Class B shares
of a Fund may be compared with the performance for the same period of one or
more of the following indices: the Consumer Price Index, the Salomon Brothers
World Government Bond Index, the Standard & Poor's 500 Index, the Shearson
Lehman Government/Corporate Bond Index, the Lehman Aggregate Bond Index, and the
J.P. Morgan Government Bond Index. Other indices may be used from time to time.
The Consumer Price Index generally is considered to be a measure of inflation.
The Salomon Brothers World Government Bond Index generally represents the
performance of government debt securities of various markets throughout the
world, including the United States. The Lehman Government/Corporate Bond Index
generally represents the performance of intermediate and long-term government
and investment grade corporate debt securities. The Lehman Aggregate Bond Index
measures the performance of U.S. corporate bond issues, U.S. government
securities and mortgage-backed securities. The J.P. Morgan Government Bond Index
generally represents the performance of government bonds issued by various
countries including the United States. The S&P 500 Index is a composite index of
500 common stocks generally regarded as an index of U.S. stock market
performance. The foregoing bond indices are unmanaged indices of securities that
do not reflect reinvestment of capital gains or take investment costs into
consideration, as these items are not applicable to indices.
From time to time, the yields and the total returns of the Funds or Class A or
Class B shares of a Non-Money Market Fund may be quoted in and compared to other
mutual funds with similar investment objectives in
- 94 -
<PAGE>
advertisements, shareholder reports or other communications to shareholders. A
Fund also may include calculations in such communications that describe
hypothetical investment results. (Such performance examples are based on an
express set of assumptions and are not indicative of the performance of any
Fund.) Such calculations may from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund's
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of a Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of a Fund investment would increase
more quickly than if dividends or other distributions had been paid in cash. A
Fund may also include discussions or illustrations of the potential investment
goals of a prospective investor (including but not limited to tax and/or
retirement planning), investment management techniques, policies or investment
suitability of a Fund, economic conditions, legislative developments (including
pending legislation), the effects of inflation and historical performance of
various asset classes, including but not limited to stocks, bonds and Treasury
bills. From time to time advertisements or communications to shareholders may
summarize the substance of information contained in shareholder reports
(including the investment composition of a Fund, as well as the views of the
investment adviser as to current market, economic, trade and interest rate
trends, legislative, regulatory and monetary developments, investment strategies
and related matters believed to be of relevance to a Fund.) A Fund may also
include in advertisements, charts, graphs or drawings which illustrate the
potential risks and rewards of investment in various investment vehicles,
including but not limited to stock, bonds, and Treasury bills, as compared to an
investment in shares of a Fund, as well as charts or graphs which illustrate
strategies such as dollar cost averaging, and comparisons of hypothetical yields
of investment in tax-exempt versus taxable investments. In addition,
advertisements or shareholder communications may include a discussion of certain
attributes or benefits to be derived by an investment in a Fund. Such
advertisements or communications may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
therein. With proper authorization, a Fund may reprint articles (or excerpts)
written regarding a Fund and provide them to prospective shareholders.
Performance information with respect to the Funds is generally available by
calling 1-800-KEY-FUND.
Investors may also judge, and a Fund may at times advertise, the performance of
a Fund or of Class A or Class B shares of a Fund by comparing it to the
performance of other mutual funds or mutual fund portfolios with comparable
investment objectives and policies, which performance may be contained in
various unmanaged mutual fund or market indices or rankings such as those
prepared by Dow Jones & Co., Inc., Standard & Poor's Corporation, Lehman
Brothers, Merrill Lynch, and Salomon Brothers, and in publications issued by
Lipper Analytical Services, Inc. and in the following publications: IBC's Money
Fund Reports, Value Line Mutual Fund Survey, Morningstar, CDA/Wiesenberger,
Money Magazine, Forbes, Barron's, The Wall Street Journal, The New York Times,
Business Week, American Banker, Fortune, Institutional Investor, Ibbotson
Associates, and U.S.A. Today. In addition to yield information, general
information about a Fund that appears in a publication such as those mentioned
above may also be quoted or reproduced in advertisements or in reports to
shareholders.
Advertisements and sales literature may include discussions of specifics of a
portfolio manager's investment strategy and process, including, but not limited
to, descriptions of security selection and analysis. Advertisements may also
include descriptive information about the investment adviser, including, but not
limited to, its status within the industry, other services and products it makes
available, total assets under management, and its investment philosophy.
When comparing yield, total return, and investment risk of an investment in
shares of a Fund with other investments, investors should understand that
certain other investments have different risk characteristics than an investment
in shares of a Fund. For example, certificates of deposit may have fixed rates
of return and may be insured as to principal and interest by the FDIC, while a
Fund's returns will fluctuate and its share values and returns are not
guaranteed. Money market accounts offered by banks also may be insured by the
FDIC and
- 95 -
<PAGE>
may offer stability of principal. U.S. Treasury securities are guaranteed as to
principal and interest by the full faith and credit of the U.S. Government.
Money market mutual funds may seek to maintain a fixed price per share.
ADDITIONAL PURCHASE, EXCHANGE, AND REDEMPTION INFORMATION
The New York Stock Exchange ("NYSE") holiday closing schedule indicated in the
SAI under "Valuation of Portfolio Securities for the Money Market Funds" is
subject to change.
When the NYSE or the Federal Reserve Board of Cleveland 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 Funds will determine their net asset value at Valuation Time. A
Fund's net asset value may be affected to the extent that its securities are
traded on days that are not Business Days.
The Victory Portfolios has elected, pursuant to Rule 18f-1 under the 1940 Act,
to redeem shares of the Balanced Fund, Diversified Stock Fund, Fund for Income,
Government Mortgage Fund, Growth Fund, Intermediate Income Fund, International
Growth Fund, Investment Quality Bond Fund, Limited Term Income Fund, National
Municipal Bond Fund, New York Tax-Free Fund, Ohio Municipal Bond Fund, Ohio
Regional Stock Fund, Special Growth Fund, Special Value Fund, Stock Index Fund,
and Value Fund solely in cash up to the lesser of $250,000 or 1% of the net
asset value of the Fund during any 90-day period for any one shareholder. The
remaining portion of the redemption may be made in securities or other property,
valued for this purpose as they are valued in computing the net asset value of
each class of the Fund. Shareholders receiving securities or other property on
redemption may realize a gain or loss for tax purposes and may incur additional
costs as well as the associated inconveniences of holding and/or disposing of
such securities or other property.
Pursuant to Rule 11a-3 under the 1940 Act, the Funds are required to give
shareholders at least 60 days' notice prior to terminating or modifying a Fund's
exchange privilege. The 60-day notification requirement may, however, 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) a 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 Funds reserve the right at any time without prior notice to shareholders to
refuse exchange purchases by any person or group if, in the Adviser's judgment,
a Fund would be unable to invest effectively in accordance with its investment
objective and policies, or would otherwise potentially be adversely affected.
PURCHASING SHARES.
ALTERNATIVE SALES ARRANGEMENTS - CLASS A AND CLASS B SHARES. The alternative
sales arrangements permit an investor to choose the method of purchasing shares
that is more beneficial depending on the amount of the purchase, the length of
time the investor expects to hold shares and other relevant circumstances.
Investors should understand that the purpose and function of the deferred sales
charge and asset-based sales charge with respect to Class B shares are the same
as those of the initial sales charge with respect to Class A shares. Any
salesperson or other person entitled to receive compensation for selling Fund
shares may receive different compensation with respect to one class of shares on
behalf of a single investor (not including dealer "street name" or omnibus
accounts) because generally it will be more advantageous for that investor to
purchase Class A shares of a Fund instead.
The two classes of shares each represent an interest in the same portfolio
investments of a Fund. However, each class has different shareholder privileges
and features. The net income attributable to Class B shares and the dividends
payable on Class B shares will be reduced by incremental expenses borne solely
by that class, including the asset-based sales charge to which Class B shares
are subject.
- 96 -
<PAGE>
CLASS B CONVERSION FEATURE. Ninety-six months after an investor's purchase order
for Class B shares is accepted, such "Matured Class B Shares" automatically will
convert to Class A shares, on the basis of the relative net asset value of the
two classes, without the imposition of any sales load or other charge. Each time
any Matured Class B shares convert to Class A shares, any Class B shares
acquired by the reinvestment of dividends or distributions on such Matured Class
B shares that are still held will also convert to Class A shares, on the same
basis. The conversion feature is intended to relieve holders of Matured Class B
shares of the asset-based sales charge under the Class B Distribution Plan after
such shares have been outstanding long enough that the Distributor may have been
compensated for distribution expenses related to such shares.
The conversion of Matured Class B shares to Class A shares is subject to the
continuing availability of a private letter ruling from the Internal Revenue
Service, or an opinion of counsel or tax adviser, to the effect that the
conversion of Matured Class B shares does not constitute a taxable event for the
holder under Federal income tax law. If such a revenue ruling or opinion is no
longer available, the automatic conversion feature may be suspended, in which
event no further conversion of Matured Class B shares would occur while such
suspension remained in effect. Although Matured Class B shares could then be
exchanged for Class A shares on the basis of relative net asset value of the two
classes, without the imposition of a sales charge or fee, such exchange could
constitute a taxable event for the holder, and absent such exchange, Class B
shares might continue to be subject to the asset-based sales charge for longer
than six years.
The methodology for calculating the net asset value, dividends and distributions
of the Fund's Class A and Class B shares recognizes two types of expenses.
General expenses that do not pertain specifically to either class are allocated
to the shares of each class, based upon the percentage that the net assets of
such class bears to a Fund's total net assets, and then pro rata to each
outstanding share within a given class. Such general expenses include (1)
management fees, (2) legal, bookkeeping and audit fees, (3) printing and mailing
costs of shareholder reports, prospectuses, statements of additional information
and other materials for current shareholders, (4) fees to the Trustees who are
not affiliated with the Adviser, (5) custodian expenses, (6) share issuance
costs, (7) organization and start-up costs, (8) interest, taxes and brokerage
commissions, and (9) non-recurring expenses, such as litigation costs. Other
expenses that are directly attributable to a class are allocated equally to each
outstanding share within that class. Such expenses include (1) Rule 12b-1
distribution fees and shareholder servicing fees, (2) incremental transfer and
shareholder servicing agent fees and expenses, (3) registration fees, and (4)
shareholder meeting expenses, to the extent that such expenses pertain to a
specific class rather than to a Fund as a whole.
REDUCED SALES CHARGE. Reduced sales charges are available for purchases of
$50,000 or more of Class A shares of a Fund alone or in combination with
purchases of other Class A shares of the Victory Portfolios. To obtain the
reduction of the sales charge, you or your Investment Professional must notify
the Transfer Agent at the time of purchase whenever a quantity discount is
applicable to your purchase.
In addition to investing at one time in any combination of Class A shares of the
Victory Portfolios in an amount entitling you to a reduced sales charge, you may
qualify for a reduction in the sales charge under the following programs:
COMBINED PURCHASES. When you invest in Class A shares of the Victory Portfolios
for several accounts at the same time, you may combine these investments into a
single transaction if purchased through one Investment Professional, and if the
total is $50,000 or more. The following may qualify for this privilege: an
individual, or "company" as defined in Section 2(a)(8) of the 1940 Act; an
individual, spouse, and their children under age 21 purchasing for his, her, or
their own account; a trustee, administrator or other fiduciary purchasing for a
single trust estate or single fiduciary account or for a single or a
parent-subsidiary group of "employee benefit plans" (as defined in Section 3(3)
of ERISA); and tax-exempt organizations under Section 501(c)(3) of the Internal
Revenue Code.
RIGHTS OF ACCUMULATION. "Rights of Accumulation" permit reduced sales charges on
future purchases of Class A shares after you have reached a new breakpoint. You
can add the value of existing Victory Portfolios Class A shares held by you,
your spouse, and your children under age 21, determined at the previous day's
net asset
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value at the close of business, to the amount of your new purchase valued at the
current offering price to determine your reduced sales charge.
LETTER OF INTENT. If you anticipate purchasing $50,000 or more of shares of a
Fund alone or in combination with Class A shares of certain other Victory
Portfolios within a 13-month period, you may obtain shares of the portfolios at
the same reduced sales charge as though the total quantity were invested in one
lump sum, by filing a non-binding Letter of Intent (the "Letter") within 90 days
of the start of the purchases. Each investment you make after signing the Letter
will be entitled to the sales charge applicable to the total investment
indicated in the Letter. For example, a $2,500 purchase toward a $60,000 Letter
would receive the same reduced sales charge as if the $60,000 had been invested
at one time. To ensure that the reduced price will be received on future
purchases, you or your Investment Professional must inform the Transfer Agent
that the Letter is in effect each time shares are purchased. Neither income
dividends nor capital gain distributions taken in additional shares will apply
toward the completion of the Letter.
You are not obligated to complete the additional purchases contemplated by a
Letter. If you do not complete your purchase under the Letter within the
13-month period, your sales charge will be adjusted upward, corresponding to the
amount actually purchased, and if after written notice, you do not pay the
increased sales charge, sufficient escrowed shares will be redeemed to pay such
charge.
If you purchase more than the amount specified in the Letter and qualify for a
further sales charge reduction, the sales charge will be adjusted to reflect
your total purchase at the end of 13 months. Surplus funds will be applied to
the purchase of additional shares at the then current offering price applicable
to the total purchase.
EXCHANGING SHARES.
Shares of any Victory Money Market Fund may be exchanged for shares of any of
the Victory Portfolios, including Class A and Class B shares of the Victory
Portfolios. Exchanges for Class A shares of the Victory Portfolios may be
subject to payment of a sales charge.
Shares of a Fund may be exchanged for the same class of shares of any other fund
of the Victory Portfolios. For example, an investor can exchange Class B shares
of a Fund only for Class B shares of another Fund. At present, not all Funds of
the Victory Portfolios offer multiple classes of shares. If a Fund has only one
class of shares that does not have a class designation, that class is "Class A"
for exchange purposes. When Class B shares are redeemed to effect an exchange,
the priorities described in the Prospectuses for the imposition of the Class B
CDSC will be followed in determining the order in which the shares are
exchanged. Shareholders should take into account the effect of any exchange on
the applicability and rate of any CDSC that might be imposed in the subsequent
redemption of remaining shares. Shareholders owning shares of both classes must
specify whether they intend to exchange Class A or Class B shares. If you do not
make a selection, your exchange will be made in Class A shares.
REDEEMING SHARES.
REINSTATEMENT PRIVILEGE. Within 90 days of a redemption, a shareholder may
reinvest all or part of the redemption proceeds of (1) Class A shares, or (2)
Class B shares that were subject to the Class B CDSC when redeemed, in Class A
shares of a Fund or any of the other Victory Portfolios into which shares of the
Fund are exchangeable as described below, at the net asset value next computed
after receipt by the Transfer Agent of the reinvestment order. No service charge
is currently made for reinvestment in shares of the Funds. The shareholder must
ask the Distributor for such privilege at the time of reinvestment. Any capital
gain that was realized when the shares were redeemed is taxable, and
reinvestment will not alter any capital gains tax payable on that gain. If there
has been a capital loss on the redemption, some or all of the loss may not be
tax deductible, depending on the timing and amount of the reinvestment. Under
the Code, if the redemption proceeds of Fund shares on which a sales charge was
paid are reinvested in shares of a Fund or another of the Victory Portfolios
within 90 days of payment of the sales charge, the shareholder's basis in the
shares of the Fund that were redeemed may not include the amount of the sales
charge paid. That would reduce the loss or
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increase the gain recognized from redemption. The Funds may amend, suspend, or
cease offering this reinvestment privilege at any time as to shares redeemed
after the date of such amendment, suspension, or cessation. The reinstatement
must be into an account bearing the same registration.
DIVIDENDS AND DISTRIBUTIONS
The Funds distribute substantially all of their 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 Funds to qualify for favorable
federal tax treatment. The Funds ordinarily declare and pay dividends,
separately for Class A and Class B shares, from their net investment income as
follows.
<TABLE>
<CAPTION>
Income Capital
Fund Dividends Gains
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balanced Fund Declared and paid Monthly Declared and paid Annually
Diversified Stock Fund Declared and paid Quarterly Declared and paid Annually
Fund for Income Declared and paid Monthly Declared and paid Annually
Government Mortgage Fund Declared and paid Monthly Declared and paid Annually
Growth Fund Declared and paid Quarterly Declared and paid Annually
Intermediate Income Fund Declared and paid Monthly Declared and paid Annually
International Growth Fund Declared and paid Quarterly Declared and paid Annually
Investment Quality Bond Fund Declared and paid Monthly Declared and paid Annually
Lakefront Fund Declared and paid Quarterly Declared and paid Annually
Limited Term Income Fund Declared and paid Monthly Declared and paid Annually
Money Market Funds Declared Daily and paid Monthly Declared and paid Annually
National Municipal Bond Fund Declared and paid Monthly Declared and paid Annually
New York Tax-Free Fund Declared and paid Monthly Declared and paid Annually
Ohio Municipal Bond Fund Declared and paid Monthly Declared and paid Annually
Ohio Regional Stock Fund Declared and paid Quarterly Declared and paid Annually
Real Estate Investment Fund Declared and paid Quarterly Declared and paid Annually
Special Growth Fund Declared and paid Quarterly Declared and paid Annually
Special Value Fund Declared and paid Quarterly Declared and paid Annually
Stock Index Fund Declared and paid Quarterly Declared and paid Annually
Value Fund Declared and paid Quarterly Declared and paid Annually
- - --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The amount of a class's distributions may vary from time to time depending on
market conditions, the composition of a Fund's portfolio, and expenses borne by
a Fund or borne separately by a class, as described in "Alternative Sales
Arrangements - Class A and Class B," above. Dividends are calculated in the same
manner, at the same time and on the same day for shares of each class. However,
dividends on Class B shares are expected to be lower as a result of the
asset-based sales charge on Class B shares, and Class B dividends will also
differ in amount as a consequence of any difference in net asset value between
Class A and Class B shares.
For this purpose, the net income of a Fund, from the time of the immediately
preceding determination thereof, shall consist of all interest income accrued on
the portfolio assets of the Fund, dividend income, if any, income
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from securities loans, if any, and realized capital gains and losses on the
Fund's assets, less all expenses and liabilities of the Fund chargeable against
income. Interest income shall include discount earned, including both original
issue and market discount, on discount paper accrued ratably to the date of
maturity. Expenses, including the compensation payable to the Adviser, are
accrued each day. The expenses and liabilities of a Fund shall include those
appropriately allocable to the Fund as well as a share of the general expenses
and liabilities of the Victory Portfolios in proportion to the Fund's share of
the total net assets of the Victory Portfolios.
TAXES
Information set forth in the Prospectuses and this SAI that relates to federal
taxation is only a summary of certain key federal tax considerations generally
affecting purchasers of shares of the Funds. The following is only a summary of
certain additional tax considerations generally affecting each Fund and its
shareholders that are not described in the Prospectus. No attempt has been made
to present a complete explanation of the federal tax treatment of the Funds or
the implications to shareholders, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential purchasers of shares
of the Funds are urged to consult their tax advisers with specific reference to
their own tax circumstances. In addition, the tax discussion in the Prospectus
and this SAI is based on tax law in effect on the date of the Prospectuses and
this SAI; such laws and regulations may be changed by legislative, judicial, or
administrative action, sometimes with retroactive effect.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
Each Fund has elected to be taxed as a regulated investment company under
Subchapter M of the Code. As a regulated investment company, a 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 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 for the taxable year and will therefore satisfy the
Distribution Requirement. If a Fund has a net capital loss (i.e., an excess of
capital losses over capital gains) for any year, the amount thereof may be
carried forward up to eight years and treated as a short-term capital loss which
can be used to offset capital gains in such future years. As of October 31,
1996, the U.S. Government Obligations Fund had capital loss carryforwards of
approximately $94,000, which expire in 2002; the Financial Reserves Fund had
capital loss carryforwards of approximately $24,000 which expire in 2001; the
Limited Term Income Fund had capital loss carryforwards of approximately
$1,642,000 and $553,000 which expire in 2002 and 2003, respectively; the
Intermediate Income Fund had capital loss carryforwards of approximately
$2,498,000, $1,386,000 and $869,000 which expire in 2001, 2002 and 2003,
respectively; the Investment Quality Bond Fund had capital loss carryforwards of
approximately $9,100,000 which expire in 2002; the Government Mortgage Fund had
capital loss carryforwards of approximately $1,977,000 which expire in 2002; and
the Fund for Income had capital loss carryforwards of approximately $806,000,
$588,000 and $328,000 which expire in 2001, 2002 and 2003, respectively. Under
Code Sections 382 and 383, if a Fund has an "ownership change," then the Fund's
use of its capital loss carryforwards in any year following the ownership change
will be limited to an amount equal to the net asset value of the Fund
immediately prior to the ownership change multiplied by the long-term tax-exempt
rate (which is published monthly by the Internal Revenue Service (the "IRS")) in
effect for the month in which the ownership change occurs (the rate for
November, 1996 is 5.60%). The Funds will use their best efforts to avoid having
an ownership change. However, because of circumstances which may be beyond the
control or knowledge of a Fund, there can be no assurance that a Fund will not
have, or has not already had, an ownership change. If a Fund has or has had an
ownership change, then any capital gain net income for any year following the
ownership change in excess of the annual limitation on the capital loss
carryforwards will have to be distributed by the Fund and will be taxable to
shareholders as described under "Fund Distributions" below.
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<PAGE>
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
(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, a 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 such sale
or other disposition for this purpose.
In general, gain or loss recognized by a 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 while the Fund held the debt obligation. In addition, under the
rules of Code Section 988, gain or loss recognized on the disposition of a debt
obligation denominated in a foreign currency or an option with respect thereto
(but only to the extent attributable to changes in foreign currency exchange
rates), and gain or loss recognized on the disposition of a foreign currency
forward contract, futures contract, option or similar financial instrument, or
of foreign currency itself, except for regulated futures contracts or non-equity
options subject to Code Section 1256 (unless a Fund elects otherwise), generally
will be treated as ordinary income or loss.
The Code also treats as ordinary income a portion of the gain recognized in a
transaction where substantially all of the return realized is attributable to
the time value of a Fund's net investment in the transaction and: (1) the
transaction consists of the acquisition of property by the Fund and a
contemporaneous contract to sell substantially identical property in the future;
(2) the transaction is a straddle within the meaning of Section 1092 of the
Code; (3) the transaction is one that was marketed or sold to the Fund on the
basis that it would have the economic characteristics of a loan but the
interest-like return would be taxed as capital gain; or (4) the transaction is
described as a conversion transaction in the Treasury Regulations. The amount of
such gain that is treated as ordinary income generally will not exceed the
amount of the interest that would have accrued on the net investment for the
relevant period at a yield equal to 120% of the applicable federal rate, reduced
by the sum of: (1) prior inclusions of ordinary income items from the conversion
transaction and (2) the capitalized interest on acquisition indebtedness under
Code Section 263(g). However, a Fund has a built-in loss with respect to a
position that becomes a part of a conversion transaction, the character of such
loss will be preserved upon a subsequent disposition or termination of the
position. No authority exists that indicates that the character of the income
treated as ordinary under this rule will not pass through to the Funds'
shareholders.
In general, for purposes of determining whether capital gain or loss recognized
by a Fund on the disposition of an asset is long-term or short-term, the holding
period of the asset may be affected (as applicable, depending on the type of the
Fund involved) if (1) the asset is used to close a "short sale" (which includes
for certain purposes the acquisition of a put option) or is substantially
identical to another asset so used, (2) the asset is otherwise held by the Fund
as part of a "straddle" (which term generally excludes a situation where the
asset is stock and Fund grants a qualified covered call option (which, among
other things, must not be deep-in-the-money) with respect thereto), or (3) the
asset is stock and the Fund grants an in-the-money qualified covered call option
with respect thereto. However, for purposes of the Short-Short Gain Test, the
holding period of the
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asset disposed of may be reduced only in the case of clause (1) above. In
addition, a Fund may be required to defer the recognition of a loss on the
disposition of an asset held as part of a straddle to the extent of any
unrecognized gain on the offsetting position.
Any gain recognized by a Fund on the lapse of, or any gain or loss recognized by
a Fund from a closing transaction with respect to, an option written by the Fund
will be treated as a short-term capital gain or loss. For purposes of the
Short-Short Gain Test, the holding period of an option written by a Fund will
commence on the date it is written and end on the date it lapses or the date a
closing transaction is entered into. Accordingly, a Fund may be limited in its
ability to write options which expire within three months and to enter into
closing transactions at a gain within three months of the writing of options.
Transactions that may be engaged in by a Fund (such as regulated futures
contracts, certain foreign currency contracts, and options on stock indexes and
futures contracts) will be subject to special tax treatment as "Section 1256
Contracts." Section 1256 Contracts are treated as if they are sold for their
fair market value on the last business day of the taxable year, even though a
taxpayer's obligations (or rights) under such Section 1256 Contracts have not
terminated (by delivery, exercise, entering into a closing transaction, or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 Contracts is taken into account for
the taxable year together with any other gain or loss that was recognized
previously upon the termination of Section 1256 Contracts during that taxable
year. Any capital gain or loss for the taxable year with respect to Section 1256
Contracts (including any capital gain or loss arising as a consequence of the
year-end deemed sale of such Section 1256 Contracts) generally is treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss. A Fund,
however, may elect not to have this special tax treatment apply to Section 1256
Contracts that are part of a "mixed straddle" with other investments of the Fund
that are not Section 1256 Contracts. The IRS has held in several private rulings
(and Treasury Regulations now provide) that deemed gains arising from Section
1256 contracts will be treated for purposes of the Short-Short Gain Test as
being derived from securities held for not less than three months if the gains
arise as a result of a constructive sale under Code Section 1256.
A Fund may enter into notional principal contracts, including interest rate
swaps, caps, floors, and collars. Treasury Regulations provide, in general, that
the net income or net deduction from a notional principal contract for a taxable
year is included in or deducted from gross income for that taxable year. The net
income or deduction from a notional principal contract for a taxable year equals
the total of all of the periodic payments (generally, payments that are payable
or receivable at fixed periodic intervals of one year or less during the entire
term of the contract) that are recognized from that contract for the taxable
year and all of the non-periodic payments (including premiums for caps, floors,
and collars) that are recognized from that contract for the taxable year. No
portion of a payment by a party to a notional principal contract is recognized
prior to the first year to which any portion of a payment by the counterparty
relates. A periodic payment is recognized ratably over the period to which it
relates. In general, a non-periodic payment must be recognized over the term of
the notional principal contract in a manner that reflects the economic substance
of the contract. A non-periodic payment that relates to an interest rate swap,
cap, floor, or collar is recognized over the term of the contract by allocating
it in accordance with the values of a series of cash-settled forward or option
contracts that reflect the specified index and notional principal amount upon
which the notional principal contract is based (or, in the case of a swap, under
an alternative method contained in the proposed regulations and, in the case of
a cap or floor, under an alternative method which the IRS may provide in a
revenue procedure).
A Fund may purchase securities of certain foreign investment funds or trusts
which constitute passive foreign investment companies ("PFICs") for federal
income tax purposes. If a Fund invests in a PFIC, it may elect to treat the PFIC
as a qualifying electing fund (a "QEF"), in which event the Fund will each year
have ordinary income equal to its pro rata share of the PFIC's ordinary earnings
for the year and long-term capital gain equal to its pro rata share of the
PFIC's net capital gain for the year, regardless of whether the Fund receives
distributions of any such ordinary earnings or capital gain from the PFIC. If
the Fund does not elect to treat the PFIC as a QEF, then, in general, (1) any
gain recognized by the Fund upon sale or other disposition of its interest in
the PFIC or any excess distribution received by the Fund from the PFIC will be
allocated ratably over the Fund's holding period of its interest in the PFIC,
(2) the portion of such gain or excess distribution so allocated to the year in
which the gain is recognized or the excess distribution is received shall be
included in
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the Fund's gross income for such year as ordinary income (and the distribution
of such portion by the Fund to shareholders will be taxable as an ordinary
income dividend, but such portion will not be subject to tax at the Fund level),
(3) the Fund shall be liable for tax on the portions of such gain or excess
distribution so allocated to prior years in an amount equal to, for each such
prior year, the sum of (i) the amount of gain or excess distribution allocated
to such prior year multiplied by the highest tax rate (individual or corporate)
in effect for such prior year and (ii) interest on the amount determined under
clause (i) for the period from the due date for filing a return for such prior
year until the date for filling a return for the year in which the gain is
recognized or the excess distribution is received at the rates and methods
applicable to underpayments of tax for such period, and (4) the distribution by
the Fund to shareholders of the portions of such gain or excess distribution so
allocated to prior years (net of the tax payable by the Fund thereon) will again
be taxable to the shareholders as an ordinary income dividend.
Under proposed Treasury Regulations, a Fund holding PFIC stock can elect to
recognize as gain the excess, as of the last day of its taxable year, of the
fair market value of each share of PFIC stock over the Fund's adjusted tax basis
in that share ("mark to market gain"). Such mark-to-market gain will constitute
ordinary income and will not be subject to the Short-Short Gain Test, and the
Fund's holding period with respect to such PFIC stock will commence on the first
day of the next taxable year. If a Fund makes such election in the first taxable
year it holds PFIC stock, it will not incur the tax described in the preceding
paragraph.
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, a 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 a 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 (provided that, with respect to each
issuer, the Fund has not invested more than 5% of the value of the Fund's total
assets in securities of each such issuer and the Fund does not hold more than
10% of the outstanding voting securities of each 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.
Generally, an option (call or put) with respect to a security is treated as
issued by the issuer of the security, not the issuer of the option. For purposes
of asset diversification testing, obligations issued or guaranteed by certain
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 a 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 may 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
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"taxable year election")). (Tax-exempt interest on municipal obligations is not
subject to the excise tax.) The balance of 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.
For purposes of calculating the excise tax, a regulated investment company: (1)
reduces its capital gain net income (but not below its net capital gain) by the
amount of any net ordinary loss for the calendar year and (2) excludes foreign
currency gains and losses incurred after October 31 of any year (or after the
end of its taxable year if it has made a taxable year election) in determining
the amount of ordinary taxable income for the current calendar year (which gains
and losses are included in determining the company's ordinary taxable income for
the succeeding calendar year).
Each 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 a Fund may in certain circumstances be required to liquidate portfolio
investments to make sufficient distributions to avoid excise tax liability.
FUND DISTRIBUTIONS
Each 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. Distributions attributable to dividends received by the Funds from
domestic corporations will qualify for the 70% dividends-received deduction for
corporate shareholders only to the extent discussed below. Distributions
attributable to interest received by the Funds will not, and distributions
attributable to dividends paid by a foreign corporation generally should not,
qualify for the dividend-received deduction. In general, the Balanced Fund,
Diversified Stock Fund, International Growth Fund, National Municipal Bond Fund,
New York Tax-Free Fund, Ohio Regional Stock Fund and Special Value Fund
dividends paid on Class A and Class B shares are calculated at the same time and
in the same manner. In general, dividends on Class B shares are expected to be
lower than those on Class A shares due to the higher distribution expenses
charged by the Class B shares. Dividends may also differ between classes as a
result of differences in other class specific expenses.
Ordinary income dividends paid by a Fund with respect to a taxable year will
qualify for the 70% dividends-received deduction generally available to
corporations (other than corporations such as S corporations, which are not
eligible for the deduction because of their special characteristics, and other
than for purposes of special taxes such as the accumulated earnings tax and the
personal holding company tax) to the extent of the amount of qualifying
dividends received by the Fund from domestic corporations for the taxable year.
A dividend received by a Fund will not be treated as a qualifying dividend (1)
if it has been received with respect to any share of stock that the Fund has
held for less than 46 days (91 days in the case of certain preferred stock),
excluding for this purpose under the rules of Code Section 246(c)(3) and (4):
(i) any day more than 45 days (or 90 days in the case of certain preferred
stock) after the date on which the stock becomes ex-dividend and (ii) any period
during which the Fund has an option to sell, is under a contractual obligation
to sell, has made and not closed a short sale of, is the grantor of a
deep-in-the-money or otherwise nonqualified option to buy, or has otherwise
diminished its risk of loss by holding other positions with respect to, such (or
substantially identical) stock; (2) to the extent that the Fund is under an
obligation (pursuant to a short sale or otherwise) to make related payments with
respect to positions in substantially similar or related property; or (3) to the
extent the stock on which the dividend is paid is treated as debt-financed under
the rules of Code Section 246A. Moreover, the dividends-received deduction for a
corporate shareholder may be disallowed or reduced (1) if the corporate
shareholder fails to satisfy the foregoing requirements with respect to its
shares of the Fund or (2) by application of Code Section 246(b) which in general
limits the dividends-received deduction to 70% of the shareholder's taxable
income (determined without regard to the dividends-received deduction and
certain other items). With respect to the International Growth Fund, only an
insignificant portion of the Fund will be invested in stock of domestic
corporations; therefore the ordinary dividends distributed by the Fund will not
qualify for the dividends-received deduction for corporate shareholders.
- 104 -
<PAGE>
A Fund may either retain or distribute to shareholders its net capital gain for
each taxable year. Each Fund currently intends to distribute any such amounts.
If net capital gain is distributed and designated as a capital gain dividend, it
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 a Fund prior to the date on which the shareholder acquired his
shares. The Code provides, however, that under certain conditions only 50% of
the capital gain recognized upon a Fund's disposition of domestic qualified
"small business" stock will be subject to tax.
Conversely, if a Fund elects to retain its net capital gain, the Fund will be
subject to tax thereon (except to the extent of any available capital loss
carryovers) at the 35% corporate tax rate. If a Fund elects to retain its net
capital gain, it is expected that the Fund also will elect to have shareholders
of record on the last day of its taxable year treated as if each received a
distribution of his pro rata share of such gain, with the result that each
shareholder will be required to report his pro rata share of such gain on his
tax return as long-term capital gain, will receive a refundable tax credit for
his pro rata share of tax paid by the Fund on the gain, and will increase the
tax basis for his shares by an amount equal to the deemed distribution less the
tax credit.
The New York Tax-Free Fund, National Municipal Bond Fund, Ohio Municipal Bond
Fund, Ohio Municipal Money Market Fund, and Tax-Free Money Market Fund (the "Tax
Exempt Funds") intend to qualify to pay exempt-interest dividends by satisfying
the requirement that at the close of each quarter of the Tax-Exempt Funds'
taxable year at least 50% of each Fund's total assets consists of tax-exempt
municipal obligations. Distributions from a Tax-Exempt Fund will constitute
exempt-interest dividends to the extent of such Fund's tax-exempt interest
income (net of expenses and amortized bond premium). Exempt-interest dividends
distributed to shareholders of a Tax-Exempt Fund are excluded 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 alternative minimum tax ("AMT") in certain circumstances and may have
other collateral tax consequences as discussed below. Distributions by a
Tax-Exempt 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 to the extent it exceeds, the regular
tax and is computed at a maximum marginal rate of 28% for non-corporate
taxpayers and 20% for corporate taxpayers on the excess of the taxpayer's
alternative minimum taxable income ("AMTI") over an exemption amount.
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 non-corporate 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 an additional 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. For purposes of the corporate AMT, the corporate
dividends received deduction is not itself an item of tax preference that must
be added back to taxable income or is otherwise disallowed in determining a
corporation's AMTI. However, corporate shareholders will generally be required
to take the full amount of any dividend received from the Fund into account
(without a dividends-received deduction) in determining their adjusted current
earnings.
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 a Tax-Exempt Fund is denied a deduction for interest
on indebtedness incurred or continued to purchase or carry shares of a
Tax-Exempt Fund. Moreover, a shareholder who is (or is related to) a
"substantial user" of a facility financed by industrial development bonds held
by a Tax-Exempt Fund will likely be subject to tax on dividends paid by the
Tax-Exempt Fund which are derived from interest on such bonds. Receipt of
exempt-interest dividends may result in other collateral federal income tax
consequences to certain taxpayers, including financial institutions, property
and casualty insurance
- 105 -
<PAGE>
companies, and foreign corporations engaged in a trade or business in the United
States. Prospective investors should consult their own advisers as to such
consequences.
Investment income that may be received by the International Growth Fund from
sources within foreign countries may be subject to foreign taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries which entitle the Fund to a reduced rate of, or exemption from, taxes
on such income. It is impossible to determine the effective rate of foreign tax
in advance since the amount of the Fund's assets to be invested in various
countries is not known: If more than 50% of the value of the Fund's total assets
at the close of its taxable year consist of the stock or securities of foreign
corporations, the Fund may elect to "pass through" to the Fund's shareholders
the amount of foreign taxes paid by the Fund. If the Fund so elects, each
shareholder would be required to include in gross income, even though not
actually received, his pro rata share of the foreign taxes paid by the Fund, but
would be treated as having paid his pro rata share of such foreign taxes and
would therefore be allowed to either deduct such amount in computing taxable
income or use such amount (subject to various Code limitations) as a foreign tax
credit against federal income tax (but not both). For purposes of the foreign
tax credit limitation rules of the Code, each shareholder would treat as foreign
source income his pro rata share of such foreign taxes plus the portion of
dividends received from the Fund representing income derived from foreign
sources. No deduction for foreign taxes could be claimed by an individual
shareholder who does not itemize deductions. Each shareholder should consult his
own tax adviser regarding the potential application of foreign tax credit rules.
Distributions by a 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 the sale of his shares, as
discussed below.
Distributions by a Fund will be treated in the manner described above regardless
of 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 a Fund reflects undistributed net investment
income, recognized net capital gain, or unrealized appreciation in the value of
the assets of the Fund, distributions of such amounts will be taxable to the
shareholder in the manner described above, although such distributions
economically constitute a return of capital to the shareholder.
Ordinarily, shareholders are required to take distributions by a Fund into
account in the year in which the distributions 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 a 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) during the year.
Each Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of ordinary income dividends and capital gain dividends, and the
proceeds of redemption of shares, paid to any shareholder (1) who has provided
either an incorrect tax identification number or no number at all, (2) who is
subject to backup withholding for failure to report the receipt of interest or
dividend income properly, or (3) who has failed to certify to the Fund that it
is not subject to backup withholding or is an "exempt recipient" (such as a
corporation).
SALE OR REDEMPTION OF SHARES
The Money Market Funds seek to maintain a stable net asset value of $1.00 per
share; however, there can be no assurance that the Money Market Funds will do
this. In such a case, and for all the Funds other than the Money Market Funds, a
shareholder will recognize gain or loss on the sale or redemption of shares of a
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 a Fund within 30 days before or after the sale or redemption. In
general, any gain or
- 106 -
<PAGE>
loss arising from (or treated as arising from) the sale or redemption of shares
of a Fund will be considered capital gain or loss and will be long-term capital
gain or loss if the shares were held for longer than one year. However, any
capital loss arising from the 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 Code Section 246(c)(3) and (4) (discussed above in connection with the
dividends-received deduction for corporations) 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 a
noncorporate taxpayer, $3,000 of ordinary income.
If a shareholder (1) incurs a sales load in acquiring shares of a Fund, (2)
disposes of such shares less than 91 days after they are acquired and (3)
subsequently acquires shares of the Fund or another fund at a reduced sales load
pursuant to a right acquired in connection with the acquisition of the shares
disposed of, then the sales load on the shares disposed of (to the extent of the
reduction in the sales load on the shares subsequently acquired) shall not be
taken into account in determining gain or loss on such shares but shall be
treated as incurred on the acquisition of the subsequently acquired shares.
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 the income from a Fund is
"effectively connected" with a U.S. trade or business carried on by such
shareholder.
If the income from a Fund is not effectively connected with a U.S. trade or
business carried on by a foreign shareholder, ordinary income dividends paid to
such foreign shareholder will be subject to U.S. withholding tax at the rate of
30% (or lower treaty rate) upon the gross amount of the dividend. Furthermore,
such a foreign shareholder in the International Growth Fund may be subject to
U.S. withholding tax at the rate of 30% (or lower treaty rate) on the gross
income resulting from the Fund's election to treat any foreign taxes paid by it
as paid by its shareholders, but may not be allowed a deduction against such
gross income or a credit against the U.S. withholding tax for the foreign
shareholder's pro rata share of such foreign taxes which it is treated as having
paid. Such a foreign shareholder would generally be exempt from U.S. federal
income tax on gains realized on the sale of shares of a Fund, capital gain
dividends and exempt-interest dividends, and amounts retained by the Fund that
are designated as undistributed capital gains.
If the income from a Fund is effectively connected with a U.S. trade or business
carried on by a foreign shareholder, then ordinary income dividends, capital
gain dividends, and any gains realized upon 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 foreign noncorporate shareholders, a Fund may be required to
withhold U.S. federal income tax at a rate of 31% on distributions that are
otherwise exempt from withholding tax (or taxable at a reduced treaty rate)
unless such shareholders furnish the Fund with proper notification of their
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 a 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 Code and the Treasury Regulations issued thereunder as in effect on
the date of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions
- 107 -
<PAGE>
expressed herein, and any such changes or decisions may have a retroactive
effect with respect to the transactions contemplated herein.
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 of
these and other state and local tax rules affecting investment in a Fund.
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 Delaware. 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 ("Independent Trustees"). The Trustees, in turn, elect the
officers of the Victory Portfolios to supervise actively its day-to-day
operations.
The Trustees of the Victory Portfolios, their addresses, ages, and their
principal occupations during the past five years are as follows:
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- - --------------------- ---------- -------------------
Leigh A. Wilson,* 52 Trustee and President From 1989 to
Glenleigh International Ltd. present, Chairman
53 Sylvan Road North and Chief Executive
Westport, CT 06880 Officer, Glenleigh
International
Limited; from 1984
to 1989, Chief
Executive Officer,
Paribas North
America and Paribas
Corporation;
President and
Trustee, The Victory
Funds and the Key
Mutual Funds
("KeyFunds").
- - -----------------
* 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.
- 108 -
<PAGE>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- - --------------------- ---------- -------------------
Robert G. Brown, 73 Trustee Retired; from
5460 N. Ocean Drive October 1983 to
Singer Island November 1990,
Riviera Beach, FL 33404 President, Cleveland
Advanced
Manufacturing
Program (non-profit
corporation engaged
in regional economic
development).
Edward P. Campbell, 47 Trustee From July 1996 to
Nordson Corporation present, President;
28601 Clemens Road from March 1994 to
Westlake, OH 44145 present, Executive
Vice President and
Chief Operating
Officer of Nordson
Corporation
(manufacturer of
application
equipment); from May
1988 to March 1994,
Vice President of
Nordson Corporation;
from 1987 to
December 1994,
member of the
Supervisory
Committee of
Society's Collective
Investment
Retirement Fund;
from May 1991 to
August 1994,
Trustee, Financial
Reserves Fund and
from May 1993 to
August 1994,
Trustee, Ohio
Municipal Money
Market Fund;
Trustee, The Victory
Funds and the
KeyFunds).
Dr. Harry Gazelle, 69 Trustee Retired radiologist,
17822 Lake Road Drs. Hill and Thomas
Lakewood, Ohio 44107 Corp.; Trustee, The
Victory Funds
Stanley I. Landgraf, 71 Trustee Retired; currently,
41 Traditional Lane Trustee, Rensselaer
Loudonville, NY 12211 Polytechnic
Institute; Director,
Elenel Corporation
and Mechanical
Technology, Inc.;
Member, Board of
Overseers, School of
Management,
Rensselaer
Polytechnic
Institute; Member,
The Fifty Group (a
Capital Region
business
organization);
Trustee, The Victory
Funds.
Dr. Thomas F. Morrissey, 63 Trustee 1995 Visiting
Weatherhead School of Scholar, Bond
Management University,
Case Western Reserve Queensland,
University Australia;
10900 Euclid Avenue Professor,
Cleveland, OH 44106-7235 Weatherhead School
of Management, Case
Western Reserve
University; from
1989 to 1995,
Associate Dean of
Weatherhead School
of Management; from
1987 to December
1994, Member of the
- 109 -
<PAGE>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- - --------------------- ---------- -------------------
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.
Dr. H. Patrick Swygert, 53 Trustee President, Howard
Howard University University; formerly
2400 6th Street, N.W. President, State
Suite 320 University of New
Washington, D.C. 20059 York at Albany;
formerly, Executive
Vice President,
Temple University;
Trustee, The Victory
Funds.
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 August 1997. 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 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 August 1997. 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
Independent 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, 1996. The Business, Legal and Audit Committee met four times during
the 12 months ended October 31, 1996.
REMUNERATION OF TRUSTEES AND CERTAIN EXECUTIVE OFFICERS.
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). 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).
- 110 -
<PAGE>
The following table indicates the compensation received by each Trustee from the
Victory "Fund Complex"(1) for the 12 month period ended October 31, 1996.
<TABLE>
<CAPTION>
Aggregate
Pension or Retirement Estimated Annual Compensation Total Compensation
Benefits Accrued as Benefits from Victory from Victory
Portfolio Expenses Upon Retirement Portfolios "Fund Complex" (1)
------------------- --------------- ----------- ------------------
<S> <C> <C> <C> <C>
Leigh A. Wilson, Trustee.......... -0- -0- $51,000 $62,250
Robert G. Brown, Trustee.......... -0- -0- 41,400 41,400
Edward P. Campbell, Trustee....... -0- -0- 39,000 50,250
Harry Gazelle, Trustee............ -0- -0- 39,000 39,000
Stanley I. Landgraf, Trustee...... -0- -0- 39,000 39,000
Thomas F. Morrissey, Trustee...... -0- -0- 39,000 39,000
H. Patrick Swygert, Trustee....... -0- -0- 36,600 36,600
</TABLE>
(1) There are presently 33 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 board of each fund in the "Fund Complex."
OFFICERS.
The officers of the Victory Portfolios, their ages, addresses, 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, 52 President and Trustee From 1989 to
Glenleigh International Ltd. present, Chairman
53 Sylvan Road North and Chief Executive
Westport, CT 06880 Officer, Glenleigh
International
Limited; from 1984
to 1989, Chief
Executive Officer,
Paribas North
America and Paribas
Corporation;
President and
Trustee of The
Victory Funds and
the KeyFunds.
William B. Blundin, 58 Vice President Senior Vice
BISYS Fund Services President of BISYS
125 West 55th Street Fund Services
New York, New York 10019 ("BISYS"); officer
of other investment
companies
administered by
BISYS Fund Services;
President and Chief
Executive Officer of
Vista Broker- Dealer
Services, Inc.,
Emerald Asset
Management, Inc. and
BNY Hamilton
Distributors, Inc.,
registered
broker/dealers.
J. David Huber, 51 Vice President Executive Vice President,
BISYS Fund Services BISYS.
3435 Stelzer Road
Columbus, OH 43219-3035
- 111 -
<PAGE>
POSITION(S) WITH THE PRINCIPAL OCCUPATION
NAME, AGE, AND ADDRESS VICTORY PORTFOLIOS DURING PAST 5 YEARS
- - ----------------------------- -----------------------------------------------------
<S> <C> <C>
Scott A. Englehart, 34 Secretary From October 1990 to
BISYS Fund Services present, employee of
3435 Stelzer Road BISYS.
Columbus, OH 43219-3035
George O. Martinez, 38 Assistant Secretary From March 1995 to
BISYS Fund Services present, Senior Vice
3435 Stelzer Road President and
Columbus, OH 43219-3035 Director of Legal
and Compliance
Services, BISYS;
from June 1989 to
March 1995, Vice
President and
Associate General
Counsel, Alliance
Capital Management.
Kevin L. Martin, 36 Treasurer From February 1996
BISYS Fund Services to present,
3435 Stelzer Road employee of BISYS;
Columbus, OH 43219-3035 from 1984 to February
1996, Senior Manager,
Ernst & Young.
</TABLE>
The mailing address of each of the officers of the Victory Portfolios is 3435
Stelzer Road, Columbus, Ohio 43219-3035.
The officers of the Victory Portfolios (other than Leigh Wilson) receive no
compensation directly from the Victory Portfolios for performing the duties of
their offices. BISYS receives fees from the Victory Portfolios as Administrator.
As of February 7, 1997, the Trustees and officers as a group owned beneficially
less than 1% of all classes of outstanding shares of the Funds.
ADVISORY AND OTHER CONTRACTS
INVESTMENT ADVISER AND SUB-ADVISER.
One of the Fund's most important contracts is with its investment adviser, Key
Asset Management Inc. ("KAM" or the "Adviser"), a New York corporation
registered as an investment adviser with the Securities and Exchange SEC. KAM is
a wholly owned subsidiary of KeyBank National Association ("KeyBank"), a
wholly-owned subsidiary of KeyCorp. Effective February 28, 1997, KAM became the
surviving corporation of the reorganization of four indirect investment adviser
subsidiaries of KeyCorp--KeyCorp Mutual Fund Advisers, Inc. ("Key Advisers"),
Society Asset Management, Inc. ("SAM"), Spears, Benzak, Salomon & Farrell, Inc.
("SBSF") and Applied Technologies, Inc. ("ATI"), each registered with the SEC as
an investment adviser. Key Advisers, SAM, and ATI were merged with and into
SBSF, a New York corporation organized on February 22, 1972. Pursuant to the
terms of the reorganization, SBSF changed its name to Key Asset Management Inc.
SAM, SBSF, and ATI will continue to operate under their existing names as
separate divisions of KAM. Affiliates of the Adviser manage approximately $50
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, 1996, KeyCorp had an asset
base of $65 billion, with banking offices in 26 states from Maine to Alaska, and
trust and investment offices in 16 states. KeyCorp is the resulting entity of a
merger in
- 112 -
<PAGE>
1994 of Society Corporation, the bank holding company of which KeyBank, formerly
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. KeyBank is the lead affiliate bank of KeyCorp.
The following schedule lists the advisory fees for each mutual fund that is
advised by the Adviser.
.25 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Institutional Money Market Fund
.35 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Prime Obligations Fund
Victory U.S. Government Obligations Fund
Victory Tax-Free Money Market Fund
.50 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Money Market Fund
Victory Limited Term Income Fund
Victory Government Mortgage Fund
Victory Financial Reserves Fund
Victory Fund for Income
.55 OF 1% OF AVERAGE DAILY NET ASSETS
Victory National Municipal Bond Fund
Victory New York Tax-Free Fund
.60 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Bond Fund
Victory Stock Index Fund
.65 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Diversified Stock Fund
.75 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Intermediate Income Fund
Victory Investment Quality Bond Fund
Victory Ohio Regional Stock Fund
1% OF AVERAGE DAILY NET ASSETS
Victory Balanced Fund
Victory Lakefront Fund
Victory Value Fund
Victory Growth Fund
Victory Real Estate Investment Fund
Victory Special Value Fund
Victory Special Growth Fund
- 113 -
<PAGE>
1.10% OF AVERAGE DAILY NET ASSETS
Victory International Growth Fund
Lakefront Capital Investors, Inc. ("Lakefront" or the "Sub-Adviser") serves as
sub-adviser to the Lakefront Fund. For its services under the Investment
Sub-Advisory Agreement, the Adviser pays Lakefront a monthly fee of 0.50% of the
Lakefront Fund's average daily net assets from its advisory fee.
THE INVESTMENT ADVISORY AND INVESTMENT SUB-ADVISORY AGREEMENTS.
Unless sooner terminated, the Investment Advisory Agreement between the Adviser
and the Victory Portfolios, on behalf of the Funds (the "Investment Advisory
Agreement"), provides that it will continue in effect as to the Funds for an
initial two-year term and for consecutive one-year terms thereafter, provided
that such continuance is approved at least annually by the Trustees or by vote
of a majority of the outstanding shares of each 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 any particular Fund at any
time on 60 days' written notice without penalty by the Trustees, by vote of a
majority of the outstanding shares of the Fund, by vote of the Board of Trustees
of the Victory Portfolios, or by the Adviser. 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 the Adviser shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Funds 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 the Adviser
in the performance of its duties, or from reckless disregard by it of its duties
and obligations thereunder.
From January 1, 1996 until February 28, 1997, Key Advisers served as investment
adviser to the Funds.
From January, 1993 until December 31, 1995, Society Asset Management, Inc.
served as investment adviser to the Funds. For the fiscal years ended October
31, 1996, 1995 and 1994, the Key Advisers (and its predecessors) earned the
following advisory fees with respect to each Fund, the amount of fees paid to
the Adviser is net of the amount of fee reduction:
- 114 -
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Amount of Amount of Amount of Amount
Amount of Fees Amount of Fee Fees Paid to Fee Fees Paid of Fee
Paid to Advisor Reduction Advisor Reduction to Advisor Reduction
--------------- --------- ------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balanced Fund $2,006,013 $376,178 $1,024,165 $624,474 $536,712 $396,767
Diversified Stock Fund 3,147,950 55,678 2,006,479 126,000 1,548,683 82,207
Financial Reserves Fund 3,402,511 582,762 3,125,072 420,213 2,132,744 584,417
Fund for Income 22,779 87,637 87,483 36,865 84,270 2,027
Government Mortgage Fund 646,159 3,389 702,724 15,995 800,556 30,223
Growth Fund 1,181,723 70,660 526,613 216,181 361,755(a) 218,180(a)
Institutional Money Market 1,131,754/ 1,087,613/
Fund (b) 1,003,395 932,844 314,773 337,327 954,467 127,900
Intermediate Income Fund 1,218,106 357,865 692,143 325,544 469,249 247,239
International Growth Fund 1,224,364 30,428 901,337 116,464 532,331 90,406
Investment Quality Bond
Fund 836,655 185,307 546,647 238,865 436,637(c) 240,057(c)
Limited Term Income Fund 671,988 46,818 710,323 20,789 421,108 6,157
National Municipal Bond 812/ 25,316/
Fund (d) 0 206,174 11,825 0 455 0
New York Tax-Free Bond 7,542 83,068 48,644 45,003 57,482 10,537
Ohio Municipal Bond Fund 298,093 103,079 183,193 163,525 163,756 173,917
Ohio Municipal Money 1,692,574/ 320,022/
Market Fund (e) 1,129,662 1,706,115 187,594 244,500 1,282,785 234,884
Ohio Regional Stock Fund 318,859 4,181 253,943 13,584 247,755 10,682
Prime Obligations Fund 1,628,427 -- 1,907,736 0 2,649,796 0
Special Growth Fund 711,543 33,521 143,381 296,856 152,165 93,307
Special Value Fund 2,304,543 71,047 1,140,267 405,752 588,378 242,661
Stock Index Fund 936,282 382,702 489,171 194,774 286,360(a) 100,857(a)
Tax-Free Money Market
Fund 1,092,669 31,987 829,802 34,209 707,270 34,905
U.S. Government Obligations
Fund 4,208,590 0 2,245,705 0 1,614,950 0
Value Fund 3,378,303 62,495 1,771,834 810,820 979,887(a) 575,355(a)
</TABLE>
- - ----------
(a) Fiscal period December 3, 1993 (commencement of operations) to October 31,
1994.
(b) Fiscal year ended October 31, 1996; fiscal period ended October 31, 1995;
fiscal year ended April 30, 1995 and April 30, 1994; respectively.
(c) Fiscal period December 10, 1993 (commencement of operations) to October 31,
1994.
(d) Fiscal year ended October 31, 1996; fiscal period ended October 31, 1995
and fiscal year ended April 30, 1995; and fiscal period February 3, 1994
(commencement of operations) to April 30, 1994 respectively.
(e) Fiscal year ended October 31, 1996; two months ended October 31, 1995;
fiscal year ended August 30, 1995 and August 31, 1994.
Under the Investment Advisory Agreement, the Adviser may delegate a portion of
its responsibilities to a sub-adviser. In addition, the Investment Advisory
Agreement provides that the 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 adviser of the Funds 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 Adviser.
- 115-
<PAGE>
GLASS-STEAGALL ACT.
In 1971 the United States Supreme Court held in Investment Company Institute v.
Camp that the federal statute commonly referred to as the Glass-Steagall Act
prohibits a national bank from operating a fund for the collective investment of
managing agency accounts. Subsequently, the Board of Governors of the Federal
Reserve System (the "Board") issued a regulation and interpretation to the
effect that the Glass-Steagall Act and such decision: (a) forbid a bank holding
company registered under the Federal Bank Holding Company Act of 1956 (the
"Holding Company Act") or any non-bank affiliate thereof from sponsoring,
organizing, or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but (b) do not prohibit such
a holding company or affiliate from acting as investment adviser, transfer
agent, and custodian to such an investment company. In 1981 the United States
Supreme Court held in Board of Governors of the Federal Reserve System v.
Investment Company Institute that the Board did not exceed its authority under
the Holding Company Act when it adopted its regulation and interpretation
authorizing bank holding companies and their non-bank affiliates to act as
investment advisers to registered closed-end investment companies. In the Board
of Governors case, the Supreme Court also stated that if a national bank
complied with the restrictions imposed by the Board in its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to investment companies, a national bank
performing investment advisory services for an investment company would not
violate the Glass-Steagall Act.
From time to time, advertisements, supplemental sales literature and information
furnished to present or prospective shareholders of the Funds may include
descriptions of Key Trust Company of Ohio, N.A. and the Adviser including, but
not limited to, (1) descriptions of the operations of Key Trust Company of Ohio,
N.A. and the Adviser; (2) descriptions of certain personnel and their functions;
and (3) statistics and rankings related to the operations of Key Trust Company
of Ohio, N.A. and the Adviser.
PORTFOLIO TRANSACTIONS.
THE MONEY MARKET FUNDS. Pursuant to the Investment Advisory Agreement of the
Victory Portfolios on behalf of the Money Market Funds, the Adviser determines,
subject to the general supervision of the Trustees of the Victory Portfolios,
and in accordance with each Money Market Fund's investment objective, policies
and restrictions, which securities are to be purchased and sold by the Money
Market Funds, and which brokers are to be eligible to execute its portfolio
transactions. Since purchases and sales of portfolio securities by the Money
Market Funds are usually principal transactions, the Money Market Funds incur
little or no brokerage commissions. For the three previous fiscal years ended
October 31, 1996, 1995 and 1994, the Money Market Funds paid no brokerage
commissions. Securities of the Money Market Funds 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 Money Market Funds 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 Money Market Funds do not seek to profit from short-term trading, and will
generally (but not always) hold portfolio securities to maturity, but the
Adviser may seek to enhance the yield of the Funds 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. The 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 the Adviser's judgment as to desirable portfolio maturity
structure or if such disposition is believed to be advisable due to other
circumstances or conditions. The investment policies of the Money Market Funds
require 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
Money Market Funds.
- 116 -
<PAGE>
The 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 the Adviser in its best judgment and in a manner deemed fair and
reasonable to shareholders.
INCOME AND EQUITY FUNDS. Pursuant to the Investment Advisory Agreement (and for
the Lakefront Fund, the Investment Sub-Advisory Agreement), the Adviser (and the
Sub-Adviser) determine, subject to the general supervision of the Trustees of
the Victory Portfolios, and in accordance with each Fund's investment objective
and restrictions, which securities are to be purchased and sold by the Funds,
and which brokers are to be eligible to execute its portfolio transactions.
Purchases from underwriters and/or broker-dealers of portfolio securities
include a commission or concession paid by the issuer to the underwriter and/or
broker-dealer and purchases from dealers serving as market makers may include
the spread between the bid and asked price. While the Adviser (and the
Sub-Adviser) generally seeks competitive spreads or commissions, each Fund may
not necessarily pay the lowest spread or commission available on each
transaction, for reasons discussed below.
Allocation of transactions to dealers is determined by the Adviser (or the
Sub-Adviser) in their best judgment and in a manner deemed fair and reasonable
to shareholders. The primary consideration is prompt execution of orders in an
effective manner at the most favorable price. Subject to this consideration,
dealers who provide supplemental investment research to the Adviser (or the
Sub-Adviser) may receive orders for transactions by the Victory Portfolios.
Information so received is in addition to and not in lieu of services required
to be performed by the Adviser (or the Sub-Adviser) and does not reduce the
investment advisory fees payable to the Adviser by the Funds. Such information
may be useful to the Adviser (or the Sub-Adviser) in serving both the Victory
Portfolios and other clients and, conversely, such supplemental research
information obtained by the placement of orders on behalf of other clients may
be useful to the Adviser (or the Sub-Adviser) in carrying out its obligations to
the Victory Portfolios. The Trustees have authorized the allocation of brokerage
to affiliated broker-dealers on an agency basis to effect portfolio
transactions. The Trustees have adopted procedures incorporating the standards
of Rule 17e-1 of the 1940 Act, which require that the commission paid to
affiliated broker-dealers must be "reasonable and fair compared to the
commission, fee or other remuneration received, or to be received, by other
brokers in connection with comparable transactions involving similar securities
during a comparable period of time." At times, the Funds may also purchase
portfolio securities directly from dealers acting as principals, underwriters or
market makers. As these transactions are usually conducted on a net basis, no
brokerage commissions are paid by the Funds.
ALL FUNDS. The Victory Portfolios will not execute portfolio transactions
through, acquire portfolio securities issued by, make savings deposits in, or
enter into repurchase or reverse repurchase agreements with the Adviser, the
Sub-Adviser, Key Trust Company of Ohio, N.A. ("Key Trust") or their affiliates,
or BISYS or its affiliates, and will not give preference to Key Trust's
correspondent banks or affiliates, or BISYS with respect to such transactions,
securities, savings deposits, repurchase agreements, and reverse repurchase
agreements.
Investment decisions for each Fund are made independently from those made for
the other Funds of the Victory Portfolios or any other investment company or
account managed by the Adviser (or the Sub-Adviser). Such other investment
companies or accounts may also invest in the securities in which the Funds
invest, and the Funds may invest in similar securities. When a purchase or sale
of the same security is made at substantially the same time on behalf of a Fund
and any other Fund, investment company or account, the transaction will be
averaged as to price, and available investments allocated as to amount, in a
manner which the Adviser (or the Sub-Adviser) believes to be equitable to such
Funds, investment company or account. In some instances, this investment
procedure may affect the price paid or received by a Fund or the size of the
position obtained by the Fund in an adverse manner relative to the result that
would have been obtained if only that particular Fund had participated in or
been allocated such trades. To the extent permitted by law, the Adviser (or the
Sub-Adviser) may aggregate the securities to be sold or purchased for a Fund
with those to be sold or purchased for the other funds of the Victory Portfolios
or for other investment companies or accounts in order to obtain best execution.
- 117
<PAGE>
In making investment recommendations for the Victory Portfolios, the Adviser
(and the Sub-Adviser) will not inquire or take into consideration whether an
issuer of securities proposed for purchase or sale by a Fund is a customer of
the Adviser (or the Sub-Adviser), their parents or subsidiaries or affiliates
and, in dealing with their commercial customers, the Advisers (or the
Sub-Adviser), their parents, subsidiaries, and affiliates will not inquire or
take into consideration whether securities of such customers are held by the
Victory Portfolios.
Brokerage commissions paid by each of the Funds listed below were as follows for
the fiscal years ended October 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
1996 1995 1994
- - ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced Fund $190,526.34 $125,079 $238,762
- - ------------------------------------------------------------------------------------------
Diversified Stock Fund 881,427.50 615,260 550,131
- - ------------------------------------------------------------------------------------------
Financial Reserves Fund -- -- --
- - ------------------------------------------------------------------------------------------
Fund For Income 1,250.00 0 176,716
- - ------------------------------------------------------------------------------------------
Government Mortgage Fund 542.84 0 469
- - ------------------------------------------------------------------------------------------
Growth Fund 97,820.00 147,798 59,306(a)
- - ------------------------------------------------------------------------------------------
Institutional Money Market Fund -- -- --
- - ------------------------------------------------------------------------------------------
Intermediate Income Fund 61,811.73 1,500 3,047
- - ------------------------------------------------------------------------------------------
International Growth Fund -- 333,609 272,288
- - ------------------------------------------------------------------------------------------
Investment Quality Bond Fund 12,889.90 1,800 4,033(b)
- - ------------------------------------------------------------------------------------------
Limited Term Income Fund 8,580.94 0 938
- - ------------------------------------------------------------------------------------------
National Municipal Bond Fund -- -- --
- - ------------------------------------------------------------------------------------------
New York Tax-Free Fund 0 0 550,131
- - ------------------------------------------------------------------------------------------
Ohio Municipal Bond Fund 0 0 0
- - ------------------------------------------------------------------------------------------
Ohio Municipal Money Market Fund -- -- --
- - ------------------------------------------------------------------------------------------
Ohio Regional Stock Fund 6,597.60 15,420 21,467
- - ------------------------------------------------------------------------------------------
Prime Obligations Fund -- -- --
- - ------------------------------------------------------------------------------------------
Special Growth Fund 176,980.29 99,980 92,278
- - ------------------------------------------------------------------------------------------
Special Value Fund 431,541.97 224,350 118,986
- - ------------------------------------------------------------------------------------------
Stock Index Fund 27,553.63 24,243 12,176(a)
- - ------------------------------------------------------------------------------------------
Tax-Free Money Market Fund -- -- --
- - ------------------------------------------------------------------------------------------
U.S. Government Obligations Fund -- -- --
- - ------------------------------------------------------------------------------------------
Value Fund 225,799.21 218,770 196,716(a)
</TABLE>
(a) Fiscal period December 3, 1993 (commencement of operations) to October 31,
1994.
(b) Fiscal period December 10, 1993 (commencement of operations) to October 31,
1994.
PORTFOLIO TURNOVER.
The turnover rate stated in the Prospectus for a Fund's investment portfolio is
calculated by dividing the lesser of a Fund's purchases or sales of portfolio
securities for the year by the monthly average value of the portfolio
securities. The calculation excludes all securities whose maturities, at the
time of acquisition, were one year or less. The portfolio turnover rates for
each of the Funds listed below were as follows for the fiscal years ended
October 31, 1996 and 1995.
Fund 1996 1995
- - ---- ---- ----
Balanced Fund (a) 80%(b) 69%
Diversified Stock Fund (a) 94%(b) 75%
- 118
<PAGE>
Fund 1996 1995
- - ---- ---- ----
Fund for Income 25% 35%
Government Mortgage Fund 127% 59%
Growth Fund 27% 107%
Intermediate Income Fund 164% 98%
International Growth Fund (a) 178%(b) 68%
Investment Quality Bond Fund 182% 160%
Limited Term Income Fund 221% 97%
National Municipal Bond Fund (a) 143% 72%/
52%(c)
New York Tax-Free Fund (a) 0% 18%
Ohio Municipal Bond Fund 81% 125%
Ohio Regional Stock Fund (a) 6%(b) 11%
Special Growth Fund (a) 152% 54%/
102%(c)
Special Value Fund (a) 55%(b) 39%
Stock Index Fund 4% 12%
Value Fund 28% 23%
- - ----------
(a) Portfolio turnover is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
(b) For year ended October 31, 1996 for Class A shares and for the period March
1, 1996 through October 31, 1996 for Class B shares.
(c) For six months ended October 31, 1995 and year ended April 30, 1995,
respectively.
ADMINISTRATOR.
BISYS serves as administrator (the "Administrator") to the Funds. The
Administrator assists in supervising all operations of the Funds (other than
those performed by the Adviser or the Sub-Adviser under the Investment Advisory
Agreement and Investment Sub-Advisory Agreement).
BISYS receives a fee from the Funds for its services as Administrator and
expenses assumed pursuant to the Administration Agreement, calculated daily and
paid monthly, at the annual rate of fifteen one hundredths of one percent (.15%)
of each Fund's average daily net assets. BISYS may periodically waive all or a
portion of its fee with respect to the Funds in order to increase the net income
of the Funds.
Unless sooner terminated, the Administration Agreement will continue in effect
as to each 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
Trustees or by vote of a majority of the outstanding shares of each 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 BISYS 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.
- 119
<PAGE>
Under the Administration Agreement, BISYS assists in each 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, BISYS may delegate all or any part of its
responsibilities thereunder.
The following chart reflects the aggregate administration fees earned after fee
reductions by the Administrator in connection with the sale of shares of each
Fund for the fiscal years ended October 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Administration Fee Administration Fee Administration Fee
Fees Reductions Fees Reductions Fees Reductions
---- ---------- ---- ---------- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Balanced Fund...................... $357,125 $0 $246,993 $303 $131,378 $8,644
Diversified Stock Fund............. 678,848 60,602 490,419 1,612 364,211 12,148
Financial Reserves Fund............ 1,196,089 0 1,063,114 472 278,025 0
Fund for Income.................... 13,292 19,833 27,624 9,681 224,695 8,592
Government Mortgage Fund........... 195,013 0 215,665 0 235,613 13,621
Growth Fund........................ 187,857 0 63,251 48,168 77,085(a) 9,905(a)
Institutional Money Market 646,353/ 0/
Fund (b)......................... 464,863 696,881 134,232 257,028 568,509 72,569
Intermediate Income Fund........... 314,921 0 203,344 194 134,787 8,510
International Growth Fund.......... 171,154 0 138,965 0 69,419 15,550
Investment Quality Bond Fund....... 205,210 0 157,427 0 126,903(c) 8,436(c)
Limited Term Income Fund........... 216,263 0 220,396 0 116,696 11,483
National Municipal Bond Fund....... 20,352 35,877 1,046 6,080 (d)
New York Tax-Free Bond............. 9,888 14,823 18,436 7,104 10,357 0
Ohio Municipal Bond Fund........... 100,340 0 86,670 10 39,988 44,425
Ohio Municipal Money Market
Fund............................. 851,457 0 (e) (e)
Ohio Regional Stock Fund........... 64,609 0 53,484 21 39,095 12,592
Prime Obligations Fund............. 697,897 0 817,341 0 1,122,585 13,042
Special Growth Fund................ 112,578 0 33,202 32,831 28,373 8,447
Special Value Fund................. 356,371 0 231,340 1,000 115,967(a) 8,689(a)
Stock Index Fund................... 0 329,746 0 171,000 0(a) 96,804(a)
Tax-Free Money Market Fund......... 446,706 35,290 370,209 0 306,609 12,066
U.S. Government Obligations
Fund............................. 1,803,685 0 780,808 88,000 679,754 12,368
Value Fund......................... 516,120 0 387,398 0 224,695(a) 8,592(a)
</TABLE>
- - ----------
(a) Fiscal period December 3, 1993 (commencement of operations) to October 31,
1994.
(b) Fiscal year ended October 31, 1996; fiscal period ended October 31, 1995;
fiscal year ended April 30, 1995 and April 30, 1994; respectively.
(c) Fiscal period December 10, 1993 (commencement of operations) to October 31,
1994.
(d) Fiscal year ended October 31, 1996; fiscal period ended October 31, 1994
and fiscal year ended April 30, 1995; and fiscal period February 3, 1994
(commencement of operations) to April 30, 1994, respectively. Until July 1,
1994 Fidelity Distributors Corporation, 82 Devonshire Street, Boston,
Massachusetts 02109, was the Administrator and Distributor to the
Predecessor Fund under separate Administration and General Distribution
Agreements. For the period February 3, 1994 through April 30, 1994,
Fidelity Distributors Corporation earned $124 from the Predecessor Fund for
services rendered to the Victory Funds pursuant to the Administration
Agreement. During the same period, Fidelity Distributors Corporation
voluntarily reimbursed $20,589 in fees and expenses to the Predecessor
Fund. For the fiscal year ended April 30, 1995, the Fund paid
administration fees of $926 of which Fidelity Distributors Corporation
received $717 and Concord Holding Corporation received
- 120 -
<PAGE>
$209. During the same period, fees and expenses of $83,748 were reimbursed
to the Predecessor Fund. (e) For the two month period ended October 31,
1995, Concord Holding Corporation earned an administration fee of $129,644
after $0 in voluntary fee waivers. For the period June 5, 1995 to
August 31, 1995, Concord Holding Corporation 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.
BISYS Fund Services serves as distributor (the "Distributor") for the continuous
offering of the shares of the Funds 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 each Fund for two
years, and thereafter for consecutive one-year terms, provided that it is
approved at least annually (1) by the Trustees or by the vote of a majority of
the outstanding shares of each Fund, and (2) 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 under the 1940 Act.
The following chart reflects the total underwriting commissions earned and the
amount of those commissions retained by the Distributor in connection with the
sale of shares of each Fund for the fiscal years ended October 31, 1996, 1995
and 1994.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Underwriting Amount Underwriting Amount Underwriting Amount
Commissions Retained Commission Retained Commissions Retained
----------- -------- ---------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balanced Fund....................... $63,000 $60,000 (a) (a) (a) (a)
Diversified Stock Fund.............. 452,000 430,000 (a) (a) (a) (a)
Financial Reserves Fund............. - - (a) (a) (a) (a)
Fund for Income..................... 18,000 17,000 (a) (a) (a) (a)
Government Mortgage Fund............ 2,000 2,000 (a) (a) (a) (a)
Growth Fund......................... 1,000 1,000 (a) (a) (a) (a)
Institutional Money Market Fund..... - - (a) (a) (a) (a)
Intermediate Income Fund............ 2,000 2,000 (a) (a) (a) (a)
International Growth Fund........... 17,000 17,000 (a) (a) (a) (a)
Investment Quality Bond Fund........ 6,000 6,000 (a) (a) (a) (a)
Limited Term Income Fund............ 3,000 3,000 (a) (a) (a) (a)
National Municipal Bond Fund........ 31,000 31,000 (a) (a) (a) (a)
New York Tax-Free Bond.............. 43,000 39,000 (a) (a) (a) (a)
Ohio Municipal Bond Fund............ 20,000 20,000 (a) (a) (a) (a)
Ohio Municipal Money Market
Fund.............................. - - (a) (a) (a) (a)
Ohio Regional Stock Fund............ 21,000 21,000 (a) (a) (a) (a)
Prime Obligations Fund.............. - - (a) (a) (a) (a)
Special Growth Fund................. 2,000 2,000 (a) (a) (a) (a)
Special Value Fund.................. 22,000 11,000 (a) (a) (a) (a)
Stock Index Fund.................... 9,000 9,000 (a) (a) (a) (a)
Tax-Free Money Market Fund.......... - - (a) (a) (a) (a)
U.S. Government Obligations
Fund............................. - - (a) (a) (a) (a)
Value Fund.......................... 1,000 1,000 (a) (a) (a) (a)
</TABLE>
(a) In 1995, the amount of underwriting commissions and the amount retained for
the entire Fund Complex was $721,000 and $107,000, respectively. In 1994,
the amount of underwriting commissions and the amount retained for the
entire Fund Complex was $212,021 and $15, respectively.
- 121 -
<PAGE>
TRANSFER AGENT.
State Street Bank and Trust Company ("State Street") serves as transfer agent
for the Funds. Boston Financial Data Services, Inc. ("BFDS") serves as the
dividend disbursing agent and shareholder servicing agent for the Funds,
pursuant to a Transfer Agency and Service Agreement. Under its agreement with
the Victory Portfolios, State Street has agreed (1) to issue and redeem shares
of the Victory Portfolios; (2) 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; (3) to respond to correspondence or inquiries by shareholders and
others relating to its duties; (4) to maintain shareholder accounts and certain
sub-accounts; and (5) to make periodic reports to the Trustees concerning the
Victory Portfolios' operations.
SHAREHOLDER SERVICING PLAN.
Payments made under the Shareholder Servicing Plan to Shareholder Servicing
Agents (which may include affiliates of the Adviser and Sub-Adviser) are for
administrative support services to customers who may from time to time
beneficially own shares, which services may include: (1) aggregating and
processing purchase and redemption requests for shares from customers and
transmitting promptly net purchase and redemption orders to our distributor or
transfer agent; (2) providing customers with a service that invests the assets
of their accounts in shares pursuant to specific or pre-authorized instructions;
(3) processing dividend and distribution payments on behalf of customers; (4)
providing information periodically to customers showing their positions in
shares; (5) arranging for bank wires; (6) responding to customer inquiries; (7)
providing subaccounting with respect to shares beneficially owned by customers
or providing the information to the Funds as necessary for subaccounting; (8) 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; (9) forwarding to customers proxy
statements and proxies containing any proposals which require a shareholder
vote; and (10) 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.
DISTRIBUTION AND SERVICE PLAN.
The Victory Portfolios, on behalf of the Financial Reserves Fund, Fund for
Income, Institutional Money Market Fund (Investor Class and Select Class),
Lakefront Fund, National Municipal Bond Fund, New York Tax-Free Fund, Ohio
Municipal Money Market Fund, Real Estate Investment Fund, and U.S. Obligations
Fund (Investor Shares) has adopted a Distribution and Service Plan (the "Plan")
pursuant to Rule 12b-1 under the 1940 Act (the "Rule 12b-1"). 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
shares of such mutual fund 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, the
Sub-Adviser and the Distributor to incur certain expenses that might be
considered to constitute indirect payment by the Funds of distribution expenses.
Under the Plan, if a payment to the Advisers or the Sub-Adviser of management
fees or to the Distributor of administrative fees should be deemed to be
indirect financing by the Victory Portfolios of the distribution of their
shares, such payment is authorized by the Plan.
The Plan specifically recognizes that the Adviser, the Sub-Adviser or the
Distributor, directly or through an affiliate, may use its fee revenue, past
profits, or other resources, without limitation, to pay promotional and
administrative expenses in connection with the offer and sale of shares of the
Funds. In addition, the Plan provides that the Adviser, the Sub-Adviser and the
Distributor may use their respective resources, including fee revenues, to make
payments to third parties that provide assistance in selling the Funds' shares,
or to third parties, including banks, that render shareholder support services.
The Plan has been approved by the Board of Trustees. As required by the Rule,
the Trustees carefully considered all pertinent factors relating to the
implementation of the Plan prior to its approval, and have determined that there
is a reasonable likelihood that the Plan will benefit the Funds and their
shareholders. In particular, the Trustees noted that the Plan does not authorize
payments by the Funds other than the advisory and administrative fees authorized
under the investment advisory and administration agreements. To the extent that
the Plan gives the Adviser, the Sub-Adviser or the Distributor greater
flexibility in connection with the distribution of shares of the Funds,
additional sales of the Funds' shares may result. Additionally, certain
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<PAGE>
shareholder support services may be provided more effectively under the Plan by
local entities with whom shareholders have other relationships.
CLASS B SHARES DISTRIBUTION PLAN.
The Victory Portfolios has adopted a Distribution Plan for Class B shares of the
Balanced Fund, Diversified Stock Fund, International Growth Fund, National
Municipal Bond Fund, New York Tax-Free Fund, Ohio Regional Stock Fund and
Special Value Fund under the Rule. The Distribution Plan adopted by the Trustees
with respect to the Class B shares of the Funds provides that each Fund will pay
the Distributor a distribution fee under the Distribution Plan at the annual
rate of 0.75% of the average daily net assets of the Fund attributable to the
Class B shares. The distribution fees may be used by the Distributor for: (a)
costs of printing and distributing each Fund's prospectus, statement of
additional information and reports to prospective investors in the Funds; (b)
costs involved in preparing, printing and distributing sales literature
pertaining to the Funds; (c) an allocation of overhead and other branch office
distribution-related expenses of the Distributor; (d) payments to persons who
provide support services in connection with the distribution of each Fund's
Class B shares, including but not limited to, office space and equipment,
telephone facilities, answering routine inquiries regarding the Funds,
processing shareholder transactions and providing any other shareholder services
not otherwise provided by the Victory Portfolios' transfer agent; (e) accruals
for interest on the amount of the foregoing expenses that exceed the
distribution fee and the CDSCs received by the Distributor; and (f) any other
expense primarily intended to result in the sale of the Funds' Class B shares,
including, without limitation, payments to salesmen and selling dealers at the
time of the sale of Class B shares, if applicable, and continuing fees to each
such salesmen and selling dealers, which fee shall begin to accrue immediately
after the sale of such shares.
The amount of the distribution fees payable by any Fund under the Distribution
Plan is not related directly to expenses incurred by the Distributor and the
Distribution Plan does not obligate the Funds to reimburse the Distributor for
such expenses. The distribution fees set forth in the Distribution Plan will be
paid by each Fund to the Distributor unless and until the Distribution Plan is
terminated or not renewed with respect to such Fund; any distribution or service
expenses incurred by the Distributor on behalf of the Funds in excess of
payments of the distribution fees specified above which the Distributor has
accrued through the termination date are the sole responsibility and liability
of the Distributor and not an obligation of the Funds.
The Distribution Plan for the Class B shares specifically recognizes that either
the Adviser or the Distributor, directly or through an affiliate, may use its
fee revenue, past profits, or other resources, without limitation, to pay
promotional and administrative expenses in connection with the offer and sale of
shares of the Funds. In addition, the Plan provides that the Adviser and the
Distributor may use their respective resources, including fee revenues, to make
payments to third parties that provide assistance in selling the Funds' Class B
shares, or to third parties, including banks, that render shareholder support
services.
The Distribution Plan was approved by the Trustees, including the independent
Trustees, at a meeting called for that purpose. As required by Rule 12b-1, the
Trustees carefully considered all pertinent factors relating to the
implementation of the Distribution Plan prior to its approval, and have
determined that there is a reasonable likelihood that the Distribution Plan will
benefit the Funds and their Class B shareholders. To the extent that the
Distribution Plan gives the Advisers or the Distributor greater flexibility in
connection with the distribution of Class B shares of the Funds, additional
sales of the Funds' Class B shares may result. Additionally, certain Class B
shareholder support services may be provided more effectively under the
Distribution Plan by local entities with whom shareholders have other
relationships.
FUND ACCOUNTANT.
BISYS Fund Services Ohio, Inc. ("BISYS, Inc.") serves as fund accountant for the
all of the Funds except the Real Estate Investment 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,
Inc. calculates each Fund's net asset value, the dividend and capital gain
distribution, if any, and the yield. BISYS, 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 Funds. Under the Fund Accounting Agreement, BISYS,
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%
- 123 -
<PAGE>
of the Fund's remaining daily average net assets. These annual fees are subject
to a minimum monthly assets charge of $2,500 per taxable fund, $2,917 per
tax-free fund and $3,333 per international fund and does 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 fiscal years ended October 31, 1996, 1995, and 1994 the Fund accountant
earned the following fund accounting fees of:
Fund 1996 1995 1994
- - ---- ---- ---- ----
Balanced Fund $93,776 $87,894 $60,781
Diversified Stock Fund 159,249 141,598 152,663
Financial Reserves Fund 78,188 100,934 276,849
Fund for Income 57,144 32,288
Government Mortgage Fund 50,487 83,080 106,719
Growth Fund 35,364 49,945 36,706(a)
Institutional Money Market Fund(b) 86,455 50,238 75,245/
31,744
Intermediate Income Fund 61,867 71,451 62,855
International Growth Fund 90,570 121,305 84,710
Investment Quality Bond Fund 52,699 70,983 62,067(c)
Limited Term Income Fund 39,040 89,012 28,184
National Municipal Bond Fund(d) 65,000 24,041 33,569/
7,193
New York Tax-Free Fund 51,388 48,533 152,663
Ohio Municipal Bond Fund 51,845 43,204 39,520
Ohio Municipal Money Market Fund 65,058 13,370/ 140,235/
30,071(e) 259,581(f)
Ohio Regional Stock Fund 51,094 30,563 23,521
Prime Obligations Fund 85,261 260,571 454,251
Special Growth Fund 57,804 20,897 16,783
Special Value Fund 79,170 75,514 52,627
Stock Index Fund 87,027 22,715 15,844(a)
Tax-Free Money Market Fund 107,911 112,625 129,044
U.S. Government Obligation Fund 85,062 243,249 152,663
Value Fund 71,046 124,400 96,327(a)
- - ----------
(a) Fiscal period December 3, 1993 (commencement of operations) to October 31,
1994.
(b) Fiscal period ended October 31, 1996; fiscal period ended October 31, 1995;
fiscal year ended April 30, 1995 and April 30, 1994; respectively.
(c) Fiscal period December 10, 1993 (commencement of operations) to October 31,
1994.
(d) Fiscal year ended October 31, 1996; fiscal period ended October 31, 1995
and fiscal year ended April 30, 1995; and fiscal period February 3, 1994
(commencement of operations) to April 30, 1994, respectively.
(e) For the period ended October 31, 1995 and the period from June 5, 1995
through August 31, 1995.
(f) In the fiscal year ended August 31, 1994, Primary Funds Service Corporation
and Federated Administrative Services earned accounting fees of $140,235
and $259,581, respectively.
Key Asset Management Inc. serves as fund accountant for the Real Estate
Investment Fund. As fund accountant for the Real Estate Investment Fund, Key
Asset Management calculates the Real Estate Investment Fund's net asset value,
the dividend and capital gain distribution, if any, and the yield. BISYS, 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 Real Estate Investment
Fund. Under the Fund Accounting Agreement, BISYS, Inc. is entitled to receive
annual fees of .03% of the first $100 million of the Real Estate Investment
Fund's daily average net assets, .02% of the next $100 million of the Real
Estate Investment Fund's daily average net assets, and .01% of the Real Estate
Investment Fund's remaining daily average net assets. These annual fees are
subject to a minimum monthly assets charge of $2,500 and does
- 124-
<PAGE>
not include out-of-pocket expenses or multiple class charges of $833 per month
assessed for each class of shares after the first class.
CUSTODIAN.
Cash and securities owned by each of the Victory Portfolios are held by Key
Trust as custodian pursuant to a Custodian Agreement dated August 1, 1996. Cash
and securities owned by the Funds are also held by Morgan Stanley Trust Company
("Morgan Stanley") as sub-custodian, and certain foreign sub-custodians,
pursuant to a Sub-Custody Agreement. Under these Agreements, Key Trust and
Morgan Stanley each (1) maintains a separate account or accounts in the name of
each respective fund; (2) makes receipts and disbursements of money on behalf of
each 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 Trustees concerning The Victory Portfolios' operations. Key Trust
may, with the approval of a fund and at the custodian's own expense, open and
maintain a sub-custody account or accounts on behalf of a fund, provided that
Key Trust shall remain liable for the performance of all of its duties under the
Custodian Agreement.
INDEPENDENT ACCOUNTANTS.
The audited financial statements of the Victory Portfolios for the fiscal year
ended October 31, 1996 are incorporated by reference herein. The financial
statements for the fiscal year ended October 31, 1996 have been audited by
Coopers & Lybrand L.L.P. as set forth in their report incorporated by reference
herein, and are included in reliance upon such report and on the authority of
such firm as experts in auditing and accounting. 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 & Frankel, 919 Third Avenue, New York, New York 10022 is
the counsel to the Victory Portfolios.
EXPENSES.
The Funds bear the following expenses relating to its operations: taxes,
interest, brokerage fees and commissions, fees of the Trustees, SEC 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 Funds'
operation.
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES.
The Victory Portfolios (sometimes referred to as the "Trust") is a Delaware
business trust. The Delaware Trust Instrument authorizes the Trustees to issue
an unlimited number of shares, which are units of beneficial interest, without
par value. The Victory Portfolios presently has twenty-six series of shares,
which represent interests in the following funds and their respective classes,
if any:
Balanced Fund
Class A Shares
Class B Shares
Diversified Stock Fund
Class A Shares
Class B Shares
Financial Reserves Fund
Fund For Income
- 125 -
<PAGE>
Government Mortgage Fund
Growth Fund
Institutional Money Market Fund
Select Shares
Investor Shares
Intermediate Income Fund
International Growth Fund
Class A Shares
Class B Shares
Investment Quality Bond Fund
Lakefront Fund
Limited Term Income Fund
National Municipal Bond Fund
Class A Shares
Class B Shares
New York Tax-Free Fund
Class A Shares
Class B Shares
Ohio Municipal Bond Fund
Ohio Municipal Money Market Fund
Ohio Regional Stock Fund
Class A Shares
Class B Shares
Prime Obligations Fund
Real Estate Investment Fund
Special Growth Fund
Special Value Fund
Class A Shares
Class B Shares
Stock Index Fund
Tax-Free Money Market Fund
U.S. Government Obligations Fund
Select Shares
Investor Shares
Value Fund
The Victory Portfolios' Trust Instrument authorizes the Trustees to divide or
redivide any unissued shares of the Victory Portfolios into one or more
additional series by setting or changing in any one or more aspects 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.
To the best knowledge of the Victory Portfolios, the names and addresses of the
holders of 5% or more of the outstanding shares of each class of the Funds'
equity securities as of February 7, 1997, and the percentage of the outstanding
shares held by such holders are set forth below:
- 126 -
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================================================
PERCENT PERCENT
OWNED OWNED
FUND NAME AND ADDRESS OF OWNER OF RECORD BENEFICIALLY
- - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCED FUND- Society National Bank of Cleveland 96.9% -
CLASS A SHARES and Company
4900 Tiedeman Road
Cleveland, Ohio 44144
- - -----------------------------------------------------------------------------------------------------------------------------
KeyCorp Plan Balanced Fund - 18.6%
127 Public Square
Cleveland, OH 44114
- - -----------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED STOCK FUND - Society National Bank of Cleveland 90.6% -
CLASS A SHARES and Company
4900 Tiedeman Road
Cleveland, Ohio 44144
- - -----------------------------------------------------------------------------------------------------------------------------
FINANCIAL RESERVES FUND Society National Bank of Cleveland 94.6% -
and Company
4900 Tiedeman Road
Cleveland, Ohio 44144
- - -----------------------------------------------------------------------------------------------------------------------------
FUND FOR INCOME Key Trust of Cleveland 11.4% -
4900 Tiedeman Road
Cleveland, Ohio 44144
- - -----------------------------------------------------------------------------------------------------------------------------
GOVERNMENT MORTGAGE Society National Bank of Cleveland 97.4% -
FUND and Company
4900 Tiedeman Road
Cleveland, OH 44144
- - -----------------------------------------------------------------------------------------------------------------------------
Bombardier Corp. - 5.7%
Collective Investment Trust
Attn: S.A. Kiker
c/o Society National Bank
127 Public Square
Cleveland, Ohio 44144
- - -----------------------------------------------------------------------------------------------------------------------------
GROWTH FUND Society National Bank of Cleveland 97.5% -
and Company
4900 Tiedeman Road
Cleveland, OH 44144
- - -----------------------------------------------------------------------------------------------------------------------------
KeyCorp Cash Balance - 40.0%
Mutual/Equity Fund
127 Public Square
Cleveland, OH 44114
- - -----------------------------------------------------------------------------------------------------------------------------
INSTITUTIONAL MONEY BISYS Fund Services Ohio Inc. 99.8% -
MARKET FUND-SELECT Attn: Iris Young
CLASS 3435 Steltzer Rd.
Columbus, Ohio 43219-3035
- - -----------------------------------------------------------------------------------------------------------------------------
CWRU - Endow Fd - Special Fd - 6.5%
K. Kaesburg
KeyCorp
127 Public Square
Cleveland, OH 44114
- 127 -
<PAGE>
=============================================================================================================================
PERCENT PERCENT
OWNED OWNED
FUND NAME AND ADDRESS OF OWNER OF RECORD BENEFICIALLY
- - -----------------------------------------------------------------------------------------------------------------------------
INVESTOR CLASS Liefke & Co. 96.6% -
c/o KeyCorp Trust Services
4900 Tiedeman Road
Cleveland, OH 44144
- - -----------------------------------------------------------------------------------------------------------------------------
KeyCorp 401(k) Plan - 15.9%
127 Public Square
Cleveland, Ohio 44114
- - -----------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE INCOME Society National Bank of Cleveland 99.4% -
FUND and Company
4900 Tiedeman Road
Cleveland, OH 44144
- - -----------------------------------------------------------------------------------------------------------------------------
KeyCorp 401(k) Plan - 25.7%
127 Public Square
Cleveland, Ohio 44114
- - -----------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL GROWTH Society National Bank of Cleveland 96.4%
FUND-CLASS A and Company
4900 Tiedeman Road
Cleveland, Ohio 44144
- - -----------------------------------------------------------------------------------------------------------------------------
CLASS B IRA of Jerry L. Ufford 19.6% 19.6%
22315 Berry Drive
Rocky River, OH 44116
- - -----------------------------------------------------------------------------------------------------------------------------
Bruce R. McBroom 6.5% 6.5%
Phyllis E. McBroom
7628 Collins St.
Lowville, NY 13367
- - -----------------------------------------------------------------------------------------------------------------------------
A. Buell Arnold 9.0% 9.0%
Doris B. Arnold Trustees
Arnold Family Trust
12 Bartlett Lane
Delmar, NY 12054
- - -----------------------------------------------------------------------------------------------------------------------------
Josephine E. Marx 6.4% 6.4%
1 Scott Place
Schenectady, NY 12309
- - -----------------------------------------------------------------------------------------------------------------------------
Brandon Bradley 9.5% 9.5%
Box 398
Route 37
Hogansburg, NY 13655
- - -----------------------------------------------------------------------------------------------------------------------------
INVESTMENT QUALITY BOND Society National Bank of Cleveland 87.9% -
FUND and Company
4900 Tiedeman Road
Cleveland, OH 44144
- - -----------------------------------------------------------------------------------------------------------------------------
LIMITED TERM INCOME Society National Bank of Cleveland 90.9% -
FUND and Company
4900 Tiedeman Road
Cleveland, OH 44144
- - -----------------------------------------------------------------------------------------------------------------------------
- 128 -
<PAGE>
=============================================================================================================================
PERCENT PERCENT
OWNED OWNED
FUND NAME AND ADDRESS OF OWNER OF RECORD BENEFICIALLY
Aultman Health Services - 21.2%
2600 Sixth Street SW
Canton, OH 44710
- - -----------------------------------------------------------------------------------------------------------------------------
NATIONAL MUNICIPAL BOND Key Trust of Cleveland 23.0% -
FUND-CLASS A SHARES 4900 Tiedeman Road
Cleveland, Ohio 44144
- - -----------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES Patricia R. Deboer 5.2% 5.2%
5481 South 125 East
Ogden, UT 84405
- - -----------------------------------------------------------------------------------------------------------------------------
El Matador Inc. 9.6% 9.6%
2564 Ogden Avenue
Ogden, UT 84401
- - -----------------------------------------------------------------------------------------------------------------------------
Key Bank of Maine, Escrow Agent 20.0% 20.0%
for Robert, Geraldine and Janet Sylvester
and GFS ND Manufacturing Co.
1 Canal Plaza
Portland, ME 04101
- - -----------------------------------------------------------------------------------------------------------------------------
Marden Spencer 6.2% 6.2%
958 E. Olympus Park Dr., #A102
Salt Lake City, UT 84117
- - -----------------------------------------------------------------------------------------------------------------------------
Faye A. Smith 5.0% 5.0%
P.O. Box 5
Oxford, ME 04270
- - -----------------------------------------------------------------------------------------------------------------------------
Ethel F. Robinson 9.7% 9.7%
2716 100th SE
Everett, WA 98208-4338
- - -----------------------------------------------------------------------------------------------------------------------------
NEW YORK TAX-FREE Key Trust of Cleveland 16.9% -
FUND-CLASS A SHARES 4900 Tiedeman Road
Cleveland, OH 44144
- - -----------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES Leon A. Philp 7.2% 7.2%
15 Budd Avenue
Clarence, NY 14031
- - -----------------------------------------------------------------------------------------------------------------------------
OHIO MUNICIPAL BOND Society National Bank of Cleveland 89.2% -
FUND and Company
4900 Tiedeman Road
Cleveland, OH 44144
- - -----------------------------------------------------------------------------------------------------------------------------
OHIO MUNICIPAL MONEY Society National Bank of Cleveland 19.6% -
MARKET FUND and Company
4900 Tiedeman Road
Cleveland, OH 44144
- - -----------------------------------------------------------------------------------------------------------------------------
Society National Bank-Private Banking 57.1% -
2025 Ontario Street
Cleveland, OH 44115
- 129 -
<PAGE>
=============================================================================================================================
PERCENT PERCENT
OWNED OWNED
FUND NAME AND ADDRESS OF OWNER OF RECORD BENEFICIALLY
- - -----------------------------------------------------------------------------------------------------------------------------
Key Clearing Corp. 15.5% -
4900 Tiedeman Road
Cleveland, OH 44144
- - -----------------------------------------------------------------------------------------------------------------------------
OHIO REGIONAL STOCK Society National Bank of Cleveland 87.4% -
FUND - CLASS A SHARES and Company
4900 Tiedeman Road
Cleveland, OH 44144
- - -----------------------------------------------------------------------------------------------------------------------------
IBEW Local #38 5.3%
c/o Society National Bank
127 Public Square
Cleveland, OH 44144
- - -----------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES IRA of Jerry Ufford 10.4% 10.4%
22315 Berry Drive
Rocky River, OH 44116
- - -----------------------------------------------------------------------------------------------------------------------------
IRA of Gerald Mencl 6.0% 6.0%
5899 Canal Road
Valley View, OH 44125
- - -----------------------------------------------------------------------------------------------------------------------------
IRA of Pamela S. Sedmak 5.0% 5.0%
6832 Teasel Ct.
Solon, OH 44139
- - -----------------------------------------------------------------------------------------------------------------------------
IRA of Stephen A. Worth 8.7% 8.7%
10064 Hunting Dr.
Brecksville, OH 44141
- - -----------------------------------------------------------------------------------------------------------------------------
PRIME OBLIGATIONS FUND Society National Bank of Cleveland 10.2% -
and Company
4900 Tiedeman Road
Cleveland, OH 44144
- - -----------------------------------------------------------------------------------------------------------------------------
Key Equity Capital Corp. 6.2% -
127 Public Square
Cleveland, OH 44114
- - -----------------------------------------------------------------------------------------------------------------------------
Society National Bank-Private Banking 20.8% -
2025 Ontario Street
Cleveland, OH 44115
- - -----------------------------------------------------------------------------------------------------------------------------
Key Clearing Corp. 36.1% -
4900 Tiedeman Road
Cleveland, OH 44144
- - -----------------------------------------------------------------------------------------------------------------------------
SPECIAL GROWTH FUND Society National Bank of Cleveland 99.0% -
and Company
4900 Tiedeman Road
Cleveland, OH 44144
- - -----------------------------------------------------------------------------------------------------------------------------
KeyCorp Cash Balance Mutual - 36.0%
Equity Fund
127 Public Square
Cleveland, OH 44114
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<PAGE>
=============================================================================================================================
PERCENT PERCENT
OWNED OWNED
FUND NAME AND ADDRESS OF OWNER OF RECORD BENEFICIALLY
- - -----------------------------------------------------------------------------------------------------------------------------
SPECIAL VALUE FUND-CLASS Society National Bank of Cleveland 93.6% -
A SHARES and Company
4900 Tiedeman Road
Cleveland, OH 44144
- - -----------------------------------------------------------------------------------------------------------------------------
KeyCorp Cash Balance Plan - 16.0%
Human Resources
127 Public Square
Cleveland, OH 44114
- - -----------------------------------------------------------------------------------------------------------------------------
CLASS B SHARES IRA of Jerry L. Ufford 7.0% 7.0%
22315 Berry Drive
Rocky River, Ohio 44116
- - -----------------------------------------------------------------------------------------------------------------------------
IRA of Frank W. Kilgore 8.8% 8.8%
30764 Pirtle Drive
Albany, OR 97321
- - -----------------------------------------------------------------------------------------------------------------------------
IRA of Robert F. Clegg 11.1% 11.1%
5402 Bennington Woods Ct.
Columbus, OH 43220-2611
- - -----------------------------------------------------------------------------------------------------------------------------
First Assembly of God 8.0% 8.0%
Daniel Wood, President
1370 Richmond Road
Lyndhurst, Ohio 44124
- - -----------------------------------------------------------------------------------------------------------------------------
IRA of Joseph R. Armeni 7.1% 7.1%
295 W. 4th Street
Columbus, OH 43201
- - -----------------------------------------------------------------------------------------------------------------------------
STOCK INDEX FUND Society National Bank and 99.3% -
Trust Company
4900 Tiedeman Road
Cleveland, OH 44144
- - -----------------------------------------------------------------------------------------------------------------------------
Steris Corp. - 6.8%
Attn: M.F. Pope
Society National Bank
127 Public Square
Cleveland, OH 44101-4717
- - -----------------------------------------------------------------------------------------------------------------------------
Eaton SPIP Victory Stock Index - 8.4%
Eaton Corporation
Eaton Center
Cleveland, OH 44114
- - -----------------------------------------------------------------------------------------------------------------------------
TAX-FREE MONEY MARKET Society National Bank of Cleveland 50.7%
FUND and Company
4900 Tiedeman Road
Cleveland, OH 44144
- - -----------------------------------------------------------------------------------------------------------------------------
Society National Bank-Private Banking 39.9%
2025 Ontario Street
Cleveland, OH 44115
- 131 -
<PAGE>
=============================================================================================================================
PERCENT PERCENT
OWNED OWNED
FUND NAME AND ADDRESS OF OWNER OF RECORD BENEFICIALLY
- - -----------------------------------------------------------------------------------------------------------------------------
Key Clearing Corp. 8.3%
4900 Tiedeman Road
Cleveland, OH 44144
- - -----------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT Society National Bank of Cleveland 40.1% -
OBLIGATIONS FUND - and Company
SELECT SHARES 4900 Tiedeman Road
Cleveland, OH 44144
- - -----------------------------------------------------------------------------------------------------------------------------
Key Clearing Corp. 15.1% -
4900 Tiedeman Road
Cleveland, OH 44144
- - -----------------------------------------------------------------------------------------------------------------------------
Society National Bank-Private Banking 29.5%
2025 Ontario Street
Cleveland, OH 44115
- - -----------------------------------------------------------------------------------------------------------------------------
Bost & Co. 10.0%
c/o Mellon Bank
3 Mellon Bank Ctr.
Pittsburgh, PA 15259
- - -----------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT Key Clearing Corp. 98.0% -
OBLIGATIONS FUND - 4900 Tiedeman Road
INVESTOR SHARES Cleveland, OH 44144
- - -----------------------------------------------------------------------------------------------------------------------------
Iron Workers Pension/Annuity - 7.3%
Charles Way
P.O. Box 398
Dayton, OH 45401
- - -----------------------------------------------------------------------------------------------------------------------------
KeyCorp PRISM - 6.9%
127 Public Square
Cleveland, OH 44114
- - -----------------------------------------------------------------------------------------------------------------------------
Premier Industrial Collective - 6.3%
Investment Trust
M.E. Halloran
KeyCorp
127 Public Square
Cleveland, OH 44114
- - -----------------------------------------------------------------------------------------------------------------------------
VALUE FUND Society National Band of Cleveland 99.7% -
and Company
4900 Tiedeman Road
Cleveland, OH 44144
- - -----------------------------------------------------------------------------------------------------------------------------
KeyCorp 401(k) Plan - 52.3%
127 Public Square
Cleveland, OH 44114
=============================================================================================================================
</TABLE>
Shares of the Victory Portfolios are entitled to one vote per share (with
proportional voting for fractional shares) on such matters as shareholders are
entitled to vote. Shareholders vote as a single class on all matters except (1)
when required by the 1940 Act, shares shall be voted by individual series, and
(2) when the Trustees have determined that the matter affects only the interests
of one or more series, then only shareholders of such series
- 132 -
<PAGE>
shall be entitled to vote thereon. 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. 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 a net asset value 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 accountants, the approval of principal underwriting contracts, and
the election of Trustees may be effectively acted upon by shareholders of the
Victory Portfolios voting without regard to series.
SHAREHOLDER AND TRUSTEE LIABILITY.
The Victory Portfolios is organized as 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
shareholders of Delaware corporations, and the Delaware Trust Instrument
provides that shareholders of the Victory Portfolios shall not be liable for the
obligations of the Victory Portfolios. The Delaware Trust Instrument also
provides for indemnification out of the trust property of any shareholder held
personally liable solely by reason of his or her being or having been a
shareholder. The Delaware Trust Instrument also provides that the Victory
Portfolios shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Victory Portfolios, and shall
satisfy any judgment thereon. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is considered to be extremely
remote.
The Delaware Trust Instrument states further that no Trustee, officer, or agent
of the Victory Portfolios shall be personally liable in connection with the
administration or preservation of the assets of the funds or the conduct of the
Victory Portfolios' business; nor shall any Trustee, officer, or agent be
personally liable to any person for any action or failure to act except for his
own bad faith, willful misfeasance, gross negligence, or reckless disregard of
his duties. The Declaration of Trust also provides that all persons having any
claim against the Trustees or the Victory Portfolios shall look solely to the
assets of the Victory Portfolios for payment.
MISCELLANEOUS.
As used in the Prospectus and in this SAI, "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, 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 that are allocated to that Fund by the Trustees. The Trustees may allocate
such general assets in any manner they deem fair and equitable. It is
anticipated that the factor 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 each respective fund at the time of
allocation. Assets belonging to a particular Fund are charged with the direct
liabilities and expenses in respect
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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, which 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 and
will be in accordance with generally accepted accounting principles.
Determinations by the Trustees 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 SAI, a "vote of a majority of the
outstanding shares" 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 SEC as an open-end management
investment company. Such registration does not involve supervision by the SEC of
the management or policies of the Victory Portfolios.
The Prospectus and this SAI omit certain of the information contained in the
Registration Statement filed with the SEC. Copies of such information may be
obtained from the SEC upon payment of the prescribed fee.
THE PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION ARE NOT AN OFFERING
OF THE SECURITIES DESCRIBED IN THESE DOCUMENTS 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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APPENDIX
DESCRIPTION OF SECURITY RATINGS.
The nationally recognized statistical rating organizations (individually, an
"NRSRO") that may be utilized by the Adviser or the Sub-Adviser with regard to
portfolio investments for the Funds include Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Corporation ("S&P"), Duff & Phelps, Inc.
("Duff"), Fitch Investors Service, Inc. ("Fitch"), IBCA Limited and its
affiliate, IBCA Inc. (collectively, "IBCA"), and Thomson BankWatch, Inc.
("Thomson"). Set forth below is a description of the relevant ratings of each
such NRSRO. The NRSROs that may be utilized by the Adviser or the Sub-Adviser
and the description of each NRSRO's ratings is as of the date of this Statement
of Additional Information, and may subsequently change.
LONG-TERM DEBT RATINGS (may be assigned, for example, to corporate and municipal
bonds).
Description of the five highest long-term debt ratings by Moody's (Moody's
applies numerical modifiers (e.g., 1, 2, and 3) in each rating category to
indicate the security's ranking within the category):
Aaa. Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa. Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements - their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times in the future. Uncertainty of position
characterizes bonds in this class.
Description of the five highest long-term debt ratings by S&P (S&P may apply a
plus (+) or minus (-) to a particular rating classification to show relative
standing within that classification):
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
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BBB. Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB. Debt rated BB is regarded, on balance, as predominately speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposure to adverse conditions.
Description of the three highest long-term debt ratings by Duff:
AAA. Highest credit quality. The risk factors are negligible being only slightly
more than for risk-free U.S. Treasury debt.
AA+, AA, AA-. High credit quality Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A+. Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
Description of the three highest long-term debt ratings by Fitch (plus or minus
signs are used with a rating symbol to indicate the relative position of the
credit within the rating category):
AAA. Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA. Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA." Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issues is generally rated "[-]+."
A. Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
IBCA's description of its three highest long-term debt ratings:
AAA. Obligations for which there is the lowest expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial. Adverse
changes in business, economic or financial conditions are unlikely to increase
investment risk significantly.
AA. Obligations for which there is a very low expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial. Adverse
changes in business, economic, or financial conditions may increase investment
risk albeit not very significantly.
A. Obligations for which there is a low expectation of investment risk. Capacity
for timely repayment of principal and interest is strong, although adverse
changes in business, economic or financial conditions may lead to increased
investment risk.
SHORT-TERM DEBT RATINGS (may be assigned, for example, to commercial paper,
master demand notes, bank instruments, and letters of credit).
Moody's description of its three highest short-term debt ratings:
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Prime-1. Issuers rated Prime-1 (or supporting institutions) have a superior
capacity for repayment of senior short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by many of the following
characteristics:
- - - Leading market positions in well-established industries.
- - - High rates of return on funds employed.
- - - Conservative capitalization structures with moderate reliance on debt and
ample asset protection.
- - - Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- - - Well-established access to a range of financial markets and assured sources
of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a strong
capacity for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
S&P's description of its three highest short-term debt ratings:
A-1. This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to have extremely strong safety
characteristics are denoted with a plus sign (+).
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
A-3. Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
Duff's description of its five highest short-term debt ratings (Duff
incorporates gradations of "1+" (one plus) and "1-" (one minus) to assist
investors in recognizing quality differences within the highest rating
category):
Duff 1+. Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S. Treasury short-term
obligations.
Duff 1. Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
Duff 1-. High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
Duff 2. Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
Duff 3. Satisfactory liquidity and other protection factors qualify issue as to
investment grade.
Risk factors are larger and subject to more variation. Nevertheless, timely
payment is expected.
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Fitch's description of its four highest short-term debt ratings:
F-1+. Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1. Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2. Good Credit Quality. Issues assigned this rating have a satisfactory degree
of assurance for timely payment, but the margin of safety is not as great as for
issues assigned F-1+ or F-1 ratings.
F-3. Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate, however,
near-term adverse changes could cause these securities to be rated below
investment grade.
IBCA's description of its three highest short-term debt ratings:
A+. Obligations supported by the highest capacity for timely repayment.
A1. Obligations supported by a very strong capacity for timely repayment.
A2. Obligations supported by a strong capacity for timely repayment, although
such capacity may be susceptible to adverse changes in business, economic or
financial conditions.
SHORT-TERM LOAN/MUNICIPAL NOTE RATINGS
Moody's description of its two highest short-term loan/municipal note ratings:
MIG-1/VMIG-1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG-2/VMIG-2. This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
S&P's description of its two highest municipal note ratings:
SP-1. Very strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will be given a plus
(+) designation.
SP-2. Satisfactory capacity to pay principal and interest.
SHORT-TERM DEBT RATINGS
Thomson BankWatch, Inc. ("TBW") ratings are based upon a qualitative and
quantitative analysis of all segments of the organization including, where
applicable, holding company and operating subsidiaries.
BankWatch Ratings do not constitute a recommendation to buy or sell securities
of any of these companies. Further, BankWatch does not suggest specific
investment criteria for individual clients.
The TBW Short-Term Ratings apply to commercial paper, other senior short-term
obligations and deposit obligations of the entities to which the rating has been
assigned.
The TBW Short-Term Ratings apply only to unsecured instruments that have a
maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an untimely
payment of principal or interest.
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TBW-1. The highest category; indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
TBW-2. The second highest category; while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1."
TBW-3. The lowest investment grade category; indicates that while more
susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and interest in a
timely fashion is considered adequate.
TBW-4. The lowest rating category; this rating is regarded as non-investment
grade and therefore speculative.
DEFINITIONS OF CERTAIN MONEY MARKET INSTRUMENTS
Commercial Paper. Commercial paper consists of unsecured promissory notes issued
by corporations. Issues of commercial paper normally have maturities of less
than nine months and fixed rates of return.
Certificates of Deposit. Certificates of Deposit are negotiable certificates
issued against funds deposited in a commercial bank or a savings and loan
association for a definite period of time and earning a specified return.
Bankers' Acceptances. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
U.S. Treasury Obligations. U.S. Treasury Obligations are obligations issued or
guaranteed as to payment of principal and interest by the full faith and credit
of the U.S. Government. These obligations may include Treasury bills, notes and
bonds, and issues of agencies and instrumentalities of the U.S. Government,
provided such obligations are guaranteed as to payment of principal and interest
by the full faith and credit of the U.S. Government.
U.S. Government Agency and Instrumentality Obligations. Obligations issued by
agencies and instrumentalities of the U.S. Government include such agencies and
instrumentalities as the Government National Mortgage Association, the
Export-Import Bank of the United States, the Tennessee Valley Authority, the
Farmers Home Administration, the Federal Home Loan Banks, the Federal
Intermediate Credit Banks, the Federal Farm Credit Banks, the Federal Land
Banks, the Federal Housing Administration, the Federal National Mortgage
Association, the Federal Home Loan Mortgage Corporation, and the Student Loan
Marketing Association. Some of these obligations, such as those of the
Government National Mortgage Association are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Export-Import Bank of
the United States, are supported by the right of the issuer to borrow from the
Treasury; others, such as those of the Federal National Mortgage Association,
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; still others, such as those of the Student Loan
Marketing Association, are supported only by the credit of the instrumentality.
No assurance can be given that the U.S. Government would provide financial
support to U.S. Government-sponsored instrumentalities if it is not obligated to
do so by law. A Fund will invest in the obligations of such instrumentalities
only when the investment adviser believes that the credit risk with respect to
the instrumentality is minimal.
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Rule 497(c)
Registration No. 33-8982
STATEMENT OF ADDITIONAL INFORMATION
THE VICTORY PORTFOLIOS
GOVERNMENT BOND FUND
MARCH 1, 1997
This Statement of Additional Information is not a Prospectus, but should be read
in conjunction with the Prospectus of The Victory Portfolios - Government Bond
Fund, dated the same date as the date hereof (the "Prospectus"). This Statement
of Additional Information is incorporated by reference in its entirety into the
Prospectus. Copies of the Prospectus may be obtained by writing The Victory
Portfolios at P.O. Box 8527, Boston, MA 02266-8527, or by telephoning toll free
800- KEY-FUND or 800-539-3863.
TABLE OF CONTENTS
INVESTMENT OBJECTIVE AND POLICIES........................................... 2
INVESTMENT LIMITATIONS AND RESTRICTIONS..................................... 4
VALUATION OF PORTFOLIO SECURITIES........................................... 6
PERFORMANCE................................................................. 6
ADDITIONAL PURCHASE, EXCHANGE AND
REDEMPTION INFORMATION.................................................... 11
DIVIDENDS AND DISTRIBUTIONS................................................. 14
TAXES....................................................................... 15
TRUSTEES AND OFFICERS....................................................... 20
ADVISORY AND OTHER CONTRACTS................................................ 25
ADDITIONAL INFORMATION...................................................... 33
APPENDIX.................................................................... 36
INDEPENDENT AUDITORS REPORT
FINANCIAL STATEMENTS
INVESTMENT ADVISER
Key Asset Management Inc.
ADMINISTRATOR
BISYS Fund Services
DISTRIBUTOR
BISYS Fund Services
TRANSFER AGENT
State Street Bank and Trust
Company
DIVIDED DISBURSING AGENT AND
SHAREHOLDER SERVICING AGENT
Boston Financial Data Services,
Inc.
CUSTODIAN
Key Trust Company of Ohio, N.A.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
COUNSEL
Kramer, Levin, Naftalis & Frankel
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
The Victory Portfolios (the "Victory Portfolios") is an open-end management
investment company. The Victory Portfolios consist of twenty- six series of
units of beneficial interest ("shares"). The outstanding shares represent
interests in the twenty- six separate investment portfolios which are currently
active. This Statement of Additional Information relates to the Class A and
Class B shares of the Victory Government Bond Fund (the "Fund") only. Much of
the information contained in this Statement of Additional Information expands on
subjects discussed in the Prospectus. Capitalized terms not defined herein are
used as defined in the Prospectus. No investment in shares of the Fund should be
made without first reading the Fund's Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
ADDITIONAL INFORMATION REGARDING FUND INVESTMENTS.
The following policies supplement the investment policies of the Fund set forth
in the Prospectus. The Fund's investments in the following securities and other
financial instruments are subject to the other investment policies and
limitations described in the Prospectus and this Statement of Additional
Information.
U.S. GOVERNMENT OBLIGATIONS. The Fund may invest in obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. Government are
supported by the full faith and credit of the U.S. Treasury; others are
supported by the right of the issuer to borrow from the U.S. Treasury; others
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; and still others are supported only by the credit of
the agency or instrumentality. No assurance can be given that the U.S.
Government will provide financial support to U.S. Government-sponsored agencies
or instrumentalities if it is not obligated to do so by law.
DELAYED-DELIVERY TRANSACTIONS. The Fund may buy and sell securities on a
delayed-delivery or when-issued basis. These transactions involve a commitment
by the Fund to purchase or sell specific securities at a predetermined price or
yield, with payment and delivery taking place after the customary settlement
period for that type of security (and more than seven days in the future).
Typically, no interest accrues to the purchaser until the security is delivered.
The Fund may receive fees for entering into delayed-delivery transactions.
When purchasing securities on a delayed-delivery basis, the Fund assumes the
rights and risks of ownership, including the risks of price and yield
fluctuations in addition to the risks associated with the Fund's other
investments. Because the Fund is not required to pay for securities until the
delivery date, these delayed-delivery purchases may result in a form of
leverage. When delayed-delivery purchases are outstanding, the Fund will set
aside cash and appropriate liquid assets in a segregated custodial account to
cover its purchase obligations. When the Fund has sold a security on a
delayed-delivery basis, it does not participate in further gains or losses with
respect to the security. If the other party to a delayed-delivery transaction
fails to deliver or pay for the securities, the Fund could miss a favorable
price or yield opportunity or suffer a loss.
The Fund may renegotiate delayed-delivery transactions after they are entered
into or may sell underlying securities before they are delivered, either of
which may result in capital gains or losses.
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<PAGE>
ILLIQUID INVESTMENTS. Illiquid investments cannot be sold or disposed of, within
seven business days, in the ordinary course of business at approximately the
prices at which they are valued. Under the supervision of The Victory
Portfolios' Board of Trustees (the "Board of Trustees" or the "Trustees"), the
Adviser determines the liquidity of the Fund's investments and, through reports
from the Adviser, the Trustees monitor investments in illiquid instruments. In
determining the liquidity of the Fund's investments, the Adviser may consider
various factors, including (1) the frequency of trades and quotations, (2) the
number of dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, (4) the nature of the security (including any
demand or tender features), and (5) the nature of the marketplace for trades
(including the ability to assign or offset the Fund's rights and obligations
relating to the investment). Investments currently considered by the Fund to be
illiquid include repurchase agreements not entitling the holder to payment of
principal and interest within seven days, over the counter options,
non-government stripped fixed-rate mortgage-backed securities, and Restricted
Securities. Also, the Adviser may determine some government-stripped fixed-rate
mortgage backed securities, loans and other direct debt instruments, and swap
agreements to be illiquid. However, with respect to over-the-counter options the
Fund writes, all or a portion of the value of the underlying instrument may be
illiquid depending on the assets held to cover the option and the nature and
terms of any agreement the Fund may have to close out the option before
expiration. In the absence of market quotations, illiquid investments are priced
at fair value as determined in good faith by a committee appointed by the
Trustees. If through a change in values, net assets, or other circumstances, the
Fund were in a position where more than 15% of its net assets were invested in
illiquid securities, it would seek to take appropriate steps to protect
liquidity.
REPURCHASE AGREEMENTS. In a repurchase agreement, the Fund purchases a security
and simultaneously commits to resell that security to the seller at an agreed
upon price on an agreed upon date within a number of days from the date of
purchase. The resale price reflects the purchase price plus an agreed upon
incremental amount which is unrelated to the coupon rate or maturity of the
purchased security. A repurchase agreement involves the obligation of the seller
to pay the agreed upon price, which obligation is in effect secured by the value
(at least equal to the amount of the agreed upon resale price and marked to
market daily) of the underlying security. The Fund may engage in a repurchase
agreement with respect to any security in which it is authorized to invest.
Since it is not possible to eliminate all risks from these transactions
(particularly the possibility of a decline in the market value of the underlying
securities, as well as delays and costs to the Fund in connection with
bankruptcy proceedings), it is The Victory Portfolios' current policy to limit
repurchase agreements for the Fund to those parties whose creditworthiness has
been reviewed and found satisfactory by the Advisers . Repurchase agreements are
considered by the staff of the Commission to be loans by the Fund.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, the Fund sells
the portfolio instrument to another party, such as a bank or broker-dealer, in
return for cash and agrees to repurchase the instrument at a particular price
and time. While a reverse repurchase agreement is outstanding, the Fund will
maintain appropriate liquid assets in a segregated custodial account to cover
its obligation under the agreement. The Fund will enter into reverse repurchase
agreements only with parties whose creditworthiness is deemed satisfactory by
the Adviser. Such transactions may increase fluctuations in the market value of
the Fund's assets, and may be viewed as a form of leverage.
RESTRICTED SECURITIES. The Fund may sell restricted securities, which generally
can be sold in privately negotiated transactions, pursuant to an exemption from
registration under the 1933 Act, or in a registered public offering. Where
registration is required, the Fund may be obligated to pay all or part of the
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<PAGE>
registration expense and a considerable period may elapse between the time it
decides to seek registration and the time the Fund may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to seek registration of the
shares.
SECURITIES LENDING. The Fund may lend securities to parties such as
broker-dealers or institutional investors. Securities lending allows the Fund to
retain ownership of the securities loaned and, at the same time, to earn
additional income. Since there may be delays in the recovery of loaned
securities, or even a loss of rights in collateral supplied should the borrower
fail financially, loans will be made only to parties deemed by the Adviser to be
of good standing. Furthermore, they will only be made if, in Society's judgment,
the consideration to be earned from such loans would justify the risk.
It is the current view of the staff of the Commission that the Fund may engage
in loan transactions only under the following conditions: (1) the Fund must
receive 100% collateral in the form of cash or cash equivalents (e.g., U.S.
Treasury bills or notes) from the borrower; (2) the borrower must increase the
collateral whenever the market value of the securities loaned (determined on a
daily basis) rises above the value of the collateral; (3) after giving notice,
the Fund must be able to terminate the loan at any time; (4) the Fund must
receive reasonable interest on the loan or a flat fee from the borrower, as well
as amounts equivalent to any dividends, interest, or other distributions on the
securities loaned and to any increase in market value; (5) the Fund may pay only
reasonable custodian fees in connection with the loan; and (6) the Board of
Trustees must be able to vote proxies on the securities loaned, either by
terminating the loan or by entering into an alternative arrangement with the
borrower.
Cash received through loan transactions may be invested in any security in which
the Fund is authorized to invest. Investing this cash subjects that investment,
as well as the security loaned, to market forces (i.e., capital appreciation or
depreciation).
INVESTMENT LIMITATIONS AND RESTRICTIONS
The following investment restrictions are fundamental with respect to the Fund
and may be changed only a vote of a majority of the outstanding shares of the
Fund as defined in "Additional Information -- Miscellaneous" of this Statement
of Additional Information.
The Fund may not:
1. With respect to 75% of the Fund's total assets, purchase the securities of
any issuer (other than securities issued or guaranteed by the U.S. Government or
any of its agencies or instrumentalities) if, as a result, (a) more than 5% of
the Fund's total assets would be invested in the securities of that issuer, or
(b) the Fund would hold more than 10% of the outstanding voting securities of
that issuer.
2. Issue any senior security (as defined in the 1940 Act), except that (a) the
Fund may engage in transactions which may result in the issuance of senior
securities to the extent permissible under the applicable regulations and
interpretations of the 1940 Act or an exemptive order; (b) the Fund may acquire
other securities that may be deemed senior securities to the extent permitted
under applicable regulations or interpretations of the 1940 Act; (c) subject to
the restrictions set forth below, the Fund may borrow money as authorized by the
1940 Act.
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3. Borrow money, except that the Fund may borrow money from banks for temporary
or emergency purposes (not for leveraging or investment), and engage in reverse
repurchase agreements in an amount not exceeding 33-1/3% of its total assets,
including the amount borrowed less liabilities other than borrowings (any
borrowings exceeding this amount will be reduced within three days (not
including Sundays and holidays) to the extent necessary to comply with the
33-1/3% limitation), provided that any such borrowings representing more than 5%
of the Fund's total assets must be repaid before the Fund may make additional
investments.
4. Underwrite securities issued by others, except to the extent that the Fund
may be considered an underwriter within the meaning of the Securities Act of
1933 in the disposition of restricted securities.
5. Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Fund from
investing in securities or other instrument backed by real estate).
6. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments.
7. Lend any portfolio security or make any other loan if, as a result, more than
33-1/3% of the Fund's total assets would be lent to other parties, but this
restriction does not apply to purchases of debt securities or to repurchase
agreements.
The following restrictions are nonfundamental and may be changed without
shareholder approval:
1. The Fund may not sell securities short, unless it owns or has the right to
obtain securities equivalent in kind and amount to the securities sold short,
and provided that transactions in futures contracts and options are not deemed
to constitute selling securities short.
2. The Fund may not purchase securities on margin, except that the Fund may
obtain such short-term credits as are necessary for the clearance of
transactions and provided that margin payments in connection with futures
contracts and options on futures contracts shall not constitute purchasing
securities on margin.
3. The Fund may not purchase any security while borrowings representing more
than 5% of the Fund's total assets are outstanding.
4. The Fund may not purchase any security or enter into a repurchase agreement
if, as a result, more than 15% of the Fund's net assets would be invested in
repurchase agreements not entitling the holder to payment of principal and
interest within seven days and in securities that are illiquid by virtue of
legal or contractual restriction on resale or the absence of a readily available
market.
5. The Fund shall not invest in the securities of other investment companies,
except that the Fund may invest in shares of money market funds that are not
"affiliated persons" of the fund and that limit their investment by the Fund,
provided investment by the Fund is limited to: (a) ten percent of the Fund's
assets; (b) five percent of the Fund's total assets in the shares of a single
money market fund; and (c) not more than three percent of the net assets of any
one acquired money market fund. The investment adviser will waive the portion of
its fee attributable to the assets of the Fund invested in such money market
funds to the extent required by the laws of any jurisdiction in which shares of
the Fund are registered for sale.
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<PAGE>
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 Trustees will consider what actions, if any, are appropriate to
maintain adequate liquidity.
The investment policies of the Fund may be changed without an affirmative vote
of the holders of a majority of the Fund's outstanding voting securities unless
(1) a policy is expressly deemed to be a fundamental policy of the Fund or (2) a
policy is expressly deemed to be changeable only by such majority vote.
VALUATION OF PORTFOLIO SECURITIES
Investment securities held by the Fund are valued on the basis of valuations
provided by an independent pricing service, approved by the Trustees, which uses
information with respect to transactions of a security, quotations from dealers,
market transactions in comparable securities, and various relationships between
securities, in determining value. Specific investment securities which are not
priced by the approved pricing service will be valued according to quotations
obtained from dealers who are market makers in those securities. Investment
securities with less than 60 days to maturity when purchased are valued at
amortized cost which approximates market value. Investment securities not having
readily available market quotations will be priced at fair value using a
methodology approved in good faith by the Trustees.
PERFORMANCE
From time to time the "standardized yield," "dividend yield," "average annual
total return," "total return," and "total return at net asset value" of an
investment in each class of Fund shares may be advertised. An explanation of how
yields and total returns are calculated for each class and the components of
those calculations are set forth below.
Yield and total return information may be useful to investors in reviewing the
Fund's performance. The Fund's advertisement of its performance must, under
applicable Commission rules, include the average annual total returns for each
class of shares of the Fund for the 1, 5 and 10-year period (or the life of the
class, if less) as of the most recently ended calendar quarter. This enables an
investor to compare the Fund's performance to the performance of other funds for
the same periods. However, a number of factors should be considered before using
such information as a basis for comparison with other investments. An investment
in the Fund is not insured; its yield and total return are not guaranteed and
normally will fluctuate on a daily basis. When redeemed, an investor's shares
may be worth more or less than their original cost. Yield and total return for
any given past period are not a prediction or representation by The Victory
Portfolios of future yields or rates of return on its shares. The yield and
total returns of the Class A and Class B shares of the Fund are affected by
portfolio quality, portfolio maturity, the type of investments the Fund holds
and its operating expenses.
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<PAGE>
STANDARDIZED YIELDS.
The Fund's "yield" (referred to as "standardized yield") for a given 30-day
period for a class of shares is calculated using the following formula set forth
in rules adopted by the Commission that apply to all funds that quote yields:
Standardized Yield = 2 [(a-b + 1)6 - 1]
---
cd
The symbols above represent the following factors:
a = dividends and interest earned during the 30-day period.
b = expenses accrued for the period (net of any expense reimbursements).
c = the average daily number of shares of that class outstanding during the
30-day period that were entitled to receive dividends.
d = the maximum offering price per share of the class on the last day of
the period, adjusted for undistributed net investment income.
The standardized yield of a class of shares for a 30-day period may differ from
its yield for any other period. The Commission formula assumes that the
standardized yield for a 30-day period occurs at a constant rate for a six-month
period and is annualized at the end of the six-month period. This standardized
yield is not based on actual distributions paid by the Fund to shareholders in
the 30-day period, but is a hypothetical yield based upon the net investment
income from the Fund's portfolio investments calculated for that period. The
standardized yield may differ from the "dividend yield" of that class, described
below. Additionally, because each class of shares is subject to different
expenses, it is likely that the standardized yields of the Fund classes of
shares will differ. The yield on Class A shares and the Class B shares for the
30-day period ended October 31, 1996 was 4.96% and 4.03%, respectively.
DIVIDEND YIELD AND DISTRIBUTION RETURN.
From time to time the Fund may quote a "dividend yield" or a "distribution
return" for each class. Dividend yield is based on the Class A or Class B share
dividends derived from net investment income during a stated period.
Distribution return includes dividends derived from net investment income and
from realized capital gains declared during a stated period. Under those
calculations, the dividends and/or distributions for that class declared during
a stated period of one year or less (for example, 30 days) are added together,
and the sum is divided by the maximum offering price per share of that class A)
on the last day of the period. When the result is annualized for a period of
less than one year, the "dividend yield" is calculated as follows:
<TABLE>
<S> <C>
Dividend Yield of the Class = Dividends of the Class + Number of days (accrual period) x 365
-----------------------------------------------------
Max. Offering Price of the Class (last day of period)
</TABLE>
The maximum offering price for Class A shares includes the maximum front-end
sales charge. For Class B shares, the maximum offering price is the net asset
value per share, without considering the effect of contingent deferred sales
charges ("CDSC").
From time to time similar yield or distribution return calculations may also be
made using the Class A net asset value (instead of its respective maximum
offering price) at the end of the period. The dividend yields on Class A shares
at maximum offering price and net asset value for the 30-day period ended
October 31, 1996 were 4.96% and 5.21%, respectively. Dividend yield on Class B
shares at maximum offering price for the 30-day period ended October 31, 1996
was 4.03%.
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<PAGE>
TOTAL RETURNS. The "average annual total return" of each class is an average
annual compounded rate of return for each year in a specified number of years.
It is the rate of return based on the change in value of a hypothetical initial
investment of $1,000 ("P" in the formula below) held for a number of years ("n")
to achieve an Ending Redeemable Value ("ERV"), according to the following
formula:
(ERV)1n = Average Annual Total Return
-------
(P)
The cumulative "total return" calculation measures the change in value of a
hypothetical investment of $1,000 over an entire period of years. Its
calculation uses some of the same factors as average annual total return, but it
does not average the rate of return on an annual basis. Total return is
determined as follows:
ERV-P = Total Return
-----
P
In calculating total returns for Class A shares, the current maximum sales
charge of 4.75% (as a percentage of the offering price) is deducted from the
initial investment ("P") (unless the return is shown at net asset value, as
discussed below). For Class B shares, the payment of the applicable CDSC (5.0%
for the first year, 4.0% for the second year, 3.0% for the third and fourth
years, 2.0% in the fifth year, 1.0% in the sixth year and none thereafter) is
applied to the investment result for the time period shown (unless the total
return is shown at net asset value, as described below). Total returns also
assume that all dividends and capital gains distributions during the period are
reinvested to buy additional shares at net asset value per share, and that the
investment is redeemed at the end of the period. The average annual total return
and cumulative total return on Class A shares for the period May 3, 1993
(commencement of operations) to October 31, 1996 (life of fund) at maximum
offering price were 3.13% and 11.39%, respectively. For the one year period
ended October 31, 1996, average annual total return for Class A shares was
(1.38)%. The average annual total return and cumulative total return on the
Class B shares for the period September 26, 1994 (commencement of operations) to
October 31, 1996 were 5.65% and 11.85%, respectively. For the one year period
ended October 31, 1996, the average annual total return for Class B shares was
(1.15)%.
From time to time the Fund may also quote an "average annual total return at net
asset value" or a cumulative "total return at net asset value" for Class A or
Class B shares. It is based on the difference in net asset value per share at
the beginning and the end of the period for a hypothetical investment in that
class of shares (without considering front-end or contingent sales charges) and
takes into consideration the reinvestment of dividends and capital gains
distributions. The average annual total return and cumulative total return on
Class A shares for the period May 3, 1993 (commencement of operations) to
October 31, 1996 (life of fund), at net asset value, was 4.58% and 11.39%,
respectively. For the one year period ended October 31, 1996, average annual
total return for Class A shares at net asset value was 3.52%. For the one year
period ended October 31, 1996, the average annual total return at net asset
value for Class B shares at net asset value was 2.77%. The average annual total
return and cumulative total return on Class B shares for the period September
26, 1994 (commencement of operations) to October 31, 1996 were 7.43% and 11.85%,
respectively.
OTHER PERFORMANCE COMPARISONS.
From time to time the Fund may publish the ranking of the performance of its
Class A or Class B shares by Lipper Analytical Services, Inc. ("Lipper"), a
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<PAGE>
widely-recognized independent mutual fund monitoring service. Lipper monitors
the performance of regulated investment companies, including the Fund, and ranks
the performance of the Fund's classes against (1) all other funds, excluding
money market funds, and (2) all other government bond funds. The Lipper
performance rankings are based on total return that includes the reinvestment of
capital gains distributions and income dividends but does not take sales charges
or taxes into consideration.
From time to time the Fund may publish the ranking of the performance of its
Class A or Class B shares by Morningstar, Inc., an independent mutual fund
monitoring service that ranks mutual funds, including the Fund, in broad
investment categories (domestic equity, international equity, taxable bond,
municipal bond, or other) monthly, based upon each fund's three, five and
ten-year average annual total returns (when available) and a risk adjustment
factor that reflects Fund performance relative to three-month U.S. Treasury bill
monthly returns. Such returns are adjusted for fees and sales loads. There are
five ranking categories with a corresponding number of stars: highest (5), above
average (4), neutral (3), below average (2) and lowest (1). Ten percent of the
funds, series or classes in an investment category receive 5 stars, 22.5%
receive 4 stars, 35% receive 3 stars, 22.5% receive 2 stars, and the bottom 10%
receive one star.
The total return on an investment made in Class A or Class B shares of the Fund
may be compared with the performance for the same period of one or more of the
following indices: the Consumer Price Index, the Salomon Brothers World
Government Bond Index, the Standard & Poor's 500 Index, the Shearson Lehman
Government/Corporate Bond Index, the Lehman Aggregate Bond Index, and the J.P.
Morgan Government Bond Index. Other indices may be used from time to time. The
Consumer Price Index is generally considered to be a measure of inflation. The
Salomon Brothers World Government Bond Index generally represents the
performance of government debt securities of various markets throughout the
world, including the United States. The Lehman Government/Corporate Bond Index
generally represents the performance of intermediate and long-term government
and investment grade corporate debt securities. The Lehman Aggregate Bond Index
measures the performance of U.S. corporate bond issues, U.S. government
securities and mortgage-backed securities. The J.P. Morgan Government Bond Index
generally represents the performance of government bonds issued by various
countries including the United States. The S&P 500 Index is a composite index of
500 common stocks generally regarded as an index of U.S. stock market
performance. The foregoing bond indices are unmanaged indices of securities that
do not reflect reinvestment of capital gains or take investment costs into
consideration, as these items are not applicable to indices.
From time to time, the yields and the total returns of Class A or Class B shares
of the Fund may be quoted in and compared to other mutual funds with similar
investment objectives in advertisements, shareholder reports or other
communications to shareholders. The Fund may also include calculations in such
communications that describe hypothetical investment results. (Such performance
examples are based on an express set of assumptions and are not indicative of
the performance of any Fund.) Such calculations may from time to time include
discussions or illustrations of the effects of compounding in advertisements.
"Compounding" refers to the fact that, if dividends or other distributions on a
Fund investment are reinvested by being paid in additional Fund shares, any
future income or capital appreciation of a Fund would increase the value, not
only of the original Fund investment, but also of the additional Fund shares
received through reinvestment. As a result, the value of the Fund investment
would increase more quickly than if dividends or other distributions had been
paid in cash. The Fund may also include discussions or illustrations of the
potential investment goals of a prospective investor (including but not limited
to tax and/or retirement planning), investment management techniques, policies
or investment suitability of the Fund, economic conditions, legislative
- 9 -
<PAGE>
developments (including pending legislation), the effects of inflation and
historical performance of various asset classes, including but not limited to
stocks, bonds and Treasury bills. From time to time advertisements or
communications to shareholders may summarize the substance of information
contained in shareholder reports (including the investment composition of a
Fund, as well as the views of the investment adviser as to current market,
economic, trade and interest rate trends, legislative, regulatory and monetary
developments, investment strategies and related matters believed to be of
relevance to the Fund). The Fund may also include in advertisements, charts,
graphs or drawings which illustrate the potential risks and rewards of
investment in various investment vehicles, including but not limited to stock,
bonds and Treasury bills as compared to an investment in shares of the Fund as
well as charts or graphs which illustrate strategies such as dollar cost
averaging, and comparisons of hypothetical yields of investment in tax-exempt
versus taxable investments. In addition, advertisements or shareholder
communications may include a discussion of certain attributes or benefits to be
derived by an investment in the Fund. Such advertisements or communications may
include symbols, headlines or other material which highlight or summarize the
information discussed in more detail therein. With proper authorization, the
Fund may reprint articles (or excerpts) written regarding the Fund and provide
them to prospective shareholders. Performance information with respect to the
Fund is generally available by calling 1-800-539-3863.
Investors may also judge, and the Fund may at times advertise, the performance
of Class A or Class B shares by comparing it to the performance of other mutual
funds or mutual fund portfolios with comparable investment objectives and
policies, which performance may be contained in various unmanaged mutual fund or
market indices or rankings such as those prepared by Dow Jones & Co., Inc.,
Standard & Poor's Corporation, Lehman Brothers, Merrill Lynch, and Salomon
Brothers, and in publications issued by Lipper Analytical Services, Inc. and in
the following publications: IBC's Money Fund Reports, Value Line Mutual Fund
Survey, Morningstar, CDA/Wiesenberger, Money Magazine, Forbes, Barron's, The
Wall Street Journal, The New York Times, Business Week, American Banker,
Fortune, Institutional Investor, Ibbotson Associates and U.S.A. Today. In
addition to yield information, general information about the Fund that appears
in a publication such as those mentioned above may also be quoted or reproduced
in advertisements or in reports to shareholders.
Advertisements and sales literature may include discussions of specifics of the
portfolio manager's investment strategy and process, including, but not limited
to, descriptions of security selection and analysis.
Advertisements may also include descriptive information about the investment
adviser, including, but not limited to, its status within the industry, other
services and products it makes available, total assets under management, and its
investment philosophy.
When comparing yield, total return and investment risk of an investment in Class
A or Class B shares of the Fund with other investments, investors should
understand that certain other investments have different risk characteristics
than an investment in shares of the Fund. For example, certificates of deposit
may have fixed rates of return and may be insured as to principal and interest
by the FDIC, while the Fund's returns will fluctuate and its share values and
returns are not guaranteed. Money market accounts offered by banks also may be
insured by the FDIC and may offer stability of principal. U.S. Treasury
securities are guaranteed as to principal and interest by the full faith and
credit of the U.S. government. Money market mutual funds may seek to maintain a
fixed price per share.
- 10 -
<PAGE>
ADDITIONAL PURCHASE, EXCHANGE AND REDEMPTION INFORMATION
The New York Stock Exchange ("NYSE") holiday closing schedule indicated in the
Prospectus under "Share Price" are subject to change.
When the NYSE is closed, or when trading is restricted for any reason other than
its customary weekend or holiday closings, or under emergency circumstances as
determined by the Commission to warrant such action, the Fund's Transfer Agent
will determine the Fund's net asset value at Valuation Time. A Fund's net asset
value may be affected to the extent that its securities are traded on days that
are not Business Days.
The Victory Portfolios has elected, pursuant to Rule 18f-1 under the 1940 Act,
to redeem shares of each Fund solely in cash up to the lesser of $250,000 or 1%
of the net asset value of the Fund during any 90-day for any one shareholder.
The remaining portion of the redemption may be made in securities or other
property, valued for this purpose as they are valued in computing the net asset
value of each class of the Fund. Shareholders receiving securities or other
property on redemption may realize a gain or loss for tax purposes and may incur
additional costs as well as the associated inconveniences of holding and/or
disposing of such securities or other property.
Pursuant to Rule 11a-3 under the 1940 Act, the Fund is required to give
shareholders at least 60 days' notice prior to terminating or modifying the
Fund's exchange privilege. Under the Rule, the 60-day notification requirement
may be waived if (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 Commission or
because it is unable to invest amounts effectively in accordance with its
investment objective and policies.
The Fund reserves the right at any time without prior notice to shareholders to
refuse exchange purchases by any person or group if, in Key Advisers' judgment,
the Fund would be unable to invest effectively in accordance with its investment
objective and policies, or would otherwise potentially be adversely affected.
PURCHASING SHARES
ALTERNATIVE SALES ARRANGEMENTS - CLASS A AND CLASS B SHARES. The alternative
sales arrangements permit an investor to choose the method of purchasing shares
that is more beneficial to the investor depending on the amount of the purchase,
the length of time the investor expects to hold shares and other relevant
circumstances. Investors should understand that the purpose and function of the
deferred sales charge and asset-based sales charge with respect to Class B
shares are the same as those of the initial sales charge with respect to Class A
shares. Any salesperson or other person entitled to receive compensation for
selling Fund shares may receive different compensation with respect to one class
of shares on behalf of a single investor (not including dealer "street name" or
omnibus accounts) because generally it will be more advantageous for that
investor to purchase Class A shares of the Fund instead.
The two classes of shares each represent an interest in the same portfolio
investments of the Fund. However, each class has different shareholder
privileges and features. The net income attributable to Class B shares and the
dividends payable on Class B shares will be reduced by incremental expenses
borne solely by that class, including the asset-based sales charge to which
Class B shares are subject.
CLASS B CONVERSION FEATURE. Ninety-six months after an investor's purchase order
for Class B shares is accepted, such "Matured Class B Shares" automatically will
- 11 -
<PAGE>
convert to Class A shares, on the basis of the relative net asset value of the
two classes, without the imposition of any sales load or other charge. Each time
any Matured Class B shares convert to Class A shares, any Class B shares
acquired by the reinvestment of dividends or distributions on such Matured Class
B shares that are still held will also convert to Class A shares, on the same
basis. The conversion feature is intended to relieve holders of Matured Class B
shares of the asset-based sales charge under the Class B Distribution Plan after
such shares have been outstanding long enough that the Distributor may have been
compensated for distribution expenses related to such shares.
The conversion of Matured Class B shares to Class A shares is subject to the
continuing availability of a private letter ruling from the Internal Revenue
Service, or an opinion of counsel or tax adviser, to the effect that the
conversion of Matured Class B shares does not constitute a taxable event for the
holder under Federal income tax law. If such a revenue ruling or opinion is no
longer available, the automatic conversion feature may be suspended, in which
event no further conversion of Matured Class B shares would occur while such
suspension remained in effect. Although Matured Class B shares could then be
exchanged for Class A shares on the basis of relative net asset value of the two
classes, without the imposition of a sales charge or fee, such exchange could
constitute a taxable event for the holder, and absent such exchange, Class B
shares might continue to be subject to the asset-based sales charge for longer
than six years.
The methodology for calculating the net asset value, dividends and distributions
of the Fund's Class A and Class B shares recognizes two types of expenses.
General expenses that do not pertain specifically to either class are allocated
to the shares of each class, based upon the percentage that the net assets of
such class bears to the Fund's total net assets, and then pro rata to each
outstanding share within a given class. Such general expenses include (1)
management fees, (2) legal, bookkeeping and audit fees, (3) printing and mailing
costs of shareholder reports, prospectuses, statements of additional information
and other materials for current shareholders, (4) fees to the Trustees who are
not affiliated with Key Advisers, (5) custodian expenses, (6) share issuance
costs, (7) organization and start-up costs, (8) interest, taxes and brokerage
commissions, and (9) non-recurring expenses, such as litigation costs. Other
expenses that are directly attributable to a class are allocated equally to each
outstanding share within that class. Such expenses include (1) Rule 12b-1
distribution fees and shareholder servicing fees, (2) incremental transfer and
shareholder servicing agent fees and expenses, (3) registration fees and (4)
shareholder meeting expenses, to the extent that such expenses pertain to a
specific class rather than to the Fund as a whole.
REDUCED SALES CHARGE. Reduced sales charges are available for purchases of
$50,000 or more of Class A shares of the Fund alone or in combination with
purchases of shares of other funds of The Victory Portfolios. To obtain the
reduction of the sales charge, you or your Investment Professional must notify
the Transfer Agent at the time of purchase whenever a quantity discount is
applicable to your purchase.
In addition to investing at one time in any combination of Class A shares of The
Victory Portfolios in an amount entitling you to a reduced sales charge, you may
qualify for a reduction in the sales charge under the following programs:
COMBINED PURCHASES. When you invest in Class A shares of The Victory Portfolios
for several accounts at the same time, you may combine these investments into a
single transaction if purchased through one Investment Professional, and if the
total is $50,000 or more. The following may qualify for this privilege: an
individual, or "company" as defined in Section 2(a)(8) of the 1940 Act; an
individual, spouse, and their children under age 21 purchasing for his, her, or
their own account; a trustee, administrator or other fiduciary purchasing for a
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<PAGE>
single trust estate or single fiduciary account or for a single or a parent-
subsidiary group of "employee benefit plans" (as defined in Section 3(3) of
ERISA); and tax-exempt organizations under Section 501(c)(3) of the Internal
Revenue Code.
RIGHTS OF ACCUMULATION. "Rights of Accumulation" permit reduced sales charges on
future purchases of Class A shares after you have reached a new breakpoint. You
can add the value of existing Victory Portfolios shares held by you, your
spouse, and your children under age 21, determined at the previous day's net
asset value at the close of business, to the amount of your new purchase valued
at the current offering price to determine your reduced sales charge.
LETTER OF INTENT. If you anticipate purchasing $50,000 or more of shares of the
Fund alone or in combination with Class A shares of certain other Victory
Portfolios within a 13-month period, you may obtain shares of the portfolios at
the same reduced sales charge as though the total quantity were invested in one
lump sum, by filing a non-binding Letter of Intent (the "Letter") within 90 days
of the start of the purchases. Each investment you make after signing the Letter
will be entitled to the sales charge applicable to the total investment
indicated in the Letter. For example, a $2,500 purchase toward a $60,000 Letter
would receive the same reduced sales charge as if the $60,000 had been invested
at one time. To ensure that the reduced price will be received on future
purchases, you or your Investment Professional must inform the transfer agent
that the Letter is in effect each time shares are purchased. Neither income
dividends nor capital gain distributions taken in additional shares will apply
toward the completion of the Letter.
You are not obligated to complete the additional purchases contemplated by a
letter. If you do not complete your purchase under the Letter within the
13-month period, your sales charge will be adjusted upward, corresponding to the
amount actually purchased, and if after written notice, you do not pay the
increased sales charge, sufficient escrowed shares will be redeemed to pay such
charge.
If you purchase more than the amount specified in the Letter and qualify for a
further sales charge reduction, the sales charge will be adjusted to reflect
your total purchase at the end of 13 months. Surplus funds will be applied to
the purchase of additional shares at the then current offering price applicable
to the total purchase.
EXCHANGING SHARES
Class A shares of the Fund may be exchanged for shares of any Victory money
market fund or any other fund of The Victory Portfolios with a reduced sales
charge. Shares of any Victory money market fund or any other fund of The Victory
Portfolios with a reduced sales charge may be exchanged for shares of the Fund
upon payment of the difference in the sales charge (or, if applicable, shares of
any Victory money market fund may be used to purchase Class B shares of the
Fund.)
Class B shares of the Fund may be exchanged for shares of other Victory
Portfolios that offer Class B shares. The CDSC applicable to Class B shares is
imposed on Class B shares redeemed within six years of the initial purchase of
the exchanged Class B shares. When Class B shares are redeemed to effect an
exchange, the priorities described in "How to Invest, Exchange and Redeem -
Class B shares" in the Prospectus for the imposition of the Class B CDSC will be
followed in determining the order in which the shares are exchanged.
Shareholders should take into account the effect of any exchange on the
applicability and rate of any CDSC that might be imposed in the subsequent
redemption of remaining shares. Shareholders owning shares of both classes must
specify whether they intend to exchange Class A or Class B shares.
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<PAGE>
REDEEMING SHARES
REINSTATEMENT PRIVILEGE. Within 90 days of a redemption, a shareholder may
reinvest all or part of the redemption proceeds of (1) Class A shares, or (2)
Class B shares that were subject to the Class B CDSC when redeemed, in Class A
shares of the Fund or any of the other Victory Portfolios into which shares of
the Fund are exchangeable as described below, at the net asset value next
computed after receipt by the Transfer Agent of the reinvestment order. No
charge is currently made for reinvestment in shares of the Fund but a
reinvestment in shares of certain other Victory Portfolios is subject to a $5.00
service fee. The shareholder must ask the Distributor for such privilege at the
time of reinvestment. Any capital gain that was realized when the shares were
redeemed is taxable, and reinvestment will not alter any capital gains tax
payable on that gain. If there has been a capital loss on the redemption, some
or all of the loss may not be tax deductible, depending on the timing and amount
of the reinvestment. Under the Internal Revenue Code, as amended (the "IRS
Code"), if the redemption proceeds of Fund shares on which a sales charge was
paid are reinvested in shares of the Fund or another of The Victory Portfolios
within 90 days of payment of the sales charge, the shareholder's basis in the
shares of the Fund that were redeemed may not include the amount of the sales
charge paid. That would reduce the loss or increase the gain recognized from
redemption. The Fund may amend, suspend or cease offering this reinvestment
privilege at any time as to shares redeemed after the date of such amendment,
suspension or cessation. The reinstatement must be into an account bearing the
same registration. This privilege may be exercised only once by a shareholder
with respect to the Fund.
DIVIDENDS AND DISTRIBUTIONS
The Fund ordinarily declares and pays dividends separately for Class A and Class
B shares from its net investment income monthly. The Fund distributes
substantially all of its net investment income and net capital gains, if any, to
shareholders within each calendar year as well as on a fiscal year basis to the
extent required for the Fund to qualify for favorable federal tax treatment.
The amount of a class's distributions may vary from time to time depending on
market conditions, the composition of the Fund's portfolio, and expenses borne
by the Fund or borne separately by the class, as described in "Alternative Sales
Arrangements Class A and Class B," above. Dividends are calculated in the same
manner, at the same time and on the same day for shares of each class. However,
dividends on Class B shares are expected to be lower as a result of the
asset-based sales charge on Class B shares, and Class B dividends will also
differ in amount as a consequence of any difference in net asset value between
Class A and Class B shares.
For this purpose, the net income of the Fund, from the time of the immediately
preceding determination thereof, shall consist of all interest income accrued on
the portfolio assets of the Fund, dividend income, if any, income from
securities loans, if any, and realized capital gains and losses on the Fund's
assets, less all expenses and liabilities of the Fund chargeable against income.
Interest income shall include discount earned, including both original issue and
market discount, on discount paper accrued ratably to the date of maturity.
Expenses, including the compensation payable to Key Advisers are accrued each
day. The expenses and liabilities of the Fund shall include those appropriately
allocable to the Fund as well as a share of the general expenses and liabilities
of The Victory Portfolios in proportion to the Fund's share of the total net
assets of The Victory Portfolios.
- 14 -
<PAGE>
TAXES
Information set forth in the Prospectus and this SAI that relates to federal
taxation is only a summary of certain key federal tax considerations generally
affecting purchasers of share of the Fund. 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 has been made
to present a complete explanation of the federal tax treatment of the Fund or
the implications to the shareholders, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential purchasers of share
of the Fund are urged to consult their tax advisers with specific reference to
their own tax circumstances. In addition, the tax discussion in the Prospectus
and this SAI is based on tax laws in effect on the date of the Prospectus and
this SAI; such laws and regulations may be changed by legislative, judicial, or
administrative action, sometimes with retroactive effect.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
The Fund has elected to be taxed as a regulated investment company under
Subchapter M of the 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 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 Code that are described below. Distributions by the 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
for the taxable year and will therefore satisfy the Distribution Requirement.
If a Fund has a net capital loss (i.e., an excess of capital losses over capital
gains) for any year, the amount thereof may be carried forward up to eight years
and treated as a short-term capital loss which can be used to offset capital
gains in such future years. As of October 31, 1996, the Fund had capital loss
carry forwards of approximately $36,000, $3,898,000 and $2,723,000 which expire
in 2002, 2003 and 2004, respectively. Under Code sections 382 and 383, if the
Fund has an "ownership change," then the Fund's use of its capital loss
carryforwards in any year following the ownership change will be limited to an
amount equal to the net asset value of the Fund immediately prior to the
ownership change multiplied by the long-term tax-exempt rate (which is published
monthly by the Internal Revenue Service (the "IRS")) in effect for the month in
which the ownership change occurs (the rate for February, 1997 is 5.48%). The
Fund will use its best efforts to avoid having an ownership change. However,
because of circumstances which may be beyond the control or knowledge of the
Fund, there can be no assurance that the Fund will not have, or has not already
had, an ownership change. If the Fund has or has had an ownership change, then
any capital gain net income for any year following the ownership change in
excess of the annual limitation on the capital loss carryforwards will have to
be distributed by the Fund and will be taxable to shareholders as described
under "Fund Distributions" below.
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
(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,
-15-
<PAGE>
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. 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 the 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 the 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 such sale or other disposition 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 the 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 while the Fund held the debt obligation.
The Code also treats as ordinary income a portion of the gain recognized in a
transaction where substantially all of the return
realized is attributable to the time value of the Fund's net investment in the
transaction and: (1) the transaction consists of the acquisition of property by
the Fund and a contemporaneous contract to sell substantially identical property
in the future; (2) the transaction is a straddle within the meaning of Section
1092 of the Code; (3) the transaction is one that was marketed or sold to the
Fund on the basis that it would have the economic characteristics of a loan but
the interest-like return would be taxed as capital gain; or (4) the transaction
is described as a conversion transaction in the Treasury Regulations. The amount
of such gain that is treated as ordinary income generally will not exceed the
amount of the interest that would have accrued on the net investment for the
relevant period at a yield equal to 120% of the applicable federal rate, reduced
by the sum of: (1) prior inclusions of ordinary income items from the conversion
transaction and (2) the capitalized interest on acquisition indebtedness under
Code Section 263(g). However, if the Fund has a built-in loss with respect to a
position that becomes a part of a conversion transaction, the character of such
loss will be preserved upon a subsequent disposition or termination of the
position. No authority exists that indicates that the character of the income
treated as ordinary under this rule will not pass through to the Funds'
shareholders.
In general, for purposes of determining whether capital gain or loss recognized
by the Fund on the disposition of an asset is long-term or short-term, the
holding period of the asset may be affected if (1) the asset is used to close a
"short sale" (which includes for certain purposes the acquisition of a put
option) or is substantially identical to another asset so used, or (2) the asset
is otherwise held by the Fund as part of a "straddle." However, for purposes of
the Short-Short Gain Test, the holding period of the asset disposed of may be
reduced only in the case of clause (1) above. In addition, the Fund may be
required to defer the recognition of a loss on the disposition of an asset held
as part of a straddle to the extent of any unrecognized gain on the offsetting
position.
Any gain recognized by the Fund on the lapse of, or any gain or loss recognized
by the Fund from a closing transaction with respect to, an option written by the
Fund will be treated as a short-term capital gain or loss. For purposes of the
Short-Short Gain Test, the holding period of an option written by the Fund will
commence on the date it is written and end on the date it lapses or the date a
closing transaction is entered into. Accordingly, the Fund may be limited in its
ability to write options which expire within three months and to enter into
closing transactions at a gain within three months of the writing of options.
Transactions that may be engaged in by the Fund (such as regulated futures
contracts and options on futures contracts) will be subject to special tax
treatment as "Section 1256 Contracts." Section 1256 Contracts are treated as if
-16-
<PAGE>
they are sold for their fair market value on the last business day of the
taxable year, even though a taxpayer's obligations (or rights) under such
Section 1256 Contracts have not terminated (by delivery, exercise, entering into
a closing transaction, or otherwise) as of such date. Any gain or loss
recognized as a consequence of the year-end deemed disposition of Section 1256
Contracts is taken into account for the taxable year together with any other
gain or loss that was recognized previously upon the termination of Section 1256
Contracts during that taxable year. Any capital gain or loss for the taxable
year with respect to Section 1256 Contracts (including any capital gain or loss
arising as a consequence of the year-end deemed sale of such Section 1256
Contracts) generally is treated as 60% long-term capital gain or loss and 40%
short-term capital gain or loss. The Fund, however, may elect not to have this
special tax treatment apply to Section 1256 Contracts that are part of a "mixed
straddle" with other investments of the Fund that are not Section 1256
Contracts. Treasury Regulations provide that deemed gains arising from Section
1256 contracts will be treated for purposes of the Short-Short Gain Test as
being derived from securities held for not less than three months if the gains
arise as a result of a constructive sale under Code Section 1256.
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 (provided that, with
respect to each issuer, the Fund has not invested more than 5% of the value of
the Fund's total assets in securities of each such issuer and the Fund does not
hold more than 10% of the outstanding voting securities of each 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. Generally, an option (call or put) with respect to a security is
treated as issued by the issuer of the security, not the issuer of the option.
For purposes of asset diversification testing, obligations issued or guaranteed
by certain 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 may 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")). The balance of
-17-
<PAGE>
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.
For purposes of calculating the excise tax, a regulated investment company
reduces its capital gain net income (but not below its net capital gain) by the
amount of any net ordinary loss for the 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. Distributions attributable to interest received by the Fund will not
qualify for the dividend-received deduction. In general, dividends on Class B
shares are expected to be lower than those on Class A shares due to the higher
distribution expenses charged by the Class B shares. Dividends may also differ
between classes as a result of differences in other class specific expenses.
The Fund may either retain or distribute to shareholders its net capital gain
for each taxable year. The Fund currently intends to distribute any such
amounts. If net capital gain is distributed and designated as a capital gain
dividend, it 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 a Fund prior to the date on which the shareholder
acquired his shares.
Conversely, if the Fund elects to retain its net capital gain, the Fund will be
subject to tax thereon (except to the extent of any available capital loss
carryovers) at the 35% corporate tax rate. If the Fund elects to retain its net
capital gain, it is expected that the Fund also will elect to have shareholders
of record on the last day of its taxable year treated as if each received a
distribution of his pro rata share of such gain, with the result that each
shareholder will be required to report his pro rata share of such gain on his
tax return as long-term capital gain, will receive a refundable tax credit for
his pro rata share of tax paid by the Fund on the gain, and will increase the
tax basis for his shares by an amount equal to the deemed distribution less the
tax credit.
Distributions by the Fund that do not constitute ordinary income 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 the sale of his shares, as discussed below.
Distributions by the Fund will be treated in the manner described above
regardless of 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 net
investment income, recognized net capital gain, or unrealized appreciation in
the value of the assets of the Fund, distributions of such amounts will be
taxable to the shareholder in the manner described above, although such
distributions economically constitute a return of capital to the shareholder.
Ordinarily, shareholders are required to take distributions by the Fund into
account in the year in which the distributions are made. However, dividends
-18-
<PAGE>
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 a 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) during the year.
The Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of ordinary income dividends and capital gain dividends, and the
proceeds of redemption of shares, paid to any shareholder (1) who has provided
either an incorrect tax identification number or no number at all, (2) who is
subject to backup withholding for failure to report the receipt of interest or
dividend income properly, or (3) who has failed to certify to the Fund that it
is not subject to backup withholding or is an "exempt recipient" (such as a
corporation).
SALE OR REDEMPTION OF SHARES
A shareholder will recognize gain or loss on the sale or redemption of shares of
a 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 for longer than
one year. However, any capital loss arising from the sale or redemption of
shares held for six months or less 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 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 a noncorporate taxpayer, $3,000 of ordinary income.
If a shareholder (1) incurs a sales load in acquiring shares of the Fund, (2)
disposes of such shares less than 91 days after they are acquired, and (3)
subsequently acquires shares of the Fund or another fund at a reduced sales load
pursuant to a right acquired in connection with the acquisition of the shares
disposed of, then the sales load on the shares disposed of (to the extent of the
reduction in the sales load on the shares subsequently acquired) shall not be
taken into account in determining gain or loss on such shares but shall be
treated as incurred on the acquisition of the subsequently acquired shares.
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 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 carried on by a foreign shareholder, ordinary income dividends paid to
such foreign shareholder will be subject to U.S. withholding tax at the rate of
30% (or lower treaty rate) upon 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 a Fund, capital gain dividends and amounts
retained by the Fund that are designated as undistributed capital gains.
If the income from the Fund is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends, and any gains realized upon 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.
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<PAGE>
In the case of foreign noncorporate shareholders, 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 tax (or taxable at a reduced treaty rate)
unless such shareholders furnish the Fund with proper notification of their
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 Code and the Treasury Regulations issued thereunder as in effect on
the date of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income 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 of these and other state and local tax
rules affecting investment in a Fund.
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 Delaware governing business trusts. There are currently seven
Trustees, six of whom are not "interested persons" of The Victory Portfolios
within the meaning of that term under the 1940 Act ("Independent Trustees"). The
Trustees, in turn, elect the officers of The Victory Portfolios to actively
supervise its day-to-day operations.
The Trustees of The Victory Portfolios, their addresses, ages and their
principal occupations during the past five years are as follows:
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- - --------------------- ---------- -------------------
Leigh A. Wilson,* 52 Trustee and From 1989 to present,
Glenleigh International President Chairman and Chief
Limited Executive Officer,
53 Sylvan Road North Glenleigh International
Westport, CT 06880 Limited; from 1984 to
1989, Chief Executive
Officer, Paribas North
America and Paribas
Corporation; President
and Trustee, the
Victory Funds and the
Key Mutual Funds (the
"KeyFunds).
- - ------------
* Mr. Wilson is deemed to be an "interested person" of The Victory
Portfolios under the 1940 Act solely by reason of his position as
President.
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<PAGE>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- - --------------------- ---------- -------------------
Robert G. Brown, 73 Trustee Retired; from October
5460 N. Ocean Drive 1983 to November 1990,
Singer Island President, Cleveland
Riviera Beach, FL 33404 Advanced Manufacturing
Program (non-profit
corporation engaged in
regional economic
development).
Edward P. Campbell, 47 Trustee From July 1996 to
Nordson Corporation present, President;
28601 Clemens Road from March 1994 to
Westlake, OH 44145 present, Executive Vice
President and Chief
Operating Officer of
Nordson Corporation
(manufacturer of
application equipment)
from May 1988 to March
1994, Vice President
of Nordson Corporation
from 1987 to December
1994, member of the
Supervisory Committee
of Society's Collective
Investment Retirement
Fund; from May 1991 to
August 1994, Trustee,
Financial Reserves Fund
and from May 1993 to
August 1994, Trustee,
Ohio Municipal Money
Market Fund; Trustee,
the Victory Funds and
the KeyFunds.
Dr. Harry Gazelle, 69 Trustee Retired radiologist, Drs
17822 Lake Road Hill and Thomas Corp.;
Lakewood, Ohio 44107 Trustee, the Victory
Funds.
Stanley I. Landgraf, Trustee Retired; currently,
71 Trustee, Rensselaer
41 Traditional Lane Polytechnic Institute;
Loudonville, 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.
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<PAGE>
Position(s) Held
With the Victory Principal Occupation
Name, Address and Age Portfolios During Past 5 Years
- - --------------------- ---------- -------------------
Dr. Thomas F. Morrissey, Trustee 1995 Visiting Scholar,
63 Bond University,
Weatherhead School of Queensland, Australia;
Management Professor, Weatherhead
Case Western Reserve School of Management,
University Case Western Reserve
10900 Euclid Avenue University; from 1989
Cleveland, OH 44106-7235 to 1995, Associate Dean
of Weatherhead School
of Management; from
1987 to December 1994,
Member of the
Supervisory Committee
of Society's Collective
Investment Retirement
Fund; from May 1991 to
August 1994, Trustee,
Financial Reserves Fund
and from May 1993 to
August 1994, Trustee,
Ohio Municipal Money
Market Fund; Trustee,
the Victory Funds.
Dr. H. Patrick Swygert, 53 Trustee President, Howard
Howard University University; formerly
2400 6th Street, N.W. President, State
Suite 320 University of New York
Washington, D.C. 20059 at Albany; formerly,
Executive Vice
President, Temple
University; Trustee,
the Victory Funds.
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 August 1997. 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 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 August 1997. 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
Independent 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, 1996. The Business, Legal and Audit Committee met four times during
the 12 month period ended October 31, 1996.
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<PAGE>
REMUNERATION OF TRUSTEES AND CERTAIN EXECUTIVE OFFICERS.
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). Leigh A.
Wilson receives an annual fee of $33,000 for serving as President and Trustee
for all of the funds of The Victory Portfolios, and an additional per meeting
fee ($3,000 in person and $1,500 per telephonic meeting).
The following table indicates the compensation received by each Trustee from the
Victory "Fund Complex"(1) for the 12 month period ended October 31, 1996.
<TABLE>
<CAPTION>
Estimated Annual Total Total Compensation
Pension or Retirement Benefits Benefits Compensation from Victory
Accrued as Portfolio Expenses Upon Retirement from Fund "Fund Complex" (1)
<S> <C> <C> <C> <C>
Leigh A. Wilson, Trustee....... -0- -0- $217.73 $62,250
Robert G. Brown, Trustee....... -0- -0- 176.72 41,400
Edward P. Campbell, Trustee.... -0- -0- 167.51 50,250
Harry Gazelle, Trustee......... -0- -0- 167.51 39,000
Stanley I. Landgraf, Trustee... -0- -0- 167.51 39,000
Thomas F. Morrissey, Trustee... -0- -0- 167.51 39,000
H. Patrick Swygert, Trustee.... -0- -0- 157.28 36,600
</TABLE>
(1) There are presently 33 mutual funds from which the above-named Trustees
are compensated in the Victory "Fund Complex," but not all of the
above-named Trustees serve on the boards of each fund in the "Fund
Complex."
OFFICERS.
The officers of The Victory Portfolios, their ages, addresses 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, 52 President and Trustee From 1989 to present,
Glenleigh International Chairman and Chief
Ltd. Executive Officer,
53 Sylvan Road North Glenleigh International
Westport, CT 06880 Limited; from 1984 to
1989, Chief Executive
Officer, Paribas North
America and Paribas
Corporation; President
and Trustee of the
Victory Funds and the
KeyFunds.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
POSITION(S) WITH THE PRINCIPAL OCCUPATION
NAME, AGE AND ADDRESS VICTORY PORTFOLIOS DURING PAST 5 YEARS
- - ------------------------------------- ------------------------------------- -------------------------------------
<S> <C> <C>
William B. Blundin, 58 Vice President Senior Vice President of
BISYS Fund Services BISYS Fund Services
125 West 55th Street ("BISYS"); officer of
New York, New York 10019 other investment
companies administered by
BISYS Fund Services;
President and Chief
Executive Officer of
Vista Broker-Dealer
Services, Inc., Emerald
Asset Management, Inc.
and BNY Hamilton
Distributors, Inc.,
registered broker/
dealers.
J. David Huber, 51 Vice President Executive Vice President,
BISYS Fund Services BISYS .
3435 Stelzer Road
Columbus, OH 43219-3035
Scott A. Englehart, 34 Secretary From October 1990 to
BISYS Fund Services present, employee of
3435 Stelzer Road BISYS .
Columbus, OH 43219-3035
George O. Martinez, 38 Assistant Secretary From March 1995 to
BISYS Fund Services present, Senior Vice
3435 Stelzer Road President and Director of
Columbus, OH 43219-3035 Legal and Compliance
Services, BISYS ; from
June 1989 to March 1995,
Vice President and
Associate General
Counsel, Alliance Capital
Management.
Kevin L. Martin , 36 Treasurer From February 1996 to
BISYS Fund Services present, employee of
3435 Stelzer Road BISYS ; from 1994 to
Columbus, OH 43219-3035 February 1996, Senior
Manager, Ernst & Young.
</TABLE>
The mailing address of each of the officers of The Victory Portfolios is 3435
Stelzer Road, Columbus, Ohio 43219-3035.
The officers of The Victory Portfolios (other than Leigh Wilson) receive no
compensation directly from The Victory Portfolios for performing the duties of
their offices. BISYS receives fees from The Victory Portfolios for acting as
Administrator.
As of February 7, 1997, the Trustees and officers as a group owned beneficially
less than 1% of the Fund.
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<PAGE>
ADVISORY AND OTHER CONTRACTS
INVESTMENT ADVISER .
One of the Fund's most important contracts is with its investment adviser, Key
Asset Management Inc. ("KAM" or the "Adviser"), a New York corporation
registered as an investment adviser with the Securities and Exchange Commission.
KAM is a wholly owned subsidiary of KeyBank National Association ("KeyBank"), a
wholly-owned subsidiary of KeyCorp. Effective February 28, 1997, KAM became the
surviving corporation of the reorganization of four indirect investment adviser
subsidiaries of KeyCorp--KeyCorp Mutual Fund Advisers, Inc. ("Key Advisers"),
Society Asset Management, Inc. ("SAM"), Spears, Benzak, Salomon & Farrell, Inc.
("SBSF") and Applied Technologies, Inc. ("ATI"), each registered with the
Securities and Exchange Commission as an investment adviser. Key Advisers, SAM
and ATI were merged with and into SBSF, a New York corporation organized on
February 22, 1972. Pursuant to the terms of the reorganization, SBSF changed its
name to Key Asset Management Inc. SAM, SBSF and ATI will continue to operate
under their existing names as separate divisions of KAM. Affiliates of the
Adviser manage approximately $50 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, 1996, KeyCorp had an asset
base of $65 billion, with banking offices in 26 states from Maine to Alaska, and
trust and investment offices in 16 states. KeyCorp is the resulting entity of a
merger in 1994 of Society Corporation, the bank holding company of which KeyBank
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.
KeyBank is the lead affiliate bank of KeyCorp.
The following schedule lists the advisory fees for each mutual fund that is
advised by the Adviser.
.25 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Institutional Money Market Fund
.35 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Prime Obligations Fund
Victory U.S. Government Obligations Fund
Victory Tax-Free Money Market Fund
.50 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Money Market Fund
Victory Limited Term Income Fund
Victory Government Mortgage Fund
Victory Financial Reserves Fund
Victory Fund for Income
.55 OF 1% OF AVERAGE DAILY NET ASSETS
Victory National Municipal Bond Fund
Victory Government Bond Fund
Victory New York Tax-Free Fund
.60 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Ohio Municipal Bond Fund
Victory Stock Index Fund
.65 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Diversified Stock Fund
-25-
<PAGE>
.75 OF 1% OF AVERAGE DAILY NET ASSETS
Victory Intermediate Income Fund
Victory Investment Quality Bond Fund
Victory Ohio Regional Stock Fund
1.00% OF AVERAGE DAILY NET ASSETS
Victory Balanced Fund
Victory Value Fund
Victory Growth Fund
Victory Special Value Fund
Victory Special Growth Fund
Victory Lakefront Fund (1)
Victory Real Estate Investment Fund
1.10% OF AVERAGE DAILY NET ASSETS
Victory International Growth Fund
- - ------------
(1) Lakefront Capital Investors, Inc. serves as sub-adviser to the Lakefront
Fund. For its services as sub-adviser, KAM pays them sub-advisory fees at
.50% of the Lakefront Fund's average daily net assets.
THE INVESTMENT ADVISORY AGREEMENT.
Unless sooner terminated, the Investment Advisory Agreement between the Adviser
and The Victory Portfolios on behalf of the Fund (the "Investment Advisory
Agreement") provides that it will continue in effect as to the Fund for an
initial two-year term and for consecutive one-year terms thereafter, provided
that such continuance is approved at least annually by The Victory Portfolios'
Trustees or by vote of a majority of the outstanding shares of the Fund (as
defined under "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 the Adviser. 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 the Adviser 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 its duties
and obligations thereunder.
Key Trust Company, an affiliate of Society, served as the investment adviser of
the Predecessor Fund. For the period May 3, 1993 to April 30, 1994, Key Trust
Company earned fees of $380,730, all of which was voluntarily waived by Key
Trust Company. For the fiscal year ended April 30, 1995, Key Trust Company
received fees of $608,134 before voluntary waiver of $317,598. For the fiscal
period ended October 31, 1995, the Adviser earned investment advisory fees of
$120,425 after fee reductions of $35,976. For the fiscal year ended October 31,
1996, the Adviser earned investment advisory fees of $85,384 after fee
reductions of $65,095.
Under the Investment Advisory Agreement, the Adviser may delegate a portion of
its responsibilities to a sub-adviser. In addition, the Investment Advisory
Agreement provides that the Advisers may render services through its own
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<PAGE>
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 the Adviser.
GLASS-STEAGALL ACT.
In 1971 the United States Supreme Court held in Investment Company Institute v.
Camp that the federal statute commonly referred to as the Glass-Steagall Act
prohibits a national bank from operating a fund for the collective investment of
managing agency accounts. Subsequently, the Board of Governors of the Federal
Reserve System (the "Board") issued a regulation and interpretation to the
effect that the Glass-Steagall Act and such decision: (a) forbid a bank holding
company registered under the Federal Bank Holding Company Act of 1956 (the
"Holding Company Act") or any non-bank affiliate thereof from sponsoring,
organizing, or controlling a registered, open-end investment company
continuously engaged in the issuance of its shares, but (b) do not prohibit such
a holding company or affiliate from acting as investment adviser, transfer
agent, and custodian to such an investment company. In 1981 the United States
Supreme Court held in Board of Governors of the Federal Reserve System v.
Investment Company Institute that the Board did not exceed its authority under
the Holding Company Act when it adopted its regulation and interpretation
authorizing bank holding companies and their non-bank affiliates to act as
investment advisers to registered closed-end investment companies. In the Board
of Governors case, the Supreme Court also stated that if a national bank
complied with the restrictions imposed by the Board in its regulation and
interpretation authorizing bank holding companies and their non-bank affiliates
to act as investment advisers to investment companies, a national bank
performing investment advisory services for an investment company would not
violate the Glass-Steagall Act.
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., the Adviser including, but not
limited to, (1) descriptions of the operations of Key Trust Company of Ohio,
N.A., the Adviser; (2) descriptions of certain personnel and their functions;
and (3) statistics and rankings related to the operations of the Trust Company
of Ohio, N.A., the Adviser.
PORTFOLIO TRANSACTIONS.
Pursuant to the Investment Advisory Agreement , the Adviser determines, subject
to the general supervision of the Trustees of The Victory Portfolios, and in
accordance with each Fund's investment objective and restrictions, which
securities are to be purchased and sold by the Fund, and which brokers are to be
eligible to execute its portfolio transactions. Purchases from underwriters
and/or broker-dealers of portfolio securities include a commission or concession
paid by the issuer to the underwriter and/or broker-dealer and purchases from
dealers serving as market makers may include the spread between the bid and
asked price. While the Adviser generally seek competitive spreads or
commissions, the Fund may not necessarily pay the lowest spread or commissions,
available on each transaction, for reasons discussed below.
Allocation of transactions to dealers is determined by the Adviser in its best
judgment and in a manner deemed fair and reasonable to shareholders. The primary
consideration is prompt execution of orders in an effective manner at the most
favorable price. Subject to this consideration, dealers who provide supplemental
investment research to the Adviser may receive orders for transactions by The
Victory Portfolios. Information so received is in addition to and not in lieu of
services required to be performed by the Adviser and does not reduce the
investment advisory fees payable to the Adviser by the Fund. Such information
may be useful to the Adviser in serving both The Victory Portfolios and other
clients and, conversely, such supplemental research information obtained by the
placement of orders on behalf of other clients may be useful to the Adviser in
carrying out its obligations to The Victory Portfolios. In the future, the
Trustees may also authorize the allocation of brokerage to affiliated
broker-dealers on an agency basis to effect portfolio transactions. In such
event, the Trustees will adopt procedures incorporating the standards of Rule
17e-1 of the 1940 Act, which require that the commission paid to affiliated
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<PAGE>
broker-dealers must be reasonable and fair compared to the commission, fee or
other remuneration received, or to be received, by other brokers in connection
with comparable transactions involving similar securities during a comparable
period of time. At times, the Fund may also purchase portfolio securities
directly from dealers acting as principals, underwriters or market makers. As
these transactions are usually conducted on a net basis, no brokerage
commissions are paid by the Fund.
The Victory Portfolios will not execute portfolio transactions through, acquire
portfolio securities issued by, make savings deposits in, or enter into
repurchase or reverse repurchase agreements with the Adviser, Key Trust Company
of Ohio, N.A. ("Key Trust") or their affiliates or BISYS or its affiliates, and
will not give preference to Key Trust Company of Ohio, N.A.'s correspondent
banks or affiliates, or BISYS with respect to such transactions, securities,
savings deposits, repurchase agreements, and reverse repurchase agreements.
Investment decisions for the Fund are made independently from those made for the
other funds of The Victory Portfolios or any other investment company or account
managed by the Adviser. Such other funds, investment companies or accounts may
also invest in the securities in which the Fund invests. When a purchase or sale
of the same security is made at substantially the same time on behalf of the
Fund and another fund, investment company or account, the transaction will be
averaged as to price, and available investments allocated as to amount, in a
manner which the Adviser believes to be equitable to the Fund and such other
fund, investment company or account. In some instances, this investment
procedure may affect the price paid or received by the Fund or the size of the
position obtained by the Fund in an adverse manner relative to the result that
would have been obtained if only the Fund had participated in or been allocated
such trades. To the extent permitted by law, the Adviser may aggregate the
securities to be sold or purchased for the Fund with those to be sold or
purchased for the other funds of The Victory Portfolios or for other investment
companies or accounts in order to obtain best execution. In making investment
recommendations for The Victory Portfolios, the 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 the Adviser, its parents or subsidiaries or
affiliates and, in dealing with their commercial customers, the Adviser, its
parents, subsidiaries, and affiliates will not inquire or take into
consideration whether securities of such customers are held by The Victory
Portfolios.
In the year ended April 30, 1995, the fiscal period ended October 31, 1995 and
the fiscal year ended October 31, 1996, the Fund paid $0, $0 and $0,
respectively, in brokerage commissions.
PORTFOLIO TURNOVER.
The turnover rate stated in the Prospectus for the Fund's investment portfolio
is calculated by dividing the lesser of the Fund's purchases or sales of
portfolio securities for the year by the monthly average value of the portfolio
securities. The calculation excludes all securities whose maturities, at the
time of acquisition, were one year or less. In the fiscal year ended October 31,
1996, the six months ended October 31, 1995 and the year ended April 30, 1995,
the Fund's portfolio turnover rates were 378%, 69% and 127%, respectively.
ADMINISTRATOR.
BISYS serves as administrator (the "Administrator") to the Fund. The
Administrator assists in supervising all operations of the Fund (other than
those performed by the Adviser under the Investment Advisory Agreement ).
BISYS 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
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<PAGE>
the Fund's average daily net assets. BISYS 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.
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
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 BISYS 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
negligence in the performance of its duties, or from the reckless disregard by
it of its obligations and duties thereunder.
Under the Administration Agreement, BISYS 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, BISYS may delegate all or any part of its
responsibilities thereunder. Until July 1, 1994 Fidelity Distributors
Corporation, 82 Devonshire Street, Boston, Massachusetts 02109, was the
Administrator and Distributor to the Predecessor Fund under separate
Administration and General Distribution Agreements. For the period May 3, 1993
to April 30, 1994, Fidelity Distributors Corporation earned $103,835 from the
Predecessor Fund for services rendered to the Victory Funds pursuant to the
Administration Agreement. During the same period, Fidelity Distributors
Corporation voluntarily reimbursed $17,404 in fees and expenses to the
Predecessor Fund. For the fiscal year ended April 30, 1995, the Fund paid
$165,855 in administration fees of which Fidelity Distributors Corporation
earned $30,762 and Concord Holding Corp. ("CHC") (the predecessor of BISYS)
earned $135,093. During the same period, fees and expenses of $0 were reimbursed
to the Fund. In the fiscal period ended October 31, 1995 and the fiscal year
ended October 31, 1996, the Administrator earned aggregate administration fees
of $39,816 and $41,078 after fee reductions of $2,839 and $0, respectively.
DISTRIBUTOR.
BISYS Fund Services serves as distributor (the "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 (1) by the Trustees or by the vote of a majority of
the outstanding shares of the Fund, and (2) 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 under the 1940 Act.
For The Victory Portfolios' fiscal period ended October 31, 1994 Winsbury earned
$212,021, in underwriting commissions, and retained $15; for the fiscal period
ended October 31, 1995 and the fiscal year ended October 31, 1996, the
Distributor earned $721,000 and $828,000 in underwriting commissions, and
retained $107,000 and 78,000, respectively.
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<PAGE>
TRANSFER AGENT.
State Street Bank and Trust Company ("State Street") serves as transfer agent
for the Fund. Boston Financial Data Services, Inc. ("BFDS") serves as dividend
disbursing agent and shareholder servicing agent for the Fund, pursuant to a
Transfer Agency and Service Agreement. Under its agreement with The Victory
Portfolios, State Street has agreed (1) to issue and redeem shares of The
Victory Portfolios; (2) 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; (3)
to respond to correspondence or inquiries by shareholders and others relating to
its duties; (4) to maintain shareholder accounts and certain sub-accounts; and
(5) to make periodic reports to the Trustees concerning The Victory Portfolios'
operations.
SHAREHOLDER SERVICING PLAN.
Payments made under the Shareholder Servicing Plan to Shareholder Servicing
Agents (which may include affiliates of the Adviser) are for administrative
support services to customers who may from time to time beneficially own shares,
which services may include: (1) aggregating and processing purchase and
redemption requests for shares from customers and transmitting promptly net
purchase and redemption orders to our distributor or transfer agent; (2)
providing customers with a service that invests the assets of their accounts in
shares pursuant to specific or pre-authorized instructions; (3) processing
dividend and distribution payments on behalf of customers; (4) providing
information periodically to customers showing their positions in shares; (5)
arranging for bank wires; (6) responding to customer inquiries; (7) providing
subaccounting with respect to shares beneficially owned by customers or
providing the information to the Fund as necessary for subaccounting; (8) 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; (9) forwarding to customers proxy
statements and proxies containing any proposals regarding this Plan; and (10)
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.
CLASS A SHARES DISTRIBUTION PLAN.
The Victory Portfolios, on behalf of the Class A shares of the Fund, has adopted
a Distribution and Service Plan ("Plan") for the Fund under Rule 12b-1 under the
Investment Company Act of 1940 (the "1940 Act"). No separate payments are
authorized to be made by the Fund under the Plan. Rather, the Plan recognizes
that the Adviser or the Distributor may use of its fee revenues, or other
resources to pay expenses associated with activities primarily intended to
result in the sale of the shares of the Fund. The Plan also provides that the
Adviser or the Distributor may make payments from these sources to third
parties, including affiliates, such as banks or broker-dealers, that engage in
the sale of the shares of a Fund. See "Investment Adviser" with respect to
certain prohibitions under the Glass-Steagall Act.
The Plan specifically recognizes that the Adviser or the Distributor, directly
or through an affiliate, may use its fee revenue, past profits, or other
resources, without limitation, to pay promotional and administrative expenses in
connection with the offer and sale of shares of the Funds. In addition, the Plan
provides that the Adviser and the Distributor may use their respective
resources, including fee revenues, to make payments to third parties that
provide assistance in selling the Funds' shares, or to third parties, including
banks, that render shareholder support services.
CLASS B SHARES DISTRIBUTION PLAN.
The Victory Portfolios has adopted a Distribution Plan for Class B shares of the
Fund under Rule 12b-1 of the 1940 Act.
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<PAGE>
The Distribution Plan adopted by the Trustees with respect to the Class B shares
of the Fund provides that the Fund will pay the Distributor a distribution fee
under the Plan at the annual rate of 0.75% of the average daily net assets of
the Fund attributable to the Class B shares. The distribution fees may be used
by the Distributor for: (a) costs of printing and distributing the Fund's
prospectus, statement of additional information and reports to prospective
investors in the Fund; (b) costs involved in preparing, printing and
distributing sales literature pertaining to the Fund; (c) an allocation of
overhead and other branch office distribution-related expenses of the
Distributor; (d) payments to persons who provide support services in connection
with the distribution of the Fund's Class B shares, including but not limited
to, office space and equipment, telephone facilities, answering routine
inquiries regarding the Fund, processing shareholder transactions and providing
any other shareholder services not otherwise provided by The Victory Portfolios'
transfer agent; (e) accruals for interest on the amount of the foregoing
expenses that exceed the distribution fee and the CDSCs received by the
Distributor; and (f) any other expense primarily intended to result in the sale
of the Fund's Class B shares, including, without limitation, payments to
salesmen and selling dealers at the time of the sale of Class B shares, if
applicable, and continuing fees to each such salesmen and selling dealers, which
fee shall begin to accrue immediately after the sale of such shares.
The amount of the Distribution Fees payable by any Fund under the Distribution
Plan is not related directly to expenses incurred by the Distributor and the
Distribution Plan does not obligate the Fund to reimburse the Distributor for
such expenses. The Distribution Fees set forth in the Distribution Plan will be
paid by the Fund to the Distributor unless and until the Plan is terminated or
not renewed with respect to the Fund; any distribution or service expenses
incurred by the Distributor on behalf of the Fund in excess of payments of the
Distribution Fees specified above which the Distributor has accrued through the
termination date are the sole responsibility and liability of the Distributor
and not an obligation of the Fund.
The Distribution Plan for the Class B shares specifically recognizes that either
the Adviser or the Distributor, directly or through an affiliate, may use its
fee revenue, past profits, or other resources, without limitation, to pay
promotional and administrative expenses in connection with the offer and sale of
shares of the Fund. In addition, the Plan provides that the Adviser and the
Distributor may use its respective resources, including fee revenues, to make
payments to third parties that provide assistance in selling the Fund's Class B
shares, or to third parties, including banks, that render shareholder support
services.
The Distribution Plan was approved by the Trustees, including the Independent
Trustees, at a meeting called for that purpose. As required by Rule 12b-1, 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 Class B
shareholders. To the extent that the Plan gives the Adviser or the Distributor
greater flexibility in connection with the distribution of Class B shares of the
Fund, additional sales of the Fund's Class B shares may result. Additionally,
certain Class B shareholder support services may be provided more effectively
under the Plan by local entities with whom shareholders have other
relationships.
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 , Inc. ("BISYS, Inc.") calculates the Fund's net asset value,
the dividend and capital gain distribution, if any, and the yield. BISYS , 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 , 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
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<PAGE>
$100 million of the Fund's daily average net assets, and .01% of the Fund's
remaining daily average net assets. These annual fees are subject to a minimum
monthly assets charge of $2,500 per taxable fund, and does 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 April 30, 1994
and the fiscal year ended April 30, 1995, the Fund paid fees of $40,881 and
$41,053, respectively. For the period ended October 31, 1995 and the fiscal year
ended October 31, 1996 , the Fund Accountant earned fund accounting fees of
$29,165 and $33,184.
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 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.
INDEPENDENT ACCOUNTANTS.
The audited financial statements of The Victory Portfolios for the fiscal year
and October 31, 1996 are incorporated by reference herein. The audited financial
statements for the fiscal year ended October 31, 1996 have been audited by
Coopers and Lybrand L.L.P. as set forth in their report incorporated by
reference herein, and are included in reliance upon such report and on the
authority of such firm as experts in auditing and accounting. 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 & Frankel, 919 Third Avenue, New York, New York 10022 is
the counsel to The Victory Portfolios.
EXPENSES.
The Fund bears the following expenses relating to its operations: taxes,
interest, brokerage fees and commissions, fees of the Trustees, 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, the Adviser or
the Administrator will waive its fees to the extent such excess expenses exceed
such expense limitation in proportion to its respective fees. As of the date of
this Statement of Additional Information, the most restrictive expense
limitation applicable to the Fund limits its aggregate annual expenses,
including management and advisory fees but excluding interest, taxes, brokerage
commissions, and certain other expenses, to 2.5% of the first $30 million of its
average net assets, 2.0% of the next $70 million of its average net assets, and
1.5% of its remaining average net assets. Any expenses to be borne by Key
Adviser or the Administrator will be estimated daily and reconciled and paid on
a monthly basis.
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Fees imposed upon customer accounts by the 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.
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES.
The Victory Portfolios (sometimes referred to as the "Trust") is a Delaware
business trust. The Delaware Trust Instrument and Declaration of Trust authorize
the Trustees to issue an unlimited number of shares, which are units of
beneficial interest, without par value. The Victory Portfolios presently has
twenty- six series of shares, which represent interests in the U.S. Government
Obligations Fund, the Prime Obligations Fund, the Tax-Free Money Market Fund,
the Balanced Fund, the Stock Index Fund, the Value Fund, the Diversified Stock
Fund, the Growth Fund, the Special Value Fund, the Special Growth Fund, the Ohio
Regional Stock Fund, the International Growth Fund, the Limited Term Income
Fund, the Government Mortgage Fund, the Ohio Municipal Bond Fund, the
Intermediate Income Fund, the Investment Quality Bond Fund, the 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
, the Ohio Municipal Money Market Fund, the Lakefront Fund, and the Real Estate
Investment Fund, respectively. The Victory Portfolios' Trust Instrument
authorizes the Trustees to divide or redivide any unissued shares of The Victory
Portfolios into one or more additional series by setting or changing in any one
or more aspects 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 The Victory Portfolios, of
any general assets not belonging to any particular fund which are available for
distribution.
As of February 7, 1997, the Fund believes that Key Trust of Cleveland was
shareholder of record of 91.5% of the outstanding Class A shares of the Fund,
but did not hold such shares beneficially.
The following shareholders beneficially owned 5% or more of the outstanding
Class B shares of the Fund as of February 7, 1997:
Number of Shares Outstanding % of Shares Outstanding
---------------------------- -----------------------
JC Rhodes 26,179.997 16.6%
c/o Indiana Masonic
Home
690 State Street
Franklin, IN 46131
Jessica Lattimore TTEE 16,867.687 10.8%
Jennifer Lattimore TR
152 Rear Brunswick Rd
Troy, NY 12180
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Shares of The Victory Portfolios are entitled to one vote per share (with
proportional voting for fractional shares) on such matters as shareholders are
entitled to vote. Shareholders vote as a single class on all matters except (1)
when required by the 1940 Act, shares shall be voted by individual series, and
(2) when the Trustees have determined that the matter affects only the interests
of one or more series, then only shareholders of such series shall be entitled
to vote thereon. 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 a net asset value of at least $25,000 or constituting 1%
of the outstanding shares) stating that such shareholders wish to communicate
with the other shareholders for the purpose of obtaining the signatures
necessary to demand a meeting to consider removal of a Trustee, The Victory
Portfolios will provide a list of shareholders or disseminate appropriate
materials (at the expense of the requesting shareholders). Except as set forth
above, the Trustees shall continue to hold office and may appoint their
successors.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
to the holders of the outstanding voting securities of an investment company
such as The Victory Portfolios shall not be deemed to have been effectively
acted upon unless approved by the holders of a majority of the outstanding
shares of each fund of The Victory Portfolios affected by the matter. For
purposes of determining whether the approval of a majority of the outstanding
shares of a fund will be required in connection with a matter, a fund will be
deemed to be affected by a matter unless it is clear that the interests of each
fund in the matter are identical, or that the matter does not affect any
interest of the fund. Under Rule 18f-2, the approval of an investment advisory
agreement or any change in investment policy would be effectively acted upon
with respect to a fund only if approved by a majority of the outstanding shares
of such fund. However, Rule 18f-2 also provides that the ratification of
independent public accountants, the approval of principal underwriting
contracts, and the election of Trustees may be effectively acted upon by
shareholders of all of The Victory Portfolios voting without regard to series.
SHAREHOLDER AND TRUSTEE LIABILITY.
The Victory Portfolios is organized as 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
shareholders of Delaware corporations and the Delaware Trust Instrument provides
that shareholders of The Victory Portfolios shall not be liable for the
obligations of The Victory Portfolios. The Delaware Trust Instrument also
provides for indemnification out of the trust property of any shareholder held
personally liable solely by reason of his or her being or having been a
shareholder. The Delaware Trust Instrument also provides that The Victory
Portfolios shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of The Victory Portfolios, and shall
satisfy any judgment thereon. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is considered to be extremely
remote.
The Delaware Trust Instrument states further that no Trustee, officer, or agent
of The Victory Portfolios shall be personally liable in connection with the
administration or preservation of the assets of the funds or the conduct of The
Victory Portfolios' business; nor shall any Trustee, officer, or agent be
personally liable to any person for any action or failure to act except for his
own bad faith, willful misfeasance, gross negligence, or reckless disregard of
his duties. The Declaration of Trust also provides that all persons having any
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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 Trustees. The Trustees may allocate such general
assets in any manner they deem fair and equitable. It is anticipated that the
factor 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 each respective fund at the time of allocation. Assets belonging to a
particular fund are charged with the direct liabilities and expenses in respect
of that fund, and with a share of the general liabilities and expenses of each
of the funds not readily identified as belonging to a particular fund, which 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 and
will be in accordance with generally accepted accounting principles.
Determinations by the Trustees 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" 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
Victory Portfolios or such 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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APPENDIX
DESCRIPTION OF SECURITY RATINGS.
The nationally recognized statistical rating organizations (individually, an
"NRSRO") that may be utilized by Key Adviser with regard to portfolio
investments for the Funds include Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Corporation ("S&P"), Duff & Phelps, Inc. ("Duff"), Fitch
Investors Service, Inc. ("Fitch"), IBCA Limited and its affiliate, IBCA Inc.
(collectively, "IBCA"), and Thomson BankWatch, Inc. ("Thomson"). Set forth below
is a description of the relevant ratings of each such NRSRO. The NRSROs that may
be utilized by Key Adviser and the description of each NRSRO's ratings is as of
the date of this Statement of Additional Information, and may subsequently
change.
LONG-TERM DEBT RATINGS (may be assigned, for example, to corporate and municipal
bonds).
Description of the five highest long-term debt ratings by Moody's (Moody's
applies numerical modifiers (e.g., 1, 2, and 3) in each rating category to
indicate the security's ranking within the category):
Aaa. Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa. Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements - their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times in the future. Uncertainty of position
characterizes bonds in this class.
Description of the five highest long-term debt ratings by S&P (S&P may apply a
plus (+) or minus (-) to a particular rating classification to show relative
standing within that classification):
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
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BBB. Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB. Debt rated BB is regarded, on balance, as predominately speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposure to adverse conditions.
Description of the three highest long-term debt ratings by Duff:
AAA. Highest credit quality. The risk factors are negligible being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-. High credit quality Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A+. Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
Description of the three highest long-term debt ratings by Fitch (plus or minus
signs are used with a rating symbol to indicate the relative position of the
credit within the rating category):
AAA. Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA. Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA." Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issues is generally rated "[-]+."
A. Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
IBCA's description of its three highest long-term debt ratings:
AAA. Obligations for which there is the lowest expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial. Adverse
changes in business, economic or financial conditions are unlikely to increase
investment risk significantly.
AA. Obligations for which there is a very low expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial. Adverse
changes in business, economic, or financial conditions may increase investment
risk albeit not very significantly.
A. Obligations for which there is a low expectation of investment risk. Capacity
for timely repayment of principal and interest is strong, although adverse
changes in business, economic or financial conditions may lead to increased
investment risk.
SHORT-TERM DEBT RATINGS (may be assigned, for example, to commercial paper,
master demand notes, bank instruments, and letters of credit).
Moody's description of its three highest short-term debt ratings:
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Prime-1. Issuers rated Prime-1 (or supporting institutions) have a superior
capacity for repayment of senior short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by many of the following
characteristics:
- - - Leading market positions in well-established industries.
- - - High rates of return on funds employed.
- - - Conservative capitalization structures with moderate reliance on debt and
ample asset protection.
- - - Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- - - Well-established access to a range of financial markets and assured sources
of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a strong
capacity for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
S&P's description of its three highest short-term debt ratings:
A-1. This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to have extremely strong safety
characteristics are denoted with a plus sign (+).
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
A-3. Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
Duff's description of its five highest short-term debt ratings (Duff
incorporates gradations of "1+" (one plus) and "1-" (one minus) to assist
investors in recognizing quality differences within the highest rating
category):
Duff 1+. Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S. Treasury short-term
obligations.
Duff 1. Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
Duff 1-. High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
Duff 2. Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
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Duff 3. Satisfactory liquidity and other protection factors qualify issue as to
investment grade.
Risk factors are larger and subject to more variation. Nevertheless, timely
payment is expected.
Fitch's description of its four highest short-term debt ratings:
F-1+. Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1. Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
F-2. Good Credit Quality. Issues assigned this rating have a satisfactory degree
of assurance for timely payment, but the margin of safety is not as great as for
issues assigned F-1+ or F-1 ratings.
F-3. Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate, however,
near-term adverse changes could cause these securities to be rated below
investment grade.
IBCA's description of its three highest short-term debt ratings:
A+. Obligations supported by the highest capacity for timely repayment.
A1. Obligations supported by a very strong capacity for timely repayment.
A2. Obligations supported by a strong capacity for timely repayment, although
such capacity may be susceptible to adverse changes in business, economic or
financial conditions.
SHORT-TERM LOAN/MUNICIPAL NOTE RATINGS
Moody's description of its two highest short-term loan/municipal note ratings:
MIG-1/VMIG-1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG-2/VMIG-2. This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
S&P's description of its two highest municipal note ratings:
SP-1. Very strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics will be given a plus
(+) designation.
SP-2. Satisfactory capacity to pay principal and interest.
SHORT-TERM DEBT RATINGS
Thomson BankWatch, Inc. ("TBW") ratings are based upon a qualitative and
quantitative analysis of all segments of the organization including, where
applicable, holding company and operating subsidiaries. BankWatch Ratings do not
constitute a recommendation to buy or sell securities of any of these companies.
Further, BankWatch does not suggest specific investment criteria for individual
clients.
The TBW Short-Term Ratings apply to commercial paper, other senior short-term
obligations and deposit obligations of the entities to which the rating has been
assigned.
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The TBW Short-Term Ratings apply only to unsecured instruments that have a
maturity of one year or less. The TBW Short-Term Ratings specifically assess the
likelihood of an untimely payment of principal or interest.
TBW-1. The highest category; indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
TBW-2. The second highest category; while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1."
TBW-3. The lowest investment grade category; indicates that while more
susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and interest in a
timely fashion is considered adequate.
TBW-4. The lowest rating category; this rating is regarded as non-investment
grade and therefore speculative.
DEFINITIONS OF CERTAIN MONEY MARKET INSTRUMENTS
Commercial Paper
Commercial paper consists of unsecured promissory notes issued by corporations.
Issues of commercial paper normally have maturities of less than nine months and
fixed rates of return.
Certificates of Deposit
Certificates of Deposit are negotiable certificates issued against funds
deposited in a commercial bank or a savings and loan association for a definite
period of time and earning a specified return.
Bankers' Acceptances
Bankers' acceptances are negotiable drafts or bills of exchange, normally drawn
by an importer or exporter to pay for specific merchandise, which are "accepted"
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity.
U.S. Treasury Obligations
U.S. Treasury Obligations are obligations issued or guaranteed as to payment of
principal and interest by the full faith and credit of the U.S. Government.
These obligations may include Treasury bills, notes and bonds, and issues of
agencies and instrumentalities of the U.S. Government, provided such obligations
are guaranteed as to payment of principal and interest by the full faith and
credit of the U.S. Government.
U.S. Government Agency and Instrumentality Obligations
Obligations issued by agencies and instrumentalities of the U.S. Government
include such agencies and instrumentalities as the Government National Mortgage
Association, the Export-Import Bank of the United States, the Tennessee Valley
Authority, the Farmers Home Administration, the Federal Home Loan Banks, the
Federal Intermediate Credit Banks, the Federal Farm Credit Banks, the Federal
Land Banks, the Federal Housing Administration, the Federal National Mortgage
Association, the Federal Home Loan Mortgage Corporation, and the Student Loan
Marketing Association. Some of these obligations, such as those of the
Government National Mortgage Association are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Export-Import Bank of
the United States, are supported by the right of the issuer to borrow from the
Treasury; others, such as those of the Federal National Mortgage Association,
are supported by the discretionary authority of the U.S. Government to purchase
the
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agency's obligations; still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored instrumentalities if it is not obligated to do so
by law. A Fund will invest in the obligations of such instrumentalities only
when the investment adviser believes that the credit risk with respect to the
instrumentality is minimal.
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