THE VICTORY GOVERNMENT BOND FUND
SEMIANNUAL
REPORT
APRIL 30,
1997
Victory Funds(R)
Letter to
Shareholders
I'm pleased to present the Victory Government Bond Fund's semiannual
report for the period ended April 30, 1997. On May 16, 1997 Government
Bond Fund shareholders approved the merger of the Fund with the Victory
Investment Quality Bond Fund. This merger was completed on June 13.
We expect that this merger will provide the benefits of an investment
in a larger portfolio--lower operating expenses, greater diversification
and investment flexibility.
Please refer to the Victory consolidated semiannual report for information
on the Investment Quality Bond Fund. Thank you for your continued investment
and confidence in Victory.
Sincerely,
/s/ Leigh A. Wilson
Leigh A. Wilson
President
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Shareholder Letter 2
Investment Review and Outlook 3
Schedule of Investments 4
Statement of Assets and Liabilities 5
Statement of Operations 6
Statement of Changes in Net Assets 7
Notes to Financial Statements 8
Financial Highlights 11
</TABLE>
NOT FDIC INSURED
Shares of The Victory Funds are not deposits or other obligations of, or
guaranteed by, any KeyCorp bank, Key Asset Management Inc., or their
affiliates, and are subject to investment risks, including possible loss
of the principal amount invested.
Key Asset Management Inc. (KAM), is the investment adviser to The
Victory Portfolios ("The Victory Funds"). The Victory Funds are sponsored
and distributed by BISYS Fund Services, which is not affiliated with
KeyCorp or its subsidiaries. KAM receives a fee for its services from The
Victory Funds.
This report is not authorized for distribution to prospective investors
unless preceded or accompanied by a current prospectus for The Victory Funds.
Investment
Review and
Outlook
1997 began with some trepidation among fund managers, whose overriding
concern was, "How long will this scenario of low inflation and high
employment last?" The Federal Reserve Board, which sets monetary policy,
seemed to share this concern when it raised the Federal Funds rate by a
quarter of a percentage point in March. This move was deemed "anticipatory"
because visible signs of inflation had not yet kicked in.
The market is concerned about inflation and the resultant impact on
interest rates because this affects the value of the future stream
of cash flows. For now this concern has been lulled by recent economic
reports that indicate that inflation has not yet become a major problem.
Of these, perhaps the most important was the employment cost index
(released April 29) which revealed no appreciable acceleration in
wages and salaries, despite the tightest labor market in some years.
Thus, despite the strong GDP growth rate of 5.8% in the first quarter
of 1997, the Federal Reserve Board left interest rates unchanged at
its subsequent meeting on May 20. The support for this move came in
the form of retail sales, which slipped in April, and factory production,
which declined for the first time in more than a year. As of April,
producer prices had also fallen for four months in a row. On the flip
side, the unemployment rate -- the percentage of labor force that cannot
find work -- is at a 30 year low, well below the "natural" rate that economists
consider sustainable without inflation.
Business cycles -- alternate periods of boom and recessions--have been
an inevitable feature of the economy. Given the fact that the current
business expansion has completed its sixth year, and is one of the
longest on record, it is natural for the financial markets to feel
some anxiety. Improved inventory management by companies and more
effective monetary policy by the Fed are possibly stretching out the
current period of expansion. The primary source of current economic
strength is consumer spending, which is being fueled by a strong labor
market and rising income levels. But some of this current strength in
spending is being borrowed from the future, and therefore it is likely that
the second half of 1997 will see activity slowing to a more sustainable pace.
/s/ Charlie Crane
Charlie Crane, Chief Market Strategist May 30, 1997
Key Asset Management Inc.
<TABLE>
The Victory Portfolios Schedule of Investments
Government Bond Fund April 30, 1997
(Amounts in Thousands) (Unaudited)
<CAPTION>
Principal Amortized
Amount Security Description Cost
<S> <C> <C>
Commercial Paper (2.2%):
Financial Services (2.2%):
$ 452 General Electric Capital Corp.,
5.62%, 5/1/97 $ 452
Total Commercial Paper 452
U.S. Treasury Notes (70.3%):
2,700 7.25%, 2/15/98 2,727
5,750 6.25%, 7/31/98 5,762
2,000 6.00%, 8/15/99 1,986
3,000 6.13%, 9/30/00 2,968
1,000 7.00%, 7/15/06 1,016
Total U.S. Treasury Notes 14,459
U.S. Treasury Bonds (26.2%):
3,500 6.25%, 8/15/23 3,168
2,300 6.75%, 8/15/26 2,225
Total U.S. Treasury Bonds 5,393
Total (Cost $20,441)<F1> $20,304
Percentages indicated are based on net assets of $20,561.
<FN>
<F1> Represents cost for federal income tax purposes and differs
from value by net unrealized depreciation of securities as follows:
Unrealized appreciation $ 12
Unrealized depreciation (149)
Net unrealized depreciation $(137)
</TABLE>
See notes to financial statements.
<TABLE>
The Victory Portfolios Statement of Assets and Liabilities
Government Bond Fund April 30, 1997
(Amounts in Thousands, Except Per Share Amounts) (Unaudited)
<CAPTION>
<S> <C>
ASSETS:
Investments, at value (Cost $20,441) $ 20,304
Interest and dividends receivable 268
Prepaid expenses and other assets 15
Total Assets 20,587
LIABILITIES:
Payable for capital shares redeemed 2
Accrued expenses and other payables:
Investment advisory fees 7
Administration fees --
Custody fees 1
Accounting and transfer agent fees 6
Shareholder service fees -- Class A 3
Shareholder service and 12b-1 fees -- Class B 1
Other 6
Total Liabilities 26
NET ASSETS:
Capital 28,101
Undistributed net investment income 76
Net unrealized depreciation from investments (137)
Accumulated undistributed net realized losses from investment transactions (7,479)
Net Assets $ 20,561
Net Assets
Class A $ 19,243
Class B 1,318
Total $ 20,561
Outstanding units of beneficial interest (shares)
Class A 2,035
Class B 139
Total 2,174
Net asset value
Redemption price per share
Redemption price per share -- Class A $ 9.46
Offering price per share -- Class B<F1> $ 9.45
Maximum sales charge 4.75%
Maximum offering price per share (100%/(100% -- maximum sales charge)
of net asset value adjusted to nearest cent)
Maximum offering price per share (100%/(100% -- maximum sales charge)
of net asset value adjusted to nearest cent) -- Class A $ 9.93
<FN>
<F1> Redemption price per Class B Share varies based on the length of time held.
</TABLE>
See notes to financial statements.
<TABLE>
The Victory Portfolios Schedule of Operations
Government Bond Fund April 30, 1997
(Amounts in Thousands) (Unaudited)
<CAPTION>
<S> <C>
Investment Income:
Interest income $752
Expenses:
Investment advisory fees 65
Administration fees 18
Shareholder service fees -- Class A 13
Shareholder service fees and 12b-1 fees -- Class B 8
Accounting fees 22
Custodian fees 4
Legal and audit fees 7
Transfer agent fees 9
Registration and filing fees 11
Printing fees 4
Other 1
Expenses voluntarily reduced (21)
Expenses before reimbursement from distributor 141
Expenses reimbursed by the distributor (4)
Total Expenses 137
Net Investment Income 615
Realized/Unrealized Gains (Losses) from Investments:
Net realized gains (losses) from investment transactions 101
Change in unrealized depreciation from investments (573)
Net realized/unrealized losses from investments (472)
Change in net assets resulting from operations $143
</TABLE>
See notes to financial statements.
<TABLE>
The Victory Portfolios Statement of Changes in Net Assets
Government Bond Fund April 30, 1997
(Amounts in Thousands) (Unaudited)
<CAPTION>
Six Months Ended Year Ended
April 30, October 31,
1997 1996
<S> <C> <C>
From Investment Activities:
Operations:
Net investment income $ 615 $ 1,533
Net realized gains (losses) from investment transactions 101 (271)
Net change in unrealized depreciation from investments (573) (334)
Change in net assets resulting from operations 143 928
Distributions to Shareholders:
From net investment income by class:
Class A (592) (1,470)
Class B (29) (63)
In excess of net investment income -- (16)
Change in net assets from distributions to shareholders (621) (1,549)
Capital Transactions:
Proceeds from shares issued 993 6,505
Dividends reinvested 446 1,510
Cost of shares redeemed (6,530) (10,029)
Change in net assets from capital transactions (5,091) (2,014)
Change in net assets (5,569) (2,635)
Net Assets:
Beginning of period 26,130 28,765
End of period $20,561 $26,130
Share Transactions:
Issued 104 671
Reinvested 47 156
Redeemed (685) (1,035)
Change in shares (534) (208)
</TABLE>
See notes to financial statements.
The Victory Portfolios Notes to Financial Statements
Government Bond Fund April 30, 1997
(Unaudited)
1. Organization:
The Victory Portfolios (collectively, the "Funds" and individually,
a "Fund") were organized on February 5, 1986, and are registered under
the Investment Company Act of 1940, as amended, (the "1940 Act") as
an open-end investment company established as a Delaware business
trust. The Funds are authorized to issue an unlimited number of shares
which are units of beneficial interest without par value. The Funds
presently offer shares of 26 active funds. The accompanying financial
statements and financial highlights are those of the Government Bond
Fund (the "Fund") only. The Government Bond Fund is authorized to
issue two classes of shares: Class A Shares and Class B Shares. Each
class of shares in a Fund has identical rights and privileges except
with respect to fees paid under shareholder servicing or distribution
plans, expenses allocable exclusively to each class of shares, voting
rights on matters affecting a single class of shares, and the exchange
privilege of each class of shares.
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.
2. Reorganization:
On May 16, 1997, the Shareholders approved a reorganization plan to
exchange Class A and Class B shares of the Government Bond Fund for
shares of the Investment Quality Bond Fund. The reorganization will
occur on June 13, 1997.
3. Significant Accounting Policies:
The following is a summary of significant accounting policies followed
by the Fund in the preparation of its financial statements. The policies
are in conformity with generally accepted accounting principles. The
preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of
income and expenses for the period. Actual results could differ from
those estimates.
Securities Valuation:
Investments in U.S. Government securities are valued at their market
values determined on the basis of the latest available bid prices
in the principal market (closing sales prices if the principal market
is an exchange) in which such securities are normally traded or on
the basis of valuation procedures approved by the Board of Trustees.
Investments in investment companies are valued at their respective
net asset values as reported by such companies. The differences between
the cost and market values of investments held by the Fund are reflected
as either unrealized appreciation or depreciation.
Securities Transactions and Related Income:
Securities transactions are accounted for on the date the security
is purchased or sold (trade date). Interest income is recognized on
the accrual basis and includes, where applicable, the pro rata amortization
of premium or accretion of discount. Dividend income is recorded on
the ex-dividend date. Gains or losses realized on sales of securities
are determined by comparing the identified cost of the security lot
sold with the net sales proceeds.
Repurchase Agreements:
The Fund may acquire repurchase agreements from financial institutions
such as banks and broker-dealers which the Fund's investment adviser
deems creditworthy under guidelines approved by the Board of Trustees,
subject to the seller's agreement to repurchase such securities at
a mutually agreed-upon date and price. The repurchase price generally
equals the price paid by the Fund plus interest negotiated on the
basis of current short-term rates, which may be more or less than
the rate on the underlying Fund securities. The seller, under a repurchase
agreement, is required to maintain the value of collateral held pursuant
to the agreement at not less than the repurchase price (including
accrued interest). Securities subject to repurchase agreements are
held by the Fund's custodian or another qualified custodian or in
the Federal Reserve/Treasury book-entry system. Repurchase agreements
are considered to be loans by the Fund under the 1940 Act.
Securities Purchased on a When-Issued Basis:
The Fund may purchase securities on a "when-issued" basis. When-issued
securities are securities purchased for delivery beyond the normal
settlement date at a stated price and/or yield, thereby, involving
the risk that the price and/or yield obtained may be more or less
than those available in the market when delivery takes place. At the
time the Fund makes the commitment to purchase a security on a when-issued
basis, the Fund records the transaction and reflects the value of
the security in determining net asset value. Normally, the settlement
date occurs within one month of the purchase. A segregated account
is established and the Fund maintains cash and marketable securities
at least equal in value to commitments for when-issued securities.
Securities purchased on a when-issued basis do not earn income until
settlement date.
Dividends to Shareholders:
Dividends from net investment income are declared and paid monthly
for the Fund. Distributable net realized capital gains, if any, are
declared and distributed at least annually.
Dividends from net investment income and from net realized capital
gains are determined in accordance with federal income tax regulations
which may differ from generally accepted accounting principles. These
differences are primarily due to differing treatments for mortgage-backed
securities, foreign currency transactions, expiring capital loss carryforwards
and deferrals of certain losses. Permanent book and tax basis differences
are reflected in the components of net assets.
Federal Income Taxes:
It is the policy of the Fund to continue to qualify as a regulated
investment company by complying with the provisions available to certain
investment companies, as defined in applicable sections of the Internal
Revenue Code, and to make distributions of net investment income and
net realized capital gains sufficient to relieve it from all, or substantially
all, federal income taxes.
Other:
Expenses that are directly related to the Fund are charged directly
to the Fund. Other operating expenses of the Funds are prorated to
each Fund on the basis of relative net assets or other appropriate
basis. Fees paid under the Fund's shareholder servicing or distribution
plans are borne by the specific class of shares to which they apply.
4. Purchases and Sales of Securities:
Purchases and sales of securities (excluding short-term securities)
for the six months ended April 30, 1997 were as follows (amounts in
thousands):
<TABLE>
<CAPTION>
Purchases Sales
<S> <C> <C>
Government Bond Fund $ 8,323 $16,377
</TABLE>
5. Related Party Transactions:
Investment advisory services are provided to the Fund by Key Asset
Management Inc. ("the Adviser"), a wholly owned subsidiary of KeyBank
National Association ("Key"), formerly Society National Bank, a wholly
owned subsidiary of KeyCorp. On February 28, 1997, Key Asset Management
Inc. became the surviving corporation after the reorganization of
four indirect investment adviser subsidiaries of KeyCorp, including
KeyCorp Mutual Fund Advisers. Under the terms of the investment advisory
agreements, the Adviser is entitled to receive fees based on a percentage
of the average daily net assets of the Fund. KeyTrust Company of Ohio,
serving as custodian the Fund, received custodian fees in addition
to reimbursement of actual out-of-pocket expenses incurred.
Key and its affiliated brokerage and banking companies also serve
as Shareholder Servicing Agent for the Fund. As such, Key and its
affiliates provide support services to their clients who are shareholders,
which may include establishing and maintaining accounts and records,
processing dividend and distribution payments, providing account information,
assisting in processing of purchase, exchange and redemption requests,
and assisting shareholders in changing dividend options, account designations
and addresses. For providing such services, Key and its affiliates
may receive a fee of up to 0.25% of the average daily net assets of
the Fund.
BISYS Fund Services (the "Administrator"), an indirect, wholly-owned
subsidiary of The BISYS Group, Inc. ("BISYS") serves as the administrator
and distributor to the Fund. Certain officers of the Funds are affiliated
with BISYS. Such officers receive no direct payments or fees from
the Fund for serving as officers of the Funds.
Under the terms of the administration agreement, the Administrator's
fee is computed at the annual rate of 0.15% of the average daily net
assets of the Funds. Pursuant to a 12b-1 Plan, the Distributor may
receive fees computed at the annual rate of 0.75% of the average daily
net assets of Class B Shares of the Government Bond Fund for providing
distribution services and is entitled to receive commissions on sales
of shares of the variable net asset value funds. BISYS Fund Services,
Ohio, Inc. (the Company), an affiliate of BISYS, serves the Funds
as Mutual Fund Accountant. Under the terms of the Fund Accounting
Agreement, the Company's fee is based on a percentage of average daily
net assets.
Fees may be voluntarily reduced to assist the Fund in maintaining
competitive expense ratios.
Additional information regarding related party transactions is as
follows for the six months ended April 30, 1997:
<TABLE>
<CAPTION>
Mutual Fund
Investment Advisory Fees Administration Fees Accountant Fees Custodian Fees
Percentage
of Average Daily Voluntary Voluntary Semi Semi
Net Assets Fee Reductions Fee Reductions Annual Fee Annual Fee
(000) (000) (000) (000) (000)
<S> <C> <C> <C> <C> <C>
Government Bond Fund 0.55% $21 0 $22 $4
</TABLE>
6. Capital Share Transactions:
Transactions in capital shares for the Fund's multiple share classes
were as follows (amounts in thousands):
<TABLE>
<CAPTION>
Six Months Ended Year Ended
April 30, October 31,
1997 1996
<S> <C> <C>
Capital Transactions:
Class A Shares:
Proceeds from shares issued $ 911 $ 5,625
Dividends reinvested 427 1,466
Cost of shares redeemed (6,280) (9,719)
Total $(4,942) $(2,628)
Class B Shares:
Proceeds from shares issued $ 82 $ 880
Dividends reinvested 19 44
Cost of shares redeemed (250) (310)
Total $ (149) $ 614
Share Transactions:
Class A Shares:
Issued 95 580
Reinvested 45 151
Redeemed (658) (1,002)
Total (518) (271)
Class B Shares:
Proceeds from shares issued 9 91
Dividends reinvested 2 5
Cost of shares redeemed (27) (33)
Total (16) 63
</TABLE>
<TABLE>
The Victory Portfolios
Government Bond Fund Financial Highlights
(Amounts in Thousands) (Unaudited)
<CAPTION>
Class A Class B
Six Months Year Six Months Year Six Months Year Six Months September 26, May 3,
Ended Ended Ended Ended Ended Ended Ended 1994 to 1993 to
April 30, October 31, October 31, April 30, April 30, October 31, October 31, April 30, April 30,
1997 1996 1995<F5> 1995<F6> 1997 1996 1995<F5> 1995<F6> 1994<F2>
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period $ 9.65 $ 9.87 $ 9.44 $ 9.45 $ 9.64 $ 9.85 $ 9.43 $ 9.25 $ 10.00
Investment
Activities
Net investment
income 0.26 0.55 0.33 0.55 0.19 0.46 0.25 0.31 0.45
Net realized
and
unrealized
gains
(losses)
from
investments (0.20) (0.22) 0.40 (0.02) (0.19) (0.20) 0.45 0.17 (0.54)
Total from
Investment
Activities 0.06 0.33 0.73 0.53 (0.00) 0.26 0.70 0.48 (0.09)
Distributions
Net investment
income (0.25) (0.55) (0.29) (0.54) (0.19) (0.46) (0.22) (0.30) (0.45)
In excess
of net
investment
income -- -- (0.01) -- -- (0.01) (0.06) -- --
Net realized
gains -- -- -- -- -- -- -- -- (0.01)
Total
Distributions (0.25) (0.55) (0.30) (0.54) (0.19) (0.47) (0.28) (0.30) (0.46)
Net Asset Value,
End of Period $ 9.46 $ 9.65 $ 9.87 $ 9.44 $ 9.45 $ 9.64 $ 9.85 $ 9.43 $ 9.45
Total Return
(excludes
sales charge) 0.66%<F3> 3.52% 7.86%<F3> 5.87% (0.02)%<F3> 2.77% 7.47%<F3> 5.26% (1.06)%
Ratios/
Supplemental
Data:
Net Assets,
End of
Period (000) 19,243 $24,632 $27,856 $84,567 $1,318 $1,498 $ 909 $ 155 $120,636
Ratio of
expenses to
average net
assets 1.07%<F4> 0.98% 0.92%<F4> 0.63% 2.36%<F4> 1.84% 1.82%<F4> 1.43%<F4> 0.38%<F4>
Ratio of net
investment
income to
average
net assets 5.28%<F4> 5.64% 6.04%<F4> 5.97% 3.99%<F4> 4.78% 4.98%<F4> 5.03%<F4> 4.61%<F4>
Ratio of
expenses to
average net
assets<F1> 1.25%<F4> 1.22% 1.06%<F4> 0.98% 3.05%<F4> 2.06% 2.12%<F4> 1.60%<F4> 0.96%<F4>
Ratio of net
investment
income to
average net
assets<F1> 5.10%<F4> 5.40% 5.90%<F4> 5.62% 3.31%<F4> 4.56% 4.68%<F4> 4.86%<F4> 4.03%<F4>
Portfolio
turnover<F7> 37% 378% 69% 127% 37% 378% 69% 127% 121%
<FN>
<F1> 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.
<F2> Period from commencement of operations.
<F3> Not annualized.
<F4> Annualized.
<F5> Effective June 5, 1995, the Victory Government Bond Portfolio
became the Government Bond Fund.
<F6> Effective September 26, 1994, the Fund designated the existing
shares as Class A Shares and commenced offering Class B Shares.
<F7> Portfolio turnover is calculated on the basis of the Fund
as a whole without distinguishing between the classes of shares issued.
</TABLE>
Victory Funds(R)
1-800-KEY-FUND(R)
(1-800-539-3863)
1GB-SEM-AR 4/97
