AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 12, 1997.
FILE NO. 33-8982
ICA NO. 811-4852
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. _____ [ ]
POST-EFFECTIVE AMENDMENT NO. 34 [X]
AND
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 35
THE VICTORY PORTFOLIOS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN TRUST INSTRUMENT)
3435 STELZER ROAD
COLUMBUS, OHIO 43219
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
(800) 362-5365
(AREA CODE AND TELEPHONE NUMBER)
COPY TO:
GEORGE O. MARTINEZ, ESQ. CARL FRISCHLING, ESQ.
BISYS FUND SERVICES KRAMER, LEVIN, NAFTALIS & FRANKEL
3435 STELZER ROAD 919 THIRD AVENUE
COLUMBUS, OHIO 43219 NEW YORK,NEW YORK 10022
(NAME AND ADDRESS OF AGENT FOR SERVICE)
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE:
[ ] IMMEDIATELY UPON FILING [ ] ON ( ) PURSUANT TO
PURSUANT TO PARAGRAPH (b) PARAGRAPH (b)
[ ] 60 DAYS AFTER FILING [ ] ( ) PURSUANT TO
PURSUANT TO PARAGRAPH (a)(1) PARAGRAPH (a)(1)
[x] 75 DAYS AFTER FILING PURSUANT TO [ ] ON ( ) PURSUANT TO
PARAGRAPH (a)(2) PARAGRAPH (a)(2) OF RULE 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[ ] THIS POST-EFFECTIVE AMENDMENT DESIGNATES A NEW EFFECTIVE DATE FOR A
PREVIOUSLY FILED POST- EFFECTIVE AMENDMENT.
<PAGE>
THE VICTORY PORTFOLIOS
CROSS-REFERENCE SHEET
THE VICTORY PORTFOLIOS
THE VICTORY FEDERAL MONEY MARKET FUND
THE VICTORY CONVERTIBLE SECURITIES FUND
THE VICTORY LIFECHOICE CONSERVATIVE INVESTOR FUND
THE VICTORY LIFECHOICE MODERATE INVESTOR FUND
THE VICTORY LIFECHOICE GROWTH INVESTOR FUND
<TABLE>
<CAPTION>
Item Number
Form N-1A
Part A Prospectus Caption
- ------------ ------------------
<S> <C> <C>
1. Cover Page Cover Page; Introduction;
2. Synopsis Fund Expenses
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Introduction; An Overview of the Fund;
Investment Objective, Policies and Strategies;
Risk Factors; Investment Limitations;
Additional Information
5. Management of the Fund Organization and Management of the Fund
5.A. Management's Discussion of Fund Investment Performance
Performance
6. Capital Stock and Other Securities INVESTING WITH VICTORY; How to Purchase
Shares; How to Exchange Shares; How to Redeem
Shares; Dividends, Distributions and Taxes;
Additional Information
7. Purchase of Securities Being Offered How to Purchase Shares; How to Exchange Shares
8. Redemption or Repurchase How to Exchange Shares; How to Redeem Shares
9. Pending Legal Proceedings Inapplicable
</TABLE>
<PAGE>
THE VICTORY PORTFOLIOS
CROSS REFERENCE SHEET
THE VICTORY PORTFOLIOS
THE VICTORY FEDERAL MONEY MARKET FUND
THE VICTORY CONVERTIBLE SECURITIES FUND
THE VICTORY LIFECHOICE CONSERVATIVE INVESTOR FUND
THE VICTORY LIFECHOICE MODERATE INVESTOR FUND
THE VICTORY LIFECHOICE GROWTH INVESTOR FUND
<TABLE>
<CAPTION>
Item Number
Form N-1A Statement of Additional
Part B Information Caption
- ------------ ----------------------
<S> <C> <C>
Item Number
Form N-1A
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Additional Information
13. Investment Objectives and Policies Investment Objectives and Policies; Investment
Restrictions
14. Management of the Fund Management of the Funds
15. Control Persons and Principal Security Holders
Holders of Securities
16. Investment Advisory and Other The Investment Adviser, Administrator and
Services Sub-Administrator; Expenses, Distributor, Distribution
Plan and Shareholder Servicing Plan; Custodian, Transfer
Agent, Servicing Agent and Dividend Disbursing Agent
17. Brokerage Allocation and Other Practices The Investment Adviser, Administrator and
Sub-Administrator; Expenses, Distributor, Distribution
Plan and Shareholder Servicing Plan; Custodian, Transfer
Agent, Servicing Agent and Dividend Disbursing Agent
18. Capital Stock and Other Securities Purchase, Redemption and Pricing Information;
Additional Information
19. Purchase, Redemption and Pricing Purchase, Redemption and Pricing Information;
of Securities Being Offered Performance Information; Additional Information
20. Tax Status Federal Income Taxes
21. Underwriters The Investment Adviser, Administrator and
Sub-Administrator; Expenses, Distributor, Distribution
Plan and Shareholder Servicing Plan; Custodian, Transfer
Agent, Servicing Agent and Dividend Disbursing Agent
22. Calculation of Performance Data Performance Information; Additional Information
23. Financial Statements
</TABLE>
<PAGE>
VICTORY FUNDS
PROSPECTUS
CONVERTIBLE SECURITIES FUND
800-KEY-FUND(R) OR 800-539-3863
MARCH 1, 1998
Shares of the Fund are:
o Not insured by the FDIC;
o Not deposits or other obligations of, or guaranteed by, any KeyBank,
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 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>
TABLE OF CONTENTS
Introduction 2
Investment Objective, Policies, and Strategies 5
An analysis which includes objective, 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
<PAGE>
THE VICTORY PORTFOLIOS
CONVERTIBLE SECURITIES FUND
800-KEY-FUND(R)
800-539-3863
This prospectus describes the Convertible Securities 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
objectives, policies, risks, and strategies of the Fund. You should read this
prospectus before investing in the Fund and keep it for future reference.
Additional information about the Fund is contained in the Statement of
Additional Information (SAI). The SAI has been filed with the Securities and
Exchange Commission , and is incorporated into this prospectus by reference. If
you would like a free copy of the SAI, please call us at 800-KEY-FUND.
KEY TO FUND INFORMATION
(1)OBJECTIVE AND STRATEGY
The goals and the strategy that the Fund plans to use in pursuing its investment
objective.
(2)RISK FACTORS
The risks that you may assume as an investor in the Fund.
(3)EXPENSES
The costs that you will pay as an investor in the Fund, including sales charges
and ongoing expenses.
(4)FINANCIAL HIGHLIGHTS
A table that shows the historical performance of the Fund by share class. This
table also summarizes previous operating expenses.
(1)INVESTMENT OBJECTIVE AND STRATEGY
OBJECTIVE: The Victory Convertible Securities Fund seeks a high level of current
income together with long-term capital appreciation.
STRATEGY: The Fund pursues its investment objective by investing primarily in
convertible bonds, corporate notes, convertible preferred stocks, and other
securities convertible into common stock. Please review "Investment Objective,
Policies, and Strategies" and "Other Securities and Investment Practices" for an
overview of the Fund.
(2)RISK FACTORS
The Fund is not insured by the FDIC. Since convertible 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."
<PAGE>
WHO SHOULD INVEST
o Investors willing to accept moderate risk along with moderate potential
long-term returns
o Investors seeking a fund for the growth portion of a diversified portfolio
o Investors who are investing for goals that are many years in the future
(3)FEES AND EXPENSES
You may pay a sales charge of up to 5.75% of the offering price, depending on
the amount you invest. You also will incur expenses for investment advisory,
administrative, and shareholder services, all of which are included in the
Fund's expense ratio.
PURCHASES
The minimum initial investment is $500 for most accounts ($250 for Individual
Retirement Accounts) and $25 thereafter. If you purchase shares through an
Investment Professional, you may be subject to different minimums. 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 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.
GENERAL INFORMATION ABOUT THE CONVERTIBLE SECURITIES FUND
- --------------------------------------------------------------------------------
Inception Date 4/14/88*
- --------------------------------------------------------------------------------
Estimated Annual Expenses 1.31%
- --------------------------------------------------------------------------------
(as a percentage of net assets)
- --------------------------------------------------------------------------------
Maximum Sales Charge 5.75%
- --------------------------------------------------------------------------------
Newspaper Abbreviation** Victory CnvSec
- --------------------------------------------------------------------------------
* Successor to the KeyFunds SBSF Convertible Securities Fund. The Fund began
operations on March 1, 1998.
**All newspapers do not use the same abbreviation.
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.
<PAGE>
INVESTMENT OBJECTIVE, POLICIES, AND STRATEGIES
(1)INVESTMENT OBJECTIVE
The Convertible Securities Fund seeks a high level of current income together
with long-term capital appreciation.
(1)INVESTMENT POLICIES AND STRATEGY
The Convertible Securities Fund pursues its investment objective by investing at
least 65% of the Fund's total assets in convertible securities.
Under normal market conditions, the Fund will invest at least 65% of its assets
in:
o Securities convertible into common stocks, such as convertible bonds,
corporate notes, and convertible preferred stocks
o Synthetic convertible securities, which are created by combining fixed
income securities with the right to acquire equity securities
May invest up to 35% of its total assets in:
o Investment-grade corporate debt securities
o U.S. Government securities and high-quality short-term debt obligations
o Preferred stocks
o Repurchase agreements
o Lower-rated debt securities
The Fund also may invest up to 10% of its total assets in foreign debt and
equity securities. For more information about other securities in which the Fund
can invest, see "Other Securities and Investment Practices" and the SAI.
(2) The Convertible Securities 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 debt securities, equity securities, and futures and
options contracts. In addition, the Convertible Securities Fund is subject to
the risks related to investments in lower-rated debt securities, sometimes
referred to as "junk bonds." By itself, the Convertible Securities 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
Richard A. Janus and James K. Kaesberg are the Portfolio Managers of the Fund,
positions they have held since April, 1996. Richard A. Janus is a Senior
Managing Director for Key Asset Management Inc. (KAM). He has been in the
investment advisory business since 1977. James K. Kaesberg is a Portfolio
Manager and Managing Director of Convertible Securities Investments for KAM, and
has been in the investment advisory business since 1985.
<PAGE>
(3)FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the Fund.
-----------------------------------------------------------------
Shareholder Transaction Expenses* Class A Shares
-----------------------------------------------------------------
Maximum Sales Charge Imposed on Purchases 5.75%
(as a percentage of 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.
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.
-----------------------------------------------------------------------
Annual Fund Operating Expenses Class A Shares
-----------------------------------------------------------------------
(as a percentage of average daily net assets)
-----------------------------------------------------------------------
Management Fees .75%
-----------------------------------------------------------------------
Other Expenses .50%
-----------------------------------------------------------------------
Total Fund Operating Expenses (1) 1.25%
=====
-----------------------------------------------------------------------
(1) Other Expenses includes an estimate of shareholder servicing fees the Fund
expects to pay. See "Organization and Management of the Fund--Shareholder
Servicing Plan."
This example is designed to help you understand the various costs you will bear,
directly or indirectly, as an investor in 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.
1 Year 3 Years 5 Years 10 Years
Class A Shares $70 $95 $122 $200
THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.
<PAGE>
FINANCIAL HIGHLIGHTS
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.
The financial highlights were audited by Coopers & Lybrand L.L.P. for year ended
November 30, 1997. The financial highlights were audited by Price Waterhouse LLP
for all other periods. These financial highlights reflect historical information
about the SBSF Convertible Securities Fund, the predecessor to the Fund. 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.
CONVERTIBLE SECURITIES FUND (4)
FISCAL YEAR ENDED NOVEMBER 30,
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988(1)
---- ---- ---- ---- ---- ---- ---- ---- ---- -------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.16 $11.05 $12.48 $10.98 $10.65 $9.15 $10.65 $9.91 $10.00
Net investment income 0.65 0.60 0.61 0.57 0.59 0.67 0.87 0.84 0.44
Net realized and unrealized gain (loss) 1.68 1.50 (1.12) 1.79 0.56 1.63 (1.38) 0.86 (0.30)
----- ----- ------ ----- ----- ----- ------ ----- ------
Total from investment operations 2.33 2.10 (0.51) 2.36 1.15 2.30 (0.51) 1.70 0.14
Less dividends and distributions:
Dividends from net investment income (0.62) (0.61) (0.61) (0.57) (0.72) (0.71) (0.80) (0.96) (0.23)
Distributions from net realized gains (0.32) (0.38) (0.31) (0.29) (0.10) (0.09) (0.19)
------ ------ ------ ------ ------ ------ ------
Total dividends and distributions (0.94) (0.99) (0.92) (0.86) (0.82) (0.80) (0.99) (0.96) (0.23)
------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $13.55 $12.16 $11.05 $12.48 $10.98 $10.65 $9.15 $10.65 $9.91
======= ======= ======= ======= ======= ======= ====== ======= =====
Total Investment Return 20.28% 20.43% (4.36%) 22.42% 11.20% 26.33% (5.18%) 17.88% 1.42%(2)
RATIOS AND SUPPLEMENTAL DATA:
Net assets end of period (in thousands) $81,478 $68,212 $58,845 $64,537 $42,442 $28,123 $15,200 $12,061 $5,044
Ratio of expenses to average net assets 1.31% 1.31% 1.30% 1.24% 1.32% 1.37% 1.52% 1.15% 0.84%(3)
Ratio of net investment income
to average net assets 5.17% 5.36% 5.20% 4.75% 6.78% 8.50% 10.64% 9.87% 8.74%(3)
Decrease reflected in above
expense ratios due to advisory
and administration fees waived 0.55% 0.98%
Portfolio Turnover Rate 40% 52% 49% 30% 42% 53% 32% 76% 9%
Average commission rate per share $ 0.0413 -- -- -- -- -- -- -- --
</TABLE>
(1) From April 14, 1988 (commencement of operations) to November 30, 1988.
(2) Not annualized.
(3) Annualized.
(4) The Fund's prior adviser Spears, Benzak, Salomon & Farrell, Inc. was one of
four subsidiaries reorganized into Key Asset management Inc. on February
28, 1997.
(2)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 about 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:
o MARKET RISK is the risk that the market value of a 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 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.
o MANAGER RISK is the risk that the Fund's Portfolio Manager may use a
strategy that does not produce the intended result. Additionally, manager
risk refers to the possibility that a Portfolio Manager may fail to execute
a Fund's investment strategy effectively and thus fail to achieve its
objective.
THE FOLLOWING RISKS ARE COMMON TO MUTUAL FUNDS THAT INVEST IN CONVERTIBLE
SECURITIES:
Convertible securities have their own unique risks, two of which are listed
below:
o DEFAULT RISK can occur since many convertible securities are not investment
grade quality, and this type of debt is subordinate to other types of debt
securities.
o INTEREST RATE RISK can occur if interest rates rise and the value of equity
securities fall. Under these circumstances, convertible securities could
lose value. Generally the loss in value of convertible securities would be
less than losses in the equity market.
THE FOLLOWING RISKS ARE COMMON TO MUTUAL FUNDS THAT INVEST IN DEBT SECURITIES:
o 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.
o 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.
<PAGE>
o 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.
o 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.
o LOWER-RATED SECURITIES (JUNK BONDS) are subject to certain risks in
addition to those risks associated with higher-rated securities.
Lower-rated securities may be more susceptible to real or perceived adverse
economic conditions than higher-rated securities. They may be less liquid
than higher-rated securities. Lower-rated securities may be more difficult
to evaluate than higher-rated securities.
THE FOLLOWING RISKS ARE COMMON TO MUTUAL FUNDS THAT INVEST IN EQUITY SECURITIES:
o 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.
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.
o FOREIGN ISSUER AND CURRENCY RISK. Foreign real estate securities involve
additional risks. Foreign issuers may not be subject to 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. 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 gains produced by investments denominated in
foreign currencies.
THE FOLLOWING RISKS ARE COMMON TO MUTUAL FUNDS THAT INVEST IN FUTURES AND
OPTIONS CONTRACTS:
o LEVERAGE RISK. Futures and options contracts are leveraged instruments,
which means that their response to economic conditions may be magnified.
Therefore, if the Portfolio Manager incorrectly uses futures or options
contracts, the Fund can sustain a loss significantly in excess of the cost
of the futures or options contracts.
o CORRELATION RISK. Futures and options contracts can be used in an effort to
hedge against certain risks. Generally, an effective hedge generates gains
or losses that offset the gains or losses from another position held by the
Fund. Correlation risk is the risk that a hedge created using futures or
options contracts (or any derivative) does not, in fact, respond to
economic conditions in the manner the Portfolio Manager expected. In such a
case, the futures or options contracts hedge may not generate gain
sufficient to offset losses and may actually generate losses.
<PAGE>
(1)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 its total assets the amount it may invest in any
single industry (other than U.S. Government obligations). The Fund limits its
borrowing to 5% 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. The Fund will not borrow for leverage purposes.
DIVERSIFICATION REQUIREMENTS
o SEC REQUIREMENT: The Fund is "diversified" according to certain federal
securities provisions regarding 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.
o 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. 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 Fund monitors these limitations on an ongoing basis.
INVESTMENT PERFORMANCE
Victory may advertise the performance of the Fund by comparing it to other
mutual funds with similar objectives and policies. Performance information also
may 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 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.
o YIELD is a measure of net interest and dividend income.
o AVERAGE ANNUAL TOTAL RETURN is a hypothetical measure of past dividend
income plus capital appreciation. It is the sum of all parts of the Fund's
investment return for periods greater than one year.
o TOTAL RETURN is the sum of all parts of the 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 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 8:00 p.m. Eastern Time Monday through Friday.
<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 Fund's share price, called its net asset value (NAV), is calculated each
business day as of the close of the New York Stock Exchange (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 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.
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:
Total Assets-Liabilities
NAV = --------------------------------------------
Number of Shares Outstanding
The Fund's net asset value usually can be found daily in The Wall Street Journal
and other local newspapers.
<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, less expenses. 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. The Fund pays any net capital gains realized as dividends at least
annually. Distributions can be received in one of the following ways:
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.
o 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.
o CASH OPTION
You will be mailed a check no later than 7 days after the pay date.
o INCOME EARNED OPTION
Dividends can be automatically reinvested in the Fund and your capital gains can
be paid in cash, or capital gains can be reinvested and dividends paid in cash.
o 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
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.
o 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.
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.
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.
o Ordinary dividends from the Fund are taxable as ordinary income; dividends
from the Fund's long-term capital gains are taxable as capital gain.
o 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.
o Dividends from the Fund that are attributable to interest on certain U.S.
Government obligations may be exempt
<PAGE>
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 the Fund.
o Certain dividends paid to you in January will be taxable as if they had
been paid to you the previous December.
o Tax statements will be mailed from the Fund every January showing the
amounts and tax status of distributions made to you.
o 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.
o 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.
INVESTING WITH VICTORY
If you are looking for a convenient way to open an account 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.
This Fund offers only Class A shares. Class A shares have a front end sales
charge of 5.75%.
All you need to do to get started is to fill out an application.
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 the Offering Price
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Up to $50,000 5.75% 6.10% 5.00%
- -----------------------------------------------------------------------------------------------
$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 2.50% 2.56% 2.00%
- -----------------------------------------------------------------------------------------------
$500,000 up to $1,000,000 2.00% 2.04% 1.75%
- -----------------------------------------------------------------------------------------------
$1,000,000 and above* 0.00% 0.00% *
- -----------------------------------------------------------------------------------------------
</TABLE>
* 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.
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.
For historical expense information, see the "Financial Highlights" in the Fund
overview earlier in this prospectus.
<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:
1. 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.
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 the age of
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,"* 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 who 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 the 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 Funds (the Victory Group).
HOW TO PURCHASE SHARES
Shares can be purchased in a number of different ways. The minimum initial
investment is $500 ($250 for Individual Retirement Accounts) and $25 thereafter.
If you purchase shares through an Investment Professional you may be subject to
different minimums. 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.
Make your check payable to: THE VICTORY FUNDS
All you need to do to get started is to fill out an application.
<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 confirmation 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 confirmation
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
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. The Fund does not currently
charge a fee for ACH transfers.
<PAGE>
o STATEMENTS AND REPORTS
You or your Investment Professional 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 or your Investment Professional 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 also will be filed with the IRS.
o SYSTEMATIC INVESTMENT PLAN
Under the Systematic Investment Plan, we will automatically withdraw an amount
($25 or more) from your bank account and invest it in shares of the Fund. To
enroll in this plan, check the Systematic Investment Plan box on the Account
Application. Choose the amount and frequency of your investment. You can select
monthly, quarterly, semi-annual, or annual investments. We need your bank
account information and a voided personal check. To use the Systematic
Investment Plan, you must have an initial investment of at least $500.
o RETIREMENT PLANS
You can use the Fund as part of your retirement portfolio. You or 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.
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.
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:
o Shares of the fund selected for exchange must be available for sale in your
state of residence.
o The Fund whose shares you want to exchange and the fund whose shares you
want to buy must offer the exchange privilege.
o 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.
o You must meet the minimum purchase requirements for the fund you purchase
by exchange.
<PAGE>
o The registration and tax identification numbers of the two accounts must be
identical.
o 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.
o Before exchanging, read the prospectus of the fund you wish to purchase by
exchange.
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
declared as payable up to and including date your redemption request is
processed.
If your request is received and accepted 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:
o Mail a check to the address of record;
o Wire funds to a domestic financial institution;
o Mail to a previously designated alternate address; or
o 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, nor the Adviser 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:
o Redemptions over $10,000;
o Your account registration has changed within the last 15 days;
o The check is not being mailed to the address on your account;
o The check is not being made payable to the owner of the account; or
o 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.
<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
we receive your instructions 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 accrued 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 your bank account 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. You must send us a voided personal check to activate
this feature. You should be aware that your account eventually may be depleted.
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 FUND
(3)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.
The Fund is supervised by the Board of Trustees, who monitors the services
provided to investors.
o ABOUT VICTORY
The Fund is a member of the Victory Portfolios, a group of 30 distinct
investment portfolios, organized as a Delaware business trust. Some of the
Victory Portfolios 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.
o THE INVESTMENT ADVISER
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. Spears, Benzak, Salomon &
Farrell, Inc. (SBSF), the prior adviser, was one of four subsidiaries recently
reorganized into KAM. Affiliates of the Adviser manage approximately $52 billion
for a limited number of individual and institutional clients.
The Advisory Agreement allows the Adviser to hire employees of its affiliates
under certain circumstances. It also allows KAM to choose brokers or dealers to
handle the purchases and sales of the Fund's securities. Subject to Board
<PAGE>
approval, Key Clearing Corporation (KCC) and/or other affiliates of KAM may act
as clearing broker for the Fund's security transactions in accordance with
procedures adopted by the Fund, and receive commissions or fees in connection
with their services to the Fund. KCC is a wholly-owned indirect subsidiary of
KeyCorp and an affiliate of the Adviser.
Prior to February 28, 1997, SBSF was the adviser to the Fund's predecessor, the
SBSF Convertible Securities Fund. During the fiscal year ended November 30,
1997, SBSF was paid an advisory fee at an annual rate of .75% of the average
daily net assets of the Fund.
-----------------------------------------------
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.
-----------------------------------------------
o THE ADMINISTRATOR AND DISTRIBUTOR
BISYS Fund Services is the Administrator and Distributor. BISYS is paid a fee at
the following annual rate based on the Fund's average daily net assets as the
Administrator:
o .15% for portfolio assets of $300 million and less,
o .12% for the next $300 million through $600 million of portfolio assets;and
o .10% for portfolio assets greater than $600 million.
BISYS does not charge a fee for its services as Distributor. BISYS Fund Services
Ohio, Inc. receives a fee as the Fund's Accountant.
As permitted under current rules and regulations, 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.
o SHAREHOLDER SERVICING PLAN
Victory 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 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.
o 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.
o INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. serves as independent accountant to the Fund.
o LEGAL COUNSEL
Kramer, Levin, Naftalis & Frankel serves as legal counsel to the Fund.
<PAGE>
OTHER COMPANIES THAT PROVIDE SERVICES TO THE
FUND
|---------------------|
| |
|-------------| 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 shareholder's accounts. |
|----------------------------------------------|
|
|----------------------------------| | |----------------------------------|
| ADMINISTRATOR, | | | CUSTODIAN |
| DISTRIBUTOR, AND FUND | | | |
| ACCOUNTANT | | | |
| |-------| |
| BISYS Fund Services | | Key Trust Company of Ohio, N.A. |
| and its affiliates | | 127 Public Square |
| 3435 Stelzer Road | | Cleveland, OH 44114 |
| Columbus, OH 43219 | | |
| | | |
| Markets the Fund, | | Provides for safe- |
| distributes shares | | keeping of the |
| through Investment | | Fund's investments |
| Professionals, and | | and cash, and |
| calculates the value | | settles trades made |
| of shares. | | by the Fund. |
| | | |
| | | |
- ----------------------------------- ----------------------------------
<PAGE>
ADDITIONAL INFORMATION
Some additional information you should know about the Fund.
o 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. The Fund is the successor to the KeyFunds SBSF Convertible
Securities Fund, which will reorganize into Class A shares of the Fund, subject
to shareholder approval on or about February 28, 1998.
o 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.
o 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.
o 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 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.
o 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.
<PAGE>
OTHER SECURITIES AND INVESTMENT PRACTICES
The following table lists some of the types of securities the Fund may choose to
purchase. The majority of the portfolio for the Fund is made up of convertible
securities. However, the Fund is also permitted to invest in the securities as
shown in the table below and in the SAI.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
LIST OF ALLOWABLE INVESTMENTS AND INVESTMENT PRACTICES CONVERTIBLE
SECURITIES FUND
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
CONVERTIBLE SECURITIES. Corporate securities (usually preferred stocks or bonds) that are 65%
exchangeable for a set number of another form (usually common stock) at a set price and date.
May include "junk bonds," or lower rated debt securities.*
- ----------------------------------------------------------------------------------------------------------------------
U.S. EQUITY SECURITIES. Can include common stock and preferred stock of U.S. corporations. 35%
- ----------------------------------------------------------------------------------------------------------------------
FOREIGN EQUITY SECURITIES. Can include common stock, preferred stock, and convertible 10%
preferred stock of non-U.S. corporations.
- ----------------------------------------------------------------------------------------------------------------------
U.S. CORPORATE DEBT OBLIGATIONS. Debt instruments issued by U.S. public corporations. They 35%
may be secured or unsecured.
- ----------------------------------------------------------------------------------------------------------------------
**WARRANTS. The right to purchase an equity security at a stated price for a limited period 5%
of time.
- ----------------------------------------------------------------------------------------------------------------------
WHEN ISSUED AND DELAYED DELIVERY SECURITIES. A security that is purchased for delivery at a 33 1/3%
later time. The market value may change before the delivery date.
- ----------------------------------------------------------------------------------------------------------------------
VARIABLE & FLOATING RATE SECURITIES. Investment grade instruments, some of which may be 35%
illiquid, with interest rates that reset periodically.
- ----------------------------------------------------------------------------------------------------------------------
SHORT-TERM DEBT OBLIGATIONS. Includes bankers' acceptances, certificates of deposit, prime 35%
quality commercial paper, cash, and cash equivalents.
- ----------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES. Securities issued or guaranteed by the U.S. government, its 35%
agencies or instrumentalities. Some are direct obligations
- ----------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS. An agreement to sell and repurchase a security at the same price plus 20%
interest. The seller's obligation to the Fund is secured with collateral.
- ----------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER. Short-term obligations issued by corporations and financial institutions. The 35%
Fund only uses prime quality commercial paper.
- ----------------------------------------------------------------------------------------------------------------------
ILLIQUID SECURITIES. Investments that cannot be sold readily within seven days in the usual 10%
course of business at approximately the price at which the Fund values them. of net assets
- ----------------------------------------------------------------------------------------------------------------------
RESTRICTED SECURITIES. Securities that are not registered under federal securities laws but 10%
that may be traded among qualified institutional investors and the Fund. Some of these
securities may be illiquid.
- ----------------------------------------------------------------------------------------------------------------------
SHORT-TERM TRADING. Selling a security soon after purchasing it. Short-term trading increases #
turnover and transaction costs. Some of these securities may be illiquid.
- ----------------------------------------------------------------------------------------------------------------------
BORROWING; REVERSE REPURCHASE AGREEMENTS. The borrowing of money from banks (up to 5% of total 5%
assets) or through reverse repurchase agreements (up to 33 1/3% of total assets). The Fund 33 1/3%
will not use borrowing to create leverage.
- ----------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY SECURITIES. Shares of other mutual funds with similar investment 5%
objectives. The following limitations apply: (1) no more than 5% of the Fund's total assets 3%
may be invested in one mutual fund, (2) the Fund may not own more than 3% of the securities of 10%
any one mutual fund, and (3) no more than 10% of the Fund's total assets in
combined mutual fund holdings.
- ----------------------------------------------------------------------------------------------------------------------
SECURITIES LENDING. In order to generate additional income, a Fund may lend its portfolio 10%
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. Subject to the receipt of exemptive relief from the SEC, Key Trust Company of
Ohio, N.A., the lending agent, may earn a fee based on a percentage of the net
returns generated in the lending transactions.
- ----------------------------------------------------------------------------------------------------------------------
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. Contracts involving the right or 5% in margins and
obligation to deliver or receive assets or money depending on the performance of one or more premiums; 33 1/3%
assets or a securities index. To reduce the effects of leverage, liquid assets equal to the subject to futures
contract commitment are set aside to cover the commitment limit. The Fund may
invest in or options on futures futures in an effort to hedge against market
risk.
- ----------------------------------------------------------------------------------------------------------------------
CALL OPTIONS. A short-term contract in which the purchaser (for a premium) has the right 5%
to buy a security at a set price at any time during the term of the contract.
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Lower-rated debt securities are securities which may or may not be rated by a
nationally recognized statistical rating organization (NRSRO). Debt obligations
rated lower than A by Moody's or S&P tend to be speculative, and generally
involve more risk of loss of principal and income than higher rated securities.
For more information on ratings, see the Appendix to the SAI.
% Percentage of total assets.
# No limitation of usage; Fund may be using currently.
** Indicates a "derivative security," whose value is linked to, or derived
from, another security, instrument or index.
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.
<PAGE>
Bulk Rate
U.S. Postage
PAID
Cleveland, OH
Permit No. 469
Victory Funds logo
PRINTED ON RECYCLED PAPER
VF/CONV-PRO (3/98)
<PAGE>
Victory Funds
PROSPECTUS
FEDERAL MONEY MARKET FUND
800-KEY-FUND(R) or 800-539-3863
March 1, 1998
An investment in the Federal Money Market 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 share. Shares of the Fund are:
o Not insured by the FDIC;
o Not deposits or other obligations of, or guaranteed by, any KeyBank, 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 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 FEDERAL MONEY MARKET FUND
800-KEY-FUND(R) 800-539-3863
This prospectus describes the Victory Federal 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.
Additional information about the Fund is contained in a detailed Statement of
Additional Information (SAI). The SAI has been filed with the Securities and
Exchange Commission, and is incorporated into this prospectus by reference. If
you would like a free copy of the SAI, please call us at 800-KEY-FUND.
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 10
How to Purchase Shares 10
How to Exchange Shares 12
How to Redeem Shares 13
Organization and Management of the Fund 14
Additional Information 18
Other Securities and Investment Practices 19
-2-
<PAGE>
KEY TO FUND INFORMATION
(1)OBJECTIVE AND STRATEGY
The goals and the strategy the Fund plans to use in pursuing its investment
objective.
(2)RISK FACTORS
The risks that you may assume as an investor in the Fund.
(3)EXPENSES
The costs that you will pay as an investor in the Fund, including sales charges
and ongoing expenses.
(4)FINANCIAL HIGHLIGHTS
A table that shows the Fund's historical performance by share class. This table
also summarizes operating expenses of the predecessor portfolio.
(1)INVESTMENT OBJECTIVE AND STRATEGY
o OBJECTIVE
The investment objective of the Victory Federal Money Market Fund is to provide
high current income to the extent consistent with preservation of capital.
o STRATEGY
The Fund pursues its investment objective by investing in a diversified
portfolio of securities issued or guaranteed by the U.S. Government or its
agencies as well as repurchase agreements collateralized by these securities.
The Fund seeks to maintain a constant net asset value of $1.00 per share, and
shares are offered at net asset value.
(2)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 manager, credit, interest rate, inflation, and
market risks. These risks are discussed in the section "Risk Factors."
WHO SHOULD INVEST
o Investors seeking relative safety and easy access to investments
o Investors with a low risk tolerance
o Investors seeking preservation of capital
o Investors willing to accept lower potential returns in return for safety
(3)FEES AND EXPENSES
No load or sales commission is charged to investors in this Fund. You will,
however, incur expenses for investment advisory, 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
-3-
<PAGE>
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."
PURCHASES
The minimum initial investment is $1,000,000. If you purchase shares through an
Investment Professional, you may be subject to different minimums. 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 net
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 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.
GENERAL INFORMATION ABOUT THE FEDERAL MONEY MARKET FUND
- --------------------------------------------------------------------------------
Investor Shares Select Shares
- --------------------------------------------------------------------------------
Inception Date 3/1/98 3/23/88*
- --------------------------------------------------------------------------------
Estimated Annual Expenses
(as a percentage of net assets) .27% .52%
After waivers
- --------------------------------------------------------------------------------
Newspaper Abbreviation** Victory Fed MMktI Victory Fed MMktS
- --------------------------------------------------------------------------------
* This class of shares is a successor to the Key Money Market Mutual Fund. The
Victory Federal Money Market Fund began operations March 1, 1998.
** All newspapers do not carry the same abbreviation.
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.
-4-
<PAGE>
INVESTMENT OBJECTIVE, POLICIES, AND STRATEGIES
(1)INVESTMENT OBJECTIVE
The investment objective of the Fund is to provide high current income to the
extent consistent with preservation of capital.
(1)INVESTMENT POLICIES AND STRATEGY
The Fund pursues its investment objective by primarily investing in securities
issued or guaranteed by the U.S. Government or its agencies and
government-sponsored enterprises. The Fund also can invest in repurchase
agreements collateralized by these securities.
UNDER NORMAL MARKET CONDITIONS, THE FUND PRIMARILY INVESTS IN:
o Treasury bills, notes, and other obligations issued or guaranteed by the
U.S. Government
o Repurchase Agreements collateralized by obligations of the U.S. Government,
its agencies, and government-sponsored enterprises, redeemable within 2
years of purchase
o Obligations of government agencies and government-sponsored enterprises,
such as GNMA, FNMA, SLMA, FFCB, FHL, TVA, and FHLMC
o Obligations guaranteed by the Export-Import Bank of the United States
IMPORTANT CHARACTERISTICS OF THE FUND'S INVESTMENTS:
QUALITY: The Fund invests only in instruments which are rated at the time of
purchase as follows:
o In the highest category if rated by two or more NRSROs,* or
o In the highest category if rated by one NRSRO, or
o If unrated, determined to be of equal quality.
The Board of Trustees has established policies to ensure that the Fund 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.
*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
certain securities based on the borrower's ability to meet its obligation to
make principal and interest payments.
(2)RISK
The Fund is subject to manager risk, 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.
-5-
<PAGE>
FUND EXPENSES
FEDERAL MONEY MARKET FUND
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the Federal Money Market Fund. You will
note in the table that you do not pay fees of any kind to buy, sell, or exchange
shares of the Fund.*
- --------------------------------------------------------------------------------
Shareholder Transaction Expenses* Investor Shares Select Shares
- --------------------------------------------------------------------------------
Maximum Sales Charge Imposed on Purchases NONE NONE
(as a percentage of offering price)
- --------------------------------------------------------------------------------
Sales Charge Imposed on Reinvested Dividends NONE NONE
- --------------------------------------------------------------------------------
Deferred Sales Charge NONE NONE
- --------------------------------------------------------------------------------
Redemption Fees NONE NONE
- --------------------------------------------------------------------------------
Exchange Fees NONE NONE
- --------------------------------------------------------------------------------
* You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent. See "How to Purchase Shares."
The Annual Fund Operating Expenses table illustrates the estimated operating
expenses for the current fiscal year 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. Since
Investor Shares were not offered prior to the date of this prospectus, the
percentages shown above with respect to Investor Shares under "Other Expenses"
and "Total Fund Operating Expenses," reflect certain anticipated fee waivers and
expense reimbursements for the current fiscal year.
- --------------------------------------------------------------------------------
Annual Fund Operating Expenses Investor Select
After expense waivers and reimbursements Shares Shares
(as a percentage of average daily net assets)
- --------------------------------------------------------------------------------
Management Fee(1) 0% 0%
- --------------------------------------------------------------------------------
Other Expenses (1) .27% .52%(2)
---- -------
- --------------------------------------------------------------------------------
Total Fund Operating Expenses (1) .27% .52%
---- ====
- --------------------------------------------------------------------------------
(1) These fees have been voluntarily reduced. Without this waiver, the
Management Fee would be .25%, and Other Expenses would be .29% for the Investor
Shares and .54% for Select Shares. Total Fund Operating Expenses would be .54 %
for Investor Shares and .79% for Select Shares.
(2) Other Expenses includes such expenses as administrative fees, custodial and
transfer agent fees, audit, legal, and other business expenses. Other Expenses
are based on estimated amounts for the current fiscal year for Investor Shares,
and includes an estimate of shareholder servicing fees the Fund expects to pay
for both Investor and Select Shares. See "Organization and Management of the
Fund--Shareholder Servicing --Select Shares."
This example is designed to help you understand the various costs you will bear,
directly or indirectly, as an investor in 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.
- ----------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- ----------------------------------------------------------------------------
Investor Shares $3 $9 $15 $34
- ----------------------------------------------------------------------------
Select Shares $5 $17 N/A N/A
- ----------------------------------------------------------------------------
THIS EXAMPLE IS ONLY AN ILLUSTRATION. ACTUAL EXPENSES AND RETURNS WILL VARY.
-6-
<PAGE>
FINANCIAL HIGHLIGHTS
The Financial Highlights describe the Federal Money Market Fund's returns and
operating expenses over time. This table shows the results of an investment in
one Select Share of the Key Money Market Mutual Fund (the predecessor to the
Fund) for each of the periods indicated.
The financial highlights for the Fund's Select Shares were audited by Coopers &
Lybrand L.L.P. for the fiscal year ended November 30, 1997. The financial
highlights for periods prior to November 30, 1997 were audited by Price
Waterhouse LLP. The audited and unaudited Financial Statements and reports of
the predecessor portfolio are incorporated. These financial highlights reflect
historical information about the Key Money Market Mutual Fund, the predecessor
to the Select Shares of the Victory Federal Money Market Fund. There is no
information on the Investor Shares since they were not sold prior to the date of
this Prospectus. You should consider this information together with the
predecessor portfolio's Annual Report and related financial statements and
notes, which are 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>
FEDERAL MONEY MARKET FUND (2)(3)
FISCAL YEAR ENDED NOVEMBER 30,
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988(1)
PER SHARE OPERATING
PERFORMANCE:
NET ASSET VALUE,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BEGINNING OF PERIOD $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
Net Investment income 0.047 0.051 0.034 0.026 0.034 0.058 0.077 0.086 0.050
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total from investment
operations 0.047 0.051 0.034 0.026 0.034 0.058 0.077 0.086 0.050
Less Dividends from net
investment income ($0.047) ($0.051) ($0.034) ($0.026) ($0.034) ($0.058) ($0.077) ($0.086) ($0.050)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END
OF PERIOD $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
========= ========= ========= ========= ========= ========= ========= ========= =========
Total investment return 4.65% 5.26% 3.37% 2.61% 3.48% 6.00% 8.07% 8.87% 4.76%
RATIOS/SUPPLEMENTAL DATA:
Net assets end of period
(in thousands) $42,159 $21,848 $28,606 $16,222 $12,531 $20,493 $22,424 $21,627 $24,354
Ratio of expenses to
average net assets 0.64% 0.63% 0.59% 0.55% 0.72% 0.59% 0.62% 0.68% 0.49%
Ratio of net investment
income to average net
assets 4.59% 5.15% 3.35% 3.16% 4.20% 6.38% 8.29% 9.29% 7.80%
Decrease reflected in above
expense ratios due to fee
waivers and reimbursements 0.28% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.30%
</TABLE>
(1) March 23, 1988 (commencement of operations) to November 30, 1988.
(2) From commencement of operations through July 11, 1996, Key Money Market
Mutual Fund was known as SBSF Money Market Fund. As of the date of this
Prospectus, the Key Money Market Fund was renamed and reorganized as the
Investor Share Class of the Victory Federal Money Market Fund.
(3) The Fund's prior adviser Spears, Benzak, Salomon & Farrell, Inc. was one of
four subsidiaries reorganized into Key Asset management Inc. on February
28, 1997.
-7-
<PAGE>
(2)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 about the securities mentioned
in the overview of the Fund. As with any mutual fund, there is no guarantee that
the Fund will earn income. Historically, 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 RISKS ARE COMMON TO ALL MUTUAL FUNDS:
o MARKET RISK is the risk that the market value of a 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.
o MANAGER RISK is the risk that a Fund's Portfolio Manager may use a strategy
that does not produce the intended result. Additionally, manager risk
refers to the possibility that a Portfolio Manager may fail to execute a
Fund's investment strategy effectively, and thus fail to achieve its
objective.
THE FOLLOWING RISKS ARE COMMON TO ALL MONEY MARKET MUTUAL FUNDS:
o 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.
o 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.
o 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.
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.
(1)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).
The SEC and IRS have certain restrictions with which all mutual funds must
comply. The Fund monitors these limitations on an ongoing basis.
-8-
<PAGE>
DIVERSIFICATION REQUIREMENTS
o 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.
o 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.
o 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.
INVESTMENT PERFORMANCE
Victory may advertise the performance of the Fund by comparing it to other
mutual funds with similar objectives and policies. Performance information also
may 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.
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 8:00 p.m. Eastern Time Monday
through Friday.
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.
o YIELD is a measure of net interest income.
o EFFECTIVE YIELD is similar to yield, except it is assumed that dividends
are reinvested daily and compounded.
o AVERAGE ANNUAL TOTAL RETURN is a hypothetical measure of past dividend
income plus capital appreciation. It is the sum of all parts of the Fund's
investment return for periods greater than one year.
o TOTAL RETURN is the sum of all parts of the 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.
Yield for 7 days ended __, 1998 was __% with respect to Investor Shares of the
Fund.
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 investment instructions are 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 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.
-9-
<PAGE>
The Fund seeks to maintain a $1.00 NAV, although there is no guarantee that it
will be able to do so. The Fund uses the "Amortized Cost Method" to value
securities. You can read about this method 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 net 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. Distributions can be received in one of the
following ways:
o 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.
o Cash Option
A check will be mailed to you no later than 7 days after the pay date.
o 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
Funds. If distributions are reinvested in a different class of another fund, you
may pay a sales charge on the reinvested distributions.
o 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.
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.
o Dividends from the Fund's long-term capital gain are taxable as capital
gain; dividends from other sources are generally taxable as ordinary
income.
o 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.
o Certain dividends paid to you in January will be taxable as if they had
been paid to you in December of the previous year.
o 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.
-10-
<PAGE>
o Tax statements will be mailed from the Fund every January showing the
amounts and tax status of distributions made to you.
o 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.
o 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.
INVESTING WITH VICTORY
If you are looking for a convenient way to open an account 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.^ The minimum
initial investment is $1,000,000. If you purchase shares through an Investment
Professional, you may be subject to different minimums. 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
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
-11-
<PAGE>
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 confirmation number.
STATE STREET BANK AND TRUST COMPANY
ABA #011000028
FOR CREDIT TO DDA
ACCOUNT #9905-201-1
FOR FURTHER CREDIT TO ACCOUNT # (insert account number, name, and confirmation
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
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.
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 Fund does not currently charge a
fee for ACH transfers.
STATEMENTS AND REPORTS
You or your Investment Professional will receive a periodic statement reflecting
any transactions that affect the balance or registration of your account. You or
your Investment Professional will receive a confirmation after any purchase,
exchange, or redemption. 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 or your Investment
Professional 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 also will 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 statement and send it with
your check to the address indicated.
SYSTEMATIC INVESTMENT PLAN
The Systematic Investment Plan is not offered to new shareholders of the Fund.
Under the Systematic Investment Plan,
-12-
<PAGE>
the Fund will automatically withdraw an amount ($500 or more) from your bank
account and invest it in shares of the Fund. Monthly, quarterly, semi-annual, or
annual investments can be made. We need your bank account information and a
voided personal check. In order to use the Systematic Investment Plan, you must
have an initial investment of at least $10,000.
RETIREMENT PLANS
You can use the Fund as part of your retirement portfolio. You or 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.
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.
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:
o Shares of the fund selected for exchange must be available for sale in your
state of residence.
o The Fund whose shares you want to exchange and the fund whose shares you
want to buy must offer the exchange privilege.
o 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 5.75% sales charge,
you would pay the 5.75% sales charge.
o You must meet the minimum purchase requirements for the fund you purchase
by exchange.
o The registration and tax identification numbers of the two accounts must be
identical.
o 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.
o Before exchanging, read the prospectus of the fund you wish to purchase by
exchange.
HOW TO REDEEM SHARES
If your request is received and accepted 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 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
-13-
<PAGE>
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:
o Mail a check to the address of record;
o Wire funds to a domestic financial institution;
o Mail to a previously designated alternate address; or
o 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, nor the Adviser 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:
o Redemptions over $10,000;
o Your account registration has changed within the last 15 days;
o The check is not being mailed to the address on your account;
o 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.
-14-
<PAGE>
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.
CHECK WRITING
The check writing feature is not offered to new shareholders of the Fund. If you
have previously activated the check writing feature, you may sell your Fund
shares by writing a check for $100.00 or more. There is no charge for checks;
however, you will pay a charge to stop payment of a check or if a check is
returned 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
The Systematic Withdrawal Plan is not offered to new shareholders of the Fund.
If you have previously activated the Systematic Withdrawal Plan for this Fund,
we will send monthly, quarterly, semi-annual, or annual payments to your bank
account or the person you designate. The minimum withdrawal is $25, and you must
have a balance of $5,000 or more. You should be aware that your account
eventually may be depleted. You cannot automatically close your account using
the Systematic Withdrawal Plan. If your account value falls below $5,000, we may
ask you to bring the account back to the minimum balance. If you decide not to
increase your account to the minimum balance, your account may be closed and the
proceeds mailed to you.
Check writing and the Systematic Withdrawal Plan are no longer offered for this
Fund.
ORGANIZATION AND MANAGEMENT OF THE FUND
o ABOUT VICTORY
The Fund is a member of the Victory Portfolios, a group of 30 distinct
investment portfolios, organized as a Delaware business trust. Some of the
Victory Portfolios 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.
-15-
<PAGE>
o THE INVESTMENT ADVISER
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. Spears, Benzak, Salomon &
Farrell, Inc., (SBSF), the prior adviser, was one of four subsidiaries recently
reorganized into KAM. Affiliates of the Adviser manage approximately $52 billion
for a limited number of individual and institutional clients.
The Advisory Agreement allows the Adviser to hire employees of its affiliates
under certain circumstances.
Prior to February 28, 1997, SBSF was the adviser to the Fund's predecessor, the
Key Money Market Mutual Fund. During the fiscal year ended November 30, 1996,
SBSF voluntarily waived the advisory fee in an amount of 0.25%.
------------------------------------------------------------------
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
------------------------------------------------------------------
o THE ADMINISTRATOR AND DISTRIBUTOR
BISYS Fund Services is the Administrator and the Distributor. BISYS is paid a
fee at the following annual rate based on the Fund's average daily net assets as
the Administrator:
o .15% for portfolio assets of $300 million and less,
o .12% for the next $300 million through $600 million of portfolio assets;
and
o .10% for portfolio assets greater than $600 million.
BISYS does not charge a fee for its services as Distributor. BISYS Fund Services
Ohio, Inc. receives a fee as the Fund's Accountant.
As permitted under current rules and regulations, 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.
o 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 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 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.
-16-
<PAGE>
o 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.
o INDEPENDENT ACCOUNTANT
Coopers & Lybrand L.L.P. serves as independent accountant to the Fund.
o 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.
<PAGE>
OTHER COMPANIES THAT PROVIDE SERVICES TO THE
FUND
|---------------------|
| |
|-------------| 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 shareholder's accounts. |
|----------------------------------------------|
|
|----------------------------------| | |----------------------------------|
| ADMINISTRATOR, | | | CUSTODIAN |
| DISTRIBUTOR, AND FUND | | | |
| ACCOUNTANT | | | |
| |-------| |
| BISYS Fund Services | | Key Trust Company of Ohio, N.A. |
| and its affiliates | | 127 Public Square |
| 3435 Stelzer Road | | Cleveland, OH 44114 |
| Columbus, OH 43219 | | |
| | | |
| Markets the Fund, | | Provides for safe- |
| distributes shares | | keeping of the |
| through Investment | | Fund's investments |
| Professionals, and | | and cash, and |
| calculates the value | | settles trades made |
| of shares. | | by the Fund. |
| | | |
| | | |
- ----------------------------------- ----------------------------------
-17-
<PAGE>
ADDITIONAL INFORMATION
Some additional information you should know about the Fund.
o SHARE CLASSES
The Fund offers only the Select and Investor classes of shares described in this
prospectus, but at some future date, the Fund may offer additional classes of
shares through a separate prospectus. The Investor Class is the successor to the
Key Money Market Mutual Fund, which will reorganize into the Investor Class of
the Fund, subject to shareholder approval, on or about February 28, 1998.
o YOUR RIGHTS AS A SHAREHOLDER
All shareholders of each class 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.
o 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.
o 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 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.
o 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.
-18-
<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 consists of short-term U.S. Government securities and repurchase
agreements. 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 FEDERAL MONEY MARKET
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
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 a U.S. agency.
- ------------------------------------------------------------------------------------------------------------------
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 U.S.
Government securities, and must be redeemed within 2 years of purchase.
- ------------------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------------------
**MORTGAGE-BACKED SECURITIES. Securities backed by a pool of mortgages. The Fund #
only purchases securities issued or guaranteed by the U.S. Government or its
agencies; i.e., GNMAs, FNMAs and SLMAs.*
- ------------------------------------------------------------------------------------------------------------------
**VARIABLE AND FLOATING RATE SECURITIES. Investment grade instruments, some of which #
may be derivatives and illiquid, with interest rates that reset periodically.
- ------------------------------------------------------------------------------------------------------------------
ILLIQUID SECURITIES. Investments that cannot be sold readily within seven days
in 10% of net assets the usual course of business at approximately the price at
which a Fund values them.
- ------------------------------------------------------------------------------------------------------------------
SECURITIES OF ANY ONE ISSUER. no more than 5% (other than
U.S. Government securities
- ------------------------------------------------------------------------------------------------------------------
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 total 33 1/3%
assets). The Fund will not use borrowing to create leverage.
- ------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY SECURITIES. Shares of other mutual funds with similar investment 5%
objectives. The following limitations apply: (1) no more than 5% of the Fund's 3%
total assets may be invested in one mutual fund, (2) the Fund may not own more than 10%
3% of the securities of any one mutual fund, and (3) no more than 10% of the
Fund's total assets in combined mutual fund holdings.
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
% Percentage of total assets.
# No limitation of usage; Fund may be using currently.
**Indicates a "derivative security," whose value is linked to, or derived from,
another security, instrument or index.
*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.
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.
VF/FMMF-PRO (3/98)
<PAGE>
VICTORY LIFECHOICE FUNDS
800-KEY-FUND(R)
OR
800-539-3863
CONSERVATIVE INVESTOR FUND
MODERATE INVESTOR FUND
GROWTH INVESTOR FUND
PROSPECTUS
March 1, 1998
SHARES OF THE FUNDS ARE:
o NOT INSURED BY THE FDIC;
o NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, ANY KEYBANK, 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 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>
VICTORY LIFECHOICE FUNDS
CONSERVATIVE INVESTOR FUND
MODERATE INVESTOR FUND
GROWTH INVESTOR FUND
800-KEY-FUND(R) 800-539-3863
This prospectus describes the following funds:
Conservative Investor Fund
Moderate Investor Fund
Growth Investor Fund
The three Victory Funds discussed in this prospectus (the Funds of LifeChoice
Funds) are a part of The Victory Portfolios family, an open-end investment
management company. The Funds are diversified mutual funds. Each Fund is a "fund
of funds," which means that it pursues its investment objective primarily by
allocating its investments primarily among other funds of The Victory
Portfolios. Each Fund may also invest a limited portion of its assets in other
mutual funds which are not a part of the same group of investment companies as
Victory. 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. Additional information about
each of the Funds is contained in the Statement of Additional Information (SAI).
The SAI has been filed with the Securities and Exchange Commission, and is
incorporated by reference into this prospectus. If you would like a free copy of
the SAI, please call us at 800-KEY-FUND.
-2-
<PAGE>
TABLE OF CONTENTS
Introduction
AN OVERVIEW OF EACH OF THE FUNDS
A fund-by-fund analysis which includes objectives, policies, strategies,
expenses, and financial highlights
Conservative Investor Fund __
Moderate Investor Fund __
Growth Investor Fund __
Risk Factors __
Investment Limitations __
Investment Performance __
Share Price __
Dividends, Distributions, and Taxes __
INVESTING WITH VICTORY __
Calculation of Sales Charges
How to Purchase Shares __
How to Exchange Shares __
How to Redeem Shares __
Organization and Management of the Funds __
Additional Information __
Other Securities and Investment Practices __
-3-
<PAGE>
Key to Fund Information:
(1) Objective and Strategy: The goals and the strategy that a Fund plans to use
in pursuing its investment objective.
(2) Risk Factors: The risks that you may assume as an investor in a Fund.
(3) Expenses: The costs that you will pay as an investor in a Fund, including
sales charges and ongoing expenses.
(4) Financial Highlights: A table which shows a Fund's historical performance by
share class. This table also summarizes previous operating expenses.
(1)INVESTMENT OBJECTIVE AND STRATEGY
(1)INVESTMENT OBJECTIVE:
The CONSERVATIVE INVESTOR FUND seeks to provide current income combined with
moderate growth of capital.
The MODERATE INVESTOR FUND seeks to provide growth of capital combined with a
moderate level of current income.
The GROWTH INVESTOR FUND seeks to provide growth of capital.
(1)INVESTMENT STRATEGY:
Each Fund pursues its investment objective by investing in other mutual funds, a
"fund of funds" approach. Each Fund's unique investment objective, with its own
risk/reward profile, results in a specific asset allocation strategy for each
fund. Each strategy is described in greater detail later in this prospectus.
OVERVIEW OF FUND OF FUNDS
WHAT IS A FUND OF FUNDS?
A fund of funds is an investment company that pursues its investment
objective by investing primarily in shares of other mutual funds. These
mutual funds themselves invest in different combinations of equity
securities, fixed income securities, or cash reserves.
WHAT MUTUAL FUNDS DO THE LIFECHOICE FUNDS INVEST IN?
The Funds invest primarily in shares of other funds within The Victory
Portfolios family, referred to as the "Victory Funds." The Funds also
may invest a portion of their assets in shares of "Other Funds" that
are not Victory Funds. The investment objective, policies, and
limitations of the Victory Funds and the Other Funds are described
later in this prospectus.
HOW DOES THE ADVISER ALLOCATE THE INVESTMENTS OF THE LIFECHOICE FUNDS?
The Adviser allocates investments for each Fund in accordance with the
policies and the risk/reward profile of each Fund described in this
prospectus. The risk/return balance of each Fund varies in proportion
to the assets that the Adviser allocates to the different kinds of
investments.
For example, the Conservative Investor Fund invests a larger portion of
its assets in mutual
-4-
<PAGE>
funds that invest in fixed-income securities, while the Aggressive
Investor Fund invests a larger portion of its assets in mutual funds
that invest in equity securities. The Moderate Investor Fund strikes a
balance between these two types of investments.
The Adviser follows investment guidelines established by the Victory
Board of Trustees. These guidelines are described later in the
prospectus.
WHAT ARE THE BENEFITS OF INVESTING IN A FUND OF FUNDS?
There are thousands of mutual funds available for investment, with many
different objectives, strategies, and policies. Choosing the right
balance and mix of mutual funds to meet your needs can be difficult and
time-consuming. The LifeChoice Funds offer an efficient and
cost-effective alternative to achieving your long-term investment goals
by providing access to three different, yet comprehensive, portfolio
mixes. You simply select the LifeChoice Fund strategy that you think is
right for your level of risk tolerance. The Adviser manages the
selection and allocation of underlying mutual funds consistent with the
overall strategy for each fund. You should also review "Risk Factors"
below.
(2)RISK FACTORS
The Funds are not insured by the FDIC. The Funds invest in mutual funds that in
turn invest in debt and equity securities. Both types of securities fluctuate in
value. Equity securities may fluctuate in response to activities of an
individual company, or in response to general market or economic conditions.
Debt securities are subject to interest rate, inflation, and credit risk.
There also are some potential disadvantages that are unique to a fund of funds.
For example, you may bear additional fees. The mutual funds in which the Funds
may invest pay various fees. These additional fees may include management fees
(to the extent that the Adviser does not waive them), administration fees, and
custody fees. There may be other disadvantages or risks of investing in a fund
of funds as well. These disadvantages and other risks of investing in the funds
are detailed later in this prospectus.
WHO SHOULD INVEST
Investors who are looking for an investment solution that may match their goal
(investment objective), stage in life (current age or time horizon), and
risk tolerance.
Investors who would like a team of experienced investment professionals to
select and maintain a portfolio of mutual funds for them.
Investors who would like to spread their money among 10-15 different mutual
funds in one simple package.
Investors who are seeking the benefits of asset allocation and multiple levels
of risk reducing diversification.
The following examples show some possible characteristics of each investor type
and how the matching portfolio allocation might look. The allocation can change
within each designated range based on market conditions and will vary over time.
-5-
<PAGE>
[The following table represents the information portrayed in the three pie
charts as they appear under the heading "Who Should Invest".]
<TABLE>
<CAPTION>
Portfolio Allocation Ranges
----------------------------------------- -----------------------------------------
Investor Type Equity Fixed Income Money Market Equity Fixed Income Money Market
- ------------- ------ ------------ ------------ ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Conservative 40% 58% 2% 30-50% 50-70% 0-15%
Moderate 60% 38% 2% 50-70% 30-50% 0-15%
Growth 80% 18% 2% 70-90% 10-30% 0-15%
</TABLE>
o Conservative Investor
Investment
Objective: Income with a moderate level of growth
Current Age: Late 50s through retirement
-OR-
Time Horizon: 3-8 years to investment goal
Risk tolerance: Low to moderate
If you seek income but are also concerned about protecting the value of
your investment, have a shorter time horizon and a lower tolerance for
volatility, you may find the Conservative Investor Fund to be a
suitable investment.
o Moderate Investor
Investment
Objective: Growth with a moderate level of income
Current Age: Early 40s to late 50s
-OR-
Time Horizon: 5-15 years to investment goal
Risk tolerance: Moderate to high
If you seek capital appreciation, with some income, have a longer time
horizon and moderate tolerance for volatility, you might find the
Moderate Investor Fund to be a suitable investment.
o Growth Investor
Investment
Objective: Growth
Current Age: 20s to early 40s
-OR-
Time Horizon: 10 to 20 years to investment goal
Risk tolerance: High
If you seek potential for capital appreciation with a longer
time horizon and a higher tolerance for volatility, you might find the
Growth Investor Fund to be a suitable investment.
-6-
<PAGE>
You should consult with your Investment Professional to help determine your
investment objectives and risk tolerance.
(3)FEES AND EXPENSES
You may pay a sales charge of up to 5.75% of the offering price, depending
on the amount you invest. You also will bear indirect expenses for
investment advisory, administration, custodian, and shareholder liaison
services. We summarize these expenses in "Fund Expenses" on 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, each Fund declares and pays dividends from its net investment income
each calendar quarter. Each Fund pays realized net capital gains, if any, 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 Portfolios. 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.
GENERAL INFORMATION ABOUT EACH OF THE FUNDS
The following pages provide you with an overview of each Fund. Please look at
the objective, policies, strategies, risks and expenses to determine which Fund
may best suit your risk tolerance and investment needs. You also should review
"About the Mutual Funds In Which We Invest," which describes the investment
objectives, policies, strategies, risks, and expenses of the mutual funds in
which the Funds invest.
-7-
<PAGE>
- --------------------------------------------------------------------------------
INCEPTION ESTIMATED ANNUAL NEWSPAPER
VICTORY FUND DATE EXPENSES AFTER ABBREVIATION*
WAIVERS (AS A %
OF NET ASSETS)
- --------------------------------------------------------------------------------
Conservative Investor Fund 12/31/96 .30%
- --------------------------------------------------------------------------------
Moderate Investor Fund 12/31/96 .30%
- --------------------------------------------------------------------------------
Aggressive Investor Fund 12/31/96 .30%
- --------------------------------------------------------------------------------
*All newspapers do not carry the same abbreviation.
The following pages provide you with an overview 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.
THE LIFECHOICE FUNDS
INVESTMENT OBJECTIVE
The CONSERVATIVE INVESTOR FUND seeks to provide current income combined with
moderate growth of capital. The MODERATE INVESTOR FUND seeks to provide growth
of capital combined with a moderate level of current income.
The AGGRESSIVE INVESTOR FUND seeks to provide growth of capital.
INVESTMENT POLICIES AND STRATEGIES
The three LifeChoice Funds invest primarily in the Victory Funds representing
different combinations of equity securities, fixed income securities, or cash
reserves. Each of the Victory Funds has varying degrees of potential investment
risk and reward. Generally, the Funds invest between 80% and 85% of their total
assets at the time of purchase in shares of the Victory Funds. In addition, the
Funds may invest up to 20% of their total assets in "Other Funds" (that is,
other mutual funds that are not part of the Victory Portfolios) to fulfill a
particular investment niche.
HOW THE ADVISER ALLOCATES ITS INVESTMENTS. The Adviser allocates each Fund's
investments in particular mutual funds based on the investment objective of each
Fund. We describe these ranges below. Although some of the mutual funds do not
share the investment objective of the Funds, the Adviser will select those funds
based on various criteria. The Adviser analyzes the underlying mutual fund's
investment objective, policies, and investment strategy to see if they meet the
investment criteria for that particular Fund. The Adviser also evaluates the
size, portfolio of securities, and management of each underlying mutual fund
before investing.
CONTINUOUS MONITORING. The Adviser continuously monitors the allocation of the
Funds and rebalances or reallocates its investments across the underlying mutual
funds depending on market conditions.
OTHER INVESTMENTS. The Funds also may invest a limited portion of their assets
directly in high quality short-term debt obligations, including commercial
paper, certificates of deposit, bankers' acceptances, repurchase agreements with
maturities of less than seven days, debt obligations backed by the full faith
and credit of the U.S. Government, and demand time deposits of domestic
-8-
<PAGE>
and foreign banks and savings and loan associations.
CONSERVATIVE INVESTOR FUND
Under normal market conditions, the Conservative Investor Fund allocates its
assets as follows:
o 30%-50% of its assets in shares of mutual funds that invest in equity
securities;
o 50%-70% of its assets in shares of mutual funds that invest in bonds and
fixed income securities; and
o 0%-15% of its assets in shares of money market funds.
MODERATE INVESTOR FUND
Under normal market conditions, the Moderate Investor Fund allocates its assets
as follows:
o 50% -70% of its assets in shares of mutual funds that invest in equity
securities;
o 30%-50% of its assets in shares of mutual funds that invest in bonds and
fixed income securities; and
o 0%-15% of its assets in shares of money market funds.
AGGRESSIVE INVESTOR FUND
Under normal market conditions, the Aggressive Investor Fund allocates its
assets as follows:
o 70% to 90% of its assets in shares of mutual funds that invest in equity
securities;
o 10% to 30% of its assets in shares of mutual funds that invest in
fixed-income securities; and
o 0%-15% of its assets in money market funds.
PORTFOLIO MANAGEMENT
The LifeChoice Allocation Committee of Key Asset Management manages each Fund's
investments. No one person is primarily responsible for making investment
recommendations to the Committee.
INFORMATION ABOUT THE MUTUAL FUNDS IN WHICH THE FUNDS INVEST
THE VICTORY FUNDS: INVESTMENT OBJECTIVES AND STRATEGIES
The LifeChoice Funds invest primarily in shares of the Victory Funds described
below. Here is a summary of the investment objective and principal strategies of
each of the Victory Funds in which the Funds may invest:
FUNDS THAT INVEST PRIMARILY IN EQUITY SECURITIES:
THE VALUE FUND seeks to provide long-term growth of capital and dividend income.
The Value Fund invests primarily in a diversified group of common stocks with an
emphasis on companies with above average total return potential.
THE DIVERSIFIED STOCK FUND seeks to provide long-term growth of capital. The
Diversified Stock Fund invests primarily in common stocks and securities
convertible into common stocks issued by established domestic and foreign
companies.
-9-
<PAGE>
THE GROWTH FUND seeks to provide long-term growth of capital. The Growth Fund
invests primarily in common stocks of issuers listed on a nationally recognized
exchange with an emphasis on companies with superior prospects for long-term
earnings growth and price appreciation.
THE SPECIAL VALUE FUND seeks to provide long-term growth of capital and dividend
income. The Special Value Fund invests primarily in common stocks of small- and
medium-sized companies listed on a nationally recognized exchange with an
emphasis on companies with above average total return potential.
THE SPECIAL GROWTH FUND seeks capital appreciation. The Special Growth Fund
invests primarily in equity securities of companies that have market
capitalizations of $750 million or less at the time of purchase.
THE INTERNATIONAL GROWTH FUND seeks to provide capital growth consistent with
reasonable investment risk. The International Growth Fund invests primarily in
equity securities of foreign corporations, most of which will be denominated in
foreign currencies.
FUNDS THAT INVEST PRIMARILY IN FIXED INCOME SECURITIES:
THE CONVERTIBLE SECURITIES FUND seeks to provide a high level of current income
together with long-term capital appreciation. The Convertible Securities Fund
invests primarily in convertible bonds, corporate notes, convertible preferred
stocks, and other securities convertible into common stock.
THE GOVERNMENT MORTGAGE FUND seeks to provide a high level of current income
consistent with safety of principal. The Government Mortgage Fund invests
exclusively in obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities.
THE INVESTMENT QUALITY BOND FUND seeks to provide a high level of income. The
Investment Quality Bond Fund invests primarily in investment-grade bonds issued
by corporations and the U.S. Government and its agencies or instrumentalities.
THE FUND FOR INCOME seeks to provide a high level of current income consistent
with preservation of shareholders' capital. The Fund for Income invests
primarily in selected mortgage-related securities.
THE INTERMEDIATE INCOME FUND seeks to provide a high level of income. The
Intermediate Income Fund invests in debt securities issued by corporations and
the U.S. Government and its agencies and instrumentalities.
THE LIMITED TERM INCOME FUND seeks to provide income consistent with limited
fluctuation of principal. The Limited Term Income Fund invests in a portfolio of
high grade, fixed income securities with a dollar-weighted average maturity of
one to five years, based on remaining maturities.
-10-
<PAGE>
MONEY MARKET FUND:
THE FINANCIAL RESERVES FUND seeks to obtain as high a level of current income as
is consistent with preserving capital and providing liquidity. The Financial
Reserves Fund invests primarily in a portfolio of high-quality U.S. dollar
denominated money market instruments. The Financial Reserves Fund seeks to
maintain a constant net asset value of $1.00 per unit of beneficial interest.
OTHER FUNDS: INVESTMENT OBJECTIVES AND STRATEGIES
The LifeChoice Funds may invest a limited portion of their assets (up to 20% of
total assets) in shares of Other Funds. THE ADVISER MAY SELECT ANY MUTUAL FUND
THAT IT BELIEVES IS APPROPRIATE, based upon its analysis of the Other Fund's
investment objective, policies, strategies, the quality of its management, and
other factors it believes are important.
As of May 31, 1997, one or more of the LifeChoice Funds invested in the
following Other Funds:
THE PBHG GROWTH FUND. The PBHG Growth Fund seeks capital appreciation. The PBHG
Growth Fund will seek to achieve its objective by investing primarily in common
stocks and convertible securities of small to mid-size companies the advisor
believes have an outlook for strong earnings growth and the potential for
significant capital appreciation.
THE NEUBERGER&BERMAN GENESIS FUND. The investment objective of the
Neuberger&Berman Genesis Fund is to seek capital appreciation. The
Neuberger&Berman Genesis Fund pursues this objective by investing primarily in
common stocks of companies with small market capitalizations. The
Neuberger&Berman Genesis Fund regards companies with market capitalization of up
to $1.5 billion at the time of investment as small-cap companies.
THE LOOMIS SAYLES BOND FUND. The Loomis Sayles Bond Fund's investment objective
is high total investment return through a combination of current income and
capital appreciation. The Loomis Sayles Bond Fund seeks to achieve its objective
by normally investing substantially all of its assets in fixed income
securities, although up to 20% of its assets may be invested in preferredstocks.
At least 65% of the Loomis Sayles Bond Fund's total assets will normally be
invested in bonds.
Limit: The LifeChoice Funds, taken as a whole, with either accounts managed by
affiliates of the Adviser may not invest in more than 3% of the outstanding
shares of any one Other Fund.
FUND EXPENSES
This section will help you understand the costs and expenses you would pay,
directly or indirectly, if you invest in the Funds.
-11-
<PAGE>
<TABLE>
<CAPTION>
Conservative Moderate Growth
Investor Fund Investor Fund Investor Fund
------------- ------------- -------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES*
Maximum Sales Charge Imposed on Purchases (as a
percentage of offering price) 5.75% 5.75% 5.75%
Maximum Sales Charge Imposed on Reinvested Dividends None None None
Maximum Deferred Sales Charge** None None None
Redemption Fees None None None
Exchange Fees None None None
</TABLE>
*You may be charged additional fees if you purchase, exchange, or redeem shares
through a broker or agent.
** There is a 1.00% redemption charge for shares redeemed within the first
year of purchase and 0.50% redemption charge for shares redeemed within the
second year of purchase.
The Annual Fund Operating Expenses table below illustrates the estimated
operating expenses that you will incur as a shareholder of the Funds.
THESE EXPENSES ARE CHARGED DIRECTLY TO EACH FUND. Expenses include
management fees, as well as the costs of maintaining accounts,
administration, providing shareholder liaison services, and other
activities. The expenses shown are estimated based on historical or
projected expenses of the Funds.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (AFTER EXPENSE Conservative Moderate Investor Growth
WAIVERS AND REIMBURSEMENTS) Investor Fund Fund Investor Fund
(as a percentage of average daily net assets): ------------- ---- -------------
<S> <C> <C> <C>
Management Fee .20% .20% .20%
Other Expenses(1) .10% .10% .10%
--- --- ---
Total Fund Operating Expenses(2) .30% .30% .30%
=== === ===
</TABLE>
(1)This example was based on the average weighted annual expense ratio for each
of the mutual funds in which the Funds invested as of May 31, 1997.
(2)These fees have been voluntarily reduced. These waivers may be terminated at
any time. Without these waivers Total Fund Operating Expenses would be:
o 1.56% for the Conservative Investor Fund.
o 1.91% for the Moderate Investor Fund, and
o 1.77% for the Growth Investor Fund,
We summarize these indirect expenses later in this prospectus.
The following example is designed to help you understand the various costs you
will bear, directly or indirectly, as an investor in the Funds.
Example: You would pay the following expenses on a $1,000 investment in the
Funds, assuming (1) a 5% annual return, and (2) redemption at the end of
each period.
-12-
<PAGE>
1 Year 3 Years 5 Years 10 Years
Conservative Investor Fund $60 $67 $73 $93
Moderate Investor Fund $60 $67 $73 $93
Growth Investor Fund $60 $67 $73 $93
This example is only an illustration. Actual expenses and returns will vary.
Financial Highlights
The Financial Highlights describe the Funds' returns and operating expenses over
time. This table shows the results of an investment in one share of the
LifeChoice Funds for the periods indicated below.
These financial highlights reflect historical information about the KeyChoice
Funds, the predecessors to the Funds. This information should be read in
conjunction with the Funds' most recent Semi-Annual Report to shareholders,
which is incorporated by reference into the SAI. If you would like a copy of the
Semi-Annual Report, write or call the Funds at 800-KEY-FUND.
<TABLE>
<CAPTION>
Conservative Moderate Growth Investor
Investor Fund(a) Investor Fund(a) Fund(a)
Period Ended May Period Ended May Period Ended May
31,1997 31,1997 31,1997
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $10.00 $10.00 $10.00
------ ------ ------
Investment Activities
Net investment income 0.14 0.09 0.05
Net realized and unrealized gains from investment
transactions 0.29 0.48 0.69
------ ------ ------
Total from Investment Activities 0.43 0.57 0.74
------ ------ ------
Distributions
Net investment income (0.09) (0.04) (0.04)
------ ------ ------
Net Asset Value, End of Period $10.34 $10.53 $10.70
====== ====== ======
Total Return 4.33%(b) 5.75%(b) 7.40%(b)
Ratios/Supplemental Data:
Net Assets, End of Period (000) $391 $3,208 $432
Ratio of expenses to average net assets 0.20%(c) 0.20%(c) 0.20%(c)
Ratio of net investment income to average net assets 3.58%(c) 2.81%(c) 1.05%(c)
Ratio of expenses to average net assets* 31.17%(c) 4.71%(c) 36.04%(c)
Ratio of net investment income to average net assets* -27.40(c) -1.71%(c) -34.79%(c)
Portfolio Turnover 44.96% 64.13% 63.27%
Average Commission Rate per share 0.00% 0.00% 0.00%
</TABLE>
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) For the period December 31, 1996 (commencement of operations) through May
31, 1997.
(b) Not annualized.
(c) Annualized.
-13-
<PAGE>
You will indirectly bear the expenses of the Victory Funds and Other Funds in
which the LifeChoice Funds invest. The table below summarizes the expenses paid
by these mutual funds (after fee waivers and expense reimbursements), as
described in their current prospectuses. Keep in mind that these expenses would
be higher if the investment manager(s) did not waive fees or reimburse expenses.
The actual expenses these funds pay may change from time to time.
You can invest directly in the mutual funds, rather than indirectly as a
LifeChoice investor. By investing in those mutual funds indirectly, you
indirectly pay a proportionate share of the expenses of those mutual funds
(including management fees, administration fees, and custodian fees), and you
also pay the expenses of the Funds. The Board of Directors has determined that
the advisory fees that the Funds pay to Key Asset Management are for services
that are in addition to, rather than duplicate, services provided to the mutual
funds by their service providers. Some of the mutual funds may incur
distribution plan expenses in the form of "12b-1 fees." The table below also
summarizes the percentage range that each LifeChoice Fund may invest in each
mutual fund. From time to time, the Adviser may select "Other Funds" that are
not listed below.
This table shows how the Funds allocate their investments among the various
types of mutual funds. The Adviser may substitute different mutual funds at any
time.
<TABLE>
<CAPTION>
Percentage of Percentage of
Conservative Moderate Investor Percentage of Underlying Portfolios
Investor Fund's Fund's Total Growth Investor Qualifying for
Investment Category Total Investments Investments Fund's Total Purchase
Investments
<S> <C> <C> <C> <C>
Equity Funds 30-50% 50-70% 70-90% VICTORY FUNDS
Value Fund
Diversified Stock Fund
Growth Fund
Special Value Fund
Special Growth Fund
International Growth Fund
*OTHER FUNDS
PBHG Growth Fund
Neuberger&Berman Genesis Fund
Bond/Fixed Income 50-70% 30-50% 10-30% VICTORY FUNDS
Funds Convertible Securities Fund
Government Mortgage Fund
Investment Quality Bond Fund
Fund for Income
Intermediate Income Fund
Real Estate Investment Fund
Limited Term Income Fund
*OTHER FUNDS
Loomis Sayles Bond Fund
Money Market Fund** 0-15% 0-15% 0-15% VICTORY FUNDS
Financial Reserves Fund
</TABLE>
* Total investments in Other Funds is expected to range between 15% and 20%
of total investments of each of the Funds.
** Total investments in the Money Market Fund may temporarily exceed the 15%
maximum due to daily investment of cash flows that are expected to be used
for next day settlement of variable fund purchases by each of the Funds.
-14-
<PAGE>
This table shows how the Funds allocate their investments among specific mutual
funds and the current expense ratio of each of those mutual funds. The expense
ratios of these mutual funds may change. The Adviser may substitute different
mutual funds at any time.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Expense Ratios (After Conservative Moderate Investor Growth Investor
Waivers and Investor Fund Fund Fund
Victory Funds Reimbursements)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Value Fund 1.40% 0%-25% 0%-35% 0%-45%
- -------------------------------------------------------------------------------------------------------------
Diversified Stock Fund* 1.05% 0%-30% 0%-40% 0%-50%
- -------------------------------------------------------------------------------------------------------------
Growth Fund 1.40% 0%-15% 0%-20% 0%-25%
- -------------------------------------------------------------------------------------------------------------
Special Value Fund* 1.40% 0%-20% 0%-25% 0%-30%
- -------------------------------------------------------------------------------------------------------------
Special Growth Fund 1.53% 0%-10% 0%-15% 0%-20%
- -------------------------------------------------------------------------------------------------------------
International Growth Fund* 1.75% 0%-20% 0%-25% 0%-30%
- -------------------------------------------------------------------------------------------------------------
Convertible Securities Fund 1.31% 0%-30% 0%-30% 0%-30%
- -------------------------------------------------------------------------------------------------------------
Government Mortgage Fund 0.90% 0%-30% 0%-25% 0%-20%
- -------------------------------------------------------------------------------------------------------------
Investment Quality Bond Fund 1.00% 0%-50% 0%-40% 0%-30%
- -------------------------------------------------------------------------------------------------------------
Fund for Income 1.00% 0%-35% 0%-25% 0%-15%
- -------------------------------------------------------------------------------------------------------------
Intermediate Income Fund 0.95% 0%-35% 0%-25% 0%-15%
- -------------------------------------------------------------------------------------------------------------
Real Estate Investment Fund 0.00% 0%-20% 0%-20% 0%-20%
- -------------------------------------------------------------------------------------------------------------
Limited Term Income Fund 0.86% 0%-10% 0%-10% 0%-10%
- -------------------------------------------------------------------------------------------------------------
Financial Reserves Fund** 0.67% 0%-15% 0%-15% 0%-15%
- -------------------------------------------------------------------------------------------------------------
Other Funds
- -------------------------------------------------------------------------------------------------------------
PBHG Growth Fund 1.25% 0%-20% 0%-20% 0%-20%
- -------------------------------------------------------------------------------------------------------------
Neuberger&Berman Genesis Fund 1.28% 0%-20% 0%-20% 0%-20%
- -------------------------------------------------------------------------------------------------------------
Loomis Sayles Bond Fund -- 0.75% 0%- 15% 0%-20% 0%-20%
Institutional Shares
- -------------------------------------------------------------------------------------------------------------
Average Weighted Expense Ratios 1.12% 1.07% 1.03%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
* Denotes Class A shares only.
** Total investments in the money market fund may temporarily exceed the 15%
maximum due to daily investment of cash flows that are expected to be used
for next day settlement of variable fund purchases by each of the funds.
The average weighted expense ratios for the Funds' investments in mutual funds
are based on a hypothetical portfolio mix that reflects expected investments
under current market conditions. These figures are approximations of the Funds'
indirect expense ratios associated with their investments in the mutual funds.
The percentage of the Funds' investments in each of the mutual funds will vary
within the ranges shown above and investment in Other Funds will total 15% to
20% of each Fund's total investments.
(2)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
-15-
<PAGE>
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.
****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.****
The following risks are common to all mutual funds:
o Market risk is the risk that the market value of a 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 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. Manager risk also refers to the
possibility that the Portfolio Manager may fail to execute a Fund's
investment strategy effectively and thus fail to achieve its objective.
The following risks are common to mutual funds that invest in equity securities:
o 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:
o 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.
o 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>
The following risks are common to mutual funds that invest in debt securities:
o 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.
o 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.
o 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.
o 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.
o Lower-rated securities ("junk bonds"). Lower-rated securities are subject
to certain risks in addition to those risks associated with higher-rated
securities. Lower-rated securities may be more susceptible to real or
perceived adverse economic conditions than higher-rated securities, less
liquid than higher-rated securities, and more difficult to evaluate than
higher-rated securities.
The following risks are common to mutual funds that invest in futures and
options contracts:
o Leverage risk. Futures and options contracts are leveraged instruments,
which means that their response to economic conditions may be magnified.
Therefore, if a Portfolio Manager incorrectly uses futures or options
contracts, a fund can sustain a loss significantly in excess of the cost of
the futures or options contracts.
o Correlation risk. Futures and options contracts can be used in an effort to
hedge against certain risks. Generally, an effective hedge generates gains
or losses that offset the gains or losses from another position held by a
fund. Correlation risk is the risk that a hedge created using futures or
options contracts (or any derivative, for that matter) does not, in fact,
respond to economic conditions in the manner the portfolio manager
expected. In such a case, the futures or options contracts hedge may not
generate gain sufficient to offset losses and may actually generate losses.
The following risks are common to a fund of funds:
o The Funds' performance is directly related to the dollar-weighted
performance of the mutual funds in which they invest. If the value of the
shares of these mutual funds declines, the value of the Funds will decline.
o Key Asset Management is subject to various conflicts of interest because of
the fund of funds structure of the Funds. The Board of Trustees has adopted
policies to monitor those potential conflicts.
-17-
<PAGE>
o You will indirectly bear additional fees charged by the mutual funds in
which the Funds invest. These may include management fees, to the extent
advisory fees are not waived by Key Asset Management.
o Depending on an Other Fund's investment objective, policies, and
restrictions, additional risks may be created by a Fund's investment in an
Other Fund. Other Funds may follow some or all of the investment practices
of the Victory Funds and may follow other investment practices. The Funds
have little or no control over the investment activities of the Other
Funds. There may, in fact, be additional investment practices, not
discussed in this Prospectus or in the Statement of Additional Information,
that both the Victory Funds and Other Funds may engage in from time to
time.
o The Funds may invest in mutual funds that concentrate, (that is, invest
more than 25% of their total assets) in a single industry. Shares of these
mutual funds may fluctuate in value more than shares of funds that do not
concentrate their investments in a single industry.
o Some of the Other Funds may limit the ability of the Funds to sell their
investments in those funds at certain times. In this case, the Funds'
investment in those shares will be considered "illiquid" and subject to the
overall limitation on investment in illiquid securities.
o From time to time, a mutual fund in which a Fund invests may choose to
redeem the Fund's shares "in kind." That is, the mutual fund may give the
Fund securities from its portfolio rather than the cash value of those
securities. If it determines that it is in the best interests of
shareholders, Key Asset Management may keep those securities in the Fund's
portfolio, even if the Fund could not otherwise purchase those securities.
Some of the mutual funds may invest in below investment grade debt securities
("junk bonds"), forward currency contracts, futures contracts and related
options, mortgage backed securities or other "derivatives" that involve special
risks. More information about these techniques is provided in the SAI, as
discussed above.
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 may 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.
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<PAGE>
Diversification Requirements:
o 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.
o 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.
INVESTMENT PERFORMANCE
****Past performance does not guarantee future results. You may obtain
performance information and the current 30-day yield by calling 800-KEY-FUND.
Our Shareholder Servicing representatives are available from 8:00 a.m. to 8:00
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 also may
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.
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 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.
o Yield is a measure of net interest and dividend income.
o 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.
o Total return is the sum of all of the parts of a Fund's investment return.
Performance of Victory Portfolios
The table below summarizes the "average annual total return" of the Victory
Funds since inception and for the one year period, through October 31, 1997. The
information reflects fund operating
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<PAGE>
expenses after waivers, but does not reflect sales charges that other investors
would pay directly.
<TABLE>
<CAPTION>
Date of
Commencement of Since
Victory Funds Operations Inception One Year Five Years Ten Years
- ------------- ---------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Value Fund 12/3/93 19.41% 27.24% n/a n/a
Diversified Stock Fund - Class A 10/20/89 16.08% 27.95% 19.73% n/a
Growth Fund 12/3/93 19.65% 29.08% n/a n/a
Special Value Fund - Class A 12/3/93 18.06% 27.05% n/a n/a
Special Growth Fund 1/11/94 15.10% 20.62% n/a n/a
International Growth Fund - Class A 5/18/90 6.21% 6.03% 10.25% n/a
Convertible Securities Fund 4/14/88 12.69% 20.38% 14.44% n/a
Government Mortgage Fund 5/18/90 8.31% 8.22% 6.53% n/a
Investment Quality Bond Fund 12/10/93 5.70% 7.67% n/a n/a
Fund for Income 5/8/87 8.34% 7.58% 6.08% n/a
Intermediate Income Fund 12/10/93 5.10% 6.62% n/a n/a
Real Estate Investment Fund 4/30/97 22.42% n/a n/a n/a
Limited Term Income Fund 10/20/89 6.39% 5.57% 4.96% n/a
</TABLE>
The Securities and Exchange Commission has imposed certain limitations on how
the LifeChoice Funds may invest and the fees that they may charge.
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 affect materially 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 open.
The NAV is calculated by adding up the total value of a Fund's investments in
the mutual funds and other assets, subtracting its liabilities, and then
dividing that figure by the number of outstanding shares of the Fund. The value
of an investment in a mutual fund is based upon the NAV determined by that
mutual fund.
NAV = Total Assets-Liabilities
------------------------
Number of Shares Outstanding
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<PAGE>
Each Fund's net asset value can generally be found daily in The Wall Street
Journal and other newspapers.
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 after expenses. 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, each Fund declares and pays dividends from its net investment income
quarterly. Any net capital gains realized by the Funds are paid as dividends at
least annually. Distributions can be received in one of the following ways:
o 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.
o Cash Option. You will be mailed a check no later than 7 days after the pay
date.
o 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.
o Directed Dividends Option. You can have distributions automatically
reinvested in shares of another fund of The Victory Portfolios. 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.
o 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.
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.
o Ordinary dividends from a Fund are taxable as ordinary income; dividends
from a Fund's long-term capital gains are taxable as capital gain.
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<PAGE>
o 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.
o 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.
o Certain dividends paid to you in January will be taxable as if they had
been paid to you the previous December.
o Tax statements will be mailed from a Fund every January showing the amounts
and tax status of distributions made to you.
o 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 a deduction for
income or other tax credits earned from foreign investments.
o 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.
o 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.
INVESTING WITH VICTORY
If you are looking for a convenient way to open an account, 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 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.
These Funds offer only Class A shares. Class A shares have a front-end sales
charge of 5.75%.
All you need to do to get started is to fill out an application.
CALCULATION OF SALES CHARGES
Shares of the Funds 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:
For historical expense information on a Fund, see the "Financial Highlights" in
the Fund overview earlier in this Prospectus.
-22-
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Sales Charge Sales Charge Dealer Reallowance
Your Investment As a % of Offering As a % of Your As a % of the
Price Investment Offering Price
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Up to $50,000 5.75% 6.10% 5.00%
-----------------------------------------------------------------------------------------
$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 2.50% 2.56% 2.00%
-----------------------------------------------------------------------------------------
$500,000 up to $1,000,000 2.00% 2.04% 1.75%
-----------------------------------------------------------------------------------------
$1,000,000 and above* 0.00% 0.00% *
-----------------------------------------------------------------------------------------
</TABLE>
*There is no initial sales charge on purchases of $1 million or more. However,
you will pay a contingent deferred sales charge (CDSC) of up to 1.00% of the
purchase price if you redeem your shares 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.
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
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.
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<PAGE>
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.
HOW TO PURCHASE SHARES
All you need to do to get started is to fill out an application.
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.
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<PAGE>
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
confirmation 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 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 at its sole discretion. If your check is
returned for any reason, you may be
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<PAGE>
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.
HOW TO EXCHANGE SHARES
An exchange is the selling of shares of one fund of The Victory Portfolios 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.
****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:
o Shares of the fund selected for exchange must be available for sale in your
state of residence.
o The Fund whose shares you would like to exchange and the Fund whose shares
you want to buy must offer the exchange privilege.
o 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.
o You must meet the minimum purchase requirements for the fund you purchase
by exchange.
o The registration and tax identification numbers of the two accounts must be
identical.
o 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.
o 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.****
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
declared as payable up to and including the date your redemption request is
processed. If your request is received and accepted 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:
o Mail a check to the address of record;
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<PAGE>
o Wire funds to a domestic financial institution;
o Mail to a previously designated alternate address; or
o 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:
o Redemptions over $10,000;
o Your account registration has changed within the last 15 days;
o The check is not being mailed to the address on your account;
o The check is not being made payable to the owner of the account; or
o If the redemption proceeds are being transferred to another Victory Fund
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 the bank
account or address of record. The minimum withdrawal is $25, and you must have
an account value of $5,000 or more to begin
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<PAGE>
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 Portfolios, a group of 30 distinct
investment portfolios, organized as a Delaware business trust. Some of the
Victory Portfolios 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 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. Affiliates of the Adviser
manage approximately $52 billion for a limited number of individual and
institutional clients.
The Advisory Agreement allows the Adviser to provide services through its own
employees or through the employees of one or more affiliates that are qualified
to act as investment advisers. 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 Clearing Corporation (KCC) may act as clearing broker for the
Fund's security transactions in accordance with procedures adopted by the Funds,
and receive commissions or fees in connection with its services to the Funds.
KCC is a wholly-owned indirect subsidiary of KeyCorp and an affiliate 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 Fund's predecessors, the KeyChoice Funds. During the fiscal year
ended November 30, 1997, Key Asset Management Inc. was paid an advisory fee at
an annual rate based on the average daily net assets of each Fund (after
waivers) as follows:
Conservative Moderate Aggressive
Investor Fund Investor Fund Investor Fund
Advisory Fees . % . % . %
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The Administrator and Distributor:
BISYS Fund Services is the Administrator and Distributor. BISYS is paid a fee at
the following annual rate based on each Fund's average daily net assets as the
Administrator:
o .15% for portfolio assets of $300 million and less,
o .12% for the next $300 million through $600 million of portfolio assets;
and
o .10% for portfolio assets greater than $600 million.
Under a Sub-Administration Agreement, BISYS pays KAM to perform some of the
administrative duties for the Fund. BISYS pays KAM a sub-administration fee at
an annual rate of up to .05% of the Fund's average daily net assets.
BISYS does not charge a fee for its services as Distributor. BISYS Fund Services
Ohio, Inc. receives a fee as the Funds' Accountant.
As permitted under current rules and regulations, 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 of the Funds. The shareholder
servicing agent performs a number of services for their customers who are
shareholders of the Funds. 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 a Fund pays
a fee at an annual rate of up to 0.25% 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 the Funds. The Funds do not currently pay
direct 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.
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OTHER COMPANIES THAT PROVIDE SERVICES TO THE
FUND
|---------------------|
| |
|-------------| 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 shareholder's accounts. |
|----------------------------------------------|
|
|----------------------------------| | |----------------------------------|
| ADMINISTRATOR, | | | CUSTODIAN |
| DISTRIBUTOR, AND FUND | | | |
| ACCOUNTANT | | | |
| |-------| |
| BISYS Fund Services | | Key Trust Company of Ohio, N.A. |
| and its affiliates | | 127 Public Square |
| 3435 Stelzer Road | | Cleveland, OH 44114 |
| Columbus, OH 43219 | | |
| | | |
| Markets the Fund, | | Provides for safe- |
| distributes shares | | keeping of the |
| through Investment | | Fund's investments |
| Professionals, and | | and cash, and |
| calculates the value | | settles trades made |
| of shares. | | by the Fund. |
| | | |
| | | |
- ----------------------------------- ----------------------------------
|
|
|---------------------------|
| SUB-ADMINISTRATOR |
| KEY ASSET MANAGEMENT INC.|
| 127 PUBLIC SQUARE |
| CLEVELAND, OH 44114 |
| Performs certain sub- |
| administrative services. |
| |
|---------------------------|
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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.
o Share Classes
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. The Funds are the successors to the former KeyChoice Funds
indicated below:
Former KeyFunds KeyChoice Fund Merged to Present Victory LifeChoice Fund
- ------------------------------ -----------------------------------------
KeyChoice Income and Growth Fund Conservative Investor Fund
KeyChoice Moderate Growth Fund Moderate Investor Fund
KeyChoice Growth Fund Growth Investor Fund
The above KeyChoice Funds will reorganize into Class A shares of the Victory
LifeChoice Funds, subject to shareholder approval on or about February ___,
1998.
o 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.
o Code of Ethics:
Victory and the Advisers each has 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.
-31-
<PAGE>
o 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 change in the
future, the Trustees would consider selecting another qualified firm so that all
services would continue.
o 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.
OTHER SECURITIES AND INVESTMENT PRACTICES
For temporary defensive purposes or short-term cash needs, 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 above
investment vehicles, see the SAI.
The following table lists some of the types of securities each of the Victory
Funds may choose to purchase under normal market conditions.
-32-
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Convertible Value Fund Diversified Growth Fund
List of Allowable Investments Securities Fund Stock Fund
and Investment Practices
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Equity Securities. Can include common 35% # # #
stock, preferred stock, and convertible preferred
stock of U.S. corporations.
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Equity Securities. Can include common 10% none none none
stock, preferred stock, and convertible preferred
stock of non-U.S. corporations.
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Corporate Debt Obligations. Debt 35% 20% 20% 20%
instruments issued by U.S. public corporations.
They may be secured or unsecured.
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities. Securities issued or 35% 20% 20% 20%
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.
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Debt Obligations. Including bankers' 35% # # #
acceptances, certificates of deposit, prime
quality commercial paper, cash, and cash
equivalents.
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Debt Securities. Debt securities of 10% none none none
foreign issuers including international bonds
traded in the United States and abroad.
- -----------------------------------------------------------------------------------------------------------------------------------
Warrants. The right to purchase an equity 5%; 2% NYSE 10% 10% 10%
security at a stated price for a limited period or ASE
of time.
- -----------------------------------------------------------------------------------------------------------------------------------
When-Issued and Delayed-Delivery Securities. A 33-1/3% 33-1/3% 33-1/3% 33-1/3%
security that is purchased for delivery at a
later time. The market value may change before
the delivery date.
- -----------------------------------------------------------------------------------------------------------------------------------
Receipts. Separately traded interest or 20% 20% 20%
principal components of U.S. Government
securities.
- -----------------------------------------------------------------------------------------------------------------------------------
Repurchase Agreements. The purchase of a security 10% 33-1/3% 33-1/3% 33-1/3%
that must later be sold back to the seller at the
same price plus interest. The seller's
obligation is secured by collateral.
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial Paper. Short-term obligations issued 35% # # #
by corporations and financial institutions. The
Funds only use prime quality commercial paper.
- -----------------------------------------------------------------------------------------------------------------------------------
Illiquid Securities. Investments that cannot be 10% net 15% net 15% net 15% net
sold readily within seven days in the usual assets assets assets assets
course of business at approximately the price at
which a Fund values them.
- -----------------------------------------------------------------------------------------------------------------------------------
oFutures Contracts and Options on Futures 5% in margins 5% in margins 5% in margins 5% in margin
Contracts. Contracts involving the right or or premiums; or premiums; or premiums; or premiums;
obligation to deliver or receive assets or money 33-1/3% subject 33-1/3% subject 33-1/3% subject 33-1/3%
depending on the performance of one or more to futures or to futures or to futures or subject to
assets or an economic index. To reduce the options on options on options on futures or
effects of leverage, liquid assets equal to the futures futures futures options on
contract commitment are set aside to cover the futures
commitment limit. The Funds may invest in
futures in an effort to hedge against market risk
and to establish equity and bond market exposure
when a cash contribution is received in a new or
an existing account (in this strategy, as
individual stocks and bonds are purchased, the
futures contracts are sold).
- -----------------------------------------------------------------------------------------------------------------------------------
Options. A Fund may write, or sell, a covered write covered write covered write covered write covered
call option on a security that it owns or on an calls 25%; calls 25% calls 25% calls 25%
index. The Special Growth Fund may purchase call purchase calls
options, purchase put options, write put options, 20%
or write uncovered call options
- -----------------------------------------------------------------------------------------------------------------------------------
Convertible Securities. Bonds and preferred 65%
stocks convertible into common stock
- -----------------------------------------------------------------------------------------------------------------------------------
Tax, Revenue, and Bond Anticipation Notes.
Issued in expectation of future revenues. Only
purchased when their yields are competitive with
taxable obligations.
- -----------------------------------------------------------------------------------------------------------------------------------
Lower-Rated Debt Securities. Sometimes called 35%
"Junk Bonds" these securities have lower ratings
by the NRSROs and are of a speculative nature.
- -----------------------------------------------------------------------------------------------------------------------------------
Investment Company Securities. Shares of other 5%
mutual funds with similar investment objectives, 3%
including shares of Victory money market funds 10%
(whose advisory fees are waived). 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 may not own more than 3% of the
securities of any one mutual fund, and (3) No
more than 10% of the Fund's total assets in combined
mutual fund holdings.
- -----------------------------------------------------------------------------------------------------------------------------------
Borrowing, Reverse Repurchase Agreements. The 33-1/3% 33-1/3% 33-1/3% 33-1/3%
borrowing of money from banks or through reverse
repurchase agreements. The Funds will not use
borrowing to create leverage.
- -----------------------------------------------------------------------------------------------------------------------------------
Securities Lending. In order to generate 10% 33-1/3% 33-1/3% 33-1/3%
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.
- -----------------------------------------------------------------------------------------------------------------------------------
Dollar Weighted Effective Average Maturity.
Based on the value of a Fund's investments in
securities with different maturity dates. Longer
term debt securities are more volatile because
their values change with interest rate changes.
Therefore, the NAV of the Fund tends to fluctuate
more when its dollar weighted effective average
maturity is longer.
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Special Value Special Growth International Government Investment
List of Allowable Investments Fund Fund Growth Fund Mortgage Fund Quality Bond
and Investment Practices in Funds Fund
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Equity Securities. Can include common # # #
stock, preferred stock, and convertible preferred
stock of U.S. corporations.
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Equity Securities. Can include common none none #
stock, preferred stock, and convertible preferred
stock of non-U.S. corporations.
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Corporate Debt Obligations. Debt # 35% 20% -- #
instruments issued by U.S. public corporations.
They may be secured or unsecured.
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Government Securities. Securities issued or 20% 20% 20% # #
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.
- -----------------------------------------------------------------------------------------------------------------------------------
Short-term Debt Obligations. Including bankers' # # #
acceptances, certificates of deposit, prime
quality commercial paper, cash, and cash
equivalents.
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign Debt Securities. Debt securities of none none 20% -- 20%
foreign issuers including international bonds
traded in the United States and abroad.
- -----------------------------------------------------------------------------------------------------------------------------------
Warrants. The right to purchase an equity 10% 10% 10% # #
security at a stated price for a limited period
of time.
- -----------------------------------------------------------------------------------------------------------------------------------
When-Issued and Delayed-Delivery Securities. A 33-1/3% 33-1/3% 33-1/3% 33-1/3% 33-1/3%
security that is purchased for delivery at a
later time. The market value may change before
the delivery date.
- -----------------------------------------------------------------------------------------------------------------------------------
Receipts. Separately traded interest or 20% 20% 20% 20% 20%
principal components of U.S. Government
securities.
- -----------------------------------------------------------------------------------------------------------------------------------
Repurchase Agreements. The purchase of a security 33-1/3% 33-1/3% 33-1/3% 33-1/3% 33-1/3%
that must later be sold back to the seller at the
same price plus interest. The seller's
obligation is secured by collateral.
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial Paper. Short-term obligations issued # # # 20% 20%
by corporations and financial institutions. The
Funds only use prime quality commercial paper.
- -----------------------------------------------------------------------------------------------------------------------------------
Illiquid Securities. Investments that cannot be 15% net 15% net 15% net 15% net 15% net
sold readily within seven days in the usual assets assets assets assets assets
course of business at approximately the price at
which a Fund values them.
- -----------------------------------------------------------------------------------------------------------------------------------
Futures Contracts and Options on Futures 5% in margins 5% in margins 5% in margins 5% in margins 5% in margins
Contracts. Contracts involving the right or or premiums; or premiums; or premiums; or premiums; or premiums;
obligation to deliver or receive assets or money 33-1/3% subject 33-1/3% subject 33-1/3% subject 33-1/3% subject 33-1/3%
depending on the performance of one or more to futures or to futures or to futures or to futures or subject to
assets or an economic index. To reduce the options on options on options on options on futures or
effects of leverage, liquid assets equal to the futures futures futures futures options on
contract commitment are set aside to cover the futures
commitment limit. The Funds may invest in
futures in an effort to hedge against market risk
and to establish equity and bond market exposure
when a cash contribution is received in a new or
an existing account (in this strategy, as
individual stocks and bonds are purchased, the
futures contracts are sold).
- -----------------------------------------------------------------------------------------------------------------------------------
Options. A Fund may write, or sell, a covered write covered 25% in put write covered
call option on a security that it owns or on an calls 25% options or call calls 25%
index. The Special Growth Fund may purchase call options written;
options, purchase put options, write put options, 5% in premiums
or write uncovered call options for call options
purchased
- -----------------------------------------------------------------------------------------------------------------------------------
Convertible Securities. Bonds and preferred
stocks convertible into common stock
- -----------------------------------------------------------------------------------------------------------------------------------
Tax, Revenue, and Bond Anticipation Notes. # #
Issued in expectation of future revenues. Only
purchased when their yields are competitive with
taxable obligations.
- -----------------------------------------------------------------------------------------------------------------------------------
Lower-Rated Debt Securities. Sometimes called -- #
"Junk Bonds" these securities have lower ratings
by the NRSROs and are of a speculative nature.
- -----------------------------------------------------------------------------------------------------------------------------------
Investment Company Securities. Shares of other 5% 5%
mutual funds with similar investment objectives, 3% 3%
including shares of Victory money market funds 10% 10%
(whose advisory fees are waived). 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 may not own more than 3% of the
securities of any one mutual fund, and (3) No
more than 10% of the Fund's total assets in
combined mutual fund holdings.
- -----------------------------------------------------------------------------------------------------------------------------------
Borrowing, Reverse Repurchase Agreements. The 33-1/3% 33-1/3% 33-1/3% 33-1/3% 33-1/3%
borrowing of money from banks or through reverse
repurchase agreements. The Funds will not use
borrowing to create leverage.
- -----------------------------------------------------------------------------------------------------------------------------------
Securities Lending. In order to generate 33-1/3% 33-1/3% 33-1/3% 33-1/3% 33-1/3%
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.
- -----------------------------------------------------------------------------------------------------------------------------------
Dollar Weighted Effective Average Maturity. less than 5-15 years
Based on the value of a Fund's investments in 10 years
securities with different maturity dates. Longer
term debt securities are more volatile because
their values change with interest rate changes.
Therefore, the NAV of the Fund tends to fluctuate
more when its dollar weighted effective average
maturity is longer.
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Fund for Income Intermediate Limited Term Financial
List of Allowable Investments Income Fund Income Fund Reserves Fund
and Investment Practices in Funds
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Equity Securities. Can include common
stock, preferred stock, and convertible preferred
stock of U.S. corporations.
- -----------------------------------------------------------------------------------------------------------------------
Foreign Equity Securities. Can include common
stock, preferred stock, and convertible preferred
stock of non-U.S. corporations.
- -----------------------------------------------------------------------------------------------------------------------
U.S. Corporate Debt Obligations. Debt # # #
instruments issued by U.S. public corporations.
They may be secured or unsecured.
- -----------------------------------------------------------------------------------------------------------------------
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.
- -----------------------------------------------------------------------------------------------------------------------
Short-term Debt Obligations. Including bankers'
acceptances, certificates of deposit, prime
quality commercial paper, cash, and cash
equivalents.
- -----------------------------------------------------------------------------------------------------------------------
Foreign Debt Securities. Debt securities of -- 20% 20%
foreign issuers including international bonds
traded in the United States and abroad.
- -----------------------------------------------------------------------------------------------------------------------
Warrants. The right to purchase an equity # # #
security at a stated price for a limited period
of time.
- -----------------------------------------------------------------------------------------------------------------------
When-Issued and Delayed-Delivery Securities. A 33-1/3% 33-1/3% 33-1/3%
security that is purchased for delivery at a
later time. The market value may change before
the delivery date.
- -----------------------------------------------------------------------------------------------------------------------
Receipts. Separately traded interest or -- 20% 20%
principal components of U.S. Government
securities.
- -----------------------------------------------------------------------------------------------------------------------
Repurchase Agreements. The purchase of a security 10% 33-1/3% 33-1/3%
that must later be sold back to the seller at the
same price plus interest. The seller's
obligation is secured by collateral.
- -----------------------------------------------------------------------------------------------------------------------
Commercial Paper. Short-term obligations issued 20% 20% 20%
by corporations and financial institutions. The
Funds only use prime quality commercial paper.
- -----------------------------------------------------------------------------------------------------------------------
Illiquid Securities. Investments that cannot be 15% net 15% net 15% net
sold readily within seven days in the usual assets assets assets
course of business at approximately the price at
which a Fund values them.
- -----------------------------------------------------------------------------------------------------------------------
Futures Contracts and Options on Futures -- 5% in margins 5% in margins
Contracts. Contracts involving the right or or premiums; or premiums;
obligation to deliver or receive assets or money 33-1/3% subject 33-1/3% subject
depending on the performance of one or more to futures or to futures or
assets or an economic index. To reduce the options on options on
effects of leverage, liquid assets equal to the futures futures
contract commitment are set aside to cover the
commitment limit. The Funds may invest in
futures in an effort to hedge against market risk
and to establish equity and bond market exposure
when a cash contribution is received in a new or
an existing account (in this strategy, as
individual stocks and bonds are purchased, the
futures contracts are sold).
- -----------------------------------------------------------------------------------------------------------------------
Options. A Fund may write, or sell, a covered
call option on a security that it owns or on an
index. The Special Growth Fund may purchase call
options, purchase put options, write put options,
or write uncovered call options
- -----------------------------------------------------------------------------------------------------------------------
Convertible Securities. Bonds and preferred
stocks convertible into common stock
- -----------------------------------------------------------------------------------------------------------------------
Tax, Revenue, and Bond Anticipation Notes. # # #
Issued in expectation of future revenues. Only
purchased when their yields are competitive with
taxable obligations.
- -----------------------------------------------------------------------------------------------------------------------
Lower-Rated Debt Securities. Sometimes called -- # --
"Junk Bonds" these securities have lower ratings
by the NRSROs and are of a speculative nature.
- -----------------------------------------------------------------------------------------------------------------------
Investment Company Securities. Shares of other 5% 5% 5%
mutual funds with similar investment objectives, 3% 3% 3%
including shares of Victory money market funds 10% 10% 10%
(whose advisory fees are waived). 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 may not own more than 3% of the
securities of any one mutual fund, and (3) No
more than 10% of the Fund's total assets in
combined mutual fund holdings.
- -----------------------------------------------------------------------------------------------------------------------
Borrowing, Reverse Repurchase Agreements. The 33-1/3% 33-1/3% 33-1/3%
borrowing of money from banks or through reverse
repurchase agreements. The Funds will not use
borrowing to create leverage.
- -----------------------------------------------------------------------------------------------------------------------
Securities Lending. In order to generate 33-1/3% 33-1/3% 33-1/3%
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.
- -----------------------------------------------------------------------------------------------------------------------
Dollar Weighted Effective Average Maturity. less than 3-10 years 1-5 years
Based on the value of a Fund's investments in 10 years
securities with different maturity dates. Longer
term debt securities are more volatile because
their values change with interest rate changes.
Therefore, the NAV of the Fund tends to fluctuate
more when its dollar weighted effective average
maturity is longer.
</TABLE>
VF/LCHF-PRO (3/98)
-34-
<PAGE>
VICTORY PORTFOLIOS
CONVERTIBLE SECURITIES FUND
FEDERAL MONEY MARKET FUND
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 1998
This Statement of Additional Information ("SAI") is not a prospectus and should
be read in conjunction with the prospectus of the Victory Portfolios for
Convertible Securities Fund and the prospectus for Federal Money Market Fund,
(formerly the Key Mutual Funds ("KeyFunds")), each dated March 1, 1998, as
supplemented from time to time. This SAI is incorporated by reference in its
entirety into the prospectus for Convertible Securities Fund and the prospectus
for Federal Money Market Fund. Copies of the prospectuses may be obtained by
writing to 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 AND SUB-ADMINISTRATOR:
Key Asset Management Inc.
ADMINISTRATOR AND DISTRIBUTOR:
BISYS Fund Services
TRANSFER AGENT:
State Street Bank and Trust Company
SERVICING AGENT AND DIVIDEND DISBURSING AGENT:
Boston Financial Data Services, Inc.
CUSTODIAN:
Key Trust Company of Ohio, N.A.
INDEPENDENT ACCOUNTANT:
Coopers & Lybrand L.L.P.
COUNSEL:
Kramer, Levin, Naftalis & Frankel
1
<PAGE>
TABLE OF CONTENTS
INVESTMENT OBJECTIVES AND POLICIES
Additional Information on Fund Investments
INVESTMENT RESTRICTIONS
PORTFOLIO TURNOVER
Convertible Securities Fund and Federal Money Market Fund
MANAGEMENT OF THE FUNDS
Trustees and Officers
SECURITY HOLDERS
THE INVESTMENT ADVISER, ADMINISTRATOR AND SUB-ADMINISTRATOR
EXPENSES, DISTRIBUTOR, DISTRIBUTION PLAN AND SHAREHOLDER SERVICING PLAN
CUSTODIAN, TRANSFER AGENT, SERVICING AGENT AND DIVIDEND DISBURSING AGENT
PERFORMANCE INFORMATION
Federal Money Market Fund
Convertible Securities Fund
PORTFOLIO TRANSACTIONS AND BROKERAGE
PURCHASE, REDEMPTION AND PRICING
FEDERAL INCOME TAXES
ADDITIONAL INFORMATION
INDEPENDENT ACCOUNTANTS AND REPORTS
COUNSEL
APPENDIX
2
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Victory Portfolios ("Victory Portfolios" or the "Company"), is an
open-end management investment company. The Victory Portfolios consist of 30
different portfolios, two of which (each a "Fund" and collectively the "Funds")
are described in this SAI. On or about February __, 1998, shareholders will vote
to reorganize the Funds described in this SAI into the Victory Portfolios. At
that time, the assets of the Key Money Market Mutual Fund will be merged into
the newly created Investor and Select Shares of the Victory Federal Money Market
Fund. The assets of the SBSF Convertible Securities Fund will be merged into the
newly created Class A Shares of the Victory Convertible Securities Fund. Prior
to December 1995, Key Mutual Funds operated under its corporate name "SBSF
Funds, Inc." In December 1995, the Trust began operating under the name "Key
Mutual Funds." Each Fund is a separately managed, diversified mutual fund with
its own investment objective and policies. The two Funds and their investment
objectives are:
Convertible Securities Fund -- its investment objective is to seek a
high level of current income together with long-term capital appreciation. The
Convertible Securities Fund will invest primarily in convertible bonds,
corporate notes, convertible preferred stocks and other securities convertible
into common stock.
Federal Money Market Fund -- its investment objective is to provide
high current income to the extent consistent with preservation of capital. The
Federal Money Market Fund invests only in securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities, as well as repurchase
agreements with respect to such securities.
ADDITIONAL INFORMATION ON FUND INVESTMENTS
In addition, the Funds may use the investment methods described below.
SECURITIES LENDING. The Convertible Securities Fund may from time to
time lend securities from their portfolio to broker-dealers, banks, financial
institutions and institutional borrowers of securities. The Convertible
Securities Fund will limit their securities lending to 33-1/3% of total assets.
Key Trust Company of Ohio, N.A. ("Key Trust"), an affiliate of Key
Asset Management Inc. ("KAM" or the "Adviser"), serves as the lending agent
pursuant to a Securities Lending Agency Agreement (the "Lending Agreement") for
the Convertible Securities Fund.
Under the guidelines established by the Board of Trustees (which may be
changed from time to time), Key Trust must maintain the loan collateral at all
times in an amount equal to at least 100% of the current market value of the
loaned securities. The Convertible Securities Fund will not lend portfolio
securities in excess of the amounts specified in its prospectus. The Convertible
Securities Fund will not lend their portfolio securities to any officer,
director, Trustee, employee, or affiliate of the Victory Funds, KAM, or the
Distributor.
3
<PAGE>
The Convertible Securities Fund must initially receive a minimum of
102% collateral in the form of cash or U.S. Government obligations, to secure
the return of the loaned securities. Key Trust, at the direction of the Adviser,
may invest the collateral in short-term debt instruments that the Adviser has
determined present minimal credit risks. This is a risk of delay in receiving
collateral or in receiving the securities loaned or even a loss of rights in the
collateral should the borrower of the securities fail financially. Each Fund
remains the owner of the securities during the term of the loan.
When portfolio securities are the subject of a loan, the borrower will
pay the Convertible Securities Fund any dividends or interest paid on the loaned
securities plus any interest negotiated between the borrower and the seller. Key
Trust, on behalf of the Convertible Securities Fund, may terminate a particular
loan at any time. While the Convertible Securities Fund will not have the right
to vote securities on loan, the Adviser intends to direct Key Trust to terminate
the loan and regain the right to vote if the issue to be voted on is considered
important with respect to the investment. The Convertible Securities Fund will
only enter into loan arrangements with broker-dealers, banks or other
institutions which KAM has determined are creditworthy under the guidelines
established by the Trustees, and when, in KAM's judgment, the potential returns
justify the attendant risks.
For the services provided under the Lending Agreement, Key Trust
receives a transaction-based fee. The Victory Portfolios, Key Trust and certain
affiliates have applied to the SEC for an order that would exempt them from
various provisions of the Investment Company Act of 1940 that, among other
things, would enable Key Trust to: (a) receive compensation based on a
percentage of the income earned on the investment of the collateral received for
each loan; and (b) invest the collateral in a joint account for the
administrative convenience and economic benefit of the Convertible Securities
Fund and other affiliated investment companies.
LOWER RATED SECURITIES. The Convertible Securities Fund may invest in
securities that are rated below investment grade by a Nationally Recognized
Statistical Rating Organization ("NRSRO") (e.g., lower than Baa by Moody's
Investor Service, Inc. or lower than BBB by Standard and Poor's Corporation)
(or, if not rated, of comparable quality). Securities rated below investment
grade by an NRSRO are sometimes referred to as "high yield" securities or "junk"
bonds. Investors should consider the following risks associated with high yield
securities before investing in the Fund.
Investing in high yield securities involves special risks in addition
to the risks associated with investments in higher rated securities. High yield
securities may be regarded as predominantly speculative with respect to the
issuer's continuing ability to meet principal and interest payments. Analysis of
the creditworthiness of issuers of high yield securities may be more complex
than for issuers of high quality debt securities, and the ability of the Fund to
achieve its investment objective may, to the extent of its investments in high
yield securities, be more dependent upon such creditworthiness analysis than
would be the case if the Fund were investing in higher quality securities.
4
<PAGE>
High yield securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than higher grade
securities. The prices of high yield securities have been found to be less
sensitive to interest rate changes than more highly rated investments, but more
sensitive to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a decline in high yield security prices because the advent
of a recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If the issuer of high
yield securities defaults, the Fund may incur additional expenses to seek
recovery. In the case of high yield securities structured as zero coupon or
payment-in-kind securities, the market prices of such securities are affected to
a greater extent by interest rate changes, and therefore tend to be more
volatile than securities which pay interest periodically in cash.
The secondary markets on which high yield securities are traded may be
less liquid than the market for higher grade securities. Less liquidity in the
secondary trading markets could adversely affect and cause large fluctuations in
the daily net asset value of the Fund's shares. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high yield securities, especially in a thinly traded
market.
The use of credit ratings as a method of evaluating high yield
securities can involve certain risks. For example, credit ratings evaluate the
safety of principal and interest payments, not the market value risk of high
yield securities. Also, credit rating agencies may fail to change credit ratings
in a timely fashion to reflect events since the security was last rated. If a
credit rating agency changes the rating of a portfolio security held by the
Fund, the Fund may retain the portfolio security if the Adviser deems it to be
in the best interests of the Fund.
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
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
5
<PAGE>
secured by bank letters of credit. Normally, the Convertible Securities Fund
will only use Step-Up Notes.
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.
REPURCHASE AGREEMENTS. The Funds may engage in repurchase agreement
transactions with broker/dealers and banks which are selected by the Adviser in
accordance with procedures approved by the Board of Trustees. A repurchase
agreement is an instrument under which the purchaser (i.e., a Fund) acquires a
security and the seller agrees, at the time of the sale, to repurchase the
obligation at a mutually agreed upon time and price, thereby determining the
yield during the purchaser's holding period. This results in a fixed rate of
return insulated from market fluctuations during such period. With respect to
repurchase agreement transactions entered into by the Convertible Securities
Fund, the underlying securities are ordinarily U.S. Treasury or other
governmental obligations or high quality money market instruments. With respect
to repurchase agreement transactions entered into by the Federal Money Market
Fund, the underlying securities are bonds, notes or other obligations of or
guaranteed by the United States, or those for which the faith of the United
States is pledged for the payment of principal and interest thereon, and bonds,
notes, debentures or any other obligations or securities issued by any federal
government agency or instrumentality. The Funds' repurchase agreements require
that at all times while a repurchase agreement is in effect, the value of the
collateral must equal or exceed the repurchase price.
With respect to repurchase agreement transactions entered into by the
Convertible Securities Fund, the maturities of the obligations securing such
transactions may be more than one
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year. However, the term of each repurchase agreement entered into by such Funds
will always be less than one year. With respect to the Federal Money Market
Fund, all obligations securing repurchase agreements entered into by such Fund
will mature or be redeemable within two years of the date of consummation of the
repurchase agreement. The Funds' risk is limited to the ability of the seller to
pay the agreed upon amount on the delivery date. In the opinion of the Adviser,
the risk is not material; if the seller defaults, the underlying security
constitutes collateral for the seller's obligation to pay although the Funds may
experience difficulties and incur certain costs in exercising its rights to the
collateral and may lose the interest it expected to receive in respect of the
repurchase agreement. Repurchase agreements usually are for short periods, such
as one week or less, but could be longer. The Funds will not enter into
repurchase agreements with maturities of more than 7 days if, taken together
with illiquid securities and other securities for which there are no readily
available quotations, more than 10% of their respective total assets would be so
invested. Repurchase agreements are considered to be loans by the Funds
collateralized by the underlying securities.
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.
RESTRICTED SECURITIES. As the prospectus provides, certain of the Funds
may purchase up to 15% of its total assets in restricted securities that
generally can be sold only in privately negotiated transactions, pursuant to an
exemption from registration under the Securities Act of 1933, or in a registered
public offering. Where registration is required, 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 a 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 security.
REVERSE REPURCHASE AGREEMENTS. The Convertible Securities Fund may
borrow funds for temporary purposes by entering into reverse repurchase
agreements, provided that the total amount of all borrowings by a Fund does not
exceed 5% of the Fund's total assets. Pursuant to such an agreement, a Fund
sells portfolio securities to financial institutions such as banks and
broker-dealers, and agrees to repurchase them at a mutually agreed-upon date and
price. At the time the Fund enters into a reverse repurchase agreement, it must
place in a segregated custodial account assets having a value equal to the
repurchase price (including accrued interest); the collateral will be marked to
market on a daily basis, and will be continuously monitored to ensure that such
equivalent value is maintained. Reverse repurchase agreements involve the risk
that the market value of the securities sold by the Fund may decline below the
price at which the Fund is obligated
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to repurchase the securities. In such an event, a Fund could suffer a loss upon
repurchase of the securities. Reverse repurchase agreements are considered by
the staff of the Securities and Exchange Commission ("SEC") to be borrowing by a
Fund under the Investment Company Act of 1940, as amended ("1940 Act").
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.
FOREIGN SECURITIES. Securities of foreign issuers may, in the opinion
of the Adviser, present attractive investment opportunities, and the Convertible
Securities Fund may invest up to 5% of its total assets in such securities.
Foreign investments may be affected favorably or unfavorably by changes in
currency
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rates and exchange control regulations, including currency blockage. There may
be less information available about a foreign company than about a U.S. company,
and foreign companies may not be subject to reporting standards and requirements
comparable to those applicable to U.S. companies. Foreign securities and their
markets may not be as liquid as U.S. securities and their markets. Securities of
some foreign companies may involve greater market risk than securities of U.S.
companies, and foreign brokerage commissions and custody fees are generally
higher than those in the United States. Investments in foreign securities may
also be subject to local economic or political risks, such as political
instability of some foreign governments and the possibility of nationalization
or expropriation of issuers. Such foreign securities may also be subject to
withholding and other taxes imposed by foreign governments.
FUTURES CONTRACTS. The Convertible Securities Fund may enter into
futures contracts, options on futures contracts, and stock index futures
contracts and options thereon for the purposes of remaining fully invested and
reducing transaction costs. Futures contracts provide for the future sale by one
party and purchase by another party of a specified amount of a specific
security, class of securities, or an index at a specified future time and at a
specified price. A stock index futures contract is a bilateral agreement
pursuant to which two parties agree to take or make delivery of an amount of
cash equal to a specified dollar amount times the difference between the stock
index value at the close of trading of the contracts and the price at which the
futures contract is originally struck. Futures contracts which are standardized
as to maturity date and underlying financial instrument are traded on national
futures exchanges. Futures exchanges and trading are regulated under the
Commodity Exchange Act by the Commodity Futures Trading Commission (the "CFTC"),
a U.S. Government agency.
The Convertible Securities Fund 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 the Convertible Securities 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.
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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
Convertible Securities Fund expects to earn interest income on its margin
deposits.
When interest rates are expected to rise or market values of portfolio
securities are expected to fall, the Convertible Securities Fund can seek
through the sale of futures contracts to offset a decline in the value of its
portfolio securities. When interest rates are expected to fall or market values
are expected to rise, the Convertible Securities Fund, through the purchase of
such contracts, can attempt to secure better rates or prices for the Convertible
Securities Fund than might later be available in the market when it effects
anticipated purchases.
The Convertible Securities Fund 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 Convertible Securities Fund's 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 the Convertible Securities Fund could
lose more than the original margin deposit required to initiate a futures
transaction.
Futures transactions involve brokerage costs and require the
Convertible Securities Fund to segregate assets to cover contracts that would
require it to purchase securities or currencies. The Convertible Securities Fund
may lose the expected benefit of futures transactions if interest rates,
exchange rates or securities prices move in an unanticipated manner. Such
unanticipated changes may also result in poorer overall performance than if the
Convertible Securities Fund had not entered into any futures transactions. In
addition, the value of the Convertible Securities Fund's futures positions may
not prove to be perfectly or even highly correlated with the value of its
portfolio securities, limiting the Convertible Securities 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.
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RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. The Convertible
Securities Fund will not enter into futures contract transactions for purposes
other than bona fide hedging purposes to the extent that, immediately
thereafter, the sum of its initial margin deposits on open contracts exceeds 5%
of the market value of the Convertible Securities Fund's total assets. In
addition, the Convertible Securities Fund will not enter into futures contracts
to the extent that the value of the futures contracts held would exceed 1/3 of
the Convertible Securities Fund's total assets. Futures transactions will be
limited to the extent necessary to maintain the Convertible Securities 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 the Convertible Securities
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 Convertible Securities Fund, those requirements
may mandate the establishment of a segregated account (not with a futures
commission merchant or broker) with cash or certain liquid assets that, when
added to the amounts deposited as margin, equal the market value of the
instruments underlying the futures contracts (but are not less than the price at
which the short positions were established). However, segregation of assets is
not required if the Convertible Securities Fund "covers" a long position. For
example, instead of segregating assets, the Convertible Securities Fund, when
holding a long position in a futures contract, could purchase a put option on
the same futures contract with a strike price as high or higher than the price
of the contract held by the Convertible Securities Fund. In addition, where the
Convertible Securities 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. The Convertible Securities
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 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.
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In addition, the extent to which the Convertible Securities Fund may
enter into transactions involving futures contracts may be limited by the Code's
requirements for qualification as a registered investment company and the
Convertible Securities 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 the Convertible Securities
Fund has insufficient cash, it may have to sell portfolio securities to meet
daily margin requirements at a time when it may be disadvantageous to do so. In
addition, the Convertible Securities 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 Convertible Securities Fund are only for
hedging purposes, the Adviser does not believe that the Convertible Securities
Fund is subject to the risks of loss frequently associated with futures
transactions. The Convertible Securities Fund would presumably have sustained
comparable losses if, instead of the futures contract, it had invested in the
underlying financial instrument and sold it after the decline.
Use of futures transactions by the Convertible Securities Fund involves
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 Convertible Securities Fund could both lose money
on futures contracts and also experience a decline in value of its portfolio
securities. There is also the risk of loss by the Convertible Securities Fund of
margin deposits in the event of bankruptcy of a broker with whom the Convertible
Securities Fund has open positions in a futures contract or related option.
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CALL OPTIONS. The Convertible Securities Fund may purchase and write
(i.e., sell) call options that are traded on U.S. securities exchanges.
Exchanges on which call options are traded include the Chicago Board Options
Exchange, the American Stock Exchange, the Philadelphia Stock Exchange and the
Pacific Stock Exchange. Generally, a call option is a short-term contract
(having a duration of nine months or less) pursuant to which the purchaser of
the call option, in return for a premium paid, has the right to buy the security
underlying the option at a specified exercise price at any time during the term
of the option. The writer of the call option, who receives the premium, has the
obligation, upon exercise of the option, to deliver the underlying security
against payment of the exercise price during the option period. Brokerage
commissions on call options transactions are generally higher than those for
exchange transactions in listed common stocks.
Generally, a call option is "covered" if the Fund which writes it owns
the underlying security covered by the call or has an absolute and immediate
right to acquire that security without additional cash consideration (or for
additional cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other securities held in its portfolio. A call
option is also covered if the Fund which writes it holds on a share-for-share
basis a call on the same security as the call written where the exercise price
of the call held is equal to or less than the exercise price of the call written
or greater than the exercise price of the call written if the difference is
maintained by the Fund in cash, Treasury bills or other high grade short-term
obligations in a segregated account with its custodian. The premium paid by the
purchaser of an option will reflect, among other things, the relationship of the
exercise price to the market price and volatility of the underlying security,
the remaining term of the option, supply and demand and interest rates.
If the writer of an option wishes to terminate his obligation, he may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of the
purchase is that the writer's position will be canceled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after it has been notified of the exercise of an option. Likewise, an investor
who is the holder of an option may liquidate his position by effecting a
"closing sale transaction." This is accomplished by selling an option of the
same series as the option previously purchased. There is no guarantee that
either a closing purchase or a closing sale transaction can be effected at the
time a Fund desires to do so.
Effecting a closing transaction in the case of a written call option
will permit the Fund which wrote it to write another call option on the
underlying security with either a different exercise price or expiration date or
both. Also, effecting a closing transaction will permit the cash or proceeds
from the concurrent sale of any securities subject to the option to be used for
other investments. If a Fund desires to sell a particular security from its
portfolio on which it has written a call option it will effect a closing
transaction prior to or concurrent with the sale of the security. If a Fund is
unable to effect a closing purchase transaction and is otherwise unable to keep
the option that it has written covered, as described above, the Fund will be
unable to dispose of the underlying security and engage in the foregoing
transactions.
A gain from a closing transaction will be realized if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to purchase the
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option; a loss will be realized from a closing transaction if the price of the
transaction is more than the premium received from writing the option or is less
than the premium paid to purchase the option. Because increases in the market
price of a call option will generally reflect increases in the market price of
the underlying security, any loss resulting from the repurchase of a call option
is likely to be offset in whole or in part by appreciation of the underlying
security owned by the Fund.
The Convertible Securities Fund may write call options only if they are
covered, and the options must remain covered so long as the Fund is obligated as
a writer. In addition, the Funds may be limited in engaging in options
transactions by certain provisions of the Internal Revenue Code which limit the
amount of gross income derived from the sale or other disposition of securities
held for less than three months to 30%. See "Federal Income Taxes."
RISKS ASSOCIATED WITH OPTIONS TRANSACTIONS. The purchase and writing of
call options involves certain risks. During the option period, the covered call
writer has, in return for the premium on the option, given up the opportunity to
profit from a price increase in the underlying securities above the exercise
price, but, as long as its obligation as a writer continues, the writer has
retained the risk of loss should the price of the underlying security decline.
The writer of an option has no control over the time when it may be required to
fulfill its obligation as a writer of the option. Once an option writer has
received exercise notice, it cannot effect a closing purchase transaction in
order to terminate its obligation under the option and must deliver the
underlying securities at the exercise price. If a call option purchased by a
Fund is not sold when it has remaining value, and if the market price of the
underlying security remains less than or equal to the exercise price, the Fund
will lose its entire investment in the option. Also, where a call option on a
particular security is purchased to hedge against price movements in a related
security, the price of the option may move more or less than the price of the
related security. There can be no assurance that a liquid market will exist when
a Fund seeks to close out an option position. Furthermore, if trading
restrictions or suspensions are imposed on the options markets, a Fund may be
unable to close out a position.
WARRANTS. Warrants are securities that give the Convertible Securities
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. The
Convertible Securities Fund will only use attached warrants.
The investment policies of the Funds set forth above may be changed or
altered by the Board of Trustees of the Funds, except to the extent set forth
under "Investment Restrictions."
INVESTMENT RESTRICTIONS
The following investment restrictions are considered to be fundamental
policies of each of the Funds and may only be changed if approved by the holders
of a majority of the outstanding voting securities of the affected Fund. Under
the 1940 Act, such approval requires the affirmative
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vote, at a meeting of shareholders of a Fund, of (i) at least 67% of the shares
of the Fund present at the meeting, if the holders of more than 50% of the
outstanding shares of the Fund are present in person or represented by proxy; or
(ii) more than 50% of the outstanding shares of the Fund, whichever is less.
EACH OF THE FUNDS WILL NOT:
1. As to 75% of their respective total assets, invest more than 5% in the
securities of any one issuer except securities of the U.S. Government,
its agencies or its instrumentalities.
2. Invest in companies for the purpose of influencing management or
exercising control, and will not purchase more than 10% of the voting
securities of any one issuer. This will not preclude the management of
the Funds from voting proxies in their discretion.
3. Lend any cash except in connection with the acquisition of a portion
of an issue of publicly distributed bonds, debentures, notes or other
evidences of indebtedness or in connection with the purchase of
securities subject to repurchase agreements, except as outlined under
"Additional Information on Fund Investments" and the sub-section,
"Securities Lending." The Funds will not lend any other assets except
as a special investment method. See "Investment Objectives and
Policies" herein and "Investment Objectives" in the Prospectus.
4. 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.
5. Purchase securities on margin or sell securities short.
6. Act as an underwriter of securities issued by others.
7. Purchase the securities of other investment companies except in the
open market and at the usual and customary brokerage commissions or
except as part of a merger, consolidation or other acquisition.
8. Purchase or hold any real estate, including real estate limited
partnerships, except that the Funds may invest in securities secured
by real estate or interests therein or issued by persons which deal in
real estate or interests therein. The Funds will not deal in
commodities or commodity contracts.
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9. Purchase securities if such purchase would cause more than 25% of any
of the Funds' total assets to be invested in the securities of issuers
in any one industry, provided however that the Federal Money Market
Fund reserves the right to concentrate in securities issued or
guaranteed as to principal and interest by the United States
Government, its agencies or instrumentalities or U.S. bank
obligations. The Federal Money Market Fund, however, will not exercise
its right to concentrate in U.S. bank obligations.
10. Make a loan of its portfolio securities if, immediately thereafter and
as a result thereof, portfolio securities with a market value of 10%
or more of the total assets of any of the Funds would be subject to
such loans.
11. Invest more than 15% of any of the Funds' net assets in (i) securities
restricted as to disposition under the Federal securities laws, (ii)
securities as to which there are no readily available market
quotations or (iii) repurchase agreements with a maturity in excess of
7 days.
In addition to the foregoing fundamental investment restrictions which
may be changed only with shareholder approval, each Fund has adopted the
following non-fundamental investment restrictions which may be changed at any
time by the Board of Trustees provided that such change does not conflict with
any fundamental policy of the Funds.
EACH OF THE FUNDS WILL NOT:
1. With respect to 75% of a Fund's total assets, purchase the securities
of any one issuer (except in securities of the United States
Government, its agencies or its 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. [Rule 2a-7 of the
1940 Act permits the Federal Money Market Fund to invest up to 25% of
its total assets in securities of a single issuer for a period of up
to three days.]
2. Invest in excess of 5% of its total assets in securities of issuers
which, including predecessors, do not have a record of at least three
years' operation.
4. Pledge or hypothecate any of the Fund's assets. For the purpose of
this limitation, collateral arrangements with respect to stock options
are not deemed to be a pledge of assets.
5. Purchase or retain the securities of any issuer if those officers and
Trustees of the Funds, or of its Investment Adviser, who own
individually more than one-half of one percent of the securities of
such issuer, together own more than 5% of the securities of such
issuer.
16
<PAGE>
6. Invest in excess of 5% of its total assets in the securities of
foreign issuers, excluding from such limitation securities listed on
any United States securities exchange.
7. Invest more than 5% of their total assets in the securities of any one
investment company, may not own more than 3% of the securities of any
one investment company or invest more than 10% of its total assets in
other investment companies.
8. Purchase 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 Investment Company Act of 1940.
With respect to those investment restrictions involving percentages, if
a percentage restriction is complied with at the time of initial investment, a
subsequent increase or decrease in that percentage resulting from a change in
the value of portfolio securities or total net assets will not constitute a
violation of the investment restriction.
PORTFOLIO TURNOVER
CONVERTIBLE SECURITIES FUND
Purchases and sales of securities are made at such times as the Adviser
deems to be in the best interest of the Funds' shareholders without regard to
the rate of portfolio turnover, about which there are no restrictions. From time
to time, the Funds may trade in securities for the short term. It is anticipated
that the annual portfolio turnover rate of the Convertible Securities Fund will
not exceed 75%. In any particular year, market conditions could result in
portfolio activity at a greater or lesser rate than anticipated. Since turnover
is a function of market opportunity, it cannot be determined whether portfolio
turnover will change significantly during the year ending November 30, 1997.
Portfolio turnover rate is, generally, the percentage computed by dividing the
lesser of purchases or sales by the average value of the portfolio. High
portfolio turnover involves correspondingly higher brokerage commission expenses
which are borne directly by the Funds. In addition, the effect of engaging in
options transactions may be to increase portfolio turnover, and, consequently,
associated expenses of the relevant Fund. The portfolio turnover rates for the
Funds are set forth in the Prospectus under "Financial Information Summary."
FEDERAL MONEY MARKET FUND
The Federal Money Market Fund's policy of investing only in securities
with remaining maturities of 397 days or less (with certain exceptions) will
result in a higher portfolio turnover rate than the Convertible Securities Fund.
Since brokerage commissions are not normally paid on investments which the
Federal Money Market Fund makes, turnover resulting from such investments should
not adversely affect the net asset value or net income of the Fund.
17
<PAGE>
MANAGEMENT OF THE FUNDS
TRUSTEES AND OFFICERS
Officers and employees of the Adviser are not permitted to serve as
officers or Trustees of the Trust due to certain regulatory restrictions imposed
on banking organizations and their subsidiaries. The persons who have been
elected to serve as officers and Trustees of the Trust, their position with the
Trust and their principal occupations during the last five years are set forth
below:
<TABLE>
<CAPTION>
NAME, AGE, ADDRESS AND PRINCIPAL POSITION WITH
OCCUPATION DURING THE PAST FIVE YEARS REGISTRANT
- ------------------------------------- ----------
<S> <C>
*LEIGH A. WILSON, Age: 52. 53 Sylvan Road N., Westport, CT 06880. From 1989 to President and
present, Chairman and Chief Executive Officer of Glenleigh International Limited Trustee
(merchant bank); from 1993 to present, President of The Victory Funds. From 1995
to present, Principal of New Century Living, Inc.; from 1989 to present,
Director of Chimney Rock Vineyard & Chimney Rock Winery; and Trustee of The
Victory Portfolios mutual fund complex.
*ROGER NOALL, Age 62. c/o Brighton, Apt. 1603, 8231 Bay Colony Drive, Naples, Chairman and
Florida 34108. From 1996 to present, Executive of KeyCorp; from 1995 to 1996, Trustee
General Counsel and Secretary of KeyCorp; from 1994 to 1996, Senior Executive
Vice President and Chief Administrative Officer of KeyCorp; from 1985 to 1994,
Vice Chairman of the Board and Chief Administrative Officer of KeyCorp and its
predecessor, Society Corporation, prior to its merger with KeyCorp.
</TABLE>
- -----------
* Mr. Wilson is an "interested person" of the Trust solely by reason of his
position as President. * Mr. Noall is an "interested person" and an "affiliated
person" of the Trust.
18
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
EDWARD P. CAMPBELL, Age: 47. 28601 Clemens Road, Westlake, Ohio 44145. From Trustee
July 1996 to present, President and Chief Operating Officer of Nordson Corpora-
tion (manufacturer of application equipment); from March 1994 to present, Execu-
tive Vice President and Chief Operating Officer of Nordson Corporation from May
1988 to March 1994, Vice President of Nordson Corporation; from 1987 to
December 1994, member of Supervisory Committee of Society National Bank'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. Currently, Trustee of The Victory Portfolios mutual
fund complex, and Director of Nordson Corporation.
EUGENE J. MCDONALD, Age: 65. 2200 Main Street, Suite 1000, Durham, North Carolina Trustee
27705. Executive Vice President for Asset Management of Duke University and
President of Duke Management Co.; Director of Central Carolina Financial Corp.;
Director of Flag Investors/ISI Funds and Alex. Brown Cash Reserve Fund, Inc.
Previously, Director of Sphinx Pharmaceuticals, Inc.
FRANK A. WEIL, Age: 66. 147 E. 48th Street, New York, New York 10017. Chairman Trustee
and Chief Executive Officer of Abacus & Associates, Inc. (private investment
firm); Director and President of the Norman and Hickrill Foundations. Formerly,
Chairman of the Council for Excellence in Government.
ROBERT G. BROWN, Age 74. 5460 N. Ocean Drive, Singer Island Riviera Beach, FL Trustee
33404. Retired; from October 1983 to November 1990, President, Cleveland Advanced
Manufacturing Program (non-profit corporation engaged in regional economic
development).
DR. HARRY GAZELLE, Age 70. 17822 Lake Road, Lakewood, Ohio 44107. Retired Trustee
radiologist, Drs. Hill and Thomas Corp.
DR. THOMAS F. MORRISSEY, Age 64. Weatherhead School of Management, Case Western Trustee
Reserve University, 10900 Euclid Avenue, Cleveland, OH 44106-7235. 1995 to
present Visiting Scholar, Bond University, Queensland, Australia; Professor,
Weatherhead School of Management, Case Western Reserve
18
<PAGE>
University; from 1989 to 1995, Associate Dean of Weatherhead School of
Management; from 1987 to 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 193 to August 1994, Trustee, Ohio Municipal
Money Market Fund.
DR. H. PATRICK SWYGERT, Age 54. Howard University, 2400 6th Street, N.W., Suite Trustee
320, Washington, D.C. 20059. President, Howard University; formerly President,
State University of New York at Albany; formerly, Executive Vice President,
Temple University.
WILLIAM B. BLUNDIN: Age 58. 125 West 55th Street, New York, N.Y. 10019. Senior Vice President
Vice President of BISYS Fund Services ("BISYS"); officer of other investment companies
administered by BISYS; 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: Age 51, 3435 Stelzer Road, Columbus, OH 43219 Executive Vice Vice President
President, BISYS.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
NAME, AGE, ADDRESS AND PRINCIPAL POSITION
OCCUPATION DURING THE PAST FIVE YEARS WITH REGISTRANT
- ------------------------------------- ---------------
GEORGE O. MARTINEZ, Age 38. 3435 Stelzer Road, Columbus Ohio 43219. From March Secretary
1995 to present, Senior Vice Vice President and Director of Legal and Compliance
Services, BISYS; from June 1989 to March 1995, Vice President and Associate
General Counsel, Alliance Capital Management.
JAY G. BARIS, Age 43. Kramer, Levin, Naftalis & Frankel, 919 3rd Avenue, 41st Assistant
Floor, New York, NY 10022. From 1994 to present, Partner, Kramer, Levin, Naftalis & Secretary
Frankel; previously Partner,
Reid & Priest.
THOMAS E. LINE, Age 30. 3435 Stelzer Road, Columbus, Ohio 43219. From December Treasurer
1996 to present, employee of BISYS Fund Services; from September, 1989 to
November, 1996, Audit Senior Manager at KPMG Peat Marwick LLP.
</TABLE>
Trustees who are not "interested persons" of either an investment
adviser to or principal underwriter for the Funds receive an annual fee of
$7,500 plus $750 per meeting of the Board of Trustees attended and reasonable
out-of-pocket expenses incurred in connection with attending such meetings.
Trustees who are "interested persons" of either an investment adviser to or
principal underwriter for the Funds do not receive any compensation from the
Trust.
<TABLE>
<CAPTION>
TOTAL COMPENSATION FROM
AGGREGATE COMPENSATION KEY FUNDS/VICTORY
FROM KEY FUNDS FOR PORTFOLIOS "FUND COMPLEX"
THE FISCAL YEAR ENDED FOR THE YEAR ENDED
NAME OF TRUSTEE NOVEMBER 30, 1997 NOVEMBER 30, 1997
- --------------- ----------------- -----------------
<S> <C>
Edward P. Campbell $
Eugene J. McDonald $
Frank A. Weil $
Leigh A. Wilson $
</TABLE>
(1) Total compensation paid with respect to service on the Board of the Trust
only.
20
<PAGE>
SECURITY HOLDERS
As of November 28, 1997, the following persons were known by the Trust
to own of record or beneficially (as indicated) 5% or more of the outstanding
shares of the following Funds:
<TABLE>
<CAPTION>
FUND/ PERCENTAGE OF SHARES
NAME AND ADDRESS OF OWNER HELD OF RECORD OR BENEFICIALLY
------------------------- ------------------------------
FEDERAL MONEY MARKET FUND
<S> <C>
Student Loan Funding Corp. 87.06%
One West Fourth St., Suite 200
Cincinnatti, OH 45202
- Record Owner
CONVERTIBLE SECURITIES FUND
Charles Schwab & Co./FBO Cust. 29.03%
101 Montgomery Street
San Francisco, CA 94104
- Record Owner
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
MAC & Co. 5.05%
c/o Mellon Bank
Mutual Funds Operation
P.O. Box 3198
Pittsburgh, PA 15230-3198
- Record Owner
Donaldson Lufkin & Jenrette Sec. 9.86%
Mutual Funds Dept.
P.O. Box 2052
Jersey City, NJ 07303-2052
- Record Owner
Key Trust Comapny of Ohio, N.A. 6.95%
4900 Tiedeman Road
Cleveland, OH 44144-2338
- Record Owner
</TABLE>
As of November 28, 1997, the Trustees and Officers of the Trust, as a group,
owned less than 1% of the equity securities of each of the Funds of the Trust.
THE INVESTMENT ADVISER, ADMINISTRATOR AND SUB-ADMINISTRATOR
INVESTMENT ADVISER. The investment adviser to the Funds is Key Asset
Management Inc. ("KAM" or the "Adviser"), a New York corporation that is
registered as an investment adviser with the SEC. The Adviser is a wholly owned
subsidiary of KeyBank National Association ("KeyBank") which is a wholly owned
subsidiary of KeyCorp, one of the largest financial services holding companies
in the United States.
On February 28, 1997, KAM became the surviving cooperation after the
reorganization of four indirect investment adviser subsidiaries of KeyCorp --
Spears, Benzak, Salomon & Farrell, Inc. ("SBSF"), KeyCorp Mutual Fund Advisers,
Inc. ("Key Advisers"), Society Asset Management, Inc., ("SAM") and Applied
Technology Investments, Inc. ("ATI"), each of which was a registered investment
adviser with the SEC. 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.
The Adviser and its affiliates managed approximately $57 billion as of
September 30, 1997, for numerous clients, including large corporate and public
retirement plans, Taft-Hartley plans, foundations and endowments, high net-worth
individuals and mutual funds. The accounts which are managed or advised by the
Adviser for these clients have varying investment objectives and the Adviser may
invest assets for such accounts in investments substantially similar to, or the
same as, those which are expected to constitute the principal investments of one
or more Funds. Such
22
<PAGE>
accounts are supervised by officers and employees of the Adviser who may also be
acting in similar capacities for the Funds. The Adviser's offices are located at
127 Public Square, Cleveland, OH 44114 and 45 Rockefeller Plaza, New York, NY
10111.
As of September 30, 1997, KeyCorp had an asset base of approximately
$72 billion, with banking offices in 26 states from Maine to Alaska, and trust
and investment offices in 16 states. KeyCorp is the resulting entity of the 1994
merger 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 consumer, business and traditional banking and associated financial
services to consumer, business and commercial markets. KeyCorp's non-bank
subsidiaries include investment advisory, securities brokerage, insurance, bank
credit card processing and leasing companies. KeyBank is the lead affiliate bank
of KeyCorp. KeyCorp's principal offices are located at 127 Public Square,
Cleveland, Ohio 44114.
Pursuant to the Funds' Investment Advisory Agreement, dated April 5,
1995, the Adviser furnishes a continuous investment program for the Funds'
portfolios, makes the day-to-day investment decisions for the Funds, executes
the purchase and sale orders for the portfolio transactions of the Funds and
generally manages the Funds' investments in accordance with the stated policies
of the Funds, subject to the general supervision of the Board of Trustees of the
Funds.
As compensation for the services rendered and related expenses borne by
the Adviser under the Investment Advisory Agreement, the Convertible Securities
Fund is obligated to pay the Adviser a fee, computed daily and payable monthly,
equal to .75% per annum of the Fund's average daily net assets. The Investment
Advisory Agreement further provides that the Federal Money Market Fund is
obligated to pay the Adviser a fee, computed daily and payable monthly, equal to
.25% per annum of its average daily net assets. During the 1998 fiscal year the
Adviser is voluntarily waiving its Advisory fee for the Federal Money Market
Fund. The Adviser is obligated to reimburse the Funds in the event expenses
exceed certain prescribed limits (see "Expenses, Distributor, Distribution Plan
and Shareholder Servicing Plan"). The Adviser's compensation for acting as
adviser to the and the Convertible Securities Fund was $455,976, $566,242, and
$____________, for the fiscal years ended November 30, 1995, 1996, and 1997,
respectively. The Adviser waived its fees for advisory services rendered to the
Federal Money Market Fund totaling $65,340, $64,632 and $________ for the fiscal
years ended November 30, 1995, 1996, and 1997, respectively.
The Investment Advisory Agreement, between the Adviser and the Funds
will continue in effect for each Fund for successive one year periods following
the first anniversary of such date only if it is specifically approved at least
annually by the Board of Trustees, including a majority of the Trustees who are
not parties to the Investment Advisory Agreement or "interested persons" of any
such party (as defined in the 1940 Act), cast in person at a meeting called for
the purpose of voting on such approval. The Investment Advisory Agreement
provides that the Adviser will not be liable for any error of judgment or
mistake of law or for any loss suffered by a Fund in connection with the
Adviser's services under the Agreement, except a loss resulting from a
23
<PAGE>
breach of fiduciary duty with respect to the receipt of compensation for
services (limited in amount by Section 36(b)(3) of the 1940 Act) or a loss
resulting from willful misfeasance, bad faith or gross negligence on the
Adviser's part in the performance of its duties or from reckless disregard by it
of its obligations and duties under the Agreement. The Investment Advisory
Agreement will terminate automatically in the event of its "assignment" (as
defined in the 1940 Act) and is terminable at any time without penalty under
certain circumstances by the Funds, the shareholders of the Funds or the
Adviser.
KAM has agreed that if in any fiscal year the sum of any of the Fund's
expenses exceeds the limits set by applicable regulations of state securities
commissions, the amounts payable by such Fund to KAM for the advisory fee for
that year shall be reduced by the amount of such excess. However, if the excess
should be greater than the total amounts payable to KAM in that year, KAM shall
reimburse such Fund of the amount by which such expenses exceed such fees. For
the purpose of this calculation, expenses shall include the fees payable to KAM
under the Investment Advisory Agreement and the amortization of organization
expenses, but shall exclude taxes, interest, brokerage, litigation and
indemnification expenses and other extraordinary expenses.
ADMINISTRATOR AND SUB-ADMINISTRATOR. BISYS Fund Services Limited
Partnership (d/b/a BISYS Fund Services) ("BISYS" or the "Administrator") serves
as the Administrator of the Funds pursuant to an administration agreement dated
July 12, 1996 (the "Administration Agreement"). The Administrator assists in
supervising all operations of each Fund (other than those performed by KAM under
the Investment Advisory Agreement), subject to the supervision of the Board of
Trustees. From April 1, 1996 through July 11, 1996, Concord Holding Corporation,
an affiliate of BISYS, served as administrator for the Funds. Prior to April 1,
1996, SBSF served as administrator to the Funds.
For the services rendered to the Funds and related expenses borne by
BISYS as Administrator, each Fund pays BISYS an annual fee, computed daily and
paid monthly, at the following annual rate based on each Fund's average daily
net assets:
.15% for portfolio assets of $300 million and less
.12% for portfolio assets for the next $300 million through $500
million
.10% for portfolio assets greater than $600 million.
BISYS may periodically waive all or a portion of its fee with respect to any
Fund in order to increase the net income of one or more of the Funds of the
Trust available for distribution to shareholders.
Unless sooner terminated, the Administration Agreement will continue in
effect as to the Funds for a period of one year, and, with respect to each Fund,
for successive one year terms thereafter, unless terminated by either party on
not less than 90 days' prior written notice to the other party. The
Administration Agreement provides that BISYS shall not be liable for any action
taken or omitted by BISYS in the absence of bad faith, willful misfeasance,
negligence or reckless disregard by it of its obligations and duties thereunder.
24
<PAGE>
Under the Administration Agreement, BISYS assists in the Funds'
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 prospectuses, coordinating the preparation, filing, printing and
dissemination of reports to shareholders, coordinating the preparation of income
tax returns, performing certain fund accounting services, maintaining books and
records and providing office facilities necessary to carry out its duties
thereunder.
Under the Administration Agreement, BISYS may delegate all or any part
of its responsibilities to a sub-administrator. Key Asset Management Inc., the
Sub-Administrator to the Funds, performs some of the duties of the
Administrator. Key Asset Management Inc. receives a fee from BISYS for its
services as Sub-Administrator and is reimbursed for expenses incurred by
carrying out the duties of the Sub-Administration Agreement. This fee is
calculated daily, and paid monthly, at an annual rate of up to five
one-hundredths of one per cent (.05%) of each Fund's average daily net assets.
For the fiscal years ended November 30, 1995, 1996, and 1997, the Funds
paid the following amounts for administrative services:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FUND 11/30/95(1) 11/30/96 11/30/97
---- ----------- -------- --------
<S> <C> <C> <C>
Federal Money Market Mutual Fund $65,340 $64,632(2) $
Convertible Securities Fund $141,195 $163,169(2) $
</TABLE>
(1) All amounts paid by the Funds for administrative services during
the fiscal years ended November 30, 1994 and 1995 were paid to SBSF, the Funds'
administrator during such fiscal years.
(2) During the period from December 1, 1995 through March 31, 1996,
SBSF served as administrator to the Funds and received fees as follows: Federal
Money Market Fund $22,722 and Convertible Securities Fund $53,761. During the
period from April 1, 1996 through July 11, 1996, Concord Holding Corporation
served as administrator to the Funds and received fees as follows: Federal Money
Market Mutual Fund $15,349 and Convertible Securities Fund $41,268. During the
period from July 11, 1996 through November 30, 1996, BISYS served as
administrator to the Funds and received fees as follows: Federal Money Market
Fund $26,561 and SBSF Convertible Securities Fund $68,140.
Pursuant to a Sub-Administration Agreement dated July 12, 1996, BISYS
had retained KAM to provide the Funds with certain sub-administrative and fund
accounting services. For its services as sub-administrator, BISYS paid KAM an
annual fee of $500,000. In addition, during the period from April 1, 1996
through July 11, 1996, KAM (then known as SBSF) served as sub-administrator for
the Funds pursuant to a Sub-Administration Agreement between KAM and an
affiliate of BISYS, Concord Holding Corporation. Such prior Sub-Administration
Agreement was substantially identical to the current Sub-Administration
Agreement, including the rate of
25
<PAGE>
compensation payable to KAM. And, during the period from April 1, 1996 through
the close of the Funds' fiscal year on November 30, 1996, KAM received a total
of $375,000 from Concord and BISYS for acting as the Funds' sub-administrator.
EXPENSES, DISTRIBUTOR, DISTRIBUTION PLAN AND SHAREHOLDER SERVICING PLAN
Except as set forth above, and as set forth below, the Funds are
responsible for the payment of their expenses. Such expenses include, among
others, the fees payable to KAM; any brokerage fees and commissions; taxes;
interest; the cost of any liability insurance or fidelity bonds; costs,
expenses, or losses arising out of any liability of or claim for damages or
other relief asserted against the Funds for violation of any law; legal and
auditing fees and expenses; the fees and certain expenses of the Funds'
Administrator, Custodian, Transfer Agent and Servicing Agent; the fees of any
trade association of which the Funds are a member; the expenses of printing and
mailing reports and notices to the Funds' shareholders; filing fees for the
registration or qualification of Fund shares under federal or state securities
laws; the fees and expenses involved in registering and maintaining registration
of the Funds with the SEC; fees of Trustees who are not "interested persons" of
an investment adviser to or principal underwriter for the Funds; the costs of
registering the Funds as a broker or dealer; the costs of qualifying Fund shares
under state securities laws; the expenses of servicing shareholders and
shareholder accounts not otherwise incurred by the Adviser or the Administrator;
and any extraordinary expenses incurred by the Funds.
As a result of certain regulatory restrictions imposed on banking
organizations and their subsidiaries, the Trust is not permitted to sell shares
of the Funds directly without an independent underwriter. Accordingly, pursuant
to a distribution agreement dated as of July 1, 1996 (the "Distribution
Agreement"), BISYS was appointed to serve as independent underwriter/distributor
for the continuous offering of the shares of the Trust. Under the Distribution
Agreement, BISYS is obligated to devote its best efforts to effect sales of
shares of the Funds, but is not required to sell any certain number of shares.
In addition, under the Distribution Agreement, BISYS may enter into agreements
with selected dealers for the distribution of shares of the Funds. During the
period from April 5, 1995 through June 30, 1996, Concord Financial Group, Inc.,
an affiliate of BISYS, served as the Funds' Distributor.
If not earlier terminated, the Distribution Agreement will continue in
effect for successive terms of one year, provided that such continuance is
specifically approved at least annually (a) by a majority of those members of
the Board of Trustees of the Trust who are not parties to the Agreement or
"interested persons" of any such party (the "Disinterested Trustees"), pursuant
to a vote cast in person at a meeting called for the purpose of voting on such
approval, and (b) by the Board of Trustees of the Trust or by vote of a
"majority of the outstanding voting securities" of each Fund. The Distribution
Agreement may be terminated by the Trust at any time with respect to any Fund,
without the payment of any penalty, by vote of a majority of the Disinterested
Trustees or by vote of a "majority of the outstanding voting securities" of such
Fund on 60 days' written notice to BISYS, or by BISYS, at any time, without the
payment of any penalty, on 60 days' written notice to the Fund. The Distribution
Agreement will automatically terminate in the event of its "assignment" as
defined in the 1940 Act.
26
<PAGE>
The Trust also has adopted a Distribution Plan (the "Distribution
Plan") for the Funds pursuant to Rule 12b-1 under the 1940 Act. No separate
payments are authorized to be made by the Funds under the Plan. Rather, the Plan
provides that to the extent that any portion of the fees payable under the
Shareholder Servicing Plan or any Shareholder Servicing Agreement (described
below) is deemed to be for services primarily intended to result in the sale of
Fund shares, such fees are deemed approved and may be paid pursuant to the Plan
and in accordance with Rule 12b-1.
Rule 12b-1 provides that the Distribution Plan will continue in effect
only if approved, at least annually, by a vote of the Board of Trustees,
including a majority of the Trustees who are not "interested persons" of the
Funds and who have no direct or indirect financial interest in the operation of
the Distribution Plan (or any agreements related to it), cast in person at a
meeting called for the purpose of voting on the Plan. The Distribution Plan may
be terminated at any time by a vote of a majority of the outstanding voting
securities of the Funds or a majority of those Trustees who are not "interested
persons" of the Funds and who have no direct or indirect financial interest in
the Distribution Plan or in any agreements related to it.
While the Distribution Plan is in effect, the selection and nomination
of Trustees who are not "interested persons" of the Funds (as defined in the
1940 Act) is committed to the discretion of the Trustees who are not interested
persons of the Funds.
During the period from December 1, 1995 through July 11, 1996, the
Funds operated under a form of the Distribution Plan that permitted each Fund to
compensate and reimburse the Distributor for distribution-related and sales
support or shareholder account services. Pursuant to such Plan, the Convertible
Securities Fund and the Federal Money Market Fund paid $9,735and $0,
respectively, in fees during such period. All amounts were paid out as
compensation to a dealer in connection with sales of Fund shares. Pursuant to
action by the Trust's Board of Trustees, the current Distribution Plan
(described above) was put in place for the Funds effective July 12, 1996.
The Trust, on behalf of the Funds, has adopted a Shareholder Servicing
Plan to provide payments to shareholder servicing agents (including affiliates
of the Adviser) (each a "Shareholder Servicing Agent") that provide
administrative support services to customers who may from time to time
beneficially own shares of a Fund, which services may include: (i) aggregating
and processing purchase and redemption requests for shares from customers and
promptly transmitting net purchase and redemption orders to the distributor or
transfer agent; (ii) providing customers with a service that invests the assets
of their accounts in shares pursuant to specific or preauthorized instructions;
(iii) processing dividend and distribution payments on behalf of customers; (iv)
providing information periodically to customers showing their positions in
shares; (v) arranging for bank wires; (vi) responding to customer inquiries;
(vii) providing sub-accounting with respect to shares beneficially owned by
customers or providing the information to the Fund necessary for sub-accounting;
(viii) if required by law, forwarding shareholder communications from the Trust
(such as proxies, shareholder reports, annual and semi-annual financial
statements and dividend, distribution and tax notices) to customers; and (ix)
providing such other similar services as reasonably requested to the extent the
Shareholder Servicing Agent is permitted to do so
27
<PAGE>
under applicable statutes, rules or regulations. For expenses incurred and
services provided pursuant to the Shareholder Servicing Agreement, the Fund pays
each Shareholder Servicing Agent a fee computed daily and payable monthly, in
amounts aggregating not more than 0.25% on an annual basis, of the average daily
net assets of the Fund attributable to the Shareholder Servicing Agent. A
Shareholder Servicing Agent may periodically waive all or a portion of its
respective shareholder servicing fees with respect to the Fund to increase the
net income of the Fund available for distribution as dividends.
During the period from July 12, 1996 to November 30, 1996, the
Convertible Securities Fund paid $8,329 under such Shareholder Servicing Plan.
Also during such period, the Federal Money Market Fund incurred shareholder
servicing fees of $3,426 and expenses of $3,625, all of which was reimbursed by
the Distributor.
CUSTODIAN, TRANSFER AGENT, SERVICING AGENT AND
DIVIDEND DISBURSING AGENT
Key Trust Company of Ohio, N.A. ("Key Trust" or the "Custodian"), 127
Public Square, Cleveland, Ohio 44114, has been retained as custodian for the
Funds' investments. Key Trust also maintains certain accounting and financial
records of the Funds. Key Trust is a wholly owned subsidiary of KeyBank, a
wholly owned subsidiary of KeyCorp, and an affiliate of the Adviser and receives
compensation from the Funds for services it performs as custodian. More
specifically, under the Mutual Fund Custody Agreement between the Trust, on
behalf of the Funds, and Key Trust, the Funds are obligated to pay Key Trust
asset-based fees for domestic custody services as well as certain
transaction-based fees. For the fiscal years ended November 30, 1996 and 1997,
the Funds paid fees to the Custodian as follows:
<TABLE>
<CAPTION>
FEES PAID FEES PAID
FUND 1997 1996
---- ---- ----
<S> <C>
Federal Money Market Fund $10,662
Convertible Securities Fund $20,537
</TABLE>
State Street Bank and Trust Company ("State Street"), 225 Franklin
Street, Boston, MA 02110, is Transfer Agent for the Funds and receives a fee for
this service. Boston Financial Data Services, Inc. ("BFDS"), Two Heritage Drive,
Quincy, MA 02171, acts as dividend disbursing agent and servicing agent for the
Funds pursuant to arrangements with State Street. BFDS receives a fee for these
services.
28
<PAGE>
PERFORMANCE INFORMATION
FEDERAL MONEY MARKET FUND
The current and effective yields of the Fund may be quoted in reports,
sales literature, and advertisements published by the Fund. Current yield is
computed by determining the net change exclusive of capital changes in the value
of a hypothetical pre-existing account having a balance of one share at the
beginning of a seven-day calendar period, dividing the net change in account
value by the value of the account at the beginning of the period, and
multiplying the return over the seven-day period by 365/7. For purposes of the
calculation, net change in account value reflects the value of additional shares
purchased with dividends from the original share and dividends declared on both
the original share and any such additional shares, but does not reflect realized
gains or losses or unrealized appreciation or depreciation. Effective yield is
computed by annualizing the seven-day return with all dividends reinvested in
additional Fund shares. The current yield and effective yield for the Federal
Money Market Fund for the seven day period ended November 30, 1997 was % and %,
respectively, before waivers or reimbursements.
CONVERTIBLE SECURITIES FUND
From time to time, the "standardized yield," "dividend yield,"
"distribution return," "average annual total return" and "total return" of an
investment in Fund shares may be advertised. An explanation of how yields and
total returns are calculated and the components of those calculations are set
forth below.
Yield and total return information may be useful to investors in
reviewing a Fund's performance. A Fund's advertisement of its performance must,
under applicable SEC rules, include the average annual total returns for the
Fund for the 1, 5 and 10-year period (or the life of the Fund, if less) as of
the most recently ended calendar quarter. This enables an investor to compare a
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 a Fund is not
insured; yield and total return are not guaranteed and normally fluctuate on a
daily basis. Yield and total return for any given past period are not a
prediction or representation by the Trust of future yields or rates of return on
its shares. The yield and total return of a Fund are affected by the types of
investments the Fund holds, operating expenses and credit or interest rate risk.
When redeemed, an investor's shares may be worth more or less than their
original cost.
STANDARDIZED YIELDS. A Fund's "yield" (referred to as "standardized
yield") for a given 30-day period for the shares of a Fund 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
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<PAGE>
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 the Fund outstanding
during the 30-day period that were entitled to receive
dividends.
d = the maximum offering price per share on the last day of the
period, adjusted for undistributed net investment income.
The standardized yield for a 30-day period may differ from its yield
for any other period. The 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 the Fund to shareholders in the 30-day period, but
is a hypothetical yield based upon the net investment income from the Fund's
portfolio investments calculated for that period. The standardized yield may
differ from the "dividend yield," described below. For the 30-day period ended
November 30, 1997, the Convertible Securities Fund had a yield of %.
DIVIDEND YIELD AND DISTRIBUTION RETURN. From time to time, a Fund may
quote a "dividend yield" or a "distribution return." Dividend yield is based on
the share dividends derived from net investment income during a stated period.
Distribution return includes dividends derived from net investment income and
from realized capital gains declared during a stated period. Under those
calculations, the dividends and/or distributions declared during a stated period
of one year or less (for example, 30 days) are added together, and the sum is
divided by the maximum offering price per share on the last day of the period.
When the result is annualized for a period of less than one year, the "dividend
yield" is calculated as follows:
Dividend Yield = Dividends + Number of days (accrual period) X 365
-------------------------------------------------
Max. Offering Price (last day of period)
TOTAL RETURN. The "average annual total return" is an average annual
compounded rate of return for each year in a specified number of years. It is
the rate of return based on the change in value of a hypothetical initial
investment of $1,000 ("P" in the formula below) held for a number of years ("n")
to achieve an Ending Redeemable Value ("ERV"), according to the following
formula:
P(1+T)^n = ERV = Average Annual Total Return
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:
30
<PAGE>
ERV-P
- -----
P = Total Return
Total returns assume that all dividends and capital gain 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.
For the periods ended November 30, 1997, the average annual total
returns of the Convertible Securities Fund were as follows:
<TABLE>
<CAPTION>
5 YEARS 10 YEARS
YEAR ENDED ENDED ENDED SINCE
FUND 11/30/97 11/30/97 11/30/97 INCEPTION
- ---- -------- -------- -------- ---------
<S> <C> <C> <C> <C>
SBSF Convertible Securities Fund 20.28% 13.53% -- 12.19%(1)(2)
</TABLE>
(1) The Convertible Securities Fund's predecessor, SBSF Convertible Securities
Fund, commenced operations on April 14, 1988.
(2) Annualized.
OTHER PERFORMANCE COMPARISONS. From time to time, a Fund may publish
the ranking of the performance of its shares by Lipper Analytical Services, Inc.
("Lipper"), a widely-recognized independent mutual fund monitoring service.
Lipper monitors the performance of regulated investment companies, including the
Funds, and ranks the performance of the Funds against (i) all other funds,
excluding money market funds, and (ii) all other government bond funds. The
Lipper performance rankings are based on a total return that includes the
reinvestment of capital gain 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 the performance of
its shares by Morningstar, Inc., an independent mutual fund monitoring service
that ranks mutual funds, including the Funds, in broad investment categories
(domestic equity, international equity, taxable bond, municipal bond or other)
monthly, based upon each funds' 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.
From time to time, the yields and the total returns of the Funds may be
quoted in and compared to other mutual funds with similar investment objectives
in advertisements, shareholder
31
<PAGE>
reports or other communications to shareholders. The Funds also may include
calculations in such communications that describe hypothetical investment
results. (Such performance examples will be based on an express set of
assumptions and are not indicative of the performance of any Fund.) Such
calculations may from time to time include discussions or illustrations of the
effects of compounding in advertisements. "Compounding" refers to the fact that,
if dividends or other distributions on a Fund investment are reinvested by being
paid in additional Fund shares, any future income or capital appreciation of the
Fund would increase the value, not only of the original Fund investment, but
also of the additional Fund shares received through reinvestment. As a result,
the value of the Fund investment would increase more quickly than if dividends
or other distributions had been paid in cash. 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 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 also may include in
advertisements, charts, graphs or drawings which illustrate the potential risks
and rewards of investment in various investment vehicles, including but not
limited to stock, bonds, Treasury bills and shares of the Fund as well as charts
or graphs which illustrate strategies such as dollar cost averaging, and
comparisons of hypothetical yields of investment in tax-exempt versus taxable
investments. In addition, advertisements or shareholder communications may
include a discussion of certain attributes or benefits to be derived by an
investment in 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.
Investors also may judge, and the Funds may at times advertise,
performance by comparing it to the performance of other mutual funds or mutual
fund portfolios with comparable investment objectives and policies, which
performance may be contained in various unmanaged mutual fund or market indices
or rankings such as those prepared by Dow Jones & Co., Inc., Standard & Poor's
Corporation, Lehman Brothers, Merrill Lynch, and Salomon Brothers, and in
publications issued by Lipper and in the following publications: IBC's Money
Fund Reports, Value Line Mutual Fund Survey, Ibottson Associates, Morningstar,
CDA/Wiesenberger, Money Magazine, Forbes, Barron's, The Wall Street Journal, The
New York Times, Business Week, American Banker, Fortune, Institutional Investor
and U.S.A. Today. In addition to yield information, general information about
the Funds 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.
32
<PAGE>
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 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 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 seek to offer a fixed price per share.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell securities for
the Funds, the selection of brokers and dealers to effect the transactions and
the negotiation of brokerage commissions. Purchases and sales of securities on a
securities exchange are effected through brokers who charge a commission for
their services. Brokerage commissions on United States securities exchanges are
subject to negotiation between the Adviser and the broker.
Fixed income securities and securities traded in the over-the-counter
market, are generally traded on a "net" basis with dealers acting as principal
for their own accounts without a stated commission, although the price of the
security usually includes a profit to the dealer. In underwritten offerings,
securities are purchased at a fixed price which includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. On occasion, certain money market instruments may be
purchased directly from an issuer, in which case no commissions or discounts are
paid.
In placing orders for portfolio securities of the Funds, the Adviser is
required to give primary consideration to obtaining the most favorable price and
efficient execution. Within the framework of this policy, the Adviser may
consider the research and brokerage services provided by brokers or dealers who
effect portfolio transactions for the Funds or the Adviser's other clients. Such
research and brokerage services are those which brokerage houses customarily
provide to institutional investors and include statistical and economic data and
research reports on particular companies and industries. Such services are used
by the Adviser in connection with all of its investment activities, and some of
such services obtained in connection with the execution of transactions for the
Funds may be used in managing other investment accounts. Conversely, brokers
furnishing such services may be selected for the execution of transactions of
such other accounts, whose aggregate assets are far larger than the Funds, and
the services furnished by such brokers may be used by the Adviser in providing
investment management for the Funds. Commission rates are established pursuant
to negotiations with brokers based on the quality and quantity of execution
services provided by the broker in the light of generally prevailing rates. In
addition, the Adviser is authorized to pay higher commissions on brokerage
transactions for the
33
<PAGE>
Funds to brokers in order to secure research and brokerage services described
above, subject to review by the Fund's Board of Trustees from time to time as to
the extent and continuation of this practice. The allocation of orders among
brokers and the commission rates paid are reviewed periodically by the Funds'
Board of Trustees. On behalf of the Convertible Securities Fund, the Adviser,
during the fiscal year ended November 30, 1997 directed $ in aggregate brokerage
transactions to brokers due to research and brokerage services they provided,
and such brokers received related commissions of approximately $__________.
In addition, for the fiscal years ended November 30, 1995, 1996, and
1997, the Funds paid brokerage commissions approximately as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
FUND 11/30/97 11/30/96 11/30/95
- ---- -------- -------- --------
<S> <C> <C>
Convertible Securities Fund $50,000 $55,000
</TABLE>
Transactions in options by the Convertible Securities Fund will be
subject to limitations established by each of the exchanges on which options are
traded governing the maximum number of options which may be written or held by a
single investor or group of investors acting in concert, regardless of whether
the options are written or held on the same or different exchanges or are
written or held in one or more accounts or through one or more brokers. Thus,
the number of options which the Funds may write or hold may be affected by
options written or held by the Adviser and other investment advisory clients of
the Adviser. An exchange may order the liquidation of positions found to be in
excess of these limits, and it may impose certain other sanctions.
During the fiscal year ended November 30, 1997, no commissions were paid by the
Funds to brokers who are affiliated persons of the Funds, the Adviser or BISYS.
PURCHASE, REDEMPTION AND PRICING
The net asset value of the shares of each Fund is calculated on each
Business Day. A "Business Day" for the Convertible Securities Fund is a day on
which the New York Stock Exchange ("NYSE") is open for trading and any day
(other than a day on which no shares of the Funds are tendered for redemption
and no order to purchase any shares is received) on which enough trading has
occurred in the securities held by a Fund to materially affect NAV. A "Business
Day" for the Federal Money Market Fund is any day on which the Federal Reserve
Bank of Cleveland or NYSE is open for trading, and any day on which enough
trading has occurred in the securities held by the Fund to materially affect
NAV. The net asset values of shares of the Convertible Securities Fund are
determined as of the close of the NYSE, which is ordinarily at 4:00 P.M.,
Eastern time, each Business Day, and the net asset value of shares of the
Federal Money Market Fund is determined at 2:00 P.M., Eastern time, each
Business Day. The NYSE will be closed 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,
34
<PAGE>
Thanksgiving and Christmas. The methods of purchase and redemption of shares,
and special retirement, withdrawal and exchange plans offered are fully set
forth in the Prospectuses. Shares may be redeemed by submitting a written
request to the Funds, by check in the case of the Federal Money Market Fund, or
by telephone, as described in the Prospectuses.
With respect to the Convertible Securities Fund, securities traded on
securities exchanges or the NASDAQ National Market are valued at the last sales
price on the exchange where the security is primarily traded or, lacking any
sales, at the mean between the most recent bid and asked quotation. Securities
traded over-the-counter are valued at the mean between the most recent bid and
asked price. Securities for which quotations are not readily available and any
other assets (other than money market instruments) are valued at fair value as
determined in good faith by or under the supervision of the Board of Trustees.
The Federal Money Market Fund values all its portfolio securities at amortized
cost in accordance with Rule 2a-7 under the 1940 Act and procedures adopted
pursuant thereto. The amortized cost method values a security initially at its
cost and thereafter assumes a constant amortization of any discount or premium
regardless of the impact of fluctuating interest rates on the market value of
the security. This method does not take into account unrealized gains or losses.
The Convertible Securities Fund values fixed income securities at market value,
except for money market instruments having a maturity of less than 60 days which
are valued at amortized cost.
Generally, trading in foreign securities, as well as corporate bonds,
United States 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 values of
the shares of the Convertible Securities Fund are determined as of such times.
Foreign currency exchange rates also are generally determined prior to the close
of the NYSE. Occasionally, events affecting the values of such securities and
such exchange rates may occur between the times at which they are determined and
the close of the NYSE which will not be reflected in the computation of such
Funds' net asset values. 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 the Board of Trustees.
Pursuant to Rule 11a-3 under the 1940 Act, a Fund is required to give
shareholders at least 60 days' notice prior to terminating or modifying
materially its exchange privilege. Under the Rule, the 60-day notification
requirement may be waived if (1) the only effect of a modification would be to
reduce or eliminate an administrative fee, redemption fee, or deferred sales
charge ordinarily payable at the time of exchange, or (2) 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 Trust has elected pursuant to Rule 18f-1 under the 1940 Act, to
commit to redeem shares of each Fund solely in cash up to the lesser of $250,000
or 1% of the net asset value of a Fund during any 90-day period for any one
shareholder. Any portion of a redemption not paid in cash may be in securities
or other property. Shareholders receiving securities or other property upon
redemption may realize a gain or loss for tax purposes and may incur additional
costs (e.g.,
35
<PAGE>
brokerage costs) as well as the inconveniences associated with disposing of such
securities or other property.
FEDERAL INCOME TAXES
The Prospectus describes generally the tax treatment of distributions
by the Funds. This section of the SAI includes additional information concerning
taxes.
Qualification as a "regulated investment company" under the Code
requires, among other things, that (a) at least 90% of each Fund's annual gross
income be derived from interest; payments with respect to securities loans;
dividends; and gains from the sale or other disposition of securities, foreign
currencies or other income (including but not limited to gains from options,
futures, or forward contracts) derived with respect to each Fund's business of
investing in such securities or currencies; (b) for taxable years beginning on
or before August 5, 1997 (this test will not apply to taxable years beginning
after August 5, 1997), each Fund will generally derive less than 30% of its
gross income from gains from the sale or other disposition of certain assets
held for less than 3 months, such as (i) stock or securities; (ii) options,
futures, and forward contracts (other than those on foreign currencies), and
(iii) foreign currencies (including options, futures, and forward contracts on
such currencies) not directly related to the Fund's principal business of
investing in stock or securities (or options and futures with respect to stocks
or securities); and (c) each Fund diversifies its holdings so that, at the end
of each quarter of its taxable year, (i) at least 50% of the market value of
each Fund's assets is represented by cash, U.S. Government securities and other
securities limited in respect of any one issuer to an amount not greater than 5%
of each Fund's assets and 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of its assets is invested in the
securities of any one issuer (other than U.S. Government securities and the
securities of other regulated investment companies), or of two or more issuers
which the Fund controls and which are determined to be engaged in the same or
similar trades or businesses or related trades or businesses. As a regulated
investment company, each Fund will not be subject to federal income tax on its
net investment income and any net capital gains distributed to its shareholders,
provided that it distributes to its shareholders at least 90% of its net
investment income, any short term capital gains, and any net tax-exempt income
earned in each year.
Generally, dividends and capital gain distributions are taxable to
shareholders when they are received. However, such dividends and distributions
declared payable as of a record date in October, November or December of any
calendar year are deemed under the Code to have been paid by a Fund and received
by the shareholder on December 31 of that calendar year if the dividend is
actually paid in the following January. Such dividends and distributions will,
accordingly, be taxable to the recipient shareholders in the year in which the
record date falls.
All income received by each Fund from sources within foreign countries
(e.g., interest dividends) may be subject to withholding and other taxes imposed
by such countries. Tax conventions between certain countries and the United
States may reduce or eliminate such taxes. Because not more than 50% of the
value of the total assets of any Fund is expected to consist of securities of
foreign issuers, no Fund will be eligible to elect to "pass through" foreign tax
credits to shareholders.
36
<PAGE>
Gains or losses on sales of portfolio securities by each Fund generally
will be long-term capital gains or losses if the securities have been held by it
for more than one year, except in certain cases including where a Fund acquires
a put or grants a call thereon. Gain recognized on the disposition of a debt
obligation (including tax-exempt obligations purchased after April 30, 1993)
purchased by a Fund at a market discount (generally, at a price less than its
principal amount) will generally be treated as ordinary income to the extent of
the portion of the market discount which accrued during the period of time the
Fund held the debt obligation. To the extent that a Fund recognizes long-term
capital gains, such gains will be distributed at least annually. Such
distributions will be taxable to shareholders as long-term capital gains,
regardless of how long a shareholder has held Fund shares. These distributions
will be designated as capital gain distributions in a written notice mailed by
the Fund to shareholders not later than 60 days after the close of the Fund's
taxable year.
If an option granted by a Fund lapses or is terminated through a
closing transaction, such as a repurchase by such Fund of the option from its
holder, the Fund will realize a short-term capital gain or loss, depending on
whether the premium income is greater or less than the amount paid by the Fund
in the closing transaction. If securities are sold by a Fund pursuant to the
exercise of a call option granted by it, the Fund will add the premium received
to the sale price of the securities delivered in determining the amount of gain
or loss on the sale. If securities are purchased by a Fund pursuant to the
exercise of a put option granted by it, the Fund will subtract the premium
received from its cost basis in the securities purchased.
Under Section 1256 of the Code, gain or loss recognized by a Fund from
certain financial forward, futures and options transactions is treated as 60%
long-term capital gain (or loss) and 40% short-term capital gain (or loss) (the
"60%/40% rule"). Gain or loss may arise upon the exercise or lapse of such
forward contracts, futures and options as well as from closing transactions. In
addition, any of such forward contracts, futures or options remaining
unexercised at the end of the regulated investment company's taxable year are
treated as sold for their then fair market value, resulting in additional gain
or loss to the Fund characterized in the manner described above (the
"marked-to-market rule"). Transactions that qualify as designated hedges are
excepted from the marked-to-market rule and 60%/40% rule. All or a portion of
the gain or loss from the disposition of non-U.S. dollar denominated securities
(including debt instruments, certain financial forward, futures and option
contracts, and certain preferred stock) may be treated as ordinary income or
loss under Section 988 of the Code (relating to the taxation of foreign currency
transactions). Furthermore, all or a portion of the gain realized from engaging
in "conversion transactions" may be treated as ordinary income under Section
1258 of the Code. Conversion transactions are defined to include certain
forward, futures, option and straddle transactions, transactions marketed or
sold to produce capital gains, or transactions described in Treasury regulations
to be issued in the future.
Offsetting positions held by a Fund involving certain financial
forward, futures or option contracts may be considered, for tax purposes, to
constitute "straddles." Straddles are defined to include "offsetting positions"
in actively traded personal property. The tax treatment of straddles is governed
by Section 1092 of the Code which, in certain circumstances, overrides or
modifies the provisions of Section 1256. If a Fund is considered to be in a
straddle because it entered into certain financial forward, futures or option
positions, the straddle could be characterized as "mixed
37
<PAGE>
straddle" if the positions comprising the straddle are ordinarily governed by
Section 1256. The Fund may make one or more elections with respect to a mixed
straddle, and, depending upon the election(s) made, if any, the tax consequences
with respect to the mixed straddle may differ. Generally, to the extent the
straddle rules apply to positions established by a Fund, losses realized by the
Fund may be deferred to the extent of unrealized gain in any offsetting
positions. Moreover, as a result of the straddle and the conversion transaction
rules, short-term capital loss on straddle positions may be recharacterized as
long-term capital loss, and long-term capital gain may be characterized as
short-term capital gain or ordinary income.
If a Fund purchases shares in a "passive foreign investment company"
("PFIC"), the Fund may be subject to federal income tax and an interest charge
imposed by the IRS upon certain distributions from the PFIC or its disposition
of PFIC shares (regardless of whether the Fund makes any distributions to its
shareholders). If a Fund invests in a PFIC, the Fund may make an available
election to "mark-to-market" its PFIC shares. Under the election, the Fund will
be treated as recognizing at the end of each taxable year as ordinary income
(but not loss) the excess, if any, of the fair market value of its interest in
PFIC shares over its basis in such shares. Although such excess will be taxable
to the Fund notwithstanding any distributions by the PFIC, the Fund will not be
subject to federal income tax or the interest charge with respect to its PFIC
shares. Alternatively, a Fund may make a "qualified electing fund" election
pursuant to which the Fund includes its ratable share of capital gains and
ordinary income from the PFIC (but not loss), irrespective of whether it
receives any distributions from the PFIC. Under this election, the Fund would
not be subject to federal income tax or the interest charge as well.
Sales charges incurred to acquire Fund shares with reinvestment rights
are not taken into account when calculating the gain or loss on the disposition
of such Fund shares, if (i) the shares are disposed of within 90 days of
acquisition and (ii) Fund shares or shares of another regulated investment
company are purchased subsequently at a reduced or eliminated sales charge,
pursuant to the reinvestment rights attendant with the initial acquisition of
Fund shares. Any sales charge not taken into account is treated as having been
incurred in the subsequent acquisition. In addition, any loss realized on a
redemption or exchange of shares of a Fund will be disallowed to the extent
substantially identical shares are reacquired within the 61-day period beginning
30 days before and ending 30 days after the disposition date of such Fund
shares.
If a shareholder receives a designated capital gain distribution on a
Fund share and such Fund share is held for six months or less, then (unless
otherwise disallowed) any loss on the sale or exchange of that Fund share will
be treated as a long-term capital loss to the extent of the designated capital
gain distribution. In addition, any loss realized by a shareholder upon the sale
or redemption of Fund shares held less than six months will be disallowed to the
extent of any tax-exempt interest dividends received by the shareholder thereon.
These rules shall not apply to losses incurred under a periodic redemption plan.
As of the printing of this SAI, the maximum individual tax rate
applicable to ordinary income is 39.6% (marginal rates may be higher for some
individuals due to phase out of exemptions and elimination of deductions); the
maximum individual tax rate applicable to net capital gains is 28%; and the
maximum corporate tax rate applicable to ordinary income and net
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capital gains is 35%. However, to eliminate the benefit of lower marginal
corporate income tax rates, corporations which have taxable income in excess of
$100,000 for a taxable year will be required to pay an additional amount of
income tax of up to $11,750 and corporations which have taxable income in excess
of $15,000,000 for a taxable year will be required to pay an additional amount
of income tax of up to $100,000.
An individual investor may be entitled to invest in Fund shares through
a tax-deferred retirement plan. Under the Code, an individual who is not active
participant (and does not have a spouse who is an active participant) in certain
types of retirement plans ("qualified retirement plans") may deduct
contributions to an individual retirement account ("IRA"), up to specified
limits ("deductible contributions"). Contributions to an IRA and investment
earnings thereon are generally tax-deferred until withdrawn.
The maximum annual deductible contribution to an IRA for individuals
under age seventy and a half is 100% of includible compensation up to a maximum
of $2,000 for single individuals and $4,000 for a married couple regardless of
whether both spouses earn income (together the "IRA contribution limits"). A
deductible contribution is also available for single individual taxpayers and
married couples who are active participants in qualified retirement plans but
who have adjusted gross incomes which do not exceed certain specified limits. If
their adjusted gross income exceeds these limits, the amount of the deductible
contribution is phased down and eventually eliminated.
Any individual who works may make "nondeductible" contributions to an
IRA in addition to any deductible contributions. Nondeductible contributions are
taxable, but investment earnings thereon in the IRA are tax deferred until
withdrawn. Aggregate deductible and nondeductible contributions are limited to
the IRA contribution limits discussed above. Aggregate contributions in excess
of the applicable IRA contribution limit are "excess contributions." In
addition, contributions made to an IRA for the year in which an individual
attains the age of seventy and a half, or any year thereafter, are also excess
contributions. Excess contributions are subject to a 6% excise tax penalty which
is charged each year that the excess contribution remains in the IRA.
An employer may also contribute to an individual's IRA as part of a
Simplified Employee Pension Plan, known as a "SEP-IRA," established prior to
January 1, 1996, or a SIMPLE plan established after December 31, 1996, both
through a shareholder servicing agent or a selling agent. Participating
employers may make an annual contribution to each employee through a SEP-IRA in
an amount up to the lesser of 15% of such employee's earned income of $30,000,
subject to certain provisions of the Code. Under a SIMPLE plan, an employee may
contribute up to $6,000 annually to his or her own IRA, and the employer must
generally match such contributions up to 3% of the employee's annual salary.
However, an employer may elect to match contributions for all eligible employees
at a rate lower than 3% (but no lower than 1%) of each employee's compensation,
in some circumstances. Alternatively, the employer may elect under the SIMPLE
formula to contribute to the employee's IRA 2% of the lesser of his or her
earned income or $150,000.
FOREIGN SHAREHOLDERS. Under the Code, distributions of net investment
income by a Fund to a nonresident alien individual, nonresident alien fiduciary
of a trust or estate, foreign corporation, or foreign partnership (a "foreign
shareholder") will be subject to U.S. withholding(at a rate of 30%
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or a lower treaty rate). Withholding will not apply if a dividend paid by a Fund
to a foreign shareholder is "effectively connected" with a U.S. trade or
business, in which case the reporting and withholding requirements applicable to
U.S. citizens, U.S. residents or domestic corporations will apply. Distributions
of net long-term capital gains are not subject to tax withholding, but in the
case of a foreign shareholder who is a nonresident alien individual, such
distributions ordinarily will be subject to U.S. withholding tax at a rate of
30% if the individual is physically present in the U.S. for more than 182 days
during the taxable year.
OTHER MATTERS. Investors should be aware that the investments to be
made by a Fund may involve sophisticated tax rules such as the original issue
discount rules that would result in income or gain recognition by the Fund,
without corresponding cash receipts. Although the Funds will seek to avoid
significant noncash income, such noncash income could be recognized by the
Funds, in which case a Fund may distribute cash derived from other sources in
order to meet the minimum distribution requirements described above.
The foregoing discussion is based upon the federal tax laws in effect
as of the date of this SAI and summarizes only some of the important federal
income tax considerations generally affecting the Funds and their shareholders.
It is not intended as a substitute for careful tax planning. Investors should
consult their tax advisors with respect to their specific tax situations as well
as with respect to state and local taxes.
ADDITIONAL INFORMATION
The Trust is an open-end series management investment company that was
organized as a corporation under the laws of the State of Delaware. The Board of
Trustees of the Trust has authorized the issuance of shares of common stock
which represent interests in thirty separate investment portfolios:
The Victory Convertible Securities Fund
The Victory Federal Money Market Fund
The Victory LifeChoice Conservative Investor Fund
The Victory LifeChoice Moderate Investor Fund
The Victory LifeChoice Growth Investor Fund
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
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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
As of the date of this SAI, the Trust offers shares of each of the Funds. Shares
of each Fund of the Trust are redeemable at the net asset value thereof at the
option of the holders thereof or in certain circumstances at the option of the
Trust. For information concerning the methods of redemption and the rights of
share ownership, see the Prospectuses under the caption "Redeeming Shares."
Generally, on each matter submitted to a vote of shareholders, each
shareholder is entitled to one vote per share. In addition, all shares of each
Fund vote as a single class; provided, however, that (i) as to any matter with
respect to which a separate vote of any Fund is required by the 1940 Act or
under the Maryland General Corporation Law, the requirements as to a separate
vote by that Fund apply in lieu of single class voting; (ii) in the event that
the separate vote requirements referred to in (i) apply with respect to one or
more Funds, then, subject to (iii) below, the shares of all other Funds vote as
a single class; and (iv) as to any matter which does not affect the interest of
a particular Fund, only the holders of shares of the one or more affected Funds
are entitled to vote. And, notwithstanding any provision of the Delaware General
Corporation Law requiring a greater portion than a majority of the votes
entitled to be cast in order to take or authorize any action, any such action
may be taken or authorized upon the concurrence of a majority of the aggregate
number of votes entitled to be cast thereon.
Shares of the Funds have no subscription or preemptive rights and only
such conversion or exchange privileges as the Trustees may grant in their
discretion.
Generally, a special meeting of shareholders of the Trust will be
called by the Secretary upon receipt of a request in writing signed by
stockholders holding not less than 25% of the Common Stock at the time issued
and outstanding and entitled to vote thereat.
INDEPENDENT ACCOUNTANTS AND REPORTS
Coopers & Lybrand L.L.P., 100 East Broad Street, Columbus, OH 43315,
acts as independent accountants for the Funds, and in that capacity audits the
Funds' annual financial statements.
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The Annual Reports of the Funds for the fiscal year ended November 30,
1996, and the reports thereon of the Funds' former independent accountants,
Price Waterhouse LLP, dated January 15, 1997, are incorporated by reference in
this SAI. The Letters to Shareholders contained in such Annual Reports are not
incorporated by reference and are not part of the registration statement or this
SAI.
COUNSEL
Kramer, Levin, Naftalis, & Frankel, 919 Third Avenue, New York, N.Y.
10022 serves as legal counsel to the Trust. Morrison & Foerster LLP, 2000
Pennsylvania Avenue, NW, Washington, DC 20006 was formerly legal counsel to the
Trust.
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APPENDIX
APPENDIX A
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
MOODY'S LONG-TERM DEBT RATINGS
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 the 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 over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
CAA Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
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CA Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Bonds rated Aaa, Aa, A and Baa are considered investment grade bonds.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
MOODY'S SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
PRIME-1 Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt
obligations. Prime-1 repayment ability will often be evidenced
by many of the following characteristics:
Leading market positions in well-established industries.
High rates of return on funds employed.
Conservative capitalization structure 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
ability 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.
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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.
NOT PRIME Issuers rated Not Prime do not fall within any of the Prime rating
categories.
STANDARD & POOR'S CORPORATION ("STANDARD & POOR'S")
STANDARD & POOR'S LONG-TERM ISSUE CREDIT RATINGS
AAA An obligation rated `AAA' has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA An obligation rated `AA' differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial
commitment on the obligation is very strong.
A An obligation rated `A' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher rated categories. However, the obligor's capacity
to meet its financial commitment on the obligation is still strong.
BBB An obligation rated `BBB' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
Issues rated in the four highest categories, AAA, AA, A and BBB, are
generally considered investment grade.
Obligations rated `BB', `B', `CCC', `CC' and `C' are regarded as having
significant speculative characteristics. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB An obligation rated `BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which
could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
B An obligation rated `B' is more vulnerable to nonpayment than
obligations rated `BB', but the obligor currently has the capacity to
meet its financial commitment on the obligation. Adverse business,
financial or economic conditions will likely impair the obligor's
capacity or willingness to meet its financial commitment on the
obligation.
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CCC An obligation rated `CCC' is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial and economic conditions
for the obligor to meet its financial commitment on the obligation. In
the event of adverse business, financial or economic conditions, the
obligor is not likely to have the capacity to meet its financial
commitment on the obligation.
CC An obligation rated `CC' is currently highly vulnerable to nonpayment.
C The `C' rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments
on this obligation are being continued.
D An obligation rated `D' is in payment default. The `D' rating category
is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace
period. The `D' rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
The ratings from `AA' to `CCC' may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within the major rating
categories.
The symbol `r' is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples include
obligations linked or indexed to equities, currencies or commodities;
obligations exposed to severe prepayment risk, such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
STANDARD & POOR'S SHORT-TERM ISSUE CREDIT RATINGS
Issues assigned A ratings are regarded as having the greatest capacity
for timely payment. Issues in this category are further refined with the
designation 1, 2 or 3 to indicate the relative degree of safety.
A-1 A short-term obligation rated `A-1' is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This indicates that
the obligor's capacity to meet its financial commitment on these
obligations is extremely strong.
A-2 A short-term obligation rated `A-2' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than obligations in higher rating categories. However, the obligor's
capacity to meet its financial commitment on the obligation is
satisfactory.
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A-3 A short-term obligation rated `A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation.
B A short-term obligation rated `B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to
meet its financial commitment on the obligation; however, it faces
major ongoing uncertainties which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
C A short-term obligation rated `C' is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the
obligation.
D A short-term obligation rated `D' is in payment default. The `D' rating
category is used when payments on an obligation are not made on the
date due even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such
grace period. The `D' rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
<PAGE>
THE VICTORY PORTFOLIOS
VICTORY LIFECHOICE FUNDS
VICTORY CONSERVATIVE INVESTOR FUND
VICTORY MODERATE INVESTOR FUND
VICTORY GROWTH INVESTOR FUND
STATEMENT OF ADDITIONAL INFORMATION
MARCH 1, 1998
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectus of The Victory LifeChoice Funds for Victory
Conservative Investor Fund, Victory Moderate Investor Fund, and Victory Growth
Investor Fund, dated March 1, 1998, as supplemented from time to time. This
Statement of Additional Information is incorporated by reference in its entirety
into the Prospectus for the Victory Conservative Investor Fund, Victory Moderate
Investor Fund, and Victory Growth Investor Fund. A copy of the Prospectus may be
obtained by writing to The Victory Portfolios at P.O. Box 8527, Boston, MA
02266-8527, or by telephoning toll free 800-KEY-FUND(R) or 800-539-3863.
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TABLE OF CONTENTS
INVESTMENT OBJECTIVES AND POLICIES 3
Additional Information on Fund Investments 3
Additional Information Regarding Certain of the
Proprietary Portfolios' Investments 6
INVESTMENT RESTRICTIONS OF THE FUNDS 23
PORTFOLIO TURNOVER 6
MANAGEMENT OF THE FUNDS 26
MANAGEMENT OF THE PROPRIETARY PORTFOLIOS 29
SECURITY HOLDERS 31
THE INVESTMENT ADVISER OF THE FUNDS 31
The Investment Advisers of the Proprietary Portfolios 33
ADMINISTRATOR OF THE FUNDS 38
EXPENSES, DISTRIBUTOR, AND DISTRIBUTION PLAN 40
SHAREHOLDER SERVICING PLAN 41
CUSTODIAN, TRANSFER AGENT, AND DIVIDEND DISBURSING AGENT 42
PERFORMANCE INFORMATION 42
PORTFOLIO TRANSACTIONS AND BROKERAGE 45
PURCHASE, REDEMPTION, AND PRICING 47
FEDERAL INCOME TAXES 48
ADDITIONAL INFORMATION 52
INDEPENDENT ACCOUNTANTS AND REPORTS 53
COUNSEL 53
APPENDIX A 54
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INVESTMENT OBJECTIVES AND POLICIES
The Victory Portfolios (the "Trust") is a professionally managed,
no-load, open-end series investment company consisting of several different
portfolios, three of which (each a "Fund" and, collectively, the "Funds") are
described in this Statement of Additional Information. Each Fund is a separately
managed, diversified mutual fund with its own investment objective and policies.
The Funds have no sales loads, redemption fees, or exchange fees. Each Fund has
been constructed as a "fund of funds," which means that it pursues its
investment objective primarily by allocating its investments among funds of The
Victory Portfolios (the "Proprietary Portfolios"). The Funds also may invest a
portion of their assets in shares of investment companies that are not part of
the same group of investment companies as The Victory Portfolios (the "Other
Portfolios"). (Proprietary Portfolios and Other Portfolios are sometimes
referred to herein as "Underlying Portfolios.")
The three Funds and their investment objectives are:
VICTORY CONSERVATIVE INVESTOR FUND
The investment objective of the Victory Conservative Investor Fund (the
"Conservative Investor Fund") is to seek to provide current income combined with
moderate growth of capital. The Conservative Investor Fund seeks to achieve its
objective by allocating its assets among Underlying Portfolios that invest in
fixed income securities and, to a lesser extent, equity securities.
VICTORY MODERATE INVESTOR FUND
The investment objective of the Victory Moderate Investor Fund (the
"Moderate Investor Fund") is to seek to provide growth of capital combined with
a moderate level of current income. The Moderate Investor Fund seeks to achieve
its objective by allocating its assets among Underlying Portfolios that invest
in equity securities and, to a lesser extent, fixed income securities.
VICTORY GROWTH INVESTOR FUND
The investment objective of the Victory Growth Investor Fund (the
"Growth Investor Fund") is to seek to provide growth of capital. The Growth
Investor Fund seeks to achieve its objective by allocating its assets primarily
among Underlying Portfolios that invest primarily in equity securities.
ADDITIONAL INFORMATION ON FUND INVESTMENTS
The Investment Company Act of 1940, as amended (the "1940 Act") permits
the Funds to invest without limitation in other investment companies that are
part of the same "group of investment companies" (as defined in the 1940 Act) as
the Trust, provided that certain limitations are observed. Generally, these
limitations require that a fund of funds (a) limit its investments to shares of
other investment companies that are part of the same "group of investment
companies" (as defined in the 1940 Act) as the fund of funds, government
securities, and short-term paper; (b) observe certain limitations on the amount
of sales loads and distribution-related fees that are borne by shareholders of
the fund of funds; and (c) do not invest in other funds of funds. Pursuant to an
Exemptive Order issued by the Securities and Exchange Commission (the
"Commission), the Funds may invest in investment portfolios of the Proprietary
Portfolios and in shares of the Other Portfolios that are not part of the same
group of investment companies as the Funds. A Fund and its affiliates,
collectively, may acquire no more than 3% of the total outstanding stock of any
Other Portfolio.
Because of their investment objectives and policies, the Funds will
concentrate (i.e., invest 25% or more of their total assets) in the mutual fund
industry. In addition, a Fund may invest in a Proprietary Portfolio or Other
Portfolio (collectively, the "Underlying Portfolios") which concentrates 25% or
more of its total assets in any one industry. Investments by a Fund in
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities or in repurchase agreements collateralized by the foregoing
equalling 25% or more of the Fund's total assets will not be considered
"concentration" by such Fund in the industry of the issuer(s) of such
securities.
The Prospectus more fully addresses the subject of each Fund's and each
Proprietary Portfolio's investment objectives, as well as the investment
policies that the Funds apply in seeking to meet those objectives. The following
disclosures will supplement that information more specifically by detailing the
types of securities and other instruments in which the Proprietary
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Portfolios may invest, the strategies behind, and the risks associated with,
such investing. Note that there can be no assurance given that the respective
investment objectives of the Funds or the Proprietary Portfolios will be
achieved.
VICTORY PORTFOLIOS:
Value Fund. The Value Fund seeks to provide long-term growth of capital
and dividend income. The fund pursues this objective by investing primarily in a
diversified group of common stocks with an emphasis on companies with above
average total return potential.
Diversified Stock Fund. The Diversified Stock Fund seeks to provide
long-term growth of capital. The fund pursues this investment objective by
investing primarily in common stocks and securities convertible into common
stocks issued by established domestic and foreign companies.
Growth Fund. The Growth Fund seeks to provide long-term growth of
capital. The fund pursues this objective by investing primarily in common stocks
of issuers listed on a nationally recognized exchange with an emphasis on
companies with superior prospects for long-term earnings growth and price
appreciation.
Special Value Fund. The Special Value Fund seeks to provide long-term
growth of capital and dividend income. The fund pursues this objective by
investing primarily in common stocks of small and medium-sized companies listed
on a nationally recognized exchange with an emphasis on companies with above
average total return potential.
Special Growth Fund. The Special Growth Fund seeks capital
appreciation. The fund pursues this investment objective by investing primarily
in equity securities of companies that have market capitalizations of $750
million [Ithink we raised this to $1 billion] or less at the time of purchase.
International Growth Fund. The International Growth Fund seeks to
provide capital growth consistent with reasonable investment risk. The fund
pursues this objective by investing primarily in equity securities of foreign
corporations, most of which will be denominated in foreign currencies.
Convertible Securities Fund. The Convertible Securities Fund's
investment objective is to seek a high level of current income together with
long-term capital appreciation. The Convertible Securities Fund invests
primarily in convertible bonds, corporate notes, convertible preferred stocks,
and other securities convertible into common stock.
Government Mortgage Fund. The Government Mortgage Fund seeks to provide
a high level of current income consistent with safety of principal. The fund
pursues this objective by investing exclusively in obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities.
Investment Quality Bond Fund. The Investment Quality Bond Fund seeks to
provide a high level of income. The fund pursues this objective by investing
primarily in investment-grade bonds issued by corporations and the U.S.
Government and its agencies or instrumentalities.
Fund For Income. The Fund For Income seeks to provide a high level of
current income consistent with preservation of shareholders' capital. The fund
pursues this objective by investing primarily in selected mortgage-related
securities.
Intermediate Income Fund. The Intermediate Income Fund seeks to provide
a high level of income. The fund pursues this objective by investing in debt
securities issued by corporations and the U.S. Government and its agencies and
instrumentalities.
Real Estate Investment Fund. The Real Estate Investment Fund seeks to
provide total return through investments in real estate-related securities. The
fund pursues this investment objective by investing primarily in common stocks,
including real estate investment trusts (REITs), rights to purchase these
securities, convertible securities, and preferred stocks.
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Limited Term Income Fund. The Limited Term Income Fund seeks to provide
income consistent with limited fluctuation of principal. The fund pursues this
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.
Financial Reserves Fund. The Financial Reserves Fund seeks to obtain as
high a level of current income as is consistent with preserving capital and
providing liquidity. The fund pursues this objective by investing primarily in a
portfolio of high-quality U.S. denominated money market instruments. The fund
seeks to maintain a constant net asset value of $1.00 per unit of beneficial
interest, and shares of the Fund are offered at net asset value.
OTHER PORTFOLIOS:
The Funds do not pay any front end sales loads or contingent deferred
sales charges in connection with the purchase or redemption of shares of the
Other Portfolios. In addition, to the extent required by the 1940 Act or the
terms of any exemptive order received by the Funds from the Commission, the
sales charges, distribution related fees and service fees related to shares of
the Funds will not exceed the limits set forth in the Conduct Rules of the NASD
when aggregated with any sales charges, distribution related fees and service
fees that the Funds pay relating to Other Portfolio shares.
The PBHG Growth Fund. The PBHG Growth Fund seeks capital appreciation.
The PBHG Growth Fund will seek to achieve its objective by investing primarily
in common stocks and convertible securities of small to mid-size companies the
advisor believes have an outlook for strong earnings growth and the potential
for significant capital appreciation.
The Neuberger & Berman Genesis Fund. The investment objective of the
Neuberger&Berman Genesis Fund is to seek capital appreciation. The
Neuberger&Berman Genesis Fund pursues this objective by investing primarily in
common stocks of companies with small market capitalizations. The
Neuberger&Berman Genesis Fund regards companies with market capitalization of up
to $1.5 billion at the time of investment as small-cap companies.
The Loomis Sayles Bond Fund. The Loomis Sayles Bond Fund's investment
objective is high total investment return through a combination of current
income and capital appreciation. The Loomis Sayles Bond Fund seeks to achieve
its objective by normally investing substantially all of its assets in fixed
income securities, although up to 20% of its assets may be invested in
preferredstocks. At least 65% of the Loomis Sayles Bond Fund's total assets will
normally be invested in bonds.
OTHER INVESTMENTS
Short-Term Obligations. Normally, each of the Funds will be
predominantly invested in shares of other mutual funds. Under certain
circumstances, however, a Fund may invest in short-term obligations. To the
extent that a Fund's assets are so invested, they will not be invested so as to
meet its investment objective. The instruments may include high-quality liquid
debt securities such as commercial paper, certificates of deposit, bankers'
acceptances, repurchase agreements with maturities of less than seven days, and
debt obligations backed by the full faith and credit of the U.S. Government.
These instruments are described below in the section of this Statement of
Additional Information describing the permissible investments of the Proprietary
Portfolios.
ADDITIONAL INFORMATION REGARDING CERTAIN OF THE PROPRIETARY PORTFOLIOS'
INVESTMENTS
The following policies supplement the descriptions of the investment
objectives and policies of the Proprietary Portfolios as set forth above and in
the Prospectus.
Bankers' Acceptances and Certificates of Deposit. Certain of the
Proprietary Portfolios may invest in bankers' acceptances, certificates of
deposit, and demand and time deposits. Bankers' acceptances are negotiable
drafts or bills of exchange typically drawn by an importer or exporter to pay
for specific merchandise, which are "accepted" by a bank; meaning, in effect,
that the bank unconditionally agrees to pay the face value of the instrument on
maturity. Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank or a savings and loan association for a
definite period of time and earn a specified return.
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Certain of the Proprietary Portfolios also may invest in Eurodollar
Certificates of Deposit ("ECDs") which are U.S. dollar-denominated certificates
of deposit issued by branches of foreign and domestic banks located outside the
United States, Yankee Certificates of Deposit ("Yankee CDs") which are
certificates of deposit issued by a U.S. branch of a foreign bank denominated in
U.S. dollars and held in the United States, Eurodollar Time Deposits ("ETDs")
which are U.S. dollar-denominated deposits in a foreign branch of a U.S. bank or
a foreign bank, and Canadian Time Deposits ("CTDs") which are U.S.
dollar-denominated certificates of deposit insured by Canadian offices of major
Canadian Banks.
Lower-rated Debt Securities. Certain of the Proprietary Portfolios may
purchase lower-rated debt securities commonly referred to as "junk bonds" (those
rated below Baa by Moody's Investors Service, Inc. or below BBB by Standard and
Poor's Corporation) that have poor protection with respect to the payment of
interest and repayment of principal, or may be in default. These securities are
often considered to be speculative and involve greater risk of loss or price
changes due to changes in the issuer's capacity to pay. The market prices of
lower-rated debt securities may fluctuate more than those of higher-rated debt
securities and may decline significantly in periods of general economic
difficulty, which may follow periods of rising interest rates.
While the market for high-yield corporate debt securities has been in
existence for many years and has weathered previous economic downturns, the
1980s brought a dramatic increase in the use of such securities to fund highly
leveraged corporate acquisitions and restructuring. Past experience may not
provide an accurate indication of future performance of the high yield bond
market, especially during periods of economic recession. In fact, from 1989 to
1991, the percentage of lower-rated debt securities that defaulted rose
significantly above prior levels, although the default rate decreased in 1992.
The market for lower-rated securities may be thinner and less active
than that for higher-rated debt securities, which can adversely affect the
prices at which the former are sold.
If market quotations are not available, lower-rated debt securities
will be valued in accordance with procedures established by the Proprietary
Portfolio's Board, including the use of outside pricing services. Judgment plays
a greater role in valuing high-yield corporate debt securities than is the case
for securities for which more external sources for quotations and last-sale
information are available. Adverse publicity and changing investor perceptions
may affect the ability of outside pricing services to value lower-rated debt
securities and the Proprietary Portfolio's ability to sell these securities.
Since the risk of default is higher for lower-rated debt securities,
the Proprietary Portfolio's research and credit analysis are an especially
important part of managing securities of this type held by the Proprietary
Portfolio. In considering investments for the Proprietary Portfolio, its
investment 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 by the Proprietary
Portfolio's investment 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 Proprietary Portfolio 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 interest of security holders if it determines this
to be in the best interest of the Proprietary Portfolio's shareholders.
Commercial Paper. Certain of the Proprietary Portfolios may purchase
rated or unrated commercial paper. Commercial paper consists of unsecured
promissory notes issued by corporations, banks, broker-dealers and other
entities. 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.
Variable Amount Master Demand Notes. Certain of the Proprietary
Portfolios may purchase variable amount master demand notes, which 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 Proprietary
Portfolio 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 Proprietary Portfolio
to dispose of a variable amount master demand note if the issuer defaulted on
its payment obligations, and a Proprietary Portfolio could, for this or other
reasons, suffer a loss to the extent of the default. While the notes are not
typically rated by credit rating agencies, issuers of variable amount master
demand notes must satisfy the same criteria as set forth above for unrated
commercial paper,
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and the Proprietary Portfolios' investment adviser will continuously monitor the
issuer's financial status and ability to make payments due under the instrument.
Where necessary to ensure that a note is of "high quality," a Proprietary
Portfolio 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 Proprietary Portfolio'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.
Foreign Investment. Certain of the Proprietary Portfolios may invest in
securities issued by foreign issuers. Such investments may subject a Proprietary
Portfolio to investment risks that differ in some respects from those associated
with investments in obligations of U.S. domestic issuers or in U.S. securities
markets. Such risks include future adverse political and economic developments,
possible seizure, nationalization, or expropriation of foreign investments, less
stringent disclosure requirements, the possible establishment of exchange
controls or taxation at the source, and the adoption of other foreign
governmental restrictions. Additional risks include currency exchange risks,
less publicly available information, the risk that companies may not be subject
to the accounting, auditing and financial reporting standards and requirements
of U.S. companies, the risk that foreign securities markets may have less volume
and therefore many securities traded in these markets may be less liquid and
their prices more volatile than U.S. securities, and the risk that custodian and
brokerage costs may be higher. Permissible investments include obligations or
securities of foreign issuers (including, in certain cases, American Depositary
Receipts), foreign branches of U.S. banks and of foreign banks.
U.S. Government Obligations. Certain of the Proprietary Portfolios 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. A Proprietary Portfolio will invest in obligations of such agencies
and instrumentalities only when its investment adviser believes that the credit
risk with respect thereto is minimal. U.S. Government obligations are subject to
interest rate risks.
Securities Lending. Certain of the Proprietary Portfolios may lend
portfolio securities to broker-dealers, banks or institutional borrowers of
securities. Generally, a Proprietary Portfolio must receive a minimum of 100%
collateral, plus any interest due in the form of cash or U.S. Government
securities. This collateral must be valued daily and should the market value of
the loaned securities increase, the borrower must furnish additional collateral
to the Proprietary Portfolio. During the time portfolio securities are on loan,
the borrower will pay the Proprietary Portfolio 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 a Proprietary
Portfolio or the borrower at any time. While a Proprietary Portfolio will not
have the right to vote securities on loan, it intends to terminate the loan and
regain the right to vote if that is considered important with respect to the
investment. A Proprietary Portfolio will only enter into loan arrangements with
broker-dealers, banks or other institutions which its investment adviser has
determined are creditworthy under guidelines established by its Board of
Directors or Trustees.
Variable and Floating Rate Notes. Certain of the Proprietary Portfolios
may acquire variable and floating rate notes, subject to the Proprietary
Portfolio's investment objective, policies and restrictions. A variable rate
note is one whose terms provide for the readjustment of its interest rate on set
dates and which, upon such readjustment, can reasonably be expected to have a
market value that approximates its par value. A floating rate note is one whose
terms provide for the readjustment of its interest rate whenever a specified
interest rate changes and which, at any time, can reasonably be expected to have
a market value that approximates its par value. Such notes are frequently not
rated by credit rating agencies; unrated variable and floating rate notes
purchased by a Proprietary Portfolio will generally only be those determined by
its investment adviser, under guidelines established by the Proprietary
Portfolios, to pose minimal credit risks and to be of comparable quality, at the
time of purchase, to rated instruments eligible for purchase under the
Proprietary Portfolio's investment policies. In making such determinations, its
investment 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
Proprietary Portfolio, the Proprietary Portfolio may resell the note at any time
to a third party. The absence of an active secondary market, however, could make
it difficult for the Proprietary Portfolio to dispose of a variable or floating
rate
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note in the event the issuer of the note defaulted on its payment obligations
and the Proprietary Portfolio could, for this or other reasons, suffer a loss to
the extent of the default. Variable or floating rate notes may be secured by
bank letters of credit.
Variable or floating rate notes may have maturities of more than one
year, as follows:
1. A note that is issued or guaranteed by the United States
government or any agency thereof and which has a variable rate
of interest readjusted no less frequently than annually will
be deemed by a Proprietary Portfolio to have a maturity equal
to the period remaining until the next readjustment of the
interest rate.
2. A variable rate note, the principal amount of which is
scheduled on the face of the instrument to be paid in one year
or less, will be deemed by a Proprietary Portfolio to have a
maturity equal to the period remaining until the next
readjustment of the interest rate.
3. A variable rate note that is subject to a demand feature
scheduled to be paid in one year or more will be deemed by a
Proprietary Portfolio to have a maturity equal to the longer
of the period remaining until the next readjustment of the
interest rate or the period remaining until the principal
amount can be recovered through demand.
4. A floating rate note that is subject to a demand feature will
be deemed by a Proprietary Portfolio to have a maturity equal
to the period remaining until the principal amount can be
recovered through demand.
Certain of the following investments may be considered to be derivative
securities:
Forward Foreign Currency Contracts. Certain of the Proprietary
Portfolios may purchase and sell forward foreign currency contracts. Foreign
securities involve currency risks. The U.S. dollar value of a foreign security
tends to decrease when the value of the U.S. dollar rises against the foreign
currency in which the security is denominated, and tends to increase when the
value of the U.S. dollar falls against such currency. Generally, a Proprietary
Portfolio may purchase and sell forward foreign currency contracts (a) to hedge
against foreign exchange risk arising from the Proprietary Portfolio's
investment or anticipated investment in securities denominated in foreign
currencies; and (b) to attempt to minimize the risk to the Proprietary Portfolio
from adverse changes in the relationship between the U.S. dollar and foreign
currencies. A forward foreign currency contract (a "forward contract") is an
obligation to purchase or sell a specific currency for an agreed price at a
future date (usually less than one year), which is individually negotiated and
privately traded by currency traders and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades. Although foreign exchange dealers do not charge a fee for
commissions, they do realize a profit based on the difference between the price
at which they are buying and selling various currencies. Although these
contracts are intended to minimize the risk of loss due to a decline in the
value of the hedged currencies, at the same time, they tend to limit any
potential gain which might result should the value of such currencies increase.
While a Proprietary Portfolio may enter into forward contracts to
reduce currency exchange risks, changes in currency exchange rates may result in
poorer overall performance for the Proprietary Portfolio than if it had not
engaged in such transactions. Moreover, there may be an imperfect correlation
between a Proprietary Portfolio's holdings of securities denominated in a
particular currency and forward contracts entered into by the Proprietary
Portfolio. Such imperfect correlation may prevent the Proprietary Portfolio from
achieving the intended hedge or expose the Proprietary Portfolio to the risk of
currency exchange loss.
Certain of the Proprietary Portfolios also may purchase and sell
options on foreign currencies and foreign currency futures contracts and related
options. (See "Options on Foreign Currencies" and "Currency Futures" in this
Statement of Additional Information.)
Generally, a Proprietary Portfolio will hold cash, cash equivalents or
U.S. Government securities and other liquid assets in a segregated account with
its custodian in an amount equal (on a daily marked-to-market basis) to the
amount of the commitments under these contracts. At the consummation of the
forward contract, a Proprietary Portfolio may either make delivery of the
foreign currency or terminate its contractual obligation to deliver the foreign
currency by purchasing an offsetting contract obligating it to purchase at the
same maturity date the same amount of such foreign currency. If the Proprietary
Portfolio
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chooses to make delivery of the foreign currency, it may be required to obtain
such currency for delivery through the sale of portfolio securities denominated
in such currency or through conversion of other assets of the Proprietary
Portfolio into such currency. If the Proprietary Portfolio engages in an
offsetting transaction, the Proprietary Portfolio will realize a gain or a loss
to the extent that there has been a change in forward contract prices. Closing
purchase transactions with respect to forward contracts are usually effected
with the currency trader who is a party to the original forward contract.
However, there can be no assurance that a liquid market will exist in which to
close a forward contract, in which case the Proprietary Portfolio may suffer a
loss. In addition, a Proprietary Portfolio is not required to enter into such
transactions with regard to its foreign currency-denominated securities and will
not do so unless deemed appropriate by its investment adviser.
It should be realized that this method of protecting the value of the
Proprietary Portfolios' portfolio securities against a decline in the value of a
currency does not eliminate fluctuations in the underlying prices of the
securities. It simply establishes a rate of exchange which can be achieved at
some future point in time. It also reduces any potential gain which may have
otherwise occurred had the currency value increased above the settlement price
of the contract.
Options on Securities and Indexes. Certain of the Proprietary
Portfolios may purchase and sell ("write") call options on securities and
indexes. Similarly, certain of the Proprietary Portfolios may purchase and write
put options on securities and indexes.
An option on a security (or index) is a contract that gives the holder
of the option, in return for a premium, the right to buy from (in the case of a
call) or sell to (in the case of a put) the writer of the option the security
underlying the option (or the cash value of the index) at a specified exercise
price at any time during the term of the option. The writer of an option on a
security has the obligation, upon exercise of the option, to deliver the
underlying security upon payment of the exercise price or to pay the exercise
price upon delivery of the underlying security. Upon exercise, the writer of an
option on an index is obligated to pay the difference between the cash value of
the index and the exercise price multiplied by the specified multiplier for the
index option. (An index is designed to reflect specified facets of a particular
financial or securities market, a specific group of financial instruments or
securities, or certain economic indicators.) Options in which certain of the
Proprietary Portfolios may invest generally will be issued by the Options
Clearing Corporation and listed on a national securities exchange; some
Proprietary Portfolios may invest in options traded in the over-the-counter
market.
Certain of the Proprietary Portfolios may write "covered" call and put
options. A call option on a security is "covered" if the Proprietary Portfolio
owns the security underlying the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or, if additional
cash consideration is required, cash or cash equivalents in such amount are
placed in a segregated account by its custodian) upon conversion or exchange of
other securities held by the Proprietary Portfolio. A call option on an index is
covered if the Proprietary Portfolio maintains with its custodian cash or cash
equivalents equal to the contract value. A call option also is covered if the
Proprietary Portfolio owns a call on the same security or index as the call
written where the exercise price of the call held is (i) equal to or less than
the exercise price of the call written, or (ii) greater than the exercise price
of the call written, provided the difference is maintained by the Proprietary
Portfolio in cash or cash equivalents in a segregated account with its
custodian. A put option on a security or an index is "covered" if the
Proprietary Portfolio maintains cash or cash equivalents equal to the exercise
price in a segregated account with its custodian. A put option also is covered
if the Proprietary Portfolio holds a put on the same security or index as the
put written where the exercise price of the put held is (i) equal to or greater
than the exercise price of the put written, or (ii) less than the exercise price
of the put written, provided the difference is maintained by the Proprietary
Portfolio in cash or cash equivalents in a segregated account with its
custodian.
If an option written by a Proprietary Portfolio expires, the
Proprietary Portfolio realizes a gain equal to the premium received at the time
the option was written. If an option purchased by a Proprietary Portfolio
expires unexercised, the Proprietary Portfolio realizes a loss equal to the
premium paid.
Prior to the earlier of exercise or expiration, an option may be closed
out by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security or index, exercise price, and expiration). There
can be no assurance, however, that a closing purchase or sale transaction can be
effected when the Proprietary Portfolio desires.
A Proprietary Portfolio will realize a gain from a closing purchase
transaction if the cost of the closing option is less than the premium received
from writing the option, or, if it is more, the Proprietary Portfolio will
realize a loss. If the premium
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received from a closing sale transaction is more than the premium paid to
purchase the option, the Proprietary Portfolio will realize a loss. The
principal factors affecting the market value of a put or call option include the
supply and demand, interest rates, the current market price of the underlying
security or index in relation to the exercise price of the option, the
volatility of the underlying security or index, and the time remaining until the
expiration date.
The premium paid for a put or call option purchased by a Proprietary
Portfolio is an asset of the Proprietary Portfolio. The premium received for an
option written by a Proprietary Portfolio is recorded as a deferred credit. The
value of an option purchased or written is marked to market daily and is valued
at the closing price on the exchange on which it is traded or, if not traded on
an exchange or no closing price is available, at the mean between the last bid
and asked prices.
The staff of the Securities and Exchange Commission has taken the
position that purchased over-the-counter options and assets used to cover
written over-the-counter options are illiquid.
Risks Associated with Options on Securities and Indexes. The purchase
and writing of options involves certain risks. The writer of the option has no
control over the time when it may be required to fulfill its obligation as a
writer of the option. Once an option writer has received an exercise notice, it
cannot effect a closing purchase transaction in order to terminate its
obligation under the option and must deliver the underlying securities at the
exercise price. If a put or call option purchased by a Proprietary Portfolio is
not sold when it has remaining value, and if the market price of the underlying
security, in the case of a put, remains equal to or greater than the exercise
price, the Proprietary Portfolio will lose its entire investment in the option.
If a Proprietary Portfolio were unable to close out a covered call option that
it had written on a security, it would not be able to sell the underlying
security unless the option expired without exercise. Furthermore, during the
option period, the covered call writer has, in return for the premium received
for the option, given up the opportunity to profit from a price increase in the
underlying securities above the exercise price, but, as long as its obligation
as a writer continues, has retained the risk of loss should the price of the
underlying security decline. In addition, except to the extent that a call
option on an index written by a Proprietary Portfolio is covered by an option on
the same index purchased by the Proprietary Portfolio, movements in the index
may result in a loss to the Proprietary Portfolio.
There can be no assurance that a liquid market will exist when a
Proprietary Portfolio seeks to close out an option position. Additionally, if
trading restrictions or suspensions are imposed on the options markets, a
Proprietary Portfolio may be unable to close out a position. The writing of call
options could result in increases in a Proprietary Portfolio's portfolio
turnover rate, particularly during periods when market prices of the underlying
securities appreciate.
A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.
Moreover, there are significant differences between the securities and options
markets that could result in an imperfect correlation between these markets,
causing a given transaction not to achieve its objectives.
Options on Foreign Currencies. Certain of the Proprietary Portfolios
may purchase and sell ("write") put and call options on foreign currencies,
either on exchanges or in the over-the-counter market. A put option on a foreign
currency gives the purchaser of the option the right to sell a foreign currency
at the exercise price until the option expires. A call option on a foreign
currency gives the purchaser of the option the right to purchase the currency at
the exercise price until the option expires. Currency options traded on U.S. or
other exchanges may be subject to position limits which may limit the ability of
a Proprietary Portfolio to reduce foreign currency risk using such options.
Over-the-counter options differ from traded options in that they are two-party
contracts with price and other terms negotiated between the buyer and seller,
and generally do not have as much market liquidity as exchange-traded options.
Certain Proprietary Portfolios may purchase and sell options on foreign
currencies for hedging purposes. For example, a decline in the dollar value of a
foreign currency in which portfolio securities are denominated will reduce the
dollar value of such securities, even if their value in the foreign currency
remains constant. In order to protect against such diminutions in the value of
portfolio securities, a Proprietary Portfolio may purchase put options on the
foreign currency. If the value of the currency does decline, that Proprietary
Portfolio will have the right to sell such currency for a fixed amount of
dollars which exceeds the market value of such currency, resulting in a gain
that may offset, in whole or in part, the negative effect of currency
depreciation on the value of a Proprietary Portfolio's securities denominated in
that currency.
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Conversely, if a rise in the dollar value of a foreign currency in
which securities to be acquired are denominated is projected, thereby increasing
the cost of such securities, a Proprietary Portfolio may purchase call options
on such currency. If the value of such currency does increase, the purchase of
such call options would enable the Proprietary Portfolio to purchase currency
for a fixed amount of dollars which is less than the market value of such
currency, resulting in a gain that may offset, at least partially, the effect of
any currency-related increase in the price of securities the Proprietary
Portfolio intends to acquire. As in the case of other types of options
transactions, however, the benefit the Proprietary Portfolio derives from
purchasing foreign currency options will be reduced by the amount of the premium
and related transaction costs. In addition, if currency exchange rates do not
move in the direction or to the extent anticipated, the Proprietary Portfolio
could sustain losses on transactions in foreign currency options which would
deprive it of a portion or all of the benefits of advantageous changes in such
rates.
Certain Proprietary Portfolios also may write options on foreign
currencies for hedging purposes. For example, if a Proprietary Portfolio
anticipates a decline in the dollar value of foreign currency-denominated
securities due to declining exchange rates, it could, instead of purchasing a
put option, write a call option on the relevant currency. If the expected
decline occurs, the option will most likely not be exercised, and the diminution
in value of portfolio securities will be offset by the amount of the premium
received by a Proprietary Portfolio.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, a
Proprietary Portfolio could write a put option on the relevant currency. If
rates move in the manner projected, the put option will expire unexercised and
allow the Fund to offset such increased cost up to the amount of the premium. As
in the case of other types of options transactions, however, the writing of a
foreign currency option will constitute only a partial hedge up to the amount of
the premium, and only if rates move in the expected direction. If unanticipated
exchange rate fluctuations occur, the option may be exercised and the
Proprietary Portfolio would be required to purchase or sell the underlying
currency at a loss which may not be fully offset by the amount of the premium.
As a result of writing options on foreign currencies, a Proprietary Portfolio
also may be required to forego all or a portion of the benefits which might
otherwise have been obtained from favorable movements in currency exchange
rates.
A call option written on foreign currency by a Proprietary Portfolio is
"covered" if the Proprietary Portfolio owns the underlying foreign currency
subject to the call or securities denominated in that currency or has an
absolute and immediate right to acquire that foreign currency without additional
cash consideration (or for additional cash consideration held in a segregated
account by its custodian) upon conversion or exchange of other foreign currency
held in its portfolio. A call option is also covered if the Proprietary
Portfolio holds a call on the same foreign currency for the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the amount of the difference is
maintained by a Proprietary Portfolio in cash and liquid high grade debt
securities in a segregated account with its custodian.
Futures Transactions. A futures contract is an agreement to buy or sell
a security or currency (or to deliver a final cash settlement price in the case
of a contract relating to an index or otherwise not calling for physical
delivery at the end of trading in the contracts), for a set price in a future
month. Certain of the Proprietary Portfolios may enter into contracts for the
future delivery of securities, stock index futures contracts and futures
contracts based on foreign currencies. Some Proprietary Portfolios also may use
foreign currency futures contracts and related options for the purpose of
hedging against changes in currency exchange rates or to enhance returns.
Certain of the Proprietary Portfolios also may purchase and write put
and call options on futures contracts of the type into which such Proprietary
Portfolio is authorized to enter and may engage in related closing transactions.
In the United States, futures on securities, stock index futures, foreign
currency futures and related options will be traded on exchanges that are
regulated by the Commodity Futures Trading Commission ("CFTC"). Subject to
compliance with applicable CFTC rules, certain of the Proprietary Portfolios
also may enter into futures contracts traded on foreign futures exchanges as
long as trading on the aforesaid foreign futures exchanges does not subject the
Proprietary Portfolio to risks that are materially greater than the risks
associated with trading on U.S. exchanges. In the United States, futures
contracts are traded on boards of trade which have been designated "contract
markets" by the CFTC. Futures contracts trade on these markets through an "open
outcry" auction on the exchange floor. Currently, there are futures contracts
based on a variety of instruments, indexes and currencies.
When a purchase or sale of a futures contract is made by a Proprietary
Portfolio, the Proprietary Portfolio is required to deposit with its custodian
(or broker, if legally permitted) a specified amount of cash or U.S. Government
securities ("initial
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margin"). The margin required for a futures contract is set by the exchange on
which the contract is traded and may be modified during the term of the
contract. The initial margin requirement may be as low as 2% or less of a
contract's face value. The initial margin is in the nature of a performance bond
or good faith deposit on the futures contract which is returned to the
Proprietary Portfolio upon termination of the contract assuming all contractual
obligations have been satisfied. Each Proprietary Portfolio expects to earn
interest income on its initial margin deposits. A futures contract held by a
Proprietary Portfolio is valued daily at the official settlement price of the
exchange on which it is traded. Each day the Proprietary Portfolio pays or
receives cash, called "daily settlement," equal to the daily change in value of
the futures contract. This process is known as "marking to market." Variation
margin does not represent a borrowing or loan by a Proprietary Portfolio but is
instead a settlement between the Proprietary Portfolio and the broker of the
amount one would owe the other if the futures contract expired. In computing
daily net asset value, each Proprietary Portfolio will mark to market its open
futures positions.
A Proprietary Portfolio is also required to deposit and maintain margin
with respect to put and call options on futures contracts written by it. Such
margin deposits will vary depending on the nature of the underlying futures
contract (and the related initial margin requirements), the current market value
of the option, and other futures positions held by the Proprietary Portfolio.
Positions taken in the futures markets are not normally held until
delivery or final cash settlement is required, but are instead liquidated
through offsetting transactions which may result in a gain or a loss. While
futures positions taken by a Proprietary Portfolio will usually be liquidated in
this manner, a Proprietary Portfolio may instead make or take delivery of
underlying securities (or currencies) whenever it appears economically
advantageous to the Proprietary Portfolio to do so. A clearing organization
associated with the exchange on which futures are traded assumes responsibility
for closing-out transactions and guarantees that as between the clearing members
of the exchange, the sale and purchase obligations will be performed with regard
to all positions that remain open at the termination of the contract.
Stock Index Futures. A stock index futures contract does not require
the physical delivery of securities, but merely provides for profits and losses
resulting from changes in the market value of the contract to be credited or
debited at the close of each trading day to the respective accounts of the
parties to the contract. On the contract's expiration date, a final cash
settlement occurs and the futures positions are simply closed out. Changes in
the market value of a particular stock index futures contract reflect changes in
the specified index of equity securities on which the contract is based. A stock
index is designed to reflect overall price trends in the market for the equity
securities.
Currency Futures. Certain of the Proprietary Portfolios may purchase
and sell futures contracts on foreign currencies. A sale of a currency futures
contract creates an obligation by the Proprietary Portfolio, as seller, to
deliver the amount of currency called for in the contract at a specified future
time for a specified price. A purchase of a currency futures contract creates an
obligation by the Proprietary Portfolio, as purchaser, to take delivery of an
amount of currency at a specified future time at a specified price. The
Proprietary Portfolio may sell a currency futures contract if its investment
adviser anticipates that exchange rates for a particular currency will fall, as
a hedge against a decline in the value of the Proprietary Portfolio's securities
denominated in such currency. If the investment adviser anticipates that
exchange rates will rise, the Proprietary Portfolio may purchase a currency
futures contract to protect against an increase in the price of securities
denominated in a particular currency the Proprietary Portfolio intends to
purchase. Although the terms of currency futures contracts specify actual
delivery or receipt, in most instances the contracts are closed out before the
settlement date without the making or taking of delivery of the currency.
Closing out of a currency futures contract is effected by entering into an
offsetting purchase or sale transaction. To offset a currency futures contract
sold by the Proprietary Portfolio, the Proprietary Portfolio purchases a
currency futures contract for the same aggregate amount of currency and delivery
date. If the price in the sale exceeds the price in the offsetting purchase, the
Proprietary Portfolio is immediately paid the difference. Similarly, to close
out a currency futures contract purchased by the Proprietary Portfolio, the
Proprietary Portfolio sells a currency futures contract. If the offsetting sale
price exceeds the purchase price, the Proprietary Portfolio realizes a gain, and
if the offsetting sale price is less than the purchase price, the Proprietary
Portfolio realizes a loss.
A risk in employing currency futures contracts to protect against the
price volatility of portfolio securities denominated in a particular currency is
that changes in currency exchange rates or in the value of the futures position
may correlate imperfectly with changes in the cash prices of a Proprietary
Portfolio's securities. The degree of correlation may be distorted by the fact
that the currency futures market may be dominated by short-term traders seeking
to profit from changes in exchange rates. This would reduce the value of such
contracts for hedging purposes over a short-term period. Such distortions are
generally minor and would diminish as the contract approached maturity. Another
risk is that an investment adviser could be incorrect in
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its expectation as to the direction or extent of various exchange rate movements
or the time span within which the movements take place.
Options on Futures. For bona fide hedging and other appropriate risk
management purposes, certain of the Proprietary Portfolios purchase and write
call and put options on futures contracts which are traded on exchanges that are
licensed and regulated by the CFTC for the purpose of options trading, or,
subject to applicable CFTC rules, on foreign exchanges. A "call" option on a
futures contract gives the purchaser the right, in return for the premium paid,
to purchase a futures contract (assume a "long" position) at a specified
exercise price at any time before the option expires. A "put" option gives the
purchaser the right, in return for the premium paid, to sell a futures contract
(assume a "short" position), for a specified exercise price at any time before
the option expires. The writer of an option on a futures contract, unlike the
holder, is subject to initial margin and variation margin requirements on the
option position.
Upon the exercise of a "call," the writer of the option is obligated to
sell the futures contract (to deliver a "long" position to the option holder) at
the option exercise price, which will presumably be lower than the current
market price of the contract in the futures market. Upon exercise of a "put,"
the writer of the option is obligated to purchase the futures contract (deliver
a "short" position to the option holder) at the option exercise price, which
will presumably be higher than the current market price of the contract in the
futures market. When an entity exercises an option and assumes a long futures
position, in the case of a "call," or a short futures position, in the case of a
"put," its gain will be credited to its futures margin account, while the loss
suffered by the writer of the option will be debited to its account. However, as
with the trading of futures, most participants in the options markets do not
seek to realize their gains or losses by exercise of their option rights.
Instead, the writer or holder of an option will usually realize a gain or loss
by buying or selling an offsetting option at a market price that will reflect an
increase or a decrease from the premium originally paid.
Options on futures contracts can be used by a Proprietary Portfolio to
hedge substantially the same risks and for the same duration and risk management
purposes as might be addressed or served by the direct purchase or sale of the
underlying futures contracts. If the Proprietary Portfolio purchases an option
on a futures contract, it may obtain benefits similar to those that would result
if it held the futures position itself.
The purchase of put options on futures contracts is a means of hedging
a Proprietary Portfolio's portfolio against the risk of declining securities
prices or declining exchange rates for a particular currency. The purchase of a
call option on a futures contract represents a means of hedging against a market
advance affecting securities prices or currency exchange rates when the
Proprietary Portfolio is not fully invested. Depending on the pricing of the
option compared to either the futures contract upon which it is based or upon
the price of the underlying securities or currencies, it may or may not be less
risky than ownership of the futures contract or underlying securities or
currencies.
In contrast to a futures transaction, in which only transaction costs
are involved, benefits received in an option transaction will be reduced by the
amount of the premium paid as well as by transaction costs. In the event of an
adverse market movement, however, the Proprietary Portfolio will not be subject
to a risk of loss on the option transaction beyond the price of the premium it
paid plus its transaction costs, and may consequently benefit from a favorable
movement in the value of its portfolio securities or the currencies in which
such securities are denominated that would have been more completely offset if
the hedge had been effected through the use of futures.
If a Proprietary Portfolio writes options on futures contracts, the
Proprietary Portfolio will receive a premium but will assume a risk of adverse
movement in the price of the underlying futures contract comparable to that
involved in holding a futures position. If the option is not exercised, the
Proprietary Portfolio will realize a gain in the amount of the premium, which
may partially offset unfavorable changes in the value of securities held by or
to be acquired for the Proprietary Portfolio. If the option is exercised, the
Proprietary Portfolio will incur a loss in the option transaction, which will be
reduced by the amount of the premium it has received, but which may partially
offset favorable changes in the value of its portfolio securities or the
currencies in which such securities are denominated.
The writing of a call option on a futures contract constitutes a
partial hedge against declining prices of the underlying securities or the
currencies in which such securities are denominated. If the futures price at
expiration is below the exercise price, the Proprietary Portfolio will retain
the full amount of the option premium, which provides a partial hedge against
any decline
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that may have occurred in the Proprietary Portfolio's holdings of securities or
the currencies in which such securities are denominated.
The writing of a put option on a futures contract is analogous to the
purchase of a futures contract. For example, if a Proprietary Portfolio writes a
put option on a futures contract on securities related to securities that the
Proprietary Portfolio expects to acquire and the market price of such securities
increases, the net cost to a Proprietary Portfolio of the securities acquired by
it will be reduced by the amount of the option premium received. Of course, if
market prices have declined, the Proprietary Portfolio's purchase price upon
exercise may be greater than the price at which the securities might be
purchased in the securities market.
While the holder or writer of an option on a futures contract may
normally terminate its position by selling or purchasing an offsetting option of
the same series, a Proprietary Portfolio's ability to establish and close out
options positions at fairly established prices will be subject to the
maintenance of a liquid market. A Proprietary Portfolio will not purchase or
write options on futures contracts unless the market for such options has
sufficient liquidity such that the risks associated with such options
transactions are not at unacceptable levels.
Limitations on Purchase and Sale of Futures Contracts and Options on
Futures Contracts. In general, the Proprietary Portfolios permitted to engage in
transactions in futures contracts and related options will do so only for bona
fide hedging and other appropriate risk management purposes, and not for
speculation. In addition, with respect to positions in futures and related
options that do not constitute bona fide hedging positions, a Proprietary
Portfolio will not enter into a futures contract or futures option contract if,
immediately thereafter, the aggregate initial margin deposits relating to such
positions plus premiums paid by it for open futures option positions, less the
amount by which any such options are "in-the-money," would exceed 5% of the
Proprietary Portfolio's total assets. A call option is "in-the-money" if the
value of the futures contract that is the subject of the option exceeds the
exercise price. A put option is "in-the-money" if the exercise price exceeds the
value of the futures contract that is the subject of the option.
Certain additional limitations on a Proprietary Portfolio's engaging in
futures transactions and related options, including asset coverage and
segregation requirements, are included in the relevent Proprietary Portfolios'
prospectuses and/or statements of additional information.
The requirements for qualification as a regulated investment company
also may limit the extent to which a Proprietary Portfolio may enter into
futures or futures options. See "Federal Income Taxes."
Risks Associated With Futures and Futures Options. There are several
risks associated with the use of futures contracts and futures options as
hedging techniques. A purchase or sale of a futures contract may result in
losses in excess of the amount invested in the futures contract. There can be no
guarantee that there will be a correlation between price movements in the
hedging vehicle and in the Proprietary Portfolio's securities being hedged. In
addition, there are significant differences between the securities and futures
markets that could result in an imperfect correlation between the markets,
causing a given hedge not to achieve its objectives. The degree of imperfection
of correlation depends on circumstances such as variations in speculative market
demand for futures and futures options on securities, including technical
influences in futures trading and futures options, and differences between the
financial instruments being hedged and the instruments underlying the standard
contracts available for trading in such respects as interest rate levels,
maturities, and creditworthiness of issuers. A decision as to whether, when and
how to hedge involves the exercise of skill and judgment, and even a
well-conceived hedge may be unsuccessful to some degree because of market
behavior or unexpected interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For example,
futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.
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There can be no assurance that a liquid market will exist at the time
when a Proprietary Portfolio seeks to close out a futures or futures option
position, and that Proprietary Portfolio would remain obligated to meet margin
requirements until the position is closed. In addition, many of the contracts
discussed above are relatively new instruments without a significant trading
history. As a result, there can be no assurance that an active secondary market
will develop or continue to exist.
Additional Risks of Options on Securities, Futures Contracts, Options
on Futures Contracts, and Forward Currency Exchange Contracts and Options
Thereon. Options on securities, futures contracts, options on futures contracts,
currencies and options on currencies may be traded on foreign exchanges. Such
transactions may not be regulated as effectively as similar transactions in the
United States; may not involve a clearing mechanism and related guarantees; and
are subject to the risk of governmental actions affecting trading in, or the
prices of, foreign securities. The value of such positions also could be
adversely affected by (i) other complex foreign political, legal and economic
factors, (ii) lesser availability than in the United States of data on which to
make trading decisions, (iii) delays in a Proprietary Portfolio's ability to act
upon economic events occurring in foreign markets during non-business hours in
the United States, (iv) the imposition of different exercise and settlement
terms and procedures and margin requirements than in the United States, and (v)
lesser trading volume.
Securities of Other Investment Companies. Certain of the Proprietary
Portfolios may invest up to 5% of their assets in the securities of any one
investment company, but may not own more than 3% of the total outstanding
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 issued by the Commission, certain of the Proprietary Portfolios may invest
in the money market funds of other investment companies advised by KAM ("KAM" or
the "Adviser") or its affiliates. The adviser to a Proprietary Portfolio will
waive its fee with respect to assets of the Proprietary Portfolio invested in a
money market fund that it or its affiliate advises. Because such other
investment companies employ an investment adviser, such investment by a
Proprietary Portfolio will cause shareholders to bear duplicative fees, such as
management fees, to the extent advisory fees are not waived by the investment
adviser to the Proprietary Portfolio.
Repurchase Agreements. Securities held by certain of the Proprietary
Portfolios may be subject to repurchase agreements. Under the terms of a
repurchase agreement, a Proprietary Portfolio would generally acquire securities
from financial institutions or registered broker-dealers deemed creditworthy by
its investment adviser pursuant to guidelines adopted by the Directors/Trustees
of the relevant investment company, 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 the repurchase obligation or become insolvent, the
Proprietary Portfolio holding such obligation would suffer a loss to the extent
that the proceeds from a sale of the underlying portfolio securities were less
than the repurchase price, or to the extent that the disposition of such
securities by the Proprietary Portfolio is delayed pending court action.
Reverse Repurchase Agreements. Certain of the Proprietary Portfolios
may borrow funds for temporary purposes by entering into reverse repurchase
agreements. Pursuant to such agreements, a Proprietary Portfolio would sell
portfolio securities to financial institutions such as banks and broker-dealers,
and agree to repurchase them at a mutually agreed-upon date and price. At the
time a Proprietary Portfolio enters into a reverse repurchase agreement, it will
place in a segregated custodial account assets (such as cash or other liquid
high-grade securities) consistent with such Proprietary Portfolio's investment
restrictions having a value equal to the repurchase price (including accrued
interest); the collateral will be marked-to-market on a daily basis, and will be
continuously monitored to ensure that such equivalent value is maintained.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by a Proprietary Portfolio may decline below the price at which
the Proprietary Portfolio is obligated to repurchase the securities.
"When-Issued" Securities. Certain of the Proprietary Portfolios may
purchase securities on a "when-issued" basis (i.e., for delivery beyond the
normal settlement date at a stated price and yield). The payment obligation and
interest rate that will be received on when-issued securities are fixed at the
time the buyer enters into the commitment. When a Proprietary Portfolio agrees
to purchase securities on a "when-issued" basis, the Proprietary Portfolio's
custodian will set aside cash or liquid portfolio securities equal to the amount
of the commitment in a separate account. Normally, the custodian will set aside
portfolio securities to satisfy the purchase commitment, and in such a case, a
Proprietary Portfolio 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 Proprietary Portfolio's commitment. It may be
expected that any such Proprietary Portfolio's net assets will fluctuate to a
greater degree
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when it sets aside portfolio securities to cover such purchase commitments than
when it sets aside cash. To the extent cash is set aside in a separate account,
it will not be available for new investment or to meet redemptions.
When a Proprietary Portfolio 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 Proprietary Portfolio incurring a loss or missing the opportunity
to obtain a price considered to be advantageous. The Proprietary Portfolios do
not intend to purchase "when-issued" securities for speculative purposes, but
only in furtherance of their investment objectives.
Receipts. Certain of the Proprietary Portfolios may purchase 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").
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.
Delayed Delivery Transactions.
Mortgage-Backed Securities. Certain of the Proprietary Portfolios may
purchase mortgage-backed securities. Mortgage-backed securities are securities
issued or guaranteed by agencies or instrumentalities of the U.S. Government and
non-government entities such as banks, mortgage lenders or other financial
institutions. A mortgage-backed security may be an obligation of the issuer
backed by a mortgage or pool of mortgages or a direct interest in an underlying
pool of mortgages. Some mortgage-backed securities make payments of both
principal and interest at a variety of intervals; others make semiannual
interest payments at a predetermined rate and repay principal at maturity (like
a typical bond). Mortgage-backed securities are based on different types of
mortgages including those on commercial real estate or residential properties.
Other types of mortgage-backed securities will likely be developed in the
future, and certain of the Proprietary Portfolios may invest in them if their
respective advisers determine they are consistent with the respective
Proprietary Portfolio's investment objective and policies.
The investment characteristics of mortgage-related securities differ
from traditional debt securities. These differences can result in significantly
greater price and yield volatility than is the case with traditional fixed
income securities. The major differences include more frequent interest and
principal payments, and the possibility that prepayments of principal may be
made at any time. Prepayment rates are influenced by changes in current interest
rates and a variety of economic, geographic, social and other factors. During
periods of declining interest rates, prepayment rates can be expected to
accelerate. Under certain interest rate and prepayment rate scenarios, a
Proprietary Portfolio may fail to recoup fully its investment in mortgage-backed
securities (and incur capital losses) notwithstanding direct or indirect
governmental or agency guarantee. In general, changes in the rate of prepayments
on a mortgage-related security will change the security's market value and its
yield to maturity. When interest rates fall, high prepayments could force a
Proprietary Portfolio to reinvest principal at a time when investment
opportunities are not attractive. Thus, mortgage-backed securities may not be an
effective means for a Proprietary Portfolio to lock in long-term interest rates.
Conversely, during periods when interest rates rise, slow prepayments could
cause the average life of the security to lengthen and the value to decline more
than anticipated. However, during periods of rising interest rates, principal
repayments by mortgage-backed securities allow a Proprietary Portfolio to
reinvest at increased interest rates. 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 (and greater risk) than government issues.
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The yield which will be earned on mortgages-backed securities may vary
from their coupon rates for the following reasons: (i) certificates may be
issued at a premium or discount, rather than at par; (ii) certificates may trade
in the secondary market at a premium or discount after issuance; (iii) interest
is earned and compounded monthly which has the effect of raising the effective
yield earned on the certificates; and (iv) the actual yield of each certificate
is affected by the prepayment of mortgages included in the mortgage pool
underlying the certificates and the rate at which principal so prepaid is
reinvested. In addition, prepayment of mortgages included in the mortgage pool
underlying a GNMA Certificate purchased at a premium may result in a loss to the
Proprietary Portfolio.
Stripped mortgage-backed securities ("SMBS") are derivative multi-class
mortgage securities. SMBS are usually structured with two classes that receive
different proportions of the interest and principal distributions from a pool of
mortgage loans or mortgage pass-through securities.
A common type of SMBS is structured so that one class recieves some of
the interest and most of the principal from the mortgage loans or mortgage
pass-through securities, while the other class recieves most of the interest and
the remainder of the principal. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, a Proprietary Portfolio may
fail to fully recoup its initial investment in these securities. The market
value of any class which consists primarily or entirely of principal payments
generally is unusually volatile in response to changes in interest rates.
The average life of mortgage-backed securities varies with the
maturities of the underlying mortgage instruments. 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, mortgage
refinancing, or foreclosures. The rate of mortgage prepayments, and hence the
average life of the certificates, will be a function of the level of interest
rates, general economic conditions, the location and age of the mortgage and
other social and demographic conditions. Such prepayments are passed through to
the registered holder with the regular monthly payments of principal and
interest and have the effect of reducing future payments. Estimated average life
will be determined by the investment adviser to a Proprietary Portfolio and used
for the purpose of determining the average weighted maturity and duration of the
Proprietary Portfolio.
Collateralized Mortgage Obligations. Certain of the Proprietary
Portfolios may invest in mortgage-related securities which may also include
collateralized mortgage obligations ("CMOs"). CMOs are debt obligations issued
generally by finance subsidiaries or trusts that are secured by mortgage-backed
certificates, including, in many cases, certificates issued by government-
related guarantors, including GNMA, FNMA and FHLMC, together with certain funds
and other collateral. CMOs are structured into multiple classes, each bearing a
different stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provided for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential prepayments.
Nevertheless, principal prepayments on an underlying mortgage pool may
cause CMOs to be retired substantially earlier than their stated maturities or
final distribution dates, resulting in a loss of all or part of the premium if
any has been paid. Interest is paid or accrues on all classes of the CMOs on a
monthly, quarterly or semiannual basis. Although payment of the principal of and
interest on the mortgage-backed certificates pledged to secure the CMOs may be
guaranteed by GNMA, FNMA or FHLMC, the CMOs represent obligations solely of the
issuer and are not insured or guaranteed by GNMA, FHLMC, FNMA or any other
governmental agency, or by any other person or entity. The issuers of the CMOs
typically have no significant assets other than those pledged as collateral for
the obligations.
The investment policies of the Proprietary Portfolios set forth above
may be changed or altered by the Boards of Directors/Trustees of the respective
Proprietary Portfolios, except to the extent they are stated to be fundamental.
Moreover, the foregoing description of investment policies and practices of the
Proprietary Portfolios is not and does not purport to be a complete description
of all investment policies, practices and techniques of all of the Proprietary
Portfolios. Information concerning other securities in which the Proprietary
Portfolios may purchase or hold, other investment practices and techniques in
which the Proprietary Portfolios may engage, and applicable parameters on such
investment policies, practices and techniques, is included in such Portfolios'
prospectuses and statements of additional information. Such securities,
practices and techniques include, among others, participation interests,
extendible debt securities, zero coupon bonds, short-term funding agreements,
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temporary investments, loans and other direct debt, restricted securities,
warrants, municipal securities, private placement investments, investment-grade
& high quality securities, bonds, notes & debentures of U.S. corporate issuers,
international bonds, mortgage-related securities issued by non-governmental
entities, real estate mortgage investment conduits, asset-backed securities,
eurodollars and "synthetic convertibles." Copies of the prospectuses and
statements of additional information of Proprietary Portfolios may be obtained
upon request and without charge by calling The Victory Portfolios at
800-KEY-FUND(R) or 800-539-3863. In addition, some or all of the investment
practices described above may be followed by the Other Portfolios in which the
Funds may invest. The Funds have no control over the investment activities of
Other Portfolios. THERE MAY, IN FACT, BE ADDITIONAL INVESTMENT PRACTICES AND
UNDERLYING RISKS, NOT DISCUSSED HEREIN, THAT BOTH THE PROPRIETARY PORTFOLIOS AND
OTHER PORTFOLIOS MAY ENGAGE IN FROM TIME TO TIME.
INVESTMENT RESTRICTIONS OF THE FUNDS
The following investment restrictions are fundamental policies of each
of the Funds and may only be changed if approved by the holders of a majority of
the outstanding voting securities of the affected Fund. Under the Investment
Company Act of 1940, as amended ("1940 Act") such approval requires the
affirmative vote, at a meeting of shareholders of a Fund, of (i) at least 67% of
the shares of the Fund present at the meeting, if the holders of more than 50%
of the outstanding shares of the Fund are present in person or by represented
proxy; or (ii) more than 50% of the outstanding shares of the Fund, whichever is
less.
The Funds may not:
1. Make investments for the purpose of exercising control or
management (but this shall not prevent a Fund from purchasing
a controlling interest in one or more Underlying Portfolios
consistent with its investment objectives and policies).
2. Purchase or sell physical commodities or commodities contracts
(but this shall not prevent a Fund from investing in
Underlying Portfolios that purchase or sell options and
futures contracts, or from investing in securities or other
instruments backed by physical commodities).
3. Purchase or sell real estate (but this shall not prevent a
Fund from investing in Underlying Portfolios that invest in
marketable securities or other instruments backed by real
estate or securities of companies engaged in the real estate
business).
4. Issue any senior security (as defined in the 1940 Act), except
that (a) a Fund may invest in Underlying Portfolios that
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) a Fund may invest in Underlying
Portfolios that 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, a Fund may borrow money as
authorized by the 1940 Act; and (d) a Fund may issue multiple
classes of shares in accordance with SEC regulations or
exemptions under the 1940 Act.
5. Borrow money, except that (a) a Fund may invest in Underlying
Portfolios that have the authority to borrow money to the
extent pemissible under applicable regulations and
interpretations of the 1940 Act or an exemptive order; (b) a
Fund may invest in Underlying Portfolios that borrow money
from banks for temporary or emergency purposes, including
meeting redemption requests, in an amount not exceeding 5% of
the lower of market value or the cost of its total assets at
the time when the loan is made, in which case it may pledge,
mortgage, or hypothecate any of its assets as security for
such borrowing, but not to an extent greater than 5% of the
market value of its assets; and (c) a Fund may borrow money
for temporary or emergency purposes in an amount not exceeding
10% 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.
-18-
<PAGE>
6. Lend any security or make any other loan if, as a result, more
than 33-1/3% of a Fund's total assets would be lent to other
parties, except that a Fund may invest in Underlying
Portfolios that lend portfolio securities consistent with
their investment objectives and policies, but this limitation
does not apply to purchases of publicly issued debt securities
or to repurchase agreements.
7. Underwrite securities issued by others, except to the extent
that a Fund (or an Underlying Portfolio) may be deemed an
underwriter within the meaning of the Securities Act of 1933
in the disposition of portfolio securities.
The following investment restrictions are non-fundamental and may be
changed without a vote of the shareholders of a Fund:
1. A Fund will not invest more than 5% of its total assets in the
securities of issuers which, together with any predecessors,
have a record of less than three years of continuous operation
(except for the Proprietary Portfolios), but a Fund may invest
in Underlying Portfolios that do so invest.
2. A Fund will not invest more than 15% of its net assets in
illiquid securities. An illiquid security is a security which
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 it. 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 and securities acquired in a
transaction or chain of transactions pursuant to Section 4(2)
of, or securities otherwise subject to restrictions or
limitations on resale under, the 1933 Act ("Restricted
Securities") shall not be deemed illiquid solely by reason of
being unregistered.
3. A Fund will not make short sales of securities, other than
short sales "against the box," 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.
4. A Fund may not purchase securities on margin except for
short-term credits necessary for clearance of portfolio
transactions, nor may a Fund invest in Underlying Portfolios
that purchase securities on margin.
5. A Fund will not participate on a joint, or a joint and
several, basis in any trading account in securities, except
pursuant to a Commission exemptive order or otherwise
permitted by the 1940 Act; the "bunching" of orders for the
sale or purchase of portfolio securities with other funds
advised by the Adviser or its affiliates to reduce brokerage
commissions or otherwise to achieve best overall execution is
not considered participation in a trading account in
securities.
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 a Fund's net assets that may be
invested in any security or other asset, or sets forth a policy regarding
quality standards, compliance with 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.
Certain Proprietary Portfolios may be subject to undertakings to state
securities commissions that are more restrictive than the investment policies
described herein and/or in their respective prospectuses and statements of
additional information.
Moreover, notwithstanding the foregoing restrictions, the Proprietary
Portfolios and Other Portfolios in which the Funds may invest have adopted
certain investment restrictions which may be more or less restrictive than those
listed above, thereby allowing a Fund to participate in certain investment
strategies indirectly that are prohibited under the fundamental and
non-fundamental investment restrictions listed above. The investment
restrictions of these Underlying Portfolios are set forth in their respective
statements of additional information.
-19-
<PAGE>
PORTFOLIO TURNOVER
Purchases and sales of securities are made at such times as KAM deems
to be in the best interest of the Funds' shareholders without regard to the rate
of portfolio turnover, about which there are no restrictions. A Fund may
purchase or sell shares of the Underlying Portfolios or other securities to: (a)
accommodate purchases and sales of its shares, (b) change the percentage of its
assets invested in each of the Underlying Portfolios in response to market
conditions, and (c) reallocate and rebalance its assets among the equity, bond
and fixed-income securities, money market funds, and cash, and among these
Underlying Portfolios within the percentage limits set forth in the Prospectus.
From time to time, the Funds may trade in securities for the short term. It is
anticipated that the annual portfolio turnover rate of the Conservative Investor
Fund, Moderate Investor Fund, and the Growth Investor Fund each will not exceed
100%. In any particular year, market conditions could result in portfolio
activity at a greater or lesser rate than anticipated. Portfolio turnover rate
is, generally, the percentage computed by dividing the lesser of purchases or
sales by the average daily net assets of the portfolio for the time period. High
portfolio turnover may involve correspondingly higher brokerage commission
expenses which are borne directly by the Funds. In addition, the effect of
engaging in options transactions may be to increase portfolio turnover.
MANAGEMENT OF THE FUNDS
DIRECTORS AND OFFICERS
Conflicts of Interest. The Trustees and officers of The Victory
Portfolios are subject to conflicts of interest in managing both the Funds
described here and some of the underlying Proprietary Portfolios. This conflict
is most evident in the Board's supervision of KAM. KAM and certain of its
affiliates may provide services to, and receive fees from, not just the Funds,
but also some of the Proprietary and Other Portfolios. Their selection of
investments and allocation of Fund assets will be continuously and closely
scrutinized by the Board in order to avoid even the appearance of improper
practices. It is possible, however, that a situation might arise where one
course of action for a Fund would be detrimental to a Proprietary Portfolio, or
vice versa. In that unlikely event, the Trustees and officers of The Victory
Portfolios will exercise good business judgment in upholding their fiduciary
duties to each set of funds. Thus, such conflicts, if any, can be minimized.
Officers and employees of KAM are not permitted to serve as officers or
directors of The Victory Portfolios due to certain regulatory restrictions
imposed on banking organizations and their subsidiaries. See "Investment Adviser
and Administrator" below. The persons who have been elected to serve as officers
and directors of The Victory Portfolios, their position with The Victory
Portfolios, and their principal occupations during the last five years are set
forth below:
<TABLE>
<CAPTION>
POSITION(S) HELD WITH THE VICTORY
NAME, AGE, ADDRESS, AND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS PORTFOLIOS
<S> <C>
*LEIGH A. WILSON, Age: 52. 53 Sylvan Road N., Westport,CT 06880. From 1989 to Trustee
and President
present, Chairman and Chief Executive Officer of Glenleigh
International Limited (merchant bank); from 1993 to present, President
of The Victory Funds. From 1995 to present, Principal of New Century
Living, Inc.; from 1989 to present, Director of Chimney Rock Vineyard &
Chimney Rock Winery; and Trustee of The Victory Portfolios mutual fund
complex..
*ROGER NOALL, Age 62. c/o Brighton, Apt. 1603, 8231 Bay Colony Chairman and Chairman and Trustee
Drive, Naples, Florida 34108. From 1996 to present, Executive of
Trustee KeyCorp; from 1995 to 1996, General Counsel and Secretary of
KeyCorp; from 1994 to 1996, Senior Executive Vice President and Chief
Administrative Officer of KeyCorp; from 1985 to 1994, Vice Chairman of
the Board and Chief Administrative Officer of KeyCorp and its
predecessor, Society Corporation, prior to its merger with KeyCorp.
ROBERT G. BROWN, Age 74. 5460 N. Ocean Drive, Singer Island Riviera Beach, FL Trustee
33404. Retired; from October 1983 to November 1990, President,
Cleveland Advanced Manufacturing Program (non-profit corporation
engaged in regional economic development).
</TABLE>
-20-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
EDWARD P. CAMPBELL, Age: 47. 28601 Clemens Road, Westlake, Ohio 44145. From Trustee
July 1996 to present, Trustee President and Chief Operating Officer of
Nordson Corporation (manufacturer of application equipment); from March
1994 to present, Executive Vice President and Chief Operating Officer
of Nordson Corporation from May 1988 to March 1994, Vice President of
Nordson Corporation; from 1987 to December 1994, member of Supervisory
Committee of Society National Bank'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. Currently, Trustee of The Victory Portfolios mutual fund complex,
and Director of Nordson Corporation.
EUGENE J. MCDONALD, Age: 65. 2200 Main Street, Suite 1000, Durham, North Trustee
Carolina 27705. Executive Vice President for Asset Management of Duke
University and President of Duke Management Co.; Director of Central
Carolina Financial Corp.; Director of Flag Investors/ISI Funds and
Alex. Brown Cash Reserve Fund, Inc. Previously, Director of Sphinx
Pharmaceuticals, Inc.
FRANK A. WEIL, Age: 66. 147 E. 48th Street, New York, New York 10017. Trustee
Chairman and Chief Executive Officer of Abacus & Associates, Inc.
(private investment firm); Director and President of the Norman and
Hickrill Foundations. Formerly, Chairman of the Council for Excellence
in Government.
DR. HARRY GAZELLE, Age 70. 17822 Lake Road, Lakewood, Ohio 44107. Retired Trustee
radiologist, Drs. Hill and Thomas Corp.
DR. THOMAS F. MORRISSEY, Age 64. Weatherhead School of Management, Case Trustee
Western Reserve University, 10900 Euclid Avenue, Cleveland, OH
44106-7235. 1995 to present Visiting Scholar, Bond University,
Queensland, Australia; Professor, Weatherhead School of Management,
Case Western Reserve University; from 1989 to 1995, Associate Dean of
Weatherhead School of Management; from 1987 to 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 193 to August 1994, Trustee, Ohio Municipal Money Market
Fund.
DR. H. PATRICK SWYGERT, Age 54. Howard University, 2400 6th Street, N.W., Trustee
Suite 320, Washington, D.C. 20059. President, Howard University;
formerly President, State University of New York at Albany; formerly,
Executive Vice President, Temple University.
WILLIAM B. BLUNDIN: Age 58. 125 West 55th Street, New York, N.Y. 10019. Senior Vice President
Vice President of BISYS Fund Services ("BISYS"); officer of other
investment companies administered by BISYS; 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: Age 51, 3435 Stelzer Road, Columbus, OH 43219. Executive Vice President
Vice President, BISYS.
THOMAS E. LINE, Age 30. 3435 Stelzer Road, Columbus, Ohio 43219. From December Treasurer
1996 to present, employee of BISYS Fund Services; from September, 1989
to November, 1996, Audit Senior Manager at KPMG Peat Marwick LLP.
GEORGE O. MARTINEZ, Age 38. 3435 Stelzer Road, Columbus, Ohio 43219. From Secretary
March 1995 to present, Senior Vice Vice President and Director of Legal
and Compliance Services, BISYS; from June 1989 to March 1995, Vice
President and Associate General Counsel, Alliance Capital Management.
JAY G. BARIS, Age 43. Kramer, Levin, Naftalis & Frankel 919 3rd Avenue, Assistant Secretary
41st Floor, New York, NY 10022. From 1994 to present, Partner, Kramer,
Levin, Naftalis & Frankel; previously Partner, Reid & Priest.
ALAINA V. METZ, Age: 3029. 3435 Stelzer Road, Columbus, Ohio 43219. Chief Assistant Secretary
Administrator, Administrative and Regulatory Services, BISYS Fund
Services Limited Partnership (June 1995 to present); Supervisor, Mutual
Fund Legal Department, Alliance Capital Management (May 1989 to June
1995).
</TABLE>
-21-
<PAGE>
* Mr. Wilson is an "interested person" of the Trust solely by reason of his
position as President. Mr. Noall is an "interested person" and an
"affiliated person" of the Trust.
Trustees who are not "interested persons" of either an investment
adviser to or principal underwriter for The Victory Portfolios receive an annual
fee of $7,500 plus $750 per meeting of the Board of Trustees attended and
reasonable out-of-pocket expenses incurred in connection with attending such
meetings. Each Director who is an "interested person" of either an investment
adviser to or principal underwriter for The Victory Portfolios does not receive
any compensation from the Trust.
<TABLE>
<CAPTION>
AGGREGATE COMPENSATION FROM THE VICTORY
PORTFOLIOSFOR THE FISCAL YEAR ENDED TOTAL COMPENSATION FROM THE VICTORY
NAME NOVEMBER 30, 1996 PORTFOLIOS
- ---- ----------------- ----------
<S> <C> <C>
Edward P. Campbell $11,250 $50,250
Eugene J. McDonald $11,250 $11,250(1)
Frank A. Weil $11,250 $11,250(1)
Leigh A. Wilson $11,250 $50,250
</TABLE>
(1) Total compensation paid with respect to service on the Board of Directors
of Key Mutual Funds only.
MANAGEMENT OF THE PROPRIETARY PORTFOLIOS
The Funds are shareholders in the Proprietary Portfolios. A brief
description of the management of The Victory Portfolios is set forth below.
THE VICTORY PORTFOLIOS' TRUSTEES AND OFFICERS:
The persons who have been elected to serve as officers and directors of
The Victory Portfolios, their position(s) with The Victory Portfolios, and their
principal occupations during the last five years are identical to the
information listed immediately above for the Funds.
VICTORY PORTFOLIOS' BOARD OF TRUSTEES:
Overall responsibility for management of the Victory Portfolios rests
with the Trustees, who are elected by the shareholders of The Victory
Portfolios. The Victory Portfolios are managed by the Trustees in accordance
with the laws of the State of Delaware governing business trusts. There are
currently seven Trustees, six of whom are not "interested persons" of The
Victory Portfolios within the meaning of that term under the 1940 Act
("Independent Trustees"). The Trustees, in turn, elect the officers of The
Victory Portfolios to supervise actively its day-to-day operations.
SECURITY HOLDERS
The name, address, and percentage of ownership of each person who is
known by the Registrant to have owned of record or beneficially 5 percent or
more of any of theFunds' shares as of November 28, 1997 is:
<TABLE>
<CAPTION>
LIFECHOICE CONSERVATIVE LIFECHOICE MODERATE INVESTOR
NAME AND ADDRESS INVESTOR FUND FUND LIFECHOICE GROWTH INVESTOR
FUND
<S> <C> <C> <C>
SNBOC and Company 98.1% 98.7% 99.3%
Attn: Jim Osbourne
4900 Tiedeman Rd.
Cleveland, OH 44144-2338
</TABLE>
-22-
<PAGE>
THE INVESTMENT ADVISER OF THE FUNDS
INVESTMENT ADVISER. The investment adviser of the Funds is KAM. KAM was
organized as a New York corporation on July 27, 1995 and is registered with the
Commission as an investment adviser under the Investment Advisers Act of 1940,
as amended. KAM is a wholly owned subsidiary of KeyCorp Asset Management
Holdings, Inc. ("KAMHI"), which is a wholly owned subsidiary of KeyBank National
Association ("KeyBank"). KeyBank is a wholly owned subsidiary of KeyCorp, one of
the largest financial services holding companies in the United States. As of
September 30, 1997, KAM and its affiliates managed approximately $57 billion in
assets for numerous clients, including large corporate and public retirement
plans, Taft-Hartley plans, foundations and endowments and high net worth
individuals.
As of September 30, 1997, KeyCorp had an asset base of $72 billion,
with banking offices in 26 states from Maine to Alaska, and trust and investment
offices in 16 states. KeyCorp is the resulting entity of the 1994 merger 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. KeyCorp's non-bank subsidiaries include investment advisory,
securities brokerage, insurance, bank credit card processing, and leasing
companies. KeyBank is the lead affiliate bank of KeyCorp, which is headquartered
at 127 Public Square, Cleveland, Ohio 44114.
Pursuant to the Asset Management Agreement between the Trust, on behalf
of the Funds, and KAM (the "Asset Management Agreement"), dated ___, KAM
furnishes a continuous investment program for the Funds', conducts investment
research, makes the day-to-day investment decisions for the Funds, executes the
purchase and sale orders for the portfolio transactions of the Funds, and
generally manages and supervises the Funds' investments in accordance with the
stated policies of the Funds, subject to the general supervision of the Board of
Trustees of the Funds.
KAM continuously monitors the allocation of each Fund's investment in
Underlying Portfolios in three distinct investment categories according to
certain percentage ranges predetermined by the Trustees as follows:
<TABLE>
<CAPTION>
CONSERVATIVE INVESTOR FUND MODERATE INVESTOR FUND AGGRESSIVE INVESTORFUND
<S> <C> <C> <C>
Equity Funds 30-50% 50-70% 70-90%
Bond/Fixed Income Funds 50-70% 30-50% 10-30%
Money Market Funds/Cash 0-15% 0-15% 0-15%
</TABLE>
KAM rebalances or reallocates the Funds' investments across Underlying
Portfolios as market conditions warrant. All reallocations are expected to occur
within the above-described ranges.
The selection of the Proprietary Portfolios in which the Growth
Investor Fund, Moderate Investor Fund and Conservative Investor Fund will
invest, as well as the percentage of assets which can be invested in each type
of underlying mutual fund, are not fundamental investment policies and can be
changed without the approval of a majority of the respective Fund's
shareholders. Any changes to the percentage ranges shown above for allocation
across types of Underlying Portfolios or for allocation in Proprietary
Portfolios and Other Portfolios requires the approval of the Trust's Board of
Trustees. Investors desiring more information on a Proprietary Portfolio listed
above may call The Victory Portfolios at 800-KEY-FUND(R) to request a
prospectus, which is available without charge. The selection of the Other
Portfolios also is within the Adviser's discretion.
Changes in the value of the Underlying Portfolios may affect cash
income, if any, derived from these investments and will affect a Fund's net
asset value. Because each Fund invests primarily in other mutual funds, which
fluctuate in value, the Funds' shares will correspondingly fluctuate in value.
Although the Funds normally seek to remain substantially fully invested in the
Underlying Portfolios, a Fund may invest temporarily in certain short-term
obligations. Such obligations may be used to invest uncommitted cash balances or
to maintain liquidity to meet shareholder redemptions. A Fund also may borrow
money for temporary or emergency purposes.
As compensation for the services rendered and related expenses borne by
KAM under the Asset Management Agreement, the Funds pay KAM a fee, computed
daily and payable monthly, equal to 0.20% per annum of the Fund's average daily
net assets.
-23-
<PAGE>
Unless sooner terminated, the Asset Management Agreement provides that
it will continue in effect for an initial two-year term and, with respect to
each Fund, for consecutive one-year terms thereafter, provided that such
continuance is approved at least annually by the Board of Trustees of the Trust
or by a vote of a majority of the outstanding voting securities of a Fund (as
defined in the 1940 Act), and, in either case, by a majority of the Trustees who
are not parties to the Asset Management Agreement or interested persons (as
defined in the 1940 Act) of any such party, by votes cast in person at a meeting
called for such purpose.
The Asset Management Agreement is terminable as to a Fund at any time
on 60 days' written notice without penalty by the Trustees, by vote of a
majority of the outstanding voting securities of the Fund, or by KAM. The Asset
Management Agreement also terminates automatically in the event of its
assignment, as defined in the 1940 Act.
The Asset Management Agreement provides that KAM shall not be liable
for any error of judgment or mistake of law or for any loss suffered by a Fund
in connection with the performance of its services pursuant to the Asset
Management 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 KAM in
the performance of its duties, or from reckless disregard by it of either duties
or obligations thereunder.
The Asset Management Agreement also provides that KAM may delegate a
portion of its responsibilities to a sub-adviser. In addition, the Asset
Management Agreement provides that KAM may render services through its own
employees or through the employees of one or more affiliated companies that are
qualified to act as an investment adviser to 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 that is managed by authorized officers of KAM.
Due to certain regulatory restrictions on banking organizations and
their subsidiaries, employees of KAM are not permitted to serve as officers or
directors of the Trust.
THE INVESTMENT ADVISERS OF THE PROPRIETARY PORTFOLIOS
As a shareholder in the Proprietary Portfolios, the Funds will bear
their proportionate share of the investment advisory fees paid by those Funds.
Set forth below is a description of the investment advisory agreements for each
Proprietary Portfolio.
-24-
<PAGE>
VICTORY PORTFOLIOS
KAM is the investment adviser to the Victory Portfolios. KAM directs
the investment of the VP Funds' assets, subject at all times to the supervision
of the Proprietary Portfolios' Board of Trustees. KAM continually conducts
investment research and supervision for the Funds and is responsible for the
purchase and sale of the Proprietary Portfolios' investments.
KAM was organized as a New York corporation on July 27, 1995 and is
registered with the Commission as an investment adviser under the Investment
Advisers Act of 1940, as amended. It is a wholly owned subsidiary of KAMHI,
which is a wholly owned subsidiary of KeyBank, a wholly owned subsidiary of
KeyCorp, a financial services holding company. KAM and its affiliates managed
approximately $57 billion, as of June 30, 1997, for numerous clients including
large corporate and public retirement plans, Taft-Hartley plans, foundations and
endowments, high net worth individuals and mutual funds.
As of September 30, 1997, KeyCorp had an asset base of $72 billion,
with banking offices in 26 states from Maine to Alaska, and trust and investment
offices in 16 states. KeyCorp is the resulting entity of the merger in 1994 of
Society Corporation, the bank holding company of which 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. KeyCorp's non-bank subsidiaries include investment advisory,
securities brokerage, insurance, bank credit card processing, and leasing
companies. KeyBank is the lead affiliate bank of KeyCorp, which is headquartered
at 127 Public Square, Cleveland, Ohio 44114.
-25-
<PAGE>
The persons primarily responsible for the investment management of the
Victory Portfolios are as follows:
<TABLE>
<CAPTION>
FUND PORTFOLIO MANAGER MANAGING FUND SINCE EXPERIENCE
- ---- ----------------- ------------------- ----------
<S> <C> <C> <C>
Victory Value Fund Judith A. Jones Commencement of operations Senior Portfolio Manager and
Managing Director of KAM, and
has been in the investment
business since 1967.
Victory Diverisifed Stock Fund Lawrence G. Babin Commencement of operations Senior Portfolio Manager and
Managing Director of KAM, and
has been in the investment
business since 1982.
Victory Growth Fund William F. Ruple June, 1995 Senior Portfolio Manager and
Director of KAM, and has
been in the investment
advisory business since 1970.
Victory Special Value Fund Anthony Aveni Commencement of operations Senior Managing Director with
KAM, and has been in the
investment business since
1981.
Victory Special Value Fund Barabara Myers June, 1985 Senior Portfolio Manager and
Director with KAM, and has
been in the investment
business since 1987.
Victory Special Growth Fund Annette Geddes June, 1996 Managing Director and
Portfolio Manager of KAM, and
has been in the investment
business since 1967.
Victory International Growth Conrad R. Metz. October, 1995 Senior Portfolio Manager and
Fund Managing Director of KAM, and
has been in the investment
business since 1978.
</TABLE>
-26-
<PAGE>
<TABLE>
<S> <C> <C> <C>
Victory Convertible Securities Richard A. Janus April, 1996
Fund
Victory Convertible Securities James K. Kaesberg April, 1996
Fund
Victory Real Estate Investment
Fund
Victory Government Mortgage Robert H. Fernald May, 1996 Senior Portfolio Manager and
Fund Director of KAM, and has been
working in the fixed income
markets for over 20 years.
Victory Investment Qulaity Richard T. Heine Commencement of operations Vice President and Portfolio
Bond Fund Manager with KAM, and has
been in the investment
advisory business since 1977
Victory Fund for Income Robert H. Fernald May, 1996 Senior Portfolio Manager and
Director of KAM, and has been
working in the fixed income
markets for over 20 years.
Victory Intermediate Income Eric Rasmussen April, 1997 Portfolio Manager and
Fund Director of the Taxable
Income Department of KAM, and
has been in the investment
business since 1988.
Victory Limited Term Income Robert H. Fernald January, 1995 Senior Portfolio Manager and
Fund Director of KAM, and has been
working in the fixed income
markets for over 20 years.
</TABLE>
-27-
<PAGE>
The following schedule lists the advisory fees for each VP mutual fund
that is advised by KAM 0.50% OF AVERAGE DAILY NET ASSETS Victory Limited Term
Income Fund
Victory Financial Reserves Fund
Victory Fund for Income
Victory Government Mortgage Fund
0.65% OF AVERAGE DAILY NET ASSETS Victory Diversified Stock Fund
0.75% OF AVERAGE DAILY NET ASSETS Victory Investment Quality Bond Fund
Victory Intermediate Income Fund
Victory Convertible Securities Fund
1.00% OF AVERAGE DAILY NET ASSETS Victory Value Fund
Victory Growth Fund
Victory Special Value Fund
Victory Special Growth Fund
Victory Real Estate Fund
1.10% OF AVERAGE DAILY NET ASSETS Victory International Growth Fund
ADMINISTRATOR OF THE FUNDS
BISYS Fund Services Limited Partnership (d/b/a BISYS Fund Services)
("BISYS") serves as the Administrator (the "Administrator") of the Funds
pursuant to an administration agreement, dated July 1, 1996, as amended December
16, 1996 (the "Administration Agreement"). The Administrator assists in
supervising all operations of each Fund (other than those performed by KAM under
the Investment Advisory Agreement), subject to the supervision of the Board of
Trustees.
Unless sooner terminated, the Administration Agreement is renewed
automatically for one year periods unless terminated by either the Trust or the
Administrator on not less than 90 days' prior written notice.
The Administration Agreement provides that the Administrator shall not
be liable for any error of judgment or mistake of law or any loss suffered by
the Funds 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, the Administrator 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 office facilities necessary to carry out its duties thereunder. Under
the Administration Agreement, the Administrator may delegate all or any part of
its responsibilities thereunder.
Fund Accountant. BISYS Fund Services, Inc. ("BISYS, Inc.") serves as a
fund accountant for each Fund pursuant to a fund accounting agreement with the
Trust dated July 1, 1996, as amended December 16, 1996 (the "Fund Accounting
Agreement"). As fund accountant, BISYS, Inc. calculates each Fund's net asset
value, dividends and capital gain distributions, if any, and yield and total
return. 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 each Fund. Under the
Fund Accounting Agreement, BISYS, Inc. is entitled to receive a fee from each
Fund equal to an annual rate of 0.02% of the first $100 million of average daily
net assets and 0.01% of average daily net assets in excess of $100 million,
subject to a minimum monthly fee of $1,666.66 per Fund.
-28-
<PAGE>
EXPENSES, DISTRIBUTOR, AND DISTRIBUTION PLAN
Except as set forth above, and as set forth below, the Funds are
responsible for the payment of their expenses. Such expenses include the fees
payable to KAM; any brokerage fees and commissions; taxes; interest; the cost of
any liability insurance or fidelity bonds; costs, expenses, or losses arising
out of any liability of or claim for damages or other relief asserted against
the Funds for violation of any law; legal and auditing fees and expenses; the
fees and certain expenses of the Custodian, Transfer Agent, BISYS Inc. and
BISYS; the fees of any trade association of which the Funds are a member; the
expenses of printing and mailing reports and notices to the Funds' shareholders;
filing fees for the registration or qualification of Funds shares under federal
or state securities laws; the fees and expenses involved in registering and
maintaining registration of the Funds and of its shares with the Commission;
fees of directors who are not "interested persons" of an investment adviser to
or the principal underwriter for the Funds; the costs of registering the Funds
as a broker or dealer; the costs of qualifying its shares under state securities
laws; the expenses of servicing shareholders and shareholder accounts not
otherwise incurred by the Adviser or the Administrator; and any extraordinary
expenses incurred by the Funds.
As a result of certain regulatory restrictions imposed on banking
organizations and their subsidiaries, the Trust is not permitted to sell shares
of the Funds directly without an independent underwriter. Accordingly, pursuant
to a distribution agreement dated as of July 1, 1996, as amended December 16,
1996, (the "Distribution Agreement"), BISYS (the "Distributor") was appointed to
serve as independent underwriter/distributor for the continuous offering of the
shares of the Trust. Under the Distribution Agreement, the Distributor is
obligated to devote its best efforts to effect sales of shares of the Funds, but
is not required to sell any certain number of shares. In addition, under the
Distribution Agreement, the Distributor may enter into agreements with selected
dealers for the distribution of shares of the Funds.
If not earlier terminated, the Distribution Agreement will continue in
effect for successive terms of one year, provided that such continuance is
specifically approved at least annually (a) by a majority of those members of
the Board of Trustees of the Trust who are not parties to the Agreement or
"interested persons" of any such party (the "Disinterested Trustees"), pursuant
to a vote cast in person at a meeting called for the purpose of voting on such
approval, and (b) by the Board of Trustees of the Trust or by vote of a
"majority of the outstanding voting securities" of each Fund. The Distribution
Agreement may be terminated by the Trust at any time with respect to any Fund,
without the payment of any penalty, by vote of a majority of the Disinterested
Trustees, or by vote of a "majority of the outstanding voting securities" of
such Fund on 60 days' written notice to the Distributor, or by the Distributor
at any time, without the payment of any penalty, on 60 days' written notice to
the Fund. The Distribution Agreement will automatically terminate in the event
of its "assignment."
The Trust has adopted a Distribution Plan (the "Distribution Plan") for
the Funds pursuant to Rule 12b-1 under the 1940 Act. No separate payments are
authorized to be made by the Funds under the Plan. Rather, the Plan provides
that to the extent that any portion of the fees payable under the Shareholder
Servicing Plan or any Shareholder Servicing Agreement (described below) is
deemed to be for services primarily intended to result in the sale of Fund
shares, such fees are deemed approved and may be paid pursuant to the Plan and
in accordance with Rule 12b-1.
Rule 12b-1 generally requires that the Distribution Plan initially be
approved by a vote of a majority of the Board of Trustees, including those
directors who are not "interested persons" of the Funds (as defined in the 1940
Act) and who have no direct or indirect financial interest in the Distribution
Plan. The Distribution Plan must be approved at least annually in the manner
described in the foregoing sentence and may be terminated at any time by a vote
of a majority of the outstanding voting securities of the Fund or a majority of
those directors who are not "interested persons" and who have no direct or
indirect financial interest in the Distribution Plan.
While the Distribution Plan is in effect, the selection and nomination
of directors who are not "interested persons" of the Trust (as defined in the
1940 Act) is committed to the discretion of the directors who are not interested
persons of the Trust.
In the event that the total expenses of a Fund exceed the limits on
investment company expenses imposed by any statute or any regulatory authority
of any jurisdiction in which shares of such Fund are qualified for offer and
sale, KAM will bear the amount of such excess, except: (i) KAM shall not be
required to bear such excess to an extent greater than the compensation due to
KAM for the period for which such expense limitation is required to be
calculated unless such statute or regulatory authority shall so require, and
(ii) KAM shall not be required to bear the expenses of the Fund to an extent
which would result in the Fund's or Trust's inability to qualify as a regulated
investment company under the provisions of Subchapter M of the Code.
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Fees imposed on customer accounts by KAM, 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 such limitation.
CUSTODIAN, TRANSFER AGENT, AND DIVIDEND DISBURSING AGENT
Key Trust Company of Ohio ("Key Trust"), N.A., 127 Public Square,
Cleveland, Ohio 44114 has been retained as Custodian for the Funds' investments.
Key Trust also maintains certain accounting and financial records of the Funds.
Key Trust is a subsidiary of KeyCorp and an affiliate of the Adviser and
receives compensation from the Funds for services it performs as Custodian.
State Street Bank and Trust Company, 225 Franklin Street, Boston, MA
02110, the Fund's Transfer Agent, subcontracts the performance of all services
to Boston Financial Data Services, Inc. ("BFDS"). BFDS, at Two Heritage Drive,
Quincy, MA 02171, acts as dividend disbursing agent and servicing agent for the
shares of the Funds and receives a fee for these services.
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PERFORMANCE INFORMATION
From time to time the "standardized yield," "dividend yield,"
"distribution return," "average annual total return," and "total return" of an
investment in Fund shares may be advertised. An explanation of how yields and
total returns are calculated and the components of those calculations are set
forth below.
Yield and total return information may be useful to investors in
reviewing a Fund's performance. A Fund's advertisement of its performance must,
under applicable Commission rules, include the average annual total returns for
the Fund for the 1, 5, and 10-year period (or the life of the Fund, if less) as
of the most recently ended calendar quarter. This enables an investor to compare
a 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 a Fund is not
insured; yield and total return are not guaranteed and normally 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 Trust of future yields or rates of return on
its shares. The yield and total return of a Fund are affected by the types of
investments the Fund holds, its operating expenses and other factors.
Standardized Yields. A Fund's "yield" (referred to as "standardized
yield") for a given 30-day period for the shares of the Fund is calculated using
the following formula set forth in rules adopted by the Commission that apply to
all funds that quote yields:
2[(a-b+1) to the 6th power-1]
Standardized Yield = ---
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 the Fund
outstanding during the 30-day period that were
entitled to receive dividends.
d = the maximum offering price per share on the last
day of the period, adjusted for undistributed net
investment income.
The standardized yield for a 30-day period may differ from its yield
for any other period. The Commission formula assumes that the standardized yield
for a 30-day period occurs at a constant rate for a six-month period and is
annualized at the end of the six-month period. This standardized yield is not
based on actual distributions paid by the Fund to shareholders in the 30-day
period, but is a hypothetical yield based upon the net investment income from
the Fund's portfolio investments calculated for that period. The standardized
yield may differ from the "dividend yield," described below.
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Dividend Yield and Distribution Return. From time to time a Fund may
quote a "dividend yield" or a "distribution return." Dividend yield is based on
the share dividends derived from net investment income during a stated period.
Distribution return includes dividends derived from net investment income and
from realized capital gains declared during a stated period. Under those
calculations, the dividends and/or distributions declared during a stated period
of one year or less (for example, 30 days) are added together, and the sum is
divided by the maximum offering price per share 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:
Dividends + Number of days (accrual period) x 365
-------------------------------------------------
Dividend Yield = Max. Offering Price (last day of period)
Total Return. The "average annual total return" is an average annual
compounded rate of return for each year in a specified number of years. It is
the rate of return based on the change in value of a hypothetical initial
investment of $1,000 ("P" in the formula below) held for a number of years ("n")
to achieve an Ending Redeemable Value ("ERV"), according to the following
formula:
ERV(1n)-1
---------
Average Annual Total Return = P
The cumulative "total return" calculation measures the change in value
of a hypothetical investment of $1,000 over an entire period of years. Its
calculation uses some of the same factors as average annual total return, but it
does not average the rate of return on an annual basis. Total return is
determined as follows:
ERV-P
-----
Total Return = P
Total returns 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.
Other Performance Comparisons. From time to time, a Fund may publish
the ranking of the performance of its shares by Lipper Analytical Services, Inc.
("Lipper"), a widely-recognized independent mutual fund monitoring service.
Lipper monitors the performance of regulated investment companies, including the
Funds, and ranks the performance of the Funds. The Lipper performance rankings
are based on a 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 the performance of
its shares by Morningstar, Inc., an independent mutual fund monitoring service
that ranks mutual funds, including the Funds, in broad investment categories
(equity, taxable bond, tax-exempt, and other) monthly, based upon each funds'
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.
From time to time, the yields and the total returns of the Funds may be
quoted in and compared to other mutual funds with similar investment objectives
in advertisements, shareholder reports or other communications to shareholders.
The Funds also may include calculations in such communications that describe
hypothetical investment results. (Such performance examples will be based on an
express set of assumptions and are not indicative of the performance of any
Fund.) Such calculations may from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on a Fund
investment are reinvested by being paid in additional Fund shares, any future
income or capital appreciation of the Fund would increase the value, not only of
the original Fund investment, but also of the additional Fund shares received
through reinvestment. As a result, the value of the Fund investment would
increase more quickly than if dividends or other distributions had been paid in
cash. 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
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retirement planning), investment management techniques, policies or investment
suitability of Fund, economic conditions, legislative developments (including
pending legislation), the effects of inflation and historical performance of
various asset classes, including but not limited to stocks, bonds and Treasury
bills. From time to time advertisements or communications to shareholders may
summarize the substance of information contained in shareholder reports
(including the investment composition of a Fund, as well as the views of the
investment adviser as to current market, economic, trade and interest rate
trends, legislative, regulatory and monetary developments, investment strategies
and related matters believed to be of relevance to a Fund). A Fund also may
include in advertisements, charts, graphs or drawings which illustrate the
potential risks and rewards of investment in various investment vehicles,
including but not limited to stock, bonds, Treasury bills and shares of the Fund
as well as charts or graphs which illustrate strategies such as dollar cost
averaging, and comparisons of hypothetical yields of investment in tax-exempt
versus taxable investments. In addition, advertisements or shareholder
communications may include a discussion of certain attributes or benefits to be
derived by an investment in 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 concerning the Funds generally
is available by calling 800-KEY-FUND(R).
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 a 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 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 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 seek to offer a fixed price per share.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Pursuant to the Asset Management Agreement, KAM determines, subject to
the general supervision of the Trustees of the Trust, and in accordance with
each Fund's investment objective and restrictions, which Underlying Portfolio
shares or securities are to be purchased or sold by a 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
bid and asked price. 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 a Fund. While KAM generally seeks competitive spreads or
commissions, a Fund may not necessarily pay the lowest prices available on each
transaction, for reasons discussed below.
Allocation of transactions to dealers is determined by KAM 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. In assessing the best overall terms available for any
transaction, KAM considers all factors it deems relevant, including the breadth
of the market in the security, the price of the security, the financial
condition and execution capability of the broker or dealer, research services
provided to KAM, and the reasonableness of the commission, if any, both for the
specific transaction and on a continuing basis.
In selecting brokers or dealers qualified to execute a particular
transaction, brokers or dealers may be selected who provide brokerage and
research services (as those terms are defined in Section 28(e) of the Securities
Exchange Act of 1934) to KAM, the Funds or other accounts over which KAM
exercises investment discretion. Research so received is in addition to and not
in lieu of services required to be performed by KAM and does not reduce the
advisory fees payable to KAM by the Funds. Such information may be useful to KAM
in serving both the Funds and other clients and, conversely, such supplemental
research
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information obtained by the placement of orders on behalf of other clients may
be useful to KAM in carrying out its obligations to the Funds. The Asset
Management Agreement authorizes KAM to pay a broker or dealer who provides such
brokerage and research services a commission for executing a portfolio
transaction for a Fund which is in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction if KAM
determines in good faith that the total commission is reasonable in relation to
the value of the brokerage and research services provided by such broker or
dealer, viewed in terms of either that particular transaction or the overall
responsibilities of KAM with respect accounts over which it exercises investment
discretion.
The Funds will not execute portfolio transactions through, acquire
portfolio securities issued by, make savings deposits in, or enter into
repurchase or reverse repurchase agreements with KAM, Key Trust Company of Ohio,
N.A. or its affiliates, BISYS, or their 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 Funds are made independently from those
made for other funds or any other investment company or account managed by KAM.
Any such other investment company or account may also invest in the same
securities as a particular Fund. When a purchase or sale of the same security is
made at substantially the same time on behalf of a Fund and another Fund or
investment company or account, the transaction will be averaged as to price, and
available investments allocated as to amount, in a manner which KAM believes to
be equitable to the Fund and such other Fund or investment company or account.
In some instances, this investment procedure may adversely affect the price paid
or received by the Fund or the size of the position obtained by the Fund. To the
extent permitted by law, KAM may aggregate the securities to be sold or
purchased for a Fund with those to be sold or purchased for the other Funds or
for other investment companies or accounts in order to obtain best execution. In
making investment recommendations for the Funds, KAM will not inquire or take
into consideration whether an issuer of securities proposed for purchase or sale
by a Fund is a customer of KAM, its parents or subsidiaries or affiliates and,
in dealing with their commercial customers, KAM, its parents, subsidiaries, and
affiliates will not inquire or take into consideration whether securities of
such customers are held by the Funds.
PURCHASE, REDEMPTION, AND PRICING
As indicated in the Prospectus, the net asset value of each Fund is
determined and the shares of each Fund are priced as of the close of regular
trading of the NYSE ("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 NYSE is
closed in observance of the following holidays: New Year's Day, Martin Luther
King, Jr. Day, President's Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving, and Christmas. The methods of purchase and redemption
of shares, and special retirement, withdrawal, and exchange plans offered are
fully set forth in the Prospectus. Certain additional information is provided
below.
Pursuant to Rule 11a-3 under the 1940 Act, a Fund is required to give
shareholders at least 60 days' notice prior to terminating or modifying its
exchange privilege. Under that 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) a Fund temporarily suspends the offering
of shares as permitted under the 1940 Act or by the Commission, or because it is
unable to invest amounts effectively in accordance with its investment objective
and policies.
The Trust and KAM reserve the right at any time without prior notice to
shareholders to refuse exchange purchases by any person or group if, in the
judgment of KAM, a Fund would be unable to invest effectively in accordance with
its investment objective and policies, or would potentially be adversely
affected.
The Trust 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 a Fund during any 90-day period for any one shareholder.
Any portion of a redemption not paid in cash may be paid in securities or other
property of the relevant Fund. Shareholders receiving securities or other
property upon redemption may realize a gain or loss for tax purposes and may
incur additional costs (e.g., brokerage costs) as well as the inconveniences
associated with disposing of such securities or other property.
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The net asset value of the shares of each Fund is normally determined
at 4:00 p.m., Eastern Time, each Business Day, and each is determined by
dividing the total value of all underlying mutual fund shares and securities
held (both valued at current market value or by other method approved by the
respective Board of the Proprietary Portfolios), and other assets, less
liabilities, divided by the total number of shares then outstanding. Securities
for which quotations are not readily available and any other assets are valued
at fair value as determined in good faith by the Board of Trustees. Money market
instruments are valued at market value except money market instruments having a
maturity of less than 60 days which are valued at amortized cost. The amortized
cost method values a security initially at its cost and thereafter assumes a
constant amortization of any discount or premium regardless of the impact of
fluctuating interest rates on the market value of the security. This method does
not take into account unrealized gains or losses.
DIVIDENDS AND DISTRIBUTIONS
The Funds distribute substantially all of their net income and net
capital gains, if any, to shareholders with each calendar year as well as on a
fiscal year basis to the extent required for the Funds to qualify for favorable
tax treatment. The Funds ordinarily declare and pay dividends quarterly and
declare and pay capital gains, if any, annually.
The net income of a Fund, from the time immediately before its
calculation, will consist of all interest income accrued on the portfolio assets
of the Fund, dividend income, if any, income from securities losses, if any, and
realized capital gain 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 daily. 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.
FEDERAL INCOME TAXES
The following is only a summary of certain additional tax
considerations generally affecting the Funds and their shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of a Fund or its shareholders, and the
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.
Qualification as a Regulated Investment Company
Each Fund has elected to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (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) 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
of the taxable year and will, therefore, satisfy the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must: (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities) and
other income (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) for taxable
years beginning on or before August 5, 1997, 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"). 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
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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 of securities for this purpose. The
Short-Short Gain Test will not apply to taxable years beginning after August 5,
1997.
In general, a gain or loss recognized by a Fund on the disposition of
an asset will be a capital gain or a capital loss. In addition, gain will be
recognized as a result of certain constructive sales, including short sales
"against the box." However, a gain recognized on the disposition of a debt
obligation purchased by a Fund at a market discount (generally, at a price less
than its principal amount) will be treated as ordinary income to the extent of
the portion of the market discount which accrued during the period of time a
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), will generally be treated as
ordinary income or loss.
Further, the Code also treats as ordinary income a portion of the
capital gain attributable to 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 the gain recharacterized 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 federal long-term, mid-term, or short-term rate, depending
upon the type of instrument at issue, reduced by an amount equal to: (1) prior
inclusions of ordinary income items from the conversion transaction and (2) the
capital interest on acquisition indebtedness under Code section 263(g). Built-in
losses will be preserved where a Fund has a built-in loss with respect to
property that becomes a part of a conversion transaction. No authority exists
that indicates that the converted character of the income will not be passed to
the Fund's 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 if (depending on the type of the
Fund) (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 the 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 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 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 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, for taxable
years beginning on or before August 5, 1997, 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.
Certain 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
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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 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 previously recognized upon the
termination of Section 1256 contracts during that taxable year. Any capital
gains or losses 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 contracts) is generally 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. Generally, 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 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 qualified 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 gains from
the PFIC. In the alternative, for tax years beginning after December 31, 1997, a
Fund that invests in stock of a PFIC may make a mark-to-market election with
respect to such stock. Pursuant to such election, the Fund will include as
ordinary income any excess of the fair market value of such stock at the close
of any taxable year over the Fund's adjusted tax basis in the stock. If the
adjusted tax basis of the PFIC stock exceeds the fair market value of the stock
at the end of a taxable year, such excess will be deductible as ordinary loss in
the amount equal to the lesser of the amount of such excess or the net
mark-to-market gains on the stock that the Fund included in income in previous
years. The Fund's holding period with respect to the PFIC stock subject to the
election will commence on the first day of the next taxable year. If the Fund
makes the election in the first taxable year it holds PFIC stock, it will not
incur the tax described below. If the Fund does not elect to treat the PFIC as a
QEF and does not make a mark-to-market election, 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 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, (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 plus (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 filing 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.
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
(including, to the extent provided in Treasury regulations, losses recognized
pursuant to the PFIC mark-to-market election) 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 the Fund's
taxable year, at least 50% of the value of the Fund's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to each of which the
Fund has not invested more than 5% of the value of the Fund's total assets in
securities of such issuer and does not hold more than 10% of the outstanding
voting securities of such issuer), and no more than 25% of the value of its
total assets may be invested in the securities of any one
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<PAGE>
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.
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 a tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies. A 4% non-deductible excise tax is
imposed on a regulated investment company that fails to distribute in each
calendar year an amount equal to 98% of its ordinary income for such calendar
year end 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 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 the excise tax, a regulated investment company shall:
(1) reduce 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) exclude
foreign currency gains and losses and ordinary gains or losses arising as a
result of a PFIC mark-to-market election (or upon an actual disposition of the
PFIC stock subject to such election) 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
(and, instead, include such gains and losses in determining 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 Fund investments to make sufficient distribution 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, but will qualify for the 70% dividends-received deduction for
corporate shareholders only to the extent discussed below. Dividends paid on
Class A, B, C, and Y shares are calculated at the same time and in the same
manner. In general, dividends on Class B and C shares are expected to be lower
than those on Class A shares due to the higher distribution expenses borne by
the Class B and C shares. Dividends may also differ between classes as a result
of differences in other class specific expenses.
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. Net capital gain that is distributed and designated as a capital gain
dividend will be taxable to shareholders as long-term capital gain, regardless
of the length of time the shareholder has held his shares or whether such gain
was recognized by the Fund prior to the date on which the shareholder acquired
his shares. The Code provides, however, that under certain conditions only 50%
(58% for alternative minimum tax purposes) of the capital gain recognized upon
the Fund's disposition of domestic "small business" stock will be subject to
tax.
Conversely, if a Fund elects to retain its net capital gain, the Fund
will be taxed 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.
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<PAGE>
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.
Generally, a dividend received by the 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) 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 that the stock on which the dividend is paid is treated as
debt-financed under the rules of Code section 246A. The 46-day holding period
must be satisfied during the 90-day period beginning 45 days prior to each
applicable ex-dividend date; the 91-day holding period must be satisfied during
the 180-day period beginning 90 days before each applicable ex-dividend date.
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).
Alternative minimum tax ("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 noncorporate taxpayers and 20% for corporate taxpayers on the
excess of the taxpayer's alternative minimum taxable income ("AMTI") over an
exemption amount. 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, a corporate shareholder will generally be required
to take the full amount of any dividend received from a Fund into account
(without a dividends-received deduction) in determining its 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.
Investment income that may be received by a 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.
Distributions by a 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 a Fund will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional Fund shares or shares of another Fund (or 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 or recognized capital gain net income, 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 they 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 month will be deemed to have
been received by the shareholders (and made by the Fund) on December 31 of such
calendar year if such dividends are actually paid in January of the following
year. Shareholders will be advised annually as to the U.S. federal income tax
consequences of distributions made (or deemed made) during the year.
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<PAGE>
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 that it is an exempt
recipient (such as a corporation).
Sale or Redemption of Shares
A shareholder will recognize a 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. Long-term capital gain recognized by an individual
shareholder will be taxed at the lowest rates applicable to capital gains if the
holder has held such shares for more than 18 months at the time of the sale.
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) (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 at
least 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 to reinvest at such reduced sales load 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 the shares disposed of but shall be treated as incurred on the
acquisition of the shares subsequently acquired.
Foreign Shareholders
Taxation of a shareholder who, as to the U.S., is a non-resident 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 a foreign shareholder will be subject to U.S. withholding tax at the
rate of 30% (or lower applicable treaty rate) upon the gross amount of the
dividend. Such 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 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 the 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.
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<PAGE>
Effect of Future Legislation; State and 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 the Funds.
ADDITIONAL INFORMATION
The Trust is an open-end management investment company organized as a
corporation under the laws of the State of Delaware on December __, 1995. The
Trust offers shares of common stock which represent interests in one of nine
separate portfolios. This SAI relates to the following Funds of the Trust:
Conservative Investor Fund, Moderate Investor Fund and Growth Investor Fund.
Each Fund offers only one class of shares. Shares of each Fund of the Trust are
redeemable at the net asset value thereof at the option of the holders thereof
or in certain circumstances at the option of the Trust. For information
concerning the methods of redemption and the rights of shares ownership, see the
Prospectus under the caption "Redeeming Shares."
Generally, on each matter submitted to a vote of shareholders, each
shareholder is entitled to one vote per share. In addition, all shares of each
Fund vote as a single class; provided, however, that (i) as to any matter with
respect to which a separate vote of any Fund is required by the 1940 Act or
under the Delaware Business Trust law, the requirements as to a separate vote by
that Fund apply in lieu of single class voting; (ii) in the event that the
separate vote requirements referred to in (i) apply with respect to one or more
Funds, then, subject to (iii) below, the shares of all other Funds vote as a
single class; and (iv) as to any matter which does not affect the interest of a
particular Fund, only the holders of shares of the one or more affected Funds
are entitled to vote. And, notwithstanding any provision of the Delaware
Business Trust Law requiring a greater portion than a majority of the votes
entitled to be cast in order to take or authorize any action, any such action
may be taken or authorized upon the concurrence of a majority of the aggregate
number of votes entitled to be cast thereon.
Shares of the Funds have no subscription or preemptive rights and only
such conversion or exchange privileges as the Trustees may grant in their
discretion. Generally, a special meeting of shareholders of the Trust will be
called by the Secretary upon receipt of a request in writing signed by
shareholders holding not less than 25% of the common stock at the time issued
and entitled to vote at such meeting.
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<PAGE>
INDEPENDENT ACCOUNTANTS AND REPORTS
The financial statement included in the SemiAnnual Report of the Funds
for the fiscal period ended May 31, 1997 are incorporated by reference in this
SAI. The Letters to Shareholders contained in such SemiAnnual Report are not
incorporated by reference and are not part of the registration statement or this
SAI. The annual financial statements of the Funds will be audited by the Trust's
independent accountants. The Board of Trustees has selected Coopers & Lybrand
L.L.P., 100 East Broad Street, Columbus, OH 43315 as independent accountants to
audit the Funds' financial statements and review the Funds' tax returns for
fiscal years ending on or after November 30, 1997.
COUNSEL
Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New
York, 10022, serves as legal counsel to the Trust.
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<PAGE>
APPENDIX A
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S")
MOODY'S BOND RATINGS
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 edge." 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
positions 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 risks
appear somewhat larger than in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes
and are 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.
Bonds rated Aaa, Aa, A, and Baa are considered investment grade bonds.
Rating Refinements: Moody's may apply numerical modifiers, 1, 2, and 3
in each generic rating classification from Aa through B in its
corporate and municipal bond rating system. The modifier 1 indicates
that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and a modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
MOODY'S SHORT-TERM DEBT RATINGS
Moody's Short-Term Debt Ratings are opinions of the ability of issuers
to repay punctually senior debt obligations which have an original maturity not
exceeding one year. Moody's employs the following three designations, all judged
to be investment grade, to indicate the relative repayment capacity of rated
issuers: Prime-1, Prime-2, and Prime-3.
Issuers rated Prime-1 have a superior ability for repayment of senior
short-term debt obligations;Issuers rated Prime-2 have a strong ability for
repayment of senior short-term debt obligations; and issuers rated Prime-3 have
an acceptable ability for repayment of senior short-term debt obligations.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
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<PAGE>
STANDARD & POOR'S CORPORATION ("STANDARD & POOR'S")
STANDARD & POOR'S BOND RATINGS
A Standard & Poor's rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources it considers reliable. The
ratings are based, in varying degrees, on the following considerations: (1)
likelihood of default capacity and willingness of the obligor as to the timely
payment of interest and repayment of principal in accordance with the terms of
the obligation; (2) nature of and provisions of the obligation; and (3)
protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and
other laws affecting creditors' rights.
Standard & Poors does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other reasons.
AAA Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
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 highest rated issues only in small
degree.
A Debt rated "A' has a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in the higher-rated categories.
BBB Debt rated "BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions, or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in
higher-rated categories.
Bonds rated AAA, AA, A, and BBB are considered investment grade bonds.
NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does
not rate a particular type of obligation as a matter of policy.
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STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard and Poor's commercial paper rating is a current assessment
of the likelihood of timely payment of debt considered short-term in the
relevant market. The commercial paper rating is not a recommendation to
purchase, sell, or hold a security, inasmuch as it does not comment as to market
price or suitability for a particular investor. The ratings are based upon
current information furnished to S&P by the issuer or obtained by S&P from other
sources it considers reliable. The ratings may be changed, suspended, or
withdrawn as a result of changes in or unavailability of such information, or
based on other circumstances. Ratings are graded into two group categories,
ranging from "A" for the highest quality obligations to "D" for the lowest. The
categories are as follows:
Issues assigned A ratings are regarded as having the greatest capacity
for timely payment. Issues in this category are further refined with the
designation 1, 2, or 3 to indicate the relative degree of safety.
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated A-1.
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
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<PAGE>
THE VICTORY PORTFOLIOS
Registration Statement
of
THE VICTORY PORTFOLIOS
on
Form N-1A
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Included in Part A:
Financial Highlights for the Victory Convertible Securities Fund and
the Victory Federal Money Market Fund
Included in Part B:
With respect to The Victory Convertible Securities Fund series of the
Registrant only, included in the Annual Report to Shareholders and
incorporated herein by reference in the Statement of Additional
Information from the Rule 30-D filing made by the Registrant on
February 2, 1997 (Accession Numbers 0001004726-97-000035).
With respect to The Victory Federal Money Market Fund series of the
Registrant only, included in the Annual Report to Shareholders and
incorporated herein by reference in the Statement of Additional
Information from the Rule 30-D filing made by the Registrant on
February 2, 1997 (Accession Number 0001004726-97-000034).
With respect to The Victory LifeChoice Conservative Investor Fund
series, The Victory LifeChoice Moderate Investor Fund series and The
Victory LifeChoice Growth Investor Fund series of the Registrant only,
included in the Semi-Annual Report to Shareholders and incorporated
herein by reference in the Statement of Additional Information from
the Rule 30-D filing made by the Registrant on July 31, 1997
(Accession Number 0000906197-97-000046).
(b) Exhibits:
EX-99.B1 (a) Declaration of Trust dated December 6, 1995 is incorporated
herein by reference to Exhibit 99B.1(a) to Post-Effective
Amendment No. 26 to the Registrant's Registration Statement on
Form N-1A filed electronically on December 28, 1995, accession
number 0000950152-95-003085.
EX-99.B2 By-Laws adopted December 6, 1995 are incorporated herein by reference
to Exhibit 99.B2 to Post-Effective Amendment No. 26 to the Registrant's
Registration Statement on Form N-1A filed electronically on December
28, 1995, accession number 0000950152-95- 003085.
EX-99.B3 None.
EX-99.B4 None.
<PAGE>
THE VICTORY PORTFOLIOS
EX-99.B5 (a) Investment Advisory Agreement dated as of March 1, 1997, between
the Registrant and Key Asset Management Inc. is filed herewith.
(b) Investment Advisory Agreement between the Registrant and Key
Asset Management Inc. regarding Lakefront Fund and Real Estate
Investment Fund is filed herewith.
(c) Investment Sub-Advisory Agreement between Key Asset Management
Inc. and Lakefront Capital Investors, Inc. regarding the
Lakefront Fund is filed herewith.
EX-99.B6 (a) Distribution Agreement dated June 1, 1996 between the Registrant
and BISYS Fund Services Limited Partnership is incorporated
herein by reference to Exhibit 99.B6(a) to Post-Effective
Amendment No. 30 to the Registrant's Registration Statement on
Form N-1A filed electronically on July 30, 1996, accession number
0000922423-96-000344.
(b) Form of Broker-Dealer Agreement is incorporated herein by
reference to Exhibit 99.B6(b) to Post-Effective Amendment No. 27
to the Registrant's Registration Statement on Form N-1A filed
electronically on January 31, 1996, accession number
0000922423-96-000047.
EX-99.B7 None.
EX-99.B8 (a) Amended and Restated Mutual Fund Custody Agreement dated May 24,
1995 by and between the Registrant and Key Trust Custody of Ohio,
N.A. is incorporated herein by reference to Exhibit 8(a) to
Post-Effective Amendment No. 22 to the Registrant's Registration
Statement on Form N-1A filed on August 28, 1995.
(b) Custody Agreement dated May 31, 1996 between Morgan Stanley Trust
Company and Key Trust Company of Ohio is incorporated herein by
reference to Exhibit 99.B8(c) to Post-Effective Amendment No. 30
to the Registrant's Registration Statement on Form N-1A filed
electronically on July 30, 1996, accession number
0000922423-96-000344.
EX-99.B9 (a) Administration Agreement dated June 1, 1996 between the
Registrant and BISYS Fund Services Limited Partnership is
incorporated herein by reference to Exhibit 99.B9(a) to
Post-Effective Amendment No. 30 to the Registrant's Registration
Statement on Form N-1A filed electronically on July 30, 1996,
accession number 0000922423-96-000344.
(b) Transfer Agency and Service Agreement dated July 12, 1996 between
the Registrant and State Street Bank and Trust Company is
incorporated herein by reference to Exhibit 99.B9(b) to
Post-Effective Amendment No. 30 to the Registrant's Registration
Statement on Form N-1A filed electronically on July 30, 1996,
accession number 0000922423-96-000344.
C-2
<PAGE>
THE VICTORY PORTFOLIOS
(c) Fund Accounting Agreement dated May 31, 1995 between the
Registrant and BISYS Fund Services Ohio, Inc., and Schedule A
thereto, are incorporated herein by reference to Exhibit 9(d) to
Post-Effective Amendment No. 22 to the Registrant's Registration
Statement on Form N-1A filed on August 28, 1995.
(d) Shareholder Servicing Plan dated June 5, 1995 with an amended
Schedule I dated March 1, 1997 is incorporated herein by
reference to Exhibit 99.B9(d) to Post-Effective Amendment No. 31
to the Registrant's Registration Statement on Form N-1A filed
electronically on February 7, 1997, accession number
0000922423-97-000066.
(e) Form of Shareholder Servicing Agreement is incorporated herein by
reference to Exhibit 99.B8(e) to Post-Effective Amendment No. 26
to the Registrant's Registration Statement on Form N-1A filed
electronically on December 28, 1995, accession number
0000950152-95-003085.
EX-99.B10 (a) Opinion of Counsel was filed with Registrant's Rule 24f-2 Notice
in respect of the period ending October 31, 1996, submitted
electronically on December 23, 1996, accession number
0000950152-96-006841.
EX-99.B11 (a) Consent of Kramer, Levin, Naftalis & Frankel is filed herewith.
(b) Consent of Coopers & Lybrand L.L.P. is filed herewith.
(c) Consent of Price Waterhouse LLP is filed herewith.
EX-99.B12 None.
EX-99.B13 (a) Purchase Agreement dated November 12, 1986 between Registrant and
Physicians Insurance Company of Ohio is incorporated herein by
reference to Exhibit 13 to Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form N-1A filed on
November 13, 1986.
(b) Purchase Agreement dated October 15, 1989 is incorporated herein
by reference to Exhibit 13(b) to Post-Effective Amendment No. 7
to the Registrant's Registration Statement on Form N-1A filed on
December 1, 1989.
(c) Purchase Agreement is incorporated herein by reference to Exhibit
13(c) to Post- Effective Amendment No. 7 to the Registrant's
Registration Statement on Form N-1A filed on December 1, 1989.
EX-99.B14 None.
C-3
<PAGE>
THE VICTORY PORTFOLIOS
EX-99.B15 (a) Distribution and Service Plan dated June 5, 1995 for The Victory
Portfolios Class A Shares of Government Bond Fund, National
Municipal Bond Fund, New York Tax-Free Fund, Fund for Income,
Financial Reserves Fund, Institutional Money Market Fund, Ohio
Municipal Money Market Fund Lakefront Fund and Real Estate
Investment Fund with amended Schedule I dated March 1, 1997 is
incorporated herein by reference to Exhibit 99.B15(a) to
Post-Effective Amendment No. 31 to the Registrant's Registration
Statement on Form N-1A filed electronically on February 7, 1997,
accession number 0000922423-97-000066.
(b) Distribution Plan dated June 5, 1995 for Class B Shares of
National Municipal Bond Fund, Government Bond Fund and New York
Tax-Free Fund and adopted December 6, 1995 for Class B Shares of
Balanced Fund, Diversified Stock Fund, International Growth Fund,
Ohio Regional Stock Fund, Special Value Fund, Institutional Money
Market Fund and U.S. Government Obligations Fund is incorporated
by reference to Exhibit 99.B15(b) to Post-Effective Amendment No.
22 to the Registrant's Registration Statement on Form N-1A filed
on August 28, 1995, and the updated schedule thereto dated
December 6, 1995 is incorporated by reference to Exhibit 99B(b)
to Post-Effective Amendment No. 27 to the Registrant's
Registration Statement on Form N-1A filed electronically on
January 31, 1996, accession number 0000922423-96-000047.
EX-99.B16 (a) Forms of computation of performance quotation are incorporated
herein by reference to Exhibit 16 to Post-Effective Amendment No.
19 to the Registrant's Registration Statement on Form N-1A filed
on December 23, 1994.
(b) Forms of computation of performance quotation for the Balanced
Fund, Diversified Stock Fund, International Growth Fund, Ohio
Regional Stock Fund and Special Value Fund are incorporated
herein by reference to Exhibit 99.B16(b) to Post-Effective
Amendment No. 30 to the Registrant's Registration Statement on
Form N-1A filed electronically on July 30, 1996, accession number
0000922423-96-000344.
(c) Forms of computation of performance quotation for the Lakefront
Fund and U. S. Government Obligations Fund - Investor Class are
incorporated herein by reference to Exhibit 99.B16(c) to
Post-Effective Amendment No. 32 to the Registrant's Registration
Statement on Form N-1A filed electronically on June 27, 1997,
accession number 0000922423-97-000530.
EX-99.B17 None.
EX-99.B18 (a) Rule 18f-3 Multi-Class Plan adopted effective June 5, 1995 is
incorporated by reference to Exhibit 17 to Post-Effective
Amendment No. 22 to the Registrant's Registration Statement on
Form N-1A filed on August 28, 1995.
C-4
<PAGE>
THE VICTORY PORTFOLIOS
(b) Amended and Restated Rule 18f-3 Multi-Class Plan effective as of
December 6, 1995 is incorporated herein by reference to Exhibit
99.B18(b) to Post-Effective Amendment No. 26 to the Registrant's
Registration Statement on Form N-1A filed electronically on
December 28, 1995, accession number 0000950152-95-003085.
(c) Amended and Restated Rule 18f-3 Multi-Class Plan effective as of
February 14, 1996 is incorporated herein by reference to Exhibit
99.B18(c) to Post-Effective Amendment No. 28 to the Registrant's
Registration Statement on Form N-1A filed electronically on
February 28, 1996, accession number 0000922423-96-000106.
EX-99.B19 (a) Power of Attorney of Leigh A. Wilson is incorporated herein by
reference to Exhibit 99.B P of A to Post-Effective Amendment No.
27 to Registrant's Registration Statement on Form N-1A and Powers
of Attorney of Robert G. Brown, Edward P. Campbell, Harry
Gazelle, Stanley I. Landgraf, Thomas F. Morrissey and H. Patrick
Swygert are incorporated herein by reference to Exhibit 99.B P of
A to Post-Effective Amendment No. 26 to the Registrant's
Registration Statement on Form N-1A filed electronically on
January 31, 1996, accession number 0000922423-96-000047 and
December 28, 1995, accession number 0000950152-95-003085,
respectively.
Item 25. Persons Controlled by or under Common Control with Registrant.
None.
Item 26. Number of Holders of Securities.
As of September 30, 1997 the number of record holders of each Fund of the
Registrant were as follows:
Number of
Title of Fund Record Holders
Balanced Fund
Class A Shares 1,317
Class B Shares 264
Diversified Stock Fund
Class A Shares 11,706
Class B Shares 2,751
Financial Reserves Fund 124
Fund For Income 1,525
C-5
<PAGE>
THE VICTORY PORTFOLIOS
Government Mortgage Fund 310
Growth Fund 480
Intermediate Income Fund 248
International Growth Fund
Class A Shares 1,348
Class B Shares 53
Institutional Money Market Fund
Select Class Shares 23
Investor Class Shares 36
Investment Quality Bond Fund 1,778
Lakefront Fund 57
Limited Term Income Fund 554
National Municipal Bond Fund
Class A Shares 1,277
Class B Shares 69
New York Tax-Free Fund
Class A Shares 489
Class B Shares 100
Ohio Municipal Bond Fund 318
Ohio Municipal Money Market Fund 147
Ohio Regional Stock Fund
Class A Shares 1,188
Class B Shares 104
Prime Obligations Fund 1,220
Real Estate Investment Fund 120
Special Growth Fund 347
Special Value Fund
Class A Shares 3,884
Class B Shares 165
Stock Index Fund 493
C-6
<PAGE>
THE VICTORY PORTFOLIOS
Tax Free Money Market Fund 85
U.S. Government Obligations Fund
Select Class Shares 331
Investor Class Shares 113
Value Fund 189
Item 27. Indemnification
Article X, Section 10.02 of the Registrant's Delaware Trust
Instrument, incorporated herein as Exhibit 99.B1(a) hereto, provides
for the indemnification of Registrant's Trustees and officers, as
follows:
"SECTION 10.02 INDEMNIFICATION.
(a) Subject to the exceptions and limitations contained in Subsection
10.02(b):
(i) every person who is, or has been, a Trustee or officer
of the Trust (hereinafter referred to as a "Covered Person") shall be
indemnified by the Trust to the fullest extent permitted by law
against liability and against all expenses reasonably incurred or
paid by him in connection with any claim, action, suit or proceeding
in which he becomes involved as a party or otherwise by virtue of his
being or having been a Trustee or officer and against amounts paid or
incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding"
shall apply to all claims, actions, suits or proceedings (civil,
criminal or other, including appeals), actual or threatened while in
office or thereafter, and the words "liability" and "expenses" shall
include, without limitation, attorneys' fees, costs, judgments,
amounts paid in settlement, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Covered
Person:
(i) who shall have been adjudicated by a court or body
before which the proceeding was brought (A) to be liable to the Trust
or its Shareholders by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the
conduct of his office or (B) not to have acted in good faith in the
reasonable belief that his action was in the best interest of the
Trust; or
(ii) in the event of a settlement, unless there has been a
determination that such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office, (A) by the court or
other body approving the settlement; (B) by at least a majority of
those Trustees who are neither Interested Persons of the Trust nor
are parties to the matter based upon a review of readily available
facts (as opposed to a full trial-type inquiry); or (C) by written
opinion of independent legal counsel based upon a review of readily
available facts (as opposed to a full trial-type inquiry).
C-7
<PAGE>
THE VICTORY PORTFOLIOS
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable,
shall not be exclusive of or affect any other rights to which any
Covered Person may now or hereafter be entitled, shall continue as to
a person who has ceased to be a Covered Person and shall inure to the
benefit of the heirs, executors and administrators of such a person.
Nothing contained herein shall affect any rights to indemnification
to which Trust personnel, other than Covered Persons, and other
persons may be entitled by contract or otherwise under law.
(d) Expenses in connection with the preparation and presentation of a
defense to any claim, action, suit or proceeding of the character
described in Subsection (a) of this Section 10.02 may be paid by the
Trust or Series from time to time prior to final disposition thereof
upon receipt of an undertaking by or on behalf of such Covered Person
that such amount will be paid over by him to the Trust or Series if
it is ultimately determined that he is not entitled to
indemnification under this Section 10.02; provided, however, that
either (i) such Covered Person shall have provided appropriate
security for such undertaking, (ii) the Trust is insured against
losses arising out of any such advance payments or (iii) either a
majority of the Trustees who are neither Interested Persons of the
Trust nor parties to the matter, or independent legal counsel in a
written opinion, shall have determined, based upon a review of
readily available facts (as opposed to a trial-type inquiry or full
investigation), that there is reason to believe that such Covered
Person will be found entitled to indemnification under this Section
10.02."
Indemnification of the Fund's principal underwriter, custodian, fund
accountant, and transfer agent is provided for, respectively, in
Section V of the Distribution Agreement incorporated by reference as
Exhibit 6(a) hereto, Section 28 of the Custody Agreement incorporated
by reference as Exhibit 8(a) hereto, Section 5 of the Fund Accounting
Agreement incorporated by reference as Exhibit 9(c) hereto, and
Section 7 of the Transfer Agency Agreement incorporated by reference
as Exhibit 9(b) hereto. Registrant has obtained from a major
insurance carrier a trustees' and officers' liability policy covering
certain types of errors and omissions. In no event will Registrant
indemnify any of its trustees, officers, employees or agents against
any liability to which such person would otherwise be subject by
reason of his willful misfeasance, bad faith, or gross negligence in
the performance of his duties, or by reason of his reckless disregard
of the duties involved in the conduct of his office or under his
agreement with Registrant. Registrant will comply with Rule 484 under
the Securities Act of 1933 and Release 11330 under the Investment
Company Act of 1940 in connection with any indemnification.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to trustees, officers, and controlling
persons or Registrant pursuant to the foregoing provisions, or
otherwise, Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Investment Company Act of 1940, as
amended, and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment
by Registrant of expenses incurred or paid by a trustee, officer, or
controlling person of Registrant in the successful defense of any
action, suit, or proceeding) is asserted by such trustee, officer, or
controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
C-8
<PAGE>
THE VICTORY PORTFOLIOS
Item 28. Business and Other Connections of Investment Adviser
Key Asset Management Inc. ("KAM") is the investment adviser to each
fund of the Victory Portfolios. KAM is a wholly-owned indirect
subsidiary of KeyCorp, a bank holding company which had total assets
of approximately $72 billion as of September 30, 1997. KeyCorp is a
leading financial institution doing business in 26 states from Maine
to Alaska, providing a full array of trust, commercial, and retail
banking services. Its non-bank subsidiaries include investment
advisory, securities brokerage, insurance, bank credit card
processing, mortgage and leasing companies. KAM and its affiliates
have over $50 billion in assets under management, and provides a full
range of investment management services to personal and corporate
clients.
Lakefront Capital Investors, Inc. ("Lakefront"), sub-adviser of the
Lakefront Fund, The Hanna Building, 1422 Euclid Avenue, Suite 840,
Cleveland, Ohio 44115, was incorporated in 1991.
To the knowledge of Registrant, none of the directors or officers of
KAM or Lakefront, except those set forth below, is or has been at any
time during the past two calendar years engaged in any other business,
profession, vocation or employment of a substantial nature, except
that certain directors and officers of KAM also hold positions with
KeyCorp or its subsidiaries.
The principal executive officers and directors of KAM are as follows:
Directors:
William G. Spears, Senior Managing Director, Chairman and Chief
Executive Officer.
Richard J. Buoncore, President and Chief Operating Officer and Senior
Managing Director.
Anthony Aveni, Senior Managing Director, Also Chief Investment Officer
of Society Asset Management Division.
Vincent DeP. Farrell, Senior Managing Director. Also Chief Investment
Officer of Spears, Benzak, Salomon & Farrell Division ("SBSF").
Richard E. Salomon, Senior Managing Director. Also President of SBSF
and Director of Wealth Management.
Gary R. Martzolf, Senior Managing Director.
Other Officers:
Charles G. Crane, Senior Managing Director and Chief Market Director.
James D. Kacic, Treasurer, Chief Financial Officer and Managing
Director.
C-9
<PAGE>
THE VICTORY PORTFOLIOS
Michael Foisel, Assistant Treasurer.
Robert M. Siewert, Chief Compliance Officer and Director. Also,
Assistant Vice President and Compliance Officer, Society.
William J. Blake, Secretary.
Steven N. Bulloch, Assistant Secretary. Also, Senior Vice President
and Senior Counsel of KMC.
Louis R. Benzak, Senior Managing Director.
Judith A. Jones, Senior Managing Director.
Lisa A. Tuckerman, Senior Managing Director.
Dennis M. Grapo, Senior Managing Director
Richard A. Janus, Senior Managing Director.
Kathleen A. Dennis, Senior Managing Director.
The business address of each of the foregoing individuals is 127 Public
Square, Cleveland, Ohio 44114.
The principal executive officers and directors of Lakefront are as
follows:
Nathaniel E. Carter, President. Also Chief Investment Officer of
Lakefront.
Kenneth A. Louard, Chief Operating Officer.
The business address of each of the foregoing individuals is 127 Public
Square, Cleveland, Ohio 44114.
Item 29. Principal Underwriter
(a) BISYS Fund Services acts as distributor and serves as administrator
for the Registrant.
(b) Directors, officers and partners of BISYS Fund Services, Inc., the
General Partner of BISYS Fund Services, as of October 24, 1997 were as
follows:
C-10
<PAGE>
THE VICTORY PORTFOLIOS
Lynn J. Mangum, Chairman and CEO.
J. David Huber, President.
Robert J. McMullan, Executive Vice President, CFO and Treasurer.
Kevin J. Dell, Vice President, General Counsel and Secretary.
Michael D. Burns, Vice President.
Annamaria Porcaro, Assistant Secretary.
Robert Tuch, Assistant Secretary.
Dennis Sheehan, Senior Vice President.
George O. Martinez, Senior Vice President. Also Assistant Secretary,
The Victory Portfolios.
Mark J. Rybarczyk, Senior Vice President.
The business address of each of the foregoing individuals is BISYS Fund
Services, Inc., 3435 Stelzer Road, Columbus, Ohio 43215.
Item 30. Location of Accounts and Records
(1) Key Asset Management Inc., 127 Public Square, Cleveland, Ohio
44114-1306 (records relating to its functions as investment adviser
and sub-administrator).
(2) Lakefront Capital Investors, Inc., 127 Public Square, Cleveland, Ohio
44114-1306 (records relating to its functions as investment
sub-adviser for the Lakefront Fund only).
(3) KeyBank National Association, 127 Public Square, Cleveland, Ohio
44114-1306 (records relating to its functions as shareholder
servicing agent).
(4) BISYS Fund Services, 3435 Stelzer Road, Columbus, Ohio 43219 (records
relating to its functions as administrator, distributor and fund
accountant).
(5) State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110- 3875 (records relating to its functions as
transfer agent).
(6) Boston Financial Data Services, Inc. Two Heritage Drive, Quincy,
Massachusetts 02171 (records relating to its functions as dividend
disbursing agent and shareholder servicing agent).
C-11
<PAGE>
THE VICTORY PORTFOLIOS
(7) Key Trust Company of Ohio, N.A., 127 Public Square, Cleveland, Ohio
44114-1306 (records relating to its functions as custodian and
securities lending agent).
(8) Morgan Stanley Trust Company, 1585 Broadway, New York, New York 10036
(records relating to its functions as sub-custodian of Balanced Fund
and International Growth Fund).
Item 31. Management Services
None.
Item 32. Undertakings
(a) Registrant undertakes to call a meeting of shareholders, at the
request of holders of 10% of the Registrant's outstanding shares, for
the purpose of voting upon the question of removal of a trustee or
trustees and undertakes to assist in communications with other
shareholders as required by Section 16(c) of the Investment Company
Act of 1940.
(b) Not applicable.
(c) Registrant undertakes to furnish to each person to whom a prospectus
is delivered a copy of the Registrant's latest Annual Report to
Shareholders upon request and without charge.
NOTICE
A copy of the Declaration of Trust of The Victory Portfolios is on file with the
Secretary of State of Delaware and notice is hereby given that this
Post-Effective Amendment to the Registrant's Registration Statement has been
executed on behalf of the Registrant by officers of, and Trustees of, the
Registrant as officers and as Trustees, respectively, and not individually, and
that the obligations of or arising out of this instrument are not binding upon
any of the Trustees, officers or shareholders of The Victory Portfolios
individually but are binding only upon the assets and property of the
Registrant.
C-12
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant has duly caused this Post-Effective Amendment to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of New York and State of New York, on the 11th day
of December, 1997.
THE VICTORY PORTFOLIOS
By: /s/ Leigh A. Wilson
----------------------
Leigh A. Wilson, President and Trustee
As required by the Securities Act of 1933, this Registration Statement has been
signed by the following persons in the capacities indicated on the 11th day of
December, 1997.
/s/ Leigh A. Wilson President and Trustee
- -------------------
Leigh A. Wilson
/s/ Thomas E. Line Treasurer
- ----------------------------
Thomas E. Line
* Trustee
- ----------------------------
Robert G. Brown
* Trustee
- ----------------------------
Edward P. Campbell
* Trustee
- ----------------------------
Harry Gazelle
* Trustee
- ----------------------------
Thomas F. Morrissey
* Trustee
- ----------------------------
H. Patrick Swygert
*By: /s/ Carl Frischling
-------------------
Carl Frischling
Attorney-in-Fact
Attorney-in-Fact pursuant to powers of attorney, dated December 18, 1995
filed with Post-Effective Amendments 27 and 26 to Registrant's Registration
Statement on January 31, 1996 and December 28, 1995, respectively.
C-13
<PAGE>
THE VICTORY PORTFOLIO
THE VICTORY PORTFOLIOS
INDEX TO EXHIBITS
Exhibit Number
EX-99.b5(a) Investment Advisory Agreement dated as of March 1, 1997, between
the Registrant and Key Asset Management Inc.
EX-99.b5(b) Investment Advisory Agreement between the Registrant and Key
Asset Management Inc. regarding Lakefront Fund and Real Estate
Investment Fund
EX-99.b5(c) Investment Advisory Agreement between the Registrant and Key
Asset Management Inc. and Lakefront Capital Investors, Inc.
regarding the Lakefront Fund.
EX-99.B11(a) Consent of Kramer, Levin, Naftalis & Frankel
EX-99.B11(b) Consent of Coopers & Lybrand L.L.P.
EX-99.B11(c) Consent of Price Waterhouse LLP
INVESTMENT ADVISORY AGREEMENT
BETWEEN
THE VICTORY PORTFOLIOS
AND
KEY ASSET MANAGEMENT INC.
AGREEMENT made as of the 1st day of March, 1997, by and between The
Victory Portfolios, a Delaware business trust which may issue one or more series
of shares of beneficial interest (the "Company"), and Key Asset Management Inc.,
a New York corporation (the "Adviser").
WHEREAS, the Company is registered as an open-end, management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Company desires to retain the Adviser to furnish
investment advisory services to the funds listed on Schedule A (each, a "Fund"
and collectively, the "Funds"), and the Adviser represents that it is willing
and possesses legal authority to so furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT.
(a) General. The Company hereby appoints the Adviser to act as
investment adviser to the Funds for the period and on the
terms set forth in this Agreement. The Adviser accepts such
appointment and agrees to furnish the services herein set
forth for the compensation herein provided.
(b) Employees of Affiliates. The Adviser may, in its discretion,
provide such services through its own employees or the
employees of one or more affiliated companies that are
qualified to act as an investment adviser to the Company under
applicable laws and are under the control of KeyCorp, the
indirect parent of the Adviser; provided that (i) all persons,
when providing services hereunder, are functioning as part of
an organized group of persons, and (ii) such organized group
of persons is managed at all times by authorized officers of
the Adviser.
(c) Sub-Advisers. It is understood and agreed that the Adviser may
from time to time employ or associate with such other entities
or persons as the Adviser believes appropriate to assist in
the performance of this Agreement with respect to a particular
Fund or Funds (each a "Sub-Adviser"), and that any such
Sub-Adviser shall have all of the rights and powers of the
Adviser set forth in this Agreement; provided that a Fund
shall not pay any additional compensation for any Sub- Adviser
and the Adviser shall be as fully responsible to the Company
for the acts and omissions of the Sub-Adviser as it is for its
own acts and omissions; and provided further that the
retention of any Sub-Adviser shall be approved in
<PAGE>
advance by (i) the Board of Trustees of the Company and (ii)
the shareholders of the relevant Fund if required under any
applicable provisions of the 1940 Act. The Adviser will
review, monitor and report to the Company's Board of Trustees
regarding the performance and investment procedures of any
Sub-Adviser. In the event that the services of any Sub-Adviser
are terminated, the Adviser may provide investment advisory
services pursuant to this Agreement to the Fund without a
Sub-Adviser and without further shareholder approval, to the
extent consistent with the 1940 Act. A Sub-Adviser may be an
affiliate of the Adviser.
2. DELIVERY OF DOCUMENTS. The Company has delivered to the Adviser
copies of each of the following documents along with all amendments thereto
through the date hereof, and will promptly deliver to it all future amendments
and supplements thereto, if any:
(a) the Company's Trust Instrument;
(b) the By-Laws of the Company;
(c) resolutions of the Board of Trustees of the Company
authorizing the execution and delivery of this Agreement;
(d) the most recent Post-Effective Amendment to the Company's
Registration Statement under the Securities Act of 1933, as
amended (the "1933 Act"), and the 1940 Act, on Form N-1A as
filed with the Securities and Exchange Commission (the
"Commission");
(e) Notification of Registration of the Company under the 1940 Act
on Form N-8A as filed with the Commission; and
(f) the currently effective Prospectuses and Statements of
Additional Information of the Funds.
3. INVESTMENT ADVISORY SERVICES.
(a) Management of the Funds. The Adviser hereby undertakes to act
as investment adviser to the Funds. The Adviser shall
regularly provide investment advice to the Funds and
continuously supervise the investment and reinvestment of
cash, securities and other property composing the assets of
the Funds and, in furtherance thereof, shall:
(i) supervise all aspects of the operations of the
Company and each Fund;
(ii) obtain and evaluate pertinent economic, statistical
and financial data, as well as other significant
events and developments, which affect the economy
generally, the Funds' investment programs, and the
issuers of securities included in the Funds'
portfolios and the industries in which
<PAGE>
they engage, or which may relate to securities or
other investments which the Adviser may deem
desirable for inclusion in a Fund's portfolio;
(iii) determine which issuers and securities shall be
included in the portfolio of each Fund;
(iv) furnish a continuous investment program for each
Fund;
(v) in its discretion and without prior consultation with
the Company, buy, sell, lend and otherwise trade any
stocks, bonds and other securities and investment
instruments on behalf of each Fund; and
(vi) take, on behalf of each Fund, all actions the Adviser
may deem necessary in order to carry into effect such
investment program and the Adviser's functions as
provided above, including the making of appropriate
periodic reports to the Company's Board of Trustees.
(b) Covenants. The Adviser shall carry out its investment advisory
and supervisory responsibilities in a manner consistent with
the investment objectives, policies, and restrictions provided
in: (i) each Fund's Prospectus and Statement of Additional
Information as revised and in effect from time to time; (ii)
the Company's Trust Instrument, By-Laws or other governing
instruments, as amended from time to time; (iii) the 1940 Act;
(iv) other applicable laws; and (v) such other investment
policies, procedures and/or limitations as may be adopted by
the Company with respect to a Fund and provided to the Adviser
in writing. The Adviser agrees to use reasonable efforts to
manage each Fund so that it will qualify, and continue to
qualify, as a regulated investment company under Subchapter M
of the Internal Revenue Code of 1986, as amended, and
regulations issued thereunder (the "Code"), except as may be
authorized to the contrary by the Company's Board of Trustees.
The management of the Funds by the Adviser shall at all times
be subject to the review of the Company's Board of Trustees.
(c) Books and Records. Pursuant to applicable law, the Adviser
shall keep each Fund's books and records required to be
maintained by, or on behalf of, the Funds with respect to
advisory services rendered hereunder. The Adviser agrees that
all records which it maintains for a Fund are the property of
the Fund and it will promptly surrender any of such records to
the Fund upon the Fund's request. The Adviser further agrees
to preserve for the periods prescribed by Rule 31a-2 under the
1940 Act any such records of the Fund required to be preserved
by such Rule.
(d) Reports, Evaluations and other Services. The Adviser shall
furnish reports, evaluations, information or analyses to the
Company with respect to the Funds and in connection with the
Adviser's services hereunder as the Company's Board of
Trustees may request from time to time or as the Adviser may
otherwise deem to be desirable. The Adviser shall make
recommendations to the Company's
<PAGE>
Board of Trustees with respect to Company policies, and shall
carry out such policies as are adopted by the Board of
Trustees. The Adviser shall, subject to review by the Board of
Trustees, furnish such other services as the Adviser shall
from time to time determine to be necessary or useful to
perform its obligations under this Agreement.
(e) Purchase and Sale of Securities. The Adviser shall place all
orders for the purchase and sale of portfolio securities for
each Fund with brokers or dealers selected by the Adviser,
which may include brokers or dealers affiliated with the
Adviser to the extent permitted by the 1940 Act and the
Company's policies and procedures applicable to the Funds. The
Adviser shall use its best efforts to seek to execute
portfolio transactions at prices which, under the
circumstances, result in total costs or proceeds being the
most favorable to the Funds. In assessing the best overall
terms available for any transaction, the Adviser shall
consider all factors it deems relevant, including the breadth
of the market in the security, the price of the security, the
financial condition and execution capability of the broker or
dealer, research services provided to the Adviser, and the
reasonableness of the commission, if any, both for the
specific transaction and on a continuing basis. In no event
shall the Adviser be under any duty to obtain the lowest
commission or the best net price for any Fund on any
particular transaction, nor shall the Adviser be under any
duty to execute any order in a fashion either preferential to
any Fund relative to other accounts managed by the Adviser or
otherwise materially adverse to such other accounts.
(f) Selection of Brokers or Dealers. In selecting brokers or
dealers qualified to execute a particular transaction, brokers
or dealers may be selected who also provide brokerage and
research services (as those terms are defined in Section 28(e)
of the Securities Exchange Act of 1934) to the Adviser, the
Funds and/or the other accounts over which the Adviser
exercises investment discretion. The Adviser is authorized to
pay a broker or dealer who provides such brokerage and
research services a commission for executing a portfolio
transaction for a Fund which is in excess of the amount of
commission another broker or dealer would have charged for
effecting that transaction if the Adviser determines in good
faith that the total commission is reasonable in relation to
the value of the brokerage and research services provided by
such broker or dealer, viewed in terms of either that
particular transaction or the overall responsibilities of the
Adviser with respect to accounts over which it exercises
investment discretion. The Adviser shall report to the Board
of Trustees of the Company regarding overall commissions paid
by the Funds and their reasonableness in relation to the
benefits to the Funds.
(g) Aggregation of Securities Transactions. In executing portfolio
transactions for a Fund, the Adviser may, to the extent
permitted by applicable laws and regulations, but shall not be
obligated to, aggregate the securities to be sold or purchased
with those of other Funds or its other clients if, in the
Adviser's reasonable judgment, such aggregation (i) will
result in an overall economic
<PAGE>
benefit to the Fund, taking into consideration the
advantageous selling or purchase price, brokerage commission
and other expenses, and trading requirements, and (ii) is not
inconsistent with the policies set forth in the Company's
registration statement and the Fund's Prospectus and Statement
of Additional Information. In such event, the Adviser will
allocate the securities so purchased or sold, and the expenses
incurred in the transaction, in an equitable manner,
consistent with its fiduciary obligations to the Fund and such
other clients.
4. REPRESENTATIONS AND WARRANTIES.
(a) The Adviser hereby represents and warrants to the Company as
follows:
(i) The Adviser is a corporation duly organized and in
good standing under the laws of the State of New York
and is fully authorized to enter into this Agreement
and carry out its duties and obligations hereunder.
(ii) The Adviser is registered as an investment adviser
with the Commission under the Investment Advisers Act
of 1940, as amended (the "Advisers Act"), and is
registered or licensed as an investment adviser under
the laws of all applicable jurisdictions. The Adviser
shall maintain such registrations or licenses in
effect at all times during the term of this
Agreement.
(iii) The Adviser at all times shall provide its best
judgment and effort to the Company in carrying out
the Adviser's obligations hereunder.
(b) The Company hereby represents and warrants to the Adviser as
follows:
(i) The Company has been duly organized as a business
trust under the laws of the State of Delaware and is
authorized to enter into this Agreement and carry out
its terms.
(ii) The Company is registered as an investment company
with the Commission under the 1940 Act and shares of
each Fund are registered for offer and sale to the
public under the 1933 Act and all applicable state
securities laws where currently sold. Such
registrations will be kept in effect during the term
of this Agreement.
5. COMPENSATION. As compensation for the services which the Adviser is
to provide or cause to be provided pursuant to Paragraph 3, each Fund shall pay
to the Adviser out of Fund assets an annual fee, computed and accrued daily and
paid in arrears on the first business day of every month, at the rate set forth
opposite each Fund's name on Schedule A, which shall be a percentage of the
average daily net assets of the Fund (computed in the manner set forth in the
<PAGE>
Fund's most recent Prospectus and Statement of Additional Information)
determined as of the close of business on each business day throughout the
month. At the request of the Adviser, some or all of such fee shall be paid
directly to a Sub-Adviser. The fee for any partial month under this Agreement
shall be calculated on a proportionate basis. In the event that the total
expenses of a Fund exceed the limits on investment company expenses imposed by
any statute or any regulatory authority of any jurisdiction in which shares of
such Fund are qualified for offer and sale, the Adviser will bear the amount of
such excess, except: (i) the Adviser shall not be required to bear such excess
to an extent greater than the compensation due to the Adviser for the period for
which such expense limitation is required to be calculated unless such statute
or regulatory authority shall so require, and (ii) the Adviser shall not be
required to bear the expenses of the Fund to an extent which would result in the
Fund's or Company's inability to qualify as a regulated investment company under
the provisions of Subchapter M of the Code.
6. INTERESTED PERSONS. It is understood that, to the extent consistent
with applicable laws, the Trustees, officers and shareholders of the Company are
or may be or become interested in the Adviser as directors, officers or
otherwise and that directors, officers and shareholders of the Adviser are or
may be or become similarly interested in the Company.
7. EXPENSES. As between the Adviser and the Funds, the Funds will pay
for all their expenses other than those expressly stated to be payable by the
Adviser hereunder, which expenses payable by the Funds shall include, without
limitation, (i) interest and taxes; (ii) brokerage commissions and other costs
in connection with the purchase or sale of securities and other investment
instruments, which the parties acknowledge might be higher than other brokers
would charge when a Fund utilizes a broker which provides brokerage and research
services to the Adviser as contemplated under Paragraph 3 above; (iii) fees and
expenses of the Company's Trustees that are not employees of the Adviser; (iv)
legal and audit expenses; (v) administrator, custodian, pricing and bookkeeping,
registrar and transfer agent fees and expenses; (vi) fees and expenses related
to the registration and qualification of the Funds' shares for distribution
under state and federal securities laws; (vii) expenses of printing and mailing
reports and notices and proxy material to shareholders, unless otherwise
required; (viii) all other expenses incidental to holding meetings of
shareholders, including proxy solicitations therefor, unless otherwise required;
(ix) expenses of typesetting for printing Prospectuses and Statements of
Additional Information and supplements thereto; (x) expenses of printing and
mailing Prospectuses and Statements of Additional Information and supplements
thereto sent to existing shareholders; (xi) insurance premiums for fidelity
bonds and other coverage to the extent approved by the Company's Board of
Trustees; (xii) association membership dues authorized by the Company's Board of
Trustees; and (xiii) such non-recurring or extraordinary expenses as may arise,
including those relating to actions, suits or proceedings to which the Company
is a party (or to which the Funds' assets are subject) and any legal obligation
for which the Company may have to provide indemnification to the Company's
Trustees and officers.
8. NON-EXCLUSIVE SERVICES; LIMITATION OF ADVISER'S LIABILITY. The
services of the Adviser to the Funds are not to be deemed exclusive and the
Adviser may render similar services to others and engage in other activities.
The Adviser and its affiliates may enter into
<PAGE>
other agreements with the Funds and the Company for providing additional
services to the Funds and the Company which are not covered by this Agreement,
and to receive additional compensation for such services. In the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of
obligations or duties hereunder on the part of the Adviser, or a breach of
fiduciary duty with respect to receipt of compensation, neither the Adviser nor
any of its directors, officers, shareholders, agents, or employees shall be
liable or responsible to the Company, the Funds or to any shareholder of the
Funds for any error of judgment or mistake of law or for any act or omission in
the course of, or connected with, rendering services hereunder or for any loss
suffered by the Company, a Fund or any shareholder of a Fund in connection with
the performance of this Agreement.
9. EFFECTIVE DATE; MODIFICATIONS; TERMINATION. This Agreement shall
become effective on March 1, 1997, provided that it shall have been approved by
a majority of the outstanding voting securities of each Fund, in accordance with
the requirements of the 1940 Act, or such later date as may be agreed by the
parties following such shareholder approval.
(a) This Agreement shall continue in force until December 31,
1997. Thereafter, this Agreement shall continue in effect as
to each Fund for successive annual periods, provided such
continuance is specifically approved at least annually (i) by
a vote of the majority of the Trustees of the Company who are
not parties to this Agreement or interested persons of any
such party, cast in person at a meeting called for the purpose
of voting on such approval and (ii) by a vote of the Board of
Trustees of the Company or a majority of the outstanding
voting shares of the Fund.
(b) The modification of any of the non-material terms of this
Agreement may be approved by a vote of a majority of those
Trustees of the Company who are not interested persons of any
party to this Agreement, cast in person at a meeting called
for the purpose of voting on such approval.
(c) Notwithstanding the foregoing provisions of this Paragraph 9,
either party hereto may terminate this Agreement at any time
on sixty (60) days' prior written notice to the other, without
payment of any penalty. Such a termination by the Company may
be effected severally as to any particular Fund, and shall be
effected as to any Fund by vote of the Company's Board of
Trustees or by vote of a majority of the outstanding voting
securities of the Fund. This Agreement shall terminate
automatically in the event of its assignment.
10. LIMITATION OF LIABILITY OF TRUSTEES AND SHAREHOLDERS. The Adviser
acknowledges the following limitation of liability:
The terms "The Victory Portfolios" and "Trustees" refer, respectively,
to the trust created and the Trustees, as trustees but not individually or
personally, acting from time to time under the Trust Instrument, to which
reference is hereby made and a copy of which is on file
<PAGE>
at the office of the Secretary of State of the State of Delaware, such reference
being inclusive of any and all amendments thereto so filed or hereafter filed.
The obligations of "The Victory Portfolios" entered into in the name or on
behalf thereof by any of the Trustees, representatives or agents are made not
individually, but in such capacities and are not binding upon any of the
Trustees, shareholders or representatives of the Company personally, but bind
only the assets of the Company, and all persons dealing with the Company or a
Fund must look solely to the assets of the Company or Fund for the enforcement
of any claims against the Company or Fund.
11. SERVICE MARK. The service mark of the Company and the name
"Victory" (and derivatives thereof) have been licensed to the Company by
KeyCorp, through its subsidiary Key Trust Company ("Key Trust"), an affiliate of
the Adviser, pursuant to a License Agreement dated June 21, 1993, and their
continued use is subject to the right of Key Trust to withdraw this permission
under the License Agreement in the event the Adviser or another subsidiary of
KeyCorp is not the investment adviser to the Company.
12. CERTAIN DEFINITIONS. The terms "vote of a majority of the
outstanding voting securities," "assignment," "control," and "interested
persons," when used herein, shall have the respective meanings specified in the
1940 Act. References in this Agreement to the 1940 Act and the Advisers Act
shall be construed as references to such laws as now in effect or as hereafter
amended, and shall be understood as inclusive of any applicable rules,
interpretations and/or orders adopted or issued thereunder by the Commission.
13. INDEPENDENT CONTRACTOR. The Adviser shall for all purposes herein
be deemed to be an independent contractor and shall, unless otherwise expressly
provided herein or authorized by the Board of Trustees of the Company from time
to time, have no authority to act for or represent a Fund in any way or
otherwise be deemed an agent of a Fund.
14. STRUCTURE OF AGREEMENT. The Company is entering into this Agreement
on behalf of the respective Funds severally and not jointly. The
responsibilities and benefits set forth in this Agreement shall refer to each
Fund severally and not jointly. No Fund shall have any responsibility for any
obligation of any other Fund arising out of this Agreement. Without otherwise
limiting the generality of the foregoing:
(a) any breach of any term of this Agreement regarding the Company
with respect to any one Fund shall not create a right or
obligation with respect to any other Fund;
(b) under no circumstances shall the Adviser have the right to set
off claims relating to a Fund by applying property of any
other Fund; and
(c) the business and contractual relationships created by this
Agreement, consideration for entering into this Agreement, and
the consequences of such relationship and consideration relate
solely to the Company and the particular Fund to which such
relationship and consideration applies.
<PAGE>
This Agreement is intended to govern only the relationships between the
Adviser, on the one hand, and the Company and the Funds, on the other hand, and
(except as specifically provided above in this Paragraph 14) is not intended to
and shall not govern (i) the relationship between the Company and any Fund or
(ii) the relationships among the respective Funds.
15. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of Ohio, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act or the Advisers Act.
16. SEVERABILITY. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby and, to this extent, the provisions
of this Agreement shall be deemed to be severable.
17. NOTICES. Notices of any kind to be given to the Company hereunder
by the Adviser shall be in writing and shall be duly given if mailed or
delivered to 3435 Stelzer Road, Columbus, Ohio 43219-3035, Attention: George O.
Martinez, Esq.; with a copy to Kramer, Levin, Naftalis & Frankel, 919 Third
Avenue, New York, New York, 10022, Attention: Carl Frischling, Esq., or at such
other address or to such individual as shall be so specified by the Company to
the Adviser. Notices of any kind to be given to the Adviser hereunder by the
Company shall be in writing and shall be duly given if mailed or delivered to
the Adviser at 127 Public Square, Cleveland, Ohio 44114-1306, Attention: William
G. Spears with a copy to William J. Blake, Esq., or at such other address or to
such individual as shall be so specified by the Adviser to the Company. Notices
shall be effective upon delivery.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
written above.
THE VICTORY PORTFOLIOS KEY ASSET MANAGEMENT INC.
By: /s/Scott A. Englehart By: /s/Kathleen A. Dennis
------------------------ -------------------------------
Name: Scott A. Englehart Name: Kathleen A. Dennis
Title: Secretary Title: Senior Managing Director
<PAGE>
Schedule A
Name of Fund Fee*
1. The Victory Balanced Fund 1.00%
2. The Victory Diversified Stock Fund .65%
3. The Victory Government Mortgage Fund .50%
4. The Victory Growth Fund 1.00%
5. The Victory Intermediate Income Fund .75%
6. The Victory International Growth Fund 1.10%
7. The Victory Investment Quality Bond Fund .75%
8. The Victory Limited Term Income Fund .50%
9. The Victory Ohio Municipal Bond Fund .60%
10. The Victory Ohio Regional Stock Fund .75%
11. The Victory Prime Obligations Fund .35%
12. The Victory Special Value Fund 1.00%
13. The Victory Stock Index Fund .60%
14. The Victory Tax-Free Money Market Fund .35%
15. The Victory U.S. Government Obligations Fund .35%
16. The Victory Value Fund 1.00%
17. The Victory Financial Reserves Fund .50%
18. The Victory Fund for Income .50%
19. The Victory Government Bond Fund .55%
20. The Victory Institutional Money Market Fund .25%
21. The Victory National Municipal Bond Fund .55%
22. The Victory New York Tax-Free Fund .55%
23. The Victory Ohio Municipal Money Market Fund .50%
24. The Victory Special Growth Fund 1.00%
- --------------------
* As a percentage of average daily net assets. Note, however, that the
Adviser shall have the right, but not the obligation, to voluntarily
waive any portion of the advisory fee from time to time. Any such
voluntary waiver will be irrevocable and determined in advance of
rendering investment advisory services by the Adviser, and shall be in
writing and signed by the parties hereto.
INVESTMENT ADVISORY AGREEMENT
BETWEEN
THE VICTORY PORTFOLIOS
AND
KEY ASSET MANAGEMENT INC.
AGREEMENT made as of the 1st day of March, 1997, by and between The
Victory Portfolios, a Delaware business trust which may issue one or more series
of shares of beneficial interest (the "Company"), and Key Asset Management Inc.,
a New York corporation (the "Adviser").
WHEREAS, the Company is registered as an open-end, management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Company desires to retain the Adviser to furnish
investment advisory services to the funds listed on Schedule A (each, a "Fund"
and collectively, the "Funds"), and the Adviser represents that it is willing
and possesses legal authority to so furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT.
(a) General. The Company hereby appoints the Adviser to act as
investment adviser to the Funds for the period and on the
terms set forth in this Agreement. The Adviser accepts such
appointment and agrees to furnish the services herein set
forth for the compensation herein provided.
(b) Employees of Affiliates. The Adviser may, in its discretion,
provide such services through its own employees or the
employees of one or more affiliated companies that are
qualified to act as an investment adviser to the Company under
applicable laws and are under the control of KeyCorp, the
indirect parent of the Adviser; provided that (i) all persons,
when providing services hereunder, are functioning as part of
an organized group of persons, and (ii) such organized group
of persons is managed at all times by authorized officers of
the Adviser.
(c) Sub-Advisers. It is understood and agreed that the Adviser may
from time to time employ or associate with such other entities
or persons as the Adviser believes appropriate to assist in
the performance of this Agreement with respect to a particular
Fund or Funds (each a "Sub-Adviser"), and that any such
Sub-Adviser shall have all of the rights and powers of the
Adviser set forth in this Agreement; provided that a Fund
shall not pay any additional compensation for any Sub- Adviser
and the Adviser shall be as fully responsible to the Company
for the acts and omissions of the Sub-Adviser as it is for its
own acts and omissions; and
<PAGE>
provided further that the retention of any Sub-Adviser shall
be approved in advance by (i) the Board of Trustees of the
Company and (ii) the shareholders of the relevant Fund if
required under any applicable provisions of the 1940 Act or
any exemptive relief granted thereunder. The Adviser will
review, monitor and report to the Company's Board of Trustees
regarding the performance and investment procedures of any
Sub-Adviser. In the event that the services of any Sub-Adviser
are terminated, the Adviser may provide investment advisory
services pursuant to this Agreement to the Fund without a
Sub-Adviser or employ another Sub-Adviser without further
shareholder approval, to the extent consistent with the 1940
Act or any exemptive relief granted thereunder. A Sub-Adviser
may be an affiliate of the Adviser.
2. DELIVERY OF DOCUMENTS. The Company has delivered to the Adviser
copies of each of the following documents along with all amendments thereto
through the date hereof, and will promptly deliver to it all future amendments
and supplements thereto, if any:
(a) the Company's Trust Instrument;
(b) the By-Laws of the Company;
(c) resolutions of the Board of Trustees of the Company
authorizing the execution and delivery of this Agreement;
(d) the most recent Post-Effective Amendment to the Company's
Registration Statement under the Securities Act of 1933, as
amended (the "1933 Act"), and the 1940 Act, on Form N-1A as
filed with the Securities and Exchange Commission (the
"Commission");
(e) Notification of Registration of the Company under the 1940 Act
on Form N-8A as filed with the Commission; and
(f) the currently effective Prospectuses and Statements of
Additional Information of the Funds.
3. INVESTMENT ADVISORY SERVICES.
(a) Management of the Funds. The Adviser hereby undertakes to act
as investment adviser to the Funds. The Adviser shall
regularly provide investment advice to the Funds and
continuously supervise the investment and reinvestment of
cash, securities and other property composing the assets of
the Funds and, in furtherance thereof, shall:
(i) supervise all aspects of the operations of the
Company and each Fund;
(ii) obtain and evaluate pertinent economic, statistical
and financial data, as well as other significant
events and developments, which affect the
2
<PAGE>
economy generally, the Funds' investment programs,
and the issuers of securities included in the Funds'
portfolios and the industries in which they engage,
or which may relate to securities or other
investments which the Adviser may deem desirable for
inclusion in a Fund's portfolio;
(iii) determine which issuers and securities shall be
included in the portfolio of each Fund;
(iv) furnish a continuous investment program for each
Fund;
(v) in its discretion and without prior consultation with
the Company, buy, sell, lend and otherwise trade any
stocks, bonds and other securities and investment
instruments on behalf of each Fund; and
(vi) take, on behalf of each Fund, all actions the Adviser
may deem necessary in order to carry into effect such
investment program and the Adviser's functions as
provided above, including the making of appropriate
periodic reports to the Company's Board of Trustees.
(b) Covenants. The Adviser shall carry out its investment advisory
and supervisory responsibilities in a manner consistent with
the investment objectives, policies, and restrictions provided
in: (i) each Fund's Prospectus and Statement of Additional
Information as revised and in effect from time to time; (ii)
the Company's Trust Instrument, By-Laws or other governing
instruments, as amended from time to time; (iii) the 1940 Act;
(iv) other applicable laws; and (v) such other investment
policies, procedures and/or limitations as may be adopted by
the Company with respect to a Fund and provided to the Adviser
in writing. The Adviser agrees to use reasonable efforts to
manage each Fund so that it will qualify, and continue to
qualify, as a regulated investment company under Subchapter M
of the Internal Revenue Code of 1986, as amended, and
regulations issued thereunder (the "Code"), except as may be
authorized to the contrary by the Company's Board of Trustees.
The management of the Funds by the Adviser shall at all times
be subject to the review of the Company's Board of Trustees.
(c) Books and Records. Pursuant to applicable law, the Adviser
shall keep each Fund's books and records required to be
maintained by, or on behalf of, the Funds with respect to
advisory services rendered hereunder. The Adviser agrees that
all records which it maintains for a Fund are the property of
the Fund and it will promptly surrender any of such records to
the Fund upon the Fund's request. The Adviser further agrees
to preserve for the periods prescribed by Rule 31a-2 under the
1940 Act any such records of the Fund required to be preserved
by such Rule.
(d) Reports, Evaluations and other Services. The Adviser shall
furnish reports, evaluations, information or analyses to the
Company with respect to the Funds and in connection with the
Adviser's services hereunder as the Company's Board of
Trustees may request from time to time or as the Adviser may
otherwise deem to
3
<PAGE>
be desirable. The Adviser shall make recommendations to the
Company's Board of Trustees with respect to Company policies,
and shall carry out such policies as are adopted by the Board
of Trustees. The Adviser shall, subject to review by the Board
of Trustees, furnish such other services as the Adviser shall
from time to time determine to be necessary or useful to
perform its obligations under this Agreement.
(e) Purchase and Sale of Securities. The Adviser shall place all
orders for the purchase and sale of portfolio securities for
each Fund with brokers or dealers selected by the Adviser,
which may include brokers or dealers affiliated with the
Adviser to the extent permitted by the 1940 Act and the
Company's policies and procedures applicable to the Funds. The
Adviser shall use its best efforts to seek to execute
portfolio transactions at prices which, under the
circumstances, result in total costs or proceeds being the
most favorable to the Funds. In assessing the best overall
terms available for any transaction, the Adviser shall
consider all factors it deems relevant, including the breadth
of the market in the security, the price of the security, the
financial condition and execution capability of the broker or
dealer, research services provided to the Adviser, and the
reasonableness of the commission, if any, both for the
specific transaction and on a continuing basis. In no event
shall the Adviser be under any duty to obtain the lowest
commission or the best net price for any Fund on any
particular transaction, nor shall the Adviser be under any
duty to execute any order in a fashion either preferential to
any Fund relative to other accounts managed by the Adviser or
otherwise materially adverse to such other accounts.
(f) Selection of Brokers or Dealers. Selection of Brokers or
Dealers. In selecting brokers or dealers qualified to execute
a particular transaction, brokers or dealers may be selected
who also provide brokerage and research services (as those
terms are defined in Section 28(e) of the Securities Exchange
Act of 1934) to the Adviser and/or the other accounts over
which the Adviser exercises investment discretion. The Adviser
is authorized to pay a broker or dealer who provides such
brokerage and research services a commission for executing a
portfolio transaction for the Fund which is in excess of the
amount of commission another broker or dealer would have
charged for effecting that transaction if the Adviser
determines in good faith that the total commission is
reasonable in relation to the value of the brokerage and
research services provided by such broker or dealer, viewed in
terms of either that particular transaction or the overall
responsibilities of the Adviser with respect to accounts over
which it exercises investment discretion. The Adviser shall
report to the Board of Trustees of the Company regarding
overall commissions paid by the Fund and their reasonableness
in relation to their benefits to the Fund. Any transactions
for the Fund that are effected through an affiliated
broker-dealer on a national securities exchange of which such
broker- dealer is a member will be effected in accordance with
Section 11(a) of the Securities Exchange Act of 1934, as
amended, and the regulations promulgated thereunder, including
Rule 11a2-2(T). The Fund hereby authorizes any such broker or
dealer to retain commissions for effecting such transactions
and to pay
4
<PAGE>
out of such retained commissions any compensation due to
others in connection with effectuating those transactions.
(g) Aggregation of Securities Transactions. In executing portfolio
transactions for a Fund, the Adviser may, to the extent
permitted by applicable laws and regulations, but shall not be
obligated to, aggregate the securities to be sold or purchased
with those of other Funds or its other clients if, in the
Adviser's reasonable judgment, such aggregation (i) will
result in an overall economic benefit to the Fund, taking into
consideration the advantageous selling or purchase price,
brokerage commission and other expenses, and trading
requirements, and (ii) is not inconsistent with the policies
set forth in the Company's registration statement and the
Fund's Prospectus and Statement of Additional Information. In
such event, the Adviser will allocate the securities so
purchased or sold, and the expenses incurred in the
transaction, in an equitable manner, consistent with its
fiduciary obligations to the Fund and such other clients.
4. REPRESENTATIONS AND WARRANTIES.
(a) The Adviser hereby represents and warrants to the Company as
follows:
(i) The Adviser is a corporation duly organized and in
good standing under the laws of the State of New York
and is fully authorized to enter into this Agreement
and carry out its duties and obligations hereunder.
(ii) The Adviser is registered as an investment adviser
with the Commission under the Investment Advisers Act
of 1940, as amended (the "Advisers Act"), and is
registered or licensed as an investment adviser under
the laws of all applicable jurisdictions. The Adviser
shall maintain such registrations or licenses in
effect at all times during the term of this
Agreement.
(iii) The Adviser at all times shall provide its best
judgment and effort to the Company in carrying out
the Adviser's obligations hereunder.
(b) The Company hereby represents and warrants to the Adviser as
follows:
(i) The Company has been duly organized as a business
trust under the laws of the State of Delaware and is
authorized to enter into this Agreement and carry out
its terms.
(ii) The Company is registered as an investment company
with the Commission under the 1940 Act and shares of
each Fund are registered for offer and sale to the
public under the 1933 Act and all applicable state
5
<PAGE>
securities laws where currently sold. Such
registrations will be kept in effect during the term
of this Agreement.
5. COMPENSATION. As compensation for the services which the Adviser is
to provide or cause to be provided pursuant to Paragraph 3, each Fund shall pay
to the Adviser out of Fund assets an annual fee, computed and accrued daily and
paid in arrears on the first business day of every month, at the rate set forth
opposite each Fund's name on Schedule A, which shall be a percentage of the
average daily net assets of the Fund (computed in the manner set forth in the
Fund's most recent Prospectus and Statement of Additional Information)
determined as of the close of business on each business day throughout the
month. At the request of the Adviser, some or all of such fee shall be paid
directly to a Sub-Adviser. The fee for any partial month under this Agreement
shall be calculated on a proportionate basis. In the event that the total
expenses of a Fund exceed the limits on investment company expenses imposed by
any statute or any regulatory authority of any jurisdiction in which shares of
such Fund are qualified for offer and sale, the Adviser will bear the amount of
such excess, except: (i) the Adviser shall not be required to bear such excess
to an extent greater than the compensation due to the Adviser for the period for
which such expense limitation is required to be calculated unless such statute
or regulatory authority shall so require, and (ii) the Adviser shall not be
required to bear the expenses of the Fund to an extent which would result in the
Fund's or Company's inability to qualify as a regulated investment company under
the provisions of Subchapter M of the Code.
6. INTERESTED PERSONS. It is understood that, to the extent consistent
with applicable laws, the Trustees, officers and shareholders of the Company are
or may be or become interested in the Adviser as directors, officers or
otherwise and that directors, officers and shareholders of the Adviser are or
may be or become similarly interested in the Company.
7. EXPENSES. As between the Adviser and the Funds, the Funds will pay
for all their expenses other than those expressly stated to be payable by the
Adviser hereunder, which expenses payable by the Funds shall include, without
limitation, (i) interest and taxes; (ii) brokerage commissions and other costs
in connection with the purchase or sale of securities and other investment
instruments, which the parties acknowledge might be higher than other brokers
would charge when a Fund utilizes a broker which provides brokerage and research
services to the Adviser as contemplated under Paragraph 3 above; (iii) fees and
expenses of the Company's Trustees that are not employees of the Adviser; (iv)
legal and audit expenses; (v) administrator, custodian, pricing and bookkeeping,
registrar and transfer agent fees and expenses; (vi) fees and expenses related
to the registration and qualification of the Funds' shares for distribution
under state and federal securities laws; (vii) expenses of printing and mailing
reports and notices and proxy material to shareholders, unless otherwise
required; (viii) all other expenses incidental to holding meetings of
shareholders, including proxy solicitations therefor, unless otherwise required;
(ix) expenses of typesetting for printing Prospectuses and Statements of
Additional Information and supplements thereto; (x) expenses of printing and
mailing Prospectuses and Statements of Additional Information and supplements
thereto sent to existing shareholders; (xi) insurance premiums for fidelity
bonds and other coverage to the extent approved by the Company's Board of
Trustees; (xii) association membership dues authorized by the Company's Board of
Trustees;
6
<PAGE>
and (xiii) such non-recurring or extraordinary expenses as may arise, including
those relating to actions, suits or proceedings to which the Company is a party
(or to which the Funds' assets are subject) and any legal obligation for which
the Company may have to provide indemnification to the Company's Trustees and
officers.
8. NON-EXCLUSIVE SERVICES; LIMITATION OF ADVISER'S LIABILITY. The
services of the Adviser to the Funds are not to be deemed exclusive and the
Adviser may render similar services to others and engage in other activities.
The Adviser and its affiliates may enter into other agreements with the Funds
and the Company for providing additional services to the Funds and the Company
which are not covered by this Agreement, and to receive additional compensation
for such services. In the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of obligations or duties hereunder on the part
of the Adviser, or a breach of fiduciary duty with respect to receipt of
compensation, neither the Adviser nor any of its directors, officers,
shareholders, agents, or employees shall be liable or responsible to the
Company, the Funds or to any shareholder of the Funds for any error of judgment
or mistake of law or for any act or omission in the course of, or connected
with, rendering services hereunder or for any loss suffered by the Company, a
Fund or any shareholder of a Fund in connection with the performance of this
Agreement.
9. EFFECTIVE DATE; MODIFICATIONS; TERMINATION. This Agreement shall
become effective on March 1, 1997, provided that it shall have been approved by
a majority of the outstanding voting securities of each Fund, in accordance with
the requirements of the 1940 Act, or such later date as may be agreed by the
parties following such shareholder approval.
(a) This Agreement shall continue in force until February 28,
1999. Thereafter, this Agreement shall continue in effect as
to each Fund for successive annual periods, provided such
continuance is specifically approved at least annually (i) by
a vote of the majority of the Trustees of the Company who are
not parties to this Agreement or interested persons of any
such party, cast in person at a meeting called for the purpose
of voting on such approval and (ii) by a vote of the Board of
Trustees of the Company or a majority of the outstanding
voting shares of the Fund.
(b) The modification of any of the non-material terms of this
Agreement may be approved by a vote of a majority of those
Trustees of the Company who are not interested persons of any
party to this Agreement, cast in person at a meeting called
for the purpose of voting on such approval.
(c) Notwithstanding the foregoing provisions of this Paragraph 9,
either party hereto may terminate this Agreement at any time
on sixty (60) days' prior written notice to the other, without
payment of any penalty. Such a termination by the Company may
be effected severally as to any particular Fund, and shall be
effected as to any Fund by vote of the Company's Board of
Trustees or by vote of a majority of the
7
<PAGE>
outstanding voting securities of the Fund. This Agreement
shall terminate automatically in the event of its assignment.
10. LIMITATION OF LIABILITY OF TRUSTEES AND SHAREHOLDERS. The Adviser
acknowledges the following limitation of liability:
The terms "The Victory Portfolios" and "Trustees" refer, respectively,
to the trust created and the Trustees, as trustees but not individually or
personally, acting from time to time under the Trust Instrument, to which
reference is hereby made and a copy of which is on file at the office of the
Secretary of State of the State of Delaware, such reference being inclusive of
any and all amendments thereto so filed or hereafter filed. The obligations of
"The Victory Portfolios" entered into in the name or on behalf thereof by any of
the Trustees, representatives or agents are made not individually, but in such
capacities and are not binding upon any of the Trustees, shareholders or
representatives of the Company personally, but bind only the assets of the
Company, and all persons dealing with the Company or a Fund must look solely to
the assets of the Company or Fund for the enforcement of any claims against the
Company or Fund.
11. SERVICE MARK. The service mark of the Company and the name
"Victory" (and derivatives thereof) have been licensed to the Company by
KeyCorp, through its subsidiary Key Trust Company ("Key Trust"), an affiliate of
the Adviser, pursuant to a License Agreement dated June 21, 1993, and their
continued use is subject to the right of Key Trust to withdraw this permission
under the License Agreement in the event the Adviser or another subsidiary of
KeyCorp is not the investment adviser to the Company.
12. CERTAIN DEFINITIONS. The terms "vote of a majority of the
outstanding voting securities," "assignment," "control," and "interested
persons," when used herein, shall have the respective meanings specified in the
1940 Act. References in this Agreement to the 1940 Act and the Advisers Act
shall be construed as references to such laws as now in effect or as hereafter
amended, and shall be understood as inclusive of any applicable rules,
interpretations and/or orders adopted or issued thereunder by the Commission.
13. INDEPENDENT CONTRACTOR. The Adviser shall for all purposes herein
be deemed to be an independent contractor and shall, unless otherwise expressly
provided herein or authorized by the Board of Trustees of the Company from time
to time, have no authority to act for or represent a Fund in any way or
otherwise be deemed an agent of a Fund.
14. STRUCTURE OF AGREEMENT. The Company is entering into this Agreement
on behalf of the respective Funds severally and not jointly. The
responsibilities and benefits set forth in this Agreement shall refer to each
Fund severally and not jointly. No Fund shall have any responsibility for any
obligation of any other Fund arising out of this Agreement. Without otherwise
limiting the generality of the foregoing:
(a) any breach of any term of this Agreement regarding the Company
with respect to any one Fund shall not create a right or
obligation with respect to any other Fund;
8
<PAGE>
(b) under no circumstances shall the Adviser have the right to set
off claims relating to a Fund by applying property of any
other Fund; and
(c) the business and contractual relationships created by this
Agreement, consideration for entering into this Agreement, and
the consequences of such relationship and consideration relate
solely to the Company and the particular Fund to which such
relationship and consideration applies.
This Agreement is intended to govern only the relationships between the
Adviser, on the one hand, and the Company and the Funds, on the other hand, and
(except as specifically provided above in this Paragraph 14) is not intended to
and shall not govern (i) the relationship between the Company and any Fund or
(ii) the relationships among the respective Funds.
15. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of Ohio, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act or the Advisers Act.
16. SEVERABILITY. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby and, to this extent, the provisions
of this Agreement shall be deemed to be severable.
17. NOTICES. Notices of any kind to be given to the Company hereunder
by the Adviser shall be in writing and shall be duly given if mailed or
delivered to 3435 Stelzer Road, Columbus, Ohio 43219-3035, Attention: George O.
Martinez, Esq.; with a copy to Kramer, Levin, Naftalis & Frankel, 919 Third
Avenue, New York, New York, 10022, Attention: Carl Frischling, Esq., or at such
other address or to such individual as shall be so specified by the Company to
the Adviser. Notices of any kind to be given to the Adviser hereunder by the
Company shall be in writing and shall be duly given if mailed or delivered to
the Adviser at 127 Public Square, Cleveland, Ohio 44114-1306, Attention: W.
Christopher Maxwell with a copy to William Blake, Esq., or at such other address
or to such individual as shall be so specified by the Adviser to the Company.
Notices shall be effective upon delivery.
9
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
written above.
THE VICTORY PORTFOLIOS KEY ASSET MANAGEMENT INC.
By: /s/Scott A. Englehart By: /s/W. Christopher Maxwell
-------------------------- ----------------------------------
Name: Scott A. Englehart Name: W. Christopher Maxwell
Title: Secretary Title: Senior Managing Director
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<PAGE>
Schedule A
Name of Fund Fee*
1. The Victory Lakefront Fund 1.00%
2. The Victory Real Estate Investment Fund 1.00%
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* As a percentage of average daily net assets. Note, however, that the
Adviser shall have the right, but not the obligation, to voluntarily
waive any portion of the advisory fee from time to time. Any such
voluntary waiver will be irrevocable and determined in advance of
rendering investment advisory services by the Adviser, and shall be in
writing and signed by the parties hereto.
INVESTMENT SUBADVISORY AGREEMENT
BETWEEN
KEY ASSET MANAGEMENT INC.
AND
LAKEFRONT CAPITAL INVESTORS, INC.
AGREEMENT made as of the 1st day of March, 1997 by and between Key
Asset Management Inc., a New York corporation (the "Adviser"), and Lakefront
Capital Investors, Inc., an Ohio corporation (the "Sub-Adviser").
WHEREAS, the Adviser is a registered investment adviser under the
Investment Advisers Act of 1940, as amended (the "Advisers Act"); and
WHEREAS, the Adviser provides investment advisory services to the
series of The Victory Portfolios, a Delaware business trust (the "Company"),
which is registered as an open-end, management investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"), pursuant to an
Investment Advisory Agreement dated March 1, 1997 (the "Advisory Agreement");
and
WHEREAS, the Adviser desires to retain the Sub-Adviser to furnish
investment subadvisory services in connection with the Victory Lakefront Fund
(the "Fund"), a series of the Company, and the Sub-Adviser represents that it is
willing and possesses legal authority to so furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. APPOINTMENT. The Adviser hereby appoints the Sub-Adviser to act as
investment subadviser to the Fund for the period and on the terms set forth in
this Agreement. The Sub- Adviser accepts such appointment and agrees to furnish
the services herein set forth for the compensation herein provided.
2. DELIVERY OF DOCUMENTS. The Adviser has delivered to the Sub-Adviser
copies of each of the following documents along with all amendments thereto
through the date hereof, and will promptly deliver to it all future amendments
and supplements thereto, if any:
(a) the Company's Trust Instrument ;
(b) the By-Laws of the Company;
(c) resolutions of the Board of Trustees of the Company
authorizing the execution and delivery of the Advisory
Agreement and this Agreement;
<PAGE>
(d) the most recent Post-Effective Amendment to the Company's
Registration Statement under the Securities Act of 1933, as
amended (the "1933 Act"), and the 1940 Act, on Form N-1A as
filed with the Securities and Exchange Commission (the
"Commission");
(e) Notification of Registration of the Company under the 1940 Act
on Form N-8A as filed with the Commission; and
(f) the currently effective Prospectus and Statement of Additional
Information of the Fund.
3. INVESTMENT ADVISORY SERVICES.
(a) Management of the Fund. The Sub-Adviser hereby undertakes to
act as investment subadviser to the Fund. The Sub-Adviser
shall regularly provide investment advice to the Fund and
continuously supervise the investment and reinvestment of
cash, securities and other property composing the assets of
the Fund and, in furtherance thereof, shall:
(i) obtain and evaluate pertinent economic, statistical
and financial data, as well as other significant
events and developments, which affect the economy
generally, the Fund's investment programs, and the
issuers of securities included in the Fund's
portfolios and the industries in which they engage,
or which may relate to securities or other
investments which the Sub-Adviser may deem desirable
for inclusion in a Fund's portfolio;
(ii) determine which issuers and securities shall be
included in the portfolio of the Fund;
(iii) furnish a continuous investment program for the Fund;
(iv) in its discretion, and without prior consultation,
buy, sell, lend and otherwise trade any stocks, bonds
and other securities and investment instruments on
behalf of the Fund; and
(v) take, on behalf of the Fund, all actions the
Sub-Adviser may deem necessary in order to carry into
effect such investment program and the Sub-Adviser's
functions as provided above, including the making of
appropriate periodic reports to the Adviser and the
Company's Board of Trustees.
(b) Covenants. The Sub-Adviser shall carry out its investment
subadvisory responsibilities in a manner consistent with the
investment objectives, policies, and restrictions provided in:
(i) the Fund's Prospectus and Statement of Additional
Information as revised and in effect from time to time; (ii)
the Company's Trust Instrument, By-Laws or other governing
instruments, as amended from time to
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<PAGE>
time; (iii) the 1940 Act; (iv) other applicable laws; and (v)
such other investment policies, procedures and/or limitations
as may be adopted by the Company or the Adviser with respect
to a Fund and provided to the Sub-Adviser in writing. The
Sub-Adviser agrees to use reasonable efforts to manage each
Fund so that it will qualify, and continue to qualify, as a
regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended, and regulations
issued thereunder (the "Code"), except as may be authorized to
the contrary by the Company's Board of Trustees. The
management of the Fund by the Sub-Adviser shall at all times
be subject to the review of the Adviser and the Company's
Board of Trustees.
(c) Books and Records. Pursuant to applicable law, the Sub-Adviser
shall keep the Fund's books and records required to be
maintained by, or on behalf of, the Fund with respect to
subadvisory services rendered hereunder. The Sub-Adviser
agrees that all records which it maintains for the Fund are
the property of the Fund and it will promptly surrender any of
such records to the Fund upon the Fund's request. The
Sub-Adviser further agrees to preserve for the periods
prescribed by Rule 31a-2 under the 1940 Act any such records
of the Fund required to be preserved by such Rule.
(d) Reports, Evaluations and other Services. The Sub-Adviser shall
furnish reports, evaluations, information or analyses to the
Adviser and the Company with respect to the Fund and in
connection with the Sub-Adviser's services hereunder as the
Adviser and/or the Company's Board of Trustees may request
from time to time or as the Sub-Adviser may otherwise deem to
be reasonably necessary. The Sub- Adviser shall make
recommendations to the Adviser and the Company's Board of
Trustees with respect to the Company's policies, and shall
carry out such policies as are adopted by the Board of
Trustees. The Sub-Adviser may, subject to review by the
Adviser, furnish such other services as the Sub-Adviser shall
from time to time determine to be necessary or useful to
perform its obligations under this Agreement.
(e) Purchase and Sale of Securities. The Sub-Adviser shall place
all orders for the purchase and sale of portfolio securities
for the Fund with brokers or dealers selected by the
Sub-Adviser, which may include brokers or dealers affiliated
with the Adviser or the Sub-Adviser to the extent permitted by
the 1940 Act and the Company's policies and procedures
applicable to the Fund. The Sub-Adviser shall use its best
efforts to seek to execute portfolio transactions at prices
which, under the circumstances, result in total costs or
proceeds being the most favorable to the Fund. In assessing
the best overall terms available for any transaction, the Sub-
Adviser shall consider all factors it deems relevant,
including the breadth of the market in the security, the price
of the security, the financial condition and execution
capability of the broker or dealer, research services provided
to the Sub- Adviser, and the reasonableness of the commission,
if any, both for the specific transaction and on a continuing
basis. In no event shall the Sub-Adviser be under any duty to
obtain the lowest commission or the best net price for the
Fund on any
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<PAGE>
particular transaction, nor shall the Sub-Adviser be under any
duty to execute any order in a fashion either preferential to
the Fund relative to other accounts managed by the Sub-Adviser
or otherwise materially adverse to such other accounts.
(f) Selection of Brokers or Dealers. In selecting brokers or
dealers qualified to execute a particular transaction, brokers
or dealers may be selected who also provide brokerage and
research services (as those terms are defined in Section 28(e)
of the Securities Exchange Act of 1934) to the Sub-Adviser
and/or the other accounts over which the Sub-Adviser exercises
investment discretion. The Sub- Adviser is authorized to pay a
broker or dealer who provides such brokerage and research
services a commission for executing a portfolio transaction
for the Fund which is in excess of the amount of commission
another broker or dealer would have charged for effecting that
transaction if the Sub-Adviser determines in good faith that
the total commission is reasonable in relation to the value of
the brokerage and research services provided by such broker or
dealer, viewed in terms of either that particular transaction
or the overall responsibilities of the Sub- Adviser with
respect to accounts over which it exercises investment
discretion. The Sub-Adviser shall report to the Board of
Trustees of the Company regarding overall commissions paid by
the Fund and their reasonableness in relation to their
benefits to the Fund. Any transactions for the Fund that are
effected through an affiliated broker-dealer on a national
securities exchange of which such broker- dealer is a member
will be effected in accordance with Section 11(a) of the
Securities Exchange Act of 1934, as amended, and the
regulations promulgated thereunder, including Rule 11a2-2(T).
The Fund hereby authorizes any such broker or dealer to retain
commissions for effecting such transactions and to pay out of
such retained commissions any compensation due to others in
connection with effectuating those transactions.
(g) Aggregation of Securities Transactions. In executing portfolio
transactions for the Fund, the Sub-Adviser may, to the extent
permitted by applicable laws and regulations, but shall not be
obligated to, aggregate the securities to be sold or purchased
with those of other Funds or its other clients if, in the
Sub-Adviser's reasonable judgment, such aggregation (i) will
result in an overall economic benefit to the Fund, taking into
consideration the advantageous selling or purchase price,
brokerage commission and other expenses, and trading
requirements, and (ii) is not inconsistent with the policies
set forth in the Company's registration statement and the
Fund's Prospectus and Statement of Additional Information. In
such event, the Sub-Adviser will allocate the securities so
purchased or sold, and the expenses incurred in the
transaction, in an equitable manner, consistent with its
fiduciary obligations to the Fund and such other clients.
-4-
<PAGE>
4. REPRESENTATIONS AND WARRANTIES.
(a) The Sub-Adviser hereby represents and warrants to the Adviser
as follows:
(i) The Sub-Adviser is a corporation duly organized and
in good standing under the laws of the State of Ohio
and is fully authorized to enter into this Agreement
and carry out its duties and obligations hereunder.
(ii) The Sub-Adviser is registered as an investment
adviser with the Commission under the Investment
Advisers Act of 1940 as amended (the "Advisers Act"),
and is registered or licensed as an investment
adviser under the laws of all applicable
jurisdictions. The Sub-Adviser shall maintain such
registrations or licenses in effect at all times
during the term of this Agreement.
(iii) The Sub-Adviser at all times shall provide its best
judgment and effort to the Adviser in carrying out
the Sub-Adviser's obligations hereunder.
(b) The Adviser hereby represents and warrants to the Sub-Adviser
as follows:
(i) The Adviser is a corporation duly organized and in
good standing under the laws of the State of New York
and is fully authorized to enter into this Agreement
and carry out its duties and obligations hereunder.
(ii) The Adviser is registered as an investment adviser
with the Commission under the Advisers Act, and is
registered or licensed as an investment adviser under
the laws of all applicable jurisdictions. The Adviser
shall maintain such registrations or licenses in
effect at all times during the term of this
Agreement.
(iii) The Company has been duly organized as a business
trust under the laws of the State of Delaware.
(iv) The Company is registered as an investment company
with the Commission under the 1940 Act, and shares of
each Fund are registered for offer and sale to the
public under the 1933 Act and all applicable state
securities laws where currently sold. Such
registrations will be kept in effect during the term
of this Agreement.
5. COMPENSATION. As compensation for the services which the Sub-Adviser
is to provide or cause to be provided pursuant to Paragraph 3, the Adviser shall
pay to the Sub-Adviser (or cause to be paid by the Company directly to the
Sub-Adviser) an annual fee equal to .50% of the Fund's average daily net assets
during the preceding month (computed in the manner set forth in the Fund's most
recent Prospectus and Statement of Additional Information),
-5-
<PAGE>
which shall be accrued daily and paid in arrears on the first business day of
each month. Average daily net assets shall be based upon determinations of net
assets made as of the close of business on each business day throughout such
month. The fee for any partial month under this Agreement shall be calculated on
a proportionate basis, based upon average daily net assets for such partial
month. In the event that the total expenses of the Fund exceed the limits on
investment company expenses imposed by any statute or any regulatory authority
of any jurisdiction in which shares of such Fund are qualified for offer and
sale, the Sub-Adviser will bear such excess in an amount which bears the same
ratio to the amount of such excess that the Adviser bears as the amount of
subadvisory fees payable pursuant hereto bears to the amount of advisory fees
payable to the Adviser by the Company under the Advisory Agreement, except: (i)
the Sub-Adviser shall not be required to bear such excess to an extent greater
than the compensation due to the Sub-Adviser for the period for which such
expense limitation is required to be calculated unless such statute or
regulatory authority shall so require, and (ii) the Sub- Adviser shall not be
required to bear the expenses of the Fund to an extent which would result in the
Fund's or Company's inability to qualify as a regulated investment company under
the provisions of the Code. The Sub-Adviser shall have the right, but not the
obligation, to voluntarily waive any portion of the sub-advisory fee from time
to time. Any such voluntary waiver will be irrevocable and determined in advance
of rendering sub-investment advisory services by the Sub-Adviser, and shall be
in writing and signed by the parties hereto.
6. INTERESTED PERSONS. It is understood that, to the extent consistent
with applicable laws, the Trustees, officers and shareholders of the Company or
the Adviser are or may be or become interested in the Sub-Adviser as directors,
officers or otherwise and that directors, officers and shareholders of the
Sub-Adviser are or may be or become similarly interested in the Company or the
Adviser.
7. EXPENSES. The Sub-Adviser will pay all expenses incurred by it in
connection with its activities under this Agreement other than the cost of
securities (including brokerage commissions) purchased for or sold by the Fund.
8. NON-EXCLUSIVE SERVICES; LIMITATION OF SUB-ADVISER'S LIABILITY. The
services of the Sub-Adviser hereunder are not to be deemed exclusive, and the
Sub-Adviser may render similar services to others and engage in other
activities. The Sub-Adviser and its affiliates may enter into other agreements
with the Fund, the Company or the Adviser for providing additional services to
the Fund, the Company or the Adviser which are not covered by this Agreement,
and to receive additional compensation for such services. In the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of
obligations or duties hereunder on the part of the Sub-Adviser, or a breach of
fiduciary duty with respect to receipt of compensation, neither the Sub-Adviser
nor any of its directors, officers, shareholders, agents, or employees shall be
liable or responsible to the Adviser, the Company, the Fund or to any
shareholder of the Fund for any error of judgment or mistake of law or for any
act or omission in the course of, or connected with, rendering services
hereunder or for any loss suffered by the Adviser, the Company, the Fund, or any
shareholder of the Fund in connection with the performance of this Agreement.
-6-
<PAGE>
9. EFFECTIVE DATE; MODIFICATIONS; TERMINATION. This Agreement shall
become effective on March 1, 1997, provided that it shall have been approved by
a majority of the outstanding voting securities of each Fund, in accordance with
the requirements of the 1940 Act, or such later date as may be agreed by the
parties following such shareholder approval.
(a) This Agreement shall continue in force until February 28,
1999. Thereafter, this Agreement shall continue in effect as
to each Fund for successive annual periods, provided such
continuance is specifically approved at least annually (i) by
a vote of the majority of the Trustees of the Company who are
not parties to this Agreement or interested persons of any
such party, cast in person at a meeting called for the purpose
of voting on such approval, and (ii) by a vote of the Board of
Trustees of the Company or a majority of the outstanding
voting securities of the Fund.
(b) The modification of any of the non-material terms of this
Agreement may be approved by a vote of a majority of those
Trustees of the Company who are not interested persons of any
party to this Agreement, cast in person at a meeting called
for the purpose of voting on such approval.
(c) Notwithstanding the foregoing provisions of this Paragraph 9,
either party hereto may terminate this Agreement as to any
Fund at any time on sixty (60) days' prior written notice to
the other, without payment of any penalty. A termination of
the Sub-Adviser may be effected as to any particular Fund by
the Adviser, by a vote of the Company's Board of Trustees, or
by vote of a majority of the outstanding voting securities of
the Fund. This Agreement shall terminate automatically in the
event of its assignment.
10. LIMITATION OF LIABILITY OF TRUSTEES AND SHAREHOLDERS. The
Sub-Adviser acknowledges the following limitation of liability:
The terms "The Victory Portfolios" and "Trustees of The Victory
Portfolios" refer, respectively, to the trust created and the Trustees, as
trustees but not individually or personally, acting from time to time under the
Trust Instrument, to which reference is hereby made and a copy of which is on
file at the office of the Secretary of State of the State of Delaware, such
reference being inclusive of any and all amendments thereto so filed or
hereafter filed. The obligations of "The Victory Portfolios" entered into in the
name or on behalf thereof by any of the Trustees, representatives or agents are
made not individually, but in such capacities and are not binding upon any of
the Trustees, shareholders or representatives of the Company personally, but
bind only the assets of the Company, and all persons dealing with the Company or
a Fund must look solely to the assets of the Company or Fund for the enforcement
of any claims against the Company or Fund.
11. CERTAIN DEFINITIONS. The terms "vote of a majority of the
outstanding voting securities," "assignment," "control," and "interested
persons," when used herein, shall have the
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<PAGE>
respective meanings specified in the 1940 Act. References in this Agreement to
the 1940 Act and the Advisers Act shall be construed as references to such laws
as now in effect or as hereafter amended, and shall be understood as inclusive
of any applicable rules, interpretations and/or orders adopted or issued
thereunder by the Commission.
12. INDEPENDENT CONTRACTOR. The Sub-Adviser shall for all purposes
herein be deemed to be an independent contractor and shall, unless otherwise
expressly provided herein or authorized by the Board of Trustees of the Company
from time to time, have no authority to act for or represent a Fund in any way
or otherwise be deemed an agent of the Fund.
13. STRUCTURE OF AGREEMENT. This Agreement is intended to govern only
the relationship between the Adviser, on the one hand, and the Sub-Adviser, on
the other hand, and is not intended to and shall not govern (i) the relationship
between the Adviser or Sub-Adviser and the Fund or any series of the Company, or
(ii) the relationships among the respective series of the Company.
14. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of Ohio, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act or the Advisers Act.
15. SEVERABILITY. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby and, to this extent, the provisions
of this Agreement shall be deemed to be severable.
16. NOTICES. Notices of any kind to be given to the Adviser hereunder
by the Sub-Adviser shall be in writing and shall be duly given if mailed or
delivered to the Adviser at 127 Public Square, Cleveland, Ohio 44114-1306,
Attention: W. Christopher Maxwell; with a copy to William Blake, Esq., or at
such other address or to such individual as shall be so specified by the Adviser
to the Sub-Adviser. Notices of any kind to be given to the Sub-Adviser hereunder
by the Adviser shall be in writing and shall be duly given if mailed or
delivered to the Sub-Adviser at The Hanna Building, 1422 Euclid Avenue, Suite
840, Cleveland, Ohio 44115, Attention: Nate Carter, or at such other address or
to such individual as shall be so specified by the Sub-Adviser to the Adviser.
Notices shall be effective upon delivery.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
written above.
LAKEFRONT CAPITAL INVESTORS, INC. KEY ASSET MANAGEMENT INC.
By: /s/Nathaniel Carter By: /s/W. Christopher Maxwell
-------------------------------- -------------------------------
Name: Nathaniel Carter Name: W. Christopher Maxwell
Title: President and Title: Senior Managing Director
Chief Investment Officer
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Kramer, Levin, Naftalis & Frankel
919 THIRD AVENUE
NEW YORK, N.Y. 10022 - 3852
(212) 715 - 9100
Arthur H. Aufses III Monica C. Lord Sherwin Kamin
Thomas D. Balliett Richard Marlin Arthur B. Kramer
Jay G. Baris Thomas E. Molner Maurice N. Nessen
Philip Bentley Thomas H. Moreland Founding Partners
Saul E. Burian Ellen R. Nadler Counsel
Barry Michael Cass Gary P. Naftalis _____
Thomas E. Constance Michael J. Nassau
Michael J. Dell Michael S. Nelson Martin Balsam
Kenneth H. Eckstein Jay A. Neveloff Joshua M. Berman
Charlotte M. Fischman Michael S. Oberman Jules Buchwald
David S. Frankel Paul S. Pearlman Rudolph de Winter
Marvin E. Frankel Susan J. Penry-Williams Meyer Eisenberg
Alan R. Friedman Bruce Rabb Arthur D. Emil
Carl Frischling Allan E. Reznick Maria T. Jones
Mark J. Headley Scott S. Rosenblum Maxwell M. Rabb
Robert M. Heller Michele D. Ross James Schreiber
Philip S. Kaufman Howard J. Rothman Counsel
Peter S. Kolevzon Max J. Schwartz _____
Kenneth P. Kopelman Mark B. Segall
Michael Paul Korotkin Judith Singer M. Frances Buchinsky
Shari K. Krouner Howard A. Sobel Abbe L. Dienstag
Kevin B. Leblang Jeffrey S. Trachtman Ronald S. Greenberg
David P. Levin Jonathan M. Wagner Debora K. Grobman
Ezra G. Levin Harold P. Weinberger Christian S. Herzeca
Larry M. Loeb E. Lisk Wyckoff, Jr. Jane Lee
Pinchas Mendelson
Lynn R. Saidenberg
Special Counsel
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FAX
(212) 715-8000
---
WRITER'S DIRECT NUMBER
(212)715-9100
-------------
December 11, 1997
The Victory Portfolios
3435 Stelzer Road
Columbus, Ohio 43219
Re: The Victory Portfolios
File No. 33-8982
Post-Effective Amendment
to Registration Statement on Form N-1A
--------------------------------------
Dear Gentlemen:
We hereby consent to the reference of our firm as counsel in
Post-Effective Amendment No. 34 to the Registration Statement on Form N-1A.
Very truly yours,
/s/ Kramer, Levin, Naftalis & Frankel
-------------------------------------
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the reference to our Firm under the captions "Independent
Accountants" in the Prospectus for the Victory LifeChoice Funds, under the
captions "Financial Highlights" and "Independent Accountants" in the
Prospectuses for the Victory Federal Money Market Fund and the Victory
Convertible Securities Fund, under the captions "Independent Accountants" and
"Independent Accountants and Reports" in the Statement of Additional Information
relating to the Victory Federal Money Market Fund and Victory Convertible
Securities Fund and under the caption "Independent Accountants and Reports" in
the Statement of Additional Information relating to the Victory LifeChoice Funds
in this Post-Effective Amendment No. 34 to the Registration Statement on Form
N-1A (File No. 33-8982) of the Victory Portfolios.
/s/COOPERS & LYBRAND L.L.P.
---------------------------
Columbus, Ohio
December 12, 1997
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information consituting parts of this Post-Effective
Amendment No. 34 to the registration statement on Form N-1A for The Victory
Portfolios (the "Registration Statement") of our report dated January 15, 1997,
relating to the financial statements and financial highlights appearing in the
November 30, 1996 Annual Report to Shareholders of Key Money Market Mutual Fund
and SBSF Convertible Securities Fund, two of the portfolios comprising the Key
Mutual Funds (SBSF Funds, Inc.), which are also incorporated by reference into
the Registration Statement. We also consent to the references to us under the
heading "Financial Highlights" in the Prospectuses and under the heading
"Independent Accountants and Reports" in the Statement of Additional
Information.
/s/Price Waterhouse LLP
- -----------------------
New York, New York
December 5, 1997
