As filed, via EDGAR, with the Securities and Exchange Commission on March 26,
1997
File No.: 333-22101
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
|X|Pre-Effective Amendment No. 1
|_|Post-Effective Amendment No. __
(check appropriate box or boxes)
-------------------
THE VICTORY PORTFOLIOS
(Exact Name of Registrant as Specified in Charter)
1-800 539-3863
(Area Code and Telephone Number)
3435 Stelzer Road, Columbus, Ohio 43219-3035
(Address of Principal Executive Office) (Zip Code)
-------------------
George O. Martinez
BISYS Fund Services
3435 Stelzer Road
Columbus, Ohio 43219-3035
(Name and address of agent for service)
Copies to:
Jay G. Baris, Esq. William J. Blake
Kramer, Levin, Naftalis & Frankel Key Asset Management Inc.
919 Third Avenue 127 Public Square
New York, New York 10022 Cleveland, Ohio 44114
-------------------
No filing fee is required because an indefinite number of shares have previously
been registered pursuant to Rule 24f-2 under the Investment Company Act of 1940.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
The Registrant has registered an indefinite number of securities under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940; accordingly, no fee is payable herewith. A Rule 24f-2 Notice for
Registrant's most recent fiscal year ended October 31, 1996 was filed with the
Commission on December 23, 1996.
<PAGE>
THE VICTORY PORTFOLIOS
THE VICTORY INVESTMENT QUALITY BOND FUND
CROSS REFERENCE SHEET
ITEMS REQUIRED BY FORM N-14
PART A
N-14
ITEM NO. ITEM CAPTION PROSPECTUS CAPTION
- -------- ------------ ------------------
1. Beginning of Registration Statement Cross Reference Sheet;
and Outside Front Cover Page of Front Cover Page.
Prospectus
2. Beginning and Outside Back Cover
Page of Prospectus Front Cover Page.
3. Fee Table, Synopsis Synopsis; Special Risk
Information and Risk Factors Factors; Comparison of
Fees and Expenses.
4. Information About the Transaction Reasons for the
Transaction; Synopsis;
Information about the
Transaction.
5. Information About the Registrant Synopsis; Comparison of
the Funds' Investment
Objectives and
Policies; Information
about the Funds;
Additional Information.
6. Information About the Company Synopsis; Comparison of
Being Acquired the Funds' Investment
Objectives and
Policies; Information
about the Funds;
Additional Information.
7. Voting Information Information Relating to
Voting Matters.
8. Interest of Certain Persons and Inapplicable.
Experts
9. Additional Information Required Inapplicable.
for Reoffering by Persons Deemed
to be Underwriters
<PAGE>
PART B
N-14 STATEMENT OF ADDITIONAL
ITEM NO. ITEM CAPTION INFORMATION CAPTION
- -------- ------------ -------------------
THE REGISTRANT HAS FILED THE INFORMATION REQUIRED IN PART B OF THE REGISTRATION
STATEMENT IN ITS REGISTRATION STATEMENT ON FORM N-14 ON FEBRUARY 20, 1997,
(ACCESSION NUMBER 0000922423-97- 000127) AND IT IS HEREBY INCORPORATED BY
REFERENCE
10. Cover Page Cover Page.
11. Table of Contents Cover Page.
12. Additional Information About
the Registrant Statement of Additional
Information of The
Victory Portfolios
dated March 1, 1997.
13. Additional Information About
the Company Being Acquired Inapplicable.
14. Financial Statements Statement of Additional
Information of The
Victory Portfolios
which incorporates the
audited annual
financial statements of
the Victory Investment
Quality Bond Fund and
the Victory Government
Bond Fund as of October
31, 1996; and the pro
forma combined
financial statements of
the Victory Investment
Quality Bond Fund and
the Victory Government
Bond Fund, as of
October 31, 1996.
PART C
N-14
ITEM NO. ITEM CAPTION PART C CAPTION
- -------- ------------ --------------
15. Indemnification Indemnification.
16. Exhibits Exhibits.
17. Undertakings Undertakings.
<PAGE>
THE VICTORY PORTFOLIOS
The Victory Government Bond Fund
3435 Stelzer Road
Columbus, OH 43219-3035
800-KEY-FUND(R)or 800-539-3863
Dear Shareholder: (Date of Letter)
We are pleased to invite you to attend a special meeting of Shareholders of the
Victory Government Bond Fund (the "Fund"). This meeting will be held at 10:00
a.m. Eastern time on May , 1997, at 3435 Stelzer Road, Columbus, Ohio 43219. The
Board of Trustees of the Fund unanimously recommends that you vote to approve a
Plan of Reorganization and Liquidation.
If the Plan is approved:
You will receive shares of the Investment Quality Bond Fund equal to
the value of your Government Bond Fund Shares on the exchange date.
The share exchange will not be taxable to you or the Fund and your cost
basis will remain the same as your original cost.
Class B shareholders will receive shares of the Investment Quality Bond
Fund and will not incur a sales charge. Additionally, Investment
Quality Bond Fund shares received in exchange may be redeemed at any
time without a contingent deferred sales charge and are not subject to
distribution expenses, which are currently paid by shareholders of
Government Bond Fund Class B shares.
No sales charge will be imposed in connection with this transaction.
As a shareholder of the Investment Quality Bond Fund it is expected that you
will realize benefits from the economies of scale associated with an investment
in a larger fund. A larger fund can be expected to more easily take advantage of
investment opportunities at more favorable terms and lower transaction expenses
than a smaller fund. Additionally, a larger fund can more easily attract new
investors and thereby increase its asset base to allow the fund and its
shareholders to benefit from reduced operating expenses. While the investment
policies of the Investment Quality Bond Fund are different than those of the
Government Bond Fund, both seek to provide investors with a high level of
income. Key Asset Management Inc. is adviser to both funds and will continue to
serve as adviser after the reorganization.
<PAGE>
Your vote is important. Please sign and return your proxy card promptly so that
a sufficient number of shares can be represented at the meeting, and the
additional expense of resolicitation can be avoided. If we don't receive your
vote, you may receive a call from a representative of Shareholder Communications
Corporation, our proxy solicitation firm. Remember to sign and return all proxy
cards you receive. We appreciate your commitment to The Victory Portfolios, and
look forward to your continuing support as a shareholder.
Sincerely,
Scott A. Englehart
Secretary
<PAGE>
THE VICTORY PORTFOLIOS
THE VICTORY GOVERNMENT BOND FUND
3435 STELZER ROAD
COLUMBUS, OHIO 43219-3035
800-KEY-FUND
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
MAY , 1997
A Special Meeting of Shareholders (the "Meeting") of the Victory
Government Bond Fund (the "Government Bond Fund") will be held on May , 1997 at
10:00 a.m. Eastern time, at the offices of The Victory Portfolios (the "Trust"),
3435 Stelzer Road, Columbus, Ohio 43219-3035, for the following purposes, which
are more fully described in the accompanying Combined Prospectus/Proxy Statement
dated March __, 1997:
1. To approve a Plan of Reorganization and Liquidation providing for
the transfer of the assets of the Government Bond Fund to the
Victory Investment Quality Bond Fund, another portfolio of the
Trust (the "Investment Quality Bond Fund"), in exchange for
shares of the Investment Quality Bond Fund and the distribution
of such shares to shareholders of the Government Bond Fund in
liquidation of the Government Bond Fund; and
2. To transact such other business as may properly come before the
Meeting or any adjournment or adjournments thereof.
THE BOARD OF TRUSTEES OF THE TRUST UNANIMOUSLY RECOMMENDS THAT
SHAREHOLDERS OF THE GOVERNMENT BOND FUND VOTE TO APPROVE THE
PLAN OF REORGANIZATION AND LIQUIDATION.
The Board of Trustees of the Government Bond Fund has fixed the close
of business on March 9, 1997 as the record date for determination of
shareholders entitled to notice of, and to vote at, the Meeting or any
adjournment thereof. The enclosed proxy is being solicited on behalf of the
Board of Trustees of the Trust.
Each shareholder who does not expect to attend in person is requested
to complete, date, sign and promptly return the enclosed form of proxy.
By order of the Board of
Trustees,
Scott A. Englehart
Secretary
Dated: March __, 1997
<PAGE>
YOUR VOTE IS IMPORTANT
Please indicate your voting instructions on the enclosed proxy card, sign and
date it, and return it in the envelope provided, which needs no postage if
mailed in the United States. In order to save any additional expense of further
solicitation, please mail your proxy promptly.
<PAGE>
THE VICTORY PORTFOLIOS
THE VICTORY GOVERNMENT BOND FUND
THE VICTORY INVESTMENT QUALITY BOND FUND
3435 STELZER ROAD
COLUMBUS, OHIO 43219-3035
800-KEY-FUND
COMBINED PROSPECTUS/PROXY STATEMENT
March __, 1997
This Combined Prospectus/Proxy Statement is sent to you in connection
with the solicitation of proxies by the Board of Trustees (the "Board") of The
Victory Portfolios (the "Trust") on behalf of the Victory Government Bond Fund
(the "Government Bond Fund") for a Special Meeting of Shareholders (the
"Meeting") to be held at the offices of the Trust, 3435 Stelzer Road, Columbus,
Ohio 43219-3035, on May , 1997, at 10:00 a.m. Eastern time, at which
shareholders of the Government Bond Fund will be asked to consider and approve a
proposed Plan of Reorganization and Liquidation (the "Plan").
The Plan provides for the transfer of the assets of the Government Bond
Fund to the Victory Investment Quality Bond Fund, another portfolio of the Trust
(the "Investment Quality Bond Fund"), in exchange for shares of the Investment
Quality Bond Fund. Following such transfer, shares of the Investment Quality
Bond Fund will be distributed to the existing shareholders of the Government
Bond Fund in liquidation of the Government Bond Fund. As a result of the
proposed transactions, each shareholder of Class A and Class B shares of the
Government Bond Fund will receive that number of full and fractional shares of
the Investment Quality Bond Fund equal in value at the close of business on the
date of the exchange to the value of that shareholder's shares of the Government
Bond Fund. These transactions are referred to as the "Reorganization." (The
Investment Quality Bond Fund and the Government Bond Fund are sometimes referred
to as a "Fund" and together as the "Funds").
The Trust is an open-end management investment company registered under
the Investment Company Act of 1940, as amended (the "1940 Act"). The Trust is
organized as a Delaware business trust, and issues its shares of beneficial
interest in separate portfolios, each with its own investment objective and
policies. The primary investment objective of the Investment Quality Bond Fund
is to provide a high level of income. The investment objective of the Government
Bond Fund is to provide as high a level of current income as is consistent with
preservation of capital by investing in U.S. Government securities. Because each
Fund is "diversified," it is subject to certain requirements under the 1940 Act
that limit the amount of its assets that may be invested in any one company.
The investment adviser to both Funds is Key Asset Management
Inc. ("KAM" or the "Adviser").
<PAGE>
This Combined Prospectus/Proxy Statement, which you should keep for
future reference, sets forth concisely the information about the Investment
Quality Bond Fund that a prospective investor should know before voting. THIS
COMBINED PROSPECTUS/PROXY STATEMENT IS ACCOMPANIED BY THE PROSPECTUS OF THE
INVESTMENT QUALITY BOND FUND DATED MARCH 1, 1997, AND THE ANNUAL REPORT OF THE
INVESTMENT QUALITY BOND FUND DATED OCTOBER 31, 1996, WHICH ARE INCORPORATED BY
REFERENCE IN THEIR ENTIRETY. A Statement of Additional Information dated March
24, 1997 relating to this Combined Prospectus/Proxy Statement (the "Related
Statement of Additional Information") has been filed with the Securities and
Exchange Commission (the "Commission") and is incorporated by reference into
this Combined Prospectus/Proxy Statement. Information about the Government Bond
Fund is incorporated by reference to the Prospectus for the Government Bond Fund
dated March 1, 1997, which has also been filed with the Commission. A Statement
of Additional Information dated March 1, 1997, for the Investment Quality Bond
Fund, has been filed with the Commission and is incorporated into the Related
Statement of Additional Information. Copies of the Related Statement of
Additional Information and the current Prospectus and Statement of Additional
Information of the Government Bond Fund may be obtained without charge by
writing the Trust, at P.O. Box 8527, Boston, Massachusetts 02266-8527, or by
calling 800-KEY-FUND.
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THE SECURITIES OF THE VICTORY INVESTMENT QUALITY BOND FUND HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
COMBINED PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS COMBINED PROSPECTUS/PROXY
STATEMENT AND IN THE MATERIALS EXPRESSLY INCORPORATED HEREIN BY REFERENCE AND,
IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE VICTORY INVESTMENT QUALITY BOND FUND OR
THE VICTORY GOVERNMENT BOND FUND.
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TABLE OF CONTENTS
Synopsis...................................................................1
Special Risk Factors.......................................................6
Comparison of Fees and Expenses............................................8
Information About the Transaction..........................................9
Reasons for the Transaction...............................................14
Comparison of the Funds' Investment Objectives and Policies...............16
Information About the Funds...............................................17
Additional Information....................................................22
Information Relating to Voting Matters....................................22
Miscellaneous.............................................................25
ii
<PAGE>
SYNOPSIS
This Synopsis provides a concise summary of the information contained
in this Combined Prospectus/Proxy Statement.
REASONS FOR THE TRANSACTION
The Board of Trustees has unanimously recommended the Reorganization and you are
being asked to vote for the Plan because the Board and the Adviser believe that
as shareholders of the combined fund you have the potential to realize
substantial benefits from the economies of scale that are associated with a
larger asset base. See "Reasons for the Transaction."
THE PLAN OF REORGANIZATION AND LIQUIDATION
Under the Plan, the Government Bond Fund will transfer its assets to the
Investment Quality Bond Fund in exchange for shares of the Investment Quality
Bond Fund and the assumption by the Investment Quality Bond Fund of the
liabilities of the Government Bond Fund. After the transaction, you will receive
that number of shares of the Investment Quality Bond Fund with a total value
equal to the net asset value of your shares of the Government Bond Fund, as
determined at the close of business on the date of the exchange. You will not be
charged a sales charge for this transaction. See "Reasons for the Transaction"
and "Information About the Transaction," and the copy of the form of the Plan,
which is attached as Exhibit A.
TAX CONSEQUENCES
Each Fund will receive an opinion of counsel to the effect that no gain or loss
will be recognized by the Government Bond Fund, the Investment Quality Bond
Fund, or the shareholders of the Government Bond Fund as a
<PAGE>
result of the Reorganization. As a shareholder of the Investment Quality Bond
Fund, however, you may be subject to greater state and local taxes on your
investment than you were as a shareholder of the Government Bond Fund. See
"Information about the Transaction."
INVESTMENT OBJECTIVES AND POLICIES
Investment Quality Bond Fund. The investment objective of the Investment Quality
Bond Fund is to provide a high level of income. The Fund pursues its objective
by investing primarily in investment-grade bonds issued by corporations and the
U.S. Government and its agencies or instrumentalities. Under normal market
conditions, the Investment Quality Bond Fund invests at least 80% of its total
assets in the following securities: Investment grade corporate securities,
including asset- backed securities and convertible and exchangeable debt
securities; Mortgage related securities issued by non-governmental entities;
Obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities; and, Government mortgage-backed securities. All instruments
in which the Investment Quality Bond Fund invests are, at the time of purchase,
"investment grade." The dollar-weighted effective average maturity of the
Investment Quality Bond Fund ranges from 5 to 15 years.
Government Bond Fund. The investment objective of the Government Bond Fund is to
provide as high a level of current income as is
-2-
<PAGE>
consistent with preservation of capital by investing in U.S. Government
securities. The Fund normally invests 100% of its total assets in U.S.
Government securities such as U.S. Treasury bonds, notes and bills and
mortgage-backed securities issued by the Government National Mortgage
Association ("GNMA"), and in repurchase agreements secured by those securities
in such a manner that the Fund's dollar-weighted average maturity does not
exceed ten years.
Each Fund has additional investment policies which are discussed under "Risk
Factors" and "Comparison of the Funds' Investment Objectives and Policies."
SHARE CLASSES
The Government Bond Fund currently offers two classes of shares: Class A shares
and Class B shares. Class A shares are subject to an initial sales charge upon
purchase and are not subject to an asset-based sales charge. The Class B shares
are subject to a contingent deferred sales charge ("CDSC") upon redemption and
are subject to an asset-based sales charge. The Investment Quality Bond Fund,
however, offers only one class of shares. That one class of the Investment
Quality Bond Fund has rights and expenses analogous to those of Class A shares
of the Government Bond Fund. After the transaction, shareholders of both Class A
and Class B shares of the Government Bond Fund will receive shares of the
Investment Quality Bond Fund with equal rights and expenses. As a result of the
reorganization, Class B
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<PAGE>
shareholders of the Government Bond Fund will no longer be subject to a CDSC on
redemptions or an asset-based sales charge, also known as a Rule 12b-1 fee. No
redemption of shares of the Investment Quality Bond Fund will be subject to a
CDSC, regardless of whether Class B shares of the Government Bond Fund were
previously owned. Class B shareholders will not pay a CDSC as a result of the
Reorganization. Class B shareholders thus will realize a material indirect
benefit from the Reorganization that will not be realized by Class A
shareholders of the Government Bond Fund. After the Reorganization, however,
additional purchases of new shares of the Investment Quality Bond Fund by former
Government Bond Fund shareholders may be subject to an initial sales charge,
depending upon the amount purchased. See "Information About the Funds" and
"Information About the Transaction."
INVESTMENT ADVISER
KAM is the investment adviser for each Fund. See "Information About the Funds."
FEES AND EXPENSES
KAM is entitled to receive, as an investment advisory fee, a maximum of 0.75% of
the average daily net assets of the Investment Quality Bond Fund. KAM is
entitled to receive a maximum of 0.55% of average daily net assets of the
Government Bond Fund as an investment advisory fee. For the previous fiscal
year, the total operating expenses of the Investment Quality Bond Fund was
1.00%, 1.13% before voluntary fee waivers. For the previous fiscal year, the
-4-
<PAGE>
total operating expenses of Class A and Class B shares of the Government Bond
Fund were 1.03% and 2.35%, respectively, and 1.18% and 2.85% before respective
voluntary fee waivers. After the Reorganization, it is expected that the total
operating expenses of the Investment Quality Bond Fund will be 1.00%, after
voluntary fee waivers. Therefore, assuming no waiver of fees by the Adviser, it
is anticipated that current Class A shareholders will be subject to
approximately the same expense ratio, while current Class B shareholders will be
subject to lower total fund expenses for the foreseeable future as a result of
the Reorganization. See "Comparison of Fees and Expenses."
DISTRIBUTION AND PURCHASE PROCEDURES
The Government Bond Fund offers two different classes of shares: if Class A
shares are purchased, there is an initial sales charge (on investments up to $1
million); if Class B shares are purchased, there is no sales charge at the time
of purchase, but if shares are redeemed within six years, shareholders normally
must pay a CDSC that varies depending on how long the shares were owned. The
Investment Quality Bond Fund offers its shares in the same manner as Class A
shares of the Government Bond Fund are offered. The Government Bond Fund has
adopted a distribution plan under Rule 12b-1 of the 1940 Act for its Class B
shares. Under the distribution plan, the Government Bond Fund pays its
distributor an annual "asset-based charge" of 0.75%
-5-
<PAGE>
per year on Class B shares. The Investment Quality Bond Fund has no distribution
plan, and therefore shareholders are not subject to distribution plan expenses.
As a result of the Reorganization, Class B shareholders of the Government Bond
Fund will become shareholders of the Investment Quality Bond Fund and will no
longer be subject to a CDSC on redemptions or distribution plan expenses,
although, unlike Class A shareholders, Class B shareholders were subject to no
initial sales charge on the p urchase of their shares. See "Information About
the Funds."
EXCHANGE RIGHTS
Shares of the Investment Quality Bond Fund may only be exchanged for "Class A"
shares of the other Victory Portfolios. Shares of the Government Bond Fund may
be exchanged for shares of the same class of the other Victory Portfolios. (Not
all series of the Victory Portfolios offer multiple classes of shares.) See
"Information About the Funds."
REDEMPTION PROCEDURES
Except for the imposition of a CDSC on certain redemptions of Class B shares of
the Government Bond Fund, the redemption procedures of both Funds are similar.
See "Information About the Funds."
OTHER CONSIDERATIONS
In the event the shareholders of the Government Bond Fund do not approve the
Reorganization, the Board will consider possible alternatives to the proposed
Reorganization. Shareholders have no right of appraisal, but may continue to
redeem their shares in accordance with normal Fund policies.
-6-
<PAGE>
This Synopsis is qualified by reference to the more complete information
contained elsewhere in this Combined Prospectus/Proxy Statement, including
information incorporated by reference herein from the accompanying Prospectus
for the Investment Quality Bond Fund dated March 1, 1997, and in the Plan of
Reorganization and Liquidation attached to this Combined Prospectus/Proxy
Statement as Exhibit A.
SPECIAL RISK FACTORS
As described more fully below under "Comparison of the Funds'
Investment Objectives and Policies," the investment objectives of the Funds are
similar: the Investment Quality Bond Fund seeks to provide a high level of
income; the Government Bond Fund seeks to provide as high a level of current
income as is consistent with preservation of capital by investing in U.S.
Government securities. There are, however, additional risk factors of investing
in the Investment Quality Bond Fund, in comparison to the Government Bond Fund,
which arise from differences in their investment objectives and policies. IN
PARTICULAR, THE SECURITIES IN WHICH THE GOVERNMENT BOND FUND INVESTS ARE LESS
LIKELY TO DEFAULT. THESE SECURITIES, HOWEVER, LIKE THE SECURITIES IN WHICH THE
INVESTMENT QUALITY BOND FUND INVESTS, WILL FLUCTUATE IN VALUE IN RESPONSE TO
CHANGES IN INTEREST RATES.
The following paragraphs provide a brief description of the principal
additional risk factors of investing in the Investment Quality Bond Fund.
The Investment Quality Bond Fund invests primarily in investment-grade
bonds issued by corporations, the U.S. Government and its agencies or
instrumentalities. The Government Bond Fund normally invests all of its assets
in U.S. Government securities. "Investment-grade" obligations are those rated at
the time of purchase within the four highest rating categories assigned by a
nationally recognized statistical rating organization (an "NRSRO") or, if
unrated, are obligations that KAM determines to be of comparable quality.
Securities rated in the fourth-highest category by Standard & Poor's Corporation
(BBB-) and Moody's Investors Service, Inc. (Baa-3), both NRSROs, are considered
to have speculative characteristics. The dollar-weighted average maturities of
the Funds, however, are substantially similar.
The Investment Quality Bond Fund may invest up to 20% of the value of
its total assets in investment-grade debt securities of foreign issuers,
including foreign banks. The Government Bond Fund does not invest in foreign
securities. Investments in securities of foreign companies may involve greater
risks than are present in U.S. investments. Compared to U.S. and Canadian
companies, there is generally less publicly available information about foreign
companies and there may be less governmental
-7-
<PAGE>
regulation and supervision of foreign stock exchanges, brokers and listed
companies. Foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to U.S. companies. Securities of some foreign
companies are less liquid, and their prices more volatile, than securities of
comparable U.S. companies. Settlement of transactions in some foreign markets
may be delayed or may be less frequent than in the U.S., which could affect the
liquidity of the Fund's investment. In addition, with respect to some foreign
countries, there is the possibility of nationalization, expropriation or
confiscatory taxation; limitations on the removal of securities, property or
other assets of the Fund; political or social instability; increased difficulty
in obtaining legal judgments; or diplomatic developments which could affect U.S.
investments in those countries.
The Investment Quality Bond Fund may enter into futures contracts and
purchase or sell options on futures contracts while the Government Bond Fund may
not. Futures transactions involve brokerage costs and require the Fund to
segregate assets to cover contracts that would require it to purchase securities
or currencies. The Fund may lose the expected benefit of futures transactions if
interest rates, exchange rates or securities prices move in an unanticipated
manner. Such unanticipated changes may also result in poorer overall performance
than if the Fund had not entered into any futures transactions. In addition, the
value of the Fund's futures positions may not prove to be perfectly or even
highly correlated with the value of its portfolio securities or foreign
currencies, limiting the Fund's ability to hedge effectively against interest
rate, exchange rate and/or market risk and giving rise to additional risks.
There is no assurance of liquidity in the secondary market for purposes of
closing out futures positions.
COMPARISON OF FEES AND EXPENSES
The following tables summarize and compare the fees and expenses of the
Funds. These tables are intended to assist shareholders in comparing the various
costs and expenses that shareholders indirectly bear with respect to an
investment in the Government Bond Fund and those that they can expect to bear
indirectly as shareholders of the Investment Quality Bond Fund.
-8-
<PAGE>
<TABLE>
<CAPTION>
SHAREHOLDER TRANSAACTION EXPENSES(1)
Maximum
Sales Charge
Imposed on
Purchases Maximum
(as a Sales
percentage Charge
of the Imposed on Deferred
offering Reinvested Sales Redemption Exchange
price) Dividends Charge Fees Fee
- ------------------------------------------------------------------------------------------------------------------------------------
Investment
<S> <C> <C> <C> <C> <C>
Quality Bond 4.75% None None None None
Fund
Government 4.75% None None None None
Bond Fund-
Class A
Government None None 5% in the None None
Bond Fund- first year,
Class B declining
to 1% in
the sixth
year and
eliminated
thereafter
ANNUAL FUND OPERATING EXPENSES (AFTER WAIVERS AND REIMBURSEMENTS)
(as a percentage of average daily net assets)
Total
Rule 12b-1 Other Operating
Management Administration Distribution Expenses Expenses
Fees (2) Fees Fees (3) (2)(3)
- ------------------------------------------------------------------------------------------------------------------------------------
Investment 0.62 0.15% 0.00% 0.23 1.00
Quality Bond
Fund
Government 0.40 0.15% 0.00% 0.48 1.03
Bond Fund-
Class A
Government 0.40 0.15% 0.75% 1.05 2.35
Bond Fund-
Class B
Pro Forma for 0.62 0.15% 0.00% 0.23 1.00
Combined Fund
</TABLE>
(1) Investors may be charged a fee if they effect transactions in Fund shares
through a broker or agent, including affiliated banks, non-banks ,and
non-bank affiliates of KAM and KeyCorp.
(2) The Adviser has agreed to reduce its investment advisory fees for the
indefinite future. Absent the voluntary reduction of investment advisory
fees, "Management Fees" as a percentage of average daily net assets would
have been 0.55% for the Government Bond Fund and 0.75% for the Investment
Quality Bond Fund, and "Total Operating Expenses" as a percentage of
average daily net assets would have been 1.18% for Class A shares and 2.85%
for Class B shares of the Government Bond Fund and 1.13% for the Investment
Quality Bond Fund.
(3) These amounts include an estimate of the shareholder servicing fees the
Funds expect to pay.
-5-
<PAGE>
EXAMPLE
Using the above expenses, you would pay the following expense on a $1000
investment, assuming (1) five percent annual return and (2) full redemption at
the end of each period:
1 Year 3 Years 5 Years 10 Years
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Investment Quality Bond $57 $78 $100 $164
Fund
Government Bond Fund-Class $57 $78 $100 $164
A
Government Bond Fund-Class $69 $89 $122 $198
B
Pro Forma for Combined $57 $78 $100 $164
Funds
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<PAGE>
The purpose of the table is to assist you in understanding the various costs and
expenses that an investor in each Fund will bear directly or indirectly. See
"Information About the Funds" for a more complete discussion of annual operating
expenses of the Funds. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
CONDENSED FINANCIAL INFORMATION. Condensed financial information with
respect to the Funds is incorporated by reference herein and is included in the
Prospectuses and Statements of Additional Information dated March 1, 1997 and in
the annual report to shareholders.
INFORMATION ABOUT THE TRANSACTION
PLAN OF REORGANIZATION AND LIQUIDATION. The Plan provides that on the
Closing Date (as defined below) for the Reorganization, substantially all of the
assets of the Government Bond Fund will be transferred to the Investment Quality
Bond Fund.
In exchange for the transfer of the assets of the Government Bond Fund,
the Investment Quality Bond Fund will assume the liabilities of the Government
Bond Fund and will issue to the Government Bond Fund full and fractional shares
of the Investment Quality Bond Fund. The Government Bond Fund will distribute
the shares so received to shareholders of Class A and Class B shares of the
Government Bond Fund, whose shares of the Government Bond Fund will become void.
Class A and Class B shareholders of the Government Bond Fund at the time of the
Reorganization will become shareholders of the Investment Quality Bond Fund and
will receive the same dollar amount in Investment Quality Bond Fund shares as
the shareholder had held in either Class A or Class B shares of the Government
Bond Fund. Shares of the Investment Quality Bond Fund distributed to former
Class B shareholders of the Government Bond Fund will not be subject to a CDSC
at any time.
For purposes of the Reorganization, the number of shares of the
Investment Quality Bond Fund to be issued to the Government Bond Fund will have
an aggregate net asset value equal to the aggregate net asset value of each
class of the Government Bond
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Fund as of the close of business on the business day preceding the Closing Date
(the "Valuation Date"). Asset value determinations will be made in accordance
with the valuation procedures set forth in the Funds' then current Prospectuses
and Statements of Additional Information.
On, or as soon as practicable after, the Closing Date, the Government
Bond Fund will liquidate and distribute pro rata the shares of the Investment
Quality Bond Fund received in the Reorganization to its shareholders of record.
Shareholders of record will be determined as of the close of business on the
Valuation Date. The liquidation and distribution will be accomplished by
establishing accounts on the share records of the Investment Quality Bond Fund
in the name of the Government Bond Fund shareholders, each account reflecting
ownership of the respective number of shares of the Investment Quality Bond Fund
due to each shareholder of the Government Bond Fund. Class A and Class B
shareholders of the Government Bond Fund will receive shares of the Investment
Quality Bond Fund. After such distribution, the Government Bond Fund will be
terminated.
The consummation of the Reorganization is subject to certain conditions
set forth in the Plan. The Board of Trustees of the Trust may terminate the Plan
at any time prior to the closing of the Reorganization without liability on the
part of either Fund. Assuming satisfaction of the conditions of the Plan, the
closing date for the Reorganization will be on April 30, 1997, or such other
date as is agreed to by the parties (the "Closing Date").
If the Reorganization is approved by shareholders, the Government Bond
Fund reserves the right to sell portfolio securities and/or purchase other
securities, to the extent necessary so that the asset composition of the
Government Bond Fund is consistent with the investment policies and restrictions
of the Investment Quality Bond Fund. Purchase and sale transactions would entail
transaction costs borne by the Government Bond Fund. As of the date of this
Combined Prospectus/Proxy Statement, however, the Trust does not anticipate that
any significant changes will need to be made to the portfolio of the Government
Bond Fund for these purposes.
DESCRIPTION OF SHARES OF THE INVESTMENT QUALITY BOND FUND. Full and
fractional shares of the Investment Quality Bond Fund will be issued to the
shareholders of each class of the Government Bond Fund in accordance with the
procedures under the Plan as described above. Each share will be fully paid and
nonassessable when issued and transferrable without restriction and will have no
preemptive or conversion rights.
SHAREHOLDER RIGHTS. The Government Bond Fund offers two classes of
shares: (1) Class A shares, which are offered at net asset value plus the
applicable sales charge (maximum of 4.75% of public offering price) and (2)
Class B shares, which are offered at net asset value with a maximum CDSC of 5.0%
imposed on certain
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redemptions. At the end of the sixth year after purchase, the CDSC no longer
applies to redemptions. Class B shares have higher ongoing expenses than Class A
shares, but automatically convert to Class A shares eight years after purchase.
The Investment Quality Bond Fund offers only one class of shares, which, like
the Class A shares of the Government Bond Fund, are offered at net asset value
plus the applicable sales charge (maximum of 4.75% of public offering price).
After the Reorganization, shareholders of both Class A and Class B of
the Government Bond Fund will be issued shares of the Investment Quality Bond
Fund, which have rights and expenses similar to Class A shares of the Government
Bond Fund. As a result of the Reorganization, Class B shareholders of the
Government Bond Fund will no longer be subject to a CDSC on redemptions or Rule
12b-1 fees. The Investment Quality Bond Fund, like Class A of the Government
Bond Fund, is subject to lower ongoing expenses than Class B of the Government
Bond Fund. Class B shareholders consequently will realize a material indirect
benefit from the Reorganization that will not be realized by Class A
shareholders of the Government Bond Fund.
By purchasing Class B shares of the Government Bond Fund, investors
were able to purchase shares of the Government Bond Fund without paying an
initial sales charge on the purchase. After the Reorganization, however, new
purchases of the Investment Quality Bond Fund by former shareholders of the
Government Bond Fund will be subject to an initial sales charge, depending upon
the amount purchased.
EXPENSES. The Reorganization will be effected for each Government Bond
Fund shareholder at net asset value without the imposition of any sales charges.
Expenses otherwise incurred by the Funds in connection with the transactions
will be borne by each Fund. In accordance with the Investment Quality Bond
Fund's policies, no new certificates for the Investment Quality Bond Fund shares
will be issued.
SHAREHOLDER APPROVAL. Approval of the Plan requires the affirmative
vote of either (i) sixty seven percent or more of the voting securities present
at the Meeting, if the holders of more than fifty percent of the outstanding
voting securities of the Government Bond Fund are present and represented by
proxy, or (ii) more than fifty percent of the outstanding voting securities of
the Government Bond Fund.
The Board may terminate the Plan at any time prior to the closing of
the transaction.
FEDERAL INCOME TAX CONSEQUENCES. At the closing of the Reorganization
the Trust will receive an opinion from counsel to the effect that, on the basis
of then current law and certain assumptions and representations, for federal
income tax purposes: (1) the Government Bond Fund and the Investment Quality
Bond Fund
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will each be treated as a separate corporation for federal income tax purposes;
(2) the exchange by the Government Bond Fund of substantially all of its assets
in exchange for shares of the Investment Quality Bond Fund and the assumption by
the Investment Quality Bond Fund of certain stated liabilities of the Government
Bond Fund, and the subsequent liquidation of the Government Bond Fund pursuant
to the Plan will constitute a reorganization within the meaning of section
368(a)(l)(C) of the Internal Revenue Code of 1986, as amended (the "Code"), and
that the Government Bond Fund and the Investment Quality Bond Fund will each be
"a party to a reorganization" within the meaning of Code section 368(b); (3) the
Government Bond Fund will not recognize any gain or loss as a result of the
Reorganization; (4) the Investment Quality Bond Fund will not recognize any gain
or loss on the receipt of the assets of the Government Bond Fund in exchange for
shares of the Investment Quality Bond Fund; (5) the shareholders of the
Government Bond Fund will not recognize any gain or loss on the exchange of
their shares of the Government Bond Fund for shares of the Investment Quality
Bond Fund; (6) the aggregate tax basis of shares of the Investment Quality Bond
Fund received by each shareholder of the Government Bond Fund will be the same
as the aggregate tax basis of the shares of the Government Bond Fund exchanged
therefor; (7) the Investment Quality Bond Fund's adjusted tax basis in the
assets received from the Government Bond Fund in the Reorganization will be the
same as the adjusted tax basis of such assets in the hands of the Government
Bond Fund immediately prior to the Reorganization; (8) the holding period of
each former shareholder of the Government Bond Fund in the shares of the
Investment Quality Bond Fund received in the Reorganization will include the
period during which such shareholder held his shares of the Government Bond Fund
as a capital asset; and (9) the Investment Quality Bond Fund's holding periods
in the assets received from the Government Bond Fund in the Reorganization will
include the holding periods of such assets in the hands of the Government Bond
Fund immediately prior to the Reorganization.
The Government Bond Fund and the Investment Quality Bond Fund have not
sought a tax ruling from the Internal Revenue Service ("IRS") with respect to
the tax aspects of the Reorganization, but will act in reliance upon the opinion
of counsel discussed in the preceding paragraph. Such opinion is not binding on
the IRS and does not preclude the IRS from adopting a contrary position. If for
any reason the Reorganization of the Government Bond Fund did not qualify as a
tax-free reorganization for federal income tax purposes, then (i) the transfer
of the Government Bond Fund's assets to the Investment Quality Bond Fund would
be treated as a taxable sale or exchange of those assets at fair market value,
and (ii) the exchange by the shareholders of the Government Bond Fund of their
Government Bond Fund shares for the Investment Quality Bond Fund shares would be
treated as a taxable exchange of the Government Bond Fund shares, also at fair
market value. Shareholders should consult their own advisers concerning that and
other potential
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tax consequences of the Reorganization to them, including any applicable state
and local income tax consequences.
OTHER TAX INFORMATION. In general, as a shareholder of the Investment
Quality Bond Fund you may be subject to greater state and local taxes on your
investment than you were as a shareholder of the Government Bond Fund. Some
states exempt mutual fund dividends derived from U.S. Government obligations
(distinct from state and local bonds) from their state and local income taxes.
Because the Government Bond Fund derives more of its income from U.S. Government
securities than the Investment Quality Bond Fund, shareholders of the Investment
Quality Bond Fund who pay taxes in such states may have a greater portion of
their dividends subject to state and local taxes. Some states, however, do not
provide this benefit (e.g., Pennsylvania) and other states may limit it (e.g.,
New York, which generally requires at least 50% of a fund's total assets to be
invested in such obligations for the exemption to apply). The Government Bond
Fund normally invests 100% of its total assets in U.S. Government securities.
Thus, the Government Bond Fund usually qualifies for the U.S. Government
interest exemption in those states which limit the exemption to mutual funds
that have satisfied certain asset requirements. The Investment Quality Bond
Fund, however, is not expected to satisfy the exemption requirements of such
states because it invests a much lower percentage of its assets in U.S.
Government securities. In those states in which the Investment Quality Bond Fund
does not qualify for the U.S. Government interest exemption, shareholders of the
Investment Quality Bond Fund will be subject to greater state and/or local taxes
on fund distributions than they were as shareholders of the Government Bond
Fund. In addition, certain types of securities, such as repurchase agreements
and certain agency-backed securities, may not quality for this U.S. Government
interest exemption.
CAPITALIZATION. The following table shows the capitalization of the
Government Bond Fund and the Investment Quality Bond Fund as of February 28,
1997, and on a pro forma basis as of that date giving effect to the proposed
acquisition of assets at net asset value:
Net Assets Net Asset Shares
(As of 2/28/97) Value per Share Outstanding
--------------- --------------- -----------
Government Bond 21,649,750 9.51 2,276,564.566
Fund-Class A
Government Bond 1,512,770 9.51 159,154.334
Fund-Class B
Investment 155,962,051 9.53 16,370,291.380
Quality
Bond Fund
Pro Forma 179,124,571 9.53 18,800,776.165
Combined
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REASONS FOR THE TRANSACTION
On February 19, 1997, the Board of Trustees of the Government Bond Fund
unanimously approved the proposed Plan and the transactions contemplated
therein, subject to shareholder approval. The Board of Trustees voted to approve
the Reorganization because the Board believed that the opportunity for
shareholders of the Government Bond Fund to become shareholders of the
Investment Quality Bond Fund would provide them with substantial advantages. The
Government Bond Fund has been unable to grow its assets. As a result, its small
size does not enable it to take advantage of investment opportunities at
favorable prices and lower transaction costs that a larger fund would enjoy. In
addition, the Government Bond Fund has been unable to enjoy the economies of
scale that are associated with a larger asset base, and the reduction of
per-share expenses achieved thereby. The Board and the Adviser believe that the
asset base of the combined fund will be larger than the asset base of either
individual fund both because of the combination of assets achieved in the
Reorganization and because it is anticipated that the combined fund could better
attract additional investors than could the Government Bond Fund alone.
Furthermore, the increased size of the combined fund could potentially result in
increased operating efficiencies for the fund and should enhance the ability of
the Adviser to effect portfolio transactions on more favorable terms.
The Board of Trustees also considered the differences in investment
policies and associated risks. They concluded that although the Investment
Quality Bond Fund does not invest primarily in U.S. Government securities, its
policy of investing in "investment grade" obligations provides an attractive
alternative.
In determining to recommend approval of the Reorganization to the
shareholders, the Board of Trustees inquired into a number of matters and
considered the following factors, among others:
(1) the terms and conditions of the Reorganization Plan;
(2) the current and anticipated size of the Government Bond Fund
and the Investment Quality Bond Fund, including recent sales
and redemptions, and the potential for greater economies of
scale that would be achieved for shareholders of the
Government Bond Fund as investors in a larger portfolio;
(3) the differences and similarities of the investment
objectives, policies and restrictions of the Funds;
(4) the fact that KAM will continue to serve as Investment
Adviser, and its experience, capabilities and
resources;
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(5) the fact that BISYS Fund Services, Inc. will continue to serve
as administrator and distributor, and Key Trust Company of
Ohio, N.A. will continue to serve as custodian, and their
respective experience, capabilities and resources;
(6) the federal tax consequences to the Government Bond
Fund, the Investment Quality Bond Fund and their
shareholders resulting from the proposed
Reorganization, and the likelihood that no recognition
of income, gain or loss for federal income tax purposes
to the Government Bond Fund, the Investment Quality
Bond Fund or their shareholders will occur as a result
thereof; and
(7) alternative options to the proposed Reorganization.
In considering these factors and reaching the decision to recommend
that the shareholders of the Government Bond Fund vote to approve the
Reorganization and the Plan, the Board concluded that the Reorganization is in
the best interests of the shareholders of the Government Bond Fund, and that the
interests of the shareholders of the Investment Quality Bond Fund would not be
diluted as a result of the Reorganization.
THE BOARD OF TRUSTEES, INCLUDING A MAJORITY OF THE TRUSTEES WHO ARE NOT
"INTERESTED PERSONS" OF THE TRUST, RECOMMENDS APPROVAL OF THE PLAN.
COMPARISON OF THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES
GOVERNMENT BOND FUND. As a fundamental policy, the Government Bond Fund
normally invests 100% of its total assets in U.S. Government securities such as
U.S. Treasury bonds, notes and bills and mortgage-backed securities issued by
GNMA, and in repurchase agreements secured by those securities in such a manner
that the Fund's dollar-weighted average maturity does not exceed ten years. The
Fund, however, normally holds some U.S. Government securities with remaining
maturities of 18 months or less. The Government Bond Fund may invest in
repurchase agreements, zero-coupon bonds, and "receipts," which are derivative
securities backed by U.S. Treasury notes and bonds. When KAM believes market
conditions warrant a temporary defensive position, the Fund may invest up to
100% of its assets in short-term securities such as U.S. Government or
Government agency obligations, and commercial paper and other short-term
corporate obligations, having remaining maturities of one year or less.
INVESTMENT QUALITY BOND FUND. The Investment Quality Bond Fund pursues
its objective by investing primarily in investment- grade bonds issued by
corporations and the U.S. Government and its agencies and instrumentalities.
Under normal market conditions, the Fund invests at least 80% of its total
assets in the following securities: Investment grade corporate
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securities, including asset-backed securities and convertible and exchangeable
debt securities; Mortgage related securities issued by non-governmental
entities; Obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities; and, Government mortgage-backed securities. All
instruments in which the Investment Quality Bond Fund invests are "investment
grade" at the time of purchase.
The Investment Quality Bond Fund's investments include debentures,
notes with remaining maturities at the time of purchase of one year or more,
zero-coupon securities, mortgage-related securities, state, municipal or
industrial revenue bonds, obligations issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, debt securities convertible
into, or exchangeable for, common stocks, first mortgage loans and participation
certificates in pools of mortgages issued or guaranteed by the U.S. Government
or its agencies or instrumentalities.
The Investment Quality Bond Fund may invest in state and municipal
securities when, in the opinion of KAM, their yields are competitive with those
of comparable taxable debt obligations.
The Investment Quality Bond Fund may also invest in collateralized
mortgage obligations issued by non-governmental agencies and certain investment
company securities, and it may lend its portfolio securities to generate
additional income.
In addition, up to 20% of the value of the Investment Quality Bond
Fund's total assets may be invested in preferred stocks, notes with remaining
maturities at the time of purchase of less than one year, short-term debt
obligations consisting of commercial paper (including variable amount master
demand notes), bankers' acceptances, certificates of deposit and time deposits
of domestic and foreign branches of U.S. banks and foreign banks, repurchase
agreements, and securities of other investment companies. Some of the securities
in which the Fund invests may have warrants or options attached.
The Investment Quality Bond Fund may invest up to 20% of the value of
its total assets in debt securities of foreign issuers, including foreign banks.
The Investment Quality Bond Fund may also enter into contracts for the future
delivery of securities or foreign currencies and futures contracts based on a
specific security, class of securities, foreign currency or an index, purchase
or sell options on any such futures contracts and engage in related closing
transactions. See "Risk Factors."
In addition, the Fund may not purchase the securities of any issuer
(other than securities issued or guaranteed by the U.S. government or any of its
agencies or instrumentalities, or repurchase agreements secured thereby) if, as
a result, more than 25% of the Fund's total assets would be invested in the
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securities of companies whose principal business activities are in the same
industry. In the utilities category, the industry shall be determined according
to the service provided. For example, gas, electric, water and telephone will be
considered separate industries.
The dollar-weighted effective average maturity of the Investment
Quality Bond Fund ranges from 5 to 15 years. Individual assets held by the
Investment Quality Bond Fund may vary from the average maturity of the Fund.
Under certain market conditions, the Adviser may go outside these boundaries.
GENERAL. Both Funds are "diversified" portfolios, and have
similar limitations concerning borrowing money and investing in
illiquid securities.
INFORMATION ABOUT THE FUNDS
INVESTMENT ADVISORY AGREEMENTS. The investment advisory agreement, on
behalf of the Investment Quality Bond Fund, between the Trust and the Adviser
(the "Investment Advisory Agreement") contains terms that are materially the
same as those set forth in the current investment advisory agreement between the
Trust and the Adviser on behalf of the Government Bond Fund.
KAM serves as the investment adviser of each Fund and was organized as
an Ohio corporation on February 28, 1997 and is registered as an investment
adviser under the Investment Advisers Act of 1940, as amended. It is a
subsidiary of KeyCorp. Affiliates of KAM manage approximately $51 billion for
numerous clients including large corporate and public retirement plans,
Taft-Hartley plans, foundations and endowments, high net worth individuals and
mutual funds.
KAM directs the investment of each Fund's assets, subject at all times
to the supervision of the Board of Trustees. KAM continually conducts investment
research and supervision for the Funds and is responsible for the purchase and
sale of each Fund's investments.
Under the Investment Advisory Agreement between the Trust and KAM, KAM
is entitled to receive a fee, computed daily and paid monthly, at an annual rate
of seventy-five one-hundredths of one percent (0.75%) of the average daily net
assets of the Investment Quality Bond Fund, and fifty-five one hundredths of one
percent (0.55%) of the average daily net assets of the Government Bond Fund. By
virtue of its higher advisory fee earned on Investment Quality Bond Fund assets,
KAM may be deemed to have a material adverse interest in the Reorganization.
KAM has agreed to reduce its investment advisory fees for the Funds for
the indefinite future. During the previous year, the "Total Fund Operating Fees"
of the Investment Quality Bond Fund and the Class A shares of the Government
Bond Fund, after
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fee waivers, were 1.00% and 1.03%, respectively. After the Reorganization, it is
estimated that the "Total Fund Operating Expenses" of the Investment Quality
Bond Fund will be 1.00%. See "Comparison of Fees and Expenses."
DISTRIBUTION FEES. Under a Rule 12b-1 distribution plan (the "Rule
12b-1 Plan") between the Government Bond Fund (for its Class B shares only) and
BISYS Fund Services ("BISYS" or the "Distributor"), the Distributor is paid a
Rule 12b-1 distribution fee at an annual rate of 0.75% of the average daily net
assets of Class B shares of the Government Bond Fund. After the Reorganization,
shareholders of Class B shares of the Government Bond Fund will be issued shares
of the Investment Quality Bond Fund that are not subject to a CDSC or Rule 12b-1
Plan.
SHAREHOLDER SERVICE PLAN. Under a shareholder services plan adopted by
the Trust, the Funds may enter into Shareholder Service Agreements under which
each Fund pays fees of up to 0.25% of its average daily net assets for expenses
incurred by service agents in connection with the personal service and
maintenance of accounts holding shares of the Fund. Such agreements are entered
into between the Trust and various shareholder servicing agents, including the
Distributor, Key Trust Company of Ohio, N.A. and its affiliates, and other
financial institutions and securities brokers (each, a "Shareholder Servicing
Agent"). Shareholder Servicing Agents may periodically waive all or a portion of
their respective shareholder servicing fees with respect to each Fund.
ADMINISTRATOR AND DISTRIBUTOR. BISYS is the administrator for the
Funds. For each Fund, BISYS receives a fee, computed daily and paid monthly, at
an annual rate of 0.15% of the Fund's average daily net assets. BISYS is also
the distributor of each Fund. The Distributor may use its own resources to pay
for distribution activities.
EXPENSE RATIOS. As of February 28, 1997, the Government Bond Fund had
total net assets of $23,162,520 and the Investment Quality Bond Fund had total
net assets of $155,962,051. As of October 31, 1996, the total expense ratios for
the Class A and Class B shares of the Government Bond Fund were 1.03% and 2.35%,
respectively, after fee waivers. Without fee waivers, the expense ratios would
have been 1.18% and 2.85%, respectively. For the same period, the total expense
ratio for the Investment Quality Bond Fund was 1.00% after fee waivers. Without
the fee waiver, the expense ratio would have been 1.13%. After the
Reorganization, it is expected that total operating expenses of the combined
Investment Quality Bond Fund will be approximately 1.00%, after fee waivers.
DIVIDENDS AND DISTRIBUTIONS. The dividend and distribution policies of the Funds
are identical. Both Funds ordinarily declare and pay dividends from their net
investment income monthly. Each Fund may make distributions at least annually
out of any realized capital gains, and each Fund may make
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supplemental distributions of dividends and capital gains following the end of
its fiscal year.
The Funds provide investors five distribution options. If a shareholder
does not choose an option on his or her Account Application, his or her income
and capital gain dividends, if any, are automatically reinvested in additional
shares of the Fund at the net asset value of the Fund as of the day after the
record date of the distribution.
The distribution option elected by shareholders of the Government Bond
Fund will carry over to the accounts of the shareholders with the Investment
Quality Bond Fund. The election may be changed by writing Boston Financial Data
Services, Inc.("BFDS"), Two Heritage Drive, Quincy, Massachusetts 02171, or by
calling at 800-539-3863, and will become effective with regard to dividends
having record dates after receipt of the request by BFDS.
It is each Fund's policy to distribute to shareholders all of its
investment income (net of expenses) and any capital gains (net of capital
losses) in accordance with the timing requirements imposed by the Code.
Distributions to shareholders will be treated in the same manner for Federal
income tax purposes whether received in cash or reinvested in additional shares
of a Fund.
PURCHASE PROCEDURES AND CONTINGENT DEFERRED SALES CHARGES. Shares of
both Funds are sold on a continuous basis at net asset value. The difference
between the purchase procedures of the Funds is that the Government Bond Fund
offers two classes of shares, Class A and Class B, while the Investment Quality
Bond Fund does not offer multiple classes of shares. Certain redemptions of
Class B shares of the Government Bond Fund are subject to a CDSC. Class A shares
of the Government Bond Fund, like shares of the Investment Quality Bond Fund,
are sold at net asset value plus the applicable sales charge. Currently,
investors have the option of purchasing shares of the Government Bond Fund with
or without the imposition of an initial sales charge because of the choice of
two classes of shares that the Government Bond Fund offers. After the
transaction, however, no such choice will exist for new purchases of the
Investment Quality Bond Fund. Purchases of new shares (not including reinvested
dividends and capital gains distributions) of the Investment Quality Bond Fund
under $1,000,000 in value will be subject to an initial sales charge, up to a
maximum of 4.75% of net asset value.
Class B shares of the Government Bond Fund are sold at net asset value
per share without an initial sales charge. If Class B shares are redeemed within
six years of their purchase, a maximum CDSC of 5% will be deducted from the
redemption proceeds. There is no CDSC on Class B shares purchased through
reinvestment of dividends or capital gains distributions. The CDSC is
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assessed on the lesser of the net asset value of the shares at the time of
redemption or the original purchase price. The CDSC is not imposed on the amount
of an account's value represented by the increase in net asset value over the
initial purchase price (including increases due to the reinvestment of dividends
and capital gains distributions).
No CDSC will be imposed in connection with a Class B shareholder's
participation in the Reorganization because the exchange of shares in connection
with the Reorganization is not considered to be a redemption for purposes of the
CDSC. After the Reorganization, Class B shareholders of the Government Bond Fund
will receive the same dollar amount in Investment Quality Bond Fund shares as
they had held in shares of the Government Bond Fund. Shares of the Investment
Quality Bond Fund distributed to shareholders of the Government Bond Fund will
not be subject to a CDSC.
Class A shares of the Government Bond Fund and shares of the Investment
Quality Bond Fund are sold at net asset value plus an initial sales charge which
varies depending upon the amount purchased. The maximum initial sales charge is
4.75%, for purchases under $50,000. The amount of the sales charge decreases
with the amount of the purchase, and purchases of $1,000,000 and above are not
subject to an initial sales charge.
EXCHANGE RIGHTS. The exchange rights of both Funds are similar, except
that shares of a particular class may be exchanged only for shares of the same
class in the other funds of the Trust. For example, an investor can exchange
Class B shares of the Government Bond Fund only for Class B shares of another
fund. At present, not all funds of the Trust offer multiple classes of shares.
If a fund has only one class of shares that does not have a class designation,
like the Investment Quality Bond Fund, they are "Class A" shares for exchange
purposes. Thus, after the Reorganization, Class B shareholders of the Government
Bond Fund will lose their right to make exchanges for Class B shares of the
other funds of the Trust. Shares of the Investment Quality Bond Fund may only be
exchanged for "Class A" shares of the other funds of the Trust with no sales
charge.
REDEMPTION PROCEDURES. Except for the imposition of a CDSC on certain
redemptions of Class B shares of the Government Bond Fund (discussed above), the
Funds offer identical redemption features pursuant to which proceeds of a
redemption are remitted to shareholders.
GENERAL. Each Fund is a separate series of the Trust and, as such, has
identical rights under the Trust Instrument of the Trust and applicable Delaware
law. Shares of each Class of the Government Bond Fund participate equally in
dividends and distributions attributable to each Class, including any
distributions in the event of a liquidation. Each share of a Fund is entitled to
one vote for all purposes. Shares of all
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series of the Trust vote for the election of Trustees and on any other matter
that affects each Fund in substantially the same manner as a single class,
except as otherwise required by law. As to matters affecting each Fund
differently, such as approval of an investment advisory agreement, shares of
each Fund vote as a separate series. In addition, on matters that affect the
classes of a Fund differently, shares of each class vote separately. Delaware
law does not require registered investment companies, such as the Trust or its
series, to hold annual meetings of shareholders and it is anticipated that
shareholder meetings will be held only when specifically required by federal or
state law. Shareholders have available certain procedures for the removal of
Trustees. The Trust indemnifies trustees and officers to the fullest extent
permitted under Delaware law.
ADDITIONAL INFORMATION
This Combined Prospectus/Proxy Statement and the Related Statement of
Additional Information do not contain all of the information set forth in the
registration statement and the exhibits relating thereto filed by the Trust with
the Commission under the Securities Act of 1933 and the 1940 Act, to which
reference is hereby made.
Information about the Investment Quality Bond Fund is included in its
Prospectus dated March 1, 1997, and in the annual report of the Investment
Quality Bond Fund dated October 31, 1996, copies of which are included herewith
and incorporated by reference herein. Additional information about the
Investment Quality Bond Fund is included in the Statement of Additional
Information dated March 1, 1997, which has been filed as part of the Related
Statement of Additional Information of this Combined Prospectus/Proxy Statement,
dated March 24, 1997 and is incorporated by reference.
Both Funds are subject to the informational requirements of the
Securities Exchange Act of 1934 (the "1934 Act") and in accordance therewith
file proxy material, reports and other information with the Commission. These
documents and other information can be inspected and copied at the Public
Reference Facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such material can also be obtained from the
Public Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, Washington, D.C. 20549 at prescribed rates.
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INFORMATION RELATING TO VOTING MATTERS
GENERAL INFORMATION. This Combined Prospectus/Proxy Statement is being
furnished in connection with the solicitation of proxies by the Board for the
Meeting. It is expected that the solicitation of proxies will be primarily by
mail. Representatives of the Adviser and its affiliates, the Trust and service
contractors retained by the Trust, may contact shareholders directly to discuss
the proposal set forth herein, and may also solicit proxies by telephone,
telegraph or personal interview. The estimated costs of solicitation of proxies
are expected to be approximately $10,000 in the aggregate for the Government
Bond Fund and will be borne by the Funds in proportion to their respective
assets. It is anticipated that banks, broker-dealers and other institutions will
be requested to forward proxy materials to beneficial owners and to obtain
authorization for the execution of proxies. The Investment Quality Bond Fund and
the Government Bond Fund may, upon request, reimburse banks, broker-dealers and
other institutions for their expenses in forwarding proxy materials to
beneficial owners.
Only shareholders of record of the Government Bond Fund at the close of
business on March 9, 1997 (the "Record Date"), will be entitled to vote at the
Meeting. As of the Record Date, there were 2,229,628.724 Class A shares and
158,991.152 Class B shares of the Government Bond Fund issued and outstanding
and 16,428,270.120 shares of the Investment Quality Bond Fund issued and
outstanding.
As of March 9, 1997, the Trustees and officers of the Trust owned less
than 1% of the outstanding shares of the Investment Quality Bond Fund. As of
March 9, 1997, Key Trust Cleveland, 4900 Tiedeman Road, Brooklyn, Ohio
44144-2338, an affiliate of KeyCorp, was the shareholder of record of 91.56% of
the outstanding Class A shares of the Government Bond Fund, but did not hold
such shares beneficially. Because an affiliate of KeyCorp owns of record more
than 25% of the outstanding Class A shares of the Government Bond Fund, KeyCorp
(or its affiliates) could be deemed to be a controlling person of the Government
Bond Fund under the 1940 Act. KeyCorp , Key Trust Cleveland and their affiliates
have advised the Trust that they intend to vote any shares over which they have
voting power at the Meeting (i) in the manner instructed by the customers for
whom such shares are held, or (ii) in the event that such instructions are not
received, in the same proportion as the votes cast by other shareholders
(including customers of the KeyCorp affiliates who furnish voting instructions).
The following shareholders beneficially owned 5% or more of the
outstanding Class B shares of the Government Bond Fund as of March 9, 1997:
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- -------------------------------------------------------------------------------
Percent Owned of
Record and
Name and Address Percent Owned of Record Beneficially
- -------------------------------------------------------------------------------
J.C. Rhodes 16.47% 16.47%
c/o Indiana
Masonic Home
690 State Street
Franklin, IN
46131
- -------------------------------------------------------------------------------
Jessica Lattimore 10.62% 10.62%
Trustee
Jennifer Lattimore
Trust
152 Rear Brunswick
Road
Troy, NY 12180
===============================================================================
Each whole share of the Government Bond Fund shall be entitled to one
vote on the Reorganization, and each fractional share shall be entitled to a
proportionate fractional vote. If the accompanying proxy is executed and
returned in time for the Meeting, the shares covered thereby will be voted in
accordance with the instructions thereon. In the absence of any instructions,
such proxy will be voted to approve the Reorganization. Any shareholder giving a
proxy may revoke it at any time before the Meeting by submitting to the
Government Bond Fund a written notice of revocation or a subsequently executed
proxy, or by attending the Meeting and voting in person.
If a proxy represents a broker "non-vote" (that is, a proxy from a
broker or nominee indicating that such person has not received instructions from
the beneficial owner or other person entitled to vote shares on a particular
matter with respect to which the broker or nominee does not have discretionary
power) or marked with an abstention (collectively, "abstentions"), the shares
represented thereby will be considered to be present at the meeting for purposes
of determining the existence of a quorum for the transaction of business and
will have the effect of a vote against the proposal.
QUORUM AND ADJOURNMENTS. A quorum is constituted by the presence in
person or by proxy of the holders of one-third of the total number of shares
outstanding and entitled to vote, with respect to the Government Bond Fund. If a
quorum is not present at the Meeting, or if a quorum is present but sufficient
votes to approve the Reorganization are not received, the persons named as
proxies may propose one or more adjournments of the Meeting to permit further
solicitation of proxies. The Meeting may be adjourned by a majority of the votes
properly cast upon the question of adjourning the Meeting to another date and
time, whether or not a quorum is present. An adjourned Meeting may be
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<PAGE>
held, within a reasonable time after the date set for the original meeting,
without the necessity of further notice. In determining whether to adjourn the
Meeting, the following factors may be considered: the nature of the proposals
that are the subject of the Meeting, the percentage of votes actually cast, the
percentage of negative votes actually cast, the nature of any further
solicitation and the information to be provided to shareholders with respect to
the reasons for the solicitation. The persons named as proxies will vote for or
against an adjournment based on their determination of what is in the best
interests of the shareholders, taking into consideration the factors discussed
above. A shareholder vote may be taken prior to any adjournment if sufficient
votes have been received for approval.
APPRAISAL RIGHTS. The Trust Instrument of the Trust does not grant
shareholders any rights of share appraisal. Shareholders of the Government Bond
Fund have the right to redeem their shares of the Government Bond Fund at net
asset value, subject to a CDSC for certain Class B shareholders, at any time
until the close of business on the business day prior to the Closing Date of the
Reorganization and, thereafter, shareholders may redeem from the Investment
Quality Bond Fund the Investment Quality Bond Fund shares acquired by them in
the Reorganization.
OTHER BUSINESS. The Board of Trustees of the Government Bond Fund knows
of no other business to be brought before the Meeting. If any other matters come
before the Meeting, proxies that do not contain specific restrictions to the
contrary will be voted on such matters in accordance with the judgment of the
persons named as Proxies.
FUTURE SHAREHOLDER PROPOSALS. Pursuant to rules adopted by the
Commission under the 1934 Act, shareholders may request inclusion in the
Government Bond Fund's proxy statement for an annual meeting of shareholders
proposals that they intend to introduce at such meeting. Any such proposals must
be presented a reasonable time before the proxy materials for the next meeting
are sent to shareholders. The submission of a proposal does not guarantee its
inclusion in the proxy statement and is subject to limitations under the 1934
Act. The Fund does not hold annual meetings of shareholders. For this reason, no
anticipated date of the next meeting, if any, can be provided.
MISCELLANEOUS
FINANCIAL STATEMENTS. The financial statements of the Funds included in
the Related Statement of Additional Information relating to this Combined
Prospectus/Proxy Statement have been audited by Coopers & Lybrand L.L.P.
independent accountants, for the periods indicated in their report thereon,
which is included in the annual report to shareholders for the fiscal year ended
October 31, 1996.
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<PAGE>
EXHIBIT A
FORM OF
PLAN OF REORGANIZATION AND LIQUIDATION
THIS PLAN OF REORGANIZATION AND LIQUIDATION (the "Plan") is adopted by The
Victory Portfolios, a Delaware business trust (the "Trust"), on behalf of two of
its portfolios, the Victory Government Bond Fund (the "Government Bond Fund")
and the Victory Investment Quality Bond Fund (the "Investment Quality Bond
Fund") as of February 19, 1997. (The Government Bond Fund and Investment Quality
Bond Fund are sometimes referred to as a "Fund" and together as the "Funds.")
W I T N E S S E T H :
WHEREAS, the Trust is an open-end management investment company registered under
the Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, this Plan is intended to be and is adopted as a plan of reorganization
and liquidation within the meaning of Section 368(a)(1)(C) of the Internal
Revenue Code of 1986, as amended, such reorganization to consist of the transfer
of all of the assets of the Government Bond Fund in exchange for shares of
beneficial interest, no par value, of the Investment Quality Bond Fund
("Investment Quality Bond Fund Shares"), the assumption by the Investment
Quality Bond Fund of stated liabilities of the Government Bond Fund, and the
distribution, after the Closing (as defined in Section 5) of Investment Quality
Bond Fund Shares to the shareholders of the Government Bond Fund in liquidation
of the Government Bond Fund, all upon the terms and conditions hereinafter set
forth in this Plan; and
WHEREAS, the Board of Trustees of the Trust, including a majority of the
Trustees who are not interested persons of the Trust, within the meaning of the
1940 Act, has determined with regard to each Fund that participating in the
transactions contemplated by this Plan is in the best interests of the Funds and
that the interests of shareholders of the Funds will not be diluted as a result
of such transactions.
NOW, THEREFORE, the Board of Trustees of the Trust hereby adopts and declares
the following Plan:
1. TRANSFER OF ASSETS. Subject to the terms and conditions set forth herein, at
the Closing the Trust shall transfer all of the assets of the Government Bond
Fund to the Investment Quality Bond Fund, and in consideration therefor, the
Investment Quality Bond Fund shall assume all of the Liabilities (as defined
herein), and issue to the Trust, on behalf of the Government Bond Fund,
Investment Quality Bond Fund Shares (the "New Shares") having an aggregate net
asset value equal to the value of the assets of the Government Bond Fund
transferred less the Liabilities assumed.
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<PAGE>
The number of New Shares to be issued to the Trust, on behalf of the Government
Bond Fund, will equal the product of (i) the number of shares of the Investment
Quality Bond Fund immediately before the reorganization, times (ii) a fraction
the numerator of which is (x) the total NAV of the Government Bond Fund
immediately before the Reorganization and the denominator of which is (y) the
total NAV of the Investment Quality Bond Fund immediately before the
Reorganization. The total number of shares of the Investment Quality Bond Fund
that will be issued to the Government Bond Fund will, in turn, be divided
between the Class A and Class B shareholders in the ratio of the respective
total NAVs of these two Classes of shares; that is, the total number of shares
of the Investment Quality Bond Fund that will be distributed in exchange for the
Class A [respectively, Class B] shares will equal the product of (i) the total
number of shares of the Investment Quality Bond Fund issued to the Government
Bond Fund, times (ii) a fraction the numerator of which is (x) the total NAV of
the Class A [respectively, Class B] shares, and the denominator of which is (y)
the total NAV of the Government Bond Fund, in both cases immediately before the
Reorganization. "Liabilities" shall mean the liabilities and obligations
reflected in an unaudited statement of assets and liabilities of the Government
Bond Fund as of the close of business on the Valuation Date (as hereinafter
defined), determined in accordance with generally accepted accounting principles
consistently applied from the Government Bond Fund's most recently completed
audit period. The net asset value of the New Shares and the value of the net
assets of the Government Bond Fund to be transferred shall be determined as of
the close of regular trading on the New York Stock Exchange on the business day
next preceding the Closing (the "Valuation Date") using the valuation procedures
set forth in the then current prospectus and statement of additional information
of the Investment Quality Bond Fund.
The Investment Quality Bond Fund shall assume only the Liabilities, and no other
liabilities or obligations, whether absolute or contingent, known or unknown,
accrued or unaccrued. All Liabilities that exist at or after the Closing shall,
after the Closing, attach to the Investment Quality Bond Fund and may be
enforced against the Investment Quality Bond Fund to the same extent as if the
same had been incurred by the Investment Quality Bond Fund.
2. LIQUIDATION OF THE GOVERNMENT BOND FUND. Upon the consummation of the
transactions referred to in Section 1, the New Shares will be issued to the
Trust, to be credited to the accounts of shareholders of record of the
Government Bond Fund at the close of business on the Valuation Date. At or as
soon as practicable after the Closing, the New Shares will be distributed to
such shareholders in exchange for and in liquidation and cancellation of the
shares of the Government Bond Fund, each such shareholder to receive the number
of New Shares that is equal in dollar amount to the value of shares of
beneficial interest of the Government Bond Fund held by such shareholder as of
the close
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<PAGE>
of business on the Valuation Date. Such distribution will be accomplished by the
establishment of an open account on the share records of the Investment Quality
Bond Fund in the name of each shareholder of the Government Bond Fund and
representing the respective number of New Shares due such shareholder. For these
purposes, the shareholders of record of the Government Bond Fund as of the close
of business on the Valuation Date shall be certified by the transfer agent of
the Trust.
The transactions contemplated in Section 1 and above in this Section 2 shall be
effected by the delivery of New Shares to the Trust on behalf of the Government
Bond Fund and the pro rata distribution of those shares to Class A and Class B
shareholders of the Government Bond Fund. Redemptions of New Shares of the
Investment Quality Bond Fund by shareholders who previously owned Class B shares
of the Government Bond Fund will not be subject to a contingent deferred sales
charge if those shares are redeemed within six years of the purchase of the
previously owned Class B shares of the Government Bond Fund. Class A and Class B
shareholders of the Government Bond Fund will become shareholders of the
Investment Quality Bond Fund with equal rights and privileges and will receive
the same dollar amount in New Shares of the Investment Quality Bond Fund as was
held in either class of the Government Bond Fund at the close of business on the
Valuation Date.
The Trust shall file on behalf of the Government Bond Fund such instruments of
dissolution, if any, as are necessary to effect the dissolution of the
Government Bond Fund and shall take all other steps necessary to effect a
complete liquidation and dissolution of the Government Bond Fund.
3. REPRESENTATIONS AND WARRANTIES.
(a) The Trust, on behalf of the Government Bond Fund, hereby represents
and warrants to the Investment Quality Bond Fund as follows:
(i) the Trust is a duly organized and validly existing
business trust in good standing under the laws of the State of Delaware and has
full power and authority to conduct its business as presently conducted;
(ii) the Trust has full power and authority to execute,
deliver and carry out the terms of this Plan on behalf of the Government Bond
Fund;
(iii) the execution and delivery of this Plan on behalf of the
Government Bond Fund and the consummation of the transactions contemplated
hereby are duly authorized and no other proceedings on the part of the Trust or
the shareholders of the Government Bond Fund (other than as contemplated in
Section 4(f)) are necessary to authorize this Plan and the transactions
contemplated hereby;
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<PAGE>
(iv) this Plan has been duly executed by the Trust on behalf
of the Government Bond Fund and constitutes its valid and binding obligation,
enforceable in accordance with its terms, subject to applicable bankruptcy,
reorganization, insolvency, moratorium and other rights affecting creditors'
rights generally, and general equitable principles;
(v) neither the execution and delivery of this Plan by the
Trust on behalf of the Government Bond Fund, nor the consummation by the Trust
on behalf of the Government Bond Fund of the transactions contemplated hereby
will conflict with, result in a breach or violation of, or constitute (or with
notice, lapse of time or both constitute) a breach of or default under, the
Trust Instrument or By-Laws of the Trust, or any statute, regulation, order,
judgment or decree, or any instrument, contract or other agreement to which the
Trust is a party or by which the Trust or any of its assets is subject or bound;
and
(vi) no authorization, consent or approval of any governmental
or other public body or authority or any other party is necessary for the
execution and delivery of this Plan by the Trust on behalf of the Government
Bond Fund or the consummation of any transactions contemplated hereby, other
than as shall be obtained at or prior to the Closing.
(b) The Trust, on behalf of the Investment Quality Bond Fund, hereby
represents and warrants to the Government Bond Fund as follows:
(i) the Trust is a duly organized and validly existing
business trust in good standing under the laws of the State of Delaware and has
full power and authority to conduct its business as presently conducted;
(ii) The Trust has full power and authority to execute,
deliver and carry out the terms of this Plan on behalf of the Investment Quality
Bond Fund;
(iii) the execution and delivery of this Plan on behalf of the
Investment Quality Bond Fund and the consummation of the transactions
contemplated hereby are duly authorized and no other proceedings on the part of
the Trust or the shareholders of the Investment Quality Bond Fund are necessary
to authorize this Plan and the transactions contemplated hereby;
(iv) this Plan has been duly executed by the Trust on behalf
of the Investment Quality Bond Fund and constitutes its valid and binding
obligation, enforceable in accordance with its terms, subject to applicable
bankruptcy, reorganization, insolvency, moratorium and other rights affecting
creditors' rights generally, and general equitable principles;
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<PAGE>
(v) neither the execution and delivery of this Plan by the
Trust on behalf of the Investment Quality Bond Fund, nor the consummation by the
Trust on behalf of the Investment Quality Bond Fund of the transactions
contemplated hereby will conflict with, result in a breach or violation of, or
constitute (or with notice, lapse of time or both constitute) a breach of or
default under, the Trust Instrument or By-Laws of the Trust, or any statute,
regulation, order, judgement or decree, or any instrument, contract or other
agreement to which the Trust is a party or by which the Trust or any of its
assets is subject or bound; and
(vi) no authorization, consent or approval of any governmental
or other public body or authority or any other party is necessary for the
execution and delivery of this Plan by the Trust on behalf of the Investment
Quality Bond Fund or the consummation of any transactions contemplated hereby,
other than as shall be obtained at or prior to the Closing.
4. CONDITIONS PRECEDENT. The obligations herein of the Trust
to effectuate the Plan shall be subject to the satisfaction of
the following conditions:
(a) At or immediately prior to the Closing, the Trust shall have
declared and paid a dividend or dividends which, together with all
previous such dividends, shall have the effect of distributing to the
shareholders of the Government Bond Fund all of the Fund's investment
company taxable income for taxable years ending at or prior to the
Closing (computed without regard to any deduction for dividends paid)
and all of its net capital gain, if any, realized in taxable years
ending at or prior to the Closing (after reduction for any capital loss
carry-forward);
(b) Such authority and orders from the Securities and Exchange
Commission (the "Commission") and state securities commissions as may
be necessary to permit the Trust to carry out the transactions
contemplated by this Plan shall have been received;
(c) A registration statement of the Trust on Form N-14 under the
Securities Act of 1933, as amended (the "Securities Act"), and such
amendment or amendments thereto as are determined by the Board of
Trustees of the Trust to be necessary and appropriate to effect such
registration of the New Shares (the "Registration Statement"), shall
have been filed with the Commission and shall have become effective,
and no stop-order suspending the effectiveness of such Registration
Statement shall have been issued, and no proceeding for that purpose
shall have been initiated or threatened by the Commission (unless
withdrawn or terminated);
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<PAGE>
(d) The New Shares shall have been duly qualified for offering to the
public in all states in which such qualification is required for
consummation of the transactions contemplated hereunder.
(e) The Board of Trustees of the Trust shall have received a legal
opinion from outside counsel, in form and substance reasonably
satisfactory to the Board of Trustees of the Trust, as to tax and
corporate matters related to this Plan, including, without limitation,
that the proposed reorganization will not result in any taxable gain or
loss to the Government Bond Fund or its shareholders; and
(f) This Plan and the proposed reorganization contemplated hereby shall
have been approved by shareholders of the Government Bond Fund in
accordance with the 1940 Act, at a meeting of shareholders of the
Government Bond Fund to be duly called for such purpose.
5. CLOSING. The closing of the transactions contemplated hereby (the "Closing")
shall be held at the offices of the Trust and shall occur as of the commencement
of business on (a) April 30, 1997, or (b) if all regulatory or shareholder
approvals shall not have been received by such date, then on the first Monday
following receipt of all necessary regulatory approvals and the final adjourned
meeting of shareholders of the Government Bond Fund at which this Plan is
considered and approved, or (c) such later time as the Trust may determine,
giving consideration to the best interests of the Funds. All acts taking place
at the Closing shall deemed to take place simultaneously unless otherwise
provided.
6. EXPENSES. The expenses of the transactions contemplated by this Plan shall be
borne by each Fund.
7. TERMINATION. This Plan and the transactions contemplated hereby may be
terminated and abandoned by resolution of the Board of Trustees of the Trust, at
any time prior to the Closing, if circumstances should develop that, in the
opinion of the Board, in its sole discretion, make proceeding with this Plan
inadvisable for either Fund. In the event of any such termination, there shall
be no liability for damages on the part of either Fund, or its agents or
officers, to the other Fund, or its agents or officers.
8. AMENDMENTS. This Plan may be amended, waived or supplemented in such manner
as may be mutually agreed upon in writing by the authorized officers of the
Trust with respect to either Fund; provided, however, that following the meeting
of the Government Bond Fund shareholders called by the Trust pursuant to Section
4(f) of this Plan, no such amendment, waiver or supplement may have the effect
of changing the provisions for determining the amount of Investment Quality Bond
Fund Shares to be issued to the Government Bond Fund shareholders under this
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<PAGE>
Plan, or otherwise to the detriment of such shareholders, without their further
approval.
9. GOVERNING LAW. This Plan shall be governed and construed in accordance with
the laws of Delaware, without giving effect to the conflicts of laws provisions
thereof that would call for the application of the substantive law of any other
jurisdiction.
10. FURTHER ASSURANCES. The Trust, with respect to the Government Bond Fund and
the Investment Quality Bond Fund, shall take such further action, prior to, at,
and after the Closing, as may be necessary or desirable and proper to consummate
the transactions contemplated hereby.
IN WITNESS WHEREOF, the Board of Trustees of the Trust has caused this Plan to
be executed on behalf of each Fund as of the date first set forth above by their
duly authorized representatives.
THE VICTORY PORTFOLIOS
on behalf of Government Bond Fund
Attest:
By:
------------------------------
- ----------------------
THE VICTORY PORTFOLIOS
on behalf of Investment Quality Bond
Fund
Attest:
By:
------------------------------
- -----------------------
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<PAGE>
PART B
The Registrant has filed the information required in Part B of the Registrant
Statement in its Registration Statement on Form N- 14 on February 20, 1997,
(accession number 0000922423-97-000127) and it is hereby incorporated by
reference .
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<PAGE>
Part C
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C to this Registration Statement.
THE VICTORY PORTFOLIOS
The Victory Investment Quality Bond Fund
PART C
Item 15. Indemnification.
Article X, Section 10.02 of the Registrant's Delaware Trust Instrument,
incorporated herein as Exhibit 1 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
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<PAGE>
(ii) in the event of a settlement, unless there has been a
determination that such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office, (A) by the court or other
body approving the settlement; (B) by at least a majority of those
Trustees who are neither Interested Persons of the Trust nor are
parties to the matter based upon a review of readily available facts
(as opposed to a full trial-type inquiry); or (C) by written opinion of
independent legal counsel based upon a review of readily available
facts (as opposed to a full trial-type inquiry).
(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall
not be exclusive of or affect any other rights to which any Covered
Person may now or hereafter be entitled, shall continue as to a person
who has ceased to be a Covered Person and shall inure to the benefit of
the heirs, executors and administrators of such a person. Nothing
contained herein shall affect any rights to indemnification to which
Trust personnel, other than Covered Persons, and other persons may be
entitled by contract or otherwise under law.
(d) Expenses in connection with the preparation and presentation of a
defense to any claim, action, suit or proceeding of the character
described in Subsection (a) of this Section 10.02 may be paid by the
Trust or Series from time to time prior to final disposition thereof
upon receipt of an undertaking by or on behalf of such Covered Person
that such amount will be paid 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 Registrant'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 7(a) hereto,
Section 28 of the Custody Agreement incorporated by reference as Exhibit 9
hereto, Section 5 of the Registrant's Fund Accounting Agreement dated May 31,
1995 between the Registrant and BISYS Fund Services Ohio, Inc. which was filed
as Exhibit 9(d) to Post-Effective
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<PAGE>
Amendment No. 22 of the Registrant's Registration Statement on Form N-1A filed
on August 28, 1995, and Section 7 of the Transfer Agency and Service Agreement
dated July 12, 1996 between the Registrant and State Street Bank and Trust
Company filed as Exhibit 6(a) to Post-Effective Amendment No. 30 to the
Registrant's Registration Statement on Form N-1A. Registrant has obtained from a
major insurance carrier a trustee's and officer's 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 of
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 Investment
Company Act of 1940, as amended, and will be governed by the final adjudication
of such issue.
Item 16. Exhibits.
Exhibit No.
EX-99.1 Delaware Trust Instrument dated December 6, 1995 is incorporated
herein by reference to Exhibit 99.B1(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-99.2 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
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<PAGE>
electronically on December 28, 1995, accession number
0000950152-95-003085.
EX-99.3 Inapplicable.
EX-99.4 Plan of Reorganization and Liquidation (filed herewith as Exhibit
A to Part A).
EX-99.5 Inapplicable.
EX-99.6(a) Investment Advisory Agreement dated as of January 1, 1996,
between the Registrant and Key Asset Management Inc. is
incorporated herein by reference to Exhibit 99.B(5)(a) 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-99.6(b) Investment Sub-Advisory Agreement between Key Asset Management
Inc. and Society Asset Management, Inc. dated as of January 1,
1996 is incorporated herein by reference to Exhibit 99.B(5)(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-99.7(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.
EX-99.7(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-99.8 Inapplicable.
EX-99.9 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.
EX-99.10 Inapplicable.
-xii-
<PAGE>
EX-99.11(a) Opinion of Kramer, Levin, Naftalis & Frankel as to the legality
of the securities being issued is filed herewith.
EX-99.11(b) Opinion of Morris, Nichols, Arsht & Tunnell as to the legality of
the securities being issued is filed herewith.
EX-99.12 Opinion of Kramer, Levin, Naftalis & Frankel as to tax
consequences is to be filed by amendment.
EX-99.13 Inapplicable.
EX-99.14 Consent of Coopers & Lybrand L.L.P. was electronically filed with
Registrant's Registration Statement on Form N-14 on February 20,
1997, accession number 0000922423-97-000127.
EX-99.15 Inapplicable.
EX-99.16 Powers of Attorney filed electronically with Post- Effective
Amendments 27 and 26 to Registrant's Registration Statement on
January 31, 1996, accession number 0000922423-96-000047 and
December 28, 1995, accession number 0000950152-95-003085,
respectively.
EX-99.17(a) Form of Proxy Card was electronically filed with Registrant's
Registration Statement on Form N-14 on February 20, 1997,
accession number 0000922423- 97-000127.
EX-99.17(b) The Registrant's declaration to register an indefinite number of
shares pursuant to Rule 24f-2 under the Investment Company Act of
1940 was electronically filed pursuant to its Rule 24f-2 notice
for its fiscal year ended October 31, 1996 on December 23, 1996,
accession number 0000950152- 96-006841.
EX-99.17(c) Prospectus and Statement of Additional Information of The Victory
Portfolios relating to the Victory Government Bond Fund,
including audited financial statements as of October 31, 1996 are
incorporated herein by reference to Post-Effective Amendment No.
31 to the Registrant's Registration Statement on form N-1A as
filed electronically on February 7, 1997, accession number
0000922423-97-000066
EX-99.17(d) Prospectus and Statement of Additional Information of The Victory
Portfolios relating to the Victory Investment Quality Bond Fund,
including audited financial statements as of October 31, 1996 are
incorporated herein by reference to Post-Effective
-xiii-
<PAGE>
Amendment No. 31 to the Registrant's Registration Statement on
Form N-1A as filed electronically on February 7, 1997, accession
number 0000922423-97- 000066.
Item 17. Undertakings
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a
prospectus which is a part of this Registration Statement by any
person or party who is deemed to be an underwriter within the
meaning of Rule 145(c) of the Securities Act [17 CFR 230.145c],
the reoffering prospectus will contain the information called for
by the applicable registration form for reofferings by persons
who may be deemed underwriters, in addition to the information
called for by the other items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as a part of an
amendment to the Registration Statement and will not be used
until the amendment is effective, and that, in determining any
liability under the 1933 Act, each post-effective amendment shall
be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering of them.
(3) The undersigned Registrant undertakes to file, by post effective
amendment, which may be filed under Rule 485(b) under the 1933
Act, an opinion of counsel supporting the tax consequences of the
proposed reorganization within a reasonable time after receipt of
such opinion.
-xiv-
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, the Registrant has duly caused this
Pre-Effective Amendment No. 1 to the Registration Statement on Form N-14 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 24th day of March, 1997.
THE VICTORY PORTFOLIOS
(Registrant)
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 24th day of
March, 1997.
/s/Leigh A. Wilson President and Trustee
- ----------------------
Leigh A. Wilson
/s/ Kevin L. Martin Treasurer
- ----------------------
Kevin L. Martin
* Trustee
- ----------------------
Robert G. Brown
* Trustee
- ----------------------
Edward P. Campbell
* Trustee
- ----------------------
Harry Gazelle
* Trustee
- ----------------------
Stanley I. Landgraf
* Trustee
- ----------------------
Thomas F. Morrisey
* Trustee
- ----------------------
H. Patrick Swygert
*By: /s/ Carl Frischling
- ----------------------
Carl Frischling
Power of Attorney
-xv-
<PAGE>
INDEX TO EXHIBITS
Exhibit Number
99.11(a) Opinion on Kramer, Levin, Naftalis & Frankel.
99.11(b) Opinion of Morris, Nichols, Arsht & Tunnell.
-xvi-
Kramer, Levin, Naftalis & Frankel
919 THIRD AVENUE
NEW YORK, N.Y. 10022 - 3852
(212) 715 - 9100
-----
FAX
(212) 715-8000
---
WRITER'S DIRECT NUMBER
(212)715-9100
-------------
March 3, 1997
The Victory Portfolios
3435 Stelzer Road
Columbus, Ohio 43219-3035
Dear Ladies and Gentlemen:
Reference is made to the Registration Statement on Form N-14,
Registration No. 333-22101, under the Securities Act of 1933, as amended (the
"Registration Statement"), filed with the Securities and Exchange Commission
(the "Commission") on February 20, 1997, registering shares of beneficial
interest, no par value (the "Shares"), of The Victory Portfolios (the "Trust"),
a Delaware business trust. The Shares are to be issued in connection with a Plan
of Reorganization and Liquidation (the "Plan") whereby all of the then-existing
assets of The Victory Government Bond Fund (the "Government Bond Fund"), a
series of the Trust will be transferred to The Victory Investment Quality Bond
Fund (the "Investment Quality Bond Fund"), another series of the Trust, in
exchange for (i) the assumption of all the obligations and stated liabilities of
the Government Bond Fund and (ii) the issuance and delivery to each class of the
Government Bond Fund of full and fractional shares of the Investment Quality
Bond Fund's Shares (as described in the Plan); such Shares will be distributed
by the Government Bond Fund pro rata to its shareholders upon its liquidation.
The Plan was approved by the Board of Trustees the Trust on February 19, 1997,
and must be approved by the shareholders of the Government Bond Fund at a
meeting of shareholders called for that purpose.
We have reviewed the Declaration of Trust of the Trust, its By-Laws,
resolutions of the Trustees of the Trust, and the Registration Statement
(including exhibits
<PAGE>
thereto). We have also made such inquiries and have examined originals,
certified copies or copies otherwise identified to our satisfaction of such
documents, records and other instruments as we have deemed necessary or
appropriate for the purposes of this opinion. For purposes of such examination,
we have assumed the genuineness of all signatures on original documents and the
conformity to the original documents of all copies submitted. In addition, we
have assumed that the representations to be made as of the closing date by the
Trust will be made by such parties in form acceptable to us and that the Trust's
activities in connection with the Plan and the transactions contemplated therein
have been and will be conducted in the manner provided in such documents and as
set forth herein.
The opinions expressed herein are limited to matters of law which
govern the due organization of the Trust and the authorization and issuance of
the Shares. We are members of the Bar of the State of New York and do not hold
ourselves out as experts as to the law of any other state or jurisdiction. As to
matters of Delaware law, we have relied upon the opinion of Morris, Nichols,
Arsht & Tunnell, a copy of which is attached hereto, and our opinion is subject
to the qualifications stated therein. Based upon and subject to the foregoing
and provided that the terms of reorganization occur in accordance with the terms
of the Plan, we are of the opinion that, and so advise you as follows:
(1) The Trust is a duly organized and validly existing business trust
in good standing under the laws of the State of Delaware; and
(2) The Shares to be issued pursuant to the Plan have been duly
authorized for issuance by all necessary action on the part of the Trust and
will, upon issuance, constitute legally issued, fully paid and non-assessable
Shares of beneficial interest in the Trust.
This opinion is solely for your information and is not to be quoted in
whole or in part, summarized or otherwise referred to, nor is it to be filed
with or supplied to or relied upon by any governmental agency or other person
without the prior written consent of this firm. This opinion is as of the date
hereof. We disclaim any responsibility to update or supplement this opinion to
reflect any events or state of facts which may hereafter come to our attention,
or any changes in statutes or regulations or any court decisions which may
hereafter occur.
Very truly yours,
/s/ Kramer, Levin, Naftalis & Frankel
--------------------------------------
March 3, 1997
The Victory Portfolios
3435 Stelzer Road
Columbus, Ohio 43219-3035
Re: The Victory Portfolios
----------------------
Ladies and Gentlemen:
We have acted as special Delaware counsel to The Victory Portfolios, a
Delaware business trust (the "Trust"), in connection with certain matters
relating to the organization of the Trust and the issuance of Shares of
beneficial interest in the Trust. Capitalized terms used herein and not
otherwise herein defined are used as defined in the Trust Instrument of the
Trust dated December 6, 1995 (the "Governing Instrument").
We understand that, pursuant to a Plan of Reorganization and
Liquidation adopted by the Trust as of February 19, 1997 (the "Plan") and
subject to the conditions set forth therein, Shares of the Victory Investment
Quality Bond Fund will be distributed to the Shareholders of the Victory
Government Bond Fund, each a Series of the Trust, in connection with the
liquidation and termination of the Victory Government Bond Fund.
In rendering this opinion, we have examined copies of the following
documents, each in the form provided to us: the Certificate of Trust of the
Trust as filed in the Office of the Secretary of State of the State of Delaware
(the "Recording Office") on December 21, 1995 (the "Certificate"); the Governing
Instrument; the Bylaws of the Trust; certain resolutions of the Trustees of the
Trust; the Plan; Post-Effective Amendment No. 26 to the Registration Statement
on Form N-1A of The Victory Portfolios, a Massachusetts business trust and the
predecessor to the Trust (the "Predecessor Trust") by which the Trust adopted
such Registration Statement and the Predecessor Trust's Notification of
Registration and Registration Statement under the Investment
<PAGE>
The Victory Portfolios
March 3, 1997
Page 2
Company Act of 1940, as filed with the Securities and Exchange Commission on
December 28, 1995; the Trust's Registration Statement on Form N-14 as filed with
the Securities and Exchange Commission on February 20, 1997 (the "Registration
Statement"); and a certification of good standing of the Trust obtained as of a
recent date from the Recording Office. In such examinations, we have assumed the
genuineness of all signatures, the conformity to original documents of all
documents submitted to us as copies or drafts of documents to be executed, and
the legal capacity of natural persons to complete the execution of documents. We
have further assumed for the purpose of this opinion: (i) the due authorization,
execution and delivery by, or on behalf of, each of the parties thereto of the
above-referenced instruments, certificates and other documents, and of all
documents contemplated by the Governing Instrument and applicable resolutions of
the Trustees to be executed by investors desiring to become Shareholders; (ii)
the transfer of the assets of the Victory Government Bond Fund to the Victory
Investment Quality Bond Fund, the satisfaction of all conditions precedent to
the issuance of Shares pursuant to the Plan and compliance with the other terms,
conditions and restrictions set forth in the Plan and the Governing Instrument
and all applicable resolutions of the Trustees in connection with the issuance
of Shares (including, without limitation, the taking of all appropriate action
by the Trustees to designate Series of Shares and the rights and preferences
attributable thereto as contemplated by the Governing Instrument); (iii) that
appropriate notation of the names and addresses of, the number of Shares held
by, and the consideration paid by, Shareholders will be maintained in the
appropriate registers and other books and records of the Trust in connection
with the issuance or transfer of Shares; (iv) that, subsequent to the filing of
the Certificate, no event has occurred, or prior to the issuance of Shares
pursuant to the Plan will occur, that would cause a termination or dissolution
of the Trust under Sections 11.04 or 11.05 of the Governing Instrument; (v) that
the activities of the Trust have been and will be conducted in accordance with
the terms of the Governing Instrument and the Delaware Act; and (vi) that each
of the documents examined by us is in full force and effect and has not been
modified, supplemented or otherwise amended except as herein referenced. No
opinion is expressed herein with respect to the requirements of, or compliance
with, federal or state securities or blue sky laws. Further, we express no
opinion on the sufficiency or accuracy of the Registration Statement, or any
other registration or offering documentation relating to the Trust or the
Shares. As to any facts material to our opinion, other than those assumed, we
have relied without independent investigation on the above-referenced documents
<PAGE>
The Victory Portfolios
March 3, 1997
Page 3
and on the accuracy, as of the date hereof, of the matters therein
contained.
Based on and subject to the foregoing, and limited in all respects to
matters of Delaware law, it is our opinion that:
1. The Trust is a duly organized and validly existing business trust in
good standing under the laws of the State of Delaware.
2. The Shares to be issued pursuant to the Plan will, upon issuance,
constitute legally issued, fully paid and non-assessable Shares of beneficial
interest in the Trust.
3. Under the Delaware Act and the terms of the Governing Instrument,
each Shareholder of the Trust, in such capacity, will be entitled to the same
limitation of personal liability as that extended to stockholders of private
corporations for profit organized under the general corporation law of the State
of Delaware; provided, however, that we express no opinion with respect to the
liability of any Shareholder who is, was or may become a named Trustee of the
Trust.
We consent to the filing of a copy of this opinion with the Securities
and Exchange Commission as an exhibit to the Registration Statement (or a
pre-effective amendment thereto). In giving this consent, we do not thereby
admit that we come within the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder. Except as
provided in this paragraph, the opinion set forth above is expressed solely for
the benefit of the addressee hereof in connection with the matters contemplated
hereby and may not be relied upon by, or filed with, any other person or entity
or for any other purpose without our prior written consent.
Sincerely,
/s/ MORRIS, NICHOLS, ARSHT & TUNNELL
------------------------------------
